Quotient Limited

Greetings, and welcome to the Quotient Limited First Quarter Fiscal Year 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the call, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Ali Khaboura, Chief Financial Officer of Quotient Limited. Please go ahead, sir.

Thank you. Good morning, everybody, and welcome to Quotient's first quarter fiscal year 2023 financial results, as well as the business update. Joining me today is Manuel O. Mendez, our Chief Executive Officer. Today's conference call, 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 quotients filings for 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, August 9th, 2022, 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 the first quarter fiscal 2023 results and business update. During today's call, I will provide an update on the progress we have made in the month since we had our last earnings call and our key priorities to fiscal 2023. As many of you will know, earlier this year, we received CE mark for our extended immunohematology microarray. Since then, we have made progress on maximizing the commercial potential for this product by growing our distribution network, participating in tenders, and increasing awareness of the Mosaic solution. We are simultaneously focused on leveraging the potential of our Mosaic platform with new microarrays. The ones closest to commercialization are extended serological disease screening microarray, autoimmune microarray, and the extended immunohematology US microarray. I am pleased to report we remain on track with our development work and regulatory filings for all three microarrays. Also, we have been exploring ways to lower R&D costs to bring new products to market and decrease the time to commercialization. Pursuant to this initiative, we recently announced new strategic alliances with Infinity Biomarkers and Theradiag. We believe these alliances will enhance our development of infectious disease screening and clinical diagnostic products. In addition, we have made advancements in our scientific and medical affairs activities with the expansion of our innovator circle, completion of workflow studies, and development of white papers. Overall, I am pleased with the execution of our key priorities since our last call just over a month ago, and I look forward to our continued progress in fiscal 2023. Let's begin with a review of Mosaic's commercial execution. In the first quarter of fiscal 2023, We secured $1.4 million in bookings and generated $0.4 million in revenue for our recently CE marked extended immunohematology mosaic solution. The commercial team continues to focus on expanding our global distribution footprint across major geographies. We have signed 10 distributor agreements, and last month we hosted our first annual distributor network meeting. The meeting was held at our headquarters in Switzerland with 12 participants from over 10 different countries who shared best practices and clinical use cases for Mosaic. Participants were enthusiastic. One of the participants, Teresa Marsik from Croatia, told us she is impressed with the Mosaic system's ease of use and she is excited for her customers to experience the Mosaic solution. I'd like to thank Teresa and all other participants. We look forward to our continued collaboration. Turning to our European immunohematology donor tender opportunities, we continue to actively participate in and prepare for the 20 European immunohematology tenders expected over the next 18 months. Turning to our transfusion diagnostics pipeline, the extended immunohematology US microarray is on track for FDA submission by year end. We continue to make progress in the development of the extended serological disease screening microarray panel. We're on track for an expected commercial launch in calendar year 2023. Our recently announced partnership with Infinity Biomarkers serves as an opportunity to enrich the Mosaic STS and infectious disease clinical immunoassay menu and reduce time and cost to commercialization. Infinity Biomarkers has proven expertise in infectious disease diagnostics and we are excited about this collaboration as it expands our innovation network, allowing us to further accelerate our development timeline. We're also pleased with the early benefits we are seeing from the TheraDiag Clinical Diagnostics Partnership. The collaboration team has confirmed technical feasibility of the extractable nuclear antigen antibodies, ENA, on the mosaic microarray. We are confident to make continued progress in our development eventual commercialization of the Connected Tissue Diseases Panel, which will include the ENA and anti-nuclear antibodies, ANA. This panel will provide us with access to part of the $1.8 billion autoimmune market and entry into the clinical diagnostic segment. Like the Infinity Collaboration, this partnership allows us to accelerate our time to commercialization and reduce cost of development. Next, I would like to update you on the scientific and medical affairs activities. We are very pleased to add three members during the quarter on the Mosaic Innovative Circle Initiative. We now have a total of 11 members, most recently the Centro de Hemoterapia y Hemodonación de Castilla y León in Spain joined this initiative. As a reminder, the goal of the Innovative Circle is to create a community of experts and institutions across the world who focus on transfusion medicine and clinical diagnostics. Member partners with Quotient to create innovation and evidence generation to improve patient care and laboratory efficiencies. Lastly, we are pleased to announce we have completed flow analysis at multiple sites. These analyses include current and future time and motion studies, which we expect will underline the efficiency and effectiveness of the Mosaic solution. We expect to submit papers for publication later this year. We are continuing to build an experienced and collaborative executive management team. Steven Suderwick joined quotient on July 1st in the role of Chief Strategy and Business Development Officer. Prior to joining our company, Stephen served as vice president of Philips, leading global strategy and business development and execution in the precision diagnostic business. Prior to Philips, Stephen led teams across Europe, Middle East, and Boston Consulting Group, BCG, to develop corporate and commercial strategies for leading financial institutions and executed several post-merger integrations and turnarounds. Stephen brings great experience and energy to help our team drive business growth, portfolio expansion, market access, and broaden global strategic partnerships. Welcome, Stephen. Finally, on the operations front, we were awarded ISO 14001 certification, reflecting we meet requirements for environmental management system. This certification exists to help organizations minimize how operations negatively affect the environment. To qualify, Quotient went through a series of external audits validating the Mosaic microarray manufacturing facility. Now let me turn the call to Ali for more details on our financial results. Ali?

