Neogenomics Inc (NEO) 2012 Q1 法說會逐字稿

Greetings and welcome to the NeoGenomics first-quarter 2012 financial results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Doug VanOort, Chairman and Chief Executive Officer. Thank you, Mr. VanOort. You may begin.

Thank you, Rob. Good morning. I'd like to welcome everyone to NeoGenomics' first-quarter 2012 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 for Finance; George Cardoza, our Chief Financial Officer; Bob Gasparini, our Chief Scientific Officer; Jerry Dvonch, our Director of External Reporting; and in addition, Dr. Maher Albitar, our Chief Medical Officer is joining us by phone from our Irvine, California office.

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 and that are not statements of historical fact are forward-looking statements. These statements by their nature involve substantial risk 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'll begin our call today with some brief remarks about our results for the first quarter of this year and then comment on a regulatory issue expected to impact our industry in the second half of the year. I'll then turn the meeting back over to Steve to discuss the financial results in more detail.

NeoGenomics performed well in the first quarter. Sales volume was very strong; service levels were excellent; productivity improved; and new test development progress was encouraging. As we ended the quarter, our pipeline of new client prospects was healthy. Overall, we were pleased with our team's performance and with the financial results they generated.

Once again, we reported the strongest quarterly year-over-year revenue increase in our corporate history. Revenue for the first quarter was $15.2 million, an increase of $6.4 million, or 72% compared with last year's first quarter.

Revenue was $160,000 higher even than the top end of our upwardly revised guidance we issued in early March. On a sequential basis, first-quarter revenue was up $2.3 million, or 18%, from the strong results we posted in the fourth quarter of 2011. As you know, our business has gained momentum with year-over-year revenue growth accelerating in each of the past four quarters.

Test volume grew 75% compared with the first quarter of last year, driven primarily by a growth in the number of new clients. We have been able to serve clients with a more comprehensive product offering and are also benefiting from a larger share of work from many of our existing clients. We're adding new clients and we are gaining market share.

We experienced growth in all types of genetic testing we perform. The strongest growth came from molecular testing, which grew by over 235% compared with our -- driven by our expanding test offerings.

FISH and traditional pathology testing also grew faster than our average growth rate as our service levels were competitively strong. In fact, overall service levels improved despite handling the substantially increased volume. We believe that our service levels continue to be among the best in the industry.

Productivity improved as well. Gross margins grew to 47.1%, primarily as a result of a 28% improvement in the average number of tests completed per lab employee versus Quarter 1, 2011.

On a sequential basis, productivity per lab employee improved by 13% from Quarter 4, 2011. We became more efficient with the additional volume and process improvements are beginning to drive productivity gains. We believe there are significant additional productivity gains that can still be achieved and we're working very hard to do so.

The productivity of our sales force was also much better with sizable gains in revenue per representative in most of their 20 territories. Clearly, we are benefiting from significant efforts on training and development and on managing the team in a process-oriented and more disciplined manner.

We continued to leverage other areas of our Company as well and saw a continued decline in SG&A costs as a percentage of sales from 52% last year to 41% this year. These productivity gains allowed us to deliver 24% of our incremental revenue growth to the bottom line.

We launched a number of exciting new initiatives during the past quarter designed to gain future efficiencies. Laboratory efficiency initiatives center around a number of best practice team projects coupled with numerous laboratory information system changes. We believe we can leverage these projects to improve process quality and lower costs at the same time.

We are particularly excited about our new test development initiatives. We're working and investing to develop new products or technologies in virtually every area of our business.

During the quarter, the most significant areas of innovation activity involved an expansion of our molecular and immunohistochemistry test capabilities. Molecular testing is a very fast-growing segment of our business and we intend to have one of the most advanced molecular capabilities in our industry. In immunohistochemistry, we're adding many new antibodies and digital imaging to our product offering. Molecular and immunohistochemistry products are being requested increasingly by clients.

On a longer term development test basis, we have also begun working on exciting development opportunities related to our licensing agreement with Health Discovery Corporation. As you know, our objective here is to develop tests that we may offer on a proprietary basis.

The organization is very busy, but we believe it is aligned, focused, and performing well.

