Cancer Genetics' (CGIX) CEO Panna Sharma on Q2 2014 Results - Earnings Call Transcript

Aug.14.14 | About: Cancer Genetics, (CGIX)

Cancer Genetics, Inc. (NASDAQ:CGIX)

Q2 2014 Results Earnings Conference Call

August 14, 2014, 08:30 AM ET

Executives

Paul Arndt - Managing Director, LifeSci Advisors, IR

Panna Sharma - President and CEO

Edward Sitar - CFO and Treasurer

Analysts

Sung Ji Nam - Cantor Fitzgerald

Ben Haynor – Feltl and Company

Ram Selvaraju – Aegis Capital

Thomas Pfister – RedChip

Operator

Greetings and welcome to the Cancer Genetics Second Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded.

I would now like to turn the conference over to Mr. Paul Arndt, Managing Director of LifeSci Advisors. Thank you, Mr. Arndt. You may now begin.

Paul Arndt

Thank you, Mannie, and thank you for joining us for Cancer Genetics 2014 earnings conference call. On today’s call are company President and Chief Executive Officer, Panna Sharma; and Chief Financial Officer, Ed Sitar.

The company issued a news release this morning detailing its second quarter earnings financial results. Following the Safe Harbor statement Panna will provide an overview of the second quarter, recent events and company activity. Ed Sitar will then provide a summary of the second quarter financial results. Lastly Panna will provide an update on Cancer Genetics’ strategy for developing a long term sustainable genomics business. We will then open up the call to questions.

Before we begin I like to remind everyone that various remarks about future expectation, plans and prospects constitute forward-looking statements for purposes of 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 their actual results to differ materially from those indicated, including risks described in the company’s filings with the SEC. Any forward-looking statements made on this conference call speak only as of today’s date Thursday, August 14, 2014 and Cancer Genetics does intend to update any of these forward-looking statements to reflect events or circumstances that occur after today’s date.

This conference call is being recorded for audio rebroadcast on Cancer Genetics’ website at www.cancergenetics.com. All participants on this call are in listen-only. The call will be followed by a question-and-answer session. It is now my pleasure to now introduce Cancer Genetics President and CEO, Mr. Panna Sharma.

Panna Sharma

Good morning everyone and thank you, Paul. Welcome to our second quarter earnings call and company update. We all are making very significant progress at CGI, in advancing the development of proprietary cancer diagnostics and closing our announced acquisitions, establishing further contracts and agreements with our bio-pharma customers and becoming the comprehensive oncology company for the development and delivery of genomic-based diagnostics for the clinical and bio-pharma community.

As many of you know CGI's mission is to personalize the diagnosis and treatment of cancer and we continue to make good progress towards our goal of developing a long-term sustainable business with unique patented targeted tests, world-class collaborations and a comprehensive oncology service offering. We've recently agreed to acquire two companies that we believe will have a transformative impact on our business, Gentris and BioServe India. Gentris is an acquisition we closed in July 16 and is a market leader in providing pharmacogenomics and sequencing services to the biotech and pharmaceutical industries.

Adding pharmacogenomics expertise is something which the oncology community feels is necessary in order to truly personalize treatment and given the increasingly important role of this discipline in cancer care, especially hematologic malignancies where patients are known to react differently to therapies and to develop different toxicities based on their own unique underlying DNA.

The Gentris technology is highly complementary with our own expertise, which up until this point has concentrated mainly on understanding that genomics have specific cancer tumor systems. So we're very excited to bring these two complementary approaches together. Combining these companies and these approaches will result in higher value, higher revenue in generating contracts with the biopharma customers and we're already working now with over half of the top 12 biopharma companies worldwide. So this transaction has resulted in an immediate and very meaningful expansion of our client and revenue base.

We closed the transaction again on July 16, and expect to have the full effects on our P&L and balance sheet in the third quarter and looking forward to the next 12 months we plan this business will contribute an additional $5 million to $6 million in contracts and revenue.

BioServe India, the second company we agreed to acquire this past quarter is a premiere genomics services company based in Hyderabad, India with over 30 people and as we discussed BioServe in the last earnings call and the rationale in some detail, let me go through some of the highlights. BioServe India is a state-of-the-art genomic service provider and services both the research and clinical markets. The transaction gives us an entry point into the very high growth healthcare market in India, which as you know is experiencing rapid growth and high consumer and clinical demand.

