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Edited Transcript of OPGN earnings conference call or presentation 6-Nov-19 9:30pm GMT

Q3 2019 OpGen Inc Earnings Call

GAITHERSBURG Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of OpGen Inc earnings conference call or presentation Wednesday, November 6, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Evan Jones

OpGen, Inc. - Chairman & CEO

* Timothy C. Dec

OpGen, Inc. - CFO & Corporate Secretary

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Conference Call Participants

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* Benjamin Charles Haynor

Alliance Global Partners, Research Division - Analyst

* Wiktoria O'Hare

* Yi Chen

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

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Presentation

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Operator [1]

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Welcome to the OpGen Third Quarter 2019 Earnings Call and Business Update. (Operator Instructions)

As a reminder, this conference is being recorded today, November 6, 2019. Before we begin, I would like to caution you that comments made during this conference call by management may contain forward-looking statements regarding the operations of and future results of OpGen and Curetis N.V.

I encourage you to review OpGen's filings with the Securities and Exchange Commission, including, without limitation, the company's most recent Form 10-K and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Factors that may affect the company's results include, but are not limited to: the completion of the business combination with Curetis N.V.; pursuit of FDA clearance for the Acuitas AMR Gene Panel for use with bacterial isolates; the use of proceeds from the October 2019 public offering; activities related to the company's products and services; the rate of adoption of its products and services by hospitals and other health care providers;

the success of its commercialization efforts, the effects on its business of existing and new regulatory requirements and other economic and competitive factors. The [content] for this conference call contains time-sensitive information that is accurate only as of the date of this live call, November 6, 2019. The company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call, except as required by law.

I would now like to turn the call over to Evan Jones, Chairman and CEO of OpGen.

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Evan Jones, OpGen, Inc. - Chairman & CEO [2]

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Thank you, operator, and thank you, everyone, for joining us this afternoon.

On today's call, we will review our third quarter 2019 financial results, provide an update on business operations and discuss recent corporate actions and our progress towards meeting key objectives by the end of the year and our planned business combination with Curetis.

We had a solid first 9 months of the year. Total revenue for the 9-month period ending September 30, increased 22% to $2.7 million compared to $2.2 million in 2018. Third quarter revenue was $648,000 compared with $552,000 in the prior year period, a 17% increase.

In September, we announced the planned combination of OpGen's business with the Curetis Group. As a reminder, we entered into an implementation agreement with Curetis N.V., a Dutch publicly listed company on Euronext under the ticker CURE, under which, we agreed to purchase all of the outstanding shares and acquire all of the related business assets of Curetis GmbH, a subsidiary of Curetis N.V., to create a combined business within OpGen for approximately 2.7 million shares as the consideration.

Curetis has been a pioneer in the development of sample-to-answer molecular diagnostics for infectious disease. The company's goal is to become a leading provider of innovative solutions for molecular microbiology diagnostics, designed to address the global challenge of detecting severe infectious diseases and identifying antibiotic resistance in hospitalized patients.

The Curetis Unyvero Test for lower respiratory infections, or LRT, was the first LRT test to be cleared by the FDA in the United States. The LRT test is marketed directly in the U.S. by Curetis, and the portfolio of currently 5 CE-marked in vitro diagnostic IVD products are marketed through Curetis distribution partners in Europe, the Middle East and some Asian markets.

Curetis' wholly owned subsidiary, Ares Genetics Gmbh, together with strong partners in the life science, diagnostics and pharmaceutical industry, is developing and commercializing next-generation molecular microbiology solutions for life science research, public health, drug development and infectious disease diagnostics. Ares Genetics solutions are based on Ares' DB, likely one of the most comprehensive databases on the genetics of antibiotic resistance and the Ares technology platform with advanced bioinformatics and artificial intelligence tools and algorithms.

We anticipate the combined company will have a broad commercial-stage diagnostic portfolio of CE-IVD-marked

(technical difficulty)

and U.S., FDA-cleared products and platforms as well as a proprietary NGS-based and AI-powered technology and knowledge base for the rapid molecular prediction of AMR.

The 2 initial foci for the company will be, first, rapid diagnostics for lower respiratory infection and urinary tract infection; and second, bioinformatics and NGS services for AMR prediction by Ares Genetics as well as bioinformatics services based on the Acuitas Lighthouse AMR knowledge base by OpGen.

Key elements of the company's combined strategy include continuing to gain regulatory clearances and approvals and establishing a market position for proprietary molecular diagnostic tests and platforms; capitalizing on unique technology platforms; leveraging global commercial capabilities and partnerships; pursuing development collaborations; and capitalizing on financial leverage and operational and research synergies to improve return on capital and achieving future profitability.

