Oncocyte Corporation

Today's call is being recorded. At this time, I'd like to turn the call over to Caroline Corner, Westwick Invest Relations. Please go ahead.

Thank you, everyone, for joining us for today's conference call to discuss OncaSight's fourth quarter and year-end 2022 financial results and recent operating highlights. If you've not seen today's financial results press releases, please visit the investors page on the company's website. Before turning the call over to Joshua Riggs, ONCA Sites President and Chief Executive Officer, I would like to remind you that during this conference call, the company will make projections and forward-looking statements regarding future events. Any statements that are not historical facts are forward-looking statements. We encourage you to review the company's SEC filings, including, without limitations, the company's forms 10-K and 10-Qs, which identify specific risk factors that may cause actual results or events to differ materially from those described in the forward-looking statements. These factors may include, without limitation, risks inherent in the development and or commercialization of potential diagnostic tests, uncertainty in the results of clinical trials or regulatory approvals, the need to obtain third-party reimbursement for patient use of any diagnostic tests the company commercializes, our need and ability to obtain future capital and maintenance of IP rights, risks inherent in strategic transactions such as failure to realize anticipated benefits, legal, regulatory, or political changes in the applicable jurisdictions, accounting and quality controls, greater than estimated allocations of resources developed in commercialized technologies, or failure to maintain any laboratory accreditation or certification, and uncertainties associated with COVID-19 pandemic and its possible effects on our operations. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. ONCA site expressly disclaims any intent or obligation to update these forward-looking statements, except as otherwise may be required under applicable law. I'll now turn the call over to Josh Riggs. Josh?

Hello. Thanks, Caroline, and welcome everyone to our conference call to discuss our fourth quarter 2022 and year-end financial results and operating highlights. Joining me today is Anish John, our Chief Financial Officer. Following our prepared remarks, as always, we'll be happy to take your questions. I would like to start the call by expressing my gratitude to the Oncocyte team, our investors, board, and those in the clinical community who continue to support us in our mission in serving patients and groundbreaking science. On March 2nd, we announced my appointment as President and CEO, as well as a Director of Oncocyte. I am honored to serve the team as we go into the next phase of development and commercialization. We are positioning the company for success in a challenging market environment by focusing on our core products and operational and commercial efficiency. On December 16th, we announced our entry into a stock purchase agreement to transfer 70% of our ownership of Razor Genomics and all of the assets and liabilities related to Determa Rx. This transaction, which closed in February 2023, eliminated an estimated $8 million of annual operating expense and $13 million of future milestone and development liabilities, while allowing Razor Genomics to maintain continuity of service for DETERMA-RX patients and clinicians. At the same time, we announced a significant reduction in headcount, further reducing our operating expenses. we announced the pricing of a stock offering of up to $13.86 million from our long-term investors. Led by Broadwood partners and with significant participation from our chairman and other of our top five holders, this vote of confidence comes at a critical time for OncoSight. In a challenging macro market environment, this deal was completed at market with no warrant coverage and allows us to retire a significant portion of our preferreds. DETERMA-IO, DETERMA-CNI, and Vitagraph represent the future of Oncocytes product offering. Each have multi-billion dollar market opportunities and differentiation from competitive products along with a growing body of literature and demand in the research market. DETERMA-IO and Vitagraph are being developed commercially through our early access program to drive market development and initial utilization. Development of these products will be continued throughout 2023 with the term of CNI development to follow in 2024. To be clear, all other development projects have been paused or canceled. Today, Oncocyte has been primarily focused on a service lab model to deliver clinical and shareholder value. Going forward, we are going to open up access to our breakthrough technology in distributed research use only, or RUO, product format. This provides a scalable, high-margin commercial channel for us, whether it be on our own, through commercial partners, or distribution relationships. Our service lab in Nashville will continue to engage the clinical community, pursue reimbursement, and support care decisions, while our RUO product will enable researchers around the world to innovate, publish, and explore new questions. The Terma IO continues to build its case as the best-in-class tool for assessing the tumor microenvironment as it relates to immune therapy use and optimization. As an update, data in colon cancer has been accepted for publication and will join previous data from non-small cell lung cancer and triple negative breast cancer, among others. Research in oncology is pushing us towards a real choice in first-line therapy, something beyond just anti-PD-L1 and or chemo. Researchers working in this space need a better tool to assess the state of the tumor microenvironment. that an RUO product version of the technology behind DERMA-IO can meet. Leveraging our continuous variable reporting, researchers can determine the appropriate cutoff value for their application. Key 2023 milestones will be coverage for our LDT, the completion of a SWOG study in triple negative breast cancer, and completed feasibility for our RUO product. Vitagraph, our transplant product, as best-in-class turnaround time and ease of use, leveraging the natural advantages of digital PCR over an NGS workflow. We continue to have active dialogue with Moldex to support a coverage decision for both kidney and liver. Engaging with the transplant community as a partner has shown us that there are many questions left unanswered by the service labs delivering DDCF DNA testing today, ours included. Developing and delivering an RUO version of our product opens the door to researchers at pharma, academic centers, and biotech to use donor-derived cell-free DNA to answer many unsolved problems like long-term patient management and the value of absolute quantification. We are pleased to announce today that we have completed feasibility and are in the pre-manufacturing optimization phase for our RUO product. Key 2023 milestones will be coverage for our LDT, strategic or distribution partner announced, and RUO product launch. We believe that this approach focusing on scalable, high margin products and rapid development reduces our time to market and revenue growth. We expect that our differentiated IP will drive commercial opportunities while reduced costs and a shorter path to revenue will benefit OncoSite shareholders. Vitagraph, DetermaIO, and DetermaCNI all have significant upside and our RUO strategy will allow us to scale quickly while maintaining high product margins that positively impact the company's bottom line and put us on a path to financial sustainability. We are grateful for your continued support, and I would like to now turn the call over to Anish John to review our financials. Anish?

