This Quarterly Report on Form 10-Q contains forward-looking statements about us
and our industry that involve substantial risks and uncertainties. We intend
such forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in Section 27A of the Securities Act of
1933, and Section 21E of the Securities and Exchange Act of 1934, or the
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Exchange Act. All statements other than statements of historical facts contained
in this Quarterly Report on Form 10-Q, including statements regarding our future
results of operations and financial position, business strategy, prospective
products and product candidates, their expected performance and impact on
healthcare costs, marketing clearance from the FDA, reimbursement for our
product candidates, research and development costs, timing of regulatory
filings, timing and likelihood of success, plans and objectives of management
for future operations, availability of funding for such operations and future
results of anticipated products, are forward-looking statements. These
statements involve known and unknown risks, uncertainties and other important
factors that may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "expect," "plan," "anticipate," "could," "intend,"
"target," "project," "contemplate," "believe," "estimate," "predict,"
"potential" or "continue" or the negative of these terms or other similar
expressions. The forward-looking statements in this Quarterly Report on
Form 10-Q are only predictions. We have based these forward-looking statements
largely on our current expectations and projections about future events and
financial trends that we believe may affect our business, financial condition
and results of operations. These forward-looking statements speak only as of the
date of this Quarterly Report on Form 10-Q and are subject to a number of risks,
uncertainties and assumptions described under the sections in this Quarterly
Report on Form 10-Q entitled "Item 1A.-Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Quarterly Report on Form 10-Q. These forward looking
statements are subject to numerous risks, including, without limitation, the
following:
• our status as an early stage company;
• our expectation to incur losses in the future;
• the market acceptance of our T2MR technology;
• our ability to timely and successfully develop and commercialize our
existing products and future product candidates;
• the length and variability of our anticipated sales and adoption cycle;
• our limited sales history;
• our ability to gain the support of leading hospitals and key thought
leaders and publish the results of our clinical trials in peer-reviewed
journals;
• our ability to successfully manage our growth;
• our future capital needs and our need to raise additional funds;
• the performance of our diagnostics;
• our ability to compete in the highly competitive diagnostics market;
• our ability to obtain marketing clearance from the FDA or regulatory
clearance for new product candidates in the United States or any other
jurisdiction;
• impacts of and delays caused by future federal government shutdowns;
• federal, state, and foreign regulatory requirements, including diagnostic
product reimbursements and FDA regulation of our product candidates;
• our ability to recruit, train and retain key personnel;
• our ability to protect and enforce our intellectual property rights,
including our trade secret protected proprietary rights in T2MR;
• the impact of security breaches on our information technology systems;
• the impact of short sellers on our share price;
• our dependence on third parties;
• our ability to continue as a going concern;
• manufacturing and other product risks;
• the impact of the adoption of new accounting standards; and
• the Tax Cuts and Jobs Act of 2017 (Tax Reform).
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These forward-looking statements represent our estimates and assumptions only as
of the date of this Quarterly Report on Form 10-Q. Unless required by U.S.
federal securities laws, we do not intend to update any of these forward-looking
statements to reflect circumstances or events that occur after the statement is
made or to conform these statements to actual results. The following discussion
should be read in conjunction with the financial statements and notes thereto
appearing elsewhere in this Quarterly Report on Form 10-Q. Our actual results
may differ materially from those anticipated in these forward-looking statements
as a result of various factors, including those set forth under "Risk Factors"
in our Annual Report on Form 10-K for the year ended December 31, 2018, as
supplemented or amended from time to time under "Item 1A.-Risk Factors" in our
Quarterly Reports on Form 10-Q, and elsewhere in this Quarterly Report on
Form 10-Q.
You should read the following discussion and analysis of our financial condition
and results of operations together with our condensed consolidated financial
statements and related notes thereto included elsewhere in this Quarterly Report
on Form 10-Q. Some of the information contained in this discussion and analysis
or set forth elsewhere in this Quarterly Report on Form 10-Q, including
information with respect to our plans and strategy for our business and related
financing, includes forward-looking statements that involve risks and
uncertainties. As a result of many factors, including those factors set forth in
the "Item 1A.-Risk Factors" section of this Quarterly Report on Form 10-Q, our
actual results could differ materially from the results described in or implied
by the forward-looking statements contained in the following discussion and
analysis.
Business Overview
We are an in vitro diagnostics company that has developed an innovative and
proprietary technology platform that offers a rapid, sensitive and simple
alternative to existing diagnostic methodologies. We are using T2MR to develop a
broad set of applications aimed at lowering mortality rates, improving patient
outcomes and reducing the cost of healthcare by helping medical professionals
make targeted treatment decisions earlier. T2MR enables rapid detection of
pathogens, biomarkers and other abnormalities in a variety of unpurified patient
sample types, including whole blood, plasma, serum, saliva, sputum, cerebral
spinal fluid and urine, and can detect cellular targets at limits of detection
as low as one colony forming unit per milliliter, or CFU/mL. Our initial
development efforts target sepsis and Lyme disease, which are areas of
significant unmet medical need in which existing therapies could be more
effective with improved diagnostics.
On September 22, 2014, we received market clearance from the FDA for our first
two products, the T2Dx Instrument and T2Candida, which have the ability to
rapidly identify the five clinically relevant species of Candida, a fungal
pathogen known to cause sepsis, directly from whole blood. On May 24, 2018, we
received market clearance from the FDA for T2Bacteria, which runs on the T2Dx
Instrument and has the ability to rapidly identify five of the most common and
deadly sepsis-causing bacteria (members of the ESKAPE pathogens, as defined in
Our T2Bacteria Panel) directly from whole blood. We have also developed and sell
a research use only Candida auris assay for the rapid identification of Candida
auris, a species of Candida that is highly drug resistant. We have developed a
T2Resistance Panel for the early and sensitive detection of carbapenemase
resistance markers and multiple hospitals are testing this new panel on a
"research use only" basis. The T2Resistance Panel received FDA Breakthrough
Device designation in February 2019 and we believe this designation will speed
our clinical trial. An additional diagnostic application in development is
called T2Lyme, which is focused on the detection of the bacteria that cause Lyme
disease. Diagnostic applications for additional bacteria species and resistance
markers were developed as part of a collaboration with CARB-X, a public-private
partnership with the U.S. Department of Health and Human Services, or HHS, and
the Wellcome Trust of London, focused on combatting antibiotic resistant
bacteria. We anticipate that existing reimbursement codes will support our
sepsis and Lyme disease product candidates, and that the anticipated economic
savings associated with our sepsis products will be realized directly by
hospitals. On August 2, 2019, the Company's T2Bacteria Panel received a New
Technology Add-on Payment from CMS, including a stand-alone ICD-10 Code for the
T2Bacteria test. In the United States, we have built a direct sales force that
is primarily targeting the top 1,200 hospitals with the highest concentration of
patients at risk for sepsis-related infections. Internationally, we have
primarily partnered with distributors that target large hospitals in their
respective international markets.
We believe our sepsis products, which include T2Candida and T2Bacteria, will
redefine the standard of care in sepsis management while lowering healthcare
costs by improving both the precision and the speed of detection of
sepsis-causing pathogens. According to a study published in the Journal of
Clinical Microbiology in 2010, targeted therapy for patients with bloodstream
infections can be delayed up to 72 hours due to the wait time for blood culture
results. In another study published in Clinical Infectious Diseases in 2012, the
delayed administration of appropriate antifungal therapy was associated with
higher mortality among patients with septic shock attributed
to Candida infection and, on that basis, the study concluded that more rapid and
accurate diagnostic techniques are needed. Due to the high mortality rate
associated with Candida infections, physicians often will place patients on
antifungal drugs while they await blood culture diagnostic results which
generally take at least five days to generate a negative test result. Antifungal
drugs are toxic and may result in side effects and can cost over $50 per day.
The speed to result of T2Candida and T2Bacteria coupled with its higher
sensitivity as compared to blood culture may help reduce the overuse of
ineffective, or even unnecessary, antimicrobial therapy which may reduce side
effects for patients, lower hospital costs and potentially counteract the
growing resistance to antifungal therapy. The administration of inappropriate
therapy is a driving force behind the spread of
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antimicrobial-resistant pathogens, which the United States Centers for Disease
Control and Prevention, or the CDC, recently called "one of our most serious
health threats." The addition of the use of our products, T2Bacteria and
T2Candida, which both run on the T2Dx instrument, with the standard of care for
the management of patients suspected of sepsis, enables clinicians to
potentially treat 90% of patients with sepsis pathogen infections with the right
targeted therapy within the first twelve hours of development of the symptoms of
disease. Currently, high risk patients are typically initially treated with
broad spectrum antibiotic drugs that typically cover approximately 60% of
patients with infections. Of the remaining 40% of patients, approximately 30% of
the patients typically have a bacterial infection and 10% typically have Candida
infections. T2Candida and T2Bacteria are designed to identify pathogens commonly
not covered by broad spectrum antibiotic drugs.
We compete with traditional blood culture-based diagnostic companies, including
Becton Dickinson & Co. and bioMerieux, Inc., as well as companies offering
post-culture species identification using both molecular and non-molecular
methods, including bioMerieux, Inc. (and its affiliate, BioFire Diagnostics,
Inc.), Bruker Corporation, Accelerate Diagnostics, Luminex, Genmark, Cepheid and
Beckman Coulter, a Danaher company. In addition, there may be a number of new
market entrants in the process of developing other post-blood culture diagnostic
technologies that may be perceived as competitive with our technology. Karius,
Inc. offers a lab developed culture independent diagnostic test for the
identification of pathogens that has not been cleared by the FDA but may be
perceived as competitive with our technology.
