Executives: Paul Kinnon - President & CEO Leon Richards -

CAO
Analysts: Bill Bonello - Craig-Hallum Joel Marcus - Network 1

Financial
Operator: Good day and welcome to the Transgenomic First Quarter 2016 Financial and Business Review Conference Call. All sites are currently in a listen-only mode. Please note there will be a question-and-answer session later on in the call. Also note, today’s conference will be recorded and will be accessible both by phone and on the Internet. For more information, please refer to the conference call press release on the Company’s Web site, transgenomic.com, for further details.

The Company has asked that I read the following statement. Management will make comments today that contain forward-looking statements. Forward-looking statements are any statements that are made that are not historical facts. These forward-looking statements are based on current expectations of the management team, and there could be no assurance that such expectations will come to fruition. Because forward-looking statements involve risk and uncertainties, Transgenomic’s actual results could differ materially from management’s current expectations.

Please refer to the press release, the Company’s 10-Q, 10-K, and other periodic SEC filings for information about factors that could cause different outcomes. The information presented today is time sensitive and is accurate only at this date. If any portion of this call is rebroadcast, retransmitted or redistributed at a later date, Transgenomic will not be reviewing nor updating this material. I’ll now turn the call over to Transgenomic’s President & Chief Executive Officer, Paul Kinnon. Please go ahead, sir.

Paul Kinnon: Good afternoon, everyone, and thank you for joining us for today’s Q1 earnings conference call. I’m joined by our Chief Accounting Officer, Leon Richards. I’ll provide an overview and an update of our progress, and Leon will then briefly review the quarter’s financial results in greater detail. This will be a short call due to the close proximity to our full year earnings call last month. As we have discussed in our full year earnings release on the call, we made the decision to carry out a strategic review of the Patient Testing business unit in the first quarter that resulted in a decision to suspend testing of our CLIA Laboratory in New Haven.

This process was time consuming but is almost completed now. Suspending operations of this facility has allowed us to reduce the operating expense of the Company significantly, resulting in savings of over $1 million a month, while enabling us to focus on accounts testing at our CLIA Laboratory in Nebraska. Auctions for these legacy business unit assets from the Patient Testing business, which do not include TBIO’s ICE COLD-PCR based cancer tests are currently being completed. The drive to exit legacy businesses has had a major effects in the Company’s operating and financial results. The Genetic Assays & Platforms business and Patient Testing businesses have been classified as discontinued operations.

Information presented for current and prior quarter periods in the financial statements has been modified to reflect these as discontinued operations and on a go forward basis the Company will only report revenues associated with ICE COLD-PCR focused businesses. Exiting these low growth money losing legacy businesses has been substantially reduced to our burn rate, importantly as a slim down high technology innovate enterprise, we are now able to focus our full attention to commercializing our ICE COLD-PCR technology. As we noted in our April call, we’ll see the remainder of 2016 as pivotal to the success of ICE COLD-PCR, building on the educational and [marking] activities now under way, as well as the recent release of compelling concordance data that helps validate the utility, the value and the enabling nature of ICE COLD-PCR. Rapidly increasing interest in activity in the liquid biopsy field reinforces our belief that ICE COLD-PCR has potential to be the core enabling technology for liquid biopsies. We should expect it to fundamentally change medical practice and drive adoption of personalized and precision medicine.

We continue to believe that this focus is, excuse me -- we continue to believe that this focus represents a realistic opportunity to achieve robust growth and ultimately retain substantial values for our shareholders. And we also believe that we made good progress from 2015 in building a strong foundation for this future business. Broader commercialization is expected to provide increasing revenues and would also help fuel expansion of the licensing and partnering strategy we’re perusing, in order to realize the full potential of this superior technology. As noted in our press release net sales for the first quarter of 2016 was 0.02 million as compared to 0.07 million for the same period in 2015. The 0.05 million decrease effects phasing of contracts in the first quarter due to client sample availability issues, a situation the Company expects to be transitory.

