Accelerate Diagnostics, Inc - Quarter Report: 2022 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____
Commission file number: 001-31822
ACCELERATE DIAGNOSTICS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 84-1072256 | ||||||||||
| (State or other jurisdiction | (I.R.S. Employer Identification No.) | ||||||||||
| of incorporation or organization) | |||||||||||
| 3950 South Country Club Road, | Suite 470 | ||||||||||
| Tucson, | Arizona | 85714 | |||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(520) 365-3100
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
| Common Stock, $0.001 par | AXDX | The Nasdaq Stock Market LLC | ||||||
| value per share | (The Nasdaq Capital Market) | |||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | |||||||
| Accelerated filer | ☐ | |||||||
| Non-accelerated filer | ☑ | |||||||
| Smaller reporting company | ☑ | |||||||
| Emerging growth company | ☐ | |||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
As of August 11, 2022, there were 81,559,928 shares of the registrant’s common stock outstanding.
TABLE OF CONTENTS
Item 1. Legal Proceedings | |||||
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ACCELERATE DIAGNOSTICS, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(in thousands, except share data)
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Unaudited | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 4,581 | $ | 39,898 | ||||
| Investments | 32,191 | 23,720 | ||||||
| Trade accounts receivable, net | 2,935 | 2,320 | ||||||
| Inventory | 5,304 | 5,067 | ||||||
| Prepaid expenses | 1,429 | 768 | ||||||
| Other current assets | 1,619 | 1,558 | ||||||
| Total current assets | 48,059 | 73,331 | ||||||
| Property and equipment, net | 4,097 | 5,389 | ||||||
| Finance lease assets, net | 2,538 | — | ||||||
| Operating lease right of use assets, net | 2,181 | 2,510 | ||||||
| Other non-current assets | 1,851 | 1,817 | ||||||
| Total assets | $ | 58,726 | $ | 83,047 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 2,221 | $ | 1,983 | ||||
| Accrued liabilities | 5,654 | 2,853 | ||||||
| Accrued interest | 746 | 909 | ||||||
| Deferred revenue | 335 | 451 | ||||||
| Current portion of long-term debt | 84 | 80 | ||||||
| Finance lease, current | 953 | — | ||||||
| Operating lease, current | 732 | 669 | ||||||
| Total current liabilities | 10,725 | 6,945 | ||||||
| Finance lease, non-current | 1,383 | — | ||||||
| Operating lease, non-current | 1,997 | 2,381 | ||||||
| Other non-current liabilities | 757 | 808 | ||||||
| Convertible notes | 105,828 | 107,984 | ||||||
| Total liabilities | $ | 120,690 | $ | 118,118 | ||||
| Commitments and contingencies | ||||||||
| Stockholders’ deficit: | ||||||||
Preferred shares, $0.001 par value; | ||||||||
5,000,000 preferred shares authorized and 3,954,546 outstanding as of June 30, 2022 and December 31, 2021 | 4 | 4 | ||||||
Common stock, $0.001 par value; | ||||||||
200,000,000 common shares authorized with 79,701,428 shares issued and outstanding on June 30, 2022 and 100,000,000 common shares authorized with 67,649,018 shares issued and outstanding on December 31, 2021 | 80 | 68 | ||||||
| Contributed capital | 560,185 | 580,652 | ||||||
| Treasury stock | (45,067) | (45,067) | ||||||
| Accumulated deficit | (576,734) | (570,668) | ||||||
| Accumulated other comprehensive loss | (432) | (60) | ||||||
| Total stockholders’ deficit | (61,964) | (35,071) | ||||||
| Total liabilities and stockholders’ deficit | $ | 58,726 | $ | 83,047 | ||||
See accompanying notes to condensed consolidated financial statements.
3
ACCELERATE DIAGNOSTICS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Unaudited
(in thousands, except per share data)
| Three Months Ended | Six Months Ended | ||||||||||||||||
| June 30, | June 30, | June 30, | June 30, | ||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||
| Net sales | $ | 3,861 | $ | 2,798 | $ | 6,820 | $ | 5,316 | |||||||||
| Cost of sales | 2,781 | 1,745 | 4,937 | 3,365 | |||||||||||||
| Gross profit | 1,080 | 1,053 | 1,883 | 1,951 | |||||||||||||
| Costs and expenses: | |||||||||||||||||
| Research and development | 7,576 | 5,733 | 13,600 | 12,629 | |||||||||||||
| Sales, general and administrative | 11,493 | 12,910 | 22,167 | 26,938 | |||||||||||||
| Total costs and expenses | 19,069 | 18,643 | 35,767 | 39,567 | |||||||||||||
| Loss from operations | (17,989) | (17,590) | (33,884) | (37,616) | |||||||||||||
| Other income (expense): | |||||||||||||||||
| Interest expense | (713) | (4,177) | (1,630) | (8,267) | |||||||||||||
| Gain on extinguishment of debt | 919 | — | 3,565 | — | |||||||||||||
| Foreign currency exchange gain (loss) | 31 | — | 40 | (159) | |||||||||||||
| Interest income | 56 | 12 | 78 | 55 | |||||||||||||
| Other (expense) income, net | (107) | 81 | (157) | 74 | |||||||||||||
| Total other income (expense), net | 186 | (4,084) | 1,896 | (8,297) | |||||||||||||
| Net loss before income taxes | (17,803) | (21,674) | (31,988) | (45,913) | |||||||||||||
| Provision for income taxes | — | — | — | — | |||||||||||||
| Net loss | $ | (17,803) | $ | (21,674) | $ | (31,988) | $ | (45,913) | |||||||||
| Basic and diluted net loss per share | $ | (0.23) | $ | (0.36) | $ | (0.44) | $ | (0.77) | |||||||||
| Weighted average shares outstanding | 76,231 | 61,049 | 71,998 | 59,790 | |||||||||||||
| Other comprehensive loss: | |||||||||||||||||
| Net loss | $ | (17,803) | $ | (21,674) | $ | (31,988) | $ | (45,913) | |||||||||
| Net unrealized (loss) gain on debt securities available-for-sale | (39) | 1 | (132) | (18) | |||||||||||||
| Foreign currency translation adjustment | (161) | 21 | (240) | (60) | |||||||||||||
| Comprehensive loss | $ | (18,003) | $ | (21,652) | $ | (32,360) | $ | (45,991) | |||||||||
See accompanying notes to condensed consolidated financial statements.
