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.
Restatement of Previously Issued Financial Statements
Background on the restatement
The Company’s previously issued interim condensed consolidated financial statements as of and for the three months ended March 31, 2022 classified its 2.50% Senior Convertible Notes due 2023 (the “Notes”) as a non-current liability with a net carrying amount of $115.8 million as of March 31, 2022. Pursuant to Accounting Standards Codification (“ASC”) 210-10-45, Balance Sheet, a portion of the Notes should have been classified as a current liability in the balance sheet as of March 31, 2022. In addition, the Company recorded an adjustment to correct a previously identified immaterial error related to the gain on extinguishment of debt for the three months ended March 31, 2022.
Effect of the restatement
The effects of the correction of the prior-period misstatements on our Condensed Consolidated Balance Sheet relating to the Notes are reflected in the table below (in thousands). The Condensed Consolidated Statements of Operations and Comprehensive Loss, Condensed Consolidated Statements of Cash Flows, and the Condensed Consolidated Statements of Stockholders’ Equity were also corrected for the other previously identified immaterial error as reflected in the table below (in thousands, except per share data).
| | | | | | | | | | | |
| March 31, |
| 2022 |
| As Previously Reported | Adjustments | As Restated |
| Current portion of convertible notes | — | | 105,661 | | 105,661 | |
| Total current liabilities | 8,214 | | 105,661 | | 113,875 | |
| Convertible notes | 115,758 | | (106,381) | | 9,377 | |
| Total liabilities | 127,133 | | (720) | | 126,413 | |
| Accumulated deficit ending balance | (558,931) | | 720 | | (558,211) | |
| Total stockholders’ deficit ending balance | (56,776) | | 720 | | (56,056) | |
| | | | | | | | | | | |
| Three Months Ended |
| March 31, |
| 2022 |
| As Previously Reported | Adjustments | As Restated |
| Gain on extinguishment of debt | 2,646 | | 720 | | 3,366 | |
| Total other income (expense), net | 1,710 | | 720 | | 2,430 | |
| Net loss before income taxes | (14,185) | | 720 | | (13,465) | |
| Net loss | (14,185) | | 720 | | (13,465) | |
| Basic and diluted net loss per share | (0.21) | | 0.01 | | (0.20) | |
| Comprehensive loss | (14,357) | | 720 | | (13,637) | |
Total net cash used in operating activities was not impacted by the error corrections.
In addition to correcting the consolidated financial statements, related revisions and updates have been made to “Liquidity & Going Concern (As Restated)” below and Note 10, Convertible Notes (As Restated).
Liquidity & Going Concern (As Restated)
Since inception, the Company has not achieved profitable operations or positive cash flows from operations. The Company’s accumulated deficit totaled $558.2 million as of March 31, 2022. For the three months ended March 31, 2022, the Company had a net loss of approximately $13.5 million and negative cash flows from operations of approximately $12.6 million. 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 the issuance of debt (see Note 9. Long-Term Debt, Note 10, Convertible Notes and Note 16, Stockholders' Equity for additional details).
At March 31, 2022, the Company held cash, cash equivalents, and marketable securities of $50.4 million and current liabilities of $113.9 million, including $105.7 million of Notes due March 15, 2023. Based on its evaluation pursuant to ASC 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, the Company has determined that, as of the date of this Form 10-Q/A filing, there is substantial doubt about its ability to continue as a going concern, as the Company does not currently have adequate financial resources to pay its outstanding debt obligation under the Notes and to fund its forecasted operating costs for at least twelve months from the filing of this Form 10-Q/A.
