HTG Molecular Diagnostics, Inc. (NASDAQ:HTGM) Q4 2021 Earnings Conference Call March 29, 2022 4:30 PM ET
Corporate Participants
Andrew Eriksen – IR, LifeSci Advisors
John Lubniewski – Chief Executive Officer
Shaun McMeans – Chief Financial Officer
Conference Call Participants
Rick Krause – Cantor Fitzgerald
Alex Nowak – Craig-Hallum Capital Group
Operator
Welcome to the HTG Molecular Diagnostics, Inc. Fourth Quarter 2021 Earnings Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [Operator Instructions].
I would now like to turn the conference over to Andrew Eriksen from LifeSci Advisors. Please go ahead.
Andrew Eriksen
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 our expected revenue recovery, the importance of company’s HTG transcriptome panel statements related to the company’s HTG therapeutics and drug discovery business, our future growth, business momentum and market opportunities and the expected capabilities of our technology.
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 include those risks and uncertainties described from time-to-time in the company’s SEC filings, including under the risk factors. heading of the company’s most recently filed annual report on Form 10-K. 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, March 29, 2022. And the company 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, Andrew, and welcome everybody. We’re pleased to be here with you today to review our financial results as well as our performance against strategic milestones in 2021.
2021 was both a recovery year for our profiling business, and an exciting expansion year for the future growth of the company. Through completion of our key development milestones in 2021, we introduced what we believe is the most important product in HTG’s history with the release of our HTG transcriptome panel, or HTP. The release of the HTP set the stage for us to also move forward with the creation of our drug discovery business unit, using our exciting capabilities in a new and exciting market segment.
Throughout 2021, we saw more of our customers resuming operations, they began to bring employees back to their facilities, and resumed some of their studies that they had planned prior to the pandemic. However, even by the end of the year, customers that we’re open, we’re still not operating at 100% of pre-COVID capabilities. Many customers had workplace restrictions in place or were impacted by nationwide supply chain and labor shortages.
And due to ongoing restrictions, global shutdowns, and careful monitoring of travel risks. Our commercial team was restricted for much of the year and its ability to actually visit customer facilities. As a result of these ongoing challenges, we’ve experienced delays in our sales cycle and continue to react to unexpected speed months throughout 2021. While customer interest in our products, especially our recently released HTP product continues to be strong, we expect some of these challenges that we faced in 2021 to continue into 2022, resulting in a continuing slow recovery of our profiling business as 2022 progresses.
Okay, now to the numbers. Total revenue for 2021 was 8.9 million, approximately 4% ahead of 2020. Breaking that down our direct revenue defined as product and product-related services revenue in our financial statements was 8.9 million, up 13% from 2020, reflecting the continued recovery in our profiling business that I discussed previously. Total revenue in 2020 included approximately 650,000 of collaborative development services revenues, of which we didn’t have any active programs in 2021. Our HTP transcriptome product generated $1.4 million in revenue in less than five months of sales and ended as our number one selling assay.
Overall, we had 29 new customers and increased our active EdgeSeq instrument install base by 10 instruments in 2021. On the publication front, we now have more than 350 publications that reference our HTG EdgeSeq technology, 32% increase over prior year. This is a clear indication that word is getting out about the advantages of HTG EdgeSeq technology.
In biopharma, we experienced a nice rebound in the number of active programs in 2021. As a reminder, there’s three requirements for a program to be included in our active programs metric. First, the program needs to be associated with a farmer sponsored clinical trial. Second, it needs to be traceable to a program on clinicaltrials.gov. And finally, it needs to have generated revenue for HTG within the last 12 months.
We finished 2021 was 62 active programs up from 50 at the end of 2020. More impressive of that 62, 48 were new programs and 14 were extensions of previous programs. So over 70% of the active programs in 2020 these are halted or discontinued by our customers during the pandemic. We believe the increase in new programs again reflects the spreading excitement about our technology, and the drive and energy of our commercial sales team.
We also expect to see the recent growth trends suggest to us that we’ve gone through the worst of the COVID-19 headwinds in pharma signaling there’s further growth ahead of this customer segment in 2022.
Turning to our strategic milestones and product development, we were thrilled with the progress that our team has made through 2021. Our development team completed the final elements of our whole transcriptome product development in the fourth quarter. This included validating additional sequencers and expanding our assay protocols to include more biologic sample types. This will help support our commercial sales teams as we continue our focus to diversify our customer base, and to expand the use of our technology beyond oncology, and into other growth areas such as immune response, diabetes, and infectious disease.
