NanoString Technologies, Inc.

Hello and welcome to the NanoString second quarter operating results. My name is Katie and I'll be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star one on your telephone keypad. I'll now hand over to your host, Doug Farrell, Vice President of Investor Relations to begin. Doug, please go ahead.

Thank you very much. On the call with me today is Brad Gray, our President and CEO, as well as Tom Bailey, our CFO. Earlier today, we released our financial results for the second quarter of 2022. During this call, we may make statements that are forward-looking, including statements about financial and operating projections, the impact of the COVID-19 pandemic and other macroeconomic factors, future growth trends and related factors, expectations regarding current and future instrument orders, prospects for expanding and penetrating our addressable markets, as well as our strategic focus and objectives, and the development status anticipated success of recent and planned product offerings. Forward-looking statements are subject to risks and uncertainties, including those described in our SEC filings. Our results may differ materially from those projected, and we undertake no obligation to update any forward-looking statements. Later in the call, Tom will be discussing our financial results and 2022 guidance. We have prepared as a supplement to GAAP financial measures, selected non-GAAP adjusted measures, calculation of which are described in detail in our press release. Throughout the call, all financial measures will be GAAP unless otherwise noted. Besides that, conciliations of GAAP and non-GAAP measures, as well as the descriptions, limitations, and rationale for using each measure in this afternoon's press release. To aid analysts and investors with their models, we've posted exhibits under the financial information tab of our investor relations homepage that include a presentation of non-GAAP or adjusted measures and other selected financial data. I'd like to remind everyone that next week we'll be participating in both the Canaccord and UBS healthcare conferences. We look forward to having the opportunity to speak with many of you there. Now I'll turn the call over to Brad.

