Executives: Paul Kinnon – President and Chief Executive Officer Leon Richards – Chief Accounting

Officer
Analysts: Bill Bonello – Craig-Hallum Capital Group

LLC
Operator: Good day, and welcome to the Transgenomic Second Quarter 2015 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 call will be recorded and will be accessible both, by phone and on the Internet. For information, please refer to the conference call press release on the company’s website 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 risks and uncertainties, Transgenomic's actual result 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 time. 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 will now turn the call over to Transgenomic's President and Chief Executive Officer, Paul Kinnon. Please go ahead, sir.

Paul Kinnon: Good afternoon everyone and thank you for joining us today’s second quarter 2015 conference call. I’m joined by our Chief Accounting Officer, Leon Richards. I will provide an overview and update of our progress during the quarter, and Leon will then briefly review the quarter's financial results in greater detail. Since the start of the second quarter, we have made tangible progress in strengthening our strategically important businesses. We also achieved major milestones in our transformation into an advanced technology company, primarily focused on commercializing the many applications of our breakthrough Multiplexed ICE COLD-PCR technology.

First in the second quarter, net sales were up 11% year over year excluding the impact of our divested Surveyor business. This marks our second consecutive quarter of double-digit increase in net sales. In the key Laboratory Services segment, we recorded a healthy 26% increase in sales compared to the year-earlier period with higher testing volumes which are mainly driven by our patient testing and services businesses and the Laboratory Services segment which is a key area we have targeted for growth. The launch during the second quarter of our new genetic test for the diagnosis of the devastating genetic disorders leukodystrophy is a good example of the focused investments we are making in to grow these businesses. In the second quarter, we reported an expected decrease in the bioconsumables and instrument sales compared to the second quarter of 2014, primarily as a result of our divestitures of Surveyor product line last year and the delayed shipment of a number of instrument orders approximately $300,000 from Q2 into Q3.

The continuing shift from our reliance on instrument service based revenues to a focus on revenues differ from product, service and licensing applications of our ICE COLD-PCR technology is consistent with our ongoing strategy to transform Transgenomic into a high technology biotechnology company, enabling widespread adoption of genomic based precession medicine. We believe that strategic path waspotential for robust revenue growth and increasing profitability in the near future. The improved gross margins, we reported in the second quarter, 41% of net sales compared to 35% in the year earlier period provide an additional evidence of our strategy is beginning to work. We’re optimistic that margins will continue to strengthen as our product mix increasingly shifts us to high margin segments. During the second quarter, we were again successful in reducing operating expenses down by almost 10% compared to the same period in 2014.

We intend to continue to restrain those expenses not directly associated with commercialization of our Multiplexed ICE COLD-PCR products. The combination of higher sales, better margins and lower expenses enabled us to reduce our loss in the second quarter along with the opportunity to begin the time when we can aim to achieve profitability. We are pleased with the positive financial trends that we’ve reported in the first two quarters of 2015, but the most exciting news this quarter was our encouraging progress in commercialization and Multiplexed ICE COLD-PCR. We began the quarter with the announcement of our Multiplexed ICE COLD-PCR technology was now available as part of our Biomarker Identification services business, making available to facilitate and accelerate the biomarker discovery and eventual FDA approval of our pharmaceutical and biotechnology company’s customers’ drug candidates. The rapid advantage and development of targeted and precision therapies for cancer and other conditions gives biopharmaceutical firms a big incentive to identify the biomarkers needed from these applications and approvals.

Multiplexed ICE COLD-PCR provides important advantages to biomarker discovery and we are making progress in getting the word out of many potential customers and partners, who could benefit from access to this technology along with our years of expertise in Biomarker Identification in our Omaha Laboratory. This was followed by a second launch at the high profile ASCO Annual Meeting in May, where we introduced our first Multiplexed ICE COLD-PCR CLIA mutation detection test to enable more efficient and informed cancer diagnoses, better treatment decisions and ongoing patient monitoring. This leverages the ultra-high sensitivity of our ICE COLD-PCR technology to deliver highly accurate results from almost any type of patient sample. The first tests are for the detection of a number of EGFR mutations with actionable consequences for the treatment lung and colorectal cancer. The sensitivity and the accuracy of our ICE COLD-PCR enhanced tests and their ability to ability to work with any type of patient sample make it possible to broadly monitor how patients tumors genetically respond to therapy, thereby facilitating and accelerating the implementation of past life treatment regimes over the cause of the disease.

