Q3 2021 Cue Health Inc Earnings Call

November 10, 2021

Good day and thank you for standing by welcome to <unk> Health third quarter 2021 earnings Conference 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 this session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to Caroline corner. Thank you. Please go ahead.

Good.

Thank you operator, welcome to Q Health third quarter 2021 earnings call. Joining me on today's call to discuss our results are <unk>, <unk>, Chairman and Chief Executive Officer and <unk>.

Dan Gallagher Chief Financial Officer.

My prepared remarks will be followed by a Q&A session.

During this call we will be making forward looking statements, including statements related to the expected performance of our business future financial results and guidance strategy long term growth and overall future prospects as well as the impact of the COVID-19 pandemic.

We wish to caution you that such statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those we projected or implied during this call in particular those described in our risk factors included in our final prospectus related to our initial public offering dated September 23, 2021, and in our Form 10-Q for the third quarter.

2021 that will be filed following this call you should not rely on our forward looking statements as predictions of future events. All forward looking statements that we make on this call are based on assumptions and beliefs as of the date hereof and <unk> disclaims any obligation to update any forward looking statement, except as required by law.

Our discussions today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results information regarding our non-GAAP financial results, including a reconciliation of our historical GAAP to non-GAAP results can be found in our earnings release, which was furnished with our form 8-K today.

<unk> with the SEC and May also be found on our Investor Relations website at investors Dot <unk> Dot com finally, a recording of this call will be available on our Investor Relations website. Shortly after this call has ended with that I would like to turn the call over to India, but for his comments on third quarter business highlights.

Thank you Caroline and thank you everyone for joining us today on our first earnings call as a public company.

You guys had a strong quarter and we're excited to share some of the recent developments in our business, including the upcoming launch of our virtual care offering and direct to consumer sales channel.

You may have seen that we held our initial public offering on September 24th and now trade on the NASDAQ exchange under the symbol H L. T H.

Well, we've only been public for about six weeks I am pleased to be able to provide an update on our business today and John will review, our third quarter financial results.

Before I take a deeper dive into our recent accomplishments this quarter and the path ahead I would like to briefly introduce our company and our mission, which is to enable personalized proactive and informed health care that empowers people to live their healthiest lives.

Imagine a world where you can perform a simple diagnostic tests at home get the result of minutes consult with the Doctor from your smartphone and get a prescription ordered right away.

That's what we built at Q and starting next week people across the U S will be able to do exactly this using the <unk> platform.

When we founded <unk> in 2010, we recognize that the first step in most health care journeys is diagnosis.

Despite being the basis for care decision. The most commonly used diagnostic solutions are inadequate because theyre not timely convenient or digitally connected care delivery.

10 years after <unk> was founded Covid clearly underscored this issue.

Our flagship hardware product is the queue health monitoring system, a tool that changes the way people manage their health by bringing labcorp diagnostics into the home or point of care setting.

The system consists of an easy to use portable battery operated Q reader, which fits in the palm of your hand, a disposable test cartridge and a sample collection want the.

<unk> testing workflows easy to use even for les user and provide digitally connected results directly to the user's smartphone and about 20 minutes.

The acute COVID-19 tests FDA authorized both at the point of care and for at home use is our first commercially available diagnostic test products and as a driver of our revenues to date. It has been validated by Mayo clinic independent clinical study demonstrating 97, 8% agreement between the Q COVID-19 test and Central Lab Pcr.

<unk>.

This unique combination of convenience accuracy ease of use and digital connectivity of our test product offering has led to rapid adoption, making us the official home and point of care test at the MBA and both Google and Netflix have adopted <unk> for their entire U S employee basis.

Well, we certainly don't see ourselves as adjusted Covid testing company, our cooler product has allowed us to validate our technological approach dramatically scale, our production and create an installed base of <unk> among our quickly expanding set of customers.

So of course of Covid has proven very difficult to predict but our recent experiences indicate that with the rise of variance and breakthrough infections, even among fully vaccinated individuals many customers and notably large self insured enterprises and public entities have shifted from thinking about COVID-19 as an acute crisis.

Thinking about it has been demick disease that they must manage for the long term.

On the consumer front, we expect that individuals will have an ongoing desire for quick and easy to use COVID-19 self testing when they have a suspicion of infection wish to engage in social activity with peace of mind or need to test to satisfy various testing mandates.

And as the prevalence of Covid ebbs and flows we anticipate ongoing outbreaks both nationally and internationally. Accordingly, we expect demand for our COVID-19 testing products to continue for some time.

Our installed base of curators driven by our successful Covid testing will be compatible with all planned Q tests, including respiratory health women's health mental sexual health cardio metabolic health and chronic disease management testing.

Paired with our durable reader based infrastructure, we believe our Covid test and future tests pipeline addressed the $30 billion diagnostic market, including a $10 billion at home testing market in a $20 billion point of care testing market.

But diagnostics is just our starting point from our founding we intended to build on our core competency and home and point of care diagnostics to offer a comprehensive digital health solution that redefines, how people access health care.

That's where our Q integrated care platform comes in.

Through the integrated care platform consumers will be able to consult with a physician via telemedicine conductor supervised test compliant with CDC requirements for international travel and order a prescription all through the queue help out.

