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 September 30, 2016 and December 31, 2015, 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.
Revenue Recognition
The Company generates revenue from product sales, which includes the sale of T2Dx, consumable diagnostic tests and related services, and research and development agreements with third parties. The Company recognizes revenue in accordance with FASB ASC Topic 605, Revenue Recognition (“ASC 605”). Accordingly, the Company recognizes revenue when all of the following criteria have been met:
i.
Persuasive evidence of an arrangement exists
ii.
Delivery has occurred or services have been rendered
iii.
The seller’s price to the buyer is fixed or determinable
iv.
Collectability is reasonably assured
If any of the above criteria have not been met, the Company defers revenue until such time each of the criteria have been satisfied.
Product revenue is generated by the sale of T2Dx and consumable diagnostic tests. The Company either sells T2Dx to customers, or retains title and places a T2Dx at the customer site pursuant to a reagent rental agreement. When a T2Dx is directly purchased by a customer, the Company recognizes revenue when all applicable revenue recognition criteria are met. When a T2Dx is placed under a reagent rental agreement, the Company’s customers generally agree to long-term agreements, certain of which may include minimum purchase commitments and/or incremental charges on each consumable diagnostic test purchased, which varies based on the monthly volume of test cartridges purchased. Revenue from the sale of consumable diagnostic tests, which includes the incremental charge, is generally recognized upon delivery as a component of product revenue in the Company’s consolidated statements of operations and comprehensive loss.
Direct sales of T2Dx include warranty, maintenance and technical support services for one year following the installation of a purchased T2Dx (“Maintenance Services”). After the completion of the initial Maintenance Services period, customers have the option to renew the Maintenance Services for additional one year periods in exchange for additional consideration. In addition, the Company may provide training to customers. The Company defers revenue from the initial sale of a T2Dx equal to the relative fair value of the one year of Maintenance Services and training and recognizes the amounts ratably over the service delivery period.
Employee Stock Purchase Plan
The Company’s 2014 Employee Stock Purchase Plan (the “2014 ESPP”) provides initially for granting up to 220,588 shares of the Company’s common stock to eligible employees. The 2014 ESPP plan period is semi-annual and allows participants to purchase the Company’s common stock at 85% of the lower of (i) the market value per share of common stock on the first day of the offering period or (ii) the market value per share of the common stock on the purchase date. Each participant can purchase up to a maximum of $25,000 per calendar year in fair market value. In May 2016, participants purchased 40,000 shares of common stock under the 2014 ESPP, resulting in proceeds to the Company of $282,000.
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
|
|
Nine months ended
|
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
Cost of product revenue
|
|
$
|
27
|
|
$
|
—
|
|
$
|
86
|
|
$
|
—
|
|
|
|
Research and development
|
|
|
292
|
|
|
440
|
|
|
902
|
|
|
1,017
|
|
|
|
Selling, general and administrative
|
|
|
779
|
|
|
882
|
|
|
2,572
|
|
|
1,882
|
|
|
|
Total stock-based compensation expense
|
|
$
|
1,098
|
|
$
|
1,322
|
|
$
|
3,560
|
|
$
|
2,899
|
|
|
For the three and nine months ended September 30, 2016, $32,000 and $99,000 of stock-based compensation expenses was capitalized as part of inventory or T2 instruments and components, respectively.
As of September 30, 2016, there was $11.1 million of total unrecognized compensation cost related to unvested stock options granted under the Plans, including the unrecognized compensation expense of stock options with performance conditions deemed probable of vesting. 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 2.7 years as of September 30, 2016.
Stock Purchase Agreement
Private Investment in Public Equity Financing
On September 21, 2016, the Company sold 6,055,341 shares of its common stock (the “Canon Shares”) to Canon U.S.A., Inc. (“Canon”) at $6.56 per share, the closing price on this date, for an aggregate cash purchase price of $39.7 million. On or before March 21, 2017, the Company has agreed to prepare and file with the Securities and Exchange Commission (the “Commission”) a registration statement on Form S-3 for purposes of registering the resale of the Canon Shares, or if the Company is not eligible for the use of Form S-3 at that time, on or before June 21, 2017, the Company has agreed to prepare and file a registration statement on Form S-1, or on an alternative form that permits the resale of the Canon Shares, with the Commission.