And we’re also proud of the fact that we launched the first of these ICE COLD tests 12-months ahead of original plan. A few weeks later, we filed some of the major launch with the announcement of our plans to introduce the pipeline of ICE COLD assays targeting cancer during 2015, including the release of up to six new lab based cancer tests, targeting actionable mutations in melanoma, lung and colorectal cancer and we are planning to achieve this in 2015. Detects would include single test in multiple gene panels and we are useful with liquid or tissue samples. These new tests will be immediately available by diagnostic use throughout the U.S. saliva CLIA laboratories.

We are starting to see traction of these tests and development of the pipeline of these additional tests is progressing well. We are targeting ongoing launches of these new tests on a regular basis over the remainder of the year and once the revenues are mature, we will share these figures with you as well. Additionally, as we promised by the end of the second quarter, we had launched our ICEme Mutation Enrichment Kits based on ICE COLD-PCR technology, which is available for research used to cancer researchers worldwide. The initial menu includes 17 clinically actionable mutations or exomes, and the uses of single mutation test or in combination. The kits are customizable to meet researchers’ specific needs and they are validated and available for use on all major sequencing platforms.

To recap, since the start of the second quarter, we have achieved three major milestones for our ICE COLD-PCR technology. These include launching of our multiplexed COLD-PCR Biomarker Discovery services, launching our initial portfolio of Multiplexed ICE COLD-PCR detection tests through our CLIA laboratory and launching our ICEme kits that enable researchers around the globe to immediately part ICE COLD-PCR to use the net as a research. We believe we now have an exciting emerging pipeline of Multiplexed ICE COLD-PCR-based products and services to researchers, physicians, and patients. Building on this momentum earlier this month, we announced the expansion of our pilot clinical study in collaboration with four leading global oncology firms to validate the accuracy and utility of ICE COLD-PCR-based liquid biopsies to guide and monitor cancer clinical trials. The results of this study could serve as a critical validation of our liquid biopsy technology and we believe that the fact that the multiple global oncology leaders are currently participating in this study is very encouraging for the future of ICE COLD-PCR.

Additionally, last week, we announced the establishments of a Clinical-Commercial Advisory Board from oncology applications of our Multiplexed ICE COLD-PCR products. The CCAB members are distinguished crew and include Dr. Scott Patterson, a recognized expert in the application of genetic biomarkers of cancer drug discovery, who is currently at Gilead; Dr. Bruce Johnson, Chief Clinical Research Officer at the renowned Dana-Farber Cancer Institute and molecular pathologist Professor Paul Waring of the University of Melbourne, who is a pioneer in the application of genomic technology to cancer diagnostics and drug development. This is an exceptional group and we believe is further evidence of the excitement in the industry around the potential of Multiplexed ICE COLD-PCR to help transform the diagnosis and treatment of cancer and we expect to announce additional CCAB members soon.

In parallel, we are also pursuing our key initiative to establish a variety of strategic partnering and licensing relationships with sequencing platform on all the other companies worldwide. These types of deals take considerable time to complete. But the initial feedback from our outreach efforts has being very encouraging and we remain confident that we will have at least one major agreement in place this year, with the potential to generate the first material revenues for the company from ICE COLD-PCR. And we will keep you everyone posted on our progress towards this. We believe we are on track and in some way ahead schedule in realizing the key elements of our plans for Multiplexed ICE COLD-PCR in the company.

We believe our progress in advancing ICE COLD-PCR technology is also contributing to our ability to attract outstanding professionals to Transgenomic. For example, during the quarter, we continued to strengthen our board with the addition of new director Mya Thomae, Mya brings tremendous insight and relevant experience to our board and we’re delighted to have her as part of our team. Mya had a premier industrial regulatory consultancy firm that was acquired by worldwide sequencing leader at Illumina last year, and she is currently oversees Regulatory Affairs for Illumina. As you know, strengthening our cash position has been a continuing priority and we are pleased to complete approximately $3 million of private investment during the quarter. We’re also continue to pursue commercialization and monetization of certain assets within the company, which we expect to contribute to our cash resources as these deals finalized and closed this year.

And we will continue to keep you informed on progress here. This has been a pivotal and positive six months for the company. And as we look to the future, we’re optimistic that we will generate grown revenues from the revitalization of our current businesses and increasingly from our new Multiplexed ICE COLD-PCR based products, services and partners. With that I’ll hand the call over to Leon. Leon?

Leon Richards: Thank you, Paul.

I am going to start today with our analysis of our second quarter results. Net sales for the second quarter of 2015 were $7 million compared with $6.8 million for the same period in 2014. Net sales for the second quarter 2015 for our Laboratory Services segments increased $1 million or 26% as Paul mentioned earlier as compared to the second quarter of 2014. The increase came in both the patient testing portion and contract laboratory services portions of that business segment. In Genetic Assays and Platform segment, second quarter 2015 net sales declined by $700,000 when compared to the same period last year.

