Neogenomics Inc (NEO) 2011 Q2 法說會逐字稿

Greetings and welcome to the NeoGenomics second-quarter 2011 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Doug VanOort, CEO for NeoGenomics. Thank you, sir. You may begin.

Thank you. Good morning. I would like to welcome everyone to NeoGenomics second-quarter 2011 conference call and introduce you to the NeoGenomics team that is here with me today. Joining me this morning are Steve Jones, our Executive Vice President of Finance; George Cardoza, our Chief Financial Officer; Jerry Dvonch, our Director of Finance and Principal Accounting Officer; and Fred Weidig, our Controller. Bob Gasparini, our Chief Scientific Officer, is traveling and will be available by phone to answer questions at the end of our presentation.

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 statements speak only as of today, and we undertake no obligation to update any such statements to reflect events or circumstances after today.

Thanks, Steve. I'm going to make some brief remarks about our results for the second quarter and comment on some important initiatives we are focused on for the third quarter and second half of this year. We will then turn the meeting back over to Steve to discuss our 2011 second-quarter results in more detail.

This morning we reported the strongest quarterly year-over-year revenue growth in our 10-year corporate history. Indeed, the quarter two revenue growth of $2 million was approximately $700,000 or 50% higher than the top end of our previous guidance. Although approximately $300,000 of this growth was nonrecurring in nature, we are still quite proud of the work our people are doing to satisfy our existing clients and attract new ones.

The momentum in our test volume growth that began in the last quarter continued and strengthened during quarter two. In fact, by June our average daily test volume was over 30% greater than it was at the beginning of this year.

We are also pleased to report that we have finally started to see meaningful increases in sales force productivity as a direct result of the numerous sales and marketing initiatives we implemented over the last year. This has resulted in a significant increase in the number of new clients since year-end.

Our profitability improved with the increase in revenue, and our adjusted EBITDA and cash flow from operations were positive for the quarter. As we discussed in the press release, approximately 35% of our revenue growth fell to the bottom line. That incremental profit improvement was encouraging, especially given that revenue per test was down almost 3% compared with last year. We continue to hold the line on selling, general and administrative costs and gain significant operating leverage in those areas with SG&A as a percentage of revenue falling 10 percentage points to 46% from 56% in quarter two of last year.

Gross margin in quarter two was 44.5% compared with 46.1% last year. While much of this decrease can be explained by the decline in average unit price, we were expecting considerably more leverage in our cost of goods sold. Steve is going to go into this in a lot more detail in a minute, but I want to comment on our gross margins.

Our average cost of supplies per test was approximately 14% higher than last year because some key suppliers raised prices. We are obviously not pleased that suppliers can raise prices in this tough environment, and we will look forward to remedy this going forward. We estimate that this increase in supplies expense reduced gross margin by approximately 2 percentage points.

In addition, we were challenged to hire and train employees to keep up with the volume growth, and we had to contract for labor at higher prices. We are working to improve in both of these areas going forward, and we expect to see a gradual improvement in our gross margins as the year continues.

On the positive side, our laboratory productivity improved with our laboratory employees performing more tests on average than ever before. These improvements help to offset costs elsewhere, and as a result, our overall average cost per test remained flat from the level recorded in quarter one.

Despite the lack of operating leverage realized in our cost of goods sold, we took a major step forward in our goal of becoming profitable by leveraging our SG&A, and we expect to continue to see more operating leverage from both cost of goods sold and SG&A moving forward.

For the past several quarters, I have discussed some significant actions and initiatives we have been working on, and I would like to briefly update you on those initiatives.

We are generally pleased with the changes we have made in much of the Company's operations. We told you that we consider 2011 as a time for us to perform, and we feel like we are on track.

In sales and marketing, we continue to see results from many initiatives. We continued to make changes in our organization to better define our sales process, invest in training and enhance the way we manage our pipeline of opportunities. We believe those actions are resulting in more discipline and accountability and productivity.

At the end of the quarter, we had 30 members in our sales and marketing team. We have a nice mix of seasoned sales professionals working along with newer talented representatives. Our sales and marketing team is working together more collaboratively and getting more productive as a result, and we are gaining confidence in our team.

I mentioned in our last call that we continued to add to our product and testing menus. During the quarter we added several molecular tests to our product offering and expanded our FISH menu for several other cancers. We continue to spend money in this area and expect to introduce another half-dozen tests in the second half of this year.

We are also investing heavily to expand our immunohistochemistry product line as these tests are being requested more frequently by our customers.

