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Operator
Hello and welcome to the QuantumSci Q3 2021 earnings call. My name is Robin and I'll be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I will now hand you over to your host, Juan Evadano from QuantumSci Investor Relations. Juan, please go.
Robin
Hello and thank you for joining us today. Yesterday, after market close, Quantum SI released financial results for the third quarter ended September 30th, 2021, and provided a business update. The release is available in the investors section of the company's website. Joining me today are Quantum SI's Chief Executive Officer, John Starr, and Chief Financial Officer, Claudia Trayton. During today's call, we'll be making 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 these risks and uncertainties appears in the section entitled Forward Looking Statements of the Earnings Risk Release. For a more complete list and description of risk factors, please see the company's filings made with the Securities and Exchange Commission. The company disclaims any obligation to update any forward-looking statements. During this call, we'll discuss certain financial measures that are not prepared in accordance with U.S. generally accepted accounting principles or GAAP. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the earnings press release. As a reminder, this call is being webcast live and recorded. A replay of the event will be available on the company's website following the call. I would now like to turn the call over to John.
John Starr
Thank you, Juan, and good morning, everyone. Thank you for joining Quantum SI's third quarter earnings call. The team and I are very pleased by the progress we are making on execution across all aspects of the company as we continue to expand customer access to our platinum system at key institutions representing high-growth segments within the proteomics market. Claudia and I look forward to discussing our third quarter performance, which marks our second time reporting results in first full quarter as a public company. We will begin with prepared remarks detailing our third quarter performance and progress related to the foundational goals we laid out in our last earnings call, and then we'll open for questions. During the quarter, we have continued to build momentum and deliver on our mission of transforming the field of single molecule analysis and proteomics. We are the first company to commercialize a system that enables digital sequencing at amino acid resolution through our differentiated time domain sequencing detection method. As we discussed on our previous call, single-molecule protein sequencing expands the resolution of the proteome by providing visibility into protein variants and measuring specific changes at the individual amino acid level. Other established and emerging technologies look to measure or confirm the existence of the 20,000 known proteins. Our technology, however, has the ability to sequence the entire structure at each individual peptide chain, making up the backbone of a protein to provide insight into the estimated millions of structural forms that exist in the cell. These modified structures potentially represent key biomarkers that will be foundational for the future development of therapies and how we detect disease. In parallel, we are commercializing a streamlined end-to-end benchtop system that simplifies the workflow enabling ease of use and better access to the general research and eventual clinical community. As a testament to the enhanced capabilities that single molecule sequencing enables, we have continued to make significant progress in expanding placements with external users. As we announced a few weeks ago, our early access program efforts have accelerated where we now have 10 external partners at premier institutions and industry partners. In that announcement, we laid out an early release strategy to accelerate the development of applications across high growth disciplines, including biological discovery and research, diagnostic and therapeutic biomarker development, and single molecule multi-omic approaches. We are very encouraged by the enthusiasm we're witnessing from the community at this stage of our system performance. As we presented in September, external sites are generating single molecule protein sequencing data for the first time. and are eager to apply it to address critical unmet needs in areas such as neurological function, immunocompromised conditions, and potential use cases for the detection of early onset of cancer. This is only the beginning of what this technology can enable and the impact that single molecule sequencing can provide to novel understanding and eventual clinical assessment. Later in this call, I will provide greater detail on the early access efforts and strategy on a path to our full commercial release. I would now like to discuss progress across the foundational goals that we laid out last quarter. The four key areas for the company to execute as we accelerate towards commercialization in the meet 2022 and future revenue projections are, first, attract industry-leading talent to expand all areas of the organization, including product development and commercial operations. Second, solidify our supply chain to secure product inventory and manufacturing scale and profitability over the next several years. Third, accelerate early access placements to finalize platform configuration, performance, and application. And finally, expand utilization of our platform ecosystem through industry and academic collaboration. I would now like to expand on our progress in each of these areas. Starting with our first objective on organizational expansion, in the quarter, we made strong progress in expanding the team, attracting top talent across the industry. The company now has over 150 employees across established operations in Connecticut and our facility in San Diego, which opened in Q3. During the quarter, we made critical hires to accelerate commercial readiness within product development and operations. We are proud to have a number of seasoned individuals join our team, including Gray Williams, Vice President of Global Operations, Matt Ansett, Head of Clinical and Farmer Market Development, and Juan Evandano, Vice