Thank you all for standing by, and welcome to Talis's First Quarter 2022 Earnings Conference Call. [Operator Instructions].

I'll now turn the call over to your host, Emily Faucette. Ma'am, you may now begin. .

Good afternoon, and thank you for participating in Talis's first quarter conference call. Joining me today are Rob Kelley, our Chief Executive Officer; and Roger Moody, our Chief Financial Officer..

Earlier today, the company released the financial results and a business update for the quarter ended March 31, 2022. A copy of that press release can be accessed on the Investors page of our website at talisbio.com..

Before we get started, I would like to remind you that Management will make remarks during this call that are forward-looking statements within the meaning of the Federal Securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. .

Additional information regarding these risks and uncertainties appears in the section entitled forward-looking statements in the press release to issued today.

For a more complete list and description, please see the company's filings with the SEC, including the Risk Factors section of the company's 10-Q filed with the SEC on May 10, 2022, and in its other filings.

Except as required by law, Talis disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast on May 10, 2022..

With that, I'd like to turn the call over to Rob. .

Thanks, Emily. Good afternoon, everyone, and thank you for joining us. Our mission at Talis is to advance health equity and outcomes by delivering accurate infectious disease testing in the moment of need at the point of care.

Over the last 60 days, we have made encouraging progress towards assessment and validation of manufacturing scale-up for our Talis One testing platform, a foundational step to support our mission..

During today's call, I'll provide an update on the objectives previously set forth and our path forward. Then I will turn it over to Roger to provide more details on manufacturing and to review our first quarter financials..

one, demonstrating our ability to manufacture Talis One instruments and cartridges at scale; two, initiating a phased launch for the Talis One COVID-19 Test System under our EUA; three, concentrating assay development to prepare for 2023 clinical milestones; and four, preserving cash to carry us through 2024..

Toward this first objective, we engaged external consulting firms and conducted internal reviews to advise us on assessing the product design of our instruments and cartridges for manufacturing at scale.

Evaluating our manufacturing processes and partners and determining appropriate next steps to manufacture both instruments and consumables at the yield and consistency needed to support commercialization.

This manufacturing assessment is complete, and we remain confident there is a path to manufacturing at scale after working out process and minor design modifications. .

Importantly, I am pleased to report we did not identify any substantial design or supply changes that would require extended time lines to validate. Based on what we have learned, we are implementing modifications around manufacturing processes, quality controls and supply conformance.

We are prioritizing this work to complete verification and validation followed by phased commercialization. Our team's immediate focus is to bring the Talis One System to market, and we are diligently executing against this priority.

Once we are in a position to deliver our products at scale, our focus will shift to initiating a phased launch for the Talis One COVID-19 Test System under our EUA beginning with a limited rollout to prospective customers.

Our fundamental goal with this launch is to ensure an excellent customer experience as we focus on long-term system adoption across multiple infectious diseases. .

As a reminder, our commercial strategy is to leverage our COVID EUA to drive initial use of the Talis One platform in select market segments. These segments represent customers who are seeking molecular point-of-care systems for infectious disease testing in respiratory, sexual and women's health.

With this in mind, we are confident that we are strongly positioned with our Talis One System as we broaden our test menu and expand our addressable market.

While a variety of point-of-care technologies are commercially available, we believe that few, if any, sufficiently meet the needs of health care providers due to limitations with accuracy, time to result, ease of use, price or menu. .

Our competitively advantaged system offers robust sample preparation with high sensitivity and specificity on an integrated platform to enable rapid and accurate results in the moment of need.

Additionally, we recently completed the first release of our cloud software to provide customers with a comprehensive solution to consolidate patient test information and enhance organizational efficiency.

We believe this cloud-based system called Sia Dx, will further our competitive edge in the large markets we plan to pursue and look forward to gaining customer feedback on this application when we begin the first phase of our commercial launch. .

Looking ahead, we are focused on addressing the growing unmet need in point-of-care molecular testing with a clear road map for our pipeline. In the near term, we plan to pursue a 510(k) regulatory pathway for our respiratory panel and are on track to begin collecting samples this year.

We are also advancing the development of our CT/NG assay to begin menu expansion into sexual and women's health. This large and growing $5 billion U.S. market opportunity is characterized by a lack of tests at the point of care where prompt treatment can be prescribed. .

