This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: Good day, ladies and gentlemen, and welcome to the Singular Genomics Systems Incorporated Second Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Philip Taylor, with the Gilmartin Group. Sir, the floor is yours.
spk11: Thank you, Operator. Presenting today are Singular Genomics founder and Chief Executive Officer, Bruce Fabenta, and Head of Finance, Dalen Meader. Earlier today, Singular Genomics released financial results for the three months ended June 30th, 2022. A copy of the press release is available on the company's website. Before we begin, I would like to inform you that comments and responses to your questions during today's call reflect management's views as of today, August 9th, 2022 only. and will include forward-looking statements and opinion statements, including predictions, estimates, plans, expectations, and other information related to our financial and operating results, plans, and strategies. Actual results may differ materially from those expressed or implied from these statements as a result of certain risks and uncertainties. These risks and uncertainties are more fully described in our press release issued earlier today and in our filings with the Securities and Exchange Commission including our most recent Form 10-K or 10-Q and the Form 8-K filed with today's press release. Our SEC filings can be found on our website or on the SEC's website. Investors are cautioned not to place undue reliance on forward-looking statements. We disclaim any obligation to update or revise these forward-looking statements. Please note that this conference call will be available for audio replay on our website at singulargenomics.com, on the events page, of the news and events section on our investors page. With that, I will turn the call over to CEO Drew Spaventa.
spk02: Hello, and thank you for joining Singular Genomics' second quarter 2022 conference call. My prepared remarks today will focus on the G4 commercial launch progress, including some detail on our target customer segments, capabilities and application expansion for the G4, our product roadmap, and some color on our near-term outlook and priorities. Then Daylon will detail the financial results and provide some commentary on expectations going forward before I conclude. Before I cover specific recent business highlights and updates, I'm going to share my perspective on Singular's positioning within the overall market relative to early commercial activity and long-term value creation. My goal is to be as direct and clear as possible. On the one hand, the second quarter was an extremely productive one for Singular, culminating in the shipment of our first production G4 system in June, continued excitement from customers around the value proposition all of which i will get into however as i suspect is evident to most listeners the market and macroeconomic conditions continue to evolve impacting how we and others think about operating our businesses we find ourselves in a very different world today compared to the first half of 2021 and we are focused on adapting to the realities of the current market some challenges have manifested themselves in the supply side with continued and in some cases exacerbated vendor and supply chain bottlenecks, affecting our ability to obtain certain parts. This has had some impact on our ability to scale manufacturing on schedule. In addition, considerations around cash burn and runway have led us and many of our peer group companies to rethink the pace of investments and roadmap priorities to ensure financial flexibility in the event of an extended market downturn. While we remain confident in our technology, the G4 product profile, our product roadmap, and long-term success, this change in mindset and shift in organizational priorities has downstream impacts on how aggressively we hire and spend. This may also have similar effects on the customer side, which could translate to altered demand dynamics. These changes in the reality of the current environment have implications in the context of how we think about building our business. Since inception, Singular has demonstrated a steadfast discipline in capital efficiency, focused spend, lean execution, agility, phase appropriate investment, and frankly scrappiness. These core cultural tenants have served Singular well to date. We believe this continued disciplined approach to spend and investment will serve us well going forward. I will go into more detail on market dynamics and what we are doing to adapt to this changing landscape. Before I talk further on this topic, let's cover a very productive and exciting list of Q2 updates. In line with our previous commentary, Singular shipped our first commercial G4 unit in June. We are at the start of the next chapter of growth for our company as our vision to advance sequencing materializes. The G4 offers unmatched power, speed, and flexibility in a benchtop instrument, including market-leading key performance indicators, or KPIs, such as data output rate, runtime, flow cell and lane-to-lane flexibility, and number of reads per run. Based on the initial orders, robust activity with prospects, and a growing sales funnel comprised of inbound and outbound leads, we remain confident in our potential to drive meaningful penetration of the sequencing market across our target customer segments. F2 flow cell kits are now available, and we are on track to ship the F3 flow cell later this year. At AGBT, we introduced our MaxRead or M-series flow cell kits. Feedback has been overwhelmingly positive. We believe the M-series kits will offer a highly unique solution ultra-short read sub-100 base kits that provide NovaSeq-level read counts at more attractive pricing. We plan to launch initially with the M2 kit, which will feature up to 1 billion reads per flow cell or up to 4 billion reads per run for short read applications. In addition, we are pleased to announce that we have hired Sam Ropp as our Chief Commercial Officer. Sam is an accomplished commercial leader in the life sciences space. He brings nearly 20 years of experience building and scaling commercial teams, including sales, marketing, and customer support. He joined Singular from 10X Genomics, most recently serving as Senior Vice President of Global Sales. Cam spent the last five years at 10X building and leading all aspects of regional sales, marketing, support, and global sales operations. His proven track record of building successful commercial organizations and driving sales will help propel Singular as we grow our commercial offering with the G4 and plan for future commercialization of the PX system. Dan has hit the ground running and is in the field speaking with customers to gain experience that will inform strategy and process development. We look forward to seeing the impact of his commercial and executive leadership. Turning to target customer profiles, we group customers into three segments, academic labs, clinical and research commercial labs, and emerging growth labs. I will provide more detail on the opportunity within each of these three target customer segments, how the G4 value proposition is resonating, and how we are addressing each segment's prospective customer needs. Number one, academic labs. These labs are often providing