Quantum-Si Q2 2023 Earnings Call Transcript

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August 7, 2023

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the QuantumSci Second Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to turn the conference over to Juan Avendano, Head of Investor Relations for QuantumSci.

Operator

Juan, please go ahead.

Speaker 1

Good morning, everyone. Thank you for joining us. Earlier today, Quantum SI released financial results for the Q2 ended June 30, 2023. A copy of the press release is available on the company's website. Joining me today are Jeff Hawkins, Chief Executive Officer and Jeff Keis, Chief Financial Officer.

Speaker 1

Before we begin, I'd like to remind you that management We'll 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 risk 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 only accurate as of the live broadcast today, August 7, 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 EBITDA and adjusted EBITDA. A reconciliation of these 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 Hawkins.

Speaker 2

Thank you, Juan. Good morning, everyone, and thank you for joining us. In today's call, we will provide a business update, present our Q2 financial performance and provide an outlook for the remainder of 2023. We will then open the line for questions. As a reminder, 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. While we continue to make solid progress with our commercialization activities in the Q2, we experienced some challenges that prevented us for meeting our revenue expectations. 1st, early customer feedback identified a set of software features that were important for our customers to efficiently analyze and interpret their experimental data. 2nd, we experienced some customer implementation challenges due to the wide range of biological sample types, sample preparation methods and sequencing applications customers wanted to perform with our technology. Finally, we observed some general extension to the sales cycle as the internal purchasing process at our customers has slowed down from what we experienced the beginning of the year.

Speaker 2

I would now like to provide more color on each of these items as well as share other updates on our progress during the quarter. Our first corporate priority is to commercialize platinum, carbon and the 2 ms chip. Our commercial organization build out is well underway. Under the leadership of our Chief Commercial Officer, Doctor. Grace Johnson, we are building a truly world class team across sales, marketing and customer support.

Speaker 2

Despite experiencing some implementation challenges in the quarter, our commercial team collaborated closely with customers Resolve the challenges and ensure the customers felt valued, supported and equally as important, excited about the potential of our technology to advance their future research. The customer feedback about the quality of our commercial team members and the support they have provided has been very positive. We are excited about the team that Grace is building and we are confident that they will build positive and lasting relationships with leading researchers globally. Our sales funnel is also strong and is tracking well ahead of our expectations for 2023. Quantum SI's technology addresses gaps in currently marketed technologies and it is clear customers are interested in exploring how platinum can positively impact their research.

Speaker 2

From a geographic standpoint, approximately 70% of the funnel is made up of U. S.-based customers and 30% from Europe. This change in geographic mix from prior quarters is the result of having more U. S.-based sales professionals. From a market segment perspective, Academic customers continue to represent the largest opportunity in the funnel with biotech customers being the 2nd largest market segment today.

Speaker 2

As we have shared on previous earnings calls, we were actively building out our commercial marketing team. And with that team in place, We expected to launch outbound marketing efforts, drive greater awareness of our technology and grow our sales funnel. In the Q2, we made key hires in our commercial marketing team and implemented our first outbound marketing campaign. The early market feedback from these campaigns has been positive and reinforces our belief that our technology fills a significant unmet need in the proteomics market. As stated at the beginning of the call, early customer feedback identified a set of software features that were important for customers to efficiently analyze and interpret their experimental data.

Speaker 2

Our product marketing team did an excellent job engaging with the customers to clearly define what enhancements were needed. These requests were communicated to our software team who got straight to work on these enhancements. And I am pleased to report the team delivered an upgraded version of software in early July. The new software version has been released to our customers and the feedback to date has been very positive. Additionally, during the Q2, we began to observe a general lengthening of our We have instrument sales that entered the customer's capital purchasing process during the quarter that continue to move along at a moderated pace.

Speaker 2

We have no reason to believe that these capital purchases will not ultimately be approved, but we are being advised by our customers that they are experiencing this process slowdown in general. We continue to believe that in the current macro environment, Having a low cost instrument will be advantageous to customer adoption. Our second priority is to lead with innovation. During the Q2, we experienced some customer implementation challenges due to the wide range of biological sample types, sample preparation methods and sequencing applications customers wanted to perform with our technology. As we dug deeper into each of these areas, We determined that our current R and D strategy and programs were not aligned optimally to our core capabilities and had gaps in terms of addressing the full scope and complexity of the proteomics workflow.

