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spk04: Good day, and thank you for standing by. Welcome to the QHealth third quarter 2023 earnings 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. To ask a question during the session, you'll need to press star 1-1 on your telephone. You'll then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Lorna Williams, Investor Relations. Please go ahead.
spk02: Good afternoon and welcome to Q's third quarter 2023 earnings conference call. Joining me today are Ayub Katak, Chairman and Chief Executive Officer of QHealth, and Asim Javed, Chief Financial Officer. Before we get started, let me begin by reminding you that we may be making forward-looking statements, including statements related to the submission of any FDA applications and expectations around receiving clearance and authorization, expectations regarding production capacity, expectations related to availability of our programs and testing volumes, 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 obligation to update these statements except as required by law. In addition, on today's call, non-GAAP financial measures will be used. Reconciliations between GAAP and non-GAAP financial measures are included in our earnings release. Finally, I'd like to mention that the press release and recording of this call are available on the investor relations page of our website. With that, I would like to turn the call over to AU.
spk06: Thank you, Lorna, and thank you everyone for joining us today. CUE reported total revenue of $17.5 million in the third quarter, exceeding expectations, driven by stronger than anticipated COVID-19 test sales. We had non-COVID contribution revenue this quarter, and we continue to expect growth in the coming quarters as new products gain momentum. Additionally, we ended the quarter with $111.5 million of cash and equivalents. We continue to execute our key strategic priorities with strong financial discipline, having brought our costs down by 165M dollars on an annualized basis, exceeding our 150M dollar target. Turning to our number 1 strategic priority, test menu expansion for the QHealth monitoring system. Our flu plus COVID multiplex test remains an active FDA review. Through the last quarter, we added a substantial amount of additional clinical data, and we believe our application exceeds the FDA's data performance criteria and the required prospective clinical samples for lay users for all three of flu A and flu B and COVID-19 positive clinical samples. To get the additional flu B samples, we conducted a study in the Southern Hemisphere this year. This is our first multiplex and has been submitted to the FDA for over-the-counter use, which would enable use both at home and at the point of care. Our flu plus COVID multiplex test simultaneously detects and differentiates between influenza and COVID-19 in approximately 25 minutes, with results delivered digitally to the QHealth app. It is integrated into QCare, our same-day test-to-treatment solution, which enables telehealth and prescription delivery. With this product, we believe we're adding a powerful tool for individuals at home, providers, and enterprise seeking to make better informed healthcare decisions and enable timely, effective treatments. We also have two de novo applications currently under review with the FDA. The QRSV molecular test was submitted earlier this year, and we have received feedback from the FDA. We believe that we can address all the feedback within the quarter and continue the review. We anticipate an approval later in the respiratory season. The Q flu molecular test was submitted to the FDA for a full de novo last year. Subsequently, we were asked for a greater number of flu B clinical samples, which has been very rarely circulating over the last three years, with almost no circulation in the northern hemisphere. We collected the additional samples in the southern hemisphere as suggested by the FDA, and we believe we exceed the requirements. The blue submission is progressing well to de novo approval this respiratory season. For all of these tests, as soon as we receive authorization, we are ready to launch them, utilizing our existing sales and distribution channels. These products will be made on our automated production line without significant additional capital investment. Our automated production lines were designed to produce any test in our menu at scale. As a reminder, all of the QF monitoring system tests show the same cartridge backbone and manufacturing process. Our installed base has more than a quarter million key readers. and we have more than 300 directly contracted enterprises and providers. Together with public sector customers, our distribution partners, and our direct-to-consumer channel, we believe we have the available channels to get these products into the market. Last quarter, we announced we are developing a combined flu, RSV, plus COVID all-in-one multiplex test supported by BARDA on a $28 million contract. This new molecular test is being developed on the same Q-Reader and cartridge system and will also utilize the same production lines. The team continues to drive solid progress in the development of this multiplex test. We plan to follow an EUA regulatory pathway with an initial objective of having this test available for the 2024-2025 respiratory season. Rounding out our respiratory pipeline, we've now completed development for our strep throat molecular test. We made the decision, though, to delay the start of the clinical study to save costs as we prioritize promising near-term revenue-generating products, including the three tests in review with the FDA. Now, I'd like to highlight Q's menu expansion efforts in the sexual health category. Our chlamydia plus gonorrhea multiplex test is in clinical studies. We now expect an FDA submission in the first half of next year. We have been developing a Q-herpes plus mpox multiplex molecular test. This is an important next step for our sexual health testing menu for sexually active people with lesions and builds on our already FDA-authorized mpox molecular test. General herpes caused by HSV-1 or HSV-2 is the most common STD in the United States with infection in one out of every six sexually active people in the U.S. A diagnostic test is needed to determine if an injured individual has either of these highly contagious viruses. We believe our new multiplex test can quickly and accurately detect herpes and or mpox to allow for timely medical intervention. Today, there is not a point of care herpes solution available on the market. We believe that our herpes plus mpox multiplex test is eligible for an EUA and we believe that we could have this herpes mpox test on the market next year. The Q Health monitoring system has many new tests on the way, and we're very excited about the progress and our key priority of menu expansion. We're also happy to see the peer-reviewed publication of real-world clinical experience with Q, comparing Q to a lab-based RT-PCR test. Recently, an independent clinical study comparing our Q molecular COVID-19 test to a lab-based PCR test was peer-reviewed and published in Microbiology Spectrum, a journal produced by the American Society for Microbiology. This largest-of-its-kind study of asymptomatic people finds that Q test is as accurate as a lab-based PCR test with 99.4% concordance with this lab-based RT-PCR test. The studies finding differentiate Q on the basis of both accuracy and speed, superior to the poor-sensitive antigen testing and without the delays of lab-based PCR testing. Shifting to the Q integrated care platform, our solution that seamlessly extends the capability of our foundational QF monitoring system, enabling an end-to-end customer journey to receive an accurate diagnosis, consult with a healthcare provider through our app, and receive treatment. We have integrated many of these building blocks over the last 18 months. Last year, we launched QCare, allowing for video consultation with clinicians and prescription delivery. We announced a partnership with Minnesota Department of Public Health to enable all the state citizens to access QCare without cost to the patient. Next, we leveraged this platform to add QLab, mail-in at-home test kits, and QPharmacy for prescription subscription. We continue to be excited about this opportunity. We believe QLab and QPharmacy have the potential to be a meaningful part of the business over the next year. Now that we have fully built out the integrated care platform, we expect that adding new tests and treatment programs will be straightforward, and I'm really pleased with how the team continues to leverage the platform across new indications. While Austin will review our financial performance in detail, I want to highlight the progress we've made with financial discipline. The team continues to balance operational execution with cost management. Our goal at the beginning of the year was to reduce spend by $150 million. We have now delivered approximately $165 million of annualized run rate cost savings. At the same time, the team is also focused on near-term revenue generating opportunities, including upcoming FDA approvals. We believe we're getting close as we continue to have positive engagement with the FDA and have continued to add data where necessary as common in the review process. Over the last months, we've been actively responding to information requests and supplying additional data as necessary. We remain optimistic that we will have additional authorization shortly, and that these approvals, along with new product launches, will be the catalyst for revenue growth and reaching EBITDA break-even in early 2025. With that, I'll turn the call over to Asim.
spk00: Thank you, Ayub, and good afternoon. Now let's walk through our third quarter financial results and fourth quarter guidance. Q's third quarter total revenue of $17.5 million exceeded our guidance range of $11 to $13 million. We are pleased with the sequential increase amidst the continued industry decline in COVID revenues. In the quarter, our private sector contributed 82% or $14.4 million of sales. Public sector revenues were $3.1 million for the third quarter, and total test cartridge sales were $13.2 million. Q3 product gross profit was a loss of $7.4 million. Gross profit is impacted by lower manufacturing volumes and also includes non-cash items. Excluding depreciation, amortization, and stock-based compensation, our gross profit would be slightly positive. Total operating expenses in the quarter were $60 million, excluding cost of revenue. Sequentially, operating expenses are in line with the second quarter. Q3 operating expenses were down 37% from Q4 2022, driven by cost reduction efforts. Further, if you exclude non-cash items such as depreciation, amortization, and stock-based comp, the reduction in operating expenses from Q4 2022 would be even higher on a percentage basis. Sales and marketing expenses were $7.1 million in the third quarter, a decrease of 63% from Q4 2022, driven by a decrease in digital and marketing costs. R&D expenses were $37.1 million for Q3, a decrease of 34% from $56.1 million of spend in Q4 2022, as we focus on development programs related to our respiratory and sexual health product offering. G&A expenses were $15.8 million during the quarter, a decline of 17% from Q4 2022 spend of $19.2 million. In the quarter, we received an employee retention credit of $20.9 million from the IRS. As a result, GAAP net loss in the third quarter was $47 million, or 31 cents per diluted share. On an adjusted basis, net loss was $63.6 million, or 42 cents per diluted share. Adjusted EBITDA was a loss of $36.6 million. Moving to the balance sheet, we ended the quarter with cash of $111.5 million. Now, I'd like to move to our guidance. We expect revenues of $16 to $18 million for the fourth quarter. Q has a healthy balance sheet with $111.5 million of cash on hand as we continue to prioritize cash preservation. As a reminder, we delivered approximately $165 million of annualized run rate cost savings versus Q4 2022. Our operating expenses were down 37% from Q4 2022, and PPE capital expenditures in the quarter were $1.7 million, a 76% decrease from Q4 2022. Our underlying cash burn rate improved from Q2. Additionally, we continued to execute on our near-term catalyst including preparing for the launch of our flu plus COVID multiplex, flu and RSV regulatory approvals, and other new product offerings. Finally, we continue to evaluate options and opportunities to bolster our cash position. In summary, I am pleased with the progress being made against our 2023 priorities of test menu expansion, our integrated care platform, and strong financial discipline. Looking ahead, we expect to have several molecular tests on the market in 2024, strengthening our expectations of a positive adjusted EBITDA by early 2025. With that, I would like to thank you for your attention, and I'll now turn the call over to the operator for questions.