sequencing services for multiple principal investigators, or PIs, and researchers, and are running a wide range of applications with diverse sequencing requirements, such as RNAC, single-cell, targeted panels, exomes, whole genome, and other multi-omics experiments. The flexibility of 16 individually addressable lanes across four flow cells in a single run, coupled with a 19-hour or less runtime, is an appealing value proposition for these customers. In our discussions, lab directors have indicated that the G4's ability to allocate individual lanes to PIs without the risk of sample contamination from pooling or the ability to sell individual lanes at a lower price point provides a compelling and unique value proposition. Our early sales focus within this segment has been to identify labs and KOLs that will help generate data and publications. These efforts are necessary in the early stages of commercialization to provide further third-party validation of the technology given we are a new entrant in the NGF space. Number two, clinical and research commercial labs. These commercial organizations often run a wide range of both research and clinical sequencing applications, such as RNA-seq, targeted panels, exomes, and rapid-hold genomes. Clinical sequencing is often done in the form of LVTs in a CLIA lab environment. The G4's power and speed, or gigabase throughput per hour, are attractive selling points for these labs that want to run more samples with shorter turnaround times. When combining this power and speed with the flexibility of the G4, these customers can run their samples quickly and cost-effectively versus having to wait and batch like-sized samples or runs. Our initial focus within this segment is then to target early innovators and technology adopters that will help prove out the robustness of the G4 system in the field. We are actively leveraging our internal customer care lab to assist in the sales cycle with these customers. This courtesy pre-sale service is proving an effective way to validate prospective customer applications on the G4 via sample optimization and testing in advance of purchasing. Number three, emerging growth labs. These labs typically span across both research and clinical LDT-based applications, such as RNA-seq, single-cell, targeted panels, spatial, and proteomics. This profile of customer is cost-conscious and looking for a solution that can scale up with their sequencing needs over time, providing varying throughput options. We believe the combination of power, speed, and flexibility of the G4 is perfectly suited for this customer profile. It offers the customer attractive pricing for both smaller scale down experiments and higher throughput runs as they scale. The flexibility enables more frequent runs and facilitates more rapid R&D iteration. A single G4 system and its capital cost is much cheaper than scaling with other benchtop offerings, which would require three to four similarly priced instruments to match a single G4's capabilities. Our sales team has been heavily engaged with this segment in a high-touch sales process. Interactions with customers in this segment typically require customized cost modeling support to highlight the overall ROI and lower cost of ownership versus other competitive systems. Some of these customers are sensitive to the upfront capital purchase model for the instrument. For these customers, we are working with them to provide flexible financing and sales options. Our aim is to establish long-lasting relationships and grow with these customers over time as their businesses scale. Overall, we are pleased with the robustness of the sales funnel and the feedback received from customer discussions in the field. We have received orders from customers within each of our target customer segments and continue to believe the value proposition of G4 is resonating. Q2 was also an active quarter for partnerships. We announced a planned partnership with TwinStrand Biosciences to collaborate and develop ultra-high accuracy NGS solutions for the G4 platform. This partnership is intended to combine TwinStrand's proven duplex sequencing solution with Singular's HDC technology on the G4 to maximize mutation detection sensitivities for applications requiring rare variant detection, such as monitoring minimum residual disease, or MRD. The combination of these technologies should offer unmatched Q50-plus accuracy at high efficiency for rare variant applications in oncology. We also announced a collaboration with O-Link to enable the use of O-Link Explorer and high throughput proteomics platform with the MaxRead kits on the G4. We believe that Singular's MaxRead kits are perfectly suited for the sub-100 base readout requirement of OLIG's Xplore solution. The M-series kits can provide readout scale at the Novaseq level at more attractive price points for both the system and reagents. On a library prep front, we are excited to announce three new partnerships with solution providers, integrated DNA technologies, Takara Bio, and Parse Biosciences. With integrated DNA technologies, we are validating its high-quality XGen NGS library preparation kits for both DNA and RNA sample prep. With Takara, we are validating its EverCode kit for single-cell RNA-seq. With Parse, we are validating its single-cell RNA-seq kit based on its SmartSeq and other NGS technologies. We were pleased to attend and participate in the AGPT conference in Orlando in June, where we met with industry leaders and prospective customers. We had a G4 instrument onsite and provided dozens of system demos for meeting attendees. Feedback was very positive, with demo attendees highlighting the G4's intuitive interface, user-friendly sequencing workflow setup, and efficient closed-cell or reagent cartridge loading. Coming out of the conference, we experienced increasing customer and KOL interest, validation of our value proposition, and strong lead generation. While at AGBT, we released several exciting application notes and third-party collaborator posters. Starting with the single-cell RNA-seq application note, this study leveraged the G4 platform to characterize single cells derived from peripheral blood mononuclear cells, or PBMCs. Results were highly concordant with those generated on Inovaseq 6000, demonstrating that the G4 can be a plug-and-play solution for single-cell RNA-seq workflows compatible with existing lab ecosystems. Moving on to whole exome sequencing application note, libraries were sequenced on a 2x150 F2 flow cell. High coverage uniformity was seen across the exome target regions, resulting in strong variant detection performance. This reflects the compatibility of the G4 platform with common exome library preparation kits. In addition to these application notes, we presented numerous posters from third-party collaborators Resolution Biosciences, Joint Genome Institute, or JGI, and TGEN. I'll provide a brief overview of some of the exciting takeaways. Resolution Biosciences evaluated the G4 with their Resolution CTDx assay on cell-free DNA. The G4 was compared against the Illumina NexSeq 550 and provided consistently high read quality, concordant read depth and unique read count, and comparable sensitivity in variant detection. The Joint Genome Institute, or JGI, successfully used the G4 to assemble bacterial genomes with