Q1 2023 Accelerate Diagnostics Inc Earnings Call

Participants

David Patience; CFO, Principal Financial Officer & Principal Accounting Officer; Accelerate Diagnostics, Inc.

Jack Phillips; CEO, President & Director; Accelerate Diagnostics, Inc.

Laura Pierson; IR Officer; Accelerate Diagnostics, Inc.

Andrew Frederick Brackmann; Research Analyst; William Blair & Company L.L.C., Research Division

Chase Richard Knickerbocker; Senior Research Analyst; Craig-Hallum Capital Group LLC, Research Division

Presentation

Operator

Good day, and welcome to the Accelerate Diagnostics Incorporated 2023 Q1 Results Conference Call. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Laura Pierson, of Accelerate Diagnostics. Please go ahead.

Laura Pierson

Before we begin, it is important to share that information presented during this call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include projections, statements about our future and those that are not historical facts. All forward-looking statements that are made during this conference call are subject to risks, uncertainties and other factors that could cause our actual results to differ materially. These are discussed in greater detail in our annual report on Form 10-K for the year ended December 31, 2022, and other reports we file with the SEC.
It is my pleasure to now introduce the company's President and CEO, Jack Phillips.

Jack Phillips

Thank you, Laura. Good afternoon, and welcome to our first quarter earnings call. Today's call will focus on our first quarter results and include several updates on progress during the quarter. My commentary will focus on our 3 important strategic priorities.
First, building financial strength. This includes restructuring our current debt obligation and reducing our cash burn while improving our operational efficiency. Our second priority is to grow market share through our Becton Dickinson partnership. And thirdly, we are focused on delivering on innovation by advancing our next generation susceptibility platform, Wave.
Before providing additional detail on each of these areas, I would like to hand it over to our Chief Financial Officer, David Patience, to review our first quarter financial results. David?

David Patience

Thank you, Jack, and good afternoon, everyone. In the first quarter, the U.S. contracted 3 new Pheno instruments and brought another 10 Pheno instruments live. We ended the quarter with a revenue-generating install base of 338 Pheno instruments and a backlog of 62 instruments pending implementation.
As we expected, the first quarter was soft for new contracted accounts as our commercial activity with Becton Dickinson continues to ramp up. Net sales were approximately $2.8 million in the first quarter compared to approximately $3 million for the same period in 2022. This slight year-over-year decrease was driven by a lack of new Pheno contracting in the current quarter.
Cost of goods sold were $1.8 million in the first quarter, resulting in a gross margin of 36%. This compares the cost of goods sold of $2.2 million or a gross margin of 27% in the same period in 2022. Our increase in gross margin resulted from product mix, with several capital instrument acquisitions during the quarter with associated zero-cost inventory.
Selling, general and administrative expenses, excluding non-cash stock-based compensation for the quarter was $10.2 million compared to $8.2 million for the same period in 2022. SG&A expenses increased over the prior period due to debt restructuring related expenses. Non-cash stock-based compensation expense in SG&A was a benefit of $100,000 compared to $2.4 million expense for the first quarter in 2022. This was due to executive turnover and subsequent forfeiture of non-cash compensation.
Research and development costs, excluding non-cash stock-based compensation expense for the quarter was $6.4 million compared to $5.7 million for the same period in the prior year. Non-cash stock-based compensation expense in R&D increased to $0.6 million from $0.4 million in the first quarter of 2023 as compared to the same period for 2022. This increase was the result of further investment in our next generation susceptibility instrument, Wave.
Our net loss was $16.2 million excluding non-cash stock-based compensation expense. Our GAAP net loss was $16.8 million for the first quarter, resulting in a net loss per share of $0.17. Net cash use was $13.7 million for the quarter, which included debt restructuring expenses during the quarter. The company ended the quarter with cash and investments of $31.9 million.
Now back to you, Jack.