We have never been profitable and have incurred net losses in each year since
inception. Our accumulated deficit at September 30, 2019 was $362.1 million.
Substantially all of our net losses resulted from costs incurred in connection
with our research and development programs and from selling, general and
administrative costs associated with our operations. We have incurred
significant commercialization expenses related to product sales, marketing,
manufacturing and distribution of our initial FDA-cleared products, T2Dx and
T2Candida. In addition, we will continue to incur significant costs and expenses
as we increase commercialization efforts for our most recent FDA-cleared
product, T2Bacteria, and continue to develop other product candidates, improve
existing products and maintain, expand and protect our intellectual property
portfolio. We may seek to fund our operations through public equity or private
equity or debt financings, as well as other sources. However, we may be unable
to raise additional funds or enter into such other arrangements when needed on
favorable terms or at all. Our failure to raise capital or enter into such other
arrangements if and when needed would have a negative impact on our business,
results of operations and financial condition and our ability to develop,
commercialize and drive adoption of the T2Dx, T2Candida, T2Bacteria, and future
T2MR-based diagnostics.
Pursuant to the requirements of Accounting Standards Codification (ASC) 205-40,
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going
Concern, management must evaluate whether there are conditions or events,
considered in the aggregate, that raise substantial doubt about the Company's
ability to continue as a going concern within one year after the date that the
financial statements are issued. This evaluation initially does not take into
consideration the potential mitigating effect of management's plans that have
not been fully implemented as of the date the financial statements are issued.
When substantial doubt exists under this methodology, management evaluates
whether the mitigating effect of its plans sufficiently alleviates substantial
doubt about our ability to continue as a going concern. The mitigating effect of
management's plans, however, is only considered if both (1) it is probable that
the plans will be effectively implemented within one year after the date that
the financial statements are issued, and (2) it is probable that the plans, when
implemented, will mitigate the relevant conditions or events that raise
substantial doubt about the entity's ability to continue as a going concern
within one year after the date that the financial statements are issued.
We believe that our existing cash and cash equivalents at September 30, 2019,
along with funding available through our Sales Agreement with Canaccord and
Purchase Agreement with Lincoln Park (Note 7), will be sufficient to allow us to
fund our current operating plan at least a year from the issuance of these
financial statements. However, because certain elements of our operating plan
are outside of our control, including our ability to sell shares under the Sales
Agreement and the Purchase Agreement, they cannot be considered probable
according to accounting standards. Under ASC 205-40, the future receipt of
potential funding from our Co-Development partners and other resources cannot be
considered probable at this time because none of the plans are entirely within
our control. In addition, we are required to maintain a minimum cash balance
under our Term Loan Agreement with CRG (Note 6).
These conditions raise substantial doubt regarding our ability to continue as a
going concern for a period of one year after the date that the financial
statements are issued. Management's plans to alleviate the conditions, should it
be necessary, include raising additional funding, earning milestone payments
pursuant to our Co- Development agreements, delaying certain research projects
and capital expenditures and eliminating certain future operating expenses in
order to fund operations at reduced levels to continue as a going concern for a
period of 12 months from the date the financial statements are
issued. Management has concluded the likelihood that its plan to obtain
sufficient funding from one or more of these sources or adequately reduce
expenditures will be successful, while reasonably possible, is less than
probable.
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Our Commercial Products and the Unmet Clinical Need
The T2 Biosystems portfolio, including all current products utilizing T2MR
technology that run on the T2Dx instrument, represent the only FDA-cleared
products that detect and identify sepsis-causing bacterial and fungal pathogens
directly from whole blood, without the need for blood culture. All other
FDA-cleared products must wait for cells to divide in blood culture to achieve
cell titer levels of greater than 1,000,000 CFU/mL. In contrast, the T2Direct
Diagnostic products detect pathogens directly as they exist in blood, with
limits of detection of 1 to 11 CFU/mL. The result is at least two days faster in
time to pathogen identification, as demonstrated by two clinical trials, each
including greater than 1,400 patients in addition to many clinical cases and
independent studies.
The current standard of care is to treat patients suspected of a bloodstream
infection using empiric antimicrobial therapy without diagnostic evidence, and
then to revise therapy when diagnostic evidence is available. But as
demonstrated by a meta-analysis of 70 studies, the proportion of infected
patients receive effective therapy by the empiric approach is only 53.5%.
However, the proportion of patients placed on effective therapy after receiving
a diagnostic species identification from a blood sample is greater than 95%. We
believe this is the principal value of our T2 Biosystems portfolio, to increase
the proportion of patients on effective therapy from 55% to 95% within three to
five hours, instead of days.
The benefits to clinical care outcomes from faster time to effective therapy
include a reduction in average patient length of stay within a hospital,
increased hospital cost savings, and reduced mortality. Across three
interventional studies, the mean ratio of length of stay reduction to time to
effective therapy was 2.7 hours. In other words, for every one hour faster time
to effective therapy, patient length of stay was reduced by 2.7 hours. The mean
reduction in length of stay from early effective therapy in these studies was up
to eight days and an independent economic analysis found a $1,149 cost savings
per patient tested with the T2Candida Panel. An independent economic review also
found rapid, direct-from-blood diagnostics result in cost savings when
sensitivity is greater than 52%, the cost of the test is less than $270, and
results are returned within two to seven hours. All of these requirements are
met by the T2Direct Diagnostic panels. Additionally, in septic shock patients,
every hour delaying effective antimicrobial therapy decreases survival by an
estimated 7.6%. In 111,816 patients given a New York State mandated sepsis
bundle, the relative probability of death increased by four percent for every
hour delay in the administration of effective therapy. In a retrospective
analysis of 70 studies, compared to patients given an appropriate empiric
antimicrobial therapy, patients given inappropriate empiric antimicrobials
showed over two-times higher probability of death. Taken together, T2 Biosystems
allow for a reduction in time to effective therapy by multiple days, which are
realized as patient and hospital benefits in reduced length of stay, cost of
care, and mortality.
Our FDA-cleared products, the T2Dx instrument, T2Candida, and T2Bacteria utilize
T2MR to detect species-specific sepsis-causing bacterial and fungal pathogens,
directly from whole blood in as few as three hours versus the one to five or
more days typically required by blood culture-based diagnostics. This allows the
patient to potentially receive the correct treatment in four to six hours versus
24 to 144 hours for blood culture. T2Candida and T2Bacteria run on the T2Dx
Instrument and provide high sensitivity with a limit of detection as low as 1
CFU/mL, even in the presence of antimicrobial therapy.
Sepsis is one of the leading causes of death in the United States, claiming more
lives annually than breast cancer, prostate cancer and AIDS combined, and it is
the most expensive hospital-treated condition. Most commonly afflicting
immunocompromised, critical care and elderly patients, sepsis is a severe
inflammatory response to a bacterial or fungal infection with a mortality rate
of approximately 30%. According to data published by HHS for 2017, the cost of
sepsis was over $27 billion in the United States, building on previous data
demonstrating that sepsis was responsible for approximately five percent of the
total aggregate costs associated with domestic hospital stays. Sepsis is
typically caused by one or more of five Candida species or over 25 bacterial
pathogens, and effective treatment requires the early detection and
identification of these specific target pathogens in a patient's bloodstream.
Today, sepsis is typically diagnosed through a series of blood cultures followed
by post-blood culture species identification. These methods have substantial
diagnostic limitations that lead to a high rate of false negative test results,
a delay of up to several days in administration of targeted treatment and the
incurrence of unnecessary hospital expense. In addition, the Survey of
Physicians' Perspectives and Knowledge About Diagnostic Tests for Bloodstream
Infections in 2015 reported that negative blood culture results are only trusted
by 36% of those physicians. Without the ability to rapidly identify pathogens,
physicians typically start treatment of at-risk patients with broad-spectrum
antibiotics, which can be ineffective and unnecessary and have contributed to
the spread of antimicrobial resistance. According to a study published by
Critical Care Medicine in 2006, in sepsis patients with documented hypotension,
administration of effective antimicrobial therapy within the first hour of
detection was associated with a survival rate of 79.9% and, over the ensuing six
hours, each hour of delay in initiation of treatment was associated with an
average decrease in survival of 7.6%.
We believe our sepsis products, which include T2Candida and T2Bacteria and the
T2Resistance Panel product candidate, will redefine the standard of care in
sepsis management while lowering healthcare costs by improving both the
precision and the speed of detection of sepsis-causing pathogens. According to a
study published in the Journal of Clinical Microbiology in 2010, targeted
therapy for patients with bloodstream infections can be delayed up to 72 hours
due to the wait time for blood culture results. In another
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study published in Clinical Infectious Diseases in 2012, the delayed
administration of appropriate antifungal therapy was associated with higher
mortality among patients with septic shock attributed to Candida infection and,
on that basis, the study concluded that more rapid and accurate diagnostic
techniques are needed. Our pivotal clinical trial for T2Candida demonstrated
that it can deliver actionable results in as few as three hours, with an average
time to result during the trial of 4.2 hours, compared to the average time to
result of one to six or more days typically required for blood-culture-based
diagnostics, which we believe will potentially enable physicians to make
treatment decisions and administer targeted treatment to patients in four to six
hours versus 24 to 144 hours for blood culture.
