NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 1. ORGANIZATION AND NATURE OF BUSINESS; BASIS OF PRESENTATION; PRINCIPLES OF CONSOLIDATION; SIGNIFICANT ACCOUNTING POLICIES
Accelerate Diagnostics, Inc. (“we” or “us” or “our” or “Accelerate” or the “Company”) is an in vitro diagnostics company dedicated to providing solutions that improve patient outcomes and lower healthcare costs through the rapid diagnosis of serious infections.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on March 14, 2022.
The condensed consolidated balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date but does not include all disclosures such as notes required by U.S. GAAP.
The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods presented, but are not necessarily indicative of the results of operations to be anticipated for the entire year ending December 31, 2022, or any future period.
All amounts are rounded to the nearest thousand dollars unless otherwise indicated.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of intercompany transactions and balances.
Risk and Uncertainties
The future success of the Company is dependent on its ability to successfully commercialize its products, obtain regulatory clearance for and successfully launch its future product candidates, obtain additional capital and ultimately attain profitable operations. Historically, the Company has funded its operations primarily through multiple equity raises and one convertible debt offering. The Company is subject to a number of risks similar to other early commercial stage life science companies, including, but not limited to commercially launching the Company’s products, development and market acceptance of the Company’s product candidates, development by its competitors of new technological innovations, protection of proprietary technology, and raising additional capital.
The COVID-19 pandemic, containment measures, and downstream impacts to hospital staffing and financial stability have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide, as well as disruptions to global supply chains and workforce participation. These effects have significantly impacted our business and results of operations, starting in the first quarter of 2020 and continuing through the current quarter, albeit to a lesser degree. These impacts include diminished access to our customers, principally hospitals, which has severely limited the ability to sell or implement products. Furthermore, the expected rate of growth of the consumable test kit sales has been reduced because of the negative impact of the COVID-19 pandemic on Accelerate Pheno system new sales and implementations. The Company has reviewed its suppliers and quantities of key materials and believes that it has sufficient stocks and alternate sources of critical materials should the supply chains become further disrupted, although raw materials for the manufacturing of reagents is in high demand, and interruptions in supply are difficult to predict. The COVID-19 pandemic also
caused the Company to reassess its build plan and evaluate its inventories accordingly, which resulted in additional charges to cost of sales for excess inventories in the prior year.
The Company may seek to fund its operations through public equity, private equity or debt financings, as well as other sources. However, the Company may be unable to raise additional funds or enter into such other arrangements when needed, on favorable terms, or at all. The Company’s failure to raise capital or enter into such other arrangements if and when needed would have a negative impact on the Company’s business, results of operations, financial condition and the Company’s ability to develop new products. To the extent the Company raises additional funds through the sale of equity, issue convertible debt securities or exchange convertible debt for equity, the issuance of securities will result in dilution to stockholders. Investors purchasing shares or other securities in the future could have rights superior to existing stockholders. In addition, the Company has a significant number of options outstanding. If the holders of these options exercise such securities, further dilution may occur.
Liquidity
The Company continues to assess liquidity needs and manage cash flows. As a result of the steps the Company has taken to enhance its liquidity, the Company currently believes that cash on hand and cash flows from operations will enable the Company to meet its working capital, capital expenditure, debt service and other funding requirements for at least one year from the date this Quarterly Report on Form 10-Q (this “Form 10-Q”) is issued. The Company’s view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for 12 months from the date these condensed consolidated financial statements are filed, which is impacted by, among other things, various assumptions regarding demand and sales prices for our products. Our financial forecasts in recent periods have proven less reliable due to conditions created by the pandemic. As a result, there is no guarantee our financial forecast, which projects sufficient cash will be available to meet planned operating expenses and other cash needs, will be accurate. In the event the Company experiences lower customer demand, lower prices for its products and services, or higher expenses than it forecasted or if the Company underperforms relative to its forecast, the Company could experience negative cash flows from operations, as has been the case in prior years, which would reduce its cash balances and liquidity.
Use of Estimates
The preparation of the Company’s condensed consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to accounts receivable, inventory, property and equipment, accrued liabilities, warranty liabilities, convertible notes, tax valuation accounts, equity–based compensation, revenue and leases. Actual results could differ materially from those estimates.
Estimated Fair Value of Financial Instruments
The Company follows Accounting Standards Codification (“ASC”) 820, Fair Value Measurement, which has defined fair value and requires the Company to establish a framework for measuring and disclosing fair value. The framework requires the valuation of assets and liabilities subject to fair value measurements using a three-tiered approach and fair value measurement be classified and disclosed in one of the following three categories:
•Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
•Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).
The carrying amounts of financial instruments such as cash and cash equivalents, trade accounts receivable, prepaid expenses, other current assets, accounts payable, accrued liabilities, and other current liabilities approximate the related fair values due to the short-term maturities of these instruments.
See Note 4, Fair Value of Financial Instruments, for further information and related disclosures regarding the Company’s fair value measurements.
The estimated fair value of the Company’s 2.50% Senior Convertible Notes due 2023 (the “Notes”) represents a Level 2 measurement. See Note 10, Convertible Notes for further detail on the Company’s Notes.
Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or less at time of purchase are considered to be cash equivalents. Cash and cash equivalents include overnight repurchase agreement accounts and other investments. As part of our cash management process, excess operating cash is invested in overnight repurchase agreements with our bank. Repurchase agreements and other investments classified as cash and cash equivalents are not deposits and are not insured by the U.S. Government, the FDIC or any other government agency and involve investment risk including possible loss of principal. We believe however, that the market risk arising from holding these financial instruments is minimal.
Investments
The Company invests in various debt and equity securities which are primarily held in the custody of major financial institutions. Debt securities consist of certificates of deposit, U.S. government and agency securities, commercial paper, and corporate notes and bonds. Equity securities consist of mutual funds. The Company records these investments in the condensed consolidated balance sheet at fair value. Unrealized gains or losses for debt securities available-for-sale are included in accumulated other comprehensive income (loss), a component of stockholders’ deficit. Unrealized gains or losses for equity securities are included in other income (expense), net, a component of condensed consolidated statements of operations and comprehensive loss. The Company considers all debt securities available-for-sale, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs. The Company classifies its investments as current based on the nature of the investments and their availability for use in current operations.
We perform an assessment to determine whether there have been any events or economic circumstances to indicate that a debt security available-for-sale in an unrealized loss position has suffered impairment as a result of credit loss or other factors. A debt security is considered impaired if its fair value is less than its amortized cost basis at the reporting date. If we intend to sell the debt security or if it is more-likely-than-not that we will be required to sell the debt security before the recovery of its amortized cost basis, the impairment is recognized and the unrealized loss is recorded as a direct write-down of the security's amortized cost basis with an offsetting entry to earnings. If we do not intend to sell the debt security or believe we will not be required to sell the debt security before the recovery of its amortized cost basis, the impairment is assessed to determine if a credit loss component exists. We use a discounted cash flow method to determine the credit loss component. In the event a credit loss exists, an allowance for credit losses is recorded in earnings for the credit loss component of the impairment while the remaining portion of the impairment attributable to factors other than credit loss is recognized, net of tax, in accumulated other comprehensive income (loss). The amount of impairment recognized due to credit factors is limited to the excess of the amortized cost basis over the fair value of the security.
Inventory
Inventory is stated at the lower of cost or net realizable value. The Company determines the cost of inventory using the first-in, first out method. The Company estimates the recoverability of inventory by reference to internal estimates of future demands and product life cycles, including expiration. The Company periodically analyzes its inventory levels to identify inventory that may expire prior to expected sale or has a cost basis in excess of its estimated realizable value and records a charge to expense for such inventory as appropriate.
We charge cost of sales for inventory provisions to write-down our inventory to the lower of cost or net realizable value or for obsolete or excess inventory. Most of our inventory provisions relate to excess quantities of products, based on our inventory levels and future product purchase commitments compared to assumptions about
future demand and market conditions. Once inventory has been written-off or written-down, it creates a new cost basis for the inventory that is not subsequently written-up.
See Note 6, Inventory, for further information and related disclosures.
Accounts Receivable
Accounts receivable consist of amounts due to the Company for sales to customers and are based on what we expect to collect in exchange for goods and services. Receivables are considered past due based on the contractual payment terms and are written off if reasonable collection efforts prove unsuccessful.