We plan on introducing our targeted oncology tests into that market and accelerating the NGS efforts BioServe which include a targeted solid tumor mutation panel that’s already being validated for use in the clinical study in India. Further there is also the opportunity to expand the clinical trials for oncology that are expanding rapidly throughout South Asia and to further developed solid standardized SFPs across multiple lines. Our goal is close the BioServe India acquisition in the next few weeks and we'll be making an announcement we hope shortly. As we guided previously we expect this to be accretive to our earnings in 2015.

With these two acquisitions we'll have over 60,000 square feet of state-of-the-art labs space. We’ll have fully staffed laboratories in the U.S., India, China and more than 18 million in clinical trial contracts with leading biopharma companies globally. We’ll also have the infrastructure and reach to expand our oncology tests like our MatBA franchise in B-cell neoplasms and FHACT, our cervical cancer test for cervical cancer diagnosis in Triaging.

Again we think having standardized consistent IP available globally in labs is very valuable for the clinical and biopharma community and further validates our focus on ensuring that consistent high quality test results are available that impact patient lives. These two transactions are consistent with our strategy and goal of pursuing selective, strategic acquisitions that enhance our position, diversify our business model and give us exposure to additional high quality revenue and great global teams. They give us good exposure in growing markets, make us a better partner for the pharma and biotech globally and allow us to bring our products into larger markets.

Additionally we believe this footprint will help us accelerate the development of our data and information that feeds into the continued improvement cycle of our targeted genomic test in leukemia, lymphoma, multiple myeloma, cervical and kidney cancer. In a few minutes our CFO Ed Sitar will discuss the financial results in detail but let me go over some of the selective highlights of our operational results.

Total revenues in the quarter for CGI standalone were $1.5 million which compares to $1.8 million we had reported in the second quarter of last year 2013. To understand what’s going on here and to help explain this number we need to look at the breakdown of these revenues between our different customer categories. As you know we sell our cancer diagnostic test and services into both the healthcare systems which includes both direct billed customers such as major cancer centers as well as Medicare and also to customers in the biopharma industry through our SelectOne business.

We saw a very robust increase in test volumes in our Medicare business which resulted in 77% year-over-year increase in revenue as well as significant increases in our reimbursement from third party insurers. These are both as a direct result of expanding our sales force. However revenues from our SelectOne clinical trials business were down year to year due to delays in scale up and initiation of trials that use our proprietary tests and services. I want to stress that this is a timing issue. It happened because one of our biopharma customers delayed the initiation of two large scale clinical trials, which in turn resulted in lower test volumes during this quarter.

This is the nature of these large scale clinical trials and at this stage in our growth cycle we are exposed to decisions our customers make and as a consequence our revenue number in the SelectOne can fluctuate from quarter-to-quarter. The good news is that our partners are already moving ahead with these trials and I'm happy to report that one of them is now underway and the second one is slated to begin later this quarter as well.

Additional piece of good news is that also the overall size of one of the trials has increased and has been updated to enroll higher number of patients to undergo the targeted testing that we provide. So we anticipate that as these studies enroll patients we will see the test volumes in SelectOne recover significantly and any shortfall we just experience should be picked up in the future quarters.

Also to give you a better sense of where our business stands today and the impact of our acquisition strategy you’ll see that in the earnings press release we have provided a breakdown of the quarterly results taking into account the contributions from the closed acquisition. You can see that in the second quarter total revenues in the combined companies was over $3.2 million which represents a very substantial increase, both quarter-over-quarter and compared to the same period last year. These numbers should help you better appreciate the full scope and the nature of the go forward business and our run rate at CGI. I would also like to add that the addition of Gentris and its existing client base should serve to substantially de-risk some of the lumpiness that we have experienced in SelectOne as a result of client concentration.

I want to switch gears for a minute and spend some time talking about our commercial test and progress that we’ve been making in getting them established in the marketplace. Last year, as you know, we launched our proprietary DNA-based FHACT test for cervical cancer as a laboratory developed test. We’re now providing the test domestically as well as in partnerships with local [inaudible] and pathology labs and community hospitals not only in the United States but also in select countries outside the U.S.

