tndm-10q_20180630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the Quarterly Period Ended June 30, 2018

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.)

 

 

 

11075 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      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      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

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

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

As of July 26, 2018, there were 53,190,159 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 June 30, 2018 (Unaudited) and December 31, 2017

  

 

1

 

  

Condensed Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)

  

 

2

 

  

Condensed Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (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

  

 

26

Item 4

  

Controls and Procedures

  

 

26

 

 

 

 

 

 

Part II

  

Other Information

  

 

28

Item 1

  

Legal Proceedings

  

 

28

Item 1A

  

Risk Factors

  

 

28

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

 

56

Item 3

  

Defaults Upon Senior Securities

  

 

57

Item 4

  

Mine Safety Disclosures

  

 

57

Item 5

  

Other Information

  

 

57

Item 6

  

Exhibits

  

 

57

 

 

 


PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

TANDEM DIABETES CARE, INC.

CONDENSED BALANCE SHEETS

(In thousands, except par value)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

(Note 1)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

50,548

 

 

$

13,700

 

Short-term investments

 

 

35,957

 

 

 

479

 

Accounts receivable, net

 

 

13,914

 

 

 

20,793

 

Inventory, net

 

 

24,912

 

 

 

26,993

 

Prepaid and other current assets

 

 

3,012

 

 

 

2,191

 

Total current assets

 

 

128,343

 

 

 

64,156

 

Property and equipment, net

 

 

18,212

 

 

 

19,631

 

Patents, net

 

 

1,294

 

 

 

1,457

 

Restricted cash - long term

 

 

10,000

 

 

 

10,000

 

Other long-term assets

 

 

145

 

 

 

102

 

Total assets

 

$

157,994

 

 

$

95,346

 

Liabilities and stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,646

 

 

$

5,150

 

Accrued expense

 

 

4,278

 

 

 

2,832

 

Employee-related liabilities

 

 

13,641

 

 

 

14,488

 

Deferred revenue

 

 

2,964

 

 

 

2,526

 

Common stock warrants

 

 

12,291

 

 

 

5,432

 

Other current liabilities

 

 

5,687

 

 

 

5,657

 

Total current liabilities

 

 

42,507

 

 

 

36,085

 

Notes payable—long-term

 

 

77,100

 

 

 

76,541

 

Deferred rent—long-term

 

 

4,250

 

 

 

4,687

 

Other long-term liabilities

 

 

8,132

 

 

 

7,181

 

Total liabilities

 

 

131,989

 

 

 

124,494

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000 shares authorized as of June 30, 2018 and December 31, 2017, 53,186 and 10,119 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively.

 

 

53

 

 

 

10

 

Additional paid-in capital

 

 

595,463

 

 

 

448,455

 

Accumulated other comprehensive income

 

 

6

 

 

 

 

Accumulated deficit

 

 

(569,517

)

 

 

(477,613

)

Total stockholders’ equity (deficit)

 

 

26,005

 

 

 

(29,148

)

Total liabilities and stockholders’ equity (deficit)

 

$

157,994

 

 

$

95,346

 

 

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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Sales

 

$

34,126

 

 

$

21,327

 

 

$

61,402

 

 

$

40,303

 

Cost of sales

 

 

19,039

 

 

 

13,325

 

 

 

34,912

 

 

 

25,549

 

Gross profit

 

 

15,087

 

 

 

8,002

 

 

 

26,490

 

 

 

14,754

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

22,628

 

 

 

22,104

 

 

 

43,541

 

 

 

44,952

 

Research and development

 

 

6,456

 

 

 

4,866

 

 

 

12,431

 

 

 

9,996

 

Total operating expenses

 

 

29,084

 

 

 

26,970

 

 

 

55,972

 

 

 

54,948

 

Operating loss

 

 

(13,997

)

 

 

(18,968

)

 

 

(29,482

)

 

 

(40,194

)

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

299

 

 

 

60

 

 

 

390

 

 

 

119

 

Interest and other expense

 

 

(3,112

)

 

 

(2,892

)

 

 

(6,184

)

 

 

(5,518

)

Change in fair value of stock warrants

 

 

(42,549

)

 

 

 

 

 

(56,777

)

 

 

 

Total other expense, net

 

 

(45,362

)

 

 

(2,832

)

 

 

(62,571

)

 

 

(5,399

)

Net loss

 

$

(59,359

)

 

$

(21,800

)

 

$

(92,053

)

 

$

(45,593

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on short-term investments

 

$

6

 

 

$

 

 

$

6

 

 

$

1

 

Comprehensive loss

 

$

(59,353

)

 

$

(21,800

)

 

$

(92,047

)

 

$

(45,592

)

Net loss per share, basic and diluted(1)

 

$

(1.17

)

 

$

(4.36

)

 

$

(2.32

)

 

$

(11.12

)

Weighted average shares used to compute basic and diluted net loss per share(1)

 

 

50,948

 

 

 

5,004

 

 

 

39,594

 

 

 

4,101

 

 

See accompanying notes to unaudited condensed financial statements.

 

 

(1)

The issued and outstanding shares of common stock have been restated for all periods presented to reflect the effects of the 1-for-10 reverse stock split, which was effective on October 9, 2017.

