Good day, and welcome to the Accelerate Diagnostics, Inc. 2023 Q2 Results Conference Call. [Operator Instructions]. 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, 2022, 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, and welcome to our Second Quarter Earnings Call. Today's call will focus on our second quarter results and include several updates on our strategic priorities. My commentary will focus on our top 3 strategic priorities.

First, I would like to review our innovation advancements with our next-generation susceptibility platform Wave. Our second priority is to continue to grow market share through our Becton Dickinson partnership with Pheno and our sample preparation instrument ARC.

And finally, continuing to build financial strength, which I will touch on closing out our debt restructuring transaction and reducing our cash burn. Before I discuss these important strategic priorities further, I'd like to hand it over to our Chief Financial Officer, David Patience, to review our preliminary second quarter financial results.

David?.

Thank you, Jack. And good afternoon, everyone. In the second quarter, the U.S. contracted 13 new Pheno instruments. We ended the quarter with a revenue-generating installed base of 339 Pheno instruments and a backlog of 70 instruments pending implementation. Net sales were approximately $2.9 million in the second quarter and $5.7 million year-to-date.

This compares to approximately $3.9 million and $6.8 million for the same period in 2022. The decrease in revenues were driven by a few large capital deals in the prior period, which did not repeat in the current quarter.

Cost of goods sold were $2.1 million and $3.9 million year-to-date, resulting in a gross margin of 27% for the quarter and 32% year-to-date. This compares to cost of goods sold of $2.8 million and $4.9 million and gross margin of 28% for the prior period.

The decline in cost of goods sold was driven by fewer Pheno capital instruments as discussed as well as a reduction in equity-based compensation. Selling, general and administrative expenses for the quarter were $7.6 million and $17.7 million year-to-date. This compares to $11.5 million and $22.2 million for the prior period.

SG&A expenses, excluding noncash stock-based compensation, were $6.3 million for the quarter and $16.5 million year-to-date. This compared to $8.3 million and $16.5 million for the prior period.

The decrease in SG&A expenses for the current quarter were due to lower employee-related expenses, while year-to-date figures included nonrecurring debt restructuring related transaction expenses. Research and development expense for the quarter was $5.8 million and $12.8 million year-to-date.

This compared to $7.6 million and $13.6 million for the prior period. R&D expenses, excluding noncash stock-based compensation was $5.6 million and $11.9 million year-to-date. This compares to $7.0 million and $12.7 million for the prior period.

The decrease in R&D expenses was primarily driven by reductions in consulting spend as our Wave program continues to advance through development. Our GAAP net loss was $26 million for the quarter and $42.8 million year-to-date, resulting in a net loss per share of $2.36 and $4.11, respectively.

Please note, on July 11, we effected a 10-for-1 reverse stock split of the company's outstanding shares of common stock. All shares and per share amounts have been retroactively adjusted for all periods presented to reflect the reverse stock split.

Our nonoperating expenses for the quarter were approximately $13.4 million, which included several notable noncash related expenses for our debt restructuring transaction. Our net loss from operations, excluding noncash stock-based compensation expense was $10.9 million for the quarter and $26.4 million year-to-date.

Net cash used was $15.2 million for the quarter and $28.9 million year-to-date, excluding cash flows from financing. Notable drivers of increased cash burn for the quarter and year-to-date were professional and legal fees related to our debt restructuring transactions. We anticipate our quarterly burn to reduce in the third quarter and thereafter.

We ended the quarter with cash and equivalents of $30.7 million. Now back to you, Jack..

commercial reach, which is tracked by the number of new sales opportunities into the funnel; and sales' effectiveness, which is measured by funnel progression and velocity to eventual close. The U.S. commercial teams continue to integrate as evidenced by the growth of the combined portfolio's new opportunities.

Thus, commercial reach continues to be a strength with consistent growth of new opportunities coming into the funnel. After just 7 months into the partnership being launched, we are pleased with the progress of the BD commercial team's ability to position Pheno within the breadth of a combined bloodstream infection portfolio.

Additionally, in the second quarter, we saw more opportunities advance further in the sales funnel. Sales velocity is notably increasing with a couple of account closes in less than 90 days of the opportunity being created. We are encouraged to see BD's strong relationships being leveraged into quick wins for the partnership.

The 13 newly contracted Phenos for the quarter was our strongest quarter since 2021, and we continue to expect to deliver incremental quarterly placement growth. As mentioned in our prior quarter earnings calls, our EMEA commercial effort is more complicated given tender-driven markets which has led to a delay.

