ACCELERATE DIAGNOSTICS, INC.
ACCELERATE DIAGNOSTICS, INC.
NOTE 1. ORGANIZATION AND NATURE OF BUSINESS; BASIS OF PRESENTATION; PRINCIPLES OF CONSOLIDATION; SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and applicable rules and regulations of the United StatesU.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2021, as filed with the SEC on February 28, 2017.March 14, 2022.
The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods presented, but are not necessarily indicative of the results of operations to be anticipated for the entire year ending December 31, 2017,2022, or any future period.
All amounts are rounded to the nearest thousand dollars unless otherwise indicated.
All highly liquid investments with an original maturity of three months or less at time of purchase are considered to be cash equivalents. Cash and cash equivalents include overnight repurchase agreement accounts and other investments. As part of our cash management process, excess operating cash is invested in overnight repurchase agreements with our bank. Repurchase agreements and other investments classified as cash and cash equivalents are not deposits and are not insured by the U.S. Government, the FDIC or any other government agency and involve investment risk including possible loss of principal. We believe however, that the market risk arising from holding these financial instruments is minimal.
The Company also has an employee stock purchase program whereby eligible employees can elect payroll deductions that are subsequently used to purchase common stock at a discounted price. There is no compensation recorded for this program as (i) the purchase discount does not exceed the issuance costs that would have been incurred to raise a significant amount of capital by a public offering, (ii) substantially all employees that meet limited employment qualifications may participate on an equitable basis, and (iii) the plan does notdoesn't incorporate option features that would require compensation to be recorded.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following tables represent the financial instruments measured at fair value on a recurring basis onin the financial statements of the Company and the valuation approach applied to each class of financial instruments at SeptemberJune 30, 2017,2022 and December 31, 2016.2021 (in thousands):
Level 1 assets are priced using quoted prices in active markets for identical assets which include money market funds, and U.S. Treasury securities and mutual funds as these specific assets are liquid.
Level 2 available-for-sale securities are priced using quoted market prices for similar instruments or nonbinding
market prices that are corroborated by observable market data. The Company uses inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from quoted market prices, independent pricing vendors, or other sources, to determine the ultimate fair value of these assets and liabilities. The Company uses such pricing data as the primary input to make its assessments and determinations as to the ultimate valuation of its investment portfolio and has not made, during the periods presented, any material adjustments to such inputs. There were no transfers between levels during
NOTE 5. CONCENTRATION OF CREDIT RISK
|
| | | | | | | | | | | | |
| AVAILABLE-FOR-SALE INVESTMENTS |
| September 30, 2017 |
| (in thousands) |
| | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| Certificates of deposit | $ | 14,367 |
| $ | — |
| $ | — |
| $ | 14,367 |
|
| US Treasury securities | 12,035 |
| — |
| (26 | ) | 12,009 |
|
| US Agency securities | 7,511 |
| — |
| (26 | ) | 7,485 |
|
| Commercial paper | 10,456 |
| — |
| — |
| 10,456 |
|
| Asset-backed securities | 5,023 |
| 1 |
| — |
| 5,024 |
|
| Corporate notes and bonds | 37,577 |
| — |
| (29 | ) | 37,548 |
|
| Total | $ | 86,969 |
| $ | 1 |
| $ | (81 | ) | $ | 86,889 |
|
|
| | | | | | | | | | | | |
| AVAILABLE-FOR-SALE INVESTMENTS |
| December 31, 2016 |
| (in thousands) |
| | Amortized
Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| Certificates of deposit | $ | 7,257 |
| $ | — |
| $ | — |
| $ | 7,257 |
|
| US Treasury securities | 8,553 |
| 1 |
| (10 | ) | 8,544 |
|
| US Agency securities | 4,514 |
| — |
| (13 | ) | 4,501 |
|
| Asset-backed securities | 5,554 |
| 3 |
| — |
| 5,557 |
|
| Corporate notes and bonds | 32,717 |
| 3 |
| (60 | ) | 32,660 |
|
| Total | $ | 58,595 |
| $ | 7 |
| $ | (83 | ) | $ | 58,519 |
|
The following table summarizes the maturities of the Company’s debt securities available-for-sale securitiesinvestments at SeptemberJune 30, 2017,2022 and December 31, 2016:2021 (in thousands):
| | | | | | | | | | | | | | |
| June 30, 2022 | December 31, 2021 |
| Amortized
Cost | Fair Value | Amortized
Cost | Fair Value |
| Due in less than 1 year | $ | 31,140 | | $ | 30,995 | | $ | 22,663 | | $ | 22,649 | |
| Due in 1-3 years | 405 | | 403 | | 231 | | 230 | |
| Total | $ | 31,545 | | $ | 31,398 | | $ | 22,894 | | $ | 22,879 | |
|
| | | | | | | | | | | | |
| AVAILABLE-FOR-SALE INVESTMENT MATURITIES |
| (in thousands) |
| | September 30, 2017 | December 31, 2016 |
| | Amortized
Cost | Fair Value | Amortized
Cost | Fair Value |
| Due in less than 1 year | $ | 60,999 |
| $ | 60,974 |
| $ | 45,391 |
| $ | 45,344 |
|
| Due in 1-5 years | 25,970 |
| 25,915 |
| 13,204 |
| 13,175 |
|
| Total | $ | 86,969 |
| $ | 86,889 |
| $ | 58,595 |
| $ | 58,519 |
|
ProceedsThere were no proceeds from sales of marketabledebt securities available-for-sale (including principal paydowns), for the three and six months endedSeptember June 30, 20172022 and 2016 were $3.0 million and $7.7 million, respectively, and for the for the nine months endedSeptember 30, 2017 and 2016 were $9.5 million and $8.7 million, respectively.2021. The Company determines gains and losses of marketable securities based on specific identification of the securities sold. There were $6,000 of realized gains from sales of marketable securities for the three and nine months ended September 30, 2016, and no grossmaterial realized gains or losses from sales of marketabledebt securities available-for-sale for the three and ninesix months ended SeptemberJune 30, 2017. The gross proceeds associated with the realized gains2022 and 2021. No material balances were reclassified out of accumulated other comprehensive income (loss) for the three and ninesix months ended SeptemberJune 30, 20162022 and 2021. No unrealized losses on debt securities available-for-sale have been recognized in income for the three and six months ended June 30, 2022 and 2021, as the issuers of such securities held by us were $7.2 million.of high credit quality.
No other-than-temporary impairments are recorded as
As of June 30, 2022, there were no material investmentholdings of debt securities available-for-sale of any one issuer, other than the U.S. government, in an amount greater than 10%.
As of June 30, 2022 the Company did not carry any debt securities available-for-sale that were below the Company's minimum credit rating. All debt securities available-for-sale had a fair value that remained less than its cost for more than twelve monthscredit rating of A- or better as of SeptemberJune 30, 2017, and there have been no other indicators2022.
Equity securities are comprised of impairment.investments in mutual funds. The Company does not intend to sell investments and it is more likely than not that we will not be required to sell investments before recovering the amortized cost.
Additional information regarding the fair value of our financial instruments is includedequity securities for each of the periods ended June 30, 2022 and December 31, 2021 was $0.8 million.
Unrealized gains or losses on equity securities recorded in Note 4, Fair Value of Financial Instruments.
NOTE 7. INVENTORY
Inventory is stated atincome during the lesser of cost or net realizable value, with cost determined on the first-in-first-out method. The allocation of production overhead to inventory costs is based on normal production capacity. Abnormal amounts of idle facility expensethree and spoilage are expensed as incurred,six months ended June 30, 2022 and not included in overhead subject to capitalization. The Company maintains provisions for excess and obsolete inventory based on management’s estimates of forecasted demand and, where applicable, product expiration. The components of inventories2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Unrealized loss on equity investments | $ | 107 | | $ | — | | | $ | 157 | | $ | — | |
These unrealized gains or losses are recorded as a component of other income (expense), net. There were no realized gains or losses from equity securities for each of the three and six months ended June 30, 2022 and 2021.
NOTE 6. INVENTORY
Inventories consisted of the following at June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | |
| June 30, | December 31, |
| 2022 | 2021 |
| Raw materials | $ | 2,078 | | $ | 1,343 | |
| Work in process | 1,690 | | 1,625 | |
| Finished goods | 1,536 | | 2,099 | |
| $ | 5,304 | | $ | 5,067 | |
|
| | | | | | |
| | September 30, | December 31, |
| | 2017 | 2016 |
| Raw materials | $ | 4,607 |
| $ | — |
|
| Work in process | 429 |
| — |
|
| Finished goods | 2,305 |
| — |
|
| Inventory, net | $ | 7,341 |
| $ | — |
|
NOTE 7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | |
| June 30, | December 31, |
| 2022 | 2021 |
| Computer equipment | $ | 3,872 | | $ | 3,181 | |
| Technical equipment | 3,285 | | 3,285 | |
| Facilities | 3,674 | | 3,675 | |
| Instruments | 4,253 | | 5,364 | |
| Capital projects in progress | 13 | | 683 | |
| Total property and equipment | $ | 15,097 | | $ | 16,188 | |
| Accumulated depreciation | (11,000) | | (10,799) | |
| Property and equipment, net | $ | 4,097 | | $ | 5,389 | |
Depreciation expense for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Depreciation expense | $ | 443 | | $ | 493 | | | $ | 903 | | $ | 1,053 | |
Instruments at cost and accumulated depreciation where the Company is the lessor under operating leases consisted of the following at June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | |
| June 30, | December 31, |
| 2022 | 2021 |
| Instruments at cost under operating leases | $ | 2,547 | | $ | 3,110 | |
| Accumulated depreciation under operating leases | (1,014) | | (1,165) | |
| Net property and equipment under operating leases | $ | 1,533 | | $ | 1,945 | |
NOTE 8. DEFERRED REVENUE AND REMAINING PERFORMANCE OBLIGATIONS
Deferred revenue consists of amounts received for products or services not yet delivered or earned. If we anticipate revenue will not be earned within the following twelve months, the amount is reported as other non-current liabilities. A summary of the balances as of June 30, 2022 and December 31, 2021 follows (in thousands):
| | | | | | | | |
| June 30, | December 31, |
| 2022 | 2021 |
| Products and services not yet delivered | $ | 335 | | $ | 451 | |
We recognized $0.2 million and $0.3 million of revenues that were included in the beginning contract liabilities balances during the three and six months ended June 30, 2022, respectively, and $0.2 million and $0.3 million of revenues that were included in the beginning contract liabilities balances during the three and six months ended June 30, 2021, respectively. No material amount of revenue recognized during the period was from performance obligations satisfied in prior periods.
Transaction Price Allocated to Remaining Performance Obligations
As of June 30, 2022, $10.1 million of revenue is expected to be recognized from remaining performance obligations. This balance primarily relates to product shipments for reagents sold to customers under sales-type lease agreements. These agreements have between two and four year terms and revenue is recognized as product is shipped, typically on a straight-line basis. The remaining balance relates to executed service contracts that begin as warranty periods expire. These service contracts typically provide for four-year terms and revenue is recognized on a straight-line basis.
