Q3 2021 Codex DNA, Inc. Earnings Conference Call

Ladies and gentlemen, thank you for standing by and welcome to the quarter 320, 21 codecs DNA incorporated any kind of things call. At this time all participants lines are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should do quite assisted.

During the conference. This press <unk> on your Touchtone telephone I would now like to turn the conference over to your host Mister Richard Repka. So please go ahead.

Thank you know good afternoon, and thanks for joining us for Kodak D. N. A third quarter of 2021 hurting a call with me today on the call or Todd Nelson, Our Chief Executive Officer, Dan Gibson, Our Chief Technology Officer, and Jennifer Mcnealy, Our Chief Financial Officer, or third quarter press releases available now.

On the investors section of our website. If you have not received the news release or if you'd like to be added to the company distribution list. Please send an email to IR at Kodak Dot D N E Dot com.

Before we begin I would like to inform you that certain statements. We make during this call will be forward looking statements involve known and unknown risks and uncertainties that hey cause actual results to differ materially from those expressed or implied such factors include those reference in the safe Harbor statement included in our earnings release and in our filings.

With the SEC.

This conference call contains time sensitive information is accurate only as of the live broadcast on November 9th 2021. Finally, any percentage changes, we discussed will be on a year over year basis, unless otherwise noted with that I'd like to turn the call over to Todd Codecs D N a C.

Thanks, Rich and good afternoon, everyone. We're pleased to share a financial results in business performance for the third quarter of 2021.

We had another solid quarter in terms of our financial results with product revenue growth 70 per cent and royalty revenue growth 73%.

Notably biography franchise revenue comprised of instrument regent sales were particularly strong drivers of record sales for both by Alex P instruments, and kit and a quarter.

<unk> P kiss more than double driven by strong contributions from recently launched applications for DNA, focusing on <unk> variant libraries and longer more complex built.

This past quarter was also a transformational quarter from a strategic perspective, as we made tremendous progress in her R&D pipeline business development and commercial execution. These three areas will help write the next chapter of codecs TNA sustainable growth story.

Before we get into the financial results I want to provide some perspective on where codecs DNA is headed over the longer term and discuss progress within our R&D pipeline.

For those of you who are new to our story. Our mission is to apply breakthroughs in automation solutions for synthesizing DNA M. Arnie and proteins to allow scientists to a program and then subsequently print biology, creating novel health care and technology solutions for some of humanity's biggest challenges.

To achieve this mission we are developing the world's first line of synthetic biology automation platforms and applications that we believe will enable researchers worldwide to build biology with the push of a button at the bench top.

Our vision has never felt more achievable as I reflect on the progress made for our R&D teams, who are not only focused on developing new and innovative applications for existing biography systems to drive sales of on market products, but also on developing paradigm shifting future technologies. These innovations have the potential to fundamentally transform our industry is at.

At the same time physician codecs DNA to serve significantly larger and broader addressable markets.

The future of our automated families biography systems and consumable kisses focused on the development of truly novel desktop printing architectures that use a proprietary form of enzymatic DNA synthesis or eds. Unlike traditional DNA synthesis methods and dramatic platforms do not require the use of toxic chemicals during the DNA synthesis process.

While traditional desktop methods for the synthesis of DNA have been in existence for decades, the need to perform these processes using sustainable scalable and cost effective solutions has revealed a multibillion dollar opportunity that we believe we can tap into with the use of automation solutions that applications that enabled desktop printing of Dean.

Hey, mrna and proteins.

We refer to our eds platform is solar which stands for short olive allegation Assembly. So has a patent pending DNA litigation and amplification approach developed by our internal team at Codex DNA.

Solo uses a DNA ligation, an application process to generate synthetic oligos from a make the stock Universal Library very short DNA building blocks. We believe that this proprietary approach is the only solution currently being developed that is suitable for the synthesis of longer fragments of DNA mrna and protein and which May result in higher.

Quality and reliability compared with other eds approaches.

Additionally, because of our proprietary manufacturing process or solid we believe there is a significant can cost advantage over potential competing technologies, such as TVT based chemistries.

We have achieved important milestones related to the development of solar technology and significantly advanced our program during the third quarter.