We maintain an allowance for credit losses for expected uncollectible accounts receivable, which is recorded as an offset to accounts receivable and changes in such are classified as general and administrative expense in the consolidated statements of operations. We assess collectibility by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when we identify specific customers with known disputes or collectibility issues. In determining the amount of the allowance for credit losses, we consider historical collectibility and make judgments about the creditworthiness of customers based on credit evaluations. Our customers typically have good credit quality. We also consider customer-specific information, current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss data.
The allowance for credit losses for the three and six months ended June 30, 2022 and 2021 is comprised of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Beginning balance | $ | 159 | | $ | 209 | | | 140 | | 445 | |
| Provisions | 7 | | 7 | | | 30 | | 38 | |
Write-offs | (16) | | (3) | | | (20) | | (270) | |
| $ | 150 | | $ | 213 | | | $ | 150 | | $ | 213 | |
The write-offs recorded during the six months ended June 30, 2021 were in connection with a one-time restructuring activity of the Company's Europe, Middle East and Africa (“EMEA”) business. These credit losses were incurred as part of the Company terminating agreements with select distributors in geographies it exited and did not pursue collection of these accounts receivables.
Property and Equipment
Property and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred and expenditures for major improvements are capitalized. Gains and losses from retirement or replacement are included in costs and expenses. Depreciation of property and equipment is computed using the straight-line method over the estimated useful life of the assets, ranging from one to seven years. Leasehold improvements are depreciated over the remaining life of the lease or the life of the asset, whichever is less.
Instruments Classified as Property and Equipment
Property and equipment includes Accelerate Pheno systems (also referred to as instruments) used for sales demonstrations, instruments under rental agreements and instruments used for research and development. Depreciation expense for instruments used for sales demonstrations is recorded as a component of sales, general and administrative expense. Depreciation expense for instruments placed at customer sites pursuant to reagent rental agreements is recorded as a component of cost of sales. Depreciation expense for instruments used in our laboratory and research is recorded as a component of research and development expense. The Company retains title to these instruments and depreciates them over five years. Losses from the retirement of returned instruments are included in costs and expenses.
The Company evaluates the recoverability of the carrying amount of its instruments whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable, and at least
annually. This evaluation is based on our estimate of future cash flows and the estimated fair value of such long-lived assets, and provides for impairment if such undiscounted cash flows or the estimated fair value are insufficient to recover the carrying amount of instruments. No impairment charges have been recorded as of June 30, 2022 and December 31, 2021.
See Note 7, Property and Equipment, for further information and related disclosures.
Long-lived Assets
Long-lived assets and certain identifiable intangibles to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company continuously evaluates the recoverability of its long-lived assets based on estimated future cash flows from and the estimated fair value of such long-lived assets, and provides for impairment if such undiscounted cash flows or the estimated fair value are insufficient to recover the carrying amount of the long-lived asset.
Warranty Reserve
Instruments are typically sold with a one year limited warranty, while kits and accessories are typically sold with a sixty days limited warranty. Accordingly, a provision for the estimated cost of the limited warranty repair is recorded at the time revenue is recognized. Our estimated warranty provision is based on our estimate of future repair events and the related estimated cost of repairs. The Company periodically assesses the adequacy of the warranty reserve and adjusts the amount as necessary. The cost incurred for these provisions is included in cost of sales on the condensed consolidated statements of operations and comprehensive loss.
Warranty reserve activity for the three and six months ended June 30, 2022 and 2021 is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Beginning balance | $ | 176 | | $ | 184 | | | $ | 139 | | $ | 232 | |
| Provisions | 93 | | 12 | | | 139 | | (10) | |
Warranty cost incurred | (14) | | (27) | | | (23) | | (53) | |
| Ending balance | $ | 255 | | $ | 169 | | | $ | 255 | | $ | 169 | |
Convertible Notes
On January 1, 2022 the Company adopted Accounting Standards Update (“ASU”) 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). As a result, the Notes are now accounted for as a single liability measured at their amortized cost. The Notes are no longer bifurcated between debt and equity and are instead accounted for entirely as debt at face value net of any discount or premium and issuance costs. Interest expense is comprised of (1) cash interest payments, (2) amortization of any debt discounts or premiums based on the original offering, and (3) amortization of any debt issuance costs. Gain or loss on extinguishment of Notes is calculated as the difference between the (i) fair value of the consideration transferred and (ii) the sum of the carrying value of the debt at the time of repurchase.
The Company classifies the Notes as a non-current liability as the Company has the ability to settle the Notes with shares of common stock.
See Note 2, Recently Issued Accounting Pronouncements and Note 10, Convertible Notes, for further information and related disclosures.
Revenue Recognition
The Company recognizes revenue when control of the promised good or service is transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Sales taxes are excluded from revenues.
The Company determines revenue recognition through the following steps:
•Identification of the contract with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations
•Recognition of revenue as we satisfy a performance obligation
Product revenue is derived from the sale or rental of instruments and sales of related consumable products. When an instrument is sold, revenue is generally recognized upon installation of the unit consistent with contract terms, which do not include a right of return. When a consumable product is sold, revenue is generally recognized upon shipment. Invoices are generally issued when revenue is recognized. Payment terms vary by the type and location of the customer and the products or services offered. The term between invoicing and when payment is due is not significant.
Service revenue is derived from the sale of extended service agreements which are generally non-cancellable. This revenue is recognized on a straight-line basis over the contract term beginning on the effective date of the contract because the Company is standing ready to provide services. Invoices are generally issued annually and coincide with the beginning of individual service terms.
The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines relative standalone selling prices based on the price charged to customers for each individual performance obligation.
Sales commissions earned by the Company’s sales force are considered incremental and recoverable costs of obtaining a contract with a customer. The Company has determined these costs would have an amortization period of less than one year and has elected to recognize them as an expense when incurred. Contract asset opening and closing balances were immaterial for the three and six months ended June 30, 2022.
Gross Profit and Gross Margin
Gross profit consists of total revenue, net of allowances, less cost of sales. Cost of sales includes cost of materials, direct labor, equity-based compensation, facility and other manufacturing overhead costs for consumable tests and instruments sold to customers. Cost of sales for instruments also includes depreciation on revenue generating instruments that have been placed with our customers under a reagent rental agreement. Cost of sales includes repair and maintenance cost for instruments covered by a service agreement or instruments covered by a reagent rental agreement. Cost of sales also includes warranty related costs.
The Company’s overall gross margin was 28% and 38% for the three months ended June 30, 2022 and 2021, respectively, and 28% and 37% for the six months ended June 30, 2022 and 2021, respectively. The decreases were primarily due to increases in the costs to manufacture consumables due to supply chain inflationary factors and a decrease in our average unit sales price period over period.
Shipping and Handling
Shipping and handling costs billed to customers are included as a component of revenue. The corresponding expense incurred with third party carriers is included as a component of sales, general and administrative costs on the consolidated statements of operations and comprehensive loss.
Leases
The Company accounts for leases in accordance with ASC 842, Leases. The Company determines if an arrangement is or contains a lease and the type of lease at inception. The Company classifies leases as finance leases (lessee) or sales-type leases (lessor) when there is either a transfer of ownership of the underlying asset by the end of the lease term, the lease contains an option to purchase the asset that we are reasonably certain will be exercised, the lease term is for the major part of the remaining economic life of the asset, the present value of the lease payments and any residual value guarantee equals or substantially exceeds all the fair value of the asset, or the asset is of such a specialized nature that it will have no alternative use to the lessor at the end of the lease term. Payments contingent on future events (i.e. based on usage) are considered variable and excluded from lease payments for the purposes of classification and initial measurement. Several of our leases include options to renew or extend the term upon mutual agreement of the parties and others include one-year extensions exercisable by the lessee. None of our leases contain residual value guarantees, restrictions, or covenants.
To determine whether a contract contains a lease, the Company uses its judgment in assessing whether the lessor retains a material amount of economic benefit from an underlying asset, whether explicitly or implicitly identified, which party holds control over the direction and use of the asset, and whether any substantive substitution rights over the asset exist.
Leases as Lessee
Operating leases are included in right-of-use (“ROU”) assets and corresponding lease liabilities, and finance leases are included in ROU assets and corresponding lease liabilities within our condensed consolidated balance sheets. These assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and their related liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Typically, we use our incremental borrowing rate based on the information available at commencement in determining the present value of lease payments. We use the implicit rate when readily determinable. ROU assets are net of lease payments made and exclude lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term, which may include options to extend or terminate the lease when it is reasonably certain that we will exercise the option.
