Quanterix Corp: Form 10-Q for the period ended Sep 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 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/A 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 on Form 10-K/A”). 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 under the sections titled “Part II, Item 1A. Risk Factors” and “Note Regarding Forward-Looking Statements” included in this Quarterly Report on Form 10-Q or under the section titled “Part I, Item 1A. Risk Factors” of our Amended Annual Report on Form 10-K/A, as updated by the section titled "Part II, Item 1A. Risk Factors" in our Quarterly Reports on Form 10-Q. Unless the context otherwise requires, the terms “Quanterix,” the “Company,” “we,” “it,” “us, “and “our” in this Quarterly Report on Form 10-Q 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.”

Overview

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 3,100 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 September 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 September 30, 2024, we had cash, cash equivalents, and marketable securities of $293.5 million. Since our inception, we have incurred annual net losses. Our net losses (2023 amounts asrestated) were $8.4 million and $26.9 million for the three and nine months ended September 30, 2024, respectively, and $6.7 million and $19.5 million for the three and nine months ended September 30, 2023, respectively. As of September 30, 2024, we had an accumulated deficit of $458.5 million and stockholders’ equity of $338.9 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

Agreement to Acquire Emission

On December 16, 2024, we entered into a Share Purchase Agreement (the “Purchase Agreement”) with Emission Inc. (“Emission”), the shareholders of Emission (collectively, the “Shareholders”), and Van Chandler, as the Shareholders’ representative. Emission is based in Georgetown, Texas and manufactures large-scale, highly-uniform dye-encapsulating magnetic beads designed for low and mid-plex assays and a mid-plex platform that reads its proprietary beads. The transaction is part of our plans to secure the use of Emission's highly controlled beads in our next generation platforms and expansion into a new multi-plex segment targeting third-party original equipment manufacturer ("OEM") customers.

Pursuant to the terms of the Purchase Agreement, we agreed to purchase from the Shareholders all of the issued and outstanding shares of capital stock of Emission (the “Transaction”) for an upfront payment of $10 million, with an additional $10 million payable upon completion of certain technical milestones. Additionally, the Shareholders may receive up to an additional $50 million in earnout payments through December 31, 2029, contingent upon the achievement of certain performance milestones. The Transaction is expected to close in January 2025 and either party may terminate the Purchase Agreement if the Transaction is not completed on or before January 31, 2025.

The Purchase Agreement also provides that, at closing, the parties will enter into a call option agreement (the “Option Agreement”), pursuant to which the Shareholders will have the right to repurchase all of the outstanding capital stock of Emission for $10 million after five years if Emission’s revenues do not exceed $5 million in any one year during such period. If the Shareholders exercise the right to repurchase Emission under the Option Agreement and consummate the repurchase, the Company will retain a perpetual, fully-paid, irrevocable license to all Emission intellectual property required to continue to manufacture and commercialize the Company’s products.

LucentAD Tests

In October 2024, we launched LucentAD Complete, a confirmatory blood biomarker test capable of providing results equivalent to cerebrospinal fluid ("CSF") biomarkers and PET imaging. This test combines p-Tau 217, Amyloid beta 42, Amyloid beta 40, GFAP, and NfL biomarkers, which are recognized by the Alzheimer’s Association as core biomarkers of amyloid and tau, or biomarkers of non-specific processes involved in Alzheimer’s Disease ("AD") pathophysiology. The LucentAD Complete test is intended for patients being evaluated for AD. The results from the LucentAD Complete test can aid in the earlier diagnosis of AD, as well as the development of personalized treatment plans.

Additionally, in March 2024, our LucentAD 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 these tests, or other Lucent Diagnostics tests, until 2025 or later, if at all.

Assay Redevelopment Program

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 assay 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 September 30, 2024 and 2023 (As Restated for 2023 Amounts):

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

Total revenues increased $4.3 million, or 13%, to $35.8 million for the three months ended September 30, 2024, compared to $31.6 million for the three months ended September 30, 2023.