Thank you, Josh. Hi, everybody, and thanks for joining our call today. Our consolidated preliminary revenues for the fourth quarter of 2022 were approximately $1.1 million. representing a decrease of 69% year-over-year. Revenues for the full year of 2022 were 5.6 million, representing a decrease of 27% year-over-year. The decrease in revenues from prior year is primarily due to $3 million of milestone payments recognized in 2021 compared to 1 million of milestone payments recognized during 2022 related to the Burning Rock sub-licensing agreement. Fourth quarter revenues associated with the TermaRx were $0.8 million, an increase of 3% year-over-year. For the full year, the TermaRx revenues were $3.6 million, an increase of 47% from the previous year. Our pharma services business generated $0.3 million in the fourth quarter, a decrease of 44% year-over-year, As we've discussed previously, revenues in pharma services depend on our partners' ability to enroll patients for trials, which will likely to continue to fluctuate from quarter to quarter. Cost of revenues for the fourth quarter were approximately $2.4 million, including $1.6 million from the cost of diagnostic tests and testing services we performed for our DetermaRx and pharma services customers, and $0.8 million in non-cash amortization expenses related to DetermaRx and pharma services related intangibles. Cost of revenues for the full year was approximately $8.9 million, including $3.7 million in non-cash amortization expenses of the acquired intangibles. Research and development expense for the fourth quarter of 2022 was $4.3 million as compared to $4.6 million for the same period in 2021. R&D expense for the full year was $19.4 million as compared to $13.6 million in 2021. This increase in R&D expense was related to investment in the build-out of our pipeline of diagnostic tests. General and administrative expense for the fourth quarter was $5.5 million as compared to $4.1 million for the same period in 2021. G&A expense for the full year was approximately $22.5 million, which was relatively flat versus the prior year, reflecting management's efforts to control spending not directly related to product development or commercial activities throughout 2022. Sales and marketing expense for the fourth quarter was $2.8 million, as compared to $3.3 million for the same period in 2021. For the full year, sales and marketing expense was approximately $13.6 million, representing an increase of 22% year-over-year. The increase is primarily attributable to the growth of our portfolio and reflects investments in sales and marketing activities to prepare for commercialization of our transplant business and support the continued commercialization efforts of Determa IO. Now I'd like to turn to our gap and non-gap analysis. Non-gap operating loss, as adjusted for the fourth quarter, was $8.4 million, an increase of $1 million as compared to the same period in 2021. Gap operating loss as reported for the fourth quarter was $44.7 million, an increase of $9 million from the fourth quarter of 2021. Non-gap operating loss as adjusted for the full year was $40.7 million, an increase of $7.5 million as compared to the prior year. GAAP operating loss, as reported for the full year, was $72.3 million, a decrease of $1.9 million from the prior year. For the fourth quarter, we reported a GAAP net loss of $45.3 million, or 41 cents a share, as compared to $35.9 million, or 40 cents a share, for the fourth quarter of 2021. For 2022, net loss was approximately $73.4 million, or 66 cents per share as compared to 64.1 million or 72 cents per share during 2021. We've provided a reconciliation between these GAAP and non-GAAP operating losses in the financial tables included with our earnings release. Turning now to the balance sheet, as of December 31st, 2022, we had cash, cash equivalents, and marketable securities of 21.9 million. Net cash used in operating activities was $45.6 million for 2022. Our focus over the last half of 2022 was to reprioritize our investments in our product portfolio and institute a more sequential approach to product development and test launches. First half, quarterly average of $12.3 million decreased to a quarterly average of $10.5 million, or a 15% reduction. Net cash used in operating activities was $9.7 million in the fourth quarter of 2022. If you recall, this is ahead of guidance provided in our mid-year 2022 earnings call, where we stated our goal of entering the first half of 2023 with a quarterly cash burn rate below $10 million. In December, we announced the reduction of over 40% of our workforce, along with the exit of our DetermaRx business. While these were difficult choices, these represent definitive steps to further reduce our cash burn from 2022 levels as we invest in our focus strategy and product pipeline. In 2023, we anticipate continued improvement in quarterly operating cash burn levels. With our current plan, we expect that continued cash management efforts will get us below $6 million in quarterly average burn for the second half of 2023. That concludes my review of our financial highlights, and I'll return the call to the operator for your questions. Thank you.

Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of David Westenberg with Piper Sandler. Please proceed with your question.

Hello, this is Tyler Anderson on for David Westenberg. I was wondering, what's the timeline for your RUO launch, and what does the cadence for that look like as far as growth? And do you have any pre-orders for that product? And I got to follow up after if nobody else is on the call for a question.

Yeah, no. Thanks, Tyler. So the timing for us is the next milestone you'll see is that we'll start manufacturing. And that'll be sort of late second half, early first, or sorry, late first half, early Q3 when you'll get that milestone. with an on-market product towards the end of the year. The revenue piece on that is just because of the sales cycle for platform placements is likely first half when we'll start to see revenue come in for that. All of this can shift depending on the nature of a partnering relationship if that comes in.

Okay, thank you. I'm going to hop back into the queue.

Thank you. Our next question comes from the line of Mark Massaro with BTIG. Please proceed with your question.

Hey, guys. Good morning, and thanks for taking my questions. So certainly I recognize that Determine.io, CNI, and Vitagraphs are now sort of the future of the company. I was curious if you could just maybe zoom in a little bit on the timing of Palmetto Moldex coverage for Vitagraphs. I also wanted to confirm that you are planning to launch vitagraft kidney and then liver. And could you just give us a sense for when you think palmetto mold X coverage can come in and when you think those kidney and liver tests can roll out?

Fantastic. So kidney and liver are both active in our early access program right now. So we are getting samples flowing to our lab in Nashville. But those are all unbilled at this time as we're just kind of just in that early access phase. We submitted back in the summer of last year. These conversations can take anywhere from nine to 12 months. That's been an active conversation with them. I'd like to say that I could predict what a government agency is going to do, but that's proven to be a bit challenging. But I would say that we're hopeful that we're at the end of the road with those guys here relatively soon.

Okay, that makes sense. You know, there were some changes recently to Medicare with respect to organ transplant, which notably were sort of made visible to the share price of CareDx, I guess. Have you had a chance to sort of digest some of the changes that were made to that coverage determination And does it impact at all how you view the opportunity for kitted transplant tests?

