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spk05: Good day and thank you for standing by. Welcome to the Quantum SIQ3 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 during the session, you will need to press TAR 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Katherine Atkinson. Please go ahead.
spk04: Good afternoon, everyone. Thank you for joining us. Earlier today, Quantum SI released financial results for the third quarter and is September 30th, 2023. A copy of the press release is available on the company's website. Joining me today are Jeff Hawkins, President and Chief Executive Officer, and Jeff Kyes, Chief Financial Officer. Before we begin, I would like to remind you that management will be making certain forward-looking statements within the meaning of federal securities law. 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, November 9, 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 the U.S. generally accepted accounting principles or GAAP. 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.
spk03: Thank you, Kathryn. Good afternoon, everyone, and thank you for joining us. In today's call, we will provide a business update present our third quarter financial performance, and provide an outlook for the remainder of 2023. We will then open the line for questions. As you are aware, 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. Before sharing updates on our progress during the quarter, I wanted to take an opportunity to look back on the significant progress that we have made as a company during my first year as CEO. First, we have enhanced the leadership team with the addition of proven industry leaders across key roles, including our Chief Financial Officer, Chief Commercial Officer, Senior Vice President of Operations, and Senior Vice President of Product Development. Second, we commercially launched Platinum, the world's first next-generation protein sequencing platform. Third, we have augmented our board of directors through the addition of three new independent directors, all with CEO or CFO experience from across life sciences, medical devices, diagnostics, and biotech. In addition, we established an independent chair of our nominating and governance committee as we strive to continually improve our board governance and performance. Fourth, we have completely retooled our reagent and consumable manufacturing model from one that was largely outsourced to one that is majority insourced. This has provided us with greater control over quality and cost and should result in improved gross margins as we achieve scale. Finally, we have completed a reorganization of our R&D team and focused our R&D projects on the capabilities and applications customers want most. We have shifted a greater percentage of our investments into near to midterm opportunities while retaining a focused investment into a compelling set of next generation technologies. Overall, the progress over the past 12 months has fundamentally improved all aspects of our business, putting us on a strong foundation for growth in 2024 and beyond. I would now like to provide an update on our progress during the quarter. Our first corporate priority is to commercialize Platinum and the 2M chip. Our sales funnel continues to grow and remains well ahead of our expectations for 2023. QuantumSI's technology addresses gaps in currently marketed technologies and it is clear customers are interested in using Platinum in their research. From a geographic standpoint, we continue to see interest across both the United States and Europe. During the quarter, we participated in the Hoopoe World Congress in Busan, South Korea. This event gave us our first opportunity to meet with potential customers and distributors in the Asia Pacific region. The team came back from this event energized about the opportunity to launch Platinum in the Asia Pacific region in 2024. In October, the first customer data using platinum was presented during a webinar. Dr. Tolman Ercik from Northwestern University leads a lab that focuses on protein engineering spanning both therapeutic and industrial applications. During the webinar, she discussed some of the methods they use for characterizing engineered proteins in her lab, and she presented data generated on platinum that was used for studying secreted protein variants. She also talked about how they plan to use platinum for other protein engineering applications, such as barcoding and selecting for genotype phenotype linkage in proteins. Beyond the specific applications of interest, the webinar also included discussion of the overall time savings of the platinum workflow that the lab has experienced. As we look out across the remainder of 2023, we expect the first customer generated manuscript will also be submitted for publication. We are excited about the momentum we are building in the market and believe it will position us well as we move from our current controlled commercial launch to full commercial launch in early 2024. Our second priority is to lead with innovation. During the quarter, we completed the strategic review of our research and development programs and our organizational design and capacity that we had discussed on our last call. I would like to share some key outcomes from this process. First, We reorganize the team to drive greater focus in product development. Post the organizational changes, we now have more than 60% of our team deployed against near to midterm opportunities. We believe this change will allow us to more rapidly deliver the technology capabilities and applications customers want most. As part of the reorganization, we are accelerating our efforts in biochemistry to further build upon our industry-leading next generation protein sequencing technology