Quotient Limited

Greetings and welcome to Quotient Limited third quarter fiscal year 2022 financial results conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. And I'd like to turn the conference over to your host, Mr. Ali Kiboro, Chief Financial Officer of Quotient Limited. Thank you, and over to you, sir.

Thank you, Vikram. Good morning, everybody, and welcome to Quotient's third quarter fiscal year 2022 financial results, as well as a business update. Joining me today is Manuel O. Mendez, our Chief Executive Officer. Today's conference call is being broadcast live through an audio webcast, and a replay of the conference call will be available later today at www.quotientbd.com. During this call, Quotient will be making forward-looking statements, including guidance and projections as to future operating results and expected development and commercialization timelines. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in Quotient's filings with the U.S. Securities and Exchange Commission as well as in this morning's release. The forward-looking statements, including guidance and projections provided during this call, are valid only as of today's date, and Quotient assumes no obligation to publicly update these forward-looking statements. With that, I would like to turn the call over to Quotient's Chief Executive Officer, Manuel O. Mendez.

Thanks, Ali, and good morning, everyone. Thank you for joining us today for our third quarter of fiscal 2022 results and business update. I would like to thank the entire Quotient team for the dedicated support and resilience this quarter, despite disruption created by the COVID Omicron surge. Today, we'll be updating you on three pillars, the Mosaic solution, ABBA by quotient, and quotient's financial position. The first pillar is our mosaic solution. We'll begin with highlights on our transfusion pipeline. We are very pleased to share the notified body completed the assessment of the technical dossier and advise it will recommend the mosaic expanded immunohematology microarray for CE marking approval. We are excited to offer the mosaic solution and the expanded immunohematology microarray to our customers once we receive the CE marking expected in first quarter calendar 2022. Shifting beyond development, our focus has also been on Mosaic commercial execution. As previously communicated, a diversified global presence is key to our go-to-market strategy. We continue to make progress on both our commercial growth initiatives, tenders, and distribution strategies. We have identified more than 20 immunohematology tenders in the EU, which are expected to become available over the next 18 to 24 months. Also, we are active in preparing for tenders in the rest of the world where CE marking approvals are accepted. Additionally, we're actively discussing commercial distribution offers with potential partners to build a commercial network across the EU, Middle East, and Africa for the Mosaic solution. In order to support these commercial efforts, last month we attended for the first time the Arab Health and Med Lab Middle East Conference. There we met with potential commercial partners from the Middle East, the EU, Asia Pacific, who expressed an interest in partnering with Quotient. As a result of the team's efforts, we're engaged in commercial negotiation process with more than 10 distribution partners. In parallel to our commercial activities, our manufacturing and operations team continues to make progress to drive scale-up to fulfill anticipated customer demand. This will be led by our new Chief Manufacturing Operations Officer, Esteban Uriarte, who joined us earlier this month based in Essam, Switzerland. We all look forward to working closely with him on the advancement of our strategic initiatives to better serve our customers. Last quarter, we placed orders for additional Mosaic instruments for the second half of 2022. We currently have enough instruments to fulfill the initial expected customer demand. At the last earnings call, we communicated our scientific and medical affairs priorities, which includes the Innovator Circle, Scientific Advisory Board, and research program initiatives led by Dr. Christine Ginocchio, our Chief Scientific and Medical Officer. The Innovator Circle is designed to be a global community of experts invited to participate in an open discussion to demonstrate the operational value of the Mosaic solution to help strengthen scientific and medical evidence. We are pleased to announce that we have exceeded the number of targeted Innovator Circle participants communicated last quarter. Previously, we were targeting four to five institutions, and we are now in communications with seven institutions currently in the contracting phase. One of those institutions, the Blood Assurance signed a partnership contract with us this month to advance the Innovator Circle initiatives. We are very excited about this collaboration, as Blood Assurance is a full-service regional blood center based in Tennessee, serving healthcare facilities in five states in the southeastern portion of the U.S. I'd like to conclude our update on the Mosaic solution and the value we can provide with an update on our clinical diagnostics program. We plan to leverage the know-how acquired through our mosaic instrument and microarray development to address the needs of clinical diagnostic customers. We have expanded our clinical R&D team to gain access to the clinical diagnostics market with particular focus on the estimated 4 billion allergy and autoimmune addressable market. We are exploring third-party collaborations in this field to develop the first wave of panels. In allergy, we intend to initially focus on the identification of inhalant herbal allergy panel. In autoimmune, we intend to initially focus on differential diagnosis of connective tissue diseases panel. Now, I'd like to connect and update you on the second pillar, Alba by Quotient. The company submitted the first IBDI filing this quarter for Alba by Quotient reagents. In addition, new distributor partners for Mosaic are expected to also sell ALBA by quotient portfolio, thereby expanding ALBA's geographical footprint. Lastly, the third pillar I would like to update you is on quotient's financial position. Last quarter, we achieved $10.2 million in revenue and 16% growth over prior years. This increase is mainly related to larger-than-anticipated shipments of products in our OEM portfolios. Our cash and cash short-term investments as of December 31st, 2021 was 103.8 million, which enables us to continue to support the Mosaic pipeline development and commercialization efforts.

