The table below summarizes the resulting weighted average inputs used to calculate the estimated fair value of options awarded duringfor the periods shown below:three months ended March 31, 2020 and 2019:
The following table shows summary information for outstanding options and options that are exercisable (vested) as of September 30, 2017:March 31, 2020:
|
| | | | | | | | | | | | |
Equity-Based Compensation Expenses (in thousands) |
| | Three Months Ended | Nine Months Ended |
| | September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 |
| Cost of sales | $ | 22 |
| $ | — |
| $ | 44 |
| $ | — |
|
| Research and development | 994 |
| 504 |
| 2,886 |
| 1,168 |
|
| Sales, general and administrative | 2,504 |
| 2,166 |
| 8,040 |
| 5,423 |
|
| Equity-based compensation expense | $ | 3,520 |
| $ | 2,670 |
| $ | 10,970 |
| $ | 6,591 |
|
As of September 30, 2017, $262,000 and $33,000 ofMarch 31, 2020, unrecognized equity-based compensation expense was a component of capitalized inventory and property and equipment respectively.
As of September 30, 2017, unrecognized equity-based compensation cost related to unvested stock options and unvested restricted stock unitsRSUs was $16.7$23.4 million and $216,000$0.8 million, respectively. This is expected to be recognized over the years 20172020 through 2022.2025.
As discussedIncluded in Notethe above-noted stock options outstanding and stock compensation expense are performance-based stock options which vest only upon the achievement of certain targets. Performance-based stock options are generally granted at-the-money, contingently vest over a period of 1 we implemented ASU 2016-09, Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting2 years, depending on January 1, 2017. Pursuantthe nature of the performance goal, and have contractual lives of 10 years. These options were valued in the same manner as the time-based options, with the assumption that performance goals will be achieved. The inputs for expected volatility, expected dividends, and risk-free rate used in estimating those options’ fair value are the same as the time-based options issued under the plan. The expected term for performance-based stock options is 5 to this guidance, we made a policy election6 years. However, the Company only recognizes stock compensation expense to accountthe extent that the targets are determined to be probable of being achieved, which triggers the vesting of the performance options.
In August 2018, the Company granted 225,000 performance-based stock options. The performance obligations were met for forfeitures75,000 options and are exercisable as they occur rather than on an estimated basisof March 31, 2020. Of the 225,000 performance-based stock options granted 100,000 performance-based stock options were forfeited for the performance targets not being achieved.
125,000 performance-based stock options were outstanding as of March 31, 2020, which included 50,000 performance-based stock options not yet probable of being achieved and therefore, equity basedhave not started being expensed. No performance-based stock options have been exercised as of March 31, 2020. For the three months ended March 31, 2020 and 2019, the Company recognized $0 and $0.1 million of stock compensation expense for performance-based stock options, respectively.
Included in the above-noted RSU and restricted stock award outstanding amount are performance-based RSU's which vest only upon the achievement of certain targets. Performance-based RSU's contingently vest over a period of 3 years, depending on the nature of the performance goal, and have contractual lives of 10 years. These units were valued in the same manner as other RSUs, based on the published closing market price on the day before the grant date. However, the Company only recognizes stock compensation expense to the extent that the targets are determined to be probable of being achieved, which triggers the vesting of the performance options. For the three and nine months ended September 30, 2017 has been calculated based on actual forfeitures in our condensed consolidated statementsMarch 31, 2020 the Company granted 95,866 performance-based RSU's, all of operations and comprehensive loss, rather than our previous approach which was net of estimated forfeitures. Share-based compensation expense for the three and nine months ended September 30, 2016 is recorded net of estimated forfeitures, which were based on historical forfeitures and adjusted to reflect changes in facts and circumstances, if any. This change was accounted for using the modified retrospective transition method. This election resulted in a cumulative-effect adjustment which increased our accumulated deficit and additional paid-in capital by $655,000 for all outstanding awards as of January 1, 2017. We believe this election simplifies several aspectsat March 31, 2020. None of the accounting for share-based payment transactions.performance goals had become probable of being achieved, and no expense was recorded at March 31, 2020.
This new guidance requires that we record excess tax benefits and tax deficiencies related to the settlement of employee stock-based compensation to the income tax expense line item on our condensed consolidated statements of operations and comprehensive loss. The new guidance also states that previously unrecognized excess tax benefits should be recognized on a modified retrospective basis as of the beginning of the annual period of adoption. At January 1, 2017, we recorded approximately $1.5 million of additional deferred tax assets, which are fully offset by a valuation allowance. Accordingly, the adoption of ASU 2016-09 did not result in an adjustment to retained earnings for the cumulative effect of the tax benefit of the stock compensation.
The new guidance also requires excess tax benefits to be classified as an operating activity in the statement of cash flows rather than as a financing activity. Additionally, ASU 2016-09 requires that the minimum tax withholding paid on behalf of employees for share-based awards be classified as a financing activity in the statement of cash flows. Adoption of ASU 2016-09 did not result in any adjustments to prior period disclosures on the condensed consolidated statement of cash flows.
NOTE 15.13. INCOME TAXES
For the ninethree months ended September 30, 2017,March 31, 2020, the Company recorded adid 0t carry an income tax provision for income taxes of $220,000, which primarily related to a profitableamount as the Company does not recognize tax benefits from current year tax losses in the U.S. and other foreign jurisdiction without any net operating loss carryforwards.jurisdictions. The Company’s tax expense for the ninethree months ended September 30, 2017March 31, 2020 differs from the tax expense computed by applying the U.S. statutory tax rate to its year-to-date pre-tax loss of $47.5$21.3 million, as no tax benefits were recorded for tax losses generated in the U.S. and other foreign jurisdictions. At September 30, 2017,March 31, 2020, the Company had deferred tax assets primarily related to U.S. federal and state tax loss carryforwards.carryforwards and a deferred tax liability related to amortization of the Notes. The Company provided a full valuation allowance against its net deferred tax assets as future realization of such assets is not more likely than not to occur.
At September 30, 2017,On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The Cares Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions include removal of certain limitations on utilization of net operating losses, increasing the loss carryback period for certain losses to five years, and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. Due to the recent enactment of the CARES Act, the Company had gross unrecognizedis unable to quantify the impact, if any, that the CARES Act will have on its financial position, results of operations or cash flows. Management does not expect the CARES Act to have a material impact on the Company’s income tax benefits of $1.1 million. position for financial reporting purposes.
The Company isaccounts for uncertain tax positions pursuant to the recognition and measurement criteria under ASC 740, Income Taxes. For the three months ended March 31, 2020, we did not currently under examination by taxing authorities and doesnote any significant
changes to our uncertain tax positions. We do not believe the amount of unrecognizedanticipate significant changes to uncertain tax benefits will significantly increase or decrease overpositions within the next 12 months.
