UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2015
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 001-36189
Tandem Diabetes Care, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
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20-4327508 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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11045 Roselle Street San Diego, California |
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92121 |
(Address of principal executive offices) |
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(Zip Code) |
(858) 366-6900
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
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Name of Exchange on Which Registered |
Common Stock, par value $0.001 per share |
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The NASDAQ Stock Market LLC |
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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¨ |
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Accelerated filer |
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x |
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Non-accelerated filer |
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¨ (Do not check if a smaller reporting company) |
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Smaller reporting company |
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¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 27, 2015, there were 30,014,450 shares of the registrant’s Common Stock outstanding.
Part I |
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1 |
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Item 1 |
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1 |
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Condensed Balance Sheets at June 30, 2015 (Unaudited) and December 31, 2014 |
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1 |
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2 |
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Condensed Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (Unaudited) |
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3 |
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4 |
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Item 2 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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14 |
Item 3 |
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21 |
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Item 4 |
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22 |
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Part II |
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23 |
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Item 1 |
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23 |
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Item 1A |
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23 |
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Item 2 |
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47 |
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Item 3 |
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47 |
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Item 4 |
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47 |
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Item 5 |
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47 |
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Item 6 |
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48 |
TANDEM DIABETES CARE, INC.
(In thousands, except par values)
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June 30, |
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December 31, |
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2015 |
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2014 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
45,921 |
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$ |
31,176 |
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Restricted cash |
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2,000 |
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2,000 |
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Short-term investments |
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51,825 |
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36,106 |
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Accounts receivable, net |
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7,473 |
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7,652 |
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Inventory |
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14,670 |
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11,913 |
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Prepaid and other current assets |
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2,170 |
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1,904 |
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Total current assets |
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124,059 |
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90,751 |
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Property and equipment, net |
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14,325 |
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12,581 |
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Patents, net |
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2,274 |
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2,441 |
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Other long-term assets |
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676 |
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691 |
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Total assets |
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$ |
141,334 |
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$ |
106,464 |
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable |
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$ |
3,999 |
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$ |
1,949 |
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Accrued expense |
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1,914 |
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2,920 |
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Employee-related liabilities |
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8,677 |
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9,722 |
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Deferred revenue |
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1,038 |
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840 |
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Other current liabilities |
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2,857 |
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2,663 |
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Total current liabilities |
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18,485 |
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18,094 |
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Notes payable—long-term |
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29,479 |
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29,440 |
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Deferred rent—long-term |
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3,084 |
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2,700 |
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Other long-term liabilities |
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2,534 |
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1,658 |
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Total liabilities |
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53,582 |
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51,892 |
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Commitments and contingencies: |
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Stockholders’ equity: |
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Common stock, $0.001 par value; 100,000 shares authorized as of June 30, 2015 and December 31, 2014, 30,007 and 23,655 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively. |
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30 |
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24 |
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Additional paid-in capital |
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377,142 |
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303,255 |
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Accumulated other comprehensive income |
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37 |
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8 |
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Accumulated deficit |
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(289,457 |
) |
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(248,715 |
) |
Total stockholders’ equity |
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87,752 |
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54,572 |
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Total liabilities and stockholders’ equity |
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$ |
141,334 |
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$ |
106,464 |
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See accompanying notes to unaudited condensed financial statements.
1
CONDENSED STATEMENTS OF OPERATIONS and comprehensive loss
(Unaudited)
(In thousands, except per share data)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2015 |
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2014 |
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2015 |
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2014 |
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Sales |
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$ |
15,706 |
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$ |
10,255 |
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$ |
28,014 |
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$ |
18,320 |
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Cost of sales |
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10,905 |
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6,806 |
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20,406 |
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14,005 |
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Gross profit |
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4,801 |
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3,449 |
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7,608 |
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4,315 |
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Operating expenses: |
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Selling, general and administrative |
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19,599 |
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18,068 |
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38,954 |
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36,109 |
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Research and development |
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3,873 |
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3,699 |
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7,735 |
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7,362 |
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Total operating expenses |
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23,472 |
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21,767 |
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46,689 |
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43,471 |
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Operating loss |
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(18,671 |
) |
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(18,318 |
) |
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(39,081 |
) |
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(39,156 |
) |
Other income (expense), net: |
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Interest and other income |
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61 |
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31 |
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160 |
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49 |
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Interest and other expense |
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(923 |
) |
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(910 |
) |
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(1,821 |
) |
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(2,052 |
) |
Total other income (expense), net |
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(862 |
) |
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(879 |
) |
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(1,661 |
) |
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(2,003 |
) |
Net loss |
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$ |
(19,533 |
) |
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$ |
(19,197 |
) |
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$ |
(40,742 |
) |
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$ |
(41,159 |
) |
Other comprehensive loss: |
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Unrealized gain (loss) on short-term investments |
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$ |
(39 |
) |
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$ |
(2 |
) |
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$ |
29 |
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$ |
12 |
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Comprehensive loss |
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$ |
(19,572 |
) |
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$ |
(19,199 |
) |
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$ |
(40,713 |
) |
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$ |
(41,147 |
) |
Net loss per share, basic and diluted |
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$ |
(0.65 |
) |
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$ |
(0.83 |
) |
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$ |
(1.47 |
) |
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$ |
(1.79 |
) |
Weighted average shares used to compute basic and diluted net loss per share |
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29,902 |
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23,098 |
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27,723 |
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23,017 |
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See accompanying notes to unaudited condensed financial statements.