7. Net Loss Per Share
Excluded from the calculation of diluted net loss per share applicable to common stockholders were 4,263,094 and 3,470,936 shares, for the three and nine month periods ended September 30, 2016 and 2015, respectively, related to options to purchase common shares. The shares are excluded because their effect would have been anti-dilutive for the periods presented.
8. Co-Development Agreement with 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. Under the terms of the Co-Development Agreement, the Company received an upfront payment of $2.0 million from Canon US Life Sciences, and the agreement includes an additional $6.5 million of
consideration upon achieving certain development and regulatory milestones for total aggregate payments of up to $8.5 million. In October 2015, the Company achieved a specified technical requirement and received $1.5 million related to the achievement of the milestone. The Company is eligible to receive an additional $5.0 million under the arrangement, in two milestone payments of $2.0 million and $3.0 million, related to the achievement of additional development and regulatory milestones. All payments under the Co-Development Agreement are non-refundable once received. The Company will retain exclusive worldwide commercialization rights of any products developed under the Co-Development Agreement, including sales, marketing and distribution and Canon US Life Sciences will not receive any commercial rights and will be entitled to only receive royalty payments on the sales of all products developed under the Co-Development Agreement.
Either party may terminate the Co-Development Agreement upon the occurrence of a material breach by the other party (subject to a cure period).
The Company evaluated the deliverables under the Co-Development Agreement and determined that the Co-Development Agreement included one unit of accounting, the research and development services, as the joint research and development committee deliverable was deemed to be
de minimis
. The Company is recognizing revenue for research and development services as a component of research revenue in the condensed consolidated financial statements as the services are delivered using the proportional performance method of accounting, limited to payments earned. Costs incurred to deliver the services under the Co-Development Agreement are recorded as research and development expense in the condensed consolidated financial statements.
The Company recorded revenue of $370,000 and $469,000 during the three months ended September 30, 2016 and 2015, respectively, and recorded revenue of $1.5 million and $846,000 during the nine months ended September 30, 2016 and 2015, respectively, under the Co-Development Agreement.
9. Related Party Transactions
On September 21, 2016, Canon became a related party when the Company sold the Canon Shares to Canon at $6.56 per share, the closing price on this date, for an aggregate cash purchase price of $39.7 million. As of September 21, 2016, the Canon Shares represented 19.9% of the outstanding shares of common stock of the Company. In connection with the sale of the Canon Shares, the Company agreed to grant Canon certain board designation rights, including the right to initially appoint a Class I director to the Company’s board of directors.
As disclosed in Note 8, on February 3, 2015, the Company entered into a Co-Development Partnership Agreement with Canon US Life Sciences, an affiliate of Canon, to develop a diagnostic test panel to rapidly detect Lyme disease. The Company recorded revenue of $370,000 and $469,000 during the three months ended September 30, 2016 and 2015, respectively, and recorded revenue of $1.5 million and $846,000 during the nine months ended September 30, 2016 and 2015, respectively, under the Co-Development Agreement with Canon US Life Sciences.
10. Subsequent Events
On November 1, 2016, the Company entered into a Co-Development, Collaboration and Co-Marketing Agreement (the “Agreement”) with Allergan Sales, LLC (“Allergan Sales”) to develop (1) a direct detection diagnostic test panel of six bacteria species directly in whole blood (the “T2Bacteria II Panel”) and (2) a direct detection diagnostic test panel of six resistance markers directly in whole blood (the “T2GNR Panel” and, together with the T2Bacteria II Panel, the “Developed Products”). In addition, Allergan Sales will receive the right to co-market the Developed Products under the Agreement.
Under the terms of the Agreement, the Company will receive an upfront payment of $2 million from Allergan Sales and additional milestone payments upon achieving certain developmental milestones for total aggregate payments of up to $4 million. The Company will retain exclusive worldwide commercialization rights of any products developed under the Agreement, including distribution, subject to Allergan Sales’ right to co-market the Developed Products. Allergan Sales, at its election, may co-market the Developed Products worldwide and will receive commission payments on its sales of Developed Products under the Agreement.
