2018 ANNUAL REPORT
with Basal-IQ® Technology
Transformational Growth
Predicts and helps
prevent lows
(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:93)(cid:72)(cid:85)(cid:82)(cid:3)(cid:564)(cid:81)(cid:74)(cid:72)(cid:85)(cid:86)(cid:87)(cid:76)(cid:70)(cid:78)(cid:86)*
with Basal-IQ® Technology
100%
3:24 PM
November 14
400
350
300
250
200
0
150
100
0
50
INSULIN ON BOARD 1.1 u | 1:09 hrs
235 u
88
mg/dL
3
3
HRS
HRS
1
2
33
3
(cid:37)(cid:68)(cid:86)(cid:68)(cid:79)(cid:16)(cid:918)(cid:52)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:3)(cid:86)(cid:76)(cid:80)(cid:83)(cid:79)(cid:72)(cid:16)(cid:87)(cid:82)(cid:16)
CLINICAL STUDY RESULTS:
(cid:88)(cid:86)(cid:72)(cid:15)(cid:3)(cid:83)(cid:85)(cid:72)(cid:71)(cid:76)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:79)(cid:82)(cid:90)(cid:16)(cid:74)(cid:79)(cid:88)(cid:70)(cid:82)(cid:86)(cid:72)(cid:3)(cid:86)(cid:88)(cid:86)(cid:83)(cid:72)(cid:81)(cid:71)(cid:3)
(cid:11)(cid:51)(cid:47)(cid:42)(cid:54)(cid:12)(cid:3)(cid:73)(cid:72)(cid:68)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:71)(cid:72)(cid:86)(cid:76)(cid:74)(cid:81)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:75)(cid:72)(cid:79)(cid:83)(cid:3)
(cid:85)(cid:72)(cid:71)(cid:88)(cid:70)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:85)(cid:72)(cid:84)(cid:88)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:88)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)
(cid:79)(cid:82)(cid:90)(cid:16)(cid:74)(cid:79)(cid:88)(cid:70)(cid:82)(cid:86)(cid:72)(cid:3)(cid:72)(cid:89)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)(cid:3)(cid:58)(cid:76)(cid:87)(cid:75)(cid:3)(cid:39)(cid:72)(cid:91)(cid:70)(cid:82)(cid:80)(cid:3)(cid:42)(cid:25)®
(cid:38)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:82)(cid:88)(cid:86)(cid:3)(cid:42)(cid:79)(cid:88)(cid:70)(cid:82)(cid:86)(cid:72)(cid:3)(cid:48)(cid:82)(cid:81)(cid:76)(cid:87)(cid:82)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:11)(cid:38)(cid:42)(cid:48)(cid:12)(cid:3)
(cid:76)(cid:81)(cid:87)(cid:72)(cid:74)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:37)(cid:68)(cid:86)(cid:68)(cid:79)(cid:16)(cid:918)(cid:52)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)
(cid:90)(cid:82)(cid:85)(cid:78)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:81)(cid:82)(cid:3)(cid:564)(cid:81)(cid:74)(cid:72)(cid:85)(cid:86)(cid:87)(cid:76)(cid:70)(cid:78)(cid:86)*(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)
(cid:73)(cid:82)(cid:85)(cid:3)(cid:70)(cid:68)(cid:79)(cid:76)(cid:69)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)(cid:80)(cid:72)(cid:68)(cid:79)(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:71)(cid:82)(cid:86)(cid:76)(cid:81)(cid:74)(cid:17)
Less time low
31%
(cid:85)(cid:72)(cid:71)(cid:88)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:86)(cid:72)(cid:81)(cid:86)(cid:82)(cid:85)(cid:3)(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:3)(cid:26)(cid:19)(cid:3)
(cid:80)(cid:74)(cid:18)(cid:71)(cid:47)(cid:3)(cid:90)(cid:75)(cid:72)(cid:81)(cid:3)(cid:86)(cid:87)(cid:88)(cid:71)(cid:92)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:81)(cid:87)(cid:86)(cid:3)(cid:88)(cid:86)(cid:72)(cid:71)(cid:3)(cid:68)(cid:3)
(cid:87)(cid:29)(cid:86)(cid:79)(cid:76)(cid:80)(cid:3)(cid:59)(cid:21)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:79)(cid:76)(cid:81)(cid:3)(cid:83)(cid:88)(cid:80)(cid:83)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:37)(cid:68)(cid:86)(cid:68)(cid:79)(cid:16)(cid:918)(cid:52)(cid:3)(cid:89)(cid:72)(cid:85)(cid:86)(cid:88)(cid:86)(cid:3)(cid:87)(cid:75)(cid:82)(cid:86)(cid:72)(cid:3)
(cid:88)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:3)(cid:38)(cid:42)(cid:48)(cid:16)(cid:76)(cid:81)(cid:87)(cid:72)(cid:74)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:83)(cid:88)(cid:80)(cid:83)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:82)(cid:88)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:72)(cid:68)(cid:87)(cid:88)(cid:85)(cid:72)(cid:17)1
Simple to use
91%
(cid:82)(cid:73)(cid:3)(cid:70)(cid:79)(cid:76)(cid:81)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:88)(cid:71)(cid:92)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:81)(cid:87)(cid:86)(cid:3)(cid:86)(cid:68)(cid:76)(cid:71)(cid:3)
(cid:37)(cid:68)(cid:86)(cid:68)(cid:79)(cid:16)(cid:918)(cid:52)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:72)(cid:68)(cid:86)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:88)(cid:86)(cid:72)(cid:17)1
Visit tandemdiabetes.com/tslimX2 to learn more.
Basal-IQ technology is not a substitute for active self-management of your diabetes. Visit www.tandemdiabetes.com/tslimx2#use for more information.
* If glucose alerts and CGM readings do not match symptoms or expectations, use a blood glucose meter to make diabetes treatment decisions.
1. Forlenza GP, Li Z, Buckingham BA, Pinsker JE, et al. Predictive low-glucose suspend reduces hypoglycemia in adults, adolescents, and children with type 1 diabetes
in an at-home randomized crossover study: Results of the PROLOG trial. Diabetes Care. 2018;41(10):2155-2161. doi:10.2337/dc18-0771.
DEAR FELLOW STOCKHOLDERS,
Tandem Diabetes Care entered the year
fighting for a place in the domestic insulin
pump market, and through steadfast
execution we became a recognized
leader in diabetes technology. This
extraordinary transformation materialized
throughout 2018 and was driven by
strong demand for our t:slim X2™ insulin
pump. This growth was the result of four
key catalysts:
1. Continued appreciation for our, easy-
to-use t:slim X2 platform and its ability
to add new features using remote
software updates,
2. The FDA approval and domestic launch
of Basal-IQ® technology, our first auto-
mated insulin delivery (AID) algorithm,
3. A reduction in the number of insulin
pump manufacturers and associated
available insulin pump options, and
4. Our commercial launch of the t:slim X2
pump in select geographies outside of
the United States.
Independently, each of these had the po-
tential to drive growth during the year. What
resulted was our successful execution across
each of these opportunities, which drove
71% year-over-year sales growth and our
achievement of more than 100% growth in
shipments for the year.
We are equally proud that we made steady
improvement in both operating and gross
margins throughout 2018. This resulted in
our substantial reduction of cash use which,
combined with our elimination of debt,
allowed us to reach the milestone
of generating cash in the fourth quarter—a
full year ahead of our expectations. These
accomplishments further reinforce our
confidence in attaining our long-term
profitability goals.
Our remarkable achievements in 2018 can
be credited to the hard work and dedication
of our employees. Together, we persevered
in support of our mission through challeng-
ing times and as a result have now touched
the lives of nearly 85,000 people who use a
Tandem pump.
At the heart of our Company there is a shared
passion for working to improve the lives of
people with diabetes. With our launch of
Basal-IQ technology, which features a pre-
dictive low glucose suspend algorithm, we
aimed to provide people a meaningful step
in improving therapy management. Basal-
IQ technology utilizes sensor values from
the Dexcom G6 continuous glucose monitor
(CGM) to temporarily suspend insulin when
glucose is predicted to go low and automat-
ically resume insulin delivery when glucose
levels begin to rise. The feedback from
customers using Basal-IQ technology has
exceeded our expectations, and significantly
contributed to our growth in the back half of
the year. We are now working to bring this
novel technology to people in select geogra-
phies outside of the United States in 2019.
We also have our second-generation auto-
mated insulin delivery (AID) system in clini-
cal development. The t:slim X2 pump with
Control-IQ™ technology is an advanced hybrid
closed-loop system that temporarily increas-
es or decreases a user’s programmed basal
insulin to minimize hyper- and hypoglyce-
mia and is intended to improve a user’s time
spent within a targeted glycemic range. It has
also been designed to provide automated
of Executive Chairman after 11 years as
President and Chief Executive Officer, and
has been succeeded by John Sheridan, who
has been the Company’s Executive Vice
President and Chief Operating Officer since
2013. We look forward to continuing to serve
the Company and our stockholders in our
new roles as Kim focuses on our corporate
strategy and John furthers the efforts of our
day-to-day operations.
Today, we are in the strongest place in our
Company’s history. Notably, all of the same
catalysts that drove our growth in 2018 are
still in place: our differentiated pump platform,
automated insulin delivery algorithms, interna-
tional expansion and the underlying creativity,
experience and passion of our employees
to improve the lives of people with diabetes.
Together, they present us with a tremendous
opportunity for the year ahead.
Thank you for your confidence in Tandem as
we continue to support people with diabetes
through relentless innovation and revolution-
ary customer experience.
Kim Blickenstaff
Executive Chairman
John Sheridan
President & CEO
correction boluses, unlike any insulin delivery
system currently on the market, which we
believe will give us a competitive advantage in
the industry.
The pivotal study for the t:slim X2 pump
with Control-IQ technology in users age 14
and above is anticipated to conclude in the
second quarter of 2019, and our goal is to
launch this product in the United States in the
second half of 2019, subject to the success-
ful completion of the study and FDA approval.
We also intend to support studies of the t:slim
X2 pump with Control-IQ technology among
younger pediatric users during 2019.
Beyond 2019, we plan to continue delivering
new innovations to the diabetes community
and are committed to our goal of launching a
new product each year. We’ve now demon-
strated our position as a key innovator in the
insulin pump industry, having launched the first
touchscreen pump in the United States, the
first pump capable of remote feature updates,
the first pump approved as iCGM compati-
ble, and most recently, the first insulin pump
classified by the FDA in a new device category
called Alternate Controller Enabled Infusion
Pumps (ACE pumps). This new classification
of the t:slim X2 pump provides more flexibility
for us as we make improvements to current
products, create new products, and collabo-
rate with best-in-class companies in the de-
velopment of future automated insulin delivery
systems. In addition to AID algorithms, our
product development efforts are also focused
on our t:sport pump, an even smaller pump in
development that’s being designed to operate
via mobile control, and our connected health
initiatives, which are at the intersections of
data management, cloud and mobile technol-
ogies and device interoperability.
As we entered our next phase of growth,
we recognized it was a timely opportunity
for our executive management structure to
grow and evolve with the business. Effective
March 1, Kim Blickenstaff assumed the role
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
(cid:4) 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
(State or other jurisdiction of
incorporation or organization)
11075 Roselle Street
San Diego, California
(Address of principal executive offices)
20-4327508
(I.R.S. Employer
Identification No.)
92121
(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
Common Stock, par value $0.001 per share
Name of Exchange on Which Registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:3) No (cid:4)
Indicate by check if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:4) No (cid:3)
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 (cid:3) No (cid:4)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes (cid:3) No (cid:4)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
emerging growth company. See definitions of “large accelerated filer, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:3)
Non-accelerated filer (cid:4)
Accelerated filer
(cid:4)
Smaller reporting company (cid:4)
Emerging growth company (cid:4)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:4)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:4) No (cid:3)
As of June 29, 2018, the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $1.1 billion based on the closing
price for the common stock of $22.02 on that date. Shares of common stock held by each executive officer, director, and their affiliated stockholders have
been excluded from this calculation as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of February 15, 2019, there were 57,717,618 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2019 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K, are incorporated by reference in Part III, Items
10-14 of this Form 10-K. Except for the portions of the Proxy Statement specifically incorporated by reference in this Form 10-K, the Proxy Statement shall
not be deemed to be filed as part hereof.
[THIS PAGE INTENTIONALLY LEFT BLANK]
TABLE OF CONTENTS
Part I
Business .....................................................................................................................................................................
Item 1
Item 1A Risk Factors ...............................................................................................................................................................
Item 1B Unresolved Staff Comments......................................................................................................................................
Properties ...................................................................................................................................................................
Item 2
Legal Proceedings......................................................................................................................................................
Item 3
Mine Safety Disclosures ............................................................................................................................................
Item 4
Part II
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ...................................................................................................................................................................
Selected Financial Data .............................................................................................................................................
Item 6
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations....................................
Item 7A Quantitative and Qualitative Disclosure About Market Risk ....................................................................................
Consolidated Financial Statements and Supplementary Data ...................................................................................
Item 8
Item 9
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ..................................
Item 9A Controls and Procedures ............................................................................................................................................
Item 9B Other Information ......................................................................................................................................................
Part III
Item 10
Item 11
Item 12
Item 13
Item 14
Part IV
Item 15
Directors, Executive Officers and Corporate Governance ........................................................................................
Executive Compensation ...........................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .................
Certain Relationships and Related Transactions, and Director Independence ..........................................................
Principal Accounting Fees and Services ...................................................................................................................
Exhibits, Financial Statement Schedules...................................................................................................................
Signatures ..................................................................................................................................................................
3
34
61
61
61
61
62
63
64
77
78
104
104
106
107
107
107
107
107
108
113
1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended December 31, 2018, or this Annual Report, contains “forward-
looking statements” within the meaning of the federal securities laws, which statements are subject to considerable risks and
uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private
Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Annual Report, other than
statements of historical fact, are forward-looking statements. You can identify forward-looking statements by the use of words such as
“may,” “will,” “could,” “anticipate,” “expect,” “intend,” “believe,” “continue” or the negative of such terms, or other comparable
terminology. Forward-looking statements also include the assumptions underlying or relating to such statements. In particular,
forward-looking statements contained in this Annual Report relate to, among other things, our future or assumed financial condition,
results of operations, liquidity, trends impacting our financial results, business forecasts and plans, research and product development
plans, manufacturing plans, strategic plans and objectives, capital needs and financing plans, product launches, regulatory
approvals, the impact of changes in the competitive environment, and the application of accounting guidance. We caution you that the
foregoing list may not include all of the forward-looking statements made in this Annual Report.
Our forward-looking statements are based on our management’s current assumptions and expectations about future events and
trends, which affect or may affect our business, strategy, operations or financial performance. Although we believe that these forward-
looking statements are based upon reasonable assumptions, they are subject to numerous known and unknown risks and uncertainties
and are made in light of information currently available to us. Our actual financial condition and results could differ materially from
those anticipated in these forward-looking statements as a result of various factors, including those set forth below under the caption
“Risk Factors” in Part I, Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in
Part II, Item 7, and elsewhere in this Annual Report, as well as in the other reports we file with the Securities and Exchange
Commission, or the SEC. You should read this Annual Report with the understanding that our actual future results may be materially
different from and worse than what we expect.
Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not
possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business
or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any
forward-looking statements.
Forward-looking statements speak only as of the date they were made, and, except to the extent required by law or the rules of
the NASDAQ Global Market, we undertake no obligation to update or review any forward-looking statement because of new
information, future events or other factors.
We qualify all of our forward-looking statements by these cautionary statements.
2
Item 1.
Business
Overview
PART I
We are a medical device company with an innovative approach to the design, development and commercialization of products
for people with insulin-dependent diabetes. We believe our competitive advantage is rooted in our unique consumer-focused approach,
and the incorporation of modern and innovative technology into our product offerings. Our manufacturing, sales and support activities
exclusively focus on our flagship pump platform, the t:slim X2 Insulin Delivery System, or t:slim X2, and our complementary product
offerings. The simple-to-use t:slim X2 is based on our proprietary technology platform and is the smallest durable insulin pump
available. It is the only pump currently available in the United States that is capable of remote feature updates, which positions us well
to address the evolving needs and preferences of differentiated segments of the insulin-dependent diabetes market. By delivering
innovative hardware and software solutions, as well as best-in-class customer support, we aim to improve and simplify the lives of
people with diabetes and their healthcare providers.
We have commercially launched six insulin pumps in the United States since inception, all of which have been developed using
our proprietary technology platform. Three of these pumps have featured continuous glucose monitoring technology, or CGM. In the
past four years, we have shipped approximately 84,000 pumps, over 4,000 of which were in international markets, which is
representative of our estimated global installed customer base on the typical four-year reimbursement cycle.
Domestically, we began commercial sales of our first insulin pump product, t:slim, in August 2012 and subsequently
commercialized t:flex in May 2015, t:slim G4 in September 2015, t:slim X2 in October 2016, t:slim X2 with Dexcom G5 Mobile
CGM integration, or t:slim X2 with G5, in September of 2017 and t:slim X2 with Basal-IQ technology in August 2018. The Basal-IQ
technology is our first-generation Automated Insulin Delivery, or AID, algorithm. This system uses Dexcom’s G6 CGM sensor values
to temporarily suspend insulin delivery to help minimize the frequency and/or duration of hypoglycemic events. In the second quarter
of 2018, the United States Food and Drug Administration, or the FDA, also created a new interoperability designation for integrated
continuous glucose monitoring, or iCGM, devices. The t:slim X2 with Basal-IQ technology was the first insulin pump to receive
approval for iCGM compatibility, which we expect will streamline the regulatory pathway for integration with future iCGM products
as they are approved by the FDA. More recently, in early 2019 the FDA classified our t:slim X2 as the first insulin pump in a new
device category referred to as Alternative Controller Enabled infusion pumps, or ACE pumps. We expect this new classification of the
t:slim X2 will provide us with more flexibility as we make improvements to current products, create new products and collaborate
with third-parties in the development of future AID systems. Interoperability with iCGM and other compatible devices will still
require development effort and business agreements. However, the regulatory process can be lengthy and unpredictable, so we believe
the FDA’s designation of iCGM products and ACE pumps will, collectively, reduce the overall timeline to commercialize
interoperable devices. In the second half of 2018, we began selling the t:slim X2 with G5, in select geographies outside the United
States, including Canada. We have discontinued sales of our original t:slim, t:flex and t:slim G4 pumps, and our t:slim X2 hardware
platform now represents 100% of new pump shipments. However, we continue to provide ongoing service and support for our earlier
products.
