Cytek Biosciences, Inc.

Good day, and thank you for standing by. Welcome to the SciTech Biosciences second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Goodson, Investor Relations. Please go ahead.

Thank you, Operator. Earlier today, SciTech Biosciences released financial results for the quarter ended June 30, 2022. If you haven't received this news release or if you'd like to be added to the company's distribution list, please send an email to investors at scitechbio.com. Joining me today from Scitech are Wenbin Zhang, CEO, and Patrick Jean Monnot, Chief Financial Officer. Before we begin, I'd like to remind you that we will be making statements during this call that are forward-looking statements within the meaning of the federal securities laws, including statements regarding Scitech's business plans, strategies, opportunities, and financial projections. These statements are based on the company's current expectations AND INHERENTLY INVOLVES SIGNIFICANT RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS OR EVENTS TO MATERIALLY DIFFER FROM THOSE ANTICIPATED. ADDITIONAL INFORMATION REGARDING THESE RISKS AND UNCERTAINTIES APPEARS IN THE SECTION ENTITLED FORWARD-LOOKING STATEMENTS IN THE PRESS RELEASE CITEC ISSUE TODAY AND IN CITEC'S FILINGS WITH THE FCC. THIS CALL WILL ALSO INCLUDE A DISCUSSION OF CERTAIN FINANCIAL MEASURES THAT ARE NOT CALCULATED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Reconciliation to the most directly comparable GAAP financial measure may be found in today's earnings release submitted to the SEC. Except as required by law, CITEC disclaims any duty to update any forward-looking statements, whether because of new information, future events, or changes in its expectations. This conference call contains time-sensitive information and is accurate only as of the live broadcast August 10, 2022. With that, I would like to turn the call over to Wenbin.

