|
| | | | | |
Stock Option Activity |
| Number of Shares | Weighted Average Exercise Price per Share |
Options outstanding December 31, 2016 | 6,857,124 |
| $ | 7.72 |
|
Granted | 1,113,861 |
| 24.49 |
|
Forfeited | (131,167 | ) | 21.41 |
|
Exercised | (384,812 | ) | 9.93 |
|
Expired | (6,422 | ) | 24.45 |
|
Options Outstanding September 30, 2017 | 7,448,584 |
| 9.86 |
|
The table below summarizes the resulting weighted average inputs used to calculate the estimated fair value of options awarded during the periods shown below:
|
| | | | | | |
Black-Scholes Assumptions for Options Granted |
| Three Months Ended |
| September 30, 2017 | September 30, 2016 |
Expected term (in years) | 6.46 |
| 6.46 |
|
Volatility | 74 | % | 89 | % |
Expected dividends | — |
| — |
|
Risk free interest rates | 2.02 | % | 1.30 | % |
Weighted average fair value | $ | 15.74 |
| $ | 15.40 |
|
The following table shows summary information for outstanding options and options that are exercisable (vested) as of September 30, 2017:March 31, 2023:
| | | | | | | | |
| Options Outstanding | Options Exercisable |
Number of options | 5,275,853 | | 4,422,198 | |
Weighted average remaining contractual term (in years) | 4.62 | 4.06 |
Weighted average exercise price | $ | 14.49 | | $ | 15.37 | |
Weighted average fair value | $ | 9.01 | | $ | 9.50 | |
Aggregate intrinsic value (in thousands) | $ | 20 | | $ | — | |
|
| | | | | | |
Stock Option Supplemental Information |
| Options Outstanding | Options Exercisable |
Number of options | 7,448,584 |
| 5,214,464 |
|
Weighted average remaining contractual term (in years) | 6.32 |
| 5.40 |
|
Weighted average exercise price | $ | 9.86 |
| $ | 6.02 |
|
Weighted average fair value | $ | 7.31 |
| $ | 4.51 |
|
Aggregate intrinsic value (in thousands) | $ | 96,074 |
| $ | 86,005 |
|
The following table summarizes restricted stock unitRSU and restricted stock award activity duringfor the nine-month period ending September 30, 2017:three months ended March 31, 2023:
| | | | | | | | |
| Number of Shares | Weighted Average Grant Date Fair Value per Share |
Outstanding January 1, 2023 | 4,355,420 | | $ | 4.29 | |
Granted | 1,833,230 | | 0.62 | |
Forfeited | (695,050) | | 4.30 | |
Released | (2,150,702) | | 1.88 | |
Outstanding March 31, 2023 | 3,342,898 | | $ | 3.82 | |
|
| | | | | |
Restricted Stock Unit (RSU) and Restricted Stock Award (RSA) Activity |
| Number of Shares | Weighted Average Grant Date Fair Value per Share |
RSUs & RSAs Outstanding December 31, 2016 | 40,250 |
| $ | 20.91 |
|
Granted | 1,911 |
| 22.40 |
|
Forfeited | — |
| — |
|
Vested/released | (18,011 | ) | 21.07 |
|
RSUs & RSAs outstanding September 30, 2017 | 24,150 |
| 20.91 |
|
The table below summarizes equity-based compensation expense recognized onfor the Company’s condensed consolidated statements of operationsthree months ended March 31, 2023 and comprehensive loss related2022 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | 2022 | | | |
Cost of sales | $ | 90 | | $ | 175 | | | | |
Research and development | 605 | | 362 | | | | |
Sales, general and administrative | (140) | | 2,442 | | | | |
| $ | 555 | | $ | 2,979 | | | | |
Equity-based compensation expense decreased for the three months ended March 31, 2023 when compared to options is summarized below:
|
| | | | | | | | | | | | |
Equity-Based Compensation Expenses (in thousands) |
| Three Months Ended | Nine Months Ended |
| September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 |
Cost of sales | $ | 22 |
| $ | — |
| $ | 44 |
| $ | — |
|
Research and development | 994 |
| 504 |
| 2,886 |
| 1,168 |
|
Sales, general and administrative | 2,504 |
| 2,166 |
| 8,040 |
| 5,423 |
|
Equity-based compensation expense | $ | 3,520 |
| $ | 2,670 |
| $ | 10,970 |
| $ | 6,591 |
|
As of September 30, 2017, $262,000 and $33,000the three months ended March 31, 2022, primarily due to the reversal of equity-based compensation expense was a componentfrom forfeitures. Employees separating from the Company forfeited an increased number of stock options and RSUs than in the previous period.
The table below summarizes share-based compensation cost capitalized to inventory for the three months ended March 31, 2023 and property and equipment respectively.2022 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | 2022 | | | |
Cost capitalized to inventory | $ | 74 | | $ | 43 | | | | |
As of September 30, 2017,March 31, 2023, unrecognized equity-based compensation costexpense related to unvested stock options and unvested restricted stock unitsRSUs was $16.7$1.2 million and $216,000$3.3 million, respectively. This is expected to be recognized over the years 20172023 through 2022.2027.
Included in Notethe above-noted RSU and restricted stock award outstanding amounts are performance-based RSUs which vest only upon the achievement of certain targets. Performance-based RSUs contingently vest over a period of 1 we implemented ASU 2016-09, Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting3 years, depending on January 1, 2017. Pursuant to this guidance, we made a policy election to account for forfeituresthe nature of the performance goal, and have contractual lives of 10 years. These units were valued in the same manner as they occur rather thanother RSUs, based on an estimated basis and, therefore, equity basedthe published closing market price on the day before the grant date. However, the Company only recognizes stock compensation expense to the extent that the targets are determined to be probable of being achieved, which triggers the vesting of the performance options.
During 2021, the Company granted performance-based RSUs of which 103,299 were outstanding as of March 31, 2023. No activity occurred during the three months ended March 31, 2023, and the targets associated with the performance-based RSUs are not considered probable of being achieved. No share-based compensation cost was recorded for the performance-based RSUs for the three and nine months ended September 30, 2017 has been calculated based on actual forfeitures in our condensed consolidated statements of operationsMarch 31, 2023 and comprehensive loss, rather than our previous approach which was net of estimated forfeitures. Share-based compensation expense for the three and nine months ended September 30, 2016 is recorded net of estimated forfeitures, which were based on historical forfeitures and adjusted to reflect changes in facts and circumstances, if any. This change was accounted for using the modified retrospective transition method. This election resulted in a cumulative-effect adjustment which increased our accumulated deficit and additional paid-in capital by $655,000 for all outstanding awards as of January 1, 2017. We believe this election simplifies several aspects of the accounting for share-based payment transactions.2022.
This new guidance requires that we record excess tax benefits and tax deficiencies related to the settlement of employee stock-based compensation to the income tax expense line item on our condensed consolidated statements of operations and comprehensive loss. The new guidance also states that previously unrecognized excess tax benefits should be recognized on a modified retrospective basis as of the beginning of the annual period of adoption. At January 1, 2017, we recorded approximately $1.5 million of additional deferred tax assets, which are fully offset by a valuation allowance. Accordingly, the adoption of ASU 2016-09 did not result in an adjustment to retained earnings for the cumulative effect of the tax benefit of the stock compensation.
The new guidance also requires excess tax benefits to be classified as an operating activity in the statement of cash flows rather than as a financing activity. Additionally, ASU 2016-09 requires that the minimum tax withholding paid on behalf of employees for share-based awards be classified as a financing activity in the statement of cash flows. Adoption of ASU 2016-09 did not result in any adjustments to prior period disclosures on the condensed consolidated statement of cash flows.
NOTE 15.13. INCOME TAXES
For the ninethree months ended September 30, 2017,March 31, 2023, the Company recorded adid not carry an income tax provision for income taxes of $220,000, which primarily related to a profitableamount as the Company does not recognize tax benefits from current year tax losses in the U.S. and other foreign jurisdiction without any net operating loss carryforwards.jurisdictions. The Company’s tax expense for the ninethree months ended September 30, 2017March 31, 2023 differs from the tax expense computed by applying the U.S. statutory tax rate to its year-to-date pre-tax loss of $47.5$16.8 million, as no tax benefits were recorded for tax losses generated in the U.S. and other foreign jurisdictions.jurisdictions due to the valuation allowance. At September 30, 2017,March 31, 2023, the Company had deferred tax assets primarily related to U.S. federal and state tax loss carryforwards.carryforwards and a deferred tax liability related to amortization of the Notes. The Company provided a full valuation allowance against its net deferred tax assets as future realization of such assets is not more likely than not to occur.
At September 30, 2017, the Company had gross unrecognized tax benefits of $1.1 million. The Company isaccounts for uncertain tax positions pursuant to the recognition and measurement criteria under ASC 740, Income Taxes. For the three months ended March 31, 2023, we did not currently under examination by taxing authorities and doesnote any significant changes to our uncertain tax positions. We do not believe the amount of unrecognizedanticipate significant changes to uncertain tax benefits will significantly increase or decrease overpositions within the next 12 months.
NOTE 16.14. COMMITMENTS
LeasesDuring April 2022, the Company entered into a non-cancellable purchase obligation with a supplier to acquire raw materials for a total commitment of $11.9 million. Under the terms of this agreement the Company has until March 15, 2027 to take delivery of purchased items. This commitment was entered into to ensure proper material quantities to develop and commercialize our next generation AST platform.
As of March 31, 2023, the commitment remains $11.9 million as the Company has not taken delivery of any inventory.
NOTE 15. LEASES
The Company has entered into lease agreements, lease amendments, and lease extensionsfollowing presents supplemental information related to our leases in which we are the last of which expires in 2022. Total rent expense, including common area charges was $308,000 and $286,000lessee for the three months ended September 30, 2017March 31, 2023 and 2016, respectively, and for the nine months ended September 30, 2017 and 2016 was $933,000 and $826,000, respectively. Future minimum lease payments under operating lease agreements are as follows:2022 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | 2022 | | | |
Cash paid for amounts included in lease liabilities: | | | | | |
Operating cash flows from operating leases | $ | 226 | | $ | 205 | | | | |
Financing cash flows from finance leases | $ | 77 | | $ | — | | | | |
ROU assets obtained in exchange for lease obligations: | | | | | |
Operating leases | $ | — | | $ | — | | | | |
Finance leases | $ | — | | $ | 240 | | | | |
Lease Cost: | | | | | |
Operating leases | $ | 249 | | $ | 305 | | | | |
Finance leases | $ | 261 | | $ | 7 | | | | |
Short-term leases | $ | 24 | | $ | 20 | | | | |
|
| | | |
Operating Lease Obligations (in thousands) |
Year ending December 31: | |
2017 | $ | 264 |
|
2018 | 1,022 |
|
2019 | 180 |
|
2020 | 65 |
|
2021 | 30 |
|
Thereafter | 4 |
|
Total operating lease obligations | $ | 1,565 |
|
Clinical Trial Agreements
The Company has entered into master agreements with clinical trial sitesweighted average remaining lease term on our operating leases is 2.3 years. The weighted average discount rate on those leases is 7.1%. The weighted average remaining lease term on our finance leases is 1.9 years. The weighted average discount rate on those leases is 6.2%.
