tndm-10q_20150930.htm

 

 

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 September 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

 

20-4327508

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

11045 Roselle Street

San Diego, California

 

92121

(Address of principal executive offices)

 

(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   

 

   Name of Exchange on Which Registered   

Common Stock, par value $0.001 per share

 

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

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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 October 26, 2015, there were 30,074,979 shares of the registrant’s Common Stock outstanding.

 

 

 

 

 


TABLE OF CONTENTS

 

Part I

  

Financial Information

  

 

1

Item 1

  

Financial Statements

  

 

1

 

  

Condensed Balance Sheets at September 30, 2015 (Unaudited) and December 31, 2014

  

 

1

 

  

Condensed Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)

  

 

2

 

  

Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (Unaudited)

  

 

3

 

  

Notes to Unaudited Condensed Financial Statements

  

 

4

Item 2

  

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

  

 

14

Item 3

  

Quantitative and Qualitative Disclosures about Market Risk

  

 

22

Item 4

  

Controls and Procedures

  

 

23

 

 

 

 

 

 

Part II

  

Other Information

  

 

24

Item 1

  

Legal Proceedings

  

 

24

Item 1A

  

Risk Factors

  

 

24

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

 

48

Item 3

  

Defaults Upon Senior Securities

  

 

48

Item 4

  

Mine Safety Disclosures

  

 

48

Item 5

  

Other Information

  

 

48

Item 6

  

Exhibits

  

 

49

 

 

 


PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

TANDEM DIABETES CARE, INC.

CONDENSED BALANCE SHEETS

(In thousands, except par values)

 

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

43,205

 

 

$

31,176

 

Restricted cash

 

 

2,000

 

 

 

2,000

 

Short-term investments

 

 

38,546

 

 

 

36,106

 

Accounts receivable, net

 

 

7,006

 

 

 

7,652

 

Inventory

 

 

17,552

 

 

 

11,913

 

Prepaid and other current assets

 

 

2,614

 

 

 

1,904

 

Total current assets

 

 

110,923

 

 

 

90,751

 

Property and equipment, net

 

 

14,888

 

 

 

12,581

 

Patents, net

 

 

2,192

 

 

 

2,441

 

Other long-term assets

 

 

515

 

 

 

691

 

Total assets

 

$

128,518

 

 

$

106,464

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,018

 

 

$

1,949

 

Accrued expense

 

 

2,603

 

 

 

2,920

 

Employee-related liabilities

 

 

9,854

 

 

 

9,722

 

Deferred revenue

 

 

1,952

 

 

 

840

 

Other current liabilities

 

 

3,893

 

 

 

2,663

 

Total current liabilities

 

 

22,320

 

 

 

18,094

 

Notes payable—long-term

 

 

29,499

 

 

 

29,440

 

Deferred rent—long-term

 

 

2,915

 

 

 

2,700

 

Other long-term liabilities

 

 

2,550

 

 

 

1,658

 

Total liabilities

 

 

57,284

 

 

 

51,892

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000 shares authorized as of September 30, 2015 and December 31, 2014, 30,071 and 23,655 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively.

 

 

30

 

 

 

24

 

Additional paid-in capital

 

 

380,215

 

 

 

303,255

 

Accumulated other comprehensive income

 

 

32

 

 

 

8

 

Accumulated deficit

 

 

(309,043

)

 

 

(248,715

)

Total stockholders’ equity

 

 

71,234

 

 

 

54,572

 

Total liabilities and stockholders’ equity

 

$

128,518

 

 

$

106,464

 

 

See accompanying notes to unaudited condensed financial statements.

 

 

 

1


TANDEM DIABETES CARE, INC.

