Lee Roth - SVP, The Ruth Group, Inc. John Roberts - President, CEO, COO & Director Ralf Brandt - President, Discovery & Early Development Services

Raghuram Selvaraju - H.C. Wainwright & Co. Caroline Palomeque - Maxim Group

Good day, and welcome to the Cancer Genetics Second Quarter 2018 Financial Results Conference Call. The company issued a press release that provided an overview of the second quarter financial results and business update. 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. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Lee Roth, Executive Vice President of the Ruth Group. Please go ahead, sir.

Thanks, Sandra, and thank you all for joining us for the Cancer Genetics Second Quarter 2018 Financial Results Conference Call. Joining me today from Cancer Genetics are Chief Executive Officer, Jay Roberts; Dr. Ralf Brandt, President of Discovery & Early Development Services; and Mike McCartney, our Chief Commercial Officer. The company issued a news release and a set of slides earlier this morning to accompany the call, and these presentation materials are available under the Investor Relations section of the company's website. Following the 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 business. Jay will follow that with some closing remarks before we open 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 on this call speak only as of today's date, Tuesday, August 14, 2018, and Cancer Genetics does not intend to update any of these forward-looking statements to reflect events or circumstances that may occur after today's date. This conference call is also being recorded for audio rebroadcast on the Cancer Genetics' website at www.cancergenetics.com. With that said, I'd like to turn the call over to the company's Chief Executive Officer, Jay Roberts. Jay?

