Singular Genomics Systems, Inc. (NASDAQ:OMIC) Q3 2022 Earnings Conference Call November 7, 2022 4:30 PM ET
Company Participants
Philip Taylor – Investor Relations
Bruce Spaventa – Founder and Chief Executive Officer
Dalen Meeter – Chief Financial Officer
Conference Call Participants
Matt Sykes – Goldman Sachs
Tom Stevens – Cowen
John Sourbeer – UBS
Operator
Good day, ladies and gentlemen and welcome to the Singular Genomics Systems, Inc. Third Quarter 2022 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Philip Taylor, Investor Relations for Singular Genomics. Sir, the floor is yours.
Philip Taylor
Thank you, operator. Presenting today are Singular Genomics’ Founder and Chief Executive Officer, Bruce Spaventa; and Chief Financial Officer, Dalen Meeter.
Earlier today, Singular Genomics released financial results for the 3 months ended September 30, 2022. A copy of the press release is available on the company’s website.
Before we begin, I would like to inform you that comments and responses to your questions during today’s call reflect management’s views as of today, November 7, 2022, only and will include forward-looking statements and opinion statements, including predictions, estimates, plans, expectations and other information related to our financial and operating results, plans and strategies.
Actual results may differ materially from those expressed or implied by these statements as a result of certain risks and uncertainties. These risks and uncertainties are more fully described in our press release issued earlier today and in our filings with the Securities and Exchange Commission, including our most recent Form 10-K or 10-Q, the Form 8-K filed with today’s press release. The SEC filings can be found on our website or the SEC’s website. Investors are cautioned not to place undue reliance on forward-looking statements. We disclaim any obligation to update or revise these forward-looking statements. Please note that this conference call will be available for audio replay on our website at singulargenomics.com on the Events page of the News & Events section on our Investors page.
With that, I will turn the call over to CEO, Bruce Spaventa.
Bruce Spaventa
Good afternoon and welcome to Single Genomics third quarter 2022 earnings call. It was a very productive quarter and we look forward to updating you on the progress we have made across the business. We will focus on three topics: one, operations progress with supply chain and manufacturing scale up; two, factors driving our continued conviction in the G4’s commercial success; and three, our product roadmap.
First, on the operations side, as projected, we are on track to ship the G4 in the fourth quarter of this year and continue gradual scale up through 2023. We have made strong progress on the supply chain and manufacturing scale up, which has been a key area of our focus. To provide more color, the challenges we highlighted in previous earnings calls related largely to a handful of third-party subsystems being reliable in meeting specifications and related system integration.
This quarter, we made significant progress identifying and resolving these issues. We have also strengthened the quality control processes to test up systems and parts prior to assembly. While we have made significant progress, this remains an area of critical focus with continued work to be done, adversity expected with any new product of this nature. We are pleased to now have better line of sight to streamline the manufacturing of the G4.
We aim to build reliable, high-quality instruments that will delight and serve our customers. We will continue to learn more about the G4 in terms of robustness and reliability as we scale and deploy production units internally and to the field. We expect to continue to make improvements based on these learnings both in terms of robustness and performance KPIs. We are dedicated delivering the highest level of performance and reliability available.
The second update focuses on the factors driving our continued conviction on the G4 commercial success. This past quarter sector activities and announcements will build more information on competitive roadmaps and reaffirm Singular’s opportunities and room to succeed given key areas of product differentiation in an increasingly transparent competitive landscape. We are increasingly excited about the opportunity in front of us within the best top sequencing category and we are bullish on the opportunity to create a strong business in large and growing markets and application segments. We remain optimistic about our TAM or total addressable market product market fit major markets and commercial execution. I will share our thoughts on each of these.
Starting with TAM, from a top-down perspective of the roughly $6 billion NGS market today, we believe that over half of this market is broadly addressable by mid throughput sequencers, such as the G4. This portion of the market is predominantly made up of about two-thirds research and translational labs and one-third clinical labs, largely running applications such as target panels, RNA-seq and single cell RNA-seq. The G4 addresses these customers’ needs and provides a compelling alternative from both a performance and value perspective in a market that is today largely served by a single NGS provider.
Rolling down further to the opportunity as it relates to the G4 market fit, we believe that G4 provides an even more differentiated solution for approximately one-third of the overall NGS market. And G4 is the only best top sequencer that is differentiated across a KPI combination of power, speed and flexibility without compromising on accuracy or workflow. The G4 offers superior performance in specs and metrics that matter most to customers across our TAM, such as data output rate, runtime, flow cell and lane-to-lane flexibility and number of reads per run. This performance is ideally suited for all labs across academic, translational or clinical markets that would like to minimize turnaround time, avoid unnecessary delays from inefficient sample batching or improve their ability to scale experience sizes up or down and cost effective economics. This has resonated across target customers and application types. The translation of this performance back to tangible benefits that will drive customer buying decisions is becoming clear as we engage with customers in CLL.
