Good day, and thank you for standing by. Welcome to the Quanterix Corporation's third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now hand the conference over to your speaker, Michael Doyle, CFO. Please go ahead.
Thank you very much. Good afternoon, everyone, and thanks for joining us today. With me on today's call is Masoud Toloue, President and CEO of Quanterix. Before we begin, I would like to remind you about a few things. The call will be recorded and will be available on the investor resources section of our website. Today's call will contain forward-looking statements that are based on management's beliefs and assumptions and on information available as of the date of this call. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
The risks and uncertainties that we face are described in our most recent filings with the Securities and Exchange Commission. To supplement the company's financial statements presented on a GAAP basis, the company has provided certain pro forma financial measures. Management uses these pro forma measures to evaluate the company's operating performance in a manner that allows for meaningful period-to-period comparison and analysis of trends in its business. Management believes that such measures are important in comparing current results with other period results and are useful to investors and financial analysts in assessing the company's operating performance. The pro forma financial information presented here should be considered in conjunction with, and not as a substitute for, the financial information presented in accordance with GAAP.
Investors are encouraged to review the reconciliation of these pro forma measures to their most directly comparable GAAP financial measures set forth in the appendix of this presentation and in the earnings release issued earlier today. With that, I will turn the call over to Masoud.
Thank you, Mike. Good afternoon. Before we begin the discussion of our results, I'd like to take a few minutes and provide a brief overview of our strategic realignment and its progress. As we shared in our last earnings call, Quanterix is at a pivotal juncture where our ability to scale with quality hasn't kept up with customer demand for our Simoa technology. Last August, we announced a comprehensive plan to improve the company's quality and operations. In addition, last quarter, we made a number of changes to the way we report gross margin that we feel better reflect our current cost of quality and will provide much better visibility into the progress of the assay remediation program we recently launched. Starting with that program, one quarter in, I am pleased to say we are on track.
The first phase was heavily focused on evaluation of reagent components to streamline across assays for improved manufacturability and reduction in variability. This will help with lot-to-lot performance issues we were experiencing, ultimately leading to improved gross margin. We also executed on our restructuring plan, which reset focus on our three principal objectives shared in August. Number one, quality, innovation, and positioning Quanterix to unlock the value of translational markets. As anticipated, with initial efforts, we saw 700 basis points of gross margin improvement with a Q3 2022 pro forma gross margin of 35% versus 28.3% in Q2 2022. We expect continued improvement as we enter the next phases of our redevelopment program, and we'll keep you updated on its progress. Moving on to the third quarter performance.
We delivered $26.6 million in total revenue, a 4% decline versus third quarter prior year, but a sequential increase of 13% versus prior quarter when our quality and scaling efforts began. We continue to manage demand while addressing quality and expect revenues to improve as process improvements are implemented over the next several quarters. Increased demand for services offered in our Accelerator Lab continue to partially offset consumable decline and have been an important lever as we balance that demand. As our redevelopment program progresses, we continue to strengthen our leading position in ultra-sensitivity space, particularly in neurology. Our Simoa technology has been key to showing p-tau217 to be one of the most prominent biomarkers being presented in neurological clinical studies recently demonstrated at AAIC in July.
Simoa non-invasive and cost-effective blood-based testing can enable identification of patients more likely to benefit from disease-modifying therapy, accelerating trial enrollment and increasing probability of approval. Our publications continue to grow, providing evidence of the industry's reliance on our ultra-sensitive technology for breakthrough discovery in research and clinical applications. In the third quarter of 2022, we added 159 publications, bringing total Simoa specific inclusions to over 2,000. We continue to see steady demand for our instruments and have placed approximately 130 instruments year to date, aligned with 2021, bringing our total of placements to over 800. It's no secret that high rates of discovery follow those who are testing and measuring in domains others don't participate. Those domains are at the single molecule and digital level, empowered by our Simoa technology.
Geographically, while North America represents 65% of our revenues, we continue to expand our regional capabilities, most notably our recent strategic IVD partnership with UltraDx in China. We believe we're in the beginning of a neuro decade of research and clinical testing, not just in North America, but in China, Asia, Europe, and around the world. Now, shifting to our progress on trials and test development. As we shared it in May, we have received funding from the Alzheimer's Drug Discovery Foundation, ADDF, to accelerate Alzheimer's disease diagnostic test development. We've kicked off our efforts with the Amsterdam University Medical Centers on four phases of a clinical trial to validate Quanterix's multi-analyte test. 50% through phase one, we're already showing promising results for Alzheimer's detection and differential diagnosis of memory complaints, which have resulted in four abstracts at international conferences.
