HTG Molecular Diagnostics, Inc.
Q1 2020 Earnings Call Transcript

Published: 14 May 2020

[Operator:]

Greetings, and welcome to HTG Molecular Diagnostics, Inc. First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode [Operator Instructions]. As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Monique Kosse. Thank you. You may begin.

[Monique Kosse:]

Thank you, operator. Earlier today, HTG released financial results for the first quarter ended March 31, 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 expected additional collaborations with pharma customers in 2020, anticipated growth in the company’s RUO profiling business and related revenue, expected growth in and benefits from pharma programs and collaboration, product development and commercialization activities.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 impact on HTG and its customers that may cause HTG's 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 HTG's SEC filings.HTG cautions listeners not place undue reliance on any forward-looking statements. HTG is providing this information as of the date of this call, May 13, 2020 and HTG undertakes no obligation to update any forward-looking statements.With that, I would like to turn the call over to John Lubniewski, Chief Executive Officer. John?

[John Lubniewski:]

Thank you, Monique. HTG entered 2020 with significant momentum, especially in our direct revenue and product development initiatives. While the events of the recent weeks and the impacts of the COVID-19 pandemic are unlike anything we could have imagined at the beginning of the year, we firmly believe the strength of our core markets is unchanged. Precision medicine is here to say. We believe biomarkers are the key to implementing precision medicine and with RNA positioned as the future of biomarker technology in oncology and other disease areas. We believe HTG’s RNA technology is well positioned now and for the long-term.That said, our near-term was impacted this quarter by COVID-19, like many in the industry and most of our peers. As the impact of the COVID-19 pandemic swept through the United States and Europe in early March, most of the impact was at the end of the first quarter. The country began to implement stay at home restrictions and social distancing efforts, which directly impacted our operations along with those of our customers and significantly altered their planned purchases for the period. Because our sales cycle is typically skewed to the last month of each quarter, this had a material effect on our revenue.Let me turn to the numbers. Total revenue for the first quarter was $2.2 million. This compares to $3.2 million we saw last year. Product and product related revenues, what we refer to as direct revenue, was $2 million compared to $2.7 million in the first quarter of 2019. While the impact of COVID-19 was significant, we did see a few bright spots in some parts of our direct revenue business, specifically in kit and instrument sales.Collaborative development services revenue continued on its expected trajectory, with revenues of $200,000 for the first quarter compared to $500,000 for the first quarter last year as we continue to await decision points from our partners. We continue to actively seek new partners and expect to add new collaboration programs in 2020. I do note, however, that while our potential partners in the world are feeling the impact of COVID-19, we do continue to have ongoing discussions and are actively pursuing partners. The timing of any one program has always been an imprecise measure. And now with COVID-19, it's even more difficult to predict the timing of any new collaborations. But we do believe the interest level remains high and we're optimistic.Now let me take a moment to take a deeper dive into our profiling business. In our academic profiling business, many of our customers have had work from home restrictions in place since mid-March. Our sales team has been finding creative ways, staying in front of them and having daily telephone and video sales calls with existing and perspective customers and continuing to do all that as possible to keep the sales process moving forward. As work from home regulations are eased, we expect the academic profiling business to return fairly quickly, both in Europe and United States. We also expect continue to see growth in our pharma profiling business. Number of active programs is now at 70 and we believe will continue to grow that number. In our pharma profiling business, we expect to see smaller pharma and biotech return to work more quickly than larger pharma.Turning to product development activities in Arizona and California. We have been able to achieve some very important milestones for us internally. In California, we achieved our first quarter milestone of designing the 23,000 probes for our whole transcriptome product and ordering them from our supplier partner. This took an incredible dedication and flexibility from the team as San Carlos was one of the first areas impacted by the stay at home regulations.Our Arizona development team also met its Q1 milestones, which included developing an RUO assay with response algorithm for a potential pharma collaboration, finishing two retrospective trials for another pharma partner and completing a comprehensive assay validation reports on our existing RUO assays. We’re very proud to have kept both development labs open and running, and we're able to keep our lab work, our bioinformatic analysis and our report writing all moving along, while at the same time prioritizing the safety of our employees and their families. We look forward to continuing to progress in this important area.Overall, it has been an extremely challenging time, but we have worked to make the most effective use of this time. We have reviewed processes and retrained all of our functional areas. We've implemented new and better systems across the board. Our sales teams have maintained steady and regular customer contact, and we've preserved the key product development value creation timelines. We firmly believe that all of these steps will allow us to emerge as a more capable and efficient company.With that, it’s my pleasure to turn the call over to our CFO, Shaun McMeans for a more thorough review of our financials. Shaun?