President of Investor Relations, all bringing knowledge and expertise in the Lifeline tool space. In San Diego, we started staffing the facility in September. with key leadership joining the team, such as Dr. Handong Li, leading product development, and key staff members with biomarker development, single molecule, and application development expertise. We plan to expand the San Diego facility to over 50 individuals as we head into 2022. I would also like to thank the Fort Catalyzer Leadership and Support Organization for allowing QuantumSI to grow and expand on campus since 2013. In the first half of 2022, We plan to relocate our headquarters to a nearby state-of-the-art campus in New Haven that will allow us to expand and accelerate company-wide efforts. The combined campuses in California and Connecticut will be the cornerstone of growth for both research and development and commercial operations. Our second objective is to secure our supply chain and product inventory. In relation to this, our operations team has placed advanced orders to secure components for more than 500 platinum systems. Working with our contract manufacturer, we have purchased materials to support our internal needs and anticipated commercial demand heading into 2023. Pilot manufacturing is complete and commercial builds are in progress. We are confident in our ability to manage instrument inventory demand for the foreseeable future. Taking into account increased production lead times by some of our vendors, we've also ensured capacity for all chip production phases for internal and commercial demand heading into 2023. As a result, we have secured the ability to increase our chip production volumes by 50% to over 1,000 units per month heading into 2022 to ensure supply chain requirements are met. In addition, we are pleased to announce that QuantumSI has acquired all assets of Magellic Technologies, a provider of semiconductor packaging and integrated circuit assembly services located in Garnet Valley, Pennsylvania. This was a strategic move by QuantumSI to not only secure assembly and packaging capabilities, but also to accelerate our ability to scale up operations for future chip designs. We've worked directly with the Magilek team for several years and have always admired their high quality and speed at meeting supply demands for the company. Michael Quinn, CEO of Magilek, will be joining QuantumSI and continue working to scale production capacity in excess of 100,000 packaged chips in years to come. We are pleased to welcome the entire Magilek team who are joining QuantumSI to continue in their previous roles. As it relates to kitted reagents, we feel confident about our supply chain and ability to scale. Many of the components in the protein sequencing kits are proprietary to a large degree, and we have de-risked our production efforts by working with multiple vendors providing chemical synthesis and protein purification capacity. While Quantum SI is equipped to assemble and manufacture kits internally, we will be transferring kit packaging externally to a global contract manufacturer in Q1 2022 in order to allocate internal capacity to accelerate development programs. Our third objective is to expand instrument placement to accelerate commercial readiness. As we announced a few weeks back, the company has now expanded its early access program to 10 external sites. This is a key milestone for the company and critical for expansion and development of applications and workflows for protein analysis. Over the last several decades, the scientific community has been limited to viewing the proteome at the known protein levels. Similar to how genomics advance from the tens of thousands of known genes, to greater than 3 billion bases, single-molecule protein sequencing can enable advanced understanding beyond the estimated 20,000 proteoforms, but potentially millions of variants and modifications that play a role in the cause and treatment of disease. QuantumSI specifically has engaged key thought leaders across target markets and application areas that represent tremendous growth in future utilization. As outlined, our key target disciplines are biological discovery and research, clinical and therapeutic biomarker development in multi-omic applications. Early access participants quoted in our recent announcement highlight the areas of application of our platinum system and the problem they are looking to solve or expand understanding. The goal of QuantumSI's commercial strategy over the next several years is to enable these groups to explore new dimensions of biology and partner with us to expand the capabilities of the system. This approach further enables the tens of thousands of users that utilize both traditional proteomic tools and next-generation DNA sequencing platforms. In parallel to the open platform approach, we are on a path to enable instrumentation, kitted content, and analysis tools that allow investigators to routinely monitor essential mechanisms in cell behavior that indicate early onset or reoccurrence of disease. Millions of individuals annually are diagnosed with cancer or immunocompromised stage for which we currently have limited ability to assess at early stages. Over the next decade, key advancements in detection and therapy are expected to improve general health. We are committed to working with our partners and end users to provide the tools to advance these efforts. The commercial team has visibility to thousands of potential placements spanning across users of central proteomics cores, next generation sequencing DNA benchtop users, drug development organizations, and future clinical testing labs. The key capabilities that will drive system placement begins with the accessibility to a benchtop instrument that streamlines both sample workflow and analysis. This coupled with the power of time domain sequencing, QuantumSI delivers unprecedented resolution and sensitivity by sequencing single molecules of protein to analyze peptide and direct amino acid changes. As stated, this increases the visibility of the biology that occurs in a cell, which is currently limited to less than 2% of true activity. Our fourth objective is to expand utilization of the ecosystem enabled by the platform. Our initial focus will be on two areas. The