SA Transcripts, Author at Elite Stock Chat

AMPX – Amprius Technologies, Inc. (AMPX) Q4 2022 Earnings Call Transcript

Written by SA Transcripts on March 25, 2023. Posted in AMPX, Stock Report.

Amprius Technologies, Inc. (NYSE:AMPX) Q4 2022 Earnings Conference Call March 23, 2023 5:00 PM ET

Company Participants

Greg Bradbury – Investor Relations

Kang Sun – Chief Executive Officer

Sandra Wallach – Chief Financial Officer

Conference Call Participants

Colin Rusch – Oppenheimer

Operator

Good afternoon and welcome to the Amprius Technologies Conference Call and Webcast. It’s now my pleasure to turn the call over to Greg Bradbury.

Greg Bradbury

Good afternoon. Welcome to Amprius Technologies’ fourth quarter and full year 2022 conference call. Joining us for today’s presentation are the company’s CEO, Dr. Kang Sun and CFO, Sandra Wallach. At this time, all participants are in listen-only mode. Following management’s remarks, we will open the call for questions.

Please note that this presentation contains forward-looking statements, including but not limited to statements regarding future product commercialization, new customer adoption and timing and ability of Amprius to build its large scale manufacturing facility, expand its manufacturing capacity and scale its business. These statements involve known and unknown risks, uncertainties and other important factors that may cause Amprius’ results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied in such forward-looking statements. For a more complete discussion of these risks and uncertainties, please refer to Amprius’ filings with the Securities and Exchange Commission, including but not limited to a discussion of Amprius’ risk factors in its quarterly report on Form 10-Q filed on November 14, 2022.

Finally, I would like to remind everyone that this conference call is being webcast and a recording will be made available for replay on the company’s Investor Relations website at ir.amprius.com. In addition to the webcast, the company has posted a shareholder letter that accompanies these results, which can also be found on the Investor Relations website.

I will now turn the call over to Amprius Technologies’ CEO, Dr. Kang Sun, for his comments. Sir, please proceed.

Kang Sun

Welcome, everyone and thank you for joining us this afternoon. To begin today’s discussion I will give some complete background followed by a review of our recent accomplishments before turning the call over to our CFO, Sandra Wallach to discuss our financial results for the year in more depth. After that, I will share some closing remarks before opening the call for questions.

Amprius develops and manufactures ultra high-energy density lithium-ion battery based on our proprietary silicon anode technology. Our business has four distinct advantages: unmatched technical and product performance, proven manufacturability, years of product commercialization with industrial leaders, and a team of seasoned business operators with a solid track record. Our near-term goal is to scale our manufacturing with the long-term goal of becoming a mainstream battery solution. With applications across all segments of the electrical mobility, including the aviation and EV industries, over the past few years, Amprius has delivered commercial batteries with the highest known energy density and the power density. Our current available batteries have as much as 450 watt-hour per kilo in specific energy density and 1,150 watt-hour per liter in volumetric energy density with up to 10C high-power capability.

Our batteries are also built for the cost operating environments with your ability to pass the United States military benchmark nail penetration test as well as the versatility to operate in an extremely wide temperature range of effort as low as minus 30-degree Celsius and up to 55 degrees Celsius. These features along with extreme fast charge rates of 0% to 80% state of charging in approximately 6 minutes set Amprius apart. It is our belief that there is no one else in the commercial market that can perform at this level. In addition, we have amassed over 80 patents and over a decade of the know-how in silicon anode technology and manufacturing.

Moving to our review, 2022 was arguably the most transformational year for Amprius since our founding in 2008. It was also the year of many firsts for our business as we execute on our strategy to transform electrical mobility with the focus on aviation applications. I will now make a minute to highlight some of our key milestones from the past year. As I mentioned a few minutes ago, Amprius has a leading position in the emerging energy transmission sector with disruptive technology. We entered 2022 with our first commercial segment on 450 watt-hour per kilo and the 1150 watt-hour per liter product for high performance aviation. We manufacture the only batteries on market that can produce these specifications and we are constantly working to improve the performance and capabilities of our technology.

As an example, earlier today, we realized that our upgrade 500 watt-hour per kilo capable batteries are those not yet available to the market had their capabilities verified by independent third-party, which is a crucial step in the product development timeline. Demand for this next-generation of the battery degree and we are making great progress. Based on trend estimates, we expect to be able to save prototypes to selected customers before end of the 2023. We also complete several important demonstrations of our technologies capability in 2022. In October, we successfully exhibit our battery’s extreme fast charging ability through a video demonstration where we were able to achieve a return of 0% to 80% state of charge in approximately 6 minutes.

Our performance is ahead of the United States advanced battery consortium 2025 goal of 0% to 80% charge in 15 minutes. In practice, this will allow the vehicles and other applications to operate much more efficiently with less downtime. Additionally, in November, we allow that independent third-party testing lab validate our 390 watt-hour per kilo polymer electrolyte cells successful passing of the United States military performance specification to nail penetration test. This test is used to determine the feasibility of a specific product in combat scenarios and is important benchmark to be considered for military applications. We have a unique opportunity to provide a significant energy density performance increase of nearly 100% doubling the runtime for mobile-powered devices without the increase in the overall weight of the wearable batteries for our soldiers.

Moving to our business development efforts, 2022 was a successful sales year for our aviation and defense segments. Amprius has deep inroads with the aviation and the eVTOL market, because we produce high-energy density, lightweight battery. Single most important issue in eVTOL performance is battery weight, which is why our batteries are in such high-demand. Lighter and denser batteries, means greater and standard range, while faster charge turnaround time means increased flight time. To that end, we signed new multiyear agreements with the Federal Aviation industry leaders like AeroVironment, Teledyne, FLIR and the BAE Systems and expand our existing commitments with Airbus, the U.S Army and the USABC among others.

I will highlight some of those agreements now. In July, we launched a 3-year deal with Teledyne FLIR to supply our batteries as they develop their unmanned aircraft system products. Also in October, we entered into a 3-year cooperation agreement with BAE Systems to develop lightweight high-energy batteries specifically for electrically powered flight applications. In May, we will award funding for the second multiyear development program in the United States advanced battery consortium for the development of a low cost EV battery. This consortium is between Ford, GM and Stellantis and is enabled a cooperative agreement with the United States Department of Energy. Their mission is to develop electrochemical energy storage technologies that advance the commercialization of next-generation electrified vehicle applications.

I am pleased to announce that we officially delivered the first set of the reference cells in the fourth quarter of 2022. Altogether, these new wins and expansions amount to a 65% year-over-year boost in shipments. We believe our successful early efforts are now driving a positive flywheel effect, leading to orders from the new customers and expansion orders from existing customers. As we think about our goals for the next several years, our primary focus is on expanding capacity to meet demand and ultimately achieve sustainable cost structure at scale. We made several strategic moves in 2022 that put us our career paths to achieve these goals.

In September, we closed our business combination with the Kensington Capital Acquisition Corp. IV to provide us with greater access to capital via the public markets. Through that process, we also raised approximately $70 million in cash net of expenses and added a strategic customer to our investor base in AeroVironment. We could not have asked for better partners than the Kensington team and have continued to work closely alongside them as we execute on our strategy. More recently, we put in place a committed equity facility, which allows us to assess up to $200 million of additional funding.

After a competitive process, we were selected to receive two cost-sharing grants from the U.S. Department of Energy in October of 2022. The first is a $1 million cost-sharing grant from the DOE’s Advanced Manufacturing Office specifically for the evaluation of development of mass production process we use for our silicon anodes. This process basing our Fremont facility includes a deposition shifting, presently used in solar cell manufacturing. The second is a $50 million cost sharing demonstration grant selected for negotiation of the award from the DOE’s Office of Manufacturing and Energy Supply Chain. We are among the first set of the companies to be selected for negotiation of the awards to receive funding from the President Biden’s Bipartisan Infrastructure Law to expand the domestic manufacturing of batteries.

To that end, in October, we received the first large-scale anode production machine from Centrotherm, which is now installed in our Fremont facility and is expected to increase our capacity for silicon anode production to approximately 2 megawatts exiting 2023. To meet this greater production output, we recently expanded our lease facility in Fremont, California effectively doubling our footprint in that location. Our expansion in Fremont is planned to improve our high-volume manufacturing processes and increase our capacity by 10x, which will serve strategic aviation customers’ increasing needs and the support sampling and qualification projects with new customers who are currently in backlog.

This takes me to our more exciting news. Earlier this month, we announced the selection of a site in Brighton, Colorado as the location for our 775,000 square foot net production facility. The selection of the Colorado for our gigawatt scale factory marks an important milestone for Amprius. We have worked closely with the state of Colorado, the Colorado Economic Development Commission, Adams County and the City of Brighton to align on terms that are mutually beneficial, which include a comprehensive incentive proposal. The initial phase of our build-out of the existing facility will provide a potential of up to 5 gigawatt-hour, and is also expanded to create over 330 new jobs. For the subsequent phases, the site has expansion capabilities for up to a total potential manufacturing capacity of 10 gigawatt-hour.

This site also hosts a few advantages over our other potential locations. The body is already equipped with the electrical power and the existing structural layout needed for gigawatt scale lithium-ion battery factory, which will reduce build-out cost and time-to-market with a goal of being operational in 2025. Also, our Brighton is closer to some of our material distributors in the Northwestern U.S., which we expect will lower operational cost over the long-term.

Lastly, our commitment to Colorado allows us to establish our largest scale operations here in the United States. Amprius batteries will be designed and made in the U.S. This new facility will transform our long-term production capabilities. In the near-term, we will continue to develop and shape cutting-edge products from our Fremont facility, while we refine our manufacturing processes to further de-risk the handle of our mass production products to Brighton in the coming years. To help with the transition, we made a strategic decision to form two new business units: Amprius Lab and Amprius Fab.

Amprius Lab, located in Fremont, will focus on advanced the battery technology product and the manufacturing process development. While Amprius Fab located in Brighton will focus on large scale fabrication of silicon anode batteries. To support this transition, Jon Bornstein currently the company’s COO, will take a new role to lead Amprius Lab as the Division Business Unit President. In the interim, I will serve as the Acting President of Amprius Fab.

I have one final update before I turn the call over to Sandra. One of the areas which I am most proud is the team we have built. Over the last several months, we have added critical roles to lead up our efforts still. In my Acting President role for Amprius Fab, I am working with our new Vice President of Infrastructure, Andrew Huie, who joined us last September. Andrew brings over 30 years of facility development and management experience and most recently served as the Director of Facilities at the Panasonic Energy of North America. Huie will be spearheading our efforts to scale production capacity, focusing on factory planning, facility development and regulatory compliance. With our leadership team in place, we believe that we are well positioned to execute on our growth strategy.

With that overview complete, I will now turn the call over to our CFO, Sandra Wallach, to review our financial results for the full year. Sandra?

Sandra Wallach

Thank you, Kang. I would now like to spend a few minutes covering some key updates. As a reminder, our detailed financials can be found in our shareholder letter. As Kang mentioned, we believe that we have the proprietary technology in place and we have shown consistent manufacturability and commercial success. We have been shipping commercial products since 2018. So, our focus today is not on commercializing, but is instead on scaling our production capacity to meet the growing demand in these fast moving markets.

In our financials, particularly in our revenue results, you will see data points that reinforced the strength of our customer development efforts as we scale. We believe that those results, especially when paired with our investments in both our Fremont capacity and gigawatt-hour scale capabilities position the company well to achieve its growth and profitability potential.

We closed out 2022 with $4.4 million in revenue. Product revenue was $2.4 million including over 25 new customers, to which we shipped batteries within calendar 2022. Within that set of new customers, 4 are leading eVTOL manufacturers and 2 are global battery pack suppliers for the aviation sector. Also, we delivered commercial quantity shipments to AeroVironment and Teledyne FLIR and completed two flight tests for Airbus’ HAPS program with a backlog of 6 more sets for future deliveries still pending.

Development services revenue totaled $1.8 million driven by both the delivery of cells and the timing of other deliverables under multiple contracts. We also recognized the first portion of the $1 million DOE cost sharing grant revenue, which was $0.2 million. For 2022, our GAAP gross profit margin was negative 123%. Our gross margin displays variations period over period based on the mix of products and services.

Now moving to our operating expense management, our GAAP operating expenses for 2022 were $12.6 million with higher G&A expenses in Q3 and Q4 due to increased public company cost. Our 2022 GAAP net loss was $17.3 million or a loss of $0.24 per share. Our shares outstanding at December 31, 2022 were $84.6 million with $71.3 million weighted average shares of common stock outstanding for the year. As of December 31, 2022, there were 59 full time employees primarily based in our Fremont, California location. Share-based compensation for 2022 was $2.7 million.

Turning to the balance sheet, we exited 2022 with $69.7 million in cash and no debt, a net increase of $58.2 million from December 31, 2021. The key drivers of our cash activity for the year were $13.9 million used in operating activities, $1.5 million in capital expenditures, which represents our investment in our current manufacturing facility as well as in opportunities to expand our footprint and accelerate our capacity to support customer qualifications and scale up, $73.6 million net cash provided by financing activities driven by proceeds received in connection with the business combination and pipe investment, net of issuance costs plus proceeds from the exercise of stock warrants and options.

Moving to our outlook, we expect to continue to be limited by manufacturing capacity until we exit 2023 with the new 2-megawatt capacity coming online. Regarding revenue, we have several ongoing development services programs with performance obligations that we expect to complete within 2023, which means that we expect increased revenue recognition weighed more heavily towards the latter part of the year. We expect that our G&A costs will continue at the higher rate exiting 2022 noting additional public company expenses. We will continue to be lean on other operating expenses strategically adding critical mass to the new business units that we announced and allocating the majority of our capital to scaling up our manufacturing. And we expect higher capital expenditures going forward as we continue to build out the 2-megawatt capacity in Fremont, California, while we, in parallel design and construct our newly announced Brighton, Colorado, gigawatt-hour scale facility. Our spending pattern is dependent on several factors outside of our control, including the timing of approval for rezoning for the Colorado site. So we will provide more specific projections as we have additional information to share.

Also, we expect that we will continue to have strong support from the U.S. Inflation Reduction Act as we access production tax credits at the anode and cell levels. In addition, we have received over $10 million in state and local incentive packages relating to our gigawatt scale facility, which is the result of significant partnerships built in Colorado through our selection process. We believe that these tailwinds will further enhance our economics as we accelerate our scale to meet our massive market. With the strength of our balance sheet and multiple vehicles to generate additional funding through both equity such as warrants in our committed equity facility and non-dilutive sources such as grants, loans and incentives, we believe we will have enough cash to execute on our strategic plan.

With that, I will conclude the financial discussion and pass the call back to Kang.

Kang Sun

Thanks, Sandra. I would like to re-emphasize a few key points before closing. First, today, we have market leading technology and the position in aviation that are reflective of our unmatched performance in real world applications. Over the past year, we have demonstrated extreme fast charging capability, enhanced our battery specific energy density from 450 to 500 watt-hour per kilo and we successfully passed the key performance test important to future work with the U.S. government.

Second, we are building out the scale to serve tremendous demand in the U.S. and to support U.S. based supply chain resiliency. Exiting 2023 we will further throughout our large-scale manufacturing process and the parameters with 2-megawatt pilot line coming up in our Fremont, California facility. We are also now moving swiftly to prepare and build out our gigawatt scale facility in Brighton, Colorado for the first 500-megawatt demonstration program with the United States Department of Energy. Third, we are continuing to build a pipeline of blue chip customers to meet our planned expansion efforts, which has operating at a scale of hundreds of megawatts exiting 2024.

As we look to the rest of 2023, our strategy and focus at Amprius remains unchanged. We have tremendous opportunity ahead with the product portfolio that positions us to post growth in aviation market and expand it to other industries, taking batteries with stronger performance and the faster charge time. We are continuing to build on our early lead through technological advancement and strategic partnerships. Through the private and public sector, we now have the capital and are building the capacity to become a leading commercial provider in the sustainable mobility sector.

Finally, we have the team in place to execute our mission. Thank you for your continued support of Amprius Technologies. With that, I will turn it back to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question today is coming from Colin Rusch from Oppenheimer. Your line is now live.

Colin Rusch

Thanks so much guys and congratulations on all the progress. Really glad to see you guys get that award this week with the Battery Show. Kang, as you started installing the megawatt tools and evaluating them, can you talk about any surprises either positive or negative that you are seeing from the tools that are in installation at this point?

Kang Sun

At this point, we already powered the two in Fremont, this Centrotherm tool. We don’t – we also try to tune the source, because this thing we need to work with the supplier to get the deposition source adjusted. We expect sometime in summer – later summer early fall, this tool will be fully – this particular tool will [indiscernible] growth will be fully in operation.

Colin Rusch

Okay, that’s tremendous. And then in terms of the selection of Colorado obviously, the building site has some advantages. But can you talk a little bit more about supply chain advantages in terms of location as well as hiring opportunities, because there seems to be potentially some efficiencies that you guys are gaining by choosing this location?

Kang Sun

Yes, the most obvious one of course is close to our selling source. Selling today is manufactured in the state of Montana, Colorado compared to the other state, where we looked Georgia, Texas, now we see that in Colorado. Now, this is probably the most visible supply chain advantage. In addition to that Colorado’s weather, it’s mostly drier, that is very important for us, I think the most important thing is the Colorado, they have the sufficient the power for us, as a battery manufacturer, we cannot afford to have power disruptions. So they almost guarantee that the power supply, the current of power supply already adequate for our Phase 1.

Colin Rusch

Okay, that’s super helpful. And then just a final one with the introduction on the new product. And the validation with a third party, I guess, can you talk about what your customers are looking for? And in terms of incremental validation on that before you start to see some orders or is it really just a capacity issue for you guys right now on that product, given the performance, so you’ve been able to demonstrate?

Kang Sun

We have capacity issue with a lot of customers a lot of inquiries. We have inquiries from industrial players, even from the government, but we don’t have enough capacity to satisfy their demand. That’s a one challenge for us. That’s why the capacity extension is our priority. The second demand from the customer, of course, we are currently focusing on aviation segment. So aviation segment, so far we are the only one can provide high energy, high power batteries. And already today, we announced the 500 watt-hour per kilo. That’s the battery the Airbus has for when really needed to make a 2nd generation product [indiscernible]. So we have capacity challenge. At the same time, we have customer demand, some energy and the power, okay. [indiscernible] energy and the power Amprius today, probably the only company we can get – okay, high energy high power. I have not seen other battery can deliver.

Colin Rusch

Okay, thanks so much, guys.

Operator

Thank you. [Operator Instructions] Our next question is coming from Chris [indiscernible] from B. Riley. Your line is now live.

Unidentified Analyst

Hey, guys. Thanks for taking my questions here. Maybe just touch on the Colorado facility, you called out in the letter rezoning process that you’re going through there anything you care about that process? And how we should think about the timing, assuming you get clarity on that over the next couple of weeks, months whenever, and then the overall capital needs expected through the end of next year. Any update there given the plans appear to be pretty solidified in Colorado?

Kang Sun

Yes, okay. And so the timing issue, and then timing question, then Sandra can you elaborate more on the financing? So, we are currently working with the regulatory authorities. I think this is the most time-consuming part of this project. And currently the source of the production line and we have never land up. I believe our production line can be delivered on time. Construction discussion went well. We are planning to have this construction start late summer and early fall. It took us about 18 months to get building retrofit suite then have our production line thought.

Unidentified Analyst

Got it. And then any update on the capital expectations through the end of next year. Given – I think we’ve probably got a pretty good idea of your expected costs at this point given the site selection and all that?

Sandra Wallach

Yes, so that’s a great question. So our production and equipment capital needs are still in the $120 million to 150 million per gigawatt. That’s the total cost without government grant offsets. And we’re estimating possibly another $100 million on construction NTIs, so, somewhere in total between $220 million and $250 million.

Unidentified Analyst

Got it. Okay, that’s really helpful. And then on the customer side, it seems like you guys are continuing to add new customers testing, maybe you could just talk a little bit more about some of the demand and segments aside from USABC, are there any other non-aerospace defense type customers in there, and then maybe within aerospace, curious if you could talk about either dies or use cases within that kind of broader sector to give us some kind of breakdown around the types of demand you’re seeing out there?

Kang Sun

So we are working with – of course, most of our customer aviation battery customers. At the same time, we have been last few years engaging with non-aviation battery customers primarily in the electrical vehicle battery space, because we don’t have a larger format, production line and it’s time. So we only can see the evaluation stage at this phase I would call technical exchange phase. As the USABC or [indiscernible] the grant, this – twice asked us to proceed the low cost high energy density electrical vehicle, we also have interaction with other OEM, EV OEMs but at this time still at a technical exchange stage until we have a larger format EV format, I mean, 100 amp-hour, 120 amp-hour cells, we will stay at a technically extended stage.

Unidentified Analyst

Yes, that makes sense. So maybe just within aerospace any other – any ways you can kind of segment out the types of customers or the use cases would be helpful there?

Kang Sun

Right. For us today, you see we have industrial customers, we have customers in Defense segment. Those batteries are adequate for other applications. We just need to have the capacity and the lighter format of the battery in a right size of the battery. For those applications, I think this is our effort [indiscernible] 18 to 24 months, we will get there. Our – as we mentioned, repeatedly mentioning in our challenge is the ease of capacity. Once we get capacity issue resolved, we will have much better fluctuation in revenue generation and serve the customers.

Unidentified Analyst

Makes sense. I will hop into queue. Thanks, guys.

Operator

Thank you. [Operator Instructions] We have reached the end of the question-and-answer session I’d like to turn the floor back over to Dr. Sun for any further or closing comments.

Kang Sun

Thanks again everyone for joining us today. I’d like to thank our employees, partners and shareholders for their continued support. As a reminder, you may learn more about our company updates and the call we will be presenting in the Investor Relations section of our website. We look forward to updating you on Amprius progress on our next call. Operator?

Operator

Thank you. That does conclude today’s teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

PEPG – PepGen Inc (PEPG) Q4 2022 Earnings Call Transcript

Written by SA Transcripts on March 25, 2023. Posted in PEPG, Stock Report.

PepGen Inc (NASDAQ:PEPG) Q4 2022 Earnings Conference Call March 23, 2023 4:30 PM ET

Company Participants

Noel Donnelly – Chief Financial Officer

James McArthur – President and Chief Executive Officer

Jaya Goyal – Executive Vice President, Research and Preclinical Development

Michelle Mellion – Senior Vice President and Head, Clinical Development

Conference Call Participants

Laura Chico – Wedbush

Operator

Good afternoon and welcome to the PepGen Conference Call to discuss PepGen’s Fourth Quarter and Full Year 2022 Financial Results and Recent Corporate Developments. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, March 23, 2023.

I would now like to turn the conference call over to Noel Donnelly, Chief Financial Officer of PepGen. Noel, please go ahead.

Noel Donnelly

Thank you, Josh. Good afternoon, everyone and thank you for joining today’s call. Earlier today, we released our financials for the fourth quarter and full year 2022 and provide an update on recent corporate developments. Press release outlining our financial results is available at our website pepgen.com and our 10-K was filed with the SEC this afternoon.

Joining us on today’s call will be James McArthur, PhD, President and Chief Executive Officer; Jaya Goyal, PhD, Executive Vice President of Research and Preclinical Development; and Michelle Mellion, MD, Senior Vice President and Head of Clinical Development.

During this call, management will be making forward-looking statements. These forward-looking statements are based on the company’s current expectations and inherently involve significant risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties. Factors that could cause results to be different from these statements include factors the company described in the section titled Risk Factors in our current report on Form 10-K filed with the SEC earlier today. PepGen does not undertake any obligation to publicly update its forward-looking statements as a result of new information, future events, or changes in its expectations.

I will now turn the call over to James McArthur. James?

James McArthur

Thank you, Noel and good afternoon, everyone. Thank you for joining our fourth quarter and full year 2022 investor call. Before we begin, I would like to note that PepGen does not currently intend to hold quarterly calls on a regular basis moving forward. However, with our updated clinical development plan that could lead to a potential accelerated approval for our lead program, PGN-EDO51 or EDO51, we felt the timing to hold this financial results call.

In September of 2022, we presented exon skipping data generated in our Phase 1 randomized, double-blind, placebo-controlled, single-ascending dose trial of EDO51 in healthy volunteers. Following a single IV administration of either placebo 1, 5, 10 or 15 mg/kg of EDO51. Needle biopsies were taken to the evaluation of muscle concentration of oligonucleotide and exon-51 skipping in biceps. As we have previously reported, the trial medics primary objective of demonstrate a generally well-tolerated safety profile at the doses study and provided key insights into the potential of PepGen’s enhanced delivery oligonucleotide or EDO cell-penetrating peptide technology platforms.

Our Phase 1 EDO51 trial exhibited the highest levels of oligonucleotide delivery and the highest levels of exon-51 skipping in human muscle biopsies following a single dose based on cross-trial comparisons from publicly available data from other exon-skipping programs. Perhaps most encouragingly, we observed the accumulation of exon-51 skip transcripts from Day 10 to Day 28 at 5, 10 and 15 mg/kg dose levels, which we believe to be supportive of the potential for both the accumulation of skip transcripts and the accumulation of functional dystrophin protein in our planned repeat dose clinical trials in patients with Duchenne muscular dystrophy for DMD.

As an example, following a single dose at 10 mg/kg, we observed levels of exon skipping up to 1.4% in healthy volunteers, sevenfold higher than previously reported results following a single dose in human mix based on a cross-trial comparison from publicly available data. As we reported at the Muscular Dystrophy Association, or MDA meeting earlier this week, we observed following a single dose of 20 mg/kg of EDO51 in male wild type non-human primates, 2.5% exon-skipping by ddPCR, the same method used to assess exon skipping in our Phase 1 human clinical trial.