Turning to commercial execution and how we intend to win in these markets. Our Chief Commercial Officer, Sam Ropp has been on board for 4 months now and is underway with building a world class commercial team, engaging with customers, evolving our sales processes and implementing the right set of tools. We have found that the sales process requires high-touch engagement with our initial customers. Our team engages to gain a deep understanding of specific use cases, applications, workflows and sample volumes. This allows our commercial team to translate the G4 performance specs into tangible real world benefits for customers, such as how they conduct and schedule their experiments, staff their labs, turnaround time, in-sourcing versus outsourcing all or some of the sequencing or reducing their cost on a sample or a per part basis. This level of deep engagement and understanding has been resonating with prospective customers as evidenced by the quantity and quality of opportunities released in the funnel and by direct feedback received for the basis of a purchasing decision.
Lastly, turning to the product roadmap update. We are enthusiastic about the progress we made by our R&D team. We are progressing development of the S3 flow cells, which will further expand our consumable offering on the G4. Feedback from customers and KOLs on our Max Read or M-Series flow cell kits continues to be strong. We believe the M-Series kits will offer a unique solution to provide ultra short-read sub-100 base kits that provide NovaSeq level recount at more attractive pricing. We have made the M-Series a priority in our product roadmap based on customer feedback.
Obviously, G4 success tops all priorities, but we want to provide a brief update on the PX. We are expanding our market research efforts around multi-homing and the needs of research and translational labs. Throughput, number of samples and sample flex are all terms used to describe the same needs at higher throughput, lower cost solution to measure cells and tissue. Additionally, concurrent multi-homing read out is an area of opportunity. Current solutions are limited in their ability to look at RNA and protein concurrently in the same sample at the same time and we expect that PX will be able to deliver this. These labs also wants facial context of information at high resolution, most notably for FFPE samples with the PX uniquely suited to provide a high throughput and high resolution.
We are using this information to prioritize internal R&D efforts and are excited to begin our technology access program in Q4, where we will begin partnering with industry leading researchers to bring samples in-house and work together and generate novel information and applications in the PX platform. We plan to expand collaborations with additional potential customers in early access program, which we plan to initiate in late 2023.
With that, I will turn the call over to Dalen to go over the details of our third quarter financial results.
Dalen Meeter
Thank you, Drew. I will start by covering the Q3 2022 financials then I will provide directional remarks on key metrics for Q4 and overall cash runway. Operating expenses for the third quarter of 2022 totaled $24.7 million compared to $17.5 million for the third quarter of 2021. These totals included non-cash stock-based compensation expense of $3.4 million in Q3 2022 and $2.9 million in Q3 2021. The year-over-year increase in total operating expenses was driven primarily by scaling headcount infrastructure to support our growth, including the G4 launch, product pipeline and R&D roadmap.
Net loss for the third quarter of 2022 was $23.8 million or $0.33 per share compared to $17.6 million or $0.25 per share in the third quarter of 2021. Our weighted average share count for the quarter used to calculate net loss per share was approximately $71.2 million. Ending cash, cash equivalents and short-term investments, excluding restricted to cash totaled $263.8 million.
Our team is focused on closing out the year on a strong note and shipping additional G4 systems at a measured pace consistent with our ability to manufacture, install and support the customer acceptance process. In addition, we continue to closely manage our hiring and investments. We expect investments related to our product priorities in Q4 to increase modestly across commercial manufacturing operations and R&D. However, we remain very mindful of the macro environment and are focusing priorities and investments to enable cash runway into the first half of 2025.
Thank you and back to Drew for closing remarks.
Bruce Spaventa
Thank you, Dalen. In closing, I want to reiterate the themes of today’s update, including: first, our number one priority with operational progress in resolving supply chain and related manufacturing issues and progressing towards G4 shipments in the fourth quarter as planned, with steady scale-up ahead through 2023; second, our continued conviction in the G4 strong differentiation and its unique value proposition to drive commercial execution in a multibillion-dollar NGS market; and third, a focused prioritized product road maps to deliver G4 enhancements as well as future innovations, all supported with a strong balance sheet.
Now let’s open up to questions, operator.