The results from our pivotal clinical trial for T2Bacteria, which was recently
published in the Annals of Internal Medicine, demonstrated that T2Bacteria can
deliver actionable results in an average of 5.4 hours, compared to an average of
60 hours for detecting the same species by blood culture. In addition,
T2Bacteria identified 69 patients with bloodstream infections that were missed
by the paired blood culture that was simultaneously run. The pivotal study was a
study of over 1,400 patient samples collected across 11 hospital and hospital
systems across the United States. The investigators concluded the following: (a)
T2Bacteria demonstrated accuracy, including overall sensitivity of 90% and
overall average specificity of 98%; (b) blood culture species identification
results took an average of 3 days while T2Bacteria took an average of only 5.4
hours in the clinical trial, providing results more than 2.5 days faster; (c)
66% of patients in the clinical trial with a bloodstream infection confirmed by
T2 and blood culture could have benefited from earlier appropriate antibiotics
based on the rapid T2Bacteria result. A separate presentation on T2Bacteria at
ASM Microbe 2018 by clinicians at Ochsner Medical Center found the following:
(a) T2Bacteria detected 14 infections missed by a paired blood culture - but
proven to be a true infection by other cultures; (b) T2Bacteria identified every
infection detected by blood culture of the target species (100% sensitivity);
and (c) T2Bacteria was accurate in identifying samples without an infection,
with 99% average specificity. The authors concluded that the advantages of
T2Bacteria over blood culture could make it a valuable tool to enable faster
time to targeted antibiotic therapy and reduced use of unnecessary antibiotics.
Also at ASM Microbe 2018, clinicians from Northwestern University presented its
findings that T2Bacteria was more sensitive when compared to blood culture
testing and detected 18 clinically important urinary and respiratory infections
that were missed by blood culture. The authors concluded that T2Bacteria may
improve patient care by providing clinicians rapid and actionable information
for treating patients. In November 2015, the Company presented preliminary data
demonstrating the ability of our T2Bacteria product candidate to provide the
rapid and sensitive identification of certain sepsis-causing bacteria included
in the panel, directly from whole blood. The bacteria species included
in T2Bacteria are Staphylococcus aureus, Enterococcus faecium, Escherichia coli,
Klebsiella pneumoniae, and Pseudomonas aeruginosa. The five bacteria species in
our T2Bacteria Panel are responsible for about half of all septic infections.
At the 2019 ECCMID conference, several clinical presentations were made on our
products. These include a poster and podium presentation by Dr. Tom Walsh from
New York Presbyterian / Cornell Hospital highlighting the clinical utility of
T2Bacteria in the hematologic malignancy and stem cell transplant patient
population. Within his institution, T2Bacteria showed a 75% positive predictive
agreement with blood culture and 98% negative predictive agreement and covered
80% of significant species detected by blood culture. T2Bacteria could have
potentially influenced care and provided an opportunity to place patients with
infections that were diagnosed by T2Bacteria but missed by blood culture on
effective therapy faster than with culture dependent methods. Another study
presented by Maiken Arendrup from Rigshospitalet, Denmark evaluated the
performance of T2Candida, Mannan Ag and blood culture for diagnosis of invasive
candidiasis infections across 126 patients. The sensitivity for invasive
candidiasis was higher for T2Candida compared to blood culture and Mannan Ag and
the positive predictive value was highest for T2Candida. A group from Bambino
Gesu Pediatrics Hospital in Rome, Italy presented a comparison of T2Candida,
SeptiFast and blood culture in pediatric and neonatal patients showing an 89%
concordance between blood culture and T2MR. Data were also presented on the new
T2Carba Resistance+ Panel (for research use only or "RUO") by clinicians at
Gemelli Hospital in Rome Italy and by scientists from our company. This data
shows that T2MR can be used for detection of resistance genes KPC, NDM, OXA-48,
VIM, IMP, and AmpC (CMY-2/DHA) in spiked human whole blood at 5 CFU/mL, as well
as in clinical samples from patients with bloodstream infections. The clinical
data shows that T2MR results for resistance markers can be available on average
25 hours faster than conventional methods and the T2Carba Resistance Panel has a
positive predictive agreement with conventional methods greater than 95%.
There are currently eight interventional studies ongoing and four interventional
studies scheduled to begin this year, as well as many observational studies
ongoing that are evaluating the clinical impact of our tests. In total, we have
over two dozen investigator-initiated clinical studies currently running on our
direct-from-blood tests for the purposes of demonstrating their clinical
utility.
Our T2Candida Panel
Candida is the fourth leading hospital-acquired bloodstream infection,
afflicting more than 135,000 patients per year in the United States, and the
most lethal form of common bloodstream infections that cause sepsis, with an
average mortality rate of approximately 40%. This high mortality rate is largely
due to a delay in providing targeted therapy to the patient due to the elapsed
time from Candida infection to positive diagnosis. According to a study
published in Antimicrobial Agents and Chemotherapy, the Candida mortality rate
can be reduced to 11% with the initiation of targeted therapy within 12 hours of
presentation of symptoms. Additionally, a typical patient with
a Candida infection averages 40 days in the hospital, including nine days in
intensive care,
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resulting in an average cost per hospital stay of more than $130,000 per
patient. In a study published in the American Journal of Respiratory and
Critical Care Medicine, providing targeted antifungal therapy within 24 hours of
the presentation of symptoms decreased the length of hospital stay by
approximately ten days and decreased the average cost of care by approximately
$30,000 per patient.
Our DIRECT pivotal clinical trial was designed to evaluate the sensitivity and
specificity of T2Candida on the T2Dx instrument. The DIRECT trial consisted of
two patient arms: a prospective arm with 1,501 samples from patients with a
possible infection and a seeded arm with 300 samples, also obtained from
patients with a possible infection. T2Candida and the T2Dx instrument
demonstrated a sensitivity of 91.1 percent and a specificity of 99.4 percent. In
addition, the speed to a species-specific positive result with T2Candida was 4.4
hours versus 129 hours with blood culture. A negative result from T2Candida was
obtained in just 4.2 hours versus greater than 120 hours with blood culture. The
data and other information from the DIRECT pivotal clinical trial was published
in January 2015 in Clinical Infectious Diseases.
In April 2015, Future Microbiology published the results of an economic study
regarding the use of T2Candida conducted by IMS Health, a healthcare economics
company. In that economic study, IMS demonstrated that an average hospital
admitting 5,100 patients at risk for Candida infections could save approximately
$5.8 million annually due to decreased hospital stays for patients, reduction in
use of antifungal drugs, and other associated savings. The economic study
further showed T2Candida can potentially reduce the costs of care by $26,887
per Candida patient and that rapid detection of Candida reduces patient deaths
by 60.6%. Results from a data analysis of T2Candida for the detection and
monitoring of Candida infection and sepsis were published comparing aggregated
results from the use of T2Candida to blood culture-based diagnostics for the
detection of invasive candidiasis and candidemia. The analysis included samples
acquired from more than 1,900 patients. Out of 55 prospective patient cases that
were tested with T2Candida and blood culture and determined to be positive or
likely to be positive for a Candida infection, T2Candida detected 96.4% of the
patients (53 cases) compared to detection of 60% of the patients (33 cases) with
blood culture. During 2016, a number of T2Candida users presented data on their
experiences with T2Candida which demonstrated both the clinical and economic
benefits of use of T2Candida in the diagnostic regimen. The Henry Ford Health
System in Detroit, Michigan reported data on a pre- and post-T2Candida
implementation analysis that covered 6 months of clinical experience. The data
showed a statistically significant (p = 0.009) seven day reduction in median
Intensive Care Unit ("ICU") length of stay per positive patient that was
identified as positive for Candida after implementation of T2Candida and a trend
(p = 0.164) of total hospital length of stay reduction of four days. The data
also showed significant reductions in use of antifungal drugs for negative
patients tested with T2Candida. The overall economic savings resulting from
these clinical benefits was projected to be approximately $2.3 million on an
annualized basis. The Lee Health System in Fort Myers, Florida compared patient
and economic experience before and after T2Candida implementation. The data
demonstrated that in the post-T2Candida cohort, median length of stay for
patients with Candida infections was reduced by 7 days when detected by
T2Candida while unnecessary antifungal therapy was avoided in 41% of patients
tested and was discontinued after one dose in another 15% of patients tested.
The average economic savings derived solely from reduction in antifungal drug
use was $195 per patient tested, net of the cost of T2Candida. Huntsville
Hospital in Huntsville, Alabama, reported that the use of T2Candida resulted in
a reduction in the duration of therapy and time to de-escalation in patients
that tested negative for Candida on T2Candida, yielding net pharmacy savings of
approximately $280 per patient tested. T2Candida also detected 56% more positive
patients than blood culture. Finally, Riverside Community Hospital in Riverside,
California, demonstrated improvements in time to appropriate therapy, increased
sensitivity, and rapid discontinuation of antifungal therapy when using
T2Candida. Specifically, 83% of patients who tested positive with T2Candida
received appropriate therapy within six hours of the blood draw and 100% of
patients received appropriate therapy in under nine hours. None of the patients
who tested positive had been identified to have been treated with antifungals
prior to T2Candida testing. In addition, antifungal therapy was discontinued for
100% of the patients who tested negative with T2Candida.