NOTE 16.14. COMMITMENTS
Leases
The Company has entered into lease agreements, lease amendments, and lease extensions the last of which expires in 2022. Total rent expense, including common area charges was $308,000 and $286,000 for the three months ended September 30, 2017 and 2016, respectively, and for the nine months ended September 30, 2017 and 2016 was $933,000 and $826,000, respectively. Future minimum lease payments under operating lease agreements are as follows:
|
| | | |
Operating Lease Obligations (in thousands) |
| Year ending December 31: | |
| 2017 | $ | 264 |
|
| 2018 | 1,022 |
|
| 2019 | 180 |
|
| 2020 | 65 |
|
| 2021 | 30 |
|
| Thereafter | 4 |
|
| Total operating lease obligations | $ | 1,565 |
|
Clinical Trial & Study Agreements
The Company has entered into master agreements with clinical trial and study sites in which we typically pay a set amount for start-up costs and then pay for work performed. These agreements typically indemnify the clinical trial sites from any and all losses arising from third party claims as a result of the Company’sCompany's negligence, willful misconduct or misrepresentation. The Company incurred clinical trial expense of $0expenses for start-up costs and $354,000work performed for the three months ended September 30, 2017these trials and 2016, respectively, and $27,000 and $1.8 million for the nine months ended September 30, 2017 and 2016, respectively. The expense incurredstudies is recorded as part of the clinical trial is included in research and development or sales, general and administrative expenses on the Company's condensed consolidated statements of operations and comprehensive loss. No commitments were recorded in connection with indemnifying these sites during the three months ended March 31, 2020 and 2019.
Legal Matters
NOTE 15. LEASES
On March 19, 2015, a putative securities class action lawsuit was filed against Accelerate Diagnostics, Inc., Lawrence Mehren, and Steve Reichling, Rapp v. Accelerate Diagnostics, Inc., et al., U.S. District Court, District of Arizona, 2:2015-cv-00504.
The complaint alleges thatfollowing presents supplemental information related to our leases in which we violated Sections 10(b) and 20(a) ofare the Securities Exchange Act of 1934 and SEC Rule 10b-5, by making false or misleading statements about our Accelerate Pheno™ system, formerly called the BACcel System. Plaintiff purports to bring the action on behalf of a class of persons who purchased or otherwise acquired our stock between March 7, 2014, and February 17, 2015. On June 9, 2015, Julia Chang was appointed Lead Plaintiff of the purported class. On June 23, 2015, Plaintiff filed an amended complaint alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, by making false or misleading statements or omissions about our ID/AST System and by allegedly employing schemes to defraud. Plaintiff sought certification of the action as a class action, compensatory damageslessee for the classthree months ended March 31, 2020 and 2019 (in thousands):
| | | | | | | | |
| Three Months Ended March 31, | |
| 2020 | 2019 |
| Cash paid for amounts included in lease liabilities | | |
| Operating cash flows from operating leases | $ | 284 | | $ | 82 | |
| ROU assets obtained in exchange for lease obligations | | |
| Operating leases | $ | 17 | | $ | — | |
| Lease Cost | | |
| Operating leases | $ | 319 | | $ | 82 | |
| Short-term leases | $ | 32 | | $ | 295 | |
The weighted average remaining lease term on our operating leases is 5.1 years. The weighted average discount rate on those leases is 7%.
The following presents maturities of operating lease liabilities in an unspecified amount, legal feeswhich we are the lessee as of March 31, 2020 (in thousands):
| | | | | |
| Remainder of 2020 | $ | 529 | |
| 2021 | 774 | |
| 2022 | 882 | |
| 2023 | 980 | |
| 2024 | 1,055 | |
| Thereafter | 518 | |
| Total lease payments | 4,738 | |
| Less imputed interest | (819) | |
| $ | 3,919 | |
The net investment in sales-type leases, where we are the lessor, is a component of other current assets and costs, and such other reliefnon-current assets in our condensed consolidated balance sheet. As of March 31, 2020, the total net investment in these leases was $1.2 million. The following presents maturities of lease receivables under sales-type leases as the court may order. Defendants moved to dismiss the amended complaint on July 21, 2015. The Court granted the motion and dismissed the case with prejudice on January 28, 2016. On February 26, 2016, Plaintiff filed a notice of appeal with the United States Court of Appeals for the Ninth Circuit, which challenges the dismissal of the amended complaint. Chang v. Accelerate Diagnostics, Inc., et al., No. 2:15-CV-00504-SPL (9th Cir. filed Feb. 26, 2016). On September 13, 2017, Plaintiff voluntarily dismissed the appeal and the case has been dismissed with prejudice.March 31, 2020 (in thousands):
| | | | | |
| Remainder of 2020 | $ | 361 | |
| 2021 | 394 | |
| 2022 | 337 | |
| 2023 | 79 | |
| 2024 | 25 | |
| Thereafter | — | |
| Total undiscounted cash flows | 1,196 | |
| Less imputed interest | — | |
| Present value of lease payments | $ | 1,196 | |
NOTE 17. SEGMENTS16. INDUSTRY, GEOGRAPHIC AND REVENUE DISAGGREGATION
The Company operates as one1 operating segment. Sales to customers outside the United States represented 11% and 33% for the three months ended March 31, 2020 and 2019, respectively.
As of March 31, 2020 and December 31, 2019, balances due from foreign customers, in U.S. dollars, were $2.0 million and $2.1 million, respectively.
The following presents total net sales by geographic territory for the three months ended March 31, 2020 and 2019 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2020 | 2019 | | | |
| Domestic | $ | 2,087 | | $ | 1,169 | | | | |
| Foreign | 255 | | 581 | | | | |
| $ | 2,342 | | $ | 1,750 | | | | |
The following presents total net sales by line of business for the three months ended March 31, 2020 and 2019 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2020 | 2019 | | | |
| Accelerate Pheno revenue | $ | 2,304 | | $ | 1,705 | | | | |
| Other revenue | | 38 | | 45 | | | | |
| $ | 2,342 | | $ | 1,750 | | | | |
The following presents total net sales by products and services for the three months ended March 31, 2020 and 2019 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2020 | 2019 | | | |
| Products | | $ | 2,141 | | $ | 1,693 | | | | |
| Services | | 201 | | 57 | | | | |
| $ | 2,342 | | $ | 1,750 | | | | |
Lease income included in net sales was $0.5 million and $0.2 million for each of the three months ended March 31, 2020 and 2019, respectively, which does not represent revenues recognized from contracts with customers.
The following presents property and equipment, net by geographic territory (in thousands):
| | | | | | | | |
| March 31, | December 31, |
| 2020 | 2019 |
| Domestic | $ | 8,039 | | $ | 7,244 | |
| Foreign | 600 | | 661 | |
| $ | 8,639 | | $ | 7,905 | |
NOTE 17. RELATED PARTY TRANSACTIONS
As discussed in Note 10, Convertible Notes the Company issued Notes in March 2018. As of March 31, 2020 and December 31, 2019 an entity controlled by one member of the Company's board of directors held an aggregate of $42.0 million of the Notes.
On August 20, 2019, the Company and an entity affiliated with then Chief Operating segments are defined as componentsOfficer of the Company entered into a securities purchase agreement (the “Purchase Agreement”) for the issuance and sale by the Company of an enterprise foraggregate of 55,586 shares of the Company’s common stock (the “Shares”) in an offering exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. The Shares were sold at a purchase price (determined in accordance with Nasdaq rules relating to the “market value” of the shares) of $17.99 per share, which separate financial informationwas equal to the consolidated closing bid price reported by Nasdaq immediately preceding the time the Company entered into the Purchase Agreement. The $1.0 million of proceeds were recorded to contributed capital.
