| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our condensed consolidated results of operations and financial condition. The discussion should be read in conjunction with (i) the unaudited condensed consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 20212022 contained in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, filed with the Securities and Exchange Commission (the “SEC”) on March 1, 202217, 2023 and (iii) our other public reports filed with the SEC. This discussion contains forward looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021.2022, and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2023 and June 30, 2023. Actual results may differ materially from those contained in any forward-looking statements. Unless the context otherwise requires, references to “we”, “us”, “our”, the “Company” or “Quantum-Si” are intended to mean the business and operations of Quantum-Si Incorporated and its consolidated subsidiaries. The unaudited condensed consolidated financial statements for the three and nine months ended September 30, 20222023 and 2021,2022, respectively, present the financial position and results of operations of Quantum-Si Incorporated and its consolidated subsidiaries.
Overview
We are an innovative life sciences company with the mission of transforming single-molecule analysis and democratizing its use by providing researchers and clinicians access to the proteome, the set of proteins expressed within a cell. We have developed a proprietary universal single-molecule detection platform that we are first applying to proteomics to enable Next-Generation Protein SequencingTM (“NGPS”), the ability to sequence proteins in a massively parallel fashion (rather than sequentially, one at a time), that can be used for the study of nucleic acids. We believe that with the ability to sequence proteins in a massively parallel fashion and offer a simplified workflow with a faster turnaround time, NGPS has the potential to unlock significant biological information through improved resolution and unbiased access to the proteome at a speed and scale that is not available today. Traditionally, proteomic workflows to sequence proteins required days or weeks to complete. Our platform, isas originally planned, was designed to offer a single-dayan end to end workflow including both sample preparation and sequencing. Our platform issequencing and was comprised of the Carbon™, our automated sample preparation instrument, theour Platinum™ NGPS instrument, the Quantum-Si Cloud™Cloud software service, and reagent kits and chips for use with our instruments. In 2021, we introduced our PlatinumTM early access program to sites with participation from leading academic centers and key industry partners. The early access program introduced the PlatinumTM single-molecule sequencing system to key opinion leaders across the globe, for both expansion and development of applications and workflows. We launched the PlatinumTM instrument and started to take orders in December 2022, and subsequently began commercial shipments of Platinum™ in January 2023.
Since our initial launch of the PlatinumTM instrument, we have found that, consistent with other proteomics detection technologies, customers select the biological sample type and sample preparation method they use. The range of sample types and sample prep methods utilized in proteomics is extensive and often some level of optimization is required to make them compatible with the downstream detection technology. Our initial platform contemplated Carbon™ as an automated sample preparation instrument. While Carbon™ could help reduce sample preparation variation and streamline the end-to-end workflow in utilizing our PlatinumTM protein sequencing instrument, it is not an absolute requirement, and may not be the best solution long-term. To this end, we recently completed an evaluation of Carbon™ as it relates to the workflow and in comparison to other potential liquid handler and sample preparation solutions. This evaluation concluded that pursuing efforts to continue development of CarbonTM was not the most effective use of our research and development efforts and therefore we have paused development related to Carbon™ to focus efforts on PlatinumTM, our reagent kits and chips for use on PlatinumTM, and our Quantum-Si Cloud environment as our go forward platform to maximize value.
Now that our Platinum™ and Quantum-Si Cloud system has launched, we intend to follow a systematic, phased approach to continue to successfully launch our platform, for research use only (“RUO”). We initiated our early access limited release to enable key thought leaders early accessupdates to our platform in 2021. We expect to launch the PlatinumTM instrument and start to take orders before the end of 2022 and begin shipping product in Q1 2023.platform. We believe we are the first company to successfully enable NGPS on a semiconductor chip, thus digitizing a massive proteomics opportunity, which allows for a massively parallel solution at the ultimate level of sensitivity —single-molecule detection.
We believe that our platform will offeroffers a differentiated end-to-end workflow solution in a rapidly evolving proteomics tools market. Within our initial focus market of proteomics, our workflow will beis designed to provide users a seamless opportunity to gain key insights into the immediate state of biological pathways and cell state. Our platform aims to address many of the key challenges and bottlenecks with legacy proteomic solutions, such as mass spectrometry (“MS”), which are complicated and often limited by manual sample preparation workflows, high instrument costs both in terms of acquisition and ownership and complexity with data analysis, which together prevent broad adoption. We believe our platform, which is designed to streamline sample preparation, sequencing and data analysis at a lower instrument cost than legacy proteomic solutions, could allow our product to have wide utility across the study of the proteome. For example, our platform could be used for biomarker discovery and disease detection, pathway analysis, immune response, and vaccine development, among other applications.
In 2021, we introduced our Platinum early access program to sites with participation from leading academic centers and key industry partners. The early access program introduced the Platinum single-molecule sequencing system to key opinion leaders across the globe, for both expansion and development of applications and workflows. We expect to launch the PlatinumTM instrument and start to take orders before the end of 2022 and begin shipping product in the first quarter of 2023.
COVID-19 Outbreak
The outbreak ofTotal revenue for the novel coronavirus (“COVID-19”),three and nine months ended September 30, 2023 was $0.2 million and $0.7 million, respectively. We define backlog as purchase orders or signed contracts from our customers for which was declared a pandemic bywe have not fulfilled and therefore have not yet recognized the World Health Organization on March 11, 2020 and declared a National Emergency by the President of the United States on March 13, 2020, has ledassociated revenue. We anticipate converting this backlog to adverse impacts on the United States and global economies and created uncertainty regarding potential impacts on our operating results, financial condition and cash flows. The COVID-19 pandemic had, and is expected to continue to have, an adverse impact on our operations, particularly as a result of preventive and precautionary measures that we, other businesses, and governments are taking. Governmental mandates related to COVID-19 or other infectious diseases, or public health crises, have impacted, and we expect them to continue to impact, our personnel and personnel at third-party manufacturing facilitiesrevenue in the United States and other countries, and the availability or cost of materials, which would disrupt or delay our receipt of instruments, components and supplies from the third parties we rely on to, among other things, produce our products currently under development. The COVID-19 pandemic has also had an adverse effect onsubsequent quarters; however, our ability to attract, recruit, interview and hire at the pacedo so is subject to customers who may seek to cancel or delay their orders even if we would typically expectare prepared to supportfulfill them. As of September 30, 2023, our rapidly expanding operations. To the extent that any governmental authority imposes additional regulatory requirements or changes existing laws, regulations, and policies that apply to our business and operations, such as additional workplace safety measures, our product development plans may be delayed, and we may incur further costs in bringing our business and operations into compliance with changing or new laws, regulations, and policies. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including expenses and research and development costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19, as well as the economic impacts including inflation on product and service costs.backlog was approximately $0.1 million.
The estimates of the impact on our business may change based on new information that may emerge concerning COVID-19 and the actions to contain it or address its impact and the economic impact on local, regional, national and international markets as well as other changes in macroeconomic factors. The COVID-19 pandemic and related economic disruptions have not had a material adverse impact on our operations to date. While we are unable to predict the full impact that the COVID-19 pandemic will have on our future results of operations, liquidity and financial condition due to numerous uncertainties, including the duration of the pandemic, the actions that may be taken by government authorities across the United States, adverse changes in macroeconomic conditions, if sustained or recurrent, could result in significant changes in costs going forward with material adverse effect on our operating results, financial condition, and cash flows.
