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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____

Commission file number: 001-31822
ACCELERATE DIAGNOSTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware84-1072256
(State or other jurisdiction(I.R.S. Employer Identification No.)
of incorporation or organization)
3950 South Country Club Road, Suite 470
Tucson,Arizona85714
(Address of principal executive offices)(Zip Code)

(520) 365-3100
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.001 parAXDXThe Nasdaq Stock Market LLC
value per share(The Nasdaq Capital Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of November 3, 2020, there were 57,029,694 shares of the registrant’s common stock outstanding.



TABLE OF CONTENTS

Item 1. Legal Proceedings

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
ACCELERATE DIAGNOSTICS, INC.
CONDENSED CONSOLIDATED
BALANCE SHEET
(in thousands, except share data)
September 30,December 31,
20202019
Unaudited
ASSETS
Current assets:
Cash and cash equivalents$27,029 $61,014 
Investments50,463 47,437 
Trade accounts receivable2,610 3,222 
Inventory9,459 8,059 
Prepaid expenses961 955 
Other current assets1,517 1,165 
Total current assets92,039 121,852 
Property and equipment, net7,104 7,905 
Right of use assets3,402 3,917 
Other non-current assets1,674 750 
Total assets$104,219 $134,424 
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable$2,372 $2,351 
Accrued liabilities3,176 3,828 
Accrued interest191 1,262 
Deferred revenue338 271 
Current portion of long-term debt511  
Current operating lease liability482 450 
Total current liabilities7,070 8,162 
Non-current operating lease liability3,231 3,579 
Other non-current liabilities259 19 
Long-term debt5,028  
Convertible notes138,299 130,043 
Total liabilities$153,887 $141,803 
Commitments and contingencies
Stockholders’ deficit:
Preferred shares, $0.001 par value;
5,000,000 preferred shares authorized and none outstanding as of September 30, 2020 and December 31, 2019
  
Common stock, $0.001 par value;
85,000,000 common shares authorized with 57,027,429 shares issued and outstanding on September 30, 2020 and 85,000,000 common shares authorized with 54,708,792 shares issued and outstanding on December 31, 2019
57 55 
Contributed capital469,302 452,344 
Treasury stock(45,067)(45,067)
Accumulated deficit(474,054)(414,653)
Accumulated other comprehensive income (loss)94 (58)
Total stockholders’ deficit(49,668)(7,379)
Total liabilities and stockholders’ deficit$104,219 $134,424 

See accompanying notes to condensed consolidated financial statements.
3


ACCELERATE DIAGNOSTICS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Unaudited
(in thousands, except per share data)
Three Months EndedNine Months Ended
September 30,September 30,September 30,September 30,
2020201920202019
Net sales$3,588 $2,271 $8,056 $5,827 
Cost of sales2,287 1,117 4,745 2,940 
Gross profit1,301 1,154 3,311 2,887 
Costs and expenses:
Research and development5,001 6,064 16,191 19,145 
Sales, general and administrative11,465 12,743 35,738 38,302 
Total costs and expenses16,466 18,807 51,929 57,447 
Loss from operations(15,165)(17,653)(48,618)(54,560)
Other income (expense):
Interest expense(3,955)(3,598)(11,540)(10,585)
Foreign currency exchange gain (loss)229 (89)191 (142)
Interest income149 676 753 2,329 
Other expense, net(15)(9)(82)(12)
Total other expense, net(3,592)(3,020)(10,678)(8,410)
Net loss before income taxes(18,757)(20,673)(59,296)(62,970)
Provision for income taxes 239   
Net loss$(18,757)$(20,434)$(59,296)$(62,970)
Basic and diluted net loss per share$(0.33)$(0.37)$(1.07)$(1.16)
Weighted average shares outstanding56,560 54,553 55,617 54,456 
Other comprehensive loss:
Net loss$(18,757)$(20,434)$(59,296)$(62,970)
Net unrealized gain (loss) on debt securities available-for-sale(117)10 62 229 
Foreign currency translation adjustment71 (113)90 (139)
Comprehensive loss$(18,803)$(20,537)$(59,144)$(62,880)

