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spk06: Greetings and welcome to the HTG Molecular Diagnostics, Inc. Third Quarter 2021 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Monique Cossey of Lifestyle Advisors. Thank you. Please go ahead.
spk05: Thank you, operator. Earlier today, HTG released its financial results for the third quarter ended September 30th, 2021. 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. These forward-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 includes risks and uncertainties described from time to time in the company's SEC filings. HCG cautions listeners not to place undue reliance on any forward-looking statements. HCG is providing this information as of the date of this call, November 10, 2021, and the company undertakes no obligation to update any forward-looking statements. With that, I would like to turn the call over to John Lubnowski, Chief Executive Officer. John?
spk03: Thank you, Monique. It's great to be here again today to review the results of the company's third quarter. It progressed much as we expected, including the announcement of our new Drug Discovery Unit, which plans to use HTG's technology in new and exciting ways. But first, let me get to the numbers associated with our profiling business. As we've been saying for the last couple of quarters, we're seeing our translational profiling business beginning to return to growth, and our third quarter's performance reflects that same pattern. Product and product-related services revenue increased by 48% to $2.5 million for the three months ended September 30, 2021, compared with $1.7 million for the three months ended September 30, 2020. Product and product-related services revenue increased by 11%, to 6 million for the nine months ended September 30, 2021, compared to 5.4 million for the nine months ended September 30, 2020. Revenue increased 22% from the second quarter of 2021 to the third quarter of 2021. This was the recovery that we've been speaking about as we saw our customers returning to pre-COVID operating levels in a quarter. This is highly encouraging as we expect this trend to continue as global supply chain and labor issues associated with COVID are alleviated. Our suppliers are currently experiencing shortages of lab plasticware that impacts our ability to run our lab, and this also impacts our customers' ability to ship us samples in appropriate sample containers. Customer labor shortages have also impacted the pace at which programs are moving as sample cohort preparation and shipment is frequently being delayed. But nonetheless, we believe our revenue for the third quarter reflects a solid all-around performance by all of our commercial teams, North America Academic, Europe, and Pharma. To add some color, we added five new customers in the quarter and expanded our active install base by four instruments. On the Pharma front, we finished the quarter with 57 active Pharma programs. The breakdown of that for the nine-month period was we added 33 new programs, extended eight existing programs, but timed out on 26 programs due to lack of activity. We expect to see this trend to continue as more programs time out in this year than in years past due to the significant impact we believe COVID had on clinical trials in 2020 and the first half of 2021. However, we're continually adding new programs to replace and overtake the programs that are timing out and expect to see these new programs drive further growth in our portfolio for this business. We also expect our revenue recovery to continue into the fourth quarter. Finally, on the publications front, we added 22 new publications in the quarter, bringing our cumulative total to 340. Again, demonstrating strong scientific and market adoption of our technology. This quarter, we also went into full commercialization mode for our new HTG Transcriptome Panel, or HTP. With a little over a quarter since commercialization, the product already represents 7% of the company's total revenue for the nine months ending September 30, 2021. This will continue to be a high area of commercial focus. We always strive to do better, but we're very pleased with the progress we've seen this quarter. Three months ago, we said we saw our translational profiling business starting to get back to growth, and that's exactly what we saw in Q3. We expect to see this trend to continue, as our customers and suppliers continue to recover from the global impacts of COVID-19. This is a big market, and we're confident we have a terrific value proposition, so commercial execution will continue to be our focus. This quarter, we also unveiled a little bit more about our HTG Therapeutics business unit. Our motivation for the company to become engaged in drug discovery was really based on three things. First, the HTP, the whole transcriptome product, really opened up new opportunities for the company beyond just profiling. Second, we believe RNA is a great biomarker tool, and we have a great platform technology that we believe can add significant value in drug discovery. And last, the emergence of RNA-targeted therapeutics. Putting all these factors together, we believe we're in the right place at the right time to leverage our capabilities in this exciting new market. Let me add some even more color. To date, the company has had four companion diagnostic collaborations In each, our pharma partner did an all-commerce trial trying to reach the largest possible market if they succeeded to reach their clinical endpoint. However, in each case, they did not reach their clinical endpoint and came to HTG in an effort to build a molecular classifier that would identify responders. But this additional effort was also unsuccessful, not because our technology didn't work, but because the drug lacked efficacy. This experience reflects closely what is seen in the