The following presents maturities of lease liabilities in which we typically payare the lessee as of March 31, 2023 (in thousands):
| | | | | | | | |
| Operating | Finance |
Remainder of 2023 | $ | 741 | | $ | 923 | |
2024 | 1,051 | | 976 | |
2025 | 583 | | 193 | |
2026 | — | | — | |
2027 | — | | — | |
Thereafter | — | | — | |
Total lease payments | 2,375 | | 2,092 | |
Less imputed interest | (185) | | (273) | |
| $ | 2,190 | | $ | 1,819 | |
The net investment in sales-type leases, where we are the lessor, is a set amount for start-up costscomponent of other current assets and then pay for work performed. These agreements typically indemnify the clinical trial sites from any and all losses arising from third party claims as a result of the Company’s negligence, willful misconduct or misrepresentation. The Company incurred clinical trial expense of $0 and $354,000 for the three months ended September 30, 2017 and 2016, respectively, and $27,000 and $1.8 million for the nine months ended September 30, 2017 and 2016, respectively. The expense incurred as part of the clinical trial is includedother non-current assets in research and development on theour condensed consolidated statementsbalance sheet. As of operations and comprehensive loss.March 31, 2023, the total net investment in these leases was $2.4 million. The following presents maturities of lease receivables under sales-type leases as of March 31, 2023 (in thousands):
Legal Matters | | | | | |
Remainder of 2023 | $ | 1,082 | |
2024 | 867 | |
2025 | 280 | |
2026 | 130 | |
2027 | 43 | |
Thereafter | — | |
Total undiscounted cash flows | 2,402 | |
Less imputed interest | — | |
Present value of lease payments | $ | 2,402 | |
On March 19, 2015, a putative securities class action lawsuit was filed against Accelerate Diagnostics, Inc., Lawrence Mehren, and Steve Reichling, Rapp v. Accelerate Diagnostics, Inc., et al., U.S. District Court, District of Arizona, 2:2015-cv-00504. The complaint alleges that we violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, by making false or misleading statements about our Accelerate Pheno™ system, formerly called the BACcel System. Plaintiff purports to bring the action on behalf of a class of persons who purchased or otherwise acquired our stock between March 7, 2014, and February 17, 2015. On June 9, 2015, Julia Chang was appointed Lead Plaintiff of the purported class. On June 23, 2015, Plaintiff filed an amended complaint alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, by making false or misleading statements or omissions about our ID/AST System and by allegedly employing schemes to defraud. Plaintiff sought certification of the action as a class action, compensatory damages for the class in an unspecified amount, legal fees and costs, and such other relief as the court may order. Defendants moved to dismiss the amended complaint on July 21, 2015. The Court granted the motion and dismissed the case with prejudice on January 28, 2016. On February 26, 2016, Plaintiff filed a notice of appeal with the United States Court of Appeals for the Ninth Circuit, which challenges the dismissal of the amended complaint. Chang v. Accelerate Diagnostics, Inc., et al., No. 2:15-CV-00504-SPL (9th Cir. filed Feb. 26, 2016). On September 13, 2017, Plaintiff voluntarily dismissed the appeal and the case has been dismissed with prejudice.
NOTE 17. SEGMENTS16. GEOGRAPHIC AND REVENUE DISAGGREGATION
The Company operates as one operating segment. Operating segments are defined as componentsSales to customers outside the U.S. represented 14% and 15% for the three months ended March 31, 2023 and 2022, respectively.
As of March 31, 2023 and December 31, 2022, balances due from foreign customers, in U.S. dollars, were $0.7 million and $0.6 million, respectively.
The following presents total net sales by geographic territory for the three months ended March 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | 2022 | | | |
Domestic | $ | 2,416 | | $ | 2,517 | | | | |
Foreign | 396 | | 441 | | | | |
| $ | 2,812 | | $ | 2,958 | | | | |
The following presents total net sales by line of business for the three months ended March 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | 2022 | | | |
Accelerate Pheno revenue | $ | 2,812 | | $ | 2,918 | | | | |
Other revenue | — | | 40 | | | | |
| $ | 2,812 | | $ | 2,958 | | | | |
The following presents total net sales by products and services for the three months ended March 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | 2022 | | | |
Products | $ | 2,444 | | $ | 2,546 | | | | |
Services | 368 | | 412 | | | | |
| $ | 2,812 | | $ | 2,958 | | | | |
Lease revenue included in net sales was $0.2 million and $0.5 million for the three months ended March 31, 2023 and 2022, respectively.
The following presents property and equipment, net by geographic territory (in thousands):
| | | | | | | | |
| March 31, | December 31, |
| 2023 | 2022 |
Domestic | $ | 2,872 | | $ | 3,120 | |
Foreign | 344 | | 358 | |
| $ | 3,216 | | $ | 3,478 | |
NOTE 17. STOCKHOLDERS' EQUITY
March 2022 Exchange Transaction
On March 29, 2022, the holder of the New Exchange Notes legally exchanged approximately $1.8 million in aggregate principal amount of New Exchange Notes held by the holder for 849,713 shares of the Company’s common stock pursuant to the March 2022 Exchange Agreement. Using the closing stock price on March 29, 2022 of $1.48, the 849,713 shares of the Company's common stock were determined to have a value of $1.3 million, which was recorded to contributed capital during the three months ended March 31, 2022. See Note 9, Convertible Notes for additional information.
March 2022 Securities Purchase Agreement
On March 24, 2022, the Company entered into a securities purchase agreement (the “March 2022 Securities Purchase Agreement”) with the Schuler Trust for the issuance and sale by the Company of an enterpriseaggregate of 2,439,024 shares of the Company’s common stock to the Schuler Trust in an offering (the “Private Placement”) exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. Pursuant to the March 2022 Securities Purchase Agreement, the Schuler Trust agreed to purchase the shares at a purchase price (determined in accordance with Nasdaq rules relating to the “market value” of the Company’s common stock) of $1.64 per share, for an aggregate purchase price of $4.0 million. The Company and the Schuler Trust agreed to extend the closing date of the Private Placement from March 24, 2023 to April 20, 2023, which separate financialwas further extended in accordance with the terms of the Restructuring Support Agreement. See Note 19, Subsequent Events for additional information is evaluated regularlyabout the contemplated restructuring of the Company’s capital structure, including the Notes, the Secured Note and the Company’s Series A Preferred Stock, as well as a contemplated amendment to the March 2022 Securities Purchase Agreement , in connection with the Restructuring Support Agreement.
NOTE 18. RELATED-PARTY TRANSACTIONS
March 2022 Securities Purchase Agreement
As discussed in Note 17, Stockholders' Equity, on March 24, 2022, the Company entered into the March 2022 Securities Purchase Agreement with the Schuler Trust for the issuance and sale by the chief operating decision maker, whoCompany of 2,439,024 shares of the Company’s common stock. Jack Schuler serves as a member of the Company’s board of directors and is the chief executive officer,sole trustee of the Schuler Trust. Pursuant to the March 2022 Securities Purchase Agreement, the Schuler Trust agreed to purchase the shares at a purchase price of $1.64 per share, for an aggregate purchase price of $4.0 million.
August 2022 Exchange Transaction
As discussed in deciding how to allocate resources and assessing performance. The Company’s business operates in one operating segment becauseNote 10, Long-Term Debt Related-Party, on August 15, 2022, the Company entered into the August 2022 Exchange Agreement with the Schuler Trust. Jack Schuler serves as a member of the Company’s chief operating decision maker evaluatesboard of directors and is the sole trustee of the Schuler Trust. Under the terms of the August 2022 Exchange Agreement, the Schuler Trust agreed to exchange with the Company $49.9 million in aggregate principal amount of Notes held by it for the Secured Note in an aggregate principal amount of $34.9 million and the Warrant. The Secured Note’s carrying amount is $17.4 million and accrued interest expense is $1.1 million. The Secured Note’s interest is payable at the option of the Company in the same form as the principal, at the earlier of (i) any prepayment of principal and (ii) maturity. It is the Company’s intention to pay all interest at maturity. No principal or accrued interest under the Secured Note have been paid or shares issued as of March 31, 2023.
See Note 19, Subsequent Events for additional information about the contemplated restructuring of the Company’s capital structure, including the Notes, the Secured Note and the Company’s Series A Preferred Stock, as well as a contemplated amendment to the March 2022 Securities Purchase Agreement, in connection with the Restructuring Support Agreement.
NOTE 19. SUBSEQUENT EVENTS
The Company evaluates events that have occurred after the balance sheet date but before the financial information and resources and assesses the performance of these resources on a consolidated basis. Sincestatements are issued.
Restructuring Support Agreement
On April 21, 2023, the Company operates in one operating segment, all required financial segment information can be foundentered into the Restructuring Support Agreement with (i) certain holders of the Notes (together with holders that subsequently execute a Joinder or Transferee Agreement (each as defined in the consolidated financial statements.Restructuring Support Agreement, the “Consenting Noteholders”), (ii) the holder (together with any holders that subsequently execute a Transferee Agreement, the “Consenting Senior Secured Lenders”) of claims arising from the Secured Note (the “Senior Secured Claims”) and (iii) the holders (together with any holders that subsequently execute a Transferee Agreement the “Consenting Preferred Shareholders,” and collectively with the Consenting Noteholders and Consenting Senior Secured Lenders, the “Consenting Stakeholders”) of the Company’s Series A Preferred Stock (the “Existing Preferred Interests”). Pursuant to the transactions contemplated by the Restructuring Support Agreement, the Company will be relieved of approximately $92.2 million of outstanding indebtedness and will incur approximately $67.3 million of indebtedness in the form of New Senior Secured Convertible Notes (as defined below) which are expected to have a term of 3.5 years, in each case subject to increase on account of interest accrued from March 15, 2023, and will receive up to approximately $14 million of additional funding (plus up to an additional $20 million of equity funding pursuant to the additional securities purchase agreement referred below). These transactions are expected to result in the issuance of significant amounts of common Stock and securities convertible into significant amounts of common Stock as described below.
