Lee Roth - Executive Vice President-The Ruth Group Jay Roberts - CEO Ralf Brandt - President-Discovery & Early Development Services

Caroline Palomeque - Maxim Group Jay Harris - Axiom Capital Management

Good afternoon and welcome to the Cancer Genetics' First Quarter 2018 Financial Results Conference Call. This morning, the company issued a press release that provided an overview of the first quarter 2018 financial results and business update. Today's conference is being recorded and will be available online at investors.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. All participants on this call will be in a listen-only mode. The call will be followed by a question-and-answer session. At this time, I’d like to turn the conference over to Mr. Lee Roth, Executive Vice President at The Ruth Group. Please go ahead, sir.

Thank you, Lauren, and thank you, all for joining us for the Cancer Genetics' first quarter 2018 financial results conference call. Joining me today from management is Cancer Genetics' Chief Executive Officer Jay Roberts; and Dr. Ralf Brandt, President of Discovery Services & Early Development Services. The Company issued a news release, and a set of slides this morning to accompany this call and these materials are available under the Investor Relations section of the company's website. Following Safe Harbor statement, Jay will provide a strategic overview and an update on recent corporate developments, as well as a brief financial overview. And Ralf will discuss some of the highlights of our Preclinical and Discovery Services businesses. Jay will then make some closing remarks before opening the call to your questions. We’d like to remind everyone that various comments about future expectations, plans and prospects constitute forward-looking statements for purposes of the 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, including the risks described in the Company’s filings with the SEC. Any forward-looking statements made during this call speak only as of today's date, Tuesday, May 15, 2018, and Cancer Genetics does not intend to update any of these forward-looking statements to reflect events or circumstances that may arise after today’s date. This call is also being recorded for audio rebroadcast on the Cancer Genetics' website, www.cancergenetics.com. With that, it’s my pleasure to turn the call over to Jay Roberts, who is recently appointed Chief Executive Officer. Jay?