And now I will hand it over to Ali to provide our financial update. Ali.

Thank you, Manuel. FISHO third quarter product sales were $10.2 million, an increase of 16% from last year's third quarter. ALBA by quotient sales increased by 21% year over year, while Mosaic COVID-19 antibody tests decreased by 96% versus the prior year. Within the ALBA by quotient business, OEM sales of $7.2 million represented 71% of all product sales. Year over year, OEM sales increased by 1.6 million or 30% versus prior year. Direct and distributor sales of 2.9 million increased 5% year over year and represented 29% of product sales. In the third quarter, gross margins on product sales was 22% compared to the gross margin of 43% reported in the third quarter of the prior year. Excluding the impact of a 2.5 million impairment of Mosaic inventory, Gross margins would have improved to 47% versus 43% in the prior year. Year-to-date, total product sales of 28.5 million increased by 9% versus prior year, with ALBA by quotient sales increasing by 13%. Gross margin on product sales year-to-date is 10.9 million, or 38%, compared to 11.3 million, or 43%, for the prior year-to-date comparison. The difference is mainly due to the write-down of inventory in the third quarter. Excluding the write-down, gross margins would have increased by $2.5 million to 47%. In the third quarter, we recorded an operating loss of $31.3 million compared to $21.6 million last year. The difference is driven by higher cost of revenue due to the inventory write-down, as well as higher operating expenses. Operating expenses were $33.5 million in the third quarter of fiscal year 2022, an increase of $8.1 million over the prior year. Research and development expenses were $13.3 million, a $1.1 million decrease year over year. General and administrative expenses were $17.4 million, an increase of $8.6 million compared to the prior year. The increase in total G&A costs is mainly driven by $3.8 million of banking and legal fees associated with the amendment to the company's senior notes indenture and a $4.2 million of stock-based compensation and transition costs associated with the executive management team. Included in G&A is stock-based compensation expense of $2.3 million, which increased by $1.1 million versus the prior year. Sales and marketing expenses of $2.9 million increased $595,000 from the prior year's third quarter, reflecting the preparation of the commercial launch of the company's extended immunohematology IH menu for donor labs. Net other expense was $13.1 million compared to $8.8 million in the third quarter of last year, and net other expenses consisted of interest expense of $9.6 million and a $3.3 million loss related to the change in fair value associated with the derivative liabilities and a $0.2 million loss in foreign exchange losses arising on monetary assets and liabilities denominated in foreign currencies. This compares to interest expense of $9.4 million and a foreign exchange gain of $0.6 million in last year's third quarter. Our net loss for the quarter was $44.8 million or $0.44 per ordinary share, compared with $31.7 million or $0.31 per ordinary share in the prior year's third quarter. Year to date, net losses reached $99.2 million or $0.98 per share compared to $71.7 million or $0.81 per share one year ago. Net cash used in operating activities totaled $96.2 million in the first nine months of fiscal 2022 compared with $56.7 million in the prior year's first nine months. The increase of cash used in operations is driven by a number of factors, mainly the increased level of R&D spend, gna expenses and movement and working capital in addition last year's cash flow was positively positively impacted by the ortho upfront payment of seven and a half million dollars capital expenditure in the third quarter of fiscal 2022 was 0.6 million compared with 1.5 million in the prior year in the first nine months capital expenditures totaled 2.3 million dollars primarily relate to the purchase of manufacturing equipment and information technology. Moving to the balance sheet, available cash and short-term investments at 31st December 2021 was $103.8 million compared to $111.7 million at the start of fiscal year 2022. In addition, we held $8.3 million restricted cash reserves related to our senior secured loan and rent deposit for our Swiss facility. Our short-term investments include investments in two Credit Suisse supply chain finance funds. As previously discussed, Credit Suisse suspended redemption and announced liquidation of those funds in March 2021. During the third quarter of the fiscal year, the company received a payment of $2.2 million. The total remaining investment as of December 31st, 2021, was $21.4 million. These funds continue to be subject to valuation uncertainties and the company has therefore maintained an impairment of $2.3 million on the outstanding amount. Now turning to guidance. For fiscal 2022, we are increasing the full-year revenue forecast from product sales of our ALBA by quotient reagents to the range of $36 million to $37 million. No milestone-related or other revenues are expected. Capital expenditures for fiscal year 2022 are expected to be in the range of $5 million to $8 million. We estimate that cash used for operations for the fourth quarter of fiscal year 2022 will be in the range of $6.5 million to $7.5 million per month, excluding debt service costs and capital expenditures. We are not providing guidance on the size of the operating loss that we expect to report for the current fiscal year. And with that, let me now turn the call back to Manuel.