4
ACCELERATE DIAGNOSTICS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
Unaudited
(in thousands)
| Six Months Ended | ||||||||
| June 30, | June 30, | |||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (31,988) | $ | (45,913) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,435 | 1,248 | ||||||
| Amortization of investment discount | 79 | 97 | ||||||
| Equity-based compensation | 6,950 | 15,429 | ||||||
| Amortization of debt discount and issuance costs | 284 | 6,079 | ||||||
| Loss (gain) on disposal of property and equipment | 283 | (100) | ||||||
| Unrealized loss on equity investments | 157 | — | ||||||
| Gain on extinguishment of debt | (3,565) | — | ||||||
| (Increase) decrease in assets: | ||||||||
| Contributions to deferred compensation plan | (110) | (236) | ||||||
| Accounts receivable | (615) | (564) | ||||||
| Inventory | (416) | (524) | ||||||
| Prepaid expense and other | (719) | 60 | ||||||
| Increase (decrease) in liabilities: | ||||||||
| Accounts payable | 658 | 564 | ||||||
| Accrued liabilities | 2,288 | 736 | ||||||
| Accrued interest | (159) | 45 | ||||||
| Deferred revenue and income | (116) | (94) | ||||||
| Deferred compensation | (51) | 245 | ||||||
| Net cash used in operating activities | (25,605) | (22,928) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of equipment | (447) | (29) | ||||||
| Purchase of marketable securities | (27,504) | (15,699) | ||||||
| Maturities of marketable securities | 18,738 | 23,993 | ||||||
| Net cash (used in) provided by investing activities | (9,213) | 8,265 | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock | — | 22,122 | ||||||
| Payments on finance leases | (424) | — | ||||||
| Proceeds from exercise of options | 7 | 1,222 | ||||||
| Proceeds from issuance of common stocks under employee purchase plan | 137 | 161 | ||||||
| Net cash (used in) provided by financing activities | (280) | 23,505 | ||||||
| Effect of exchange rate on cash | (219) | (43) | ||||||
| (Decrease) increase in cash and cash equivalents | (35,317) | 8,799 | ||||||
| Cash and cash equivalents, beginning of period | 39,898 | 35,781 | ||||||
| Cash and cash equivalents, end of period | $ | 4,581 | $ | 44,580 | ||||
See accompanying notes to condensed consolidated financial statements.
5
ACCELERATE DIAGNOSTICS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
Unaudited
(in thousands)
| Six Months Ended | ||||||||
| June 30, | June 30, | |||||||
| 2022 | 2021 | |||||||
| Non-cash investing activities: | ||||||||
| Net transfer of instruments from inventory to property and equipment | $ | 202 | $ | 500 | ||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | 1,506 | $ | 2,144 | ||||
| Extinguishment of Convertible Senior Notes through issuance of common stock | $ | 10,180 | $ | — | ||||
See accompanying notes to condensed consolidated financial statements.
6
ACCELERATE DIAGNOSTICS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIT
Unaudited
(in thousands)
| Three Months Ended | Six Months Ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||
| Preferred stock shares outstanding | |||||||||||||||||
| Beginning | 3,955 | — | 3,955 | — | |||||||||||||
| Ending | 3,955 | — | 3,955 | — | |||||||||||||
| Preferred stock | |||||||||||||||||
| Beginning | $ | 4 | $ | — | $ | 4 | $ | — | |||||||||
| Ending | $ | 4 | $ | — | $ | 4 | $ | — | |||||||||
| Common stock shares outstanding | |||||||||||||||||
| Beginning | 68,712 | 59,561 | 67,649 | 57,608 | |||||||||||||
| Issuance of common stock | — | 1,481 | — | 2,870 | |||||||||||||
| Exercise of options and restricted stock awards issued | 974 | 436 | 1,128 | 990 | |||||||||||||
| Issuance of common stock under employee purchase plan | 66 | 11 | 125 | 21 | |||||||||||||
| Issuance of shares to retire Convertible Notes | 9,949 | — | 10,799 | — | |||||||||||||
| Ending | 79,701 | 61,489 | 79,701 | 61,489 | |||||||||||||
| Common stock | |||||||||||||||||
| Beginning | $ | 69 | $ | 60 | $ | 68 | $ | 58 | |||||||||
| Proceeds from issuance of common stock | — | 1 | — | 2 | |||||||||||||
| Exercise of Options | 1 | — | 1 | 1 | |||||||||||||
| Issuance of shares to retire Convertible Notes | 10 | — | 11 | — | |||||||||||||
| Ending | $ | 80 | $ | 61 | $ | 80 | $ | 61 | |||||||||
| Contributed capital | |||||||||||||||||
| Beginning | $ | 547,381 | $ | 495,857 | $ | 580,652 | $ | 475,072 | |||||||||
| Cumulative effect of accounting changes | — | — | (37,438) | — | |||||||||||||
| Proceeds from issuance of common stock | 11,455 | — | 22,120 | ||||||||||||||
| Exercise of options | 6 | 113 | 6 | 1,221 | |||||||||||||
| Issuance of common stock under employee purchase plan | 60 | 81 | 137 | 161 | |||||||||||||
| Issuance of shares to retire Convertible Notes | 8,912 | — | 10,169 | — | |||||||||||||
| Equity-based compensation | 3,826 | 6,616 | 6,659 | 15,548 | |||||||||||||
| Ending | $ | 560,185 | $ | 514,122 | $ | 560,185 | $ | 514,122 | |||||||||
See accompanying notes to condensed consolidated financial statements.