first, to develop clinically relevant assays focused on identification and measurement of post-translational modifications. And second, to optimize content to drive high volume applications in single molecule detection assays. The goal of these efforts will be to partner with drug development and clinical research groups to eventually drive the implementation of routine monitoring. Key external partners have voiced that there is a huge demand for technologies that can deliver enhanced accuracy sensitivity and time to result in many cases such as in the treatment of lung cancer patients are put on kinase inhibitors that can result in successful treatment initially however nutrient modifications and protein structure can cause the activation of alternative key signaling pathways resulting in the reoccurrence of disease the ability to recognize post-translational modifications at low frequency is a potential method for identifying these activated pathways at early onset by routine monitoring post-treatment. Similar to what drove the routine adoption of next-generation DNA sequencing, we believe that focused content can lead to high-volume routine utilization. Moving from simple protein identification to individual amino acid sequencing can unlock advanced content insights, much like targeted panels have done with genomics in the areas of cancer and in terrible disease. Given this, we are elated to be working with key opinion leaders to define and prioritize actionable content and performance specifications in areas such as immunocompromised states. In parallel to our internal development programs, we are also accelerating our efforts to create an application ecosystem around our platform through external partnerships. A few specific examples I would like to highlight are ESPCI in Paris was recently able to self-install a platinum instrument and quickly generate data validating our protein sequencing technology. Our development teams have been working closely with ESPCI and the University of Wollongong to create new proprietary and scalable barcoding approaches. Similar to the barcodes utilized in sample multiplexing or single-cell tagging, this novel barcoding approach utilizes kinetics as opposed to biologically attached oligo strands and has the potential to enable applications such as single-cell proteomics. In September, we announced a development partnership with Protein Evolution Inc., a private company utilizing proprietary technology in the field of proteomics. In this collaboration, we intend to create new classes of affinity reagents for use on the platform to support the development of focused content in assays. Much like an antibody, these affinity reagents will serve as the front end to our sample preparation workflow to enrich key proteins of interest. Our ultimate goal is to enable customers to develop custom panels for their own targets and to commercialize high-throughput content for immune monitoring and characterization. QuantumSI will continue to drive novel applications targeting high-growth markets and leveraging our unique time-domain sequencing approach in collaboration with our partners. We are very grateful for the active engagement of our early access program thus far and look forward to updating you on progress over the next quarter. I will now turn the call over to Claudia to review our financial results. Claudia.
Juan
Thank you, John. Hello, everyone. Let's discuss now the details of our Q3 financial performance, including a high-level spending outlook for the next few quarters. Total operating expenses in the third quarter of 2021 were $25.2 million. an increase of $16.6 million from $8.6 million in the third quarter of 2020. Operating expenses decreased sequentially in Q3 from Q2 levels. Recall that in Q2, we recorded one-time transaction expenses related to our merger with High Cape. Research and development expenses for the third quarter of 2021 were 11.1 million compared to 6.7 million in Q3 of 2020. As John mentioned earlier, we are continuing to hire employees in all areas, including R&D. In addition, our spending also reflects important investments we're making with our suppliers. Sales and marketing expenses were 1.1 million for the quarter compared to 0.3 million in the third quarter of last year while general and administrative expenses for the third quarter of 2021 were $13 million compared to $1.6 million in the same period last year. The increase in expenses is driven by higher headcount as we continue to build our teams and expenses related to being a publicly traded company. Net loss for the quarter was $18.1 million, compared to a net loss of $8.6 million during the same timeframe in 2020. Adjusted EBITDA was a loss of $17.5 million in the third quarter of 2021, compared with a loss of $7.8 million in Q3 of 2020. We have provided tables that reconcile adjusted EBITDA to gap net loss in the earnings press release. We had $500.2 million in cash, cash equivalent, in marketable securities as of September 30th, 2021. We have a strong cash position that allows us to continue investing in our business and to prepare for commercialization. In the next few quarters, we expect to continue investing in hiring personnel. Hires will be mainly in R&D and sales and marketing, as we continue to advance our technology and to scale for our anticipated full commercial launch in 2022. Accordingly, we expect operational spending to continue to grow sequentially in the next few quarters. In summary, and as John highlighted in his prepared remarks, our early access program is off to a strong start as reflected by the higher than expected number of partnerships we have executed so far. We are also encouraged by our progress in ramping up operations and proactively executing supply chain initiatives to support our manufacturing and commercial readiness. As a result, we reiterate our key milestones in long-term financial targets. We anticipate commercial launch of our system in 2022 and expect a combined carbon and platinum install base of over 5,000 instruments by 2025. with an average selling price of about $50,000, an annual consumable pull-through of over $45,000 per unit, and a long-term gross margin target of over 70%. With that, I would now like to turn the call back over to John for closing remarks. John?