Question-and-Answer Session
Operator
[Operator Instructions] And the first question is coming from Matt Sykes from Goldman Sachs. Matt, your line is live.
Matt Sykes
Thanks for taking my questions. Good afternoon, guys. Just maybe, Drew, first on the supply chain comments made at the outset of the call. It sounds like you made some progress there and are kind of putting things in place to make sure that disruptions are minimal. As you think about sort of the measured pace of shipments, what kind of measures can you put in place as we go through ‘23 to ensure that supply chain constraints won’t be an issue or is it something that you feel like you’ve taken care of at this point?
Bruce Spaventa
Hey, Matt, thanks for the question. It’s a good question. I think there are certain things we’re doing right now internally to make sure that we’re testing component, subcomponent subsystems, especially the complicated ones before they are put into a system. That’s one part. I think from a supply chain management perspective, there are also steps we can take to have the vendor do additional QA/QC before they ship us to parts. I think a big focus is trying to make sure once we integrate a subsystem and bring a system up, we know the parts are going to work the way they are intended. That being said, beyond where we are right now, we’re going to learn things about the system performance in the field as we get more reps on the systems. And as frankly, customers take them and start to use them in real-world ways, they are going to find new ways to break the system. So it will be continual learning. The other thing I will say is, in general, we do expect to have continued improvements in robustness and reliability over time as we understand the nature of the instruments. And again, the way they start to break or need help after you see high-volume usage over many, many runs. So again, I just think you have to take a step back and in the context of a new product coming to market that’s fairly complex. There are going to be learnings, and we’re doing everything we can internally mostly on the subsystems QA side at this point, but also sufficient testing before they leave. And then once they are out in the field, it will be closely monitoring, working with the customer, understanding kind of how they behave at scale and after repeated use and then taking those learnings and incorporating them. So kind of a long-winded way of saying there are concrete steps we’re taking internally, and we will continue to adapt and evolve as we learn how the system perform at scale.
Matt Sykes
Got it. Thanks for the color. And then just on the PX, recognizing that G4 launch in execution is your number one priority. As you think about the PX into ‘23 and look at sort of the OpEx profile that you have and wanting to maintain a certain level of conservatism there, do you feel like you have the resources in place from an OpEx and balance sheet standpoint to be able to progress with the PX kind of within the budget that you have or will it require some shifting of priorities as you move through ‘23?
Bruce Spaventa
Yes. We’re going through our kind of financial planning right now for next year, and those are the questions that essentially, we’re asking ourselves. I think we really want to maintain operational flexibility in terms of how we think about runway extension. And right now, it really is all hands-on deck on the G4 and trying to look at the organization in a lot of ways being as lean as possible to make sure we deliver on that first product. We do have an insulated separate team on the PX. We intend to continue investing in the PX. And part of what we’re trying to figure out is how we could find either non-dilutive ways or ways to essentially attract partnership to advance the PX.
The short answer to your question is we do have resources to continue developing the PX, but frankly, the interest and excitement from the market is one where we would love to be able to throw more resources at it. But in a constrained macro environment like we are right now, I think we just need to be very first principles in terms of spending on the first product and making sure that we get it to market before we get out over our skis on additional spend. So kind of a balanced, I would say, viewpoint of making sure we invest to push it forward, but certainly being very conscious of runway extension and flexibility from a balance sheet perspective.
Matt Sykes
Got it. And just one last question just on of the shipments you’re making in Q4, any concentration within one of those particular customer groups that you’ve highlighted in the past that’s been resonating?
Bruce Spaventa
It’s still pretty balanced. The Q4 and Q1 shipments will likely be a pretty even split between kind of your academic and your small to medium-sized private companies. clinical or industrial. There is – orders we’ve taken there as well, but that’s probably more of a – once we have robust is reliability, track record, that’s probably a profile customer that adopts more once you have that base level of credibility. So that’s kind of how we’re thinking about the early funnel and early placements.
Matt Sykes
Great. Thank you.
Operator
Thank you. The next question is coming from Tom Stevens from Cowen. Tom, your line is live.
Tom Stevens
Hi, all. Thanks for taking the question. Just a brief one on the kind of evolving competitive environment in the kind of lower to mid-throughput space, specifically with regards to MGI and the coming presence in the U.S. I guess, what have you had from customers when they have picked you over that coming system? And yes, I guess what have they said to you guys, which has given you confidence for the growth ramp for the G4 in general going forward?
