Cytek Biosciences, Inc.

Good day and thank you for standing by. Welcome to the SciTech fourth quarter and full year 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 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1-1 again. 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 of Investor Relations.

Please go ahead.

Thank you, Operator. Earlier today, SciTech Biosciences released financial results for the quarter and full year ended December 31, 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 Jaminot, Chief Financial Officer. Before we begin, I'd like to remind you that management will make 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 involve 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 issued today and in CITEC's filings with the SEC. 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, SITAC 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 February 28th, 2023. With that, I'd like to turn the call over to Wenbin.

Thanks, Paul, and welcome everyone joining the call today. As always, I want to start by thanking our team at SciTech for their dedication and execution as we close out 2022. On the call today, I will discuss our progress for the quarter and the year and highlight several recent developments that illustrate how CITES continues to advance towards our mission and vision. Finally, I will turn the call over to Patrick for a more detailed look at our financial results and Outlook for 2023. 2022 was a significant year for SciTech, which demonstrated our continued evolution and progression as an organization. We began the year by announcing the opening of our new facility in Fremont, California, which tripled our previous manufacturing capacity to meet growing global demand for cell analysis solutions In April, we announced the appointment of Todd Barland as our chief commercial officer. In June, we hosted our successful inaugural analyst and investor day. And in October, we named Chris Williams chief operating officer. And now in 2023, we are already seeing significant momentum. At the start of this month, We announced a strategic partnership with Biolab Laboratories to expand our reagent portfolio, enhancing high-parameter panels on our cell analysis systems. We believe that the addition of Biolab Star Bright Dice to our full-spectrum profiling, or FSP, platform is a big win for researchers conducting multi-parameter experiments and We are enthusiastic about this new partnership. Finally, we are very excited to have announced our acquisition of Luminix Pro Cytometry Business. We are thrilled to welcome this organization and the team to our enterprise as this acquisition expands Cytus product portfolio, technical capabilities, global installer base, service offerings, and market opportunities. We will discuss further details of this transaction, including financial and strategic benefits later in the call. This quarter and a year, our achievements have showcased the efficiency and effectiveness of our global business operations. We demonstrated solid results across growth margins, net income and the adjusted EBITDA, and our global sales have expanded. This is all in addition to our ongoing efforts to diversify our revenue and further our overall strategy. As we look at the industry landscape, SciTech 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. Now, even further enhanced by the recent acquisition and the partnership I just mentioned. Our unique patented 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. This past year, we have consistently highlighted our comprehensive suite of products and services, which has led to a further diversification of our revenue stream beyond the sales of instruments. As we have said previously, beyond our original suite of instruments, which continues to see solid demand, we expect our sales orders and reagents to continue to contribute considerably to our future enterprise revenue growth. I'm pleased to say that our installed base of instruments continues to achieve robust growth in the field. During the fourth quarter, we placed 169 instruments, a quarterly record, bringing our total additions for the year to 560. well above the pace we accomplished in 2021. Altogether, our installed base has now reached 1,670 instruments as of the end of 2022. Furthermore, these placements reflected our core strategy to achieve growth across the range of applications and users, from entry-level to high-dimensional cell analysis applications. Since first being introduced in 2017, our cell analysis systems have gained widespread adoption across the globe, with use in 50 countries and regions. And now, we have seen great traction in diversifying our revenue base through the launch of new products. including recruiting sources of revenue through service and the reagent sales. While still a smaller part of our overall revenue, demand for our reagents is growing rapidly, and we are excited for the potential of this contribution to our enterprise. Through our recent strategic partnership with Biolab to expand our reagent portfolio, The new star bright dyes will be available to SciTech to develop and commercialize reagent products to support high-parameter applications on aurora and northern light flow cytometry systems. Star bright dyes have been designed to be stable with superior brightness, narrow excitation, and emission characteristics for minimized spillover and improved resolution of specific cell populations. Thereby, allowing researchers to build bigger and better panels. Some of our dyes complement SciTech's C4 family of proprietary dyes, providing a wide variety of color options for highly multiplexed panel design and application development. SciTech plans to develop and optimize single-valve reagents and the multicolor panels using stop-right bias for the more than 1,600 SciTech FFP instruments already deployed across 50 countries and regions. These single-valve reagents and the multicolor panel will unlock additional capabilities for our end users. Researchers will be able to expand multi-parameter analysis into violet, and ultraviolet channels with SciTech optimized reagents, unleashing the full power of FFT technology to obtain better resolution and a deeper understanding of cell populations. This partnership is squarely in line with our organization's strategic goals and