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spk01: Ladies and gentlemen, thank you for standing by. Welcome to the QuantumSci second quarter 2023 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star 11 on your telephone. You will then hear an automated message advising 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 Juan Avendano, Head of Investor Relations for QuantumSci. Juan, please go ahead.
spk09: Good morning, everyone. Thank you for joining us. Earlier today, QuantumSci released financial results for the second quarter ended June 30th, 2023. A copy of the press release is available on the company's website. Joining me today are Jeff Hawkins, Chief Executive Officer, and Jeff Kyes, 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 only accurate as of the live broadcast today, August 7, 2023. Except, as required by law, the company disclaims any intention or obligation to update or revise any forward-looking statements. During this call, we will also be referring to certain financial measures that are not prepared in accordance with U.S. generally accepted accounting principles or GAAP, including EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is included in the press release filed earlier today. With that, I will turn the call over to Jeff Hawkins.
spk15: Thank you, Juan. Good morning, everyone, and thank you for joining us. In today's call, we will provide a business update, present our second quarter financial performance, and provide an outlook for the remainder of 2023. We will then open the line for questions. As a reminder, the goal of 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. While we continue to make solid progress with our commercialization activities in the second quarter, we experienced some challenges that prevented us from meeting our revenue expectations. First, Early customer feedback identified a set of software features that were important for our customers to efficiently analyze and interpret their experimental data. Second, we experienced some customer implementation challenges due to the wide range of biological sample types, sample preparation methods, and sequencing applications customers wanted to perform with our technology. Finally, we observed some general extension to the sales cycle as the internal purchasing process at our customers has slowed down from what we experienced in the beginning of the year. I would now like to provide more color on each of these items, as well as share other updates on our progress during the quarter. Our first corporate priority is to commercialize platinum, carbon, and the 2M chip. Our commercial organization build-out is well underway. Under the leadership of our Chief Commercial Officer, Dr. Grace Johnson, we are building a truly world-class team across sales, marketing, and customer support. Despite experiencing some implementation challenges in the quarter, our commercial team collaborated closely with customers to resolve the challenges and ensure the customers felt valued, supported, and equally as important, excited about the potential of our technology to advance their future research. The customer feedback about the quality of our commercial team members and the support they have provided has been very positive. We are excited about the team that Grace is building, and we are confident that they will build positive and lasting relationships with leading researchers globally. Our sales funnel is also strong and is tracking well ahead of our expectations for 2023. QuantumSI's technology addresses gaps in currently marketed technologies, and it is clear customers are interested in exploring how platinum can positively impact their research. From a geographic standpoint, approximately 70% of the funnel is made up of U.S.-based customers and 30% from Europe. This change in geographic mix from prior quarters is the result of having more U.S.-based sales professionals. From a market segment perspective, academic customers continue to represent the largest opportunity in the funnel, with biotech customers being the second largest market segment today. As we have shared on previous earnings calls, we were actively building out our commercial marketing team. And with that team in place, we expected to launch outbound marketing efforts, drive greater awareness of our technology, and grow our sales funnel. In the second quarter, we made key hires in our commercial marketing team and implemented our first outbound marketing campaign. The early market feedback from these campaigns has been positive and reinforces our belief that our technology fills a significant unmet need in the proteomics market as stated at the beginning of the call early customer feedback identified a set of software features that were important for customers to efficiently analyze and interpret their experimental data our product marketing team did an excellent job engaging with the customers to clearly define what enhancements were needed these requests were communicated to our software team who got straight to work on these enhancements and I am pleased to report the team delivered an upgraded version of software in early July. The new software version has been released to our customers, and the feedback to date has been very positive. Additionally, during the second quarter, we began to observe a general lengthening of our customers' capital purchasing process. We have instrument sales that entered the customers' capital purchasing process during the quarter that continue to move along at a moderated pace. We have no reason to believe that these capital purchases will not ultimately be approved, but we are being advised by our customers that they are experiencing this process slowdown in general. We continue to believe that in the current macro environment, having a low-cost instrument will be advantageous to customer adoption. Our second priority is to lead with innovation. During the second quarter, we experienced some customer implementation challenges due to the wide range of biological sample types, sample preparation methods, and sequencing applications customers wanted to perform with our technology. As we dug deeper into each of these areas, we determined that our current R&D strategy and programs were not aligned optimally to our core capabilities and had gaps in terms of addressing the full scope and complexity of the proteomics workflow. As such, we have initiated a strategic review of current R&D programs and our R&D organizational design and capacity. We are near the completion of that process and expect to implement the necessary changes during the current quarter. While that process is not yet complete, I would like to share some of our thinking and initial actions taken thus far. Consistent with other proteomics detection technologies, customers select the biological sample type and sample preparation method they use. The range of sample types and sample prep methods utilized in proteomics is extensive, and often some level of optimization is required to make them compatible with the downstream detection technology. One solution we have been pursuing to address this area is CARBON, our automated sample prep instrument. While CARBON could help reduce sample prep variation and streamline the end-to-end workflow of our platform, It is not an absolute requirement for our platinum protein sequencing instrument and may not be the best solution long term. There are commercially available liquid handling platforms and sample prep chemistry that may be an equal or better fit for customers and allow us to instead focus our internal resources on our core competencies in protein sequencing. To this end, we have put the beta testing and launch of carbon on hold while we complete an