Neogenomics Inc (NEO) 2011 Q3 法說會逐字稿

Greetings, and welcome to the NeoGenomics third-quarter 2011 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, Chief Executive Officer, Mr. Dan VanOort. Thank you, Mr. VanOort, you may begin.

Good morning, everyone. This is Doug VanOort. I would like to welcome everyone to NeoGenomics' third-quarter 2011 conference call. And I would like to introduce you to the NeoGenomics team that is here with me today.

Joining me this morning are Mr. Stephen Jones, our Executive Vice President of Finance; Mr. George Cardoza, our Chief Financial Officer; and Mr. Jerry Dvonch, our Director of Finance. Mr. 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 very nature involve substantial risks and uncertainties, certain of which are beyond our control.

Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements. Any forward-looking statement speaks only as of today and we undertake no obligation to update any such statements to reflect events or circumstances after today.

Thank you, Steve. As in the past, I am going to make some brief remarks about our results for the quarter, comment on progress toward achieving our goals and discuss opportunities as we look forward. We will then turn the meeting back over to Steve to discuss our results in more detail.

This morning, for the second straight quarter, we reported the strongest quarterly year-over-year and sequential revenue increases in our corporate history, and our momentum continues to build.

Year-over-year revenue growth for the third quarter was $2.6 million, 30% higher than the last year's third quarter. It was also approximately $500,000 higher than the top end of our quarter three guidance. Sequentially, revenue grew by $850,000, or 8%, from this year's second quarter despite the seasonal trends which typically pressure our third-quarter results.

We are gaining traction in the marketplace, and I'm proud of the work we are doing to deliver exceptional cancer-testing services to our existing clients and to continue attracting new clients to our Company.

As you know, we began to achieve improved test volume growth in late spring of this year and the momentum of test volume growth has continually strengthened as the year has progressed. Indeed, our test volume increased in each of the three months of quarter three, and by the end of September, our monthly average number of tests reported per day was 50% higher than at the beginning of this year. In addition, the number of new clients we serve has grown, and we are gaining a larger share of testing from our clients.

Revenue grew 30% from last year's quarter three. That performance is particularly rewarding given the work we've put into sales and marketing. Our sales and marketing leaders are managing in a more disciplined fashion, and are continuing to invest in training and in development. We are beginning to see improvements in sales productivity as a result of numerous sales and marketing initiatives we've implemented over the last year. We remain encouraged also by the pipeline of new sales opportunities we are pursuing across the country.

Revenue growth was also positively impacted by the successful deployment of a new partnership model we developed for a large hematology-oncology group. Under this model, we leveraged the capabilities of our flexible business model to allow our partner client to perform certain aspects of testing with us. Clearly, our ability to perform either the technical or professional components of testing or both is important to successful deployment of this partnership model.

This initiative also capitalizes on the insourcing trend among clinician groups, and does so in a way that benefits NeoGenomics. We are now working on business development initiatives to further develop this model with other clinician groups in other parts of the country.

Our revenue growth in quarter three was also encouraging because it occurred despite a 6% net reduction in average unit price. This reduction in pricing resulted from a very large reduction in reimbursement levels for bladder cancer FISH testing, reductions in reimbursement for flow cytometry and reductions in the clinical lab fee schedule for 2011. We also experienced faster growth in certain lower-priced testing segments, such as molecular testing, which contributed to the lowering of our average unit price.

Our march toward profitability continued in quarter three. Approximately 40% of our revenue growth versus last year fell to the bottom line, and operating income and adjusted EBITDA were both positive for the quarter. Clearly, it is harder to drive healthy incremental profit improvement when revenue per test is down almost 6% compared with last year's third quarter. However, we continued to maintain tight control of selling, general and administrative costs, and reported only a 2.7% increase in these costs compared with last year. SG&A as a percentage of revenue was further reduced to 44% compared with 56% in quarter three of last year.

As a result of the average unit price decline, gross margin continued to be disappointing. We reported gross margin of approximately 45%, which was essentially unchanged from last year's quarter three levels. We can't fault our laboratory people for the lack of gross margin improvement. Our people are working very hard and are getting more productive. In fact, the number of tests reported per laboratory employee improved almost 15% compared with last year's third quarter. Similarly, our cost of goods sold per test continued to improve and was down 6% compared with quarter three last year.