Jack Phillips

Thanks, David. I would like to turn now to our 3 important strategic priorities, financial strength, market share growth through our Becton Dickinson partnership, and delivering on innovation by advancing Wave.
Starting with financial strength, we continue to make progress on our debt restructuring, recently announcing a Restructuring Support Agreement, or RSA, on April 21, which is an agreement with 91% of our 2.5% convertible senior secured notes, which matured and became due and payable on March 15 of this year, as well as with our largest shareholder.
As part of the proposed transaction, we have been able to lower our overall debt outstanding and simplify our capital structure. Secondly, extend our outstanding convertible debt another 3.5 years. And finally, we secured $24 million in new capital to fund our development efforts. We are expecting the transaction to close soon as we sign on the remaining debt holders and seek shareholder approval to facilitate this transaction. In addition to finalizing our debt restructuring, our focus on reducing cash burn and improving our operational efficiency will continue.
Moving now to our next priority, growing market share through our Becton Dickinson partnership. Last quarter on the call, we discussed the launch of the U.S. commercial partnership in January and an EMEA starting in March. After about four months of U.S. selling activities, we are very encouraged. With the integration of Pheno and Arc into the existing BD portfolio, the only end-to-end complete microbiology workflow for combating bloodstream infections was launched into the market. This focus led to some delays with near-term Pheno opportunities, but it was the right decision to ensure the successful launch of our partnership.
Moving on to our commercial progress with BD. As a quick reminder, there are 3 principal drivers for us joining forces with BD: First, to significantly improve our commercial reach, both in the U.S. and abroad; second, to improve our selling effectiveness by combining our offerings with the BD portfolio to close more accounts; and lastly, to collaborate on future innovation.
We are pleased with our improved commercial reach within the first several months of the partnership being launched in the U.S., as well as with the early days in EMEA. We are tracking commercial reach closely and are seeing big improvements with the volume of sales calls, as well as those calls turning into new Pheno opportunities. In the U.S. alone, during the first quarter, we added nearly as many new Pheno opportunities to the funnel as we did throughout all of 2022.
Turning to selling effectiveness, we are measuring effectiveness through sales funnel progression, funnel velocity, and ultimately account capture. We are seeing meaningful funnel stage progression, which has led to a significant increase in quotes and contracts being developed and presented compared to the prior year. In quarter 2 and beyond, we are expecting to deliver a significant increase in placements not seen since prior to the pandemic. This is exactly why we entered into a long-term partnership with Becton Dickinson.
In EMEA, we launched the global bloodstream infection campaign along with BD at the largest microbiology congress, ECCMID, in Copenhagen last month. By showcasing Accelerate's Arc and Pheno with the breadth of BD's microbiology portfolio, customer enthusiasm was clear for end-to-end workflow complete solutions. Many current and prospective customers were eager to discuss implementing the BSI solution. This has led to a simplified contract offering for the combined BSI portfolio, which will include contracting and ordering to improve customer ease and speed of adoption.
Turning more specifically to Arc, a customer from Italy will be presenting a poster on Arc workflow at the ASM Microbe coming up in June. The author also intends to publish a full study readout in a peer-reviewed European journal. We will leverage this customer's good work as part of our selling efforts in EMEA in the future. Bringing Arc to the U.S. market remains a priority as there are clear demand for an automated, cost-effective sample preparation solution for positive blood cultures.
As discussed on our prior calls, we continue to pursue Arc as a Class II 510(k) device with the FDA and remain in active dialogue. We will not have a forecasted launch date in the U.S. until we begin clinical trials. Lastly, with our BD partnership, collaboration on future product development efforts remains a focus and early progress is being made on a number of fronts.
Now turning my comments to our third strategic priority, delivering innovation with our next generation platform, Wave. We continue to make very good progress with our Wave development program. As discussed previously, we have taken delivery of over 20 alpha instruments, which are up and running in our core lab. Early instrument reliability is very good and the data being produced is quite promising. This is very exciting and has significantly sped up our development efforts.
As a reminder, the Wave platform will be able to provide rapid susceptibility test results for both positive blood culture and isolated colony samples and other sample types on a single system with significantly improved platform economics over Pheno. The Wave system has complete random access and is capable of running 20 samples in a single shift from a single module. The system is fully scalable, which allows easy adoption by small and medium labs, while larger labs can integrate multiple modules into 1 system to manage all necessary volume and workflow needs.
Our customers have confirmed a consolidated susceptibility approach will have a superior advantage over traditional isolated-based platforms on the market today. For Accelerate, Wave significantly expands our revenue and wallet share per customer, while restating our platform economics. Our target is to deliver a pre-clinical data readout by the end of the year and start our clinical trials shortly thereafter.
In summary, Q1 results were in line with our expectations and we are very optimistic about the remainder of 2023 and beyond. By restructuring our debt and securing additional new capital, we can solely focus on driving our core business priorities. Our partnership with BD is off to a good start and will continue to gain momentum.
Our R&D, regulatory, and manufacturing organizations are laser-focused on Wave development and achieving key milestones. And of course, we will continue to focus on organizational talent, infrastructure, and processes to scale up our business and support future growth.
I would now be happy to answer questions from our analysts. Should others on the call have questions not addressed today, we would welcome you to send these questions or request for a follow-up meeting to investors@axdx.com. Thank you.