See accompanying notes to condensed consolidated financial statements.
4


ACCELERATE DIAGNOSTICS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
Unaudited
(in thousands)
Nine Months Ended
September 30,September 30,
20202019
Cash flows from operating activities:
Net loss$(59,296)$(62,970)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization2,270 1,862 
Amortization of investment discount43 (400)
Equity-based compensation12,291 9,409 
Amortization of debt discount and issuance costs8,256 7,370 
Realized loss on sale of investments3  
Loss on disposal of property and equipment546 577 
Contributions to deferred compensation plan(248) 
(Increase) decrease in assets:
Accounts receivable532 (782)
Inventory and instruments in property and equipment(1,734)(3,286)
Prepaid expense and other(1,267)(319)
Increase (decrease) in liabilities:
Accounts payable76 788 
Accrued liabilities, and other(759)(2,115)
Accrued interest(1,071)(1,071)
Deferred revenue and income67 33 
Deferred compensation240 (25)
Net cash used in operating activities(40,051)(50,929)
Cash flows from investing activities:
Purchases of equipment(1,364)(148)
Purchase of marketable securities(44,589)(20,710)
Proceeds from sales of marketable securities 13,400 
Maturities of marketable securities41,707 78,922 
Net cash (used in) provided by investing activities(4,246)71,464 
Cash flows from financing activities:
Proceeds from issuance of common stock296 1,363 
Proceeds from exercise of options4,458 4,879 
Proceeds from debt5,552  
Payment of debt(13) 
Net cash provided by financing activities10,293 6,242 
Effect of exchange rate on cash19 (99)
(Decrease) increase in cash and cash equivalents(33,985)26,678 
Cash and cash equivalents, beginning of period61,014 66,260 
Cash and cash equivalents, end of period$27,029 $92,938 

See accompanying notes to condensed consolidated financial statements.
5



ACCELERATE DIAGNOSTICS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
Unaudited
(in thousands)
Nine Months Ended
September 30,September 30,
20202019
Non-cash investing activities:
Net transfer of instruments from inventory to property and equipment$1,284 $3,225 
Supplemental cash flow information:
Interest paid$4,288 $4,288 
Income taxes paid, net of refunds$46 $54 

See accompanying notes to condensed consolidated financial statements.
6


ACCELERATE DIAGNOSTICS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Unaudited
(in thousands)
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
Common stock shares outstanding
Beginning56,249 54,512 54,709 54,232 
Proceeds from issuance of common stock 56  56 
Exercise of options770 66 2,287 334 
Issuance of common stock under employee purchase plan8 7 31 19 
Ending57,027 54,641 57,027 54,641 
Common stock
Beginning$56 $55 $55 $54 
Exercise of Options1  2 1 
Ending$57 $55 $57 $55 
Contributed capital
Beginning$463,178 $443,857 $452,344 $432,885 
Proceeds from issuance of common stock 1,000  1,000 
Exercise of options1,427 510 4,458 4,879 
Issuance of common stock under employee purchase plan79 112 294 362 
Equity-based compensation4,618 3,130 12,206 9,483 
Ending$469,302 $448,609 $469,302 $448,609 

See accompanying notes to condensed consolidated financial statements.
7



ACCELERATE DIAGNOSTICS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Unaudited
(in thousands)
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
Accumulated deficit
Beginning$(455,297)$(372,884)$(414,653)$(330,348)
Cumulative effect of accounting changes— — (105) 
Net loss(18,757)(20,434)(59,296)(62,970)
Ending$(474,054)$(393,318)$(474,054)$(393,318)
Treasury stock
Beginning$(45,067)$(45,067)$(45,067)$(45,067)
Ending$(45,067)$(45,067)$(45,067)$(45,067)
Accumulated other comprehensive (loss) income
Beginning$140 $44 $(58)$(149)
Net unrealized gain on debt securities available-for-sale(117)10 62 229 
Foreign currency translation adjustment71 (113)90 (139)
Ending$94 $(59)$94 $(59)
Total stockholders' equity (deficit)$(49,668)$10,220 $(49,668)$10,220 

See accompanying notes to condensed consolidated financial statements.

8


ACCELERATE DIAGNOSTICS, INC.
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 condensed consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC on February 28, 2020.

The condensed consolidated balance sheet as of December 31, 2019 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, 2020, 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.

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, tax valuation accounts and equity–based compensation. Actual results could differ materially from those estimates.

