tndm-10q_20180930.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 September 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

                                 

  

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant 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 October 24, 2018, there were 57,369,283 shares of the registrant’s Common Stock outstanding.

 

 

 

 

 


TABLE OF CONTENTS

 

Part I

  

Financial Information

  

 

1

Item 1

  

Financial Statements

  

 

1

 

  

Condensed Consolidated Balance Sheets at September 30, 2018 (Unaudited) and December 31, 2017

  

 

1

 

  

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

  

 

2

 

  

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (Unaudited)

  

 

3

 

  

Notes to Unaudited Condensed Consolidated Financial Statements

  

 

4

Item 2

  

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

  

 

15

Item 3

  

Quantitative and Qualitative Disclosures about Market Risk

  

 

27

Item 4

  

Controls and Procedures

  

 

28

 

 

 

 

 

 

Part II

  

Other Information

  

 

29

Item 1

  

Legal Proceedings

  

 

29

Item 1A

  

Risk Factors

  

 

29

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

 

57

Item 3

  

Defaults Upon Senior Securities

  

 

57

Item 4

  

Mine Safety Disclosures

  

 

58

Item 5

  

Other Information

  

 

58

Item 6

  

Exhibits

  

 

58

 

 

 


PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

TANDEM DIABETES CARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

(Note 1)

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

32,327

 

 

$

13,700

 

Short-term investments

 

 

81,254

 

 

 

479

 

Accounts receivable, net

 

 

21,689

 

 

 

20,793

 

Inventory, net

 

 

24,366

 

 

 

26,993

 

Prepaid and other current assets

 

 

3,035

 

 

 

2,191

 

Total current assets

 

 

162,671

 

 

 

64,156

 

Property and equipment, net

 

 

17,582

 

 

 

19,631

 

Patents, net

 

 

1,212

 

 

 

1,457

 

Restricted cash—long term

 

 

-

 

 

 

10,000

 

Other long-term assets

 

 

141

 

 

 

102

 

Total assets

 

$

181,606

 

 

$

95,346

 

Liabilities and stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,198

 

 

$

5,150

 

Accrued expense

 

 

3,931

 

 

 

2,832

 

Employee-related liabilities

 

 

17,229

 

 

 

14,488

 

Deferred revenue

 

 

3,703

 

 

 

2,526

 

Common stock warrants

 

 

20,643

 

 

 

5,432

 

Other current liabilities

 

 

6,846

 

 

 

5,657

 

Total current liabilities

 

 

58,550

 

 

 

36,085

 

Notes payable—long-term

 

 

-

 

 

 

76,541

 

Deferred rent—long-term

 

 

4,028

 

 

 

4,687

 

Other long-term liabilities

 

 

3,599

 

 

 

7,181

 

Total liabilities

 

 

66,177

 

 

 

124,494

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000 and 100,000 shares authorized as of September 30, 2018 and December 31, 2017, respectively. 57,364 and 10,119 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively.

 

 

57

 

 

 

10

 

Additional paid-in capital

 

 

719,148

 

 

 

448,455

 

Accumulated other comprehensive loss

 

 

(13

)

 

 

 

Accumulated deficit

 

 

(603,763

)

 

 

(477,613

)

Total stockholders’ equity (deficit)

 

 

115,429

 

 

 

(29,148

)

Total liabilities and stockholders’ equity (deficit)

 

$

181,606

 

 

$

95,346

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

1


TANDEM DIABETES CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and comprehensive loss

(Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Sales

 

$

46,264

 

 

$

27,003

 

 

$

107,667

 

 

$

67,306

 

Cost of sales

 

 

24,468

 

 

 

15,131

 

 

 

59,381

 

 

 

40,680

 

Gross profit

 

 

21,796

 

 

 

11,872

 

 

 

48,286

 

 

 

26,626

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

29,506

 

 

 

20,125

 

 

 

73,048

 

 

 

65,077

 

Research and development

 

 

7,999

 

 

 

4,914

 

 

 

20,430

 

 

 

14,910

 

Total operating expenses

 

 

37,505

 

 

 

25,039

 

 

 

93,478

 

 

 

79,987

 

Operating loss

 

 

(15,709

)

 

 

