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T2 BIOSYSTEMS, INC.

(TTOO)
  Report
Delayed Nasdaq  -  04:00 2022-09-30 pm EDT
0.1130 USD   +6.70%
09/30T2 Biosystems, Inc. : Entry into a Material Definitive Agreement (form 8-K)
AQ
09/29T2 Biosystems Says BARDA Exercises Contract Option Worth $3.7 Million
MT
09/29T2 Biosystems Announces BARDA Exercise of Contract Option 3 Valued at $3.7 Million
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T2 BIOSYSTEMS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/16/2022 | 06:05am EDT

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 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 raw materials and components for our products, 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 are subject to numerous risks, including, without limitation, the following:

  • our ability to continue as a going concern;


  • our ability to regain compliance with Nasdaq listing requirements;


  • our status as an early commercial-stage company;


  • our expectation to incur losses in the future;


  • the market acceptance of our 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 relatively 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 ability to raise additional funds;


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  • the performance of our diagnostics;


  • our ability to compete in the highly competitive diagnostics market;


   •  our ability to obtain marketing clearance from the U.S. Food and Drug
      Administration or regulatory clearance for new product candidates in other
      jurisdictions;


   •  federal, state, and foreign regulatory requirements, including diagnostic
      product reimbursements and FDA regulation of our products and product
      candidates;


   •  our ability to protect and enforce our intellectual property rights,
      including our trade secret-protected proprietary rights in our technology;


  • our ability to recruit, train and retain key personnel;


  • our dependence on third parties;


   •  manufacturing and other product risks, including unforeseen interruptions in
      supply chain;


   •  the impact of cybersecurity risks, including ransomware, phishing, and data
      breaches on our information technology systems;


  • the impact of short sellers and day traders on our share price;


   •  the impact of the COVID-19 pandemic on our business, results of operations
      and financial positions;


   •  the continued market demand for SARS-CoV-2 testing and our ability to
      convert T2SARS-CoV-2 customers to our other test panels.

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 Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Quarterly Report on Form 10-Q, and Part I, Item 1A and Part II, Item 7A, "Risk Factors" and "Quantitative and Qualitative Disclosures about Market Risks", respectively, in our Annual Report on Form 10-K for the year ended December 31, 2021, as updated by Part I, Item 3, "Quantitative and Qualitative Disclosures about Market Risks" and Part II, Item 1A-"Risk Factors" 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 and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Business Overview

We are an in vitro diagnostics company and leader in the rapid detection of sepsis-causing pathogens and antibiotic resistance genes. We are dedicated to improving patient care and reducing the cost of care by helping clinicians effectively treat patients faster than ever before. We have developed innovative products that offer a rapid, sensitive and simple alternative to existing diagnostic methodologies. We are developing a broad set of applications aimed at improving patient outcomes, reducing the cost of healthcare, and lowering mortality rates by helping medical professionals make earlier targeted treatment decisions. Our technology enables rapid detection of pathogens, biomarkers and other abnormalities in a variety of unpurified patient sample types, including whole blood, plasma, serum, saliva, sputum and urine, and can detect cellular targets at limits of detection as low as one colony forming unit per milliliter, or CFU/mL. We are currently targeting a range of critically underserved healthcare conditions, focusing initially on those for which a rapid diagnosis will serve an important dual role - saving lives and reducing costs. Our current development efforts primarily target sepsis, which is an area of significant unmet medical need in which existing therapies could be more effective with improved diagnostics.

Our primary commercial products include the T2Dx® Instrument, the T2Candida® Panel, the T2Bacteria® Panel, the T2Resistance® Panel, and the T2SARS-CoV-2™ Panel.

We have never been profitable and have incurred net losses in each year since inception. Our accumulated deficit at June 30, 2022 was $506.7 million and we have experienced cash outflows from operating activities over the past years. Substantially all of our net losses resulted from costs incurred in connection with our research and development programs and from selling, general and


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administrative costs associated with our operations. We have incurred significant commercialization expenses related to product sales, marketing, manufacturing and distribution of our FDA-cleared products, the T2Dx Instrument, T2Candida Panel and T2Bacteria Panel. In addition, we will continue to incur significant costs and expenses as we 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 Instrument, T2Candida, T2Bacteria, T2Resistance, T2SARS-CoV-2 and future products.

We are subject to a number of risks similar to other early commercial stage life science companies, including, but not limited to commercially launching our products, development and market acceptance of our product candidates, development by our competitors of new technological innovations, protection of proprietary technology, and raising additional capital.