We see this as a temporary low in our revenues as the sample volume is expected to pick up in the remainder of the year and as our cancer CLIA testing and ICE COLD-PCR sales should begin to ramp-up. As we have stated previously it’s important to provide access to the ICE COLD-PCR technology as broadly as possible. In order to achieve this, we will continue our efforts to strategically partner with sequencing platform companies, life science companies, molecular testing labs and service providers. We feel confident that we have assembled a strong pipeline of potential partners. And while we have not yet achieved our goal of signing off our first major partner, now that we have a compelling concordance date we anticipate doing so in the next several months.

How do we achieve the bright future we believe is possible? Firstly, by creating a solid foundation for expansion of our ICE COLD-PCR commercialization and licensing activities. A key element is compelling data providing scientific validation of ICE COLD-PCR. We took a giant step forward achieving this with the release of our most recent concordance study showing 100% concordance between ICE COLD-PCR liquid biopsies and conventional tissue testing results, notably ICE COLD-PCR also identified more tumor mutations than conventional methods. The concordance study confirmed the ICE COLD-PCR in which -- in testing identified all mutations detected by standard tissue biopsy in PCR. Even more importantly, ICE COLD-PCR also identified additional mutations that were missed by conventional tissue biopsies.

The study confirmed ICE COLD-PCR ultra sensitivity enables to use plasma-based liquid biopsies for cancer mutation detection, replacing costly and invasive tissue biopsies and enabling ongoing patient monitoring while also providing more accurate and informative results to oncologists and their patients. We also expect to be able to release additional compelling ICE COLD-PCR data at the high profile ASCA Meeting in Chicago next month. Additionally, we will soon be announcing the expansion of our current ICE COLD-PCR cancer testing offering quoting more amplicons and mutations along with the product release that gets us to approximately 200 actionable and clinically relevant cancer mutations by the end of next year, which will be fully customizable to meet customers’ needs. All of these activities have helped position us and establish a foundation for TBIO to be become a leader of liquid biopsies in precision medicine through our own sales and by our strategic and growth-based licensing and partnering strategy. And now that our legacy businesses divestments are almost complete we believe that TBIO will be more focused and an aligned organization that is better able to deliver on the promise of ICE COLD-PCR to the precision medicine market.

Overall, we believe this strategy is being well received in the market by potential clients and partners. As has been the performance of our ICE COLD-PCR product all this gives us confidence that our strategy is right now and the right one. Overall, we are pleased with the increasing momentum we are achieving and believe we are on track to realize the key elements of our plan for ICE CLOD-PCR into Transgenomic. And with our new streamlines structure, we’re now able to focus our full resources and energies on commercializing the technology whose versatility and ease of use we believe are perfectly aligned with the needs of the emerging high growth market for liquid biopsies. With that, I’ll now hand the call over to Leon.

Leon?

Leon Richards: Thank you, Paul. As noted, 2015 was a transitional year for the Company. From a financial reporting perspective, the revenues expenses associated with the GAP business and the Patient Testing business are no longer included in the Company’s results. And the information presented for both the current and prior years in the financial statements has been modified to reflect both those units as discontinued operations. From a continuing operations basis net sales for the quarter ended March 31, 2016 were 200,000 compared with 800,000 for the same period in 2015.

This $500,000 decrease primarily reflects lower contract laboratory services related to the phasing and timing of some receipts of samples for two contracts in particular. Which combined have remaining revenue recognition potential of approximately $1 million. Gross profit reflects a loss of $300,000 compared to a profit of 300,000 for the same period in 2015. The loss of the gross profit line reflects the aforementioned lower revenue coupled with a one-time milestone expense payment related to product commercialization. The Company anticipates that gross profits will increase as revenues increase and providing additional coverage of the current fixed operating cost.

