Apr 25, 2013
Executives
Douglas M. VanOort - Executive Chairman and Chief Executive Officer Steven C.
Jones - Chief Compliance Officer, Executive Vice President of Finance, Director and Chairman of Compliance Committee Maher Albitar - Chief Medical Officer and Director of Research & Development George A. Cardoza - Chief Financial Officer Jerome J.
Dvonch - Director of Finance - External Reporting
Analysts
Matthew Hewitt - Craig-Hallum Capital Group LLC, Research Division Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division Debjit Chattopadhyay - Emerging Growth Equities, Ltd., Research Division Mark Zinski - 21st Century Equity Research Grant Zeng - Zacks Investment Research Inc.
Operator
Greetings, and welcome to the Neogenomics' first quarter 2013 financial results. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Douglas VanOort, Chairman and CEO for Neogenomics. Thank you, Mr.
VanOort. You may begin.
Douglas M. VanOort
Well, thank you, and good morning. I'd like to welcome everyone to Neogenomics' first quarter 2003 (sic) 2013 conference call and introduce you to the Neogenomics team that's 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; Fred Weidig, our Director of Finance and Principal Accounting Officer; and Jerry Dvonch, our Director of External Reporting. Dr.
Maher Albitar, our Chief Medical Officer is joining us from our Irvine, California office by phone. In addition I'm particularly pleased that we're joined by Steve Ross, our New Chief of Information Officer.
Steve has a great deal of experience in information technology having served as Vice President of Technology for a very large organization where he had responsibility for areas such as: IT infrastructure; development; organizational design; system integration; enterprise architecture and security. And we welcome Steve to our team.
Before we begin our prepared remarks, Steve Jones will read the standard language about forward-looking statements.
Steven C. Jones
Thanks, Doug. This conference call may contain forward-looking statements, which represent our current expectations and beliefs about our operations, performance, financial condition and growth opportunities.
Any statements made on this call that are not statements of historical fact are forward-looking statements. These statements, by their nature, involve substantial risks and uncertainties, certain of which are beyond our control.
Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements. Any forward-looking statement speaks only as of today, and we undertake no obligation to update any such statements to reflect events or circumstances after today.
Douglas M. VanOort
Thank you, Steve. I'll begin our call today with some remarks about our performance in the first quarter of 2013, including an update on some key initiatives we're executing to drive growth and profitability.
I'll then turn the meeting back over to Steve to discuss our financial results in more detail. We were pleased with Neogenomics' first quarter performance.
Both revenue growth and profitability were solidly consistent with our guidance. We made excellent progress with initiatives to return Neogenomics to profitability after last year's big regulatory change and to relentlessly develop and introduce new and innovative tests of important medical value to cancer care.
First quarter revenue was $15.7 million, an increase of 3% compared with last year's first quarter. However, testing volume grew by over 19% from quarter 1 last year.
Volume growth was impacted by a reduced number of revenue days in this year's first quarter. In fact, test volume per day grew almost 23% compared with last year's first quarter.
Average revenue per test fell by over 13% due largely to the impact of the TC Grandfather Clause expiration at the beginning of the second half of last year. Price was also affected by recent changes in molecular reimbursement levels by our Medicare carrier.
Despite these changes, we were pleased that our average revenue per test has been stable over the past 6 months. We were especially pleased with the steady improvement we achieved in gross margins.
First quarter gross margin increased to over 46% as a result of our continued emphasis on productivity. In fact, gross margin increased by over $800,000 compared with last year -- last quarter, even though revenue increased by less than $800,000.
While over 100% incremental gross profit is not sustainable, clearly, lowering our cost structure is a strategic imperative that we've been working very hard to accomplish and we have initiatives in place to drive our cost even lower. We ramped up our spending on sales and R&D activities in the first quarter and we believe these are smart investments.
The sales cost increase was a result of our initiative to add to the number of sales representatives and oncology business development specialists we have in the field. The R&D cost increase has allowed us to continue to launch a number of exciting new tests in the first quarter.
Productivity in our sales and R&D organizations remains very high. And despite the increased spending, our adjusted EBITDA grew by 25% sequentially even though revenue was up just 5% from quarter 4.
Another important achievement during the first quarter was the completion of the secondary offering of 3.3 million shares of the company's stock in late February at a price of $3 per share. That offering gave us an opportunity to introduce Neogenomics to a new group of high-quality investors, many of whom have joined us for this investor call.