We continue to work collectively to roll out a simplified contract, which will allow BD to represent the full product portfolio in tenders. This approach should improve both contracting and adoption rates as it will allow us to win not only new tender opportunities, but also be added to existing tenders.

We remain enthusiastic about our automated Arc System, which rapidly cleans up PBC samples to enable direct MALDI microbial identification to eliminate the overnight culture step. We are currently seeing growing interest in the EMEA market through our BD partnership.

Further, in the U.S., we are poised to initiate clinical trials in the short term to ensure a Class II 510(k) system is launched next year. In summary, the BD partnership is progressing, and we remain encouraged by the strong sales metrics and improved closes in the quarter.

We expect this momentum to translate into increased placements and future revenues as we continue to bring new customers live. Lastly, on our financial strength, we announced the closing of our debt restructuring late in the second quarter, which allowed us to extend our convertible debt maturities out 3.5 years.

It simplified our capital structure and brought in new capital. Moving forward, as discussed in our prior quarter, we are focusing on improving operational efficiency and further reducing cash burn. I would now be happy to answer questions from our analysts.

And should others on the call have any questions not addressed, we would welcome you to send these questions or request a follow-up meeting to investors@axdx.com. Thank you..

[Operator Instructions]. And today's first question comes from Alex Nowak with Craig-Hallum..

This is Conner Chamberlain on for Alex. First off, can you give us the latest update on the pathway for Arc approval? I'm assuming a de novo 510(k), but -- and feeding off that, what are some studies you need to run with this as well..

Conner, thanks for the question, sure thing. So we are well underway with our planning for a clinical trial for Arc in the U.S. The clinical trial hasn't started yet. But we're in the process of identifying the sites. We have a clinical trial partner in place to help us manage that clinical trial as well.

In addition, just over the past couple of weeks, I've reviewed the clinical trial design as well and that we're ready to move forward with. So things are coming into place fairly rapidly with everything we need to do to basically embark on a clinical trial.

We expect the clinical trial to be frankly, pretty straightforward given what we're actually going to be doing the clinical study on, which is downstream MALDI. And then we're still looking to submit the successful clinical study, and a successful submission to the FDA by year-end. And hopefully, a rapid approval shortly thereafter..

What's the pathway for Wave approval? What clinical studies do we need on that? And do you have any time line on that as well?.

Yes. So sure. So on WAVE, as we mentioned in our prepared remarks, we're making really good progress in many areas with regard to Wave.

As we get closer to a clinical trial, first thing I would mention is we're first going to be proceeding forward with a preclinical study or trial ahead of that just to confirm the results that we're seeing right now in the studies that we're doing relative to algorithm development, that's happening.

The preclinical study we expect to happen before the end of the year, be complete with that. We will be -- then we also have, again, a partner already secured to help manage our clinical study. And we expect that clinical study to start shortly thereafter the preclinical study.

So the clinical trial, I should say, will start shortly thereafter, likely in Q1 of '24 is what we're shooting for. It will be a gram-negative-focused positive blood culture study and then we'll be preparing in parallel for a submission on positive blood culture gram-positive and then also isolates.

As a reminder, the system will -- for Wave will do really is set to do isolates as well as positive blood culture, and we'll be rapidly seeking to get approval for all those type of combinations..

And then just one more.

Can you give us an update on the competitive environment for these rapid microbiology systems?.

You broke up a little bit there, but I think you said the competitive arena.

Is that what you're talking about?.

Just an update on the competitive environment for these rapid microbiology systems..

Sure. That's what I thought you said. Sure, no problem. So I mean, where we're at right now, I mean, clearly, embedded with BD and our partnership is going very well, selling a complete bloodstream infection solution from end-to-end, and that continues to go very well.

And the solution that we have with Pheno continues to resonate in the market, rapid -- positive -- rapid identification with AST, AST only as well as Arc not launched in the U.S., of course, but in Europe, and that continues to resonate very well. Yes, we -- as we expected, emerging competitors are coming.

We've seen them in Europe a bit, not so much in the U.S. just because of clearance time lines. And we're very confident in our menu. We're very confident in the 80-plus studies that we already have published on Pheno, the confidence that our current customers have in Pheno.

So while I think competition, overall, is a very good thing for any market actually. It will make us better, make us stronger. And in essence, I think, we're well suited, especially with our partnership with BD to compete with the emerging competitors..