Our operating leases consist primarily of leased office, factory, and laboratory space in the U.S. and office space in Europe, have between two and six-year terms, and typically contain penalizing, early-termination provisions. Our finance leases consist of leased equipment and have three-year terms.
Leases as Lessor
The Company leases instruments to customers under “reagent rental” agreements, whereby the customer agrees to purchase consumable products over a stated term, typically five years or less, for a volume-based price that includes an embedded rental for the instruments. When collectibility is probable, that amount is recognized as income at lease commencement for sales-type leases and as product is shipped, typically in a straight–line pattern, over the term for operating leases, which typically include a termination without cause or penalty provision given a short notice period.
Consideration is allocated between lease and non-lease components based on stand-alone selling price in accordance with ASC 606, Revenue from Contracts with Customers.
Net investment in sales-type leases are included within our condensed consolidated balance sheets as a component of other current assets and other non-current assets, which include the present value of lease payments not yet received and the present value of the residual asset, which are determined using the information available at commencement, including the lease term, estimated useful life, rate implicit in the lease, and expected fair value of the instrument.
Nonqualified Cash Deferral Plan
The Company's Cash Deferral Plan (the “Deferral Plan”) provides certain key employees with an opportunity to defer the receipt of such participant's base salary. The Deferral Plan is intended to be a nonqualified deferred compensation plan that complies with the provisions of Section 409A of the Internal Revenue Code. All of
the investments held in the Deferral Plan are equity securities consisting of mutual funds and recorded at fair value with changes in the investments' fair value recognized as earnings in the period they occur. The corresponding liability for the Deferral Plan is included in other non-current liabilities in the condensed consolidated balance sheet.
Equity-Based Compensation
The Company may award stock options, restricted stock units (“RSUs”), performance-based awards and other equity-based instruments to its employees, directors and consultants. Compensation cost related to equity-based instruments is based on the fair value of the instrument on the grant date, and is recognized over the requisite service period on a straight-line basis over the vesting period for each tranche (an accelerated attribution method) except for performance-based awards. Performance-based awards vest based on the achievement of performance targets. Compensation costs associated with performance-based awards are recognized over the requisite service period based on probability of achievement. Performance-based awards require management to make assumptions regarding the likelihood of achieving performance targets.
The Company estimates the fair value of service based and performance based stock option awards, including modifications of stock option awards, using the Black-Scholes option pricing model. This model derives the fair value of stock options based on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rate and dividend yield.
•Volatility: The expected volatility is based on the historical volatility of the Company's stock price over the most recent period commensurate with the expected term of the stock option award.
•Expected term: The estimated expected term for employee awards is based on a simplified method that considers an insufficient history of employee exercises. For consultant awards, the estimated expected term is the same as the life of the award.
•Risk-free interest rate: The risk-free interest rate is based on published U.S. Treasury rates for a term commensurate with the expected term.
•Dividend yield: The dividend yield is estimated as zero as the Company has not paid dividends in the past and does not have any plans to pay any dividends in the foreseeable future.
The Company records the fair value of RSUs or stock grants based on the published closing market price on the day before the grant date.
The Company accounts for forfeitures as they occur rather than on an estimated basis.
The Company also has an employee stock purchase program whereby eligible employees can elect payroll deductions that are subsequently used to purchase common stock at a discounted price. There is no compensation recorded for this program as (i) the purchase discount does not exceed the issuance costs that would have been incurred to raise a significant amount of capital by a public offering, (ii) substantially all employees that meet limited employment qualifications may participate on an equitable basis, and (iii) the plan doesn't incorporate option features that would require compensation to be recorded.
See Note 12, Employee Equity-Based Compensation for further information.
Deferred Tax
Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying condensed consolidated balance sheet. The change in deferred tax assets and liabilities for the period represents the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws in deferred tax assets and liabilities are reflected as an adjustment to the tax provision or benefit in the period of enactment.
The Company follows the provisions of ASC 740, Income Taxes, to account for any uncertainty in income taxes with respect to the accounting for all tax positions taken (or expected to be taken) on any income tax return. This guidance applies to all open tax periods in all tax jurisdictions in which the Company is required to file an income tax return. Under U.S. GAAP, in order to recognize an uncertain tax benefit the taxpayer must be more
likely than not certain of sustaining the position, and the measurement of the benefit is calculated as the largest amount that is more likely than not to be realized upon resolution of the position. Interest and penalties, if any, would be recorded within tax expense.
Foreign Currency Translation and Foreign Currency Transactions
Adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in the foreign currency translation adjustment, a component of accumulated other comprehensive loss in the condensed consolidated statements of stockholders’ deficit.
The Company has assets and liabilities, including receivables and payables, which are denominated in currencies other than their functional currency. These balance sheet items are subject to re-measurement, the impact of which is recorded in foreign currency exchange gain and loss, within the condensed consolidated statement of operations and comprehensive loss.
Loss Per Share
Basic loss per share includes no dilution and is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding for the period. Potentially dilutive common shares consist of shares issuable from stock options and unvested RSUs. Potentially dilutive common shares would also include common shares that would be outstanding if the Notes and the Series A Preferred Stock outstanding at the balance sheet date were converted and shares issuable in connection with the Securities Purchase Agreement (as defined in Note 17). Diluted earnings are not presented when the effect of adding such additional common shares is antidilutive.
See Note 11, Loss Per Share, for further information.
Comprehensive Loss
In addition to net loss, comprehensive loss includes all changes in equity during a period, except those resulting from investments by and distributions to owners. The Company holds debt securities as available-for-sale and records the change in fair market value as a component of comprehensive loss. The Company also has adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars which is included as a component of comprehensive loss.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Standards that were recently adopted
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). This update simplifies the accounting for convertible debt instruments by removing the beneficial conversion and cash conversion separation models for convertible instruments. Under the update, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives or that do not result in substantial premiums accounted for as paid-in capital. The update also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will no longer be available. The Company adopted the standard on January 1, 2022 through application of the modified retrospective method of transition. The Company applied the standard to the Notes outstanding as of January 1, 2022, as discussed in Note 10, Convertible Notes. As a result, the Notes are now accounted for as a single liability measured at their amortized cost. The Notes are no longer bifurcated between debt and equity and are instead accounted for entirely as debt at face value net of any discount or premium and issuance costs. Interest expense is comprised of (1) cash interest payments, (2) amortization of any debt discounts or premiums based on the original offering, and (3) amortization of any debt issuance costs. On January 1, 2022, the cumulative effect of adoption resulted in an increase in the net carrying amount of the Notes, of $11.5 million, a decrease in additional-paid-in-capital of $37.4 million, and a decrease in accumulated deficit of $25.9 million. ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share. This change has no impact on the Company given the Company was already using the if-converted method to calculate diluted earnings per share.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity’s Own Equity (Topic 815 - 40). ASU 2021-04 codifies the final consensus reached by the Emerging Issues Task Force (EITF) on how an issuer should account for modifications made to equity-classified written call options (hereafter referred to as a warrant to purchase the issuer’s common stock). The guidance in the ASU requires the issuer to treat a modification of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange of the original warrant for a new warrant. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the warrant or as termination of the original warrant and issuance of a new warrant. This ASU was adopted January 1, 2022, and did not impact the Company's consolidated financial statements at January 1, 2022.
Standards not yet adopted
In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method. ASU 2022-01 is related to the portfolio layer method of hedge accounting. The amendments in this update clarify the accounting and promote consistency in reporting for hedges where the portfolio layer method is applied. This update is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. We do not expect the update to have a material effect on our condensed consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 relates to troubled debt restructurings (“TDRs”) and vintage disclosures for financing receivables. The amendments in this update eliminate the accounting guidance for TDRs by creditors while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty. The amendments also require disclosure of current-period gross write-offs by year of origination for financing receivables. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We do not expect the update to have a material effect on our condensed consolidated financial statements.
NOTE 3. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments and accounts receivable.
The Company has financial institutions for banking operations that hold 10% or more of the Company’s cash and cash equivalents. As of June 30, 2022, four of the Company's financial institutions held 33%, 19%, 17% and 16% of the Company’s cash and cash equivalents. As of December 31, 2021, two of the Company's financial institutions held 72% and 13% of the Company’s cash and cash equivalents.