I would now like to highlight OpGen's business activities in the third quarter of 2019. During the third quarter, OpGen continued to execute on one of our highest priorities: to bring our novel Acuitas AMR Gene Panel and Acuitas Lighthouse software to market. In May, we filed a 510(k) submission, seeking FDA clearance of the Acuitas AMR Gene Panel product for the detection of antimicrobial resistance genes in bacterial isolates. We received our first formal request for additional information from the agency in July, and we've been working towards a response to the agency through an interactive review process.

To date, we've provided the agency with responses to approximately 2/3 of the requests and are working to address the remaining items in a formal submission to the FDA by the early-January 2020 response deadline.

Through this interactive review process, we seek to align our responses with FDA expectations to facilitate the timely and successful completion of the clearance process. In early-November, we will begin sample testing for the Acuitas AMR Gene Panel, urine de novo FDA submission. The start date is later than originally planned as a result of the incorporation of feedback from the FDA received through the Q-Sub process.

There are 9 sites under contract for the trial that will involve collection of approximately 1,500 clinical remnant samples and testing of additional contrived specimens.

In advance of FDA clearance, we're beginning to transition to Acuitas products being the growth driver for the company. In the first 9 months of the year, RUO Acuitas AMR Gene Panel and Acuitas Lighthouse related revenue represented 43% of total revenue or $1.2 million up from less than 5% of revenue in the comparable 2018 period. This encouraging trend was the primary driver behind the 22% growth we've seen year-to-date.

I would now like to turn the call over to OpGen's CFO, Tim Dec. Tim?

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Timothy C. Dec, OpGen, Inc. - CFO & Corporate Secretary [3]

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Thank you, Evan.

On today's call, I will touch on the highlights of the third quarter and the 9 months ended September 30, 2019.

Revenue for the third quarter of 2019 was $648,000 compared with $552,000 in the third quarter of 2018. Operating expenses for the third quarter of 2019 were $4.1 million compared with $3.8 million in the third quarter of 2018. The increase in operating expenses was primarily attributable to $538,000 of transaction costs associated with the proposed business combination with Curetis.

R&D expenses were $1.1 million, down from $1.3 million in 2018; G&A expenses were $1.6 million, down from $1.7 million in 2018; and sales and marketing expenses were flat quarter-over-quarter, at $400,000.

The net loss for the third quarter of 2019 was $3.5 million or $3.95 per share compared with a net loss of $3.3 million or $10.67 per share in the third quarter of 2018. Total revenue for the first 9 months ended September 30, 2019, was $2.7 million compared with $2.2 million for the 9 months ended September 30, 2018, as Evan mentioned, an increase of 22.4%.

Total operating expenses for the 9 months ended September 30, 2019, were $12.4 million compared to $11.7 million for the 9 months ended September 30, 2018. The increase in operating expenses was attributable to 2 items: $538,000 of transaction costs associated with the Curetis business combination; and a $521,000 impairment charge in Q1 of this year, associated with the abandonment of our [Woburn] facility.

R&D expenses were $4.1 million, up from $3.8 million in 2018; G&A expenses were $4.9 million, down from $5.4 million in 2018; and sales and marketing expenses were flat year-over-year, at $1.1 million.

Net loss for the first 9 months of September 30, 2019, was $9.9 million or $13.32 per share compared to $9.6 million or $36.09 per share for the period ended September 30, 2018.

We closed the quarter with roughly $1 million of cash. This amount was augmented on October 28 of this year when we closed a public offering of 4.7 million units at $2 per unit. The offering raised gross proceeds of $9.4 million. In terms of Nasdaq, we recently heard from them that we've regained compliance with the shareholder equity requirement.

Early in the quarter, we had regained compliance with the Nasdaq minimum bid price rule and are currently in compliance with all continuing listing requirements.

At this point, everyone is aware of the exciting business combination of OpGen and Curetis. As a reminder, we will be issuing roughly 2.7 million shares at the time of closing, and we expect to meet other customary closing requirements. We've been actively working on integrating the 2 teams since the deal was announced in early-September. The Curetis team has been to Gaithersburg a number of times, and I, with other members of the OpGen team, will be traveling to Germany next week to continue the integration efforts.

This will be our primary focus until the combination has been approved and completed, which we expect to occur by late-January or early-February of 2020.

In terms of the combination, there are a few items I would like to touch on. In the transaction announcement, we estimated combined pro forma 2019 revenue would be in the $5 million to $6 million range. We expect revenue to grow to $10 million to $15 million in 2020, a potential 2x to 3x increase in our top line revenue.