evaluation of the business case and assessment of potential options to address this portion of the customer workflow. Another consideration in our goal-forward product strategy will be to drive greater focus and investment in our core capabilities in protein sequencing. And therefore, we will look to leverage more industry partnerships and customer consortiums to address items like sample prep, workflow automation, or the development of specific sequencing applications. Finally, we are looking closely at our organizational design to ensure that we fully resource the most critical areas to our success, such as applications development. During the second quarter, we recognized the need for greater resourcing in applications development and redeployed some of our internal resources to this effort. The resulting outcome is that we were able to successfully deliver five new application notes demonstrating the capabilities of our protein sequencing technology. We believe that once complete, the realignment of our R&D efforts will position us to deliver additional product improvements before the end of 2023, while also ensuring a pipeline of technology improvements that will support a steady cadence of releases throughout 2024. Our third priority is to preserve financial strength. We remain committed to continuously improving our fiscal discipline. In this vein, one objective in the announced R&D strategic review is to prioritize the programs that have the broadest customer appeal while maintaining a base level of investment into a pipeline of longer-term projects that will drive significant improvements to our core technology in the future. We intend to continuously evaluate all of our investments across the to ensure that the capital we have been provided is utilized to maximize shareholder value and our financial runway. Finally, on the operations front, we are continuing to work through several initiatives to lower manufacturing costs, including in the areas of procurement, automation, and our insourcing versus outsourcing strategy. These initiatives have the clear goal to secure our supply chain and enhance our margin position as we continue to scale up. In closing, Launching a novel technology into a new market always involves some bumps in the road. Our focus remains on ensuring we execute a commercial strategy that prioritizes the early customer experience and seeks to strike a balance between long-term success and near-term revenue attainment. Given this philosophy, we expect to continue with a controlled rollout for the remainder of the year. We will continue to closely monitor customer feedback and implementation success metrics throughout this timeframe. That data will ultimately determine how the commercial team accelerates our new customer implementation efforts. I will now turn the call over to Jeff Kyes to review our financial results. Jeff?
spk12: Thank you, Jeff. First, I would like to say how excited I am to be on board with Quantum SI. We have an excellent leadership team and all of us are aligned and focused on commercial execution and delivering the best and most innovative solutions to our customers. I personally come from a background of leading a series of companies through rapid change and growth and where extreme financial discipline was paramount. I plan to draw upon these experiences to help lead Quantum SI through a continued financially disciplined approach that ensures we utilize our existing capital in the best way for rapid commercial growth while at the same time maximizing our capital runway. Now let's discuss the details of our Q2 2023 financial results. Revenue in the second quarter of 2023 was $205,000, which consisted of revenue from our platinum instrument and associated consumable kits. At the end of the second quarter, we had two units that were in backlog and revenue was deferred. We anticipate recognizing revenue on these units in Q3. Gross profit in the second quarter was 78,000 and gross margin was 38%. Our gross margin will be somewhat variable for the near future as we work through our initial stages of commercialization and also be impacted by the timing and mix of instruments versus consumable sales. GAAP operating expenses in the second quarter of 2023 was 27 million compared to $30.2 million in the second quarter of 2022. The decrease was primarily due to a $2.6 million lower research and development expense and $600,000 lower SG&A expenses. Included in those amounts is a decrease of stock-based compensation by $1.9 million with the remaining $1.3 million comprising a large decrease in general and administrative expenses offset by higher sales and marketing expenses as we ramp up our commercial operations team. Net loss for the second quarter of 2023 was $25.6 million compared to $32.4 million in the second quarter of 2022. Adjusted EBITDA for the second quarter of 2023 was a loss of $22.9 million compared to a loss of $25.8 million in the second quarter of 2022. A reconciliation table of adjusted EBITDA to gap net loss is provided in our press release filed earlier today. As of June 30th, 2023, we had $297.2 million in cash and cash equivalents and investments in marketable securities. Our guidance for the rest of 2023 includes our controlled commercialization execution approach as we align our R&D resources towards capabilities and feature enhancements that have the broadest customer appeal. Finally, I am reiterating that our non-GAAP operating expenses are expected to be flat compared to 2022, while still ensuring that we have all the resources and capabilities for our commercial execution plan and our existing cash, cash equivalents, and investment in marketable securities will provide runway into 2026. Now I'll turn the call back over to Jeff Hawkins for closing remarks.
spk15: Thank you, Jeff. Over the last quarter, we made great strides in the build-out of our commercial team and have received valuable feedback from customers as we continue our thoughtful and controlled commercialization of Platinum. We believe the outcome of our strategic review of R&D will better position us to deliver additional product improvements before the end of 2023, while also ensuring a pipeline of technology improvements that will support a steady cadence of releases throughout 2024. Going forward, we will continue to be laser focused on delivering the technology capabilities and applications customers want most while maintaining a high level of fiscal discipline over the use of our capital resources. Operator, please open the line for questions.
spk01: As a reminder, to ask a question, Please 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 the Q&A roster. The first question comes from Kyle Mixon with Canaccord. Your line is open.
spk11: Hey, good morning. Thanks, guys. So, Jeff, appreciate all the I guess commentary around like, you know, I guess what's been happening lately and why the revenue came in where it is and why you're kind of doing some of these initiatives now and what's going to be happening going forward, like the software and implementation and stuff and the sales cycle stuff. But I guess like obviously less revenue than last quarter. You put up a quarter million in revenue last quarter on almost a half a million dollars in orders. Maybe that makes some sense given there was likely a pendant demand early in the launch, but I guess, like, why weren't you able to convert those orders exiting 1Q into revenue or at least generate more revenue than the last quarter? Again, like half a million dollars in orders exiting the quarter is kind of interesting. And then maybe, Jeff, could you just share any comments on the orders, like the dollar number of orders in second quarter and the backlog exiting the quarter as well? Thanks.