NOTE 18. SUBSEQUENT EVENTS
On April 14, 2020, the Company entered into a promissory note evidencing an unsecured loan (the “Loan”) in the amount of $4.8 million made to the Company under the Paycheck Protection Program (the “PPP”). The PPP was established under the CARES Act and is evaluated regularlyadministered by the chief operating decision maker, who is the chief executive officer, in deciding how to allocate resourcesU.S. Small Business Administration.
The promissory note matures on April 14, 2022 and assessing performance. The Company’s business operates in one operating segment because the Company’s chief operating decision maker evaluates the Company’s financial information and resources and assesses the performancebears interest at a rate of these resources on a consolidated basis. Since1% per annum. Beginning November 14, 2020, the Company operatesis required to make 18 monthly payments of principal and interest in one operating segment,the amount of $0.3 million. The Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The proceeds from the Loan may only be used for payroll costs (including benefits), interest on mortgage obligations, rent, utilities and interest on certain other debt obligations.
The Note contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the lender or breaching the terms of the Loan documents. The occurrence of an event of default will result in an increase in the interest rate to 18% per annum and provides the lender with customary remedies, including the right to require immediate payment of all required financial segment informationamounts owed under the promissory note.
Pursuant to the terms of the CARES Act and the PPP, the Company may apply to the lender for forgiveness for the amount due on the Loan. The amount eligible for forgiveness is based on the amount of Loan proceeds used by the Company (during the eight-week period after the lender makes the first disbursement of Loan proceeds) for the payment of certain covered costs, including payroll costs (including benefits), interest on mortgage obligations, rent and utilities, subject to certain limitations and reductions in accordance with the CARES Act and the PPP. No assurance can be foundgiven that the Company will obtain forgiveness of the Loan in the consolidated financial statements.whole or in part.
NOTE 18. RELATED PARTY TRANSACTIONSItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In June 2016,
Introductory Note
Except as otherwise indicated by the Company recorded a net amount of $866,000 relatedcontext, references in this Quarterly Report on Form 10-Q (this “Form 10-Q”) to the recovery“Company,” “Accelerate,” “we,” “us” or “our” are references to the combined business of short-swing profits underAccelerate Diagnostics, Inc.
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning of Section 16(b)27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended.amended (the “Exchange Act”), and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements, which can be identified by the use of words such as “may,” “will,” “expect,” “anticipate,” “estimate,” or “continue,” or variations thereon or comparable terminology, include but are not limited to, statements about the plans and objectives of management for future operations, including plans and objectives relating to the products and future performance of the Company; projections of our future financial performance and demand for our products; the anticipated impacts from the COVID-19 pandemic on the Company, including to our business, results of operations, cash flows and financial position, as well as our future responses to the COVID-19 pandemic; and our plans or expectations with relating to our agreement with BioCheck, Inc. (“BioCheck”). In addition, all statements other than statements of historical facts that address activities, events, or developments the Company expects, believes, or anticipates will or may occur in the future, and other such matters, are forward-looking statements.
The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties, including the duration and severity of the COVID-19 pandemic and its ultimate effect on our business, results of operations, cash flows and financial position, as well as our ability (or inability) to execute on our plans to respond to the COVID-19 pandemic. These forward-looking statements are also based on assumptions that the Company will retain key management personnel, the Company will be successful in the commercialization of the Accelerate Pheno® system, the Company will obtain sufficient capital to commercialize the Accelerate Pheno system and continue development of complementary products, the Company will be able to protect its intellectual property, the Company’s ability to respond to technological change, the Company will accurately anticipate market demand for the Company’s products and there will be no material adverse change in the Company’s operations or business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking statements will be realized. Any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) summarizes the significant factors affecting our results of operations, liquidity, capital resources and contractual obligations. The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related notes included elsewhere herein. Certain information contained in the discussion and analysis set forth below and elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. The Company’s future operating results may be affected by various trends and factors which are beyond the Company’s control. These include, among other factors, general public perception of issues and solutions, and other uncertain business conditions that may affect the Company’s business. The Company recognizedcautions the reader that a number of important factors discussed herein, and in other reports filed with the SEC including but not limited to the risks in the section entitled “Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, the section entitled "Risk Factor” in this Form 10-Q and in the Company's subsequent filings with the SEC, could affect the Company’s actual results and cause actual results to differ materially from those discussed in forward-looking statements.
All amounts in the MD&A have been rounded to the nearest thousand unless otherwise indicated.
Overview
Accelerate Diagnostics, Inc. (“Accelerate”) is an in vitro diagnostics company dedicated to providing solutions that improve patient outcomes and lower healthcare costs through the rapid diagnosis of serious infections. Microbiology laboratories are in need of new tools to address what the U.S. Centers for Disease Control and Prevention (the “CDC”) calls one of the most serious healthcare threats of our time, antibiotic resistance. A significant contributing factor to the rise of resistance is the overuse and misuse of antibiotics, which is exacerbated by a lack of timely diagnostic results. The delay of identification and antibiotic susceptibility results is often due to the reliance by microbiology laboratories on traditional culture-based tests that often take two to three days to complete. Our technology platform is built to address these challenges by delivering significantly faster testing of infectious pathogens in various patient sample types.
Our first system to address these challenges is the Accelerate Pheno system. The Accelerate Pheno system utilizes genotypic technology to identify (“ID”) infectious pathogens and phenotypic technology to conduct antibiotic susceptibility testing (“AST”), which determines whether live bacterial and fungal cells are resistant or susceptible to a particular antimicrobial. The Accelerate PhenoTest® BC Kit, which is the first test kit for the system, provides ID and AST results for patients suspected of bacteremia or fungemia, both life-threatening conditions with high morbidity and mortality risk. This information is used to rapidly modify antibiotic therapy to lessen side-effects, improve clinical outcomes, and help preserve the useful life of antibiotics.
On June 30, 2015, we declared our conformity to the European In Vitro Diagnostic Directive 98/79/EC and applied a CE Mark to the Accelerate Pheno system and the Accelerate PhenoTest BC Kit for in vitro diagnostic use. On February 23, 2017, the U.S. Food and Drug Administration (“FDA”) granted our de novo request to market our Accelerate Pheno system and Accelerate PhenoTest BC Kit.
In 2017, we began selling the Accelerate Pheno system in hospitals in the United States, Europe, and the Middle East. Consistent with the Company's “razor” / “razor-blade” business model, revenues to date have principally been generated from the sale of the instruments and the sale of single use consumable test kits.
In 2019, based upon our initial experience selling and implementing the Accelerate Pheno system, we implemented initiatives to improve and refine our commercial execution and to re-engineer our product implementation processes. Improving our commercial and implementation capabilities remains an emphasis going forward, along with geographic expansion and product innovation.