The Bio-Hermes trial we are participating in is nearing completion at the beginning of 2023. Bio-Hermes is a prospective trial in partnership with the Global Alzheimer's Platform Foundation. The trial spans 17 U.S. sites and will include around 1,000 early Alzheimer's patients. These patients will have amyloid PET scans. All the sites are in the U.S., and the trial will include underserved populations and cognitively unimpaired subjects. This prospective validation trial for p-tau181 will generate data in support of our existing FDA filing for clearance of the test. Now, I'm going to turn it over back to Mike to discuss some more financial details. Mike?
Thanks, Masoud. I'm going to provide some additional financial details about our third quarter of 2022 performance. For your reference, those following on the call, I'm starting on slide four. As Masoud noted, our total revenue in the third quarter of 2022 was $26.6 million, a 4% decrease versus the third quarter 2021. Our third quarter revenue in 2021 included $1 million of RADx revenue. Excluding RADx, we were flat to Q3 2021. We had product revenue in the third quarter of $17.7 million, a 14% decrease versus the third quarter of 2021. Within product revenue, consumables revenue was the biggest driver of the shortfall, declining 30% versus the third quarter of 2021.
As Masoud mentioned, we continue to manage production demand for consumables while we address asset quality. Instrument revenue increased 20% versus the third quarter of 2021, aided by the sale of instruments to UltraDx in China. Third quarter service revenue increased 42% versus the prior year third quarter to $8.4 million. Included within services revenue is $2.7 million recognized during the third quarter of 2022 from our collaboration agreement with Eli Lilly. I would now like to spend some time talking about gross margin for the business. As a reminder, during the second quarter, based on a deep dive review of the business, we made a few changes on how we captured costs in our P&L. We changed the cost allocation of three departments based on their focused activity on quality and operations.
In addition, we are capturing freight costs not billed to customers and recorded as operating expenses as a pro forma adjustment to cost of goods sold. The pro forma adjustment is reflected in prior year comparisons. Both adjustments result in a move of cost from operating expense to cost of goods sold with no impact on the bottom line, but with a significant impact to gross margin. We have made these changes that give greater visibility into our quality activity and allow investors to better monitor our progress. Now let's review margin performance this quarter versus prior year. In Q3 of 2022, our pro forma gross margin was 35% compared to 49.8% in the third quarter of 2021, a decline of almost 1,500 basis points. There are a few factors that drove this change.
First, our inventory reserve increased significantly versus last year to capture the impact of quality. This negatively impacted margin approximately 800 basis points. Second, the change in allocation of resources associated with quality and operations in the second quarter of this year negatively impacted the year-over-year margin by approximately 500 basis points. However, as Masoud pointed out earlier, our efforts are already resulting in improved gross margin with an increase of approximately 700 basis points in pro forma gross margin from Q2 of 2022 to Q3 of 2022.
As a result of reorganization actions taken in Q3 and the change in allocations to cost of goods sold, operating expenses, excluding the impact of restructuring and related expenses, decreased to $26.5 million in the third quarter of 2022, a decrease of $4 million versus the operating expenses in the third quarter of 2021. We had a few significant items hit restructuring and related charges during the quarter. First, we incurred restructuring charges for severance totaling $3.4 million. Second, as a result of the announced restructuring and reduced guidance in our Q2 call, the stock price dropped meaningfully, causing a review of our goodwill. The subsequent analysis resulted in an impairment of $8.2 million to goodwill, a non-cash charge to our P&L.
Third, we incurred an impairment charge to our Bedford, Massachusetts, real estate, which we will not be utilizing, and a write-down for abandoned software totaling $8.7 million, a non-cash charge to the P&L. Finally, we incurred $600,000 related to other lease expenses related to the Bedford facilities. During the third quarter of 2022, our unrestricted cash balance decreased by $17.5 million from the end of the second quarter of 2022, which is detailed on slide five. Ending unrestricted cash balance is $343.7 million as of September 30, 2022. Basic weighted average shares outstanding for EPS purposes totaled 37 million for the third quarter of 2022.