On the Effective Date (as defined in the Restructuring Support Agreement), the Company expects to enter into the transactions described in this paragraph pursuant to the Restructuring Support Agreement. The Company expects to issue approximately $57.3 million aggregate principal amount of New Senior Secured Convertible Notes to the Consenting Noteholders in exchange for a like aggregate amount of the outstanding existing Notes (plus additional New Senior Secured Convertible Notes in respect of interest accrued on the from March 15, 2023). Separately, subject to agreed allocations, certain Consenting Noteholders have committed to purchase $10 million of additional New Senior Secured Convertible Notes, in the aggregate. The New Senior Secured Convertible Notes are expected to have a term of 3.5 years and would be convertible at the election of the holder into up to approximately 93.5 million shares of Company’s common stock (without giving effect to interest accrued on the Notes since March 15, 2023) at a conversion price of approximately $0.72 per share and would bear interest at a rate of 5% per annum, payable in kind. Interest on the New Senior Secured Convertible Notes would be convertible into up to approximately 18.0 million shares of the Company’s common stock if held to maturity. The conversion price is subject to adjustment based on the difference between the 31 to 90 day volume-weighted average price, subject to a cap of $0.83 per share. The foregoing amounts are based on the amount of principal and accrued but unpaid interest on the Notes as of March 15, 2023 and the final amounts will be adjusted based on interest accrued on the Notes after March 15, 2023. Pursuant to the Restructuring Support Agreement, the Senior Secured Claims in the aggregate principal amount of $35.9 million (inclusive of accrued interest) would be converted into the Company’s common stock at a price of $1.06 per share or approximately 34.0 million shares valued at $1.06 per share and the Existing Preferred Interests would be converted into 3,954,546 shares of the Company’s common
stock. Also pursuant to the Restructuring Support Agreement, the Company would enter into an amendment to the March 2022 Securities Purchase Agreement that it entered into with the Schuler Trust in March 2022. Pursuant to this amendment, the Company would issue approximately 5.0 million shares of the Company’s common stock valued at $0.82 per share to the Schuler Trust for proceeds of $4.0 million, with the closing date under the March 2022 Securties Purchase Agreement also being extended to the effective date. Also pursuant to the Restructuring Support Agreement, the Company would enter into an additional securities purchase agreement with the Schuler Trust that would require the Schuler Trust at the Company’s option to either purchase approximately 14.0 million shares of common stock from the Company for aggregate proceeds of $10.0 million or to backstop a public offering by the Company of common stock at market prices for proceeds of $10.0 million. If other investors purchase $10 million of common stock in the public offering, the Schuler Trust will have the right, but not the obligation, to purchase up to $10 million of additional shares of common stock at the public offering price for the backstopped offering.
The Company and the Consenting Stakeholders agreed to negotiate in good faith to effect the Restructuring Transactions as an Out-of-Court Restructuring. The Consenting Noteholders party to the Restructuring Support Agreement held 91% in aggregate principal amount of the Notes as of April 21, 2023. In connection with the Out-of-Court Restructuring, holders of no less than 99% (the “Consent Condition Milestone”) in principal amount of the outstanding Notes must agree to exchange their existing Notes for a like aggregate amount of senior secured convertible notes (“New Senior Secured Convertible Notes”). In the event that the requisite consents for the Out-of-Court Restructuring are not obtained by the date provided for in the Restructuring Support Agreement, the Company and Consenting Stakeholders have agreed to consummate the Restructuring Transactions pursuant to a pre-packaged plan of reorganization under chapter 11 of the U.S. Bankruptcy Code.
The Restructuring Support Agreement may be mutually terminated by the Company and certain Consenting Stakeholders by written agreement. The Restructuring Support Agreement will automatically terminate immediately upon (a) the date that is 10 days after any third party files involuntary bankruptcy petitions in respect of the Company unless such petitions have been dismissed or (b) the consummation of the Restructuring Transactions on the terms and conditions set forth in the Restructuring Support Agreement. The Company and the Consenting Stakeholders each have termination rights if certain conditions are not met.
In connection with the Restructuring Support Agreement and the transactions contemplated thereby, on April 14, 2023, the Company’s board of directors approved an amendment to the Company’s Certificate of Incorporation to increase the total number of authorized shares of the Company’s capital stock to 455,000,000 shares, of which 450,000,000 shares are to be designated as common stock and 5,000,000 shares are to be designated as preferred stock. The adoption of this amendment is subject to the consent of the stockholders of the Company. The Company filed a Preliminary Proxy Statement on April 21, 2023 and a Definitive Proxy Statement on May 1, 2023 (the “Proxy Statement”) seeking stockholder approval of the amendment in order to enable the Company to restructure the Company’s outstanding Notes, including to be able to reserve for issuance shares of common stock that would underlie the New Senior Secured Convertible Notes to be issued in connection with the restructuring. In the Proxy Statement, the Company is also seeking stockholder approval prior to the issuance of the Company’s common stock or securities convertible or exercisable into common stock in connection with the restructuring in accordance with the NASDAQ Listing Rule 5635(d). These proposals in the Proxy Statement provide additional details concerning the transactions contemplated by the Restructuring Support Agreement.
On May 12, 2023, the Company and the Consenting Noteholders agreed to extend the Consent Condition Milestone to no later than 11:59 P.M. (Eastern Daylight Time) on May 16, 2023.
NOTE 18. RELATED PARTY TRANSACTIONSItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In June 2016,
Introductory Note
Except as otherwise indicated by the Company recorded a net amount of $866,000 relatedcontext, references in this Quarterly Report on Form 10-Q (this “Form 10-Q”) to the recovery“Company,” “Accelerate,” “we,” “us” or “our” are references to the combined business of short-swing profits underAccelerate 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 16(b)27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended.amended (the “Exchange Act”), and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements, which can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” or “continue,” or variations thereon or comparable terminology, include but are not limited to, statements about our future development plans and growth strategy, including plans and objectives relating to our future operations, products and performance; projections as to when certain key business milestones may be achieved; expectations regarding the potential or benefits of our products and technologies; projections of future demand for our products; our continued investment in new product development to both enhance our existing products and bring new ones to market; the anticipated impacts from the COVID-19 pandemic on the Company, including to our business, results of operations, cash flows and financial position, as well as our future responses to the COVID-19 pandemic; our expectations relating to current supply chain impacts and inflationary pressures, including our belief that we currently have sufficient inventory of Accelerate Pheno system instruments to limit the impact of cost increases on such devices; our expectations regarding our commercial partnership with Becton, Dickinson and Company (“BD”), including anticipated benefits from such collaboration; our expectations and plans relating to regulatory approvals, including with respect to the U.S. Food and Drug Administration (“FDA”) and 510(k) clearance for our Accelerate Arc Products (as defined in this Form 10-Q); our plans to continue marketing and distributing the Accelerate Arc Products in Europe pursuant to its existing CE In Vitro Diagnostic Regulation (IVDR) registration; our liquidity and capital requirements, including, without limitation, as to our ability to continue as a going concern and our belief that we do not currently have adequate financial resources to pay our outstanding debt obligation under the Company’s 2.50% Convertible Senior Notes (the “Notes”) and to fund our forecasted operating costs for at least twelve months from the filing of this Form 10-Q; and our plans and expectations relating to the terms and consummation of the Restructuring Transactions contemplated by the Restructuring Support Agreement, including, but not limited to, the anticipated issuance of significant amounts of common stock and securities convertible into significant amounts of common stock and the resulting impact to the Company’s capital structure. 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 of the diminished COVID-19 pandemic, including any new variants that may become predominant; government and other third-party responses to it and the consequences for the global economy and the businesses of our suppliers and customers, such as the possibility of customer demand fluctuations, supply chain constraints and inflationary pressures; and its ultimate effect on our business, results of operations, cash flows and financial position, as well as difficulties in resolving our continuing financial condition and ability to obtain additional capital to meet our financial obligations, including, without limitation, difficulties in obtaining adequate capital resources to fund our operations and whether we will be successful in consummating the Restructuring Transactions contemplated by the Restructuring Support Agreement,
including, among other things, obtaining the requisite consents for the contemplated Out-of-Court Restructuring. Other important factors that could cause our actual results to differ materially from those in our forward-looking statements include those discussed herein, and in other reports filed with the U.S. Securities and Exchange Commission (the “SEC”) including but not limited to the risks in the section entitled “Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 10-K”), the section entitled “Risk Factors” in this Form 10-Q and in the Company’s subsequent filings with the SEC. These forward-looking statements are also based on certain additional assumptions, including, but not limited to, that we will retain key management personnel; we will be successful in the commercialization of our products; we will obtain sufficient capital to commercialize our products and continue development of complementary products; we will be successful in obtaining marketing authorization for our products from the FDA and other regulatory agencies and governing bodies; we will be able to protect our intellectual property; our ability to respond effectively to technological change; our ability to accurately anticipate market demand for our products; and that there will be no material adverse change in our 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 we believe 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.
Overview
Accelerate is an in vitro diagnostics company dedicated to providing solutions that improve patient outcomes and lower healthcare costs through the rapid diagnosis of serious infections. Microbiology laboratories need new tools to address what the U.S. Centers for Disease Control and Prevention (the “CDC”) calls one of the most serious healthcare threats of our time, antibiotic resistance. A significant contributing factor to the rise of resistance is the overuse and misuse of antibiotics, which is exacerbated by a lack of timely diagnostic results. The delay of identification and antibiotic susceptibility results is often due to the reliance by microbiology laboratories on traditional culture-based tests that often take two to three days to complete. Our technology platform is intended to address these challenges by delivering significantly faster testing of infectious pathogens in various patient sample types.
Our first system to address these challenges is the Accelerate Pheno® system. The Accelerate PhenoTest® BC Kit, which is the first test kit for the system, is indicated as an aid, in conjunction with other clinical and laboratory findings, in the diagnosis of bacteremia and fungemia, both life-threatening conditions with high morbidity and mortality risk. The device provides identification (“ID”) results followed by antibiotic susceptibility testing (“AST”) for certain pathogenic bacteria commonly associated with or causing bacteremia. This test kit utilizes genotypic technology to identify infectious pathogens and phenotypic technology to conduct AST, which determines whether live bacterial cells are resistant or susceptible to a particular antimicrobial. This information can be used by physicians to rapidly modify antibiotic therapy to lessen adverse events, improve clinical outcomes, and help preserve the useful life of antibiotics.
On June 30, 2015, we declared our conformity to the European In Vitro Diagnostic Directive 98/79/EC and applied a CE mark to the Accelerate Pheno system and the Accelerate PhenoTest BC Kit for in vitro diagnostic use. On February 23, 2017, the FDA granted our de novo classification request to market the first version of our Accelerate Pheno system and Accelerate PhenoTest BC Kit.
In 2017, we began selling the Accelerate Pheno system in hospitals in the United States, Europe, and the Middle East. Consistent with our “razor” / “razor-blade” business model, revenues to date have principally been generated from the sale or leasing of the instruments and the sale of single use consumable test kits.
