ACCELERATE DIAGNOSTICS, INC. 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 ofAccelerate 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; 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. 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; 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 theU.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 endedDecember 31, 2021 (the "2021 10-K") and in the Company's subsequent filings with theSEC . 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 forward-looking statements will be realized. Any forward-looking statements made by us in this 34 --------------------------------------------------------------------------------
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 theU.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. OnJune 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. OnFebruary 23, 2017 , theU.S. Food and Drug Administration ("FDA") granted our de novo classification request to market our Accelerate Pheno system and Accelerate PhenoTest BC Kit. In 2017, we began selling the Accelerate Pheno system in hospitals inthe United States ,Europe , and theMiddle 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. InJuly 2021 , we launched our second test for use on the Accelerate Pheno system, the PhenoTest BC Kit, AST configuration. This test kit runs antibiotic susceptibility testing following the input of an ID result from another system or methodology. InAugust 2021 , we announced that this new AST only configuration had been CE marked for use inEurope . We believe this new AST only configuration may be attractive to prospective customerswho 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 OnMarch 28, 2022 , we announced the launch 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. We believe the Accelerate Arc system and BC Kit to be a complementary offering to our recently launched PhenoTest BC kit enabling a rapid ID leveraging an existing MALDI system and rapid AST through Pheno. 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 addition of new AST content to our Accelerate Pheno system, additional applications for the Accelerate Arc system, and a next generation rapid susceptibility system with lower costs, higher through-put, and capable of testing a broader set of sample types.
COVID-19 and Supply Chain Impacts Update
In late 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced 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. New cases and hospitalizations have 35 -------------------------------------------------------------------------------- risen and fallen throughout the course of this pandemic. More recently, the emergence and spread of new variants of COVID-19, such as the Delta and Omicron variants, that are significantly more contagious than previous strains led many government authorities and businesses to reimplement prior restrictions in an effort to lessen the spread of COVID-19 and its variants. While some of these restrictions have begun to be lifted, 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 emergence of COVID-19 variants, including the Delta and Omicron 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. The reduced sales and implementations caused by the COVID-19 pandemic lowered our realized and expected revenue growth for 2020 and 2021. Many of the detrimental effects of the pandemic on our business discussed above began to ease in the latter half of the first quarter of 2022. 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 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 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 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 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 36 -------------------------------------------------------------------------------- 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 months ended
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 March 31,
(in thousands)
2022 2021 $ Change % Change
Net sales $ 2,958 $ 2,518 $ 440 17 %
For the three months ended March 31, 2022 , total revenues increased primarily as
a result of higher sales of Accelerate PhenoTest BC Kits, service contract
revenue and Accelerate PhenoTest instruments compared to the three months ended
March 31, 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 March 31,
(in thousands)
2022 2021 $ Change % Change
Cost of sales $ 2,156 $ 1,621 $ 535 33 %Non-cash equity-based compensation as a component of cost of sales
175 101 74 73 %
Cost of sales less non-cash equity-based compensation
30 %
For the three months ended March 31, 2022 , cost of sales increased as compared
to the three months ended March 31, 2021 as a result of higher Accelerate
PhenoTest BC Kit sales and increases to our cost of manufacturing, and other
factors.
Cost of sales includes non-cash equity-based compensation of $0.2 million and
$0.1 million for the three months ended March 31, 2022 and 2021, respectively.
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. Non-cash equity-based compensation increased for the three months ended
March 31, 2022 when compared to the three months ended March 31, 2021 , due to
increased inventory turnover as net sales increased.
37
--------------------------------------------------------------------------------
Three Months Ended March 31,
(in thousands)
2022 2021 $ Change % Change
Gross profit $ 802 $ 897 $ (95) (11) %Non-cash equity-based compensation as a component of gross profit
175 101 74 73 %
Gross profit less non-cash equity-based compensation
(2) %
For the three months ended
Three Months Ended
(in thousands)
2022 2021 $ Change % Change
Research and development $ 6,024 $ 6,895 $ (871) (13) %Non-cash equity-based compensation as a component of research and development
362 2,746 (2,384) (87) %
Research and development less non-cash equity-based
compensation $ 5,662 $ 4,149 $ 1,513 36 %
Research and development expenses for the three months ended March 31, 2022
decreased due to the decrease in non-cash equity-based compensation expense,
partially offset by increases in costs related to product development. Research
and development expenses include non-cash equity-based compensation of $0.4
million and $2.7 million for the three months ended March 31, 2022 and 2021,
respectively. The decrease in non-cash equity-based compensation expense was the
result of a decrease in the fair value of awards. 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 increased compared to the three months ended March 31, 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 March 31,
(in thousands)
2022 2021 $ Change % Change
Sales, general and administrative $ 10,673 $ 14,029 $ (3,356) (24) %
Non-cash equity-based compensation as a component of sales, general and administrative
2,442 5,992 (3,550) (59) %
Sales, general and administrative less non-cash
equity-based compensation $ 8,231 $ 8,037 $ 194 2 %
Sales, general and administrative expenses for the three months ended March 31,
2022 decreased as compared to the three months ended March 31, 2021 due to a
decrease in non-cash equity-based compensation expense. Sales, general and
administrative expenses include non-cash equity-based compensation of $2.4
million and $6.0 million for the three months ended March 31, 2022 and 2021,
respectively. The decrease in non-cash equity-based compensation expense was the
result of a decrease in fair value of awards. The Company records the fair value
of RSUs based on the published closing market price on the day before grant. For
the three months ended March 31, 2022 , sales, general and administrative
expenses less non-cash equity-based compensation was consistent with the prior
year.