I'm pleased to announce that we can now reliably and <unk> were introduced simply print high fidelity short DNA Oligos between 20, and 100 base pairs in length. These oligos can then be efficiently assembled using our Gibson assembly regents into synthetic genes and mrna templates of up to approximately two K b and length.

Additional technical achievements include building biologically active guide aren't as for Christopher cast nine genome editing and the production of PCR farmers.

These milestones demonstrates the viability of our technology and exceptional capabilities of our R&D organization are a testament to the strength and dedication of our team.

The eventual goal of this exciting technology is to build what we describe as the bio XP digital to biological converter or DVD system, but.

By utilizing our solar technology R. D. B C system has massive potential to disrupt existing vaccine and biologics discovery and development workflows by dramatically decreasing the amount of time it takes to print DNA mrna or protein in the future. The system's unique design will allow codecs DNA customers to begin their experiment with a digital.

DNA sequence instead of physical pieces of DNA such as oligonucleotides.

The DDC system is designed to take binary DNA sequence data and produced synthetic genes or convert those genes automatically into mrna are protein at the bench top.

We believe the bvc system will enable a sequence in biologics out paradigm that can potentially replace a significant portion of traditional centralised DNA manufacturing processes, depending on the application R. D. B C. Workflow may be carried out in a matter of hours or days, which would represent a massive improvement compared to current.

Which is which currently may take weeks to months.

The impact of this technology is profound both from a commercial entity ESG perspective, it has the potential to significantly reduce the development times for both infectious disease and cancer vaccines and therapeutics, while also significantly reducing the waste and benefiting the environment imagine the power of a system that can take a digital sequence corresponding to piece of DNA.

And sustainably print that DNA or its corresponding mrna approaching anywhere in the world with the push a button.

We believe the solar powered bvc instrument will have potential to dramatically expand codecs dnase market opportunity, allowing us to tap into potential multibillion dollar market for global printing of biology.

The global market opportunity for synthesize DNA Oligos reagents alone is estimated to be about $1.9 billion today with potential the expansion around $4 billion by 2026, driven by the growth of new therapeutic applications and increased focus on personalized medicine.

We are pleased to report that we are on track with our development of our PVC system, which is enabled by the assembly and integration of the buyouts be 9600, a higher throughput synthetic biology automation platform and the solar powered by <unk>, although printer systems.

The bio it's been 9600 built on the foundational technology underlying the current biopsy 30 to 50 and hasn't advanced motion control system, which allows for higher processing speeds and greater reliability.

It is designed to include additional reagent capacity and consumables that enable as much as three times as many DNA mrna and protein regenerated with each one what we're eating all of the functionality of the current biopsy 32 feet 50 system. The biopsy 9600 is currently scheduled for beta release during the first half of 2022 with a.

Full commercial launch of the system in the third quarter of next year.

Our solar powered Aldo printer instruments, which are on track for commercial launch in 2023. It can be sold as a standalone benchtop instruments or can be integrated into the 9600 installed base to make possible our vision of on demand printing of desktop biology.

We are also pleased with the progress in the development of our mrna and protein product lines, we estimate that we won't be able to launch our clean cap mrna product during the fourth quarter, which will give us access to an additional customer segment for mrna synthesis.

The clean Cat technology is expected to increase productivity and yields for mrna synthesis workflows, while providing us with access to an additional segment of the market not using the Arco capping technology is contained in our initial product release.

We also remain on track commercialized two additional mrna kits for the biopsy and the first half of 2022.

These kids will focus on longer mrna synthesis capabilities of up to seven K b transcripts and increase yields which physicians are mrna franchise to support additional workloads, such as vaccine development, which typically require larger bills. When taken together, we believe our suite of three biopsy mrna kits will cover a significant portion of.

The small scale rapid synthesis market for mrna and we believe we are uniquely positioned with a biopsy 30 to 50 to benefit from strong fundamental drivers from the adoption of synthetic mrna.

Switching gears I'd like to touch base and our business development efforts today, we announce that we've agreed to acquire eaten bioscience.

A privately held provider synthetic biology products and services based in San Diego.

We expect the deal to close within the next 60 days, we're excited to welcome the eaten employees to our team we think the deals an excellent strategic fit.