I want to reiterate that we, the Talis Board and Management team, are encouraged by the progress made in these past couple of months as we work to manufacture a complex system at scale with the goal of serving multiple infectious disease areas over time.

While COVID-19 provides a near-term opportunity to introduce the Talis One System and gain market acceptance, it is just the beginning in realizing our mission to make a meaningful impact on health equity and outcomes with accurate infectious disease testing at the point of care..

With that, I will turn it over to Roger to provide more detail on operations and to review our first quarter financials.

Roger?.

Thanks, Rob. With Doug Lou's departure, I have reassumed the responsibility for manufacturing and operations. functions I originally established as we pivoted to developing our COVID test and scale up manufacturing in mid-2020.

Prior to joining Talis, I spent more than 2 decades in various leadership positions at medtech companies, including COO at Medsn and COO, followed by CEO at GlySure. Here at Talis, I am fortunate to work with highly experienced and capable manufacturing, operations and supply chain leaders and their respective teams.

I look forward to drawing on this talented group and my past experience to demonstrate our ability to manufacture high-quality Talis One instruments and cartridges. .

As Rob stated earlier, we are pleased to have completed the internal and external assessments of our manufacturing processes and product design. These assessments provided us with valuable insights on how we can refine our manufacturing and quality control procedures to produce high-quality products at scale.

Based on learnings from this manufacturing review, we are implementing modifications around manufacturing processes, quality controls and supply conformance that are necessary to manufacture at scale while achieving our target quality standards. These changes will take some time to implement, verify and validate.

Fortunately, we have now ruled out the need for a substantial design or supply changes that would require extended time lines to implement. I'm also encouraged that our recent manufacturing refinements are beginning to yield improvements in instrument first pass acceptance and cartridge performance, including reduced invalid rates.

We will continue to work diligently on making these improvements and expect to be able to provide specific time lines for our commercial launch in the future..

Turning now to first quarter 2022 financial results. We recognized $3 million in revenue in the first quarter, which was driven by antigen test sales and a final payment from the NIH RADx contract. While we may, from time to time, pursue other near-term revenue-generating opportunities, we do not expect significant revenue contribution in 2022..

Turning to expenses. First quarter total operating expenses were $33 million compared to $68 million in the same period last year. Research and development spending for the first quarter of 2022 was $21 million compared to $60 million in the same period of 2021.

This decrease was driven primarily by our manufacturing scale-up investments that were largely completed in 2021. Selling, general and administrative expenses in the first quarter were $12 million compared to $7 million in the first quarter of 2021.

This increase was primarily due to higher personnel expenses, including salaries, benefits and stock compensation as well as increases from public company expenses. .

Unrestricted cash and cash equivalents as of March 31, 2021, was $188 million. In the first quarter, we used $45 million in cash. Of this amount, approximately $23 million was related to non-recurring payments for manufacturing scale-up, inventory, payroll and insurance.

As Rob mentioned earlier, our objective is to ensure that our cash reserves are sufficient to fund operations through the end of 2024, if needed. We continue to focus on preserving cash to give us the longest runway possible and believe this objective is achievable.

As we gain more clarity on the timing and trajectory of our Talis One launch, this objective may change..

With that, I'll turn the call back over to Rob for closing remarks. .

Thanks, Roger. I'm encouraged by the progress our team has made over the last couple of months towards understanding, modifying and completing verification and validation of our manufacturing scale up. I continue to believe it is a matter of when, not if we are able to deliver the long-term value proposition of our Talis One System. .

With the team's continued focus on execution, I am confident we are on the right path to deliver on our 2022 business objectives. We see a clear and fundamental need for rapid, accurate and expansive point-of-care testing for infectious diseases and are committed to bringing the Talis One System to market.

In doing so, we believe we will be well positioned to address a multibillion-dollar opportunity in respiratory, women's and sexual health, which we expect to be our core focus. We look forward to updating you on our progress in the months ahead..

With that, we will now open the call up for questions.

Jesse?.

[Operator Instructions] Our first question is from the line of Rachel Vatnsdal of JPMorgan. .

So during last quarter, you flagged that the invalid test rate was greater than 10%. And today, you mentioned that you made some improvements, just given the manufacturing implementation that you've been doing.

So where does that error rate stands today? And then what does that validate need to get to ahead of the full commercial launch?.