CONDENSED STATEMENTS OF OPERATIONS and comprehensive loss

(Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Sales

 

$

15,716

 

 

$

13,514

 

 

$

43,730

 

 

$

31,834

 

Cost of sales

 

 

10,203

 

 

 

9,117

 

 

 

30,609

 

 

 

23,121

 

Gross profit

 

 

5,513

 

 

 

4,397

 

 

 

13,121

 

 

 

8,713

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

19,123

 

 

 

18,895

 

 

 

58,077

 

 

 

55,004

 

Research and development

 

 

5,093

 

 

 

4,508

 

 

 

12,828

 

 

 

11,870

 

Total operating expenses

 

 

24,216

 

 

 

23,403

 

 

 

70,905

 

 

 

66,874

 

Operating loss

 

 

(18,703

)

 

 

(19,006

)

 

 

(57,784

)

 

 

(58,161

)

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

87

 

 

 

30

 

 

 

247

 

 

 

79

 

Interest and other expense

 

 

(969

)

 

 

(923

)

 

 

(2,791

)

 

 

(2,976

)

Total other expense, net

 

 

(882

)

 

 

(893

)

 

 

(2,544

)

 

 

(2,897

)

Net loss

 

$

(19,585

)

 

$

(19,899

)

 

$

(60,328

)

 

$

(61,058

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on short-term investments

 

$

(5

)

 

$

7

 

 

$

24

 

 

$

19

 

Comprehensive loss

 

$

(19,590

)

 

$

(19,892

)

 

$

(60,304

)

 

$

(61,039

)

Net loss per share, basic and diluted

 

$

(0.65

)

 

$

(0.85

)

 

$

(2.12

)

 

$

(2.64

)

Weighted average shares used to compute basic and diluted net loss per share

 

 

30,040

 

 

 

23,472

 

 

 

28,504

 

 

 

23,171

 

 

See accompanying notes to unaudited condensed financial statements.

 

 

 

2


TANDEM DIABETES CARE, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

Nine Months Ended September 30,

 

 

2015

 

 

2014

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(60,328

)

 

$

(61,058

)

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

 

 

 

 

 

 

 

Depreciation and amortization expense

 

3,610

 

 

 

3,085

 

Interest expense related to amortization of debt discount and debt issuance costs

 

109

 

 

 

176

 

Provision for allowance for doubtful accounts

 

(8

)

 

 

105

 

Provision for inventory reserve

 

317

 

 

 

163

 

Amortization of premium/discount on short-term investments

 

(21

)

 

 

(33

)

Stock-based compensation expense

 

10,010

 

 

 

11,048

 

Other

 

6

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

653

 

 

 

(649

)

Inventory

 

(5,987

)

 

 

(1,772

)

Prepaid and other current assets

 

(710

)

 

 

392

 

Other long-term assets

 

128

 

 

 

(150

)

Accounts payable

 

2,224

 

 

 

616

 

Accrued expense

 

(260

)

 

 

(683

)

Employee-related liabilities

 

132

 

 

 

2,492

 

Deferred revenue

 

1,111

 

 

 

227

 

Other current liabilities

 

195

 

 

 

(1,822

)

Deferred rent

 

(469

)

 

 

(311

)

Other long-term liabilities

 

770

 

 

 

333

 

Net cash used in operating activities

 

(48,518

)

 

 

(47,841

)

Investing activities

 

 

 

 

 

 

 

Purchase of short-term investments

 

(67,471

)

 

 

(61,856

)

Proceeds from sales and maturities of short-term investments

 

65,200

 

 

 

22,710

 

Purchase of property and equipment

 

(4,094

)

 

 

(3,660

)

Purchase of patents

 

(74

)

 

 

(173

)

Net cash used in investing activities

 

(6,439

)

 

 

(42,979

)

Financing activities

 

 

 

 

 

 

 

Issuance of notes payable, net of issuance costs

 

 

 

 

29,925

 

Restricted cash in connection with notes payable and corporate credit card

 

 

 

 

50

 

Principal payments on notes payable

 

 

 

 

(30,000

)

Proceeds from public offering, net of offering costs

 

64,862

 

 

 

 

Proceeds from issuance of common stock

 

2,124

 

 

 

2,018

 

Net cash provided by financing activities

 

66,986

 

 

 

1,993

 

Net increase (decrease) in cash and cash equivalents

 

12,029

 

 

 

(88,827

)

Cash and cash equivalents at beginning of period

 

31,176

 

 

 

124,385

 

Cash and cash equivalents at end of period

$

43,205

 

 

$

35,558

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Interest paid

$

2,616

 

 

$

2,800

 

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

 

 

Lease incentive—lessor-paid tenant improvements

$

933

 

 

$

1,600

 

Property and equipment included in accounts payable

$

634

 

 

$

46

 

 

See accompanying notes to unaudited condensed financial statements.

