HTG Molecular Diagnostics, Inc.

Greetings, and welcome to the HTG Molecular Diagnostics, Inc. Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Arndt, with Lifestyle Advisors. Thank you. You may begin.

Thank you, Operator. Earlier today, HTG released its financial results for the third quarter ended September 30, 2020. Before we begin the call, let me remind you that the company's remarks include forward-looking statements within the meaning of the federal securities laws, including statements regarding increasing use of RNA-based biomarkers, expected growth in the molecular profiling market, anticipated growth in the company's RUO profiling business and related revenue, expectations regarding biopharma programs and collaborations, product development and commercialization activities, and the impact of and potential recovery from the ongoing COVID-19 pandemic. These four looking statements are subject to numerous risks and uncertainties, many of which are beyond HTG's control, including uncertainties regarding the ongoing COVID-19 pandemic and its impacts on HTG and its customers that may cause actual circumstances events, or results to differ materially from those projected on today's call. Factors that could cause events or results to differ materially include those risks and uncertainties described from time to time in the company's SEC filings. HTG cautions listeners not to place undue reliance on any forward-looking statements. HTG is providing this information as of the date of this call, Tuesday, November 10, 2020. and the company undertakes no obligation to update any forward-looking statement. With that, I would like to turn the call over to John Lubneski, Chief Executive Officer. John?

