ACCELERATE DIAGNOSTICS, INC.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") summarizes our change in fiscal year financial
condition, results of operations, recent developments, the significant factors
affecting our results of operations, capital resources and liquidity,
off-balance sheet arrangements, and contractual obligations, and discusses
recent accounting pronouncements and our critical accounting policies and
estimates. You should read the following discussion and analysis together with
our financial statements, including the related notes, which are included in
this Form 10-K. Certain information contained in the discussion and analysis set
forth below and elsewhere in this report, including information with respect to
our plans and strategy for our business and related financing, includes
forward-looking statements that involve risks and uncertainties. See Part I,
Item 1A, Risk Factors of this Form 10-K for a discussion of important factors
that could cause actual results to differ materially from the results described
in or implied by the forward-looking statements in this report.
COVID-19 and Supply Chain Impacts Update
In late 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced inWuhan, China , and spread globally. InMarch 2020 , theWorld 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. More recently, the emergence and spread of COVID-19 variants, such as the Delta and Omicron variants, that are significantly more contagious than previous strains have led many government authorities and businesses to reimplement prior restrictions in an effort to lessen the spread of COVID-19 and its variants. 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 44 -------------------------------------------------------------------------------- effects have significantly impacted our business and results of operations, starting in the first quarter of 2020 and continuing through 2021. 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. More recently, 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 sales and implementations caused by the COVID-19 pandemic lowered our realized and expected revenue growth for 2020 and 2021.
The emergence of COVID-19 variants, vaccine hesitancy and the prevalence of breakthrough cases of infection among fully vaccinated people adds additional 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 ourTucson, Arizona headquarters under the variousState 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 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 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 consumable test 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 Strategies-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 this Form 10-K for additional information. Additionally, the Company received loan proceeds of approximately$4.8 million under the Paycheck Protection Program ("PPP") established under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. DuringJanuary 2021 , the Company submitted its application for forgiveness to the lender, and onJuly 15, 2021 , theSmall Business Administration ("SBA") informed the Company of its full forgiveness in the amount of$4.8 million . For additional information about the loan, refer to Part II, Item 8, Note 10, Long-Term Debt of this Form 10-K. We continue to monitor the evolving impacts to our business caused by the COVID-19 pandemic. We may take further actions required by governmental authorities or that we determine are prudent to support the well-being of our employees, customers, suppliers, business partners and others. The degree to which the COVID-19 pandemic ultimately impacts our business, results of operations, cash flows and financial position will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the pandemic and its severity; the emergence and severity of its variants; 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 Part I, Item 1A of this Form 10-K for additional risks we face due to the COVID-19 pandemic.
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Changes in Results of Operations: Comparison of fiscal years ended
The Company has provided enhanced information in a tabular format which presents
some of the captions presented on the statement of operations, less inventory
write-downs and 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 inventory write-downs and 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.
December 31, December 31,
(in thousands) (in thousands)
2021 2020 $ Change % Change 2020
2019 $ Change % Change
Net sales
During the year endedDecember 31, 2021 , total revenues increased primarily as a result of higher sales of Accelerate PhenoTest BC Kits and service contract revenue compared to the year endedDecember 31, 2020 . 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. During the year endedDecember 31, 2020 , total revenues increased as a result of higher sales of Accelerate PhenoTest BC Kits and instruments compared to the year endedDecember 31, 2019 . Accelerate PhenoTest BC Kit revenue increased as customers completed their instrument verifications and began purchasing kits. In addition, the Company recorded increased revenue in connection with sales-type leases of Accelerate PhenoTest Systems during the year endedDecember 31, 2020 when compared to the prior period. December 31, December 31, (in thousands) (in thousands) 2021 2020 $ Change % Change