All people with type 1 diabetes require daily rapid-acting insulin, but only a subset of people with type 2 diabetes require daily
rapid-acting insulin, as a large majority manage their therapy through improvements in diet and exercise, oral medications, or
injectable therapies such as long acting insulin. According to the Centers for Disease Control and Prevention, or the CDC, 2017
National Diabetes Statistics Report, approximately 23 million people in the United States had diagnosed diabetes, of which type 1
diabetes accounts for approximately 5% to 10%, or approximately 1.2 to 2.3 million people. Of people with type 2 diabetes in the
United States, the CDC reports that approximately 14%, or 3.2 million people, manage their diabetes with insulin only. The
International Diabetes Federation, or the IDF, estimates that in 2017 approximately 425 million people had diabetes worldwide, of
which approximately 10%, or 42.5 million, had type 1. Our target market consists of people in the United States and select
geographies worldwide, who require daily rapid-acting insulin.
Our insulin pump products are generally considered durable medical equipment and have an expected lifespan of at least four
years. In addition to selling insulin pumps, we sell disposable products that are used together with our pumps and replaced every few
days, including cartridges for storing and delivering insulin, and infusion sets that connect the insulin pump to a user’s body.
3
In the United States, our insulin pumps are compatible with the Tandem Device Updater, a revolutionary tool that allows pump
users to update their pumps’ software quickly and easily from a personal computer. The Tandem Device Updater provides our in-
warranty domestic customers potential access to new and enhanced features and functionality faster than the industry has been able to
in the past. The first use of our Tandem Device Updater was for our deployment of the latest t:slim software to in-warranty t:slim
pumps purchased before April 2015. Since that time, we set a new standard of care in our industry by offering all existing in-warranty
t:slim X2 customers in the United States two significant software updates: (i) integration with the Dexcom G5 Mobile CGM system in
September 2017; and (ii) an upgrade to our new Basal-IQ technology and integration with Dexcom’s G6 CGM in August 2018. Our
Tandem Device Updater positions us to bring future innovations and AID algorithms to t:slim X2 customers, independent of the
typical four-year insurance pump reimbursement cycle. Though we have not utilized our Tandem Device Updater to perform software
updates for devices outside the United States, we are currently developing that capability, and intend to do so in the future.
Our innovative approach to product design and development is consumer-focused and based on our extensive study of
behavioral sciences, as we believe the user is the primary decision maker when purchasing an insulin pump, and the healthcare
provider is a key influencer. Our behavioral science research consists of interviews, focus groups and online surveys to understand
what people with diabetes, their caregivers and healthcare providers are seeking in order to improve diabetes therapy management. We
also apply the science of human factors to our design and development process, which seeks to optimize our devices, so that users can
successfully operate them in their intended environment.
We developed our products to provide the specific features that people with insulin-dependent diabetes seek in a next-generation
insulin pump. Our proprietary technology platform allows us to design the slimmest and smallest durable insulin pumps on the market,
without sacrificing insulin capacity. Our t:slim X2 platform features our patented Micro-Delivery technology, a miniaturized pumping
mechanism that draws insulin from a flexible bag within the pump’s cartridge, rather than relying on a syringe and plunger
mechanism. It also features an easy-to-navigate software architecture and a vivid color touchscreen. In addition, it features an
advanced Bluetooth radio capable of communicating with multiple compatible devices, such as a CGM sensor, and possibly a blood
glucose meter or mobile device application. Our platform has a micro-USB connection that supports a rechargeable battery and, in the
United States, software updates through the Tandem Device Updater. In addition, this connectivity allows for uploads to our
t:connect Diabetes Management Application, or t:connect, in the United States, and other compatible diabetes management
applications. t:connect is our custom cloud-based data management application that provides customers and healthcare providers a
fast, easy and visual way to display therapy management data from the pump and supported blood glucose meters. In April 2017, we
launched the t:connect HCP Portal, which is designed to streamline healthcare providers’ use of the original t:connect application and
improve office efficiency.
Based on customer surveys, approximately half of our domestic customers are new to insulin pump therapy, and the average age
of our existing domestic customers is 32 years old, with relatively equal distribution between men and women. Of our customers who
converted from another manufacturers’ pump, the greatest percentage converted from Medtronic plc, or Medtronic, followed by
Animas Corporation, or Animas. In the fourth quarter of 2017, and throughout 2018, we saw a meaningful increase in our sales to
former Animas pump users.
For the years ended December 31, 2018, 2017 and 2016, our consolidated sales were $183.9 million, $107.6 million, and $84.2
million, respectively. For the years ended December 31, 2018, 2017 and 2016, our net loss was $122.6 million, $73.0 million, and
$83.4 million, respectively. Worldwide pump sales accounted for 67%, 66%, and 74% of our total sales, respectively, for the years
ended December 31, 2018, 2017 and 2016, while pump-related supplies and accessories accounted for the remainder in each year. Our
accumulated deficit as of December 31, 2018 and December 31, 2017 was $600.1 million and $477.6 million, respectively. This
included $147.4 million and $56.9 million of non-cash stock-based compensation charges and non-cash changes in the fair value of
common stock warrants as of December 31, 2018 and 2017, respectively.
In the United States, we have rapidly increased sales since our commercial launch by expanding our sales, clinical and
marketing organization, by developing, commercializing and marketing multiple differentiated products that utilize our proprietary
technology platform and consumer-focused approach, and by providing strong customer support. More recently, our sales have also
rapidly increased following the scaled launch of t:slim X2 in geographies outside the United States. We believe that by demonstrating
our product benefits and the shortcomings of existing insulin therapies, more people will choose our insulin pumps for their therapy
needs, allowing us to further penetrate and expand the market both domestically and outside of the United States. We also believe we
are well positioned to address consumers’ needs and preferences with our current products and products under development and by
offering customers access to our future innovations through the Tandem Device Updater, as they are approved by the FDA, and as we
develop the capability to offer the Tandem Device Updater outside the United States. At the same time, by rapidly innovating and
offering new product features and benefits through the t:slim X2 platform, we are able to leverage a shared global manufacturing and
supply chain infrastructure. In the United States, we are able to leverage a single sales, marketing, and clinical organization, as well as
our domestic customer support services. In Canada, we have a separate sales organization and customer support infrastructure, both of
which benefit from close collaboration with our United States organization. In other international geographies, we have contracted
with experienced distribution partners to commercialize and support our t:slim X2 platform.
4
Our headquarters and our manufacturing facility are located in San Diego, California and we employed 653 full-time employees
as of December 31, 2018.
The Market
Diabetes is a chronic, life-threatening disease for which there is no known cure. The disease is categorized by improper function
of the pancreas when it either does not produce enough insulin or the body cannot effectively use the insulin it produces. Insulin is a
life-sustaining hormone that allows cells in the body to absorb glucose from blood and convert it to energy. As a result, a person with
diabetes cannot utilize the glucose properly and it continues to accumulate in the blood. If not closely monitored and properly treated,
diabetes can lead to serious medical complications, including damage to various tissues and organs, seizures, coma and death.
The IDF estimates that in 2017, approximately 425 million people had diabetes worldwide and that by 2045, this number will
increase to 629 million people worldwide. According to the CDC, approximately 23 million people in the United States have
diagnosed diabetes.
There are two primary types of diabetes:
•
•
The IDF estimates that people with type 1 diabetes represent approximately 10% of the diabetes population worldwide, or
approximately 42.5 million people. Similarly, the CDC estimates that people with type 1 diabetes represent approximately 5%
to 10% of individuals with diagnosed diabetes in the United States, or approximately 1.2 to 2.3 million people.
The IDF estimates that people with type 2 diabetes represent approximately 90% of the diabetes population worldwide, or
approximately 382.5 million people. Similarly, the CDC estimates that people with type 2 diabetes represent approximately
90% to 95% of individuals with diagnosed diabetes in the United States, or approximately 20.7 to 21.8 million people.
Initially, many people with type 2 diabetes attempt to manage their diabetes with improvements in diet, exercise and oral
medications. However, as their diabetes advances, some patients progress to requiring injectable therapies, such as long-
acting insulin, and a subset of this population will require daily rapid-acting insulin therapy. Approximately 14% of people
with type 2 diabetes in the United States, or 3.2 million people, manage their diabetes with insulin only.
Throughout this Annual Report, we refer to people with type 1 diabetes and people with type 2 diabetes who require daily rapid
acting insulin as people with insulin-dependent diabetes.
People with insulin-dependent diabetes require intensive insulin therapy to manage their blood glucose levels within a healthy
range, which is typically between 70-120 milligrams per deciliter, or mg/dL. Blood glucose levels can be affected by many factors,
such as type or quantity of food eaten, illness, stress and exercise. Hypoglycemia, or low blood glucose levels, can cause a variety of
long-term effects or complications, including damage to various tissues and organs, seizures, coma or death. Hyperglycemia, or high
blood glucose levels, can also cause a variety of long-term effects or complications, including cardiovascular disease and damage to
various tissues and organs. It can also cause the emergency condition ketoacidosis, which can result in vomiting, shortness of breath,
coma or death. According to the CDC, in 2014 there were approximately 245,000 emergency department visits for adults with
hypoglycemia, and approximately 207,000 visits for hyperglycemic crisis in the United States.
There are two primary therapies used by people with insulin-dependent diabetes, insulin injections and insulin pumps, each of
which is designed to supplement or replace the insulin-producing function of the pancreas.
MDI Therapy: The use of insulin injections is often referred to as Multiple Daily Injection, or MDI, therapy. MDI therapy
involves the administration of a rapid-acting insulin before meals, or bolus insulin, to bring blood glucose levels down into the healthy
range. MDI therapy may also require a separate injection of a long-acting insulin, or basal insulin, to control glucose levels between
meals; this type of insulin is typically taken once or twice per day.
MDI can be administered using a traditional needle and syringe with a vial of insulin, or with an insulin pen. When using a
traditional needle and syringe, insulin is drawn from a vial to fill the syringe. It is then injected into the person’s body by manually
depressing the syringe’s plunger which pushes against the volume of insulin and dispenses it through the needle and into the person’s
subcutaneous tissue.
By comparison, to inject insulin using an insulin pen, the person selects a requested amount of insulin using a dial. Next, the
person depresses a button, rather than pushing against a plunger, to inject the insulin. Some insulin pens come prefilled with insulin
and are disposable. However, others are reusable for extended periods and insulin is inserted into the pen in the form of a prefilled vial
that is then dispensed using the pen. Also, more recently, people have begun using insulin pens with additional features, which are
5
referred to as smart pens. These devices may feature connectivity with mobile apps, and may automatically import glucose readings,
calculate recommended dosages, and keep track of insulin dose history.
Insulin Pump Therapy: Insulin pumps are used to perform what is often referred to as continuous subcutaneous insulin
infusion, or insulin pump therapy. Generally, durable insulin pumps use a programmable device and an infusion set to administer
insulin into the person’s body, while patch insulin pumps are disposable and adhere to the body without an infusion set.
Insulin pump therapy uses only rapid-acting insulin to fulfill both mealtime (bolus) and background (basal) requirements.
Insulin pump therapy allows a person to customize their bolus and basal insulin doses to meet their insulin needs throughout the day
and is intended to more closely resemble the physiologic function of a healthy pancreas.
Insulin pump therapy can provide a person with insulin-dependent diabetes with benefits when used independently or in
conjunction with CGM. A pump featuring CGM is known as a sensor augmented pump, or SAP, which allows the pump to receive
CGM data directly from a wearable sensor. In addition, SAPs may feature an AID algorithm that is designed to automatically adjust a
person’s insulin delivery based on their CGM trends to help minimize the frequency and/or duration of hypoglycemia and/or
hyperglycemic events. Insulin pumps may also feature connectivity with mobile apps and data management applications, which are
used by the pump user, caregivers and healthcare providers, to quickly and easily identify meaningful insights and trends, allowing
them to refine therapy and lifestyle choices for better management of their diabetes.
Insulin pump therapy has been shown to provide people with insulin-dependent diabetes with numerous advantages relative to
MDI therapy. The following chart illustrates some of the key advantages and disadvantages of using MDI therapy versus insulin pump
therapy:
6
Comparison of MDI Therapy vs. Insulin Pump Therapy
Therapy
Advantages
Disadvantages
MDI
(cid:5) Less training and shorter time to educate
(cid:5) Requires injections up to seven times per
(cid:5) Less cost (however, insulin pens and
smart pens are more expensive than a
traditional needle and syringe)
(cid:5) Delivers insulin less accurately than
insulin pumps
day
(cid:5) Lower risk of technological malfunction
(cid:5) Results in greater variability in blood
glucose levels or less accurate glycemic
control
(cid:5) Requires more planning around and
restrictions regarding meals and exercise
Insulin Pump
(cid:5) Eliminates individual insulin injections
(cid:5) Requires intensive education on insulin
(cid:5) Delivers insulin more accurately and
precisely than injections
(cid:5) Wearing a pump can be bothersome
pump therapy and management
(cid:5) Often improves HbA1c, a common
(cid:5) More costly
measure of blood glucose levels over time
(cid:5) Risk of diabetic ketoacidosis if the
catheter comes out and insulin infusion is
interrupted
(cid:5) Fewer large swings in blood glucose
levels
(cid:5) Provides greater flexibility with meals,
exercise and daily schedules
(cid:5) Can improve quality of life
(cid:5) Reduces severe low blood glucose
episodes
(cid:5) Eliminates unpredictable effects of
intermediate or long-acting insulin
(cid:5) Allows exercise without having to eat
large amounts of carbohydrates, as insulin
delivery can be adjusted
(cid:5) Provides access to AID features
According to the American Diabetes Association, it is estimated that in 2015, between 750,000 and 1 million people worldwide
used an insulin pump. Domestically, we estimate that 550,000 people in the United States use an insulin pump, of which
approximately 80% have type 1 diabetes. There are a variety of insulin pump manufacturers worldwide, while domestically, we are
currently one of only two commercial durable insulin pump manufacturers and there is one programmable commercial patch insulin
pump manufacturer.
We believe that the distinct advantages and increased awareness of insulin pump therapy as compared to other available insulin
therapies will continue to generate demand for insulin pump devices and pump-related supplies. We also believe that the adoption of
insulin pump therapy would have been even greater if not for the significant and fundamental perceived shortcomings of durable
syringe-and-plunger insulin pumps currently available, which we refer to as traditional pumps. We further believe that recent and
ongoing developments in the use of CGM technology and AID algorithms in conjunction with insulin pump therapy will continue to
provide people with insulin-dependent diabetes benefits that will make insulin pump therapy an even more attractive treatment
alternative.
7
The Opportunity
The foundation of our consumer-focused approach is behavioral sciences, through which we seek to better understand the
opportunity within the insulin-dependent diabetes market through research. This opportunity includes both the introduction of the
benefits of pump therapy to people using MDI and the introduction of the features and benefits of our pumps to people who use
traditional pumps. We have conducted extensive research obtained from interviews, focus groups and online surveys to understand
what people with diabetes, their caregivers and healthcare providers are seeking to improve in diabetes therapy management. Based on
our research, we believe that the limited adoption of insulin pump therapy by people with insulin-dependent diabetes has been largely
due to the shortcomings of traditional pumps currently available. These shortcomings include:
Antiquated style. While consumer electronic devices have rapidly evolved in form and function over the past decade, traditional
pumps have not achieved similar advances. Our market research has shown that consumers believe traditional pumps resemble dated
consumer technology, as they generally still feature small display screens, push-button interfaces, plastic cases and disposable
batteries. Because an insulin pump must be used multiple times throughout the day, often in social settings, its style and appearance
are important to users. Our market research has shown that traditional insulin pump users frequently report being embarrassed by the
style of their traditional pump. For current MDI users, the style of traditional pumps is often cited as a reason for not adopting pump
therapy.
Not adaptable. Traditional pumps are typically sold as a single-product offering that are then iterated to add features, rather than
being designed as a technology platform that is easily updatable to support new features and functionality as they are developed and
approved by the FDA. We believe this is due to hardware and user interface limitations that prevent traditional pumps from being
easily updatable to provide new feature offerings. As a result, consumers have had limited product choices from pump manufacturers,
and healthcare providers are required to learn a greater number of user interfaces. We believe the lack of adaptability of traditional
pump platforms has been a restricting factor in offering people with diabetes differentiated product features to best meet their therapy
needs.
Bulky size. Our market research has shown that consumers view traditional pumps as large, bulky and inconvenient to carry or
wear, especially when compared to modern consumer electronic devices, such as smartphones. The size of the pump further
contributes to users being embarrassed by the pump. This complaint, along with concerns relating to how and where the pump can be
utilized due to its size and shape, is frequently cited among users of traditional pumps. For current MDI users, the size of traditional
pumps is often communicated as a reason for not adopting pump therapy.
Difficult to learn and teach. Traditional pumps often rely on complicated and outdated technology and are not intuitive to
operate. Our research has shown that it can take several days to competently learn how to use traditional pumps, and when an AID
feature is offered, the training time may take even longer. This may lead to frustration, frequent mistakes and additional training, each
of which may discourage adoption. We believe difficult-to-use traditional pumps result in a higher frequency of calls by the user to the
pump manufacturer or their healthcare provider for support, adding both frustration and cost to the learning process. We also believe
that the complicated functionality of traditional pumps significantly limits the willingness of healthcare providers to recommend
insulin pump therapy to many patients and limits the number of patients they consider as candidates for insulin pump therapy.