At this point, I'm going to change topics and discuss a regulatory change which is expected to take effect on July 1 and impact NeoGenomics in the second half of this year. As we noted in a press release issued in early March, the so-called TC Grandfather Clause is set to expire on June 30. Billing practices covered by the TC Grandfather Clause have been in existence for decades and the Grandfather Clause has been continually extended by Congress since 1999.

Most experts now believe the clause will not be further extended.

The TC Grandfather Clause has allowed laboratories to bill Medicare directly for the technical component of laboratory testing performed for hospital patients when such tests are reimbursed from the Medicare physician fee schedule. All but a few of our hospital clients are grandfathered hospitals.

After expiration of the TC Grandfather Clause, laboratories will be required to bill hospitals directly for these services instead of billing Medicare. Unfortunately for hospitals, they will incur additional laboratory costs but will receive little or no additional revenue to offset the additional cost.

The impact of this regulatory change has been difficult to analyze because it affects long-standing practices, and we don't have full information about hospital cases that come to NeoGenomics through pathology practices or how this will affect ordering patterns and other dynamics. Factoring in a number of these variables, we currently believe expiration of the TC Grandfather Clause will affect the billing practices on 16% to 18% of our total revenue and will cause NeoGenomics overall average revenue per test to decline by 5% to 8% beginning in Quarter 3.

Volume may be affected as well. We may benefit from additional volume if certain hospital business is competitively bid and in cases where small hospital labs close and send their work to us. In fact, we are already aware of such cases.

In competitive bidding situations, we intend to maintain our pricing discipline and will not serve hospitals if the business is not profitable for us.

Thankfully, NeoGenomics is better prepared to deal with this regulatory change than ever before. Expiration of the TC Grandfather Clause will not have a material effect on our strategies or objectives. We continue to be focused on growth, productivity, process improvements, and innovation and we intend to maintain our focus on profitability. We believe the process we began last year to improve our laboratory productivity will enable us to fully absorb these price reductions in fairly short order.

However, we do expect to experience a reduction in profit in Quarter 3 to around breakeven and then expect to resume incremental profit growth in the fourth quarter.

We noted in today's press release that we experienced a similar dynamic last year. Between quarter 4, 2010, and quarter 4, 2011, our overall average revenue per test decreased by approximately 6.3%, due to reductions in the average reimbursement of bladder cancer FISH testing services and a limitation on reimbursement for the number of flow cytometry markers.

However, as the result of productivity improvements, our gross margin increased by 60 basis points over the same period.

We believe that allowing the TC Grandfather Clause to expire is bad for our healthcare system. Hospitals were already under considerable cost pressures and this extra expense is not going to help.

In addition, it is well-documented that medical testing makes up just 3% of total healthcare expenditures in the US but that results inform approximately 70% of treatment decisions. In particular, genetic and molecular tests save healthcare costs by allowing physicians to more accurately characterize cancer and tailor personalized medicine treatment regimens optimized for each patient's unique situation.

Personally, we don't see how this is good for America.

Along with the College of Pathologists and the American Clinical laboratory Association, NeoGenomics has taken a leadership role in lobbying for Congress to extend or permanently fix the TC Grandfather Clause. There are two bills pending in the House and one in the Senate to do just this, and we urge everyone listening to this call to write to your Senators and Congressmen. There's a link on the home page of our website that will allow you to do this in an automated fashion.

To summarize my remarks, I'd like to make a few key points. Our first-quarter results were excellent and reflect an underlying strength in our business model and organization. We continue to make progress building and developing our Company, and we are now beginning to see those efforts yield improved financial performance. We continue to work hard on revenue growth and productivity initiatives and are investing in our people and in the development and launch of a number of new tests. We are also maintaining our focus on process discipline and on profitability.

We're pleased and proud of our Company's quality and service levels. We have a flexible business model and expanding test menu, a new product portfolio, and a strong team. We believe there are excellent growth opportunities for NeoGenomics well into the future.

So, as a team, we're excited about the Company and its prospects and are intensely focused on continuing our growth momentum in the coming quarters.