We believe it will accelerate our long term growth rates provide opportunities to expand our profit margins and support our enzymatic DNA synthesis product development program overall to steal makes us a fundamentally stronger company for several reasons first we believe there are synergies from our customer acquisition perspective at Eton serves a very similar end user market.

With its products and services. Therefore, the deal immediately enhances our commercial footprint and reached by giving US access tetons extensive customer base into which we intend to introduce to buy XP product line.

Second Eaton's DNA sequencing and Alagoas synthesis offerings are highly complimentary to our commercial platforms and have the potential to expand our biopsy customer reach and build stronger customer relationships. While at the same time, demonstrating the value of her biopsy platform and the codex DNA teen scientific expertise.

Not only will these expanded commercial offerings enable us to provide more solutions to a broader customer base, but they also enhanced the potential customer funnel into our product business third there are several strategic benefits to this acquisition associated with the production of August which is an important raw material for a business.

In the near term. The addition of Eaton gives us greater control over all of those supply and quality by supplementing our current procurement effort the.

The acquisition provides an opportunity to improve our already industry, leading customer turnaround times by reducing procurement wait times.

And the longer term, we believe eaten through the deployment of its proprietary August synthesis platform can scale up to contribute meaningful portion of our all of those supply in the future.

Those efforts will further enhance the acquisition benefits, while also reducing our all of those synthesis costs potentially providing significant accretion to gross margin.

It's important to note that this production ramp up will require some time development efforts and capital investment, we expect to be able to begin ramping up in the fourth quarter of 2022, and finally, we belief that are combined technical expertise can potentially accelerate some of our research and development areas in the area of enzymatic DNA synthesis.

We have <unk> all of the synthesis capabilities to benefit our solar powered biography I'll have a printer system developments with longer term potential supply us with some of the materials needed for ETS.

Overall, we believe the acquisition is the right thing to do for the company and our shareholders due to these clear strategic advantages.

We are potentially expanding our commercial offerings, securing a portion of our our logo supply reducing raw material costs and accelerating our growth strategy.

Moving on General Jennifer will review, our full financial results, but before she does I would like to discuss our commercial execution in the third quarter, we had a record quarter for bio. It's P. R Award winning biopsy system as a fully automated push-button platform for the rapid synthesis of both DNA and <unk>.

Certain drug discovery activities that person that previously took months can now be completed using the biopsy system in just a week or so and what previously took days can now literally be done in our industry, leading quality combined with enhanced speed accuracy and scale can result in vast improvements to productivity.

Our customers recognize these benefits and demand remains very strong overall, we believe that we are in the early innings of the product lifecycle for a biopsy $32 50 instrument. We also had a record quarter for bio X P. Kit revenue driven by strong results for revenue associated with recently launched products to biopsy.

We also expanded our customer base across geographic regions and responded to customer demand with the release of our full length.

Instead of genome for the highly infectious delta variant of the Sars Kobe to virus.

Synthetic genome can be used by researchers to generate breakthrough therapies and vaccines and to develop new diagnostics to help detect contain and slow the spread of highly transmissible variance in the Covid pandemic. This release not only proves our technical capabilities and scientific expertise in the complex genome synthesis area, but also demonstrates or.

Into building in providing innovative synthetic tools that accelerate virus research and simplify the discovery and development processes to make a positive impact on our world.

Finally, we continue to strengthen our leadership team with key hiring throughout the organization, including Chief Legal Officer, Rob Cutler, Rob was a former general counsel and Secretary synthetic genomics, we will continue to hire in key roles to support accelerated growth, particularly in our commercial organization in the coming quarters.

With that I'll pass the call over to Jennifer to review our financial results.

Okay. Thank you cat detailed financial results for the current quarter were included in today's press release out briefly review Eric melts on a call.

Cut SG&A smell capitalize the cash and investments at $109 million as of September 30th 2021.

Revenue with 2.8 million credit third quarter of 2021 at 70% increase in total revenue from $1.6 million credit same period in the prior year.

It's grasmick, primarily driven by products out due to new product introduction throughout peas, and other revenue also greater because of an increase in revenue related to the licensing of our product. It's amount of collaboration research program revenue.