Although the primary reason for gross margin pressure was the 6% decline in average unit price, cost of sales was also impacted by an increase in supplies cost by a few key suppliers. In addition, for much of the third quarter, we were also forced to contract out for labor when we were unable to find qualified technologists and medical staff to handle the large increase in our volume.

I am pleased to report now that we have just recently hired a number of very qualified and experienced technologists, many of whom are already trained and integrated into our laboratory processes.

We don't expect to continually deliver 40% incremental profit on our revenue improvement going forward, but we do expect to continue making steady progress in growing our profitability. And we are doing this the old-fashioned way. Our Company is driven by a desire to deliver value to customers and we have continued to invest in our people, in our infrastructure and in developing new products. We believe these are the things that will allow us to create a great Company that will win in the long term.

For the past several quarters, I have tried to provide some insight regarding significant actions and initiatives we've been working on, and I would like to comment briefly on some of those initiatives today.

We've done a lot of work on organizational effectiveness. We are always working on our culture. Over these past few quarters, we've made progress creating a culture of first-time quality with companywide training on quality management and with companywide process improvement teams working on improving our service to clients. We also remain focused on compliance, on accreditation, on licensing initiatives, and have continued to invest in each of these areas during the quarter.

In addition, we've continued to invest heavily to develop our people and organization by developing and deploying a variety of important employee recommended initiatives and training programs. We are working hard to be recognized in our industry as a Company with a great corporate culture, built on strong values, and to increasingly be able to attract and retain the very best people in our industry.

During our last conference call, I mentioned important initiatives underway in information technology and in developing our medical team. We are making solid progress in each of these areas.

In information technology, we've invested to develop an organizational capability to manage our own laboratory information system and to implement electronic interfaces with important clients. We've made several investments in improving our infrastructure and plan to continue to invest in our systems and capabilities. We now have a much more disciplined approach underway to make enhancements to our laboratory information system and to implement client interfaces effectively and efficiently.

As for our medical and scientific team, we've now successfully recruited outstanding professionals as medical directors for both our Irvine and Fort Myers facilities and to lead our cytogenetics and molecular programs. We've already accelerated the pace of new product launches and have a number of new products scheduled for development and launch over the next six months.

Not the least of these is the next test under our strategic supply agreement with Abbott Molecular. We are in the process of finishing a prospective validation study for this test now and are hopeful that we will be able to prove out prognostic claims for this test. We expect to announce and launch this new FISH test in the first quarter of 2012, but for competitive reasons, we've decided not to announce what disease state this test will address until we are ready to launch it in the marketplace.

In addition, we have now begun to expand our immunohistochemistry product offering and have invested significantly in digital pathology and image and analysis. We are also in the final phase of validating new 10-color flow cytometry capabilities and anticipate offering this new capability for certain specialized samples for our clients in the first quarter of next year. As a Company focused on delivering exceptional cancer genetic diagnostic services, our investments in this area are important to fulfilling our mission.

At NeoGenomics, our employees are truly our greatest asset, and on a broader level, amid continued high unemployment levels in Southwest Florida and in other parts of our country, we are adding to our employment levels. With 50% growth in the monthly average number of tests reported per day this year, our total employee count has increased by 18%, or 34 people, from last year's end. Most of these additions have occurred in southwestern Florida where it has been particularly difficult to attract qualified technologists and medical professionals.

We've recently signed a lease to expand our operation's footprint up into the Tampa Bay area and have already recruited 12 technologists to staff this office. We've worked hard to attract and recruit these people and are very pleased to have added so significantly to our team.

As many of you know, NeoGenomics operates in a very competitive environment. Fortunately for us, many of our competitors are in the midst of structural change, mostly as a result of merger or acquisition activity. During this time, we remain resolutely focused on delivering the highest quality testing and service in our industry, and continue to invest deliberately in our business and in our clients. We believe this approach will result in sustainable growth and profitability for all our stakeholders.

The guidance we issued this morning of $11.4 million to $12 million in revenue for the fourth quarter implies a year-over-year growth rate of 31% to 37% compared with the $8.8 million of revenue reported in last year's fourth quarter. We expect adjusted EBITDA to continue to improve from the quarter three level, even as we continue to invest in growth initiatives, and we expect to turn modestly profitable in the fourth quarter.