Following 4 monthly doses in non-human primates, the level of skip transcripts increased to 14-fold to 34.9%. We therefore believe that the combination of non-clinical data in non-human primates and the Phase 1 human data signals the potential for PGN-EDO51 to drive clinically impactful levels of exon skipping in Duchenne patients. We also believe that these results are indicative of EDO51 potential for strong activity and the potential of our EDO platform to drive a transformational treatment paradigm shift for people living with Duchenne muscular dystrophy and myotonic dystrophy Type 1.

Turning now towards our myotonic dystrophy Type 1 or DM1 program, PGN-EDODM1 or EDODM1, we announced IND-enabling non-clinical data for EDODM1 in December of 2022. Just as a brief reminder, EDODM1 is designed to bind the CUG repeat hairpin loops in the DMPK transcripts of patients living with DM1 to liberate muscleblind like splicing regulator 1 or MBLN1 sequestered by the CUG repeat expansion, the root cause of DM1. Liberation of MBLN1 has been observed to lead to correction, downstream transcript misplacing events that caused the multi-system muscle and neurologic pathology of DM1.

As reported at the MDA meeting earlier this week, we have shown in patient cells with over 2,600 CUG repeats. The EDODM1 treatment reduced MBLN1 accumulation in the toxic CUG-DMPK foci in the nuclei of cells. Additionally, in non-clinical models, EDODM1 showed no evidence of off-target effects. Moreover, no short-term or long-term impacts were observed on the levels of other transcripts containing more than 10 CUG repeat in a mouse model of DM1 through 24 weeks. In acute toxicology studies in non-human primates, EDODM1 was well-tolerated through the 9 mg/kg dose level I thought which is the highest dose level we explored in non-human primates. We believe that these data support EDODM1’s potential to drive clinical activity to provide a favorable tolerability profile.

In addition to the milestones achieved that I just outlined for you. In May of 2022, PepGen went public on the NASDAQ Stock Exchange, raising $122.9 million and broadening our access to capital, while creating meaningful value appreciation opportunities for our shareholders. In 2022, PepGen appointed Laurie Keating and Habib Dable to our Board of Directors with Laurie serving as Board Chair. We also added key members of the senior management team over the course of 2022 including Dr. Michelle Mellion, Senior Vice President and Head of Clinical Development, who will soon walk you through our future EDO51 and EDODM1 clinical plans.

In summary, we believe PepGen is well positioned to capitalize on key value inflection points as we debut our multi-pronged clinical development plan for 2023. Based on encouraging non-clinical and Phase 1 healthy volunteer clinical data, PepGen is planning to initiate two clinical trials to assess the safety and efficacy of repeat doses of EDO51 in boys and young men living with DMD. As we have previously communicated in the first half of 2023, we expect to initiate an open label Phase 2 13-week multiple ascending dose or MAD clinical trial CONNECT1-EDO51 with four monthly doses in boys and young men living with DMD pending approval of the clinical trial application by Health Canada.

We currently expect this trial to evaluate EDO51 doses similar to our Phase 1 study conducted in 2022 in Canada. And importantly, we expect to report dystrophin protein data from this repeat dose Phase 2 trial in 2024. In parallel to the CONNECT1-EDO51 study in Canada, we plan to initiate in the second half of this year, a Phase 2 global double-blind, placebo-controlled 25-week multiple ascending dose trial of EDO51 in DMD patients. CONNECT2-EDO51 that we believe based on feedback from regulators could support a potential accelerated approval pathway for EDO51. We believe that conducting this study in parallel with our open label MAD study in Canada is the most efficient pathway towards the potential approval of EDO51 subject to alignment with regulators.

Lastly, in the first half of 2023, we expect to initiate a single ascending dose clinical trial FREEDOM-DM1 in DM1 patients in the U.S and Canada pending the approval by the U.S. FDA and Health Canada. And we anticipate reporting, safety, correction of mis-splicing and other clinical data in 2024.

I will now turn the call over to Dr. Jaya Goyal, PepGen’s Executive Vice President of Research and Preclinical Development to further detail our non-clinical studies supporting our clinical progress and to summarize our early phase non-clinical programs. Jaya?

Jaya Goyal

Thank you, James. As James mentioned, PepGen presented non-clinical data in the mdx mouse model and non-human primates demonstrating the potential of EDO51 to treat DMD earlier this week at the MDA’s Clinical & Scientific Conference in Dallas, Texas. In our mdx mice study received dosing with 30 mg/kg of PGN-EDO23 every 4 weeks and in our non-human primate study, in which NHPs were dosed with 20 mg/kg of EDO51 every 4 weeks, we observed stacking of exon skipping in both the species and accumulation of dystrophin protein in mdx mice after four doses. In mdx mice bicep, we observed up to 92% of exon skipping and dystrophin production up to 82% after the fourth dose. In non-human primates dosed at 20 mg/kg per monthly for four doses, we showed level of exon skipping in bicep tissues that increased 14-fold from 2.5% after a single dose to 35% after four monthly doses. Based on this encouraging non-clinical data, we are planning a 25B repeat dose clinical study that Michelle will cover momentarily.

Additionally, we announced earlier this week at the MDA meeting in Texas that EDODM1 was observed to reduce pathogenic nuclear foci and liberated MBLN1 from the toxic RNA full size in a dose-dependent manner in DM1 patient cells with 2,600 repeat. This data provides further non-clinical support for continued development of EDODM1.

As we turn towards our earlier stage preclinical programs, we were pleased to deliver positive non-human primate exon-skipping data from the repeat dose PGN-EDO53 study. Following a single dose of EDO53, we observed a mean exon-skipping level of 36.4% while exon skip traffic accumulated with a mean exon-53 skipping level of 57.2% upon repeated administration. This accumulation is consistent with what we have seen in the non-human primate study for EDO51 and in conjunction with the healthy volunteer data from our Phase 1 study with EDO51 supports the potential accumulation of the script transcripts and potentially dystrophin protein in patients upon repeated dosing. In our previous update on our preclinical pipeline, we also shared in vitro exon-skipping results from wild-type human myoblast treated with PGN-EDO45 and PGN-EDO44. In these wild type human myoblasts, both showed high level of exon skipping.

I will now turn the call over to Dr. Michelle Mellion, PepGen’s Senior Vice President and Head of Clinical Development to further detail our clinical plan moving forward and to summarize our presentation at MDA earlier this week that informs our clinical strategy. Michelle?

Michelle Mellion

Thank you, Jaya. As Jaya and James said, in support of our clinical development program for EDO51, PepGen presented our Phase 1 results in healthy volunteers and non-clinical data in the mdx mouse model and NHP demonstrating the potential for EDO51 to treat DMD earlier this week at the MDA conference. The Phase 1 study shows that a single dose of EDO51 resulted in the highest levels of oligonucleotide delivery and exon-skipping in healthy muscle and was generally well-tolerated at clinically relevant doses. The data at Day 28 support the potential for accumulation of exon skips transfer.

As Jaya described this potential for accumulation of skip transfer is supported by our non-clinical study. Specifically, we showed in our healthy volunteer study that a single dose of 10 mg/kg resulted in 1.4% exon skipping, while a single dose of 20 mg/kg in NHP showed roughly 2x the amount of exon-skipping, 2.5% by ddPCR as that pain in healthy volunteers suggesting possible scalability. After 4 monthly doses in NHP, exon-51 skipping increased to approximately 35%, 14x that of a single dose, supporting not only monthly dosing, but also the potential to achieve a meaningful increase in exon-skipping with this dosing regimen.

Following on our successful Phase 1 trial of EDO51 in healthy volunteers, we are planning to initiate two clinical trials to assess the safety and efficacy of repeat monthly doses of EDO51 in boys and young men living with DMD. CONNECT1-EDO51 is a 13-week open label multiple ascending dose clinical trial expected to be initiated in Canada in the first half of 2023. We anticipate reporting the dystrophin protein data in 2024. In parallel, CONNECT2-EDO51 is a 25-week global randomized placebo-controlled trial that is expected to be initiated in the second half of 2023 to support a potential accelerated approval.

Additionally, our EDO51 healthy volunteer study informed clinical development for EDODM1, which employs the same EDO peptide technology as our EDO51 program. Based on clinical results from our EDO51 healthy volunteer Phase 1 study, we believe that we will be able to achieve clinically relevant concentrations of EDODM1 in muscle. We are planning to initiate a Phase 1 placebo-controlled single-ascending dose study FREEDOM-DM1 in the U.S. and Canada enabling PepGen to report safety, correction of transcript, misplacing data and clinical data in patients in 2024.

I will now hand the line to Noel Donnelly, PepGen’s Chief Financial Officer to review our fourth quarter and full year 2022 financial results.

Noel Donnelly

Thank you, Michelle. My comments will reflect the high level financial results of our fourth quarter and full year 2022 periods. More details are provided in this afternoon’s financial results, press release and then corresponding SEC filing.

As of December 31, 2022, PepGen held $181.8 million in cash and cash equivalents compared to $132.9 million on December 31, 2021. PepGen’s strong cash position is expected to fund operations into early 2025, which includes the generation of dystrophin production data or our lead DMD asset EDO51 and the correction of downstream transcript misplacing data or our lead DM1 asset EDODM1. PepGen’s net loss for the fourth quarter of 2022 was $14.9 million compared to a net loss of $7.1 million for the same period in 2021. Our net loss for the full year 2022 was $69.1 million compared with a net loss of $27.3 million for the full year 2021.

Research and development expenses for the 3 months ended December 31, 2022 were $13.2 million compared to $4.5 million for the fourth quarter of 2021. For the full year 2022, R&D expenses were $54.1 million compared to $19.0 million for the year ended December 31, 2021. The increase in R&D expenses in the fourth quarter of 2022 compared to the fourth quarter of 2021 was primarily attributable to increased preclinical, manufacturing and clinical trial cost associated with our EDO51 and EDODM1 programs as well as increased personnel related costs.

General and administrative expenses were $4.0 million for the 3 months ended December 31, 2022 compared to $2.7 million for the fourth quarter of 2021. G&A expenses for the full year 2022 were $14.2 million compared to $8.1 million for the full year ended December 31, 2021. The increase in G&A expenses was primarily due to increased expenses associated with supporting public company operations. Finally, PepGen’s shares of common stock outstanding as of December 31, 2022 were approximately 23.7 million shares with 27.1 million fully diluted shares outstanding.

And with that, I will turn the call back to James.

James McArthur

Thank you, Noel. We are proud with the recent progress we have made over the last year advancing our pipeline and platform technology and moving into our new Boston headquarters. We are eager to continue to capitalize on our clinical momentum in 2023 with the two EDO51 and EDODM1 studies we have referenced on the call that we expect to initiate in 2023 with key patient data readouts expected in 2024. We will be presenting at the upcoming investor conferences, Stifel CNS Days, March 28; Needham Healthcare Conference, April 29; and Bank of America Healthcare Conference on May 11.

With that, I will now open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Paul Matteis with Stifel. You may proceed.

Unidentified Analyst

Hi, this is James on for Paul. Thanks for taking our question. Just a quick one regarding the global DMD study set to initiate in second half of this year. Just wondering, have you talked to the FDA yet? And the reason I ask this is because it seems like the FDA has been pretty conservative in the space with a number of clinical holds. So just wondering if they have specifically asked for anything before – any data before allowing you to initiate in the U.S. and kind of on that point, how will be open label study kind of inform the pivotal given it’s only starting a few months before? Thanks so much.

James McArthur

I appreciate the question. Thank you. Yes, we have had a lot of conversations with regulators and our clinical design has been informed by that. We are balancing both the desire to deliver on dystrophin data in 2024 for the benefit of both investors as well as people living with DMD as rapidly as possible which is what drives us to do the open label study in Canada. And that data will be integrated into the global study. The global studies we appreciate after interaction with regulators needs to be a 6-month dosing study. And to go and support that study we will be completing the associated toxicology studies by the end of this year. And that is the reason for the timing of that study in the second part of this year.

Unidentified Analyst

Thanks.

Operator

Thank you. Our next question comes from Joe Schwartz with SVB Securities. You may proceed.

Unidentified Analyst

Hi, this is Beth on for Joe. Thanks for taking our question. I was just curious if you could provide any color on the dose cohorts you are planning to assess in the CONNECT1 and 2 studies and how you are thinking about the potential to dose up to or above that highest 15 mg/kg dose with the assessment of healthy volunteers?

James McArthur

Thanks for the question. Let me first start off by highlighting that we think that the dose level of 10 mg/kg, a dose level that was safe and well tolerated with only Grade 1 treatment emergent adverse events in our single dose study, we believe will deliver truly significant levels of exon-skipping in the multi-dose study. The reason for this is twofold. First is as highlighted, the single dose study at 10 mg/kg delivered levels of exon-skipping that was sevenfold higher than the highest level ever previously reported following a single dose in humans.

Second, the study that Jaya highlighted we are using the same drug in non-human primates, a single dose at 20 mg/kg delivered on 2.5% exon-skipping by ddPCR the same assay. But following four doses, we saw almost 35% exon-skipping showing a tremendous accumulation of exon skip transcripts with higher exon skip, higher levels of exon skip transcript, of course, we would anticipate seeing higher levels of dystrophin being produced as well. So we are very excited about what we believe is the potential to go to 10 mg/kg. Now that said, we do believe there is an opportunity to potentially go above that and we will have those conversations with regulators with patient safety all of being front and center in our mind as we move through our clinical development strategy.

Unidentified Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Tazeen Ahmad with Bank of America. You may proceed.

Unidentified Analyst

Hey, guys. This is [indiscernible] on for Tazeen. We have had a quick clarifying question on CONNECT2. What is the – what endpoints are you planning to measure? Is it going to be dystrophin levels? And then how are you thinking about how the potential approval of gene therapy for DMD might affect how the agency is thinking about accelerated approval and maybe enrollment for DMD patients in the U.S.?

James McArthur

So, perhaps I can first take the second part of your question and then I will turn the endpoint part of your question over to our Head of Clinical Development. We think that the potential for approval of a gene therapy is beneficial for patients. It could provide a baseline that could be beneficial, particularly in younger patients. And that said we and many others believe that the treatment of Duchenne muscular dystrophy is going to require a polypharmacy approach with multiple therapies to truly deliver on meaningful levels of dystrophin and clearly, the level of the type of dystrophin being delivered in it with an exon-skip product which is almost full length in nature is obviously quite a bit different than that of a microdystrophin. So we think that there is a great opportunity here to deliver on meaningful change for patients. And with that, I will turn it over to Michelle.

Michelle Mellion

Yes. So in terms of the design of that global randomized controlled clinical trial, what we will be looking at in this clinical trial of course is dystrophin production as well as safety. We will also be including a broad array of clinical assessments to give us an idea of how the increased dystrophin production does affect these assessments and how we can improve performance on these assessments. And we will leave that in further discussions with regulators and the information that we have from them is that is timing along with evaluation of these endpoints maybe important for an accelerated approval.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Laura Chico with Wedbush. You may proceed.

Laura Chico

Hi, good afternoon. Thanks very much for taking the question. I guess I wanted to ask perhaps a different one around the regulatory landscape. So there will be an advisory committee meeting coming up soon for a DMD candidate. I am wondering though do you think there is any discussions that could emerge around dystrophin as a surrogate endpoint? Do you see the landscape changing in terms of FDA’s willingness to accept it? And then I just wanted to verify on CONNECT2, could you reiterate again what was the timing for the assessments that you are going to be performing there specifically on the dystrophin productions? Thanks very much.

James McArthur

So, let me first touch on the regulatory component. And again, I will turn it over to Michelle for the readout from dystrophin their timing. So our understanding is that the upcoming advisory committee meeting is focused on microdystrophin. As I mentioned before, microdystrophin is a very different product than the slightly truncated dystrophin product that is produced by an exon-skipping agent on which there have been four approvals to-date. The product that is produced by exon-skipping, is perhaps 10% to 20% of the native molecule size comprising most of the normal domains present in the normal dystrophin protein and is a molecule that we know is functional in Becker patients, if expressed at high enough levels. And that’s why we believe our approach has the potential to be transformative for patients. With that, I will turn it over to Michelle.

Michelle Mellion

Yes, with that dystrophin production, we will be looking at more performing muscle biopsies at baseline and at week 25. So, this will give us an idea of dystrophin production after approximately 24 weeks of treatment.

Laura Chico

Okay, thanks very much. And then maybe one quick follow-up just circling back with respect to the EDO platform and after the recent presentations at MDA, can you just remind us what are some of the differences in the physical properties for the cell penetrating peptide portion of EDO51 versus throughout this 5051? And I guess, stick to any other drivers or features that maybe driving the increased levels of exon-skipping observed versus the R6G analog, whether it’s just access to the nuclear compartment other things like that? That would be helpful. Thank you.

James McArthur

Yes, appreciate the question, Laura. So, our molecule is a shorter than 20 amino acid linear peptide, completely synthetic in nature comprising three motifs, two motifs do contain arginine, but those arginines are interspersed by non-natural amino acids, which confers much greater stability upon the peptide. They sandwiched between the two of them a short hydrophobic core that we believe is fundamentally essential in conjunction with these polyarginine sequences driving the peptide at oligo into the cell. So, we think that it’s a very different sequence with very different biology. And on the basis of both research and preclinical work, we believe not only we are getting better access to cells, but also better access of the oligonucleotide into the nucleus, of course, which is necessary to perform its role and function.

Laura Chico

Thanks very much.

Operator

Thank you. And this concludes the Q&A session. I’d now like to turn the call back over to James McArthur for any closing remarks.

James McArthur

Thank you, operator and thank you everybody for participating in today’s call. Have a great afternoon and evening depending on where you are. Thank you.

Operator

This concludes today’s conference call. Thank you for participating. You may now disconnect.

OPFI – OppFi Inc (OPFI) Q4 2022 Earnings Call Transcript

Written by SA Transcripts on March 25, 2023. Posted in OPFI, Stock Report.

OppFi Inc (NYSE:OPFI) Q4 2022 Earnings Conference Call March 23, 2023 4:30 PM ET

Company Participants

Shaun Smolarz – Head, Investor Relations

Todd Schwartz – Chief Executive Officer and Executive Chairman

Pam Johnson – Chief Financial Officer

Conference Call Participants

Mike Grondahl – Northland Securities

David Scharf – JMP Securities

Chris Brendler – D.A. Davidson

Operator

Good afternoon and welcome to OppFi’s Fourth Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. As a reminder, this conference call is being recorded. [Operator Instructions] And it is now my pleasure to introduce your host, Shaun Smolarz, Head of Investor Relations. Thank you, sir. You may begin.

Shaun Smolarz

Thank you, operator. Good afternoon. On today’s call are Todd Schwartz, Chief Executive Officer and Executive Chairman, and Pam Johnson, Chief Financial Officer. Our fourth quarter 2022 earnings press release and supplemental presentation can be found at investors.oppfi.com.

During this call, OppFi will discuss certain forward-looking information. These forward-looking statements are based on assumptions and assessments made by OppFi’s management in light of their experience and assessment of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today and OppFi undertakes no duty to update or revise any such statement, whether as a result of new information, future events or otherwise. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the company’s filings with the Securities and Exchange Commission, including the sections entitled Risk Factors.

In today’s remarks by management, the company will discuss certain non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in the earnings press release issued earlier this afternoon. This call is being webcast live and will be available for replay on our website.

I would now like to turn the call over to Todd Schwartz.

Todd Schwartz

Thanks, Shaun and good afternoon everyone. We’re excited to begin 2023, and we believe our business continues to stabilize and strengthen. As founder of OppFi, I returned as CEO a year ago and immediately took steps to enhance our leadership team as well as talent in key roles throughout the company.

While the macro environment in 2022 was challenging in many ways, we persevered with resiliency, focus, and a relentless emphasis on improvement. As a result, despite significant economic headwinds, including a 40-year peak in inflation, we delivered record net originations, total revenue, and ending receivables for the full year. As a result, we achieved our eighth consecutive year of profitability, exceeding our profitability guidance for 2022.

Although, challenging at the time, we embraced the learnings from 2022 as they provide a distinctive competitive advantage. We believe that embedding these learnings into our operating processes going forward enhance our ability to deliver a stable, profitable platform across economic cycles. We are optimistic about 2023, while remaining mindful of the continuation of an uncertain macroeconomic environment. The experiences of 2022, coupled with our 10-year business history, give us the confidence that we can control our success by balancing originations growth, overall risk, and expenses.

Pam will review our fourth quarter and full year results in detail, as well as discuss guidance for Q1 and full year 2023. Before she does, I will cover four topics. One, some highlights from our Q4 and full year 2022 financial performance; two, an update on strategic business initiatives for 2023; three, our macroeconomic outlook and quarter to date business trends; and four, our long-term growth strategy. Our fourth quarter results were driven by credit performance and operational leverage through expense reductions. This enabled us to beat the top end of our full year guidance for adjusted net income.

The key highlights for the full year compared to the previous year included 27% growth in net originations to $758 million, 19% growth in ending receivables to $403 million, 29% growth in total revenue to $453 million, net income of $3.3 million and adjusted net income of $5 million. We also successfully improved our marketing and operating cost efficiencies in 2022 as demonstrated by the 20% decrease in marketing cost per new funded loan and a 13% improvement in operating expenses as a percentage of total revenue, excluding interest expense, add-backs, and one-times. In addition, our net promoter score, or NPS, was 82 for 2022. We believe that maintaining an 80 plus NPS score demonstrates the value and quality of OppFi’s platform in different operating environments, and even more so, when there are elevated charge-offs and challenging macro conditions.

Turning to our fourth quarter summary. On a year over year basis, total revenue increased by 25% to $120 million. Net loss was $5.2 million and adjusted net loss was $2.8 million. Our improved efficiency trends continued in the fourth quarter with a 25% decrease in marketing cost per new funded loan and a 23% improvement in operating expenses as a percentage of total revenue, excluding interest expense, add-backs, and one-times. One of the other highlights in the fourth quarter was the closing of $150 million credit facility with Castlelake. The addition of Castlelake to our existing stable of funding sources has already helped fuel profitable growth and demonstrates that OppFi can continue to attract funding even in challenging market conditions. We’re excited to have a new financial partner and look forward to continuing to grow with them.

Now, I’d like to provide progress updates on some of our core strategic initiatives that we expect to drive our 2023 financial performance. Last year, the most significant adjustments to credit models were made in the company’s history. In the fourth quarter, the first payment default rate continued to improve, which we think bodes well for performance later in 2023. The vintage level metric is generally a leading indicator for the net charge-off rate.

In the fourth quarter, the first payment default rate for new customers continued to move closer to pre-pandemic levels, having been down 29% from the second quarter before credit adjustments were made. For existing customers on refinanced loans, the first payment default rate was down 11% from the second quarter. In the fourth quarter, delinquency rates across the portfolio began to improve. The total past-due rate decreased 7% from the end of the third quarter, and we have experienced further improvement so far in the first quarter. These improvements provide us with the confidence that the net charge-off rate will improve later this year as better performing new and refinanced loans comprise a larger mix of the portfolio and older non-performing loans cycle out.

Focus remains on continuous improvement to credit models, specifically by utilizing technology, data sources, and additional attributes to enhance the accuracy and manage risk for the underwriting platform. This year, we are also very focused on enhancing our platform differentiation. Key marketing initiatives include exploring new partners and channels, improving search engine optimization, as well as making direct mail and email more compelling and efficient. We’re also working towards building upon our 66% increase in referrals that we experienced last year.

From a product perspective, we are continuing to introduce and communicate to customers new features such as same-day funding in collaboration with our bank partners as well as enhancements to our self-service payment portal. Our renewed values-based collection strategy continues to be accretive to our business, yielding increased payments and lowering our net charge-off rate. Additionally, recoveries of previously charged-off loan balances grew by 26% year over year. We expect this area to further contribute to our earnings rebound this year. 2022 was a strong year from an expense leverage perspective as revenue growth substantially outpaced operating expenses. This year, we remain focused on realizing more expense efficiencies by focusing on technology and operational initiatives.

I’d now like to spend a couple of minutes discussing our current macroeconomic view as well as some current business trends for the first quarter. We’re encouraged by recent economic reports indicating that inflation is decelerating and that for some categories such as used vehicles, prices are falling. The employment market continues to be strong as the overall unemployment rate remains low at 3.6%. These trends are helpful for middle class consumers, which is our addressable market. Pam will detail our Q1 and full year 2023 guidance; however, I will say that we are encouraged by our quarter-to-date trends, which we think set us up nicely for a significant rebound in full year adjusted net income. With that said, we expect profitability to be skewed to the second half of the year as Q2 will be partially impacted by loan vintages from last year before credit adjustments were made.

Now, I’d like to take a step back and provide an update on our long-term growth strategy to accelerate profitable growth. In addition to our plans to drive core product volume growth and expand our partnerships to serve more consumers, we are expanding our focus on corporate development. In our view, this is the best way for us to diversify the business.

During our 10-year history, OppFi has generated significant brand equity across a core set of attributes, credit access and choice, transparency, value, and market leading customer experience driven by technological innovation. We believe these same attributes would have significant synergy and create incremental value with platforms or assets in adjacent customer or product categories. We think by bringing such platforms or assets under the OppFi umbrella, we could drive scale and diversification in a manner that strategically leverages our core competencies. For investors, our long term goal is to deliver sustainable earnings per share growth that is consistently among the highest in our industry. We are confident that we are on the right path to achieving this vision.

Before I turn it over to Pam, I want to reiterate that we are optimistic about 2023, given continued strong origination demand and improved credit performance. With our positive outlook and confidence in the business, my family and I purchased OppFi’s shares in the open market during the fourth quarter open trading window. We intend to continue purchasing shares in the open trading windows when we believe the market price does not reflect its long-term intrinsic value.

