Hyperfine, Inc. Q2 FY2022 Earnings Call

Ladies and gentlemen, thank you for being here and welcome to the Hyperfine Q2 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the presentations from the speakers, we will have a question-and-answer session. I would now like to turn the call over to your host, Ms. Bych. You may begin.

Thank you for joining today's call. Earlier today, Hyperfine released financial results for the fiscal quarter ended June 30, 2022. A copy of the press release is available on the company's website as well as sec.gov. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements. All forward-looking statements, including without limitation, those relating to our operating trends and future financial performance, expense management, expectations for hiring, physician training and adoption, growth in our organization, market opportunity, commercial and international expansion, regulatory approvals, and product development are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our form 10-Q filed with the SEC on May 12, 2022. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 10, 2022. Hyperfine disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. And with that, thank you again. I will turn the call over to Scott Huennekens, Interim President and Chief Executive Officer of Hyperfine.

Thank you, Marissa. Good afternoon and thank you all for joining us. I am also joined by our Chief Financial Officer, Alok Gupta. We are pleased to continue the conversation on Hyperfine's story with you today and highlight our recent progress. But first I would like to remind listeners of our vision as a company and our transformative solution in the field of medical imaging. Hyperfine's vision is to transform healthcare by creating access to life-saving diagnostics and actionable data at the patient bedside. Today, brain diagnostics are a single point in time and delay the time from door to discharge. Our mission remains to transform that experience, first and foremost, with our portable bedside MRI system. Our initial product, our portable MRI system called Swoop, was FDA cleared in 2020. Today, we are driving adoption of the Swoop system in the hospital setting to solve significant unmet patient and provider needs. This device addresses an immense $20 billion-plus medical imaging market opportunity considering the potential for installations across hospitals, clinics, and outpatient centers over time. Today, just 10% of the world's population has access to MRI. And we are committed to improving that. As we have noted in the past, our near-term opportunities for improving patient care are first in the ICU; secondly, in pediatric hospitals to address hydrocephalus; and third, in stroke. Patients in the ICU for neurological conditions experience a variety of challenges when it comes to getting an MRI. Patients are typically too unstable to transport to the MRI suite for imaging and it takes time to get imaging completed, which can be prohibitively long in a process and consume valuable resources. There's simply not an effective way to perform MRI imaging for ICU patients today. We've been working with our clinical partners to build strong clinical validation to support the ICU use case. Turning to hydrocephalus, a disease that accounts for over 40,000 hospital admissions each year, and is an excellent use case for portable MRI. Hydrocephalus is characterized by a buildup of fluid in the brain, addressed by introducing a shunt and tubing to drain that fluid. Although, MRI is the preferred approach for regular imaging of these patients, they are typically taken for CT scans due to lack of MRI availability. Our technology enables a quick, simple radiation-free diagnosis process for shunt failure. This July at the National Hydrocephalus Association Conference, HA CONNECT, we announced a new Swoop enhancement that enables brain scans for hydrocephalus patients in under three minutes with no ionizing radiation. This development is especially significant for younger patients who may have difficulty staying still without sedation and have previously received a CT scan. Hyperfine is an official partner with the Hydrocephalus Association, the nation's most widely respected organization dedicated to research and advocacy of hydrocephalus. These are just two examples of use cases where we have received overwhelmingly positive early responses to the Swoop system. We have systems located at leading institutions across the country with ongoing studies to add even greater validation to the utility and clinical efficacy of our technology in both of these use cases. We also remain focused on building our base of clinical data in stroke. Data demonstrates that MRI scans can better detect ischemic stroke damage compared to CT scans. We are continuing to leverage research including the independent publication by our partners at Yale and Harvard, Massachusetts General in Science Advances earlier this year, to build awareness of the value Swoop in the detection and evaluation of stroke. As a reminder, this Science Advances paper concluded that Hyperfine Swoop enabled highly accessible and dynamic bedside evaluation of ischemic stroke, obtaining actionable bedside neuroimaging for 50 confirmed patients. Overall, Swoop detected infarcts in 45 of 50 patients or 90% and captured lesions as small as four millimeters. The authors highlighted the safety and convenience of portable low-field MRI as a tool to expedite the stroke treatment pathway and concluded that results validated the use of low-field MRI to obtain clinically useful imaging of stroke, setting the stage for broader use. We're continuing to engage multiple U.S. hospitals to collect data, demonstrating the clinical value of Swoop and stroke patients. As we gather greater clinical data, we will increase our focus on driving awareness and educating the field about Swoop utilization for the stroke use case. We look forward to sharing our progress over the coming quarters. In addition to improving patient workflow and saving critical time for these use cases across ICU, hydrocephalus and stroke patients, we remain hard at work on our next-generation development to expand use cases beyond the intensive care unit and hydrocephalus into stroke and new anatomy such as C-spine. I would like to highlight a recent strategic initiative. We've had the exciting opportunity to launch a partnership with Viz.ai, a leading AI-powered disease detection and intelligent care coordination platform, to bring MRI to the patient's bedside and deliver valuable insights to the clinician's fingertips for timely decision making. The partnership between Hyperfine and Viz.ai further validates our aligned mission statements to provide fast and accurate point-of-care through intelligence software. Together, we are opening doors to expedite clinical access to MRI imaging and increasing access to time-critical diagnostics in acute and post-acute care phases. With Viz.ai, we are hoping to introduce Swoop to new sites of care as we continue generating awareness of our value proposition. Now turning to our recent commercial progress. We installed nine commercial Swoop systems in the second quarter of 2022, driving revenue of $1.53 million. Our progress included broadening our global footprint to Australia and New Zealand, where we placed commercial units and established the foundation for additional installations over time. We are pleased that we have continued to develop and enhance our customer relationships, working closely with neurosurgeons, interventional neuroradiologists, and critical care clinicians alongside radiology and hospital executives, all influential stakeholders to roll out successful new programs and placements. However, our business has not been immune to the challenges of today's selling environment. These include limitations in accessing hospital administrative personnel and department leadership, staffing shortages at hospitals, local regulatory and administrative approval timing for new purchases, and spending constraints in today's inflationary environment, all resulting in an overall elongated sales cycle. These factors have detracted from our ability to finalize contracts in the timing we have projected. As the macro environment continues to impact order timing, we are also projecting an elongated sales cycle going forward. As a result, we are revising our 2022 expectations to 35 to 45 commercial system installations and $7 million to $8 million in total revenue. Despite our lower near-term expectations, we remain highly confident in our value proposition and long-term goals. Our team remains hard at work stimulating awareness of our technology, and we have a robust network of ongoing communications with existing and new potential customers that leave us optimistic for the future. We continue to expand our commercial footprint and are not losing opportunities in our pipeline. The time to close sales is simply proving longer than we projected at the start of the year. For example, just this week, we received a signed letter of intent for seven commercial units from Barnes-Jewish Healthcare System in St. Louis, which is one of the leading hospital systems in the United States. We expect to receive a final purchase order from BJC HealthCare within the quarter and we anticipate delivering these systems over the next six months. We originally expected this order in June, a testament to the slower selling process or approval process we are experiencing today. Separately, I'm pleased to announce that we've received a letter of intent from King's College, London, to order 20 commercial systems. This is in association with the Bill & Melinda Gates Foundation. We expect to receive a final order shortly and begin shipment of these units over the next several months. Lastly, given market conditions and the elongated sales cycle, we have updated our intermediate-term operational plan with a focus on prioritizing projects and extending our cash runway. We feel good about the momentum we are building for sales growth in 2023 and 2024. We are continuing to prioritize our commercialization, clinical, and R&D spending accordingly. We are confident that we have adequate capitalization given this plan through year-end 2024. We will continue to be diligent in our OpEx planning, while continuing to invest where we see potential for the greatest growth. As part of the prioritization of all projects and expenditures, we will be assessing the company's strategic options for Liminal, our brain-sensing platform, which is in the early stages of development with a view towards maximizing shareholder value creation across all of Hyperfine. In summary, we are pleased with our progress towards achieving our long-term goals. Before I turn the call over to Alok, our Chief Financial Officer, a quick note on our CEO search. We are working with a leading search firm and are in the process of interviewing multiple high-level seasoned executives for our CEO role. We are excited about the quality and depth of candidates for the position and are hopeful to have the role filled in Q4. I will now turn the call over to Alok to review our second quarter performance and financial outlook in greater detail.