The COVID-19 pandemic has impacted and may continue to impact our operations. We have established protocols for continued manufacturing, distribution and servicing of our products with safe social distancing and personal protective equipment measures and for remote work for employees not essential to on-site operations. To date these measures have been mostly successful but may not continue to function should the pandemic escalate and further impact our personnel. In 2020, our hospital customers restricted our sales team's access to their facilities and as a result, we had significantly reduced our commercial and general and administrative staffing levels at the beginning of the COVID-19 pandemic to reduce expenses. We have since hired sales, marketing, and medical and clinical affairs personnel. Although we did not see any material impact to accounts receivable during the three and six month period ended June 30, 2022, our exposure may increase if our customers continue to be adversely affected by the COVID-19 pandemic, including as a result of the spread of variants of the virus. Customers may reduce their purchases of products, depending on their needs and cash flow, which could negatively impact revenue. Our customers may cease to comply with the terms of our sales agreements and this may impact our ability to recognize revenue and hinder receivables collections. We have a significant development contract with BARDA, as described further below, and should BARDA reduce, cancel or not grant additional milestone projects, our ability to continue our future product development may be impacted. Our shipping carrier's ability to deliver our products to customers may be disrupted. We have reviewed our suppliers and quantities of key materials and believe we have sufficient stocks and alternate sources of critical materials should our supply chains become disrupted, although raw materials and plastics for the manufacturing of reagents and consumables are in high demand, and interruptions in supply are difficult to predict.

We believe that our cash, cash equivalents, and restricted cash of $14.3 million at June 30, 2022 will not be sufficient to fund our current operating plan at least a year from issuance of these financial statements unless additional funds are raised. Absent any reductions in current operating expenses, the Company believes it will require additional financing during the first quarter of 2023. Certain elements of our operating plan cannot be considered probable.

The Term Loan Agreement with CRG Servicing LLC ("CRG") (Note 6) has a minimum liquidity covenant which requires us to maintain a minimum cash balance of $5.0 million. There can be no assurances that we will continue to be in compliance with the cash covenant in future periods without additional funding.

In February 2022, CRG amended the Term Loan Agreement extending the interest only period and maturity to December 30, 2023.

On March 31, 2022, BARDA, part of the Office of the Assistant Secretary for Preparedness and Response at the U.S. Department of Health and Human Services exercised Option 2B under our existing multiple-year cost-share agreement with BARDA and the Company and is providing an additional $4.4 million in funding to the Company. The total potential BARDA funding if all contract options are exercised is $69.0 million. The additional funding under Option 2B will be used to advance the U.S. clinical trials for the T2Biothreat® Panel and T2Resistance® Panel, and to advance the development of the Company's comprehensive panel for the detection of bloodstream infections and antimicrobial resistance and next-generation instrument.

The option exercise occurred simultaneously on March 31, 2022 with a modification to the BARDA Contract to make immaterial changes to, among other things, the statement of work. The modification does not change the overall total potential value of the BARDA agreement.


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Our stock has been trading under $1.00 since September 27, 2021. On November 5,
2021, we received a letter from The Nasdaq Stock Market LLC ("Nasdaq")
indicating that we were not in compliance with the requirement of Nasdaq Listing
Rule 5450(a)(1) for continued listing on the Nasdaq Global Market as a result of
the closing bid price of our common stock being below $1.00 per share (the "Bid
Price Rule") for thirty consecutive business days. Under the Nasdaq rules, we
had 180 days (or until May 4, 2022) to regain compliance by maintaining a
minimum closing bid price of $1.00 per share of our common stock for at least
ten consecutive trading days during such compliance period. On May 5, 2022, we
received a letter from Nasdaq informing us that our shares of common stock have
failed to comply with the Bid Price Rule for continued listing and, as a result,
our shares are subject to delisting. The letter further stated that we may
appeal the Nasdaq Staff delisting determination to a Nasdaq listing
qualifications hearings panel (the "Panel").
We filed an appeal and hearing request to the Nasdaq Staff's determination to
stay the delisting of our shares of common stock from Nasdaq pending the Panel's
decision. The Nasdaq Staff informed us that the delisting action had been
stayed, pending a final written decision by the Panel, and the hearing date had
been set for June 2, 2022.
On June 9, 2022, we received a letter from the Nasdaq notifying us that the
Nasdaq had granted our request to be transferred to The Nasdaq Capital Market,
effective at the open of trading on June 13, 2022, and our request for an
exception to the Bid Price Rule until November 1, 2022. If we do not regain
compliance during the extension, the Nasdaq will provide written notification to
the us that our common stock will be delisted. At that time, we may appeal the
relevant delisting determination.

