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spk01: Ladies and gentlemen, thank you for standing by. Welcome to the Quantum SI first quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. After this presentation, there will be a question and answer session. To ask a question, you will need to press star 1 1 on your telephone. You will then hear an automatic message advising your hand is raised. Please be advised today's conference is being recorded. I would now like to turn the conference over to Juan Avendano, Head of Investor Relations for Quantum SI. Juan, please go ahead.
spk02: Good evening, everyone. Thank you for joining us. Today, after market close, Quantum SI released financial results for the first quarter ended March 31st, 2023. A copy of the press release is available on the company's website. Joining me today are Jeff Hawkins, Chief Executive Officer, Patrick, Schneider, President and Chief Operating Officer, and Claudia Creighton, Chief Financial Officer. Before we begin, I'd like to remind you that management will be making certain forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section entitled forward-looking statements of our press release. For a more complete list and description of risk factors, please see the company's filings made with the Securities and Exchange Commission. This conference call contains time-sensitive information that is accurate only as of the live broadcast today, May 11, 2023. Except, as required by law, the company claims any intention or obligation to update or revise any forward-looking statements. During this call, we will also be referring to certain financial measures that are not prepared in accordance with U.S. generally accepted accounting principles or GAAP, including adjusted EBITDA, a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures as included in the press release filed earlier today. With that, I will turn the call over to Jeff.
spk06: Thank you, Juan. Good evening, everyone, and thank you for joining us. In today's call, we will provide a business update, present our first quarter financial performance, and provide an outlook for 2023. We will then open the line for questions. The goal of QuantumSI is to bring next generation protein sequencing to every lab everywhere. Our proprietary technology delivers deeper, unbiased proteomics insights that we believe will accelerate scientific research, enable the discovery of new biomarkers, and ultimately power the development of new therapies and diagnostic tests that will positively impact human health. In the first quarter of 2023, we started delivering on this mission with the initial shipments of our platinum protein sequencing system. As we have shared on previous calls, Quantum SI has established three corporate priorities for 2023. I would like to provide an update on our progress in the quarter against each of these priorities. Our first priority is to commercialize platinum, carbon, and the 2M chip. We were pleased with customer orders in the first quarter of 2023, which totaled $449,000 and were slightly above our internal plan. We reported revenue of $254,000 in the first quarter. This difference is due to a delay in the shipment of two international orders we received in the quarter, but were not able to ship until recently. To provide a bit more color, to ship these international orders, we needed to obtain specific import codes and engage with an international logistics partner, which we have since done, and these two orders were successfully shipped in the current quarter. I would also like to provide more insights from our commercialization activities in the first quarter. Geographically, we have been pleasantly surprised by the level of customer interest from potential European customers. In fact, our advanced sales funnel is made up of approximately 60% US and 40% European customers. By end market, most of our internal customers are in academic research centers, as expected. However, looking closer into how the sales funnel is evolving, we are pleased to see interest from a wide range of end markets, including academia, biotech, pharma, industrial, and government. By application, we are seeing the most interest in proteoform and PTM analysis, followed by protein identification and emerging interest in protein barcoding and antibody validation and QAQC through sequencing. Customer feedback continues to be positive. We are observing customers embrace our platinum system for its convenience, simplicity, accessibility, and the ability to enable deep and unbiased proteomic studies at the individual amino acid level. On one end of the spectrum, these customers are proteomic researchers looking to do more in-depth, unbiased proteomic studies with a technology such as ours. They value single molecule sensitivity and individual amino acid resolution as it unlocks the novel analysis of proteoforms and post-translational modifications in their research. On the other end, there are customers who are new to proteomics, and only QuantumSI's protein sequencing platform can provide a convenient, accessible solution that is easy to use and affordable. Overall, we are encouraged by the level of customer interest in our technology and are pleased with the sales funnel we have been able to generate with a small commercial team and based largely from inbound customer interest and trade shows. That said, we expect to continue to be deliberate with our rollout in this early phase of commercialization to ensure customers have the best possible experience. Given this, we expect Q2 orders to be similar to Q1, which is consistent with our internal plan entering the year. Over the next few months, we plan to turn on outbound marketing and increase our direct sales efforts, support revenue growth in the second half of the year. To facilitate this, We have added talent to our commercial team across marketing, sales, and customer support. Based on these initiatives and our existing sales funnel, we remain on track to further accelerate placements and revenue in the second half of this year. Our second priority is to lead with innovation. QuantumSI is the leader in the protein sequencing space, and we will continue to leverage our deep technical expertise and novel technology to transform and democratize the field of proteomics. Recently, we executed one of our proof of concept engagements with a major academic institution. The study demonstrated that we could sequence and distinguish spike proteins from various SARS-CoV-2 variants. Later in the fall, Patrick will provide more details about this study, as well as highlight some of the other data that has been recently presented at industry conferences. Finally, our carbon sample prep instrument is on track to enter beta testing in the second quarter of 2023. We also remain on track for the launch of carbon in the second half of this year. Our third priority is to preserve financial strength. As I stated on previous calls, we are committed to continuously improving our fiscal discipline. In a similar way, we are laser focused on supply chain and operations, and our first quarter gross margin at 48.8% is a reflection of that effort. We are pleased with this result as we are far from operating at scale. Patrick will provide additional color on the efficiency initiatives our supply chain and operations teams are executing. Going forward, although there may be some fluctuations quarter to quarter, we expect full year 2023 gross margins to be similar to the level observed in the first quarter 2023. Lastly, with regards to operating expenses, we reiterate non-GAAP operating expense growth to be flat year over year in 2023. It is worth highlighting that we are keeping operating expenses flat while still making meaningful investments into building out the commercial teams and executing the marketing programs required to successfully drive adoption of our Platinum system. Before turning the call over to Patrick, I would like to briefly comment on the CFO transition we recently announced. Last week, we announced the appointment of a new Chief Financial Officer, Jeff Kite, who will join QSI on May 15th. Jeff brings more than 25 years of experience in senior financial positions, providing transformational leadership in both public and private companies. He has extensive experience managing public company requirements, including interacting with auditors, investors, and analysts. In addition to leading the typical functions within the CFO scope, Jeff has also led operations, legal, and HR at various points in his career, giving him a unique perspective and understanding of company operations and strategy. We look forward to welcoming Jeff to the company on May 15th. Claudia will continue to serve as our CFO until then. Upon Jeff's start date with the company, Claudia will transition into a senior advisor role through the end of June to ensure a smooth transition. Claudia played a significant role in taking Quantum SI public. I want to thank Claudia personally for her contributions to QuantumSI over the past two years. I would now like to turn the call over to Patrick, our President and Chief Operating Officer, to discuss additional business updates. Patrick?
spk07: Thank you, Jeff. Starting with product development, as I've explained before, we have a world-class team in the area of protein engineering and directed evolution. Our internal team generates high-quality, differentiated amino acid recognizers and aminopeptidases that result in our ability to sequence proteins with a small set of recognizers that bind to multiple amino acids with different affinities. This is a major advantage over other approaches that require a specific recognizer for each of the 20 amino acids. Our R&D pipeline continues to make advancements on all aspects of the technology. Stay tuned for more to come later this year. We continue to develop our strategic partnerships with key opinion leaders to help seed the market and support our internal development efforts. As Jeff mentioned, we've been collaborating with a large institution on SARS-CoV-2 variants. We published an application note describing our ability to sequence and distinguish spike protein from three variants, Omicron, Alpha, and Beta. This is an important capability for researchers when RNA is not accessible but proteins are still present. The ability to simply and affordably discern these variants from COVID and other diseases could be highly impactful for human health. We view these ongoing efforts to generate additional data as an important element of our strategic growth plan. You can find more details of this work in our application note published on our website this week. One of our value propositions is easy access to protein identification and characterization. Whether a researcher wants to validate that their antibody is specific to its intended target, or they just want to determine what proteins are in their sample, they can use next generation protein sequencing to achieve their objectives. Often researchers send their samples to a mass spec contract lab or core facility for an identification of the protein in their samples. This can be costly and time consuming. Our platinum next generation single molecule protein sequencing instrument can often provide the same level of protein identification without sending a sample out or buying an instrument that can cost five to ten times more than our platinum. To demonstrate that capability, we took a protein sample and sent half of the sample to a mass spec core facility, and we sequenced the other half. And the results show that both methods identified the same protein. This will be a game changer for protein identification as we continue to advance the technology with respect to coverage and throughput. You can find this mass spec comparison to protein sequencing using our platinum in an application note on the website. I want to pause here and express my appreciation for the team's effort in generating all of this new sequencing data. I'm honored to work with such a