Estimated Fair Value of Financial Instruments

The Company follows Accounting Standards Codification (“ASC”) 820, Fair Value Measurement, which has defined fair value and requires the Company to establish a framework for measuring and disclosing fair value. The framework requires the valuation of assets and liabilities subject to fair value measurements using a three tiered approach and fair value measurement be classified and disclosed in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

9


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.

The estimated fair value of the Company’s convertible note represents a Level 2 measurement. See Note 11, Convertible Notes for further detail on the Company’s convertible notes.

The estimated fair value of the Company’s long-term debt represents a Level 3 measurement. The promissory notes issued under the Paycheck Protection Program (PPP) and other long-term debt is privately held with no public market. The carrying amount of these notes approximates fair value. See Note 10, Long-Term Debt for further detail on the Company’s long-term debt.

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 securities available-for-sale and equity securities which are primarily held in the custody of major financial institutions. Debt securities available-for-sale consist of certificates of deposit, U.S. government and agency securities, commercial paper, asset-backed securities, 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’ equity. Unrealized gains or losses for equity securities are included in other income (expense), net, a component of 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.

On a quarterly basis, 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 available-for-sale 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 available-for-sale.

10


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.

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 condensed 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. 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 as of September 30, 2020 was $0.3 million.

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 this evaluation is performed 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 September 30, 2020 and December 31, 2019.

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.

11


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 expense incurred for these provisions is included in cost of sales on the condensed consolidated statements of operations and comprehensive loss.

Warranty reserve activity for the three and nine months ended September 30, 2020 and 2019 is as follows (in thousands):

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Beginning balance$305 $196 $403 $215 
Provisions72 77 72 147 
Warranty cost incurred
(40)(51)(138)(140)
Ending balance$337 $222 $337 $222 

Paycheck Protection Program (PPP) Loan

The PPP was established by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, through a significant expansion of the Small Business Administration (“SBA”) 7(a) loan program. On April 14, 2020, the Company entered into a promissory note (the “PPP Note”) evidencing an unsecured loan in the amount of $4.8 million.

The Company elected to account for the PPP Note in accordance with ASC 470, Debt, with interest accrued in accordance with the interest method under ASC 835-30, Imputation of Interest. The Company recognized the entire PPP Note amount as a liability on the balance sheet, with interest accrued and expensed over the term of the loan. The Company did not impute additional interest at a market rate because transactions where interest rates are prescribed by governmental agencies are excluded from the scope of ASC 835-30.

The PPP Note will remain a liability until either of the following criteria are met:

the Company has been legally released from being the primary obligor under the liability (i.e. the PPP Note is forgiven); or

the Company pays the lender and is relieved of its obligation for the liability

See Note 10, Long-Term Debt for further detail regarding the PPP Note.

Convertible Notes

The Company accounts for convertible debt instruments that may be settled in cash or equity upon conversion, which includes the 2.50% Senior Convertible Notes due 2023 (the “Notes”), by separating the liability and equity components of the instruments in a manner that reflects our nonconvertible debt borrowing rate. The Company determined the carrying amount of the liability component of the Notes by using estimates and assumptions that market participants would use in pricing a debt instrument. These estimates and assumptions are judgmental in nature and could have a significant impact on the determination of the debt component, and the associated non-cash interest expense.

The equity component is treated as a discount on the liability component of the Notes, which is amortized over the term of the Notes using the effective interest rate method. Debt issuance costs related to the Notes are allocated to the liability and equity components of the Notes based on their relative values. Debt issuance costs allocated to the liability component are amortized over the life of the Notes as additional non-cash interest expense. Transaction costs allocated to equity are netted with the equity component of the convertible debt instrument in stockholders’ deficit.
12



Revenue Recognition

The Company recognizes revenue when control of the promised good or service is transferred to our customers in an amount that reflects the consideration we expect 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 our 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 and the term between invoicing and when payment is due is not typically 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.

Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine relative standalone selling prices based on the price charged to customers for each individual performance obligation.

Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. The Company has determined these costs would have an amortization period of less than one year and has elected to recognize them as an expense when incurred. Contract asset opening and closing balances were immaterial for the three and nine months ended September 30, 2020.

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 expenses.

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 condensed consolidated statements of operations and comprehensive loss.

