Earnings Call Transcript - QSI Q1 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Quantum-Si First Quarter 2024 Earnings Call. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Katherine Atkinson from Quantum-Si. Katherine, please go ahead.

Katherine Atkinson, Senior Vice President of Investor Relations

Good afternoon, everyone. Thank you for joining us. Earlier today, Quantum-Si released financial results for the first quarter ended March 31, 2024. 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, May 9, 2024. 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. 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, President and CEO

Good afternoon, everyone, and thank you for joining us. In today's call, we will provide a business update to present our first quarter 2024 financial results and provide an outlook for the remainder of 2024. We will then open the line for questions. As a reminder, 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 human health. With the full launch of Platinum now underway, I wanted to take this opportunity to share our corporate priorities for 2024. These priorities build upon what we accomplished in 2023 and will guide our execution throughout the year. Our corporate priorities for 2024 are as follows: accelerate commercial adoption, deliver on our innovation roadmap, and preserve financial strength. With those priorities in mind, I would now like to provide an update on our progress during the first quarter as well as provide an updated outlook for 2024. Our first corporate priority is to accelerate commercial adoption. As I discussed on our last earnings call, we were finalizing our commercial readiness to support our full commercial launch. The preparations included training of the current and new members of our direct sales force and training of our distributor network. The preparations also included the launch and initial rollout of the Version 2 sequencing kit to customers, which we began executing on in early February. As of today, all customers have successfully migrated to the version 2 sequencing kit. Based on all these items being complete, I am pleased to announce that we have moved into the full commercial launch of Platinum as of the end of March 2024. Going forward, we expect to have steady quarter-over-quarter revenue growth as we progress through the remainder of 2024. We will continue to closely monitor our commercial performance and customer success rates and leverage that data to execute on a thoughtful scale-up of our commercial infrastructure, both direct and distribution throughout 2024. In addition to gathering routine customer feedback, we will continue to work closely with key opinion leaders and early adopters of our technology to help define and develop future applications for our technology. As a reminder, our commercial strategy involves a mix of direct sales and distribution partners. In the U.S. market, we are currently operating with a direct sales and service model. In EMEA, our initial focus is the European market where we will use a mix of direct and distribution approaches. In addition, we have a distributor partner in Japan, which we expect will serve as our strategic entry point into the broader APAC market. At the end of the first quarter, our direct commercial team, which consists of sales, marketing, service and support personnel, encompasses approximately 24 individuals based in the United States and Western Europe. Customer interest in our uniquely differentiated technology has always been strong. From our initial launch in December of 2022 until now, we have observed consistent growth in our sales funnel in terms of the number of leads generated every month. As we move forward with our full launch, the focus will be conversion of these leads into instrument placements and revenue. Our current commercial team size is in line with our expectations to support the early phases of the full commercial launch, and we will be closely monitoring a variety of commercial metrics as we look to shape and grow our team and approach going forward. From a market segment perspective, our customers to date have largely been academic research labs. In the first quarter, that changed positively. We are pleased to report that we secured our first customers in both the government and pharma market segments. These first two success stories underpin a broader interest we are seeing emerge in these two market segments in addition to biotech and other commercial applications. We continue to believe academic research labs will remain a key customer for us going forward, but we are pleased to see customers in these additional market segments adopting our technology as well. From an application standpoint, one application we are seeing increasing interest in is barcoding. For customers who need to generate and characterize large numbers of proteins, protein barcodes can be used to streamline screening and selection of proteins with the desired characteristics. Barcoding applications could potentially span multiple market segments, including biomedical research, pharma, biotech, and industrial. For these customers, Platinum offers a simple, cost-effective, and highly specific way to screen hundreds of proteins at once. While adoption of our technology is in the early stages in pharma, biotech, and government labs, it does highlight that with growing market awareness and an ever-increasing set of capabilities, our technology addresses an unmet need we believe will be of interest to customers across the broad range of market segments and lab types. On a macro basis, we closely monitor the information and themes being shared by companies across the broader life sciences market regarding sales cycles and capital sales processes. Early evidence of our sales cycle indicates that it is approximately a three- to four-month process with a slightly longer sales cycle in some segments, as those customers may require