On July 22, 2022, we received a letter from the Nasdaq indicating that, for the last thirty-five consecutive business days, the Market Value of Listed Securities, as defined by Nasdaq ("MVLS") had been below the $35 million minimum requirement for continued listing on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(b)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(C), we have been provided an initial period of 180 calendar days, or until January 18, 2023, to regain compliance. The letter states that the Nasdaq staff will provide written notification that we have achieved compliance with Rule 5550(b)(2) if at any time before January 18, 2023, we maintain our MVLS at $35 million or more for a minimum of ten consecutive business days. The Nasdaq Staff Deficiency Letter has no immediate effect on the listing or trading of our common stock. If compliance is not achieved by January 18, 2023, we expect that Nasdaq would provide written notification to us that our securities are subject to delisting. We will continue to monitor our MVLS and consider our available options to regain compliance with the Nasdaq minimum MVLS requirements, which may include applying for an extension of the compliance period or appealing to a Nasdaq Hearings Panel. 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 that raise substantial doubt include raising additional funding, earning payments pursuant to our contract with BARDA, delaying certain research projects and capital expenditures and eliminating certain future operating expenses in order to fund operations at reduced levels for us to continue as a going concern for a period of 12 months from the date these unaudited condensed consolidated financial statements are issued. Management has concluded the likelihood that its plan to successfully obtain sufficient funding from one or more of these sources or adequately reduce expenditures, while reasonably possible, is less than probable. Accordingly, we have concluded that substantial doubt exists about our ability to continue as a going concern for a period of at least 12 months from the date of issuance of these financial statements.

Financial Overview

Revenue

We generate revenue from the sale of our products, related services, reagent rental agreements and government contributions.

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 for as a contribution if the resource provider does not receive commensurate value in return for the assets transferred.


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Product revenue is generated by the sale of instruments and 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 its 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. We either sell instruments to customers and international distributors, or retain title and place the instrument at the customer site pursuant to a reagent rental agreement. When the instrument is placed under a reagent rental agreement, our customers generally agree to fixed term agreements, which can be extended, and incremental charges on each consumable diagnostic test purchased. Shipping and handling costs are billed to customers in connection with a product sale.

Fees paid to member-owned group purchasing organizations ("GPOs") are deducted from related product revenues.

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 on a straight-line basis 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 that represent separate purchasing decisions.

We warrant 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, we provide replacement product free of charge.

Our current sales strategy is to drive adoption of our test platform installed base in hospitals, to increase test use by our existing hospital customers, and to expand T2SARS-CoV-2 customers to sepsis testing. Accordingly, we expect the following to occur:

  • recurring revenue from our consumable diagnostic tests will increase; and


  • become a more predictable and significant component of total revenue; and


   •  we will gain manufacturing economies of scale through the growth in our
      sales, resulting in improving gross margins and operating margins.

We believe the COVID-19 pandemic hindered our U.S. and international sales growth. Our customers may cease to comply with the terms of our sales agreements and this may impact our ability to recognize revenue and hinder receivables collections. We have a significant development contract with BARDA and should BARDA reduce, cancel or not grant additional milestone projects, our ability to continue our future product development may be impacted.

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. We expect cost of product revenue to decrease as a percentage of revenue as a result of the cost of product revenue improvement initiatives.

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, depreciation on T2Dx instruments used in research and development activities and contract services. Research and development expenses also include costs of delivering products or services associated with contribution revenue. We expense all research and development costs as incurred.

We anticipate our overall research and development expenses remain consistent or increase in support of increased activity under the BARDA agreement. We expect to continue developing additional product candidates, improving existing products, and


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conducting ongoing and new clinical trials. We have a significant development contract with BARDA and should BARDA reduce, cancel or not grant additional milestone projects, our ability to continue our future product development may be impacted.

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. Other selling, general and administrative expenses include commercial support activity, 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 the majority of selling, general and administrative expenses as incurred. We expect selling, general and administrative expenses to decrease as a percentage of revenue in future periods.

Interest income

Interest income consists of interest earned on our cash and cash equivalents.

Change in fair value of derivative instrument

The change in fair value of the derivative consists of the change in fair value of the derivative associated with the CRG Term Loan Agreement.

Interest expense

Interest expense consists primarily of interest expense on our notes payable and the amortization of deferred financing costs and debt discount.

Other income, net

Other income, net, consists of dividend and other investment 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, 2021 remained materially consistent. 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, 2021.