Two other important initiatives involve information technology and our medical team. In information technology, we are currently working to enhance our systems capabilities, improve our efficiency and be able to connect better with our clients' systems.

We are also adding to our medical team's capabilities. We filled some key positions in hematopathology, cytogenetics and molecular areas, and we are working to recruit senior medical leadership to add further to our hematopathology capabilities. We believe that our initiatives in sales and marketing, new product development, IT and in building our medical team will enhance our competitive position further, and we are aggressively investing in each of these areas.

The guidance we issued this morning of $10.2 million to $10.8 million in revenue for quarter three implies a year-over-year growth rate of 17% to 24% compared with the $8.7 million in revenue reported in last year's third quarter. We expect to remain EBITDA positive in the third quarter, even as we invest in growth initiatives. We expect improvement in gross margins to begin to have an impact as the year progresses. We are not expecting much improvement in gross margin percent until the fourth quarter as productivity enhancing initiatives take some time to fully implement.

I will summarize my remarks in the following way. We continue to make progress building and developing our Company, and we are now just beginning to see those efforts yield improved financial performance. We continue to work hard on revenue growth and are investing in a variety of growth initiatives even as we remain determined to drive toward profitability.

We remain very pleased and proud of our Company's quality and service levels and of our people. We believe that our flexible business model, excellent test menu and new product portfolios are strong, and as a team we remain excited about our Company and its prospects, and we are intensely focused on continuing our growth momentum in coming quarters.

I will now turn it over to Steve to comment more fully on this past quarter's results.

Thanks, Doug. I will start by reviewing some of our financial and operating metrics, and then we want to open it up for questions.

During the second quarter, we reported total revenue of approximately $10.5 million, a 23.3% increase from Q2 last year. As mentioned in the press release, about $300,000 of this revenue was from one-time overflow testing, which is not expected to carry through into Q3. After adjusting for this and for the internalization of testing by one large client in 2010, recurring revenue grew by approximately 25% on a year-over-year basis. The number of requisitions or cases there were processed in Q2 increased by 24.5%, and the average revenue per requisition decreased by 1% from Q2 last year.

The total number of tests reported increased by 26.9% from Q2 last year. However, on a normalized basis, after adjusting out the tests associated with the extra $300,000 in revenue this quarter and the lost test volume from in-sourcing that was included in our Q2 2010 results, recurring test volume grew by approximately 32% on a year-over-year basis.

As we have discussed before, this adjusted test volume growth number is very important in understanding the strength of our business. It is the only metric that washes both the effects of in-sourcing and the effects of unit price declines out of the equation.

Another important metric is the average number of tests reported per day because it washes out the differences in the number of reporting days per month and per quarter. The number of tests reported per day in Q2 was 287, an increase of 18.2% sequentially from Q1.

Recall that this metric increased by 7.4% from Q4 2010 to Q1 2011. Thus, clearly our daily momentum continued to build in the second quarter.

For those of you that track such things, there were 64 reporting days in Q2 and 63.5 reporting days in Q1. Average revenue per test was $570, a 2.9% or $17 decline from the $587 recorded in Q2 last year. We are encouraged that our average unit price finally seems to have stabilized around this level as it was only off $2 from the level reported in the first quarter.

Turning now to gross margin, it decreased by approximately 1.6 percentage points in Q2 to 44.5% from 46.1% in Q2 last year. Most of this decrease was a result of the $17 decrease in average unit price from Q2 last year. Our average cost per test, which is calculated by dividing total cost of goods sold by the number of tests reported, only increased by $0.21 from Q2 2010, thus costs per test was effectively unchanged. Therefore, with a $17 decrease in average unit price and costs per test unchanged, our average gross margin per test was $17 below what it was in Q2 2010, which when aggregated resulted in the 1.6 percentage point decline in gross margin to the 44.5% level that we recorded in the quarter.

However, as Doug mentioned in his remarks, our supplies and contract labor costs were higher than average and offset the improvement to gross margin that we should have otherwise seen from the increase in productivity per laboratory FTE. We believe that the 14% increase in our average cost to supplies per test reduced gross margin by at least 200 basis points.

In addition, contract labor and over time was considerably higher than normal as a result of the strong volume growth as we had to do whatever it took to maintain our turnaround times and not compromise on our service levels.

The good news in all this, if there is any, is that unit prices appear to have finally stabilized and reining in costs should not be that difficult to accomplish. We have already begun to staff up considerably, which will be far more cost-effective than using contract resources.