I'll summarize my remarks in the following way. We continue to make progress building and developing our Company, and we are now beginning to see these efforts yield improved financial performance. We continue to work very hard on revenue growth and are investing in a variety of growth initiatives, even as we remain determined to become and remain profitable.

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, our excellent test menu and new product portfolio are strong. And as a team, we are excited about the Company and its prospects, and we are intensely focused on continuing our growth momentum in the coming quarters.

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

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

During the third quarter, we reported total revenue of approximately $11.3 million, a 30% increase from Q3 last year. Just to add a little context around our revenue growth rates, recall that there have been two major headwinds to top-line growth that NeoGenomics has been battling through over the last 18 to 24 months. The first is that our then-largest customer began insourcing all of their bladder cancer FISH testing revenue in late 2009, and it wasn't all the way out of our mix until August 2010. As a result, we had to replace approximately $4.5 million of annual revenue before we could start growing the top line in the aggregate again.

I am delighted to report that we are now through this, as there was only a negligible impact to our year-over-year revenue growth from this internalization in Q3 this year. Thus, we will no longer be breaking out our adjusted growth rates separately.

The second headwind was our decision to go in-network with managed care providers. Beginning in mid-2009, we began entering into contracts with the larger insurance carriers. These contracts allow us to have certainty over the fact that we will get paid and the price at which we will be paid. Without them, you are always subject to your claims being denied for being out of network, and the larger you get, the more of a target you become for the various leakage prevention programs at these managed care organizations. And we were beginning to get a big bull's-eye on our back.

However, this certainty comes at a price. As an out-of-network payor, we usually received a multiple of the average Medicare reimbursement on most claims, say on the order of 1.1 times Medicare, until recently. As an in-network provider, we saw some of our pricing go as low as 0.4 times Medicare. When you combine the impacts from this decision with the other reimbursement reductions in 2011 that Doug described, we have experienced a 13% peak-to-trough decrease in our overall average unit price over the last two years.

While our unit pricing has finally stabilized this year, this decrease in unit pricing combined with the revenue we had to replace from insourcing created a major drag on our year-over-year revenue growth rates over the last two years.

What is amazing to us is that despite having to replace $8 million to $9 million of annualized revenue from these headwinds, we were still able to grow each quarter and we did not post any year-over-year or sequential declines in revenue during this period. Now that these headwinds are behind us, we feel very good about our revenue growth trends moving forward.

Turning back to the third quarter now, the number of requisitions or patient cases that were processed in quarter three increased by 32.9% and average revenue per requisition decreased by 2.2% from Q3 last year. The total number of tests reported increased by 38% from Q3 last year and the average revenue per test decreased by 5.8% or $34.82.

Although the year-over-year decrease in average unit price was significant, it was only off $3.46 from the level reported in the second quarter, and we are encouraged that unit prices have stabilized around this $560 to $570 level.

As we have discussed before, the average number of tests reported per day is an important metric because it washes out differences in the number of reporting days per quarter. The number of tests reported per day in Q3 was 312, an increase of 8.9% sequentially from Q2 and an increase of 38% from the level reported in Q4 2010. This metric improved steadily in each of the three months of Q3, and as Doug mentioned in his remarks, is now up over 50% when you look at it on a monthly basis from the level we reported in December of 2010. For those of you that track such things, there were 64 reporting days in both Q3 and in Q2.

Turning now to gross margin, it improved by only 15 basis points in Q3 to 44.82% from 44.67% in Q3 last year. Although our average cost per test, which is calculated by dividing total cost of goods sold by the number of tests reported, decreased by approximately $20 or 6% from Q3 2010, as I just mentioned, our average revenue per test fell by almost $35 or 5.8% during the quarter. Thus, the improvements in lab efficiency we realized were offset by the fall in average revenue per test.

As Doug mentioned, our supplies and contract labor costs continued to be higher than average as a result of the rapid growth we have experienced this year, and we believe there are further opportunities to increase productivity in each of these two areas. Our new Tampa facility, which is scheduled to open shortly, should allow us to reduce send-out costs substantially. Cytogenetics and FISH technologists are a bit of a scarce resource, and our ability to hire 12 such people at once is a major coup for us. In addition, we continue to add new pathologists, which will further reduce our send-out costs.