 

 

 

3


TANDEM DIABETES CARE, INC.

 

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 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 second 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. In September 2015, the Company received clearance from the FDA to commercialize its third product, the t:slim G4™ Insulin Delivery System, or t:slim G4. The t:slim G4 combines features of the t:slim Insulin Pump and Dexcom G4® PLATINUM Continuous Glucose Monitoring (CGM) System into a single device. The Company commenced commercial sales of t:slim G4 in the United States during the third quarter of 2015.

 

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 was terminated.

 

2. Summary of Significant Accounting Policies

 

There have been no significant changes in our significant accounting policies during the nine months ended September 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

 

Restricted cash as of September 30, 2015 and December 31, 2014 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, t:flex insulin pump and t:slim G4 insulin pump (each, a “Tandem Pump”), 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 determining 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 a 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 recognizes the revenue over the four-year hosting period. At September 30, 2015 and December 31, 2014, $0.9 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 of return. 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 is recorded as a reduction of revenue and accounts receivable in the period that the related sale is recorded. The amounts recorded on the Company’s balance sheet for product return allowance were $0.2 million and $0.3 million at September 30, 2015 and December 31, 2014, respectively. Actual product returns have not differed materially from estimated amounts reserved in the accompanying financial statements.

 

In connection with the t:slim G4 commercial launch, the Company offered an exchange program (“exchange program”) for eligible customers. The exchange program offered customers who received a t:slim or t:flex pump on or after August 1, 2015, an opportunity to elect to exchange their pump for a t:slim G4. The exchange program ended in October 2015. The Company accrued for the right of return and estimated cost of exchanges by reducing revenues in the same period that the related sale was recorded and establishing a deferred revenue account that is included in “Other current liabilities” in the Company's balance sheet. The amount accrued for the right of return related to the exchange program was $700,000. The related revenues will be recognized upon fulfillment of the exchanges.

 

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 eligible for refurbishment 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 and actual experience. The Company evaluates the reserve quarterly and makes adjustments when appropriate. At September 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 September 30, 2015 (in thousands):

 

Balance at December 31, 2014

$

1,974

 

Provision for warranties issued during the period

 

4,252

 

Settlements made during the period

 

(3,213

)

Balance at September 30, 2015

$

3,013

 

 

 

 

 

Current portion

$

805

 

Non-current portion

 

2,208

 

Total

$

3,013

 

 

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.

 

6


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.

 

Net Loss Per Share

 

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

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Common stock warrants

 

990,031

 

 

 

1,006,577

 

 

 

990,031

 

 

 

1,006,577

 

Common stock options

 

1,935,203

 

 

 

2,292,897

 

 

 

1,935,203

 

 

 

2,279,347

 

ESPP

 

127,039

 

 

 

104,691

 

 

 

62,821

 

 

 

52,537

 

 

 

3,052,273

 

 

 

3,404,165

 

 

 

2,988,055

 

 

 

3,338,461

 

 

Recent Accounting Pronouncements

 

In July 2015, the Financial Accounting Standards Board (“FASB”) issued guidance on simplifying the measurement of inventory. The guidance changes the measurement principle for inventory from the lower of cost or market, to the lower of cost and net realizable value. The guidance defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance must be applied on a prospective basis and is effective for fiscal years beginning after December 15, 2015, and interim periods within those years, with early adoption permitted. The Company does not believe the implementation of this standard will have a material impact on its financial statements.

 

In April 2015, 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 will reclassify debt issuance costs from other long-term assets to notes payable. Debt issuance costs included in other long-term assets in the accompanying financial statements were $0.4 million and $0.5 million at September 30, 2015 and December 31, 2014, respectively.

 

In May 2014, 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.

