Alpha Teknova, Inc. (NASDAQ:TKNO) Q3 2023 Earnings Call Transcript

Alpha Teknova, Inc. (NASDAQ:TKNO) Q3 2023 Earnings Call Transcript November 11, 2023

Operator: Hello, and welcome to Alpha Tech Nova, Inc. Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Jennifer Henry, Senior Vice President of Marketing. You may begin.

Jennifer Henry: Thank you, Operator. Welcome to Tech Nova's third quarter of 2023 earnings conference call. With me on today's call are Steven Gunstream, Tech Nova's President and Chief Executive Officer, and Matt Lowell, Tech Nova'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. Additional information concerning these risk factors is included in the press release the company issued 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 update 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 strategy. 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 posted to Technova's website and at www.sec.gov/edgar.

Non-GAAP financial measures should always be considered only as a supplement to, and not as a substitute for, or as superior to, 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 posted a supplemental slide deck to accompany today's prepared remarks. It can 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.

Stephen Gunstream: Thank you, Jen. Good afternoon, and thank you everyone for joining us for our third quarter 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 custom reagents with short turnaround times and are positioned to scale with our customers as they advance their products from discovery to commercialization. We had a solid third quarter, both financially and operationally, against the backdrop of a difficult market. Our ability to deliver in these challenging conditions is a testament to the dedication of our very talented team and the diversity of our market segments.

Also, during the third quarter, we raised $22.9 million of capital through a registered direct offering and concurrent private placement, and we paid down $10 million of long-term debt. We remain optimistic about the potential of our target markets and are pleased with the progress we've made executing our growth strategy in the third quarter. As we reported during our Q2 update, our new facility has been certified for GMP-grade production. We are enthusiastic about the potential this multi-year investment will unlock for the business. During Q3, we extended the types of products available for both research and clinical-grade production, which now include single-use bags and an assortment of bottles, giving us the ability to serve nearly all bioprocessing and diagnostic customers in our target market segments.

In addition, since the beginning of June, we have been qualified by 12 high-profile customers, eight of which are companies involved in cell and gene therapy development. We have been very encouraged by their reaction to our new GMP facility and TechNova's transformation. The response to the qualification audits and our conversations with these customers have increased our confidence that the facility investments we have made will begin to bear fruit in mid to late 2024. As a reminder, we believe this new facility, plus our existing operating infrastructure, will give us the capacity to deliver approximately $200 million in annual product revenue when fully utilized. Next, on the R&D front, I'm pleased to say our new product introductions are progressing ahead of schedule.

In September, we added the third serotype of our AEX Buffer Screening Kit by extending the portfolio to include AAV6, and we launched a suite of reagents to support the plasmid bio-production workflow. Our AAV product pipeline, which we just introduced earlier this spring, now encompasses more than 60 total reagents, simplifying and streamlining AAV-related workflows for process development scientists. In late October, we presented three posters at the European Society of Gene and Cell Therapy, including data for a new reagent kit to streamline PCR analytics for empty-full capsid analysis. The full launch of this kit is expected in Q4. Through our new product offerings, we expect to become an even more valued supplier to our customers as they advance their therapies towards commercialization.

Needless to say, along with many others in the lab sciences, we found ourselves confronting a challenging and dynamic market environment in Q3. I'm proud to note we continue to deliver against our operational plan during the quarter and successfully managed our expenses. Our total employee count at the end of the third quarter was 216 associates, reduced from our high of more than 300 last year. I'm very grateful for the effort of our past and present employees who worked tirelessly to put us in a position for success going forward. In the near term, we continue to see emerging biotech historically one of our larger growth segments, focused on conserving capital by delaying, reducing, or canceling clinical trials. That said, we have seen an increase in the total number of clinical customers purchasing from us annually.

Combined with our recent audit qualifications and new product launches, we are cautiously optimistic as we look into 2024. As we turn to our revenue outlook for the remainder of 2023, we expect the market conditions we observed in Q3 to persist and therefore expect to finish at the low end of our revenue guidance of $37 million to $40 million. Even so, we believe we will outperform our previously communicated free cash outflow target and now expect free cash outflow of less than $30 million for fiscal 2023. I will now hand the call over to Matt for a discussion of the financials.

A biotechnologist holding a test tube with a ground-breaking drug, showing off the company's pioneering developments.