While our crystal ball is no better than anyone else's about what Medicare will do with reimbursements next year, we can state that absent any further declines in unit prices, it should just be a question of time and management focus before we start to see improvements in our gross margin.

Turning now to an analysis of SG&A, sales and marketing expenses were down $259,000, or 13%, from last year, driven primarily by a decrease in the number of sales and marketing personnel. General and administrative expenses increased by approximately $390,000, or 13.3%, from Q3 last year, driven primarily by increases in payroll, recruiting, information technology and incremental bad debt expense on the revenue increase.

Total SG&A expense increased on net just $130,000, or 2.7%, on a year-over-year basis. Put another way, this increase in SG&A was just 5% of the incremental $2.6 million in revenue we reported, and bad debt expense normally runs in the neighborhood of 6% of revenue. Thus, we continue to be quite proud of our efforts to hold the line on costs.

Total SG&A expense as a percentage of revenue decreased by almost 1200 basis points year-over-year to 44.4% from 56.3% in Q3 last year. So we are getting significant increases in operating leverage in our business.

As Doug touched upon, we intend to continue to invest in a number of growth 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. As we discussed on the last call, we plan to emphasize profitability and growth and do not plan to run large losses to accomplish any of these planned initiatives. 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.

Absent any further deterioration in unit prices, with just modest improvements in our gross margin, we expect to be able to continue to drive approximately $0.25 to $0.30 on average 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 large NOL carryforwards and thus not a taxpayer.

Net interest expense in the quarter was flat relative to the level reported last year. Net loss for the quarter was $143,000, or 0.00 per share, compared to a net loss of $1.2 million, or 0.3 per share in Q3 last year. As mentioned in the press release, this $1,056,000 decrease in net loss represents approximately 40% of the incremental $2.6 million in revenue year-over-year.

Depreciation and amortization was approximately $521,000 in Q3, and EBITDA was $563,000. However, if you were to further adjust our EBITDA for the $129,000 of non-cash charges relating to stock-based compensation and warrant amortization, our adjusted EBITDA for the quarter was $693,000, a $1.1 million increase over the level reported in Q3 2010.

We finished Q3 with 219 full-time-equivalent employees and contract doctors as compared to 196 at June 30, 2011 and 185 at December 31, 2010 and 182 at September 30, 2010.

As Doug mentioned, we began hiring additional technologists and medical personnel in Q3 to keep up with the volume growth, 12 of which were in September for our Tampa pod lab. So the full effects of all the hires won't be felt until the fourth-quarter results are reported.

Our accounts receivable balance, net of allowance for doubtful accounts, was $7.4 million at September 30, up approximately $200,000 from the $7.2 million balance at June 30. Our AR balance expressed in terms of days sales outstanding was 60 days as of September 30, down from the 62 days reported as of June 30.

While we are growing at the rate we currently are, it will be hard to make further improvements in the current level of DSO, and we still have one of the better DSO metrics in the industry. Some of our competitors have over 100-day DSOs.

In terms of overall liquidity, as of September 30, we had $3.1 million of cash and restricted cash on hand and $534,000 available to us under our credit facility, as compared to $3.1 million of cash and $880,000 of availability at June 30. However, there were seven payrolls in quarter three versus only six in quarter two, and the final payroll hit just before quarter end. This resulted in a small use of $115,000 of cash in our cash flow from operations for quarter three as compared to a use of $925,000 in quarter three 2010.

On a year-to-date basis for the nine months ended September 30, our cash flow from operations has use $1.2 million, which is a 50% reduction from the $2.4 million used in the comparable period in 2010.

I would like to note that our current accounts receivable facility has a borrowing limit of the lesser of $5 million or 85% of eligible receivables. The balance on this facility as of September 30 was approximately $4.5 million, so we are pretty much at the contractual cap on this facility. We have been approached by a number of banks recently about giving us a larger credit facility, and we expect to replace our current facility in the next three to four months.

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 and would like to submit a question, please feel free to e-mail us at SJones[at]NeoGenomics.com during the Q&A session, and we will address your questions at the end if the subject matter hasn't already been addressed by our call-in listeners.

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

(Operator Instructions) Boris Peaker, Oppenheimer.

