HTG Molecular Diagnostics, Inc.
Q4 2016 Earnings Call Transcript

Published: 24 Mar 2017

[Operator:]

Good day, ladies and gentlemen and welcome to the HTG Molecular Diagnostics Fourth Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. I'd now like to introduce your host for today’s conference, Mr. Jamar Ismail, Westwicke Partners. Sir, please go ahead.

[Jamar Ismail:]

Thank you. Earlier today, HTG released financial results for the quarter and year ended December 31, 2016. Before we begin the call, let me remind you that the Company’s remarks include forward-looking statements within the meaning of federal securities laws, including statements regarding potential growth in pharma collaborations, and clinical diagnostic opportunities, possible additional collaborations from existing pharma customers, expected benefit of HTG’s collaboration with QIAGEN, expected commercialization activities in Europe and planned chemistry development. These forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond HTG’s control 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 to place undue reliance on any forward-looking statements. HTG is providing this information as of the date of this call and HTG undertakes no obligation to update any forward-looking statements. With that, I would like to turn the call over to TJ Johnson, President and Chief Executive Officer. TJ?

[TJ Johnson:]

Thank you, Jamar. Good afternoon, everyone and thank you for joining us on our fourth quarter and year end conference call. On today’s call, I will provide a summary of 2016 and progress toward our long-term goals. I will then turn the call over to our CFO, Shaun McMeans to cover our financial results. After that, I will make some closing comments and then open the call to your questions. 2016 was a very productive year for HTG, as we demonstrated progress and in some situation significant progress against our strategic objectives. Our achievements include

[Shaun McMeans:]

Thank you, TJ. Our total revenue was $1.59 million for fourth quarter compared to $1.2 million in 2015. Product revenues including instruments and consumables were $1.1 million in Q4 compared to $1.2 million in 2015. Consumables revenue decreased 35% to $642, 000 in Q4 from $990,000 in 2015, reflect an increase in component of service revenues driven by demand in our VERI/O laboratory. Service revenue increased to $381,000 in Q4 from $33,000 in 2015. Instrument revenue increased to $435,000 in Q4 from $192,000 in 2015. We expect our product and service revenues continue to be approximately split, along with steady improvement in gross margins as we scale our business. Our full-year margins continue to reflect our strong standard product margins, increasing top line growth, and our continued leveraging of a stable fixed cost of operations. Our Q4 gross margin was 15.3% compared to 34.5% in 2015. Gross margin was 19.4% for the year ended December 31, 2016 compared to 17.5% for 2015. Our decreased margin for the fourth quarter reflects $145,000 in additional non-cash charges to inventory reserves. For our original HTG Edge technology. Prior to turning our primary commercial focus to our HTG EdgeSeq product platform. Absent this charge, our gross margin would have been be 25.3% for the quarter and 29% for 2016. For 2016 and 2015 this non-cash charges amounted to $704,000 and has fully reserved inventory for our original technology. Our operating expenses increased to $5.5 million for Q4 from $5.8 million in 2015. SG&A costs were $4.1 million in Q4, for both 2016 and 2015. Our research and development expenses were $1.4 million in Q4 compared to $1.7 million in 2015, primarily a result placing Project Janus on hold for the second half of 2016. Our operating loss for Q4 was $5.2 million compared to $5.3 million for the fourth quarter of 2015. Net loss per share was $0.76 for Q4 and $0.83 for 2015. For the year ended December 31, 2016, revenue totaled $5.1 million, including $2.8 million and $2.4 million of product from service, revenues, respectively. Operating loss for the year ended December 31, 2016 was $24.3 million compared to $18.9 million from the prior year. On a per share basis, net loss for 2015 was $3.66, compared to $5.03 in 2015. We ended 2016 with a $11.8 million of cash investments, including $7.5 million in cash equivalents and $4.3 million in short-term available for sale investments. At this point, I’d like to turn the call back to TJ, for closing comments.

[TJ Johnson:]

Thank you, Shaun. 2017 is off to a robust star and we see progression in many growth catalysts. We continue our efforts to expand into the clinical market and just obtained CE IVD marking for the HTG EdgeSeq out plus assay. We have begun commercialization of the out plus in Europe with our early adopter customers and will be taking a measured or highlight to use the term go slow to go fast approach. We just completed our first scientific symposium in Paris where we solidified programs with existing users and introduce prospective new customers to our solutions. The symposium was well attended and co-sponsored by QIAGEN in [indiscernible]. We expect Europe to be a meaningful catalyst for us this year. As we gain momentum with QIAGEN -- the QIAGEN partnership. We expect continued growth in our pharma pipeline. Our revenues will continue to be heavily pharma services driven and therefore lumpy. We are excited to keep you informed as our collaborations mature into further expected companion diagnostic deals. We are also very excited about the market potential of our new direct target sequencing chemistry. Initially we will offer this chemistry with a mutation panel via our VERI/O service lab that we plan to quickly expand into other applications later this year and beyond. In summary, we are intensely focused on continuing growth in our pharma business, commercializing our CE IVD mark products in the clinical market in Europe, completing our plan HTG EdgeSeq out plus PMA, final model submission in driving broader and deeper customer adoption, including several new and exciting research collaborations to be announced. I will now open-up to questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Mark Massaro with Canaccord Genuity.