The Company grants credit to domestic and international customers. Exposure to losses on accounts receivable is principally dependent on each client's financial position. The Company had one customer that accounted for 11% and 13% of the Company’s net accounts receivable balance as of June 30, 2022 and December 31, 2021, respectively.
The Company did not have any customers that represented 10% or more of the Company’s total revenue for the three and six months ended June 30, 2022 and 2021.
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following tables represent the financial instruments measured at fair value on a recurring basis in the financial statements of the Company and the valuation approach applied to each class of financial instruments at June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | |
| June 30, 2022 |
| Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) | Significant
Other
Observable Inputs
(Level 2) | Significant
Unobservable
Inputs
(Level 3) | Total |
| Assets: | | | | |
| Cash and cash equivalents: | | | | |
| Money market funds | $ | 118 | | $ | — | | $ | — | | $ | 118 | |
| Total cash and cash equivalents | 118 | | — | | — | | 118 | |
| Equity investments: | | | | |
| Mutual funds | 793 | | — | | — | | 793 | |
| Total equity investments | 793 | | — | | — | | 793 | |
| Debt securities available-for-sale: | | | | |
| Certificates of deposit | — | | 5,242 | | — | | 5,242 | |
| U.S. Treasury securities | 13,218 | | — | | — | | 13,218 | |
| Commercial paper | — | | 5,044 | | — | | 5,044 | |
| Corporate notes and bonds | — | | 7,894 | | — | | 7,894 | |
| Debt securities available-for-sale | 13,218 | | 18,180 | | — | | 31,398 | |
| Total assets measured at fair value | $ | 14,129 | | $ | 18,180 | | $ | — | | $ | 32,309 | |
| | | | | | | | | | | | | | |
| December 31, 2021 |
| Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) | Significant
Other
Observable Inputs
(Level 2) | Significant
Unobservable
Inputs
(Level 3) | Total |
| Assets: | | | | |
| Cash and cash equivalents: | | | | |
| Money market funds | $ | 5,563 | | $ | — | | $ | — | | $ | 5,563 | |
| Commercial paper | — | | 200 | | — | | 200 | |
| Total cash and cash equivalents | 5,563 | | 200 | | — | | 5,763 | |
| Equity investments: | | | | |
| Mutual funds | 841 | | — | | — | | 841 | |
| Total equity investments | 841 | | — | | — | | 841 | |
| Debt securities available-for-sale: | | | | |
| Certificates of deposit | — | | 1,351 | | — | | 1,351 | |
| U.S. Treasury securities | 250 | | — | | — | | 250 | |
| Commercial paper | — | | 8,046 | | — | | 8,046 | |
| Corporate notes and bonds | — | | 13,232 | | — | | 13,232 | |
| Debt securities available-for-sale | 250 | | 22,629 | | — | | 22,879 | |
| Total assets measured at fair value | $ | 6,654 | | $ | 22,829 | | $ | — | | $ | 29,483 | |
Highly liquid investments with an original maturity of three months or less at time of purchase are included in cash and cash equivalents on the condensed consolidated balance sheet.
Level 1 assets are priced using quoted prices in active markets for identical assets which include money market funds, U.S. Treasury securities and mutual funds as these specific assets are liquid.
Level 2 available-for-sale securities are priced using quoted market prices for similar instruments or nonbinding market prices that are corroborated by observable market data. The Company uses inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from quoted market prices, independent pricing vendors, or other sources, to determine the ultimate fair value of these assets and liabilities. The Company uses such pricing data as the primary input to make its assessments and determinations as to the ultimate valuation of its investment portfolio and has not made, during the periods presented, any material adjustments to such inputs.
At June 30, 2022, the Notes had an outstanding principal amount of $106.5 million with a fair value of $70.7 million. At December 31, 2021, the Notes had an outstanding principal amount of $120.5 million with a fair value of $89.4 million. The fair value of the Notes represents a Level 2 measurement.
The fair value of the Notes is typically correlated to the Company’s stock price and as a result, significant changes to the Company’s stock price will have a significant impact on the calculated fair value.
See Note 10, Convertible Notes for further detail on the Notes.
NOTE 5. INVESTMENTS
The following tables summarize the Company’s debt securities available-for-sale investments at June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | |
| June 30, 2022 |
| Amortized
Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| Certificates of deposit | $ | 5,268 | | $ | — | | $ | (26) | | $ | 5,242 | |
| U.S. Treasury securities | 13,272 | | — | | (54) | | 13,218 | |
| Commercial paper | 5,067 | | — | | (23) | | 5,044 | |
| Corporate notes and bonds | 7,938 | | — | | (44) | | 7,894 | |
| Total | $ | 31,545 | | $ | — | | $ | (147) | | $ | 31,398 | |
| | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized
Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| Certificates of deposit | $ | 1,351 | | $ | — | | $ | — | | $ | 1,351 | |
| U.S. Treasury securities | 250 | | — | | — | | 250 | |
| Commercial paper | 8,048 | | — | | (2) | | 8,046 | |
| Corporate notes and bonds | 13,245 | | — | | (13) | | 13,232 | |
| Total | $ | 22,894 | | $ | — | | $ | (15) | | $ | 22,879 | |
The following table summarizes the maturities of the Company’s debt securities available-for-sale investments at June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | |
| June 30, 2022 | December 31, 2021 |
| Amortized
Cost | Fair Value | Amortized
Cost | Fair Value |
| Due in less than 1 year | $ | 31,140 | | $ | 30,995 | | $ | 22,663 | | $ | 22,649 | |
| Due in 1-3 years | 405 | | 403 | | 231 | | 230 | |
Total | $ | 31,545 | | $ | 31,398 | | $ | 22,894 | | $ | 22,879 | |
There were no proceeds from sales of debt securities available-for-sale (including principal paydowns) for the three and six months ended June 30, 2022 and 2021. The Company determines gains and losses of marketable securities based on specific identification of the securities sold. There were no material realized gains or losses from debt securities available-for-sale for the three and six months ended June 30, 2022 and 2021. No material balances were reclassified out of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2022 and 2021. No unrealized losses on debt securities available-for-sale have been recognized in income for the three and six months ended June 30, 2022 and 2021, as the issuers of such securities held by us were of high credit quality.
As of June 30, 2022, there were no holdings of debt securities available-for-sale of any one issuer, other than the U.S. government, in an amount greater than 10%.
As of June 30, 2022 the Company did not carry any debt securities available-for-sale that were below the Company's minimum credit rating. All debt securities available-for-sale had a credit rating of A- or better as of June 30, 2022.
Equity securities are comprised of investments in mutual funds. The fair value of equity securities for each of the periods ended June 30, 2022 and December 31, 2021 was $0.8 million.
Unrealized gains or losses on equity securities recorded in income during the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Unrealized loss on equity investments | $ | 107 | | $ | — | | | $ | 157 | | $ | — | |
These unrealized gains or losses are recorded as a component of other income (expense), net. There were no realized gains or losses from equity securities for each of the three and six months ended June 30, 2022 and 2021.
NOTE 6. INVENTORY
Inventories consisted of the following at June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | |
| June 30, | December 31, |
| 2022 | 2021 |
| Raw materials | $ | 2,078 | | $ | 1,343 | |
| Work in process | 1,690 | | 1,625 | |
| Finished goods | 1,536 | | 2,099 | |
| $ | 5,304 | | $ | 5,067 | |
NOTE 7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | |
| June 30, | December 31, |
| 2022 | 2021 |
| Computer equipment | $ | 3,872 | | $ | 3,181 | |
| Technical equipment | 3,285 | | 3,285 | |
| Facilities | 3,674 | | 3,675 | |
| Instruments | 4,253 | | 5,364 | |
| Capital projects in progress | 13 | | 683 | |
| Total property and equipment | $ | 15,097 | | $ | 16,188 | |
| Accumulated depreciation | (11,000) | | (10,799) | |
| Property and equipment, net | $ | 4,097 | | $ | 5,389 | |
Depreciation expense for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Depreciation expense | $ | 443 | | $ | 493 | | | $ | 903 | | $ | 1,053 | |
Instruments at cost and accumulated depreciation where the Company is the lessor under operating leases consisted of the following at June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | |
| June 30, | December 31, |
| 2022 | 2021 |
| Instruments at cost under operating leases | $ | 2,547 | | $ | 3,110 | |
| Accumulated depreciation under operating leases | (1,014) | | (1,165) | |
| Net property and equipment under operating leases | $ | 1,533 | | $ | 1,945 | |
NOTE 8. DEFERRED REVENUE AND REMAINING PERFORMANCE OBLIGATIONS
Deferred revenue consists of amounts received for products or services not yet delivered or earned. If we anticipate revenue will not be earned within the following twelve months, the amount is reported as other non-current liabilities. A summary of the balances as of June 30, 2022 and December 31, 2021 follows (in thousands):
| | | | | | | | |
| June 30, | December 31, |
| 2022 | 2021 |
| Products and services not yet delivered | $ | 335 | | $ | 451 | |
We recognized $0.2 million and $0.3 million of revenues that were included in the beginning contract liabilities balances during the three and six months ended June 30, 2022, respectively, and $0.2 million and $0.3 million of revenues that were included in the beginning contract liabilities balances during the three and six months ended June 30, 2021, respectively. No material amount of revenue recognized during the period was from performance obligations satisfied in prior periods.