A study presented at ASM Microbe 2018 found that the T2MR technology provided
accurate diagnostic results from patient skin samples for Candida auris. The
study concluded that T2MR could be used to provide a more rapid detection of
Candida auris in patient skin swabs.
Recent publications and presentations continue to demonstrate the clinical
utility of T2Candida to assess the presence of disease, and continuation of
antifungal therapy and resolution of disease despite negative blood cultures.
(Ahuja et al. "Combination Antifungal Therapy for Treatment of Candida
Parapsilosis Prosthetic Valve Endocarditis and utility of T2Candida Panel: A
Case Series" ID Cases 2019; Chaudhry "Tales from the trenches" ID Week 2018.)
Additionally, the Open Forum of Infectious Diseases recently published online
"Diagnostic performance of T2Candida among ICU patients with risk factors for
invasive candidiasis" by Maiken C. Arendrup reported on a multi-center study on
126 intensive care patients with high risk of invasive candidiasis and sepsis
testes with T2Candida, blood culture and Candida Mannan Antigen. In this study
the best diagnostic performance was observed for a combination of T2Candida and
blood culture. Additionally, the authors note that "T2Candida was superior to
blood culture and mannan-antigen and may improve diagnosis of patients with
invasive candidiasis."
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Our T2Bacteria Panel
On May 24, 2018, we received market clearance from the FDA for T2Bacteria, a
multiplex diagnostic panel that runs on the T2Dx and detects five major
bacterial pathogens (members of the ESKAPE pathogens, as defined below)
associated with sepsis and, in conjunction with T2Candida and standard empiric
therapy regimens, may enable the early, appropriate treatment of 90% of sepsis
patients. T2Bacteria addresses the same approximately 6.75 million symptomatic
high-risk patients as T2Candida and also a new population of patients who are at
increased risk for bacterial infections, including an additional two million
patients presenting with symptoms of infection in the emergency room setting.
On August 4, 2017 we completed a pivotal clinical study of T2Bacteria, which is
a qualitative T2MR assay designed for the direct detection of bacterial species
in human whole blood specimens from patients with suspected bacteremia.
T2Bacteria is designed to identify five species of bacteria directly from human
whole blood specimens: Enterococcus faecium, Escherichia coli, Klebsiella
pneumoniae, Pseudomonas aeruginosa, and Staphylococcus aureus. Outside of the
United States, the CE-marked T2Bacteria identifies all 5 of these species along
with a 6th species, Acinetobacter baumannii.
The performance characteristics of T2Bacteria were evaluated through a series of
analytical studies as well as a multi-center clinical study. The clinical study
evaluated the performance of T2Bacteria in comparison to the current standard of
care, blood culture. All of the data generated in the analytical studies and the
clinical study were submitted to the United States Food and Drug Administration,
or FDA, in a 510(k) premarket notification on September 8, 2017. T2Bacteria was
cleared by the FDA on May 24, 2018.
The clinical study consisted of two arms, a prospective arm and a seeded arm. In
the prospective arm, a total of 1,427 subjects were tested at eleven
geographically dispersed and demographically diverse sites in the United States.
In the seeded arm, 300 specimens of known bacterial composition were evaluated
at three sites. Seeded specimens were prepared by spiking whole blood with
multiple strains of the bacterial species detected by T2Bacteria at defined
concentrations (CFU/mL). Fifty negative blood samples also were evaluated as
part of the seeded arm of the study. In total, 1,777 (1,427 prospective
specimens and 350 seeded and negative) clinical samples were tested to evaluate
the clinical performance of T2Bacteria.
Recently, poster presentations by Dr. Christopher Voigt at ECCMID 2019 and EIM
2019 reported on the performance of T2Bacteria in the emergency department of
Ochsner Medical Center and Tampa General Hospital. Data from 137 emergency
department patients were evaluated and relative to blood culture, T2Bacteria
showed 100% positive percent agreement and 99.2% negative percent agreement. In
addition, for species on T2Bacteria, the T2Bacteria assay detected 4 more
positive results associated with infection than blood culture, the average time
to identification was 56.6 hours faster than blood culture and T2Bacteria
covered 70.5% of all species detected by blood culture. A review of the 16
positive results identified by T2Bacteria records revealed, relative to actual
care, T2Bacteria could have potentially allowed for focused therapy in 8
patients, potentially reduced time to a species-directed therapy in 4 patients,
and potentially reduced time to effective therapy in 4 patients. In this
emergency department population, T2Bacteria appeared to be a more rapid and
sensitive detector of bacteremia for the most common ESKAPE pathogens (E. coli,
E. faecium, S. aureus, K. pneumoniae, and P. aeruginosa) and showed the
theoretical potential to influence subsequent patient therapy, ranging from
antibiotic de-escalation to faster time to effective therapy.
On August 2, 2019, the United States Centers for Medicare & Medicaid Services
(CMS) granted approval for a New Technology Add-on Payment (NTAP) for the
T2Bacteria Panel for FY 2020. In its FY 2020 inpatient prospective payments
system final rule, CMS explained: "the T2Bacteria Test Panel represents a
substantial clinical improvement over existing technologies because it reduces
the proportion of patients on inappropriate therapy, thus reducing the rate of
subsequent diagnostic or therapeutic intervention as well as length of stay and
mortality rates caused by sepsis causing bacterial infections." With this
designation, hospitals in the United States treating Medicare inpatients with
sepsis will now be eligible for a NTAP, in addition to the standard payment
amount. In the final rule, CMS determined a maximum NTAP amount of $97.50 for
the T2Bacteria Panel in addition to the diagnosis-related group (MS-DRG)-based
reimbursement that hospitals receive under the Medicare Hospital Inpatient
Prospective Payment System (IPPS). Hospitals will be eligible for the NTAP for
any in-patient T2Bacteria Panel tests performed on Medicare patients beginning
October 1, 2019. The maximum NTAP reimbursement for a qualifying case involving
the use of the T2Bacteria Panel is $97.50, (65 percent of the list price of one
T2Bacteria Panel test) in addition to standard hospital payment under the
appropriate sepsis MS-DRG codes. According to CMS there are more than 30 million
Medicare patients in the United States enrolled in Medicare fee-for-service.
Our T2 Biosystems Portfolio
We believe our T2MR delivers what no conventional technology currently available
can: a rapid, sensitive and simple diagnostic platform to enable sepsis
applications that can identify specific sepsis pathogens directly from an
unpurified blood sample
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in hours instead of days at a level of accuracy equal to or better than blood
culture-based diagnostics. The addition of the use of our products, T2Bacteria
and T2Candida, which both run on the T2Dx Instrument, with the standard of care
for the management of patients suspected of sepsis enables clinicians to
potentially treat 90% of patients with sepsis pathogen infections with the right
targeted therapy within the first twelve hours of developing the symptoms of
disease. Currently, high risk patients are typically initially treated with
broad spectrum antibiotic drugs that typically cover approximately 60% of
patients with infections. Of the remaining 40% of patients, approximately 30% of
the patients have a bacterial infection and 10% have Candida infections.
T2Candida and T2Bacteria are designed to identify pathogens commonly not covered
by broad spectrum antibiotic drugs.
We believe our products provide a pathway for more rapid and targeted treatment
of infections, potentially reducing the mortality rate by as much as 50-75% if a
patient is treated within 12 hours of suspicion of infection and significantly
reducing the cost burden of sepsis. Each year, approximately 250,000 patients in
the United States die from sepsis. According to a study published by Critical
Care Medicine in 2006, in sepsis patients with documented hypotension,
administration of effective antimicrobial therapy within the first hour of
detection was associated with a survival rate of 79.9% and, over the ensuing six
hours, each hour of delay in initiation of treatment was associated with an
average decrease in survival of 7.6%. According to such study, the survival rate
for septic patients who remained untreated for greater than 36 hours was
approximately 5%. The toll of sepsis on a patient's health can be severe: more
than one-in-five patients die within two years as a consequence of sepsis.
Sepsis is also the most prevalent and costly cause of hospital readmissions.
We believe our T2 Biosystems Portfolio addresses a significant unmet need in in
vitro diagnostics by providing:
• Limits of Detection as Low as 1 CFU/mL. T2MR is the only technology
currently available that can enable identification of sepsis pathogens
directly from a patient's blood sample at limits of detection as low as 1
CFU/mL.
• Rapid and Specific Results in as Few as Three Hours. T2MR is the only
technology that can enable species-specific results for pathogens
associated with sepsis, directly from a patient's blood sample, without
the need for blood culture, to deliver an actionable result in three
hours.
• Accurate Results Even in the Presence of Antimicrobial Therapy. T2MR is
the only technology that can reliably detect pathogens associated with
sepsis, including slow-growing pathogens, such as C. glabrata, directly
from a patient's blood sample, even in the presence of an antimicrobial
therapy.
• Easy-to-Use Platform. T2MR eliminates the need for sample purification or
extraction of target pathogens, enabling sample- to-result instruments
that can be operated on-site by hospital staff, without the need for
highly skilled technicians.
Our T2Dx Instrument
Our FDA-cleared T2Dx instrument is an easy-to-use, fully-automated, benchtop
instrument utilizing T2MR for use in hospitals and labs for a broad range of
diagnostic tests. To operate the system, a patient's sample tube is snapped onto
a disposable test cartridge, which is pre-loaded with all necessary reagents.
