This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Thank you for standing by and welcome to QHealth's second quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, Lorna Williams, Investor Relations.
spk06: Please go ahead.
spk00: Good afternoon, and welcome to Q's second quarter 2022 earnings conference call. Joining me today are Ayub Katak, Chairman and Chief Executive Officer, and John Gallagher, Chief Financial Officer of QHealth. Before we get started, let me begin by reminding you that we are making forward-looking statements, including statements related to the expected performance of our business, future financial results and guidance, strategy, long-term growth, and overall future prospects as well as the impact of the COVID-19 pandemic. These statements are subject to risks, uncertainties, assumptions, and other factors that could cause actual results to differ materially from those described. These risks and uncertainties include but are not limited to those outlined in today's call, as well as other risks identified from time to time in our public statements and reports filed with the SEC. Forward-looking statements that we make on this call are based on assumptions and beliefs as of the date they are made, And the company disclaims any obligations to update these statements except as required by law. In addition, on today's call, non-GAAP financial measures will be used. Reconciliation between GAAP and non-GAAP financial measures are included in our earnings release. Finally, I would like to mention that the press release and a recording of this call will be available on the investor relations page of our website, found at investors.qhealth.com. With that, I would like to turn the call over to Ayub.
spk08: Thank you, Lorna, and thank you everyone for joining us today. I would like to start by welcoming Dr. Josh Geim to our Board of Directors. Josh is a founder of Ignite Venture Studios, an innovation accelerator for companies focused on changing how healthcare is delivered, and also serves as president of Small World Brands, a health and beauty startup with a mission to support girls' education and women-owned businesses. Earlier in his career, Josh was Chief Technology Officer of Consumer Health Johnson & Johnson. Josh's experience in consumer health, technology, and R&D will be a valuable addition to our board as we continue to pursue our vision of making the healthcare system more accessible, convenient, and timely by placing diagnostic information at the center of care. I'm pleased to present our second quarter financial results, which I believe reflect another strong quarter of execution. Total revenue of $87.7 million was better than expected due to stronger than anticipated COVID testing orders from existing customers. Our private sector customers accounted for 92% of our revenue in the second quarter. Now let me walk you through the performance of our three key growth drivers. One, broadening our customer base. Two, expanding our test menu. And three, further developing our digital services and capabilities. Starting with broadening our customer base, where distribution of our key readers is a key metric for tracking awareness of our platform across different customer categories enhances pull-through of our future diagnostic tests. In the second quarter, we shipped nearly 15,000 Q readers, bringing total shipments to over a quarter of a million, including over 30,000 readers in our direct consumer customer category. As a reminder, late last year, we made our fast and accurate COVID molecular test available to the general public. We continue to be pleased with the uptake of the D2C category. Q products are available for purchase on our website and the Q Health app, as well as most major healthcare product distributors, retail pharmacies, and through enterprise accounts. Shifting to our menu expansion growth driver, we continue to be on track to deliver all of the pipeline milestones outlined during our fourth quarter earnings call. To level set on the terminology for FDA submissions in the diagnostic category, If a company's test is the first in this category, a combination of the intended use setting, for example, the home and or point of care, and the specific test target, then it is called a de novo application. As a testament to Q's pioneering approach to both the point of care and the home settings, most of Q's submissions will be de novo applications for full FDA authorization. As previously shared, we submitted the full de novo application for the Q COVID-19 molecular test in May. In addition, we continue to execute our plans for flu standalone and flu plus COVID multiplex molecular tests. I'm pleased to share that we have completed clinical studies for the flu standalone and are preparing the de novo application for submission in the third quarter. We began our flu plus COVID multiplex clinical studies during the second quarter as planned and expect to submit for EUA for flu plus COVID in the third quarter. For another key test in the respiratory category, respiratory syncytial virus, or RSV, we remain on track to start RSV clinical studies in the third quarter of this year, 22. Our first sexual health test, the chlamydia and gonorrhea molecular multiplex test, is progressing well, and we expect to begin clinical studies in the second half of this year. I'm extremely proud of the R&D team's ability to deliver these accomplishments and look forward to providing updates as the pipeline progresses. Moving to our third growth driver, digital capabilities. I am thrilled to share that we began our phase launch of QCare, our diagnostic to treatment capability. QCare successfully closes the care loop as customers can conduct a diagnostic test, consult a medical professional, and get the treatment they need delivered on the same day all within the QHealth platform. QCare is win-win for all stakeholders because it delivers effective treatment to patients