Transaction Price Allocated to Remaining Performance Obligations
As of June 30, 2022, $10.1 million of revenue is expected to be recognized from remaining performance obligations. This balance primarily relates to product shipments for reagents sold to customers under sales-type lease agreements. These agreements have between two and four year terms and revenue is recognized as product is shipped, typically on a straight-line basis. The remaining balance relates to executed service contracts that begin as warranty periods expire. These service contracts typically provide for four-year terms and revenue is recognized on a straight-line basis.
The Company elects not to disclose the value of unsatisfied performance obligations for (i) contracts with an expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
NOTE 9. LONG-TERM DEBT
The Company entered into two loan agreements with one financing company in 2020. Loan proceeds were $0.2 million, with interest rates ranging from 9.8% to 12.4% and maturities becoming due through 2022.
As of June 30, 2022 and December 31, 2021, long-term debt consisted of the following (in thousands):
| | | | | | | | |
| June 30, | December 31, |
| 2022 | 2021 |
| Loans - various interest | $ | 84 | | $ | 80 | |
| Current portion of long-term debt | 84 | | 80 | |
| Long-term debt | $ | — | | $ | — | |
The following presents maturities of future principal obligations of long-term debt as of June 30, 2022 (in thousands):
| | | | | |
| Remainder of 2022 | $ | 84 | |
| 2023 | — | |
| 2024 | — | |
| 2025 | — | |
| 2026 | — | |
| Thereafter | — | |
| Total | $ | 84 | |
NOTE 10. CONVERTIBLE NOTES
The Notes are the Company's senior unsecured obligations and mature on March 15, 2023 (the “Maturity Date”), unless earlier repurchased or converted into shares of common stock under certain circumstances described below. Upon conversion of the Notes, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock, or a combination of cash and shares of common stock, at the Company’s election. The initial conversion rate of the Notes is 32.3428 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $30.92 per share of common stock, subject to adjustment. The Company pays interest on the Notes semi-annually in arrears on March 15 and September 15 of each year. The Company’s Notes have a fixed coupon rate of 2.5% per annum on the principal amount.
The Company incurred issuance costs related to the issuance of the Notes which is amortized over the five-year contractual term of the Notes using the effective interest method. The effective interest rate on the Notes, including accretion of the Notes to par was 3.2%.
The Notes include customary terms and covenants, including certain events of default upon which the Notes may be due and payable immediately. Holders have the option to convert the Notes in multiples of $1,000 principal amount at any time prior to December 15, 2022, but only in the following circumstances:
•if the Company’s stock price exceeds 130% of the conversion price for 20 of the last 30 trading days of any calendar quarter after June 30, 2018;
•during the 5 business day period after any 5 consecutive trading day period in which the Notes’ trading price is less than 98% of the product of the common stock price times the conversion rate; or
•the occurrence of certain corporate events, such as a change of control, merger or liquidation.
At any time on or after December 15, 2022, a holder may convert its Notes in multiples of $1,000 principal amount. Holders of the Notes who convert their Notes in connection with a make-whole fundamental change (as defined in the Indenture pursuant to which the Notes were issued) are, under certain circumstances, entitled to an increase in the conversion rate. In addition, in the event of a fundamental change or event of default prior to the Maturity Date, holders will, subject to certain conditions, have the right, at their option, to require the Company to repurchase for cash all or part of the Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the repurchase date.
Interest expense during the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Contractual coupon interest | $ | 666 | | $ | 1,072 | | | $ | 1,449 | | $ | 2,144 | |
| Amortization of debt issuance costs | 154 | | 180 | | | 265 | | 354 | |
| Amortization of the debt discount | — | | $ | 2,903 | | | $ | — | | $ | 5,724 | |
| Total interest expense on convertible notes | $ | 820 | | $ | 4,155 | | | $ | 1,714 | | $ | 8,222 | |
As of June 30, 2022 and December 31, 2021, no Notes were convertible pursuant to their original terms.
On March 21, 2022, the Company entered into a privately negotiated exchange agreement (the “Exchange Agreement”) with a holder of the Notes. Under the terms of the Exchange Agreement, the note holder agreed to exchange with the Company $14.0 million in aggregate principal amount of Notes held by it in eight equal tranches as follows for each tranche: (a) 22.64 shares per $1,000 principal amount of Notes exchanged, plus (b) an additional number of shares of the Company’s common stock per $1,000 principal amount of Notes exchanged equal to the sum, for each of the trading days during a separate agreed upon reference period for each tranche commencing on March 21, 2022 for the first tranche, of the quotient of (i) $155.67 divided by (ii) the daily volume-weighted average price for such trading day (collectively, the “Exchange Transaction”). The closing of the Exchange Transaction occurred in eight tranches (“Obligation to Exchange”), with the first closing occurring on March 29, 2022 and the last closing on May 18, 2022.
On March 21, 2022 the Obligation to Exchange the $14.0 million of Notes was accounted for as an extinguishment and was replaced by new notes with an embedded feature (the “New Notes”). The New Notes were elected to be carried using the fair value option. The New Notes were recorded at fair value on initial measurement and remeasured at fair value (“mark to market”) at each reporting period with changes in fair value reported in other income and expense, net. This fair value election was exclusive to the New Notes and did not extend to other Notes. At June 30, 2022 the embedded feature was no longer outstanding as the New Notes were exchanged and the Obligation to Exchange was retired. At June 30, 2022 no Notes were carried using the fair value option.
During the six months ended June 30, 2022 the holder of the Notes exchanged approximately $14.0 million in aggregate principal amount of Notes held by the holder for 10,798,482 shares of the Company's common stock pursuant to the Exchange Agreement. The legal exchange of the Notes resulted in a gain of $3.6 million. The Company's common stock was determined to have a value of $10.2 million, which was recorded to contributed capital during the six months ended June 30, 2022.
Gain on extinguishment of exchanged Notes during the three and six months ended June 30, 2022 and 2021 was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Gain on extinguishment | $ | 919 | | $ | — | | | $ | 3,565 | | $ | — | |
The carrying value of the Notes at June 30, 2022 consisted of the following (in thousands):
| | | | | |
| June 30, |
| 2022 |
Outstanding principal at par | $ | 106,500 | |
| Unamortized debt issuance | (672) | |
| Net carrying amount of the liability component | $ | 105,828 | |
In connection with the Notes issuance, the Company entered into a prepaid forward stock repurchase transaction (“Prepaid Forward”) with a financial institution (“Forward Counterparty”). Pursuant to the Prepaid Forward, the Company used approximately $45.1 million of the net proceeds from its issuance of the Notes to fund the Prepaid Forward. The aggregate number of shares of the Company’s common stock underlying the Prepaid Forward was approximately 1,858,500. The expiration date for the Prepaid Forward is March 15, 2023, although it may be settled earlier in whole or in part. Upon settlement of the Prepaid Forward, at expiration or upon any early settlement, the Forward Counterparty will deliver to the Company the number of shares of common stock underlying the Prepaid Forward or the portion thereof being settled early. The shares purchased under the Prepaid Forward are treated as treasury stock and not outstanding for purposes of the calculation of basic and diluted earnings per share, but will remain outstanding for corporate law purposes, including for purposes of any future stockholders’ votes, until the Forward Counterparty delivers the shares underlying the Prepaid Forward to the Company. The Company’s Prepaid Forward hedge transaction exposes the Company to credit risk to the extent that its counterparty may be unable to meet the terms of the transaction. The Company mitigates this risk by limiting its counterparty to a major financial institution.