initiatives to continue building out our application-driven reagent business and further extend SciTech's competitive lead as head of other technologies. In 2022, we also announced the launch of SciTech Cloud, a cloud-based platform that features two integrated tools to streamline workflows on SciTech's state-of-the-art sales orders and analyzers. The SciTech Cloud streamlines the process from panel design to data acquisition. The new SciTech Cloud digital ecosystem combines all of SciTech's special panel design tools in one place and allows users to prepare experiments remotely prior to accessing the instrument. The benefit of this approach is accelerating the time to insight for a wide range of applications, including immunology, oncology, infectious diseases, and inflammatory diseases. The addition of SciTech Cloud brings benefits to both our current extensive customer base and future SciTech users. On our roadmap, we aim to expand the capabilities of SciTech Cloud, covering data management, sharing, and analysis. The launch of SciTech Cloud is an exciting step for our organization. further solidifying our position in the industry as a full solution provider with a wide array of offerings and services that seems they say work together toward helping our customers achieve their own goals. We have worked diligently to build out an organization that is now uniquely positioned in the industry as a full solution provider. offering a diverse and a complete suite of solutions to our customers. And this is well-recognized across the industry. As we continue to grow our offerings in the face of instruments, religion, and services, our technology has now been validated by more than 1,000 peer-reviewed publications as of the end of the quarter. This quarter alone, There were 129 peer-reviewed publications mentioning SciTech, bringing the total for the year to 504, and the all-time publications to 1,013. I'm very proud of this accomplishment, which speaks to the momentum of our platform and validates the use of our offerings to the scientific community. as an example of how significant some of these research efforts are. One paper published in Nature identified a possible therapeutic target to alleviate brain deficits of aging and Alzheimer's disease. A second exemplifies how our technology is used to study the relationship between the microbiome and the health. In that paper, Researchers identified which gut bacteria drive neural inflammation in a module of multiple sclerosis. Finally, I would like to spend a moment to discuss our acquisitions of Luminex Flow cytometry business. As we shared when we first announced the deal, we are excited about this transaction and are confident This acquisition will bring both immediate and a long-term value for SciTech. The Luminix Flow cytometry business provides important contributions to our technological abilities, product range, customer base, and the commercial reach. Starting with the technology, both the cellular imaging and the artificial intelligence technologies from the analyst line will be used to enhance the performance of SciTech aurora analyzers and cell sorters. These new capabilities will allow SciTech to offer researchers and scientists a combination of enhanced AI-driven analytical performance from high-resolution cell imagery, together with the speed, accuracy, phenotyping, and the cell sorting capabilities of full-spectral aurora flow cytometry. We will also use Guava technology to enhance site test products. For example, Guava's capillary fluidity technology for sample handling, along with its menu-driven user interface, will be incorporated into our Northern Lights platform. As a result, we are planning to gradually transition both the non-imaging Guava and the Amnes product lines to our Northern Lights platform. or while retaining the key capabilities of these machines that have been so well appreciated by their respective customer bases. While we expect these tech transfer activities and the product development initiatives to take some time, we believe SciTech will be positioned to offer new products with exciting new features and capabilities. These will include ease of use and the reduction of time required to conduct experiments, both of which we believe will broaden the appeal of our instruments to include scientists looking for insights without having to become full cytometry experts. In the meantime, we are committed to continue servicing and supporting Guava and Amelix customers throughout the instrument lifecycle. looking at the customer base and our commercial reach. This transaction is expected to substantially expand our commercial team of pro experts by 50% in Asia Pacific and more than 80% in Europe, the Middle East, and Africa. This is in line with our existing goals to broaden our commercial footprint. to allow for even greater penetration worldwide for Scitex, Aurora, and Northern Lights instruments. Furthermore, we believe the current installed base of Amnes and Guava product lines, which totals over 7,000 instruments across more than 1,500 customers in over 70 countries, will be an attractive target market for Scitex. as this installed base will benefit from replacements and upgrades into our Northern Lights and Aurora platforms. And finally, looking at the benefits to our operations, this acquisition offers significant operational synergies in the service functions. We expect the expanded service team will provide greater efficiency in our service organizations. reducing the travel time for our technicians and increasing our margin as we support our growing input base of instruments at a higher customer density in each geographic location. To summarize, while we expect modest revenue contributions from the acquisition this year, on which Patrick will provide more details shortly, we believe that The new value of this acquisition is threefold as discussed above. First, the acquired technology will be used to accelerate the development of new products. Second, is the dramatic expansion in prospective customers for our Aurora and Northern Lights products from the existing user base of Amnesty and Guava instruments. And third, we expect the efficiency of having these product lines under the SciTech umbrella to drive improvement in the growth margins and the profitability of our service operations. We look forward to welcoming the Luminex Pro psychometry team into the SciTech family, working together to meet the needs of our customers and continuing to drive their research forward. For more details, I encourage anyone who did not attend our conference call earlier this month to access the replay on the investor section of our website and refer to the press release and presentation deck from the announcement. In all, once again, I'm pleased with the progress our team has made this quarter and throughout 2022. 