Thank you, Ali. I would like now to share our upcoming priorities for the three pillars I mentioned a few moments ago, beginning with the mosaic solution and transfusion pipeline. We believe the expanded immunohematology microarray is on track to receive the CE mark in the first quarter of calendar 2022. We are locked, loaded, and ready to commercialize. Regarding our serological disease screening microarrays, we continue to focus on panel development, completion of field trials, and targeted submission for CE marking and FDA approval in the second half of the current calendar year. The STS program continues to cover both the expanded STS donor microarray as well as the plasma microarray. On the Mosaic commercial execution, we will continue to monitor tenders and look forward to participating in more than 20 upcoming tenders over the next 18 to 24 months. We look forward to expanding our distribution network by closing the commercial contracting process to expand into rest of the world markets accepting CE marketing. Regarding the Mosaic Solutions manufacturing and operations priorities, we finalized the decision on a second manufacturing line based on the market access and anticipated market demand. We aim to have the second manufacturing line operational within the next 18 to 24 months. On our scientific and medical affairs priorities, we will continue to drive our scientific, medical studies, and publication initiatives. Our focus will be on value creation with clinical outcomes and workflow. Next, in clinical diagnostics, we'll continue to drive internal product development with the support from external partnerships to accelerate our mosaic menu development. Moving on to our second pillar, ABBA by Quotient, we'll continue to leverage commercial execution and geographical expansion opportunities. On to our third and final pillar, finance. We'll continue to drive growth in ALBA and support our R&D priorities and commercial launch efforts for the Mosaic solution. Lastly, I'm optimistic about our Mosaic expanded immunohematology CE marking approval and commercial launch efforts to continue to bring value to our customers. Now, I'd like to hand it over to Bikram to open the Q&A session.

Thank you very much, sir. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pour for questions.

Our first question comes from the lineup.

Josh Jennings from Corwin. Please go ahead.

Hi. Good morning. Thanks, Manuel and Ali. Congratulations on the update from the notified body. Maybe it would be great to start on that topic and just ask, it seems like The CE marking process has been almost fully de-risked. I just want to make sure I'm interpreting this correctly. What are the remaining steps before you have CE mark approval in hand? Is it just the European Commission taking this recommendation from the notified body and stamping the approval, or are there any further steps that are required on your side or on the notified body's side?