dedicated and passionate group of professionals that is discovering new insights along with our collaborators and customers. The volume of sequencing data being generated every day is impressive. To keep up, we started a weekly post on social media, our Protein of the Week. This is where we've been showcasing examples of the protein sequenced every week. On the supply chain front, although we remain in a good position, we are conducting a thorough review of our supply chain and manufacturing operations as we look to the future. Even though we were pleased with our gross margin performance in Q1 at almost 50%, which is very strong for a newly launched product offering, we're being diligent in looking for operational efficiencies and economies of scale as commercialization continues to ramp up. Our engineering team designed the platinum instrument with simplicity and margin in mind, and now we're seeing the results of that early effort. We've established initiatives in other areas, including procurement, automation, and have kicked off a strategic review of some outsourced contract manufacturing arrangements versus insourcing. Our objective is to remain in a strong supply chain and margin position as we roll out our technology and increase its availability in the market globally. Moving on to commercialization, we're driving a controlled commercial rollout that will allow us to be reactive to early customer feedback. Most of our leads are currently coming from inbound organic activity, trade shows, and the science paper. Our funnel is developing on track to our expectations. A key element of progressing our funnel is our proof of concept program, which allows customers to send a protein for analysis to our lab for a modest fee prior to purchase. This has been an attractive offering for some of our customers. In line with our internal plans, we're looking to place instruments in the first half of 2023 with a select number of key opinion leaders in order to manage early placements with customers diligently and collect customer feedback for new applications and development opportunities. In April, we attended the American Association for Cancer Research, AACR, where we exhibited the platform system and presented posters entitled Detection of Arginine PTMs by Single Molecule Protein Sequencing on the QuantumSI Platinum Platform. This week, our commercial team attended the Association of Biomolecular Resource Facilities, ABRF, where we presented a poster titled, Advances in Single Molecule Protein Sequencing on the QuantumSI Platinum Platform, and showcased several exciting applications, including the ability to sequence multiple proteins from a sample mixture. In addition, we presented at the booth an application note demonstrating the ability to identify by protein sequencing an important biomarker in a biological sample. Albumin is one of the most abundant proteins in your blood, and when it accumulates in urine, it's an indication of potential kidney damage. We demonstrated the ability to identify albumin in urine by protein sequencing, which opens up the possibility to detect other protein biomarkers in a liquid biopsy. Up next, we are planning to be at the American Society for Mass Spectrometry, ASMS, an annual conference being held in Houston, Texas in June. Now I'll turn the call over to Claudia to review our financial results. Claudia?
spk00: Thank you, Patrick. Hello, everyone. Let's discuss the details of our Q1 2023 financial performance. Revenue in the first quarter of 2023 was $254,000. This was the first revenue recognized by the company on the sale of platinum instruments and kits. As a reminder, we launched the platinum instrument in December 2022 and began commercial shipments in January 2023. Gross profit in the first quarter of 2023 was 124,000, resulting in a gross margin of 48.8%. The gross margin was primarily driven by the platinum instrument product mix. Operating expenses in the first quarter of 2023 were 29.3 million compared to 27.1 million in the first quarter of 2022. The increase was primarily due to higher selling general and administrative expenses and an increase of 4.6 million in stock-based compensation. Net loss for the first quarter of 2023 was 23.6 million compared to 35.2 million in the first quarter of 2022. Adjusted EBITDA for the first quarter of 2023 was a loss of 23.7 million compared to a loss of 27.4 million in the first quarter of 2022. A reconciliation table of adjusted EBITDA to GAAP net loss is provided in a press release filed earlier today. As of March 31, 2023, we had $322.1 million in cash and cash equivalents in investments in marketable securities. Turning to guidance, given our early stage of commercialization, we expect to be in a better position to provide quantitative revenue guidance later in the year. However, as Jeff mentioned earlier in the call, we expect Q2 orders to be similar to Q1. Relative to the first half of the year, we expect revenue to accelerate in the second half based on our business funnel visibility and as outbound marketing and sales activities ramp up. With regards to margins, we expect gross margin in 2023 to be similar to the level observed in Q1 2023. Lastly, we reiterate non-GAAP operating expense growth to be flat year over year in 2023 and a projected cash runway into 2026. I would now like to turn the call back over to Jeff for closing remarks.
spk06: Thank you, Claudia. We are off to a good start in 2023. First quarter customer orders came in slightly above our internal plan, and we delivered a solid margin performance. We are making strong progress across all three of our corporate priorities for 2023. Our business funnel is robust. We have a strong team in place, and we believe we are well positioned to accelerate commercial momentum in the second half of the year. Operator, please open the line for questions.
spk01: Certainly. Ladies and gentlemen, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question coming from the line of Kyle Mixon with Canaccord. Your line is open.
spk05: Hey guys, thanks for taking the questions. Congrats on the launch and the revenue and the margins. Great to see. Maybe just starting with, you know, the funnel and actually really where these placements are going right now. I heard like how the leads are kind of, you know, inbound organic and trade shows, things like that. But I am curious who the early buyers are of Platinum and maybe aside from those early access users. And what are some of the initial applications that you were talking about before? And, I mean, are customers still figuring out the use cases? I mean, are they hitting the ground running? I mean, how are they thinking about this going forward? How could that evolve, you know, in the near term? Thanks.
spk06: Yeah, thanks, Kyle. I'll start out here and then perhaps pass to Patrick if he wants to add any additional color. You know, as we said, academic research centers are the preponderance of those early customers. You know, it's what we expected would be, you know, the target and where the initial interest would be. You know, a solid portion of the funnel is also those academic researchers, but we're beginning to make our attraction into other segments of the market. So we mentioned some of those pharma, biotech, some industrial applications in areas like antibody, QAQC or antibody validation, and even some government-related accounts both here in the U.S. as well as in Europe. you know, getting a more diverse funnel as we, you know, get out there with some people, you know, sort of in direct selling and attend more of those trade shows. Application wise, maybe Patrick, you want to provide some insights on the application? Sure.
spk07: Yeah, so continue to refine the applications with, you know, customer feedback for, you know, for example, we had the Protea form characterization. With the SARS-CoV-2 spike protein as an example of identifying, you know through through sequencing differences at the amino acid level So, you know, this is now beginning to take form as an application the proteoform, you know characterization Certainly continuing with protein identification, you know moving into two protein mixtures moving into identifying proteins and biological fluids. So this, you know, is really starting to strengthen that particular application. And, of course, you know, post-translational modifications is an application that we've, you know, always talked about and continue to reinforce. And certainly some early, you know, customer feedback from that, like the arginine, you know, modifications is an example. So really continuing to develop those applications, it's a big focus of ours to work with the key opinion leaders to continue to build out and strengthen those applications.
spk04: Awesome. Great. Thanks so much, guys, for that.
spk05: Yeah, just got a couple more here. Sorry about that. I think I heard something about discounting and sort of pricing, gross marketing, things like that for the box. Could you guys walk through how you're thinking about pricing for Platinum right now? I think the list is 7K, and I know you don't want to provide what you're actually selling this for and everything. We don't have to go over the actual placement number because I understand that's kind of confidential. But how are you thinking about pricing just given such a novel platform? And I'm actually curious how our customers are sort of purchasing the initial – you know, a batch of chips, you know, and are you seeing any trends in utilization so far either? I know there's a lot of questions there. I can repeat myself if need be.
spk06: Thanks. No, you're okay, Kyle. I think we've got them, and if we missed one, we can come back to it. So, you know, on the first point, you know, we're not seeing a lot of pricing pressure in the market. So, both on our instrument as well as our consumables, we've been able to do most of the transactions at or very close to list pricing. So we're not seeing any significant pricing pressure in that regard. I think we're continuing to evaluate if there could be opportunities to increase the price, especially of the instrument, given its capabilities and how unique it is in the market. Right now, we're not going to make any of those changes, but it is something we're monitoring if we believe you know, the market would bear that out. And then in terms of buying, what we tend to see, Kyle, is that somebody who purchases the platinum instrument will buy, you know, some number of kits to get going into whatever their research or what study they have sort of in mind. You know, it's obviously early in the commercialization cycle, but, you know, we can tell you that, you know, one of our early implementations has recently repurchased consumables. So it gives us sort of some confidence that people in those initial orders aren't necessarily taking a big stocking order and are, you know, going to be sitting on consumables for a long period of time that they're, they're ordering sort of what they need, they're, they're moving forward, they're making progress, and, you know, continuing to remain interested in, in using our platform for the intended research.
spk05: Okay. Thanks, Jeff. And just two more questions for me. Maybe first on the second half lift that you were describing. I mean, it sounds interesting. And thanks for kind of the guidance for the second quarter. That's helpful. I guess I'm curious how significant that lift will be in the second half and how much pent-up demand is there and how secure is the demand? You know, just given it's pretty novel, I figured there's not going to be a lot of slippage, but I'm just curious what your thoughts are there. And then any comments on book to bill? going forward, just maybe like, you know, compared to what we saw in the first few months?