2
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Six Months Ended June 30, |
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2015 |
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2014 |
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Operating activities |
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Net loss |
$ |
(40,742 |
) |
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$ |
(41,159 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization expense |
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2,414 |
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1,918 |
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Interest expense related to amortization of debt discount and debt issuance costs |
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71 |
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134 |
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Provision for allowance for doubtful accounts |
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(100 |
) |
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101 |
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Provision for inventory reserve |
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101 |
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163 |
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Amortization of premium/discount on short-term investments |
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(37 |
) |
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(21 |
) |
Stock-based compensation expense |
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7,033 |
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7,302 |
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Other |
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(63 |
) |
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— |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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279 |
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|
835 |
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Inventory |
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(2,892 |
) |
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(1,008 |
) |
Prepaid and other current assets |
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(249 |
) |
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(804 |
) |
Other long-term assets |
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(17 |
) |
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— |
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Accounts payable |
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1,388 |
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77 |
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Accrued expense |
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(933 |
) |
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(187 |
) |
Employee-related liabilities |
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(1,045 |
) |
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(378 |
) |
Deferred revenue |
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198 |
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103 |
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Other current liabilities |
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(47 |
) |
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(1,241 |
) |
Deferred rent |
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(308 |
) |
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(161 |
) |
Other long-term liabilities |
|
769 |
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|
66 |
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Net cash used in operating activities |
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(34,180 |
) |
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(34,260 |
) |
Investing activities |
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Purchase of short-term investments |
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(58,993 |
) |
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(35,829 |
) |
Proceeds from sales and maturities of short-term investments |
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43,450 |
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10,860 |
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Purchase of property and equipment |
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(2,351 |
) |
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(2,690 |
) |
Purchase of patents |
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(74 |
) |
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(173 |
) |
Net cash used in investing activities |
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(17,968 |
) |
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(27,832 |
) |
Financing activities |
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Issuance of notes payable, net of issuance costs |
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— |
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29,925 |
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Restricted cash in connection with notes payable and corporate credit card |
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— |
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50 |
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Principal payments on notes payable |
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— |
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(30,000 |
) |
Proceeds from public offering, net of offering costs |
|
64,862 |
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|
— |
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Proceeds from issuance of common stock |
|
2,031 |
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|
|
1,940 |
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Net cash provided by financing activities |
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66,893 |
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|
|
1,915 |
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Net increase (decrease) in cash and cash equivalents |
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14,745 |
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(60,177 |
) |
Cash and cash equivalents at beginning of period |
|
31,176 |
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|
|
124,385 |
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Cash and cash equivalents at end of period |
$ |
45,921 |
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|
$ |
64,208 |
|
Supplemental disclosures of cash flow information |
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|
|
|
|
|
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Interest paid |
$ |
1,735 |
|
|
$ |
1,919 |
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Supplemental schedule of noncash investing and financing activities |
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|
|
|
|
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Lease incentive—lessor-paid tenant improvements |
$ |
933 |
|
|
$ |
1,600 |
|
Property and equipment included in accounts payable |
$ |
1,510 |
|
|
$ |
59 |
|
See accompanying notes to unaudited condensed financial statements.
3
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
The Company
Tandem Diabetes Care, Inc. is a medical device company focused on the design, development and commercialization of products for people with insulin-dependent diabetes. Unless the context requires otherwise, the terms the “Company” or “Tandem” refer to Tandem Diabetes Care, Inc.
The Company designed and commercialized its flagship product, the t:slim Insulin Delivery System, or t:slim, based on its proprietary technology platform and unique consumer-focused approach. The U.S. Food and Drug Administration (FDA) cleared t:slim in November 2011 and the Company commenced commercial sales of t:slim in the United States in August 2012. In January 2015, the Company received clearance from the FDA to commercialize its next product, the t:flex Insulin Delivery System, or t:flex, for people with greater insulin needs. The Company commenced commercial sales of t:flex in the United States during the second quarter of 2015.
