tndm-10q_20190331.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 March 31, 2019

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 April 26, 2019, there were 58,067,241 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 March 31, 2019 (Unaudited) and December 31, 2018

  

 

1

 

  

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

  

 

2

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018

 

 

3

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

 

4

 

  

Notes to Unaudited Condensed Consolidated Financial Statements

  

 

5

Item 2

  

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

  

 

15

Item 3

  

Quantitative and Qualitative Disclosures about Market Risk

  

 

25

Item 4

  

Controls and Procedures

  

 

26

 

 

 

 

 

 

Part II

  

Other Information

  

 

27

Item 1

  

Legal Proceedings

  

 

27

Item 1A

  

Risk Factors

  

 

27

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

 

55

Item 3

  

Defaults Upon Senior Securities

  

 

55

Item 4

  

Mine Safety Disclosures

  

 

55

Item 5

  

Other Information

  

 

55

Item 6

  

Exhibits

  

 

56

 

 

 


PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

TANDEM DIABETES CARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

(Note 1)

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

40,445

 

 

$

41,826

 

Short-term investments

 

 

85,159

 

 

 

87,201

 

Accounts receivable, net

 

 

33,027

 

 

 

35,193

 

Inventories, net

 

 

22,826

 

 

 

19,896

 

Prepaid and other current assets

 

 

4,571

 

 

 

3,769

 

Total current assets

 

 

186,028

 

 

 

187,885

 

Property and equipment, net

 

 

17,182

 

 

 

17,151

 

Operating lease right-of-use assets

 

 

10,087

 

 

 

-

 

Patents, net

 

 

1,048

 

 

 

1,130

 

Other long-term assets

 

 

353

 

 

 

128

 

Total assets

 

$

214,698

 

 

$

206,294

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,206

 

 

$

6,824

 

Accrued expense

 

 

3,376

 

 

 

3,930

 

Employee-related liabilities

 

 

17,047

 

 

 

24,030

 

Deferred revenue

 

 

5,460

 

 

 

4,600

 

Common stock warrants

 

 

29,762

 

 

 

17,926

 

Operating lease liabilities

 

 

3,703

 

 

 

-

 

Other current liabilities

 

 

6,126

 

 

 

8,978

 

Total current liabilities

 

 

76,680

 

 

 

66,288

 

Deferred rent—long-term

 

 

-

 

 

 

3,799

 

Operating lease liabilities - long-term

 

 

10,685

 

 

 

-

 

Other long-term liabilities

 

 

6,371

 

 

 

4,932

 

Total liabilities

 

 

93,736

 

 

 

75,019

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000 shares authorized as of March 31, 2019 and December 31, 2018.  57,982 and 57,554 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively.

 

 

58

 

 

 

57

 

Additional paid-in capital

 

 

743,930

 

 

 

731,306

 

Accumulated other comprehensive income (loss)

 

 

41

 

 

 

(13

)

Accumulated deficit

 

 

(623,067

)

 

 

(600,075

)

Total stockholders’ equity

 

 

120,962

 

 

 

131,275

 

Total liabilities and stockholders’ equity

 

$

214,698

 

 

$

206,294

 

 

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 March 31,

 

 

 

 

2019

 

 

2018

 

 

Sales

 

$

65,995

 

 

$

27,277

 

 

Cost of sales

 

 

32,642

 

 

 

15,873

 

 

Gross profit

 

 

33,353

 

 

 

11,404

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

34,961

 

 

 

20,914

 

 

Research and development

 

 

9,389

 

 

 

5,975

 

 

Total operating expenses

 

 

44,350

 

 

 

26,889

 

 

Operating loss

 

 

(10,997

)

 

 

(15,485

)

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

757

 

 

 

91

 

 

Interest and other expense

 

 

(6

)

 

 

(3,071

)

 

Change in fair value of stock warrants

 

 

(12,746

)

 

 

(14,228

)

 

Total other expense, net

 

 

(11,995

)

 

 

(17,208

)

 

Net loss

 

$

(22,992

)

 

$

(32,693

)

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

Unrealized gain on short-term investments

 

$

50

 

 

$

 

 

Foreign currency translation

 

 

4

 

 

 

 

 

Comprehensive loss

 

$

(22,938

)

 

$

(32,693

)

 

Net loss per share, basic and diluted

 

$

(0.40

)

 

$

(1.82

)

 

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

 

 

57,771

 

 

 

17,993

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

2


TANDEM DIABETES CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity (Deficit)

 

Balance at December 31, 2018

 