capabilities. We are already seeing positive early signs from this renewed focus and are confident that it will yield strong results in 2024 and beyond. Finally, we have retained a focused set of investments in next generation technologies to ensure we remain on the path to being the first company to deliver de novo sequencing in the future. Another goal of the R&D Strategic Review was to evaluate all of our projects and define a more focused and prioritized set of initiatives. As part of that process and consistent with our prior earnings call, we completed a review of the carbon program. After a comprehensive review of the carbon program, we have determined that we will not move forward with commercialization of the carbon instrument at this time. It was clear from our discussions with customers that carbon was not required for successful implementation of platform and that there were higher impact R&D programs we could work on to advance our customers' research. To that end, during the strategic review process, we identified several product improvements across our library prep kit, sequencing reagents, and chips that could improve the sequencing output per sample, coverage, and overall robustness of the full workflow from library prep to sequencing results. I am pleased to share that these improvements will be included in a version two of our kits, which we expect to launch in the first quarter of 2024. We expect that these improvements will also provide greater compatibility between our next generation protein sequencing technology and the range of sample prep methods, sample types, and even specific proteins our customers are interested in studying. Overall, we believe that the version two kit combined with the work we are doing around sample prep compatibility puts us on a strong path towards full commercial launch in early 2024. Given this, we have initiated a set of commercial activities to ensure we are well prepared for that event. While we are still in the early days of operating in this new structure and against the more focused set of R&D projects, I am optimistic that we are well positioned to deliver a steady cadence of new technology capabilities and applications throughout 2024. Our third priority is to preserve financial strength. As we have stated on previous calls, we remain committed to continuously improving our fiscal discipline. We are committed to ensuring that the capital we have been provided is utilized to maximize shareholder value and our financial runway. Given our efforts to date and our commitment to continuous improvement, we remain confident that our current capital can support operations into 2026. I will now turn the call over to Jeff Kyes to review our financial results. Jeff?
spk02: Thank you, Jeff. Now let's discuss the details of our third quarter 2023 financial results. Revenue in the third quarter of 2023 was $223,000, which consisted of revenue from our platinum instrument and associated consumable kits. Gross profit was $108,000, and a gross margin was 48%. As I've stated before, our gross margin percentage will be somewhat variable for the near future as we work through our initial stages of commercialization and will also be impacted by the timing and mix of instruments versus consumable sales. GAAP's total operating expenses in the third quarter of 2023 were $27.3 million compared to $27.7 million in the third quarter of 2022. Included within operating expenses are stock-based compensation and restructuring charges. Removing these items, we arrive at an adjusted operating expenses, which were $23.9 million for the third quarter of 2023 compared to $23.6 million for the third quarter of 2022, reflecting an approximate $300,000 increase. What's important here is the details of the change. As a company, we have been able to maintain a minimal increase to our adjusted total operating expenses year over year for the quarter, while at the same time, we have ramped up our commercial operations team significantly. We have been able to do this based on our recent R&D realignment efforts, as well as our disciplined efforts to utilize our capital in the most effective ways as possible. This is further displayed with our year over year adjusted total operating expenses. For the year-to-date period September 2023, adjusted total operating expenses is $72.6 million compared to $77.9 million for the same period in 2022, a $5.3 million decrease. Though we are not committing to a particular operating expense spend level at this time, we are very aggressively looking at our spend to ensure maximum utilization of our capital to enhance and speed our R&D results while ensuring that we had the resources to maximize our market penetration with our commercial team. Net loss for the third quarter of 2023 was $24.7 million compared to $31.7 million in the third quarter of 2022. An adjusted EBITDA for the third quarter of 2023 was negative $22.6 million compared to negative $22.9 million in the third quarter of 2022. As of September 30th, 2023, we had $274.6 million of cash, cash equivalents, and investments in marketable securities. As we discussed today and previously, our guidance for the rest of 2023 includes our controlled commercial launch approach while continuing to put in place significant building blocks from a commercial capability standpoint for execution for an anticipated full commercial launch in early 2024. Based on our R&D realignment progress and other initiatives, we expect our adjusted total operating expenses to be $100 million for 2023 compared to $103.2 million in 2022. We are still very confident that our existing cash, cash equivalents, and investments in marketable securities will provide runway into 2026. Now I will turn the call back over to Jeff Hawkins for closing remarks.
