Strong 2Q16 revenue growth of 67% YoY and 15% QoQ; Biopharma Services expected to drive revenue growth in 2H16 and 2017. 2Q16 revenue grew 67% YoY to $7.0 million. This growth was driven primarily by increases in Biopharma services revenue, which grew 58% YoY and 26% QoQ to $4.2 million. Looking forward, we anticipate Biopharma services revenue to continue to show significant growth, driven by overall increases in the # of clinical trials and a greater number of later stage clinical trials.

2Q16 revenue from Clinical services increased 103% YoY and 4% QoQ to $2.5 million. We are currently projecting modest QoQ growth through 2017, although our assumptions could change if we see meaningful volume increases in some of the Company’s proprietary tests. We believe that FHACT and the Tissue of Origin test are the most likely candidates to show volume increases over the near-term. 2Q16 gross margins improved to 39%, showing significant improvements as compared to 32% in 1Q16 and 26% in 2Q15. We expect gross margin to continue to improve going forward, as test volumes increase. Net loss in 2Q16 was $4.0 million, or ($0.28) per diluted share, which represented an improvement over net losses of $5.1 million in 1Q16 and $5.0 million in 2Q15. We are projecting further improvements in net losses throughout 2H16 and 2017, as Biopharma services revenue increase and operational improvements and expense reductions are implemented. Gross margins have shown significant and continued improvements in recent quarters, and the hiring of new EVP of Finance and COO Jay Roberts should help to further optimize operations and lower the Company’s cash burn rate. We are projecting CGIX to essentially reach breakeven in 3Q17 (with a projected net loss of $0.3 million and revenue of $11.8 million).

Current expected revenue from biopharma contracts of over $47 million; we expect this to increase as # of trials and trial complexity both increase. CGIX’s current expected revenue from biopharma contracts is over $47 million (this revenue is expected to be realized between 2016-2018). CGIX continues to aggressively expand its biopharma services, and in particular almost doubled its immuno-oncology trials to 20 in 2Q16, up from 12 in 1Q16. The immuno-oncology market is expected to reach over $35 billion by 2024 (source: IMS Health), and impact up to 60%-70% of cancer patients. Given the expected significant growth in immuno-oncology over the next decade, providing services for immuno-oncology clinical trials should drive consistent revenue growth for biopharma services, along with providing significant long-term revenue potential in clinical services. As more immunotherapies are approved for use in the clinic, we anticipate clinical demand for multi-gene NGS panels to increase. CGIX’s current focus on Biopharma services should generate a positive impact both for current results and longer-term potential in clinical services and companion diagnostics.

Continuing to build test portfolio, infrastructure, and intellectual property/knowledge; we believe that this backbone will translate into near-term revenues in biopharma and set up an eventual longer-term opportunity in clinical revenues. CGIX has continued to build its intellectual property and test portfolio. Main highlights include the launch of the NGS panel FOCUS::LymphomaTM with CLIA validation, the offering and distribution of multiple PD-L1 tests, the announcement of results at ASCO with HTG, Keck School of Medicine at USC, and Japan Clinical Cancer Research Organization of using immune-related genes to identify particular subtypes of colorectal cancer, and the acceptance of the presentation of the Tissue of Origin (TOO) test for presentation at USCAP. CGIX is also focusing on developing multi-gene panels using liquid biopsies for kidney and lung cancer.

CGIX has over 11 genomic tests commercially launched, 15 research collaborations with leading institutions, and over 100 patents globally. Further R&D development should lead to the launch of additional tests and improvements to current test offerings. This should pay dividends in near-term growth in biopharma revenues and eventually longer-term in clinical services.

We are applying a 2.5x EV/S multiple to our FY17E revenue of $45.0 million to derive a target price of $7.15. CGIX has built a significant backbone of intellectual property and proprietary genomic tests. This expertise has enabled the Company to grow its Biopharma services business, and we believe will eventually lead to significant growth in Clinical services. In particular, we think that the Company’s rapid increase in immuno-oncology trials is very promising, as immuno-oncology is considered by many top analysts to have a huge impact on future cancer treatment.

Long-term, we believe a huge opportunity exists in the clinical services side of the business. However, as noted by industry participants, improvements in clinical revenue and reimbursement rates have materialized much slower than was anticipated. Near-term, we have clinical services revenue growing at a modest rate, although this could be adjusted depending on data presentations and sales and marketing efforts of some of the Company’s proprietary tests, in particular FHACT and TOO. Longer-term, we believe that reimbursement rates and clinical adoption will improve significantly. As more immunotherapies and targeted therapies are approved, it is apparent that genomic information that can only be given by sophisticated, multi-gene panels will be required to effectively utilize these therapies. In particular, we believe that a strong economic case will be given for the use of NGS testing alongside immunotherapies, especially given the high cost of treatment of these therapies (typically $100k+), and the increasing evidence of the need for variable treatment regimens dependent on specific patient characteristics. CGIX’s strong, disease focused knowledge base should prove valuable as immunotherapies and targeted therapies are approved for indications where the Company has developed expertise. Any companion diagnostic approvals should greatly increase clinical services revenue. Ultimately, we believe that the clinical services opportunity is a matter of “when”, not “if.”

Given this backdrop, we view the Company’s focus on moving toward breakeven to be a strong strategic move. Strong improvements have already been seen in gross margins, and the hiring of new EVP of Finance and COO Jay Roberts should further help this initiative. We are estimating CGIX reaches breakeven in 3Q17. We are not currently modeling any additional capital raises, although a small capital raise could be needed depending on how long it takes CGIX to reduce costs. Controlling costs ensures that the Company minimizes dilution while the clinical opportunity develops.

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Legal: Lowenstein Sandler LLP

Auditor: McGladrey LLP

Transfer Agent: Continental Stock Transfer & Trust Co.

Investor Contact Info:

RedChip Companies Inc.
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(407) 644-4256
www.RedChip.com