Codex DNA, Inc.

and thank you for standing by. Welcome to the second quarter 2021 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 that session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today, Jennifer McNeely. Chief Financial Officer. Thank you. Please go ahead.

Thank you, Paul. This afternoon, CodexDNA released its financial results for the second quarter ended June 30th, 2021. If you have not received the news release or if you'd like to be added to the company's distribution list, please send an email to IR at CodexDNA. Joining me today from CodexDNA are Todd Nelson, our Chief Executive Officer, and Dan Gibson, our Chief Technology 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 meeting of the federal securities laws. These statements involve material risks and uncertainties that can cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appear in the section entitled forward-looking statements in the press release we issue today. For a more complete list and description, please see the risk factor section of the company's quarterly report on Form 10-Q for the quarter ended June 30, 2021, and in other filings with the Securities and Exchange Commission. Except by required by law, we disclaim any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast August 10, 2021. With that, I'd like to turn the call over to Todd.

Thanks, Jennifer, and thank you all for joining us this afternoon. I'm very pleased to welcome you to our first earnings call as a public company and to review our results for the second quarter of 2021. During the second quarter, Codex D&I took a big step forward in the evolution of our business, We successfully closed an IPO, strengthened the diversity of our leadership team and board of directors, enabled new downstream mRNA applications, expanded our customer base, and grew revenue 76% year over year. We continue to be well-positioned to build on this foundation, scale our global operations, and empower more customers with the ability to rapidly create sustainable synthetic biology solutions to help advance precision medicine, biologics drug discovery, vaccine development, genome editing, and both cell and gene therapy. I'd like to take a moment and express my sincere thanks to our amazing team for their hard work and dedication leading up to our IPO in June, in which we raised approximately $123 million in gross proceeds. All the incredible progress we've made is truly a testament to their collective efforts. I would also like to thank all of our investors for their continued support. We look forward to developing meaningful long-term relationships and working with you to grow the company together. With that in mind, let me give you a sense of what's driving us at Codex DNA. Our mission is to apply breakthroughs in automation solutions for synthesizing DNA, mRNA, and proteins to allow scientists to program and print synthetic biology, creating sustainable healthcare and technology solutions for some of humanity's biggest challenges. Our team has been innovating in the synthetic biology industry for years and has driven many of the industry's most significant scientific achievements, including the invention of Gibson Assembly Method, which has now been cited in more than 6,000 scientific publications. We're excited to drive the next revolution in synthetic biology, The first revolution focused on the reading or sequencing of DNA molecules, decades of investment in this area has led to the opportunity to write or print DNA at the benchtop, which will allow for the rapid translation of DNA into novel products. We believe the next revolution will be driven by synthetic biology applications that rapidly write or recode DNA, allowing customers worldwide to develop sustainable technology solutions and bring critical products to market faster. We've developed an innovative solution to unlock this writing revolution that is purpose-built to meet pressing needs for fast and accurate DNA writing technologies that drive significant improvements in productivity. Our BioXP automation platform has the potential to unlock this DNA writing revolution, giving us access to large market opportunities by bringing this technology to the bench top. The award-winning BioXP system is disrupting an industry by providing a fully automated push-button system for the rapid synthesis of both DNA and mRNA. Certain drug discovery activities that previously took months can now be completed using the BioXV system in just a week or so, and what previously took days can now be done in hours. Industry-leading quality combined with enhanced speed, accuracy, and scale can result in vast improvements to productivity. This allows scientists to write or print functional-grade DNA and mRNA with the push of a button, enabling rapid iteration of synthetic biology products. Scientists around the world are able to accelerate the design-build-test paradigm for faster development of novel, high-value products for precision medicine, biologics drug discovery, vaccines and therapeutics, genome editing, and both cell and gene therapy. Our technology is being applied towards developments in medicine as well as food supply sustainability, as is the case for Citrus Greening Disease Grant awarded to us by the U.S. Department of Agriculture. Now a few words on our second quarter results. In the second quarter, we responded to customer demand with a number of BioXP synthetic workflow enhancements. We launched the first mRNA kit for BioXP system. This product line is the first of three mRNA kits in a full product line. It's designed to enable the rapidly growing market for mRNA vaccine development and RNA-based therapeutics. We also launched longer gene fragment building capabilities for overnight production of error-corrected de novo synthetic genes as long as 7.2 kB in length. Such improvement in the size dramatically expands the menu of applications that can be studied, such as antibody engineering, metabolic engineering, genome construction, targeted gene variant analysis, and more. In July, we signed a licensing and supply agreement with TriLink Biotechnologies, which is part of Merivy Life Sciences for its industry-leading clean cap technology. We plan to integrate the mRNA capping technology into our suite of automated mRNA synthesis kits for the BioXP system, as well as within our biofoundry services offering. customers will now have the option to generate up to 16 biologically active mRNA constructs at a yield of at least 10 micrograms each, all from fully de novo synthesized and error-corrected genes in a single automated run. These combined technologies increase the fraction of translationally active mRNA during transcription, which simplifies and shortens the mRNA manufacturing process and results in higher levels of protein production. Together, the technologies are expected to increase productivity and yields for mRNA synthesis workflows potentially opening the doors for a broader range of downstream therapeutic and vaccine applications. We also strengthened our leadership team with three key additions to the board of directors during the second quarter. They are Jamie Nochstein, Christine Singos, and Andrea Jackson. Jamie is the former corporate vice president of sales and marketing group and the director of worldwide marketing at Intel Corporation and currently serves on the board of several leading biomedical and technology companies. Jamie serves as the Chair of our Corporate Governance and Nominating Committee and as a member of our Compensation Committee. Christine is the former Executive Vice President and Chief Financial Officer at Bio-Rad Laboratories. She previously held executive positions at Autodesk, the Cooper Companies, and Atest Systems. Christine serves as the Chair of our Audit Committee. Andrea is the Director of North Pond Ventures, which is a science, medical, and technology-focused venture capital firm that was founded in 2018. She is also a member of the board of directors of other emerging growth companies, including Current Health, NanoView, Octavi Biosciences, and others. Andrea serves as a member of the Compensation Committee and the Corporate Governance and Nominating Committee. We welcome them all to the CodexDNA team. And with that, I will pass the call back over to Jennifer to review our financials.

