Good day, and welcome to the Accelerate Diagnostics, Inc. 2022 First Quarter Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be a question-and-answer session. 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...

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, 2021, and other reports we file with the SEC. It is my pleasure to now introduce the company's President and CEO, Jack Phillips..

Thank you, Laura. Good afternoon, everyone, and welcome to our first quarter 2022 earnings call. We were pleased to see improved access to current and prospective customers in the latter part of the first quarter. This positive trend contributed to the achievement of commercial results consistent with our expectations.

We also achieved all product development milestones for the quarter. As promised, we launched as an RUO our new rapid MALDI sample preparation solution, ARC prior to the quarter end, and today announced its launch as an IVD ahead of schedule.

ARC, in its early days of commercialization has already generated numerous evaluations and inbound interest from potential commercial partners. In addition to ARC, we completed enhancements to Pheno and lock the design of our Pheno 2 platform.

Before providing additional details on our progress during the quarter, I'd like to hand it over to Steve to review our first quarter financial results.

Steve?.

Thank you, Jack, and good afternoon, everyone. Net sales were $3 million in the first quarter compared to $2.5 million for the same period in 2021. This year-over-year sales increase was driven by 29% growth in recurring revenues, while instrument revenues decreased over the same period.

This increase was the result of a growing revenue-generating installed base and a return to more predictable annuities as hospital patient mix became more typical in the quarter. Cost of goods sold were $2.2 million in the first quarter, resulting in a gross margin of 27%.

This compares to cost of goods sold of $1.6 million or a gross margin of 36% during the same period in 2021. The decline in gross margin resulted from inflation to production costs and other factors.

Selling, general and administrative expenses, excluding non-cash stock-based compensation expense for the quarter was $8.2 million compared to $8 million from the same period in the prior year.

SG&A expenses were relatively unchanged over prior year as we are maintaining a lower level of SG&A costs after efforts to reduce these costs over the past 2 years. Non-cash stock-based compensation expense and SG&A declined to $2.4 million from $6 million in the first quarter of 2022 as compared to the same period from 2021.

Research and development costs, excluding non-cash stock-based compensation expense for the quarter were $5.7 million compared to $4.1 million from the same period in the prior year. This increase was the result of launch studies for ARC and increased investment in Pheno 2.

Non-cash stock-based compensation expense in R&D declined to $0.4 million from $2.7 million in the first quarter of 2022 as compared to the same period in 2021. Our net loss was $11.2 million, excluding non-cash stock-based compensation expense. Our GAAP net loss was $14.2 million for the quarter, resulting in a net loss per share of $0.21.

Net cash used was $13.2 million for the quarter. The company ended the quarter with cash and investments of $50.4 million. During the first quarter, we announced a $4 million insider financing round. We also reduced our convertible debt balance by $14 million with our largest bondholder. I will now hand it back to Jack.

Jack?.

Thanks, Steve. With COVID hospitalizations on the decline, health care leaders are returning their attention to sepsis and antimicrobial resistance given the primary health care concerns they pose. This is evident through new scientific literature, commentary from world governments and recent partnerships and acquisitions in the space.

Not only does transitioning the ID and AST market to rapid testing to help mitigate antibiotic resistance, it provides immediate benefits to patients and hospitals. The market for such solutions is substantial, numbering some 300 million tests annually.

Our strategy is to address this large and growing market opportunity through three complementary product offerings. First, continue to penetrate the market with our rapid Pheno IDAST and AST solutions.

Second, with the recent launch of ARC, capitalize on the sizable untapped market for enabling rapid MALDI testing through fully automated sample preparation. And third, launch the Pheno 2 system, which will address the entire market for acute bacterial infections beyond positive blood cultures on a single diagnostic platform.

In the first quarter, we saw steady improvement in the hospital environment for selling our products and made progress in each of the three areas of our product strategy. In the second half of the first quarter, commercial access and customer engagement increased globally.

This was evident in both live customer meetings and the number of new funnel opportunities created during the quarter. While it's a leading indicator, we are confident our meaningful customer engagements are positioning us for higher rates of contracting on the horizon.

Another sign of the improving environment was the very well-attended ACMID [ph] Conference, our first live customer conference in 2 years. Rapid ID AST testing was a principal theme highlighted by clinicians and company participants alike further underscoring a shift away from an emphasis on COVID-related testing.

We used the conference to highlight our product strategy with an emphasis on the new ARC product. For me, personally, it was great to meet with customers and experience firsthand the enthusiasm of prospective customers looking to adopt our Pheno system and ARC into their workflows.

While a few new customers were contracted and went live during the quarter, several new opportunities were created for Pheno and ARC.

These results were consistent with internal forecast due to our anticipation that hospitals would require time to reset their staff, priorities and budgets as they emerge from two highly disruptive years of the pandemic. New Pheno opportunities were equally divided between IDAST integrated test kits and our new AST test kit.