On April 13, 2020 we signed a non-exclusive agreement with BioCheck to sell MS-FAST, a fully-automated chemiluminescence immunoassay analyzer, along with BioCheck’s SARS-CoV-2 tests for the detection of IgG and IgM antibodies (“BioCheck COVID-19 Serology Test”) in North America, Europe and the Middle East. We expect to begin sellling the BioCheck COVID-19 Serology Test in the second quarter of 2020. We will pay BioCheck a pre-defined price for the sale of each BioCheck COVID-19 Serology Test device and assay. The BioCheck COVID-19 Serology Test has a CE Mark and FDA regulatory approval is pending. In Europe we plan to obtain the BioCheck products directly through BioCheck's related partyentity, Sophonix Limited of China. The BioCheck COVID-19 Serology Test will be the first third-party product sold by Accelerate, the first product sold by Accelerate outside bacterial infections, and will be directed at the rapidly evolving COVID-19 serology market. As such, there are uncertainties regarding market demand, market acceptance, supply constraints, FDA approval, ramp up expenditures, and other factors impacting market penetration.
COVID-19 Update
In late 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China, which has since spread globally. In March 2020, the World Health Organization declared COVID-19 a global pandemic. Further, the COVID-19 outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place, stay-at-home or total lock-down (or similar) orders and business limitations and shutdowns. For example, the State of Arizona has implemented a stay-at-home order promoting physical distancing and limiting residents time away from their residence or property, except to conduct or participate in essential activities. The COVID-19 pandemic and these measures have caused, and are continuing to cause, business slowdowns or
shutdowns in affected areas, both regionally and worldwide, which have significantly impacted our business and results of operations.
For example, as a result of the pandemic, during the first quarter of 2020, our access to our customers to sell and implement the Accelerate Pheno system began to diminish as hospitals became primarily focused on the COVID-19 pandemic. By the end of the first quarter of 2020, we were largely unable to sell or implement new Accelerate Pheno systems. We are uncertain how long our access to our customers to sell and implement Accelerate Pheno systems will be limited. Further, starting in April our revenue from consumable test kits declined modestly from some of our current customers due to hospitals in many regions suspending elective surgeries and seeing lower rates of occupancy. As a result of delayed implementations of Accelerate Pheno systems, our results of operations for the first quarter of 2020 were negatively impacted.
As a medical device company, we are permitted to continue manufacturing our products at our Tucson, Arizona headquarters under the State of Arizona stay-at-home order. We are able to have staff at our office who are essential to manufacturing and shipping our products, and certain other staff who need to work in the office in order to be fully productive, while maintaining necessary social distancing practices. Our third-party manufacturing supply chain for Accelerate Pheno systems and consumable test kits remains stable. However, the economic effects of the COVID-19 pandemic remain unpredictable, and we are closely monitoring the ability of all our suppliers to provide us with materials necessary for the manufacture of Accelerate Pheno systems and consumable test kits.
Additionally, the Company has applied for and received loan proceeds of approximately $4.8 million under the Paycheck Protection Program established under the CARES Act. The proceeds from the loan may only be used for payroll costs (including benefits), interest on mortgage obligations, rent, utilities and interest on certain other debt obligations. For additional information about the loan, refer to Item 1, Note 18, Subsequent Events in this Form 10-Q.
We continue to monitor the rapidly evolving situation caused by the COVID-19 pandemic, and we may take further actions required by governmental authorities or that we determine are prudent to support the well-being of our employees, customers, suppliers, business partners and others. The degree to which the COVID-19 pandemic ultimately impacts our business, results of operations, cash flows and financial position will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
Accordingly, our current results and financial condition discussed herein may not be indicative of future operating results and trends. Refer to the section entitled “Risk Factors” in this Form 10-Q for additional risks we face due to the COVID-19 pandemic.
Changes in Results of Operations: Three months ended March 31, 2020 compared to three months ended March 31, 2019
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | |
| (in thousands) | | | | | | | | |
| 2020 | 2019 | $ Change | % Change | | | | | |
| Net sales | | $ | 2,342 | | $ | 1,750 | | $ | 592 | | 34 | % | | | | | |
For the three months ended March 31, 2020, total revenues increased as compared to the three months ended March 31, 2019 primarily due to increased sales of Accelerate PhenoTest BC Kits.
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | |
| (in thousands) | | | | | | | | |
| 2020 | 2019 | $ Change | % Change | | | | | |
| Cost of sales | | $ | 1,287 | | $ | 916 | | $ | 371 | | 41 | % | | | | | |
| Gross profit | | $ | 1,055 | | $ | 834 | | $ | 221 | | 26 | % | | | | | |
For the three months ended March 31, 2020, cost of sales and gross profit increased as compared to the three months ended March 31, 2019 as a result of higher sales. This increase was primarily driven by an increase in consumable inventory sales. Inventory without a cost basis was sold to customers for the three months ended March 31, 2020 and 2019. Pre-launch inventory previously not capitalized and expensed in a previous period for each of the three months ended March 31, 2020 and 2019, was $0.1 million.
Cost of sales included non-cash equity-based compensation of $0.1 million for each of the three months ended March 31, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | |
| (in thousands) | | | | | | | | |
| 2020 | 2019 | $ Change | % Change | | | | | |
| Research and development | | $ | 5,842 | | $ | 6,933 | | $ | (1,091) | | (16) | % | | | | | |
Research and development expenses for the three months ended March 31, 2020 decreased compared to the three months ended March 31, 2019. The decrease was primarily the result of decreases in employee non-cash equity-based compensation and reductions in external study expenditures.
Research and development expenses included non-cash equity-based compensation of $1.1 million and$1.5 million for the three months ended March 31, 2020 and 2019, respectively.
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | |
| (in thousands) | | | | | | | | |
| 2020 | 2019 | $ Change | % Change | | | | | |
| Sales, general and administrative | | $ | 12,943 | | $ | 12,723 | | $ | 220 | | 2 | % | | | | | |
Sales, general and administrative expenses for the three months ended March 31, 2020 increased as compared to the three months ended March 31, 2019. The increase was primarily the result of an increase in employee non-cash equity-based compensation, and partially offset by other discretionary items such as professional services and travel-related expenses.
Sales, general and administrative expenses included non-cash equity-based compensation of $3.0 million and $1.8 million for the three months ended March 31, 2020 and 2019, respectively. Non-cash equity-based compensation increased for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 due to larger stock option grants made to key management.
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | |
| (in thousands) | | | | | | | | |
| 2020 | 2019 | $ Change | % Change | | | | | |
| Loss from operations | | $ | (17,730) | | $ | (18,822) | | $ | 1,092 | | (6) | % | | | | | |
For the three months ended March 31, 2020, our loss from operations decreased as compared to the three months ended March 31, 2019. The decreases were primarily the result of a decrease in research and development expenses, combined with an increase in total revenues as described above. Loss from operations included non-cash equity-based compensation of $4.2 million and $3.4 million for the three months ended March 31, 2020 and 2019, respectively. This loss and further losses are anticipated and was the result of our continued investments in sales and marketing, key research and development personnel, related costs associated with product development, and commercialization of the Company’s products.
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | |
| (in thousands) | | | | | | | | |
| 2020 | 2019 | $ Change | % Change | | | | | |
| Total other expense, net | | $ | (3,579) | | $ | (2,678) | | $ | (901) | | 34 | % | | | | | |
Other expense for the three months ended March 31, 2020 increased as compared to the three months ended March 31, 2019. The increases were primarily the result of decreased interest income and increased interest expense for the three months ended March 31, 2020. For the three months ended March 31, 2020 and 2019, the Company incurred interest expense associated with our Notes of $3.7 million and $3.5 million, respectively. These amounts were partially offset by investment income of $0.4 million and $0.8 million for the three months ended March 31, 2020 and 2019, respectively.