Speaker 2

As such, We have initiated a strategic review of current R and D programs and our R and D organizational design and capacity. We are near the completion of that process and expect to implement the necessary changes during the current quarter. While that process is not yet complete, I would like to share some of our thinking and initial actions taken thus far. Consistent with other proteomics detection technologies, Customers select the biological sample type and sample preparation method they use. The range of sample types to make them compatible with the downstream detection technology.

Speaker 2

One solution we have been pursuing to address this area is Carbon, our automated sample prep instrument. While Carbon could help reduce sample prep variation and streamline The end to end workflow of our platform, it is not an absolute requirement for our platinum protein sequencing instrument and may not be the best solution long term. There are commercially available liquid handling platforms and sample prep chemistry that may be an equal or better fit for customers and allow us to instead focus our internal resources on our core competencies in protein sequencing. To this end, we have put the beta testing and launch of Parbin on hold, while we complete an evaluation of the business case and assessment of potential options to address this portion of the customer workflow. Another consideration in our go forward product strategy will be to drive greater focus and investment in our core capabilities in protein sequencing.

Speaker 2

And therefore, we will look to leverage more industry partnerships and customer consortiums to address items like sample prep, workflow automation for the development of specific sequencing applications. Finally, we are looking closely at our organizational design to ensure that we fully resource the most critical areas to our success, such as applications development. During the Q2, we recognized the need for greater resourcing and applications development and redeployed some of our internal resources to this effort. The resulting outcome is that we were able to We deliver 5 new application notes demonstrating the capabilities of our protein sequencing technology. We believe that once complete, realignment of our R and D efforts will position us to deliver additional product improvements before the end of 2023, while also ensuring the pipeline of technology improvements that will support a steady cadence of releases throughout 2024.

Speaker 2

Our third priority is to preserve financial strength. We remain committed to continuously improving our fiscal discipline. In this vein, one objective in the announced R and D strategic review is to prioritize the programs that have the broadest customer appeal, while maintaining a base level of investment into a pipeline of longer term projects that will drive significant improvements to our core technology in the future. We intend to continuously evaluate all of our investments across the company to ensure that the capital we have been provided is utilized to maximize shareholder value and our financial runway. Finally, on the operations front, we are continuing to work through several initiatives These initiatives have the clear goal to secure our supply chain and enhance our margin position as we continue to scale up.

Speaker 2

In closing, launching a novel technology into a new market always involves some bumps in the road. Our focus remains on ensuring we a commercial strategy that prioritizes the early customer experience and seeks to strike a balance between long term success and near term revenue attainment. Given this philosophy, we expect to continue with a controlled rollout for the remainder of the year. We will continue to closely monitor customer feedback and implementation success metrics throughout this time frame. That data will ultimately determine how the commercial team accelerates our new customer implementation efforts.

Speaker 2

I will now turn the call over to Jeff Tice to review our financial results. Jeff?

Speaker 3

Thank you, Jeff. First, I would like to say how excited I am to be on board with Quantum SI. We have an excellent leadership team And all of us are aligned and focused on commercial execution and delivering the best and most innovative solutions to our customers. I personally come from a background of leading a series of companies through rapid change and growth and where extreme financial discipline was paramount. I plan to draw upon these experiences to help lead Quantum SI through a continued financially disciplined approach that ensures we utilize our Now let's discuss the details of our Q2 2023 financial results.

Speaker 3

Revenue in the 2nd quarter of 2023 was $205,000 which consisted of revenue from our platinum instrument and associated consumable kits. At the end of the Q2, we had 2 units that were in backlog and revenue was deferred. We anticipate recognizing revenue on these units in Q3. Gross profit in the 2nd quarter was $78,000 and gross margin was 38%. Our gross margin will be somewhat variable for the near future as we work through our initial stages of commercialization and also be impacted by the timing and mix of instruments versus consumable sales.

Speaker 3

GAAP operating expenses in the Q2 of 2023 was $27,000,000 compared to 30 point $2,000,000 in the Q2 of 2022. The decrease was primarily due to a $2,600,000 lower research and development expense and $600,000 lower SG and A expenses. Included in those amounts is a decrease of stock based compensation by 1,900,000 with the remaining $1,300,000 comprising a large decrease in general and administrative expenses, offset by higher sales and marketing As we ramp up our commercial operations team. Net loss for the Q2 of 2023 was $25,600,000 compared to $32,400,000 in the Q2 of 2022. Adjusted EBITDA for the Q2 of 2023 was a loss of $22,900,000 compared to a loss of $25,800,000 in the Q2 of 2022.

