Greetings, and welcome to the NeoGenomics' Second Quarter 2017 Financial Results. 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, Doug VanOort, Chairman and CEO for NeoGenomics. Thank you, Mr. VanOort, you may begin.

Thank you, and good morning. I'd like to welcome everyone to NeoGenomics' second quarter 2017 conference call. To begin, I would like to introduce 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; Bill Bonello, our Treasurer, and Director of Corporate Development; Fred Weidig, our Vice President of Finance; Jessica King, our Director of External Reporting; Rob Shovlin, President of our Clinical Services Division; and Jennifer Balliet, our Vice President and Chief Culture Officer. 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. 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 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 to give more people a chance to ask questions within the one hour we have allotted for this call.

Good, thank you, Steve. In this morning's conference call I will focus my comments on the company's second quarter performance, and then briefly discuss a few key dynamics related to our expectations for the second half of the year. We reported very good second quarter financial results this morning. Second quarter revenue was at record $66.1 million, and exceeded the guidance we provided just three months ago. This was driven by strong 16.2% year-over-year volume growth in our core clinical genetic testing business, and accelerating momentum in our pharma services business. Sequential growth was also strong, with revenue growing by 7% from quarter one. We're also pleased with the improvement in profitability compared with last quarter. Gross profit increased by $4 million on a revenue increase of $4.4 million. In fact, gross margin of 47.2% was the highest we have achieved since 2014. Also, adjusted EBITDA, of $9.2 million, was a 30% improvement over last quarter, and represented a 47% contribution on a sequential revenue growth. The improvement compared with last quarter was driven by dramatic improvements in service, productivity, and cost, with nearly every measure of quality and service improving significantly. At the same time that service improved, we drove efficiencies in our lab. Cost per test declined by 13.4% compared with last year to a record low, and lab productivity increased by 6.1% to a record high. We are realizing synergies in our laboratories, and we have more opportunities to pursue. We've also made very good progress in our billing process and function. Cash collections were strong as cash from operations totaled $6.5 million in the quarter, and days sales outstanding were reduced by five days from March 31st. We're very pleased with our quarter two performance, and are looking forward to more improvement as the year progresses.…

Thanks, Doug. Before we open it up for questions, I would like to briefly touch on a few financial highlights from the quarter. Second quarter consolidated revenue was $66.1 million a 5% increase over the prior year. Clinical generic testing revenue increased by 7.1%, Path Logic revenue decreased 18.8% and pharma service revenue decreased 7.7% versus the prior year. As Doug noted, we expected to have a resolution for Path Logic shortly. Although pharma services posted a modest decline in revenue yea-over-year, there was a 26% sequential growth from Q1. As we have discussed previously, pharma services revenue can be a bit lumpy. Average revenue per clinical generic test was $355 a 7.8% reduction from the prior year but a $1 increase relative to the quarter one level. Sequential growth in PD-L1 testing moderated to 10% in Q2 which lessened some of the pressure on average unit price as a result of mix shifts that we've seen in recent quarters. We continue to believe that is appropriate use estimates of average revenue per test in the range of $345 to $355 for the balance of the year. Consolidated gross margin was 47.2%, 190 basis point increase from the 45.3% reported in quarter two 2016 and a 310 basis points sequential increase from the 44.1% reported in quarter one. Fully 90% of the sequential $4.4 million increase in revenue from quarter one drop to gross margin in quarter two. This level of incremental contribution was a result of increasing lab productivity and unlocking costs synergies. In addition the increased revenue in pharma services division improved pharma margins as many of the pharma services costs are fixed and more revenue can have a dramatic impact on margins in this business. We expect gross margin to continue to increase during the balance of…

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Amanda Murphy with William Blair. Please proceed with your question.

Hi, thanks. Good morning. So…

Good morning.

So, the PD-L1 commentary was helpful just in terms of thinking about Q1 to Q2 trends. I was curious if you could talk a bit more about sort of your general lab pipeline. I think you had mentioned in the past larger hospital wins. Do we see that come through in the quarter at all?

Well, Amanda, this is Doug. Thanks for the question. PD-L1 continued to grow a little for us. And we're happy that we're a leader in this kind of testing because we believe that there will be more different types of oncology testing coming to us as a result of that. In terms of the pipeline, as you know, it takes a little while to go through the sales cycle with hospitals. And we think the progress is very good. The pipeline is very, very healthy. We're moving through the process very well. There were a lot of new account closes in the last couple of months after we finished the integration, but we're expecting that that momentum in closing new hospital accounts is going to pick up as we go through the year.

