Q2 2023 Quantum-Si Inc Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the quantum saw second quarter 2023 earnings call. At this time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question you wouldn't each press star one one on your telephone.

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Be advised that today's conference is being recorded.

I'd now like to turn the conference over to Juan Avendano head of Investor Relations for quantum sites. One. Please go ahead.

Good morning, everyone. Thank you for joining us earlier today quantum aside released financial results for the second quarter ended June 32023.

Copy of the press release is available on the company's website.

Joining me today are Jeff Hawkins, Chief Executive Officer, and Jeff <unk>, Chief Financial Officer.

Before we begin I'd like to remind you that management will be making certain forward looking statements within the meaning of federal securities laws.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated.

Additional information regarding this Chris and uncertainties appears in the section entitled forward looking statements of our press release.

For a more complete list and description of risk factors. Please see the company's filings made with the Securities and Exchange Commission.

This conference call contains time sensitive information that is only accurate as of the live broadcast today August seven 2023.

Except as required by law the company disclaims any intention or obligation to update or revise any forward looking statements.

During this call we will also be referring to certain financial measures that are not prepared in accordance with U S. Generally accepted accounting principles or GAAP, including EBITDA and adjusted EBITDA.

A reconciliation of these non-GAAP financial measure most directly comparable GAAP financial measures is included in the press release filed earlier today.

With that I will turn the call over to Jeff Hawkins.

Thank you Juan good morning, everyone and thank you for joining us in today's call. We will provide a business update present, our second quarter financial performance and provide an outlook for the remainder of 2023.

And open the line for questions.

As a reminder, the goal of quantum ESI is to bring next generation protein sequencing to every lab everywhere, our proprietary technology delivers deeper unbiased proteomics insights that we believe will accelerate scientific research enable the discovery of new Biomarkers and ultimately power of the development.

Of new therapies, and diagnostic tests that will positively impact human health.

While we continued to make solid progress with our commercialization activities in the second quarter.

Some challenges that prevented us from meeting our revenue expectations.

First <unk>.

Early customer feedback identified a set of software features that were important for our customers to efficiently analyze and interpret their experimental data.

Second we experienced some customer implementation challenges due to the wide range of biological sample types sample preparation method and sequencing applications customers wanted to perform with our technology.

Finally, we observed some general extension to the sales cycle as the internal purchasing processes at our customers has slowed down from what we experienced in the beginning of the year.

I would now like to provide more color on each of these items as well as share other updates on our progress during the quarter.

Our first corporate priority is to commercialize the platinum carbon and the QM chip.

Our commercial organization build out is well underway.

Under the leadership of our Chief Commercial Officer, Dr. Grace Johnson, we are building a truly world class team across sales marketing and customer support.

<unk> experiencing some implementation challenges in the quarter, our commercial team collaborated closely with customers to resolve the challenges and ensure the customers thought valued supported and equally as important excited about the potential of our technology to advance their future research.

The customer feedback about the quality of our commercial team members and support they have provided has been very positive.

We're excited about the team that Grace is building and we are confident that they would build positive and lasting.

<unk> with leading researchers globally.

Our sales funnel is also strong and is tracking well ahead of our expectations for 2023.

Quantum ESI technology addresses.

And currently marketed technology and it is clear.

We are interested in exploring a platinum.

<unk> impact their research.

From a geographic standpoint, approximately 70% of the funnel is made up of U S based customers and 30% from Europe .

This change in geographic mix from prior quarters as a result of having more U S based sales protection.

From a market segment perspective.

Customers continue to represent the largest opportunity in the bundle with biotech customer is being the second largest market segment today.

As we have shared on previous earnings calls, we were actively building out our commercial marketing E and with that team in place. We expect it to launch outbound marketing efforts to drive greater awareness of our technology and grow our sales funnel.

In the second quarter, we made key hires in our commercial marketing and implemented our first outbound marketing campaign.

Early market feedback from the campaign has been positive and reinforces our belief that our technology fills a significant unmet need in the proteomics market.

As stated at the beginning of the call early customer feedback identified et cetera software features that were important for customers to efficiently analyze and interpret their experimental data.

Our product marketing team did an excellent job engaging with the customers to clearly define what enhancement where needed.

The requests were communicated to our software team who've got straight to work on these enhancements.

And I am pleased to report the team delivered an upgraded version of software in early July the <unk>.

New software version has been released to our customers and the feedback to date has been very positive.

Additionally, during the second quarter, we began to observe a general lengthening of our customers' capital purchasing process.