 

 

7


3. Short-Term Investments

 

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 September 30, 2015 and December 31, 2014 (in thousands):

 

At September 30, 2015

 

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Estimated

Fair Value

 

Available-for-sale investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Less than 1

 

$

30,218

 

 

$

30

 

 

$

 

 

$

30,248

 

Treasury securities

 

Less than 1

 

 

2,059

 

 

 

1

 

 

 

 

 

 

2,060

 

Government-sponsored enterprise securities

 

Less than 1

 

 

6,054

 

 

 

1

 

 

 

 

 

 

6,055

 

 

 

 

 

$

38,331

 

 

$

32

 

 

$

 

 

$

38,363

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds held for nonqualified deferred compensation plan participants

 

 

 

$

194

 

 

$

 

 

$

(11

)

 

$

183

 

Total

 

 

 

$

38,525

 

 

$

32

 

 

$

(11

)

 

$

38,546

 

 

 

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):

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Raw materials

$

10,649

 

 

$

7,085

 

Work in process

 

3,470

 

 

 

1,972

 

Finished goods

 

3,433

 

 

 

2,856

 

Total

$

17,552

 

 

$

11,913

 

 

 

5. 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:

 

8


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 September 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

 

 

 

 

 

 

 

September 30, 2015

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

$

41,766

 

 

$

41,766

 

 

$

 

 

$

 

Commercial paper

 

 

30,248

 

 

 

 

 

30,248

 

 

 

Mutual funds held for nonqualified deferred compensation plan participants (2)

 

 

183

 

 

 

183

 

 

 

 

 

Government-sponsored enterprise securities

 

 

6,055

 

 

 

 

 

6,055

 

 

 

Treasury securities

 

 

2,060

 

 

 

2,060

 

 

 

 

 

Total assets

 

$

80,312

 

 

$

44,009

 

 

$

36,303

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation (2)

 

$

183

 

 

$

183

 

 

$

 

 

$

 

Total liabilities

 

$

183

 

 

$

183

 

 

$

-

 

 

$

 

 

 

 

 

 

 

 

 

 

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.

 

9


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 nine months ended September 30, 2015.

 

6. Loan Agreements

 

At September 30, 2015 and December 31, 2014, the Company had $30.0 million of 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 $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 September 30, 2015, the Company was in compliance with all of the covenants in the Amended and Restated Term Loan Agreement.

 

 

7. 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 September 30, 2015:

 

Shares underlying outstanding warrants

 

990,031

 

Shares underlying outstanding stock options

 

5,613,183

 

Shares authorized for future equity award grants

 

2,183,233

 

Shares authorized for issuance as ESPP awards

 

605,844

 

 

 

9,392,291

 

 

The Company issued 213,981 shares of its common stock upon the exercise of stock options and warrants during the nine months ended September 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.

 

10


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 nine months ended September 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

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Weighted average grant date fair value (per share)

$

7.08

 

 

$

9.30

 

 

$

7.64

 

 

$

15.90

 

Risk-free interest rate

 

1.8

%

 

 

1.9

%

 

 

1.7

%

 

 

1.9

%

Expected dividend yield

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

Expected volatility

 

62.8

%

 

 

78.1

%

 

 

67.2

%

 

 

78.7

%

Expected term (in years)

 

6.1

 

 

 

6.1

 

 

 

6.1

 

 

 

6.1

 

 

 

ESPP

 

 

Nine Months Ended

 

 

September 30,

 

 

2015

 

 

2014

 

Weighted average grant date fair value (per share)

$

4.98

 

 

$

7.30

 

Risk-free interest rate

 

0.3

%

 

 

0.2

%

Expected dividend yield

 

0.0

%

 

 

0.0

%

Expected volatility

 

62.1

%

 

 

62.9

%

Expected term (in years)

 

1.3

 

 

1.3

 

 

The following table summarizes the allocation of stock-based compensation expense (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Cost of sales

$

261

 

 

$

313

 

 

$

892

 

 

$

940

 

Selling, general & administrative

 

2,422

 

 

 

2,979

 

 

 

8,002

 

 

 

8,798

 

Research and development

 

294

 

 

 

454

 

 

 

1,116

 

 

 

1,310

 

Total

$

2,977

 

 

$

3,746

 

 

$

10,010

 

 

$

11,048

 

 

The total stock-based compensation capitalized as part of the cost of inventory was $0.2 million at September 30, 2015 and December 31, 2014.