Speaker 3

A reconciliation table of adjusted EBITDA to GAAP net loss is provided in our press release filed earlier today. As of June 30, 2023, we had $297,200,000 in cash and cash equivalents and investments in marketable securities. Our guidance for the rest of 2023 includes our controlled commercialization execution approach as we align our R and D resources toward capabilities and feature enhancements that have the broadest customer appeal. Finally, I am reiterating that our Non GAAP operating expenses are expected to be flat compared to 2022, while still ensuring that we have all the resources and capabilities for our commercial execution plan and our existing cash, cash equivalents and investment in marketable securities will provide runway into 2026. Now I'll turn the call back over to Jeff Hawkins for closing remarks.

Speaker 2

Thank you, Jeff. Over the last quarter, we made great strides in the build out of our commercial team and have received valuable feedback from customers as we continue our thoughtful and controlled commercialization of Platinum. We believe the outcome of our strategic review of R and D will better position us to deliver additional product improvements before the end of 2023, while also ensuring a pipeline of technology improvements that will support a steady cadence of releases throughout 2024. Going forward, we will continue to be laser focused on delivering the technology capabilities and applications customers want most while maintaining a high level of fiscal discipline over the use of our capital resources. Operator, please open the line for questions.

Operator

The first question comes from Kyle Mixon with Canaccord. Your line is open.

Speaker 4

Hey, good morning. Thanks, guys. So Jeff, appreciate all the, I guess, commentary around like, I guess, what's been happening lately and why The revenue came in where it is and why you're kind of doing some of these initiatives now and what's going to be happening going forward like the software and implementation stuff and sales cycle stuff. I guess like obviously less revenue than last quarter. You put up $250,000 in revenue last quarter on almost $500,000 in orders.

Speaker 4

Maybe that makes some sense given there was likely Demand early in the launch, but I guess like why weren't you able to convert those orders exiting 1Q into revenue or at least generate more revenue than the last quarter? Again, like $500,000 in orders exiting the quarter is kind of interesting. And then maybe Jeff, could you just share any comments on the orders, like the dollar number of orders in 2nd quarter and the backlog exit in the quarter as well? Thanks.

Speaker 2

Yes. Thanks, Kyle. I'll take your the last part of the question first. So we exited the quarter, as Jeff Cai said, with 2 instruments in the backlog that we would expect to convert in the Q3. With respect to Sort of events during the quarter that impacted revenue, as I said in the prepared remarks, it had a lot to do with just some of the Implementation challenges that we experienced with customers and when we experience these things, we react sort of in real time, meaning we deploy our applications team to help those customers validate a given sample type or validate a sample prep method they're using.

Speaker 2

And we don't want to sort of keep expanding the installed base and end up in a situation where we're unable to provide the level of support needed. So we had to Sort of measure our activities on the commercial front to ensure we could really provide that high level of support on the implementation front.

Speaker 4

Okay. I mean, that's Yes, that's helpful. And again, it sounds like some of the changes that you're making are going to be done by the end of the second quarter. I mean, are you is it safe to say that in the second half I guess by the end of the year, a lot of these I'll use the word issues, but they're just kind of like bumps Growing pains, I guess that will happen along the way. Those will be worked out by the end of the year and you'll kind of at least enter the Q4 over 2024 at like a solid run rate be comfortable with?

Speaker 2

Yes, Kyle, I think that's a fair way to assess it. We're learning a lot every day in the market. We're prioritizing The various improvements that customers want to see are the applications that they'd like us to open up or help them optimize. We're deploying people in real time to these activities, as I mentioned in the prepared remarks. We'll go even further With that, with the sort of the finalization of the R and D strategic review, I mean, the goal is Have sort of been the smoothest implementation sort of scenario we can be in for 2024.

Speaker 2

But even saying that, we do expect that we'll continue To evolve and enhance the product for the foreseeable future, there's a lot of headroom technologically here to continue to expand the capabilities and enable our customers to do more and more and we'll continue to invest in that.

Speaker 4

Okay. Thanks for that. And then, Jeff Hawkins, you talked about last quarter how you there could be a potential inflection in orders and shipments and revenue in the second half of this year. I guess it sounds like that's not really expected anymore, but could you just provide some thoughts and maybe Jeff Kies as well and welcome to the Maybe

Speaker 5

you could provide some thoughts on how

Speaker 4

to think about the, I guess, shipments and revenue and utilization, things like that in the second half of the year as we sort of think about modeling?