This test informs the detection and staging of the HPV-related cervical cancer. In June we entered into a multi-year collaborative agreement with a group in Texas, PathAdvantage that delivers specialized focused gynecological pathology services and we continue to explore various additional commercial channels for FHACT and plan on additional partnerships to increase the reach in this non-invasive highly sensitive test for the management of cervical cancer. So we expect to be making announcements in these commercialization efforts shortly.

The addressable market for FHACT is enormous with a nearly 1.5 million to 2 million abnormal path results and path results in the U.S. that are referred on for colposcopy or a cervical biopsy and we believe this test could obviate the need for 75% to 90% of these procedures. At the same time this test provides a more accurate genomic-based diagnosis that can be monitored overtime and can be tracked and all this is done from the same sample that the FHACT or HPV test is done from.

We’re also in the process of substantially increasing this market size and applying for the CE Mark approval in Europe and we expect to have that process completed this quarter, opening up additional markets for the use of this test globally not only as a laboratory developed test but then also as a CE mark in-vitro diagnostic. We also plan to broaden the sale of this test in India and South Asia and also was part of the reason for the acquisition of BioServe to help us scale up for the demand and the manufacturing. And BioServe India already have the infrastructure in place that’ll allow us not only to manufacture but also address a market that accounts for nearly 25% of the global deaths attributed to cervical cancer due to delays in diagnosis and inaccurate findings.

We think that working hard to establish robust-IP around FHACT is very important and we should be in a position to give you an update later this quarter, third quarter on advancements on the IP positions and issuance for this test. For our MatBA test which is for the B-cell neoplasms category that’s experiencing significant renaissance especially around targeted therapeutics, we’re in the process of signing collaborations in our DLBCL which is the defused large B-cell lymphoma array with two major academic and research centers in the U.S., one on the East Coast and the second on the West Coast. These collaborations have already started and we’ll be making detailed announcements later this quarter.

A very important goal on these collaborations is to get access to large patient databases to help us further generate validation of this product that will drive commercial adoption, drive publications and at the same time better position us for one of the key components which is multiple clinical validations in the FDA’s proposed framework for the regulation of risk in laboratory tests. Diffuse large B-cell is what the most common form of Non-Hodgkin’s Lymphoma. It is a very diverse group of hematological malignancies. About 190,000 people in the United States suffer from this cancer and about 25,000 cases are diagnosed each year, makes up about 40% of Non-Hodgkin’s Lymphoma cases and the disease progression varies significantly and outcomes very widely, largely due to the genomic characteristics of each individual patient’s cancer.

So there is a significant clinical need for accurate and molecular base prognostic testing, not only at the time of initial diagnoses but also after initial treatment and throughout ongoing disease monitoring. So we expect as this diffuse large B-cell array and also our follicular array get into the market the entire efforts are to ensure that patients are matched to the best treatment plan and CGI today has the only in-market test, laboratory developed test that is a comprehensive genomic panel for predicting outcome for these patients.

These new tests along with their comprehensive capabilities in oncology and pharmacogenomics is driving interest in both the clinical and biopharma community as evidenced by our growing contracts with our biopharma customers who have signed agreements, continue growing and are now over 18 million and also as evidenced by increasing sites that are beginning to continue sending us tests and services from the clinical community.

At this point I’ll hand over the call to Ed before commenting further so Ed can review the current financials.

Edward Sitar

Thank you Panna and good morning to everybody. Second quarter 2014 revenues were $1.5 million, a decrease of 17% compared to second quarter of 2013. The reduction was due to decreases in test volumes related to our SelectOne clinical trial business. This was partially offset by increases in volumes related to Medicare and direct bill hospitals and institutions. The lower SelectOne volumes reduced our gross margin to 1% in the second quarter of 2014. We have been investing in our laboratory technicians and scientists in anticipation of higher volume in the upcoming clinical trials.

As we’ve said previously our gross profit can be impacted by slight changes in volumes. These fluctuations should become less dramatic as the company grows and we remain focused on our longer-term efforts to deliver year-over-year margin improvements.

Research and development increased by $650,000 due to two factors, approximately $300,000 due to increased activity for OncoSpire, the company's joint venture with Mayo Clinic and higher based stock compensation and salary cost. General and administrative expenses increased by $1 million to $2.4 million. 45% of the increase was due to higher non-cash stock-based compensation cost and 43% of the increase was related to higher expenses associated with being a public company including cost related to our two announced acquisitions.