I'll now turn it over to Steve to comment more fully on our financial 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. Since Doug has already reviewed our revenue metrics, I will start with our operating metrics.

The total number of tests reported in the first quarter increased by 75% over Q1 last year. Average revenue per test was $563, a 1.6% or $9 decline from the $572 recorded in Q1 last year. This decrease was almost entirely due to a shift in our tests mix. Lower priced molecular and histology tests now make up a greater percentage of our total revenue, and higher priced flow cytometry tests have decreased as a percentage of revenue over the last year. Molecular and traditional pathology testing are now the fastest-growing components of our revenue mix.

Gross margin improved by approximately 320 basis points in Q1 to 47.1% from 43.9% in Q1 last year. This improvement came despite the reduction in unit prices I just mentioned and is directly attributable to improved lab productivity compared with quarter 1 last year. Our average cost of goods sold per test decreased by $23, or 7.3%, in Q1 2012 compared to Q1 last year. Thus, when netted against the average revenue per test decreases, we still had an increase in average gross margin per test of $14.

The biggest single component of this margin increase came from increases in productivity per lab employee. As Doug mentioned, we had a 28% year-over-year improvement in the number of tests completed for laboratory FTE from Q1 2011 to Q1 2012.

Turning now to SG&A, total sales and marketing expenses increased by just $283,000 or 16% versus Q1 last year, despite the record $6.4 million increase in revenue. Put differently, this increase in sales and marketing expense was just 4.4% of the incremental year-over-year revenue growth.

This quarter, you will notice that we have started to break out research and development expenses separately. Our R&D expenses are mostly related to new test development activities. R&D expenses in Q1 increased by $378,000 year over year from Q1 last year. This increase is right in line with our comments in February that we expect our R&D expenses to increase in 2012 by $1 million to $1.5 million incrementally over what we were otherwise planning as a result of the significant increase in our molecular test expansion activities and our licensing agreement with Health Discovery Corporation.

As we discussed in the press release, we expect to bring up at least 25 new molecular tests this year.

The remaining general and administrative expenses increased by $1.05 million, or 39%, from Q1 last year, primarily as a result of increases in payroll, recruiting, information technology, and incremental bad debt increase on the revenue increase versus last year.

Total SG&A expense increased by $1.7 million or 37% on a year-over-year basis. Total SG&A expense as a percentage of revenue decreased to 41.4% from 52% in Q1 last year. Net interest expense in the quarter increased 42% from Q1 2011 as a result of increased borrowing under capital leases and our bank facility.

Net income for the quarter was $603,000 or $0.01 per share compared to a net loss of $893,000 or $0.02 a share in Q1 2011. This $1.5 million increase in profitability implies that 23.5% of the incremental $6.4 million in year-over-year revenue growth fell to the bottom line in the first quarter.

Depreciation and amortization was $763,000 in Q1 and EBITDA was $1.6 million. Adjusting for the $151,000 of non-cash charges relating to stock-based compensation and warrant amortization, our adjusted EBITDA for the quarter was $1.8 million, which is a $1.9 million increase over the negative $97,000 reported in Q1 2011.

We finished the first quarter with 246 full-time equivalent employees and contract doctors as compared to 238 at December 31 and 181 at March 31 of last year. Our accounts receivable balance net of allowance for doubtful accounts was $10.7 million at March 31, up approximately $2.8 million from the $7.9 million balance December 31.

Our AR balance, expressed in terms of days sales outstanding, was 64 days as of March 31, up from the 56 days reported at December 31. For those of you that follow such things, our AR balance usually increases significantly in Q1 as most patients have not yet hit their deductible limits for the year and so there's a fair amount of billing and question activity with individual patients.

In addition, the AMA introduced new molecular billing codes that went into effect on January 1 and only some payers have adopted these new codes, whereas other payers still want to use the older stack codes. Some carriers have even asked for both.

While we sort out which payers want which billing format, this has increased our quote-unquote re-bill rate for molecular testing which, in turn, impacted our DSOs a little in Q1 as well.

In terms of our overall liquidity, as of 3/31, we had $3.1 million of cash and restricted cash on hand and $800,000 available to us under our credit facility as compared to $3.1 million of cash and $1.1 million of availability at December 31.

