Earnings Call Transcript - VNRX Q1 2022

Operator, Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to VolitionRx Limited's First Quarter 2022 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference call will be open for questions. This conference is being recorded today, May 12, 2022. And now, I would like to turn the conference call over to Scott Powell, Executive Vice President of Investor Relations. Please go ahead.

Scott Powell, Executive Vice President of Investor Relations

Thank you, and welcome, everyone, to today's earnings conference call for VolitionRx Limited. This call will cover Volition's financial and operating results for the first quarter of 2022, along with a discussion of our recent activities and key upcoming milestones. Following our prepared remarks, we will open the conference call to a question-and-answer session. Also on our call today are Mr. Cameron Reynolds, President and Chief Executive Officer; Dr. Tom Butera, Chief Executive Officer of our Volition Veterinary subsidiary; and Terig Hughes, Chief Financial Officer. Before we begin, I'd like to remind everyone that some of the information discussed on this conference call will include forward-looking statements covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our beliefs as well as assumptions we have used based upon information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties and assumptions. Actual future results may vary significantly based on a number of factors that may cause the actual results or events to be materially different from future results, performance, or achievements expressed or implied by these statements. We have identified various risk factors associated with our operations in our most recent Annual Report on Form 10-K, quarterly reports on Form 10-Q, and other filings with the Securities and Exchange Commission. We do not undertake an obligation to update any forward-looking statements made during the course of this call. I'd now like to turn the call over to our President and Chief Executive Officer, Mr. Cameron Reynolds.

Cameron Reynolds, President and Chief Executive Officer

Thanks, Scott, and thank you everyone for joining Volition's first quarter 2022 earnings call today. We especially appreciate your time given the busy earnings call season. We will commence the call with our financial report and then, given all the activities surrounding Volition's debt, we are delighted to be joined by Dr. Tom Butera, Chief Executive Officer of Volition Veterinary. I will wrap up with a quick update on our exciting ongoing work. But first, just in case you missed previous announcements, we are hosting our 2022 Capital Markets day tomorrow, May 13 at 10 a.m. U.S. Eastern time. You might just be in time to register to attend in person at the NYSE or else you are very welcome to join via the webcast. Details for both can be found on our website volition.com in the Investor Relations section. Given the capital markets presentation tomorrow and indeed the fairly recent filing of the 10-K, we aim to keep this call quite tight, but as usual, we'll be happy to answer any questions you might have. And with that, I will hand over to Terig for our financial update.

Terig Hughes, Chief Financial Officer

Thanks very much, Cameron, and thank you everyone for joining our earnings call today. I will now provide a summary of the key financial results for the quarter ended March 31, 2022. We ended the quarter with cash and cash equivalents of approximately $23.7 million compared with $20.6 million at the end of 2021. This cash position includes an upfront milestone payments of $10 million received from Heska Corporation in relation to the licensing and supply agreement executed with them on March 28, 2022. Moving on to the P&L, while we continue to manage our costs carefully, as expected, the overall level of expenditure has increased in comparison to the first quarter of 2021. Total operating expenses for the quarter was $7.8 million compared to $6.1 million in the first quarter of 2021. This increase was primarily the result of increased expenditures in the sales and marketing and general and administrative functions, mainly due to higher personnel costs primarily as a result of additional headcount as well as higher stock-based compensation charges. Overall, research and development expenses were lower in the first quarter of 2022 compared to the first quarter of last year. Revenue reported in the first quarter of 2022 was $114,000 versus $25,000 for the first quarter of the prior year. Year-on-year increase was primarily from the initial sale of Nu.Q Discover to customers in Europe, but also included the first sale of our Nu.Q Vet tests to SAGE in Singapore as well as sale of H3.1 Q. Net loss for the quarter was $7.7 million compared to $6.1 million for the three months ended March 31, 2021. As mentioned previously, we received an upfront milestone payment of $10 million in cash from Heska Corporation. This was not only a milestone payment but also a company milestone. The combination of much work across the Company has truly marked the beginning of our commercial journey. It is worth noting that whilst this payment has been fully received and it's non-refundable, it has not been recognized as revenue in the period and has been accounted for as deferred revenue in accordance with the relevant accounting standard ASC 606 revenue from contracts with customers. Given the complexity around ASC 606 in relation to our agreement with Heska, it is difficult to predict our revenue outlook at this point; however, we aim to update you in the near future. As we discussed on the previous call and plan to cover in some detail during our capital markets event tomorrow, given the product range, we believe we can develop from our proprietary Nucleosomics platform. We believe our addressable markets are very significant, most notably in the short term with Nu.Q Vet and Nu.Q NET. We look forward to updating you in due course on our progress in accessing these opportunities. And with that, I'm delighted to hand over to Dr. Tom Butera, who will provide further details regarding not only the Heska licensing and supply agreements, but also other activities and upcoming milestones for Volition Veterinary.