Item 2.
Management’s Discussion and Analysi
s 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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy, prospective products and product candidates, their expected performance and impact on healthcare costs, marketing authorization from the U.S. Food and Drug Administration (the “FDA”), regulatory clearance, reimbursement for our product candidates, research and development costs, timing of regulatory filings, timing and likelihood of success, plans and objectives of management for future operations 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 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 of our anticipated sales cycle;
|
|
|
·
|
|
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 authorization from the FDA or regulatory clearance for new product candidates in the United States or any other jurisdiction;
|
|
|
·
|
|
federal, state, and foreign regulatory requirements, including FDA regulation of our product candidates; and
|
|
|
·
|
|
our ability to protect and enforce our intellectual property rights, including our trade secret-protected proprietary rights in T2MR.
|
These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made or to conform these statements to actual results. The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, 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 our T2 Magnetic Resonance platform (“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. Our initial development efforts utilizing T2MR target sepsis and hemostasis, which are areas of significant unmet medical need where existing therapies could be more effective with improved diagnostics. On September 22, 2014, we received market authorization from the FDA for our first two products, the T2Dx Instrument (“T2Dx”), and the T2Candida Panel (“T2Candida”), for the direct detection of
Candida
species in human whole blood specimens and independent of blood culture from patients with symptoms of, or medical conditions predisposing the patient to, invasive fungal infections. We have launched the commercialization of T2Dx and T2Candida in the United States, and we have built and continue to expand a direct sales force that is primarily targeting the top 450 hospitals in the United States that have the highest concentration of patients at risk for
Candida
infections. Our next three diagnostic applications are called T2Bacteria, T2HemoStat, and T2Lyme, which are focused on bacterial sepsis infections, hemostasis, and Lyme disease, respectively. In Q4 2015, we began collecting patient samples for our clinical trial for T2Bacteria. We hope to commercially launch the T2Bacteria Panel in 2017. We expect that existing reimbursement codes will support our T2Bacteria product candidate, and that the anticipated economic savings associated with T2Bacteria and T2Candida will be realized directly by hospitals. We believe our combined initial annual addressable market opportunity for sepsis, hemostasis and Lyme disease is over $3.7 billion in the United States alone, when the market opportunity for T2Candida, T2Bacteria, T2Lyme and our initial hemostasis diagnostic panel is combined. We believe the benefits of our proprietary technology platform, including the ability to rapidly and directly detect a broad range of targets in a wide variety of sample types, will have potential future applications within and outside of the
in vitro
diagnostics market, including the diagnosis of infectious disease, cancer, cardiac and other wellness applications, as well as environmental, food safety, industrial and veterinary applications.
We have never been profitable and have incurred net losses in each year since inception. Our accumulated deficit at September 30, 2016 was $189.1 million. Substantially all 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. Having obtained authorization from the FDA to market T2Dx and T2Candida, we are incurring significant commercialization expenses related to product sales, marketing, manufacturing and distribution. In addition, we expect that our expenses will increase substantially as we continue the research and development of our other product candidates and maintain, expand and protect our intellectual property portfolio. Accordingly, 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 as and when needed would have a negative impact on our financial condition and our ability to develop and commercialize T2Dx, T2Candida and our other product candidates.
Our Commercial Products and the Unmet Clinical Need
Our initial FDA-authorized products, T2Dx and T2Candida, utilize T2MR to detect species-specific
Candida
directly from whole blood in three to five hours versus the one to five days required by blood culture-based diagnostics. This allows the patient to receive the correct treatment in four to six hours versus at least 48 hours for blood culture. The T2Candida runs on T2Dx and provides high sensitivity with a limit of detection as low as 1 CFU/mL, even in the presence of antimicrobial therapy.
Our T2Candida Panel
Our direcT2 pivotal clinical trial was designed to evaluate the sensitivity and specificity of T2Candida on T2Dx. The direcT2 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 T2Dx 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 120 hours with blood culture. The data and other information from the direcT2 pivotal clinical trial was published in January 2015 in Clinical Infectious Diseases.