Customer health information is stored in a HIPAA compliant Q data and innovation, there and COO test results can be connected to a doctor pharmacy or electronic medical record.

With the launch of our virtual care platform, which I'll discuss more in a moment <unk> entry into the 120 billion digital health market.

Through our integrations with last mile delivery, we're well positioned to deliver product right when people needed and as new COVID-19, Antivirals and to the market soon with requirement of time sensitive administration, we expect our platform to give consumers the ability to go from testing using the Q COVID-19 tests.

<unk> results for the Doctor immediately within our App to getting the right antiviral treatment if appropriate all within the comfort and convenience of their own homes.

We're very excited for this big step in realizing our vision of making the health care system more accessible convenient and timely.

With that overview I'd now like to turn to our third quarter performance and recent highlights.

As John will discuss in greater detail our revenue in the third quarter of 2021 with $223 $7 million up from $64 5 million in Q1, and 137 4 million in Q2.

We break our revenue streams into two sectors private sector and public sector.

Within the private sector, we have three customer categories enterprise health care providers, and starting next week direct to consumer or DTC.

Public sector revenues include a 481 million dollar agreement with the department of Defense and U S health and human services or HHS as well as revenues from other public sector entities, such as state public health departments.

During Q3, we saw rapid growth in revenue contributions from the private sector, 58% of our product revenue came from the public sector and 42% from the private sector compared to private sector contribution of 4% in Q1 and 24% in Q2.

And the public sector, we continued to deliver against our Doj agreement with scaled our manufacturing to an average of over 60000 test cartridges produced per day and will continue to deliver products through the end of Q4.

We're in the midst of ongoing conversations with D O D regarding contract renewals and broader opportunities.

<unk> contract has also served as a starting point for direct deals with a number of organizations that originally provided Q products as part of the Doj contract, including Colorado Department of public health Guy finger and NASA among others.

In Q3, we nearly tripled our direct customer base, adding over 50 customers ending Q3 with over 80 customers. This does not include new accounts acquired through distributors, nor new end user organization accounts in the public sector acquired through our <unk> agreement.

Well not a metric we will update going forward.

Offering this to frame our growing customer diversification.

Moving on I'm really pleased with the progress made by our R&D team, we are progressing well against our near term milestones for menu expansion as laid out in our S. One.

To review our pipeline of tests, all which integrate into our Q reader include Covid 500, 10-K flu flu Covid multiplex RSV strep chlamydia gonorrhea multiplex herpes fertility pregnancy cholesterol inflammation, <unk> and vitamin D.

I know that's a lot of targets, let me update you on some key developments.

Starting with our goal of five 10-K clearance for a COVID-19 product. We've completed the clinical study site selection and on boarding and started enrolling patients in the study we will continue enrollment through the first half of 'twenty two.

For our flu test we're in the process of clinical study site selection and on boarding including IRB submissions and contracting and we anticipate and many patients into the five 500 10-K study beginning in December.

Notably funding for Covid and flu clinical trials is provided by BARDA. The biomedical advanced research and development Authority, a division of HHS and longtime partner of Q.

Validation studies for RSV tests are expected to start by Q1 'twenty two.

For our flu Covid multiplex test, we are completely chemistry proof of concept and we are now in late stage technical development.

Tests within our sexual health category are on track as well with our chlamydia gonorrhea multiplex tests in late stage development. So more to come later there too.

We're investing heavily and ramp up of our R&D operation to get the testing products in our pipeline to market as soon as possible.

Moving to a software and services update next week simultaneously with our D to C launch we are rolling out our integrated virtual care offering. This integration enables us to provide users the quote health care loop, providing a diagnostic result, virtual physician visits and prescription ordering all into Q health App.

We also launched in App supervised testing compliant with CDC requirements for international travel.

Our software development team has been driving the integration of last mile delivery application to enable convenient Q product delivery to homes.

Gration with door Dash for example will allow for same day delivery of two meters and test in many locations.

Turning to manufacturing I'm very proud of the crisp execution of our manufacturing team as we successfully scale and capacity to meet burgeoning demand importantly, all of our automated lines built to date, our universal meaning they can produce any test in the queue pipeline.

We recently hired a chief operating officer, David Reader, who joined us from decks Com, where he managed the worldwide operations organization and sort of global manufacturing sites as the business scales from $60 million in revenue to $2 4 billion and a 10.

10 years.

We are excited to leverage David's experience as we continue manufacturing expansion.

Turning to our commercial team based on our experience to date, we've chosen to build out our internal sales force to tackle larger opportunities like enterprise clients and hospital systems and also work with distributors like Henry Schein and Medline to approach doctors' offices and other fragment fragmented markets.

This model has worked well so far as the recent illustration of our direct sales force its progress with hospital systems, but more Herman and <unk> have entered into contracts in the last few months. We're currently integrating into their EMR systems.

We believe sales to our provider customers are going well so far yeah. We're still clearly early in the build out of our commercial team. So we'll make adjustments as we learn over time.

And the enterprise customer category, we are seeing increased interest by large employers looking to provide Q2 their employee basis.

We've also expanded our existing enterprise relationships. For example, the MBA is now providing cute all 30 NBA teams and the leagues referees in the end this season as well as to the at WNBA and Mbas Minorly.