Product revenue was $19.7 million for the three months ended September 30, 2024 and consisted of instrument sales of $2.4 million and sales of consumables and other products of $17.3 million. This represented a decrease of $0.2 million compared to product revenue of $19.9 million for the three months ended September 30, 2023. The decrease was due to a $1.5 million decrease in instrument sales and was partially offset by a $1.3 million increase in sales of consumables and other products driven by increased demand and higher selling prices. We believe the reduced instrument demand is due to a constrained capital funding environment and we expect softness in instrument sales to continue throughout 2024.

Service revenue was $13.8 million for the three months ended September 30, 2024, compared to $10.9 million for the three months ended September 30, 2023, an increase of $3.0 million, or 27%. The increase was due to higher volumes of sample testing and assay development services in our Accelerator Laboratory. We expect to see continued growth in Accelerator Laboratory services throughout 2024.

Collaboration and license revenue was $1.9 million for the three months ended September 30, 2024, compared to $0.2 million for the three months ended September 30, 2024, an increase of $1.6 million, or 690%. The increase was primarily due to LDT-related license revenue.

Cost of Goods Sold and Services

Total cost of goods sold and services increased $3.5 million, or 29%, to $15.7 million for the three months ended September 30, 2024, compared to $12.2 million for the three months ended September 30, 2023.

Cost of product revenue increased $3.3 million, or 46%, to $10.6 million for the three months ended September 30, 2024, compared to $7.2 million for the three months ended September 30, 2023. This increase was primarily due to lower production volume and output, which led to decreased labor and overhead capitalization, as well as increased costs due to the introduction of new assays.

Cost of service and other revenue was $5.1 million for the three months ended September 30, 2024, compared to $4.9 million for the three months ended September 30, 2023, an increase of $0.2 million, or 3%. Although service and other revenue increased by 27% during the same period, these costs remained consistent with the same period in the prior year due to larger project sizes and improved efficiency delivering Accelerator Laboratory services.

Research and Development

Research and development expense increased $0.4 million, or 5%, to $8.1 million for the three months ended September 30, 2024, compared to $7.7 million for the three months ended September 30, 2023. This increase was primarily due to a $0.7 million increase in compensation and benefits costs related to increased headcount and a $0.4 million increase in outside services to enable product development. These increases were partially offset by a $0.4 million decrease in lab supplies and equipment used in product research and a $0.4 million decrease related to the disposal of certain assets in the third quarter of 2023, which did not repeat in 2024. We expect research and development expense to continue to increase into 2025 due to continued investment in new instrument and assay development.

Selling, General and Administrative

Selling, general and administrative expense decreased $0.6 million, or 3%, to $22.9 million for the three months ended September 30, 2024, compared to $23.6 million for the three months ended September 30, 2023. This decrease was primarily due to a $0.5 million decrease in shipping and handling costs for products due to lower instrument sales, and the effect of more streamlined distribution operations. Included within selling, general, and administrative expense are $2.0 million and $2.6 million of shipping and handling costs for product sales for the three months ended September 30, 2024 and 2023, respectively.

Other Lease Costs

Other lease costs were $0.9 million for both the three months ended September 30, 2024 and the three months ended September 30, 2023. We are not using a leased office and are evaluating alternatives, including sub-leasing the facility. Other lease costs include amortization of the related operating lease right-of-use asset and other leased facility operating expenses from periods after determining that the facility would not be used.

Interest Income

Interest income decreased $0.6 million, or 16%, to $3.5 million for the three months ended September 30, 2024, as compared to $4.2 million for the three months ended September 30, 2023. The decrease was driven by lower interest rates and a lower balance of cash, cash equivalents, and marketable securities.

Other Income (Expense), Net

Other income (expense), net decreased $2.1 million, or 100%, to less than $0.1 million for the three months ended September 30, 2024, as compared to $2.1 million for the three months ended September 30, 2023. The decrease primarily relates to recognizing a $2.4 million receivable under the Employee Retention Credit established by the Coronavirus Aid, Relief, and Economic Security Act in the third quarter of 2023.