John Starr
In Q3, we made significant progress on our core foundational goals and accelerated all phases of commercial efforts. We are encouraged by the enthusiasm within the scientific community as we move from known protein confirmation to resolution at variant and structural levels. In our view, this is what reflects true biological activity within the cell and what can eventually be leveraged by the clinical community to advance how to detect and treat disease at earlier stages of progression. We are well capitalized to fulfill our mission with over $500 million on the current balance sheets and are ready to compete for market leadership in the field of single molecule protein sequencing and proteomic analysis. Thank you for your time today, and I will now turn the call over for questions.
Operator
Thank you. It is now time for Q&A. Our first question comes from Kyle Mixon from Canaccord Genuity. Please, Kyle, go ahead.
Kyle Mixon
Thanks. Hi, John and Claudia. Hope you guys are doing well. Congrats on the progress so far. Really sounds encouraging, especially the kind of the targets that you think you can kind of meet a little long term. I do just want to ask, though, since we're approaching the year end, if you could just tell us if the, you know, 500 plus system placement number you previously laid out for next year is still the right way to think about the near term forecast. And I know you shored up the inventory. Sounds promising on that front. But just given some of these ship supply shortages, will that expectation need to be reduced? Thanks.
John Starr
Hey, Kyle. Good to hear from you. Thank you for joining the call. Just to confirm, the 500 platinum systems, we have gone in process in placing that order, and we're starting to receive instruments as we speak. So that would more than fulfill the 2022 revenue mark for platinums. As far as chips, I think we addressed that during the call. Strong relationships with our foundries, not only current supply, but development of future chips, and obviously with the acquisition of Magilic. really gives us control now over the packaging as well as supply to our customers. So we're feeling very good about where we're at at this point.
Kyle Mixon
Perfect. Thanks for that. And obviously, demonstrating reproducibility is obviously a critical endpoint for this early access program. From what you've seen during the program with ESPCI, et cetera, are you tracking in line with your expectations for this early launch? And I guess what challenges have you seen so far and what issues have users faced in the early stages?
John Starr
Yeah, no, another great question. So first of all, reproducibility is one of the key aspects. Actually, take a step back. Really, the first focus, especially going out to 10, is to make sure that we can not only deliver, install, and train 10 sites, and that'll all be accomplished at least by the end of the year, if not by the end of this month for those 10 sites. As far as reproducibility, we're very thankful for these sites. to actually be confirming data that we've generated internally just to show equivalence. So that has gone very, very well so far. As far as challenges are concerned, I mean, what we're facing now in early access programs and why you do them is because now we're looking at specific applications, right? We mentioned quite a few during the press release and during the narrative that we just gave. where customers are looking to barcode single cells, not only for interrogation of proteins derived directly from a B cell, but also in OHH, Oregon Health Sciences Center's case, looking at neurological tissue. So one of the things is to work with these customers to actually optimize that approach. Those are some of the challenges and make sure we can specifically interrogate the proteins of interest.
Kyle Mixon
As you kind of work through this program and you see the data being generated, I'm just curious what improvements you want to make to platinum and, I guess, carbon, too, before you launch. I'm thinking, like, what needs to be locked down, really? Assays, throughput, increase the number of amino acids you want to detect. That would be helpful to hear. And I guess just related to this, how many individuals for the commercial team or the sales force are you targeting heading to the launch?
John Starr
Yeah, sure. So, multiple questions there. So, let's start with the last one as far as commercial teams. So, right now, we've been able to build up the marketing team, which is very focused on voice of customer as well as application. Obviously, it started hiring specialists that are going to be targeting pharma, more of the clinically oriented applications. That's also going to be bringing forward some of the field application specialists. And we'll build that team in the first half of the year, and that'll be projected in our budgets. And your first question you asked before that?
Kyle Mixon
Basically, the improvements to the platform before you launch, so it needs to be kind of locked down still.
John Starr
Yeah, really encouraged, Kyle, by the performance of the Platinum system and the workflow thus far. I mean, you know, I can't say that we're 100% confident that we'd be able to bring sites up in a month, but we've effectively been able to do that in training. So that gives us a lot of confidence in our ability to scale, and that's why we moved forward with the 500-instrument order. from our contract manufacturer going forward into next year.
Kyle Mixon
Perfect. And just moving on to Biopharma, obviously a power user of many proteomics technologies, certainly going to be an important partner for you early on. Just wondering if you could talk about your progress at Biopharma so far, just wondering if you're confident some of those companies will be early adopters, and if you could kind of give us any feedback thus far from the end market, that'd be really helpful as well.
John Starr
Yeah, and of course I can already confirm that biopharma and industrial accounts will be part of the early access program. Unfortunately, we don't have the rights to disclose them. And typically when you're working with pharma in later stage, say biomarker development implementation in the clinical research stages, a lot of times that information is kept confidential, but I can confirm that we're already working with them. There's a number of assays that we are considering at this point in time, specifically focusing on content that could be used for inclusion exclusion trial criteria. One example that we gave is post-translational modification. I believe right now there's about four key phosphorylation events that occur at the amino acid level that can predict 80% of reoccurrence of lung cancer. This is of high interest to pharma. And just a simple assay with just four markers, the reason we can do that so effectively is because we are looking at single molecule resolution and able to detect that at the individual peptide and amino acid level. and that gives you absolute frequency. So these are assays that we're going to be working on in partnership with pharma. We'll be doing the internal work ourselves.
Kyle Mixon
Okay. Related to that, have you confirmed your ability to kind of elucidate those PTMs, or are you still kind of working on that?
John Starr
We've shown data in the past where we've been able to demonstrate being able to pick up phosphorylation. I believe some data was disclosed here a few months ago showing tyrosine. tyrosine event and then phosphorylated tyrosine event. But that is a dedicated program that we have right now housed out of San Diego.
Kyle Mixon
Okay. Yeah, no, that sounds good. Let me just ask one more before I hop off about protein evolution. I just wanted to ask if you could kind of walk through the decision to collaborate rather than, I guess, merger or acquire. Just given the fact that PEI is a four-catalyzer company, I'm just reminded of the merger between Hyperfine and Liminal, which I still believe is pending. Generally, there seems to be some solid synergies between you guys and Progenvolution. So I'm just wondering if you could kind of walk through why you're so excited. And also, and John, I think this is kind of an important question, if these reagents will be kind of integrated into carbon.
John Starr
Yeah, great question again. And first of all, the team at Quantum SI, we have a strong protein evolution team, right, developing recognizers and cutters for our core programs in protein sequencing. What PEI actually brings to the table is expertise on working with infinity reagents, which is not something that we're developing necessarily internally. So it allows us to really scale our plans as we go out for that expansion of the ecosystem, while the internal team can still focus on know the core technologies and the core platforms so that's how we see it okay it will be integrated into carbon or standalone basically uh we have the opportunity for both um we can use affinity reagents and again we're not disclosing the actual exact structure but it can be used for targeted protein assays which can be incorporated into carbon or we could use them for the future development of recognizers Got it. Okay. Awesome. Well, thanks so much, John. Appreciate it. One thing I do want to say on that, too, is obviously PEI is a collaboration that we're very excited about. We obviously have other opportunities to develop out content as well as recognize their development. So, you know, there are other partnerships that we haven't announced at this stage.
Kyle Mixon
Perfect. Sounds promising. Well, congrats, guys. Thanks again. Thanks, Kyle.
Operator
Thank you, Carl. As a final reminder, to ask any further questions, please press Start followed by 1 on your telephone keypad now. thank you this concludes our q a session thank you for joining today's call i will now pass you back to juan for closing comments thank you well thank you all for listening and your participation today we look forward to updating you on our progress in the next quarterly earnings call have a good day thank you everyone you may now disconnect your lines
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