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spk01: Ladies and gentlemen, thank you for standing by and welcome to the TechNova second quarter 2021 financial results call. At this time, all participant lines are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one, your telephone keypad. And to read your question, please press the pound key. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Sarah Mitchell-Moore from McDougal. Thank you. Please go ahead, Madam.
spk00: Yes, thank you, Suzanne. And welcome, everyone, to Technova's second quarter 2021 earnings conference call. On today's call, Stephen Gunstream, Technova's chief executive officer, will provide business highlights and updates, followed by Matt Lowell, Technova's chief financial officer, who will review financial results. After we conclude the prepared remarks, we will be happy to take your questions. As a reminder, the forward-looking statements that we make during this call, including those regarding business goals and expectations for the financial performance of the company, are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning these risk factors is included in the press release the company issued earlier today and are more fully described in the company's various filings with the SEC. Today's comments reflect the company's current views, which could change as a result of new information, future events, or other factors, and the company does not obligate or commit itself to update these forward-looking statements except as required by law. The company's management believes that in addition to GAAP results, non-GAAP financial measures can provide meaningful insight when evaluating the company's financial performance and the effectiveness of its business strategies. During this call, the company will therefore use non-GAAP financial measures of certain of its results. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that was issued this afternoon, which is posted to Technova's website and also available on the SEC website. Non-GAAP financial measures should also be considered only as a supplement to and not a substitute for financial measures prepared in accordance with GAAP. The non-GAAP financial measures in this presentation may differ from similarly named non-GAAP financial measures used by other companies. Please also be advised that the company has made available a supplemental slide deck to accompany today's prepared remarks, which can be viewed on this current webcast and accessed on the investor relations section of TechNova's website. And with that, I'll turn the call over to Stephen.
spk07: Thank you, Sarah. Good afternoon and thank you everyone for joining us for technos first ever earnings call i'd like to extend a warm welcome to our analysts and new investors who participated in our recent initial public offering which closed in June. We have technos our leading provider of critical reagents that support the discovery development and production of drug therapies novel vaccines and molecular diagnostics. We have a strong competitive position in the marketplace and are differentiated by our ability to manufacture high quality custom reagents with short turnaround times and to scale with our customers from discovery to commercialization. This is best exemplified in cell and gene therapy where there is a significant need for custom made reagents in volumes less than 1,000 liters. Our rapid delivery of custom clinical grade bioprocessing solutions enabled our cell and gene therapy customers to reduce the time from drug discovery to clinical impact. We have the infrastructure in place today to support our near-term growth outlook and are positioning the company for long-term success by investing in capacity expansion, marketing, sales, and R&D. The strength of our existing business and the success of our recent financing efforts, including, of course, our IPO, will both support those investments in the pursuit of our growth strategy. Lastly, we have the team in place to execute on our vision. I want to thank all of our 200 plus associates whose dedication has been and will continue to be critical to our success. Moving to our business update, I am pleased to report that in the second quarter we performed well commercially and made meaningful progress on our investment priorities. Matt will provide the details of our second quarter financial results, but first I'd like to highlight some notable accomplishments. Our total Q2 revenue excluding sample transport media was $8.3 million, up 41% as compared to $5.9 million in the same period of the prior year. We completed our initial public offering, raising $99.1 million in proceeds after deducting for underwriting discounts and commissions and other offering expenses. We strengthened the company's board of directors with appointments of life science veterans Bob McNamara, Brett Robertson, and Alex Spock as independent directors. We began construction on our new state-of-the-art GMP manufacturing facility in Hollister, California, which, when operational at the end of 2022, will increase production capacity by five-fold. And finally, we established our scientific affairs team, which will drive engagement with scientists developing novel cell and gene therapies. Overall, we are encouraged by our second quarter performance and are excited with the progress we've made in executing on our strategic plan. I will now hand the call over to Matt for discussion of the financials.