But also as Paul mentioned, the Genetic Assays and Platforms segment was negatively impacted by the divestiture of our Surveyor product line during the third quarter of 2014. Gross profit was $2.9 million or 41% of net sales, compared with gross profit of $2.4 million or 35% of net sales in the same period in 2014. The increase in gross profit was a result of higher Laboratory Services sales, which resulting in a 54% gross margin and that was partially offsets by decreased gross profit in the Genetic Assays and Platform segment, again being impacted by the Surveyor product line and about $300,000 adjustments made for inventory obsolescence during the quarter. Operating expenses were $5.7 million during the second quarter of 2015, compared to $6.3 million in the prior year. The decrease was primarily due to lower – some lower personnel costs, lower operating supply costs, lower stock compensation costs in the current quarter.

In summary, the net loss for the second quarter of 2015 was $3.3 million or approximately $0.30 per share, compared with a net loss of $3.9 million, or $0.57 per share, for the second quarter of 2014. Modified EBITDA, showed a loss of $2 million for the second quarter of 2015 compared to a loss of $3.2 million for the same period in 2014. And you can find a reconciliation of Modified EBITDA and net loss in our earnings release. Cash and cash equivalents at the end of the quarter were $2.3 million compared with $1.6 million at December 31, 2014. As mentioned on our last call during the first quarter of 2015, we completed financing that raised approximately $7 million in net proceeds and additionally we’ve recently completed a private placement financing in July that raised approximately $2.7 million in net proceeds.

As for the year-to-date results, net sales for the six months ended June 30, 2015 were $13.6 million compared with $13 million for the same period in 2014, a 4% increase. Net sales for the Laboratory Services segment increased by 29% year-over-year, again resulting from increase in both the patient testing and contract laboratory services portion of that segment that increase was partially offsets by a 30% decrease in revenues in Genetic Assays and Platforms as a result of lower instrument sales along with the impact on the six months from the previously mentioned divestiture of Surveyor product line during the third quarter of 2014. Gross profit of $5.8 million or 43% for the six months ended June 30 compared with gross profit of $4.9 million or 38% of net sales for the same period in 2014. Gross profit increased $2.2 million in the Laboratory Services segment as a result of the increased test volumes, lower manufacturing costs and resulting in approximately 55% in gross margin for that business segment. Partially offsetting that [indiscernible] in the Genetic Assays and Platforms segment was about $1.2 million and again impacting that margin was the sale of the Surveyor product line divestiture and some lower instrument sales.

In the first six months of 2015, operating expenses were $11.3 million compared with $12.4 million in the prior year period. Again the decrease included some lower personnel costs, some lower operating supplies, and lower stock compensation costs. Partially offsetting those lower costs was higher bad debt provision in the current year compared to the first six months of 2014 of approximately $400,000. Net loss for the first half of 2015 was $6.3 million, or $0.65 per share, compared with net loss of $8.1 million, or $1.17 per share, in the first half of 2014. Before I turn the call back to Paul, I just want to indicate on balance sheet, the company has accumulated undeclared dividends on its Series A and Series B shares.

Previously, the company has reported that as the liability, but during the – of about $3.1 million. But during the quarter, a change in our accounting indicated that we should remove that liability and credit our equity. So you will see a large change on the balance sheet for that dividend – accumulated dividend payable at $3.1 million coming off of the liability and going back into our equity. And with that, I’m going to turn the call back to Paul.

Paul Kinnon: Thank you, Leon.

And at this point operator, we are ready to open the call for questions.

Operator: Thank you. [Operator Instruction] We’ll take our first question from Bill Bonello [Craig-Hallum Capital Group LLC]. Your line is now open.

Bill Bonello: Good afternoon guys, just a couple of questions.

Paul, I was hoping that maybe you could elaborate a bit more on the pilot clinical study to validate the accuracy and utility of ICP for using clinical trials. May be tell us a bit more about endpoint for that study and about the specific role that the biopharma firms are playing and then may be give us some sense of timing and any plans for presenting or publishing data that comes out of those trials.

Paul Kinnon: Sure Bill Bonello. And the four global companies are providing us with liquid biopsy samples of 1,000 plus samples for us to analyze in-house and in some cases they’re also carrying out the analysis in-house with our kits that we sell commercially. And we’ll be starting that study – we’ll be starting that study this quarter and we’ve actually completing it in this quarter as well and providing the data back to the pharma companies.