Thank you, Lee, and welcome, to our second quarter 2018 earnings conference call. When I took on the leadership of the company back in February, we told you our plans for reorienting the company to achieve greater efficiencies and stability. The theme of today's call is to report to you what we've accomplished in the first half of the year and we plan to continue keeping you informed of our progress. For example, earlier in the year, we outlined some of the most important components of our transformative growth strategy. During the first half of the year, we began implementing our transformation plans for 2018. We have made great progress in reviewing our organization and taking strives to optimize our business to cultivate growth by utilizing and investing in our core areas of expertise to drive sustainable revenue improvements while eliminating or consolidating noncore activities to lower our operating expenses. We believe this is a good approach to accelerate our path to profitability. We've already taken a number of important steps in the execution of the strategy. Firstly, as announced in April, we completed the sale of our Indian business, BioServe to REPROCELL Incorporated for $1.9 million. We're also exploring licensing opportunities with REPROCELL and potentially others to bring our menu of unique and proprietary tests and services to other geographies without requiring direct investments, incurring expenses related to developing and maintaining a direct presence and taking the execution risks at the local level. I look forward to sharing updates on our progress with you. Secondly, we are consolidating our molecular profiling lab in Los Angeles by transitioning those activities to our facilities in New Jersey and North Carolina. This decision will lower our operating expenses and simplify our operating structure. This consolidation activity has not changed our clinical capability or coverage of testing and profiling services we offer in any way. The team is making great progress with these consolidation and relocation efforts, is on schedule and within our budget and on track to complete this initiative by the end of the third quarter of 2018. This initiative, which is reducing our geographic footprint and cutting operating costs, is clearly aimed at exploiting our core competencies to drive sustainable growth and accelerate our path to profitability. We are taking the steps necessary to differentiate ourselves to customers and partners by leveraging our strength and the added value we provide, namely our expertise in developing innovative tests and providing key solutions to our client-developing oncology and immuno-oncology therapies. In that regard, our Biopharma business is gaining momentum. We doubled the number of clinical studies and trials we are supporting, reaching 342 at the end of the second quarter of 2018 from 170 a year ago. To further support our Biopharma growth initiatives, we appointed Michael McCartney, who is here with Ralf and me today, to the newly created position of Chief Commercial Officer. Michael has over 2 decades of life sciences, diagnostic and lab services industry experience, having served in senior level positions in sales management, global marketing and business development. Mike is responsible for managing our commercial strategy and overseeing CGI's business development engagements. We believe that Mike is an excellent addition to our team and we look forward to leveraging his proven track record in leading sales and strategic partnering efforts to successfully help the company achieve new levels of growth, performance and innovation. I would also like to mention that I am particularly excited about the recent advances in our Biopharma channel strategy as the project work with firms like ICON and other CROs is expanding. As you may remember, in 2015, we signed a partnership agreement with ICON and have recently begun expanding the scope of our collaboration, which we believe will create further expansion opportunities as we continue to move these relationships forward. As always, we remain focused on working toward building a sizable pipeline of future projects. And I'm pleased to report that our second quarter 2018 booking-to-billing ratio was 2.5. On the financial front, in July of 2018, we completed a convertible note financing to a net of $2.5 million with an institutional investor. This capital raise will further support the execution of our 2018 transformation and strategic plan to reorganize our business and execute against a path to profitability while establishing CGI as a leader in oncology-focused testing, genomic services and bio market insight capabilities. Ralf will provide some additional detail in the work we're doing in preclinical and Discovery Services as well as elaborate on some of the progress we have made so far this year. But before I turn it over to him, I would like to briefly review our financial results for the second quarter. The company reported total revenue of $7 million for the second quarter of 2018, compared to revenue of $6.6 million in the second quarter of 2017, an increase of 7% or $432,000. Biopharma Services revenue totaled $3.6 million in the second quarter compared to $3.3 million during the second quarter of 2017. Biopharma projects are dependent on the timing, size and duration of our contract with pharmaceutical and biotech companies and clinical research organizations and can fluctuate in comparable periods. As I mentioned, the company increased the number of clinical studies and trials it is supporting to 342, up from 170 in Q2 2017. Clinical Services revenue decreased by approximately $1 million in the second quarter of 2018, compared to the same period in 2017 from $3.1 million to $2.1 million. The company's Discovery Services contributed $1.3 million in revenue for the second quarter of 2018, an increase of approximately 400% compared to $263,000 in the second quarter of 2017, primarily driven by the acquisition of vivoPharm. Gross profit margin was 31% or $2.2 million in the second quarter of 2018, compared to 39% or $2.6 million in the second quarter of 2017. Our total operating expenses for the second quarter of 2018 were approximately $7.4 million, an increase of 30% compared to $5.7 million during the second quarter of 2017, principally due to restructuring costs of $700,000, an increase in our professional fees of about $0.5 million related to recent financing and M&A activities, an increase in our bad debt expense of $200,000 and an increase in our selling expenses of about $100,000. Net loss was $3.6 million or $0.13 per share for the second quarter of 2018 compared to a net loss of $2.8 million or $0.16 per share for the second quarter of 2017. Cash and cash equivalents as of June 30, 2018, totaled $1.6 million, excluding $350,000 of restricted cash as of March 31, 2017. Lastly, as we disclosed our fourth quarter 2017 results, we've engaged Raymond James as a financial adviser to assist us in evaluating options for the company's strategic direction. I can't provide any additional color on the discussions at this point, but in collaboration with our board, over the past few weeks, we have evaluated several potential strategic opportunities and are encouraged by the process and we hope to be in a position to provide further details in the very near future. 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. It's been 1 year since vivoPharm became a part of CGI. For the first time today, we are reporting financial results for 2 complete quarters of a fiscal year. Compared to the same reporting period in 2017, vivoPharm's newly signed service contracts have grown by 49% with an increase in the value per contract of approximately 10%. Total engagements for the first 2 quarters in 2018 exceeded our expectations by 19%, resulting in positive cash flow from this segment of the business. I would like to note that we have been able to successfully manage the increased demand and the number of new contracts this year compared to the first half of 2017 without increasing headcount. We have placed a major emphasis on our efforts aimed at increasing efficiency and productivity to further improve our bottom line. We expect to continue this effort through the second half of 2018 and beyond. In terms of our marketing strategy, we have initiated new marketing channels and have grown our presence at boutique conferences in the United States and Europe to meaningfully improve visibility and awareness of our services while also increasing our lead generation capabilities. As a result of this, we have been able to increase the opportunity pipeline for the second half of the year with such a strong sales pipeline we are working toward achieving strong growth and further improvement of our bottom line performance in discovery and preclinical services moving forward. Growth in the number of synergistic projects accelerated in the first half of 2018 as well. The several crossover projects between the Biopharma and vivoPharm's discovery business initiated and several others in the works. Such projects have generated immediate momentum to drive substantial growth in both our discovery and preclinical and our Biopharma businesses. We have successfully expanded our offerings to include highly specialized immuno-oncology models that support IND programs and clinical trials. vivoPharm is running a total of 86 projects with 63% of these projects in the immuno-oncology space. This includes 3 projects that are expected to flow into Biopharma Services business. For our safety and toxicology business, we have recorded substantial growth across the United States, Australia and Europe for the first time altogether. With that, I would like to turn the call back over to Jay and closing remarks. Jay?

