Codex DNA, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Quarter 1 2022 Codex DNA Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. I would now like to turn the conference over to your host, Richard Lepke, Director of Investor Relations.

Thank you, Faith. Good afternoon, and thanks for joining us for CodexDNA's first quarter 2022 earnings call. With me on the call today are Todd Nelson, our chief executive officer, and Jennifer McNeely, our chief financial officer. Our first quarter press release is available now on the investor section of our website. If you'd like to be added to the company's distribution list, please send an email to ir at codexdna.com. Before we begin, I'd like to inform you that certain statements we make during this call will be forward-looking. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in the Safe Harbor Statement included in our earnings release and in our filings with the SEC. This conference call contains time-sensitive information and is accurate only as of the live broadcast on May 10th, 2022. Finally, any percentage changes we discuss will be on a year-over-year basis unless otherwise noted. With that, I'd like to turn the call over to Todd, CodexDNA's CEO.

Thanks, Rich, and good afternoon, everyone. Thank you for joining us today. We're pleased to discuss our financial results for the first quarter of 2022. To start, I'd like to talk about our first quarter highlights and commercial results. We are off to a very strong start to the year across our entire product portfolio. We continue to strengthen our business and see robust demand for our products. For the first quarter, we grew revenue by 142% compared to the prior year period. And excluding the inorganic contributions from Eaton Bio, growth was 82%. Revenue during the period was driven in part by our highest number of quarterly placements of our BioXP 3250 instruments, strong growth in BioXP consumable kits and biofoundry services, and increased partnership revenue related to our agreement with Pfizer. As a reminder, our go-to-market strategy can be broken down into three distinct categories. First, our BioXP automation platforms and portfolio of consumable products, including Gibson assembly kits and a growing catalog of synthetic genomes, which are all sold globally through both direct and distributed sales channels. Second, our BioFoundry services, which now includes parts of Eaton Bioscience and leverages those same direct and distributed channels to provide customers with BioXP-enabled services and solutions. And third, value-creating partnerships which build on our technology portfolio, intellectual property, and technical capabilities to support customer needs while giving us access to substantial end-user market economics. We executed in all of these areas in the first quarter, and I'll touch on each one. We expect these strategies to drive long-term sustainable growth and to create maximum value for our customers and our shareholders. Our BioXP automation platforms are headlined by our BioXP 3250 system, which is a fully automated push-button platform for the rapid synthesis of DNA and mRNA. Certain drug discovery activities that previously took months can now be completed using the BioXP system in just a week or so, and what previously took days can now be done in just hours. Industry-leading quality combined with enhanced speed, accuracy, and scale can lead to vast productivity improvements. In our last earnings call, we discussed the headwinds we experienced in the fourth quarter of 2021 related to the emergence of the Omicron variant. This affected our ability to meet with certain customers on site and to ship, place, and install our BioXP3250 instruments. This resulted in fewer shipments than we had anticipated as we closed out 2021. However, the COVID-related commercial disruption subsided in the first quarter, which contributed to a record quarter of shipments as some of the delayed instruments from the prior period were able to be delivered. Therefore, while we had our largest number of instruments placed, we expect this to normalize in the second quarter. Overall, we had an excellent quarter of commercial execution. Our customers continue to recognize the benefits of the BioXP platforms. As a reminder, we ended 2021 with nearly 200 instruments in our installed base and are off to an outstanding start to 2022. We believe we are still in the early stages of product adoption for our BioXP3250 instrument, and the demand remains strong. Within our portfolio of consumable products, BioXP kits experience a solid quarter of growth compared to the prior year period. This was driven by gene fragments, cloning, and our recently launched mRNA product offering. Over time, we intend to expand our installed base of instruments and launch additional kits, to meet the needs of our customers, which will fuel a consistent and profitable razor razor blade business model. On a related note, we anticipate that consumable kit gross margins will improve significantly as we ramp up our internal oligosynthesis capabilities in 2023. This will provide us with a path to sustainable profitability in the future. Moving on, our CodexDNA BioFoundry services experience robust revenue growth in line with our year-over-year organic growth rate. This was driven by strong demand for customer genome orders and variant libraries, and we expect demand in this area to continue to grow rapidly. As a reminder, our BioFoundry services organization leverages our best-in-class BioXP automation platforms to provide customers with custom solutions, quick turnaround, and excellent quality. In addition to being a catalyst for growth, our BioFoundry services team helps to expand our customer reach, build strong customer relationships, and demonstrate the value of our BioXP instrumentation and the CodexDNA team's scientific expertise, which ultimately drives product sales. Therefore, services enable us to provide more solutions to a broader customer base and offers a key customer funnel into our product business. Within services, Eaton Bio performed solidly in the quarter and contributed approximately $1.4 million of revenue, which was ahead of our internal forecast. We saw very strong demand for sequencing services in the quarter, resulting in higher than expected performance. As a reminder, we have allocated a significant amount of Eaton's resources and manufacturing capacity in the near term towards our own internal raw material supply to invest in oligo production and R&D efforts to support the Pfizer collaboration. Starting in the fourth quarter of 2022, we believe Eaton can begin scaling up the production of oligos, which should reduce our raw material costs within several product lines and provide significant accretion to gross margins as we ramp up production into 2023. Toward the end of the year, we intend to complete the integration of Eaton's operations into biofoundry services, and we believe Eaton's legacy business will grow steadily as a part of this combined service organization. Moving on now to partnerships, I'm pleased to report that we're off to a very strong start in our collaboration agreement with Pfizer. While we can't get into the specifics at this point, our progress from a technical development perspective related to our Sola EDS technology has been outstanding. For example, we have successfully synthesized key target genes of interest using Sola EDS workflow and made progress developing new protocols for rapid high fidelity synthesis of target genes. It's very early days, but we're very encouraged by the data and the results we're seeing so far and we will provide updates as we progress further toward our joint objectives. As we discussed in our prior call, our business development and leadership teams continue to cultivate partnerships with potential partners and we intend to establish additional agreements with both new and existing customers over time. More specifically, we aim to pursue value-added partnerships that can leverage our differentiated intellectual property portfolio and proprietary technologies. This includes all of our technology categories, such as BioXP automation solutions for DNA, mRNA, and protein synthesis, and our VMAX platform for the efficient and large-scale cloning and scale-up of DNA. Before I turn the call over to Jennifer to discuss the financials, I want to touch on the progress within our R&D programs and organizational updates. We recently showcased our innovative SOLA EDS technology and automated benchtop BioXP systems at SynBioBeta's Built with Biology global conference and in our first R&D investor webinar in March. SOLA is our proprietary enzymatic synthesis platform based on DNA ligation and amplification approaches that is used to build oligos from a make-to-stock universal library of short DNA building blocks. We believe that this approach is the ideal solution for synthesis of longer fragments of DNA, mRNA, and protein at the benchtop due to its advantages in fidelity, buildability, scalability, and cost. We expect our approach to building oligos using SOLA in the BioXP system will result in higher quality and more cost-effective products compared with other enzymatic DNA synthesis approaches. During the first quarter, we advance our SOLA development programs. We continue to reliably generate high-fidelity DNA oligos of 20 to 100 base pairs at the benchtop As a part of an internal development project, SOLA-generated oligos were efficiently assembled into full-length SARS-CoV-2 spike protein genes, which is approximately 3.9 kb in length, and the company's longest gene ever assembled enzymatically. This achievement further validates our belief that this technology is the leading approach for building high-fidelity, longer segments of DNA using enzymatic DNA synthesis technology. At the Built with Biology Global Conference, we also showcase the BIOXP 9600 to potential customers. The 9600 is designed to have approximately three times the capacity as the current BIOXP 3250 system, making it an ideal solution for higher throughput customer segments within biotech and pharma. We are pleased to report that the BIOXP 9600 is on track for a full commercial launch in the fourth quarter of 2022. And finally, during the first quarter of this year, we recruited and hired key positions across the organization. These new hires will enable us to scale to meet future anticipated demand for our products, services, and technology partnerships. And with that, I'll pass the call over to Jennifer to review our financials.