Complicated to use. Traditional pumps are designed with linear software menus, which require the user to follow display
screens sequentially, limiting their ability to access information within workflows or easily return to the starting point. Most traditional
pumps require users to scroll through numerous menus and input multiple commands to make selections. This process, which must be
performed multiple times per day, can be frustrating and time-consuming. It may also lead to added complexity when a user is
programming and operating an AID feature. Our research has shown that the complicated nature of the process can lead to confusion,
frustration and fear of making mistakes with the pump, which in turn can limit the user’s willingness to take advantage of a pump’s
features, or even discourage use entirely.
8
Pump mechanism limitations. Traditional pumps utilize a mechanism in which a lead screw drives a plunger to deliver insulin.
This design limits the ability to reduce the size of the pump due to the length and diameter of the syringe and lead screw.
Traditional Pump Mechanism
We believe that these shortcomings of traditional pumps have limited the adoption of pump therapy. By addressing these issues,
there is a meaningful opportunity to not only motivate MDI users to adopt pump therapy, but also to respond to the concerns and
unmet needs of traditional insulin pump users thereby encouraging increased demand for our pumps.
Our Solution
We develop our insulin pump technology and related product offerings using a consumer-focused approach. We initially rely on
the use of behavioral sciences, including extensive research to ascertain what people with insulin-dependent diabetes require and
prefer from their diabetes therapy. We then look to modern consumer technology for inspiration and design our hardware and software
solutions to meet the specific demands of people with diabetes. Our development process then applies the science of human factors,
which optimizes a device or system to the intended user through iterative usability and design refinement. This multi-step approach
has resulted in products that provide users with the distinct features and functionality they seek and in a manner that makes the
features usable and intuitive. All of our insulin pump products were developed using this customer-focused approach, as were our
related product offerings, including the Tandem Device Updater, t:connect and our customized t:lock connector, which is used to
connect our pump cartridge to our infusion set offerings. We expect to continue to utilize this approach as we develop new product
offerings and innovations.
Our flagship pump platform, t:slim X2, which we believe addresses the shortcomings of currently available traditional pumps,
features:
Contemporary style. t:slim X2, as well as our products under development, has the look and feel of a modern consumer
electronic device, such as a smartphone. Relying on extensive consumer input and feedback received during the development process,
we believe the modern and innovative design of our products addresses the embarrassing appearance-related concerns of insulin pump
users. Key product features such as a high-resolution, color touchscreen with shatter-resistant glass, aluminum casing and
rechargeable battery, make t:slim X2 unique in the insulin pump market.
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Our t:slim X2 Insulin Pump Form Factor (Actual Size)
Adaptable platform. Our t:slim X2 platform is highly adaptable as a result of a number of features that are inherent within our
proprietary technology, including our easy-to-navigate software architecture and touchscreen user interface. Our t:slim X2 is also
compatible with the Tandem Device Updater, which is a tool currently available in the United States that allows pump users to update
their pumps’ software quickly and easily from a personal computer. This tool uniquely allowed us to bring new features and benefits,
such as CGM integration and our Basal-IQ technology to customers within their typical four-year insurance pump replacement cycle.
It also positions us to bring future innovations and AID algorithms to t:slim X2 customers both domestically and outside of the United
States. Our touchscreen also allows us to efficiently implement new language functionality; t:slim X2 is currently available in seven
different languages. We believe the adaptability of our pump platform uniquely positions us to address the needs and preferences of
people with insulin-dependent diabetes, and to do so quickly as those needs and preferences change and the functionality of our
products evolves.
Compact size. With a narrow profile, similar to many smartphones, our t:slim X2 can easily and discreetly fit into a pocket.
t:slim X2 is the slimmest and smallest durable insulin pump on the market, while still offering a cartridge with 300 units of insulin.
More specifically, our t:slim X2 is 38% smaller than the newest insulin pump form factor offered by our leading competitor. The size
and shape of our t:slim X2 was designed to provide increased flexibility with respect to how and where a pump can be worn. Based on
extensive consumer input during development, we believe our products address both the embarrassment and functionality concerns
related to the size and inconvenience of carrying a traditional pump.
10
t:slim X2 Profile (Actual Size)
Easy to learn and teach. Our technology platform allows for the use of a color touchscreen and easy-to-navigate software
architecture, providing users intuitive access to the key functions of their pumps directly from the home screen. Insulin pump users
can quickly learn how to efficiently navigate their pumps’ software, thereby enabling healthcare providers to spend less time teaching
a person how to use the pump and more time improving management of their diabetes. We believe these features also allow healthcare
providers to more efficiently train people to use our pump and have a higher degree of confidence that users can successfully operate
our pump, including its more advanced features, such as our Basal-IQ technology. Our touchscreen technology also allows us to offer
our t:simulator App, which permits anyone to experience our easy-to-navigate software for any of our pumps free of charge on a
mobile device. We believe the ease with which our pump can be learned and taught, and the accessibility of our t:simulator App that
broadly demonstrates our software technology, will help attract consumers who may have been frustrated or intimidated by traditional
pumps.
t:simulator App Accessible Through Mobile Device
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Intuitive to use. Similar to what is found in modern consumer electronic devices, the embedded software displayed on our color
touchscreen features intuitive and commonly interpreted colors, language, icons and feedback. Our software also features numerous
shortcuts, including a simple way to return to the home screen and view critical information for therapy management. These features
were designed to enable users to operate their pump more efficiently and with greater confidence, and to expand the set of therapy
features they regularly utilize. Users can also execute most tasks in fewer steps than traditional pumps, which we believe further
encourages people to use more advanced pump features. For example, our Basal-IQ technology feature, adds only one new screen. We
believe the intuitive features of our pump also allow users to more efficiently manage their diabetes without fear or frustration.
Easy-to-Navigate Pump Software Architecture
Innovative technology. Our Micro-Delivery technology is unique compared to traditional pumps. Its miniaturized pumping
mechanism draws insulin from a flexible bag within the pump’s cartridge rather than relying on a mechanical syringe and lead screw
mechanism. Our technology was tested under both typical and extreme operating conditions and is designed to last for at least the
anticipated four-year warranty of the pump. Our technology allows us to reduce the size of the device as compared to traditional
pumps, making t:slim X2 the slimmest and smallest durable insulin pump on the market. In addition, our technology is capable of
delivering the smallest increment of insulin compared to any pump currently available, which allows insulin therapy to be
individualized for each user.
Quick Access to Pump History
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Our Insulin Pump Mechanism
The t:slim X2 features a micro-USB connection that supports a rapid rechargeable battery and uploads to t:connect, both of
which can be performed without disconnecting or interrupting insulin delivery. This connection also supports software updates
through the Tandem Device Updater.
We believe the t:slim X2 platform will allow us to further penetrate and expand the insulin pump therapy market by addressing
the specific product and technology limitations associated with traditional pumps that have been raised by people with diabetes, their
caregivers and healthcare providers. We also believe our technology under development provides us with the opportunity to address
unmet needs in the insulin-dependent diabetes market, including further advancements in AID and device miniaturization.
Our Strategy
Our goal is to significantly expand and further penetrate the insulin-dependent diabetes market and become the leading provider
of insulin pump therapy by focusing on both consumer and clinical needs. We believe we are uniquely positioned to address
differentiated segments of the insulin-dependent diabetes market by continually using behavioral sciences to determine what people
with insulin-dependent diabetes and healthcare providers desire from insulin therapy, and by offering an adaptable insulin pump that
can provide features and functionality to respond to evolving needs and preferences. At the same time, by rapidly innovating and
offering new product features and benefits through the t:slim X2 platform, we are also able to leverage a shared global manufacturing
and supply chain infrastructure. In Canada, we have a separate sales organization and customer support infrastructure, both of which
benefit from close collaboration with our United States organization. In other international geographies, we contract with experienced
distribution partners to commercialize and support our t:slim X2 platform.
To achieve our goal, we intend to pursue the following business strategies:
Drive domestic adoption of our products through our sales, marketing and clinical infrastructure. We have achieved
commercial success by investing in the development of our domestic sales, marketing and clinical infrastructure. With this base
infrastructure, we believe we are well-positioned to introduce our products to more people with insulin-dependent diabetes, their
caregivers and healthcare providers, while continuing to provide the highest level of customer service. For example, we are leveraging
our infrastructure by marketing our new products, including t:slim X2 with Basal-IQ, to primarily the same healthcare providers as our
previous pump products, thereby increasing our efficiency. We believe our continued investments in this infrastructure, when
combined with the launch and marketing of new products, will drive continued adoption of our products, while efficiently increasing
our revenues over the long-term.
Drive adoption of our products outside of the United States through our Canadian sales and customer support
infrastructure, and through our distribution arrangements. We have invested in a small direct sales and customer support
infrastructure for our new commercialization efforts in Canada. In other select international geographies, we have contracted with
experienced insulin pump distribution partners who are responsible for sales and customer support services in specific geographies.
This strategy allowed us to quickly establish access to international markets and support the needs of more people with diabetes
outside the United States without the upfront investment and complexities of creating a local infrastructure in each location. We intend
to continue to evaluate opportunities to expand into additional international geographies, either directly or through independent
distributors.
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Promote awareness of our products to consumers, their caregivers and healthcare providers. Our products were specifically
designed to address the shortcomings of currently available technologies that we believe have limited the adoption of insulin pump
therapy. We intend to continue our direct-to-consumer marketing to promote the insulin therapy features and functionalities offered by
our products through our website, the use of social media and online advertising tools, our t:simulator App and motivational
spokespeople at industry forums and events. We also expect to leverage our domestic and Canadian sales and clinical forces, together
with our marketing specialists, to cultivate relationships with diabetes clinics, insulin-prescribing healthcare professionals and other
key opinion leaders. By promoting awareness of our products, we believe we will be able to attract users of our competitors’ insulin
pump products, as well other pump therapies and MDI, to our products.
Advance our clinical activities to further demonstrate that use of our pump products may contribute to improved clinical
outcomes. Data published in the Diabetes Care medical journal from a pivotal study of our t:slim X2 with Basal-IQ technology
demonstrated a significant reduction in hypoglycemia without rebound hyperglycemia, compared to time on a t:slim X2 Pump with
integrated CGM and no automated insulin suspension. In addition, data analyzed from t:connect suggests that use of our pump
products may provide users with improved clinical outcomes. For example, we published retrospective user data comparing our t:slim
G4 SAP and a leading competitor’s SAP. Our SAP demonstrated statistically significant clinical advantages, including reduced
hypoglycemia, increased time in range, and improved overall glycemic control, despite approximately half of our competitors’ SAP
users actively using a feature that suspends insulin delivery if blood glucose levels fall below a preset threshold. This study suggests
that our simple-to-use touchscreen interface may translate to improved clinical outcomes for people with insulin-dependent diabetes.
We also continue to be actively involved in multiple clinical trials supporting the use of our AID products in development, which are
designed to demonstrate the clinical benefits associated with these products. We plan to continue to invest in clinical activities
intended to demonstrate that the use of our products contributes to improved clinical outcomes.
Continue to innovate to provide products that address the unmet needs of people in the insulin-dependent diabetes market.
We believe the t:slim X2 platform allows us to provide the most sophisticated and intuitive insulin pump therapy on the market. In
addition, our Tandem Device Updater, which is currently available in the United States, is designed to allow pump users to quickly
and easily update their pump’s software from a personal computer. We successfully demonstrated the utility of this tool in the third
quarter of 2017 when, following FDA approval, we simultaneously offered Dexcom G5 Mobile CGM integration to both existing and
new t:slim X2 users. Following FDA approval of our Basal-IQ technology, we were able to leverage the t:slim X2 platform to allow
in-warranty customers to update their pumps’ software to include our first AID algorithm. This eliminated the need for disruptive and
costly trade-in programs to upgrade hardware to newer platforms. Historically, software updates offered through the Tandem Device
Updater have been at no cost, however in the future we may opt to apply charges for updates in certain circumstances. We also intend
to offer use of the Tandem Device Updater to customers outside the United States, subject to any required regulatory approvals and
our compliance with applicable privacy regulations in specific international geographies. In addition, we plan to leverage the t:slim X2
platform to continue to pursue advances in AID, including through strategic agreements and commercial product development efforts.
As examples of these efforts, we have entered into development agreements with Dexcom, Inc., or Dexcom, to allow the integration of
our insulin pumps with Dexcom’s currently-available CGM systems. We also entered into a license agreement with TypeZero
Technologies, LLC, or TypeZero, which was acquired by Dexcom in August 2018, to allow the integration of TypeZero’s AID
algorithms. In addition, we intend to continue to explore additional features, functionality and mobile applications for the t:slim X2
platform, as well as a next-generation pump platform, in order to address differentiated segments of the insulin-dependent diabetes
market.
Invest in our consumer-focused approach. We believe our consumer-focused approach to product design, marketing and
customer care is a key differentiator. Our extensive behavioral science research involving people with diabetes, their caregivers and
healthcare providers has driven the design and development of our products and customer care model. This approach allows us to add
the product features most requested by people with insulin-dependent diabetes, thereby affording the consumer the opportunity to
more efficiently manage their diabetes. We will continue to apply the study of behavioral sciences throughout the design, development
and continuous improvement of our products, as well as in the identification of work flow and process improvements and to aid in our
customer retention efforts. We will continue to invest in our consumer-focused approach throughout our business.
Broaden direct access to third-party payor reimbursement for our products in the United States. We believe third-party
reimbursement is an important determinant in driving consumer adoption of insulin pump therapy. We also believe customer and
healthcare provider interest in our products is an important factor that enhances our prospect of contracting with third-party payors.
We intend to intensify our efforts to encourage third-party payors to establish direct reimbursement for our products as we expand our
market presence and product offerings. We may also pursue additional reimbursement for product features currently in development,
such as advanced AID algorithms. In addition, we also plan to participate in clinical studies to demonstrate the benefits of our
products relative to other pump products and therapies as a way to gain support from third-party payors.
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Leverage our manufacturing operations to achieve cost and production efficiencies. We manufacture our products at our
facilities located in San Diego, California. We utilize a semi-automated manufacturing process for our pump products and disposable
cartridges. We have significantly increased our manufacturing output since we began commercialization of our products. During 2017,
we relocated our manufacturing operations to our new, 50,000 square foot Barnes Canyon facility, which became fully operational at
the beginning of 2018. This facility doubled our previous manufacturing capacity for both insulin pumps and cartridges and expanded
warehousing for infusion set supplies. The facility is designed to maximize efficiencies in our manufacturing processes and workflows
and allow us to further expand our production capacity by replicating our production lines within the same facility. Continued growth
in the demand for our products will likely require that we expand our manufacturing, warehouse and logistics facilities in the future.
As demand for our products increases, we intend to drive operational efficiencies by leveraging our manufacturing infrastructure,
which we expect will result in improvements in gross margin over the long-term. In addition, because the t:slim X2 platform is highly
adaptable and can provide new features and functionality through remote software updates, our current systems will not need to
change significantly to support new features as they are approved by the FDA, which we expect will create additional manufacturing
efficiencies for our current platform.
Our Technology Platform
We have developed an innovative technology platform that we believe is fundamental to the ease-of-use and functionality of
t:slim X2 and will provide the foundation for the development of our future products. The key elements of our current technology
platform are:
Advanced core technology. Our patented Micro-Delivery technology is our miniaturized pumping mechanism, which is unique
compared to traditional pumps. It allows us to reduce the size of the pump as compared to traditional pumps. It was also designed to
provide precise dosing as frequently as every five minutes and in increments as small as 0.001 u/hr, or units per hour, as compared to
the smallest increment available in traditional pumps, which is 0.025 u/hr. This technology also helps prevent unintentional insulin
delivery by limiting the volume of insulin that can be delivered to a person at any one time.
Easy-to-navigate embedded software architecture. Our technology platform was developed using an iterative human factors
design process that results in the intuitive software architecture which features commonly interpreted colors, language, icons and
feedback. This allows the user to easily navigate the system and perform necessary functions in fewer steps than traditional pumps,
including a one-touch method to return to the home screen. Our intuitive software architecture is designed to facilitate ease of
learning, teaching and use for traditional pump functionality as well as more advanced features such as AID. The flexible software
architecture also facilitates updates to the software through the Tandem Device Updater, which is currently available in the United
States, without requiring any hardware changes.
Vivid color touchscreen. Our full color touchscreen allows users to access a streamlined, easy-to-use interface that promotes
user confidence. The high-grade, shatter-resistant glass touchscreen provides the user the ability to enter numbers and access features
directly, rather than scrolling through numerous screens and options. The touchscreen facilitates safety features that were designed to
prevent unintended pump operations. The touchscreen also supports enhanced visual and tactile feedback.
Lithium-polymer rechargeable battery technology. Our products are the first and only insulin pumps to use a rechargeable
battery, unlike traditional pumps that rely on expensive disposable batteries. By using a built-in rechargeable battery, we eliminate the
risk of losing personal settings associated with replacing batteries. Our lithium-polymer rechargeable battery charges rapidly with a
standard micro-USB connection, and a full charge lasts for five to seven days depending on CGM use. Users report that they keep
their battery powered by charging it for just 10 to 15 minutes each day, often while showering or commuting with the use of the car
charger. Our battery allows for accessible monitoring of the current charge level on the device’s home screen. Our battery has also
been tested to last for the four-year warranty life of the pump.