Thanks, Doug. Good afternoon and thank you for joining us. I'm pleased to report strong results from our second quarter during which we rapidly expanded our spatial biology customer base while improving our commercial execution. We booked orders for approximately 50 spatial biology instruments, an increase of about 65% year-on-year and 40% sequentially. We achieved a midpoint of our Q2 revenue guidance, even as our order mix shifted towards cosmic spatial molecular imagers, which were currently building our backlog rather than generating current period revenue. These solid Q2 results and strong demand for our novel platforms We underscore our continued leadership in spatial biology and have set up NanoString for a strong revenue growth in 2023 and beyond. During the call today, I'll provide an update on our commercial execution and the dynamics that we're seeing in the spatial market. I'll then provide an overview of our progress towards our strategic objectives before handing the call over to Tom to review the details of our financial results and our outlook for the balance of the year. Our team has rallied behind the rigorous steps we are taking to sharpen our commercial execution. Members of the sales team are settling into their new roles and are more effectively managing both short and long-term instrument opportunities. We're pleased with the progress and the expected commercial execution across to continue to improve during the third and fourth quarters of the year. During June, we had a successful showing of the annual AGVT meeting Spatial biology was a key focus and accounted for about 25% of all presentations and posters. NanoStream and our customers led the field in terms of scientific content, showcasing 20 scientific abstracts, including 15 for Cosmix. We also hosted our fourth annual spatial summit, which drew a standing room only crowd of more than 300 attendees in Orlando and another 300 plus researchers who participated virtually. The AGBT conference also highlighted the degree to which the research community is being rapidly educated regarding spatial biology. No fewer than eight companies are marketing new spatial platforms, primarily single cell imagers in the same product category as our Cosmix SMI. Against this backdrop, several new market dynamics have come into focus. First, we're competing in a spatial biology land graph as researchers commit to platforms and companies that will power their future research. The simplest way to measure progress during this phase of market development is the pace of orders for new spatial biology instruments. As a result, total spatial biology instrument orders will begin to feature prominently in our guidance and reporting for the balance of 2022. Second, the combined energy of so many vendors marketing single-cell imagers is rapidly increasing customer interest in this product category. The result for NanoString is that we're currently finding the volume of orders for our Cosmix SMI to be equal to or even greater than the orders for our well-established Geomix DSP. Rather than fight this market trend, we embrace it. We are equally pleased to place a Cosmix or a Geomix system as either one represents an expansion in the research community's commitment to our platform and an equally valuable revenue opportunity for NanoString. Third, and most importantly, we believe that NanoString is well-positioned to win the spatial biology land grab. We provide a complete portfolio of spatial biology solutions that includes a whole transcriptome profiler and a HyPlex imager integrated with a cloud-based informatics suite, all supported by blue chip partners, including Illumina, Leica, Avcan, and Biotechnology. This portfolio provides researchers with a compelling ecosystem that can offer a solution for virtually any spatial biology experiment a scientist might design. Now I'd like to provide an update on our strategic objectives for the year, which are tied to the individual products in our portfolio. Our first objective is to drive geomic CSP further into the mainstream, broadening adoption across multiple areas of bio, discovery, and translational research. During the second quarter, Geomics instrument revenue grew about 10% sequentially. NGS readout for whole transcriptome assays continued to be the most popular application, driving about 85% of new geomics placements. Two-thirds of systems were sold to translational researchers who represent our historical customer base, while one-third went to discovery researchers who represent a new target market for us. Instrument bundles increased in popularity and accounted for a record 35% of Geomix instrument orders, demonstrating that many new customers are jumping into our spatial biology ecosystem with both feet. Most of these bundles included both a Geomix and a Cosmix system, and several included all three of our platforms, Geomix, Cosmix, and Encounter. Consumable pull-through for Geomix was $77,000, per system on an annualized basis and consistent with our seasonal expectations. About 80% of the cost of geomix consumables were for RNA analysis as our whole transcriptome panels expand to reach beyond the cancer researchers who were our primary early adopters. In May, NanoString and Illumina launched a seamless cloud-based workflow that employed the spatial, improved the spatial data analysis experience of customers using Illumina's NextSeq platform to process samples prepared on geomics. This system includes an integrated push-button run planning tool, as well as automated downstream processing using the Dragon BioIT platform. We believe that this simple, fast, end-to-end solution will improve customers' productivity and experience. Our geomics customers have already been tremendously productive. As of the end of Q2, they had published approximately 130 peer-reviewed publications using GeoMix, and in July, they added another 14 more. We continue to see positive leading indicators for GeoMix adoption as well. Orders for new GeoMix test drives through our technology access program increased 20% sequentially from Q1 to Q2. GeoMix has driven about half the opportunities entering our spatial biology instrument funnel year-to-date, Based on our funnel and improving commercial execution, we expect the pace of geomics instrument sales to increase in the second half of the year, even as new orders are split about evenly between geomics and cosmics. Our second objective for 2022 is to launch cosmics as the leading molecular imaging platform. The excitement around cosmics continues to exceed our expectations. We took orders from more than 25 Cosmic Systems in Q2, about double the pace that Geomix was generating at the same point in its launch. The synergy between our spatial biology platforms and the appeal of our ecosystem is undeniable, as evidenced by the fact that two-thirds of our cumulative Cosmix orders have come from customers who have also adopted Geomix. We are also seeing tremendous interest from customers who are engaging with NanoStrength for the first time. During the second quarter, more than 80% of Cosmex orders came from new customers. Half of these orders came from researchers working outside of oncology in areas such as immunology, neurology, and a host of other applications. These trends demonstrate that Cosmex is helping win the spatial biology land grab. While researchers can now choose among several molecular imagers, COSMIC leads with best-in-class performance metrics, including highest plex RNA, the capability to image proteins, robust data quality, all done in challenging FFPE tissue. Although emerging companies are seeking to promote their offerings, these entrants cannot match our specifications, product portfolio, commercial channel, brand reputation, partnership ecosystems, or financial resources. We remain on track to begin shipping commercial Cosmets instruments during Q4. Earlier this week, we shipped our first beta system to a customer and are