Quantum-Si Q1 2023 Earnings Call Transcript

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May 11, 2023

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Quantum SI First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised today's conference is being recorded.

Operator

I would now like to turn the conference over to Juan Avendano, Head of Investor Relations for Quantum SI. Juan, please go ahead.

Speaker 1

Good evening, everyone. Thank you for joining us. Today, after market close, Quantum SI released financial results for the Q1 ended March 31, 2023. A copy of the press release is available on the company's website. Joining me today are Jeff Hawkins, Chief Executive Officer Patrick Schneider, President and Chief Operating Officer and Claudia Creighton, Chief Financial Officer.

Speaker 1

Before we begin, I'd like to remind you that management will be making certain forward looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding this risks and uncertainties appears in the section entitled Forward Looking Statements of our press release. For a more complete list and description of risk factors, please see the company's filings made with the Securities and Exchange Commission. This conference call contains time sensitive information that is accurate only as of the live broadcast today, May 11, 2023.

Speaker 1

Except as required by law, the company disclaims any intention or obligation to update or revise any forward looking statements. During this call, we will also be referring to certain financial measures that are not prepared in accordance with U. S. Generally Accepted Accounting Principles or GAAP, including adjusted EBITDA. A reconciliation of non GAAP financial measures to the most directly comparable GAAP financial measures is included in the press release filed earlier today.

Speaker 1

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

Speaker 2

Thank you, Juan. Good evening, everyone, and thank you for joining us. In today's call, we will provide a business update, present our Q1 financial performance and provide an outlook for 2023. We will then open the line for questions. The goal of Quantum SI is to bring next generation protein sequencing to every lab, everywhere.

Speaker 2

Our proprietary technology delivers deeper, unbiased proteomics insights that we believe will accelerate scientific research, Enable the discovery of new biomarkers and ultimately power the development of new therapies and diagnostic tests that will positively impact human health. In the Q1 of 2023, we started delivering on this mission with the initial shipments of our platinum protein sequencing system. As we have shared on previous calls, Quantum SI has established 3 corporate priorities for 2023. I would like to provide an update on our progress in the quarter Our first priority is to commercialize platinum, carbon and the 2 ms chip. We were pleased with customer orders in the Q1 of 2023, which totaled $449,000 And we're slightly above our internal plan.

Speaker 2

We reported revenue of $254,000 in the 1st quarter. This difference is due to a delay in the shipment of 2 international orders we received in the quarter, but were not able to ship until recently. To provide a bit more color, to ship these international orders, we needed to obtain specific import codes and engage with an international logistics partner, which we have since done and these two orders were successfully shipped in the current quarter. I would also like to provide more insights from our commercialization In the Q1, geographically, we have been pleasantly surprised by the level of customer interest from potential European customers. In fact, Our advanced sales funnel is made up of approximately 60% U.

Speaker 2

S. And 40% European customers. By end market, most of our internal customers are in academic research centers as expected. However, looking closer into how the sales funnel is evolving, By application, we are seeing the most interest in proteoform and PTM analysis, followed by protein identification And emerging interest in protein barcoding and antibody validation and QAQC through sequencing. Customer feedback continues to be positive.

Speaker 2

We are observing customers embrace our Platinum system for its convenience, Simplicity, accessibility and the ability to enable deep and unbiased proteomic studies at the individual amino acid level. On one end of the spectrum, these customers are proteomics researchers looking to do more in-depth unbiased proteomic studies with a technology such as ours. They value single molecule sensitivity and individual amino acid resolution as it unlocks the novel analysis of proteoforms and post translational modifications in their research. On the other end, there are customers who are new to proteomics and only Quantum SI's protein sequencing platform and provide a convenient, accessible solution that is easy to use and affordable. Overall, we are encouraged by the level of customer interest In our technology and are pleased with the sales funnel, we have been able to generate with a small commercial team and based largely from inbound customer interest and trade shows.

Speaker 2

That said, we expect to continue to be deliberate with our rollout in this early phase of commercialization to ensure customers have the best possible experience. Given this, we expect Q2 orders to be similar to Q1, which is consistent with our internal plan entering the year. Over the next few months, we plan to turn on outbound marketing and increase our direct sales efforts to support revenue growth in the second half of the year. To facilitate this, we have added talent to our commercial team across marketing, sales and customer support. Based on these initiatives and our existing sales funnel, we remain on track to further accelerate placements and revenue in the second half of this year.

