Quantum-Si incorporated (NASDAQ:QSI) Q3 2023 Earnings Call Transcript

Quantum-Si incorporated (NASDAQ:QSI) Q3 2023 Earnings Call Transcript November 9, 2023

Quantum-Si incorporated beats earnings expectations. Reported EPS is $-0.17456, expectations were $-0.19.

Operator: Good day and thank you for standing by. Welcome to the Quantum-Si Q3 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Katherine Atkinson. Please go ahead.

Katherine Atkinson: Good afternoon, everyone. Thank you for joining us. Earlier today, Quantum-Si released financial results for the third quarter ended September 30th, 2023. A copy of the press release is available on the company’s website. Joining me today are Jeff Hawkins, President and Chief Executive Officer; and Jeff Keyes, Chief Financial Officer. Before we begin, I would like to remind you that management will be making certain forward-looking statements within the meaning of Federal Securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section entitled Forward-looking Statements of our press release.

For a more complete list and description of risk factors, please see the company’s filings made with the Securities and Exchange Commission. This conference call contains time-sensitive information that is accurate only as of the live broadcast today, November 9th, 2023. Except as required by law, the company disclaims any intention or obligation to update or revise any forward-looking statements. During this call, we will also be referring to certain financial measures that are not prepared in accordance with the US Generally Accepted Accounting Principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is included in the press release filed earlier today. With that, I will turn the call over to Jeff Hawkins.

Jeff Hawkins: Thank you, Katherine. Good afternoon, everyone and thank you for joining us. In today’s call, we will provide a business update, present our third quarter financial performance and provide an outlook for the remainder of 2023. We will then open the line for questions. As you are aware, the goal of Quantum-Si is to bring next-generation protein sequencing to every lab, everywhere. Our proprietary technology delivers deeper, unbiased proteomics insights that we believe will accelerate scientific research, enable the discovery of new biomarkers, and ultimately power the development of new therapies and diagnostic tests that will positively impact the human health. Before sharing updates on our progress during the quarter, I wanted to take an opportunity to look back on the significant progress that we have made as a company during my first year as CEO.

First, we have enhanced the Leadership Team with the addition of proven industry leaders across key roles, including our Chief Financial Officer, Chief Commercial Officer, Senior Vice President of Operations and Senior Vice President of Product Development. Second, we commercially launched Platinum, the world’s first next-generation protein sequencing platform. Third, we have augmented our Board of Directors through the addition of three new Independent Directors, all with CEO or CFO experience from across life sciences, medical devices, diagnostics and biotech. In addition, we established an Independent Chair of our Nominating and Governance Committee as we strive to continually improve our Board governance and performance. Fourth, we have completely retooled our Reagent and Consumable manufacturing model from one that was largely outsourced to one that is majority insourced.

This has provided us with greater control over quality and cost and should result in improved gross margins as we achieve scale. Finally, we have completed a reorganization of our R&D team, and focused our R&D projects on the capabilities and applications customers want most. We have shifted a greater percentage of our investments into near to mid-term opportunities, while retaining a focused investment into a compelling set of next-generation technologies. Overall, the progress over the past 12 months has fundamentally improved all aspects of our business putting us on a strong foundation for growth in 2024 and beyond. I would now like to provide an update on our progress during the quarter. Our first corporate priority is to commercialize Platinum and the 2M Chip.

Our sales funnel continues to grow and remains well ahead of our expectations for 2023. Quantum-Si’s technology addresses gaps in currently marketed technologies, and it is clear customers are interested in using Platinum in their research. From a geographic standpoint, we continue to see interest across both the United States and Europe. During the quarter, we participated in the HUPO World Congress in Busan, South Korea. This event gave us our first opportunity to meet with potential customers and distributors in the Asia Pacific region. The team came back from this event energized about the opportunity to launch Platinum in the Asia Pacific region in 2024. In October, the first customer data using Platinum was presented during a webinar, Dr. Tullman-Ercek from Northwestern University leads the lab that focuses on protein engineering, spanning both therapeutic and industrial applications.

During the webinar, he discussed some of the methods they use for characterizing engineered proteins in her lab, and she presented data generated on Platinum that was used for studying secreted protein variants. She also talked about how they plan to use Platinum for other protein engineering applications such as barcoding and selecting for genotype-phenotype linkage in proteins. Beyond the specific applications of interests, the webinar also included discussion of the overall time savings of the Platinum workflow that the lab has experienced. As we look out across the remainder of 2023, we expect the first customer-generated manuscript will also be submitted for publication. We are excited about the momentum we are building in the market and believe it will position us well as we move from our current controlled commercial launch to full commercial launch in early 2024.