We have not incurred any impairment losses in the carrying values of our assets as a result of the COVID-19 pandemic and are not aware of any specific related event or circumstance that would require us to revise our estimates reflected in our condensed consolidated financial statements.
Other Global Developments
In 2022, various central banks around the world (including the Federal Reserve in the United States) raised interest rates. While theseThese rate increases have not hadcaused a significant adverse impact on usdecline in the fair value of our fixed income mutual funds to date, thedate. The impact of such rate increaseschanges on the overall financial markets and the economy may adverselycontinue to impact us in the future.future, including by making capital more difficult and costly to obtain on reasonable terms and when needed. In addition, the global economy has experienced and is continuing to experience high levels of inflation and global supply chain disruptions. We continue to monitor these supply chain, inflation and interest rate factors, as well as the uncertainty resulting from the overall economic environment.
In addition, although we have no operations in or direct exposure to Russia Belarus andor Ukraine, we have experienced limitedsome constraints in product and material availability and increasing costs required to obtain some materials and supplies due, in part, toas a result of the negative impact of the Russia-Ukraine military conflict on the global economy.economy, which has contributed to the global supply chain disruptions. To date, our business has not been materially impacted by the conflict, however,conflict. However, as the conflict continues or worsens, it may adversely impact our business, financial condition, or results of operations.operations or cash flows.
Business CombinationRecent Developments
On June 10, 2021,In April 2023, we consummatedinformed the previously announced Business Combination. The Business Combination was approved by HighCape’s stockholderscontract manufacturer who manufactures our PlatinumTM and CarbonTM instruments that we intend to wind down the relationship and transition to a different contract manufacturer. In October 2023, we were informed that the contract manufacturer had filed a complaint alleging breach of contract and made claims for economic damage under the contract as well as attorney costs. Although it is not possible to determine the potential financial exposure associated with the alleged claim at the point given its special meeting held on June 9, 2021. The transaction resultedearly stage, we believe that we have a meritorious defense and intend to vigorously defend against all claims asserted in the combined company being renamed “Quantum-Si Incorporated” and Legacy Quantum-Si being renamed “Q-SI Operations Inc.” The combined company’scomplaint.
In August 2023, we filed a universal shelf registration statement on Form S-3 (the “Shelf Registration Statement”), which became effective on August 22, 2023, covering the offering of Class A common stock, preferred stock, debt securities, warrants, rights and warrantsunits.
In August 2023, we also entered into an Equity Distribution Agreement (“EDA”) with an outside placement agent (the “Agent”), under which we may, from time to purchasetime, sell shares of our Class A common stock commenced trading on Nasdaq on June 11, 2021having an aggregate offering price of up to $75 million in “at-the-market” offerings through the Agent (the “ATM Offering”). The Shelf Registration Statement included a prospectus supplement covering the offering, issuance and sale of up to $75 million of our Class A common stock, from time to time, through the ATM Offering. The shares to be sold under the symbol “QSI”EDA may be issued and “QSIAW”, respectively. As a resultsold pursuant to the Shelf Registration Statement. The EDA also provides that the Agent will be entitled to compensation for its services in an amount up to 3.0% of the Business Combination,gross proceeds from the sales of shares sold through the Agent under the EDA. We have no obligation to sell any shares under the EDA and may at any time suspend solicitation and offers under the EDA. To date, we received proceedshave not issued or sold any shares of approximately $511.2 million onour Class A common stock under the dayATM Offering.
Description of Closing. Certain Components of Financial Data
Revenue
Revenue is derived from sales of products and services. Product revenue is generated from the following sources: (i) instrument sales of our PlatinumTM instrument and (ii) consumables, which consist of sales of our sequencing reagents, chips, and library reagents. Service revenue is generated from service maintenance contracts including cloud access, proof of concept services and advanced training for instrument use. Freight revenue is recognized as Product revenue in the condensed consolidated statements of operations and comprehensive loss upon product shipment.
See Note 3 “Business Combination”2 “Summary of Significant Accounting Policies” in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information regarding the Business Combination.our revenue recognition policies.
Recent DevelopmentsCost of revenue
On October 4, 2022, we announced that Jeffrey Hawkins was appointed by our boardCost of directors as Chief Executive Officer, effective asrevenue primarily consists of October 10, 2022 (the “Appointment Date”). In connection with Mr. Hawkins’ appointment as Chief Executive Officer, the board of directors also approved an increase in the size of the board of directors from seven to eight membersproduct and appointed Mr. Hawkins to fill the newly created vacancy, effective as of the Appointment Date, to serve for a term to continue until our next annual meeting of stockholders. In connection with Mr. Hawkins’ appointment, Jonathan M. Rothberg, Ph.D., who had been serving as our Interim Chief Executive Officer, stepped down from that role effective as of the Appointment Date.
Effective November 1, 2022, the Executive Chairman Agreement between usservice costs including material costs, personnel costs and Dr. Rothberg was terminatedbenefits, inbound and we entered into an Advisory Agreement with Dr. Rothberg (the “Advisory Agreement”), pursuant to which Dr. Rothberg advises our Chief Executive Officeroutbound freight, packaging, warranty replacement costs, royalty costs, facilities costs, depreciation and our board of directors on strategic matters,amortization expense, and provides consulting, business developmentinventory obsolescence and similar services on matters relating to our current, future and potential scientific and strategic initiatives and such other consulting services reasonably requested from time to time. Pursuant to the Advisory Agreement, as compensation for the services provided thereunder, we will grant to Dr. Rothberg an option to purchase 250,000 shares of our Class A common stock pursuant to our 2021 Equity Incentive Plan as of the date of the second business day following our earnings call with respect to the fiscal year ended December 31, 2022. In connection with the Advisory Agreement, Dr. Rothberg’s title was changed from Executive Chairman to Chairman of the Board of Directors.
Description of Certain Components of Financial Datawrite-offs.
Research and development
Research and development expenses primarily consist of personnel costs and benefits, stock-based compensation, lab supplies, consulting and professional services, fabrication services, facilities costs, depreciation and amortization expense, software, and other outsourced expenses. Research and development expenses are expensed as incurred. All of our research and development expenses are related to developing new products and services. We expect to continue to make substantial investments in research and development activities in the future as we continue to prepare for our anticipated commercialization.
Selling, general and administrative
Selling, general and administrative expenses primarily consist of personnel costs and benefits, stock-based compensation, patent and filing fees, consulting and professional services, legal and accounting services, facilities costs, depreciation and amortization expense, insurance and office expenses, product advertising and marketing. We expect our selling, general and administrative expenses to increase in the foreseeable future as we expect to launch the PlatinumTM instrument and start to take orders before the end of 2022 and begin shipping product in the first quarter of 2023.
Interest expense
Interest expense primarily consists of interest that was paid on our Paycheck Protection Program (“PPP”) loan.
Dividend income
Dividend income primarily consists of dividends earned on fixed income mutual funds classified as marketable securities.