While the Company continues to explore additional funding in the form of potential equity and/or debt financing arrangements or similar transactions, as well as non-cash means to settle or refinance the Notes, there can be no assurance the necessary financing will be available on terms acceptable to the Company, or at all. If the Company raises funds by issuing equity securities, dilution to stockholders may result. Any equity securities issued may also provide for rights, preferences or privileges senior to those of holders of common stock. If the Company raises funds by issuing debt securities, these debt securities would have rights, preferences and privileges senior to those of preferred and common stockholders. The terms of debt securities or borrowings could impose significant restrictions on our operations. Similarly, there can be no assurance that market conditions and refinancing alternatives will be sufficient to settle or refinance the Notes on or prior to their maturity on March 15, 2023. The capital markets have in the past, and may in the future, experience periods of upheaval that could impact the availability and cost of equity and debt financing. In addition, recent and anticipated future increases in federal fund rates set by the Federal Reserve, which serve as benchmark rates on borrowing, and other general economic conditions may impact the cost of debt financing or refinancing existing debt.
Although we are actively considering all available strategic alternatives to maximize value, if we are unable to obtain adequate capital resources to fund operations and address the upcoming maturity of the Notes, we would not be able to continue to operate our business pursuant to our current plans. This may require us to, among other things, materially modify our operations to reduce spending; sell assets or operations; delay the implementation of, or revising certain aspects of, our business strategy; file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring; or discontinue our operations entirely.
The accompanying condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
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 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 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 months ended March 31, 2022 and 2021 is comprised of the following (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | 2021 | | | |
| Beginning balance | $ | 140 | | $ | 445 | | | | |
| Provisions | 23 | | 31 | | | | |
Write-offs | (4) | | (267) | | | | |
| $ | 159 | | $ | 209 | | | | |
The write-offs recorded during the three months ended March 31, 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 March 31, 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 months ended March 31, 2022 and 2021 is as follows (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | 2021 | | | |
| Beginning balance | $ | 139 | | $ | 232 | | | | |
| Provisions | 46 | | (22) | | | | |
Warranty cost incurred | (9) | | (26) | | | | |
| Ending balance | $ | 176 | | $ | 184 | | | | |
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, rather 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.
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 months ended March 31, 2022.
Gross (Loss) 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 27% and 36% for the three months ended March 31, 2022 and 2021, respectively. The decrease was primarily due to increases in the costs to manufacture consumables due to pandemic-related inflationary factors and a decrease in our average unit sales price period over period.
The Company manufactures pre-launch inventory in advance of regulatory approval. This inventory is expensed before an economic benefit is probable. Pre-launch inventory sold to customers, previously not capitalized and expensed in a previous year for each of the three months ended March 31, 2022 and 2021, is immaterial.
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 commercial leases in accordance with ASC 842, Leases. We determine if an arrangement is or contains a lease and the type of lease at inception. The Company classifies commercial 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.
Lessee
Operating leases are included in right-of-use (“ROU”) assets and corresponding lease liabilities, and finance leases are included in Property and Equipment 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.
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 at the balance sheet date were converted and shares issuable in connection with a securities purchase agreement. 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. This standard may be adopted through either a modified retrospective method of transition or a full retrospective method of transition. As the Company is a smaller reporting company as defined by the SEC, the guidance is effective for the Company beginning on January 1, 2023.
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 will codify 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 March 31, 2022, two of the Company's financial institutions held 54% and 30% 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 15% and 13% of the Company’s net accounts receivable balance as of March 31, 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 months ended March 31, 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 March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | |
| March 31, 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 | $ | 558 | | $ | — | | $ | — | | $ | 558 | |
| Corporate notes and bonds | — | | 152 | | — | | 152 | |
| Total cash and cash equivalents | 558 | | 152 | | — | | 710 | |
| Equity investments: | | | | |
| Mutual funds | 845 | | — | | — | | 845 | |
| Total equity investments | 845 | | — | | — | | 845 | |
| Debt securities available-for-sale: | | | | |
| Certificates of deposit | — | | 5,164 | | — | | 5,164 | |
| U.S. Treasury securities | 15,728 | | — | | — | | 15,728 | |
| Commercial paper | — | | 6,197 | | — | | 6,197 | |
| Corporate notes and bonds | — | | 8,788 | | — | | 8,788 | |
| Debt securities available-for-sale | 15,728 | | 20,149 | | — | | 35,877 | |
| Total assets measured at fair value | $ | 17,131 | | $ | 20,301 | | $ | — | | $ | 37,432 | |
| | | | | | | | | | | | | | |
| 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.