Okay, got it. And then I've got a question just in terms of the guidance. So obviously you have talked about being kind of the lower end of EBITDA, and I'm sure you established a range, and there's different outcomes there, I'm just trying to understand a bit better what's kind of changed relatively. I mean, I think the points you made make sense in terms of investment, and then obviously the bad debt point, but just trying to get an idea of kind of what changed, I guess, in terms of expectations relative to Q1, if anything, on the EBITDA line?

Okay, let me give you a little bit of editorial about that, and I think Steve is going to give you a little bit more detail. As we though about this there were a number of things that we'd like to put in context. First of all, our labs are doing great. And the improvement in our lab operations was actually better than we expected it to be at this point. Also doing better than we expected, frankly, is sales momentum. We think the pipeline is very strong, although it does take a little time to go through the cycle, we're happy that prices are stable. And that's good. What's a bit worse is really two areas, one is bad debt expense, and which is a little unusual because our billing process is terrific. We have a great billing team, cash collections are strong, but the expense relates to activity last year. And we had higher debt expense in quarter two, and we think that'll come down as the year goes on, but still it's a little higher than we expected. The other area that's a bit worse, frankly, is G&A spending. Frankly we're spending too much in admin. And we're spending a little bit more in the last quarter because we're still focused on stabilizing our service. But at this point we've instituted tighter controls, we're toughening up, and our focus is moving from a focus on service to a focus on business process improvement. And I think that that G&A expense will come down as the year goes on as well. But a combination of all those factors led us to point to the lower end of the guidance range.

So, Amanda, just to fill in a few gaps for you and for others on the call, the selling, general, and administrative expense has actually increased by about $2.6 million from Q1 to Q2. $600,000 of that was selling expense -- sales and marketing expenses, and that's a reflection of the higher revenue and higher marketing expenses. We've really ramped up our marketing activities this year. $550,000 of that was stock-based compensation which is in fact a non-cash item and is adjusted out for adjusted EBITDA, and that's a reflection of the higher stock price. And additionally the Board goes through a annual award period for stock options in April of every year. Bad debt was $460,000 higher than in Q1, and that's purely a reflection of normalizing our reserves. We're seeing some of the carryover effects of the integration. We want to build our reserves back up to the levels that we have operated at historically. Travel was up a couple of hundred thousand bucks in the quarter, and that's due to integration-related activities of which were fast and furious. The facility move of $264,000 is a one-time item, that goes away in adjusted EBITDA, and it goes away in quarter three. And then the Geneva one-time professional fees and other setup fees was about $300,000, and that will moderate considerably as the year goes on. And once we have revenue all of the Geneva expenses will be moved back into cost of goods sold. So $2.4 million of the $2.6 million is either growth or one-time related. We do believe that by the end of the year the bad debt expense as a percentage of revenue will begin to moderate back down and some of these one-time growth investments will be moderated and out of the equation. But we are still going to continue to invest in growth where opportunities present themselves.

Got it; super helpful. Thank you.

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

Thanks. Good morning guys.

Good morning.

You talked a little bit about Path Logic and a resolution there being reached in August. If you could give any more color there? And then is the impact going to be felt in time for 4Q? And also maybe could you tell us what's been the Path Logic drag on EBITDA year-to-date?

Okay, Drew, let me try to give you some comments and context about that. Path Logic really is an easy answer. We will have this resolved, and it will be resolved shortly. And then I can promise that. What we're trying to do is to be responsible about the resolution. Path Logic and the NeoGenomics core business share certain customers. And we need to go through this process deliberately. We are near an end, and we will be announcing this within the next several weeks. In terms of the drag and when it will be resolved, this will be resolved for quarter four. In terms of the impact in quarter two, I think we had about a $600,000 adjusted EBITDA loss, and that will go away as the year goes on.

Similar amounts in quarter one as well.

Okay, great. And then on pharma services, nice to see the uptick there, are we at a point where the momentum with the backlog build and kind of sales momentum there that we can say that's going to flow through to revenue quarter-to-quarter? And understanding the lumpiness, but should we see sequential uptick there? And then lastly, just kind of what are the margins there and how should we exit the year for pharma services post Geneva?

Yes, the pharma services momentum is very strong. And we were happy with the 36% increase in revenue. The 80% increase in backlog is certainly gives us a lot of confidence. And the path there is very positive. But as you know, the timing of revenue recognition in this area is somewhat uncertain. I would expect because of that backlog and because we have tighter visibility on the business in general that we will see an uptick in revenue. Again, timing is a bit uncertain. I would say the bottom line on this business is strategically we like this business. It's a good business for a lot of reasons. One is that it leads us to see what's going on in terms of innovation with the pharma companies. It's an area that we think will grow even faster than our core business, and it's also a bit of a diversification for us. And we like it.