We announced on March 28 that we amended our accounts receivable-backed credit facility to increase our maximum availability to $8 million, up from a previous maximum availability of $5 million, subject to a formula based on qualified receivables. However, we have the right to increase this maximum further to up to $10 million in $1 million increments.

Our cash flow from operations in Q1 was a use of $1.1 million as compared to a use of $1.5 million in Q1 2011. As a result of the increase in accounts receivable, we generally experience in Q1, our cash flows from operations is usually negative in the first quarter of each year.

In quarter 1 we also used $[1.3] (technical difficulty) million in investing activities, $1.04 million of which -- which resulted from the cash portion of the upfront payment to Health Discovery Corp., pursuant to the licensing agreement we entered into in January. The remainder was from unfinanced CapEx.

Turning now to the guidance we issued this morning for the full year and second quarter of 2012. Based on the strength of our Q1 performance, we are reinstating and raising our full-year 2012 revenue guidance to $57 million to $63 million, which is a 5.6% to 6.8% increase from the original guidance we issued in mid-February of $54 million to $59 million.

We are also reinstating our original full-year 2012 EPS guidance of $0.02 to $0.04 for share.

Although the expiration of the TC Grandfather Clause will have a modest impact to our earnings in the second half of the year, our business is growing rapidly and we believe that we should be able to offset these impacts through continued growth and productivity improvements in fairly short order. Thus we are leaving our original EPS guidance unchanged for the year despite the anticipated change in reimbursement.

For the second quarter of 2012, we are expecting revenues of $15.5 million to $16 million. At the $15.75 million midpoint of this range, this would imply a 50.5% year-over-year growth rate from the $10.5 million in revenue we reported in Q2 2011. We also expect earnings of zero to $0.01 per share for the second quarter.

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 question 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). Amanda Murphy, William Blair.

I had a question actually on pricing. But thanks for the quantification of the TC Grandfather Clause. That's helpful.

But one of the sort of earnings seems this quarter was pricing, especially with the larger labs. I'm just curious what you guys are seeing out there. Obviously, it's a difficult Medicare environment but I'm curious on the private payer side what you're seeing. And also, how we should think about contracts over the next year or two. Is there anything up for renewal that we should be thinking about?

Amanda, thanks for your question. We actually have not experienced any impacts on the private payer side. In fact, we're in conversations with at least one about raising our rates. We generally sign contracts for a two- to three-year period. And they often renew with no adjustment in price unless we push for an increase.

As we've stated on earlier calls, we have about 32% of our revenue is reimbursed by insurance companies but 7 points of that is Medicare Advantage, so you can take that off the top, and another 5 points of that is for self-insured companies, and Indian reservations and municipalities and whatnot. So there's really only about 20% of our revenue that could be on contract. And we believe we have about 18% of that already on contract.

So, there's really -- there's only one major national carrier that we don't have a contract with. That's CIGNA and we are working to get that. But we don't see a lot more exposure to going on contract, and we're actually hopeful that now that enough time has gone by on some of our earlier contracts, we can start to renegotiate those up.

Got it. Okay, and in terms of the quantification that you provided for the TC Grandfather Clause situation I'm just curious. What are -- It seems like a lot of puts and takes there so I'm just curious how you thought about that in terms of quantifying the exposure. And then how should we think about potential risk in that number and potential upside? Is there a way we can quantify that in some fashion?

So this has been an enormous undertaking at NeoGenomics with a lot of resources going into trying to quantify this.

We have approximately 140 to 150 hospital clients that may get caught up in this that are quote-unquote grandfathered. The only test that really come into play here for those that are reimbursed off the physician fee schedule, which are predominantly flow cytometry, FISH, and immunohistochemistry. When we boil it all down, we think it is about 16% to 18% of our total revenue that is exposed to this and we could see, in some cases, as much as a 25% or even 50% reduction from what the Medicare reimbursement was in some of these things.

And so we believe when you extrapolate that over all of our revenue, it lines up being somewhere on the order of a 5% to 8% range for the overall average revenue reduction, revenue per test reduction.