NOTE 11. LOSS PER SHARE
Basic net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted average common shares outstanding during the period. Basic and diluted net loss per share are the same because all outstanding common stock equivalents have been excluded, as they are anti-dilutive due to the Company’s losses.
The following potentially issuable common shares were not included in the computation of diluted net loss per share because they would have an anti-dilutive effect for each of the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Shares issuable upon the release of restricted stock units | 4,909 | | 2,444 | | | 4,909 | | 2,444 | |
| Shares issuable upon exercise of stock options | 6,039 | | 7,941 | | | 6,039 | | 7,941 | |
| 10,948 | | 10,385 | | | 10,948 | | 10,385 | |
Potentially dilutive common shares would include common shares that would be outstanding if Notes convertible at the balance sheet date were converted. As discussed in Note 10, Convertible Notes, upon conversion of the Notes, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock, or a combination of cash and shares of common stock, at the Company’s election. The initial conversion rate of the Notes is 32.3428 shares of common stock per $1,000 principal amount of the Notes. As of
June 30, 2022, no Notes were convertible pursuant to the original terms. The number of shares of common stock issuable upon conversion of the outstanding Notes based on the initial conversion rate was approximately 3.4 million shares as of June 30, 2022.
In connection with the Notes, the Company entered into a prepaid forward stock repurchase transaction. The aggregate number of shares of the Company’s common stock underlying the Prepaid Forward was approximately 1,858,500. The shares purchased under the Prepaid Forward are treated as treasury stock and not outstanding for purposes of the calculation of basic and diluted earnings per share, but will remain outstanding for corporate law purposes, including for purposes of any future stockholders’ votes, until the Forward Counterparty delivers the shares underlying the Prepaid Forward to the Company.
Potentially dilutive common shares would also include common shares that would be outstanding if Series A Preferred Stock were converted into common stock. Each share of Series A Preferred Stock is convertible, at the option of the holder, at any time into one share of the Company’s common stock. Additionally, each share of Series A Preferred Stock will automatically be converted into one share of the Company’s common stock immediately upon a sale of all outstanding stock of the Company or a merger of the Company into another corporation where the pre-merger Company’s stockholders cease to be the controlling stockholders of the post-merger corporation. The number of shares of common stock issuable upon conversion of the Series A Preferred Stock is 3,954,546 as of June 30, 2022.
As discussed in Note 17, Stockholders' Equity, the Company entered into a securities purchase agreement with the Jack W. Schuler Living Trust for the issuance and sale by the Company of an aggregate of 2,439,024 shares of the Company’s common stock The closing of the transaction is expected to occur on September 26, 2022, subject to the satisfaction of customary closing conditions and is considered an equity forward agreement. The shares to be issued from this agreement were not included in the computation of diluted net loss per share because they would have an anti-dilutive effect due to net losses.
NOTE 12. EMPLOYEE EQUITY-BASED COMPENSATION
The following table summarizes option activity under the Company's equity-based compensation plans for the six months ended June 30, 2022:
| | | | | | | | |
| Number of Shares | Weighted Average Exercise Price per Share |
| Options outstanding January 1, 2022 | 7,192,540 | | $ | 13.89 | |
| Granted | 140,000 | | 3.05 | |
| Forfeited | (128,670) | | 13.02 | |
| Exercised | (6,105) | | 1.04 | |
| Expired | (1,158,808) | | 10.05 | |
| Options outstanding June 30, 2022 | 6,038,957 | | $ | 14.41 | |
The table below summarizes the resulting weighted average inputs used to calculate the estimated fair value of options awarded for the three months ended June 30, 2022 and 2021:
| | | | | | | | |
| Three Months Ended June 30, |
| 2022 | 2021 |
| Expected term (in years) | 0.0 | 5.79 |
| Volatility | — | % | 65 | % |
| Expected dividends | — | | — | |
| Risk free interest rates | — | % | 1.10 | % |
| Weighted average fair value | $ | — | | $ | 4.09 | |
No stock options were granted during the three months ended June 30, 2022, resulting in no summarized data for the period.
The following table shows summary information for outstanding options and options that are exercisable (vested) as of June 30, 2022:
| | | | | | | | |
| Options
Outstanding | Options
Exercisable |
| Number of options | 6,038,957 | | 4,644,828 | |
| Weighted average remaining contractual term (in years) | 5.71 | 5.18 |
| Weighted average exercise price | $ | 14.41 | | $ | 15.04 | |
| Weighted average fair value | $ | 9.00 | | $ | 9.31 | |
| Aggregate intrinsic value (in thousands) | $ | — | | $ | — | |
The following table summarizes RSU and restricted stock award activity for the six months ended June 30, 2022:
| | | | | | | | |
| Number of Shares | Weighted Average Grant Date Fair Value per Share |
| Outstanding January 1, 2022 | 2,090,182 | | $ | 10.77 | |
| Granted | 4,107,083 | | 1.55 | |
| Forfeited | (167,129) | | 9.94 | |
| Vested/released | (1,121,468) | | 3.39 | |
| Outstanding June 30, 2022 | 4,908,668 | | $ | 4.77 | |
The table below summarizes equity-based compensation expense for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Cost of sales | $ | 228 | | $ | 74 | | | $ | 403 | | $ | 175 | |
| Research and development | 539 | | 1,328 | | | 901 | | 4,074 | |
| Sales, general and administrative | 3,204 | | 5,188 | | | 5,646 | | 11,180 | |
| $ | 3,971 | | $ | 6,590 | | | $ | 6,950 | | $ | 15,429 | |
The table below summarizes share-based compensation cost capitalized to inventory or inventory transferred to property and equipment (also referred to as instruments) for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
Cost capitalized to inventory | $ | 74 | | $ | 87 | | | $ | 117 | | $ | 242 | |
As of June 30, 2022, unrecognized equity-based compensation expense related to unvested stock options and unvested RSUs was $3.1 million and $11.0 million, respectively. This is expected to be recognized over the years 2022 through 2027.
Included in the above-noted stock options outstanding and stock compensation expense are performance-based stock options which vest only upon the achievement of certain targets. Performance-based stock options are generally granted at-the-money, contingently vest over a period of 1 to 2 years, depending on the nature of the performance goal, and have contractual lives of 10 years. These options were valued in the same manner as the time-based options, with the assumption that performance goals will be achieved. The inputs for expected volatility, expected dividends, and risk-free rate used in estimating those options’ fair value are the same as the time-based options issued under the Company's equity incentive plans. The expected term for performance-based stock options is 5 to 7 years. However, the Company only recognizes stock compensation expense to the extent that the targets are determined to be probable of being achieved, which triggers the vesting of the performance options.
During 2020, the Company granted 105,000 performance-based stock options. Of these performance-based stock options, performance obligations had been met for 90,000 options which became exercisable in a prior period. Of these performance-based stock options, 90,000 options expired during the three and six months ended June 30, 2022. No performance-based stock options were outstanding as of June 30, 2022.
The table below summarizes share-based compensation cost in connection with performance-based stock options for the six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | |
| Six Months Ended June 30, |
| 2022 | 2021 |
Performance-based stock option expense | $ | — | | $ | 230 | |
Included in the above-noted RSU and restricted stock award outstanding amounts are performance-based RSUs which vest only upon the achievement of certain targets. Performance-based RSUs contingently vest over a period of 1 to 3 years, depending on the nature of the performance goal, and have contractual lives of 10 years. These units were valued in the same manner as other RSUs, based on the published closing market price on the day before the grant date. However, the Company only recognizes stock compensation expense to the extent that the targets are determined to be probable of being achieved, which triggers the vesting of the performance options.
During 2020, the Company granted performance-based RSUs of which 165,974 were outstanding as of June 30, 2022. No changes occurred during the six months ended June 30, 2022.
During 2021, the Company granted performance-based RSUs of which 111,806 were outstanding as of June 30, 2022. No changes occurred during the six months ended June 30, 2022.
The table below summarizes share-based compensation cost in connection with performance-based RSUs for the six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | |
| Six Months Ended June 30, |
| 2022 | 2021 |
Performance-based RSU expense | $ | — | | $ | 818 | |
NOTE 13. INCOME TAXES
For the six months ended June 30, 2022, the Company did not carry an income tax provision amount as the Company does not recognize tax benefits from current year tax losses in the U.S. and other foreign jurisdictions. The Company’s tax expense for the six months ended June 30, 2022 differs from the tax expense computed by applying the U.S. statutory tax rate to its year-to-date pre-tax loss of $32.0 million, as no tax benefits were recorded for tax losses generated in the U.S. and other foreign jurisdictions due to the valuation allowance. At June 30, 2022, the Company had deferred tax assets primarily related to U.S. federal and state tax loss carryforwards and a deferred tax liability related to amortization of the Notes. The Company provided a valuation allowance against its net deferred tax assets as future realization of such assets is not more likely than not to occur.