Sepsis is one of the leading causes of death in the United States, claiming more lives annually than breast cancer, prostate cancer and AIDS combined, and it is the most expensive hospital-treated condition. Most commonly afflicting immunocompromised, critical care and elderly patients, sepsis is a severe inflammatory response to a bacterial or fungal infection with a mortality rate of approximately 30%. One out of approximately every two to three hospital deaths in the United States is attributable to sepsis. According to data published by the U.S. Department of Health and Human Services for 2011, the cost of treating sepsis is over $20 billion in the United States, or 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 typically diagnosed through a series of blood cultures followed by post-blood culture species identification. This method has substantial diagnostic limitations that lead to a delay of up to several days in administration of targeted treatment and the incurrence of unnecessary hospital expense. In addition, the Survey of Physicians’ Perspectives and Knowledge About Diagnostic Tests for Bloodstream Infections in 2015 reported that negative blood culture results are only trusted by 36% of those physicians. Without the ability to rapidly identify pathogens, physicians typically start treatment of at-risk patients with broad-spectrum antibiotics, which can be ineffective and unnecessary and have contributed to the spread of antimicrobial resistance. According to a study published by Critical Care Medicine in 2006, in sepsis patients with documented hypotension, administration of effective antimicrobial therapy within the first hour of detection was associated with a survival rate of 79.9% and, over the ensuing six hours, each hour of delay in initiation of treatment was associated with an average decrease in survival of 7.6%.
We believe our sepsis products 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, leading to the conclusion that more-rapid identification of the causative organism would be highly desirable to facilitate targeted treatment in the critical phase of septic illness. 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 stated that more rapid and accurate diagnostic techniques appear to be needed. Our pivotal clinical trial demonstrated that T2Candida can deliver actionable results as fast as three hours, with an average time to result 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 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. We believe that T2Bacteria will also deliver actionable results within these timeframes because this diagnostic panel operates similarly to T2Candida and is designed to run on the same instrument as T2Candida.
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 the elapsed time from
Candida
infection to positive diagnosis and treatment. According to a study published in Antimicrobial Agents and Chemotherapy,
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. Furthermore, 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 Health 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%. Most recently, 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, T2Candida detected or likely detected 96.4% of the patients (53 cases) compared to detection of 60% of the patients (33 cases) with blood culture.
Additionally, the speed to result of the T2Candida, run on T2Dx, can help reduce the empiric overuse of ineffective, or even unnecessary, antimicrobial therapy. This inappropriate therapy is a driving force behind the spread of antimicrobial-resistant pathogens, which the United States Centers for Disease Control and Prevention recently called “one of our most serious health threats.”
Our T2Dx Instrument
Our FDA-authorized T2Dx 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 T2Dx, which automatically processes the sample and then delivers a diagnostic test result. Test results are displayed on screen or directly through the lab information system.
By utilizing our proprietary T2MR for direct detection, T2Dx 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. T2Dx incorporates a simple user interface and is designed to efficiently process up to seven specimens simultaneously.
Our T2Bacteria Panel
We are also developing T2Bacteria, a multiplex diagnostic panel that detects six major bacterial pathogens associated with sepsis and, in conjunction with T2Candida and standard empiric therapy regimens, will enable the early, appropriate treatment of 95% of sepsis patients. FDA market authorization of T2Bacteria would expand our target market from 450 hospitals to 2,500 hospitals. T2Bacteria, which will also run on T2Dx, is expected to address 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. We expect that T2Bacteria will achieve similar performance capabilities and provide similar benefits as T2Candida, including similar time to results and limits of detection.
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 introduces particles to the sample that are coated with target-specific binding agents. If the target is present, the particles bind to and cluster around it, disrupting the surrounding water molecules and altering the magnetic resonance signal.
Another significant unmet clinical need that we believe can be addressed by T2MR is the timely diagnosis and management of impaired hemostasis, which is a potentially life-threatening condition in which a patient is unable to promote the formation of blood clots to stabilize excessive bleeding. For critical trauma patients with impaired hemostasis, diagnostic results are typically required in fewer than 45 minutes to aid clinicians in making the most effective treatment decisions. The need for rapid diagnosis is not met by current diagnostic methods, which typically involve multiple instruments and can take hours to process a patient specimen. As a result, physicians often make critical decisions for treatment of impaired hemostasis with limited or no diagnostic data. Within the hemostasis market, for trauma alone, there are over ten million patients in the United States annually who present with symptoms of impaired hemostasis. Approximately 80% of these patients are treated in a level 1 or 2 trauma center, 85% of which overlap with the 450 hospitals being targeted for T2Candida.