overall drug development market. where 90% of drugs fail in the clinic due to efficacy or toxicity issues. With our new RNA transcriptome technology now in hand, we see this market-wide challenge as a clear opportunity for HTG. Why not use our proven and well-validated RNA technology to pull key learnings for drug development, specifically mechanism of action, structure activity relationships, and toxicity screening forward into drug discovery? when there's still time to make modifications to the chemical structure of the proposed drug candidate? Why wait to get a drug into an expensive late-stage trial only to find out it doesn't work? To seize this opportunity, we needed to harden our RNA technology, and we needed to add a differentiated medicinal chemistry platform. So we went out and acquired what we believe is a state-of-the-art in silico library design and docking technology. We had what we already viewed as a best-in-class mRNA profiling tool in our HTP, and we paired with our best-in-class whole transcriptome microRNA panel, but we also needed to expand our technology to profile RNA modifications, like M6A. And we've now done that in creating our epitranscriptomic technology called HTG EpiEdgeSeq. HTG EpiEdgeSeq was a significant achievement, but we plan to keep this as an internal capability and not fully commercialized. We can now analyze hits coming out of our hit-to-lead process using our transcriptomic tools and then use this to inform our medicinal chemistry, dialing in molecules for efficacy and lower toxicity. We internally call this approach chemitranscriptomics. While some would argue that RNA-seq can do much of what we're proposing, we believe we're advantaged on several fronts with our own technology. First, as our HTP white papers demonstrated, We have substantially higher assay success rates than RNA-Seq. We also work with a fraction of the sample required. And our workflow is significantly more simple, enabling actionable data in days, not weeks or months. I believe our ability to quickly turn sample data in just a couple of days at a very affordable cost to inform chemistry optimization is a highly relevant differentiating technology for HTG. So in theory, can people use RNA-Seq to inform chemistry? Yes. but the challenges of sample size, timelines, and sample quality will very often make this option impractical, and we believe show clearly why our HTG EdgeSeq technology holds a strong advantage. It's just not me that thinks this is a great opportunity for the company. It's also a lot of the people we've recruited. I'm delighted that Dr. Steve Barrett came to us from Janssen Pharmaceuticals to run this unit. As US head for non-clinical safety assessment at Janssen, Steve led a large team supporting programs in all phases of discovery and development, from target assessment and lead optimization, through candidate selection, and early and late stage development and registration. Prior to that, Steve served as Vice President for Preclinical Research and Early Development at Skinexis, and also held senior roles at Allergan, Forest, Shearing Plow, and Merck. Also joining the company are industry veterans, Todd Huffman as Vice President of Strategy, Carl Cobb as Vice President of Chemistry, and Desmond Ray as our Vice President of Business Development. We've also augmented this core team with several KOLs and experienced consultants. We're excited about the potential to use our proprietary RNA profiling technology to be highly disruptive in drug discovery. By matching our HTG technology with a complimentary team of industry experts, we believe we'll be able to develop a pipeline of licensable drug candidates beginning in late 2022 and early 2023. With that, I'd like to now turn the call over to Sean for a deeper dive on our financial results.
spk00: Thanks, John. Total revenue for Q3 was $2.5 million compared with $1.8 million for Q3 2020. Our Q3 revenue was again comprised entirely of direct revenue defined as product and product-related services revenue in our financial statements. Our cost of product and product-related services revenue was $1 million in Q3 2021 and $0.9 million for Q3 2020. Q3 2021 also produced improving gross margins versus Q3 2020, reflecting our higher product and product-related services revenue. The costs for our Tucson-based service lab and operations are largely fixed, and as a result, higher volumes produce increased gross margins. A portion of our margin improvement over 2020 was also attributable to the receipt of employee retention credits. Q3 2021 research and development expense increased by approximately $0.2 million compared with Q3 2020. Research and development expenses included $1.1 million of profiling development costs and $0.4 million of costs related to our therapeutics unit. Based on our development team's successful completion of our development milestone goals through Q3 2021, we were able to announce the official commercial launch for our transcriptome panel on August 5th. Sales of our transcriptome panel totaled $200,000 in Q3 2021. Our operating loss for Q3 2021 was $4.2 million compared with $5.2 million for Q3 2020, reflecting the recognition of an additional $0.6 million in employee retention credits and focused management of overall operating expenses. That loss per share was $0.60 for the quarter ended September 30, 2021 and $1.12 for the same period in 2020. This reduction reflects additional shares of common stock sold in 2020 and 2021 through our at-the-market facility and our equity line of credit and our November 2021 for 15 reverse stock split of our common stock. As of September 30, 2021, we had approximately 7.5 million shares of common stock outstanding. We ended the quarter with 25.4 million in cash, cash equivalents, and short-term available for sale securities. I will now turn the call back to John for closing comments.