This growing interest in both offerings continues to prove the benefits of giving customers flexible options to meet their workflow needs. In the U.S., we ended the quarter with a revenue-generating installed base of 313 Pheno instruments and a backlog of 76 instruments pending implementation. In addition, as U.S.

hospital patient mix normalized, we saw recurring revenues from existing customers returned to pre-pandemic levels. We also signed several existing customers to long-term contracts, which brings us to 70% of our revenue-generating customer base secured. In EMEA, we continue to steadily grow our customer base and revenues.

Our second area of focus is capitalizing on a new market segment in microbiology, rapid MALDI for positive blood culture. For a large portion of the microbiology market, MALDI is the preferred solution for microbial identification due to its comprehensive library of organisms, accuracy and low cost to operate.

In fact, nearly 60% of prospective customers have MALDI devices, and this number is growing as smaller and lower-cost MALDI systems come to market. However, MALDI has one major drawback. The 18 to 24 hours it takes to deliver an ID result, which can mean the difference between life and death in the context of sepsis.

The ARC system automates the front-end process to deliver rapid MALDI ID. The run time is just over an hour, which is a significant reduction in time to result compared to the standard of care. From a business perspective, ARC creates an entirely new razor/razorblade revenue stream for Accelerate at very attractive margins.

The acquisition model will be a traditional capital and price per test. This market opportunity will also greatly benefit our ability to bundle the Pheno with AST test kits.

Considering there are over 10 million positive blood culture ID tests performed globally at a targeted average selling price of $30, we're actually creating a new $300 million market opportunity. At the recent ECCMID conference, ARC was featured in the first external study conducted by the Medical College of Wisconsin.

The study was found that ARC enabled direct identification of micro organisms in 90% of blood cultures with a 100% agreement between the ARC and the standard slow method for MALDI identification. To put this in context, existing manual methods for sample prep of positive blood culture to MALDI produce IDs from 60% to 85% of the time.

In addition, the study highlighted workflow benefits, including the rapid turnaround time in less than five minutes of hands-on time. In the U.S., ARC was launched as an RUO at the end of the first quarter and supported by strong performance data is now available as an IVD.

Early commercialization efforts are going very well and consistent with our expectations. We had numerous ARC evaluations signed prior to quarter end and the rate of contracting is accelerating in the second quarter.

What is notable that nearly all of these evaluations were signed with customers entirely new to accelerate, which is a good early sign that ARC will provide a gateway to more Pheno business. We are similarly pursuing a fast track path to the EMEA market and expect to have IVDR approval later this year.

As highlighted at ECCMID, our meetings with distributors and direct market customers confirmed our sizable opportunity for ARC and EMEA, where MALDI is the dominant method for bacterial identification. Our new platform, Pheno 2 positions us to enter the entire rapid AST market.

Pheno 2 is designed to give customers the ability to run both positive blood cultures and all other isolated colonies from other samples on a single platform. Today's microbiology lab relies principally on culture plates and decades old automation. The old platforms have labor intensive and complex workflows that produce slow results.

We are confident Pheno 2 will take microbiology susceptibility testing to an entirely new level. Pheno 2 is designed for random access and a variety of organisms across various sample types can be run simultaneously. We continue to make very good progress on Pheno 2.

In the first quarter, we locked our consumable design, established a consumable pilot manufacturing line and finalized the design for our development instruments, which are currently being manufactured. We anticipate conducting clinical trials in 2023 and are targeting a U.S. launch in 2024.

With Pheno 2, we will have a solution for the entire AST market in a single integrated platform. For Accelerate Pheno 2 will bring larger instrument annuities at higher gross margins.

In summary, our financial results for the quarter put us on track to achieve our revenue guidance of $13 million to $14 million and our cash burn guidance of $45 million to $55 million for the year. Improving access, growing funnels and new products to sell should drive increasing rates of contracting in subsequent quarters.

In addition, our consistent execution in R&D puts us on track to deliver or beat all key product development milestones for the year. I would now be happy to answer questions from our analysts. Should others on the call have questions not addressed, we would welcome you to send these questions or request a follow-up meeting to investors@axdx.com.

Thank you..

Thank you. We will now begin the question-and-answer session. And the first question today comes from Brian Weinstein with William Blair. Please go ahead..

Hey, guys. This is Duston on for Brian. Thanks for the call and taking the question. I know you talked about improving access throughout your prepared remarks. Just wondering on the placements in the quarter, came in at two, which was a little below our expectations.

Just wondering if you could talk a little bit more about that and maybe how that's improving as you stand today? Thank you..