Our integration efforts are focused on operational efficiencies and financial discipline. Key saving opportunities to note. Curetis has a state-of-the-art robotic manufacturing facility, with historical capital investments approaching $10 million. This facility has the potential to save millions of dollars of future CapEx when scaling up manufacturing and help expedite the ability to bring our AMR Gene Panel to market.

Curetis has a strong U.S. sales and marketing team, something that we were looking to build will no longer be necessary. Curetis also has a dedicated European commercial partner support team. Utilizing these teams will save us millions of dollars in operating expenses going forward. Their U.S. sales force is currently selling into the same accounts that our rapid pathogen ID and our Acuitas AMR products are or will be, once cleared, sold to.

Curetis, with Ares Genetics, has advanced bioinformatics capabilities that can be leveraged to integrate both companies' AMR databases and data analytics and reporting platforms and venture into next-generation sequencing-based infectious diagnostics in the future.

We will certainly look across all other areas of the combined company to look for ways to reduce, both our net loss and cash burn. As we work through our integration efforts over the next 2 to 3 months, our primary focus will be on identifying and then capturing the financial synergies associated with this combination in 2020 and beyond. Our preliminary annual cost saving estimates are in the 15% to 20% range, potentially, even higher.

Overall, we are committed to the critical objectives we laid out at the beginning of the year, and we'll continue to do everything in our power to improve shareholder value.

With that, I'll turn the call back to Evan.

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Evan Jones, OpGen, Inc. - Chairman & CEO [4]

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Thank you, Tim.

As noted earlier on the call, we are making good progress developing our Acuitas AMR Gene Panel and Acuitas Lighthouse business in advance of FDA clearance. We are honored to be participating in the New York State Infectious Disease Digital Health Initiative demonstration project. Conditional CLEP approval was received by the Wadsworth Center over the summer, and as additional conditional CLEP approvals are received, we are beginning the hospital testing phase of the project.

We successfully completed the third project milestone, and we anticipate completing the fourth and fifth milestones in the fourth quarter and Q1 of 2020, respectively.

I would like to share some of the strategic thinking behind the planned business combination with the Curetis Group. The combination with Curetis will bring multiple strategic benefits to the combined business. These include creating a market leader, positioned to capitalize on global opportunities in infectious disease and antimicrobial resistance detection; proprietary molecular diagnostic tests and platforms; premier AI-powered bioinformatics solutions for multi-drug resistance diagnostics; global commercial channel capabilities and partners; and financial leverage, operational synergies and a positive growth-driven business outlook.

In addition to the recent progress at OpGen, I'd like to highlight several key operational and business development milestones that have recently been accomplished by Curetis. First, in September, Curetis N.V. announced that its wholly owned subsidiary, Ares Genetics, has entered into a multi-phase collaboration with an undisclosed leading global in vitro diagnostics corporation, to jointly develop diagnostic solutions for infectious disease testing based on next-generation sequencing technology.

The company signed an R&D and option agreement for the first phase of the collaboration. Under the current agreement, the collaboration partner will fully fund the Ares Genetics research and development activities for the genotypic and phenotypic characterization of additional bacterial strains to augment Ares DB and the development of optimized algorithms for predicting antibiotic resistance.

Furthermore, in return for an undisclosed upfront option fee, the collaboration partner obtains a right of first negotiation for an exclusive human clinical diagnostic use license to Ares DB and the Ares technology platform. Following this important announcement, in October, Ares Genetics announced the launch of an early access program for its novel, artificial intelligence-powered next-generation sequencing-based molecular antibiotic susceptibilities test.

Ares Genetics has received commercial orders for more than 1,000 of the new Ares UPA tests, an order volume exceeding EUR 500,000. Together with advanced bioinformatics and artificial intelligence services, leveraging Ares DB for the diagnostics and pharma industry as well as access to certain rights, Ares Genetics has contracted for and received orders amounting to more than EUR 2 million in 2019 to date.

The core Unyvero A50 LRT testing business is also progressing nicely, with a solid funnel of sales opportunities and a focus on early adopter accounts. As of the end of Q3 2019, 15 Unyvero A50 analyzers are installed in the United States. Numerous commercial evaluations are ongoing, and the first evaluations have been successfully completed.

Anticipated 2020 corporate milestones for Curetis include FDA clearance for expanded Unyvero LRT indications; Unyvero partnering transactions; China NMPA approval and launch of the Unyvero HPN test in China; and progressing Ares Genetics' collaboration with a global IVD corporation and potential licensing of the technology for human clinical diagnostics use to such partner.

