T2 Biosystems(TTOO) - 2019 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION PART I FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents unaudited condensed consolidated financial statements, including balance sheets, operations, equity, cash flows, and explanatory notes Condensed Consolidated Balance Sheets | Metric | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | Change (in thousands) | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | | Cash and cash equivalents | $16,213 | $50,805 | $(34,592) | | Total assets | $34,253 | $64,309 | $(30,056) | | Total current liabilities | $57,698 | $52,297 | $5,401 | | Total stockholders' (deficit) equity | $(25,912) | $11,387 | $(37,299) | Condensed Consolidated Statements of Operations and Comprehensive Loss Three Months Ended September 30 | Metric | 2019 (in thousands) | 2018 (in thousands) | Change (in thousands) | | :---------------------- | :------------------ | :------------------ | :-------------------- | | Total Revenue | $1,677 | $2,466 | $(789) | | Total Costs and Expenses | $14,023 | $11,640 | $2,383 | | Loss from operations | $(12,346) | $(9,174) | $(3,172) | | Net loss | $(14,171) | $(10,767) | $(3,404) | | Net loss per share | $(0.31) | $(0.25) | $(0.06) | Nine Months Ended September 30 | Metric | 2019 (in thousands) | 2018 (in thousands) | Change (in thousands) | | :---------------------- | :------------------ | :------------------ | :-------------------- | | Total Revenue | $5,266 | $8,708 | $(3,442) | | Total Costs and Expenses | $44,956 | $40,204 | $4,752 | | Loss from operations | $(39,690) | $(31,496) | $(8,194) | | Net loss | $(44,965) | $(36,004) | $(8,961) | | Net loss per share | $(1.01) | $(0.91) | $(0.10) | Condensed Consolidated Statements of Stockholders' Equity (Deficit) | Metric | Dec 31, 2018 (in thousands) | Sep 30, 2019 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Common Stock (Amount) | $44 | $45 | | Additional Paid-In Capital | $328,514 | $336,179 | | Accumulated Deficit | $(317,171) | $(362,136) | | Total Stockholders' (Deficit) Equity | $11,387 | $(25,912) | - The accumulated deficit increased by $44,965 thousand from December 31, 2018, to September 30, 2019, primarily due to net losses[14] Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :------------------------------------------ | :----- | :----- | | Net cash used in operating activities | $(35,242) | $(30,450) | | Net cash used in investing activities | $(735) | $(950) | | Net cash provided by financing activities | $1,385 | $49,746 | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(34,592) | $18,346 | Notes to Condensed Consolidated Financial Statements 1. Nature of Business - T2 Biosystems, Inc. is an in vitro diagnostics company using T2 Magnetic Resonance technology (T2MR) for rapid detection of pathogens and biomarkers, primarily targeting sepsis and Lyme disease[18] - FDA-cleared products include the T2Dx Instrument, T2Candida Panel (2014), and T2Bacteria Panel (2018); the T2Resistance Panel received FDA Breakthrough Device designation in February 2019[18] - As of September 30, 2019, the company had cash and cash equivalents of $16.2 million and an accumulated deficit of $362.1 million, raising substantial doubt about its ability to continue as a going concern[20][26] 2. Summary of Significant Accounting Policies - The company operates in a single operating segment focused on developing and commercializing diagnostic products[31] Total International Sales | Period | 2019 (in millions) | 2018 (in millions) | | :-------------------------------- | :----------------- | :----------------- | | Three months ended September 30 | $0.6 (36% of total revenue) | $0.6 (25% of total revenue) | | Nine months ended September 30 | $1.8 (34% of total revenue) | $1.4 (16% of total revenue) | - Adopted ASC 842 (Leases) on January 1, 2019, recognizing operating lease liabilities of $5.6 million and right-of-use assets of $4.8 million[39][64] - Adopted ASU 2018-08 (Contributions) on a modified prospective basis, resulting in $0.9 million in contribution revenue from CARB-X for the nine months ended September 30, 2019[68] 3. Fair Value Measurements Financial Assets and Liabilities at Fair Value (in thousands) | Category | Sep 30, 2019 | Dec 31, 2018 | | :---------------- | :----------- | :----------- | | Cash (Level 1) | $11,926 | $6,868 | | Money market funds (Level 1) | $4,287 | $43,937 | | Restricted cash (Level 1) | $180 | $180 | | Total Assets | $16,393 | $50,985 | | Derivative liability (Level 3) | $2,603 | $2,142 | - The derivative liability, related to the Term Loan Agreement, increased by $461 thousand during the nine months ended September 30, 2019[75] 4. Restricted Cash - The company held $0.2 million in restricted cash at September 30, 2019, and December 31, 2018, primarily as security deposits for its operating lease and credit