(13,167

)

 

 

(45,192

)

 

 

(53,361

)

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

443

 

 

 

60

 

 

 

833

 

 

 

179

 

Interest and other expense

 

 

(1,401

)

 

 

(2,928

)

 

 

(7,585

)

 

 

(8,445

)

Loss on extinguishment of debt

 

 

(5,313

)

 

 

 

 

 

(5,313

)

 

 

 

Change in fair value of stock warrants

 

 

(12,265

)

 

 

 

 

 

(69,042

)

 

 

 

Total other expense, net

 

 

(18,536

)

 

 

(2,868

)

 

 

(81,107

)

 

 

(8,266

)

Net loss

 

$

(34,245

)

 

$

(16,035

)

 

$

(126,299

)

 

$

(61,627

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on short-term investments

 

$

(19

)

 

$

 

 

$

(13

)

 

$

1

 

Comprehensive loss

 

$

(34,264

)

 

$

(16,035

)

 

$

(126,312

)

 

$

(61,626

)

Net loss per share, basic and diluted

 

$

(0.62

)

 

$

(3.09

)

 

$

(2.81

)

 

$

(13.79

)

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

 

 

55,615

 

 

 

5,190

 

 

 

44,993

 

 

 

4,468

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

2


TANDEM DIABETES CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(126,299

)

 

$

(61,627

)

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

 

 

 

 

 

 

 

Depreciation and amortization expense

 

4,353

 

 

 

4,737

 

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

 

1,721

 

 

 

1,338

 

Provision for allowance for doubtful accounts

 

1,017

 

 

 

664

 

Provision for inventory reserve

 

397

 

 

 

316

 

Payment in kind interest accrual of notes payable

 

 

 

 

1,236

 

Change in fair value of common stock warrants

 

69,042

 

 

 

 

Amortization of premium (discount) on short-term investments

 

783

 

 

 

(16

)

Stock-based compensation expense

 

13,427

 

 

 

10,502

 

Loss on extinguishment of debt

 

5,313

 

 

 

 

Other

 

155

 

 

 

69

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

(1,913

)

 

 

(73

)

Inventory, net

 

2,752

 

 

 

(9,038

)

Prepaid and other current assets

 

(823

)

 

 

1,133

 

Other long-term assets

 

(39

)

 

 

(53

)

Accounts payable

 

1,083

 

 

 

522

 

Accrued expense

 

1,098

 

 

 

907

 

Employee-related liabilities

 

2,741

 

 

 

797

 

Deferred revenue

 

1,178

 

 

 

(4,137

)

Other current liabilities

 

1,100

 

 

 

(601

)

Deferred rent

 

(571

)

 

 

(425

)

Other long-term liabilities

 

1,033

 

 

 

(746

)

Net cash used in operating activities

 

(22,452

)

 

 

(54,495

)

Investing activities

 

 

 

 

 

 

 

Purchase of short-term investments

 

(100,550

)

 

 

 

Proceeds from sales and maturities of short-term investments

 

18,500

 

 

 

8,500

 

Purchase of property and equipment

 

(2,098

)

 

 

(4,299

)

Net cash provided by (used in) investing activities

 

(84,148

)

 

 

4,201

 

Financing activities

 

 

 

 

 

 

 

Principal payments on notes payable

 

(87,711

)

 

 

 

Proceeds from public offering, net of offering costs

 

172,929

 

 

 

25,125

 

Proceeds from exercise of warrants

 

29,536

 

 

 

 

Proceeds from common stock issued under employee benefit plans

 

473

 

 

 

570

 

Net cash provided by financing activities

 

115,227

 

 

 

25,695

 

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

 

8,627

 

 

 

(24,599

)

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

$

32,327

 

 

$

22,079

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Interest paid

$

5,841

 

 

$

5,871

 

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

 

 

Lease incentive - lessor-paid tenant improvements

$

 

 

$

3,037

 

Debt discount included in other long-term liabilities

$

 

 

$

6,720

 

Common stock warrants issued in connection with term loan

$

 

 

$

3,331

 

Property and equipment included in accounts payable

$

57

 

 

$

72

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

 

TANDEM DIABETES CARE, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED 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 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 (t:slim X2), the next-generation flagship product that is updatable and designed to display continuous glucose monitoring (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 and subsequently commercialized t:flex in May 2015, t:slim G4 in September 2015 and t:slim X2 in October 2016. The t:slim X2 hardware platform now represents 100% of new pump shipments, but the Company will continue to provide ongoing service and support to existing t:slim, t:slim G4 and t:flex customers. In June 2018, the Company received approval by the United States Food and Drug Administration (FDA) for t:slim X2 with Basal-IQ technology, the Company’s first generation Automated Insulin Delivery (AID) algorithm, and commenced commercial sales of this product in August 2018.