Tom Butera, Chief Executive Officer, Volition Veterinary

Thanks very much, Terig, and hello everybody. This first quarter of 2022 has really been a breakthrough time for Volition in veterinary care. I am so proud to update all of you on the call today. I honestly could not be prouder of our achievement in securing a global licensing and supply contract with one of the industry's leading companies, Heska Corporation. Heska is a leading global provider of advanced veterinary diagnostic and specialty products and is dedicated to developing the next generation of rapid, low-cost, point-of-care diagnostics for companion animals. It has a worldwide distribution and partnering network. When we announced this deal in March, I commented about Heska very much sharing our philosophy, work ethic, and vision as to how Nu.Q Vet can really help save lives and improve outcomes for millions of pets worldwide. And I have to say that since then, I believe this even more strongly today. We have many workstreams up and running from technical transfer and logistics to sales and marketing and are making tremendous progress towards the launch. As a reminder, our executed agreement with Heska provides exclusive rights to sell Volition's Nu.Q Vet Cancer Test for companion animals at the point of care, in addition to non-exclusive rights to sell the Nu.Q Vet Cancer Test for companion animals through Heska's reference laboratories. Finally, looking into the future, it provides exclusive rights to canine cancer monitoring and feline lymphoma tests, as well as certain rights to potentially commercialize a wider test menu for companion animals again at the point of care. This multiyear global supply and licensing agreement totals up to $28 million in milestone payments, the first of which is the upfront payment of $10 million Terig has spoken about, in addition to ongoing payments for kits and kit components. I understand from some of the questions we received subsequent to the last call, there was some confusion surrounding the financial elements of this deal, and so while I don't wish to repeat myself too much, I would like to provide a little more clarity. This contract with Heska provides for milestone payments to Volition. To give you the breakdown, Volition received a $10 million upfront payment on signing the agreement and will receive up to $18 million based upon the achievement of near and midterm milestones, $13 million of which we anticipate receiving in 2023. In addition to these milestone payments, and most likely significantly greater than these payments, is the ongoing revenue that Volition expects to receive in relation to payment for kits, which are used in the reference lab market and for the supply of key components for the exclusive point-of-care product that Heska will bring to the market. Every time Heska sells a test, Volition will make money, whether that be through the sale of a kit or from the sale of a key component. This is a long-term deal with incredible market potential where we expect millions of tests will be sold each year. So, the ongoing revenue for Volition could be significant. It's a fantastic deal for both companies, and we are certainly excited to finish the legal work and get on to preparing for a launch possibly as early as later this year, but if not, in early 2023. And talking of launches subsequent to quarter end, I'm delighted to say SAGE Healthcare launched the Nu.Q Vet Cancer Test in Singapore. Dr. Wilson-Robles and I had the honor of presenting to the Singapore veterinarians via a launch webinar hosted by SAGE. As ever, there was a lot of interest and many great questions, and I know the SAGE team are now spreading the word and driving demand in the clinic. I certainly expect to provide more updates in the coming quarters. Regarding our other negotiations, these remain ongoing. I am pleased to say that we are making progress and as ever, I remain optimistic about signing further deals this calendar year. We believe that this simple, easy-to-use blood test addresses a huge unmet need in the veterinary market. As I have said on previous calls, cancer screening is not yet as commonplace in animal health as it is in human health. But I firmly believe that blood tests like the Nu.Q Vet Cancer Test could significantly transform how veterinarians manage cancer in companion animals. Our clinical work didn't stop with the screening test. Dr. Wilson-Robles and the team have been working on expanding the range of cancers our test detects, as well as expanding the potential use of Nu.Q Vet for the monitoring of diseases. I discussed last time the data Dr. Wilson-Robles presented at the Veterinary Cancer Society meeting in the fourth quarter of 2021 in relation to using the Nu.Q Vet test as a monitoring tool, and I'm delighted to say on the call today that Dr. Wilson-Robles will be presenting further data in this regard at the European Society of Veterinary Oncology Congress later this month in Sicily. To get too technical here, but excitingly, Nu.Q Vet may serve as a more sensitive measurement of both minimal residual disease and remission and could be a very useful monitoring test for dogs with cancer. We believe that being able to use the Nu.Q Vet test to not only screen for cancer, as per our current product, helping identify disease earlier, but also to then help monitor a dog's response to treatment and the disease progression as an early indication that a dog is coming out of remission will meet a real unmet need in the veterinary market. All in all, an incredibly busy time for the whole Volition Veterinary team and many of the Volition executives as well. I would like to publicly commend and thank the team for their tremendous hard work, a great job well done. I hope many of you can join the Capital Market Day tomorrow or else view it on catch-up, as we will be sure to be providing more details on the many activities we have ongoing at Volition Veterinary, but today, as I was asked to keep it short, I'll hand it back to Cameron.