The Company elects not to disclose the value of unsatisfied performance obligations for (i) contracts with an expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
NOTE 9. LONG-TERM DEBT
The Company entered into 2 loan agreements with 1 financing company in 2020. Loan proceeds were $0.2 million, with interest rates ranging from 9.8% to 12.4% and maturities becoming due through 2022.
As of June 30, 2022 and December 31, 2021, long-term debt consisted of the following (in thousands):
| | | | | | | | |
| June 30, | December 31, |
| 2022 | 2021 |
| Loans - various interest | $ | 84 | | $ | 80 | |
| Current portion of long-term debt | 84 | | 80 | |
| Long-term debt | $ | — | | $ | — | |
The following presents maturities of future principal obligations of long-term debt as of June 30, 2022 (in thousands):
| | | | | |
| Remainder of 2022 | $ | 84 | |
| 2023 | — | |
| 2024 | — | |
| 2025 | — | |
| 2026 | — | |
| Thereafter | — | |
| Total | $ | 84 | |
NOTE 10. CONVERTIBLE NOTES
The Notes are the Company's senior unsecured obligations and mature on March 15, 2023 (the “Maturity Date”), unless earlier repurchased or converted into shares of common stock under certain circumstances described below. Upon conversion of the Notes, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock, or a combination of cash and shares of common stock, at the Company’s election. The initial conversion rate of the Notes is 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. The Company pays interest on the Notes semi-annually in arrears on March 15 and September 15 of each year. The Company’s Notes have a fixed coupon rate of 2.5% per annum on the principal amount.
The Company incurred issuance costs related to the issuance of the Notes which is amortized over the five-year contractual term of the Notes using the effective interest method. The effective interest rate on the Notes, including accretion of the Notes to par was 3.2%.
The Notes include customary terms and covenants, including certain events of default upon which the Notes may be due and payable immediately. Holders have the option to convert the Notes in multiples of $1,000 principal amount at any time prior to December 15, 2022, but only in the following circumstances:
•if the Company’s stock price exceeds 130% of the conversion price for 20 of the last 30 trading days of any calendar quarter after June 30, 2018;
•during the 5 business day period after any 5 consecutive trading day period in which the Notes’ trading price is less than 98% of the product of the common stock price times the conversion rate; or
•the occurrence of certain corporate events, such as a change of control, merger or liquidation.
At any time on or after December 15, 2022, a holder may convert its Notes in multiples of $1,000 principal amount. Holders of the Notes who convert their Notes in connection with a make-whole fundamental change (as defined in the Indenture pursuant to which the Notes were issued) are, under certain circumstances, entitled to an increase in the conversion rate. In addition, in the event of a fundamental change or event of default prior to the Maturity Date, holders will, subject to certain conditions, have the right, at their option, to require the Company to repurchase for cash all or part of the Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the repurchase date.
Interest expense during the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Contractual coupon interest | $ | 666 | | $ | 1,072 | | | $ | 1,449 | | $ | 2,144 | |
| Amortization of debt issuance costs | 154 | | 180 | | | 265 | | 354 | |
| Amortization of the debt discount | — | | $ | 2,903 | | | $ | — | | $ | 5,724 | |
| Total interest expense on convertible notes | $ | 820 | | $ | 4,155 | | | $ | 1,714 | | $ | 8,222 | |
As of June 30, 2022 and December 31, 2021, no Notes were convertible pursuant to their original terms.
On March 21, 2022, the Company entered into a privately negotiated exchange agreement (the “Exchange Agreement”) with a holder of the Notes. Under the terms of the Exchange Agreement, the note holder agreed to exchange with the Company $14.0 million in aggregate principal amount of Notes held by it in 8 equal tranches as follows for each tranche: (a) 22.64 shares per $1,000 principal amount of Notes exchanged, plus (b) an additional number of shares of the Company’s common stock per $1,000 principal amount of Notes exchanged equal to the sum, for each of the trading days during a separate agreed upon reference period for each tranche commencing on March 21, 2022 for the first tranche, of the quotient of (i) $155.67 divided by (ii) the daily volume-weighted average price for such trading day (collectively, the “Exchange Transaction”). The closing of the Exchange Transaction occurred in 8 tranches (“Obligation to Exchange”), with the first closing occurring on March 29, 2022 and the last closing on May 18, 2022.
On March 21, 2022 the Obligation to Exchange the $14.0 million of Notes was accounted for as an extinguishment and was replaced by new notes with an embedded feature (the “New Notes”). The New Notes were elected to be carried using the fair value option. The New Notes were recorded at fair value on initial measurement and remeasured at fair value (“mark to market”) at each reporting period with changes in fair value reported in other income and expense, net. This fair value election was exclusive to the New Notes and did not extend to other Notes. At June 30, 2022 the embedded feature was no longer outstanding as the New Notes were exchanged and the Obligation to Exchange was retired. At June 30, 2022 no Notes were carried using the fair value option.
During the six months ended June 30, 2022 the holder of the Notes exchanged approximately $14.0 million in aggregate principal amount of Notes held by the holder for 10,798,482 shares of the Company's common stock pursuant to the Exchange Agreement. The legal exchange of the Notes resulted in a gain of $3.6 million. The Company's common stock was determined to have a value of $10.2 million, which was recorded to contributed capital during the six months ended June 30, 2022.
Gain on extinguishment of exchanged Notes during the three and six months ended June 30, 2022 and 2021 was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Gain on extinguishment | $ | 919 | | $ | — | | | $ | 3,565 | | $ | — | |
The carrying value of the Notes at June 30, 2022 consisted of the following (in thousands):
| | | | | |
| June 30, |
| 2022 |
| Outstanding principal at par | $ | 106,500 | |
| Unamortized debt issuance | (672) | |
| Net carrying amount of the liability component | $ | 105,828 | |
In connection with the Notes issuance, the Company entered into a prepaid forward stock repurchase transaction (“Prepaid Forward”) with a financial institution (“Forward Counterparty”). Pursuant to the Prepaid Forward, the Company used approximately $45.1 million of the net proceeds from its issuance of the Notes to fund the Prepaid Forward. The aggregate number of shares of the Company’s common stock underlying the Prepaid Forward was approximately 1,858,500. 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 the Company 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 are treated as treasury stock and not outstanding for purposes of the calculation of basic and diluted earnings per share, but will 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 the Company. The Company’s Prepaid Forward hedge transaction exposes the Company to credit risk to the extent that its counterparty may be unable to meet the terms of the transaction. The Company mitigates this risk by limiting its counterparty to a major financial institution.
NOTE 11. LOSS PER SHARE
Basic net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted average common shares outstanding during the period. Basic and diluted net loss per share are the same because all outstanding common stock equivalents have been excluded, as they are anti-dilutive due to the Company’s losses.
The following potentially issuable common shares were not included in the computation of diluted net loss per share because they would have an anti-dilutive effect for each of the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Shares issuable upon the release of restricted stock units | 4,909 | | 2,444 | | | 4,909 | | 2,444 | |
| Shares issuable upon exercise of stock options | 6,039 | | 7,941 | | | 6,039 | | 7,941 | |
| 10,948 | | 10,385 | | | 10,948 | | 10,385 | |
Potentially dilutive common shares would include common shares that would be outstanding if Notes convertible at the balance sheet date were converted. As discussed in Note 10, Convertible Notes, upon conversion of the Notes, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock, or a combination of cash and shares of common stock, at the Company’s election. The initial conversion rate of the Notes is 32.3428 shares of common stock per $1,000 principal amount of the Notes. As of
June 30, 2022, no Notes were convertible pursuant to the original terms. The number of shares of common stock issuable upon conversion of the outstanding Notes based on the initial conversion rate was approximately 3.4 million shares as of June 30, 2022.
In connection with the Notes, the Company entered into a prepaid forward stock repurchase transaction. The aggregate number of shares of the Company’s common stock underlying the Prepaid Forward was approximately 1,858,500. The shares purchased under the Prepaid Forward are treated as treasury stock and not outstanding for purposes of the calculation of basic and diluted earnings per share, but will 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 the Company.
Potentially dilutive common shares would also include common shares that would be outstanding if Series A Preferred Stock were converted into common stock. Each share of Series A Preferred Stock is convertible, at the option of the holder, at any time into 1 share of the Company’s common stock. Additionally, each share of Series A Preferred Stock will automatically be converted into 1 share of the Company’s common stock immediately upon a sale of all outstanding stock of the Company or a merger of the Company into another corporation where the pre-merger Company’s stockholders cease to be the controlling stockholders of the post-merger corporation. The number of shares of common stock issuable upon conversion of the Series A Preferred Stock is 3,954,546 as of June 30, 2022.
As discussed in Note 17, Stockholders' Equity, the Company entered into a securities purchase agreement with the Jack W. Schuler Living Trust for the issuance and sale by the Company of an aggregate of 2,439,024 shares of the Company’s common stock The closing of the transaction is expected to occur on September 26, 2022, subject to the satisfaction of customary closing conditions and is considered an equity forward agreement. The shares to be issued from this agreement were not included in the computation of diluted net loss per share because they would have an anti-dilutive effect due to net losses.
NOTE 8. PROPERTY AND EQUIPMENT12. EMPLOYEE EQUITY-BASED COMPENSATION
Property and equipment are recorded at cost and consisted ofThe following table summarizes option activity under the following at September 30, 2017, and December 31, 2016.
|
| | | | | | |
| PROPERTY AND EQUIPMENT |
| (in thousands) |
| | September 30, | December 31, |
| | 2017 | 2016 |
| Computer equipment | $ | 2,865 |
| $ | 2,270 |
|
| Technical equipment | 3,267 |
| 2,427 |
|
| Facilities | 3,512 |
| 3,387 |
|
| Instruments | 1,015 |
| — |
|
| Capital projects in progress | 464 |
| 1,010 |
|
| Total property and equipment | $ | 11,123 |
| $ | 9,094 |
|
| Accumulated depreciation - other | (6,433 | ) | (4,836 | ) |
| Net property and equipment | $ | 4,690 |
| $ | 4,258 |
|
Depreciation expense (which includes amortization of capital lease assets)Company's equity-based compensation plans for the threesix months endedSeptember June 30, 2017 and 2016 was $550,000 and $598,000, respectively, and for2022:
| | | | | | | | |
| Number of Shares | Weighted Average Exercise Price per Share |
| Options outstanding January 1, 2022 | 7,192,540 | | $ | 13.89 | |
| Granted | 140,000 | | 3.05 | |
| Forfeited | (128,670) | | 13.02 | |
| Exercised | (6,105) | | 1.04 | |
| Expired | (1,158,808) | | 10.05 | |
| Options outstanding June 30, 2022 | 6,038,957 | | $ | 14.41 | |
The table below summarizes the nine months endedSeptember 30, 2017 and 2016 was $1.6 million and $1.7 million, respectively.