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 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 using the proportional performance method as the work is completed, limited to payments earned, and the related costs are expensed as incurred as research and development expense.
Product revenue is derived from the sale of our instruments and related consumable diagnostic tests. We recognize product revenue from the sale of our instruments as soon as all applicable revenue recognition criteria have been met. In the majority of cases, we expect to place our instruments, under reagent rental agreements, in hospitals in exchange for long-term agreements, certain of which may include minimum commitments and/or an incremental charge on the purchase of our consumable diagnostic tests. Under this business model, we believe we will recover the cost of placing our instruments in hospitals through the margins realized from our consumable diagnostic tests. Our consumable diagnostic tests can only be used with our instruments, and accordingly, as the installed base of our instruments grows, we expect the following to occur:
•
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.
Revenue from consumables is based on the volume of tests sold and the price of each consumable unit.
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 some of our consumable diagnostic tests in our facilities. We outsource the manufacturing of components of our consumable diagnostic tests to a contract manufacturer.
We expect cost of product revenue to increase and to initially exceed or represent a high percentage of our product revenue as we continue to invest in our manufacturing facilities 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, including 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 expect that our overall research and development expenses may continue to increase in absolute dollars. We have committed, and expect to commit, significant resources toward developing additional product candidates, improving product performance and reliability, 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 that receive marketing authorization or regulatory clearance 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 also anticipate increased expenses related to audit, legal, regulatory and tax-related services associated with being a public company. 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 and the amortization of deferred financing costs, partially offset by interest earned on our cash and cash equivalents.
Other income, net
Other income, net, primarily consists of government grant income.
Critical Accounting Policies and Use of Estimates
We have prepared our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States. Our preparation of these condensed consolidated financial statements requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosures at the date of the condensed consolidated financial statements, as well as revenue and expenses recorded during those periods. We evaluated our estimates and judgments on an ongoing basis. We based our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions.
The items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2015 remain materially consistent. For a description of those critical accounting policies, please refer to our Annual Report on Form 10-K filing for the year ended December 31, 2015.
Results of Operations for the Three Months Ended September 30, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
|
|
|
(in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
580
|
|
$
|
245
|
|
$
|
335
|
|
|
Research revenue
|
|
|
504
|
|
|
804
|
|
|
(300)
|
|
|
Total revenue
|
|
|
1,084
|
|
|
1,049
|
|
|
35
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
1,894
|
|
|
829
|
|
|
1,065
|
|
|
Research and development
|
|
|
5,200
|
|
|
6,204
|
|
|
(1,004)
|
|
|
Selling, general and administrative
|
|
|
5,935
|
|
|
5,181
|
|
|
754
|
|
|
Total costs and expenses
|
|
|
13,029
|
|
|
12,214
|
|
|
815
|
|
|
Loss from operations
|
|
|
(11,945)
|
|
|
(11,165)
|
|
|
(780)
|
|
|
Interest expense, net
|
|
|
(876)
|
|
|
(501)
|
|
|
(375)
|
|
|
Other income, net
|
|
|
38
|
|
|
22
|
|
|
16
|
|
|
Net loss
|
|
$
|
(12,783)
|
|
$
|
(11,644)
|
|
$
|
(1,139)
|
|
Product revenue
Product revenue was $580,000 for the three months ended September 30, 2016, compared to $245,000 for the three months ended September 30, 2015, an increase of $335,000. The increase was the result of an increase in sales volume of our products, primarily the sale of T2Candida consumable diagnostic tests, driven from growth in our installed T2Dx Instrument base.
Research revenue
Research revenue was $504,000 for the three months ended September 30, 2016, compared to $804,000 for the three months ended September 30, 2015, a decrease of $300,000. The decrease was primarily the result of lower revenue from services delivered under our Co-Development Agreement with Canon US Life Sciences, which decreased $99,000 over the prior year period, as well as a decrease in revenue from research and development agreements utilizing T2MR technology with other third parties.