In addition, we believe that we can get our supplies expense as a percentage of revenue back in line with where it has been historically in coming quarters.

Absent any further declines in unit prices, it should be just a question of time and management focus before we start to see improvements in our gross margin.

Turning now to SG&A, sales and marketing expenses were down $259,000 or 13.3% versus Q2 last year. As discussed in the press release, this decrease was primarily driven by a decrease in the number of sales and marketing personnel, which was the result of eliminating a number of underperforming individuals over the last year. Candidly we probably overhired in the early part of last year, and we do currently have two openings for sales reps, thus we expect sales and marketing costs to increase in coming quarters, but I don't believe you will see a big difference in sales and marketing costs as a percentage of revenue.

General and administrative expenses increased $317,000 or 11.5% from Q2 last year. This increase was primarily attributable to increases in payroll, recruiting, information technology and R&D expenses versus last year.

Total SG&A expense increased just $58,000 or 1.2% on a year-over-year basis. When you consider that this increase in SG&A was just 3% of the incremental $2 million in revenue, we are quite proud of our efforts to hold the line on costs.

As Doug mentioned, total SG&A expense as a percentage of revenue decreased by almost 1000 basis points to 45.6% from 55.5% in Q2 last year. This is a significant accomplishment. No one on our management team has ever seen another lab company achieve 1000 basis points of incremental operating leverage from their SG&A in just one year. Thus, although we got little to no incremental leverage from our cost of goods sold, we got outstanding leverage from our SG&A.

As we discussed in the press release and Doug touched upon, we intend to continue to invest in a number of initiatives in the coming quarters. While we should be able to capitalize the costs for some of these initiatives, others will result in modest incremental increases in SG&A. Rest assured that we plan to emphasize profitability and growth and do not plan to run large losses to accomplish any of this. Indeed, we believe we can keep SG&A as a percentage of revenue around the same area as it is now for the next few quarters and accomplish our objectives.

Further, with stable unit prices and just modest improvements in gross margin, we expect to be able to continue to drive approximately $0.25 to $0.35 of each incremental dollar of revenue to the operating profit line, most of which will drop to the bottom line while we are working off our substantial NOL carryforwards and thus not a taxpayer.

Net interest expense in the quarter was flat relative to the level reported last year. The balance on our capital leases, which is typically more expensive debt, actually decreased by $400,000 over the last year. However, the balance on our less expensive bank debt increased by $800,000. The net result was a wash in terms of interest expense.

Net loss for the quarter was $293,000 or a loss of $0.01 per share compared to a net loss of $978,000 or a loss of $0.03 per share in Q2 2010.

As mentioned in the press release, this $685,000 decrease in net loss represents approximately 35% of the incremental $2 million in revenue year over year.

Depreciation and amortization was approximately $474,000 in Q2, and EBITDA was positive $360,000. However, if you were to further adjust our EBITDA for the $123,000 of non-cash charges relating to stock-based compensation and warrant amortization, our adjusted EBITDA for the quarter was $483,000, which is a $631,000 increase over the levels reported in Q2 2010.

We finished Q1 with 196 full-time equivalent employees and contract doctors as compared to 189 at June 30, 2010, and 185 at December 30, 2010.

As Doug mentioned, we begin hiring in Q2 to keep up with the volume growth. Incidentally we filled a number of open positions in the lab in early July, and we are currently at 203 FTEs.

Our accounts receivable balance net of allowance for doubtful accounts was $7.2 million at June 30, up approximately $1 million from the $6.2 million balance at March 31. Our A/R balance expressed in terms of days sales outstanding was 62 days as of June 30, down from the 63 days reported as of March 31. However, keep in mind that we had an exceptionally strong acceleration in growth throughout the quarter, which always makes the DSO appear worse than it is. If you were to average our A/R balance between March 31 and June 30, our DSO would have been closer to 59 days.

In terms of our overall liquidity, as of June 30, we had $3.1 million of cash and restricted cash on hand and $880,000 available to us under our credit facility, as compared to $3 million of cash and $173,000 of availability at March 31. Thus, we actually increased our liquidity by approximately $800,000 over the last quarter.

I should mention here that in Q2 we not only had positive cash flow from operations for the quarter, we also had positive cash flow before financing, which is calculated by subtracting total capital expenditures, including leased capital expenditures from cash flow from operations.

In effect, the Company would have been able to fund all of its CapEx without borrowing if it had chosen to do so. This is the first quarter in our corporate history where we have accomplished this.

