Oncocyte Corporation

Good day and welcome to the OncoSite first quarter 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Stephanie Prince of PCG Advisory. Please go ahead, ma'am.

Thank you, Chuck. And thank you to everyone joining us for today's conference call to discuss OncaSight's first quarter 2023 financial results and recent operating highlights. If you have not seen today's press release, financial results press release, please visit the company's website on the investor page. Before turning the call over to Josh Riggs, the company's president and CEO, 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 fact are forward-looking statements. We encourage you to review the company's SEC filings, including, without limitation, the company's forms 10-K and 10-Q, which identify the specific risk factors that may cause actual results or events to differ materially from those described in these forward-looking statements. 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 by law. With that, I'll turn the call over to Josh Riggs. Josh?

Thanks, Stephanie, and welcome everyone to our conference call to discuss our first quarter 23 highlights. On today's call, we will review the progress we have made improving our cost structure and pivoting to a high margin, scalable product business. OncoSight has a faster path to market and lightweight infrastructure. Before we go there, I would like to provide a little extra context on our shift in strategy. While many other diagnostic companies are pursuing the more typical service lab business model, They have also historically generated substantially large losses and continue to consume significant capital. OncoSight's kitted product commercial model should allow us to scale our revenue with relatively little capital while we generate higher profit margins that are sustainable over the long term. As a company, we continue to face adverse market conditions. Reining in cost and focusing investment in Q1 was critical. We've consolidated our lab operations, pared down our product portfolio, and right-sized the company, eliminating over $20 million in annual operating expense. Going forward, we will continue to focus on managing spend down and driving towards a capital-efficient model. These efforts and the shift in strategy allowed us to complete a $13.86 million equity raise that was at market, contained the warrant coverage, and was composed of top holders and insiders. We appreciate that continued commitment to the company and meeting the needs of patients. Now onto our product portfolio. On our last call, we talked about DETERMA-IO RUO as a kitted product. We are happy to announce that we are complete with the first phase of development and are now optimizing the assay to prepare for manufacturing. DETERMA-IO continues to build its case as the best-in-class measure of the tumor microenvironment. We believe that this is evident in the recent peer-reviewed publication of the results of a study applying DETERMA-IO to samples collected from the randomized Phase II atezotribe clinical trial in metastatic colorectal cancer. The results were published in Clinical Cancer Research and showed the utility of DETERMA-IO in potentially identifying more responders to ICI therapy than current standard of care biomarkers. Additionally, we presented four abstracts exploring the tumor microenvironment and its potential implications for therapeutic response at the annual meeting of the American Association for Cancer Research. Also at AACR, data was presented highlighting exciting study results applying DETERMA-CNI, our blood-based test, to metastatic pancreatic cancer that indicate our test can identify patients not responding to therapy. The Termocyanide is a blood-only solution for efficacy monitoring, which we believe will make it an attractive alternative for researchers that don't have access to or need to conserve precious tissue since no upfront tumor typing is required. Our vitagraft assays for transplant management continue to work their way through CMS as we pursue reimbursement. The kitted version of the transplant test is through phase one of development and is on pace to enter manufacturing in the next three months. We are looking forward to an expected early access launch date later this year, making our technology available to research labs here in the U.S. and abroad. Revenue is expected to begin in the first half of 2024. Gaining reimbursement for our portfolio and bringing our test to market to generate revenue growth is essential. We believe our optimized product strategy will attract revenue-generating external partnership and licensing opportunities, and our reduced burn ensures our current resources will carry us well into the first half of 2024. At this point, I would like to turn the call over to Anish John to review our financials.