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ACCELERATE DIAGNOSTICS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
Unaudited
(in thousands)
| Three Months Ended | Six Months Ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||
| Accumulated deficit | |||||||||||||||||
| Beginning | $ | (558,931) | $ | (517,205) | $ | (570,668) | $ | (492,966) | |||||||||
| Cumulative effect of accounting changes | — | — | 25,922 | — | |||||||||||||
| Net loss | (17,803) | (21,674) | (31,988) | (45,913) | |||||||||||||
| Ending | $ | (576,734) | $ | (538,879) | $ | (576,734) | $ | (538,879) | |||||||||
| Treasury stock | |||||||||||||||||
| Beginning | $ | (45,067) | $ | (45,067) | $ | (45,067) | $ | (45,067) | |||||||||
| Ending | $ | (45,067) | $ | (45,067) | $ | (45,067) | $ | (45,067) | |||||||||
| Accumulated other comprehensive (loss) income | |||||||||||||||||
| Beginning | $ | (232) | $ | (9) | $ | (60) | $ | 91 | |||||||||
| Net unrealized loss on debt securities available-for-sale | (39) | 1 | (132) | (18) | |||||||||||||
| Foreign currency translation adjustment | (161) | 21 | (240) | (60) | |||||||||||||
| Ending | $ | (432) | $ | 13 | $ | (432) | $ | 13 | |||||||||
| Total stockholders' deficit | $ | (61,964) | $ | (69,750) | $ | (61,964) | $ | (69,750) | |||||||||
See accompanying notes to condensed consolidated financial statements.
8
ACCELERATE DIAGNOSTICS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 1. ORGANIZATION AND NATURE OF BUSINESS; BASIS OF PRESENTATION; PRINCIPLES OF CONSOLIDATION; SIGNIFICANT ACCOUNTING POLICIES
Accelerate Diagnostics, Inc. (“we” or “us” or “our” or “Accelerate” or the “Company”) 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.
Basis of Presentation
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 U.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, 2021, as filed with the SEC on March 14, 2022.
The condensed consolidated balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date but does not include all disclosures such as notes required by U.S. GAAP.
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, 2022, or any future period.
All amounts are rounded to the nearest thousand dollars unless otherwise indicated.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of intercompany transactions and balances.
Risk and Uncertainties
The future success of the Company is dependent on its ability to successfully commercialize its products, obtain regulatory clearance for and successfully launch its future product candidates, obtain additional capital and ultimately attain profitable operations. Historically, the Company has funded its operations primarily through multiple equity raises and one convertible debt offering. The Company is subject to a number of risks similar to other early commercial stage life science companies, including, but not limited to commercially launching the Company’s products, development and market acceptance of the Company’s product candidates, development by its competitors of new technological innovations, protection of proprietary technology, and raising additional capital.
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. These impacts include diminished access to our customers, principally hospitals, which has severely limited the ability to sell or implement products. Furthermore, the expected rate of growth of the consumable test kit sales has been reduced because of the negative impact of the COVID-19 pandemic on Accelerate Pheno system new sales and implementations. The Company has reviewed its suppliers and quantities of key materials and believes that it has sufficient stocks and alternate sources of critical materials should the supply chains become further disrupted, although raw materials for the manufacturing of reagents is in high demand, and interruptions in supply are difficult to predict. The COVID-19 pandemic also
9
caused the Company to reassess its build plan and evaluate its inventories accordingly, which resulted in additional charges to cost of sales for excess inventories in the prior year.
The Company may seek to fund its operations through public equity, private equity or debt financings, as well as other sources. However, the Company may be unable to raise additional funds or enter into such other arrangements when needed, on favorable terms, or at all. The Company’s failure to raise capital or enter into such other arrangements if and when needed would have a negative impact on the Company’s business, results of operations, financial condition and the Company’s ability to develop new products. To the extent the Company raises additional funds through the sale of equity, issue convertible debt securities or exchange convertible debt for equity, the issuance of securities will result in dilution to stockholders. Investors purchasing shares or other securities in the future could have rights superior to existing stockholders. In addition, the Company has a significant number of options outstanding. If the holders of these options exercise such securities, further dilution may occur.
Liquidity
The Company continues to assess liquidity needs and manage cash flows. As a result of the steps the Company has taken to enhance its liquidity, the Company currently believes that cash on hand and cash flows from operations will enable the Company to meet its working capital, capital expenditure, debt service and other funding requirements for at least one year from the date this Quarterly Report on Form 10-Q (this “Form 10-Q”) is issued. The Company’s view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for 12 months from the date these condensed consolidated financial statements are filed, which is impacted by, among other things, various assumptions regarding demand and sales prices for our products. Our financial forecasts in recent periods have proven less reliable due to conditions created by the pandemic. As a result, there is no guarantee our financial forecast, which projects sufficient cash will be available to meet planned operating expenses and other cash needs, will be accurate. In the event the Company experiences lower customer demand, lower prices for its products and services, or higher expenses than it forecasted or if the Company underperforms relative to its forecast, the Company could experience negative cash flows from operations, as has been the case in prior years, which would reduce its cash balances and liquidity.
Use of Estimates
The preparation of the Company’s condensed consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to accounts receivable, inventory, property and equipment, accrued liabilities, warranty liabilities, convertible notes, tax valuation accounts, equity–based compensation, revenue and leases. Actual results could differ materially from those estimates.
Estimated Fair Value of Financial Instruments
The Company follows Accounting Standards Codification (“ASC”) 820, Fair Value Measurement, which has defined fair value and requires the Company to establish a framework for measuring and disclosing fair value. The framework requires the valuation of assets and liabilities subject to fair value measurements using a three-tiered approach and fair value measurement be classified and disclosed in one of the following three categories:
•Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
•Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).
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The carrying amounts of financial instruments such as cash and cash equivalents, trade accounts receivable, prepaid expenses, other current assets, accounts payable, accrued liabilities, and other current liabilities approximate the related fair values due to the short-term maturities of these instruments.
See Note 4, Fair Value of Financial Instruments, for further information and related disclosures regarding the Company’s fair value measurements.
The estimated fair value of the Company’s 2.50% Senior Convertible Notes due 2023 (the “Notes”) represents a Level 2 measurement. See Note 10, Convertible Notes for further detail on the Company’s Notes.
Cash and Cash Equivalents
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.
Investments
The Company invests in various debt and equity securities which are primarily held in the custody of major financial institutions. Debt securities consist of certificates of deposit, U.S. government and agency securities, commercial paper, and corporate notes and bonds. Equity securities consist of mutual funds. The Company records these investments in the condensed consolidated balance sheet at fair value. Unrealized gains or losses for debt securities available-for-sale are included in accumulated other comprehensive income (loss), a component of stockholders’ deficit. Unrealized gains or losses for equity securities are included in other income (expense), net, a component of condensed consolidated statements of operations and comprehensive loss. The Company considers all debt securities available-for-sale, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs. The Company classifies its investments as current based on the nature of the investments and their availability for use in current operations.