This adoption is an expansion of the successful pilot program. The MBA ran using Q last season.

Similarly, Netflix originally contracted use Q just a few offices as a return to work effort and has now expanded to offices and recently contracted to provide Q readers and cartridges to its U S based employees.

We believe we're winning over highly sophisticated enterprise customers not only because we have a class leading solution to COVID-19 testing, but also because we offer a compelling and cost efficient employee health solution for the future.

Moving on to the direct to consumer customer category again, we are very excited that our DTC sales channel launches next week, enabling new retail consumers and current customers to purchase Q product directly from our App and website with same day delivery of the queue health monitoring system and test kits in many major markets.

The DTC offering also provides the ability to subscribe to <unk>, plus our new membership program, which bundles access through our connected diagnostic product with 24, seven virtual care and supervise testing for travel.

Looking ahead now I'd like to lay out our key growth drivers to help frame, how we are planning to build our business and reach our goals.

Our first driver is our focus on commercial execution through building and diversifying our customer base.

We nearly tripled our private customer base in Q3 and going forward. We expect our sales force to drive continued customer acquisition in both the private and public sectors.

Within the private sector, we were adding new enterprises distributors and large healthcare networks as well as investing in the success of our DTC program to our first large scale marketing and advertising campaign.

On the public side. In addition to our continued relationship with H S. S. D. O D. We're engaging directly with several state health systems School systems and other government organizations.

While our recent focus has been on domestic revenues are regulatory authorizations in locations like Canada, the EU and India demonstrate the global acceptance of <unk> technology, and the trend of global Regulators' permitting users access to at home testing.

Ex U S authorizations open.

Open up new customers and also allow us to better service, our enterprise customers, many of which have a worldwide footprint of employees.

We've already begun product sales into the Canadian professional market and look forward to expansion into other international markets.

Our second growth driver is expansion of our testing menu.

Our Covid five 10-K trial is underway with our flu clinical trial in RSV validation studies, starting soon I very much look forward to updating you further on these efforts as they progress.

Our third growth driver is building the technology enhancements for our integrated care platform.

As we probably launch a virtual care integration supervised testing for travel and E. Prescription capabilities. We are also working towards further enhancements to provide a comprehensive and seamless digital health experience. For example, we're currently working to incorporate same day prescription delivery the ability to connect with and sand test results.

Two one preferred primary care physician and the ability to book a virtual care appointment in advance.

We will also be improving supervised testing functionality to allow users to schedule an appointment for in a supervised test with 24, seven coverage and minimal wait times.

Our recently announced partnership Google Cloud underscores our focus on enhancing the analytic capabilities of our data and innovation layer.

Through this project coupons to equip public health officials and researchers with critical real time information about variant types, including their geographic distribution as well as adding predictive capabilities to help identify and curb emerging threats.

It is our plan this will be a useful tool not only in the fight against COVID-19, but also to mitigate future outbreaks of other infectious diseases, such as influenza and RSV, which as you know our tests in our pipeline.

At the same time that we're enhancing our virtual care model will continue to build out integration with EMR systems at our hospital customers. So their platform can span the continuum between physical and virtual care.

And supportive of the third growth driver and knowing that progressive development of our software and services offering is key to our continued success. We recently hired our Chief Technology Officer Alan Gal.

He brings over 20 years of experience in software development and engineering teams at some of the world's leading technology Corporation and quake, Microsoft Amazon as well as pill pack and online pharmacy that offers E prescription medication sorting and delivery.

We are thrilled to have him on board and believe Allan will be instrumental in driving the technical integrations I mentioned.

Yeah.

In summary, we are proud of our recent progress and we are excited by the many opportunities ahead as we work to fulfill our mission of making health care more timely and accessible.

We see continued expansion of our customer base product offerings and software and services on the horizon as we look to become to health care delivery platform for the next era.

We are truly just getting started and I look forward to updating you on our progress on future calls with that I'll turn it over to Jon to walk through our financial results.

Thank you <unk> and good afternoon, everyone.

In Q3, we had a record quarter with revenues of $223 7 million up 63% from $137 4 million in the prior quarter. Please.

Please note that I'll be providing sequential quarterly comparisons our rapid growth. This year makes the quarter on quarter view most meaningful.

As <unk> mentioned, we split our revenue by public sector and private sector. The growth in revenue was driven by both public and private sectors.

Public sector revenue accounted for $129 5 million, while private sector revenue accounted for $94 2 million.

Public sector revenue grew 23% sequentially from Q2 and accounted for 58% of total Q3 revenues for reference the public sector was 76% of total Q2 revenue.

Private sector revenue grew 191% versus prior quarter and accounted for 42% of total Q3 revenue.

As a comparison private sector revenue was 24% of the of the total in Q2.

Also in the quarter, we sold approximately 56000 readers as a reminder, these readers are sold to our customers, who then distribute them to the end users as.

As we initiate new customer contracts, we expect reader sales to fluctuate quarter to quarter.

Disposable test cartridge sales in the quarter were $179 million up 74% sequentially over Q2.

Moving down the P&L product gross margin was 62% for the third quarter compared with 59, 9% in the prior quarter.

The gross margin benefited quarter on quarter due to the increase in production.

That benefit was partially offset by higher labor and material costs.