In July 2021, we launched our second test for use on the Accelerate Pheno system, the Accelerate PhenoTest BC Kit, AST configuration. This test kit runs antibiotic susceptibility testing following the input of an ID result from another system or methodology. In August 2021, we announced that this new AST only configuration had been CE marked for use in Europe. We believe this new AST only configuration may be attractive to prospective customers who already have a rapid ID system but still need fast susceptibility results to support getting patients on an optimal antibiotic therapy as soon as possible.
In March and May 2022, we announced the launch and commercialization of the Accelerate ArcTM system and BC Kit (“Accelerate Arc Products”). This instrument and associated one-time-use test kit automates the clean-up and concentration of microbial cells from positive blood culture samples. In May 2022, we announced IVD registration of the Accelerate Arc system and BC Kit with the FDA as a Class I device exempt from FDA clearance requirements, and in June 2022 we received CE IVDR registration for use in Europe.
On October 21, 2022, the “Company announced it has been in discussions with the FDA regarding its Accelerate Arc Products. Pursuant to such discussions, the FDA has challenged the Company’s commercialization of this product in the United States as a Class I device exempt from 510(k) clearance requirements. The Company recognizedis in active dialogue with the FDA to determine the appropriate regulatory pathway. While these discussions are ongoing the Company has put on hold in the United States its sales and marketing efforts of Accelerate Arc Products. The Company will continue marketing and distributing the Accelerate Arc Products in Europe pursuant to its existing CE In Vitro Diagnostic Regulation (IVDR) registration.
In August 2022, we entered into a sales and marketing agreement (the “Sales and Marketing Agreement”) with BD pursuant to which BD will perform certain sales, tactical marketing, technical service call forwarding, order preparation, research and development support and/or regulatory activities on our behalf as our exclusive sales agent for certain of our products, including the Accelerate Pheno system, Accelerate Arc Products. The Sales and Marketing Agreement also grants to BD certain other rights to certain of our future products. We entered into the Sales and Marketing Agreement in order to leverage BD’s expansive global sales team, benefit from natural synergies between BD’s existing products and those from us, and reduce our sales and marketing expenses. The Company and BD subsequently agreed to modify certain terms of the Sales and Marketing Agreement in 2022 and in 2023.
We continue to invest in new product development to both enhance our existing products and bring new ones to market. Current research and development areas of focus include the potential addition, if authorized by the FDA, of new AST content to our Accelerate Pheno system, additional applications for the Accelerate Arc Products, and a next generation AST platform, which is being developed with the goal to have lower costs, higher throughput, and capability to test a broader set of sample types compared to the current Accelerate Pheno system.
COVID-19 and Supply Chain Impacts Update
In late 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China, and spread globally. In March 2020, the World Health Organization declared COVID-19 a global pandemic. The COVID-19 outbreak resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place, stay-at-home or total lock-down (or similar) orders and business limitations and shutdowns. New cases and hospitalizations have risen and fallen throughout the course of this pandemic. Since the initial outbreak, the emergence and spread of new variants of COVID-19 that are significantly more contagious than previous strains initially led many government authorities and businesses to reimplement prior restrictions in an effort to lessen the spread of COVID-19 and its variants. While most of these restrictions have been lifted, uncertainty remains as to whether additional restrictions may be initiated or again reimplemented in response to surges in COVID-19 cases. The lingering impact of the COVID pandemic continues to create significant volatility throughout the global economy, including supply chain constraints, labor supply issues and higher inflation. Accordingly, it is unclear at this point the full impact COVID-19 and its variants will have on the global economy and on our Company.
The COVID-19 pandemic, containment measures, and downstream impacts to hospital staffing and financial stability have caused, and are continuing to cause, business slowdowns in affected areas, both regionally and worldwide, as well as disruptions to global supply chains and workforce participation. These effects have significantly impacted our business and results of operations, starting in the first quarter of 2020 and continuing through the current quarter, albeit to a lesser degree. For example, we have experienced diminished access to our customers, including hospitals, which has severely limited our ability to sell and, to a lesser degree, implement previously contracted Accelerate Pheno systems. Hospital turnover resulting from burnout and vaccine mandates have further diverted the attention of hospital decision makers. In addition, in certain months with high rates of COVID-19 hospitalization, our Accelerate PhenoTest BC Kit orders declined as many hospitals curtailed elective surgeries to respond to COVID-19.
The reduced new instrument sales and implementations caused by the COVID-19 pandemic lowered our realized and expected revenue growth for 2020 and 2021. In 2022, we began to see many of the detrimental effects of the pandemic on our business discussed above start to ease. For example, in recent quarters, we have seen bloodstream infection testing regain normalcy, which has in turn lessened the adverse impact of the COVID-19 pandemic on our recurring revenues through the sale of Accelerate PhenoTest BC Kits. However, with the emergence of new COVID-19 variants, vaccine hesitancy and the prevalence of breakthrough cases of infection among fully vaccinated people, there remains uncertainty regarding our access to customers and prospects, demand for our products, and ability to implement our products.
As a medical device company, we have not experienced any disruptions to our ability to manufacture our products at our Tucson, Arizona headquarters under the various State of Arizona executive orders relating to the COVID-19 pandemic because we were classified as an essential service. We continue to expect that, should future orders be issued, we would be able to sustain our essential operations. Our third-party manufacturing supply chain for Accelerate Pheno systems and consumable test kits remains stable despite a high-degree of unpredictability in the broader supply chain environment. However, like many industries experiencing inflationary pressures in raw materials, the direct costs to manufacture our products are increasing and delivery schedules elongating.
For example, we are currently experiencing unprecedented cost increases from many of our suppliers primarily as a result of labor and supply disruptions and increased inflation. The areas of cost increases include raw materials, components, and value-add supplier labor. We believe that we currently have sufficient inventory of Accelerate Pheno system instruments to limit the impact of cost increases on such devices. However, we are being impacted by cost increases to components and raw materials necessary for the production of our Accelerate Pheno kits. Our ability to pass increased material costs to many of our customers is limited because of long-term sales agreements with limits on price increases. Accordingly, we are closely monitoring the ability of all our suppliers to provide us with necessary materials and services at reasonable costs. See “Risk Factors - Risks Related to Our Business and Strategy - Disruptions in the supply of raw materials, consumable goods or other key product components, or issues associated with their quality from our single source suppliers, could result in a significant disruption in sales and profitability” in Part I, Item 1A of 2022 10-K for additional information.
We continue to monitor the evolving impacts to our business caused by the COVID-19 pandemic, supply chain issues and inflationary cost increases. The degree to which the these issues ultimately impact 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 financial impact of COVID-19 on hospitals, including to their budget priorities; hospital staffing issues; general economic factors, such as increased inflation; global supply chain constraints and the related increase in costs; labor supply issues; and how quickly and to what extent normal economic and operating conditions can resume.
Accordingly, our current results and financial condition discussed herein may not be indicative of future operating results and trends. Refer to the section entitled “Risk Factors” in the 2022 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 March 31, 2023 compared to three months ended March 31, 2022
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.
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| Three Months Ended March 31, | | |
| (in thousands) | | |
| 2023 | 2022 | $ Change | % Change | | | | | |
Net sales | $ | 2,812 | | $ | 2,958 | | $ | (146) | | (5) | % | | | | | |
For the three months ended March 31, 2023, total revenues decreased due to lower sales of Accelerate PhenoTest instruments compared to the three months ended March 31, 2022 which was partially offset by an increase in revenue from sales of Accelerate PhenoTest BC Kits as customers completed their instrument verifications and began purchasing kits.
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| Three Months Ended March 31, | | |
| (in thousands) | | |
| 2023 | 2022 | $ Change | % Change | | | | | |
Cost of sales | $ | 1,801 | | $ | 2,156 | | $ | (355) | | (16) | % | | | | | |
Non-cash equity-based compensation as a component of cost of sales | 90 | | 175 | | (85) | | (49) | % | | | | | |
Cost of sales less non-cash equity-based compensation | $ | 1,711 | | $ | 1,981 | | $ | (270) | | (14) | % | | | | | |
For the three months ended March 31, 2023, cost of sales decreased as compared to the three months ended March 31, 2022. This decrease is primarily due to lower sales of Accelerate PhenoTest instruments. Other factors include the reduction in costs to manufacture consumables, instruments being sold to customers that were expensed in a previous year and a decrease in non-cash equity-based compensation expense.
Cost of sales includes non-cash equity-based compensation expense of $0.1 million and $0.2 million for the three months ended March 31, 2023 and 2022, respectively. Non-cash equity-based compensation expense decreased for the three months ended March 31, 2023 when compared to the three months ended March 31, 2022. Non-cash equity-based compensation expense is a component of manufacturing overhead and service cost of sales. Manufacturing overhead is capitalized as inventory and relieved to cost of sales when products are sold to a customers, or when instruments under reagent rentals are amortized to cost of sales.
Cost of sales expenses excluding non-cash equity-based compensation expense for the three months ended March 31, 2023 decreased compared to the three months ended March 31, 2022. This decrease is primarily due to lower sales of Accelerate PhenoTest instruments. Other factors include the reduction in costs to manufacture consumables and instruments being sold to customers that were expensed in a previous year.
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| Three Months Ended March 31, | | |
| (in thousands) | | |
| 2023 | 2022 | $ Change | % Change | | | | | |
Gross profit | $ | 1,011 | | $ | 802 | | $ | 209 | | 26 | % | | | | | |
Non-cash equity-based compensation as a component of gross profit | 90 | | 175 | | (85) | | (49) | % | | | | | |
Gross profit less non-cash equity-based compensation | $ | 1,101 | | $ | 977 | | $ | 124 | | 13 | % | | | | | |
The Company’s overall gross margin was 36% and 27% for the three months ended March 31, 2023 and 2022, respectively. The increase in gross margin is primarily due to reductions in costs to manufacture consumables. Other contributing factors include increased margin from select instruments being sold to certain customers with more favorable gross margins, which included instruments that were expensed in a previous year. The Company also incurred a decrease in non-cash equity-based compensation expense which also benefited gross margin.
Gross profit excluding non-cash equity-based compensation expense for the three months ended March 31, 2023 increased compared to the three months ended March 31, 2022. The increase in gross margin is primarily due to reductions in costs to manufacture consumables. Other contributing factors include increased margin from select instruments being sold to certain customers with more favorable gross margins, which included instruments that were expensed in a previous year.
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| Three Months Ended March 31, | | |
| (in thousands) | | |
| 2023 | 2022 | $ Change | % Change | | | | | |
Research and development | $ | 6,968 | | $ | 6,024 | | $ | 944 | | 16 | % | | | | | |
Non-cash equity-based compensation as a component of research and development | 605 | | 362 | | 243 | | 67 | % | | | | | |
Research and development less non-cash equity-based compensation | $ | 6,363 | | $ | 5,662 | | $ | 701 | | 12 | % | | | | | |
Research and development expenses for the three months ended March 31, 2023 increased as compared to the three months ended March 31, 2022 primarily due to increases in contracted service costs for the development of our next generation AST platform.