Sales and marketing expenses increased to 106% to $919,000 due to increased sales personnel and commercial activities. Our net loss for the quarter was $4.2 million compared to a net loss of $9.1 million in the second quarter of 2013. We continue to have a strong balance sheet with $43.4 million of cash, $6 million of which is restricted to secure our credit facility with Wells Fargo.

The Gentris acquisition is a tangible opportunity for our company to expand its capabilities to reach a broader set of biopharma customers and diversify our revenue base. To provide a sense of the scope and financial snapshot of the combination I'll provide highlights of the combined quarterly income statement. Had CGI and Gentris been combined for the full quarter the combined entity would have had total revenues of $3.2 million, representing a 76% over revenues reported by CGI in the second quarter of 2013.

Total operating expenses would have aggregated to $5.8 million compared to $2.3 million reported by CGI in the second quarter of 2013. Net loss would have been $4.7 million or $0.50 per basic share compared to a net loss of $9.1 million or $2.29 per share reported by CGI in the second quarter of 2013. The amounts I've just discussed is a result of the aggregation of the unaudited results reported for the second quarter of 2014 by both Cancer Genetics and Gentris Corporation, the amounts may not be indicative of the future results.

Since we closed on July 16, we will not be able to include the full Q3 results for Gentris in our Q3. We also have estimated the impact of pro forma purchase price accounting adjustments. These estimates are preliminary and subject to revision. We have not included BioServe in our aggregated calculations but we expect to close shortly and have them as part of our 2013 results. BioServe will be included in our financial statements for the portion of the quarter we own them.

Now let's talk briefly about the six month period ended June 30, 2014 versus 2013. Revenues for the six month period were $2.9 million, a decline of 4%. As we've discussed SelectOne clinical trial revenue is significantly lower and this decline could not be offset by the increase in overall test volume which tests in 2014 were 5,436 and 2013 were 5,115. Gross margin was 5% as compared to 23% in 2013 as lower volumes did not allow us to absorb the increased cost we've put in place in anticipation of new clinical trials.

Total operating expenses were $8.5 million for the six month period compared with $4.7 million for the same period in 2013. Net loss for the six month period was $6.7 million compared with $6.8 million for the same period last year. Now let me return to the call to Panna.

Panna Sharma

Thank you Ed. Let me comment on a few things that were not in the financials as-well-as provide some additional commentary on what to expect going forward. I want to reiterate that we're developing a very unique business and proprietary technology and a comprehensive approach to personalizing treatment, both for the clinical customers as-well-as the biopharma community. What we're putting in place is the pieces for solid long-term business that is not reliant on a single platform or some unitary approach to oncology.

The acquisitions that we've done are critical to building not only critical mass globally and expanding internationally but also the acceleration of our existing strategy to get our test out to a wider group of patients and customers. We continue to be at the forefront of Novel genetic testing for oncology in markets that are highly underserved such as kidney cancer, such as B cell lymphomas and Pharma and also then integrating this approach with pharmacogenomics.

As you know the healthcare industry is undergoing a significant paradigm shift, one towards more comprehensive genomic-based testing and towards molecular treatment of cancer and CGI currently the significant technology advantage and resources to really take advantage of this market globally.

We continue to be very uniquely positioned to service both the physicians and clinicians servicing the bed side as well as companies looking to validate and accelerate the development of their therapeutic products. Our technology platform is significantly validated by launch of proprietary oncology tests which we continue to make good validation on and we expect also in the upcoming quarter to have significant publications at ASH and also publications at ASH through our joint venture with Mayo Clinic and OncoSpire.

As I mentioned earlier our collaborations with the academics enable us not only to validate our proprietary tests but also gain access to robust patient data that continues to inform the update of these algorithms. This is very important since we also believe that developing these clinical collaborations with academic partners will also be congruent with the FDA's approach to having clinical data de-risked and be a part of the validation process with the proposed regulatory framework.