Unrealized gain (loss) on marketable securities
Unrealized gain (loss) on marketable securities primarily consists of unrealized gains/(losses) on fixed income mutual funds in marketable securities.
Realized loss on marketable securities
Realized loss on marketable securities primarily consists of realized losses on fixed income mutual funds in marketable securities.
Change in fair value of warrant liabilities
Change in fair value of warrant liabilities primarily consists of the change in the fair value of our publicly traded warrants (the “Public Warrants”) and our warrants sold in a private placement (the “Private Warrants”).
Other income (expense), net
Other income (expense), net primarily consists of realized and unrealized losses on fixed income mutual fundsa change in marketable securities.the fair value of the Majelac Technologies LLC (“Majelac”) contingent consideration.
Provision for income taxes
We utilize the asset and liability method of accounting for income taxes where deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities using the enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established against net deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the net deferred tax assets will not be realized. We recorded a full valuation allowance as of September 30, 20222023 and 2021.2022. Based on the available evidence, we believe that it is more likely than not that we will be unable to utilize all of our deferred tax assets in the future.
Results of Operations
The following is a discussion of our results of operations for the three and nine months ended September 30, 2023 and 2022 and 2021. Ourour accounting policies are described in Note 2 “Summary of Significant Accounting Policies” in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
| | | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended September 30, | | Nine months ended September 30, | |
| (in thousands, except for % changes) | | 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change | | | 2023 | | 2022 | | % Change | | 2023 | | 2022 | | % Change | |
| Revenue: | | | | | | | | | | | | | | |
| Product | | | $ | 216 | | | $ | - | | nm | | | $ | 654 | | | $ | - | | nm | |
| Service | | | | 7 | | | | - | | nm | | | | 28 | | | | - | | nm | |
| Total revenue | | | | 223 | | | | - | | nm | | | | 682 | | | | - | | nm | |
| Cost of revenue | | | | 115 | | | | - | | nm | | | | 372 | | | | - | | nm | |
| Gross profit | | | | 108 | | | | - | | nm | | | | 310 | | | | - | | nm | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Research and development | | $ | 16,675 | | $ | 11,104 | | 50.2 | % | | $ | 53,905 | | $ | 32,190 | | 67.5 | % | | | 16,587 | | | | 16,675 | | | | (0.5 | )% | | | 50,588 | | | | 53,905 | | | | (6.2 | )% |
| Selling, general and administrative | | | 10,983 | | | 14,071 | | (21.9 | )% | | | 31,093 | | | 36,928 | | (15.8 | )% | | | 10,696 | | | | 10,983 | | | | (2.6 | )% | | | 33,010 | | | | 31,093 | | | | 6.2 | % |
| Total operating expenses | | | 27,658 | | | 25,175 | | 9.9 | % | | | 84,998 | | | 69,118 | | 23.0 | % | | | 27,283 | | | | 27,658 | | | | (1.4 | )% | | | 83,598 | | | | 84,998 | | | | (1.6 | )% |
| Loss from operations | | (27,658 | ) | | (25,175 | ) | | 9.9 | % | | (84,998 | ) | | (69,118 | ) | | 23.0 | % | | | (27,175 | ) | | | (27,658 | ) | | | (1.7 | )% | | | (83,288 | ) | | | (84,998 | ) | | | (2.0 | )% |
| Interest expense | | - | | - | | nm | | - | | (5 | ) | | (100.0 | )% | |
| Dividend income | | 1,381 | | 739 | | 86.9 | % | | 3,288 | | 741 | | 343.7 | % | | | 2,572 | | | | 1,381 | | | | 86.2 | % | | | 7,274 | | | | 3,288 | | | | 121.2 | % |
| Unrealized gain (loss) on marketable securities | | | | 1,953 | | | | (4,240 | ) | | | (146.1 | )% | | | 8,302 | | | | (20,384 | ) | | | (140.7 | )% |
| Realized loss on marketable securities | | | | (1,901 | ) | | | (1,348 | ) | | | 41.0 | % | | | (6,489 | ) | | | (2,399 | ) | | | 170.5 | % |
| Change in fair value of warrant liabilities | | 137 | | 6,975 | | (98.0 | )% | | 5,121 | | 3,442 | | 48.8 | % | | | (162 | ) | | | 137 | | | | (218.2 | )% | | | (81 | ) | | | 5,121 | | | | (101.6 | )% |
| Other (expense), net | | | (5,573 | ) | | | (630 | ) | | 784.6 | % | | | (22,713 | ) | | | (627 | ) | | nm | | |
| Other income (expense), net | | | | (15 | ) | | | 15 | | | | (200.0 | )% | | | 370 | | | | 70 | | | | 428.6 | % |
| Loss before provision for income taxes | | | (31,713 | ) | | | (18,091 | ) | | 75.3 | % | | | (99,302 | ) | | | (65,567 | ) | | 51.5 | % | | | (24,728 | ) | | | (31,713 | ) | | | (22.0 | )% | | | (73,912 | ) | | | (99,302 | ) | | | (25.6 | )% |
| Provision for income taxes | | | - | | | - | | nm | | | - | | | - | | nm | | | | - | | | | - | | nm | | | | - | | | | - | | nm | |
| Net loss and comprehensive loss | | $ | (31,713 | ) | | $ | (18,091 | ) | | 75.3 | % | | $ | (99,302 | ) | | $ | (65,567 | ) | | 51.5 | % | | $ | (24,728 | ) | | $ | (31,713 | ) | | | (22.0 | )% | | $ | (73,912 | ) | | $ | (99,302 | ) | | | (25.6 | )% |
Comparison of the Three Months Ended September 30, 2023 and 2022
Revenue, Cost of revenue and Gross profit
| | | Three months ended September 30, | | | Change |
| (in thousands, except for % changes) | | 2023 | | | 2022 | | | Amount | | % |
| Total revenue | | $ | 223 | | | $ | - | | | $ | 223 | | nm |
| Cost of revenue | | | 115 | | | | - | | | | 115 | | nm |
| Gross profit | | | 108 | | | | - | | | | 108 | | nm |
| Gross profit margin | | | 48.4 | % | | nm | | | | | | |
We launched the PlatinumTM instrument and started to take orders in December 2022, and 2021subsequently began commercial shipments of PlatinumTM in January 2023. Total revenue recognized in the three months ended September 30, 2023 was $0.2 million for the sale of PlatinumTM instruments and kits. No revenue was recognized in 2022. Gross profit was $0.1 million for the three months ended September 30, 2023.
Research and development
| | | Three months ended September 30, | | Change | | | Three months ended September 30, | | Change | |
| (in thousands, except for % changes) | | 2022 | | | 2021 | | | Amount | | | % | | | 2023 | | | 2022 | | | Amount | | | % | |
| Research and development | | $ | 16,675 | | | $ | 11,104 | | | $ | 5,571 | | | | 50.2 | % | | $ | 16,587 | | $ | 16,675 | | $ | (88 | ) | | (0.5 | )% |
Research and development expenses increaseddecreased by $5.6$0.1 million, or 50.2%0.5%, for the three months ended September 30, 20222023 compared to the three months ended September 30, 2021.2022. The increasedecrease was primarily due to the following elements: $3.5 million in personnel costs as a result of increased headcountrefined research and $2.5 million related to internal and external product development activities. These increases were partially offset byactivities coupled with a decrease in headcount due to restructuring activities initiated in the first and third quarters of $0.4 million of reduced stock-based compensation due primarily to stock option and restricted stock unit awards granted and vested in connection with the closing of the Business Combination in 2021.2023.