spk03: Thank you, Sean. I've said and will say again, I firmly believe the best days for HDG are still in front of us. Hopefully, as I've reviewed our encouraging results and provided more color on our strategy, you're going to share my enthusiasm. At the end of each of the last two quarters, I said I expected to see the business continue to recover. And in the second and third quarters of 2021, we saw our profiling business continue to experience this trend, showing strong growth over the first quarter and over comparable quarters in 2020. We also saw continued new customer additions and a rebuilding of our pharma business. I said we're going to launch our landmark HTP product in the third quarter, and we delivered again. I'm expected that we're going to see continued momentum in our profiling business as our markets continue to return and we begin to fully capitalize on the opportunities opened up by the HTP product. We also expanded the utility of our EdgeSeq technology, creating potential future revenue and valuation opportunities with the formation of the HTG Therapeutics business unit. HTG has a terrific RNA profiling technology and continues to seek out new and better applications for this technology. I think we may have found a great one in drug discovery. We plan to execute on this business plan in a very capital-efficient manner, and really understand where we should best position the company in the drug discovery value chain to maximize return and closely manage expense. I look forward to being able to report out on our technical and business achievements of this business unit in future calls. We've been through a rough stretch with COVID, but we've managed to emerge on the other side better than ever. Our translational profiling business is coming back online, and I believe it has a highly differentiated product that should enable us to sustain this growth. We've also framed a market opportunity in drug discovery with real and substantial needs where we believe our technology can be highly disruptive and increase drug development productivity, yielding a significant revenue and valuation opportunity for the company. I don't think we've ever been in a better place. That's why I believe the best days for this company are still ahead of us. With that, I'd like to open up the call for questions. Operator.
spk06: Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star 1 to register a question at this time. Our first question is from Kristin Kluska of Cantor Fitzgerald. Please go ahead.
spk04: Good afternoon. This is Rick on for Kristin. Thank you for taking our questions. Could you please discuss a little bit about the degree to which the early adopters you've worked with have continued to work with the HTG transcriptome panel and the potential collaborative role that you've talked about having with the early adopters? How do you believe this could influence potential continued development of the transcriptome product?
spk03: Rick, this is John. Nice to meet you here. Yeah, the early adopter program was important for us because we didn't want to wait until the product was launched, which was August, before we started the process of getting people to design experiments and begin to lay the groundwork for publications that I think will actually probably be our best sales and promotional activity. So of the EAPs, we signed actually 32 of them prior to launch. And of those, we've gotten orders from about half of them right off the bat. So that was very, very important for us. The other thing was we were on pace for what I think is going to be a substantial revenue contribution, even this year, probably stands to be 10% to 15% of our year-end revenue. And as I'm looking into even Q1 forecast, we're seeing that this product will very quickly become a substantial driver for revenue for the company.
spk04: Thanks. Another question. Do you have any metrics you're looking at to get an idea of whether labs who switch to the HTG transcriptome panel are sticking with the product and potentially even choosing it over RNA-seq over time?
spk03: We've got metrics that we're looking at in regards to where are we coexisting versus where are we kind of a on our own. They're a little premature given the fact we've only been on market for really less than a quarter officially on that. But we will report out on the highlights, if you will, on the transcript on panel commercialization. What we're trying to do also is position this product in a complementary way with our legacy panels as well. So we want to make sure that we continue to grow our traditional panels and use this as incremental and not risk potential cannibalization of revenue.