We perform an assessment to determine whether there have been any events or economic circumstances to indicate that a debt security available-for-sale in an unrealized loss position has suffered impairment as a result of credit loss or other factors. A debt security is considered impaired if its fair value is less than its amortized cost basis at the reporting date. If we intend to sell the debt security or if it is more-likely-than-not that we will be required to sell the debt security before the recovery of its amortized cost basis, the impairment is recognized and the unrealized loss is recorded as a direct write-down of the security's amortized cost basis with an offsetting entry to earnings. If we do not intend to sell the debt security or believe we will not be required to sell the debt security before the recovery of its amortized cost basis, the impairment is assessed to determine if a credit loss component exists. We use a discounted cash flow method to determine the credit loss component. In the event a credit loss exists, an allowance for credit losses is recorded in earnings for the credit loss component of the impairment while the remaining portion of the impairment attributable to factors other than credit loss is recognized, net of tax, in accumulated other comprehensive income (loss). The amount of impairment recognized due to credit factors is limited to the excess of the amortized cost basis over the fair value of the security.
Inventory
Inventory is stated at the lower of cost or net realizable value. The Company determines the cost of inventory using the first-in, first out method. The Company estimates the recoverability of inventory by reference to internal estimates of future demands and product life cycles, including expiration. The Company periodically analyzes its inventory levels to identify inventory that may expire prior to expected sale or has a cost basis in excess of its estimated realizable value and records a charge to expense for such inventory as appropriate.
We charge cost of sales for inventory provisions to write-down our inventory to the lower of cost or net realizable value or for obsolete or excess inventory. Most of our inventory provisions relate to excess quantities of products, based on our inventory levels and future product purchase commitments compared to assumptions about
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future demand and market conditions. Once inventory has been written-off or written-down, it creates a new cost basis for the inventory that is not subsequently written-up.
See Note 6, Inventory, for further information and related disclosures.
Accounts Receivable
Accounts receivable consist of amounts due to the Company for sales to customers and are based on what we expect to collect in exchange for goods and services. Receivables are considered past due based on the contractual payment terms and are written off if reasonable collection efforts prove unsuccessful.
We maintain an allowance for credit losses for expected uncollectible accounts receivable, which is recorded as an offset to accounts receivable and changes in such are classified as general and administrative expense in the consolidated statements of operations. We assess collectibility by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when we identify specific customers with known disputes or collectibility issues. In determining the amount of the allowance for credit losses, we consider historical collectibility and make judgments about the creditworthiness of customers based on credit evaluations. Our customers typically have good credit quality. We also consider customer-specific information, current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss data.
The allowance for credit losses for the three and six months ended June 30, 2022 and 2021 is comprised of the following (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||
| Beginning balance | $ | 159 | $ | 209 | 140 | 445 | |||||||||||
| Provisions | 7 | 7 | 30 | 38 | |||||||||||||
Write-offs | (16) | (3) | (20) | (270) | |||||||||||||
| $ | 150 | $ | 213 | $ | 150 | $ | 213 | ||||||||||
The write-offs recorded during the six months ended June 30, 2021 were in connection with a one-time restructuring activity of the Company's Europe, Middle East and Africa (“EMEA”) business. These credit losses were incurred as part of the Company terminating agreements with select distributors in geographies it exited and did not pursue collection of these accounts receivables.
Property and Equipment
Property and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred and expenditures for major improvements are capitalized. Gains and losses from retirement or replacement are included in costs and expenses. Depreciation of property and equipment is computed using the straight-line method over the estimated useful life of the assets, ranging from to seven years. Leasehold improvements are depreciated over the remaining life of the lease or the life of the asset, whichever is less.
Instruments Classified as Property and Equipment
Property and equipment includes Accelerate Pheno systems (also referred to as instruments) used for sales demonstrations, instruments under rental agreements and instruments used for research and development. Depreciation expense for instruments used for sales demonstrations is recorded as a component of sales, general and administrative expense. Depreciation expense for instruments placed at customer sites pursuant to reagent rental agreements is recorded as a component of cost of sales. Depreciation expense for instruments used in our laboratory and research is recorded as a component of research and development expense. The Company retains title to these instruments and depreciates them over five years. Losses from the retirement of returned instruments are included in costs and expenses.
The Company evaluates the recoverability of the carrying amount of its instruments whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable, and at least
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annually. This evaluation is based on our estimate of future cash flows and the estimated fair value of such long-lived assets, and provides for impairment if such undiscounted cash flows or the estimated fair value are insufficient to recover the carrying amount of instruments. No impairment charges have been recorded as of June 30, 2022 and December 31, 2021.
See Note 7, Property and Equipment, for further information and related disclosures.
Long-lived Assets
Long-lived assets and certain identifiable intangibles to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company continuously evaluates the recoverability of its long-lived assets based on estimated future cash flows from and the estimated fair value of such long-lived assets, and provides for impairment if such undiscounted cash flows or the estimated fair value are insufficient to recover the carrying amount of the long-lived asset.
Warranty Reserve
Instruments are typically sold with a one year limited warranty, while kits and accessories are typically sold with a sixty days limited warranty. Accordingly, a provision for the estimated cost of the limited warranty repair is recorded at the time revenue is recognized. Our estimated warranty provision is based on our estimate of future repair events and the related estimated cost of repairs. The Company periodically assesses the adequacy of the warranty reserve and adjusts the amount as necessary. The cost incurred for these provisions is included in cost of sales on the condensed consolidated statements of operations and comprehensive loss.
Warranty reserve activity for the three and six months ended June 30, 2022 and 2021 is as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||
| Beginning balance | $ | 176 | $ | 184 | $ | 139 | $ | 232 | |||||||||
| Provisions | 93 | 12 | 139 | (10) | |||||||||||||
Warranty cost incurred | (14) | (27) | (23) | (53) | |||||||||||||
| Ending balance | $ | 255 | $ | 169 | $ | 255 | $ | 169 | |||||||||
Convertible Notes
On January 1, 2022 the Company adopted Accounting Standards Update (“ASU”) 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). As a result, the Notes are now 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. Interest expense is comprised of (1) cash interest payments, (2) amortization of any debt discounts or premiums based on the original offering, and (3) amortization of any debt issuance costs. Gain or loss on extinguishment of Notes is calculated as the difference between the (i) fair value of the consideration transferred and (ii) the sum of the carrying value of the debt at the time of repurchase.