Selling, general and administrative
| | | Three months ended September 30, | | Change | | | Three months ended September 30, | | Change | |
| (in thousands, except for % changes) | | 2022 | | | 2021 | | | Amount | | | % | | | 2023 | | | 2022 | | | Amount | | | % | |
| Selling, general and administrative | | $ | 10,983 | | $ | 14,071 | | $ | (3,088 | ) | | (21.9 | )% | | $ | 10,696 | | $ | 10,983 | | $ | (287 | ) | | (2.6 | )% |
Selling, general and administrative expenses decreased by $3.1$0.3 million, or 21.9%2.6%, for the three months ended September 30, 20222023 compared to the three months ended September 30, 2021.2022. The decrease was primarily due to the following elements: $2.9a decrease of $2.3 million of reduced stock-based compensation due primarily to stock option and restricted stock unit awards granted and vested in connection with the closingas a result of the Business Combinationrestructuring activities initiated in 2021,the first and a reductionthird quarters of $0.6 million of expenses primarily related to consulting, professional fees and insurance. These decreases were2023, partially offset by an increase of $0.4$1.1 million in personnel costs as a resultprimarily due to increased headcount for the ramp up of increased headcount.commercial sales and restructuring costs and an increase of $0.9 million of expenses primarily for consulting, legal and professional fees and insurances.
Dividend income
| | | Three months ended September 30, | | Change | | | Three months ended September 30, | | Change | |
| (in thousands, except for % changes) | | 2022 | | | 2021 | | | Amount | | | % | | | 2023 | | | 2022 | | | Amount | | | % | |
| Dividend income | | $ | 1,381 | | $ | 739 | | $ | 642 | | 86.9 | % | | $ | 2,572 | | $ | 1,381 | | $ | 1,191 | | 86.2 | % |
Dividend income increased by $0.6$1.2 million, or 86.9%86.2%, for the three months ended September 30, 20222023 compared to the three months ended September 30, 20212022 as a result of higher interest ratesdividends earned on invested balances in marketable securities.
Change in fair value of warrant liabilitiesUnrealized gain (loss) on marketable securities
| | | Three months ended September 30, | | Change | | | Three months ended September 30 | | Change | |
| (in thousands, except for % changes) | | 2022 | | | 2021 | | | Amount | | | % | | | 2023 | | | 2022 | | | Amount | | | % | |
| Change in fair value of warrant liabilities | | $ | 137 | | | $ | 6,975 | | | $ | (6,838 | ) | | | (98.0 | )% | |
| Unrealized gain (loss) on marketable securities | | | $ | 1,953 | | $ | (4,240 | ) | | $ | 6,193 | | (146.1 | )% |
The fair value of warrant liabilities decreased, which resulted in aUnrealized gain of $6.8(loss) increased by $6.2 million, or 146.1%, for the three months ended September 30, 20222023 compared to the three months ended September 30, 2021. The warrant liabilities were recorded at fair value as part of the Business Combination.
Other (expense), net
| | | Three months ended September 30, | | | Change | |
| (in thousands, except for % changes) | | 2022 | | | 2021 | | | Amount | | | % | |
| Other (expense), net | | $ | (5,573 | ) | | $ | (630 | ) | | $ | (4,943 | ) | | | 784.6 | % |
Other (expense), net increased by $4.9 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 primarily as a result of reportedan increase in unrealized and realized losses ongains as a result of the market adjustments of investments in marketable securities, which consist of fixed income mutual funds that are marked to market.funds.
Comparison of the Nine Months Ended September 30, 2022 and 2021Realized loss on marketable securities
Research and development
| | | Nine months ended September 30, | | Change | | | Three months ended September 30, | | Change | |
| (in thousands, except for % changes) | | 2022 | | | 2021 | | | Amount | | | % | | | 2023 | | | 2022 | | | Amount | | | % | |
| Research and development | | $ | 53,905 | | $ | 32,190 | | $ | 21,715 | | 67.5 | % | |
| Realized loss on marketable securities | | | $ | (1,901 | ) | | $ | (1,348 | ) | | $ | (553 | ) | | 41.0 | % |
Research and development expensesRealized loss on marketable securities increased by $21.7$0.6 million, or 67.5%41.0%, for the ninethree months ended September 30, 2023 compared to the three months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily due to the following elements: $12.4 million related to internal and external product development activities; $11.1 million in personnel costs as a result of increased headcount; and $1.1 millionan increase in realized losses from sales of collaboration fees with Protein Evolution, Inc. These increases were partially offset by decreases primarily related to the Business Combination in 2021: $0.9 million of stock-based compensation and $2.0 million of transaction bonuses.
Selling, general and administrative
| | | Nine months ended September 30, | | | Change | |
| (in thousands, except for % changes) | | 2022 | | | 2021 | | | Amount | | | % | |
| Selling, general and administrative | | $ | 31,093 | | | $ | 36,928 | | | $ | (5,835 | ) | | | (15.8 | )% |
Selling, general and administrative expenses decreased by $5.8 million, or 15.8% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The decrease was primarily due to the following elements related to the Business Combination in 2021: $3.9 million in consulting and professional fees; $1.0 million of transaction bonuses; and $9.9 million of reduced stock-based compensation due primarily to stock option and restricted stock unit awards granted and vested in connection with the closing of the Business Combination in 2021. The reduced stock-based compensation of $9.9 million also resulted from a reversal of $4.7 million of restricted stock unit awards that were forfeited by our former Chief Executive Officer upon his separation. These decreases were partially offset by the following increases: $5.3 million of headcount expenses to scale up our administrative and executive functions and $3.7 million of expenses primarily due to being a publicly traded company including consulting, professional fees and insurance.
Interest expense
| | | Nine months ended September 30, | | | Change | |
| (in thousands, except for % changes) | | 2022 | | | 2021 | | | Amount | | | % | |
| Interest expense | | $ | - | | | $ | (5 | ) | | $ | 5 | | | | (100.0 | )% |
Interest expense on the PPP loan decreased for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 as a result of us repaying the loan in full in June 2021 in connection with the Business Combination.
Dividend income
| | | Nine months ended September 30, | | | Change | |
| (in thousands, except for % changes) | | 2022 | | | 2021 | | | Amount | | | % | |
| Dividend income | | $ | 3,288 | | | $ | 741 | | | $ | 2,547 | | | | 343.7 | % |
Dividend income increased by $2.5 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 as a result of higher interest rates earned on invested balances in marketable securities.
Change in fair value of warrant liabilities
| | | Nine months ended
September 30, | | Change | | | Three months ended September 30, | | Change | |
| (in thousands, except for % changes) | | 2022 | | | 2021 | | | Amount | | | % | | | 2023 | | | 2022 | | | Amount | | | % | |
| Change in fair value of warrant liabilities | | $ | 5,121 | | $ | 3,442 | | $ | 1,679 | | 48.8 | % | | $ | (162 | ) | | $ | 137 | | $ | (299 | ) | | (218.2 | )% |
The change in fair value of warrant liabilities decreased which resultedby $0.3 million, or 218.2%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 primarily due to a decline in a gainthe Company’s underlying common stock price.