Income Tax Expense (Benefit)

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

Comparison of Results of Operations for Nine Months Ended September 30, 2024 and 2023 (As Restated for 2023 Amounts):

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

Total revenues increased $11.4 million, or 13%, to $102.3 million for the nine months ended September 30, 2024, compared to $90.8 million for the nine months ended September 30, 2023.

Product revenue was $59.3 million for the nine months ended September 30, 2024 and consisted of instrument sales of $7.4 million and sales of consumables and other products of $51.9 million. This represented an increase of $0.4 million, or 1%, compared to product revenue of $58.8 million for the nine months ended September 30, 2023. The increase was due to a $5.4 million increase in sales of consumables and other products driven by growth in demand and higher selling prices, and was partially offset by a $5.0 million decrease in instrument sales. Product revenue for the nine months ended September 30, 2023, also included 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). We believe the reduced instrument demand is due to a constrained capital funding environment and we expect softness in instrument sales to continue throughout 2024.

Service revenue was $39.3 million for the nine months ended September 30, 2024, compared to $29.9 million for the nine months ended September 30, 2023, an increase of $9.5 million, or 32%. This increase was primarily due to an $8.6 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 throughout 2024.

Collaboration and license revenue was $2.8 million for the nine months ended September 30, 2024, compared to $1.2 million for the nine months ended September 30, 2023, an increase of $1.5 million, or 123%. The increase was primarily due to LDT-related license revenue.

Cost of Goods Sold and Services

Total cost of goods sold and services increased $5.3 million, or 15%, to $41.3 million for the nine months ended September 30, 2024, compared to $36.0 million for the nine months ended September 30, 2023.

Cost of product revenue increased $3.7 million, or 17%, to $25.5 million for the nine months ended September 30, 2024, compared to $21.8 million for the nine months ended September 30, 2023. This increase was primarily due to higher costs related to increased consumables sales, as well as increased costs due to the introduction of new assays, and was partially offset by decreased costs due to lower instrument sales.

Cost of service and other revenue increased $1.7 million, or 12%, to $15.9 million for the nine months ended September 30, 2024, compared to $14.2 million for the nine months ended September 30, 2023. This increase was primarily due to the increase in demand for Accelerator Laboratory services and an increase in compensation and benefits costs related to increased headcount. Although service and other revenue increased by 32% during the same period, these costs did not increase at the same rate compared with the same period in the prior year due to larger project sizes and improved efficiency delivering Accelerator Laboratory services.

Research and Development

Research and development expense increased $4.2 million, or 22%, to $23.0 million for the nine months ended September 30, 2024, compared to $18.9 million for the nine months ended September 30, 2023. This increase was primarily due to a $3.3 million increase related to increased headcount, consisting of $3.0 million in compensation and benefit costs and $0.3 million in stock-based compensation, and a $1.4 million increase in costs of outside services and research lab supplies and equipment to enable product development. These increases were partially offset by a $0.4 million decrease from the disposal of certain assets in the third quarter of 2023, which did not repeat in 2024. We expect research and development expense to continue to increase throughout the remainder of 2024 and into 2025 due to continued investment in new instrument and assay development.

Selling, General and Administrative

Selling, general and administrative expense increased $7.4 million, or 11%, to $73.0 million for the nine months ended September 30, 2024, compared to $65.6 million for the nine months ended September 30, 2023. This increase was primarily due to (1) a $6.9 million increase related to headcount, consisting of $4.9 million in compensation and benefits costs and $2.0 million in stock-based compensation expense, (2) a $1.0 million increase in software and technology expenses, (3) a $0.5 million increase in travel and related expenses, and (4) a $0.5 million increase in marketing expense for promotion and branding. These increases were partially offset by a $0.5 million decrease in professional services and consulting fees. Included within selling, general, and administrative expense are $6.2 million and $6.0 million of shipping and handling costs for product sales for the nine months ended September 30, 2024 and 2023, respectively.

Other Lease Costs

Other lease costs increased by less than $0.1 million, or 2%, to $2.7 million for the nine months ended September 30, 2024, compared to $2.7 million for the nine months ended September 30, 2023. We are not using a leased office and are evaluating alternatives, including sub-leasing the facility. Other lease costs include amortization of the related operating lease right-of-use asset and other leased facility operating expenses from periods after determining that the facility would not be used.