in a timely and convenient fashion It seamlessly connects healthcare providers to patients, and it limits community exposure and disease transition by identifying and treating ill individuals in their own home. We have launched our pilot and expect general availability nationwide in the next few weeks. Q-Care meets an urgent and unmet need for positively diagnosed COVID-19 customers and is a foundational capability for future diagnostic tests in our pipeline, particularly for those tests in which there are specific treatments available. For example, for flu, there are two approved FDA antiviral medications that are most effective if taken within 48 hours of the onset of symptoms. For chlamydia and gonorrhea, antibiotics are the effective treatment, and RSV has multiple antivirals coming. All of these have similar diagnosis of treatment workflow as the one we're launching for COVID-19 in the third quarter. In summary, I am proud of our progress on all of our growth drivers. With continued expansion of the customer base with over 250,000 Q readers shipped, a recent test menu expansion efforts, including the completion of the flu standalone clinical studies, and planned de novo submission for flu standalone and EUA submission for flu plus COVID multiplex in the third quarter of 22, and the phased rollout of Q-CARE, our foundational diagnostic to treatment capability this third quarter of 22, taken together with our progress on our RSV test, We believe we can have a comprehensive offering to the respiratory category next year. Our team is making great strides towards our mission of enabling personalized, proactive, and informed healthcare to empower people to live their healthiest lives. With that, I'll turn the call over to John.
spk04: Thank you, Ayub, and good afternoon, everyone. I will walk through our financial results before sharing our Q3 guidance. Q's second quarter total revenue of $87.7 million was better than expected, as COVID testing demand was higher than anticipated, and we saw strong customer ordering from enterprise customers, direct-to-consumer, and the public sector. Both the private and public sectors exceeded our expectations for the quarter, with our private sector contributing 92%, or $80.5 million of sales. an increase of $48.1 million from Q2 last year. Public sector revenues were $7.2 million for the second quarter, and disposable test cartridge sales were $82.9 million. Moving down the P&L, adjusted product gross profit margin was 30%. Driven by stronger demand for COVID test cartridges, which was offset by higher supply chain costs and a reduction in overall production volume in the quarter. Adjusted product gross profit margin excludes a one-time inventory charge of $42.8 million relating to obsolescent inventory and warranty reserves. This charge is primarily related to an overbuild of inventory after Q successfully scaled production late in 2021 to meet certain contract obligations as well as surging COVID testing demand at that time. In addition, during the quarter, we made the decision to reduce our manufacturing workforce to align capacity and better position Q with the current macroeconomic environment. As a result, we took a restructuring charge of $1.9 million. Manufacturing remains a core competency for Q. Our freestanding modular production pods for automated cartridge production allow us to scale quickly as new tests become available and the demand for our products changes. Moving to operating expenses, over the last few quarters we've been building our business, which included appropriate investments in SG&A and R&D. For the second quarter of 2022, total adjusted operating expenses were $86.4 million, excluding the one-time restructuring charge I just mentioned. Sequentially, Comparing the second quarter to the first quarter of 2022, adjusted operating expenses decreased by 3.9% from $89.9 million. Sales and marketing expense was $17 million in the second quarter, down from $34.2 million in the first quarter, demonstrating our ability to flex variable expenses to meet quarterly deliverables and changing market dynamics. R&D expense was $44 million for Q2 versus $28.8 million in the prior quarter. Spend is aligned with our menu expansion and software development priorities. G&A expense was $25.4 million during Q2. As a result, the adjusted net loss for Q2 2022 was $55.2 million or 37 cents per share, and our adjusted EBITDA for the quarter was a loss of $29.9 million. This is the first quarter we are introducing earnings before interest, taxes, depreciation, and amortization, or EBITDA, as we believe it is a good proxy for cash from our operations. Moving to the balance sheet, we ended the second quarter with cash of $363 million. We view our multi-year cash position as sufficient to allow us to continue to operate the business and invest and execute our strategy and vision, regardless of the economic climate. In addition, on June 30th, we entered into a $100 million secured revolving credit facility to increase financial flexibility. As we ended the quarter, it remains undrawn. As a reminder, Q operates with no debt obligations. I'd like to now move to our guidance. For the third quarter, we expect revenues of 55 to $60 million, excluding any adjustment to deferred revenue held on the balance sheet. As you know, forecasting COVID testing demand beyond the near term is challenging. We will limit our forecast to Q3 and plan to update you on next quarter's call. In summary, the company performed well in the second quarter, beating top line and bottom line expectations. Our strong balance sheet allows continued execution of our plans and strategies, including progress on our flu standalone and flu plus COVID multiplex clinical studies, both of which will be submitted to the FDA in Q3, in addition to our phased rollout of Q care. With that, I would like to thank you for your attention, and I'll now turn the call over to the operator for questions.
