Oncocyte Corporation

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Thank you.

And welcome to the OncoSite Q2 2023 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, press star then one on your touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Stephanie Prince from PCG Advisory. Please go ahead.

Thank you, Anthony. And thank you to everyone for joining us for today's conference call to discuss Oncocytes second quarter 2023 financial results and recent operating highlights. If you have not seen today's financial results press release, please visit the company's website on the investors page. Before turning the call over to Josh Riggs, Oncocytes 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 fact are forward-looking statements. We encourage you to review the company's SEC filings, including, without limitation, the company's 10-K and 10-Qs, 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 under applicable law. With that, I'll turn the call over to Josh. Josh?

Thanks, Stephanie, and welcome everyone to our conference call to discuss our second quarter 2023 highlights. In the first half of 23, OncoSight shifted to a capital light, product-focused commercial model, significantly reducing our cash burn and channeling our efforts for success in 2024 and beyond. We're accelerating on 10 key development milestones that we'll highlight today and preparing for product launch while maintaining tight controls on our expenses. I'll start by taking us through progress on our nearest-to-market products, the Vitagraph kidney and liver lab-developed tests and our donor-derived cell-free DNA research use-only assay. Both Vitagraph kidney and liver have been up for review and coverage decisions at Moldex for a little over a year. We're encouraged by the conversations we are having and the robustness of that review process, and we hope to be able to provide an update soon on status for those assays. On clinical development, we recently published a paper in Kidney International Reports that highlights, again, the strength of our technology in identifying antibody-mediated rejection, a key problem in post-kidney transplant patient management. This is the second publication that showed the reliability of absolute quantification over time, a key advantage of the digital droplet PCR that our assays use. In Q1, we guided to a Q4 2023 early access launch of our blood-based transplant monitoring assay, and I'm happy to report that the manufacturing transfer process started in Q2 and is on track to meet our goal. We will continue to update you on our progress as we hit the additional milestones that are expected in Q3 and beyond. Early market access work is preparing us for commercial launch and anticipated start of generating revenue from this important product beginning in the first half of 24. In line with keeping our cost infrastructures low, we committed to partnering on our commercial channel. Those conversations with strategic platform and distribution partners continue to progress. Vitagraph Kidney and Liver have an estimated $2 billion U.S. clinical market opportunity, and potential downstream value inflection points to watch out for include obtaining coverage for Vitagraph Kidney and Vitagraph Liver, a national or global commercial partnership for the RUO product, and a manufacturing transfer completion of that same RUO product. Shifting to our oncology products, DETERMA-IO-LDT continues to build its case as best-in-class measure of the tumor-immune microenvironment. We are making progress on the NIH-funded SWOG study being run by the Southwest Oncology Group in triple negative breast cancer. This study is expected to be completed in late 2023 or early 2024, The data is expected to support our existing application for coverage at Moldex. The review process for our foundation coverage decision is expected to continue into 2024. The RUO product is nearing design lock and is showing significant promise for further analytical and clinical development. This is a reminder, DetermaIO has an estimated $2 billion clinical U.S. market opportunity. And the potential value inflection points to watch out for are, you know, coverage decision for IO in non-small cell lung cancer and or triple negative breast cancer, and the SWOG study data publication. DETERMA-C and I, our blood-based solution for therapeutic efficacy monitoring, which we believe makes an attractive alternative for researchers that don't have access to or need to get suppressed tissue since no upfront tumor typing is required. In Q1, together with UPenn, we presented data at the AACR, or the American Association for Cancer Research, annual meeting in pancreatic cancer that showed CNI's ability to distinguish between responders and non-responders. Doctors have two options for treating late-stage pancreatic cancer, knowing if a patient is benefiting from the chosen therapy can give them an opportunity to adjust if needed. The submission for publication of this data is expected in the second half of this year. Once accepted for print, we plan to submit for coverage under local coverage decision L38835. This is the same LCD that multiple companies have received coverage under in the past several months. Reimbursement for these types of assays has reached into thousands per episode of care, and timing on submission is expected to be in the first half of 2024. The term of CNI has a greater than $4 billion estimated U.S. clinical market opportunity. And the inflection points for that assay include the completed CLIA validation in our Nashville lab, the publication of the pancreatic data, and submission to Moldex for coverage. I'm going to shift over to the financials. Our consolidated revenues for the second quarter of 23 were approximately $500,000, and cost of revenues for the second quarter were approximately $200,000, primarily from services for our lab service customers. Consolidated research and development expense for the second quarter decreased 56% year-over-year from 5.6 million to 2.4 million, driven by our strategic pivot to focus our investment on developing manufacturable versions of our assays that we believe are scalable at high contribution margins. Consolidated G&A expense for the second quarter decreased 35% year-over-year from 5.5 million to 3.5 million, reflecting our successful efforts to reduce spending not directly related to product development or commercial activities. Consolidated S&M expense for the second quarter decreased 77% year-over-year from $3.5 million to $800,000. We focused our sales and marketing investments on our early access programs and early market access work for our LDTs and scalable RUO products. Non-GAAP operating loss as adjusted for the second quarter was $4.7 million, a decrease of $6.5 million compared to the same period in 2022. GAAP operating loss as reported for the quarter was $8.3 million, a change of $0.3 million compared to the loss of $8.6 million in the second quarter of 2022. For the second quarter, we reported a GAAP net loss from continuing operations of $8.3 million or $1.07 per share as compared to a net loss of $8.3 million or $1.48 a share for the second quarter of 22. We have provided a reconciliation between these GAAP and non-GAAP operating losses in the financial tables included with our earnings release. As of June 30, 2023, we had cash, cash equivalents, and marketable securities of $17.9 million. Net cash used in operating activities was $6.8 million for Q2 2023. We anticipate continuing improvement in quarterly operating cash burden levels in the back half of 2023 and are maintaining our guidance to reach a below $5 million in quarterly average burn. And just as a final comment, the next steps for OncoSight are gating reimbursement for our product portfolio, bringing our tests to market to generate revenue growth, And we believe we have optimized our product development strategies to support these steps, which we believe have a strong probability of leading to revenue-generating external partnerships and licensing. Our strategy should generate much higher contribution margins than is typically seen at publicly traded diagnostic companies. And we believe that this superior commercial strategy, combined with our reduced burn, puts us on path to financial sustainability. As a final note, next week we will be presenting at the 23rd Annual Needham virtual conference. Thank you. I'll hand the call back to the operator.