13


Restructure Activity

During the three months ended September 30, 2020, following the completion of a strategic review of its Europe, the Middle East and Africa (“EMEA”) business, the Company's board of directors approved a plan to reduce its workforce, focus the geographies it plans to operate in, and terminate agreements with some distributors in geographies it plans on exiting (collectively, the “EMEA Restructuring Plan”). As of September 30, 2020, the Company substantially completed the workforce reduction portion of the EMEA Restructuring Plan, while the remaining restructuring activities are likely to occur through the end of the year. Restructuring charges are primarily comprised of employee severance and other post-employment benefits. The Company evaluates the nature of these costs to determine if they relate to on-going benefit arrangements which are accounted for under ASC 712 or one-time benefit arrangements which are accounted for under ASC 420. The Company incurred expense of $0.4 million in connection with the EMEA Restructuring Plan.

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 operating lease liabilities within our 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. As of September 30, 2020 and December 31, 2019, the Company was not party to finance lease arrangements.

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.
14



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 the calculation published by the SEC in SAB110 for use when there is not a sufficient history of employee exercise patterns. 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 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.

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Deferred Tax Assets

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 balance sheets. 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 income (loss).

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 at the balance sheet date were converted. Diluted earnings are not presented when the effect of adding such additional common shares is antidilutive.

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 investments classified as debt securities 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 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement (Topic 820); Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies, among other things, the disclosures required for Level 3 fair value measurements, including the range and weighted average of significant unobservable inputs. The guidance removes, among other things, the disclosure requirement to disclose transfers between Levels 1 and 2. Level 3 fair value measurement disclosures should be applied prospectively while all other amendments should be applied retrospectively. The Company adopted ASU 2018-13 on January 1, 2020, which had no impact to our condensed consolidated financial statements as the Company did not carry Level 3 fair value items upon implementing this ASU on January 1, 2020.

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In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments. In November 2018, ASU 2018-19 was issued which amended the standard to clarify that receivables arising from operating leases are within the scope of lease accounting standards. Further, the FASB issued ASU 2019-04, 2019-05, 2019-10, ASU 2019-11, 2020-02 and 2020-03 to provide additional guidance on the credit losses standard. ASU 2016-13 amends the guidance on measuring credit losses on financial assets (including trade accounts receivable and available for sale debt securities) held at amortized cost. Previously, an “incurred loss” methodology was used for recognizing credit losses which delays recognition until it is probable a loss has been incurred. This amendment requires assets valued at amortized cost to be presented at the net amount expected to be collected using an allowance for credit losses. Reversal of credit losses on available for sale debt securities are now recorded in current period net income. The Company adopted ASU 2016-13 on January 1, 2020. We adopted this standard using a modified-retrospective approach, and recorded a $0.1 million cumulative-effect adjustment to the opening balance of accumulated deficit in connection with the adoption. This adjustment was recorded to establish an allowance for trade account receivables and investment in leases. No cumulative-effect adjustment was recorded for unrealized losses on debt securities available-for-sale as the issuers of such securities held by us were of high credit quality. As a result, the condensed consolidated financial statements for the current periods are presented under the new standard, while the comparative prior year period is not adjusted and continues to be reported in accordance with our historical accounting policy.

Standards not yet 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). ASU 2020-06 reduces the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. In addressing the complexity, this ASU amends the guidance on convertible instruments and the guidance on the derivatives scope exception for contracts in an entity’s own equity. This ASU will reduce the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current U.S. GAAP standards. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. This ASU is effective for us on January 1, 2022, with early adoption permitted. We are currently assessing the impact this will have on our condensed consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force). ASU 2020-01 clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for the equity method investments in Topic 323 and the accounting for certain forward contracts and purchased options in Topic 815. This ASU is effective for us on January 1, 2021, with early adoption permitted. We are currently assessing the impact this will have on our condensed consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740); Simplifying the Accounting for Income Taxes. ASU 2019-12 reduces complexity in the accounting standard. This ASU is effective for us on January 1, 2021, with early adoption permitted. We are currently assessing the impact this will have 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, including receivables from major customers.

The Company has financial institutions for banking operations that hold 10% or more of the Company’s cash and cash equivalents. As of September 30, 2020, four of the Company's financial institutions held 18%, 38%, 21% and 11% of the Company’s cash and cash equivalents, respectively. As of December 31, 2019, two of the Company's financial institutions held 73% and 18% of the Company’s cash and cash equivalents, respectively.