spk03: Thank you, Jeff. We have made significant progress during the last quarter, led by the completion of our R&D strategic review. We are excited about the level of clarity and focus we achieved through this process, including the roadmap to deliver near and midterm product improvements, including our anticipated version two of our kits on track for launch in the first quarter of 2024. We are looking forward to providing additional updates on the version two kits during our next call. In the meantime, we are continuing to build our infrastructure to support our full commercial launch while adhering to our disciplined approach to capital deployment. Operator, please open the line for questions.
spk05: In order to ask a question, please press TAR11 on your telephone and wait for your name to be announced. To withdraw your question, please press TAR11 again. Please stand by while we'll compile the Q&A roster. And your first question comes from the line of Kyle Mixon with Canaccord Genuity. Your line is now open.
spk01: Hey, guys. Thanks for taking the questions. Jeff, I know you guys have this controlled launch ongoing, and we shouldn't expect a huge uptick or bolus in placement anytime soon, I guess. And that makes sense, relatively appropriate given the early stage of this launch. But it seems to get a couple of placements again this quarter. How should we think about the placement and the shipment trajectory kind of going forward? Is this controlled launch really going to be kind of a couple placements each quarter, or how should we sort of think about it in the near-term release and maybe going into 24?
spk03: Yeah, thanks for that question, Kyle. So I would say two things about it. I think we're in that controlled launch through the end of this year. As part of our preparation for a full launch early next year, we are initiating some commercial activities, you know, both in terms of some hiring and potentially distribution related partners. So you may see a little uptick in the fourth quarter over what we've done the last couple of quarters, but not a sort of a significant rise. You know, really then the focus becomes the V2 kit launch in the first quarter. And we really believe that's the catalyst, you know, that kit in the hands of customers and seeing that increased performance become sort of the catalyst to be able to move to a full launch and start to see, you know, a scale up sort of quarter over quarter after that.
spk01: Okay. All right. That was great. And then I guess, you know, most of the revenue right now is coming from instruments. There's probably some service revenue. That's, you know, relatively lower margin than consumables. And this new kit sounds like that'll help drive utilization next year and thereafter. But, you know, 45% and kind of like the high 40s, I think, is what gross margin has been at thus far. You know, obviously pretty good for if your revenue base is instrumented in service. So as you sort of roll out, you know, these improved kits, then you have utilization picking up with the expanding install base. Could we see gross margin get above 50% next year at some point?
spk03: Yeah, maybe I'll start and then I'll turn it over to Jeff for a few comments. The one thing I wanted to input here, Kyle, was you know, as we've talked about on other calls, we did do a tremendous amount of, you know, value engineering when we built our machine. So, you know, while we are selling an instrument and selling capital and there's sort of perceived margins of selling that, we, you know, we're We're generating an attractive gross margin with our platform, even at a very low scale. And consumable is obviously at a much earlier stage, but maybe Jeff wants to comment a little bit on how we are thinking about that blend and sort of how it might change over the course of next year.
spk02: Yeah, I'll just add on saying that as we scale, we're going to have more opportunities to bring more and more of the kit manufacturing in-house. and have the ability to improve margins on that. Obviously, we need that scale to be able to achieve that improvement, but it's absolutely on our radar as we ramp up over the course of 2024 and beyond.
spk01: Okay, that was great. That was great, guys. And Jeff Hawkins, is there anything you could kind of share with respect to the, almost like the backlog, you know, of customers and kind of like the leads that you've generated thus far? And, you know, things like types of customers, the end markets. I know we talked about biotech before, and maybe even like regions, because there's a lot to think about when you think about the, you know, backlog and kind of pipeline. So it'd be good to hear like what to kind of, you know, be excited for going forward.