[Shaun McMeans:]

Thanks, John. Total revenue for the first quarter of 2020 was $2.2 million versus $3.2 million for the same period in 2019. Direct revenue defined as product and product related services revenue in our financial statements was $2 million for the first quarter of 2020 compared to $2.7 million in Q1 of 2019. This decrease was primarily the result of a decrease in RUO sample processing revenue, which in 2019 included significant levels of subcontracted laboratory services revenue for two large pharma customer programs, which did not recur in 2020.While our product revenue increased $240,000 over the first quarter of 2019, this increase was lower than anticipated due to our inability to ship instruments and consumables resulting from COVID-19 related closures of our customers’ facilities in March. Our RUO sample processing revenue was also impacted by COVID-19 as customer facility closures delayed the preparation and shipping of samples to HTG for anticipated customer programs.Collaborative development services revenue decreased year over year by $300,000 as existing programs reached partner decision points in 2019. Ongoing revenue reflects completion of remaining contract development tasks on these programs as we await further decisions. While the impact to our planned revenue has continued into the second quarter of 2020, we're hopeful based on recent discussions with our customers that many of the planned programs and related product or service revenue will be reinitiated in future periods once our customers’ operations are able to return to pre-COVID-19 levels.Our costs of product and product related services revenue decreased to $1 million in the first quarter of 2020 compared to $2 million for the same period in 2019. This primarily reflects a decrease in low margin subcontracted laboratory services revenue in 2020 compared to prior year. Research and development expense decreased approximately $150,000 in the first quarter of 2020 compared to the same period in 2019, primarily related to the decrease in collaborative development services revenue as costs related to these programs are recorded in research and development expense.Our contingent new product related research and development expenses unrelated to our collaborative development services programs amounted to approximately $1.7 million in the first quarter of 2020 compared with $1.6 million for the same period in 2019. This increase reflects our ongoing development activities and successful milestone achievements in both our California and Arizona facilities throughout the period despite operational disruptions from COVID-19.Our operating loss for the first quarter of 2020 was $5.4 million compared to $5.3 million for the same period in 2019. Net loss per share was $0.08 for the first quarter of 2020 and $0.19 for the same period in 2019. This reduction reflects additional shares of common stock and warrants for common stock, and an underwritten public and private offering at September 2019, and common shares sold through our ATM facility in Q1 2020.We currently have approximately 62.2 million shares of common stock outstanding. We ended Q1 with $32 million in unrestricted cash, cash equivalents and short-term available for sale securities.I will now turn the call back to John for closing comments.

[John Lubniewski:]

Thank you, Shaun. We're very proud of how we operated during this time. We've been nimble in managing around the uncertainties and we believe we made the necessary adjustments to maintain our product development momentum and preserve our cash runway.As we look forward, we still see a large and meaningful opportunity in front of us, and look forward to executing on our strategy as we see restrictions begin to lift. We continue to have a terrific value proposition with our current products and services, and expect to regain our momentum and signing new farmer programs, which eventually will yield potential diagnostic opportunities. We continue to make investments in our future with our product development teams in California and Arizona to maintain and grow the momentum of our business. And we're doing this in a very capital efficient manner with a focus on building shareholder value.In closing, our strategy remains unchanged. Our priorities will continue to be; one, grow our base profiling business at a high rate to fund continuing operations and to create new companion diagnostic collaboration opportunities; second, continue to grow our farmer pipeline, both in the number of programs and the number of customers; and third, continue to invest in R&D, both in California and Arizona to develop the next wave of products, services and applications.This experience is bringing the HTG team together and we're working at new levels of efficiency and effectiveness. Hard winners make good timber. We will emerge from this a stronger and more capable company.With that, I would like to open up the call for questions.