 

2


TANDEM DIABETES CARE, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

Six Months Ended June 30,

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(92,053

)

 

$

(45,593

)

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

 

 

 

 

 

 

 

Depreciation and amortization expense

 

2,898

 

 

 

3,016

 

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

 

1,387

 

 

 

817

 

Provision for allowance for doubtful accounts

 

745

 

 

 

417

 

Provision for inventory reserve

 

184

 

 

 

265

 

Payment in kind interest accrual of notes payable

 

 

 

 

817

 

Change in fair value of common stock warrants

 

56,777

 

 

 

 

Amortization of discount on short-term investments

 

298

 

 

 

(16

)

Stock-based compensation expense

 

3,890

 

 

 

8,110

 

Other

 

151

 

 

 

66

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

6,135

 

 

 

1,726

 

Inventory, net

 

1,958

 

 

 

(4,797

)

Prepaid and other current assets

 

(821

)

 

 

1,534

 

Other long-term assets

 

(43

)

 

 

(20

)

Accounts payable

 

(1,733

)

 

 

(447

)

Accrued expense

 

1,446

 

 

 

(873

)

Employee-related liabilities

 

(848

)

 

 

2,506

 

Deferred revenue

 

439

 

 

 

(1,350

)

Other current liabilities

 

(49

)

 

 

(850

)

Deferred rent

 

(359

)

 

 

(266

)

Other long-term liabilities

 

603

 

 

 

(539

)

Net cash used in operating activities

 

(18,995

)

 

 

(35,477

)

Investing activities

 

 

 

 

 

 

 

Purchase of short-term investments

 

(40,500

)

 

 

 

Proceeds from sales and maturities of short-term investments

 

4,250

 

 

 

8,500

 

Purchase of property and equipment

 

(1,087

)

 

 

(4,055

)

Net cash provided by (used in) investing activities

 

(37,337

)

 

 

4,445

 

Financing activities

 

 

 

 

 

 

 

Proceeds from public offering, net of offering costs

 

64,008

 

 

 

21,135

 

Proceeds from exercise of warrants

 

29,164

 

 

 

 

Proceeds from common stock issued under employee benefit plans

 

8

 

 

 

570

 

Net cash provided by financing activities

 

93,180

 

 

 

21,705

 

Net increase in cash and cash equivalents and restricted cash

 

36,848

 

 

 

(9,327

)

Cash and cash equivalents and restricted cash at beginning of period

 

23,700

 

 

 

46,678

 

Cash and cash equivalents and restricted cash at end of period

$

60,548

 

 

$

37,351

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Interest paid

$

4,784

 

 

$

3,882

 

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

 

 

Lease incentive - lessor-paid tenant improvements

$

 

 

$

2,784

 

Debt discount included in other long-term liabilities

$

4,964

 

 

$

4,095

 

Common stock warrants issued in connection with term loan

$

 

 

$

3,331

 

Property and equipment included in accounts payable

$

92

 

 

$

60

 

 

 

 

 

 

 

 

 

 

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. The Company is incorporated in the state of Delaware. Unless the context requires otherwise, the terms the “Company” or “Tandem” refer to Tandem Diabetes Care, Inc.

 

The Company manufactures and sells insulin pump products in the United States that are designed to address large and differentiated needs of the insulin-dependent diabetes market. The Company’s manufacturing and sales activities primarily focus on the t:slim X2 Insulin Delivery System, or t:slim X2, the next-generation flagship product that is updatable and designed to display Dexcom G5 continuous glucose monitoring, or CGM, sensor information directly on the pump Home Screen. The Company’s insulin pump products are generally considered durable medical equipment, and have an expected lifespan of at least four years. In addition to selling insulin pumps, the Company sells disposable products that are used together with the pumps and are replaced every few days, including cartridges for storing and delivering insulin, and infusion sets that connect the insulin pump to a user’s body. The Company’s insulin pump products are compatible with the Tandem Device Updater, a Mac and PC-compatible tool for the remote update of Tandem insulin pump software.

 

The Company began commercial sales of its first product, t:slim, in August 2012. During 2015, the Company commenced commercial sales of two additional insulin pumps: t:flex in May 2015 and t:slim G4 in September 2015. In October 2016, the Company commenced commercial sales of t:slim X2 and discontinued new sales of t:slim. In September 2017, the Company commenced commercial sales of t:slim X2 with Dexcom G5 Mobile CGM integration, or t:slim X2 with G5, and discontinued new sales of t:slim G4. Because the t:slim X2 hardware platform has represented nearly 100% of new pump shipments, the Company discontinued marketing and sales of new t:flex pumps in the third quarter of 2018. The Company will continue to provide ongoing service and support to existing t:slim, t:slim G4 and t:flex customers.

 

In July 2016, the Company launched a Technology Upgrade Program that provided eligible t:slim and t:slim G4 customers a path to obtain t:slim X2, or, as of September 2017, t:slim X2 with G5. Participating customers had the right to exchange their original t:slim and t:slim G4 for a t:slim X2 or t:slim X2 with G5, under a variable pricing structure. The Technology Upgrade Program expired on September 30, 2017.

 

The Company has incurred operating losses since its inception and, as reflected in the accompanying financial statements, the Company has an accumulated deficit of $569.5 million as of June 30, 2018, which includes a net loss of $92.1 million for the six months ended June 30, 2018. The Company primarily funded its operations through private and public equity and debt financing. Management expects operating losses and negative cash flows to continue for at least the next 12 months.

 

As of June 30, 2018, the Company had $96.5 million in cash and cash equivalents and short-term investments, which included $10.0 million of restricted cash. Management believes that the cash on hand will be sufficient to satisfy its liquidity requirements for at least the next 12 months.

 

The Company’s ability to execute on its business strategy, meet its future liquidity requirements, satisfy the covenants under the Amended and Restated Term Loan Agreement with Capital Royalty Partners (“Term Loan Agreement”) (see Note 6, “Term Loan Agreement”) and achieve and maintain profitable operations, is dependent on a number of factors, including its ability to continue to gain market acceptance of its products and achieve a level of revenues adequate to support its cost structure, achieve renewal pump sales objectives, develop and launch new products, increase gross profits from higher sales of infusion sets, maximize manufacturing efficiencies, and leverage the investments made in its sales, clinical, marketing and customer support organizations.

 

The Company has primarily funded its operations through private and public equity and debt financing. The Company may in the future seek additional capital from public or private offerings of its capital stock, it may elect to repay, restructure or refinance its existing indebtedness, or it may elect to borrow additional amounts under new credit lines or from other sources. If the Company issues equity or debt securities to raise additional funds, its existing stockholders may experience dilution, it may incur significant financing costs, and the new equity or debt securities may have rights, preferences and privileges senior to those of its existing stockholders. There can be no assurance that equity or debt financing will be available on acceptable terms, or at all.