spk03: Sure. Yeah. The first thing I'd say, Kyle, is that the funnel tends to be sort of consistent with what we said in the second quarter. You know, it's heaviest in the U.S. where we have, you know, our direct presence. still have a strong amount, sort of similar levels to Q2 in terms of funnel in Europe. By coming out of the HUPO World Congress, as we mentioned in our prepared remarks, starting to get some of our first leads into the funnel for the Asia-Pacific region. So I think as we get more visibility into those other markets and interface with both customers and distributors, we'll start to pick up in that regard. In terms of The split, the academic market remains, you know, the biggest portion of our funnel. But, you know, as we said earlier in the year, we expected that academic customers would represent those first customers in the majority of the funnel. And then we would work. And over time, we'd see it start to build in the pharma biotech and even government and industrial space. And I think that's what's transpiring. So the funnel continues to be overweighted to academic, but we are seeing growth. more traction and we're getting sort of further into the the funnel and the process with some of the pharma biotechs and and government sort of accounts so you know excited to see those types of customers progressing you know obviously those types of customers can um you know be very helpful in terms of you know your pull through um and such so you know excited about that trend as we look out to 2024. okay and then is anyone in the um in the current installed base
spk01: like a non-beta user? Because I figure like most of these, you know, handful of placements out there in the field are probably with those initial, you know, early access program users. And then with the funnel, I mean, that could be many potential placements over time. How many like new to QSI or new to, you know, proteomics possibly customers does that represent?
spk03: So our current installed base is almost all are new to QSI. They were not necessarily part of the early access program. So the vast majority of those placements we've made throughout the year, Kyle, are net new to us in terms of, you know, not having been a part of the early access program.
spk01: Yeah, okay. That's great. That's great. Let me just ask another one, a last one before I wrap off. on the pipeline and possibly the kits and everything. So you talked about how carbon is going to be, I guess, discontinued. You're not going to be commercializing that anymore. And your explanation makes sense. I know it was touched on last quarter as well, and it sounds like that was kind of in the cards, I guess, so it's not super surprising. As you look forward, though, I mean, what type of hardware updates or improvements do you sort of envision for quantum SI? Like, could there be a new box anytime soon? Is that necessary maybe to get, you know, I feel like in proteomics there are some of these attributes and features that have to be kind of pretty robust, and that does require a legitimate hardware type upgrade rather than just reagents, but that's one side of the question. The other is the version 2 kits. I know we'll hear more about those. Is that mainly around, like, increasing density of
spk03: the of the chips or um or is this completely new just you know chemistry based or something like that sure yeah let's uh take the two questions so in terms of hardware um versus kits i i would say that there's the existing platinum instrument and the existing 2m chip have you know a lot of headroom in terms of their capabilities and and performance the majority of you know what we need to do right now to unlock that is around a combination of the library prep, the sequencing reagent kit, and even somewhat the surface chemistry of the chip that can influence things like loading. So a lot of the focus is there. We certainly are working through our plans as it relates to what new types of hardware we might want to introduce over the coming years. We haven't really set a firm date on what the next platform would be, but we do see opportunities to continue to sort of grow the hardware portfolio to address other attributes that Platinum doesn't necessarily address today. In terms of the version 2 kit, Kyle, the way I would think about it is we are We are touching upon improvements sort of across the set of kits that we sell to a customer. Everything from enhancements to the library prep kit and protocol, enhancements to the sequencing reagents, including the addition of a new recognizer for glutamic acid or E. And just for your reference, that's the third most abundant amino acid in the proteome. And then just overall increasing through some improvements to surface chemistry, sort of the amount of reads, the amount of output we're getting per run on the current chip. So, you know, we expect to have more quantitative data to share, you know, when we get to the launch in the first quarter of next year. But, you know, early data here internally in development, you know, really market improvement over, the current version of the chemistry and also, you know, seeing a lot lower sort of sample input requirement with the new library prep sort of kit and protocol, which should help us really with that compatibility with the various sample prep kits and sample types. So we think that might, you know, improve some of those interfaces with what the customer is trying to do up front of our kits.
spk01: Okay. Yeah, sounds like a pretty solid and comprehensive update. I look forward to that. All right, thanks, guys. Appreciate the time.
spk03: Yep, thank you, Kyle.
spk05: One moment for the next question. And your next question comes from the line of Swayam Pakula Ramakant with HCW. Your line is now open.
spk00: Thank you. Good afternoon, Jeff and Jeff. Good afternoon. So... You know, you are planning to initiate the full launch early next year and at the same time also launch a second version of the kit. I'm just trying to understand, you know, is there any reason for us to think one would happen before the other? Are they going to happen together? And, you know, are they dependent on each other in terms of deployment? Just trying to understand, you know, what is the sequence of events that we should be looking out for?