 

In August 2018, the Company commenced sales of the t:slim X2 in select geographies outside the United States.

 

In July 2016, the Company launched a Technology Upgrade Program that provided eligible t:slim and t:slim G4 customers a path to obtain the t:slim X2 hardware platform. Participating customers had the right to exchange their original t:slim and t:slim G4 for a t:slim X2 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 had an accumulated deficit of $603.8 million as of September 30, 2018, which included a net loss of $126.3 million for the nine months ended September 30, 2018. Management expects operating losses and negative cash flows to continue for at least the next 12 months.

 

As of September 30, 2018, the Company had $113.6 million in cash and cash equivalents and short-term investments in marketable securities. Management believes that the cash and investments 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, 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, satisfy increasing production requirements, leverage the investments made in its sales, clinical, marketing and customer support organizations and operate its business and manufacture and sell products without infringing third party intellectual property rights.

 

The Company has funded its operations primarily 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, 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 funded its operations primarily 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, or it may elect to borrow 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 or debt service 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 financing will be available on acceptable terms, or at all.

 

Interim financial results are not necessarily indicative of results anticipated for the full year or any other period(s). These unaudited condensed consolidated 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 consolidated financial statements exclude disclosures required by U.S. GAAP for complete financial statements.

 

The condensed consolidated financial statements include the accounts of Tandem Diabetes Care, Inc. and its wholly owned subsidiary in Canada. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Reclassifications

 

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

 

2. Summary of Significant Accounting Policies

 

There have been no material changes in our significant accounting policies during the nine months ended September 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 discrete financial information is available for evaluation by the chief operating decision-maker (CODM) in making decisions regarding resource allocation and assessing performance. The Company’s current product offering consists primarily of insulin pumps, disposable cartridges and infusion sets for the storage and delivery of insulin. The Company has viewed its operations and managed its business as one segment as key operating decisions and resource allocations are made by the CODM using consolidated financial data.

 

Restricted Cash

 

The Company recorded $10.0 million of restricted cash as of December 31, 2017, for the minimum cash balance requirement in connection with the Amended and Restated Term Loan Agreement (Term Loan Agreement) with Capital Royalty Partners II, L.P. and its affiliated funds (CRG) (see Note 6, Term Loan Agreement). Due to the full repayment of the term loan in August 2018, no restricted cash balance existed at September 30, 2018. In January 2018, the Company adopted new guidance from the Financial Accounting Standards Board (FASB) that clarified how entities should classify certain cash receipts and cash payments on the statement of cash flows. As a result, the restricted cash balance that existed in prior periods is included as a component of cash and cash equivalents on the statement of cash flows in the relevant 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.

 

5


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 September 30, 2018 and December 31, 2017 (see Note 5, “Fair Value Measurements”).

 

Revenue Recognition

 

Revenue is generated primarily from sales 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 the Revenue from Contracts with Customers Standard which 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, such as the 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 September 30, 2018 and December 31, 2017, $2.7 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 $0.2 million and $0.2 million at September 30, 2018 and December 31, 2017, respectively. Actual product returns have not differed materially from estimated amounts reserved in the accompanying condensed consolidated 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 September 30, 2018 and December 31, 2017, the warranty reserve was $7.7 million and $5.6 million, respectively. The following table provides a reconciliation of the change in product warranty liabilities from December 31, 2017 through September 30, 2018 (in thousands):

 

Balance at December 31, 2017

$

5,640

 

Provision for warranties issued during the period

 

5,570

 

Settlements made during the period

 

(5,741

)

Increases in warranty estimates

 

2,267

 