The cartridge is then inserted into the T2Dx instrument, which automatically
processes the sample and then delivers a diagnostic test result. Test results
are displayed on screen and printed out.
By utilizing our proprietary T2MR technology for direct detection, the T2Dx
instrument eliminates the need for sample purification and analyte extraction,
which are necessary for other optical-detection devices. Eliminating these
sample processing steps increases diagnostic sensitivity and accuracy, enables a
broad menu of tests to be run on a single platform, and greatly reduces the
complexity of the consumables. The T2Dx instrument incorporates a simple user
interface and is designed to efficiently process up to seven specimens
simultaneously.
Our T2MR Platform
T2MR is a miniaturized, magnetic resonance-based approach that measures how
water molecules react in the presence of magnetic fields. For molecular and
immunodiagnostics targets, T2MR utilizes advances in the field of magnetic
resonance by deploying particles with magnetic properties that enhance the
magnetic resonance signals of specific targets. When particles coated with
target-specific binding agents are added to a sample containing the target, the
particles bind to and cluster around the target. This clustering changes the
microscopic environment of water in that sample, which in turn alters the
magnetic resonance signal, or the T2 relaxation signal that we measure,
indicating the presence of the target.
We believe that T2MR can also address the significant unmet need associated with
Lyme disease, a tick-borne illness that can cause prolonged neurological disease
and musculoskeletal disease. For patients with Lyme disease, early diagnosis and
appropriate treatment significantly reduces both the likelihood of developing
neurological and musculoskeletal disorders, as well as the significant costs
associated with treating these complications. Our product candidate, T2Lyme,
will identify the bacteria that cause Lyme disease
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directly from the patient's blood, without the need for blood culture which, for
the bacteria associated with Lyme disease, can take several weeks. Our Lyme
product candidate is currently in development and we initiated a T2Lyme clinical
trial in May 2018.
We have also developed the T2Resistance Panel, a product candidate that detects
13 resistance genes from both gram-positive and gram-negative pathogens. These
targets include the most clinically important carbapenem resistance genes (KPC,
OXA-48, NDM, VIM, IMP), which are listed on the CDC Urgent Threat list for
antibiotic resistance; CTXM-14 and CTXM-15, a major source of extended spectrum
beta lactamases (ESBLs); AmpC beta-lactamase genes (CMY, DHA); detection of
vanA/B resistance genes, which are responsible for vancomycin resistant
gram-positive enterococcus; and the detection of the methicillin resistance
genes mecC and mecA, which cause methicillin resistant Staphylococcus aureus
(MRSA). Initial clinical performance data demonstrates the carbapenemase targets
on the T2Resistance Panel identify these resistance genes with an average time
of 5.3 hours compared to an average of 30 hours (and up to 95 hours) with
conventional methods. Antibiotic resistance is recognized by the WHO as 'one of
the biggest threats to global health, food security, and development today'. We
believe the T2Resistance Panel has the potential to prevent the spread of
multidrug-resistant organisms and improve patient outcomes by enabling rapid
identification of the genes and species associated with antibiotic resistance -
enabling the reduction of unnecessary antibiotic use which is the primary cause
of antibiotic resistance. Most importantly, these tests can enable more patients
to get on the right targeted therapy quicker, potentially reducing mortality and
hospitalization cost. Finally, these tests could also be used to accelerate
clinical trials for new antibiotics and reduce the time to commercial
availability. We expect the T2Resistance Panel to be available for research use
only in the United States and receive a CE mark for commercial availability in
Europe by the end of 2019.
The T2Dx Instrument also has the ability to ability to enable high-sensitivity,
culture-independent detection of pathogens at ultra-high sensitivity in
ultra-low concentrations for five biothreat pathogens, including Bacillus
anthracis (anthrax), Burkholderia spp., Rickettsia prowazekii, Francisella
tularensis and Yersinia pestis. The U.S. Department of Homeland Security has
defined these as biothreat pathogens because they require quick antibiotic
treatment and can be difficult to diagnose due to non-distinguishing symptoms,
making the development and availability of rapid, high-throughput,
high-sensitivity diagnostics for these biothreat pathogens a national priority.
Rapid, ultra-high sensitivity diagnosis with T2MR will help discriminate the
infected from the non-infected, reducing the spread of disease and impact of a
bioweapon event.
In addition, we now have data that demonstrates potential support for a T2MR
test panel that could potentially report greater than 40 reported results
covering greater than 99% of infections caused by blood-borne bacterial and
fungal pathogens. This panel includes "pan-level" channels that detect greater
than 250 pathogen species with detection at less than or equal to 10 CFU/mL.
Additionally, this panel provides coverage for all blood-borne antibiotic
resistance threats identified by the CDC.
We believe T2MR is the first technology with the ability to detect directly from
a clinical sample of whole blood, plasma, serum, saliva, sputum, cerebral spinal
fluid or urine, saving time and potentially improving sensitivity by eliminating
the need for purification or the extraction of target pathogens. T2MR has been
demonstrated to detect cellular targets at limits of detection as low as one
colony-forming unit per milliliter (CFU/mL). More than 100 studies published in
peer reviewed journals have featured T2MR in a breadth of applications.
US Government Contract
In September 2019, the Biomedical Advanced Research and Development Authority
("BARDA") awarded the Company a milestone-based contract, with an initial value
of $6 million, and a potential value of up to $69 million, if BARDA awards all
contract options. BARDA operates within the Office of the Assistant Secretary
for Preparedness and Response ("ASPR") at the U.S. Department of Health and
Human Services' ("HHS")." If BARDA awards and the Company completes all options,
Management believes it will enable a significant expansion of the Company's
current portfolio of diagnostics for sepsis-causing pathogen and anti-biotic
resistance genes.
Financial Overview
Revenue
We generate revenue from the sale of our products, related services, reagent
rental agreements and from activities performed pursuant to research and
development agreements.
Revenue earned from activities performed pursuant to research and development
agreements is reported as research revenue and is recognized over time, using an
input method as the work is completed, limited to payments earned. Costs
incurred to deliver the services are recorded as research and development
expense in the condensed consolidated financial statements. The timing of
receipt of cash from the Company's research and development agreements generally
differs from when revenue is recognized. Milestones are
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contingent on the occurrence of future events and are considered variable
consideration being constrained until the Company believes a significant revenue
reversal will not occur.
Grants received, including cost reimbursement agreements, are assessed to
determine if the agreement should be accounted for as an exchange transaction or
a contribution. An agreement is accounted as a contribution if the resource
provider does not receive commensurate value in return for the assets
transferred. Contribution revenue is recognized when all donor-imposed
conditions have been met.
Product revenue is derived from the sale of our instruments and related
consumable diagnostic tests, predominantly through our direct sales force in the
United States, and distributors in geographic regions outside the United States.
We do not offer product return or exchange rights (other than those relating to
defective goods under warranty) or price protection allowances to our customers,
including our distributors. Payment terms granted to distributors are the same
as those granted to end-user customers and payments are not dependent upon the
distributors' receipt of payment from their end-user customers. The Company
either sells instruments to customers and international distributors, or retains
title and places the instrument at the customer site pursuant to a reagent
rental agreement. When the instrument is directly purchased by a customer, the
Company recognizes revenue when the related performance obligation is satisfied
(i.e. when the control of an instrument has passed to the customer; typically,
at shipping point). When the instrument is placed under a reagent rental
agreement, the Company's customers generally agree to fixed term agreements,
which can be extended, certain of which may include minimum purchase commitments
and/or incremental charges on each consumable diagnostic test purchased, which
varies based on the volume of test cartridges purchased. Revenue from the sale
of consumable diagnostic tests (under a reagent rental agreement), which
includes the incremental charge, is recognized upon shipment. Revenue associated
with reagent rental consumable purchases is currently classified as variable
consideration and constrained until a purchase order is received and related
performance obligations have been satisfied (or partially satisfied). The
transaction price from consumables purchases is allocated between the lease of
the instrument (under a contingent rent methodology as provided for in ASC 842),
and the consumables when related performance obligations are satisfied as a
component of lease and product revenue.
Direct sales of instruments include warranty, maintenance and technical support
services typically for one year following the installation of the purchased
instrument ("Maintenance Services"). Maintenance Services are separate
performance obligations as they are service based warranties and are recognized
straight-line over the service delivery period. After the completion of the
initial Maintenance Services period, customers have the option to renew or
extend the Maintenance Services typically for additional one-year periods in
exchange for additional consideration. The extended Maintenance Services are
also service based warranties and classified as separate performance
obligations. The Company will recognize the revenue allocated to the extended
Maintenance Services performance obligation straight-line over the service
delivery period. The Company warrants that consumable diagnostic tests will be
free from defects, when handled according to product specifications, for the
stated life of the product. To fulfill valid warranty claims, the Company
provides replacement product free of charge. Accordingly, the Company accrues
warranty expense associated with the estimated defect rates of the consumable
diagnostic tests.
Fees paid to member-owned group purchasing organizations ("GPOs") are deducted
from related product revenues
Our consumable diagnostic tests can only be used with our instruments, and
accordingly, as we expect the installed base of our instruments to continue to
grow, we expect the following to occur:
• recurring revenue from our consumable diagnostic tests will increase and
become subject to lower period-to-period fluctuation;
• consumable revenue will become an increasingly predictable and important
contributor to our total revenue; and
• we will gain economies of scale through the growth in our sales, resulting
in improving gross margins and operating margins.