Speaker 2

Our second priority is to lead with innovation. Quantum SI is the leader in the protein sequencing space and we will continue to leverage our deep technical expertise And novel technology to transform and democratize the field of proteomics. Recently, we executed one of our proof of concept engagements with a major academic institution. The study demonstrated that we could sequence and distinguish spike protein from various SARS CoV-two variants. Later in the call, Patrick will provide more details about this study as well as highlight some of the other data that has been recently presented at industry conferences.

Speaker 2

Finally, our Carbon sample prep instrument is on track to enter beta testing in the Q2 of 2023. We also remain on track for the launch of Karbon in the second half of this year. Our third priority is to preserve financial strength. As I've stated on previous calls, we are committed to continuously improving our fiscal discipline. In a similar way, we are laser focused on Supply chain and operations and our first quarter gross margin at 48.8% is a reflection of that effort.

Speaker 2

We are pleased with this result as we are far from operating at scale. Patrick will provide additional color on the efficiency initiatives our supply chain and operations teams Going forward, although there may be some fluctuations quarter to quarter, we expect full year 2023 gross margins to be similar to the level observed in the Q1 of 2023. Lastly, with regards to operating expenses, We reiterate non GAAP operating expense growth to be flat year over year in 2023. It is worth highlighting that we are keeping operating expenses Flat, while still making meaningful investments into building out the commercial team and executing the marketing programs required To successfully drive adoption of our platinum system. Before turning the call over to Patrick, I would like to briefly comment on the CFO transition we recently announced.

Speaker 2

Last week, we announced the appointment of a new Chief Financial Officer, Jeff Cai, who will join QSI on May 15. Jeff brings more than 25 years of experience in senior financial positions, providing transformational leadership in both public and private companies. He has extensive experience managing public company requirements, including interacting with auditors, investors and analysts. In addition to leading the typical functions within the CFO scope, Jeff has also led operations, legal and HR at various points in his career, giving him a unique perspective and understanding of company operations and strategy. We look forward to welcoming Jeff to the company on May 15.

Speaker 2

Claudia will continue to serve as our CFO until then. Upon Jeff's start date with the company, Claudia will transition into a senior advisor role through the end of June to ensure a smooth transition. Claudia played a significant role in taking Quantum SI public. I want to thank Claudia personally for her contributions to Quantum SI over the past 2 years. I would now like to turn the call over to Patrick, our President and Chief Operating Officer to discuss additional business updates.

Speaker 2

Patrick?

Speaker 3

Thank you, Jeff. Starting with product development, as I've explained before, we have a world class team in the area of protein engineering and directed evolution. Our internal team generates high quality differentiated amino acid recognizers and aminopestidases that result in our ability to sequence Proteins with a small set of recognizers that bind to multiple amino acids with different affinities. This is a major advantage over other approaches that require a specific recognizer for each of the 20 amino acids. Our R and D pipeline continues to make advancements on all aspects of the technology.

Speaker 3

Stay tuned for more to come later this year. We continue to develop our strategic partnerships with key opinion leaders to help seed the market and support our internal development efforts. As Jeff mentioned, we've been collaborating with a large institution on SARS CoV-two variants. We published an application note describing our ability to sequence and distinguish spike protein from 3 variants, omicron, alpha and beta. This is an important capability for researchers when RNA is not But proteins are still present.

Speaker 3

The ability to simply and affordably discern these variants from COVID and other diseases could be highly impactful for human health. We view these ongoing efforts to generate additional data as an important element of our strategic You can find more details of this work in our application note published on our website this week. One of our value propositions is easy access to protein identification and characterization. Whether a researcher wants to validate that their antibody is specific its intended target or they just want to determine what proteins are in their sample, they can use next generation protein sequencing to achieve their objectives. Often researchers send their samples to a mass spec contract lab or core facility for an identification of the protein in their samples.

Speaker 3

This can be costly and time consuming. Our platinum next generation single molecule protein sequencing instrument can often provide the same level of protein identification without sending a sample out or buying an instrument that can cost 5 to 10 times more than our platinum. To demonstrate that capability, we took a protein sample and sent half of the sample to a mass spec core facility And we sequenced the other half. And the results show that both the same methods identified the same protein. This will be a game changer for protein identification as we continue to advance the technology with respect to coverage and throughput.

Speaker 3

You can find this mass spec comparison to protein sequencing using our platinum in the application note on the website. I want to pause here and express my appreciation for the team's effort in generating all of this new sequencing data. I'm honored to work with such a dedicated and passionate group of professionals that is discovering new insights along with our collaborators and customers. The volume of sequencing data being generated every day is impressive. To keep up, we started a weekly post on social media, Our protein of the week.