 

57,554

 

 

$

57

 

 

$

731,306

 

 

$

(13

)

 

$

(600,075

)

 

$

131,275

 

Exercise of stock options

 

 

409

 

 

 

1

 

 

 

1,898

 

 

 

 

 

 

 

 

 

1,899

 

Exercise of common stock warrants

 

 

19

 

 

 

 

 

 

64

 

 

 

 

 

 

 

 

 

64

 

Fair value of common stock warrants at time of exercise

 

 

 

 

 

 

 

 

910

 

 

 

 

 

 

 

 

 

910

 

Stock-based compensation

 

 

 

 

 

 

 

 

9,752

 

 

 

 

 

 

 

 

 

9,752

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

4

 

Unrealized gain on short-term investments

 

 

 

 

 

 

 

 

 

 

 

50

 

 

 

 

 

 

50

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,992

)

 

 

(22,992

)

Balance at March 31, 2019

 

 

57,982

 

 

$

58

 

 

$

743,930

 

 

$

41

 

 

$

(623,067

)

 

$

120,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity (Deficit)

 

Balance at December 31, 2017

 

 

10,119

 

 

$

10

 

 

$

448,455

 

 

$

 

 

$

(477,614

)

 

$

(29,149

)

Adjustment to retained earnings from adoption of ASC 606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

150

 

 

 

150

 

Issuance of common stock in public offering, net of

   underwriter’s discount and offering costs

 

 

34,500

 

 

 

36

 

 

 

63,994

 

 

 

 

 

 

 

 

 

64,030

 

Exercise of common stock warrants

 

 

1,937

 

 

 

2

 

 

 

6,776

 

 

 

 

 

 

 

 

 

6,778

 

Fair value of common stock warrants at time of exercise

 

 

 

 

 

 

 

 

1,599

 

 

 

 

 

 

 

 

 

1,599

 

Stock-based compensation

 

 

80

 

 

 

 

 

 

1,134

 

 

 

 

 

 

 

 

 

1,134

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32,693

)

 

 

(32,693

)

Balance at March 31, 2018

 

 

46,636

 

 

$

47

 

 

$

521,958

 

 

$

-

 

 

$

(510,157

)

 

$

11,848

 

 

See accompanying notes to unaudited condensed consolidated financial statements.


3


TANDEM DIABETES CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

Three Months Ended March 31,

 

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(22,992

)

 

$

(32,693

)

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

 

 

 

 

 

 

 

Depreciation and amortization expense

 

1,438

 

 

 

1,493

 

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

 

 

 

 

692

 

Provision for allowance for doubtful accounts

 

342

 

 

 

359

 

Provision for inventories reserve

 

679

 

 

 

107

 

Change in fair value of common stock warrants

 

12,746

 

 

 

14,228

 

Amortization of premium (discount) on short-term investments

 

(94

)

 

 

59

 

Stock-based compensation expense

 

9,834

 

 

 

1,192

 

Other

 

27

 

 

 

148

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

1,821

 

 

 

7,657

 

Inventories, net

 

(3,690

)

 

 

342

 

Prepaid and other current assets

 

(1,036

)

 

 

(745

)

Other long-term assets

 

(225

)

 

 

(18

)

Accounts payable

 

4,376

 

 

 

(1,654

)

Accrued expense

 

(553

)

 

 

366

 

Employee-related liabilities

 

(6,982

)

 

 

(3,978

)

Deferred revenue

 

861

 

 

 

349

 

Other current liabilities

 

(2,120

)

 

 

(356

)

Deferred rent

 

 

 

 

(185

)

Other long-term liabilities

 

1,444

 

 

 

365

 

Net cash used in operating activities

 

(4,124

)

 

 

(12,272

)

Investing activities

 

 

 

 

 

 

 

Purchase of short-term investments

 

(42,914

)

 

 

(9,000

)

Proceeds from sales and maturities of short-term investments

 

45,100

 

 

 

 

Purchase of property and equipment

 

(1,408

)

 

 

(514

)

Net cash provided by (used in) investing activities

 

778

 

 

 

(9,514

)

Financing activities

 

 

 

 

 

 

 

Proceeds from public offering, net of offering costs

 

 

 

 

64,157

 

Proceeds from exercise of common stock warrants

 

64

 

 

 

6,512

 

Proceeds from issuance of common stock under Company stock plans

 

1,898

 

 

 

 

Net cash provided by financing activities

 

1,962

 

 

 

70,669

 

Effect of foreign exchange rates on cash

 

3

 

 

 

 

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

 

(1,384

)

 

 

48,883

 

Cash and cash equivalents and restricted cash at beginning of period

 

41,826

 

 

 

23,700

 

Cash and cash equivalents and restricted cash at end of period

$

40,445

 

 

$

72,583

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Interest paid

$

-

 

 

$

2,379

 

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for operating lease obligations

$

3,053

 

 

$

 

Debt discount included in other long-term liabilities

$

 

 

$

827

 

Public offering costs included in accounts payable

$

 

 

$

129

 

Property and equipment included in accounts payable

$

130

 

 

$

217

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 


4


 

 

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 Company’s flagship pump platform that is capable of remote feature updates and designed to display continuous glucose monitoring (CGM), sensor information directly on the pump home screen. 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’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 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 September 2017, the Company received approval by the United States Food and Drug Administration (FDA) for the integration of t:slim X2 with the Dexcom MOBILE G5 CGM. In June 2018, the Company received FDA approval for t:slim X2 with Basal-IQ technology, the Company’s first-generation Automated Insulin Delivery (AID) algorithm, and the first insulin pump designated as compatible with integrated CGM (iCGM) devices. The Company commenced commercial sales of this product integrated with the Dexcom G6 CGM in August 2018.

 

During the third quarter of 2018, the Company commenced sales of the t:slim X2 in select geographies outside the United States, including Australia, Italy, New Zealand, Scandinavia (Denmark, Norway and Sweden), South Africa, Spain, and the United Kingdom. Direct sales efforts in Canada began in the fourth quarter of 2018.

 

As of March 31, 2019, the Company had $125.6 million in cash and cash equivalents and short-term investments. The Company has incurred operating losses since its inception and, as reflected in the accompanying financial statements, the Company had an accumulated deficit of $623.1 million as of March 31, 2019, which included a net loss of $23.0 million for the three months ended March 31, 2019. Management believes that the cash, cash equivalents and short-term investments on hand will be sufficient to satisfy the Company’s liquidity requirements for at least the next 12 months from the date of this filing.

 

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, 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 through debt financing which has since been fully repaid. The Company may in the future seek additional capital from public or private offerings of its capital stock, or it may elect to borrow capital 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.

 

5


Basis of Presentation

 

The Company has prepared the accompanying unaudited condensed consolidated 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 consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (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.

 

2. Summary of Significant Accounting Policies

 

There have been no material changes in our significant accounting policies during the three months ended March 31, 2019, as compared with those disclosed in the Annual Report other than adoption of the new lease accounting standard (See Note 6, “Leases”).

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make 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 consolidated financial statements and accompanying notes as of the date of the consolidated financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions.

 

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.

 

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. The Company believes the fair value of its operating lease liabilities at March 31, 2019 approximated its carrying value, based on the borrowing rates that were available for loans with similar terms. The estimated fair value of certain of the Company’s common stock warrants was determined using the Black-Scholes pricing model as of March 31, 2019 and December 31, 2018 (see Note 5, “Fair Value Measurements”).

 

6


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 superseded 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 was 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 impact of 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 typical 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 March 31, 2019 and December 31, 2018, $4.7 million and $3.8 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. 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. The amount recorded on the Company’s balance sheets for product return allowance was $0.2 million and $0.3 million at March 31, 2019 and December 31, 2018, 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.    

 

7


As of March 31, 2019 and December 31, 2018, the warranty reserve was $10.8 million and $9.1 million, respectively. The following table provides a reconciliation of the change in product warranty liabilities from December 31, 2018 through March 31, 2019 (in thousands):

 

Balance at December 31, 2018

$

9,138

 

Provision for warranties issued during the period

 

3,384

 

Settlements made during the period

 

(2,043

)

Increases in warranty estimates

 

298

 

Balance at March 31, 2019

$

10,777

 

 

 

 

 

Current portion

$

4,404

 

Non-current portion

 

6,373

 

Total

$

10,777

 

 

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 the fair value of the employees’ purchase rights under 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

 

 

March 31,

 

 

2019

 

 

2018

 

Warrants to purchase common stock

 

785

 

 

 

7,323

 

Options to purchase common stock

 

5,475

 

 

 

419

 

ESPP

 

142

 

 

 

-

 

 

 

6,402

 

 

 

7,742

 

8


 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13, which modifies 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. This new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. 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 2020, and is in the process of reviewing its credit loss models to assess the impact of the adoption of the standard on its consolidated financial statements.

 

In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which adds and modifies certain disclosure requirements for fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public companies will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. The Company is in the process of determining the impact of the adoption of the standard on its consolidated financial statements as well as whether to early adopt the new standard.

 

In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, or ASU 2018-15, that changes the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The update 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 on 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 consolidated financial statements.

 

3. Short-Term Investments

 

The Company invests in marketable securities, principally debt instruments of the U.S Government, and financial institutions and corporations with strong credit ratings. The following represents a summary of the estimated fair value of short-term investments as of March 31, 2019 and December 31, 2018 (in thousands):

 

At March 31, 2019

 

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Estimated

Fair Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Less than 1

 

$

29,795

 

 

$

4

 

 

$

 

 

$

29,799

 

U.S. Treasury securities

 

Less than 1

 

 

8,939

 

 

 

3

 

 

 

 

 

 

8,942

 

Corporate debt securities

 

Less than 1

 

 

46,388

 

 

 

31

 

 

 

(1

)

 

 

46,418

 

Total

 

 

 

$

85,122

 

 

$

38

 

 

$

(1

)

 

$

85,159

 

 

 

At December 31, 2018

 

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Estimated

Fair Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Less than 1

 

$

53,559

 

 

$

 

 

$

(22

)

 

$

53,537

 

U.S. Treasury securities

 

Less than 1

 

 

17,937

 

 

 

 

 

 

(2

)

 

 

17,935

 

Corporate debt securities

 

Less than 1

 

 

15,718

 

 

 

12

 

 

 

(1

)

 

 

15,729

 

Total

 

 

 

$

87,214

 

 

$

12

 

 

$

(25

)

 

$

87,201

 

 

9


4. Inventories

 

Inventories consisted of the following as of March 31, 2019 and December 31, 2018 (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

Raw materials

$

9,585

 

 

$

6,622

 

Work-in-process

 

3,560

 

 

 

2,710

 

Finished goods

 

9,681

 

 

 

10,564

 

Total

$

22,826

 

 

$

19,896

 

 

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 March 31, 2019 and December 31, 2018, 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

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

$

28,087

 

 

$

28,087

 

 

$

 

 

$

 

Commercial paper

 

 

29,799

 

 

 

 

 

29,799

 

 

 

U.S. Treasury securities

 

 

8,942

 

 

 

8,942

 

 

 

 

 

Corporate debt securities

 

 

46,418

 

 

 

 

 

46,418

 

 

 

Total assets

 

$

113,246

 

 

$

37,029

 

 

$

76,217

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock warrants

 

$

29,762

 

 

$

 

 

$

 

 

$

29,762

 

Total liabilities

 

$

29,762

 

 

$

 

 

$

 

 

$

29,762

 

 

10


 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

$

37,373

 

 

$

37,373

 

 

$

 

 

$

 

Commercial paper

 

 

53,537

 

 

 

 

 

 

53,537

 

 

 

 

U.S. Treasury securities

 

 

17,935

 

 

 

17,935

 

 

 

 

 

 

 

Corporate debt securities

 

 

15,729

 

 

 

 

 

 

15,729

 

 

 

 

Total assets

 

$

124,574

 

 

$

55,308

 

 

$

69,266

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock warrants

 

$

17,926

 

 

$

 

 

$

 

 

$

17,926

 

Total liabilities

 

$

17,926

 

 

$

 

 

$

 

 

$

17,926

 

 

 

(1)

Generally, cash equivalents include money market funds and investments with a maturity of three months or less from the date of purchase.

 

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 three months ended March 31, 2019.

 

The Company’s Level 3 liabilities at March 31, 2019 and December 31, 2018 include the Series A warrants issued by the Company in connection with the public offering of common stock in October 2017. 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 A warrants were initially valued in the aggregate amount of $3.3 million on the date of issuance utilizing a Black-Scholes pricing model. As of March 31, 2019, there were Series A warrants to purchase 492,500 shares of common stock outstanding (see Note 8, “Stockholders’ Equity”).

 

The Company reassesses the fair value of the outstanding Series A warrants at each reporting date utilizing a Black-Scholes pricing model. Inputs used in the pricing model include the market price of the Company’s common stock and 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 March 31, 2019 and December 31, 2018 are presented below:

 

 

 

Series A Warrants

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Risk-free interest rate

 

 

2.2

%

 

 

3.0

%

Expected dividend yield

 

 

0.0

%

 

 

0.0

%

Expected volatility

 

 

80.7

%

 

 

78.3

%

Expected term (in years)

 

 

3.5