Because Neogenomics is now listed as a NASDAQ company and additional shares are now available to the public, trading activity and demand for the company stock increased nicely. The offering also allowed us to shore up our balance sheet and we now have over $10 million of cash and debt capacity available to us.
We've been working diligently on accomplishing our key objectives for 2013. There are 5 key categories of objectives, which we call our critical success factors.
Our entire organization is aligned to drive achievement of these objectives. The 5 areas are: people, quality, growth, innovation and performance.
For this investor call, we'll briefly describe a few of the objectives we think you might find interesting. Let's begin with quality and performance-related objectives.
Many of these quality and performance-related objectives are interrelated. That's because we believe that high-quality processes are also low-cost processes.
In today's healthcare environment, being a low-cost provider is extremely important. As a result, we are investing in quality management, process management, lab automation and information technology.
For example, we have the best practice teams deployed for each laboratory discipline around the company. These cross-functional cross unit teams have developed detailed plans and goals to improve quality, eliminate nonessential process steps and to reduce by year-end, our quarterly average cost per test by 20% from the level reported in quarter 4 2012.
After one quarter, we have already seen a 5.5% reduction in average cost per test. But quite frankly, we believe the 20% cost reduction goal over 1 year is a real stretch goal, but our teams have not backed away from the challenge.
These teams are diligently and systematically adding lab automation and testing new processes and methodologies. One additional benefit of the best practice structure is that once initiatives are approved, they are deployed in a rigorous and standardized manner in each of our laboratory facilities.
We also have initiatives to apply lean principals to our laboratory processes. Just a couple of weeks ago, we held another Kaiser[ph] event in one of our very strongest lab departments.
Frankly, we were skeptical that the impact of applying lean in this lab was going to have much of an impact since it already was extremely efficient and well run. Toward the light, the team completely redesigned the workflow process and significantly reduced a number of unnecessary processes.
The result will be a combination of cost-reduction, improved turnaround time and increased testing consistency. Although we're just getting started on the lean journey, we've been getting good results from our continued emphasis on process management and quality.
Our laboratory productivity was a record high in the first quarter and our cost per test improved by almost 12% compared with last year's first quarter. And now that we're creating a culture of lean, we expect to continue to make improvements in all of our processes going forward.
As you know, we're also focused on achieving a number of innovation-related objectives. We are determined to have Neogenomics be widely recognized as a leader in oncology testing.
During the first quarter, our R&D teams led by Dr. Albitar, introduced 17 additional molecular tests and 2 more molecular profiles, targeting certain disease states.
We also continued our leadership in FISH testing by introducing an improved test for melanoma as well as improved hematologic disease profiles to allow physicians to better understand the cancer type and make more informed therapeutic decisions. As a result of our new product activity, we believe that Neogenomics currently has the most comprehensive menu of both FISH and molecular oncology tests available in America.
We also have capabilities in next-generation sequencing and in ARRAY SNP cytogenetics profiling testing that makes Neogenomics unique among cancer testing laboratories. Developing proprietary tests is a relatively new area for us, but we're making progress.
The most interesting of these is a test in development for the diagnosis of prostate cancer. There are 2 goals for this test.
First, is to diagnose the presence of cancer in patients with BPH. The second, is to be able to distinguish high-grade from low-grade prostate cancer in patients with prostate cancer.
This test is unique in as much as it's designed to be performed on blood and urine as opposed to prostate tissue from biopsy or on urine alone. Early performance characteristics are positive and we're beginning to invest more in the development of this test even though it will be a longer-term development project.
We have also filed a patent application on our approach to this test augmenting the license that we acquired from Health Discovery Corporation last year on prostate cancer. In the first quarter, our spending on R&D increased over 60% on a year-over-year basis, but adjusting for unusual cost associated with stock option accounting, the underlying cost increase was about 10%.
Our R&D team is extremely efficient and has been very productive and we're satisfied with this approximate level of R&D spending. Our growth objectives are obviously a vital part of our strategy.
There are 4 major objectives in place for us in 2013. First, is to capitalize on the new tests we've introduced in the past couple of years.
As you may know, we launched about 50 new molecular tests and profiles, a number of new FISH tests, new amino histochemistry tests and a digital image analysis product and some proprietary tests. So far in the first quarter, we're on track with our revenue goals from new products.
Our second key growth objective is to target our services to larger oncology practices. In the first quarter, we hired 4 new oncology business development managers to market our services to these large oncology groups, either in partnership with our pathology clients, or directly, depending on local market dynamics.
