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EX-32.2 - EX-32.2 - TANDEM DIABETES CARE INCtndm-ex322_9.htm
EX-32.1 - EX-32.1 - TANDEM DIABETES CARE INCtndm-ex321_8.htm
EX-31.2 - EX-31.2 - TANDEM DIABETES CARE INCtndm-ex312_7.htm
EX-31.1 - EX-31.1 - TANDEM DIABETES CARE INCtndm-ex311_6.htm
EX-10.3 - EX-10.3 BARNES CANYON LEASE AGREEMENT - TANDEM DIABETES CARE INCtndm-ex103_36.htm

 

 

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 June 30, 2016

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

 

x

 

 

 

 

Non-accelerated filer

 

¨  (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 July 25, 2016, there were 30,613,826 shares of the registrant’s Common Stock outstanding.

 

 

 

 

 


TABLE OF CONTENTS

 

Part I

  

Financial Information

  

 

1

Item 1

  

Financial Statements

  

 

1

 

  

Condensed Balance Sheets at June 30, 2016 (Unaudited) and December 31, 2015

  

 

1

 

  

Condensed Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

  

 

2

 

  

Condensed Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (Unaudited)

  

 

3

 

  

Notes to Unaudited Condensed Financial Statements

  

 

4

Item 2

  

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

  

 

13

Item 3

  

Quantitative and Qualitative Disclosures about Market Risk

  

 

22

Item 4

  

Controls and Procedures

  

 

23

 

 

 

 

 

 

Part II

  

Other Information

  

 

24

Item 1

  

Legal Proceedings

  

 

24

Item 1A

  

Risk Factors

  

 

24

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

 

50

Item 3

  

Defaults Upon Senior Securities

  

 

50

Item 4

  

Mine Safety Disclosures

  

 

50

Item 5

  

Other Information

  

 

50

Item 6

  

Exhibits

  

 

51

 

 

 

 

 

 

 

 

 

 

 

 

 

 


PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

TANDEM DIABETES CARE, INC.

CONDENSED BALANCE SHEETS

(In thousands, except par value)

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

 

(Note 1)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

30,250

 

 

$

43,088

 

Restricted cash

 

 

2,000

 

 

 

2,000

 

Short-term investments

 

 

24,068

 

 

 

28,018

 

Accounts receivable, net

 

 

9,426

 

 

 

14,055

 

Inventory

 

 

21,692

 

 

 

17,543

 

Prepaid and other current assets

 

 

3,445

 

 

 

2,280

 

Total current assets

 

 

90,881

 

 

 

106,984

 

Property and equipment, net

 

 

16,242

 

 

 

15,526

 

Patents, net

 

 

1,947

 

 

 

2,110

 

Other long-term assets

 

 

120

 

 

 

105

 

Total assets

 

$

109,190

 

 

$

124,725

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,841

 

 

$

5,234

 

Accrued expense

 

 

2,177

 

 

 

2,121

 

Employee-related liabilities

 

 

10,952

 

 

 

11,761

 

Deferred revenue

 

 

1,763

 

 

 

1,822

 

Other current liabilities

 

 

5,332

 

 

 

5,582

 

Total current liabilities

 

 

27,065

 

 

 

26,520

 

Notes payable—long-term

 

 

44,398

 

 

 

29,275

 

Deferred rent—long-term

 

 

2,207

 

 

 

2,743

 

Other long-term liabilities

 

 

3,447

 

 

 

2,719

 

Total liabilities

 

 

77,117

 

 

 

61,257

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000 shares authorized as of June 30, 2016 and December 31, 2015, 30,613 and 30,255 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively.

 

 

31

 

 

 

30

 

Additional paid-in capital

 

 

391,981

 

 

 

384,551

 

Accumulated other comprehensive income

 

 

3

 

 

 

20

 

Accumulated deficit

 

 

(359,942

)

 

 

(321,133

)

Total stockholders’ equity

 

 

32,073

 

 

 

63,468

 

Total liabilities and stockholders’ equity

 

$

109,190

 

 

$

124,725

 

 

See accompanying notes to unaudited condensed financial statements.

 

 

 

1


TANDEM DIABETES CARE, INC.