The upside is if the Grandfather Clause is extended further, obviously that reduction won't happen and we probably will experience significantly better profitability in the second half of the year. We don't believe that there's a lot of downside to that. I guess you can never predict the future with a lot of accuracy, but we've done a fairly exhaustive analysis of what we expect to happen and we are well into having discussions with our hospitals at this point in time.

There is a small piece of revenue that comes to us through pathology practices that may originate from the hospital that we just don't have a lot of insight into, so I suppose there is some nuance that we could have under-quantified that piece. But we did make a good-faith effort to get at that as well.

Got it. Okay, and then just last one from me on the salesforce side. So it sounds like you've had some meaningful productivity increases both with the salesforce and the lab side of it as well, but I'm curious with the sales side of it, how far do you think that productivity measure could go? How do you think about the salesforce overall? Can you see that productivity number go up even more? And then just also curious what your long-term thoughts are on the salesforce. Are you planning on adding meaningfully over the next couple of years?

Amanda, this is Doug. Thanks for the question. We have had very good success driving productivity through our sales force, and we believe that there is more productivity gains there. Part of -- in addition to the training and all of the development activities that we've undertaken, we have benefited from longevity in our salesforce. So, we have not had a lot of turnover. In our business it does matter when people are in the territory for a while and we have some very, very savvy and experienced territory business managers in the field now who are very productive.

We conduct pretty rigorous reviews on a monthly basis of our pipelines. And the pipelines virtually across the board are very healthy at this point.

We do intend to add to our sales team although we're doing that in a pretty disciplined way and our additions to the team will probably come in the western part of the country as we go through the year.

Okay, thanks very much for the help.

Kevin Degeeter, Ladenburg Thalmann.

Congratulations on the strong performance. A couple of maybe big picture questions for me as well. You mentioned in the prepared script that you continued to experience market share gain. How much of that is, in your view, related to some amount of customer dislocation involving a lot of the M&A [on your peer] group. And parse that out from just blocking and tackling, sort of competitive wins where there were stable relationships from the practice side.

Thanks, Kevin, for the questions.

So we do believe we're taking market share. Some of that is anecdotal. We hear from a lot of our competitors what they are doing.

We think that our service levels have remained very, very consistent. Our salesforce has been also very consistent, and that is driving natural growth. There has been some dislocation as a result of M&A activity in the industry, and through that period we been quite stable.

We do believe that our service levels are as good or better than anyone in the industry and we hear that a lot. So we don't lose a lot of clients. That really helps a lot.

As you know, there has been a lot of activity in the M&A side. We keep our heads down and remain very focused on what we're doing, and we are also focused on larger accounts. Our target customers tend to be the larger pathology groups that are getting larger and taking share themselves, and I think that's been helpful.

The other thing that's been helpful is we have expanded our test offering and, as we mentioned in our remarks, we continue to do that, particularly in the molecular and immunohistochemistry area. And that's driving a share of wallet gains to NeoGenomics as well.

Okay, and maybe on a related question to you, your comments on growth and test venue, the molecular and someday IHC has to carry lower revenue per test metric, and a little bit different gross margin profile than definitely some of the FISH test. How do we think about now with using base case assumptions that the TC Grandfather Clause goes away, how do we just think about metrics here? Less so on revenue per test, although I'd appreciate maybe a little color on that, but just target gross margins as the test menu evolves here a little bit and the mix evolves.

Well, Kevin, I would say that what's important to our business is productivity gains. And as we generate more volume through our laboratory, that generates incremental gross margin and profitability. But we're also working very hard on other productivity and efficiency gains and on reducing the cost of our testing in molecular and IHC labs. So even though the average revenue per test may decline as a result of the relative mix of those product lines, we're also working very hard to cost reduced in those areas as well as in other areas of our laboratory.

So we believe, let's say absent the TC Grandfather Clause expiration, I think we've said that we intended to drive our gross margins into the 50% range. And we've given you some indication as to the impact of the TC Grandfather Clause. But after quarter 3, we will resume our drive to increase our gross margins.