Compatibility and connectivity. Our PC- and Mac-compatible, cloud-based data management application, t:connect, provides
our domestic insulin pump users a fast, easy and visual way to display therapy management data from all of our pump products and
supported blood glucose meters. Additionally, our pump platform enables rapid data uploads through a micro-USB connection,
without interrupting insulin delivery. Internationally, we offer our customers connectivity to a third-party diabetes management
application. Providing connectivity to a data management platform empowers people with diabetes, as well as their caregivers and
healthcare providers, to quickly and easily identify meaningful insights and trends, allowing them to fine-tune therapy and lifestyle
choices for better control of their diabetes.
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Our Products
We have commercially launched six insulin pumps since inception, all of which have been developed using our proprietary
technology platform. Domestically, we began commercial sales of our first product, t:slim, in August 2012 and subsequently
commercialized t:flex in May 2015, t:slim G4 in September 2015, t:slim X2 in October 2016, t:slim X2 with G5 integration in
September of 2017 and t:slim X2 with Basal-IQ technology in August 2018. Internationally, we launched the t:slim X2 with G5 in
September 2018. Our t:slim X2 hardware platform now represents 100% of new pump shipments, but we continue to provide ongoing
service and support to existing t:slim, t:slim G4 and t:flex customers.
Commercial Products
In the past four years, we have shipped approximately 84,000 pumps, over 4,000 of which were in international markets, which
is representative of our estimated global installed customer based on the typical four-year insurance pump reimbursement cycle.
Today, our commercial efforts exclusively focus on the manufacturing, sale and support of our flagship pump platform, the t:slim X2
insulin delivery system.
The t:slim X2 Insulin Delivery System
The t:slim X2 insulin delivery system is our proprietary pump platform comprised of a t:slim X2 pump, its 300-unit disposable
insulin cartridge and an infusion set. We began commercial sales of t:slim X2 in the United States in the fourth quarter of 2016.
Measuring 2.0 x 3.1 x 0.6 inches, t:slim X2 is the slimmest and smallest durable insulin pump on the market. It is also the only
commercially available insulin pump featuring optional integration with Dexcom’s CGM. CGM is a therapy that provides users with
real-time access to their glucose levels as well as trend information. Our agreements with Dexcom provide us non-exclusive licenses
to integrate our product platform with the Dexcom G5 Mobile CGM System and Dexcom G6 CGM System.
t:slim X2 also features new hardware advancements, including a two-way Bluetooth wireless technology radio for
communicating with more than one external device at a time. Domestically, we sell the t:slim X2 with Basal-IQ technology, and
outside the United States, we sell the t:slim X2 with G5.
Consistent with our prior generation insulin pumps, the t:slim X2 pump platform features a vivid, full color touchscreen made of
high-grade, shatter-resistant glass that provides users the ability to enter numbers and access features directly, rather than scrolling
through a list of numbers and screens. We designed the streamlined, user-friendly interface of our products to facilitate rapid access to
the features people use most, such as delivering a bolus, viewing remaining insulin on board, viewing insulin cartridge volume and
monitoring current pump status and settings. The interface also includes an Options Menu that provides quick and intuitive navigation
to key insulin management features, pump settings, cartridge loading and use history. With just a simple tap of our logo on the pump
touchscreen the user immediately returns to the home screen where important administrative features are displayed, including the
current battery charge level, a time and date display, and an LED indicator for alerts, alarms and reminders.
In addition, the t:slim X2 allows for the creation of multiple customizable personal profiles, each supporting up to 16 timed
insulin delivery settings. This feature allows users to manage their day-to-day insulin therapy with less effort and interruption. Users
can quickly and easily adjust insulin settings based on a number of key factors, including basal rate, correction factor, insulin-to-
carbohydrate ratio and target blood glucose levels.
Furthermore, the t:slim X2 features a black aluminum case and chrome trim, giving it the look and feel of a modern consumer
electronic device, such as a smartphone. It is also watertight, with an IPX7 rating, eliminating concerns about accidentally getting it
wet. The t:slim X2 also features a micro-USB connection that supports charging the lithium-polymer battery, software updates
through the Tandem Device Updater in the United States, and rapid data uploads to either t:connect or the third-party Glooko diabetes
data management application.
In February 2019, we received FDA approval of our de novo application to down-classify the t:slim X2 to a Class II 510(k)
device, under the new insulin pump classification referred to as ACE pumps. This classification is intended to help expedite future
FDA review of changes to our pump hardware and integration with future products supporting interoperability initiatives. However,
we anticipate that the software component of our products related to AID features, such as our Basal-IQ technology, will continue to
be subject to review by the FDA under the class III PMA device standards.
t:slim X2 Insulin Delivery System with Basal-IQ Technology
In the United States, we offer the t:slim X2 with our Basal-IQ technology feature. This is our first commercial AID offering.
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The t:slim X2 with Basal-IQ technology utilizes Dexcom G6 sensor values to support our AID algorithm, which is designed to
temporarily suspend insulin delivery to help minimize the frequency and/or duration of hypoglycemic events. All new domestic
pumps are shipped with Basal-IQ technology, and it is then at the discretion of the user and the user’s healthcare provider to determine
whether or not to use this feature with CGM integration. It is the first and only CGM integrated insulin pump system that does not
require fingersticks for calibration or diabetes treatment decisions. Our Basal-IQ technology was developed internally in consultation
with clinical thought leaders in AID research. In our market research, a predictive low glucose suspend algorithm was reported as the
most valuable AID feature among people with insulin-dependent diabetes and their healthcare providers.
In January 2018, we completed a pivotal study for our t:slim X2 with Basal IQ technology. Results from this study, which were
published in the Diabetes Care medical journal, showed that the system achieved the primary outcome of reducing time spent in
hypoglycemia compared to SAP therapy alone. This reduction was accomplished without any increase in the rate of hyperglycemia.
Study participants reported that the system was easy to use and also reported a high level of confidence using the system.
The t:slim X2 with Basal-IQ technology received FDA approval in June 2018 and launched domestically in August 2018.
Concurrent with approval, the t:slim X2 with Basal-IQ technology was also deemed compatible with approved iCGM devices.
Currently, the Dexcom G6 CGM is the only iCGM-designated device in the United States; however, we expect this interoperability
designation will streamline the regulatory pathway for integration of the t:slim X2 with future iCGM products as they are approved by
the FDA. Interoperability with iCGM devices will still require development effort and business agreements; however, the regulatory
process can be lengthy and unpredictable, so we believe this designation, together with the FDA’s recent designation of the t:slim X2
as an ACE pump, may reduce the overall timeline to commercialize interoperable devices.
We anticipate offering t:slim X2 with Basal-IQ technology in select international markets during 2019. Our ability to offer the
t:slim X2 with Basal-IQ technology will depend on several factors, including the availability of Dexcom G6 CGM in the relevant
geography.
300-unit Insulin Cartridge being inserted into a t:slim X2 pump
t:slim X2 with G5 Integration
Outside of the United States, we offer the t:slim X2 with G5 integration. The t:slim X2 with G5 integration incorporates the
same pump technology and user interface as t:slim X2, but also provides the added convenience of allowing CGM information to be
displayed on the pump, thereby eliminating the need to carry an additional device. Based on this information, users are able to utilize
the pump to take direct action with their insulin pump therapy.
We believe that our AID and CGM integration advancements, together with future anticipated applications and the global
availability of the Tandem Device Updater, will continue to enable users to add significant new features and functionality to their
pumps independent of their typical four-year insurance pump replacement cycle.
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Our Complementary Products
Tandem Device Updater
The t:slim X2 is compatible with the Tandem Device Updater, a revolutionary tool that allows pump users to update their
pumps’ software quickly and easily from a personal computer. The Tandem Device Updater was cleared by the FDA in the third
quarter of 2016 and is PC- and Mac- compatible. It is currently only available in the United States.
The Tandem Device Updater was designed to work with the t:slim X2 in a manner similar to software updates on a smartphone.
Because remote updatability for insulin pump software is a unique feature not available in competitive pump offerings, the Tandem
Device Updater provides our customers with the capability to access new and enhanced features and functionality faster than the
industry has been able to in the past. We are uniquely positioned to offer this capability due to the intuitive software architecture and
convenient micro-USB connection included within the t:slim X2.
We have launched three different software updates using the Tandem Device Updater. The first was a deployment of updated
t:slim software to in-warranty t:slim pumps purchased before April 2015. Next, in September 2017, we set a new standard of care in
our industry by offering all existing in-warranty t:slim X2 customers integration with the Dexcom G5 Mobile CGM system through a
software update using the Tandem Device Updater. Most recently, we offered all existing in-warranty t:slim X2 customers access to
Basal-IQ technology, following their procurement of a prescription and completion of training. We estimate that approximately 40%
of our domestic t:slim X2 customers use integrated Dexcom CGM, and about half of those customers have updated their pump to
allow use of our Basal-IQ technology. We anticipate that there will be continued adoption of Basal-IQ technology as more people
adopt CGM use and with the increasing availability of Dexcom G6 sensors.
Historically, we have made all software updates through the Tandem Device Updater available for no cost to in-warranty users.
In the future, this tool has the potential to enable users to add other new features and functionality to their pumps, such as new AID
algorithms, independent of the typical four-year insurance pump replacement cycle. We expect that future software upgrades will be
implemented through our Tandem Device Updater. Although our reimbursement strategy may vary by product and geography, in the
future we may seek to secure additional reimbursement for software updates and or charge for updates as we obtain regulatory
approval for their commercialization. We also plan to complete the required development work and submit for the necessary
regulatory approvals to offer the Tandem Device Updater outside of the United States beginning in 2019.
t:connect Diabetes Management Application
We commercially introduced the t:connect Diabetes Management Application, or t:connect, our web-based data management
application, in the United States in the first quarter of 2013. It provides users, their caregivers and their healthcare providers a fast,
easy and visual way to display diabetes therapy management data from our pumps and supported blood glucose meters. This
application empowers people with diabetes, as well as their caregivers and healthcare providers, to quickly and easily identify
meaningful insights and trends, allowing them to refine therapy and lifestyle choices for better management of their diabetes. It also
provides us with valuable data that we can analyze computationally to reveal patterns, trends and associations that can be used in
continuous product improvements, and identification of clinical outcomes data. We also believe t:connect can serve as a key
component of mobile health applications that are currently under development.
We developed t:connect to be intuitive by using the same consumer-focused approach utilized in the development of our insulin
pumps. It features built-in logic that manages duplicate blood glucose readings from a user’s pump and blood glucose meter to ensure
report accuracy. t:connect can also generate color-coded graphs and interactive, multi-dimensional reports that make it easy to identify
therapy management trends, problems and successes.
In 2017, we launched t:connect HCP, which is an enhanced version of t:connect that we expect will simplify the ability of pump
users to share t:connect data with their healthcare providers. This application allows healthcare providers to establish a separate
account that centralizes t:connect data from all of their enrolled patients. t:connect and t:connect HCP are not currently available to
users or healthcare providers outside the United States.
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Infusion Sets
t:connect Diabetes Management Application
In September 2017, we began replacing the standard Luer-lok connector that previously joined an infusion set to our cartridge
with a custom connector, the t:lock connector. Our t:lock is similar in its design to that of a standard Luer connector, but on average,
reduces the time required to fill tubing by more than 30 seconds and reduces the amount of insulin used in the process by 4.5 units. It
also reduces the possibility of air bubbles being trapped in the connector. The transition to our t:lock connector resulted in a
substantial increase in our sales of infusion sets beginning in the third quarter of 2017. By the end of 2017, our infusion sets and
cartridges were being sold on a one-to-one basis. This trend continued in 2018 and is expected for the long-term. We intend to
continue to identify solutions that will enhance our infusion set products to address the perceived shortcomings of existing products on
the market.
Pump Accessories
We offer our customers a broad range of accessories for their pumps, such as cases and belt clips, allowing users to customize
their device to their individual lifestyle and sense of style. We believe our accessories increase user flexibility and willingness to use
and carry their insulin pump.
Products under Development
Our products under development support our strategy of focusing on both consumer and clinical needs, and include new AID
systems, a next-generation hardware platform, and connected (mobile) health offerings. We intend to leverage our consumer-focused
approach and proprietary technology platform to continue to develop products that have the features and functionalities that will allow
us to meet the needs of people in differentiated segments of the insulin-dependent diabetes market.
t:slim X2 with Control IQ Technology
Our second-generation AID system, the t:slim X2 with Control-IQ technology, is expected to integrate the t:slim X2 with
technology that we licensed from TypeZero and Dexcom’s G6 CGM sensor. The iCGM designation for the system also provides the
opportunity for integration development efforts with future iCGM sensors that may become available in the market. With our
implementation of TypeZero’s inControl AID algorithms, our product is intended to both increase and decrease basal insulin based on
a user’s predicted blood glucose levels from a compatible iCGM sensor, as well as deliver automated correction boluses. In
conjunction with Dexcom and TypeZero, which was acquired by Dexcom in August 2018, we have integrated our technologies into
the U.S. portion of the Clinical Acceptance of the Artificial Pancreas, or DCLP3, portion of the International Diabetes Closed Loop, or
the IDCL, trial. Enrollment for the 6-month study was completed in October 2018. Our t:slim X2 with Control-IQ technology has also
been evaluated in several early pediatric studies and we intend to support a pivotal study among pediatric patients with type 1 diabetes
that will commence in the first half of 2019. Our goal is to commence commercial sales of the t:slim X2 with Control-IQ technology
in the United States in the second half of 2019, followed by an international launch in 2020.
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t:sport Insulin Delivery System: Our Next-generation Hardware Platform
t:slim X2 with Control IQ Technology
Our next-generation hardware platform is referred to under its development name, the t:sport insulin delivery system, or t:sport.
This product is expected to be half the size of t:slim and is being designed for people who seek even greater discretion and flexibility
with the use of their insulin pump. We anticipate that t:sport will feature a 200-unit cartridge, an on-pump bolus button, a rechargeable
battery, an AID algorithm, and a Bluetooth radio. t:sport is being designed for use with leading U-100 insulins, and we are evaluating
the use of insulin concentrates to provide people with greater insulin needs. t:sport will utilize a pumping mechanism that differs from
our current Micro-Delivery technology.
t:sport Shown with Touchscreen Controller
Since 2016, we have engaged in discussions with the FDA regarding whether the t:sport controller can be implemented as a
mobile device application or will need to be a separate device. Based on the FDA’s feedback regarding the use of unrestricted mobile
phones, we are designing the product so that it will have the technical capability to be controlled using either a dedicated controller or
a mobile device. Because of the nature of our touchscreen user interface, we are well positioned to pursue either option.
We anticipate pursuing FDA authorization for t:sport as an ACE pump, and we are designing t:sport to be compatible with our
AID algorithms and any available iCGM. Our goal is to receive FDA authorization for this product for use in the United States in
2020, and to thereafter submit for regulatory approvals outside the United States.
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Connected (Mobile) Health Offerings
We are currently developing a mobile application that is being designed to utilize the capability of the Bluetooth radio to
wirelessly upload pump data to t:connect, receive notification of pump alerts and alarms, integrate other health-related information
from third party sources, and support future pump-control capabilities for our products under development. Subject to FDA approval,
we intend to launch the first generation of our mobile application with a subset of these features in the United States in 2019.
Sales and Marketing
Our sales and marketing objectives are to:
Mobile Application
•
•
generate demand and acceptance for our product offerings developed using our technology platform among people with
insulin-dependent diabetes; and
promote advocacy and support for our products and brands with healthcare providers.
As of December 31, 2018, we had approximately 70 territories in our U.S. sales organization, with approximately 200 full-time
employees on our sales, clinical and marketing team. The vast majority of territories are supported by a territory manager and a
clinical diabetes specialist who, as a team, call on domestic endocrinologists, nurse practitioners, primary care physicians, certified
diabetes educators and potential customers. Where appropriate, some territories are supported by multiple clinical diabetes specialists.
Our U.S. sales team is augmented by individuals in our internal customer sales support organization, who follow up on leads
generated through promotional activities and educate people on the benefits of our proprietary technology and products.
Our internal San Diego-based customer sales support organization also contacts existing customers who are approaching their
insurance renewal date to aid in the renewal process. Our goal is for at least 70% of our existing customers to purchase a new pump
from us when making their next pump purchasing decision. Typically, domestic customers are eligible for insurance reimbursement to
purchase a new insulin pump once every four years; however, some plans may be limited to once every five years or have additional
restrictions or requirements. Insurance reimbursement processes outside the United States vary by geography. 2017 was our first full
year with customers eligible for renewal. Renewal sales to existing customers nearly doubled between 2017 and 2018. Factors such as
the timing of competitive product launches, regulatory approvals, advancements in diabetes therapy alternatives, insurance eligibility
and other market dynamics may impact the rate of renewal purchases in the future.
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As our market penetration continues to build momentum, and as we launch new products into the market, we plan to further
expand our sales, clinical and marketing infrastructure in the United States. However, only modest territory optimizations and
expansions are anticipated in 2019.
In Canada, in the second half of 2018 we established a small direct sales and clinical infrastructure. We also intend to use a local
distributor for select order processing and fulfillment services as needed. In October 2018, we received approval from Health Canada
to begin marketing the t:slim X2 with G5 integration and commenced marketing and sales efforts. We also began the process of
securing reimbursement in each of the provinces, which we expect to continue in 2019.
In other select geographies outside the United States, our efforts have primarily focused on the identification and contracting of
distributors in areas where we believe there is a meaningful opportunity for our t:slim X2 insulin pump. Unlike our domestic
operations, our international distributors other than in Canada will have substantially greater responsibility for sales, marketing and
customer support efforts. Our existing international distributors cover several geographies, including: Australia, Italy, New Zealand,
Scandinavia (Denmark, Norway and Sweden), South Africa, Spain, and the United Kingdom.
We began attending prominent international diabetes tradeshows in early 2018 and obtained the right to affix the CE Mark to the
t:slim X2 with G5 integration in April 2018. We began our scaled launch in the third quarter of 2018 following the completion of pre-
launch activities, such as translating both our pump software and user manual, and distributor sales and customer service trainings. We
anticipate continuing to expand our commercial efforts outside the United States throughout 2019, which may include expanding our
sales to additional select geographies and contracting with additional international distributors.