Publications such as the recent COVID-19 based publication in frontiers and immunology, noted the use of our technology to systematically characterize COVID-19 lymph nodes to better understand the complex immuno-pathological changes of severe disease, both from our morphological and transcriptomic level and reflect the potential of what our technology can do in regards to these other disease areas for scientific discovery.
In our drug discovery business, we have also made substantial progress in a very short amount of time. To help guide our strategy and provide valuable collaboration support, we added our first two scientific advisory board members, Dr. Jerry Radich from the Fred Hutchinson Cancer Center, and Dr. Roberts [indiscernible] from the University of California at Irvine. We also added therapeutic depth to our Board of Directors, with the addition of biopharma veteran Chris Kiristy, formerly of Kos Pharmaceuticals. While this infrastructure is being built, our therapeutic development team was busy moving our vision forward this exciting new proprietary technology.
During this period, we’ve chosen our first drug target. We’ve also used our machine learning chemistry capability to search a universe of 33.5 billion potential biologic structures, and have designed a library to just a few 100 compounds. From there, we’ll have those compounds synthesized, and run them in our first cell-based model. Lysates will be analyzed using our full transcriptome EdgeSeq technology to show we can differentiate between pharmacophores based on full transcriptomic analysis. This is the first critical step for RNA profiling of drug development candidates from human derived cell-based test systems providing unique insights in the association between structure activity relationships, and gene and pathway expression.
This understanding will help us make well-informed adjustments to the molecular structure of the drug candidates with a more complete understanding of how those structural adjustments actually affect gene expression, our initial approach to early derisking of a drug candidate. We believe the derisking of drug candidate molecules early in drug development will result in improved chances for preclinical and clinical development success for these drug candidates.
With that, it’s my pleasure to turn our call over to our CFO, Shaun McMeans for a view of our financials. Shaun?
Shaun McMeans
Thanks, John.
Total revenue for 2021 was 8.9 million compared with 8.5 million in 2020. Our 2021 revenue was 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 4.1 million in 2021 and 4 million in 2020. Research and Development expense remain consistent with prior year at approximately 6.1 million for both 2021 and 2020. However, this included a change in the blend of costs year-over-year. In addition to ongoing costs relating to the development of our proprietary profiling technology, which was comprised primarily of HTP product, 2021 Research and Development expense included approximately $1.4 million of costs related to our new therapeutics business unit.
Our development team successfully completed all of its development milestones in 2021, resulting in the commercial launch of our HTG transcriptome panel in August. That’s when feature expansions were completed in the fourth quarter, including additional sequencing capabilities and sample type expansion. Sales of our transcriptome panel kits, and through sample processing services performed in our VERI/O laboratory totaled $1.4 million in 2021.
Our operating loss for 2021 was 17.8 million compared to 19.6 million for 2020, primarily reflecting the receipt of $1.2 million of additional employee retention credits in 2021, then were received in 2020, and a focus management of overall operating expenses.
Net loss per share was $2.47 for the year ended December 31, 2021 and $4.51 for the same period in 2020. This reduction reflects additional shares of common stock sold in 2021 through or at the market facility, and equity line of credit. As of December 31, 2021, we had approximately 7.6 million shares of common stock outstanding. On March 21, 2022, we closed the private placement of our securities for gross proceeds of approximately $7.5 million. The transaction increased our common shares outstanding by approximately 834,000 shares, and included approximately 2.4 million pre-funded warrants for common stock. We ended the quarter with $21.9 million in 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. 2020 and 2021 were interesting, exciting and challenging years for HTG. COVID-19 forced us to modify our strategies to account for changes in the market and to seek new opportunities for our technology. As a result of these efforts, we have a great new product in our HTG transcriptome panel that opens up new doors of opportunity in profiling and therapeutics. HTP enables us to continue to provide important information in oncology, but also to move forward with becoming a more complete precision medicine company in all disease areas where RNA analysis is relevant.
We’ve also leveraged our collaboration experience and seized upon new thinking in drug discovery to use transcriptomic profiling in the drug discovery process. We believe the application of our profiling technology to human derived cell-based test systems integrated with medicinal chemistry allows for early derisking of drug candidate molecules opening up another door of opportunity for HTG to deliver exciting licensable new drug candidates and potentially to bring new companion diagnostic collaborations forward.
This new business units holds the potential to bring in cash upfront and longer term milestone and royalty payments as our development efforts continue. This evolve strategy positions the company to be a tech driven biotechnology company with two engines of revenue and valuation growth, profiling and drug discovery.