With that, I will turn the call over to Pam.

Pam Johnson

Thanks Todd and good afternoon everyone. We are very pleased to have achieved our eighth consecutive year of profitability with record net originations, total revenue, and ending receivables. In addition, we exceeded all of our full year 2022 guidance metrics that we reiterated in our third quarter earnings release: total revenue, operating expenses as a percentage of total revenue, excluding interest expense, add-backs and one-time items; and adjusted profitability.

For 2022, adjusted net income was $5 million, resulting in adjusted earnings per share of $0.06. Total revenue increased 29% to $453 million, while net originations were up 27% year over year to $758 million, driving a 19% increase in ending receivables to $403 million. Adjusted EBITDA was $54 million. For the fourth quarter, total revenue increased 25.1% to $120 million, despite our net originations of $187 million, which was the same as the year ago period. This reflects the credit adjustments made in the third quarter.

From a mix perspective, in the fourth quarter, approximately 54% of originations were to existing customers for refinanced loans. On an absolute basis, new customer loan originations for the quarter decreased by 10% year over year due in part to the credit adjustments implemented in the third quarter, while existing customer loan originations increased by 10%.

We are very pleased that new originations for the lowest credit risk tier increased by 328% year over year. We accomplished this with strategic marketing initiatives, including adjusted our filter criteria with key digital marketing partners, as well as moving upmarket with our direct mail campaign. Our annualized net charge-off rate as percentage of average receivables was 71% for the fourth quarter of 2022, compared to 53.2% for the prior year quarter. As a percentage of revenue, the annualized net charge-off rate was 59.8%, compared to 43.2% last year. Given the steadily improving early delinquency rate performance at the vintage and portfolio levels, we believe that the net charge-off rate peaked in the fourth quarter and will begin to improve with our first quarter results this year.

Turning to expenses, operating expenses for the fourth quarter, excluding interest expense, add-backs, and one-time items, totaled $42.2 million or 35.1% of total revenue, compared to $43.9 million or 45.8% of revenue for the fourth quarter of 2021. The year over year decrease was primarily driven by lower direct marketing spend due to lower cost per funded loan and increased efficiencies through headcount reduction. Adjusted EBITDA totaled $9.9 million for the fourth quarter, compared to $20.4 million in the prior year quarter, as higher revenues and relatively lower expenses were more than offset by increased net charge-offs.

Interest expense for the fourth quarter totaled $10.7 million or 8.9% of total revenue, compared to $6.9 million or 7.1% of total revenue in the same period a year ago. The year over year increase was due to higher interest rates on our credit facilities utilized to fund originations growth. Adjusted net loss was $2.8 million for the fourth quarter, compared to adjusted net income of $11.4 million for the comparable period last year. This loss was smaller than anticipated by our full year guidance due to the credit performance.

For the three months ended December 31, 2022, OppFi had 14.6 million weighted average diluted shares outstanding. Since this period resulted in an adjusted loss, the basic and diluted share counts were the same as they both exclude dilutive securities. Adjusted net loss for the fourth quarter was $0.19 per share.

As a reminder, our shares of Class B common stock that are exchangeable into shares of Class A common stock as a result of our Up-C structure are excluded from the diluted shares calculation in any period in which OppFi reports a loss because the inclusion would be anti-dilutive.

Our balance sheet remains healthy with cash, cash equivalents, and restricted cash of $49.6 million, total debt of $347.1 million, gross receivables of $457.3 million, and equity of $159.1 million as of quarter end. We believe we have ample liquidity available to support our future growth plans with $532.2 million in total funding capacity at the end of 2022. During the fourth quarter, OppFi did not have any activity under its share repurchase authorization. For the year, the company repurchased approximately 704,000 shares for $2.4 million at an average price of $3.47 per share.

Turning now to our outlook. For full year 2023, we are providing guidance for total revenue of $500 million to $520 million, which implies growth of 10% to 15% year over year. We expect adjusted net income of $22 million to $28 million. Based on an anticipated diluted weighted average share count of 84.3 million, adjusted diluted earnings per share would be between $0.26 and $0.33.

For the first quarter, we expect to be approximately breakeven on an adjusted basis. Quarter to date, we have managed the business to tighter balance of growth and risk. In addition, we expect our net charge-off rate to improve sequentially from the fourth quarter, while remaining elevated. The net charge-off rate remains elevated due to the dynamic of poor performing loans cycling out of the portfolio and our conservative approach to growth at the beginning of the year.

Beginning in the second quarter, we expect to return to quarterly profitability with a gradual acceleration during the remainder of the year as credit continues to strengthen based on adjustments made last year and a customer mix that is shifting to our lowest risk tiers. The improvements in the first payment default rate and total portfolio delinquency rate provide us confidence that the net charge-off rate will decrease as the year progresses.

With that, we would now like to turn the call over to the operator for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And the first question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.

Mike Grondahl

Hey, thanks, guys. The first question, could you just talk about the yield environment that you’re seeing? And are you seeing any compression there? And then secondly, just what’s the one or two main attributes that you’re seeing that gives you some comfort that charge-offs peaked in 4Q?

Todd Schwartz

Yes, good question. Just to clarify, though, when you say yield compression, can you be more specific. So I answer your question correctly.

Mike Grondahl

Yes, I mean, I guess, I’m just saying what are the yields you’re offering in the market? And have you had to lower those or are those compressing at all? I mean, I don’t know that they are, but that’s what I’m asking.

Todd Schwartz

Yes, pricing. So the answer is no. There is been some favorability there. I think Pam had mentioned this that we are we are currently, on behalf of the bank partners, originating the highest percentage of low-risk customers that we’ve seen. Part of this is macroeconomic situation that’s going on in the country, where we’re seeing significant tightening still going on above us. Then obviously, with the banks right now, that’s going to exacerbate it. But also due to our marketing team and our funneling, we’ve been able to find new pockets and be able to go after growth in those areas. So it’s a little – it’s a attribution of it, it’s a little bit of both.

Mike Grondahl

Got it. And then I guess, the one or two attributes you’re seeing, that make you believe net charge-offs have peaked.

Todd Schwartz

Well, listen, I think there is uncertainty in the macroeconomic environment for different swaths of customers, in particular, it’s our customer. I said it many a times last year, spike high inflation is probably the most painful for our customers, which peaked in in last year, and we think it peaked in Q4. We usually kind of – the way we look at things is when loans are originated, usually 6 months after is kind of when we would see the spike in charge-offs. But for our customers specifically, we’ve seen significant improvement. Customers that we lend to, the middle-income consumers, they have changed their behaviors. We’re pretty sure of it. They have been able to adapt to the high price environment. And when things changed, they were kind of in shock and people had to adjust their lifestyles. But what’s happened now is, people have done that, and we’ve been able to see significant improvement in our FPD rates and total DQ rate. Also, the other thing I’ll say is unemployment, right? So unemployment remaining low has been very beneficial for our customers. Our customers are gainfully employed. And then that has been something that we kind of forecasted to tick up. And I think everyone is surprised with how unemployment has stayed so low.

Mike Grondahl

Got it. And maybe I’ll just ask one more. But historically, I thought your collection strategy was pretty hands off, and it sounds like you’re kind of leaning into collections a little bit. You said something about recoveries were being up 26% year-over-year. One, could you just kind of describe that collection strategy and two, what’s the dollar amount associated with up 26% like, what were recoveries last year and this year?

Todd Schwartz

Yes, I will. I can pull the number for you while I’m talking, but we’re going to pull for you. But it’s interesting you say that. So OppFi has never been an aggressive collector of debt. We have always been a humanistic, value-based recovery strategy where we treat people with dignity and respect, and we’ve continued to do that. But that doesn’t mean that product features like a portal, a self-service payment portal, for settlement offers, for collecting on people’s loans, and making it easier for customers to pay with more debit card integrations and abilities to pay, is really where we’re seeing a lot of the pickup, right? And so how we treat our customers and our thoughts around that, they are never going to be aggressive. And – but we do make sure that we give customers options and we’re prudent on follow-ups and settlement offers to make sure that we’re successful.

Mike Grondahl

Got it. Thank you.

Todd Schwartz

And Pam has pulled the numbers. I think you had a question on the increase. Go ahead.

Pam Johnson

Sure. Mike, we had about $12 million in recoveries in 2021, and we had over $15 million in 2022.

Mike Grondahl

Got it. Okay. Great. Thank you.

Operator

[Operator Instructions] Our next question comes from the line of David Scharf with JMP Securities. Please proceed with your question.

David Scharf

Hi, good afternoon. Thanks for taking my questions. I had a few I wanted to touch on. One is somewhat guidance related. But we obviously got good color from you directionally on the expected pace of losses, given the credit tightening mid-year, last year, and how those run off. Can you give us a sense for how to frame what you think of is a normalized loss rate? Obviously, 2021 was depressed based on stimulus. Late 2022 is elevated based on some of those vintages that were originated with neobanks and other sources. Where should we be ending this year if we should think of the end of ‘23 as a more normalized level?

Todd Schwartz

Yes. It’s a good question. And I’ll take the first question of the target of [indiscernible]. So historically, OppFi has been around 10 years now. We’ve achieved mid to – mid-30s percentage of revenue, that has historically been where the business operates very efficiently and where we’ve had it. I think that obviously spiked this year, but our goal is to get that back down into the mid-30s in a normalized environment. I think this year, we still have a little bit flowing through in the first quarter. Obviously, we’re optimistic on what we’re seeing on that front and feel really, really good. But we are still dealing with some of that but feel like we’re going to make significant progress if things continued the way they are looking as far as our early indicators.

David Scharf

Got it. Understood. Todd, I also wanted to just dig a little more into some of the strategic initiatives you were talking about, and specifically, you made reference to sort of product and asset adjacencies. And I guess, I’ll just play devil’s advocate for a moment. Historically, the equity markets haven’t been very kind to consumer lenders that have branched out very often expanding their products in – under the guise of, there is a lot of different ways to serve our existing customer. Even if well-founded, very often sticking to the knitting strategy has been rewarded mostly. Can you talk about, just given where your market share is now, the opportunity in front of you with just your core lending business, maybe what the thought process is about expanding corporate development activities as opposed to just staying focused on the core product?

Todd Schwartz

Yes. So to be clear, be focused is the core business. That is the focus. And we think there is a lot of growth and opportunity in – just in our core business and we can do that. I do think though, as we look to the future, like the current environment is actually starting to get more active. Whereas, like two years ago, everything was so overvalued and there was no – there was really no value in our ability to really find value. There are some specific verticals we’ve identified that are pretty sizable addressable markets, that there is real profitable growth that we think matched up with our consumer business and our brand equity and our skillset, could not only drive future net income growth for the business but also, it’s a diversification away from our core business, which gives people comfort that there is new revenue and profit streams. And we feel like in this environment, maybe with – it’s a little premature now. But we feel like coming, there is going to be accretive acquisitions out there, and that can definitely help us with our long-term vision and story. And so we’re starting to – last year was all getting the business stabilized. We focused on balance sheet. We focused on really targeting those high-risk customers, and we’re going to continue to do that. That is the priority this year, to make it really clear. But we think that there is going to be some opportunity coming in this economy with some of the dislocation that we’re seeing today. And listen, I – and yes, that’s what I’ll say on that.

David Scharf

Okay. No, understood. And then maybe just lastly, I guess in today’s environment, particularly the news flow in the last couple of weeks, kind of be remiss if I didn’t ask, just the relative stability of deposits and otherwise, your bank partners, particularly your leading partner. Anything you can comment there?

Pam Johnson

Yes, I’ll take that one, David. We’re not exposed to any losses from Silicon Valley Bank or Signature. We have really good strong relationships with some very strong banks and really have concentrated our deposits and our banking relationships with those two strong players.

David Scharf

Got it. Got it. And actually – and also, Pam, I guess what I was really referring to is just the relative – FinWise and the banks that you partner with to be the lender of the actual originator, whether there is anything they have been impacted at all? I’m not aware of anything, but I just wanted to ask.

Todd Schwartz

Yes, I don’t – yes, I don’t have a crystal ball and what’s going to happen to the whole regional and small banks in this environment. It’s – I think we’re all waiting and seeing there. I do feel that the guaranteeing of deposits by the Fed in the FDIC was the right move to prevent run on regionals from just a overall standpoint, that’s how I feel about it. However, we have no knowledge. And we’ve checked in with all our bank partners and all our partners and have no exposure to SVB or Signature.

David Scharf

Got it. Great. Thank you very much.

Operator

[Operator Instructions] And our next question comes from the line of Chris Brendler with D.A. Davidson. Please proceed with your question.

Chris Brendler

Hi. Thanks. Good afternoon, guys. Just wanted to drill in a little bit more on the credit picture, just because given the fair value accounting it’s a little more difficult to see from the trends you’re talking about. Can you just give us a little more color, if possible, on your delinquency trends into the first quarter that’s given you the confidence? And it sounds like, from the fair value marks – slides that maybe the back-book was causing some of the elevated charge-offs in the fourth quarter, and therefore – that’s why, things don’t get better because the back-back is wondering off. Anymore color there would be great? Thanks.

Todd Schwartz

Yes. Specifically, we’re looking at early indicators. Like, we have a lot of history from the 10 years of operating that – our level of confidence in our early indicators. And similarly in July, when we made one of the largest credit adjustments in the company history, we kind of used early indicators to determine future forecast and profitability and gross charge-offs. So our early indicators are very favorable. Obviously, we do realize the environment right now is a little – there is a little volatility out there in the economy. But we feel really good that the credit adjustments that we’ve tested into, made and now, fully deployed, and continue to refine and improve, were the right ones. And our level of confidence is growing as the year goes on.

Chris Brendler

Okay, great. That’s helpful. I just wanted to ask also on the front end of the business, the competitive environment sort of when you guys first came public, it was a very strange macroenvironment where demand was artificially low. And I assume that’s changed dramatically in the last 18 months. But I think as you look into ‘23, it feels like you’re OppFi should be a good spot from a competition perspective, like probably more loan volume they can handle. But just given the offset of what’s happening on the credit front, how do you balance those two? And what does that mean from a net basis on the origination growth outlook? Thanks.

Todd Schwartz

Yes. I mane, we’re not – by no means, we are not loosening credit. That’s pretty certain. What we have found, though, is with predictive attribute sets, you can make customers look low risk and we’ve tested into that. And that is looking accurate. On the growth side, though, we see less competition. There is been a couple of players non-public, one public player, I won’t mention any names, that’s gone private. And then there is been some more regional players that are not showing up as frequently and maybe dealing with some balance sheet issues as well. So we feel like we’re in a really strong position. We are the leader in our space, in our credit bands, and we feel really confident. And also, I mentioned this couple of times, but seeing the largest percentage of low-risk customers that we’ve seen historically.

Chris Brendler

Okay. And one more as I have you is just new Castlelake facility was disclosed in December, any color around the terms of pricing? Sort of how you came to close that deal? Obviously, a pretty impressive transaction in this macroenvironment. And I hope it speaks to the confidence that not only you, but they have in your credit performance, would be great to hear.

Todd Schwartz

Yes, it’s on the same terms as our other facility. Obviously, interest rate increases are real, and it’s something we’re watching closely. But that’s on all facilities with floating rate based off SOFR. But as far as the terms go, LTV terms and flexibility, it’s substantially the exact same.

Chris Brendler

Great. Thanks, Todd.

Operator

There are no further questions in the queue. And now, management will answer your questions submitted via the webcast.

Shaun Smolarz

Why was the corporate share repurchase program not utilized in the fourth quarter?

Todd Schwartz

Okay. Yes, I mean, first of all, I’d like to start by saying, I personally purchased shares, my family personally purchased shares. But when you’re looking at some of the – first of all, the opportunity set, there is a – we feel really strong right now and our confidence level just on credits is getting higher and our ability to find very profitable transactions for growth is first and foremost. I think right now though, coming out of this, we see some competition around us where there is some balance sheet issues. And we’ve come out of this with a really strong balance sheet, with a really strong cash position – unrestricted cash position and feel that we want to see a couple more cards before we just start investing in spaces and being very thoughtful and strategic about where we want to allocate that capital. And I think right now – I forget who said it, but cash is king in this environment. And then having a strong balance sheet is definitely something that we’ve prioritized and have worked through and feel really good about. So it’s not to say that the company is not going to purchase coming up here. We still think the stock price is disconnected from its long-term intrinsic value. And so personally, the family is purchasing. Just the company we decided, we’re going to wait for the time being.

Operator

And as there are no more questions from the webcast, I’d like to pass it back to management for any closing remarks.

Todd Schwartz

I want to thank everyone for joining us today. We’re excited by our start to 2023 with improved credit performance and a higher mix of origination to the lowest credit risk tiers. We look forward to updating you again on our progress in May. And we expect to report our Q1 results then. Thanks, everyone.

Operator

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

IVVD – Invivyd, Inc (IVVD) Q4 2022 Earnings Call Transcript

Written by SA Transcripts on March 25, 2023. Posted in IVVD, Stock Report.

Invivyd, Inc (NASDAQ:IVVD) Q4 2022 Earnings Conference Call March 23, 2023 4:30 PM ET

Company Participants

Kyra Faircloth – Investor Relations

Dave Hering – Chief Executive Officer

Pete Schmidt – Chief Medical Officer

Lukas Dillinger – Interim Head, Discovery and Preclinical

Fred Driscoll – Interim Chief Financial Officer

Conference Call Participants

Evan Wang – Guggenheim

Sidharth Mehta – Jefferies

Operator

Thank you for standing by and welcome to the Invivyd 2022 Year End Financial Results Update Call. [Operator Instructions] As reminder, today’s call is being recorded. I would now like to turn the conference to your host, Kyra Faircloth, Vice President, Advocacy and Corporate Communications. Please go ahead.

Kyra Faircloth

Thank you for joining us today. Before we get started, I wanted to attend to a few housekeeping items. I invite you to review our press release discussing our full year ended December 31, 2022 financial results, which can be found on the Investors section of the Invivyd website. I would like to remind you that during today’s discussion, we will be making several forward-looking statements.

Forward-looking statements include statements concerning, among other things, the future of the COVID-19 landscape including the expectation of its continued evolution and emergence of new variants and sub-variants, our ongoing research and clinical development plans, including the timing of these plans as well as the technology and resources to develop therapeutic or preventative options for COVID-19 and other infectious diseases our regulatory and commercialization plans and opportunities and our expected cash runway and other statements that are not historical fact. Forward-looking statements are subject to a number of risks and uncertainties and that may cause our actual results to differ materially from those expressed or implied in the forward-looking statements, including those described under the heading Risk Factors in our filings made with the U.S. Securities and Exchange Commission including our most recent 10-K filed earlier today.

It is now my pleasure to introduce the Invivyd management team to the call. I am joined by Dave Hering, CEO of Invivyd, Dr. Pete Schmidt, Chief Medical Officer; Dr. Lukas Dillinger, Interim Head of Discovery and Preclinical and Fred Driscoll, Interim Chief Financial Officer.

With that, I will turn the call over to Dave.

Dave Hering

Good afternoon and thanks for joining the call. We are looking forward to sharing with you financial results from this past year, along with highlights of significant progress we made during this past quarter. For those who maybe new to the Invivyd story, we are on a mission to rapidly and perpetually deliver antibody-based therapies designed to protect vulnerable people from the devastating consequences of circulating viral threats.

Beginning with SARS-CoV-2. The foundation of our mission is based on three key factors: one, COVID is here to stay and represents an unacceptable medical burden on human kind. Two, the medicine cabinet to protect humanity from COVID is alarmingly limited; and three, we are uniquely positioned to keep pace with viral evolution and provide therapeutic options to people who urgently need them. We have reached a stage where SARS-CoV-2 is circulating unchecked amongst the broader population with as many as 85% of people in the U.S. having been infected.

The vaccination rate for boosters is exceedingly low compared with rates of the primary series. Recent reports highlight that only 28% of the eligible people have now received the most recent COVID-19 booster. People are being infected and reinfected while the virus continues to evolve. Every day, 250 to 400 families in the U.S. lose a loved one to COVID-19, and COVID remains the third leading cause of death behind only heart disease and cancer. While most of society has accepted the status quo and are trying to live with COVID, we would argue that all are not living well, particularly vulnerable populations.

Although the immediate impact of COVID-19 on many healthy adults appear mild the long-term consequences remain unknown. Preliminary data reported by the Mayo Clinic show that COVID-19 infections are linked to long-term complications that impact numerous body systems, including pulmonary, renal, neurological and gastrointestinal complications. Additionally, vulnerable populations remain at an increased risk of severe disease, resulting in hospitalization and even death. Immunocompromised patients alone in the U.S. represent between 8 million and 20 million individuals, depending on how their status is classified. The threat we are facing from COVID-19 is constantly changing as viral evolution has continued through Omicron sub-lineages. In fact, hundreds of new variants have been identified in the U.S. in the last 5 months. This continual viral evolution mandates that drug discovery and development must keep pace. However, as of January 2023, there are no longer any monoclonal antibodies for the treatment or prevention of COVID-19 authorized in the U.S. We consider this market an open opportunity for Invivyd to target near term. For reference, the last full quarter with all antibodies authorized in the U.S. and/or approved globally, represented approximately $1.1 billion in revenue.

Importantly, we see this category growing because although many populations have been served by vaccination and treatment with antiviral medication as we referred to, there are many populations who have not benefited from these approaches and which will require ongoing protection and treatment outside of the major options. Monoclonal antibodies for COVID-19 alone generated almost $8 billion in revenue in 2022. While the bad news is, there are no monoclonal antibodies available for treatment or prevention and an ongoing high burden of disease, the good news is we believe Invivyd uniquely positioned to respond to this need, having generated a pipeline of multiple next-generation engineered antibody candidates for COVID-19 designed to keep pace with viral evolution. Our pipeline assets are engineered to be broadly neutralizing antibodies effective across multiple members of the coronavirus family to support their prolonged utilities.

Earlier this month, we announced plans to advance VYD-222, our next pipeline candidate into the clinic for SARS-CoV-2. VYD-222 is one of the components of NVD200, a mAb combination candidate that Invivyd previously elected to advance in development. The company chose to prioritize the clinical development of VYD-222 monotherapy instead of NVD200 combination products because we believe this strategy will enable us to provide patients with a much needed therapeutic option as quickly as possible in a capital-efficient way. Importantly, we had selected a combination drug candidate prior to the emergence of potential expedited regulatory pathways, which may allow Invivyd to develop multiple new antibodies staggered in time to take advantage of data from new SARS-CoV-2 variants.

We see VYD-222 as a highly attractive candidate for clinical advancement for several reasons. VYD-222 targets the Spike protein of SARS-CoV-2, a well-understood mechanism with a safety profile established by multiple FDA-approved antibodies, which we feel reduces clinical risk. Additionally, VYD-222 is an engineered version of our first monoclonal antibody product called adintrevimab which demonstrated clinically meaningful results across its three primary endpoints and large global Phase 3 trials. Our strong data package from adintrevimab has the potential to support accelerated development of VYD-222.

Importantly, in standardized in-vitro assays, VYD-222 showed neutralizing activity against multiple currently circulating variants of concern, including those that led to the obsolescence of products previously authorized in the U.S. that has since been told from the market. We continue to plan to initiate a Phase 1 clinical trial in Q1 of 2023 and assuming positive Phase 1 data, we anticipate rapidly initiating the Phase 3 pivotal trials that could support regulatory filings globally.

Recently, there have been several positive external developments that indicate momentum for faster development of next-generation COVID treatments, including VYD-222. We are often asked about the White House’s decision to end the COVID-19 public health emergency and how this could impact the FDA’s emergency-use authorization for COVID and the development of monoclonal antibodies like VYD-222. We do not see this impacting our development strategy. Soon after the Biden administration announced that the public health emergency will end on May 11, and the FDA confirmed that existing EUAs for vaccines, tests and treatments will not be affected and confirms that it may continue to issue EUAs for new products that meet the required criteria.

Additionally, the industry remains hopeful that alternative efficient regulatory strategies to support the development of novel monoclonal antibody therapies will be utilized for this critical unmet need. While we are optimistic about VYD-222’s potential to serve the critical need for therapeutic options for COVID-19, continued viral evolution dictates that we also continue to evolve our assets and further add to our pipeline. Leveraging our proprietary discovery platform approach, we are perpetually monitoring emerging viral threats, discovering, engineering and evaluating new monoclonal antibodies for their ability to neutralize SARS-CoV-2. In addition to VYD-222, we have three other COVID-19 candidates in our pipeline at the preclinical stage. The message is clear. There remains a large persistent medical and commercial opportunity. Outside of COVID, I am not aware of any other opportunity in biotech that is larger, offers a faster path to authorization and has a higher probability of meaningful clinical results given our mechanistic understanding of the virus. We believe we are well positioned to capitalize on this opportunity time and time again with our proprietary discovery technology.

I will now turn it over to our Chief Medical Officer, Pete Schmidt, to review our recent pipeline progress and ongoing discovery and development activities.

Pete Schmidt

Thanks, Dave. As Dave mentioned, we recently nominated VYD-222 to advance to the clinic as a new monoclonal antibody candidate or mAb, against SARS-CoV-2. As you know, VYD-222 will be our second mAb candidate to enter clinical testing. After a Phase 1 dose ranging trial to evaluate safety and pharmacokinetics, or PK, we intend to initiate what we expect to be a larger registrational Phase 3 clinical trial to assess the efficacy of VYD-222 to prevent COVID-19, specifically in immune-compromised individuals. VYD-222 has demonstrated in-vitro neutralizing activity against SARS-CoV-2 variant of concern or VOCs, including the current dominant Omicron sub-lineage XBB.1.5.