It does. We saw the release and the clarification from Moldex. And I think it does take some of the top off the market, maybe 15%, 20% off of the $2 billion clinical market there. But I think what an RUO product does is it opens up a whole lot of questions that aren't answered today. So if you look at the clarification that Moldex put out, it was really specific to for-cause testing, and sort of that was the only thing that's really been proven to date. By putting other people in the business of answering questions, we believe that that market can be expanded for long-term patient management, for the ability to look at alcoholic recidivism, And, you know, xenografts, there's a whole bunch of questions that aren't answered by LDTs today. So I see that some element of the clinical piece has been shrunk, but I think it's just because they haven't had the chance to do the research to validate that routine monitoring is useful in the clinical environment.

Okay, yep, that makes sense. And then just a couple of clarifying questions on when you think you might be able to get palmetto moldex coverage for Determa IO. And then I know Determa CNI seems to be more of a 2024 development initiative. When do you think that CNI might commercially launch?

You know, the best I can say on CNI right now is, you know, sometime in 24, if things line up. You know, there is a blanket LCD out there that we believe covers the approach that CNI takes to patient management. But, you know, that's, it's just, it's a little bit far out for us right now as we've kind of brought our cost structure down significantly to really put everything we can behind the term IO and transplant this year. You know, as far as IO, we submitted that back in, you know, December. And, you know, again, that's kind of a, we expect a nine to 12 month process. on that. It is a de novo submission for Moldec, so this is a novel test for them to take a look at. Those can have longer timelines. I'd say the earliest we could possibly see that would be probably Q4, but we may get surprised.

Okay, and then maybe one for Anish. I think I heard that the planned cash burn in the second half of the year will be sub $6 million. Is it fair to think that the cash burn in the first half of this year will be a little bit higher than $6 million? Just curious if you could clarify that and what some of the factors are that might be, you know, puts and takes to that number.

Yeah, no, that's a great question. I mean, I think we had previously guided to, you know, sub-10 in the first half of 23, and obviously – you know, with net cash use and operating activities in the fourth quarter of 22 being 9.7, we were ahead of that. You know, there are a couple of things that we need to see the full effect of, you know, with respect to the, well, two major pieces. One was the over 40% reduction in our staff, which, you know, occurred in, was announced in December, right? So you're going to start seeing the impact of that as well as, you know, as part of that, the divestiture of our RX business. So, I mean, I think, you know, the sub-10 burn is clearly something that's very achievable. You know, we do think that, you know, guiding to the second half at this point, we're really safe that, you know, a sub-6, I think, is a reasonable, you know, estimate at this point.

All right, excellent.

I will hop back in the queue. Thanks, Mark.

Thank you. Our next question comes from the line of Mike Mattson with Niedermann Company. Please proceed with your question.

Hi, guys. This is Joseph on for Mike. Thanks for taking our questions. I guess maybe to start off, can you maybe discuss the early adopter program a little bit for Vitagraph? I guess maybe how many physicians or sites are involved in this? I think you gave maybe some metrics on that in the past, but if you could talk about some of the metrics around like reordering or maybe some of the feedback from physicians, especially if they've potentially used, you know, a competitor test and their differences between them. Um, and then I guess maybe, you know, the same or similar question for Determa IO, uh, that early adopted program if possible. Uh, and then if I could just add something on there for clarification in terms of, uh, DETERMA-IO submission to MoldDx. Was that for triple negative breast cancer as well as lung cancer? I believe those are the two you were talking about in the past. Thank you.

Yeah, I can confirm for the DETERMA-IO that we did submit for both the non-small cell lung cancer and for triple negative breast cancer. You know, the EAP success has been really good for us. So I And we'll get into kind of like the specific sites and numbers, but reorder rate has been fantastic. And I think the biggest sign of success for us is when the researchers get access to the technology and they're able to kind of use it to ask these questions, they get excited and then they want to set up IRBs and they want to set up studies. And that's the momentum that we felt over the past three months. is that there's a general level of excitement around DETERMA-IO's ability to really assess the tumor microenvironment. And then when we get to Vitagraph, I think the use of absolute quantification is intuitive for docs who are used to seeing sort of absolute values on their test reports. We don't have the clinical data today to say that that can supplant the way it's being done with fractional measurement, but it's something that's generated a lot of interest from the community. It's testing incredibly well across the EAP and across our advisory boards.