4


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 accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (“Annual Report”), from which the balance sheet information herein was derived. These unaudited condensed financial statements exclude disclosures required by U.S. GAAP for complete financial statements.

 

2. Summary of Significant Accounting Policies

 

There have been no material changes in our significant accounting policies during the six months ended June 30, 2018, as compared with those disclosed in the Annual Report other than adoption of the new revenue recognition standard (“Revenue from Contracts with Customers Standard”).

 

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 footnotes as of the date of the financial statements. Actual results could materially differ from those estimates and assumptions.

 

Segment Reporting

 

Operating segments are identified as components of an enterprise about which segment discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and managed its business as one segment, operating in the United States.

 

Restricted Cash

 

The Company recorded $10.0 million of restricted cash as of both June 30, 2018 and December 31, 2017, for the minimum cash balance requirement in connection with the Term Loan Agreement (see Note 6, “Term Loan Agreement”). In January 2018, the Company adopted new guidance from the Financial Accounting Standards Board (“FASB”)  that clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. As a result, the restricted cash balance is now included as a component of cash and cash equivalents on the statement of cash flows in all periods presented.

 

Accounts Receivable

 

The Company grants credit to various customers in the ordinary course of business. The Company maintains an allowance for doubtful accounts for potential credit losses. Provisions are made based on historical experience, assessment of specific risk, review of outstanding invoices, and various assumptions and estimates that are believed to be reasonable under the circumstances. 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 are carried at fair value. Based on the borrowing rates currently available for loans with similar terms, the Company believes the fair value of its long-term notes payable approximates its carrying value. The estimated fair value of certain of the Company’s common stock warrants is determined using the Black-Scholes pricing model as of June 30, 2018 and December 31, 2017 (see Note 5, “Fair Value Measurements”).

 

5


Revenue Recognition

 

Revenue is generated primarily from sales in the United States of insulin 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.

 

In January 2018, the Company adopted Revenue from Contracts with Customers Standard that supersedes existing revenue guidance under U.S. GAAP and International Financial Reporting Standards. Pursuant to the Revenue from Contracts with Customers Standard’s core principle, subsequent to January 1, 2018, the Company recognizes 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. The Company elected to implement this new standard utilizing the modified retrospective method. Under this approach, the Company applied the new standard to all new contracts initiated on or after the effective date, and, for contracts which had remaining obligations as of the effective date, the Company recorded an adjustment to the opening balance of accumulated deficit. The accounting for the significant majority of the Company’s revenues is not impacted by the new guidance. As a result, on January 1, 2018, the Company recorded a net reduction to accumulated deficit in the amount of $149,000, reflecting the accounting change.   

 

Prior to the implementation of this new standard, revenue was recognized when persuasive evidence of an arrangement existed, delivery had occurred and title passed, the price was fixed or determinable, and collectability was reasonably assured.

  

The Company considers the individual deliverables in its product offering as separate performance obligations. The transaction price is determined based on the consideration expected to be received, based either on the stated value in contractual arrangements or the estimated cash to be collected in non-contracted arrangements. The Company allocates the consideration to the individual performance obligations and recognizes the consideration based on when the performance obligation is satisfied, considering whether or not this occurs at a point in time or over time. Generally, insulin pumps, cartridges, infusion sets and accessories are deemed performance obligations that are satisfied upon delivery, while access to the complementary products (t:connect cloud-based data management application and the Tandem Device Updater) are considered performance obligations satisfied over the four-year warranty period of the insulin pumps. There is no standalone value for these complementary products. Therefore, the Company determines their value by applying the expected cost plus margin approach and then allocates the residual to the insulin pumps. At June 30, 2018 and December 31, 2017, $2.3 million and $2.0 million, respectively, were recorded as deferred revenue for these performance obligations that are satisfied over time.

 

Additionally, the Company offers a 30-day right of return to its customers from the date of shipment of any of its insulin pumps, 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. Under the new guidance, the allowance for product returns is recorded as a reduction of revenue and an increase in deferred revenue in the period in which the related sale is recorded. Historically, the allowance was recorded as a reduction of revenue and accounts receivable. The amount recorded on the Company’s balance sheets for product return allowance was $0.1 million and $0.2 million at June 30, 2018 and December 31, 2017, respectively. Actual product returns have not differed materially from estimated amounts reserved in the accompanying condensed financial statements.

 

Warranty Reserve

 

The Company generally provides a four-year warranty on its insulin pumps to end user customers and may replace any pumps that do not function in accordance with the product specifications. Insulin pumps 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 product replacement cost and expected replacement rates based on historical experience. The Company evaluates the reserve quarterly and makes adjustments when appropriate. Changes to the actual replacement rates or the expected product replacement cost could have a material impact on the Company’s estimated warranty reserve.    

 

6


As of June 30, 2018 and December 31, 2017, the warranty reserve was $6.3 million and $5.6 million, respectively. The following table provides a reconciliation of the change in product warranty liabilities from December 31, 2017 through June 30, 2018 (in thousands):

 

Balance at December 31, 2017

$

5,640

 

Provision for warranties issued during the period

 

3,390

 

Settlements made during the period

 

(3,869

)

Increases in warranty estimates

 

1,159

 

Balance at June 30, 2018

$

6,320

 

 

 

 

 

Current portion

$

3,152

 

Non-current portion

 

3,168

 

Total

$

6,320

 

 

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 requisite service period on a straight-line basis. The Company estimates the fair value of stock options issued under the Company’s 2013 Stock Incentive Plan (“2013 Plan”) and shares issued under the Company’s 2013 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 about a number of key variables, including stock price volatility, expected term, and risk-free interest rate. For awards that vest based on the achievement of service conditions, the Company recognizes expense using the straight-line method less estimated forfeitures based on historical experience.