spk04: Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. please stand by while we compile our Q&A roster. Our first question comes from the line of Tejas Savant with Morgan Stanley. Your line is now open.
spk07: Hi, this is Jason for Tejas. So congratulations on the quarter, guys. So my first question is, just back in August, one of your shareholders, they published a public letter voicing their views on your business strategy. And then recently in October, a separate group of shareholders acting independently published a letter voicing similar views. So my question was just, have you had any dialogue with either of these stakeholders in the past few months? And how do you think about your company's strategy moving forward, if it's the right one?
spk06: Hey, thanks for the question. So, um, you know, the board and the management team, you know, the key lens that we apply to every decision is, you know, increasing shareholder value. Um, that's a, it's a fundamental, um, part of how we, we make decisions and we value shareholder feedback. Um, so, you know, we take it very seriously, um, and we deliberate on what is the right strategy for the company. All the time, not only at the behest of you know shareholders, but also just as the you know fiduciaries of this company so. With regards to what we're doing, you can see that we've been executing with really strong fiscal discipline, you know, instead of $150 million target. we actually achieved $165 million of cost lowering. And that's while focusing and moving forward our key strategic priority of menu expansion. So in terms of our priorities, they are to expand the menu, to do so with fiscal discipline, to expand integrated care platform, which delivers the full experience that we seek to with our product and platform.
spk07: Got it. Thank you for the color. I may ask a follow-up question. So you ended the quarter with $111 million in cash, and then last quarter you provided about 12 months of runway. So with another three months past us, how do you think about cash management financing opportunities over next year to extend your runway?
spk00: Thanks for the question. You know, we're always building towards our post-approval profitability phase and all the opportunities that come with it. Our cash performance this year of the $17 million utilization, we're very happy with that performance. This is the best cash performance we've had since Q1 2022, which was the height of the Omicron. And not just this quarter, if you look at the whole year, in every quarter our cash utilization has trended better quarter on quarter. So we're continuing to focus on our cash and manage our cash and extend our runway And as you've mentioned, you know, from a savings standpoint, we had a target of $150 million. We came in at $165 million, so higher than the target and from a timing standpoint ahead of our target. You know, all our investments and most of our investments are behind us. And we're edging closer and closer to approval. So, you know, as we sit here, we're really excited about, you know, the not-too-distant future when we have these approvals in hand.
spk03: Got it. That was helpful. Thank you, guys. Thank you. One moment for our next question. This question comes to the line of Matthew Sykes with Goldman Sachs.
spk04: Your line is now open.
spk05: Hey, guys. This is Will on for Matt. Thanks for taking the question. Just wanted to start a high level. Do you see your multiplex tests cannibalizing the sales of standalone tests? And on top of that, what are the use cases for the standalone tests once the multiplex comes out? Thank you.
spk06: We see, you know, the ability to deliver the tests individually like flu, COVID, RSV is very important and complementary to multiplex tests like flu COVID that we have under review or the flu COVID RSV test that we're developing with BARDA. Our customers, they want options, especially on the provider side. They're used to having both combinations and the ability to order a single test. And so we want to provide that flexibility. We also think it's part of a regulatory strategy. So we believe that, you know, having options is really the best strategy. And with regards to cannibalization, you know, we've been having better than expected sales from our COVID-19 test. And we think that in the long term, depending upon the customer category, they're going to have more desires for one test or a combination test, and also could depend on whether or not, you know, there's flu circulating or not circulating. So it's not a, It's pretty nuanced, and I think the baseline is that you want options.
spk05: That makes sense. Thank you. And then just a follow-up on the tests for this upcoming season, the FLU-AB and the RSV currently with the FDA. It sounds like you guys are expecting those from the quarter and generated some good new evidence. Is there any chance those end up getting pushed to the first half of 24, or how are you guys thinking about that? Thank you.
