Jay Roberts - COO & EVP, Finance Panna Sharma - President & CEO Igor Gitelman - CAO

Mitchell Kapoor - H.C. Wainwright Raymond Myers - Benchmark Ram Selvaraju - H.C. Wainwright

Please standby. We're about to begin. Good afternoon and welcome to the Cancer Genetics Second Quarter 2017 Earnings Call and Company Update. This afternoon, the Company issued a press release that provided an overview of the second quarter 2017. Today's conference is being recorded and will be available online at investor.cgix.com. Additionally, CGIX has also provided a set of slides to accompany today's update that are available, both online or by contacting ir@cgix.com. At this time, I would now like to turn the conference over to Mr. Jay Roberts, Chief Operating Officer and EVP of Finance. Please go ahead, sir.

Thank you, Operator, and thank you all for joining the Cancer Genetics' second quarter 2017 earnings conference call. On the call today is Cancer Genetics President and Chief Executive Officer, Panna Sharma; our Chief Accounting Officer, Igor Gitelman; and I am Jay Roberts, Chief Operating Officer and EVP of Finance. The Company issued a news release this afternoon and a set of slides to accompany its earnings call. We highlighted our second quarter and first half 2017 financial results and operational progress we have been making year-to-date. The financial materials are available under the Investor Relations' section of the Company's website. We filed our Quarterly Report on Form 10-Q after market today. Following the Safe Harbor statement, Panna will provide an overview of the second quarter and our significant accomplishments this year, including business results, recent strategic activity progress on our strategic goals including our recent acquisition and financing. I will then provide a summary of the second quarter financial results, and then we'll open up the call up for questions. We'd like to remind everyone that various remarks about future expectations, plans and prospects constitute forward-looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Cancer Genetics cautions that these forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those indicated, indicating risks described in the Company's filings with the SEC. Any forward-looking statements made on this conference call speak only as of today's date, Monday August 14, 2017, and Cancer Genetics does not intend to update any of these forward-looking statements to reflect events or circumstances that would occur after today's date. This conference call is also being recorded for audio rebroadcast on Cancer Genetics' website at www.cancergenetics.com. All participants on this call will be in a listen-only mode. The call will be followed by a question-and-answer session. With that, I'd like to turn the call over to President and CEO, Panna Sharma. Panna?