Cash outflow from operations was $14 and a half million, driven by our net loss, severance expense, and CapEx, partially offset by collections on past due balances. With over $9 per share in cash and no debt, our balance sheet is in excellent shape, and we are well positioned with adequate resources to pursue our strategic objectives. The decision made to restructure the business in August of this year right-sized the business for our projected near-term revenue, but still retained adequate resources to address the quality issues and build our business to scale in a profitable manner. We had a good quarter, meeting our internal revenue target and exceeding consensus. As Masoud discussed, we are making good progress on rebuilding our assays.
As we head into the fourth quarter, we project Q4 revenue between $24-$26 million and full revenue of between $104-$106 million, which would have us finishing the year flat to prior year, excluding the impact of RADx in 2021, which is consistent with our previous guidance. With that, I'll turn it back to Masoud.
Thank you, Mike. Before we get into questions, I want to share a few market developments. Over the last several months, we're seeing a ramp in new discoveries using Simoa neurofilament light, a key biomarker to monitor neural damage impact of a wide range of health developments and issues. Key recent applications include using serum neurofilament light levels as a predictor of stroke severity and recovery, the direct monitoring of common and critical neurological side effects from CAR T therapy, and use as a biomarker to monitor critical chemotherapy side effects. Several more examples of using serum NfL as a secondary endpoint in the development of new therapeutics and continued advances in the use of NfL as both a diagnostics and a treatment monitoring biomarker for MS.
These, among many other publications, serve as direct evidence of the value of Simoa NfL as an important check engine light for the brain. You know, it's fair to call Quanterix unique. With over 800 instruments installed, strong IP, one of the very few commercial proteomics companies with revenues over $100 million, we are well positioned for the next big pharma market in neuro. Recent exciting data presented at the Alzheimer's Association International Conference in July demonstrated that plasma tau levels, particularly p-tau217 and p-tau231, as measured with Simoa, elevate early in cognitively unimpaired patients and correlate with Aβ pathology. This suggests that these Simoa biomarkers may be excellent tools for screening patients into new preventative trials instead of having to screen by PET or CSF.
As these Simoa assays are being developed and validated by our pharma partners, we are just starting to see first published data that in fact lower p-tau217 levels could be an ideal biomarker to advance these exciting new drugs. Later this month, at the Clinical Trials on Alzheimer's Disease, CTAD, in San Francisco, we'll participate in an all-day panel on the use of these blood-based biomarkers in clinical trials, where we expect to see and hear several top-line readouts and updates to ongoing Alzheimer's work. It's truly an exciting time for this space. Simply put, the market opportunity in neurodegenerative research and the demand for ultrasensitive tools for early biomarker detections have never been stronger.
The steps we are taking to ensure that we remain at the forefront of this market, we still have challenges, but we're meeting them head-on and are confident that the steps we are taking will improve our quality and manufacturability of our assays, allowing us to both scale and improve our cost structure in preparation to accomplish our translational goals. It continues to be the single greatest priority of the company, and we believe that at the conclusion of this transformation, we'll be capturing a larger share of the proteomics market, innovating and growing at a much faster pace than before, and in a leading position to propel new discoveries, advancing neurodegenerative disease research and diagnostics. Let's take some questions. Operator?
As a reminder, to ask a question, you'll need to press star one one on your telephone. Please limit yourself to one question and one follow-up, and then re-queue. Please stand by while we compile the Q&A roster. We have a question from Puneet Souda with SVB Securities. Your line is open.
Hey, thanks. Thanks for the question. This is Philip Dante for Puneet. Appreciate that you're still in the midst of assay redevelopment, but kind of given the progress you've seen so far, just wondering if you see any upside to the flat year-over-year guidance.
Hey, Philip, this is Masoud. As we said on the call, you know, the assay redevelopment program and roadmap is on track and, you know, it's meeting our expectations that we set out from the beginning of last quarter. Three months in, you know, we don't see any sort of delay in our progress. We think it's, you know, on time and measured and, you know, our guidance, you know, we reiterated our guidance on the call that, hey, this is gonna be similar to what we said last quarter, which is flat in 2022 versus 2021.