Cameron Reynolds, President and Chief Executive Officer

Thanks very much, Tom. I'd like to add that on a personal note, I could not be prouder of the team's achievement in securing a global licensing and supply contract with one of the industry's leading companies, the Heska Corporation. Such deals take time, and I could not be happier with the outcome. I am excited about everything the vet and commercial teams have in the pipeline. I'm also delighted with the progress we have made in this key pillar of the business as we progress strongly from a purely research and development company to a commercial company with a wide range of products. It is an exciting, fast-moving part of our business with clear potential to generate significant revenue for the Company in terms of both milestone payments and ongoing revenue streams, as Tom explained from the sales of kits and key components, not only to Heska, but also to SAGE Healthcare. Now, on to other aspects of our business, starting, as ever, with our people. In the first quarter of 2022, we have expanded our team and strengthened the bench with some incredibly talented recruits, especially in the veterinary team. Additionally, subsequent to the quarter end, we welcomed Sharon Ballesteros as Head of U.S. Quality and Development processes. Sharon has over 20 years of experience within the in vitro diagnostic industry with senior program management, quality assurance, and process improvement roles at Siemens Health Diagnostics, Thermo Fisher, Agena Bioscience, and most recently, Sharon was Director of Design, Quality and Risk at GRAIL, where she led the Company's design control and risk programs. I'm absolutely delighted to say, in true Volition style, Sharon hits the ground running and will be presenting the clinical and regulatory strategy including the FDA strategy for the Nu.Q NETs program tomorrow at the Capital Markets Day. It's great to have you on board, Sharon. Our next key element of the Company is our product. We have five product pillars, one of which Tom covered earlier regarding Nu.Q Vets. Given it has only been a few weeks since our last call, we have no significant updates regarding our Nu.Q Cancer or Nu.Q Discover programs. Further, as Jake Micallef will cover Nu.Q NETs in detail tomorrow at the Capital Markets Day, and so not to steal his thunder, I will just provide a brief update on Nu.Q Capture today. As I've said on previous calls, we believe the Nu.Q Capture technology will be transformational as a DNA enrichment technology which could potentially aid diagnosis, treatment selection, and both treatment and disease monitoring when used in combination with either sequencing, mass spectrometry, and/or Nu.Q assays. The Nu.Q Capture program now has several strands of technology, which either essentially remove background noise thereby amplifying the signal, or look to identify the signal in a novel way. Other strands of the Nu.Q Capture technology involve isolating various parameters and fragments including nucleosomes and transcription factors from plasma for analysis by mass spectrometry and next-generation DNA sequencing. We are currently actively working on four different strands in Nu.Q Capture in Belgium and in our new California lab, all of which are potentially very exciting product areas. Subsequent to the year-end, we were delighted to sponsor a genome web webinar which featured key opinion leader Professor Axel Imhoff and our very own Dr. Terry Kelly. This webinar was incredibly well received with over 300 attendees spanning industry, including many of the leading liquid biopsy companies and academia. It included a busy