VYD-222 is an engineered version of adintrevimab, our first investigational mAb. And adintrevimab has a robust safety data package and has demonstrated clinically meaningful results in global Phase 3 clinical trials for both the prevention and treatment of COVID-19 during the Delta and Omicron BA.1 waves of SARS-CoV-2, but subsequently lost in-vitro activity against Omicron BA.2. Utilizing our expertise in protein engineering, we were able to restore in-vitro neutralization activity against BA.2 and other Omicron VOCs while maintaining activity against previous VOCs. Our precision engineering resulted in VYD-222 different from adintrevimab by only 8 amino acids in the variable region. The regulatory landscape around COVID-19 is advancing. And there has been considerable movement with the U.S. Food and Drug Administration and the European Medicines Agency as they work to establish regulatory frameworks that consider the rapidity of viral evolution.

The agencies are looking for ways to accelerate development of mAbs as well. On December 15, 2022, and a joint EMA, FDA workshop entitled, efficacy of monoclonal antibodies in the context of rapidly evolving SARS-CoV-2 variants was held to discuss alternative strategies for the development of novel mAb therapies, including those based on prototype products that have demonstrated safety and efficacy in clinical trials.

Invivyd was asked to present alongside Eli Lilly and Regeneron at this workshop to discuss ways of accelerating mAb development against COVID-19. As part of the joint industry presentation and utilizing data from our adintrevimab prevention trial, EVADE, neutralizing antibody titers were proposed as a surrogate marker of protection. It is our belief that these neutralizing antibody titers, combined with associated PK and safety information, could be used for a streamlined development pathway in the prevention of COVID-19. Encouragingly, we have seen other companies in the COVID-19 mAb space refer to the use of biomarker surrogate endpoints to expedite their clinical development, which may suggest that the FDA and other major regulatory bodies have agreed in principle to such a trial design for a next-generation mAb product. We see this as an important advancement not only for VYD-222 ,a but also for future mAbs, we anticipate generating against SARS-CoV-2 to allow us to rapidly shift from 1 mAb to another as the virus mutates.

After demonstrating clinical development success with adintrevimab by generating clinically meaningful results, we are leveraging and applying this expertise to new therapeutic candidates. Furthermore, targeting the SARS-CoV-2 receptor binding domain, or RBD, is a well-validated mechanism of action for mAbs with robust safety and efficacy data generated across the class. We expect that these data supporting the broader class of RBD targeted antibodies will also enable regulatory authorities, including the FDA and EMA to apply surrogate endpoints as correlative protection in future clinical trials.

I know many of you want more details about our clinical trial design and time lines. For VYD-222, we are planning a standard Phase 1 PK and dose rating trial. This trial, which will be conducted in Australia is on track to dose the first patient this quarter. Consistent with the adintrevimab program, we are planning to initiate Phase 3 pivotal trials that could support global regulatory filings rapidly on the heels of completing this Phase 1 trial.

With regards to CMC, to support manufacturing of our clinical materials and commercial drug product, we have the partnership with WuXi which has FDA-approved manufacturing facilities and has delivered 100% of our drug substance lots on time. Through this relationship, we have already manufactured the drug substance needed for clinical trials of VYD-222 in support of an EUA. I am confident in our ability to work with speed, agility and efficiency to reduce traditional clinical time lines and to get to top line data as quickly as possible.

I will now pass the call over to Lukas Dillinger, Invivyd’s Interim Head of Discovery and Preclinical, who will discuss our ongoing surveillance and antibody discovery, screening and engineering effort.

Lukas Dillinger

Thank you, Pete, for that update on our near-term outlook. As Dave discussed at the beginning of the call, Invivyd’s approach to R&D for COVID-19 is one of perpetual innovation. Invivyd was created to continually develop candidates and not rely on any one candidate. The pace of viral evolution demands that our candidates need to keep pace and have the potential to address emerging modern threats. This unique perpetual discovery engine is fueled by cutting-edge viral epidemiological surveillance, identification of broadly neutralizing monoclonal antibodies and industry-leading B cell mining protein and antibody engineering as well as screening capabilities through our internal expertise and collaboration.

With regards to monitoring viral resolution, we continuously maintain and improve our in-house surveillance system for new and upcoming SARS-CoV-2 variants before these become variants of concern. Furthermore, by pinpointing dominant spike glycoprotein sites targeted by human antibody repertoires and netting common mutational escape routes. We aim to predict and target future SARS-CoV-2 variants. We have industry-leading antibody mining, engineering and developability screening capabilities built with our internal expertise and enhanced with our fully operational [indiscernible] facility that we moved into in December. This is further supported by our partnership with Adimab, our industrial and academic collaborators and the council of our world class scientific advisory board, comprised of leading researchers and key opinion leaders in immunology, virology, epidemiology and the COVID-19 space. Our innovation engine leverages B cell mining capabilities to assess broadly neutralizing antibodies, followed by antibody engineering to improve the potency, breadth, biophysical properties and developability of our candidates we seek to advance into non-clinical development and IND-enabling studies.

For example, where applicable we specifically engineer our antibodies to extend the half-life, modify the assimilated innate immune effective function or to introduce alternative formats, such as single domain or bispecific molecules. Our established platforms and key learnings from our work with our adintrevimab helped to accelerate our path to the clinic and beyond. Through this approach, we are generating not just VYD-222 but the robust pipeline of discovery-stage candidates with potential for use in both, prevention and/or treatment of serious viral diseases, starting with COVID-19. From there, we are expanding discovery efforts into high need indications, including influenza.

Beyond VYD-222, we have already initiated new antibody campaigns, the target reengineering and affinity maturation of our current molecules against the most recent COVID 19 variants of concerns, such as XBB.1.5. We are currently evaluating several of these candidates in preclinical studies to support nomination of additional candidates for IND-enabling and clinical development. We envision further product development opportunities emerging from SARS-CoV-2 discovery efforts for the prevention and/or treatment of COVID-19.

We believe the discovery of additional broadly neutralizing monoclonal antibodies that target new viral epitopes, both within and outside the RBD will support durable products for COVID-19 as new variants of concern continues to arise. In conclusion, our strategy is to predict and respond to variance before they become variants of concern and continuously discover and engineer antibodies with neutralization breadth and potency such that patients in need may have access to high-quality protection even in the face of rapid viral evolution. We do not rely on a single molecule targeting a single epitope that may experience viral case. We believe our integrated discovery platform linked to our drug development and manufacturing expertise offers a unique competitive advantage in this effort and the potential to provide a distinct benefit to patients in need, caregivers and global health authorities searching for durable solutions to the ongoing burden imposed by COVID-19.

With that, I will turn the call over to Fred Driscoll, Invivyd’s Interim Chief Financial Officer, who will discuss our financials.

Fred Driscoll

Thanks, Lukas and good afternoon everyone. Let me begin by providing an update on our 2022 fiscal year P&L as compared to the comparable 2021 period and an update on cash guidance. With respect to operating expenses, R&D, including in-process R&D, was $183.6 million for the year ended December 31, 2022, and compared to $190.4 million for the comparable period of 2021. This decrease is attributable primarily to wind down of adintrevimab clinical trials partially offset by an increase in contract manufacturing, including adintrevimab commercial supply for a potential EUA and to support our pipeline programs, including VYD-222. This decrease in R&D was further offset by an increase in personnel-related expenses.

Our SG&A expenses were $47 million for the year ended December 31, 2022, and compared to $36.5 million for the comparable period of 2021. This increase is attributable to higher personnel-related expenses, professional fees and costs to support our operations as a public company. In the fourth quarter of 2022, the company incurred a $17.4 million expense attributable to a one-time charge associated with warrants issued to Population Health Partners, or PHP, as compensation for consulting services to be provided by PHP to the company.

The net loss for the year ended December 31, 2022, was $241.3 million compared to $226.8 million for the comparable period in 2021. Basic and diluted net loss per share was $2.23 for the year ended December 31, 2022, compared to a net loss of $5.32 for the comparable period in 2021. The net loss of $241.3 million for the year ended December 31, 2022, included a one-time charge of $17.4 million related to the fair value of the warrants issued to PHP.

We finished 2022 in a strong balance sheet position with cash, cash equivalents and marketable securities of $372 million. Based on our current operating plans, which reflect the completion of a bottoms-up departmental analysis that we highlighted on the Q3 earnings call, our cash guidance has improved from our previous guidance. And we now expect our cash will enable the company to fund its operating expenses, excluding any potential revenue associated with VYD-222 into the second half of 2024.

With that, operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Evan Wang of Guggenheim. Your line is open.

Evan Wang

Hi, guys. Thanks for taking my questions. Can you tell us what’s remaining before the VYD-222 trial start and then expand a little bit more in terms of how you guys are thinking about trial design, both dosing, time lines, etcetera?

Dave Hering

Yes. Thanks, Evan. Pete, do you want to talk a little bit about what remains as we’re getting ready towards the end of this quarter?

Pete Schmidt

Yes. As we stated previously, we’re still anticipating dosing our first in-human study this quarter. We haven’t released a lot of details about that study. But as you heard from the call, it’s a pretty traditional dose-ranging PK and safety study. Beyond that, we will continue to release details as appropriate on our subsequent studies.

Dave Hering

Yes. And you asked, Evan a little bit about timing, right? And so – as Pete mentioned, we still anticipate the first study starting by the end of the month, just getting clinical trial material to the sites, getting the recruitment done, etcetera. And then our plan is to continue to have ongoing data releases throughout the year.

Evan Wang

Got it. Thanks. And then in terms of a Phase 3, I know you guys put up a paper in terms of correlates, how are you guys thinking about primary endpoints? And secondly, VYD-222 adapted from ADG20, how does that kind of benefit in terms of if you can provide some maybe a framework in terms of how that may reduce the trial size? And what kind of scope of trial are we looking at here?

Dave Hering

Yes, I’ll take the first part and then Pete, you can take the second. So as we’ve said and shown before, ADG20, our original antibody we went from IND to pivotal clinical data in 16 months, and we utilize both treatment and prevention studies that use event-driven clinical endpoints. And what we continue to look at as a possibility is whether there is an opportunity to use coreless surrogates, immunobridging etcetera. And so those discussions continue. As Pete mentioned, as a part of the upfront on the call, this was really articulated during the December 15 joint FDA EMA meeting, and we, alongside academics and other stakeholders really commented about the need for these types of approaches, especially given the dynamic environment that we’re in, really going against a virus that continues to evolve at such a rapid pace. And so we continue to have those conversations and as we previously mentioned, as soon as we have outlined and confirmed exactly what those clinical parameters would be for pivotal studies we plan to share more details about that. Pete, any other comments?

Pete Schmidt

Yes. Great question about the relationship to ADG20, the molecular relationship. And we’re still in conversations with global regulators around this, of course. But we do believe that it is an advantage to have a robust safety data set and also efficacy data from our previous Phase 3 studies in a molecule that was generated on the same manufacturing platform and is so closely structurally related to VYD – to ADG20, I’m sorry. So lots of potential there.

Evan Wang

Great. Thanks, guys.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Sidharth Mehta of Jefferies. Your line is open.

Sidharth Mehta

Hi, this is Sid on for Michael Yee, Jefferies. So two quick questions. First one being, AstraZeneca, another big company, while they made a lot of money in 2022 and antibodies, have noted that they see the market going significantly down in ‘23 and beyond as we move to an endemic market. So how do you guys think about that as you move your antibody forward? And my second question is although you’ve mentioned having these kind of correlates of protection for Phase 3 studies, has there been any discussion or definitive answers from the FDA on whether or not you can use that as a part of your Phase 3 studies? Thank you.

Dave Hering

Yes, I’ll take the first question. And so our estimates that in 2022, the sort of overall market across vaccines, oral anti-virals, monoclonal antibodies was almost $100 billion. And yes, I think that a lot of folks are predicting that, that will come down. But it’s still an incredibly sizable market, monoclonal antibodies did $8 billion about in revenue in 2022, and that was with predominantly bebtelovimab and Evusheld. And Evusheld did $500 and some million in Q3 of last year. And what we see is with a similar indication, really targeting immune compromised vulnerable populations, they only touched really a fraction of that population, and we continue to work with – these groups talk to patient advocacy groups, speak with these individuals, and they still are really clamoring for products. In particular, I spoke to a physician who works at the Mayo Clinic and said he had never been in a position that these types of patients come in and ask for products, and there is nothing available. And so based on that, we see the market for monoclonal antibodies continuing to be incredibly significant and a huge unmet need in this patient population. As it relates to your other question in terms of where regulators are and what the status is, we will provide updates, additional updates when we get them. We continue to be in dialogue with the FDA and other global regulators. And as I said, as soon as we have confirmed what that trial design will look like, we plan to provide that information.

Sidharth Mehta

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Matthew Harrison of Morgan Stanley. Your line is open.

Unidentified Analyst

Hi, this is an [indiscernible] for Matthew. Thanks for taking our questions. I have two questions. One is – is there any update on adding kind of regulatory thresholds for new antibody therapy for COVID given the change of the pandemic setting. Could there be any flexibility in potential approval? The second is, do you have any updates on your potential progress on flu antibodies therapy development?

Dave Hering

Sure. No, thank you for the question. So on the first one, in terms of regards to thresholds, as you’re likely aware, at least in the U.S., none of the antibodies have been fully licensed and gone through BLA, they have all been authorized through EUAs and there currently are no monoclonal antibodies on the market. And so we have not seen any specific changes in thresholds. In particular, what we continue to look at is in-vitro data ahead of time and as what we’ve seen on VYD-222 is consistently strong activity against a variety of variants, including the most recent on .1.5 and so we see that, that is really important information as it relates to getting products into clinical trials, etcetera. And as I mentioned through the presentation, while the public health emergency is ending, that does not remove the potential for the FDA to utilize the EUAs. And so, we still see that as an open possibility for VYD-222 or our additional other candidates that we have in the pipeline. As it relates to the flu component, I’ll turn it over to Lukas. You can provide an update on the status of what – of where we are with the flu program.

Lukas Dillinger

Yes. Thank you, Dave. So we’ve identified several interesting molecules in the flu program already. These molecules are currently being further characterized in in-vitro assays and other studies, and we will be releasing the data as soon as we have them available.

Unidentified Analyst

Okay, thank you.

Operator

Thank you. I’m showing no further questions at this time. I turn the call back over to Dave Hering for any closing remarks.

Dave Hering

Thank you so much. So thanks, everyone, for joining. It was a fantastic quarter and a great 2022. So I’m very excited for where we are. And as I alluded to at the start of this discussion, I’m extremely pleased with our progress in the fourth quarter and our start to this year. We have multiple monoclonal antibody candidates that have shown in-vitro neutralizing activity against multiple current lineages of Omicron. I believe in the company’s ability to bring to market a product for COVID-19 as fast and efficiently as possible to meet this continued large unmet need in patients and to capitalize on the significant market opportunity and create value for shareholders. Given the rapid pace of viral evolution and the ongoing regulatory environment, we are positioning the company to pivot as necessary to deliver on that goal time and time again. So that concludes our meeting for today. And as always, we will be happy to follow up with analysts or investors one-on-one after the call tonight and tomorrow. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may now disconnect. Have a great day.

TBIO – Telesis Bio, Inc. (TBIO) Q4 2022 Earnings Call Transcript

Written by SA Transcripts on March 25, 2023. Posted in Stock Report, TBIO.

Telesis Bio, Inc. (NASDAQ:TBIO) Q4 2022 Earnings Conference Call March 21, 2023 4:30 PM ET

Company Participants

Jen Carroll – VP, IR

Todd Nelson – President, CEO & Director

Eric Esser – COO

Conference Call Participants

Brandon Couillard – Jefferies

Harrison Schrage – KeyBanc Capital Markets

Poon Mah – TD Cowen

Operator

Good day, and thank you for standing by, and welcome to the Q4 2022 Telesis Bio Earnings Conference Call. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Jen Carroll, Telesis’ Vice President of Investor Relations. You may begin.

Jen Carroll

Thank you, Justin. Good afternoon, and thanks for joining us for Telesis Bio’s Fourth Quarter and Year-end 2022 Earnings Call. With me on the call today are Telesis Bio Founder and Chief Executive Officer, Todd Nelson; Chief Operating Officer, Eric Esser; and Decky Goodrich, Senior Vice President of Commercial Operations. Our fourth quarter and full year 2022 financial results press release is now available on the Investors section of our website.

Before we begin, I would like to inform you that certain statements we make during the call will be forward-looking statements that involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in the safe harbor statement included in our earnings release and in our filings with the SEC. This conference call contains time-sensitive information and is accurate only as of the live broadcast on March 21, 2023. Finally, any percentage changes we discuss will be on a year-over-year basis unless otherwise noted.

And with that, I will hand the call over to our CEO, and we can get started.

Todd Nelson

Thanks, Jen. Welcome, everyone. Thank you for joining today’s call. First, I would like to thank our entire Telesis Bio team for their tremendous efforts resulting in a stellar 2022, where we exceeded revenue expectations, delivered meaningful expansion of gross margin and, in recognition of the current macroeconomic environment, delivered on reducing our operating expenses as a measure to extend our cash reserves. We have done this at the same time as funding our growth initiatives and executing commercially.

Our overall plan this year is to continue to expand our BioXp customer base and drive the adoption of new BioXp kits. And to do this, we’ll be focused on 3 things. First, expanding access to the synthetic biology market. We will do this by introducing our Select kit line of BioXp products that will allow customers to use their own DNA as a starting point. Second, we’ll be entering a new market for NGS library prep. We will launch an NGS library prep kit that will run on our existing BioXp installed base. And later in the year, we will launch a 9600 version for high throughput NGS sample prep. And third, we will expand in the fourth quarter, our genome engineering workflow applications through the launch of CRISPR guide RNA based upon our proprietary enzymatic DNA synthesis chemistry referred to as SOLA.

Telesis Bio is a leader in automated multi-omic and synthetic biology solutions. At our heart, we are an instrumentation company offering unique first-to-market benchtop automation platforms that are driving production of DNA, mRNA and protein to the benchtop for a global customer base. Our systems enable decentralization of rapid, accurate and reproducible writing of biology.

Our vision at Telesis Bio has always been to provide researchers with the tools to build biology in their own laboratory without any constraints. The ability to create novel synthetic biology-enabled solutions allows us to address large unmet needs in our targeted markets. Scientists around the world are using our comprehensive solutions to accelerate a design-build-test paradigm for novel, high-value products for biologics and vaccine discovery, genome editing and cell and gene therapies, just to name a few.

Now moving on to our fourth quarter and year-end results. I’d like to remind everyone that our detailed financial results for the fourth quarter were also included in today’s press release. Total revenue for the fourth quarter and full year 2022 was $9.5 million and $27.4 million, representing growth of 208% and 148% for the respective periods.

Notably, our core BioXp revenue, which consists of instruments and kits grew at 158% and 67% for the fourth quarter and full year, respectively. This strong growth was the direct result of demand for both the BioXp 3250 and our recently launched BioXp 9600 systems and increased utilization resulting from new kits launched during the year.

In the fourth quarter, we sold a total of 19 BioXp units, representing 138% increase over Q4 of 2021. And similarly, for the year, we sold 66 additional instruments representing 32% growth, which brings the total installed base to in excess of 250 instruments.

Overall, we continue to be very pleased with the demand for the 3250 and the initial uptake within the market of the 9600. The launch of the BioXp 9600 system brings significant revenue potential stemming from higher instrument ASPs, higher BioXp kit utilization rates and an ability to expand into new and adjacent markets.

Gross margins came in at 68% for the fourth quarter and 57% for the full year of 2022, reflecting positive mix shift in revenue towards higher-priced BioXp kits launched during the year for mRNA, long fragment builds, cell-free DNA scale-up as well as the receipt of Pfizer technical milestone payment resulting from the successful achievement of our first of 4 milestones.

Operating expenses were $14.3 million for the fourth quarter of 2022 compared to $13 million for the same period in the prior year. For the full year, operating expenses, including noncash charges, totaled $62 million, reflecting prudent efforts in the second quarter to reduce our annual run rate expenses. This increase in operating expenses was driven by personnel costs and expansion across our business, primarily our commercial organization to support our increased revenues.

Net loss was $8.1 million for the fourth quarter 2022 compared to $12.5 million in the same period the prior year. The net loss per share was $0.27 for the fourth quarter compared to $0.43 for the corresponding year and for the full year period of $48 million compared to $39 million during the prior period.

Cash and cash equivalents were $43.8 million as of December 31, 2022, noting also that the company has approximately $20 million worth of debt outstanding as of the end of the year.

In summary, during 2022, we believe that we assembled the right executive team that can drive revenues, increased gross margin and stabilized base operating costs so that we can become a profitable company in the second half of 2024 and deliver value to our shareholders.

Now I’d like to briefly cover our financial guidance for the full year 2023, which will be back-end weighted in the second half of the year due to our 2023 new product launches throughout the year. For the full year 2023, we’re issuing the following guidance: Total revenue of greater than $45 million. Gross margin is expected to be in the mid- to high 50s on a percentage basis. Operating expenses, including onetime and noncash charges, are expected to be approximately $62 million to $64 million.

Now let’s walk through the things that will help us achieve this plan. First of all, on revenue growth, we have a robust series of BioXp product launches, including the launch of approximately 11 additional BioXp kits and 2 new BioXp systems for NGS library prep and the SOLA-powered system that will, for the first time, allow customers to achieve same-day turnaround results or CRISPR guide RNA.

The combination of our new product launches when layered on to our historical growth should, in our view, generate significant continued revenue growth in the next couple of years. And now some details on our commercial strategy. We anticipate launching several Select kits for both mRNA and cell-free DNA scale-up. These kits will add value — will add to the value proposition offered by our de novo gene synthesis kits and for the first time, as mentioned, will allow scientists to use their own DNA as a starting point in experiment.

We believe these make-to-stock kits will allow our current and future customers to use their BioXp systems more frequently, thus driving up recurring revenue growth rates. These kits should help us unlock the remainder of the synbio TAM of approximately $2.6 billion, which is estimated to be growing at a rate of 27%. And by opening up our systems for customers to use their own DNA as a starting point, we’re providing scientists with further flexibility.

In addition to the BioXp Select kit, we anticipate launching an additional BioXp platform focused on NGS library prep, which gives us access to an additional market opportunity of $1.6 billion, growing at 25%.

One final note on product revenue. We anticipate launching the first ever version of the BioXp 9600 that will have our proprietary enzymatic DNA synthesis technology referred to as SOLA as a reagent platform. The system will be the first-to-market product for CRISPR guides, enabling same-day turnaround. This, too, is a new market for us and represents an opportunity of approximately $1.5 billion, growing at 25%.

Collaboration revenue, we anticipate continuing success with our partner, Pfizer, and we anticipate we will successfully achieve 2 additional milestones during the year.

Moving on now to gross margins. We have a 3-point plan for achieving our targets, which include: number one, contributions from a favorable mix of higher-margin products like the 9600 and Select kits; number two, in-sourcing initiatives related to raw materials; and three, similar in-sourcing initiatives related to the vertical integration of our instrument manufacturing.

To this end, during the course of 2023, we anticipate further establishing an oligo production operation built around a fleet of proprietary oligo synthesis systems. When at full capacity, this operation will produce sufficient oligo volumes to meet our raw material needs, allowing us to effectively place existing supply from outside vendors. Additionally, we intend to internalize both the 3250 and 9600 instrument production lines throughout the year, which will also improve not only our supply chain and quality on our margins.

Moving on to base costs or OpEx. We anticipate base costs will remain relatively flat during the year as we’re able to backfill growth in this category, resulting from several large onetime charges we experienced in 2022. As a reminder, as we continue to execute against our strategic plan, we continue to see a path to achieving profitability during 2024 but anticipate that we will seek access to additional capital during 2023 to further solidify our cash position.

Strong revenue growth and expanding gross margins when combined with stabilizing operating costs and an experienced execution-oriented management team provides us with a potential path to profitability within a 12- to 18-month window based on timing at year-end of 2022.

We are extremely pleased with the fourth quarter and full year results, and we remain encouraged by strong commercial execution and progress in our product pipeline. We are focused on executing against our near-term commercial goals, launching new products into 2 new markets, improving profit margins and decreasing costs, furthering new and existing partnerships and growing market share. We continue to stabilize operating expenses and make strategic and measured investments to drive long-term sustainable growth and a path toward profitability.

And with that, I will thank you for joining our call and ask the operator to open the call for questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question comes from Brandon Couillard from Jefferies.

Brandon Couillard

Maybe just starting with guidance. Todd, can you give us a sense of what that embeds for new BioXp instrument placements? Any color on the mix between the 3250 and the 9600? And maybe an update on just kind of how the 9600 order book is developing. Any color in terms of new versus existing customers now that we’re kind of 6 months into that rollout?

Todd Nelson

Yes. Thanks, Brandon. Appreciate the question. So let me start with the latter. First, on the 9600, we launched that effectively I think the last day of September. So in the fourth quarter, and I would say we sold 9 or 10 last year, and we disclosed that. We think the initial uptake is good. We’re happy with the uptake of the 9600, and I think that’s ramping up consistent with our expectations for this year.

So getting to the first part of your question on what are we looking at for unit volumes, I would say that we sold approximately 66 units in — or we sold 66 units in 2022, and we would expect that to just about double from a unit volume perspective.

And on the mix, I think it’s early to tell. But I think that we sold about 9 in the fourth quarter. There was some pent-up demand. So I’d expect that to — the year will be back-end weighted for both the 3250 and the 9600 due to the kit launches. So I’d expect that to maybe not be 9 necessarily in the first or second quarter but ramping up after that.