Other income (expense), net
| | | Three months ended September 30, | | | Change | |
| (in thousands, except for % changes) | | 2023 | | | 2022 | | | Amount | | | % | |
| Other income (expense), net | | $ | (15 | ) | | $ | 15 | | | $ | (30 | ) | | | (200.0 | )% |
Other income (expense), net remained flat for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.
Comparison of the Nine Months Ended September 30, 2023 and 2022
Revenue, Cost of revenue and Gross profit
| | | Nine months ended September 30, | | | Change |
| (in thousands, except for % changes) | | 2023 | | | 2022 | | | Amount | | % |
| Total revenue | | $ | 682 | | | $ | - | | | $ | 682 | | nm |
| Cost of revenue | | | 372 | | | | - | | | | 372 | | nm |
| Gross profit | | | 310 | | | | - | | | | 310 | | nm |
| Gross profit margin | | | 45.5 | % | | nm | | | | | | |
Total revenue recognized in the nine months ended September 30, 2023 was $0.7 million for the sale of PlatinumTM instruments and kits. No revenue was recognized in 2022. Gross profit was $0.3 million for the nine months ended September 30, 20222023.
Research and development
| | | Nine months ended September 30, | | | Change | |
| (in thousands, except for % changes) | | 2023 | | | 2022 | | | Amount | | | % | |
| Research and development | | $ | 50,588 | | | $ | 53,905 | | | $ | (3,317 | ) | | | (6.2 | )% |
Research and development expenses decreased by $3.3 million, or 6.2%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2021.2022. The warrant liabilities were recorded at fair value as partdecrease was primarily due to refined research and development activities coupled with a decrease in headcount due to restructuring activities initiated in the first and third quarters of the Business Combination.2023 and collaboration fees, which includes $1.1 million paid to Protein Evolution, Inc. in 2022.
Other (expense), netSelling, general and administrative
| | | Nine months ended September 30, | | Change | | | Nine months ended September 30, | | Change | |
| (in thousands, except for % changes) | | 2022 | | | 2021 | | | Amount | | | | % | | | 2023 | | | 2022 | | | Amount | | | % | |
| Other (expense), net | | $ | (22,713 | ) | | $ | (627 | ) | | $ | (22,086 | )
|
| | nm | | |
| Selling, general and administrative | | | $ | 33,010 | | $ | 31,093 | | $ | 1,917 | | 6.2 | % |
Other (expense), netSelling, general and administrative expenses increased by $22.1$1.9 million, or 6.2%, for the nine months ended September 30, 20222023 compared to the nine months ended September 30, 20212022. The increase was primarily due to an increase of $1.7 million in personnel costs primarily due to increased headcount for the ramp up of commercial sales and restructuring costs and an increase of $0.7 million of stock-based compensation, partially offset by a decrease of $0.5 million of expenses primarily for consulting, legal and professional fees and insurances.
Dividend income
| | | Nine months ended September 30, | | | Change | |
| (in thousands, except for % changes) | | 2023 | | | 2022 | | | Amount | | | % | |
| Dividend income | | $ | 7,274 | | | $ | 3,288 | | | $ | 3,986 | | | | 121.2 | % |
Dividend income increased by $4.0 million, or 121.2%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 as a result of higher dividends earned on invested marketable securities.
Unrealized gain (loss) on marketable securities
| | | Nine months ended September 30, | | | Change | |
| (in thousands, except for % changes) | | 2023 | | | 2022 | | | Amount | | | % | |
| Unrealized gain (loss) on marketable securities | | $ | 8,302 | | | $ | (20,384 | ) | | $ | 28,686 | | | | (140.7 | )% |
Unrealized gain (loss) on marketable securities increased by $28.7 million, or 140.7%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily as a result of reportedan increase in unrealized and realized losses ongains as a result of the market adjustments of investments in marketable securities, which consist of fixed income mutual funds that are marked to market.funds.
Non-GAAP Financial MeasuresRealized loss on marketable securities
| | | Nine months ended September 30, | | | Change | |
| (in thousands, except for % changes) | | 2023 | | | 2022 | | | Amount | | | % | |
| Realized loss on marketable securities | | $ | (6,489 | ) | | $ | (2,399 | ) | | $ | (4,090 | ) | | | 170.5 | % |
Realized loss on marketable securities increased by $4.1 million, or 170.5%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily as a result of an increase in realized losses from sales of marketable securities.
We present non-GAAP financial measuresChange in order to assist readersfair value of our condensed consolidated financial statements in understanding the core operating results that our management uses to evaluate the business and for financial planning purposes. Our non-GAAP financial measures, EBITDA and Adjusted EBITDA, provide an additional tool for investors to use in comparing our financial performance over multiple periods.warrant liabilities
EBITDA and Adjusted EBITDA are key performance measures that our management uses to assess our operating performance. EBITDA and Adjusted EBITDA facilitate internal comparisons of our operating performance on a more consistent basis. We use these performance measures for business planning purposes and forecasting. We believe that EBITDA and Adjusted EBITDA enhance an investor’s understanding of our financial performance as it is useful in assessing our operating performance from period-to-period by excluding certain items that we believe are not representative of our core business.
| | | Nine months ended September 30, | | | Change | |
| (in thousands, except for % changes) | | 2023 | | | 2022 | | | Amount | | | % | |
| Change in fair value of warrant liabilities | | $ | (81 | ) | | $ | 5,121 | | | $ | (5,202 | ) | | | (101.6 | )% |
Our EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies because they may not calculate these measures in the same manner. EBITDA and Adjusted EBITDA are not prepared in accordance with U.S. GAAP and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with U.S. GAAP. When evaluating our performance, you should consider EBITDA and Adjusted EBITDA alongside other financial performance measures prepared in accordance with U.S. GAAP, including net loss.
EBITDA and Adjusted EBITDA
We calculate EBITDA as net loss adjusted to exclude interest expense, dividend income and depreciation. Adjusted EBITDA is calculated as EBITDA adjusted to excludeThe change in fair value of warrant liabilities other expense, net, stock-based compensation, and other non-recurring items. The other non-recurring items include costs relateddecreased by $5.2 million, or 101.6%, for the nine months ended September 30, 2023 compared to discretionary transaction bonuses and other costs incurred with the Closing ofnine months ended September 30, 2022 primarily due to a decline in the Business Combination on June 10, 2021.Company’s underlying common stock price.
The following table reconciles Adjusted EBITDA toOther income (expense), net loss, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP.