The goal being obviously is for them to validate the technology and the benefit of using it to analyze and interpret the data generated through liquid samples. And then we will be using some of that data in some sort of formatting of public presentations whether its PowerPoint posters or conferences and we’ll look at whether or not we can actually produce a white paper to show the validation of the technology as well in the marketplace. And then the benefit from our point of view as well as once this is proven within the hands of the customers and with our data then they’ll also give us more business and start growing their business in terms of giving us clinical trial work, but will eventually end with ICE COLD being used as a companion diagnostic longer-term in the projects or projects with other partners as well.

Bill Bonello: Okay, that’s helpful. And just – I mean when you say they’re trying to validate the utility for using clinical trials and what specifically do they want to see to confirm – to get comfortable for adopting the technology for a trial?

Paul Kinnon: Well, it varies by client in terms of what they’re looking for, in terms of what mutations, what level of mutations and what stage of samples have been collected at.

It could be – they’re looking at using in a study for a drug that’s been used early for identification of early stage cancer or latest stage. So, they’re looking at which mutations are present. And all the companies are also looking at and possibility of using it to identify unknown and known mutations or to stratify populations of their studies. So one of the examples could be is as with Amgen in the past, we’ve done a stratification study to say this population should not be given the drug therefore don’t include them in the study. We can do that more efficiently with blood samples and testing because we can get lower level of mutations.

Therefore, the pharma company when they go to FDA, they eliminate that population before they do the study, therefore it’s a clean test, therefore it gets through the FDA quick and more efficiently. So there is a variety of different applications that they’re looking at. It’s not so much there looking at and validating do we detect low level mutations, it’s really targeting what their application is and what their utility for the technology is.

Bill Bonello: Okay, that’s helpful. And just so I understand are they – is this a process that that they’re providing you the samples that’s their contribution, and then you’re not charging them for the data that you’re – or the testing that you’re doing or the data that you’re providing back to them that suggest in essence sort of part of the commercialization strategy?

Paul Kinnon: We haven’t really disclosed what the commercial terms are, but in essence we’re working with them to allow them access the technology quickly and rapidly.

They are providing us their samples whether they’re new samples or current samples they have in storage from clinical studies or from their own collections, but it’s a way of rapidly penetrating the market for us and getting commercial adoption with them and building a pipeline of strong commercial partners for us longer term as well.

Bill Bonello: Okay. And then on the Clinical Advisory Committee, can you maybe tell us a little bit more about that and some of the specific objectives for that group and what they will be doing?

Paul Kinnon: I mean well, you know, what we’re trying to do is pull together some of the – that what we think of the strongest candidate in the market, they are thought leaders in the opportunities and the applications for liquid testing and biopsies, who have applications in the real world, who will understand which genes and which exons and which mutations are relevant one. And the reason is it’s more of a Clinical-Commercial Advisory Board is, we are looking at how that’s helping us navigate the – sort of the rapidly expanding marketplace to prioritize which is the best market to go after, which is the best gene to go after or other areas that we aren’t developing yet that we should be considering. So really it’s a net – less scientific review, more commercial with scientific guidance.

Bill Bonello: Okay that’s great. And then just Leon in thoughts on sort of cash burn going forward, I mean, it looks like you’re burning sort of $3 million, $3.5 million a quarter, what’s the outlook for the back half of the year?

Leon Richards: That’s a little bit high, Bill. So for the second quarter, the cash burn from operations is going to be reported in the Q at about $2.5 million.

Bill Bonello: Okay.

Leon Richards: And that’s the number that we are obviously not thrilled, still $2.5 million, but it is down from what we burned in Q1.

We continue to monitor any expenses as Paul indicated earlier that are not ICE-COLD related and anything that is – anything that we can do to reduce the cash burn, it is what we’re working on. So $2.5 million is our – the number we hit of Q2 and we’re looking to keep at that level and less.

Bill Bonello: Okay, great. Thank you very much.

Operator: [Operator Instructions] And ladies and gentlemen, this will conclude our question-and-answer portion of the call.

I’d like to turn it back over to management now for additional closing remarks.

Paul Kinnon: Thank you, very much. I hope we’ve communicated our enthusiasm about the progress we are making in revitalizing Transgenomic along with our excitement about the major milestones we’ve achieved so far this year, as well as there – those soon to come in successfully commercializing ICE-COLD PCR during the next 18 months with its potential to transform both our company and emerging filed to precision medicine. We look forward to keeping you apprised of our progress and we will do so in the future.

Operator: We appreciate your participation.

You may now disconnect. Thank you and have a great day.