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The Company grants credit to domestic and international customers. Exposure to losses on accounts receivable is principally dependent on each client's financial position. None of the Company's customers accounted for 10% or more of the net accounts receivable balance as of September 30, 2020. The Company had one customer that accounted for 11% of the Company’s net accounts receivable balance as of December 31, 2019.

The Company did not have any customers who represented 10% or more of the Company’s total revenue during the three and nine months ended September 30, 2020 and 2019.


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 September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020
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$5,013 $ $ $5,013 
Commercial paper 1,875  1,875 
Total cash and cash equivalents5,013 1,875  6,888 
Equity investments:
Mutual funds248   248 
Total equity investments248   248 
Debt securities available-for-sale:
Certificates of deposit 6,857  6,857 
U.S. Treasury securities13,484   13,484 
Commercial paper 9,345  9,345 
Corporate notes and bonds 20,529  20,529 
Debt securities available-for-sale13,484 36,731  50,215 
Total assets measured at fair value$18,745 $38,606 $ $57,351 

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December 31, 2019
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$43,745 $ $ $43,745 
Commercial paper 1,993  1,993 
Corporate notes and bonds 1,006  1,006 
Total cash and cash equivalents43,745 2,999  46,744 
Debt securities available-for-sale:
Certificates of deposit 5,663  5,663 
U.S. Treasury securities12,579   12,579 
U.S. Agency securities 3,998  3,998 
Commercial paper 2,491  2,491 
Corporate notes and bonds 22,706  22,706 
Debt securities available-for-sale12,579 34,858  47,437 
Total assets measured at fair value$56,324 $37,857 $ $94,181 

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.

In 2018, the Company issued the Notes, for total proceeds of $171.5 million, as described in Note 11, Convertible Notes. At September 30, 2020 and December 31, 2019, the fair value of the Notes were $110.7 million and $133.8 million, respectively. The fair value of the Notes is highly 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. The fair value of the Notes are classified as Level 2 within the fair value hierarchy. See Note 11, Convertible Notes for further detail on the Company’s convertible notes.

The Company's PPP Note along with its other long-term notes, cumulatively $5.5 million, approximate their fair value. The estimated fair value of the Company’s long-term debt represents a Level 3 measurement. See Note 10, Long-Term Debt for further detail on the Company's long-term debt.

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NOTE 5. INVESTMENTS

The following tables summarize the Company’s debt securities available-for-sale investments at September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Certificates of deposit$6,838 $19 $ $6,857 
U.S. Treasury securities13,435 49  13,484 
U.S. Agency securities    
Commercial paper9,345 1 (1)9,345 
Corporate notes and bonds20,513 19 (3)20,529 
Total$50,131 $88 $(4)$50,215 

December 31, 2019
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Certificates of deposit$5,646 $17 $ $5,663 
U.S. Treasury securities12,564 16 (1)12,579 
U.S. Agency securities4,002  (4)3,998 
Commercial paper2,492  (1)2,491 
Corporate notes and bonds22,711 6 (11)22,706 
Total$47,415 $39 $(17)$47,437 

The following table summarizes the maturities of the Company’s debt securities available-for-sale investments at September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020December 31, 2019
Amortized
Cost
Fair ValueAmortized
Cost
Fair Value
Due in less than 1 year$49,874 $49,958 $43,627 $43,650 
Due in 1-3 years257 257 3,788 3,787 
$50,131 $50,215 $47,415 $47,437 

Proceeds from sales of debt securities available-for-sale (including principal paydowns) for each of the three months ended September 30, 2020 and 2019 was $0, and for the nine months ended September 30, 2020 and 2019 were $0 and $13.4 million, respectively. The Company determines gains and losses of marketable securities based on specific identification of the securities sold. There were no material realized gains or losses from debt securities available-for-sale for the three and nine months ended September 30, 2020 and 2019. No material balances were reclassified out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019.

As of September 30, 2020, 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 September 30, 2020 there were no debt securities available-for-sale in a material unrealized loss position.

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As of September 30, 2020 the Company carried debt securities available-for-sale that were certificates of deposits, which were not covered by a rating agency or the credit rating was below the Company's minimum credit rating. As of September 30, 2020 all of the Company's certificate deposits were below the FDIC's insurance limit of $250,000 per depositor which mitigated the Company's investment risk. All other debt securities available-for-sale had a credit rating of A- or better as of September 30, 2020.

