Alpha Teknova Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 9 speakers on the call.

Operator

Good day, and welcome to Technova's Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. After this speaker presentation, there will be a question and answer session. You will then hear an automated message advising your hand is ready. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker, Ms. Sarah Mitchell Moore with Investor Relations. The floor is yours.

Speaker 1

Great. Thank you, operator. Welcome to Technova's Q2 of 2023 Earnings Conference Call. With me today on the call are Stephen Gunstream, Technova's President and Chief Executive Officer and Matt Lowell, Technova's Chief Financial Officer, who will make prepared remarks and then 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.

Speaker 1

Additional information concerning these risk factors is included in the press release the company Earlier today, and they 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 updating its 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. We will therefore use non GAAP financial measures of certain of our results during this call. Reconciliations of GAAP to non GAAP financial measures are included in the press release that we issued this afternoon, which is also posted to Technova's website and available on the SEC website.

Speaker 1

Non GAAP financial measures should always be considered only as a supplement to and not as a substitute for or as superior to financial 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 posted a supplemental slide deck to accompany today's prepared remarks. It can also be accessed on the Investor Relations section of Technova's website and on today's webcast. And now, I will turn the call over to Stephen.

Speaker 2

Thank you, Sarah. Good afternoon and thank you everyone for joining us for our Q2 of 2023 earnings call. Technova is a leading producer of critical reagents for the life sciences industry to accelerate the introduction of novel therapies, Vaccines and molecular diagnostics that will help people live longer healthier lives. We manufacture high quality customer agents with short turnaround times And are positioned to scale with our customers as they advance their products from discovery to commercialization. We had an excellent Q2, both financially and operationally, against the difficult market backdrop.

Speaker 2

Our ability to deliver in these challenging conditions is to the dedication of our very talented team and the diversity of our market segments. We increased revenue sequentially by 26% We continue to execute on our key initiatives to position the company for sustainable long term growth. Our sales in the Q2 were $11,500,000 the 2nd highest quarterly revenue in the company's history. We had a notable uptick in clinical solutions benefiting from the migration of a large customer from Lab Essentials as it prepares to enter clinical trials. In addition, we have Actively and effectively managed our operating expenses, reducing our free cash outflow in the Q2 to $6,200,000 giving us confidence that we will achieve our free cash outflow target of $30,000,000 for the year despite a lowered near term revenue outlook.

Speaker 2

We remain optimistic about the long term potential of our target markets and are excited about the progress we've made in the second quarter to Our long term growth strategy. First, our new state of the art modular manufacturing facility is now certified for GMP grade production. We are enthusiastic about the potential this multiyear investment will unlock for the business. We have already hosted a number of high profile customers And have been very encouraged by the reaction to the facility and the company's transformation. Our customer audit Schedule is nearly full for the remainder of 2023, increasing our confidence that this investment will begin to bear fruit in mid to late 2024.

Speaker 2

As a reminder, we believe this new facility plus our existing operating infrastructure will give us the capacity to deliver approximately $200,000,000 in annual Next, on the R and D front, I am pleased to say our new product pipeline is progressing ahead of schedule. In July, we built upon the recent launch of our AAV2 buffer screening kit by extending the portfolio to include the AAV8 serotype. We expect to launch AAV6 and AAV9 by the end of the year. Early feedback on the product line has been very positive, With some customers already in discussions about scaling up with our proprietary buffer formulations. We believe this buffer kit can save our gene therapy customers months As they develop their production workflows.

Speaker 2

In addition, we launched more than 20 reagents Lastly, I want to take a moment to discuss our view of the current market environment. In the near term, we continue to see emerging biotech, historically one of our larger growth segments focused on conserving capital by delaying, reducing We still believe this to be temporary, particularly against the backdrop of Total number of trials underway and encouraging recent clinical outcomes. We are particularly encouraged by the advancements in gene therapy. We saw a notable approval for an AAV gene therapy for Duchenne muscular dystrophy. We believe this approval demonstrates the potential value of AAV gene therapies, an area in which we have recently developed and will continue to develop a number of proprietary product offerings.