Thank you, Scott. Turning to our financial results for the second quarter 2022, revenue for the quarter ended on June 30, 2022, was $1.5 million compared to $400,000 in the second quarter of 2021. Gross margin for the second quarter of 2022 was negative $0.2 million compared to negative $0.1 million in the second quarter of 2021. R&D expenses for the second quarter of 2022 were $7.3 million compared to $6 million in the second quarter of 2021. Sales, general and administrative expenses for the second quarter of 2022 were $15.8 million compared to $8.5 million in the second quarter of 2021. Net loss for the second quarter was $23.2 million equating to a net loss of $0.33 per share as compared to the net loss of $14.6 million or a net loss of $0.88 per share for the same period of the prior year. We ended the second quarter of 2022 with $145.1 million in cash and cash equivalents. Turning to our 2022 outlook. As Scott mentioned, based on our first and second quarter progress and current trends in the business, we now anticipate installing 35 to 45 commercial systems in 2022. This compares to four commercial system installations in 2020, 23 commercial systems in 2021 and implies that at year-end 2022, we expect to have a total commercial install base of 62 to 72 Swoop systems. In conjunction with our lower system placement expectations, we are revising our full-year revenue expectation to be between $7 million and $8 million. Shifting to our additional expectations for the year. Based on the trend of our business as Scott described, we currently anticipate a relatively flat to slightly down third quarter in terms of system placements and revenue versus our second quarter results. We now anticipate total cash burn of $70 million to $80 million in 2022, as we focus on investments in our business, which offer the greatest growth return potential. At this point, I would like to turn the call back to Scott for closing comments.