a hands-on evaluation of our technology before making a buying decision. In general, we expect the sales cycle trend of three to four months to continue into the future. Another theme in the broader market has been challenges securing capital budgets in general and within the market in China specifically. To date, we have not seen these issues affect us given the price point of our Platinum device and the value the technology offers versus competitive instrumentation. As a reminder, our Platinum instrument has a current list price of $85,000, whereas many of the other instrument offerings in our space carry list prices ranging from $500,000 up to $1 million or more. With respect to China, we do not currently sell Platinum in that market, so we are not exposed to any of the headwinds being discussed by other companies in the broader life science market. With the full commercial launch underway, we are laser-focused on our commercial execution to ensure consistent quarter-over-quarter growth. We will closely monitor commercial success metrics and look to expand our commercial footprint in a fiscally responsible way while ensuring all our customers receive the highest level of service and support. As we have said before, our goal is not simply to place instruments. It is to secure customers who will utilize our technology to advance their research for years to come. As this process evolves, we will be nimble and adjust our approach to maximize our revenue growth while ensuring customer success. Our second priority is to deliver on our innovation roadmap. In February, we launched our version 2 sequencing kit, which includes the introduction of a new amino acid recognizer, high reproducibility across runs, and an approximately threefold reduction in cost per amino acid. I am pleased to report that we have successfully transitioned all our existing customers to the version 2 kit. Overall, the customer feedback for the version 2 kit has been very positive. Last week, we announced the release of a new version of our Platinum analysis software. This new version of software offers customers an average of a 55% increase in the number of peptide alignments, a 9% increase in the precision of identifying unknown proteins present in a sample, and a 70% reduction in primary analysis time from 85 minutes to 25 minutes. As part of the analysis software launch, we also shared some details about our proprietary kinetic model and kinetic database, made up today of nearly 2 million parameters. The ability to continuously train the kinetic model on generated sequencing data represents a significant opportunity to unlock even deeper insights from our next-generation protein sequencing technology, further building upon the improvements we expect to continue to make to the sequencing chemistry. Turning now to our version 3 kit. Our product development team is fully engaged in this program, and we expect to deliver this updated kit to our customers by the end of Q3 2024, as previously communicated. It is still too early to discuss full details of this latest kit update, but current development results are promising, and we are expecting a very meaningful performance improvement over the version 2 kit. The level of innovation happening every day across our R&D teams is exciting to get to see. Equally important to our long-term success is the significant strides we have made in terms of project planning and execution. Delivering products our customers can use every day is the goal of our innovation pipeline, whether that be a new sequencing kit, new software, or a new instrument. Looking back at the version 2 kit project and now more recently, the Version 3 kit project, it is impressive to see our R&D team build plans and execute them in such close alignment with the targets set out at the start of the program. It is this level of planning and execution rigor that is critical to reliably delivering on a continuous flow of new products to customers. I'm confident we have that foundation in place and I'm personally grateful for the work our R&D teams are doing every day to advance the field of proteomics with next-generation protein sequencing. Finally, we attended the U.S. Human Proteome Organization Conference in March, where a Quantum-Si customer gave an oral presentation regarding their use of Platinum for PTM detection and a second customer presented a poster describing their use of Platinum to develop alternative library prep applications for next-generation protein sequencing. Furthermore, in late February, Dr. Chris Mason presented a webinar about using next-generation protein sequencing to characterize extremophiles, historically difficult and understudied set of organisms that naturally exist in nature and our interest in various industrial applications. We expect that customers will continue to present their work at industry conferences throughout 2024, further increasing awareness of the benefits of Platinum. Our third priority is to preserve financial strength. As we state on each of our calls, we remain committed to continuously improving our fiscal discipline. Now that we have the first quarter of activity completed, the results are becoming clear. We have reduced our overall spend year-over-year while improving our ability to deliver new products to the market, all while funding our commercial operations ramp up. Jeff will go into more details on this, but we believe these results are excellent, and it shows how focused we are on utilizing our capital in the most effective way. We are confident that we are appropriately balancing the need to preserve capital with our goal to maximize commercial adoption of Platinum and deliver a steady cadence of new products to customers. Delivering on these two goals represents a significant strategic advantage that will be the foundation of our growth for years to come. I will now turn the call over to Jeff Keyes to review our financial results. Jeff?