The next question is from Andrew Brackmann with William Blair..

This is Dustin on for Andrew. First question on the BD partnership. Just wondering what the status is on cross-training of the sales team there and how the synergies in the sales team there is translating into some reductions in operating expenses and if those are tracking to your thoughts at the start of the partnership..

Perfect. I'll take the first end of that and let David take the second part of the question around cash burn reductions and so forth. So first of all, let me touch first on the U.S. We are fully trained -- we fully trained the entire U.S. organization within BD.

And just a reminder, I mean, Becton Dickinson is one of the largest microbiology and diagnostic companies in the world. So they have a lot of sales reps, a lot of marketing, regions, et cetera. So it's a comprehensive organization. We've had a very successful trainings in the U.S. We have all the marketing materials in their hands.

We have ongoing training as well. So we've done initial training and then we're doing ongoing training on a regular basis out in the field. We have also online learning sessions as well and overall, going very well.

In Europe, it's taken a bit longer, and it's just really because of the nature of Europe, with the many countries, the many different languages, et cetera, et cetera.

So we've been training in Europe, and we're about complete in the initial training in Europe for almost all the countries in the Wave 1 cycle that we'll be focused on and that's complete. We also plan to do ongoing follow-up training in all those countries as well as we come up to speed and start ramping up our efforts.

But overall, again, I think the training has been going very well, not only for Pheno and Arc, but also the overarching strategy for BD, which is their bloodstream infection strategy that really focuses on a comprehensive solution for bloodstream infections across the entire continuum of care, from sample collection through blood culture, through identification and then ultimately, rapid susceptibility with Pheno.

So all of that's coming together as well. That's new for the BD sales team as well as Pheno and I got to say we're really happy with -- while it's taken a while to get it off the ground, we're really starting to see great activity as I mentioned in some of the remarks, I mean, we've got really good activity going on.

We definitely need to put more closes on the board, but we had the best quarter we've had in quite a long time in Q2, and we look for better quarters moving forward. And then your second part of the question on the -- how is this doing relative to cash burn, I'll turn it over to David for that one..

Yes. As it relates to the cash burn and the reductions thereof in SG&A, about this time last year is when we announced a restructuring of our commercial organization in the United States, to reflect the selling strategy we're going to implement with BD.

And so with that, it would be a focused effort in the Accelerate commercial organization to support the commercial reach that BD brings and to have Accelerate bring on the commercial and selling effectiveness to bring opportunities further and further into the funnel to close. And so with that, we had a restructuring back in August of 2022.

And with that, those numbers were a bit muddied in the first quarter of this year due to SG&A-related expenses to the debt restructuring transaction.

The debt restructuring transaction did close in the second quarter, but the accounting for those fees related to professional and legal fees of the debt restructuring, went into debt and equity issuance costs.

And so the year-to-date figures reflect legal and professional services from our transaction, but the second quarter figures are more cleaned, if you will, to give you a further run rate and then a noncash stock adjusted basis of that SG&A spend. And so looking at the second quarter number is a cleaner way to look at it.

And then understanding that these expenses are onetime nonrecurring to the transaction, give you kind of a forward-looking number that we're looking to operationally improve on a go-forward basis.

And so with that, taking a step back, having the transaction behind us and furthering the Wave development program allows us to lower our spend with third parties. And so moving forward, we anticipate our cash burn to materially come down over just the next quarter, the rest of the year as well as into 2024..

Understood. Appreciate the color there. And second question, we've been hearing a lot from competitors on turnover at labs and hospitals in terms of staffing.

Just wondering, is there any derivative impact to you guys and the conversations you're having with lab directors there? Or are you not really exposed to that as much?.

So great point. And the answer is yes. We see that as well. There's an incredible amount of turnover post-COVID within health care, in general, and definitely in the laboratories, both the staffing level. So the microbiologists and the other lab technicians, it's there. And it's also at the management and senior management level.

And so that is challenging for sure. It's definitely something that it slows down go-lives. We've had a couple of go-lives that did not go live in the quarter because of management change and the key champions that were part of the Pheno or Accelerate implementation with us in BD have changed, but those are still going to be on track.

It's just delayed because of a new microbiology manager or a lab director being replaced or leaving. So we're seeing that turnover. I have -- I do expect it to settle down. I mean that's what typically happens, and I expect it to get back to more normal, but it's something that we continue to address.