Thank you, Alok. Despite transitory headwinds in our operating environment, I want to reiterate our differentiated value proposition and our confidence in the future of Hyperfine. We believe greater access to medical imaging through portable point-of-care MRI is inevitable, and we are determined to continue delivering high-quality imaging to new sites of care, to improve provider workflow and patient care. With our early success marked by a total global installed base of over 90 Swoop systems today, we are setting the stage for affordable point-of-care imaging to transform lives and enhance patient care around the world. With that, I want to thank you for your time and open it up to any questions.

Our first question comes from Larry Biegelsen with Wells Fargo. Your line is open.

Hey, guys. Good afternoon. Thanks for taking the question. Can you hear me okay?

We can.

Hey, Scott. First, regarding the Barnes seven systems and the College of London 20 systems, what does the commercial and revenue guidance for 2022 indicate? The guidance seems to suggest only 20 systems at the midpoint of the second half. Are the College of London systems, which I heard you mention in relation to the Bill & Melinda Gates Foundation, considered non-commercial systems? How much risk is associated with those systems? I have a couple of follow-up questions.

Yeah. Those are commercial systems, all 20 of them. And in our projections, we have five to 10 coming from that group, which kind of explains the bandwidth around the 35 to 45 to a large degree. But Alok, anything to add there?

No, I think you covered that. So, it is a commercial contract with King's College, London, supported by the Bill & Melinda Gates Foundation for King's College. Unlike the first grant, this is not a grant; it is a commercial system sale.

So, I heard you say that you're going to be shipping these systems in the next few months. So, why is the midpoint of the guidance now 20 systems in the second half when you have these letters of intent for 27 systems?

As I mentioned, we expect to deliver only five to ten systems to King's College London during the second half of the year, and potentially three to five of the BJC units.

I understand.

I was just going to say, so hopefully we're starting to build a backlog running into quarters to have a little better predictability as we move forward.

Scott, you reaffirmed the guidance on June 29th, and now you're lowering it significantly. What changed between June 29th, when you reaffirmed on the CEO call, and today?

Alok, do you want to take a crack at that first with the detail and I can answer as well?

I think, as Scott mentioned, we expected some orders, like the one from Barnes-Jewish, to arrive earlier in the quarter, but we were still anticipating them by the end of the quarter. However, the timing has changed; we only received the Letter of Intent last week. This has extended the sales order process by at least six weeks for just that one order. That's why, although we initially believed we could meet our second quarter guidance, the longer sales cycle is taking more time to finalize these orders.

I believe that assessment is completely correct. We are currently in a somewhat uncertain period, similar to what has been reported by other medical device companies regarding general business conditions. We are being very careful as we navigate what we are observing with longer sales cycles. We are not losing deals, but rather accumulating a backlog of opportunities. This situation arises from three main factors: first, the overall business environment; second, a sales force that is evolving over time, which affects their predictive capabilities; and third, introducing a new technology is challenging, especially in the current environment. Additionally, while our value proposition is clear to customers, the process involves various approvals from different hospital departments, such as radiology, administration, and others. This can lead to delays in obtaining purchase orders. Initially, we thought these approvals would not be necessary, which has also contributed to the longer sales cycles. So, it is a mix of factors lengthening the sales cycle, but our value proposition remains unchanged. We are essentially pushing the demand timeline further out.

Lastly, Alok, to get to that burn rate you talked about, what's the OpEx implied for the second half or for the full year?

So, for the full-year OpEx, Larry, we are still expecting slightly over $80 million, which by the way, includes all the non-cash, stock-based compensation included in it. But the cash burn commentary, if you recall, originally we were expecting it to be $80 million to $90 million. We have revised it down to $70 million to $80 million now.

Yeah. And as you looked out in 2023 and 2024, the combination of reasonable assumptions on revenue increases with the combination of units and pricing, gross margin expansion relative to cost, a little bit of volume, our gross margin goes up, our R&D and sales and marketing versus this year flat to down, and G&A a level of leverage. So cash burn goes down rather significantly in 2023 and 2024, which allows us to extend cash in our plan so we have that cash balance at the end of 2024 going into 2025.

Okay. Thank you.

One moment for our next question. Our next question comes from Vijay Kumar with Evercore. Your line is open.

