tndm-10q_20180331.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, 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.)

 

 

 

11045 Roselle Street

San Diego, California

 

92121

(Address of principal executive offices)

 

(Zip Code)

(858) 366-6900

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

 

   Title of Each Class   

 

   Name of Exchange on Which Registered   

Common Stock, par value $0.001 per share

 

The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

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

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

As of April 23, 2018, there were 50,067,860 shares of the registrant’s Common Stock outstanding.

 

 

 

 

 


TABLE OF CONTENTS

 

Part I

  

Financial Information

  

 

1

Item 1

  

Financial Statements

  

 

1

 

  

Condensed Balance Sheets at March 31, 2018 (Unaudited) and December 31, 2017

  

 

1

 

  

Condensed Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017 (Unaudited)

  

 

2

 

  

Condensed Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (Unaudited)

  

 

3

 

  

Notes to Unaudited Condensed Financial Statements

  

 

4

Item 2

  

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

  

 

14

Item 3

  

Quantitative and Qualitative Disclosures about Market Risk

  

 

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

  

 

57

Item 3

  

Defaults Upon Senior Securities

  

 

57

Item 4

  

Mine Safety Disclosures

  

 

57

Item 5

  

Other Information

  

 

57

Item 6

  

Exhibits

  

 

58

 

 

 


PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

TANDEM DIABETES CARE, INC.

CONDENSED BALANCE SHEETS

(In thousands, except par value)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

(Note 1)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

62,583

 

 

$

13,700

 

Short-term investments

 

 

9,295

 

 

 

479

 

Accounts receivable, net

 

 

13,043

 

 

 

20,793

 

Inventory, net

 

 

26,486

 

 

 

26,993

 

Prepaid and other current assets

 

 

2,936

 

 

 

2,191

 

Total current assets

 

 

114,343

 

 

 

64,156

 

Property and equipment, net

 

 

18,860

 

 

 

19,631

 

Patents, net

 

 

1,375

 

 

 

1,457

 

Restricted cash - long term

 

 

10,000

 

 

 

10,000

 

Other long-term assets

 

 

121

 

 

 

102

 

Total assets

 

$

144,699

 

 

$

95,346

 

Liabilities and stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,751

 

 

$

5,150

 

Accrued expense

 

 

3,199

 

 

 

2,832

 

Employee-related liabilities

 

 

10,510

 

 

 

14,488

 

Deferred revenue

 

 

2,875

 

 

 

2,526

 

Common stock warrants

 

 

18,061

 

 

 

5,432

 

Other current liabilities

 

 

5,315

 

 

 

5,657

 

Total current liabilities

 

 

43,711

 

 

 

36,085

 

Notes payable—long-term

 

 

76,405

 

 

 

76,541

 

Deferred rent—long-term

 

 

4,488

 

 

 

4,687

 

Other long-term liabilities

 

 

8,247

 

 

 

7,181

 

Total liabilities

 

 

132,851

 

 

 

124,494

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000 shares authorized as of March 31, 2018 and December 31, 2017, 46,636 and 10,119 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively.

 

 

47

 

 

 

10

 

Additional paid-in capital

 

 

521,958

 

 

 

448,455

 

Accumulated deficit

 

 

(510,157

)

 

 

(477,613

)

Total stockholders’ equity (deficit)

 

 

11,848

 

 

 

(29,148

)

Total liabilities and stockholders’ equity (deficit)

 

$

144,699

 

 

$

95,346

 

 

See accompanying notes to unaudited condensed financial statements.

 

 

 

1


TANDEM DIABETES CARE, INC.

CONDENSED STATEMENTS OF OPERATIONS and comprehensive loss

(Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Sales

 

$

27,277

 

 

$

18,977

 

Cost of sales

 

 

15,873

 

 

 

12,224

 

Gross profit

 

 

11,404

 

 

 

6,753

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

20,914

 

 

 

22,849

 

Research and development

 

 

5,975

 

 

 

5,130

 

Total operating expenses

 

 

26,889

 

 

 

27,979

 

Operating loss

 

 

(15,485

)

 

 

(21,226

)

Other income (expense), net:

 

 

 

 

 

 

 

 

Interest and other income

 

 

91

 

 

 

59

 

Interest and other expense

 

 

(3,071

)

 

 

(2,625

)

Change in fair value of stock warrants

 

 

(14,228

)

 

 

 

Total other expense, net

 

 

(17,208

)

 

 

(2,566

)

Net loss

 

$

(32,693

)

 

$

(23,792

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Unrealized gain on short-term investments

 

$

-

 

 

$

1

 

Comprehensive loss

 

$

(32,693

)

 

$

(23,791

)

Net loss per share, basic and diluted(1)

 

$

(1.82

)

 

$

(7.46

)

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

 

 

17,993

 

 

 

3,189

 

 

See accompanying notes to unaudited condensed financial statements.

 

 

(1)

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

 

2


TANDEM DIABETES CARE, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

Three Months Ended March 31,

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(32,693

)

 

$

(23,792

)

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

 

 

 

 

 

 

 

Depreciation and amortization expense

 

1,493

 

 

 

1,428

 

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

 

692

 

 

 

294

 

Provision for allowance for doubtful accounts

 

359

 

 

 

307

 

Provision for inventory reserve

 

107

 

 

 

131

 

Payment in kind interest accrual of notes payable

 

 

 

 

405

 

Change in fair value of common stock warrants

 

14,228

 

 

 

 

Amortization of discount on short-term investments

 

59

 

 

 

(13

)

Stock-based compensation expense

 

1,192

 

 

 

2,964

 

Other

 

148

 

 

 

64

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

7,657

 

 

 

3,178

 

Inventory, net

 

342

 

 

 

(2,615

)

Prepaid and other current assets

 

(745

)

 

 