Question and Answer Session

Operator

We'll now begin the question-and-answer session. The first question comes from Andrew Brackmann with William Blair. Please go ahead.

Andrew Frederick Brackmann

Jack, you talked about the momentum that you're seeing here with BD on the commercialization front. Can you maybe peel back the onion there a little bit and tell us exactly where you're starting to see that momentum? Anything in terms of specific customer types where you're starting to see some increased interest there?

Jack Phillips

Sure. Andrew appreciate the question. Yes, as I said in my opening remarks, really good activity and the momentum is building with BD. As I mentioned, we've been live since January. We've trained an entire sales organization of a large number of people, regions, and so forth.
And so what we're starting to see now is more and more accounts coming into the funnel. Specifically, I mean, they're across the U.S. They're really, I mean, where we're starting to see early, early success with BD is naturally in the accounts where BD already has a very strong relationship where they have systems in place, whether it be blood culture systems or whether it be MALDI systems or even, in some cases, the Phoenix susceptibility system that they have as well.
With those accounts, we're really getting entry. We're getting reach. We're getting access. We're immediately, with our small team of specialists that support the BD sales people, we're able to go in and get very quickly into dialogue. And those are where the accounts are starting to not only just become introductory calls, but also advancing very rapidly through the sales funnel because of the relationships, because of the trust that's already been built in BD.
And so, again, what we're seeing is and what we believe will happen and what I've talked about is as we move into quarter 2 here, we're almost halfway through the quarter, and then Q3 and Q4, we're going to start seeing more and more funnel growth, funnel progression through the funnel, and then, ultimately, more and more account closes as we progress throughout the year.

Andrew Frederick Brackmann

That's perfect and good to hear. Maybe just turning to Wave here, it sounds like things are progressing nicely with development efforts there. Can you maybe just sort of take a step back and just sort of talk about the critical steps that are needed here to get that to the market? And then if you're successful there, just sort of talk to a high level about what this does to your opportunity size with customers?

Jack Phillips

Yes, absolutely. Let me take the second part of that first. I mean, just a reminder on why Wave? So, Wave is a completely new innovative platform that builds on the great experience that we've learned in rapid ID and AST testing over the years. We're using a significant amount of our AI that we've built relative to organism and bug-drug combination, learnings that we have already. And -- but the actual system and the technology that we're using relative to image capture, throughput, random access, all of that is unique to Wave and it's different than Pheno.
And then also from a business model standpoint, Wave will dramatically change our overall cost position because of cost of goods sold and the way that we're able to capture images. So we believe with this then, with Wave, what will happen is we have the opportunity to open up not only positive blood culture, which we're clearly doing today with Pheno, that will be available on Wave, but also it will also take it to the next level, which is the much higher volume testing in the isolate market and other future samples that is a much, much lower acuity, but much higher volume testing segment within microbiology, which will significantly expand our footprint within microbiology. It will allow us to not only compete in rapid positive blood culture, but also the much broader segment. It will allow customers to consolidate instrumentation that they have today in their laboratory and bring that together.
As far as the program goes, we're very happy with the way the program is progressing. We have over 25 systems live today in our clinical laboratory, we're running samples on. We're getting very good results. Reliability looks very good. The next phase is, Andrew, our -- we'll be looking at having beta units here over the coming months. We'll be getting those units live as well. That is on track.
And then from there, we look to prepare for really the pre-clinical studies that we'll be doing. We expect to produce that pre-clinical readout sometime in Q4. From there, we'll prepare our clinical trial that we're already working on today, but we'll prepare that and get started on the clinical trial work thereafter.