Hi, everybody, and thanks for joining our call. Before we begin our formal review of the financials, I'd like to start by saying that Oncocite overall have seen a significant year-over-year operating expense decline across all categories of spend in Q1 of 2023. This largely reflects management's successful efforts to optimize the portfolio and definitively reduce our operating expenses. With that, our consolidated preliminary revenues for the first quarter of 2023 were approximately 0.7 million, representing a decrease of 50% year-over-year. Excluding Determa RX revenue, the continuing operations revenue related to pharma services was $0.3 million for the three months ended March 31st, 2023. Cost of revenues for the first quarter were approximately $0.8 million, primarily from the cost of diagnostic tests and testing services we performed for our Determa RX and pharma services customers. Research and development expense decreased 45% year-over-year from 5.1 million to 2.8 million, primarily due to the decrease in CLIA laboratory expenses and focused product development spend in the three months ended March 31st, 2023. General administrative expense decreased 34% year-over-year from 5.7 million to 3.7 million, reflecting management's efforts to control spending not directly related to product development or commercial activities throughout 2022 and into 2023. Sales and marketing expense decreased 63% year-over-year from 3.2 million to 1.2 million, mainly attributable to the decrease in product development and commercialization efforts of DetermaRx and due to the sale of Razor Genomics during the first quarter of 2023. Now I'd like to turn to our GAAP and non-GAAP analysis. Non-GAAP operating loss as adjusted for the first quarter was $7.8 million, a decrease of $3.5 million as compared to the same period in 2022. GAAP operating income as reported for the first quarter was $2.9 million, a change of $12.8 million compared to a loss of $9.9 million for the first quarter of 2022. For the first quarter, we reported a GAAP net income of $3 million or 2 cents a share as compared to a net loss of 10.3 million or 11 cents a share for the first quarter of 2022. We've provided a reconciliation between these GAAP and non-GAAP operating losses in the financial tables included within our earnings release. Turning now to the balance sheet, as of March 31st, 2023, we had cash, cash equivalents and marketable securities of 12.4 million. Net cash used in operating activities was $9.6 million for Q1 2023 and represents a 27% reduction versus prior year and includes non-recurring expenses related to the exit of the razor business. We anticipate continued improvement in quarterly operating cash burn levels in the back half of 2023 and are now revising our guidance to below 5 million in quarterly average burn versus the 6 million quarterly average burn in the back half of 2023 that we guided to previously. Lastly, I wanted to share that I will be resigning from my position of CFO of Oncocyte effective June 15th of 2023. It's been a privilege to serve Oncocyte during this period of significant transition, particularly over the last few quarters. From an operational finance perspective, we had taken the difficult but needed steps to successfully right-size the organization, optimize our product portfolio, and deliver on our commitment to reduce our burn rate. I'm confident that these efforts have put us in the best position to bring our key products to market on behalf of our shareholders and patients. I know we're well positioned to realize the key value milestones ahead, and I want to take a moment to thank my colleagues here at Oncocite, our board of directors, and our shareholders for the privilege of serving as Oncocite's CFO. That concludes my review of our financial highlights, and I'll return the call to the operative for your questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble a roster. And the first question will come from Mike Madsen with Needham. Please go ahead.

Hey, Josh. Hey, Mish. Just wanted to – oh, sorry. This is Joseph on from Mike, by the way. Hey, Joe. Hey, Joe. Hey. So just wanted to maybe get an update on the milestone calendar, maybe what you guys expect to be like the first shoe to drop. We're obviously expecting a – reimbursement decision to TRIO and Vitagraft in the future. But you as well have the RUO product kind of lined up. So maybe if you could, you know, frame the timeline a little bit, whether it be, you know, first to reimbursement decision, or maybe the first to contribute materially to revenue.

Yeah, I would say the transplant products are about six months ahead of the term I.O. in the reimbursement process. So our expectation would be that they would be the first shoes to drop. I.O. is sort of a unique product. from the point of view of Moldex, so they're going to take a little bit more time with that as they review it. So, yeah, I think it's kind of one of those things, any quarter now, we're hoping that we get aligned with Moldex and we're able to announce reimbursement.

Okay, great. And I guess maybe on IO and Vitagraft, I know for IO you have an EAP ongoing at around seven sites or so, if you could confirm that. But could you maybe, you know, talk about both those programs? You know, how large is the Vitagraph EAP? You know, what's been the feedback from those and the reorder rates? But yeah, maybe just some color on both of those.

Yeah, I think the Early Access Program is a wonderful learning tool for us. I think it allows us, without the pressure of having to stick specifically to a claim, we can ask open-ended questions with our collaborative researchers at multiple academic institutions and large oncology networks. They're really exploring the utility of DETERMA-IO and its reliable nature in identifying patients that are going to respond to immunotherapy. And we find that we're able to move towards IRBs and ask new questions with the product. So I think there's been robust interest around Determa IO in that program. And the site enrollment continues to grow there. And the same with the transplant test. We talked about it on the last call that there are several unanswered questions today in transplant management. And having an early access program, giving access to these researchers, to the technology has opened up a lot of interest in the community to ask new questions alongside the ones that they need to answer for day-to-day patient management.

Okay. Okay, great. Yeah, thank you very much. Maybe just one more on Determa IO. So I assume it's six months or so away from any potential reimbursement decision. But, you know, maybe as we get closer to that and maybe, you know, what you've been talking about in the EAP program, you know, while the test seems to, you know, outperform, you know, traditional methods, you know, PD-L1 or TMB, we've obviously seen that the accuracy has improved with combining those assays. So, you know, will you expect to or are you currently kind of marketing the test in that way in the sense that, you know, look to use this test to combine with other diagnostic methods? Thanks.

No, it's a really insightful question. You know, I think the biomarkers that exist today have done an amazing job of, you know, attracting CDX claims and, you know, proving their utility. I don't imagine that they're ever going to go away. I think the term IO will be used in the context of that, you know, really complicated clinical decision point in clinical environments.

Okay, great. Thank you very much.

The next question will come from Mason Carrico with Stevens. Please go ahead.

Hey, guys. Maybe just could you provide some color around those early conversations or the interest from, you know, potential customers for the Determa IO product, overall demand, any incremental color you can give there?

Yeah, I would say our best data is in the greater than 50% PD-L1 expressors in non-small cell lung cancer. This is a population where you're trying to make a decision on do I add chemo, do I not add chemo? And I think we provide unique information in that setting. you know, alongside, you know, multiple other clinical indications that we've published on. But I would say there's been a high degree of interest in non-small cell lung cancer and then also in triple negative breast where, you know, the SWOG study where we're going to do well over 800 patients looking at, you know, adjuvant, you know, pembrolizumab or Keytruda. It's, you know, doctors are seeing the value of having a test that they can rely on to identify who's actually going to respond to the anti-PD-L1 therapy.