Okay. Great. Thanks. Just quick follow-up. I was just wondering if you could share any updates on how instrument orders have been trending. It looks like, I think you said 20% growth here in the quarter, seems pretty good. I was just wondering, like, has there been or do you expect kind of a negative impact from some kind of broader challenges in assay consumable business?
Yeah. Phil, you can see that, you know, we have some challenges on the consumable side. A lot of those were self-inflicted as we, you know, improved the quality of the processes, the stability, and variances of the assay. You see that, you know, instruments are on track versus what we did last year in 2021. You know, they're per our expectations and, you know, nothing unusual.
Okay. Thanks. Otherwise, I'll hop back.
Thanks, Phil.
Our next question comes from Kyle Mikson with Canaccord Genuity. Your line is open.
Hi, this is Alex Dickerson. I'm on the line for Kyle Mikson. Just a few questions. I was wondering if you could discuss any geographic related headwinds that you experienced during the quarter, whether it be consumables or instrument related. Also, I was curious as to whether there's any more, any further workforce reductions during the quarter as well. Thank you.
Yeah. I'll take the question. Maybe Mike can add some color on the regional breakdown. No, you know, we announced the reduction in force last quarter and, you know, we don't have any plans for, you know, additional reductions. I'd say that, you know, the realignment that we had in last quarter really brought focus to the, you know, the quality, the innovation and the translation initiatives that we announced. That's, you know, progressing as expected. You can see some of the improvements in the P&L. And, you know, from a geographic perspective, I think Mike can, you know, go into it, but broadly speaking, you know, no major headwinds in any particular region.
In fact, you know, we announced a partnership with UltraDx , and so we saw, you know, some growth from instrument side in China. Mike, why don't you.
Yeah. I mean, if you look at it, we're down slightly from a revenue perspective year-over-year and spread almost evenly between North America and Europe, Asia Pac, to Masoud's point, is up double digits, driven primarily by the UltraDx shipments of instruments to China. That's pretty much the way it breaks out. It doesn't seem to be isolated to, like I say, any one region. North America, obviously still our largest region at about 63%. It looks like it's spread pretty evenly.
Got it. Thank you very much.
Thank you. Our next question will come from Matt Sykes with Goldman Sachs. Your line is open.
Hey, Masoud , Mike. Thanks for taking my questions. Good afternoon. Maybe just to start on the assay redevelopment operations, clearly shown the slide is very helpful to show the improvement you've seen. Just wondering when you're talking about managing volume, resulting in some of the declines we saw in consumables, how's that being communicated to customers? Meaning it sounds like demand is still there, but if you're managing volume, is there a risk that you're missing business? Is there some substitution risks for some of those assays where they could go elsewhere? Or is what you're providing, you know, onto a closed system and/or unique in that they're able to wait as you manage that volume and work through the redevelopment?
Hey, Matt, I'll take that. You know, the great news is that to achieve, you know, the ultra-sensitivity that you need in a lot of cases, Simoa and our ability to measure, you know, with great limits of detection is unmatched. You know, a lot of these customers, you know, we have been able to manage the volume and say, "Hey, you know, we want to validate things and we put up a quality wall so, you know, things aren't getting into their hands as fast as, you know, we might expect." You know, I think a lot of it is managed. Will there be some customers that can't wait? Of course. You know, overall, we're trying to manage demand. We've moved some of our demand to the Accelerator Laboratory.
You know, we've filled that, you know, in terms of capacity. You can see we have big projects with Lilly and, you know, other pharma partners that we've moved there. When we say volume management, it's, you know, partly some orders are being delayed, some orders are going to accelerator and, you know, we've been doing a triage.
Got it. Thanks for that color. Maybe just more of a high level question on sort of end markets. I mean, you've talked a lot about the pharma partnerships and the work you're doing there. You know, early in the year, you know, you talked a little bit about CROs and the potential there. Just given the slide you had up on the, you know, versus PET scans and kind of the lowering of costs you can provide from trial work with your eventual diagnostic. Any inroads into the CRO market? Do you see that as a market, if you look a few years out, as being an important one for Quanterix?
Absolutely. Yeah, you know, we're very clear that through our own laboratory or through, you know, what we're doing here internally, we're not gonna be able to ourselves match, you know, all of the demands in neurology. We absolutely wanna enable the CRO partners that are working with pharma companies. For us it's, you know, let's enable them. They're a big part of the market. They account for, you know, anywhere from 40%-60% of our business, depending on the quarter. We're a big fan and we'll continue to support CROs.