Thanks Jay. Thank you for the introduction. And thank you for all those that are listening on the call this afternoon, especially those that are on the internet. We saw record demand this past quarter from Biopharma customers and we remain committed to being a leading partner in that category. We're also fortunate to work with colleagues, customers, and collaborators that share and are lined with our vision of changing the future of cancer, while making sure that we make daily improvements to change patient outcomes and improve our ability to predict, diagnose, and managing cancer. We're very excited today to announce a very accretive acquisition that strengthens our bench-to-bedside capability and gives us a more diverse and global customer base of Biopharma partners. We've announced earlier today a transformative and accretive acquisition of vivoPharm, it is a global oncology and immuno-oncology discovery services company, and we'll talk more about that on today's call. The team at vivoPharm will be joining us in driving the shift away from a one-size-fits-all approach in drug development and in medicine towards precision, more importantly personalized medicine. Our singular vision to help develop and deliver on these comprehensive and innovative capabilities is part of our mission to have the most through and comprehensive capabilities in oncology development and diagnostics. We're striving to be a leader in delivering this molecular information that's needed to make precision oncology a reality both for therapeutic companies and for clinicians and their patients. We continued on our path to profitability in the second quarter, further reducing operating expenses, improving our net loss profile, and our first revenue for the first six months of 2017 was $13.6 million, a 4% increase over the prior year, driven by strong growth especially in our Clinical Services and Discovery Services categories. This is also done in an environment where we reduced operating expenses by over 15% and improved our net losses by over 40% and maintained our gross profit margins at around 39%, 40% while we continue to innovate by launching new offerings in liquid biopsy, FDA approved NextGen sequencing panels and many other categories. Again, this evening we announced the accretive acquisition of vivoPharm, it's a transformative step for our company that strengthens our bench-to-bedside capability, increases our opportunities especially in immuno-oncology and pharmacology. It also expands our Biopharma customer base internationally and very importantly allows us to deliver contracts and studies in earlier phases of testing that will then lock in and drive downstream clinical trials. With this acquisition, we start a very important path on the transformation of CGI from purely a diagnostic reference laboratory and testing provider to really a fully integrated drug discovery company where we can strengthen our ability to repurpose drugs and develop rescue programs in collaboration with our partners in the biotech and pharma segment, the major initiative that we've announced earlier this year and this is on the critical pieces of the puzzle to putting us there. This transaction will also strengthen CGI’s position as the leader in oncology discovery and allow us to participate in potential future upside in some of these oncology programs. By being an early-stage clinical trial testing partner and development partner for biotech and pharma companies, we will be well positioned to really own the entire process from discovery through clinical trials and eventually into patient monitoring, and using all that data to circle back then find new indications and new uses for these molecules and therapies. With over a decade of experience in delivering a wide range of discovery and preclinical Services, vivoPharm has supported over 200 IND submissions with over 50% near-term focus on immuno-oncology. This accretive acquisition not only brings immediate revenue and income but it strengthens our market position as the premier partner and it allows us to further our mission to change patient outcomes globally. At the same time, we're going to be improving our industry insight into really the mechanisms of oncology by integrating our Genomic and biomarker data with very meaningful vivo data, cell imaging data, and bio-analytical data provided by vivoPharm. Partnering with biotechnology and pharmaceutical companies to continue advancing our market share in testing and diagnostics has been a proven and important approach on the development of CGI. Our next chapter is really to drive that partnership from providing testing to really participating in the drug development journey, and more importantly in the drug development upside, and this is our next chapter in our biopharma strategy. We believe this strategy will enable us to refurbish and rescue oncology drug, generate new revenue through this capability and allow us broad-based participation in some of the upside with biotech partners globally. vivoPharm has generated compounded annual revenue growth of 14% approximately over the past few years, and it’s expected revenues for their fiscal year ending 2017 which is June 30 of approximately $5 million in the most recent fiscal year. And that's for our second quarter. We experienced, as I mentioned, record demand for our biopharma services. We experienced strong growth in our clinical portfolio where we saw revenues in clinical services up 20% over the prior year period, mostly driven by our Solid Tumor Center of Excellence that we integrated over last year and massive expansion in immuno-oncology testing. We are also pleased to report record test volume which is up 6%. However, we did see some lumpy and perhaps uneven revenue from our biopharma customers in the second quarter. Our second quarter revenue in biopharma came in at about $3.1 million, slightly lower than we expected, largely driven by nine trials and we will talk about that a little bit later in the call. However, we did see growth in our Discovery Services of 10%. We saw improvements in also our bookings to billings ratio which is really indicator of future growth and our bookings to billings ratio was over 2.2. We're also pleased to report that we saw further reduction of sales and marketing expense which decreased 20% in the first half of 2017 compared to the prior year and we also saw expensive reduction in R&D as well as G&A and our overall net income improved significantly. In our biopharma revenue, our demand in the second quarter came in quite strong with over $7.1 million in new pharma contracts that we can consign. We think it's an important measure for future growth. We also saw significant increase now up to 170 projects that were managing with biopharma customers that's a significant increase from the 111 a year ago and at the close the vivoPharm deal will be adding another approximately 55 studies. Importantly, our efforts in immuno-oncology continue to bear fruit with projects in the same space increasing from 12 to over 39. We think this is very important to see the immuno-oncology projects take advantage not only the genomic testing but also the biomarker testing as well. The larger trial that we had which I mentioned earlier is came in lighter than we expected due to delays in nine trials, some of those were environment related, some of those were replanning as they launched the Phase three trials, most of these were in immuno-oncology. However we still had solid billings of over $3.1 million in the quarter and we expect it to rebound and increase in the future quarters as bookings that we traded translated to new projects and new revenue. Again we have seen some very positive momentum especially from biotech customers that we've been able to bring on over the last few quarters. As I mentioned earlier, CGI is now supporting the work for 170 trials, those trials typically have an average duration of about two years, so the efforts that we are much focused is how to bring in more near-term retrospective studies, smaller trials that accomplish and get done within the quarter, and we think that we're in a very good position to start executing on that strategy. We also believe that the near-term acquisition of vivoPharm which will be revenue generating out of the gate, but most importantly the vivoPharm projects are very complementary since 90% of those projects are typically recorded during the same quarter over the 90 days of being sold or started. On the clinical services side, which is up over 20% our impact continues to be felt and grown in the marketplace. We delivered over 14,000 tests not only help to influence treatment decisions, but also make therapy selection monitor patients. We currently have collaborations with over 15 major partners globally. They give us access to new insights, new tests, new patient data and these partners are such as Mayo Clinic, Sloan-Kettering, the National Cancer Institute, Columbia, Keck School Medicine at USC, Huntsman University of Paris, Moffitt, as well as Apollo in India. One of the collaborations that we're very excited about is our Mayo collaboration and joint venture OncoSpire and we now also got approval and we launched our multiple myeloma profiler which is developed in conjunction with Mayo. We launched this for biopharma customers last year and this past quarter we now launched it into patient care and we provided more data on that and both blood test will only be offered by Mayo Clinic and by CGI. We've also started major initiative to transform our information and electrical data to make it available for biopharma customers and to healthcare systems and we expect over the next several quarters that to help drive revenue and also to be able to use that information to drive new relationships. Overall, we believe the progress we are making both on our biopharma and our clinical business are important steps of realizing our vision of becoming the precision oncology partner and with the near-term effort around integrating our recent acquisition of vivoPharm, we believe will make a big effort in driving significant growth to our Discovery Services. And we will talk in little more detail on second half of the call about Dr. Ralph Brand and his team and the management and future growth of Discovery Services. With that, I would like to take a pause here and turn the call over to Jay Roberts to talk about our financial and operating results for the second quarter and we'll come back and talk more about some future initiatives as well as details on both the financing and acquisitions.