Despite global supply chain constraints, we've been successful in obtaining necessary components and meeting our customers' expectations for supply of our product.

Operating expenses were $47 6 million in the third quarter up 171% from $17 6 million in the second quarter.

R&D expense was $9 1 million in the third quarter up 98% from $4 6 million in the second quarter the.

The increase in R&D expense was driven by growth in the R&D organization, mainly head count as we continue to work on menu expansion and prepare for upcoming clinical studies.

Sales and marketing expense was $5 6 million in the third quarter up 264% from $1 5 million in the second quarter.

The increase was driven by head count related to the expansion of our commercial sales team along with some initial investment related to our upcoming D to C launch.

G&A expense was $32 9 million in the third quarter up 187% from $11 5 million in the second quarter the.

The increase in expense was related to added head count to manage a growing organization and also includes a onetime equity expense of $12 9 million.

As we continue to invest in the business Opex, most notably sales and marketing and R&D will accelerate in the amount of spend.

Net income for the third quarter was $19 3 million compared to net income of $19 8 million in the second quarter.

This translates to an EPS of <unk> 13 cents in the third quarter versus 14 in the second quarter.

Net income reflects a 61% effective tax rate for the quarter for some color on this rate IPO related equity adjustment of $49 2 million are not deductible for tax purposes, driving the tax rate higher in the quarter.

Adjusted net income for the quarter was $67 1 million up from $50 2 million in Q2.

This translates to an adjusted EPS of <unk> 52 cents in the third quarter versus 37 tenths in the second quarter.

Q3 was impacted by onetime equity adjustments related to the initial public offering.

Moving to the balance sheet, we finished the third quarter with cash and cash equivalents of $446 6 million.

This represents an increase from the prior quarter of $203 million, primarily driven by IPO proceeds of $213 9 million net of commissions to underwriters.

This cash positions us with a strong balance sheet and the ability to invest in the business to execute on our strategy and vision.

I'd now like to move to our full year 2021 guidance.

Based on our expectations and contract pipeline, we expect full year revenues in the range of $580 million to $590 million.

With that I would like to thank you for your attention and I'll now turn the call over to the operator for questions.

Did you ask a question you will need to press star one on your telephone to withdraw.

Your question press the pound key lead you ask that you limit yourself to one question and one follow up question. Please standby, while we compile the Q&A roster.

Your first question comes from the line of David <unk> with Goldman Sachs.

Hey, guys congrats on the strong quarter.

To see the D to C business.

Getting ready to launch soon certainly a great opportunity for you guys.

Could you tell us more about how many customers you're expecting to sign up for membership over the next few quarters in the next year.

Hi, Dave This is John yes, thanks on the quarter I appreciate that and we.

We're very excited about the D to C launch as you noted it's coming next Monday, along simultaneously with the virtual care offering.

We look at customers Hey look this is early days for us where.

We're a pilot for D to C. We're very excited about the prospect here and it's a great opportunity to make our brand awareness for <unk> and our product out there, but it's a little early to call how sizable of an impact this will be.

Got it and.

The customer adds.

Could you tell us what was the mix of enterprise provider and public customers.

So we we have across the board actually so even in the short time since we did the IPO.

We've added additional customers there so we referenced during the prepared remarks, we talked about the <unk>.

Customers and that was nearly three times of where we were previously and.

Move into the queue for D O D related shipments as we finalize the initial contract with D. O D are going to be lower so that's really the primary driver of the down sequentially that that you would see in queue for what I would want to note that being said we have.

We have an installed base now 30000 readers across 19 different states and we're already seeing demand signals coming in directly from some of these states and municipalities. So we feel good about the positioning there, but that's what it's really in the public on the public sector side.

See that.

Got it thank you and how are we thinking about the roadmap for international expansion.

Can you maybe touch on some of the strategies for DDC in Canada in India, and can you kind of quantify what you expect.

The contribution for Canada to be going forward.

Hey, this is a you have so as I noted we have already started sales in the Canadian professional markets in the third quarter. We also received the authorization for over the counter in Canada, and we expect to roll out into the Canadian OTC market.

Very very soon.

And.

Internationally in Europe and India.

We are working on expanding.

We do have a very global product very global value proposition. There's a lot of work to do already here in North America. So it is a priority and.

I think the notable thing is that worldwide, you're seeing this macro trend of regulators and public health officials and physicians all getting behind this idea of testing at home and that's that's really a big tailwind for us.

Crow for the future.

Thanks for taking my question.

Actually you mind, if I ask one quick one.

Go ahead.

So could you tell.

Tell us about.

Some of the enterprise user like Google and Netflix and risk activity to using the platform in a broader context beyond COVID-19.

Yes, we believe that.

Have a compelling overall solution for health care delivery and I think they see that I think they understand the value proposition of having a single health monitoring system to be able to run multiple different types of diagnostic tests that their employees wanted to see and that.

In the net reduced their costs over time and are able to provide.

Healthcare benefit that will make their employees happier healthier.

And more productive.

Got it thank you.

That's it for me.

Your next question comes from the line and Charles Leahy with Cowan.

Yeah. Thanks for taking the questions and I just wanted to follow up John you said 33.

30000 readers was that 30000 readers added in the quarter on top of where you were at and <unk>.