Jeff Keyes, CFO

Thank you, Jeff. Now let's discuss the details of our first quarter 2024 financial results. Revenue in the first quarter of 2024 was $457,000, which consisted of revenue from our Platinum instrument, consumable kits, and related services. Gross profit was $269,000 and gross margin was 59%. As I've stated before, our gross margin percentage will be somewhat variable in the near future as we work through our initial stages of commercialization and will also be impacted by the timing and mix of instruments versus consumable sales. Our margin will also be impacted in the near term by acquisition costs and any accounting adjustments to underlying inventory that dates back to the pre-commercial stage of Quantum-Si. As we are still working through these items, we have not provided margin percentage guidance for 2024, but what I can say is the margin mix for the first quarter of 2024 includes approximately a 10% benefit for inventory utilized in the first quarter that were carried at lower or no value that dates back to prior to our initial commercialization. We expect more of these variances that we'll work through into our margin over the course of the year, both positive and negative, and I will point them out as these things evolve. GAAP total operating expenses in the first quarter of 2024 were $23.6 million compared to $29.3 million in the first quarter of 2023. While adjusted operating expenses were $21.9 million for the first quarter of 2024 compared to $24.6 million for the first quarter of 2023. As we alluded to in our press release today, the year-over-year reduction in operating expenses was the result of several initiatives we put in place in 2023 to maximize our capital efficiency, including our R&D realignment efforts while at the same time delivering a steady cadence of R&D enhancements to our customers. Specifically, this has resulted in lower spend in R&D by $6.1 million and effectively swapping G&A dollars to fund commercial operations, increasing overall SG&A by only $350,000. Net loss for the first quarter of 2024 was $19.5 million compared to $23.6 million in the first quarter of 2023, a decrease of $4.1 million. The decrease in net loss was primarily related to the operating expense reduction previously discussed, partially offset by changes in dividend income and unrealized gains on marketable securities. Adjusted EBITDA for the first quarter of 2024 was negative $20.5 million compared to negative $23.7 million in the first quarter of 2023, an improvement of $3.2 million. This improvement was primarily related to the aforementioned reduction in operating expenses, primarily in R&D-related costs. Near the end of 2023, we made some structural changes to our investment holdings makeup to maximize yields while minimizing risk. These changes, along with the impact of rate increases, produced dividend and interest income of $3.6 million in the first quarter of 2024, compared to $2.2 million in the first quarter of 2023, an increase of $1.4 million. As of March 31, 2024, we had $235.4 million in cash and cash equivalents and investments in marketable securities. We are also reaffirming our 2024 financial guidance, which includes revenues to range between $3.7 million and $4.2 million, adjusted operating expenses to be less than $103 million and net cash usage less than $100 million. Finally, we still expect that our existing cash and cash equivalents and investments in marketable securities will provide runway into 2026. Now I will turn the call over to the operator to open the line for questions.

Operator, Operator

Our first question comes from Swayampakula Ramakanth with HCW.

Swayampakula Ramakanth, Analyst

This is RK from H.C. Wainwright. It looks like it was a great quarter. A lot of progress on all fronts, which is excellent to hear. So starting off from the top line, in terms of the commercial launch, I know you said you did the full launch only in late quarter. But I'm just trying to understand how are you seeing the launch progress since the end of March to now. And it's also good to see that you're holding to your full year guidance on the revenue side. So if you can kind of give us a little bit of color as to what gives you the confidence that you would reach that guidance level?

Jeff Hawkins, President and CEO

Yes. Thanks for that question, RK. I think the first part of that is, you are correct. The full commercial launch started right at the tail end of March 2024. So we're in the early innings of that. As we had talked about on our last call and mentioned here today, we had a series of new sales reps and distribution partners that were trained in the first quarter. So those folks are coming up to speed. We're satisfied with the rate of that coming up to speed. But given many of them are in their first sort of three or four months with the company, we do view Q2 as sort of a more modest step up from Q1 in terms of the revenue. And then really with those folks fully in and executing the back half of the year, then able to accelerate more. And in total, that sort of general shape of the curve gives us confidence we'll be where we need to be in terms of delivering on our revenue guidance of $3.7 million to $4.2 million. The other thing I'd add, RK, that's relevant to that is we will look at options to sort of scale up the commercial team as we go throughout the year, and we'll do that more based on some of those early signs we see here throughout Q2 and into Q3 in the beginning of this full commercial launch.