Interest Income

Interest income decreased $0.4 million, or 3%, to $11.2 million for the nine months ended September 30, 2024, as compared to $11.5 million for the nine months ended September 30, 2023. The decrease was driven by lower interest rates and a lower balance of cash, cash equivalents, and marketable securities.

Other Income (Expense), Net

Other income (expense), net was $0.2 million for the nine months ended September 30, 2024, as compared $1.9 million for the nine months ended September 30, 2023. The decrease primarily relates to recognizing a $2.4 million receivable under the Employee Retention Credit established by the Coronavirus Aid, Relief, and Economic Security Act in the third quarter of 2023.

Income Tax Expense (Benefit)

Income tax expense was $0.4 million for the nine months ended September 30, 2024, as compared to $0.6 million for the nine months ended September 30, 2023.

Liquidity and Capital Resources

Our principal sources of liquidity are cash, cash equivalents, marketable securities, and funds generated from sales of our products and services. As of September 30, 2024, we had $29.3 million of cash and cash equivalents and $264.2 million of 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 this Quarterly Report on Form 10-Q.

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. Additionally, we recently announced our agreement to acquire Emission, and we regularly assess other potential acquisitions and may need capital to 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):

37

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 $30.9 million and $12.7 million for the nine months ended September 30, 2024 and 2023, respectively. The $18.2 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 due to an increase in inventory as a result of completing the assay development program and manufacturing and stocking new assays and an increase in accounts receivable from sales timing and revenue growth. These were partially offset by increases in accrued compensation and benefits, accrued expenses, and other current liabilities.

Net Cash Used in Investing Activities (As Restated)

Our primary investing activities have consisted 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 $114.6 million during the nine months ended September 30, 2024, which consisted of the purchase of $271.0 million of marketable securities and $3.0 million of purchases of property and equipment, offset by proceeds from maturities of marketable securities of $159.3 million.

Net cash used in investing activities was $127.1 million during the nine months ended September 30, 2023, which consisted of the purchase of $125.2 million of marketable securities and $1.9 million of purchases of property and equipment.

Net Cash Provided by Financing Activities

Financing activities provided $0.4 million and $2.5 million of cash during nine months ended September 30, 2024 and 2023, respectively, from the issuance of our common stock under our equity incentive plans.

Future Cash Obligations

As of September 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 on Form 10-K/A.

Subsequently, on December 16, 2024, we entered into a Purchase Agreement with Emission. Subject to the completion of the transaction, which is expected to occur in January 2025, we will purchase Emission for an upfront payment of $10 million, with an additional $10 million payable upon completion of certain technical milestones. Additionally, we may owe up to an additional $50 million in earnout payments through December 31, 2029, contingent upon the achievement of certain performance milestones. Refer to the section titled "Recent Business Developments" for additional information.

In addition to the cash commitments disclosed in our Amended Annual Report on Form 10-K/A, 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 on Form 10-K/A.

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 Quarterly Report on Form 10-Q 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 of September 30, 2024, there have been no material changes to the market risk information from those described in the section titled “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk” included in our Amended Annual Report on Form 10-K/A.

As previously disclosed in the section titled “Part II, Item 9A. Controls and Procedures” in our Amended Annual Report on Form 10-K/A, 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 September 30, 2024.

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 September 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 September 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 September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our business is subject to risks and events that, if they occur, could adversely affect our financial condition, results of operations, or the price of our common stock. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors described in the section titled “Part I, Item 1A. Risk Factors” in Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2023, as filed with the SEC on December 23, 2024 (the “Amended Annual Report on Form 10-K/A”). Those risk factors are not the only risks we face. Additional risks and uncertainties not currently known to us or that we deem to be not material also may adversely affect our business, financial condition, and results of operations.

As of the date of this Quarterly Report on Form 10-Q, there were no material changes to the risk factors described in our Amended Annual Report on Form 10-K/A.