Thank you, Panna. We continue to generate strong revenue in the second quarter. Additionally, we have continued our focus on streamlining internal operations and reducing our cost through lowering our G&A expenses. My discussion today will focus on changes in the second quarter of 2017 versus the second quarter of 2016. For additional information, please refer to our Form 10-Q on the quarter ended June 30, 2017, which will be available on our website after this call. Total second quarter revenue was $6.6 million. Biopharma services revenue was about $3.3 million and clinical revenue were about $3 million. Discovery Services revenue were about $300,000. We experienced some reductions in revenues on a quarter-over-quarter basis with total revenue declining 6%, while revenues for the six month period increased 4% over the first half of 2016. As our contracted book-to-bill ratio for our Biopharma segment increased to 2.2 in the second quarter, up from 1.6 in the year ago period, and up from 1.2 in Q1 2017. This improvement is a direct result of over $7 million in new contracts being booked in the second quarter. This is a key measurement of the velocity of our new business development and an important indicator of future revenue. Total accounts receivable, net of allowance for doubtful accounts, was $13.2 million in the second quarter, an increase of $1.5 million or 13% over the 2016 year-end balance of $11.7 million, a direct result of increasing test volume in our clinical services business which was up 13% year-over-year to slightly more than 8,000 tests in the second quarter. Also contributing to the increase in accounts receivable was slower than expected cash collections from clients as we migrate our bank deposits as required by our new senior lender. We believe this is a temporary situation and expect to experience some improved cash collections in the second half of 2017. Our gross margins remain the same on a quarter-to-quarter basis standing at 39%. Margins for the six months ended June 30 were also 39% an improvement of three percentage points from the six month period ended June 30, 2016, reflecting our continuing efforts at controlling costs. Total operating expenses decreased 15% year-over-year in the second quarter. For the six months ended June 30, 2017, versus six months ended June 30, 2016, the company experienced a 19% reduction in total operating expenses. These figures represent continual efficiencies that the company gains by streamlining operations, cutting cost, and improving efficiency. Our net loss in the second quarter decreased to about $2.8 million from about $4 million in the second quarter of 2016, a significant 31% reduction. On a dilutive per share basis, EPS improved to negative $0.16 in the current quarter from negative $0.28 per diluted share in 2016. We had total cash and cash equivalents at June 30, 2017, of $6.1 million, a decrease from $9.5 million as of December 31, 2016. Echoing Panna's earlier comments, our innovation will continue to drive our top-line growth and revenue performance but additionally we are very focused on expense control and margin management that can allow us to achieve profitability as a precision medicine company. I would like to now turn the call back to Panna.