NOTE 9. LICENSE AGREEMENTS AND GRANTS
National Instituteresulting weighted average inputs used to calculate the estimated fair value of Health Grant
In February 2015, the National Institute of Healthoptions awarded Denver Health and the Company a five-year, $5.0 million grant to develop a fast and reliable identification and categorical susceptibility test carbepenem-resistant Enterobacteriaceae directly from whole blood. The cumulative sub-award amount is $885,000, under which the Company has invoiced a total of $740,000, which is recorded as an offset to research and development expenses. The amounts invoiced for the three months ended SeptemberJune 30, 20172022 and 20162021:
| | | | | | | | |
| Three Months Ended June 30, |
| 2022 | 2021 |
| Expected term (in years) | 0.0 | 5.79 |
| Volatility | — | % | 65 | % |
| Expected dividends | — | | — | |
| Risk free interest rates | — | % | 1.10 | % |
| Weighted average fair value | $ | — | | $ | 4.09 | |
No stock options were $180,000 and $8,000, respectively, andgranted during the three months ended June 30, 2022, resulting in no summarized data for the nineperiod.
The following table shows summary information for outstanding options and options that are exercisable (vested) as of June 30, 2022:
| | | | | | | | |
| Options
Outstanding | Options
Exercisable |
| Number of options | 6,038,957 | | 4,644,828 | |
| Weighted average remaining contractual term (in years) | 5.71 | 5.18 |
| Weighted average exercise price | $ | 14.41 | | $ | 15.04 | |
| Weighted average fair value | $ | 9.00 | | $ | 9.31 | |
| Aggregate intrinsic value (in thousands) | $ | — | | $ | — | |
The following table summarizes RSU and restricted stock award activity for the six months ended SeptemberJune 30, 20172022:
| | | | | | | | |
| Number of Shares | Weighted Average Grant Date Fair Value per Share |
| Outstanding January 1, 2022 | 2,090,182 | | $ | 10.77 | |
| Granted | 4,107,083 | | 1.55 | |
| Forfeited | (167,129) | | 9.94 | |
| Vested/released | (1,121,468) | | 3.39 | |
| Outstanding June 30, 2022 | 4,908,668 | | $ | 4.77 | |
The table below summarizes equity-based compensation expense for the three and 2016six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Cost of sales | $ | 228 | | $ | 74 | | | $ | 403 | | $ | 175 | |
| Research and development | 539 | | 1,328 | | | 901 | | 4,074 | |
| Sales, general and administrative | 3,204 | | 5,188 | | | 5,646 | | 11,180 | |
| $ | 3,971 | | $ | 6,590 | | | $ | 6,950 | | $ | 15,429 | |
The table below summarizes share-based compensation cost capitalized to inventory or inventory transferred to property and equipment (also referred to as instruments) for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Cost capitalized to inventory | $ | 74 | | $ | 87 | | | $ | 117 | | $ | 242 | |
As of June 30, 2022, unrecognized equity-based compensation expense related to unvested stock options and unvested RSUs was $3.1 million and $11.0 million, respectively. This is expected to be recognized over the years 2022 through 2027.
Included in the 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 to 2 years, depending on the nature of the performance goal, and have contractual lives of 10 years. These options were $183,000valued 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 $67,000, respectively.risk-free rate used in estimating those options’ fair value are the same as the time-based options issued under the Company's equity incentive plans. The expected term for performance-based stock options is 5 to 7 years. 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.
Arizona Commerce AuthorityDuring 2020, the Company granted 105,000 performance-based stock options. Of these performance-based stock options, performance obligations had been met for 90,000 options which became exercisable in a prior period. Of these performance-based stock options, 90,000 options expired during the three and six months ended June 30, 2022. No performance-based stock options were outstanding as of June 30, 2022.
In August 2012,The table below summarizes share-based compensation cost in connection with performance-based stock options for the six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | |
| Six Months Ended June 30, |
| 2022 | 2021 |
| Performance-based stock option expense | $ | — | | $ | 230 | |
Included in the above-noted RSU and restricted stock award outstanding amounts are performance-based RSUs which vest only upon the achievement of certain targets. Performance-based RSUs contingently vest over a period of 1 to 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.
During 2020, the Company granted performance-based RSUs of which 165,974 were outstanding as of June 30, 2022. No changes occurred during the six months ended June 30, 2022.
During 2021, the Company granted performance-based RSUs of which 111,806 were outstanding as of June 30, 2022. No changes occurred during the six months ended June 30, 2022.
The table below summarizes share-based compensation cost in connection with performance-based RSUs for the six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | |
| Six Months Ended June 30, |
| 2022 | 2021 |
| Performance-based RSU expense | $ | — | | $ | 818 | |
NOTE 13. INCOME TAXES
For the six months ended June 30, 2022, 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. The Company’s tax expense for the six months ended June 30, 2022 differs from the tax expense computed by applying the U.S. statutory tax rate to its year-to-date pre-tax loss of $32.0 million, as no tax benefits were recorded for tax losses generated in the U.S. and other foreign jurisdictions due to the valuation allowance. At June 30, 2022, the Company had deferred tax assets primarily related to U.S. federal and state tax loss carryforwards and a deferred tax liability related to amortization of the Notes. The Company provided a valuation allowance against its net deferred tax assets as future realization of such assets is not more likely than not to occur.
The Company accounts for uncertain tax positions pursuant to the recognition and measurement criteria under ASC 740, Income Taxes. For the three and six months ended June 30, 2022, we did not note any significant changes to our uncertain tax positions. We do not anticipate significant changes to uncertain tax positions within the next 12 months.
NOTE 14. COMMITMENTS
During April 2022, the Company entered into a Grantnon-cancellable purchase obligation with a supplier to acquire raw materials for a total commitment of $11.9 million. Under the terms of this agreement the Company has until March 15, 2027 to take delivery of purchased items. This commitment was entered into to ensure proper material quantities to develop and commercialize our next generation AST platform.
As of June 30, 2022 the commitment remains $11.9 million as the Company has not taken delivery of any inventory.
NOTE 15. LEASES
The following presents supplemental information related to our leases in which we are the lessee for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Cash paid for amounts included in lease liabilities | | | | | |
| Operating cash flows from operating leases | $ | 203 | | $ | 154 | | | $ | 266 | | $ | 308 | |
| Operating cash flows from finance leases | $ | 424 | | $ | — | | | $ | 424 | | $ | — | |
| ROU assets obtained in exchange for lease obligations | | | | | |
| Operating leases | $ | — | | $ | — | | | $ | — | | $ | — | |
| Finance leases | $ | 2,760 | | $ | — | | | $ | 2,760 | | $ | — | |
| Lease Cost | | | | | |
| Operating leases | $ | 259 | | $ | 261 | | | $ | 564 | | $ | 559 | |
| Finance leases | $ | 97 | | $ | — | | | $ | 97 | | $ | — | |
| Short-term leases | $ | 21 | | $ | 59 | | | $ | 41 | | $ | 59 | |
The weighted average remaining lease term on our operating leases is 3.1 years. The weighted average discount rate on those leases is 7.1%. The weighted average remaining lease term on our finance leases is 2.7 years. The weighted average discount rate on those leases is 4.6%.
The following presents maturities of lease liabilities in which we are the lessee as of June 30, 2022 (in thousands):
| | | | | | | | |
| Operating | Finance |
| Remainder of 2022 | $ | 446 | | $ | 491 | |
| 2023 | 968 | | 983 | |
| 2024 | 1,055 | | 983 | |
| 2025 | 585 | | 239 | |
| 2026 | — | | — | |
| Thereafter | — | | — | |
| Total lease payments | 3,054 | | 2,696 | |
| Less imputed interest | (325) | | (158) | |
| $ | 2,729 | | $ | 2,538 | |
The net investment in sales-type leases, where we are the lessor, is a component of other current assets and other non-current assets in our condensed consolidated balance sheet. As of June 30, 2022, the total net investment in these leases was $3.3 million. The following presents maturities of lease receivables under sales-type leases as of June 30, 2022 (in thousands):
| | | | | |
| Remainder of 2022 | $ | 727 | |
| 2023 | 1,140 | |
| 2024 | 646 | |
| 2025 | 192 | |
| 2026 | 606 | |
| Thereafter | — | |
| Total undiscounted cash flows | 3,311 | |
| Less imputed interest | — | |
| Present value of lease payments | $ | 3,311 | |
NOTE 16. GEOGRAPHIC AND REVENUE DISAGGREGATION
The Company operates as 1 operating segment. Sales to customers outside the U.S. represented 14% for each of the three and six months ended June 30, 2022, and 15% for each of the three and six months ended June 30, 2021.
As of June 30, 2022 and December 31, 2021, balances due from foreign customers, in U.S. dollars, were $0.8 million and $0.7 million, respectively.
The following presents total net sales by geographic territory for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Domestic | $ | 3,321 | | $ | 2,386 | | | $ | 5,839 | | $ | 4,532 | |
| Foreign | 540 | | 412 | | | 981 | | 784 | |
| $ | 3,861 | | $ | 2,798 | | | $ | 6,820 | | $ | 5,316 | |
The following presents total net sales by line of business for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Accelerate Pheno revenue | $ | 3,818 | | $ | 2,767 | | | $ | 6,736 | | $ | 5,240 | |
| Other revenue | 43 | | 31 | | | 84 | | 76 | |
| $ | 3,861 | | $ | 2,798 | | | $ | 6,820 | | $ | 5,316 | |
The following presents total net sales by products and services for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2020 | 2019 |
| Products | $ | 3,476 | | $ | 2,483 | | | $ | 6,023 | | $ | 4,700 | |
| Services | 385 | | 315 | | | 797 | | 616 | |
| $ | 3,861 | | $ | 2,798 | | | $ | 6,820 | | $ | 5,316 | |
Lease revenue included in net sales was $0.6 million and $0.4 million for the three months ended June 30, 2022 and 2021, respectively, and $1.1 million and $0.8 million for the six months ended June 30, 2022 and 2021, respectively, which does not represent revenues recognized from contracts with customers.
The following presents property and equipment, net by geographic territory (in thousands):
| | | | | | | | |
| June 30, | December 31, |
| 2022 | 2021 |
| Domestic | $ | 3,866 | | $ | 5,014 | |
| Foreign | 231 | | 375 | |
| $ | 4,097 | | $ | 5,389 | |
NOTE 17. STOCKHOLDERS' EQUITY
Convertible Notes Exchange Agreement
During the six months ended June 30, 2022, a holder of the Notes exchanged approximately $14.0 million in aggregate principal amount of Notes held by the holder for 10,798,482 shares of the Company's common stock pursuant to the Exchange Agreement. The Company's common stock was determined to have a value of $10.2 million, which was recorded to contributed capital during the six months ended June 30, 2022. See Note 10, Convertible Notes for additional information.
Securities Purchase Agreement
On March 24, 2022, the Company entered into a securities purchase agreement (the “Grant“Securities Purchase Agreement”) with the Arizona Commerce Authority, an agency of the State of ArizonaJack W. Schuler Living Trust (the “Authority”), pursuant to which the Authority provided certain state and county sponsored incentives for the Company to relocate its corporate headquarters to, and expand its business within, the State of Arizona (the “Project”). Pursuant to the Grant Agreement, the Authority agreed to provide a total grant in the amount of $1.0 million (the “Grant”“Schuler Trust”) for the useissuance and sale by the Company in the advancement of the Project. The Grant is payable out of an escrow account in four installments, upon the achievementaggregate of the following milestones:
Milestone 1 – Relocation of Company’s operations and corporate headquarters to Arizona and creation of 15 Qualified Jobs (as defined below).