 

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 loss per share is calculated in accordance with the treasury stock method and reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted to common stock. 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 warrants that are recorded as a liability in the accompanying balance sheet, the calculation of diluted loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of such securities are dilutive to loss per share for the period, an adjustment to net loss used in the calculation is required to remove the change in fair value of the warrants from the numerator for the period. Likewise, an adjustment to the denominator is required to reflect the related dilutive shares, if any, under the treasury stock method. 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 thousands, in common stock equivalent shares):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017(1)

 

 

2018

 

 

2017(1)

 

Warrants for common stock

 

628

 

 

 

-

 

 

 

628

 

 

 

-

 

Common stock options

 

2,166

 

 

 

-

 

 

 

1,852

 

 

 

-

 

ESPP

 

1

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

2,795

 

 

 

-

 

 

 

2,481

 

 

 

-

 

 

(1)

As of June 30, 2017 there were no outstanding common share equivalents that were dilutive based on their respective exercise prices compared to the market value of the Company’s common stock on that date.

 

Reclassifications

 

Certain reclassifications of prior year amounts have been made to conform to the current year presentation.

7


 

Recent Accounting Pronouncements

 

In June 2016, FASB issued a new credit loss standard that changes the impairment model for most financial assets and certain other instruments. The standard is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods within those years. The Company is in the process of assessing the impact of the adoption of the standard on its financial statements.

 

In February 2016, FASB issued final guidance for lease accounting. The new accounting standard requires lessees to recognize right-of-use assets and corresponding lease liabilities for all leases with lease terms of greater than twelve months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new accounting standard must be adopted using the modified retrospective approach and will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted. The Company is in the process of assessing the impact of the adoption of the standard on its financial statements.

 

In March 2018, the FASB issued Accounting Standards Update No. 2018-05, Income taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 regarding Income Tax Accounting Implications of the Tax Cuts and Jobs Act. The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements for which the accounting under ASC Topic 740 is incomplete, but a reasonable estimate could be determined. The tax effects of certain provisions of the 2017 Tax Act, such as the deductibility of compensation in excess of $1 million for certain employees, and limitations on executive compensation, requires further analysis. The Company is in the process of assessing the impact of the adoption of the standard on its financial statements.

 

 

3. Short-Term Investments

 

The Company invests 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 as of June 30, 2018 and December 31, 2017 (in thousands):

 

At June 30, 2018

 

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Estimated

Fair Value

 

Available-for-sale investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Less than 1

 

$

35,952

 

 

$

7

 

 

$

(2

)

 

$

35,957

 

Total

 

 

 

$

35,952

 

 

$

7

 

 

$

(2

)

 

$

35,957

 

 

 

At December 31, 2017

 

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Estimated

Fair Value

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds held for nonqualified deferred compensation plan participants

 

 

 

$

459

 

 

$

20

 

 

$

 

 

$

479

 

Total

 

 

 

$

459

 

 

$

20

 

 

$

 

 

$

479

 

 

4. Inventory

 

Inventory consisted of the following as of June 30, 2018 and December 31, 2017 (in thousands):

 

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Raw materials

$

10,265

 

 

$

10,328

 

Work in process

 

3,125

 

 

 

3,812

 

Finished goods

 

11,522

 

 

 

12,853

 

Total

$

24,912

 

 

$

26,993

 

8


 

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 intended to reflect an assumed 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 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 and that are significant to the fair value of the assets or liabilities, 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, 2018 and December 31, 2017, 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, 2018

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

$

60,548

 

 

$

60,548

 

 

$

 

 

$

 

Commercial paper

 

 

35,957

 

 

 

 

 

35,957

 

 

 

Total assets

 

$

96,505

 

 

$

60,548

 

 

$

35,957

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock warrants

 

$

12,291

 

 

$

 

 

$

 

 

$

12,291

 

Total liabilities

 

$

12,291

 

 

$

 

 

$

 

 

$

12,291

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

$

23,700

 

 

$

23,700

 

 

$

 

 

$

 

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

 

 

479

 

 

 

479

 

 

 

 

 

 

 

Total assets

 

$

24,179

 

 

$

24,179

 

 

$

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock warrants

 

$

5,432

 

 

$

 

 

$

 

 

$

5,432

 

Deferred compensation (2)

 

 

479

 

 

 

479

 

 

 

 

 

 

-

 

Total liabilities

 

$

5,911

 

 

$

479

 

 

$

 

 

$

5,432

 

 

 

(1)

Generally, cash equivalents include money market funds and investments with a maturity of three months or less from the date of purchase. This asset is included as a component of cash and cash equivalents on the balance sheet, of which $10.0 million is classified as restricted cash – long-term as of both June 30, 2018 and December 31, 2017.

 

(2)

The deferred compensation plan was directed by the Company and structured as a Rabbi Trust for the benefit of certain executives and non-employee directors. The investment assets of the Rabbi Trust were 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. The Company cancelled the deferred compensation plan in 2017 and all deferred compensation amounts were distributed to participants during the quarter ended June 30, 2018.

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 assets during the six months ended June 30, 2018.

 

The Company’s Level 3 liabilities at June 30, 2018 included the Series A warrants issued by the Company in connection with its public offering of common stock in October 2017. Level 3 liabilities at December 31, 2017 included the Series A and Series B warrants issued by the Company in connection with the October 2017 offering. The Series A warrants have a term of five years and initially provided holders the right to purchase 4,630,000 shares of the Company’s common stock at an exercise price of $3.50 per share. The Series B warrants had a term of six months and initially provided holders the right to purchase 4,630,000 shares of the Company’s common stock at an exercise price of $3.50 per share. The Series A and Series B warrants were initially valued in the aggregate amount of $6.5 million on the date of issuance utilizing a Black-Scholes pricing model. As of June 30, 2018, there were Series A warrants to purchase 628,235 shares outstanding and no Series B warrants outstanding (see Note 7, “Stockholders’ Equity”).