spk06: Yeah, as we said, we added a lot of really good data for especially our flu COVID and flu de novo applications, and there's RSVs in process as well. What we think is that over the course of the respiratory season, there's a good chance that we'll be able to achieve the approvals for flu COVID combo, flu de novo, and RSV de novo. In terms of the exact timing, I mean, you know, this is a process that we're working through with the FDA, so I can't give you an exact timing, but we are optimistic that we can get them in this respiratory season.
spk00: And to add to that, you know, these tests are made on the same manufacturing line, so, you know, we're really ready from a manufacturing standpoint as soon as these tests are ready. We have customers, over 300 customers that we've had and over a quarter million install base in terms of readers. So we do think we have those channels available to us to commercialize as soon as we get these approvals.
spk03: That's very helpful. Thank you.
spk04: Thank you. As a reminder, to ask a question, please press star 1-1 on your phone and wait for your name to be announced. Our next question comes from the line of Charles Rhee with Cowan. Your line is now open.
spk01: Yeah, thanks for taking the questions. I just wanted to follow up a little bit on sort of the comments about reaching EBITDA positive early 2025. Can you give us a sense then sort of what the revenue mix you would expect when you're reaching break even and sort of what the run rate revenue on an annualized basis to reach that target would be I guess I'm trying to figure out here you know you did what you know like 70 80 million in the quarter you know you're guiding 16 18 for the next quarter so obviously we're in the the respiratory season it was obviously light in the second quarter you know so you're running you know what you know, 60, 70, you know, 70 million on COVID right now. You know, what would you expect that to look like, particularly to the prior question about, you know, with multiple respiratory tests in the market? Is it really respiratory tests that are going to be driving the revenues, you know, out in towards the end of 24 where that's how we reach EBITDA breakeven? Or if we look at expenses, should we expect OPEX to continue to come down? Just try to get a better sense for what that mix between revenue and expense looks like, or even in margins, gross margin looks like as we hit that, to reach that breakeven point.
spk00: Hey, Charles, thanks for the question. You know, while we're not quite guiding 2024, recognize you guys have two-year models, right? So I think the way to think about 2024 and early 2025 is, you know, you're right, there's a kind of basal COVID rate that we expect to be there. But then when you, and on top of that, you know, we do expect several approvals. So, you know, we expect to have several approvals in 2024. So it's not just respiratory, it's sexual health as well. And then on top of that, you know, our software and services, the QCare, QLab, QPharmacy, we'd expect those to also start gaining and we've also talked about this flywheel effect that when we have all these other test approvals, we think there's a flywheel effect that actually benefits QCare, QLab, QPharmacy. And then the last piece on the top line is not to forget is the grant revenue that we have. We have the BARDA deal contract that we signed at $28 million that also contributes to the top line. So that's kind of broad strokes how I think about top line. As you go down the P&L, Look, I mean, gross profit is going to be impacted by volumes as well as mix. And you would have seen in the past when we've had higher volumes, we've posted over 60% margins. And you'll also see sequentially this year, our gross profit has kind of trended with how volumes have played out. And when we think about our future products, you know, as we move away from COVID or the proportion away from COVID, we do think we'd have a kind of price mix benefit as well on margins. So we think, you know, over time as revenues grow, margins would grow for those reasons. And then on spend, you know, we're very proud of or we're very happy with where our spend is right now and that allows us to where the right amount of spend to play out our strategic priorities. So, you know, While I'm not going to guide 2024 spend, you know, we're kind of at this new level of OPEX. And at least in the near term, it's fair to assume similar amount of OPEX quarter on quarter.
spk01: Okay, thanks. And, you know, the EBITDA loss was 35 and a quarter. Actually, cash used was only 18. Can you remind us sort of what the delta between... adjusted EBITDA and actually cash you used this?
spk00: Yeah, a cash utilization of 17, as I mentioned, the best kind of cash performance that we've had since Q1 2022. We did have an ERC credit of $20 million. And while that was one time, I think the philosophy here is that here as a management team, we continue to look for opportunities to bolster our cash balance.
spk01: Okay. And lastly, can you just remind us for the BARDA contract how we should expect to sort of layer those revenues as we go through the year? Is that sort of a portion quarterly or will it be recognized in chunks? Just curious there. Thanks.
spk00: Yeah, the barter revenue, I mean, it shows up in the grant and the revenue line item on our P&L, and it does show up quarterly, and it will continue to show up quarterly up until we have the approval for the flu COVID RSV multiplex.
spk01: Okay, great. I appreciate the questions. Thanks.
spk04: Thank you. I'm showing no further questions at this time. So thank you for your participation in today's conference. This does conclude the program and you may now disconnect.
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