planning to ship two more to other customers this month. Meanwhile, we're allowing customers to test drive Cosmets via our technology access program. About 40% of these test drives have already generated an order for a Cosmets instrument. while many others have provided data for grant applications that may support future Cosmic Explorers. Our third strategic objective for the year is to launch our Atomics Spatial Informatics Platform. Atomics is an easy-to-use, cloud-based solution that enables image analysis, data visualization, global collaboration, and highly scalable compute and storage capacity for both Cosmics and Geomics. In addition, Atomics uses a flexible data structure ready to be examined using artificial intelligence and machine learning approaches. We showcased Atomics during the AGBT meeting, and customer feedback was outstanding. Researchers appreciated that we anticipated and addressed the challenge of managing large spatial biology datasets. And we believe that Atomics provides an important differentiator between NanoString's portfolio and the more limited offerings of our competitors. We plan to launch Atomics during this fall. Our fourth objective for 2022 is to sustain growth for our Encounter franchise. Encounter is a foundational business that supports both our global channel and continued innovation. In April, we introduced our new Encounter Pro, which incorporates a comprehensive cybersecurity solution and can be easily paired with Roslyn, a collaborative data analysis platform. These enhancements have been well received, especially by our biopharma customers. We continue to introduce new panels to drive adoption and markets outside of cancer. This quarter, we launched a cardiovascular disease panel, which is now the subject of a collaboration across five thought-leading institutions. We'll also expand our cell and gene therapy portfolio for encounter, and we'll be integrating this application into our spatial platforms. These applications are considered some of the most promising for developing the next generation of therapies across many disease areas. Now I'd like to turn the call over to Tom to review the details of our financial results and outlook. Thanks, Brad, and thanks all for joining us today. The second quarter of 2022 product and service revenue was $32 million. We sold about 50 spatial biology systems during Q2. Orders were comprised of more than 20 geomic systems and more than 25 cosmic systems. Q2 spatial biology revenue was $10.9 million, including geomics instrument revenue of $5.2 million and geomics consumables revenue of $5.7 million. Q2 annualized geomics consumables pull-through was $77,000 per installed system. At the end of Q2, our geomics installed base was approximately 315 instruments. For Cosmics, our over 25 new system orders in Q2 added approximately $6 million in revenue backlog, bringing our cumulative Cosmics total to over 60 orders and our cumulative Cosmics revenue backlog to about $14 million. We expect to begin recognizing material revenue from our growing Cosmics order book at the start of 2023. For our encounter business, which includes all service, Q2 revenue was $21.1 million. Instrument revenue was $4.3 million, consumables revenue was $12.2 million, and Q2 annualized encounter consumables pull-through was approximately $45,000 for installed system. Service revenue, inclusive of all service contract revenue for all platforms and spatial biology tap revenue, was about $4.6 million. At the end of Q2, our encounter installed base was approximately $1,085,000. Turning to margins and expenses, I'll provide results on a non-GAAP or adjusted basis, which removes the impact of stock-based compensation, depreciation, and certain other items. Please refer to our press release as well as the exhibits we have posted to our investor relations webpage for detailed information on how our non-GAAP or adjusted measures are prepared. Q2 adjusted gross margin was 54%, a decrease of 200 basis points as compared to Q2 of last year. The year-over-year change in gross margins was mainly driven by investments we're making in our manufacturing capacity in advance of the commercial launch of COSMICS. Adjusted R&D expense was $14.5 million flat year-over-year, and adjusted SG&A expense was $30.2 million, an increase of 39% year-over-year. The increase in SG&A year-over-year was driven primarily by the full run rate impact of investments made in our spatial biology-related commercial initiatives including the expansion of our Salesforce service and customer support groups. Our adjusted EBITDA loss was $27.5 million and our cash and cash equivalents were $272.3 million as of June 30th. Turning to guidance, we are updating our full year 2022 outlook to reflect an updated expected mix of spatial biology system orders and our current expectation of the pace of improvement of sales execution. For 2022, we now expect to receive orders for about 200 spatial biology systems, consistent with previous guidances updated in May. While our expectation for the total number of spatial biology system orders is unchanged, our view of the geomics-cosmics order mix has. We now expect our order mix this year to be comprised of approximately 100 geomic system orders and approximately 100 cosmic system orders. As compared to our last update, and about 60 COSMICS orders. We have not included any material COSMICS revenue recognition in our 2022 guidance. As a result, we're adjusting our expected 2022 full-year spatial biology revenue to $50 to $55 million to reflect our updated expected system order mix. Our full-year estimated pull-through guidance for geomics is unchanged from our previous range of $90 to $95,000. We also expect We continue to expect full-year end-counter revenue of $90 to $95 million, an estimated pull-through of $50,000 to $55,000, all unchanged from our previous guidance. For total revenue, we now expect to record about $140 to $150 million in 2022, reflecting the updated expected mix of spatial biology system orders. Turning to margins and expenses, we are reiterating our previous full-year guidance for adjusted gross margin, which we expect will be in the range of 56 to 58% and operating expenses. We are therefore updating our expected 2022 adjusted EBITDA loss to a range of 75 to 85 million from the previous range of 65 to 75 million. For the third quarter, we expect to book orders for about 55 spatial biology systems, representing about 60% year-over-year growth with an approximate 50-50 mix of geomics and cosmics. spatial biology revenue of $12 to $13 million, which in Q3 will only include revenue recognized from geomic instruments and consumables, encounter revenue of $22 to $24 million, and total revenue of $34 to $37 million. Finally, I'd like to comment on our setup for 2023. The 100 COSMICS orders expected in 2022 combined with the 20 orders we received in 2021 would bring cumulative COSMICS orders entering 2023 to about 120 total, representing about $30 million in revenue backlog. During 2023, we expect to recognize substantially all of this COSMICS instrument backlog while continuing to accumulate additional orders. This provides line of sight for 2023 revenue growth of more than 40%. Our balance sheet remains strong, and we continue to be confident we have the resources to achieve cash flow break-even while sustaining our key investments and growing our spatial biology market share and leadership position. Now I'll turn the call over to Brad for our closing comments. Thanks, Tom. Nanostring is rapidly winning the most valuable properties in the ongoing spatial biology land graph. We believe our market position will continue to grow stronger in the future based on our broad portfolio, unique ecosystem, and strong financial position. Because COSMICS is not yet shipping, our progress is best reflected in the current growth of our spatial biology instrument orders and our outstanding setup of revenue growth for 2023.

Now we'd like to open the call for your questions.

If you would like to ask a question, please press star followed by 1 on your telephone keypad now. If you would like to remove your question, please press star followed by 2. And when preparing to ask your question, please ensure your phone is unmuted locally.

The first question comes from Katherine Schultz from Baird. Please go ahead. Katherine, your line is open. Please ensure you're unmuted locally. Unfortunately, Catherine, I'm going to hear you, so we will move to the next question.

We take the next question from Carl Mixon from Canaccord Genuity. Carl, please go ahead.

Hi, Alex McKayson. I'm on for Carl Mixon. Thank you for the update. So I was just curious if you could provide some color on the performance of the commercial team during the quarter. Also, some of your competitors had to make some cuts to their workforces recently. Are there plans to cut costs given some of the looming recession indicators? Also, if so, why are you so confident that this cost cutting won't hinder COSMEX commercial launch? Thank you.

Thank you for the questions. First, let me start with the color on the commercial performance. I'm pleased with the improvement in commercial execution that we saw in Q2. I'd highlight two areas in particular. One, the commercial team is really transitioning well into their new roles that were assigned back in January. They've all gone through role-specific training. We've seen the teams work together well, each playing in the position that they're now assigned to. We're also seeing more effective management of both short and long-term opportunities, meaning closing business in the current quarter while continuing to develop a funnel for future quarters. So that performance has been improved. We've also seen normalization in the performance of accounts that were transitioned from one rep to the other, which was a real sore point for us. during the first quarter. That improved substantially in the second quarter, and those accounts types are performing basically equally. I do expect us to continue to improve our performance in the second half. Two areas that we're looking at in particular are making sure that our account managers who come from a consumable sales background begin to become just as effective at selling our spatial biology instruments as our account managers who have instrument backgrounds are, and I'm sure they will. And finally, we're looking for improved performance from our most junior consumer reps who are still cutting up the curve and learning how to be field-based sales individuals. So overall, I'm pleased with the progress, but there's more still to come. On your second question, NanoString does not have plans to cut costs at this time. We believe that we have the right commercial infrastructure and people on staff. We expect to grow into that cost base nicely through the second half of this year, and in particular, when the large backlog of COSMIC's revenue that we'll enter 2023 with begins to run through our P&L.

So we have no plans for cost cutting at this time. Thank you so much for that update.

Really good color there. Just one more question, if that's okay. I was curious about the Atomics. And most typically, if you guys could provide some updates on the beta testing and the eventual launch timing, and also just take a high-level look at things. So we always said this is a cloud-based informatics portal that'll help you streamline workflows, but I was wondering if you could highlight some of the ways in which this in fact, portals differentiated from what we're seeing from competitors in the space. Thank you.

Yes. Well, we think Atomics is an underappreciated competitive advantage for NanoString. No other provider is making the investments that NanoString is in cloud-based solutions to manage the massive amount of data that spatial biology platforms produce. These are data sets that are so large they can't be easily emailed around from one researcher to the other. So we need to create workspaces in the cloud where multiple users can dial in, manipulate, visualize, analyze, and store their data sets. Atomics, importantly, will also tie together NanoStream's two separate spatial biology instrument platforms into a single sort of desktop where all the informatics can be stored, analyzed on the same basic platform. So Atomics will launch basically simultaneously with the commercial shipment of Cosmix, which is slated to happen in the fourth quarter of this year. Beta testing is ongoing.

Feedback so far has been excellent, and we look forward to sharing more as time goes on.

Excellent. Thank you very much.

The next question comes from Dan Brennan from Cohen. Please go ahead, Dan.

Great, guys. Thanks for the questions here. I guess maybe the first one would be just on Geomix. For second half pull-through numbers, what's the visibility on getting to your full-year numbers given the jumping-off part right now with the first half of the year?

think that dan as we commented in the last quarter the seasonal pattern that we're seeing right now is pretty consistent with the seasonal pattern that we saw for last year so if you assume a seasonal pattern and pull through percentage change in q3 q4 like you saw in 2021 that gets you to our 90 to 95 000 range give or take for the whole year got it okay and in terms of the shift here

towards Cosmix, which has shown some nice, you know, really good order momentum, but kind of, you know, somewhat at the expense of Geomix, which is, you know, a big question mark in kind of how these two products coexist, complementary or kind of ballistic-like. Maybe could you give us some color around how you're thinking about it? You gave some color on 2023. How do we think about the jumping off for Geomix as we get into 2023?

Now, this is Brad. Dan, I'll take that one. When we first characterized these two different product categories, the whole transcriptome profiling category from Geomix and the single-cell imaging platform category from Cosmix, we estimated their total addressable markets as about equal. We said that there were about 7,000 labs worldwide that could own both of these two systems and that most labs in the long term would need both capabilities, the ability to look at all genes on geomics and the ability to get single cell resolution on cosmics. I think it's safe to say that we underestimated just how quickly the single cell resolution of cosmics would appeal to researchers and have them shift for that to be their first uh spatial biology instrument purchase so that's what we're seeing right now we're seeing a lot of excitement about that resolution that excitement's been reinforced by years of marketing non-spatial single cell biology and by eight different competitors in the market all of whom are detailing researchers on this capability the great news for nanostring is that we're basically indifferent between which of those two instruments any customer chooses to order We are not going to spend time talking somebody who's interested in a Cosmix out of that and then do a Geomix just because one revenue recognizes this year. We are happy to get our first platform into their lab with an expectation that in many cases we will come back in subsequent years and sell them a second of the other platform. So I think as we enter 2023, you're going to hear us talk about total spatial biology instruments. rather than trying to project individual installed base growth for the Geomix versus the Cosmix platform. 2022 has taught us that that mix is difficult to predict, and in 2023, when we'll revenue recognize both, we'll basically be indifferent to mix. So, you know, that's a long-winded way of saying we think that Geomix has a tremendous opportunity ahead of it, that over time these product lines should remain about equal in their total opportunity. And that's the instrument mix that we expect in the second half. And that as RevRec normalizes across these systems, the mix will matter less and less. So stay tuned.

And you've talked a lot about Cosmix, Geomix owners. Do you expect, have you seen any evidence, although Cosmix is just seeing some orders now through three quarters now. But from those early orders, are there a fair amount of those that don't have a geomix where you think you could follow up with a geomix? What's that conversation like?

Well, as I outlined in my prepared remarks, cumulatively over the approximately 60 cosmic systems that we've sold, a large fraction have a geomic system either at the time that they purchased or bought in a bundle simultaneously as they made a major investment in uh spatial biology for the first time so i think that shows that it is possible for us to go in and place both of our spatial biology systems and really make that lab a very nano stream oriented spatial biology lab in the most recent quarter though 80% of Cosmics went to customers with whom NanoString had never done business. They didn't have encounters, and they didn't have geomic systems. These tended to be traditional single-cell biology researchers who were using droplet-based approaches from other providers in the past who were eager to get single-cell resolution in their spatial. So we're seeing the opportunity for us to expand beyond our traditional all base as well. Dan, let me just add one more piece of color that I think could be helpful. We think a lot about cannibalization and the question of whether COSMICS is likely to cannibalize geomics in the long term. One of the metrics that we keep a close eye on here is the rate at which new opportunities are being added to our geomics and cosmics funnels. If we started to see a substantial slowdown in the rate of new customers who are interested in geomics relative to cosmics, that would be an indicator of cannibalization. We do not see that kind of slowdown. On a year-to-date basis, the number of new opportunities that we've added to the geomics and the cosmics funnels are about equal. we've put in our funnel has increased year on year versus the same period. I think that underscores the idea that in the long term, both of these instruments are likely to be vibrant businesses and that most labs will need both a whole transcriptome and a single cell capability.

Right. But maybe one more follow-up. But is it fair to say the fact that the geomix number is coming down this year, Cosmix is going off that Is that due to just you underestimated maybe or you overestimated the demand this year for geomics? Or is it sales force capacity or just why? You know, that's an interesting data point. But for the geomics step down this year, what's the catalyst for that versus where we were a quarter ago?

We think about it as total instrument opportunities in the year. So if you look at our May guidance, the implicit guidance was about 200 instruments. At that time, we thought it would be about 140 geomic systems that we'd sell this year and about 60 cosmic systems. What has changed in the period since is that it's become clear that that same 200 systems, which is consistent with previous guidance, will be a 100-instrument and 100-instrument mix rather than a 140 geomics and 60 cosmics mix. So I would say we properly estimated the total demand for spatial biology instruments during the year, but we misjudged the mix, which is more tilted, at least at this point in time, towards single-cell biology systems. And as I said, I think, in answer to a previous question, the reasons are several-fold. One is single-cell biology in a non-spatial format has been a very productive area of science. And there's a whole bunch of customers who are waiting for a spatial solution that provided that who are coming in to the market for spatial biology. And two is there's a lot of marketing of that product category that's happening right now with eight providers in the space. And, you know, NanoString is winning, I think, a very admirable share of the overall volume of that demand.

And then maybe last one, and I'll go back in the queue, but just for Cosmix, do you feel like as we get out, say, 12 months and more of these players get into the market that, you know, the concern from some is that there's going to be so many players, the market will be kind of, you know, there will be a lot of inertia from decision-making. Are you seeing that yet today? Do you expect to see that? I know right now you're in a leadership position with, you know, Atomics and the Salesforce, and the product set, but do you expect in 12 months for there to be any degradation in your relative share or growth?

No, quite the opposite, Dan. I think over time, some of the smaller entrants in this market may no longer be meaningful participants. I believe that our market leadership position will be reinforced and grow stronger through the success and elaboration of our of our product pipeline and that you know like in the ngs market there'll be a consolidation around a small number of standards and nanostring will absolutely be one of those you know the sales cycle right now on imagers on comics is incredibly fast we of course weren't talking about this platform really even publicly 12 months ago and here we are you know outselling and the most recent quarter geomics in terms of number of units. Our customers are being very decisive about, you know, choosing our platform. We believe that has to do both with its superior specifications and with NanoString's brand reputation and overall space ecosystem.

Great. Okay. Thanks, guys. Appreciate it.

Next is a question from Catherine Schulte from Baird. Please go ahead, Catherine.

There, Catherine.

We appear to have just lost Catherine's line, so we'll move on to the next question. We have a question from Tejas Savant from Morgan Stanley.

Hey, guys, this is Edmund. Thanks for taking the questions. Just circling back to the mix of Cosmix and GeoMix that are expected, I understand what drove the excitement behind Cosmix, but I just kind of want to parse out. I think you guys have previously said that sales reps were having problems balancing new products in the portfolio, and some of them were gravitating more towards Cosmix versus GeoMix. I'm just wondering if any of that played into this dynamic you're seeing today.

That's a great question and a good follow-up to some of our commercial execution improvements. During the first quarter, we did see a bifurcation within our sales force between those reps who gravitated to selling Geomix and those reps who gravitated to selling Cosmix. That bifurcation largely disappeared in the second quarter. All of our reps are enjoying success across both platforms, but overall net-net, you know, Cosmix slightly outsold Geomix during the second quarter. But, you know, through work and training and repositioning of our platforms, you know, we feel that every rep is positioned to sell each of these platforms successfully. In fact, you know, most of the time when we enter a customer discussion now, I wouldn't call it either a Geomix or a Cosmix sales call. It's a nanostring spatial biology sales call. Because we have the leading platform in both the profiler and imager category, as well as an informatics suite, we're able to go in from a very strong position, talking about the type of science that that customer wants to perform in spatial and helping them navigate which of the systems is the right first system investment

Got it. And then, Brad, circling back to your beta instrument for Cosmix that shipped in August, I believe that was initially planned for a shipment in June. I was wondering if you can comment on what caused the delay here.

Actually, what caused the delay, the primary cause of the delay was the availability of the customer. So as you can imagine, many customers go on vacation in the summer. When we install the system, we want to have several weeks of that customer's full attention to install, to train, and to get the utilization of that system going. And the best time for that particular customer was, you know, to start in August.

Got it. That makes sense. And then back to your comment earlier about, In the most recent quarter, 80% of the COSMICS orders went to new to nanostring customers, and these guys are typically single-cell workflow researchers. I was just wondering, out of these 80% of customers that ordered COSMICS, how many of them are currently performing spatial profiling?

You know, that's a good question. I don't have a quick answer to that at this stage, but I would guess it's a minority. I mean, spatial profiling is so new that most customers who buy any of our systems are making their first investment in that new capability. So my expectation would be that a relatively small number of them are doing spatial profiling today, and most are adopting it for the first time.

Got it. Super helpful. Thank you for the time.

Next, we have a question from . Please go ahead, Dan.

Yeah. Hi, guys. Thanks for the questions. Some dial-in issues here, so apologies if you've touched on these, but Brad, to what extent is bundling of the two systems playing a role in the orders that you're driving, and is there anything in the product and service outlook that reflects a pricing change on the geomics?

Hey, Dan. Thanks for the questions. Bundling has become an important tactic for us. You know, about 35% of the cost of the geomics orders during the quarter were bundled. I'd say of that 35%, probably 25% 25 of the 35 was Cosmix plus Geomix orders, so people who were kind of doubling down on the nanostring spatial biology franchise, and that's really a great sign for us. We're happy to see that. In fact, as a further answer to some of the cannibalization questions before, when we look at dialogues with customers that began as Geomix dialogues where they ended up buying a Cosmix, more time than not they ended up buying a cosmics in a bundle with a geomix rather than switching from geomics to a cosmic so it's another great indication that this is not cannibalization but rather synergy so bundling is helpful our standard bundling discount is about 15 so it does not materially change the asps of our platforms um uh and so it i you know we are not modeling any meaningful change and ASP for geomics in the second half of the year.

Okay, helpful. Maybe on consumables pull-through for geomics, I appreciate Tom's comments on seasonality, but just overall, what are you hearing from customers about usage? It sounds like you're on your way with the commercial team fixes, but that was more of an instrument issue, I believe, in consumables. pulled through with 77,000. So, you know, what is it that seems to explain the step down from the mid-90s level that you saw for last year?

Well, you know, the first thing that explains the step down is the fraction of systems that are relatively newly installed. As we mentioned on our May call, we've observed a pattern that shows that customers require quite some time for it to become fully effective in running their new geomic system. This is a more pronounced issue with those customers who are using the whole transcriptome atlas, who require the connectivity to an Illumina sequencer and very often auxiliary storage and compute capacity to deal with the large data sets. And so as the pace of instruments placement has increased throughout the launch, so too has the fraction of our installed base that is relatively new, and that is modestly suppressing the overall growth and pull-through that we might otherwise be seeing. We have an initiative that's focused on what we call site activation, working to support the customer in building up their own workflow and learning how to design experiments. It is working in terms of site activation modestly improving in the second quarter, but it's going to take some time before we see that play through on overall average pull through.

