Earnings Call: Q3 2023

Nov 8, 2023

Good day, and thank you for standing by. Welcome to the Q Health Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer that your hand is raised. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Lorna Williams, Investor Relations. Please go ahead. Good afternoon, and welcome to Q's Q3 2023 earnings conference call. Joining me today are Ayub Khattak, Chairman and Chief Executive Officer of Q Health and Asim Javed, Chief Financial Officer. Before we get started, let me begin by reminding you that we may be making forward looking statements, including statements related to the submission of any FDA applications and expectations around receiving clearance and authorization expectations regarding production capacity related to availability of our programs and testing volumes, the expected performance of our business, future financial results and guidance, strategy, long term growth and overall future prospects as well as the impact of the COVID-nineteen pandemic. These statements are subject to risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those described. These risks and uncertainties include, but are not limited to those outlined in today's call as well as other risks identified from time to time in our public statements and reports filed with the SEC. Forward looking statements that we make on this call are based on assumptions and beliefs as of the date they are made, and the company disclaims any obligation to update these statements except as filed by law. In addition, on today's call, non GAAP financial measures will be used. Reconciliations between GAAP and non GAAP financial measures are included in our earnings release. Finally, I'd like to mention that the press release and recording of this call are available on the Investor Relations page of our website. With that, I would like to turn the call over to A. Yu. Yu:] Thank you, Lorna, and thank you everyone for joining us today. CURE reported total revenue of $17,500,000 in the 3rd quarter, exceeding expectations, driven by stronger than anticipated COVID-nineteen test sales. We had non COVID contribution revenue this quarter and we continue to expect growth in the coming quarters as new products gain momentum. Additionally, we ended the quarter with $111,500,000 of cash and equivalents. We continue to execute our key strategic priorities Strong financial discipline, having brought our costs down by $165,000,000 on an annualized basis, exceeding our $150,000,000 target. Turning to our number one strategic priority, test venue expansion for the Q Health monitoring system. Our flu plus COVID multiplex test remains an active FDA review. Through the last quarter, we added a Substantial amount of additional clinical data and we believe our application exceeds FDA's data performance criteria and the required prospective clinical samples for lay users for all three of Flu A and Flu B and COVID-nineteen positive clinical samples. To get the additional Flu B samples, We conducted a study in the Southern Hemisphere this year. This is our first multiplex and has been submitted to the FDA for over the counter use, which would enable use both at home and at the point of care. Our flu plus COVID multiplex test Simultaneously detects and differentiates between influenza and COVID-nineteen in approximately 25 minutes, with the results delivered digitally to the Q Health app. It is integrated into Q Care, our same day test to treatment solution, which enables telehealth and prescription delivery. With this product, we believe we're adding a powerful tool for individuals at home, providers and enterprise seeking to make better informed healthcare decisions and enable We also have 2 de novo applications currently under review with the FDA. The QRSV molecular test was submitted earlier this year and we have received feedback from the FDA. We believe that we can address all the feedback within the quarter and continue We anticipate an approval later in the respiratory season. The Q Flue molecular test was submitted to the FDA for a full de novo last year. Subsequently, we were asked for a greater number of flu B clinical samples, which has been very rarely circulating over the last 3 years, Almost no circulation in the Northern Hemisphere. We collected the additional samples in the Southern Hemisphere as suggested by the FDA and we believe we exceed the requirements. The blue submission is progressing well to de novo approval this respiratory season. For all of these tests, as soon as we receive authorization, We're ready to launch them, utilizing our existing sales and distribution channels. These products will be made on our automated production lines without significant additional capital investment. Our automated production lines were designed to produce any test in our menu at scale. As a reminder, all of the QF monitoring system tests Show the same cartridge backbone and manufacturing process. Our installed base has more than a quarter 1000000 curators And we have more than 300 directly contracted enterprises and providers. Together with public sector customers, our distribution partners and our direct to consumer channel, we believe we have the available channels to get these products into the market. Last quarter, we announced we are developing a combined flu RSV plus COVID all in one multiplex test supported by BARDA on a $28,000,000 contract. This new molecular test is being developed on the same Q reader and cartridge system and will also utilize the same production line. The team continues to drive solid progress in the development of this multiplex test. We plan to follow an EUA regulatory pathway with an initial objective of having this test available for the 2024, 2025 respiratory season. Rounding out our respiratory pipeline, we've now completed