These are more complex sales and they take some time to accomplish, but we believe successful deployment of this initiative could accelerate our revenue growth as we proceed through the year. The third key growth objective is to continue to manage our sales team to be among the most productive in our industry.
We ended the quarter with a total of 24 sales representatives with 1 territory vacancy that we intend to fill shortly. Our pipeline of new account activity is robust and the number of new accounts that we've begun to serve in the first quarter is strong.
Once we attract a new client, we work very hard over time to offer our full complement of services to them and grow our share of wallet. We have aggressive goals for sales force productivity, but we believe we have some of the very best sales professionals in the industry and we're determined to achieve our goals.
Lastly, we believe that all of the recent changes in reimbursement may serve to accelerate the consolidation in our industry and we have begun to take a more active approach to exploring acquisition opportunities. To summarize my comments about the first quarter, I believe we're making strong progress building and developing our company even in a difficult environment for the laboratory industry in general.
We believe our key laboratory disciplines in cytogenetics, FISH, flow cytometry, IHC and molecular testing, are indeed among the very best in America. And we continue to invest in making them even better.
We remain pleased about our company's consistently strong quality and service levels which we believe, help differentiate us in this industry. We're intensely focused on maintaining superior sales growth by taking market share and our investments in R&D are positioning us to drive growth in future periods.
Our teams remain excited about the company and its prospects and we're focused on continuing our growth momentum in the coming quarters. I'll now turn it over to Steve Jones to comment more fully on our financial results.
Steven C. Jones
Thanks, Doug. I'll start by reviewing some of our financial and operating metrics for the fourth quarter and then we want to open it up for questions.
First quarter revenue grew by 3% to $15.7 million on 19% test volume growth. Average revenue per test was $488, a 13% decline from Q1 '12, primarily as a result of the exploration of the TC Grandfather Clause.
The average revenue per test decline is why revenue growth didn't keep pace with volume growth. As we discussed on previous calls, the exploration of the TC Grandfather Clause impacted about 18% of our total revenue, which resulted in about a $1.3 million per quarter reduction in revenue.
Sequentially, average revenue per test was unchanged. The real story for us in quarter 1 was the dramatic improvement of gross margin in the quarter compared with quarter 4.
Gross margin improved by over 310 basis points to 46.3% in Q1 from 43.2% in Q4. In dollar terms, there was an $812,000 increase in gross profit on a $764,000 increase in revenue.
You don't often see a company drop more than 100% of the sequential revenue increase down to the gross profit line. As Doug discussed, substantial increases in lab productivity and significant cost reductions are having a dramatic impact on our margins.
For those of you that track such things closely, you may recall that in our quarter 3 2012 earnings call, we stated that we believe that we could fully absorb the impact to margin from the TC Grandfather exploration within a few quarters by continuing to focus on productivity and process improvements. We are well on track to meet this goal.
As Doug mentioned, we have created a number of best practice teams to really go after improving our efficiencies and ringing out incremental cost savings. Although we have already seen a 5.5% reduction in our overall average cost per test from quarter 4 2012, we believe we can improve this metric by at least another 5% to 10% by the end of Q4 2013 and hopefully achieve the 20% internal goal that Doug discussed in his remarks.
Turning now to SG&A. Total sales and marketing expenses actually decreased by $104,000 or 5% versus quarter 1 last year despite the $500,000 increase in revenue.
However, as Doug mentioned, we have begun adding experienced sales professionals to our sales and marketing team and thus, expect this level of expense to go up in coming quarters. R&D expenses in the fourth quarter increased by $337,000 or 68% versus Q1 2012.
This increase in R&D spending is directly related to the significant increase in our molecular test expansion activities and the new product development initiatives associated with our licensing agreement with Health Discovery Corp. In addition, as we discussed in the press release, we had 289,000 of additional variable stock-based compensation expenses in Q1, most of which was booked to our R&D account.
The remaining general and administrative expenses increased by $425,000 or 11% from quarter 1 last year, primarily as a result of increases in personnel and incremental depreciation expense versus last year. Net income for the quarter was $3,000 or $0.00 per share compared to net income of $603,000 or $0.01 per share in quarter 1 2012.