Speaker 2

Yes. So I'll start and Jeff Caius can add any color he'd like to add. As I mentioned in the prepared remarks, Kyle, we're going to keep The sort of the controlled launch in place through the end of the year, that doesn't mean that there might not be some Uplift in revenue in a given quarter, but we don't expect sort of a rapid acceleration in the second half, a much more sort of controlled launch in the second half with the growth. Jeff Kies, anything you want to add to that?

Speaker 3

No, I think that about sums it up. Jeff's comments are Consistent with my thoughts as we work through this process of the R and D realignment and deployment, we're going to continue to have this Controlled ramp, but we would expect that we might see some uplift over the next couple of quarters. But I think that's going to be dependent on our customer base and how we interact with them for the rest of the year.

Speaker 4

Okay. All right. Thanks guys for that. And then on the strategic R and D realignment, it sounded like just carbon for now. I mean, maybe Jeff just can Confirm that, I feel like maybe there were probably some chips in development that were higher density, maybe like that's affected.

Speaker 4

And with carbon, like was that critical to any Orders like were they contingent on carbon being launched and perhaps there was like a guaranteed bundle? I'm just kind of curious about that. And then overall, again, I'm just not totally certain on this right now. What was the purpose of the strategy kind of underlying the review? And then kind of like what's the end game here?

Speaker 4

And how would you What would you deem as a successful outcome for that?

Speaker 2

Yes, Kyle, let me take a shot at those. If I miss one, let me know. First on the carbon front, So there are there were no deals in the pipeline that were contingent upon a carbon. We didn't have any sort of carbon bundles as you I described it, really the assessment of carbon was about is a cartridge based Sort of solution which can be very elegant, but has a lot higher sort of development, sort of cost timelines to adapt it to all these different sample types and sample prep methods. Is that the best way to approach sample prep or It's more of an open platform, one of the commercially available liquid handling platforms.

Speaker 2

Might that be more flexible to this sort of range of sample types and methods we're seeing. So that's really that what that evaluation is about. And that's the only program, as you mentioned, that We're stating right now is on hold. We're obviously though reviewing, Kyle, the totality of The R and D investments and really looking at driving the investments that Really unlock the full potential of the platinum device and the existing consumable. What we're seeing is There's a lot of growth potential for that existing platform and chip, and it's really about enabling applications.

Speaker 2

It's about enabling additional sequencing capabilities as we expand coverage and other things like that. So really that's how we're looking at it. And the end game is ultimately that we have the right level of R and D investment into those core areas that will really drive The adoption and that we have that sort of process that allows us to generate a consistent sort of release of improvements throughout a given year. So that's really the end game in mind.

Speaker 4

Yes. And you touched on all the questions there. Can I just ask about manufacturing? I mean, you didn't really mention that at all, but is that a bottleneck whatsoever? So far, are you pretty much good to go on when it comes to the supply chain, things like that?

Speaker 2

Yes. No concerns on supply chain and manufacturing Was not a bottleneck in any way to the results in the Q2.

Speaker 4

Okay, awesome. And then maybe just Closing on like a positive comment, like it's good to hear the outbound marketing is kind of all systems go and it sounds like early success there, early kind of like progress. When you kind of crank that up, I mean, are you thinking about going after any new customer types? Maybe you're going to unlock or increase your footprint in non academic markets Like biotech, maybe just kind of expand your footprint there, I think that'd be kind of interesting to hear.

Speaker 2

Yes, Kyle, thanks for that question. The way The commercial marketing team is approaching it is it's a mix. Sometimes you're diving in with a campaign to really look for a specific type of user with specific types of applications within the academic research environment and other times the campaigns will be around unlocking New segments, biotech, as you mentioned, perhaps more industrial settings for antibody QAQC. So Really the outbound marketing programs are very, very targeted. So we'll run many of them across these different areas as we try to drive Really that specific demand that lines up well to where we're seeing success in the market.

Speaker 4

Okay, great. Look forward to seeing that. All right, thanks guys. Appreciate it. Thank you.

Operator

Please standby for the next question. The next question comes from Yuan Jie with B. Riley. Your line is open.