[Operator:]

Thank you. We will now be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Puneet Souda with SVB Leerink. Please proceed with your question.

[Unidentified Analyst:]

[Leslie] on for Puneet this afternoon, thanks for taking our question. I wanted to start looking at the Whole Transcriptome Assay, I mean, recent departure of senior team member here. Wanted to just get a view into where the current teams stands in terms of actually being able to work in the lab and be present in the lab on a daily basis, early priorities and kind of as to previous pathway and milestones are still in place at this point?

[John Lubniewski:]

Actually, San Carlos, as I mentioned in the call, one of the early spots being in Northern California affected by the work from home. We are an exempted industry but that said we try not to have any more than one person in the lab at a time. The good news is we're able to do a lot of that work telephonically and the experimental plans, the data analysis, all can be done remotely and that's what we've been doing since we went to stay at home. I just talk to the program lead up there [Dr. Mainland Lu] this morning. As mentioned in the call, we have met our Q1 milestone. We are on track for our Q2.That being said this is another, this is another steep part of the climb. This is getting to final assay configuration for the whole, it’s now up to 24,000 probe assay. So that technical team, which is really the one that was doing the work, if you will, is still there, still working every single day. One of our lead scientists actually is in trying to get some sequencing runs completed today as a matter of fact. So that program continues on plan.

[Unidentified Analyst:]

And then moving to biopharma, you mentioned that you expect smaller pharma and biotech to return a bit quicker. So I guess what does that mean for HTG? How is the funnel of the biopharma project looking right now? And I guess how have your priorities changed in the last few months with everything going on?

[John Lubniewski:]

Obviously, it's a bit of a moving target. But just based on what we're seeing, we're actually seeing the academic markets look like they're going to come back more quickly than the pharma and the biotech. We're already seeing -- we installed two instruments at a big academic customer this month. Within pharma, we're expecting the smaller biotechs to come back more quickly and we're seeing some of the very large pharma, they might not come back to late summer. So obviously, that's causing us to kind of relook at customer targeting, try to look for ways to stay effective, even if they're not back on site.Again, the number of programs that we work with, with pharma we've got a very stringent criteria that we use to actually count them, which basically means it has to be an active program within the last 12 months. And we know that just statistically, half of the programs are going to time out during the year. So we went into the year with 88. So we knew that 44 are going to time out.And then we also knew that cycles by quarter. So the optics of the Q1 number of 70 is because 22, so almost half of the total number of programs we're expecting to time out actually happened in Q1. So it was kind of a disproportionate number. So that's why we're not kind of too worried about that, because we have optics on one, what we've already booked here in April and May and then going forward. So I think pharma is going to be a bit of a challenge depending upon when the big guys come back online.

[Unidentified Analyst:]

And then just one quick one on the cash burn side, I guess our assumptions changing with everything going on with levers can and are being pulled anything there would be great. Thanks.

[John Lubniewski:]

Yes, I'll take the first part and then I'll ask Shaun to comment a little bit. Coming into the year, we knew we were going to be lighter on collaborations. And so we did do a headcount adjustment in January that turned out to be very well timed, because it got our Tucson, Arizona, employee base, I think to a number that it needed to be. Subsequently when we did see the lack of collaboration revenues, that also translates to a lowering of expenses. So we’re as planned and as anticipated, we have been able to go at a fraction of our expense plan. Those two things have combined to let us really maintain our cash burn rate to our targeted levels. Shaun?

[Shaun McMeans:]

I think one thing I’ll add Leslie is we raised some capital in the first quarter as well. So that gives us a little bit of initial runway into Q. And again as John said, we are targeting that same $5 million per quarter and we'll consider throwing levers in Q2 and beyond as needed.

[Operator:]

Our next question comes from the line of Kristen Kluska with Cantor Fitzgerald. Please proceed with your question.

[Kristen Kluska:]

Hi John and Sean, thank you for taking my questions, and I hope everyone on your team as well at this time. So the first question here, as you're looking to expand the transcriptome product, you've highlighted transplant and diabetes as two potential markets. Could you talk more about the level of unmet need for the product offering here? And also since your team is actively engaging in conversations with your customers at this time. Are there any new particular indications or topics that have come up in these conversations?

