Quanterix Corp: Form 10-Q/A for the period ended Jun 30, 2024

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited Consolidated Financial Statements and Notes to Consolidated Financial Statements in the section titled “Part I. Item 1. Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q/A (the "Amended Report") and our audited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on December 23, 2024 (the “Amended Annual Report”). Certain columns and rows may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying unrounded numbers. In addition to historical information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results, performance, or experience may differ materially from those discussed below due to various important factors, risks, and uncertainties, including, but not limited to, those set forth in the sections titled “Part II, Item 1A. Risk Factors” and “Note Regarding Forward-Looking Statements” included in this Amended Report, "Part II, Item 1A. Risk Factors" of the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2024 (the "Original Report"), as filed with the SEC on August 8, 2024, or “Part I, Item 1A. Risk Factors” of the Amended Annual Report, as may be updated by Part II, Item 1A. Risk Factors in our subsequently filed Quarterly Reports on Form 10-Q. Unless the context otherwise requires, the terms “Quanterix,” the “Company,” “we,” “it,” “us, “and “our” in this Amended Report refer to Quanterix Corporation and its consolidated subsidiaries.

Restatement of Previously Issued Financial Statements

This Management's Discussion and Analysis of Financial Condition and Results of Operations reflects the effects of the restatement of our Consolidated Financial Statements as described in Note 1 - Restatement of Financial Statements (the "Restatement"). For further detail regarding the Restatement, refer to the sections titled “Explanatory Note” and “Part I, Item 4. Controls and Procedures.”

Other than to reflect effects of the Restatement, this discussion does not reflect any information or events occurring after August 8, 2024, the filing date of the Original Report, or modify or update those disclosures affected by events that occurred at a later date or facts that subsequently became known to us, except to the extent they are otherwise required to be included and discussed herein.

Overview (As Restated)

We are a life sciences company that has developed next-generation, ultra-sensitive digital immunoassay platforms that advance life sciences research and diagnostics. Our platforms are based on our proprietary digital “Simoa” detection technology and enable customers to reliably detect protein biomarkers at ultra-low concentrations in blood, serum, and other fluids that, in many cases, are undetectable using conventional, analog immunoassay technologies. The ability of our Simoa platforms to detect proteins in the femtomolar range is enabling the development of novel therapies and diagnostics and has the potential to facilitate a paradigm shift in healthcare from an emphasis on treatment to a focus on earlier detection, monitoring, prognosis, and, ultimately, prevention. Our Simoa platforms have achieved significant scientific validation and commercial adoption, and our Simoa technology has been cited in more than 2,900 scientific publications in areas of high unmet medical need and research interest such as neurology, oncology, cardiology, infectious disease, and inflammation.

Our instruments are designed to be used either with assays fully developed by us, including all antibodies and supplies required to run the assays, or with “homebrew” assay kits where we supply some of the components required for testing and the customer supplies the remaining required elements. Accordingly, our installed instruments generate a recurring revenue stream through the sale of these consumables. As the installed base of our Simoa instruments increases, we expect total consumables revenue to increase.

We commercially launched our HD-X instrument in the second half of 2019. The HD-X is an upgraded version of the Simoa HD-1 (our first Simoa instrument, launched in January 2014), collectively “HD Instruments”, that is designed to deliver significant productivity and operational efficiency improvements, as well as greater user flexibility. The HD-X uses our bead-based technology, and assays run on the HD-X are fully automated. At June 30, 2024, approximately 83% of the HD Instrument installed base were HD-X instruments.

Further, we launched our SR-X instrument in 2017 as a compact desktop instrument with a lower price point, more flexible assay preparation, and a wider range of applications. The SR-X utilizes the same Simoa bead-based technology and assay kits as the HD-X.

With our acquisition of Aushon BioSystems, Inc. in 2018, we acquired a CLIA certified laboratory and proprietary sensitive planar array detection technology. The Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) are federal regulatory standards that apply to all clinical laboratory testing performed on humans in the United States (with the exception of research testing that does not report patient specific results). Leveraging our proprietary sophisticated Simoa image analysis and data analysis algorithms, we further refined the planar array technology to develop the SP-X instrument to provide sensitivity similar to that found in our Simoa bead-based platform. We commercially launched the SP-X instrument in 2019.

Our wholly-owned subsidiary UmanDiagnostics AB (“Uman”), a company located in Umeå, Sweden, supplies neurofilament light (“NfL”), antibodies, and enzyme-linked immunoassay (“ELISA”) kits, which are used by researchers and biopharmaceutical and diagnostics companies world-wide in the detection of NfL to advance the development of therapeutics and diagnostics for neurodegenerative conditions.