Thank you, Ralf. We believe we have taken a number of major steps in the past few months to positively impact our future performance. We believe that the execution of this new growth and transformation strategy will bring CGI closer to being a leader -- a leading company in the precision oncology space. We're excited about what the future holds, particularly as it relates to a potential strategic transaction and look forward to updating you further as new details can be disclosed. With that, I would like to open up the line to questions and answers.

[Operator Instructions]. We'll go first to Ram Selvaraju at H.C. Wainwright.

So I have a couple for Jay and a couple for Ralf, if I may. Jay, can you provide us some more elaboration on what you expect the restructuring expenses to be for the remainder of the year? Unless the bulk of this is behind you guys or if we should still expect some of these to crop up in the upcoming quarters. And secondly, I wanted to know if there was, in fact, a sequential quarter-over-quarter decline in top line and if this involved, basically, a shift to higher margin lines of business, particularly with respect to revenue per test as a metric. And then the 2 questions that I had for Ralf were, firstly, do you think that, at some point, we might potentially see a way for the vivoPharm side of the business to provide a portal as it works to getting CGI more involved or better positioned to be involved with drug developers on kind of a co-development basis in principle? And I've asked this question, I think, before. And secondly, pursuant to that, do you think that sometime down the line, even though this might potentially take a few years, that specifically with respect to vivoPharm, the Evotec model is something that you guys could aspire to?

Great. Ram, thank you. Let me -- I'll take the first couple, and then I can hand it over to Ralf and he can answer the other two. So as it relates to restructuring charges, Ram, we're about halfway there. Just to kind of give you a little bit of guidance around it. And so there's, of course, work to be done yet through the end of August and into September. I think as I mentioned in my comments a little bit earlier, we're on plan, we're on schedule, and the team has done a really nice job of marching through what is a fairly complicated set of efforts. And from a -- I think, from a cost perspective, there have been no surprises. And so we're very pleased with the progress. And we'll continue to report to you as we come into the end of the third quarter with the expectation that it will be done by Q3. As it relates to the sequential revenue growth question, I think sequentially, we saw our Biopharma business continue to essentially remain even and, obviously, we're pretty optimistic given the kind of momentum that we're seeing with new contracts being signed. And so I think that, that is an ongoing indication that there's strong demand for the services that we offer. And from, I think, the place where, again, sequentially moving from $7.6 million of revenue to $7 million, Q1 to Q2, partially driven by lower unit volume in our Clinical Service business part and really a good part of that was planned, given some of the changes that we're making in the business. And I think that in our vivoPharm and our discovery business, we saw a slight decline, although we're anticipating that we'll meet our plan for the full year of 2018. So again, we remain very optimistic in terms of how that business is performing. As it relates to how vivo can drive and our Discovery Services can drive the remainder of the business, I'll let Ralf pick that one up. We -- and I think in his comments, you'll see that we've identified -- there is several projects already that we know can move from discovery into clinical trial that is directly attributable to the work that we're doing. And I believe that we'll continue to see that happen. But Ralf, if you could comment, that would be great.