Yeah, so first, thanks, Josh. Good to hear from you. So look, I think where we stand at this point is that we've had conversations with them regarding the status of the submission. We've answered all the questions. They have all the information that they need in order to put the recommendation for approval. So we've cleared this language with them. They feel very comfortable in that regard. Next steps are they put the recommendation and then it should follow by the CE marking stamp of approval. So we look forward to that completion in the next couple of weeks. Again, we don't have a specific timeline. All we know is that it's a completion of this report that will be submitted. And then once that's submitted, then the stamping should follow. Again, we don't have any further information on that, but again, we're very optimistic, and we believe that then it's certainly going to be as we've committed in the past within the next couple weeks.

Excellent. And it's my understanding that your clinical team has been focused on this CMARC submission, and will the team now focus on the U.S. field trials and any update on when the U.S. field trials could be initiated and and timelines for submission.

Yeah, so thanks for the question. Yeah, certainly our teams have been very focused on this EU submission and completing all the necessary steps through that. Now that that's behind us, the team has been focusing on the US submission and clinical trials, so that's ongoing. So we do expect to have that completed within the first six months of this year. So that will be a product that is serving the U.S. market, which will include additional specificities that we believe are important for that market. And then, again, the team is very excited with the possibilities also to continue to drive continuous improvement in the different products that we offer. So that's very exciting for us.

Excellent. And then just one last follow-up on just commercialization once CMARC is in hand, a number of positive updates on the distributor front and with the tenders that your team is tracking. Is there any, I guess, way to break down near-term tenders? I mean, within calendar 2022, do you expect to be participating in tenders and You talked about ordering additional Mosaic instruments for the second half of this year to fulfill initial customer demand. Can you help us understand how many systems you may have ordered? And just thinking about modeling and thinking about potential Mosaic revenues in calendar 2022 versus calendar 2023, when clearly there'll be a bigger bolus of Mosaic-driven revenues. Thanks for taking all the questions.

Yeah, thanks, Josh. No, look, I think there's going to be tenders that are going to be starting as soon as March, for example, or just shortly thereafter, which we are ready to participate, and our teams are working, assuming on the assumptions that we get this approval, like we said, in the next couple of weeks, that we will participate in those tenders. So we're not waiting. The team is mobilizing very quickly. Some are going to happen in the first half, of this year, and some are going to happen in the second half. There's, like I said, more than 20 of them that we've identified. Some large ones are going to be towards the first half of the year, and then there's a couple other large that are going to be in the second half. We'll be sort of in conversations as to what is the right moment to share specifically countries, locations, and so on, I think, again, we have all the details and the team is really prepared. So on the tender front, I think that's looking, we're very excited about that and we're very well prepared. Likewise, on the distribution front, as I continue to emphasize, that's, you know, also moving forward very nicely. And, you know, we expect, you know, those to, in the right time, you know, we'll communicate what does that mean in terms of revenue for, you know, this year and the timing of that. So we'll communicate on that front. And then, you know, in terms of go-live, I think that different countries, different tenders are going to be a little bit longer or a little bit shorter in their go-live. So we're going to be, again, assessing that as they close the tender process, that they get those tenders awarded, and then go-live varies, you know, within 22 and 23 as we'll be communicating those tenders. in the weeks to come. We don't want to put, you know, get too ahead of ourselves to give you information because, again, tenders are evolving, which is, you know, a good thing for us because, you know, that means that we'll have an opportunity to participate once the CE marking is, you know, is received. So I'm sorry that it's a little bit vague and it's not very specific, but in terms of revenue and timings, you know, we're sort of, trying to understand what is the right time to communicate. But, Ali, I don't know if there's anything you want to add to that.

I think we will have better clarity, and as we've shared previously, we will continue to provide guidance as we're thinking through it. We don't have anything for this quarter, as you can imagine, as we wait for the CE marking to be approved. As we get it and as we then look forward, we will definitely continue provide some way for us to think of what are the different inputs. So there'll be more to come, not for this quarter, though, as we've said in our remarks here.

Understood. Thanks for the intel, Fels. Thank you. Thank you.

To ask a question, participants may press star and 1 on their touchtone phone now. We have next question from the lineup, Matt Sykes from Goldman Sachs. Please go ahead.