I want to take a few minutes and discuss the impact of the FDA's regulatory framework and our view on that. At Cancer Genetics we think one of the most important things is to provide clarity to not only for the clinical community but also for the investors on the validity of a test. We think the FDA's proposed regulatory framework which will be upcoming helps to provide a sense of where the starting point is for de-risking test and bring classification into categories. There is no doubt we'll have near term dampening effect potentially on adoption but long term we think this is a good approach and one that we’re fully prepared to work with.

We already have in place systems for a quality review, systems for quality assurance and more importantly tracking the use of these tests, since we have developed many of our products to be CE marked. So we think we're in a great place with existing infrastructure, tremendous amount of existing clinical data from multiple robust studies and already have the informatics database and tracking to support the type of event registration and event monitoring that the FDA would like.

So we think that this framework will be not only useful but welcome and it also will be an opportunity for the U.S. to show leadership in helping provide clarity on what is meaningful and how to use the powerful technology of targeted genomic profiling for these tumor systems. We continue to be very excited to bring our test to market and more importantly to developing a world-class company and we think there is a lot upside for our business on a go-forward basis.

I would like to open up the line now for any questions. Ed, thank you and Paul?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is from Sung Ji Nam of Cantor Fitzgerald. Please go ahead.

Sung Ji Nam - Cantor Fitzgerald

Hi, thanks for taking the question. I was wondering for Gentris, you provided the aggregated results and what's the revenue growth on a pro forma basis, if you combine Gentris revenues for the prior quarter as well.

Edward Sitar

The prior quarter for Q1?

Sung Ji Nam - Cantor Fitzgerald

No, for second quarter 2013 for Gentris. I want to able to compare on a pro forma basis, because you're combining the combined revenues for Gentris and Cancer Genetics for this quarter versus Cancer Genetic standalone in the prior year quarter. Is that correct?

Edward Sitar

Yeah, so we look to the second quarter of 2014 versus the aggregate…

Panna Sharma

Standalone.

Edward Sitar

Versus the standalone.

Sung Ji Nam - Cantor Fitzgerald

(inaudible) pro-forma.

Edward Sitar

I think at this point we have not but I think we can certainly take that offline in terms of looking at the -- since Gentris is a private company, I’m not sure we have all the immediate data but we can certainly provide that for Gentris.

Sung Ji Nam - Cantor Fitzgerald

Okay, great. And then in terms of Gentris, I know I realize there is potentially lumpiness on a quarterly basis, quarter-to-quarter basis. Is there any seasonality associated with that business?

Panna Sharma

There is some and the seasonality typically is little bit counter to the clinical business which is interesting. The clinical business as you know experiences delays in Q4 and a little bit in Q1 as patients are not in the hospitals or the labs as much due to holidays et cetera. That tends to be a little bit counter in some of the biopharma work or in certain segments with biopharma work since a lot of budgets tend to be used later in the year and in fact in Q4 they try to use that budgets for finalize studies or initiate new studies or programs.

So it tends to have almost a very different pattern to this spending and we see that not only at CGI but also at Gentris as well. So we think it's kind of counter cyclical to the clinical business and the biopharma trial business.

Sung Ji Nam - Cantor Fitzgerald

Great that's helpful. And then lastly would you mind giving us a split in terms of your volume or I guess for the revenues for the second quarter coming from SelectOne versus your clinical business?

Panna Sharma

Sure we can definitely do that. So second quarter SelectOne business -- was of the main five was about $400,000.

Sung Ji Nam - Cantor Fitzgerald

Great, thank you so much. I'll get back in the queue.

Operator

Thank you. The next question is from Ben Haynor of Feltl and Company. Please go ahead.

Ben Haynor – Feltl and Company

Good morning. [Technical Difficulty] question could you talk a little bit about some of the activities that have taken place since the Gentris acquisition closed, have you started any cross-selling activities, where is that added integration?

Panna Sharma

Hey Ben, how are you?

Ben Haynor – Feltl and Company

Great.

Panna Sharma

Very good question. We have spent a lot of time in the last months on the integration activities. We have typical 30, 90, 100 day plan multiple work streams. One of the work streams I have very been very closely involved with has been with the major customers visiting sites. And in fact we also already experienced multiple RFPs requests from clinical customers both outside the U.S. as well as in the U.S. asking specifically for our combined capabilities in pharmacogenomics as well as the full oncology menu. In fact I think we probably have now at this point two or three RFPs within the first 30 days.