Tandem was originally incorporated in the state of Colorado on January 27, 2006 under the name Phluid, Inc. On January 7, 2008, the Company was reincorporated in the state of Delaware for the purposes of changing its legal name from Phluid, Inc. to Tandem Diabetes Care, Inc. and changing its state of incorporation from Colorado to Delaware.
Basis of Presentation
The Company has prepared the accompanying unaudited condensed financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments which are of a normal and recurring nature, considered necessary for a fair presentation of the financial information contained herein, have been included.
Interim financial results are not necessarily indicative of results anticipated for the full year or any other period(s). These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, from which the balance sheet information herein was derived but excludes disclosures required by GAAP for complete financial statements.
Voluntary Recall
On January 10, 2014, the Company announced a voluntary recall of select lots of cartridges used with t:slim that may have been at risk of leaking. The cause of the recall was identified during the Company’s internal product testing. The recall was expanded on January 20, 2014 to include additional lots of affected cartridges used with t:slim. The Company incurred approximately $1.7 million in direct costs associated with the recall. The Company recorded a cost of sales charge of approximately $1.3 million in the fourth quarter of 2013 and recorded a cost of sales charge for the remainder in the first quarter of 2014 for affected cartridges shipped in 2014. The total cost of the recall consisted of approximately $0.7 million associated with the return and replacement of affected cartridges in the field and approximately $1.0 million for the write-off of affected cartridges within the Company’s internal inventory. As of December 31, 2014, the FDA determined that the recall is terminated and the Company does not currently expect any further direct financial impact of the recall beyond these costs.
2. Summary of Significant Accounting Policies
There have been no significant changes in our significant accounting policies during the six months ended June 30, 2015, as compared with those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make informed estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in the Company’s financial statements and accompanying notes as of the date of the financial statements. Actual results could materially differ from those estimates and assumptions.
4
Restricted cash as of June 30, 2015 and December 31, 2014 was primarily composed of a $2.0 million minimum cash balance requirement in connection with the Capital Royalty Term Loan Agreement (see Note 7 “Loan Agreements”).
Accounts Receivable
The Company grants credit to various customers in the normal course of business. The Company maintains an allowance for doubtful accounts for potential credit losses. Provisions are made, generally, for receivables greater than 120 days past due and based upon a specific review of other outstanding invoices. Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a balance is uncollectible.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expense, and employee-related liabilities are reasonable estimates of their fair values because of the short-term nature of these assets and liabilities. Short-term investments and foreign exchange forward contracts that are not designated as hedges are carried at fair value. Based on the borrowing rates currently available for loans with similar terms, the Company believes that the fair value of its long-term debt approximates its carrying value.
Revenue Recognition
Revenue is generated from sales, in the United States, of the t:slim insulin pump and t:flex insulin pump (collectively, “Tandem Pumps”), disposable cartridges and infusion sets to individual customers and third-party distributors that resell the product to insulin-dependent diabetes customers. The Company is paid directly by customers who use the products, distributors and third-party insurance payors.
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred and title passed, the price is fixed or determinable, and collectability is reasonably assured. These criteria are applied as follows:
● |
The evidence of an arrangement generally consists of contractual arrangements with distributors, third-party insurance payors or direct customers. |
● |
Transfer of title and risk and rewards of ownership are passed upon shipment of the pump to distributors or upon delivery to the customer. |
● |
The selling prices are fixed and agreed upon based on the contracts with distributors, the customer and contracted insurance payors, if applicable. For sales to customers associated with insurance providers with whom there is no contract, revenue is recognized upon collection of cash, at which time the price is determinable. The Company generally does not offer rebates to its distributors and customers. |
● |
The Company considers the overall creditworthiness and payment history of the distributor, customer and the contracted insurance payor in concluding whether collectability is reasonably assured. |
Revenue Recognition for Arrangements with Multiple Deliverables
The Company considers the deliverables in its product offering as separate units of accounting and recognizes deliverables as revenue upon delivery only if (i) the deliverable has standalone value and (ii) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is probable and substantially controlled by the Company. The Company allocates consideration to the separate units of accounting, unless the undelivered elements were deemed perfunctory and inconsequential. The Company uses the relative selling price method, in which allocation of consideration is based on vendor-specific objective evidence (VSOE) if available, third-party evidence (TPE), or if VSOE and TPE are not available, management’s best estimate of a standalone selling price (ESP) for the undelivered elements.
