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," "anticipate," "estimate," or "continue," or variations thereon or comparable terminology, include but are not limited to, statements about the plans and objectives of management for future operations, including plans and objectives relating to the products and future performance of the Company; projections of our future financial performance and demand for our products; the anticipated impacts from the COVID-19 pandemic on the Company, including to our business, results of operations, cash flows and financial position, as well as our future responses to the COVID-19 pandemic; and our plans or expectations with relating to our agreement withAscend Diagnostics Ltd. ("Ascend"). 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 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 COVID-19 pandemic and its ultimate effect on our business, results of operations, cash flows and financial position, as well as our ability (or inability) to execute on our plans to respond to the COVID-19 pandemic. 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, 2020 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, the Company will obtain sufficient capital to commercialize the Accelerate Pheno system and continue development of complementary products, the Company will be able to protect its intellectual property, the Company's ability to respond to technological change, the Company will accurately anticipate market demand for the Company's products and there will be no material adverse change in the Company's operations or business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking statements will be realized. Any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 31 --------------------------------------------------------------------------------
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 Pheno system utilizes genotypic technology to identify ("ID") infectious pathogens and phenotypic technology to conduct antibiotic susceptibility testing ("AST"), which determines whether live bacterial cells are resistant or susceptible to a particular antimicrobial. The Accelerate PhenoTest® BC Kit, which is the first test kit for the system, provides ID and AST results for patients suspected of bacteremia or fungemia, both life-threatening conditions with high morbidity and mortality risk. This information is used to rapidly modify antibiotic therapy to lessen 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 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 of the instruments and the sale or leasing of single use consumable test kits. In 2019 and 2020, based upon our initial experience selling and implementing the Accelerate Pheno system, we implemented initiatives to improve and refine our commercial execution and to re-engineer our product implementation processes. Improving our commercial and implementation capabilities remains an emphasis going forward, along with geographic expansion and product innovation. OnJuly 29, 2020 we signed an exclusive product supply and collaboration agreement with Ascend to commercialize a benchtop MALDI identification platform to complement the Company's expanded product offering plans. We continue our analytical and market evaluations of the Ascend benchtop MALDI identification platform. We have limited experience implementing third-party product commercialization agreements. There are, therefore, uncertainties regarding market demand, market acceptance, supply constraints, FDA authorization, ramp up expenditures, and other factors impacting market penetration.
COVID-19 Update
In late 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced inWuhan, China , which has since spread globally. InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic. Further, the COVID-19 outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place, stay-at-home or total lock-down (or similar) orders and business limitations and shutdowns. For example, theState of Arizona has implemented several orders promoting physical distancing, limiting certain activities, and restricting the operations of certain retail businesses. The COVID-19 pandemic and these measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide, which have significantly impacted our business and results of operations, starting in the first quarter of 2020. For example, this included diminished access to our customers, including hospitals, which has severely limited our ability to sell and, to a lesser degree, implement the Accelerate Pheno systems. Our commercial access to customers has improved in some regions, with access in other regions remaining limited. In addition, in certain months with high rates of COVID-19 hospitalization our Accelerate Pheno kit orders declined as many hospitals curtailed elective surgeries to respond to COVID-19. InMarch 2021 , our Accelerate Pheno kit orders returned to more normal levels after the higher levels of COVID-19 hospitalization during January and February, but could decline again if surges in COVID-19 cases cause hospitals to reduce or prohibit elective surgeries. Furthermore, 32 --------------------------------------------------------------------------------
our expected rate of growth of our 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 reduced sales and implementations caused by the COVID-19 pandemic lowered our realized and expected revenue growth for 2020 and 2021, respectively.
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 currently 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. However, the economic effects of the COVID-19 pandemic remain unpredictable, and we are closely monitoring the ability of all our suppliers to provide us with materials necessary for the manufacture of Accelerate Pheno systems and consumable test kits.
Additionally, the Company received loan proceeds of approximately
We continue to monitor the evolving situation caused by the COVID-19 pandemic, and we may take further actions required by governmental authorities or that we determine are prudent to support the well-being of our employees, customers, suppliers, business partners and others. The degree to which the COVID-19 pandemic ultimately impacts our business, results of operations, cash flows and financial position will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, the level and effectiveness of vaccinations, vaccination hesitancy impeding herd immunity, the emergence of new COVID-19 variants that are more deadly, contagious or vaccination resistant, the financial impact of COVID-19 on hospitals, including their budget priorities, 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 our Annual Report on Form 10-K for the year endedDecember 31, 2020 for additional risks we face due to the COVID-19 pandemic.
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 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)
2021 2020 $ Change % Change
Net sales $ 2,518 $ 2,342 $ 176 8 %
For the three months ended March 31, 2021 , total revenues increased as compared
to the three months ended March 31, 2020 primarily due to increased sales of
Accelerate PhenoTest BC Kits and instruments. Accelerate PhenoTest BC revenue
has increased due to an increase in Accelerate PhenoTest BC Kit revenue
generated by a growing installed base.