As described in Note 10, Convertible Notes, the Obligation to Exchange the Notes for common stock does not meet the definition of a freestanding instrument and is therefore embedded in the Notes. The Company concluded the $14.0 million of Notes has been extinguished and replaced by new notes with an embedded feature (the “New Notes”). The New Notes were elected to be carried using the at fair value option. The remaining principal of the New Notes was $12.3 million, with a fair value of $9.4 million on March 31, 2022. The estimated fair value of the New Notes represents a Level 2 measurement.
At March 31, 2022, the principal of the Notes excluding the New Notes was $106.5 million with a fair value of $73.7 million. At December 31, 2021, the Notes had an outstanding principal 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 Company’s convertible notes.
NOTE 5. INVESTMENTS
The following tables summarize the Company’s debt securities available-for-sale investments at March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | |
| March 31, 2022 |
| Amortized
Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| Certificates of deposit | $ | 5,176 | | $ | 1 | | $ | (13) | | $ | 5,164 | |
| U.S. Treasury securities | 15,768 | | — | | (40) | | 15,728 | |
| Commercial paper | 6,219 | | — | | (22) | | 6,197 | |
| Corporate notes and bonds | 8,820 | | — | | (32) | | 8,788 | |
| Total | $ | 35,983 | | $ | 1 | | $ | (107) | | $ | 35,877 | |
| | | | | | | | | | | | | | |
| 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 March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | |
| March 31, 2022 | December 31, 2021 |
| Amortized
Cost | Fair Value | Amortized
Cost | Fair Value |
| Due in less than 1 year | $ | 35,348 | | $ | 35,246 | | $ | 22,663 | | $ | 22,649 | |
| Due in 1-3 years | 635 | | 631 | | 231 | | 230 | |
Total | $ | 35,983 | | $ | 35,877 | | $ | 22,894 | | $ | 22,879 | |
There were no proceeds from sales of debt securities available-for-sale (including principal paydowns) for each of the three months ended March 31, 2022 and 2021. The Company determines gains and losses of marketable securities based on specific identification of the securities sold. There were no realized gains or losses from debt securities available-for-sale for the three months ended March 31, 2022 and 2021. No balances were reclassified out of accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021. No unrealized losses on debt securities available-for-sale have been recognized in income for the three months ended March 31, 2022 and 2021, as the issuers of such securities held by us were of high credit quality.
As of March 31, 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 March 31, 2022 the Company did not carry a material amount of debt securities available-for-sale that were below the Company's minimum credit rating. These debt securities available-for-sale are not subject to credit risk. All other debt securities available-for-sale had a credit rating of A- or better as of March 31, 2022.
Equity securities are comprised of investments in mutual funds. The fair value of equity securities for each of the periods ended March 31, 2022 and December 31, 2021 was $0.8 million. There were no material unrealized gains or losses on equity securities recorded in income for each of the three months ended March 31, 2022 and 2021. 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 months ended March 31, 2022 and 2021.
NOTE 6. INVENTORY
Inventories consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | |
| March 31, | December 31, |
| 2022 | 2021 |
| Raw materials | $ | 1,791 | | $ | 1,343 | |
| Work in process | 1,762 | | 1,625 | |
| Finished goods | 1,952 | | 2,099 | |
| $ | 5,505 | | $ | 5,067 | |
During the fourth quarter of 2021, the Company took charges to cost of sales for inventory provisions primarily related to the write-down of excess quantities of instrument raw materials and work in process, whose inventory levels were higher than our updated forecasts of future demand for those products. Inventory provisions totaled $4.5 million during the fourth quarter of 2021. None of this inventory had been sold to customers for the three months ended March 31, 2022.