The Company classifies the Notes as a non-current liability as the Company has the ability to settle the Notes with shares of common stock.
See Note 2, Recently Issued Accounting Pronouncements and Note 10, Convertible Notes, for further information and related disclosures.
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Revenue Recognition
The Company recognizes revenue when control of the promised good or service is transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Sales taxes are excluded from revenues.
The Company determines revenue recognition through the following steps:
•Identification of the contract with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations
•Recognition of revenue as we satisfy a performance obligation
Product revenue is derived from the sale or rental of instruments and sales of related consumable products. When an instrument is sold, revenue is generally recognized upon installation of the unit consistent with contract terms, which do not include a right of return. When a consumable product is sold, revenue is generally recognized upon shipment. Invoices are generally issued when revenue is recognized. Payment terms vary by the type and location of the customer and the products or services offered. The term between invoicing and when payment is due is not significant.
Service revenue is derived from the sale of extended service agreements which are generally non-cancellable. This revenue is recognized on a straight-line basis over the contract term beginning on the effective date of the contract because the Company is standing ready to provide services. Invoices are generally issued annually and coincide with the beginning of individual service terms.
The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines relative standalone selling prices based on the price charged to customers for each individual performance obligation.
Sales commissions earned by the Company’s sales force are considered incremental and recoverable costs of obtaining a contract with a customer. The Company has determined these costs would have an amortization period of less than one year and has elected to recognize them as an expense when incurred. Contract asset opening and closing balances were immaterial for the three and six months ended June 30, 2022.
Gross Profit and Gross Margin
Gross profit consists of total revenue, net of allowances, less cost of sales. Cost of sales includes cost of materials, direct labor, equity-based compensation, facility and other manufacturing overhead costs for consumable tests and instruments sold to customers. Cost of sales for instruments also includes depreciation on revenue generating instruments that have been placed with our customers under a reagent rental agreement. Cost of sales includes repair and maintenance cost for instruments covered by a service agreement or instruments covered by a reagent rental agreement. Cost of sales also includes warranty related costs.
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 due to supply chain inflationary factors and a decrease in our average unit sales price period over period.
Shipping and Handling
Shipping and handling costs billed to customers are included as a component of revenue. The corresponding expense incurred with third party carriers is included as a component of sales, general and administrative costs on the consolidated statements of operations and comprehensive loss.
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Leases
The Company accounts for leases in accordance with ASC 842, Leases. The Company determines if an arrangement is or contains a lease and the type of lease at inception. The Company classifies leases as finance leases (lessee) or sales-type leases (lessor) when there is either a transfer of ownership of the underlying asset by the end of the lease term, the lease contains an option to purchase the asset that we are reasonably certain will be exercised, the lease term is for the major part of the remaining economic life of the asset, the present value of the lease payments and any residual value guarantee equals or substantially exceeds all the fair value of the asset, or the asset is of such a specialized nature that it will have no alternative use to the lessor at the end of the lease term. Payments contingent on future events (i.e. based on usage) are considered variable and excluded from lease payments for the purposes of classification and initial measurement. Several of our leases include options to renew or extend the term upon mutual agreement of the parties and others include one-year extensions exercisable by the lessee. None of our leases contain residual value guarantees, restrictions, or covenants.
To determine whether a contract contains a lease, the Company uses its judgment in assessing whether the lessor retains a material amount of economic benefit from an underlying asset, whether explicitly or implicitly identified, which party holds control over the direction and use of the asset, and whether any substantive substitution rights over the asset exist.
Leases as Lessee
Operating leases are included in right-of-use (“ROU”) assets and corresponding lease liabilities, and finance leases are included in ROU assets and corresponding lease liabilities within our condensed consolidated balance sheets. These assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and their related liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Typically, we use our incremental borrowing rate based on the information available at commencement in determining the present value of lease payments. We use the implicit rate when readily determinable. ROU assets are net of lease payments made and exclude lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term, which may include options to extend or terminate the lease when it is reasonably certain that we will exercise the option.
Our operating leases consist primarily of leased office, factory, and laboratory space in the U.S. and office space in Europe, have between and six-year terms, and typically contain penalizing, early-termination provisions. Our finance leases consist of leased equipment and have three-year terms.
Leases as Lessor
The Company leases instruments to customers under “reagent rental” agreements, whereby the customer agrees to purchase consumable products over a stated term, typically five years or less, for a volume-based price that includes an embedded rental for the instruments. When collectibility is probable, that amount is recognized as income at lease commencement for sales-type leases and as product is shipped, typically in a straight–line pattern, over the term for operating leases, which typically include a termination without cause or penalty provision given a short notice period.
Consideration is allocated between lease and non-lease components based on stand-alone selling price in accordance with ASC 606, Revenue from Contracts with Customers.
Net investment in sales-type leases are included within our condensed consolidated balance sheets as a component of other current assets and other non-current assets, which include the present value of lease payments not yet received and the present value of the residual asset, which are determined using the information available at commencement, including the lease term, estimated useful life, rate implicit in the lease, and expected fair value of the instrument.
Nonqualified Cash Deferral Plan
The Company's Cash Deferral Plan (the “Deferral Plan”) provides certain key employees with an opportunity to defer the receipt of such participant's base salary. The Deferral Plan is intended to be a nonqualified deferred compensation plan that complies with the provisions of Section 409A of the Internal Revenue Code. All of
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the investments held in the Deferral Plan are equity securities consisting of mutual funds and recorded at fair value with changes in the investments' fair value recognized as earnings in the period they occur. The corresponding liability for the Deferral Plan is included in other non-current liabilities in the condensed consolidated balance sheet.
Equity-Based Compensation
The Company may award stock options, restricted stock units (“RSUs”), performance-based awards and other equity-based instruments to its employees, directors and consultants. Compensation cost related to equity-based instruments is based on the fair value of the instrument on the grant date, and is recognized over the requisite service period on a straight-line basis over the vesting period for each tranche (an accelerated attribution method) except for performance-based awards. Performance-based awards vest based on the achievement of performance targets. Compensation costs associated with performance-based awards are recognized over the requisite service period based on probability of achievement. Performance-based awards require management to make assumptions regarding the likelihood of achieving performance targets.