So Kevin, the way you can think about this is you'll lose some revenue from the TC Grandfather impact but you won't have incremental bad debt on that or incremental commissions on the lost revenues. Say you use a number of sort of 85% to 88% of the dollars of lost revenue will be the margin impact before productivity increases. But as Doug pointed out in his remarks, we had a 6.3% reduction in cost last year and we actually increased our gross margin by 60 basis points over a one-year period.

We are well in stride in terms of making productivity improvements. You can't really foresee exactly what quarter they are going to show up in and what magnitude, but we believe they are going to continue to show up in a meaningful way throughout the balance of this year and next year. And then this will just be the 2012 issue we had to deal with.

The good news is, as Doug mentioned, is we are much stronger and much more able to absorb this than we were even just a year ago.

I would just add one thing, and that is that we do continue to invest pretty aggressively in our business and particularly in new test development. So some of these tests will help us to gain further market share and some of these tests will generate additional clients.

Okay, that's helpful. Just lastly here, can you comment on availability of qualified lab techs and how we should think about -- are you looking to make a number of hires out in Irvine versus some of the facilities in Florida and just sort of the luxury problem of how do you keep up with the test volume growth to make sure we don't get in a situation -- bumped into a couple of quarters ago of really demand being how to keep the process in-house.

Okay, well, thanks again for the question. Even a couple of quarters ago, we were relatively successful in maintaining pretty good turnaround times despite the increased volume. But we're in a much better condition now to deal with that, given that we have a Tampa lab; we have an Irvine lab; we have a lab in Nashville and a lab here in Fort Myers, Florida. So we have more opportunity to hire very qualified people. And because the Company is doing well, we are benefiting from having more people actually come to us and want to work for us proactively. So that is helping as well.

Perfect. Thanks so much.

(Operator Instructions). Mark Zinski, 21st Century Equity.

Congratulations on the quarter. I just wanted to confirm the sales rep account. Is that still at 21 then?

The sales representatives, we have 20 active territories right now and we have one opening there.

Okay. There recently was a Supreme Court ruling which put a little damper on the proprietary aspect of genetic testing. Do you see that having any kind of impact on your corporate strategy going forward and in terms of how you look to invest in proprietary test development?

Well, we actually think that it's probably good for us. We do have, in fact, a much more active strategy and initiative in launching new tests, and some of those may be proprietary. Part of our licensing arrangement with Health Discovery allowed us to have tools that would help us in biomarker discovery as well as in the clinical use of testing.

So, we feel that we've got some proprietary tools to help us here. The fact that it's more difficult for a lot of these development companies, pure development companies, to lock up genes, I think, is helpful to us in the long run.

Okay. And then the Grandfather Clause, you'd mentioned that you think -- I believe you said that you thought that there was a pretty strong chance that it would not be renewed. Is that based on your industry contacts and such? Or is it still up in the air a 50/50 proposition?

It's really hard for us to handicap this thing, but what we're hearing is that the way Congress works these days, there needs to be some legislation that they can attach this legislation to, and given that we're in an election year, the probability, as we understand it, of solo legislation going through Congress is not high.

So we are hoping for the best and planning for the worst in this one.

Okay. And just lastly, in terms of new test development, the 25 molecular tests that you mentioned, can you give us some color in terms of what -- from a categorical basis, what kinds of tests these are? Were these pretty much in the pipeline already or have some of these key new personnel hires you made recently contributed to the progress of this development as well?

Mark, this is Bob Gasparini and maybe I'll start this one and ask Dr. Albitar to balance that. To answer the first half of your question, the tests that we're bringing on board generally fall into three different categories. A lot of what we have been doing on the molecular side prior to Dr. Albitar coming onboard has been known as a point mutation analysis -- as we look for specific mutations within parts of genes for diseases like (inaudible) colon and various leukemias, et cetera.

So the first general category that is going to encompass some of these 25 or more new molecular tests involve sequence analysis. And that's a little bit different from point mutation in that you can look at the entire gene and the entire area rather than specific points along that gene. So, sequence analysis is one of the categories.

Fragment length analysis is another category, and one of the tests that we've been offering for years is a B and T-cell gene rearrangement where you can look for clonality, and you can look for specific abnormal hormones that are present in (technical difficulty) or lymphoma. And there are other fragment length tests. And so again, it represents a separate category.