Thank you, Lee, and welcome everyone to our first quarter 2018 earnings conference call and thank you all for joining us. When we held our year-end conference call on April 2, we outlined some of the key elements of the transformative growth strategy that we developed and began implementing when I was named Interim-CEO earlier this year. We discussed the comprehensive organizational and strategic scan that was conducted, and our plan to use the information gathered from this review to optimize our business. We expect that this optimization will put Cancer Genetics in a position to grow by leveraging and investing in our core areas of strength to drive sustainable topline revenue growth while divesting or eliminating non-core activities to reduce operating expenses and accelerate our path to profitability. In the six weeks since we reviewed this strategy, we've already taken several important steps in its execution. First, as we announced at the end of April, we completed the sale of our Indian business BioServe to REPROCELL Incorporated for $1.9 million. This accomplished several objectives in that we exited a non-core activity in a nonstrategic market while generating monetary value, which we will use to fund new programs. It's important to point out that despite the sale of BioServe, it remains the potential for us to capitalize on anticipated demand in the Indian market. To that end, we are exploring licensing opportunities with REPROCELL and potentially other parties to bring our menu of tests and services to the region along with a strong interest from possible business partners in both Japan and China. Such partnerships carry significant upside potential for Cancer Genetics as they allow us to benefit from expected demand and test volumes in specific geographies without requiring large investments of capital and human resources and ongoing expense and execution risks associated with developing and maintaining a direct presence along with a significantly improved gross margin profile. This is a strategy that may consider pursuing in other markets as well and I look forward to updating you on our progress. Secondly, as we disclosed in the earnings press release this morning, we are beginning to relocate our comprehensive solid tumor test portfolio and capabilities from our West Coast lab operation to our facilities on the East Coast. While not an easy decision, this has significant benefits for the company as it will reduce our annual operating expenses by at least $4 million and further simplifies our operating structure. It is important to point out that the consolidation of the LA facility in no way reduces our clinical capabilities or the breadth of testing and clinical trial services we offer. In conjunction with the consolidation, we expect to lower our overall staffing levels while offering relocation opportunities to several of our key clinical and medical team members. We anticipate this transition will take us approximately five months to complete as we validate certain tests on our East Coast laboratories and assure that we maintain redundant capabilities and assure outstanding customer service to our biopharma and clinical service clients. As I stressed on our last call, the goal to this program extends beyond reducing our footprint in cutting costs. In fact the main focus is on driving future growth and profitability. In order to achieve this, we are strategically investing in areas of strength where we can truly differentiate ourselves to customers and partners and to build a successful sustainable business. We recently announced receipt of a special 510(k) clearance from the FDA for our Tissue of Origin or TOO test. TOO is a microarray-based gene expression test that analyzes a tumor’s genomic information to help identify its origin which is valuable in classifying metastatic, poorly differentiated, or undifferentiated cancers. TOO assesses 2,000 individual genes covering 15 of the most common tumor types across 58 morphologies and 90% of all solid tumors. TOO, the only FDA cleared test of its kind, is an important addition to our test portfolio. It represents a unique offering with the ability to add tremendous value to continuum of care for cancer patients and has a potential to significantly enhance development efforts in our biopharma partners. Since this recent announcement, we're experiencing meaningful interest in this test both domestically and internationally. Of course, having a world class test portfolio was only one part of the equation, and I am pleased to report that we're making progress in our efforts to optimally monetize our testing asset. We are currently engaged in discussions with several potential partners regarding opportunities that, if consummated, would greatly expand the reach of TOO, as well as other tests in our portfolio and generate high margin licensing revenue for the company. Momentum in our Biopharma Services continues to build. While revenue from this segment of the business was flat quarter-over-quarter, the number of active trials we are supporting increased to 241 at the end of Q1 from 220 last quarter and 140 in the first quarter of 2017. This Q1 2018 trial count includes 58 trials in immuno-oncology and studies of combination therapies. As we’ve disclosed in the past, Biopharma Services revenue continues to be lumpy from quarter-to-quarter based on a variety of factors including the timing, size, and duration of contracts with pharma and biotech partners as well as CROs. Nonetheless, we're continuing to add new clients while growing revenue at existing clients and building a substantial pipeline for future projects. We will continue to report revenue from biopharma and Discovery Services separately, but I'm pleased to say that the division between these two activities is becoming increasingly narrow. When we acquired vivoPharm last year, the goal was two-fold. First, to bolster our preclinical and early-stage capabilities; and second, to identify and leverage synergies between our emerging Discovery Services business and our more established Biopharma Services. In the time since we integrated vivoPharm, we have seen these synergies drive incremental opportunities in both preclinical and discovery, as well as Biopharma Services. Our Biopharma Services partners are increasingly approaching us about new earlier stage development opportunities based on our expanded capabilities, while the completion of preclinical and discovery work is leading to the initiation of new biopharma projects. These efforts are beginning to bear fruit and are helping us advance toward our mission of being the partner of choice and precision oncology at all stages of development. Ralf will provide some additional detail on the work we're doing in preclinical and Discovery Services, as well as elaborate on some of the synergies I alluded to. But before I turn it over to him, I would like to briefly review our financial results for the first quarter. Our total revenues were $7.7 million, increase of 10% compared to $7 million for the same period in 2017. Biopharma Services revenue totaled $3.7 million in the first quarter compared to $3.7 million in Q1 2017. Additionally we increased the number of clinical studies and trials we’re supporting to 241 of 101 from Q1 2017. Clinical Services revenue decreased to $2.3 million in the first quarter of 2018 from $3 million in the first quarter 2017. The decrease in revenue was primarily related to the adoption of ASC 606 and attributable to a 16% decline in test volume in our New Jersey lab. Discovery Services contributed $1.7 million in revenue for the first quarter of 2017, a $1.4 million increase over Q1 2017 revenue of 300,000 driven by a full quarter of vivoPharm revenue and growing demand for early-stage discovery result combined with bioinformatics analysis capabilities. Gross profit margin decreased to 33.7% or $2.6 million compared to 40% or $2.8 million in Q1, 2017. The decline in gross profit and gross margin were primarily related to a reduction in number of non-revenue generating test validations, an increased focus among our clinical and medical staff on customer driven initiatives partially offset by the continued rationalization of the company's cost structure from prior acquisitions and efforts to introduce greater efficiency in our lab operations. Total operating expenses for Q1 2018 were $7.5 million, an increase of 35.5% compared to $5.6 million during Q1, 2017. The increase in operating expenses was primarily the result of the addition of SG&A expenses from the vivoPharm acquisitions of approximately 900,000, increases in sales and marketing costs of approximately 400,000 in the comparable periods as the company ramped up clinical sales during the second half of 2017 and non-cash charges associated with severance-related payroll and benefit costs of 500,000 in Q1 2018 and an increase in bad debt reserve of 500,000 related to its Clinical Services business. Net loss was $4.5 million or $0.16 per share for the first quarter of 2018 compared to a net loss of $9.6 million or $0.51 per share for the first quarter of 2017. Cash and cash equivalents totaled $4.4 million of March 31, 2018. Finally, as we disclosed in our fourth quarter report we’ve engaged Raymond James as a financial advisor to assist us in evaluating options for the company's strategic direction. Our Board is committed to evaluating any and all potential opportunities and to pursuing the path that best positions us to create near and longer-term shareholder value. These options could include additional financing. The addition of another company and/or complementary assets, the sale of the company or another type of strategic partnership. We’re in the very early stage of this process and will provide updates on potential opportunities as appropriate. With that, I’d like to turn the call over to Dr. Ralf Brandt, President of Discovery & Early Development Services. Ralf?