2020 2019 $ Change % Change Total cost of sales 12,163 6,706 5,457
81 % 6,706 4,897 1,809 37 %
Inventory write-down 4,500 - 4,500 100 % - - - 100 %
Non-cash equity-based
compensation as a
component of cost of
sales 325 351 (26) (7) % 351 277 74 27 %
Total cost of sales
less inventory
write-down and non-cash
equity-based
compensation $ 7,338 $ 6,355 $ 983 15 % $ 6,355 $ 4,620 $ 1,735 38 %
For the years ended
For the year endedDecember 31, 2021 , total cost of sales included the components of cost of sales of products and services of$7.7 million , and a inventory write-down of$4.5 million which resulted in total cost of sales of$12.2 million . During the year endedDecember 31, 2021 , total cost of sales less inventory write-downs and non-cash equity based compensation increased as a result of an increase in sales of Accelerate PhenoTest BC Kit revenue, increases to our cost of manufacturing, and other factors compared to the year endedDecember 31, 2020 . During the year endedDecember 31, 2020 , total cost of sales less non-cash equity based compensation increased as a result of an increase in sales and sales-type leases of Accelerate Pheno systems and Accelerate PhenoTest BC Kits compared to the year endedDecember 31, 2019 . This increase was primarily driven by an increase in Accelerate PhenoTest BC Kits sales. During the year endedDecember 31, 2021 , the Company took charges to cost of sales for inventory provisions primarily related to the write-down of excess quantities of instrument raw materials and work in process, whose inventory levels were higher than our updated forecasts of future demand for those products. Inventory 46 --------------------------------------------------------------------------------
provisions totaled
Cost of sales includes non-cash equity-based compensation of$0.3 million ,$0.4 million and$0.3 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. The period over period changes were not considered meaningful. 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 are amortized to cost of sales. December 31, December 31, (in thousands) (in thousands) 2021 2020 $ Change % Change
2020 2019 $ Change % Change
Gross (loss) profit
(109) % $ 4,459 $ 4,400 $ 59 1 %
Inventory write-down $ 4,500 $ - $ 4,500 100 % $ - $ - $ - 100 %
Non-cash equity-based
compensation as a
component of gross
(loss) profit 325 351 (26) (7) % 351 277 74 27 %
Gross (loss) profit
less inventory
write-down and non-cash
equity based
compensation $ 4,444 $ 4,810 $ (366) (8) % $ 4,810 $ 4,677 $ 133 3 %
During the year ended
Gross (loss) profit less inventory write-downs and non-cash equity based compensation decreased during the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , primarily due to increases in costs to manufacture consumables due to pandemic-related inflationary factors and a decrease in our average unit sales price period over period. During the year endedDecember 31, 2020 , gross profit increased as a result of an increase in sales and sales-type leases of Accelerate Pheno systems and Accelerate PhenoTest BC Kits compared to the year endedDecember 31, 2019 . This increase was primarily driven by an increase in Accelerate PhenoTest BC Kits sales. Gross profit increased at a slower rate than the increase in sales due to higher revenue from sales-type leases of Accelerate PhenoTest systems. Gross profit on sales-type leases is generally lower than gross profit from sales of Accelerate PhenoTest systems sold direct to customers. Inventory without a cost basis was sold to customers for the years endedDecember 31, 2021 , 2020 and 2019. Pre-launch inventory previously not capitalized and expensed in a previous year for the years endedDecember 31, 2021 , 2020 and 2019 was$0.2 million ,$0.1 million and$0.5 million , respectively. December 31, December 31, (in thousands) (in thousands) 2021 2020 $ Change % Change 2020 2019 $ Change % Change Research and development$ 21,943 $ 21,255 $ 688 3 %$ 21,255 $ 25,345 $ (4,090) (16) % Non-cash equity-based compensation as a component of research and development 4,102 4,035 67 2 % 4,035 4,115 (80) (2) % Research and development less non-cash equity-based compensation$ 17,841 $ 17,220 $ 621 4 %$ 17,220 $ 21,230 $ (4,010) (19) % Research and development expenses for the year endedDecember 31, 2021 increased as compared to the year endedDecember 31, 2020 . The increase was primarily the result of an increase in costs related to the completion of the Accelerate Arc module and associated BC kit, and development and contracted services used to 47 --------------------------------------------------------------------------------
develop our next generation AST platform. This increase was partially offset by decreases in employee related expenses and engineering supplies.