We also provide contract research services for customers and Laboratory Developed Test (“LDT”) services through our CLIA-certified Accelerator Laboratory (the “Accelerator Laboratory”). The Accelerator Laboratory provides customers with access to our Simoa technology and our Lucent Diagnostics clinical testing services (launched in July 2023), and supports multiple projects and services, including sample testing, homebrew assay development, custom assay development, and blood-based biomarker testing. To date, we have completed over 2,300 projects for more than 480 customers from all over the world using our Simoa platforms.

We have an extensive base of customers including pharmaceutical, biotechnology, contract research organizations, academic, and governmental research institutions. We sell our instruments, consumables, and services through a direct field sales force and support organizations in North America and Europe, and through our own sales force and distributors in additional countries, including Australia, Brazil, China, Czech Republic, India, Hong Kong, Israel, Japan, New Zealand, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan, and the United Arab Emirates.

As of June 30, 2024, we had cash, cash equivalents, and marketable securities of $296.9 million. Since our inception, we have incurred annual net losses. Our net losses were $7.4 million and $18.6 million for the three and six months ended June 30, 2024, respectively, and $5.6 million and $12.8 million for the three and six months ended June 30, 2023, respectively. As of June 30, 2024, we had an accumulated deficit of $450.1 million and stockholders’ equity of $340.8 million.

We expect to incur significant expenses and operating losses at least through the next 24 months and we expect our expenses to increase substantially as we:

• expand our sales and marketing efforts to further commercialize our products;
• expand our research and development efforts to improve our existing, or to develop and launch, new assays and instruments. These expenses could be particularly significant if any of our products become subject to additional or more burdensome regulation by the U.S. Food and Drug Administration (the “FDA”);
• invest in Lucent Diagnostics, additional LDTs, and other diagnostics initiatives including entry into translational pharma and clinical diagnostic markets;
• seek Premarket Approval (“PMA”), de novo classification, or 510(k) clearance from the FDA for our existing products or new products, including new assays and instruments, if or when we decide to market products for use in the prevention, diagnosis, or treatment of a disease or other condition;
• hire additional personnel to support our growth and research and development;
• strategically acquire and integrate companies or technologies that may be complementary to our business;
• enter into collaboration arrangements, or in-license other products and technologies; and
• add or enhance operational, financial, and management information systems.

Recent Business Developments

In March 2024, our Lucent AD p-Tau 217 blood test was granted Breakthrough Device designation by the FDA. This designation is granted to products that have the potential to offer more effective diagnosis of life-threatening diseases with an unmet medical need. Proposed indications for this blood test include use of the test results in patients presenting with cognitive impairment who are being evaluated for Alzheimer’s disease risk to aid in diagnostic evaluation. The test is not intended as a stand-alone diagnostic test and test results will be interpreted in conjunction with other diagnostic tools to establish a final clinical diagnosis. This test has not been otherwise cleared or approved by the FDA and Breakthrough Device designation does not guarantee that the FDA review and approval process will be shortened or that an application will be approved. We do not expect material revenue from this test, or other Lucent Diagnostics tests, until 2025 or later, if at all.

During the fourth quarter of 2023, we substantially completed our six-quarter assay redevelopment program. The objective of this operational program was to improve our ability to manufacture and deliver high-quality assays at scale. Since then, and using the improved protocols resulting from the redevelopment program, we have launched our new Simoa Advantage PLUS assays and continue to transition existing assays to Advantage PLUS. The improved protocols leverage manufacturing efficiencies and reagent improvements to provide more consistent results and improved lot-to-lot consistency, which also enables production of larger lot sizes with extended shelf lives. Advantage PLUS assays began shipping to customers in the first quarter of 2024. We expect to continue to apply these improved protocols and manufacturing efficiencies to other existing assays, as well as assays that we may develop in the future.

Comparison of Results of Operations for Three Months Ended June 30, 2024 and 2023:

The following table sets forth select Consolidated Statements of Operations data, and such data as a percentage of total revenues (in thousands, except percentages):

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Revenues (As Restated)

Total revenues increased $3.6 million, or 12%, to $34.4 million for the three months ended June 30, 2024, compared to $30.8 million for the three months ended June 30, 2023.