Revenue Concentrations and Significant Customers. A small number of independent domestic distributors have historically
accounted for a significant portion of our revenues. During the year ended December 31, 2018, we made sales to approximately 55
independent distributors in the United States, and nine independent distributors internationally. In fiscal 2018, sales to Edgepark
Medical Supplies, Inc. and Byram Healthcare accounted for 19.4% and 15.6% of consolidated sales, respectively. In fiscal 2017,
Edgepark Medical Supplies, Inc. and Byram Healthcare accounted for 21.5% and 14.0% of our sales, respectively. In fiscal 2016,
Edgepark Medical Supplies, Inc. and Byram Healthcare accounted for 18.7% and 14.0% of our sales, respectively. None of our
independent distributors in the United States are required to sell our products exclusively and each of them may freely sell the
products of our competitors. Our distributor agreements in the United States generally have one-year initial terms with automatic one-
year renewal terms and are terminable in connection with a party’s material breach. Our distributor agreements outside the United
States generally have longer initial terms and, in addition to being terminable in connection with a party’s material breach, include
provisions that allow us to terminate those agreements prior to their ordinary expiration in exceptional circumstances. We believe both
our domestic and international distributors carry minimal inventory at any given time.
Healthcare provider focused initiatives. Healthcare providers are a critical resource in helping patients understand and select
their diabetes therapy options. Each of our territories in the United States and many of our territories in Canada are supported by a
clinical diabetes specialist who is a certified diabetes educator and holds either a registered nurse or registered dietician license. Our
clinical diabetes specialists support and educate healthcare providers on our products and proprietary technology, certify healthcare
providers to train people to use our products and support our customers with initial training following the purchase of our products.
We have also established a network of independent, licensed diabetes educators who have been certified to train on our products and
will conduct customer training on our behalf.
In addition to calling on healthcare providers in their offices, some of our recent marketing initiatives include:
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presentations and product demonstrations at local, regional, national and international tradeshows, including the American
Diabetes Association Scientific Sessions and the American Association of Diabetes Educators Annual Meeting, Diabetes
Canada and Advanced Technologies and Treatment for Diabetes;
our Demonstration Unit Program, through which we provide healthcare professionals with our products, or a mobile
device that operates our t:simulator App, for pump demonstrations to their patients; and
business relationships with third-party diabetes management applications, such as Glooko, for the display of Tandem
pump data.
Consumer-focused initiatives. We sell our products directly to consumers through referrals from healthcare providers and
through leads generated through our promotional activities. Our direct-to-consumer marketing efforts focus on positioning our
products as innovative, consumer-focused insulin pumps with a unique Micro-Delivery technology, slim touchscreen design, and an
intuitive user interface designed to meet different needs in the diabetes community. In connection with the domestic launch of t:slim
X2 with Basal-IQ technology, our marketing also educates consumers and healthcare providers on the benefit of our AID algorithm,
and the Dexcom G6 as a more accurate sensor that does not require fingersticks compared to competitive products. Some of our recent
consumer-focused marketing initiatives include:
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participation at consumer-focused regional diabetes conferences and events including the Juvenile Diabetes Research
Foundation, or JDRF, Type One Nation Summits, the American Diabetes Association Expos, Children With Diabetes
Friends for Life and Taking Control Of Your Diabetes, or TCOYD, conferences and local diabetes camps;
(cid:5) website enhancements and utilization of social media, online advertising and consumer-focused newsletters to drive
online awareness and expand web presence;
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promotion of our t:simulator App, which allows anyone to explore the key features of our pump products for free using
their mobile device;
corporate sponsorships of organizations focused on people with diabetes, including JDRF, TCOYD and College Diabetes
Network; and
community diabetes fundraising and awareness events.
Branding. We developed our comprehensive branding strategy to engage consumers and communicate our identity as a modern
and progressive company that works “in tandem” with the diabetes community, healthcare providers, our employees and business
partners. We strive to embody this through our product offerings, marketing efforts and interactions throughout our business. Our
product names are consistently branded using a “t:” to create uniformity and help consumers quickly identify our products. In the
United States, our “pump that gets updated, not outdated” marketing campaign highlights that we are able to offer customers the
ability to remotely update or add features on their in-warranty insulin pump. Our other product packaging, website, advertising and
promotional materials are a reflection of our consumer-focused approach and modern style. We value having clear, friendly and
helpful communications throughout our business.
Animas Transition
In October 2017, Johnson & Johnson announced that it was discontinuing the operations of Animas, and exiting the insulin
pump business entirely, and, in connection with these activities, designated Medtronic as a preferred partner to facilitate the transition
of Animas insulin pump customers. Animas supply ordering and support was transitioned to Medtronic as of April 2018. Medtronic is
offering a portion of Animas customers the option of acquiring a Medtronic insulin pump at no charge. As a result of this change in
the insulin pump market, we now offer the only alternative durable insulin pump to Medtronic in the United States. Nevertheless, a
large percentage of our new customers still report being new to pump therapy, with approximately half converting from MDI,
followed by customers who reported converting from either a Medtronic or Animas pump. However, throughout 2018 we experienced
an increase in our percentage of sales to people who reported converting from using an Animas pump. The longer-term impact on our
business of Animas’ exit may be dependent on one or more of the following factors:
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The offer to Animas customers for a free Medtronic pump is currently limited to customers with a warranty expiration
date later than September 30, 2019. It remains uncertain how many Animas customers will avail themselves of this offer.
(cid:5) While Medtronic will have direct access to all Animas customers during the transition period, as those customers' pumps
come up for renewal and they make new pump purchasing decisions, they may consider alternative pump options. Our
own customer data and other available market research shows a high number of customers converting to our products
from an Animas pump, and we believe our pumps are an attractive alternative to both Animas and Medtronic pumps.
(cid:5) We believe one of the product features that has made Animas pumps attractive to their customers is the integration of the
Animas Vibe with Dexcom’s CGM technology. We now provide the only commercially available pump that is integrated
with Dexcom’s technology.
(cid:5)
The opportunity for our international distributors to convert current Animas customers to a Tandem pump. Unlike in the
United States, many of our international distributors have existing relationships with Animas customers and will be
motivated to keep those individuals as existing customers by replacing Animas pumps with our t:slim X2 as opportunities
arise.
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Training and Customer Care
Given the chronic nature of diabetes, and the potentially complicated dynamic of health insurance coverage, training and
customer care is important for developing long-term relationships with our customers. Our customer care infrastructure, which
services the United States and Canada, consists of individuals focused on training, technical services and insurance verification. We
provide training to our distribution partners who fulfill these responsibilities outside the United States. We believe our consumer-
focused approach enables us to develop a personal relationship with the customer, or potential customer, beginning with the process of
evaluating our products, then navigating insurance coverage and extending to our provision of training and ongoing support. Providing
reliable and effective ongoing customer support reduces anxiety, improves our customers’ overall experiences with our products and
helps reinforce our positive reputation in the diabetes community. In order to provide complete training and customer care solutions,
we leverage the expertise of our clinical diabetes specialists in the Unites States and Canada who provide one-on-one training, and we
offer ongoing complementary technical services, as well as ongoing support with insurance verification.
Training. Our research has shown that it can take several days for a user to competently learn how to use a traditional pump,
leading to frustration, frequent mistakes and additional training, each of which may ultimately discourage adoption. As a result, we
believe that healthcare providers may be less likely to recommend pump therapy to potential candidates.
By offering an intuitive user interface, we believe healthcare providers will be able to train people to use our products more
efficiently than traditional pumps, and will have a higher degree of confidence in their patients’ ability to operate it, including the
more advanced features. For example, the addition of Basal-IQ technology to our t:slim X2 only added one new screen to our user
interface. In addition, the intuitive nature of our pump products likely will allow healthcare providers to spend less time teaching a
person how to use their pump and more time helping to improve the management of their diabetes. This ease of training may also help
users feel less intimidated and fearful of pump therapy, leading to increased adoption and market expansion.
We tailor our training efforts for insulin pump users and healthcare providers. In some cases, our clinical training managers may
certify clinic-based healthcare providers to train their patients on our products. In other cases, a member of our clinical team will
conduct one-on-one training on our products with the customer. We have also established a network of independent, licensed diabetes
educators who have been certified to train on our products and will conduct customer training on our behalf.
For our customers who purchased t:slim X2 with Basal-IQ technology, we offer online training on the use of the AID algorithm
and CGM components of the system. Customers can access one or more modules of the training system at their own pace and at their
preferred location, which offers them a convenient method to access the latest training available. In the fourth quarter of 2017, we
presented research demonstrating the ease-of-use and effectiveness of computer-based training from the human factors study of the
t:slim X2 with Basal-IQ technology. The study demonstrated a 99% success rate among study participants who performed a series of
critical tasks using the system after initial training. Out of 530 tasks performed, only seven task failures were observed, none of which
related to safety. In addition, participants in the t:slim X2 with Basal-IQ technology pivotal study reported that the system is easy to
use and also reported a high level of confidence using the system. We believe the ease of training on the t:slim X2 with Basal-IQ
technology is a competitive advantage compared to currently-available AID systems.
Technical Services. We believe that a difficult-to-use pump will result in users making more frequent calls to the pump
manufacturer or their healthcare provider for support in using the device. This can be frustrating for the customer and costly for the
pump manufacturer as well as for the healthcare provider. In general, we expect the intuitive nature of our products to result in fewer
calls from users requesting support from our technical services team or their healthcare provider. However, because of the significant
percentage of our customers who are new to pump therapy, we also anticipate receiving high call volume from customers who are still
becoming familiar with the fundamentals of insulin pump therapy. In addition, we have experienced increases to our call volume as
our existing customers begin to utilize CGM integration with their t:slim X2, and begin using our AID algorithm. We anticipate
experiencing a similar dynamic in the future as we launch new AID systems and new product offerings.
Our customer-focused technical services team provides support to U.S.- and Canadian-based customers seven days a week, 24
hours a day by answering questions, troubleshooting and addressing issues or concerns about the pump, CGM and algorithm
components of our systems. In 2018, we began investing in technology solutions to improve the customer’s experience calling into our
call center, and improve efficiencies of our internal support infrastructure. We anticipate continuing to invest in this area in 2019,
while further leveraging our infrastructure. Our insulin pump products are typically covered by a four-year warranty. The warranty
includes our product replacement program, which allows our technical services team members to provide a customer with a
replacement device within as little as 24 hours, to minimize the interruption of his or her therapy. We also coordinate product
replacements of CGM components where appropriate.
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Internationally, our distribution partners provide technical services support to their t:slim X2 customers.
Insurance Verification. Our insurance verification team provides support to U.S. and Canadian based customers, and potential
customers, understand their insurance benefits. We work with the customers and their healthcare providers to collect information
required by the insurance provider and to determine their insurance benefit coverage for our products and notify them of their benefit.
Following communication of a person’s estimated financial responsibility, final confirmation of their desire to purchase the
device and method of fulfillment, the customer’s order is typically shipped to their home. The initial order generally contains their
insulin pump as well as a 90-day supply of infusion sets and cartridges. For customers that we service on a direct basis, a member of
our internal team then contacts the customer prior to the end of their 90-day supply to re-verify their insurance benefits and assist in
reordering supplies. For customers who purchase our insulin pump through one of our authorized U.S. or international distributors,
ongoing supplies are typically also arranged through the distributor.
Third-Party Reimbursement
In the United States, customer orders are typically fulfilled by billing third-party payors on behalf of our customers, or by
utilizing our network of distributors who then bill third-party payors on our customers’ behalf. Our fulfillment and reimbursement
systems are fully integrated such that our products are shipped only after receipt of a valid physician’s order and verification of current
health insurance information.
We are accredited by the Community Health Accreditation Program and are an approved Medicare provider. Domestically, we
primarily bill for our insulin pump products and associated supplies using existing Healthcare Common Procedure Coding System
codes for which Medicare reimbursement is well established. However, pump eligibility criteria for people with type 2 diabetes can be
different and often requires additional documentation and laboratory testing to gain in-network insurance reimbursement benefits.
Over the last ten years, Medicare reimbursement rates for insulin pumps and disposable cartridges have remained relatively
unchanged. However, Medicare periodically reviews its reimbursement practices for diabetes-related products. In 2010, 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, in 2017, Medicare announced, and then shortly thereafter suspended, a
competitive bidding process for insulin pumps. As a result, there is some uncertainty as to the future Medicare reimbursement rate for
our current and future products.
We enter into contracts with national and regional third-party payors to establish reimbursement for our insulin pump products,
disposable cartridges and other related supplies. We employ a team of managed care managers who are responsible for negotiating and
securing contracts with third-party payors throughout the United States. For the year ended December 31, 2018, approximately 20% of
our shipments were generated through our direct third-party payor contracts.
If we are not contracted with a person’s third-party payor and in-network status cannot be otherwise obtained, then to the extent
possible we utilize distribution channels so our customers’ orders can be serviced. As of December 31, 2018, we had executed
distributor agreements with approximately 55 independent distributors. In some cases, but not all, this network of distributors allows
us to access people who are covered by commercial payors with whom we are not contracted, at in-network rates that are generally
more affordable for our customers. However, UnitedHealthcare designated one of our competitors as their preferred, in-network
durable medical equipment provider of insulin pumps for most customers over seven years of age. We expect this decision will
prevent a majority of UnitedHealthcare members from purchasing our insulin pump for the foreseeable future, whether directly from
us or through our network of distributors.
Our distribution partners outside the United States and Canada are responsible for all reimbursement, tender application and
fulfillment activities.
Manufacturing and Quality Assurance
We currently manufacture our products at our facility in San Diego, California. In 2017, we transitioned our manufacturing
operations to a new facility located on Barnes Canyon Road in San Diego, California, which became fully operational at the beginning
of 2018. This facility doubled our manufacturing capacity for insulin pumps and cartridges, expanded warehousing for additional
infusion set supplies, and provided additional production capacity for new products under development, without significantly
increasing the cost of overhead associated with our manufacturing facilities.
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The Barnes Canyon facility is designed to optimize our manufacturing processes and allow for greater operational efficiencies,
which we believe positions us well to achieve our long-term gross margin targets. By maintaining close proximity to our other
business functions, we believe we will enhance our ability to monitor and manage our manufacturing processes, and to adjust
manufacturing operations quickly in response to our business needs. The transition to the new manufacturing facility took place
primarily in the second half of 2017, during which time we experienced some temporary duplication of operations to support ongoing
product requirements, as well as some incremental manufacturing costs. In 2018, we did not make significant capital expenditures in
our manufacturing operations. In 2019, we anticipate making capital expenditures in the purchase of an additional manufacturing
equipment and to expand our warehousing capacity.
We currently utilize a semi-automated manufacturing process for our pump products and disposable cartridges. The pump
production line requires approximately 20 manufacturing assemblers and limited support staff to run the line, and reaches a maximum
output of approximately 30,000 pumps per year on a single shift. We currently have two pump manufacturing lines that have capacity
to produce 110,000 pumps annually. Disposable cartridges are manufactured on a production line that requires 10 manufacturing
operators and limited support staff, and reaches a maximum output of approximately one million cartridges per year on a single shift.
We currently have four cartridge manufacturing lines that provide capacity to build 12 million units annually, which we believe can
support an installed customer base of approximately 100,000 customers. We also have capacity to add two additional lines in our
current facility which will provide approximately six million cartridges annually, to supporting an additional 50,000 customers. We
continue to improve the efficiency of our disposable cartridge manufacturing process.
The cartridge automation equipment is designed to operate at capacity. As such, the line is constructed in several modular
sections that perform different aspects of the assembly. This is important because at any given time, maintenance, service or
inspection can be performed on any one section independent of the rest of the line. The manufacturing process may then continue
uninterrupted while the assembly step is performed manually until the automation section is back on-line.
Outside suppliers are the source for most of the components and some sub-assemblies in the production of our insulin pumps.
Typically, our outside vendors produce components to our specifications and in many instances to our designs. Any sole and single
source supplier is managed through our supplier management program that is focused on reducing supply chain risk. Key aspects of
this program include managing component inventory in house and at the supplier, contractual requirements for last time buy
opportunities and second sourcing approaches for specific suppliers. Due to the rapid increase in demand for our products over the
past 12 months, we have not maintained our desired inventory levels for certain key pump components, which has limited our
production capacity. Accordingly, during 2019 we intend to substantially increase our ongoing purchases of key components and sub-
assemblies to produce our insulin pump products and make corresponding increases for our warehousing capacity of both raw
materials and finished goods.
Our suppliers are evaluated, approved and monitored periodically by our quality department to ensure conformity with the
specifications, policies and procedures for our devices. Members of our quality department also inspect our devices at various steps
during the manufacturing cycle to facilitate compliance with our devices’ stringent specifications.
We have received certification from BSI Group, a Notified Body to the International Standards Organization, or ISO, of our
quality system. This ISO 13485 certification now extends to our new manufacturing facility on Barnes Canyon Road. Certain
processes utilized in the manufacturing and testing of our devices have been verified and validated as required by the FDA and other
regulatory bodies. As a medical device manufacturer, our manufacturing facility and the facilities of our sterilization and other critical
suppliers are subject to periodic inspection by the FDA and certain corresponding state agencies.
Research and Development
Our research and development team includes employees who specialize in software engineering, mechanical engineering,
electrical engineering, fluid dynamics, mobile connectivity and graphical user interface design, many of whom have considerable
experience in diabetes-related products. Our research and development team focuses on the continuous improvement and support of
current product offerings, as well as our products under development.