5
The Company offers a cloud-based data management application, t:connect, which is made available to customers upon purchase of the Tandem Pump. This service is deemed an undelivered element at the time of the Tandem Pump sale. Because the Company has neither VSOE nor TPE for this deliverable, the allocation of revenue is based on the Company’s ESP. The Company establishes its ESP based on the estimated cost to provide such services, including consideration for a reasonable profit margin, which is then corroborated by comparable market data. The Company allocates fair value based on management’s ESP to this element at the time of sale and is recognizing the revenue over the four-year hosting period. At June 30, 2015 and December 31, 2014, $0.8 million and $0.7 million was recorded as deferred revenue for the t:connect hosting service, respectively. All other undelivered elements at the time of sale are deemed inconsequential or perfunctory.
Product Returns
The Company offers a 30-day right of return to its customers from the date of shipment of a Tandem Pump, provided a physician’s confirmation of the medical reason for the return is received. Estimated allowances for sales returns are based on historical returned quantities as compared to pump shipments in those same periods. The return rate is then applied to the sales of the current period to establish a reserve at the end of the period. The return rates used in the reserve are adjusted for known or expected changes in the marketplace when appropriate. The allowance for product returns included in other current liabilities on the Company’s balance sheets at June 30, 2015 and December 31, 2014 was $0.2 million and $0.3 million, respectively. Actual product returns have not differed materially from estimated amounts reserved in the accompanying financial statements.
Warranty Reserve
The Company generally provides a four-year warranty on a Tandem Pump to end user customers and may replace any pumps that do not function in accordance with the product specifications. Any pump returned to the Company may be refurbished and redeployed. Additionally, the Company offers a six-month warranty on disposable cartridges and infusion sets. Estimated warranty costs are recorded at the time of shipment. Warranty costs are estimated based on the current expected replacement product cost, actual experience and expected failure rates from test studies performed in conjunction with the clearance of the t:slim pump with the FDA relating to the longevity and reliability of the pump. The Company evaluates the reserve quarterly and makes adjustments when appropriate. At June 30, 2015 and December 31, 2014, the warranty reserve was $3.0 million and $2.0 million, respectively. Actual warranty costs have not differed materially from estimated amounts reserved in the accompanying financial statements.
The following table provides a reconciliation of the change in product warranty liabilities through June 30, 2015 (in thousands):
Balance at December 31, 2014 |
$ |
1,974 |
|
Provision for warranties issued during the period |
|
3,145 |
|
Settlements made during the period |
|
(2,108 |
) |
Balance at June 30, 2015 |
$ |
3,011 |
|
|
|
|
|
Current portion |
$ |
806 |
|
Non-current portion |
|
2,205 |
|
Total |
$ |
3,011 |
|
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and the portion that is ultimately expected to vest is recognized as compensation expense over the employee’s requisite service period on a straight-line basis. The Company estimates the fair value of stock options and shares issued to employees under the Employee Stock Purchase Plan (ESPP) using a Black-Scholes option-pricing model on the date of grant. The Black-Scholes option-pricing model requires the use of subjective assumptions including volatility, expected term, and risk-free rate. For awards that vest based on service conditions, the Company recognizes expense using the straight-line method less estimated forfeitures. As of June 30, 2015, there were no outstanding equity awards with market or performance conditions.
The Company records the expense for stock option grants to non-employees based on the estimated fair value of the stock options using the Black-Scholes option-pricing model. The fair value of non-employee awards is remeasured at each reporting period as the underlying awards vest, unless the instruments are fully vested, immediately exercisable and nonforfeitable on the date of grant.
6
Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares that were outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by dividing the net loss by the sum of the weighted-average number of dilutive common share equivalents outstanding for the period determined using the treasury stock method. Dilutive common share equivalents are comprised of warrants, potential awards granted pursuant to the ESPP, and options outstanding under the Company’s other equity incentive plans. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.
Potentially dilutive securities not included in the calculation of diluted net loss per share (because inclusion would be anti-dilutive) are as follows (in common stock equivalent shares):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, |
|
|
June 30, |
|
||||||||||
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
Warrants for common stock |
|
990,031 |
|
|
|
1,009,170 |
|
|
|
990,031 |
|
|
|
1,009,170 |
|
Common stock options |
|
2,042,322 |
|
|
|
4,352,181 |
|
|
|
2,042,322 |
|
|
|
4,350,888 |
|
ESPP |
|
16,470 |
|
|
|
18,251 |
|
|
|
8,280 |
|
|
|
9,176 |
|
|
|
3,048,823 |
|
|
|
5,379,602 |
|
|
|
3,040,633 |
|
|
|
5,369,234 |
|
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board issued a comprehensive new revenue recognition standard that will supersede existing revenue guidance under U.S. GAAP and International Financial Reporting Standards. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. This may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. On July 9, 2015, the FASB approved a one-year deferral of the effective date of the standard to December 15, 2017 and early application is permitted, but not before the original effective date of December 15, 2016. The Company is in the process of assessing the future impact of the adoption of the standard on its financial statements.
