UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2019

OR

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

For the transition period from                      to                     

Commission file number: 001-36571

 

T2 Biosystems, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

20-4827488

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

101 Hartwell Avenue

Lexington, Massachusetts

02421

(Address of principal executive offices)

(Zip Code)

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

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001

 

TTOO

 

The Nasdaq Global Market

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

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

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

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

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

As of November 14, 2019, the registrant had 46,679,163 shares of common stock outstanding.

 

 

 

 


 

T2 BIOSYSTEMS, INC.

TABLE OF CONTENTS

 

 

 

Page  

 

 

 

 

PART I FINANCIAL INFORMATION

 

 

 

 

Item 1.    

Financial Statements (unaudited)

1

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

1

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for three and nine months ended September 30, 2019 and 2018

2

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the nine months ended September 30, 2019 and 2018

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

Item 2.

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

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

41

 

 

 

Item 4.

Controls and Procedures

41

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

43

 

 

 

Item 1A.

Risk Factors

43

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

 

 

 

Item 3.

Defaults Upon Senior Securities

43

 

 

 

Item 4.

Mine Safety Disclosures

43

 

 

 

Item 5.

Other Information

43

 

 

 

Item 6.

Exhibits, Financial Statement Schedules

44

 

 

SIGNATURES

45

 

 

i


 

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

T2 BIOSYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,213

 

 

$

50,805

 

Accounts receivable

 

 

1,573

 

 

 

1,786

 

Inventories

 

 

4,110

 

 

 

2,677

 

Prepaid expenses and other current  assets

 

 

1,917

 

 

 

1,340

 

Total current assets

 

 

23,813

 

 

 

56,608

 

Property and equipment, net

 

 

6,314

 

 

 

7,315

 

Operating lease right-of-use assets

 

 

3,740

 

 

 

 

Restricted cash

 

 

180

 

 

 

180

 

Other assets

 

 

206

 

 

 

206

 

Total assets

 

$

34,253

 

 

$

64,309

 

Liabilities and stockholders’ (deficit) equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Notes payable

 

$

42,258

 

 

$

42,373

 

Accounts payable

 

 

3,427

 

 

 

744

 

Accrued expenses and other current liabilities

 

 

8,800

 

 

 

6,073

 

Derivative liability

 

 

2,603

 

 

 

2,142

 

Deferred revenue

 

 

610

 

 

 

697

 

Current portion of lease incentives

 

 

 

 

 

268

 

Total current liabilities

 

 

57,698

 

 

 

52,297

 

Lease incentives, net of current portion

 

 

 

 

 

492

 

Operating lease liabilities, net of current portion

 

 

2,390

 

 

 

 

Deferred revenue, net of current portion

 

 

77

 

 

 

133

 

Commitments and contingencies (see Note 13)

 

 

 

 

 

 

 

 

Stockholders’ (deficit) equity:

 

 

 

 

 

 

 

 

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

   outstanding at September 30, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized; 46,678,746 and

  44,175,441 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

45

 

 

 

44

 

Additional paid-in capital

 

 

336,179

 

 

 

328,514

 

Accumulated deficit

 

 

(362,136

)

 

 

(317,171

)

Total stockholders’ (deficit) equity

 

 

(25,912

)

 

 

11,387

 

Total liabilities and stockholders’ (deficit) equity

 

$

34,253

 

 

$

64,309

 

 

See accompanying notes to condensed consolidated financial statements.

1


 

T2 BIOSYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

 

 

2018

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

1,177

 

 

 

 

$

1,218

 

 

$

3,765

 

 

$

3,486

 

Research revenue

 

 

56

 

 

 

 

 

1,248

 

 

 

269

 

 

 

5,222

 

Contribution revenue

 

 

444

 

 

 

 

 

 

 

 

1,232

 

 

 

 

Total revenue

 

 

1,677

 

 

 

 

 

2,466

 

 

 

5,266

 

 

 

8,708

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenue

 

 

3,944

 

 

 

 

 

3,042

 

 

 

13,153

 

 

 

9,773

 

Research and development

 

 

4,098

 

 

 

 

 

2,725

 

 

 

12,047

 

 

 

11,193

 

Selling, general and administrative

 

 

5,981

 

 

 

 

 

5,873

 

 

 

19,756

 

 

 

19,238

 

Total costs and expenses

 

 

14,023

 

 

 

 

 

11,640

 

 

 