[John Lubniewski:]

So I think that the first market that we're targeting for the whole transcriptome clearly is oncology that's our background. We believe that's where there’s already a significant unmet need for a more agile RNA technology to let RNA be used more commonly for biomarker work for precision medicine oncology. The next market that we think we're going to be moving into, matter of fact we already are, is in the auto-immune space. So whether that's Lupus, or MS or rheumatoid arthritis, biomarkers are now starting to become seen as a necessary component of drug strategies in autoimmune. And they're probably trailing oncology probably maybe by five years or so, but we think that that's going to be another very good market for the whole transcriptome product.We do participate in other markets. You mentioned a couple of them. Diabetes, we've gotten some interesting publications, as well as transplant. Those have a tendency to be more microRNA as opposed to the mRNA panels that we have. And we do have a whole transcriptome microRNA product and that's what's being used for those. So, I think that was -- did I miss anything. I usually write them down, Kristen,I'm sorry, I didn't write those questions down.

[Kristen Kluska:]

And can you talk about geographically whether you're seeing any trends related to your business and where COVID-19 might be the most disruptive? And also, how might you be looking to track this as things may start to open and vary by region?

[John Lubniewski:]

As a matter of fact, I had a conversation with my head of sales this morning to that very subject. So what we're doing is we're pulling together our customers that really represented our trailing 12 months revenue. And we are in the process of building a model based on when we expect to see them start to come online. We don't have that built yet. It will certainly not be a precise measure, because it's looking retrospectively at what we're going to be thinking prospectively, but it'll give us some shape of what we think the percentage of the business will come back by July, by August, et cetera.Geographically to your question, surprisingly we've seen in our academic business, even post-COVID kind of hang in there, maybe at 50%. It's not a complete all is lost scenario. Whereas pharma really has kind of shutdown. So we're seeing Europe, believe it or not, and the academic markets starting to make noise of coming back. We've seen MD Anderson and Texas come back online this quarter, or I mean this month. So, we’re cautiously optimistic there.

[Kristen Kluska:]

And then last I wanted to ask when things do start to reopen. Do you think there are going to be segments of the business where it may ramp up quickly just to make up for lost work and lost time? Or do you expect kind of the pattern to be at the relatively same speed? Or does it defer? Is it different amongst the different businesses?

[John Lubniewski:]

It's the latter. So I think inside academia, I think we'll return to normalcy pretty quickly with maybe even a little bit of upside in regards to the burn rates, because they've used this time to write grants and the like. Pharma, it's actually interesting, the bigger the pharma the more they're actually doing a portfolio analysis. And so they may actually come on even a bit slower, because they're basically reprioritizing their assets. Everyone has used this time as almost like a TV timeout in a basketball game to basically rethink their game plans. And in pharma’s case it’s what drugs, what indications, what trials are going to be prioritized over others. So it remains to be seen how quickly they come back online with their testing needs.I know the question you asked that I just remembered. Are there any other areas that we're seeing? Actually we are. So we've gotten recently from a host of customers, samples in where they actually looking at trying to develop subtypes of COVID patients, where they're actually trying to figure out from a mechanism standpoint why are some patients asymptomatic, why are some patients move very quickly into a very severe disease state. So although, that's not oncology personally, I find that a very interesting area of study and mRNA is a very viable biomarker to look at that. So I would not be surprised if we didn't pick up a lot of programs trying to understand the mechanism of disease behind the COVID-19.

[Operator:]

Our next question comes from the line of Yi Chen with H.C. Wainwright.Q - Unidentified AnalystThis is the [Dubalin] dialing in for Yi Chen. I have a couple of questions. First one, are you sensing any early signals from your customers of the molecular profiling business or recurring from the COVID-19 lockdown?

[John Lubniewski:]

The answer to that is, yes. We're starting to see, as I mentioned before, our academic medical centers are starting to return to work. We're expecting, for example, before the end of this month actually to receive and start running some more samples. Like I said, the last two weeks of March, it really shut down hard. April was pretty quiet. But we're now starting to see an awakening in those areas. Big pharma remains pretty quiet on regards to segments.