In April 2015, the FASB issued guidance on the balance sheet presentation requirements for debt issuance costs. The guidance will require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. A company should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, a company is required to comply with the applicable disclosures for a change in an accounting principle. The guidance only affects the presentation of debt issuance costs in the balance sheet and has no impact on results of operations. We will apply ASU 2015-03 on January 1, 2016 and we do not expect that the application of the new standard will have any impact on our results of operations. Debt issuance costs included in other long-term assets in the accompanying financial statements were $0.4 million and $0.5 million at June 30, 2015 and December 31, 2014, respectively.
7
The Company invests its excess cash in investment securities, principally debt instruments of financial institutions and corporations with strong credit ratings. The following represents a summary of the estimated fair value of short-term investments at June 30, 2015 and December 31, 2014 (in thousands):
At June 30, 2015 |
|
Maturity (in years) |
|
Amortized Cost |
|
|
Unrealized Gain |
|
|
Unrealized Loss |
|
|
Estimated Fair Value |
|
||||
Available-for-sale investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
Less than 1 |
|
$ |
41,956 |
|
|
$ |
37 |
|
|
$ |
— |
|
|
$ |
41,993 |
|
Treasury securities |
|
Less than 1 |
|
|
2,084 |
|
|
|
— |
|
|
|
— |
|
|
|
2,084 |
|
Government-sponsored enterprise securities |
|
Less than 1 |
|
|
7,579 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
7,579 |
|
|
|
|
|
$ |
51,619 |
|
|
$ |
39 |
|
|
$ |
(2 |
) |
|
$ |
51,656 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds held for nonqualified deferred compensation plan participants |
|
|
|
$ |
165 |
|
|
$ |
4 |
|
|
|
|
|
|
$ |
169 |
|
Total |
|
|
|
$ |
51,784 |
|
|
$ |
43 |
|
|
$ |
(2 |
) |
|
$ |
51,825 |
|
At December 31, 2014 |
|
Maturity (in years) |
|
Amortized Cost |
|
|
Unrealized Gain |
|
|
Unrealized Loss |
|
|
Estimated Fair Value |
|
||||
Available-for-sale investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
Less than 1 |
|
$ |
32,536 |
|
|
$ |
9 |
|
|
$ |
— |
|
|
$ |
32,545 |
|
Government-sponsored enterprise securities |
|
Less than 1 |
|
|
3,504 |
|
|
|
— |
|
|
|
(1 |
) |
|
|
3,503 |
|
|
|
|
|
$ |
36,040 |
|
|
$ |
9 |
|
|
$ |
(1 |
) |
|
$ |
36,048 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds held for nonqualified deferred compensation plan participants |
|
|
|
$ |
56 |
|
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
58 |
|
Total |
|
|
|
$ |
36,096 |
|
|
$ |
11 |
|
|
$ |
(1 |
) |
|
$ |
36,106 |
|
4. Inventory
Inventories, stated at the lower of cost or market, consisted of the following (in thousands):
|
June 30, |
|
|
December 31, |
|
||
|
2015 |
|
|
2014 |
|
||
Raw materials |
$ |
9,132 |
|
|
$ |
7,085 |
|
Work in process |
|
2,629 |
|
|
|
1,972 |
|
Finished goods |
|
2,909 |
|
|
|
2,856 |
|
Total |
$ |
14,670 |
|
|
$ |
11,913 |
|
5. Foreign Exchange Rate Contracts
In April 2015, the Company entered into two foreign exchange forward contracts for a total notional amount of $1.0 million, to offset a portion of the foreign exchange risk of expected future cash flows on certain Euro-denominated liabilities that are associated with the purchase of manufacturing equipment. Both forward contracts are short-term contracts expiring before December 31, 2015. While the foreign exchange forward contracts act as economic hedges, they are not designated as hedges for accounting purposes. Gains and losses resulting from changes in the fair values of these foreign exchange forward contracts are recorded to other income or expense on the Company’s statement of operations and comprehensive loss.