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | |
| (in thousands) | | | | | | | | |
| 2020 | 2019 | $ Change | % Change | | | | | |
| Provision for income taxes | | $ | — | | $ | (221) | | $ | 221 | | NM | | | | | |
NM indicates percentage is not meaningful
For the three months ended March 31, 2020, the Company did not carry an income tax provision amount as the Company does not recognize tax benefits from current year tax losses in the U.S. and other foreign jurisdictions. For the three months ended March 31, 2019, the Company recorded tax provisions related to tax liabilities generated by our foreign subsidiaries for international income taxes.
Capital Resources and Liquidity
Our primary source of liquidity has been from sales of shares of common stock and the issuance of our convertible notes. As of March 31, 2020, the Company had $92.0 million in cash and cash equivalents and available-for-sale securities, a decrease of $16.4 million from $108.5 million at December 31, 2019. The primary reason for the decrease was due to cash used in operations during the period.
The Company is subject to lease agreements. The future minimum lease payments under these lease agreements are included in Item 1, Note 15, Leases.
As of March 31, 2020, management believes that current cash balances will be sufficient to fund our capital and liquidity needs for the next twelve months.
Our primary use of capital has been for the commercialization and development of the Accelerate Pheno system. We believe our capital requirements will continue to be met with our existing cash balance and those provided by revenue, grants, exercises of stock options and/or additional issuance of equity or debt securities. However, if capital requirements vary materially from those currently planned, we may require additional capital sooner than expected. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to us, if at all. Additional issuances of equity or convertible debt securities will result in dilution to our current common stockholders.
Summary of Cash Flows
The following summarizes selected items in the Company’s condensed consolidated statements of cash flows for the three months ended March 31, 2020 and 2019:
| | | | | | | | | | | |
| Cash Flow Summary | | | |
| Three Months Ended March 31, | | |
| (in thousands) | | |
| 2020 | 2019 | $ Change |
| Net cash used in operating activities | $ | (17,597) | | $ | (19,505) | | $ | 1,908 | |
| Net cash (used in) provided by investing activities | (5,356) | | 24,799 | | (30,155) | |
| Net cash provided by financing activities | 1,429 | | 3,816 | | (2,387) | |
Cash flows from operating activities
The net cash used in operating activities was $17.6 million and $19.5 million for the three months ended March 31, 2020 and 2019, respectively. Net cash used in operating activities was primarily the result of net losses offset by equity-based compensation and amortization of debt discount and issuance costs. These losses are the result of continued investments in research and development, sales and marketing, along with other factors. A decrease in our net loss offset by changes in working capital resulted in a decrease in cash used in operating activities for the three months ended March 31, 2020 compared to the prior year period.
Cash flows from investing activities
The net cash used in investing activities was $5.4 million for the three months ended March 31, 2020. During the three months ended March 31, 2020, the Company purchased marketable securities of $21.6 million, which were offset in part by maturities of marketable securities of $16.7 million. The net cash provided by investing activities was $24.8 million for the three months ended March 31, 2019. During the three months ended March 31, 2019, the Company had proceeds from sales and maturities of marketable securities of $37.7 million, which were offset in part by purchases of marketable securities of $12.8 million.
The Company had an increase in marketable securities purchases during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, due to the Company liquidating a portion of its money market funds carried as cash and cash equivalents as of December 31, 2019, and reinvesting these balances in debt securities available-for-sale during the three months ended March 31, 2020. The Company had larger proceeds from sales and maturities of marketable securities for the three months ended March 31, 2019 compared to the three months ended March 31, 2020 due to the Company carrying larger balance of debt securities available-for-sale during the three months ended March 31, 2019.
Cash flows from financing activities
The net cash provided by financing activities was $1.4 million and $3.8 million for the three months ended March 31, 2020 and 2019, respectively. These balances are comprised of proceeds from exercises of stock options. For the three months ended March 31, 2020 the Company had a decrease in proceeds from option exercises due to a lower average price of options exercised.
Convertible Notes
On March 27, 2018, the Company issued $150.0 million aggregate principal amount of 2.50% Convertible Senior Notes (“Notes”). In connection with the offering of the Notes, the Company granted the initial purchasers of the Notes a 13-day option to purchase up to an additional $22.5 million aggregate principal amount of the Notes on the same terms and conditions. On April 4, 2018 the option was partially exercised, which resulted in $21.5 million of additional proceeds, for total proceeds of $171.5 million. The Notes mature on March 15, 2023, unless earlier repurchased or converted into shares of common stock subject to certain conditions. The Notes are convertible into shares of the Company’s common stock, can be repurchased for cash, or a combination thereof, at the Company’s election, at an initial conversion rate of 32.3428 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $30.92 per share of common stock, subject to
adjustment. We pay interest on the Notes semi-annually in arrears on March 15 and September 15 of each year with interest payments beginning on September 15, 2018. Proceeds received from the issuance of the Notes were allocated between long-term debt (the “liability component”) and contributed capital (the “equity component”), within the condensed consolidated balance sheet. The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature. For additional information about the Notes, refer to Item 1, Note 10, Convertible Notes in this Form 10-Q.
In connection with the offering, we entered into a prepaid forward stock repurchase transaction (the “Prepaid Forward”) with a financial institution. Pursuant to the Prepaid Forward, we used approximately $45.1 million of the proceeds from the offering of the Notes to pay the prepayment amount. The aggregate number of our common stock underlying the Prepaid Forward is approximately 1,858,500 shares (based on the sale price of $24.25). The expiration date for the Prepaid Forward is March 15, 2023, although it may be settled earlier in whole or in part. Upon settlement of the Prepaid Forward, at expiration or upon any early settlement, the Forward Counterparty will deliver to us the number of shares of common stock underlying the Prepaid Forward or the portion thereof being settled early. The shares purchased under the Prepaid Forward were treated as treasury stock on the condensed consolidated balance sheet.sheet (and not outstanding for purposes of the calculation of basic and diluted earnings per share), but remain outstanding for corporate law purposes, including for purposes of any future stockholders' votes, until the Forward Counterparty delivers the shares underlying the Prepaid Forward to us.
Contractual Obligations
There have been no material changes in our reported contractual obligations, as described under “Contractual Obligations” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2020.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our estimates on an ongoing basis, including those related to accounts receivable, inventories, property and equipment, intangible assets, accruals, warranty liabilities, tax valuation accounts and stock-based compensation. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and are not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. There have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2020.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our investment portfolio is exposed to market risk from changes in interest rates. The fair market value of fixed rate securities may be adversely impacted by fluctuations in interest rates while income earned on floating rate securities may decline as a result of decreases in interest rates. We have historically maintained a relatively short average maturity for our investment portfolio, and we believe a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would change the fair value of our interest sensitive financial instruments by approximately $0.1 million as of March 31, 2020 and $0.3 million as of December 31, 2019.
Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to ensure the safety and preservation of our invested principal funds by limiting
default risk, market risk and reinvestment risk. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. To achieve our goals, we maintain a portfolio of cash equivalents and investments in a variety of securities that management believes to be of high credit quality. Further information regarding our investments is included in Item 1, Note 5, Investments in this Form 10-Q.