spk06: Yeah, so I think on your last point, you know, really the difference between the booked revenue and the orders we received really had to do with that international demand. And, you know, that was very early in our commercialization sort of history here. And we just needed to check off the two boxes that I mentioned in my prepared remarks and, you know, any future orders coming in from the European Union would, you know, be easily executed on now in a more real-time basis like we have with U.S. orders. So, you know, I think the concept of sort of building up a huge backlog, I don't believe will be a key part of the story. We'll look to fill orders, you know, as we get them as quick as we can. In terms of the funnel, you know, obviously we're not giving out guidance yet as to how we think that will accelerate. You know, some of this is seeing what those order patterns are, seeing the utilization. But also, we brought in new people to our team and those folks really are just now hitting the ground, have been trained and are out working every day in a direct selling capacity. So I think we'll learn a lot in this current quarter about how much lift you see as you add more people to the team. And I think you put the customer feedback with that information together and put us in a position to provide sort of more quantitative guidance for the back half of the year on the next call.
spk05: Perfect. And one last one for me. Just reproducibility out there in the field with the first few systems, I'm sure it's not perfect, and there probably will be some time where maybe you pause shipments and reevaluate how the technology is being run and things like that. and the best way to run that in the workflow and such. Could you just kind of talk about and comment on what you're seeing out there in the field right now compared to what was running in your facilities? And yeah, like any plans forward there with kind of improving performance, I suppose, and maybe how carbon kind of factors in there as well.
spk06: Yeah. So, so far, Kyle, we have not seen, you know, a lot of variation in the field. What customers are experiencing is very similar to what we experience here in R&D. So we've been fortunate in that regard, but obviously, you know, very close to the customers, making sure that that trend continues. You know, some of the early customers have given us a suggestion for, you know, improvements we can make to say our cloud analytic tool or some of the data visualization. So things we're working on and we'll implement to continue to evolve the features of the cloud analytic tool, you know, with their thoughts in mind. So really more just spend more enhancements they like to see or those little tweaks we haven't seen any significant variation in performance um across the market i i lost your second question though kyle if you can repeat that oh sure sure so maybe and maybe this could kind of be like another a fifth question potentially
spk05: Maybe how much of a game changer is carbon going to be once that is launched? Will that move the needle? And I think it was later this year it was launched. And then maybe like attach rate thoughts for carbon on platinum, because I feel like that's super useful to have that automation. But I'm just curious what you think about that.
spk06: Yeah. And Kyle, I think that's really what that beta study we're going to kick off here in the current quarter will help us define. For sure, carbon is going to bring an additional level of automation over, you know, the current workflow of the product. I think that what we're hoping to learn from customers sort of twofold. One is, you know, how valuable is that automation in terms of hands-on time reductions? Does it help them achieve higher run success rates? Do they see better, you know, do they see more reads from the consumables? So we'll be looking at these various metrics to see what other benefits beyond purely automation do they see. And I think you know, the more it trends towards these other, you know, value add sort of capabilities, the higher that attach rate will be. But I think, you know, when we get through data, we'll have the quantitative data we need here. And I think we'll be able to really project or at least provide you a perspective on what we think that attach rate will look like, you know, with that data in mind. So stay tuned on that. I'm going to get this data going in this quarter and you know, expect to get some data from that and be able to provide more quantification.
spk05: Got it. Yeah, I'll leave it there, but thanks for the time, guys, and congratulations again. Thank you, Kyle.
spk01: Thank you. And our next question coming from the line of , would be Riley .
spk03: Hi. This is for Yuan. Thanks for taking our question, and congratulations on the launch. Just one from us. We were just wondering if you could elaborate on a particular user case where the customer leveraged or was planning on leveraging Platinum for post-translational modification research. Yeah, any color on that you could give us would be helpful.
spk06: Yeah, Patrick, do you want to provide a couple examples there? I know we put some application notes out, and you can give a little more color.
spk07: Yeah, yeah. So one particular user case, and this is This is a very interesting one. Some post-translational modifications are extremely difficult to see by traditional methods like mass spec. For example, modifications of arginine, which has implications in aging and various other diseases. And so what we've done is, in working with KOL, we've identified various forms of post-translational modification on the arginines. So asymmetric versus symmetric dimethylation, so it's like the same molecule but just in a different form. Extremely difficult, you know, to detect with mass spec. Also, other modifications on arginine like citrullation, again, you know, extremely, extremely difficult. So that's, I would say that's probably one major use case for some of this post-translational modification.
spk04: And then there are various others as well. Okay, thanks. Appreciate the call. You're welcome.
spk01: Thank you. And I'm sure enough for the questions in the queue at this time. I will now turn the call back over to Juan for any closing remarks.
spk02: Thank you all for your participation today. We look forward to updating you on our progress in the next quarterly earnings call. Have a good evening.
spk01: Ladies and gentlemen, that's the conference for today. Thank you for your participation. You may now disconnect.
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