Andrew Frederick Brackmann

And then just sort of last one for me, just on the RSA that was announced a few weeks ago, it sounds like you're increasingly confident that that's going to get done. I recognize you probably don't want to say too, too much on that, but can you maybe just sort of provide a high-level detail around what's driving that confidence?

Jack Phillips

Yes. Great. I'll turn it over to David and let him take that one.

David Patience

Sure. Andrew, thank you for the question. So this is the question that we're getting a lot these days, and it is a pending transaction, so I want to start there, that nothing's been finalized and it's a proposal. And so what we have here is, as you know, we've agreed to a restructuring support agreement with a vast majority of our note holders. And so really, once that subsequently was announced, we got to work on 3 main priorities. The first one was the subsequent documentation and the agreements that we're working on with both us and the note holders to bring this transaction to closure. And so that includes many, as I said, the purchase agreements, and there's many subsequent transactions as a part of this proposal, so we're working on that every day.
Secondarily, we're working with our current RSA signers, if you will, that we're going to go on and get more folks signed on to the deal. We work on this every single day, and really, getting progress there is twofold. It's ongoing and active dialogues with the folks that aren't yet signed on. Additionally, it is going to bringing up those note holders up to speed on what the terms and the conditions are of the transaction, walking them through the series of transactions, why certain things were done. And so those have been good and productive dialogues.
And thirdly, as well, is we have a shareholder meeting next Friday, which is May 19, and part of our outstanding proxy statement is we have several proposals out there that will help facilitate the transactions that are within the RSA proposal. And so we're working on all three of those work streams every single day and continue to work, and we've had a lot of great dialogue, and so from there, we keep working it every day.

Operator

The next question comes from Alex Nowak with Craig-Hallum.

Chase Richard Knickerbocker

This is Chase on for Alex. I'll start now with one for David. I mean, looking at, OpEx in the quarter, up a little bit sequentially, I know kind of, you know, optimization of that spend is certainly a big focus for you guys. I guess, walk me through the moving pieces of the increase sequentially? And then you had mentioned some one-time expenses from the debt restructuring. Kind of walk me through what comes out, and then what we should be thinking about for Opex on the go forward?

David Patience

Great question. So, when we look at OpEx, that is one of our focuses, as Jack talks about financial strength. Once we work through the debt restructuring and the proposed transaction, this is going to be the laser focus moving forward. And so, we did have a hefty amount of professional fees associated with the debt restructuring in the quarter. We do anticipate that to bleed into this quarter a bit as we work to close the transaction as previously discussed.
That said, we are also seeing savings from the restructuring of our commercial organization back last year, and so that will continue to streamline as well. So, overall, SG&A will streamline over the subsequent quarters for those reasons.
Moving to R&D, and most importantly, another laser focus for us is the great progress we're making with Wave. So, as Jack mentioned, we just began ordering beta units, which will essentially be very close to our production units that we'll be using in a post-FDA setting.
So, these beta units we're actually purchasing will be used in the clinical trial. And so from there, we're getting a lot of -- we're bringing the project timeline in from that standpoint, but that also brings in cost. So, for us, it's a very exciting time, but also bringing in some of the project costs has led to higher incurred costs earlier in the year than we anticipated.
And for us, that's very exciting. But as we're exiting development and entering B&D, we'll see the costs be reduced, and that's because we're entering trial, and with the significantly lower cost of goods sold, it'll be a much more cost-effective clinical trial than Pheno was. And so with that, we anticipate both SG&A and R&D coming down in the subsequent quarters this year.

Chase Richard Knickerbocker

And maybe relaying that into a question for Jack, I mean, assuming that the RSA closes and everything gets squared away there, without drastic
OpEx cuts, we've got another capital raise in our model needed at some point in the future here. Certainly, though, it gets pushed out meaningfully. I mean, kind of update investors where you'll be able to get to from a business perspective with traction, with BD, with this restructuring and additional capital that's going to flow into the model?

