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 status as an early commercial-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 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; 23
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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 FDA or regulatory clearance for new product candidates inthe 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 products and product candidates; • our ability to protect and enforce our intellectual property rights, including our trade secret-protected proprietary rights in T2MR; • our ability to recruit, train and retain key personnel; • our dependence on third parties; • manufacturing and other product risks; • the impact of the adoption of new accounting standards; • 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 cost-cutting measures; • unforeseen interruptions in our supply chain; • our ability to maintain compliance with Nasdaq listing requirements; • the Tax Cuts and Jobs Act of 2017 (Tax Reform) and the impact of future tax legislation; • the impact of the COVID-19 pandemic on our business, results of operations and financial positions; and • 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
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
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Business Overview
We are an in vitro diagnostics company and leader in the rapid detection of
sepsis-causing pathogens, and 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 an innovative and proprietary
technology platform that offers a rapid, sensitive and simple alternative to
existing diagnostic methodologies. We are using our T2MR technology 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 and urine,
and can detect cellular targets at limits of detection as low as one colony
forming unit per milliliter, or CFU/mL. Our products include the T2Dx
Instrument, the
On
We believe our sepsis products, which include T2Candida, T2Bacteria, and T2Resistance, will redefine the standard of care in sepsis management while lowering healthcare costs by improving both the precision and the speed to detect sepsis-causing pathogens. 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. The speed to result of T2Candida and T2Bacteria coupled with their 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 antimicrobial therapy.
According to a 2013 study published in Clinical Infectious Disease, 50% of
Candida infections are missed by conventional blood culture techniques. In
studies published in 2016, 2018, and 2020, T2Candida was able to confirm the
existence of fungal infections in hours vs. days, shorten overall length of
stay, and significantly reduce prescriptions of antifungal therapy in patients
that tested negative. Antifungal drugs are toxic and may result in side effects
and can cost over
A meta-analysis of 70 studies found antibiotic therapy prescribed in advance of
blood culture results was inappropriate in 46.5% of patients. Reducing time to
effective appropriate therapy results in significant reductions in overall
length of stay of up to 8 days. A growing number of studies demonstrate clinical
benefit of
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The administration of inappropriate therapy is a driving force behind the spread
of antimicrobial-resistant pathogens, which the
We have never been profitable and have incurred net losses in each year since
inception. Our accumulated deficit at
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. Our hospital customers have 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. Our customers may reduce their purchases of our products. 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 for the manufacturing of reagents is in high demand, and interruptions in supply are difficult to predict. At the onset of the pandemic, we believed that the pandemic's impact on our sales would affect the recoverability of the value of our T2-owned instruments and components. The COVID-19 pandemic also caused us to reassess our build plan and evaluate our inventories accordingly, which resulted in an additional charge to cost of product revenue for excess inventories.
While the Company believes that its cash, cash equivalents, marketable
securities and restricted cash of
The Term Loan Agreement with
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These conditions raise substantial doubt regarding the Company's 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 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 successfully obtain sufficient funding from one or more of these sources or adequately reduce expenditures, while reasonably possible, is less than probable. Accordingly, the Company has concluded that substantial doubt exists about the Company's ability to continue as a going concern for a period of at least 12 months from the date of issuance of these consolidated financial statements.
T2SARS-CoV-2
On
Clinical data from
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.
Product revenue is generated by the sale of instruments and consumable
diagnostic tests predominantly through our direct sales force in
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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.
Near term, however, we believe the COVID-19 pandemic may hinder our
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 that we initiated
during the year ended
At the beginning of the COVID-19 pandemic, we believed that the pandemic would
reduce product sales and impair our ability to recover the cost of our T2-owned
instruments and components. We assessed the impact on the related cash flows of
the instruments and reduced their carrying values by
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 and contribution revenue. We expense all research and development costs as incurred.
We anticipate our overall research and development expenses to decrease as a percentage of revenue. We expect to continue developing additional product candidates, improving existing products, and conducting ongoing and new clinical trials. We have a
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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.
Customer service personnel provide customer product support as well as field
installation, training and T2Dx system maintenance. Time spent in the field
servicing customers with service maintenance contracts and for installation and
training is considered services and included in cost of goods sold. Time spent
providing customer support is now considered a commercial support activity and
is included in selling, general and administrative expenses. Previously,
customer support was considered a development phase activity and was included in
research and development expense. Prior periods have been reclassified to
conform to the current period presentation. The reclassification increased
selling, general and administrative expenses by
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 decrease as a percentage of revenue in future periods. 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.
As noted under research and development expenses, the reclassification of
customer support increased selling, general and administrative expenses by
Interest income
Interest income consists of interest earned on our cash and cash equivalents.
Interest expense
Interest expense 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.
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 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
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Results of Operations for the Three Months Ended
Three Months Ended March 31, 2021 2020 Change (in thousands) Revenue: Product revenue$ 4,650 $ 1,045 $ 3,605 Contribution revenue 2,306 1,500 806 Total revenue 6,956 2,545 4,411 Costs and expenses: Cost of product revenue 5,790 4,671 1,119 Research and development 4,665 4,780 (115 ) Selling, general and administrative 6,203 6,655 (452 ) Total costs and expenses 16,658 16,106 552 Loss from operations (9,702 ) (13,561 ) 3,859 Other income (expense): Interest income 6 - 6 Interest expense (1,013 ) (1,417 ) 404 Other income, net 49 29 20 Total other expense (958 ) (1,388 ) 430 Net loss$ (10,660 ) $ (14,949 ) $ 4,289 Product revenue
Product revenue was
Contribution revenue
Contribution revenue was
Cost of product revenue
Cost of product revenue was
Research and development expenses
Research and development expenses were
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Selling, general and administrative expenses
Selling, general and administrative expenses were
Interest income
Interest income was immaterial for the three months ended
Interest expense
Interest expense, net, was
Other income, net
Other income, net, was immaterial for the three months ended
Liquidity and Capital Resources
We have incurred losses and cumulative negative cash flows from operations since
our inception, and as of
Historically, we have funded our operations primarily through our
Equity Distribution Agreement
On
On
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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.
Purchase Agreement
On
In consideration for the execution and delivery of the Purchase Agreement, we issued 413,349 shares of common stock to Lincoln Park.
Plan of operations and future funding requirements
As of
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 impact our personnel. Our hospital customers have restricted our sales team's access to their facilities and as a result, we had significantly reduced our sales and general and administrative staffing levels at the beginning of the COVID-19 pandemic to reduce expenses. Our customers may reduce their purchases of our products. 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 carriers' ability to deliver our products to customers may be disrupted, although raw materials for the manufacturing of reagents is in high demand, and interruptions in supply are difficult to predict. We have reviewed our suppliers and quantities of key materials and believe we have sufficient stocks and alternate sources of critical materials including personal protective equipment should our supply chains become disrupted. As further described in Note 5, at the onset of the pandemic, we believed that the pandemic's impact on our sales would affect the recoverability of the value of our T2-owned instruments and components. The COVID-19 pandemic also caused us to reassess our build plan and evaluate our inventories accordingly, which resulted in an additional charge to cost of product revenue for excess inventories.
Going Concern
While the Company believes that its cash, cash equivalents, marketable
securities and restricted cash of
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The Term Loan Agreement with
These conditions raise substantial doubt regarding the Company's 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 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 successfully obtain sufficient funding from one or more of these sources or adequately reduce expenditures, while reasonably possible, is less than probable. Accordingly, the Company has concluded that substantial doubt exists about the Company's ability to continue as a going concern for a period of at least 12 months from the date of issuance of these consolidated 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.
Cash flows
The following is a summary of cash flows for each of the periods set forth below: Three Months Ended March 31, 2021 2020 (in thousands) Net cash provided by (used in): Operating activities$ (8,708 ) $ (14,740 ) Investing activities 2,553 (67 ) Financing activities 53 40,097 Net (decrease) increase in cash, cash equivalents and restricted cash$ (6,102 ) $ 25,290
Net cash used in operating activities
Net cash used in operating activities was approximately
Net cash used in operating activities was approximately
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associated with financings and the CEO transition and increased severance
associated with the headcount reduction, a decrease in operating lease
liabilities of
Net cash used in investing activities
Net cash provided by investing activities was approximately
Net cash used in investing activities was approximately
Net cash provided by financing activities
Net cash provided by financing activities was approximately
Net cash provided by financing activities was approximately
Borrowing Arrangements Term Loan Agreement
In
The Term Loan Agreement with CRG is classified as a non-current liability at
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
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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. The Company issued to CRG warrants to purchase 568,291 shares of
the Company's common stock ("New Warrants") (Note 9) at an exercise price of
In
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.
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.
The fair value of the derivative at
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
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
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