In June 2015, we entered into non-exclusive agreements with Dexcom to allow the integration of our insulin pump products
with the Dexcom G5 and G6 CGM systems worldwide. Each agreement has an initial term of five years, and thereafter renew
automatically for additional one-year terms unless either party provides advance notice to the other party that they do not wish to
extend the agreement. The agreements do not require any licensing fees, milestone payments or royalty obligations to Dexcom. The
agreements contain customary provisions for termination in the event of an uncured material breach or in the event of a dissolution of
the other party, and prohibit our assignment of the agreements to a Dexcom competitor without Dexcom’s prior consent.
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In 2016, we entered into a worldwide, non-exclusive, royalty-bearing license agreement with TypeZero to allow the integration
of our insulin pump products with TypeZero’s inControl AID technology. The agreement also provides us access to TypeZero’s future
AID innovations for five years following the date of the agreement. In addition, the license agreement contemplates that our insulin
pump products will be used alongside TypeZero’s AID technology in the IDCL Trial. In August 2018, TypeZero was acquired by
Dexcom. Nevertheless, the terms of our agreement with TypeZero remain effective until the patents covered by the agreement have
expired, subject to customary provisions for termination in the event of an uncured material breach.
Intellectual Property
We have made protection of our intellectual property a strategic priority. We rely on a combination of copyright, patent,
trademark, trade secret and other intellectual property laws, non-disclosure agreements and other measures to protect our proprietary
rights.
As of December 31, 2018, our patent portfolio consisted of approximately 68 issued U.S. patents and 68 pending U.S. patent
applications. Of these, our issued U.S. patents expire between approximately 2021 and 2036. We are also seeking patent protection for
our proprietary technology in other countries throughout the world. In addition, we also have 23 trademark registrations, including 10
U.S. trademark registrations and 13 foreign trademark registrations.
In July 2012, we entered into an agreement with Smiths Medical, Inc., or Smiths Medical, pursuant to which we were granted,
through certain assignments and certain non-exclusive and exclusive, worldwide, fully paid-up, royalty-free licenses, certain rights to
patents and patent applications related to ambulatory infusion pumps and related software and accessories for the treatment of
diabetes. We agreed to pay $5.0 million in license fees and to share equally any associated sublicense revenues we may receive. As of
December 31, 2018, we had paid the initial license fees in full and have not entered into any sublicense agreements.
Competition
The medical device industry is intensely competitive, subject to rapid change and highly sensitive to the introduction of new
products, treatment techniques or technologies, or other market activities of industry participants. We compete in domestic and
international markets with a number of companies that manufacture insulin delivery devices, such as Medtronic MiniMed, a division
of Medtronic, and Insulet Corporation. However, the market for insulin pumps recently underwent significant changes. For instance,
in late 2016, Roche Diabetes Care, a division of F. Hoffman-La Roche, discontinued sales of new insulin pumps in the United States.
Roche continues to sell and market its insulin pump products in international markets. In October 2017, Johnson & Johnson
announced that it was discontinuing the operations of Animas and exiting the insulin pump business entirely, and designated
Medtronic as a preferred partner to facilitate the transition of Animas insulin pump customers. Also, in late 2017, Eli Lilly & Co.
announced that it was developing an insulin pump with AID technology and Becton Dickinson recently confirmed that it intends to
launch an insulin pump designed for people with type 2 diabetes in 2019. However, it is difficult to predict the potential impact of
these changes on our competitive landscape. There are also several other companies that are currently marketing insulin pump
products in international markets.
Our current primary competitors are either publicly traded companies or divisions or subsidiaries of publicly traded companies.
These companies have several competitive advantages over us, including greater financial resources for sales and marketing and
product development, established relationships with healthcare providers and third-party payors, and larger and more established
distribution networks. In some instances, our competitors also offer products that include features that we do not currently offer. For
instance, Insulet offers an insulin pump with a tubeless delivery system that does not utilize an infusion set, and Medtronic offers a
traditional insulin pump that is integrated with a CGM system featuring a hybrid closed-loop AID algorithm.
In addition, we face competition from a number of companies, medical researchers and existing pharmaceutical companies that
are pursuing new delivery devices, delivery technologies, sensing technologies, procedures, drugs and other therapeutics for the
monitoring, treatment and prevention of diabetes.
For additional information, see the section of this Annual Report entitled “Risk Factors” in Part I, Item 1A.
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Government Regulation
Our products are medical devices subject to extensive regulation by the FDA in the United States, corresponding state
regulatory authorities and other regulatory bodies in other countries. The U.S. Federal Food, Drug, and Cosmetic Act, or the FDCA,
and the FDA’s implementing regulations govern:
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product design and development;
pre-clinical and clinical testing;
establishment registration and product listing;
product manufacturing;
labeling and storage;
pre-market clearance or approval; advertising and promotion;
product sales and distribution;
recalls and field safety corrective actions; and
servicing and post-market surveillance.
FDA’s Pre-Market Clearance and Approval Requirements. Unless an exemption applies, each new or significantly modified
medical device we seek to commercially distribute in the United States will require either a pre-market notification under
Section 510(k) of the FDCA, also referred to as a 510(k) clearance, or approval from the FDA through the Premarket Approval, or
PMA, process. Both the 510(k) clearance and PMA processes can be expensive, lengthy and require payment of significant user fees,
unless an exemption is available.
The FDA classifies medical devices into one of three classes. Devices requiring fewer controls because they are deemed to pose
lower risk are placed in Class I or II. Class I devices are subject to general controls such as labeling, pre-market notification and
adherence to the FDA’s Quality System Regulation, or QSR, which cover manufacturers’ methods and documentation of the design,
testing, production, control quality assurance, labeling, packaging, sterilization, storage and shipping of products. Class II devices are
subject to special controls such as performance standards, post-market surveillance, FDA guidelines, or particularized labeling, as well
as general controls. Some Class I and Class II devices are exempted by regulation from the 510(k) clearance requirement, and the
requirement of compliance with substantially all of the QSR. t:slim, t:flex, t:slim X2 and t:connect received FDA clearance as Class II
devices. However, t:connect was subsequently down-classified to a Class I device. A PMA application is required for devices deemed
by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or certain implantable devices, or those that are “not
substantially equivalent” either to a device previously cleared through the 510(k) process or to a “preamendment” Class III device in
commercial distribution before May 28, 1976 when PMA applications were not required. t:slim G4 and t:slim X2 with Dexcom’s G5
sensor integration, and t:slim X2 with Basal-IQ technology received FDA approval as a Class III device.
Our t:slim X2 with Basal-IQ technology was the first insulin pump to receive approval for iCGM compatibility, a new
interoperability designation for integrated iCGM devices. Similarly, as part of the FDA’s interoperability initiative, in February 2019,
we received FDA approval of our De Novo application to down-classify the t:slim X2 to a Class II device, under the new insulin pump
classification referred to as ACE pumps. This classification, as well as the iCGM classification, are intended to help streamline the
regulatory pathway for integrated products approved by the FDA. However, we anticipate that the software component of our
products related to AID features, such as our Basal-IQ technology and our Control-IQ technology currently in development, will
continue to be subject to review by the FDA under the class III PMA device standards.
A PMA application must be supported by valid scientific evidence that typically includes extensive technical, pre-clinical,
clinical, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device. A PMA
application also must include a complete description of the device and its components, a detailed description of the methods, facilities
and controls used to manufacture the device, and proposed labeling. After a PMA application is submitted and found to be sufficiently
complete, the FDA begins an in-depth review of the submitted information. During this review period, the FDA may request
additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts
from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA. In addition,
the FDA generally will conduct a pre-approval inspection of the manufacturing facility to evaluate compliance with QSR, which
requires manufacturers to implement and follow design, testing, control, documentation and other quality assurance procedures.
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FDA review of a PMA application generally takes between one and three years but may take significantly longer. The FDA can
delay, limit or deny approval of a PMA application for many reasons, including:
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systems may not be safe or effective to the FDA’s satisfaction;
the data from pre-clinical studies and clinical trials may be insufficient to support approval;
the manufacturing process or facilities may not meet applicable requirements; and
changes in FDA approval policies or adoption of new regulations may require additional data.
If an FDA evaluation of a PMA application is favorable, the FDA will issue either an approval letter, or approvable letter, which
usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of a
device, subject to the conditions of approval and the limitations established in the approval letter. If the FDA’s evaluation of a PMA
application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. The
FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for
several months or years while the trials are conducted and data is submitted in an amendment to the PMA. The PMA process can be
expensive, uncertain and lengthy and a number of devices for which FDA approval has been sought by other companies have never
been approved by the FDA for marketing.
New PMA applications or PMA supplements may be required for modifications to the manufacturing process, labeling, device
specifications, materials or design of a device that has been approved through the PMA process. PMA supplements often require
submission of the same type of information as an initial PMA application, except that the supplement is limited to information needed
to support any changes from the device covered by the approved PMA application and may or may not require as extensive technical
or clinical data or the convening of an advisory panel.
Clinical trials are typically required to support a PMA application and are sometimes required for a 510(k) clearance. These
trials generally require submission of an application for an Investigational Device Exemption, or IDE, to the FDA. The IDE
application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the
device in humans and that the testing protocol is scientifically sound. The IDE application must be approved in advance by the FDA
for a specified number of patients, unless the product is deemed a non-significant risk device and eligible for abbreviated IDE
requirements. Generally, clinical trials for a significant risk device may begin once the IDE application is approved by the FDA and
the study protocol and informed consent are approved by appropriate institutional review boards at the clinical trial sites. The FDA’s
approval of an IDE allows clinical testing to go forward, but it does not bind the FDA to accept the results of the trial as sufficient to
prove the product’s safety and efficacy, even if the trial meets its intended success criteria. All clinical trials must be conducted in
accordance with the FDA’s IDE regulations that govern investigational device labeling, prohibit promotion, and specify an array of
recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators. Clinical trials must further comply
with the FDA’s regulations for institutional review board approval and for informed consent and other human subject protections.
Required records and reports are subject to inspection by the FDA. The results of clinical testing may be unfavorable or, even if the
intended safety and efficacy success criteria are achieved, may not be considered sufficient for the FDA to grant approval or clearance
of a product. The commencement or completion of any clinical trial may be delayed or halted, or be inadequate to support approval of
a PMA application, for numerous reasons, including, but not limited to, the following:
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the FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical trial on
hold;
patients do not enroll in clinical trials at the rate expected;
patients do not comply with trial protocols;
patient follow-up is not at the rate expected;
patients experience adverse side effects;
patients die during a clinical trial, even though their death may not be related to the products that are part of our trial;
institutional review boards and third-party clinical investigators may delay or reject the trial protocol;
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third-party clinical investigators decline to participate in a trial or do not perform a trial on the anticipated schedule or
consistent with the clinical trial protocol, good clinical practices or other FDA requirements;
• we or third-party organizations do not perform data collection, monitoring and analysis in a timely or accurate manner or
consistent with the clinical trial protocol or investigational or statistical plans;
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third-party clinical investigators have significant financial interests related to us or our study that the FDA deems to make the
study results unreliable, or the company or investigators fail to disclose such interests;
regulatory inspections of our clinical trials or manufacturing facilities, which may, among other things, require us to
undertake corrective action or suspend or terminate our clinical trials;
changes in governmental regulations or administrative actions;
the interim or final results of the clinical trial are inconclusive or unfavorable as to safety or efficacy; and
the FDA concludes that our trial design is inadequate to demonstrate safety and efficacy.
Other Regulatory Requirements. Even after a device receives clearance or approval and is placed in commercial distribution,
numerous regulatory requirements apply. These include:
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establishment registration and device listing;
• QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, production,
control, supplier/contractor selection, complaint handling, documentation and other quality assurance procedures during all
aspects of the manufacturing process;
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labeling regulations that prohibit the promotion of products for uncleared, unapproved or “off-label” uses, and impose other
restrictions on labeling, advertising and promotion;
the FDA’s Medical Device Reporting, or MDR regulations, which require that manufacturers report to the FDA if their
device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or
contribute to a death or serious injury if the malfunction were to recur;
voluntary and mandatory device recalls to address problems when a device is defective and could be a risk to health; and
corrections and removals reporting regulations, which require that manufacturers report to the FDA field corrections and
product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA
that may present a risk to health.
Also, the FDA may require us to conduct post-market surveillance studies or establish and maintain a system for tracking our
products through the chain of distribution to the patient level. The FDA and the Food and Drug Branch of the California Department
of Health Services enforce regulatory requirements by conducting periodic, unannounced inspections and market surveillance.
Inspections may include the manufacturing facilities of our subcontractors.
In general, failure to comply with applicable regulatory requirements can result in enforcement actions by the FDA and other
regulatory agencies. These may include any of the following sanctions or consequences:
• warning letters or untitled letters that require corrective action;
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fines and civil penalties;
unanticipated expenditures;
delays in approving or refusal to approve future products;
FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries;
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suspension or withdrawal of FDA clearance or approval;
product recall or seizure;
interruption of production;
operating restrictions;
injunctions; and
criminal prosecution.
We and our contract manufacturers, specification developers and some suppliers of components or device accessories, are
required to manufacture our products in compliance with current Good Manufacturing Practice, or GMP, requirements set forth in the
QSR. The QSR requires a quality system for the design, manufacture, packaging, labeling, storage, installation and servicing of
marketed devices, and it includes extensive requirements with respect to quality management and organization, device design,
buildings, equipment, purchase and handling of components or services, production and process controls, packaging and labeling
controls, device evaluation, distribution, installation, complaint handling, servicing, and record keeping. The FDA evaluates
compliance with the QSR through periodic unannounced inspections that may include the manufacturing facilities of our
subcontractors. If the FDA believes that we or any of our contract manufacturers, or regulated suppliers, are not in compliance with
these requirements, it can shut down our manufacturing operations, require recall of our products, refuse to approve new marketing
applications, institute legal proceedings to detain or seize products, enjoin future violations or assess civil and criminal penalties
against us or our officers or other employees.
Licensure. In the United States, several states require that durable medical equipment, or DME, providers be licensed in order to
sell products to patients in that state. Some of these states require that DME providers maintain an in-state location or retain a licensed
pharmacist, and in those states, we sell our products through a third-party distributor. Although we believe we are in material
compliance with applicable state regulations regarding licensure requirements, if we were found to be noncompliant, we could be
subject to fines and penalties or lose our licensure in that state, which could prohibit us from selling our current or future products to
patients in that state. In addition, we are subject to certain state laws regarding professional licensure. We believe that our certified
diabetes educators are in material compliance with such state laws. However, if our educators or we were to be found non-compliant
in a given state, we may need to modify our approach to providing education, clinical support and customer service.
Fraud and Abuse Laws. There are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse, including the
federal Anti-Kickback Statute and the Physician Self-Referral Law, or the Stark Law, the federal civil False Claims Acts, the federal
criminal Health Care Fraud Statute, as well as various state laws regulating healthcare. Our relationships with healthcare providers and
other third parties are subject to scrutiny under these laws. Violations of these laws are punishable by criminal and civil sanctions,
including, in some instances, imprisonment and exclusion from participation in federal and state healthcare programs, including the
Medicare, Medicaid and Veterans Administration health programs.
Federal Anti-Kickback Statue. The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting,
receiving, offering or providing remuneration, directly or indirectly, in cash or in kind, to induce either the referral of an individual, or
the furnishing, recommending, or arranging of a good or service, for which payment may be made under a federal healthcare program
such as Medicare and Medicaid.
We provide the initial training to customers necessary for appropriate use of our products either through our own diabetes
educators or by contracting with outside diabetes educators who have completed a Tandem pump-training course. Outside diabetes
educators are reimbursed for their services at fair market value. Although we believe that these arrangements do not violate the Anti-
Kickback Statute, regulatory authorities may determine otherwise, especially as enforcement of this law historically has been a high
priority for the federal government. Noncompliance with the federal Anti-Kickback Statute could result in our exclusion from
Medicare, Medicaid or other governmental programs (which could adversely affect our revenues to a material extent), restrictions on
our ability to operate in certain jurisdictions, and civil and criminal penalties.
Physician Self-Referral Law. The Stark Law prohibits a physician from referring Medicare or Medicaid patients to an entity
providing “designated health services,” including a company that furnishes durable medical equipment, if the physician has a financial
relationship with the company. In addition to statutory exceptions, CMS has issued numerous regulatory exceptions to the Stark Law.
Violation of the Stark Law could result in denial of payment, disgorgement of reimbursements received under a noncompliant
arrangement, civil penalties, and exclusion from Medicare, Medicaid or other governmental programs. Although we believe that we
have structured our provider arrangements to comply with current Stark Law requirements, these arrangements may not expressly
meet the requirements for applicable exception from the law.
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Federal False Claims Act. The federal False Claims Act provides, in part, that the federal government may bring a lawsuit
against any person whom it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment
from the federal government, or who has made a false statement or used a false record to get a claim approved. In addition,
amendments in 1986 to the False Claims Act have made it easier for private parties to bring “qui tam” whistleblower lawsuits under
the act. Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare companies to have to
defend a false claim action, pay fines and/or be excluded from Medicare, Medicaid or other federal or state healthcare programs as a
result of an investigation arising out of such action.
We submit reimbursement claims to federal healthcare programs, and we also may provide some coding and billing information
to purchasers of our devices. These activities, if inappropriate, could result in liability under the False Claims Act. Further, claims
arising from relationships which violate the Anti-Kickback Statute are considered to be false claims under the False Claims Act.
Liability under the False Claims Act may also attach to claims arising from financial relationships which violate the Stark Law. We
believe that we currently are in material compliance with the federal government’s laws and regulations concerning the submission of
claims and the provision of coding and billing information. However, because we cannot guarantee that the government or qui tam
relators will regard any billing errors that may be made as inadvertent, or our provider relationships as compliant, we may have
exposure under the False Claims Act.