Hi. Good morning, Manuel and Ali. Congrats again on the CE mark, pending CE mark. I just wanted to ask about the commercial agreements. It seems like you've been able to kind of loop in ALBA as well with some of your commercial agreements. And as you expect that to take place, is that an acceleration that could occur? when Mosaic is sold, or could you see an additional acceleration from those agreements earlier than that for ALBA?

Yeah, so for ALBA, I think, again, as we put those contracts in place, it doesn't require CE marking. It's just going to be automatic for them to take both on. So, we are, again, expecting that increased access to give us some level of incremental sales, of course, in those geographies, of course.

Great. And then just any update on COVID-related impacts? You mentioned at the outset that it still remains an overhang, maybe in the U.S. or other areas. Just any commentary on that and what the environment's like at this point?

Yeah, I think we've seen it as of late, you know, just through the last week there was a lot of people. I mean, it just seems like every day somebody has it or their kids have it and then, you know, four or five people are out. So they did impact us, you know, in the last quarter and then, you know, now. But we see hopefully that some of these things are going to improve in the next few weeks. I think we see the cases going down. But it certainly did impact, you know, people, you know, presence in some of the areas of our business in different functions. So that's why, you know, again, I thought, again, despite of that, of those interruptions, you know, our teams, you know, sort of continue to drive on. So, yeah, but I think, again, we're, you know, it did impact, you know, some of the timelines, you know, particularly the U.S. and then the STS, some delays there. But look, we've already reflected that in my commentary, in my remarks. We don't anticipate that, you know, going forward, any further impact. But certainly, it was not convenient for anyone.

Great. And just my last question, just on supply chain. It sounds like you're anticipating demand and ordering ahead, which will probably be helpful. But just any supply chain related issues in terms of the instrument manufacturing?

No, not at all. You know, we're in conversations with our partners on that. We believe, again, that we've already told them, you know, our needs from an instrumentation perspective. You know, so that should be, you know, on track. We don't expect any disruption there. And also regarding, you know, other areas of our business, I think the supply chain and manufacturing team, operations team, they do a nice job in making sure that we have all the things we need in order to meet the anticipated market demand for the mosaic immunohematology products.

Great. Thanks very much for the call. I appreciate it. Thank you, Manish. Thank you.

Our last question comes from the line-up, Brandon Coelert from Jefferies. Please go ahead.

Hey, good morning, guys. In terms of following up on Josh's questions kind of around the commercial launch, can you help us understand, so the initial 20 IH tenders that you talked about on market, does that account for maybe how many donations do these labs process a year? And would it be your expectation that these are just primarily IH customers and that kind of the initial SDS panel won't necessarily be part of that conversation, that way you interpret it?

Yes, Brandon, and thanks. Good morning to you as well. So look, I think, again, when we look at the tenders, what we're discussing is really immunohematology-specific tenders. These are not joint tenders for any of the other modalities, which is, you know, good for us because that gives us an opportunity to enter, you know, into these other blood centers, you know, through other modalities in the future. So that's just to clarify that. In terms of the tenders and timing, again, we have a list of all the tenders. We have a spreadsheet that's really clear. What are the donations? What do we expect? What is our capture rate? What is, again, the go live that we expect? So all these specific details I've reviewed and discussed with the team. We're hesitant to share those things, you know, currently just because we don't want to set the expectations and then, you know, sort of be slave to those. And so we'll be, you know, communicating those in the near future when we have some specific, you know, participation. And then, you know, we can start communicating the progress we're making there. Also, again, it depends on the CE marking approval in the next couple weeks. So, but again, we're very focused on it. The teams are ready to go, and we're preparing, you know, for those tenders, you know, as soon as March. There's a couple tenders that we expect to participate, assuming we get the CE marking. So then the go-live, you know, we'll determine that afterwards, you know, once those tenders then get evaluated, awarded, and then have conversations when they want to go live. I mean, I hope that answers your question, or do you want something, again, maybe you have a follow-up on that?