Hello, guys. Can you hear me?

Hey, Boris. How are you?

Good. How are you? Thank you for a detailed breakdown of your quarterly performance. I guess I would like to start, though, with questions on the cost side. Can you explain how the cost structure, when we look at consumables, labor, other variable costs versus certain capital cost amortization, how that cost structure has evolved perhaps over the last year?

And kind of a follow-up to that is we've seen a decrease in pricing on some of the consumables just in general on laboratory reagents. And I just want to understand if you are seeing that in your business as well.

Sure. There is a lot in there. Let me start with sort of some historical relationships that we've had, and maybe that will give you a little context for it.

In general, our supplies used to run on the order of 12% to 13%. In the current year, they are running closer to 14%. So we've seen a slight uptick in that. And actually most of that uptick comes from an increase in the cost of consumables such as reagents. We've had a couple of suppliers increase the cost quite significantly in recent years, and we are working with them to try to get some relief on that. So that has been one of the larger drivers of continued gross margin pressure.

When you think about labor, labor historically has run somewhere on the order of 20% to 21% of revenue in terms of the cost of goods sold. We are actually slightly now down below the 20% level, as we are starting to get some operating leverage on that. And we expect that we will continue to get more operating leverage.

Doug mentioned that we had a 15% increase in the number of labs tests completed per lab FTE year-over-year. That is a pretty substantial increase in productivity. Unfortunately for us, that was offset by the decrease in average unit price, so it didn't show up in gross margin. But we believe we will be able to continue to get more and more productivity as we get bigger, and that is just an economy of scale question.

In terms of equipment, obviously, the bigger you get, the less you need to spend in terms of your replacement CapEx because it takes a while to get things going. You know, our depreciation and amortization and whatnot comes down each year by a little bit and we expect it to continue coming down. If you look at the large labs, they spend, on average, about 3% to 4% of revenue on CapEx. We are down around the 7% to 8% range, so we've got some more room to take that down.

Why don't I leave it at that and see if you have further questions?

Sure. This is very helpful, and I think you covered all the elements that I asked.

But if we look at equipment, do you monitor some kind of equipment utilization, just to get a sense of how much reserve capacity you may have?

The lab capacity is really driven much more by technologists. Getting more boxes is easy. They tend to cost anywhere from $125,000 to as much as $400,000. But suppliers love to sell them to you and can usually get them here pretty quick. It is the lab head count that really becomes the capacity constraint, the rate-limiting factor, if you will.

And each lab is a little different. With these new hires in Tampa, we now have, for the first time in quite some time, a fair cushion in our capacity for FISH and cytogenetics, which has been pinching us lately.

So Boris, I'd just build on that just very briefly by saying that over the last year, we've really improved our ability to understand capacity with capacity planning models around people. We've also used that to help us improve our productivity in each of our departments. I think we've got a pretty good idea, depending on our volume, of how many people we will need and when we will need them.

Okay, great. That's helpful. And my last question in terms on the revenue side, one dynamic that we are seeing in general is hospitals acquiring private physician practices. And I just want to understand, is that something that you are seeing in terms of practices that you work with? And if so, how do you see that potentially impacting your business?

Yes, there is a trend for that. Obviously, that is impacting the entire laboratory industry. In our case, it has, I would say, been a slight net positive. As you know, our business model is focused on community-based pathologists, and many of them operate in hospital settings. As hospitals buy hematology and oncology groups, that has been helpful to us.

In some cases, it goes the other way, if that hospital is not a client of ours. But we've got -- we've been pretty lucky so far that many of our clients -- and we try to help them to be successful, and we've focused on the kind of clients that are growing in the marketplace. So it has been a net-net positive for us so far.

We've had one client in particular that actually doubled their volumes with us earlier in the year as a result of some practices that they purchased.

Okay. Thank you very much for taking my question.

Raymond Myers, Benchmark.

Thank you, and Steve and Doug, congratulations on the nice growth. I came into the call a few minutes late, so I apologize if you've covered some of this before.

But what I want to drill upon is what are the few factors that are most driving your growth. And in answering the question, maybe you could touch upon why did you have the need to open the Tampa facility.