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 FFP platform to these customers as they push the bounds of scientific discovery 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 fourth quarter of 2022 was $48.3 million, a 24% increase over the fourth quarter of 2021. On a constant currency basis for the quarter, revenue was $61.2 million. an increase of 32% over the fourth quarter of 2021. Growth profit was $29.4 million for the fourth quarter of 2022, an increase of 24% compared to a growth profit of $23.6 million in the fourth quarter of 2021. Gross profit margin was 61% in the fourth quarter of 2022 compared to 61 in the fourth quarter of 2021. Adjusted gross profit margin in the fourth quarter of 2022 was 62% compared to 63% in the fourth quarter of 2021 after adjusting for stock-based compensation expense and amortization of acquisition-related intangibles. Operating expenses were $29.3 million for the fourth quarter of 2022, a 31% increase from $22.3 million in the fourth 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 expenses were $9.7 million for the fourth quarter of 2022, compared to $7.1 million for the fourth quarter of 2021. Sales and marketing expenses were $9 million for the fourth quarter of 2022, compared to $8.3 million in the first quarter of 2021. General and administrative expenses with $10.5 million for the fourth quarter of 2022, an increase from $6.9 million in the fourth quarter of 2021. We achieved net income of $3.7 million this quarter compared to a loss of $1.2 million for the fourth quarter of 2021. Additionally, adjusted EBITDA in the first quarter of 2022 was $6.6 million, compared to $5.5 million in the first quarter of 2021 after adjusting for stock-based compensation expense. Now for the full year. Total revenues for the year ended December 31, 2022 was $164 million, a 28% increase over the year ended December 31, 2021. On a constant currency basis, revenue was 171.8 million, an increase of 34% over the full year of 2021. While we experienced targeted anticipated FX headwinds during the year, on a constant currency basis, we exceeded the top of our guidance range for 2022, driven by strength in instrument and service revenue. Growth profit was $101 million for the year ended December 31, 2022, an increase of 28% compared to a growth profit of $79.1 million in the year ended December 31, 2021. Growth profit margin was 62% in the year ended December 31, 2022, compared to 62% in the year ended December 31, 2021. Adjusted gross profit margin in the year ended December 31, 2022 was 63%, compared to 63% in the year ended December 31, 2021, after adjusting for stock-based compensation expense and amortization of acquisition related intangibles. Operating expenses were 102.8 million for the year ended December 31, 2022, a 47% increase from $70 million in the year ended December 31, 2021. The increase was primarily due to expenses to support continued growth of the business, including costs related to operating as a public company. Research and development expenses were $34.9 million for the year ended December 31, 2022, compared to $24.4 million for the year ended December 31, 2021. Sales and marketing expenses were $33.2 million for the year ended December 31, 2022, compared to $24.7 million for the year ended December 31, 2021. General and administrative expenses were $34.7 million for the year ended December 31, 2022, an increase from $20.8 million for the year ended December 31, 2021. Net income in the year ended December 31, 2022 was $2.5 million compared to $3 million in the year ended December 31, 2021. Adjusted EBITDA in the year ended December 31, 2022 was $21.2 million compared to $17.5 million in the year ended December 31, 2021. after adjusting for stock-based compensation expense and other non-recurring expenses. Cash, cash equivalents, and short-term investment were approximately $341.1 million as of December 31, 2022. Subsequent to year end, we made an all-cash acquisition of the aforementioned product line from Luminex, which will reduce our cash balance by approximately $45 million. Now turning to our guidance for 2023. We expect to see robust growth from our existing pre-acquisition business this year and anticipate revenue from our existing business to be in the range of $205 million to $215 million. representing growth of 25 to 31% over full year 2022, revenue of 164 million. This range assumes no changes to the rate of foreign exchange at the beginning of 2023, as well as some continued impact in China during the first half of the year related to COVID and other factors. We expect these effects from China to abate by the second half of 2023. In addition, we expect approximately 20 million of revenue contribution in 2023 related to our acquisition of the Luminex asset. As a reminder, the acquisition which closed earlier today will contribute only 10 months of revenue in 2023. Additionally, as Wendy mentioned, we are transitioning the Guava product line as well as some of the Amnesty product line to our normal life platforms. We expect these tech transfer activities and product development effort to take some time. As a result, our guidance assumes only very modest contribution from Guava in 2023. Taken together, this brings our full year 2023 revenue guides to 225 to 235 million representing growth of 37 to 43% over full year 2022. In keeping with our typical seasonal pattern, we are expecting our 2023 revenue to be scooped towards the back half of the year. In all, FITEC is in a strong position financially, continues to see solid demand, and is committed to remaining profitable on an annual EBITDA and net income basis. as well as achieving our long-term growth targets and objectives. In addition, our solid balance sheet 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 Wendy.