This decrease in profitability is due entirely to the loss of approximately $1.3 million of revenue from the unit price decreases that accompanied the TC Grandfather Exploration, as well as to a lesser extent the reduction in the number of revenue reporting days in Q1 this year from last year. Depreciation and amortization was $1 million in the first quarter and noncash stock-based compensation was $444,000, which resulted in adjusted EBITDA of $1.8 million, essentially unchanged from the level reported in Q1 last year.
Purely for the purposes of comparison, were if not for TC Grandfather exploration, we believe adjusted EBITDA would have been closer to $3 million this quarter. As we discussed from the press release, we had unusually high stock-based compensation expense in Q1 as a result of the 58% increase in our FISH stock price.
Just to add a little color to that, many of the doctors who work for us work in states where there is a prohibition against the corporate practice in medicine. This means that they cannot legally be employees.
So we have to structure arrangements with them where they form their own professional service corporations and then we contract with such PFCs on a full-time basis. Unfortunately, GAAP rules require that any options or warrants we grant to nonemployees have to be accounted for using variable accounting, which means that the value of these stock awards rise and fall, the amount of expense we have to incur varies with the stock price.
In contrast, the accounting for employee stock based compensation allows us to establish a value upfront and then amortize it over the vesting period. This is not variable accounting because the expense is fixed up front and the expense then is amortized on a fixed basis, period to period.
In any event, as the awards to our nonemployee doctors start to vest, the amount of variable expense will come down and the period-to-period volatility should lessen. We finished the first quarter with 281 full-time equivalent employees and contract doctors as compared to 268 at December 31 of last year.
Our accounts receivable balance, net of allowance for doubtful accounts, was $15.6 million at March 31, up approximately $1.6 million from the balance at December 31. Our AR balance, expressed in terms of days sales outstanding, was 90 days as of March 31, up 3 days from the level we reported at December 31.
The increase in DSO was mostly due to the fact that Medicare and other payers held up reimbursing us for molecular tests for the better part of the first quarter while they were establishing new rates to go within the new molecular CPT codes. Most of these rates have now been established and we expect a little bit of a catch up to happen here in quarter 2.
In terms of our overall liquidity, as of March 31, we had $4.6 million of cash-on-hand and $5.8 million of availability under our working capital line of credit, which results in $10.4 million of total liquidity as compared to $2.4 million of total liquidity at December 31. As we discussed in the press release, we recently completed a 3.3 million share equity offering.
The stock was sold at $3 per and we receive gross proceeds of $10 million. After deducting transaction fees and expenses, we netted approximately $9.2 million.
We used approximately $4.3 million of this amount to pay down our revolving credit facility and we added $2.8 million to our cash balance. The remainder was used in our working capital accounts.
Our cash flow from operations in Q1 was negative $1.3 million as compared to negative $1.1 million in quarter 1 2012. We purchased 493,000 of property plant and equipment in the first quarter, however, we were able to lease finance approximately $253,000 of this amount, thus the net use of cash from investing activities was only $240,000.
Turning now to the guidance we issued this morning for the second quarter of 2013. In quarter 2, we are expecting revenue of $15.8 million to $16.4 million and $0.00 to $0.01 per share of net income.
We began to hire additional personnel, so we expect that our SG&A expenses are going to go up modestly from quarter 1 levels and we do not expect to see the same percentage of incremental revenue to fall to the gross margin line as we did from Q4 to Q1. However, we do believe we can maintain approximately 46% gross margins in Q2.
In addition, investors need to remember that our Q4 2011, Q1 and Q2 2012 quarters, did benefit from the activities of one of our larger customers who is integrating a number of additional practices that they had purchases, and so we received a significant bump in volume during that time. Also, the reduction in unit prices as a result of the TC Grandfather Exploration is going to be a headwind to year-over-year revenue growth for one more quarter until it annualizes out in Q3.
At this point, I'd like to close down our formal remarks and open it up for questions. [Operator Instructions] Operator, you may now open it up for questions.
Operator
[Operator Instructions] Our first question comes from the line of Matt Hewitt with Craig-Hallum Capital Group.
Matthew Hewitt - Craig-Hallum Capital Group LLC, Research Division
First and foremost, you had a very large quarter of new test development with 17 new molecular, I mean just going online, it was a fantastic quarter. I'm curious, number one, some of the traction is there a test or 2 that you've launched over the last couple of years that has maybe exceeded expectations and as you look at this batch, is there 1 or 2 that we should be focusing on?
Douglas M. VanOort
Yes. I think maybe I'll just lay out.
One that we've gotten a lot of traction on is the ALK gene rearrangement test for non-small cell lung cancer. We're doing quite a bit of those.