question-and-answer session demonstrating the interest in epigenetics and the work we are undertaking. Should you be interested, the webinar is still available on-demand catch-up. For more details, please contact mediarelations@volition.com. We will also be sponsoring future genome web webinars with the next one due late July focused on NETosis with leading Intensive Care Consultant, Dr. Andrew Aswani. In conclusion, I'm delighted with the significant progress we made in the first quarter of 2022, and momentum has carried into the second quarter. I hope to see many of you at a Capital Markets Day tomorrow, but if not in person, that you're able to join our webcast. I will be joined by many members of our executive team, who will share further details focused this time on Nu.Q Vet and Nu.Q NET. In drawing the earnings call to a close, I'd like to thank you all for joining this call today. We very much appreciate it given this is earnings call season. I, along with the rest of the board and indeed the whole company, look forward to sharing further news regarding Nu.Q Vet and other subsidiaries, as well as the results of our key clinical studies, publications, and milestones over the coming months and quarters. I very much feel we are in an extremely strong position to commercialize our Nu.Q platform in so many areas. I could not be more positive about our work at the heart of epigenetics, and I'm excited for the next phase of our journey. We're now happy to take questions.

Operator, Operator

We'll now begin the question-and-answer session. Please go ahead.

Ross Osborn, Analyst

Starting off, could you maybe provide a little bit more insight into your directory recognizing some of the 18 million in incremental milestone payments?

Cameron Reynolds, President and Chief Executive Officer

Yes. So, Terig, do you want to deal with that?

Terig Hughes, Chief Financial Officer

As we said on the call, with respect to the first 10 million, we've treated that as deferred revenue at this point. The money is in the bank, and it's non-refundable, but given the complexity around the accounting for that and respect to this contract, we're going to take a bit of time to work out how exactly we're going to recognize that over the coming quarters. Similarly, with the other 18 million, we are going to update you probably next quarter on what that's likely to look like. But at this point, it's difficult to give firm guidance on that in relation to this year.

Cameron Reynolds, President and Chief Executive Officer

But I think it's also very important to point out, Ross, and to everyone listening, that the other 18 million is on three very achievable milestones. The actual just launch of the first products, which is what the CEO of Heska is expecting later this year, early next year, and the second product, which we would expect to be in the next kind of 12 months as well, and then an option on the feline market, which hopefully could be next year as well. So, between the 10 and the 18, that's $28 million, which I think goes a long way to buttressing our burn over the next two years, assuming we get the others, which I think is a reasonable assumption. We couldn't be happier. And then once we have achieved those milestones, that's when the revenue kicks in, and we would expect from the kit sales, which we also expect to be very, very meaningful as well. Overall, I think it drastically changes our position so far as we can really start to have a lot of money coming in, which will go a long way to dealing with our burn rate. So, we're extremely happy with both the ongoing revenue and the $28 million potential milestone payments.