The following table summarizes the notional amount of the foreign exchange forward contracts outstanding as of June 30, 2015 and December 31, 2014 (in thousands):
|
June 30, |
|
|
December 31, |
|
||
|
2015 |
|
|
2014 |
|
||
Foreign exchange contracts not designated as hedges |
$ |
971 |
|
|
$ |
— |
|
8
The following table summarizes the fair value of derivative instruments included in Prepaid and other current assets in the accompanying Balance Sheets (in thousands):
|
June 30, |
|
|
December 31, |
|
||
|
2015 |
|
|
2014 |
|
||
Foreign exchange contracts not designated as hedges |
$ |
17 |
|
|
$ |
— |
|
The following table summarizes the gain recognized in earnings for foreign currency forward contracts outstanding for the three and six months ended June 30, 2015 and 2014 (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, |
|
|
June 30, |
|
||||||||||
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
Foreign exchange contracts not designated as hedges |
$ |
17 |
|
|
$ |
— |
|
|
$ |
17 |
|
|
$ |
— |
|
6. Fair Value Measurements
Authoritative guidance on fair value measurements defines fair value, establishes a consistent framework for measuring fair value, and expands disclosures for each major asset and liability category measured at fair value on either a recurring or a nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: |
|
Observable inputs such as unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
|
|
|
Level 2: |
|
Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly for substantially the full term of the asset or liability. |
|
|
|
Level 3: |
|
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own valuation techniques that require input assumptions. |
The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):
|
|
|
|
|
|
Fair Value Measurements at |
|
|||||||||
|
|
|
|
|
|
June 30, 2015 |
|
|||||||||
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (1) |
|
$ |
41,486 |
|
|
$ |
41,486 |
|
|
$ |
— |
|
|
$ |
— |
|
Commercial paper |
|
|
41,993 |
|
|
— |
|
|
|
41,993 |
|
|
— |
|
||
Mutual funds held for nonqualified deferred compensation plan participants (2) |
|
|
169 |
|
|
|
169 |
|
|
— |
|
|
— |
|
||
Government-sponsored enterprise securities |
|
|
7,579 |
|
|
— |
|
|
|
7,579 |
|
|
— |
|
||
Treasury securities |
|
|
2,084 |
|
|
|
2,084 |
|
|
— |
|
|
— |
|
||
Foreign exchange forward contracts not designated as hedges (3) |
|
|
17 |
|
|
|
|
|
|
|
17 |
|
|
— |
|
|
Total assets |
|
$ |
93,328 |
|
|
$ |
43,739 |
|
|
$ |
49,589 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation (2) |
|
$ |
169 |
|
|
$ |
169 |
|
|
$ |
— |
|
|
$ |
— |
|
Total liabilities |
|
$ |
169 |
|
|
$ |
169 |
|
|
$ |
— |
|
|
$ |
— |
|
9
|
|
|
|
|
|
Fair Value Measurements at |
|
|||||||||
|
|
|
|
|
|
December 31, 2014 |
|
|||||||||
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (1) |
|
$ |
30,050 |
|
|
$ |
30,050 |
|
|
$ |
— |
|
|
$ |
— |
|
Commercial paper |
|
|
32,545 |
|
|
|
— |
|
|
|
32,545 |
|
|
|
— |
|
Mutual funds held for nonqualified deferred compensation plan participants (2) |
|
|
58 |
|
|
|
58 |
|
|
|
— |
|
|
|
— |
|
Government-sponsored enterprise securities |
|
|
3,503 |
|
|
|
— |
|
|
|
3,503 |
|
|
|
— |
|
Total assets |
|
$ |
66,156 |
|
|
$ |
30,108 |
|
|
$ |
36,048 |
|
|
$ |
— |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation (2) |
|
$ |
58 |
|
|
$ |
58 |
|
|
$ |
— |
|
|
$ |
— |
|
Total liabilities |
|
$ |
58 |
|
|
$ |
58 |
|
|
$ |
— |
|
|
$ |
— |
|
(1) |
Cash equivalents included money market funds and commercial paper with a maturity of three months or less from the date of purchase. |
(2) |
Deferred compensation plans are compensation plans directed by the Company and structured as a Rabbi Trust for certain executives and non-employee directors. The investment assets of the Rabbi Trust are valued using quoted market prices multiplied by the number of shares held in each trust account. The related deferred compensation liability represents the fair value of the investment assets. |
(3) |
The fair value of foreign exchange forward contracts not designated as hedges is determined using the forward exchange rates at the measurement date, with the resulting value discounted back to present values. |
The Company’s Level 2 financial instruments are valued using market prices on less active markets with observable valuation inputs such as interest rates and yield curves. The Company obtains the fair value of Level 2 financial instruments from quoted market prices, calculated prices or quotes from third-party pricing services. The Company validates these prices through independent valuation testing and review of portfolio valuations provided by the Company’s investment managers. There were no transfers between Level 1 and Level 2 securities during the three and six months ended June 30, 2015.