Speaker 2

The combination of our new products with our operational capabilities positions us well to participate in this segment as the market evolves. As we turn to our revenue outlook for the remainder of 2023, we now expect a mid single digit percentage year on year decline in top line revenue with a return to year on year growth in the Q4 of 2023. Even with this change in guidance, we continue to track Our previously communicated free cash outflow target of approximately $30,000,000 for fiscal 2023. I will now hand the call over to Matt for a discussion of the financials.

Speaker 3

Thanks, Stephen, and good afternoon, everyone. Total revenue was $11,500,000 for the Q2 of 2023, a slight decline from $11,700,000 In the Q2 of 2022, reflecting the continued headwinds associated with lower demand from early stage biopharma customers, but partially offset by delivery of a large order to a significant customer during the quarter. Lab Essentials products are targeted at the research use only or RUO market and include both catalog and custom products. Lab Essentials revenue was $7,600,000 in the Q2 of 2023, a 10% decrease from $8,400,000 in the Q2 of 2022. The decline was attributable to a decreased number of customers, partially offset by higher average revenue per customer.

Speaker 3

Clinical Solutions products are made according to good manufacturing practices Or GMP quality standards and are used by our customers primarily as components or inputs in the development and manufacture of diagnostic A 24% increase from $2,900,000 in the Q2 of 2022. The growth in Clinical Solutions revenue was attributable to an increased number of customers, partially offset by lower average revenue per customer. We expect revenue per customer to increase over time as they ramp up their purchase volumes. However, this metric can be affected by the mix Just as a reminder, due to the larger average orders in clinical solutions We delivered a large GMP order to a diagnostics customer who had previously purchased Lab Essentials products in 2022. Turning to the income statement.

Speaker 3

Gross profit for the Q2 of 2023 was $5,100,000 compared to $5,200,000 in the Q2 of 2022. Gross margin was 43.9 percent of revenue in the Q2 of 2023, which is down from 44.9% of revenue in the Q2 of 2022. Despite increased overhead costs, including depreciation from our new manufacturing facility, our gross margins were down only slightly Compared to the Q2 2022, as higher margin clinical solutions revenue represented a larger percentage of our total revenue in the Q2 of 2023 compared to the Q2 of 2022. Sequentially, gross margins were up significantly Operating expenses for the Q2 of 2023 were $12,100,000 compared to $11,900,000 for the Q2 of 2020 2. Excluding a non cash impairment charge related to certain fixed assets of $2,200,000 In the Q2 of 2023, operating expenses were down $2,000,000 compared to the Q2 of 2022.

Speaker 3

The decrease was driven by reduced spending, primarily in professional fees and occupancy costs. In the Q2 of 2023, the company decided to cease further use and development of certain manufacturing machinery and equipment As we completed qualification of our new manufacturing facility, prepared for our ISO recertification audit And also consolidated facilities. Additionally, changes in the market price of previously impaired assets were identified. The company reviewed the recoverability of the carrying value of these assets and as a result recorded a non cash impairment charge of $2,200,000 related to these long lived assets. Net loss for the Q2 of 2023 was 7,200,000 or $0.25 per diluted share compared to a net loss of $6,200,000 or $0.22 per diluted share for the Q2 of 2022.

Speaker 3

The company recorded minimal non current tax expense this quarter against its pre tax losses due to Increases in our valuation allowances against incremental net operating loss carry forwards. Adjusted EBITDA, a non GAAP measure was negative $2,300,000 for the Q2 of 2023 compared to negative $4,900,000 for the Q2 of 2022. The decrease was primarily driven by lower net loss after adding back the $2,200,000 non cash impairment charge recorded in the Q2 of 2023 compared to the Q2 of 2022. Turning to the cash flow and balance sheet. Capital expenditures for the Q2 of 2023 were $2,300,000 compared to $10,900,000 For the Q2 of 2022, this marks the 4th straight quarter of sequential decreases in capital expenditures.