38
--------------------------------------------------------------------------------
Three Months Ended March 31,
(in thousands)
2022 2021 $ Change % Change
Loss from operations $ (15,895) $ (20,027) $ 4,132 (21) %Non-cash equity-based compensation as a component of loss from operations
2,979 8,839 $ (5,860) (66) %
Loss from operations less non-cash equity-based
compensation $ (12,916) $ (11,188) $ (1,728) 15 %
For the three months ended March 31, 2022 , our loss from operations decreased as
compared to the three months ended March 31, 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.
The Company records the fair value of RSUs based on the published closing market
price on the day before grant. For the three months ended March 31, 2022 , loss
from operations less non-cash equity-based compensation increased due to the
increases in product development and costs related to Accelerate Arc studies
described 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 March 31,
(in thousands)
2022 2021 $ Change % Change
Total other income (expense), net
For the three months ended
OnMarch 21, 2022 the Obligation to Exchange the$14.0 million of Notes has been extinguished and 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 are 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. OnMarch 21, 2022 , the New Notes were determined to have a fair value of$11.5 million . The fair value of the New Notes was determined using a common share price of$1.86 per share, applied using the settlement method described above. The original carrying value of the Notes was$14.0 million which resulted in a gain on extinguishment of$2.5 million , which was recorded as a gain on extinguishment during the three months endedMarch 31, 2022 . Three Months Ended March 31, (in thousands) 2022 2021 $ Change % Change Provision for income taxes $ - $ - $ - NM
NM indicates percentage is not meaningful
For the three months endedMarch 31, 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 theU.S. and other foreign jurisdictions. 39 --------------------------------------------------------------------------------
Capital Resources and Liquidity
Our primary sources of liquidity has been from sales of shares of our equity securities, the issuance of our convertible notes and cash from operations. As ofMarch 31, 2022 , the Company had$50.4 million in cash and cash equivalents and investments, a decrease of$13.2 million from$63.6 million atDecember 31, 2021 . The primary reason for the decrease was due to cash used in operations during the period.
The Company is subject to lease agreements. The future minimum lease payments under these lease agreements are included in Part I, Item 1, Note 14, Leases.
As ofMarch 31, 2022 , 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 development and commercialization of the Accelerate Pheno system and development of complementary 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. Our current outstanding convertible debt balance can be settled in shares or cash at the terms stipulated in the note or refinanced at terms mutually agreed upon with the bond holders. 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. Payments due by Period (in thousands) Material Cash Requirements Total 2022 2023 2024 2025 2026 Operating lease obligations$ 3,267 $ 649 $ 968 $ 1,055 $ 595 $ - Purchase obligation(1) - - - - - - Finance leases(2) 240 60 80 80 20 - Long term debt 82 82 - - - - Deferred compensation 845 - - - 406 439 Convertible notes(3) 118,750 - 118,750 - - - Convertible notes interest 2,968 1,484 1,484 - - - Total$ 126,152 $ 2,275 $ 121,282 $ 1,135 $ 1,021 $ 439 (1) DuringApril 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 5 years to take delivery of purchased items. This increase in purchase obligation is not reflected in the balance provided above. (2) The Company entered into a finance lease agreement with one lessor duringApril 2022 . The finance lease obligation is$2.5 million , with monthly payment terms and maturities becoming due through 2025. This increase in finance leases is not reflected in the balance provided above. (3) As described in Part I, Item 1, Note 10, Convertible Notes, the closing of the Exchange Transaction is expected to occur in eight tranches with the first closing having occurred onMarch 29, 2022 and the remaining seven tranches closing after the balance sheet date. The settlement of the remaining seven tranches will result in an exchange of an additional$12.3 million of principal. After giving effect for the exchange, the total outstanding principal amount would be$106.5 million . The reduction in principal is not reflected in the convertible notes balance provided above. 40
--------------------------------------------------------------------------------
© Edgar Online, source