(468

)

Other long-term assets

 

(18

)

 

 

(43

)

Accounts payable

 

(1,654

)

 

 

(2,725

)

Accrued expense

 

366

 

 

 

855

 

Employee-related liabilities

 

(3,978

)

 

 

1,447

 

Deferred revenue

 

349

 

 

 

(1,423

)

Other current liabilities

 

(356

)

 

 

(382

)

Deferred rent

 

(185

)

 

 

(162

)

Other long-term liabilities

 

365

 

 

 

(262

)

Net cash used in operating activities

 

(12,272

)

 

 

(20,812

)

Investing activities

 

 

 

 

 

 

 

Purchase of short-term investments

 

(9,000

)

 

 

 

Proceeds from sales and maturities of short-term investments

 

 

 

 

5,250

 

Purchase of property and equipment

 

(514

)

 

 

(2,643

)

Net cash provided by (used in) investing activities

 

(9,514

)

 

 

2,607

 

Financing activities

 

 

 

 

 

 

 

Proceeds from public offering, net of offering costs

 

64,157

 

 

 

21,595

 

Proceeds from exercise of warrants

 

6,512

 

 

 

 

Proceeds from exercise of common stock

 

 

 

 

266

 

Net cash provided by financing activities

 

70,669

 

 

 

21,861

 

Net increase in cash and cash equivalents and restricted cash

 

48,883

 

 

 

3,656

 

Cash and cash equivalents and restricted cash at beginning of period

 

23,700

 

 

 

44,678

 

Cash and cash equivalents and restricted cash at end of period

$

72,583

 

 

$

48,334

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Interest paid

$

2,379

 

 

$

1,926

 

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

 

 

Lease incentive - lessor-paid tenant improvements

$

 

 

$

1,773

 

Debt discount included in other long-term liabilities

$

827

 

 

$

2,559

 

Common stock warrants issued in connection with term loan

$

 

 

$

3,331

 

Public offering costs included in accounts payable

$

129

 

 

$

374

 

Property and equipment included in accounts payable

$

217

 

 

$

229

 

 

See accompanying notes to unaudited condensed financial statements.

 

 

3


TANDEM DIABETES CARE, INC.

 

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

1. Organization and Basis of Presentation

 

The Company

 

Tandem Diabetes Care, Inc. is a medical device company focused on the design, development and commercialization of products for people with insulin-dependent diabetes. The Company is incorporated in the state of Delaware. Unless the context requires otherwise, the terms the “Company” or “Tandem” refer to Tandem Diabetes Care, Inc.

 

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

 

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

 

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

 

The Company has incurred operating losses since its inception and, as reflected in the accompanying financial statements, the Company has an accumulated deficit of $510.2 million as of March 31, 2018, which includes a net loss of $32.7 million for the three months ended March 31, 2018. The Company’s ability to achieve profitable operations primarily depends upon achieving a level of revenues adequate to support its cost structure. The Company primarily funded its operations through private and public equity and debt financing. Management expects operating losses and negative cash flows to continue for at least the next 12 months.

 

As of March 31, 2018, the Company had $81.9 million in cash and cash equivalents and short-term investments, which included $10.0 million of restricted cash. Management evaluated the Company’s ability to continue as a going concern within one year of the financial statements being issued and believes that the cash on hand will be sufficient to satisfy its liquidity requirements for at least the next 12 months.

 

The Company’s ability to continue as a going concern, meet its minimum liquidity requirements in the future or satisfy the other covenants under the Amended and Restated Term Loan Agreement with Capital Royalty Partners, or the Term Loan Agreement (see Note 6, “Term Loan Agreement”) is dependent on its ability to continue to grow the business by executing its strategy to achieve renewal pump sales objectives, develop and launch new products, increase gross profits from higher sales of infusion sets, maximize manufacturing efficiencies and leverage early investments made in the sales, clinical and marketing organization. If the Company does not achieve these objectives, it 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


The financial statements included in this Quarterly Report on Form 10-Q for the three months ended March 31, 2018 (the “Quarterly Report”) have been prepared on a basis that assumes that the Company will continue as a going concern, and do not include any adjustments that may result from the outcome of this uncertainty. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of the Company’s liabilities and commitments in the normal course of business and does not include any adjustments to reflect the possible future effects of the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Basis of Presentation

 

The Company has prepared the accompanying unaudited condensed financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments which are of a normal and recurring nature, considered necessary for a fair presentation of the financial information contained herein, have been included.

 

Interim financial results are not necessarily indicative of results anticipated for the full year or any other period(s). These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (“Annual Report”), from which the balance sheet information herein was derived. These unaudited condensed financial statements exclude disclosures required by U.S. GAAP for complete financial statements.

 

2. Summary of Significant Accounting Policies

 

There have been no material changes in our significant accounting policies during the three months ended March 31, 2018, as compared with those disclosed in the Annual Report other than adoption of the new revenue recognition standard (“Revenue from Contracts with Customers Standard”).

 

Use of Estimates

 

The preparation of the financial statements in conformity with U.S. GAAP requires management to make informed estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in the Company’s financial statements and accompanying footnotes as of the date of the financial statements. Actual results could materially differ from those estimates and assumptions.

 

Segment Reporting

 

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

 

Restricted Cash

 

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

 

 

Accounts Receivable

 

The Company grants credit to various customers in the ordinary course of business. The Company maintains an allowance for doubtful accounts for potential credit losses. Provisions are made based on historical experience, assessment of specific risk, review of outstanding invoices, and various assumptions and estimates that are believed to be reasonable under the circumstances. Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a balance is uncollectible.

 

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 that 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 by using the Black-Scholes pricing model as of March 31, 2018 and December 31, 2017, as discussed in Note 5.