Instrument sales that entered the customers' capital purchasing process during the quarter that continue to move along at a moderated pace.

We have no reason to believe that these capital purchases will not ultimately be approved but we are being advised by our customers that they are experiencing that's processed slowdown in general.

We continue to believe that in the current macro environment, having a low cost instrument will be advantageous to customer adoption.

Our second priority is to lead with innovation.

During the second quarter, we experienced some customer implementation challenges due to the wide range of biological sample types.

Preparation method and sequencing applications customers wanted to perform with our technology.

As we dug deeper into each of these areas, we determined that our current R&D strategy and programs were not aligned optimally to our core capabilities and.

Yes in terms of addressing the full scope and complexity of the proteomics workflow.

As such we have initiated a strategic review of current R&D programs, and our R&D organization design and capacity we.

Our near the completion of that process and expect to implement the necessary changes during the current quarter.

While that process is not yet complete I would like to share some of our thinking and initial actions taken thus far.

Consistent with other proteomics detection technologies customers select the biological sample type and sample preparation method they use.

The range of sample types and sample prep methods utilized in proteomics is extensive and often some level of optimization is required to make them compatible with the downstream detection technology.

One solution, we have been pursuing to address this area is carbon our automated sample prep instrument.

While carbon could help reduce sample prep variation and streamline the end to end work.

Of our platform it is not an absolute requirement for our platinum.

Instrument and may not be the best solution long term.

There are commercially available liquid platforms and sample prep chemistry that may be an equal or better fit for customers and allow us to instead focus our internal resources on our core competencies in part D.

So that then we have put the beta testing and launch of carbon on all while we complete an evaluation of the business case and assessment of potential options to address this portion of the custom workflow.

Another consideration in our go forward product strategy will be to drive greater focus and investment in our core capabilities in protein sequencing and therefore, we will look to leverage more industry partnerships and customer consortium's to address items like sample prep workflow automation or the development of spin.

<unk> sequencing applications.

Finally, we are looking closely at our organizational design to ensure that we fully resource the most critical areas to our success such as applications development.

During the second quarter, we recognized the need for greater Resourcing and applications development and redeployed some of our internal resources to this effort the.

<unk> outcome is that we were able to successfully deliver five new application notes demonstrating the capabilities of our protein sequencing technology.

We believe that once complete the realignment of our R&D efforts will position us to deliver additional product improvements or the end of 2023.

While also ensuring our pipeline technology improvements that will support steady cadence of releases throughout 2024.

Our third priority is to preserve financial strength.

We remain committed to continuously improving our fiscal discipline in that vein, one objective and the announced R&D strategic review is to prioritize the programs that have the broadest customer appeal, while maintaining our base level of investment into our pipeline of longer term projects that will draw.

Significant improvements to our core technology in the future.

We intend to continuously evaluate all of our investments across the company to ensure that the capital we have been provided to utilize to maximize shareholder value and our financial runway.

Finally on the operations front, we are continuing to work through several initiatives to lower manufacturing costs, including in the areas of procurement automation and our insourcing versus outsourcing strategy.

These initiatives have been feared goal to secure our supply chain and enhance our margin position as we continue to scale up.

In closing launching a novel technology into a new market always involves some bumps in the road.

Our focus remains on ensuring we execute our commercial strategy that prioritizes the early customer experience and seeks to strike the balance between long term success and near term revenue attainment.

Given this philosophy, we expect to continue with our controlled rollout for the remainder of the year.

We will continue to closely monitor customer feedback and implementation success metrics throughout this timeframe.

That data will ultimately determine how the commercial team accelerates, our new customer implementation efforts.

I will now turn the call over to Jeff to review our financial results Jeff.

Thank you Jeff.

I would like to say how excited I am to be onboard with quantum ESI. We have an excellent leadership team and all of US are aligned and focused on commercial execution and delivering the best and most innovative solutions to our customers.

Personally come from a background of leading a series of companies through rapid change and growth and where extreme financial discipline with Paramount I plan to draw. Upon these experiences to help lead quantum ESI through a continued financially disciplined approach that ensures we utilize our existing capital and the best way for rapid commercial growth.

While at the same time maximizing our capital runway.

Now, let's discuss the details of our Q2 2023 financial results.

Revenue in the second quarter of 2023 was 205000, which consisted of revenue from our platinum instrument and associated consumable kits.

At the end of the second quarter, we had two units that were in backlog and revenue was deferred and we anticipate recognizing revenue on these units in Q3.

Gross profit in the second quarter was $78 and gross margin was 38%.