spk15: Yeah, thanks, Kyle. I'll take the last part of the question first. So we exited the quarter, as Jeff Kai said, with two instruments, in the backlog that we would expect to convert in the third quarter. With respect to events during the quarter that impacted revenue, as I said in the prepared remarks, it had a lot to do with just some of the implementation challenges that we experienced with customers. And when we experience these things, we react sort of in real time, meaning we deploy our our applications team to help those customers validate a given sample type or validate a sample prep method they're using. And we don't want to sort of keep expanding the installed base and end up in a situation where we're unable to provide the level of support needed. So we had to sort of measure our activities on the commercial front to ensure we could really provide that high level of support on the implementation front.
spk11: Okay. I mean, I guess that's helpful. And again, it sounds like some of the changes that you're making are going to be done by the end of the second quarter. I mean, is it safe to say that in the second half, or I guess by the end of the year, a lot of these, I'll use the word issues, but they're just kind of like bumps and you know, growing pains, I guess that will happen along the way. Those will be worked out by the end of the year and will kind of, you know, at least enter the fourth quarter or 24 at like a solid run rate you'll be comfortable with.
spk15: Yeah, Kyle, I think that's a fair way to assess it. You know, we're learning a lot every day in the market. We're prioritizing the various improvements that customers want to see or the applications that they'd like us to open up or help them optimize. you know, we're deploying people in real time to these activities, as I mentioned in the prepared remarks. We'll go even further with that, with the sort of the finalization of the R&D strategic review. I mean, the goal is to, you know, have sort of being the smoothest implementation sort of scenario we can be in for 2024. But, you know, even saying that, we do expect that we'll continue to evolve and enhance the product, you know, for the foreseeable future. There's a lot of headroom technologically here to continue to expand the capabilities and enable our customers to do more and more, and we'll continue to invest in that.
spk11: Okay, thanks for that. And then, Jeff Hawkins, you talked about last quarter how there could be a potential inflection in orders and shipments and revenue in the second half of this year. I guess it sounds like that's not really expected anymore, but could you just provide some thoughts, and maybe Jeff Kyes as well, and welcome to the call. Maybe you could provide some thoughts on how to think about
spk15: know the i guess shipments and and um and revenue and utilization things like that in the second half of the year as we sort of think about modeling yeah so i'll start and uh jeff kies can add any uh color he'd like to add you know as i mentioned in the prepared remarks kyle you know we're going to keep the sort of the controlled launch in place through the end of the year um that doesn't mean that there might not be some uplift in in revenue in a given quarter, but we don't expect sort of a rapid acceleration in the second half, a much more sort of controlled launch in the second half with the growth. Jeff Kyes, anything you want to add to that?
spk12: No, I think that about sums it up. Jeff's comments are consistent with my thoughts as we work through this process. of the R&D realignment and deployment, we're going to continue to have this controlled RAM. But we would expect that we might see some uplift over the next couple quarters. But I think that's going to be dependent on our customer base and how we interact with them for the rest of the year.
spk11: Okay. All right. Thanks, guys, for that. And then on the strategic R&D realignment, it sounded like just carbon for now. I mean, maybe Jeff just can confirm that I feel like maybe there were probably some chips in development that were higher density, maybe like that's affected. And with carbon, like, was that critical to any orders? Like, were they contingent on carbon being launched? And perhaps it was like a guaranteed bundle. I'm just kind of curious about that. And then overall, um, again, not, not, I'm just not totally certain on this right now. What was the purpose of the strategy kind of underlying the review and kind of like, what's the end game here and how would you, what would you deem as a successful outcome for that?
spk15: Yeah, Kyle, let me, uh, Take a shot at those. If I miss one, let me know. First on the carbon front. So there were no deals in the pipeline that were contingent upon a carbon. We didn't have any sort of carbon bundles as you described it. Really, the assessment of carbon was about is a cartridge-based sort of solution which can be very elegant but has a lot higher sort of development sort of cost and timelines to adapt it to all these different sample types and sample prep methods, is that the best way to approach sample prep? Or is more of an open platform, one of the commercially available liquid handling platforms, might that be more flexible to this sort of range of sample types and methods we're seeing? So that's really what that evaluation is about. And that's the only program, as you mentioned, that we're stating right now is on hold. we're obviously though reviewing uh kyle the the totality of the r d investments and really looking at you know driving the investments that really unlock the full potential of the platinum device and the existing consumable um you know what we're seeing is there's a lot of growth potential for that existing platform and chip and it's really about enabling applications it's about enabling additional sequencing capabilities as we expand coverage and other things like that. So really, that's how we're looking at it. And the end game is ultimately that we have the right level of R&D investment into those core areas that will really drive the adoption and that we have that sort of process that allows us to generate a consistent sort of release of improvements throughout a given year. So that's really the end game in mind.
spk11: Yeah, and you touched on all the questions there. Can I just ask about manufacturing? I mean, you didn't really mention that at all, but is that a bottleneck whatsoever so far? Are you pretty much good to go on when it comes to the supply chain, things like that?
spk15: Yeah, no concerns on supply chain and manufacturing was not a bottleneck in any way to the results in the second quarter.
spk11: Okay, awesome. And then maybe just closing on like a positive comment, like it's good to hear the outbound marketing is kind of all systems go and it sounds like early success there or early kind of like progress. When you kind of crank that up, I mean, are you thinking about going after any new customer types? Maybe you're going to unlock or increase your footprint in non-academic markets like biotech, maybe just kind of expand your footprint there. I think that'd be kind of interesting to hear.