Thanks, Paul, and welcome everyone joining the call today. I want to start by again thanking the incredible CITIC team for their dedication and execution as we close out the second quarter of 2022. On today's call, I will begin with a recap of our progress this year and discuss how CITESC continues to advance toward our mission and vision. And then I will turn the call over to Patrick for a more detailed look at our financial results and outlook. CITESC continues to stand apart in the field as we provide our customers with an end-to-end solution consisting of instruments, reagents, software, and application services. Since our inception, we have continued to develop and launch new products and services, which have been validated in the field by our robust customer base. Our unique portfolio of comprehensive solutions positions us as a leader in the sector, and we are proud of the demonstrated value we provide to our customers. Beyond our original suite of instruments, which continue to see solid demand, we expect our reagents and the recently launched sales orders to contribute considerably to our future enterprise revenue growth. We see this further diversification of our revenue stream, including a growing contribution from recurring revenue, consisting of services and reagents playing an important role in SciTech's future. I'm pleased to say that our installed base of instruments continues to achieve robust growth in the field. During the second quarter, we placed 130 instruments, bringing our total installed base to 1,356 instruments as of the end of Q2. These placements are also aligned with our core strategy, and we have continued to achieve solid adoption with high-dimensional cell analysis users while also bringing in full-special profiling to entry-level users. Since first being introduced in 2017, our cell analysis systems have gained widespread adoption across the globe with use in more than 40 countries. As Patrick will discuss later, our efforts have once again translated to strong revenue growth this quarter. with revenue increasing 32% over the prior year's second quarter. These results reflect a strong demand driven by the recognition from customers of the advantages of our technology in addressing their needs. Once again, our team continues to execute well and achieve operational excellence even in the face of various macro pressures. Our dedicated team is able to leverage SiteX's global workforce in order to manage through inflationary and supply chain pressures. Additionally, our PaaS inventory buffer provides further mitigation of potential supply chain disruptions, insulating our operations from constraints. In all, we continue to be focused on execution and I remain confident in the SciTech team's demonstrated ability to manage through this environment and continue to succeed despite the ongoing challenges. I would like to take a moment to highlight some important recent developments for SciTech from this past quarter. As a reminder, at the end of April, we announced the appointment of Todd Garland as our chief commercial officer. Since joining, Todd has proven an integral part of our team and has already demonstrated a significant value to our organization. And we are pleased to have Todd with us as we continue to execute our mission. At the end of May, we announced that a series of single-color sea floor reagents and a six-color TBMP chip have received CE marking under the European Union IVDD 9879EC. Other regions that accept the CE marking are also included in the certification. With this development, clinical flow cytometry laboratories based in the European Union can now purchase CYTEX-C for CE IVD certified reagents for their use. This exciting achievement makes the sea floor region available for clinical diagnostic use in hospitals, laboratories, and clinics across the EU, and positions us on a path to offering a total-cell analysis solution to the European market. In early June, we participated at CITO, which is one of the premier flow cytometry conferences. At the event, we had the only sales order that was actually running on the show floor, which enabled us to perform live demonstrations showing the power of combining analysis with sales sorting. Dr. Sylvain Simon from Fred Hutch gave a commercial tutorial on running a 59-marker panel using the Aurora system, providing further validation of the transformative power of our technology. Overall, this year's CYTO conference was a very successful event for CYTEX, and significant customer interest resulted in a record number of sales leads for the company. Later in June, we also hosted our inaugural analyst and investor day. In addition to our executive providing a deep dive into flow cytometry, we showcased four key opinion leader users of our products and services who illustrated the power of our solution and the important value we bring to our customers. For those who may not have attended the event, we invite you to view the replay of the webcast on the investor section of our website. The KOLs who spoke are scientists and physicians in the research and the clinical field who focus largely on oncology, but also HIV, diabetes, inflammation, aging, and the multiple aspects of the COVID pandemic, demonstrating the breadth of SciTech technology. These experts spoke to the dramatic expansion in capabilities, sensitivity, and the accuracy they have achieved from SciTech machines, reagents, and the software. as well as the consistency of results and the significant cost savings they have obtained. 1KOL, who operates the core clinical laboratory, said that Cytex machines save from 50% to 200% in cost for running samples, which is due to being 300% faster than competing technologies. He observed that Cytex's ability to run more samples in fewer tubes produces results in less time, gives faster diagnosis, allows treatment to begin sooner, allows a more specific therapeutic approach, consumes fewer resources, costs less, and allows hospitals to make patient discharge decisions more quickly, thus saving further costs. Others commented that the advanced capabilities of SciTech Analyzer and the groundbreaking nature of Cytex's new cell solder creates new opportunities in research and clinical practice. 2KOL said that Cytex's flow cytometer has become the default tool for spectral analysis, simplifying the technical skills needed and unleashing the power that artificial intelligence can offer. We are gratified that our work at SciTech is enabling such significant scientific and clinical advancements. As we continue to grow our offerings and the base of instruments, reagents, and services, our technology has now been validated by 768 peer-reviewed publications as of the end of the quarter. This quarter alone, there were 116 peer-reviewed publications mentioning SciTech. I'm very proud of this accomplishment, which speaks to the momentum of our platform and validates the use of our offering in the scientific community. A notable publication was from Roswell Park Cancer Center entitled, Development of a 27-Color Panel for the Detection of Magical Residual Disease in Patients Diagnosed with Acute Myeloid Leukemia, in which The researchers used only one tool, reducing cost and improving workflow. This exemplifies our mission at SciTech and the technology we bring to the field as we continue to demonstrate proven real-world results. In all, I'm pleased with the progress our team has made this quarter and expect to make throughout the remainder of the year as we continue to establish ourselves as a leading cell analysis solution company. As we continue to push forward a cadence of new products and applications, we remain deeply focused on providing a complete cell analysis solution to our customers. We look forward to continuing to provide our novel FFT platform to these customers as they push the bounds of scientific discoveries and clinical progress. With that, I will now turn the call over to Patrick for more details around our financials.

Thanks, Wenbin. Total revenue for the second quarter of 2022 was $40.2 million, a 32% increase over the second quarter of 2021. Gross profit was $24.6 million for the second quarter of 2022. an increase of 24% compared to a gross profit of $19.7 million in the second quarter of 2021. Gross profit margin was 61% in the second quarter of 2022 compared to 65% in the second quarter of 2021. Adjusted gross profit margin in the second quarter of 2022 was 64% compared to 65% in the second quarter of 2021. after adjusting for stock-based compensation expense and amortization of acquisition-related intangibles. Operating expenses were $25.5 million for the second quarter of 2022, a 60% increase from $15.9 million in the second quarter of 2021. The increase was primarily due to expenses to support continued growth of the business including further investment in sales and marketing, R&D, and costs related to operating as a public company. Research and development expense were $8.4 million for the second quarter of 2022, compared to $6.2 million for the second quarter of 2021. Sales and marketing expenses were $8.4 million for the second quarter of 2022, compared to $5.6 million in the second quarter of 2021. General and administrative expenses were $8.6 million for the second quarter of 2022, an increase from $4.2 million in the second quarter of 2021. Adjusted EBITDA in the second quarter of 2022 was $4.8 million compared to $4.7 million in the second quarter of 2021. After adjusting for stock-based compensation expense, and foreign currency exchange impacts. Turning to our guidance, we continue to expect full year 2022 revenue to be closer to the high end of the range of 160 million to 168 million. While we have seen an increase in foreign currency exchange headwinds, namely through the Euro, the growing momentum in our business gives us the confidence and ability to maintain our full year guidance. We have taken and will continue to take action to address this ongoing challenge, and our sales pipeline provides us visibility into future revenue expectations. I'm pleased to say that our organization is in a strong position financially, continues to see solid demand, and is committed to remaining profitable on an EBITDA and net income basis annually, as well as achieving our long-term growth targets and objectives. As such, we do not anticipate the need for future capital raise to meet operating needs. Our strong balance sheet, including a solid cash position and no debt, underpins the strength of our healthy organization. We will continue to invest in our core business as it relates to new projects and innovation while remaining opportunistic in the M&A environment and focusing on growth in all key areas. With that, I will turn it back over to Wenbin.