44,956

 

 

 

40,204

 

Loss from operations

 

 

(12,346

)

 

 

 

 

(9,174

)

 

 

(39,690

)

 

 

(31,496

)

Interest expense, net

 

 

(1,876

)

 

 

 

 

(1,836

)

 

 

(5,658

)

 

 

(4,910

)

Other income, net

 

 

51

 

 

 

 

 

243

 

 

 

383

 

 

 

402

 

Net loss and comprehensive loss

 

$

(14,171

)

 

 

 

$

(10,767

)

 

$

(44,965

)

 

$

(36,004

)

Net loss per share — basic and diluted

 

$

(0.31

)

 

 

 

$

(0.25

)

 

$

(1.01

)

 

$

(0.91

)

Weighted-average number of common shares used in computing

   net loss per share — basic and diluted

 

 

45,413,215

 

 

 

 

 

43,762,551

 

 

 

44,711,463

 

 

 

39,363,294

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

2


 

T2 BIOSYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

(In thousands, except share data)

(Unaudited)

 

 

 

 

Common

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

Stock

 

 

 

 

Paid-In

 

 

 

 

Accumulated

 

 

 

 

Stockholders’

 

 

 

 

Shares

 

 

Amount

 

 

 

 

Capital

 

 

 

 

Deficit

 

 

 

 

(Deficit) Equity

 

Balance at December 31, 2017

 

 

 

35,948,900

 

 

$

36

 

 

 

 

$

267,421

 

 

 

 

$

(266,117

)

 

 

 

$

1,340

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

1,381

 

 

 

 

 

 

 

 

 

 

1,381

 

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

 

 

 

70,983

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

5

 

Prior year accumulated deficit adjustment from ASC 606 implementation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

99

 

 

 

 

 

99

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,913

)

 

 

 

 

(12,913

)

Balance at March 31, 2018

 

 

 

36,019,883

 

 

$

36

 

 

 

 

$

268,807

 

 

 

 

$

(278,931

)

 

 

 

$

(10,088

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

3,898

 

 

 

 

 

 

 

 

 

 

3,898

 

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

 

 

 

382,114

 

 

 

 

 

 

 

 

1,119

 

 

 

 

 

 

 

 

 

 

1,119

 

Share issuance

 

 

 

55,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock from secondary offering, net

 

 

 

7,015,000

 

 

 

7

 

 

 

 

 

49,371

 

 

 

 

 

 

 

 

 

 

49,378

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,324

)

 

 

 

 

(12,324

)

Balance at June 30, 2018

 

 

 

43,472,411

 

 

$

43

 

 

 

 

$

323,195

 

 

 

 

$

(291,255

)

 

 

 

$

31,983

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

2,208

 

 

 

 

 

 

 

 

 

 

2,208

 

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

 

 

 

566,343

 

 

 

1

 

 

 

 

 

483

 

 

 

 

 

 

 

 

 

 

484

 

Issuance of common stock from secondary offering, net

 

 

 

 

 

 

 

 

 

 

 

(141

)

 

 

 

 

 

 

 

 

 

(141

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,767

)

 

 

 

 

(10,767

)

Balance at September 30, 2018

 

 

 

44,038,754

 

 

$

44

 

 

 

 

$

325,745

 

 

 

 

$

(302,022

)

 

 

 

$

23,767

 

 

 

 

 

 

Common

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

Stock

 

 

 

 

Paid-In

 

 

 

 

Accumulated

 

 

 

 

Stockholders’

 

 

 

 

Shares

 

 

Amount

 

 

 

 

Capital

 

 

 

 

Deficit

 

 

 

 

(Deficit) Equity

 

Balance at December 31, 2018

 

 

 

44,175,441

 

 

$

44

 

 

 

 

$

328,514

 

 

 

 

$

(317,171

)

 

 

 

$

11,387

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

2,033

 

 

 

 

 

 

 

 

 

 

2,033

 

Issuance of common stock from vesting of restricted stock

 

 

 

163,802

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of warrants upon modification

 

 

 

 

 

 

 

 

 

 

 

147

 

 

 

 

 

 

 

 

 

 

147

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,147

)

 

 

 

 

(15,147

)

Balance at March 31, 2019

 

 

 

44,339,243

 

 

$

44

 

 

 

 

$

330,694

 

 

 

 

$

(332,318

)

 

 

 

$

(1,580

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

1,277

 

 

 

 

 