 

Revenue Recognition

 

Revenue is generated primarily from sales in the United States of insulin pumps, disposable cartridges and infusion sets to individual customers and third-party distributors that resell the product to insulin-dependent diabetes customers. The Company is paid directly by customers who use the products, distributors and third-party insurance payors.

 

In January 2018, the Company adopted Revenue from Contracts with Customers Standard that supersedes existing revenue guidance under U.S. GAAP and International Financial Reporting Standards. Pursuant to the Revenue from Contracts with Customers Standard’s core principle subsequent to January 1, 2018, the Company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company elected to implement this new standard utilizing the modified retrospective method. Under the modified retrospective approach, the Company applied the new standard to all new contracts initiated on/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, our insulin pumps, cartridges, infusion sets and accessories are deemed performance obligations that are satisfied upon delivery, while access to our complementary products (t:connect cloud-based data management application and the Tandem Device Updater) are considered performance obligations satisfied over the four-year warranty period of the insulin pumps. There is no standalone value for these complementary products. Therefore, the Company determines their value by applying the expected cost plus margin approach and then allocates the residual to the insulin pumps. At March 31, 2018 and December 31, 2017, $2.1 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 March 31, 2018 and December 31, 2017, respectively. Actual product returns have not differed materially from estimated amounts reserved in the accompanying condensed financial statements.

 

Warranty Reserve

 

The Company generally provides a four-year warranty on its insulin pumps to end user customers and may replace any pumps that do not function in accordance with the product specifications. Insulin pumps returned to the Company may be refurbished and redeployed. Additionally, the Company offers a six-month warranty on disposable cartridges and infusion sets. Estimated warranty costs are recorded at the time of shipment. Warranty costs are estimated based on the current expected product replacement cost and expected replacement rates based on historical experience. The Company evaluates the reserve quarterly and makes adjustments when appropriate. Changes to the actual replacement rates or the expected product replacement cost could have a material impact on the Company’s estimated warranty reserve.    

6


 

As of March 31, 2018 and December 31, 2017, the warranty reserve was $6.1 million and $5.6 million, respectively. The following table provides a reconciliation of the change in product warranty liabilities from December 31, 2017 through March 31, 2018 (in thousands):

 

Balance at December 31, 2017

$

5,640

 

Provision for warranties issued during the period

 

1,672

 

Settlements made during the period

 

(1,836

)

Increases in warranty estimates

 

610

 

Balance at March 31, 2018

$

6,086

 

 

 

 

 

Current portion

$

2,803

 

Non-current portion

 

3,283

 

Total

$

6,086

 

 

 

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

 

 

March 31,

 

 

2018

 

 

2017

 

Warrants for common stock

 

7,323

 

 

 

-

 

Common stock options

 

419

 

 

 

125

 

ESPP

 

-

 

 

 

39

 

 

 

7,742

 

 

 

164

 

 

 

Reclassifications

 

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

7


 

Recent Accounting Pronouncements

 

 

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

 

In February 2016, FASB issued final guidance for lease accounting. The new guidance requires lessees to put most leases on their balance sheet but to recognize expenses on their income statement in a manner similar to current accounting principles. The new guidance also eliminates the current real estate-specific provisions for all entities. The standard is effective for public companies for annual periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted for all entities. 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 March 31, 2018 and December 31, 2017 (in thousands):

 

At March 31, 2018

 

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Estimated

Fair Value

 

Available-for-sale investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

 

$

8,941

 

 

$

1

 

 

$

(1

)

 

$

8,941

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds held for nonqualified deferred compensation plan participants

 

 

 

 

355

 

 

 

(1

)

 

 

 

 

 

354

 

Total

 

 

 

$

9,296

 

 

$

 

 

$

(1

)

 

$

9,295

 

 

 

At December 31, 2017

 

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Estimated

Fair Value

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds held for nonqualified deferred compensation plan participants

 

 

 

$

459

 

 

$

20

 

 

$

 

 

$

479

 

Total

 

 

 

$

459

 

 

$

20

 

 

$

 

 

$

479

 

 

 

4. Inventory

 

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

 

 

March 31,

 

 

December 31,

 

 

2018

 

 

2017

 

Raw materials

$

10,395

 

 

$

10,328

 

Work in process

 

3,761

 

 

 

3,812

 

Finished goods

 

12,330

 

 

 

12,853

 

Total

$

26,486

 

 

$

26,993

 

8


 

 

5. Fair Value Measurements

 

Authoritative guidance on fair value measurements defines fair value, establishes a consistent framework for measuring fair value, and expands disclosures for each major asset and liability category measured at fair value on either a recurring or a nonrecurring basis. Fair value is intended to reflect an assumed exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1:

 

Observable inputs such as unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

 

 

Level 2:

 

Inputs, other than quoted prices in active markets, that are observable either directly or indirectly for substantially the full term of the asset or liability.

 

 

 

Level 3:

 

Unobservable inputs in which there is little or no market data and that are significant to the fair value of the assets or liabilities, which require the reporting entity to develop its own valuation techniques that require input assumptions.

 

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 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

 

 

 

 

 

 

 

March 31, 2018

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

$

64,709

 

 

$

64,709

 

 

$

 

 

$

 

Commercial paper

 

 

8,941

 

 

 

 

 

8,941

 

 

 

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

 

 

354

 

 

 

354

 

 

 

 

 

Total assets

 

$

74,004

 

 

$

65,063

 

 

$

8,941

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock warrants

 

$

18,061

 

 

$

 

 

$

 

 

$

18,061

 

Deferred compensation (2)

 

 

354

 

 

 

354

 

 

 

 

 

Total liabilities

 

$

18,415

 

 

$

354

 

 

$

 

 

$

18,061

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

$

23,700

 

 

$

23,700

 

 

$

 

 

$

 

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

 

 

479

 

 

 

479

 

 

 

 

 

 

 

Total assets

 

$

24,179

 

 

$

24,179

 

 

$

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock warrants

 

$

5,432

 

 

$

 

 

$

 

 

$

5,432

 

Deferred compensation (2)

 

 

479

 

 

 

479

 

 

 

 

 

 

-

 

Total liabilities

 

$

5,911

 

 

$

479

 

 

$

 

 

$

5,432

 

 

 

(1)

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

9


 

(2)

The deferred compensation plan is 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 are valued using quoted market prices multiplied by the number of shares held in each trust account. The related deferred compensation liability represents the fair value of the investment assets.