[Unidentified Analyst:]

The next one, what are your expectations for COVID impact in 2Q '20?

[John Lubniewski:]

It's probably a little too early to say. I mean, if things continue to come back online and we're back in business, if you will, sometime in June, we might lose between March and what happened then Q2 the equivalent of perhaps as bad as quarter of revenue. It all kind of remains to be seen about as states come back online, will they stay back online, et cetera. So we're constantly asking that question to our customers. And again, that's going back into that model that I spoke of where we're actually trying to retrospectively build a model where we can get a better feel for a forward looking forecast on revenues.

[Unidentified Analyst:]

One final from me. I know you mentioned that you have 88 programs last year. So how many new active programs did you add this year, this quarter?

[John Lubniewski:]

From Q1, 22 timed out and we added four new ones. So the net-net was 18, a negative 18. And again, as previously mentioned that was because a disproportionate number timed out in Q1, bit of a cycle issue. We're still expecting to be north of 100 programs year-end 2020.

[Operator:]

Our next question comes from the line of Alex Nowak with Craig-Hallum Capital Group.

[Will Fafinski:]

This is Will Fafinski on for Alex. Thanks for taking our questions. First one for me, John, given the ongoing situation and many sales reps working from home. Can you discuss how you've been preparing the team to work in a post-COVID environment where the ease of meeting in person is not what it used to be?

[John Lubniewski:]

We've actually been spending a lot of time with our sales force. Again, as previously mentioned, it was a fairly new sales team. So we used the time that we had to do a lot of technical training, market training with this team, a lot of sales planning and portfolio analysis. We actually went into every one.So if you have Bristol Myers as your account, we actually walked through their entire portfolio, win the sales teams so they would be better equipped to actually be able to identify future clinical trial applications for RNA assays. So they're kind of all lined up with all that information. Where possible they've been doing Microsoft Teams and WebEx meetings with folks to move things along. We do have optics on new programs, new customers in April and May.So, I think that the teams will be more capable than we kind of exited. That said, just personally and for the safety of our employees, we're probably not going to be the first people on airplanes. We can still do a lot of work from basically telephone or video. The key thing for us is our customers have to get back to work, because if our customers aren't in their labs, they're not running tips, they're not using our tests, or they're not assembling the samples to send those so that we can actually work on their projects.I think our sales teams can be very effective working telephonically, the most important thing right now is get our customers back to work, and then we'll let our people get back on planes and trains once we feel it's a safe thing for our employees and for our customers.

[Will Fafinski:]

And then second question for me. Could you just share an update, if there is one, on your precision diagnostic partnership programs? This has been a big focus for us. We know PDP-3 has been historically tough to predict. But is there an update on PDP-2 now that that partners through their merger?

[John Lubniewski:]

So we know that they have been doing a portfolio reevaluation. It remains to be seen what their new priorities are going to be, they have not shared them with us. So that's probably one of the places that we're going to want to be live sooner rather than later to be able to sit down and say, now that you've combined the assets of both of these companies, where are you going, because with that we then can figure out how we can help them in regards to trial stratification.We do still have optics on adding one or two new ones this year. Obviously, that has been slowed but we did reach a key milestone with one person that's kind of knocking on the door. So hopefully, we'll be able to get that deal done within the next quarter or two. And then we're working on another one beyond that. So ;19 was a bit of a lost year. We now understand respectively why we had kind of a slowdown in our partnership with Qiagen. But we remain very bullish that we've got a tremendous value proposition. We will reload the opportunities and keep them moving forward.

[Operator:]

We have reached the end of our question-and-answer session. I'd like to turn the call back over to management for any closing remarks.

[John Lubniewski:]

First of all, I'd like to thank everyone for joining us today. I know these are the interesting times. But in particular, I again have to thank our Board, they've been very helpful over the last several months, and also to our shareholders for their continued support at this time. And then I also really want to thank the employees here at HTG for their tremendous commitment that they continue to make to help us move forward with key strategic initiatives that we have for this company. And we look forward to updating you again on the next earnings call. Thank you very much.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.