Thank you, Manuel.

Fiscal first quarter sales were $8.8 million, a decrease of 3.3% from last year's first quarter. The Alba reagent business generated product sales of $8.4 million in the first quarter of fiscal year 2023, down by 6% year over year. Sales in the quarter decreased mainly due to a change in the ordering cycle of one of our products from an OEM customer. We expect the ordering pattern to normalize by year end. This customer's ordering pattern for other products has not changed, so we believe this is isolated to a single product. In the quarter, as Manuel discussed, we had our first sales for Mosaic post our immunohematology CE mark approval. Sales of Mosaic products increased by $0.3 million for the quarter ended June 30, 2022. In the first quarter, gross margins and product sales were 31% compared to gross margins of 47% reported in the first quarter of the prior year. The decrease in gross margins was primarily driven by lower sales in the quarter, 0.4 million in write-offs for stock at the end of its shelf life, 0.2 million of write-downs of raw materials and in-process inventory associated with Mosaic to net realizable value, and 0.3 million in increased costs for logistics and production costs. The increased costs we see in UPS logistics costs and production costs including utilities, is roughly a 3% to 4% headwind on gross margins. Adjusting for the write-offs, our gross margins would have been between 37% and 41% for the quarter. In the first quarter, we recorded an operating loss of $25.8 million compared to $21.9 million last year. Operating expenses were $28.5 million in the first quarter, fiscal 2023, an increase of $2.3 million or 9% compared to the first quarter of the prior fiscal year. This increase is driven primarily by an increase of $0.9 million in general and administrative expenses to $11 million in the first quarter. The increase is primarily attributable to legal costs incurred in the senior secured debt modification first quarter of fiscal year 2023. Sales and marketing expenses were $3.3 million in the first quarter, representing a $0.8 million increase compared to the prior year's first quarter. The increase was primarily driven by the increase in sales and marketing activities over the past year as we ramped up for the planned commercial launch of Mosaic. Research and development costs were $14.1 million, a $0.6 million increase year over year. The increase in research and development costs is driven by expenses to support upcoming field trials and product development in transfusion and clinical diagnostics. Net other expenses was $12.9 million in the current quarter compared to $4.7 million in the first quarter of last year. The change year over year is due to a combination of items, including interest on the convertible notes issued in May 2021, An additional $1 million impairment on the Credit Suisse Supply Chain Fund, a benefit in the royalty cost estimate in Q1 of last year, and a gain in the fair value of our derivative liabilities this quarter. This was offset by a FX loss of assets and liabilities denominated in foreign currencies in the same period. Net loss for the first quarter was $38.9 million, or 0.3%. per share compared to $27.3 million or $0.27 per share in the prior year. Net cash used in operating activities totaled $35.5 million for the first quarter compared with $32.1 million for the prior fiscal year. As you may recall, operating cash in the first quarter is higher than other quarters due to annual or semi-annual items paid out in Q1. Of the $35.5 million of operating cash, $10.5 million pertains to interest on our outstanding debt. Of the remaining $25 million, a little over $7 million pertains to our fiscal 2022 employee annual incentive plan and our annual insurance renewal premiums. Normalizing for these annual costs, our underlying operating cash flow was $6.5 million per month during the quarter. We continue to remain vigilant and actively engaged on all aspects of spend and headcount for the company. Moving to the balance sheet, available cash, cash equivalents and investments as of June 30th, 2022 was $63.2 million compared to $83.2 million as of March 31st, 2022. Of the $63.2 million in cash and investments, $17.1 million relates to investments held by Credit Suisse supply chain funds. In the first quarter, we determined a further impairment of $1 million was required related to an updated estimate of litigation costs projected by Credit Suisse, which Credit Suisse communicated will be deducted from future investor recoveries. Our total debt as of June 30th, 2022 was $236.3 million. This morning, we are confirming our fiscal year 2023 guidance. We expect total sales in the current fiscal year will be in the range of $39 million to $42 million. We expect capital expenditures for fiscal year 2023 to be in the range of $5 million to $10 million. Finally, we expect cash used for operations for fiscal year 2023 will be in the range of $6.5 million to $7.5 million per month, excluding debt service costs and capital expenditures.