Research and development expenses for the year endedDecember 31, 2020 decreased as compared to the year endedDecember 31, 2019 . The decrease was the result of a decrease in external studies spend and other cost containment measures. Research and development expenses include non-cash equity-based compensation of$4.1 million ,$4.0 million and$4.1 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. The period over period changes were not considered meaningful. December 31, December 31, (in thousands) (in thousands) 2021 2020 $ Change % Change 2020 2019 $ Change % Change Sales, general and administrative$ 49,236 $ 46,904 $ 2,332 5 %$ 46,904 $ 51,886 $ (4,982) (10) % Non-cash equity-based compensation as a component of sales, general and administrative 17,620 12,078 5,542 46 % 12,078 8,226 3,852 47 % Sales, general and administrative less non-cash equity-based compensation$ 31,616 $ 34,826 $ (3,210) (9) %$ 34,826 $ 43,660 $ (8,834) (20) % Sales, general and administrative expense for the year endedDecember 31, 2021 increased as compared to the year endedDecember 31, 2020 primarily due to increases in non-cash equity-based compensation expense resulting from an increased number of RSUs granted compared to the prior year period. For the year endedDecember 31, 2021 , sales, general and administrative expenses less non-cash equity-based compensation decreased. This decrease is primarily the result of the COVID-19 pandemic, as hospitals have limited access to their facilities to primarily focus on COVID-19 initiatives. These circumstances resulted in decreased expenses associated with travel, trade shows, and instrument demonstration expenses. In addition, cost containment initiatives implemented in the prior year continued to realize lower expenses in areas such as services and marketing. Sales, general and administrative expenses for the year endedDecember 31, 2020 decreased as compared to the year endedDecember 31, 2019 . This decrease is primarily the result of the COVID-19 pandemic, as hospitals have limited access to their facilities to primarily focus on COVID-19 initiatives. These circumstances resulted in decreased expenses associated with travel, trade shows, and instrument demonstration expenses. In addition management also implemented additional cost containment initiatives to reduce other expenses such as services and marketing expenses. Sales, general and administrative expenses include non-cash equity-based compensation of$17.6 million ,$12.1 million and$8.2 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. The increase of expense for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 was primarily the result of larger stock option and stock awards granted to employees in the current year period. The increase of expense for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 was primarily the result of larger stock option and stock awards granted to employees period over period. 48
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December 31, December 31,
(in thousands) (in thousands)
2021 2020 $ Change % Change 2020 2019 $ Change % Change
Loss from operations $ (71,560) $ (63,700) $ (7,860) 12 % $ (63,700) $ (72,831) $ 9,131 (13) %
Inventory write-down 4,500 - $ 4,500 100 % - - - 100 %
Non-cash equity-based
compensation as a
component of loss from
operations 22,047 16,464 $ 5,583 34 % 16,464 12,618 3,846 30 %
Loss from operations
less inventory
write-down and non-cash
equity based
compensation $ (45,013) $ (47,236) $ 2,223 (5) % $ (47,236) $ (60,213) $ 12,977 (22) %
During the year ended December 31, 2021 , our loss from operations increased as
compared to the year ended December 31, 2020 primarily due to higher non-cash
equity-based compensation expense, inventory provisions related to write-downs,
which was partially offset by higher revenues compared to the prior year period.
During the year ended December 31, 2021 , loss from operations less inventory
write-downs and non-cash equity-based compensation decreased due to the
continued benefit of cost cutting measures which started in 2020 and continued
through 2021.
During the year ended December 31, 2020 , our loss from operations decreased
compared to the year ended December 31, 2019 . This decrease was primarily the
result of a decrease in research and development expenses, and sales, general
and administrative expenses, combined with an increase in net sales as described
above.
Loss from operations includes non-cash equity-based compensation expense of
$22.0 million , $16.5 million and $12.6 million for the years ended December 31,
2021 , 2020 and 2019, respectively. The increase of expense for the year ended
December 31, 2021 as compared to the year ended December 31, 2020 was primarily
the result of larger stock option and stock awards granted to employees in the
current year period. The increase of expense for the year ended December 31,
2020 as compared to the year ended December 31, 2019 was primarily the result of
larger stock option and stock awards granted to employees period over period.
This loss and further losses are anticipated and are the result of our continued
investments in sales and marketing, key research and development program costs,
and commercialization of the Company's products.
December 31, December 31,
(in thousands) (in thousands)
2021 2020 $ Change % Change 2020 2019 $ Change % Change
Total other expense, net $ (6,097) $ (14,503) $ 8,406 (58) % $ (14,503) $ (11,585) $ (2,918) 25 %
During the year ended December 31, 2021 , other expense, net, decreased as
compared to the year ended December 31, 2020 due to a gain on extinguishment of
debt in connection with the forgiveness of the Company's PPP loan and the
exchange transactions entered into with respect to a portion of the Company's
outstanding convertible notes during the period. This gain was offset by
interest expense for the current period which was lower in the prior year
period. During the year ended December 31, 2021 , gain on extinguishment of debt
was $9.8 million which was partially offset by interest expense of $15.5
million .