I should also mention that the $8 million available to us under our stock purchase arrangement with Fusion Capital expires next week, and we do not plan to renew or replace it. Thus, we will no longer be factoring this into our liquidity calculations. We put the Fusion Capital facility in 30 months ago as an insurance policy in light of the deteriorating capital markets conditions, and we are quite proud of the fact that we never had to draw on it.

Before wrapping up our formal remarks, I want to touch on the Q3 guidance issued this morning. We are projecting $10.2 million to $10.8 million of revenue for Q3 with positive adjusted EBITDA and earnings per share of between $0.00 and negative $0.02 per share. At the midpoint of this range, we would have approximately 21% year-over-year growth from Q3 2010, but flat sequential growth relative to the quarter just completed. However, investors should back out the $300,000 of non-recurring revenue recorded in Q2 before establishing the Q2 baseline for sequential growth comparisons.

I should also highlight that historically we have seen very little sequential growth from Q2 to Q3 and sometimes even modest declines as a result of seasonality. Thus, while we are optimistic that our revenue momentum will continue into Q3, we are still expecting seasonality to impact our sequential growth rates.

Incidentally for those of you that track such things, we only had $130,000 of revenue in Q3 2010 from the customer that in-sourced their testing last year, and this was the last quarter we had any revenue from this customer. Thus, the pressure on the year-over-year comparisons that we have been experiencing over the last 12 to 18 months will be minimal in Q3 and completely eliminated by Q4.

At this point I would like to close down our formal remarks and open it up for questions. Incidentally, if you are listening to this conference call via webcast only and would like to submit a question, please feel free to e-mail us at sjones@neogenomics.com during the Q&A session, and we will address your questions at the end if the subject matter has not already been addressed by our call-in listeners.

Operator, you may now open up the call for questions.

(Operator Instructions). Amanda Murphy, William Blair.

Good morning. Just a question -- actually I have a few questions. But first on the volume side, you guys are reporting great growth and have talked to some improvements in sales force productivity, etc. So I'm curious you are obviously getting that business from somewhere. So what is it that gets an account to move to you guys? And then also if you could talk to any kind of underlying utilization trends, it may be difficult given your growth, but just curious on that point as well.

Well, thanks for your question, by the way. It is a very competitive environment out there, and we are really pleased about our growth. Because we are winning versus some very tough competitors.

I think that there are a number of reasons for that. One is our service levels have been, we believe, stellar. And they have been very consistent service levels as well. It is not only turnaround time, but it is all the other things that we do for clients.

I think the word is starting to get out. We have a lot of word-of-mouth positivity amongst our clients, and our sales force is fueling that because our sales force is now a lot more seasoned.

We have gone through a number of initiatives in sales and marketing, and our people are better trained. They are more focused than they have ever been before. We have got more tools for them, and we are seeing a lot more productivity by them. So we are getting out there in front of clients a lot more. We are winning a lot more accounts because of our service levels and our product offering, which we continue to expand as we discussed. And so we've got a pretty robust pipeline as well.

We think we have got opportunity as well as we add to our test menu. We talked about immunohistochemistry as an example there. We have a number of clients that send us a lot of work, but not IHC work because we don't have a robust enough product line, and so we are working very hard to capture more of their business as we expand our product.

Okay. And then if you look at underlying utilizations, one of your larger competitors reported this morning and talked to, I guess, a couple of things. One is just a weak position opposite the environment impacting volumes and also continued in-sourcing, which I know has been an issue for you guys in the past. I'm just curious if you can provide some perspective on those two things.

Let me comment on the in-sourcing thing for a minute. We have tried to flip that from a competitive disadvantage to an advantage for us. And, as you know, we have what we think of as a very flexible business model here.

So we can perform global tests. We can perform tech only tests. In fact, one of the growth opportunities that we managed in quarter two was to help one of our important clients to internalize a certain part of their testing, and we are performing all of the other testing for that client. So that is a way that is a win-win. We can help our clients to internalize where it makes sense for them. We can lend some of our expertise to their efforts, and we can gain marketshare because then as a result they will send us all of their other work.

So there is a lot of in-sourcing going on. In terms of utilization, we have not seen in our business a big decline or pressure on utilization, although we know there is some because there is a high unemployment rate out there obviously, and that has been impacting every laboratory company. But we deal with cancer patients. And so many times there is not a lot of opportunity for them other than to seek diagnosis and treatment.