Yeah. Thanks, Dustin. I appreciate the question. Yeah, I mean, from a placement contract standpoint in Q1 and the go-lives, it was a disappointing quarter. But as I indicated, we have a lot of good activity going on as we get more and more access to more and more health systems with very, very meaningful meetings. The funnels are increasing as a result.

And our forecast moving forward in the quarters are improving as well for new contracts. Specific to Q1, much of this is just really the hangover effect from COVID as we come out of COVID really, it's about labs getting staffed appropriately. There's been significant turnover.

There's also been a significant burn out of existing staff members, not wanting to take on projects. And all of that contributed to our poor new contract signings in Q1. But what has again given us great courage is the fact that more and more meetings are being set, more and more opportunities are being pursued.

And genuinely, prospects are much more excited about the future and really kind of moving things forward in the area of rapid IDAST. So as we move forward in the quarters, we really expect improvement here as we go through the year..

Got it. Thank you. I know you guys reiterated your guidance for this year in terms of revenues.

Could you give us maybe an expected split between what's going to be AST only, what's going to be ARC and the full IDAST solutions implied in that guidance?.

Yeah. I can take a first crack at that. As we mentioned on the script, if you take a look at our sales funnel, which is always the early indicator to contracting and therefore revenues, the new opportunities around Pheno are about equally split between those customers that are being targeted for IDAST.

And largely in those cases, it's because they don't have an existing ID technology. And then on the other side, we're seeing a whole new segment of the market open up. where these are folks that have an existing ID and would like to leverage that for their AST.

So right now, it looks like certainly the existing base of book is going to be the majority of revenues given the go-live cycle. But as we move forward, we're expecting the rate of contract to be split about evenly and therefore, the revenues from these two in the future to be split about evenly..

Understood.

And Steve, I'm wondering if you could just talk a little bit more about the balance sheet, how you guys expect to bolster that in the future, just given what you're assuming for cash burn this year and where your cash balance still at the end of the quarter?.

Yeah. Thanks for the question. This is obviously a top priority of mine and for the company. And let me just take a minute and slow down and walk you through the components of that strategy. First, we need to continue to reduce our net burn. We're doing a good job here. Our internal efficiencies and burn continue to reduce.

The plans that we have in place and our current trajectory leave us confident that we will end at the low end of our range for burn guidance of 45% to 55%. And also, based on these plans, leaves us a lot of opportunity to further reduce spend in further years. And let me just give you an example of this.

Pheno 1 is a largely mature offering at this stage. And with the heavy lift of ARC largely behind us, Pheno 2 will principally be funded through winding down existing investment in other areas. So that's going to be a big help.

In addition, our interest costs are reducing as we manage our debt down, and then Jack and I are carefully evaluating all other areas of spend. So reducing burn is kind of fundamental. The second, we need to continue to finance the company and we have a lot of options here. There's five in particular that we're keeping a close eye on.

The first two are potentially material sources of non-dilutive financing, which we hope to share with investors very soon. These would also serve as strong validations of our product strategy and catalyst for shareholder value creation. In addition, we continue to benefit from strong insider support.

For example, we will close on $4 million from our largest shareholder and various other insiders have voiced their interest to continue to support the company. The last one in this bucket of financing the company is we have $40 million left on our ATM to provide an opportunistic vehicle for getting cash in the market.

Third, we need to manage our convertible note. You saw in the quarter that we continue to work with our largest bondholder on a plan to manage this down. The latest transaction represents the first two steps of a three-step plan and the bondholders continue to be constructive.

Very last thing I'll mention is that we just added 100 million authorized shares and provides us the flexibility and the means to do the things that we need to do, even though those shares don't represent exact plans. This represents more cushion and flexibility to do the things that we need to do in due course. I hope that's helpful..

Yeah, that is. Thank you very much. And just lastly, a question on competition. We kind of always knew that one day this would arrive. And it seems like some companies are getting closer to being on the market in the U.S. and some are even on the market OUS.

So could you guys talk more about the differentiation you guys see with your products versus the competition? And how much of a threat to your growth plan these companies can be, especially given some recent M&A in the space?.

Yeah, I can take that one, Justin. So a couple of things here. First of all, no surprise on the competition. I mean, this is a very, very important space in health care and microbiology and sepsis management, antimicrobial resistance, transforming the space with rapid ID and AST solutions is absolutely going to happen.

It's a major market and it's really just a matter - it's a matter of time. So it's not catching us by surprise or anything like that. And I don't believe anybody else on the line is probably caught by surprise here. And as you mentioned, some active M&A in the space as well in the past quarter.

What I would say specific to the Accelerate solution and how we see ourselves as competition begins to come to market.

First of all, many of these competitors that are coming to market, not to specifically mention anyone, but many of them are, I would say, very much niche players in the area of specifically like a rapid gram-negative only offering positive blood gram-negative only offering.