spk15: Yeah, Kyle, thanks for that question. You know, the way the commercial marketing team is approaching it is It's a mix. Sometimes you're diving in with a campaign to really look for a specific type of user with specific types of applications within the academic research environment. And other times the campaigns will be around unlocking new segments, you know, biotech, as you mentioned, perhaps, you know, more industrial settings for antibody QA, QC. So really the the outbound marketing programs are very, very targeted. So we'll run many of them across these different areas as we try to drive really that specific demand that lines up well to where we're seeing success in the market.
spk11: Okay, great. Look forward to seeing that. All right. Thanks, guys. Appreciate it. Thank you.
spk01: Please stand by for the next question. The next question comes from Yuan Ji with V-Rally, your line is open.
spk03: Good morning. Thank you for taking our questions. Jeff, a quick follow-up on Carol's question. You mentioned the challenge in the implementation front. Can you comment on if the test run request from customers or potential customers have changed since 1Q? And then I have a follow-up question.
spk15: Yeah. The requests haven't changed, Yuan. Really what it is is more you get into the customer's laboratory and they work through that full workflow from whatever the biological sample type is they selected on up through the sequencing on our platform and ultimately that analysis. And there's just a very broad range of samples and sample prep methods. I mean, ranging everywhere from someone who might isolate a protein in a gel and cut out a band to people using immunoprecipitation kits and other sort of chemistry. So it's not really that there's any difference in the request. It's just each customer has a somewhat unique set of samples and prep methods that we have to work closely with them to optimize in front of the sequencing on the platinum instruments.
spk03: Got it. Thanks for clarifying that technical challenge there. My other question is, can you maybe talk about the poster presentation you had at ASMS? What was the challenge identifying protein and the proteoform in that sample in that presentation?
spk15: Yeah, at the ASMS conference, you know, that was really a poster to not only demonstrate some of the capabilities of our technology, but really to help for that group of users who are also mass spec users, really help them understand how does our technology perform in comparison to mass spec, as well as share information around the workflow, the automated analysis that our platform affords a user. So it was really an educational and sort of comparative data study for those users in the mass spec community.
spk02: Got it. Thanks for taking our questions. Thank you.
spk01: Please stand by for the next question. The next question comes from Swayam Pakula Ramakant with HC Wainwright. Your line is open.
spk07: Thank you. Good morning, Jeff and Jeff. I appreciate you taking my questions. So, Jeff, The issues that some of your current customers have flagged during this initial launch, were they to a specific sample types or is it more universal?
spk15: Yeah, I wouldn't say it's a specific sample type as much as it is just this combination of sample type and the way they're preparing the sample. you know, how many proteins are they looking for at once? How pure is that sample versus, you know, how impure is that sample? It really wasn't about a specific sample type that was challenging.
spk06: Okay. Thanks for that.
spk07: And then in terms of the software upgrade that you released, if I heard it correctly, it was in July. So do you think that upgrade was able to handle the issues at hand and how have the customers responded to that upgrade to date?
spk15: Yeah, good question. So you are correct. We released that software version in July. And I would say the key attribute that customers were looking for were some additional visualizations at the amino acid level of the data they were generating with the technology. So the initial version showed know uh parados of peptides how peptides um are in in indicated in you know to a given protein and really what this new software did was really enhance the the the ui of that the ability to visualize it giving amino acid level uh data and information sort of in aggregate things that allowed our customers to really understand the data they were generating you know really at both the amino acid, the peptide, and the protein level. So again, we rolled that out in July. The feedback from users has been very positive. They're very happy with those changes and with sort of the overall improvement to the user interface. And as we get more feedback, we'll continue to make enhancements to that software. But I think the big sort of transformation of our software that needed to take place to enable our customers on the analysis side you know, is this change we made in July and it'll be, you know, somewhat more incremental moving forward. Okay.
spk07: And then just my last question, this is on the sales cycle lengthening that you stated. Is this more of a, because at this point, most of your customers are from academic labs. Is it more like, R. V. I can missions waiting for the fourth quarter to ensure that they use up all the research dollars associated with the grant or is this more more than that you know is this is this some really accounting and other people getting involved in.
spk15: R. V. yeah our K we're not hearing that there's a scenario where our instruments being held up because there's. R. V. Some pending grant that hasn't been approved, you know really what we're commenting on in the prepared remarks is. you know, given Grace and my and other members of the commercial team sort of experience, you know, with an instrument at $70,000, we would expect, you know, if that enters the procurement cycle at a customer, it's going to take some, you know, period of time to get through that process. And what we're seeing is we've gotten through the sales cycle with the customer, sort of the technical buyer that, you know, purchase order goes into the procurement process and that process is just moving a little bit slower. It's not moving through that process of internal approvals and more of the procurement and accounting or financial side as fast as we had been seeing. So again, no reason to believe at this stage that those instruments that are in that cycle won't ultimately be approved and will come through. It's just moving at a slower pace than sort of we saw in Q1 and sort of a slower pace than we would expect given our collective experience, you know, selling capital equipment in the life science space.
spk05: Okay.
spk15: Thank you.
spk05: Thank you for taking all the questions. You're welcome.
spk01: I show no further questions at this time. I would now like to turn the call back to Juan for closing remarks.