Cost of Product Revenue
Cost of product revenue includes the cost of materials, direct labor and
manufacturing overhead costs used in the manufacture of our consumable
diagnostic tests sold to customers and related license and royalty fees. Cost of
product revenue also includes depreciation on the revenue-generating T2Dx
instruments that have been placed with our customers under reagent rental
agreements; costs of materials, direct labor and manufacturing overhead costs on
the T2Dx instruments sold to customers; and other costs such as customer support
costs, warranty and repair and maintenance expense on the T2Dx instruments that
have been placed with our customers under reagent rental agreements. We
manufacture the T2Dx instruments and part of our consumable diagnostic tests in
our facilities. We outsource the manufacturing of components of our consumable
diagnostic tests to contract manufacturers.
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We expect cost of product revenue to continue to represent a high percentage of
our product revenue as we continue to invest in our manufacturing capabilities,
infrastructure and customer service organization and grow our installed customer
base. We plan to continue to expand our capacity to support our growth, which
will result in higher cost of revenue in absolute dollars. However, we expect
cost of product revenue, as a percentage of revenue, to decline as revenue grows
in the future.
Research and development expenses
Our research and development expenses consist primarily of costs, incurred for
the development of our technology and product candidates, technology
improvements and enhancements, clinical trials to evaluate the clinical utility
of our product candidates, and laboratory development and expansion, and include
salaries and benefits, including stock-based compensation, research-related
facility and overhead costs, laboratory supplies, equipment and contract
services. Research and development expenses also include costs of delivering
products or services associated with research revenue. We expense all research
and development costs as incurred.
We anticipate our overall research and development expenses to be flat to a
slight increase due to the anticipation of additional research partnerships.
Research and development costs include costs to support research partnerships,
clinical trials and new product development. We have committed, and expect to
commit, significant resources toward developing additional product candidates,
improving existing products, conducting ongoing and new clinical trials and
expanding our laboratory capabilities.
Selling, general and administrative expenses
Selling, general and administrative expenses consist primarily of costs for our
sales and marketing, finance, legal, human resources, business development and
general management functions, as well as professional services, such as legal,
consulting and accounting services. We expect selling, general and
administrative expenses to increase in future periods as we commercialize
products and future product candidates and as our needs for sales, marketing and
administrative personnel grow. Other selling, general and administrative
expenses include facility-related costs, fees and expenses associated with
obtaining and maintaining patents, clinical and economic studies and
publications, marketing expenses, and travel expenses. We expense all selling,
general and administrative expenses as incurred.
Interest expense, net
Interest expense, net, consists primarily of interest expense on our notes
payable, changes in fair value of our derivative liability and the amortization
of deferred financing costs and debt discount, partially offset by interest
earned on our cash and cash equivalents.
Other income, net
Other income, net, consists of dividend and other investment income, and
government grant income.
Critical Accounting Policies and Use of Estimates
We have prepared our condensed consolidated financial statements in accordance
with accounting principles generally accepted in the United States. Our
preparation of these condensed consolidated financial statements requires us to
make estimates, assumptions, and judgments that affect the reported amounts of
assets, liabilities, expenses, and related disclosures at the date of the
condensed consolidated financial statements, as well as revenue and expenses
recorded during those periods. We evaluated our estimates and judgments on an
ongoing basis. We based our estimates on historical experience and on various
other factors that we believe are reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results could therefore differ materially from these estimates under different
assumptions or conditions.
The items that we disclosed as our critical accounting policies and estimates in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the year ended December 31,
2018 remained materially consistent, other than the January 1, 2019 adoption of
ASC 842, Leases ("ASC 842") (Note 2). For a description of those critical
accounting policies, please refer to our Annual Report on Form 10-K filing for
the year ended December 31, 2018.
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Results of Operations for the Three Months Ended September 30, 2019 and 2018
Three Months Ended
September 30,
2019 2018 Change
(in thousands)
Revenue:
Product revenue $ 1,177 $ 1,218 $ (41 )
Research revenue 56 1,248 (1,192 )
Contribution revenue 444 - 444
Total revenue 1,677 2,466 (789 )
Costs and expenses:
Cost of product revenue 3,944 3,042 902
Research and development 4,098 2,725 1,373
Selling, general and administrative 5,981 5,873 108
Total costs and expenses 14,023 11,640 2,383
Loss from operations (12,346 ) (9,174 ) (3,172 )
Interest expense, net (1,876 ) (1,836 ) (40 )
Other income, net 51 243 (192 )
Net loss $ (14,171 ) $ (10,767 ) $ (3,404 )
Product revenue
Product revenue was $1.2 million for the three months ended September 30, 2019
and 2018.
Research revenue
Research revenue was $0.1 million for the three months ended September 30, 2019,
compared to $1.2 million for the three months ended September 30, 2018, a
decrease of $1.1 million. The decrease primarily was the result of $0.5 million
less revenue recognized related to our Co-Development Agreement with Allergan
Sales, which completed in October 2018, and $0.1 million less revenue from
services delivered under our Co-Development Agreement with Canon Life Sciences.
Research revenue for the three months ended September 30, 2018 included $0.4
million from our cost-sharing agreement with CARB-X. Revenue from our
cost-sharing agreement with CARB-X, for the three months ended September 30,
2019, is recorded as contribution revenue, a result of adopting a new accounting
standard.
Contribution revenue
Contribution revenue of $0.4 million, for the three months ended September 30,
2019, relates to our cost-sharing agreement with CARB-X and our US Government
Contract, which began in September 2019. Revenue related to our cost-sharing
agreement with CARB-X, for the three months ended September 30, 2018, was
recorded as research revenue.
Cost of product revenue
Cost of product revenue was $3.9 million for the three months ended
September 30, 2019, compared to $3.0 million for the three months ended
September 30, 2018, an increase of $0.9 million driven primarily by unabsorbed
manufacturing overhead capacity offset in part by reduced consumables scrap
rates from improved manufacturing processes.
Research and development expenses
Research and development expenses were $4.1 million for the three months ended
September 30, 2019, compared to $2.7 million for the three months ended
September 30, 2018, an increase of $1.4 million. The increase was driven by
higher R&D materials cost of $0.8 million due to increased R&D activity,
increased travel of $0.2 and payroll of $0.2 million. Increased travel and
payroll are the result of higher headcount. Research and development expense
also increased $0.2 million from higher lab expenses associated with research
and development projects.
Selling, general and administrative expenses
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Selling, general and administrative expenses were $6.0 million for the three
months ended September 30, 2019, compared to $5.9 million for the three months
ended September 30, 2018, an increase of $0.1 million driven by $0.7 million
higher wages and travel associated with the medical science liaison team, $0.5
million of costs to recover from the cyber-attack, $0.2 million for insurance,
offset by $0.7 million reduced stock compensation expense due to the vesting of
restricted stock units with market conditions, causing acceleration of expense,
during the nine months ended September 30, 2018, $0.4 million lower incentive
compensation associated with revenue performance, and $0.1 million reductions in
tradeshow spending and other expense reductions.
Interest expense, net
Interest expense, net, was $1.9 million for the three months ended September 30,
2019, compared to $1.8 million for the three months ended September 30, 2018, an
increase of $0.1 million.
Other income, net
Other income, net, was $0.1 million for the three months ended September 30,
2019 compared to $0.2 million for the three months ended 2018.
Results of Operations for the Nine Months Ended September 30, 2019 and 2018
Nine Months Ended
September 30,
2019 2018 Change
(in thousands)
Revenue:
Product revenue $ 3,765 $ 3,486 $ 279
Research revenue 269 5,222 (4,953 )
Contribution revenue 1,232 - 1,232
Total revenue 5,266 8,708 (3,442 )
Costs and expenses:
Cost of product revenue 13,153 9,773 3,380
Research and development 12,047 11,193 854
Selling, general and administrative 19,756 19,238 518
Total costs and expenses 44,956 40,204 4,752
Loss from operations (39,690 ) (31,496 ) (8,194 )
Interest expense, net (5,658 ) (4,910 ) (748 )
Other income, net 383 402 (19 )
Net loss $ (44,965 ) $ (36,004 ) $ (8,961 )
Product revenue
Product revenue was $3.8 million for the nine months ended September 30, 2019
compared to $3.5 million for the nine months ended September 30, 2018, an
increase of $0.3 million. The increase was driven by higher T2Dx instrument
sales.
Research revenue
Research revenue was $0.3 million for the nine months ended September 30, 2019,
compared to $5.2 million for the nine months ended September 30, 2018, a
decrease of $4.9 million. The decrease was primarily the result of $2.8 million
less of revenue recognized related to our Co-Development Agreement with Allergan
Sales, which completed in October 2018, and $1.2 million less of revenue
recognized under our Co-Development Agreement with Canon US Life Sciences, a
result of achieving a $2.0 million milestone during the nine months ended
September 30, 2018. Research revenue for the nine months ended September 30,
2018 included $0.9 million from our cost-sharing agreement with CARB-X. Revenue
from our cost-sharing agreement with CARB-X for the nine months ended September
30, 2019 is recorded as contribution revenue, a result of adopting a new
accounting standard.