Product revenue of $19.9 million for the three months ended June 30, 2024 consisted of instrument sales of $2.5 million and sales of consumables and other products of $17.4 million. This represented an increase of $0.3 million compared to product revenue of $19.5 million for the three months ended June 30, 2023. The increase in product revenue was primarily due to a $1.1 million increase from growth in consumables demand. This increase was partially offset by a decrease from the one-time receipt of ordinary shares in UltraDx in the second quarter of 2023 with a fair value of $0.8 million that was recognized as variable consideration revenue under the UltraDx Agreement (as a Level 3 financial asset, the fair value was determined primarily using the third-party purchase price of similar instruments issued by UltraDx), and a $0.8 million decrease in instrument sales due to reduced demand in what we believe is a constrained capital funding environment. Based on the constrained capital funding environment, we expect softness in instrument sales to continue for the remainder of 2024.

Service revenue was $13.5 million for the three months ended June 30, 2024, compared to $10.5 million for the three months ended June 30, 2023, an increase of $3.0 million, or 29%. This increase was primarily due to a $2.6 million increase in Accelerator Laboratory revenue driven by higher volumes of sample testing and assay development services, as well as higher selling prices. We expect to see continued growth in Accelerator Laboratory services through 2024.

Cost of Goods Sold and Services (As Restated)

Total cost of goods sold and services increased $0.8 million, or 7%, to $12.1 million for the three months ended June 30, 2024, compared to $11.4 million for the three months ended June 30, 2023.

Cost of product revenue was $6.7 million for both the three months ended June 30, 2024, and the three months ended June 30, 2023, and is consistent with flat product revenue growth during the same periods.

Cost of service and other revenue increased $0.8 million, or 17%, to $5.5 million for the three months ended June 30, 2024, compared to $4.7 million for the three months ended June 30, 2023. This increase was primarily due to the increase in Accelerator Laboratory services.

Research and Development (As Restated)

Research and development expense increased $2.0 million, or 33%, to $8.2 million for the three months ended June 30, 2024, compared to $6.1 million for the three months ended June 30, 2023. This increase was primarily due to a $1.1 million increase in compensation and benefits costs related to increased headcount and a $0.8 million increase in outside services and research lab supplies and equipment to enable product development. We expect research and development expense to continue to increase throughout 2024 and into 2025 due to continued investment in new instrument and assay development.

Selling, General and Administrative (As Restated)

Selling, general and administrative expense increased $2.8 million, or 13%, to $24.1 million for the three months ended June 30, 2024, compared to $21.3 million for the three months ended June 30, 2023. This increase was primarily due to a $1.8 million increase in compensation and benefits costs and a $0.8 million increase in stock-based compensation expense, both due to increased headcount. Included within selling, general, and administrative expense are $2.1 million and $1.6 million of shipping and handling costs for product sales for the three months ended June 30, 2024 and 2023, respectively.

Other Lease Costs (As Restated)

Other lease costs decreased $0.1 million, or 4% to $0.9 million for the three months ended June 30, 2024, compared to $1.0 million for the three months ended June 30, 2023. We are not using two leased office and laboratory facilities and are evaluating alternatives, including sub-leasing the facilities. Other lease costs include amortization of the related operating lease right-of-use assets and other leased facility operating expenses from periods after determining that the facilities would not be used.

Interest Income

Interest income decreased $0.2 million, or 5%, to $3.7 million for the three months ended June 30, 2024, as compared to $3.9 million for the three months ended June 30, 2023.

Other Income (Expense), Net (As Restated)

Other income (expense), net was less than $0.1 million for the three months ended June 30, 2024, as compared to $0.2 million for the three months ended June 30, 2023.

Income Tax Expense

Income tax expense was $0.1 million for the three months ended June 30, 2024, as compared to $0.2 million for the three months ended June 30, 2023.

Comparison of Results of Operations for Six Months Ended June 30, 2024 and 2023:

The following table sets forth select Consolidated Statements of Operations data, and such data as a percentage of total revenues (in thousands, except percentages):

Revenues (As Restated)

Total revenues increased $7.2 million, or 12%, to $66.4 million for the six months ended June 30, 2024, compared to $59.3 million for the six months ended June 30, 2023.