Our second priority is to lead with innovation. During the quarter, we completed the strategic review of our research and development programs and our organizational design and capacity that we had discussed on our last call. I would like to share some key outcomes from this process. First, we reorganized the team to drive greater focus in product development. Post the organizational changes, we now have more than 60% of our team deployed against near to mid-term opportunities. We believe this change will allow us to more rapidly deliver the technology capabilities and applications customers want most. As part of the reorganization, we are accelerating our efforts in biochemistry to further build upon our industry-leading next-generation protein sequencing technology capabilities.

We are already seeing positive early signs from this renewed focus and are confident that it will yield strong results in 2024 and beyond. Finally, we have retained a focused set of investments in next-generation technologies to ensure we remain on the path to being the first company to deliver de novo sequencing in the future. Another goal of the R&D strategic review, was to evaluate all of our projects and define a more focused and prioritized set of initiatives. As part of that process, and consistent with our prior earnings call, we completed a review of the Carbon program. After a comprehensive review of the Carbon program, we have determined that we will not move forward with commercialization of the Carbon Instrument at this time. It was clear from our discussions with customers that Carbon was not required for successful implementation of platform, and that there were higher impact R&D programs we could work on to advance our customers’ research.

To that end, during the strategic review process, we identified several product improvements across our library prep kit, sequencing reagents and chips that could improve the sequencing output per sample, coverage and overall robustness of the full workflow from library prep to sequencing results. I am pleased to share that these improvements will be included in a Version 2 of our kits, which we expect to launch in the first quarter of 2024. We expect that these improvements will also provide greater compatibility between our next-generation protein sequencing technology, and the range of sample prep methods, sample types and even specific proteins our customers are interested in studying. Overall, we believe that the Version 2 kits combined with the work we are doing around sample prep compatibility puts us on a strong path towards full commercial launch in early 2024.

Given this, we have initiated a set of commercial activities to ensure we are well prepared for that event. While we are still in the early days of operating in this new structure and against the more focused set of R&D projects, I am optimistic that we are well positioned to deliver a steady cadence of new technology capabilities and applications throughout 2024. Our third priority is to preserve financial strength. As we have stated on previous calls, we remain committed to continuously improving our fiscal discipline. We are committed to ensuring that the capital we have been provided is utilized to maximize shareholder value and our financial runway. Given our efforts to-date and our commitment to continuous improvement, we remain confident that our current capital can support operations into 2026.

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

Jeff Keyes: Thank you, Jeff. Now let’s discuss the details of our third quarter 2023 financial results. Revenue in the third quarter of 2023 was $223,000 which consisted of revenue from our Platinum Instrument and Associated Consumable kits. Gross profit was $108,000 and the gross margin was 48%. As I’ve stated before, our gross margin percentage will be somewhat variable for the near future as we work through our initial stages of commercialization, and while also be impacted by the timing and mix of Instruments versus Consumables sales. GAAP total operating expenses in the third quarter of 2023 were $27.3 million, compared to $27.7 million in the third quarter of 2022. Included within our operating expenses are stock-based compensation and restructuring charges.

Removing these items, we arrive at an adjusted operating expenses, which were $23.9 million for the third quarter of 2023 compared to $23.6 million for the third quarter of 2022, reflecting an approximate $300,000 increase. What’s important here is the details of the change. As a company, we have been able to maintain a minimal increase to our adjusted total operating expenses year-over-year for the quarter, while at the same time, we have ramped up our commercial operations team significantly. We have been able to do this based on our recent R&D realignment efforts, as well as our disciplined efforts to utilize our capital in the most effective ways as possible. This is further splayed with our year-over-year adjusted total operating expenses.

For the year-to-date period September 2023, adjusted total operating expenses is $72.6 million, compared to $77.9 million for the same period in 2022. A $5.3 million decrease. Though we are not committing to a particular operating expense and level at this time, we are very aggressively looking at our spend to ensure maximum utilization of our capital to enhance and speed our R&D results, while ensuring that we have the resources to maximize our market penetration with our commercial team. Net loss for the third quarter of 2023 was $24.7 million, compared to $31.7 million in the third quarter of 2022. And adjusted EBITDA for the third quarter of 2023 was negative $22.6 million, compared to negative $22.9 million in the third quarter of 2022.

As of September 30th, 2023, we had $274.6 million of cash, cash equivalents and investments in marketable securities. As we discussed today, and previously, our guidance for the rest of 2023 includes our controlled commercial launch approach, while continuing to put in place significant building blocks from a commercial capability standpoint for execution or an anticipated full commercial launch in early 2024. Based on our R&D realignment progress and other initiatives, we expect our adjusted total operating expenses to be $100 million for 2023 compared to $103.2 million in 2022. We are still very confident that our existing cash, cash equivalents and investments in marketable securities will provide runway into 2026. Now, I will turn the call back over to Jeff Hawkins for closing remarks.