We recently launched the RAS 1 FISH test to go alongside of that to pick up a few more mutations. A lot of the molecular test we're now offering are getting into really specific subtypes of cancer, they're -- some of them aren't well known yet, but we believe they will be well known.
They're answering second and third level questions whereas the first batch, we did last year, are answering first level questions. I think maybe at this point we'd like to have Dr.
Maher Albitar chime in here and add any additional insights he might have on that.
Maher Albitar
I think we are getting a lot of interest in our profile, especially for the leukemias and solid tumors. And we really built very nice list of molecular test for each cancer.
And these are going very nicely. But as Steve said, overall the entire menu is attractive and I think we have the most comprehensive molecular testing, to my knowledge in the industry.
Douglas M. VanOort
So now, one of the ways to think about this is, this has actually had a dramatic impact on our margin because a year ago, we were sending out a lot of these different types of test. Today, we have very few send-outs, where we have to send out to a lab.
In fact, we now have some of the leading research institutions and universities sending stuff to us because our molecular menu is so extensive. I think we probably saved $400,000 or more of the send-out testing over the last year alone just by increasing our menu.
Matthew Hewitt - Craig-Hallum Capital Group LLC, Research Division
Well, that's great. And obviously that speaks to some of the improvements that you've been able to see on the gross margin front.
And I think you've kind of answered this in the prepared remarks. So I apologize if you're rehashing it.
But as far as the gross margin is concerned, you mentioned an internal goal, and it's not going to be easy to achieve, but an internal goal of 20% improvement on the cost side of things with -- I think you said 5% to 15% over the remainder of the year. If you were able to achieve those and assuming the revenue guidance that you previously provided, where do you exit the year on a gross margin standpoint?
Douglas M. VanOort
Well, Matt, I would say -- let me just reemphasize that, that's a stretch goal. And we're really delighted that our people have embraced the goal and we're working very hard to achieve it.
But it's a stretch goal. If we were to come close to that, I think our gross margins would approach 50%.
George A. Cardoza
Or more than that.
Douglas M. VanOort
Yes, let's not overpromise. But we have a lot of good stuff going on.
I mentioned Steve Ross is joining us. IT is very important to this.
And we've got a lot of good initiatives going on here. I mentioned lean kind of techniques.
We got best practice teams, a lot of people throughout the company really focused on process management and process improvement. Doctor Albitar is a part of that.
Bob Gasparini is part of it. This is our company culture.
Matthew Hewitt - Craig-Hallum Capital Group LLC, Research Division
That's great. Actually that's a good lead-in.
My next question is for Steve. Obviously coming to a very different company and industry than you were at before, what attracted you to the Neogenomics opportunity?
What skills do you think and attributes can you bring to the table for this company as they continue to grow?
Steven C. Jones
That's a good question, Matt. I spent 10 years in retail.
And I had also spent the previous 6 weeks here on an IT assessment, working with Steve and Doug. This company has built a very solid infrastructure, a very good systems platform, but there's an opportunity to optimize and innovate.
And that's kind of what really attracted me to this. There's a lot of similarities with retail and the people and process aspect and I want to bring that to the table and I'm looking forward to it.
Operator
Our next question is from the line of Kevin DeGeeter with Ladenburg Thalmann.
Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division
A lot of great information. Hey, Doug, can you kind of give us your updated thoughts on some important characteristics of potential M&A or product acquisition opportunities?
Anything sort of incrementally in your thinking and how should we think about financial metrics and the one that I think most of us are more sensitive to is your appetite to take on dilution to EPS in the context of building longer term growth perspective?
Douglas M. VanOort
So let me first say that there's a lot of dynamic in our industry, which we believe will cause more consolidation in the future. This industry has consolidated a lot in the past and I think we're not done.
So we plan to do our part to see if we can participate in that. What we're interested in, if we were to engage in any M&A activity is, we're very practical folks.
We would like to acquire companies that are in the same kind of product line that we're in. Same similar customers, same products where we would have some natural synergy.
And we're not talking about some synergy that might occur 5 years from now. We're talking about kind of immediate stuff.
And so if we were to issue shares, we would be very focused on making sure that over a very short period of time, that these deals would be accretive. There are other interesting strategic objectives that we might have in looking at deals, but that would be first and foremost.
Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division
Okay. Great.
Very helpful. And maybe just one or two quick questions, if I may, with regard to the impacts of the change over the molecular pricing by Palmetto and Medicare more generally.