Milestone 2 – Creation of 30 Qualified Jobs (including Qualified Jobs under Milestone 1).
Milestone 3 – Creation of 40 Qualified Jobs (including Qualified Jobs under Milestones 1 and 2).
Milestone 4 – Creation of 65 Qualified Jobs (including Qualified Jobs under Milestones 1, 2 and 3) and capital investment of at least $4.5 million.
For purposes of the Grant Agreement, a “Qualified Job” is a job that is permanent, full-time, new to Arizona, and for which the Company pays average (across all Qualified Jobs identified by the Company in its discretion) annual wages of at least $63,000 and offers health insurance benefits and pays at least 65% of the premiums associated with
such benefits. The amount of each installment payment will be determined in accordance with a formula specified in the Grant Agreement. The Grant Agreement also contains other customary provisions, including representations, warranties and covenants of both parties. As of September 30, 2017, the Company has collected all of the $1.0 million in milestones. The full amount is recorded in current deferred revenue and income until the economic development provisions of the grant have been satisfied in full, as there are “claw-back” provisions which would require repayment of certain amounts received if employment levels are not sustained during the term of the arrangement. Once the “claw-back” provisions expire in January 2018, we will recognize the grant as an offset to expense. Further details are included in Note 10, Deferred Revenue and Income.
Arizona R&D Refundable Tax Credit Program
The Company received a “Certificate of Qualification” from the Authority, which allowed the Company a partial refund of research and development investments. The amounts incurred under this program are recorded as an offset to research and development expenses, and for the nine months ended September 30, 2017 and 2016 were $0 and $1.2 million, respectively, and no amounts were incurred for three months ended September 30, 2017 and 2016, respectively. If the amount received for this program is later determined to be incorrect or invalid, the excess may need to be repaid.
NOTE 10. DEFERRED REVENUE AND INCOME
Deferred revenue consists of amounts received for products or services not yet delivered or earned. Deferred income consists of amounts received for commitments not yet fulfilled. If we anticipate that the revenue or income will not be earned within the following twelve months, the amount is reported as long-term deferred income. A summary of the balances as of September 30, 2017, and December 31, 2016, follows:
|
| | | | | | |
| Deferred Revenue and Income |
| (in thousands) |
| | September 30, | December 31, |
| | 2017 | 2016 |
| Products and services not yet delivered | $ | 81 |
| $ | 35 |
|
| Arizona Commerce Authority grant | 1,000 |
| — |
|
| Total current deferred revenue and income | $ | 1,081 |
| $ | 35 |
|
| | | |
| Arizona Commerce Authority grant | — |
| 1,000 |
|
| Total long-term deferred income | $ | — |
| $ | 1,000 |
|
We have received $1.0 million in milestone payments from the Authority under the Grant Agreement described in Note 9, License Agreements and Grants. As of September 30, 2017, no such payments have been recognized in income, and we do not anticipate recognizing such payments as income until the “claw-back” provisions under the Grant Agreement expire in January 2018.
NOTE 11. STOCK PURCHASE
In April 2012, we entered into a Securities Purchase Agreement with Abeja Ventures, LLC pursuant to which the Company agreed, among other things, to issue a warrant to purchase2,439,024 shares of the Company’s common stock. Further detailsstock (the “Shares”) to the Schuler Trust in an offering (the “Private Placement”) exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. Jack Schuler, serves as a member of the Company’s board of directors and is the sole trustee of the Schuler Trust.
Pursuant to the Securities Purchase Agreement, the Schuler Trust has agreed to purchase the Shares at a purchase price (determined in accordance with Nasdaq rules relating to the “market value” of the Company’s common stock) of $1.64 per share, which is equal to the consolidated closing bid price reported by Nasdaq immediately preceding the time the Company entered into the Securities Purchase Agreement, for an aggregate purchase price of $4.0 million.
On June 29, 2022, the Company and the Schuler Trust agreed to extend the closing date of the Private Placement from June 30, 2022 to September 26, 2022. The Securities Purchase Agreement is considered an equity forward agreement and meets the definition of a freestanding financial instrument which is classified in stockholders’ deficit. The value of this equity forward agreement are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as filed with the SEC on February 28, 2017. As of December 31, 2016, there were warrants to purchase 415,871 shares unexercised. During the nine months ended SeptemberJune 30, 2017, warrants to purchase 370,307 shares were exercised at an exercise price of $2.00 per share. Proceeds from the exercise of such warrants totaling $741,000 are recorded as common stock and contributed capital in the condensed consolidated balance sheet. The remaining warrants to purchase 45,564 shares expired unexercised on June 26, 2017.2022 is immaterial.
NOTE 12. PUBLIC OFFERING
On May 9, 2017, the Company published a prospectus supplement underwritten by J.P. Morgan Securities LLC, William Blair & Company, L.L.C., Piper Jaffray & Co. and BTIG, LLC ("Underwriters") offering 2.8 million shares of common stock with an option for the Underwriters to purchase up to 413,000 additional shares of common stock for a total of 3.2 million shares. The public offering price was $28.850 per share and underwriting discounts and commissions were $1.731 per share for net proceeds of $27.119 per share.
The public offering was finalized and 2.8 million shares of common stock were delivered to the purchasers on or around May 15, 2017. The Underwriters partially exercised their option to purchase an additional 335,000 shares, with the sale closing on June 14, 2017, and the option as to the remaining shares expired June 15, 2017. Proceeds from the sales totaled $89.0 million less underwriting discounts, commissions and other costs of $5.8 million for net proceeds of $83.2 million. The net proceeds will be used for general corporate purposes and to fund our commercialization efforts. We may also use a portion of the net proceeds to acquire or invest in complementary businesses, technologies, product candidates or other intellectual property, although we have no present commitments or agreements to do so. Accordingly, we will retain broad discretion over the use of these proceeds.
NOTE 13. EARNINGS PER SHARE
The financial statements show basic and diluted loss per share.
The Company’s net loss for the periods presented caused the inclusion of all outstanding warrants, restricted stock and options to purchase our common stock to be antidilutive. As of September 30, 2017, and December 31, 2016, there were common stock options, restricted stock units and warrants exercisable for 7,472,734 and 7,313,245 shares of common stock, respectively, which were not included in diluted loss per share as the effect was antidilutive.
NOTE 14. EMPLOYEE EQUITY-BASED COMPENSATION
The following table summarizes option activity under all plans during the nine-month period ending September 30, 2017:
|
| | | | | |
| Stock Option Activity |
| | Number of Shares | Weighted Average Exercise Price per Share |
| Options outstanding December 31, 2016 | 6,857,124 |
| $ | 7.72 |
|
| Granted | 1,113,861 |
| 24.49 |
|
| Forfeited | (131,167 | ) | 21.41 |
|
| Exercised | (384,812 | ) | 9.93 |
|
| Expired | (6,422 | ) | 24.45 |
|
| Options Outstanding September 30, 2017 | 7,448,584 |
| 9.86 |
|
The table below summarizes the resulting weighted average inputs used to calculate the estimated fair value of options awarded during the periods shown below:
|
| | | | | | |
| Black-Scholes Assumptions for Options Granted |
| | Three Months Ended |
| | September 30, 2017 | September 30, 2016 |
| Expected term (in years) | 6.46 |
| 6.46 |
|
| Volatility | 74 | % | 89 | % |
| Expected dividends | — |
| — |
|
| Risk free interest rates | 2.02 | % | 1.30 | % |
| Weighted average fair value | $ | 15.74 |
| $ | 15.40 |
|
The following table shows summary information for outstanding options and options that are exercisable (vested) as of September 30, 2017:
|
| | | | | | |
| Stock Option Supplemental Information |
| | Options Outstanding | Options Exercisable |
| Number of options | 7,448,584 |
| 5,214,464 |
|
| Weighted average remaining contractual term (in years) | 6.32 |
| 5.40 |
|
| Weighted average exercise price | $ | 9.86 |
| $ | 6.02 |
|
| Weighted average fair value | $ | 7.31 |
| $ | 4.51 |
|
| Aggregate intrinsic value (in thousands) | $ | 96,074 |
| $ | 86,005 |
|
The following table summarizes restricted stock unit and restricted stock award activity during the nine-month period ending September 30, 2017:
|
| | | | | |
| Restricted Stock Unit (RSU) and Restricted Stock Award (RSA) Activity |
| | Number of Shares | Weighted Average Grant Date Fair Value per Share |
| RSUs & RSAs Outstanding December 31, 2016 | 40,250 |
| $ | 20.91 |
|
| Granted | 1,911 |
| 22.40 |
|
| Forfeited | — |
| — |
|
| Vested/released | (18,011 | ) | 21.07 |
|
| RSUs & RSAs outstanding September 30, 2017 | 24,150 |
| 20.91 |
|
The expense recognized on the Company’s condensed consolidated statements of operations and comprehensive loss related to options is summarized below:
|
| | | | | | | | | | | | |
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 of 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 units was $16.7 million and $216,000 respectively. This is expected to be recognized over the years 2017 through 2022.
As discussed in Note 1, we implemented ASU 2016-09, Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting on January 1, 2017. Pursuant to this guidance, we made a policy election to account for forfeitures as they occur rather than on an estimated basis and, therefore, equity based compensation expense for the three and nine months ended September 30, 2017 has been calculated based on actual forfeitures in our condensed consolidated statements 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 aspects of the accounting for share-based payment transactions.
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. INCOME TAXES
For the nine months ended September 30, 2017, the Company recorded a provision for income taxes of $220,000, which primarily related to a profitable foreign jurisdiction without any net operating loss carryforwards. The Company’s tax expense for the nine months ended September 30, 2017 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 million as no tax benefits were recorded for tax losses generated in the U.S. and other foreign jurisdictions. At September 30, 2017, the Company had deferred tax assets primarily related to U.S. federal and state tax loss carryforwards. The Company provided a full valuation allowance against its deferred tax assets as future realization of such assets is not more likely than not to occur.
At September 30, 2017, the Company had gross unrecognized tax benefits of $1.1 million. The Company is not currently under examination by taxing authorities and does not believe the amount of unrecognized tax benefits will significantly increase or decrease over the next 12 months.
NOTE 16. 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 Agreements
The Company has entered into master agreements with clinical trial 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’s negligence, willful misconduct or misrepresentation. The Company incurred clinical trial expense of $0 and $354,000 for the three months ended September 30, 2017 and 2016, respectively, and $27,000 and $1.8 million for the nine months ended September 30, 2017 and 2016, respectively. The expense incurred as part of the clinical trial is included in research and development on the condensed consolidated statements of operations and comprehensive loss.
Legal Matters
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 that we violated Sections 10(b) and 20(a) of 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 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.