Thank you, Todd. Detailed financial results for the current quarter were included in today's press release. I will briefly review our results on this call. Codex CNAs were capitalized with cash investments of $123.8 million as of June 30, 2021. Revenue was $2.9 million for the second quarter of 2021, a 76% increase from $1.6 million for the same period in the prior year. This growth was related to new product introductions and growth in royalties and collaboration research program revenue. Cost of revenue for the second quarter of 2021 was $1.9 million compared with 0.6 million for the same period in the prior year. The increase of 1.3 million was primarily driven by increased standard costs related to increasing unit sales and higher raw material costs associated with reagent sales and biofoundry services. Operating expenses were 8.5 million for the second quarter of 2021 compared to 4.3 million for the same period in the prior year. This increase was driven by headcount expansion across our business, primarily focused in our commercial and research and development organizations as we ramp up our sales and marketing efforts and product development efforts, as well as additional expenses related to operating as a public company. Net loss was $9.2 million for the second quarter 2021 compared to $4.1 million in the same period in the prior year. Net loss per share was $1.06 for the second quarter 2021 compared to $0.82 for the corresponding prior year period. And with that, I will now turn the call back over to Todd.

Thanks, Jennifer. Before closing, I want to thank everyone at CodexDNA for all their efforts this past quarter. It's been amazing to see how well they've executed, and I could not be more proud to be part of the team. We remain grateful to our investors for their support and look forward to working with you to bring a great company in synthetic biology and sustainable solutions to our planet. confident about our future opportunities ahead. And with that, we will now open the call for questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that is star 1 on your telephone. However, if your question has been answered and you wish to withdraw from the queue, press the pound key or the hash key. Please stand by while we compile the Q&A roster. Your first question is from Paul Knight with KeyBank. Your line is open.