NOTE 7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | |
| March 31, | December 31, |
| 2022 | 2021 |
| Computer equipment | $ | 3,652 | | $ | 3,181 | |
| Technical equipment | 3,285 | | 3,285 | |
| Facilities | 3,675 | | 3,675 | |
| Instruments | 4,901 | | 5,364 | |
| Finance lease equipment | 240 | | — | |
| Capital projects in progress | 238 | | 683 | |
| Total property and equipment | $ | 15,991 | | $ | 16,188 | |
| Accumulated depreciation | (10,883) | | (10,799) | |
| Property and equipment, net | $ | 5,108 | | $ | 5,389 | |
Depreciation expense for the three months ended March 31, 2022 and 2021 was $0.5 million and $0.6 million, respectively.
Instruments at cost and accumulated depreciation where the Company is the lessor under operating leases consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | |
| March 31, | December 31, |
| 2022 | 2021 |
| Instruments at cost under operating leases | $ | 2,884 | | $ | 3,110 | |
| Accumulated depreciation under operating leases | (1,061) | | (1,165) | |
| Net property and equipment under operating leases | $ | 1,823 | | $ | 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 March 31, 2022 and December 31, 2021 follows (in thousands):
| | | | | | | | |
| March 31, | December 31, |
| 2022 | 2021 |
| Products and services not yet delivered | $ | 398 | | $ | 451 | |
We recognized $0.2 million of revenues that were included in the beginning contract liabilities balances during the three months ended March 31, 2022 and $0.1 million of revenues that were included in the beginning contract liabilities balances during the three months ended March 31, 2021. 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 March 31, 2022, $9.9 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 capital asset 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 March 31, 2022 and December 31, 2021, long-term debt consisted of the following (in thousands):
| | | | | | | | |
| March 31, | December 31, |
| 2022 | 2021 |
| Loans - various interest | $ | 82 | | $ | 80 | |
| Current portion of long-term debt | 82 | | 80 | |
| Long-term debt | $ | — | | $ | — | |
The following presents maturities of future principal obligations of long-term debt as of March 31, 2022 (in thousands):
| | | | | |
| Remainder of 2022 | $ | 82 | |
| 2023 | — | |
| 2024 | — | |
| 2025 | — | |
| 2026 | — | |
| Thereafter | — | |
| Total | $ | 82 | |
NOTE 10. CONVERTIBLE NOTES (As Restated)
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, pursuant to the terms and conditions of the Notes. 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 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 months ended March 31, 2022 were as follows (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | | |
| 2022 | 2021 | | |
| Contractual coupon interest | $ | 753 | | $ | 1,072 | | | | |
| Amortization of debt issuance costs | 162 | | 175 | | | | |
| Amortization of the debt discount | — | | $ | 2,821 | | | | |
| Total interest expense on convertible notes | $ | 915 | | $ | 4,068 | | | | |
As of March 31, 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 Company’s 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 is expected to occur in eight tranches (“Obligation to Exchange”), subject to customary closing conditions, with the first closing occurring on March 29, 2022. The remaining seven tranches are expected to close during the three months ended June 30, 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 are recorded at fair value on initial measurement and remeasured at fair value (“mark to market”) at each reporting period with changes in fair value reported in other income and expense, net. This fair value election is exclusive to the New Notes and does not extend to other Notes.
On March 21, 2022, the New Notes were determined to have a fair value of $11.5 million. The fair value of the New Notes was determined using a common share price of $1.86 per share, applied using the settlement method described above. The original carrying value of the Notes was $14.0 million which resulted in a gain on extinguishment of $3.4 million, which was recorded as a gain on extinguishment during the three months ended March 31, 2022.