spk09: Thank you all for your participation today. We look forward to updating you on our progress in the next quarterly earnings call. Have a good day.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect. you Thank you. Thank you. Ladies and gentlemen, thank you for standing by. Welcome to the QuantumSci second quarter 2023 earnings call. At this time, all participants are in a listen-only mode. After the speaker's 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 automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Juan Avendano, Head of Investor Relations for QuantumSci. Juan, please go ahead.
spk09: Good morning, everyone. Thank you for joining us. Earlier today, QuantumSci released financial results for the second quarter ended June 30th, 2023. A copy of the press release is available on the company's website. Joining me today are Jeff Hawkins, Chief Executive Officer, and Jeff Kyes, 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 findings made with the Securities and Exchange Commission. This conference call contains time-sensitive information that is only accurate as of the live broadcast today, August 7, 2023. Except, as required by law, the company disclaims any intention or obligation to update or revise any forward-looking statements. During this call, we will also be referring to certain financial measures that are not prepared in accordance with U.S. generally accepted accounting principles or GAAP, including EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is included in the press release filed earlier today. With that, I will turn the call over to Jeff Hawkins.
spk15: Thank you, Juan. Good morning, everyone, and thank you for joining us. In today's call, we will provide a business update, present our second quarter financial performance, and provide an outlook for the remainder of 2023. We will then open the line for questions. As a reminder, the goal of 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. While we continue to make solid progress with our commercialization activities in the second quarter, we experienced some challenges that prevented us from meeting our revenue expectations. First, Early customer feedback identified a set of software features that were important for our customers to efficiently analyze and interpret their experimental data. Second, we experienced some customer implementation challenges due to the wide range of biological sample types, sample preparation methods, and sequencing applications customers wanted to perform with our technology. Finally, we observed some general extension to the sales cycle as the internal purchasing process at our customers has slowed down from what we experienced in the beginning of the year. I would now like to provide more color on each of these items, as well as share other updates on our progress during the quarter. Our first corporate priority is to commercialize platinum, carbon, and the 2M chip. Our commercial organization build-out is well underway. Under the leadership of our Chief Commercial Officer, Dr. Grace Johnson, we are building a truly world-class team across sales, marketing, and customer support. Despite experiencing some implementation challenges in the quarter, our commercial team collaborated closely with customers to resolve the challenges and ensure the customers felt valued, supported, and equally as important, excited about the potential of our technology to advance their future research. The customer feedback about the quality of our commercial team members and the support they have provided has been very positive. We are excited about the team that Grace is building, and we are confident that they will build positive and lasting relationships with leading researchers globally. Our sales funnel is also strong and is tracking well ahead of our expectations for 2023. QuantumSI's technology addresses gaps in currently marketed technologies, and it is clear customers are interested in exploring how platinum can positively impact their research. From a geographic standpoint, approximately 70% of the funnel is made up of U.S.-based customers and 30% from Europe. This change in geographic mix from prior quarters is the result of having more U.S.-based sales professionals. From a market segment perspective, academic customers continue to represent the largest opportunity in the funnel, with biotech customers being the second largest market segment today. As we have shared on previous earnings calls, we were actively building out our commercial marketing team. And with that team in place, we expected to launch outbound marketing efforts to drive greater awareness of our technology and grow our sales funnel. In the second quarter, we made key hires in our commercial marketing team and implemented our first outbound marketing campaign. The early market feedback from these campaigns has been positive and reinforces our belief that our technology fills a significant unmet need in the proteomics market as stated at the beginning of the call early customer feedback identified a set of software features that were important for customers to efficiently analyze and interpret their experimental data our product marketing team did an excellent job engaging with the customers to clearly define what enhancements were needed these requests were communicated to our software team who got straight to work on these enhancements and I am pleased to report the team delivered an upgraded version of software in early July. The new software version has been released to our customers, and the feedback to date has been very positive. Additionally, during the second quarter, we began to observe a general lengthening of our customers' capital purchasing process. We have instrument sales that entered the customers' capital purchasing process during the quarter that continue to move along at a moderated pace. We have no reason to believe that these capital purchases will not ultimately be approved, but we are being advised by our customers that they are experiencing this process slowdown in general. We continue to believe that in the current macro environment, having a low-cost instrument will be advantageous to customer adoption. Our second priority is to lead with innovation. During the second quarter, we experienced some customer implementation challenges. due to the wide range of biological sample types, sample preparation methods, and sequencing applications customers wanted to perform with our technology. As we dug deeper into each of these areas, we determined that our current R&D strategy and programs were not aligned optimally to our core capabilities and had gaps in terms of addressing the full scope and complexity of the proteomics workflow. As such, we have initiated a strategic review of current R&D programs and our R&D organizational design and capacity. We are near the completion of that process and expect to implement the necessary changes during the current quarter. While that process is not yet complete, I would like to share some of our thinking and initial actions taken thus far. Consistent with other proteomics detection technologies, customers select the biological sample type and sample preparation method they use. The range of sample types and sample prep methods utilized in proteomics is extensive, and often some level of optimization is required to make them compatible with the downstream detection technology. One solution we have been pursuing to address this area is CARBON, our automated sample prep instrument. While CARBON could help reduce sample prep variation and streamline the end-to-end workflow of our platform, It is not an absolute requirement for our platinum protein sequencing instrument and may not be the best solution long term. There are commercially available liquid-handling platforms and sample prep chemistry that may be an equal or better fit for customers and allow us to instead focus our