Good day, and thank you for standing by. Welcome to the Teknova Third Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jennifer Henry, Senior Vice President of Marketing at Teknova. Please go ahead.

Thank you, operator. Welcome to Teknova's third quarter 2022 earnings conference call. With me on today's call are Stephen Gunstream, Teknova's President and Chief Executive Officer; and Matt Lowell, Teknova's Chief Financial Officer, who will make prepared remarks and then take your questions. As a reminder, the forward-looking statements that we make during this call, including those regarding business goals and expectations for the financial performance of the company are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning these risk factors is included in the press release the company issued earlier today and they are more fully described in the company's various filings with the SEC. Today's comments reflect the company's current views, which could change as a result of new information, future events or other factors. And the company does not obligate or commit itself to update its forward-looking statements, except as required by law. The company's management believes that in addition to GAAP results, non-GAAP financial measures can provide meaningful insight when evaluating the company's financial performance and the effectiveness of its business strategy. During this call, we will therefore use non-GAAP financial measures of certain of our results. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this afternoon, which is posted to Tecnova's website and at www.sec.gov/edgar. Non-GAAP financial measures should always be considered only as a supplement to and not as a substitute for or as superior to financial measures prepared in accordance with GAAP. The non-GAAP financial measures in this presentation may differ from similarly named non-GAAP financial measures used by other companies. Please also be advised that the company has posted a supplemental slide deck to accompany today's prepared remarks. It can be accessed on the Investor Relations section of Tecnova's website and on today's webcast. And now I will turn the call over to Stephen.

Thank you, Jen. Good afternoon, and thank you, everyone, for joining us for our third quarter earnings call. Teknova is a leading provider of critical reagents that accelerate the introduction of drug therapies, novel vaccines and molecular diagnostics. We manufacture high-quality customer agents with short turnaround times and are positioned to scale with our customers as they advance their products from discovery to commercialization. This is best exemplified in the cell and gene therapy market, as well as in the synthetic biology and liquid biopsy markets where there's a significant need for custom-made reagents and volumes smaller than 1,000 liters. Our ability to manufacture custom research and clinical grade solutions with short turnaround times enables our customers to reduce the time from discovery to clinical impact. As our revenue growth performance demonstrated this quarter, we continue to see healthy demand growth across our broader customer base. We were encouraged by large custom orders we received from customers in the synthetic biology and liquid biopsy spaces to attractive high-growth end markets for which our custom-made reagents are well suited. As expected, we did see a softening of demand from our early-stage biopharma customers, particularly in cell and gene therapy, which negatively impacted our revenue in the quarter. However, we remain optimistic about this market despite what we believe to be current headwinds. During Q3, we advanced the construction of our new state-of-the-art modular manufacturing facility. In fact, we successfully completed our very first wet run [ph] demonstrating the end-to-end functionality of the manufacturing platform. This facility remains on track to be operational by the end of 2022 for research grade production and will ultimately give us the capacity to manufacture approximately an additional $150 million in product revenue when fully utilized. After the opening of the facility, we will continue to…

Thanks, Stephen, and good afternoon, everyone. We delivered solid results for the third quarter of 2022. Total revenue was $10.7 million for the third quarter of 2022, a 14% increase from $9.4 million in the third quarter of 2021. On a trailing 12-month basis, excluding sample transport revenue, total revenue increased 29% over the prior 12-month period. Given our small overall revenue base and the potential for large orders to drive some variability in our growth rates, we believe trailing 12 months revenue growth is a useful additional metric to track our growth. By way of reminder, Teknova launched the sample transport product in the latter part of 2020 to address the urgent need for COVID-19 tests, and we no longer market or manufacture this product. Lab Essentials products are targeted at the research use only, or RUO, market and include both catalog and custom products. Lab Essentials revenue was $9.5 million in the third quarter, a 32% increase from $7.2 million in the third quarter of 2021 and a 21% increase on a trailing 12-month basis. Several large custom orders contributed to the strong revenue performance this quarter. Revenue growth reflected an increase in both the number of active customers and average revenue per active customer over the last 12 months compared to the prior 12-month period. Clinical Solutions products are made according to good manufacturing practices, or GMP, quality standards and are primarily used by customers in the clinical development or commercial release phase of a therapy or diagnostic. Our Clinical Solutions revenue was $0.9 million in the third quarter, a 46% decrease from $1.7 million in the third quarter of 2021 and a 68% increase on a trailing 12-month basis. Even as revenue was down in the quarter, the number of active customers has increased in the…

Thanks, Matt. Overall, we are pleased with our third quarter 2022 performance and the progress we have made against our strategic priorities. The fundamental growth opportunity for Teknova remains unchanged, and we are confident in our ability to help our customers accelerate the introduction of novel therapies, tools and other products through our unique ability to manufacture custom-made reagents and volumes smaller than 1,000 liters with short turnaround times. We will now take your questions.

Sam Martin [ph] on for Matt Larew. Just one question. What impact has the company seen from inflation? And have you been able to successfully pass it along through price increases? If not, how do you see inflation impacting gross margin in the fourth quarter in 2023, although it might be a little too early to speak about that. And previously, you mentioned that you were slowing hiring to control costs. Can you just speak a little bit about how labor costs have impacted margins? And have you know you made any changes to your hiring strategy? I know you touched briefly on that on the call. Thanks.

Okay. Maybe I'll start and then hand it off to you Matt. From an inflation perspective, we do pass on the cost to our customers through price increases and have been able to do so thus far. You have to remember that our cost of materials itself are not the majority of cost, we do have other overhead and labor in there as well, most of which we can pass through. So we do not see this as a sort of a going-forward headwind for us, although we watch it very closely and are monitoring as we go forward. I'm not sure we're ready to comment on Q4 2023 inflation at this point.

Yeah. I think your - Sam, the other part of your question related to hiring and cost of hiring, if I got that correctly. I would just say, from my perspective, certainly, as we've been through the last several quarters, with the tight hiring market, there has been inflation also with respect to our labor costs. But we've also been adding people just to grow our capabilities. So we've had both of those factors impacted. We have slowed down the hiring compared to what we were seeing earlier in the year. And as I indicated in my remarks, we're actually down quarter-to-quarter on the total headcount on a net basis. That wasn't necessarily a decision driven by inflation per se. It's just where we are with the business, but it is a trend we're seeing nonetheless.

So just real quick, Sam. I want to add to that. On the hiring side, you heard Matt talk about holding OpEx for the last 3 quarters, that $11 million to $12 million. We believe that we have the critical hires we need to execute the entire growth plan. So that kind of gives you an indication of how we're managing the business going forward.

Thank you, guys. Appreciate it.

Thank you. [Operator Instructions] Thank you all for your participation in today's conference. This does conclude the program. You may now disconnect.