On March 29, 2022, the holder of the New Notes legally exchanged approximately $1.8 million (the “Exchanged Principal”) in aggregate principal amount of New Notes held by the holder for 849,713 shares of the Company's common stock pursuant to their respective exchange agreement. The legal exchange of the New Notes resulted in an additional gain of $0.2 million. Using the closing stock price on March 29, 2022 of $1.48, the 849,713 shares of the Company's common stock were determined to have a value of $1.3 million, which was recorded to contributed capital during the three months ended March 31, 2022.
After giving effect for the Exchanged Principal the remaining principal of the New Notes was $12.3 million on March 31, 2022. On March 31, 2022, the remaining New Notes were determined to have a fair value of $9.4 million. The fair value of the New Notes was determined using the common stock share prices on March 31, 2022 (the “Second Tranche”) applied using the settlement method described above.
After giving effect to such Exchanged Principal, the total principal amount of the Notes and New Notes as of March 31, 2022 was $118.8 million.
The carrying value of the Notes and New Notes at March 31, 2022 consisted of the following (in thousands):
| | | | | |
| March 31, |
| 2022 |
| As Restated |
Outstanding principal at par and balances measured at fair value | $ | 115,831 | |
| Unamortized debt issuance | (793) | |
| Net carrying amount of the liability component | $ | 115,038 | |
As of March 31, 2022, the Notes and New Notes consisted of the following (in thousands):
| | | | | |
| March 31, |
| 2022 |
| As Restated |
| Current portion of convertible notes | $ | 105,661 | |
| Non-current portion of convertible notes | 9,377 | |
| Total convertible notes | $ | 115,038 | |
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 months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | 2021 | | | |
| Shares issuable upon the release of restricted stock units | 3,610 | | 2,457 | | | | |
| Shares issuable upon exercise of stock options | 6,818 | | 7,567 | | | | |
| 10,428 | | 10,024 | | | | |
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 March 31, 2022, no Notes were convertible pursuant to the original terms. After giving effect for the Exchanged Principal, the total principal amount of the Notes and New Notes outstanding as of March 31, 2022 was $118.8 million. The number of shares of common stock issuable upon conversion of the Notes and New Notes based on the initial conversion rate was approximately 3.8 million shares as of March 31, 2022.
Per the terms of the Exchange Agreement, the Exchange Transactions are expected to occur in eight tranches, subject to customary closing conditions, with the first closing on March 29, 2022 and the remaining seven tranches closing after the balance sheet date. The shares to be issued from the closing of the other seven tranches, following the three months ended March 31, 2022 were not included in the computation of diluted net loss per share because they would have an anti-dilutive effect due to net losses. The Company estimates the shares to be issued from the closing of the other seven tranches to be approximately 9.5 million shares.
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 March 31, 2022.
As discussed in Note 16, 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 June 30, 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 three months ended March 31, 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 | (104,141) | | 13.17 | |
| Exercised | — | | — | |
| Expired | (410,028) | | 12.17 | |
| Options Outstanding March 31, 2022 | 6,818,371 | | $ | 13.78 | |
The table below summarizes the resulting weighted average inputs used to calculate the estimated fair value of options awarded for the three months ended March 31, 2022 and 2021:
| | | | | | | | |
| Three Months Ended March 31, |
| 2022 | 2021 |
| Expected term (in years) | 6.30 | 0 |
| Volatility | 66 | % | — | % |
| Expected dividends | — | | — | |
| Risk free interest rates | 2.05 | % | — | % |
| Weighted average fair value | $ | 1.88 | | $ | — | |
No stock options were granted during the three months ended March 31, 2021, 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 March 31, 2022:
| | | | | | | | |
| Options
Outstanding | Options
Exercisable |
| Number of options | 6,818,371 | | 4,916,480 | |
| Weighted average remaining contractual term (in years) | 5.44 | 4.46 |
| Weighted average exercise price | $ | 13.78 | | $ | 14.64 | |
| Weighted average fair value | $ | 8.56 | | $ | 9.04 | |
| Aggregate intrinsic value (in thousands) | $ | 120 | | $ | 120 | |
The following table summarizes RSU and restricted stock award activity for the three months ended March 31, 2022:
