Codex DNA, Inc.

Good day, and thank you for standing by. Welcome to the Q2 2022 Codex DNA Incorporated 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. And to ask a question, you will need to press star 11 on your cell phone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Todd Nelson, Chief Executive Officer. Please go ahead.

Thank you, Kyle. Good afternoon, and thanks for joining us for CodexDNA's second quarter 2022 earnings call. My name is Todd Nelson, and I'm the CEO here at CodexDNA. With me on the call today are Chief Operating Officer Eric Esser and our VP of Finance Brent Hunter, who is assuming the responsibilities of our previous CFO, Jennifer McNeely. Our second 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 the 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 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 August 9, 2022. Finally, any percentage changes we discuss will be on a year-over-year basis unless otherwise noted. And with that, let's get started. At CodexDNA, our mission is to apply breakthrough automation solutions to global healthcare and technology markets. Our customers and collaborators include premier academic research institutions, rapidly growing biotech companies, and nearly all of the top 25 biopharma companies. Our systems are utilized by academic and industry scientists worldwide in a variety of discovery activities, ranging from discovering novel infectious disease vaccines to developing precision immunotherapy for cancer and antibody therapeutics to the creation of engineered meat substitutes and sustainable cellular agricultural products. Our automation solutions allow scientists to synthesize and assemble DNA and mRNA with the push of a button, allowing us to address large unmet needs within our targeted markets and our customers to bring critical products to the market in an unprecedented amount of time. We believe that our strong financial momentum will support the long-term mission of the company. And with that, I will turn to the discussion of our recently reported financial results and corporate updates. To start, I'd like to highlight our 2022 achievements and commercial results. We've experienced a strong first half of the year across our product portfolio. Our business continues to grow, and we see increasing demand for our products. During today's call, I will discuss our recent commercial success and our path to profitability, specifically around our thoughts on future revenue, gross margins, and operating expenditures. With a cash position of approximately $62 million at the end of the second quarter and our combined efforts to reduce spend access to non-dilutive debt financing of up to an additional $25 million, and the potential for $30 million in milestones from our Pfizer partnership, we are laying a strong foundation for a potential path to profitability by year-end 2024. Before we dive into the details, here are a few highlights from the second quarter and for the first six months of 2022. In the second quarter of 2022, we grew total revenue by nearly 100% compared to the prior year period. Excluding contributions from Eaton Bioscience acquired in Q4 of last year, overall growth was 44% and for the six month period ending June 30, 2022, total growth was 118% and growth excluding Eaton was 61%. We sold 16 BIOXP 3250 systems during the second quarter, bringing the number sold during the first six months of 2022 to 34. Instrument revenue was up 21% and 43% respectively for the second quarter and six month period ending June 30, 2022. BioXP system volumes were up 23% during the second quarter and 31% for the six month period. This was a record setting first half for the company and reflects the strong continued demand for automated platforms for DNA fragment assembly and mRNA synthesis. We also experienced a record quarter for BioXP kit sales which have continued along a strong growth path, posting 66% growth over the prior period and 50% for the first six months of the year compared to the same period in 2021. During the second quarter, we recorded solid growth of 392% in services revenue from combined Eaton and Codex B&A BioFoundry Services Group and growth of 558% for the six-month period, driven mostly by contributions from Eaton. Fewer COVID-related gene synthesis requests impacted the organic growth, that being excluding Eden, for the second quarter and first six-month periods, which was down 42% and 3%, representing a decrease of $149,000 and $15,000, respectively. Collaborations, royalties, and other revenue grew at 113% for the second fiscal quarter and 144% for the first six months of the year, respectively. Growth in this category stems from continued growth in royalties from our licensing partners such as New England Biolabs, Thermo Fisher, and others for gifts and assembly products and the amortization of an $8 million upfront payment we received from Pfizer. Gross margin improved significantly during the second quarter from 33.4% in Q1 of 21 to 48% in Q2 of 22. For the first half of 2022, gross margin improved, 43.5% in 2021 to 48.6% in 2022. Margin expansion for the second quarter, as compared to the same period a year ago, was largely driven by a positive mix shift to higher margin products, including mRNA, and a lower cost of raw materials, including all of the nucleotides or oligos. And finally, we have substantially completed the development work on the BioXP9600 system and are preparing for a fourth quarter launch. Importantly, we have already secured several presale purchase orders, which, if fully executed, will be sufficient to cover our internal forecast for 9,600 sales for the rest of 2022. Our vision has never felt more achievable. We've made significant progress developing new, innovative applications for existing BioXP systems that drive sales of on-market products, as well as developing paradigm-shifting future technologies. These innovations have the potential to fundamentally transform our industry and, at the same time, position Codex DNA to serve significantly larger and broader addressable markets. Inherent in this vision is our path toward improving our growth and operating margins, becoming a profitable company, and delivering value to our stakeholders. In an effort to accelerate our path to profitability, our management team and board have taken prudent steps to undergo targeted expense reductions the near term which will extend our current cash runway and will be reflected in our updated 2022 financial guidance shifting gears now to our commercial results we executed in all areas of our go-to-market strategy this quarter we experienced a strong quarter of growth within our bioxp franchise of systems and kits as mentioned we sold 16 bioxp 3250 systems this quarter And when combined with the 18 units from the first quarter, we are on a record pace for sales going into the second half of the year. Similarly, BioXP kit sales were strong during the quarter compared to the prior year period. We experienced record revenue growth of $838,000 in sales during the first quarter for BioXP kits, representing 66% growth over the prior period and 50% growth for the first six months of 2022. as compared to the same period in 2021. North America contributed the vast majority of kit growth and revenue, reflecting an investment that we made in the second half of last year into the North American region, including adding additional field-based reps, field application scientists, and field service engineers. In addition, we established an inside sales initiative that has contributed significantly to the growth in this category during the first half of the year. While core DNA kits for fragment synthesis and cloning continue to account for the majority of revenue mix, we're pleased to see that products introduced during the past 18 to 24 months are now contributing approximately 30% of the overall kit revenue. Within services, the Eaton business, driven by strong demand for sequencing services, performed solidly in the quarter and contributed approximately 1.5 million in revenue, which was ahead of our internal forecast. As a reminder, we've allocated a significant amount of Eaton's resources and manufacturing capacity in the near term toward 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 that Eaton can begin scaling up production of oligos for internal use in manufacturing, which should reduce our raw material costs within several product lines, providing a significant to gross margins as we ramp up production throughout 2023. I'm also pleased to report that we're off to a strong start in our collaboration with Pfizer. We've announced significant technical development progress related to our proprietary second generation DNA synthesis chemistry, referred to as SOLA, and we have several key milestones the team is working on to achieve, and we are on track to do so. As we discussed previously, our team continues to cultivate relationships with potential partners, and we intend to establish additional agreements with both new and existing collaborators over time. Now, I'd like to touch on recent progress within our R&D programs and provide some organizational updates. Our next generation instrument, the BioXP 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're pleased to report the BioXP 9600 system is on track for a full commercial launch in the fourth quarter of 2022. Moving on now to our SOLA EDS program. As a reminder, SOLA EDS is our highly differentiated and proprietary enzymatic DNA synthesis platform that constructs DNA ranging in size from short oligos of the full-length genes, which can also be used to enable the production of both RNA and protein. We expect our approach to building DNA using SOLA-EDS will allow scientists to construct higher-quality products faster at the benchtop. During the second quarter, we advanced our SOLA development program and are now able to consistently and reliably generate high-fidelity DNA algas of 20 to 100 base pairs at the benchtop. Importantly, using the BioXP system, we have demonstrated fully automated gene, mRNA, and protein synthesis, starting from SOLA-generated oligos. Based on this success, we are accelerating our time to market for our first DVC instrument. This version of the system will be the first of several in the BioXP DVC line of benchtop instruments that will focus on same-day turnaround for DNA, RNA, and protein synthesis. We anticipate launching the system with SOLA EDS library specific for CRISPR guide RNAs, enabling same-day turnaround production for up to 24 guides during a fully automated run in the fourth quarter of 2023. As I hand the call over to Brent to review our financials in more detail, I want to mention that as an existing member of our senior leadership team, he has a deep knowledge of our business, markets, and culture, and has been a valued partner within our finance organization. forward to introducing Brent to many of you soon. And with that, I will pass the call over to Brent.