I guess maybe shifting gears, I guess, a bit. Can you update us on where your microarray manufacturing yields are today? Not necessarily capacity, but kind of what the yields are and where you think that would be in a year? And then... how much capex do you think will be needed to build out the second manufacturing line? And then what do you think yield capacity sort of looks like at that point in time? I think you said 18 to 24 months from now.

Yeah, it's difficult to speak about yields because, you know, at the end, we are really focused on development runs as well as then clinical trial runs. So it's difficult to assess. What I can say is that when we were developing COVID the COVID tests that were launched on antibody tests in 2020, our yields were, you know, greater than 95%, you know, so they were very high on those yields, and the team did a very nice job, you know, in that process, so that was a good learning for the team. What I can say is we have, again, as we communicated in the past, we have, with our current line, a capacity of... 30 million, that's, you know, on paper. What we can say is that, again, as we ramp up and scale up depending on the different microarrays, then we'll learn from that process. But we certainly understand that when we look at the demand that we believe we can generate in the next, you know, 18 to 24 months, that, you know, we need to invest in this second line, as I mentioned before, which, you know, again... we're very committed to doing to ensure that we have satisfying the customer needs in this area. But Ali, do you want to comment on the second line investments or timing? If we want to communicate that now, I'm not sure.

Yeah, sure. So I think what we've said is that the second line that we need to put together, we've looked at different options there. We know it's going to cost us You know, I think if we look at the first line that we did, it's going to cost us over $15 million. And what we are looking at, just so you understand as well, is how we build it. So we're not building it exactly the same way we did with the first line. We're using a modular approach. We're looking at upgrades to what we currently have. So that's going to give us a range of potential values of how we build it. But we do expect that it's going to cost us over $15 million by the time it's complete.

Gotcha. Okay. When do you think we'll see some initial commercial distribution agreements, and what's kind of the optimal number of channel partners you openly see or envision supporting?

Well, look, we hope to be closing some of these contracts soon. I think, again, we're ready with some of these activities as we speak, so anytime now. Certainly, that's all dependent on the CE marking, that we get received that in the next couple weeks. But again, those conversations are not stopping, and those contracts should be closed fairly soon. And then in terms of ideal number of distributors, I think it's going to depend on the different geographies around the world. I can tell you we're in conversations with more than 50-some distributors. in the right locations that we will prioritize. Again, what's the right number? I think, again, that is going to depend on the different geographies and the access we want to have there. But it could be upwards of around where we're targeting 2025 distributors, depending on timing, not all immediate, but throughout the next 12 to 18 months.

Okay, and then just last one, Ali, can you just elaborate a little bit more on the Mosaic inventory charge that you absorbed in the third quarter, kind of what that was related to exactly? Thank you.

Sure. So as you know, our inventory, we typically book it at the lower of its cost or its net realizable value. So now as we're getting close to launching our Mosaic microarray here for immunohematology, were required under the accounting rules to essentially do a comparison of whether our inventory is held at the lower value of its cost or the net realizable value. So when we do that analysis, it requires us to write down some of the work in process that we had because the cost that we have, it was lower than what we expect to realize when we commercialize the product. And really this is a reflection of the fact, as you can imagine, that Our production is still not at scale because we have not launched, and so our cost is higher than what we are expecting to sell those microarrays at. And so we have to write down the raw materials and inventory that we have here in the quarter. So that's where it is, and we have to book that into the cost of sales because we expect to start selling them here pretty soon. So that's what you're seeing flowing through our cost of sales.

Gotcha. Okay. All right, thanks for the time this morning. I appreciate it. Thank you, Brian. Okay.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I'd like to turn the call back to Mr. Manuel O. Mendez, CEO, for closing remarks. Over to you, sir.

Thank you, Vikram. Well, look, thanks for the questions. We're very excited. You know, I think our teams are highly focused on One, receiving the approval, and number two, the commercial execution, as you hear from our conversation. Again, thanks for your time, and we'll keep you updated with any news in the next couple of weeks. Thank you. Have a good day.

Thank you very much, sir. Ladies and gentlemen, this concludes today's conference call. Thank you for joining us. You may now disconnect your lines.