Product revenue of $39.6 million for the six months ended June 30, 2024 consisted of instrument sales of $5.0 million and sales of consumables and other products of $34.5 million. This represented an increase of $0.6 million, or 2%, compared to product revenue of $38.9 million for the six months ended June 30, 2023. The increase in product revenue was primarily due to a $4.2 million increase in consumables from growth in both demand and selling prices. This increase was partially offset by a decrease from the one-time receipt of ordinary shares in UltraDx in the second quarter of 2023 with a fair value of $0.8 million that was recognized as variable consideration revenue under the UltraDx Agreement (as a Level 3 financial asset, the fair value was determined primarily using the third-party purchase price of similar instruments issued by UltraDx), and a $3.5 million decrease in instrument sales due to reduced demand in what we believe is a constrained capital funding environment. Based on the constrained capital funding environment, we expect softness in instrument sales to continue for the remainder of 2024.

Service revenue was $25.5 million for the six months ended June 30, 2024, compared to $19.0 million for the six months ended June 30, 2023, an increase of $6.5 million, or 34%. This increase was primarily due to a $5.8 million increase in Accelerator Laboratory revenue driven by higher volumes of sample testing and assay development services, as well as higher selling prices. We expect to see continued growth in Accelerator Laboratory services through 2024.

Cost of Goods Sold and Services (As Restated)

Total cost of goods sold and services increased $1.8 million, or 8%, to $25.7 million for the six months ended June 30, 2024, compared to $23.9 million for the six months ended June 30, 2023.

Cost of product revenue increased $0.3 million, or 2%, to $14.9 million for the six months ended June 30, 2024, compared to $14.6 million for the six months ended June 30, 2023. This increase was primarily due to increases in overhead costs and increased consumables sales, and was partially offset by decreased costs due to lower instrument sales.

Cost of service and other revenue increased $1.5 million, or 16%, to $10.8 million for the six months ended June 30, 2024, compared to $9.3 million for the six months ended June 30, 2023. This increase was primarily due to the increase in Accelerator Laboratory services and royalty payments.

Research and Development (As Restated)

Research and development expense increased $3.8 million, or 34%, to $14.9 million for the six months ended June 30, 2024, compared to $11.1 million for the six months ended June 30, 2023. This increase was primarily due to (1) a $1.7 million increase in compensation and benefits costs related to increased headcount, (2) a $1.1 million increase in costs of outside services and research lab supplies and equipment to enable product development, and (3) a $0.3 million increase in stock-based compensation expense due to increased headcount. We expect research and development expense to continue to increase throughout 2024 and into 2025 due to continued investment in new instrument and assay development.

Selling, General and Administrative (As Restated)

Selling, general and administrative expense increased $8.0 million, or 19%, to $50.1 million for the six months ended June 30, 2024, compared to $42.1 million for the six months ended June 30, 2023. This increase was primarily due to (1) a $4.6 million increase in compensation and benefits costs related to increased headcount, (2) a $1.9 million increase in stock-based compensation expense due to increased headcount, (3) a $0.8 million increase in software and technology expenses, and (4) a $0.8 million increase in distribution costs. Included within selling, general, and administrative expense are $4.2 million and $3.5 million of shipping and handling costs for product sales for the six months ended June 30, 2024 and 2023, respectively.

Other Lease Costs (As Restated)

Other lease costs increased $0.1 million, or 5%, to $1.9 million for the six months ended June 30, 2024, compared to $1.8 million for the six months ended June 30, 2023. We are not using two leased office and laboratory facilities and are evaluating alternatives, including sub-leasing the facilities. Other lease costs include amortization of the related operating lease right-of-use assets and other leased facility operating expenses from periods after determining that the facilities would not be used.

Interest Income

Interest income increased $0.3 million, or 4%, to $7.6 million for the six months ended June 30, 2024, as compared to $7.3 million for the six months ended June 30, 2023.

Other Income (Expense), Net (As Restated)

Other income (expense), net was $0.2 million for the six months ended June 30, 2024, as compared $(0.2) million for the six months ended June 30, 2023.

Income Tax Expense

Income tax expense was $0.3 million for the six months ended June 30, 2024, as compared to $0.4 million for the six months ended June 30, 2023.

Liquidity and Capital Resources (As Restated)

Our principal sources of liquidity are cash, cash equivalents, marketable securities, and funds generated from sales of our products and services. As of June 30, 2024, we had cash and cash equivalents of $47.0 million and $249.9 million of available for sale marketable securities. Historically we have also financed our operations through equity offerings and borrowings from credit facilities.

We believe our cash, cash equivalents, and marketable securities, along with funds generated from sales of our products and services, will be sufficient to meet our anticipated operating cash requirements for at least 12 months from the date of the Original Report.