In fact, to that end, Amanda, if you look at the average utilization by client from Q1 to Q2, a number of our clients actually increased utilization because the weather was such a factor in the early part of Q1 across the central and northeastern part of the US. So I'm not sure the data we are seeing would correspond really with what you might have heard from that other lab.

Okay. Got it. And then I guess as a follow-up to that whole thing, obviously there has been discussion about hospitals buying physician practices to control their referral patterns. I'm curious if you should see that as an issue or more of an opportunity just given your flexible model?

Well, it cuts both ways. Frankly, we are seeing it as a little bit more of an opportunity. Because what we are doing is we're going to -- our clients, as you know, are predominately community-based and hospital-based pathologists. And so if, in fact, as those hospital-based organizations are growing, our clients are trying to gain more of that business, and we're trying to help them to do that.

And so as hospitals buy hem/onc practices or buy other practices, in many cases it will help our clients.

Now it does cut the other way in some cases where a hospital group that is not a client of ours will buy a current client, hem/onc client, but that has not happened as much. Our business model increasingly is to help our pathology clients to be more competitive out there, and we think that is a winning formula for us as hospitals buy more physician practices and gain share locally.

In fact, Amanda, there is a great example that just happened along the lines of your question in March. One of our older hospital-based pathology clients that is a big tech only customer of ours, they bought an 8% hem/onc group in their local area, and their volume with us doubled between February and April as a result because we wound up picking up all that incremental business.

So, as Doug mentioned, our business is probably more predominately skewed toward pathology in hospital groups. So just if you look at it on an average basis, it should be more of a benefit to us than perhaps a detriment to spread.

Okay, guys. This is the last one for me then. Obviously the UroVysion cuts were sort of painful for a lot of people. I am just curious if, I guess, what you are seeing on the reimbursement fronts are either positive or negative. Anything on the Florida situation or any other area that you might see as a risk going forward?

Yes, we think of UroVysion as we took the lion's share of the hit when that large customer in-sourced last year, and so it did not affect us as much perhaps it might affect others. It is down to about 3% of our total testing revenue. It is not a huge piece of our business anymore.

With respect to other reimbursements, the issue of the Florida Medicare service provider limiting the flow markers to 24 markers is still out there. We are actually beginning to see other parts of the country implement similar policies. We have changed our revenue recognition policies to limit them to 24 markers. If we are successful on appeal for getting any more than that, we will add it as a prior period revenue adjustment.

So it is kind of already baked all into our mix. There is not any incremental impact of pricing. The biggest impact was sort of put through our mix there in quarter one.

So we don't actually see anything on the horizon for the rest of this year that will lead to incremental pricing pressure. We are actually quite encouraged by the fact for the first time in many quarters that we are going to have a stable pricing environment for a while here now.

Who knows what will happen next year. We know that the 1.75% decrease in reimbursement for all the clinical lab fee schedule tests will take effect. But when you really look at our mix of business, there is only about 15% of our revenue comes off the clinical lab fee schedule; the rest comes off the physician fee schedule. And so we are not anywhere near as subject to that as perhaps some of the bigger labs.

Kevin Degeeter, Ladenburg Thalmann.

Congratulations on the nice results for the quarter. A couple of questions for me. Just so that signing off the top and following up on the point with regard to flow reimbursement, can you just give me a little more granularity as to if you had experience with cases now where you have appealed for the additional markers? Incrementally it sounds like you feel the probability of getting reimbursement for the full number of markers that you are running that you're a little less optimistic that is going to pull through?

It comes down to is it worth the effort to go after the incremental. Each appeal is on a case-by-case basis. It is time-consuming. We have been successful on a number of appeals. I would say, what do think, George, 20% or 30% of the appeals? But, at the end of the day, it is a lot of time to spend chasing it. Unless there is a hue and cry from the industry that gives us reason to believe that this is going to change, our mindset is shifting more and more towards this is one that we are probably not going to get back and we are just going to need to live with it. And so I think we are slowly getting comfortable that the new reality may be the limit is 24, and it is what it is.

In almost all the hem cases we run, almost all of our doctors request 28 to 31 markers. It has been established as medically necessary in a number of different areas of the country. We are quite surprised at how aggressive of a stance that the Florida or First Coast Options service provider has taken.

But having said that, we are seeing indications that there's a couple of other service providers doing the same thing. And so I'm not sure where it will shake out. We have not given up yet, but I would tell you that with the more and more data that comes out, it is less and less likely that we are going to see relief on that front.