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| (in thousands) | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Net loss | | $ | (31,713 | ) | | $ | (18,091 | ) | | $ | (99,302 | ) | | $ | (65,567 | ) |
| Adjustments to reconcile to EBITDA: | | | | | | | | | | | | | | | | |
| Interest expense | | | - | | | | - | | | | - | | | | 5 | |
| Dividend income | | | (1,381 | ) | | | (739 | ) | | | (3,288 | ) | | | (741 | ) |
| Depreciation | | | 729 | | | | 264 | | | | 1,789 | | | | 712 | |
| EBITDA | | $ | (32,365 | ) | | $ | (18,566 | ) | | $ | (100,801 | ) | | $ | (65,591 | ) |
| Adjustments to reconcile to Adjusted EBITDA: | | | | | | | | | | | | | | | | |
| Change in fair value of warrant liabilities | | | (137 | ) | | | (6,975 | ) | | | (5,121 | ) | | | (3,442 | ) |
| Other expense, net | | | 5,573 | | | | 630 | | | | 22,713 | | | | 627 | |
| Stock-based compensation | | | 4,043 | | | | 7,396 | | | | 7,099 | | | | 17,840 | |
| Transaction related costs - business combination | | | - | | | | - | | | | - | | | | 6,920 | |
| Adjusted EBITDA | | $ | (22,886 | ) | | $ | (17,515 | ) | | $ | (76,110 | ) | | $ | (43,646 | ) |
| | | Nine months ended September 30, | | | Change | |
| (in thousands, except for % changes) | | 2023 | | | 2022 | | | Amount | | | % | |
| Other income (expense), net | | $ | 370 | | | $ | 70 | | | $ | 300 | | | | 428.6 | % |
Other income (expense), net increased by $0.3 million, or 428.6%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily as a result of a gain of $0.4 million recorded on the Majelac contingent consideration.
Liquidity and Capital Resources
Since our inception, we have generated no revenue and have funded our operations primarily with proceeds from the issuance of equity to private investors. In addition,investors, as well as with the $511.2 million in proceeds received from the closing of the Business Combination on June 10, 2021,2021. Additionally, we completed the Business Combination, and as a result we received proceeds of approximately $511.2 million on the day of the Closing.began to generate revenue during 2023. Our primary uses of liquidity have been operating expenses, capital expenditures and our acquisition of certain assets of Majelac Technologies LLC (“Majelac”).Majelac. Cash flows from operations have been historically negative as we continue to invest in the development of our technology in NGPS. We expect to incur negative operating cash flows on an annual basis for the foreseeable future until such time that we can successfully commercializescale our products that are currently under development. However, we can provide no assurance that such products will be successfully developed and commercialized in the future.revenue growth.
We expect that our existing cash and cash equivalents and investments in marketable securities, together with revenue from the funds raised in connection with the Business Combinationsale of our products and services, will be sufficient to meet our liquidity, capital expenditure, and anticipated working capital requirements and fund our operations for at least the next 12 months. We expect to use theour cash and cash equivalents and investments in marketable securities and funds raisedfrom revenue generated to invest in connection with the Business Combinationour continued commercialization efforts, to further invest in the research and development, of our products, for other operating expenses, business acquisitions and for working capital and general corporate purposes.
As of September 30, 2022,2023, we had cash and cash equivalents and investments in marketable securities totaling $372.1$274.6 million. Our future capital requirements may vary from those currently planned and will depend on various factors including the timingpace and success of product commercialization.
We expect to launchlaunched the PlatinumTM instrument and startstarted to take orders before the end ofin December 2022, and begin shipping productsubsequently began commercial shipments of Platinum™ in the first quarter ofJanuary 2023. During the ramp upIn addition, we are continuing further research and development efforts to launch,enhance our Platinum™ instrument. Based on these initiatives and activities, our business will require an accelerated amount of spending to enhance the sales and marketing teams, continue to drive development, and build inventory. Other factors that could accelerate cash needs include: (i) delays in achieving scientific and technical milestones; (ii) unforeseen capital expenditures and fabrication costs related to manufacturing for commercialization; (iii) changes we may make in our business or commercialization strategy; (iv) the impact of the COVID-19 pandemic; (v) costs of running a public company; (vi)(v) other items affecting our forecasted level of expenditures and use of cash resources, including potential acquisitions; and (vii)(vi) increased product and service costs.
In August 2023, we filed the Shelf Registration Statement, which became effective on August 22, 2023.
In August 2023, we also entered into the EDA with the Agent, under which we may, from time to time, sell shares of our Class A common stock under the ATM Offering. The Shelf Registration Statement included a prospectus supplement covering the offering, issuance and sale of up to $75 million of our Class A common stock, from time to time, through the ATM Offering. The shares to be sold under the EDA may be issued and sold pursuant to the Shelf Registration Statement. The EDA also provides that the Agent will be entitled to compensation for its services in an amount up to 3.0% of the gross proceeds from the sales of shares sold through the Agent under the EDA. We have no obligation to sell any shares under the EDA and may at any time suspend solicitation and offers under the EDA. To date, we have not issued or sold any shares of our Class A common stock under the ATM Offering.
In the future, we may be unable to obtain any required additional financing on terms favorable to us, if at all. If adequate funds are not available to us on acceptable terms or otherwise, we may be unable to successfully develop or enhance products and services, respond to competitive pressure or take advantage of acquisition opportunities, any of which could have a material adverse effect on our business, financial condition, operating results and cash flows.
Cash flows
The following table summarizes our cash flows for the periods indicated:
| | | Nine months ended September 30, | | | Nine months ended September 30, | |
| (in thousands) | | 2022 | | | 2021 | | | 2023 | | | 2022 | |
| Net cash (used in) provided by: | | | | | | | | | | |
| Net cash used in operating activities | | $ | (70,977 | ) | | $ | (48,348 | ) | | $ | (73,067 | ) | | $ | (70,977 | ) |
| Net cash provided by (used in) investing activities | | 111,684 | | (441,859 | ) | |
| Net cash provided by investing activities | | | 82,360 | | 111,684 | |
| Net cash provided by financing activities | | | 1,771 | | | 515,400 | | | | 210 | | | 1,771 | |
| Net increase in cash and cash equivalents | | $ | 42,478 | | $ | 25,193 | | | $ | 9,503 | | $ | 42,478 | |
Net cash used in operating activities
The net cash used in operating activities represents the cash receipts and disbursements related to our activities other than investing and financing activities. We expect that the cash provided by financing activities in 2021 will continue to be our primary source of funds to support operating needs and capital expenditures$73.1 million for the foreseeable future.nine months ended September 30, 2023 was due primarily to a net loss of $73.9 million resulting from continued spend on research and development efforts and commercialization ramp up, net cash outflows from changes in operating assets and liabilities of $8.5 million and unrealized gains on marketable securities of $8.3 million, partially offset by stock-based compensation of $6.9 million, realized losses on marketable securities of $6.5 million and depreciation and amortization of $3.1 million.
The net cash used in operating activities of $71.0 million for the nine months ended September 30, 2022 was due primarily to a net loss of $99.3 million and a change in fair value of warrant liabilities of $5.1 million, partially offset by unrealized losses on marketable securities (realized and unrealized) of $22.8$20.4 million, stock-based compensation of $7.1 million and netrealized losses on marketable securities of $2.4 million.