 

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, 2018.

 

Level 3 liabilities at March 31, 2018 and December 31, 2017 include the Series A and Series B common stock warrants issued by the Company in connection with the public offering of common stock in October 2017. The Series A warrants to purchase 4,630,000 shares of the Company’s common stock have a term of five years and an exercise price of $3.50 per share. The Series B warrants to purchase 4,630,000 shares of the Company’s common stock have a term of six months and an exercise price of $3.50 per share. These warrants were initially valued at $6.5 million on the date of issuance utilizing a Black-Scholes pricing model.

 

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 March 31, 2018 and December 31, 2017 are presented below:

 

 

 

Series A Warrants

 

 

 

March 31, 2018

 

December 31, 2017

 

Risk-free interest rate

 

 

2.6

%

 

2.2

%

Expected dividend yield

 

 

0.0

%

 

0.0

%

Expected volatility

 

 

65.2

%

 

63.5

%

Expected term (in years)

 

 

4.6

 

 

4.8

 

 

 

 

 

Series B Warrants

 

 

 

March 31, 2018

 

December 31, 2017

 

Risk-free interest rate

 

 

1.6

%

 

1.4

%

Expected dividend yield

 

 

0.0

%

 

0.0

%

Expected volatility

 

 

42.8

%

 

80.3

%

Expected term (in years)

 

 

0.1

 

 

0.3

 

 

The following table presents a summary of changes in fair value of the Company’s total Level 3 financial assets for the quarter ended March 31, 2018:

 

Balance at December 31, 2017

 

$

5,432

 

Decrease in fair value from warrants exercised during the period

 

 

(1,599

)

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

 

 

14,228

 

Balance at March 31, 2018

 

$

18,061

 

 

During the quarter ended March 31, 2018, the Company issued 1,936,565 shares of common stock upon the exercise of Series A and Series B warrants. As a result, Series A and Series B warrants to purchase 7,323,435 common stock warrants from the October financing were outstanding as of March 31, 2018.

 

10


6. Term Loan Agreement

 

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

 

Under the Term Loan Agreement, interest is payable at the Company’s option, (i) in cash at a rate of 11.5% per annum, or (ii) at a rate of 9.5% of the 11.5% per annum in cash and 2.0% of the 11.5% per annum (the “PIK Loan”) to be added to the principal of the loan and subject to accruing interest. Interest-only payments are due quarterly on March 31, June 30, September 30 and December 31 of each year of the interest-only payment period, which ends on December 31, 2019. The principal balance is due in full at the end of the term of the loan, which is March 31, 2020 (the “Maturity Date”). The Company had elected to pay interest in cash at a rate of 11.5% per annum through September 30, 2015. From October 1, 2015 through December 31, 2017, the Company elected to pay interest in cash at a rate of 9.5% per annum and for a rate of 2.0% per annum to be added to the principal of the loan. As a result, $2.7 million was added to the principal of the loan during that time period (the “PIK Loans”).

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

11


 

7. Stockholders’ Equity

 

Public Offerings

 

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

 

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

 

In October 2017, the Company completed a public offering, pursuant to which it sold 4,630,000 shares of its common stock, Series A warrants to purchase up to 4,630,000 shares 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 March 31, 2018, the Company had issued 1,936,565 shares of common stock upon exercise of Series A and Series B warrants, which resulted in gross proceeds to the Company of $6.5 million. Subsequent to March 31, 2018, through the expiration of the Series B warrants on April 17, 2018, an additional 3,432,555 warrants were exercised resulting in additional gross proceeds of $11.3 million.

 

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

 

     Shares Reserved for Future Issuance

 

The following shares of the Company’s common stock were reserved for future issuance as of March 31, 2018 (in thousands):

 

Shares underlying outstanding warrants

 

7,616

 

Shares underlying outstanding stock options

 

1,267

 

Shares authorized for future equity award grants

 

97

 

Shares authorized for issuance as ESPP awards

 

101

 

 

 

9,081

 

 

   The Company did not issue any shares of its common stock upon the exercise of any form of stock warrants during the year ended December 31, 2017. The Company issued 24,406 shares of its common stock upon the exercise of stock options during the year ended December 31, 2017. The Company did not issue any shares of its common stock upon the exercise of stock options during the three months ended March 31, 2018.

 

The ESPP enables eligible employees to purchase shares of the Company’s common stock using their after tax payroll deductions, subject to certain conditions. Historically, offerings under the ESPP consisted of a two-year offering period with four six-month purchase periods which began in May and November of each year. The Company announced the suspension of the ESPP in May 2017 due to a lack of available shares. Therefore, no shares of the Company’s common stock were purchased under the ESPP during the three months ended March 31, 2018. There were 38,929 shares of the Company’s common stock purchased under the ESPP during the year ended December 31, 2017.