The Company estimates the fair value of service based and performance based stock option awards, including modifications of stock option awards, using the Black-Scholes option pricing model. This model derives the fair value of stock options based on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rate and dividend yield.
•Volatility: The expected volatility is based on the historical volatility of the Company's stock price over the most recent period commensurate with the expected term of the stock option award.
•Expected term: The estimated expected term for employee awards is based on a simplified method that considers an insufficient history of employee exercises. For consultant awards, the estimated expected term is the same as the life of the award.
•Risk-free interest rate: The risk-free interest rate is based on published U.S. Treasury rates for a term commensurate with the expected term.
•Dividend yield: The dividend yield is estimated as zero as the Company has not paid dividends in the past and does not have any plans to pay any dividends in the foreseeable future.
The Company records the fair value of RSUs or stock grants based on the published closing market price on the day before the grant date.
The Company accounts for forfeitures as they occur rather than on an estimated basis.
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 doesn't incorporate option features that would require compensation to be recorded.
See Note 12, Employee Equity-Based Compensation for further information.
Deferred Tax
Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying condensed consolidated balance sheet. The change in deferred tax assets and liabilities for the period represents the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws in deferred tax assets and liabilities are reflected as an adjustment to the tax provision or benefit in the period of enactment.
The Company follows the provisions of ASC 740, Income Taxes, to account for any uncertainty in income taxes with respect to the accounting for all tax positions taken (or expected to be taken) on any income tax return. This guidance applies to all open tax periods in all tax jurisdictions in which the Company is required to file an income tax return. Under U.S. GAAP, in order to recognize an uncertain tax benefit the taxpayer must be more
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likely than not certain of sustaining the position, and the measurement of the benefit is calculated as the largest amount that is more likely than not to be realized upon resolution of the position. Interest and penalties, if any, would be recorded within tax expense.
Foreign Currency Translation and Foreign Currency Transactions
Adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in the foreign currency translation adjustment, a component of accumulated other comprehensive loss in the condensed consolidated statements of stockholders’ deficit.
The Company has assets and liabilities, including receivables and payables, which are denominated in currencies other than their functional currency. These balance sheet items are subject to re-measurement, the impact of which is recorded in foreign currency exchange gain and loss, within the condensed consolidated statement of operations and comprehensive loss.
Loss Per Share
Basic loss per share includes no dilution and is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding for the period. Potentially dilutive common shares consist of shares issuable from stock options and unvested RSUs. Potentially dilutive common shares would also include common shares that would be outstanding if the Notes and the Series A Preferred Stock outstanding at the balance sheet date were converted and shares issuable in connection with the Securities Purchase Agreement (as defined in Note 17). Diluted earnings are not presented when the effect of adding such additional common shares is antidilutive.
See Note 11, Loss Per Share, for further information.
Comprehensive Loss
In addition to net loss, comprehensive loss includes all changes in equity during a period, except those resulting from investments by and distributions to owners. The Company holds debt securities as available-for-sale and records the change in fair market value as a component of comprehensive loss. The Company also has adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars which is included as a component of comprehensive loss.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Standards that were recently adopted
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). This update simplifies the accounting for convertible debt instruments by removing the beneficial conversion and cash conversion separation models for convertible instruments. Under the update, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives or that do not result in substantial premiums accounted for as paid-in capital. The update also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will no longer be available. The Company adopted the standard on January 1, 2022 through application of the modified retrospective method of transition. The Company applied the standard to the Notes outstanding as of January 1, 2022, as discussed in Note 10, Convertible Notes. As a result, the Notes are now 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. Interest expense is comprised of (1) cash interest payments, (2) amortization of any debt discounts or premiums based on the original offering, and (3) amortization of any debt issuance costs. On January 1, 2022, the cumulative effect of adoption resulted in an increase in the net carrying amount of the Notes, of $11.5 million, a decrease in additional-paid-in-capital of $37.4 million, and a decrease in accumulated deficit of $25.9 million. ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share. This change has no impact on the Company given the Company was already using the if-converted method to calculate diluted earnings per share.
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In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity’s Own Equity (Topic 815 - 40). ASU 2021-04 codifies the final consensus reached by the Emerging Issues Task Force (EITF) on how an issuer should account for modifications made to equity-classified written call options (hereafter referred to as a warrant to purchase the issuer’s common stock). The guidance in the ASU requires the issuer to treat a modification of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange of the original warrant for a new warrant. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the warrant or as termination of the original warrant and issuance of a new warrant. This ASU was adopted January 1, 2022, and did not impact the Company's consolidated financial statements at January 1, 2022.
Standards not yet adopted
In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method. ASU 2022-01 is related to the portfolio layer method of hedge accounting. The amendments in this update clarify the accounting and promote consistency in reporting for hedges where the portfolio layer method is applied. This update is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. We do not expect the update to have a material effect on our condensed consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 relates to troubled debt restructurings (“TDRs”) and vintage disclosures for financing receivables. The amendments in this update eliminate the accounting guidance for TDRs by creditors while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty. The amendments also require disclosure of current-period gross write-offs by year of origination for financing receivables. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We do not expect the update to have a material effect on our condensed consolidated financial statements.
NOTE 3. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments and accounts receivable.
The Company has financial institutions for banking operations that hold 10% or more of the Company’s cash and cash equivalents. As of June 30, 2022, four of the Company's financial institutions held 33%, 19%, 17% and 16% of the Company’s cash and cash equivalents. As of December 31, 2021, two of the Company's financial institutions held 72% and 13% of the Company’s cash and cash equivalents.
The Company grants credit to domestic and international customers. Exposure to losses on accounts receivable is principally dependent on each client's financial position. The Company had one customer that accounted for 11% and 13% of the Company’s net accounts receivable balance as of June 30, 2022 and December 31, 2021, respectively.
The Company did not have any customers that represented 10% or more of the Company’s total revenue for the three and six months ended June 30, 2022 and 2021.