Cost of product revenue
Cost of product revenue was $1.9 million for the three months ended September 30, 2016, compared to $829,000 for the three months ended September 30, 2015, an increase of $1.1 million. The increase was primarily due to increased sales of T2Candida Panels and T2Dx Instruments to customers, as well as an increase of $176,000 in
unabsorbed manufacturing overhead, an increase of $142,000 in depreciation related to T2Dx Instruments placed at customer locations pursuant to reagent rental agreements, and an increase of $132,000 in cost to provide technical support services to customers,.
Research and development expenses
Research and development expenses were $5.2 million for the three months ended September 30, 2016, compared to $6.2 million for the three months ended September 30, 2015, a decrease of $1.0 million. The decrease was driven by $408,000 of lower payroll and related expenses, including $148,000 of decreased stock compensation expense, $321,000 of lower prototype development expenses, as prior year projects did not recur in the current year, $197,000 of lower consulting expenses due to replacing consultants with headcount and lower other research and development expenses of $320,000, which includes lower travel, lab and facilities expenses. Partially offsetting these declines is $242,000 of clinical expenses, associated with the T2Bacteria clinical trial.
Selling, general and administrative expenses
Selling, general and administrative expenses were $5.9 million for the three months ended September 30, 2016, compared to $5.2 million for the three months ended September 30, 2015. The increase of approximately $754,000 was due primarily to increased payroll and related expenses of approximately $492,000, net of $103,000 of decreased stock compensation expense, as we expanded our sales personnel, increased outside services expenditures of $189,000, increased travel expenses of $135,000 related to increased sales personnel, and slight increases to other selling, general and administrative expenses. These expenses were partially offset by a decline of $62,000 in lower marketing program spend and other expenses.
Interest expense, net
Interest expense, net, was $876,000 for the three months ended September 30, 2016, compared to $501,000 for the three months ended September 30, 2015. Interest expense, net, increased by $375,000 due to higher borrowing levels on our notes payable.
Other income, net
Other income, net, was $38,000 of net income for the three months ended September 30, 2016, compared to $22,000 for the three months ended September 30, 2015. Other income, net, increased by $16,000 due to higher income from our money market funds.
Results of Operations for the Nine Months Ended September 30, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
|
|
|
(in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
1,168
|
|
$
|
255
|
|
$
|
913
|
|
|
Research revenue
|
|
|
2,003
|
|
|
1,547
|
|
|
456
|
|
|
Total revenue
|
|
|
3,171
|
|
|
1,802
|
|
|
1,369
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
4,701
|
|
|
832
|
|
|
3,869
|
|
|
Research and development
|
|
|
18,160
|
|
|
18,724
|
|
|
(564)
|
|
|
Selling, general and administrative
|
|
|
18,282
|
|
|
14,086
|
|
|
4,196
|
|
|
Total costs and expenses
|
|
|
41,143
|
|
|
33,642
|
|
|
7,501
|
|
|
Loss from operations
|
|
|
(37,972)
|
|
|
(31,840)
|
|
|
(6,132)
|
|
|
Interest expense, net
|
|
|
(2,416)
|
|
|
(1,455)
|
|
|
(961)
|
|
|
Other income, net
|
|
|
133
|
|
|
37
|
|
|
96
|
|
|
Net loss
|
|
$
|
(40,255)
|
|
$
|
(33,258)
|
|
$
|
(6,997)
|
|
Product revenue
Product revenue was $1.2 million for the nine months ended September 30, 2016, compared to $255,000 for the nine months ended September 30, 2015, an increase of $913,000. The increase was the result of an increase in sales volume of our products, primarily the sale of T2Candida consumable diagnostic tests, driven from growth in our installed T2Dx Instrument base.
Research revenue
Research revenue was $2.0 million for the nine months ended September 30, 2016, compared to $1.5 million for the nine months ended September 30, 2015, an increase of $456,000. The increase was primarily the result of higher revenue from services delivered under our Co-Development Agreement with Canon US Life Sciences, which increased by $643,000, partially offset by decreased revenue from research and development agreements utilizing T2MR technology with other third parties.