Balance at September 30, 2018

$

7,736

 

 

 

 

 

Current portion

$

4,137

 

Non-current portion

 

3,599

 

Total

$

7,736

 

 

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

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Warrants for common stock

 

710

 

 

 

-

 

 

 

710

 

 

 

-

 

Common stock options

 

5,155

 

 

 

8

 

 

 

3,031

 

 

 

3

 

ESPP

 

61

 

 

 

-

 

 

 

24

 

 

 

-

 

 

 

5,926

 

 

 

8

 

 

 

3,765

 

 

 

3

 

7


 

Recent Accounting Pronouncements

 

In February 2016, the 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. In July 2018, the FASB added a transition option for implementation that allows companies to continue to use the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented in the year of adoption of the new leases standard. 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. Companies that elect the transition option will record a cumulative-effect adjustment to retained earnings in the period of adoption rather than the earliest period presented. The Company expects that the adoption of this standard will result in a material increase in assets and liabilities on its consolidated balance sheets and is in the process of analyzing its lease commitments, which consist primarily of operating leases for facilities, to determine the impact of the adoption of the standard on its financial statements.

 

In June 2016, the FASB issued an accounting standards update that changes the measurement and recognition of credit losses for most financial assets and certain other instruments. The new standard requires the use of forward-looking expected credit loss models based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount, which may result in earlier recognition of credit losses under the new standard. The standard is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods within those years. The Company plans to implement the new standard in the first quarter of fiscal 2020, and is in the process of reviewing its credit loss models to assess 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.

 

In August 2018, the FASB issued ASU 2018-15 that changes the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The implementation costs should be presented as a prepaid asset in the balance sheet and expensed over the term of the hosting arrangement. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 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.

 

 

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 September 30, 2018 and December 31, 2017 (in thousands):

 

At September 30, 2018

 

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Estimated

Fair Value

 

Available-for-sale investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Less than 1

 

$

65,654

 

 

$

1

 

 

$

(14

)

 

$

65,641

 

U.S. Treasury securities

 

Less than 1

 

 

15,613

 

 

 

 

 

 

 

 

 

15,613

 

Total

 

 

 

$

81,267

 

 

$

1

 

 

$

(14

)

 

$

81,254

 

 

 

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

 

 

8


4. Inventory

 

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

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Raw materials

$

8,609

 

 

$

10,328

 

Work-in-process

 

4,489

 

 

 

3,812

 

Finished goods

 

11,268

 

 

 

12,853

 

Total

$

24,366

 

 

$

26,993

 

 

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 September 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

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

$

28,104

 

 

$

28,104

 

 

$

 

 

$

 

Commercial paper

 

 

65,641

 

 

 

 

 

65,641

 

 

 

U.S. Treasury securities

 

 

15,613

 

 

 

15,613

 

 

 

 

 

Total assets

 

$

109,358

 

 

$

43,717

 

 

$

65,641

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock warrants

 

$

20,643

 

 

$

 

 

$

 

 

$

20,643

 

Total liabilities

 

$

20,643

 

 

$

 

 

$

 

 

$

20,643

 

 

9


 

 

 

 

 

 

 

 

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 was classified as restricted cash – long-term as of 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 second quarter of 2018.

 

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 nine months ended September 30, 2018.

 

The Company’s Level 3 liabilities at September 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 September 30, 2018, there were Series A warrants to purchase 516,030 shares of common stock outstanding and no Series B warrants outstanding (see Note 7, “Stockholders’ Equity”).

10


 

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 September 30, 2018 and December 31, 2017 are presented below:

 

 

 

Series A Warrants

 

 

 

September 30, 2018

 

December 31, 2017

 

Risk-free interest rate

 

 

2.9

%

 

2.2

%

Expected dividend yield

 

 

0.0

%

 

0.0

%

Expected volatility

 

 

77.6

%

 

63.5

%

Expected term (in years)

 

 

4.1

 

 

4.8

 

 

 

 

 

Series B Warrants

 

 

 

September 30, 2018(1)

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 September 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 nine months ended September 30, 2018:

 

Balance at December 31, 2017

 

$

5,432

 

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

 

 

69,042

 

Decrease in fair value from warrants exercised during the period

 

 

(53,831

)

Balance at September 30, 2018

 

$

20,643

 

 

During the nine months ended September 30, 2018, the Company issued 8,598,076 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 516,030 Series A warrants to purchase common stock outstanding as of September 30, 2018.