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Results of Operations for the Three Months Ended June 30, 2022 and 2021

                                                  Three Months Ended
                                                       June 30,
                                                  2022          2021         Change
                                                           (in thousands)
Revenue:
Product revenue                                 $   2,559     $   3,678     $ (1,119 )
Contribution revenue                                3,352         3,016          336
Total revenue                                       5,911         6,694         (783 )
Costs and expenses:
Cost of product revenue                             5,081         4,831          250
Research and development                            8,025         5,399        2,626
Selling, general and administrative                 7,824         7,244          580
Total costs and expenses                           20,930        17,474        3,456
Loss from operations                              (15,019 )     (10,780 )     (4,239 )
Other income (expense):
Interest income                                         2             6           (4 )
Change in fair value of derivative instrument      (1,675 )         181       (1,856 )
Interest expense                                   (1,346 )      (1,881 )        535
Other income, net                                       4            (1 )          5
Total other expense                                (3,015 )      (1,695 )     (1,320 )
Net loss                                        $ (18,034 )   $ (12,475 )   $ (5,559 )


Product revenue

Product revenue was $2.6 million for the three months ended June 30, 2022 compared to $3.7 million for the three months ended June 30, 2021, a decrease of $1.1 million, which was driven by lower consumables sales of $1.5 million mostly due to a decrease in sales of T2SARS-CoV-2, offset by higher T2Dx sales of $0.4 million.

Contribution revenue

Contribution revenue relates to our BARDA agreement and was $3.3 million for the three months ended June 30, 2022, compared to $3.0 million for the three months ended June 30, 2021. The increase of $0.3 million was due to increased contract activity.

Cost of product revenue

Cost of product revenue was $5.1 million for the three months ended June 30, 2022, compared to $4.8 million for the three months ended June 30, 2021, an increase of $0.3 million. The increase was driven by $0.8 million of costs related to higher instrument sales, $0.6 million of higher costs due to the effect of a change in build plan and manufacturing inefficiencies, $0.2 million of higher shipping related expenses, $0.1 million of higher service and repair costs, partially offset by $1.2 million of decreased costs related to lower consumable sales, $0.1 million of lower royalties, and $0.1 million of lower other costs.

Research and development expenses

Research and development expenses were $8.0 million for the three months ended June 30, 2022, compared to $5.4 million for the three months ended June 30, 2021, an increase of $2.6 million. The increase was driven by $0.5 million in payroll expenses due to a higher average headcount partially offset by lower stock based compensation expenses of $0.1 million, a $0.7 million increase due to higher materials costs, a $0.5 million increase in lab and facility expenses primarily due to BARDA, a $0.6 million increase in clinical-related expenses for our T2Resistance Panel 510(k) Study, and a $0.4 million increase in internal usage for BARDA and T2Resistance research and development projects.

Selling, general and administrative expenses

Selling, general and administrative expenses were $7.8 million for the three months ended June 30, 2022, compared to $7.2 million for the three months ended June 30, 2021, an increase of $0.6 million. The increase was driven by a $0.5 million increase in


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payroll expenses due to higher average headcount partially offset by lower stock based compensation expenses of $0.2 million, a $0.2 million increase in marketing expenses primarily for tradeshows, and a $0.2 million increase in travel expenses due to increased sales personnel and tradeshows, partially offset by a $0.1 million decrease in consulting expenses.

Interest income

Interest income was immaterial for the three months ended June 30, 2022 and 2021.

Change in fair value of derivative instrument

The change in fair value of the derivative instrument was $1.7 million of expense for the three months ended June 30, 2022 due to the probability of triggering a violation of the minimum liquidity covenant associated with the CRG Term Loan Agreement (Note 6). The change in fair value of the derivative instrument was a $0.2 million reduction of expense for the three months ended June 30, 2021 as we achieved the only remaining revenue covenant in June 2021 and had sufficient cash and cash equivalents that the minimum liquidity covenant would not be triggered, relieving the derivative liability.

Interest expense

Interest expense was $1.3 million for the three months ended June 30, 2022, compared to $1.8 million for the three months ended June 30, 2021, a decrease of $0.5 million, primarily due to amortization of the debt discount and the final fee interest associated with the CRG Term Loan Agreement (Note 6).

Other income, net

Other income, net, was immaterial for the three months ended June 30, 2022 and 2021.