Hey, guys. Thanks for taking my question. Scott, maybe a big picture question for you, right? Given the guidance change, and I understand your commentary around the macro environment. I guess for investors, the question is why isn't this an indicator of underlying demand that may indicate the technology is too new for the market? Like what gives you the confidence? I know you sort of alluded to the demand shifting to the right, just talk about what gives you confidence? Why is this not a demand issue and why you're optimistic about the business?

Because the pipeline continues to grow and the interest by deal is still there. Whether it's for ICU, whether it's hydrocephalus, whether it's for stroke relative to improvements in the software and what we're seeing and hearing, the customers want the product, and they're figuring out ways to get the product. It's just taking longer and/or they're having to prioritize when they can budget and get it. So, if you're looking at demand, the demand is there for this large market, though the demand in the particular timeframe is lower. Hopefully that clarifies.

If we break that down a bit, you're saying that when you examine the funnel, the indication of interest shows a healthier trend over the past six months. It primarily relates to the sales cycle. Once it moves past the physician point of contact, that’s where we notice a slowdown in closing deals.

In a number of instances, that is accurate. Correct. I don't want to attribute everything to the environment. It's a combination of factors. The environment might account for 50%, while 25% involves a sales channel that is becoming more adept at understanding the complexities of closing a deal. In each region, there are many subtle differences that need to be considered. The remaining 25% relates to new technology. There are different workflow requirements, and the radiology department needs to endorse and support it. While the ICU may express interest, they need to coordinate with the radiology department to establish new workflows. Both departments desire it, but the administration requires clarity from both sides before giving approval. This was somewhat similar to the situation at Barnes-Jewish; obtaining clarity led to resolving issues, resulting in an order for seven systems from one of the top 10 healthcare systems in the U.S.

Understood. That's helpful. Regarding the 20 system order from King's College, are there any other large integrated delivery networks or contractors in the pipeline that are similar to what you're experiencing with the King's College of London order?

No. Not at this time. There are things in the multiple unit status in the pipeline, but not of that magnitude.

Gotcha. Gotcha. And then, Alok, maybe a couple for you. I think I heard you say third quarter sequentially flatting or down, was it a system placement commentary or revenue commentary?

Both aspects are driven by the system placements. We had nine units, and we are guiding for flat to down performance, but still expect the midpoint to be around 40 units. Sequentially from Q3 to Q4, it will be slightly higher. That's our guidance for today.

And to hit the guidance, the revenue guidance at the midpoint 7.5, assuming sequentially revenues are flattish, step up for 1.5 to $3 million-plus in Q4. Yeah. Sorry, go ahead.

No. What I wanted to mention is that since we changed our pricing models on January 1st, the anticipated impact has not yet been fully realized. As we initially indicated, the effects of these transitions are expected to manifest in the second half of the year, and we are beginning to observe the relevant data. If I explain why we expect to see higher revenue for the 20 units in the second half compared to the first half, the average revenue per device in the first quarter was $110,000. In this upcoming quarter, with nine units generating $1.2 million in device revenue, the total will amount to $1.5 million. The device revenue has increased to $130,000, representing a growth of about 16% to 17%. In the second half, the older devices are diminishing, with very few remaining. Therefore, we anticipate that pricing will transition into future contracts with figures of $250,000 or over $200,000. This gives us confidence that the projected second half revenue will average around $4.5 million, compared to $3 million for the first half. Does that make sense, Vijay?

Is that a good starting number for fiscal 2023 regarding your commentary on cash burn? I ask because with $145 million to $146 million in cash on hand, I believe I heard Scott mention exploring strategic options for the brain-sensing segment of the business. Considering that existing cash, how long can the business operate while making the necessary investments before needing to look for additional funding?

So, I'll let Scott talk about additional raises. But we are not commenting on the 2023 cash burn, Vijay. But what Scott did say is, we have built a plan to last this cash. We started the year at $188.5 million. And like I guided, we will burn $70 million to $80 million this year, which will give us enough cash to lead us through 2024. So, we will have cash at the end of December 2024. I will let Scott comment on the other one.

No. That's absolutely correct. And not only will we have cash at the end of 2024, I think we'll demonstrate over that time significant revenue growth, expansion of clinical indications, progression of the technology and the next version of the product, expanding gross margins as well. And that's from price as well as from cost. So, I think we'll be in a strong position and hit significant milestones for value creation over that timeframe. By the time we would need to raise additional capital. And so, like all programs, you're looking at them to try to figure out how you can advance them vis-à-vis other programs as efficiently capital wise to create the best returns for shareholders. So as we progress in that regard, we'll share that appropriately.

Understood. Thanks, guys.

And I'm not showing any further questions at this time. I turn the call back over to Scott.

Well, thank you all for joining today. We look forward to sharing our continued progress as we go forward. Thanks again.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.