Although the Company’s Notes are based on a fixed rate, changes in interest rates could impact the fair market value of the Notes. As of March 31, 2020, the fair market value of the Notes was $93.5 million. For additional information about the Notes, refer to Item 1, Note 10, Convertible Notes in this Form 10-Q.
Foreign Currency Risk
We operate primarily in the United States and a majority of our cost, expense and capital purchasing activities for the three months ended March 31, 2020 were transacted in U.S. dollars. As a corporation with international and domestic operations, we are exposed to changes in foreign exchange rates. Our international revenue is predominantly in Europe and the Middle East and is denominated in Euros and United States dollars. In our international operations, we pay payroll and other expenses in local currencies. Our exposures to foreign currency risks may change over time and could have a material adverse impact on our financial results.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introductory Note
Except as otherwise indicated by the context, references in this Quarterly Report on Form 10-Q (this “Form 10-Q”) to the “Company,” “Accelerate,” “we," “us” or “our” are references to the combined business of Accelerate Diagnostics, Inc.
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements, which can be identified by the use of words such as “may,” “will,” “expect,” “anticipate,” “estimate,” or “continue,” or variations thereon or comparable terminology, include the plans and objectives of management for future operations, including plans and objectives relating to the products and future economic performance of the Company. In addition, all statements other than statements of historical facts that address activities, events, or developments the Company expects, believes, or anticipates will or may occur in the future, and other such matters, are forward-looking statements.
The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on assumptions that the Company will retain key management personnel, the Company will be successful in the commercialization of the Accelerate Pheno™ system, the Company will obtain sufficient capital to commercialize the Accelerate Pheno™ system and continue development of complementary products, the Company will be able to protect its intellectual property, the Company’s ability to respond to technological change, that the Company will accurately anticipate market demand for the Company’s products and that there will be no material adverse change in the Company’s operations or business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking statements will be realized. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) summarizes the significant factors affecting our results of operations, liquidity, capital resources and
contractual obligations. The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related notes included elsewhere herein. Certain information contained in the discussion and analysis set forth below and elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. The Company’s future operating results may be affected by various trends and factors which are beyond the Company’s control. These include, among other factors, general public perception of issues and solutions, and other uncertain business conditions that may affect the Company’s business. The Company cautions the reader that a number of important factors discussed herein, and in other reports filed with the SEC including but not limited to the risks in the section entitled “Risk Factors” in its Annual Report on Form 10-K for the period ended December 31, 2016, could affect the Company’s actual results and cause actual results to differ materially from those discussed in forward-looking statements.
Our MD&A is composed of the following sections: Overview, Changes in Results of Operations, Capital Resources and Liquidity and Off-Balance Sheet Arrangements. All amounts have been rounded to the nearest thousand unless otherwise indicated.
Overview
Accelerate Diagnostics, Inc. is an in vitro diagnostics company dedicated to providing solutions that improve patient outcomes and lower healthcare costs through the rapid diagnosis of serious infections. Microbiology laboratories are in need of new tools to address what the U.S. Centers for Disease Control and Prevention calls one of the most serious healthcare threats of our time, antibiotic resistance. A significant contributing factor to the rise of resistance is the overuse and misuse of antibiotics, which is exacerbated by a lack of timely diagnostic results. The delay of these results is often due to the reliance by microbiology laboratories on traditional culture-based tests that often take two to three days to complete. Our technology platform is built to address these challenges by delivering significantly faster and accurate testing of infectious pathogens in various patient sample types.
Since 2004, we have focused our efforts on research into and the development of an innovative rapid diagnostic platform, the Accelerate Pheno™ system, intended for the rapid diagnosis of infectious pathogens. Our goal is to reduce the failure rate of initial antibiotic drug therapy by shortening lab turnaround time to hours rather than the two to three days now required to deliver identification and susceptibility results.
The Accelerate Pheno™ system utilizes genotypic technology to identify, or “ID,” infectious pathogens and phenotypic technology to conduct antibiotic susceptibility testing, or “AST,” which determines whether live bacterial or fungal cells are resistant or susceptible to a particular antimicrobial agent. The Accelerate PhenoTest™ BC Kit provides ID and AST results for patients suspected of bacteremia or fungemia, both life-threatening conditions with high morbidity and mortality risk. The Accelerate PhenoTest™ BC Kit is a highly multiplexed panel targeting over 80% of the routine and significant pathogens causing blood stream infections and over 90% of the antibiotics useful in treating those pathogens.
On June 30, 2015, we declared our conformity to the European In Vitro Diagnostic Directive 98/79 EC and applied a CE Mark to the Accelerate Pheno™ system and the Accelerate PhenoTest™ BC Kit for in vitro diagnostic use. On February 23, 2017, the FDA granted our de novo request to market our Accelerate Pheno™ system and Accelerate PhenoTest™ BC Kit in the United States. The Accelerate PhenoTest™ BC kit includes 140 assays for both identification and susceptibility testing, of which 116 were cleared by the FDA and 24 assays are available in a Research Use Only mode of the software.
Changes in Results of Operations: Three and nine months ended September 30, 2017 compared to three and nine months ended September 30, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | (in thousands) | | (in thousands) |
| | 2017 | 2016 | $ Change | % Change | | 2017 | 2016 | $ Change | % Change |
| Net sales | $ | 828 |
| $ | 24 |
| $ | 804 |
| 3,350 | % | | $ | 2,058 |
| $ | 207 |
| $ | 1,851 |
| 894 | % |
For the three and nine months ended September 30, 2017, total revenues increased due to sales of Accelerate Pheno™ systems and Accelerate PhenoTest™ BC kits.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | (in thousands) | | (in thousands) |
| | 2017 | 2016 | $ Change | % Change | | 2017 | 2016 | $ Change | % Change |
| Cost of sales | $ | 191 |
| $ | — |
| $ | 191 |
| 100 | % | | $ | 352 |
| $ | — |
| $ | 352 |
| 100 | % |
| Gross Profit | $ | 637 |
| $ | 24 |
| $ | 613 |
| 2,554 | % | | $ | 1,706 |
| $ | 207 |
| $ | 1,499 |
| 724 | % |
For the three and nine months ended September 30, 2017, cost of sales and gross profit increased as a result of the Company capitalizing inventory in connection with the FDA granting Accelerate’s de novo request to market the Accelerate Pheno™ system and Accelerate PhenoTest™ BC kit.
Inventory without a cost basis was sold to customers during the three and nine months ended September 30, 2017. This inventory was comprised of pre-launch inventory previously not capitalized, and expensed in a previous period. Cost of sales associated with this inventory during the three and nine months ended September 30, 2017, would have been an additional $244,000 and $611,000, respectively.