 

Stock-Based Compensation

 

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

 

 

Stock Option

 

 

Three Months Ended

 

 

March 31,

 

 

2018

 

 

2017

 

Weighted average grant date fair value (per share)

$

1.86

 

 

$

12.50

 

Risk-free interest rate

 

2.7

%

 

 

2.1

%

Expected dividend yield

 

0.0

%

 

 

0.0

%

Expected volatility

 

61.4

%

 

 

59.3

%

Expected term (in years)

 

6.1

 

 

 

6.1

 

12


 

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

 

 

Three Months Ended

 

 

March 31,

 

 

2018

 

 

2017

 

Cost of sales

$

165

 

 

$

229

 

Selling, general & administrative

 

912

 

 

 

2,461

 

Research and development

 

115

 

 

 

274

 

Total

$

1,192

 

 

$

2,964

 

 

The total stock-based compensation expense capitalized as part of the cost of inventory was $0.1 million and $0.2 million as of March 31, 2018 and December 31, 2017, respectively.

 

8. Commitments and Contingencies

 

From time to time, the Company may be subject to legal proceedings, disputes and other claims arising in the ordinary course of business, including actions with respect to intellectual property, employment, product liability and contractual matters. In connection with these matters, the Company regularly assesses the probability and range of possible loss based on the developments in these matters. A liability is recorded in the financial statements if it is determined that it is probable that a 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 unfavorable outcome. As of March 31, 2018 and December 31, 2017, there were no legal proceedings, regulatory encounters or other matters for which the negative outcome was considered probable or for which the amount or range of loss was reasonably estimable.

 

 

 

 

   

 

 


13


Item 2.

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

 

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

 

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, competitive environment, and the application of accounting guidance. We caution you that the foregoing list may not include all of the forward-looking statements made in this Quarterly Report.

 

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

 

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

 

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

 

We qualify all of our forward-looking statements by these cautionary statements.

 

Overview

 

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

 

Since the launch of our first product in August 2012 through March 2018, we have shipped more than 72,000 pumps to customers in the United States, of which over 63,000 pumps have been shipped within the four years ended March 31, 2018. We plan to begin commercialization of t:slim X2 in select geographies outside the United States, including Canada, during 2018.

 

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

 

 

14


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

 

Our insulin pumps are compatible with the Tandem Device Updater, a revolutionary new tool that allows pump users to update their pumps’ software quickly and easily from a personal computer. The Tandem Device Updater provides our customers access to new and enhanced features and functionality faster than the industry has been able to in the past. The first use of our Tandem Device Updater was for deployment of the latest t:slim software to in-warranty t:slim pumps purchased before April 2015. In September 2017, we set a new standard of care in our industry by offering all existing t:slim X2 customers integration with the Dexcom G5 Mobile CGM system through a software update using the Tandem Device Updater. In October 2017, we announced that, subject to United States Food and Drug Administration (FDA) approval, we intend to make any new features approved by the FDA in 2018 available to all in-warranty users of t:slim X2 at no cost through the Tandem Device Updater. In the future, this tool has the potential to enable users to add other new features and functionality to their pumps, such as Automated Insulin Delivery (AID) algorithms 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.

 

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

 

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

 

15


Products Under Development

 

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

 

 

t:slim X2 with Basal IQ – Our first generation AID system is designed to utilize Dexcom G5 sensor values to adjust the rate of insulin delivery to help minimize the frequency and/or duration of hypoglycemic events. During 2016, we completed a feasibility study of our predictive low glucose suspend (PLGS) algorithm. The data from this feasibility study was used in an investigational device exemption (IDE) submission for a pivotal study, which was approved by the FDA in May 2017. We completed a pivotal study for our t:slim X2 with Basal IQ technology and a Dexcom G5 sensor in January 2018. The results of the pivotal study were used in our premarket approval (PMA) application that was submitted to the FDA in late February 2018. Subject to future FDA approval, our goal is to launch the t:slim X2 with Basal IQ in the summer of 2018 utilizing the Dexcom G5 sensor. More recently, Dexcom received FDA approval for their next generation G6 sensor, which has a new interoperability designation from the FDA, or integrated continuous glucose monitoring (iCGM). We are also pursuing a path to provide the iCGM compatibility for the t:slim X2 with Basal IQ.   

 

 

t:slim X2 with Control IQ – Our second generation AID system is expected to integrate the t:slim X2 pump with the treat-to-range technology that we licensed from TypeZero Technologies LLC, as well as Dexcom’s G6 sensor. With TypeZero’s technology, our product is intended to both increase and decrease basal insulin based on a user’s predicted blood glucose levels, as well as deliver automated correction boluses. In November 2016, we announced that we are working with Dexcom and TypeZero on the integration of our technologies into the International Diabetes Closed Loop (IDCL) Trial. We anticipate that a portion of the trial will utilize a t:slim X2 integrated with TypeZero’s inControl AID algorithms, which is designed to automatically adjust a person’s insulin based on information from a Dexcom G6 sensor. We intend to use the results from this portion of the trial in a PMA submission with the FDA. We have conducted and anticipate continuing to conduct targeted pediatric studies for a future regulatory submission. Subject to both the timely completion of the IDCL Trial with a satisfactory outcome and future FDA approval, our goal is to launch this product in the first half of 2019.

 

 

t:sport Insulin Delivery System – This product is our next generation hardware platform that is expected to be half the size of t:slim and is being designed for people who seek even greater discretion and flexibility with the use of their insulin pump. We anticipate conducting clinical trials in 2019 and our goal is to launch this product in 2020 or 2021.