Steve, have you sat down and done a similar kind of metric as you did with TC Grandfather, kind of looking at going if previous status quo would have been -- remains sort of, what was kind of the incremental impact here in Q1 from those step down the reimbursement rates?
Douglas M. VanOort
Kevin, I should say that this is a story that's still being written. Palmetto came out in early February with a bunch of new rates on their website.
They had guidance on there about how microdissection was supposed to now be included in the rates. That guidance about microdissection suddenly disappeared in early March and we got the first of what is now been 2 different increases in the Palmetto results in early March.
And early February, they -- I think, it was 9 more tests they increased the reimbursement form. Palmetto has invited industry to comment on their rates.
We actually submitted a 10-page comment letter and gave them a lot of insight as to what the costs are to performing these tests on a number of different molecular tests. I think the number in response from industry, number of people responding and the quality of the response from industry is probably as high as it's ever been.
I know that Palmetto has certainly had a lot to think about as regard all this. We have not yet gotten formal guidance from CMS as to what the rates are going to be.
We expect the first preliminary guidance issuance report from CMS in the next few weeks. From there, we'll have 60 days to comment on it and then they'll issue the preliminary rate in I think July.
And we'll have another 60 days to comment on it and the final won't be issued until September and so this is still very much a moving target. I would tell you, based on the early issuances in early February, we were -- our mix of business was similar to everyone else as we were looking at 20% to 25% reduction across the board.
Since that time they have meaningfully increased some of the key ones that were just out of whack, they were below everybody's cost from what we can tell. And so we're cautiously optimistic that we won't have any test where we will have a negative margin, but the story is still being written.
Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division
Okay. Maybe just one kind of finer point.
I think I believe one of the issues that's potentially on the table here is a question of, do some of these additional price adjustments, are they retroactive back to January 1 of this year and is there kind of another potential revenue component to that? And when we look at the Q2 guidance, how do we think about and how did you think about just even coming to a baseline as to where some of these molecular reimbursements are going to come in?
Douglas M. VanOort
Okay. So all of the rate increases that Palmetto has published are retroactive to Q1.
There is specific guidance about if you been paid although not many claims were paid, to resubmit. If you haven't paid, they'll be paid at the revised rates.
Palmetto is paying clean claims now. We have started to get paid.
We didn't get paid for most of the quarter while this was still being worked out. There is a big backlog of tests that need to be cleared.
I expect that we'll see a pretty good catch-up on that. With respect to Q2, the thinking that went into the guidance was, we came up with, what we believe was a reasonable estimate for the molecular claims that were pending in Q1 and we applied that same reasonable estimate to Q2 to determine our guidance.
We do not have any material negative adjustments to Q2, but things are lower across the board than where they were. It's hard to give you an overall estimate of how much lower, but I think what we have is 2 things going on with molecular: One, is we're seeing an increase ordering of the disease profiles and so you get a higher average revenue per case and it's hard for us to track these cases in the individual test.
So they wind up being tracked as one test. And so, that's on a positive side.
On the negative side you got all the lower reimbursements. And so, net-net we're cautiously optimistic that it's not going to be a huge impact to us, but again the story is still being written.
Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division
And maybe one more and then I'll hop back in the queue. Just prompted question to my mind.
Are there specific issues in Q1 with regard to mix that had a material impact on gross margin or should we really look at the positive result on the margin line as being really kind of wholly driven by the impressive lab improvements?
Douglas M. VanOort
Well, molecular continues to be our fastest-growing business. We -- the increase in molecular revenue was 50% year-over-year.
It's now up to 9% of our total revenue. So it's still a relatively small percentage of our total revenue.
That does increase mix. We had a fair number of fairly high-priced CRO tests hit in Q1 and the CRO test we're able to offset some of the reimbursement pressures we were seeing in molecular.
So net-net, these are things around the edges, they're not material drivers of things. So I would say our -- the rest of our mix -- FISH is still somewhere on the order of 50%, cyto is still around 12%.
At the end of the day, flow cytometry is still in the 19%, 20% level. So we haven't seen any big changes like that.
Operator
Our next question comes from the line of Debjit Chattopadhyay with Emerging Growth Equities.
Debjit Chattopadhyay - Emerging Growth Equities, Ltd., Research Division
In terms of the guidance for the second quarter. So even if you hit on the high end of your second quarter guidance, it looks like you need to have a significant ramp going into the second half of the year.