 

The Company reassesses the fair value of the outstanding Series A and Series B warrants at each reporting date utilizing a Black-Scholes pricing model. Inputs used in the pricing model include estimates of stock price volatility, expected warrant life and risk-free interest rate. The Company develops its estimates based on publicly available historical data. The assumptions used to estimate the fair values of the common stock warrants at June 30, 2018 and December 31, 2017 are presented below:

 

 

 

Series A Warrants

 

 

 

June 30, 2018

 

December 31, 2017

 

Risk-free interest rate

 

 

2.7

%

 

2.2

%

Expected dividend yield

 

 

0.0

%

 

0.0

%

Expected volatility

 

 

80.9

%

 

63.5

%

Expected term (in years)

 

 

4.3

 

 

4.8

 

 

 

 

 

Series B Warrants

 

 

 

June 30, 2018

December 31, 2017

 

Risk-free interest rate

 

N/A

 

1.4

%

Expected dividend yield

 

N/A

 

0.0

%

Expected volatility

 

N/A

 

80.3

%

Expected term (in years)

 

N/A

 

0.3

 

 

(1)

As of June 30, 2018, there were no Series B warrants outstanding.

 

The following table presents a summary of changes in the fair value of the Company’s Level 3 financial assets for the quarter ended June 30, 2018:

 

Balance at December 31, 2017

 

$

5,432

 

Decrease in fair value from warrants exercised during the period

 

 

(49,919

)

Increase in fair value included in change in fair value of common stock warrants

 

 

56,778

 

Balance at June 30, 2018

 

$

12,291

 

 

During the six months ended June 30, 2018, the Company issued 8,485,871 shares of common stock upon the exercise of Series A and Series B warrants and 13,450 Series B warrants expired unexercised. As a result, there were 628,235 Series A warrants to purchase common stock from the October 2017 financing outstanding as of June 30, 2018.

 

10


6. Term Loan Agreement

 

The Company had $82.7 million of aggregate borrowings outstanding under the Term Loan Agreement as of June 30, 2018 and December 31, 2017, respectively.

 

Under the Term Loan 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 (the “PIK Loan”) to be added to the principal of the loan and subject to accruing interest. 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 December 31, 2019. The principal balance is due in full at the end of the term of the loan, which is March 31, 2020 (the “Maturity Date”). The Company had elected to pay interest in cash at a rate of 11.5% per annum through September 30, 2015. From October 1, 2015 through December 31, 2017, the Company elected to pay interest in cash at a rate of 9.5% per annum and for a rate of 2.0% per annum to be added to the principal of the loan. As a result, $2.7 million was added to the principal of the loan during that time period (the “PIK Loans”).

 

The term loan is collateralized by all assets of the Company. The principal financial covenants require that the Company attain minimum annual revenues of $95.0 million in 2018 and each year thereafter until the Maturity Date.

 

Pursuant to Amendment No. 3 to the Term Loan Agreement (the “Third Amendment”), the Company agreed to pay, on the earlier of (i) the Maturity Date, (ii) the date that the loan under the Term Loan Agreement becomes due, and (iii) the date on which the Company makes a voluntary pre-payment of the loan, a financing fee equal to 3.0% of the sum of (x) the aggregate amount drawn under the Third Amendment, which is $50.0 million, and (y) any PIK Loans issued in relation to the Third Amendment (collectively, the “Back End Financing Fee”).

 

In March 2017, the Company entered into Amendment No. 4 to the Term Loan Agreement (the “Fourth Amendment”), which included a limited waiver of a potential event of default that could have resulted from the explanatory paragraph in the audit report of its independent registered public accounting firm contained in its financial statements for the year ended December 31, 2016. In consideration for the waiver, the Company agreed to: (i) issue Capital Royalty Partners ten-year warrants to purchase an aggregate of 193,788 shares of the Company’s common stock at an exercise price of $23.50 per share, (ii) increase the Company’s minimum cash balance requirement under the Term Loan Agreement from $2.0 million to $10.0 million, (iii) provide Capital Royalty Partners the same information it makes available to its board of directors, subject to limited exceptions, and (iv) not incur additional third party indebtedness secured solely by accounts receivable, inventory and cash.

 

Furthermore, the Company agreed to increase the Back End Financing Fee to 5.0% of the entire aggregate principal amount of borrowings outstanding, including total PIK Loans issued, under the Term Loan Agreement, which was $82.7 million as of December 31, 2017. The Back End Financing Fee is payable at maturity of the Company’s loans and on the principal amount of any loans for which it makes an optional prepayment, and may be payable in connection with asset sales not permitted under the Term Loan Agreement or a change of control.

 

In February 2018, the Company entered into Amendment No. 5 to the Term Loan Agreement (the “Fifth Amendment”), which included a limited advance waiver of a potential event of default that could have resulted from a qualification regarding the Company’s ability to continue as a going concern in the audit report for the year ended December 31, 2017. The Fifth Amendment included a covenant requiring the Company to complete a financing in which gross proceeds from the sale of equity securities was at least $20.0 million, no later than August 30, 2018, which covenant was satisfied in February 2018. In addition, the Company agreed to increase the Back End Financing Fee from 5.0% to 6.0% of the entire aggregate principal amount of borrowings outstanding, including total PIK Loans issued, under the Term Loan Agreement.

 

As of June 30, 2018, and December 31, 2017, the Company had accrued $5.0 million and $4.1 million for the Back End Financing Fee in other long-term liabilities and as contra-debt in notes payable-long-term on the accompanying balance sheet.

 

The Company treated the execution of each of the Third, Fourth and Fifth Amendments as a modification for accounting purposes. The present value of the future cash flows under these amendments did not exceed the present value of the future cash flows under the previous terms by more than 10%. The Back End Financing Fee and the remaining balance of debt issuance costs and debt discount of the loan are amortized to interest expense over the remaining term using the effective interest method.