Rachel, this is Roger. I'll take that question. So we've made some good progress over the last couple of months. And our target is to get that rate as low as possible ultimately. We certainly would like to launch the product under 10%. In fact, our EUA studies we had a rate of invalid under 10%. And so we are now seeing us approach that number.

And more importantly than even seeing the number come down. We're also seeing the variability around that number come down, which is also good news. So the changes that we're making are showing improvements already. That said, we're continuing to make other changes to make sure that when we launch this product that the customers have a great result.

So we are going through a very methodical verification and validation process to ensure that we get that lower invalid rate in when we launched this to customers. .

Great. And then could you spend a minute just talking about supply chain and inflation.

Now that you're starting to get at that manufacturing curve to approach that full-scale launch, how is the emerging profile changed for the product just given inflation in supply chain?.

Sure. So we are very fortunate to have purchased quite a bit of materials last year and into the beginning of this year. but mostly last year to scale up. And so from an instrument perspective, we purchased parts for 5,000 instruments. And -- so we're largely supplied for a good number of placements.

On the consumables side, we also purchased materials for a fairly healthy number of cartridges to be manufactured. So we do not have any what we consider to be supply constraints right now. And also, it helps from an efficiency of working capital because we've already purchased and, in fact, expensed this inventory. .

Got it. And then last one for me, just on the 510(k) for the respiratory panel. You mentioned that you're going to begin collecting samples later this year. So obviously, you'll likely miss this respiratory season.

But when do you think that you can receive that 510(k) approval? And would you be at full commercial launch ahead of next respiratory season.

So for the 2023 to '24 respiratory season?.

Sure, Rachel, this is Rob. So I appreciate the question, and we certainly are working diligently to bring our respiratory panel to market. Of course, we're not providing time lines at this moment. we do have a corporate objective to initiate our staged launch, or phase launch towards the end of 2022.

If things go well, I mean, obviously, we're doing a lot of work right now on validating our instrumentation and as Roger pointed out, looking at invalid rates and the quality of our cartridges. If all goes well, we'd like to start that.

And given the data that we're seeing right now, I feel more and more confident that we'll have some time lines in the near future. .

Next question is from the line of Derik De Bruin of Bank of America. .

I'm sorry, we're at our health care conference, so I'm bouncing around over the place.

But just on sort of like the cash burn or like targets for this year?.

Sure. So we haven't put out numbers, but what we -- I did put in the prepared remarks was that the cash we used in the first quarter was $45 million, about half of that was non-recurring, $23 million, so just over half. So we see that, that cash burn continuing to come down. We'll see some further benefits, we think, each quarter of this year.

And then as we get into next year, we would expect to see 1 of 2 things, either contribution from gross profit and/or we would make further cash savings measures. And either way, we see that cash being able to stretch out for -- through 2024. .

Great.

And I just -- I'm sort of curious on your feedback from the field, I mean, given the COVID waning and we're getting, there's a lot of point-of-care platforms out there, I guess, what gives you confidence that you're going to be able to basically make inroads into the market when you're coming to the market so late?.

Yes, Derik, it's a good question. I think we all feel the dwindling effects of COVID as masks come off and people are getting back to work into the airports and traffic these days here in San Francisco.

Ultimately, we believe, first of all, that we're seeing a lot of demand decline in the antigen space, not as much in the molecular space, which is obviously good for our business and good for molecular testing. .

The other piece of that is, I mean, we think that there's great ways to differentiate the molecular test systems in the market. Menu is one of them. Accuracy is one, price point, ease of use, all of those things.

And as we look at where we're positioning ourselves in the market, we're focused on building a customer base that's going to be a long-term user of our product, and that long-term user is going to be looking at respiratory health with sexual and women's health.

And the way that we designed our product with this robust sample preparation on board, is going to enable us to do things a little bit differently than other vendors that are out there, I believe, namely the extraction and purification of the target nucleic acids. .

And so as you move towards different tests like bacterial vaginosis, you start to see yeast and types of bacteria, gram-positive bacteria, that are difficult to life. We've designed our system for that. So as we go forward to more and more challenging pathogens in the women's health space, we think we'll have a leg up.

And yes, the first step is for us to get the product to the market and launch COVID. But I do -- I am optimistic that we have some real value in the way we design the cartridge that will extend into the longer-term menu. .