Thanks, Patrick. Again, this quarter, BISAC has continued to demonstrate our commitment to developing tools, reagents, and the software to advance the next generation of cell analysis. I would like to express my deep gratitude for the team we have here at SciTech. Their excellence, hard work, and shared belief in this important mission drives our progress. I would like to again remind anyone who did not attend our analyst and investor day that a replay is available on our website. Thank you, everyone, and we will now open the call for questions. I'll play this.

As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by. We can file the Q&A roster. Our first question comes from the line of Max Masucci from Cowan & Company. So...

So you disclosed some targets, some near-term, some longer-term, just for the percentage of total revenues that could be generated from reagent kits a few months ago. And clearly, there's a lot of macro factors and other regional dynamics in play that are impacting both supply and demand for life science research tools, products, etc. I would just be curious to hear how the demand for the reagent offerings has trended over the course of 2022, and then maybe more specifically during Q2.

Max, maybe I can take that first question. We had another very solid quarter on the reagent. received from last year just because we had a small base from last year very pleased with where we are so overall the it's it's in line with our expectation we've seen a little bit of a I would say headwind on the currency side so we were impacted with the I would say we have impacted adversely with some maybe three to five percent on the on the total revenues But outside of that, I think it's marching towards our expectation. I think the business is performing very well considering the macro environment. I would say that we delivered another quarter of very solid financials, and I think it's positioned us very well for another great year.

Okay, great. And then, you know, another insight from the analyst's day, you know, is the evaluations of clinical flow cytometry labs in terms of the performance of instruments that are supporting clinical applications, you know, along with their operational efficiency, turnaround time, et cetera. Just curious if there are similar standards in place you know, for, you know, European flow cytometry labs? And then, you know, if so, you know, we saw the CE mark announcement. You know, how much, you know, how should we be thinking about, you know, the, you know, how much you're prioritizing a commercial push in the clinical setting in Europe?

Yeah, I will pick up that question. In fact, the CE marking provides us a new opportunity some of the clinical tenders in Europe, that including our CE approved certified instrument as well as the regions. So, certainly it's still new to us, and we have just got our regions cleared, but again, there will be new opportunities for us going forward.

Okay, great. Thanks for taking the questions.

Thank you. Our next question comes in the line of Matt Sykes from Goldman Sachs.

Patrick, thanks for taking my questions. Maybe just first, I guess at a high level, because I know you don't necessarily break out the different instruments, but I know last year, towards the latter half of the year, you were generating a decent amount of traction within Aurora relative to Northern Lights. It's been a year since you've launched the cell sorter. And just given the ASP of the sales order and the potential impact on margins, maybe just kind of give us an update on the progression of each instrument category, or maybe just specifically I'm interested in the sales order as well and the progress given the time that's elapsed since launch. Thanks.

So on the sales order, what I can say, we don't really break out information, but we have a record number of sales orders this quarter. And we continue to see demand for every instrument type, the Aurora, the Northern Light. But yes, this quarter, we had a very strong quarter on sales orders.

Great. Thanks, Patrick. And then just maybe another one for you, Patrick. Something like adjusted gross margin came in above where we were, somewhat on par with last year, a fairly high level. Can you just maybe talk about some of the drivers here? gross margins this quarter and then what your expectations are for gross margin trends, adjusted gross margin trends for the balance of the year?

Yeah, so the expectation is that the gross profit margin will stay or will gradually improve over time, especially as we roll out the reagents that typically have a higher gross profit margin. And as we also continue to globalize our processes, we have seen, as I said earlier, a little bit of a headwind on the effects position, but I think we've been able to manage that quite well in this quarter.

Got it. Thanks very much for taking my questions.

Thank you. Our next question comes in the line of David Westenberg from Piper Sandler.