Maybe turning around that question from a little different perspective, I mean my sense is the incremental gross margin by the time you factor in the costs associated with trying to recapture that additional revenue would be pretty modest regardless. So if I thought about this as the impact on gross margin from any incremental revenue you are able to claim for the additional markers, it sound like it pretty much washes out.

I think that is right, although the billing costs associated would be down in SG&A, not in gross margin. But it is some amount of money per test without a lot of extra costs associated with it. But whatever you pick up on the gross margin side would probably have a pretty heavy offset on the SG&A side and so you're right. It probably would come because you got to figure in the costs of the other 70% you are not winning as well. And so it would probably come close to a wash.

And maybe just two more quick questions for me. In 2010 the Company made a big push to get more of the private pay business under contract. You were successful in doing that. Can you just talk about how that is flowing through the P&L if at all at this point? I mean obviously some of it is coming through in the revenue per test, but are you seeing any offsetting volume gains or benefits? Can you give us a little different granularity on how that is playing through in the business.

Sure, Kevin. So there is no question we are seeing some volume gains. There is some avoidance of volume loss in there, too, I would say. The number of the managed care organizations did get quite aggressive last year and actually sent letters to providers saying if the lab is not under contract, then you should not use them. And so we feel like we did the right thing relative to volume.

Now we are also right now engaged in an exercise to try to turn that even more to an advantage for us by looking at leakage reports that are provided by managed care organizations as they try to rein in their costs, and that will help our volume as well going forward. So we are trying to use tools in collaboration with our partners in the managed care organizations to help each of us.

So I would say that it has been -- the volume gains to this point have been relatively modest, but we continue to work on those. And we think we did the right thing.

Yes, and I would say we had great timing on this because we were in front of it, and then there was this big push by a couple of them last year to eliminate leakage, and there were other labs that did not get in front of us and paid a really healthy price for that. And so we are quite pleased with it.

It was painful to our investors to watch our unit price go down. Now we suffered a 14% peak to trough decrease in unit prices, which absent any other change comes straight out of gross margin. And that was brutal. But we are through it now, and we are feeling comfortable that we have got a base in that we can then improve off.

Okay. Great. And just lastly, can you just talk a little on the molecular side? You mentioned that you launched some tests in the quarter, and I think some of those may have been coming from -- instead of using a third-party bringing those in-house. But can you just talk about the bigger picture strategy for the molecular business and how you envision the right mix of molecular tests for your customer base, which is disproportionately on the hem side?

Sure. Bob, do you want to answer that, or do you want me to take a crack at it?

Why don't I start, and then you can follow up, Doug.

Great.

Can you hear me okay, everybody?

Yep.

Okay. So it's a great question because there is a lot of movement now on the molecular side of things. There is a lot of different platforms. More importantly, there is a lot of different applications within the platforms as we look at DNA, array technology, gene expression profiling, RNA, RNA silencing.

And so what we do is we have a process to sort of look through all of that and try to choose carefully based on a strategy of trying to move into the molecular areas that answer the relevant clinician questions. That is probably the briefest answer to your question. And that is, if a test is diagnostic, that answers a certain set of questions. If a test is prognostic, it answers another set of questions.

But today's questions that come from the oncology community and from the pathology community are more and more focused on what is collectively known in the lay population as personalized medicine. We call it predictive testing and the ability to use the molecular tests or even a non-molecular test to answer a question that is directly related to a patient response to therapy.

So if you're asking about an overall general strategy, when the algorithm is appropriate, meaning that there are already diagnostic questions that are being answered, there are already prognostic questions being answered, our strategy would be to develop new molecular tests via whatever platform to answer questions that are predictive in nature and that allow clinicians to tailor or personalize their therapeutic approach to these cancers.

Elemer Piros, Rodman & Renshaw.

Very nice quarter. Very good signs of recovery. What I would like to ask is, Steve, if you could break out some of the non-cash items in the P&L so we could help to reconcile what those may have been?

Sure. There is actually a table at the back of the press release that breaks out the depreciation and amortization into non-cash stock-based compensation. Depreciation and amortization was $475,000, and then the non-cash stock-based compensation, which includes the amortization of -- (multiple speakers)

I see. I did not see that at the bottom, yes.

$123,000. (multiple speakers) I'm sure there's a few others, but they would not be anywhere near material.

Okay. You guided for the third quarter. What sort of an assumption shall we make for the whole year then compared to last year? Last year was challenging. You clearly have momentum going on right now. What sort of range would you feel comfortable for the year?