Results of Operations for the Six Months Ended June 30, 2022 and 2021

                                                   Six Months Ended
                                                       June 30,
                                                  2022          2021         Change
                                                           (in thousands)
Revenue:
Product revenue                                 $   6,403     $   8,328     $  (1,925 )
Contribution revenue                                6,742         5,322         1,420
Total revenue                                      13,145        13,650          (505 )
Costs and expenses:
Cost of product revenue                            11,286        10,621           665
Research and development                           14,681        10,064         4,617
Selling, general and administrative                17,054        13,447         3,607
Total costs and expenses                           43,021        34,132         8,889
Loss from operations                              (29,876 )     (20,482 )      (9,394 )
Other income (expense):
Interest income                                         5            12            (7 )
Change in fair value of derivative instrument      (1,675 )       1,010        (2,685 )
Interest expense                                   (2,996 )      (3,723 )         727
Other income, net                                      13            48           (35 )
Total other expense                                (4,653 )      (2,653 )      (2,000 )
Net loss                                        $ (34,529 )   $ (23,135 )   $ (11,394 )


Product revenue

Product revenue was $6.4 million for the six months ended June 30, 2022 compared to $8.3 million for the six months ended June 30, 2021, a decrease of $1.9 million, which was driven by lower consumables sales of $2.7 million mostly due to a decrease in sales of T2SARS-CoV-2, offset by higher T2Dx sales of $0.8 million.


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Contribution revenue

Contribution revenue relates to our BARDA agreement and was $6.7 million for the six months ended June 30, 2022 compared to $5.3 million for the six months ended June 30, 2021. The increase of $1.4 million is primarily due to increased contract activity.

Cost of product revenue

Cost of product revenue was $11.3 million for the six months ended June 30, 2022, compared to $10.6 million for the six months ended June 30, 2021, an increase of $0.7 million. The increase in cost was driven by $1.5 million of costs due to higher instrument sales, $0.7 million of higher service and repair costs, $0.4 million of higher shipping related expenses, partially offset by $1.5 million of decreased costs related to lower consumable sales, $0.2 million of decreased costs due to a change in build plan and manufacturing efficiencies, $0.1 million of lower quality control testing costs and $0.1 million of lower royalties.

Research and development expenses

Research and development expenses were $14.7 million for the six months ended June 30, 2022, compared to $10.1 million for the six months ended June 30, 2021, an increase of $4.6 million. The increase was driven by $1.0 million of higher payroll related expenses and $0.2 million of stock based compensation expenses due to a higher average headcount, clinical related expenses of $0.9 million primarily for our T2Resistance Panel 510(k) Study, lab and facility expenses of $0.8 million primarily related to BARDA, a $0.7 million due to higher materials costs, consulting expenses of $0.5 million primarily for BARDA and $0.5 million of increased internal usage for BARDA and T2Resistance research and development projects.

Selling, general and administrative expenses

Selling, general and administrative expenses were $17.1 million for the six months ended June 30, 2022, compared to $13.5 million for the six months ended June 30, 2021, an increase of $3.6 million. The increase was driven by higher payroll related expenses of $1.7 million and higher stock based compensation expenses of $0.7 million due to higher average headcount, $0.4 million of increased travel primarily from increased sales personnel and tradeshows, $0.3 million of increased marketing expenses for tradeshows, $0.3 million of increased consulting expenses primarily for BARDA, and other expenses of $0.2 million for software, professional dues and equipment to support the higher average headcount.




Interest income

Interest income was immaterial for the six months ended June 30, 2022 and 2021.

Change in fair value of derivative instrument

The change in fair value of the derivative instrument was $1.7 million of expense for the six months ended June 30, 2022 due to the probability of triggering a violation of the minimum liquidity covenant associated with the CRG Term Loan Agreement (Note 6). The change in fair value of the derivative instrument was a $1.0 million reduction of expense for the six months ended June 30, 2021 as we achieved the only remaining revenue covenant in June 2021 and had sufficient cash and cash equivalents that the minimum liquidity covenant would not be triggered, relieving the derivative liability.

Interest expense

Interest expense was $3.0 million for the six months ended June 30, 2022, compared to $3.7 million for the six months ended June 30, 2021. Interest expense decreased by $0.7 million primarily due to amortization of the debt discount and the final fee interest associated with the CRG Term Loan Agreement.

Other income, net

Other income, net, was immaterial for the six months ended June 30, 2022 and 2021.

Liquidity and Capital Resources

We have incurred losses and cumulative negative cash flows from operations since our inception, and as of June 30, 2022 and December 31, 2021 we had an accumulated deficit of $506.7 million and $472.2 million, respectively. Having obtained clearance


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from the FDA and a CE mark in Europe to market the T2Dx Instrument, T2Candida Panel, and T2Bacteria Panel, we have incurred significant commercialization expenses related to product sales, marketing, manufacturing and distribution. We may seek to continue 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 and commercialize T2Dx, T2Candida, T2Bacteria, T2SARS-CoV-2 and other product candidates.

Historically, we have funded our operations primarily through our August 2014 initial public offering, our December 2015 public offering, our September 2016 private investment in public equity ("PIPE") financing, our September 2017 public offering, our June 2018 public offering, our July 2019 establishment of an Equity Distribution Agreement and Equity Purchase Agreement (Note 7), our March 2021 establishment of an Equity Distribution Agreement (Note 7), private placements of redeemable convertible preferred stock and debt financing arrangements.