Speaker 3

We have now substantially completed the capital investment in our new manufacturing facility. Free cash flow, a non GAAP measure, which we define as cash provided by or used in operating activities, less purchases of property, plant and equipment, Was negative $6,200,000 for the Q2 of 2023 compared to negative $16,800,000 for the Q2 of 2022. This decrease compared to the prior year period was due to both lower cash used in operating activities and A decrease in capital expenditures. Turning to the balance sheet. As of June 30, 2023, We had $23,700,000 in cash and cash equivalents and $22,100,000 in gross debt.

Speaker 3

For 2023 outlook, we are lowering our 2023 total revenue guidance to a range of 37,000,000 $40,000,000 At the midpoint, this assumes revenue decrease of approximately 7% compared to 2022. With respect to product categories, we now expect Lab Essentials revenue to be down 9% to down 5% Compared to 2022 and clinical solutions revenue to be down 15% to up 5% compared to 2022. The company continues to manage expenses aggressively. At the end of June, the company had 232 associates, down from 251 at the end of the Q1 of 2023 and 290 at the end of 2022. The company posted operating expenses excluding non recurring charges below $10,000,000 the Q1 we have done so since 2021.

Speaker 3

Similarly, the company saw a reduction in free cash outflow during the Q2 of 2023. This marks the 4th straight quarter of lower cash outflow and is consistent with the company's expectations for the year. Despite our lower revenue outlook, as we anticipate operating expenses and capital expenditures to continue to trend downward over the course of the year. In addition to cash on hand, we have access to our revolver up to $5,000,000 and ATM facility. Based on our guidance, we expect approximately $11,800,000 in free cash outflow in the second half of twenty twenty three.

Speaker 3

We believe that we have already made the step up investments needed to execute on our growth strategy and can scale without significant additional investments. With that, I'll turn the call back to Stephen.

Speaker 2

Thanks, Matt. Overall, we were pleased with our performance in the Q2 of 2023. The long term outlook for our end markets remains positive. We are committed to executing on our strategy to help our customers accelerate the introduction of novel therapies, diagnostics and other products that improve human health. We will now take your questions.

Operator

Thank Due to time restraints, we ask that you please limit yourself to 1 question and one follow-up question. Please stand by while we compile the Q and A roster. Our first question will come from the line of Stephen Ma with Cowen, your line is open.

Speaker 4

Great. Thanks for taking the questions. Appreciate the color you gave on the macro landscape and how it's impacting Technova. Just Looking at some of the recent guide down by your peers, some of them have guided down more significantly Than you, and I appreciate the color you gave on the growth drivers, The new products are coming online, the new GMP facility. But is there anything else that gives you confidence on the new guide?

Speaker 2

Sure. Thanks, Stephen. I would have to I'm just going to go back When we lowered guidance last year, we started seeing the impact of the early stage biopharma customer. I think we're pretty early in the shoot there compared to others. The combination of being pretty closely tied to the spending patterns and not having a lot of our revenue tied up in stock And destocking allows us to get a closer view towards the end of this the back half of this year.

Speaker 2

And I would also say that we are Pretty diverse in our offering. While a lot of the growth drivers of the business in the last 2 or 3 years have been these sort of early stage biopharma, We serve, really all the way from research through commercialization and not solely biopharma, but also cover the life science tools and diagnostic So I think we're a little bit more diverse. That said, obviously, we do believe the long term strategy in the business will be to migrate these customers from research And we have seen a slowdown, and that slowdown has continued throughout the back half of this year, hence the reason we are lowering guidance.

Speaker 4

Okay. That's helpful color. And I appreciate the color you also gave on the increased customer interest on your GMP facility. Can you give us a sense of what you think the sales cycle is to convert these people that are doing the facility audits to customers? Thank you.