And with that, let me now turn the call back to Manuel.

Thank you, Ali. I am pleased with the progress we are making on our key priorities for fiscal 2023. We have further validated our strategic vision and are steadily growing our distributor network and increasing awareness of our Mosaic solution through our commercial activities. We're in active conversations to expand the number of distributor partners globally. Our new distributors are broadening our installed base into new geographical territories, and we are poised to ramp up production in the coming quarters. Turning to our European immunohematology donor tender opportunities, we continue to actively participate in the 20 European immunohematology tenders expected in the next 18 months. When final decisions are made, We look forward to communicating successful tender outcomes. Our transfusion diagnostics pipeline continues to progress as we focus on submitting the extended immunohematology microarray for U.S. approval by year end and bringing the extended STS microarray panel to an EU commercial launch in calendar year 2023. Next, our scientific and medical affairs team will be presenting performance data on CE-marked mosaic immunohematology donor extended microarray at the annual AABB meeting in October of this year. Regarding clinical diagnostics, we are energized by our successful collaboration with our innovative partners, TheraDiag, to accelerate our time to market and reduce cost for our mosaic platform. We will be communicating other collaboration agreements and partnerships to further strengthen our R&D pipeline. Finally, I would like to thank our global teams for their contribution this past quarter. Our whole team is laser focused on delivering on our commitments to all stakeholders and to empower our customers to meet their needs. Thank you for your time today, and we look forward now to taking your questions.

Thank you. At this time, we'll 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'd 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. In the interest of time, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Josh Jennings from Cowan. Please proceed with your question.

Hi, good morning, gentlemen, and thank you for taking the questions. I wanted to start with just the, it's great to hear that you're on track to submit in the U.S. with the FDA by the end of the year, and just wanted to better understand where your team is on the development process just in terms of expanding the number of specificities and improving the performance of some specificities. I mean, I think you gave some color on the earnings call in June around that progress, but is there more work to be done or is that work completed and you're moving right into U.S. field trials in the coming months?

Thanks, Josh, and good to hear from you. Thanks for the question. So, look, I'm happy to say that we've made, that the development process is completed. We actually have completed also our verification, validation, and clinical trial protocols with the pre-FDA, so in conversation with the FDA. The sites are up and live going. Currently, our teams are working with the IQs, OQs, which is, you know, qualification process, you know, as we start the clinical trials. So, yeah, we're in very good shape, and we're excited with the progress we're making to then perform. our submission as we have communicated previously by year end. So it's very exciting times for us.

Anything you could share, Manuel, just in terms of the increased performance on some specificities or the build out of the menu that is going to be evaluated in the U.S. field trials?

Yeah, so we'll have additional specificities beyond the ones that we had in our current CE-Mark product. which, as I had communicated previously, will be bringing some of that data back and then gaining some additional approvals that we would expect with the data and the performance back into the EU. But what I'm happy to say is that we've completed the three different lots which are required as we enter clinical trials, and the performance is incredible. I mean, 100% or better. in most of the specificities, including the ones we've added for the U.S. market, which we'll later on bring back to the EU market. And certainly we can share that in a later time, one-on-one, if you like. And then the other thing that is also exciting for us is the fact that, again, the sites are ready, teams are ready. you know, and, you know, everything points, you know, to a very successful, you know, completion of the clinical trials and then a good solid submission to the FDA. I think the key for us was, you know, to get this pre-FDA meeting, pre-submission, you know, completed, which we did with the FDA, and they have agreed and confirmed all the verification, validation, and clinical trial protocols. That's a really good outcome for us going forward. So we expect, again, expedite approval as part of that process, you know, and excited about that.