And I think the key first differentiator for Accelerate is our comprehensive solutions. So we have Pheno with rapid identification and AST susceptibility testing, all of this in about 7 hours. Very simple to run.

It affords labs the opportunity to run on a 24-hour, 7-day a week shift because they are not relying on difficult methods for ID or bringing an ID into an AST-only platform. Secondly, for those customers that do want to automate with rapid MALDI.

We now have an end-to-end solution with that as well, which no competitor will have that, which is a - which utilizing ARC, interface with the customers' own MALDI and then rapid AST on the back end, customers will be able to even more affordably produce a rapid IDAST.

And then from an organism standpoint, as you look at the competition that's emerging, I mean, we continue to have a very robust menu of organisms both in gram-negative and gram-positive blood cultures. And it's a superior menu. It's a menu that will remain superior as these competitors come to market.

\ And then the last thing I would say is just our history as a company. This space is not easy. We now have over 80 publications out in the market today. We have very solid customers and those - many of those customers now are secured in long-term contracts.

And then we continue to invest in our next-generation platform, which will open up a much, much broader segment of microbiology for us, that's the segment that's not positive like culture, but the segment around isolate testing and other specimens and so forth.

And so overall, we have a, again, end-to-end solution today that's exceeding customers' expectations, and we're investing for tomorrow as well..

Okay. Great. Thank you for taking the questions..

Thanks..

Our next question today comes from Alex Nowak with Craig-Hallum. Please go ahead..

Good afternoon, guys. This is Chase Knickerbocker [ph] on for Alex. Just starting from me. Concerning these staffing shortages affecting placements and go-lives.

When do you guys expect this to abate? And how do you see this dynamic improving through this year?.

Yes. Is it Chase, I'm sorry..

It is, yes..

Thanks. Yes, so a couple of things. It is improving already. Our activity in customer sites is improving dramatically from an appointment standpoint, customers that are interested, new customers going into the funnel and progressing throughout the sales funnel. So it's improving right now.

And as we go through the quarters, your question is, how is this going to translate into new contracts into new sales. And we expect that to continue to improve as we go throughout the year. And again, there's still some areas that are slower than others. But overall, in the U.S.

and abroad, I had the opportunity to spend a few weeks in Europe for ECCMID a couple of weeks ago, and things continue to go well there, just like they're going well in the U.S. to. So overall, we're happy with the activity.

Clearly, we want to see greater results from the standpoint of new contracts and new customers going live, and we expect to see that as we progress throughout the quarters in the year..

Got it. Thanks for the color, there.

1In the quarter, any OUS instrument placements? And then can you talk about your expectations in guidance for that business?.

Yeah. So we had one new customer contracted in Europe last quarter. Europe had a very solid year last year. We essentially doubled the business there last year. And the momentum continues this year. We expect good growth out of Europe as well as the Middle East, too. And like I said, it's opened up.

It's really opened up there and access to customers is much greater now, and we have good funnels going on, and we expect the business to continue to grow in 2022 and see some good growth out of the markets that we're focused in..

Got it. And then just lastly from me on the balance sheet side.

Can you update us on the time line for your acquired debt repayments? Any changes there?.

At this point, no change in that it's a March 2023 maturity on the balance of the note, one of the things that we've been doing over the past 12 months is working that debt down by working with certain of our debt holders. We started with close to $175 million.

Now we have right around $100 million after some of the recent transactions and are working with the bondholders to manage the rest of that balance..

Are there further levers to pull there? We thought what you did during the quarter, are there further announcements that we should be expecting concerning those efforts?.

Like I mentioned in the response to Dustin's question around the overall balance sheet strategy. There's a lot in the works, a lot of it, we haven't been able to get into great detail on.

And all of that will be kind of potentially helpful and synergistic to our overall strategy to continue to finance the company and part and parcel to that is to manage this debt downward and/or extend the maturity..

Got it. Helpful. Thanks for the question, guys..

Thank you..

Thank you..

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Jack Phillips for any closing remarks..

Thank you, everybody. I just wanted to take a moment and recognize our employees for the great progress and work that they're putting in already this year. As I mentioned, we've made really good progress in the commercial markets.

And as they open up, where we couldn't be more excited about how the launch of ARC is going and really thrilled that we now have IVD registration for this product in the U.S. We already have numerous evaluations in place and really excited about the opportunity to transform MALDI in this space with ARC.

And then we continue to make good progress, really good progress with our Pheno 2 next-generation platform as well. I wanted to also thank our loyal customers for their commitment to accelerate and the great work that they're doing day in and day out. And we're really excited about the future.

We're really excited about the next couple of quarters here moving forward. And we appreciate your interest in Accelerate Diagnostics. And as we said, should anybody have any questions, please send those to our website, and we're happy to answer any questions that you might have moving forward. Thank you so much, and have a wonderful day..

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.+.