Equity securities are comprised of investments in mutual funds. The fair value of equity securities at September 30, 2020 was $0.2 million. There were no material unrealized gains or losses on equity securities recorded in income for the three and nine months ended September 30, 2020. 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 the three and nine months ended September 30, 2020.

NOTE 6. INVENTORY

Inventories consisted of the following at September 30, 2020 and December 31, 2019 (in thousands):

September 30,December 31,
20202019
Raw materials$5,128 $4,854 
Work in process2,257 1,561 
Finished goods2,074 1,644 
$9,459 $8,059 


NOTE 7. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at September 30, 2020 and December 31, 2019 (in thousands):

September 30,December 31,
20202019
Computer equipment$2,599 $2,477 
Technical equipment3,943 3,681 
Facilities3,690 3,883 
Instruments6,599 7,491 
Capital projects in progress1,047 238 
Total property and equipment$17,878 $17,770 
Accumulated depreciation(10,774)(9,865)
Property and equipment, net$7,104 $7,905 

Depreciation expense for each of the three months ended September 30, 2020 and 2019 was $0.6 million, and for the nine months ended September 30, 2020 and 2019 was $1.8 million and $1.7 million, respectively.

Gross assets under operating leases where the Company is the lessor at September 30, 2020 and December 31, 2019 were $4.3 million and $4.6 million, respectively. The underlying accumulated depreciation under operating leases where the Company is the lessor at September 30, 2020 and December 31, 2019 was $1.1 million and $0.8 million, respectively.

NOTE 8. LICENSE AGREEMENTS AND GRANTS

National Institute of Health Grant

In February 2015, the National Institute of Health awarded Denver Health and the Company a five-year, $5.0 million grant to develop a fast and reliable identification and categorical susceptibility test for carbepenem-
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resistant Enterobacteriaceae directly from whole blood. The grant is paid to the Company incrementally through sub-awards. The cumulative amount awarded to date under these sub-awards is $1.5 million. The amount invoiced for the nine months ended September 30, 2020 and 2019 was $0.1 million and $0.2 million, respectively. Subsequent to the original term of the grant the National Institute of Health has provided incremental annual extensions that have allowed the Company to provide additional services.

NOTE 9. 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 September 30, 2020 and December 31, 2019 follows (in thousands):

September 30,December 31,
20202019
Products and services not yet delivered$338 $271 

We recognized $0.1 million and $0.2 million of revenues that were included in the beginning contract liabilities balances during the three and nine months ended September 30, 2020, respectively, and $0.2 million and $0.3 million of revenues that were included in the beginning contract liabilities balances during the three and nine months ended September 30, 2019. 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 September 30, 2020, $8.6 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 10. LONG-TERM DEBT

As of September 30, 2020 and December 31, 2019, long-term debt consisted of the following (in thousands):

September 30,December 31,
20202019
PPP Loan - 1% interest
$4,803 $ 
Other Loans - various interest736  
Total debt5,539  
Current portion of long-term debt511  
Long-term debt$5,028 $ 

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The following presents maturities of future principal obligations of long-term debt as of September 30, 2020 (in thousands):

Remainder of 2020$76 
2021825 
20221,604 
20231,291 
20241,304 
Thereafter439 
Total$5,539 

Other notes payable

During the three months ended September 30, 2020, the Company entered into three loan agreements with two capital asset financing companies. Loan proceeds were $0.7 million, with interest rates ranging from 9.8% to 12.4% and maturities ranging from January 1, 2022 to September 2022. As of September 30, 2020, the current portion of long-term debt was $0.3 million and long-term debt was $0.4 million.

PPP Loan

On April 14, 2020, the Company entered into the PPP Note evidencing an unsecured loan in the amount of $4.8 million made to the Company under the PPP. The PPP was established under the CARES Act and is administered by the SBA.

On September 3, 2020 the Company's loan provider amended the PPP Note per the Paycheck Protection Program Flexibility Act (“PPP Flexibility Act”), which was enacted after the PPP Note was approved and funded. The PPP Flexibility Act amended the CARES Act to require that all PPP Notes made prior to June 5, 2020 be extended to a 5-year term. In accordance with this amendment the PPP Notes' original maturity date of April 14, 2022 was amended to April 14, 2025. The original terms of the loan required 18 monthly payments of principal and interest in the amount of $0.3 million starting November 14, 2020. These amended terms now require 45 monthly payments of principal and interest in the amount of $0.1 million starting August 14, 2021. The PPP Note's interest rate was unchanged and bears interest at a rate of 1% per annum.