Federal Health Care Fraud Statutes. We are also subject to a federal health care fraud statute that, among other things,
imposes criminal and civil liability for executing a scheme to defraud any health care benefit program including non-governmental
programs, and prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false or
fraudulent statement or representation, or making or using any false writing or document with knowledge that it contains a materially
false or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services.
State Fraud and Abuse Provisions. Many states have also adopted some form of anti-kickback and anti-referral laws and false
claims acts. We believe that we are in material conformance to such laws. Nevertheless, a determination of liability under such laws
could result in fines and penalties and restrictions on our ability to operate in these jurisdictions.
Data Privacy and Information Security Laws and Regulations. t:connect data is hosted on secure servers and our use of
t:connect data is subject to internal policies and procedures that are designed to comply with the federal U.S. Health Insurance
Portability and Accountability Act of 1996, or HIPAA, as well as applicable U.S state privacy laws (including, but not limited to, the
recently passed California’s Consumer Privacy Act). Although t:connect and t:connect HCP are not currently available to users or
healthcare providers outside the United States, we are also mindful of requirements under Canada’s Personal Information Protection
and Electronic Documents Act, referred to as PIPEDA, and similar Provincial laws; and the EU General Data Protection Regulation,
commonly known as GDPR, and similar Member State laws. Collectively, these laws and regulations set standards for safeguarding
the confidentiality, integrity, and availability of the personal information we collect and use from customers and healthcare
providers. These laws also require, among other things, that we are transparent about how we collect and share personal data and that
we give t:connect users the ability to know what data we are collecting about them, to obtain a copy of that data, to correct or amend
that data, and to request we restrict use of that data.
Healthcare Fraud. In addition to information security and data privacy obligations, HIPAA also created two new federal
crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and
willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony
and may result in fines, imprisonment or exclusion from government sponsored programs. The false statements statute prohibits
knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent
statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony
and may result in fines or imprisonment. We believe we are in substantial compliance with these provisions of HIPAA.
Physician Payments Sunshine Act. The Physician Payments Sunshine Act requires certain manufacturers, including medical
device manufacturers, to submit annual data pertaining to payments or other transfers of value to covered recipients, including
physicians. Manufacturers may be subject to audit for their compliance with this law. Failure to submit the required data in an accurate
and timely manner may result in the imposition of civil monetary penalties. We believe we are in substantial compliance with the
Physician Payments Sunshine Act.
Anti-Bribery and Anti-Corruption Laws. The U.S. Foreign Corrupt Practices Act, or the FCPA, and similar laws in foreign
jurisdictions generally prohibit U.S. corporations and their representatives from offering, promising, authorizing or making improper
payments, gifts or transfers to any foreign government official in order to obtain or retain business. The scope of the FCPA would
include interactions with certain healthcare professionals and hospital administrators in many countries. We believe we are in
substantial compliance with the FCPA and similar foreign regulations.
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International Regulation
International sales of medical devices are subject to local government regulations, which vary substantially from country to
country. The time required to obtain approval in another country may be longer or shorter than that required for FDA approval, and
the requirements may differ. There is a trend towards harmonization of quality system standards among the European Union, United
States, Canada and various other industrialized countries.
The primary regulatory body in Europe is that of the European Union, which includes most of the major countries in Europe.
Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with
respect to medical devices. The European Union has adopted numerous directives and standards regulating the design, manufacture,
clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of a relevant
directive will be entitled to bear the CE conformity marking, indicating that the device conforms to the essential requirements of the
applicable directives and, accordingly, can be commercially distributed throughout Europe. The method of assessing conformity varies
depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party
assessment by a “Notified Body.” This third-party assessment may consist of an audit of the manufacturer’s quality system and
specific testing of the manufacturer’s product. An assessment by a Notified Body of one country within the European Union is
required in order for a manufacturer to commercially distribute the product throughout the European Union. Additional local
requirements may apply on a country-by-country basis. Outside of the European Union, regulatory approval would need to be sought
on a country-by-country basis in order for us to market our products.
In April 2018, we obtained the right to affix the CE Mark to the t:slim X2 with G5 integration. The CE Mark gives us
authorization to distribute the t:slim X2 throughout the European Union and in other countries that recognize the CE Mark. In October
2018, we received Health Canada approval to distribute the t:slim X2 with G5 integration throughout Canada. In the third quarter of
2018, we began selling the t:slim X2 with G5 integration in select geographies outside the United States through distributors, and our
direct sales efforts in Canada began in the fourth quarter of 2018.
Employees
As of December 31, 2018, we had 653 full-time employees. None of our employees are represented by a collective bargaining
agreement, and we have never experienced any work stoppage. We believe we have good relations with our employees.
Executive Officers
Kim D. Blickenstaff (age 66) has served as our President and Chief Executive Officer and as one of our directors since
September 2007. We recently announced that Mr. Blickenstaff will transition to the role of Executive Chairman of our board of
directors effective as of March 1, 2019. Prior to joining our company, Mr. Blickenstaff served as Chairman and Chief Executive
Officer of Biosite Incorporated, or Biosite, a provider of medical diagnostic products, from 1988 until its acquisition by Inverness
Medical Innovations, Inc. in June 2007. Mr. Blickenstaff previously served as a director of Medivation, Inc. (NASDAQ: MDVN), a
biotechnology company, from 2005 to 2016, until its acquisition by Pfizer, and as a director of DexCom, Inc. (NASDAQ: DXCM), a
provider of continuous glucose monitoring systems, from June 2001 to September 2007. Mr. Blickenstaff was formerly a certified
public accountant and has more than 20 years of experience overseeing the preparation of financial statements. He received a B.A. in
Political Science from Loyola University, Chicago, and an M.B.A. from the Graduate School of Business, Loyola University, Chicago.
John F. Sheridan (age 63) has served as our Executive Vice President and Chief Operating Officer since April 2013. We
recently announced that Mr. Sheridan will be appointed as our President and Chief Executive Officer effective as of March 1, 2019,
and will serve as our principal executive officer commencing on that date. Prior to joining our company, Mr. Sheridan served as Chief
Operating Officer of Rapiscan Systems, Inc., a provider of security equipment and systems, from March 2012 to February 2013. Mr.
Sheridan served as Executive Vice President of Research and Development and Operations for Volcano Corporation, a medical
technology company, from November 2004 to March 2010. From May 2002 to May 2004, Mr. Sheridan served as Executive Vice
President of Operations at CardioNet, Inc., a medical technology company, now operating as BioTelemetry, Inc. (NASDAQ: BEAT).
From March 1998 to May 2002, he served as Vice President of Operations at Digirad Corporation, a medical imaging company. Mr.
Sheridan holds a B.S. in Chemistry from the University of West Florida and an M.B.A. from Boston University.
David B. Berger (age 49) has served as our General Counsel since August 2013, as our Corporate Secretary since January 2015,
and as our Executive Vice President since January 2016. Prior to joining our company, from January 2008 until August 2013, he
served as Vice President and General Counsel of Senomyx, Inc., a taste science company, and was promoted to Senior Vice President
in January 2012. He also served as Corporate Secretary of Senomyx from January 2008 until May 2014. From April 2003 until
October 2007, Mr. Berger was responsible for all commercial aspects of legal affairs at Biosite, most recently serving as Vice
President, Legal Affairs. Previously, Mr. Berger was an attorney at Cooley Godward LLP and Amylin Pharmaceuticals, Inc. Mr.
Berger holds a B.A. in Economics from the University of California, Berkeley and a J.D. from Stanford Law School.
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Brian B. Hansen (age 51) has served as our Executive Vice President and Chief Commercial Officer since February 2016. Prior
to joining our company, Mr. Hansen served from September 2014 as Chief Commercial Officer of Adaptive Biotechnologies Corp.
From May 2013 to September 2014, Mr. Hansen served as Head of Commercial, Sales and Marketing, of Genoptix, a Novartis
Company. From December 2005 to February 2013, he served in various roles of increasing responsibility at Gen-Probe, Inc., a
medical diagnostics company, most recently serving as Senior Vice President, Global Sales and Services from January 2012 to
February 2013. Mr. Hansen received an M.B.A. from the School of Business at San Diego State University and a B.S. in Business
Administration from the University of Missouri-Columbia.
Susan M. Morrison (age 39) has served as our Chief Administrative Officer since September 2013 and as an Executive Vice
President since December 2017. From April 2013 until September 2013, she served as our Vice President, Human Resources,
Corporate and Investor Relations. Ms. Morrison served as our Director, Corporate and Investor Relations, from January 2009 to
March 2013, and was our Director, Corporate Services from November 2007 to December 2008. Prior to joining our company, Ms.
Morrison held various positions in Corporate and Investor Relations at Biosite from August 2003 through November 2007. Ms.
Morrison holds a B.A. in Public Relations from Western Michigan University.
Leigh A. Vosseller (age 46) has served as our Senior Vice President, Chief Financial Officer and Treasurer since January 2018
and as Executive Vice President since June 2018. Ms. Vosseller is our principal financial and accounting officer. She joined us as Vice
President of Finance in 2013 and was promoted to Senior Vice President of Finance in August 2017. Prior to that time, she served as
Vice President and Chief Financial Officer at Genoptix, beginning in 2011, after initially joining Genoptix in 2008. Prior to that she
held a senior finance position at Biosite where she played a key role in developing the financial and administrative infrastructure for
international expansion. Ms. Vosseller is a certified public accountant (inactive) and holds a B.S. in Accounting from Missouri State
University.
Family Relationships
Mr. Sheridan, who is expected to be appointed as our President and Chief Executive Officer as of March 1, 2019, and Ms.
Vosseller, who is currently our Executive Vice President, Chief Financial Officer and Treasurer, are involved in a personal
relationship. Ms. Vosseller will report directly to Mr. Sheridan in his new position as our President and Chief Executive Officer. Our
board of directors is informed of the relationship and due to the direct reporting arrangement, we have taken appropriate actions to
ensure compliance with Company policies and procedures. Mr. Sheridan and Ms. Vosseller will not be involved in setting
compensation or benefits for one another, which will continue to be determined by our Compensation Committee. In addition, our
Audit Committee of the Board of Directors intends to consider whether additional internal disclosure controls and procedures are
appropriate in light of the circumstances.
Except as described above, there are no family relationships between any of our directors and executive officers.
Additional Information
We were incorporated in Colorado in January 2006 and reincorporated in Delaware in January 2008. Our website address is
www.tandemdiabetes.com. We post links to our website to the following filings as soon as reasonably practicable after they are
electronically filed with or furnished to the SEC: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, proxy statements, information statements, beneficial ownership reports and any amendments to those reports or statements
filed or furnished pursuant to Sections 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
All such filings are available through our website free of charge. However, the information contained on or accessed through our
website does not constitute part of this Annual Report, and references to our website address in this Annual Report are inactive textual
references only.
Item 1A. Risk Factors
An investment in our common stock involves risks. You should carefully consider the risks described below, together with all of
the other information included in this Annual Report, as well as in our other filings with the SEC, in evaluating our business. If any of
the following risks actually occur, our business, financial condition, operating results and future prospects could be materially and
adversely affected. In that case, the trading price of our common stock may decline and you might lose all or part of your investment.
The risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently
believe to be immaterial may also impair our business, financial condition, operating results and prospects. Certain statements below
are forward-looking statements. For additional information, see “Cautionary Note Regarding Forward-Looking Statements.”
Risks Related to our Business and our Industry
We have incurred significant operating losses since inception and cannot assure you that we will achieve profitability.
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Since our inception in January 2006, we have incurred a significant net loss. As of December 31, 2018, we had an accumulated
deficit of $600.1 million. To date, we have financed our operations primarily through public and private sales of our equity securities,
debt financing, and cash collected from sales of our products. We have devoted substantially all of our resources to the development
and commercialization of our products, the scaling of our manufacturing operations and commercial organization, the research and
development of our current products and products under development, and the assembly of a management team to manage our
business.
We began commercial sales of our first commercial product, the t:slim Insulin Delivery System, or t:slim, in the third quarter of
2012. In October 2016, we launched t:slim X2, our flagship pump platform, and in August 2017, we commenced commercial sales of
t:slim X2 with Dexcom G5 Mobile CGM integration. The t:slim X2 hardware platform now represents nearly 100% of new pump
shipments. In June 2018, we received FDA approval to sell our new t:slim X2 with Basal-IQ technology, which is integrated with
Dexcom G6 CGM, and commenced sales and shipments of the t:slim X2 with Basal-IQ technology in the United States during the
third quarter of 2018. In addition, we commenced sales and shipments of our t:slim X2 with G5 integration in select markets outside
the United States during the third quarter of 2018.
Since the first quarter of 2013, we have been able to manufacture and sell our insulin pump products at a cost and in volumes
sufficient to allow us to achieve a positive overall gross margin. For the years ended December 31, 2018 and 2017, our gross profit
was $89.8 million and $44.1 million, respectively. Although we have achieved a positive overall gross margin, we still operate at a
significant net loss and expect that we will continue to do so for the foreseeable future.
To implement our business strategy and achieve profitability, we need to, among other things, increase sales of our products and
the gross profit associated with those sales, maintain an appropriate customer service and support infrastructure, fund ongoing
research and development activities, create additional efficiencies in our manufacturing processes, and obtain regulatory clearance or
approval to commercialize our products currently under development both domestically and internationally. Our expenses may
continue to increase as we pursue these objectives and make investments in our business. Additional increases in our expenses without
commensurate increases in sales could significantly increase our operating losses.
The extent of our future operating losses and the timing of our profitability are highly uncertain in light of a number of factors,
including the timing of the launch of new products and product features by us and our competitors, market acceptance of our products
and competitive products by people with insulin-dependent diabetes, their caregivers and healthcare providers, and the timing of
regulatory approval of our products and the products of our competitors. 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 insulin pump products to generate a significant portion of our revenue, and any factors that
negatively impact sales of these products may adversely affect our business, financial condition and operating results.
We generate nearly all of our revenue from the sale of t:slim X2 insulin pumps and the related insulin cartridges and infusion
sets. Sales of these products may be negatively impacted by many factors, including:
• market acceptance of the insulin pumps and related products manufactured and sold by our key competitors, including
Medtronic;
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•
the potential that breakthroughs for the monitoring, treatment or prevention of diabetes may render our insulin pumps
obsolete or less desirable;
adverse regulatory or legal actions relating to our insulin pump products or similar products or technologies;
failure of our Tandem Device Updater to accurately and timely provide customers with remote access to new product
features and functionality as anticipated, or our failure to obtain regulatory approval for any such updates;
changes in reimbursement rates or policies relating to insulin pumps or similar products or technologies by third-party
payors, such as the decision by UnitedHealthcare that restricts a majority of its members from accessing our pumps;
our inability to enter into contracts with third-party payors on a timely basis and on acceptable terms;
problems arising from the expansion of our manufacturing capabilities and commercial operations, or destruction, loss,
or temporary shutdown of our manufacturing facilities; and
claims that any of our insulin pump products, or any component thereof or related supplies or systems, infringes on
patent rights or other intellectual property rights of third parties.
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In addition, sales of any of our current or future insulin pump products with CGM integration are subject to the continuation of
our applicable agreements with Dexcom, which under some circumstances are subject to termination by Dexcom, with or without
cause, on relatively short notice. Sales of our products may also be negatively impacted in the event of any regulatory or legal actions
relating to Dexcom’s CGM products, or in the event of any disruption to the availability of the applicable CGM related supplies, such
as sensors or transmitters, in a given market in which our products are sold.
Furthermore, sales of our products may be adversely impacted by negative perceptions regarding our financial stability relative
to that of our competitors, and our ability to sustain our business operations on a long-term basis. These perceptions may cause people
with insulin-dependent diabetes, their caregivers and healthcare providers, as well as independent distributors and third-party payors,
to question our ability to continue to sell our products, provide customer service, support our commercial organization, and fulfill our
strategic objectives. These concerns may arise from a number of factors, including our recent and projected financial results, changes
in and volatility of our stock price, the competitive environment in our industry, and uncertainties regarding the regulatory
environment. Any such concerns, whether actual or perceived, could cause consumers to delay the purchase of our products or
purchase competitive products.
Because we currently rely on sales of our t:slim X2 insulin pump and related products to generate a significant majority of our
revenue, any factors that negatively impact sales of these products, or result in sales of these products increasing at a lower rate than
expected, could adversely affect our business, financial condition and operating results.
Our ability to maintain and grow our revenue depends in part on retaining a high percentage of our customer base.
A key to maintaining and growing our revenue is the retention of a high percentage of our customers due to the potentially
significant revenue generated from ongoing purchases of disposable insulin cartridges and other supplies. In addition, our pumps are
designed and tested to remain effective for at least four years and a satisfied customer may consider purchasing another product from
us when the time comes to replace the pump. We have developed retention programs aimed at our customers, their caregivers and
healthcare providers, which include training specific to our products, ongoing support by sales and clinical employees, and 24/7
technical support and customer service. Demand for our products from our existing customers could decline, or could fail to increase
in line with our projections, as a result of a number of factors, including the introduction of competitive products, breakthroughs for
the monitoring, treatment or prevention of diabetes, changes in reimbursement rates or policies, manufacturing problems, perceived
safety or reliability issues with our products or the products of our competitors, the failure to secure regulatory clearance or approvals
in a timely manner or at all, or for other reasons. The failure to retain a high percentage of our customers and increase sales to these
customers consistent with our forecasts would have a material adverse effect on our business, financial condition and operating results.
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, treatment techniques or technologies, as well as other activities of industry participants. We believe our products compete,
and will continue to compete, directly with a number of traditional insulin pumps, as well as other methods for the treatment of
diabetes, including MDI therapy.