Hey, Todd. I missed the first second or so of your opening comments, but what were our placements in the quarter for you?

Yeah, Paul, I think we haven't been breaking the BIOXP placements out on a quarterly basis. If you'll recall, we stated previously that we had about 162 systems that were placed through the first quarter, and I believe we said we placed 13 in the first quarter. So we'll be reporting out, Paul, on cumulative placements at the end of the year, but not on an inter-quarter basis.

Okay. And can you talk to the – I know the kit level on the XP side of the business is going to be an increasing part of the business flow. What are you seeing on pull through qualitatively?

Yeah, so as we've said before, there's a handful of customers that, you know, we're pleased to say are, you know, purchasing kits for BioXP systems that approach or if not exceed the current cost of capital for the system. So there's a handful of customers that are doing that. I think that the way we look at the business, given the size that it's at now, we certainly see utilization going up for sure. We're happy about that, and I think that commenting just generally on utilization rates would be difficult for us. But we continue to place systems, and we continue to launch innovative products on there, and utilization is certainly going up.

And then lastly, you announced the TriLink deal in July. When will the capping technology be available commercially?

That's currently scheduled, Paul, for a fourth quarter launch.

Okay. And then lastly, on the services side, any change in tone or level of business on BioFoundry? Okay.

The biofoundry business, just like the product side of the business, is small numbers for us at this point. We're very pleased with the direction that both segments of the business are headed. And I think we're well positioned to answer questions that customers have, either on the product side or on the services side. So really no change in the tenor of the services business. We continue to execute. Okay. Thank you. Yep. Thank you.

Your next question is from the line of Brandon Couillard with Jefferies. Your line is open.

Hey, thanks. Good afternoon. Todd, maybe just starting with the first new small-scale MRNA kit that you launched in April, any metrics you can kind of share about uptake or interest in that kit, maybe for some of the install base that might be using it that you can share with us?

Yeah, Brandon, thanks for the question. I think it's early days. The launch of the kit happened on time and at spec at the end of April. And as you may recall, that's just a five prime. It's an ARCA cap, three prime tail. We use enzymatic tailing. And then we did announce the clean cap technology, which has a significant share of the downstream market. So I think Rather than giving you the system uptake details early on in the launch, I would say that we're in the midst of the commercial launch. We're pleased with the direction that it's going. We're looking forward to the fourth quarter launch of the CleanCap technology, which will give us access to a significantly larger segment of the mRNA workflow market. And then to answer your question, The kits that we launch, irrespective of what they do, if it's mRNA or DNA, everything is backwards integratable into the entirety of the existing install base. So we've already got a very good list of customers that we're working with, and we're seeing mRNA orders currently.

Gotcha. Okay. And maybe secondly, shifting gears, it would be great if you could just touch on how the commercial channel activation efforts are going in some of the OUS markets, how those are coming along?

Yeah, so outside the US, we've got a direct channel predominantly in Western Europe. As we've discussed before, we're continuing to hire there. Recently put in place a regional manager there that came over from another company, has a good deal of experience. I think we're pretty well staffed in our direct channel in Europe. I believe I have currently about 40 distributors in our OUS channels. And that channel is continuing to be activated, and we've seen a number of systems come through that, as we discussed previously. So I think our channels are up and going. We're going to continue to hire. We've got, I think, a full funnel of opportunities on the BioXP side around the globe, and a significant portion of those will come from channel next year as we extend our reach throughout the globe.

Okay, and then one from Jen. Can you just touch on the gross margin weakness in the quarter? What exactly are the standard costs that went up, I think, a million dollars? And, you know, any guidance on how we should think about that metric, you know, in the second half? Or should we assume maybe some of these higher costs may be with you for a little while?