Net cash inflows from changes in operating assets and liabilities of $1.6 million.provided by investing activities
The net cash used in operatingprovided by investing activities of $48.3$82.4 million forin the nine months ended September 30, 20212023 was due primarily to a net losssales of $65.6marketable securities of $88.0 million, offset by purchases of property and equipment of $4.9 million and a change in fair valuecapitalized internally developed software costs of warrant liabilities of $3.4 million, partially offset by stock-based compensation of $17.8 million and net cash inflows from changes in operating assets and liabilities of $1.5 million.
Net cash provided by (used in) investing activities$0.8 million.
The net cash provided by investing activities of $111.7 million in the nine months ended September 30, 2022 was due primarily to sales of marketable securities of $119.8 million, partially offset by purchases of property and equipment of $7.2 million and marketable securities of $0.8 million.
Net cash provided by financing activities
The net cash used in investingprovided by financing activities of $441.9$0.2 million in the nine months ended September 30, 20212023 was due to purchasesprimarily from $0.4 million from proceeds from exercise of marketable securitiesstock options offset by $0.1 million of $438.7 milliondeferred offering costs paid for the S-3 shelf registrations and property and equipment of $3.1 million.
Net cash provided by financing activitiesATM.
The net cash provided by financing activities of $1.8 million in the nine months ended September 30, 2022 was due primarily from $2.6 million from proceeds from exercise of stock options, offset by $0.5 million from payment of deferred consideration and $0.3 million from payment of contingent consideration related to the Majelac acquisition.
The net cash provided by financing activities of $515.4 million in the nine months ended September 30, 2021 was primarily from $512.8 million from proceeds from the Business Combination and $4.4 million from proceeds from exercise of stock options, partially offset by a $1.7 million payment of notes payable.
Contractual Obligations
We lease certain facilities and equipment under non-cancellable lease agreements that expire at various dates through 2032. As of September 30, 2022,2023, the future payments, before adjustments for tenant incentives, under leases was $35.3$32.2 million, which includes a lease we entered into in December 2021 for a facility in New Haven, Connecticut, which commenced in January 2022, and a lease that commenced in April 2022 for a facility in Branford, Connecticut.
Licenses related to certain intellectual property
We license certain intellectual property, some of which may be utilized in our current or future product offerings. To preserve the right to use such intellectual property, therewe are required to make annual minimum annual fixed royalty payments oftotaling approximately $0.2 million. Once we commercialize and begin to generate revenue, there will bemillion as well as royalties based on net sales if the current anticipated utilization.royalties exceed annual minimum fixed payments.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as expenses incurred during the reporting periods. Our estimates are based on our historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about items that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
Revenue is derived from sales of products and services. Product revenue is primarily generated from the sales of instrument and consumables used in protein sequencing and analysis. Service revenue is primarily generated from service maintenance contracts including cloud access, proof of concept services and advanced training for instrument use. Freight revenue is recognized as Product revenue in the condensed consolidated statements of operations and comprehensive loss upon product shipment.
We recognize revenue when control of our products and services is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the distinct performance obligations in the contract, determining the transaction price, allocating the transaction price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. Revenue recognition for contracts with multiple deliverables is based on the separate satisfaction of each distinct performance obligation within the contract. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. We allocate transaction price to the performance obligations in a contract with a customer, based on the relative standalone selling price of each performance obligation. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information and specific factors such as competitive positioning, internal costs, profit objectives, and internally approved pricing guidelines related to the performance obligation.
Our performance obligation for sales of products is considered satisfied upon shipment of the goods to the customer in accordance with the shipping terms (either upon shipment or delivery), which is when control of the product is deemed to be transferred; this would include instruments and consumables. Customers generally do not have a right of return, except for defective or damaged products during the warranty period or unless prior written consent is provided. In instances where right of payment or transfer of title is contingent upon the customer’s acceptance of the product, revenue is deferred until all acceptance criteria have been met. Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as fulfillment costs and are included in Cost of revenue in the condensed consolidated statements of operations and comprehensive loss. Shipping and handling costs billed to customers are considered part of the transaction price and are recognized as revenue with the underlying product sales. Revenues for service maintenance contracts, which start after the first year of purchase and are considered as service type warranties that effectively extend the standard first-year warranty coverage at the customer’s option, are recognized ratably over the contract service period as these services are performed evenly over time. Revenues for proof of concept services and advanced training is recognized upon satisfaction of the underlying performance obligation. We typically provide a standard one-year warranty which covers defects in materials and workmanship and manufacturing or performance conditions including bug fixes under normal use and service for the first year. The first year of the warranty of our products is considered an assurance-type warranty and we have determined that this standard first-year warranty is not a distinct performance obligation. Deferred revenue primarily consists of billings and payments received in advance of revenue recognition from service maintenance contracts including cloud access, proof of concept services and advanced training, and is reduced as the revenue recognition criteria are met.
There have been no additional material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, filed with the SEC on March 1, 2022.17, 2023.
See Note 2 “Summary of Significant Accounting Policies” in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information regarding our significant accounting policies and estimates.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 “Summary of Significant Accounting Policies – Recently Issued Accounting Pronouncements” in our condensed consolidated financial statements containedincluded elsewhere in this Quarterly Report on Form 10-Q.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Inflation risk
We do not believe that inflation has had a material effect on our business, financial condition, or results of operations or cash flows, other than its impact on the general economy. Nonetheless, to the extent our costs are impacted by general inflationary pressures, we may not be able to fully offset such higher costs through price increases or manufacturing efficiencies. Our inability or failure to do so could harm our business, financial condition, and results of operations.operations or cash flows.
Interest rate risk
Our cash and cash equivalents, and marketable securities are comprised primarily of cash and investments in fixed income mutual funds. The primary objective of our investments is the preservation of capital to fulfill liquidity needs. We do not enter into investments for trading or speculative purposes. DueInterest rate increases have resulted in changes in the fair value of our fixed income mutual funds to date. As of September 30, 2023, this cumulative impact is a net unrealized loss of $12.9 million. The impact of such rate changes on the short-term nature of these investments, we do not expect cash flowsoverall financial markets and the economy may continue to be affected to any significant degree by a sudden changeimpact us in market interest rates.the future.
Foreign Currency Risk
WePresently, we operate our business primarily within the United States and currently execute the majority of our transactions in U.S. dollars. This limited foreign currency translation risk is not expected to have a material impact on our condensed consolidated financial statements. To date, we have not entered into any hedging arrangements with respect to foreign currency risk. As our international operations grow, we will continue to reassess our approach to managemanaging our risk relating to fluctuations in currency rates.
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that due to (i) the restatement of our financial statements to reclassify our warrants as described below and in Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2020 filed with the SEC on May 10, 2021 and (ii) the other material weaknesses described below, our disclosure controls and procedures were not effective as of September 30, 2022.
Material Weakness in Internal Control over Financial Reporting
We have identified two material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.
As previously disclosed in our Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2020, we identified a material weakness in our internal control over financial reporting related to inaccurate accounting for the Public Warrants and Private Warrants issued in connection with HighCape’s initial public offering. Management identified this error when the SEC issued the SEC Statement. The SEC Statement addresses certain accounting and reporting considerations related to warrants of a kind similar to those we issued in connection with HighCape’s initial public offering in September 2020. This control deficiency resulted in us having to restate our audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2020 and if not remediated, could result in a material misstatement to future annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.