NOTE 17. SEGMENTS
The Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who is the chief executive officer, in deciding how to allocate resources 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 performance of these resources on a consolidated basis. Since the Company operates in one operating segment, all required financial segment information can be found in the consolidated financial statements.
NOTE 18. RELATED PARTY TRANSACTIONS
Securities Purchase Agreement
On March 24, 2022, the Company entered into the Securities Purchase Agreement with the Schuler Trust for the issuance and sale by the Company of the Shares to the Schuler Trust. Jack Schuler, serves as a member of the Company’s board of directors and is the sole trustee of the Schuler Trust.
See Note 17, Stockholders' Equity, for further information.
Convertible Notes
As of June 30, 2022 the Schuler Trust held $1.8 million aggregate principal amount of the Notes. See Note 10, Convertible Notes, for further information regarding the Notes.
NOTE 19. SUBSEQUENT EVENTS
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
Debt Exchange
Effective August 15, 2022, the Company entered into an exchange agreement (the “Exchange Agreement”) with the Jack W. Schuler Living Trust (the “Schuler Trust”), a holder of the Company’s 2.50% Convertible Senior Notes due 2023 (the “Notes”). Jack Schuler, who serves as a member of the Company’s board of directors, is the sole trustee of the Schuler rust. Under the terms of the Exchange Agreement, the Schuler Trust has agreed to exchange with the Company (the “Exchange”) $49,905,000 in aggregate principal amount of Notes held by it for (a) a secured promissory note in an aggregate principal amount of $34,933,500 (the “Secured Note”) and (b) a warrant (the “Warrant”) to acquire the Company’s common stock at an exercise price of $2.12 per share (the “Exercise Price”), which represents the closing price of the Company’s common stock as of August 12, 2022.
The Secured Note has a scheduled maturity date of August 15, 2027 and will be repayable upon written demand at any time on or after such date. The Company may, at its option, repay the note in (i) United States dollars or (ii) in the form of common stock of the Company, in a number of shares that is obtained by dividing the total amount of such payment by $2.12, subject to certain adjustments as more fully described in the Secured Note. The Secured Note bears interest at a rate of 5.0% per annum, payable at the option of the Company in the same form, at the earlier of (i) any prepayment of principal and (ii) maturity. The Company may prepay the Secured Note at any time without premium or penalty. The Secured Note contains customary representations and warranties and events of default, including certain “change of control” events involving the Company. The Secured Note is secured by substantially all of the assets of the Company. The Secured Note does not restrict the incurrence of future indebtedness by the Company but shall become subordinated in right of payment and lien priority upon the request of any future senior lender.
The Warrant may be exercised from February 15, 2023 through the earlier of (i) August 15, 2029 and (ii) the consummation of certain acquisition transactions involving the Company, as set forth in the Warrant. The Warrant is exercisable for up to 2,471,710 shares, or 15% of the principal amount of the Secured Note, divided by the Exercise Price. Such number of shares and the Exercise Price are subject to certain customary proportional adjustments for fundamental events, including stock splits and recapitalizations, as set forth in the Warrant.
Sales and Marketing Agreement
On August 15, 2022 (the “Effective Date”), the Company entered into a Sales and Marketing Agreement (the “Sales Agreement”) with Becton, Dickinson and Company (“BD”) appointing BD as the Company’s worldwide exclusive sales agent to commercialize the Company’s Pheno 1.0 and Arc instruments and kits (“Products”) in the field of microbiology and in territories in which the necessary regulatory approvals are achieved and granting to BD certain other rights to future Company products. The term of the agreement is five (5) years (the “Initial Term”) and is subject to automatic one year renewals unless prior notice is provided to a party.
Pursuant to the Sales Agreement, the Company engages BD to be generally responsible for sales-related support activities for the Products in exchange for commissions on Product sales by Company. BD will provide such sales activities pursuant to a mutually acceptable commercialization plan and strategy. These services will be agreed to by the parties and set forth in a commercialization plan, the first one to be negotiated by the parties shortly after the Effective Date, and are expected to include sales, marketing, technical and order support. The Company and BD shall agree on rolling 12-month sales forecasts on a quarterly basis for the Products. BD must use reasonable efforts to meet or exceed each Product forecast and the Company must use reasonable efforts to produce sufficient quantities of Products to meet each Product forecast. The Company retains the responsibility for all other commercialization necessary to market the Products, including negotiating and booking sales for customer orders, manufacture and provision of inventory of Products, and marketing materials and collateral support.
The Company is responsible for all regulatory approvals in the United States and other countries where Products are marketed as of the Effective Date. Company is also responsible for obtaining and maintaining regulatory approvals in additional countries until December 31, 2023 (“Additional Countries”). The Additional Countries are to be agreed upon by the parties and the Company must deliver existing and new registrations for the Arc instruments and kits in such Additional Countries. The Company will hold the regulatory approvals for the existing countries and the Additional Countries. Beginning on January 1, 2024, BD will lead the registration process for regulatory approvals in any other countries (“BD Countries”) other than the existing countries as of the Effective Date and any Additional Countries. BD will hold the regulatory approvals for the BD Countries. Expenses associated with BD obtaining regulatory approvals will be agreed upon by the parties’ steering committee and set forth in a commercialization plan. For the Additional Countries and BD Countries, the steering committee will assess and approve specific regulatory approval requirements at the appropriate time in relation to the commercialization plan. Once regulatory approvals are obtained in an Additional Country or by BD in a BD Country, BD shall be responsible, at its expense, for the commercial launch of Products in those countries, except that costs associated with strategic marketing for such commercial launch of Products in any Additional Country will be paid for by the Company. In the event the steering committee does not approve specific regulatory approval requirements within a specific region or area, BD will lose the exclusivity granted to it in such region or area and BD will not be prohibited from selling, promoting, distributing or otherwise commercializing any third party products that directly compete with the Products.
The Parties each have made certain exclusivity commitments with respect to the Products and the promotion of directly competitive products. Subject to certain limitations Company has granted exclusive global commercial rights to BD and is required to wind down any existing agreements with third party sales agents or distributors within one year of the Effective Date. In addition, BD has agreed not enter into any new agreements with a third party for BD to sell, promote, distribute or otherwise commercialize any directly competing products. However, BD may continue to perform its obligations under any existing agreement. BD is not precluded from (i) making an expenditure to acquire or invest in third property or assets of directly competing products, or (ii) developing, improving, and/or commercializing its BD PhoenixTM automated identification and susceptibility testing system. Either party has the right to terminate the Sales Agreement upon 90 days’ notice to the other party following the first public announcement of BD’s acquisition of any directly competing product. The Company’s sole and exclusive remedy in the event of such termination is to receive any remaining balance of the Commercial Fee (as defined below).
Sales Agreement also grants BD certain rights with respect to the Company’s next generation antibiotic susceptibility test system of microbiology (“Pheno 2.0”). BD has an exclusive right of first negotiation to be the exclusive sales agent to commercialize Pheno 2.0, which will be triggered if the Company proposes to license Pheno 2.0, or if the Company and BD mutually agree that Pheno 2.0 clinical data is ready to be submitted to the U.S. Food and Drug Administration for 510(k) clearance. The terms of such subsequent agreement would have to be negotiated by the parties.
BD also has certain rights regarding a potential acquisition or financing of the Company. BD has the right to receive notice of an acquisition proposal or the initiation of a sale process. BD also has a right to receive information and a non-exclusive negotiation right regarding such potential change of control transaction. In the event of an acquisition of Company by a third party, other than BD, either party will have the right to terminate the Sales Agreement on three (3) months prior notice. Upon such termination, the Company or the acquiring party must pay BD 20% of revenue recognized for the shorter of one year or the remainder of the Initial Term, and any remaining unpaid Commercial Fee will be forgiven. Further, BD has the right to provide up to 20% of all future financings of the Company, the terms of which would be subject to negotiation by the parties.
In June 2016,consideration of the rights granted, BD will pay the Company recordedan exclusive commercial arrangement fee of $15.0 million (the “Commercial Fee”). The Commercial Fee is payable in equal $3.0 million installments commencing on the date the parties agree BD will start providing services and for the next four subsequent calendar years. The Commercial Fee is payable in the event of a net amounttermination of $866,000 relatedthe Sales Agreement, except in the event of a termination (i) for convenience by the Company, (ii) by BD within one year of the Effective Date as a result of the Company’s insolvency, (iii) by BD for the Company’s material breach of the Sales Agreement, or (iv) by either party following a change of control to a third party. Additionally, the Commercial Fee or any unpaid balance will be forgiven in the event that a Product infringes a third party’s intellectual property rights. The Company also is obligated to pay BD sales commissions on the revenue recognized by the Company in accordance with U.S. generally accepted accounting principles on sales of Products (“Sales Commissions”). For existing business, the parties will define a base book listing of accounts in the commercialization plan and an annual base book fee for the Sales Commissions. For new business, the parties have established target revenue amounts and the Sales Commissions will be based on such revenue target amounts. New business is cumulative, including new accounts obtained in the previous year. Once the target level or the above target level is achieved, the Company will pay BD the target rate or the above target rate, as applicable, for all new business in that calendar year. In the event the Sales Agreement is terminated, the Company shall pay Sales Commissions for nine months past the effective date of such termination.
The Sales Agreement contains rights for each of the Company and BD to terminate the Sales Agreement based on a material breach, insolvency and other circumstances. Company and BD each may terminate the Sales Agreement for material breach by, or insolvency of, the other party following notice, and if applicable, a cure period. After the second anniversary of the Effective Date, Company and BD each has the right to terminate the Sales Agreement and any commercialization plan with 12 months’ prior written notice to the recovery of short-swing profits under Section 16(b)other party. The Company may also terminate the Sales Agreement if BD fails to meet certain targets for Products in any 12 months period following a cure period.
The foregoing description of the Sales Agreement is not complete and is qualified in its entirety by reference to the full text of the Sales Agreement, which will be filed with the U.S. Securities and Exchange Act of 1934, as amended. The Company recognized these related party proceedsCommission as an increaseexhibit to contributed capitalthe Company’s Quarterly Report on Form 10-Q for the condensed consolidated balance sheet.quarterly period ending September 30, 2022.
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. 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.
All amounts in the MD&A have been rounded to the nearest thousand unless otherwise indicated.
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,” “believe,” “anticipate,” “estimate,” or “continue,” or variations thereon or comparable terminology, include thebut are not limited to, statements about our future development plans and objectives of management for future operations,growth strategy, including plans and objectives relating to theour future operations, products and performance; projections as to when certain key business milestones may be achieved; expectations regarding the potential or benefits of our products and technologies; projections of future economic performancedemand for our products; our continued investment in new product development to both our existing products and bring new ones to market; 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 Company. COVID-19 pandemic; and our expectations relating to current supply chain impacts and inflationary pressures.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.