Sure, sure. The standard costs are just the non-allocated costs, and gross margins were down this quarter as a result of switching our primary suppliers, wherein we experienced less favorable pricing on certain raw materials until our volumes increased. We anticipate that our cost of goods will decrease as volume increases, and it's a temporary situation.

Gotcha. Okay. Thank you. Thank you.

And your last question is from Doug Shankle with Cowen. Your line is open.

Hi. Good afternoon. This is Kyle on for Doug. Thanks for taking the questions. So over the past year and a half, you've had increasing success in placing instruments in biopharma accounts that are higher volume users. We were wondering if you could just share any cohort analysis on how much more customers who recently adopted instruments, like over the past few quarters, are utilizing their instruments.

Sure. Kyle, this is Todd. Let me, you know, I'll take that one. So let me first state, as I said before, we've got predominantly in that group of customers you'd be talking about, we have as customers 15 of the top 25 pharma accounts. And as we mentioned earlier on in the call, we've got a handful of customers that are putting the cost of, you know, in reagents equivalent to the cost of capital. through those systems. So customers do ramp up to what we would call higher utilization rates, and we're continuing to see that. So the answer to your question is that it depends. What we strive to do is to get customers to order sooner rather than later. But every customer has its own rate of ramp. So for sure, predominantly, Our install base continues to be really focused on the biotech segment for the workflows that we've talked about. But the rate that a customer can ramp up really depends where they are in their projects, how many systems they buy, and whatnot. So it's hard to really give you, like, you know, an answer to specifically the rate of engagement for any one customer because it's small numbers now. But we are seeing customers engage, engage quickly, place orders. And it's not typically just an order for one of our products. It's orders for multiple products. So rapid engagement and then utilization is ramping up. And then, again, we do have customers that are putting the cost capital through the system.

Thank you. And as a follow-up, could you share maybe a high-level roadmap for the automated mRNA synthesis kits? You know, what modules could we expect in the next year or so?

Yeah, this is Dan Gibson. I can take this one. So we have two additional mRNA BioXP kits that we'll be launching within the next six months, so early 2022. The first is what we call rapid-scale mRNA synthesis, and so this would enable customers, if they already have their cloned they can generate messenger RNA from those at 50 to 100 microgram quantities, and also that would enable them to use their own custom cloning vectors. In addition, we have another mRNA kit, which we call large-scale mRNA synthesis, which leverages de novo synthesis up to 7.2 kB and also allowing those customers to clone those larger constructs into their custom vectors as well, also up to 50 to 100 micrograms quantities.

Yeah, and Kyle, this is Todd. Let me just add and kind of give you some of the broader context of the three products because with those three products, we think we've got very, very good coverage of the discovery market for MRNA. Okay. And the first one that we launched and we're active commercially selling now was an ArcaCap, and it has enzymatic poly-A tailing. And so that's a great discovery tool, and that builds up to 1.8 kB. So that's a great tool for protein engineering, enzymology, and for biologics with shorter sequences like for CDRs and things like that. As Dan mentioned, the second one, the error-corrected genes are already placed into the vector, so that's just a very rapid synthesis market. And in that one, the poly-A tail will already be in the vector. And then the third one really gets us, you know, to leverage the core competencies of the organization where we can, you know, we launched the build big capability up to 7.2 KB. of gene assembly and synthesis, and that's really important for the vaccine development market. So we're starting out in biologics, protein engineering, and then with the third launch, really getting into the ability to build antigens like we've done for COVID, flu vaccines, and things like that. So we plan on having the CleanCap technology integrated into each one of those also. So we think we've got very good coverage of a very large rapidly growing market with all three of those product launches though, as Dan mentioned, launched one and will be launched in the first half of 2022.

That's great. Thank you again for taking the questions.

Thank you.

And that concludes the question and answer session. I will now turn the call back to Ms. Jennifer McNeely for closing remarks.

Thank you, Paul, and thank you all for participating in our call today. Please follow up with us if you have additional questions.

Thank you. This concludes today's conference call. Thank you for joining Humanities Connect. Have a great day. Stay safe and well.