spk04: Understood. Thank you. One more question. In the past, you've talked about how the whole transcriptome approach kind of came out of the desire to have every potential customer's favorite gene represented on the panel. With that said, has there been any feedback from customers in the early stages of commercialization on any potential limitations or just transcripts that they would like to see, or has it been pretty fairly sufficient from the customer's perspective?
spk03: Now, it's kind of an all-in panel, so if it's a coding – RNA gene. We have that probe set in the mix. So we kind of eliminated that barrier. And, you know, we're having our initial success in oncology, which is our core. We have a lot of sales and marketing plans to execute on our strategies of customer and market diversification because the market for RNA gene expression is a lot bigger than just oncology. Matter of fact, I'd make the argument that in other disease areas, the market's probably larger. And by finally having a comprehensive solution, not just kind of an oncology subset, I think it positions the company for substantial growth, not only in oncology, but in other areas like immune response, you know, CNS, transplant, diabetes, cardiology, et cetera.
spk04: All right. Thank you very much.
spk03: Thanks, Rick.
spk06: Thank you. Our next question is coming from Alex Nowak of Craig Hallam. Please go ahead.
spk02: Great. Good afternoon, everyone. This is Connor Stevenson. I'm for Alex. So I just have some questions around the HTP product. You know, how much revenue per HTP customer can we expect, and how many customers in total so far have you signed up for HTP?
spk03: Yep. First of all, good to meet you, Connor. Again, with under a quarter of data under our belt, it's, you know, this is preliminary and premature at best. But, you know, we had, you know, somewhere in the neighborhood of 15 customers so far. And those orders came, you know, in between, you know, $50,000 and $100,000 per order. And that is accelerating. So, you know, we're looking at an
spk02: increasing uh forecast in q4 and as i mentioned before into q1 sure okay that's helpful um and then i guess kind of going off that thinking about 2022 you know how are you thinking about you know sales and cash burn i mean i know you're going to have this you know strengthen the core business but then you know with the addition of htp gaining traction you know just kind of how are you thinking about um expenses going into 22
spk03: Yeah, well, we've not provided guidance for quite some time. We, you know, we're encouraged that we're seeing our growth rates return back to that, you know, 20, 30, 40%. We're looking to see that hold together again for Q4. And based on how we finish in, you know, 2021, you know, we're probably going to be not, again, not providing guidance, but expecting that we will be back into that, you know, relatively high growth rate, 20, 30, 40% off that core products and services business into 2022. Sure. Okay.
spk02: That's all for me. Nice to meet you. Thanks. Thanks, Connor.
spk06: Thank you. Our next question is coming from Yi Chen of HC Wainwright. Please go ahead.
spk01: Hey guys, this is Chait on behalf of WE. You've answered most of my questions. So just a quick one on upcoming milestones or catalysts and what we should expect across your business units. Thank you.
spk03: Now, good question. So as you guys have covered, as you know, we like to publish strategic milestones and we like to be able to check them off because we like to have the reputation of doing what we say and saying what we do. So we have just a couple of final milestones here, this to close out 2021. And that will be, you know, the completion of additional sequencer validation and sample type validation for the HTP. So we'll put a PR out on that. And then the next probably substantial milestone is we'll begin to announce our scientific advisory board between now and the end of the year that we've put together. to support our therapeutics business unit. Upon closure of that year, as we roll into next year, we will then do exactly what we did this year. We'll provide our strategic milestone calendar that we believe are significant value inflection events for the company. We'll announce that and then we'll begin reporting out on our successful achievement of those.
spk01: Great, thank you so much, and congratulations once again. Hey, thank you.
spk06: Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments.
spk03: Great. Well, first, I'd just like to thank everyone for making time and joining us today. I again want to thank the employees here at HTG for really a tremendous quarter, and we're working and digging out of this COVID situation. And I really appreciate their self-sacrifice and their loyalty they continue to show to the company. Additionally, I also want to thank our board, who's been extremely helpful to me and to the rest of management with counsel through 2020 and the early part of 2021, and especially our shareholders for their continued support and also guidance and counsel. We look forward to updating you again on our next earnings call. Thank you for joining us.
spk06: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time or log off the webcast and enjoy the rest of your day.
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