Our liquidity requirements have consisted, and we expect that they will continue to consist, of sales and marketing expenses, research and development expenses, working capital, and general corporate expenses. Our future capital requirements will depend on many factors, including, but not limited to, our pace of growth, expansion or introduction of instruments, assays, and services, including Lucent Diagnostics, and advancing access to our diagnostic tests, market acceptance of our products and services, regulatory requirements, regulatory approval of our products or services, and the effects of competition, technological developments, and broader market and economic trends.

We regularly assess potential acquisitions and pursue acquisitions of complementary businesses, services, and technologies. To the extent our existing cash, cash equivalents, and marketable securities are insufficient to fund future activities or requirements to continue operating our business, we may need to raise additional capital. If the conditions for raising capital are favorable, we may seek to finance future cash needs through public or private equity, debt offerings, or other financings.

If needed, we cannot guarantee that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have or are not able to obtain sufficient funds, if needed, we may have to delay development or commercialization of our products and services. We also may have to reduce marketing, customer support, or other resources devoted to our products, or cease operations.

Cash Flows

The following table summarizes our cash flows (in thousands):

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Net Cash Used in Operating Activities (As Restated)

We derive cash flows from operations primarily from the sale of our products and services. Our cash flows from operating activities are also significantly influenced by our use of cash for operating expenses to develop new products and services, invest in process and product improvements, and increase our sales and marketing efforts. We have historically experienced negative cash flows from operating activities as we have developed our technology, expanded our business, and built our infrastructure. We expect negative cash flows from operating activities will continue in future periods.

Net cash used in operating activities was $25.1 million and $8.8 million for the six months ended June 30, 2024 and 2023, respectively. The $16.3 million increase in net cash used in operating activities was primarily driven by an overall increase in our net loss, adjusted for non-cash items including stock-based compensation, accretion of our marketable securities, and depreciation and amortization. The increase was further driven by changes in working capital items, primarily (1) an increase in accounts receivable from sales timing and revenue growth, (2) an increase in inventory as a result of completing the assay development program and manufacturing and stocking new assays, and (3) increases in accrued compensation and benefits, accrued expenses, and other current liabilities.

Net Cash Used in Investing Activities (As Restated)

Our primary investing activities consist of purchases of marketable securities. Additionally, we use funds towards capital expenditures for the purchase of property and equipment to support our expanding infrastructure and work force. We expect to continue to incur additional capital expenditures related to these efforts in future periods.

Net cash used in investing activities was $102.2 million during the six months ended June 30, 2024, which consisted of the purchase of $189.3 million of marketable securities and $2.1 million of purchases of property and equipment, offset by proceeds from maturities of marketable securities of $89.2 million.

Net cash used in investing activities was not material during the six months ended June 30, 2023.

Net Cash Provided by Financing Activities

Financing activities provided $0.3 million and $0.7 million of cash during six months ended June 30, 2024 and 2023, respectively, from the issuance of our common stock under our equity incentive plans.

Future Cash Obligations

As of June 30, 2024, there have been no material changes to our contractual obligations and commitments from those described in the section titled “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Amended Annual Report.

In addition to the cash commitments disclosed in our Amended Annual Report, we may have other payables and liabilities that may be legally enforceable but are not considered contractual commitments.

Critical Accounting Policies and Estimates

Our critical accounting policies and significant estimates that involve a higher degree of judgment and complexity are described in the section titled “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies, Significant Judgments and Estimates” included in our Amended Annual Report.

There have been no material changes to our critical accounting policies and estimates as previously disclosed in that report.

Non-GAAP Financial Measures

To supplement our financial statements presented on a U.S. GAAP basis, we present non-GAAP gross profit, non-GAAP gross margin, non-GAAP total operating expenses, and non-GAAP loss from operations. These non-GAAP measures are calculated by including shipping and handling costs for product sales within cost of product revenue instead of within selling, general and administrative expenses. We use these non-GAAP measures to evaluate our operating performance in a manner that allows for meaningful period-to-period comparison and analysis of trends in our business and our competitors. We believe that presentation of these non-GAAP measures provides useful information to investors in assessing our operating performance within our industry and to allow comparability to the presentation of other companies in our industry where shipping and handling costs are included in cost of goods sold for products. The non-GAAP financial information presented here should be considered in conjunction with, and not as a substitute for, the financial information presented in accordance with U.S. GAAP.