Thank you, Todd, and good afternoon, everyone. Detailed financial results for the current quarter were included in today's press release. In my remarks today, I will briefly review our financial results. Codex DNA is well capitalized with cash and short-term investments of $76.8 million as of March 31, 2022. Revenue was $5.6 million for the first quarter of 2022, which was a 142% increase in total revenue from $2.3 million for the same period in the prior year. This strong growth was driven by BioFP kits, BioFoundry services, and contributions from Eaton Revenues which was about $1.4 million. Royalties and other revenue also grew due to revenue related to the Pfizer collaboration agreement. Gross margin for the first quarter was 49.3%, compared to 56% for the same period in the prior year. The decrease was primarily driven by higher raw material costs associated with sales of reagents and biofoundry services, increased shipping and logistics, and increased personnel and departmental expenses as we are investing to support future growth. It is worth noting that our gross margin improved significantly sequentially compared to our fourth quarter, reflecting the contribution of the Pfizer milestone payment amortization and improved product margins. Operating expenses were $15.6 million for the first quarter compared to $7.6 million for the same period in the prior year. The increase was driven by headcount expansion across our businesses, primarily in our commercial R&D and G&A organizations. The increased personnel expense relates to sales and marketing efforts, increased product development efforts, and hiring of new leadership and professional support staff. Other expense increases included professional services, R&D material costs, and facility and insurance costs. Net loss was $13.2 million for the first quarter compared to $7.4 million in the same period in the prior year, Net loss per share was 45 cents for the first quarter compared to a net loss of $1.43 for the corresponding prior year period. And with that, I will now turn the call back over to Bob.