Brandon Couillard

Okay. Yes, that’s my second question. You mentioned kind of a back-end loaded year. Any more, I guess, color on how you expect maybe the first half versus the second half in terms of the full year weighting?

Todd Nelson

Yes. I mean I think we had a solid fourth quarter. And I think during the first half of the year, we’re launching a number of BioXp Select kits. Those need to get out in the market. We’re getting the 9600 out there. We’re getting utilization up.

So I’d say from a cadence perspective, I don’t want to guide on cadence, but I think the rationale here is that we’ll have a full year of 9600 but ramping up into the second half. So I’d expect the unit volumes to have a much higher cadence, I guess, in the second half of the year, and we’ll get the benefit of the product launches on the BioXp kit line in the first half and the second half.

So I don’t know how helpful that is. I think from a cadence perspective, we’d expect more than half of the revenue for sure to be in the second half of the year.

Brandon Couillard

Got you. Okay. And in terms of your in-sourcing some raw material production, what percent of oligos supply needs do you expect to be making in-house by the end of the year? And what will — what impact will that ongoing shift have on gross margins as we look after ’24?

Todd Nelson

So I’ll get started on this. We’re fortunate to have Eric here. So I’ll hand it over to him after I give you some high-level color. This is just the continued execution against something that was really important for the company, and that was to gain control over our supply chain, better control our quality and improve gross margins at the same time.

So we’ve endeavored to build our own systems. We’ve invested significantly in that in the last few years. We now have a handful of systems Eric can walk through. Those are coming online throughout the course of 2023, and they will ramp up production throughout that time period.

Overall, the accretion to gross margin will be mostly felt in 2024, where there should be significant accretion in gross margin as a result of that. I’ll hand it over to Eric for some detailed comments.

Eric Esser

Yes. I think you covered most of it, Todd. So by the end of this year in Q4, we would expect something approaching 100% offset of our external supply of oligos. So internally, we’ll have the capacity that we need to offset the vast majority of our external oligo — of the needs today that we have for oligos that we currently purchase from outside vendors. And so as we look in 2024, most of our 2024 oligo supply will come from that internal capability.

And as Todd said, the margin impact will be mostly felt in 2024 because we are ramping up through this year. And I think we’re — on a total blended product basis, we’ll be expanding pretty significantly multiple hundred basis points in 2024.

Brandon Couillard

Got it. And then lastly, just to confirm in terms of the Pfizer technical milestones, so I think there’s 3 left. How many have you contemplated in the guide? Just want to confirm — each of them are $2.5 million, is that right? And then what’s left to recognize in ’24 from that?

Todd Nelson

Yes. So in ’24 or ’23?

Brandon Couillard

That’s right. I think there’s another tranche in ’24.

Todd Nelson

Yes. Okay. So — yes, sorry, Brandon, I understand the question. Yes, so we had an $8 million upfront technology access fee that will continue to be amortized throughout the course of 2023, but that will go away at the end of the research period which is the fourth quarter roughly of 2023.

During 2023, we’d anticipate achieving 2 additional Pfizer milestones, and they’re all, to the best of my knowledge, priced about the same, if you will, from an accomplishment perspective. And the first one that we disclosed was about $2.5 million. Then there will be another one that we’d anticipate achieving in 2024. So there’s typically a milestone and then a little bit of time to do the work and then another milestone. So just noting that we accomplished the first milestone in the fourth quarter of 2022.

Operator

And our next question comes from Harrison Schrage from KeyBanc Capital Markets.

Harrison Schrage

Congrats on the great quarter. If I could just follow up on the Pfizer milestone payments. I think I understand generally what that’s going to be here in FY ’23 but if you could just provide a little bit more detail into ’24 and ’25 on that.

Todd Nelson

Yes, Harrison, I don’t know how much — so we’ve disclosed, I think, publicly, generally at a high level what those categories are. So just again, by way of review, the Pfizer deal had an upfront fee that we’re amortizing. And I just mentioned that there are 4 milestones that need to be achieved during the research period.

And then there are some pretty significant milestones in 2024 related to potentially exclusivity or non-exclusivity. And then after that, there are commercial milestones as well as clinical milestones and royalties on sales.

So the cadence of revenue from ’24 and ’25, I think we’re anticipating the successful achievement of a milestone in ’24. And then there’s the opportunity for us to receive some additional large onetime milestones related to the exercise of exclusivity, if appropriate. And then I would say for ’24, that’s it, and then ’25 would kick in some commercial milestones and clinical milestones.

I think what we disclosed also is that per exclusive product, it all adds up to about $280 million per product.

Harrison Schrage

Got it. Okay. That’s helpful. And then again on the guide, I think we understand the systems outlook here pretty well, but it seems like your kits are certainly starting to gain some traction. And so if you could just kind of quantify what you’re expecting in terms of kit revenue or kit growth in ’23. And then maybe directionally, how we should be thinking about kits into ’24 and beyond, and then same with the services business as well?

Todd Nelson

Yes. So let me handle the products first in the order that you’ve asked on the BioXp kit side. And just by way of review, we’ve got, right now, everything that we’ve done at the company has been built around de novo gene synthesis and 8 or so kits that do that. We’re now adding beginning in the first quarter of this year to that, the Select kits, which will allow customers to use their own DNA as a starting point, including NGS, and we expect to launch about 11 kits during the course of this year, that being 2023.

I believe revenue for kits grew at approximately 64% to 67% for a year-on-year period. We’d expect that category to continue to grow, being the de novo gene synthesis category at about that same rate or higher and would layer on top of that the additional revenue from the Select kits. So overall revenue guide of $45 million, I think you can back into a product number that’s kind of in the — you can get there by backing out the Pfizer milestones and the royalties.

And then on services, that business, the plan for the Eton business is to grow that business in the Sanger sequencing business this year. And then with excess capacity that we have for oligo production off of our proprietary systems to give those systems then and any excess capacity to Eton to enter into the oligo market, and that will happen in 2024.

Harrison Schrage

Got it. Okay. And then last one for me, just on the instruments and new systems outlook. I think you guys have previously talked about the BioXp oligo printer as well as the DBC platforms and possibly delaying them in light of the cost-cutting measures. Could you just kind of refresh the timing and outlook of new systems to be released?

Todd Nelson

Sure. Happy to. So as far as systems go in 2023, we’re looking at a third quarter launch of a proprietary 9600-based, purpose-built system for NGS library prep. In the fourth quarter, we pivoted our larger DBC program to CRISPR guide RNAs to get something onto the market but with a limited scope, and that would be in the fourth quarter. That product will have on board SOLA chemistry. So that will enable same-day turnaround of CRISPR guides.

So two systems this year, 1 in the third quarter for NGS, 1 for CRISPR guide based upon DBC technology and SOLA reagents in the fourth quarter.

Harrison Schrage

Got it. And then, Todd, I’m so sorry, if I could just sneak one more in. On those new systems, I mean, would we expect that 9600 system in the third quarter to generally have a similar ASP to the regular 9600 that you launched during this last year as well as consumable pull-through? I mean, how should we think of ASPs and on these?

Todd Nelson

You’re talking about the system that we just called on the launch for NGS? I think we’re working through price discovery there and the business model around that. So we’ve got placeholders in there that I think are generally — I don’t want to misspeak actually, Harrison. I may have to get back to you on that, but I think they’re generally in line with the current price of the 9600 to maintain market continuity.

Operator

And our next question comes from Steven Mah from Cowen.

Poon Mah

Great. Congrats on the quarter. A lot of ground already covered. So just some follow-up questions, mostly on gross margin. So I believe you said the gross margins in 2022 were 57% and then the guide for ’23 is about around that range. Just trying to reconcile that because given you’re going to be launching kind of 11 kits. The 9600, I believe, has a better gross margin profile. Just trying to understand the gross margin guide for 2023. Is that just being conservative on your part?

Todd Nelson

Well, I think part of it is just related to the timing of the ramp-up for the internal oligo production, which will predominantly have — it’s linear. But I think from a production perspective, let’s say it’s linear with respect to getting the systems up and going but nonlinear with respect to capacity and uptime and things like that, so more of an emphasis on gross margin accretion later in the year from the oligo in-sourcing initiatives.

And then I think on the mix, we said like mid- to high 50s. And I think that is generally good place for us to be right now. I wouldn’t say it’s necessarily inconsistent. We’re ramping up the sale of the 9600. And yes, that has a higher price point. We need to see how the mix between the 9600 and the 3250 works out. Our anticipation is that because it has higher margins, any contribution from that will be accretive to where we’re at.

And then on the kits, 11 kits throughout the year. But again, from a cadence perspective, a lot of them will be in the second half. Now that is all good stuff and headed in the right direction from a margin perspective. That’s also offset slightly at the same time by a very rapidly growing gene synthesis business from our de novo kits, which has generally a lower gross margin.

So as the company works to operationalize these systems for our own internal oligo production to accrete to gross margin, launches new kits throughout the course of the year. We’re also — we need to recognize that we’ve got a very rapidly growing business. It’s growing in excess of 60%, which has a typically lower gross margin for gene fragments and gene synthesis products.

Poon Mah

Okay. That’s helpful. And then on the cadence of these 11 kits, yes, you said it’s going to be mostly second half, but getting within in the second half, should we be thinking it going to be weighted more to Q4 or…

Todd Nelson

I’ll hand it over to Eric. I think the peanut butter is pretty well spread between the year. I get the sense there’s a lot going on in the second and third quarters, but I’ll hand it over to Eric.

Eric Esser

Yes, that’s right. Of the 11, let’s see, we have a couple that are launching in Q1, the majority launch in late Q2 and Q3. And then one of those kits, the last one launches together with the DBC in Q4.

Operator

And thank you. And I’m showing no further questions. This concludes today’s conference call. Thank you for participating. You may now disconnect.

Todd Nelson

Thank you, everyone.

EDBL – Edible Garden AG, Inc. (EDBL) Q4 2022 Earnings Call Transcript

Written by SA Transcripts on March 25, 2023. Posted in EDBL, Stock Report.

Edible Garden AG, Inc. (NASDAQ:EDBL) Q4 2022 Earnings Conference Call March 22, 2023 11:00 AM ET

Company Participants

Theodore Ayvas – IR

James Kras – CEO, President & Chair

Michael James – CFO, Treasurer, Secretary & Director

Conference Call Participants

Jeremy Pearlman – Maxim Group

Paul Cooney – Joseph Gunnar & Co.

Elon Friedman – VKC Fund

Operator

Greetings, and welcome to the Edible Garden Fourth Quarter and Year-End 2022 Business Update Call. [Operator Instructions].

I will now turn the conference over to your host, Mr. Ted Ayvas. You may begin.

Theodore Ayvas

Thanks, Ali. Good morning, and thank you for joining Edible Garden’s Year-end 2022 Conference Call and Business Update. On the call with us today are Jim Kras, Chief Executive Officer of Edible Garden; and Mike James, Chief Financial Officer of Edible Garden.

Earlier this morning, the company announced its operating results for the year ended December 31, 2022. The press release is posted on the company’s website, www.ediblegardenag.com. In addition, the company filed its annual report on Form 10-K with the United States Securities and Exchange Commission this morning, which can also be accessed on the company’s website, as well as the SEC’s website at www.sec.gov. If you have any questions after the call and would like any additional information about the company, please contact Crescendo Communications at 212-671-1020.

Before Mr. Kras reviews the company’s operating results for the year-end 2022 and provide a business update, we would like to remind everyone that this conference call may contain forward-looking statements. All statements other than statements of historical facts contained in this conference call, including statements regarding our future results of operations and financial position, strategy and plans and our expectations for future operations are forward-looking statements. The words expect, project, plan, believe, may, will, would, should, could, mission, strategy, potential, seek, strive and the negative of such terms and other words and terms of similar expressions are intended to identify forward-looking statements. These forward-looking statements are based largely on the company’s current expectations and projections about future events and trends that it believes may affect its financial condition, results of operation, strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to several risks, uncertainties and assumptions as described in the company’s most recent annual filing on Form 10-K filed with the U.S. Securities and Exchange Commission. Because of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this conference call may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Although the company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, level of activity, performance or achievements. In addition, neither the company nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. The company disclaims any duty to update any of these forward-looking statements, except as required by law. All forward-looking statements attributable to the company are expressly qualified in their entirety by these cautionary statements as well as others made in this conference call. You should evaluate all forward-looking statements made by the company in the context of these risks and uncertainties.

With that, I will now turn the call over to Jim Kras. Jim?

James Kras

Thank you, Ted. Good morning, and thank you to everyone for joining us today. On behalf of the Edible Garden team, I want to extend our sincere gratitude to our investors for their unwavering support and belief in our vision. With your continued support, we are confident that we will achieve our goals and pave the way for building shareholder value.

We are pleased to report that Edible Garden achieved year-over-year top line revenue growth for the third quarter in a row since our IPO last year. This notable success is a result of our strategic capital management and unwavering focus on building a strong Edible Garden brand. Despite a challenging economic climate, we have remained resilient and continue to deliver exceptional customer service while keeping our pricing relatively stable even during a period of unprecedented rapid inflation. As a result, we believe we have gained a competitive advantage over many of our competitors who have struggled in this environment.

In addition, we expect to see an increase in our margins once our Heartland Midwest facility is fully operational. With the continued dedication of the Edible Garden team, we believe that we will achieve positive cash flow later this year, marking a significant milestone in our journey as a public company.

Our company’s distribution network is expanding rapidly with the addition of new retail partners in the Northeast, Midwest, Mid-Atlantic and Southeastern regions of the country. In addition, we are introducing new product categories and what we expect to be higher-margin products to the Edible Garden brand to meet our customers’ ever-evolving needs. Our commitment to sustainability through our Zero-Waste Inspired mission has resonated with environmentally conscious consumers and our distribution partners contributing to the strong demand for our products.

Among our achievements in the fourth quarter, we introduced complete salad kits to our product line. These greenhouse grown kits feature our popular sustainable, locally grown cut lettuce that come with all the ingredients necessary to make a complete salad. The first 3 kits in our lineup include a Caesar Salad Kit with baby romaine lettuce, a Crisp Ranch Kit with crispy green leaf lettuce and a Balsamic Vinaigrette kit with spring mix lettuce, with even more in development. The salad kits, which were created to align with current consumption trends and provide maximum convenience to consumers, were first made available at Meijer retail locations in the Midwest.

We also acquired the Pulp line of all-natural non-GMO preservative-free and sustainable gourmet sauces and chili-based products. This marks the company’s initial entree into the global sauces and condiments market, which is projected to grow from $172.8 billion in 2021 to $240.7 billion by 2028. According to research and markets, these fermented sauces, which elevate food flavors from bland to bold, were introduced at Natural Products Expo West 2023 earlier this month.

The Pulp product line will initially launch a Whole Foods Markets Mid-Atlantic and Southeastern retail locations starting this summer 2023. The refrigerated section of the supermarket where the sauces will be located is typically adjacent to the produce section, which will enable Edible Garden to leverage its growing brand recognition and to capitalize on the demand for healthier and sustainable options. Expanding into a new product category is a significant step forward for the Edible Garden brand as it positions us into what we believe will be higher-margin products with extended shelf life. The launch of Pulp products line at Whole Foods Markets Mid-Atlantic and Southeastern retail locations also provides us with a further expansion of our already robust distribution network.

Additionally, we added Morton Williams Supermarkets to our Northeast distribution network, which began carrying the Edible Garden product line in all of its locations in the New York metropolitan area. We also expanded our distribution with Gristedes and D’Agostino markets to sell an optimized assortment of Edible Garden products in 29 of their combined locations in Manhattan, Brooklyn and Westchester, New York. These retail locations are ideally located in densely populated urban areas that receive high volumes of foot traffic in the New York City metropolitan area. Moreover, this expansion enabled us to deepen our penetration and improve our product placement within these retail locations.

This past holiday season proved to be one of the most successful in the company’s history as we surpassed industry averages with an order fulfillment rate or a fill rate across all of our retail and distribution partners. Notably, we exceeded a fill rate of 100% in one of the country’s largest supercenter operators, strengthening our existing relationship with this key partner.

Despite significant supply chain challenges, Edible Garden was able to deliver outstanding service and execution to our customers, further demonstrating our commitment to excellence. By consistently exceeding our partner’s expectations, we have established ourselves as a reliable and trusted supplier to sustainably grown produce. The company continues to be committed to leveraging the latest technology to advance our strategy of increasing yields and maximizing the nutritional value of locally grown produce.

Edible Garden recently forged at a research partnership with the New Jersey Institute of Technology, the USDA and the EPA to investigate the effects of nanobubble technology in controlled environment agriculture settings. The primary goal of this EPA funded research is to validate the potential benefits of nanobubbles for indoor agriculture and explore their impact on plant health, water usage, nutrient utilization and energy efficiency.

This research is particularly exciting to us as it has the potential to revolutionize plant nutrition and provide more nutritious plants with longer shelf lives. In addition, the partnership is well aligned with Edible Garden’s Zero-Waste Inspired missions which seeks to promote sustainable agricultural practices that reduce waste and conserve resources. If successful, the research project could have significant implications for Edible Garden’s product line benefiting not just the company but also consumers who prioritize health and sustainable food options. Our commitment to sustainability and innovation makes this partnership a significant step forward in the quest for more efficient and sustainable agriculture practices.

Earlier this month, Edible Garden was recognized as one of the top agro food tech companies globally in this year’s FoodTech 500 final rankings. Our Zero-Waste Inspired mission has been the driving force behind our success. Our team’s hard work and dedication, along with the implementation of innovative technologies such as our patented GreenThumb software and patent pending self-watering displays have enabled us to improve yield, reduce waste and optimize costs. We take pride in being acknowledged as 1 of the most promising agro food tech companies worldwide, and strive to maintain this position by building on our achievements and continuing to lead the way in the industry.

I would like to now turn the call over to Mike James, Chief Financial Officer of Edible Garden, who will review the financial results for the 3-month and full year periods ending December 31, 2022. Mike?

Michael James

Thanks, Jim, and good morning. Looking at the fourth quarter financial results first, the company reported revenues of $3.1 million in the quarter, an increase of 10%, compared to $2.8 million for the fourth quarter of 2021. As Jim said earlier, this represents the third consecutive quarter of revenue growth since our IPO last year and represents growth from the existing customer base.

Cost of goods sold was $3 million for the 3 months ended December 31, 2022 compared to $2.8 million for the 2021 fourth quarter. The increase was due to higher packaging costs due to inflation, higher labor costs due to a tight labor market and increases in rates charged by contract farmers.

Selling, general and administrative expenses were $3.1 million for the 3 months ended December 31, 2022 compared to $1.7 million for the 3 months ended December 31, 2021. The increase was primarily driven by higher payroll and compensation expense, as well as other public company expenses that were not incurred in 2021.

Net loss was $3 million or $9.31 per share for the 3 months ended December 31, 2022 compared to a net loss of $2.1 million or $12.76 per share for the 3 months ended December 31, 2021.

Turning to the results. For the year ended December 31, 2022, revenues totaled $11.6 million, an increase of 10% compared to $10.5 million for the year ended December 31, 2021. The increase represents the growth from the existing customer base. Cost of goods sold was $11.2 million for the year ended December 31, 2022 compared to $9.9 million for the year ended December 31, 2021. The increase was due to higher packaging costs due to inflation, higher labor costs due to a tight labor market and higher costs charged by contract farmers.

Selling, general and administrative expenses were $9.4 million for the year ended December 31, 2022 compared to $5.6 million for the year ended December 31, 2021. The increase was primarily driven by higher payroll and compensation expense which included onetime expenses related to the completion of our IPO, as well as other public company expenses that were not incurred in 2021.

Net loss was $12.5 million or $48.68 per share for the year ended December 31, 2022 compared to a net loss of $5.5 million or $39.28 per share for the year ended December 31, 2021. Per share amounts have been adjusted to reflect all stock splits.

Before turning the call back over to the operator for questions, I would like to take a moment to discuss the successful offering we completed in February of 2023, which generated roughly $10.2 million in gross proceeds. The offering was important as it allowed us to secure the necessary funding to accelerate the expansion of our business. With this funding, we are confident in our ability to execute our business plan and achieve sustainable long-term growth.

I would now like to open up the call for questions. Operator, can you please assist us with that?

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is coming from Anthony Vendetti with Maxim Group.

Jeremy Pearlman

This is actually Jeremy on the line. So just a couple of questions from our end. I mean, first, could we talk maybe a little bit more about your distribution network? How many stores are you currently in, where in the U.S. is that, are those stores primarily located? And then what are your plans for 2023 to increase the distribution increase to your store count?

James Kras

Thank you, Jeremy. This is Jim Kras. Currently, we’re north of 4,000 stores. We are looking — we are primarily concentrated, call it, East of the Mississippi, Midwest, Northeast, and we’re making inroads into the Southeast vis-a-vis Whole Foods. The plan is to continue to strengthen our distribution might in the Northeast, in the Midwest with adding store counts with major retailers, as well as more additional local smaller regional chains. We’ll be looking to expand with some of the larger big boxes kind of outside of that region as we move forward, and you’ll see some of that happen over the next few months.

Jeremy Pearlman

Okay. Great. And then just piggybacking off that, I know you mentioned that you have your Grand Rapids, Michigan greenhouse. You completed the first phase of that, and I think you had commenced the second phase. Where are you in the process of that?

James Kras

We are in very, very good shape. We are in the final stages of bringing that online. And I would think that you would see that online in the next 30 days, if not [indiscernible].

Jeremy Pearlman

And does that include — I know you mentioned that you put in a request to get a USDA organic certification. Is that something that you expect…

James Kras

It’s all completed, and we just — our kind of our final go-ahead. We’re in pretty good shape, we’re in very good shape actually, and so that should all sort of dovetail nicely with a launch within the next 30 days.

Jeremy Pearlman

Okay. Great. And then just remind us, I think you said that you have about the capacity for that greenhouse is about $20 million in annualized revenue. And I know you mentioned a couple of times on the call in the financial section about how some of the contract growers were increasing the costs were — is this going to allow you to sort of maybe offset or just replace some of those contract growers once this greenhouse is up and running at full capacity?

James Kras

It will let us offset. So some of our grower — our contract growers will stay in place. They do a very nice job for us, we have agreements in place, and then some of this will allow us to bring on additional business at a much higher margin since margin for us will be much higher since we’ll be fully vertically integrated.

Jeremy Pearlman

Okay. Great. And then in that capacity, is that something that you’re going to have to know — is that something that you could — once it’s online, you think you’ll be able to have that ready to go right away with buyers or is that something you’re going to have to add to your distribution increases? Hopefully throughout 2023, you’ll be able to supply those new stores or new customers with output from this greenhouse.

Michael James

It will — there’ll be somewhat of a ramp-up, but the thing will be in a very good position to take on some existing business as well as definitely integrating the new business, I think, very fluidly.

Jeremy Pearlman

Okay. All right, great, that’s really helpful. And then I think just moving over to the — more of the products. You introduced in the fourth quarter the new salad kits. It’s been about 3 months now. Is there any more information you can give about how that’s been received, what type of velocity have you been seeing on this product and then what you plan — where you plan to see that expanding to other stores if you’re in talks with them?

James Kras

We’ll look, they’ve been doing well. They’re a nice add-on, and we will probably look to extend that into some other varieties as well as push that into distribution into other accounts probably starting out in the Midwest where we currently have production and then look to expand it probably from the West to the East as that’s where, once again, our leverage as a supplier with the large accounts ranging from, obviously, Meijer in the Midwest, Wakefern/Shoprite in the Northeast and then Hannaford. So those are just 3 of many, and we’re obviously doing sales calls to continue to leverage the locality of where those are produced and the freshness, the reduction in crude miles and make sure that we have the freshest product out there that continues to sell well.

Jeremy Pearlman

Okay. All right. Great. And then is there anything else in the pipeline, the product pipeline that might be you could share with us or that’s more — something that we’ll see as it comes out?

James Kras

We’re working on constant innovations here. That’s a lot of what continues to separate us from a lot of our competitors. It also adds to our diversity as a company. And our assortment ranges from things that we grow to finished goods. And we continue to focus on being Zero-Waste Inspired, doing it within an ethical, sustainable manner, ways. And to help that drive innovations, not only from what we’re growing and how we increase our yields, but also some of the new finished goods such as Pulp and some of the other alternate proteins that we’re working on. I think you’ll see a real nice host of product coming out over the next 12 to 18 months. And it will be even sooner as new products are the lifeblood of any company, especially CPG/CEA company like we are.

Operator

Our next question is coming from Paul Cooney with Joseph Gunnar & Company.

Paul Cooney

Just wondering with the opening of the Grand Rapids facility, should that be an immediate significant ramp-up in revenue?

James Kras

It will be an immediate impact on margin and profitability as we’re eyeing cash flow positive this year. So that’s going to be a big piece of it. So it will be twofold. It will be an immediate hit to the bottom line, which is great in a positive way, and then obviously it gives us more capabilities to bring in more business that we’ve got teed up.

Paul Cooney

And do you believe the current capital that the company has with the latest raise will get you there to the profit?

James Kras

Yes, yes.

Paul Cooney

All right. And last question. As far as the nonperishable part of your business that you acquired, what are you modeling for that as far as what type of revenue impact do you think that will have in ’23?