Hey, Charles No no. That's what I was referencing is the fact that we've shipped.

And have in place 30000 readers associated with the DHHS contract.

Oh I see.

What is a little number readers.

Right.

Yeah, what I mentioned was 56000 readers on the quarter and so what that does for US right. Now is we are north of 120000 readers in total cumulatively.

Great. Okay. That's helpful and then if I could ask.

Congrats on the progress, we're making in terms of signing.

It sounds like a very diverse.

And good slate of clients here as.

As we think not to jump ahead too early here, but as we think about next year.

No you mentioned D O D you're talking about already for renewals.

Maybe an update on.

The Google contractor I think that comes due shortly.

And then it's just we think about coverage for next year revenues can you give us any kind of comments around that.

Yeah sure Charles So as we look at next year, there's three key points that I want to lay out there. The first is what we're seeing is the pandemic will shift to endemic overtime and what we're also seeing correlated to that as a shift in and buying patterns to longer term in nature and.

But with a focus on managing risk both for organizations and their employees. So that's point number one again all in relation to how do we think about next year 2022.

Point number two is during this year, we've seen peaks and valleys in Covid testing, we've experienced that throughout the year and despite that Q.

<unk> has grown both into the into the peak sand and into the valleys and there's a reason for that and that's because the market recognizes that we've got a highly differentiated solution.

And the third point that I would want to make is just look at the momentum in the business.

Right now are <unk> results really speak for themselves and as we mentioned in the prepared remarks. He said hey, we've nearly tripled our private customers in the quarter, even in the short time since the IPO we've added Netflix we've added.

Major League Baseball, we've added guys singer in addition to Google Mayo in the MBA is a very strong stable of customers. So that the customer diversification aspect is growing and so as as you take all these points together that gives us a lot of confidence as we head into next year.

No that that's really helpful and if I could just have one last follow up here.

You talked about obviously the guide increase in applies <unk> is going up as well.

Maybe as it relates to the D. O D. I think you mentioned earlier, a big part of the revenue this quarter was shipments to the D O D.

In terms of tests.

How many tests have you delivered to D. O D through the end of the third quarter and maybe kind of any estimate for what you expect for third quarter in the public sector.

Yeah, Yeah. So.

Total tests in cumulatively have been four 6 million through the through the quarter and.

When you do the math on that you'll see that what we're looking at is one four then in queue for and so that's the reason the implied guidance for the quarter is.

It down a bit because we are we knew that we'd be peeking in our shipment to D. O D and so as we move into queue for where we're finalizing those shipments on our initial contract.

Great. That's helpful. Thanks, a lot guys.

Thanks.

As a reminder, if you would like to ask a question at this time it simply press Star then the number one on your telephone keypad.

Our next question comes from the line Mark Sarah with B T I E.

Hey, guys. Thanks for the questions Congrats on the IPO and they're really terrific.

Start as a public company.

Thanks, I appreciate that.

Yeah. My first question is is really just seeking a little more Intel on the DTC, obviously very exciting.

Huge potential market.

Obviously offering offering the curator on your website and on your mobile App would be most helpful. I think if people knew that they should go to your web site. So can you just speak to.

What types of strategies you haven't place is a T V.

Is it radio.

And I would love to hear any comments about your willingness to potentially put the queue reader either into an apple store or perhaps pursue Amazon.

Thanks, Mark So to answer your question, Yes, we're very excited about it not only because it's a new sales channel for us, but it's also.

The coincident with the release of the rest of our virtual health.

Platform with integrated virtual care supervised testing for travel.

And a bunch of other things so.

As we as we think about.

The.

Prospects in this area you are correct that marketing and sales is a line item that we haven't invested really heavily in the past and so this will be the.

Mark of our first major.

A major advertising and marketing campaign and so you are looking at a mix of digital out of home.

And television in order to execute this campaign.

Okay, that's super helpful.

So I understand so it's going to be a combination of digital and television.

Would you be would you be willing to comment on you are willing to pursue Amazon as a strategic partner or perhaps apple or some other large retailer.

It's either digital or bricks and mortar.

Yeah, So our strategy.

The actual fulfillment and distribution aspect.

He is really.

Oriented around when people why don't they really need it right then and so that's why we're doing integration door dash to get the product to people on the same day, but they want it right in many major market.

If you think about how COVID-19 works and when when people have a concern or are they want to to buy on the on the consumer side. They really want to know right then and so that the distribution strategy performance strategy reflects that.

And so we want it all of the intelligence that we could get in terms of how the course of the market and learn from it when we felt like we would have greater visibility to that if we controlled the distribution of it more tightly.

Okay. That's helpful. I also wanted to ask about your influenza click.

Clinical trial so.

Believe you indicated you plan to enrol patients in December.

Will that be for standalone flu or will that be flu COVID-19 combo, and then related to that last year was a really bizarre flu season, there was no flu.

Is it fair to say that.

We will need to see flew prevalence for you to enroll in complete enrollment of that trial.

So the food five 10-K process is kicking off in December with the start of enrollment then we've already done site selection contracting.

And so things are expected to begin in December.

It's for a flu standalone.

And for Covid five 10-K.

That that the clinical studies have already started as well. So we've already started enrolling patients and that is expected to continue through first half 22.