Thanks, Jennifer. Before opening the call for questions, let me conclude by saying that we are pleased with our performance through the first quarter of 2022. We are encouraged by continued strong commercial execution and the progress within our R&D pipeline. We are focused on executing against our near-term commercial goals, launching new products, furthering new and existing partnerships, growing market share, improving profit margins, and investing for future success. We continue to invest in talent, technology, and processes to drive long-term sustainable growth. And with that, I'll ask the operator to open the call for questions. Thank you.

Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself in the queue, please press the pound key. Your first question comes from the line of Brandon Collard from Jefferies. Your line is open.

Hey, thanks. Good afternoon. Todd, in terms of the record biofeed placements in the first quarter, any chance you're willing to quantify the total gross number of installs and how many came from delayed 4Q orders? And are these mostly being placed at new or existing customers? And any color you're willing to share in terms of US versus OUS channels?

Yeah. Hi, Brandon. Thanks for the question. I guess the additional color that I would add is we saw really strong growth in North America and Channel and across all regions, but predominantly North America. On the earlier part of your question about kind of the mix in the quarter, I'd say a small percentage of the overall installs came over from the fourth quarter, so just a couple to a few. And the color on the demographics of the customers really hasn't changed. We're still seeing adoption mostly by new customers. We are on occasion seeing existing customers order a couple of systems, but primarily new customers, just a couple to a few went over. So we really had a strong quarter in and of itself in the first quarter. It was augmented slightly by a couple of instruments sliding into the first quarter due to the COVID issues that we saw on the channels in the fourth quarter. So a really strong quarter. Mostly new customers, for sure, and strong performance, but North America really stood out as growing well, and that makes sense because we invested a lot, as you know, into North American Channel and commercial operations a couple of quarters ago. So that's really, I think, starting to bear some fruit and has been a successful place for us.

Gotcha. And in terms of the BioXP 9600 launch timeline, what's going to be begun sort of commercial detailing for that? Have you started to build an order funnel for that system yet? And have you solidified the expected ASP for that instrument?

So, again, good question. We're on track for the launch in the fourth quarter. I'd have to check with the team here. I think we're nearly done with beta testing. Everything seems to be going well, so we feel comfortable that we're going to remain on track. We're, of course, doing pricing studies right now And we should conclude with those and have pricing soon. But we'll be launching with fragment and cloning capabilities. Other kits will come online after that. So we'll launch in the fourth quarter with gene fragment synthesis capabilities up to 1.8 KB, which is consistent with one of the kits available on the 3250. It'll have three times the throughput. and we'll be able to clone 96 genes into any one of four vectors, and then we'll launch subsequent kits on that later on. So working on pricing, but everything's on track.

Okay. Jennifer, I didn't hear you speak to guidance for the year, so we assume that you're reaffirming the prior revenue and installation guidance that you talked about on the 4Q call.

Yeah, thanks for the question. So, we did give our annual guidance on the Q4 call, and it is our practice to give annual guidance rather than quarterly guidance.

Sure, I understand, like, you're not giving necessarily Q2 guidance, but should we, you know, assume that kind of that full year out like you talked about before is still intact?

We have not provided change to that outlook at this time, yeah.

Yeah, this is Rich. I mean, clearly we're off to an outstanding start to the year. You know, our goal and our aim always is to meet or exceed our guidance, but, you know, our practice typically is, you know, we'll provide annual guidance. You know, we're only one quarter through the year. I don't want to get too far ahead of ourselves here, but we're feeling good about the year. Gotcha. Okay, thank you.

Thank you.

Your next question. Your next question comes from the line of Paul Knight from KeyBank. Your line is open.

Hi, Todd. On the 3.9 KB sequence data that you're producing, could you talk, is that the level of consistency do you want? How much, what's the sequence size you ultimately are targeting? If you could talk about that sequence performance.