Swayampakula Ramakanth, Analyst

Perfect. And then just in terms of the segments where you're selling, in the press release and also in the prepared remarks, you talked about government and the industry being also the areas where you're selling. So when you say government, are we talking about government labs? Or is it some sort of regulatory institutions that we are talking about? I'm just trying to get a feel for it. And how easy was it to penetrate that segment in itself? And in terms of the pharmaceutical industry, is this something of a one-off? Because I know you are putting in a lot of focus on the academic labs. So I'm just trying to understand how should we think about this? Or should we wait to get overly excited and get you guys into trouble?

Jeff Hawkins, President and CEO

Yes, it's probably too early to become overly enthusiastic. We are definitely optimistic about the long-term potential in these segments. To address your question, when we refer to government accounts, we mean labs operated by government entities, not regulatory agencies. This includes various military branches, national labs, and similar facilities, all of which are government-funded and government-run. In terms of how challenging it is to penetrate this space, I would describe it similarly to the pharmaceutical and biotech sectors. During our initial controlled launch, we highlighted that our primary focus would be academic labs, as they host key opinion leaders and innovators who adopt technology and collaborate to explore its potential applications. At the same time, we were establishing relationships and gaining traction in other segments. Ultimately, these segments tend to take longer to achieve initial traction. As we mentioned, some customer segments prefer to conduct hands-on evaluations, which is quite common in pharma and biotech. Although the sales cycle is longer compared to academic labs, we are very pleased to have landed these first two customers and believe this is not a one-time occurrence. There is a timeline for entry and a timeline for these customers to start applying the technology more extensively over time. It’s a two-stage process: securing the initial sale and then collaborating to expand the number of applications. We feel very positive about our current position, understanding what matters to these customers, and we are now focused on replicating our success in other accounts while continuing to build momentum and diversify our reach across segments.

Swayampakula Ramakanth, Analyst

Perfect. One last question from me. Regarding the Human Proteome Conference, what kind of feedback did you receive, both about the presentations and in terms of generating additional leads and excitement, with an increase in inquiries?

Jeff Hawkins, President and CEO

Yes, that's a great question. The feedback has been consistently positive. When customers discuss the technology, it creates an added advantage of peer connections. A customer's account of their experience resonates well with other customers, which is a definite benefit. We're still in the early stages of our commercial phase, and we aren't a large, established company with widespread brand recognition. Therefore, trade shows, conferences, presentations, and webinars where our customers share their experiences remain extremely valuable for us. They allow us to engage face-to-face, generate leads, and connect with individuals interested in learning more or possibly demoing the technology. For the foreseeable future, we believe that trade shows, webinars, and the various tools we are utilizing will continue to yield fruitful opportunities to meet new people and explore potential placements and utilization.

Operator, Operator

Our next question comes from Kyle Mikson with Canaccord Genuity.

Kyle Mikson, Analyst

Congrats on the quarter. So Jeff, can you kind of walk through or maybe like parse out the components of product revenue. At this point, it's been a year or so since the soft launch was commenced where you have some sense of instrument and consumable mix and pull-through, things like that. And then if you could, I mean, the service revenue really increased a ton. I mean it's possible you went through that already. But could you just talk about some of the dynamics here that we're seeing with the certain product level segments in certain services?