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NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following tables represent the financial instruments measured at fair value on a recurring basis in the financial statements of the Company and the valuation approach applied to each class of financial instruments at June 30, 2022 and December 31, 2021 (in thousands):
| June 30, 2022 | ||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||
| Assets: | ||||||||||||||
| Cash and cash equivalents: | ||||||||||||||
| Money market funds | $ | 118 | $ | — | $ | — | $ | 118 | ||||||
| Total cash and cash equivalents | 118 | — | — | 118 | ||||||||||
| Equity investments: | ||||||||||||||
| Mutual funds | 793 | — | — | 793 | ||||||||||
| Total equity investments | 793 | — | — | 793 | ||||||||||
| Debt securities available-for-sale: | ||||||||||||||
| Certificates of deposit | — | 5,242 | — | 5,242 | ||||||||||
| U.S. Treasury securities | 13,218 | — | — | 13,218 | ||||||||||
| Commercial paper | — | 5,044 | — | 5,044 | ||||||||||
| Corporate notes and bonds | — | 7,894 | — | 7,894 | ||||||||||
| Debt securities available-for-sale | 13,218 | 18,180 | — | 31,398 | ||||||||||
| Total assets measured at fair value | $ | 14,129 | $ | 18,180 | $ | — | $ | 32,309 | ||||||
| December 31, 2021 | ||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||
| Assets: | ||||||||||||||
| Cash and cash equivalents: | ||||||||||||||
| Money market funds | $ | 5,563 | $ | — | $ | — | $ | 5,563 | ||||||
| Commercial paper | — | 200 | — | 200 | ||||||||||
| Total cash and cash equivalents | 5,563 | 200 | — | 5,763 | ||||||||||
| Equity investments: | ||||||||||||||
| Mutual funds | 841 | — | — | 841 | ||||||||||
| Total equity investments | 841 | — | — | 841 | ||||||||||
| Debt securities available-for-sale: | ||||||||||||||
| Certificates of deposit | — | 1,351 | — | 1,351 | ||||||||||
| U.S. Treasury securities | 250 | — | — | 250 | ||||||||||
| Commercial paper | — | 8,046 | — | 8,046 | ||||||||||
| Corporate notes and bonds | — | 13,232 | — | 13,232 | ||||||||||
| Debt securities available-for-sale | 250 | 22,629 | — | 22,879 | ||||||||||
| Total assets measured at fair value | $ | 6,654 | $ | 22,829 | $ | — | $ | 29,483 | ||||||
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Highly liquid investments with an original maturity of three months or less at time of purchase are included in cash and cash equivalents on the condensed consolidated balance sheet.
Level 1 assets are priced using quoted prices in active markets for identical assets which include money market funds, 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.
At June 30, 2022, the Notes had an outstanding principal amount of $106.5 million with a fair value of $70.7 million. At December 31, 2021, the Notes had an outstanding principal amount of $120.5 million with a fair value of $89.4 million. The fair value of the Notes represents a Level 2 measurement.
The fair value of the Notes is typically correlated to the Company’s stock price and as a result, significant changes to the Company’s stock price will have a significant impact on the calculated fair value.
See Note 10, Convertible Notes for further detail on the Notes.
NOTE 5. INVESTMENTS
The following tables summarize the Company’s debt securities available-for-sale investments at June 30, 2022 and December 31, 2021 (in thousands):
| June 30, 2022 | ||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
| Certificates of deposit | $ | 5,268 | $ | — | $ | (26) | $ | 5,242 | ||||||
| U.S. Treasury securities | 13,272 | — | (54) | 13,218 | ||||||||||
| Commercial paper | 5,067 | — | (23) | 5,044 | ||||||||||
| Corporate notes and bonds | 7,938 | — | (44) | 7,894 | ||||||||||
| Total | $ | 31,545 | $ | — | $ | (147) | $ | 31,398 | ||||||
| December 31, 2021 | ||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
| Certificates of deposit | $ | 1,351 | $ | — | $ | — | $ | 1,351 | ||||||
| U.S. Treasury securities | 250 | — | — | 250 | ||||||||||
| Commercial paper | 8,048 | — | (2) | 8,046 | ||||||||||
| Corporate notes and bonds | 13,245 | — | (13) | 13,232 | ||||||||||
| Total | $ | 22,894 | $ | — | $ | (15) | $ | 22,879 | ||||||
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The following table summarizes the maturities of the Company’s debt securities available-for-sale investments at June 30, 2022 and December 31, 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 | ||||||
There were no proceeds from sales of debt securities available-for-sale (including principal paydowns) for the three and six months ended June 30, 2022 and 2021. The Company determines gains and losses of marketable securities based on specific identification of the securities sold. There were no material realized gains or losses from debt securities available-for-sale for the three and six months ended June 30, 2022 and 2021. No material balances were reclassified out of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2022 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 of high credit quality.
As of June 30, 2022, there were no holdings 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 credit rating of A- or better as of June 30, 2022.
Equity securities are comprised of investments in mutual funds. The fair value of equity 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 income 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 | ||||||||||||||
| 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 | |||||
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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.
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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 two loan agreements with one 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:
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•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 eight 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 eight 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.
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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
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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 one share of the Company’s common stock. Additionally, each share of Series A Preferred Stock will automatically be converted into one 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 12. EMPLOYEE EQUITY-BASED COMPENSATION
The following table summarizes option activity under the Company's equity-based compensation plans for the six months ended June 30, 2022:
| 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 | |||||
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The table below summarizes the resulting weighted average inputs used to calculate the estimated fair value of options awarded for the three months ended June 30, 2022 and 2021:
| 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 granted during the three months ended June 30, 2022, resulting in no summarized data for the period.
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 June 30, 2022:
| 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 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 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 | ||||||||||
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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 valued in the same manner as the time-based options, with the assumption that performance goals will be achieved. The inputs for expected volatility, expected dividends, and risk-free rate used in estimating those options’ fair value are the same as the time-based options issued under the 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.
During 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.
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 | ||||
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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 non-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%.
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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 one 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 | ||||||||||
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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 “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 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.
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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 as June 30, 2022 is immaterial.
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.
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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.
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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 consideration of the rights granted, BD will pay the Company an 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 termination of the 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 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 Commission as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ending September 30, 2022.
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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 but are not limited to, statements about our future development plans and growth strategy, including plans and objectives relating to our 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 demand 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 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, 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® system and the Accelerate Arc™ system, the Company will obtain sufficient capital to commercialize the Accelerate 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, the Company will accurately anticipate market demand for the Company’s products and there will be no material adverse change in the Company’s operations or business 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
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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.