 

 

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

 

Pump Shipments

 

Since inception, we have derived nearly all of our sales from the shipment of insulin pumps and associated supplies in the United States. We consider the number of units shipped per quarter to be an important metric for managing our business. We have shipped more than 72,000 insulin pumps since our initial launch in August 2012, of which over 63,000 pumps were shipped within the four year period ended March 31, 2018. Pump shipments are broken down by fiscal quarter as follows:

 

 

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

 

 

Total

 

 

March 31

 

 

June 30

 

 

September 30

 

 

December 31

 

 

Total

 

2012

 

-

 

 

 

9

 

 

 

204

 

 

 

844

 

 

 

1,057

 

2013

 

852

 

 

 

1,363

 

 

 

1,851

 

 

 

2,406

 

 

 

6,472

 

2014

 

1,723

 

 

 

2,235

 

 

 

2,935

 

 

 

3,929

 

 

 

10,822

 

2015

 

2,487

 

 

 

3,331

 

 

 

3,431

 

 

 

6,234

 

 

 

15,483

 

2016

 

4,042

 

 

 

4,582

 

 

 

3,896

 

 

 

4,418

 

 

 

16,938

 

2017

 

2,816

 

 

 

3,427

 

 

 

3,868

 

 

 

6,950

 

 

 

17,061

 

2018

 

4,444

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

4,444

 

16


 

 

(1)

This table does not reflect returns or exchanges of pump products that occur in the ordinary course of business, nor does it reflect approximately 3,300 trade-ins fulfilled in 2016 and 2017 under the Technology Upgrade Program (discussed below) related to our commercial launch of t:slim X2.

 

Technology Upgrade Program

 

Beginning in the third quarter of 2016 through the third quarter of 2017, we offered a Technology Upgrade Program under a variable pricing structure, as a pathway for certain existing customers to obtain the t:slim X2 insulin pump. Due to the high degree of accounting complexity, the program created unpredictable financial results under U.S. GAAP for the duration of the program. The accounting treatment for the program required us to defer up to 100% of sales at the time of pump shipment and recognize them in a subsequent period, either when the upgrade was fulfilled or at the expiration of the program. We recognized the deferred amount of sales and cost of sales at the earlier of when the obligations under the program were satisfied or upon the expiration of the program. If a customer elected to participate in the program, we recognized any upgrade fees that we received and the associated costs at the time of fulfilling the given obligation. The program expired on September 30, 2017 and, therefore, has no impact on the 2018 financial results.

 

Historical Financial Results

 

For the three months ended March 31, 2018 and 2017, our sales were $27.3 million and $19.0 million, respectively. For the three months ended March 31, 2017, this included incremental net sales of $1.5 million as a result of the Technology Upgrade Program. For the three months ended March 31, 2018 and 2017, our net loss was $32.7 million and $23.8 million, respectively. Our accumulated deficit as of March 31, 2018 was $510.2 million.

  

Trends Impacting Financial Results

 

Overall, we have experienced considerable sales growth since the commercial launch of our first product in the third quarter of 2012, while incurring operating losses since our inception. Our operating results have historically fluctuated on a quarterly or annual basis, particularly in periods surrounding anticipated regulatory approvals, and the commercial launch of products by us and our competitors. In particular, customers may defer a purchasing decision if they believe that a new product may be launched in the near future. For example, we believe that our pump shipments were negatively impacted during the second half of 2016 and first half of 2017, as we announced the launches of t:slim X2 and the Technology Upgrade Program in the third quarter of 2016, and one of our competitors announced the future availability of two new products with financial incentives for adoption.

  

We believe that our financial condition and operating results, as well as the decision-making process of our customers, has been and will continue to be impacted by a number of general trends, including the following:

 

 

market acceptance of our products and competitive products by people with insulin-dependent diabetes, their caregivers and healthcare providers;

 

 

seasonality associated with summer vacations, annual insurance deductibles, and coinsurance requirements associated with the medical insurance plans utilized by our customers and the customers of our distributors;

 

 

the buying patterns of our distributors and other customers;

 

 

the timing of the commercialization of new products by us or our competitors;

 

 

changes in the competitive landscape, including as a result of companies entering or exiting the diabetes therapy market;

 

 

access to adequate coverage and reimbursement for our current and future products by third-party payors, and reimbursement decisions by third-party payors;

 

 

the magnitude and timing of any changes to our facilities, manufacturing operations and other infrastructure; and

 

 

anticipated and actual regulatory actions relating to our products and competitive products.

 

In particular, we believe the following specific factors could materially impact our business going forward:

17


 

continued increase in demand following the commercial launch of t:slim X2 with G5 and the demonstrated success of our Tandem Device Updater, which we expect will positively impact our sales;

 

 

the anticipated launch of t:slim X2 with Basal IQ in the summer of 2018, subject to future FDA approval;

 

 

increased opportunity to achieve customer renewals as customers become eligible for insurance reimbursement to purchase a new insulin pump at the end of the typical four year reimbursement cycle;

 

 

opportunity to attract Animas customers as their pumps come up for renewal, following the announcement by Johnson & Johnson that it intends to discontinue the operations of Animas and exit the insulin pump business entirely;

 

 

increased sales of infusion sets following the commercial launch of t:lock-compatible pump supplies in the third quarter of 2017;

 

 

designation by UnitedHealthcare in July 2016 of one of our competitors as their preferred, in-network durable medical equipment provider of insulin pumps for most customers over the age of 18; and

 

 

international expansion in select geographies, including Canada, in the second half of 2018.

 

For 2018, in addition to working to achieve our sales growth expectations, we intend to continue to leverage our infrastructure investments to realize additional manufacturing cost efficiencies to improve our operating margins, including costs associated with our international launch plans. We believe we can ultimately achieve profitability by driving incremental sales growth, meeting our pump renewal sales objectives, increasing gross profits from larger sales of infusion sets, maximizing manufacturing efficiencies on increased production volumes and leveraging the investments made in our sales, clinical, marketing and customer support organizations.

 

Recent Developments

 

Regulatory Submission

 

In February 2018, we announced results from a pivotal study of the t:slim X2 with Basal IQ technology, a PLGS feature. Data showed that the system achieved the primary outcome of reducing time spent in hypoglycemia compared to sensor-augmented pump therapy alone. The results of the pivotal study were used in our PMA that was submitted to the FDA in late February 2018. Subject to future FDA approval, our goal is to launch the t:slim X2 with Basal IQ in the summer of 2018.  