Contribution revenue
Contribution revenue of $1.2 million, for the nine months ended September 30,
2019, relates to our cost-sharing agreement with CARB-X of $0.9 million and our
US Government Contract of $0.3 million, which began in September 2019. Revenue
related to our cost-sharing agreement with CARB-X for the nine months ended
September 30, 2018 was recorded as research revenue.
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Cost of product revenue
Cost of product revenue was $13.2 million for the nine months ended
September 30, 2019, compared to $9.8 million for the nine months ended
September 30, 2018, an increase of $3.4 million. The increase in cost was driven
by $1.1 million of reagent rental placement costs from higher placements, $0.8
from higher consumables and instrument sales volumes, $0.6 million manufacturing
scrap incurred before the improved consumables manufacturing process, $0.5
service repairs to a growing reagent rental instrument base and $0.4 in
instrument design change costs.
Research and development expenses
Research and development expenses were $12.0 million for the nine months ended
September 30, 2019, compared to $11.2 million for the nine months ended
September 30, 2018, an increase of $0.8 million. The increase was attributed to
increased payroll expenses of $0.4 million and increased travel expenses of $0.2
million due to higher headcount. Research and development expense also increased
$0.2 million from higher lab expenses associated with research and development
projects.
Selling, general and administrative expenses
Selling, general and administrative expenses were $19.8 million for the nine
months ended September 30, 2019, compared to $19.2 million for the nine months
ended September 30, 2018, an increase of $0.6 million. The increase was
attributed to increased payroll expenses of $1.8 million and increased travel
expenses of $0.4 million due to an increase in medical affairs personnel, $0.5
million for systems restoration from the cyber-attack and $0.2 million for
insurance and other expenses. The increase was partially offset by a $2.3
million decrease in stock compensation expense due to the vesting of restricted
stock units with market conditions, causing acceleration of expense, during the
nine months ended September 30, 2018.
Interest expense, net
Interest expense, net, was $5.7 million for the nine months ended September 30,
2019, compared to $4.9 million for the nine months ended September 30, 2018, an
increase of $0.8 million, primarily due to the change in fair value of the
derivative.
Other income, net
Other income, net, was $0.4 million for the nine months ended September 30, 2019
and 2018.
Liquidity and Capital Resources
We have incurred losses and cumulative negative cash flows from operations since
our inception, and as of September 30, 2019 and December 31, 2018 we had an
accumulated deficit of $362.1 million and $317.2 million respectively. Having
obtained clearance from the FDA and a CE mark in Europe to market the T2Dx,
T2Candida, and T2Bacteria, the Company has incurred significant
commercialization expenses related to product sales, marketing, manufacturing
and distribution. The Company may seek to fund its operations through public
equity or private equity or debt financings, as well as other sources. However,
the Company may be unable to raise additional funds or enter into such other
arrangements when needed on favorable terms or at all. The Company's failure to
raise capital or enter into such other arrangements if and when needed would
have a negative impact on the Company's business, results of operations and
financial condition and the Company's ability to develop and commercialize T2Dx,
T2Candida, T2Bacteria, and other product candidates.
Historically, the Company has funded its operations primarily through its August
2014 initial public offering, its December 2015 public offering, its September
2016 private investment in public equity ("PIPE") financing, its September 2017
public offering, its June 2018 public offering, its July 2019 establishment of
an Equity Distribution Agreement and equity Purchase Agreement, private
placements of redeemable convertible preferred stock and debt financing
arrangements.
Equity Distribution Agreement
On July 30, 2019, the Company entered into an Equity Distribution Agreement (the
"Sales Agreement") with Canaccord Genuity LLC, as agent ("Canaccord"), pursuant
to which the Company may offer and sell shares of common stock, for aggregate
gross sale proceeds of up to $30.0 million from time to time through Canaccord.
Sales of the shares pursuant to the Sales Agreement, if any, may be made by any
method permitted by law deemed to be an "at the market offering" as defined in
Rule 415(a)(4) of the Securities Act, including sales made directly on or
through The Nasdaq Global Market or any other existing trading market for the
Shares, in negotiated transactions at market prices prevailing at the time of
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sale or at prices related to such prevailing market prices and/or any other
method permitted by law. The Company intends to use the net proceeds from the
offering for working capital and general corporate purposes, which may include,
among other things, commercialization and research and development expenses and
capital expenditures. The Company is not obligated to make any sales of Shares
under the Sales Agreement. The Company or Canaccord may suspend or terminate the
offering of Shares upon notice to the other party, subject to certain
conditions. Canaccord will act as sales agent on a commercially reasonable
efforts basis consistent with its normal trading and sales practices and
applicable state and federal law, rules and regulations and the rules of Nasdaq.
The Company has agreed to pay Canaccord for its services of acting as agent 3%
of the gross proceeds from the sale of the Shares pursuant to the Sales
Agreement. The Company has also agreed to provide Canaccord with customary
indemnification and contribution rights. At September 30, 2019, legal and
accounting fees associated with the Sales Agreement were immaterial. Legal and
accounting fees are expected to be reclassified to share capital upon issuance
of shares under the Sales Agreement.
This Quarterly Report on Form 10-Q shall not constitute an offer to sell or a
solicitation of an offer to buy any securities, nor shall there be any sale of
these securities in any state or jurisdiction in which such an offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such state or other jurisdiction.
Purchase Agreement
On July 29, 2019, the Company entered into a $30.0 million purchase agreement
(the "Purchase Agreement") with Lincoln Park Capital Fund, LLC ("Lincoln Park"),
pursuant to which the Company may sell and issue to Lincoln Park, and Lincoln
Park is obligated to purchase, up to $30.0 million in value of its shares of
common stock from time to time over a 36-month period starting from the
effective date of the respective registration statement.
The Company may direct Lincoln Park, at its sole discretion, and subject to
certain conditions, to purchase up to 200,000 shares of common stock on any
business day, provided that at least one business day has passed since the most
recent purchase. The amount of a purchase may be increased under certain
circumstances provided, however, that Lincoln Park's committed obligation under
any single purchase shall not exceed $2.0 million. The purchase price of shares
of common stock related to the future funding will be based on the then
prevailing market prices of such shares at the time of sales as described in the
Purchase Agreement.
In consideration for the execution and delivery of the Purchase Agreement, the
Company issued 413,349 shares of common stock to Lincoln Park.
Plan of operations and future funding requirements
As of September 30, 2019 and December 31, 2018 we had unrestricted cash and cash
equivalents of approximately $16.2 million and $50.8 million respectively.
Currently, our funds are primarily held in money market funds invested in U.S.
government agency securities. Our primary uses of capital are, and we expect
will continue to be, compensation and related expenses, costs related to our
products, clinical trials, laboratory and related supplies, supplies and
materials used in manufacturing, legal and other regulatory expenses and general
overhead costs.
Until such time as we can generate substantial product revenue, we expect to
finance our cash needs, beyond what is currently available or on hand, through a
combination of equity offerings, debt financings and revenue from existing and
potential research and development and other collaboration agreements. If we
raise additional funds in the future, we may need to relinquish valuable rights
to our technologies, future revenue streams or grant licenses on terms that may
not be favorable to us.
Going Concern
Our ability to continue operations after September 30, 2019 will depend on our
ability to obtain additional funding, as to which no assurances can be given.
These conditions raise substantial doubt about our ability to continue as a
going concern. There can be no assurance that any financing by us can be
realized, or if realized, what the terms of any such financing may be, or that
any amount that we are able to raise will be adequate.
We believe that our existing cash and cash equivalents at September 30, 2019,
along with funding available through our Sales Agreement with Canaccord and
Purchase Agreement with Lincoln Park, will be sufficient to allow us to fund our
current operating plan at least a year from the issuance of these financial
statements. Should our current operating plan not materialize, Management's
plans include raising additional funding, earning milestone payments pursuant to
the Company's Co- Development agreements, delaying certain research projects and
capital expenditures and eliminating certain future operating expenses in order
to fund operations at reduced levels for the Company to continue as a going
concern for a period of 12 months from the date the financial statements are
issued. Management has concluded the likelihood that its plan to obtain
sufficient funding from one or more of these
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sources or adequately reduce expenditures will be successful, while reasonably
possible, is less than probable. The Term Loan Agreement requires us to achieve
certain annual revenue targets, whereby we are required to pay double the amount
of any shortfall as an acceleration of principal payments, and maintain a
minimum liquidity amount. Should we fall short of the revenue target we would
seek a waiver of this provision. There can be no assurances that we would be
successful in obtaining a waiver. We are also required to maintain a minimum
cash balance under our Term Loan Agreement with CRG.
Cash flows
The following is a summary of cash flows for each of the periods set forth
below:
Nine Months Ended
September 30,
2019 2018
(in thousands)
Net cash (used in) provided by:
Operating activities $ (35,242 ) $ (30,450 )
Investing activities (735 ) (950 )
Financing activities 1,385 49,746
Net (decrease) increase in cash, cash equivalents and
restricted cash $ (34,592 ) $ 18,346Net cash used in operating activities
Net cash used in operating activities was approximately $35.2 million for the
nine months ended September 30, 2019, and consisted of a net loss of $44.9
million adjusted for non-cash items including stock-based compensation expense
of $4.5 million, depreciation and amortization expense of $1.7 million, non-cash
interest expense of $1.8 million, amortization of operating lease right-of-use
assets of $1.1 million, a change in the fair value of the derivative instrument
of $0.5 million, and a net change in operating assets and liabilities of $0.3
million, primarily related to an increase in accounts payable of $2.7 million
due to timing of payments, an increase in accrued expenses of $1.3 million due
to timing of interest payments, a decrease in accounts receivable of $0.2
million due to less outstanding instrument invoices and partially offset by a
decrease in operating lease liabilities of $1.7 million, a decrease in deferred
revenue of $0.1 million, an increase in prepaid expenses and other assets of
$0.6 million primarily related to tradeshows and insurance and a $1.5 million
increase in instrument inventories to meet anticipated demand.