During the year ended December 31, 2020 , other expense, net, increased compared
to the previous year. The increase was primarily the result of increased
interest expense and lower investment income during 2020 as compared to 2019 .
For the years ended December 31, 2020 and 2019 the Company incurred interest
expense of $15.6 million , and $14.3 million , respectively. These amounts were
partially offset by investment income of $0.9 million and $2.8 million for the
years ended December 31, 2020 and 2019, respectively.
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December 31, December 31,
(in thousands) (in thousands)
2021 2020 $ Change % Change 2020 2019 $ Change % Change
(Provision) benefit for
income taxes $ (45) $ (5) $ (40) 800 % $ (5) $ 111 $ (116) (105) %
For the years ended December 31, 2021 and 2020, the Company was subject to a
small amount of current foreign and US state tax expense. For the year ended
December 31, 2019 , the Company recorded a benefit for income taxes due to an
income tax refund in connection with restructuring a transfer pricing agreement
of a foreign subsidiary.
Capital Resources and Liquidity
Our primary source of liquidity has been from sales of shares of our equity securities, the issuance of our convertible notes and cash from operations. As ofDecember 31, 2021 , the Company had$63.6 million in cash and cash equivalents and marketable securities, a decrease of$4.7 million from$68.3 million atDecember 31, 2020 . The primary reason for the decrease was due to cash used in operations during the period partially offset by the various capital financing activities that occurred during the period.
The Company is subject to Lease Agreements. The future lease obligations under the Lease Agreements are included in Item 8, Note 16, Leases.
As ofDecember 31, 2021 , management believes that current cash balances will be sufficient to fund our capital and liquidity needs for the next twelve months. 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 commercialization and development of the Accelerate Pheno system. We believe our capital requirements will continue to be met with our existing cash balance and those provided under revenue, grants, exercises of stock options and/or additional issuance of equity or debt securities. However, if capital requirements vary materially from those currently planned, we may require additional capital sooner than expected. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to us, if at all. Additional issuances of equity or convertible debt securities will result in dilution to our current common stockholders.
Summary of Cash Flows
The following summarizes selected items in the Company's consolidated statements
of cash flows for years ended
Cash Flow Summary
(in thousands)
2021 2020 2019
Net cash used in operating activities $ (47,323) $ (50,394) $ (64,794)
Net cash provided by investing activities 8,304 13,606 52,811
Net cash provided by financing activities 43,226 11,633 6,823
Cash flows from operating activities
The net cash used in operating activities was
The net cash used in operating activities was$50.4 million and$64.8 million during the years endedDecember 31, 2020 and 2019, respectively. Net cash used in operating activities was primarily the result of net losses offset by equity-based compensation and amortization of debt discount and issuance costs. 50 -------------------------------------------------------------------------------- These losses are the result of continued investments in research and development to further mature the Accelerate Pheno system, develop ancillary products, including the Accelerate Arc system and our next generation AST Pheno system, and sales and marketing, along with other factors.
Cash flows from investing activities
The net cash provided by investing activities was$8.3 million for the year endedDecember 31, 2021 . The Company had maturities of marketable securities of$38.7 million which were offset in part by purchases of marketable securities of$30.1 million . The net cash provided by investing activities was$13.6 million for the year endedDecember 31, 2020 . The Company had maturities of marketable securities of$61.9 million which were offset in part by purchases of marketable securities of$46.9 million . The net cash provided by investing activities was$52.8 million for the year endedDecember 31, 2019 . The Company had maturities of marketable securities of$88.9 million and proceeds from sales of marketable securities of$14.5 million , which were offset in part by purchases of marketable securities of$50.2 million
Cash flows from financing activities
The net cash provided by financing activities was$43.2 million for the year endedDecember 31, 2021 . The Company had proceeds from the issuance of common and preferred shares of$42.9 million as well as proceeds from equity compensation plans of$1.9 million , which were partially offset by other less significant items. The net cash provided by financing activities was$11.6 million for the year endedDecember 31, 2020 , and was primarily comprised of proceeds from equity compensation plans and long-term debt. Proceeds from equity compensation plans was$6.1 million , while the Company received$5.6 million in proceeds from long-term debt,$4.8 million of which consists of proceeds from the PPP loan described below.