 

6. Term Loan Agreement

 

In August 2018, the Company fully repaid the term loan made by CRG pursuant to the Term Loan Agreement. The term loan was collateralized by all assets of the Company. The balance of the outstanding debt at the time of repayment was $82.7 million. The repayment included approximately $1.1 million in accrued interest and $5.0 million in associated financing fees that became due. As a result of the repayment, the Company did not have any borrowings outstanding under the Term Loan Agreement as of September 30, 2018. The Company had aggregate borrowings under the Term Loan Agreement of $82.7 million as of December 31, 2017. Notes payable-long term on the accompanying consolidated balance sheet reflected these aggregate borrowings, offset by a $6.2 million debt discount associated with the financing fees and certain debt issuance costs at December 31, 2017. Such discounts were amortized to interest expense over the term of the loan using the effective interest method. At the time of repayment, the remaining balance of $5.3 million was accelerated and recognized as a loss on extinguishment of debt in the consolidated statement of operations in the third quarter ended September 30, 2018.

 

Under the Term Loan Agreement, interest was 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 were due quarterly on March 31, June 30, September 30 and December 31 of each year of the interest-only payment period, which would have ended on December 31, 2019. The principal balance was due in full at the end of the term of the loan, which was 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”).

 

11


The Company entered into a series of amendments to the Term Loan Agreement in 2016, 2017 and 2018, which included the addition of a financing fee payable at the maturity of the Company’s loans, the issuance of 193,788 ten-year warrants to CRG to purchase shares of the Company’s common stock at an exercise price of $23.50 per share and certain other minimum financing covenants. The financing fee was applicable to the entire aggregate principal amount of borrowings outstanding, including total PIK Loans issued. 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%.

 

At December 31, 2017, the Company had accrued $4.1 million for the financing fee of 5%, which was subsequently increased to $5.0 million, or 6%, in February 2018. These fees were included in other long-term liabilities and as contra-debt in notes payable-long term on the accompanying consolidated balance sheet.

 

 

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 the fourth quarter of 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 of common stock and Series B warrants to purchase up to 4,630,000 shares of common stock 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 September 30, 2018, the Company had issued 8,598,076 shares upon exercise of Series A and Series B warrants, which resulted in gross proceeds to the Company of $29.5 million. As of September 30, 2018, there were 516,030 Series A warrants outstanding and no Series B warrants outstanding. In April 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.

 

In August 2018, the Company completed a public offering of 4,035,085 shares of its common stock at a public offering price of $28.50 per share. The gross proceeds to the Company from the offering were $115.0 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 September 30, 2018 (in thousands):

 

Shares underlying outstanding warrants

 

809

 

Shares underlying outstanding stock options

 

5,655

 

Shares authorized for future equity award grants

 

1,189

 

Shares authorized for issuance as ESPP awards

 

2,101

 

 

 

9,754

 

 

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 8,598,076 shares of its common stock upon the exercise of warrants, and 31,519 shares of its common stock upon the exercise of stock options during the nine months ended September 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.

 

12


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 previously suspended 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 nine months ended September 30, 2018. There were 38,929 shares of common stock purchased under the ESPP during the year ended December 31, 2017.

 

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

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Weighted average grant date fair value (per share)

$

21.77

 

 

$

3.00

 

 

$

12.35

 

 

$

5.10

 

Risk-free interest rate

 

2.8

%

 

 

2.0

%

 

 

2.8

%

 

 

1.9

%

Expected dividend yield

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

Expected volatility

 

70.5

%

 

 

60.3

%

 

 

71.4

%

 

 

60.0

%

Expected term (in years)

 

6.1

 

 

 

6.1

 

 

 

5.7

 

 

 

6.1

 

 

 

 

ESPP

 

Nine Months Ended

 

September 30,

 

2018

 

 

2017(1)

Weighted average grant date fair value (per share)

$

9.62

 

 

N/A

Risk-free interest rate

 

2.4

%

 

N/A

Expected dividend yield

 

0.0

%

 

N/A

Expected volatility

 

77.0

%

 

N/A

Expected term (in years)

 

1.3

 

 

N/A

 

(1)

There were no grants made pursuant to the ESPP during the nine months ended September 30, 2017.