Thank you, Todd, for that kind introduction, and good afternoon, everyone. It's been a pleasure to meet some of you in my first few months as the head of finance with CodexDNA, and I look forward to getting to know many more of you in the coming months. Detailed financial results for the second quarter were included in today's press release. In my remarks today, I'm going to walk through our income statement, touch on a few key financial metrics, and finish with our updated financial guidance for 2022. Codex DNA is well capitalized with cash and short-term investments of $61.9 million as of June 30, 2022. Revenue was $5.7 million for the second quarter of 2022, which was a 98% increase in total revenue from $2.9 million for the same period in the prior year. This strong growth was driven by a record quarter for BioXP kit revenue, totaling approximately $840,000, up 66% year-over-year, and solid contributions from Eaton's sequencing services and oligo production revenue, which totaled $1.5 million. Royalties and other revenue also grew due to revenue related to the Pfizer collaboration agreement. Organic growth for the core business net of Eaton contributions was 44%, and for the first six-month period, the growth was 61%. Gross margin for the second quarter was 48% compared to 33.4% for the same period in the prior year. The increase of 14.6%, or 1,460 basis points, was primarily driven by the continued amortization of the Pfizer milestone payment, the contribution of Gibson Assembly licensing revenue, and improved product margins resulting from price increases and increasing contributions from higher margin products such as mRNA. For the first six months of 2022, gross margins were 48.6% compared to 43.5% for the prior year period. Operating expenses were $17.2 million for the second quarter compared to $8.5 million for the same period in the prior year. This increase was driven by headcount expansion 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. Operating expenses for the first six months of 2022 totaled $32.8 million compared to $16.1 million for the same period in the prior year. Net loss was $14.8 million or $0.50 per share and $28 million or $0.95 per share for the second quarter and first six months of 2022 respectively. This compares to a net loss of $9.2 million, or $1.06 per share, and $16.6 million, or $2.39 per share, in the same period in the prior year, respectively. Now I'd like to briefly cover our updated financial guidance for 2022. Due to our strong first half of 2022, we are raising full-year revenue guidance accordingly. As a reminder, we initially guided to revenue of $19 million to $21 million in 2022. Based on our second quarter results, we are increasing our revenue guidance to $22 million to $24 million. I will now provide some additional context regarding our updated guidance for the year. We anticipate being able to sell approximately the same number of BioXP 3250s during the second half of the year. As it relates to the BioXP 9600, we are still on track for a fourth quarter commercial launch. The BioXP 9600 will have a higher price point compared to the BioXP 3250 with an approximate list price of $300,000 and we expect to place mid to high single digit instruments in 2022. In addition, we anticipate BioXP kit revenues driven by a larger install base and higher utilization rates within our top customers will be approximately $1.3 million for the second half of the year. Continuing down the P&L, we forecast 2022 gross margin to be in the 48% to 52% range, which represents a significant increase when compared to 2021 gross margin of 34.8%. The secretion is being driven by favorable raw material costs for oligos, and importantly, high margin revenue related to our collaboration and loyalty programs, and a combination of favorable product mix within the BioXP franchise stemming from a favorable mix shift within kit and the contribution of higher margin from the launch of the BioXP 9600. As Todd previously mentioned, we are also reducing operating expenses, which we view as prudent in this uncertain macroeconomic environment. we expect our 2022 operating expenses to be in the range of $62 million to $65 million. And with that, I will now turn the call back over to Todd.