 

11


8. Collaborations

 

DexCom Development and Commercialization Agreement

 

In February 2012, the Company entered into a Development and Commercialization Agreement (the “DexCom Agreement”) with DexCom, Inc. (“DexCom”) 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 G4 PLATINUM continuous glucose monitoring system. Under the DexCom Agreement, the Company paid DexCom $1.0 million at the commencement of the collaboration in 2012, $1.0 million in 2014 upon the achievement of the t:slim G4 pre-market approval, or PMA, submission to the FDA and an additional $1.0 million in September 2015 upon approval of the PMA submission by the FDA. All payments were recorded as research and development costs in their respective years. Additionally, the Company agreed to reimburse DexCom up to $1.0 million of its research and development costs and is solely responsible for its own research and development costs. As of September 30, 2015, the Company has reimbursed DexCom $0.2 million of its research and development costs. The research and development costs recognized for the three and nine months ended September 30, 2015, and 2014 were not significant. The Company does not expect any further research and development costs to be incurred in connection with the DexCom Agreement.

 

Under the DexCom Agreement, upon commercialization of the t:slim G4 integrated system, and as compensation for the non-exclusive license rights, the Company agreed to pay DexCom a royalty of $100 for each integrated system sold.

 

In September 2015, the Company entered into an amendment to the DexCom Agreement (the “Amendment”). Pursuant to the Amendment, in lieu of the $100 royalty payment, the Company will commit $100 for each t:slim G4 integrated system sold for incremental marketing activities associated with the t:slim G4 integrated system that are in addition to a level of ordinary course marketing activities or marketing activities to support other Company and DexCom jointly funded development projects. The liability associated with the Amendment was not material at September 30, 2015.

 

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. Under the terms of the agreement, the Company has agreed to pay JDRF a royalty calculated as a percentage of each t:dual Infusion System the Company sells until JDRF has received royalty payments equal to three times the amount of funding that the Company receives from JDRF under the agreement. Thereafter, no royalty payments will be due under the agreement. Either party may terminate the agreement without cause at any time upon 90 days’ prior notice, provided that if the Company terminates the agreement without cause prior to 2017, then it may be required to pay JDRF two times the amount that it has received from JDRF prior to such termination, and if the Company terminates the agreement without cause after that date it may be required to pay JDRF three times the amount that it has received from JDRF prior to such termination. Any intellectual property developed by either party in the performance of the agreement will be owned or exclusively licensed 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 September 30, 2015, milestone achievement payments received by the Company totaled $0.7 million, and research and development costs were offset cumulatively by $0.5 million. The research and development costs were offset by $0 and $74,000 for the three and nine months ended September 30, 2015, respectively, and $46,000 and $0.1 million for the three and nine months ended September 30, 2014, respectively. The Company did not have any restricted cash balances related to the JDRF Agreement at September 30, 2015 or December 31, 2014.

 

12


The Company and JDRF have been in ongoing discussions over a period of several months surrounding the Company’s assessment of technical, scientific and regulatory challenges associated with developing and commercializing the t:dual Infusion System in a manner consistent with the existing JDRF Agreement.  In October 2015, JDRF notified the Company that it believes an interruption has occurred under the agreement, and has requested a payment in the amount of $1.3 million, which is equivalent to two times the amount that it has received from JDRF to date, or that the Company resume development of t:dual Infusion System notwithstanding the Company’s assessment of technical, scientific and regulatory challenges.  The notification from JDRF also initiated the dispute resolution procedures under the agreement. The Company intends to continue good faith discussions with JDRF in an effort to resolve the dispute.  However, due to the ongoing nature of the matter, it is not currently possible to predict whether the agreement will ultimately be amended or terminated or, to the extent it is terminated, the extent to which the Company would incur any liability to JDRF. As of September 30, 2015, and in light of the Company’s assessment of technical, scientific and regulatory challenges and the status of the Company’s ongoing discussions with JDRF, further amortization of the liabilities will cease until a resolution is reached. As of September 30, 2015, the Company has not accrued a liability related to potential losses as a result of notification from JDRF.