[Operator Instructions] Your next question is from the line of Mark Massaro of BTIG. .

I guess I just want to clarify your commentary on the respiratory panel, in the 510(k).

Can you just confirm that, that is a flu COVID panel?.

Correct. At the current state is right now, we are focused on COVID, flu A and flu B, for the respiratory health. .

Great.

And should we -- is it fair for us to assume that it's unlikely that you will commercialize your EUA Emergency-Use Authorized COVID test?.

I'm sorry, are you asking if it's unlikely that we will be commercializing our COVID EUA test?.

Correct. .

No. So as I mentioned earlier, we have a strategic objective this year to do a phased launch. And the first phase of that launch we're hoping to squeeze into 2022 if all goes well. .

Yes. And if we do so, it will be under the COVID EUA that we currently have. .

Okay. I appreciate that clarification. I guess, what are some of the -- maybe for Roger, you talked about the $23 million of non-recurring in Q1.

How much of that was related to maybe severance or consulting or manufacturing remediation expenses and -- so maybe the second part of it is, should we expect somewhere around $22 million or so to be kind of that recurring run rate throughout the rest of this year?.

Yes. So to provide you with a little more color without providing a specific projection here, Mark. We -- the largest portion of the non-recurring was trailing payments for the manufacturing scale-up and inventory.

Those aren't completely over, so we're going to still see a little bit of that onetime spend here in the second quarter, but it's trending down dramatically. There were some onetime charges related to salaries that we took down in the reduction in force as well as severance they were smaller amounts. .

And then there's also some large premiums that we paid in the first quarter. So I would expect that we'll see it trending down. I don't know that I would go as far as to say it's going to go all the way down to no non-recurring cash flow this year or this quarter, but it will continually come down.

We also have the benefit of working capital advantage here that we have prepurchased all of this inventory in these materials. So most companies as they're getting ready for launch have a fairly sizable investment that they need to make in inventory. We've already made that. And we also have no debt.

So we feel pretty good about our balance sheet right now. .

Okay. Great. And just my last question on the CT/NG assay.

What are some of the milestones we can expect? And should we expect clinical trials to perhaps initiate in 2023?.

So we haven't given time lines on the milestones yet, although, obviously, we are working through those now. And so I guess, at this point in time, we won't -- we don't have that information. But as we get more clarity on our manufacturing status, hopefully, that will give us the insights for us to be able to do that. .

And Mark, one other response I should have shared with you earlier on the COVID EUA part. The rationale for us moving forward with COVID at this point in time is not just to get COVID sales. It's to prove our system, right? We think we have a great system. And rather than wait for our first 510(k) to do so.

This gives us an opportunity to get our products into the hands of customers specifically KOLs in others who really can dig in on this and attest to the value that this system can bring.

It also gives us an opportunity to learn like we did with antigen testing to deliver product to customers to support customers to get a feel for what they like for new enhancements to it, et cetera. So even if there's not a huge amount of adoption of our system for COVID, getting the system into the market is going to be huge for us.

And I think as the customers see it, we will start to see an increased demand for it and making sure we put those placements in the right locations that will drive long-term revenue with our extended menu is going to be key. .

Okay. Great. Actually, maybe just one more. Your decision to pursue a 510(k) on the flu COVID. Is that because you're not expecting EUAs to be sort of a, I don't know, 2023 or 2024 option.

I guess what are you hearing maybe from the agency with respect to the duration of these EUA?.

Yes. So we haven't heard anything else from the agencies that anyone else hasn't heard. It's just -- we expect that as COVID is winding down, they may start to make decisions to that end.

I do believe, however, that there was some guidance earlier about COVID flu products and the requirements to be able to take a COVID flu through IVD -- I'm sorry, through EUA. And it was around test capacity. I believe we had to do something like 500,000 tests per week in order to be able to apply for an EUA for COVID flu.

Since even with -- at capacity, our systems are only 1 million a month, we determined that it was the best course for us to just move forward with the traditional 510(k) submission and not try to find some way around that volume requirement. .

Thank you, participants. I'll now turn the call back over to Talis's panel for final remarks. .

Okay. Well, thank you for joining us today and for your time and interest in Talis. Have a great day. .

This concludes today's conference call. Thank you all for joining. You may now disconnect..