The PPP Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The proceeds from the PPP Note may only be used for payroll costs (including benefits), interest on mortgage obligations, rent, utilities and interest on certain other debt obligations.

The PPP Note contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the lender or breaching the terms of the PPP Note documents. The occurrence of an event of default will result in an increase in the interest rate to 18% per annum and provides the lender with customary remedies, including the right to require immediate payment of all amounts owed under the PPP Note.

Pursuant to the terms of the CARES Act and the PPP, the Company may apply to the lender for forgiveness for the amount due on the PPP Note. The amount eligible for forgiveness is based on the amount of PPP Note proceeds used by the Company (during the 24 week period after the lender makes the first disbursement of PPP Note proceeds) for the payment of certain covered costs, including payroll costs (including benefits), rent and utilities, subject to certain limitations and reductions in accordance with the CARES Act and the PPP. No assurance can be given that the Company will obtain forgiveness of the PPP Note in whole or in part. As of September 30, 2020 the Company had submitted their application for forgiveness to the loan provider, which is currently under review.

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NOTE 11. CONVERTIBLE NOTES

On March 27, 2018, the Company issued $150.0 million aggregate principal amount of 2.50% Senior Convertible Notes due 2023. In connection with the offering of the Notes, the Company granted the initial purchasers of the Notes a 13-day option to purchase up to an additional $22.5 million aggregate principal amount of the Notes on the same terms and conditions. On April 4, 2018, the option was partially exercised, which resulted in $21.5 million of additional proceeds, for total proceeds of $171.5 million. 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. The Notes are convertible into shares of the Company’s common stock, can be repurchased for cash, or a combination thereof, at the Company’s election, at an initial conversion rate of 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 $171.5 million of proceeds received from the issuance of the Notes were allocated between long-term debt (the “liability component”) of $116.6 million and contributed capital (the “equity component”) of $54.9 million. The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the aggregate face value of the Notes. The liability component will be accreted up to the face value of the Notes of $171.5 million, which will result in additional non-cash interest expense being recognized through the Maturity Date. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification.

The Company incurred approximately $5.0 million of issuance costs related to the issuance of the Notes, of which $3.4 million and $1.6 million were recorded to long-term debt and contributed capital, respectively. The $3.4 million of issuance costs recorded as long-term debt on the condensed consolidated balance sheet are being 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 and debt issuance cost amortization, is 11.52%.

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.

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The Notes at September 30, 2020 and December 31, 2019 consisted of the following (in thousands):

September 30,December 31,
20202019
Outstanding principal$171,500 $171,500 
Unamortized debt discount(31,267)(39,042)
Unamortized debt issuance(1,934)(2,415)
Net carrying amount of the liability component$138,299 $130,043 

Interest expense for the three and nine months ended September 30, 2020 and 2019 were as follows (in thousands):

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Contractual coupon interest
$1,072 $1,072 $3,216 $3,216 
Amortization of the debt discount
2,666 2,379 7,775 6,940 
Amortization of debt issuance costs
165 147 481 429 
Total interest expense on convertible notes$3,903 $3,598 $11,472 $10,585 

As of September 30, 2020 and December 31, 2019, no Notes were convertible pursuant to their terms.

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.

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NOTE 12. EARNINGS PER SHARE

Basic net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted average common shares outstanding during the period. Basic and diluted net loss per share are the same because all outstanding common stock equivalents have been excluded, as they are anti-dilutive due to the Company’s losses.

The following potentially issuable common shares were not included in the computation of diluted net loss per share because they would have an anti-dilutive effect for each of the three and nine months ended September 30, 2020 and 2019 (in thousands):

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Shares issuable upon the release of restricted stock units722 20 722 20 
Shares issuable upon exercise of stock options8,952 10,159 8,952 10,159 
9,674 10,179 9,674 10,179 

Potentially dilutive common shares would also include common shares that would be outstanding if Notes convertible at the balance sheet date were converted. As discussed in Note 11, Convertible Notes, the Company issued $171.5 million of Notes due 2023. The Notes are convertible into shares of the Company’s