spk08: Thanks, Stephen. Good afternoon, everyone. We delivered strong results in the second quarter of 2021. Let's start with revenue. Total revenue for the second quarter of 2021 was 8.3 million, a 38% increase from 6.0 million in the second quarter of 2020. As Steven mentioned, excluding sample transport media, revenue for the second quarter of 2021 was 8.3 million, a 41% increase from 5.9 million in the second quarter of 2020. By way of reminder, Technova launched a transport media product in the latter part of the second quarter of 2020. to address the urgent need for COVID-19 tests. But we consider revenue from transport media sales to be non-recurring and the product is not part of the company's ongoing strategy. First, Lab Essentials products are targeted at the research use only or RUO market and include both catalog and custom products. Lab Essentials revenue was 6.5 million, a 46% increase from 4.4 million in the second quarter of 2020, driven by an increase in the number of customers and higher average revenue per customer. Bear in mind, however, that the COVID-19 pandemic dampened Lab Essentials' product revenue in the second quarter of 2020. More meaningful, we believe, is that comparing the 12 months trailing each of June 30th, 2020 and 2021 shows that Lab Essentials' product revenue grew by 33% over that period. Next, clinical solutions. Clinical solutions products are made under good manufacturing practices or GMP quality standards and are targeted for use by customers in the clinical and commercial phases of a product or therapy's development. Our clinical solutions revenue was 1.6 million, a 32% increase from 1.2 million in the second quarter of 2020. Over the 12 months prior to the period's end, we are pleased to report we grew our clinical solutions revenue by adding new active customers. We expect revenue attributable to these new clinical solutions customers will grow over time even as their initial buying activity contributed to lower average revenue per customer in the same period. Just as a reminder, due to the larger average orders in clinical solutions, There can be quarter-to-quarter revenue lumpiness in this category. Gross profit for the second quarter of 2021 was 3.4 million compared to 3.5 million in the second quarter of 2020. Gross profit in the second quarter of 2021 included the adverse impact of a 0.7 million one-time reserve related to excess sample transport media inventory. The company built up stock in the fourth quarter of 2020 to serve growing COVID-19 testing needs, but demand subsequently decreased due to the successful rollout of vaccines, while market supply also increased, resulting in this excess inventory. Gross margin, excluding the one-time reserve, was 48.7%, which is down from 57.4% in the second quarter of 2020. reflecting higher costs associated with planned investments that the company is making in its current manufacturing capacity and capabilities. Operating expenses for the second quarter of 2021 were $5.9 million compared to $2.8 million in the second quarter of 2020. The increase was driven by the growth of the company's corporate, commercial, and R&D teams. We're pleased with the progress on our internal initiatives to increase operational capabilities and with our success in attracting talent as we expand our commercial and R&D teams. Of note, aside from our CEO, almost the entire executive management team joined Technova after the second quarter of 2020. As of June 30th, 2021, the company had over 200 associates, up over 50% from June 30th, 2020. The net loss for the second quarter, 2021, was $2.3 million, or $0.52 per diluted share, compared to net income of $0.6 million, or $0.02 per diluted share, for the second quarter, 2020. Lastly, adjusted EBITDA, a non-GAAP measure, was negative $1.5 million for the second quarter, 2021, compared to $1.2 million for the second quarter, 2020. Capital expenditure in the quarter was $4.7 million compared to $0.6 million the prior year. The majority of spend in the second quarter of 2021 was towards our new GMP manufacturing facility. We also continue to make investments in our current production facilities and R&D lab. We are committed to building capacity ahead of the demand curve to ensure our customers are able to receive their custom products in weeks instead of months. Adjusted free cash flow, a non-GAAP measure, was negative $6.2 million for the second quarter 2021 compared to positive $0.6 million for the second quarter 2020. This decrease compared to the prior year period was due to lower adjusted EBITDA and a significant increase in capital expenditures. Turning to the balance sheet, as of June 30th, 2021, we had $108 million in cash and cash equivalents and $12 million in gross debt. We realized net proceeds of $99.1 million from our IPO in the second quarter of 2021. Our net cash position of $96 million as of June 30th, 2021 puts us in a strong position as we continue to invest for the long-term growth of our business. In addition, we continue to see strong customer interest in our products and have had good order flow since the end of last quarter. To serve these customers as their order volume scales, we are aggressively investing in the expansion of our current capacity and building a new state-of-the-art GMP facility, which we believe will further solidify our competitive advantage in short turnaround time on custom products. With that, I'll turn the call back to Steven.
spk07: Thanks, Matt. We are absolutely delighted with the progress we have made so far this year in executing on all phases of our strategic plan. We have a strong competitive position in the marketplace and the infrastructure in place today to support our near-term growth outlook. We are positioning the company for long-term success by investing in capacity expansion, marketing, sales, and R&D. Lastly, we have a team in place to execute on our strategic vision and enable our customers to develop and commercialize novel vaccines and therapies. I will now open up the call for questions. Suzanne?
spk01: As a reminder, to ask a question, you need to press star one, your telephone, and to redraw your question, please press the pound key. Again, to ask a question, please press star one, your telephone keypad, and to redraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Max Masucci from Cohen and Company. Your line is now open.
spk06: Hi, Steven and Matt. Congrats on a strong quarter at the gate. To start, can you just break out some of the ordering trends you've been seeing for different customer types, you know, whether it be cell and gene therapy developers versus vaccine developers or molecular diagnostics companies?