Jeff Hawkins, President and CEO

Yes. I'll start and talk a little bit about the services and then perhaps, Jeff, you can pick it up and talk about sort of overall revenue and the mix to the extent we break that out. I think on the services front, Kyle, it's a mix of a couple of different things in there. Obviously, we placed some instruments throughout 2023, and some of those instruments are now coming off of their initial warranty and moving into service contracts. So that is one sort of source of service revenue that comes through. The other source of service revenue is some of our customers are electing to sort of engage us in more of an advanced training to really come in and train a large number of operators across their laboratory and give them sort of deeper hands-on training and interactions than maybe they can get on their own by setting the machine up. So there's a cost associated with that advanced training. It's not a significantly large number, but when multiple customers sort of choose to take on that advanced training, it can certainly add to that services line. So sort of those advanced trainings and service contracts are the two primary drivers there on the services line. Jeff Keyes, how about you go into the rest of it?

Jeff Keyes, CFO

Yes. Kyle, we don't provide a detailed breakdown of our mix in our financials. However, I can share that it's mainly influenced by instrument placements, which is expected during the company's early commercial phase. Our focus is on getting instruments into the field, and while we are also attentive to pull-through, the emphasis is on instrument placements. Currently, we are monitoring pull-through from a kits perspective as we navigate through commercialization. We have a long-term vision for consumable pull-through, and we'll notice some differences between academic labs and commercial customers such as biopharma and pharma as we progress. We may share more details in the future.

Kyle Mikson, Analyst

That was great, everyone. Jeff Hawkins, regarding the new version kits, version 3 is coming up soon. When we consider which kits or consumables are ready for the market, do you view version 2 as the official first product for the company, with these subsequent versions being enhancements? Or when can we expect to see a significant change in what customers can achieve with Platinum, particularly in terms of capabilities and the overall effectiveness of sequencing peptides?

Jeff Hawkins, President and CEO

Certainly. The version 2 kit represented a significant improvement in both the output and the reproducibility of sequencing results. Customers can run samples across multiple chips or days and achieve consistent results. This kit marked a substantial upgrade from version 1. For version 3, I don’t see it as just a minor improvement; we're still at a point in our innovation where we are experiencing notable advancements in technology, output, coverage, and compatibility with various sample types. Each time we release a new version, it involves substantial improvements that enable customers to perform tasks they couldn’t before. Looking ahead to version 4 will follow a similar pattern, as we don’t plan to make small iterative changes like a 2.5 version. I view the changes from V2 to V3 and beyond as unlocking greater capabilities and application opportunities for our customers.

Kyle Mikson, Analyst

Okay, that's great. Let me ask another question before I pass it on. Regarding the Platinum analysis software, that was an interesting launch. Jeff, with your background experience, I'm curious about where it fits within the software ecosystem, particularly in relation to life science tools research. When considering platforms like Dragon or base space, especially in terms of secondary or tertiary analysis and given the complexity of proteomic information from mass spectrometry, it's definitely a complicated area. My first question is, why was this such a bottleneck or an unmet need for customers? And my second question is, what does the future look like for monetizing data from the platform over time?

Jeff Hawkins, President and CEO

Sure. That's a great question. In the field of proteomics, analyzing data through software has always presented challenges. If you visit a large proteomics lab that uses mass spectrometry, you'll typically find bioinformatics or data science staff who create custom tools to ease data analysis. This setup works well for institutions with such resources, but most research labs worldwide do not have that level of sophistication. Thus, automating data analysis has always been central to our strategy, enabling broader distribution of this technology over time. Regarding the future and our software launch, there's the essential analysis software, which includes a kinetic model and database that support the detection and identification of amino acids and peptides. We focus on improving these databases for accuracy and capability by utilizing real-world sequencing data. Additionally, we will develop purpose-built tools to cater to specific analytical needs, similar to approaches in the DNA sequencing world. There will be core tools used in every run, which we'll continue to enhance, and we will also create customized workflows tailored for specific customer analyses. This presents a significant opportunity to expand our technological capabilities while improving customer application of the tech, independent from the cycles of developing new sequencing kits like the Version 3 kit.

Operator, Operator

This concludes our question-and-answer period. I would now like to turn it back over to Jeff Hawkins for closing remarks.

Jeff Hawkins, President and CEO

Thank you, everyone, for attending today. We believe the progress we've made during the first quarter was outstanding. We are excited to be executing on our full commercial launch, and we remain on track for our version 3 sequencing kit delivery by the end of Q3 2024. We look forward to providing an update on our next call. Thank you.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.