And, Drew, in terms of pharma gross margin you can actually calculate this by backing out the clinical genetic stuff in the last table in the press release. But the margin increased in that business from 24.2% to 37.7%. I need to caution everybody that we do not do full allocations on that business, so that wouldn't survive a gap on it, but directionally it gives us a feel for the power of incremental revenue in the gross pharma margins. Fully 90% of the incremental increase in pharma services revenue dropped to the pharma services gross margin. And just to put things into context for you, last year we did $6.8 million in quarter two, and he had a high 40s gross margin in that area. Now, we've made some hires and some other investments in pharma, but we do expect the pharma services margin contribution to increase considerably as the revenue goes up there.

Thank you, guys.

Thank you, Drew.

Our next question comes from the line of Kevin Ellich from Craig-Hallum. Please proceed with your question.

Good morning. Thanks for taking the question. I guess going back to the costs and the bad debt. I guess it looks like on the balance sheet your net allowance for doubtful accounts reserve dropped by about $3 million sequentially. It's now down to $11.6 million. I guess how did that impact or flow through the income statement or P&L?

Well, keep in mind that that is really a reflection of how we write things off. So one of the things we have been doing is working with the billing team. And we did take a lot of write-offs in the second half, so clearly that did -- in the second quarter, excuse me. So clearly that did impact our bad debt expense with what you see roll through. But the fact is we didn't do as many adjustments in the first quarter, so it's a function of when we write off is when it actually hits the balance sheet. The expense reserve is when we actually don't believe it's collectable. So that tends to be more upfront. But when things are written off then actually it does hit the balance sheet. But we have accelerated some of our write-offs. So I don't believe that balance will be as high as it's been historically since we're trying to write things off a little bit faster than we have historically.

And then that's just based on -- that's just based on the [technical difficulty] of the receivables, or how do you determine what to write off?

A lot of things, it's when items are not collectable. Certainly we have a lengthy review. Historically our policy has been at 360 days, it's fully reserved. Our reserves do step up from that point. So again, as things age out the reserve balances and our bad debt expense basically increase over time. Again, but if our team knows something is uncollectible or if a client declares bankruptcy or something certainly we would accelerate that write-off based on known items.

So, Kevin, you're correct, we're at about 15.8 [technical difficulty] in Q2. We've historically run sort of 16% to 18%. And that is exactly why you guys should expect us to see increased bad debt expense in Q3 and Q4 relative to historical norms so that we can build that reserve back up again, so it all kind of ties together.

Understood. And then a quick one for Doug, so in your prepared remarks you talked about MMR, MSI. What was the contribution in the quarter, and what should we expect from that going forward?

Well, we just began to have an uptick, particularly in MSI testing during the quarter. We don't disclose the number of tests at that level of detail, but it's clearly growing. And we would expect it to grow as we go forward here.

Our next question comes from the line of Nicholas Jansen from Raymond James. Please proceed with your question.

Hi guys, congrats on a strong quarter. A couple ones for me, and just in terms of your guys' bigger picture thinking on capital allocation from here. I thought the interesting thing about the Clarient deal which had added a lot more infrastructure and scale for you guys to perhaps be more aggressive on the M&A front. And now that the integration is almost towards the end of that lifecycle, how do we think about your guys' appetite from a capital perspective as you look at your strong cash flow heading out into '18? Thanks.

Well, you see that we've invested a lot in capital for organic growth. We have a lot of organic growth opportunities. Geneva is one; we're investing in our Houston lab to grow our capacity there. So right now we're putting a lot of our cash, and particularly in 2017, into investments of an organic growth nature. In terms of M&A, we're pretty actively looking at possibilities. As you know, we've had our plate full. And so over the last year-and-a-half we've not as actively looked. There are some opportunities available. We're starting to talk with people. I think at this point we would be interested in maybe acquiring where there are quick synergies. And that's really our focus at this point.

That's helpful. Maybe just from a numbers perspective, I think if I heard you correctly about the third quarter adjusted EBITDA being similar to what you guys just reported to 2Q, and to get to the well end of the range, which is the guidance you talked about for the full-year, would cause for a pretty sizable sequential delta between 3Q and 4Q. And I'm just trying to better understand maybe some of the specific drivers behind that. I would assume bad debt is a little bit lower. I assume some of these expenses ramped down. But it would still need to be a pretty healthy incremental contribution margin sequentially. So any helpful color will be there would be great. Thanks.