spk07: Sure, I can start. Thanks, Max. From a breakdown perspective, I can say that we're happy with the order volume that we're receiving. And I will say that it is across the board, but we're seeing particular growth in those areas, the cell and gene therapy, the biopharma, and the CMO side of things. As you know, that space is growing quite quickly. And as Matt mentioned in the call just now, We have seen an increase in total number of GMP customers, which we believe is a testament to what we've been doing and the things we've been putting in place.
spk06: That's great. Segue into the next question. An IPO can serve as a marketing event for companies. Technova can be put on the radar of other public companies that could be prospective customers and Separately, there continues to be a steady pace of M&A. And I know you're still in the early stages of building out your sales force, but with all of this in mind, can you just give us a sense for how your pipeline for new customer wins is looking?
spk07: Sure. So from a new customer perspective, The pipeline looks really strong, as Matt mentioned. We're not going to give details on exactly what that looks like, but I can tell you that there's a lot of new potential order volume headed our way. The new team that we've put in place, we're already starting to see some progress there. And then some of the things that we've been working on over the past six months, they're starting to come to fruition. They'll probably start to happen in the back half of this year into next year. There are other benefits, obviously, of being a public company, like you mentioned, right? We're getting more recognition, but we're also attracting more talent. And we feel like, you know, obviously, this combined with all of the financing we have available allows us to execute on our plan.
spk06: Great. Maybe if I could sneak one more in. Your business did a great job weathering the initial impacts of the pandemic in Q2 of 2020. As the Delta variant continues to flare up in certain regions of the U.S., are you seeing any impact in terms of customer ordering separately? Do you feel like your customers are better prepared to handle any disruption we may see in the fall, I guess this time around?
spk07: Yeah, I would say that, first, we're not seeing any impact yet. In fact, you can see the research, the lab essential business growth year on year is significant. Part of that is last year's dip from the pandemic. We have not yet seen an impact. I do think everyone is much better prepared. If you think about where we were last year at this time, getting everyone remote, how to operate that way, we're in a completely different situation. Of course, there's a number of people now with vaccines that are able to go to work. To date, we're not seeing that. In fact, the variance is obviously showing the promise of all these new medicines and technologies. So there's a potential uplift for the business over time as that goes forward.
spk06: Absolutely makes sense. Thank you for taking the questions.
spk01: Our next question comes from the line of Matthew LaRue from William Blair. Your line is now open.
spk05: Hi, good afternoon. You obviously alluded to the new facility coming online by end of 22, but I think you talked about adding capacity through things like additional shifts and days. I'm just curious where you're at in terms of your current capacity and confidence in being able to maintain turnaround times before the new facility comes online.
spk07: Yeah, thanks, Matt. That's exactly why we continue to add capacity. As we spoke before, we've shifted from a five-day work week to a seven-day work week. We still have ample capacity there to deliver for our customers in short turnaround times. Then we're adding additional infrastructure and automation to increase that even more. At this point, we're very comfortable with where we sit in our growth trajectory over the next year and a half as we build out this new facility.
spk05: And then over the last month or so, I guess since the IPO, there's been quite a bit of news flow on mRNA as a platform for vaccines and therapies and a number of large companies making investments, both organic and inorganic in the space. Nick, can you talk about how you're positioned to serve that market and how much of an opportunity that is for the company?
spk07: Sure. So from an mRNA perspective, obviously, we've all seen the benefits of these new therapies. Our products are some of the core reagents that go into manufacturing those new vaccines or potential drug therapies. And the fact that we can deliver our products, these made-to-order products, in weeks instead of months allows us to keep up with that demand as those companies scale. The volumes that many of them are requesting are in that 1,000 liter or less. We're pretty well suited to help them get to their scale that they're hoping for right now. I think much of the money going in right now is in that infrastructure stage. As that goes forward and these come up and go from building out a facility to fully operational, I think we'll see some benefit in the future.
spk05: Okay, thank you.
spk01: Our next question comes from the line of from VTIG. Your line is now open.
spk02: Hi, thanks for taking my questions and congrats on the quarter. Maybe starting out with your expansion plans specifically for sales and marketing, would you be able to elaborate on kind of the plan there over the next 12 months or so? You know, if you could talk about what the current headcount is and then where you could see that go, you know, over that period. You talked about, obviously, the scientific affairs team, the establishment of that. I'm just kind of curious what the strategy there is and if there are certain, you know, if you're trying to prioritize certain channels in the near term with your strategy.
spk07: Sure, no problem. So as we stated in the release here, we've now established a scientific affairs team. We're really in the early stages there, but the idea is to bring in experts in cell and gene therapy, particularly PhD scientific experts, to engage our cell and gene therapy customers to develop custom solutions for them and really help them accelerate the time to clinic. And so we've now brought that on. We also have a number of other individuals that will help move those customers that are buying catalog products from us towards those custom products and onto the GMP products. From an outlook perspective, I think we're in the very early stages here. And we're establishing the foundation and the operational efficiency to really drive this forward. So I would think, I'm not going to give exact numbers, but a significant expansion over the next year is in our plans right now.