Jeff Hawkins: Thank you, Jeff. We have made significant progress during the last quarter led by the completion of our R&D strategic review. We are excited about the level of clarity and focus we achieved through this process, including the roadmap to deliver near and mid-term product improvements, including our anticipated Version 2 of our kits on track for launch in the first quarter of 2024. We are looking forward to providing additional updates on the Version 2 kit during our next call. In the meantime, we are continuing to build our infrastructure to support our full commercial launch, while adhering to our disciplined approach to capital deployment. Operator, please open up the line for questions.

Operator: [Operator Instructions] And your first question comes from the line of Kyle Mikson with Canaccord Genuity. Your line is now open.

Kyle Mikson: Hey, guys, thanks for taking the questions. Jeff, I know you guys have this controlled launch ongoing and we shouldn’t expect like a huge uptick or bolus and placement anytime soon, I guess and that makes sense like relatively appropriately given like the early stage of this launch. But, it seems to be a couple of placements again this quarter. How should we think about the placement and the shipment like trajectory kind of going forward? Is this controlled launch really going to be kind of a couple placements each quarter? Or how should we start thinking about it in the near-term release and maybe going into ‘24?

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Q&A Session

Jeff Hawkins: Yeah, thanks for that question, Kyle. So, I would say two things about it. I think we’re in that controlled launch through the end of this year, as part of our preparation for a full launch early next year. We are initiating some commercial activities both in terms of some hiring and potentially distribution-related partners. So you may see a little uptick in the fourth quarter over what we’ve done the last couple of quarters, but not a sort of a significant rise. Really then the focus becomes the V2 kit launch in the first quarter. And we really believe that’s the catalyst that kit in the hands of customers, and seeing that increased performance become sort of the catalysts to be able to move to a full launch and start to see a scale up sort of quarter-over-quarter after that.

Kyle Mikson: Okay, all right. That was great. And then I guess most of the revenue right now is coming from Instruments. There’s probably some service revenue. That’s relatively lower margin than Consumables, and this new kit sounds like that will help drive utilization next year and thereafter. But 45% and kind of like the high 40s, I think is what gross margin has been at thus far. Obviously pretty good for, if your revenue basis Instrument and Service. So as you sort of roll out, these improved kits, then you have the utilization picking up with the expanding install base. Could we see gross margin get above 50% next year at some point?

Jeff Hawkins: Yes, maybe I’ll start and then I’ll turn it over to Jeff for a few comments. The one thing I wanted to input here, Kyle was, as we’ve talked about on other calls, we did do a tremendous amount of value engineering when we built our machine. So, while we are selling an Instrument and Selling capital, and they’re sort of perceived margins of selling that. We’re generating an attractive gross margin with our platform, even at a very low scale, in your own Consumables, obviously at a much earlier stage, but maybe Jeff wants to comment a little bit on how we are thinking about that blend and sort of how it might change over the course of next year.

Jeff Keyes: Yeah, I’ll just add on saying that as we scale, we’re going to have more opportunities to bring more and more of the kit manufacturing in-house, and have the ability to improve margins on that, obviously, we need that scale to be able to achieve that improvement. But it’s absolutely on our radar as we ramp up over the course of 2024 and beyond.

Kyle Mikson: Okay, that was great. That was great guys. And Jeff Hawkins, is there anything you could kind of share with respect to the almost like the backlog of customers and kind of like the leads that you’ve generated thus far? And things like types of customers, the end markets? I know, you talked about biotech before, and maybe even like regions, because there’s a lot to think about when you think about the backlog and kind of pipeline so good to hear like what to kind of be excited for going forward?

Jeff Hawkins: Sure, yeah. First thing, I’d say, Kyle is that, the funnel tends to be sort of consistent with what we said in the second quarter. It’s heaviest in the US where we have our direct presence. Still have a strong amount sort of similar levels to Q2 in terms of funnel in Europe. By coming out of the HUPO World Congress as we mentioned in our prepared remarks, starting to get some of our first leads into the funnel for the Asia Pacific region. So I think as we get more visibility into those other markets and interface with both customers and distributors will start to pick up in that regard. In terms of the split, the academic market remains the biggest portion of our funnel. But as we said earlier in the year, we expected that academic customers would represent those first customers in the majority of the funnel, and then we would work and over time, we’d see it start to build in the pharma, biotech and even government and industrial space.