Yeah. Hi, Paul. Thanks for the question. So we presented this data twice now, which is great. We presented to a standing room only audience at the SynBioBeta conference regarding SOLID. Dan's not here. I apologize. But let me go ahead and answer the question in his stead. So 3.9 KB is the longest gene we've ever synthesized. And to the best of our knowledge, it's the longest gene that's ever been synthesized using enzymatic DNA synthesis. Now, as you know, the company has a history of building entire genomes. So we can enzymatically assemble entire genomes or millions of base pairs. But when it comes to one contiguous piece of DNA, that's the longest we've been able to synthesize. And we did that from all of those that we were able to build using the SOLA-based process. So we feel very comfortable about that. We are experiencing about a 50-fold improvement in fidelity using our process relative to other enzymatic DNA synthesis technologies and feel good about where we're at. The second part of your question is why, you know, where's the sweet spot? And, you know, really the market, in our view, is migrating to longer, more complex builds, and that's being driven by just the demand for longer sequences as a result of a couple of segments like vaccine development, whether it's infectious disease or or personalized medicine, those genes, as an example, the spike protein or flu genes, are multiple KB in length. So the necessity to build genes using enzymatic synthesis at the benchtop is going to require long build capabilities. I think we're squarely within that targeted amount. And so certainly for any human protein, it'll be smaller than that, and we're very comfortable with that. As you get into viral antigens, You know, we're up there in the multiple KB length, so we think we've got a path forward.

And you had mentioned you were going to increase headcount. I think even in Q1, where are you with that progress with the number of headcount we added?

We've made a number of key hires in Q1, and currently we have approximately 250 U.S. employees and about a dozen internationally. Okay.

Okay. And you began the Pfizer milestone in Q1. Is that right?

Yeah, that was the first full quarter of recognizing that milestone. Yeah.

It was a full quarter. Sorry, Jennifer.

Yeah, that was the first full quarter of recognizing that.

Okay. Thank you. Thanks, Bob.

Your next question comes from the line of Stephen Ma from Cowan. Your line is open.

Hi, congrats on the quarter, and thanks for taking the questions.

Hi, Steve.

Hey. So maybe just to follow up on Paul's question, on the Pfizer upfront payment, can you give us a sense of the cadence of the timing of the rest of the upfront payments?

Sure. So we received in January an $8 million upfront payment. That payment is being recognized on a straight-line basis over a two- to three-year period. And we are also eligible for future near-term milestones totaling up to $10 million. Okay.

And those will be recognized as completed? Correct. Okay. Got it. Okay. Thanks for that. And then... I wanted to talk about the 9600 launch. Looks like that's scheduled for Q4, but are there any lingering supply chain issues that could potentially impact the launch timing, or are you guys feeling pretty good about that?

We feel very good about the launch timing now, and we have secured supply chain requirements, so we've procured all of the parts in the bill of materials for our pilot in MR1 runs. So to the best of our knowledge, based on our forecast, we will have sufficient materials in finished goods.

Okay, perfect. And then you guys talked about the Eton internal oligosupply impacting gross margins in 2023. given lower costs of raw materials. But can you give us a sense for the potential of the gross margin impact?

So, this is Todd. I'll take the first part of that question and hand it over to Jennifer, and we can follow up. So, at a high level, we plan on launching internal synthesis capabilities. This is DMT synthesis, not enzymatic. So, our first chemistry will be DMT, then a launch very late in the year, start accreting to gross margin. And then throughout the course of 2023, we intend to ramp that up. So I'll hand it over to Rich and Jen to kind of ask or answer the second part of the question.

Yeah, this is Rich. It's a good question. You know, we haven't provided margin guidance next year. You know, at this point in the year, we haven't really built up the budget. But, you know, if you think about where all of those play into our commercial products, you know, because they go into every kit, all the consumables there. So the strategy makes sense, right? You've got to lower those raw material costs, and that helps to create a much more profitable recurring revenue stream with our consumable kits, and it's a key important part of our strategy. So as Todd said, we do expect much more of an impact in 2023, and it will ramp up throughout the year.

Okay, great. Thanks. And last question, given the strength of the services business, Do you ever get customers switching over from a services customer to an instrument buyer?

Yeah, that happens all the time. As a matter of fact, you know, we're first to market with, you know, a new technology and a new instrument and a new approach, which gives researchers and scientists worldwide, you know, the ability to better control their workflow, have IP at the benchtop. and whatnot. And so we're first to market with that. Sometimes customers want to do a proof of principle. We call them a POP. So they will come in and want to make sure that the instrument works for their workflow. So we oftentimes use that as a way to convert customers to the instrument, and that happens all the time. So it's a great tool for us to bring leads in whether they're MQLs or SQLs, and transition them over to a product format. There are customers, again, to your question, that have been with us in services for quite some period of time that are happy with the services and then eventually end up purchasing an instrument because of the value proposition or a change in their program. So we certainly do see that transition. We see a healthy transition there. from services to products. And, you know, we also offer through our services things that you can't do on the BioXP. So we're trying to answer and address a larger segment of the market, but we certainly do see customers converting over to products.

Okay, great. Thanks a lot.

Thank you.

I am showing no further questions at this time. We'd like to turn the conference back to Richard Lepke for the closing remarks.

Thank you, Faith. With that, we'd like to thank you all for attending. Operator, we will now conclude the call. Thank you.

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