 

11


 

7. Stockholders’ Equity

 

Public Offerings

 

In the first quarter of 2017, the Company completed a public offering of 1,850,000 shares of its common stock at a public offering price of $12.50 per share. The gross proceeds to the Company from the offering were $23.1 million, before deducting underwriting discounts and commissions and other offering expenses payable by the Company.  

 

From July 2017 through September 2017, the Company sold 464,108 shares of its common stock under its “at-the-market” offering program at prices ranging from $5.64 to $10.54. The gross proceeds from the offering were $4.3 million, before deducting underwriting discounts and commissions and other offering expenses.

 

In October 2017, the Company completed a public offering, pursuant to which it sold 4,630,000 shares of its common stock, Series A warrants to purchase up to 4,630,000 shares and Series B warrants to purchase up to 4,630,000 shares at a public offering price of $3.50 per share and accompanying warrants. The gross proceeds from the public offering were approximately $16.2 million, before deducting underwriting discounts and commissions and other offering expenses. As of June 30, 2018, the Company had issued 8,485,871 shares upon exercise of Series A and Series B warrants, which resulted in gross proceeds to the Company of $29.2 million. As of June 30, 2018, there were 628,235 Series A warrants outstanding and no Series B warrants outstanding. During the three months ended June 30, 2018, 13,450 Series B warrants expired unexercised.

 

In the first quarter of 2018, the Company completed a public offering of 34,500,000 shares of its common stock at a public offering price of $2.00 per share. The gross proceeds to the Company from the offering were $69.0 million, before deducting underwriting discounts and commissions and other offering expenses payable by the Company.

 

     Shares Reserved for Future Issuance

 

The following shares of the Company’s common stock were reserved for future issuance as of June 30, 2018 (in thousands):

 

Shares underlying outstanding warrants

 

921

 

Shares underlying outstanding stock options

 

5,558

 

Shares authorized for future equity award grants

 

1,317

 

Shares authorized for issuance as ESPP awards

 

2,101

 

 

 

9,897

 

 

  In June 2018, the Company received approval from its stockholders to increase the number of shares of common stock reserved under the 2013 Plan by 5,500,000 shares. The Company issued 8,485,871 shares of its common stock upon the exercise of warrants, and 564 shares of its common stock upon the exercise of stock options during the six months ended June 30, 2018. The Company did not issue any shares of its common stock upon the exercise of warrants, and issued 24,406 shares of its common stock upon the exercise of stock options during the year ended December 31, 2017.

 

The ESPP enables eligible employees to purchase shares of common stock using their after tax payroll deductions, subject to certain conditions. Historically, offerings under the ESPP consisted of a two-year offering period with four six-month purchase periods which began in May and November of each year. The Company announced the suspension of the ESPP in May 2017 due to a lack of available shares. In June 2018, the Company received approval from its stockholders to increase the number of shares reserved for issuance under the ESPP by 2,000,000 shares. A new offering commenced under the ESPP on June 15, 2018, and the first purchase date will be November 15, 2018. As a result of the previous suspension of the ESPP, no shares of common stock were purchased under the ESPP during the six months ended June 30, 2018. There were 38,929 shares of common stock purchased under the ESPP during the year ended December 31, 2017.

 

12


Stock-Based Compensation

 

In June 2018, the Company issued options to purchase 811,800 shares of common stock under the 2013 Plan, which were originally granted on December 1, 2017, subject to and conditioned upon the approval by its stockholders of an increase in the number of shares authorized under the 2013 Plan. In addition, in June 2018, the Company granted options to purchase 3,339,300 shares of common stock under the 2013 Plan. These options have an exercise price equal to the closing price of the common stock on the respective grant date, and generally vest 50% on the first anniversary of the grant date, with the balance vesting monthly over the following year.

 

The assumptions used in the Black-Scholes option-pricing model are as follows:

 

 

Stock Options

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Weighted average grant date fair value (per share)

$

11.97

 

 

$

5.10

 

 

$

11.89

 

 

$

5.20

 

Risk-free interest rate

 

2.8

%

 

 

1.9

%

 

 

2.8

%

 

 

1.9

%

Expected dividend yield

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

Expected volatility

 

71.5

%

 

 

60.0

%

 

 

71.4

%

 

 

60.0

%

Expected term (in years)

 

5.6

 

 

 

6.1

 

 

 

5.7

 

 

 

6.1

 

 

 

ESPP

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2018

 

 

2017(1)

 

 

 

 

 

2017(1)

Weighted average grant date fair value (per share)

$

9.62

 

 

N/A

 

$

9.62

 

 

N/A

Risk-free interest rate

 

2.4

%

 

N/A

 

 

2.4

%

 

N/A

Expected dividend yield

 

0.0

%

 

N/A

 

 

0.0

%

 

N/A

Expected volatility

 

77.0

%

 

N/A

 

 

77.0

%

 

N/A

Expected term (in years)

 

1.3

 

 

N/A

 

 

1.3

 

 

N/A

 

(1)

There were no grants made pursuant to the ESPP during the three and six months ended June 30, 2017.

 

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

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cost of sales

$

180

 

 

$

529

 

 

$

345

 

 

$

758

 

Selling, general & administrative

 

2,100

 

 

 

4,001

 

 

 

3,012

 

 

 

6,462

 

Research and development

 

418

 

 

 

616

 

 

 

533

 

 

 

890

 

Total

$

2,698

 

 

$

5,146

 

 

$

3,890

 

 

$

8,110

 

 

The total stock-based compensation expense capitalized as part of the cost of inventory was $0.2 million and $0.2 million as of June 30, 2018 and December 31, 2017, respectively.