comparable performance and error profiles to that of short-read sequencing platforms. TGEN tested the performance of the G4, focusing on data quality and accuracy of variant calling for whole exome sequencing. The TGEN team noted that the system was easy to use, exhibited a high degree of flow cell reproducibility, and met their expectations for variant calling performance. In summary, we had a strong quarter on many fronts. especially in areas of data generation and publication. We shipped our first commercial system, announced several important workflow and collaborative partnerships, and filled a key leadership role with Sam Roth as our new chief commercial officer. Now I'd like to revisit some of my earlier comments and provide a summary of where things are going well, where there are challenges, and how we are addressing those challenges. First and foremost, the G4 technology in terms of specs and product roadmap has delighted us internally on the upsides. The specs are resonating strongly with customers, power, speed, flexibility, and the system profile and KPIs are highly differentiated within the Benchtop segment. In addition, the specialized application kits in our product roadmap, most notably MaxReads, has really put wind in our sails. We believe that the demand for a Benchtop instrument that can do high-throughput short reads at low cost would be significant. We expect these kits will address some of the most widely run and highest volume applications today, including single-cell readouts, proteomics library readout, CRISPR library readout, counting applications, and NIPT. Since we announced the M-series, the demand has shifted our internal prioritization towards getting the M-series kits robust and launched as soon as possible. This is an area where the G4 and the M-series are highly differentiated in the marketplace. No other Benchtop offering comes close to providing 4 billion reads per run, and that's just the first kit in our M-series roadmap. Additional internal positives on the G4 technology include progressing the F3 kits, which are on schedule to launch later this year, and advancing HDSeq to achieve Q50 accuracy at over 100 million reads on our current F2 flow cells. We believe the commercial uptake for HDSeq will be more gradual as it will be application and content specific. However, the unique accuracy profile and translational and clinical applicability support our conclusion that this will become a sticky and highly differentiated offering on the G4 platform. Long-term differentiation of applications and capabilities and unique content will be important areas of continued focus for Singular. Other activities that are progressing nicely include expanded third-party validations through additional application notes, workflow partnerships, and collaborations with innovative companies in the NGS and multi-omic space. We have now signed 13 library prep partners to show broad G4 application compatibility with leading library prep kits, and we have published seven papers, three of which were peer-authored from early G4 early access partners. Lastly, onboarding commercial leadership in the form of chief commercial officer, as well as the head of U.S. sales, were important and exciting steps for singular this quarter. Now, I'll shift gears to discuss some of the challenges that have surfaced and what we are doing to address them. I will cover three areas. First, manufacturing challenges manifested themselves in Q2 in a variety of escalating and some unexpected ways. Supply of parts to build and scale commercial G4 units has been a growing pain point. Despite ordering long lead time parts and key components very early on and in large production quantities, Some vendors have been unable to deliver on time or meet their commitments. This has translated to a slower build and scale up of the G4 production units. We are working tirelessly to address these issues in real time. For parts and supplies, we have engaged and qualified secondary vendors across many components. We are pushing our current vendors to meet their obligations. Right now, in terms of ability to scale G4 instruments, We estimate that we are running about three months behind where we'd like to be and anticipate some limitations on how quickly we can scale production units in the near term. These supply and vendor-related delays are manageable. We are revisiting our instrument delivery schedules and looking ahead to minimize additional scale delays in future quarters. Our priority is to ensure that every customer has a positive experience as we ship, install, and bring up instruments in the field. Second, The macroeconomic environment has changed, and many growth-orientated companies have shifted to leaner operating budgets and a focus on extension of cash runway or near-term profitability. We, too, are adapting, taking a leaner approach to building our business with less aggressive near-term hiring and spend. This will likely have some impact on how fast we can scale our teams to support growth. However, this is a tradeoff that we believe must be made in the current environment to maintain flexibility. We have the right team in place, to understand manufacturing scale-up, system installation, field support, and sales. We intend to stay lean until we better understand the scale-up of production units and ultimately the ramp in revenue. Lastly, the macroeconomic environment will likely influence customer buying behavior and demand dynamics. We are working to anticipate the impact, adapt, and implement sales tactics to address down-cycle sales dynamics where the pace of investment in new technologies may be less aggressive or more driven by near-term cost savings. One of the positives of our G4 value proposition is that for a wide range of users, switching to a G4 or purchasing it over other instruments is a cost savings investment. We believe the G4 will offer consumable savings between 20% to 50% across most kits when compared to a NexSeq. MaxRead kits should deliver even higher savings. Our approach is to focus on value. cost savings and provide the right simple analysis so customers can view the G4 as a cost savings decision. Additionally, we have added more purchasing models to our sales team's toolkit, offering leases, reagent rentals, and subscriptions to best align with our customers' needs. In summation, Q2 has been a busy quarter with a lot of positive progress. This is also a quarter where some real challenges have emerged. We are addressing these challenges and are confident they are both manageable and and of a transient nature. Translating progress and these learnings to instrument placements and revenues will require a growing understanding of four primary operational and commercial factors. The ability to manufacture and scale unit availability, the timeframe and resources to install systems, bring up customers, and understand consumable pull-through, the level of ongoing field support for existing placements, and finally, how demand continues to grow and translate into purchase orders as macro conditions unfold. I look forward to revisiting these topics on our quarterly calls going forward. With that, I will now turn the call over to Dale and to go over the details of our second quarter financial results and some commentary on expectations going forward.
spk03: Thank you, Drew. I will start by covering the Q2 2022 financials. Then I'll provide brief directional remarks on our anticipated spend through the rest of 2022, cash runway, as well as our expected production run rate in the coming quarters. Operating expenses for the second quarter of 2022 totaled $24.2 million, compared to $13.9 million for the second quarter of 2021. These totals included non-cash stock-based compensation expense of $3.6 million in Q2 2022 and $2.3 million in Q2 2021. The year-over-year increase in total operating expenses was driven primarily by our product pipeline and R&D roadmap and scaling headcount and infrastructure to support our growth and prepare for commercialization of the G4. Net loss for the second quarter of 2022 was $24 million, or 34 cents per share, compared to $37.5 million, or $1.18 per share, in the second quarter of 2021. The year-over-year decrease in net loss and net loss per share was driven primarily by the change in fair value of convertible notes and warrant in Q2 2021, which were converted to common stock with the IPO and are no longer outstanding in Q2 2022. This is partially offset by higher operating expenses as previously noted. In addition, the year-over-year decrease in net loss per share was driven by the increase in weighted average share count used to calculate net loss per share because of the common stock issued in connection with the IPO. Our weighted average share count for the quarter used to calculate net loss per share was approximately $70.8 million. Ending cash, cash equivalents, and short-term investments excluding restricted cash totaled $287.5 million. Looking ahead through the rest of 2022, we still expect investment to increase across commercial, manufacturing, operations, and R&D, albeit at a more modest pace given the broader market challenges that Drew just outlined. We expect our Q3 weighted average share count used to calculate net loss per share to be approximately 71 million. We are acutely aware of the current macro environment and intend to focus our investments in the highest priority areas. We have historically been capital efficient, To date, we have raised approximately $450 million and have cumulative cash burn of approximately $163 million. We anticipate our existing capital to be sufficient to support our activities into the first half of 2025, or roughly three years. We will continue to manage our prioritization of activities, the pace of investment, and phasing of hiring accordingly. Lastly, while we are not providing formal guidance at this stage, we do want to provide some directional commentary to support Drew's earlier comments about some of the challenges we are navigating. Since shipping our first unit in late June, we are phasing our commercial activity in line with our ability to manufacture, sell, ship, and support new customers coming up. As we look out into the second half of 2022 and early 2023, we are anticipating a moderate pace of getting G4 units into the field and generating revenues. As Drew mentioned, we are running about three months behind in terms of our ability to scale G4 instruments. In addition to this later start, we anticipate a gradual ramp. As we look towards the rest of 2022, moving into Q4, we expect to deploy one to two systems per month with the goal of understanding each of the four operational and commercial factors outlined. Manufacturing scale-up, installation and customer bring-up, ongoing support, and extended sales dynamics. We expect to enter 2023 with the demand and capacity to ship approximately two to four systems per month, gradually growing that number as we better understand the internal and external factors that will allow us to scale faster. We will be updating you on these factors and expectations as we move forward and implement the learnings gained from initial system shipments, installations, validation, acceptance testing, and early customer utilization. This may take several quarters, but we remain committed to providing more formal guidance at the point we feel it can be reasonably predicted and estimated. Thank you, and back to Drew for closing remarks.
spk02: Thank you, Dalen. We are excited to advance our business and transition to the commercial stage with products in the field serving and pleasing our customers. We believe it's vitally important to be patient and disciplined during this stage to make sure we understand our business, to lay the right foundation for scalable success, and to ensure a positive customer experience for every system placed. Many of the values and attributes that have enabled Cingulate to advance quickly and effectively as an organization in its pre-commercial development stages will be equally important moving forward. Just as we have taken a stage-based, substance-driven, and financially disciplined approach to develop our science and technology, we plan to extend these principles forward as we turn to manufacturing and commercial scale-up. Over the next few quarters, we will be laser-focused on addressing manufacturing scale-up, on understanding customer installation and system bring-up, and instrument field service and support parameters. We will also learn more about the sales cycle and translating demand to orders. As we look towards the end of this year and begin to think about 2023, singular genomics is well-positioned, and our long-term thesis is robust. Near-term challenges, while real, are both manageable, transient, and not related to the fundamental value proposition of our business. Our technology is powerful and unique. Our initial product and product roadmap are highly differentiated. We are entering high-growth markets, and we have the right team in place with a strong balance sheet that will allow us to build a highly successful business. Joining me for Q&A, we have Eli Glesser, founder and CSO, and Dalen Meter, head of finance. Now let's open it up to questions. Operator.
spk05: Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from Dan Brennan Please announce your affiliation, then pose your question.
spk09: Great, thanks, Callan. Congrats, guys. Maybe just kind of digging into a bit of the manufacturing constraints, can you maybe elaborate a little bit on specifically what the constraints are and maybe what the visibility is toward alleviating these constraints as we look ahead?
spk02: Yeah, sure, Dan. This is Drew. There's really a couple parts to it. You know, the first part is very detailed. Simply put, some of the more complex aspects of the systems have just been hard to come by in terms of getting the parts in on time. And when we think about manufacturing and scaling up, it's really the type of activity where it comes in phases. Initially, you have all your parts coming, and you're building your first instruments. Not until you have a number of instruments built and up to scale do you go into the next part, which is really integration of the instrument validation and testing. And each of those phases, you know, they take time. We had hoped that we could kind of compress that second phase, but the reality of, you know, not getting all the parts in and having to work through the normal, you know, bring up challenges and then moving into that second phase has kind of put us where we are right now. We really need to understand the fundamentals of each one of those phases, getting in all the parts, being able to scale up a high number of instruments, and then working through all the validation and bring up this typical with a highly complex instrument. So there's not really anything specific other than we need that time for each one of those phases. And some of the complex parts have really just been hard to come by and not delivered on time. And we've had issues with vendors, you know, kind of getting things here on time to get those bills going, which has had a cascading effect.
spk09: And maybe just related, Drew. So I guess as we progressed over the last few quarters, it sounds like this is kind of new you guys hadn't explicitly guided to manufacturing, but we hadn't heard like something specific that was a bottleneck. And obviously we're dealing with a hyperinflationary environment, global supply chain issues, but net net, is this something that you guys foresaw three to six or nine months ago? Is this something like over the last month that's kind of manifest itself? Maybe you can do this a little bit more color. And then again, as we think ahead, it sounds like you're talking about somewhere in the zip code of six to 12 instruments per quarter is what you can make right now, and that's what the demand is. I'm just trying to get a sense of how do we get confidence that the bottlenecks will be alleviated, whether by Q4 or Q1 or Q2 of next year.
spk02: Yeah, I mean, to your first part of your question, you know, we have mentioned a few times earlier this year that there were challenges to the supply chain. I think repeatedly we've said we're not immune to it. I think the extent of those challenges, as you kind of candidly articulated really came to a head over the last three months or so. I think the other realization we had is there's two ways to go. One way is to try and rush things out as quickly as you can. Another way is to stay disciplined on the fundamentals of understanding each of those phases. I think we've always been careful not to get out of our skis. We're not saying that we couldn't be shipping instruments sooner, but in order to take the right type of stage-based approach and really understand what scale-up looks like and really understand you know, what the machines look like running at scale across many, many instruments. I mean, we want that visibility, that understanding, that reproducibility, that robustness to be crystal clear before we start, you know, putting high numbers of units out there in customer hands. So it's really just, you know, kind of that supply chain issue coming to a point. And then also, you know, us, you know, looking at ourselves in the mirror and saying, hey, we had planned X amount of months to do integration testing, you know, internal scale up of our R&D units, our application lab. Do we think we can go faster on that part? And I think we would be making a long-term mistake if we compressed that really important time to have the learnings internally for ourselves. As we move forward, again, we don't see anything here that's not transient. I mean, the biggest issue has been getting the parts here on time and being able to work through all the typical challenges that come with assembling highly complex instruments. Nothing fundamental about the design of the instrument. We're working with suppliers. We think we do have a clear line of sight to making sure we have the parts we need. As we cascade out this phase into the next phase, which is getting our first six, 10, 15 units out there, I think the caution in units is really just us trying to make sure that we understand how those units behave in the field before we start predicting anything more aggressive. So the attempt is to provide transparency in how we're seeing the business, and that's on the supply side and the demand side. You know, we've had really strong, robust demand. In fact, given our capacity right now, we likely have demand that essentially takes up our ability to supply units the rest of this year. Moving into the next year, I think we have to understand those four pillars that we outlined in the call. It's manufacturing, scale, capability. It's time-framed to bring up a customer in the field and what that bring-up looks like in terms of instrument pull-through and resources to support it. It's ongoing support. And then the last part is the demand side, the commercial side. What does extended execution commercially look like beyond the bullets of initial interest in adopting a new platform, scaling it past 20, 30, 40, 50? orders is going to take a lot of understanding of, you know, really how to scale the business. And we're still kind of getting that under our feet.
spk09: Got it. I mean, one final one, I'll get back in the queue. So I guess you guys didn't provide any official guidance, right? But I mean, we've got 26 boxes this year and 85 next year. Sounds like it's kind of on an as-go-ahead basis. But just, I mean, what could you comment? How should we be thinking about the potential for placements? Because it sounds like from your comments, obviously, you're saying demand is kind of at capacity right now. So it sounds like the funnel is there. How should we be thinking about where we stand today? What's realistic?
spk02: Yeah, I think we really, you know, we put the first unit out there. We're working with the customers that have already put orders in. At this point, we really need to, you know, get the next few units coming off the line internally and get those into our applications lab, our customer care lab. So for this quarter, I think we're probably putting those units internally. As we move into Q4 from a supply and manufacturing capacity, we think we can do one to two per month. And we have demand that will absorb that through POs through the rest of this year. As we look into next year, again, we're trying to provide the right type of goalposts. So moving into next year, we think given all those factors, it's two to four units per month entering next year. Beyond that first month or two or three, I think we're going to have to learn more before we can tell you exactly what that ramp looks like. So that's just us trying to, given the information we have right now, provide you kind of what the next six to nine months look like. Great.
spk04: Okay, I'll go back and cue. Thanks, Joe.
spk05: Your next question for today is coming from John Sauerbeer. Please announce your affiliation, then pose your question.
spk10: Hello, this is actually Christian for John with UBS. I want to say thank you very much for taking my question and all the color today. My question is more just, you know, high-level revolving around the funnel that you guys have. Not quantifying it, however, I'm just curious. if it skews any direction regarding the end market or use case for devolving around the academic labs, clinical research, or emerging? Thank you.
spk02: Yeah, I think we've actually been pretty purposely addressing each one of those market segments. What I would say in general is The applications specifically where we're seeing a ton of interest are largely around applications that require the short reads in the M-series. That's been something that really has a lot of uptake. Core labs also are an area where there's been a lot of interest due to the flexibility of the sequencer for flow cells, individually addressable lanes. We're solving or offering a very unique solution there since a lot of these core labs sell individual lanes or have multiple PIs that they're servicing, so alleviating those batching or sample compatibility issues that typically those labs face is something that's really positive. On the industrial side of things, I think there's going to be a lot of interest in the high-volume next-sheet shops, but a lot of those are clinical companies. And for those types of companies or labs, I think it'll just take a little bit more time. We're going to have to get instruments out there, kind of understand robustness, reliability of the instrument. But over time, there's a high-interest level of kind of the high-volume next-seek shops, just since this is such a compelling alternative versus a next-seek. I mean, in a very simple way to think about it, a single box knocks out four or five next-seek 550s or two or three next-seek 2000s. So it's cheaper capex and cheaper operating expenses with faster turnaround times and more flexibility. So that's a huge focus for us longer term. There's a lot of very good initial customer prospects there. We're taking orders from those types of customers. But what the real goal there is not to put a single box or two. It's to find those labs that have 20, 30, 40 next weeks and figure out how you convert a large number of those instruments. And then the last area that we mentioned are the kind of growth companies. Emerging growth, I think, is what we call them. And I think there is also a lot of interest. However, I think we just need to get more instruments in the field and get some data out there. If you're buying your first sequencer or you're coveting every dollar, I think you really want to make sure that you're buying something that's going to come with robustness and you know it's going to work the way it needs to. So I think we're addressing all of those issues. Holistically, there's been strong interest on all of those types of customer profiles.
spk04: Thank you.
spk07: your next question for today is coming from Julia Quinn please announce your affiliation and pose your question hi this is Amy on for Julia thank you for taking my question my first question is about the consumables did you guys see like the manufacturing issue is having an impact on the consumables and also for the change in customer demand or custom behavior is this also affecting that the consumables or all the kits and the flow cells?
spk02: Now, the manufacturing challenges at this point are really on the instrument. We haven't seen any real showstoppers or delays in the consumables. So those are on track. The instruments are really where there's been a little bit of a struggle to get some of the parts here in time and that quantity. On the customer side of things, I don't think in the academic side we have seen much of a change in terms of buying behavior or at least interest. And I think a lot of that probably has to do with budgets being put in place in advance of the actual purchase decision and the buying cycle. I would definitely say emerging growth companies that raise money, they have to advance their R&D. So there's not anything there that's changing, although I would say there's definitely a general feeling of people trying to be leaner and more cost-conscious and But I think that's an area that plays to a strength of ours. On the larger company side, I think that's probably where we see the most difference in mindset. If you have larger companies that are running large labs with many, many sequencers, adopting new technology or a willingness to invest up front for longer-term savings, It's something that I don't think people are thinking about now the same way they were a couple years ago. So I think that's probably the segment that's most affected by the current market. It's larger companies or growth companies that are either profitable or near profitable that are more worried about getting to profitability or increasing their operating profits who are less likely right now to take any risk or put capital out for new technology. So In summation, I guess I'd say two of the markets are probably, you know, we haven't seen much of a change. And one, we have seen a little bit different of a sentiment in terms of adoption of new technology.
spk03: Hey, Amy, just one thing to add. This is Dalen. In terms of the customers that, you know, may, you know, have a challenge, you know, affording, you know, a box, you know, up front with a large capital outlay, you know, we have implemented some alternative sales models that we're putting in the sales team's toolkit. You know, the whole idea there just being, you know, make sure that we give, you know, them the tools they need to sell into customers that, you know, may have a challenge with that upfront investment through some type of a reagent rental, lease, subscription, some alternative model that could make it a little bit more appealing for them.
spk07: Okay. Thank you. That's very helpful. My next question is regarding, like, the PX system. So did you guys see the manufacturing issue affecting the shipment of the PX system?
spk02: We haven't, I guess, gotten far enough along in the PX system where manufacturing at scale would be an issue. We're currently bringing up a handful of internal beta units. To my knowledge, I don't think we've had any issues there getting those small number of instruments up and running. So I guess the short answer is you know, we haven't had manufacturing or parts issues for the PX, but again, it's at a much different stage. We're bringing up a small number of internal betas, which is different than, you know, bringing up in ordering, you know, high numbers of parts, you know, for commercial launch.
spk07: Okay. Thank you. That's very helpful. So my last question and I'll back in the line. So since, you know, you guys mentioned the G4 is three months behind. So for now, When do you guys expect to see revenue recognition for G4 systems?
spk03: Yeah, hey, Amy, I think a safe assumption from a modeling standpoint would be Q4, kind of the later part of the year.
spk07: Okay, very helpful. Thank you so much.
spk05: Your next question for today is coming from Matt Sykes. Please announce your affiliation, then pose your question.
spk06: Hey, it's Matt Sykes from Goldman Sachs. Hey, Drew and Dale, and thanks for taking my questions. Maybe just my first question, just, you know, given the sort of shipment schedule you guys laid out due to some of the supply constraints, assuming demand is outstripping those supply constraints in your shipment schedule, presumably you'll be building a backlog of orders over the course of the next six to nine months. How do you keep, if that is the case, how do you keep those potential customers engaged in terms of communication on potential delivery so that you don't necessarily lose those orders or you're building backlog? Or are you just simply only fulfilling and taking orders for instruments you can actually ship?
spk02: It's a really good question, Matt, and candidly one that we debate live currently. I think it's one of those things where it's kind of like whack-a-mole, where as soon as you solve one thing, then all of a sudden it shifts to the other. Right now, it's really, you know, a discussion with prospective customers and us being transparent on, you know, when we can get them an instrument. There are some customers that I think just want to get in the queue and are willing to wait. There are other customers that want to know if they put in the PO, they're going to get an instrument a certain amount of time. And in that case, it's either shuffling priorities if we can internally on who gets the next instrument or it's telling them, let's re-engage later. We can't commit to that. I think there's probably a healthy amount of lead time between taking an order and shipping it, and that's what we're debating right now. But I think that range is somewhere in the three to six months, and that's kind of what we think we need visibility to. If we You can't tell you're going to get an order ideally within three months. Probably we want to keep the customer warm and make sure we continue to develop that relationship, but I think it becomes a little tenuous if you're trying to take orders for instruments you're not able to commit to with 100% certainty that you can ship within less than six months. It just feels uncomfortable. So as we move into next year, that's really what we want to understand is The supply side, in terms of being able to scale up the instruments, we'll have a much better understanding, and I believe we will be past this current kind of supply and instrument bring-up issue. But we'll also understand the demand side much better, and I think we'll have a better idea of figuring out how we can communicate to customers, keep them warm, and make sure that we can meet their expectations on getting an instrument if they put in a PO. Got it.
spk06: Thanks, Drew. That's really helpful. Thank you. My second question is just, you mentioned you're taking on some secondary suppliers to deal with some of the constraints that you have on some of the parts. If you utilize some of the secondary suppliers, how do you ensure that you're not necessarily compromising the performance of the instrument? Meaning, obviously, these first couple of instruments that go out into the market are really important from a validation standpoint in terms of performance. But if you're having to utilize secondary suppliers because of just constraints that are lasting longer than you think, how are you ensuring that? Are you validating these new parts? Does that take time? I just want to understand the thought process there.
spk02: You know, Matt, it's a really good question. We had Eli here. I think he's probably the right one to answer that, so I'll let him kind of address that, but you hit on some key points.
spk01: Yeah, Matt, I think for a lot of the really performance-critical components, you know, we already have existing relationships and are far along in those There are some other parts that we are looking at second source. In general, wherever possible, we're trying to build up second source options. It's a good general practice and safety precaution. In terms of your question around proving those parts out, certainly that's part of the ongoing process. If we're going to switch to a different vendor for a part, we would validate those. Some things rise to a higher level of validation than others. So, yeah, definitely paying attention to that.
spk06: Got it. Thanks. And just one more question. Just as you look across your cost segments, academic, commercial, and merging, on the commercial side, I mean, this is a potentially very large market, but even some of the larger labs are probably having some funding issues and are reining in costs. Is there a certain constraint around the time and resources, and maybe not necessarily dollars, but time and resources around the validation that they need to do? And is there some reluctance on the part of them to go through that validation because of the commitment of those resources? Or is your pre-sale service that you mentioned trying to alleviate that potential bottleneck or reluctance on the basis of customers?
spk02: You know, Matt, that's another good question. In all being candid, I think over the last few months, there's been a lot of people that are completely focused on one thing, and that's figuring out how to create a leaner business And that's taken the majority of their mind share. I think that will start to shift once people get their houses in order and make the necessary changes. And that will provide more of an opportunity to engage. So I would say there was probably a good few months where there were a lot of businesses where management teams were frankly just really concerned about that. I think it's starting to turn. We're starting to turn the corner on that. I would say the other part to your question is, yeah, getting broader adoption or transitioning fleets of instruments when you have a business built upon that technology that you know works with predictability, it's a pretty high bar. And I think that's why when we spoke about that customer profile, getting those guys to buy one or two systems and starting to work on validation of their assays on our systems That's just the first step. And the customer care lab helps, but really it is a big decision, and it's one that doesn't happen very quickly. So it's really a staged approach. First we have to make sure they have confidence in the system in terms of robustness and being able to meet their needs and providing a cost advantage or some type of a value differentiator for them. And then when we think about moving through those different stages, it will take time. to get them comfortable with the system, to get comfortable with multiple systems. So it's really not something that I think happens all at once. First, you need to get mind, share, and willingness. Then you need to work with them kind of in a very stage-based approach. And over time, I think as you generate trust and confidence, that's how you could potentially get these larger labs to shift. And that's absolutely our goal. Great.
spk04: Thanks for the call, Drew. I appreciate it.
spk05: Your next question is coming from Michael Riskin. Please announce your affiliation, then pose your question.
spk12: Great, thanks. This is Mike Riskin, Bank of America. Got a couple smaller questions I want to follow up from earlier comments, then one big picture one at the end. First, on the supply chain challenges, any specifics you can give us on exactly what it is that you're running into? Is it semiconductors? Is it something in the microfluidics? If you could just give us some color on some of the specific components, it might help us sort of get a sense for what's going on.
spk02: Yeah, I think in general, you can kind of put in the electronics category. I don't think we want to go into specific components, but there's been some more complex electronic-related components that, again, have been just been in short supply, our vendors have not been able to meet their commitments, and that's kind of created a cascading delay. That's probably the most general and accurate way to think about the supply, the nature of the supply chain issues.
spk12: Got it. And to the cadence you kind of laid out, you know, one or two systems per month the rest of the year, and then two to four as you enter 2023, the supply chain issues you're talking about, they're continuing to persist, and they're not really – In some cases, they're abating. In some cases, they're not. So I guess my question is, is there any chance that accelerates? Is there any chance it ends up being slower where we're chatting again in three months and it's taking longer to process this? I guess there's still risk. So how much confidence do you have in that timeline and that cadence you're weighing out?