Sure, sure. Thank you for the question, actually. As I mentioned in my short presentation, we are already a quarter for CGI. Maybe we are funneling a smaller amount of project through it, but we have key trends of an increasing number of projects, which will lead in the field of immuno-oncology from preclinical studies into the CGI Biopharma Services compared for the first day of vivoPharm joining where we just started -- we have a lot of momentum in that field at the moment and you'll see us clearly growing. To your second question of the Evotec model, I'm aware of the Evotec model, that's a discussion in vivoPharm even before CGI merger. We discussed the business to be a strategic decision. vivoPharm, at the moment, is not a drug development company, and CGI is not. So to answer your question, I think that needs strategic discussion whether this is what the company wants or whether we see that as a diversion from our major directional development of the company.

Okay, great. And then just a -- I have a -- just a quick follow-up, yes. The bad debt expense increased in this quarter, when would you anticipate that it should actually start going down?

Yes. So that's a great question. We're still continuing to wrap up some of our work related to 2017 and that's going to continue throughout the course of this year. And we've made really good progress on it and we'll continue to make progress on it. That said, as we all know, it's a challenging climate and we're continuing to work really hard at it. The impact in 2018, however, is quite different. Under ASC 606, the way in which the company calculates and records its revenue and ultimately puts up accounts receivable value is directly attributable to current -- our current track record related to cash collection. So there's a much closer correlation. So I don't envision that, that particular challenge, at least in terms of how it's -- how we manage through it, will be difficult to monitor. That being said, the challenges in the industry, the challenges that we face like many other diagnostic companies in the space, don't go away in terms of our ability to move through providing what I believe to be great service to physicians and patients being treated for cancer, and ultimately, the challenges that we have in terms of being reimbursed. And I think that, that's -- unfortunately, that's the nature of what we'll continue to try to improve upon, as a company, as we create better efficiency and build better relationships with managed care.

We'll go next to Caroline Palomeque of Maxim Group.

So apologies if this was just asked, but I just wanted to see if you can elaborate on any trends in the discussions that you're having for partnerships. I know you mentioned the immuno-oncology, is there any other trends that you're seeing as far as partnerships that might be upcoming?

Just to be really clear, Caroline, so when we talk about partnerships, I can certainly talk to you about how we're driving our business development activities in both our Biopharma business and in our preclinical and discovery business as well as Clinical Services. And certainly, in that area, some of the partnerships that are continuing to take and gain some good momentum there was working with a very select group of CROs and obviously, we've been able to build great relationships with both biotechnology companies as well as meaningful pharmaceutical companies. Those partnerships have continued. I think you're right that we're seeing more and more momentum around immunotherapy development and as Ralf pointed out, in our book of business within our discovery area, we have a large percentage of those projects are being driven by the development of immunotherapies. And then similarly, as we have reported, we're seeing the same kind of trend in our Biopharma business. We expect for that trend to continue. And we're working really hard. We have a number of similar projects with Biotech and Pharma that have therapies in Phase III. And as we continue to position the business toward Biopharma, that -- we're anticipating that we'll continue to follow our clients and partners as they move from discovery to early-stage development into later-stage development. And the work that we do, I believe, has earned us the right to be a partner as those therapies continue to make their way through the pipeline.

And that does conclude the question-and-answer session. I'll turn the conference back over to management for any closing remarks.

Okay. Thank you, operator. And thank you all for joining us today. We do plan to continue with updating you on our progress and we are going to continue to work really hard to meet our goals and to move the company forward. So thank you very much, and we look forward to our next call.

And that does conclude today's conference. Again, thank you for your participation.