CONDENSED STATEMENTS OF OPERATIONS and comprehensive loss

(Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Sales

 

$

22,985

 

 

$

15,706

 

 

$

43,043

 

 

$

28,014

 

Cost of sales

 

 

14,809

 

 

 

10,905

 

 

 

27,939

 

 

 

20,406

 

Gross profit

 

 

8,176

 

 

 

4,801

 

 

 

15,104

 

 

 

7,608

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

21,087

 

 

 

19,599

 

 

 

43,084

 

 

 

38,954

 

Research and development

 

 

4,142

 

 

 

3,873

 

 

 

8,310

 

 

 

7,735

 

Total operating expenses

 

 

25,229

 

 

 

23,472

 

 

 

51,394

 

 

 

46,689

 

Operating loss

 

 

(17,053

)

 

 

(18,671

)

 

 

(36,290

)

 

 

(39,081

)

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

107

 

 

 

61

 

 

 

225

 

 

 

160

 

Interest and other expense

 

 

(1,379

)

 

 

(923

)

 

 

(2,744

)

 

 

(1,821

)

Total other expense, net

 

 

(1,272

)

 

 

(862

)

 

 

(2,519

)

 

 

(1,661

)

Net loss

 

$

(18,325

)

 

$

(19,533

)

 

$

(38,809

)

 

$

(40,742

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on short-term investments

 

$

(37

)

 

$

(39

)

 

$

(17

)

 

$

29

 

Comprehensive loss

 

$

(18,362

)

 

$

(19,572

)

 

$

(38,826

)

 

$

(40,713

)

Net loss per share, basic and diluted

 

$

(0.60

)

 

$

(0.65

)

 

$

(1.28

)

 

$

(1.47

)

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

 

 

30,489

 

 

 

29,902

 

 

 

30,392

 

 

 

27,723

 

 

See accompanying notes to unaudited condensed financial statements.

 

 

 

2


TANDEM DIABETES CARE, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

Six Months Ended June 30,

 

 

2016

 

 

2015

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(38,809

)

 

$

(40,742

)

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

 

 

 

 

 

 

 

Depreciation and amortization expense

 

2,718

 

 

 

2,414

 

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

 

142

 

 

 

71

 

Provision for allowance for doubtful accounts

 

601

 

 

 

(100

)

Provision for inventory reserve

 

 

 

 

101

 

Payment in kind interest accrual of notes payable

 

440

 

 

 

 

Amortization of discount on short-term investments

 

(19

)

 

 

(37

)

Stock-based compensation expense

 

5,828

 

 

 

7,033

 

Gain (loss) on disposal of property and equipment

 

(84

)

 

 

14

 

Other

 

(21

)

 

 

(77

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

4,028

 

 

 

279

 

Inventory

 

(4,108

)

 

 

(2,892

)

Prepaid and other current assets

 

(1,165

)

 

 

(249

)

Other long-term assets

 

(15

)

 

 

(17

)

Accounts payable

 

1,731

 

 

 

1,388

 

Accrued expense

 

78

 

 

 

(933

)

Employee-related liabilities

 

(809

)

 

 

(1,045

)

Deferred revenue

 

(58

)

 

 

198

 

Other current liabilities

 

403

 

 

 

(47

)

Deferred rent

 

(453

)

 

 

(308

)

Other long-term liabilities

 

135

 

 

 

769

 

Net cash used in operating activities

 

(29,437

)

 

 

(34,180

)

Investing activities

 

 

 

 

 

 

 

Purchase of short-term investments

 

(22,657

)

 

 

(58,993

)

Proceeds from sales and maturities of short-term investments

 

26,750

 

 

 

43,450

 

Purchase of property and equipment

 

(4,048

)

 

 

(2,351

)

Purchase of patents

 

 

 

 

(74

)

Net cash provided by (used in) investing activities

 

45

 

 

 

(17,968

)

Financing activities

 

 

 

 

 

 

 

Issuance of notes payable, net of issuance costs

 

14,994

 

 

 

 

Proceeds from public offering, net of offering costs

 

 

 

 

64,862

 

Proceeds from issuance of common stock

 

1,560

 

 

 

2,031

 

Net cash provided by financing activities

 

16,554

 

 

 

66,893

 

Net (decrease) increase in cash and cash equivalents

 

(12,838

)

 

 

14,745

 

Cash and cash equivalents at beginning of period

 

43,088

 

 

 

31,176

 

Cash and cash equivalents at end of period

$

30,250

 

 

$

45,921

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Interest paid

$

2,099

 

 

$

1,735

 

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

 

 

Lease incentive - lessor-paid tenant improvements

$

 

 

$

933

 

Debt issuance cost included in other long-term liabilities

$

454

 

 

$

 

Property and equipment included in accounts payable

$

595

 

 

$

1,510

 

 

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 a family 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 currently manufactures and sells three insulin pump products in the United States that are designed to address large and differentiated needs of the insulin-dependent diabetes market:

 

 

·

the t:slim® Insulin Delivery System, or t:slim, the Company’s flagship product that can easily and discreetly fit into a pocket,

 

·

the t:flex® Insulin Delivery System, or t:flex, for people with greater insulin needs, and

 

·

the t:slim G4TM Insulin Delivery System, or t:slim G4, a Continuous Glucose Monitoring (“CGM”) enabled pump with touch-screen simplicity.

 

 The Company designed and commercialized its products based on its proprietary technology platform and consumer-focused approach. 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.

 

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 footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, from which the balance sheet information herein was derived but excludes disclosures required by GAAP for complete financial statements.

    

 

2. Summary of Significant Accounting Policies

 

There have been no significant changes in our significant accounting policies during the six months ended June 30, 2016, as compared with those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

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

 

Restricted Cash

 

Restricted cash as of June 30, 2016 and December 31, 2015 was comprised of a $2.0 million minimum cash balance requirement in connection with the Company’s Term Loan Agreement, as amended by Consent and Amendment Agreement, dated June 20, 2014, Omnibus Amendment Agreement No. 2, dated February 23, 2015 and Amendment No. 3 to Term Loan Agreement, dated January 8, 2016  with Capital Royalty Partners II, L.P. and its affiliate funds (“Capital Royalty Partners”) (as amended, the “Term Loan Agreement”) (see Note 6, “Term Loan Agreement”).

 

4


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. Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a balance is uncollectible.

 

Fair Value of Financial Instruments

 

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expense, and employee-related liabilities are reasonable estimates of their fair values because of the short-term nature of these assets and liabilities. Short-term investments and foreign exchange forward contracts that are not designated as hedges 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.

 

Revenue Recognition

 

Revenue is generated 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.

 

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 determining whether collectability is reasonably assured.

 

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.

 

The Company offers a cloud-based data management application, t:connect, which is made available to customers upon purchase of any of its insulin pumps. This service is deemed an undelivered element at the time of the insulin pump 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 the estimated cost to provide such services, including consideration for a reasonable profit margin, which is then corroborated by comparable market data. The Company allocates fair value based on management’s ESP to this element at the time of sale and is recognizing the revenue over the four-year hosting period. At June 30, 2016 and December 31, 2015, $1.3 million and $1.1 million, respectively, were recorded as deferred revenue for the t:connect hosting service. All other undelivered elements at the time of sale are deemed inconsequential or perfunctory.

 

5


Product Returns

 

The Company offers a 30-day right of return to its customers from the date of shipment of any of its insulin pumps, provided a physician’s confirmation of the medical reason for the return is received. Estimated allowances for sales returns are based on historical returned quantities as compared to pump shipments in those same periods of return. The return rate is then applied to the sales of the current period to establish a reserve at the end of the period. The return rates used in the reserve are adjusted for known or expected changes in the marketplace when appropriate. The allowance for product returns is recorded as a reduction of revenue and accounts receivable in the period in which the related sale is recorded. The amounts recorded on the Company’s balance sheet for product return allowance were $0.2 million and $0.3 million at June 30, 2016 and December 31, 2015, 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 replacement product 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 could have a material impact on the Company’s estimated liability.    

 

At June 30, 2016 and December 31, 2015, the warranty reserve was $4.6 million and $3.5 million, respectively. The following table provides a reconciliation of the change in product warranty liabilities through June 30, 2016 (in thousands):

 

Balance at December 31, 2015

$

3,547

 

Provision for warranties issued during the period

 

3,863

 

Settlements made during the period

 

(4,003

)

Increases in warranty estimates

 

1,242

 

Balance at June 30, 2016

$

4,649

 

 

 

 

 

Current portion

$

2,018

 

Non-current portion

 

2,631

 

Total

$

4,649

 

 

 

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 2013 Stock Incentive Plan (“2013 Plan”) and shares issued 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, and risk-free rate. For awards that vest based on 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 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 warrants, potential awards granted pursuant to the ESPP, and options outstanding under the Company’s other equity incentive plans. 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.

6


 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Warrants for common stock

 

990

 

 

 

990

 

 

 

990

 

 

 

990

 

Common stock options

 

2,932

 

 

 

2,042

 

 

 

2,623

 

 

 

2,042

 

ESPP

 

17

 

 

 

17

 

 

 

9

 

 

 

9

 

 

 

3,939

 

 

 

3,049

 

 

 

3,622

 

 

 

3,041

 

 

 

Reclassifications

 

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

 

Recent Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (“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 March 2016, FASB issued an Accounting Standards Update on changing certain aspects of accounting for share-based payments to employees. The new guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting, and to make a policy election to account for forfeitures as they occur. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted, but all of the guidance must be adopted in the same period. 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 today’s accounting. The new guidance also eliminates today’s real estate-specific provisions for all entities. The standard is effective for public business entities 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.

 

In April 2015, the FASB issued ASU No. 2015-03 amended requirements that require debt issuance costs, related to a recognized debt liability, to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, effective for the Company beginning January 1, 2016 and applied retroactively for all consolidated balance sheets presented. The Company applied the amended presentation requirements in the first quarter 2016, which resulted in the reclassification of $0.4 million of debt issuance costs in the Company’s balance sheet from other long-term assets to long-term notes payable at December 31, 2015.

 

In May 2014, FASB and the International Accounting Standards Board issued a comprehensive new revenue recognition standard that will supersede existing revenue guidance under U.S. GAAP and International Financial Reporting Standards. 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. This 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. On July 9, 2015, the FASB approved a one-year deferral of the effective date of the standard to December 15, 2017 and early application is permitted, but not before the original effective date of December 15, 2016. The Company is in the process of assessing the impact of the adoption of the standard on its financial statements.

 

 

7


3. Short-Term Investments

 

The Company invests in various securities, principally in debt instruments of financial institutions and corporations. The following represents a summary of the estimated fair value of short-term investments at June 30, 2016 and December 31, 2015 (in thousands):

 

At June 30, 2016

 

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Estimated

Fair Value

 

Available-for-sale investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Less than 1

 

$

23,703

 

 

$

4

 

 

$

(1

)

 

$

23,706

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds held for nonqualified deferred compensation plan participants

 

 

 

$

346

 

 

$

18

 

 

$

(2

)

 

$

362

 

Total

 

 

 

$

24,049

 

 

$

22

 

 

$

(3

)

 

$

24,068

 

 

 

At December 31, 2015

 

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Estimated

Fair Value

 

Available-for-sale investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Less than 1

 

$

21,712

 

 

$

23

 

 

$

 

 

$

21,735

 

US Treasuries

 

Less than 1

 

 

2,035

 

 

 

 

 

 

(1

)

 

$

2,034

 

Government-sponsored enterprise securities

 

Less than 1

 

 

4,029

 

 

 

 

 

 

(2

)

 

 

4,027

 

 

 

 

 

$

27,776

 

 

$

23

 

 

$

(3

)

 

$

27,796

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds held for nonqualified deferred compensation plan participants

 

 

 

$

224

 

 

$

1

 

 

$

(3

)

 

$

222

 

Total

 

 

 

$

28,000

 

 

$

24

 

 

$

(6

)

 

$

28,018

 

 

  

 

4. Inventory

 

Inventory consisted of the following (in thousands):

 

 

June 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Raw materials

$

12,071

 

 

$

10,606

 

Work in process

 

4,595

 

 

 

3,394

 

Finished goods

 

5,026

 

 

 

3,543

 

Total

$

21,692

 

 

$

17,543

 

 

 

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 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:

 

8


Level 1:

 

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

 

 

 

Level 2:

 

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

 

 

 

Level 3:

 

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

 

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):  

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

 

June 30, 2016

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

$

13,639

 

 

$

13,639

 

 

$

 

 

$

 

Commercial paper

 

 

23,706

 

 

 

 

 

23,706

 

 

 

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

 

 

362

 

 

 

362

 

 

 

 

 

Total assets

 

$

37,707

 

 

$

14,001

 

 

$

23,706

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation (2)

 

$

362

 

 

$

362

 

 

$

 

 

$

 

Total liabilities

 

$

362

 

 

$

362

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

$

23,402

 

 

$

23,402

 

 

$

 

 

$

 

Commercial paper

 

 

21,735

 

 

 

 

 

 

21,735

 

 

 

 

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

 

 

222

 

 

 

222

 

 

 

 

 

 

 

US Treasuries

 

 

2,034

 

 

 

2,034

 

 

 

 

 

 

 

Government-sponsored enterprise securities

 

 

4,027

 

 

 

 

 

 

4,027

 

 

 

 

Total assets

 

$

51,420

 

 

$

25,658

 

 

$

25,762

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation (2)

 

$

222

 

 

$

222

 

 

$

 

 

$

 

Total liabilities

 

$

222

 

 

$

222

 

 

$

 

 

$

 

 

 

(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.

 

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 securities during the six months ended June 30, 2016.

9


6. Term Loan Agreement

 

In January 2016, the Company entered into Amendment No. 3 to Term Loan Agreement with Capital Royalty Partners (“Third Amendment”), which was previously amended by Consent and Amendment Agreement, dated June 20, 2014, and Omnibus Amendment Agreement No. 2, dated February 23, 2015.

 

Under the Term Loan Agreement, the Company had aggregate borrowings outstanding of $30.2 million (such amount, the “First Tranche”) as of December 31, 2015. Under the Third Amendment, the Company borrowed $15.0 million (such amount, the “Second Tranche”) in January 2016, and the Third Amendment provides the Company with a one-time option to draw up to an additional $35.0 million in increments of $5.0 million on or before December 31, 2016 (such amount, to the extent drawn, the “Third Tranche”).

 

The other principal terms of the Term Loan Agreement were not amended by the Third Amendment. Accordingly, interest continues to be 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 continue to be 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 continues to be due in full at the end of the term of the loan, which is March 31, 2020 (the “Maturity Date”). The Term Loan Agreement provides for prepayment fees in an amount equal to one percent (1.0%) of the outstanding balance of the loan if the loan is repaid prior to March 31, 2017, after which there is no prepayment fee. The term loan is collateralized by all assets of the Company. The principal financial covenants continue to require that the Company attain minimum annual revenues of $65.0 million in 2016, $80.0 million in 2017 and $95.0 million each year thereafter until the Maturity Date. At June 30, 2016, the Company was in compliance with all of the covenants in the Term Loan Agreement.

 

The Company had elected to pay interest in cash at a rate of 11.5% per annum through September 30, 2015. Beginning October 1, 2015, the Company elected to pay interest in cash at a rate of 9.5% per annum and to have 2.0% per annum added to the principal of the loan. As a result, $440,000 and $153,000 was added to the principal of the loan for the six months ended June 30, 2016 and the three months ended December 31, 2015, respectively. The Company had $45.6 million of aggregate borrowings outstanding under the Term Loan Agreement as of June 30, 2016.

 

Pursuant to the Third Amendment, the Company has 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 three percent (3.0%) of the sum of (x) the aggregate amount of the Second Tranche and Third Tranche drawn, and (y) any PIK Loans issued in relation to the Second Tranche and Third Tranche (collectively, the “Back End Financing Fee”). As of June 30, 2016 the Company had accrued $0.5 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 this amendment as a modification. The present value of the future cash flows under the Third Amendment 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 of the Third Amendment using the effective interest method.

 

7. Stockholders’ Equity

 

Public Offering

 

In the first quarter of 2015, the Company completed a public offering of 6,037,500 shares of its common stock at a public offering price of $11.50 per share. Net cash proceeds from the public offering were approximately $64.9 million, after deducting underwriting discounts, commissions and offering expenses paid by the Company.

 

Shares Reserved for Future Issuance

 

The following shares of the Company’s common stock were reserved for future issuance at June 30, 2016:

 

Shares underlying outstanding warrants

 

990,031

 

Shares underlying outstanding stock options

 

6,774,815

 

Shares authorized for future equity award grants

 

2,058,291

 

Shares authorized for issuance as ESPP awards

 

520,420

 

 

 

10,343,557

 

 

10


The Company issued 108,299 shares of its common stock upon the exercise of stock options and warrants during the six months ended June 30, 2016, and issued 260,091 shares of its common stock upon the exercise of stock options and warrants during the year ended December 31, 2015.

 

The ESPP enables eligible employees to purchase shares of the Company’s common stock using their after tax payroll deductions, subject to certain conditions. The ESPP consists of a two-year offering period with four six-month purchase periods which begin in May and November of each year. There were 250,367 shares of the Company’s common stock purchased under the ESPP during the six months ended June 30, 2016, and 302,171 shares of the Company’s common stock purchased under the ESPP during the year ended December 31, 2015.

 

Stock-Based Compensation

 

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

 

 

Stock Option

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Weighted average grant date fair value (per share)

$

4.36

 

 

$

7.24

 

 

$

3.79

 

 

$

7.67

 

Risk-free interest rate

 

1.4

%

 

 

1.7

%

 

 

1.4

%

 

 

1.7

%

Expected dividend yield

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

Expected volatility

 

56.0

%

 

 

66.1

%

 

 

55.5

%

 

 

67.4

%

Expected term (in years)

 

6.1

 

 

 

6.1

 

 

 

6.1

 

 

 

6.1

 

 

 

ESPP

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Weighted average grant date fair value (per share)

$

2.69

 

 

$

4.98

 

 

$

2.69

 

 

$

4.98

 

Risk-free interest rate

 

0.6

%

 

 

0.3

%

 

 

0.6

%

 

 

0.3

%

Expected dividend yield

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

Expected volatility

 

56.9

%

 

 

62.1

%

 

 

56.9

%

 

 

62.1

%

Expected term (in years)

 

1.3

 

 

1.3

 

 

 

1.3

 

 

1.3

 

 

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

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Cost of sales

$

269

 

 

$

307

 

 

$

509

 

 

$

631

 

Selling, general & administrative

 

2,422

 

 

 

2,602

 

 

 

4,672

 

 

 

5,580

 

Research and development

 

338

 

 

 

351

 

 

 

648

 

 

 

822

 

Total

$

3,029

 

 

$

3,260

 

 

$

5,829

 

 

$

7,033

 

 

The total stock-based compensation capitalized as part of the cost of inventory was $0.2 million and $0.1 million at June 30, 2016 and December 31, 2015, respectively.

 

8. Collaborations

 

DexCom Development and Commercialization Agreement

 

In February 2012, the Company entered into a Development and Commercialization Agreement (the “DexCom Agreement”) with DexCom, Inc. (“DexCom”) for the purpose of collaborating on the development and commercialization of an integrated system which incorporates t:slim Insulin Delivery System with DexCom’s proprietary continuous glucose monitoring system.

 

11


Under the DexCom Agreement, the Company paid DexCom $1.0 million at the commencement of the collaboration in 2012, $1.0 million in 2014 upon the achievement of t:slim G4 pre-market approval (“PMA”) submission to the U.S. Food and Drug Administration (“FDA”) and an additional $1.0 million in September 2015 upon obtaining approval of the PMA submission from the FDA. All payments were recorded as research and development costs in their respective years.

 

Additionally, upon commercialization and as compensation for the non-exclusive license rights, under the original DexCom Agreement the Company agreed to pay DexCom a royalty calculated at $100 per integrated system sold.

 

In September 2015, the Company entered into an amendment to the DexCom Agreement (the “Amendment”). Pursuant to the Amendment, in lieu of the $100 royalty payment for each integrated system sold, the Company will commit $100 of each t:slim G4 integrated system sold to incremental marketing activities associated with t:slim G4 integrated systems that are in addition to a level of ordinary course marketing activities or marketing activities to support other Company and DexCom jointly funded development projects. The committed marketing fund is recorded as an increase to cost of sales and current liability in the period that the related t:slim G4 sale is recorded. The Company has recorded such marketing fund activities of $0.3M and $0.5M for the three and six months ended June 30, 2016, respectively. As of June 30, 2016 and December 31, 2015, the Company has recorded a marketing fund liability of $0.8 million and $0.4 million, respectively, in other current liabilities on the accompanying balance sheet.

 

JDRF Collaboration

 

In January 2013, the Company entered into a Research, Development and Commercialization Agreement (“JDRF Agreement”) with 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 would 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. Any intellectual property developed by either party in the performance of the agreement would be owned or exclusively licensed by the Company.

 

Payments that the Company received to fund the collaboration efforts under the terms of the JDRF Agreement were recorded as restricted cash and current and long-term liabilities. The liabilities were 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 was utilized to fund such development activities.

 

In February 2016, the Company and JDRF entered into a termination agreement (“JDRF Termination Agreement”), where both parties mutually terminated the JDRF Agreement. As of December 31, 2015, milestone payment achievements totaled $0.7 million, and research and development costs were offset cumulatively by $0.5 million. Under the terms of the JDRF Termination Agreement, the Company agreed to repay JDRF $0.7 million, which is equal to the amount of milestone payments received by the Company to date. The Company accrued for the repayment in other current liabilities on the accompanying balance sheet as of December 31, 2015 and repaid such amount during the first quarter of 2016.

 

9. Commitments and Contingencies

 

From time to time, the Company may be subject to legal proceedings or regulatory encounters or other matters 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 assesses, on a regular basis, 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 believed to be probable that a loss has been incurred and 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 actions, 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 each of June 30, 2016 and December 31, 2015, there were no material matters