Two different kinds of questions, Ray. What is driving our growth is really two things. One is we are -- as you know, we've focused an awful lot over the last year on our sales force and adding tools to our sales and marketing team that allows them to become more productive. So we've done everything we could think of, quite frankly. We've added training programs, we've added new products, we've changed our compensation systems, we've changed our sales leadership.

We've done everything we could think of, including really used a customer management system much more fully, so we've got very good metrics and measures and understand our pipeline of opportunities and so forth. So that is a significant driver to our growth.

The other driver to our growth is this new business model that I made some comments about. We have developed a business model and a partnership with a large hematology and oncology group that leverages the capabilities of our flexible business model. And we intend -- this has been a model that allows this group to do certain aspects of testing and us to do certain aspects of testing. And as you know, we've got a model that allows us to do both the technical component, the professional component, or either or both in a variety of testing areas.

And so we are leveraging that. And we intend to try to take that model and deploy it in other hematology-oncology groups across the country. So we are pretty encouraged by our success there. Those are two key factors for our revenue growth over the last quarter.

Now, in terms of your other question relative to the Tampa facility, we mentioned that it is very difficult for us to recruit qualified people. We need qualified and experienced technologists to be able to generate the kind of turnaround time and the quality and service that is our hallmark. And so we had an opportunity to hire a number of people in Tampa as a result of the closure of a facility by a competitor. And we were -- we moved very quickly there, and we successfully recruited some excellent, excellent people. And we couldn't get them to move, because many of -- in this environment, a lot of people's houses are underwater, and so we decided for a modest cost to open a facility there.

That's great. Let me ask how much of the growth is due to revenue that you acquired, in effect, by hiring these people? I assume the competitor left the market. Were you able to take that revenue with you?

Not yet.

Not yet?

No, we didn't get any growth from that move. We are just hiring qualified people. The growth came from just totally organic reasons.

These are technologists, Ray. They are not salespeople, so they wouldn't have client relationships.

Okay. Good. It sounds like a good opportunity, though. Let's shift gears and did you discuss your plans to get listed on a major stock exchange?

We haven't updated that. Right now, we currently meet all of the criteria to trade on both the NASDAQ and the AMEX, except for the minimum bid price. It is my understanding that the lower threshold on AMEX requires a $2 minimum bid price for, I believe, it is a 20-day period. And on NASDAQ, it is a $4 minimum bid price.

So if we could get some smart analysts like you to promote how ridiculously undervalued our stock is, we would get there a lot faster.

Okay, well, point taken. Thank you. And congratulations again about your growth.

Grant Zeng, Zacks Investment Research.

Thanks for taking my question. First, congratulations on the strong quarter, and also congratulations on the stock performance today, following (inaudible) over 15% increase.

I have two quick questions. The first one is related to the product under the agreement with Abbott Laboratories. You mentioned that the (technical difficulty) will be launched early next year -- I believe -- right? And my question is that based on your experience with the first product (inaudible) side, how are you going to promote this second product? For example, what strategy are you going to use to increase pathologists' awareness of this product?

My second question is related to the balance sheet. Steve, I remember you mentioned there is about three (inaudible) in lease agreement. I believe this (inaudible) cash inflow. Can you talk a little bit more about the lease agreement?

Let me try to take the first question relative to promoting and selling the melanoma test and the new test, which we've not named yet. In terms of melanoma, we continue to market this test pretty aggressively. We think it is a very, very good test, very high sensitivity and specificity. We were working with a number of opinion leaders around the country. And the test continues to gain some traction in the marketplace, albeit at a much lower slower pace than we originally intended and expected.

Relative to the next test, we are using some of the lessons learned from the launch of MelanoSITE. We will also continue to sell this through our normal channels to our pathology clients. But we will probably also sell it in a very -- in a different way, inasmuch as there are centers of excellence for this particular test that we will target. So I think it will be a little bit more targeted campaign, and we will probably have a couple of sales specialists that will promote this test going forward.

Relative to your second question on the balance sheet, Steve, do you want to handle that?

I'm not sure I understood the question. Can you just rephrase that for us?

Grant, are you still there?

Yes. I remember, Steve, you mentioned there is about $3 million in lease agreement. Is that right?

Yes, thereabouts. It goes up and down.

I think this is a cash inflow for the Company, right?