The Covid flu combo is on a different track. So we entered in late stage technical development here in queue for just planned.

And that has a potential and so we're looking at that.

As part of that's part of the pathway for that.

Yes, that's super helpful I guess.

I think there was a question earlier about large contract renewals I guess wanted to just see what your degree of confidence is or if you've heard anything from your two largest customers about appetite to continue ordering.

Through 2022 for example, and then the other the other part of the question is.

Consensus at least heading into this call.

Look like people were modeling on average.

Some type of decline in 22 relative to 21.

Given your comments that you believe that Covid will be endemic.

What are your thoughts about the likelihood that you will grow revenue year over year in 2022.

So one of the.

Interesting things from today, and it's kind of late breaking news is that the vital administration issued an RFP request for proposal for molecular testing at.

Point of care.

And today a lot of the buying activity has been on the <unk> side. So it's.

Welcome to see that Biden administration, taking a multimodal approach to testing to.

To help manage this.

Next phase of the pandemic.

With regards and as we noted in the prepared remarks, we we have been having ongoing discussions with respect to fuse.

Future contract renewals.

And while I can't we can't comment specifically on.

You know that.

Tales of our existing private customers.

We can say that as we mentioned we grew significantly.

The customer base on the private side and we've been signing.

Deals for.

That take us into 22.

And mark as far as the.

Just building on the question around 22, and the consensus there as I mentioned earlier, we've got a ton of momentum.

Go into the business right now that's going to carry over into queue for particularly on the customer diversification side and then.

As a.

Hey, you have just mentioned regarding the public sector is certainly interesting news.

For all of us to take a look at it but so we'll give you more on 22, obviously on the next call will guide twenty-two, but that's probably what we've got for now.

Awesome just one last one for me it's a two parter, obviously you've increased some investment into your growing business can you give us a sense for the size of your direct Salesforce. I mean, obviously you are working with distribution and Youre going DTC, but maybe like where you are now and where do you think it will be a year from now.

And then maybe a clarification question. Your installed base is now what appears to be about 123000 to your readers.

You indicated that you sold 50 56000 readers.

How many of the 56000 are in the field being used.

You are aware of that because I understand some of those might've been stocking orders to distributors.

It takes it takes time for the for the readers to get in service. So I think one of the things to recognize is that when we were recognizing that revenue when we ship and we're talking about those numbers when we ship and then.

We shipped to our customers who are not ultimately the end users and then they're having to distribute out to the ultimate end users. So I guess, that's the way of saying it can take a little while to get all the way through mark that the.

<unk> said the majority of the readers we're seeing are activated or we think they are and so.

At that.

We have tens of thousands of of users.

Who are who are actively using the product and running tests.

And then and then on your question related to the sales force, obviously, that's an investment item for us and as I mentioned in the prepared remarks, we expect opex inclusive of sales and marketing to increase because we are investing in the commercial and sales team as well as in the marketing aspects related to D. C. So we've definitely.

Seeing traction and ramping up.

And ramping up our sales team.

And that's something that you're going to see continue into Q4. So the spend that you see in sales and marketing.

In this quarter will go north of $20 million as we look at Q4.

Terrific. That's it for me congrats on the strong progress.

Thank you Mark.

At this time that does conclude our question and answer session and this does conclude today's conference call. Thank you for participating you may now disconnect.

[music].

Good day, and thank you for standing by and welcome to Q Health third quarter 2021 earnings Conference 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 this session you will need to press star one on your tele.

A phone.

You require any further assistance. Please press star zero I would now like to hand, the conference over to Caroline corner. Thank you. Please go ahead.

Operator, welcome to Q Health third quarter 2021 earnings call. Joining me on today's call to discuss our results are a yucatan, chairman and Chief Executive Officer, and Dan Gallagher Chief Financial Officer.

Prepared remarks will be followed by a Q&A session.

During this call we won't be making forward looking statements, including statements related to the expected performance of our business future financial results and guidance strategy long term growth and overall future prospects as well as the impact of the COVID-19 pandemic.

We wish to caution you that such statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those we projected or implied during this call in particular those described in our risk factors included in our final prospectus related to our initial public offering in September 'twenty through 2021 and in our Form 10-Q for the third quarter.

<unk> with the SEC and May also be found on our Investor Relations website at investors Dot two dot com finally, a recording of this call will be available on our Investor Relations website. Shortly after this call has ended with that I would like to turn the call over to Ed for his comments on third quarter business highlights Abe.

Thank you Caroline and thank you everyone for joining us today on our first earnings call as a public company.

She has had a strong quarter and we're excited to share some of the recent developments in our business, including the upcoming launch of our virtual care offerings and direct to consumer sales channel.

You may have seen that we held our initial public offering on September 24th and now trade on the NASDAQ exchange under the symbol H L T H well.

Well, we've only been public for about six weeks I am pleased to be able to provide an update on our business today and John will review, our third quarter financial results.

Before I take a deeper dive into our recent accomplishments this quarter and the path ahead I'd like to briefly introduce our company and our mission, which is to enable personalized proactive and informed health care that empowers people to live their healthiest lives.

Imagine a world where you can perform a simple diagnostic tests at home get the result of minutes consult with a doctor from your smartphone and get a prescription order right away.