In addition to these important anticipated developments, OpGen anticipates completing the planned business combination with Curetis in the first quarter of 2020, obtaining FDA clearance to market the Acuitas AMR Gene Panel for use with bacterial isolates, completing clinical studies and filing de novo submissions with the FDA for the Acuitas AMR Gene Panel urine and Acuitas Lighthouse Software for rapid testing of urine specimens and prediction of antibiotic resistance to frontline antibiotics and completing the data-collection phase for the New York State Infectious Disease Digital Health Initiative demonstration project.

We're pleased with our progress so far this year, and we are very excited about the company's future as we transition and combine our business with Curetis. We appreciate your support and your time this afternoon.

And I would now like to turn the call back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Your first question comes from the line of Yi Chen from H.C. Wainwright.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [2]

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So once the Acuitas AMR Gene Panel test for bacterial isolates obtains the 510(k) clearance, how soon can the commercialization start? And whether that would depend on the completion of the combination with Curetis?

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Evan Jones, OpGen, Inc. - Chairman & CEO [3]

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Thanks for your question, Yi. We appreciate it. The timing of the clearance is a little hard to pinpoint, but we're clearly getting close to the finish line.

And just on the commercialization side, I think the key milestone is the announcement of the clearance. And then it will take us, following that date, likely another month or 2 to work through the labeling with the FDA and the incorporation of changes that will be required to our software. And that should dovetail well with the merger with Curetis and this being a new product to launch into their sales force.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [4]

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I see. Could you also provide some color on the potential timeframe for the completion of the clinical studies for the urine panel? Is it in the middle of 2020? Or towards second half of 2020?

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Evan Jones, OpGen, Inc. - Chairman & CEO [5]

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So back to the urine trial, one of the things that's occurred over the recent months is we've begun analytical testing. We've also worked to -- do the verification work to begin the study, and that has more complexity to it than you might imagine. There's a third-party site that's doing all the microbiology for us. And as we begin the accruals here shortly, that testing is envisioned to take, we believe, just into the early winter. And then there will be additional DNA sequencing analysis to be required. So if all goes well, we'll be done with those phases during the first quarter.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [6]

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Okay, great. So can you remind us when the New York State DOH contract is -- will be over during 2020? And what the next step could possibly be after you complete the data collection?

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Evan Jones, OpGen, Inc. - Chairman & CEO [7]

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Sure. So our original contract was for 1 year to develop infrastructure to support a rollout and testing, and the infrastructure is to deploy both in conjunction with the New York State Department of Health and Merck's ILUM subsidiary. That work has largely been completed, and including adaptations to our Lighthouse Software, the last 6 months of the contract involve a prospective data-collection phase.

Then based on that data-collection phase, the authorities at New York State will work to determine potential funding in future years.

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Operator [8]

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Your next question comes from the line of Max Jacobs from Edison Investment Research.

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Wiktoria O'Hare, [9]

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This is actually Wiktoria O'Hare here on behalf of Max Jacobs. Tim, you mentioned cost savings as a result of the merger. How much of a financial runway will the combined company have?

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Timothy C. Dec, OpGen, Inc. - CFO & Corporate Secretary [10]

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So factoring in the raise that we just completed and the fact that we're currently looking into ways to augment that amount, we'd expect to see that reach potentially into Q2 of next year.

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Wiktoria O'Hare, [11]

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Okay. Great. And then you also mentioned that there are some remaining conditions for closing the transaction with Curetis. So could you go over what the remaining conditions are? And what you would say is the probability of the transaction closing successfully?

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Evan Jones, OpGen, Inc. - Chairman & CEO [12]

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Sure, Victoria (sic) [Wiktoria.] This is Evan answering.

The first critical milestone was completing the financing that was just completed, I guess, last week. So that was a very, very significant milestone. The next major milestone will be gaining the shareholder approvals, and that will follow the distribution of appropriate meeting materials by both companies to their shareholders.

And that will then lead you to a timing of, let's just say, January, February. And currently, we are optimistic that the transaction will close successfully.

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Wiktoria O'Hare, [13]

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Okay. And when is the shareholder approval slotted for?

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Evan Jones, OpGen, Inc. - Chairman & CEO [14]

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So just to give you a little more color on the process, OpGen will be filing what's called an S-4. And that S-4 will have a review by the SEC. As soon as the SEC declares effectiveness for the S-4, then we can provide meeting materials for our stockholders. And that will tee up the vote to approve the merger.