Research and development expenses include non-cash equity-based compensation expense of $0.6 million and $0.4 million for the three months ended March 31, 2023 and 2022, respectively. Non-cash equity-based compensation expense increased for the three months ended March 31, 2023 when compared to the three months ended March 31, 2022, due to a large number of stock awards being granted during the three months ended March 31, 2023.
Research and development expenses excluding non-cash equity-based compensation expense for the three months ended March 31, 2023 increased compared to the three months ended March 31, 2022, primarily due to increases in contracted service costs for the development of our next generation AST platform.
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| Three Months Ended March 31, | | |
| (in thousands) | | |
| 2023 | 2022 | $ Change | % Change | | | | | |
Sales, general and administrative | $ | 10,105 | | $ | 10,673 | | $ | (568) | | (5) | % | | | | | |
Non-cash equity-based compensation as a component of sales, general and administrative | (140) | | 2,442 | | (2,582) | | (106) | % | | | | | |
Sales, general and administrative less non-cash equity-based compensation | $ | 10,245 | | $ | 8,231 | | $ | 2,014 | | 24 | % | | | | | |
Sales, general and administrative expenses for the three months ended March 31, 2023 decreased as compared to the three months ended March 31, 2022, primarily due to a decrease in non-cash equity-based compensation expense, partially offset by increased legal and professional services in connection with the restructuring activities relating to the Notes.
Sales, general and administrative expenses includes a non-cash equity-based compensation reversal of $0.1 million and expense of $2.4 million for the three months ended March 31, 2023 and 2022, respectively. Non-cash equity-based compensation expense decreased for the three months ended March 31, 2023 when compared to the three months ended March 31, 2022, primarily due to the reversal of non-cash equity-based compensation expense from forfeitures. Employees separating from the Company forfeited an increased number of stock options and RSUs than in the previous period.
Sales, general and administrative expenses excluding non-cash equity-based compensation expense for the three months ended March 31, 2023 increased compared to the three months ended March 31, 2022, primarily due to increased legal and professional services in connection with the restructuring activities relating to the Notes.
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| Three Months Ended March 31, | | |
| (in thousands) | | |
| 2023 | 2022 | $ Change | % Change | | | | | |
Loss from operations | $ | (16,062) | | $ | (15,895) | | $ | (167) | | 1 | % | | | | | |
Non-cash equity-based compensation as a component of loss from operations | 555 | | 2,979 | | $ | (2,424) | | (81) | % | | | | | |
Loss from operations less non-cash equity-based compensation | $ | (15,507) | | $ | (12,916) | | $ | (2,591) | | 20 | % | | | | | |
For the three months ended March 31, 2023, our loss from operations increased as compared to the three months ended March 31, 2022. The increase was primarily the result of increased sales, general and administrative expenses in connection with the restructuring activities relating to the Notes along with increases in research and development expenses to develop our next generation AST platform. These increases were partially offset by a decrease in non-cash equity-based compensation expense for the three months ended March 31, 2023.
Loss from operations excluding non-cash equity-based compensation expense for the three months ended March 31, 2023 increased compared to the three months ended March 31, 2022. The increase was primarily the result of increased sales, general and administrative expenses in connection with the restructuring activities relating to the Notes along with increases in research and development expenses to develop our next generation AST platform.
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.
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| Three Months Ended March 31, | | |
| (in thousands) | | |
| 2023 | 2022 | $ Change | % Change | | | | | |
Total other (expense) income, net | $ | (733) | | $ | 2,430 | | $ | (3,163) | | (130) | % | | | | | |
For the three months ended March 31, 2023 the Company incurred other expense, net compared to other income, net for the three months ended March 31, 2022. This change was the result of a gain on extinguishment relating to certain Notes that were exchanged for the Company’s common stock during the three months ended March 31, 2022. After giving effect for mark to market adjustments and the legal exchange of such Notes the Company recorded a gain on extinguishment of $3.4 million during the three months ended March 31, 2022.
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| Three Months Ended March 31, | | |
| (in thousands) | | |
| 2023 | 2022 | $ Change | % Change | | | | | |
Provision for income taxes | $ | — | | $ | — | | $ | — | | NM | | | | | |
NM indicates percentage is not meaningful
For the three months ended March 31, 2023 and 2022, the Company did not carry an income tax provision amount as the Company does not recognize tax benefits from current period tax losses in the U.S. and other foreign jurisdictions.
Capital Resources and Liquidity
Since inception, the Company has not achieved profitable operations or positive cash flows from operations. The Company’s accumulated deficit totaled $624.0 million as of March 31, 2023. During the three months ended March 31, 2023, the Company had a net loss of $16.8 million and negative cash flows from operations of $13.4 million. The Notes matured on March 15, 2023 and became due and payable.
On March 9, 2023, the Company entered into a forbearance agreement (the “Forbearance Agreement”), which became effective on March 13, 2023, with the holders of approximately 85% of the Company’s outstanding Notes (collectively, the “Ad Hoc Noteholder Group”) and the trustee for the Notes (the “Trustee”). Pursuant to the Forbearance Agreement, the members of the Ad Hoc Noteholder Group agreed, and directed the Trustee, to forbear from exercising their rights and remedies under the indenture governing the Notes (the “Indenture”) in connection with certain events of default under the Indenture, including, but not limited to, the failure to timely pay in full the principal of any Note due and payable on March 15, 2023 and the failure to pay any interest on any Note due and payable. The Forbearance Agreement was initially effective for the period commencing on March 13, 2023 and ending on March 29, 2023, which was subsequently extended by the parties to April 21, 2023. On April 21, 2023, the Company entered into a restructuring support agreement (the “Restructuring Support Agreement”) with certain holders of the Notes, the holder of the Company’s secured promissory note in an aggregate principal amount of $34.9 million (the “Secured Note”) and the holders of the Company’s Series A Preferred Stock to negotiate in good faith to effect the restructuring of the Company’s capital structure (the “Restructuring Transactions”), including the Notes, the Secured Note and the Company’s Series A Preferred Stock, as well as a contemplated amendment to the March 2022 Securities Purchase Agreement (as defined below), as an out-of-court restructuring and not involve any judicial proceeding or approval (the “Out-of-Court Restructuring”). See Part I, Item 1, Note 19, Subsequent Events for additional information.
As of March 31, 2023, the Company had $31.9 million in cash and cash equivalents and investments, a decrease of $13.7 million from $45.6 million at December 31, 2022. The primary reason for the decrease was due to cash used in operations during the period. The future success of the Company is dependent on its ability to successfully commercialize its products, obtain regulatory clearance for and successfully launch its future product candidates, obtain additional capital and ultimately attain profitable operations.
The Company is subject to a number of risks similar to other early commercial stage life science companies, including, but not limited to commercially launching the Company’s products, development and market acceptance of the Company’s product candidates, development by its competitors of new technological innovations, protection of proprietary technology, and raising additional capital. Historically, the Company has funded its operations primarily through multiple equity raises and the issuance of debt (see below and Note 9, Convertible Notes, Note 10, Long-Term Debt Related-Party and Note 17, Stockholders' Equity in Part I, Item 1 of this Form 10-Q for additional information).
Based on its evaluation pursuant to ASC 205-40, the Company has determined that, as of the date of this Form 10-Q filing, there is substantial doubt about its ability to continue as a going concern, as the Company does not currently have adequate financial resources to pay its outstanding debt obligation under the Notes and to fund its forecasted operating costs for at least twelve months from the filing of this Form 10-Q.
Our primary use of capital has been for the development and commercialization of the Accelerate Pheno system and development of complementary products. While the Company continues to explore additional funding in the form of potential equity and/or debt financing arrangements or similar transactions, as well as non-cash means to settle and/or refinance the Notes in accordance with the Restructuring Support Agreement, there can be no assurance the necessary financing will be available on terms acceptable to the Company, or at all. If the Company raises funds by issuing equity securities, dilution to stockholders may result. Any equity securities issued may also provide for rights, preferences or privileges senior to those of holders of common stock. If the Company raises funds by issuing debt securities, these debt securities would have rights, preferences and privileges senior to those of preferred and common stockholders. The terms of debt securities or borrowings could impose significant restrictions on our operations. The capital markets have in the past, and may in the future, experience periods of upheaval that could impact the availability and cost of equity and debt financing. In addition, recent and anticipated future increases in federal fund rates set by the Federal Reserve, which serve as benchmark rates on borrowing, and other general economic conditions may impact the cost of debt financing or refinancing existing debt.
Although we are actively considering all available strategic alternatives to maximize value, if we are unable to obtain adequate capital resources to fund operations, we would not be able to continue to operate our business pursuant to our current plans. This may require us to, among other things, materially modify our operations to reduce spending; sell assets or operations; delay the implementation of, or revising certain aspects of, our business strategy; or discontinue our operations entirely. Additionally, if the Company is unable to consummate the Restructuring Transactions contemplated by the Restructuring Support Agreement, including in the event that the requisite consents for the contemplated Out-of-Court Restructuring are not obtained by the date provided for in the Restructuring Support Agreement, the Company and the Consenting Stakeholders (as defined elsewhere in this
Form 10-Q) have agreed to consummate the Restructuring Transactions pursuant to a pre-packaged plan of reorganization under chapter 11 of the U.S. Bankruptcy Code.
In connection with the preparation of this Form 10-Q, the Company is required to evaluate its financial condition as of the date of filing this Form 10-Q pursuant to the requirements of ASC 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.
The Company is subject to lease agreements. The future minimum lease payments under these lease agreements are included in Part I, Item 1, Note 15, Leases.
For more information on the Company’s liquidity please see Part I, Item 1, Note 1, Organization and Nature of Business; Basis of Presentation; Principles of Consolidation; Significant Accounting Policies.
As of March 31, 2023, our contractual material cash requirements were as follows:
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Payments due by Period (in thousands) |
Material Cash Requirements | Total | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter |
Operating lease obligations | $ | 2,375 | | $ | 741 | | $ | 1,051 | | $ | 583 | | $ | — | | $ | — | | $ | — | |
Purchase obligation 1) | 11,900 | | — | | — | | — | | — | | 11,900 | | — | |
Finance lease obligations | 2,092 | | 923 | | 976 | | 193 | | — | | — | | — | |
Deferred compensation | 978 | | — | | — | | 356 | | 381 | | 241 | | — | |
Convertible notes | 56,595 | | 56,595 | | — | | — | | — | | — | | — | |
Convertible notes interest | 707 | | 707 | | — | | — | | — | | — | | — | |
Related party secured note 2) | 34,934 | | — | | — | | — | | — | | 34,934 | | — | |
Related party secured note interest 3) | 9,863 | | — | | — | | — | | — | | 9,863 | | — | |
Total | $ | 119,444 | | $ | 58,966 | | $ | 2,027 | | $ | 1,132 | | $ | 381 | | $ | 56,938 | | $ | — | |
1) The Company entered into a non-cancellable purchase obligation with a supplier to acquire raw materials for a total commitment of $11.9 million. Under the terms of this agreement the Company has until March 15, 2027 to take delivery of purchased items. As of March 31, 2023 the commitment remains $11.9 million as the Company has not taken delivery of any inventory.