Operating expenses for the year were 2 million compared with 2.3 million in the prior year period. This $300,000 decrease in operating expenses reflects lower general and administrative expenses primarily associated with legal and other professional fees, and some lower research and development costs in the current year, primarily related to the operating supplies used in that research and development. In summary, the net loss from continuing operations for the first quarter ended March 31 was 2.1 million or $0.10 per share compared with a net loss of 2.3 million or $0.28 per share for 2015. Modified EBITDA which is a non-GAAP measure that the Company views as appropriate and sound measure of the Company's results was a loss of 2 million for 2016, compared to a loss of 1.8 million for the same period in 2015 and a reconciliation of the net loss to modified EBITDA is presented in our earnings release. Cash and cash equivalents were 200,000 at the end of March 2016 compared with 400,000 at December 31, 2015.

And with that I will turn the call back to Paul.

Paul Kinnon: Thanks Leon. In recap Transgenomic has made significant progress to becoming a focused precision medicine Company we've been targeting in the past 12 months. We significantly advanced our ICE COLD-PCR commercialization strategy with the launch of multiple CLIA tests for cancer. We signed our first licensing deal powered by ICE COLD-PCR for clear diagnostic testing and we continue to work with our pharma partners towards developing scalable ICE COLD-PCR based services business.

We accomplished this while delivering on our promise to divest our non-strategic asset thereby significantly reducing our expenses and generating some non-dilutive cash. At this point operator we're ready to open the call for questions.

Operator: [Operator Instructions] And we'll take our first question from Bill Bonello with Craig-Hallum. Please go ahead.

Bill Bonello: A couple of questions on the outlook for commercialization going forward of ACP, I think on the Q4 call you talked about one; expecting to announce a licensing agreement in the next couple of months; and two, expecting to announce a large distribution agreement for kits outside of the U.S., I am wondering if you could give us any sense of where you're at with those initiatives?

Paul Kinnon: Yes Bill there's been no change I know it's been three or four weeks since we spoke to the full year earnings and stuff.

We have a strong pipeline of partnerships, distribution deals and licensing deals around ICE COLD that we are aggressively working on to close. And as we have stated, we expect to announce this before the end of the quarter. It has only been a few weeks, but we are going through all the various stages of getting these things closed. We're also preparing for ASCO in a couple of weeks in Chicago where we'll have a good presence in the process. So we're working through them.

We still believe they'll get closed before the end of the quarter and that's where we stand at the moment.

Bill Bonello: And just to be clear is that on both the distribution and the licensing agreements?

Paul Kinnon: Yes.

Bill Bonello: Okay, great.

Paul Kinnon: And Bill the distribution agreement isn't outside of the U.S. it's actually in the U.S.

Bill Bonello: It is, okay, great thanks. And then have you had a chance to look at all the recent Medicare guidelines on -- creating guidelines for circulating tumor DNA validity studies, it seems like we're starting to see some preparation being laid for reimbursement on that front and more consistency in terms of what providers will have to show, I am just curious if you've had a chance to look at those and do you have any sort of sense where you fit in there?

Paul Kinnon: Yes, I mean we've looked at them, we're aware of them and obviously with Mya Thomae on our Board of Directors as well obviously we're not influencing them, but we're aware of what's going on, which is Mya Thomae and the people there because obviously we listen to what’s being said and talked about in a non-confidential basis. The guidelines are important and critical for the adoption of precision medicines, especially around circulating free tissue and again because we’re using the multiple strategies and we’re using commercialization, where we will partner with the instrument providers, we’ll partner with the laboratory labs, we’ll partner with the molecular testing labs, whether it’s a commercial institute like LabCorp or Quest or even, Johns Hopkins, the Mayo, Institute of Cancer Research we have institutes or laboratories, where their own molecular testing, we can work with them. We are basically just the enrichment tool they use in the process, so in reality from a FDA point of view or even a code point of view for CPT code we’re just an enrichment step in the process. And we’ll basically be enabled more as those tactics are more widely adopted.

But we just fit inside the workings and the systems that everybody else is doing, so it won’t affect us and it will accelerate the business I think can accelerate the adoption of the marketplace and I think more and more professionals in the industry are aware of it now and we see that demand starting to come through as well.