Excellent. And just one last follow-up on, you guys have had some success with the partnerships with Theradag and Infinity. I was wondering if you could share just any other partnership channels that they could potentially lead to some non-dilutive capital contributions to the balance sheet and whether there are any active discussions on that front. Thanks for taking the question.

Thanks for the question. Regarding the partnerships, I think the TheraDiag and the other partnerships that we've communicated are really working at infinity. It's working towards the faster development. It's really about saving R&D costs because we save time and then commercialization much more quickly. In terms of aspects of strategic collaborations that we're evaluating, you know, to be able then to either gain capabilities or, you know, access in terms of other specific markets or, you know, some type of collaborations like the one we have communicated in the past with Ortho, you know, that's ongoing. We have some great conversations as we speak, and we'll continue to explore those in the next weeks and months to come. So as soon as we have these other collaborations agreements in place, whether it's on R&D capabilities or other type of relationships on collaborations or partnerships around markets or investments, then we'll be communicating those in the next weeks and months to come.

Thanks again. Thank you.

Thank you. Our next question comes from the line of Brandon Collard with Jefferies. Please proceed with your question.

Hey, thanks. Good morning. Just a question on the distributor channel. So you've got kind of 10 partners so far. You still expect it to reach 20 by the end of the year. And I'm curious, kind of what happens next? Are you stocking it with initial inventory? And I'd be curious to hear kind of how many systems you're getting inbound and from StratTech, either per month or per quarter, just kind of what those levels look like.

Yeah, thanks, Brandon, and good to hear from you. So the distribution conversations are going extremely well. I think we've communicated to you guys that our target is 20. We already have 10, and I think with the success that we've shown in our ability to execute against this milestone and this strategic goal, I think we're going to probably exceed that. And our goal is to be able to achieve that in, you know, not by year end, but much, much quicker than that. In terms of what that means in terms of to us for revenue opportunities, there are some minimum commitments, you know, on this distributor relationships, you know, that we expect to have, not necessarily to stock, but to go into market, into customer accounts, you know, so that that's ongoing. so then we can then start putting up some conversions of customers. That's going to be determined, again, from a timing standpoint. There will be some level of evaluations that occurs in some of these customer accounts, and we're working through those. That's sort of tied also with the innovator circle, as you saw in our press release and my remarks, that we've been able to successfully enlist additional folks, two of them that are really high hitters you know, in Europe, Centro de Hemoterapia en Hemodonación de Castilla y León in Spain, and also the transfusion center, the Croix-Rouge Suisse, which is basically the Swiss Red Cross, you know, main site in Bern, who has also signed up for our innovator circle, Dr. Christoph Niederhauser, who actually, as a matter of fact, he's joined also our scientific advisory board. So I think all these things in place, you know, whether it's the distributor activities and the innovator circle activities, the evaluations at some of these distributor sites that are going to be then creating this momentum, we believe, to, you know, meet the expectations we have for the second half of the year.

Okay. And then just one question for Ali. On the gross margin line, you've had a few quarters here where you've had some small inventory write-offs. Do we expect those to continue to sort of trickle in on the cause line? And then I think you mentioned logistics and production costs, maybe two or three hundred basic point headwinds. Do we expect that to pick up and to be larger from here, or is it in the run rate?

Thanks.

Thanks.

So, yeah, a couple things that you've seen going through the gross margin line. You know, part of the change, as you can imagine, is because, as we said, we are starting to get closer to the launch of – actually, we have launched already our IH. And so part of what you're seeing going through that gross margin line over the last three quarters has been the net realizable value, which we've been booking to that line. That's been the big one going through there. What we thought would be important to understand as well is, you know, where we see write-offs like we did this quarter for – red blood cells and other items that are one time in nature. We're calling those out. And then on the last one, which is really the cost items, you know, those for us, I think we quantified them in my earlier comments. We think that's maybe a 3% to 4% headwind that we're seeing. And part of what we're seeing there is on the logistics side, and we're also seeing increases in costs on things like utilities and some of the inputs that we're buying. We expect that in the near term, that 3% to 4% to continue. But we just thought it was important to call out those components. The net realizable value one will continue as we commercialize on Mosaic. And as we said previously, that really, as we start to get to scale and as that picks up, that number will change over time. But in the near term, I'd expect that net realizable value that we've been writing down, our work in process inventory will continue. And some of this headwind of 3% to 4% least in the near term, we expect that to continue as well.