And these are all high six, seven figure type projects, some with existing clients that we've visited and some actually with the new clients that have been, we think that we are hoping to have work in the future with Gentris. So we think we're very hopeful, we think that our strategy of bringing these two genomic approaches together makes a lot more sense, not only for the biopharma but we also think eventually in the clinical community as well.

So we are very excited and the integration as you know, doesn't -- is not always so perfect. We do have things to work through, systems to integrate we do expect costs in terms of IP to increase, we do expect more time to be spent on work flow between the two sites but I think those are good things to invest and worry about because in the long-term it will be a much more durable business.

Ben Haynor – Feltl and Company

Great, that's helpful. And then where are you at in terms of the number of sales people exiting the quarter?

Panna Sharma

So let me answer that, Ben two part question, for CGI we’re about 16 people and at Gentris there are three people on and that’s been -- so combined we’re about at 19, 20 people in the sales and marketing -- sales in commercial organization.

Ben Haynor – Feltl and Company

Okay, great and then are you happy with the performance, particularly at community hospitals if the sales force for CGI gets ramped up?

Panna Sharma

I’d say that we had significant increase in the volume from our non-SelectOne business. Unfortunately SelectOne business, because time of trials is lower, so it kind of matches the overall growth significantly. But we are pleased, we are very pleased with the pipeline and the number of opportunities that we’re getting and we’re already seeing the effects on -- in the non-biopharma business with more and more community hospitals beginning to do trials, some of our fastest growing geographies in terms of new tests all are in geographies that we’ve not been in very active in like the Southeast, Midwest et cetera.

So I think we’re pleased in -- I think we have a major effort to continue to recruiting another four to five this quarter as well. So we’re very actively looking for additional clinical sales people to augment our existing sales efforts. Thank you.

Ben Haynor – Feltl and Company

Okay, and then a couple of quick ones on FHACT, you mentioned getting CE Mark approval, hoping to have this quarter, how do you plan on selling the ones you have the approval, will that go through distributors, how will that work?

Panna Sharma

Good question, and as I mentioned we’re pretty far along the process. So I think we’ll not have any hiccups delivering the CE mark. It opens up a significant market for us in terms of delivering the product. We already have request for orders from distributors for a CE Mark version of the product. Since we do not have an active sales organization, outside of India and the United States it will largely be through distributors and we are also in collaboration with certain big hospitals and surgery groups like [inaudible] in India, like [inaudible] Brazil, others and they might buy directly. But everything else will largely be through a distributor base.

Ben Haynor – Feltl and Company

Okay, great and then lastly on FHACT, with BioServe taking over the manufacturing does that appreciably change the manufacturing cost there?

Panna Sharma

Yeah so we expect -- we’re looking for the closing BioServe and making investments. But a driver as part of our strategy was lower manufacturing cost to ramp up. So we think it will -- near term will add 10 to 15 points of gross profit margin, longer term it could add about 30 to 40 as it scales up. So it’s pretty sizeable because of the labor cost and because of the efficiencies we get doing it at one site.

Operator

Thank you. Our next question is from Ram Selvaraju of Aegis Capital. Please go ahead.

Ram Selvaraju – Aegis Capital

Thanks very much for taking my questions. One is with respect to the clinical testing going forward? Could you give us a little bit more color as to the size and scope of the clinical trials that are not only ongoing but that you anticipate starting over the course of the remainder of this year and then if you could give us some insight as to how much of the clinical testing revenue that you expect going forward would likely be attributable to Phase 4 testing in the context of your biopharmaceutical partners?

Secondly I wanted to ask whether you’ve seen any developments or whether you expect any developments near term with respect to broadening your collaboration network with other larger players in the diagnostic sectors, like for example the relationships that you already have with Roche’s unit in Central America? And then a couple of financial housekeeping questions; firstly could you give us an overview of how you anticipate stock-based compensation expense to evolve over the course of the coming quarter?

And then secondly could you give us some perspective on your current cash position and whether you believe that if the current capital you have on hand would be able to achieve breakeven status? Thanks.

Panna Sharma

Ram, thank you. How are you?

Ram Selvaraju – Aegis Capital

Fine, thanks.

Panna Sharma

Good, so a lot of lot of questions. So I'm going to repeat some of them before we answer, I think we have one, two, three, four, four-five and then housekeeping, do you mind if we do that housekeeping first.