We will now begin the question and answer session. To ask a question, you may press star then on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster. First question will come from Mike Madsen with Needham & Co. You may now go ahead.

Yeah, thanks. So I guess just Just to clarify, the quarter itself, you said that the revenue was really all from the kind of pharma services part of the business, correct? You didn't really have any testing revenue in the quarter? That's correct. Okay. And then, you know, just with regard to vitagraphs, I mean, when do you think you would, what's the earliest you think you could start to generate some revenue from that, from either liver or kidney?

Yeah, I think it all depends on sort of the timing of the coverage decision. You know, there's usually a couple-month lag between coverage decision and sort of the final reimbursement decision. It'd have to be really, really quick for us to see revenue this year. So I would say it's either extremely late this year or early next year, depending on the timing of that coverage decision.

Okay, got it. And then just the, it's good to see the big declines in the OPEX. I mean, are you kind of, well, you're guiding to the $5 million cash burn, quarterly cash burn or less in the second half. But, you know, are you kind of at the run rate that you're expecting to maintain for the rest of the year for the, you know, R&D, sales and marketing, and G&A? Or is that going to tick down a little more in the second half?

Yeah, I mean, I think you'll see it scale down a bit. I mean, you know, in that six-plus million that we used in the quarter, I mean, there were some one-time expenses. So, yeah, I would say the run rates are starting to look like what we expect on a go forward.

Okay. Got it. Thank you.

No, for sure. Again, if you have a question, please press star, then 1. Our next question will come from Nathan Merrico with Stevens. You may now go ahead.

Hey, thanks. So for your transplant product, once it's launched, what does the initial validation work timeline look like for an academic center that's interested in the product? How long does that last, and how should we think about that from a volume-rank perspective?

Yeah, no, really, really good question. You know, I can speak to our personal experience. And so it took us about three months to transfer the assay from our German lab to our Nashville lab once we had sort of made the decision to bring the assay over. We have a lot of experience with the assay, so we probably are on the faster end of that spectrum. But I can't speak specifically to sort of average timelines without sort of having already done it. But that gives you some kind of guidance.

All right, yeah, thanks. Just one for me. Appreciate it. Yeah, sure.

It appears there are no further questions. This concludes our question and answer session as well as the conference. Thank you for attending today's presentation. You may now disconnect.