As with last year, we’ve created a calendar of strategic milestones. In Q1, we expect to align our micro RNA assays to the same sample prep workflow as our HTP. This will enable our sales team to bundle these two whole transcriptome products together. We also plan to bring out our first proof of approach white paper, which will capture the foundational aspects of our novel approach to drug discovery.
In Q2, we expect to finalize development on our m6A R&D assay and provide an additional white paper on our proof of approach for drug discovery. Through Q3 and Q4, we plan to continue advancing our drug discovery efforts through optimization of our novel drug candidate molecules with the goal of pursuing licensing opportunities of our most advanced preclinical assets at the end of the year.
We’re moving fast and expect to continue our development momentum in this new and exciting business area through 2022. Our key priorities for the year are going to be; one, to maintain growth in our profiling business to help fund continuing operations and to create new pharma CDx opportunities; two, to achieve our strategic milestones and technology and product development; and three, to achieve our strategic milestones in our drug discovery business unit.
With the challenges of the past few years, we’ve hardened and extended our technology and strategy to create an even more exciting new opportunity for HTG. I strongly believe the best days are still in front of us.
With that, it’s my pleasure to open up the call for questions. Operator?
Question-and-Answer Session
Operator
Thank you. We will now begin the question answer session. [Operator Instructions] The first question comes from Kristen Kluska with Cantor Fitzgerald. Please go ahead.
Rick Krause
Hello, this is Rick on for Kristen, thank you for taking our question. You’ve previously talked about the potential for further publications and presentations at medical conferences from HTG including the potential for publications from users in the early adopter program. So could you please talk about what we could expect in terms of publications and conference presentations upcoming from HTG?
John Lubniewski
Hi, Rick, this is John Lubniewski. Nice. Thanks for the question. Our early adopter program went very well. So we’re actually in the process right now of submitting abstracts, I believe we had one at AACR. And we’re expecting additional abstracts at ASCO, in addition to moving forward with peer reviewed articles. As you’re aware, you know that this is a several month process but, obviously, we’re driving it and we’re very encouraged.
Rick Krause
All right, appreciate that. Thank you.
Operator
The next question comes from Yi Chen with HC Wainwright. Please go ahead.
Unidentified Analyst
Hey, this is [indiscernible] on Yi. We just have three quick questions. The first one on the companion diagnostics elaborations. Any talks or anything planned for this year or in the near future? And the second one on, I know you spoke about this during your introductory remarks. Any progress so far with any comments on the progress so far with HTG EdgeSeq and specifically on how your [indiscernible] processes shaping up? And finally, your thoughts on the impact of COVID through 2022? Thank you so much.
John Lubniewski
Sure. So regarding companion collaborations, unfortunately, when we had 70% or so of our active programs basically cancelled in 2021, that kind of pushed a reset button on a lot of those programs, and we had to kind of start from scratch. The good news is, we really refilled that funnel, as can be seen with the 62 active programs.
We’re working with one biotech that could evolve into a companion program this year, but there’s one thing I’ve learned the last few years is trying to predict when pharma is going to move is just about impossible. But like I said, the good news is, we’ve refilled that pipeline. I expect that, that pipeline is going to continue to grow through this year, and eventually, that will lead to additional collaborative development opportunities. Regarding the drug discovery and where are we with that hit the lead process, I actually just this morning read our draft white paper. So we’re right on track with where we expect to be with our ability to develop a licensable family of assets by the end of the year.
So we should have that first white paper out literally probably in a day or two. And this is a really important white paper because it actually demonstrates how we used our proprietary profiling technology to distinguish between very slight changes in chemical structure, which is very insightful in regards to drug design. So, extremely excited by that because to me, it’s kind of the proof that we can do this, which is really, really exciting. And then lastly, your COVID question, I think we’re going to continue to see — not everyone is in to work all the time, kind of probably very similar to our own workplaces. So we’re expecting just to see continued delays and continued supply chain interruptions as things turn back on. We don’t anticipate things are going to go backwards, but it’s just going to be a slow ramp-up of activity as basically everyone comes back to work full-time.
Unidentified Analyst
Excellent. Thank you so much.
John Lubniewski
Yes.
Operator
The next question comes from Alex Nowak with Craig-Hallum Capital Group. Please go ahead.
Alex Nowak
Great. Good afternoon, everyone. You’re not giving guidance here, but investors have gone through a lot of swings here over the last couple of years. So just how are you thinking about growth in the core business in 2022? The Street budget model that doubling sales essentially for next year for 2022 here. Do you think that’s plausible or where do you think the growth could ultimately shake out? And then just thinking about HTP, that initial success, how should we think about that ramping throughout the year?