development for We made the decision though to delay the start of the clinical study to save costs as we prioritize promising near term revenue generating products, including the 3 tests interview with the FDA. Now, I'd like to highlight Cube's menu expansion efforts in the sexual health category. Our chlamydia plus gonorrhea multiplex test is in clinical studies. We now expect an FDA submission in the first half of next year. We have been developing a key herpes plus and pox multiplex molecular test. This is an important next for sexual health testing menu for sexually active people with lesions and builds on our already FDA authorized mpox molecular test. General herpes caused by HSV-one or HSV-two is the most common STD in the United States with infection in 1 out of every 6 Actually active people in the U. S. A diagnostic test is needed to determine if an injured individual has either of these highly contagious viruses. We believe our new multiplex test can quickly and accurately detect herpes and or mpox to allow for timely medical intervention. Today, there is not a point of care herpes solution available on the market. We believe that our herpes plus mpox multiplex test is eligible for an EUA and we believe that we could have this herpes mpox test on the market next year. The Q Health monitoring system has many new tests on the way and we're very excited about the progress and our key priority of menu expansion. We're also happy to see the peer reviewed publication of real world clinical experience with CUE comparing CUE to a lab based RT PCR test. Recently, an independent clinical study comparing our Q molecular COVID-nineteen test to a lab based PCR test was peer reviewed and published in Microbiology Spectrum, a journal produced by the American Society For Microbiology. This largest of its kind study of asymptomatic people finds that Q test Is as accurate as the lab based PCR test with 99.4% concordance with this lab based RT PCR test. The study's findings differentiate Q on the basis of both accuracy and speed, superior to the poor sensitive antigen Testing and without the delays of lab based PCR testing. Shifting to the Q integrated care platform, Our solution that seamlessly extends the capability of our foundational QF monitoring system, enabling an end to end customer journey to receive an accurate diagnosis, Consulted to healthcare providers who are apps and receive treatments. We have integrated many of these building blocks over the last 18 months. Last year, we launched QCARE, allowing for video consultation with clinicians and prescription delivery. We announced a partnership with Minnesota Department Public Health to enable all the state citizens to access Q care without cost of the patient. Next, we leverage this platform to add QLab, mail in at home test kits AnQ Pharmacy for prescription subcription. We continue to be excited about this opportunity. We believe QAb and AnQ Pharmacy have the potential to be a meaningful part of the business over the next year. Now that we have fully built out the integrated care platform, we expect that adding new tests and treatment programs will be straightforward and I'm really pleased with how the team continues to leverage While Austin will review our financial performance in detail, I want to highlight the progress we've made with financial discipline. The team continues to balance operational execution with cost management. Our goal at the beginning of the year was to reduce spend by $150,000,000 We have now delivered approximately $165,000,000 of annualized run rate cost savings. At the same time, the team is also focused on near term revenue generating opportunities, including We believe we're getting close as we continue to have positive engagement with the FDA and have continued to add data where necessary as common in the review process. Over the last months, we've been actively responding to information requests and supplying additional data as necessary. We remain optimistic that we will have additional authorization shortly and that these approvals along with new product launches will be the catalyst for revenue growth and we see EBITDA breakeven in early 2025. With that, I'll turn the call over to Austin. Thank you, Ayub, and good afternoon. Now let's walk through our Q3 financial results and 4th quarter guidance. Q3 total revenue of $17,500,000 exceeded our guidance range of $11,000,000 to $13,000,000 We are pleased with the sequential increase amidst the continued industry decline in COVID revenues. In the quarter, our private sector contributed 82% or $14,400,000 of sales. Public sector revenues were $3,100,000 for the 3rd quarter and total desk cartridge sales were $13,200,000 Q3 product gross profit was a loss of $7,400,000 Gross profit is impacted by lower manufacturing volumes and also includes non cash items. Excluding depreciation, amortization and stock based compensation, our gross profit would be slightly positive. Total operating expenses in the quarter were $60,000,000 excluding cost of revenue. Sequentially, Operating expenses are in line with the 2nd quarter. Q3 operating expenses were down 37% from Q4 2022, driven by cost reduction efforts. Further, if you exclude non cash items such as depreciation, amortization and stock based comp, The reduction in operating expenses from Q4 2022 would be even higher on a percentage basis. Sales and marketing expenses were $7,100,000 in the 3rd quarter, a decrease of 63% from Q4 2022, driven by a decrease in digital and marketing costs. R and D expenses were $37,100,000 for Q3, a decrease of 34 percent from $56,100,000 of spend in Q4 2022, as we focus on development programs related to our respiratory and sexual health product offering. G and A expenses were $15,800,000 during the quarter, a decline of 17% from Q4 2022 spend