Sure. We would advise you to take the Q2 level and remove the $264,000 of one-time expense, and run it at about that level. The reason for that is we're going to have - we typically have flattish revenue from Q2 to Q3. There's not a lot of growth there because of seasonality. And we're continuing to make investments in Geneva, and some of the other things we're going to continue to run bad debt at a higher level. So until we get normalized here we think the most conservative way to do this is just to assume total SG&A is somewhere on the order $29.5 million which would eliminate that one-time moving expense.

Just to add a little bit more color on that, what you've seen here is -- and then this is really the historic performance of NeoGenomics, we have pretty good incremental gross profit. And you saw that in quarter two versus quarter one. And we would expect to maintain pretty high levels of incremental profit going forward. That's driven by a few things, one is we are continuing to reduce our cost per test. In the lab, I mentioned our labs are doing very well, and we see a continuation of that trend as we pull on the levers of supply cost and performance improvements, and so forth that I've mentioned. I think SG&A, particularly bad debt expense; we should see that coming down over time. And we think the incrementals that are projected from quarter three to quarter four are very doable.

Congrats again on a good quarter.

Thank you.

Our next question comes from the line of Paul Knight with Janney Montgomery. Please proceed with your question.

My first of two is, Steve, on the taxes, where are we with the full year, I mean, the Q or your last filing shows seven-ish or more, but more specifically are you a taxpayer in Q3 and Q4?

Yes. Let's be clear, and this is actually in our 10-K document, we have over $50 million of NOL. So the vast majority of what you see on the tax expense line is really going into deferred taxes barring some alternative minimum taxes that we wound up paying, but our cash taxes we do a list in the cash flow statement, but even for future years with $50 million of NOLs, we do not expect to be a cash taxpayer for several years.

And then lastly, regarding the hope, Doug, there is a question for you, the selling of Clarient IHC and vice versa on molecular test, how is that traction going?

Thanks, Paul. I mentioned that those are our two fastest growing areas. And so, one of the -- part of the thesis behind the acquisition of Clarient was that there are lot of cost synergies, but there were also some cross-selling opportunities for the old Clarient accounts to be able to take advantage of the extensive molecular menu of NeoGenomics and vice versa for the old NeoGenomics accounts to take advantage of the very comprehensive digital pathology and immunohistochemistry of Clarient. That is happening, and you can see that molecular and immunohistochemistry are growing faster than our other tests at the present time. Now, I think that we've got a lot of room to continue to grow that particularly on a molecular side. And molecular, we have a terrific menu there and a lot of these new tasks for immune-oncology we think are molecular-based. And as we continue to educate our sales team and educate our client base, we think that we've got room to grow particularly in that area.

Thank you.

Our next question comes from the line of Joe Munda with First Analysis. Please proceed with your question.

Good morning, guys. Thanks for taking the questions. Can you hear me okay?

Yes. Thanks, Joe.

So my first of two here, Doug, looking back at the Analyst Day a couple weeks -- well, now two months ago, right about, I guess went into detail about the backlog roughly 50% class that is preclinical, the other 50% in Phase 1 or 2 or 3, you talked about roughly 400 active projects, new client engagements, I guess, can you give us a little bit more color, if there has been a change, or is that a good I guess backdrop to work off of -- or think of in terms of where you guys are out with Pharma services? In addition, you talked about roughly 10% of the backlog coming from MultiOmyx, so any color or updates there would be great.

Sure, Joe. The backlog in pharma services, we think is a good indicator of the future growth potential. And that number is -- now we're scrubbing that number increasingly, so in the quarter, the net increase to backlog is really net of what we think our contracts that might not occur. So, we think the $46.5 million of backlog that we reported is a good number. And the growth there is pretty broad based, but MultiOmyx is growing faster than the other areas. We've got a lot of interest in MultiOmyx Technology. I think you and others have seen it in action. We demonstrated it during the Analyst Day tour. And it's getting a lot of good attention. We've got more and more pharma companies are interested in it. So, the backlog is a good number, and it indicates a lot of good future growth there in pharma.

Doug, allow me to just add one quick question to that, yes, you mentioned in your prepared remarks a new IT system for pharma, I was wondering if you could give us some details regarding that. And I mean, was that sort of the hindrance, or I guess the reason that held back pharma services, I mean any thoughts there would be great.

Sure. Pharma services has slightly different requirements than our clinical division, particularly in IT. So, the pharma sponsors require a lab system, which has extraordinary bar coding and tracking capabilities, and we have been working on and have launched a system -- recently we launched a new version of it, have invested in it for quite some time, which is compliant with a rule called 21 CFR Part 11, which is a pharma specification for IT systems. And so, this is an important component of our competitiveness in this area. And we now have a good system, we've launched it just a few months ago, and we will increase the capabilities in that system over time, but this will allow us to grow we think even perhaps more rapidly than we have in the past.