James Kras

Well, we’re going to see that come online. I don’t know how much I can speak to that on this call, but that, we’ve already got POs in-house from Whole Foods, which is exceptional. We’re working with major big box retailers that to bring them online. One of the great things about Edible Garden is that we’ve got great authenticity being a grower, a greenhouse grower and a CEA company. We’ve got the wherewithal in our team and some of the recent people that we’ve brought onboard from, actually 1 person from 1 of the major retailers, to really have a mindset that’s geared towards bringing these finished goods to market. Our expectation is the second half of the year as we push this stuff into retail and leveraging our distribution platform which is what I was trying to get at, we have entree into every major chain out there. We should be able to “light this up pretty quickly,” and that’s our goal. So we had an exceptional show at Natural Product Expo West, which is sort of the Super Bowl of new products for these type of products. And we are getting on the road. I’m leaving tonight and presenting the items to big partners, and we’re excited about it. We’re thrilled. So I think that’s going to be a nice complement, excuse the pun, to our assortment and to our revenue line. We’re excited.

Paul Cooney

When you guys are done with — when we get done and we’re online with the Grand Rapids facility, is the plan then to maybe try it on another location like that, maybe more out West and start building a new facility to expand? Or are you going to be looking more to acquire existing grow houses?

James Kras

Well, I mean, look, I think that’s a great question, and I’ll tell you why. It’s because, look, an M&A is going to be part of the strategy moving forward. But as of right now, one of the key differentiators about us is the position that we’re in. The company doesn’t have a considerable amount of debt on it. We have a plan, and being cash flow positive is right within striking distance. And the focus on — with this management team right now is to get to cash flow positive and prove to everybody in this category that these businesses work because this is the future of how we’re going to feed ourselves, our country, the world. And someone needs to get out and show that it can also be commercially viable. So to me, it’s like let’s get through the next quarter or 2, let’s get to cash flow positive. And then we’ll, in the back on be looking to identify. And I think more retrofits, Paul, to be frank.

The team did a fabulous job out in Grand Rapids in a very short period of time of getting this thing ready for prime time from how well we performed on our inspections for organic and food safety. A lot of that is just leveraging the knowledge bank that we have with people who — look, our team has been together for almost 10 years. And then obviously, that team was part of the IPO this past year. We’ve had a committed, knowledgeable workforce and management team that understand what the goal is. And we’re in this thing to win it. And I think that for us, the first step is to make sure that we understand that we can make money and build shareholder value. Let’s bring in, let’s reuse, repurpose, reimagine some of these old greenhouses because it really plays into being Zero-Waste Inspired and doing more with less. And I think that, that serves us well.

And it really worked out well in Grand Rapids and we’re excited about that. So I think you’re going to see us make some moves but I want to get through the next 90, 120 days and make sure we’re leveraging from a position of strength, especially considering what’s going on out in the economy in the market. So we’re going to play it a little close to the vest. But in the background, we’ll be looking to bring something in and really be very smart about how we grow this thing.

Operator

[Operator Instructions]. Our next question is coming from Elon Friedman with VKC Fund.

Elon Friedman

Congratulations on the revenue growth. You said in your remarks that you believe that the company will achieve positive cash flow later this year. Can you please elaborate on how you expect to get there?

James Kras

We plan on bringing on our Grand Rapids facility, Edible Garden Heartland. That will be coming online in the next 30 days. With that is going to be a — it will be a considerable factor based on how much business will be in there and how that impacts our margins. So that will be a key driver for this, as well as the addition of higher-margin, more shelf-stable products that allow us to go into our existing distribution network at a higher margin. So that should help clean things up for us a little bit as we’re going to have kind of the right assortment with the right growing facility that we’re vertically integrated on that will allow for that margin expansion, which will drive that cash flow piece for us.

Elon Friedman

One more question. Can you please provide us about the partnership with the New Jersey Institute of Technology, the USDA and EPA?

James Kras

Yes, it’s pretty cool. It’s really around how the nanobubbles, which are essentially kind of what they say they are. They’re small oxygenated bubbles that [indiscernible], but will allow to stimulate plant growth. Obviously, plant growth, when you’re growing plants and not only do you sell produce, which is a plant, or you take — and you take those plants and turn them into some sort of ingredient, obviously, you want high yield. And if you can impact plant growth and what you can do it in a way that you better improve the conditions for plant growth and nanobubbles would do that, then obviously that impacts quality yield. And for us, obviously, we’re doing more with less, and it’s much more environmentally friendly than other types of ways to impact plant growth. So it is funded, I believe, by the EPA which is very cool for us. We are really a partner that’s more of a test lab. And we are exchanging our knowledge as well as our facilities to allow them to do a lot of this testing and then we are able to benefit from it. So we’re excited about being in partnership with the EPA and the FDA and the USDA, and of course, the New Jersey Institute of Technology because we are a New Jersey-based company. So excited about it, it’s very promising and it’s important that the company can offer these type of studies.

Elon Friedman

Congratulations on the revenue once again.

Operator

Thank you. We have reached the end of our question-and-answer session. So I will now turn the call back over to management for closing remarks.

James Kras

Thank you again for joining us today. We are pleased with our progress in Edible Garden over the past year, and are excited about the opportunities that lie ahead. We will continue to execute our strategy, and look forward to updating you on our progress in the coming months. Thank you very much, and have a good day.

Operator

Thank you. This does conclude today’s conference, and you may disconnect your lines at this time. We thank you for your participation.

BAER – Bridger Aerospace Group Holdings, Inc. (BAER) Q4 2022 Earnings Call Transcript

Written by SA Transcripts on March 25, 2023. Posted in BAER, Stock Report.

Bridger Aerospace Group Holdings, Inc. (NASDAQ:BAER) Q4 2022 Earnings Conference Call March 20, 2023 5:00 PM ET

Company Participants

Eric Gerratt – CFO

Timothy Sheehy – Founder, CEO & Director

McAndrew Rudisill – CIO & Director

Conference Call Participants

Operator

Greetings, and welcome to Bridger Aerospace Fourth Quarter and Year-end 2022 Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Gerratt, I apologize, Chief Financial Officer. Thank you. Mr. Gerratt, you may begin.

Eric Gerratt

Good afternoon, and thank you for joining us today. Joining me on the call this afternoon are Chief Executive Officer, Founder and Director, Tim Sheehy; and Chief Investment Officer and Director, McAndrew Rudisill. Before we begin, please note that certain statements contained in this conference call that do not describe historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Since forward-looking statements are based on various assumptions, risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. Factors that could cause results to differ materially from those expressed include, but are not limited to, those discussed in the company’s filings with the Securities and Exchange Commission, excluding expectations regarding — including expectations regarding financial results for 2023.

Management cannot control or predict many factors that ultimately impact future results. Listeners should not place undue reliance on forward-looking statements, which reflect management’s views only as of today. We anticipate that subsequent events and developments will cause our assessments to change. However, we undertake no obligation to revise or update any forward-looking statements or to make any other forward-looking statements.

For those joining by webcast, you can follow along with today’s presentation. For those listening by phone, you can access today’s presentation on our website at www.bridgeraerospace.com under the Investor Relations tab. Throughout this afternoon’s earnings release and our call and presentation today, we will refer to non-GAAP financial measure adjusted EBITDA. The definition, calculation and reconciliation to the financial statements of adjusted EBITDA can be found in Exhibit A of our earnings release, which is available on our website. We believe adjusted EBITDA is useful in evaluating our reported results as a supplement to and not a substitute for our reported results under GAAP. With that, I’d like to turn the call over to Tim.

Timothy Sheehy

Thank you, Eric. Good afternoon, everyone, and welcome. Happy to be joining everyone today on our first earnings call as a public company. Bridger Aerospace began trading on the NASDAQ Global Market under the symbol BAER on January 25. While Eric will discuss our 2022 results in more detail in a moment. Since this is our first earnings call as a public company, I’d like to provide a brief overview of Bridger Aerospace and the market opportunity it.

Prior to founding Bridger, I was a Navy SEAL Officer leading operations overseas coordinating close air support for my ground teams and was [indiscernible] and subsequently discharged. Seeing how effective in the air-to-ground task force was together on the battlefield. I look to bring that same aerial intelligence capability to BAER on public safety tasks in the U.S.

We founded a Bridger in 2014 with one surplus government plan and a basic sensor system we had developed to map wildfires. Over the first several years, we grew organically until 2018 when we took an investment from Blackstone to grow our business more substantially. Today, Bridger is one of the nation’s largest aerial firefighting companies. We have a fleet of over 20 aircraft, including 6 CL-415EAF Super Scoopers, which fight fires by scooping water from nearby lakes, rivers, reservoirs or oceans and dropping it directly on the fire.

As of today, it is the only purpose-built firefighting aircraft in the world. The CL-415 family of aircraft is the safest, most efficient and most effective aerial firefighting platform in the world. We also have a fleet of surveillance aircraft that do fire mapping with immediate data transfer to enable awareness of what fires are doing in real time. We are well positioned to efficiently address and combat the growing economic and environmental damage caused by wildfires. The need for aerial firefighting services continues to grow as fire seasons are becoming longer and more aggressive, typically mid-April to mid-November. And because the Wildland Urban Interface is rapidly growing worldwide. At the same time, tanker modernization requirements instituted decades ago to bring aerial firefighting standards in line with 21st Century aviation standards, significantly reduced the U.S. supply of EU large air tanker aircraft from over 50 in early 2000s to around 20 today. This has meant that demand is outstripping supply for aerial firefighting capabilities.

Related directly to our business, our contracts are with the U.S. Forest Service Department of Interior as well as many state governments and oftentimes last between 5 and 10 years. Most of our contracts include provisions that cover operating costs such as fuel and airports fees, providing protection from commodity variability. This has created a very attractive aircraft unit economics, and we are well positioned to drive incremental margins with the [indiscernible] fleet expansion. As we have reported previously, Each Scooper can generate between $6 million to $11 million in adjusted EBITDA annually. 2022 was a year of preparation for our public debut as well as adding infrastructure and personnel to support our fleet expansion. Looking out to 2023, we will have 6% operation, the most recent of which was delivered in February 2023, up from 4 for the majority of the 2022 fire season. As a result, we are well positioned to leverage the infrastructure we put in place in 2022 for significant growth this year.

We expect this to lead to significant improvements to revenue, margins and adjusted EBITDA, which McAndrew will discuss in more detail later in the call. With that, I will turn it over to Eric, who will talk about our financial performance in 2022.

Eric Gerratt

Thanks, Tim. Revenue for 2022 grew 18% to $46.4 million compared to $39.4 million in 2021. Fire suppression revenue was $38.8 million, up 28% from 2021, driven by 2 additional Scooper aircraft in service for the full season in 2022. Aerial Surveillance revenue declined to $7.2 million from $8.6 million in 2021 due to a decreased number of fires with high incident levels. Standby revenue as a percentage of total revenue was 45% in 2022 compared to 47% in 2021.

Our cost of revenues increased 27% to $33.9 million in 2022 and was comprised of flight operation expenses of $18.8 million and maintenance expenses of $15.1 million. This compares to cost of revenues of $26.6 million in 2021, which included $15.8 million of flight operations expenses and $10.8 million of maintenance expenses. The increase is primarily related to costs added during the year in anticipation of the delivery of the additional Super Scooper aircraft, which were ultimately delivered later than expected and therefore did not contribute meaningfully to expected revenue during the 2022 fire season.

Selling, general and administrative expenses were $35.1 million in 2022 compared to $11.2 million in 2021. The increase was partially driven by higher personnel expenses and professional services fees of $15.4 million in connection with the business combination and for our preparation of becoming a public company. Interest expense for 2022 was $20 million compared to $9.3 million in 2021. For 2022, the company reported a net loss of $42.1 million compared to a net loss of $6.5 million in 2021.

Adjusted EBITDA was $3.7 million in 2022 compared to $9.8 million in 2021. Adjusted EBITDA excludes interest expense, depreciation and amortization, stock-based compensation, losses on disposal of assets, legal fees relating to financing transactions and business development expenses as well as non-recurring items such as gain/loss on extinguishment of debt, onetime discretionary bonus payments and transaction costs related to the business combination.

Looking to the fourth quarter, which is the quarter where we typically schedule much of our annual maintenance activities for our fleet, revenue was $1.1 million compared to $0.7 million in the fourth quarter of 2021. The increase was due to higher deployment of aircraft early in the fourth quarter of 2022 compared to the same period in 2021.

Cost of revenues for the fourth quarter of 2022 was $5.3 million compared to $4.4 million in the fourth quarter of 2021. Selling, general and administrative expenses were $6.5 million in the fourth quarter compared to $4.2 million in the fourth quarter of 2021. This increase was partially driven by higher personnel expenses and higher professional and third-party expenses to support the growth of the business and preparation of becoming a public company. Interest expense for the fourth quarter of 2022 was $7 million compared to $3.5 million in the prior period.

For the fourth quarter of 2022, net loss was $17 million compared to a net loss of $11.1 million in the fourth quarter of 2021. Adjusted EBITDA was negative $8.5 million compared to negative $6.1 million in the fourth quarter of 2021.

Turning to the balance sheet. We ended 2022 with cash, restricted cash and marketable securities of $97.4 million. Our outstanding debt was $207.9 million as of December 31, 2022. With that, I’ll turn the call now over to McAndrew Rudisill, our Chief Investment Officer, who will discuss our guidance for 2023.

McAndrew Rudisill

Thank you, Eric. Bridger’s current fleet of over 20 aircraft, including 6 Super Scoopers is projected to generate revenue of $84 million to $96 million in 2023. This projected revenue growth is consistent with our public projections in connection with the business combination. However, it does not include any potential fleet additions, which we have previously referred to as a seventh Scooper equivalent. With much of the cost to support the 2 latest Scoopers, Scooper #5 and Scooper #6 already embedded in our cost structure. Adjusted EBITDA margins are projected to improve from 8% in 2022 to over 40% in 2023. As a result, adjusted EBITDA is projected to range from $37 million to $45 million in 2023, again, excluding the impact of any potential fleet additions. We continue to see a growing number of opportunities to further expand our fleet through M&A during 2023.

We anticipate acting on one or more of these M&A opportunities this year, and we’ll continue to explore these acquisitions and our growth plans. We expect to add revenue and adjusted EBITDA from potential future fleet expansion, if any, to our guidance upon transaction closings.

While we won’t provide specific quarterly guidance, as Tim mentioned, the fire season typically runs from mid-April to mid-November. As a result, the first and fourth quarters each year typically consist of a significant amount of off-season maintenance, training and recertification activities with minimal offsetting revenue. This means we expect to report negative EBITDA in the first and fourth quarters, while our most profitable quarters will be the second and third quarters. With that, operator, we are ready for questions.

Question-and-Answer Session

Operator

Timothy Sheehy

Okay. With no shareholder questions. We’ll answer a couple of frequent questions we’ve received from investors over the course of the last several months as we’ve gone through our process. Many of the questions have revolved around contracts, given that aerial firefighting is a relatively unique industry and the contracts we have are generally quite different than contracts and other aviation and aerospace realms.

The way our contracts are structured are multiyear, 5 years, sometimes as long as 10 years. There are multiyear contracts classified under the indefinite delivery, indefinite quantity paradigm within the U.S. Federal Acquisition code. We charge daily and hourly rates depending on the type of firefighting services rendered, and these services are primarily split into flight revenue and standby revenue, so paid by the hour and paid by the day.

These contracts exist over a 5- to 10-year horizon and do have annual renewal criteria based upon performance and technical compliance. Thus far in Bridger’s life cycle, we have a 100% contract reaward ratio. Additionally, our mix between federal and state contracts is heavily weighted to the federal side with the majority of our revenue being between the DOI and U.S. Forest Service at roughly 75% of our rent revenue.

I’ll answer a couple more comment/questions we have related to guidance. Why has guidance changed from what was previously reported or provided in the 2023 EBITDA of $58 million?

Guidance is not actually reduced for the base Bridger business as it stands currently. In fact, base Bridger business is in line, if not a bit higher than what we had in our estimates for last year. We felt it was more appropriate to base our updated guidance on our current fleet as exists today as opposed to assuming potential aircraft additions through aircraft acquisitions or M&A, which I previously referred to as the seventh Scooper equivalent. As we have said, there are a number of opportunities to further expand our fleet through M&A, and we will add the impact of future fleet expansion to our guidance throughout the year once these transactions close.

The key metrics for us to focus on for our M&A transactions will relate primarily to free cash flow generation of the business and how that can be accretive to our bottom line and reinvested in the business for technical innovation and growth of our business. as well as technical differentiation related to specific aerial firefighting technologies for fire mapping, fire imaging and data sharing related to active wildfire incidents to support the fireflies on the ground.

With no other further questions in the queue. Thank you for participating in today’s call and for your support for the completion of becoming a public company and delivery of our latest Scoopers as well as a growing number of opportunities to further expand our fleet through M&A and geographic diversification. We are well positioned to see significant growth and drive shareholder returns while supporting our federal and state government clients in the growing battle against wildfires. We look forward to updating you on our progress when we report our first quarter fiscal year 2023 results in May. Have a great day.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.

ACDC – ProFrac Holding Corp (ACDC) Q4 2022 Earnings Call Transcript

Written by SA Transcripts on March 25, 2023. Posted in ACDC, Stock Report.

ProFrac Holding Corp (NASDAQ:ACDC) Q4 2022 Earnings Conference Call March 21, 2023 11:30 AM ET

Company Participants

Brian Wheatley – IR

Matthew Wilks – Executive Chairman & President

Ladd Wilks – CEO

Lance Turner – CFO

Conference Call Participants

Stephen Gengaro – Stifel, Nicolaus & Company

Saurabh Pant – Bank of America Merrill Lynch

John Daniel – Daniel Energy Partners

Donald Crist – Johnson Rice & Company

Operator

Greetings, and welcome to the ProFrac Holdings Corp. Fourth Quarter Earnings Conference Call. [Operator Instructions].

It is now my pleasure to introduce your host, Brian Wheatley, Investor Relations. Thank you. You may begin.

Brian Wheatley

Thank you, operator. Good morning, everyone. We appreciate you joining us for ProFrac Holding Corp.’s conference call and webcast to review fourth quarter and full year 2022 results. With me today are Matt Wilks, Executive Chairman; Ladd Wilks, Chief Executive Officer; and Lance Turner, Chief Financial Officer.

Following my remarks, management will provide high-level commentary on the financial highlights of the full year and fourth quarter of 2022 as well as the business outlook before opening the call up to your questions. There will be a replay of today’s call available by webcast on the company’s website at pfholdingscorp.com as well as a telephonic recording available until March 28, 2023. More information on how to access these replay features is included in the company’s earnings release.

Please note that information reported on this call speaks only as of today, March 21, 2023. And therefore, you are advised that any time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

Also, comments on this call may contain forward-looking statements within the meaning of the United States federal securities laws, including management’s expectations of future financial and business performance. These forward-looking statements reflect the current views of ProFrac management and are not guarantees of performance.

Various risks and uncertainties and contingencies could also cause actual results, performance or achievements to differ materially from those expressed in the management’s forward-looking statements. The listener or reader is encouraged to read ProFrac’s Form 10-K and other filings with the Securities and Exchange Commission, which can be found at sec.gov or on the company’s Investor Relations website section under the SEC Filings tab to understand those risks and uncertainties and contingencies.

The comments today also includes certain non-GAAP financial measures as well as other adjusted figures to exclude the contribution of ProFrac. Additional details and reconciliations to the most directly comparable consolidated and GAAP financial measures are included in the quarterly earnings press release, which can be found on the company’s website.

And now I would like to turn the call over to ProFrac’s Executive Chairman, Mr. Matt Wilks.

Matthew Wilks

Thank you, Brian. 2022 was a milestone year for our organization. We listed on the NASDAQ, announced 8 M&A transactions totaling roughly $1.8 billion and assembled the most technologically advanced fleet in the industry, along with an in-basin sand mining footprint and manufacturing capabilities to support it. As we have demonstrated, M&A is core to our strategy and integrating acquired assets and businesses is a key competency.

In 2022, we successfully leveraged this skill set scaling our vertically integrated platform while building upon and executing on our “Acquire, Retire, Replace” strategy. Vertical integration positions ProFrac to reduce market volatility and deliver more consistent profitability throughout the cycle. Our internal manufacturing capabilities result in shortened lead times for inventory, rationalized purchase orders and improved capital efficiency. Owning the production of critical inputs to the frac value chain such as sand and chemicals, ensured supply enhances fleet utilization and limits nonproductive time.

Furthermore, it allows us to control a larger share of the frac value chain and aggregate a larger share of the total profits earned along the way to the wellhead. This is critical to our strategy. Our leading in-basin production footprint when combined with the baseload demand from our fleets insulates us from price volatility and operational disruptions caused by the sand market, and serves as a competitive advantage, facilitating our goal of improving integrated sand and logistics sales.

Historically, ProFrac has always aimed to offer fully integrated fleets with proppant, chemicals and logistics sold along with the service and equipment. This strategy uniquely differentiates our business model from the companies we acquired in 2022, all of which marketed their fleets on an equipment-only basis. This provides a distinct opportunity for new growth, and as we apply our commercial strategy to these fleets and those legacy fleets currently not providing materials.

We expect continued improvement in the profit earning potential of our business. To put it in context, at today’s pricing, we believe a fully integrated fleet that aggregates profits across the entire frac value chain, including horsepower, sand and chemicals and logistics could generate as much as $50 million in gross profit annually. To be clear, we believe this is the amount already being earned by various service providers throughout the value chain.

We also believe that ProFrac can do it more efficiently and more effectively for our customers, providing them with the cost savings and thus a profit enhancement by capturing as much of that value chain as possible.

Finally, our recent acquisitions of Producer Services Corp and Rev Energy Services demonstrate further commitment to our “Acquire, Retire, Replace” strategy and also illustrates our ability to identify financially attractive opportunities with additional strategic upside. We are confident that we can improve the economics of the fleets we acquired in both these transactions.

We have successfully run this playbook following our acquisitions of FTSI and U.S. Well Services. In addition, we also gained a low-cost avenue for expanding our manufacturing presence in the Northeast through the Producers acquisition.

With REV, we acquired modern, high-quality fleets and gained a foothold in the Rockies, further diversifying our basin and customer mix without diluting pricing in that market. In connection with these transactions, we made the decision to retire equipment equivalent to 3 frac fleets, evaluating and targets assets to determine what equipment can be immediately worked at ProFrac standards, what can be rebuilt or refurbished, and what should be retired is a critical element of our process.

We believe our decision to retire certain fleets not only allows us to maintain the highest quality of assets and levels of operating efficiency, but also helps to add balance to the overall market. ProFrac’s objective is simple. We are working to build the most nimble and financially stable company in the oilfield. Vertical integration is critical to achieving this goal. By controlling the critical links in our supply chain and maintaining an unwavering focus on safety, efficiency and profitability, we believe we can deliver for our customers, shareholders and employees like no other company in our industry.

Now I would like to turn the call over to Ladd.

Ladd Wilks

Thanks, Matt. We’re incredibly proud of our team’s performance in the fourth quarter to generate nearly 14% sequential revenue growth and to achieve annualized adjusted EBITDA per fleet of approximately $30 million, excluding Flotek, despite an early round of cold weather that negatively impacted fleet efficiency.

The inclusion of 7 electric fleets acquired from U.S. Well Services for a partial quarter, increased the number of average active fleets in the fourth quarter to 36. Furthermore, we continue to benefit from our integrated services model through which we provide equipment, chemicals, proppants and logistics to our customers. During the quarter, we supplied approximately 1/3 of the sand pumped by our frac fleets compared to roughly 26% in the previous quarter. This allowed us to increase sand sales approximately 9% versus the third quarter of 2022. The improvement was primarily driven by a full quarter contribution from the Monahans mine.

The goal is to increase our materials penetration even higher, closer to 60% or 70%. So we expect to see further gains at the Lamesa mine, which came online at the end of December and the recently acquired mine for Monarch Silica and the Performance Proppants mine will contribute to our results in Q1.

During the fourth quarter, we averaged 2 mines operating, but with the closing of the Performance Proppants acquisition in February, we will exit the quarter with a total of 8 mines and nearly 23 million tons of in-basin annual nameplate production capacity located strategically throughout major pressure pumping markets.

I must also commend the commercial team for their accomplishments as well. Following the closing of the Performance Proppants acquisition, the team successfully placed 2 fleets with Tier 1 clients in the Haynesville. In addition, the recently acquired fleet from U.S. Well Services were previously operating at below market rates in the fourth quarter, but the team successfully worked with many customers to find win-win solutions for these fleets. That will provide more improved returns to ProFrac.

While we will begin to see the benefit of these changes in late Q1, we expect the full impact to be realized in the second quarter of 2023. We’re very excited about our active electric fleets and those under construction, and we’re proud to currently operate 8E fleets, the largest number of electric fleets in the industry. We believe next-generation fleets such as electric and dual-fuel fleets are the future, and we continue to see significant demand for these technologies from our customers.

The recent sharp decline in gas prices, especially relative to crude oil prices has magnified the value proposition of our next-generation fleet. Customers are becoming increasingly focused on substituting natural gas for diesel fuel, wherever possible, in order to capitalize on lower completion costs.

As a result, we’re seeing incredible levels of inbound interest in our dual fuel and electric fleets from high-quality customers. Currently, we have multiple opportunities to place our first in-house manufacturer electric fleet with Tier 1 customers on a dedicated or contracted basis. And we expect to deploy that fleet under such an arrangement in the near future.

Today, 59% of ProFrac fleets are next-generation, fuel-efficient fleets that offer significant fuel cost savings and emission reductions, which helps differentiate ProFrac from the rest of our industry. We remain firmly committed to delivering premium value while improving our environmental footprint.

Lower commodity prices have impacted our customers’ business over the last several months. Service pricing levels have remained steady through February, but we will continue to assess the impact. In response to the reduction in gas prices, we have seen a less efficient calendar to develop over the course of the first quarter 2023. The less efficient calendar combined with the seasonal weather impact is expected to reduce our efficiencies in the first quarter of 2023. However, we have capitalized on our improved in-basin sand footprint to high-grade customers in the Haynesville and Eagle Ford.