2) The Company may, at its option, repay the note in (i) cash or (ii) in the form of common stock of the Company. However, the amount of shares to repay the Secured Notes, shall not exceed an aggregate amount of 19.99% of the Company’s outstanding shares of common stock, and any remainder amount due will be paid in cash.
3) The Company may, at its option, repay the interest in (i) cash or (ii) in the form of common stock of the Company, which is due on or after August 15, 2027. The Secured Note bears interest at a rate of 5.0% per annum and if the Company were to make a first and final interest payment on the maturity date of August 15, 2027, the interest payable amount would be $9.9 million. As of March 31, 2023, accrued interest is $1.1 million.
Until such time as we can generate substantial product revenue, we expect to finance our cash requirements, beyond what is currently available or on hand, through a combination of equity offerings and debt financings, or contributed partnership fees.
Summary of Cash Flows
The following summarizes selected items in the Company’s condensed consolidated statements of cash flows for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | |
Cash Flow Summary |
| Three Months Ended March 31, |
| (in thousands) |
| 2023 | 2022 | $ Change |
Net cash used in operating activities | $ | (13,367) | | $ | (12,606) | | $ | (761) | |
Net cash provided (used) by investing activities | 8,209 | | (13,641) | | 21,850 | |
Net cash (used) provided by financing activities | (77) | | 77 | | (154) | |
Cash flows from operating activities
During the three months ended March 31, 2023, net cash used in operating activities was primarily the result of net losses, partially offset by the amortization of a debt discount from a related party, depreciation and amortization, and equity-based compensation.
During the three months ended March 31, 2022, net cash used in operating activities was primarily the result of net losses and gain on extinguishment of debt, partially offset by equity-based compensation, and depreciation and amortization.
Cash flows from investing activities
The net cash provided by investing activities was $8.2 million for the three months ended March 31, 2023, resulting from maturities of marketable securities.
The net cash used by investing activities was $13.6 million for the three months ended March 31, 2022. The Company had purchases of marketable securities of $24.1 million which were offset in part by maturities of marketable securities of $11.0 million.
Cash flows from financing activities
The net cash used by financing activities was $0.1 million for the three months ended March 31, 2023, resulting from the payments of finance leases.
The net cash provided by financing activities was $0.1 million for the three months ended March 31, 2022, resulting from proceeds from the issuance of common stock under the Company’s employee stock purchase plan.
Convertible Notes
On March 27, 2018, the Company issued $150.0 million aggregate principal amount of 2.50% Convertible Senior 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. After giving effect to various exchange transactions described below, the Notes had an outstanding principal amount of $56.6 million as of March 31, 2023. The Notes matured on March 15, 2023 and became due and payable.
As discussed above, on March 9, 2023, the Company entered into the Forbearance Agreement with respect to the Notes, and on April 21, 2023, the Company entered into the Restructuring Support Agreement to negotiate in good faith to effect the restructuring of the Company’s capital structure, including the Notes, the Secured Note and the Company’s Series A Preferred Stock, as well as a contemplated amendment to the March 2022 Securities Purchase Agreement, in connection with the Restructuring Support Agreement. See Part I, Item 1, Note 9, Convertible Notes and Part I, Item 1, Note 19, Subsequent Events for additional information.
2021 Exchange Transactions
On September 22, 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 it for shares of the Company’s common stock. During the year ended December 31, 2021, $51.0 million in aggregate principal amount of Notes were exchanged for 6,602,974 shares of the Company's common stock in these exchange transactions.
March 2022 Exchange Transaction
On March 21, 2022, the Company entered into an increaseexchange agreement with one holder of the Notes. Under the terms of the exchange agreement, the holder agreed to contributed capitalexchange Notes held by them for shares of the Company’s common stock. During the year ended December 31, 2022, $14.0 million in aggregate principal amount of Notes were exchanged for 10,798,482 shares of the Company's common stock in this exchange transaction.
See Part I, Item 1, Note 9, Convertible Notes for additional information.
August 2022 Exchange Transaction
On August 15, 2022, the Company entered into an exchange agreement (the “August 2022 Exchange Agreement”) with the Jack W. Schuler Living Trust (the “Schuler Trust”). Under the terms of the August 2022 Exchange Agreement, the Schuler Trust agreed to exchange with the Company $49.9 million in aggregate principal amount of Notes held by it for (a) the Secured Note in an aggregate principal amount of $34.9 million and (b) a warrant (the “Warrant”) to acquire the Company’s common stock at an exercise price of $2.12 per share (the “Exercise Price”). See “Capital Resources and Liquidity-Secured Note” below for additional information regarding the Secured Note.
After giving effect to the exchange transactions described above, the Notes had an outstanding principal amount of $56.6 million as of March 31, 2023.
The Warrant may be exercised from February 15, 2023 through the earlier of (i) August 15, 2029 and (ii) the consummation of certain acquisition transactions involving the Company, as set forth in the Warrant. The Warrant is exercisable for up to 2,471,710 shares, or 15% of the principal amount of the Secured Note, divided by the Exercise Price. Such number of shares and the Exercise Price are subject to certain customary proportional adjustments for fundamental events, including stock splits and recapitalizations, as set forth in the Warrant.
See Part I, Item 1, Note 9, Convertible Notes and Note 10, Long-Term Debt Related-Party for additional information.
Prepaid Forward
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 $45.1 million of the proceeds from the offering of the Notes to pay the prepayment amount. The aggregate number of our common stock underlying the Prepaid Forward is approximately 1,858,500 shares (based on the sale price of $24.25). During March 2023, 1,858,500 shares of common stock were returned to the Company pursuant to our agreement with the counterparty.
See Part I, Item 1, Note 9, Convertible Notes for additional information.
At-The-Market Equity Sales Agreement
On May 28, 2021, the Company entered into a Sales Agreement with William Blair pursuant to which it may sell shares of the Company’s common stock having an aggregate offering price of up to $50 million, from time to time, through an “at-the-market” equity offering program under which William Blair will act as sales agent. Subject to the terms and conditions of the 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 three months ended March 31,
2023, no shares of common stock were sold under the Sales Agreement. As of March 31, 2023, the Company had an aggregate of $39.1 million available for future sales under its at-the-market equity offering program.
2021 Sales of Equity Securities
On December 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. On September 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 the December 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 ended December 31, 2022, the Company issued 201,820 shares of common stock to the other purchasers and received total proceeds of approximately $1.5 million under the December 2020 Securities Purchase Agreement after giving effect to the rescission agreement.
On September 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 ended December 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 the September 2021 Securities Purchase Agreement.
March 2022 Securities Purchase Agreement
On March 24, 2022, the Company entered into a securities purchase agreement (the “March 2022 Securities Purchase Agreement”) with the Schuler Trust for the issuance and sale by the Company of an aggregate of 2,439,024 shares of the Company’s common stock to the Schuler Trust (the “Private Placement”). Jack Schuler, serves as a member of the Company’s board of directors and is the sole trustee of the Schuler Trust.
Pursuant to the March 2022 Securities Purchase Agreement, the Schuler Trust has agreed to purchase the Shares at a purchase price (determined in accordance with Nasdaq rules relating to the “market value” of the Company’s common stock) of $1.64 per share, which is equal to the consolidated closing bid price reported by Nasdaq immediately preceding the time the Company entered into the March 2022 Securities Purchase Agreement, for an aggregate purchase price of $4.0 million. The Company and the Schuler Trust agreed to extend the closing date of the Private Placement from March 24, 2023 to April 20, 2023, which was further extended in accordance with the terms of the Restructuring Support Agreement. See Part I, Item 1, Note 19, Subsequent Events for additional information about the contemplated restructuring of the Company’s capital structure, including the Notes, the Secured Note and the Company’s Series A Preferred Stock, as well as a contemplated amendment to the March 2022 Securities Purchase Agreement, in connection with the Restructuring Support Agreement.
2022 Sales of Equity Securities
On August 23, 2022, the Company completed a public offering of 17,500,000 shares of its common stock at a public offering price of $2.00 per share. The Company received net proceeds of approximately $32.9 million from the offering after deducting underwriting discounts and commissions and offering expenses paid by the Company.
Secured Note
The Secured Note has a scheduled maturity date of August 15, 2027 and will be repayable upon written demand at any time on or after such date. The Company may, at its option, repay the note in (i) cash or (ii) in the form of common stock of the Company, in a number of shares that is obtained by dividing the total amount of such payment by $2.12. The Secured Note bears interest at a rate of 5.0% per annum, payable at the option of the Company in the same form, at the earlier of (i) any prepayment of principal and (ii) maturity. The Company may prepay the Secured Note at any time without premium or penalty. The Secured Note is secured by substantially all of the assets of the Company, subject to customary exceptions and limitations, pursuant to a security agreement, dated as of August 15, 2022. The Secured Note does not restrict the incurrence of future indebtedness by the Company but shall become subordinated in right of payment and lien priority upon the request of any future senior lender.
See Part I, Item 1, Note 10, Long-Term Debt Related-Party for additional information.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2023.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated balance sheet.financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our estimates on an ongoing basis, including those related to accounts receivable, inventories, property and equipment, intangible assets, accruals, warranty liabilities, tax valuation accounts and stock-based compensation. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and are not readily apparent from other sources. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates discussed in Part II, Item 7 of the 2022 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for a smaller reporting company.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introductory Note
Except as otherwise indicated by the context, references in this Quarterly Report on Form 10-Q (this “Form 10-Q”) to the “Company,” “Accelerate,” “we," “us” or “our” are references to the combined business of Accelerate Diagnostics, Inc.
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 the plans and objectives of management for future operations, including plans and objectives relating to the products and future economic performance of the Company. 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.
The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are 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, that the Company will accurately anticipate market demand for the Company’s products and that there will be no material adverse change in the Company’s operations or business. 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. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) summarizes the significant factors affecting our results of operations, liquidity, capital resources and
contractual obligations. The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related notes included elsewhere herein. Certain information contained in the discussion and analysis set forth below and elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. The Company’s future operating results may be affected by various trends and factors which are beyond the Company’s control. These include, among other factors, general public perception of issues and solutions, and other uncertain business conditions that may affect the Company’s business. The Company cautions the reader that a number of important factors discussed herein, and in other reports filed with the SEC including but not limited to the risks in the section entitled “Risk Factors” in its Annual Report on Form 10-K for the period ended December 31, 2016, could affect the Company’s actual results and cause actual results to differ materially from those discussed in forward-looking statements.