The net cash provided by financing activities was
Convertible Notes OnMarch 27, 2018 , the Company issued$150.0 million aggregate principal amount of 2.50% Convertible Senior Notes (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 onMarch 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 onMarch 15 andSeptember 15 of each year with interest payments beginning onSeptember 15, 2018 . Proceeds received from the issuance of the Notes were allocated between long-term debt (the "liability component") and contributed capital (the "equity component"), within the consolidated balance sheet. The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature. During the year endedDecember 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 (the "Exchange Transactions"). During the year endedDecember 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 the Exchange Transactions. After giving effect to such exchanges, the total principal amount of the Notes outstanding as ofDecember 31, 2021 was$120.5 million .
In connection with the offering of the Notes, we entered into a prepaid forward
stock repurchase transaction (the "Prepaid Forward") with a financial
institution. Pursuant to the Prepaid Forward, we used approximately
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million of the proceeds from the offering of the Notes to pay the prepayment amount. The aggregate number of our common stock underlying the Prepaid Forward is approximately 1,858,500 shares (based on the sale price of$24.25 ). The expiration date for the Prepaid Forward isMarch 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 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.
Paycheck Protection Program (PPP) Loan
OnApril 14, 2020 , the Company entered into a promissory note (the "PPP Note") evidencing an unsecured loan in the amount of$4.8 million . The PPP Note was to mature onApril 14, 2025 and bore interest at a rate of 1% per annum. BeginningAugust 14, 2021 , the Company was required to make 45 monthly payments of principal and interest in the amount of$0.1 million . The proceeds from the PPP Note could only be used for payroll costs (including benefits), interest on mortgage obligations, rent, utilities and interest on certain other debt obligations. Pursuant to the terms of the CARES Act and the PPP, the Company could apply to the lender for forgiveness for the amount due on the PPP Note. The amount eligible for forgiveness was based on the amount of loan proceeds used by the Company (during the 24 week period after the lender made the first disbursement of loan proceeds) for the payment of certain covered costs, including payroll costs (including benefits), rent and utilities, subject to certain limitations and reductions in accordance with the CARES Act and the PPP. DuringJanuary 2021 , the Company submitted its application for forgiveness to the lender. DuringJuly 2021 , the SBA informed the Company of its full forgiveness for the entire loan amount plus accrued interest, which was$4.8 million . The SBA's determination of loan forgiveness does not preclude further investigation by the SBA according to its rules and regulations.
Other notes payable
The Company entered into three loan agreements with two capital asset financing companies in 2020. Loan proceeds were$0.8 million , with interest rates ranging from 9.8% to 12.4% and maturities becoming due through 2022. As ofDecember 31, 2021 , the current portion of long-term debt was$0.1 million .
At-The-Market Equity Sales Agreement
OnMay 28, 2021 , the Company entered into a Sales Agreement withWilliam 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 whichWilliam Blair will act as sales agent. Subject to the terms and conditions of the 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 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 Sales Agreement. During the year endedDecember 31, 2021 , the Company sold 2,092,497 shares of common stock under the Sales Agreement for aggregate gross proceeds of$10.9 million .
Other sales of equity securities
OnDecember 24, 2020 , the Company entered into a securities purchase agreement (the "December 2020 Securities Purchase Agreement") with certain purchasers for the issuance and sale by the Company of shares of its common stock. The purchasers were comprised of certain directors and officers of the Company, or entities affiliated or related to such persons. OnSeptember 17, 2021 , the Company entered into a rescission agreement with certain of the purchasers (the "Schuler Purchasers") in order to, among other things, rescind and unwind theDecember 2020 Securities Purchase Agreement for all legal, tax and financial purposes ab initio as if the related transactions, including the issuance and sale of the shares, had never occurred with respect to the Schuler Purchasers and the Company. During the year endedDecember 31, 2021 , the Company issued 201,820 shares of common stock to the other purchasers and received total proceeds of approximately$1.5 million under theDecember 2020 Securities Purchase Agreement after giving effect to the rescission agreement. 52 -------------------------------------------------------------------------------- OnSeptember 22, 2021 , the Company entered into a new securities purchase agreement (the "September 2021 Securities Purchase Agreement") with the Schuler Purchasers for the issuance and sale by the Company of the Company's newly designated Series A Preferred Stock. During the year endedDecember 31, 2021 , the Company issued 3,954,546 shares of Series A Preferred Stock to the Schuler Purchasers and received total proceeds of approximately$30.5 million under theSeptember 2021 Securities Purchase Agreement.
Contractual Obligations
The Company has certain contractual obligations and commercial commitments as
disclosed in Part II, Item 8, Note 15, Commitments and Contingencies that do not
meet the definition of long term debt obligations, capital leases, operating
leases or purchase obligations. The Company has entered into Lease Agreements as
described in Part I, Item 2, Properties and Part II, Item 8, Note 16, Leases.