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| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | (in thousands) | | (in thousands) |
| | 2017 | 2016 | $ Change | % Change | | 2017 | 2016 | $ Change | % Change |
| Research and development | $ | 6,351 |
| $ | 7,874 |
| $ | (1,523 | ) | (19 | )% | | $ | 16,166 |
| $ | 23,974 |
| $ | (7,808 | ) | (33 | )% |
Research and development expenses for the three and nine months ended September 30, 2017, decreased as compared to the same periods in the prior year as a result of clinical trial expenses not recurring in the current periods. Additionally, on January 1, 2017, the regulatory review process had progressed to a point that objective and persuasive evidence of approval was sufficiently probable, and a future economic benefit existed for the Accelerate Pheno™ system and Accelerate PhenoTest™ BC kit. As a result, the Company started capitalizing pre-launch inventory for the Accelerate Pheno™ system and Accelerate PhenoTest™ BC kit on January 1, 2017. Prior to January 1, 2017, all pre-launch inventory was not capitalized, because a future economic benefit couldn’t be asserted.
Pre-launch inventory not capitalized in accordance with U.S. GAAP, which included instruments and consumables charged to research and development were $225,000 and $795,000 for the three months ended September 30, 2017 and 2016, respectively, and $376,000 and $3.9 million for the nine months ended September 30, 2017 and 2016, respectively.
Research and development expenses include non-cash equity-based compensation of $1.0 million and $504,000 for the three months ended September 30, 2017 and 2016, respectively, and $2.9 million and $1.2 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in non-cash equity-based compensation was primarily driven by an increase in the number of employees and stock option grants.
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| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | (in thousands) | | (in thousands) |
| | 2017 | 2016 | $ Change | % Change | | 2017 | 2016 | $ Change | % Change |
| Sales, general and administrative | $ | 11,601 |
| $ | 9,566 |
| $ | 2,035 |
| 21 | % | | $ | 33,589 |
| $ | 26,710 |
| $ | 6,879 |
| 26 | % |
Sales, general and administrative expenses for the three and nine months ended September 30, 2017, increased due to an increase in salaries and related expenses as we ramp up our sales and marketing operations globally.
Pre-launch inventory not capitalized in accordance with U.S. GAAP, which included instruments and consumables charged to sales, general and administrative expenses were $11,000 and $1.2 million for the three months ended September 30, 2017 and 2016, respectively, and $40,000 and $2.5 million for the nine months ended September 30, 2017 and 2016, respectively.
Sales, general and administrative expenses include non-cash equity-based compensation of $2.5 million and $2.2 million for the three months ended September 30, 2017 and 2016, respectively, and $8.0 million and $5.4 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in non-cash equity-based compensation was primarily driven by an increase in the number of employees and stock option grants.
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| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | (in thousands) | | (in thousands) |
| | 2017 | 2016 | $ Change | % Change | | 2017 | 2016 | $ Change | % Change |
| Loss from operations | $ | (17,315 | ) | $ | (17,416 | ) | $ | 101 |
| (1 | )% | | $ | (48,049 | ) | $ | (50,477 | ) | $ | 2,428 |
| (5 | )% |
For the three and nine months end September 30, 2017, loss from operations decreased as a result of the Company capitalizing inventory in connection with the FDA granting Accelerate’s de novo request to market the Accelerate Pheno™ system and Accelerate PhenoTest™ BC kit.
Loss from operations include non-cash equity-based compensation of $3.5 million and $2.7 million for the three months ended September 30, 2017 and 2016, respectively, and $11.0 million and $6.6 million for the nine months ended September 30, 2017 and 2016, respectively. This loss and further losses are anticipated and was the result of our continued investments in research and development, expanded laboratory and operational space, increased employee headcount and other factors as we develop and commercialize the Company’s products.
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| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | (in thousands) | | (in thousands) |
| | 2017 | 2016 | $ Change | % Change | | 2017 | 2016 | $ Change | % Change |
| Total other income | $ | 285 |
| $ | 117 |
| $ | 168 |
| 144 | % | | $ | 536 |
| $ | 238 |
| $ | 298 |
| 125 | % |
Other non-operating income during the three and nine months ended September 30, 2017, increased due to an increase in interest and dividends, which were offset by other components of other income.
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| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | (in thousands) | | (in thousands) |
| | 2017 | 2016 | $ Change | % Change | | 2017 | 2016 | $ Change | % Change |
| Provision from income taxes | $ | (45 | ) | $ | — |
| $ | (45 | ) | 100 | % | | $ | (220 | ) | $ | — |
| $ | (220 | ) | 100 | % |
Due to net losses incurred, we have only recorded tax provisions related to tax liabilities generated by our foreign subsidiaries.
Capital Resources and Liquidity
Our primary source of liquidity has been from sales of shares of common stock. As of September 30, 2017, the Company had $121.3 million in cash and cash equivalents and available-for-sale securities, an increase of $43.6
million from $77.8 million at December 31, 2016. The primary reason for the change in these assets was a public offering that occurred during the nine months ended September 30, 2017.
The Company is subject to lease agreements. The future minimum lease payments under theses lease agreements is included in Item 1, Note 16, Commitments.
As of September 30, 2017, management believes that current cash balances will be more than sufficient to fund our capital and liquidity needs for the next twelve months.
The following summarizes selected items in the Company’s consolidated statements of cash flows for the nine months ended September 30, 2017, and 2016:
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| | | | | | | | | |
Cash Flow Summary
(in thousands) |
| | Nine Months Ended | |
| | September 30, | September 30, | Increase (Decrease) |
| | 2017 | 2016 |
| Net cash used in operating activities | $ | (42,498 | ) | $ | (40,607 | ) | $ | (1,891 | ) |
| Net cash used in investing activities | (30,907 | ) | (52,215 | ) | 21,308 |
|
| Net cash provided by financing activities | 88,303 |
| 983 |
| 87,320 |
|
The net cash used in operating activities was $42.5 million and $40.6 million for the nine months ended September 30, 2017, and 2016, respectively. These losses are the result of our continued investments in research and development, expanded laboratory and operational space, increased employee headcount and other factors as we develop and prepare to commercialize the Company’s products.
The net cash used in investing activities was $30.9 million for the nine months ended September 30, 2017, and is primarily comprised of purchases of available-for-sales securities, offset by sales and maturities of available-for-sale securities. Net cash used in investing activities was $52.2 million for the nine months ended September 30, 2016, and is primarily comprised of purchases of available-for-sale investments, offset by sales and maturities of available-for-sale investments.
The net cash provided by financing activities was $88.3 million for the nine months ended September 30, 2017, and is primarily comprised of proceeds from a public offering. The net cash provided by financing activities was $983,000 for the nine months ended September 30, 2016, and was primarily comprised of the recovery of short swing profits from related parties, offset by common stock issuance cost and the exercise of options and warrants.
Our primary use of capital has been for development and commercialization of the Accelerate Pheno™ system. We believe our capital requirements will continue to be met with our existing cash balance and those provided under grants, exercises of warrants and stock options and/or additional issuance of equity or debt securities. However, if capital requirements vary materially from those currently planned, we may require additional capital sooner than expected. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to us, if at all. Additional issuances of equity or convertible debt securities will result in dilution to our current common stockholders.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of September 30, 2017.
Item 3. Quantitative and Qualitative Disclosures
Interest Rate Risk
Our investment portfolio is exposed to market risk from changes in interest rates. The fair market value of fixed rate securities may be adversely impacted by fluctuations in interest rates while income earned on floating rate
securities may decline as a result of decreases in interest rates. We have historically maintained a relatively short average maturity for our investment portfolio, and we believe a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would change the fair value of our interest-sensitive financial instruments by approximately $789,000.
Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. To achieve our goals, we maintain a portfolio of cash equivalents and investments in a variety of securities that management believes to be of high credit quality. Further information regarding our investments is included in Item 1, Note 6, Investments.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s Principal Executive Officer and Principal Financial Officer have concluded that the Company’s disclosure controls and procedures as(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange ActAct) were effective as of September 30, 2017,March 31, 2020, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s management, including its Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the nine months ended September 30, 2017,There was no change in connection with the Company’s preparationsinternal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2020 that materially affected, or is reasonably likely to commercializematerially affect, the Accelerate Pheno™ system and Accelerate PhenoTest™ BC Kit the Company implemented additionalCompany’s internal controls related to revenue recognition and inventory.control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 19, 2015,We are from time to time subject to various claims and legal actions in the ordinary course of our business. We believe that there are currently no claims or legal actions that would reasonably be expected to have a putative securities class action lawsuit was filed against Accelerate Diagnostics, Inc., Lawrence Mehren, and Steve Reichling, Rapp v. Accelerate Diagnostics, Inc., et al., U.S. District Court, Districtmaterial adverse effect on our results of Arizona, 2:2015-cv-00504. The complaint alleges that we violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, by making falseoperations or misleading statements about our Accelerate Pheno™ system, formerly called the BACcel System. Plaintiff purports to bring the action on behalf of a class of persons who purchased or otherwise acquired our stock between March 7, 2014, and February 17, 2015. On June 9, 2015, Julia Chang was appointed Lead Plaintiff of the purported class. On June 23, 2015, Plaintiff filed an amended complaint alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, by making false or misleading statements or omissions about our ID/AST System and by allegedly employing schemes to defraud. Plaintiff sought certification of the action as a class action, compensatory damages for the class in an unspecified amount, legal fees and costs, and such other relief as the court may order. Defendants moved to dismiss the amended complaint on July 21, 2015. The Court granted the motion and dismissed the case with prejudice on January 28, 2016. On February 26, 2016, Plaintiff filed a notice of appeal with the United States Court of Appeals for the Ninth Circuit, which challenges the dismissal of the amended complaint. Chang v. Accelerate Diagnostics, Inc., et al., No. 2:15-CV-00504-SPL (9th Cir. filed Feb. 26, 2016). On September 13, 2017, Plaintiff voluntarily dismissed the appeal and the case has been dismissed with prejudice.financial condition.
Item 1A. Risk Factors
There have been no material changesIn addition to the risk factors that were disclosedother information set forth in this Form 10-Q, you should carefully consider the risks discussed in the Company’ssection entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2019 and the risks relating to the impact of the COVID-19 pandemic described below. The risks described in our Annual Report on Form 10-K for the year ended December 31, 2019 and below are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, results of operations, cash flows and financial position.
Additional Risk Related to Our Business and Strategy
The COVID-19 pandemic has had, and is expected to continue to have, a significant adverse impact on our commercial operations and also exposes our business to other risks.
In late 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China, which has since spread globally. In March 2020, the World Health Organization declared COVID-19 a global pandemic. Further, the COVID-19 outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place, stay-at-home, or total lock-down (or similar) orders and business limitations and shutdowns. For example, the State of Arizona has implemented a stay-at-home order promoting physical distancing and limiting residents time away from their residence or property, except to conduct or participate in essential activities. The COVID-19 pandemic and these measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide, which have significantly impacted our business and results of operations, starting in the first quarter of 2020. For example, this included diminished access to our customers, including hospitals, which has severely limited our ability to sell or implement the Accelerate Pheno systems, as well as a modestly negative impact to the demand for our consumable test kits beginning in April 2020. For additional information, refer to “—COVID-19 Update” in Part I, Item 2 of this Form 10-Q.
In addition to the negative impact on new sales and implementations of the Accelerate Pheno system and to demand for our consumable test kits, the pandemic exposes our business, operations, and workforce to a variety of other risks, including:
•delays in product development or reductions in manufacturing production as a result of inventory shortages, supply chain shortages, or diversion of our efforts and resources to projects related to COVID-19;
•increased expenses resulting from our COVID-19 BioCheck serology initiative;
•regulatory approval delays due to regulators being overwhelmed reviewing COVID-19 related medical devices and drugs;
•increased regulatory restrictions or continued market volatility could hinder our ability to execute strategic business activities, as well as negatively impact our stock price;
•significant disruption of global financial markets, which could cause fluctuations in currency exchange rates or negatively impact our ability to access capital markets;
•inability to access capital markets on terms that are not significantly detrimental to our business because our revenue growth rate has slowed due to our inability to sell and implement the Accelerate Pheno system as forecasted prior to the pandemic at a stage in our maturation when we are cash flow negative and have significant indebtedness in the form of convertible senior notes;
•negative impact on our workforce productivity, product development, and research and development due to difficulties resulting from our personnel working remotely; and
•illnesses to key employees, or a significant portion of our workforce, which may result in inefficiencies, delays, and disruptions in our business;
Any of these developments may adversely affect our business, harm our reputation, or result in legal or regulatory actions against us.
The potential effects of COVID-19 may also impact many of our other risk factors discussed in in Part I, Item 1A, Risk Factors, in our Annual report on Form 10-K for the year ended December 31, 2019. The degree to which COVID-19 ultimately impacts our business, results of operations, cash flows and financial position will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted, including, but not limited to, the duration and spread of the COVID-19 outbreak, its severity, the actions to contain the virus or treat its impact and how quickly and to what extent normal economic and operating conditions can resume.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
|
| | | | | | | |
| Exhibit No. | Description | Filing Information |
| | Incorporated by reference to Appendix B to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on November 13, 2012 |
| | Incorporated by reference to Exhibit A to the Registrant’s Definitive Information Statement on Schedule 14C filed on July 12, 2013 |
| | Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on March 15, 2016 |
| 3.1.3 | | Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 15, 2019 |
| 3.2 | | Incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on August 8, 2019 |
| 10.1 | | Incorporated by reference to Exhibit 3.2 filed with10.8 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 2012filed on February 28, 2020 |
| 10.2 | | Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on April 8, 2020 |
| 10.3 | | Incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on form 8-K filed on April 8, 2020 |
| 10.4 | | Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on April 20, 2020 |
| 31.1 | | Filed herewith |
| | Filed herewith |
| | FiledFurnished herewith |
101**101.INS | 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 | Filed herewith |
101**101.SCH | Inline XBRL Taxonomy Extension Schema Document | Filed herewith |
101**101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith |
101**101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith |
101**101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed herewith |
101**101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) | Filed herewith |
** Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.
SIGNATURES
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.
ACCELERATE DIAGNOSTICS, INC.
| | | | | |
| May 8, 2020 | /s/ Jack Phillips |
| Jack Phillips
President and Chief Executive Officer |
| (Principal Executive Officer) |
| |
November 7, 2017May 8, 2020 | /s/ Lawrence Mehren |
| Lawrence Mehren
President and Chief Executive Officer
|
| (Principal Executive Officer) |
| |
November 7, 2017 | /s/ Steve Reichling |
| Steve Reichling
Chief Financial Officer
|
| (Principal Financial and Accounting Officer) |