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Three Months Ended March 31,
(in thousands)
2021 2020 $ Change % Change
Cost of sales $ 1,621 $ 1,287 $ 334 26 %Non-cash equity-based compensation as a component of cost of sales
101 71 30 42 %
Cost of sales less non-cash equity-based compensation
25 %
For the three months ended March 31, 2021 , cost of sales increased as compared
to the three months ended March 31, 2020 as a result of higher Accelerate
PhenoTest BC Kit 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 customer or depreciation on revenue generating
instruments.
Three Months Ended March 31,
(in thousands)
2021 2020 $ Change % Change
Gross profit $ 897 $ 1,055 $ (158) (15) %Non-cash equity-based compensation as a component of gross profit
101 71 30 42 %
Gross profit less non-cash equity-based compensation
(11) %
For the three months ended
Three Months Ended
(in thousands)
2021 2020 $ Change % Change
Research and development $ 6,895 $ 5,842 $ 1,053 18 %Non-cash equity-based compensation as a component of research and development
2,746 1,123 1,623 145 %
Research and development less non-cash equity-based
compensation $ 4,149 $ 4,719 $ (570) (12) %
Research and development expenses for the three months ended March 31, 2021
increased compared to the three months ended March 31, 2020 . The increase was
primarily the result of an increase in employee non-cash equity-based
compensation expense which was offset in part by other improved internal
efficiencies and reductions in external study fees. This increase in non-cash
equity-based compensation expense was due to a large grant of restricted stock
units and the release of performance based stock awards during the three months
ended March 31, 2021 .
Three Months Ended March 31,
(in thousands)
2021 2020 $ Change % Change
Sales, general and administrative $ 14,029 $ 12,943 $ 1,086 8 %
Non-cash equity-based compensation as a component of sales, general and administrative
5,992 3,005 2,987 99 %
Sales, general and administrative less non-cash
equity-based compensation $ 8,037 $ 9,938 $ (1,901) (19) %
Sales, general and administrative expenses for the three months ended
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equity-based compensation expense which was offset in part by reductions in
ordinary compensation, travel, trade shows and instrument demonstration
expenses. Non-cash equity-based compensation increased for the three months
ended
Three Months Ended March 31,
(in thousands)
2021 2020 $ Change % Change
Loss from operations $ (20,027) $ (17,730) $ (2,297) 13 %Non-cash equity-based compensation as a component of loss from operations
8,839 4,199 $ 4,640 111 %
Loss from operations less non-cash equity-based
compensation $ (11,188) $ (13,531) $ 2,343 (17) %
For the three months ended March 31, 2021 , our loss from operations increased as
compared to the three months ended March 31, 2020 . The increase was primarily
the result of an increase in employee non-cash equity-based compensation expense
offset in part by our continued benefit of cost cutting measures taken during
2020. As discussed above the Company granted larger equity-based awards to
employees during the three months ended March 31, 2021 .
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)
2021 2020 $ Change % Change
Total other expense, net $ (4,212) $ (3,579) $ (633) 18 %
Other expense, net for the three months ended March 31, 2021 increased as
compared to the three months ended March 31, 2020 . The increase was primarily
the result of decreased interest income and increased interest expense for the
three months ended March 31, 2021 .
For the three months ended March 31, 2021 and 2020, the Company incurred
interest expense associated with our convertible notes of $4.1 million and $3.7
million , respectively. These amounts were partially offset by investment income
for the three months ended March 31, 2021 and 2020, respectively.
Three Months Ended March 31,
(in thousands)
2021 2020 $ Change % Change
Provision for income taxes $ - $ - $ - NM
NM indicates percentage is not meaningful
For the three months endedMarch 31, 2021 and 2020, the Company did not carry an income tax provision amount as the Company does not recognize tax benefits from current year tax losses in theU.S. and other foreign jurisdictions. 35 --------------------------------------------------------------------------------
Capital Resources and Liquidity
Our primary source of liquidity has been from sales of shares of common stock, the issuance of our convertible notes and cash from operations. As ofMarch 31, 2021 , the Company had$66.7 million in cash and cash equivalents and investments, a decrease of$1.6 million from$68.3 million atDecember 31, 2020 . The primary reason for the decrease was due to cash used in operations during the period mostly offset by proceeds received from the first tranche closing of the Company's private placement offering of shares of its common stock. For additional information about the private placement offering, refer to Part I, Item 1, Note 17, (Securities Purchase Agreement) in this Form 10-Q.
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.
As of
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, exercises of stock options and/or additional issuance of equity or debt securities. However, if capital requirements vary materially from those currently planned, or if our business is negatively impacted by the COVID-19 pandemic more seriously or for longer than we currently expect, we may require additional capital sooner than expected. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to us, if at all. Additional issuances of equity or convertible debt securities will result in dilution to our current common stockholders.
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