spk07: Certainly. Once again, if you have a question at this time, please press star 1 1. One moment for our first question. And our first question comes from the line of Charles Rhee from Cowan.
spk06: Your question, please. Charles, you might have your phone on mute.
spk01: Oh, sorry. Apologies for that. Yeah, thanks for taking the question. You know, Abe and John, maybe to start, you know, talking about the Q-Care rollout. You said it's a phased rollout. Can you describe a little more of that by geography or is that with certain customers? You know, how should we think about that in terms of, you know, the progression through the rest of the year?
spk08: Thanks for the question, Charles. So we've started a pilot, so we've definitely gotten patients through at a small scale, and we expect general availability nationwide in the next few weeks. So we'll be dialing it up in the app stores over the next, you know, really just the next few weeks. It'll get to 100% distribution in a few weeks' time nationwide.
spk01: Great. And then, you know, you talked about the progress in all the non-COVID test menu. It looks like everything sort of is still on track with your prior comments. When we think about revenue contribution from non-COVID tests, is it right to still think that we should start to see some contribution beginning next year?
spk04: Hi, Charles. It's John. Yeah, that is the right way to think about it. We're very excited about the progress we've been making on the menu, including now saying that we'll submit not only the flu standalone, but also the flu plus COVID multiplex within this quarter. So that's good progress in our minds and some acceleration from the initial plan. But of course, what we don't know is exactly when the approvals will come in. So I think the best way to model it is to think about next year as certainly being a very reasonable period to be having non-COVID revenue. And think about that even beyond flu and think about respiratory, as we think about the full year of 2023, think about respiratory being a category as well as sexual health, where we'll be able to introduce our first test there where we're doing clinical studies in the back half of the year on chlamydia gonorrhea. So if you think about 23, then absolutely we should think about revenue there, and we're very excited about the progress we're making this quarter on the menu expansion.
spk01: Is that something where we should see it in starting the first quarter, or do you think that might end up being something more like a second quarter event?
spk04: Well, again, it's hard to predict the approval timelines, but I'd like to, you know, being optimistic and looking at it optimistically, knowing that we're going to submit in Q3. then we're certainly hopeful that that would be a Q1 event where we'd be able to get revenue. But again, it's predicated on the approval timeline.
spk01: Great. Appreciate that. Thank you.
spk07: Thank you. One moment for our next question. And our next question comes from the line of Dave Delahunt from Goldman Sachs. Your question, please.
spk02: Hey, guys. Congrats on the strong quarter. Could you tell us more about your revenue expectations for Q-Care, and what does the gross margin profile of that business look like?
spk04: Hi, Dave. It's John. Yeah, thanks. We're pleased with the quarter. And, yeah, look, we're very excited about Q-Care, as you heard Ayub talk about. You know, as far as revenue expectations, You know, it's not going to be material inside of this year where it's a phased rollout. We think it's a very important proof point in closing the loop in home health care. And that's a critical milestone. And it's going to help not only when you think about COVID testing, but as I was just mentioning, the menu expanded tests that we have coming out all have treatments for them available. And so the ability to be able to go from diagnostic to treatment with our QCare platform is something that's going live now. And that's foundational to Q's platform moving forward. The ability to take the diagnostics, speak with a doctor, have a prescription written and have that delivered to your door in a couple of hours or in that range is something that is very exciting. So I wouldn't want to dimension that revenue quite yet and the gross margin as well. But you can think about it in the context of that kind of service would be less than $100 to the consumer.