[Mark Massaro:]

Hey, guys. Thanks for taking the questions.

[TJ Johnson:]

No problem.

[TJ Johnson:]

The first one and I guess congratulations on the CE marking of the out plus assay. TJ, can you just speak to the size of the -- how your sizing up the European market and maybe talked about the number of customers you have their today or you know give us a little more color as far as where you see this test being used? And to any extent you can provide color on, the market sizing would be helpful.

[TJ Johnson:]

Yes. Sure, Mark. Well, first of all testing in Europe is a very large market. As you know lung cancer as a very high incident prevalence rate. The European market is also more centralized as it relates to this testing than in the U.S market. So our efforts in the [indiscernible] of 2016 were really to begin introducing a lot of the major testing institutions in the main countries to the product concept and now that the product has achieved CE IVD marking. We are working very closely with a select number less than five, key opinion leaders in that market to start bringing up the assay either in parallel or on a evaluation modality. We don't have huge material expectations in our 2017 plan as it relates to ALK specific testing. We are expecting considerable growth in Europe this year as it relates to our overall business. We do believe that we will start to see uptake in the assay which will also help us drive instrument placements in Europe. But would expect a bigger inflection point as it relates to that specific assay in 2018.

[Mark Massaro:]

Okay, great. And then as it relates to out plus, your final submission or your final module to the FDA. Can you give us any update on when you expect to submit that fourth module?

[TJ Johnson:]

Yes, sure. We are busily [ph] at this point in time back-and-forth responding to questions around the initial module submissions. As you may recall, Mark, we completed the module three submission at the end of December. We're pretty much skewed up right now to run the method comparison study. We would expect that to happen in the very near future and that approximately two to three months post that study, we would have all the data prepared in the submission prepared to go into FDA. So we are still pretty comfortable with kind of a midyear timing, maybe Q3 for the submission and hard to predict how quickly we will be able to get the fourth module reviewed and turn around, but as we’ve stated before the whole concept of the modular submission is that you get much of the work out of the way by having the initial modules pre-submitted in the questions and answers back and forth. So, in theory, we would hope to see a faster turnaround time on the final module and overall submission approval.

[Mark Massaro:]

Okay, great. And then on the services revenue side, I was wondering if you could just speak at a high-level what your expectations are for your services business to grow throughout the course of 2017? And maybe as a dovetail to that question or the flipside of that question, can you give us an update on the number of installs you have on the -- on your instrument business?

[TJ Johnson:]

Yes, sure. We're expecting considerable growth in our pharma services business this year, Mark. We got a very strong pipeline and backlog. Heavy proposal activity going on right now. It's really hard to predict exact timing of lot of these revenues as they are very milestone driven, which causes them to be as I’ve indicated lumpy. But we are expecting considerable growth on that service line. We saw considerable growth in '16, and would expect probably a doubling of that business easily in 2017.

[Mark Massaro:]

Great. And then an update on your install base?

[TJ Johnson:]

Sorry, yes.

[Mark Massaro:]

That’s okay.

[TJ Johnson:]

We exited the year with 47 instruments in our install base. As I announced earlier last year, we’ve been bringing down the number of evaluation units that are in the field. I think we may have topped out at some point in '16 at nearly 20 instruments under evaluation. I believe that number is now down to seven or eight and we continue to be very focused on quality over quantity of instrument placements. Our primary market of focus today its pharma, and we're seeing them skewed toward service versus buying instruments. Although we are still seeing demand for the instrument selectively going into the key cancer institutions were we see a large translational programs and I believe we will start to see this year in 2017 our transition into the classic diagnostic razor-razor blade model as we start to see the market in Europe with our two CE IVD based products. So we have a pretty modest view of our placements this year. Most of them to be focused on Europe and some into some of the major institutions here in U.S., but obviously as we get diagnostic content for the box, we will start to see an uptake as people don't have the service option obviously, with the diagnostic products unlike our research products.