Yes, right now, we are able to lease finance about 90% of all of our CapEx through long-term lease arrangements. We typically seek out five-year finance leases. Sometimes something depends on the nature of the equipment and we are only able to enter into operating leases. But we've been very successful with that.

There is always some portion of your CapEx that is not able to be lease financed, buildout of facilities and stuff like that. So you'll never get it up to 100%. So if you think about our CapEx, nearly all of that is financed with financing. So when we look at total cash flow, it is really cash flow from operations is the key metric for us.

Okay, good. Thank you.

Bruce Jackson, Morgan Joseph.

Thanks for taking the question. With the marketing team, last quarter, I believe you said it was around 30. Have there been any changes this quarter?

I think it is about the same as it was last quarter. We added two? I think we added one or two. But Bruce, that is in the normal course of business. I think we've added one territory. And we'll look at adding to our sales team further as we gain confidence in the techniques and tools that we've used to improve our sales force productivity.

Okay. And then looking at the growth, you've got some new customers and you also have some same-store growth from existing customers. What is driving the same-store growth for the existing customers?

Bruce, in our business, it is quite common to start a client off in a particular product line. And as that client gains confidence in us and our ability to service them, to have really outstanding turnaround time and so forth, it allows us an opportunity to gain penetration in other product areas.

So, for example, if we would maybe start out with cytogenetics, we might move and gain their confidence enough to allow them to send us all their FISH testing, and then maybe molecular testing. And so -- and I had mentioned that we are expanding our immunohistochemistry product offering. That's another way in which we can provide sort of a one-stop shop and gain more share of wallet from our existing clients.

Okay. And then do you feel like you've fully expanded your IHC menu, or are you about there?

No, we have not yet. We are working on it. I think we have added, I think as of yesterday, maybe 20 or so antibodies to our menu. And we're going to continue at a pretty deliberate pace here over the next six months to continually add antibodies to our menu.

Okay. And then moving over to your flow cytometry, you were talking last quarter about the new reimbursement rules that are limiting the reimbursement of the 24 markers. Is that still the case? Has there been any movement on getting around that?

We have experienced a fair amount of success on appealing some of these. The business question is how much does it cost to go through the appeals process. It is quite an involved process and you've got to do it for each one separately.

So I don't think we believe that the Florida Medicare service provider is going to change their policy on this anytime soon. We are starting to get some prior-period adjustment for some appeals that were earlier in the year. We are not changing our revenue recognition policies. We are still just recognizing upfront the 24 markers, and we believe that is the most conservative way to do this.

Okay, great. Thank you very much.

(Operator Instructions) George Walsh, Gilford Securities.

I just had a question regarding the sales and marketing. You did mention the increased initiatives that you had, but the overall sales and marketing on a year-over-year basis were down. So just could you elaborate on that? And is it a matter of dollars on sales and marketing to help increase the revenue growth?

Our sales and marketing costs did decline a little bit from last year. We restructured our sales force fairly significantly from last year's quarter three, and we eliminated some positions where we weren't getting a lot of productivity for a variety of reasons. So that is the reason.

This year, over the course of the last four months, I think we've added slightly to our sales and marketing group. It is not really a matter of money as much as it is a matter of understanding where our opportunities are and making sure that we have good tools in place and can handle the growth in our team. And we will continue to look at expanding our sales and marketing force going forward.

Okay. Could you go into a little more detail in terms of the additional line capacity, financial line capacity you're looking at with the other banks?

Right now, we currently have about $7.5 million of accounts receivable. The current facility we have allows us to borrow up to 85% of eligible receivables that are aged no more than 150 days, and there is one bucket that can only be aged 120 days.

When you boil it all down, we get about 70% advance rate against our accounts receivable, and that is right about where we are right now. We have eligible just about five -- maybe a little more than five on a straight formula basis, but the line is capped at five. So we are clearly at the place where we have outgrown the current facility.

We have not made a decision yet whether we will work with our current lender to replace that facility with them or increase it. But we have started to get a significant number of inquiries from other banks that are aggressively pursuing our business. In fact, I've received an e-mail from one such bank just while we were on this call.

So we are going to take this opportunity to look at it and to see if our credit profile will warrant going to a number that will support our growth over the next two, three years. And I think initially, we are thinking about targeting an $8 million facility. I don't want to overdo that because you pay for unused capacity. But we also --messing with these things is a big deal, and so you want to get a couple years of good run room before you have to redo it again.