Our MD&A is composed of the following sections: Overview, Changes in Results of Operations, Capital Resources and Liquidity and Off-Balance Sheet Arrangements. All amounts have been rounded to the nearest thousand unless otherwise indicated.
Overview
Accelerate Diagnostics, Inc. is an in vitro diagnostics company dedicated to providing solutions that improve patient outcomes and lower healthcare costs through the rapid diagnosis of serious infections. Microbiology laboratories are in need of new tools to address what the U.S. Centers for Disease Control and Prevention 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 these 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 built to address these challenges by delivering significantly faster and accurate testing of infectious pathogens in various patient sample types.
Since 2004, we have focused our efforts on research into and the development of an innovative rapid diagnostic platform, the Accelerate Pheno™ system, intended for the rapid diagnosis of infectious pathogens. Our goal is to reduce the failure rate of initial antibiotic drug therapy by shortening lab turnaround time to hours rather than the two to three days now required to deliver identification and susceptibility results.
The Accelerate Pheno™ system utilizes genotypic technology to identify, or “ID,” infectious pathogens and phenotypic technology to conduct antibiotic susceptibility testing, or “AST,” which determines whether live bacterial or fungal cells are resistant or susceptible to a particular antimicrobial agent. The Accelerate PhenoTest™ BC Kit provides ID and AST results for patients suspected of bacteremia or fungemia, both life-threatening conditions with high morbidity and mortality risk. The Accelerate PhenoTest™ BC Kit is a highly multiplexed panel targeting over 80% of the routine and significant pathogens causing blood stream infections and over 90% of the antibiotics useful in treating those pathogens.
On June 30, 2015, we declared our conformity to the European In Vitro Diagnostic Directive 98/79 EC and applied a CE Mark to the Accelerate Pheno™ system and the Accelerate PhenoTest™ BC Kit for in vitro diagnostic use. On February 23, 2017, the FDA granted our de novo request to market our Accelerate Pheno™ system and Accelerate PhenoTest™ BC Kit in the United States. The Accelerate PhenoTest™ BC kit includes 140 assays for both identification and susceptibility testing, of which 116 were cleared by the FDA and 24 assays are available in a Research Use Only mode of the software.
Changes in Results of Operations: Three and nine months ended September 30, 2017 compared to three and nine months ended September 30, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| (in thousands) | | (in thousands) |
| 2017 | 2016 | $ Change | % Change | | 2017 | 2016 | $ Change | % Change |
Net sales | $ | 828 |
| $ | 24 |
| $ | 804 |
| 3,350 | % | | $ | 2,058 |
| $ | 207 |
| $ | 1,851 |
| 894 | % |
For the three and nine months ended September 30, 2017, total revenues increased due to sales of Accelerate Pheno™ systems and Accelerate PhenoTest™ BC kits.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| (in thousands) | | (in thousands) |
| 2017 | 2016 | $ Change | % Change | | 2017 | 2016 | $ Change | % Change |
Cost of sales | $ | 191 |
| $ | — |
| $ | 191 |
| 100 | % | | $ | 352 |
| $ | — |
| $ | 352 |
| 100 | % |
Gross Profit | $ | 637 |
| $ | 24 |
| $ | 613 |
| 2,554 | % | | $ | 1,706 |
| $ | 207 |
| $ | 1,499 |
| 724 | % |
For the three and nine months ended September 30, 2017, cost of sales and gross profit increased as a result of the Company capitalizing inventory in connection with the FDA granting Accelerate’s de novo request to market the Accelerate Pheno™ system and Accelerate PhenoTest™ BC kit.
Inventory without a cost basis was sold to customers during the three and nine months ended September 30, 2017. This inventory was comprised of pre-launch inventory previously not capitalized, and expensed in a previous period. Cost of sales associated with this inventory during the three and nine months ended September 30, 2017, would have been an additional $244,000 and $611,000, respectively.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| (in thousands) | | (in thousands) |
| 2017 | 2016 | $ Change | % Change | | 2017 | 2016 | $ Change | % Change |
Research and development | $ | 6,351 |
| $ | 7,874 |
| $ | (1,523 | ) | (19 | )% | | $ | 16,166 |
| $ | 23,974 |
| $ | (7,808 | ) | (33 | )% |
Research and development expenses for the three and nine months ended September 30, 2017, decreased as compared to the same periods in the prior year as a result of clinical trial expenses not recurring in the current periods. Additionally, on January 1, 2017, the regulatory review process had progressed to a point that objective and persuasive evidence of approval was sufficiently probable, and a future economic benefit existed for the Accelerate Pheno™ system and Accelerate PhenoTest™ BC kit. As a result, the Company started capitalizing pre-launch inventory for the Accelerate Pheno™ system and Accelerate PhenoTest™ BC kit on January 1, 2017. Prior to January 1, 2017, all pre-launch inventory was not capitalized, because a future economic benefit couldn’t be asserted.
Pre-launch inventory not capitalized in accordance with U.S. GAAP, which included instruments and consumables charged to research and development were $225,000 and $795,000 for the three months ended September 30, 2017 and 2016, respectively, and $376,000 and $3.9 million for the nine months ended September 30, 2017 and 2016, respectively.
Research and development expenses include non-cash equity-based compensation of $1.0 million and $504,000 for the three months ended September 30, 2017 and 2016, respectively, and $2.9 million and $1.2 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in non-cash equity-based compensation was primarily driven by an increase in the number of employees and stock option grants.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| (in thousands) | | (in thousands) |
| 2017 | 2016 | $ Change | % Change | | 2017 | 2016 | $ Change | % Change |
Sales, general and administrative | $ | 11,601 |
| $ | 9,566 |
| $ | 2,035 |
| 21 | % | | $ | 33,589 |
| $ | 26,710 |
| $ | 6,879 |
| 26 | % |
Sales, general and administrative expenses for the three and nine months ended September 30, 2017, increased due to an increase in salaries and related expenses as we ramp up our sales and marketing operations globally.
Pre-launch inventory not capitalized in accordance with U.S. GAAP, which included instruments and consumables charged to sales, general and administrative expenses were $11,000 and $1.2 million for the three months ended September 30, 2017 and 2016, respectively, and $40,000 and $2.5 million for the nine months ended September 30, 2017 and 2016, respectively.
Sales, general and administrative expenses include non-cash equity-based compensation of $2.5 million and $2.2 million for the three months ended September 30, 2017 and 2016, respectively, and $8.0 million and $5.4 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in non-cash equity-based compensation was primarily driven by an increase in the number of employees and stock option grants.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| (in thousands) | | (in thousands) |
| 2017 | 2016 | $ Change | % Change | | 2017 | 2016 | $ Change | % Change |
Loss from operations | $ | (17,315 | ) | $ | (17,416 | ) | $ | 101 |
| (1 | )% | | $ | (48,049 | ) | $ | (50,477 | ) | $ | 2,428 |
| (5 | )% |
For the three and nine months end September 30, 2017, loss from operations decreased as a result of the Company capitalizing inventory in connection with the FDA granting Accelerate’s de novo request to market the Accelerate Pheno™ system and Accelerate PhenoTest™ BC kit.
Loss from operations include non-cash equity-based compensation of $3.5 million and $2.7 million for the three months ended September 30, 2017 and 2016, respectively, and $11.0 million and $6.6 million for the nine months ended September 30, 2017 and 2016, respectively. This loss and further losses are anticipated and was the result of our continued investments in research and development, expanded laboratory and operational space, increased employee headcount and other factors as we develop and commercialize the Company’s products.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| (in thousands) | | (in thousands) |
| 2017 | 2016 | $ Change | % Change | | 2017 | 2016 | $ Change | % Change |
Total other income | $ | 285 |
| $ | 117 |
| $ | 168 |
| 144 | % | | $ | 536 |
| $ | 238 |
| $ | 298 |
| 125 | % |
Other non-operating income during the three and nine months ended September 30, 2017, increased due to an increase in interest and dividends, which were offset by other components of other income.
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| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| (in thousands) | | (in thousands) |
| 2017 | 2016 | $ Change | % Change | | 2017 | 2016 | $ Change | % Change |
Provision from income taxes | $ | (45 | ) | $ | — |
| $ | (45 | ) | 100 | % | | $ | (220 | ) | $ | — |
| $ | (220 | ) | 100 | % |
Due to net losses incurred, we have only recorded tax provisions related to tax liabilities generated by our foreign subsidiaries.
Capital Resources and Liquidity
Our primary source of liquidity has been from sales of shares of common stock. As of September 30, 2017, the Company had $121.3 million in cash and cash equivalents and available-for-sale securities, an increase of $43.6
million from $77.8 million at December 31, 2016. The primary reason for the change in these assets was a public offering that occurred during the nine months ended September 30, 2017.
The Company is subject to lease agreements. The future minimum lease payments under theses lease agreements is included in Item 1, Note 16, Commitments.
As of September 30, 2017, management believes that current cash balances will be more than sufficient to fund our capital and liquidity needs for the next twelve months.
The following summarizes selected items in the Company’s consolidated statements of cash flows for the nine months ended September 30, 2017, and 2016:
|
| | | | | | | | | |
Cash Flow Summary (in thousands) |
| Nine Months Ended | |
| September 30, | September 30, | Increase (Decrease) |
| 2017 | 2016 |
Net cash used in operating activities | $ | (42,498 | ) | $ | (40,607 | ) | $ | (1,891 | ) |
Net cash used in investing activities | (30,907 | ) | (52,215 | ) | 21,308 |
|
Net cash provided by financing activities | 88,303 |
| 983 |
| 87,320 |
|
The net cash used in operating activities was $42.5 million and $40.6 million for the nine months ended September 30, 2017, and 2016, respectively. These losses are the result of our continued investments in research and development, expanded laboratory and operational space, increased employee headcount and other factors as we develop and prepare to commercialize the Company’s products.
The net cash used in investing activities was $30.9 million for the nine months ended September 30, 2017, and is primarily comprised of purchases of available-for-sales securities, offset by sales and maturities of available-for-sale securities. Net cash used in investing activities was $52.2 million for the nine months ended September 30, 2016, and is primarily comprised of purchases of available-for-sale investments, offset by sales and maturities of available-for-sale investments.
The net cash provided by financing activities was $88.3 million for the nine months ended September 30, 2017, and is primarily comprised of proceeds from a public offering. The net cash provided by financing activities was $983,000 for the nine months ended September 30, 2016, and was primarily comprised of the recovery of short swing profits from related parties, offset by common stock issuance cost and the exercise of options and warrants.