Okay, great. Yeah, that's very helpful. And then maybe one more, and I'll hop back in the queue. Maybe I'm understanding this wrong, but The RUO product, is this the, like, the kitted version? Mm-hmm. That's correct. Oh, okay. Okay, perfect. Just wanted to make sure. Thank you very much. Mm-hmm. Sure. Thank you.

Thank you. Our next question comes from the line of Mason Carrico with Stevens Inc. Please proceed with your question.

Hey, guys. Maybe just a couple quick ones on the liver test. In terms of once you receive coverage there, how are you thinking about the initial revenue ramp and how should we think about the build out of maybe a more targeted or smaller commercial team once that coverage is established?

Thank you for the question. We are very firmly pivoting towards a product approach as a company just because of the cost of building out, you know, a large sales and marketing team isn't something that we can support at this time. And so I would expect that, you know, any sales and marketing effort around, you know, both liver and kidney in the transplant space is going to be very small, very targeted, focusing on deep relationships more than sort of broad market adoption. And then we're going to rely on our distribution partners or platform partners to help us really penetrate the market at the research level. So I would say very low millions at maturity and that whenever we get coverage, reimbursement is about three months post that for revenue start. Got it.

And then maybe one more. How should we think about the pricing or economics of those product-based kits?

And it's, you know, without getting into speculation, you know, other tests, comparable tests have been reimbursed at, you know, $28.50 and $27.50-ish. We are hoping that we will be crosswalked to that pricing, but can't guarantee it. Got it. Okay. Thanks, guys.

Thank you. Our next question comes from the line of Bruce Jackson with the Benchmark Company. Please proceed with your question.

Hi, thanks for taking my question. So with Determa IO, you submitted for non-small cell lung cancer and triple negative breast cancer, and then you mentioned that you've got the new data for colon that was just published. Do you plan to add that to the application at some point?

We're going to take that to our science committee. We haven't made a determination on that. I think it's just a matter of resources at this point, but we believe our best data right now is in non-small cell and triple negative.

Okay, great. Thank you. That's it for me.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of David Westenberg with Piper Sandler. Please proceed with your question.

Hi, guys. Once again, just a quick housekeeping question. So where does this newest cash injection take you as far as timeline? And is this as a result of growth or is this more of like a sustaining cash line that we're getting? And then do we expect this again in 2024 or is this more like a 25 and 6 and on question? I'm just asking because we had asked in Q1 in 21 or 22. Thank you.

Yeah, thanks for the question. Yeah, I think, you know, the way we ought to think about it is just for continuing and growth. It's really more of a combination of the two. You know, we should expect, based on our current cash burn levels, that this would help us, you know, through with the cash runway through well into the first half of 24. And that's how you ought to think about it.

Perfect, thank you. Thank you.

Thank you. Our next question comes from the line of Mike Mattson with Needham & Company. Please proceed with your question.

Hey, just one more from me. When you guys had announced selling a majority stake of Determ Rx, I believe the press release mentioned, you know, some potential for upside, I guess, you know, sales ramp, would it be possible to maybe size, you know, the sample volume needed to see some of those benefits or the likelihood from some upside? I guess maybe not quantitatively, but, you know, qualitatively, you know, how much, I guess, success would raise a genomics need for you guys to see some type of benefit from that?

No, it's a good question. And, you know, we've got a 30% ownership rate. of the remaining business. So it's not a royalty payment back to us. So what we would expect is that while they continue to develop the product and mature the assay, get out of the randomized clinical trial and publish that data, that the product will become sort of higher revenue producing, more attractive, and that eventually that they would lead to an acquisition. That's at the point when we would expect sort of a windfall payment to come our direction.

Okay, yes, that makes perfect sense. Well, thank you very much for taking our questions. For sure.

Thank you. Ladies and gentlemen, this concludes our Q&A session and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.