 

 

9. 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 September 30, 2015 and December 31, 2014, there were no material matters for which the negative outcome was considered probable or estimable.


13



Item 2.

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

 

You should read the following discussion and analysis together with our financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

This Quarterly Report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Quarterly Report, other than statements of historical fact, are forward-looking statements. You can identify forward-looking statements by the use of words such as “may,” “will,” “could,” “anticipate,” “expect,” “intend,” “believe,” “continue” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to such statements.

 

Our forward-looking statements are based on our management’s current assumptions and expectations about future events and trends, which affect or may affect our business, strategy, operations or financial performance. Although we believe that these forward-looking statements are based upon reasonable assumptions, they are subject to numerous known and unknown risks and uncertainties and are made in light of information currently available to us. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below in the section entitled “Risk Factors” in Part II, Item 1A, and elsewhere in this Quarterly Report. You should read this Quarterly Report with the understanding that our actual future results may be materially different and worse from what we expect.

 

Forward-looking statements speak only as of the date they were made, and, except to the extent required by law or the rules of the NASDAQ Stock Market, we undertake no obligation to update or review any forward-looking statement because of new information, future events or other factors. Readers are cautioned not to place undue reliance on forward-looking statements.

 

Overview

 

We are a medical device company with an innovative approach to the design, development and commercialization of products for people with insulin-dependent diabetes. The foundation of our product portfolio is our proprietary technology platform and unique consumer-focused approach, which allows us to focus on both consumer and clinical needs to develop and commercialize products that address different segments of the insulin-dependent diabetes market. We began commercial sales of our flagship product, the t:slim Insulin Delivery System, or t:slim, in August 2012. In January 2015, we received clearance from the FDA to commercialize our second product, the t:flex Insulin Delivery System, or t:flex, for people with greater insulin needs. We began commercial sales of t:flex in the United States during the second quarter of 2015. In September 2015, we received approval from the FDA and began commercial sales of our third product, the t:slim G4 Insulin Delivery System, or t:slim G4, the first and only touch-screen pump with continuous glucose monitoring (CGM) integration. The t:slim G4 Pump can operate as a stand-alone insulin pump without CGM, or be paired with a DexCom G4 PLATINUM sensor. We are responsible for the manufacturing and sale of the pump and cartridges. DexCom will separately make and sell the associated sensor and transmitters to customers as they do today.

 

Our technology platform features our patented Micro-Delivery Technology, a miniaturized pumping mechanism which draws insulin from a flexible bag within the pump’s cartridge rather than relying on a syringe and plunger mechanism. It also features an easy-to-navigate embedded software architecture, a vivid color touchscreen and a micro-USB connection that supports both a rechargeable battery and t:connect, our data management application. Our innovative approach to product design and development is also consumer-focused and based on our extensive market research, as we believe the user is the primary decision maker when purchasing an insulin pump. We also apply the science of human factors to our design and development process, which seeks to optimize our devices to the intended users, allowing users to successfully operate our devices in their intended environment. Leveraging our technology platform and consumer-focused approach, we develop products to address unmet needs of people in different segments of the large and growing insulin-dependent diabetes market.

 

Since inception, we have derived nearly all of our revenue from the sale of insulin pumps and associated supplies in the United States. We consider the number of units shipped per quarter to be an important metric for managing our business. We have shipped over 28,000 insulin pumps since commercialization. Pump shipments are broken down by product, and by quarter as follows:

 

14


 

Pump Units Shipped for Each of the Three Months Ended in Respective Years

 

 

t:slim

 

 

March 31

 

 

June 30

 

 

September 30

 

 

December 31

 

 

Total

 

2012

N/A

 

 

 

9

 

 

 

204

 

 

 

844

 

 

 

1,057

 

2013

 

852

 

 

 

1,363