Cost of revenue for the third quarter of 2021 with $1.6 million compared to zero point $7 million for the same period in the prior year. The increase of 0.9 million was primarily driven by higher raw material costs associated with south of free agents and buy a foundry circumstance hire instrument units sold in costs related to our collaboration research program.

The collaboration with the USTA to combat such a screening disease. It's a low margin consequence government contract and negatively impact on our overall growth Martin.

We continue discussing the rest of the P&L I want to add additional contact and discuss our plans for improved gross margins in a short medium and long term.

Our cost of goodwill is currently highly sensitive to the cockpit alagez, which is a key raw material for all of our IP Ken.

In recent quarters, we have encountered several supply chain talented from suppliers. We currently stories from this is negatively affected aircrafts margin. However, we expect these issues to be temporary and that our margins will improve gradually over time, it's we execute on several different solution.

Let me take a moment to outline for you or increase that plan to improve gross margins and controllers supply chain for critical raw material.

In the short term, we continue to work with key suppliers to ramp production and established new volume based discounting arrangement.

As we ramp up volume, we will see benefit to me unit cost perspective, along with fixed absorption benefit.

We also have implemented additional inline quality control processes with the suppliers to drive to improve quality and reliability. We expect to see these benefits right away and gross margin should trend higher in the coming quarters as we implement these initiatives and drive product mix to higher margin products.

Second acquisition at Eton Bioscience will provide us with direct control over a portion of our Olga supply.

As a business granted the additional supply of August from eating platform will help care any gap and secure supply needs by supplementing procured volume.

Starting in the fourth quarter of 2022, we believe that eaten can begin scaling up production of August which should reduce our unit costs further and pedantic potentially provide significant accretion to gross margins as we ramp up production.

As Tad often mentioned this ramp up will require time development efforts and capital investment, but we believe that eating provides a great opportunity to improve the cost of raw material.

In the longer term.

Launch of our next generation enzymatic DNA synthesis program disgusting, Todd comments referred to add solar offers an excellent opportunity for gross margin accretion the system would be designed to essentially printed desire alagoas for the customer on their pens top and an automated passion with low cost raw material as the primary input.

The three represents a big opportunity to improve our margins, while also providing customers with ultra fast turnaround time reduce weight and an end to end solution for their synthetic biology need.

Moving on operating expenses were $10.6 million for the third quarter of 2021 compared to $5.2 million for the same period in the prior year. This increase was driven by head count expansion across our business primarily in commercial R&D in TNA.

Expectations the increase Chris not spent.

Relates to sales and marketing efforts, particularly in our European region.

Creek product development efforts and hiring of new leadership and professional support staff.

Neither expenses other expense increases included professional services R&D material costs facility costs and insurance costs.

Net loss with nine 8 million for the third quarter of 2021 compared to 4.5 million in the same period in the prior year net loss per share with 34 cents for the third quarter of 2021 compared to 89 cents for the corresponding prior year period, and with that I will now turn the call back to Todd.

Thanks, Jim before opening call for questions I want to review with you several upcoming milestones for a company, including the launch in the fourth quarter of our clean cap mrna technology. This will provide us with access to an additional what we estimate to be 50% of the small scale rapid synthesis market for mrna.

Second the field deployment during the first half of 2022 of our biopsy 9600 beta units, providing us with access to additional customer segments seating higher throughput automation solutions.

And that which represents the first step towards the commercialization of the bio CVC.

We also anticipate advancing during the fourth quarter corporate development initiatives and the commercial launch of two additional mrna and one protein kids during the first half of 2022.

I also want to thank everyone codecs DNA for their efforts this past quarter and welcome the employees the codex TNA failing.

We are encouraged by our continued strong commercial execution, the progress of our R&D pipeline and the acquisition.

<unk>.

We continue to invest in talent technology and processes to drive long term sustainable growth.

We remain grateful to our investors for their support and look forward to working with you to bring great synthetic biology solutions to our planet.

And with that I'll ask the operator to open the call for questions. Thank you.

Thank you ladies and gentlemen, if you had a question at this time. Please press the star and then a number one key on your Touchtone telephone is it a question has been answered Oh, you wish to move yourself from the queue. Please press the pound key.