Now, is that a function of business cycle or is that the full productivity of additional head count or do you have some overgrowth, which kind of gets you beyond the $68 million kind of low end of your guidance?
Douglas M. VanOort
So there are a number of things to which we had always planned relative to the ramp up of revenue this year. One of those was the traction that we would get with new products.
As you know, we introduced a lot of new products last year including 10-color flow cytometry, image analysis, a whole number of molecular test and we talked about those. So as we are in the marketplace longer with those tests, will get more traction and that's our plan.
The second thing is, as you know, we have added to our sales force. So we've added 4 new oncology business development managers in January and February.
These are complex sales, take a little longer. We're adding selectively to our sales team and other places.
And they will take a little time to get traction as well. So these are not new things.
We've planned them all year. And we expect to have more revenue growth as the year progresses.
Debjit Chattopadhyay - Emerging Growth Equities, Ltd., Research Division
In terms of -- just a housekeeping item here. Could you remind us on your NOLs carryforward and the effective tax rate that we should be looking at in the next 3 quarters?
Douglas M. VanOort
Okay. So the actual amount of tax NOL is on the order of $9 million.
That's the one that saves us cash. The book NOL is closer to about $14 million, $15 million.
And the effective tax rate -- we had taxes this quarter that we booked because we have certain minimums we've got to pay in states, but that's a de minimis amount. We won't be a meaningful taxpayer this year, and maybe not even next year.
Debjit Chattopadhyay - Emerging Growth Equities, Ltd., Research Division
Okay. And in terms of the molecular profiles of panels, could you just kind of educate us on the -- if the uptick has been satisfactory or do you see a longer sales cycle?
I mean, how involved is the discussion moving from either single EGFR test versus a full panel -- kind of how do you go about convincing practices team to use it.
Douglas M. VanOort
Dr. Albitar, do you want to provide your thoughts on it?
Maher Albitar
Yes. For all practical purpose, practicing physicians are having difficulties keeping up with most recent advances.
One of our jobs here is to keep up with the most recent advances in molecular testing and patient management and personalized medicine. So you can imagine most of practicing physician in community practice, they see patients with different diseases and everything else.
So the fact that we are making it easier for them, putting them in panels, they find that attractive to them. And very helpful in terms of deciding what test would they offer to their patient.
And we are extremely careful in trying to really putting our panels which are clinically useful and helpful to these clinicians.
Debjit Chattopadhyay - Emerging Growth Equities, Ltd., Research Division
And one final question before I hop on. In terms of your G&A and sales and marketing.
You did mention that's going to be higher than the current levels but in terms of -- as a percentage of sales, currently you are about 26%, 26.6% and 12.3%, is that going down incrementally and it just goes up on -- in dollar terms, or should we keep modeling it at the 26%, and 12% rates?
Jerome J. Dvonch
The way I think about it, if you add the increases in R&D and the increases in sales, we're probably going to stay -- right now if you add R&D into the mix we're actually around 44%. I would keep the whole mix right in the 43% to 44% area for a quarter or 2 and over the rest of the year as the back end revenue ramp starts to happen that will come down again.
In Q2, though, I don't think you're going to see a meaningful difference in the percentages.
Operator
Our next question comes from the line of Mark Zinski with 21st Century Equity Research.
Mark Zinski - 21st Century Equity Research
I just wanted to start off by just kind of dissecting the organic growth. In terms of just market share gains, new tests, geographic expansion, can you kind of put some ballpark figures on how those 3 items are entering your organic growth calculus?
Is it mostly market share gains at this point?
Douglas M. VanOort
Yes, it is. When you really look at it, the same-store sales on a year-over-year basis, is actually down because of the TC Grandfather impact.
So I mean, that came right out of that and so pretty much most of the growth now is from new clients and new products within existing clients. And I would say, I'm going to make a guesstimate here about 75% to 80% of that is new clients.
George A. Cardoza
I'll just add one thing. In the laboratory industry, what's very critical is service levels and retaining clients.
And our retention rate of clients has traditionally been very high and it's not changed. So we've had some very few clients leave us because they've closed.
It's a tough environment out there. We've had some clients leave us because they had to, for contractual obligations, as everyone sort of tightens down their costs.
But other than that, our retention rate is still over 95% in terms of new account -- existing accounts.
Mark Zinski - 21st Century Equity Research
Okay. And then the -- I mean, are you essentially kind of planning the West Coast sales ramp, is that fair to say?