 

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cost of sales

$

784

 

 

$

264

 

 

$

1,129

 

 

$

1,022

 

Selling, general & administrative

 

6,821

 

 

 

1,961

 

 

 

9,833

 

 

 

8,423

 

Research and development

 

1,932

 

 

 

167

 

 

 

2,465

 

 

 

1,057

 

Total

$

9,537

 

 

$

2,392

 

 

$

13,427

 

 

$

10,502

 

 

The total stock-based compensation expense capitalized as part of the cost of inventory was $0.7 million and $0.2 million as of September 30, 2018 and December 31, 2017, respectively.

 

13


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 amount or 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 September 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. However, regardless of the outcome, legal proceedings, disputes and other claims can have an adverse impact on the Company because of legal costs, diversion of management time and resources, and other factors.

 

 

14


 

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 September 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 the NASDAQ Global Market, 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, the t:slim X2 Insulin Delivery System, or 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.

 

We began commercial sales in the United States of our first insulin pump, t:slim, in August 2012. Subsequently, we commercialized t:flex in May 2015, t:slim G4 in September 2015 and t:slim X2 in October 2016. The t:slim X2 technology platform now represents 100% of our new pump shipments, but we continue to provide ongoing service and support to existing t:slim, t:slim G4 and t:flex customers.

 

In June 2018, we received approval by the United States Food and Drug Administration (FDA) for t:slim X2 with Basal-IQ technology, our first-generation Automated Insulin Delivery (AID) algorithm. We commenced commercial sales of this product in the United States in August 2018. This system uses Dexcom G6 continuous glucose monitoring (CGM) sensor values to adjust the rate of insulin delivery to help minimize the frequency and/or duration of hypoglycemic events. In the second quarter of 2018, the FDA also created a new interoperability designation for integrated continuous glucose monitoring (iCGM) devices. Our t:slim X2 with Basal-IQ technology 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.

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In August 2018, we commenced commercial sales in select international geographies of our t:slim X2 insulin pump, which is capable of displaying Dexcom’s G5 Mobile CGM.

 

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.

 

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 in-warranty 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. Since that time, we set a new standard of care in our industry by offering all existing t:slim X2 customers two significant software updates including integration with the Dexcom G5 Mobile CGM system in September 2017 and an upgrade to our new Basal-IQ technology at no cost in August 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 available only 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. 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 in the United States, a shared manufacturing and supply chain infrastructure, and the expertise of our customer support services.

 

In the third quarter of 2018, we established a small group of sales and customer support employees to commercialize our products in Canada. In other select geographies outside the United States, we expect that most of our commercial sales will initially be to independent distributors 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 including the following products under development:

 

 

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 CGM 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. In conjunction with Dexcom and TypeZero, we have integrated 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 was completed in October 2018. This trial will utilize a t:slim X2 integrated with our implementation of TypeZero’s inControl AID algorithms, which is designed to automatically adjust a person’s insulin based on information from a Dexcom G6 CGM sensor. Under new guidelines with the FDA, we intend to file a 510(k) in the fourth quarter of 2018 in pursuit of a new insulin pump classification for the t:slim X2 pump referred to as iPump followed by an additional submission for the Control IQ algorithm using the results of the trial in the first half of 2019. We have also conducted and anticipate continuing to conduct targeted pediatric studies for a future regulatory submission.

 

 

t:sport Insulin Delivery System – This product is our next generation hardware platform that is expected to be half the size of the t:slim platform and is being designed for people who seek even greater discretion and flexibility with the use of their insulin pump.

 

 

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 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, particularly the number of units shipped in the most recent four-year period due to typical four-year reimbursement cycles.

 

In the United States, we have shipped more than 70,000 pumps within the four-year period ended September 30, 2018. Pump shipments in the United States by fiscal quarter are as follows:

 

 

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

 

 

Total

 

 

March 31

 

 

June 30

 

 

September 30

 

 

December 31

 

 

Total