Operator: [Operator Instructions] We will go next to Joel Marcus with Network 1 Financial. Please go ahead. Joel Marcus : I -- and listen, this is my opinion but I mean I feel that you have got a tremendous intellectual property base here, and a tremendously valuable technology, but obviously at this point in time, we’re a little bit cash constrained. Walk us through, how this works, can you make the expenditures to educate people to this, to do what you need to do to get the product out there, just could you walk us through, how we get from here to there because, if you can commercialize this.

I mean I think you have got a tremendous home run, in your intellectual property and in this Company. And number two, could you compare our technology to competing technologies in what regards are we superior to that technologies and why should providers adopt our technologies to use moving forward to identify cancer, cancer genetics, optimal treatments et cetera?

Paul Kinnon: So yes from a point of view in the short-term, we reduced our burn rate down to about 1.3 a quarter and it’s positive from that point of view. We’re still transacting some of the Patient Testing business unit and it has taken a little bit longer than we would like, but that is always the case. We are generating funds from the Patient Testing business, we’ve generated probably around $1 million of funds, non-diluted from those transactions and we continue to look to other parts of the Patient Testing business and we still are generating cash from the outstanding AR from the Patient Testing business, that contributed probably around $1.7 million of non-diluted funding, which is collections on the old Patient Testing business from last year. So that’s the cash coming in.

In terms of the time to develop the business yes, I mean we talk about the distribution and licensing deals that we’ve got, they are at various stages and it’s always difficult to elaborate on it, we’ve got a large funnel of activity, we have got a lot of interest in the marketplace, whether it’s pharma companies, life science companies or molecular testing labs and the molecular testing labs has two categories, there is the big guys like the LabCorp, Quests and is also the guys who are smaller labs. But also the molecular diagnostic testing labs, which are part of institutes, whether it’s a Innovate in San Francisco, whether it is the Cancer Center of America, whether it’s the Mayo or at labs like that. They have their own molecular testing labs to do 5,000, 10,000 may be 20,000 patient samples a year and they are the labs that we’re talking to. So that commercial process in ongoing, it takes time but the adoption is there. So we have got a sort of challenge of working through those relationships.

In terms of the compelling nature of the business and the second part of your question, yes I mean comparing our technology with other technologies, we sometimes and we have said in the past that we consider ourselves a bit like the android compared to apple. Most institutes and most companies are saying, you have to come to us, you have to pay a premium and we’ll run a test for you or you have to buy equipments and spend a lot of money. We are simply a chemical that you buy, that’s very cheap, that will increase your change or change your cost may be about $30 to $40 per test and then we give you the ability of super charging the assay to give you a more sensitive result. We work on every platform and every system as the platforms in the systems improve overtime, we improve overtime, we are not sort of here now for the next two years and then gone in three years time. So really it’s a chemical that supercharges the assay that gives you improved sensitivity without increasing the cost of the assay, without taking extra time.

And it doesn’t have a capital investment period or a costing incurred on it. So we do think it’s compelling from a technology point of view as the value proposition is there, the adoption rate is a little bit slower than we would like. We are starting to get adoption and we do believe this year we will be transformational and we do think the revenues will start to increase for our CLIA business, for our kits and for the licensing and the royalty part of the business, as we go through this year and as I said we are looking at ways of generating cash to make sure that we have got enough runway to do that. But yes, we are confident from that point of view. Did that answer both questions Joel?

Joel Marcus: Okay listen I know I shouldn’t say this, but I think that’s one of the greatest single answers I have ever heard on a conference call.

It tremendously increased both my understanding of the Company, my understanding of the technology and the confidence that we are going to get there, so thank you very much.

Operator: And ladies and gentlemen this will conclude our question-and-answer portion of the call. I'd like to turn the call back over to Paul Kinnon for any additional or closing remarks.

Paul Kinnon: Thank you very much, despite our challenges we are encouraged by the progress that we are making in advancing commercialization of ICE COLD-PCR, with its potential to transform both our Company and the emerging field of precision medicine. We look forward to keeping you apprised of our progress and thank you for joining our call.

Operator: And ladies and gentlemen this will conclude today’s program. Thanks for your participation. You may now disconnect and have a great day.