Our gross margin will be somewhat variable for the near future as we work through our initial stages of commercialization and also be impacted by the timing and mix of instruments versus consumable sales.

GAAP operating expenses in the second quarter of 2023, it was $27 million compared to $30 2 million in the second quarter of 2022.

The decrease was primarily due to a $2 6 million lower research and development expense and $600 thousand dollars lower SG&A expenses.

Included in those amounts as a decrease in stock based compensation by $1 9 million with.

With the remaining $1 3 million comprising a large decrease in general and administrative expenses offset by higher sales and marketing expenses as we ramp up our commercial operations team.

Net loss for the second quarter of 2023 was $25 6 million compared to $32 4 million in the second quarter of 2022.

Adjusted EBITDA for the second quarter of 2023 was a loss of $22 9 million compared to a loss of $25 8 million in the second quarter of 2022.

A reconciliation table of adjusted EBITDA to GAAP net loss is provided in our press release filed earlier today.

As of June 32023, we had $297 $2 million in cash and cash equivalents and investments in marketable securities.

Our guidance for the rest of 2023 includes our controls commercialization execution approach as we align our R&D resources charge capabilities and feature enhancements the have the broadest customer appeal.

Finally, I am reiterating that our non-GAAP operating expenses are expected to be flat compared to 2022.

While still ensuring that we have all the resources and capabilities for our commercial execution plan and our existing cash cash equivalents and investments in marketable securities will provide runway into 2026.

Now I'll turn the call back over to Jeff Hawkins for closing remarks.

Thank you Jeff over the last quarter, we made great strides in the Buildout of our commercial team and have received valuable feedback from customers as we continue our thoughtful and controlled commercialization of platinum.

We believe the outcome of our strategic review of R&D will better position us to deliver additional product improvements before the end of 2023, while also ensuring a pipeline of technology improvements that will support a steady cadence of releases throughout 2024 going forward, we will continue to be laser focused on delivering.

The technology capabilities and applications customers want most while maintaining a high level of fiscal discipline over the use of our capital resources.

Operator, please open the line for questions.

As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.

To withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.

The first question comes from Kyle mixing with Canaccord. Your line is open.

Hey, good morning, Thanks, guys.

So Jeff I appreciate all the.

Commentary around like.

That's what's been happening lately and why the revenue came in where it where it is and why you are kind of doing some of these.

Initiatives, now and what's going to be happening going forward like the software and the implementation of SAP in the sales cycle stuff, but I guess look obviously you have less revenue than last quarter.

You put up a quarter million dollars of revenue last quarter on almost a half a million dollars in orders maybe that makes some sense given there was likely a pent up demand early in the launch but.

I guess why Werent, you able to convert those orders exiting <unk> into revenue or at least generate more revenue than last quarter.

Again like a half a million dollars in orders exiting the quarter just kind of interesting and then maybe Jeff can you guys share any comments on the orders.

The dollar number of orders in second quarter, and the backlog exiting the quarter as well.

<unk>.

Yes, Thanks, Kyle I'll.

I'll take the last part of the question first so we exited the quarter as Jeff said with two instruments in the backlog that we would expect to convert.

In the third quarter.

With respect to sort of events during the quarter that impacted revenue as I said in the prepared remarks.

It had a lot to do with just some of the implementation challenges that we experienced with customers and when we experience. These things we react sort of in real time, meaning we deploy our our applications team to help those customers validate.

Given sample typer or validate a sample prep method they are using.

And we don't want to sort of keep expanding the installed base.

And end up in a situation, where we're unable to provide the level of support needed. So we had to sort of measure our.

Our activities on the commercial front to ensure we could really provide that high level of support on the implementation front.

Okay Alright.

Okay Thats helpful.

And again it sounds like some of the changes that you're making are going to be done by the end of the second quarter.

Are you is it safe to say that in the second half I guess by the end of the year a lot of these I'll use the word issues, but I think they're just kind of kind of kind of like bumps.

Growing pains, I guess that will happen along the way those will be worked out by the end of the year and Youll kind of at least entered the fourth quarter or <unk> 24 at a solid run rate youll be comfortable with.

Yes, I think Thats, a fair way to assess it we were learning a lot every day in the market we're prioritizing.

<unk> improvements that customers want to see are the applications that they would like us.

To open up our help them optimize we're deploying people in real time to these activities as I mentioned in the prepared remarks, we will go even further with that with the sort of the finalization of the R&D strategic review I mean.

The goal is to.

Have sort of been the smoothest implementation sort of scenario, we can be in for 2024, but.