 

 

 

 

 

1,277

 

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

 

 

 

196,329

 

 

 

 

 

 

 

 

330

 

 

 

 

 

 

 

 

 

 

330

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,647

)

 

 

 

 

(15,647

)

Balance at June 30, 2019

 

 

 

44,535,572

 

 

$

44

 

 

 

 

$

332,301

 

 

 

 

$

(347,965

)

 

 

 

$

(15,620

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

1,165

 

 

 

 

 

 

 

 

 

 

1,165

 

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

 

 

 

50,438

 

 

 

 

 

 

 

 

53

 

 

 

 

 

 

 

 

 

 

53

 

Issuance of common stock from secondary offering, net

 

 

 

1,679,387

 

 

 

1

 

 

 

 

 

1,883

 

 

 

 

 

 

 

 

 

 

1,884

 

Change in fair value of warrants upon modification

 

 

 

 

 

 

 

 

 

 

 

117

 

 

 

 

 

 

 

 

 

 

117

 

Issuance of warrants

 

 

 

 

 

 

 

 

 

 

 

660

 

 

 

 

 

 

 

 

 

 

660

 

Shares issued in connection with Purchase Agreement

 

 

 

413,349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,171

)

 

 

 

 

(14,171

)

Balance at September 30, 2019

 

 

 

46,678,746

 

 

$

45

 

 

 

 

$

336,179

 

 

 

 

$

(362,136

)

 

 

 

$

(25,912

)

 

See accompanying notes to condensed consolidated financial statements.

 

3


 

T2 BIOSYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(44,965

)

 

$

(36,004

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,694

 

 

 

1,862

 

Amortization of operating lease right-of-use assets

 

 

1,065

 

 

 

 

Stock-based compensation expense

 

 

4,475

 

 

 

7,487

 

Change in fair value of derivative instrument

 

 

461

 

 

 

(175

)

Loss on disposal of property and equipment

 

 

(3

)

 

 

18

 

Impairment of property and equipment

 

 

 

 

 

173

 

Non-cash interest expense

 

 

1,763

 

 

 

1,658

 

Deferred rent

 

 

 

 

 

(162

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

213

 

 

 

(1,267

)

Prepaid expenses and other assets

 

 

(577

)

 

 

(1,254

)

Inventories

 

 

(1,464

)

 

 

(1,191

)

Accounts payable

 

 

2,683

 

 

 

(40

)

Accrued expenses and other liabilities

 

 

1,250

 

 

 

(771

)

Deferred revenue

 

 

(143

)

 

 

(784

)

Operating lease liabilities

 

 

(1,694

)

 

 

 

Net cash used in operating activities

 

 

(35,242

)

 

 

(30,450

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases and manufacture of property and equipment

 

 

(735

)

 

 

(950

)

Net cash used in investing activities

 

 

(735

)

 

 

(950

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

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

 

 

383

 

 

 

1,604

 

Proceeds from issuance of common stock in public offering, net of offering costs

 

 

1,884

 

 

 

49,236

 

Principal repayments of finance leases

 

 

(882

)

 

 

(1,094

)

Net cash provided by financing activities

 

 

1,385

 

 

 

49,746

 

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

(34,592

)

 

 

18,346

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

50,985

 

 

 

42,059

 

Cash, cash equivalents and restricted cash at end of period

 

$

16,393

 

 

$

60,405

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

3,435

 

 

$

2,859

 

Supplemental disclosures of noncash activities

 

 

 

 

 

 

 

 

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

 

$

31

 

 

$

802

 

Change in fair value of warrants issued and modified

 

$

924

 

 

 

 

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

 

$

4,805

 

 

 

 

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

 

$

43

 

 

$

109

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

T2 BIOSYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Business

T2 Biosystems, Inc. (the “Company”) was incorporated on April 27, 2006 as a Delaware corporation with operations based in Lexington, Massachusetts. The Company is an in vitro diagnostics company that has developed an innovative and proprietary technology platform that offers a rapid, sensitive and simple alternative to existing diagnostic methodologies. The Company is using its T2 Magnetic Resonance technology (“T2MR”) to develop a broad set of applications aimed at lowering mortality rates, improving patient outcomes and reducing the cost of healthcare by helping medical professionals make targeted treatment decisions earlier. T2MR enables rapid detection of pathogens, biomarkers and other abnormalities in a variety of unpurified patient sample types, including whole blood, plasma, serum, saliva, sputum, cerebral spinal fluid 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”). On February 6, 2019, the FDA granted the Company’s T2Resistance Panel designation as a Breakthrough Device. On August 2, 2019, the Center for Medicare & Medicaid Services (CMS) granted approval for a New Technology Add-on Payment for the T2Bacteria Panel for fiscal year 2020.