Edward Sitar

We could do that if you like.

Panna Sharma

Do the housekeeping first to get those done because there is -- and then after that, then I will go and answer the other questions. A little more color oriented, Ed?

Edward Sitar

Okay. So on the stock-based compensation in the current quarter Q2, there is about $750,000 of stock-based compensation in the results. If you look at our current options that are outstanding, if you look at Q3 and Q4 we think stock-based compensation would more approximate $800,000 a quarter, $1.6 million for the remainder of the year. However we're going to issue stock options to our new colleagues at both Gentris and BioServe. And it's difficult to estimate the impact of those issuances because the expense is based on several factors, including the stock price, when we actually make the grant and any difference in vesting schedules that the Board believes is appropriate. So right now I can't give you an estimate of what that impact might be. So I am going to stop here and ask you if that answers your question?

Ram Selvaraju – Aegis Capital

Yes, I mean, if you can't accurately state what the impact is going to be then that's just the way it is, but so far that's at least helpful to some extent. Thank you.

Edward Sitar

Okay, so in terms of the cash position we had total cash of $43.4 million, which is in the press release, of that $37.4 million is unrestricted and $6 million is used to collateralize our debt facility at Wells Fargo. As I talked about last quarter one of the things that we're working on is to try to change the arrangement at Wells Fargo so we don't have that direct collateral requirement. We have made good progress on that and I hope in the next 30 to 45 days to make more significant progress on that.

I think the second was that breakeven, so I will take this. I think as you saw in the combined numbers of the company on a go-forward basis we do have a small increase in the burn rate from Gentris, not significant. So we continue to believe we're more than adequately capitalized to get to breakeven. Our burn rate continues to be about the same and as we get some of these contracts that are starting you will see that burn rate could be about the same or reverse. There are going to be investments obviously to meet the framework, that's going to be proposed for the regulatory risk and given our fairly small size in terms of headcount, we'll probably be adding to the free headcount there and so that could probably offset any increases.

But we continue to feel like we have adequate capital to get to breakeven for the business and in fact the Gentris and BioServe actually accelerate us to breakeven faster because of the synergy value. Number one taking our products into their customer base and then bringing our products into India more rapidly and reducing some of our analytical and data management costs associated with a lot of data analysis in India versus doing it in the United States. So again our efforts have been strategic on two parts, certainly to drive growth in new markets but also at the same time use those assets wisely to reduce our cost of operating the business.

Edward Sitar

I think I have taken some notes in the other portion, so I am going through. Yes, we're in active talks, nothing that I can talk about this point, Ram in terms of discussions with other big global diagnostic and device companies in terms of collaborations and not only platform-based collaborations but also content development type collaborations and we're pretty far along with a number of major players.

In terms of announcements we're hoping one in Q3 and one in Q4. In terms of clinical testing, in terms of ongoing we have started one of the major trails that was delayed this year we've started that now and the other major one we expect to start closer to the end of this quarter. Phase 4 we currently have a handful of small Phase 4 efforts there underway and we have several that are in the pipeline to do monitoring and to do data collection and there is a [non-operational goal] in the CLO world they are beginning to start as well. And so yes we will have more and more Phase 4 type work but only one and pretty large one started and one smaller one that’s beginning to start as well.

Ram Selvaraju – Aegis Capital

Okay thank you very much. That’s very helpful.

Operator

Thank you. The next question comes from Thomas Pfister of RedChip Companies. Please go ahead.

Thomas Pfister – RedChip

Hey Panna, hey, Ed. Thanks so much for taking my questions.

Panna Sharma

Tom, how are you?

Thomas Pfister – RedChip

Good, how are you?

Panna Sharma

Very good.

Thomas Pfister – RedChip

Would you just mind going over some of your near term test launches that you have in the pipeline, I think you have some NGS panels that are slated to be released here very soon?

Panna Sharma

Yes, thank you for the question. Again I want to take this, Edward also talked a little bit about the NGS panels require a diagonal validation or validating from one platform to on another, so to ensure that you have analytical specificity and obviously having multiple sites allows us to do the analytical validation and [inaudible] validation easier to get to multiple sites and different platforms. In fact actually is quite exciting from an operational standpoint because of the synergy. We plan on launching the myeloid and the CLL panel, proprietary CLL panel this quarter. Those have been finalized and we’re waiting CLIA or New York State approval.