First question comes from the lineup Randon Chiliad with Jeffrey Sure line is now open you May ask you a question.

Hey, Thanks, good afternoon.

Hi, just starting with the third quarter record placements can you be more specific in terms of a <unk> number of installations in the period any color you can share with this in terms of the mix of the verses existing customers as well as direct versus distribution channel mix because those placements.

Yeah, Hey, Brandon. Thanks, Great question, So I'll try to take those those in order and tell you what I can.

As far as the the.

Quarterly we experienced as I mentioned it was the.

The best that we've seen in in the in the company's history and that was both for the instruments and for revenue for the bio X P kits, which knee.

Nearly doubled so I think without going into too much of the details are happy with that I think from a mixed perspective, we're starting to see a lot of contribution from the channels that we've established over the course of the last year and I think as you may recall, we we mentioned that we've got probably 30 distributors now setup.

And we're starting to see significant contributions from the channel.

And mostly from end users in rest of world in certain parts of Europe, where we're not direct so the channel contributed.

Quite a few units to that we're seeing I think good mix from their unfortunately, they're not a lot of demo units there more end user customers that we are starting to work with.

More in rest of world country and in parts of Europe, where we're not direct so sales were up.

And really happy about the volume growth with biography kits and again just the color on that was driven really by our I think that things that people are starting to appreciate in the market or the longer and more complex bill capabilities and the contribution of new products introduced in the last.

Period of time, so good solid execution I think on the commercial team and contributing.

Increased contribution from channel and good mix on the on the reagent side and Brian and I think you have asthma.

New versus existing company customers and they were primarily play with new customers. In addition, we're very pleased with.

Geographic mix as well.

Alright, Thanks, Joe Brown, and sorry about that uhm added quite a few customers during the during the quarter I don't think we've really disclosed but happy with the number of new customer adds a lot of new customers and I think really driven by some of the new products were getting out of new market.

Okay I appreciate that detail and then on the E E acquisition.

Couple of questions can you just elaborate a little bit more on the the types of customers that did.

It is.

You'll be able to access now.

And any color in terms of the growth rate in the business and the piano profile of E. And then if you look to scale up I'll go production started or Q next year you could eat.

Ballpark numbers around that in terms of the capex investment that might be required for that expansion.

Yeah, Let me go ahead and take that and I think I could between Jen and I can go back and forth. So from a customer perspective highly complimentary customer groups. As you know from our recent placements were really targeting and seeing a lot of traction with with small to medium sized biotech.

Customers and we're also seeing good traction in larger customers, where we're starting with large cap pharma, where we're seeing.

More than two units place and things like that but we're predominantly most of our customer base is biotech and pharma.

Eaten on the other hand has a very complimentary and customer base, where they provide services. So during the test cycle. If you will to do a lot of Oliver synthesis and sequencing.

That is downstream of us, but mostly in academic customer. So one of the things that were excited about us.

Being able to put.

Some of our biography systems is demo units and their various facilities around North America.

And gaining access to that customer base, we could see ourselves through bio foundry service is also offering a very rapid turnaround in regional areas, whether it's Boston, where they have a facility.

New Jersey, San Diego here or in research Triangle Park, so highly complementary.

Think customer base, where we can go in and cross sell our products and vice versa. They've got a very large customer base that we think represents a very very good customer base for potential biography customers.

I think the second thing was around all ago production I'll, let jen kind of handle that but that will come up.

That will ramp up over the course of 2022 will be able to offset some of our all ago supplied the truth of the matter is we're outstripping.

Some of the ability for suppliers to meet our demands. So it was really very important for us to do this that will start contributing in offsetting in the fourth quarter of 2022 there'll be some capital investments because we have to build these systems. We have to build about five of the systems that will require some capex that wasn't in the model before I think as we get to the end of the year in review IOP will get back to you.

Revision on a pro forma basis of what that would be but there is some capex to execute against that but it will eventually accrete significantly to gross margin. This will be able to reduce our raw materials costs better supply better controller supply and quality and then the last last question general hand over to you.

Oh.

Okay. So yeah, just historically they for your reference they year to date their revenues generated about 5 million.