[Mark Massaro:]

Okay, great. And you’ve made -- your ability to potentially sign more and what your funnel looks like?

[TJ Johnson:]

Absolutely. I think a big key to that Mark, it is obviously our decision to partner up with QIAGEN. Now between the two companies our capacity for pharma deals has grown considerably. So we're quite frankly extremely excited about what we’re seeing now three to four months into the partnership. As they indicated, the level of request for proposals and engagement from customers have been extremely positive. We're literally working around-the-clock to meet timelines for a lot of our clients. So I believe we’ve got between the two companies more than adequate capacity to bring on considerably higher numbers of new deals. As you know these deals as they index in, hit different areas of resources in the Company at different times. So obviously, its key for us to try to make sure that we will bring them in a -- kind of step function versus bringing them -- bring in a bunch of men in batch or ones [ph], but I think the capacity is definitely there. The pipeline is definitely there. We will be very disappointed if we don't, exceed last year's performance. I think we're going to definitely do better than we did last year and I thought for a company last year was pretty good.

[Mark Massaro:]

Great. And I know you guys put the Project Janus on hold. Can you speak to when you think you might get that project back going again and any timeline will be helpful.

[TJ Johnson:]

Sure. We don’t have a timeline at this point, Mark. A big piece of what we're evaluating today as we want to make sure the V2 chemistry is 100% mature, because we're wrapping the automation of the Janus program around the new V2 chemistry. So we’re now as indicated rolling that out through our VERI/O service lab. We want to give that a little bit of time and we would expect based on early planning, we would love to have Project Janus up back and running this year. We think the timing of that product is going to be very important for us. As we enter 2019 and really start to drive to drive and expanding the install base. But as of today, we don’t have a firm timeline.

[Mark Massaro:]

Okay. And maybe a question for Shaun. I know your OpEx was more disciplined than I’ve -- with modeling for. You have a 11.8 million of cash in the balance sheet. Can you just speak to what levels of OpEx we should expect in Q1 and some of the quarters throughout 2017.

[Shaun McMeans:]

I think its show up consistent with how we ended up the year, Mark. We -- our cash burn was approximately $1.6 million in Q4. And we see that pretty much at stable state right now. Obviously, if we turn Janus back on, that would increase that.

[TJ Johnson:]

We’ve been pretty diligent, Mark, in managing our spending and cash. So, we’re not going to change that in the first half of this year from what you saw in Q4?

[Mark Massaro:]

Great. Thanks for all the time.

[TJ Johnson:]

Thanks, Mark.

[Shaun McMeans:]

Thanks, Mark.

[Operator:]

Our next question comes from Yi Chen with Rodman & Renshaw.

[Yi Chen:]

Hi. Thank you for taking my questions. My first question is, shall we expect more products to be announced between the collaborate -- from the collaboration between HTG and QIAGEN during this year?

[TJ Johnson:]

We -- hi, Yi. Yes, we would absolutely expect to see new pharma collaborations announced via the partnership during the year. Hard to predict how many, but we definitely believe that the number of companion diagnostic agreements that we will jointly capture this year will happen throughout the year and we’re planning for -- definitely more than one. Now that we've demonstrated technical feasibility of our HTG EdgeSeq chemistry being quantitated on the GeneReader. We’re also in conversations with QIAGEN about potentially expanding other products between the two platforms that we could provide to pharma customers on the [indiscernible] side, but nothing firm there at this point in time. But we absolutely plan on having if not one, multiple companion diagnostic deal signed through the partnership.

[Yi Chen:]

Thank you. And my second question is can you give us some additional color, regarding which European countries that you’re going to launch ALKPlus Assays first and whether you have any expectation of sales of the asset sales in Europe this year.

[TJ Johnson:]

Sure. We completed the direct salesforce implementation for our Company. So we have now direct representation in the U.K., Germany, France, and -- yes, Germany, U.K., France and Spain. We also have distributorships covering some of the other geographies in the EU. We've already begun a number of conversations with a bunch of the various key research facilities in each of those geographies. So we would expect to be fully commercialized in both our B-cell lymphoma Assay as well as the HTG EdgeSeq out assay in all of the prime geographies in Europe. At this point in time, I think it's premature to provide any specific guidance on revenues from the product until we get a little further along, but we look forward to doing so in the foreseeable future.

[Yi Chen:]

Got it. Thank you.

[TJ Johnson:]

Yes.

[Operator:]

And that concludes today’s question-and-answer session. I’d like to turn the call back to Mr. Johnson for any closing remarks.

[TJ Johnson:]

I just like to thank everybody for your support and participation on the call today, and have a good evening by now.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.