 

8. Commitments and Contingencies

 

From time to time, the Company may be subject to legal proceedings, disputes and other claims arising in the ordinary course of business, including actions with respect to intellectual property, employment, product liability and contractual matters. In connection with these matters, the Company regularly assesses the probability and range of possible loss based on the developments in these matters. A liability is recorded in the financial statements if it is determined that it is probable that a material loss has been incurred, and that the amount or range of the loss can be reasonably estimated. Because of uncertainties related to any pending actions, the Company is currently unable to predict their ultimate outcome, and, with respect to any legal proceeding 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 adverse outcome. As of June 30, 2018 and December 31, 2017, there were no legal proceedings, disputes or other claims for which a material loss was considered probable or for which the amount or range of loss was reasonably 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 for the quarter ended June 30, 2018, or this Quarterly Report.

 

This Quarterly Report contains forward-looking statements within the meaning of the federal securities laws, which statements are subject to considerable risks and uncertainties. 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. In particular, forward-looking statements contained in this Quarterly Report may relate to, among other things, our future or assumed financial condition, results of operations, liquidity, business forecasts and plans, research and product development plans, manufacturing plans, strategic plans and objectives, capital needs and financing plans, product launches, regulatory approvals and competitive environment. We caution you that the foregoing list may not include all of the forward-looking statements made in this Quarterly Report.

 

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 financial condition and 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 financial condition and results may be materially different from and worse than what we expect.

 

Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

Forward-looking statements speak only as of the date they were made, and, except to the extent required by law or the rules of NASDAQ, we undertake no obligation to update or review any forward-looking statement because of new information, future events or other factors.

 

We qualify all of our forward-looking statements by these cautionary 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. We believe our competitive advantage is rooted in our unique consumer-focused approach, and the incorporation of modern and innovative technology into our product offerings. Our manufacturing and sales activities primarily focus on our flagship product, t:slim X2, which is based on our proprietary technology platform. The simple-to-use t:slim X2 is the smallest durable insulin pump available, and the only pump currently available in the United States that is capable of remote feature updates, which positions us well to address the evolving needs and preferences of differentiated segments of the insulin-dependent diabetes market. By delivering innovative hardware and software solutions, as well as best-in-class customer support, we aim to improve and simplify the lives of people with diabetes and their healthcare providers. For the past five consecutive years, the Company has been ranked #1 by insulin pump users in the United States for customer support in an independent survey by dQ&A, a leading diabetes research firm.

 

Since the launch of our first product in August 2012 through June 2018, we have shipped nearly 78,000 pumps to customers in the United States, of which over 66,000 pumps have been shipped within the four years ended June 30, 2018. We plan to begin commercialization of t:slim X2 in select geographies outside the United States, including Canada, during the second half of 2018.

 

We began commercial sales of our first insulin pump, t:slim, in August 2012. During 2015, we commenced commercial sales of two additional insulin pumps: t:flex in May 2015 and t:slim G4 in September 2015. In October 2016, we commenced commercial sales of t:slim X2 and discontinued new sales of t:slim. In September 2017, we commenced commercial sales of t:slim X2 integrated with the Dexcom G5 Mobile CGM system and discontinued new sales of t:slim G4. Because the t:slim X2 technology platform has represented nearly 100% of our new pump shipments, we discontinued marketing and sales of new t:flex pumps in the third quarter of 2018. We will continue to provide ongoing service and support to existing t:slim, t:slim G4 and t:flex customers.

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In June 2018, we received approval by the United States Food and Drug Administration (FDA) for t:slim X2 with Basal-IQ, our first generation Automated Insulin Delivery (AID) algorithm. We plan to commence commercial sales of this product in the third quarter of 2018. This system uses Dexcom G6® sensor values to adjust the rate of insulin delivery to help minimize the frequency and/or duration of hypoglycemic events. Recently, the FDA also created a new interoperability designation for integrated continuous glucose monitoring (iCGM) devices. Our t:slim X2 with Basal-IQ was the first insulin pump to receive approval for iCGM compatibility, which we expect will streamline the regulatory pathway for integration with future iCGM products approved by the FDA.

 

Our insulin pump products are generally considered durable medical equipment, and have an expected lifespan of at least four years. In addition to selling insulin pumps, we sell disposable products that are used together with our pumps and replaced every few days, including cartridges for storing and delivering insulin, and infusion sets that connect the insulin pump to a user’s body. In September 2017, we commenced commercial sales of cartridge and infusion set products using t:lock, which replaces the standard Luer-lok connector that historically joined an infusion set to our cartridge.

 

Our insulin pumps are compatible with the Tandem Device Updater, a revolutionary new tool that allows pump users to update their pumps’ software quickly and easily from a personal computer. The Tandem Device Updater provides our customers access to new and enhanced features and functionality faster than the industry has been able to in the past. The first use of our Tandem Device Updater was for deployment of the latest t:slim software to in-warranty t:slim pumps purchased before April 2015. In September 2017, we set a new standard of care in our industry by offering all existing t:slim X2 customers integration with the Dexcom G5 Mobile CGM system through a software update using the Tandem Device Updater. In October 2017, we announced that, subject to FDA approval, we intend to make any new features approved by the FDA in 2018 available to all in-warranty users of t:slim X2 at no cost through the Tandem Device Updater. This includes software featuring our new Basal-IQ technology, which was approved by the FDA in June 2018. In the future, this tool has the potential to enable users to add other new features and functionality to their pumps independent of the typical four-year insurance pump reimbursement cycle.

 

Our innovative approach to product design and development is consumer-focused and based on our extensive market research, as we believe the user is the primary decision maker when purchasing an insulin pump. Our market research consists of interviews, focus groups and online surveys to understand what people with diabetes, their caregivers and healthcare providers are seeking in order to improve diabetes therapy management. We also apply the science of human factors to our design and development process, which seeks to optimize our devices, thereby allowing users to successfully operate them in their intended environment.