Got it. Then just one final follow-up for Mike. As we look at that sequential improvement in gross margins, that's fair to see that as apples to apples in terms of all the exceptions and changes that you've made on an accounting basis? I'm talking about sequential, not year-over-year.
Yeah, no. On a sequential basis, that's absolutely right, Matt. You know, figure Q2 and Q3 captured the impact of the allocation changes, captured the impact of the pro forma distribution. It's a real improvement, you know, primarily driven by, you know, expense reductions that, you know, were the result of the restructuring. We had some product mix bump up, and that pretty much offset some of the inventory reserves. It's a real quarter-over-quarter improvement.
Got it. You're not expecting any additional changes there in terms of your plans, so we can see sort of Q2 as a base to work from going forward?
I think that's right. I think that's a good baseline to work from. You know, I think and once we, you know, get beyond, you know, Q1 of next year, the year-over-year comparisons are gonna be easier as well. We're gonna try and call it out at each call just so people understand what's in and what's out.
Got it. Thanks very much. Appreciate it.
Thanks, Matt.
Thanks, Matt.
We have a question from Max Masucci with Cowen. Your line is open.
Hi, this is Stephanie on for Max Masucci. Thanks for taking my questions. The results from the Clarity AD study is gonna be presented at CTAD later this month. How do you expect the late November data readout and lecanemab PDUFA to influence demand for product and service revenues in the acute phase following what will be a landmark catalyst for Alzheimer's patient care?
Hey, Stephanie. We're incredibly excited as well. I think that it's gonna be a great conference. A lot of, you know, as I said, as you mentioned, top line readouts and, just progress, in the whole, you know, neuro, area. We really believe this is the neuro decade. In addition to the ALZ, you know, readouts that we expect to hear at CTAD, there's also a lot of work happening in ischemic stroke, you know, MS, ALS, TBI, Parkinson's. We think that, you know, CTAD is a great start for Alzheimer's. Obviously, you know, you're aware a lot of our tests in the market are being used in clinical trials.
Our tests are being used, you know, for monitoring drug effects and pre-screening, enrolling, you know, diverse populations and really just improving the whole disease continuum. You know, the readouts and the results I think is just great for the field, and we're incredibly fortunate that you know, the technology and the products we have are going to really enable that disease, you know, improvement and continuum. We're excited about the conference, and we're looking forward to the results.
Great. Thanks for that color. Additionally, Eli Lilly's president of neuroscience indicated during the company's earnings call last week that the company plans to launch a p-tau blood diagnostic next year. Could you, one, provide some additional context around Lilly's comment? Two, should we assume that the test Lilly is referring to will be run in your CLIA lab?
Yeah. Stephanie, we're not able to make comments on that on this call. You know, I can say publicly that we do have a partnership with Lilly that we have released and that is public information. We're very active, you know, in this space. You know, I wouldn't wanna. I hadn't listened to that specific call. I wouldn't wanna make comments on it.
Got it. Understood. Just one more for me if I could squeeze one in. On your p-tau181 LDT that you commercially launched in late July to potential clinical users and researchers, was p-tau181 the LDT a revenue contributor exiting Q3? Can you describe the demand trends that you've seen from clinical customers versus research customers?
Yeah, that's a great question. We did launch the p-tau181 LDT first of its kind in North America. It's, you know, important test for, as an AD tech diagnostic for Alzheimer's. I would say very early innings. Nothing material in terms of revenue for diagnostic side, but for clinical testing, for research applications, you know, us having this has absolutely driven interest in us being able to provide a diagnostic pathway and ultimately, you know, something that, you know, could be regulated and, you know, we could get a FDA approval for in the future. To answer your question, very minimal on the revenues. You know, there isn't a drug available today. We anticipate, you know, the revenues would stay minimal until there was a drug approved.
The interest driven from biopharma to do testing and to do clinical trial screening, pre-screening, is high, and having that test helps.
Great. Thanks so much for taking my questions again.
Absolutely. Thanks, Stephanie.
Thank you. There are no other questions in the queue. This concludes today's conference call. Thank you for participating. You may now disconnect.