Okay. I mean, if I could just push you a little bit on that. I mean, you're placing fewer geomic systems now than you were in the past. So, shouldn't you have been seeing the impact on the consumables rate last year when you were placing more geomic systems? on the consumables pull-through? I mean, it would seemingly be less of a factor now, given that you're in the 20s range and you were in the 30s range last year.

Well, you'll have to remember the very large volume of orders that we had last year were all in the second half, right? So those sites, the 50-plus, for instance, orders that we had in the fourth quarter, most of them were not installed into the first and activated until the second quarter. according to the normal cadence of how shipment, install, and activation work. So in fact, that huge bolus of instrument orders from last year are exactly the sites that are suppressing pull through now.

Okay. Maybe just one more since hopefully we're at the end of the Q&A here. Is there anything that you think you would run into manufacturing capability-wise on COSMICS? In other words, if orders sound like they're trending pretty nicely, would you run up against any constraints on the production side at all that we should be aware of?

We're working very hard, Dan, to make sure we don't. As our own internal forecast for the volume of instruments has been revised upward, we've been working very closely with our contract manufacturer to pre-purchase parts for the assembly of systems. and identifying parts that are at risk and even having them custom manufactured in small batches so that we can be sure that we're able to fulfill demand. So, you know, we don't have any line of sight to a supply chain constraint at this time, but we are working hard to make sure that remains the case.

Yep. Okay. Appreciate the answers. Thanks, Brad.

We have a follow-up question from Dan Brennan from Cohen. So please go ahead, Dan.

Hey, guys. Just maybe one or two more. Just on the macro, anything you're seeing given the global economy, what it's doing? Have you seen any pauses or longer sales cycle? And have you baked anything into the back half of the year given the expectation is for the economy to, you know, likely get worse from here?

Yes, in a rapidly growing product category like spatial biology, macro factors are probably in the noise. China certainly is a factor that we see. The lockdowns in China, without a doubt, have slowed down the commerce and the scientific activity in that region for us. And it probably played through to the tune of half a million to a million dollars a quarter for us China is a relatively small part of Nanostream's business. It's more of a growth opportunity for us as a company than it is a current drag on our overall outlook. We have not seen the challenges in Europe that some of our colleagues have talked about. So I think it's relatively modest in terms of what the macroeconomic impact has been for us. I do think a recovery in China is built into our second half guidance, not a miraculous one because it's a relatively small part of our mix, but we're starting to see improvements there, and we hope they'll continue, expect they'll continue.

Got it. And then just on free cash, I know you guys have talked about confidence and getting the free cash for positivity, I guess, with the balance sheet cash you have. You stepped up your spending a little bit. Just kind of remind us, given the increasing focus on capital preservation and or just capital pathway. How do we think about your cash balance today and what the burn rate looks like as we move forward?

Yeah, I think the most important factor in that, Dan, to consider is the big backlog of COSMIC's revenue we're entering into next year combined with the comments that we've made about moderating our expense growth and growing into our base of expenses in 2023. In particular, you can see we've already started to do that with R&D where we had flat year-over-year growth in R&D expenses. So when you take the COSMICS backlog and expected revenue for next year, run it over what our existing expense base is, you start to get to the math that you need to get to pretty quickly to see our cash balance more than adequate to get us to profitability. We're still thinking about that in the revenue range. We've talked about previously in the have are plenty to get us there.

Got it. And then maybe the final one, just on COSMICS and pull-through, I think you've talked about a good placeholder is what GEOMICS does. I know it's early, but any color on how we think about the use case for COSMICS, and is there headroom on COSMICS to increase the sample throughput at all, since it sounds like that could really maybe unlock some new markets as well? Thanks.

Yeah, Dan, for modeling purposes, I'd say modeling COSMICS pull-through as similar to geomics is still the best answer we're in a position to give you until we've begun to see actual utilization on that system. From the question of what throughput is possible and whether there are opportunities to increase our throughput, the answer is yes. We are working on techniques that would allow us to increase the number of samples that are processed per week on that system and, you know, expecting to hear more on that as time goes on.

Great. Thanks, guys. Thank you, Dan.

I have a final reminder. Thank you so much. So I'll now hand the call back over to our speakers for any closing remarks.

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