spk03: Yeah, RK, I would say that the working plan is that we would launch the V2 kit, and then at some period of time, shortly after that, we would move to the full launch. I would not expect us to move to full launch in advance of the V2 kit. We would sort of stay in the controlled launch we're in right now. So that's the way I would think about it, is V2 kit, and then somewhere between right after that to just shortly after that, we would move to the full launch.
spk00: Okay. And Mark? I guess you'll discuss the V2 later, but in general terms, is this going to be anything significantly different or in the sense that you need additional tweaking to the machine as it is now? Or do you don't think there is something majorly different in the kit itself?
spk03: Yes, so the machine is not impacted by this at all. The version two kits will be compatible with the existing platinum instrument that customers have. This is really improvements to a mix of either the library prep or sequencing reagents or an improvement we've made to the chip. We're not fundamentally changing the underlying 2M chip or the hardware itself. It's really, this will be very seamless improvements customers they'll receive the library prep and sequencing kits and run them with the same instrument in the same software they've been using be a fairly seamless change for them no no sort of specific upgrades they need to go through okay and then you know in terms of the data presentations or data publications that are that you're expecting this year and early next year you know
spk00: what sort of data should we be expecting from it? And then would that data pretty much portray what the current version of the instrument can deliver? Or is this going to be something a little bit more than that in the sense so people like us can kind of think about, okay, what the next version of the instrument itself could be and what better capabilities can can be delivered?
spk03: Sure. So we talked about in the script the webinar and the presentation from Northwestern. That really represents the performance that customers are generating today with the existing instrument and the existing version of the chemistry. The publication that we discussed that we expect to be submitted before the end of the year, really showing some of the capabilities of the technology in the world of post-translational modifications, but again, using the existing kit and instrument. As we get into next year, I'd expect in the beginning of the year that any data that comes out would be, you know, generated with the kits that are in the market right now. And, you know, as the year progresses, more and more of that data coming out with the version two kits. So there's always some lag between a version of chemistry and data. that gets generated with that. But that's sort of how I would think about the near-term versus mid-term and throughout 24.
spk00: Okay, perfect. Yeah, so basically those publications can certainly be used in marketing the products that are in the market right now.
spk03: Yeah, they can be used for that. We will obviously share internal data as part of our launch of the version 2 kit to sort of prime the pump, but then turning immediately to working with some of these existing customers that have been part of the controlled launch to quickly implement the V2 in their laboratories and generate some data with that. So get a little bit more of a running start when you have an existing install base, when you bring in an upgraded chemistry like we're going to do. Okay.
spk00: And then you were talking about the X-US launch. With the way the launch is going here in the U.S. on a limited control basis, is the X-US launch going to be more – like a typical launch, or is that because it's going to be through a distributorship that it should be viewed a little bit different than what is happening here in the United States?
spk03: It's a good question, RK. So the way I think about it is, you know, again, the version 2 kit we think is really a key aspect of giving us the type of consistency of performance and capabilities that that make the implementation and adoption a sort of cycle with the customer as efficient as possible. That said, when we look at Europe, while we expect to have a small number of employees on the ground there to help support our activities, we do expect to use distributors in many markets. We haven't decided exactly which markets. We may go direct in select markets, but I would expect us to use a reasonable number of countries being covered by distributors. I think our experience in markets like Europe would say that in the beginning there'll be of that early market development, right? Instrument being placed with a KOL, data being generated, being presented at a major conference in the region, or coming that sort of reference account, and then you'll see sort of the sales pick up. So I don't expect the European launch to necessarily be in a defined sort of controlled launch. I would expect it to be more of a traditional launch, but with that initial market development that exist when you place an instrument, you know, either directly or with a distributor in a new region of the world.
spk00: Okay, perfect. Thank you. Thank you for taking all my questions.
spk03: You're welcome.
spk05: And that is all the time we have for questions. I will now turn the call back over to Jeff Hawkins for the closing remarks.
spk03: Thank you everyone for attending today. We look forward to providing you with more updates on our next call. Have a good evening.
spk05: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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