of $19,200,000 In the quarter, we received an employee retention credit of $20,900,000 from the IRS. As a result, GAAP net loss in the 3rd quarter was $47,000,000 or $0.31 per diluted share. On an adjusted basis, net loss was $63,600,000 or $0.42 per diluted share. Adjusted EBITDA was a loss of $36,600,000 Moving to the balance sheet, we ended the quarter with cash of $111,500,000 Now I'd like to move to our guidance. We expect revenues of $16,000,000 to $18,000,000 for the 4th quarter. CU has a healthy balance sheet with $111,500,000 of cash on hand as we continue to prioritize cash preservation. As a reminder, we delivered approximately $165,000,000 of annualized run rate cost savings versus Q4 2022. Our operating expenses were down 37% from Q4 2022 and PPE capital expenditures in the quarter were $1,700,000 a 76% decrease from Q4 2022. Our underlying cash burn rate improved from Q2. Additionally, we continue to execute on our near term catalysts, including preparing for the launch of our flu plus COVID multiplex, flu and RSV, regulatory approvals and other new product offerings. Finally, we continue to evaluate options and opportunities to bolster our cash position. In summary, I am pleased with the progress being made against our 2023 priorities of test expansion, our integrated care platform and strong financial discipline. Looking ahead, we expect to have several molecular tests on the market in 2024, strengthening our expectations of a positive adjusted EBITDA by early 2025. With that, I would like to thank you for your attention. And I'll now turn the call over to the operator for questions. Thank Our first question comes from the line of Tejas Savant with Morgan Stanley. Your line is now open. Hi, this is Jason in for Cajun for Cajun. So congratulations on the quarter guys. So my first question is just back in August, one of your shareholders, they Published a public letter voicing their views on your business strategy. And then recently in October, a separate group of shareholders acting independently published a letter voicing similar views. So my question was just, have you had any dialogue with either of these stakeholders in the past few months? And how do you think about your company's strategy moving forward? Is this the right one? Hey, thanks for the question. So the Board and the management team, the key lens that we apply to every decision is Increasing shareholder value. That's a it's a fundamental part of how we make decisions. And we value shareholder feedback. So we take it very seriously and we deliberate on what It's the right strategy for the company all the time, not only at the behest of shareholders, but also just as the fiduciaries Of this company. So with regards to what we're doing, you can see that we've Been executing with really strong fiscal discipline. Instead of $150,000,000 target, we actually achieved $165,000,000 of cost lowering. So, and that's while focusing and moving forward our key strategic priority of menu expansion. So, in terms of our priorities, They are to expand the menu, to do so with fiscal discipline, to expand and integrated care platform, which delivers the full experience that We seek to with our product and platform. Got it. Thanks for the color. I may ask a follow-up question. So you End of the quarter with $111,000,000 in cash. And then last quarter, you guided to provide you about 12 months of runway. So with another 3 months past us, how do you think about Cash management financing opportunities over next year to extend your runway. Thanks for the question. We're always building towards we're building towards our post approval profitability phase and all the opportunities that come with it. So Our cash performance this year of the $17,000,000 utilization, we're very happy with that performance. This is the best cash performance we've had Since Q1 2022, which was the height of the Omicron. And not just this quarter, if you look at the whole year And every quarter our cash utilization has trended better quarter on quarter. So we're continuing to focus on our cash, Manage our cash and extend our runway. And as you've mentioned, from a savings standpoint, we had a target of $150,000,000 We came in at $165,000,000 so bigger higher than the target and from a timing standpoint ahead of our target. All our investments and most of our investments are behind us and we're, I think, closer and closer to approval. So as we sit here, We're really excited about the not too distant future when we have these approvals in hand. Got it. That was helpful. Thank you, guys. Thank you. One moment for our next question. This question comes from the line of Matthew Sykes with Goldman Sachs. Your line is now open. Hey, guys. This is Will on for Matt. Thanks for taking the question. Just wanted to start high level. Do you see your multiplex tests cannibalizing the sales of standalone tests? And on top of that, what are the use cases for the standalone tests once the multiplex comes out? Thank you. We see the ability to deliver the tests individually like flu, COVID RSV is very important and complementary to multiplex tests like flu COVID that we have under review or The flu COVID RSV test that we're developing with BARDA, our customers they want options, especially on the provider side. They're used to having both combinations and the ability to order a single test. And so we want to provide that flexibility. We also think it's part of a regulatory strategy. So we believe that having options is really the best It was the best strategy. And with regards to cannibalization, we've been having Better than expected sales from our COVID-nineteen test. And we think that in the long term, Depending upon the customer category, they're going to have more desires for one test or combination test and also could depend on