Future events and actual results could differ materially from those set forth in, contemplated or suggested by, or underlying the forward-looking statements. There can be no assurances that results described in forward-looking statements will be achieved, and actual results could differ materially from those suggested by the forward-looking statements. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties.uncertainties, including the duration and severity of the ongoing COVID-19 pandemic, including any new variants that may become predominant; government and other third-party responses to it and the consequences for the global economy and the businesses of our suppliers and customers, such as the possibility of customer demand fluctuations, supply chain constraints and inflationary pressures; 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. Other important factors that could cause our actual results to differ materially from those in our forward-looking statements include those discussed herein, and in other reports filed with the U.S. Securities and Exchange Commission (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, 2021 (the “2021 10-K”) and in the Company's subsequent filings with the SEC. 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™Pheno® system and the Accelerate Arc™ system, the Company will obtain sufficient capital to commercialize the Accelerate Pheno™Pheno system and the Accelerate Arc 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.business and general market and industry conditions. 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 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 (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 theseidentification 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 builtintended 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,Our first system to address these challenges is the Accelerate Pheno™ system, intendedPheno® system. The Accelerate PhenoTest® BC Kit, which is the first test kit for the rapidsystem, is indicated as an aid, in conjunction with other clinical and laboratory findings, in the 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 identificationbacteremia 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 isdevice provides identification (“ID”) results followed by antibiotic susceptibility testing (“AST”) for certain pathogenic bacteria commonly associated with or causing bacteremia. This test kit utilizes genotypic technology to identify infectious pathogens and phenotypic technology to conduct AST, which determines whether live bacterial cells are resistant or susceptible to a highly multiplexed panel targeting over 80%particular antimicrobial. This information can be used by physicians to rapidly modify antibiotic therapy to lessen adverse events, improve clinical outcomes, and help preserve the useful life of the routine and significant pathogens causing blood stream infections and over 90% of the antibiotics useful in treating those pathogens.antibiotics.
On June 30, 2015, we declared our conformity to the European In Vitro Diagnostic Directive 98/79 79/EC and applied a CE Markmark to the Accelerate Pheno™Pheno system and the Accelerate PhenoTest™PhenoTest BC Kit for in vitro diagnostic use. On February 23, 2017, the FDAU.S. Food and Drug Administration (the “FDA”) granted our de novo classification request to market the first version of our Accelerate Pheno™Pheno system and Accelerate PhenoTest™PhenoTest BC KitKit.
In 2017, we began selling the Accelerate Pheno system in hospitals in the United States. TheStates, Europe, and the Middle East. Consistent with our “razor” / “razor-blade” business model, revenues to date have principally been generated from the sale or leasing of the instruments and the sale of single use consumable test kits.
In July 2021, we launched our second test for use on the Accelerate PhenoTest™Pheno system, the Accelerate PhenoTest BC Kit, AST configuration. This test kit includes 140 assays for both identification andruns antibiotic susceptibility testing following the input of an ID result from another system or methodology. In August 2021, we announced that this new AST only configuration had been CE marked for use in Europe. We believe this new AST only configuration may be attractive to prospective customers who already have a rapid ID system but still need fast susceptibility results to support getting patients on an optimal antibiotic therapy as soon as possible.
In March any May 2022, we announced the launch and commercialization of the Accelerate ArcTM system and BC Kit. This instrument and associated one-time-use test kit automates the front end steps required to rapidly produce an ID result on an existing matrix-assisted laser desorption/ionization (“MALDI”) system. In May 2022, we announced IVD registration of the Accelerate Arc system and BC Kit with the FDA, and in June 2022 we received CE IVDR registration for use in Europe. We believe the Accelerate Arc system and BC Kit to be a complementary offering to our recently launched Accelerate PhenoTest BC Kit, AST configuration, by enabling a rapid ID result by leveraging an existing MALDI system and rapid AST through the Accelerate Pheno system, which 116 were clearedwe further believe provides an opportunity for a large new market for rapid MALDI.
We continue to invest in new product development to both enhance our existing products and bring new ones to market. Current research and development areas of focus include the potential addition, if authorized by the FDA, of new AST content to our Accelerate Pheno system, additional applications for the Accelerate Arc system, and 24 assaysa next generation rapid susceptibility system, which is being developed with the goal to have lower costs, higher through-put, and capability to test a broader set of sample types.
COVID-19 and Supply Chain Impacts Update
In late 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China, and spread globally. In March 2020, the World Health Organization declared COVID-19 a global pandemic. The COVID-19 outbreak 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. New cases and hospitalizations have risen and fallen throughout the course of this pandemic. More recently, the emergence and spread of new variants of COVID-19 that are availablesignificantly more contagious than previous strains initially led many government authorities and businesses to reimplement prior restrictions in an effort to lessen the spread of COVID-19 and its variants. While many of these restrictions have been lifted, uncertainty remains as to whether additional restrictions may be initiated or again reimplemented in response to surges in COVID-19 cases. The lingering impact of the COVID pandemic continues to create significant volatility throughout the global economy, including supply chain constraints, labor supply issues and higher inflation. Accordingly, it is unclear at this point the full impact COVID-19 and its variants will have on the global economy and on our Company.
The COVID-19 pandemic, containment measures, and downstream impacts to hospital staffing and financial stability have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide, as well as disruptions to global supply chains and workforce participation. These effects have significantly impacted our business and results of operations, starting in the first quarter of 2020 and continuing through the current quarter, albeit to a lesser degree. For example, we have experienced diminished access to our customers, including hospitals, which has severely limited our ability to sell and, to a lesser degree, implement previously contracted Accelerate Pheno systems. Hospital turnover resulting from burnout and vaccine mandates have further diverted the attention of hospital decision makers. In addition, in certain months with high rates of COVID-19 hospitalization, our Accelerate PhenoTest BC Kit orders declined as many hospitals curtailed elective surgeries to respond to COVID-19.
The reduced new instrument sales and implementations caused by the COVID-19 pandemic lowered our realized and expected revenue growth for 2020 and 2021. In the first half of 2022, we began to see many of the detrimental effects of the pandemic on our business discussed above start to ease. However, with the emergence of COVID-19 variants, including the Omicron variant and its sub-variants, vaccine hesitancy and the prevalence of breakthrough cases of infection among fully vaccinated people, there remains uncertainty regarding our access to customers and prospects, demand for our products, and ability to implement our products.
As a medical device company, we have not experienced any disruptions to our ability to manufacture our products at our Tucson, Arizona headquarters under the various State of Arizona executive orders relating to the COVID-19 pandemic because we were classified as an essential service. We continue to expect that, should future orders be issued, we would be able to sustain our essential operations. Our third-party manufacturing supply chain for Accelerate Pheno systems and consumable test kits remains stable despite a high-degree of unpredictability in the broader supply chain environment. However, like many industries experiencing inflationary pressures in raw materials, the direct costs to manufacture our products are increasing and delivery schedules elongating.
For example, we are currently experiencing unprecedented cost increases from many of our suppliers primarily as a result of the ongoing COVID-19 pandemic, labor and supply disruptions and increased inflation. The areas of cost increases include raw materials, components, and value-add supplier labor. We believe that we currently have sufficient inventory of Accelerate Pheno system instruments to limit the impact of cost increases on such devices. However, we are being impacted by cost increases to components and raw materials necessary for the production of our Accelerate Pheno kits. Our ability to pass increased material costs to many of our customers is limited because of long-term sales agreements with limits on price increases. Accordingly, we are closely monitoring the ability of all our suppliers to provide us with necessary materials and services at reasonable costs. See “Risk Factors— Risks Related to Our Business and Strategy—Disruptions in the supply of raw materials, consumable goods or other key product components, or issues associated with their quality from our single source suppliers, could result in a Research Use Only modesignificant disruption in sales and profitability” in Part I, Item 1A of 2021 10-K for additional information.
We continue to monitor the evolving impacts to our business caused by the COVID-19 pandemic. 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 software.pandemic and its severity; the emergence and severity of its variants, including the Omicron variant and its subvariants; the actions to contain the virus or treat its impact, such as the availability and efficacy of vaccines (particularly with respect to emerging strains of the virus) and potential hesitancy to use them; the financial impact of COVID-19 on hospitals, including to their budget priorities; hospital staffing issues; general economic factors, such as increased inflation; global supply chain constraints and the related increase in costs; labor supply issues; 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 the 2021 10-K for additional risks we face due to the COVID-19 pandemic, including risks relating to our supply chain.
Changes in Results of Operations: Three and ninesix months ended SeptemberJune 30, 20172022 compared to three and ninesix months ended SeptemberJune 30, 20162021
The Company has provided enhanced information in a tabular format which presents some of the captions presented on the statement of operations less non-cash equity-based compensation expense. These figures are reconciled to the statement of operations and are intended to add additional clarity on the operating performance of the business. The Company believes providing such figures less non-cash equity-based compensation expense provides helpful information for investors in understanding and evaluating our operating results in the same manner as our management and our board of directors. |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | | (in thousands) |
| 2022 | 2021 | $ Change | % Change | | 2022 | 2021 | $ Change | % Change |
| Net sales | $ | 3,861 | | $ | 2,798 | | $ | 1,063 | | 38 | % | | $ | 6,820 | | $ | 5,316 | | $ | 1,504 | | 28 | % |
For the three and ninesix months ended SeptemberJune 30, 2017,2022, total revenues increased due toprimarily as a result of higher sales of Accelerate Pheno™ systemsPhenoTest instruments, Accelerate PhenoTest BC Kits and service contract revenue compared to the three and six months ended June 30, 2021. Accelerate PhenoTest™PhenoTest BC Kit revenue increased as customers completed their instrument verifications and began purchasing kits. Service contract revenue increased as a higher number of customers entered into multi-year service agreements following the expiration of their warranty periods.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | | (in thousands) |
| 2022 | 2021 | $ Change | % Change | | 2022 | 2021 | $ Change | % Change |
| Cost of sales | $ | 2,781 | | $ | 1,745 | | $ | 1,036 | | 59 | % | | $ | 4,937 | | $ | 3,365 | | $ | 1,572 | | 47 | % |
| Non-cash equity-based compensation as a component of cost of sales | 228 | | 74 | | 154 | | 208 | % | | 403 | | 175 | | 228 | | 130 | % |
| Cost of sales less non-cash equity-based compensation | $ | 2,553 | | $ | 1,671 | | $ | 882 | | 53 | % | | $ | 4,534 | | $ | 3,190 | | $ | 1,344 | | 42 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 ninesix months ended SeptemberJune 30, 2017,2022, cost of sales increased as compared to the three and gross profitsix months ended June 30, 2021, as a result of higher Accelerate Pheno sales, higher non-cash equity-based compensation, and increases to our cost of manufacturing consumables. Our cost of manufacturing has increased as we are experiencing cost increases from many of our suppliers primarily as a result of the Company capitalizing inventory in connection withongoing COVID-19 pandemic, labor and supply disruptions and increased inflation. The areas of cost increases include raw materials, components, and value-add supplier labor.
Cost of sales includes non-cash equity-based compensation of $0.2 million and $0.1 million for the FDA granting Accelerate’s de novo request to marketthree months ended June 30, 2022 and 2021, respectively, and $0.4 million and $0.2 million for the Accelerate Pheno™ systemsix months ended
June 30, 2022 and Accelerate PhenoTest™ BC kit.