spk02: Got it. And any additional thoughts on what some of the drivers were creating the higher reorder from existing customers in the quarter?
spk04: Well, you know, I mean, I think – You know, what we saw, and I think what many others saw in this space, is that COVID testing volumes were higher than anticipated on the quarter. So prevalence, as well as testing volume, was higher in the quarter. And I think it's a nice proof to the platform and the stickiness of our business that our customers are reordering. And that's in the enterprise category. It's in direct-to-consumer. We're even seeing it in the public sector, too, some of the states. coming directly to us to work off the installed base that they got as a benefit of the DOD contract from last year. So that's how we're seeing it, and I think those rates are why we had a beat in the quarter.
spk02: Great. Thanks, guys.
spk07: Thank you. And once again, if you have a question, please press star 1-1. Our next question comes from the line of Mark Massaro from BTIG. Your question, please.
spk09: Hey, guys. This is Vivian. I'm for Mark. Thanks for taking the question. So any call you can give on path to profitability, any initiatives for growth margin improvement? You talked about a manufacturing workforce reduction. So you could just share your updated outlook for OpEx for 2022. Thanks.
spk04: Yeah, sure. So maybe I'll start with the last one there on the OpEx outlook for 2022. You know, what we've been able to say is that, hey, you know, last year we were ramping expenses, appropriately so, especially as we were growing the organization and investing in the key areas of menu expansion, software, and technology. And you've seen that continue. But the ramp in OPEX is complete really at this point. And we're expecting it to be sort of in the range that we've seen in Q1 and now in Q2 as well. So that was OPEX. As far as path to profitability, then one of the important things about the status of Q right now is our balance sheet. We've got $363 million of cash on the balance sheet. We also just put a $100 million revolving credit facility in place, which is undrawn, not needed, best to get capital when you don't need it. And so we view that as multi-year cash going forward, and that's going to allow our investment in R&D, in the menu, in software and technology, to put in place that foundational platform that Ayub was describing earlier. So as it relates to profitability, then we did introduce EBITDA as a key metric here. We think that's an important way for you to look at us and look at what our cash from operations looks like on a quarterly basis. And the path to profitability is going to be somewhat contingent on the volumes that we have there. And obviously, as our menu rolls out and we expand our product portfolio, we expect that the volumes will increase from a single COVID offering that we have on the market today. And then the last piece I think you asked about was gross margin. So, you know, we did with volumes lower in Q2 than we had seen in previous quarters, we still posted and adjusted 30% gross margin. So that's a healthy gross margin. You know, we are still putting in place manufacturing efficiencies. You saw us take actions related to the market where we reduced our manufacturing workforce. And that was a tough decision, but the right decision to do in this business climate. And so those are the types of actions that you'll see us take to be able to get that path to profitability. And EBITDA is a good measure going forward to look at what our cash from operations looks like.
spk09: Perfect. Thanks so much. Just a quick follow-up. So, on the partnership front, a couple of months ago, you talked about your distribution agreement with bioreference labs. You've also discussed administering tests in partnership with Albertsons. So, just curious how those partnerships are progressing relative to your expectations. Thanks.
spk05: Yeah, thanks.
spk08: You know, we've continued to ramp up our retail pharmacy footprint. That's gone well. We believe that, you know, it's an interesting model for the system as a point of care point to access. You know, we've been looking at various distribution mechanisms and, you know, obviously the pull through on the install base has been very solid and we'll look to continue to expand, you know, our footprint in retail pharmacy and healthcare providers and in the home. So all the customer categories are very important to us. They all have strategic value. So we'll continue to expand on those.
spk09: Perfect. Thanks so much for taking the questions.
spk05: Thanks, Vivian.
spk07: And our next question comes from the line of TJ Savant from Morgan Stanley. Your question, please.