whether or not there's flu circulating or not circulating. So it's not a it's Pretty nuanced and I think the baseline is that you want options. That makes sense. Thank you. And then just a follow-up on the tests for this upcoming Season, the flu AB and the RSV that are currently with the FDA, it sounds like you guys are expecting those in the quarter And generated some good new evidence. Is there any chance those end up getting pushed to the first half of twenty twenty four? Or how are you guys thinking about that? Thank you. Yes. As we said, we added a lot of really good data for especially our flu COVID and flu genova applications, and there's RSV is in process as well. What we think is that over the course of the respiratory season, there There's a good chance that we'll be able to achieve the approval for flu COVID combo, flu de novo and RSV de novo. In terms of the exact timing, I Yes, this is a process that we're working through with the FDA. So I can't give you an exact timing, but we are optimistic that we can get them into this respiratory season. And to add to that, these tests are made on the same manufacturing line. So we're really ready from a Manufacturing standpoint, as soon as these tests are ready, we have customers over 300 customers that we've had and Over a quarter million installed base in terms of readers. So we do think we have those channels available to us to commercialize as soon as we get these approvals. That's very helpful. Thank you. Thank you. Our next question comes from the line of Charles Rhyee with Cowen. Your line is now open. Yes. Thanks for taking the questions. Just wanted to follow-up a little bit on sort of the Your comments about reaching EBITDA positive early 2025. Maybe can you give us a sense then sort of what the Revenue mix you would expect when you're reaching breakeven and sort of what the run rate revenue On an annualized basis to reach that target would be, I guess I'm trying to figure out here, you did Like $70,000,000 $80,000,000 in the quarter. You're guiding $16,000,000 $18,000,000 for the next quarter. So Obviously, we're in the respiratory season. It was obviously light in the second quarter. So you're running, what, $60,000,000 $70,000,000 on COVID right now. What would you expect that to look like, Particularly to the prior question about with multiple respiratory tests in the market, is it really respiratory tests that are going to be driving the Revenues out in towards the end of 'twenty four where that's how we reach EBITDA breakeven or If we look at expenses, should we expect OpEx to continue to come down? Just trying to get a better sense for What that mix between revenue and expense looks like or even in margins gross margin looks like as we hit that to reach that breakeven point? Hey, Charles. Thanks for the question. While we're not quite guiding 2024, recognize you guys have to To your models, right. So I think the way to think about 2024 and early 2025 is, you're right, there's a kind of basal COVID rate That we expect to be there. But then when you and on top of that, we do expect Several approvals. So we expect to have several approvals in 2024. So it's not just respiratory, it's a sexual health as well. And then on top of that, our software and services, the Q Care, Q Lab, Q Pharmacy, we'd expect those to also start gaining A momentum and we've also talked about this flywheel effect that when we have all these other test approvals, we think there's a flywheel effect that actually benefits Q Care, Q Lab, Q Pharmacy. And then the last piece on the top line is not to forget is the grant revenue that we have. We have the BARDA deal contract that we signed a $28,000,000 that also contributes to the top line. So that's kind of broad strokes how I think about top line. As you go down the P and L, look, I mean gross profit is going to be impacted by volumes as well as mix. And You would have seen in the past when we've had higher volumes, we've posted over 60% margins. And you'll also see sequentially Our gross profit has kind of trended with how volumes have played out. And when we think about our future products, there as we move away from COVID or the proportion away from COVID, We do think we'd have a kind of price mix benefit as well on margins. So we think over time as revenues grow, margins would grow for those reasons. And then about on spend, we're very proud of we're very happy with where our spend is right now and that allows us to We're at the right amount of spend to play out our strategic priorities. So while I'm not going to guide Similar amount of OpEx quarter on quarter. Okay, thanks. And the EBITDA loss was $35,000,000 in the quarter. Actually cash used was only 18,000,000 you remind us sort of what the delta between adjusted EBITDA and actually cash used is? Yes. Our cash utilization of 17, as I mentioned, this is the best kind of cash Four months that we've had since Q1 2022. We did have an ERC credit of $20,000,000 And while that was one time, I think the philosophy here is that here as a management team, we continue to look for opportunities to bolster our cash balance. Okay. And then lastly, can you just remind us For the BARDA contract, how we should expect to sort of layer those revenues as we go through the year? Is that sort of A portion of quarterly or will it be recognized in chunks? Just curious there. Thanks. Yes. The barter revenue, I mean, it shows up in the grant and the revenue line item on our P and L and it does show up Quarterly and it will continue to show up quarterly, up until we have the approval for the flu COVID RSV multiplex. Okay, great. Appreciate the questions. Thanks. Thank you. I'm showing no further questions at this time. So thank you for your participation in today's conference. This does conclude the program and you may now disconnect.