Speaker 3

This is where we've been showcasing examples of the protein sequence every week. On the supply chain front, although we remain in a good position, we are conducting a thorough review of our supply chain and manufacturing operations as we look Even though we are pleased with our gross margin performance in Q1 at almost 50%, which is very strong for a newly launched product offering, We're being diligent in looking for operational efficiencies and economies of scale as commercialization continues to ramp up. Our engineering team designed the platinum instrument with simplicity and margin in mind, and now we're seeing the results of that early effort. We have established initiatives in other areas including procurement, automation and have kicked off a strategic review of some outsourced Our objective is to remain in a strong supply chain and margin position as we roll out our technology and increase its availability in the market globally. Moving on to commercialization.

Speaker 3

We're driving a controlled commercial rollout that will allow us to be reactive to early customer feedback. Most of our leads are currently coming from Our funnel is developing on track to our expectations. A key element of progressing our funnel is our proof of concept program, which allows customers to send a protein for analysis to our lab for a modest fee prior to purchase. This has been an attractive offering for some of our customers. In line with our internal plans, we are looking to place instruments In the first half of twenty twenty three with a select number of key opinion leaders in order to manage early placements with customers Cancer Research, AACR, where we exhibited the platform system and presented posters entitled Detection of arginine PTMs by single molecule protein sequencing on the Quantum SI platform.

Speaker 3

This week, our commercial team attended the Association of Biomolecular Resource Facilities, ABRF, where we presented a poster titled Advances in single molecule protein sequencing on the Quantum SI Platinum platform and showcased several exciting applications including the ability to sequence In addition, we presented at the booth an application node demonstrating the ability to identify By protein sequencing, an important biomarker in a biological sample, albumin is one of the most abundant proteins in your blood And what it accumulates in urine is an indication of potential kidney damage. We demonstrated the ability to identify albumin in urine by protein sequencing, which opens up the possibility to detect other protein biomarkers in a liquid biopsy. Up next, we are planning to be at the American Society For Mass Spectrometry, ASMS, an annual conference being held in Houston, Texas in June. Now I'll turn the call over to Claudia to review our financial results. Claudia?

Speaker 4

Thank you, Patrick. Hello, everyone. Let's discuss the details of our Q1 2023 financial performance. Revenue in the Q1 of 2023 was $254,000 This was the first revenue recognized by the company on the sale of platinum instruments and kits. As a reminder, we launched the platinum instrument in December 2022 and began commercial shipments in January 2023.

Speaker 4

Gross profit in the Q1 of 2023 was $124,000 resulting in a gross margin of 48.8%. The gross margin was primarily driven by the platinum instrument product mix. Operating expenses in the first Quarter of 2023 were $29,300,000 compared to $27,100,000 in the Q1 of 2022. The increase was primarily due to higher selling, general and administrative expenses and an increase of $4,600,000 in stock based compensation. Net loss for the Q1 of 2023 was $23,600,000 compared to $35,200,000 in the Q1 of 2022.

Speaker 4

Adjusted EBITDA for the Q1 of 2023 was a loss of $23,700,000 compared to a loss of $27,400,000 in the Q1 of 2022. A reconciliation table of adjusted EBITDA to GAAP net loss is provided in our press release filed earlier today. As of March 31, 2023, we had $322,100,000 in cash and cash equivalents and Investments in Marketable Securities. Turning to guidance, given our early stage of commercialization, We expect to be in a better position to provide quantitative revenue guidance later in the year. However, as Jeff mentioned earlier in the call, We expect Q2 orders to be similar to Q1.

Speaker 4

Relative to the first half of the year, we expect revenue to accelerate in the second half based on our business funnel visibility and as outbound marketing and sales activities ramp up. With regards to margins, We expect gross margin in 2023 to be similar to the level observed in Q1 2023. Lastly, we reiterate non GAAP operating expense growth to be flat year over year in 2023 and a projected cash runway into 2026. I would now like to turn the call back over to Jeff for closing remarks.

Speaker 2

Thank you, Claudia. We are off to a good start in 2023. 1st quarter customer orders came in slightly above our internal plan We delivered a solid margin performance. We are making strong progress across all three of our corporate priorities for 2023. Our business funnel is robust.

Speaker 2

We have a strong team in place and we believe we are well positioned to accelerate commercial momentum in the second half of the year. Operator, please open the line for questions.

Operator

And our first question coming from the line of Kyle Mixon with Canaccord. Your line is open.