Inventory without a cost basis was sold to customers during2021, respectively. Non-cash equity-based compensation increased for the three and ninesix months ended SeptemberJune 30, 2017. This2022 when compared to the three and six months ended June 30, 2021. Non-cash equity-based compensation cost is a component of manufacturing overhead and service cost of sales. Manufacturing overhead is capitalized as inventory was comprisedand relieved to cost of pre-launch inventory previously not capitalized, and expensed insales when consumable tests are sold to a previous period. customer, instruments are sold to a customer, or when instruments under reagent rentals are amortized to cost of sales.
Cost of sales associated with this inventory duringexpenses excluding non-cash equity-based compensation expense for the three and ninesix months ended SeptemberJune 30, 2017, would have been an additional $244,0002022 increased compared to the three and $611,000,six months ended June 30, 2021, as a result of higher Accelerate Pheno sales, and increases to our cost of manufacturing consumables, as described above.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | | (in thousands) |
| 2022 | 2021 | $ Change | % Change | | 2022 | 2021 | $ Change | % Change |
| Gross profit | $ | 1,080 | | $ | 1,053 | | $ | 27 | | 3 | % | | $ | 1,883 | | $ | 1,951 | | $ | (68) | | (3) | % |
| Non-cash equity-based compensation as a component of gross profit | 228 | | 74 | | 154 | | 208 | % | | 403 | | 175 | | 228 | | 130 | % |
| Gross profit less non-cash equity-based compensation | $ | 1,308 | | $ | 1,127 | | $ | 181 | | 16 | % | | $ | 2,286 | | $ | 2,126 | | $ | 160 | | 8 | % |
For the three months ended June 30, 2022, gross profit increased as compared to the three months ended June 30, 2021, as a result of higher Accelerate Pheno sales, partially offset by increases in costs of sales, and a decrease in our average unit sales price. The increase in cost of sales is due to increases to manufacture consumables, as described above. While our average unit sales price primarily decreased period over period due to securing long-term, committed contracts with existing customers.
For the six months ended June 30, 2022, gross profit decreased as compared to the six months ended June 30, 2021, as a result of increases in cost of sales and a decrease in our average unit sales price. The increase in cost of sales is due to increases to manufacture consumables, as described above. While our average unit sales price primarily decreased period over period due to securing long-term, committed contracts with existing customers.
The Company’s overall gross margin was 28% and 38% for the three months ended June 30, 2022 and 2021, respectively, and 28% and 37% for the six months ended June 30, 2022 and 2021, respectively. The decreases were primarily due to increases in the costs to manufacture consumables as described above, and a decrease in our average unit sales price period over period as discussed above.
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | | (in thousands) |
| 2022 | 2021 | $ Change | % Change | | 2022 | 2021 | $ Change | % Change |
| Research and development | $ | 7,576 | | $ | 5,733 | | $ | 1,843 | | 32 | % | | $ | 13,600 | | $ | 12,629 | | $ | 971 | | 8 | % |
| Non-cash equity-based compensation as a component of research and development | 539 | | 1,328 | | (789) | | (59) | % | | 901 | | 4,074 | | (3,173) | | (78) | % |
| Research and development less non-cash equity-based compensation | $ | 7,037 | | $ | 4,405 | | $ | 2,632 | | 60 | % | | $ | 12,699 | | $ | 8,555 | | $ | 4,144 | | 48 | % |
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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 ninesix months ended SeptemberJune 30, 2017, decreased2022 increased as compared to the same periodsthree and six months ended June 30, 2021 primarily due to increased expenses to develop our next generation AST platform, partially offset by a decrease 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.non-cash equity-based compensation expense.
Pre-launch inventory not capitalized in accordance with U.S. GAAP, which included instruments and consumables charged to researchResearch and development were $225,000expenses includes non-cash equity-based compensation of $0.5 million and $795,000$1.3 million for the three months ended SeptemberJune 30, 20172022 and 2016,2021, respectively, and $376,000$0.9 million and $3.9$4.1 million for the ninesix months ended SeptemberJune 30, 20172022 and 2016,2021, respectively. Non-cash equity-based compensation decreased for the three and six months ended June 30, 2022 when compared to the three and six months ended June 30, 2021, due to a decrease in the fair value of awards being granted. The Company records the fair value of RSUs based on the published closing market price on the day before grant.
Research and development expenses includeexcluding non-cash equity-based compensation of $1.0 million and $504,000expense for the three and six months ended SeptemberJune 30, 20172022 increased compared to the three and 2016, respectively, and $2.9 million and $1.2 million for the ninesix months ended SeptemberJune 30, 20172021, primarily due to increases in costs related to the completion of the Accelerate Arc system and 2016, respectively. The increase in non-cash equity-based compensation was primarily driven byrelated Accelerate Arc studies, as well as an increase in the number of employeesdevelopment and stock option grants.contracted services used to develop our next generation AST platform.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | | (in thousands) |
| 2022 | 2021 | $ Change | % Change | | 2022 | 2021 | $ Change | % Change |
| Sales, general and administrative | $ | 11,493 | | $ | 12,910 | | $ | (1,417) | | (11) | % | | $ | 22,167 | | $ | 26,938 | | $ | (4,771) | | (18) | % |
| Non-cash equity-based compensation as a component of sales, general and administrative | 3,204 | | 5,188 | | (1,984) | | (38) | % | | 5,646 | | 11,180 | | (5,534) | | (49) | % |
| Sales, general and administrative less non-cash equity-based compensation | $ | 8,289 | | $ | 7,722 | | $ | 567 | | 7 | % | | $ | 16,521 | | $ | 15,758 | | $ | 763 | | 5 | % |
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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 ninesix months ended SeptemberJune 30, 2017, increased2022 decreased as compared to the three and six months ended June 30, 2021 primarily due to an increasea decrease in salariesnon-cash equity-based compensation expense.
Sales, general and administrative expenses includes non-cash equity-based compensation of $3.2 million and $5.2 million for the three months ended June 30, 2022 and 2021, respectively, and $5.6 million and $11.2 million for the six months ended June 30, 2022 and 2021, respectively. Non-cash equity-based compensation decreased for the three and six months ended June 30, 2022 when compared to the three and six months ended June 30, 2021, due to a decrease in the fair value of awards being granted. The Company records the fair value of RSUs based on the published closing market price on the day before grant.
Sales, general and administrative expenses excluding non-cash equity-based compensation expense for the three and six months ended June 30, 2022 increased compared to the three and six months ended June 30, 2021, primarily due to increases in costs related expensesto marketing and promotional activities and professional services.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | | (in thousands) |
| 2022 | 2021 | $ Change | % Change | | 2022 | 2021 | $ Change | % Change |
| Loss from operations | $ | (17,989) | | $ | (17,590) | | $ | (399) | | 2 | % | | $ | (33,884) | | $ | (37,616) | | $ | 3,732 | | (10) | % |
| Non-cash equity-based compensation as a component of loss from operations | 3,971 | | 6,590 | | $ | (2,619) | | (40) | % | | 6,950 | | 15,429 | | $ | (8,479) | | (55) | % |
| Loss from operations less non-cash equity-based compensation | $ | (14,018) | | $ | (11,000) | | $ | (3,018) | | 27 | % | | $ | (26,934) | | $ | (22,187) | | $ | (4,747) | | 21 | % |
For the three and six months ended June 30, 2022, our loss from operations decreased as we ramp up our salescompared to the three and marketingsix months ended June 30, 2021. The decrease was primarily the result of a decrease in non-cash equity-based compensation expense. As discussed above, the decrease in employee non-cash equity-based compensation expense was the result of a decrease in the fair value of equity awards granted.
Loss from operations globally.
Pre-launch inventory not capitalizedexcluding non-cash equity-based compensation expense for the three and six months ended June 30, 2022 increased compared to the three and six months ended June 30, 2021, primarily due to increases in accordance with U.S. GAAP, which included instrumentsproduct development costs related to the Accelerate Arc and consumables chargedthe next generation AST program, and increases to sales, general and administrative expenses were $11,000related to marketing and $1.2 million for the three months ended September 30, 2017promotional activities and 2016, respectively, and $40,000 and $2.5 million for the nine months ended September 30, 2017 and 2016, respectively.professional services, as discussed above.
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 sales and marketing, key research and development expanded laboratorypersonnel, related costs associated with product development, and operational space, increased employee headcount and other factors as we develop and commercializecommercialization of the Company’s products.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | | (in thousands) |
| 2022 | 2021 | $ Change | % Change | | 2022 | 2021 | $ Change | % Change |
| Total other income (expense), net | $ | 186 | | $ | (4,084) | | $ | 4,270 | | (105) | % | | $ | 1,896 | | $ | (8,297) | | $ | 10,193 | | (123) | % |
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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 duringFor the three and ninesix months ended SeptemberJune 30, 2017, increased due2022 the Company incurred other income, net compared to an increaseother expense, net for the three and six months ended June 30, 2021.
In March 2022, the Company entered into a privately negotiated exchange agreement with a holder of the Notes pursuant to which such holder exchanged approximately $14.0 million in aggregate principal amount of Notes held by them for 10,798,482 shares of the Company's common stock. The closing of the exchange transaction occurred in eight tranches with the first closing occurring on March 29, 2022 and the last closing on May 18, 2022. The gain on extinguishment of exchanged Notes was $0.9 million for the three months ended June 30, 2022 and $3.6 million for the six months ended June 30, 2022. This reduction in principal also resulted in a decrease in interest expense for the the three and dividends, which were offset by other componentssix months ended June 30, 2022. See Part I, Item 1, Note 10, Convertible Notes for Additional information.
The Company also adopted ASU 2020-06 on January 1, 2022. The Company’s 2.50% Senior Convertible Notes due 2023 (the “Notes”) Notes are no longer bifurcated between debt and equity and are instead accounted for entirely as debt at face value net of other income.any discount or premium and issuance costs. Interest expense is comprised of cash interest incurred and amortization of any debt issuance costs. This change in accounting principle primarily resulted in a decrease in interest expense for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021.
Interest expense was $0.7 million and $4.2 million for the three months ended June 30, 2022 and 2021, respectively, and $1.6 million and $8.3 million for the six months ended June 30, 2022 and 2021, 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 |
| Provision from income taxes | $ | (45 | ) | $ | — |
| $ | (45 | ) | 100 | % | | $ | (220 | ) | $ | — |
| $ | (220 | ) | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | | (in thousands) |
| 2022 | 2021 | $ Change | % Change | | 2022 | 2021 | $ Change | % Change |
| Provision for income taxes | $ | — | | $ | — | | $ | — | | NM | | $ | — | | $ | — | | $ | — | | NM |
Due to netNM indicates percentage is not meaningful
For the three and six months ended June 30, 2022 and 2021, the Company did not carry an income tax provision amount as the Company does not recognize tax benefits from current year tax losses incurred, we have only recorded tax provisions related to tax liabilities generated by ourin the U.S. and other foreign subsidiaries.jurisdictions.