Jay, thank you. During 2017, remainder of 2017, we expect our business on the biopharma services to return to higher double-digit growth. While we have seen some delays that have caused near-term biopharma performance on revenue side to be less than expected, we have seen a contracted book be higher than expected. So again we've got, we think both near-term quarterly growth for biopharma already in process and with the innovations with some of the new product offering specifically in multiple myeloma, the FDA cleared Oncomine diagnostic test, and our drug repurpose and rescue efforts, we believe there is going to be significant drivers of new projects, new revenue visibility. Let me talk a little bit about this very important for our shareholders the acquisition of vivoPharm that we announced today. We will be hosting a detailed call with vivoPharm management to talk about our offering, and more importantly, to talk about what we expect to see as revenue growth, customer synergies, and capabilities around drug rescue, repurpose, and immune-oncology. We expect that call to occur next week on Monday. And it will be Monday before market open; we will have management available for investors. Again we expect this acquisition to be immediately accretive based in the history of profitability of vivoPharm. We will be adding over 30 new immune-oncology projects in early phase, many of these will go on to being Phase two and Phase three trials which CGI will be well positioned to capture and we will be focused near-term on drug rescue and repurposing for the integrated studies of biomarker analysis early PDX and in-vivo modeling and also leveraging our existing data from a number of different cancer knowledge basis that we've developed internally. The total purchase price of the acquisition is $12 million, 90% of that is in CGI stock, 10% in cash, and it will sort of add significantly to 170 existing projects bring that total to nearly 215 -- 225 with again over 30 of there are in immune-oncology sort of bring our immune-oncology total project count to nearly seventy projects, that's a very rapid and significant increase that gives us line of sight to future revenue. Additionally our liquid biopsy franchise continues to mature. We have eight projects today in liquid biopsy and we expect to launch two more clinical tests in liquid biopsy after the first one Liquid::Lung which we just launched about two months ago. We believe that was a clear path towards achieving profitability as we get to higher revenue numbers in the future quarters. But more importantly accelerating our market share through partnerships and collaborations such as the ones that we have now with Thermo Fisher, on the FDA Oncomine diagnostic, and the one with Mendel purposed on AI and Big Data for the patient side. So again we’re integrating our business model on a very active and aggressive manner every quarter. We believe that the integration of vivoPharm's global business infrastructure gives us greater reach into the oncology system earlier and it strengthens our operating fundamentals because of the accretive nature and cash flow history of vivoPharm. This coupled with our ongoing improvements on operations and near-term increase in our Biopharma revenue we think will make, will really make us a leader in developing and delivering the oncology diagnostics from bench-to-bedside. So with that, I'd like to turn little bit of the discussion to the recent financing that we also announced. We closed a financing equity arrangement for up to U.S. $16 million of which the first tranche of $3 million will be brought down, and then we will be able to based on the companies discretion bring down future tranches based on our need stock price as well as over the next two years. So, with that I'd like to turn the call over to any question and any insights that the community might have.

Thank you. [Operator Instructions]. We'll take our first question from Ram Selvaraju with H.C. Wainwright.

Hi there. This is Mitchell on for Ram and thank you for taking our question. How has the launch of Oncomine --? I’m sorry.

How are you today?

Good, good. How are you guys?

Good.

So how has the launch of Oncomine Dx been progressing so far and what percent of the total Oncomine Dx testing volume has been handled by Cancer Genetics? And how does CGI intend to leverage its positioning in a world dominated by anti-cancer drugs that are targeted to extremely small patient subgroups?