internal resources on our core competencies in protein sequencing. To this end, we have put the beta testing and launch of carbon on hold while we complete an evaluation of the business case and assessment of potential options to address this portion of the testing workflow. Another consideration in our goal-forward product strategy will be to drive greater focus and investment in our core capabilities in protein sequencing. And therefore, we will look to leverage more industry partnerships and customer consortiums to address items like sample prep, workflow automation, or the development of specific sequencing applications. Finally, we are looking closely at our organizational design to ensure that we fully resource the most critical areas to our success, such as applications development. During the second quarter, we recognized the need for greater resourcing in applications development and redeployed some of our internal resources to this effort. The resulting outcome is that we were able to successfully deliver five new application notes demonstrating the capabilities of our protein sequencing technology. We believe that once complete, the realignment of our R&D efforts will position us to deliver additional product improvements before the end of 2023, while also ensuring a pipeline of technology improvements that will support a steady cadence of releases throughout 2024. Our third priority is to preserve financial strength. We remain committed to continuously improving our fiscal discipline. In this vein, one objective in the announced R&D strategic review is to prioritize the programs that have the broadest customer appeal while maintaining a base level of investment into a pipeline of longer-term projects that will drive significant improvements to our core technology in the future. We intend to continuously evaluate all of our investments across the to ensure that the capital we have been provided is utilized to maximize shareholder value and our financial runway. Finally, on the operations front, we are continuing to work through several initiatives to lower manufacturing costs, including in the areas of procurement, automation, and our insourcing versus outsourcing strategy. These initiatives have the clear goal to secure our supply chain and enhance our margin position as we continue to scale up. In closing, Launching a novel technology into a new market always involves some bumps in the road. Our focus remains on ensuring we execute a commercial strategy that prioritizes the early customer experience and seeks to strike a balance between long-term success and near-term revenue attainment. Given this philosophy, we expect to continue with a controlled rollout for the remainder of the year. We will continue to closely monitor customer feedback and implementation success metrics throughout this timeframe. That data will ultimately determine how the commercial team accelerates our new customer implementation efforts. I will now turn the call over to Jeff Kyes to review our financial results. Jeff?
spk12: Thank you, Jeff. First, I would like to say how excited I am to be on board with Quantum SI. We have an excellent leadership team and all of us are aligned and focused on commercial execution and delivering the best and most innovative solutions to our customers. I personally come from a background of leading a series of companies through rapid change and growth and where extreme financial discipline was paramount. I plan to draw upon these experiences to help lead Quantum SI through a continued financially disciplined approach that ensures we utilize our existing capital in the best way for rapid commercial growth while at the same time maximizing our capital runway. Now let's discuss the details of our Q2 2023 financial results. Revenue in the second quarter of 2023 was $205,000, which consisted of revenue from our platinum instrument and associated consumable kits. At the end of the second quarter, we had two units that were in backlog and revenue was deferred. We anticipate recognizing revenue on these units in Q3. Gross profit in the second quarter was 78,000 and gross margin was 38%. Our gross margin will be somewhat variable for the near future as we work through our initial stages of commercialization and also be impacted by the timing and mix of instruments versus consumable sales. GAAP operating expenses in the second quarter of 2023 was 27 million compared to $30.2 million in the second quarter of 2022. The decrease was primarily due to a $2.6 million lower research and development expense and $600,000 lower SG&A expenses. Included in those amounts is a decrease of stock-based compensation by $1.9 million with the remaining $1.3 million comprising a large decrease in general and administrative expenses offset by higher sales and marketing expenses as we ramp up our commercial operations team. Net loss for the second quarter of 2023 was $25.6 million compared to $32.4 million in the second quarter of 2022. Adjusted EBITDA for the second quarter of 2023 was a loss of $22.9 million compared to a loss of $25.8 million in the second quarter of 2022. A reconciliation table of adjusted EBITDA to gap net loss is provided in our press release filed earlier today. As of June 30, 2023, we had $297.2 million in cash and cash equivalents and investments in marketable securities. Our guidance for the rest of 2023 includes our controlled commercialization execution approach as we align our R&D resources towards capabilities and feature enhancements that have the broadest customer appeal. Finally, I am reiterating that our non-GAAP operating expenses are expected to be flat compared to 2022, while still ensuring that we have all the resources and capabilities for our commercial execution plan and our existing cash, cash equivalents, and investment in marketable securities will provide runway into 2026. Now I'll turn the call back over to Jeff Hawkins for closing remarks.
spk15: Thank you, Jeff. Over the last quarter, we made great strides in the build-out of our commercial team and have received valuable feedback from customers as we continue our thoughtful and controlled commercialization of Platinum. We believe the outcome of our strategic review of R&D will better position us to deliver additional product improvements before the end of 2023, while also ensuring a pipeline of technology improvements that will support a steady cadence of releases throughout 2024. Going forward, we will continue to be laser focused on delivering the technology capabilities and applications customers want most while maintaining a high level of fiscal discipline over the use of our capital resources. Operator, please open the line for questions.
spk01: As a reminder, to ask a question, please 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 the Q&A roster. The first question comes from Kyle Mixon with Canaccord. Your line is open.
spk11: Hey, good morning. Thanks, guys. So, Jeff, appreciate all the I guess commentary around like, you know, I guess what's been happening lately and why the revenue came in where it is and why you're kind of doing some of these initiatives now and what's going to be happening going forward, like the software and implementation and stuff and the sales cycle stuff. But I guess like obviously less revenue than last quarter. You put up a quarter million in revenue last quarter on almost a half a million dollars in orders. Maybe that makes some sense given there was likely a pandemic demand early in the launch, but I guess like why weren't you able to convert those orders exiting 1Q into revenue or at least generate more revenue than the last quarter? Again, like half a million dollars in orders exiting the quarter is kind of interesting. And then maybe, Jeff, could you just share any comments on the orders, like the dollar number of orders in second quarter and the backlog exiting the quarter as well? Thanks.