Thank you. You're welcome.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Matt Sykes with Goldman Sachs. Please proceed with your question.

Hey, good morning, Manuel and Ellie. Thanks for taking my questions. Maybe just kind of start off along the lines of Brandon's question on distribution agreements, targeting 20 by the end of this year. In terms of how you think about managing those relationships, obviously more agreements could potentially lead to more sales, but how do you plan to actively manage those distribution agreements over time, meaning optimize those that might have particular success in particular regions, or are you kind of spread out regionally so that you have few distribution agreements per region? I'm just wondering how you're thinking about managing those relationships, given it will be close to 20 by the end of the year, and how you look to optimize that over time.

Yeah, so thanks, Matt, and good to hear from you. So, look, what we have is Mohamed El-Khoury, our chief commercial officer. He set up a nice network of internal folks. So we now have somebody who's leading the Middle East, Africa, somebody who's leading Asia-Pacific, a person who's going to be leading, you know, Latin America. And it's not just one person that's going to manage distribution, but it's also going to start setting up, you know, like service and support along with the distributors that we select. The way we thought through distribution is there is an agreement that in order for that exclusive rights that they're going to have for that geography, there's a commitment that is then initial startup, you know, order and then commitments throughout the different years. Now, we're going to work on, of course, the demand. We know the market sizes, the donations per geography, and then what it should deliver. We know when those contracts that are related more to donations and donor centers. So we have a good visibility on that with the distributors. So we're putting incentives in place to be able then to achieve those target opportunities in the short term and then others as we develop and ramp up, then it will be appropriately incentivized and resourced. So that's sort of the way we're looking at it. Of course, there are some sales commitments attached to that, like I said, and we expect those to sort of ramp up as some of these evaluations that I mentioned before are completed, as we then have all these further proof sources from the innovator circle. I mentioned in my remarks, and then also in our press release earlier today, that we've completed some workflow studies, which we're very excited about, because these workflow studies not only are gonna be able to show the value of the mosaic being in a site, so we actually, one of the sites that we just, that is in our Adverter Circle, Two of those sites actually did a workflow study, one in Europe, one in the U.S. The initial data shows us that we have some significant benefit from a technical perspective with our Mosaic solution as we compare against their current user scenario. I think, again, this is more on the development of what we see. We're going to be publishing some papers, whether it's white papers or official publications, as we finalize that data. But the indication is, the initial data is that Mosaic is going to be significantly more valuable as we look at efficiency effectiveness in those sites. So all this together, again, speaks to the distributor network, the distributor, you know, growth strategy. And then, of course, you know, the strategy is going to allow us also to win as we continue to participate in tenders.

Great. Thanks for that, Manuel. And, Ali, maybe one for you. You outlined sort of your OPEX trends for the balance of the year. And apologies if I missed it. Just CAPEX came a little bit lower than what we thought and lower than the previous, you know, fiscal first quarter of last year. Could you just maybe talk about sort of CAPEX trends? I assume given the ramp of Mosaic that you've done, perhaps that could come down versus historical. I just wanted to get a sense for how CAPEX is trending over the course of this year.

So the guidance we've given, Matt, really builds around what we are doing in terms of investments that we've talked about from everything to the second manufacturing line to other improvements that we've talked through doing. So that's how we've thought about it as we've been prudent here in the near term. You can see we're not spending it right now, but it is in our outlook or things that we will consider through the balance of the year. So that's how I would think about the CapEx. It's probably going to be later in the year than up front here is how I would size it.

But even so, I would say that it's probably more towards the low end than the high end of what we've guided, given where we are today and the way we see going forward. Got it.

Thanks very much. Appreciate the questions. Yeah. Thank you, guys.

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to management for any final comments.

Well, I just want to say thanks again for your support and listening for the questions, and we look forward to updating you guys against our goals in the next quarter. So have a nice day. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.