Yes, great question. So let me kind of unwind sort of for everyone. So I'll try to answer one of those questions at a time. We're excited by a partnership with Thermo Fisher on the Oncomine Dx, the FDA – assuming you are talking about FDA approved Oncomine Dx correct?

Yes, correct.

That's one that you are talking about. So, today I think we'll have pretty significant share not only in the clinical testing marketplace, it's probably very early that we see a lot of clinical demand especially from patients and patients clinicians that want an FDA approved test. So as you know CGI already has an FDA approved test or tissue of origin test, as well FDA cleared. And so we've a good history of being able to manage and market that to the clinical oncology community. It's too early to know what share, I mean the test really just launched. I think right now we’re probably the only lab that has it fully up and running. The other lab on the -- other two labs are LabCorp and Mayo. On the Biopharma side, it’s only LabCorp and CGI and I believe CGI is the first one on the Biopharma side again to have it up and running. On the Biopharma side, there are number of clinical trials going on both in very, very targeted panels, but also they're doing exploratory work. And I would say it is probably fair to say that the vast majority of the CDx work on Oncomine the FDA approved panels all being done at CGI. But as you are right and that as those panels go from being Biophrma work to clinical work, those panels have to be -- are targeting very, very nuanced markers. So, the challenge and what we are often finding today in some of the clinical trials that we’re doing is that companies as they launch these clinical trials and its very timely because there is just a big article about it at the New York Times in fact this weekend. It’s hard to find the patients for these very targeted trials. And so you really have to think carefully about what are the inclusion and exclusion criteria for these trials and make them very, very narrowcast, but at the same time think about as you launch these trials, if you're only finding one out of every 80 patients or 60 patients that make sense for your drug, how do you continue increasing in the population stratification. So that's going to be I think a big challenge for the cancer community. One of the biggest things that they have done is really move to basket trials where you're looking at multiple indications, multiple markers that are able to use one test and I think that’s one of the great advantages of an FDA cleared panel as you can use one panel that's cleared at the FDA level and then use that as potential testing for multiple trials and sometimes perhaps even across multiple sponsors. So I think you’re going to see the oncology community start working together to really share data, share potential patients, and keep the testing at a minimum. So, I think testing will consolidate with a handful of really unique labs like CGI and the few others that are very focused in Cancer. Cancer is one of the very, very unique categories where the test mean a lot more because not only do they dictate therapy but they also dictate how the patient is monitored and they dictate potentially what the therapeutic regimen strategy is. So, as we see an era in which the testing -- the testing and the therapeutic gets more and more linked, I think that bodes really well for CGI since we’re really helping empower and deliver that whole precision part in Precision Oncology so, very good question, very timely. Take the next question.

Thank you. We'll take our next question from Raymond Myers with Benchmark.

Congratulations on the strategic progress in the acquisition. I want to ask you about how those synergies will work but first let me touch upon the nine delayed trials, is that related to difficulty in enrolling patients as was described in the New York Times article over the weekend or what was that and second part of that question is what visibility do you have to the revenue in the Biopharma improving as you suggest that you believe it will?