Thank you, Paul, and welcome, everybody. Let me begin with an overview of where we are in the near term and how we view our business in the longer term. This year has been challenging as COVID-19 interrupted our growth trajectory, but our commitment and belief in our technology has not wavered. we continue to see the fundamental macro trend of personalized medicine driving increasing use of biomarkers, and especially RNA-based biomarkers, to guide treatment decisions. Precision medicine is better for the patient, the family, and the payer, and molecular profiling is one of the key tools to enable this. Molecular profiling is a large and fast-growing market in which we believe we will be a player. COVID has had a short-term impact on some of our oncology efforts, but it's also provided visibility to areas where biomarker-based medicine should be embraced in other disease areas, including immune response. And our EdSeq technology continues to be adopted as a platform technology for NGS-based gene expression. In the short term, we continue to feel the impact of workplace restrictions due to COVID-19. Work-from-home restrictions and precautions remain in place for many of our largest customers and have impacted our business for the simple reason that lab work can't be done from home. Fewer people physically in the labs this quarter meant fewer customers running our instruments in their facilities and sending us samples for lab services. This quarter also reflects the historical trend of softness during the summer months, especially in Europe. While we have seen many begin the slow process of opening back up, we're adjusting to the new normal. In the last few quarters, it's become apparent pandemic is going to continue to impact our customers and their businesses for an extended period. So we're remaining nimble and are adjusting to this new environment. We are looking for where we can leverage our business, technology, and people without sacrificing our strategic priorities. We're aggressively looking for new opportunities and making adjustments to our near-term objectives to help offer the impact of COVID-19 on our business. This includes accelerating our customer diversification, which includes a larger number of smaller and mid-sized biopharma customers, and increasing our presence in academic medical centers. Other opportunities include targeting the large immune response market by leveraging our current call points and expanding into new call points within the same customer addresses. And I'm pleased to say we're starting to see the results of those measures as many of our key metrics in our business show that we're starting to see the signs of revenue recovery in our business. And let me take a look at our performance for the quarter. Total revenue for the third quarter was $1.8 million, compared with $5.4 million for the same period last year. Product and product-related services revenue, or what we refer to as direct revenue, was $1.7 million, compared to $4.3 million for the same period last year. Our direct revenue business offered up a few bright spots this quarter as well. We continue to see a margin-friendly mix shift in business from lab services to kits and instruments. We've also been able to post modest revenue gains in Europe year-to-date, in spite of significant headwinds. Growth in this region is being driven by many factors, but one tactic that's been especially effective is a focus on existing instrument placements and a related reagent pull-through. we are seeing customers gradually starting to return to their laboratories. It's small, and in some cases, it may only be a day or two a week, but this is an improvement over what we've seen the last couple of quarters. We track and forecast this very carefully and are seeing more and more customers resuming some semblance of normal work schedules. Our current expectations, as long as there's not another wave of complete shutdowns, is that in the coming quarters, more and more customers will be returning to work, and oncology trials will get back on track, allowing us to regain our growth momentum that we had before the pandemic. Collaborative development services revenue continued on its expected reduced trajectory, with revenue of $76,000 for the third quarter, compared with $1.1 million for the same period last year. We remain very active with our sales efforts in this area, and we believe that as people return to work, HTG will eventually contract new collaborations. Now let me take a closer look at our profiling business. In spite of reduced activity by our existing customers, they do remain actively engaged with our sales teams. In addition, we recognize revenue from several new customers during the quarter. Approximately 20% of our Q3 customers were new. First orders are usually small, but they do graduate to larger revenue opportunities over time. This is a great example of how our sales teams employ new tactics and measures and measures that are starting to yield results. Similarly, on the publications front, we now have more than 225 publications that reference HTG edge seek technology, a 42% increase from the approximate 158 that we had Q3 2019. We believe the growth in customers and growth in publications reinforces our message that HTG technology is a cutting edge and scientifically integral part of the research process. These metrics give us confidence that our strategy is working. And with data showing that our customers are starting to return to their laboratories, we believe there will be increased demand in the market for our products. In biopharma, we continue to see the number of active programs time out due to work-from-home restrictions. As a reminder, for us to include a program in our active programs metric, it first needs to be a pharma-sponsored trial. It also needs to be traceable in clinicaltrials.gov. Finally, it needs to have generated revenue for HTG within the last 12 months. So with so many trials delayed and pharma not on-site running samples or sending samples to HTG, projects have started to time out, especially because many of our biopharma customers are on the coast where the impact of COVID-19 was more pronounced. With that in mind, we finished the quarter with 55 active programs. down from 88 at the end of 2019. This is a net loss of 33 programs, including 50 programs that have timed out. However, 20 programs have been extended. We've also signed up 17 new programs. So the numbers are actually more encouraging than at first glance, and another promising indicator that our sales measures are starting to deliver results, especially as it relates to customer diversification and biopharma. Turning to our strategic milestones and product development, we continue to operate at a very high level. First, we're very pleased to have achieved our milestone to produce a white paper on technical feasibility of our approximate 20,000-gene whole transcriptome edge-seq panel, which internally we call WTTX. Some of the high points of that white paper are it demonstrated HTG's edge-seq technology is highly scalable and allows measurement of the entire human transcriptome. while maintaining all of its advantages, such as low sample input, extraction-free chemistry, and the ability to test low-quality FFPE tissue. The prototype whole transcriptome panel demonstrated good directional alignment with RNAC. It generated differential expression data that were highly correlated to those generated also using RNAC. Additionally, excellent accuracy of differential expression analysis using spiked-in reference material was also demonstrated. This proof-of-concept study has underscored our view that the HTG EdgeSeq technology is a robust alternative to RNA-Seq for gene expression profiling, with all of the advantages it offers to traditional extracted RNA-based GEP methodologies. This study also demonstrated that our technology can measure the entire human transcriptome out of a single cut of tissue. This is exciting. as we are building what we believe is a game-changing product for HTG and the market. We believe we can enable translational researchers, biomarker leads in biopharma, and diagnostic companies who have medical content to use the WTTX almost like an RNA operating system. As with our existing products, WTTX uses less sample, has an easier to implement workflow, has a faster turnaround time, and greatly simplifies bioinformatics versus traditional RNA-seq. The WTTX has been designed to a clinical grade of performance for precision and reproducibility. In addition, if our customers want to down-select the smaller panels from the WTTX, probes can simply be selected from the WTTX and incorporated into smaller, more sequencer-efficient panels with minimal revalidation. As the assay chemistry and the probe sequence design remains the same. In Q4, we expect to take the technology to the market with an early access program. The final product for full commercialization remains on track for a mid-2021 launch. Also in the quarter, we introduced a new application on our precision immuno-oncology panel that identifies signatures that measure 23 unique immune and stromal cell types, allowing for immunophenotyping of the tumor microenvironment. We believe having these immunophenotypes available to researchers will allow them to characterize responders or non-responders based on an RNA molecular profile more easily than if they had to build their own pipelines and classifiers. We will continue to bring more apps for our pre-existing panels to drive utility and to make them easier to use for our customers. Lastly, we've renamed and repositioned our previously described autoimmune panel to what we now call our immune response panel. This panel is a powerful tool to help translational researchers and biopharma better understand the immune response, not only in oncology, but also in autoimmune disorders such as lupus and RA and infectious disease areas, including COVID-19. We continue to work at a very high level in product development and look forward to continuing to achieve our technical milestones as the year progresses. This quarter, we started to see the results of some of our strategy shifts that we made in response to COVID-19. And although our revenue was down as expected, we were very encouraged by our new customer growth and by the fact that we're starting to see our legacy customers return to their laboratories. I've said before that I expect HDG to emerge through all of this as a stronger and better company. And with more customer growth and diversification, better penetration of our instruments with tips, and exciting new product pipelines, we're producing results that justify that confidence. With that, it's my pleasure to turn the call over to our CFO, Sean McMeans, for a review of our financials. Sean?