Well, you know, last October we put a yearly guidance of $41 million to $45 million of revenue for 2011. I think we still feel comfortable at the lower end of that range. I think we would have to have outstanding quarters to get up into the upper end of that range. But I think we feel reasonably comfortable that the lower end of that range is very, very doable.

And so usually we start to see a nice uptick in revenue in Q4 because of the seasonality snapback. Keep in mind, there is still about 30%, 31% of our revenue comes from the state of Florida, and a lot of the senior citizens go back north in the summer months. And so it disproportionately impacts us in terms of sequential revenue growth between Q2 to Q3 and then Q3 to Q4.

So we would normally get a nice snapback every year as a result of that, and I think we are expecting a snapback again this year. I don't want to get into providing a specific Q4 number, but if you aggregate where we are with a Q3 guidance, I think we feel reasonably comfortable that we will be in the -- certainly above the low end of that range and in the lower part of the range of annual guidance.

That is very helpful, Steve. Doug, if you could address where are we in terms of the melanoma test that you launched, when do we expect more support from the scientific literature for it, and what have you changed if anything on a marketing front to make it more appealing to customers?

And a follow-up question to that is, there was some other tests in the Abbott relationship that were going to be launched. If you could provide us an update on that, please?

Sure. The melanoma test has -- we continued to market it. We are continuing to talk with dermatopathologists around the country to try to advance the understanding of the test. We've got a publication that is now being evaluated by a journal to try to get a peer-reviewed piece out there, and we think that that will help. Clearly there is some time required by the derm/path community to get comfortable with this test. Clearly it is an important test. Clearly it has very strong clinical utility, and it is a matter of time, I think, before we get additional volume growth and demand for it.

We do continue to be out there marketing it, although less aggressively right now than we have in the past. We are selling it through a more dedicated team of people, and we think that is the right approach at this point until it gains more credibility in the derm/path community.

Relative to the next so-called Abbott test, we are working very hard on what we think is a very powerful test. We have not announced it. We want to go through the validation process. It is a more complicated validation process than with melanoma, and we have engaged a number of researchers to help us with this. We are making very good progress. I would expect that in the maybe late third quarter we would be able to have our validation complete, maybe fourth quarter, and we would be able to announce what this is and to begin to market it.

George Walsh, Gilford Securities.

I wondered if you gentlemen could outline given your improvements in cash flow how you see yourselves in terms of needs for capital short-term and long-term as your growth accelerates with some of these opportunities you are talking about?

Sure. We just did a transaction in January with certain insiders of the Company and I think five members of the board and officers participated. At the time, if you recall, we all bought stock at $1.50 a share, which is about a 25% premium to the market, and it was just restricted stock and no warrants.

So we are feeling pretty good about our capitalization right now. I will tell you there is a lot of demand from our board and from our insiders to purchase more stock if an opportunity arises.

Having said that, we have always run the Company with a lot of sensitivity to dilution for our shareholders and that we are not the kind of company that absent a real strong specific use of proceeds is going to raise a lot of money just for the sake of having money on our balance sheet. We have -- if you look at our modus operandi over the last 24 months or so, we have tried to run with between $2 million to $4 million of cash at any given point in time. Now that we are getting into a cash flow positive situation, I don't see us raising any more equity capital short of some sort of strategic transaction in the coming quarters.

Having said that, everybody talks to everybody in this industry, and there is always opportunities that we are looking at. We could decide that we want to embark upon a strategic transaction that requires some capital, and we would go out to the market at that point in time.

Okay. So just to clarify, what I'm trying to get at is the idea that your need for capital would be more of a maybe strategic acquisition as opposed to if there was an acceleration of growth. Do you feel your positioned for the growth right now with your capacity and your salesforce, etc.?

Yes, absolutely. We are starting to get substantial operating leverage both from our SG&A and we expect to get some from our cost of goods sold. And so we should be able to "internally fund" further growth initiatives. (multiple speakers) We had 19% sequential growth rate in revenue from Q1 to Q2, and our liquidity increased by $800,000 over the quarter. So that is an indication of our ability to handle that.

Okay. And how important is a strategic acquisition? Is that something you look at on a regular basis? Is it a --?

Yes, strategic acquisitions are one legitimate avenue for growth for us. No question. We are pretty discriminatory about what we would look at, and we are very focused as a company. We would look for synergies, either costs kinds of synergies where we could derive some incremental profitability, or we would look possibly for some product development opportunities. Innovation is very important to our business, and we would look at opportunities like that as well.