 

We developed our products to provide the specific features that people with insulin-dependent diabetes seek in a next-generation insulin pump. Our proprietary technology platform allows us to design the slimmest and smallest durable insulin pumps on the market, without sacrificing insulin capacity. Our platform features our patented Micro-Delivery technology, and a miniaturized pumping mechanism that 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 software architecture, and a vivid color touchscreen. In addition, the t:slim X2 features an advanced Bluetooth radio capable of communicating with multiple compatible devices, such as a CGM sensor, blood glucose meter or mobile device applications. Our platform has a micro-USB connection that supports a rechargeable battery and software updates through the Tandem Device Updater, as well as uploads to t:connect Diabetes Management Application, or t:connect. t:connect is our custom cloud-based data management application that provides customers and healthcare providers a fast, easy and visual way to display therapy management data from the pump and supported blood glucose meters. In April 2017, we launched the t:connect HCP Portal, which is designed to streamline healthcare providers’ use of the original t:connect Application and improve office efficiency. Currently, t:connect and the Tandem Device Updater are only available in the United States.

 

We have rapidly increased sales since our commercial launch by expanding our sales, clinical and marketing organization, by developing, commercializing and marketing multiple differentiated products that utilize our proprietary technology platform and consumer-focused approach, and by providing strong customer support. In our research, approximately 86% of healthcare providers surveyed believe that providing great customer support is the most important attribute in an insulin pump manufacturer. We believe that by demonstrating our product benefits and the shortcomings of existing insulin therapies, more people will choose our insulin pumps for their therapy needs, allowing us to further penetrate and expand the market. We also believe we are positioned well to address consumers’ needs and preferences with our current products and products under development and by offering customers access to our future innovations through the Tandem Device Updater, as they are approved by the FDA. As we continue to develop differentiated products based on our proprietary technology platform, we intend to leverage a single sales, marketing and clinical organization, a shared manufacturing and supply chain infrastructure, and the expertise of our customer support services.

 

In the second half of 2018, we intend to commence commercial sales of our t:slim X2 with G5 integration in select international geographies. We expect that most of our commercial sales outside the United States will be to independent distributors in select geographies who will perform all sales, customer support and training in their respective territories.

 

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Products Under Development

 

Our products under development support our strategy of focusing on both consumer and clinical needs, and include AID systems, a next-generation hardware platform, and connected (mobile) health offerings. We intend to leverage our consumer-focused approach and proprietary technology platform to continue to develop products that have the features and functionalities that will allow us to target people in differentiated segments of the insulin-dependent diabetes market:

 

t:slim X2 with Control IQ – Our second generation AID system is expected to integrate the t:slim X2 pump with the treat-to-range technology that we licensed from TypeZero Technologies LLC, as well as Dexcom’s G6 sensor. With TypeZero’s technology, our product is intended to both increase and decrease basal insulin based on a user’s predicted blood glucose levels, as well as deliver automated correction boluses. We are working with Dexcom and TypeZero on the integration of our technologies into the U.S. portion of the Clinical Acceptance of the Artificial Pancreas (DCLP3) portion of the International Diabetes Closed Loop (IDCL) Trial, for which enrollment began in June 2018. This trial will utilize a t:slim X2 integrated with TypeZero’s inControl AID algorithms, which is designed to automatically adjust a person’s insulin based on information from a Dexcom G6 sensor. We intend to use the results from this trial in a PMA submission with the FDA, the first module of which we intend to file in September 2018. We have also conducted and anticipate continuing to conduct targeted pediatric studies for a future regulatory submission. Subject to both the timely completion of the DCLP3 Trial with a satisfactory outcome and future FDA approval, our goal is to launch this product in the summer of 2019.

t:slim X2 with Control IQ – Our second generation AID system is expected to integrate the t:slim X2 pump with the treat-to-range technology that we licensed from TypeZero Technologies LLC, as well as Dexcom’s G6 sensor. With TypeZero’s technology, our product is intended to both increase and decrease basal insulin based on a user’s predicted blood glucose levels, as well as deliver automated correction boluses. We are working with Dexcom and TypeZero on the integration of our technologies into the U.S. portion of the Clinical Acceptance of the Artificial Pancreas (DCLP3) portion of the International Diabetes Closed Loop (IDCL) Trial, for which enrollment began in June 2018. This trial will utilize a t:slim X2 integrated with TypeZero’s inControl AID algorithms, which is designed to automatically adjust a person’s insulin based on information from a Dexcom G6 sensor. We intend to use the results from this trial in a PMA submission with the FDA, the first module of which we intend to file in September 2018. We have also conducted and anticipate continuing to conduct targeted pediatric studies for a future regulatory submission. Subject to both the timely completion of the DCLP3 Trial with a satisfactory outcome and future FDA approval, our goal is to launch this product in the summer of 2019.

 

 

t:sport Insulin Delivery System – This product is our next generation hardware platform that is expected to be half the size of t:slim and is being designed for people who seek even greater discretion and flexibility with the use of their insulin pump. Subject to FDA approval, our goal is to launch this product in 2020 or 2021.

 

 

Connected (Mobile) Health Offerings - We are currently developing a mobile application that is being designed to utilize the capability of the Bluetooth radio to wirelessly upload pump data to t:connect, receive notification of pump alerts and alarms, integrate other health-related information from third party sources, and support future pump-control capabilities for our products under development. Subject to FDA approval, we intend to launch the first generation of our mobile application in the second half of 2018, with a subset of these features.

 

Pump Shipments

 

Since inception, we have derived nearly all of our sales from the shipment 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 nearly 78,000 insulin pumps since our initial launch in August 2012, of which over 66,000 pumps were shipped within the four year period ended June 30, 2018. Pump shipments are broken down by fiscal quarter as follows:

 

 

Pump Units Shipped for Each of the Three Months Ended in Respective Years(1)

 

 

Total

 

 

March 31

 

 

June 30

 

 

September 30

 

 

December 31

 

 

Total

 

2012

 

-

 

 

 

9

 

 

 

204

 

 

 

844

 

 

 

1,057

 

2013

 

852

 

 

 

1,363

 

 

 

1,851

 

 

 

2,406

 

 

 

6,472

 

2014