Cost of product revenue
Cost of product revenue was $4.7 million for the nine months ended September 30, 2016, compared to $832,000 for the nine months ended September 30, 2015. The increase of $3.9 million was primarily the result of increased sales of T2Candida Panels and T2Dx Instruments to customers, as well as an increase of approximately $1.5 million of cost to provide technical support services to customers, approximately $886,000 of unabsorbed manufacturing overhead, and $380,000 of depreciation related to T2Dx Instruments placed at customer locations pursuant to reagent rental agreements.
Research and development expenses
Research and development expenses were $18.2 million for the nine months ended September 30, 2016, compared to $18.7 million for the nine months ended September 30, 2015, a decrease of $564,000. The decrease was primarily due to lower prototype development expenses of $893,000, as prior year projects did not recur in the current year, lower travel costs of $155,000, and decreased other research and development costs of $304,000, which includes lower consulting, facility and lab expenses. Partially offsetting the decrease were an increase of $616,000 in clinical expenses, primarily related to the T2Bacteria clinical trial and increased payroll and payroll-related expenses of $172,000, net of lower stock compensation expense of $115,000.
Selling, general and administrative expenses
Selling, general and administrative expenses were $18.3 million for the nine months ended September 30, 2016, compared to $14.1 million for the nine months ended September 30, 2015. The increase of approximately $4.2 million was due primarily to increased payroll and related expenses of approximately $3.1 million, including $690,000 of increased stock compensation expense, as we expanded our sales personnel, increased consulting, audit, public relations and patent fees of $875,000, increased travel expenses of $544,000 related to increased sales personnel and increased other selling, general and administrative expenses of $112,000. Partially offsetting these increases were lower marketing program expenditures of $449,000.
Interest expense, net
Interest expense, net, was $2.4 million for the nine months ended September 30, 2016, compared to $1.5 million for the nine months ended September 30, 2015. Interest expense, net, increased by $961,000 due to higher borrowing levels on our notes payable.
Other income, net
Other income, net, was $133,000 of net income for the nine months ended September 30, 2016, compared to $37,000 for the nine months ended September 30, 2015. Other income, net, increased by $96,000 due to higher income from our money market funds.
Liquidity and Capital Resources
We have incurred losses and cumulative negative cash flows from operations since our inception, and as of September 30, 2016, we had an accumulated deficit of $189.1 million. We anticipate that we will continue to incur losses for at least the next couple of years. We expect that our costs and expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may raise through a combination of equity offerings, debt financings, other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements.
We have been funding our operations principally from the sale of common stock and preferred stock, the incurrence of indebtedness, and revenue from research and development agreements.
As of September 30, 2016, we had cash and cash equivalents of approximately $75.1 million. We believe that our existing cash and cash equivalents, and additional liquidity of up to $5.4 million available under an Equipment Lease Credit Facility (the “Credit Facility”) that was entered into in October 2015, will be sufficient to meet our anticipated cash requirements for at least the next 12 months. Should our current operating plans not materialize as expected, and we are unable to obtain additional capital from the sources described on a timely basis, we may be required to change our current operating plans to reduce future expenses, which are within our control, in order to fund operations at reduced levels for at least the next 12 months.
Cash flows
The following is a summary of cash flows for each of the periods set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
September 30,
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
(in thousands)
|
|
|
Net cash (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(36,143)
|
|
$
|
(28,645)
|
|
|
Investing activities
|
|
|
(4,594)
|
|
|
(6,020)
|
|
|
Financing activities
|
|
|
42,186
|
|
|
933
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
1,449
|
|
$
|
(33,732)
|
|
Net cash used in operating activities
Net cash used in operating activities was approximately $36.1 million for the nine months ended September 30, 2016, and consisted primarily of a net loss of $40.3 million adjusted for non-cash items including depreciation and amortization expense of $1.6 million, stock-based compensation expense of $3.7 million, non-cash interest expense of $459,000, deferred rent of $187,000, and a net change in operating assets and liabilities (use of cash) of $1.4 million, primarily related to an increase in inventory of $654,000 to support our commercial demand, prepaid expenses of $118,000 related to the amortization of insurance premiums and a decrease in deferred revenue of approximately $1.3 million primarily related to the recognition of revenue from our Co-Development Agreement with Canon US Life Sciences, partially offset by an increase in accounts payable and accrued expenses of $665,000 related to increased audit, clinical study and payroll accruals.