Our embrace of these markets has paid off as we have added fully integrated fleets with top-tier operators. Importantly, in the Haynesville, we are partnered with customers who are well hedged and expect to maintain activity and completion programs throughout the year.

While the market for frac equipment remains tight, we have seen dislocation in the Permian during the first quarter of 2023, driven by E&P consolidation and service companies rotating fleets from natural gas basins to the Permian.

In the near term, these trends have limited our ability to grow our penetration of fully-integrated fleets in the region. However, we remain committed to our strategy of pursuing work that offers both calendar density as well as full material bundling. As a result, we have reduced our supply of fleets in the Permian in the first quarter and expect to build our active fleet count over the next several months as a shortage of strategically located sand and premium fuel-efficient fleets creates a call on ProFrac services.

Right now, we are continuing to deploy our capital for maintenance. In doing so, we are ensuring that our fleet is positioned to continue delivering the high level of service quality we are known for. Additionally, we are laser-focused on standardizing the equipment, controls and procedures used by our fleets across all regions, allowing us to optimize both efficiency and inventory levels.

As Matt mentioned earlier, we retired 3 of the fleets we acquired and are actively working to make the rest of the acquired fleet uniform with ProFrac’s legacy assets. This brings our total fleet count to 42 today, which we expect to grow to 46 by the end of the year as we complete construction of our new build electric fleets.

We remain excited for 2023 and believe the market for frac equipment will remain tight for the foreseeable future. Although the commodity market may create a headwind in the near term, we believe our portfolio of next-generation fleet and in-basin sand mine network will allow us to maintain our financial expectations for the remainder of the year.

The opportunity to combine significant fuel cost savings, optimize sand and logistics and best-in-class operating efficiency enables us to generate a mutually beneficial situation where ProFrac achieved premium pricing while still delivering lower all-in completion cost per lateral foot for our customers.

And finally, I want to thank all of our employees. Without your tireless work and sacrifice, none of this could be possible. Thank you so much, and I appreciate all of you.

With that, I’ll turn the call over to Lance and he’ll review our financial results in more detail.

Lance Turner

Thank you, Ladd. Good morning, everyone. We’re pleased to announce our results and the progress we made during the fourth quarter.

On a consolidated basis, revenue for the fourth quarter was $794 million, up almost 14% sequentially. The improvement in revenue was driven by a higher average active fleet count of 36, providing an increased amount of the sand pumped by our fleet, slightly offset by lower efficiencies during the quarter.

Adjusted EBITDA, excluding Flotek was $269 million for the quarter, up slightly from the third quarter. Annualized adjusted EBITDA per fleet was $30 million, down from last quarter due to the lower overall profitability of the U.S. Well Services fleet that were under firm pricing when we acquired them. For the full year, revenue totaled $2.4 billion, and adjusted EBITDA excluding Flotek was $836 million.

I’ll now drill down on our various business segments. The Simulation Services segment generated revenue of $767 million for the fourth quarter and $2.3 billion for the year. Adjusted EBITDA for the fourth quarter was $252 million compared to $250 million in the third quarter. Again, this was driven by higher active fleet count and providing an increased amount of sand pump by our fleet, offset by lower profitability on U.S. Well fleets and efficiencies overall. As we look into the first quarter, we expect average fleets to increase to approximately 41 fleets.

The Proppant Production segment revenue increased approximately 44% in the fourth quarter and totaled $35 million, of which 64% was intercompany. The improvement was attributable to improved pricing and an increased number of tons sold. Our ability to provide more sand was in large part due to a full quarter contribution from the Monahan sand mine.

For the quarter, adjusted EBITDA grew 120% to roughly $20 million. The profit segment will expand considerably in the first quarter as we add 4 additional mines operating for the full quarter, and we acquired 4 mines in the Performance acquisition. In addition, we continue to focus on improving utilization of all mines, which will improve revenue, cost per ton and ultimately, total EBITDA generated. As we integrate the profit segment, we expect continued improvement as we build the best-in-class profit mining company.

The Manufacturing segment generated $51 million of revenue in the fourth quarter, up 5% sequentially. Approximately 93% of this revenue was intercompany. Cost pressures continue to be a headwind for this segment as it absorbed the higher raw material prices of its products and as it ramps up production to accommodate the larger fleet cap resulting from the recent acquisitions.

Adjusted EBITDA for the quarter was negative $3.1 million. Looking forward, we expect the first quarter to have increased sales volume with normalized profit levels at or exceeding Q3 levels.

From a corporate perspective, SG&A, excluding acquisition-related expenses and stock-based compensation increased to $60 million in the fourth quarter, driven by the expansion of our fleet count and the build-out of our profit segment. Approximately $5 million of this related to Flotek for the quarter.

At year-end, our total debt balance, excluding amounts attributable to Flotek was $941 million. The total debt balance on a pro forma basis for the upsize of our term loan and the recent draw on our ABL facility to close the Performance Proppants acquisition is approximately $1.3 billion.

Based on the current interest rates, this equates to an annual run rate interest expense of roughly $10 million per month. We believe the ability to upsize the term loan by $320 million and increase our ABL facility commitments from $280 million to $400 million underscores the earnings power and creditworthiness of our business as well as the strong commitment from our lenders.

More importantly, we believe the earnings potential in the Performance acquisition goes beyond profit production capacity and will provide significant benefits to our Pressure Pumping segment. As Ladd mentioned, we have already started to see some of those benefits.

Operating cash flow was $159 million in the fourth quarter, down slightly from the previous quarter. It was impacted by an approximately $50 million working capital build, of which approximately $9 million related to Flotek.

Finally, capital expenditures for the year, excluding acquisitions, were $356 million. For 2023, we expect our capital expenditures to be in line with 2022 levels. Although the total spend will be similar, it will consist of a slightly different mix.

We have budgeted approximately 15% to complete the constraint of the 4 electric power fleets. We also expect to allocate roughly 30% of our capital expenditure budget to complete engine upgrades and other growth initiatives as well as 15% for various initiatives in our proppant production and manufacturing segments.

The remainder of the 2023 capital expenditure budget will be used to fund maintenance capital expenditures estimated to be between $3 million and $3.5 million per fleet per year.

I’ll now turn the call back over to Matt.

Matthew Wilks

I want to thank everyone for joining our conference call today and taking the time to listen to our results. If we’ve been successful, you all will leave here with 3 key takeaways: one, ProFrac’s significant proppant production footprint across key pressure pumping markets will allow us to offer fully integrated fleets with proppant, chemicals and logistics sold along with our service and equipment. This provides a distinct opportunity for new growth and expanded margins.

Two, our vertically integrated business model is resilient and therefore, can deliver a differentiated return profile that is profitable through [indiscernible]. We continue to execute on our “Acquire, Retire, Replace” efforts. And by utilizing our scale, we can improve the commercial success of these operations.

And with that, operator, we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Stephen Gengaro with Stifel.

Stephen Gengaro

I guess two things for me. Just — you — in your presentation, you put out this morning, you have this illustrative annual run rate EBITDA bridge. And I just wanted to make sure I completely understood sort of the bridge from 4Q ’22. I think one of the elements is 12 active fleets and kind of a run rate EBITDA of $34 million, I think you used. Is that the e-fleets plus the 2 recent acquisitions of REV and Producers that drive the incremental 12 fleets? Or where do those 12 fleets come from?

And then I guess the second part of that question is the impact from the sand operations as a separate line kind of embedded in the profitability of the fleet at that 34 million per fleet per year of EBITDA?

Matthew Wilks

No, they’re separate. And so when we look at the 12 active — additional active fleets, those come from a combination of acquisitions as well as the new builds that we’ve had planned and have disclosed the new electric fleet. And then we’ve added an additional 16 million tons per year of capacity on the sand side, which we expect to see a pull-through on each of the fleets as we see the fully bundled offering.

If you break it down and you look at the full value chain that’s associated with bundled services, we believe that there’s as much as $50 million a year annualized and that — when you own each part of that value chain, you have the ability to pull that through. So we’re really excited about being able to do that. And this also takes our capacity on sand mines to 22.3 million tons total. And we’re really, really excited about that. We’ve got some great comps out there of smaller sand companies that really showed just what the value of these assets are worth.

Stephen Gengaro

Just to clarify, the $34.3 million run rate of EBITDA for those 12 active fleets excludes sand?

Matthew Wilks

That’s right.

Stephen Gengaro

Okay. Great. The other question — and thank you for the color, I appreciate it. The other question is in a world where investors in general seem to be nervous about debt, and you have — you’ve made a lot of good strategic acquisitions. How do you think about the debt levels that you’re comfortable with? And then any longer-term plans to sort of delever and return capital?

Matthew Wilks

Yes. We’re certainly in the process of deleveraging. But when we look at the cash flow that we generate, we don’t see us as having any issues with our — with the total amount of leverage. But when we look at the run rate and the cash flow generation that we fully expect to see through the remainder of the year, we think that this will be a shrinking issue.

Operator

Our next question comes from the line of Saurabh Pant with Bank of America.

Saurabh Pant

I had a quick question. I think we talked about taking some supply out of the market. You’re obviously retiring 3 fleets. I think of the 6 that you acquired in the Producers and REV transaction, plus, I think I also heard you say that you are reducing our supply of fleets in the Permian. So if you can just talk to that, how much capacity you’re retiring/taking out from the market, just so that we are on the same page in that? That would be helpful.

Matthew Wilks

Certainly. So we’ve stayed consistent on our plans for “Acquire, Retire, Replace.” And so when we go through and we look at any acquisition, the first part of that is going in and looking at the quality, the horsepower, our ability to upgrade it and the overall cost of upgrading it. And so we go through a careful process of evaluating whether we should or if we should retire.

And so based on the quality of some of these fleets and some — not necessarily fleets but more so on an individual pump basis. So when you go in and you look at these individual pumps, it just doesn’t make sense to convert or upgrade them. And so we’ve elected to retire them and take capacity away from the market. I think it’s a prudent thing to do.

And our #1 priority is make sure that the service quality and the execution that we have on location is never compromised by the quality of the equipment. We also focus on standardizing our — what we have out there, what we make available to our customers as well as to our employees. We want to make sure that everybody has the best tools for the job. So we made that choice to remove 3 from the mix.

And as far as the asset allocation, we’re fully aware and seeing the tape on natural gas with our footprint and the strength that we’re seeing with our overall supply chain, we really like the developments that we’ve seen there. We’ve seen a very warm welcome from our customer base in the Haynesville, the Northeast; and then the Eagle Ford, where we’ve actually seen an increase of activity from the customers that we target.

And with that, there’s a number of reasons that we think that may have developed. We know that many of our peers have pulled fleets from those areas. And taking them back to the — taking them back west to the Permian. And so we’re seeing a little bit of a shuffle out there in the Permian and we’re really excited about what we’re doing and expect to see that our supply chain will start — will continue to show results as we fully bundle our services around our frac fleets.

We’ve taken a position that these frac fleets are packages that sell products. And for that reason, it’s allowed us to take a new view of our customer base so that we can focus more exclusively on utilization rates with customers that would expect to see a slightly lower horsepower price. And it’s an easier decision for us to make now that we have so many products to offer through our horsepower.

Saurabh Pant

Okay. Okay. No, that makes sense. And then just quickly on the vertical integration strategy. Obviously, that was part of your strategy from Day 1, right? So no surprises there. But if I just look at the Haynesville and think about how much sand capacity you have, right, I’m doing this back of the envelope math, about 0.5 million tons per annum of sand required per fleet. It looks like you can service 20 to 21 fleets at nameplate capacity, right? Obviously, it’s going to be lower than that on an effective basis.

But that means a lot of upside potentially to the number of fleets that you can deploy in the Haynesville over the medium term, right? I understand near term, have challenges, right? But over the medium term, you can substantially increase your footprint in the Haynesville. Is that the strategy? How should we think about that versus your selling sand to third-party pressure pumping companies?

Matthew Wilks

Well, it’s a tough environment out there, not just the one with commodities, but also just the broader markets. I mean there’s potentially a recession coming. You’ve got this crisis, this banking crisis that’s going on. So we’re taking a very cautious approach. We’re not looking to be too aggressive on deploying more assets to any of these regions. But theoretically, we could support a substantially higher number of fleets in the Haynesville.

We’re playing this really close to the chest, but make no mistake, we’re long-term believers in the gas markets and love what we see by the end of this decade with the export capacity that’s coming on. We especially like seeing operators secure their own offtake agreements with these LNG exports. And so we think that it’s really important that we stay committed to these markets and maintain those relationships to make sure that we have a reputation that doesn’t run from a little bit of weakness in the short term.

And I think that’s being rewarded with that level of commitment that these operators, we’ve actually added a couple of fleets, but we don’t anticipate getting too aggressive with too many more additions.

Operator

Our next question comes from the line of John Daniel with Daniel Energy Partners.

John Daniel

I just got a few sort of basic questions initially. Matt, can you tell us — I know it’s the guidance for the active count is, but just given sort of the choppiness, if you will, what is the typical working fleet count on any given day right now?

Matthew Wilks

So we’re not looking to provide any guidance on Q1. We think that we’ve indicated that there’s some softness in West Texas, but we’ve been able to pick up additional fleets and in the Eagle Ford and the Haynesville as well as in the Northeast. So I think that overall, we’ve got a pretty balanced approach. And our main focus is getting the entire supply chain pulled through, been very successful with it in these smaller markets and continue to see signs of adoption in West Texas.

And what we do like is with the tightness in the sand market that we’re seeing out there, we are very constructive about our ability to pull that all the way through and show the full benefit of a fully-bundled business with all these parts of the value chain included. So what we’re guiding to is 46 for exit — we exit with 46 fleets with 42 active today.

John Daniel

Okay. Fair enough. The — let’s assume that we do have a choppy market in the back half of the year. You guys have been very good at consolidating the market. Do you use that as an opportunity to prosecute more deals? Or do you think that the story for you — for ProFrac for the balance of this year is just — is to integrate from costs and focus on cash flow? Just thoughts there.

Matthew Wilks

So we’re concentrating on our business as it is today and focusing on our balance sheet. But we have always been contrarians. We’ve always looked at down markets as opportunities and we’ll explore opportunities as they’re presented. And our focus is to go in and evaluate them carefully and make sure that we don’t put our balance sheet in a precarious position.

John Daniel

Okay. And then final one for me is just you’re doing both the dual fuel upgrades as well as the electric build-out. At this point, are you seeing customer preference for 1 versus the other? Or is it just very nuance between people? Just any trend there?

Matthew Wilks

Yes. I think that all comes down to the different regions and the infrastructure that exists. When you look at the dry gas areas where you’ve got higher pressure for your gathering lines, you’ve got better infrastructure to supply the gas. And so there’s a lot more flexibility in how you approach each customer. There’s a lot of excitement overall. I think the main theme is just displacing diesel.

I think that’s the single biggest area that an operator can look for, for saving money on their completions. And — but when you look at some of the markets with associated gas, you’ve got lower pressure lines. And so you’ve got to have a solution that you can bring to the table to make this — to make these platforms more available because the high-pressure infrastructure lines that you need to run these platforms isn’t readily available.

Operator

Our next question comes from the line of Don Crist with Johnson Rice.

Donald Crist

I wanted to touch a little bit on the sand side. Obviously, I appreciate the bridge that you have on the new capacity coming in. But can we assume that the legacy plants are going to be operating at similar margins and utilization?

Matthew Wilks

So when we look at this, the first thing that we do is we go in and we work carefully with any existing customers. And then any — we really like the free volumes that we have so that we can structure them the way that we see the market. And I think the historical financial performance of these assets are certainly not what we expect from them going forward. We’ve seen tremendous pull through.

When you look at our financials, you only see part of the picture. So on the full bundle on existing fleet, we only have 1/3 of our fleets that are fully bundled. And on those fleets that are fully bundled when we’re supplying the sand, you have a much higher profile of profitability of those fleets.

Again, highlighting the full value chain when you can get incredible utilization like our fleets have, you can get an incredible pull-through on your products that you’re selling through, which would include the sand, logistics and chemicals. So having high utilization and pulling goes through on a fully bundled service offering is incredible. And with it being such a low percentage in Q4 and seeing that growing on a quarter-over-quarter basis, we think that the annualized EBITDA per fleet has potential to reach well over $50 million of fleet.

Donald Crist

I appreciate the color there. And just one more for me, maybe for Lance. How do you see working capital progressing through the year Obviously, there’s been a pretty big build as you’ve done a bunch of acquisitions through 2022 and will probably build again in the first quarter. But do you see a release as we move through the balance of ’23, just thoughts around working capital from here?

Lance Turner

Yes. I mean I think in the near term, for the first quarter, I wouldn’t expect a big impact. As you progress through the year, I think it’s highly reliant on, obviously, the number of fleets, the pricing of our fleets, the efficiencies of our fleet as we look to integrate materials into our fleet that will be a use of working capital. And so I don’t know that we would expect to see a significant release going further into the year.

Donald Crist

But not as big a build as we saw in ’22, correct?

Lance Turner

Correct. Yes. I mean ’22, you had fleet count, you had efficiency growth, you had pricing growth, you had — not on a percentage basis but overall material integration, you just had a lot of things happening in 1 year.

Matthew Wilks

Yes, one thing real quick on that. Whenever you’ve got — the longer you work with an operator, the better the reconciliation process is and the smoother the invoicing is with each customer. And so as we continue to establish new relationships and each of those relationships appropriately, the reconciliation tightens up and significantly improves the — your working capital and the timing of payment.

Operator

That is all the time we have for questions. I’d like to turn the call back to management for closing remarks.

Matthew Wilks

We thank everybody for a very successful 2022. We thank all of our stakeholders. Appreciate their questions on this call. We look forward to delivering an incredible ’23 and showing what our business model is capable of. It’s these types of environments where we see a little choppiness in the market where — we hope to set ourselves apart and show exactly why we put a vertically integrated business together that captures as much of the value chain as possible. It gives us a very resilient business model and allows us to outperform on a relative basis and show that this is a full cycle business that doesn’t just look good in the good times but outperforms through the cycle.

And we appreciate everyone, and hope that you have a great day.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.

TZOO – Travelzoo (TZOO) Q4 2022 Earnings Call Transcript

Written by SA Transcripts on March 25, 2023. Posted in Stock Report, TZOO.

Travelzoo (NASDAQ:TZOO) Q4 2022 Earnings Conference Call March 22, 2023 11:30 AM ET

Company Participants

Wayne Lee – CFO

Holger Bartel – Global CEO

Arveena Ahluwalia – Global Director, META

Conference Call Participants

Michael Kupinski – NOBLE Capital Markets

James Goss – Barrington Research Associates

Ed Woo – Ascendiant Capital Markets

Steven Silver – Argus Research Company

Operator

Hello, everyone. Welcome to the Travelzoo Fourth Quarter 2022 Financial Results Conference Call. [Operator Instructions].

The company would like to remind you that all statements made during this conference call and presented in the slides that are not statements of historical facts constitute forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could vary materially from those contained in the forward-looking statements.

Factors that could cause actual results to differ materially from those in the forward-looking statements are described in the company’s forms 10-K and 10-Q and other periodic filings with the SEC. Unless required by law, the company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company’s website for important information, including the company’s earnings press release issued earlier this morning.

An archived recording of this conference call will be made available on the Travelzoo Investor Relations website at travelzoo.com/ir.

Now it’s my pleasure to turn the floor over to Travelzoo’s Global CEO, Holger Bartel; its Chief Financial Officer, Wayne Lee; and its General Manager, Travelzoo META, Arveena Ahluwalia. Wayne will start with an overview of the fourth quarter 2022 financial results.

Wayne Lee

Thank you, Regina, and welcome to those of you joining us today. Please open or refer to the management presentation to follow along with our prepared remarks. The presentation in PDF format is available on our Investor Relations website at travelzoo.com/ir.

Let’s begin with Slide #3. Revenue growth accelerated in Q4, leading to much stronger earnings. Our consolidated Q4 revenue was $18.6 million, up 36% from $13.7 million in the previous year, and in constant currencies, it was $19.4 million, which is an increase of 42% year-over-year. Operating income, which we, as management, call operating profit was $3.6 million, which is approximately 19% of revenues compared to an operating loss of $3.8 million in the prior year. As of December 31, we had $30.4 million unduplicated members compared to $30.3 million as of December 31, 2021.

On Slide 4, we go into more details about the revenue and operating profit of our 2 more significant business segments, North America and Europe. North America segment revenue increased 53% year-over-year from $8.6 million to $13.1 million. The operating profit in North America was $3.7 million in Q4 compared to an operating loss of $2.1 million a year ago.

Europe segment revenue increased from $4.3 million to $4.7 million or 9% year-over-year. At constant currencies, Europe revenue increased 23% year-over-year. Europe had an operating profit of $42,000 in Q4 compared to an operating loss of $1.7 million in the prior year.

On Slide 5, you can see that our operating margin for all of 2022 reached 11%, which is at a level higher than our operating margins before the pandemic in 2020.

Before the pandemic, Travelzoo’s reported operating margin was much lower because of operating losses from our Asia Pacific segment. In March 2020, Travelzoo decided to exit its Asia Pacific business and operate it as a licensing business going forward. Now the operating margin shows the true profitability of Travelzoo in North America and in Europe.

Slide 6 shows that our operating margin in North America reached 29% for Q4.

On Slide 7, we provide information on non-GAAP operating profit as we believe it better explains how Travelzoo evaluates performance. This slide shows the non-GAAP operating profit, which was $4.8 million in Q4 compared to a loss of $2.4 million in the prior year.

Slide 8 provides more information about the items that are excluded in the calculation of non-GAAP operating profit.

Please turn to Slide 9. As of December 31, 2022, consolidated cash, cash equivalents and restricted cash was $19.4 million. The cash balance reached the expected level as the number of vouchers outstanding has decreased greatly at the end of 2022.

Slides 10 and 11 detail our revenue by business segment. The North America business segment saw a year-over-year revenue increase of $4.5 million.

Turning to Slide 11. The Europe business segment, which we report in U.S. dollars was and continues to be impacted by the strong dollar. We saw revenue in Q4 increased by $384,000. But in constant currencies, revenue increased $1 million year-over-year.

Slide 12 shows that the pandemic led to a significant reduction of fixed costs. We believe we can keep our fixed costs relatively low in the foreseeable future, while revenues are expected to grow. For Q1 2023, we currently expect higher revenue and profitability. During the pandemic, we have been able to lower our fixed costs. We believe we can keep our fixed costs relatively low in the foreseeable future.

Now I turn over to Holger.

Holger Bartel

Thank you, Wayne. Revenue growth accelerated in both North America and in Europe, leading to much stronger earnings. As the recovery from the pandemic continues, we will leverage Travelzoo’s global reach and trusted brand to further improve earnings in future periods. With more than 30 million members, 7 million mobile app users and 4 million social media followers, travelers with love by travel enthusiasts, who are affluent, active and open to new experiences.

Slide 13 provides more information about our members. 87% say they are open to new destinations and travel ideas. So Travelzoo members are travel enthusiasts.

Slide 15 provides an overview of what management and our global team are focused on. We want to reach and surpass pre-pandemic number of members and accelerate revenue growth. We want to utilize higher operating margins to significantly increase EPS, grow Jack’s Flight Club’s profitable subscription revenue and launch Travelzoo META.

At this point, I’d like to turn over to Arveena.

Arveena Ahluwalia

Hi, everyone. Today’s update will be super quick since the team is pretty busy with the launch of Phase 1 of Travelzoo META in the coming weeks.

For today, please turn to the next slide for a first look at one of Travelzoo META’s marketing teaser.

[Presentation]

With that, I’m handing over to the operator for questions for Holger, Wayne and me.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Michael Kupinski with NOBLE Capital Markets.

Michael Kupinski

A couple of questions. I was wondering, Holger, can you kind of — you indicated that the third quarter is shaping up to be a little bit better. I’m sorry, the next quarter is shaping up to be a little bit better. I was just wondering if you can kind of put some color around that. What are you seeing in terms of people traveling both on North America versus Europe? Are there any disparities there? Then also, I have a few questions about Jack’s Flight Club as well.

Holger Bartel

Okay, Michael. So in general, as you see in Q4 and now again in Q1, it’s become easier for us to negotiate offers for our members that of course, resulting in more activity by our members and also advertisers are back much stronger than last year because there’s more confidence in travel and while we have high inflation everywhere and possibly recessions coming. Travel is one of the areas where consumers don’t want to — they don’t want to give up on it. They just want to do more for less and they are looking for better deals, and that’s I think where we are well positioned. So we see that continue in Q1.

As you saw North America was a bit stronger. Europe is still lagging a bit. We see that gap closing in Q1 and probably this year. So in general, in Europe, travel activity is also quite good. And our business in Europe is improving better and more quickly now than probably last year, so that’s good.

Michael Kupinski

Got you. And then can you give us some color on voucher sales versus just — versus advertising in the quarter? And I noticed that as I’ve been traveling as well that prices in hotel rooms have gone quite high. And then it seems like more recently, we started to see more discounting. I was just wondering if you can add a little bit of color on that, too.

Holger Bartel

To answer your first question, vouchers have been — were very important during the early days of the pandemic. I would say, even the first 2 years of the pandemic because people just couldn’t travel and so they purchase the vouchers for future travel. They are less important today, a much smaller percentage of our business than they were in 2020 and 2021.

Advertising revenue is now the majority of the revenue that we generate. So we’re a bit back to patterns, what we saw in 2019. And the same is with travel behavior. So with regards to your second question, we are clearly seeing now that there are patterns of periods when hotels are busy and patterns of periods when they are less busy, and that provides us an opportunity to negotiate great deals for our members again.