In the first nine months 2021, and historically their grass margins have been in the similar range of ours and they have been.

Breakeven her man.

Net income perspective.

We've modeled pretty modest.

In the business and most of the value to generation from the down really kind of tremor carrying around like a supply having higher quality and delivery better about your turn our customary and then as we ramp up production over time, we expect the DLC.

Very accretive congrats Martin's starting in 2023.

Got you a couple of the last one for you Jen understanding you not governments were given explicit guidance, but E. Directional color you share with us in terms of how we should think about sequential revenue growth to the base business in the fourth quarter.

Expected contribution in the book or should we expect anything material and then should we think about the third quarter Opex is kind of go forward run Greek.

From here thanks.

Sure. So there are a couple of questions in there.

And the fourth quarter the contribution.

It will be pretty minimal depending on the timing of the deal.

And an opex.

Not.

At.

Prepared to give poorly guidance that we continue to invest in.

R&D programs and proudly across the business and.

We will continue to do that going forward.

Great. Thank you.

Thank you again, if anyone would like to ask a question you will need to press, Taiwan on a touchtone telephones. They had the next question comes from the lineup might gilkey with Keybanc capital. Your lines now open you may ask the question.

Hey, guys. Thanks for the question just following up on brands question is it fair to say that you guys have exceeded your placements.

Mhm and placements in the first nine months than you did in 2020.

Yeah [laughter].

Okay.

And then I guess talking to the uptake of mrna.

Since the launch can you kind of talk to the feedback you received from customers on and performance.

Any new inquiries as a result of the launch in terms of placing new instruments to customers that weren't customers before and then any uptick in terms of new inquiries as well.

Specific.

Specifically to the try link.

Announcement and then.

A deal licensing deal and then do you have any orders for that product already.

So hey, Michael taught here few questions certainly let me take them in reverse order so and.

And generally just say that for the instruments. We sold I would say we are seeing increased adoption for the <unk> line.

Which we're pleased to see so more than several of the instruments went into workflows, specifically for RNA and that was both based on the fact that those customers may or may not have mayor, we're using arco or intend to use clean cap I don't have a breakdown for you right now like what the mix is.

I'd have to get back to you on whether we're like back logging on on orders for clean cap I, just know that gives us access to an additional part of the market were super pleased with where the technology is we've been working very closely with our partner on that I think the specs are great and we're really happy that we'll be launching.

Out in the fourth quarter. So I think the key takeaways without giving you the exact numbers. So they just don't have in front of me we had.

New products for biography, new placements into new customers for mrna.

The clean cap product I don't think is trading backlog, yet because we haven't really it will be launched in the fourth quarter.

And I'd have to see if we're taking orders against it I'm not sure. If we are but we expect a pretty good ramp on that I will say overall that the franchise still continues to be predominantly DNA and I think we're early days and what can be a very large market for us an mrna we're working hard to get there and I think it clean cap launch will will be part of that and then we've got those two other kids who will be launched.

During the first half of 2022, which together collectively as three will give us I think very good coverage of the small scale rapid synthesis market for mrna.

Great. That's helpful. And then maybe the last one for Dan Nice to hear some progress on the enzymatic synthesis side.

Seems like you have the chemistry and biology down can you talk to the next step saw challenges ahead to make this a commercial product and kind of has this update today.

Accelerated the timeline for the oligarch printer. Thanks.

Yeah, a ton of progress, but we're super excited about.

Because it really does truly enable the global.

Distributed manufacturing of synthetic biology, so we've.

We've made a ton of progress in developing a very robust process for building 100 murders going from the library of parts that are pre manufactured.

And really now it's just about optimizing that process and figuring out the best path forward for turning the overlapping hunter emerged that we generate through this process into synthetic jeans and at the same time also.

Identifying opportunities to elaborate this this process in other areas.

Great. Thank you for the time that I.

Thank you.

Thank you I am showing no. So good question at this time I would now like to turn to conference back to Mister return, let's say okay.

Thank you Mel and thank you all for participating error in our call today, we call up with US if you have any additional questions and we thank you for your time.

Thank you so much for centers, ladies and gentlemen. This concludes today's conference call. Thank you also think dissipation have a wonderful day you may all disconnect.

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