Thanks, Patrick. I'm proud once again of CITEC's achievements this quarter and throughout 2022, marked by strong growth profit margins, net income, and adjusted EBITDA results, as well as the continued evolution of our organization. As I have discussed before, we operate our business according to four key pillars. each of which is integral to our enterprise's mission and forward vision. These pillars, which are instrument, application, bioinformatics, and clinical, lay out our roadmap for operating our business now and in the future with intentional and purposeful execution. Today, I'm even more confident that our daily work aligned under these four pillars adhere to and execute on our overall strategy. I would like to express my appreciation for our team around the world. It is their excellence, hard work, and shared belief in our important mission that drives our progress. Thank you, everyone. And we will now open the call for questions. Certainly.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. One moment. Our first question comes from David Westenberg of Piper Sandler.

Your line is open. Again, David Westenberg, your line is open.

Oh, sorry, on mute. My bad. Congrats on the acquisition here. In closing that today. So can you talk about the only $20 million in revenue from the acquisition? I know it's been traded hands a few times at a higher revenue basis. I mean, if I'm getting your color correctly, I think the Guava line, you're not actively selling it. Can you just maybe give us a little bit more how we should think about the contributions from the different product lines you're acquiring? Really, are you just focusing on the consumables and the service contracts, and you're selling your own instruments? Any way you can help us think about that part.

So just to start, and just want to reemphasize, The purpose of this acquisition, the primary driver, is not for its revenue. So by saying that, we still expect some revenue coming from this acquisition, but just to emphasize the three objectives. One is the technology. And the second part is the wider customer base that will help us to sell our full special profiling technology and products into those customer base. And third is the efficiency that will help bring to improve our operation margin on the service side. Now, part of the reason for this 20 million is first is, as Patrick has indicated, it's only 10 months, right? It's not a full 12 months. Second part is we focus more towards imaging technology side, a reason why most of the contribution coming from the Armonyx imaging products. Now, if you look at Armonyx itself, there are other products which is non-imaging, which we are going to de-emphasize through the integration process. And then also mentioned about this Guava. And actually, during the Guava, we are moving the Guava manufacturing into SciTech. facility, and there will be interruption during that process through the integration, and we are also looking deep into this product line, and through that whole process, that's why, and as Patrick has indicated, not much revenue has been counted from the Guaba side. So overall, and adding together, we feel $20 million is kind of conservative.