Overview
Accelerate is an in vitro diagnostics company dedicated to providing solutions that improve patient outcomes and lower healthcare costs through the rapid diagnosis of serious infections. Microbiology laboratories need new tools to address what the U.S. Centers for Disease Control and Prevention (the “CDC”) calls one of the most serious healthcare threats of our time, antibiotic resistance. A significant contributing factor to the rise of resistance is the overuse and misuse of antibiotics, which is exacerbated by a lack of timely diagnostic results. The delay of identification and antibiotic susceptibility results is often due to the reliance by microbiology laboratories on traditional culture-based tests that often take two to three days to complete. Our technology platform is intended to address these challenges by delivering significantly faster testing of infectious pathogens in various patient sample types.
Our first system to address these challenges is the Accelerate Pheno® system. The Accelerate PhenoTest® BC Kit, which is the first test kit for the system, is indicated as an aid, in conjunction with other clinical and laboratory findings, in the diagnosis of bacteremia and fungemia, both life-threatening conditions with high morbidity and mortality risk. The device 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 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 antibiotics.
On June 30, 2015, we declared our conformity to the European In Vitro Diagnostic Directive 98/79/EC and applied a CE mark to the Accelerate Pheno system and the Accelerate PhenoTest BC Kit for in vitro diagnostic use. On February 23, 2017, the U.S. Food and Drug Administration (the “FDA”) granted our de novo classification request to market the first version of our Accelerate Pheno system and Accelerate PhenoTest BC Kit.
In 2017, we began selling the Accelerate Pheno system in hospitals in the United States, Europe, and the Middle East. Consistent with 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 Pheno system, the Accelerate PhenoTest BC Kit, AST configuration. This test kit runs 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 we 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 a 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.
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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 significantly 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 significant 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
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future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the pandemic 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 six months ended June 30, 2022 compared to three and six months ended June 30, 2021
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 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 six months ended June 30, 2022, total revenues increased primarily as a result of higher sales of Accelerate PhenoTest instruments, Accelerate PhenoTest BC Kits and service contract revenue compared to the three and six months ended June 30, 2021. Accelerate 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 | % | |||||||||||||
For the three and six months ended June 30, 2022, cost of sales increased as compared to the three and six 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 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.
Cost of sales includes non-cash equity-based compensation of $0.2 million and $0.1 million for the three months ended June 30, 2022 and 2021, respectively, and $0.4 million and $0.2 million for the six months ended
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June 30, 2022 and 2021, respectively. Non-cash equity-based compensation increased for the three and six months ended June 30, 2022 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 and relieved to cost of sales when consumable tests are sold to a customer, instruments are sold to a customer, or when instruments under reagent rentals are amortized to cost of sales.
Cost of sales 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, 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.
| 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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Research and development expenses for the three and six months ended June 30, 2022 increased as compared to the three 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 non-cash equity-based compensation expense.
Research and development expenses includes non-cash equity-based compensation of $0.5 million and $1.3 million for the three months ended June 30, 2022 and 2021, respectively, and $0.9 million and $4.1 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.
Research and development 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 to the completion of the Accelerate Arc system and related Accelerate Arc studies, as well as an increase in development and 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 | % | |||||||||||||
Sales, general and administrative expenses for the three and six months ended June 30, 2022 decreased as compared to the three and six months ended June 30, 2021 primarily due to a decrease in non-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 to marketing and promotional activities and professional services.
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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 | ||||||||||||||||||||||
| 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 compared to the three and six 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 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 product development costs related to the Accelerate Arc and the next generation AST program, and increases to sales, general and administrative expenses related to marketing and promotional activities and professional services, as discussed above.
This loss and further losses are anticipated and was the result of our continued investments in sales and marketing, key research and development personnel, related costs associated with product development, and commercialization of the Company’s products.
| Three Months Ended 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) | % | |||||||||||||
For the three and six months ended June 30, 2022 the Company incurred other income, net compared to other 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 six 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 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 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 | |||||||||||||||
NM 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 in the U.S. and other foreign jurisdictions.
Capital Resources and Liquidity
Our primary sources of liquidity have been from sales of shares of our equity securities, the issuance of our convertible notes and cash from operations. As of June 30, 2022, the Company had $36.8 million in cash and cash equivalents and investments, a decrease of $26.8 million from $63.6 million at December 31, 2021. The primary reason for the decrease was due to cash used in operations during the period.
As of June 30, 2022, management believes current cash balances and probable future cash proceeds will be sufficient to fund our capital and liquidity needs for the next twelve months. Future cash proceeds include a contracted equity offering, collection of accounts receivables and future lease payments from already contracted customers and other probable events that will be realized into cash. Management also maintains plans to continue to fund the operations of the Company and to achieve self-sustaining operations upon the realization of its sales generation and cost containment strategies beyond the next twelve months.
Our primary use of capital has been for the development and commercialization of the Accelerate 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 by revenue, grants 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.
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As of June 30, 2022, our material cash requirements were as follows:
| 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.
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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
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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 June 30, 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for a smaller reporting company.
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 defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of June 30, 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
There was no change in the Company’s internal 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 materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 material adverse effect on our results of operations or financial condition.
Item 1A. Risk Factors
In addition to the other information set forth in this Form 10-Q, you should carefully consider the risks discussed in the section entitled “Risk Factors” in the 2021 10-K. The risks described in our 2021 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, results of operations, cash flows and financial position.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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.
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Item 6. Exhibits
| Exhibit No. | Description | Filing Information | ||||||
| 3.1 | Incorporated by reference to Appendix B to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on November 13, 2012 | |||||||
| 3.1.1 | Incorporated by reference to Exhibit A to the Registrant’s Definitive Information Statement on Schedule 14C filed on July 12, 2013 | |||||||
| 3.1.2 | 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 3.1 to the Registrant’s Current Report on Form 8-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 | |||||||
| 31.2 | Filed herewith | |||||||
| 32 | Furnished herewith | |||||||
| 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.SCH | Inline XBRL Taxonomy Extension Schema Document | Filed herewith | ||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | ||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | ||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | ||||||
| 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 | ||||||
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SIGNATURES
Pursuant to the requirements 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) | |||||
| 8/15/20222 | /s/ Steve Reichling | ||||
| Steve Reichling Chief Financial Officer | |||||
| (Principal Financial and Accounting Officer) | |||||
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