Thank you, Jay. Hello, everyone. Since the acquisition of vivoPharm last August, CGI has successfully expanded its offering to include unique specialized studies to guide drug discovery and development programs, particularly in immuno-oncology models, two more micro-environment studies and specialized pharmacology services, patient-derived xenograft model studies that support basic discovery of preclinical and Phase 1 clinical trials. The integration of vivoPharm’s capabilities has added an important element to the suite of services that CGI can offer to biotech and pharma partners. The successful integration of these capabilities has enabled us to provide high-quality tests and services in both preclinical and clinical applications in oncology and immuno-oncology further increasing Cancer Genetics appeal as a partner for the industry. Currently we are supporting 67 discovery and preclinical projects and expect that total to continue to grow. We have experienced increasing demand for our discovery and preclinical offerings to support drug development, target validation and biomarker analysis and believe we are well positioned to capture this demand in the form of new projects and concepts. I am particularly excited to report that of the 67 active discovery and preclinical projects more than 42 are in immuno-oncology and combination therapies. These metrics are significant as immuno-oncology and combination therapies are the two of the fastest growing segments of the oncology space. According to a June 2017 report from PAMA and partnership with American Cancer Society Action Network, more than 248 new immuno-oncology therapies and vaccines were either in clinical trials or awaiting FDA review. This report also indicated that the number of combination studies combining PD-1 or PDL-1 inhibitors with other therapies have grown by more than 3.5 times from 215 in 2015 to 765 last year. As these 42 preclinical projects in immuno-oncology and combination therapies conclude those that are successful and move into the clinic are natural candidates for our biopharma service offering. As Jay pointed out earlier, these synergies have both upstream and downstream benefits for CGI. By that I mean that we have the ability to not only expand biopharma partnership as preclinical and discovery work moves forward, but we also have the opportunity to more closely engage with our biopharma partners or new earlier stage programs where we provide comprehensive support to all stages of development from bench to bedside. We are in the very early stages of capturing these cross selling opportunities, but believe strongly that the potential is significant. With that, I would like to turn the call back over to Jay for closing remarks. Jay?

Thank you, Ralf. We have taken a number of significant steps in the past few months what we believe will have a positive impact on our future performance. We continue to execute on our growth strategy and remain committed to making Cancer Genetics a premier company in the precision oncology arena. With that I would like to open up the line to Q&A. Operator?

[Operator Instructions] We'll take our first question from Caroline Palomeque with Maxim Group.

This is Caroline for Jason McCarthy. I just wanted to know what – out of the three different sectors of the services that you offer, which one do you think has the most potential for growth in the short term. I know you were talking about your biopharma. Is that really where the focus will be going forward or do you also see growth in the clinical and Discovery services?

So, we think that the acceleration of growth will come both from our Discovery Services and from our biopharma business in 2018. That being said, we have a good amount of focus on our clinical service business. We think that all three pillars to our strategy are important, and with that while we are putting a lot of attention and investing time and focus in our biopharma and discovery business, because we think that there is near term and meaningful growth opportunity there, we will continue holistically continuing to drive topline revenue across the business.

[Operator Instructions] At this time, I would like to turn things back to management for any additional or closing remarks.

Actually, we have one other question that just queued up. Can we actually take that?

[Operator Instructions] Our next question comes from Jay Harris with Axiom Capital Management.

Would you please give us some insight as to what the cash burn was in the March quarter and how close - what kind of progress you are likely to make in ensuing quarters?

So Jay, thanks for your question. We burned about $4.5 million of cash in the quarter, and we are continuing to make progress in terms of lowering that cash burn. This announcement in terms of -- that we have been talking about in terms of transformation of the business, is focused on reducing our overall footprint, and so with that piece of consolidation allows us to continue to lower our cash burn. We are also seeing a good amount of improvement in cash collections in the quarter, and we are making other changes as it relates to that part, and as we move through this migration, we will see further improvements quarter-to-quarter throughout 2018.

Where do you stand with respect to need to additional funding to support the business?

So Jay, this is a part of the work that we are doing with Raymond James, and as we are exploring financing opportunities and various other strategic options for the company, we’ll be moving through that and being able to talk a little bit more as that effort progresses, and we did get the benefit on the sale of our Indian operation, which I think we reported was $1.9 million cash transaction, of which $1.6 million of cash came into the company, which was a post March 31st transaction, and so that helped us from a cash position perspective, and it will continue to kind of work through in terms of driving topline revenue growth and supporting the company through other rationalization of the business.

At this time, I would like to turn things back to Jay Roberts for any additional or closing remarks.

Okay, thank you, operator. And thank you all for joining us this morning. We look forward to continuing to keep you informed of our successes in the transformation strategy and on our path to profitability. So with that, thanks again and good morning to you all. Have a great day.

This concludes today’s conference. Thank you for your participation. You may now disconnect.