So we continue to look, but we also are very focused on driving organic growth in our business, and we try not to be too distracted about chasing a lot of deals. But we would do them clearly if we found the right deal.

Puja Jain, AMI Research.

Congratulations on a good quarter, and first, I have a follow-up question. You just mentioned that clients -- you were helping more clients internalize tests. So I was just wanting to understand if that is a trend that is gaining strength and do you expect more clients to internalize tests? What is the kind of impact that you see on your revenues because of this?

So when we talk about internalization, it is really important to get specific. There's sort of two kinds of internalization. There are hematology/oncology group and other end practitioners who are seeing the patients who are just going to just in-source the professional component of testing, and that by far and away is the low-hanging fruit, and that is the piece that most of the physician offices or clinicians are going to be focused on. And that is something that we are set up beautifully to help them do. Because it is exactly identical to the services we perform for the community-based pathologists and hospital pathologists where they -- we would provide the technical component of the services, and they would read those services and then collect the professional component themselves. You have to be a very large practitioner to think about in-sourcing both the professional and the technical component.

Now we had one of those. We estimate that you need to have at least $100 million a year of annual revenue to have the kind of volume that it would make sense to bring the people on board, the technologists and the boxes and whatnot.

And so we think the in-sourcing of both professional and technical component is going to be a much more rare event. It could happen. It happened to us in 2009 and 2010. It was painful when it happened to us, but we feel pretty good about the fact that our current customer base is much more interested in perhaps just in-sourcing the professional component. And it is a huge opportunity. Doug alluded to one customer that we helped bring in-house, the professional component on certain tests, and we have picked up a fair bit of incremental business as a result of that one situation.

So we look at it as more of an opportunity than a threat to us, and we are actively designing programs to take advantage of that opportunity.

Okay. That is very helpful. And another question which -- could you just tell me what percent of the incremental revenue was coming from new clients?

You know, I don't think we have broken that down yet. I will say that there has been a substantial uptick in new clients. We have tended not to give away new client numbers because we define a client different than the way other competitors and it is confusing. And without a lot of footnotes around how we define it, it would not -- you would not have a context for it. But I can just tell you that the number of our ascending clients is probably up 30% from the end of the year last year. And so that's a pretty good indicator of where it is coming from. I would say most of the increase in revenue was coming from new clients because the existing clients, their volume absent any acquisitions by themselves or other for us is not going to change that much year over year.

Okay. That is fine. Just like you discussed that you did not have in-house capabilities for IHC tests. So is a strategic acquisition of possibility for acquiring such capability?

Let me -- go ahead, Doug.

I was just going to say that we do have the capability for immunohistochemistry and image analysis, and we currently provide those products and services to a number of clients. What we are talking about is expanding it significantly. So we are going to expand more than double the number of stains that we offer in the immunohistochemistry line, and we are also working very hard to increase our capabilities in image analysis. And so we currently offer this, and we are going to expand our offering.

Correct. That is nice. That is all I have for you then, gentleman. Thank you.

Thank you.

We do have one e-mail question that has come in. We have talked about DSOs and reimbursement trends. I'm wondering about regulatory risk. Any sense of the impact that reinstating something like a co-pay would have? I'm not sure how to think about that in terms of impact on testing in the cancer testing space. Is it potentially meaningful or not?

You know, there is a lot of noise on this from time to time. I think our view is that instituting a small co-pay in Medicare would be a giant pain in the neck. By the time you get done touching every bill and paying the postage for it, it has quite diminishing returns. We watch this. I think that there is a huge laboratory regulatory lobby initiative to try to thwart that. If it comes about, we will deal with it, but I don't think that that is going to come about any time soon without quite a lot of back-and-forth. And we have kind of got to the place where it is not productive to speculate about what Washington is going to do. Who the heck knows?

Let me see, another question here. Can you comment on MelanoSITE product? I guess we have talked about that in the next Abbott test.

So I think that that concludes the e-mail questions we have. Doug, do you want to wrap us up?

Sure. So, first of all, thank you for your participation, and as we end the call, I want to especially recognize all 203 of our current NeoGenomics team members around the United States for their superb dedication and commitment to building a world-class cancer genetics testing program. And on behalf of the entire team here, I want to thank you for your time joining us this morning on our second-quarter 2011 earnings call. And for those of you listening that are investors or thinking about investing in NeoGenomics, we thank you for your confidence in us as we continue to drive shareholder value in 2011.

Thank you and goodbye.

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

Nice job. Nice job, guys.