Set forth below is a reconciliation of non-GAAP gross profit, non-GAAP gross margin, non-GAAP total operating expenses, and non-GAAP loss from operations to their most directly comparable GAAP financial measures (in thousands):

Recent Accounting Pronouncements

Refer to Note 3 - Significant Accounting Policies in the Notes to Consolidated Financial Statements included in this Amended Report for a full description of recent accounting pronouncements, including the expected dates of adoption and effects on our Consolidated Financial Statements and related disclosures.

As previously disclosed in the section titled "Part II, Item 9A. Controls and Procedures" in our Amended Annual Report, management concluded that our internal control over financial reporting was not effective at a reasonable assurance level as of December 31, 2023 due to the material weaknesses in the effectiveness of our internal controls associated with the valuation of our inventory, inclusive of the subsequently identified control design deficiency related to the capitalization of labor and overhead costs in our inventory balances (the "Inventory Valuation MW"), and the accounting for property and equipment, net (the "Property and Equipment MW").

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Based on our updated evaluation of the effectiveness of internal control over financial reporting under the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and in light of the material weaknesses discussed above, our management continued to conclude that our internal control over financing reporting was not effective at the reasonable assurance level as of June 30, 2024.

If not remediated, or if we identify further material weaknesses in our internal control, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in additional material misstatements in our consolidated financial statements or a failure to meet our reporting and financial obligations.

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosures. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2024. Because our efforts to remediate the material weaknesses in our internal control over financial reporting are still underway and we have not had a sufficient period of time to test the operating effectiveness of our internal control over financial reporting, which we view as an integral part of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of June 30, 2024.

Nevertheless, based on a number of factors, including the performance of additional procedures by management designed to ensure the reliability of our financial reporting, we believe that the Consolidated Financial Statements and Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations, and cash flows as of the dates, and for the periods, presented, in conformity with U.S. GAAP.

Remediation Efforts

Management, with oversight from the Audit Committee of our Board of Directors, continues taking steps to remediate the control deficiencies that resulted in the Inventory Valuation MW and Property and Equipment MW described above by implementing changes to our internal control over financial reporting. Our remediation plans, which include addressing the additional deficiency related to the Restatement, include, but are not limited to, the efforts summarized below:

• we have engaged accounting advisory consultants to:
• implement new software solutions to automate key manual inventory valuation processes and outputs, some of which we began to use in the second quarter of 2024;
• assess our current enterprise resource planning system and identify opportunities to enhance our use of the system through automating certain controls and processes, for which development of system enhancements were made and continue to be underway; and
• design new internal controls evaluating the accounting for inventory, including enhancements to inventory valuation review procedures.
• we have redesigned our analysis of labor and overhead cost capitalization, including related controls;
• we continue to strengthen and document our existing controls and, starting in the first quarter of 2024, have implemented additional compensating controls and will continue to do so throughout the remainder of fiscal year 2024;
• we continue to execute controls that we worked to improve during fiscal year 2023 that did not have a sufficient period of time to demonstrate operating effectiveness as of December 31, 2023;
• we have hired a Head of SOX Transformation to oversee the remediation of our material weaknesses and further drive improvements across our internal controls;
• we continue to evaluate, enhance, and add personnel in the finance organization with a focus on the requisite experience in the areas of accounting, SEC financial reporting, and associated internal controls;
• we have hired additional accounting consultants to provide additional depth and breadth in our period end closes, financial reporting capabilities, and internal controls compliance until we have filled key additions or vacancies on our team with qualified personnel for a sufficient period of overlap to ensure successful transition of responsibilities;
• we continue to enhance the effectiveness of the related controls based on the recommendations provided by the third-party consulting firm we engaged to assess our remediation plan; and
• we continue to provide trainings on a regular basis related to internal control over financial reporting for all control owners.

We have taken significant steps in our remediation plan and continue our efforts to remediate the material weaknesses described above. We believe that the implementation of the above steps will allow us to address the deficient controls within our internal control environment. As we continue to evaluate and work to improve our internal control over financial reporting, we will take additional measures to address control deficiencies and we may modify certain of the remediation measures described above. Following our design and implementation of our remediation efforts, we will need to demonstrate their operating effectiveness. We expect the remediation of the Property and Equipment MW to continue through fiscal year 2024 and based on the Restatement, we expect the remediation of the Inventory Valuation MW, including the additional control design deficiency, will continue into fiscal year 2025. We will not be able to consider any material weakness remediated until the applicable remedial controls operate for a sufficient period of time and our management has concluded, through testing, that our controls are operating effectively.

Changes in Internal Control over Financial Reporting

Other than the changes outlined above to remediate the material weaknesses, there have been no changes in our internal control over financial reporting during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.