The Company accounts for uncertain tax positions pursuant to the recognition and measurement criteria under ASC 740, Income Taxes. For the three and six months ended June 30, 2022, we did not note any significant changes to our uncertain tax positions. We do not anticipate significant changes to uncertain tax positions within the next 12 months.
NOTE 14. COMMITMENTS
During April 2022, the Company entered into a non-cancellable purchase obligation with a supplier to acquire raw materials for a total commitment of $11.9 million. Under the terms of this agreement the Company has until March 15, 2027 to take delivery of purchased items. This commitment was entered into to ensure proper material quantities to develop and commercialize our next generation AST platform.
As of June 30, 2022 the commitment remains $11.9 million as the Company has not taken delivery of any inventory.
NOTE 15. LEASES
The following presents supplemental information related to our leases in which we are the lessee for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Cash paid for amounts included in lease liabilities | | | | | |
| Operating cash flows from operating leases | $ | 203 | | $ | 154 | | | $ | 266 | | $ | 308 | |
| Operating cash flows from finance leases | $ | 424 | | $ | — | | | $ | 424 | | $ | — | |
| ROU assets obtained in exchange for lease obligations | | | | | |
| Operating leases | $ | — | | $ | — | | | $ | — | | $ | — | |
| Finance leases | $ | 2,760 | | $ | — | | | $ | 2,760 | | $ | — | |
| Lease Cost | | | | | |
| Operating leases | $ | 259 | | $ | 261 | | | $ | 564 | | $ | 559 | |
Finance leases | $ | 97 | | $ | — | | | $ | 97 | | $ | — | |
| Short-term leases | $ | 21 | | $ | 59 | | | $ | 41 | | $ | 59 | |
The weighted average remaining lease term on our operating leases is 3.1 years. The weighted average discount rate on those leases is 7.1%. The weighted average remaining lease term on our finance leases is 2.7 years. The weighted average discount rate on those leases is 4.6%.
The following presents maturities of lease liabilities in which we are the lessee as of June 30, 2022 (in thousands):
| | | | | | | | |
| Operating | Finance |
Remainder of 2022 | $ | 446 | | $ | 491 | |
| 2023 | 968 | | 983 | |
| 2024 | 1,055 | | 983 | |
| 2025 | 585 | | 239 | |
| 2026 | — | | — | |
| Thereafter | — | | — | |
| Total lease payments | 3,054 | | 2,696 | |
| Less imputed interest | (325) | | (158) | |
| $ | 2,729 | | $ | 2,538 | |
The net investment in sales-type leases, where we are the lessor, is a component of other current assets and other non-current assets in our condensed consolidated balance sheet. As of June 30, 2022, the total net investment in these leases was $3.3 million. The following presents maturities of lease receivables under sales-type leases as of June 30, 2022 (in thousands):
| | | | | |
| Remainder of 2022 | $ | 727 | |
| 2023 | 1,140 | |
| 2024 | 646 | |
| 2025 | 192 | |
| 2026 | 606 | |
| Thereafter | — | |
| Total undiscounted cash flows | 3,311 | |
| Less imputed interest | — | |
| Present value of lease payments | $ | 3,311 | |
NOTE 16. GEOGRAPHIC AND REVENUE DISAGGREGATION
The Company operates as one operating segment. Sales to customers outside the U.S. represented 14% for each of the three and six months ended June 30, 2022, and 15% for each of the three and six months ended June 30, 2021.
As of June 30, 2022 and December 31, 2021, balances due from foreign customers, in U.S. dollars, were $0.8 million and $0.7 million, respectively.
The following presents total net sales by geographic territory for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Domestic | $ | 3,321 | | $ | 2,386 | | | $ | 5,839 | | $ | 4,532 | |
| Foreign | 540 | | 412 | | | 981 | | 784 | |
| $ | 3,861 | | $ | 2,798 | | | $ | 6,820 | | $ | 5,316 | |
The following presents total net sales by line of business for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
Accelerate Pheno revenue | $ | 3,818 | | $ | 2,767 | | | $ | 6,736 | | $ | 5,240 | |
| Other revenue | 43 | | 31 | | | 84 | | 76 | |
| $ | 3,861 | | $ | 2,798 | | | $ | 6,820 | | $ | 5,316 | |
The following presents total net sales by products and services for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2020 | 2019 |
| Products | $ | 3,476 | | $ | 2,483 | | | $ | 6,023 | | $ | 4,700 | |
| Services | 385 | | 315 | | | 797 | | 616 | |
| $ | 3,861 | | $ | 2,798 | | | $ | 6,820 | | $ | 5,316 | |
Lease revenue included in net sales was $0.6 million and $0.4 million for the three months ended June 30, 2022 and 2021, respectively, and $1.1 million and $0.8 million for the six months ended June 30, 2022 and 2021, respectively, which does not represent revenues recognized from contracts with customers.
The following presents property and equipment, net by geographic territory (in thousands):
| | | | | | | | |
| June 30, | December 31, |
| 2022 | 2021 |
| Domestic | $ | 3,866 | | $ | 5,014 | |
| Foreign | 231 | | 375 | |
| $ | 4,097 | | $ | 5,389 | |
NOTE 17. STOCKHOLDERS' EQUITY
Convertible Notes Exchange Agreement
During the six months ended June 30, 2022, a holder of the Notes exchanged approximately $14.0 million in aggregate principal amount of Notes held by the holder for 10,798,482 shares of the Company's common stock pursuant to the Exchange Agreement. The Company's common stock was determined to have a value of $10.2 million, which was recorded to contributed capital during the six months ended June 30, 2022. See Note 10, Convertible Notes for additional information.
Securities Purchase Agreement
On March 24, 2022, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with the Jack W. Schuler Living Trust (the “Schuler Trust”) for the issuance and sale by the Company of an aggregate of 2,439,024 shares of the Company’s common stock (the “Shares”) to the Schuler Trust in an offering (the “Private Placement”) exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. Jack Schuler, serves as a member of the Company’s board of directors and is the sole trustee of the Schuler Trust.
Pursuant to the Securities Purchase Agreement, the Schuler Trust has agreed to purchase the Shares at a purchase price (determined in accordance with Nasdaq rules relating to the “market value” of the Company’s common stock) of $1.64 per share, which is equal to the consolidated closing bid price reported by Nasdaq immediately preceding the time the Company entered into the Securities Purchase Agreement, for an aggregate purchase price of $4.0 million.
On June 29, 2022, the Company and the Schuler Trust agreed to extend the closing date of the Private Placement from June 30, 2022 to September 26, 2022. The Securities Purchase Agreement is considered an equity forward agreement and meets the definition of a freestanding financial instrument which is classified in stockholders’ deficit. The value of this equity forward agreement as June 30, 2022 is immaterial.
NOTE 18. RELATED PARTY TRANSACTIONS
Securities Purchase Agreement
On March 24, 2022, the Company entered into the Securities Purchase Agreement with the Schuler Trust for the issuance and sale by the Company of the Shares to the Schuler Trust. Jack Schuler, serves as a member of the Company’s board of directors and is the sole trustee of the Schuler Trust.
See Note 17, Stockholders' Equity, for further information.
Convertible Notes
As of June 30, 2022 the Schuler Trust held $1.8 million aggregate principal amount of the Notes. See Note 10, Convertible Notes, for further information regarding the Notes.
NOTE 19. SUBSEQUENT EVENTS
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
Debt Exchange
Effective August 15, 2022, the Company entered into an exchange agreement (the “Exchange Agreement”) with the Jack W. Schuler Living Trust (the “Schuler Trust”), a holder of the Company’s 2.50% Convertible Senior Notes due 2023 (the “Notes”). Jack Schuler, who serves as a member of the Company’s board of directors, is the sole trustee of the Schuler rust. Under the terms of the Exchange Agreement, the Schuler Trust has agreed to exchange with the Company (the “Exchange”) $49,905,000 in aggregate principal amount of Notes held by it for (a) a secured promissory note in an aggregate principal amount of $34,933,500 (the “Secured Note”) and (b) a warrant (the “Warrant”) to acquire the Company’s common stock at an exercise price of $2.12 per share (the “Exercise Price”), which represents the closing price of the Company’s common stock as of August 12, 2022.