Speaker 2

Sure. Yes, it takes a while. I mean, this is a long term strategy to engage with the customers in those preclinical development And then scale with them as they go down that pipeline. We did talk about a large customer here that might be a great example for us to use, although it's not on the therapeutic side, it does Follow very similar patterns. We engaged with this customer in 2021.

Speaker 2

We'll start discussions in 20 22 in the back half of twenty twenty two, we delivered a research grade product for their verification, preclinical trial Work by basically to demonstrate that we can manufacture the product, that their product worked as they would like it to work before going on to make a GMP grade version of that product. After delivering that order came in, in the first half of twenty twenty three, actually the Q1 of 2023 For GMP grade for validation, so they can use those products to go into clinical trials. And so we delivered that in Q2. And You can see the revenue there and of course you can see as well as the financial impact that has when we do shift towards more clinical solutions As well as the type of size of those orders. And so that's just getting them into the clinical trials.

Speaker 2

Now it's probably another year end for this one in this particular diagnostic. So it's probably a different timeline than some of these others. But just from the onboarding process, even you can see that We're talking anywhere between 12 24 months till these customers really scale up, but that is essentially the strategy. The more we get in that early stage funnel, we believe that Not only the scale up, they'll become extremely sticky as we are here. They're the manufacturers for this product going forward.

Speaker 2

Great. Thank you.

Operator

Thank you. One moment for our next question. And that will come from the line of Matt Larew with William Blair. Your line is open.

Speaker 5

Hey, good afternoon. First, I wanted to ask about OpEx. And so obviously, you talked about it being sort of flat Year over year excluding the impairment charge, as volumes start to scale back next year, particularly at the new facility, You may just remind us how to think about the level of OpEx scale versus the sort of the capacity and

Speaker 2

Hey, Matt, you're a little bit quiet. Did you get that? I think you were saying flat year on year excluding impairment charge. Are you asking how those scale over time, Yes.

Speaker 5

Sorry, it was just as the capacity of the new facility really starts to come online next year, Just how to think about OpEx trends throughout 2024, if they're going to be sort of flat year over year in 2023?

Speaker 3

Yes. Thanks for the question, Matt. Yes, first of all, I mean, I think we've obviously been very Happy with the way we've been able to manage OpEx costs down here during the course of this year and Expecting those to stay at or slightly down from these levels. So we're demonstrating that we've been To manage costs in terms of what that means for the future, as I said a little bit in the remarks, I mean, when we say we feel like we've made the investments necessary to be able Scale the business with limited additional investment. Of course, we're not providing any specific FY 'twenty four guidance at this point, but I think you can assume that as we start to grow back, which we Expect to do in FY 2024 that we would not need to increase those expenses Or substantially in any way.

Speaker 3

So we haven't gotten to all the detailed preparation of our budget or anything. But in principle, we believe We can grow this business with holding those operating expenses. Does that help answer your question?

Speaker 5

Yes, yes, it does. Thank you. The second question, Matt, you reclassified some long term debt into current portion This period and notice that I think there's a covenant related to TTM revenue as of December 31, so is the reclassification related to the guidance reduction? And I guess just maybe help us get comfortable With that amount of debt outstanding relative to your cash position and cash outflow this year?

Speaker 3

Yes. Good observation, Matt. We did reclassify our debt from long term to short term for this quarter. Just to be open, we did have a covenant. We're out of compliance with the covenant following the quarter, Actually in July period here and we have notified our lender of the situation and are in discussions with them on a Preliminary basis so far.

Speaker 3

They've not issued any kind of notice to us at this point and don't plan to until after the Quarter statement is filed here. So that is the reason why the debt has been reclassified

Operator

Thank you. One moment for our next question. And that will come from the line of Paul Knight with KeyBanc. Your line is open.

Speaker 6

Matt, I guess it's fair to say the ATM, no action on that.

Speaker 3

Right. We have we will of Of course, we'll be filing the 10 Q tomorrow. And at this point, there has been no use of the ATM.

Speaker 6

And, Stephen, I guess, regarding the macro, it does look like, if ARM data is correct, We have had overall trials start to grow a little bit in the first half of the year. Are you seeing that?