spk02: Yeah, I think we're pretty confident that we'll be able to and are working through the current issues And we should be able to meet that, you know, much more modest schedule. And again, I think, you know, beyond, you know, Q4 moving into next year, I think the more time we have, the more visibility we'll have on our ability to scale up. So I don't know, Eli, if you have anything to comment. I mean, Eli's been working this, you know, very closely.
spk01: Yeah, I mean, you know, it hasn't been sort of just a single thing, you know, it's an accumulation of things over time in the development. And so for us to get through all of the testing integration has required a period of time, and that was sort of pushed back by some of those delays. Going forward, you know, we want to be realistic in getting a modest number of instruments out in the field, making sure everything goes smoothly, making sure there's no issues observed when the instruments are out in the field. So that's also part of our thinking going forward. And then we expect to have parts on hand to be able to scale up beyond that.
spk12: Okay. One more quick one, and then the big picture one. So you also kind of talked about investing only in the highest priority areas, more disciplined spend. uh, in the business, uh, as we think about the PNL for the rest of the year, for the next couple of years, where are we making the biggest adjustments? I mean, I think it kind of makes sense in a commercial organization, given you're being more, uh, careful in your, in your rollout, but are there any cuts to R and D? Are there any cuts to, uh, catbacks sort of, you know, walk us through the model a little bit on the, on the changes to the spend?
spk03: Yeah. Hey, Mike, this is Dylan. Um, I think it's less about cuts and more about just a slower pace of growth, more measured based on how we see things scaling, and then ultimately trying to scale our expenses in line as we have a better line of sight to the ramp in revenue. You can expect to see expenses increase in both RMD and SG&A, you know, here through the second half of the year. You know, I think, you know, from a modeling standpoint, you know, we previously said, you know, 2022 expenses expected to roughly double 2021. You know, I think you can expect that that's going to be, you know, slightly lower, you know, for the year based on, you know, kind of the slower ramp and the delays. And, you know, just looking here in the second half, you know, you can expect that expenses will increase over the first half, you know, across all functions.
spk12: Okay. All right. And then the last one. I realize that you haven't really had a guide or any commentary on pacing previously or quarterly cadence. But still, I mean, you met with investors, you met with analysts as recently as HBT, you know, a little over two months ago. And at the time, you sounded quite bullish on the ramp and on the operations. So I'm just wondering, you know, is this something that... really didn't have that much visibility until June and July. Sort of how much has the situation really deteriorated in the last month or two versus what might have been evident earlier in the year? Thanks.
spk02: Yeah, you know, I think we're still incredibly bullish, and I think that the demand and the engagement is still, you know, very positive. And, you know, so there really hasn't much change on that side. I think there's been really a couple things. The first one is it really did come to a head in what the delays of parts were going to result in over the last month or two, meaning we thought and had hoped that there was a best-case scenario where, given the delays in parts and given some of the challenges with getting vendors to meet their commitments, we could still potentially compress that phase that we spoke about, which is really bringing up the instruments, doing the testing, the validation, and getting the reps done. And I think it was partly fully realizing the supply and vendor issues, but also taking a step back and saying, is it most important for us to be rushing instruments out?
spk00: We have willing customers.
spk02: We have orders in. We could be putting instruments out right now. Or do we need to make sure we take our time to understand what this instrument looks like on an extended bring-up basis? And what does reliability look like and robustness? And are there any ways that we need to really understand fundamentally what customer bring-up looks like. So I think it was really both. And I think if we take a step back and we think about long-term success, the last thing we want to do is get out over our skis and have customers have negative experiences with instruments. And we need that time to bring the instruments up, to scale them, to service our internal needs first. We need to get units into our applications lab, into our customer care lab, into R&D's hands. And it's just a matter of building the right foundation to have bigger success longer term, and we just need the extra time right now. So I think we remain as bullish as we've ever been on the opportunity on the customer side. We have people waiting for instruments, but we need to take the time to get it right before we start putting instruments out there and having people actually rely on them to generate their data for them.
spk04: Great. Thanks.
spk05: You have a follow-up question coming from Dan Brennan. Dan, your line is live.
spk08: Hey, this is Tom. I'm Dan. Just a quick follow-up. More on the PX and kind of your outlook for cost control. So I was kind of wondering, is there a lot of slowing of hiring happening in the R&D side, or is that kind of more concentrated on your sales and marketing effort? And then the kind of follow-up is, you know, how do you expect to marry your kind of sequencing-based approach on the PX with your proteomic kits coming out on the G4 with Erlang? Thanks.
spk02: I'm not sure we caught the first part of the question. Could you repeat the first part?
spk08: Sure, yeah. It was more on the cost control side. So is that affecting research and development in any meaningful way for the PX?
spk02: No, it's not going to affect anything for the PX. We've had kind of an insulated and dedicated team on the PX. You know, that being said, you know, there have been, you know, a few people that have been pulled over to the G4. That is the priority. We've got to get the G4 out. There's probably been a few decisions we've made around, you know, additional, you know, longer-term roadmap, you know, activities or products where we've deprioritized or shifted resources. And I think in general the mindset, you know, a year ago was, you know, essentially build it and they will come, you know, build manufacturing, build commercial for max scale and make sure you have those people there ready for it. And now I think it's more of a, you know, hire people when we have a clear need for them and make sure that we scale each part of the business appropriately based on the need. So I would say R&D is the least affected by it. PX is still moving forward. G4 is the focus right now, and leaner spend across the rest of the organization in a more kind of phase-based approach as we see revenue ramp.
spk04: All right. Thank you.
spk05: There are no further questions in queue. Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
Disclaimer