spk03: Hey, this is Neil. Congrats on the strong quarter and the initial rollout here for Qcare. Just had a couple of quick questions. So starting with OpEx this quarter, with some of the major shifts and line items, could you provide some detail there? I guess, can you break out some of the individual drivers on the sales and marketing side to get that flex quarter to quarter?
spk04: Yeah, yeah, hi. So on the OPEC, yeah, on the specific lines there, so sales and marketing, you saw that down sequentially quarter over quarter, as I mentioned in the prepared remarks. You know, some of that is just natural quarter to quarter. Some of that is intentional as, you know, in this climate, we pulled back a bit on some media spending and we, you know, are constraining the costs inside the organization as it relates to some of the spend there. As we look forward, you know, that spend, you know, will normalize. And when you look at R&D, R&D, that's a spot, obviously, we've been investing quite a bit, menu expansion, as well as the software and technology related to Qcare. So that's why that is an increase on a quarter over quarter basis. But when you take OpEx all in on a net net basis, you know, the range of 85 to 90 plus million dollars is a fair way to look at it. Because again, we're not anticipating continuing the kind of ramp that we had in OPEX during 2021. That's not the plan for 22. Got it.
spk03: Thank you. And a couple on Q-Care. So in its current state, could you provide who the providers are backfilling the telehealth and prescription purchasing end of the loop? And do you see any opportunities post-launch to expand on this offering with major partnerships on those ends?
spk08: Yeah, great question. So what we've done on the Q-Care is we've Obviously on the mobile side, that's the front end that the patient or physician would operate to run a test. And then if they get a positive test, they can get into the Q-Care flow. And on the other side of that is a web-based application we call Q-Clinic, which the doctor network, any doctor network can operate. And so the idea is that we have a web-based application that's agnostic to doctor network. And what it does is it allows for the doctor to receive test results, to conduct video-based telemedicine visits and asynchronous messaging, and to be able to prescribe with a full EMR backing in. So it gives the full spectrum of capabilities to allow for a doctor to be on the other side of this telemed visit and prescribe and track the prescription to delivery. So really excited about it because underneath the hood of Q care, you have Q clinic for doctors and this really makes it agnostic to doctor network, which will be a potent tool for the future as we want to expand the doctor network behind it.
spk03: Thanks for the call. And are there any, you know, metrics you could provide us on utilization of virtual care in its current state? Any trends you're seeing and how that might evolve with Q-Care? And thoughts on how you see this offering driving further adoption on the DTC side?
spk04: Yeah, so the way to think about the metrics and the usage there is, you know, Q-Care is completing the home health care loop by offering the ability to have a prescription written and then delivered to your door. And so what we anticipate, although we don't have specific metrics to put out at this point in time, what we would anticipate is that we'd see a significant uptake in the usage of the telehealth portion of our platform because there's a treatment there that's a full loop to be able to take a test talk to a doctor, both of which you can do on our platform today, but then have the prescription written and delivered to your door is going to create an uptick that we anticipate related to the telehealth visit. And, you know, maybe the other piece I would add to that, too, is that as we look at our platform, the testing, because we do have access to be able to look at what testing looks like on our platform, And the testing volumes on our Q readers that are out in the field have been relatively high. And you saw that in our revenue results in Q2 when we post almost $88 million of revenue.
spk03: Got it. And just one last for me on the partnership with Albertsons. Um, you know, with menu expansion progressing really well and, um, any early discussions with your partner, um, to expand the partnership alongside your menu, um, into areas like flu or STD testing or eventually cardiometabolic.
spk08: Yeah, not just with Albertsons, but across the, across the spectrum with enterprise, with, um, with DTC, we've been seeing a lot of demand for what's coming next on the platform. So I think our customers understand that when they bought the Q reader, They were buying something that was going to be flexible across our future menu expansion, and that was why they made the investment to get the durable equipment to really have the capability into the future. So we believe our customers, as we talk to them, not just in retail pharmacy but across the spectrum, are really excited about what they see coming down the pipe. And so the fact that we're delivering on that pipe at a rapid pace is really good news.
spk03: Great. That's it for me. Thank you for the talk. Thank you, Neil.
spk07: Thank you. This does conclude the question and answer session as well as today's program. Thank you for your participation. You may now disconnect. Good day.
Disclaimer