spk02: Great, thank you. And then I know you're not providing guidance for the rest of the year, but could you help us think about what are the key drivers for growth in the second half? In terms of revenue cadence, I realize there is necessarily seasonality in the business, but what can we expect in terms of the potential outlook for the second half of the year?
spk08: Yeah, I think we're... You know, seeing strong growth across the two main product categories that we have, the lab essentials and the clinical solutions. As we have said before, we see very steady growth in the research side of the business where 15 to 20% type normalized growth over the long term is, we're continuing to see that and perhaps better at times here. And then the clinical solutions business is also growing quite nicely here with the addition of some new customers. We expect that to be able to add to our future base of business. Although as we've said in the past, I mean there is a certain lumpiness there because of the size of those orders and the proportion of that business to our total business. So I think basically we are seeing great growth across both of those product categories and are looking to continue to deliver against targets there.
spk02: Great. And then if I may be able to squeeze one more in. Matt, maybe just on gross margins for the second quarter, you talked about the one-time inventory reserve there affecting it. Could you kind of, you know, walk us through the puts and takes for the second half in terms of what we should take into consideration as remodeling your margins for the balance of the year?
spk08: Yeah. Yeah, so the reserve that we took here in Q2 was a one-time event, obviously. with respect to sample transport and the drop in demand. So I think it's consistent with what we said there. That's not really part of our forecast going forward. But in general, from a higher level, with respect to the gross margin outlook going forward, I think we are continuing to make aggressive investments in capacity. Stephen mentioned about the new automation. We're adding to the workforce there to be able to expand the number of shifts that we have and are doing other investments including in tools and things that will help us serve customers in the future. So I do expect there to be continued pressure on gross margins for the rest of the year as we take these moves for the future. So I think that we should expect that the margins will continue to be under pressure there for the rest of the year for sure.
spk07: Yeah, and I'll just add, you know, we're committed to making sure that we keep our delivery times in the weeks instead of the months, right? So we can help aid in building all this new infrastructure and capacity and resolve some of the capacity constraints in the space.
spk02: Great.
spk01: Thank you so much. Our next question comes from the line of Jacob Johnson from Stevens. Your line is now open.
spk04: Hey, thanks. Good afternoon, and I'll add my congrats on this quarter. Maybe, Matt, just one piece of housekeeping following up on that last question. That $700,000 charge related to sample transport media, you didn't back that out of adjusted EBITDA. Is that correct?
spk08: We did not back it out of adjusted EBITDA. That's correct. It is not a non-GAAP adjustment.
spk04: Okay, perfect. Thanks for that, Matt. And then maybe for Stephen, You've been talking about sales and R&D investments. That obviously, I think, requires hiring people. It's kind of a tough labor environment right now. So can you just maybe talk about how those efforts are going and maybe it sounds like you're having success in attracting new talent to the organization, maybe why that is?
spk07: Yeah, it certainly is a very competitive environment right now. But we have had a success in bringing the right people in and at the pace we wanted to bring them in. So that's one of the key parts of obviously to execute on a strategy, we have to have the people. And from what I did, I think it's a pretty exciting space to play in for us. And many of our new individuals joining us are excited to build something that they think will be very unique over time and with a great team. And the more of the talent we attract, the easier it is for us to attract more talent. So I feel like we've done a great job so far, and we'll continue to be able to do that going forward.
spk04: Got it. That's helpful. And maybe last one from me. We talked some about the sales and marketing investments, but Stephen, could you maybe just talk about on the R&D side, the key areas you're investing in there, I would think some of that's to develop new products and maybe further differentiate your offering, but would be interested in your take on that.
spk07: Absolutely. So one of the key things we did this last quarter is get that R&D lab operational fully staffed, which is a huge accomplishment to pull off in three to four months. And we have a phenomenal team already working and developing products. And you're absolutely right. We have this great manufacturing capability that we're investing to scale over the next couple of years. But in addition, now we have a team that can develop proprietary reagents to drive efficiency for cell and gene therapy bioprocessing. And so we're using this team to figure out what reagents can we drive that efficiency up. And then, of course, we can order essentially from ourselves and put it in stocks and sell to customers with much more proprietary formulations. There are some more futuristic things that we also are building out. I'm not going to comment too much on those now, but we see a pipeline of products coming out over the coming quarters that can really make an impact in the space.
spk04: Got it. Thanks for taking the questions.
spk07: Thanks, Jacob.
spk01: There are no further questions at this time. This now concludes today's conference call. Thank you for participating. You may now disconnect.
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