Yes, so it's great questions. So, I think you’re right to ask a fundamental question about the unevenness in the revenue. As I mentioned, we signed up a lot of immuno-oncology trials or combination trials over the past six months. So, the three trials out of the nine have been delayed were in immuno-oncology, and we're looking at immuno-oncology primarily as monotherapy, and so we expect those to launch probably in Q4 now. The other six trials are finding different types of challenges either in finding patients because of stratification method or signing up sites because of the competitive nature of all the targeted drugs competing for all the same sites. On three of them, we've already seen some changes and we've already seen enrolment peak up post July 4 and so that gives some visibility, in fact we saw a lot of enrollment because of the new site strategy and also we have visibility into additional markers that are being used may be to open up the window of patients that get retested in different arms. So I think we have some visibility into the pickup because it’s already happening in this quarter for us. We thought it will continue into Q4 and we would also see that the other trials that were delayed that were monotherapy for IO drugs we see those launching in Q4. So, I think there is visibility on those nine that we're looking at very carefully. The other part of the answer is a different strategy that we've taken and this is the one that I’ve talked lot about recently is really transforming our infrastructure from helping trial to being proactive and helping with drug rescue and drug repurpose and that’s what we’re looking at data and looking at samples retroactively and looking at either improving or increasing indications for pharma and biotech customers or taking drugs that are not being or sluggish to develop and doing larger scale retrospective work and so that retrospective work we're able to close within the quarter or within a few months typically of signing because we are not leading on perspective trials to enroll patients. And so we’ve got a very big push to start the early work for analyzing existing samples through retrospective analysis for our clinical biopharma partners that gives us visibility into the biopharma side and a lot of that work we think also is very informative driven as well. And so we also see a big increase in the informative need which again that is more deliverable based on our capabilities and not based on the pharma thing yes, it’s time to deliver. So, yes so we see both perspective visibility improving and we see retrospective trials increasing because we have more focus on that so there is the two drives like CD returns in basically the double-digit growth that we had in the past.

Thank you. [Operator Instructions]. We'll now take a follow-up question from Ram Selvaraju with H.C. Wainwright.

Hi, yes thank you very much for the follow-up so, I just had a question regarding the BeiGene collaboration if you could just give us the sense of where you are with that collaboration, where those clinical trials are with the various candidates that are coming from BeiGene's pipeline and if on any of them this has progressed to actual design of formal companion diagnostics that could potentially accompany, the commercialization of such candidates if they are approved. Thank you.

Hi, good question. So we as -- we announced that we're working with BeiGene very exciting company and it’s really at the forefront of a lot of the innovations that we’re talking about in terms of looking at targeted, very targeted markers that's also going to be using immuno-oncology novel immno-oncology target as well so, very much in the combination vein. We're working in four active projects I can't really talk much about nature of those projects. I think the CDx growth I’ll speak broadly. We’re in several CDx programs now. I’ve never seen the CDx category so busy. So we're very much in number of CDx conversations, a number of CDx launches, a number of CDx projects we are looking at potential pathways and they’re evaluating them but typically CDx route will be talked more by the bio partners and not by us so, we're down by confidentially and other agreements. But CDx space is very busy for us right now especially with combination companies. So, I think would make sense for BeiGene to go down that route both from an immunohistochemistry marker perspective and also genomic marker perspective. One of the things at BeiGene is looking at it's very, that they talked about publically and openly is the tumor microenvironment. And so the tumor microenvironment is becoming more and more of a target for a lot of the pharma customers. And that is one of the big drivers also if you're looking at vivoPharm and obviously it’s big topic I want to talk but the vivoPharm because of their capabilities in doing vivo models, fair models, PDx work that tumor microenvironment opportunities open up significantly for us. So again it’s another capability that we will be able to drive revenue from and then firmly drives the types of future partnerships that we want with pharma and biotech customers. So Ram good question. Thank you. Again our goal next week is to have a call specifically focus on introducing the management and our new President of Discovery Services Dr. Ralf Brandt and also talking about the revenue lines, the capabilities and customers' synergies that acquisition will bring. So, we’ll be having a call next week and put a press release later this week with the details of the call and dial-in.

Thank you. This does concludes this question-and-answer session. I'd like to turn the conference back over to management for additional or closing remarks.

Thank you and I like to thank everyone for the questions. We had some great questions today. Our company believes we make -- continue to make very good progress on our operating cost in our portfolio and more importantly continuing to drive a very strong book-to-bill ratio in our Biopharma business. We think we're taking the right steps to really be the Precision Oncology Partner of choice. We think near-term financing and more importantly the near-term accretive revenue from the acquisition of vivoPharm will go long ways to helping us to enable that vision. And so, with that I’d like to thank you all for joining our call. I look forward to providing more detailed update on the transaction with vivoPharm and our enhanced capabilities in terms of Discovery and Preclinical work next week. Thank you very much and thank you for joining our call today.

Thank you. That does conclude today's conference. Thank you for your participation.