cards[76] 5. Supplemental Balance Sheet Information Accounts Receivable (in thousands) | Category | Sep 30, 2019 | Dec 31, 2018 | | :--------------- | :----------- | :----------- | | Accounts receivable | $873 | $1,786 | | Unbilled receivables | $700 | $0 | | Total | $1,573 | $1,786 | Inventories (in thousands) | Category | Sep 30, 2019 | Dec 31, 2018 | | :--------------- | :----------- | :----------- | | Raw materials | $1,903 | $639 | | Work-in-process | $1,586 | $1,713 | | Finished goods | $621 | $325 | | Total | $4,110 | $2,677 | - Property and equipment, net, decreased to $6,314 thousand at September 30, 2019, from $7,315 thousand at December 31, 2018[79] - Accrued expenses and other current liabilities increased to $8,800 thousand at September 30, 2019, from $6,073 thousand at December 31, 2018[80] 6. Notes Payable - Total notes payable were $42,258 thousand at September 30, 2019, primarily consisting of a Term Loan Agreement with CRG, classified as a current liability due to potential covenant violations[81] - The Term Loan Agreement was amended in March 2019 to reduce the 2019 minimum revenue target to $9.0 million and in September 2019 to further reduce the 2019 target to $4.0 million, extend the interest-only period to December 31, 2021, and extend initial principal repayment to March 31, 2022[83][84] - The final payment fee on the Term Loan Agreement was increased from 8% to 10% of the principal outstanding upon repayment in September 2019[84] 7. Stockholders' Equity - The company entered into an Equity Distribution Agreement with Canaccord in July 2019 to sell up to $30.0 million in common stock, selling 1,679,387 shares for $1.9 million net proceeds during Q3 2019[91][94] - A $30.0 million Purchase Agreement with Lincoln Park was also entered in July 2019, under which 413,349 shares of common stock were issued as consideration[96][98] 8. Stock-Based Compensation Stock-Based Compensation Expense (in thousands) | Period | 2019 | 2018 | | :-------------------------------- | :----- | :----- | | Three Months Ended September 30 | $1,152 | $2,033 | | Nine Months Ended September 30 | $4,486 | $7,240 | - As of September 30, 2019, there was $6.5 million of unrecognized compensation cost related to non-vested stock options and $1.6 million for non-vested restricted stock units[106][109] - Stock options outstanding at September 30, 2019, totaled 6,431,437 shares with a weighted-average exercise price of $5.03[105] 9. Warrants - In September 2019, the company issued new warrants to CRG for 568,291 shares at an exercise price of $1.55 and reduced the exercise price of previously issued warrants (528,958 shares) to $1.55[112] - Total warrants to purchase common stock outstanding at September 30, 2019, were 1,097,249[114] 10. Net Loss Per Share - Basic and diluted net loss per share were the same for all periods presented due to the anti-dilutive effect of common stock equivalents[34] Anti-Dilutive Common Stock Equivalents (Shares) | Category | Sep 30, 2019 | Sep 30, 2018 | | :-------------------------- | :----------- | :----------- | | Options to purchase common shares | 6,431,437 | 4,236,595 | | Restricted stock units | 1,311,758 | 1,202,123 | | Warrants to purchase common stock | 1,097,249 | 528,958 | | Total | 8,840,444 | 5,967,676 | 11. Co-Development Agreements - Research revenue from Canon US Life Sciences decreased to $0.2 million for the nine months ended September 30, 2019, from $1.5 million in 2018[116] - No revenue was recorded from Allergan Sales, LLC for the three and nine months ended September 30, 2019, as the agreement completed in October 2018[118] - Contribution revenue from CARB-X was $0.9 million for the nine months ended September 30, 2019, following the adoption of a new accounting standard[121][122] - A new US Government Contract with BARDA, awarded in September 2019, has an initial value of $6 million and a potential value of up to $69 million, with $0.3 million revenue recognized for the three and nine months ended September 30, 2019[123][124] 12. Leases - Upon adoption of ASC 842 on January 1, 2019, the company recognized operating lease liabilities of $5.6 million and right-of-use assets of $4.8 million[64] Operating Lease Liabilities (in thousands) | Category | Sep 30, 2019 | | :-------------------------------- | :----------- | | Current operating lease liabilities | $1,913 | | Noncurrent operating lease liabilities | $2,390 | | Total lease liabilities | $4,303 | - The company repurchased equipment under finance leases for $0.3 million during the three months ended September 30, 2019[133] 13. Commitments and Contingencies - The company has a license agreement requiring annual fees ($5 thousand-$25 thousand) and royalties (0.5%-3.5% on net sales, 10% on sublicensed products), with immaterial royalties for the nine months ended September 30, 2019 and 2018[138] - A severance