That's what we built at Q and starting next week people across the U S will be able to do exactly this using the <unk> platform.

When we started Q and 2010, we recognize that the first step in most health care journeys is diagnosis.

Despite being the basis for care decision. The most commonly used diagnostic solutions are inadequate because theyre not timely convenient or digitally connected care delivery.

10 years after Q was founded Covid clearly underscored this issue.

Our flagship hardware product is the queue health monitoring system, a tool that changes the way people manage their health by bringing lab diagnostics into the home or point of care setting.

The system consists of an easy to use portable battery operated Q reader, which fits in the palm of your hand, a disposable test cartridge and a sample collection what the.

In Q testing workflows easy to use even for les user and provide digitally connected results directly to your smartphone and about 20 minutes.

The acute COVID-19 tests FDA authorized both at the point of care and for at home use is our first commercially available diagnostic test products and as a driver of our revenues today. It has been validated by Mayo clinic independent clinical study demonstrating 97, 8% agreement between the acute COVID-19 test and Central Lab PCR testing.

This unique combination of convenience accuracy ease of use and digital connectivity of our test product offering has led to rapid adoption.

Home and point of care test at the MBA and both Google and Netflix have adopted <unk> for their entire U S employee bases.

Well, we certainly don't see ourselves as adjusted Covid testing company, our cobot product has allowed us to validate our technological approach dramatically scale, our production and create an installed base of <unk> among our quickly expanding.

Expanding set of customers.

So of course, if COVID-19 has proven very difficult to predict but our recent experiences indicate that with the rise of variance and breakthrough infections, even among fully vaccinated individuals many customers and notably large self insured enterprises and public entities have shifted from thinking about COVID-19 as an acute crisis.

About it has been demick disease that they must manage for the long term.

Our installed base of curators driven by our success with Covid testing will be compatible with all planned Q tests, including respiratory health women's health mental sexual health cardio metabolic health and chronic disease management testing.

That's where our Q integrated care platform comes in.

Customer health information is stored in a HIPAA compliant Q data and innovation there in Q test results can be connected to a doctor pharmacy or electronic medical record.

With the launch of our virtual care platform, which I'll discuss more in a moment <unk> entry into the 120 billion digital health market.

Through our integrations with last mile delivery, we're well positioned to deliver product right when people needed and as new COVID-19, Antivirals and to the market soon with the requirement of time sensitive administration, we expect our platform to give consumers the ability to go from testing using the Q COVID-19 tests to sharing results with.

The Doctor immediately within our App to getting the right antiviral treatment if appropriate all within the comfort and convenience of their own homes.

We're very excited for the big step in realizing our vision of making the health care system more accessible convenient and timely.

With that overview I'd now like to turn to our third quarter performance and recent highlights.

As John will discuss in greater detail our revenue in the third quarter of 2021 was $223 $7 million up from $64 5 million in Q1, and 137 4 million in Q2.

We break our revenue streams into two sectors private sector and public sector within the private sector. We have three customer categories enterprise health care providers and starting next week direct to consumer or DTC.

Public sector revenues include a $481 million agreement with the department of Defense and U S health and human services or HHS as well as revenues from other public sector entities, such as state public health departments.

And the public sector, we continued to deliver against our Doj agreement, we've scaled our manufacturing to an average of over 60000 test cartridges produced per day and will continue to deliver products through the end of Q4.

We're in the midst of ongoing conversations with D O D regarding contract renewals and broader opportunities.

Not a metric we will update going forward well offering this to frame our growing customer diversification.

Moving on I'm really pleased with the progress made by our R&D team, we are progressing well against our near term milestones for menu expansion as laid out in our S. One.

To review, our pipeline of tests, all which integrate into our Q reader and COO.

Covid five 10-K flu flu COVID-19 multiplex RSV strep, chlamydia gonorrhea multiplex herpes fertility pregnancy cholesterol inflammation, H B C and vitamin D.

Well I know, there's a lot of targets, let me update you on some key developments.

Starting with our goal of five 10-K clearance for a COVID-19 product. We've completed the clinical study site selection and on boarding and started enrolling patients in the study.

We will continue enrollment through the first half of 'twenty two.

For our flu tests were in the process of clinical study site selection and on boarding including IRB submissions and contracting and we anticipate and many patients into the five 500 10-K study beginning in December.

Notably funding for Covid and flu clinical trials is provided by BARDA. The biomedical advanced research and development Authority, a division of HHS and longtime partner of Q.

[noise] validation studies for RSV test are expected to start by Q1 'twenty two.

For our flu Covid multiplex test, we are completely chemistry proof of concept and we are now in late stage technical development.

Tests within our sexual health category are on track as well with our chlamydia gonorrhea multiplex tests in late stage development. So more to come later there too.

We're investing heavily and ramp up of our R&D operation to get the testing products in our pipeline to market as soon as possible.

Moving to a software and services update next week simultaneously with our D to C launch we are rolling out our integrated virtual care offering. This integration enables us to provide users the closed health care loop, providing a diagnostic result, virtual physician visits and prescription ordering all into Q health App.

We also launched in App supervised testing compliant with CDC requirements for international travel.

Our software development team has been driving the integration of last mile delivery application to enable convenient Q product delivery two humps integration with door Dash. For example will allow for same day delivery of two meters and test in many locations.