John Lubniewski
Good questions there, Alex. So I think doubling is aggressive. We believe that once people are back to work, we should return to that 40%, 50% growth rate that we were seeing pre-COVID. Obviously, timing of when we’re going to be hitting on all cylinders is up for grabs. But I think probably doubling is a little aggressive, unless we land a large OEM opportunity, and we really just started the commercialization of HTP into the OEM segment.
Regarding the HTP ramp, as mentioned, we had a very good fourth quarter. We had 13 customers buy the product, just a little shy of $1 million. And of that 13, 6 were brand-new customers to HTG, and they represented about a third of that $1 million number. So we’re very optimistic about HTP. We’ve kind of guide or not guided, but we’ve stated we’d like to see at least 50% of our revenue as we exit Q4 be in that product. And then as previously mentioned, now that we’ve harmonized the upfront protocol with microRNA, we’re going to be pushing both of those products because we offer the opportunity off a single sample to do a full transcriptome microRNA and then a full transcriptome message RNA, which is a very unique and advantaged capability for our chemistry.
Alex Nowak
Got it. And then other than your own internal white papers, what about external papers for HTP? Just are these — are you sending out these instruments to the big labs in our genome center broad, et cetera? And then when should we expect some sort of papers around them from the external users?
John Lubniewski
Yes. I think you’ll see the first couple of things coming in abstracts at ASCO. So that is where we’ll see the leads from the EAP program. So we’re driving that. Obviously, there’s a whole process that, that goes through, but that’s we’re basically on track with that.
Alex Nowak
Okay. Got it. And then on the drug discovery piece, what sort of news events should we expect HTG to announce there? Are there major milestones? Are these sort of newsworthy events that we should see by the end of the year there?
John Lubniewski
No, well, actually, one will be out this week, which will be the white paper number one that I was kind of previously talking about. And this was really — it’s pretty technical and be more than willing to feel the call afterwards to kind of walk you through it. But basically, what we’re demonstrating with white paper number one is the ability to use the transcriptomic profiling to measure very slight changes in expression associated with very minor chemical structure modifications in a library, and then also then mapping that back to the CMAP database that is held by the Broad and which is kind of an in silico version, and we actually are showing how by looking at the entire transcriptome, all 20,000 genes as opposed to just the surrogate, we’re actually able to demonstrate superior sensitivity to those chemical structure changes, which obviously has a lot of value as we look at trying to dial up a molecule for potency and/or dial down for toxicity.
Alex Nowak
All right. And then considering the current cash balance, can you expand on your needs for future capital here? But also it does seem like you have a good number of catalysts or improvements coming up here on HTP and the therapeutics business later in the year. So maybe just speak to the reasons for the recent private placement as well?
John Lubniewski
Yes, I’ll kind of start and then I’ll ask Shaun to fill that in. We’re being, as we always are, but maybe even more so than ever, extremely cost conscious regarding managing our cash position. As you kind of rightly call out, we think we have some very, very significant milestones that are going to happen in that September, October time horizon. And we wanted to make sure we had enough cash to comfortably get to those readouts versus — we read a lot of the same analyst reports that everyone else does. And the number of biotechs that are going to be in the market in Q2 and Q3 is high. And so we thought it was prudent to do something to shore up our balance sheet while we could without facing 3,000 other companies that are also out there trying to raise money. Shaun?
Shaun McMeans
Yes, Alex, a measure where we had — we have a constraint with our current senior note with Silicon Valley Bank, and we wanted to make sure that we were prepared to meet that over the next 90 to 180 days. And again, we’re trying to remain responsible to the balance sheet, make sure we have plenty of cash runway. And as John indicates, we don’t have to pull levers to reduce burn. We are amortizing our current note and that probably will continue in the near-term, but we were trying to prepare for enough runway to get us to these inflection points.
Alex Nowak
Can you just remind us the covenant there on that note? And were you in default of that covenant or potentially?
Shaun McMeans
We were not. We weren’t even close. So it’s a $12.5 million cash minimum, balance cash and equivalents minimum balance. So we were just, again, preparing to meet that at some point later in the year, so we can get through these inflection points.
Alex Nowak
Okay. Thank you.
Shaun McMeans
You bet.
Operator
This concludes the question-and-answer session. I would like to turn the conference back over to John Lubniewski for any closing remarks.
John Lubniewski
Well, first of all, I’d like to thank everyone for joining us today. It’s highly appreciated. And I again want to thank the employees here at HTG for their tremendous work and self-sacrifice as they continue to demonstrate just a real can-do attitude to help us grow this company. And I’d also like to thank our Board and also our shareholders for their continued support, and we look forward to updating you again on our next earnings call. Thank you.
Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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