Net cash used in operating activities was approximately $30.5 million for the
nine months ended September 30, 2018, and consisted of a net loss of $36.0
million adjusted for non-cash items including stock-based compensation expense
of $7.5 million, depreciation and amortization expense of $1.9 million, non-cash
interest expense of $1.7 million, an impairment charge of $0.2 million, offset
by a change in the fair value of the derivative instrument of $0.2 million,
deferred rent of $0.2 million, and a net change in operating assets and
liabilities of $5.3 million, primarily related to an increase in accounts
receivable of $1.3 million from increased instrument sales and our cost-sharing
agreement with CARB-X, a decrease in accrued expenses and accounts payable of
$0.8 million due to clinical, bonus and professional fees, a decrease in
deferred revenue of $0.8 million primarily from our Co-Development Agreement
with Allergan Sales, LLC, and an increase in prepaid expenses and other assets
of $1.3 million.
Net cash used in investing activities
Net cash used in investing activities was approximately $0.7 million for the
nine months ended September 30, 2019, and consisted of costs to acquire property
and equipment.
Net cash used in investing activities was approximately $1.0 million for the
nine months ended September 30, 2018, and consisted of costs to acquire property
and equipment.
Net cash used in / provided by financing activities
Net cash provided by financing activities was approximately $1.4 million for the
nine months ended September 30, 2019, and consisted of repayments of finance
leases of $0.9 million, partially offset by proceeds from issuance of common
stock of $0.4 million and $1.9 million proceeds from secondary offering.
Net cash provided by financing activities was approximately $49.7 million for
the nine months ended September 30, 2018, and consisted primarily of the net
proceeds from the June 2018 public offering of $49.2 million and proceeds from
the exercise of stock options of $1.6 million, which were partially offset by
$1.1 million of repayments of notes payable.
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Borrowing Arrangements
Term Loan Agreement
In December 2016, we entered into a Term Loan Agreement (the "Term Loan
Agreement") with CRG. We borrowed $40.0 million pursuant to the Term Loan
Agreement, which has a six-year term with four years of interest-only payments
(through December 30, 2020), after which quarterly principal and interest
payments will be due through the December 30, 2022 maturity date. Interest on
the amounts borrowed under the Term Loan Agreement accrues at an annual fixed
rate of 11.5%, 3.5% of which may be deferred during the interest-only period by
adding such amount to the aggregate principal loan amount. In addition, if we
achieve certain financial performance metrics, the loan will convert to
interest-only until the December 30, 2022 maturity, at which time all unpaid
principal and accrued unpaid interest will be due and payable. We are required
to pay CRG a financing fee based on the loan principal amount drawn. We are also
required to pay a final payment fee of 8.0% of the principal outstanding upon
repayment. We are accruing the final payment fee as interest expense and it is
included as a current liability at September 30, 2019 and December 31, 2018 on
the balance sheet.
We may prepay all or a portion of the outstanding principal and accrued unpaid
interest under the Term Loan Agreement at any time upon prior notice subject to
a prepayment fee during the first five years of the term and no prepayment fee
thereafter. As security for our obligations under the Term Loan Agreement we
entered into a security agreement with CRG whereby we granted a lien on
substantially all of our assets, including intellectual property. The Term Loan
Agreement also contains customary affirmative and negative covenants for a
credit facility of this size and type. The Term Loan Agreement also requires us
to achieve certain revenue targets, whereby we are required to pay double the
amount of any shortfall as an acceleration of principal payments.
In connection with the Term Loan Agreement, we issued to CRG warrants to
purchase a total of 528,958 shares of common stock in December 2016. The
warrants are exercisable any time prior to December 30, 2026 at an original
price of $8.06 per share, with typical provisions for termination upon a change
of control or sale of all or substantially all of our assets.
In March 2019, the Term Loan Agreement was amended to reduce the 2019 minimum
revenue target to $9.0 million and delete the 2018 revenue covenant. In exchange
for the amendment, we agreed to reset the strike price of the warrants issued in
connection with the Term Loan Agreement, from $8.06 per share to
$4.35 per share. The fair value of the warrants was determined by the
Black-Scholes-Merton option pricing model, with an amended fair value of $0.9
million. The incremental fair value of the modified instrument of $0.1 million
was recorded as debt discount and additional paid-in-capital.
In September 2019, the Term Loan Agreement was amended to extend the
interest-only payment period through December 31, 2021, to extend the initial
principal repayment to March 31, 2022, and to reduce the minimum product revenue
target for 2019 from $9 million to $4 million, for the twenty-four month period
beginning on January 1, 2019 from $95 million to $15 million and for the
twenty-four month period beginning on January 1, 2020 from $140 million to $43
million. The final payment fee was increased from 8% to 10% of the principal
amount outstanding upon repayment. The Company issued to CRG warrants to
purchase 568,291 shares of the Company's common stock (Note 9) at an exercise
price of $1.55, with typical provisions for termination upon a change of control
or a sale of all or substantially all of the assets of the Company. All of the
New Warrants are exercisable any time prior to September 9, 2029. The Company
also reduced the exercise price for the warrants previously issued to CRG to
purchase an aggregate of 528,958 shares of the Company's common stock to $1.55
per share. The fair value of the new warrants and the incremental fair value of
the amended warrants was determined by the Black-Scholes-Merton option pricing
model. The incremental fair value of the amended warrants of $0.1 million and
the fair value of the new warrants of $0.7 million were recorded as debt
discount and additional paid-in-capital.
The Term Loan Agreement includes a subjective acceleration clause whereby an
event of default, including a material adverse change in the business,
operations, or conditions (financial or otherwise), could result in the
acceleration of the obligations under the Term Loan Agreement. Under certain
circumstances, a default interest rate of an additional 4.0% per annum will
apply at the election of CRG on all outstanding obligations during the
occurrence and continuance of an event of default. CRG has not exercised its
right under this clause, as there have been no such events. We believe the
likelihood of CRG exercising this right is remote.
We assessed the terms and features of the Term Loan Agreement, including the
interest-only period and the acceleration of the obligations under the Term Loan
Agreement under an event of default, in order to identify any potential embedded
features that would require bifurcation. In addition, under certain
circumstances, a default interest rate of an additional 4.0% per annum will
apply at the election of CRG on all outstanding obligations during the
occurrence and continuance of an event of default. We concluded that these
features are not clearly and closely related to the host instrument, and
represent a single compound derivative that is required to be re-measured at
fair value on a quarterly basis.
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The fair value of the derivative at September 30, 2019 and December 31, 2018 is
$2.6 million and $2.1 million, respectively. We classified the derivative
liability as accrued expenses and other current liabilities on the balance sheet
at September 30, 2019 and December 31, 2018 to match the classification of the
related Term Loan Agreement.
Equipment Lease Credit Facility
In October 2015, we signed the $10.0 million Credit Facility (the "Credit
Facility") with Essex Capital Corporation ("Essex") to fund capital equipment
needs. As one of the conditions of the Term Loan Agreement, the Credit Facility
is capped at a maximum of $5.0 million. Under the Credit Facility, Essex will
fund capital equipment purchases presented by us. We will repay the amounts
borrowed in 36 equal monthly installments from the date of the amount funded. At
the end of the 36 month lease term, we have the option to (a) repurchase the
leased equipment at the lesser of fair market value or 10% of the original
equipment value, (b) extend the applicable lease for a specified period of time,
which will not be less than one year, or (c) return the leased equipment to the
Lessor.
In April 2016 and June 2016, we completed the first two draws under the Credit
Facility of $2.1 million and $2.5 million, respectively. We made monthly
payments of $67,000 under the first draw and $79,000 under the second draw. The
borrowings under the Credit Facility were treated as finance leases and are
included in property and equipment on the balance sheet. The amortization of the
assets conveyed under the Credit Facility is included as a component of
depreciation expense. During the three months ended September 30, 2019, the
Company repurchased the equipment for $0.3 million in accordance with the terms
of the Credit Facility.
Contractual Obligations and Commitments
On July 30, 2019, the Company announced that founding CEO John McDonough was
named Executive Chairman of the Board, effective immediately, and that the
Company was undertaking a national search for a new CEO. Once that candidate is
identified, Mr. McDonough will become non-executive Chairman of the Board. Mr.
McDonough will continue in the role of CEO and Executive Chairman until his
successor is in place. A successor has not been named. Transition payments and
health benefits under the terms of the agreement are estimated to be
approximately $1.0 million, which will be paid over the 15 month period
following the successor's start date, and will be classified as selling, general
and administrative expense over the anticipated period of the national search,
estimated to be 8 months. Such expenses were immaterial for the three and nine
months ended September 30, 2019.
There were no other material changes to our contractual obligations and
commitments from those described under Management's Discussion and Analysis of
Financial Condition and Results of Operations in the Annual Report on Form 10-K
for the year ended December 31, 2018.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any
off-balance sheet arrangements, as defined under SEC rules.
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