Hesperos Seeks $21 Million For Animal-Free Toxicology Testing System (HESP)

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A Quick Take On Hesperos

Hesperos (HESP) has filed to raise $21.25 million in an IPO of its common stock, according to an S-1 registration statement.

The firm provides chemical and therapeutic testing capabilities through its chip platform.

When we learn more pricing and valuation details from management, I’ll provide a final opinion.

Hesperos Overview

Orlando, Florida-based Hesperos was founded to develop what it calls a “Human-on-a-Chip” system for pre-clinical toxicology testing.

Management is headed by Chief Executive Officer, James F. Kronauge, Jr., Ph.D., who has been with the firm since April 1, 2022 and was Vice President of Process Development at Cystosite Biopharma and has held a variety of senior roles at various other biotechnology companies.

The system promises to reduce the need for animal testing and can be configured for specific customer requirements.

The company has received a number of SBIR grants from the National Institute of Health.

Hesperos has booked fair market value investment of $1 million as of March 31, 2022 from investors including CEO Kronauge.

Hesperos – Customer Acquisition

To-date, the company has funded its operations primarily from NIH grant funding, with some revenue from pharma and cosmetic industry clients.

The firm has received $17.5 million in NIH as of March 31, 2021 with an additional $7.4 million in potential funding through 2024.

General & Administrative expenses as a percentage of total revenue have risen as revenues have decreased, as the figures below indicate:

General & Administrative

Expenses vs. Revenue

Period

Percentage

Three Mos. Ended March 31, 2022

53.3%

2021

35.6%

2020

30.1%

(Source – SEC)

The General & Administrative efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of General & Administrative spend, fell to negative (0.1x) in the most recent reporting period, as shown in the table below:

General & Administrative

Efficiency Rate

Period

Multiple

Three Mos. Ended March 31, 2022

-0.1

2021

0.0

(Source – SEC)

Hesperos’ Market & Competition

According to a 2021 market research report by Grand View Research, the global market for in vitro toxicology testing was an estimated $22.7 billion in 2020 and is forecast to reach $51.2 billion by 2028.

This represents a forecast CAGR of 10.7% from 2021 to 2028.

The main drivers for this expected growth are the increasing costs associated with animal testing, lack of available animal models and growing ethical concerns with animal testing.

Also, the chart below shows the breakdown of use cases for toxicology testing worldwide:

Global In-Vitro Toxicology Testing Market

Global In-Vitro Toxicology Testing Market (Grand View Research)

Major competitive or other industry participants include:

  • TissUs

  • Emulate

  • HuREL

  • Mimetas

  • Hepregan

  • InSphero

  • CN Bio Innovations

  • Nortis

  • Organovo

  • TARA Biosystems

  • Scikon

  • 4Design Bioscience

  • RegeneMed

Hesperos’ Financial Performance

The company’s recent financial results can be summarized as follows:

  • Contracting topline revenue

  • Reduced gross profit and gross margin

  • Growing operating losses

  • Cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Three Mos. Ended March 31, 2022

$ 1,103,181

-7.0%

2021

$ 5,197,370

-0.9%

2020

$ 5,242,376

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Three Mos. Ended March 31, 2022

$ 263,227

-30.4%

2021

$ 1,473,054

-1.4%

2020

$ 1,494,016

Gross Margin

Period

Gross Margin

Three Mos. Ended March 31, 2022

23.86%

2021

28.34%

2020

28.50%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Three Mos. Ended March 31, 2022

$ (325,221)

-29.5%

2021

$ (375,874)

-7.2%

2020

$ (82,702)

-1.6%

Net Income (Loss)

Period

Net Income (Loss)

Net Margin

Three Mos. Ended March 31, 2022

$ (347,932)

-31.5%

2021

$ (483,544)

-43.8%

2020

$ 64,713

5.9%

Cash Flow From Operations

Period

Cash Flow From Operations

Three Mos. Ended March 31, 2022

$ (91,921)

2021

$ 186,988

2020

$ 182,932

(Glossary Of Terms)

(Source – SEC)

As of March 31, 2022, Hesperos had $282,745 in cash and $4.5 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2022, was $57,391.

Hesperos’ IPO Details

Hesperos intends to raise $21.25 million in gross proceeds from an IPO of its common stock, although the final figure may differ.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Management says it will use the net proceeds from the IPO as follows:

to enhance the fabrication of our Human-on-a-Chip system;

to automate our system’s measurement processes in order to increase throughput and attain consistent quality;

to invest in research and lab staff;

to hire sales and marketing staff to target pharmaceutical companies and a broader set of commercial companies; and

the remaining amounts to fund working capital and general corporate purposes.

We believe that our existing cash and cash equivalents, together with the net proceeds from this offering, will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next 36 months.

(Source – SEC)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management says there are no current legal claims that would have a material adverse effect on its financial condition or operations.

The sole listed bookrunner of the IPO is ThinkEquity.

Commentary About Hesperos’ IPO

HESP is seeking public capital market investment to fund further development of its platform and for initial commercialization efforts.

The firm’s financials have reported lowered topline revenue, less gross profit and gross margin, increasing operating losses and a swing to cash used in operations.

Free cash flow for the twelve months ended March 31, 2022, was $57,391.

General & Administrative expenses as a percentage of total revenue have risen considerably as revenue has decreased; its General & Administrative efficiency multiple was a negative (0.1x) in the most recent reporting period.

The firm currently plans to pay no dividends and will retain future available funds for its continued development and growth plans.

The market opportunity for providing toxicology testing is large and expected to grow at a substantial rate of growth in the coming years, so the company enjoys favorable market growth dynamics.

ThinkEquity is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (67.7%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

The primary risk to the company’s outlook is the potential for slow acceptance of its synthetic approach to toxicology testing

The company has a history of surviving on NIH grants, which can make it difficult to transition into a commercial business while weaning itself off of grant revenue.

When we learn more IPO details from management, I’ll provide an update.

Expected IPO Pricing Date: To be announced.



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