Speaker 5

Hey guys, thanks for taking the questions. Congrats on the launch and the revenue and the margins, great to see. Maybe just starting with The funnel and actually really where these placements are going right now. I heard like how the leads are kind of inbound organic and trade shows But I am curious who the early buyers are of Platinum and maybe aside from those early access users and what are some of the initial applications that you were You're talking about before. And I mean, are customers still figuring out the use cases?

Speaker 5

I mean, are they hitting the ground running? I mean, how are they thinking about this going forward? How could that evolve

Speaker 2

Yes. Thanks, Kyle. I'll start out here and then perhaps pass to Patrick if he wants to add any Additional color. As we said, academic research centers are the preponderance of those early customers. It's what we expected would be the target and where the initial interest would be.

Speaker 2

A solid portion of the fund was also those academic Researchers, but we're beginning to make our traction into other segments of the market. So we mentioned some of those Pharma, Biotech, some industrial applications in areas like antibody QAQC or antibody validations, and even some Government related accounts both here in the U. S. As well as in Europe. So getting a more diverse funnel as we Get out there with some people sort of in direct selling and attend more of those trade shows.

Speaker 2

Application wise, maybe Patrick, you want to provide Some insights on the applications.

Speaker 3

Sure. Yes. So, we continue to refine the applications with Customer feedback, for example, we had the proteoform characterization With the SARS CoV-two spike protein as an example of identifying through sequencing Differences at the amino acid level. So this is now beginning to take form as an application, The proteoform characterization, certainly continuing with protein identification, moving into protein mixtures, Moving into identifying proteins and biological fluids, so this is really starting to strengthen That particular application and of course post translational modifications is an application that we've always talked about and continue To reinforce, and certainly some early customer feedback from that, like the arginine is an example. So really continuing to develop those applications, It's a big focus of ours to work with the key opinion leaders to continue to build out that and strengthen those applications.

Speaker 5

Awesome. Great. Thanks so much guys for that. Yes, just got a couple more here. Sorry for that.

Speaker 5

I think I heard something about discounting and sort of And sort of on pricing, gross margin, things like that for the box, could you guys walk through how you're thinking about pricing I think the list is 7 ks and I know you don't want to provide what you're actually selling this for everything. We don't have to go over the actual placement number because I understand that's kind of confidential, but How are you thinking about pricing just given such a novel platform? And I'm actually curious how like how are customers sort of purchase The initial batch of chips, are you seeing any trends in utilization so far either? I know there's a lot of questions there. I can repeat myself Thanks.

Speaker 2

No, you're okay, Kyle. I think we've got them and if we miss one, we can come back to it. So on the first point, We're not seeing a lot of pricing pressure in the market. So both on our instrument as well as our consumables, we've been able to Do most of the transactions at or very close to list pricing? So we're not seeing any significant pricing pressure In that regard, I think we're continuing to evaluate if there could be opportunities to increase The price especially of the instrument given its capabilities and how unique it is in the market, right now We're not going to make any of those changes, but it is something we're monitoring, if we believe the market would bear that And then in terms of buying, what we tend to see, Kyle, is that somebody who purchases the Platinum instrument will buy Some number of kits to get going into whatever their research or what study they have sort of in mind.

Speaker 2

It's obviously early in the commercialization cycle, but we can tell you that one of our early implementations has recently Repurchased consumables. So it gives us sort of some confidence that people in those initial orders aren't necessarily taking a big stocking order and are Going to be sitting on consumables for a long period of time that they're ordering sort of what they need. They're moving forward. They're making progress And continuing to remain interested in using our platform for the intended research.

Speaker 5

Okay. Thanks, Jeff. And just two more questions for me. Maybe first on the just like second half lift that you were describing. I mean, it sounds Sounds interesting and thanks for the kind of the guidance for the Q2.

Speaker 5

That's helpful. I guess I'm curious how significant that will be in the second half and how much pent up demand is there and how secure is Just given it's pretty novel, I figured there's not going to be a lot of slippage, but I'm just curious what your thoughts are there. And then, any comments on book to bill Going forward, just maybe like compared to what you saw in the 1st few months?

Speaker 2

Yes. So I think on your last point, really The difference between the booked revenue and the orders we received really had to do with that international demand and that was Very early in our commercialization sort of history here, and we just needed to check off the two boxes that I mentioned in my prepared remarks And any future orders coming in from the European Union would be easily executed on now in a more real time basis like we have with U. S. Orders. I think the concept of sort of building up a huge backlog, I don't believe will be a key Part of the story, we'll look to fill orders as we get them as quick as we can.