Matthew Lowell: Thanks, Stephen, and good afternoon, everyone. Starting with revenue, total revenue was $8.2 million for the third quarter of 2023. A 24% decline from $10.7 million in the third quarter of 2022. Excluding two large non-biotech customer deliveries in the third quarter of 2022, underlying growth was approximately 5%. Lab Essentials products are targeted at the research use only or RUO market and include both catalog and custom products. Lab Essentials revenue was $7.3 million in the third quarter of 2023, a 23% decrease from $9.5 million in the third quarter of 2022. The decline was attributable to a lower number of customers and to a lesser extent, lower average revenue per customer. Excluding two large customer deliveries in the third quarter of 2022, Lab Essentials revenue grew approximately 11%.

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 and therapeutic products. Clinical solutions revenue was $0.6 million in the third quarter, a 35% decline from $0.9 million in the third quarter of 2022. The decline in clinical solutions revenue was attributable to lower average revenue per customer, partially offset by a higher number of customers. 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 of newer clinical customers who typically order less. Just as a reminder, due to the larger average orders in clinical solutions compared to Lab Essentials, there can be quarter-to-quarter revenue lumpiness in this category.

Onto the income statement, gross profit for the third quarter of 2023 was $1.5 million compared to $4.8 million in the third quarter of 2022. Gross margin was 18.0% of revenue in the third quarter of 2023, which is down from 44.6% of revenue in the third quarter of 2022. The decrease in gross profit percentage was primarily driven by the decrease in revenue and the associated lower absorption of fixed manufacturing costs, and to a lesser extent, increased overhead costs, which were partially offset by reduced headcount. Operating expenses for the third quarter of 2023 were $10.2 million compared to $27.7 million for the third quarter of 2022. Excluding the non-recurring non-cash charges of 0.4 million in the third quarter of 2023 related to the write-off of ATM facility offering costs and the $16.6 million goodwill impairment charge recorded in the third quarter of 2022, operating expenses were down $1.3 million in the third quarter of 2023 compared to the third quarter of 2022.

Decrease was primarily driven by reduced headcount and spending primarily in professional fees. During the third quarter, we raised $22.9 million of capital through a registered direct offering and concurrent private placement, and we paid down $10.0 million of long-term debt. As a result, we wrote off ATM facility offering costs of $0.4 million because we do not expect to use this facility in the near term. Net loss for the third quarter of 2023 was $10.2 million or $0.34 per diluted share compared to a net loss of $22.5 million or $0.80 per diluted share for the third quarter of 2022. The company recorded minimal non-current tax expenses 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 $5.5 million for the third quarter of 2023 compared to negative $4.6 million for the third quarter of 2022. The increase in the third quarter of 2023 was primarily driven by higher operating losses, excluding the non-recurring goodwill impairment charge recorded in the third quarter of 2022, somewhat offset by higher depreciation add-backs. On to cash flow and balance sheet. Capital expenditures for the third quarter of 2023 were $1.0 million compared to $6.6 million for the third quarter of 2022. This marks the fifth straight quarter of sequential decreases in capital expenditures. We have now completed the initial capital investment necessary to utilize our new manufacturing facility. Pre-cash flow, a non-GAAP measure that we define as cash used in operating activities less purchases of property, plant, and equipment, was negative $5.4 million for the third quarter of 2023 compared to negative $14.9 million for the third quarter 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 September 30th, 2023, we had $32.1 million in cash and cash equivalents and $12.1 million in gross debt. And now on to our 2023 guidance and outlook. We now anticipate that fiscal year 2023 total revenue will be at the low end of our previously communicated range of $37 million to $40 million. We expect the challenging market conditions we have seen during 2023 to persist at least through year end. On the other hand, we now anticipate free cash outflow to be less than $30 million for 2023, despite a revenue outlook significantly below where it started the year. The Company continues to manage expenses aggressively while preserving the critical investments we believe will allow us to achieve our long-term growth targets.

At the end of September, the Company had 216 associates down from 232 at the end of the second quarter of 2023 and 290 at the end of fiscal year 2022. The Company posted operating expenses excluding non-returning charges below $10 million for the second quarter in a row. To that end, we have taken a number of steps during the fiscal year aimed at reducing operating expenses, which have resulted in total annualized cost savings of more than $8 million compared to fourth quarter of 2022, excluding non-recurring charges. Similarly, the Company saw a reduction in free cash outflow during the third quarter of 2023. This marks the fifth 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 remain at lower levels. Based on our guidance, we expect less than $6.5 million in free cash outflow in the last quarter of 2023. We believe that we have already made the step-up investments needed to execute our growth strategy and believe there is significant margin expansion potential when top line growth resumes. We also strengthened our balance sheet with the additional capital raised in the third quarter. With that, I'll turn the call back over to Stephen.

Stephen Gunstream: Thanks Matt. Overall, we were pleased with our performance in the third quarter of 2023. The long-term outlook for our end markets is 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.

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