Douglas M. VanOort
Yes. We have added, relatively speaking, more sales resources on the West Coast.
As you may remember, last year, we moved our laboratory to a brand-new purpose built facility with a brand-new molecular lab. And we've got a great capability out there.
We've added an immunohistochemistry laboratory as well. And so we're ready to do business in the West Coast and we've added resources to optimize that.
Mark Zinski - 21st Century Equity Research
So right now, West Coast sales are fairly minimal, is that fair to say?
Douglas M. VanOort
Not minimal. But they representatively across the country, they are -- we have a lower share of the West Coast.
Mark Zinski - 21st Century Equity Research
Okay. And then in terms of the budget sequestration issue with the 2% Medicare cuts, is that pretty much going to have just negligible impact on you?
George A. Cardoza
The first thing you need to understand is that, that only applies to the clinical lab fee schedule. And that test on the clinical lab fee schedule for us are cytogenetics and Molecular.
Molecular was changing anyway. So that really wasn't in the mix.
Cytogenetics is about 12% of our revenue. There's a few other test that are on it, but it's not a meaningful percentage of our overall revenue.
And it's something we were able to absorb pretty quickly.
Mark Zinski - 21st Century Equity Research
Okay. And then just lastly, Time Magazine came out with an article on sort of the state of cancer research a few weeks ago, and how there's kind of been somewhat of a paradigm shift in the research effort, the incentive structure sort of delivering results on the research and better coordination between the various disciplines involved in the cancer research process.
Can you guys just generally comment, do you think that all of this is a positive development in terms of potentially bringing products to market more quickly and is this complementary to your business essentially?
Douglas M. VanOort
Dr. Albitar?
Maher Albitar
Yes, absolutely. And I think one of our goal as Doug already mentioned, is to work on long-term, very important test like prostate cancer screening in determining the clinical relevance of the testing in terms of determining who has aggressive cancer, which is not aggressive cancer.
Who should be treated and who should not be treated. But the key thing here is that we are trying to work with academic centers and collaboration between academic center and the industry, in my opinion, is essential for the success for the entire medical field and I believe that's where the direction is going to be.
And our commitment to spend on research and collaboration with academic centers, I think it is very important for -- strategically for our company for moving forward with the current pressure on the industry as a whole.
Mark Zinski - 21st Century Equity Research
Okay. Great.
And then just lastly solid tumor. How is that as a percentage of sales and what kind of progress is being made there?
George A. Cardoza
That's actually a much more difficult question to answer than you might think. We certainly have a general feel for it, but a lot of molecular test for instance can be used in both.
And so it's hard to really give you a feel for it. I can tell you that generally speaking, we were around 20% before last time we looked at this.
It's getting blurry. We expect that to continue to increase certainly as this new digital image analysis program goes up, we expect IHC and our image analysis revenues to go up.
Many of the new markers that we've launched are predominantly for solid tumor oriented cancers, although they can again be used in [indiscernible] cancers as well. So I would say without looking at it any closer, it's probably inching up and we expect it to continue to inch up.
Operator
Our next question is from the line of Grant Zeng with Zacks Investment Research.
Grant Zeng - Zacks Investment Research Inc.
Actually most of my questions have been answered. And I would like to repeat that one -- 2 questions here about the gross margin.
It looks like the gross margin increased a lot from last quarter. And you just mentioned that for the second quarter of this year, the gross margin can still be maintained.
My questions are, for the whole year and going forward, can this be actually maintained or improved?
Douglas M. VanOort
We think we can improve those gross margins. We're planning to improve them.
We've got a lot of activities underway to improve our processes and automate our processes and so forth. So, yes, we are planning to improve our gross margins going forward.
Steven C. Jones
There are no further questions in the queue here and we really haven't received any other questions via e-mail. So at this point, I'd like to turn the call back over to Doug to wrap this up.
Douglas M. VanOort
Okay, thanks, Steve. So as we end the call, I'd like to recognize all 281 of the full-time Neogenomics team members around the United States for their dedication and commitment to building a world-class cancer genetics testing program.
On behalf of our Neogenomics team, I want to thank you for your time in joining us this morning for our quarter 1 2013 earnings call. And let you know that our quarter 2 2013 earnings call will be held on or around July 25 of this year.
For those of you listening that are investors or thinking about investing in Neogenomics, we thank you for your interest in our company. Goodbye.
Operator
This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.