Speaker 2

In terms of the funnel, obviously, we're not giving out guidance Yes, as to how we think that will accelerate. Some of this is seeing what those order patterns are, seeing the utilization. But also, we brought in new people to our team and those folks really are just now hitting The ground has been trained and are out working every day in a direct selling capacity. So I think we'll learn a lot In this current quarter, about how much lift do you see as you add more people to the team. And I think you put the customer Feedback with that information together can put us in a position to provide sort of more quantitative Guidance for the back half of the year on the next call.

Speaker 5

Perfect. And one last one for me. Just reproducibility out there in the field with the first few systems. I'm sure it's not perfect and there probably will be some time where you kind of Pause, maybe you pause shipments and reevaluate how the technology is being run and things like that and the best way to run that in the workflow and such. Could you just kind of talk about and comment on what you're seeing out there in the field right now compared to what was running in your facilities?

Speaker 5

And, yes, like any plans forward there with kind of improving performance, I suppose, and maybe how carbon kind of factors in there as well?

Speaker 2

Yes. So, so far, Kyle, we have not seen a lot of variation in the field. What customers are experiencing is very similar to what We experienced here in R and D, so we've been fortunate in that regard, but obviously very close to the customers making sure that that trend continues. Some of the early customers have given us suggestions for improvements we can make to Our cloud analytic tool or some of the data visualization, so things we're working on and we'll implement to continue to evolve the features Of the cloud analytic tool with their thoughts in mind. So really more just been more enhancements they like to see or those little tweaks.

Speaker 2

We haven't seen any Significant variation in performance across the market. I lost your second question though, Kyle, if you can repeat that.

Speaker 5

Sure, sure. So maybe and maybe this could kind of be like another a 5th question potentially. Maybe like how much of a game changer is Carbon going to be once that is launched? Well, that moved the needle and I think it was later this year's launch. And then maybe like a catch rate thoughts for Harbin on platinum because I feel like that's Super useful to have that automation, but I'm just curious what you think about that?

Speaker 2

Yes. And Kyle, I think that's really what that beta study

Speaker 5

We're going

Speaker 2

to kick off here in the current quarter will help us define. For sure, Carbon is going to bring an additional level of automation Over the current workflow of the product, I think what we're hoping to learn from customers sort of twofold. One is, how valuable is that automation in terms of hands on time reductions? Does it help them achieve Higher run success rate, do they see better, do they see more reads from the consumable. So we'll be looking at these various metrics to see what other Benefits beyond purely automation do they see and I think the more it trends towards these other Value add sort of capabilities, the higher that attach rate will be.

Speaker 2

But I think when we get through beta, We'll have the quantitative data we need here, and I think we'll be able to really project or at least provide you a perspective on what we think that The tax rate will look like with that data in mind. So stay tuned on that. I'm going to get this beta going in this quarter and Expect to get some data from that and be able to provide more quantification. Got it. I'll leave

Speaker 5

it there, but thanks for the time guys and congratulations again.

Speaker 2

Thank you,

Operator

Kyle. Thank you. And our next question coming from the line of Wamsi with B. Riley, your line is open.

Speaker 6

Hi, this is Brandon Carney on for Yuan. Thanks for taking our question and congratulations on the launch. Just one from us. We're just wondering if you could elaborate on a particular user case where the customer leveraged or was planning on leveraging Platinum for post translational modification research. Yes, any color on that in each case would be helpful.

Speaker 2

Yes, Patrick, do you want to provide a couple of examples there? I know we put some application notes out and Sure. You can give a little more color.

Speaker 3

Yes. So one particular user case, and this is a very interesting one. Some post translational modifications are extremely difficult to see by traditional methods like mass spec. For example, modifications of arginine, which has implications in aging and various other diseases. And so what we've done is in working with KOL, we've identified various forms of post translational modification on the arginines.

Speaker 3

So asymmetric versus symmetric Dimethylation, so it's like the same molecule, but just in a different form, extremely difficult to detect With Mass Spec. Also other modifications on arginine like citrullation, again extremely difficult. So that's I would say that's probably one major use case for some of this post translational modification. And then there are various others as well.

Speaker 6

Okay. Thanks. Appreciate the color.

Speaker 2

You're welcome.

Operator

Thank you. And I'm showing no further questions in the queue at this time. I will now turn the call back over to Juan for any closing remarks.

Speaker 1

Thank you all for your participation today. We look forward to updating you on our progress in the next quarterly earnings call. Have a good evening.

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