Our primary use of capital has been for development and commercialization of the Accelerate Pheno™ system. We believe our capital requirements will continue to be met with our existing cash balance and those provided under grants, exercises of warrants and stock options and/or additional issuance of equity or debt securities. However, if capital requirements vary materially from those currently planned, 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.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of September 30, 2017.
Item 3. Quantitative and Qualitative Disclosures
Interest Rate Risk
Our investment portfolio is exposed to market risk from changes in interest rates. The fair market value of fixed rate securities may be adversely impacted by fluctuations in interest rates while income earned on floating rate
securities may decline as a result of decreases in interest rates. We have historically maintained a relatively short average maturity for our investment portfolio, and we believe a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would change the fair value of our interest-sensitive financial instruments by approximately $789,000.
Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. To achieve our goals, we maintain a portfolio of cash equivalents and investments in a variety of securities that management believes to be of high credit quality. Further information regarding our investments is included in Item 1, Note 6, Investments.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Company’s Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s Principal Executive Officer and Principal Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2023 as a result of the material weakness in the Company’s internal control over financial reporting (as defined in Rules 13a-15(e)13a-15(f) and 15d-15(e)15d-15(f) under the Exchange Act were effectiveAct) described in Part II, Item 9A of the 2022 10-K and that continued to exist as of September 30, 2017, to ensure that information required to be disclosed byMarch 31, 2023 (the “Material Weakness”).
Remediation Plan
With oversight from the Audit Committee of the Company’s board of directors and input from management, the Company has begun designing and implementing changes in reports that it files or submits underprocesses and controls to remediate the Exchange Act is (i) recorded, processed, summarizedMaterial Weakness and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to enhance the Company’s management,internal control over financial reporting, including its Principal Executive Officer and Principal Financial Officer, as appropriatea control to allow timely decisions regarding required disclosure.review the accounting treatment of outstanding debt instruments on a quarterly basis in accordance with applicable accounting guidance.
Changes in Internal Control Over Financial Reporting
During the nine months ended September 30, 2017,Other than as described above, there was no change in connection with the Company’s preparationsinternal control over financial reporting during the quarter ended March 31, 2023 that materially affected, or is reasonably likely to commercializematerially affect, the Accelerate Pheno™ system and Accelerate PhenoTest™ BC Kit the Company implemented additionalCompany’s internal controls related to revenue recognition and inventory.control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 19, 2015,We are from time to time subject to various claims and legal actions in the ordinary course of our business. We believe that there are currently no claims or legal actions that would reasonably be expected to have a putative securities class action lawsuit was filed against Accelerate Diagnostics, Inc., Lawrence Mehren, and Steve Reichling, Rapp v. Accelerate Diagnostics, Inc., et al., U.S. District Court, Districtmaterial adverse effect on our results of Arizona, 2:2015-cv-00504. The complaint alleges that we violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, by making falseoperations or misleading statements about our Accelerate Pheno™ system, formerly called the BACcel System. Plaintiff purports to bring the action on behalf of a class of persons who purchased or otherwise acquired our stock between March 7, 2014, and February 17, 2015. On June 9, 2015, Julia Chang was appointed Lead Plaintiff of the purported class. On June 23, 2015, Plaintiff filed an amended complaint alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, by making false or misleading statements or omissions about our ID/AST System and by allegedly employing schemes to defraud. Plaintiff sought certification of the action as a class action, compensatory damages for the class in an unspecified amount, legal fees and costs, and such other relief as the court may order. Defendants moved to dismiss the amended complaint on July 21, 2015. The Court granted the motion and dismissed the case with prejudice on January 28, 2016. On February 26, 2016, Plaintiff filed a notice of appeal with the United States Court of Appeals for the Ninth Circuit, which challenges the dismissal of the amended complaint. Chang v. Accelerate Diagnostics, Inc., et al., No. 2:15-CV-00504-SPL (9th Cir. filed Feb. 26, 2016). On September 13, 2017, Plaintiff voluntarily dismissed the appeal and the case has been dismissed with prejudice.financial condition.
Item 1A. Risk Factors
There have been no material changesIn addition to the risk factors that were disclosedother information set forth in this Form 10-Q, you should carefully consider the risks discussed in the section entitled “Risk Factors” in the 2022 10-K and the risk factor described below, which could materially affect our business, financial condition or future results. The risks described in the 2022 10-K and below are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, results of operations, cash flows and financial position.
Risks Related to Our Financial Condition, Liquidity and Indebtedness
We are in default of payment obligations under the terms of our Notes, which matured on March 15, 2023 and became due and payable.
On March 9, 2023, the Company entered into a forbearance agreement (the “Forbearance Agreement”), which became effective on March 13, 2023, with the holders of approximately 85% of the Company’s Annual Report on Form 10-Koutstanding Notes (collectively, the “Ad Hoc Noteholder Group”) and the trustee for the fiscal year ended December 31, 2016Notes (the “Trustee”). Pursuant to the Forbearance Agreement, the members of the Ad Hoc Noteholder Group agreed, and directed the Trustee, to forbear from exercising their rights and remedies under the indenture governing the Notes (the “Indenture”) in connection with certain events of default under the Indenture, including, but not limited to, the failure to timely pay in full the principal of any Note due and payable on March 15, 2023 and the failure to pay any interest on any Note due and payable. The Forbearance Agreement was initially effective for the period commencing on March 13, 2023 and ending on March 29, 2023, which was subsequently extended by the parties to April 21, 2023. On April 21, 2023, the Company entered into a restructuring support agreement (the “Restructuring Support Agreement”) with certain holders of the Notes, the holder of the Company’s secured promissory note (the “Secured Note”) and the holders of the Company’s Series A Preferred Stock to negotiate in good faith to effect the restructuring of the Company’s capital structure (the “Restructuring Transactions”) on the terms described in the Restructuring Support Agreement. The Restructuring Transactions involve a restructuring of the Notes, conversion of the Company’s Series A Preferred Stock in accordance with its terms, and amendments to the Secured Note and the March 2022 Securities Purchase Agreement. The Restructuring Support Agreement contemplates that so long as certain conditions are met, the Restructuring Transactions will be effectuated as an out-of-court restructuring and without any judicial proceeding or approval (the “Out-of-Court Restructuring”). See Part I, Item 1, Note 19, Subsequent Events for additional information.
These transactions are expected to result in the issuance of significant amounts of common Stock and securities convertible into significant amounts of common stock, which could result in substantial dilution to existing holders of our common stock.
In connection with the Restructuring Support Agreement, to effectuate the Out-of-Court Restructuring, holders of no less than 99% in principal amount of the outstanding Notes must agree to exchange their existing Notes for a like aggregate amount of New Senior Secured Convertible Notes. In the event that the requisite consents for the Out-of-Court Restructuring are not obtained by the date provided for in the Restructuring Support Agreement, the Company and Consenting Stakeholders have agreed to consummate the Restructuring Transactions pursuant to a pre-packaged plan of reorganization under chapter 11 of the U.S. Bankruptcy Code. Seeking Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity.
In connection with the Restructuring Support Agreement, the Company’s board of directors approved amendments to the Company’s Certificate of Incorporation. The Company filed with the SEC a Preliminary Proxy Statement on April 21, 2023 and a Definitive Proxy Statement on May 1, 2023 seeking stockholder approval. The following shareholder proposals are critical to the Restructuring Support Agreement becoming effective:
•approval to increase the total number of authorized shares, and
•approval to issue Common Stock in a non-public offering at a price below the “minimum price” and in a number that would exceed 20% of the Company’s outstanding shares of Common Stock in accordance with Nasdaq Listing Rule 5635(d)
As of the date of this 10-Q the Company has not obtained the necessary stockholder approval. Failure to obtain the necessary votes could prevent the Restructuring Support Agreement from becoming effective and could have a material adverse effect on our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.There were no unregistered sales of equity securities during the quarter ended March 31, 2023 other than as reported in our Current Reports on Form 8-K filed with the SEC.
Item 3. Defaults Upon Senior Securities
Not applicable.The Notes matured on March 15, 2023 and became due and payable. As of the date of the filing of this Form 10-Q, there was approximately $57.3 million of Notes outstanding, inclusive of accrued and unpaid interest. On March 9, 2023, the Company entered into the Forbearance Agreement with respect to the Notes, and on April 21, 2023, the Company entered into the Restructuring Support Agreement to negotiate in good faith to effect the restructuring of the Company’s capital structure, including the Notes, the Secured Note and the Company’s Series A Preferred Stock, as well as a contemplated amendment to the March 2022 Securities Purchase Agreement, in connection with the Restructuring Support Agreement. See Part I, Item 1, Note 9, Convertible Notes and Part I, Item 1, Note 19, Subsequent Events for additional information.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
|
| | | | | | | |
Exhibit No. | Description | Filing Information |
| | Incorporated by reference to Appendix B to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on November 13, 2012 |
| | Incorporated by reference to Exhibit A to the Registrant’s Definitive Information Statement on Schedule 14C filed on July 12, 2013 |
| | Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on March 15, 2016 |
3.1.3 | | Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 15, 2019 |
3.1.4 | | Incorporated by reference to Exhibit 3.2 filed with3.1 to the Registrant’s AnnualCurrent Report on Form 10-K for the fiscal year ended July 31, 20128-K filed on May 13, 2021 |
3.1.5 | | Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on September 23, 2021 |
3.1.6 | | Incorporate by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 17, 2022 |
3.2 | | Incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on August 8, 2019 |
3.2.1 | | Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on February 3, 2022 |
10.1 | | Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 14, 2023 |
10.2 | | Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 24, 2023 |
10.3 | | Filed herewith |
31.1 | | Filed herewith |
| | Filed herewith |
| | FiledFurnished herewith |
| | | | | | | | |
101**101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | Filed herewith |
101**101.SCH | Inline XBRL Taxonomy Extension Schema Document | Filed herewith |
101**101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith |
101**101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith |
101**101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed herewith |
101**101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith |
104 | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) | Filed herewith |
** Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Reportreport to be signed on its behalf by the undersigned thereunto duly authorized.
ACCELERATE DIAGNOSTICS, INC.
| | | | | |
May 15, 2023 | /s/ Jack Phillips |
| Jack Phillips President and Chief Executive Officer |
| (Principal Executive Officer) |
| |
November 7, 2017May 15, 2023 | /s/ Lawrence MehrenDavid Patience |
| Lawrence Mehren
President and Chief Executive Officer
|
| (Principal Executive Officer) |
| |
November 7, 2017 | /s/ Steve Reichling |
| Steve Reichling
David Patience Chief Financial Officer |
| (Principal Financial and Accounting Officer) |