Okay. And then switching gears on Path Logic, I think we are beating this one to death, but if you could just remind us what you paid for that, that line, and if a sale were to occur or were that to be the resolution, does the guidance as it stands today include any potential write-downs as a result of it or any potential charges resulting from the sale? Thank you.

Okay. Yes, so I will talk a little bit about Path Logic. I think we paid $6 million for few years ago. A lot of things have changed since we acquired Path Logic. First is -- probably perhaps most importantly we acquire Clarient. So, in the past when we had just Path Logic we acquire Path Logic to be able to support the Covance clinical trials business. Covance was acquired by Lab Core, so that affected the Path Logic business. Then we acquired Clarient and we found that we were competing in the same geography as Path Logic was. Path Logic is more like a client of NeoGenomics. And Path Logic was competing with several clients that Clarient had, and we were gaining in that geographic area. So, we had a little channel conflict. And the original thesis behind the acquisition wasn't appropriate any longer. I think in terms of the resolution, I mentioned, we expect a resolution very shortly. We may have a small fixed asset write-off one-time cost, but I think you know that would be relatively…

We previously wrote off all of the intangible assets related to Path Logic in quarter four.

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

Thank you. Just following along out about Path Logic; is Path Logic's resolution included in your reiterated guidance today?

No. When we set up the guidance we didn't take into consideration the resolution of Path Logic because we weren't in a place where we could talk about that yet. Obviously it will depend on what month the resolution occurred with $600,000 a quarter of negative adjusted EBITDA with that going away in some point here during quarter three, you know, that will impact certainly quarter four and perhaps some of quarter three.

Okay, very good. And the pharma service revenue has been -- it grew nicely this quarter, the backlog of that business has been growing very nicely and continues to, and I believe it outpaces the general slope of revenue growth in that business still. What can we think about the pharma services revenue trend and how soon will that start to reflect the growth in backlog?

Well, Ray, we ask this question a lot. So, we have a very healthy backlog for the last three quarters. Before quarter two we were scratching our heads saying, "Where is the revenue?" It's starting to show up. It started to show up in quarter two. It will show up in the future. The timing as I mentioned is uncertain, but you know, fully at $46.5 million of backlog up from $26 million, you know, a year ago at quarter two that is going to result in revenue over the next couple of years. So, it is difficult for anyone in this business to accurately predict when the revenue will fall on a quarter-by-quarter basis, but the trend is clearly up.

Okay, thanks. That's my two questions.

Okay, thank you.

We have time for one last person to ask a question. Our next question comes from the line of Chris Lewis with ROTH Capital Partners. Please proceed with your question.

Hey, guys. Good morning. Thanks for adding me in here. I wanted to circle back to the gross margin discussion. Yes, that number notably topped our expectation despite some of the mix trends. I guess broadly just with the lab consolidation now completed, is this kind of a new reasonable base level to expect going forward?

Yes, I think so. I think so. Our gross margins, we looked at a little historical, looked this morning, and back in 2014 before the massive fish cuts we were up around 48%. So, we're acquiring our way back, scale helps, but we've got cost reduction opportunities, we've reduced our cost per test 13% you know in quarter two. And we think we can continue to reduce our cost per test. And that all result in higher gross margins. As our cost reductions as you know are outpacing the mix change impact in our revenue per tests, and we certainly think with this more stability in revenue per test going forward as we mentioned that we can make gains in the gross margin by continuing to cost reduces in our last…

And keep in mind, Path Logic's gross margin has been operating around 0%. So, after the resolution of Path Logic, that will be additive to us.

Right, and I guess just following up on the earlier question around the implied acceleration in EBITDA, in the fourth quarter versus the third, you know the commentary seems to imply another meaningful step up on the gross margin line in the fourth quarter. I guess, any commentary that you can you know provide or potentially quantify where you think gross margins kind of exit the year?

We hope Chris that they are going to exit the year higher than where they are for the reasons that we mentioned, but we haven't given specific guidance around that.

Okay, thanks.

That is all the time we have for questions. I'd like to turn the call back over to management for closing comments.

Okay, thank you very much. As we end the call here, I'd like to recognize approximately a thousand people at NeoGenomics that are operating around the company for their dedication and commitment to building a world-class cancer genetic testing program. And so, on behalf of the entire NeoGenomics team, I want to thank you for your time joining us this morning, let you know that our third quarter 2017 earnings call will be held on or around October 25th of 2017. For those of you listening, there are investors or are considering an investment in the NeoGenomics, we thank you for your interest in our company. Goodbye.

Ladies and gentlemen that does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.