The Secured Note has a scheduled maturity date of August 15, 2027 and will be repayable upon written demand at any time on or after such date. The Company may, at its option, repay the note in (i) United States dollars or (ii) in the form of common stock of the Company, in a number of shares that is obtained by dividing the total amount of such payment by $2.12, subject to certain adjustments as more fully described in the Secured Note. The Secured Note bears interest at a rate of 5.0% per annum, payable at the option of the Company in the same form, at the earlier of (i) any prepayment of principal and (ii) maturity. The Company may prepay the Secured Note at any time without premium or penalty. The Secured Note contains customary representations and warranties and events of default, including certain “change of control” events involving the Company. The Secured Note is secured by substantially all of the assets of the Company. The Secured Note does not restrict the incurrence of future indebtedness by the Company but shall become subordinated in right of payment and lien priority upon the request of any future senior lender.
The Warrant may be exercised from February 15, 2023 through the earlier of (i) August 15, 2029 and (ii) the consummation of certain acquisition transactions involving the Company, as set forth in the Warrant. The Warrant is exercisable for up to 2,471,710 shares, or 15% of the principal amount of the Secured Note, divided by the Exercise Price. Such number of shares and the Exercise Price are subject to certain customary proportional adjustments for fundamental events, including stock splits and recapitalizations, as set forth in the Warrant.
Sales and Marketing Agreement
On August 15, 2022 (the “Effective Date”), the Company entered into a Sales and Marketing Agreement (the “Sales Agreement”) with Becton, Dickinson and Company (“BD”) appointing BD as the Company’s worldwide exclusive sales agent to commercialize the Company’s Pheno 1.0 and Arc instruments and kits (“Products”) in the field of microbiology and in territories in which the necessary regulatory approvals are achieved and granting to BD certain other rights to future Company products. The term of the agreement is five (5) years (the “Initial Term”) and is subject to automatic one year renewals unless prior notice is provided to a party.
Pursuant to the Sales Agreement, the Company engages BD to be generally responsible for sales-related support activities for the Products in exchange for commissions on Product sales by Company. BD will provide such sales activities pursuant to a mutually acceptable commercialization plan and strategy. These services will be agreed to by the parties and set forth in a commercialization plan, the first one to be negotiated by the parties shortly after the Effective Date, and are expected to include sales, marketing, technical and order support. The Company and BD shall agree on rolling 12-month sales forecasts on a quarterly basis for the Products. BD must use reasonable efforts to meet or exceed each Product forecast and the Company must use reasonable efforts to produce sufficient quantities of Products to meet each Product forecast. The Company retains the responsibility for all other commercialization necessary to market the Products, including negotiating and booking sales for customer orders, manufacture and provision of inventory of Products, and marketing materials and collateral support.
The Company is responsible for all regulatory approvals in the United States and other countries where Products are marketed as of the Effective Date. Company is also responsible for obtaining and maintaining regulatory approvals in additional countries until December 31, 2023 (“Additional Countries”). The Additional Countries are to be agreed upon by the parties and the Company must deliver existing and new registrations for the Arc instruments and kits in such Additional Countries. The Company will hold the regulatory approvals for the existing countries and the Additional Countries. Beginning on January 1, 2024, BD will lead the registration process for regulatory approvals in any other countries (“BD Countries”) other than the existing countries as of the Effective Date and any Additional Countries. BD will hold the regulatory approvals for the BD Countries. Expenses associated with BD obtaining regulatory approvals will be agreed upon by the parties’ steering committee and set forth in a commercialization plan. For the Additional Countries and BD Countries, the steering committee will assess and approve specific regulatory approval requirements at the appropriate time in relation to the commercialization plan. Once regulatory approvals are obtained in an Additional Country or by BD in a BD Country, BD shall be responsible, at its expense, for the commercial launch of Products in those countries, except that costs associated with strategic marketing for such commercial launch of Products in any Additional Country will be paid for by the Company. In the event the steering committee does not approve specific regulatory approval requirements within a specific region or area, BD will lose the exclusivity granted to it in such region or area and BD will not be prohibited from selling, promoting, distributing or otherwise commercializing any third party products that directly compete with the Products.
The Parties each have made certain exclusivity commitments with respect to the Products and the promotion of directly competitive products. Subject to certain limitations Company has granted exclusive global commercial rights to BD and is required to wind down any existing agreements with third party sales agents or distributors within one year of the Effective Date. In addition, BD has agreed not enter into any new agreements with a third party for BD to sell, promote, distribute or otherwise commercialize any directly competing products. However, BD may continue to perform its obligations under any existing agreement. BD is not precluded from (i) making an expenditure to acquire or invest in third property or assets of directly competing products, or (ii) developing, improving, and/or commercializing its BD PhoenixTM automated identification and susceptibility testing system. Either party has the right to terminate the Sales Agreement upon 90 days’ notice to the other party following the first public announcement of BD’s acquisition of any directly competing product. The Company’s sole and exclusive remedy in the event of such termination is to receive any remaining balance of the Commercial Fee (as defined below).
Sales Agreement also grants BD certain rights with respect to the Company’s next generation antibiotic susceptibility test system of microbiology (“Pheno 2.0”). BD has an exclusive right of first negotiation to be the exclusive sales agent to commercialize Pheno 2.0, which will be triggered if the Company proposes to license Pheno 2.0, or if the Company and BD mutually agree that Pheno 2.0 clinical data is ready to be submitted to the U.S. Food and Drug Administration for 510(k) clearance. The terms of such subsequent agreement would have to be negotiated by the parties.
BD also has certain rights regarding a potential acquisition or financing of the Company. BD has the right to receive notice of an acquisition proposal or the initiation of a sale process. BD also has a right to receive information and a non-exclusive negotiation right regarding such potential change of control transaction. In the event of an acquisition of Company by a third party, other than BD, either party will have the right to terminate the Sales Agreement on three (3) months prior notice. Upon such termination, the Company or the acquiring party must pay BD 20% of revenue recognized for the shorter of one year or the remainder of the Initial Term, and any remaining unpaid Commercial Fee will be forgiven. Further, BD has the right to provide up to 20% of all future financings of the Company, the terms of which would be subject to negotiation by the parties.
In consideration of the rights granted, BD will pay the Company an exclusive commercial arrangement fee of $15.0 million (the “Commercial Fee”). The Commercial Fee is payable in equal $3.0 million installments commencing on the date the parties agree BD will start providing services and for the next four subsequent calendar years. The Commercial Fee is payable in the event of a termination of the Sales Agreement, except in the event of a termination (i) for convenience by the Company, (ii) by BD within one year of the Effective Date as a result of the Company’s insolvency, (iii) by BD for the Company’s material breach of the Sales Agreement, or (iv) by either party following a change of control to a third party. Additionally, the Commercial Fee or any unpaid balance will be forgiven in the event that a Product infringes a third party’s intellectual property rights. The Company also is obligated to pay BD sales commissions on the revenue recognized by the Company in accordance with U.S. generally accepted accounting principles on sales of Products (“Sales Commissions”). For existing business, the parties will define a base book listing of accounts in the commercialization plan and an annual base book fee for the Sales Commissions. For new business, the parties have established target revenue amounts and the Sales Commissions will be based on such revenue target amounts. New business is cumulative, including new accounts obtained in the previous year. Once the target level or the above target level is achieved, the Company will pay BD the target rate or the above target rate, as applicable, for all new business in that calendar year. In the event the Sales Agreement is terminated, the Company shall pay Sales Commissions for nine months past the effective date of such termination.
The Sales Agreement contains rights for each of the Company and BD to terminate the Sales Agreement based on a material breach, insolvency and other circumstances. Company and BD each may terminate the Sales Agreement for material breach by, or insolvency of, the other party following notice, and if applicable, a cure period. After the second anniversary of the Effective Date, Company and BD each has the right to terminate the Sales Agreement and any commercialization plan with 12 months’ prior written notice to the other party. The Company may also terminate the Sales Agreement if BD fails to meet certain targets for Products in any 12 months period following a cure period.
The foregoing description of the Sales Agreement is not complete and is qualified in its entirety by reference to the full text of the Sales Agreement, which will be filed with the U.S. Securities and Exchange Commission as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ending September 30, 2022.