Speaker 2

It's a hard one to measure at the moment because we have multiple competing Right. We've scaled up our commercial organization. We do see our funnel increasing, which would indicate that that's true, but also we're putting our efforts Towards attracting those customers. But I will say that the cycles are longer and the size of the trials still seem to be Smaller than they used to be. But I'm in agreement with you.

Speaker 2

It does feel like when you talk to customers that they are starting to think about how to move these things forward. That said, we still have the conversations with customers that they're really stuck in trying to maintain their capital and the timing of when those So builds happen is still undetermined.

Speaker 6

Would it be fair to say that the kind of the components of the XBI or The larger, more medium sized biotechs are not really deteriorating. Would that be fair? And then The last follow on would be what portion of revenue is emerging biotech right now do you think?

Speaker 2

Yes. I'm not sure I can comment on that. We have had we mentioned our new facility opening. We probably had 4 or 5 customers come through there now and they've been both Large and small. And so, we have not necessarily seen a specific trend on the size, but I will say that Wherever you're engaging with customers is very early on, given the fact that the facility is just now coming online.

Speaker 6

Okay. Thanks.

Operator

Thank you. One moment for our next question. And that will come from the line of Mark Massaro with BTIG. Your line is open.

Speaker 7

Hey guys, thanks for taking the questions. Stephen, obviously, you called out some soft Soft climate in biotech and cell and gene therapy that's very much consistent with what all of your peers have said. So there's really no surprise there. But I'd be curious to hear your thoughts on other areas of your business, which are diversified In areas like diagnostics, food, agriculture, I guess, what are you seeing across those other segments of your end markets?

Speaker 2

Yes. Great question, Mark. And so outside of the sort of biopharma, early stage biotech, we do serve across all those segments Everything from academic to life science tools, diagnostics to food and ag. And I would say, generally speaking, the majority of those are kind of within line of expectations historically. We are coming over a tough year on year comparison as you can see.

Speaker 2

If you look at the first half of last year, the end of 2021 and early part of 2022, we had a lot of larger biotech Builds being made for clinical trials that and those were put on hold. So a year on year comparison is not exactly fair from A financial perspective, but when you look take a step down, we do see hotspots within spatial Genomics, which I'm sure you're aware of, that group is growing quite nicely. And then some of the more novel diagnostic sites, Like liquid biopsy and other genomic type of diagnostics, we're seeing some pickup there that is Probably favorable or equal to what has been previously in like in the 2021 time period excluding COVID related diagnostics. We do benefit from that and being a diverse business that can support all these customers.

Speaker 7

Yes, that makes sense. And congrats on the ribbon cutting of the GMP grade facility. Maybe can you just remind us What the new facility is likely to enable, whether it's from new customers, size of customers, Maybe just walk us through sort of how you see the business changing in the next couple of years?

Speaker 2

Yes. This is something we're really proud of. We spent the last 2 years building out this facility. It really takes the company to where we can bring customers in and they're not concerned about the long term ability for us to deliver for them. And like I said, we've had a number of customers there already and Every one of them said this is where we want our stuff made.

Speaker 2

This is perfect and what we're looking forward to moving towards over time. So that's all very positive From the capability of the facility, combined with our existing other facilities, we can get to about $200,000,000 And total revenue from a capacity standpoint, but probably more relevant here is the fact that we have built a facility that specializes in these sort of less than 1,000 Leader batch sizes, all the way down we can do 1 liter bags or even smaller in this facility and is extremely flexible in how we operate With a number of redundancies as well. So, what we're finding and when we bring some of these customers in is that it's not just The sort of the fact that we have this capacity, but we've built a purpose built facility that can do this custom manufacturing at these small And then scale with them all the way up through commercialization and they're excited and we are too. So I think The early indicators on us is that this is the right type of capability for them for the long term. And we're now kind of working them through the audit Schedules and bring them in.

Speaker 2

We'll do the pilot lots and then over the course of the next couple of years, hopefully, get in become one of their key suppliers as they go into clinical trials.