Even saying that we do expect that we will continue to.

Evolve and enhance the product for the foreseeable future. There is theres a lot of headroom technologically here to continue to expand the capabilities.

Enable our customers to do more and more and we will continue to invest in that.

Okay. Thanks for that and then and Jeff Hawkins you talked about last quarter. How you there can be a potential inflection in orders and shipments and revenue in the second half of this year.

I guess it sounds like Thats, not really expect any more but could you just provide some thoughts and maybe Jeff guys as well and welcome to the call. Maybe you could provide some thoughts on how to think about.

I guess shipments and revenue and utilization and things like that in the second half of the year as we sort of think about modeling.

Yeah, So I'll start and Jeff can add any color he'd like to add as I mentioned in the prepared remarks, Kyle we're going to keep the sort of a controlled launch in place through the end of the year that doesn't mean that there might not be some uplift in in revenue and in a given quarter.

But we don't expect sort of a rapid acceleration in the second half a much more sort of controlled.

<unk> launched in the second half with with with the growth.

Jeff anything you want to add to that.

No I think that about sums it up.

<unk> comments are consistent with my thoughts as we work through this process of the R&D realigning maintain and deployment.

We're going to continue to have this controlled controlled ramp, but we would expect that.

Might see some uplift over the next couple of quarters, but I think thats going to be dependent on our customer base and how we interact with them for the rest of the year.

Okay. Thanks, guys for that and then on the strategic R&D realignment.

It sounded like just carbon for now I mean, maybe Jeff just can you confirm that I feel like maybe there were probably some chips and development that were higher density maybe like that's affected and with carbon black was that critical to any orders like what are they contingent on carbon being launched and perhaps that was like a guaranteed bundle I'm just kind of curious about that and then overall.

Again not.

I'm just not totally certain on this right now what was the purpose of the strategy kind of underlying the review and I'm kind of like what's the end game here and how would you what would you deem as a successful outcome for that.

Yes, let me.

I'll take a shot at those if I Miss one let me know first on the carbon front. So there are there were no deals in the in the pipeline that were contingent upon the carbon we didn't have any sort of carbon bundles. As you described it really the assessment of carbon was about.

<unk> is a cartridge based solution, which can be very elegant, but has a lot higher sort of development.

Sort of cost and timelines to adapt it to all of these different sample types and sample prep methods is that the best way to approach sample prep or is more of an open platform one of the commercially available liquid handling platforms might that be more flexible.

To this sort of range of sample types and methods. We're seeing so that's really that what that evaluation is about and that's the only program as you mentioned that.

We're standing right now is on hold where obviously they'll reviewing Kyle the totality of the R&D investments and really looking at.

Driving the investments that really unlock the full potential of the platinum device and the existing consumable.

What we're seeing is there's a lot of growth potential for that existing platform and chip and it's really about enabling applications, it's about enabling additional.

Additional sequencing capabilities as we expand coverage and other things like that so really that's how we're looking at it.

The end game is ultimately that we have the right level of R&D investment into those core areas that will really drive the adoption.

And that we have that sort of process that allows us to generate a consistent sort of release of improvements throughout a given year.

So that's really the end game in mind.

And you touched on all the questions there.

Just ask about manufacturing I mean, you didn't really mentioned that at all but does that.

Our bottleneck whatsoever. So far are you from pretty much good to go on when it comes to the supply chain things like that.

Yes, no no concerns on supply chain and manufacturing.

It was not a bottleneck in any way to the results in the second quarter.

Okay Awesome and then maybe just closing on like a positive comment okay. Good to hear the outbound marketing is kind of all systems go and it sounds like early success, there or are we kind of like progress.

Can you kind of crank that up I mean are you thinking about going after any new customer types, maybe youre going to unlock or increase your footprint in non academic markets.

Biotech, maybe just kind of expand your footprint footprint, there is going to be kind of interesting to hear.

Yes, Karl Thanks for that question.

<unk>.

Commercial marketing team is approaching it is it's a mix sometimes you're you're diving in with a campaign to really look for a specific type of user with specific types of applications within the academic research environment and other times the campaigns will be around unlocking.

The new segments biotech as you mentioned perhaps.

More industrial settings for antibody QA QC, so really the <unk>.

Outbound marketing programs are very very targeted so we'll run many of them across these different areas as we try to drive really that specific demand that lines up well to where we're seeing success in the market.

Okay, Great look forward to seeing that our thanks guys I appreciate it thank.

Thank you.

Please standby for the next question.

The next question comes from <unk> <unk> with B Riley Your line is open.