spk15: Yeah, thanks, Kyle. I'll take the last part of the question first. So we exited the quarter, as Jeff Kai said, with two instruments, in the backlog that we would expect to convert in the third quarter. With respect to sort of events during the quarter that impacted revenue, as I said in the prepared remarks, it had a lot to do with just some of the implementation challenges that we experienced with customers. And when we experience these things, we react sort of in real time, meaning we deploy our our applications team to help those customers validate a given sample type or validate a sample prep method they're using. And we don't want to sort of keep expanding the installed base and end up in a situation where we're unable to provide the level of support needed. So we had to sort of measure our activities on the commercial front to ensure we could really provide that high level of support on the implementation front.
spk11: Okay. I mean, I guess that's helpful. And again, it sounds like some of the changes that you're making are going to be done by the end of the second quarter. I mean, is it safe to say that in the second half, or I guess by the end of the year, a lot of these, I'll use the word issues, but they're just kind of like bumps and you know, growing pains, I guess that will happen along the way. Those will be worked out by the end of the year and you'll kind of, you know, at least enter the fourth quarter or 24 at like a solid run rate you'll be comfortable with.
spk15: Yeah, Kyle, I think that's a fair way to assess it. You know, we're learning a lot every day in the market. We're prioritizing the various improvements that customers want to see or the applications that they'd like us to open up or help them optimize. you know, we're deploying people in real time to these activities, as I mentioned in the prepared remarks. We'll go even further with that with the sort of the finalization of the R&D strategic review. I mean, the goal is to, you know, have sort of being the smoothest implementation sort of scenario we can be in for 2024. But, you know, even saying that, we do expect that we'll continue to evolve and enhance the product, you know, for the foreseeable future. There's a lot of headroom technologically here to continue to expand the capabilities and enable our customers to do more and more, and we'll continue to invest in that.
spk11: Okay, thanks for that. And then, Jeff Hawkins, you talked about last quarter how there could be a potential inflection in orders and shipments and revenue in the second half of this year. I guess it sounds like that's not really expected anymore, but could you just provide some thoughts, and maybe Jeff Kyes as well, and welcome to the call. Maybe you could provide some thoughts on how to think about
spk15: know the i guess shipments and and um and revenue and utilization things like that in the second half of the year as we sort of think about modeling yeah so i'll start and uh jeff kies can add any uh color he'd like to add you know as i mentioned in the prepared remarks kyle you know we're going to keep the sort of the controlled launch in place through the end of the year um that doesn't mean that there might not be some uplift in in revenue in a given quarter, but we don't expect sort of a rapid acceleration in the second half, a much more sort of controlled launch in the second half with the growth. Jeff Kyes, anything you want to add to that?
spk12: No, I think that about sums it up. Jeff's comments are consistent with my thoughts as we work through this process. of the R&D realignment and deployment, we're going to continue to have this controlled RAM. But we would expect that we might see some uplift over the next couple quarters. But I think that's going to be dependent on our customer base and how we interact with them for the rest of the year.
spk11: Okay. All right. Thanks, guys, for that. And then on the strategic R&D realignment, it sounded like just carbon for now. I mean, maybe Jeff just can confirm that I feel like maybe there were probably some chips in development that were higher density, maybe like that's affected. And with carbon, like, was that critical to any orders? Like, were they contingent on carbon being launched? And perhaps it was like a guaranteed bundle. I'm just kind of curious about that. And then overall, um, again, not, not, I'm just not totally certain on this right now. What was the purpose or the strategy kind of underlying the review? And I'm kind of like, what's the end game here and how would you, what would you deem as a successful outcome for that?
spk15: Yeah. Kyle, let me, uh, Take a shot at those. If I miss one, let me know first on the carbon front. So there are there were no deals in the in the pipeline that were contingent upon a carbon. We didn't have any sort of carbon bundles as you described it. Really, the assessment of carbon was about, you know, is a is a cartridge based sort of solution which can be very elegant but has a lot higher sort of development sort of cost and timelines to adapt it to all these different sample types and sample prep methods, is that the best way to approach sample prep? Or is more of an open platform, one of the commercially available liquid handling platforms, might that be more flexible to this sort of range of sample types and methods we're seeing? So that's really what that evaluation is about. And that's the only program, as you mentioned, that we're stating right now is on hold. we're obviously though reviewing uh kyle the the totality of the r d investments and really looking at you know driving the investments that really unlock the full potential of the platinum device and the existing consumable you know what we're seeing is there's a lot of growth potential for that existing platform and chip and it's really about enabling applications it's about enabling additional sequencing capabilities as we expand coverage and other things like that. So really, that's how we're looking at it. And the end game is ultimately that we have the right level of R&D investment into those core areas that will really drive the adoption and that we have that sort of process that allows us to generate a consistent sort of release of improvements you know, throughout a given year. So that's really the end game in mind.
spk11: Yeah, and you touched on all the questions there. Can I just ask about manufacturing? I mean, you didn't really mention that at all, but is that, you know, a bottleneck whatsoever so far? Are you pretty much good to go on, you know, when it comes to the supply chain, things like that?
spk15: Yeah, no concerns on supply chain and manufacturing was not a bottleneck in any way to the results in the second quarter.