agreement for founding CEO John McDonough includes estimated transition payments and health benefits of approximately $1.0 million, to be paid over 15 months[139] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, results, T2MR technology, ongoing losses, funding, and revenue/expense trends Forward-Looking Statements - The company is an early-stage company and expects to incur losses in the future[143] - Future capital needs and the ability to raise additional funds are critical risks[143] - Risks include market acceptance of T2MR technology, timely product commercialization, regulatory clearance, competition, and intellectual property protection[143] Business Overview - T2 Biosystems is an in vitro diagnostics company leveraging T2MR technology for rapid detection of sepsis and Lyme disease pathogens[146] - FDA-cleared products include T2Dx Instrument, T2Candida, and T2Bacteria; the T2Resistance Panel received FDA Breakthrough Device designation in February 2019[147] - The T2Bacteria Panel received a New Technology Add-on Payment (NTAP) from CMS for FY2020[147] - The company has an accumulated deficit of $362.1 million at September 30, 2019, and faces substantial doubt about its ability to continue as a going concern[151][154] Our Commercial Products and the Unmet Clinical Need - T2MR products are the only FDA-cleared diagnostics that detect sepsis-causing bacterial and fungal pathogens directly from whole blood without the need for blood culture, providing results at least two days faster[155] - T2Candida demonstrated 91.1% sensitivity and 99.4% specificity, with species-specific positive results in 4.4 hours compared to 129 hours for blood culture[167] - T2Bacteria demonstrated 90% sensitivity and 98% specificity, delivering actionable results in an average of 5.4 hours compared to 60 hours for blood culture[162] - The T2Bacteria Panel received CMS NTAP approval for FY2020, with a maximum reimbursement of $97.50 per test for Medicare inpatients[176] - The T2Resistance Panel, detecting 13 resistance genes, shows an average time to result of 5.3 hours compared to 30-95 hours for conventional methods, expected for research use only (RUO) in the US and CE mark in Europe by end of 2019[185] - BARDA awarded a milestone-based contract in September 2019, with an initial value of $6 million and a potential value of up to $69 million, to expand diagnostics for sepsis-causing pathogens and antibiotic resistance genes[189] Financial Overview - Revenue is generated from product sales (instruments, consumables), related services, reagent rental agreements, and research and development agreements[190][194] - Cost of product revenue includes materials, labor, manufacturing overhead, depreciation on T2Dx instruments, customer support, warranty, and royalties[196] - Research and development expenses are expensed as incurred and are anticipated to be flat to slightly increase due to additional research partnerships and new product development[198][199] - Selling, general and administrative expenses are expected to increase in future periods as commercialization efforts and personnel grow[200] Results of Operations (Three Months) Key Financials (Three Months Ended September 30, in thousands) | Metric | 2019 | 2018 | Change | | :-------------------------------- | :----- | :----- | :------- | | Total Revenue | $1,677 | $2,466 | $(789) | | Product revenue | $1,177 | $1,218 | $(41) | | Research revenue | $56 | $1,248 | $(1,192) | | Contribution revenue | $444 | $0 | $444 | | Cost of product revenue | $3,944 | $3,042 | $902 | | Research and development expenses | $4,098 | $2,725 | $1,373 | | Selling, general and administrative expenses | $5,981 | $5,873 | $108 | | Net loss | $(14,171) | $(10,767) | $(3,404) | - Research revenue decreased primarily due to $0.5 million less from the Allergan Sales Co-Development Agreement (completed Oct 2018) and $0.1 million less from Canon Life Sciences; contribution revenue increased due to a new accounting standard and the US Government Contract[207][208] - Cost of product revenue increased by $0.9 million, driven by unabsorbed manufacturing overhead capacity[209] - Research and development expenses increased by $1.4 million due to higher R&D materials, travel, and payroll costs[210] Results of Operations (Nine Months) Key Financials (Nine Months Ended September 30, in thousands) | Metric | 2019 | 2018 | Change | | :-------------------------------- | :----- | :----- | :------- | | Total Revenue | $5,266 | $8,708 | $(3,442) | | Product revenue | $3,765 | $3,486 | $279 | | Research revenue | $269 | $5,222 | $(4,953) | | Contribution revenue | $1,232 | $0 | $1,232 | | Cost of product revenue | $13,153 | $9,773 | $3,380 | | Research and development expenses | $12,047 | $11,193 | $854 | | Selling, general and administrative expenses | $19,756 | $19,238 | $518 | | Net loss | $(44,965) | $(36,004) | $(8,961) | - Research revenue decreased by $4.9 million, primarily due to $2.8 million less from the Allergan Sales Co-Development Agreement and $1.2 million less from Canon US Life Sciences; contribution revenue increased due to CARB-X and the new US Government Contract[217][218] - Cost of product revenue increased by $3.4 million, driven by reagent rental placement costs, higher sales volumes, manufacturing scrap, and service repairs[219] - Selling, general and administrative expenses increased by $0.5 million, impacted by increased payroll, travel, and cyber-attack recovery costs, partially offset by decreased stock compensation expense[221] Liquidity and Capital Resources - The company had an accumulated deficit of $362.1 million at September 30, 2019, and negative cash flows from operations, raising substantial doubt about its ability to continue as a going concern[224][236] Cash, Cash Equivalents and Restricted Cash (in thousands) | Period | Sep 30, 2019 | Dec 31, 2018 | | :------------------------------------------ | :----------- | :----------- | | Cash and cash equivalents | $16,213 | $50,805 | | Cash, cash equivalents and restricted cash at end of period | $16,393 | $50,985 | - Net cash used in operating activities was $35.2 million for the nine months ended September 30, 2019, compared to $30.5 million in 2018[240][241] - Net cash provided by financing activities significantly decreased to $1.4 million for the nine months ended September 30, 2019, from $49.7 million in 2018[243][244] - The company entered into an Equity Distribution Agreement (up to $30.0 million) and a Purchase Agreement (up to $30.0 million) in July 2019 to raise additional capital[226][231] - The Term Loan Agreement with CRG was amended in 2019 to reduce revenue targets, extend interest-only and principal repayment periods, and modify warrants, while increasing the final payment fee to 10%[248][249] Item 3. Quantitative and Qualitative Disclosures about Market Risk Primary market risk is interest rate sensitivity on short-term investments, with no material impact expected - Primary market risk exposure is interest rate sensitivity, affecting short-term investments in U.S. government agency securities[258] - An immediate one percent change in interest rates would not have a material effect on the fair market value of the investment portfolio due to its short-term duration and low risk profile[258] - As of September 30, 2019, and December 31, 2018, the company had no outstanding debt exposed to variable market interest rates[258] Item 4. Controls and Procedures Disclosure controls were ineffective due to a material weakness in IT data backups, leading to delayed financial reporting - The company's disclosure controls and procedures were not effective as of September 30, 2019[261] - A material weakness was identified in internal control over the quality, frequency, and periodic testing of IT data backups, leading to potential data loss and delayed financial statement preparation[261][262] - Remedial actions include upgrading the tape backup system, implementing redundant cloud-based backups, increasing backup frequency, and establishing semi-annual data recovery testing[263] PART II OTHER INFORMATION PART II OTHER INFORMATION Item 1. Legal Proceedings No material adverse legal proceedings or claims are currently outstanding against the company - No material adverse claims or legal actions are currently outstanding[267] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the Annual Report on Form 10-K for 2018 - No material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018[268] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds to report for the period - None[269] Item 3. Defaults Upon Senior Securities This item is not applicable to the company's operations or financial structure - Not applicable[270] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations or industry - Not applicable[271] Item 5. Other Information Founding CEO John McDonough became Executive Chairman, and a search for a new CEO is underway - John McDonough was named Executive Chairman of the Board, effective July 30, 2019[272] - A national search for a new CEO is being undertaken[272] Item 6. Exhibits, Financial Statement Schedules This section lists exhibits filed with Form 10-Q, including corporate governance and loan agreement amendments - Key exhibits include the Restated Certificate of Incorporation, Amended and Restated Bylaws, Amendment No. 5 to Term Loan Agreement, and certifications by the principal executive and financial officers[274] SIGNATURES SIGNATURES SIGNATURES The report was signed on November 18, 2019, by John McDonough and John M. Sprague - Report signed by John McDonough (Executive Chairman, CEO, and Director) and John M. Sprague (Chief Financial Officer)[278] - Date of signing: November 18, 2019[278]