Good morning, Thank you for taking our questions just a quick follow up on Carls question you mentioned the challenge in the.

Instrumentation, France can you comment on it.

The past wrong request from customers or potential customers Hasnt changed since <unk> and then I have a follow up question.

Yes.

The request haven't changed you on really what is what it is is more you get into the to the customer's laboratory and they work through that full workflow from there from whatever the biological sample type as they selected on up through the sequencing on our platform and ultimately that analysis and.

There is just a very broad range of of samples and sample prep methods ranging everywhere from someone who might isolate a protein in a in a gel and cut out of band to people using immuno precipitation kits and other sort of chemistry. So it's not really that there is any difference in the request it's Jeff.

Each customer has a somewhat unique set of samples and in prep method that we have to work closely with them to optimize in front of the.

The sequencing on the platinum instrument.

Yes.

First of all clarify that technical challenges there.

Other question is can you.

Maybe talk about the poster presentation you had.

What was the challenge.

<unk> proteins on the protium for some portion of that presentation.

Yes at the ASM conference that was really a poster two to not only demonstrate some of the capabilities of our technology, but really to help.

For that.

Group of users who are also mass spec users really help them understand how does our technology perform in comparison to mass spec as well as share information around that.

The workflow the automated analysis.

That our platform affords users. So it was really an educational.

And sort of comparative data study for that for those users in the mass spec community.

Got it thanks for taking all my questions. Thank you.

Please standby for the next question.

The next question comes from swam pack yellow Rama <unk> with H C. Wainwright Your line is open.

Thank you good morning, Jeff and Jeff.

Appreciate you taking my questions.

Okay.

Jeff.

The issues that some of your current customers have flagged during this initial launch.

Great day.

That's fair.

Sam prototypes or is it more you wouldn't even worse.

Yes, I would.

Wouldn't say, it's a specific sample type as much as it is just this combination of sample type.

And in the way they are preparing the sample you know how.

How many proteins are they looking for at once how pure is that sample versus how impure as that sample it really wasn't about a specific.

Sample type that was challenging.

Okay. Thanks for that and then in terms of the software upgrade that you released.

If I heard it correctly it was in July .

<unk>.

Do you think that upgrade.

Was able to handle.

The issues at hand.

Customers responded to that Greg.

To date.

Yeah. Good question. So you are correct. We released that software version in July and I would say the key attribute that customers were looking for were some additional.

Visualizations at the amino acid level of the data they were generating with the with the technology. So the initial version showed.

<unk> of peptides how peptides.

Our.

<unk> indicated to a given protein and really what this new software did was really enhanced.

The UI of that the ability to visualize it giving amino acid level.

Data and information sort of in aggregate things that allowed our customers to really understand the data they were generating.

Really at both the amino acid peptide and the protein level. So again, we rolled that out in July the feedback from users has been very positive, they're very happy with those those changes and with sort of the overall improvement to the user interface and as we get more feedback we will continue to make enhancements.

To that software, but I think the big.

Sort of transformation of our software that needed to take place to enable our customers on the analysis side is this change we made in July and there will be somewhat more incremental.

Moving forward.

Okay and then.

Just my last question. This is on the sales cycle lengthening that you stated.

Is this a more of because at this point.

Have your customers from academic labs is it more.

Academicians waiting for the fourth quarter to ensure that they use up all our research dollars associated with the grant or is this more more than that.

Yes.

Really accounting.

We're getting involved in it.

Yes RK.

Not hearing that there is a scenario where our instruments being held up because there is some pending grant that hasnt been approved really what we're commenting on in the prepared remarks is.

Given grace in my and I and other members of the commercial team sort of experience with an instrument at $70000. We would expect if that enters the procurement cycle that a customer is going to take some.

Period of time to get through that process and what we're seeing is we've gotten through the.

The sales cycle with the customer that sort of the technical buyer that debt.

Purchase order goes into the procurement process and that process is just moving a little bit slower it's not moving through that process of internal approvals on more of the procurement and an accounting or financial side as fast as we had been seeing so again no reason to believe at this stage that those.

Instruments that are in that cycle won't ultimately be approved in and will come through it's just moving at a slower pace than we saw in Q1 and sort of a slower pace than we would expect given our collective experience selling capital equipment in the life science space.

Okay. Thank you. Thank you for taking all my questions.

Youre welcome.

I show no further questions at this time I would now like to turn the call back to <unk> for closing remarks.

Thank you all for your participation today, we look forward to updating you on our progress in the next quarterly earnings call have a good day.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

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