And the third category that we're expanding where we only offered prior to Dr. Albitar joining us, one test. And those are known as RT-PCR, where you are not looking at DNA mutations or abnormalities, but you are looking at RNA. And we used to offer RT-PCR tests for a relatively rare but well-known leukemia known as CNL. There are a plethora of RT-PCR tests that we are currently working on right now under Dr. Albitar's leadership that will look at RNA from a number of different disorders in addition to CNL.

And then, I think the last question that I heard you ask and that is personnel. And that ties to, I think, a previous question also. And that is, the advantage I think of having multiple laboratories across the United States, including the one in California, is that we do have access to highly qualified and skilled laboratory technologists. And if California has any type of laboratory, skilled laboratory technologies, there are molecular technologists out there.

And so Dr. Albitar and our Neo team out there have been very successful in being able to recruit molecular biologists to help us grow this particular product offering.

Okay, that's helpful, and just as a follow-up to that, then, as a customary then, in terms of the product chain, will these molecular test sort of be a third and fourth option that adds clarity after you've already performed maybe one or two T tests?

Mark, that's an excellent question and I think Dr. Albitar might be able to comment more on that. What you're referring to is algorithmic approaches to answering questions. Because the bottom line is we're trying to answer questions that the clinician asks. So if we can use one or two tests, depending on what the question is they are asking, cytogenetics and FISH and/or flow typically answer the front line questions for at least amount of poetic disease.

For some of the solid tumor diseases, it may be that we go right to a molecular test. So that there is not going to be as classic an algorithm or a cascade with regard to what we're used to on the hematopoietic side.

Dr. Albitar, do you want to maybe comment on that?

The focus of our (inaudible) is truly personalized medicine. And we are investing a lot, we are thinking along that diagnosis, to confirm diagnosis or to nail a prognosis to help clinicians to determine the cause of the disease as well as early detections and monitoring of therapy or determining what kind of therapy this patient needs.

So our tests merely the way our thinking is going is to support clinicians in the various and making more informed decisions -- a major focus going beyond the hematology disease is into the solid tumors.

Okay. So do you expect then -- some of these (technical difficulty) molecular tests will address solid tumors then?

Will address how the tumor -- I'm sorry? Repeat this --.

Will some of Though some of these 25 molecular tests then involve solid tumor analysis?

Absolutely. As a matter of fact, the majority will involve solid tumors.

Okay, very good.

Mark, we have got one more questioner in the queue here and I'd like to let that person get in. So if I can ask you to get back in the queue if you have further questions.

Grant Zang, Zacks Investments.

Congratulations on another strong quarter. Just a quick question about the R&D spending here. It looks that you have R&D spending for the first time in this quarter. My question is, I guess this is related to the HDC acquisition and my question is that, is there a significant increase in the next few quarters? And can you give us a little bit more color on this question.

Sure. We announced in our Q4 call in mid-February that we expected to spend $1 million to $1.5 million more in R&D this year as a result of expanding our molecular testing menu and our development activities with Health Discovery Corp. Obviously when you are doing trials and whatnot usually you have to pay for specimens and whatnot.

We're sticking with that. We generally have a small increase in R&D anyway each year as we bring out more test development. But you'll see this number probably start to get up into the $0.5 million per quarter range here in Q2 and Q3 and it may even go up a little bit from there. But as we mentioned on our Q4 conference call in February, we expect that to continue to operate profitably and that we want to balance all of our growth initiatives with what we're doing on the profitability side.

So, we're not going to get crazy about this. We are making selective bets that we think can have a near-term impact and yes, we're spending some extra money on it now, but the early results look encouraging on the things that we're spending money on.

Okay, thank you.

Okay, I have a few questions that have come in by e-mail. This is an institutional investor who comments -- gross receivables increased 29% sequentially while the allowance for doubtful accounts increased only 7%. The allowance now represents 18% of gross receivables while it averaged 21.5% over the last four quarters and it was 21.8% in 2010. Why the significant change? It appears the improvement in gross margin is largely a function of the change in the provisioning policy.