7. Loan Agreements
At June 30, 2015 and December 31, 2014, the Company had $30.0 million aggregate borrowings outstanding under the Amended and Restated Term Loan Agreement with Capital Royalty Partners (the “Amended and Restated Term Loan Agreement”). Under the agreement, interest is payable, at the Company’s option, (i) in cash at a rate of 11.5% per annum or (ii) at a rate of 9.5% of the 11.5% per annum in cash and 2.0% of the 11.5% per annum to be added to the principal of the loan and subject to accruing interest. The Company has elected to pay interest in cash at a rate of 11.5% per annum. Interest-only payments are due quarterly on March 31, June 30, September 30 and December 31 of each year of the interest-only payment period, which ends on March 31, 2018.
At December 31, 2014, the Company was also a party to a new Term Loan Agreement with Capital Royalty Partners (the “New Tranche Term Loan Agreement”), under which the Company could have borrowed up to an additional $30.0 million on or before March 31, 2015 at the same interest rate and on the same key terms as the Amended and Restated Term Loan Agreement.
In February 2015, the Company amended its Amended and Restated Term Loan Agreement, as well as its New Tranche Term Loan Agreement. Pursuant to this amendment, the interest-only payment period was extended to December 31, 2019 from March 31, 2018, at the same interest rate and on the same key terms as the existing agreements. The principal balance is due in full at the end of the term of the amended and restated term loan, which is March 31, 2020. The present value of the future cash flows under the modified terms did not exceed the present value of the future cash flows under the previous terms by more than 10%. The Company treated this amendment as a modification. The remaining debt discount costs are be amortized over the remaining term of the Amended and Restated Term Loan Agreement using the effective interest method.
The Company did not elect to borrow any amounts under the New Tranche Term Loan Agreement on or before March 31, 2015, and the Company’s ability to borrow any amounts under that agreement has now lapsed.
The Capital Royalty loan is collateralized by all assets of the Company. The Amended and Restated Term Loan Agreement also imposes various affirmative and negative covenants on the Company. The principal financial covenants require that the Company attain minimum annual revenues of $30.0 million in 2014, $50.0 million in 2015, $65.0 million in 2016, $80.0 million in 2017 and $95.0 million each year thereafter until the end of the term of the loan. At June 30, 2015, the Company was in compliance with all of the covenants in the Amended and Restated Term Loan Agreement.
10
8. Stockholders’ Equity
Public Offering
In the first quarter of 2015, the Company completed a public offering of 6,037,500 shares of its common stock at a public offering price of $11.50 per share. Net cash proceeds from the public offering were approximately $64.9 million, after deducting underwriting discounts, commissions and offering expenses payable by the Company.
Shares Reserved for Future Issuance
The following shares of the Company’s common stock are reserved for future issuance at June 30, 2015:
Shares underlying outstanding warrants |
|
990,031 |
|
Shares underlying outstanding stock options |
|
5,689,557 |
|
Shares authorized for future equity award grants |
|
2,174,749 |
|
Shares authorized for issuance as ESPP awards |
|
605,844 |
|
|
|
9,460,181 |
|
The Company issued 150,259 shares of its common stock upon the exercise of stock options and warrants during the six months ended June 30, 2015, and issued 477,741 shares of its common stock upon the exercise of stock options and warrants during the year ended December 31, 2014.
In October 2013, the Company adopted the ESPP, which enables eligible employees to purchase shares of the Company’s common stock using their after tax payroll deductions, subject to certain conditions. Generally, the ESPP consists of a two-year offering period with four six-month purchase periods which begin in May and November of each year. There were 164,569 shares of the Company’s common stock purchased under the ESPP during the six months ended June 30, 2015, and 251,390 shares of the Company’s common stock purchased under the ESPP during the year ended December 31, 2014.