In some cases, it does create new opportunities for us as lab directors move from site to site and their proponents of rapid susceptibility in Pheno and BD, et cetera, those are also positive examples to where this -- where change within the laboratory can be good, and we've seen some of that as well, where we've seen change in new directors come in that really know the value of rapid susceptibility and Pheno and we immediately have a sales opportunity overnight.

So I think it goes both ways, but it is definitely something that we continue to address on a daily basis out in the field..

Last question for us, just on the reintroduction of Arc when that eventually comes to the U.S. market. How impactful do you think this could be on eventually driving momentum with BD once this occurs..

I mean, we're very bullish on the value proposition for Arc and so is Becton Dickinson and as well as other people that are focused in the MALDI sector. I mean it's a just a reminder of what Arc is, Arc addresses a real unmet medical need within microbiology.

They're about -- there's thousands -- I mean, over 10,000 MALDI platforms placed globally in laboratories today. It was a great advancement in technology and microbiology for a number of reasons. It's very cost effective to run MALDI. It's a very, very wide range menu that MALDI produces. Fairly easy to use, good results.

And so it's well planted in microbiology. But one of the drawbacks it's been a real drawback from Day 1 is if you want to run a rapid identification off of MALDI that's just not possible in the current state without doing something different.

Because today, MALDI identification is run through a first performing an isolated colony and then spotting MALDI from there. What Arc does is Arc automates that entire process in 2 steps in about 1 hour and allows you to then plate the MALDI platform and get your result in the same shift.

And so when we came on the market in the U.S., we saw immediate interest uptake. We had significant number of evaluations signed up. And that's only -- while the -- as we've talked, I mean, we're going back and getting a Class II claim from the FDA.

In the end, that will actually be -- that will be a favorable feature to have, a favorable claim to have more of a validated platform out in the market. The unfortunate thing, it just takes time to go through the clinical trials, as I mentioned earlier here, and then ultimately through FDA clearance.

But we are very excited about this, and we believe it's going to be a good alternative for customers, globally, to really that are seeking a rapid identification off of MALDI..

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Jack Phillips for any closing remarks..

Yes. Thanks. I appreciate it, Chris. So just a couple of things from my side in closing. First of all, thanks for dialing into our Q2 Earnings Call. It's greatly appreciated. Just a couple of things to highlight as we think about our strategic imperatives that we've highlighted today.

First of all, our next-generation platform, Wave continues to -- we continue to make really good progress and hit our milestones on this platform. It is a platform that will open up a much, much larger market within microbiology.

It will be the platform that will perform isolates, which, as I mentioned, is over 100 million tests globally, and that's going to be very important and a very important segment for us to address. Things continue to go very well with Wave. And as I mentioned, we not only have isolates on the platform.

We'll also have positive blood on a single platform, random access, scalable. So this platform will fit in community hospitals, but also reference labs and regional labs as well as academic centers. So it's truly a scalable platform that's so important as you look at the entire health system. So more to come there.

And finally, we continue to see very good quality performance on our initial studies that we've been going through over 100 million images taken now off of our 15 alpha units that are running day and night in our laboratory here in Tucson. And then the second thing I'd say with our partnership with Becton Dickinson and our commercial effectiveness.

As I mentioned, very large microbiology company in BD. They're a terrific partner. And we've got -- it's taken us a while to get through training, to get reps comfortable and confident in selling rapid identification and susceptibility. We're getting there. Every day is a better day out in the field and in the market.

Our reach continues to grow, and that means new accounts coming into the funnel continues to grow. Our sales effectiveness is also improving our ability to actually bring Pheno into the overall bloodstream infection portfolio with BD, we're getting much, much better at that as well.

And as a result, what we're seeing is we're really starting to advance sales opportunities quicker. And where we're in labs with the BD shops within the hospital. I mean, we're advancing these opportunities much, much quicker.

So this is work in progress that we continue to make progress on every day, and we expect to see, again, continued good success there. And then the last thing I'd mention is really our financial strength as a company. That's something David and I focus on frequently every day. We now have debt restructuring behind us.

We're focused on reducing our burn rate. We're focused on preserving cash everywhere we can. And then obviously, revenues will take care of that as well as we continue to increase revenues and drop margin to the bottom line. So with that, more to come, and I appreciate you tuning into the Q2 earnings call today.

And again, should you have any further on questions, please contact us at axdx.com and we're happy to schedule a follow-on meeting. Thank you very much..

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect..