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 March 31, 2015
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 |
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20-4327508 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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11045 Roselle Street San Diego, California |
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92121 |
(Address of principal executive offices) |
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(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 |
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Name of Exchange on Which Registered |
Common Stock, par value $0.001 per share |
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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 |
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¨ |
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Accelerated filer |
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x |
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Non-accelerated filer |
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¨ (Do not check if a smaller reporting company) |
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Smaller reporting company |
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¨ |
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 April 27, 2015, there were 29,801,681 shares of the registrant’s Common Stock outstanding.
TABLE OF CONTENTS
Part I |
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1 |
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Item 1 |
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1 |
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Condensed Balance Sheets at March 31, 2015 (Unaudited) and December 31, 2014 |
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1 |
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2 |
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Condensed Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (Unaudited) |
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3 |
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4 |
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Item 2 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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13 |
Item 3 |
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19 |
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Item 4 |
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20 |
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Part II |
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21 |
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Item 1 |
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21 |
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Item 1A |
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21 |
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Item 2 |
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44 |
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Item 3 |
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44 |
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Item 4 |
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44 |
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Item 5 |
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44 |
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Item 6 |
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45 |
TANDEM DIABETES CARE, INC.
(In thousands except par values)
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March 31, |
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December 31, |
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2015 |
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2014 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
62,549 |
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$ |
31,176 |
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Restricted cash |
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2,000 |
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2,000 |
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Short-term investments |
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53,834 |
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36,106 |
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Accounts receivable, net |
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5,226 |
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7,652 |
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Inventory, net |
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13,581 |
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11,913 |
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Prepaid and other current assets |
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1,960 |
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1,904 |
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Total current assets |
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139,150 |
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90,751 |
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Property and equipment, net |
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12,928 |
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12,581 |
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Patents, net |
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2,355 |
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2,441 |
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Other long term assets |
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692 |
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|
691 |
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Total assets |
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$ |
155,125 |
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$ |
106,464 |
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable |
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$ |
4,087 |
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$ |
1,949 |
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Accrued expense |
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2,586 |
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2,920 |
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Employee-related liabilities |
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8,789 |
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9,722 |
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Deferred revenue |
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803 |
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840 |
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Other current liabilities |
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2,505 |
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2,663 |
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Total current liabilities |
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18,770 |
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18,094 |
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Notes payable—long-term |
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29,459 |
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29,440 |
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Deferred rent—long-term |
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2,546 |
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2,700 |
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Other long-term liabilities |
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2,102 |
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1,658 |
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Total liabilities |
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52,877 |
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51,892 |
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Commitments and contingencies |
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Common stock, $0.001 par value; 100,000 shares authorized, 29,780 and 23,655 shares issued and outstanding at March 31, 2015 (unaudited) and December 31, 2014, respectively. |
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30 |
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24 |
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Additional paid-in capital |
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372,102 |
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303,255 |
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Accumulated other comprehensive income |
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39 |
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8 |
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Accumulated deficit |
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(269,923 |
) |
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(248,715 |
) |
Total stockholders’ equity |
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102,248 |
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54,572 |
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Total liabilities and stockholders’ equity |
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$ |
155,125 |
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$ |
106,464 |
|
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)
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Three Months Ended March 31, |
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2015 |
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2014 |
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Sales |
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$ |
12,308 |
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$ |
8,065 |
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Cost of sales |
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9,500 |
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7,199 |
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Gross profit |
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2,808 |
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866 |
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Operating expenses: |
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Selling, general and administrative |
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19,355 |
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18,041 |
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Research and development |
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3,863 |
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3,663 |
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Total operating expenses |
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23,218 |
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21,704 |
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Operating loss |
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(20,410 |
) |
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(20,838 |
) |
Other income (expense), net: |
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Interest and other income |
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99 |
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18 |
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Interest and other expense |
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(897 |
) |
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(1,142 |
) |
Total other income (expense), net |
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(798 |
) |
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(1,124 |
) |
Net loss |
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$ |
(21,208 |
) |
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$ |
(21,962 |
) |
Other Comprehensive Loss: |
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Unrealized gain on short-term investments |
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$ |
39 |
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$ |
14 |
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Comprehensive loss |
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$ |
(21,169 |
) |
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$ |
(21,948 |
) |
Net loss per share, basic and diluted |
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$ |
(0.83 |
) |
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$ |
(0.96 |
) |
Weighted average shares used to compute basic and diluted net loss per share |
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25,522 |
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22,936 |
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See accompanying notes to unaudited condensed financial statements.
2
TANDEM DIABETES CARE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Three Months Ended March 31, |
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2015 |
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2014 |
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Operating activities |
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Net loss |
$ |
(21,208 |
) |
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$ |
(21,962 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization expense |
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1,182 |
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921 |
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Interest expense related to amortization of debt discount and debt issuance costs |
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35 |
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93 |
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Provision for allowance for doubtful accounts |
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(31 |
) |
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54 |
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Provision for inventory reserve |
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— |
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260 |
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Amortization of premium/discount on short-term investments |
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(18 |
) |
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(6 |
) |
Stock-based compensation expense |
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3,773 |
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3,771 |
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Other |
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(60 |
) |
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— |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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2,457 |
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1,821 |
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Inventory, net |
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(1,658 |
) |
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(188 |
) |
Prepaid and other current assets |
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(56 |
) |
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(118 |
) |
Other long term assets |
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(17 |
) |
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— |
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Accounts payable |
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1,354 |
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(481 |
) |
Accrued expense |
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(260 |
) |
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(385 |
) |
Employee-related liabilities |
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(933 |
) |
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|
699 |
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Deferred revenue |
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(37 |
) |
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(29 |
) |
Other current liabilities |
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(160 |
) |
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(1,276 |
) |
Deferred rent |
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(151 |
) |
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(67 |
) |
Other long term liabilities |
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366 |
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(67 |
) |
Net cash used in operating activities |
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(15,422 |
) |
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(16,960 |
) |
Investing activities |
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Purchase of short-term investments |
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(39,099 |
) |
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(28,833 |
) |
Proceeds from sales and maturities of short-term investments |
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21,500 |
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— |
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Purchase of property and equipment |
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(600 |
) |
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(1,620 |
) |
Purchase of patents |
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(74 |
) |
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(173 |
) |
Net cash used in investing activities |
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(18,273 |
) |
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(30,626 |
) |
Financing activities |
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Proceeds from issuance of preferred stock for cash, net of offering costs |
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— |
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27 |
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Proceeds from public offering, net of offering costs |
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64,851 |
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— |
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Proceeds from issuance of common stock |
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217 |
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— |
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Net cash provided by financing activities |
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65,068 |
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27 |
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Net increase (decrease) in cash and cash equivalents |
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31,373 |
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(47,559 |
) |
Cash and cash equivalents at beginning of period |
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31,176 |
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|
124,385 |
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Cash and cash equivalents at end of period |
$ |
62,549 |
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$ |
76,826 |
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Supplemental disclosures of cash flow information |
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Interest paid |
$ |
863 |
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$ |
1,050 |
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Income taxes paid |
$ |
18 |
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$ |
88 |
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Supplemental schedule of noncash investing and financing activities |
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Property and equipment included in accounts payable |
$ |
1,638 |
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$ |
149 |
|
See accompanying notes to unaudited condensed financial statements.
3
TANDEM DIABETES CARE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
The Company
Tandem Diabetes Care, Inc. is a medical device company focused on the design, development and commercialization of products for people with insulin-dependent diabetes. 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 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 August 2012. In January 2015, the Company received clearance from the FDA, to commercialize its next product, the t:flex Insulin Delivery System, or t:flex, for people with greater insulin needs. The Company intends to begin commercial sales of t:flex in the United States during the second quarter of 2015.
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 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, 2014, from which the balance sheet information herein was derived.
Voluntary Recall
On January 10, 2014, the Company announced a voluntary recall of select lots of cartridges used with 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 t:slim. The Company has 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 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. As of December 31, 2014, the FDA determined that the recall is terminated and the Company does not currently expect any further direct financial impact of the recall beyond these costs.
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 materially differ from those estimates and assumptions.
4
Restricted Cash
Restricted cash as of March 31, 2015 and December 31, 2014 was primarily composed of 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. Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a balance is uncollectible.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expense, and employee-related liabilities are reasonable estimates of their fair values because of the short-term nature of these assets and liabilities. Short-term investments are carried at fair value. 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 from sales, in the United States, 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. 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. |
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 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 for a reasonable profit margin and 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 March 31, 2015 and December 31, 2014, $0.7 million was 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 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 return allowances for sales returns are based on historical returned quantities as compared to t:slim pump shipments in those same periods. 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 included in other current liabilities on the Company’s balance sheets at March 31, 2015 and December 31, 2014 was $0.2 million and $0.3 million, respectively. Actual product returns have not differed materially from estimated amounts reserved in the accompanying financial statements.
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. Any pump 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 expected replacement product cost, actual experience and expected failure rates from test studies performed in conjunction with the clearance of the t:slim pump with the FDA to support the longevity and reliability of the pump. The Company evaluates the reserve quarterly and makes adjustments when appropriate. At March 31, 2015 and December 31, 2014, the warranty reserve was $2.5 million and $2.0 million, respectively. Actual warranty costs have not differed materially from estimated amounts reserved in the accompanying financial statements.
The following table provides a reconciliation of the change in product warranty liabilities through March 31, 2015 (in thousands):
Balance at December 31, 2014 |
$ |
1,974 |
|
Provision for warranties issued during the period |
|
1,332 |
|
Settlements made during the period |
|
(834 |
) |
Balance at March 31, 2015 |
$ |
2,472 |
|
|
|
|
|
Current portion |
$ |
668 |
|
Non-current portion |
|
1,804 |
|
Total |
$ |
2,472 |
|
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 employee’s requisite service period on a straight-line basis. 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, and risk-free rate. For awards that vest based on service conditions, the Company recognizes expense using the straight-line method less estimated forfeitures. As of March 31, 2015, there were no outstanding equity awards with market or performance conditions.
The Company records the expense for stock option grants to non-employees based on the estimated fair value of the stock options 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.
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 Employee Stock Purchase Plan (ESPP) awards, and options outstanding under the Company’s stock 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 common stock equivalent shares):
|
Three Months Ended |
|
|
|||||
|
March 31, |
|
|
|||||
|
2015 |
|
|
2014 |
|
|
||
Warrants for common stock |
|
990,031 |
|
|
|
1,297,057 |
|
|
Common stock options |
|
2,163,331 |
|
|
|
4,889,549 |
|
|
ESPP |
|
127,067 |
|
|
|
137,943 |
|
|
|
|
3,280,429 |
|
|
|
6,324,549 |
|
|
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“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. On April 1, 2015, the FASB proposed deferring the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB also proposed permitting early adoption of the standard, but not before the original effective date of December 15, 2016. The Company is in the process of assessing the future impact of the adoption of the standard on its financial statements.
3. Short-Term Investments
The Company invests its excess cash in investment securities, principally debt instruments of financial institutions and corporations with strong credit ratings. The following represents a summary of the estimated fair value of short-term investments at March 31, 2015 and December 31, 2014 (in thousands):
At March 31, 2015 |
|
Maturity (in years) |
|
Amortized Cost |
|
|
Unrealized Gain |
|
|
Unrealized Loss |
|
|
Estimated Fair Value |
|
||||
Available-for-sale investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
Less than 1 |
|
$ |
45,156 |
|
|
$ |
38 |
|
|
$ |
— |
|
|
$ |
45,194 |
|
Government-sponsored enterprise securities |
|
Less than 1 |
|
|
8,501 |
|
|
|
1 |
|
|
|
— |
|
|
|
8,502 |
|
|
|
|
|
$ |
53,657 |
|
|
$ |
39 |
|
|
$ |
— |
|
|
$ |
53,696 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds held for nonqualified deferred compensation plan participants |
|
|
|
$ |
134 |
|
|
$ |
4 |
|
|
$ |
— |
|
|
$ |
138 |
|
Total |
|
|
|
$ |
53,791 |
|
|
$ |
43 |
|
|
$ |
— |
|
|
$ |
53,834 |
|
At December 31, 2014 |
|
Maturity (in years) |
|
Amortized Cost |
|
|
Unrealized Gain |
|
|
Unrealized Loss |
|
|
Estimated Fair Value |
|
||||
Available-for-sale investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
Less than 1 |
|
$ |
32,536 |
|
|
$ |
9 |
|
|
$ |
— |
|
|
$ |
32,545 |
|
Government-sponsored enterprise securities |
|
Less than 1 |
|
|
3,504 |
|
|
|
— |
|
|
|
(1 |
) |
|
|
3,503 |
|
|
|
|
|
$ |
36,040 |
|
|
$ |
9 |
|
|
$ |
(1 |
) |
|
$ |
36,048 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds held for nonqualified deferred compensation plan participants |
|
|
|
$ |
56 |
|
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
58 |
|
Total |
|
|
|
$ |
36,096 |
|
|
$ |
11 |
|
|
$ |
(1 |
) |
|
$ |
36,106 |
|
7
4. Inventory
Inventories, stated at the lower of cost or market, consisted of the following (in thousands):
|
March 31, |
|
|
December 31, |
|
||
|
2015 |
|
|
2014 |
|
||
Raw materials |
$ |
8,091 |
|
|
$ |
7,085 |
|
Work in process |
|
3,205 |
|
|
|
2,288 |
|
Finished goods |
|
2,512 |
|
|
|
2,856 |
|
|
|
13,808 |
|
|
|
12,229 |
|
Less reserve |
|
(227 |
) |
|
|
(316 |
) |
Total |
$ |
13,581 |
|
|
$ |
11,913 |
|
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 unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
|
|
|
Level 2: |
|
Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly for substantially the full term of the asset of liability. |
|
|
|
Level 3: |
|
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own valuation techniques that require input assumptions. |
The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):
|
|
|
|
|
|
Fair Value Measurements at |
|
|||||||||
|
|
|
|
|
|
March 31, 2015 |
|
|||||||||
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (1) |
|
$ |
54,452 |
|
|
$ |
54,452 |
|
|
$ |
— |
|
|
$ |
— |
|
Commercial paper |
|
|
45,194 |
|
|
— |
|
|
|
45,194 |
|
|
— |
|
||
Mutual funds held for nonqualified deferred compensation plan participants (2) |
|
|
138 |
|
|
|
138 |
|
|
— |
|
|
— |
|
||
Government-sponsored enterprise securities |
|
|
8,502 |
|
|
— |
|
|
|
8,502 |
|
|
— |
|
||
Total assets |
|
$ |
108,286 |
|
|
$ |
54,590 |
|
|
$ |
53,696 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation (2) |
|
$ |
138 |
|
|
$ |
138 |
|
|
$ |
— |
|
|
$ |
— |
|
Total liabilities |
|
$ |
138 |
|
|
$ |
138 |
|
|
$ |
— |
|
|
$ |
— |
|
8
|
|
|
|
|
|
Fair Value Measurements at |
|
|||||||||
|
|
|
|
|
|
December 31, 2014 |
|
|||||||||
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (1) |
|
$ |
30,050 |
|
|
$ |
30,050 |
|
|
$ |
— |
|
|
$ |
— |
|
Commercial paper |
|
|
32,545 |
|
|
|
— |
|
|
|
32,545 |
|
|
|
— |
|
Mutual funds held for nonqualified deferred compensation plan participants (2) |
|
|
58 |
|
|
|
58 |
|
|
|
— |
|
|
|
— |
|
Government-sponsored enterprise securities |
|
|
3,503 |
|
|
|
— |
|
|
|
3,503 |
|
|
|
— |
|
Total assets |
|
$ |
66,156 |
|
|
$ |
30,108 |
|
|
$ |
36,048 |
|
|
$ |
— |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation (2) |
|
$ |
58 |
|
|
$ |
58 |
|
|
$ |
— |
|
|
$ |
— |
|
Total liabilities |
|
$ |
58 |
|
|
$ |
58 |
|
|
$ |
— |
|
|
$ |
— |
|
(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 three months ended March 31, 2015.
6. Loan Agreements
SVB 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 the amount up to the lesser of $1.5 million or 75% of eligible accounts receivable. There were no amounts outstanding under this loan as of December 31, 2014. The SVB revolving line of credit expired unused in January 2015.
Capital Royalty Term Loan
At December 31, 2013, the Company had $30.0 million outstanding under a term loan agreement with Capital Royalty Partners II L.P. and Capital Royalty Partners II—Parallel Fund “A” L.P., together, Capital Royalty Partners (the “Original Term Loan Agreement”). The loan accrued interest at an annual rate of 14%. In connection with the Original Term Loan Agreement the Company issued warrants with a fair value of approximately $0.4 million and paid a $0.4 million financing fee to Capital Royalty Partners, which 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. All fees and the value of the warrants are amortized to interest expense over the remaining term using the effective interest method.
In April 2014, the Company entered into an amended 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 amended certain terms of the Original Term Loan Agreement, including a reduction of the applicable interest rate from 14.0% to 11.5% and an extension of the interest only payment period from December 31, 2015 to March 31, 2018. Under the agreement, 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 would be added to the principal of the loan and subject to accruing interest. Interest-only payments are due quarterly on March 31, June 30, September 30 and December 31 of each year of the interest-only payment period. This agreement also 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.
9
The loan is collateralized by all assets of the Company. The Amended and Restated Term Loan Agreement also imposes various affirmative and negative covenants on the Company. 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. At March 31, 2015, the Company was in compliance with all of the covenants.
Aggregate borrowings outstanding under the Amended and Restated Term Loan Agreement were $30.0 million at March 31, 2015 and December 31, 2014. 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 was recorded as a discount to the Amended and Restated Term Loan. The facility fee and the remaining balance of debt issuance costs 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 with entering into the Amended and Restated Loan Agreement, 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 could have borrowed 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.
In February 2015, the Company amended its Amended and Restated Term Loan Agreement, as well as its New Tranche Term Loan Agreement. Pursuant to this amendment, the interest-only payment period was extended to December 31, 2019 from March 31, 2018 at the same interest rate and on the same key terms as the existing agreements. The principal balance is due in full at the end of the term of the loan which is March 31, 2020. The present value of the future cash flows under the modified terms did not exceed the present value of the future cash flows under the previous terms by more than 10%. The Company treated this amendment as a modification. The remaining debt discount costs will be amortized over the remaining term of the Amended and Restated Term Loan using the effective interest method.
The Company did not elect to borrow any amounts under the New Tranche Loan Agreement on or before March 31, 2015, and the Company’s ability to borrow any amounts under the New Tranche Term Loan Agreement has now lapsed.
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 payable by the Company.
Shares Reserved for Future Issuance
The following shares of common stock are reserved for future issuance at March 31, 2015:
Common stock warrants outstanding |
|
990,031 |
|
Stock options issued and outstanding |
|
5,194,724 |
|
Authorized for future option grants |
|
2,734,773 |
|
Employee stock purchase plan |
|
770,413 |
|
|
|
9,689,941 |
|
The Company issued 87,555 shares of common stock upon the exercise of stock options and warrants during the three months ended March 31, 2015, and issued 477,741 shares of common stock upon the exercise of stock options and warrants during the year ended December 31, 2014.
In October 2013, the Company adopted the 2013 Employee Stock Purchase Plan (the “ESPP”), which enables eligible employee to purchase shares of the Company’s common stock using their after tax payroll deductions, subject to certain conditions. Generally, the ESPP consists of a two-year offering period with four six-month purchase periods which begin in May and November of each year. No shares had been purchased under the ESPP during the three months ended March 31, 2015, and 251,390 shares of the Company’s common stock were purchased under the ESPP during the year ended December 31, 2014.
10
Stock-Based Compensation
The assumptions used in the Black-Scholes option-pricing model are as follows:
|
Stock Option |
|
|||||
|
Three Months Ended |
|
|||||
|
March 31, |
|
|||||
|
2015 |
|
|
2014 |
|
||
Weighted average grant date fair value (per share) |
$ |
8.58 |
|
|
$ |
17.05 |
|
Risk-free interest rate |
|
1.7 |
% |
|
|
1.9 |
% |
Expected dividend yield |
|
0.0 |
% |
|
|
0.0 |
% |
Expected volatility |
|
70.4 |
% |
|
|
78.7 |
% |
Expected term (in years) |
|
6.1 |
|
|
|
6.1 |
|
There were no ESPP valuations performed during the three months ended March 31, 2015 and 2014.
The following table summarizes the allocation of stock compensation expense (in thousands):
|
Three Months Ended |
|
|||||
|
March 31, |
|
|||||
|
2015 |
|
|
2014 |
|
||
Cost of sales |
$ |
324 |
|
|
$ |
364 |
|
Selling, general & administrative |
|
2,978 |
|
|
|
3,003 |
|
Research and development |
|
471 |
|
|
|
404 |
|
Total |
$ |
3,773 |
|
|
$ |
3,771 |
|
The total stock-based compensation capitalized as part of the cost of inventory was $0.2 million at each of the periods ended March 31, 2015 and December 31, 2014.
8. Collaborations
DexCom Development and Commercialization Agreement
In February 2012, the Company entered into a Development and Commercialization Agreement with DexCom, Inc. (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 at the commencement of the collaboration in 2012, and an additional $1.0 million in 2014, upon the achievement of a pre-market approval, or PMA submission to the FDA. Both payments were recorded as research and development costs in their respective years. 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 March 31, 2015, the Company has reimbursed DexCom $0.2 million of its development costs. The research and development costs recognized for the three months ended March 31, 2015, and 2014 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.
JDRF 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. Payments the Company receives to fund the collaboration efforts under the terms of the JDRF Agreement are 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. The estimated completion date is re-evaluated each reporting period based on development progress through that date. As of March 31, 2015, the Company estimated the completion date to be September 2016.
11
As of March 31, 2015, milestone payment achievements totaled $0.7 million, and research and development costs were offset cumulatively by $0.4 million. The research and development costs were offset by $37,000 and $0.1 million for the three months ended March 31, 2015 and 2014 respectively. The Company did not have any restricted cash balances related to the JDRF Agreement at March 31, 2015 or December 31, 2014.
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 March 31, 2015 and December 31, 2014, there were no material matters for which the negative outcome was considered probable or estimable.
10. Subsequent Event
In April 2015, the Company entered into two foreign currency forward contracts for a total notional amount of $1.0 million, to offset a portion of the foreign exchange risk of expected future cash flows on certain euro-denominated liabilities that are associated with purchase of manufacturing equipment. Both forward contracts are short-term contracts expiring before December 31, 2015. While the foreign exchange forward contracts act as economic hedges, they are not designated as hedges for accounting purposes. Gains and losses resulting from changes in the fair values of these foreign currency forward contracts will be recorded to other income or expense on the Company’s statement of operations.
12
You should read the following discussion and analysis together with our financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption “Risk Factors” in Part II, Item 1A.
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 future operating performance, and the products we expect to offer and other statements regarding matters that are not historical facts, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the 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. The foundation of our product portfolio is our proprietary technology platform and unique consumer-focused approach, which allows us to focus on both consumer and clinical needs to develop and commercialize products that address different segments of the insulin-dependent diabetes market. The U.S. Food and Drug Administration, or FDA, cleared t:slim in November 2011 and we commenced commercial sales of t:slim in the United States in the third quarter of 2012. In January 2015, we received clearance from the FDA to commercialize our next product, the t:flex Insulin Delivery System, or t:flex, for people with greater insulin needs. We intend to begin commercial sales of t:flex in the United States during the second quarter of 2015.
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 different segments of the large and growing insulin-dependent diabetes market.
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 20,800 pumps, broken down by quarter as follows:
|
Units Shipped for Each of the Three Months Ended in Respective Years |
|
|||||||||||||
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
||||
March 31 |
|
2,487 |
|
|
|
1,723 |
|
|
|
852 |
|
|
N/A |
|
|
June 30 |
N/A |
|
|
|
2,235 |
|
|
|
1,363 |
|
|
|
9 |
|
|
September 30 |
N/A |
|
|
|
2,935 |
|
|
|
1,851 |
|
|
|
204 |
|
|
December 31 |
N/A |
|
|
|
3,929 |
|
|
|
2,406 |
|
|
|
844 |
|
|
Total |
|
2,487 |
|
|
|
10,822 |
|
|
|
6,472 |
|
|
|
1,057 |
|
For the three months ended March 31, 2015 and 2014, our sales were $12.3 million and $8.1 million, respectively. For the three months ended March 31, 2015 and 2014, our net loss was $21.2 million and $22.0 million, respectively.
13
We have derived nearly all of our revenue from the sale of t:slim and associated supplies in the United States and expect to continue to do so until we are able to commercialize t:flex and our other products that are currently under development. During the third quarter of 2014, we submitted a PMA application to the FDA for the t:slim G4 Insulin Pump System, which we have previously referred to as t:sensor.
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. 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. 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. 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 sale of our products. By leveraging our technology platform, we believe we can develop and bring to market products more rapidly while significantly reducing our design and development costs. We also expect to continue to increase production volume, and to reduce the per-unit production overhead cost for our pump products and their associated disposable cartridges over time. 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 different 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 March 31, 2015, 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.
In the first quarter of 2015, we completed a public offering of 6,037,500 shares of our 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 payable by us.
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, in particular during the initial stages of commercialization of new products, including t:flex, 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. 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. As of December 31, 2014, the FDA determined that the recall is terminated and we do not currently expect any further direct financial impact of the recall beyond these costs
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.
14
We anticipate that our sales will increase as we expand our sales and marketing infrastructure, increase awareness of our products, introduce new products into the market, including t:flex, 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 the impact of the buying patterns of our distributors and other customers, as well as the impact of seasonality. 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 negatively impacted by the summer vacation period. In addition, we have experienced, and expect to continue to experience, sequential growth of sales in each quarter from the first quarter to the fourth quarter, but we also expect sequential sales from the fourth quarter to the first quarter to be relatively flat or down. Our overall 2014 sales were weighted heavily towards the second half of the year, and we expect this trend to continue in 2015.
Cost of Sales
We manufacture the t:slim pump and its disposable cartridge at our manufacturing facility in San Diego, California. We will also manufacture the t:flex pump and its disposable cartridge at the same facility. 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 production capacity, manufacturing overhead expenses are currently a significant portion of our per-unit costs. These manufacturing overhead expenses include expenses relating to quality assurance, manufacturing engineering, material procurement, inventory control, facilities, equipment, information technology and operations supervision and management.
We anticipate that our cost of sales will increase as our products gain broader market acceptance. However, as our sales increase, we expect our overall gross margin, which, for any given period, is calculated as sales less cost of sales divided by sales, to fluctuate in future periods as a result of numerous factors, including the changing percentage of products sold to distributors versus directly to individual customers, varying levels of reimbursement among third-party payors, the changing mix of products sold with different gross margins, the timing and success of new product launches, warranty and training costs, and changes in our manufacturing processes, costs or output. Manufacturing efficiencies or 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 processes, change our manufacturing capacity or output, implement additional automated manufacturing equipment and expand our manufacturing facilities.
Selling, General and Administrative
Our selling, general and administrative, or SG&A, expenses primarily consist of salary, cash-based incentive compensation, fringe benefits and stock-based compensation for our executive, financial, marketing, sales, business development, regulatory affairs and administrative functions. Other significant SG&A expenses include those incurred for product demonstration samples, commercialization activities associated with new product launches, trade shows, outside legal counsel fees, independent auditor fees, outside consultant fees, insurance premiums, facilities costs and information technology costs. We expect our SG&A expenses to increase as our business expands.
Research and Development
Our research and development, or R&D, activities primarily consist of engineering and research programs associated with our products under development, as well as 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 R&D expenses for supplies, license fees, development prototypes, outside design and testing services and milestone payments under our development and commercialization agreements. We expect our R&D expenses to increase as we initiate and advance our development projects.
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 our amended and restated term loan agreement with Capital Royalty Partners. At March 31, 2015 and December 31, 2014, there was $30.0 million of outstanding principal under our term loan agreement, which accrues interest at a rate of 11.5% per annum (see "Indebtedness").
15
Results of Operations
|
Three Months Ended |
|
|||||
|
March 31, |
|
|||||
(in thousands, except percentages) |
2015 |
|
|
2014 |
|
||
Sales |
$ |
12,308 |
|
|
$ |
8,065 |
|
Cost of sales |
|
9,500 |
|
|
|
7,199 |
|
Gross profit |
|
2,808 |
|
|
|
866 |
|
Gross margin |
|
23 |
% |
|
|
11 |
% |
Operating expenses: |
|
|
|
|
|
|
|
Selling, general and administrative |
|
19,355 |
|
|
|
18,041 |
|
Research and development |
|
3,863 |
|
|
|
3,663 |
|
Total operating expenses |
|
23,218 |
|
|
|
21,704 |
|
Operating loss |
|
(20,410 |
) |
|
|
(20,838 |
) |
Other income (expense), net: |
|
|
|
|
|
|
|
Interest and other income |
|
99 |
|
|
|
18 |
|
Interest and other expense |
|
(897 |
) |
|
|
(1,142 |
) |
Total other expense, net |
|
(798 |
) |
|
|
(1,124 |
) |
Net loss |
$ |
(21,208 |
) |
|
$ |
(21,962 |
) |
Comparison of the Three Months Ended March 31, 2015 and 2014
Sales. Sales for the three months ended March 31, 2015 were $12.3 million, representing an increase of 53% compared to $8.1 million for the same period in 2014. For the three months ended March 31, 2015 and 2014, sales from the t:slim pump accounted for 81% and 86% of sales, respectively, while sales of pump-related supplies primarily accounted for the remainder of our sales during those periods. Sales of accessories were not material in either of the reported periods.
The increase in t:slim pump sales during the three months ended March 31, 2015 compared to the same period in 2014 was primarily attributable to a 44% increase in t:slim pump shipments from 1,723 in the first three months of 2014 to 2,487 in the same period of 2015. The commercialization of the t:slim pump and pump-related supplies and accessories initially involved a sales force of limited size. At March 31, 2015, we operated with 60 sales territories. During the first quarter of 2014, we expanded from 36 to 60 sales territories. During the expansion of the sales territories in 2014 and for several months following, we believe our sales representatives experienced some disruption in their individual productivity as territories were realigned and responsibilities adjusted.
Sales to distributors accounted for 76% and 68% of our total sales for the three months ended March 31, 2015 and 2014, respectively. The mix of sales to distributors versus direct customers is principally determined by whether or not we have a contractual arrangement with the underlying third-party insurance payor. The increase in the percentage of our sales to distributors is primarily attributable to new exclusive arrangements between certain insurance payors and certain of our distributors that became effective during the third quarter of 2014. As a result of these new arrangements, a portion of our business that previously involved an opportunity to make a direct sale to the customer transitioned to an opportunity to make a sale through a distributor. The new arrangement has afforded its members easier access to our products as an in-network benefit and it also provided access to our products for a large portion of members who were previously unable to obtain coverage for our products.
Cost of Sales and Gross Profit. Our cost of sales for the three months ended March 31, 2015 was $9.5 million, representing an increase of 32% compared to $7.2 million for the same period in 2014. Gross profit for the three months ended March 31, 2015 was $2.8 million and gross margin was 23%, compared to gross profit of $0.9 million and gross margin of 11% for the same period in 2014. Included in cost of sales for the three months ended March 31, 2014 were costs of $0.3 million associated with our voluntary product recall of selected lots of cartridges initiated in January 2014, resulting in a reduction of the gross margin for that period of four percentage points.
The increase in our gross margin for the three months ended March 31, 2015 from the comparable period of 2014 was primarily due to a decrease in per unit manufacturing overhead costs of our products, which was driven by increased production volumes and manufacturing efficiencies. Our manufacturing overhead costs have been and will continue to be a significant component of the overall cost of our products. Also impacting the gross margin in the first quarter of 2015 as compared to the first quarter of 2014 were the percentage of products sold to distributors versus directly to individual customers, the varying levels of reimbursement among a changing mix of third-party payors, and an increase in sales of pump-related supplies, which generally have lower gross margins than our t:slim pumps.
16
Selling, General and Administrative Expenses. SG&A expenses increased 7% to $19.4 million for the three months ended March 31, 2015 from $18.0 million for the same period of 2014. The increase in SG&A expenses for the three months ended March 31, 2015 was primarily the result of increased headcount within our sales, general and administrative functions, which increased costs by $1.9 million for the period ended March 31, 2015 as compared to the same period in 2014. This increase in expenses was offset by a decrease of $0.6 million associated with marketing and promotional activities, tradeshows, travel expenses and facilities costs as compared to the same period of 2014.
Research and Development Expenses. R&D expenses increased 5% to $3.9 million for the three months ended March 31, 2015 from $3.7 million for the same period of 2014 principally as a result of increased headcount within our R&D organization.
Other Income and Expense. Other expense for the three months ended March 31, 2015 and 2014 was $0.8 million and $1.1 million. Other expense for the first quarter of 2015 was primarily comprised of $0.8 million of interest expense associated with the Amended and Restated Term Loan Agreement, which was executed in April 2014. In comparison, other expense for the first quarter of 2014 was primarily comprised of $1.1 million interest expense associated with the Original Term Loan Agreement, which was executed in December 2012. The decrease in interest expense during the first quarter of 2015 compared to the same period in 2014 is due to the decrease in the interest rate on our outstanding debt from 14% to 11.5%.
Liquidity and Capital Resources
At March 31, 2015, we had $118.4 in cash, cash equivalents and short-term investments, which included $2.0 million of restricted cash. We believe that our current cash and cash equivalents balances, together with cash generated from operations and proceeds from the exercise of options and warrants will be sufficient to satisfy our liquidity requirements for at least the next 12 months. We expect that our future liquidity and capital resource needs will be impacted by numerous factors, including market acceptance and sales of our products, our financial and operating performance. We have utilized, and may continue to utilize, debt arrangements with debt providers and financial institutions to finance our operations. Factors such as interest rates and available cash will impact our decision to continue to utilize debt arrangements as a source of cash.
Historically, our primary sources of cash have included private placements and public offerings of equity securities, debt arrangements, and cash generated from operations. Our historical cash outflows have primarily been associated with cash used for operating activities such as the purchase of inventory, expansion of our sales and marketing infrastructure, increase in our R&D activities and other working capital needs, as well as cash used for investing activities, such as the acquisition of intellectual property, expenditures related to equipment and improvements used to increase our manufacturing capacity and improve our manufacturing efficiency and overall facility expansion.
The following table shows a summary of our cash flows for the three months ended March 31, 2015 and 2014:
|
Three Months Ended |
|
|||||
|
March 31, 2015 |
|
|||||
(in thousands) |
2015 |
|
|
2014 |
|
||
Net cash provided by (used in): |
|
|
|
|
|
|
|
Operating activities |
$ |
(15,422 |
) |
|
$ |
(16,960 |
) |
Investing activities |
|
(18,273 |
) |
|
|
(30,626 |
) |
Financing activities |
|
65,068 |
|
|
|
27 |
|
Total |
$ |
31,373 |
|
|
$ |
(47,559 |
) |
Operating activities. Net cash used in operating activities was $15.4 million for the three months ended March 31, 2015, compared to $17.0 million for the same period in 2014. The decrease in net cash used in operating activities was primarily associated with a decrease in net loss of $0.8 million, as well as a decrease in working capital and other assets and liabilities of $0.8 million.
Investing activities. Net cash used in investing activities was $18.3 million for the three months ended March 31, 2015, which was primarily related to the purchase of $39.1 million in short-term investments and $0.7 million in purchases of long-term assets, offset by proceeds from sales and maturities of short-term investments of $21.5 million. Net cash used in investing activities was $30.6 million for the three months ended March 31, 2014, which was primarily related to the purchase of $28.8 million in short-term investments and $1.8 million in long-term assets.
Financing activities. Net cash provided by financing activities was $65.1 million for the three months ended March 31, 2015, which was primarily the result of the net proceeds from a public offering of our common stock in the amount of $64.9 million. Net cash provided by financing activities in the first three months of 2014 was not material.
17
Our liquidity position and capital requirements are subject to fluctuation based on a number of factors. For example, our cash inflows and outflows may be impacted by the following:
● |
fluctuations in gross margins and operating margins; |
● |
our ability to generate sales; and |
● |
fluctuations in working capital. |
Our primary short-term capital needs, which are subject to change, include expenditures related to:
● |
support of our commercialization efforts related to our current and future products; |
● |
improvements in our manufacturing capacity and efficiency; |
● |
growth of our sales, marketing and clinical infrastructure; |
● |
new research and product development efforts; |
● |
payment of quarterly interest due under our term debt agreement; |
● |
the acquisition of equipment and other fixed assets; |
● |
facilities expansion needs; and |
● |
potential up-front fees, milestone payments or reimbursement of costs under R&D collaborations and licensing agreements. |
Although we believe the foregoing items reflect our most likely uses of cash in the short-term, we cannot predict with certainty all of our particular short-term cash uses or the timing or amount of cash used. If cash generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we may be required to sell additional equity or debt securities or obtain additional credit facilities. Additional capital, if needed, may not be available on satisfactory terms, if at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants and commit us to significant additional debt service obligations.
Indebtedness
Capital Royalty Partners Term Loans
At December 31, 2013, we had $30.0 million outstanding under a term loan agreement with Capital Royalty Partners II L.P. and Capital Royalty Partners II—Parallel Fund “A” L.P., together, Capital Royalty Partners (the “Original Term Loan Agreement”). The loan accrued interest at an annual rate of 14%.
In April 2014, we entered into an amended and restated term loan agreement (the "Amended and Restated Term Loan Agreement") with Capital Royalty Partners. The Amended and Restated Term Loan Agreement amended certain terms of the Original Term Loan Agreement, including a reduction of the applicable interest rate from 14.0% to 11.5% and an extension of the interest only payment period from December 31, 2015 to March 31, 2018. Under the agreement, 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 would be added to the principal of the loan and subject to accruing interest. Interest-only payments are due quarterly on March 31, June 30, September 30 and December 31 of each year of the interest-only payment period. This agreement also 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. Aggregate borrowings outstanding under the Amended and Restated Term Loan Agreement were $30.0 million at March 31, 2015 and December 31, 2014.
The loan is collateralized by all of our assets. The Amended and Restated Term Loan Agreement also imposes various affirmative and negative covenants on us. The principal financial covenants require that we 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.
18
In February 2015, we amended the Amended and Restated Term Loan Agreement. Pursuant to this amendment, the interest only payment period was extended to December 31, 2019 from March 31, 2018 at the same interest rate and on the same key terms as the existing agreements. The principal balance will be due in full at the end of the term of the loan which is March 31, 2020.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about our financial condition and results of operations that are not readily apparent from other sources. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies Involving Management Estimates and Assumptions,” included in our Annual Report on Form 10-K for the year ended December 31, 2014.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk |
We invest our excess cash primarily in commercial paper and government-sponsored enterprise securities. Some of the financial instruments in which we invest have market risk associated with them in that a change in prevailing interest rates may cause the principal amount of the instrument to fluctuate. Other financial instruments in which we invest potentially subject us to credit risk in that the value of the instrument may fluctuate based on the issuer’s ability to pay.
The primary objectives of our investment activities are to maintain liquidity and preserve principal while at the same time maximizing the income we receive from our financial instruments without significantly increasing risk. We have established guidelines regarding approved investments and maturities of investments, which are primarily designed to maintain liquidity and preserve principal.
Because of the short-term maturities of our financial instruments, we do not believe that an increase or decrease in interest rates would have any significant impact on the realized value of our investment portfolio. If a 10% change in interest rates were to have occurred on March 31, 2015, this change would not have had a material effect on the fair value of our investment portfolio as of that date.
The interest rate under our Amended and Restated Term Loan Agreement is fixed and not subject to changes in market interest rates.
Our operations are located in the United States, and nearly all of our sales since inception have been made in US dollars. Accordingly, we have assessed that we do not have any material exposure to foreign currency rate fluctuations. From time to time, we may have foreign exchange risk associated with currency exposure related to existing assets and liabilities, committed transactions and forecasted future cash flows. We seek to manage our foreign exchange risk by using derivative instruments such as foreign currency forward contracts to hedge our risks. In general, we may hedge material foreign exchange exposures up to twelve months in advance. However, we may choose not to hedge some exposures for a variety of reasons including prohibitive economic costs.
19
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance a particular design will succeed in achieving its stated goals under all potential future conditions. Furthermore, over time, control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
As of March 31, 2015, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2015.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2015, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
20
From time to time we may be involved in various disputes and litigation matters that arise in the ordinary course of business. We are currently not a party to any material legal proceedings.
The following sets forth certain risk factors associated with our business. The risk factors set forth below marked with an asterisk (*) next to the title contain changes to the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014.
If any of the following risks occur, our business, financial condition, results of operations or prospects could be materially and adversely affected. In these circumstances, the market price of our common stock could decline and you might lose all or part of your investment. Additional risks and uncertainties of which we are currently unaware may also become important factors that affect us.
Risks Relating to Our Business and our Industry
We have incurred significant operating losses since inception and cannot assure you that we will achieve profitability.*
Since our inception in January 2006 we have incurred a significant net loss. As of March 31, 2015, we had an accumulated deficit of $269.9 million. To date, we have financed our operations primarily through public and private sales of our equity securities, debt financing with Capital Royalty Partners and certain of its affiliates, and sales of our products. We have devoted substantially all of our resources to the research and development of our products, the commercial launch of our products, the development of a sales and marketing team and the assembly of a management team to manage our business.
We began commercial sales of t:slim in the third quarter of 2012. Beginning in the first quarter of 2013, we have been able to manufacture and sell t:slim at a cost and in volumes sufficient to allow us to achieve a positive gross margin. For the year ended December 31, 2014 and 2013, our gross profit was $15.2 million and $6.2 million, respectively. However, although we have achieved a positive gross margin, we still operate at a substantial net loss and expect that we will continue to do so for the next several years.
To implement our business strategy we need to, among other things, grow our sales and marketing infrastructure to increase sales of our products, fund ongoing research and development activities, expand our manufacturing capabilities, and obtain regulatory clearance or approval to commercialize our products currently under development. We expect our expenses to increase significantly as we pursue these objectives. The extent of our future operating losses and the timing of profitability are highly uncertain, especially given that we only recently expanded the size of our sales, clinical and marketing infrastructure and that we expect to begin sales of our next commercial product, t:flex, in the second quarter of 2015, which makes forecasting our sales more difficult. Any additional operating losses will have an adverse effect on our stockholders’ equity, and we cannot assure you that we will ever be able to achieve or sustain profitability.
We currently rely on sales of t:slim to generate a significant portion of our revenue, and any factors that negatively impact sales of this product may adversely affect our business, financial condition and operating results.
Our primary revenue-generating commercial product is t:slim, which we introduced to the market in the third quarter of 2012. We expect to continue to derive a significant portion of our revenue from the sale of t:slim and pump-related supplies. Accordingly, our ability to generate revenue is highly dependent on our ability to market and sell t:slim.
Sales of t:slim may be negatively impacted by many factors, including:
● |
problems arising from the expansion of our manufacturing capabilities, or destruction, loss, or temporary shutdown of our manufacturing facility; |
● |
changes in reimbursement rates or policies relating to t:slim or similar products or technologies by third-party payors; |
● |
our inability to enter into contracts with third-party payors on a timely basis and on acceptable terms; |
● |
claims that t:slim, or any component thereof, infringes on patent rights or other intellectual property rights of third parties; |
21
● |
the harm to our reputation or any other associated liability or perceived risks that may arise from our January 2014 recall of cartridges used with t:slim; and |
● |
adverse regulatory or legal actions relating to t:slim or similar products or technologies. |
Because we currently rely on a single product to generate a significant portion of our revenue, any factors that negatively impact sales of this product, or result in sales of this product increasing at a lower rate than expected, could adversely affect our business, financial condition and operating results and negatively impact our ability to successfully launch future products currently under development.
The failure of our products to achieve and maintain market acceptance could result in us achieving sales below our expectations, which would cause our business, financial condition and operating results to be materially and adversely affected.
Our current business strategy is highly dependent on t:slim and t:flex achieving and maintaining market acceptance. We do not intend to begin commercial sales of t:flex until the second quarter of 2015. In order for us to sell our products to people with insulin-dependent diabetes, we must convince them, their caregivers and healthcare providers that it is an attractive alternative to competitive products for the treatment of diabetes, including traditional insulin pump products and MDI therapies, as well as alternative insulin treatment methodologies. Market acceptance and adoption of our products depends on educating people with diabetes, as well as their caregivers and healthcare providers, as to the distinct features, ease-of-use, positive lifestyle impact, and other perceived benefits of our products as compared to competitive products. If we are not successful in convincing existing and potential customers of the benefits of our products, or if we are not able to achieve the support of caregivers and healthcare providers for t:slim or t:flex, our sales may decline or we may fail to increase our sales in line with our forecasts.
Achieving and maintaining market acceptance of our products could be negatively impacted by many factors, including:
● |
the failure of our products to achieve wide acceptance among people with insulin-dependent diabetes, their caregivers, insulin-prescribing healthcare providers, third-party payors and key opinion leaders in the diabetes treatment community; |
● |
lack of evidence supporting the safety, ease-of-use or other perceived benefits of our products over competitive products or other currently available insulin treatment methodologies; |
● |
perceived risks associated with the use of t:slim or t:flex or similar products or technologies generally; |
● |
the introduction of competitive products and the rate of acceptance of those products as compared to t:slim and t:flex; |
● |
discounts, rebates and other financial incentives that our competitors may offer for competitive products; |
● |
results of clinical studies relating to t:slim, t:flex or similar competitive products. |
In addition, t:slim or t:flex may be perceived by people with insulin-dependent diabetes, their caregivers or healthcare providers to be more complicated, less reliable or less effective than traditional insulin therapies, including MDI, and people may be unwilling to change their current treatment regimens. These negative perceptions may be heightened following our January 2014 recall of cartridges used with t:slim.
Moreover, we believe that healthcare providers tend to be slow to change their medical treatment practices because of perceived liability risks arising from the use of new products and the uncertainty of third-party reimbursement. Accordingly, healthcare providers may not recommend our products until there is sufficient evidence to convince them to alter the treatment methods they typically recommend, such as receiving recommendations from prominent healthcare providers or other key opinion leaders in the diabetes treatment community that our products are effective in providing insulin therapy. Additionally, payors may have more stringent requirements for reimbursement.
Further, even if we are able to convince people with insulin-dependent diabetes, their caregivers or healthcare providers that our products compare favorably to the products and treatment alternatives offered by our competitors, the rapid evolution of technology and treatment options within our industry may cause consumers to delay the purchase of our products in anticipation of advancements, or the perception that advancements could occur, in our products or the products offered by our competitors. For example, it is possible that a consumer that is currently interested in purchasing t:slim will delay the purchase decision in anticipation of the future release of t:slim G4, or the release of a product with advanced features offered by one of our competitors.
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If t:slim or t:flex do not achieve and maintain widespread market acceptance, we may fail to achieve sales at or above our projected amounts. If our sales do not meet our projections, we may fail to meet our strategic objectives, and our business, financial condition and operating results could be materially and adversely affected.
Failure to secure or retain adequate coverage or reimbursement for t:slim, t:flex and our potential future products by third-party payors could adversely affect our business, financial condition and operating results.*
We have derived nearly all of our revenue from the sale of t:slim in the United States, and we do not expect to begin commercial sales of t:flex in the United States until the second quarter of 2015. We expect to derive nearly all of our revenue during 2015 from sales of t:slim and t:flex insulin pumps and associated supplies, and expect to continue to do so until we are able to commercialize our other products that are currently under development. 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. Because we have not initiated commercial sales of t:flex, there remains considerable uncertainty regarding the coverage that third-party payors will offer for this new product, particularly for individuals with type 2 diabetes where coverage requirements may necessitate additional laboratory tests or other information to support a determination of medical necessity. 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.
Many third-party payors use coverage decisions and payment amounts determined by the Centers for Medicare and Medicaid Services, or CMS, which administers the U.S. Medicare program, as guidelines in setting their coverage and reimbursement policies. Medicare has recently begun to review its reimbursement practices for diabetes-related products. Medicare implemented a competitive bidding process for blood glucose strip reimbursement, which resulted in a significant reduction in the reimbursement rate for those products. More recently, Medicare has also initiated a competitive bidding process for insulin pumps in limited geographies. As a result, there is uncertainty as to the future Medicare reimbursement rate for our products. In addition, those third-party payors that do not follow the CMS guidelines may adopt different coverage and reimbursement policies for our current and future products. It is possible that some third-party payors will not offer any coverage for our current or future products.
We currently have contracts establishing reimbursement for t:slim with more than 70 national and regional third-party payors in the United States. We are also currently in the process of approaching these and other third-party payors to discuss reimbursement for t:flex. While we anticipate adding coverage for t:flex under our current agreements and entering into additional contracts with third-party payors to provide reimbursement for both t:slim and t:flex, we cannot guarantee that we will succeed in doing so or that the reimbursement contracts that we are able to negotiate will enable us to sell our products on a profitable basis. In addition, contracts with third-party payors generally can be modified or terminated by the third-party payor without cause and with little or no notice to us. Moreover, compliance with the administrative procedures or requirements of third-party payors may result in delays in processing approvals by those third-party payors for customers to obtain coverage for our products. Failure to secure or retain adequate coverage or reimbursement for t:slim or t:flex and our future products by third-party payors, or delays in processing approvals by those payors, could result in the loss of sales, which could have a material adverse effect on our business, financial condition and operating results.
Further, the healthcare industry in the United States is increasingly focused on cost containment as government and private insurers seek to control healthcare costs by imposing lower payment rates and negotiating reduced contract rates with third-party payors. If third-party payors deny coverage or reduce their current levels of payment, or if our production costs increase faster than increases in reimbursement levels, we may be unable to sell our products on a profitable basis.
We operate in a very competitive industry and if we fail to compete successfully against our existing or potential competitors, many of whom have greater resources than us, our sales and operating results may be negatively affected.
The medical device industry is intensely competitive, subject to rapid change and highly sensitive to the introduction of new products or technologies, or other activities of industry participants. We expect our products will compete directly with a number of traditional insulin pumps as well as other methods for the treatment of diabetes. In particular, we expect that the competitive landscape for t:flex will be similar to that of t:slim.
Many of our existing and potential competitors are major medical device companies that are either publicly traded companies or divisions or subsidiaries of publicly traded companies. For instance, Medtronic MiniMed, a division of Medtronic, Inc., has been the market leader for many years and has the majority share of the traditional insulin pump market in the United States. Other significant insulin pump suppliers in the United States include Animas Corporation, a division of Johnson & Johnson, Roche Diagnostics, a division of F. Hoffman-La Roche Ltd., and Insulet Corporation. There are also newer companies entering the field.
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Many of these more established competitors enjoy several competitive advantages over us, including:
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greater financial and human resources for sales and marketing, and product development; |
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established relationships with healthcare providers and third-party payors; |
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established reputation and name recognition among healthcare providers and other key opinion leaders in the diabetes industry; |
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in some cases, an established base of long-time customers; |
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products supported by long-term clinical data; |
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larger and more established distribution networks; |
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greater ability to cross-sell products or provide incentives to healthcare providers to use their products; and |
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more experience in conducting research and development, manufacturing, clinical trials, and obtaining regulatory approval or clearance. |