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.