Speaker 5

Good morning. Thank you for taking our questions. Jeff, a quick follow-up on Kyle's question. You mentioned the challenge in the implementation front. Can you comment on If the test run request from customers or potential customers have changed since 1Q and then I have a follow-up question.

Speaker 2

Yes. The request haven't changed, Yuan. Really what it is, is more you get into the to the customer's laboratory and they work through that full workflow from whatever the biological sample type is they selected on up through The sequencing on our platform and ultimately that analysis and there's just a very broad range of samples and sample prep methods. I mean ranging everywhere from someone who might isolate a protein in a And cut out a ban to people using immunoprecipitation kits and other sort of chemistry. So it's not really that there's any difference in the request.

Speaker 2

It's just Each customer has a somewhat unique set of samples and prep methods that we have Work closely with them to optimize in front of the sequencing on the platinum instrument.

Speaker 5

Yes, got it. Thanks for clarifying that technical challenge there. My other question is, can you maybe About the poster presentation you had at ASMS, what was the challenge identifying protein and the proteoform in that sample in that presentation?

Speaker 2

Yes. At the ASMS conference, that was really a poster to not only demonstrate some of the capabilities of our technology, but really to help For that group of users who are also mass spec users, really help them understand how does our technology perform in comparison to mass spec as well as share information around the workflow, the automated analysis that our platform affords a user. So it was really an educational and sort of comparative data study for that for those users in the mass spec community.

Speaker 5

Got it. Thanks for taking our questions.

Speaker 2

Thank you.

Operator

Please standby for the next question. The next question comes from Swayampakula Ramakanth with H. C. Wainwright. Your line is open.

Speaker 6

Thank you. Good morning, Jeff and Jeff. I appreciate you taking my questions.

Speaker 3

So, Jeff,

Speaker 6

The issues that some of your current customers have flagged during this initial launch, Were there to a specific sample types or is it more universal?

Speaker 2

Yes. I wouldn't say it's a specific sample type as much as it is just this combination of sample type And the way they're preparing the sample, how many proteins are they looking for at once? How Pure is that sample versus how impure is that sample. It really wasn't about a specific sample type that was challenging.

Speaker 6

Okay. Thanks for that. And then in terms of the software upgrade that you released, If I heard it correctly, it was in July. So do you think that upgrade was able to handle the issues at hand and how have the customers responded to that upgrade to date?

Speaker 2

Yes, good question. So you are correct. We released that software version in July. And I would say the key attribute That customers were looking for were some additional visualizations at the amino acid level of the data they were generating with the technology. So the initial version showed Pareto's of peptides, how peptides are indicated in to a given protein and really what this new software did was really enhance The UI of that, the ability to visualize it, giving amino acid level data and information, Sort of in aggregate, things that allowed our customers to really understand the data they were generating Really at both the amino acid, the peptide and the protein level.

Speaker 2

So again, we rolled that out in July. The feedback from users has been Very positive, very happy with those changes and with sort of the overall improvement to the user interface. And as we get more feedback, we'll continue to make enhancements to that software. But I think the big sort of Transformation of our software that needed to take place to enable our customers on the analysis side is this change we made in July and it will be somewhat more

Speaker 6

Okay. And then just my last question, this is on the sales cycle lengthening that you stated. Is this more of because at this point, most of your customers are from academic labs. Is it more Are commissions waiting for the Q4 to ensure that they use up all the research dollars associated with the grant? Or is this More than that, is this some really accounting and other people getting involved in it?

Speaker 2

Yes. RK, we're not hearing that there's a scenario where our instruments being held up because there's Some pending grant that hasn't been approved. Really what we're commenting on in the prepared remarks is, Given Grace and my and other members of the commercial team sort of experience with an instrument at $70,000 we would expect If that enters the procurement cycle at a customer, it's going to take some period of time to get through that process. And what we're seeing is we've gotten through the sales cycle with the customer, the sort of the technical buyer that Purchase order goes into the procurement process and that process is just moving a little bit slower. It's not moving through That process of internal approvals and more of the procurement and accounting or financial side as fast as we had been seeing.

Speaker 2

So again, no reason To believe at this stage that those instruments that are in that cycle won't ultimately be approved and will come through. It's just moving at a slower pace than sort of we saw in Q1 and sort of a slower pace than we would expect given our Collective experience selling capital equipment in the life science space. Okay.

Speaker 6

Thank you. Thank you for taking all my questions. You're welcome.

Operator

I show no further questions at this time. I would now like to turn the call back to Juan for 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 day.

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