Stock-Based Compensation
The assumptions used in the Black-Scholes option-pricing model are as follows:
|
Stock Option |
|
|||||||||||||
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, |
|
|
June 30, |
|
||||||||||
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
Weighted average grant date fair value (per share) |
$ |
7.24 |
|
|
$ |
11.58 |
|
|
$ |
7.67 |
|
|
$ |
16.38 |
|
Risk-free interest rate |
|
1.7 |
% |
|
|
1.9 |
% |
|
|
1.7 |
% |
|
|
1.9 |
% |
Expected dividend yield |
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected volatility |
|
66.1 |
% |
|
|
78.6 |
% |
|
|
67.4 |
% |
|
|
78.7 |
% |
Expected term (in years) |
|
6.1 |
|
|
|
6.1 |
|
|
|
6.1 |
|
|
|
6.1 |
|
|
ESPP |
|
|||||||||||||
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, |
|
|
June 30, |
|
||||||||||
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
Weighted average grant date fair value (per share) |
$ |
4.98 |
|
|
$ |
7.30 |
|
|
$ |
4.98 |
|
|
$ |
7.30 |
|
Risk-free interest rate |
|
0.3 |
% |
|
|
0.2 |
% |
|
|
0.3 |
% |
|
|
0.2 |
% |
Expected dividend yield |
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected volatility |
|
62.1 |
% |
|
|
62.9 |
% |
|
|
62.1 |
% |
|
|
62.9 |
% |
Expected term (in years) |
|
1.3 |
|
|
1.3 |
|
|
|
1.3 |
|
|
1.3 |
|
11
The following table summarizes the allocation of stock-based compensation expense (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, |
|
|
June 30, |
|
||||||||||
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
Cost of sales |
$ |
307 |
|
|
$ |
263 |
|
|
$ |
631 |
|
|
$ |
626 |
|
Selling, general and administrative |
|
2,602 |
|
|
|
2,816 |
|
|
|
5,580 |
|
|
|
5,819 |
|
Research and development |
|
351 |
|
|
|
452 |
|
|
|
822 |
|
|
|
857 |
|
Total |
$ |
3,260 |
|
|
$ |
3,531 |
|
|
$ |
7,033 |
|
|
$ |
7,302 |
|
The total stock-based compensation capitalized as part of the cost of inventory was $0.2 million and $0.2 million at June 30, 2015 and December 31, 2014, respectively.
9. Collaborations
DexCom Development and Commercialization Agreement
In February 2012, the Company entered into a Development and Commercialization Agreement with DexCom, Inc. (DexCom Agreement) for the purpose of collaborating on the development and commercialization of an integrated system which incorporates the t:slim Insulin Delivery System with DexCom’s proprietary continuous glucose monitoring system. Under the DexCom Agreement, the Company paid DexCom $1.0 million at the commencement of the collaboration in 2012, and an additional $1.0 million in 2014, upon the achievement of a pre-market approval, or PMA, submission to the FDA. Both payments were recorded as research and development costs in their respective years. The Company will make one additional $1.0 million payment upon approval of the PMA submission by the FDA. Additionally, the Company will reimburse DexCom up to $1.0 million of its development costs and is solely responsible for its own development costs. As of June 30, 2015, the Company has reimbursed DexCom $0.2 million of its development costs. The research and development costs recognized for the three and six months ended June 30, 2015, and 2014 were not significant.
Upon commercialization of the integrated system, and as compensation for the non-exclusive license rights, the Company will pay DexCom a royalty of $100 for each integrated system sold.
JDRF Collaboration
In January 2013, the Company entered into a Research, Development and Commercialization Agreement with the Juvenile Diabetes Research Foundation (JDRF Agreement) to develop the t:dual Infusion System, a first-of-its-kind, dual-chamber infusion pump for the management of diabetes. According to the terms of the JDRF Agreement, JDRF will provide research funding of up to $3.0 million based on the achievement of research and development milestones, not to exceed research costs incurred by the Company. Payments that the Company receives to fund the collaboration efforts under the terms of the JDRF Agreement are recorded as restricted cash and current and long-term liabilities. The liabilities are recognized as an offset of research and development expenses straight-line over the remaining months until anticipated completion of the final milestone, only to the extent that the restricted cash is utilized to fund such development activities. The estimated completion date is re-evaluated each reporting period based on development progress through that date. As of June 30, 2015, and in light of the Company’s assessment of technical and regulatory challenges, the Company is unable to estimate the completion date of the project. Therefore, further amortization of the liabilities will cease until such date can be determined.
As of June 30, 2015, milestone payment achievements totaled $0.7 million, and research and development costs were offset cumulatively by $0.5 million. The research and development costs were offset by $37,000 and $74,000 for the three and six months ended June 30, 2015, respectively, and $46,000 and $0.1 million for the three and six months ended June 30, 2014, respectively. The Company did not have any restricted cash balances related to the JDRF Agreement at June 30, 2015 or December 31, 2014.
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10. Commitments and Contingencies
From time to time, the Company may be subject to legal proceedings, regulatory encounters or other matters arising in the ordinary course of business, including actions with respect to intellectual property, employment, product liability, and contractual matters. The Company assesses the probability and range of possible loss based on the developments in these matters on a regular basis. A liability is recorded in the financial statements if the Company believes it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Because of the uncertainties related to the occurrence, amount, and range of loss on any pending actions, the Company is currently unable to predict their ultimate outcomes, and, with respect to any pending litigation or claim where no liability has been accrued, to make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome. At each of June 30, 2015 and December 31, 2014, there were no material matters for which the negative outcome was considered probable or estimable
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