In connection with Legacy Quantum-Si’s financial statement close process for the years ended December 31, 2020 and 2019, we identified a material weakness in the design and operating effectiveness of our internal control over financial reporting. Legacy Quantum-Si outsourced its accounting and financial reporting to a third-party service provider, and therefore as of and for the years ended December 31, 2020 and 2019, did not have its own finance function or finance or accounting professionals that had the requisite experience or were in a position to appropriately perform the supervision and review of the information received from that third-party service provider. As a result, during the three months ended September 30, 2021, we identified a presentation error of the basic and diluted net loss per share calculation, including the weighted-average common stock for the three and six months ended June 30, 2021, which was prepared by a third-party service provider. This presentation error was due to the material weakness related to our ability to appropriately perform the supervision and review of the information received from the third-party service provider as discussed above.
Notwithstanding these material weaknesses, management has concluded that our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with U.S. GAAP for each of the periods presented therein.
Plan for Remediation of the Material Weakness in Internal Control over Financial Reporting
In response to these material weaknesses, our management has expended, and will continue to expend, a substantial amount of effort and resources for the remediation of these material weaknesses in internal control over financial reporting. Our management developed and started to execute a remediation plan. We hired accounting and finance resources of Quantum-Si, which included the Chief Financial Officer and Vice President, Controller, with technical public company accounting and financial reporting experience, as well as other team members. We also have access to accounting training, literature, research materials and increased communication among our personnel and outsourced third-party professionals with whom we have consulted and may continue to consult with regarding the application of complex accounting transactions. We have designed controls and deemed them to be effective. We have also tested and will continue to test for operational effectiveness to validate that the material weaknesses have been remediated and are operating effectively for a reasonable period of time. Our remediation plan can only be accomplished over time and will be continually reviewed to determine that we are achieving our objectives. There is no assurance that these initiatives will ultimately have the intended effects. The material weaknesses will not be considered remediated until our management designs and implements effective controls that operate for a sufficient period of time and our management has concluded through testing that these controls are effective.2023.
Changes in Internal Control over Financial Reporting
Except as disclosed above, thereWe began commercial shipments of the Platinum™ protein sequencing instrument in the first quarter of 2023. We are in the process of implementing additional controls over the processes that are associated with the commercial launch of PlatinumTM including but not limited to revenue recognition and inventory. There were no additional changes in our internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II -
OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS. |
We are not currently a party to any material legal proceedings.
Our business, results of operations and financial condition are subject to various risks and uncertainties including the risk factors described under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, filed with the SEC on March 1, 2022,17, 2023, in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 filed, with the SEC on May 11, 2023, in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 filed, with the SEC on August 7, 2023 and there have been no material changes to the risk factorsfactor described thereinbelow.
We rely on certain contract manufacturers to manufacture and supply components of both our instruments and consumable offerings. If these manufacturers should fail or not perform satisfactorily, our ability to commercialize and supply our instruments and consumable offerings would be adversely affected.
We rely on certain contract manufacturers to manufacture and supply components of both our instruments and consumable offerings. Since our contracts with these manufacturers do not commit them to carry inventory or make available any particular quantities, these manufacturers may give other customers’ needs higher priority than ours, and we may not be able to obtain adequate supplies in a timely manner or on commercially reasonable terms. Further, if these manufacturers are unable to obtain critical components used in our instruments or supply our instruments on the timelines we require, our business and commercialization efforts would be harmed. In November 2021, we acquired one of our key suppliers in the semiconductor chip assembly and packaging business, Majelac.
In the event it becomes necessary to utilize a different contract manufacturer for our products, we would experience additional costs, delays and difficulties in doing so as a result of identifying and entering into an agreement with a new manufacturer as well as preparing such new manufacturer to meet the logistical requirements associated with manufacturing our instruments and consumable offerings, and our business would suffer. In addition, once our products are authorized for use by the FDA as medical devices, we will need to contract with FDA-registered device establishments that are able to comply with current Good Manufacturing Practice requirements that are set forth in the QSR, unless explicitly exempted by regulation. We are presently working to transition activities of one of our contract manufacturers that produces a component of our semi-conductor chips. The existing contract manufacturer is moving their operations to a new facility, which has been delayed, requiring us to transition to a new contract manufacturer. If we are unable to begin manufacturing at this new contract manufacturer in a timely fashion, it will affect our ability to produce semi-conductor chips which would harm our research and development efforts and commercial operations.
In addition, certain of the components and consumables used in our instruments and consumable offerings are sourced from a limited number, or sole suppliers. If we were to lose such a supplier, there can be no assurance that we will be able to identify or enter into an agreement with an alternative supplier on a timely basis on acceptable terms, if at all. An interruption in our ability to sell and deliver instruments or consumable offerings to customers could occur if we encounter delays or difficulties in securing these components or consumables, or if the quality of the components or consumables supplied do not meet specifications, or if we cannot then obtain an acceptable substitute. Our suppliers have also been impacted by the COVID-19 pandemic, and in the past, we have experienced supply delays for critical hardware and instrumentation as a result. If any of these events occur, our subsequently filed reports.business, results of operations, financial condition and prospects could be harmed.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES, AND USE OF PROCEEDS.PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Issuer Purchases of Equity Securities
Not applicable.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
Not applicable.
| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
| ITEM 5. | OTHER INFORMATION. |
Not applicable.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
Exhibit Number | | Exhibit Description | | Filed Herewith | | Incorporated by Reference Herein from Form or Schedule | | Filing Date | | SEC File/ Reg. Number |
| | Equity Distribution Agreement, dated as of August 11, 2023, by and between Quantum-Si Incorporated and Evercore Group L.L.C. | | | | Form S-3 (Exhibit 1.2) | | 8/11/2023 | | 333-273934 |
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| | Separation Agreement, dated as of July 18, 2023, by and between Quantum-Si Incorporated and Michael P. McKenna, Ph.D. | | | | Form 8-K (Exhibit 10.1) | | 7/20/2023 | | 001-39486 |
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| | Separation Agreement, dated as of September 1, 2023 by and between Quantum-Si Incorporated and Patrick Schneider, Ph.D. | | | | Form 8-K (Exhibit 10.1) | | 9/5/2023 | | 001-39486 |
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| | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | |
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| | Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | |
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| | CertificationsCertification of the ChiefPrincipal Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | |
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| | Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | |
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| 101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | | X | | | | | | |
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| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | X | | | | | | |
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| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | X | | | | | | |
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| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | X | | | | | | |
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| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | X | | | | | | |
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| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | X | | | | | | |
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| 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) | | X | | | | | | |
| + | Management contract or compensatory plan or arrangement. |
| * | The certifications attached as Exhibit 3232.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Quantum-Si Incorporated under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of such Form 10-Q), irrespective of any general incorporation language contained in such filing. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| QUANTUM-SI INCORPORATED | |
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Date: November 8, 20229, 2023 | By: | /s/ Jeffrey Hawkins |
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| | Jeffrey Hawkins |
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| | President and Chief Executive Officer |
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Date: November 8, 20229, 2023 | By: | /s/ Claudia DraytonJeffry Keyes |
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| | Claudia DraytonJeffry Keyes |
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| | Chief Financial Officer |
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