In July 2021, our shareholders approved an increase in the number of authorized shares of our common stock from 200,000,000 to 400,000,000.

Equity Distribution Agreement

On March 31, 2021, we entered into a Sales Agreement with Canaccord ("New Sales Agreement"), as agent, pursuant to which we may offer and sell shares of common stock, for aggregate gross sale proceeds of up to $75.0 million from time to time from the effective date of the respective registration statement through Canaccord. In the second quarter of 2021, we had sold 16,809,424 shares of common stock for net proceeds of $20.0 million. During the six months ended June 30, 2022, the Company sold 29,417,716 shares for net proceeds of $5.2 million under the New Sales Agreement. We sold 16,809,424 shares for net proceeds of $20.0 million under the New Sales Agreement during the six months ended June 30, 2021.

We 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 New Sales Agreement. Legal and accounting fees are reclassified to share capital upon issuance of shares under the New Sales Agreements.

Plan of operations and future funding requirements

As of June 30, 2022 and December 31, 2021 we had unrestricted cash and cash equivalents of approximately $13.2 million and $22.2 million, respectively. 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.

The COVID-19 pandemic has impacted and may continue to impact our operations. We have established protocols for continued manufacturing, distribution and servicing of our products with safe social distancing and personal protective equipment measures and for remote work for employees not essential to on-site operations. To date these measures have been mostly successful but may not continue to function should the pandemic escalate and further impact our personnel. In 2020, our hospital customers restricted our sales team's access to their facilities and as a result, we had significantly reduced our commercial and general and administrative staffing levels at the beginning of the COVID-19 pandemic to reduce expenses. We have since hired sales and marketing personnel. Although we did not see any material impact to accounts receivable during the six months ended June 30, 2022, our exposure may increase if our customers continue to be adversely affected by the COVID-19 pandemic, including as a result of the spread of variants of the virus. Customers may reduce their purchases of products, depending on their needs and cash flow, which could negatively impact revenue. Our customers may cease to comply with the terms of our sales agreements and this may impact our ability to recognize revenue and hinder receivables collections. We have a significant development contract with BARDA and should BARDA reduce, cancel or not grant additional milestone projects, our ability to continue our future product development may be impacted. Our shipping carrier's ability to deliver our products to customers may be disrupted. We have reviewed our suppliers and quantities of key materials and believe we have sufficient stocks and alternate sources of critical materials should our supply chains become disrupted, although raw materials and plastics for the manufacturing of reagents and consumables are in high demand, and interruptions in supply are difficult to predict.


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Going Concern

We believe that our cash, cash equivalents, and restricted cash of $14.3 million at June 30, 2022 will not be sufficient to fund our current operating plan for at least a year from issuance of these financial statements. Absent any reductions in current operating expenses, we believe we will require additional financing during the first quarter of 2023. Certain elements of our operating plan cannot be considered probable.

The Term Loan Agreement with CRG Servicing LLC ("CRG") (Note 6) has a minimum liquidity covenant which requires us to maintain a minimum cash balance of $5.0 million. There can be no assurances that we will continue to be in compliance with the cash covenant in future periods without additional funding. In February 2022 CRG amended the Term Loan Agreement extending the interest only period and maturity to December 30, 2023.


Our stock has been trading under $1.00 since September 27, 2021. On November 5,
2021, we received a letter from The Nasdaq Stock Market LLC ("Nasdaq")
indicating that we were not in compliance with the requirement of Nasdaq Listing
Rule 5450(a)(1) for continued listing on the Nasdaq Global Market as a result of
the closing bid price of our common stock being below $1.00 per share (the "Bid
Price Rule") for thirty consecutive business days. Under the Nasdaq rules, we
had 180 days (or until May 4, 2022) to regain compliance by maintaining a
minimum closing bid price of $1.00 per share of our common stock for at least
ten consecutive trading days during such compliance period. On May 5, 2022, we
received a letter from Nasdaq informing us that our shares of common stock have
failed to comply with the Bid Price Rule for continued listing and, as a result,
our shares are subject to delisting. The letter further stated that we may
appeal the Nasdaq Staff delisting determination to a Nasdaq listing
qualifications hearings panel (the "Panel").
We filed an appeal and hearing request to the Nasdaq Staff's determination to
stay the delisting of our shares of common stock from Nasdaq pending the Panel's
decision. The Nasdaq Staff informed us that the delisting action had been
stayed, pending a final written decision by the Panel, and the hearing date had
been set for June 2, 2022.
On June 9, 2022, we received a letter from the Nasdaq notifying us that the
Nasdaq had granted our request to be transferred to The Nasdaq Capital Market,
effective at the open of trading on June 13, 2022, and our request for an
exception to the Bid Price Rule until November 1, 2022. If we do not regain
compliance during the extension, the Nasdaq will provide written notification to
the us that our common stock will be delisted. At that time, we may appeal the
relevant delisting determination.