| | | | | | | | |
| Number of Shares | Weighted Average Grant Date Fair Value per Share |
| Outstanding January 1, 2022 | 2,090,182 | | $ | 10.77 | |
| Granted | 1,740,291 | | 2.13 | |
| Forfeited | (66,750) | | 11.51 | |
| Vested/released | (153,750) | | 10.71 | |
| Outstanding March 31, 2022 | 3,609,973 | | $ | 6.59 | |
The table below summarizes equity-based compensation expense for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | 2021 | | | |
| Cost of sales | $ | 175 | | $ | 101 | | | | |
| Research and development | 362 | | 2,746 | | | | |
| Sales, general and administrative | 2,442 | | 5,992 | | | | |
| $ | 2,979 | | $ | 8,839 | | | | |
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 months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | 2021 | | | |
Cost capitalized to inventory | $ | 43 | | $ | 155 | | | | |
As of March 31, 2022, unrecognized equity-based compensation expense related to unvested stock options and unvested RSUs was $4.1 million and $12.3 million, respectively. This is expected to be recognized over the years 2022 through 2026.
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 2012 Omnibus Equity Incentive Plan. 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 months ended March 31, 2022. No performance-based stock options were outstanding as of March 31, 2022.
The table below summarizes share-based compensation cost in connection with performance-based stock options for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | |
| Three Months Ended March 31, |
| 2022 | 2021 |
Performance-based stock option expense | $ | — | | $ | 165 | |
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 March 31, 2022. No changes occurred during the three months ended March 31, 2022.
During 2021, the Company granted performance-based RSUs of which 111,806 were outstanding as of March 31, 2022. No changes occurred during the three months ended March 31, 2022.
The table below summarizes share-based compensation cost in connection with performance-based RSUs for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | |
| Three Months Ended March 31, |
| 2022 | 2021 |
Performance-based RSU expense | $ | — | | $ | 547 | |
NOTE 13. INCOME TAXES
For the three months ended March 31, 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 three months ended March 31, 2022 differs from the tax expense computed by applying the U.S. statutory tax rate to its year-to-date pre-tax loss of $13.5 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 March 31, 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 months ended March 31, 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. LEASES
The following presents supplemental information related to our leases in which we are the lessee for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | 2021 | | | |
| Cash paid for amounts included in lease liabilities | | | | | |
| Operating cash flows from operating leases | $ | 205 | | 159 | | | | |
| Operating cash flows from finance leases | $ | 7 | | — | | | | |
| ROU assets obtained in exchange for lease obligations | | | | | |
| Operating leases | $ | — | | — | | | | |
| Finance leases | 240 | — | | | | |
| Lease Cost | | | | | |
| Operating leases | $ | 305 | | 298 | | | | |
Finance leases | $ | 7 | | $ | — | | | | |
| Short-term leases | $ | 20 | | $ | 18 | | | | |
The weighted average remaining lease term on our operating leases is 3.3 years. The weighted average discount rate on those leases is 7.1%. The weighted average remaining lease term on our finance leases is 2.9 years. The weighted average discount rate on those leases is 6.0%.
The following presents maturities of operating lease liabilities in which we are the lessee as of March 31, 2022 (in thousands):
| | | | | |
Remainder of 2022 | $ | 649 | |
| 2023 | 968 | |
| 2024 | 1,055 | |
| 2025 | 595 | |
| 2026 | — | |
| Thereafter | — | |
| Total lease payments | 3,267 | |
| Less imputed interest | (376) | |
| $ | 2,891 | |
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 March 31, 2022, the total net investment in these leases was $3.2 million. The following presents maturities of lease receivables under sales-type leases as of March 31, 2022 (in thousands):
| | | | | |
| Remainder of 2022 | $ | 1,037 | |
| 2023 | 1,030 | |
| 2024 | 536 | |
| 2025 | 118 | |
| 2026 | 510 | |
| Thereafter | — | |
| Total undiscounted cash flows | 3,231 | |
| Less imputed interest | — | |
| Present value of lease payments | $ | 3,231 | |
NOTE 15. GEOGRAPHIC AND REVENUE DISAGGREGATION
The Company operates as one operating segment. Sales to customers outside the U.S. represented 15% for each of the three months ended March 31, 2022 and 2021.