Capital Resources and Liquidity
Our primary sourcesources of liquidity hashave been from sales of shares of common stock.our equity securities, the issuance of our convertible notes and cash from operations. As of SeptemberJune 30, 2017,2022, the Company had $121.3$36.8 million in cash and cash equivalents and available-for-sale securities, an increaseinvestments, a decrease of $43.6
$26.8 million from $77.8$63.6 million at December 31, 2016.2021. The primary reason for the changedecrease was due to cash used in these assets was a public offering that occurredoperations during the nine months ended September 30, 2017.period.
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 SeptemberJune 30, 2017,2022, management believes that current cash balances and probable future cash proceeds 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 Future cash proceeds include a contracted equity offering, collection of cash flows for the nine months ended September 30, 2017,accounts receivables 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 headcountfuture lease payments from already contracted customers and other factors as we develop and prepareprobable events that will be realized into cash. Management also maintains plans to commercializecontinue to fund 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 comprisedoperations of the recoveryCompany and to achieve self-sustaining operations upon the realization of short swing profits from related parties, offset by common stock issuanceits sales generation and cost andcontainment strategies beyond the exercise of options and warrants.next twelve months.
Our primary use of capital has been for the development and commercialization of the Accelerate Pheno™ system.Pheno system and development of complementary and next generation products. We believe our capital requirements will continue to be met with our existing cash balance and those provided underby revenue, 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, or if our business is negatively impacted by the COVID-19 pandemic more seriously or for longer than we currently expect, 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.
The Company is subject to lease agreements. The future minimum lease payments under these lease agreements are included in Part I, Item 1, Note 15, Leases.
For more information on the Company’s liquidity please see Part I, Item 1, Note 1, Organization and Nature of Business; Basis of Presentation; Principles of Consolidation; Significant Accounting Policies.
As of June 30, 2022, our material cash requirements were as follows:
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Payments due by Period
(in thousands) |
| Material Cash Requirements | Total | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter |
| Operating lease obligations | $ | 3,054 | | $ | 446 | | $ | 968 | | $ | 1,055 | | $ | 585 | | $ | — | | $ | — | |
| Purchase obligation | 11,900 | | — | | — | | — | | — | | — | | 11,900 | |
| Finance lease obligations | 2,696 | | 491 | | 983 | | 983 | | 239 | | — | | — | |
| Long term debt | 84 | | 84 | | — | | — | | — | | — | | — | |
| Deferred compensation | 806 | | — | | — | | — | | 406 | | 400 | | — | |
Convertible notes1) 2) | 106,500 | | — | | 106,500 | | — | | — | | — | | — | |
Convertible notes interest1) 2) | 2,662 | | 1,331 | | 1,331 | | — | | — | | — | | — | |
Secured Notes2) | — | | — | | — | | — | | — | | — | | — | |
| Total | $ | 127,702 | | $ | 2,352 | | $ | 109,782 | | $ | 2,038 | | $ | 1,230 | | $ | 400 | | $ | 11,900 | |
1) Our capital requirements also include the maturity of convertible notes due March 2023, which can be settled in shares, cash, or a combination thereof. The Company has sufficient shares to settle all outstanding convertible notes in shares and will also consider options to refinance the debt or settle in cash.
2) Effective August 15, 2022, the Company entered into an exchange agreement (the “Exchange Agreement”) with the Jack W. Schuler Living Trust (the “Schuler Trust”), a holder of the Company’s 2.50% Convertible Senior Notes due 2023 (the “Notes”). Under the terms of the Exchange Agreement, the Schuler Trust has agreed to exchange with the Company (the “Exchange”) $49,905,000 in aggregate principal amount of Notes held by it for a secured promissory note in an aggregate principal amount of $34,933,500 (the “Secured Note”). The Secured Note has a scheduled maturity date of August 15, 2027 and will be repayable upon written demand at any time on or after such date. The Secured Note bears interest at a rate of 5.0% per annum, payable at the option of the Company in the same form, at the earlier of (i) any prepayment of principal and (ii) maturity. The reduction in principal is not reflected in the convertible notes and interest balance provided above. The increase in principal is not reflected in the Secured Notes balance provided above.
Until such time as we can generate substantial product revenue, we expect to finance our cash requirements, beyond what is currently available or on hand, through a combination of equity offerings and debt financings.
Summary of Cash Flows
The following summarizes selected items in the Company’s condensed consolidated statements of cash flows for the six months ended June 30, 2022 and 2021:
| | | | | | | | | | | |
| Cash Flow Summary |
| Six Months Ended June 30, |
| (in thousands) |
| 2022 | 2021 | $ Change |
| Net cash used in operating activities | $ | (25,605) | | $ | (22,928) | | $ | (2,677) | |
| Net cash (used in) provided by investing activities | (9,213) | | 8,265 | | (17,478) | |
| Net cash (used in) provided by financing activities | (280) | | 23,505 | | (23,785) | |
Cash flows from operating activities
During the six months ended June 30, 2022, net cash used in operating activities was primarily the result of net losses and gain on extinguishment of debt, partially offset by equity-based compensation, and depreciation and amortization.
During the six months ended June 30, 2021, net cash used in operating activities was primarily the result of net losses offset by equity-based compensation, amortization of debt discount and issuance costs, and depreciation and amortization.
The Company adopted ASU 2020-06 on January 1, 2022. The adoption of ASU 2020-06 resulted in the Notes now being accounted for as a single liability measured at their amortized cost. The Notes are no longer bifurcated between debt and equity and are instead accounted for entirely as debt at face value net of any discount or premium and issuance costs. This change in accounting principle resulted in a decrease in amortization of debt discount and issuance costs for the six months ended June 30, 2022.
Cash flows from investing activities
The net cash used in investing activities was $9.2 million for the six months ended June 30, 2022. The Company had purchases of marketable securities of $27.5 million which were offset in part by maturities of marketable securities of $18.7 million.
The net cash provided by investing activities was $8.3 million for the six months ended June 30, 2021. The Company had maturities of marketable securities of $24.0 million which were offset in part by purchases of marketable securities of $15.7 million.
Cash flows from financing activities
The net cash used in financing activities was $0.3 million for the six months ended June 30, 2022, which was from payments of finance leases, partially offset by proceeds from the issuance of common stock under the Company’s employee stock purchase plan.
The net cash provided by financing activities was $23.5 million for the six months ended June 30, 2021. During the six months ended June 30, 2021, the Company received $22.1 million in proceeds from the issuance of common stock in connection with a private placement offering and $1.2 million from the exercise of stock options.
Convertible Notes
On March 27, 2018, the Company issued $150.0 million aggregate principal amount of the Notes. In connection with the offering of the Notes, the Company granted the initial purchasers an option to purchase additional amounts. 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. Upon conversion of the Notes, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock, or a combination of cash and shares of common stock, at the Company's election. The initial conversion rate of the Notes is 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.
During the year ended December 31, 2021, the Company entered into separate exchange agreements with certain holders of the Notes. Under the terms of the exchange agreements, such holders agreed to exchange Notes held by them for shares of the Company’s common stock. During the year ended December 31, 2021, $51.0 million in aggregate principal amount of Notes were exchanged for 6,602,974 shares of the Company's common stock in these exchange transactions.
During the six month ended June 30, 2022, the Company entered into an exchange agreement with one holder of the Notes. Under the terms of the exchange agreement, the holder agreed to exchange Notes held by them for shares of the Company’s common stock. During the six month ended June 30, 2022, $14.0 million in aggregate principal amount of Notes were exchanged for 10,798,482 shares of the Company's common stock in this exchange transaction. After giving effect to the exchange transactions described above, the Notes had an outstanding principal amount of $106.5 million as of June 30, 2022.
In connection with the Notes 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 (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.
See Part I, Item 1, Note 10, Convertible Notes for additional information.
Sales of Equity Securities
On March 24, 2022, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with the Jack W. Schuler Living Trust (the “Schuler Trust”) for the issuance and sale by the Company of an aggregate of 2,439,024 shares of the Company’s common stock (the “Shares”) to the Schuler Trust. Jack Schuler, serves as a member of the Company’s board of directors and is the sole trustee of the Schuler Trust.
Pursuant to the Securities Purchase Agreement, the Schuler Trust has agreed to purchase the Shares at a purchase price (determined in accordance with Nasdaq rules relating to the “market value” of the Company’s common stock) of $1.64 per share, which is equal to the consolidated closing bid price reported by Nasdaq immediately preceding the time the Company entered into the Securities Purchase Agreement, for an aggregate purchase price of $4.0 million. On June 29, 2022, the Company and the Schuler Trust agreed to extend the closing date of the Private Placement from June 30, 2022 to September 26, 2022.
For additional information regarding other sales of equity securities completed by the Company in 2020 and 2021, see “Capital Resources and Liquidity—Other sales of equity securities” in Part II, Item 7 of the 2021 10-K.
At-The-Market Equity Sales Agreement
On May 28, 2021, the Company entered into an Equity Sales Agreement (the “ATM Sales Agreement”) with William Blair pursuant to which it may sell shares of the Company’s common stock having an aggregate offering price of up to $50 million, from time to time, through an “at-the-market” equity offering program under which William Blair will act as sales agent. Subject to the terms and conditions of the ATM Sales Agreement, William Blair may sell shares by any method deemed to be an “at-the-market” offering as defined in Rule 415 under the Securities Act. The Company is not obligated to sell any shares under the ATM Sales Agreement. William Blair is entitled to a commission of 3% of the aggregate gross proceeds from each sale of shares occurring pursuant to the ATM Sales Agreement. During the six months ended June 30, 2022, the Company did not sell any shares of common stock under the ATM Sales Agreement. As of June 30, 2022, the Company had an aggregate of $39.1 million available for future sales under its at-the-market equity offering program.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of SeptemberJune 30, 2017.2022.
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 the 2021 10-K.
Item 3. Quantitative and Qualitative Disclosures
Interest Rate About Market 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 rateNot required for a smaller reporting company.
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 SeptemberJune 30, 2017,2022, 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 June 30, 2022 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’s Annual Report on Formsection entitled “Risk Factors” in the 2021 10-K. The risks described in our 2021 10-K forare not the fiscal year ended December 31, 2016.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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.There were no unregistered sales of equity securities during the quarter ended June 30, 2022 other than as reported in our Current Reports on Form 8-K filed with the SEC.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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| | | | | | | |
| 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 |
| 3.1.4 | | Incorporated by reference to Exhibit 3.2 filed with3.1 to the Registrant’s AnnualCurrent Report on Form 10-K for the fiscal year ended July 31, 20128-K filed on May 13, 2021 |
| 3.1.5 | | Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on September 23, 2021 |
| 3.1.6 | | Incorporate by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 17, 2022 |
| 3.2 | | Incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on August 8, 2019 |
| 3.2.1 | | Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on February 3, 2022 |
| 10.1 | | Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 17, 2022 |
| 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.
| | | | | |
| 8/15/20222 | /s/ Jack Phillips |
| Jack Phillips
President and Chief Executive Officer |
| (Principal Executive Officer) |
| |
November 7, 20178/15/20222 | /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) |