Ross Osborn, Analyst

Okay. It sounds great. And then maybe switching over to Discover's contract, would you remind us how many you have signed now? And then, if you can provide any visibility on new contracts? And then as a follow-up, would you be able to provide a little more clarity on which phase each contract is in, or at least an average, so we can better understand the revenue potential there?

Cameron Reynolds, President and Chief Executive Officer

Terig?

Terig Hughes, Chief Financial Officer

Yes. There is not much of an update since the last call on the 10-K. We have got five signed contracts and the average is somewhere around $40,000 on average that we expect to realize this year. So, we are looking at just in terms of the signed contracts about $200,000 for this year. But then, we also have a pipeline with a couple of other contracts that we expect to materialize this year as well. So, we're looking at somewhere between $200,000 to $400,000 for this year. I think going forward, Ross, it’s probably just important to show that while Discover is exciting and this is great revenue compared to $90,000 for everything last year, I think you'll see at the Capital Markets Day tomorrow, we are going to put a lot of effort into Discover and it’s very good, great contracts. However, I think you’ll see tomorrow that the total addressable market for Vet and NETosis is about $33 billion between them. We think we will put a lot of effort into Discover and it's good as it is, but it’s never going to be a massive market for us.

Ross Osborn, Analyst

Okay. Looking forward to tomorrow. And then maybe last one for me, you are able to control expenditures a bit better than we were forecasting. Could you maybe just help us think about the rest of the year where you are able to continue to fully understand and maybe where you'll grow a little bit here?

Terig Hughes, Chief Financial Officer

So, yes, in terms of cash burn, it has ticked up a little bit. The first quarter was a bit heavier for us than the balance of the year, just because of some of the expenditures in the first quarter. Our underlying cash burn is somewhere a little above $2 million, but not much. So it's, as you'd expect, it ticked up a little bit compared to the same period last year, but it's still well under control.

Cameron Reynolds, President and Chief Executive Officer

And I think that's just again, to point out something. Thank you. Yes, we are a little below where we thought we'd be. The projections were difficult market conditions at the moment. We want to make sure we're spending our money very wisely. At the same time, we need to get out there and start commercializing our products. You can see how much money can be made from the Vet space. We're about to show how much can be made from the NET space. It's a balance of keeping it tight, but making sure we deliver revenue. The message we've received loud and clear from everybody is that we have a fantastic platform and great team, but we need to make some money. So, we're balancing spending money to make more money, which I think has proved very successful in the Vet space. But we will keep a tight rein on things while making sure we invest in getting revenue.

Operator, Operator

We still have time for questions.

Cameron Reynolds, President and Chief Executive Officer

Actually, sorry, I've just been informed of a technical issue on the phone line. Given the fact that we've got a Capital Markets Day tomorrow, we will be answering more questions during that session. I understand there are some analysts who are trying to get on but cannot. We will take the rest of the calls tomorrow and answer them, perhaps more fully given the longer time we have. So I apologize for the technical issue on the phone line, but I am very happy to take down those questions or those who are trying to get on the call today for tomorrow, given the Capital Markets Day. To wrap up, I thank you very much. I couldn't be happier with where we are. I think you've heard a lot about how our team has grown stronger and deeper, how our patent portfolio is growing, and how we are developing a very wide range of products. Tomorrow will be a very good indication of that. You'll hear from quite a few people you perhaps have not heard from before from Volition. You'll hear about the path forward on the Vet space and where we are going to be making revenue, as well as for the NETosis. Overall, I think we're in an incredibly good position. The 12 years we've spent have really put us in a great position where we are now, and we have a great strategy moving forward to commercialize what we're doing. For those of you who can, please attend tomorrow live or in person. It's a great event at the New York Stock Exchange or online. Thank you very much for your time. Hope to update you a lot more next quarter, and I believe there should be a lot going on. Have a great few months and I look forward to presenting more updates to you soon. Have a great day. Thank you.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.