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Timothy C. Dec, OpGen, Inc. - CFO & Corporate Secretary [15]

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As Evan touched on, we're well into the S-4 preparation, and hopefully, conclusion here in the next few business days to week.

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Operator [16]

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(Operator Instructions) Your next question comes from the line of Ben Haynor from Alliance Global Partners.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [17]

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First off, for me, just looking at your results through Q3 and the amounts that Curetis has announced through June as well as the announcement that they've already booked EUR 2 million of contractual order volume. I mean, it would appear that you're already -- almost at the 5 -- at least the bottom end of the range that you've guided to for the combined firms this year -- for both firms this year, I guess, I should say.

How should we read this? I mean, should we read this as implying that Q4 revenue will be relatively minimal? Should we read it as a reflection of different revenue recognition policies? Should we read it as conservatism? How should we think about this?

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Timothy C. Dec, OpGen, Inc. - CFO & Corporate Secretary [18]

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I think in looking at our Q4 revenue, it's fair to say that you should look at it fairly conservatively. We do have another milestone with New York State that we anticipate meeting in the fourth quarter as well as the legacy FISH business that we have. So you should see an uptick in terms of the revenue based on Q3 results.

You can see on the face of the P&L that our collaboration revenue was only $75,000. As we reach the other milestone with New York, it should increase by at least another $175,000. So yes, again, a modest quarter.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [19]

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Okay. So you're thinking that if you reach the milestone, Q4 looks something more like $250,000 for that portion of your revenue?

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Timothy C. Dec, OpGen, Inc. - CFO & Corporate Secretary [20]

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The New York State piece, yes.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [21]

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Correct. Okay, great. And then just thinking about the FDA's questions on the isolate submission. Presumably, it's a, I guess, you've said that, that's impacted how you're conducting the urine trial. Can you talk a little bit more about that? And any major changes to what you had expected, that have taken place as a result of the questions you've gotten from the FDA?

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Evan Jones, OpGen, Inc. - Chairman & CEO [22]

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Sure. Well, let me first give a little color on the isolate submission. Through the interactive review process, we received questions from the agency, there's over 100 of these questions. And then many of them are quite technical relating to DNA sequencing, results and methods or looking at study results. There have been no questions in terms of requiring us to do new clinical studies. And then we respond to the agency. The agency, in some cases, in a number of them, acknowledges that your response is adequate. So that supports an ultimate clearance decision and a fast one when they've basically gone through all their 100 questions.

There's some where we are following up with additional information. And then the last questions to be answered are a block of data questions that we're just finishing off to get back to the agency. But these are very large studies. You can think of them having thousands of samples, and literally, many data points on each one ranging from whole genome sequencing to our multiplex DNA test to microbiology results.

And so it's just a lot of exacting work to get that done properly.

So we -- as I mentioned, we are approaching the finish line there and are encouraged by that. The impact on the urine trial has, in many ways, been just refining the methods that need to be done, and -- meaning, in the trial. For instance, the use of a third-party site and the verification there and a number of analytical studies and that some of it we've learned over the last period of time.

And we think we're now in a position to execute that trial successfully and get that submission going.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [23]

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Okay. That's very helpful color. And then on the R&D spending, do you expect that to ramp up from Q3, now that you've started the urine panel trial, I would imagine? And then how -- what's a good way about -- to think of that tracking for the next quarter or 2?

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Timothy C. Dec, OpGen, Inc. - CFO & Corporate Secretary [24]

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Yes. So as Evan mentioned, we started really this month. So you should see a modest increase in Q4 of this year, maybe in the $100,000 range, then you'll see it increase more significantly in Q1 of next year. And then a smaller piece in Q2, probably in the close to $1 million range in aggregate over those 3 quarters.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [25]

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Okay. Excellent. And then I guess, lastly for me, just kind of a housekeeping question. Presumably, with the recent offering, a lot of those prepaid warrants were already exercised. Is that correct? And if so, and you can answer, can you answer how many?

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Timothy C. Dec, OpGen, Inc. - CFO & Corporate Secretary [26]

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Yes, they have been exercised.

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Operator [27]

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That's all the time we have today. I will now turn the call back to Mr. Jones for closing remarks.

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Evan Jones, OpGen, Inc. - Chairman & CEO [28]

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Thank you, everyone, for joining today, and we look forward to updating you as we continue to progress the business. And for more information, please visit the Investors section of our website or our SEC filings. And feel free to give Tim or myself a call. Thank you very much.

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Timothy C. Dec, OpGen, Inc. - CFO & Corporate Secretary [29]

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Thank you.

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Operator [30]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.