The Company has entered into Long-Term Debt as described in Part II, Item 8,
Note 10, Long-Term Debt. The Company has entered into the Notes as described
above and in Part II, Item 8, Note 11, Convertible Notes. The future expected
payment obligations under our agreements over the next five years are (in
thousands):
Payments due by Period
(in thousands)
Contractual Obligations Total 2022 2023 2024 2025 2026
Operating lease obligations $ 3,479 $ 856 $ 968 $ 1,055 $ 600 $ -
Long term debt 80 80 - - - -
Deferred compensation 840 - - - 406 434
Convertible notes 120,500 - 120,500 - - -
Convertible notes interest 3,762 3,012 750 - - -
Total $ 128,661 $ 3,948 $ 122,218 $ 1,055 $ 1,006 $ 434 Recent Accounting Pronouncements
A discussion relating to recent accounting pronouncements can be found in Part II, Item 8, Note 2, Summary of Significant Accounting Policies.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in theU.S. ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that are believed to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are more fully described in Note 1 in the Notes to Consolidated Financial Statements, we believe that the following judgments are most critical to aid in fully understanding and evaluating our reported financial results. 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.
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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 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 Part II, Item 8, Note 6, Inventory, for further information and related disclosures.
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 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. For the years endedDecember 31, 2021 and 2020, the Company identified potential impairment indicators related to instruments installed at customer sites under rental agreement that have not yet generated revenue and the length of time from when these instruments are installed to when revenue is initially generated. The Company's evaluation for impairment included consideration of the cash flows of current revenue generating instruments, the length of time to recover the carrying value, the historical rate of returned instruments from customers and the Company's ability to resell or repurpose used instruments. As a result of the Company's evaluation, no impairment charges were recorded atDecember 31, 2021 and 2020.
See Part II, Item 8, Note 7, Property and Equipment, for further information and related disclosures.
Convertible Notes The Company accounts for its convertible debt instruments that may be settled in cash or equity upon conversion, which currently consist of the 2.50% Senior Convertible Notes due 2023 (the "Notes"), by separating the liability and equity components of the instruments in a manner that reflects our nonconvertible debt borrowing rate. The Company determined the carrying amount of the liability component of the Notes by using estimates and assumptions that market participants would use in pricing a debt instrument. These estimates and assumptions are judgmental in nature and could have a significant impact on the determination of the debt component, and the associated non-cash interest expense. The equity component is treated as a discount on the liability component of the Notes, which is amortized over the term of the Notes using the effective interest rate method. Debt issuance costs related to the Notes are allocated to the liability and equity components of the Notes based on their relative values. Debt issuance costs allocated to the liability component are amortized over the life of the Notes as additional non-cash interest expense. Transaction costs allocated to equity are netted with the equity component of the convertible debt instrument in stockholders' deficit.
Extinguishment of Debt
The Company accounts for an extinguishment of debt when it's relieved of it's obligation to pay the debt, or when it is is legally released from being the primary obligor under the liability, either judicially or by the creditor.
In an early extinguishment of debt through exchange for common stock, the reacquisition price of the extinguished debt is determined by the value of the common stock issued or the value of the debt-whichever is 54
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more clearly evident. Gains or losses on extinguishment of debt is determined by comparing the consideration allocated to the liability component to the sum of the carrying value of the liability component, net of the proportionate amounts of unamortized debt discount and remaining unamortized debt issuance costs.
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 year endedDecember 31, 2021 . Leases The Company accounts for leases in accordance with ASC 842, Leases, which was adopted onJanuary 1, 2019 . We determine 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 the Company's 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 the Company's 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.
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Lessee
Operating leases are included in right-of-use ("ROU") assets and operating lease
liabilities within our 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. We elect not to separate the lease components
from the non-lease components for all classes of underlying assets. 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. As of December 31, 2021 and
2020 the Company was not a party to any finance lease arrangements.
The Company's operating leases consist primarily of leased office, factory, and
laboratory space in the U.S. and office space in Europe , have between two and
six-year terms, and typically contain penalizing, early-termination provisions.
Lessor
The Company leases instruments to customers under commercial "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, the 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 and ASC 842, Leases.
Net investment in sales-type leases are included within our 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.
See Part II, Item 8, Note 16, Leases for further information.
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 estimate 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
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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.
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