As of March 31, 2022 and December 31, 2021, balances due from foreign customers, in U.S. dollars, were $0.6 million and $0.7 million, respectively.
The following presents total net sales by geographic territory for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | 2021 | | | |
| Domestic | $ | 2,517 | | $ | 2,145 | | | | |
| Foreign | 441 | | 373 | | | | |
| $ | 2,958 | | $ | 2,518 | | | | |
The following presents total net sales by line of business for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | 2021 | | | |
Accelerate Pheno revenue | $ | 2,918 | | $ | 2,473 | | | | |
| Other revenue | 40 | | 45 | | | | |
| $ | 2,958 | | $ | 2,518 | | | | |
The following presents total net sales by products and services for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | 2021 | | | |
| Products | $ | 2,546 | | $ | 2,217 | | | | |
| Services | 412 | | 301 | | | | |
| $ | 2,958 | | $ | 2,518 | | | | |
Lease revenue included in net sales was $0.5 million and $0.4 million for the three months ended March 31, 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):
| | | | | | | | |
| March 31, | December 31, |
| 2022 | 2021 |
| Domestic | $ | 4,764 | | $ | 5,014 | |
| Foreign | 344 | | 375 | |
| $ | 5,108 | | $ | 5,389 | |
NOTE 16. STOCKHOLDERS' EQUITY
Convertible Notes Exchange Agreements
On March 29, 2022, the holder of the New Notes legally exchanged $1.8 million in aggregate principal amount of New Notes held by the holder for 849,713 shares of the Company's common stock pursuant to their
respective exchange agreement. Using the closing stock price on March 29, 2022, of $1.48, the 849,713 shares of the Company's common stock were determined to have a value of $1.3 million, which was recorded to contributed capital during the three months ended March 31, 2022. See Note 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.
The closing of the Private Placement is expected to occur on June 30, 2022, subject to the satisfaction of customary closing conditions, and is considered an equity forward agreement. This equity forward agreement meets the definition of a freestanding financial instrument which is classified in stockholders equity. The value of this equity forward agreement as March 31, 2022 is immaterial.
NOTE 17. RELATED PARTY TRANSACTIONS
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. Jack Schuler, serves as a member of the Company’s board of directors and is the sole trustee of the Schuler Trust.
See Note 16, Stockholders' Equity, for further information.
NOTE 18. SUBSEQUENT EVENTS
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
Commitment
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 5 years 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.
Finance Lease
The Company entered into a finance lease agreement with one lessor during April 2022. The finance lease obligation is $2.5 million, with monthly payment terms and maturities becoming due through 2025.
Convertible Notes
As described in Note 10, Convertible Notes, the closing of the Exchange Transaction is expected to occur in eight tranches, subject to customary closing conditions, with the first closing having occurred on March 29, 2022 and the remaining seven tranches closing after the balance sheet date. Six additional tranches have closed subsequent to March 31, 2022 and before these financial statements were issued, leaving only one tranche remaining as of the filing date of this Form 10-Q. Through the closing of the first seven tranches of the Exchange Transaction, the holder of the Notes exchanged approximately $12.3 million (the “Exchanged Principal”) in aggregate principal amount of Notes held by the holder for an aggregate of 8.8 million shares of the Company's common stock pursuant to the Exchange Agreement. The eighth and final tranche is expected to settle shortly after May 16, 2022.
See Note 10, Convertible Notes, for further information.