And congrats again on all the progress. I want to actually start with probably a question probably more for Patrick because it's on inventory. We're picking up a lot of companies. I mean, you've talked about supply chain on the call. We appreciate the color there. We're picking up from a lot of companies that they're having to be opportunistic with supply chain and parts. And when things become available, they're kind of just buying right then and buying in big numbers. Should we expect free cash flow due to the fact that inventory is Maybe you'll have to build a lot of inventory over the next few quarters in order to kind of keep a lot of the parts on hand. I mean, just how should we think about inventory-free cash flow that you'll probably have to do over the next six to nine months?

Right. And so we haven't waited this quarter to build our inventory. And you'll see that looking at the balance sheet, our inventory level is now at the highest it's been, $45 million. up from 32, so substantially higher if I look at last year. And I think what we're doing here is, to your point, I mean, we try to ensure that we have sufficient parts in stock, in inventory, so that we can continue to deliver and provide the best service to our customers. So I think we've done a pretty good job, which has a cost, sadly, which is having a slightly higher inventory. So we will probably continue. I'm expecting the inventory to continue to build a little bit over time, but it should not be as dramatic that we've seen since December. Got it. Okay.

And then probably this one's more of a question for Winveen. We did see a partnership between BD and LabCorp using flow cytometers in a potential for CDX. Now, I think on the analyst day, you know, you did show a lot of indications around or usage around minimal residual disease. Are there any other maybe clinical applications that you see as being particularly interesting from full spectroflow cytometry and maybe anything outside of minimal residual disease? Or how do you think some of those CDX kind of partnerships could look in the future if you ever did plan on doing some of those.

Yeah, in addition to the MRD, which we have talked about, in fact, we have quite a few collaboration partnerships ongoing today with the clinical laboratories in the world across several countries. So that includes applications such as immunoprofiling and other type of research projects as well as the clinical activities.

Got it. Okay. Okay. All right. And then just maybe for the last one, this one should be nice. Sorry, I cut out. Can you guys hear me okay?

Yeah, we can hear you.

Okay, perfect. cut out for a little bit. And then just maybe just one last question if I can. Patrick, you know, on the guidance, there was one, it's still that 160 to 168. You did mention kind of the high end of guidance. Is there a reason why you didn't just bring up the low point of guidance? You know, I will accept the answer of it's just a stylistic thing versus I just was wondering if maybe there is some you know, things that could happen that would still hit the low end of guidance, for example, you know, maybe supply chain, recession in Europe. You know, again, I'm just trying to get some color, whether that's stylistic or, because this is the first time I've worked with you as a CFO, and you guys are only about a year and a half out from my feeling. So, anyway.

Yeah, it might be stylistic, but no, I think we're still pretty good about the, I mean, we're reiterating our guidances despite some FX headwind, if I can call it this way, and it will be on the higher end, yes. I don't know if that answers your question.

That's good enough. Thank you. I've got enough of your time. I appreciate it.

Thank you. Our next question comes from the line of Tejas Savant from Morgan Stanley.

Good evening. Thanks. Wenbin, I want to start with Europe. I know you mentioned FX and exposure there, but outside of that, I'm curious if you're seeing any elongation of sales cycles or tighter scrutiny of CapEx purchases among your customers. If you're not, any color on that because we're starting to pick up signs of that happening with some of the other instrument-focused life science plays out there. I'm just curious as to what you're seeing and why.

Actually, it really depends on the region and territories. I think U.S., APEC, especially China, we have been doing well. But in Europe, we do see some delayed process, takes longer time to close. But the business is still there, and we expect all of those businesses will continue to come back maybe towards the second half of the year.

Got it. That's helpful. And then, Patrick, one for you. I mean, implicit in the guide, what are you assuming for a budget flush this year? And is, I guess, a normalized budget flush essential to, you know, the 4Q uplift that you are assuming you're modeling into your projections?

Yeah, so, I mean, currently, as I said, I mean, we came with our guidance We feel a little bit of a headwind, especially coming from Europe on the FX side. I mean, the euro against dollar has weakened substantially. So for us, we feel good about the second half to be in that 168 range. And I don't know if that answers your question.

Got it. Okay. And some current operating conditions, and what are your sort of assumptions around the recovery in the region?

Our manufacturing is actually outside of Shanghai, in Wuxi. And the impact is very minimal. And we, as Patrick earlier mentioned, we have been building inventory not only on the part side, as well as on the instrument side to make sure we will be able to serve our customers.

Got it. Okay. And then finally, last one for me here. You know, in terms of the next-gen clinical flow instrument that you're working on, can you just give us an update? I know you mentioned at the analyst day being in contact with the FDA for system requirements, et cetera. I'm just curious as to any color on how those conversations went and a progress update on the development.

So cross-experimentation.

a couple of years uh that's why i we don't really have much new updates got it okay thank you thank you this concludes today's conference call thank you for participating you may now disconnect