Net cash used in operating activities was approximately $28.6 million for the nine months ended September 30, 2015, and consisted primarily of a net loss of $33.3 million adjusted for non-cash items including depreciation and amortization expense of $979,000, stock-based compensation expense of $2.9 million, non-cash interest expense of $288,000, deferred rent of $86,000, and a net change in operating assets and liabilities (source of cash) of $533,000, primarily related to an increase in deferred revenue of approximately $1.1 million from an up-front payment received pursuant to our Co-Development Agreement with Canon US Life Sciences, an increase in accounts payable and accrued expenses of $561,000 related to growth in the business, partially offset by $942,000 in purchases of inventory, an increase in accounts receivable of $177,000 related to increased research and product revenue, and cash outflows from other working capital items totaling $28,000.
Net cash used in investing activities
Net cash used in investing activities was approximately $4.6 million for the nine months ended September 30, 2016 and consisted of costs to acquire components of and manufacture Company-owned instruments of $3.7 million, which are classified as property and equipment, $725,000 of purchases of laboratory and manufacturing equipment incurred to support commercialization efforts and research and development programs and $200,000 of other equipment and software purchases to support internal functions.
Net cash used in investing activities was approximately $6.0 million for the nine months ended September 30, 2015, and consisted of costs to develop Company-owned instruments of $3.5 million, which are classified as property and equipment, and purchases of laboratory equipment and leasehold improvements of $2.6 million incurred to support the growth of the business, partially offset by proceeds of $80,000 from the release of certain restricted cash balances.
Net cash provided by financing activities
Net cash provided by financing activities was approximately $42.2 million for the nine months ended September 30, 2016, and consisted primarily of proceeds from our September 21, 2016 PIPE financing with Canon of $39.7 million, in which we sold 6,055,341 shares of common stock at the closing price of $6.56 per share. Net cash provided by financing activities also consisted of $736,000 of proceeds from the exercise of stock options and sale of common stock under our 2014 Employee Stock Purchase Plan and $4.6 million of proceeds from the Credit Facility. Partially offsetting these sources of cash were $2.5 million of repayments of notes payable and $385,000 of payments of issuance costs from our December 2015 secondary offering.
Net cash provided by financing activities was approximately $933,000 for the nine months ended September 30, 2015, and consisted of $1.2 million of proceeds from the exercise of stock options and sale of common stock under our 2014 Employee Stock Purchase Plan, partially offset by $235,000 of repayments of notes payable.
Contractual Obligations and Commitments
Other than as described below, there were no other material changes to our contractual obligations and commitments from those described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K for the year ended December 31, 2015.
In October 2015, we signed the $10.0 million Credit Facility with Essex Capital Corporation (the “Lessor”) to fund capital equipment needs. Under the Credit Facility, the Lessor will fund capital equipment purchases presented. 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. Through September 2016, we borrowed $4.6 million under the Credit Facility and commenced repayment.
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 U.S. Securities and Exchange Commission (“SEC”) rules.
Item 3.
Quantitative and Qualitative Disclosure
s about Market Risk
We are exposed to market risk related to changes in interest rates. As of September 30, 2016, we had cash and cash equivalents of $75.1 million 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. We are also subject to interest rate risk from the loans under our credit facility with Solar Capital, Ltd., which has an outstanding principal balance of $28.3 million as of September 30, 2016 and bears interest at an annual rate equal to the one-month LIBOR plus 7.05%.
A 10% increase in the one-month LIBOR annual rate would result in an immaterial increase in our annual interest expense under our credit facility with Solar Capital, Ltd., as a result of the current low interest rate environment.
Item 4.
Controls and Procedure
s
(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 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of September 30, 2016. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files 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 Chief Financial Officer, as appropriate, 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 September 30, 2016.
(b) Changes in Internal Control over Financial Reporting
There have been no material changes to the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