Turning to manufacturing I'm very proud of the crisp execution of our manufacturing team as we successfully scale its capacity to meet burgeoning demand importantly, all of our automated lines built to date, our universal meaning they can produce any test in the queue pipeline.

We recently hired a chief operating officer, David Reader, who joined us from decks Com, where he managed a worldwide operations organization and set up global manufacturing sites as the business scaled from $60 million in revenue to $2 4 billion and a.

10 years.

We are excited to leverage David's experience as we continue manufacturing expansion.

Turning to our commercial team based on our experiences to date, we've chosen to build out our internal sales force to tackle larger opportunities like enterprise clients and hospital systems and also work with distributors like Henry Schein and Medline to approach doctors' offices and other fragment fragmented markets.

This model has worked well so far as the recent illustration of our direct sales force its progress with hospital systems, but more hermine and guys think or have entered into contracts in the last few months. We're currently integrating into their EMR systems.

We believe sales to our provider customers are going well so far yeah. We're still clearly early in the build out of our commercial team. So we'll make adjustments as we learn overtime.

And the enterprise customer category, we are seeing increased interest by large employers looking to provide Q2 their employee basis.

We've also expanded our existing enterprise relationships. For example, the MTA is now providing cute all 30 NBA teams and the leagues referees in the end this season as well as to the WNBA and Mbas Minorly.

This adoption is an expansion of the successful pilot program. The MBA ran using Q last season.

Similarly, Netflix originally contracted use Q just a few offices as a return to work effort and has now expanded to all offices and recently contracted to provide Q readers and cartridges to its U S based employees.

Moving on to the direct to consumer customer category again, we are very excited that our DTC sales channel launches next week, enabling new retail consumers and current customers to purchase Q product directly from our App and website with same day delivery of acute health monitoring system and test kits in many major markets.

Looking ahead now I'd like to lay out our key growth drivers help frame, how we are planning to build our business and reach our goals.

Our first driver is our focus on commercial execution through building and diversifying our customer base.

We nearly tripled our private customer base in Q3 and going forward. We expect our sales force to drive continued customer acquisition in both the private and public sectors.

But in the private sector, we were adding new enterprises distributors and large healthcare networks as well as investing in the success of our DTC program to our first large scale marketing and advertising campaign.

On the public side. In addition to our continued relationship with HSN Vod, we're engaging directly with several state health systems School systems and other government organizations.

Yeah.

Ex U S authorizations open.

Open up new customers and also allow us to better service, our enterprise customers, many of which have a worldwide footprint of employees.

We've already begun product sales into the Canadian professional market and look forward to expansion into other international markets.

Our second growth driver is expansion of our testing menu.

Our Covid five 10-K trial is underway with our flu clinical trial and RSP validation studies, starting soon I very much look forward to updating you further on these efforts as they progress.

Our third growth driver is building the technology enhancements for our integrated care platform.

For example, we're currently working to incorporate same day prescription delivery the ability to connect with and sand tests results directly to one preferred primary care physician and the ability to book a virtual care appointment in advance.

We will also be improving supervised testing functionality to allow users to schedule an appointment for to supervise test with 24, seven coverage and minimal wait times.

Our recently announced partnership Google Cloud underscores our focus on enhancing the analytic capabilities of our data and innovation layer.

At the same time that we're enhancing our virtual care model, we're continuing to build out integration with EMR systems at our hospital customers. So their platform can span the continuum between physical and virtual care.

And supportive of this third growth driver and knowing that progressive development of our software and services offering is key to our continued success. We recently hired our Chief Technology Officer. Alan go Alan brings over 20 years of experience in software development and engineering teams at some of the world's leading technology Corporation and quake Microsoft.

<unk> as well as pill pack and online pharmacy that offers E prescription medications sorting and delivery.

We are thrilled to have him on board and believe Allan will be instrumental in driving the technical integrations I mentioned.

Yeah.

In summary, we are proud of our recent progress and we are excited by the many opportunities ahead as we work to fulfill our mission of making health care more timely and accessible.

We see continued expansion of our customer base product offerings and software and services on the horizon as we look to become to health care delivery platform for the next era.

We are truly just getting started and I look forward to updating you on our progress on future calls with that I'll turn it over to Jon to walk through our financial results.

Thank you <unk> and good afternoon, everyone.

In Q3, we had a record quarter with revenues of $223 7 million up 63% from $137 4 million in the prior quarter.

Please note that I'll be providing sequential quarterly comparisons our rapid growth. This year makes the quarter on quarter view most meaningful.

As <unk> mentioned, we split our revenue by public sector and private sector. The growth in revenue was driven by both public and private sectors.

Public sector revenue accounted for $129 5 million, while private sector revenue accounted for $94 2 million.

Public sector revenue grew 23% sequentially from Q2 and accounted for 58% of total Q3 revenues for reference the public sector was 76% of total Q2 revenue.

Private sector revenue grew 191% versus prior quarter and accounted for 42% of total Q3 revenue.

As a comparison private sector revenue was 24% of the of the total in Q2.

Also in the quarter, we sold approximately 56000 readers as a reminder, these readers are sold to our customers, who then distribute them to the end users as we initiate new customer contracts, we expect reader sales to fluctuate quarter to quarter.