Speaker 7

Okay. Thanks for the color.

Operator

Thank you. One moment for our next question. And that will come from the line of Jacob Johnson with Stephens. Your line is open.

Speaker 8

Yes. Thanks for taking the questions. Good afternoon. Maybe just another one on guidance As it relates to Clinical Solutions, kind of the implied back half number there is I understand you haven't had a lumpy order in 2Q, but it So at the midpoint implies something kind of lighter than 1Q, and I understand the macro environment. But could you just speak Why such a step down in the back half and maybe related, the softness you're seeing, is the customers ordering Less than you thought they would previously or some of these orders getting pushed into 2024?

Speaker 3

Yes. I'll take it first and then Steve can comment if he wants. So yes, I think from your observation is fair, Jacob, the back half Guidance for or implied guidance for the Clinical Solutions business is certainly a step down from what we've seen here in Q2. In general, what we're seeing is the environment is essentially unchanged. We've been seeing earlier in the year.

Speaker 3

And of course in Q2, we did have this particularly large order from 1 customer go through during the quarter. So We've gotten a nice boost during Q2. So Q3 and Q4, we'd expect it to go back to more normal what we're seeing in this environment. Although, of course, we are expecting that to come back as the environment improves. But in terms of Smaller orders or fewer customers, I think I've got Stephen community.

Speaker 2

Yes. I don't think there are fewer customers. I think we're getting smaller orders or delays Mostly and it's a combination of both. I mean, some customers that used to order 7 figures last year are still Dedicated to using Technova for their builds, but they're talking about small six figures now for this So that is the primary piece. And we do have some customers that have Plans that originally there would be like a Q3 order, Q4 delivery or Q2 order, Q3 delivery that have gone out 1 or 2 quarters, right?

Speaker 2

And I think Even they are not sure about the timing of when they are going to exactly meet those based on their own capital constraints. So that's what we're seeing. I mean, the excitement is there and It's not like we're losing customers. It's really very much a market dynamic.

Speaker 8

Got it. That's really helpful. Thanks for the Steve. And then We haven't talked about AAV Tech in the Q and A, so maybe a question on that. Just, 1, how's initial reception been?

Speaker 8

And then 2, Can you just talk about initial launches from here? It sounds like 2 more this year, but how many more potentially beyond that? And then also, can you just remind us kind of how we should think about the revenue contribution from this? And I'll leave it there. Thank you.

Speaker 2

Yes, great. I'll start with the revenue contribution. Obviously, the products we're selling now in these AAV tech buffer screening kits is relatively insignificant To the overall business, because the whole point of the screening kit is to get customers to try out a set of buffers that we know are going to work for them to help On that polishing step where they separate MTE from full capsids and then get them into the right reagent that then they can scale up through Development and into the clinical trial. So this is a long term strategy here that will then play out over time And allows us to kind of engage with them and get them into this trials faster than they would otherwise be able to do so. So the revenue contribution there is relatively small, but the portfolio itself is important to make as broad as possible, right?

Speaker 2

So we want to Support all of their production for AAV from end to end and across many serotypes. So yes, we have 2 out now. We plan to have 2 out again by the end of the year, 2 more. And we'll continue to go through, I think there's probably 10 or 11 serotypes, but of The reagents for lysis or purification or TFF, they can just buy our off the shelf reagents. And we'll continue to build out that portfolio throughout the rest of the year so that they can be kind of a one stop shop for them as they start Going down that process development piece and capture more dollar share as they move into the clinical trials.

Speaker 2

So, again, Altogether, maybe over time, they will add up to be a decent amount of revenue in the early stages, but certainly as these go into clinical trials, that's where we'll see the biggest uptick.

Speaker 8

Got it. Thanks for taking the questions.

Operator

Thank you. As I'm showing no further questions in the queue at this time, This concludes today's program. Thank you all for participating. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Alpha Teknova Q2 2023
00:00 / 00:00