Jack Phillips

Yes. So, I mean, a couple things on that front. First of all, as David highlighted, I mean, we're actively looking at our cash burn and continuing to conserve cash wherever possible. We're doing a good job with that on many fronts, and we're going to continue to do that.
The second thing that you mentioned is absolutely getting the commercial business cranking and doing that through our partnership with BD. As I mentioned, that's going -- we're.very happy and encouraged about how it's going. It just as you look at training an entirely new sales organization, these things take time. But what we're starting to see is the opportunity for revenue growth, new account places, new account placements, closes, leading the revenue growth into the future.
So we're looking closely at that clearly, and all of those things put together will ultimately lead us to at what point should we need to raise additional capital. And we'll make that decision in the future as we look at all these different levers.

Chase Richard Knickerbocker

Got it. But at that point, BD is going to be an attraction. There's going to be a much different place. I guess digging in a little bit more on kind of the funnel that started to grow now with BD. I mean, let's kind of separate out that customer base that's coming into the funnel. Is it kind of where BD is out there currently doing RFPs for certain customers and build-outs or expansions in the lab? Or is it existing customers that are kind of being cross-sold with existing BD devices might not need upfront capital from them, but they're kind of being cross-sold your instruments and your solutions?

Jack Phillips

Yeah. It's a combination of all of the above. So in EMEA, for example, just this week alone, we participated in several very key, very large tenders that were completely driven by BD. It was a tender for a much bigger group of product offerings than just the Pheno and Arc, but it included Pheno and Arc as well. And so we've got that happening in EMEA. And then in the U.S., we definitely have very specific accounts where BD customers are upgrading or renewing contracts, and as part of that, they're very interested in closing the gap relative to rapid susceptibility. And that's where Pheno comes in, and that's where we are effectively combining the Pheno along with other solutions.
And then I would say equally, we have very specific pointed customers that are interested solely in rapid ID and AST. These may be accounts that we've known or were working previously, and now we're working those along with BD. And those are accounts that are, I would call them our more traditional accounts that we had before our partnership with BD that are more standalone opportunities that are looking for rapid ID/AST, or they're looking for AST only, an AST only solution. They're looking for a combination of things, and that's where we're continuing to drive that along with BD as well.

Operator

This will conclude our question-and-answer session. I'll turn the conference back over to Mr. Jack Phillips for any closing remarks.

Jack Phillips

Thank you, and thanks to everyone for dialing in to the call today. Just in summary, a few things from my side, as I mentioned a few times today, our BD partnership, the reason why we came to this partnership was to grow market share globally, to really create great reach, to improve our selling effectiveness by combining the rapid ID/AST along with other solutions to create an end-to-end bloodstream inflection solution for customers, and then ultimately to collaborate on much broader innovation for the future.
And I would say while this partnership was a big stepwise change for Accelerate, it took a lot of effort and continues to take a lot of effort as it relates to training, bringing all the key stakeholders up to speed, from regional sales managers, marketing managers, sales people, et cetera, up to speed. We've done so much of that legwork along with BD, and I would say right now it's going extremely well, and what we're looking for into the future here, we're starting to, look to the future for more closes, more effective opportunities, and ultimately reagent growth and more account penetration.
And then on the Wave front, we could not be happier about how our next generation innovation is advancing that will dramatically improve our footprint in microbiology. It will allow customers to consolidate and add not only rapid positive blood culture susceptibility but also consolidate that high-volume isolate testing as well. We are on track with our program. We continue to innovate every day, and we expect to continue to update on this very important innovation program as we go throughout the year.
And then as David talked about today, our debt restructuring continues to go along. We expect this to be closed out over the coming weeks, and we plan to update on that as well, and that will clearly open us up to truly focus on all the other key aspects of the business around market share growth and innovation, et cetera.
So with that, I'll bring this earnings call to a close. Thank you for your support of Accelerate Diagnostics, and we'll talk to you all soon. Thank you.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.