 

Registered Public Offerings

 

In February 2018, we completed a registered public offering of 34.5 million shares of common stock resulting in gross proceeds to us of approximately $69.0 million, before deducting underwriting discounts and commissions and other offering expenses payable by us, or the February Financing.

 

In October 2017, we completed a registered public offering of 4.6 million shares of our common stock, Series A warrants to purchase up to 4.6 million shares of our common stock and Series B warrants to purchase up to 4.6 million shares of our common stock at a public offering price of $3.50 per share and accompanying warrants, which we refer to as the October Financing. The October Financing resulted in gross proceeds to us of approximately $16.2 million, before deducting underwriting discounts and commissions and other offering expenses payable by us. The Series A warrants have an exercise price of $3.50 per share, are immediately exercisable, and will expire on the 5-year anniversary of the date of issuance. The Series B warrants have an exercise price of $3.50 per share, are immediately exercisable, and will expire on the 6-month anniversary of the date of issuance. Through March 31, 2018, we received gross proceeds of $6.5 million from the exercise of 1.9 million Series A and Series B warrants. Subsequent to March 31, 2018, through the expiration of the Series B warrants on April 17, 2018 an additional 3.4 million warrants were exercised resulting in additional gross proceeds of $11.3 million.

 

Term Loan Agreement

18


 

We have entered into the Term Loan Agreement with Capital Royalty Partners. As of March 31, 2018, we had $82.7 million of aggregate borrowings outstanding under the Term Loan Agreement. On February 6, 2018, we entered into the Fifth Amendment, which included a limited advance waiver of a potential event of default that could have resulted from a qualification regarding our ability to continue as a going concern in the audit report for the year ended December 31, 2017. The Fifth Amendment also included a covenant requiring us to complete a financing in which our gross proceeds from the sale of equity securities was at least $20.0 million, no later than August 30, 2018. We satisfied this covenant with the completion of the February Financing. For additional information about the Term Loan Agreement, see the section entitled “Indebtedness” below.

 

International Expansion

 

In preparation for a commercial launch outside the United States in the second half of 2018, we have filed for the necessary regulatory approvals of our t:slim X2 pump with Dexcom G5 integration in select geographies. In addition, we have also recently entered into distribution agreements with independent distibutors for markets in Australia, New Zealand, Italy and Scandinavia.

 

Leverage from Technology Platform

 

We believe we can ultimately achieve profitability because our proprietary technology platform will allow us to maximize efficiencies in the development, production, sale and marketing of multiple differentiated products. By offering products that are all based on our proprietary technology platform, in combination with the flexibility provided by the Tandem Device Updater, we believe we can develop and bring to market products and functionality more rapidly, while significantly reducing our per-unit design and development costs. Due to shared product design features, our production system is adaptable to new products and we intend to leverage our shared manufacturing infrastructure to drive operational efficiencies. Further, we expect to continue to increase production volume and to reduce the per-unit production overhead cost for our pump products and their associated disposable cartridges over time. We anticipate that the transition to our recently launched t:lock Connector will continue to increase our sales of infusion sets. By expanding our product offerings to address the varying needs among people in different segments of the large and growing insulin-dependent diabetes market, we believe we can increase the productivity of our sales, clinical and marketing organization, as well as our customer support infrastructure, thereby improving our operating margin over the long term.

 

Components of Results of Operations

 

Sales

 

We offer products for people with insulin-dependent diabetes. We commenced commercial sales of t:slim in the United States in the third quarter of 2012. We launched our second insulin pump product, t:flex, in the second quarter of 2015, and launched our third insulin pump product, t:slim G4, in the third quarter of 2015. In October 2016, we began shipping t:slim X2, our next generation flagship product, at which time we discontinued sales of t:slim. In August 2017, we commenced commercial sales of t:slim X2 with G5 and discontinued new sales of t:slim G4. The t:slim X2 hardware platform now represents nearly 100% of our new pump shipments. Accordingly, we intend to discontinue new sales of t:flex in the third quarter of 2018. Our products also include disposable cartridges and infusion sets. In addition, we offer accessories including protective cases, belt clips, and power adapters, although such sales are not significant.

 

We primarily sell our products through national and regional distributors in the United States on a non-exclusive basis. These distributors are generally providers of medical equipment and supplies to individuals with diabetes. Our primary end customers are people with insulin-dependent diabetes. Similar to other durable medical equipment, the primary payor is generally a third-party insurance carrier and the customer is usually responsible for any medical insurance plan copay or coinsurance requirements. We believe our existing sales, clinical and marketing infrastructure will allow us to continue to increase sales by allowing us to promote our products to a greater number of potential customers, caregivers and healthcare providers.

 

In 2018, we intend to commence commercial sales in select international geographies. We expect that most of our commercial sales outside the United States will be to independent distributors in select geographies who will perform all sales, customer support and training in their respective territories.  Historically we have experienced consistent levels of reimbursement for our products in the United States, but the average sales price will vary in international markets based on economic factors, such as the nature of the reimbursement environment, government regulations and the extent to which we rely on distributor relationships to provide sales, clinical and marketing support.  

 

In general, we have experienced, and expect to continue to experience, product shipments being weighted heavily towards the second half of the year, with the highest percentage of product shipments expected in the fourth quarter of the year. Consistent with prior results, we also expect product shipments from the fourth quarter to the following first quarter to decrease significantly.