Bruce Spaventa
Yes, thanks. Tom. We still see predominantly in customer engagements that the buying decision is between NextSeq or NovaSeq or an existing Illumina system or potentially buying the G4. That’s typically who we’re selling against. Candidly, we haven’t really been in a buying decision at this point that I’m aware of, where there was a customer that was realistically looking at MGI versus a G4. So I couldn’t really speak to that specifically.
Tom Stevens
Great, thanks for that. And then just one more on the kind of G4 QA/QC ramp, so now you’re seeing some kind of supply chain kinks even out on the semi side and potentially from the custom side too. What kind of management changes have you made to that QA/QC team, which you think insulates that going forward? Thanks.
Bruce Spaventa
Yes. We haven’t made management or personnel changes. I think more of it’s been just making sure that we’re focusing on testing subsystems, and we’re working with the vendor to make sure they test and have kind of quality control before they release parts to us. There is another part to it as well. It’s not just getting the subsystems of the parts. It’s also building the machine and bringing the machine up and bring up basically means working through all of the small but nuanced things to get a sequencer working robustly and properly. And that does take time with early instruments. There is always variability in small things you learn as you start to bring up multiple units, eventually dozens of units and a lot of it is making sure that you have predictability and consistency on bring up and that you’re able to transfer bring up from an R&D to a development to a manufacturing kind of part of your business. And a part of – that’s a big part of being able to scale up is transferring into your manufacturing, and those are all things that take time. So, I just want to make sure that the comment you made, it’s not just the supply chain. It’s the related downstream integration time that you need to get these systems robust and reliable and transfer to manufacturing. We have made strides on that as well. So, yes, I think that’s – no personnel change at this point, just really understanding the system, bring up, QA-QC and a real focus on transfer to manufacturing.
Tom Stevens
Good stuff. Thanks.
Operator
Thank you. The next question is coming from John Sourbeer from UBS. John, your line is live.
John Sourbeer
Hi. Thanks for the taking question. Just you said you are on track to ship in 4Q. Does that mean you plan on generating revenues next quarter? And just any commentary or a way to quantify what the backlog currently looks like? And I think you previously mentioned shipping or the capacity to ship one to two instruments per month in 4Q? Is that still on track?
Dalen Meeter
Yes. Hi John, this is Dalen. We are not disclosing a backlog metric at this point. I don’t think we have plans to do that. I think what commentary that we gave previously around manufacturing capacity and our ability to deploy about one to two systems per month here in Q4 kind of gradually scaling up into 2023 as we know more about the ramp. And I think that still holds. From a revenue recognition standpoint, there is a customer acceptance process tied to some of these initial units, which is pretty typical for an early product launch like this. We are engaged with the customers trying to work through the installation and that acceptance process. Our aim is to get that done in about 30 days kind of post shipment, but each situation is a little bit different. But that’s our target. So, you can kind of expect that each system that goes out here in Q4 will have that acceptance process tied to it as well from a rev/rec standpoint.
John Sourbeer
Got it. And then I guess just on the sales cycle and the conversations you are having, it sounds like it’s mostly with existing Illumina customers. Have those conversations changed at all since the X-Leap [ph] announcement a couple of months ago and potential for X-Leap on the NextSeq in 2024?
Bruce Spaventa
Hey. John, this is Drew. I wouldn’t say there has been really a change. Most of the customers that we are speaking with are typically in the mid-throughput. So, they are running NextSeq or they are running the low end of the NovaSeq. Increasingly, we are talking with customers that are sending out a lot of their sequencing. So, some of them might have a lower throughput instrument, doing internal sequencing and they are sending out certain types of sequencing or higher throughput. And that’s turning out to be an area where I think there is a real opportunity to catch customers with the flexibility and the ability to scale both up and down with the G4. So, we have had a lot of traction with those types of customers. I think again, back to your original question on X-Leap. I haven’t really heard much through my office in terms of X-Leap specifically. I think there was a little bit of a wait and see if Illumina was going to do anything on mid-throughput. It looks like that’s not happening for quite some time. And I don’t think there is clarity on what subset of features that were released for the new NovaSeq line will be available as a retrofit versus having to wait for a new bench-top sequencer, which looks like it’s probably out in ‘25 at some point. So, I think if anything, it was probably clearing event for us in a little bit in that our target segment, again, is not super high throughput genome factories or high-throughput labs. So, in a lot of ways, I think it’s actually – the opportunity is very real. And with all the cards kind of flipped on the table now with all the different existing and new entrants in terms of systems coming to market, we feel like it’s very highly differentiated and fits really well within the customer feedback that we are getting.