But clearly, the credit profile of the Company is dramatically different than it was just 18 months ago when we last amended our facility.

Okay. And how much do you see improvements in your cash flow as you've seen here in this reported quarter that you can rely more on that going forward?

So think about it on a year-to-date basis. Our cash flow from operations used $2.4 million last year on a year-to-date basis. This year, it used $1.2 million. So it was a 50% reduction.

Now look at it intra-quarter sequentially. Our cash flow from operations was actually positive in Q2 and only used $115,000 in Q3. So most of the $1.2 million that we used occurred in the first quarter. So we are really at the place now where the business can support its operations with internally-generated funds, and we are able to lease finance some 90% plus of our capital equipment costs. So we are at the place where we are not going to be seeking significant outside capital, other than perhaps through a new bank line.

Okay. All right. Thanks a lot.

Mike Petusky, Noble Financial.

Good morning, guys. A couple of questions. It looks to me like roughly versus the same period last year, you increased the number of tests by about 5500. Do you have a way of quantifying how much of that came from new customers, how much of that was effectively same customer or same store or however you want to term it?

I'm sure somewhere back in the back bowels of the finance department we could do that. I don't have that data right at my fingertips. It has been really strong growth from both sources. As a directional feel, I'd probably say it is somewhere around 50/50.

How much of your, I guess, current business is out-of-network versus in-network? What is the percentage breakdown of that?

If you think about our payor mix overall, we're about 50% Medicare, about 30% insurance and 20% client bill. And of the 30% insurance, we think 10 points of that, or a third of that, will never be eligible to go on-network. These are municipalities, self-insured corporations, Indian tribes, you name it.

And so of the remaining two thirds or 20% of total revenue, we think we now have somewhere on the order of 16%, or about 75%, 80% of that, in-network. So we still have a couple, 3, 4 percentage points of revenue exposed, but we have the four biggies. We have UnitedHealthcare, we have Aetna, we have Blue Cross Blue Shield and we have Humana. What we don't have is CIGNA, and we are working on that. But that is a small portion of that. Once you get beyond those five managed-care organizations, our percentage of revenue derived from the others drops off significantly.

All right. And I'm sorry, I didn't catch -- how recently did you switch some of the bigger payors over? Over the last quarter or over the last year or (multiple speakers)?

Last two years. We started in the summer of '09 with Aetna. That one wasn't so painful. And then Blue Cross Blue Shield and United were pretty painful. And Humana has just really been more recently.

Okay. Has kind of the impact of that in terms of pricing, has that already shown up in this past quarter's results, or is that maybe going to linger into Q4 in terms of, you know, on a sequential basis, I guess, compared (multiple speakers)?

No, we think it is pretty well priced in at this point.

Okay, all right, great. And I didn't catch -- I think you gave it. What was the bad debt reserve this quarter versus a year ago?

Bad debt reserve this quarter was about 5.57 versus 6.65 last quarter -- or year-ago quarter.

As we've gone more and more into managed care, our bad debt reserve can come down, because we have more certainty about what we are going to get paid.

Okay. All right. And then just one last question. In terms of your, I guess, investments in broadening your IHC platform, is there a point that you guys have targeted to essentially kind of get to the -- I guess I'll term it the robust platform that you desire there, or 95% of the way there? Is there a point over the next six months, 12 months? I mean, what is targeted to really make you guys competitive in that piece of your business?

Well, I think -- here is what we are doing. We are talking with a lot of clients. And some of these clients have some capability to perform IHC in-house. And so we have a very targeted approach to add antibodies that they want us to add.

And so I would say that over the next six months, we ought to be able to satisfy the bulk of the requests coming from our clients. And I think we will be there at that point.

Great. Congratulations on the progress.

There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Okay, thank you. So as we end the call, I would like to just take a minute to recognize all 219 of our NeoGenomics team members around the country for their dedication and commitment to building a world-class cancer, genetics testing program.

And on behalf of our entire team, I thank you for your time in joining us this morning on our third-quarter 2011 earnings call. For those of you listening that are investors or thinking about investing in NeoGenomics, we thank you for your participation in this third-quarter conference call. Goodbye.

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