 

19


In addition, our quarterly sales have fluctuated, and may continue to fluctuate, substantially in the periods surrounding anticipated and actual regulatory approvals and commercial launches of new products by us or our competitors. For instance, customers may defer a purchasing decision if they believe that a new product may be launched in the future. Additionally, upon the announcement of FDA approval or commercial launch of a new product, either by us or one of our competitors, potential new customers may reconsider their purchasing decision or take additional time to consider the anticipated or new approval or product launch in their purchasing decision. For example, we believe that our pump shipments were negatively impacted during the second half of 2016 and first half of 2017, as we announced the launches of t:slim X2 and the Technology Upgrade Program in the third quarter of 2016, and one of our competitors announced the future availability of two new products with financial incentives for adoption. However, we are not able to quantify the extent of the impact of these or similar events, including the launch of t:slim X2 with G5 and the transition to our t:lock Connector in the third quarter of 2017, on future purchasing decisions.

 

Cost of Sales

 

We manufacture our pumps and disposable cartridges at our manufacturing facilities in San Diego, California. Infusion sets and pump accessories are manufactured by third-party suppliers. Cost of sales includes raw materials, labor costs, manufacturing overhead expenses, product training costs, reserves for expected warranty costs, scrap and inventory excess and obsolescence. Manufacturing overhead expenses include expenses relating to quality assurance, manufacturing engineering, material procurement, inventory control, facilities, equipment, information technology and operations supervision and management. Historically, cost of sales has also included royalty costs associated with sales of t:slim G4. In August 2017, we commenced commercial sales of t:slim X2 with G5, which has no royalty obligation, and discontinued new sales of t:slim G4. We anticipate that our cost of sales will continue to increase as our products gain broader market acceptance and our product sales increase.

 

We expect our overall gross margin percentage, which for any given period is calculated as sales less cost of sales divided by sales, to improve over the long term, as our sales increase and we have more opportunities to spread our overhead costs over larger production volumes. We expect we will be able to leverage our manufacturing cost structure across our products that utilize the same proprietary technology platform and manufacturing infrastructure, and will be able to further reduce costs with increased automation, process improvements and raw materials cost reductions. We also expect our warranty costs to decrease as we release product features and functionality utilizing the Tandem Device Updater. However, our overall gross margin may also fluctuate in future quarterly periods as a result of numerous factors besides those associated with production volumes. Specifically, in 2017, we increased our manufacturing capacity by relocating our manufacturing operations and related functions to a new facility over a period of several quarters, which added duplicative and incremental cost for the duration of the transition. The transition was completed January 2018.

 

In general, we expect the gross margin on insulin pumps to be higher than the gross margin on pump-related supplies, which would be consistent with our historical experience. Other factors impacting our overall gross margin may include the changing mix of products sold with different gross margins, the changing percentage of products sold to distributors versus directly to individual customers, varying levels of reimbursement among third-party payors and in international markets, the timing and success of new regulatory approvals and product launches, warranty and training costs, and changes in our manufacturing processes, capacity, costs or output.

20


Selling, General and Administrative

 

Our selling, general and administrative, or SG&A, expenses primarily consist of salary, cash-based incentive compensation, fringe benefits and non-cash stock-based compensation for our executive, financial, marketing, sales, clinical, customer care, technical services, insurance verification, regulatory affairs and administrative functions. In particular, our sales and clinical organization consisted of approximately 70 territories as of March 31, 2018. Territories are maintained by sales representatives and field clinical specialists, and supported by managed care liaisons, additional sales management and other customer support personnel. Other significant SG&A expenses include those incurred for product demonstration samples, commercialization activities associated with new product launches, travel, trade shows, outside legal fees, independent auditor fees, outside consultant fees, insurance premiums, facilities costs and information technology costs. Although we do not contemplate an increase in the number of domestic sales territories in the near term, we expect our SG&A expenses, including the cost of our customer care infrastructure, to increase as our customer base grows in the United States and international geographies. Our SG&A expenses may also increase due to costs associated with additional compliance and regulatory reporting requirements.

 

Research and Development

 

Our research and development, or R&D, activities primarily consist of engineering and research programs associated with our products under development, as well as activities associated with our core technologies and processes. R&D expenses are primarily related to employee compensation, including salary, fringe benefits, non-cash stock-based compensation and temporary employee expenses. We also incur R&D expenses for supplies, development prototypes, outside design and testing services, depreciation, allocated facilities and information services, clinical trial costs, payments under our licensing, development and commercialization agreements and other indirect costs. We expect our R&D expenses to increase as we advance our products under development and develop new products and technologies.

 

Other Income and Expense

 

Our other income and expense primarily consists of changes in the fair value of the Series A and Series B warrants issued in the October Financing, as well as interest expense and amortization of debt discount and issuance costs associated with the Term Loan Agreement. As of March 31, 2018, there was $14.2 million of expense associated with the change in fair value of Series A and Series B warrants. There was no expense associated with the change in fair value of Series A and Series B warrants in 2017. As of March 31, 2018 and 2017, there was $82.7 million and $81.5 million, respectively, of outstanding principal under the Term Loan Agreement, which accrues interest at a coupon rate of 11.5% per annum (see the section below entitled “Indebtedness”). We expect other income and expense to fluctuate quarterly due to revaluations of the outstanding common stock warrants which expire in the fourth quarter of 2022.

 

Results of Operations

 

 

Three Months Ended

 

 

March 31,

 

(in thousands, except percentages)

2018

 

 

2017

 

Sales

$

27,277

 

 

$

18,977

 

Cost of sales

 

15,873

 

 

 

12,224

 

Gross profit

 

11,404

 

 

 

6,753

 

Gross margin

 

42

%

 

 

36

%

Operating expenses:

 

 

 

 

 

 

 

Selling, general and administrative

 

20,914

 

 

 

22,849

 

Research and development

 

5,975

 

 

 

5,130

 

Total operating expenses

 

26,889

 

 

 

27,979

 

Operating loss

 

(15,485

)

 

 

(21,226

)

Other income (expense), net: