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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

For the Quarterly Period Ended September 30, 2014

OR

¨

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

For the Transition Period from              to                 

Commission File Number 001-36189

 

Tandem Diabetes Care, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-4327508

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

11045 Roselle Street

San Diego, California

 

92121

(Address of principal executive offices)

 

(Zip Code)

(858) 366-6900

Registrant’s telephone number, including area code

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

 

   Title of Each Class   

 

   Name of Exchange on Which Registered   

Common Stock, par value $0.001 per share

 

The NASDAQ Stock Market LLC

 

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

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

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

As of October 30, 2014, there were 23,500,687 shares of the registrant’s Common Stock outstanding.

 

 

 

 

 


TABLE OF CONTENTS

 

Part I

  

Financial Information

  

1

Item 1

  

Financial Statements

  

1

 

  

Condensed Balance Sheets at September 30, 2014 (Unaudited) and December 31, 2013

  

1

 

  

Condensed Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)

  

2

 

  

Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)

  

3

 

  

Notes to Condensed Financial Statements (Unaudited)

  

4

Item 2

  

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

  

15

Item 3

  

Quantitative and Qualitative Disclosure About Market Risk

  

23

Item 4

  

Controls and Procedures

  

23

 

 

 

 

 

Part II

  

Other Information

  

25

Item 1

  

Legal Proceedings

  

25

Item 1A

  

Risk Factors

  

25

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

48

Item 3

  

Defaults Upon Senior Securities

  

49

Item 4

  

Mine Safety Disclosures

  

49

Item 5

  

Other Information

  

49

Item 6

  

Exhibits

  

49

 

 

 


PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

TANDEM DIABETES CARE, INC.

CONDENSED BALANCE SHEETS

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

35,558,073

 

 

$

124,385,137

 

Restricted cash

 

2,000,000

 

 

 

2,050,000

 

Short-term investments

 

44,318,806

 

 

 

5,095,331

 

Accounts receivable, net

 

5,842,849

 

 

 

5,298,502

 

Inventory

 

11,891,586

 

 

 

10,330,156

 

Prepaid and other current assets

 

1,438,282

 

 

 

1,830,056

 

Total current assets

 

101,049,596

 

 

 

148,989,182

 

Property and equipment, net

 

12,344,942

 

 

 

9,885,985

 

Patents, net

 

2,459,230

 

 

 

2,697,220

 

Other long term assets

 

710,931

 

 

 

642,746

 

Total assets

$

116,564,699

 

 

$

162,215,133

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

3,046,800

 

 

$

2,352,037

 

Accrued expense

 

1,190,483

 

 

 

1,873,565

 

Employee-related liabilities

 

8,367,716

 

 

 

5,876,011

 

Deferred revenue

 

638,143

 

 

 

411,423

 

Other current liabilities

 

2,412,812

 

 

 

4,086,196

 

Total current liabilities

 

15,655,954

 

 

 

14,599,232

 

Notes payable—long-term

 

29,415,563

 

 

 

29,396,571

 

Deferred rent—long-term

 

2,853,814

 

 

 

1,886,508

 

Other long-term liabilities

 

1,156,092

 

 

 

795,640

 

Total liabilities

 

49,081,423

 

 

 

46,677,951

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized, 23,491,770 and

   22,925,614 shares issued and outstanding at September 30, 2014 (unaudited) and

   December 31, 2013, respectively

 

23,492

 

 

 

22,926

 

Additional paid-in capital

 

297,689,896

 

 

 

284,705,251

 

Accumulated other comprehensive income

 

18,811

 

 

 

Accumulated deficit

 

(230,248,923

)

 

 

(169,190,995

)

Total stockholders’ equity

 

67,483,276

 

 

 

115,537,182

 

Total liabilities and stockholders’ equity

$

116,564,699

 

 

$

162,215,133

 

 

See accompanying notes to condensed financial statements.

 

 

 

1


TANDEM DIABETES CARE, INC.

CONDENSED STATEMENTS OF OPERATIONS and comprehensive loss

(Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Sales

$

13,513,716

 

 

$

7,776,150

 

 

$

31,833,824

 

 

$

18,762,301

 

Cost of sales

 

9,116,570

 

 

 

5,243,288

 

 

 

23,121,269

 

 

 

13,783,155

 

Gross profit

 

4,397,146

 

 

 

2,532,862

 

 

 

8,712,555

 

 

 

4,979,146

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

18,894,758

 

 

 

12,008,799

 

 

 

55,003,966

 

 

 

30,217,184

 

Research and development

 

4,508,004

 

 

 

2,651,580

 

 

 

11,869,567

 

 

 

7,732,818

 

Total operating expenses

 

23,402,762

 

 

 

14,660,379

 

 

 

66,873,533

 

 

 

37,950,002

 

Operating loss

 

(19,005,616

)

 

 

(12,127,517

)

 

 

(58,160,978

)

 

 

(32,970,856

)

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

29,991

 

 

 

151

 

 

 

79,275

 

 

 

611

 

Interest and other expense

 

(923,771

)

 

 

(1,205,697

)

 

 

(2,976,225

)

 

 

(3,543,568

)

Change in fair value of stock warrants

 

 

 

 

272,030

 

 

 

 

 

 

(3,011,574

)

Total other expense, net

 

(893,780

)

 

 

(933,516

)

 

 

(2,896,950

)

 

 

(6,554,531

)

Net loss

$

(19,899,396

)

 

$

(13,061,033

)

 

$

(61,057,928

)

 

$

(39,525,387

)

Other comprehensive gain or loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on short-term investments

 

6,529

 

 

 

 

 

 

18,811

 

 

 

 

Comprehensive loss

$

(19,892,867

)

 

$

(13,061,033

)

 

$

(61,039,117

)

 

$

(39,525,387

)

Net loss per share, basic and diluted

$

(0.85

)

 

$

(60.96

)

 

$

(2.64

)

 

$

(187.33

)

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

 

23,472,150

 

 

 

214,269

 

 

 

23,170,665

 

 

 

210,996

 

 

See accompanying notes to condensed financial statements.

 

 

 

2


TANDEM DIABETES CARE, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine Months Ended

 

 

September 30,

 

 

2014

 

 

2013

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(61,057,928

)

 

$

(39,525,387

)

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

 

 

 

 

 

 

 

Depreciation and amortization expense

 

3,084,774

 

 

 

2,463,022

 

Provision for allowance for doubtful accounts

 

104,726

 

 

 

144,050

 

Provision for inventory reserve

 

163,246

 

 

 

435,419

 

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

 

175,808

 

 

 

160,565

 

Change in fair value of common and preferred stock warrants

 

 

 

 

3,011,574

 

Amortization of premium/discount on short-term investments

 

(32,713

)

 

 

 

Stock-based compensation expense

 

11,047,973

 

 

 

1,609,675

 

Other

 

 

 

 

14,132

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

 

 

 

(177,800

)

Accounts receivable

 

(649,073

)

 

 

(1,899,014

)

Inventory

 

(1,772,338

)

 

 

(4,851,688

)

Prepaid and other current assets

 

391,774

 

 

 

812,580

 

Other long term assets

 

(150,000

)

 

 

 

Accounts payable

 

615,963

 

 

 

(157,918

)

Accrued expense

 

(683,082

)

 

 

849,818

 

Employee-related liabilities

 

2,491,706

 

 

 

2,730,448

 

Deferred revenue

 

226,720

 

 

 

(1,712,159

)

Other current liabilities

 

(1,822,330

)

 

 

1,315,502

 

Deferred rent

 

1,289,451

 

 

 

(431,211

)

Other long term liabilities

 

334,483

 

 

 

252,597

 

Payments received on note receivable from employees

 

 

 

 

25,000

 

Net cash used in operating activities

$

(46,240,840

)

 

$

(34,930,795

)

Investing activities

 

 

 

 

 

 

 

Purchase of short-term investments

 

(61,855,984

)

 

 

 

Proceeds from sales and maturities of short-term investments

 

22,710,000

 

 

 

 

Purchase of property and equipment

 

(5,259,831

)

 

 

(2,530,041

)

Purchase of patents

 

(173,200

)

 

 

(2,000,000

)

Net cash used in investing activities

$

(44,579,015

)

 

$

(4,530,041

)

Financing activities

 

 

 

 

 

 

 

Issuance of notes payable, net of issuance costs

 

29,925,000

 

 

 

28,874,504

 

Restricted cash in connection with notes payable and corporate credit card

 

50,000

 

 

 

(2,000,000

)

Principal payments on notes payable

 

(30,000,000

)

 

 

(4,396,323

)

Issuance of preferred stock for cash, net of offering costs

 

 

 

 

15,990,891

 

Proceeds from issuance of common stock

 

2,017,791

 

 

 

14,687

 

Deferred initial public offering costs

 

 

 

 

(635,630

)

Net cash provided by financing activities

$

1,992,791

 

 

$

37,848,129

 

Net decrease in cash and cash equivalents

$

(88,827,064

)

 

$

(1,612,707

)

Cash and cash equivalents at beginning of period

$

124,385,137

 

 

$

17,162,730

 

Cash and cash equivalents at end of period

$

35,558,073

 

 

$

15,550,023

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Interest paid

$

2,800,417

 

 

$

3,666,516

 

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

 

 

Unrealized gain on short-term investments

$

18,811

 

 

$

 

Property and equipment included in accounts payable

$

45,910

 

 

$

32,549

 

Deferred initial public offering costs included in accounts payable

$

 

 

$

1,127,856

 

Common and preferred stock warrants issued, including incremental value of modification of warrants

$

 

 

$

437,268

 

 

See accompanying notes to condensed financial statements.

 

 

3


TANDEM DIABETES CARE, INC.

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

(Unaudited)

 

1. Organization and Basis of Presentation

 

The Company

 

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

 

The Company designed and commercialized its flagship product, the t:slim Insulin Delivery System, or t:slim, based on its proprietary technology platform and unique consumer-focused approach. The t:slim Insulin Delivery System is comprised of the t:slim Pump and pump-related supplies that include disposable cartridges and infusion sets. The U.S. Food and Drug Administration (“FDA”) cleared t:slim in November 2011 and the Company commenced commercial sales of t:slim in the United States in the third quarter of 2012.

 

Tandem was originally incorporated in the state of Colorado on January 27, 2006 under the name Phluid, Inc. On January 7, 2008, the Company was reincorporated in the state of Delaware for the purposes of changing its legal name from Phluid, Inc. to Tandem Diabetes Care, Inc. and changing its state of incorporation from Colorado to Delaware.

 

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 with 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 have been included.

 

Interim financial results are not necessarily indicative of results anticipated for the full year. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, from which the balance sheet information herein was derived.

 

Initial Public Offering

 

In November 2013, the Company completed its initial public offering of 8,000,000 shares of its common stock at a public offering price of $15.00 per share. Net cash proceeds from the initial public offering were approximately $108.3 million, after deducting underwriting discounts, commissions and estimated offering related transaction costs payable by the Company. In November 2013, the underwriters also exercised their overallotment option and purchased an additional 1,200,000 shares of the Company’s common stock, from which the Company received cash proceeds, net of underwriting discounts and commissions, of approximately $16.7 million. In connection with the closing of the initial public offering, all of the Company’s shares of convertible preferred stock outstanding at the time of the offering were automatically converted into 13,403,747 shares of common stock. In addition, all outstanding preferred stock warrants were automatically converted into warrants to purchase an aggregate of 1,171,352 shares of common stock.

 

Reverse Stock Splits

 

In October 2013, the Board of Directors approved a 1-for-1.6756 reverse stock split of the Company’s common stock. All share and per share information included in the accompanying unaudited condensed financial statements and notes to the unaudited condensed financial statements give retroactive effect to this reverse stock split of the common stock.

 

4


Voluntary Recall

 

On January 10, 2014, the Company announced a voluntary recall of select lots of cartridges used with the t:slim that may have been at risk of leaking. The cause of the recall was identified during the Company’s internal product testing. The recall was expanded on January 20, 2014 to include additional lots of affected cartridges used with the t:slim. The Company incurred approximately $1.7 million in direct costs associated with the recall. The Company recorded a cost of sales charge of approximately $1.3 million in the fourth quarter of 2013 and recorded a cost of sales charge for the remainder in the first quarter of 2014 for affected cartridges shipped in 2014. The Company does not currently expect any further direct financial impact of the recall beyond these costs. The total cost of the recall consisted of approximately $0.7 million associated with the return and replacement of affected cartridges in the field and approximately $1.0 million for the write-off of affected cartridges within the Company’s internal inventory.

 

2. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of the 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 financial statements and accompanying notes as of the date of the financial statements. Actual results could differ from those estimates and assumptions.

 

Restricted Cash

 

Restricted cash as of September 30, 2014 represents a $2.0 million minimum cash balance requirement in connection with the Capital Royalty Term Loan (see Note 6 “Loan Agreements”).

 

Accounts Receivable

 

The Company grants credit to various customers in the normal course of business. The Company maintains an allowance for doubtful accounts for potential credit losses. Provisions are made, generally, for receivables greater than 120 days past due and based upon a specific review of other outstanding invoices. Accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a balance is uncollectible.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company maintains deposit accounts in federally insured financial institutions in excess of federally insured limits. The Company also maintains investments in money market funds that are not federally insured. Additionally, the Company has established guidelines regarding investment instruments and their maturities, which are designed to preserve principal and maintain liquidity.

 

The following table summarizes customers who accounted for 10% or more of net accounts receivable:

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Byram Healthcare

 

18.5

%

 

 

N/A

 

CCS Medical, Inc.

 

13.8

%

 

 

21.4

%

Edgepark Medical Supplies, Inc.

 

13.5

%

 

 

13.1

%

 

The following table summarizes customers who accounted for 10% or more of sales for the periods presented:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Edgepark Medical Supplies, Inc.

 

14.6

%

 

 

17.2

%

 

 

15.6

%

 

 

17.1

%

Byram Healthcare

 

14.3

%

 

 

N/A

 

 

 

N/A

 

 

 

N/A

 

CCS Medical, Inc.

 

10.9

%

 

 

15.8

%

 

 

13.8

%

 

 

11.6

%

 

 


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 value because of the short-term nature of these items. 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 debt approximates its carrying value.

 

Revenue Recognition

 

Revenue is generated in the United States from the sale of the t:slim Pump, disposable cartridges and infusion sets to individual customers and third-party distributors that resell the product to insulin-dependent diabetes customers. Sales to distributors accounted for 72% and 71% of our total sales for the nine months ended September 30, 2014 and 2013, respectively. The Company is paid directly by customers who use the products, distributors and third-party insurance payors.

 

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred and title passed, the price is fixed or determinable, and collectability is reasonably assured. These criteria are applied as follows:

 

The evidence of an arrangement generally consists of contractual arrangements with distributors, third-party insurance payors or direct customers.

 

Transfer of title and risk and rewards of ownership are passed upon shipment of the pump to distributors or upon delivery to the customer.

 

The selling prices are fixed and agreed upon based on the contracts with distributors, the customer and contracted insurance payors, if applicable. For sales to customers associated with insurance providers with whom there is no contract, revenue is recognized upon collection of cash at which time the price is determinable. The Company generally does not offer rebates to its distributors and customers.

 

The Company considers the overall creditworthiness and payment history of the distributor, customer and the contracted insurance payor in concluding whether collectability is reasonably assured.

 

Prior to the first quarter of 2013, t:slim Pump sales were recorded as deferred revenue until the Company’s 30-day right of return expired because the Company did not have sufficient sales history to be able to reasonably estimate returns. At December 31, 2012, $1.9 million was recorded as deferred revenue. Beginning in the first quarter of 2013, the Company began recognizing t:slim Pump revenue when all the revenue recognition criteria above are met, as it established sufficient history in order to reasonably estimate product returns. As a result of this change, a one-time adjustment was recorded during the nine month period ended September 30, 2013, to recognize previously deferred revenue and cost of sales of $1.9 million and $1.1 million, respectively.

 

Revenue Recognition for Arrangements with Multiple Deliverables

 

The Company considers the deliverables in its product offering as separate units of accounting and recognizes deliverables as revenue upon delivery only if (i) the deliverable has standalone value and (ii) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is probable and substantially controlled by the Company. The Company allocates consideration to the separate units of accounting, unless the undelivered elements were deemed perfunctory and inconsequential. The Company uses the relative selling price method, in which allocation of consideration is based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence (“TPE”), or if VSOE and TPE are not available, management’s best estimate of a standalone selling price (“ESP”) for the undelivered elements.

 

In February 2013, the FDA cleared t:connect, the Company’s cloud-based data management application, which is made available upon purchase by t:slim Pump customers. This service is deemed an undelivered element at the time of the t:slim sale. Because the Company has neither VSOE nor TPE for this deliverable, the allocation of revenue is based on the Company’s ESP. The Company establishes its ESP based on estimated cost to provide such services, including consideration of a reasonable profit margin that is corroborated by comparable market data. The Company allocates fair value based on management’s ESP to this element at the time of sale and recognizes the revenue over the four-year hosting period. Deferred revenue for the t:connect hosting services was $0.5 million and $0.2 million at September 30, 2014 and December 31, 2013, respectively. All other undelivered elements at the time of sale are deemed inconsequential or perfunctory.

 

6


Product Returns

 

The Company offers a 30-day right of return for its t:slim Pump customers from the date of shipment, 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 t:slim Pump shipments in the same period. The return rate is then applied to the sales of the 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 at September 30, 2014 and December 31, 2013 was $0.2 million, which was included in accounts receivable on the Company’s condensed balance sheets. Actual product returns have not differed materially from estimated amounts reserved.

 

Warranty Reserve

 

The Company generally provides a four-year warranty on its t:slim Pump to end user customers and may replace any pumps that do not function in accordance with the product specifications. Pumps returned to the Company may be refurbished and redeployed. Additionally, the Company offers a six-month warranty on t:slim cartridges and infusion sets. Estimated warranty costs are recorded at the time of shipment. Warranty costs are estimated based on the current product cost considering a mix of new and refurbished costs for the pump, actual experience and expected failure rates from test studies performed in conjunction with the clearance of the Company’s product with the FDA to support the longevity and reliability of its t:slim Pump. The Company evaluates the reserve quarterly and makes adjustments when appropriate. At September 30, 2014 and December 31, 2013, the warranty reserve was $1.3 million and $1.1 million, respectively. Of the $1.1 million warranty reserve at December 31, 2013, $0.3 million was related to potential replacements associated with the voluntary product recall of selected lots of cartridges. The estimated reserve has been fully utilized and the Company does not expect further replacements related to this recall. As such, there was no warranty reserve at September 30, 2014 for such potential replacements. Actual warranty costs have not differed materially from estimated amounts reserved.

 

The following table provides a reconciliation of the change in product warranty liabilities through September 30, 2014 (in thousands):

 

Balance at December 31, 2013

$

1,123

 

Provision for warranties issued during the period

 

2,301

 

Settlements made during the period

 

(2,114

)

Balance at September 30, 2014

$

1,310

 

 

 

 

 

Current portion recorded in other current liabilities

$

360

 

Non-current portion recorded in other long-term liabilities

 

950

 

Total

$

1,310

 

 

Stock-Based Compensation

 

The Company estimates the fair value of stock options and shares issued to employees under the Employee Stock Purchase Plan (“ESPP”) using a Black-Scholes option-pricing model on the date of grant. The Black-Scholes option-pricing model requires the use of subjective assumptions including volatility, expected term, risk-free rate, and the fair value of the underlying common stock. For awards that vest based on service conditions, the Company recognizes expense using the straight-line method less estimated forfeitures. Prior to the Company’s initial public offering, the estimated fair value of these awards was determined at the date of grant based upon the estimated fair value of the Company’s common stock. Subsequent to the Company’s initial public offering, the fair value of the common stock is based on observable market prices. As of September 30, 2014, there were no outstanding equity awards with market or performance conditions.

 

The Company also records the expense for stock option grants to non-employees based on the estimated fair value of the stock option using the Black-Scholes option-pricing model. The fair value of non-employee awards is remeasured at each reporting period as the underlying awards vest unless the instruments are fully vested, immediately exercisable and nonforfeitable on the date of grant.

 

7


Warrant Liabilities

 

The Company issued freestanding warrants to purchase shares of common stock and convertible preferred stock in connection with the issuance of convertible notes payable in 2011 and 2012. The Company accounted for these warrants as a liability in the financial statements because either the Company did not have enough authorized shares to satisfy potential exercise of the common stock warrants and the number of shares to be issued upon their exercise was outside the control of the Company, or because the underlying instrument into which the warrants were exercisable (Series D convertible preferred stock) contained deemed liquidation provisions that were outside of the control of the Company. Upon the closing of the initial public offering, warrants to purchase shares of Series D Preferred Stock automatically converted into warrants to purchase shares of common stock. The Company reclassified the warrant liability to stockholders’ equity as the warrants met the definition of an equity instrument.

 

Prior to the warrants being converted to an equity instrument, the warrants were recorded at fair value using either the Black-Scholes option pricing model or a binomial lattice model, depending on the characteristics of the warrants at the time of the valuation. The fair value of these warrants was remeasured at each financial reporting period with any changes in fair value being recognized as a component of other income (expense) in the accompanying statements of operations and comprehensive loss. For the three and nine months ended September 30, 2013, income of $0.3 million and expense of $3.0 million were recorded as other income and expense from the revaluations, respectively. In connection with the completion of the initial public offering in November 2013, the Company performed the final remeasurement of the warrant liability.

 

Net Loss Per Share

 

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares that were outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by dividing the net loss by the sum of the weighted-average number of dilutive common share equivalents outstanding for the period determined using the treasury stock method. Dilutive common share equivalents are comprised of convertible preferred stock, preferred stock warrants, common stock warrants, potential ESPP shares, restricted common stock and options outstanding under the Company’s equity incentive plans. Applicable accounting guidance provides that a contract that is reported as an asset or liability for accounting purposes may require an adjustment to the numerator of the diluted earnings per share calculation for any changes in income or loss that would result if the contract had been reported as an equity instrument during the period. Securities are assumed to be converted at the beginning of the period, and the resulting common shares are included in the denominator of the diluted earnings per share calculation for the entire period presented. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.

 

Potentially dilutive securities not included in the calculation of diluted net loss per share (because inclusion would be anti-dilutive) are as follows (in common stock equivalent shares):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Convertible preferred stock outstanding

 

 

 

13,148,484

 

 

 

 

 

12,314,967

 

Warrants for convertible preferred stock

 

 

 

1,426,704

 

 

 

 

 

1,426,704

 

Warrants for common stock

 

1,006,577

 

 

 

271,834

 

 

 

1,006,577

 

 

 

256,898

 

Common stock options

 

2,292,897

 

 

 

1,716,845

 

 

 

2,279,347

 

 

 

967,857

 

ESPP

 

139,145

 

 

 

 

 

139,145

 

 

 

Restricted common stock subject to repurchase

 

 

 

58,555

 

 

 

 

 

55,633

 

 

 

3,438,619

 

 

 

16,622,422

 

 

 

3,425,069

 

 

 

15,022,059

 

 

Recent Accounting Pronouncements

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update, which requires management of public and private companies to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when applicable) and, if so, disclose that fact. Management will be required to make this evaluation for both annual and interim reporting periods, if applicable. Management is also required to evaluate and disclose whether its plans alleviate that doubt. The standard is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not believe the adoption of this standard will have a material impact on its financial position, results of operations or related financial statement disclosures.

 

8


In May 2014, the FASB and the International Accounting Standards Board (“IASB”) issued a comprehensive new revenue recognition standard that will supersede existing revenue guidance under U.S. GAAP and International Financial Reporting Standards (“IFRS”). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that period. The Company is in the process of assessing the future impact of the adoption of the standard on its financial statements.

 

In April 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update, which includes amendments that change the requirements for reporting discontinued operations and require additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations - that is, a major effect on the organization’s operations and financial results - should be presented as discontinued operations. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. Additionally, the update requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The guidance is effective prospectively for fiscal years beginning after December 15, 2014 and interim periods within annual periods beginning on or after December 15, 2015. The Company does not believe the adoption of this standard will have a material impact on its financial position, results of operations or related financial statement disclosures.

 

3. Short-Term Investments

 

The Company invests excess cash in investment securities, principally debt instruments of financial institutions, government sponsored enterprise securities and corporations with strong credit ratings. The following represents a summary of the estimated fair value of short-term investments at September 30, 2014 and December 31, 2013 (in thousands):

 

At September 30, 2014

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Estimated

Fair Value

 

Commercial paper

Less than 1

 

$

40,769

 

 

$

19

 

 

$

 

 

$

40,788

 

Government-sponsored enterprise securities

1 to 2

 

 

3,505

 

 

 

 

 

 

 

 

 

3,505

 

Trading securities — mutual funds held for nonqualified deferred compensation plan participants

 

 

 

26

 

 

 

 

 

 

 

 

 

26

 

Total

 

 

$

44,300

 

 

$

19

 

 

$

 

 

$

44,319

 

 

 

At December 31, 2013

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Estimated

Fair Value

 

Commercial paper

Less than 1

 

$

5,095

 

 

$

 

 

$

 

 

$

5,095

 

Total

 

 

$

5,095

 

 

$

 

 

$

 

 

$

5,095

 

  

4. Inventory

 

Inventories, stated at the lower of cost or market, consisted of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Raw materials

$

6,098

 

 

$

6,363

 

Work in process

 

3,832

 

 

 

2,169

 

Finished goods

 

2,191

 

 

 

3,535

 

 

 

12,121

 

 

 

12,067

 

Less reserve

 

(229

)

 

 

(1,737

)

Total

$

11,892

 

 

$

10,330

 

 

The inventory reserve at December 31, 2013 included $0.9 million associated with the Company’s voluntary product recall. There was no reserve associated with the product recall at September 30, 2014.

 

9


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 nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1: Observable inputs such as quoted prices in active markets.

 

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

 

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):  

 

 

 

 

 

 

Fair Value Measurements at

 

 

September 30,

 

 

September 30, 2014

 

 

2014

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

$

31,801

 

 

$

31,801

 

 

$

 

 

$

 

Restricted cash

 

2,000

 

 

 

2,000

 

 

 

 

 

Commercial paper

 

40,788

 

 

 

 

 

40,788

 

 

 

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

 

26

 

 

 

26

 

 

 

 

 

Government-sponsored enterprise securities

 

3,505

 

 

 

3,505

 

 

 

 

 

Total assets

$

78,120

 

 

$

37,332

 

 

$

40,788

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation (2)

$

26

 

 

$

26

 

 

$

 

 

$

 

Total liabilities

$

26

 

 

$

26

 

 

$

 

 

$

 

 

(1)

Cash equivalents included money market funds and commercial paper with a maturity of three months or less from the date of purchase.

 

(2)

Deferred compensation plans are compensation plans directed by the Company and structured as a Rabbi Trust for certain executives and non-employee directors.  The investment assets of the Rabbi Trust are valued using quoted market prices multiplied by the number of shares held in each trust account. The related deferred compensation liability represents the fair value of the investment assets.

 

 

 

 

 

 

Fair Value Measurements at

 

 

December 31,

 

 

December 31, 2013

 

 

2013

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

115,112

 

 

$

115,112

 

 

$

—  

 

 

$

—  

 

Restricted cash

 

2,050

 

 

 

2,050

 

 

 

—  

 

 

 

—  

 

Commercial paper

 

5,095

 

 

 

—  

 

 

 

5,095

 

 

 

—  

 

Total assets

$

122,257

 

 

$

117,162

 

 

$

5,095

 

 

$

—  

 

 

The Company’s Level 2 financial instruments are valued using market prices on less active markets and model-derived valuations with observable valuation inputs such as interest rates and yield curves. The Company obtains the fair value of Level 2 financial instruments from quoted market prices, calculated prices or quotes from third-party pricing services. The Company validates these prices through independent valuation testing and review of portfolio valuations provided by the Company’s investment managers. There were no transfers between Level 1 and Level 2 securities during the nine months ended September 30, 2014.

 

10


6. Loan Agreements

 

Silicon Valley Bank Loan

 

In March 2012, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”), drawing a bridge loan in the amount of $5.0 million (the “SVB Bridge Loan”). Subsequent to the closing of the Series D financing, the SVB Bridge Loan was converted into a 24-month term loan (the “SVB Term Loan”) in September 2012. The term loan accrued interest at an annual rate of 4%, with principal and accrued interest payments due monthly throughout the 24-month term. The SVB Term Loan also required a final payment of $0.3 million and a fee of $0.2 million if the loan was prepaid in its entirety prior to the end of the term of the loan.

 

In connection with the SVB Bridge Loan and SVB Term Loan, the Company issued an aggregate of 102,270 warrants to purchase shares of Series D convertible preferred stock at an exercise price of $4.40 per share. In November 2013, in connection with the closing of the initial public offering, all SVB Series D Preferred Stock warrants automatically converted into warrants to purchase 61,033 shares of our Common Stock at a weighted average exercise price of $7.37 per share.

 

In conjunction with the Capital Royalty Term Loan closing in January 2013, all principal, interest due and prepayment fee amounts due under the SVB Term Loan were paid by the Company.

 

Silicon Valley Bank Revolving Line of Credit

 

In January 2013, the Company entered into an amended loan agreement with Silicon Valley Bank, making available a revolving line of credit in an amount up to the lesser of $1.5 million or 75% of eligible accounts receivable, and expiring in January 2015. Interest-only payments at a rate of 6% per annum are payable monthly through the maturity date. Loans drawn under the agreement are secured by eligible accounts receivable and proceeds therefrom. Additionally, the terms of the revolving line of credit contain various affirmative and negative covenants. There were no amounts outstanding under this loan as of September 30, 2014 or December 31, 2013.

 

Capital Royalty Term Loan

 

In December 2012, the Company executed a Term Loan Agreement (the “Original Term Loan Agreement”) with Capital Royalty Partners II L.P. (“Capital Royalty Partners”) and Capital Royalty Partners II—Parallel Fund “A” L.P. (“CRPPF,” together with Capital Royalty Partners, the “Lenders”), providing the Company access to up to $45.0 million under the arrangement, of which $30.0 million was available in January 2013. An additional amount up to $15.0 million became available upon achievement of a 2013 revenue-based milestone. In January 2013, $30.0 million was drawn under the Original Term Loan Agreement. The loan under the Original Term Loan Agreement accrued interest at an annual rate of 14%. Interest-only payments were due quarterly at March 31, June 30, September 30 and December 31 of each year through December 31, 2015. Thereafter, in addition to interest accrued during the period, quarterly payments were required to include an amount equal to the outstanding principal at December 31, 2015 divided by the remaining number of quarters prior to the maturity of the loan which is December 31, 2017. The Original Term Loan Agreement stipulated prepayment fees of 5% of the outstanding balance of the loan if the loan was repaid prior to April 1, 2014. The prepayment fee was reduced 1% per year for each subsequent year until maturity.

 

In connection with the Original Term Loan Agreement, in January 2013, the Company issued warrants to purchase 271,834 shares of the Company’s Common Stock at an exercise price of $0.02 per share. The warrants were immediately exercisable and expire in January 2023. Because the exercise price of these warrants is nominal, the Company used the fair value of the common stock of $1.61 at December 31, 2012 to value these warrants. The Company also paid a $0.4 million financing fee to the Lenders. The warrants’ fair value of approximately $0.4 million and the financing fee of $0.4 million were recorded as a debt discount. Additionally, the Company paid $0.7 million to a third party for sourcing the Capital Royalty Term Loan, which was recorded as debt issuance cost, within other long term assets on the condensed balance sheets. The fees and the value of the warrants are amortized to interest expense over the remaining term using the effective interest method.

 

11


In April 2014, the Company entered into an Amended and Restated Term Loan Agreement (the “Amended and Restated Term Loan Agreement”) with the Lenders and other parties affiliated with Capital Royalty Partners. The Amended and Restated Term Loan Agreement primarily amends the terms of the Original Term Loan Agreement to reduce the borrowing limit to $30.0 million, to reduce the applicable interest rate from 14.0% to 11.5%, and to extend the interest only payment period from December 31, 2015 to March 31, 2018. Interest is payable, at the Company’s option, (i) in cash at a rate of 11.5% per annum or (ii) 9.5% of the 11.5% per annum in cash and 2.0% of the 11.5% per annum is added to the principal of the loan and is 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. Thereafter, in addition to interest accrued during the period, the quarterly payments shall include an amount equal to the outstanding principal at March 31, 2018 divided by the remaining number of quarters prior to the end of the term of the loan which is March 31, 2020. The Amended and Restated Term Loan Agreement provides for prepayment fees of 3% of the outstanding balance of the loan if the loan is repaid prior to March 31, 2015. The prepayment fee is reduced by 1% per year for each subsequent year until maturity.

 

Certain affirmative and negative covenants were also amended. The principal financial covenants require that the Company attain minimum annual revenues of $30.0 million in 2014, $50.0 million in 2015, $65.0 million in 2016, $80.0 million in 2017 and $95.0 million thereafter. As of September 30, 2014, the Company had already met the minimum annual revenue threshold for 2014.

 

Aggregate borrowings outstanding under the Amended and Restated Term Loan Agreement are $30.0 million. Borrowings under the Amended and Restated Term Loan Agreement were used to refinance amounts outstanding under the Original Term Loan Agreement. The present value of the future cash flows under the modified terms described above did not exceed the present value of the future cash flows under the original terms by more than 10%. The Company treated this amendment as a modification and the facility fee of approximately $0.1 million recorded as a discount to the Amended and Restated Term Loan. The facility fee and the remaining balance of debt issuance cost and debt discount of the Original Term Loan are amortized over the remaining term of the Amended and Restated Term Loan using the effective interest method.

 

Concurrently, the Company also entered into a new Term Loan Agreement (the “New Tranche Term Loan Agreement”) with the Lenders and other parties affiliated with Capital Royalty Partners, under which the Company may borrow up to an additional $30.0 million on or before March 31, 2015 at the same interest rate and on the same key terms as the Amended and Restated Term Loan Agreement.

 

 

7. Stockholders’ Equity

 

Shares Reserved for Future Issuance

 

The following shares of common stock are reserved for future issuance at September 30, 2014:

 

Common stock warrants outstanding

 

1,006,577

 

Stock options issued and outstanding

 

4,899,528

 

Authorized for future option grants

 

2,149,102

 

Employee stock purchase plan

 

659,863

 

 

 

8,715,070

 

 

The Company issued 106,801 shares of common stock upon the exercise of stock options and warrants during the nine months ended September 30, 2014, and issued 95,007 shares of common stock upon the exercise of stock options and warrants during the year ended December 31, 2013.

 

In October 2013, the Company adopted the 2013 Employee Stock Purchase Plan (“2013 ESPP”). During the nine months ended September 30, 2014, there were 125,393 shares of common stock purchased under the 2013 ESPP.

 

12


Stock-Based Compensation

 

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

 

 

Stock Option

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Risk-free interest rate

 

1.9

%

 

 

1.8

%

 

 

1.9

%

 

 

1.1

%

Expected dividend yield

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

Expected volatility

 

78.1

%

 

 

79.4

%

 

 

78.7

%

 

 

76.6

%

Expected term (in years)

 

6.1

 

 

 

5.7

 

 

 

6.1

 

 

 

5.6

 

 

 

 

ESPP

 

Nine Months Ended

 

September 30,

 

2014

 

 

2013

Risk-free interest rate

 

0.2

%

 

Expected dividend yield

 

0.0

%

 

Expected volatility

 

62.9

%

 

Expected term (in years)

 

1.3

 

 

 

There were no ESPP valuations performed during the three months ended September 30, 2014.

 

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Cost of sales

$

313

 

 

$

(9

)

 

$

940

 

 

$

58

 

Selling, general & administrative

 

2,979

 

 

 

861

 

 

 

8,798

 

 

 

1,370

 

Research and development

 

454

 

 

 

114

 

 

 

1,310

 

 

 

183

 

Total

$

3,746

 

 

$

966

 

 

$

11,048

 

 

$

1,611

 

 

The total stock-based compensation capitalized as part of the cost of inventory was $0.2 million and $0.3 million at September 30, 2014 and December 31, 2013, respectively.

 

8. Collaborations

 

DexCom Development and Commercialization Agreement

 

In February 2012, the Company entered into a Development and Commercialization Agreement with DexCom, Inc. (the “DexCom Agreement”) for the purpose of collaborating on the development and commercialization of an integrated system which incorporates the t:slim Insulin Delivery System with DexCom’s proprietary continuous glucose monitoring system. Under the DexCom Agreement, the Company paid DexCom $1.0 million in 2012 at the commencement of the collaboration and a $1.0 million milestone payment in July 2014, which related to the Company’s submission of a pre-market approval (“PMA”) application for the t:slim G4, which the Company has previously referenced as t:sensor, to the FDA. The payments were recorded as research and development costs. The Company will make one additional $1.0 million payment upon the achievement of certain milestones. Additionally, the Company will reimburse DexCom up to $1.0 million of its development costs and is solely responsible for its own development costs. As of September 30, 2014, the Company has reimbursed DexCom $0.2 million of its development costs. The Company recognized research and development costs of $32,000 and $78,000 for the nine months ended September 30, 2014 and 2013, respectively. The research and development costs recognized for the three months ended September 30, 2014, and 2013 were not significant.

 

Upon commercialization of the integrated system, and as compensation for the non-exclusive license rights, the Company will also pay DexCom a royalty of $100 for each integrated system sold.

 

13


Juvenile Diabetes Research Foundation Collaboration

 

In January 2013, the Company entered into a research, development and commercialization agreement (“JDRF Agreement”) with the Juvenile Diabetes Research Foundation (“JDRF”) to develop the t:dual Infusion System, a first-of-its-kind, dual-chamber infusion pump for the management of diabetes. According to the terms of the JDRF Agreement, JDRF will provide research funding of up to $3.0 million based on the achievement of research and development milestones, not to exceed research costs incurred by the Company. The research and development milestones are anticipated to be reached by September 2016. Payments the Company receives to fund the collaboration efforts under the terms of the JDRF Agreement will be recorded as restricted cash and current and long-term liabilities. The liabilities are recognized as an offset of research and development expenses straight-line over the remaining months until anticipated completion of the final milestone, only to the extent that the restricted cash is utilized to fund such development activities.

 

As of September 30, 2014, milestone payment achievements totaled $0.7 million, and research and development costs were offset cumulatively by $0.3 million. The research and development costs were offset by $37,000 and $146,000 for the three and nine-months ended September 30, 2014, respectively. For the three and nine months ended September 30, 2013, research and development costs were offset by $63,000 and $145,000, respectively. The Company did not have any restricted cash balances related to the JDRF Agreement at September 30, 2014 or December 31, 2013.

 

9. Commitments and Contingencies

 

From time to time, the Company may be subject to legal or regulatory proceedings or other matters arising in the ordinary course of business, including proceedings with respect to intellectual property, employment, product liability, and contractual matters. The Company assesses, on a regular basis, the probability of a negative outcome and the range of possible loss based on the developments with respect to these matters. A liability is only recorded in the financial statements if it is believed to be probable that a loss has been incurred and that the amount of the loss can be reasonably estimated. Because of the uncertainties related to the occurrence, amount, and range of loss on any pending proceedings, the Company is currently unable to predict their ultimate outcome, and, with respect to any pending litigation or claim where no liability has been accrued, to make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome. At September 30, 2014 and December 31, 2013, there were no pending legal or regulatory proceedings for which a negative outcome was considered probable and for which the loss could be reasonably estimated. As a result, no amounts have been accrued with respect to any such proceedings at either date.

 

 

 

 

14


Item 2.

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2013 included with our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission, or SEC. Operating results are not necessarily indicative of results that may occur in future periods.

 

Certain statements contained in this Quarterly Report on Form 10-Q, including statements regarding the development, growth and expansion of our business, our intent, belief or current expectations, primarily with respect to our projected financial and operating performance, and the products we expect to offer in the future, and other statements that are not statements of historical fact, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act, and are subject to the “safe harbor” created by these sections. Future filings with the SEC, future press releases and future oral or written statements made by us or with our approval, which are not statements of historical fact, may also contain forward-looking statements. Because such statements include risks and uncertainties, many of which are beyond our control, actual results may differ materially from those expressed or implied by such forward-looking statements. Some of the factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements can be found under the caption “Risk Factors,” and elsewhere in this Quarterly Report on Form 10-Q as well as in our other filings with the SEC. Readers are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.

 

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

 

The FDA cleared t:slim in November 2011. We commenced commercial sales of t:slim in the United States in the third quarter of 2012. We consider the number of units shipped per quarter to be an important metric for managing our business. Since the launch of t:slim, we have shipped approximately 14,400 pumps as of September 30, 2014, broken down by quarter as follows:

 

 

Units Shipped for Each of the Three Month Periods

 

 

2012

 

 

2013

 

 

2014

 

March 31

N/A

 

 

 

852

 

 

 

1,723

 

June 30

 

9

 

 

 

1,363

 

 

 

2,235

 

September 30

 

204

 

 

 

1,851

 

 

 

2,935

 

December 31

 

844

 

 

 

2,406

 

 

N/A

 

Total

 

1,057

 

 

 

6,472

 

 

 

6,893

 

 

For the three months ended September 30, 2014 and 2013, our sales were $13.5 million and $7.8 million, respectively. For the three months ended September 30, 2014 and 2013, our net loss was $19.9 million and $13.1 million, respectively.

 

For the nine months ended September 30, 2014 and 2013, our sales were $31.8 million and $18.8 million, respectively. For the nine months ended September 30, 2014 and 2013, our net loss was $61.1 million and $39.5 million, respectively. Our accumulated deficit as of September 30, 2014 was $230.2 million.

 

15


We have derived nearly all of our revenue from the sale of t:slim in the United States and expect to continue to do so until we are able to commercialize our other products that are currently under development, including the t:slim G4™ Insulin Pump System, for which we submitted a PMA application to the FDA during the three months ended September 30, 2014.  We also recently submitted a 510(k) application to the FDA for the t:flex Insulin Pump, which will include the same product platform, technology and user interface as t:slim, but will offer a 480 unit insulin cartridge. A substantial portion of the purchase price of an insulin pump is typically paid for by third-party payors, including private insurance companies, preferred provider organizations and other managed care providers. Future sales of our current and future products will be limited unless our customers can rely on third-party payors to pay for all or part of the associated purchase cost. Access to adequate coverage and reimbursement for our current and future products by third-party payors is essential to the acceptance of our products by customers. In circumstances that we do not have contracts established with third-party payors, to the extent possible we utilize our network of national and regional distributors to service our customers.