David, I'm going to just add that we expect to phase out products that have a a lower gross profit margin than what we expect. So there's going to be some phasing out at some point.

Really appreciate that. Can you maybe give color? So, I mean, I'm sorry to harp on this, but the guidance did come post that acquisition a little bit below, I mean, I think where we were all modeling. So I kind of have to get a little bit more granular here. I mean, we were expecting – I mean, I would have thought a little bit of revenue synergies as, you know, you develop this product and now you can sell a ton of your, you know, best-in-class full-spectral flow cytometry on this operating structure. You know, is there maybe upside for that versus the guidance expectations? Is that synergy, you know, still potential in 2023 or is maybe just a 2024 phenomenon for you to sell – your existing products into that product line and really capture that revenue synergy.

Yeah. So I would say that, yes, there are some upsides, but maybe more so on the second half of the year than on the first half. Yes.

Okay. Maybe I'm just going to squeeze one last one in here. On the working capital, working capital, at least, you know, we're seeing a balance sheet versus a cash flow statement here. You know, There is a – the working capital does look like it's taking up – outpacing revenue. In 2023, can we expect working capital to kind of go more towards the pace of revenue growth in 2023, Patrick? And then I'll stop there. Thank you.

Yeah, and yes, you are correct. The expectation this year considering the growth is that the working capital will align with the revenue growth.

Okay, moving forward to our next question. And our next question will come from Dejah Savant of Morgan Stanley.

Dejah, your line's open.

Hello, this is Yuko on for Tejas. Thank you for taking our questions. How should we be thinking about balancing investments into the newly acquired business versus cost synergies? Is there anything in particular to flag for OPEX in terms of cadence over the course of 2023?

First of all, it's a carve-out, so the expectation here on the synergies is mostly on the revenue, gross profit margin as we continue to improve the gross profit margin. And really, where we see expansion is on the service side. As Wenbin mentioned, the business has about 7,000 instruments out there with a number of field service engineers. So we believe that there's an opportunity for us to improve that substantially.

I think one of the most important aspects of this cardboard acquisition is actually its imaging technology. And that will really drive us toward building the next generation imaging-based sales orders, special sales orders. That's what we are focusing on. This actually plays a lot with regarding to the decision of going after this acquisition.

Got it. And then as a separate follow-up, could you elaborate on the circumstances where revenue is recognized under bill and hold transaction? How much revenue was recognized in 4Q under the Bill and Fold?

I would have to come back to you, but it's about the same amount that we had in Q3 of this year, of last year, sorry.

Okay, thank you.

One moment for our next question. And our last question will come from Max Masuki of Cohen. Your line's open.

Hi, this is Stephanie on for Max. Thanks for taking my questions and congrats on closing the acquisition. Just quickly on your 2023 revenue guide, specifically that 20 million in revenue from the Osorin. So you mentioned that you were planning on transitioning some Amnesty and Guava users to the Northern Light platform. Can you just provide some more color on the pacing behind that transition? And is that specifically baked into that 20 million in revenue and do you plan to break out organic revenue as the year progresses?

We haven't made any decision whether we will break out or not but among those 20 million the primary driver is the ominous imaging flow cytometer so along with the service revenue we as Patrick has earlier indicated, and not much Huaba revenue is embedded into this forecast.

Got it. Understood. And then on the service margin, so I understand that the recent acquisition should improve that. Can you provide some more color on the timing and the degree of improvements that we should expect to see in 2023 in terms of the margin?

Yeah, so the expectation, as we're going to go through a transition period as we integrate the company, so my expectation is that the margin will be much higher on the second half, more so towards the last quarter of this year.

As you can imagine, during the integration stage, we need to take some time for cross-training of technicians on both sides in order for them to service the instruments of Guava Omnist as well as SciTech's food special products.

Got it. Understood. And then if I could squeeze in one more. So with the acquisition expanding your commercial team in APAC by 50% and your EMEA commercial team by 80%, how should we think about this driving additional growth for these two regions in 2023?

We feel just like the service, initially there will be a period of time for cross-training of our people on both sides to be able to cross-sell. But we expect we will see the benefits towards the second half of the year.

Got it. Understood. Thank you for taking my questions.

And I'm showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.