John Sourbeer
Got it. And then I guess just one last clarification just on the shipments in 4Q question earlier. Just given that we are about a third of the way through a little over a third the way through the quarter, have you shipped any instruments yet so far, or are there still anticipated later in the quarter?
Bruce Spaventa
We have. We have shipped. We are probably not going to go into much more detail yet since it’s all recent and unfolding, but we have shipped instruments, and we should ship more instruments over the next couple of months. And we look forward to updating you at the next earnings call on how those shipments are going, the installation, the placement, customer feedback. So, it’s a really exciting time for us and yes, we are excited.
John Sourbeer
Got it. Thanks for taking the questions.
Bruce Spaventa
Thanks John.
Operator
[Operator Instructions] And the next question is coming from Michael Ryskin from Bank of America. Michael, your line is live.
Unidentified Analyst
Hey. This is [indiscernible] on for Mike. Thank you for the question. So, to start off, maybe have you seen any change in customer conversations since the second quarter, we have seen the competitive landscape develop here. And I was wondering if you have some insight on how customers are evaluating all these options?
Bruce Spaventa
Yes. Again, I think there is not really much of a change for the customers that are in our target markets. And again, as we think about target markets, there is a few ways we can dice it. But essentially, the conversations that I think had the most customer mind share were really around the super high end and what Illumina is going to do on the new NovaSeq and potentially other high-end entrants. I would say within our general market segment, which is largely high throughput mid sequencers or bench-top sequencers, largely academics, core labs and then small and medium-sized businesses. Most of those profiles of customers weren’t one that we are going to be buying a super high throughput instrument. So, for us, I don’t think there is much that’s changed since Q2. I think the big thing, frankly, is going to be credibility and track record. And I think once we have the G4 out there and there is a few dozen in the market and people know it’s reliable and it works and they can get their data. I think all of a sudden, the value proposition of the speed, the flexibility and the cost is really going to reflect the true value in the G4. So, I think it’s still early. I know everyone is trying to figure out who they place where in the market, but I think until everyone has really been out there and had time to get systems used and credibility established. It’s hard to figure out how – which value proposition resonates when. Beneath that, there is still that reliability, trustworthiness that needs to be checked off.
Unidentified Analyst
That makes sense. Another one on budgets and funding, have you seen much change for customer spending abilities, in macro environment in the quarter at all?
Bruce Spaventa
For the academics, no, I couldn’t speak of any change. I think likely because they have budgets in place and the nature of the funding is different. Kind of small and medium scale businesses, a lot of them, they still have to invest in their own R&D. And a lot of times, they are thinking about how do I save money on sequencing and one of the value propositions that I think has become more kind of clear to us is people that are sending out to a core lab with an up-charge on sequencing as a service. And so for the small and medium-sized companies, I don’t think we have seen much of a buying change other than just really making sure they are bottom line, cost conscious on whatever they buy, making sure that it makes sense financially. I think one area where potentially, it’s a little bit different is the larger scale super high throughput or not super high throughput, but the high-use mid-level market. So, either clinical or industrial people that are NextSeq shops, I think they are – if you are thinking about an upgrade cycle or trading in fleet of old NextSeq, I think right now, there is probably a little bit more scrutiny on upfront capital outlay even if there is long-term savings. And for those types of customers, I think you just have to think through how you make sure that there is an attractive ROI near-term, not just a long tail of how they make their money back. But for the most part, those larger-scale customers and the kind of CLIA-type customers are probably more of our customer profile that we are going after in Q3, Q4 next year once we have kind of established credibility and some of the lower hanging fruit in terms of earlier adopters.
Unidentified Analyst
That makes sense. And one more quick one here, just following up on the last quarter on the manufacturing supply chain, are you seeing any pressures on either instruments or consumables? And how should we kind of think about it going into the back half or the back quarter of this year and early ‘23?
Bruce Spaventa
I think we have seen across the board increases in cost, not extreme, but there has been modest increases of costs across the board. So, it’s something we are definitely cautious and conscious of. The challenges that we had cited previously were more specifically related to the G4 instrument. We haven’t really spoke of nor experienced any challenges on the consumables yet. But I think cost and margin profile is absolutely something we are thinking about, although I would say it’s a second order focus right now. First orders robustness, reliability, performance, getting the systems up and running and then very quickly, that will start shifting to margin profile and building materials and those types of things. So, yes, I think definitely some upward pressure on price, but nothing extreme.
Unidentified Analyst
Got it. Thank you.
End of Q&A
Operator
Thank you. And there were no other questions in queue at this time. Ladies and gentlemen, this does conclude today’s conference. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
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