Well, first off, our bad debt reserves are booked against G&A, not against gross margins, so it has absolutely nothing to do with gross margin. The gross margin as we talked about improvements came from increases in lab productivity.

In the fourth quarter of every year, we do a fairly extensive analysis of where we are versus our [aged] receivables and our allowance. And generally, you'll see a lot higher write-offs against the allowance in the fourth quarter than in other quarters because we're obviously preparing for the full-year audit.

As a result of going on contract with more and more managed care providers over the last two years, we know to the penny what we expect to receive. And so we're able to reserve a little bit less than we did perhaps two years ago.

So, this is just a function of scale and getting better at what we do. But there is no real mystery in this. This is -- I would expect that we will operate in the 18% to 20% range here this year, down a little bit from last year.

We also got a series of questions from another institutional investor.

Can you please provide an update on the added development program? How are things progressing with this next test?

I'm going to ask Doug to step in on that one.

So we have a number of development initiatives underway. We've talked a little bit about the initiatives with the Health Discovery licensing arrangement.

We also have some interesting opportunities in addition -- alongside the strategic agreement that we developed with Abbott a couple of years ago. We continue to work on developing this second test under our agreement with Abbott Molecular. And we've had some pretty good results.

What we have decided to do was to go back and increase our validation, the size of our validation test. And we expect now to, in the third quarter, probably have a much better clinical validation and we're hoping that this test is going to be every bit as successful as we ever thought it would be.

So we're continuing to work on it.

Okay. A few other follow-up questions here from the same writer.

We've discussed the TC Grandfather, so I'm not going to get into that again.

Overall volumes, can you comment a little bit about the trends you're seeing in the context of normal seasonality? Weather patterns were crazy this year and the snowbirds didn't really head south. Curious as to your thoughts on how this might impact normal seasonal trends.

We do a usually experience a pretty strong uptick in the first quarter because a third or so of our business still is derived from the state of Florida. That last year our business was impacted by the extreme snowstorms throughout a lot of the Northeast and the Central states in the winter months. Obviously, we had a snap back from that. But first quarter is generally stronger for us anyway.

The second quarter, things do begin to slow down a little bit as the snowbirds began to head up [South]. We don't anticipate any decreases in revenue in Q2 and certainly our guidance would imply a sequential increase in quarterly revenue.

It's really Q3 where we start to see the biggest impact in seasonality each year, although last year we did have nice sequential increases in Q3 as well. Obviously in Q3 of this year, we will have the TC Grandfather impacts and the seasonality impacts, and so we might see a little bit of sequential growth pressure there in Q3 for this year.

Last question here I have is -- is there any update on a NASDAQ listing?

I'm actually delighted to inform everyone that the NASDAQ's application to lower the minimum price for the market value of equity securities threshold of the listing was approved by the SEC last week, and we got notice from NASDAQ on that. And so once we get to $2 per share for 90 days in a row, we can move up to the NASDAQ. We've had fairly extensive conversations with NASDAQ and hope to be completing our application here in the second quarter to get ready for that.

But we're very focused on trying to achieve this and given the recent performance of the Company, we're hopeful that more institutional investors will perhaps help see the value in our Company and help move the price up.

I just had one final question roll in here and I'll get this one quickly.

There's obviously been a significant amount of M&A activity in the testing area. You're one of the last players standing. You are greater than $50 million annual run rate and profitable, have you received any recent inquiries?

As a matter of public policy and legal policy, we just don't comment on strategic activity. We've stated a number of times in the past that everybody talks to everybody in this industry and we're no different than anybody. So we just don't comment on any kind of specific conversations that we're having.

Doug, I'll turn it back to you to wrap it up.

All right, thanks, Steve. So as we end this call, I would like to recognize all 246 now of our NeoGenomics team members around the country for their dedication and commitment to building a world-class cancer genetics testing program.

On behalf of our team, I want to thank you for your time and joining us this morning for our quarter 1 2012 earnings call and let you know that our quarter 2 2012 earnings call will be on or around Thursday, July 19.

For those of you listening that are investors or are thinking about investing in NeoGenomics, we thank you for your interest in our Company. Goodbye.

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