spk11: Okay, awesome. And then maybe just closing on like a positive comment, like it's good to hear the outbound marketing is kind of all systems go and it sounds like early success there or early kind of like progress. When you kind of crank that up, I mean, are you thinking about going after any new customer types? Maybe you're going to unlock or increase your footprint in non-academic markets like biotech, maybe just kind of expand your footprint there. I think that'd be kind of interesting to hear.
spk15: Yeah, Kyle, thanks for that question. You know, the way the commercial marketing team is approaching it is It's a mix. Sometimes you're diving in with a campaign to really look for a specific type of user with specific types of applications within the academic research environment. And other times the campaigns will be around unlocking new segments, you know, biotech, as you mentioned, perhaps, you know, more industrial settings for antibody QA, QC. So really the the outbound marketing programs are very, very targeted. So we'll run many of them across these different areas as we try to drive really that specific demand that lines up well to where we're seeing success in the market.
spk11: Okay, great. Look forward to seeing that. All right. Thanks, guys. Appreciate it. Thank you.
spk01: Please stand by for the next question. The next question comes from Yuan Ji with B-Rally, your line is open.
spk03: Good morning. Thank you for taking our questions. Jeff, a quick follow-up on Carol's question. You mentioned the challenge in the implementation front. Can you comment on if the test run request from customers or potential customers have changed since 1Q? And then I have a follow-up question.
spk15: Yeah. The requests haven't changed, Yuan. Really what it is is more you get into the customer's laboratory and they work through that full workflow from whatever the biological sample type is they selected on up through the sequencing on our platform and ultimately that analysis. And there's just a very broad range of samples and sample prep methods. I mean, ranging everywhere from someone who might isolate a protein in a gel and cut out a band to people using immunoprecipitation kits and other sort of chemistry. So it's not really that there's any difference in the request. It's just each customer has a somewhat unique set of samples and prep methods that we have to work closely with them to optimize in front of the sequencing on the platinum instrument.
spk03: Got it. Thanks for clarifying that technical challenge there. My other question is, can you maybe talk about the poster presentation you had at ASMS? What was the challenge identifying protein and the proteoform in that sample in that presentation?
spk15: Yeah, at the ASMS conference, you know, that was really a poster to not only demonstrate some of the capabilities of our technology, but really to help for that group of users who are also mass spec users, really help them understand how does our technology perform in comparison to mass spec, as well as share information around the workflow, the automated analysis that our platform affords a user. So it was really an educational and sort of comparative data study for those users in the mass spec community.
spk02: Got it. Thanks for taking our questions. Thank you.
spk01: Please stand by for the next question. The next question comes from Swayam Pakula Ramakant with HC Wainwright. Your line is open.
spk07: Thank you. Good morning, Jeff and Jeff. I appreciate you taking my questions. So, Jeff, The issues that some of your current customers have flagged during this initial launch, were they to a specific sample types or is it more universal?
spk15: Yeah, I wouldn't say it's a specific sample type as much as it is just this combination of sample type and the way they're preparing the sample, you know, how you know, how many proteins are they looking for at once? How pure is that sample versus, you know, how impure is that sample? It really wasn't about a specific sample type that was challenging.
spk06: Okay, thanks for that.
spk07: And then in terms of the software upgrade that you released, if I heard it correctly, it was in July. So do you think that upgrade was able to handle the issues at hand and how have the customers responded to that upgrade to date?
spk15: Yeah, good question. So you are correct. We released that software version in July. And I would say the key attribute that customers were looking for were some additional visualizations at the amino acid level of the data they were generating with the technology. So the initial version showed you know, Pareto's of peptides, how peptides are indicated in, you know, to a given protein. And really what this new software did was really enhance the UI of that, the ability to visualize it, giving amino acid level data and information, sort of in aggregate things that allowed our customers to really understand the data they were generating, you know, really at both the amino acid, the peptide, and the protein level. So again, we rolled that out in July. The feedback from users has been very positive. They're very happy with those changes and with sort of the overall improvement to the user interface. And as we get more feedback, we'll continue to make enhancements to that software. But I think the big sort of transformation of our software that needed to take place to enable our customers on the analysis side
spk07: know is this change we made in july and it'll be you know somewhat more incremental moving forward okay and then just my last question this is on the sales cycle lengthening that you stated um is this more of uh because at this point um most of your customers are from academic labs is it more um Akademiations waiting for the fourth quarter to ensure that they use up all the research dollars associated with the grant? Or is this more than that? You know, is this some really accounting and other people getting involved in it?
spk15: Yeah, RK, we're not hearing that there's a scenario where our instrument's being held up because there's some pending grant that hasn't been approved. You know, really what we're commenting on in the prepared remarks is you know, given Grace and my and other members of the commercial team sort of experience, you know, with an instrument at $70,000, we would expect, you know, if that enters the procurement cycle at a customer, it's going to take some, you know, period of time to get through that process. And what we're seeing is we've gotten through the sales cycle with the customer, sort of the technical buyer that, you know, purchase order goes into the procurement process and that process is just moving a little bit slower. It's not moving through that process of internal approvals and more of the procurement and accounting or financial side as fast as we had been seeing. So again, no reason to believe at this stage that those instruments that are in that cycle won't ultimately be approved and will come through. It's just moving at a slower pace than sort of we saw in Q1 in sort of a slower pace than we would expect given our collective experience, you know, selling capital equipment in the life science space.
spk05: Okay.
spk15: Thank you. Thank you for taking all the questions.
spk05: You're welcome.
spk01: I show no further questions at this time. I would now like to turn the call back to Juan for closing remarks.
spk09: Thank you all for your participation today. We look forward to updating you on our progress in the next quarterly earnings call. Have a good day.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
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