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 September 30, 2019, the Company had cash and cash equivalents of $16.2 million and an accumulated deficit of $362.1 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, its July 2019 establishment of an Equity Distribution Agreement and Equity Purchase Agreement, 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

5


 

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 September 30, 2019, along with funding available through our Equity Distribution Agreement (the “Sales Agreement”) with Canaccord Genuity LLC, as agent (“Canaccord”) and our Purchase Agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”) (Note 7), will be sufficient to allow us to fund our current operating plan at least a year from issuance of these financial statements. However, because certain elements of our operating plan are outside of our control, including our ability to sell shares under the Sales Agreement and the Purchase Agreement, 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 to the Company’s Co- Development agreements, delaying certain research projects and capital expenditures and eliminating certain future operating expenses in order to fund operations at reduced levels for the Company to continue as a going concern for a period of 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 accounting principles generally accepted 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 September 30, 2019, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2019 and 2018, the condensed consolidated statements of stockholders’ equity (deficit) for the nine months ended September 30, 2019 and 2018, the condensed consolidated statements of cash flows for the nine months ended September 30, 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 September 30, 2019, and the results of its operations for the three and nine months ended September 30, 2019 and 2018 and its cash flows for the nine months ended September 30, 2019 and 2018. The results for the three and nine months ended September 30, 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.

6


 

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.

Geographic Information

The Company sells its products domestically and internationally. For the three and nine months ended September 30, 2019, there were no international customers that represented greater than 10% of total revenue. For the three months ended September 30, 2018, there was one international customer that represented greater than 10% of total revenue. For the nine months ended September 30, 2018, there were no international customers that represented greater than 10%  of total revenue. Total international sales were approximately $0.6 million or 36% of total revenue and $0.6 million or 25% of total revenue for the three months ended September 30, 2019 and 2018, respectively. Total international sales were approximately $1.8 million or 34% of total revenue and $1.4 million or 16% of total revenue for the nine months ended September 30, 2019 and 2018, respectively.

As of September 30, 2019 and December 31, 2018, the Company had outstanding receivables of $0.5 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 September 30, 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.

7


 

Leases

The Company adopted 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.

 

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 842, 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

8


 

and allocated to product revenue in the condensed 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.  

 

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

 

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.

 

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 for 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,

September 30,

 

 

Nine months ended,

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Product Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Instruments

 

$

543

 

 

$

504

 

 

$

1,540

 

 

$

1,213

 

Consumables

 

 

604

 

 

 

608

 

 

 

2,054

 

 

 

1,929

 

Instrument rentals

 

 

30

 

 

 

106

 

 

 

171

 

 

 

344

 

Total Product Revenue

 

 

1,177

 

 

 

1,218

 

 

 

3,765

 

 

 

3,486

 

Research Revenue

 

 

56

 

 

 

1,248

 

 

 

269

 

 

 

5,222

 

Contribution Revenue

 

 

444

 

 

 

 

 

 

1,232

 

 

 

 

Total Revenue

 

$

1,677

 

 

$

2,466

 

 

$

5,266

 

 

$

8,708

 

 

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 September 30, 2019, the aggregate amount of transaction price allocated to remaining performance obligations for contracts with an original duration greater than one year was $3.5 million, of which $3.0 million is constrained revenue. 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 two years.

 

Significant Judgments

 

9


 

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

 

The Company did not record any contract assets at September 30, 2019 and December 31, 2018.  

 

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 September 30, 2019 and $0.6 million at December 31, 2018. Revenue recognized in the three and nine months ended September 30, 2019 relating to contract liabilities at December 31, 2018 was $0.1 million and $0.4 million, respectively, 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.

10


 

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 the practical expedient that allowed each separate lease component of a contract and its associated non-lease components to be treated as a single lease component. As of the January 1, 2019 effective date the Company identified eight operating lease arrangements and two finance lease arrangements in which it is a lessee. The adoption of this standard 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 of $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 September 30, 2019, the Company was the lessor of T2Dx instruments. The lease agreements typically do not include fixed rental payments, but rather rental revenue i