On July 22, 2022, we received a letter from the Nasdaq indicating that, for the last thirty-five consecutive business days, the Market Value of Listed Securities, as defined by Nasdaq ("MVLS") had been below the $35 million minimum requirement for continued listing on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(b)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(C), we have been provided an initial period of 180 calendar days, or until January 18, 2023, to regain compliance. The letter states that the Nasdaq staff will provide written notification that we have achieved compliance with Rule 5550(b)(2) if at any time before January 18, 2023, we maintain our MVLS at $35 million or more for a minimum of ten consecutive business days. The Nasdaq Staff Deficiency Letter has no immediate effect on the listing or trading of our common stock. If compliance is not achieved by January 18, 2023, we expect that Nasdaq would provide written notification to us that our securities are subject to delisting. We will continue to monitor our MVLS and consider our available options to regain compliance with the Nasdaq minimum MVLS requirements, which may include applying for an extension of the compliance period or appealing to a Nasdaq Hearings Panel.

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 that raise substantial doubt include raising additional funding, earning payments pursuant to our contract with BARDA, delaying certain research projects and capital expenditures and eliminating certain future operating expenses in order to fund operations at reduced levels for us to continue as a going concern for a period of 12 months from the date the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are issued. Management has concluded the likelihood that its plan to successfully obtain sufficient funding from one or more of these sources or adequately reduce expenditures, while reasonably possible, is less than probable. Accordingly, we have concluded that substantial doubt exists about our ability to continue as a going concern for a period of at least 12 months from the date of issuance of these financial statements.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above.


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Cash flows


The following is a summary of cash flows for each of the periods set forth
below:

                                                              Six Months Ended
                                                                  June 30,
                                                             2022          2021
                                                               (in thousands)
Net cash provided by (used in):
Operating activities                                       $ (24,397 )   $ (19,305 )
Investing activities                                           9,821        14,948
Financing activities                                           5,123        20,272

Net change in cash, cash equivalents and restricted cash $ (9,453 ) $ 15,915

Net cash used in operating activities

Net cash used in operating activities was approximately $24.4 million for the six months ended June 30, 2022, and consisted of a net loss of $34.5 million adjusted for non-cash items including stock-based compensation expense of $4.1 million, a change in fair value of the derivative of $1.7 million, non-cash interest expense of $1.1 million, non-cash lease expense of $0.6 million, depreciation and amortization expense of $0.5 million and a net change in operating assets and liabilities of $2.2 million. The net change in operating assets and liabilities was primarily driven by a decrease in accounts receivable of $2.4 million due to BARDA payments and the timing and volume of instrument and consumable sales, an increase in accounts payable of $2.4 million primarily due to timing of invoices and payments and increased spend on inventory, a decrease in prepaid expenses and other assets of $0.7 million due to timing of proceeds receivable under the New Sales Agreement, partially offset by an increase in inventory of $1.9 million due to securing raw materials and bulk materials purchases for favorable pricing, a decrease in accrued expenses of $0.6 million primarily from bonus payouts, a decrease in operating lease liabilities of $0.5 million, and a decrease in deferred revenue of $0.3 million due to ratably recognized service agreements.

Net cash used in operating activities was approximately $19.3 million for the six months ended June 30, 2021, and consisted of a net loss of $23.1 million adjusted for non-cash items including stock-based compensation expense of $3.2 million, non-cash interest expense of $1.8 million, non-cash lease expense of $0.7 million, depreciation and amortization expense of $0.7 million, a change in fair value of the derivative of $1.0 million, and a net change in operating assets and liabilities of $1.6 million. The net change in operating assets and liabilities was primarily driven by an increase of $1.8 million in inventory to support the 2021 build plan, a decrease in operating lease liabilities of $1.5 million, a decrease in accrued expenses of $0.6 million primarily from bonus, payments related to the Transition Agreement and accrued interest and a decrease of $0.1 million in deferred revenue due to timing of service agreements, partially offset by a decrease in accounts receivable of $1.1 million primarily due to the timing and volume of instrument and consumable sales shipped near quarter end partially offset by an increase in accounts receivable for our BARDA agreement, an increase in accounts payable of $0.8 million due to timing of payments and an increase in prepaid expenses and other assets of $0.5 million.