Got it. That's helpful. And then thinking about your cash runway, you've provided some color on this, but could you just help us think about what are the key items that are baked into the current budget and what do you view as kind of the key risks that could arise that could potentially shorten the cash runway? Okay.

Yeah, I think we've brought the cash runway down, you know, primarily with the expectation that revenue wasn't going to start until, you know, the first half of next year. And so I think we see ourselves in kind of a development stage at this point. And so the cash flows or cash burn should be relatively predictable, but, you know, I mean, I guess there's always the unknown unknowns out there, but there's nothing that I can foresee at this point that would throw lumpiness into that. Anish?

No, and I think organically, I mean, obviously we are coming off of two rifts in 2022, which were sort of an operationally organically seeing savings as a direct result of these efforts. I'd confirm what Josh is saying in terms of we're starting to see or get an operating rhythm where the expenses are very predictable at this point.

Got it. That's helpful. That's it for me, guys. Thanks. Thank you.

Thank you. The next question will come from Mark Massaro with BTIG. Please go ahead.

Hey, guys. This is Vivian. I'm for Mark. Thanks for taking the question. So a few other companies in our space are reporting broad-based pressures on transplant volumes across all organ types. So can you just give us a sense about how you're thinking about the space? I think liver is a relatively under-penetrated indication, but I just wanted to get your updated views there of what you're seeing. Thanks.

Yeah, I think the recent CMS clarification on what's billable, what's not billable, probably clipped the top line in the industry. But I also think it speaks for the reason on why you want to create an RUO version of the product so that you can open up new indications for the technology and begin to grow the top line again.

Okay, understood. Thanks. And then I guess on a potential kitting partnership, just how are those conversations progressing? And any timing you can share on what we might expect to hear an update there. Thanks.

Yeah, I mean, I'd say those conversations are ongoing. You know, we were talking to manufacturers and we're also talking to distribution partners. You know, I think the imperative for us is to have a product on market by the end of the year. And I think as we get into, you know, Q3, we'll have a lot of clarity on what that commercial strategy will look like.

Okay, perfect. And maybe just one last one from me. On the step-down in cash burn, just how you're thinking about rep expansion or other investments just to help facilitate commercialization of skidded products? Thanks.

No, good question. I think we're committed to maintaining a capital light infrastructure here at OncoSight, and our primary mode of commercialization will be through partnership or distribution.

Okay, awesome. That's it for me. Thanks for taking the questions.

Thanks, man. The next question will come from David Westingberg with Piper. Please go ahead.

Hi, everyone. This is Tyler on for David. Thank you for taking my question. So just zooming into IO, can you describe the early access customers that you've been talking to and what kind of feedback you've gotten from them, as well as if you've had any discussions for pre-sales?

Yeah, I love the question because we've got a really good mix in our EAP. So there's kind of the broad-based networks of oncologists, that are kind of very well known in the Southeast. And then there's the academic institutions. So I think we're getting feedback from a lot of different clinical experiences and sort of the utility of the test in those environments. And I would say generally the demand is strong for reliable tests that they can use to help manage their patients.

Okay. And what is the manufacturing ramp up in Q3 look like as far as like a volume cadence going forward into Q4, if you have any insight onto that? And then do you expect to see any increase in sales and marketing expense considering you're going the distribution route or is that going to remain suppressed for quite some time?

I would expect costs to remain suppressed, but then as far as manufacturing ramp up, I wouldn't expect anything significant this year, and it's really tough to project 24 at this point, just ahead of us even getting into manufacturing. I think we'll be able to update what that looks like in future calls.

Perfect. Thank you, guys.

Thank you.

Again, if you have a question, please press star, then 1. Our next question will come from Bruce Jackson with the Benchmark Company. Please go ahead.

Good morning, and thank you for taking my questions. I just wanted to get a little more specificity around the timelines for the reimbursement. So would Vitagraph be roughly third quarter, potentially?

Yeah, I mean, I don't want to put words in Moldex's mouth, but that's in striking distance for us. We've been working with them for going on a year now, and so we're hopeful that we're at the end of the road with them, but we could have more work to do.

Okay, and then Determa IO would be roughly six months after that, again, potentially because we don't know exactly what Moldex is going to do.

Exactly. You've got that right.

Okay, perfect. And then any update on Determine CNI in terms of the development?

Only the publication that was at AACR in pancreatic cancer, where it's a unique use case for Determine CNI, where there's really two first-line therapy decisions. And when one's not working, you flip to the other. And so having an early notification that the therapy is not serving the patient is potentially beneficial in management of patients. And we demonstrated that we are a good early warning system for when the therapy is not working. So I think that's for us very encouraging in a very problematic cancer. And then we're going to do additional clinical development that we'll be able to update on later in the year.

Okay, great. Thank you very much.

Thank you, Bruce. Thank you.

This concludes our question and answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.