Michael Kupinski

You’ve indicated that there has been an increase in the number of subscribers at Jack’s Flight Club, but it seems to me like maybe the effort there has been a little disappointing that we thought that maybe there would have been a little bit faster growth. And I know that maybe you’ve taken your foot off the accelerator of that one. But can you kind of give us your outlook for Jack’s Flight Club?

Holger Bartel

Yes, you’re right, it grew less in 2022 than what we were hoping for, but we also were looking for the right time to promote the service. Now airfares are very high. People are very interested in a service that provides them information about the airfares. So in 2023, we are looking at much faster growth of Jack’s Flight Club compared to what we saw before.

Michael Kupinski

Got you. And then just a final question about margins. You mentioned that the increase in the margins was due to the absence of losses in Japan, but I believe that you had made some structural changes as well, like decreases in office space and so forth. And I was just wondering now that you moved to more of a licensing agreement in Asia and with the structural changes that you’ve made, can you kind of give us your thought about what are the prospects of margin improvement and what could be the sustainable margins for the company?

Holger Bartel

You’re absolutely right, Michael. It’s a combination of both. We just wanted to make it clear that operating margins before the pandemic were not that much lower if we actually eliminate the investments we made in Asia Pacific. So that was one element. And the other element is, of course, as you say, that we have changed our cost structure permanently going forward. Well, in Q4, operating margin in North America was 29%. That’s actually quite good. That’s before taxes, obviously, but I think we can get the entire business to that level over the long run.

Operator

Your next question will come from the line of Jim Goss with Barrington Research.

James Goss

I am curious how you would evaluate Travelzoo’s trends right now relative to broader industry measures for hotels, airlines and other services like Expedia that make more direct bookings. And why do you think you would lead or lag any of those particularly broader trends?

Holger Bartel

So clearly coming out of the pandemic, there was pent-up demand. And as we said in the last quarter, people were traveling even more than they would have without the pandemic happening. So flights were full. Hotels were completely full. Airlines and hotels were not even operating at the same capacity. Now they’re increasing capacity, people are looking more for value. So in general, when you see travel suppliers having reported relatively good numbers recently.

For us, I think 2023 will be a year where we’ll be doing better than 2022 just because there is more opportunity for us to do what we are best at, which is negotiating and finding offers for our members that inspire them to travel and helping travel suppliers to really fill those dates when they are not busy and the destinations where that maybe — there may be less known or destinations where they are less busy indoor seasons. That’s what Travelzoo is about.

James Goss

So do you think you might — there might be a reason you might lag sort of the direct placements for hotels and placement in flights, et cetera, that you would catch up now as that — and maybe even at least grow as fast as some of the industry trends once that interest in travel revise. Is that…

Holger Bartel

Yes. I think that’s a good description. You put that forward very well, Jim. In general, when you look back, I mean, a company that’s been around for a long time and in periods when people watching their wallets closer, and we definitely are entering such times this year with inflation continuing to be high and some of the money that was spent — sorry, that was spread out by governments across the world that money is evaporating. And so people are looking more for value and for deals. So I think we are better positioned, but you explained very well, Jim.

James Goss

Okay. And within North America, are you noticing a difference in trends between Canada versus U.S.? And relative to North America vis-a-vis Europe, if Europe could be viewed as sort of collective continent rather than a group of countries. Is there more interest in international travel on this side of the pond versus that side of the pond?

Holger Bartel

No difference really between the U.S. and Canada between Europe and North America. Also no big differences — yes, you are right, people love to travel more now across the oceans further distances. Europe is particularly popular now for our members in the U.S. We clearly see that they want to go out. Again, they want to visit Europe. They also are now interested increasingly in Asia Pacific. And so I would just say maybe in Europe, the advertisers are a little bit more cautious with coming back in advertising. So — but we are seeing that, that is also improving.

James Goss

Okay. One last question. You made a point of saying there are 30 million members, is there a 7.3 million mobile app users and 4 million social media users. Could you talk about the consistency or differences among those categories in terms of the value and the economics of each?

Holger Bartel

Not really because — I mean, there’s not really a big difference between them because in the end, we cater to what I explained earlier, travel enthusiasts, people who are inspired by our offers to go to places that they didn’t even think about. And the media, how we reach them might be different, but their interests are the same and the behavior.

Operator

Your next question comes from the line of Ed Woo with Ascendiant Capital.

Ed Woo

My question is, during the pandemic, a lot of travel suppliers, particularly hotels, reduced their capacity because they couldn’t find labor, has that improved? Do you see more supply coming online, especially with hotels as the labor market improves in the U.S.

Holger Bartel

Yes, not only hotels, but also airlines, they have more capacity and also the hotels have stepped up. We see that happening more quickly in the U.S. than in Europe just because of the differences in labor laws. But yes, absolutely, yes.

Ed Woo

Great. And what are you seeing for the summer travel season? Do you see it having as robust as it was last summer as everybody came back? Or do you think that is beginning to more — have more normal trends?

Holger Bartel

You have to wait and see, but — it’s a good question, Ed. What we see is that members are booking trips further out than they did last year. So for example, we just had a really fantastic offer in New York, and it’s available for summer and a lot of our members booked already trips to New York for summer. We didn’t see it quite as much last year. So people are booking trips further out, but we will have to see if people take these trips.

Ed Woo

Great. And on the inflation front, have you seen travel suppliers able to pass on increases in the consumers willing to pay the higher prices?

Holger Bartel

Not so much a question for us because we are not a travel supplier, but from what I can see, yes, I think consumers are still accepting the higher prices. Let’s see how long that lasts. I expect that, that will change over the next 6 months.

Operator

Our final question will come from the line of Steve Silver with Argus Research.

Steven Silver

Most of mine have been asked already, but I’ve got a couple left. First of all, Holger, you mentioned that this management’s focus to continue to expand the member base looks to be pretty flat year-over-year. Just curious as to whether there are particular steps that can be taken to meaningfully grow the user base — member base over the short term? Or is it really just the expectation that former members will continue to return as business conditions continue to normalize.

Holger Bartel

Look, it’s mostly about better explaining the value that our membership is offering to consumers. We haven’t done that so well over the last 2 years. We’re going to do it more, and we obviously also investing more in marketing and making the brand more known. And beyond that, I think it’s just the changes in what’s happening in the industry that are helping us as I know it was — I think it was Michael or Ed who mentioned that they were looking to book a hotel and was so expensive as year.

Last year, you were often happy to even find a hotel if it wasn’t booked out yet, that is changing. And so people are now looking more for the kind of service that we have — that we are providing and that has made us so popular among these millions of travel enthusiasts over the years. So the industry trends are just simply helping us. And you are right, in the last 3 years during the pandemic, we didn’t grow our member base, but we’re looking to change that this year.

Steven Silver

Great. And just one base of big picture. Over the last couple of years, there’s been significant changes in the way both the company has operated in terms of the changing of the Asia Pacific business, then weathering the pandemic while I think there are a couple of headwinds left maybe in terms of the higher inflation still and maybe the unfavorable currency exchange at this point. But would you say broadly that in terms of headwinds on the business that Travelzoo’s fundamentals are as strong as they’ve been in quite some time?

Holger Bartel

Well, you saw we had a very good quarter in Q4. It was our best quarter in the last 3 years. We’re going to have a good quarter again in Q1. And so we are very optimistic about 2023. We see that the trends that we are seeing among consumers are helping our business. We see that the trends of what we’re seeing in the industry with more capacity, with more seasonal changes in seasonal patterns in demand again, all that is favoring our business. So we’re very optimistic about 2023. So yes, we hope we’re finally back in a position where we can continue to deliver these really good operating margins that we have seen in Q4 and probably do even better.

Operator

I will now turn the call back over to Mr. Holger Bartel.

Holger Bartel

Well, thanks, everyone, for listening in, and we look forward to speaking with you soon again next quarter. Have a great day.

Operator

Thank you, ladies and gentlemen. This concludes today’s teleconference. You may disconnect your lines at this time. Have a nice day.

GRIL – Muscle Maker, Inc. (GRIL) Q4 2022 Earnings Call Transcript

Written by SA Transcripts on March 25, 2023. Posted in GRIL, Stock Report.

Muscle Maker, Inc. (NASDAQ:GRIL) Q4 2022 Earnings Conference Call March 22, 2023 10:00 AM ET

Company Participants

Michael Roper – CEO & Secretary

Jennifer Black – CFO

Conference Call Participants

Operator

Hi, everyone. Thank you for joining today’s call. We’re going to give it a few minutes just for everybody to funnel in, and then we will go ahead and begin. Thank you.

Unidentified Company Representative

Thank you, operator, and welcome, everyone, to Muscle Maker, Inc.’s Year-End 2022 Earnings Call. Before we get started, I would like to say that this call may include forward-looking statements pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. To the extent that the information presented on this call can discuss financial projections, information or expectations about business plans, results of operations, products or markets or otherwise make statements about future events, such statements may be forward-looking. Such forward-looking statements can be identified by the use of the words such as should, may, intends, anticipates, believes, estimates, projects, forecasts, expects, plans and proposes. Although management sees that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. You are urged to carefully review and consider any cautionary statements and other disclosures, including the statements made under the heading Risk Factors and Elsewhere in documents that Muscle Maker, Inc. files from time to time with the SEC.

Forward-looking statements speak only as of the date of the document in which they are contained, and Muscle Maker, Inc. does not undertake any duty to update any forward-looking statements, except as may be required by law. For this call, all numbers disclosed have been rounded to the closest thousand and percentages have been rounded to the closest percent.

With me on the call today are Muscle Maker’s Chief Executive Officer, Michael Roper; and Chief Financial Officer, Jennifer Black. Michael and Jennifer will be presenting prepared remarks related to the financials filed on March 21, 2023, and those documents may be found on Muscle maker’s IR website, Newswire fees and on the SEC’s website linked from the Muscle Maker IR pages.

At this point, I would like to turn the call over to Muscle Maker’s CEO, Michael Roper. Michael?

Michael Roper

Thanks, , and welcome to everyone joining us on our call today. 2022 was a transformative year for Muscle Maker as we focused our franchising efforts on Pokemoto and launched our new wholly owned subsidiary, Sadot LLC. In Q4 2022, we began evolving Muscle Maker by strategically diversifying into a food-focused company delivering high-quality, healthy food to consumers through our restaurants and to manufacturers by an international agri commodity shipping, sourcing and farming business. Our goal is to create a comprehensive global food supply chain company, spanning from sustainable farming, agri commodity shipping, distribution, production and with the goal of ultimately reaching consumers through our restaurant franchising and meal prep companies. Today, we’ll be discussing our new diversification strategy and the impact of Sadot on operational and financial results and the performance of our restaurant division with an emphasis on Pokemoto.

Now I want to turn our attention to Sadot, our new wholly owned subsidiary and its strategic [indiscernible] in the global food supply chain. As I’m sure, many of you have seen the recent announcements and want to fully understand what this all means to Muscle Maker. Let me start by recapping why 2022 was a transformative year from the beginning.

Sadot was formed in October 2022 and is a wholly owned subsidiary of Muscle Maker, Inc. Its purpose was to diversify the company’s operations and lines of business from the local U.S. restaurant and franchising business and catapult us into the global food supply chain. All financial performance of Sadot is consolidated upwards to the parent company, Muscle Maker, Inc. Some of you might ask is other private and institutional investors have over the past few months, why do we choose this trajectory, departing from our legacy restaurant and franchise business and the move into the global food supply chain. The answer lies in the understanding of the agriculture and food landscape today and in the very near future to come. We’ve all seen how world events such as COVID and the war in Ukraine can be disruptive to the world’s supply chains on a local level. Food security and sustainable farming has become household terms, and we can only imagine what the world’s food market will look like when populations approach 10 billion people. We understand that going forward, as a food company that’s committed to apply healthy food and sustainable practices, we need to invest in laying the groundwork today in order to bring value for years to come.

On November 18, 2022, we announced an agreement with AGGIA LLC FZ to manage the day-to-day operations of Sadot. AGGIA is an international consulting company managed by seasoned professionals in various aspects of the global food supply chain. AGGIA manages the day to day operations of Sadot. Our agreement with AGGIA was designed as a pay-for-performance model, where AGGIA only earns shares of Muscle Maker common stock when they drive net income in the Sadot subsidiary. AGGIA can earn up to 14,424,275 shares of common stock, which would require them to generate approximately $22.538 million of net income for Sadot. The calculation of shares earned uses net income generated in Sadot and this is divided by a premium share price of $1.5625 per share to $1.5625 per share. AGGIA also has the right to nominate up to 8 new Board members, of which 1 was nominated upon execution of the agreement and the balance are based on certain net income thresholds. These thresholds allow the nomination of 2 new directors at $3.3 million in net income, 2 additional new directors at $6.6 million in net income and the final 3 new directors at $9.9 million of net income generated into Sadot. The fact that AGGIA is paid in shares and can nominate board positions upon performance reflects AGGIA confidence in its abilities to perform as well as its confidence in Muscle Maker’s knowledge and management. More than a consultancy agreement, this is really a joining of forces with a common goal.

Because AGGIA can own more than 20% of the outstanding shares as well as potential future control of the Board of Directors, the agreement required that we hold a shareholder meeting to have each of these items approved by our shareholders. On February 28, 2023, the shareholders of Muscle Maker approved the transaction and all accompanying provisions. We view the formation of Sadot and the agreement with AGGIA with the approval of our shareholders as our official launch of our diversification strategy. Upon executing our agreement with AGGIA, we began implementing our new strategy by starting with the agri commodity shipping and trading portion of the food supply chain. To be clear, we’re not sitting around with the computer trading electronic commodities. Instead, we’re actually shipping and trading physical commodities such as corn, wheat and rice, which are loaded on the cargo ships and transported between countries. A typical shipment may contain 25,000 to 75,000 metric tons with associated revenue values that range between $5 million to $40 million per shipment. Our first shipment was executed in the second half of November 2022. From mid-November through the end of December, basically half of Q4 Sadot with AGGIA’s day-to-day management generated $150,586,000 in revenue.

To put that into perspective, the entire prior year revenue for Muscle Maker as a whole was $9,321,000. And in the final 6 weeks of Q4 alone, Sadot generated $150,586,000 in revenue. This $150,586,000 in revenue generated $4,548,000 in net income or a 3% profit margin. By achieving this net income threshold and the execution of the agreement, AGGIA nominated and Muscle Maker approved the addition of 2 new Board members who bring extensive experience in the food supply chain and international business. I’d like to welcome Benjamin Patel, who was originally nominated to the Board of Directors upon execution of the agreement with AGGIA as well as Hannah O and Ray Shankar to the Board of Directors. Benjamin has worked in the global agricultural commodity trading field for over a decade and his experience spans across commodity trading, finance, M&A and operations. Hannah is an experienced agri-food business leader and certified sustainability professional with over 15 years’ experience with Bayer Crop Science and Manto. Ray brings international legal expertise as a partner in a law firm where he manages the private wealth and family office practice. These 3 members of our Board of Directors bring a wealth acknowledged to Muscle Maker and help elevate the expertise of the new Sadot subsidiary.

The agri commodity shipping business is centered on high revenue, lower-margin transactions. We believe we can improve on these margins overtime by only and managing sustainable farms. This will allow us to control the sustainability and quality of products at the farm level and enjoy the increased margins from supplying our own products to the supply chain. In addition, we’re in the process of cultivating our banking relationships with international financiers with the goal of developing more elaborate financial instruments, allowing us to conduct different types of transactions by taking possession of the physical commodities for longer periods of time or even owning our own cargo ships. There are many ways to increase margins in this area alone, and we believe we have plans to address these areas in the future.

In 2023 through the end of February, Sadot has generated over $100 million in additional revenue. This brings the total revenue generated since mid-November 2022 through February 2023 to over $250 million. Now that shareholders have approved the transaction, we believe we can begin executing at a faster pace moving forward.

Our next phase with Sadot will be focused on entering farming and sustainable farm management with the goal of increasing margins and control commodities at the initial stage as well as enhancing the social, environmental and financial value to our company. As part of our agreement, all net income proceeds generated by Sadot will be reinvested in growing and executing against the food supply chain strategy. Recently, by using proceeds from the $4,548,000 in net income generated in Q4, we placed a deposit on undeveloped farmland in Africa, representing over 27,000 acres of future development. While this transaction is billed in negotiation, our intent is to either develop this specific land or use the deposit on a more fully developed property, which could potentially generate revenue in 2023 versus further down the road, while also providing a potential opportunity to improve the profit margins in the core agri commodity shipping business.

We are excited about the potential of Sadot in our company’s advancement in the global food supply chain. We believe our results to date have been very encouraging, and we look forward to further building out the supply chain strategy and executing against potentially improving margins. Now I’d like to turn the call over to our CFO, Jennifer Black, to review the financial performance of the company for 2022. Jennifer?

Jennifer Black

Thanks, Mike, and thank you, everyone, for joining us here today. Before I begin, I would like to note that our financial results on Form 10-K were filed with the SEC on March 21 and in a press release that same day. With that, I’d like to give an overview of the financials for 2022.

For the year ended December 31, 2022, our company-led revenues significantly increased and totaled $161,698,000 compared to $10,350,000 for the prior year ended December 31, 2021. The $150,348,000 increase is mainly due to the commodity sales revenue generated by Sadot in its servicing agreement with AGGIA. Sadot generated commodity sales revenue of $150,586,000 for the year ended December 31, 2022. The commodity sales revenue was attributable to the formation of Sadot and the generated from physical food-related commodities. $150 million was generated from November 14, 2022, which was the date the servicing agreement was finalized with AGGIA through the end of the year. The restaurant division generated company restaurant sales net of discounts of $10,300,000 for the year ended December 31, 2022 compared to $9,321,000 for the year ended December 31, 2021. This represented an increase of $979,000 or 11%, which is mainly due to a full year of sales for Pokemoto restaurants in Superfit Foods compared to 2021 when these segments were acquired. Franchise royalties and fees for the year ended December 31, 2022 and 2021 totaled $727,000 and $778,000, respectively. This represents a decrease of $51,000 or 7%. Franchise fees are recognized income over the life of the franchise agreement. As the franchise location closes, our franchise agreement is terminated for any reason, the remaining deferred revenue will be recognized in full at that time.

In 2021, there were several Muscle Maker Grill franchises that closed, resulting in higher franchise fees recognized. Overall, our 2022 loss from operations narrowed by $1,330,000. This is mainly due to Sadot. However, our results were impacted by onetime expenses in 2022 or onetime gains in 2021. The onetime transactions that affected our net income for 2021 and 2022 are as follows; in 2021, we recorded $1,920,000, employee retention credit that reduced our labor expenses. In 2022, we recorded $670,000 of amortization expense that were not recorded in 2021 due to the transitioning of the trademark and Muscle Maker Grill from an infinite light asset to a finite light asset, resulting in an increase in amortization expense. If you remove the effects of these onetime events, the company’s loss from operations would have improved by $3,920,000 compared to the $1,330,000 that was disclosed. The most significant change in expenses from prior year is the stock-based consulting expense at $3,602,000, for the year ended December 31, 2022. The stock-based consulting expense is the result of the consulting fees due to AGGIA for Sadot operations. Based on these service agreements with AGGIA, the consulting fees are calculated at approximately 80% of net income generated by the Sadot business segment. This expense is expected to be paid in stock in 2023.

To elaborate a little further on the Sadot segment. It generated net income of $4,548,000. However, this net income was offset by the expense of the issuance of shares to AGGIA as per the terms of the agreement between Muscle Maker and AGGIA for the management of Sadot. In this Sadot service agreement with AGGIA, AGGIA earns Muscle Maker shares at a premium share price of $1.5625 per share and can earn up to 14,424,275 shares, which is the equivalent to generating $22,538,000 in net income in Sadot. Once AGGIA has reached maximum number of shares they can acquire, the consulting fees due to AGGIA will accrue as debt payable by Sadot to AGGIA. As Mike previously mentioned, we view the agreement with Sadot as joining forces towards a common goal. Therefore, we clearly see how the expense to AGGIA is actually an investment towards our future growth.

As of December 31, 2022, we had cash balance of $9,898,000 and a working capital surplus of $4,033,000. With that, I’d like to turn the call back over to Michael Roper.

Michael Roper

Thanks, Jennifer, for that financial overview and kind of amazes me to go through all the numbers and didn’t get to twisted [indiscernible] so that’s actually good. So we believe our new diversification strategy, okay, will have a significant impact on our company. To date, Sadot has generated over $250 million in revenue and reported net income in the Sadot division in Q4 of $4,548,000. Muscle Maker is a food-based company. Simply put, as an example, we feed people, and our company is evolving. Our strategy is changing. We like to think of Muscle Maker, Inc., which is our parent company as more of a holding company with multiple operational divisions. Basically, we have the newly created supply chain division, Sadot and then our restaurant division. We’ve spoken about Sadot. Now let me walk everyone through an overview of how the restaurant division has performed.

Our restaurant division is seeing continued improvements in our key performance metrics. As a percentage of company restaurant net sales, our revenue is up by 10.51%. Our labor percent — expense after adjusting for the 2021 ERC credits was reduced by 3.85%. Our rent expense — percent reduced by 1.97%. Our other restaurant operating expenses as a percent were reduced by 2.86%, and our food and paper costs, although they’re up slightly, increased by 0.35%. However, I actually consider the — considering the inflationary pressures on food and paper products in the industry that we faced this year, I think we did a pretty good job managing our costs here. So we’re up slightly in food and paper costs.

And then finally, our SG&A was reduced by 27.08%. So all of our key performance metrics are improving or are basically flat in the inflationary environment. So pretty good stuff that’s happening there. Not only are we excited about the potential and performance of Sadot, we remain focused on growing the restaurant division. Our restaurant division consists of 3 brands: Muscle Maker Grill restaurants, Superfit Foods meal prep and Pokemoto, Hawaiian Poke. All of our restaurant brands focus on healthier-for-you menu options. Muscle Maker Grill is our legacy brand and has been in business for over 25 years. We currently have 16 locations open with 1 new franchise location under construction. Superfit Foods is a meal prep company based in the Jacksonville, Florida market. Superfit is a subscription-based model that focuses on premade meals, Meals are prepurchased and assembled in a temperature-controlled facility and delivered the branded coolers placed in fitness facilities in 34 pickup locations throughout the Jacksonville market. We believe the key to our growth and performance in the restaurant division is directly tied into growing the Pokemoto brand and leveraging the corporate team’s background and growth through franchising. We currently have 28 Pokemoto locations open and operating today. We also have an additional 50 new franchise agreements that have been sold and not yet open.

In addition to these 50 new franchise agreements, we’re also excited to be working on several combo stores where we’ll operate both a Muscle Maker Grill restaurant and a Pokemoto restaurant in the same location, under the same roof leveraging the existing infrastructure and reducing overall costs while offering a wide variety of options to our consumers. Our first 2 test locations will be in Chelsea, New York, and Fort Sill in Lawton, Oklahoma. Our strategy has become the largest Hawaiian poke chain in the industry through our franchising model and strategic placement of corporate-owned locations. Pokemoto franchise locations generate initial franchise fees of up $25,000 per location upon signing the franchise agreement and then additional franchise royalty fee revenue of up to 6% of franchisee net sales each month once they’re open. A typical franchise agreement is 10 years with one 5-year renewal option.

Some additional highlights I’d like to point out as Pokemoto is now open or coming soon in 16 states. These states include Connecticut, Rhode Island, Texas, Florida, New York, Massachusetts, Tennessee, South Carolina, Virginia, Mississippi, Kansas, New Jersey, Maryland, California, Oklahoma and Pennsylvania. Pretty soon it’s going to be easier to say where we’re not in than where we are in, right? Pokemoto franchises are now available to be sold in all states aside from Hawaii. In 2022, we added California, Illinois, Indiana, Maryland, Minnesota, North Dakota, South Dakota, Virginia and Washington. We are also able to sell in the District of Columbia and Puerto Rico. We expanded Superfit Foods pickup locations to get up to 34 pickup locations. We launched our fully refrigerated production facility at Superfit Foods.

We rolled out multiple menu items across Pokemoto, including lobster seafood salad as a new protein option, which actually provides for a lower food cost option and to enhance our dessert and beverage options. We created a new interior design package for Pokemoto focusing on Hawaiian theme. We expanded our franchise sales team and we completed the full transition of the accounting and finance teams moving offices and personnel to the new location near Fort Worth, Texas. And finally, we integrated the Muscle Maker Grill meal plan menu into the Superfit Foods meal plan menu, expanding consumer choices. So a lot of things happening throughout the year. Our restaurant division is growing through our Pokemoto franchising efforts, and I’m proud of the team and what they’ve accomplished so far. I look forward to continuing to focus on Pokemoto franchising and what the team can do in 2023.

To conclude, I think we’ve done a great job executing on our diversified growth strategy and look forward to what the future brings. We believe the messaging around our new strategy and evolution of Muscle Maker into the global food supply chain is just now being received. We’ve hired investor relations companies to assist in getting this messaging out to the masses and look forward to building new relationships from these efforts.

I want to thank our shareholders and stakeholders for the support of the company and our initiatives. Finally, I want to thank our employees for all they do, we’ve got an incredible team here who deserve credit for our success and will be proud to be part of what we have built here.

Unidentified Company Representative

Thank you, ladies and gentlemen, for joining us today. That will conclude management’s prepared comments on today’s call. If you have any comments or questions, please direct them to us through the company’s new IR website at www.ir.musclemakergrill.com, or reach out to us via phone or e-mail.

Operator

Goodbye.

Question-and-Answer Session

End of Q&A

Author: SA Transcripts