Net cash provided by investing activities

Net cash provided by investing activities was $9.8 million for the six months ended June 30, 2022, and primarily consisted of proceeds from sales of marketable securities of $10.0 million, partially offset by equipment purchases of $0.2 million.

Net cash provided by investing activities was approximately $14.9 million for the six months ended June 30, 2021, and primarily consisted of proceeds from maturities of marketable securities of $15.2 million, partially offset by equipment purchases of $0.3 million.

Net cash provided by financing activities

Net cash provided by financing activities was approximately $5.1 million for the six months ended June 30, 2022, and consisted primarily of proceeds from sales of our common stock under the Sales Agreement, net of issuance costs, of $5.2 million and proceeds from issuance of shares under our 2014 Employee Stock Purchase Plan of $0.1 million, offset by payment of employee restricted stock tax withholdings of $0.2 million.

Net cash provided by financing activities was approximately $20.3 million for the six months ended June 30, 2021, and consisted primarily of proceeds from sales of our common stock under the Sales Agreement, net of issuance costs, of $20.0 million, and proceeds from issuance of shares under our 2014 Employee Stock Purchase Plan and stock option exercises of $0.3 million.


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Borrowing Arrangements

Term Loan Agreement

In December 2016, we entered into a Term Loan Agreement with CRG. We borrowed $40.0 million pursuant to the Term Loan Agreement. Interest on the amounts borrowed under the Term Loan Agreement accrues at an annual fixed rate of (a) prior to the Approval Milestone, 12.50%, 4.0% of which may be deferred during the interest-only period by adding such amount to the aggregate principal loan amount and (b) following the Approval Milestone, 11.50%, 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 maturity date, 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%, subsequently amended to 10%, of the principal outstanding upon repayment. We are accruing the final payment fee as interest expense and it is included as a non-current liability at June 30, 2022 and December 31, 2021 on the balance sheet.

The Term Loan Agreement with CRG is classified as non-current at June 30, 2022 and December 31, 2021 as we have sufficient cash and cash equivalents that the minimum liquidity covenant would not be triggered. We have assessed the classification of the note payable as non-current based on facts and circumstances as of the date of this filing, specifically as it relates to the probability of triggering the minimum liquidity covenant. Management continues to reassess at each balance sheet and filing date based on facts and circumstances and can provide no assurances regarding the probability of meeting its minimum liquidity covenant in future periods.

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 certain 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 its assets, including intellectual property. The Term Loan Agreement also contains customary affirmative and negative covenants for a credit facility of this size and type, including a requirement to maintain a minimum cash balance of $5.0 million. 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 2019, the Term Loan Agreement was amended to reduce minimum revenue targets, extend the interest-only period and extend the principal repayment. The final payment fee was increased from 8% to 10% of the principal amount outstanding upon repayment. We issued to CRG warrants to purchase 568,291 shares of the Company's common stock ("New Warrants") (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. We also reduced the exercise price for the warrants previously issued to CRG to purchase an aggregate of 528,958 shares of our common stock to $1.55. All of the New Warrants are exercisable any time prior to September 9, 2029, and all of the previously issued warrants are exercisable any time prior to December 30, 2026.

In January 2021, the Term Loan Agreement was amended to extend the interest-only payment period through December 30, 2022, to extend the initial principal repayment to December 30, 2022, and to significantly reduce the revenue covenant for the 24-month period beginning on January 1, 2020. We did not pay or provide any consideration in exchange for this amendment. We accounted for the January 2021 amendment as a modification to the Term Loan Agreement. In June 2021, the Company satisfied the only remaining revenue covenant which was for the 24-month period beginning on January 1, 2020.

In February 2022, the Term Loan Agreement was amended to extend the interest-only payment period through December 30, 2023, and to extend the initial principal repayment to December 30, 2023. We did not pay or provide any consideration in exchange for this amendment. As the effective borrowing rate under the amended agreement is less than the effective borrowing rate under the previous agreement, a concession is deemed to have been granted under ASC 470-60. As a concession has been granted, the agreement was accounted for as a troubled debt restructuring under ASC 470-60. The amendment did not result in a gain on restructuring as the future undiscounted cash outflows required under the amended agreement exceed the carrying value of the debt immediately prior to the amendment.

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.


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We assessed the terms and features of the Term Loan Agreement, including the interest-only period dependent on the achievement of the Approval Milestone and the acceleration of the obligations under the Term Loan Agreement under an event of default, of the Term Loan Agreement 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 the features of the Term Loan Agreement 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.

Contractual Obligations and Commitments

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, 2021.

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