 

We believe we can achieve profitability because our proprietary technology platform will allow us to maximize efficiencies in the development, production and sales of our products. By leveraging our core technology, we believe we can develop and bring to market products rapidly and greatly reduce our design and development costs. We expect to continue to increase production volume, and to reduce the per unit production cost for the t:slim Pump and its disposable cartridge over time. Further, due to shared product design features, our production system is adaptable to new products and we intend to leverage our shared manufacturing infrastructure to reduce our product costs and drive operational efficiencies. By expanding our product offerings to address people in all segments of the large and growing insulin-dependent diabetes market, we believe we can increase the productivity of our sales force, thereby improving our operating margin.

 

From inception through September 30, 2014, we have primarily financed our operations through sales of equity securities, and, to a lesser extent, debt financings. We expect to continue to incur net losses for the next several years and may require additional capital through equity financings and debt financings in order to fund our operations to a level of revenues adequate to support our cost structure.

 

We have experienced considerable revenue growth since the commercial launch of t:slim in the third quarter of 2012, while incurring operating losses since our inception. Our operating results may fluctuate on a quarterly or annual basis in the future and our growth or operating results may not be consistent with predictions made by securities analysts. We may not be able to achieve profitability in the future. For additional information about the risks and uncertainties associated with our business, see the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

 

Voluntary Recall

 

On January 10, 2014, we announced a voluntary recall of select lots of cartridges used with the t:slim that may have been at risk of leaking. The cause of the recall was identified during our internal product testing. The recall was expanded on January 20, 2014 to include additional lots of affected cartridges used with the t:slim. We incurred approximately $1.7 million in direct costs associated with the recall. We recorded a cost of sales charge of approximately $1.3 million in the fourth quarter of 2013 and recorded the cost of sales charge for the remainder in the first quarter of 2014 for affected cartridges shipped in the first quarter of 2014. We do not currently expect any further direct financial impact of the recall beyond these costs. The total cost of the recall consisted of approximately $0.7 million associated with the return and replacement of affected cartridges in the field and approximately $1.0 million for the write-off of affected cartridges within our internal inventory.

 

Components of Results of Operations

 

Sales

 

We commenced commercial sales of t:slim in the United States in the third quarter of 2012. The t:slim Insulin Delivery System is comprised of the t:slim Pump and pump-related supplies that include disposable cartridges and infusion sets. We also offer accessories including protective cases, belt clips, and power adapters. Sales of accessories since commercial launch have not been material. We primarily sell our products through national and regional distributors 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 co-insurance requirements.

 

16


We anticipate our sales will increase as we expand our sales and marketing infrastructure, increase awareness of our products and broaden third party reimbursement for our products. We also expect that our sales will fluctuate on a quarterly basis in the future due to a variety of factors, including seasonality and the impact of the buying patterns of our distributors and other customers. We believe that our sales are subject to seasonal fluctuation due to the impact of annual deductible and coinsurance requirements associated with most medical insurance plans utilized by our individual customers and the individual customers of our distributors. Our sales may also be influenced by the summer vacation period. Accordingly, we have experienced and expect to continue to experience sequential growth of sales in each quarter from the first quarter to the fourth quarter, and we also expect sequential sales from the fourth quarter to the first quarter to be relatively flat or down.

 

Cost of Sales

 

We manufacture the t:slim Pump and its disposable cartridge at our manufacturing facility in San Diego, California. Infusion sets and t:slim accessories are manufactured by third-party suppliers. Cost of sales includes raw materials, labor costs, manufacturing overhead expenses, product training costs and reserves for expected warranty costs, scrap and inventory obsolescence. Due to our relatively low production volumes compared to our potential capacity to produce our products, manufacturing overhead expenses are a significant portion of our per unit costs. These expenses include quality assurance, manufacturing engineering, material procurement, inventory control, facilities, equipment, information technology and operations supervision and management.

 

We expect our overall gross margin, which is calculated as sales less cost of sales for a given period divided by sales, to fluctuate in future periods as a result of the changing percentage of products sold to distributors versus directly to individual customers, varying levels of reimbursement among third-party payors, changing mix of products sold with different gross margins, and changes in our manufacturing processes, costs or manufacturing output. Manufacturing inefficiencies will also impact our gross margins, which we may experience as we attempt to manufacture our products on a larger scale, change our manufacturing capacity or output, and expand our manufacturing facilities. Any new products that we sell in the future may also change our gross margins.

 

Selling, General and Administrative

 

We expect our selling, general and administrative, or SG&A, expenses to increase as our business expands. Our SG&A expenses primarily consist of salary, fringe benefits and stock-based compensation for our executive, financial, marketing, sales, business development, regulatory affairs and administrative functions. Other significant expenses include those incurred for product demonstration samples, trade shows, outside legal counsel fees, independent auditor fees, outside consultant fees, insurance premiums, facilities costs and information technology costs.

 

Research and Development

 

We expect our research and development, or R&D, expenses to increase as we initiate and advance our development projects. Our R&D activities primarily consist of engineering and research programs associated with our products under development, as well as R&D activities associated with our core technologies and processes. R&D expenses are primarily related to employee compensation, including salary, fringe benefits, stock-based compensation and temporary employee expenses. We also incur significant expenses for supplies, development prototypes, outside design and testing services and milestone payments under our development and commercialization agreements with DexCom and other collaborators.

 

Other Income and Expense

 

Our other income and expense primarily consists of interest expense and amortization of debt discount and debt issuance costs associated with term loan agreements. At September 30, 2014, there was $30.0 million of outstanding principal under our Amended and Restated Term Loan Agreement with the Lenders, which accrues interest at a rate of 11.5% per annum. In previous years, other income and expense also included interest expense and amortization of debt discount associated with convertible notes payable and the change in the fair value of outstanding common and preferred stock warrants for which the final revaluation was performed in connection with our initial public offering in the fourth quarter of 2013.

 

17


Results of Operations

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

(in thousands, except percentages)

2014

 

 

2013

 

 

2014

 

 

2013

 

Sales

$

13,514

 

 

$

7,776

 

 

$

31,834

 

 

$

18,762

 

Cost of sales

 

9,117

 

 

 

5,243

 

 

 

23,121