UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-36571

 

T2 Biosystems, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

20-4827488

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

101 Hartwell Avenue

Lexington, Massachusetts

02421

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (781) 761-4646

 

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

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

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

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

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

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001

 

TTOO

 

The Nasdaq Global Market

As of May 6, 2019, the registrant had 44,339,243 shares of common stock outstanding.

 

 

 

 


 

T2 BIOSYSTEMS, INC.

TABLE OF CONTENTS

 

 

 

Page  

 

 

 

 

PART I FINANCIAL INFORMATION

 

 

 

 

Item 1.    

Financial Statements (unaudited)

1

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

1

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for three months ended March 31, 2019 and 2018

2

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three months ended March 31, 2019 and 2018

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

37

 

 

 

Item 1A.

Risk Factors

37

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

 

 

 

Item 3.

Defaults Upon Senior Securities

37

 

 

 

Item 4.

Mine Safety Disclosures

37

 

 

 

Item 5.

Other Information

37

 

 

 

Item 6.

Exhibits, Financial Statement Schedules

38

 

 

SIGNATURES

39

 

 

i


 

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

T2 BIOSYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

37,400

 

 

$

50,805

 

Accounts receivable

 

 

1,773

 

 

 

1,786

 

Inventories

 

 

2,664

 

 

 

2,677

 

Prepaid expenses and other current  assets

 

 

1,741

 

 

 

1,340

 

Total current assets

 

 

43,578

 

 

 

56,608

 

Property and equipment, net

 

 

7,128

 

 

 

7,315

 

Operating lease right-of-use assets

 

 

4,463

 

 

 

 

Restricted cash

 

 

180

 

 

 

180

 

Other assets

 

 

206

 

 

 

206

 

Total assets

 

$

55,555

 

 

$

64,309

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Notes payable

 

$

42,450

 

 

$

42,373

 

Accounts payable

 

 

618

 

 

 

744

 

Accrued expenses and other current liabilities

 

 

7,784

 

 

 

6,073

 

Derivative liability

 

 

2,225

 

 

 

2,142

 

Deferred revenue

 

 

658

 

 

 

697

 

Current portion of lease incentives

 

 

 

 

 

268

 

Total current liabilities

 

 

53,735

 

 

 

52,297

 

Lease incentives, net of current portion

 

 

 

 

 

492

 

Operating lease liabilities, net of current portion

 

 

3,259

 

 

 

 

Deferred revenue, net of current portion

 

 

141

 

 

 

133

 

Commitments and contingencies (see Note 13)

 

 

 

 

 

 

 

 

Stockholders’ (deficit) equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and

   outstanding at March 31, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized; 44,339,243 and

  44,175,441 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

44

 

 

 

44

 

Additional paid-in capital

 

 

330,694

 

 

 

328,514

 

Accumulated deficit

 

 

(332,318

)

 

 

(317,171

)

Total stockholders’ (deficit) equity

 

 

(1,580

)

 

 

11,387

 

Total liabilities and stockholders’ equity

 

$

55,555

 

 

$

64,309

 

 

See accompanying notes to condensed consolidated financial statements.

1


 

T2 BIOSYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

Product revenue

 

$

1,314

 

 

$

1,048

 

Research revenue

 

 

142

 

 

 

1,263

 

Contribution revenue

 

 

329

 

 

 

 

Total revenue

 

 

1,785

 

 

 

2,311

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of product revenue

 

 

4,388

 

 

 

3,273

 

Research and development

 

 

3,901

 

 

 

4,718

 

Selling, general and administrative

 

 

7,055

 

 

 

5,755

 

Total costs and expenses

 

 

15,344

 

 

 

13,746

 

Loss from operations

 

 

(13,559

)

 

 

(11,435

)

Interest expense, net

 

 

(1,782

)

 

 

(1,568

)

Other income, net

 

 

194

 

 

 

90

 

Net loss and comprehensive loss

 

$

(15,147

)

 

$

(12,913

)

Net loss per share — basic and diluted

 

$

(0.34

)

 

$

(0.36

)

Weighted-average number of common shares used in computing

   net loss per share — basic and diluted

 

 

44,282,345

 

 

 

35,978,306

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

2


 

T2 BIOSYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share and per share data)

(Unaudited)

 

 

 

 

Common

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

Stock

 

 

 

 

Paid-In

 

 

 

 

Accumulated

 

 

 

 

Stockholders’

 

 

 

 

Shares

 

 

Amount

 

 

 

 

Capital

 

 

 

 

Deficit

 

 

 

 

Equity (Deficit)

 

Balance at December 31, 2017

 

 

 

35,948,900

 

 

 

36

 

 

 

 

 

267,421

 

 

 

 

 

(266,117

)

 

 

 

 

1,340

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

1,381

 

 

 

 

 

 

 

 

 

 

1,381

 

Issuance of common stock from vesting of restricted stock, exercise of stock options and employee stock purchase plan

 

 

 

70,983

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

5

 

Prior year accumulated deficit adjustment from ASC 606 implementation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100

 

 

 

 

 

100

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,913

)

 

 

 

 

(12,913

)

Balance at March 31, 2018

 

 

 

36,019,883

 

 

$

36

 

 

 

 

$

268,807

 

 

 

 

$

(278,930

)

 

 

 

$

(10,087

)

 

 

 

 

 

Common

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

Stock

 

 

 

 

Paid-In

 

 

 

 

Accumulated

 

 

 

 

Stockholders’

 

 

 

 

Shares

 

 

Amount

 

 

 

 

Capital

 

 

 

 

Deficit

 

 

 

 

Equity (Deficit)

 

Balance at December 31, 2018

 

 

 

44,175,441

 

 

 

44

 

 

 

 

 

328,514

 

 

 

 

 

(317,171

)

 

 

 

 

11,387

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

2,033

 

 

 

 

 

 

 

 

 

 

2,033

 

Issuance of common stock from vesting of restricted stock, exercise of stock options and employee stock purchase plan

 

 

 

163,802

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Change in fair value of warrants upon modification

 

 

 

 

 

 

 

 

 

 

 

147

 

 

 

 

 

 

 

 

 

 

147

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,147

)

 

 

 

 

(15,147

)

Balance at March 31, 2019

 

 

 

44,339,243

 

 

$

44

 

 

 

 

$

330,694

 

 

 

 

$

(332,318

)

 

 

 

$

(1,580

)

 

See accompanying notes to condensed consolidated financial statements.

 

3


 

T2 BIOSYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(15,147

)

 

$

(12,913

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

557

 

 

 

629

 

Amortization of operating lease right-of-use assets

 

 

342

 

 

 

 

Stock-based compensation expense

 

 

2,033

 

 

 

1,381

 

Change in fair value of derivative instrument

 

 

83

 

 

 

(142

)

Non-cash interest expense

 

 

568

 

 

 

560

 

Deferred rent

 

 

 

 

 

(52

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

13

 

 

 

(115

)

Prepaid expenses and other assets

 

 

(401

)

 

 

145

 

Inventories

 

 

(141

)

 

 

64

 

Accounts payable

 

 

(126

)

 

 

132

 

Accrued expenses and other liabilities

 

 

118

 

 

 

(682

)

Deferred revenue

 

 

(31

)

 

 

(749

)

Operating lease liabilities

 

 

(735

)

 

 

 

Net cash used in operating activities

 

 

(12,867

)

 

 

(11,742

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases and manufacture of property and equipment

 

 

(194

)

 

 

(56

)

Net cash used in investing activities

 

 

(194

)

 

 

(56

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock and stock option exercises, net

 

 

 

 

 

4

 

Principal repayments of finance leases

 

 

(344

)

 

 

(352

)

Net cash used in financing activities

 

 

(344

)

 

 

(348

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(13,405

)

 

 

(12,146

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

50,985

 

 

 

42,059

 

Cash, cash equivalents and restricted cash at end of period

 

$

37,580

 

 

$

29,913

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,131

 

 

$

972

 

Supplemental disclosures of noncash activities

 

 

 

 

 

 

 

 

Transfer of T2 owned instruments and components to (from) inventory

 

$

(154

)

 

$

802

 

Change in fair value of warrants issued upon modification

 

$

147

 

 

 

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

$

4,805

 

 

 

 

Purchases of property and equipment included in accounts payable and accrued expenses

 

$

56

 

 

$

119

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

T2 BIOSYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Business

T2 Biosystems, Inc. (the “Company”) was incorporated on April 27, 2006 as a Delaware corporation with operations based in Lexington, Massachusetts. The Company is 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. The Company is using its T2 Magnetic Resonance technology (“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 and urine, and can detect cellular targets at limits of detection as low as one colony forming unit per milliliter (“CFU/mL”). The Company’s 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, the Company received market clearance from the U.S. Food and Drug Administration (“FDA”) for its first two products, the T2Dx Instrument (the “T2Dx”) and T2Candida Panel (“T2Candida”). On May 24, 2018, the Company received market clearance from the FDA for its T2Bacteria Panel (“T2Bacteria”).

The Company has devoted substantially all of its efforts to research and development, business planning, recruiting management and technical staff, acquiring operating assets, raising capital, and, most recently, the commercialization and improvement of its existing products.

Liquidity and Going Concern

At March 31, 2019, the Company had cash and cash equivalents of $37.4 million and an accumulated deficit of $332.3 million. The future success of the Company is dependent on its ability to successfully commercialize its products, obtain regulatory clearance for and successfully launch its future product candidates, obtain additional capital and ultimately attain profitable operations. 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, private placements of redeemable convertible preferred stock and debt financing arrangements.

The Company is subject to a number of risks similar to other newly commercial life science companies, including, but not limited to commercially launching the Company’s products, development and market acceptance of the Company’s product candidates, development by its competitors of new technological innovations, protection of proprietary technology, and raising additional capital.

Having obtained authorization from the FDA 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, 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, financial condition and the Company’s ability to develop and commercialize T2Dx, T2Candida, T2Bacteria and other product candidates.

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 the Company’s 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.

Management believes that its existing cash and cash equivalents at March 31, 2019 will be sufficient to allow the Company to fund its current operating plan through May 2020. However, as certain elements of the Company’s operating plan are outside of the

5


 

Company’s control, including the receipt of certain d evelopment and regulatory milestone payments under the Company’s Co-Development agreements, they cannot be considered probable. Under ASC 205-40, the future receipt of potential funding from the Company’s Co-Development partners and other resources cannot be considered probable at this time because none of the plans are entirely within the Company’s control. In addition, the Company is required to maintain a minimum cash balance under its Term Loan Agreement with CRG Servicing LLC (“CRG”) (Note 6).

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 milestone payments pursuant 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 twelve 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.  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 twelve months from the date of issuance of these condensed 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.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company’s financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States GAAP as defined in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). The Company’s condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, T2 Biosystems Securities Corporation. All intercompany balances and transactions have been eliminated.  

Unaudited Interim Financial Information

Certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

The accompanying interim condensed consolidated balance sheet as of March 31, 2019, the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2019 and 2018, the condensed consolidated statements of cash flows for the three months ended March 31, 2019 and 2018 and the related financial data and other information disclosed in these notes are unaudited. The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements, and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of March 31, 2019, and the results of its operations and its cash flows for the three months ended March 31, 2019 and 2018. The results for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019, any other interim periods, or any future year or period.

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company views its operations and manages its business in one operating segment, which is the business of developing and, upon regulatory clearance, commercializing its diagnostic products aimed at lowering mortality rates, improving patient outcomes and reducing the cost of healthcare by helping medical professionals make targeted treatment decisions earlier.

6


 

Geographic Information

The Company sells its products domestically and internationally. For the three months ended March 31, 2019, the Company derived approximately 13% of its total revenue from one international customer and 11% of its total revenue from a second international customer. International sales to a single country did not exceed 10% of total revenue in the three months ended March 31, 2018. Total international sales were approximately $0.6 million or 36% of total revenue and $0.3 million or 14% of total revenue in the three months ended March 31, 2019 and 2018, respectively.

As of March 31, 2019 and December 31, 2018, the Company had outstanding receivables of $1.0 million and $0.9 million, respectively, from customers located outside of the U.S.

Net Loss Per Share

Basic net loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by adjusting the weighted-average number of shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method. For purposes of the diluted net loss per share calculation, stock options and unvested restricted stock and restricted stock contingently issuable upon achievement of certain market conditions are considered to be common stock equivalents, but have been excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive for all periods presented. Therefore, basic and diluted net loss per share applicable to common stockholders was the same for all periods presented.

Guarantees

As permitted under Delaware law, the Company indemnifies its officers and directors for certain events or occurrences while each such officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification is the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make is unlimited; however, the Company has directors’ and officers’ liability insurance coverage that limits its exposure and enables the Company to recover a portion of any future amounts paid.

The Company leases office, laboratory and manufacturing space under noncancelable operating leases. The Company has standard indemnification arrangements under the leases that require it to indemnify the landlords against all costs, expenses, fines, suits, claims, demands, liabilities, and actions directly resulting from any breach, violation or nonperformance of any covenant or condition of the Company’s leases.

In the ordinary course of business, the Company enters into indemnification agreements with certain suppliers and business partners where the Company has certain indemnification obligations limited to the costs, expenses, fines, suits, claims, demands, liabilities and actions directly resulting from the Company’s gross negligence or willful misconduct, and in certain instances, breaches, violations or nonperformance of covenants or conditions under the agreements.

As of March 31, 2019 and December 31, 2018, the Company had not experienced any material losses related to these indemnification obligations, and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible, and no related reserves were established.

Leases

The Company adopted Accounting Standards Codification (“ASC”), Topic 842, Leases (“ASC 842”), using the modified retrospective approach through a cumulative-effect adjustment and utilizing the effective date of January 1, 2019 as its date of initial application, with prior periods unchanged and presented in accordance with the previous guidance in Topic 840 , Leases (“ASC 840”).

 

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. However, certain adjustments to the right-of-use asset may be required for items such as prepaid or accrued lease payments. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

7


 

 

In accordance with the guidance in ASC 842, components of a lease should be split into three categories: lease components (e.g. land, building, etc.), non-lease components (e.g. common area maintenance, consumables, etc.), and non-components (e.g. property taxes, insurance, etc.) Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on the respective relative fair values to the lease components and non-lease components.

 

The Company made the policy election to not separate lease and non-lease components. Each lease component and the related non-lease components are accounted for together as a single component.  

Revenue Recognition

The Company generates revenue from the sale of instruments, consumable diagnostic tests, related services, reagent rental agreements and research and development agreements with third parties. Pursuant to ASC 606, Revenue from Contracts with Customers (“ASC 606”), revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration the Company expects to be entitled to receive in exchange for these goods and services.

 

Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations the Company must deliver and which of these performance obligations are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company's performance obligations are transferred to customers at a point in time, typically upon shipment, or over time, as services are performed.

 

Most of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Excluded from the transaction price are sales tax and other similar taxes which are presented on a net basis.

 

 

 

 

 

 

Product revenue is generated by the sale of instruments and consumable diagnostic tests predominantly through the Company’s direct sales force in the United States and distributors in geographic regions outside the United States. The Company does not offer product return or exchange rights (other than those relating to defective goods under warranty) or price protection allowances to its 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. 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 an instrument is 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, and incremental charges on each consumable diagnostic test purchased. Revenue from the sale of consumable diagnostic tests (under a reagent rental agreement) is recognized upon shipment.  The transaction price from consumables purchases is allocated between the lease of the instrument (under a contingent rent methodology as provided for in ASC 840, Leases ), and the consumables when related performance obligations are satisfied, as a component of lease and product revenue, and is included as Instrument Rentals in the below table. Revenue associated with reagent rental consumables purchases is currently classified as variable consideration and constrained until a purchase order is received and related performance obligations have been satisfied.  Shipping and handling costs billed to customers in connection with a product sale are recorded as a component of the transaction price and allocated to product revenue in the consolidated statements of operations and comprehensive loss as they are incurred by the Company in fulfilling its performance obligations.

 

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.  The Company recognizes revenue allocated to the extended Maintenance Services performance obligation on a straight-line basis 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.

8


 

 

Revenue earned from activities performed pursuant to research and development agreements is reported as research revenue in the condensed consolidated statements of operations and comprehensive loss, and is recognized over time using an input method as the work is completed. The related costs are expensed as incurred as research and development expense. The timing of receipt of cash from the Company’s research and development agreements generally differs from when revenue is recognized.  Milestones are 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.  Refer to Note 11 for further details regarding the Company’s research and development arrangements.

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.

 

Disaggregation of Revenue

 

The Company disaggregates revenue from contracts with customers by type of products and services, as it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The following table disaggregates our revenue by major source (in thousands):

 

 

Three months ended,

March 31,

 

 

 

2019

 

 

2018

 

Product Revenue

 

 

 

 

 

 

 

 

Instruments

 

$

535

 

 

$

221

 

Consumables

 

 

733

 

 

 

746

 

Instrument rentals

 

 

46

 

 

 

81

 

Total Product Revenue

 

 

1,314

 

 

 

1,048

 

Research Revenue

 

 

142

 

 

 

1,263

 

Contribution Revenue

 

 

329

 

 

 

 

Total Revenue

 

$

1,785

 

 

$

2,311

 

 

Remaining Performance Obligations

 

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed or goods and services have not been delivered. As of March 31, 2019, the aggregate amount of transaction price allocated to remaining performance obligations for contracts with an original duration greater than one year was $3.6 million. We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. The Company expects to recognize revenue on the remaining performance obligations over the next 2 years.

 

Significant Judgments

 

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Once we determine the performance obligations, the Company determines the transaction price, which includes estimating the amount of variable consideration, based on the most likely amount, to be included in the transaction price, if any. We then allocate the transaction price to each performance obligation in the contract based on a relative stand-alone selling price method. The corresponding revenue is recognized as the related performance obligations are satisfied as discussed in the revenue categories above.

 

Judgment is required to determine the standalone selling price for each distinct performance obligation. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions and the expected costs and margin related to the performance obligations.

 

Contract Assets and Liabilities

 

At March 31, 2019, the Company recorded $0.1 million of contract assets, which represents unbilled amounts related to work performed under a research and development agreement. The Company did not record any contract assets at December 31, 2018.  

9


 

 

The Company’s contract liabilities consist of upfront payments for research and development contracts and Maintenance Services on instrument sales. We classify these contract liabilities in deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. Contract liabilities were $0.6 million at March 31, 2019 and December 31, 2018. Revenue recognized in the three months ended March 31, 2019 relating to contract liabilities at December 31, 2018 was $0.1 million, and related to performance of research and development services and straight-line revenue recognition associated with maintenance agreements.  

Cost to Obtain and Fulfill a Contract

The Company does not meet the recoverability criteria to capitalize costs to obtain or fulfill instrument purchases.  Reagent rental agreements do not meet the recoverability criteria to capitalize costs to obtain the contracts and the costs to fulfill the contracts are under the scope of ASC 842.  At the end of each reporting period, the Company assesses whether any circumstances have changed to meet the criteria for capitalization. The Company did not incur any expenses to obtain research and development agreements and costs to fulfill those contracts do not generate or enhance resources of the entity.  As such, no costs to obtain or fulfill contracts have been capitalized at period end.

Cost of Product Revenue

Cost of product revenue includes the cost of materials, direct labor and manufacturing overhead costs used in the manufacture of consumable diagnostic tests sold to customers and related license and royalty fees. Cost of product revenue also includes depreciation on revenue generating T2Dx instruments that have been placed with 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, royalties and license fees, warranty and repair and maintenance expense on the T2Dx instruments that have been placed with customers under reagent rental agreements.

Research and Development Costs

Costs incurred in the research and development of the Company’s product candidates are expensed as incurred. Research and development expenses consist of costs incurred in performing research and development activities, including activities associated with performing services under research revenue arrangements and contribution agreements, costs associated with the manufacture of developed products and include salaries and benefits, stock compensation, research‑related facility and overhead costs, laboratory supplies, equipment and contract services.

Recent Accounting Standards

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

Accounting Standards Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”) in order to increase transparency and comparability among organizations by recognizing right-of-use assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous generally accepted accounting principles. ASU 2016-02 requires a lessee to recognize a lease liability for its future lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet for most lease arrangements. The new standard also changes many key definitions, including the definition of a lease. The new standard includes a short-term lease exception for leases with a term of 12 months or less, as part of which a lessee can make an accounting policy election not to recognize right-of-use assets and lease liabilities. Lessees will continue to differentiate between finance leases (previously referred to as capital leases) and operating leases using classification criteria that are substantially similar to the previous guidance in ASC 840.

ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) and early adoption is permitted. In August 2018, the FASB issued ASU 2018-11, Leases, Targeted Improvements , which provides a new transition option in which an entity initially applies ASU 2016-02 at the adoption date and recognizes a cumulative-effect adjustment in the period of adoption. Prior period comparative balances will not be adjusted. The Company used the new transition option and was also utilizing the package of practical expedients that allows it to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. We also used the short-term lease exception for leases with a term of twelve months or less. Additionally, the Company used

10


 

the practical expedient that allow ed each separate lease component of a contract and its assoc iated non-lease components to be treated as a single lease component. As of the January 1, 201 9 effective date the Company identified eight operating lease arrangements and two finance lease arrangements in which it is a lessee. The adoption of this standa rd resulted in the recognition of operating lease liabilities and right-of-use assets of $5.6 million and $4.8 million, respectively, on the Company’s balance sheet, with the difference relating to a reclassification of the current accrued rent liability o f $0.8 million as a reduction to the right-of-use-assets for its operating leases.

In calculating the present value of the lease payments, the Company applied an individual discount rate for each of its leases, and determined the appropriate discount rate based on the remaining lease terms at the date of adoption. As the lessee to several lease agreements, the Company did not have insight into the relevant information that would be required to arrive at the rate implicit in the lease. Therefore, the Company utilized its outstanding borrowings as a benchmark to determine its incremental borrowing rate for its leases. The benchmark rate was adjusted to arrive at an appropriate discount rate for each lease.

Under the new guidance, lessor accounting is largely unchanged. As of March 31, 2019, the Company was the lessor of T2Dx instruments. The lease agreements typically do not include fixed rental payments, but rather rental revenue is earned through usage-based variable lease payments. In accordance with ASC 842 the Company recognized lease revenue related to variable lease payments in the period in which it was earned. For the three months ended March 31, 2019, the Company recognized $46,000 of lease revenue for instrument rentals.

In June 2018, the FASB issued ASU No. 2018-07,  Compensation-Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting  (“ASU 2018-07”), which expands the scope of Compensation – Stock Compensation (“Topic 718”) to include share-based payment transactions for acquiring goods and services from nonemployees. This amendment applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The Company adopted ASU 2018-07 on January 1, 2019. The impact was immaterial to the financial statements.

In June 2018, the FASB issued ASU No. 2018-08,  Not-For-Profit Entities – Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made (“ASU 2018-08”).  ASU 2018-18 clarifies how an entity determines whether a resource provider is participating in an exchange transaction by evaluating whether the resource provider is receiving commensurate value in return for the resources transferred.  The guidance is effective for annual periods beginning after June 15, 2018, including interim periods within those annual periods, and has been adopted on a modified prospective basis.  The modified prospective adoption is applied to agreements that are not completed as of the effective date, or entered into after the effective date.  Under the modified prospective adoption approach, prior period results have not been restated and no cumulative-effect adjustment has been recorded.  As a result of applying ASU 2018-18, the Company recorded revenue earned under its agreement with CARB-X (Note 11) as contribution revenue during the three months ended March 31, 2019.

Accounting Standards Issued, Not Adopted

In August 2018, the FASB issued ASU No. 2018-13,  Fair Value Measurement  (“ASU 2018-13”), which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The amendment is effective for interim and annual reporting periods beginning after December 15, 2019.

In November 2018, the FASB issued ASU No. 2018-18,  Collaborative Arrangements  (“ASU 2018-18”), which clarifies the interaction between ASC 808, Collaborative Arrangements and ASC 606, Revenue from Contracts with Customers. Certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, ASU 2018-18 precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue if the counterparty is not a customer for that transaction. ASU 2018-18 should be applied retrospectively to the date of initial application of ASC 606. This guidance is effective for interim and fiscal periods beginning after December 15, 2019. 

Emerging Growth Company Status

In April 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was enacted in the United States. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, as amended, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

11


 

3. Fair Value Measurements

The Company measures the following financial assets at fair value on a recurring basis. There were no transfers between levels of the fair value hierarchy during any of the periods presented. The following tables set forth the Company’s financial assets carried at fair value categorized using the lowest level of input applicable to each financial instrument as of March 31, 2019 and December 31, 2018 (in thousands):

 

 

 

Balance at

March 31,

2019

 

 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

8,270

 

 

$

8,270

 

 

$

 

 

$

 

Money market funds

 

 

29,130

 

 

 

29,130

 

 

 

 

 

 

 

Restricted cash

 

 

180

 

 

 

180

 

 

 

 

 

 

 

 

 

$

37,580

 

 

$

37,580

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

2,225

 

 

$

 

 

$

 

 

$

2,225

 

 

 

$

2,225

 

 

$

 

 

$

 

 

$

2,225

 

 

 

 

Balance at

December 31,

2018

 

 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

6,868

 

 

$

6,868

 

 

$

 

 

$

 

Money market funds

 

 

43,937

 

 

 

43,937

 

 

 

 

 

 

 

Restricted cash

 

 

180

 

 

 

180

 

 

 

 

 

 

 

 

 

$

50,985

 

 

$

50,985

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

2,142

 

 

$

 

 

$

 

 

$

2,142

 

 

 

$

2,142

 

 

$

 

 

$

 

 

$

2,142

 

 

The Company’s Term Loan Agreement with CRG (Note 6) contains certain provisions that change the underlying cash flows of the instrument, including an interest-only period dependent on the achievement of receiving 510(k) clearance for the marketing of T2Bacteria by the FDA by a certain date (the “Approval Milestone”), which originally was April 30, 2018 , and acceleration of the obligations under the Term Loan Agreement under an event of default. 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. The Company 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.

 

In March 2018, the Term Loan Agreement was amended to extend the Approval Milestone to June 30, 2018, which was achieved in May 2018, to extend the additional $10.0 million funding through September 27, 2018 and reduce the fiscal year 2018 product revenue target to $7.0 million. 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.   The fair value of the derivative at March 31, 2019 and December 31, 2018 is $2.2 million and $2.1 million, respectively. The estimated fair value of the derivative, at both dates, was determined using a probability-weighted discounted cash flow model that includes contingent interest payments under the following scenarios: 4% contingent interest beginning in 2020 (70%) and 4% contingent interest beginning in 2021 (30%). Should the Company’s assessment of these probabilities change, including amendments of certain revenue targets, there could be a change to the fair value of the derivative liability.

 

The following table provides a roll-forward of the fair value of the derivative liability (in thousands):

12


 

 

Balance at December 31, 2018

 

$

2,142

 

 

Change in fair value of derivative liability, recorded as interest expense

 

 

83

 

 

Balance at March 31, 2019

 

$

2,225

 

 

 

 

4. Restricted Cash

The Company is required to maintain a security deposit for its operating lease agreement for the duration of the lease agreement and for its credit cards as long as they are in place. At March 31, 2019 and December 31, 2018, the Company had certificates of deposit for $180,000, which represented collateral as security deposits for its operating lease agreement for its facility and its credit cards.   

5. Supplemental Balance Sheet Information

Inventories

Inventories are stated at the lower of cost or net realizable value on a first-in, first-out basis and are comprised of the following (in thousands):

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Raw materials

 

$

847

 

 

$

639

 

Work-in-process

 

 

1,630

 

 

 

1,713

 

Finished goods

 

 

187

 

 

 

325

 

Total inventories, net

 

$

2,664

 

 

$

2,677

 

 

Property and Equipment

Property and equipment consists of the following (in thousands):

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Office and computer equipment

 

$

409

 

 

$

409

 

Software

 

 

762

 

 

 

751

 

Laboratory equipment

 

 

4,720

 

 

 

4,636

 

Furniture

 

 

200

 

 

 

200

 

Manufacturing equipment

 

 

695

 

 

 

695

 

Manufacturing tooling and molds

 

 

255

 

 

 

255

 

T2-owned instruments and components

 

 

7,048

 

 

 

6,796

 

Leasehold improvements

 

 

3,461

 

 

 

3,437

 

Construction in progress

 

 

1,421

 

 

 

1,443

 

 

 

 

18,971

 

 

 

18,622

 

Less accumulated depreciation and amortization

 

 

(11,843

)

 

 

(11,307

)

Property and equipment, net

 

$

7,128

 

 

$

7,315

 

 

Construction in progress is primarily comprised of equipment that have not been placed in service. T2-owned instruments and components is comprised of raw materials and work-in-process inventory that are expected to be used or used to produce T2-owned instruments, based on our business model and forecast, and completed instruments that will be used for internal research and development, clinical studies or reagent rental agreements with customers. Included within property and equipment, net, are assets under finance leases. At March 31, 2019, there were $0.6 million of raw materials and work-in-process inventory in T2-owned instruments and components compared to $0.3 million at December 31, 2018. Completed T2-owned instruments are placed in service once installation procedures are completed and are depreciated over five years. Depreciation expense for T2-owned instruments placed at customer sites pursuant to reagent rental agreements is recorded as a component of cost of product revenue and totaled approximately $0.2 million for the three months ended March 31, 2019 and 2018. Depreciation expense for T2-owned instruments used for internal research and development and clinical studies is recorded as a component of research and development expense.

13


 

Depreciation and amortization expense of $ 0. 6 million was charged to operations for the three months ended March 31, 2019 and 2018. Total property and equipment, gross, included $3.6 million for property and equipment recorded under finance leases as of Ma rch 31, 2019 and December 31, 2018, respectively. Accumulated depreciation and amortization included $2. 7 million and $ 2 . 6 million for property and equipment recorded under finance leases as of March 31, 2019 and December 31, 2018, respectively.   

Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Accrued payroll and compensation

 

$

2,815

 

 

$

2,940

 

Accrued research and development expenses

 

 

272

 

 

 

359

 

Accrued professional services

 

 

485

 

 

 

576

 

Operating lease liabilities

 

 

1,900

 

 

 

 

Other accrued expenses

 

 

2,312

 

 

 

2,198

 

Total accrued expenses and other current liabilities

 

$

7,784

 

 

$

6,073

 

 

At March 31, 2019 and December 31, 2018, the Company classified $1.6 million and $1.4 million, respectively, related to a fee associated with the Company’s Term Loan Agreement (Note 6), as other accrued expenses in the table above to match the current classification of the associated debt.

 

6. Notes Payable

Future principal payments on the notes payable are as follows (in thousands):

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Term loan agreement, net of deferred issuance costs of $1.6

   million and $1.8 million, respectively

 

$

41,840

 

 

$

41,419

 

Equipment lease credit facility, net of immaterial deferred issuance costs

 

 

610

 

 

 

954

 

Total notes payable

 

 

42,450

 

 

 

42,373

 

Less: current portion of notes payable

 

 

(42,450

)

 

 

(42,373

)

Notes payable, net of current portion

 

$

 

 

$

 

 

The Term Loan Agreement with CRG is classified as a current liability on the balance sheet at March 31, 2019 and December 31, 2018 based on the Company’s consideration of the probability of violating the minimum liquidity covenant included in the Term Loan Agreement.  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. The contractual terms of the agreement require principal payments of $23.2 million and $23.2 million during the years ended December 31, 2021 and 2022, respectively.

Term Loan Agreement

In December 2016, the Company entered into a Term Loan Agreement (the “Term Loan Agreement”) with CRG. The Company initially 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 the Company achieves 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. The Company is required to pay CRG a financing fee based on the loan principal amount drawn. The Company is also required to pay a final payment fee of 8.0% of the principal outstanding upon repayment. The Company is accruing the final payment fee as interest expense and it is included as a current liability at March 31, 2019 and December 31, 2018 on the balance sheet.

The Company 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 its obligations under the Term Loan Agreement the Company entered into a security agreement with

14


 

CRG whereby the Company granted a lien on substantially all of its assets, including intellectual property. The Term Loan Agreement also contains c ustomary affirmative and negative covenants for a credit facility of this size and type , including a requirement to maintain a minimum cash balance . The Term Loan Agreement also requires the Company to achieve certain revenue targets, whereby the Company i s required to pay double the amount of any shortfall as an acceleration of principal payments. 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 f or the amendment, the Company 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 Term Loan Agreement includes a subjective acceleration clause whereby an event o f 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 a n 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. The Company bel ieves the likelihood of CRG exercising this right is remote.   

The Company 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, The Company 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 March 31, 2019 and December 31, 2018 is $2.2 million and $2.1 million, respectively. The Company classified the derivative liability as accrued expenses and other current liabilities on the balance sheet at March 31, 2019 and December 31, 2018 to match the classification of the related Term Loan Agreement.  

In connection with the Term Loan Agreement entered into in December 2016, the Company issued to CRG warrants to purchase a total of 528,958 shares of the Company’s common stock (Note 9).

Equipment Lease Credit Facility

In October 2015, the Company signed a $10.0 million Credit Facility (the “Credit Facility”) with Essex Capital Corporation (the “Lessor”) 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 the Company. The Company 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, the Company has 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, the Company completed the first two draws under the Credit Facility, of $2.1 million and $2.5 million, respectively. The Company will make monthly payments of $67,000 under the first draw and $79,000 under the second draw. The borrowings under the Credit Facility are 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.

7. Stockholders’ Equity

Public Offering

On June 4, 2018, the Company sold 7,015,000 shares of its common stock in a public offering at $7.50 per share, for an aggregate gross cash purchase price of $52.6 million, resulting in net proceeds of $49.2 million after underwriters discount and expenses.

 

 

8. Stock-Based Compensation

Stock Incentive Plans

2006 Stock Incentive Plan

The Company’s 2006 Stock Option Plan (“2006 Plan”) was established for granting stock incentive awards to directors, officers, employees and consultants of the Company. Upon closing of the Company’s IPO in August 2014, the Company ceased granting stock

15


 

incentive awards under the 2006 Plan. T he 2006 Plan provided for the grant of incentive and non-qualified stock options and restricted stock grants as determined by the Company’s board of directors. Under the 2006 Plan, stock options were generally granted with exercise prices equal to or great er than the fair value of the common stock as determined by the board of directors, expired no later than 10 years from the date of grant, and vest over various periods not exceeding 4 years.

2014 Stock Incentive Plan

The Company’s 2014 Incentive Award Plan (“2014 Plan”, and together with the 2006 Plan, the “Stock Incentive Plans”), provides for the issuance of shares of common stock in the form of stock options, awards of restricted stock, awards of restricted stock units, performance awards, dividend equivalent awards, stock payment awards and stock appreciation rights to directors, officers, employees and consultants of the Company. Since the establishment of the 2014 Plan, the Company has primarily granted stock options and restricted stock units. Generally, stock options are granted with exercise prices equal to or greater than the fair value of the common stock on the date of grant, expire no later than 10 years from the date of grant, and vest over various periods not exceeding 4 years.

The number of shares reserved for future issuance under the 2014 Plan is the sum of (1) 823,529 shares, (2) any shares that were granted under the 2006 Plan which are forfeited, lapsed unexercised or are settled in cash subsequent to the effective date of the 2014 Plan and (3) an annual increase on the first day of each calendar year beginning January 1, 2015 and ending on January 1, 2024, equal to the lesser of (A) 4% of the shares outstanding (on an as-converted basis) on the final day of the immediately preceding calendar year, and (B) such smaller number of shares determined by the Company’s Board of Directors. As of March 31, 2019, there were 1,250,943 shares available for future grant under the Stock Incentive Plans.

Inducement Award Plan

The Company’s Amended and Restated Inducement Award Plan (“Inducement Plan”), which was adopted in March 2018 and amended and restated in February 2019, provides for the granting of equity awards to new employees, which includes options, restricted stock awards, restricted stock units, performance awards, dividend equivalent awards, stock payment awards and stock appreciation rights. The aggregate number of shares of common stock which may be issued or transferred pursuant to awards under the Inducement Plan is 1,625,000 shares. Any awards that forfeit, expire, lapse, or are settled for cash without the delivery of shares to the holder are available for the grant of an award under the Inducement Plan. Any shares repurchased by or surrendered to the Company that are returned shall be available for grant of an award under the Inducement Plan. The payment of dividend equivalents in cash in conjunction with any outstanding Award shall not be counted against the shares available for issuance under the Inducement Plan. As of March 31, 2019, there were 1,009,750 shares available for future grant under the Inducement Plan.  

Stock Options

During the three months ended March 31, 2019 and 2018, the Company granted stock options with an aggregate fair value of $2.0 million and $4.4 million, respectively, which are being amortized into compensation expense over the vesting period of the options as the services are being provided.

The following is a summary of option activity under the Stock Incentive Plans and Inducement Plan (in thousands, except share and per share amounts):

 

 

 

Number of

Shares

 

 

Weighted-Average

Exercise Price Per

Share

 

 

Weighted-Average

Remaining

Contractual Term

(In years)

 

 

Aggregate Intrinsic

Value

 

Outstanding at December 31, 2018

 

 

4,241,833

 

 

$

6.98

 

 

 

7.02

 

 

$

471

 

Granted

 

 

908,250

 

 

 

3.42

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(47,394

)

 

 

6.84

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(10,219

)

 

 

9.02

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2019

 

 

5,092,470

 

 

 

6.34

 

 

 

7.29

 

 

 

260

 

Exercisable at March 31, 2019

 

 

2,672,591

 

 

 

7.67

 

 

 

5.58

 

 

 

260

 

Vested or expected to vest at March 31, 2019

 

 

4,520,320

 

 

 

6.56

 

 

 

7.03

 

 

 

260

 

 

16


 

The weighted-average grant date fair values of stock options granted in the three month periods ended March 31, 2019 and 2018 were $ 2 . 20 per share and $ 3 . 41 per share, respectively, and were calculated using the following estimated assumptions:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Weighted-average risk-free interest rate

 

 

2.52

%

 

 

2.63

%

Expected dividend yield

 

 

%

 

 

%

Expected volatility

 

 

71

%

 

 

68

%

Expected terms

 

6.0 years

 

 

6.0 years

 

 

The total fair values of options that vested during the three months ended March 31, 2019 and 2018 were $1.0 million and $0.8 million, respectively.

As of March 31, 2019, there was $7.1 million of total unrecognized compensation cost related to non-vested stock options granted under the Stock Incentive Plans and Inducement Plan. Total unrecognized compensation cost will be adjusted for future changes in the estimated forfeiture rate. The Company expects to recognize that cost over a remaining weighted-average period of 3.0 years as of March 31, 2019.

Restricted Stock Units

During the three months ended March 31, 2019, the Company awarded shares of restricted stock units to certain employees and directors at no cost to them, which cannot be sold, assigned, transferred or pledged during the restriction period. The restricted stock and restricted stock units, excluding any restricted stock units with market conditions, vest through the passage of time, assuming continued employment. Restricted stock units are not included in issued and outstanding common stock until the shares are vested and released. During the year ended December 31, 2017, 78,172 restricted stock units vested but were not reflected as outstanding shares until the three months ended March 31, 2019 due to a deferred release date. During the year ended December 31, 2018, 73,172 restricted stock units vested but are not reflected as outstanding shares at March 31, 2019 or December 31, 2018 due to a deferred release date. The fair value of the award at the time of the grant is expensed on a straight line basis. The granted restricted stock units had an aggregate fair value of $1.9 million, which are being amortized into compensation expense over the vesting period of the restricted stock units as the services are being provided.

Included in the nonvested restricted stock units at March 31, 2019 are 898,633 restricted stock units with market conditions, which vest upon the achievement of stock price targets. The compensation cost for restricted stock units with market conditions is being recorded over the derived service period and was $0.7 million and $0.2 million for the three months ended March 31, 2019 and 2018, respectively.

The following is a summary of restricted stock unit activity under the 2014 Plan (in thousands, except share and per share amounts):

 

 

 

Number of

Shares

 

 

Weighted-Average

Grant Date Fair

Value

 

Nonvested at December 31, 2018

 

 

1,198,634

 

 

 

5.04

 

Granted

 

 

589,142

 

 

 

3.23

 

Vested

 

 

(85,629

)

 

 

5.21

 

Forfeited

 

 

(46,099

)

 

 

4.73

 

Cancelled

 

 

 

 

 

 

Nonvested at March 31, 2019

 

 

1,656,048

 

 

 

4.40

 

 

As of March 31, 2019, there was $3.0 million of total unrecognized compensation cost related to nonvested restricted stock units granted under the 2014 Plan. Total unrecognized compensation cost will be adjusted for future changes in the estimated forfeiture rate. The Company expects to recognize that cost over a remaining weighted-average period of 1.9 years, as of March 31, 2019.

17


 

Stock-Based Compensation Expense

The following table summarizes the stock-based compensation expense resulting from awards granted under Stock Incentive Plans, including the 2014 ESPP, that was recorded in the Company’s results of operations for the periods presented (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Cost of product revenue

 

$

50

 

 

$

22

 

Research and development

 

 

364

 

 

 

369

 

Selling, general and administrative

 

 

1,506

 

 

 

966

 

Total stock-based compensation expense

 

$

1,920

 

 

$

1,357

 

 

For the three months ended March 31, 2019 and 2018, $0.1 million and $0.0 million of stock-based compensation expenses were capitalized as part of inventory or T2Dx instruments and components, respectively.   

9. Warrants

In connection with the Term Loan Agreement entered into in December 2016, the Company issued to CRG warrants to purchase a total of 528,958 shares of the Company’s common stock. The warrants are exercisable any time prior to December 30, 2026 at a price of $4.35 per share, which was amended in March 2019 from an original price of $8.06 per share, with typical provisions for termination upon a change of control or a sale of all or substantially all of the assets of the Company. The warrants are classified within shareholders’ equity, and the proceeds were allocated between the debt and warrants based on their relative fair value. The fair value of the warrants was determined by the Black-Scholes-Merton option pricing model. The fair value of the amended warrants was $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.

10. Net Loss Per Share

The following shares were excluded from the calculation of diluted net loss per share applicable to common stockholders, prior to the application of the treasury stock method, because their effect would have been anti-dilutive for the periods presented:

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Options to purchase common shares

 

 

5,092,470

 

 

 

4,542,082

 

Restricted stock units

 

 

1,656,048

 

 

 

1,714,463

 

Warrants to purchase common stock

 

 

528,958

 

 

 

528,958

 

Total

 

 

7,277,476

 

 

 

6,785,503

 

 

11. Co-Development Agreements

Canon US Life Sciences

On February 3, 2015, the Company entered into a Co-Development Partnership Agreement (the “Co-Development Agreement”) with Canon U.S. Life Sciences, Inc. (“Canon US Life Sciences”) to develop a diagnostic test panel to rapidly detect Lyme disease. On September 21, 2016, Canon became a related party when the Company sold the Canon Shares for an aggregate cash purchase price of $39.7 million, which represented 19.9% of the outstanding shares of common stock of the Company.

Under the Co-Development Agreement, the Company recorded revenue of $0.1 million for the three months ended March 31, 2019 and did not record any revenue for the three months ended March 31, 2018. The Company expects to record revenue over the next ten months.

Allergan Sales, LLC

On November 1, 2016, the Company entered into a Co-Development, Collaboration and Co-Marketing Agreement (the “Allergan Agreement”) with Allergan Sales, LLC (“Allergan Sales”) to develop (1) a direct detection diagnostic test panel that adds one additional bacteria species to the existing T2Bacteria product candidate (the “T2Bacteria II Panel”), and (2) a direct detection diagnostic test panel for testing drug resistance directly in whole blood (the “T2GNR Panel” and, together with the T2Bacteria II

18


 

Panel, the “Developed Products”). In addition, both the Company and Allergan Sales will participate in a joint research and development committee and Allergan Sales will receive the right to cooperatively market T2Candida, T2Bacteria, and the Developed Products u nder the Allergan Agreement to certain agreed-upon customers. The Company achieved the final developmental milestone under the Allergan Agreement in October 2018.

The Company did not record any revenue for the three months ended March 31, 2019 and recorded revenue of $1.3 million for the three months ended March 31, 2018 under the Allergan Agreement.

CARB-X

In March 2018, the Company was awarded a grant of up to $2.0 million from CARB-X. The collaboration with CARB-X will be used to accelerate the development of new tests to identify bacterial pathogens and resistance markers directly in whole blood more rapidly than is possible using today’s diagnostic tools. The new tests aim to expand the T2Dx instrument product line by detecting 20 additional bacterial species and resistance targets, with a focus on blood borne pathogens on the United States Centers for Disease Control and Prevention (“CDC”) antibiotic resistance threat list.

Under this cost-sharing agreement, the Company may be reimbursed up to $1.1 million, with the possibility of up to an additional $0.9 million based on the achievement of certain project milestones. In January 2019, the Company was awarded the $0.9 million reimbursement option.

The Company recorded contribution revenue of $0.3 million for the three months ended March 31, 2019 under the CARB-X Agreement. The Company did not record any revenue for the three months ended March 31, 2018 under the CARB-X Agreement. The Company expects to record revenue over the next six months, based upon cost-sharing and the achievement of certain project milestones.

 

 

12. Leases

Operating Leases

The Company leases certain office space, laboratory space, and equipment. At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. The Company does not recognize right-of-use assets or lease liabilities for leases determined to have a term of 12 months or less. For new and amended leases beginning in 2019 and after, the Company has elected to account for the lease and non-lease components as a combined lease component.

In August 2010, the Company entered into an operating lease for office and laboratory space at its headquarters in Lexington, Massachusetts. The lease commenced in January 2011, with the Company providing a security deposit of $400,000. In accordance with the operating lease agreement, the Company reduced its security deposit to $180,000 in January 2018, which is recorded as restricted cash in the consolidated balance sheets. In March 2017, the Company entered into an amendment to extend the term to December 2021.

In May 2013, the Company entered into an operating lease for additional office, laboratory and manufacturing space in Wilmington, Massachusetts. In August 2018, the Company entered into an amendment to extend the term to December 2020.

In November 2014, the Company entered into an agreement to rent additional office space in Lexington, Massachusetts. In April 2015, the Company entered into an amendment to extend the term to December 31, 2017. In connection with this agreement, the Company paid a security deposit of $50,000, which is recorded as a component of other assets in the consolidated balance sheets. In May 2015, the Company entered into an amendment to expand existing manufacturing facilities in Lexington, Massachusetts. In September 2017, the Company entered into an amendment to extend the term to December 31, 2021.

In November 2014, the Company entered into a lease for additional laboratory space in Lexington, Massachusetts. The lease term commenced in April 2015 and extended for six years. The rent expense, inclusive of the escalating rent payments, is recognized on a straight-line basis over the lease term. As an incentive to enter into the lease, the landlord paid approximately $1.4 million of the $2.2 million space build-out costs. Prior to the adoption of ASC 842, the incentive was recorded as a component of lease incentives on the consolidated balance sheets and was amortized as a reduction in rent expense on a straight-line basis over the term of the lease. Upon adoption of the new standard the unamortized balance of the lease incentive as of January 1, 2019 was reclassed as a reduction to the initial recognition of the right-of-use asset related to this lease. In connection with this lease agreement, the Company paid a

19


 

secu rity deposit of $281,000, which is recorded as a component of both prepaid expenses and other current assets and other assets in the consolidated balance sheets.

Operating leases are amortized over the lease term and included in costs and expenses in the condensed consolidated statement of operations and comprehensive loss. Variable lease costs are recognized in costs and expenses in the condensed consolidated statement of operations and comprehensive loss as incurred.

Finance Leases

In October 2015, the Company signed a $10.0 million Credit Facility (the “Credit Facility”) to fund capital equipment needs. As one of the conditions of the agreement, the Credit Facility is capped at a maximum of $5.0 million. Under the Credit Facility, the lender will fund capital equipment purchases presented by the Company. The Company 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, the Company has 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, the Company completed the first two draws under the Credit Facility of $2.1 million and $2.5 million, respectively. The Company will make monthly payments of $67,000 under the first draw and $79,000 under the second draw. The borrowings under the Credit Facility are 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.

The following table summarizes the effect of operating and finance lease costs in the Company’s condensed consolidated statement of operations and comprehensive loss (in thousands):

 

Lease cost

 

Three months ended

March 31, 2019

 

Finance lease cost:

 

 

 

 

Amortization of right-of-use assets

 

$

116

 

Interest on lease liabilities

 

 

27

 

Operating lease cost

 

 

499

 

Variable lease cost

 

 

172

 

Total lease cost

 

$

814

 

 

The following table summarizes supplemental information for the Company’s finance and operating leases:

 

Other information

 

Three months ended

March 31, 2019

 

Weighted-average remaining lease term - finance leases (in years)

 

 

0.2

 

Weighted-average remaining lease term - operating leases (in years)

 

 

2.6

 

Weighted-average discount rate - finance leases

 

 

14.5

%

Weighted-average discount rate - operating leases

 

 

11.9

%

 

The minimum lease payments for the next five years and thereafter is expected to be as follows (in thousands):

 

 

 

March 31, 2019

 

Maturity of lease liabilities

 

Operating Leases

 

 

Finance Leases

 

2019 (excluding the 3 months ended March 31, 2019)

 

$

1,697

 

 

$

618

 

2020

 

 

2,313

 

 

 

 

2021

 

 

1,951

 

 

 

 

2022

 

 

23

 

 

 

 

2023

 

 

 

 

 

 

Thereafter

 

 

 

 

 

 

Total lease payments

 

$

5,984

 

 

$

618

 

Less: effect of discounting

 

 

(825

)

 

 

(9

)

Present value of lease liabilities

 

$

5,159

 

 

$

609

 

 

20


 

The following table summarizes the presentation of the Company’s operating leases in its condensed consolidated balance sheets (in thousands):

 

 

Leases

 

Classification

 

March 31, 2019

 

Assets

 

 

 

 

 

 

Operating lease assets

 

Operating lease assets

 

$

4,463

 

Finance lease assets

 

Property and equipment, net

 

 

879

 

Total lease assets

 

 

 

$

5,342

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Current

 

 

 

 

 

 

Operating

 

Accrued expenses and other current liabilities

 

$

1,900

 

Finance

 

Notes payable

 

 

609

 

Noncurrent

 

 

 

 

 

 

Operating

 

Noncurrent operating lease liabilities

 

 

3,259

 

Finance

 

Notes payable, net of current portion

 

 

 

Total lease liabilities

 

 

 

$

5,768

 

 

Under ASC 840, future minimum non-cancelable lease payments under the Company’s operating leases as of December 31, 2018 were as follows (in thousands):

 

Year ended December 31,

 

 

 

 

2019

 

$

2,225

 

2020

 

 

2,277

 

2021

 

 

1,926

 

 

 

$

6,428

 

 

Under ASC 840, rent expense for the years ended December 31, 2018, and 2017 was $2.0 million, and $1.9 million, respectively.

 

13. Commitments and Contingencies

Leases

Refer to Note 12, Leases, for discussion of the commitments associated with the Company’s leases.

License Agreement

In 2006, the Company entered into a license agreement with a third party, pursuant to which the third party granted the Company an exclusive, worldwide, sublicenseable license under certain patent rights to make, use, import and commercialize products and processes for diagnostic, industrial and research and development purposes. The Company agreed to pay an annual license fee ranging from $5,000 to $25,000 for the royalty‑bearing license to certain patents. The Company also issued a total of 84,678 shares of common stock pursuant to the agreement in 2006 and 2007, which were recorded at fair value at the date of issuance. The Company is required to pay royalties on net sales of products and processes that are covered by patent rights licensed under the agreement at a percentage ranging between 0.5% - 3.5%, subject to reductions and offsets in certain circumstances, as well as a royalty on net sales of products that the Company sublicenses at 10% of specified gross revenue. Royalties for the three months ended March 31, 2019 and 2018 were immaterial.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

21


 

statements regarding our future results of operations and financial position, business strategy, prospective pro ducts and product candidates, their expected performance and impact on healthcare costs, marketing clearanc e from the FDA , reimbursement for our product candidates, research and development costs, timing of regulatory filings, timing and likelihood of succ ess, 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;

 

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).

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

22


 

various factors, including those set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended De cember 31, 201 8 , 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 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 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 below) 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 T2Carba Resistance+ 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 T2Carba Resistance+ Panel received FDA Breakthrough Device designation in February 2019 and we believe this designation will speed our clinical trial timeliness. Two additional diagnostic applications in development are called T2Resistance and T2Lyme, which are focused on antibiotic resistant bacterial sepsis infections and Lyme disease, respectively. Diagnostic applications for additional bacteria species and resistance markers are in development 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. 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 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

23


 

have a bact erial 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 March 31, 2019 was $332.3 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 March 31, 2019 will be sufficient to allow us to fund our current operating plan through May 2020. However, because certain elements of our operating plan are outside of our control, including receipt of certain development and regulatory milestone payments under our Co-Development agreements, 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.

Our Commercial Products and the Unmet Clinical Need

Our FDA-cleared products, the T2Dx instrument, T2Candida, and T2Bacteria utilize T2MR to detect species-specific Candida and sepsis-causing bacteria, respectively, 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

24


 

care and elderly patients, sepsis is a severe inflammatory response to a bacterial or fungal infection with a mortality rate of approximately 30%. Accordin g 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 5% 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 typi cally 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 admini stration 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 sprea d 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 surv ival 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, 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. 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.

Data from our pivotal clinical trial for T2Bacteria 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

25


 

neonatal patients showing an 89% concordance between blood culture and T2MR . Data were also presented on the new T2Carba Resistance+ RUO Panel 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 fro m patients with bloodstream infections. The clinical data shows that T2MR results for resistance markers ca n be available on average 25 hours faster than conventional methods and the T2Carba Resistance Panel has a positive predictive agreement with convent ional methods greater than 95% .   

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, 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 agency. 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.

26


 

A study presented at ASM Microbe 2018 found tha t 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.”

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 6 th  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.

Our T2Direct Diagnostics

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

27


 

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 th at 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 co mmonly 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 T2Direct Diagnostics 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

28


 

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 believe T2MR is the first technology with the ability to detect directly from a clinical sample of whole blood, plasma, serum, saliva, sputum 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.

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 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 840), 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.

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:

29


 

 

recurring revenue from our consumable diagnostic tests will increase and become subject to less 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.

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,

30


 

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 est imates 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.

Results of Operations for the Three Months Ended March 31, 2019 and 2018

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

2019

 

 

2018

 

 

Change

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

1,314

 

 

$

1,048

 

 

$

266

 

Research revenue

 

 

142

 

 

 

1,263

 

 

 

(1,121

)

Contribution revenue

 

 

329

 

 

 

 

 

 

329

 

Total revenue

 

 

1,785

 

 

 

2,311

 

 

 

(526

)

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenue

 

 

4,388

 

 

 

3,273

 

 

 

1,115

 

Research and development

 

 

3,901

 

 

 

4,718

 

 

 

(817

)

Selling, general and administrative

 

 

7,055

 

 

 

5,755

 

 

 

1,300

 

Total costs and expenses

 

 

15,344

 

 

 

13,746

 

 

 

1,598

 

Loss from operations

 

 

(13,559

)

 

 

(11,435

)

 

 

(2,124

)

Interest expense, net

 

 

(1,782

)

 

 

(1,568

)

 

 

(214

)

Other income, net

 

 

194

 

 

 

90

 

 

 

104

 

Net loss

 

$

(15,147

)

 

$

(12,913

)

 

$

(2,234

)

Product revenue

Product revenue was $1.3 million for the three months ended March 31, 2019 compared to $1.0 million for the three months ended March 31, 2018, an increase of $0.3 million.  The increase was driven by higher T2Dx instrument sales of $0.3 million.

Research revenue

Research revenue was $0.1 million for the three months ended March 31, 2019, compared to $1.3 million for the three months ended March 31, 2018, a decrease of $1.1 million.  The decrease was the result of $1.3 million less of revenue recognized related to our Co-Development Agreement with Allergan Sales, which completed in October 2018, offset slightly by an increase of $0.1 million from services delivered from our Co-Development Agreement with Canon US Life Sciences, and an increase of $0.1 million under other research and development agreements.

Contribution revenue

Contribution revenue was $0.3 million for the three months ended March 31, 2019. No contribution revenue was recognized for the three months ended March 31, 2018.  The increase of $0.3 million is due to our cost-sharing agreement with CARB-X, which was executed in March 2018.

Cost of product revenue

Cost of product revenue was $4.4 million for the three months ended March 31, 2019, compared to $3.3 million for the three months ended March 31, 2018, an increase of $1.1 million. The increase in cost was driven by an increase of $0.5 million due to

31


 

higher T2Dx instrument sales , $0.3 million from changes in inventory reserves , and $0. 3 million from service related activity due to an increased customer base.

Research and development expenses

Research and development expenses were $3.9 million for the three months ended March 31, 2019, compared to $4.7 million for the three months ended March 31, 2018, a decrease of $0.8 million. Research and development expenses decreased by $0.9 million related to FDA clearance of T2Bacteria, at which time, we are able to capitalize T2Bacteria costs in inventory. Clinical and preclinical expenses decreased by $0.1 million due to less T2Bacteria from completion of the trial. Outside services decreased by $0.1 million, as a result of less T2 Lyme consulting services. The decreases in research and development expenses were partially offset by a $0.1 million increase in facilities and related costs which include higher depreciation and amortization, lab-related, and project expenses. Decreases in research and development expenses were further offset by a $0.2 million increase in payroll related expenses, primarily due to stock compensation expense associated with restricted stock units with market conditions.         

Selling, general and administrative expenses

Selling, general and administrative expenses were $7.1 million for the three months ended March 31, 2019, compared to $5.8 million for the three months ended March 31, 2018, an increase of $1.3 million. The increase was attributed to increased payroll expenses of $0.7 million primarily due to expansion of the sales and medical affairs personnel, increased stock compensation expense of $0.5 million primarily associated with restricted stock units with market conditions, and increased travel expenses of $0.2 million associated with the increased headcount. These increases were partially offset by a decrease in professional fees of $0.1 million.  

Interest expense, net

Interest expense, net, was $1.8 million for the three months ended March 31, 2019, compared to $1.6 million for the three months ended March 31, 2018, an increase of $0.2 million. 

Other income, net

Other income, net, was $0.2 million   for the three months ended March 31, 2019 and $0.1 million for the three months ended March 31, 2018, an increase of $0.1 million. 

Liquidity and Capital Resources

We have incurred losses and cumulative negative cash flows from operations since our inception, and as of March 31, 2019, and December 31, 2018 we had an accumulated deficit of $332.3 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, private placements of redeemable convertible preferred stock and debt financing arrangements.

Plan of operations and future funding requirements

As of March 31, 2019 and December 31, 2018 we had unrestricted cash and cash equivalents of approximately $37.4 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

32


 

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 fav orable to us .

Going Concern

Our ability to continue operations after March 31, 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 March 31, 2019, will be sufficient to allow us to fund our current operating plan through May 2020. 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 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:

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Net cash used in:

 

 

 

 

 

 

 

 

Operating activities

 

$

(12,867

)

 

$

(11,742

)

Investing activities

 

 

(194

)

 

 

(56

)

Financing activities

 

 

(344

)

 

 

(348

)

Net decrease in cash, cash equivalents and restricted cash

 

$

(13,405

)

 

$

(12,146

)

 

Net cash used in operating activities

Net cash used in operating activities was approximately $12.9 million for the three months ended March 31, 2019, and consisted of a net loss of $15.1 million adjusted for non-cash items including stock-based compensation expense of $2.0 million, depreciation and amortization expense of $0.6 million, non-cash interest expense of $0.6 million, amortization of operating lease right-of-use assets of $0.3 million, a change in the fair value of the derivative instrument of $0.1 million, partially offset by a net change in operating assets and liabilities of $1.4 million, primarily related to an increase in prepaid expenses and other assets of $0.4 million primarily due to expected landlord reimbursements, an increase in inventories of $0.2 million, a decrease in operating lease liabilities of $0.7 million, and a decrease in deferred revenue of $0.1 million.

Net cash used in operating activities was approximately $11.7 million for the three months ended March 31, 2018, and consisted of a net loss of $12.9 million adjusted for non-cash items including stock-based compensation expense of $1.4 million, depreciation and amortization expense of $0.6 million, non-cash interest expense of $0.6 million, partially offset by deferred rent of $0.1 million, a change in the fair value of the derivative instrument of $0.1 million and a net change in operating assets and liabilities of $1.2 million, primarily related to a decrease in accrued expenses and accounts payable of $0.5 million, a decrease in deferred revenue of $0.7 million, a decrease in inventory of $0.1 million, and a decrease in prepaid expenses and other assets of $0.1 million, partially offset by an increase in accounts receivable of $0.2 million.  

Net cash used in investing activities

Net cash used in investing activities was approximately $0.2 million for the three months ended March 31, 2019, and consisted of costs to acquire property and equipment.

33


 

Net cash used in investing activities was approximately $0.1 million for the three months end ed March 31, 2018, and consisted of costs to acquire property and equipment.  

Net cash used in financing activities

Net cash used in financing activities was approximately $0.3 million for the three months ended March 31, 2019, and consisted of repayments of notes payable.

Net cash used in financing activities was approximately $0.3 million for the three months ended March 31, 2018, and consisted of repayments of notes payable.  

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 and could borrow up to an additional $10.0 million at any time through and including July 27, 2018, provided that, among other conditions, we receive 510(k) clearance for the marketing of T2Bacteria by the FDA by a certain date (the “Approval Milestone”), which originally was April 30, 2018. The Term Loan Agreement has a six-year term with three years (through December 30, 2019) of interest-only payments, which period shall be extended to four years (through December 30, 2020) if we achieve the Approval Milestone, 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 (a) prior to the Approval Milestone, 12.5%, 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, 11.5%, 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. The Company is accruing the final payment fee as interest expense and it is included as a current liability at December 31, 2018 and 2017 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.  On December 18, 2017, the Term Loan Agreement was amended and the 2017 minimum revenue target was reduced to $3.0 million from $5.0 million.  In March 2018, the Term Loan Agreement was amended to extend the Original Approval Milestone Date to June 30, 2018, extend the additional $10.0 million funding through September 27, 2018 and reduce the fiscal year 2018 product revenue target to $7.0 million. In May 2018, we achieved the Approval Milestone by obtaining market clearance from the FDA for T2Bacteria. 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 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.

34


 

The fair value of the derivative at March 31, 2019 December 31, 2018 is $2.2 million and $2.1 million , respectively . We classified the derivative liability as accrued expenses and other current liabilities on the balance sheet at March 31, 2019 and December 31, 2018 to match the classification of the related Term Loan Agreement.

In December 2016, pursuant to the Term Loan Agreement, we made an initial draw of $39.2 million, net of financing fees. We used approximately $28.0 million of the initial proceeds to repay approximately $28.0 million of outstanding debt. Upon the repayment of all amounts owed by us related to debt outstanding prior to the Term Loan Agreement, all commitments related to prior debt terminated and all security interests granted by us were released.

In connection with the Term Loan Agreement entered into in December 2016, we issued to CRG four separate warrants to purchase a total of 528,958 shares of common stock. The warrants are exercisable any time prior to December 30, 2026 at a price of $4.35 per share, with typical provisions for termination upon a change of control or sale of all or substantially all of our assets.  The strike price was reduced, by a March 2019 amendment, from an original strike price of $8.06 per share. The warrants are classified within shareholders’ equity, and the proceeds were allocated between the debt and warrants based on their relative fair value. The fair value of the warrants was determined by the Black Scholes Merton option pricing model. The fair value of the amended warrants was $0.9 million. The incremental fair value of the modified instrument of $0.1 million was recorded as additional debt discount and additional paid-in-capital.

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 will make monthly payments of $67,000 under the first draw and $79,000 under the second draw. The borrowings under the Credit Facility are 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.

Contractual Obligations and Commitments

There were no 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk related to changes in interest rates. As of March 31, 2019 and December 31, 2018, we had cash and cash equivalents of $37.4 million and $50.8 million, respectively, held primarily in money market funds consisting of U.S. government agency securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term securities. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate one percent change in interest rates would not have a material effect on the fair market value of our portfolio.  As of March 31, 2019 and December 31, 2018, we had no outstanding debt exposed to variable market interest rates.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and

35


 

15d-15(e) of the Securities Exchange Act of 1934, as amended) as of March 31, 2019. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it file s or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropr iate, to allow timely decisions regarding disclosure. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2019.

(b) Changes in Internal Control over Financial Reporting

There have been no changes to the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

36


 

PART  II.

OTHER INFORMATION

Item 1. Legal Proceedings

We may be from time to time subject to various claims and legal actions during the ordinary course of our business. There are currently no claims or legal actions, individually or in the aggregate, that would have a material adverse effect on our results of operations or financial condition.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 2. Unr egistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None

 

37


 

Item 6. Exhibits, Financ ial Statement Schedules

 

Exhibit Number  

 

Exhibit Description

 

 

 

    3.1

 

Restated Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K (File No. 001-36571) filed on August 12, 2014)

 

 

 

    3.2

 

Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K (File No. 001-36571) filed on August 12, 2014)

 

 

 

   10.1*

 

GE Catalog Supply Agreement – OEM Retail, dated March 15, 2019, by and between the Company and GE Healthcare Bio-Sciences Corp.

 

 

 

   10.2*

 

Non-Employee Director Compensation Program, effective as of February 21, 2019

 

 

 

   31.1*

 

Certification of principle executive officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

   31.2*

 

Certification of principal financial officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

   32.1**

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

  32.2**

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

  101.1*

 

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted in XBRL: (i) Condensed Consolidated Balance Sheets (unaudited), (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited), (iii) Condensed Consolidated Statements of Cash Flows (unaudited), and (v) Notes of Condensed Consolidated Financial Statements.

*

Filed herewith

       Portions of this exhibit (indicated by asterisks) have been omitted pursuant to Regulation S-K, Item 601(b)(10). Such omitted information is not material and would likely cause competitive harm to the registrant if publicly disclosed.

**

Furnished herewith

 

38


 

SIGNAT URES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

T2 BIOSYSTEMS, INC.

 

 

 

 

Date: May 10, 2019

 

By:

/s/ JOHN MCDONOUGH

 

 

 

John McDonough

 

 

 

President, Chief Executive Officer and Director

 

 

 

(principal executive officer)

 

 

 

 

Date: May 10, 2019

 

By:

/s/ JOHN SPRAGUE

 

 

 

John Sprague

 

 

 

Chief Financial Officer

 

 

 

(principal financial and accounting officer)

 

39

T2 Biosystems (NASDAQ:TTOO)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more T2 Biosystems Charts.
T2 Biosystems (NASDAQ:TTOO)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more T2 Biosystems Charts.