The kidney panel, which is again a proprietary panel the only one of its kind for kidney diagnosis and prediction that gives direct outcome is in the final phases of development and we expect that to be end Q4 or early of Q1 but really just depends on how quickly we can get the approvals from CLIA or New York State. So we’re on target in our organic efforts. Additionally in India we’re launching, because of the significant need for solid tumor, we’re really beginning to help and drive the solid tumor penetration panel being done by BioServe and obviously as soon as we close in the next, as soon as possible we’ll even put more efforts into that.

Let me also take this time to talk a bit about OncoSpire. We have three projects with OncoSpire and at our next kind of company update, analyst update which we hope to have at the end of September, I think so many of you have already been kind of circulated on that, we will be providing detailed update.

We’re very excited about one of the major projects which is in multiple myeloma and will augment our own efforts in multiple myeloma. We’ve -- that actually has accelerated faster than we expected. That project, initial test has been finalized and now it’s undergoing validation in multiple centers, including one in Europe and one here in the U.S. to finalize that multiple myeloma panel. And so that’s -- that will be a very unique panel, and in fact we fairly expect that to be available very shortly to go through CGI hopefully as well as through Mayo Medical Labs. And that’ll be our proprietary targeted panel for multiple myeloma and likewise in heels of that follicular probably next year and lung after that.

Thomas Pfister – RedChip

Okay, great thanks for the color there and then just a little bit of diving to the numbers here, so how should we expect R&D expenses to be growing here going forward. So I think there was about $300,000 from OncoSpire this quarter should that stay stable or how should we be viewing those?

Edward Sitar

So OncoSpire as their activity increases as they progress with the projects will likely increase. Panna I don’t know if you have any thoughts on that, on how much OncoSpire might be next quarter or perhaps quarters after.

Panna Sharma

I think there will be a slight increase not significant but we specified in this quarter another 20%, 25% increase in the activity, and our organic activity be about the same but increase in Q4 and Q1.

Thomas Pfister – RedChip

Okay, great thanks and just one last question from me here do you mind going into some detail on some of the validations on your tests that you’re currently working with some academic institutions. Some of the ones that are currently ongoing, some of the ones that maybe you are also working on?

Panna Sharma

So we try to achieve is multiple datasets. So we have multiple datasets for our CLL array and publications on that, so that’s in-market and DLBCL on follicular, we’re working on that as well. We’ll be announcing two major collaborations, probably in this quarter and again we started on this collaboration already. So it’s before, we don’t have permission to announce those. But our typical strategy is once we develop a product, get a preliminary blueprint of it, and show that it works the way we want, get the CLIA and/or New York State approval, we then try to take that and validate it with one or two or three sites.

And so that’s where we are in the process of doing both for our kidney as well as for our DLBCL currently. In FHACT, which is for cervical cancer we have a number of collaborations as you know it’s already in market. But much like in Oncotype DX, the more and more data you have the more collaborations you have, that helps drive interest, helps drive new insight and constantly improves the usage and algorithm. So there are a number of collaborations that we’re now doing with FHACT that will help both reimbursement and help with large scale data collection.

Operator

Thank you. Ladies and gentlemen that is all of time we have for questions today. I would now like to turn the floor back over to Panna Sharma for any closing remarks.

Panna Sharma

Thank you and great questions and again as you can see the acquisitions that we’ve done, we think will provide us a very long-term sustainable business. As you know the whole healthcare industry now in the U.S. but globally is undergoing a transformation and we think we’re uniquely positioned to serve. And so as we develop this company to premier oncology partner of choice for molecular diagnostics both for the clinical and for the biotech and pharma setting we think that our investors would be very uniquely positioned.

We’re investing not only in operational efficiencies at the company but also very focused on ensuring that patients have access to innovation and we continue to also invest in the innovation in terms of products and also in collaborations. So we think again this is the blueprint of developing long-term sustainable genomics business that will truly impact the outcome and treatment of cancer.

Thank you very much and we will be presenting today at the 1:30 at the Canaccord Genuity Growth Conference in Boston. So we’ll be obviously presenting there for investors that are there or interested in listening in. Thank you.

Operator

Thank you. Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!