Our primary 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 plc, has been the market leader
for many years and has the majority share of the traditional insulin pump market in the United States. However, the market for insulin
pumps continues to experience significant changes. For instance, in October 2017, Johnson & Johnson announced its plans to
discontinue the operations of Animas and to exit the insulin pump business entirely. Animas designated Medtronic as a preferred
partner to facilitate the transition of their respective insulin pump customers. In addition, over the past several years Eli Lilly & Co.
announced that it was developing an insulin pump and Becton Dickinson announced that it plans to launch an insulin pump designed
for persons with type 2 diabetes. There are also a number of other companies developing and marketing their own insulin delivery
systems and/or related software applications, including insulin pumps and Bluetooth-enabled insulin pens to support MDI therapy.
While these industry changes are significant, it is difficult to know how they will impact our business or the competitive landscape in
which we operate. Our key competitors, most notably Medtronic, enjoy several competitive advantages over us, including:
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greater financial and human resources for sales and marketing, product development, customer service and clinical
resources;
greater ability to respond to competitive pressures and regulatory uncertainty;
established relationships with healthcare providers, third-party payors and regulatory agencies;
established reputation and name recognition among healthcare providers and other key opinion leaders in the medical
industry generally and the diabetes industry in particular;
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greater market share and established base of customers;
products supported by long-term clinical data;
larger and more established distribution networks;
greater ability to cross-sell products or provide incentives to healthcare providers to use their products; and
• more experience in conducting research and development, manufacturing, clinical trials, and obtaining regulatory
approval or clearance.
In some instances, our competitors offer products that include features that we do not currently offer. For instance, Medtronic
offers a traditional insulin pump with a hybrid closed-loop AID functionality and a new CGM system and Insulet offers an insulin
pump with a tubeless delivery system that does not utilize an infusion set. These specific features may make the competitive products
more desirable to customers and healthcare providers, which could negatively impact sales of our products.
In addition, the competitive environment in which we operate has resulted and may continue to result in competitive pressures
on our manufacturers, suppliers, distributors, collaboration partners and other business constituents. For example, we have entered into
development agreements with Dexcom, which provide us non-exclusive licenses to integrate various generations of Dexcom CGM
technology with our insulin pump products. In the fourth quarter of 2017, Abbott Laboratories launched a new blood glucose
monitoring system in the United States which competes with the Dexcom technology, and another CGM product with CE mark
approval was approved in the second quarter of 2018 for sale in the United States. Competitive pressures within our industry could
negatively impact the financial condition of our business partners, impact their ability to fulfill contractual obligations to us, and result
in harm to our financial condition and operating results.
For these and other reasons, we may not be able to compete successfully against our current or potential future competitors. As a
result, our product sales may be negatively affected, which could have a material adverse impact on our financial condition and
operating results
Competitive products or other technological developments and breakthroughs for the monitoring, treatment or prevention of
diabetes may render our products obsolete or less desirable.
Our ability to achieve our strategic objectives will depend, among other things, on our ability to develop and commercialize
products for the treatment of diabetes that offer distinct features and functionality, are easy-to-use, receive adequate coverage and
reimbursement from third-party payors, and are otherwise more appealing than available alternatives. Our primary competitors, as
well as a number of other companies and medical researchers are pursuing new delivery devices, delivery technologies, sensing
technologies, treatment techniques, procedures, drugs and other therapies for the monitoring, treatment and prevention of diabetes.
Any breakthroughs in diabetes monitoring, treatment or prevention could reduce the potential market for our products or render our
products obsolete altogether, which would significantly reduce our sales or cause our sales to grow at a slower rate than we currently
expect. In addition, even the perception that new products may be introduced, or that technological or treatment advancements could
occur, could cause consumers to delay the purchase of our products.
Because the insulin-dependent diabetes market is large and growing, we anticipate companies will continue to dedicate
significant resources to developing competitive products and technologies. The introduction by competitors of products that are or
claim to be superior to our products may create market confusion that may make it difficult to differentiate the benefits of our products
over competitive products. In addition, some of our competitors employ aggressive pricing strategies, including the use of discounts,
rebates, low cost product upgrades or other financial incentives that could adversely affect sales of our products. If a competitor
develops a product that competes with or is perceived to be superior to our products, or if competitors continue to utilize strategies that
place downward pressure on pricing within our industry, our sales may decline, our operating margins could be reduced and we may
fail to meet our financial projections, which would materially and adversely affect our business, financial condition and operating
results.
Moreover, we have designed our products to resemble modern consumer electronic devices to address certain embarrassment
and functionality concerns consumers have raised with respect to traditional pumps. The consumer electronics industry is itself highly
competitive, and characterized by continuous new product introductions, rapid developments in technology, and subjective and
changing consumer preferences. If, in the future, consumers cease to view our products as contemporary or convenient as compared to
then-existing consumer electronics technology, our products may become less desirable.
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The failure of our insulin pump and related 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 our insulin pump and related products achieving and maintaining market
acceptance. In order for us to sell our products to people with insulin-dependent diabetes, we must convince them, their caregivers and
healthcare providers that our products are an attractive alternative to competitive products for the treatment of diabetes, including
traditional insulin pump products and MDI therapies, as well as alternative diabetes monitoring, treatment or prevention
methodologies. Market acceptance and adoption of our products depends on educating people with diabetes, as well as their caregivers
and healthcare providers, about 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 our products, our sales may decline or
we may achieve sales below our expectations.
Market acceptance of our products could be negatively impacted by many factors, including:
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the failure of our products to achieve and maintain wide acceptance among people with 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 or uncertainties associated with the use of our insulin pump products or similar products or
technologies generally;
adverse regulatory or legal actions relating to our insulin pump products or similar products or technologies; and
results of clinical studies relating to our existing products or products under development or similar competitive
products.
Furthermore, 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 breakthroughs, or the perception that advancements or breakthroughs
could occur, in our products or the products offered by our competitors. It is also possible that consumers interested in purchasing any
of our future products currently under development may delay the purchase of one of our current products.
If our insulin pump products do not achieve and maintain widespread market acceptance, we may fail to achieve sales consistent
with our projections, in which case our business, financial condition and operating results could be materially and adversely affected.
Our ability to achieve profitability will depend, in part, on our ability to reduce the per unit cost of our products by increasing
production volume and manufacturing efficiency, and by reducing raw material and component costs, labor, product-training,
warranty and manufacturing overhead costs per unit.
We believe our ability to reduce the per unit cost of our insulin pumps and related products will have a significant impact on our
ability to achieve profitability. Our cost of sales includes raw materials and component parts, labor costs, product training expenses,
warranty, freight, scrap and inventory excess and obsolescence. It also includes manufacturing overhead costs, including expenses
relating to quality assurance, inventory procurement and control, facilities, equipment, information technology and operations
management. If we are unable to sustain or reduce our overall cost of sales, including through arrangements such as volume purchase
discounts, negotiation of pricing and cost reductions with our suppliers, more efficient training programs for customers, and improved
warranty performance, it will be difficult to reduce our per unit costs and our ability to achieve profitability will be constrained.
In addition, the per unit cost of our products is significantly impacted by our overall production volumes, and any factors that
prevent our products from achieving market acceptance, cause our production volumes to decline, or result in our sales growing at a
slower rate than we expect, would significantly impact our expected per unit costs, which would adversely impact our gross margins.
In addition, we may not achieve anticipated improvements in manufacturing productivity following the relocation of our
manufacturing operations to our Barnes Canyon facility. Furthermore, while we currently believe our proprietary technology platform
will allow us to efficiently design and develop new products, changes in the market that require us to modify or replace our existing
platform will reduce the efficiencies gained through our platform and could increase our per unit costs or prevent those costs from
declining. If we are unable to effectively manage our overall costs while increasing our production volumes and lowering our per unit
costs, we may not be able to achieve or sustain profitability, which would have an adverse impact on our business, financial condition
and operating results.
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Failure to secure or retain adequate coverage or reimbursement for our current products 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 sales of insulin pumps, and related insulin cartridges and infusion sets, and
expect to continue to do so in the foreseeable future. A substantial portion of the purchase price of an insulin pump is typically paid
for by third-party payors, including private insurance companies, preferred provider organizations and other managed care providers.
Future sales of our current and future products will be limited unless our customers can rely on third-party payors to pay for all or part
of the associated purchase cost. Access to adequate coverage and reimbursement for our current and future products by third-party
payors, both domestically and internationally, is essential to the acceptance of our products by customers.
As guidelines in setting their coverage and reimbursement policies, many third-party payors in the United States use coverage
decisions and payment amounts determined by the Centers for Medicare and Medicaid Services, or CMS, which administers the U.S.
Medicare program. Medicare periodically reviews its reimbursement practices for diabetes-related products. Medicare previously
implemented a competitive bidding process for blood glucose strip reimbursement, which resulted in a significant reduction in the
reimbursement rate for those products. In 2017, Medicare announced, and then shortly thereafter suspended, a competitive bidding
process for insulin pumps. As a result, there is uncertainty as to the future Medicare reimbursement rate for our products. It is also
possible that CMS may review and modify the current coverage and reimbursement of diabetes-related products in connection with
anticipated changes to the regulatory approval process for insulin pumps and related products, software applications and services. In
addition, 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.
For instance, UnitedHealthcare has designated one of our competitors as their preferred, in-network durable medical equipment
provider of insulin pumps for most customers age seven or above. We expect this decision will prevent a majority of UnitedHealthcare
members from purchasing an insulin pump from us for the foreseeable future. It is possible that other third-party payors may adopt
similar policies in the future, which would adversely impact our ability to sell our products.
We currently have contracts establishing reimbursement for our insulin pump products with approximately 184 national and
regional third-party payors in the United States. While we may enter into additional contracts both domestically and internationally,
with third-party payors and adding coverage for future products under our current agreements, 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 particular, we do not have experience securing reimbursement in international markets. In addition, existing 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 our current and 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 may face unexpected challenges in marketing and selling our products, and training new customers on the use of our products,
which could harm our ability to achieve our sales forecasts.
We have limited experience marketing and selling our products as well as training new customers on their use, particularly in
international markets. In addition, the vast majority of our existing customers are individuals with type 1 diabetes, and we have limited
experience marketing and selling our products to customers with type 2 diabetes. We anticipate that selling our products to customers
with higher insulin requirements, including customers with type 2 diabetes, may be even more difficult following our decision to
discontinue sales of new t:flex pumps in the third quarter of 2018.
We expect to derive nearly all of our revenue from the sale of our t:slim X2 insulin pump, and the related insulin cartridges and
infusion sets, unless and until we receive regulatory clearance or approval for other products currently under development. As a result,
our financial condition and operating results are and will continue to be highly dependent on our ability to adequately promote, market
and sell our t:slim X2 insulin pump and related products, and the ability of our diabetes educators to train new customers on the use of
our products. If our sales and marketing representatives or diabetes educators fail to achieve their objectives, our sales could decrease
or may not increase at levels that are in line with our forecasts.
If we are unable to maintain our existing sales, marketing, clinical and customer service infrastructure, we may fail to increase
our sales to meet our forecasts.
A key element of our business strategy involves our sales, clinical, marketing and customer service personnel driving adoption
of our products. We have increased the number of sales, marketing, clinical and customer service personnel employed by us since the
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initial commercial launch of t:slim in 2012. However, we have faced considerable challenges in growing and managing these
resources, including with respect to recruiting, training and assimilation of new territories and accounts. We expect to continue to face
significant challenges as we manage and grow our infrastructure in the future and work to motivate and retain the individuals who
make up our existing infrastructure. These challenges may be even greater in connection with our commercial expansion outside the
United States, where we have limited experience. Unexpected turnover among our sales, marketing, clinical and customer service
personnel would have a negative impact on our ability to achieve our sales projections. Further, if a sales, marketing or clinical
representative was to depart and be retained by one of our competitors, we may fail to prevent him or her from helping competitors
solicit business from our existing customers, which could adversely affect our sales. Similarly, if we are not able to recruit and retain a
network of diabetes educators and customer service personnel, we may not be able to successfully train and service new customers,
which could delay new sales and harm our reputation.
We expect the management of our sales, marketing, clinical and customer service personnel will continue to place significant
burdens on our management team. If we are unable to retain our personnel in line with our strategic plans, we may not be able to
effectively commercialize our existing products or products under development, or enhance the strength of our brand, either of which
could result in the failure of our sales to increase in line with our projections or cause sales to decline.
Our sales and marketing efforts are dependent on independent distributors who are free to market products that compete with our
products. If we are unable to maintain or expand our network of independent distributors, our sales may be negatively affected.
For the year ended December 31, 2018, sales to approximately 64 independent distributors represented approximately 79% of
our sales. While our goal in the United States is to reduce the percentage of our sales to independent distributors over time as we enter
into contracts with additional third-party payors, we believe a majority of our sales will continue to be to independent distributors for
the foreseeable future, and it is possible that the percentage of our sales to independent distributors could even increase in the near
term, particularly in light of our plans to primarily rely on independent distributors outside of the United States. For example, our
dependence upon independent distributors domestically could increase if third-party payors decide to contract with independent
distributors directly in lieu of contracting with us to supply our products to their members directly. Our dependence upon independent
distributors could also increase if customers prefer to purchase all of their diabetes supplies through a single source, instead of
purchasing pump-related products through us and other diabetes supplies through other suppliers. None of our independent
distributors domestically has been required to sell our products exclusively and each of them may freely sell the products of our
competitors. Our distributor agreements in the United States generally have one-year initial terms with automatic one-year renewal
terms, and are terminable in connection with a party’s material breach. Our distributor agreements outside the United States generally
have longer initial terms and, in addition to being terminable in connection with a party’s material breach, include provisions that
allow us to terminate those agreements prior to their ordinary expiration in specified circumstances. If we are unable to maintain or
expand our network of independent distributors, our sales may be negatively affected.
For the year ended December 31, 2018, our two largest independent distributors in the United States collectively comprised
approximately 35% of our sales, and our nine independent international distributors collectively comprised approximately 5% of our
sales. If any of our key independent distributors were to cease to distribute our products or reduce their promotion of our products as
compared to the products of our competitors, our sales could be adversely affected. In that case, we may need to seek alternative
independent distributors or increase our reliance on our other independent distributors or our direct sales representatives, which may
not prevent our sales from being adversely affected. Additionally, to the extent we enter into additional arrangements with
independent distributors to perform sales, marketing or distribution services, or other arrangements pursuant to which independent
distributors may purchase product from us, the terms of the arrangements could result in our product margins to be lower than if we
directly marketed and sold our products.
If the third parties on which we increasingly rely to assist us with our current and anticipated pre-clinical development or clinical
trials do not perform as expected, we may not be able to obtain regulatory clearance or approval or commercialize our products.
As our clinical infrastructure expands, we expect to increasingly rely on third parties, such as contract research organizations,
medical institutions, clinical investigators and contract laboratories to conduct some of our current and anticipated pre-
clinical investigations and clinical trials. If we are not able to reach mutually acceptable agreements with these third parties on a
timely basis, or these third parties do not successfully carry out their commitments or regulatory obligations or meet expected
deadlines, or the quality or accuracy of the data they obtain is compromised due to the failure to adhere to agreed upon clinical
protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended,
delayed, suspended or terminated, and we may not be able to obtain regulatory clearance or approval for, or successfully
commercialize, our products on a timely basis, if at all, and our business, operating results and prospects may be adversely affected. In
particular, we currently expect to rely on data from the U.S. portion of the Clinical Acceptance of the Artificial Pancreas (DCLP3)
portion of the IDCL Trial, to support our development of t:slim X2 with Control IQ technology. We may also rely on data from other
portions of the larger IDCL Trial to support additional regulatory submissions. The IDCL Trial is being conducted entirely by third
parties over which we have little or no control or influence. In the event that the IDCL Trial is not performed on a timely basis, or if
the quality or accuracy of the data obtained from the IDCL Trial is compromised due to the failure to adhere to clinical protocols or
40
regulatory requirements or for other reasons, our development activities for t:slim X2 with Control IQ technology may be negatively
impacted.
We are increasingly dependent on clinical investigators and clinical sites to enroll patients in our current and anticipated clinical
trials, and the failure to successfully complete the clinical trials could prevent us from obtaining regulatory approvals for or
commercializing our products.
As part of our product development efforts, we expect to increasingly rely on clinical investigators and clinical sites to enroll
patients in our clinical trials and other third parties to manage such trials and to perform related data collection and analysis. However,
we may not be able to control the amount and timing of resources that clinical sites may devote to our clinical trials, especially with
respect to the IDCL Trial that we intend to rely upon for the development of t:slim X2 with Control IQ technology. If these clinical
investigators and clinical sites fail to enroll a sufficient number of patients, fail to ensure compliance by patients with clinical
protocols, or fail to comply with regulatory requirements, we may be unable to successfully complete our clinical trials, which could
prevent us from obtaining regulatory approvals for our products and commercializing our products, which would have an adverse
impact on our business.
If important assumptions about the potential market for our products are inaccurate, or if we have failed to understand what
people with insulin-dependent diabetes are seeking in an insulin pump, our business and operating results may be adversely
affected.
Our business strategy was developed based on a number of important assumptions about the diabetes industry in general, and
the insulin-dependent diabetes market in particular, any one or more of which may prove to be inaccurate or may change over time.
For example, we believe that the benefits of insulin pump therapy as compared to other common insulin treatment alternatives will
continue to drive growth in the market for insulin pump therapy. In addition, we believe the incidence of diabetes in the United States
and worldwide is increasing. However, each of these assumptions may prove to be inaccurate and limited sources exist to compare
treatment alternatives and obtain reliable market data. The actual incidence of diabetes, and the actual demand for our products or
competitive products, could differ materially from our projections if our assumptions are incorrect. In addition, our strategy of
focusing exclusively on the insulin-dependent diabetes market may limit our ability to increase sales or achieve profitability.
Another key element of our business strategy is utilizing market research to understand what people with diabetes are seeking to
improve their diabetes therapy management. This strategy underlies our entire product design, marketing and customer support
approach and is the basis on which we developed our current products and are pursuing the development of new products. However,
our market research is based on interviews, focus groups and online surveys involving people with insulin-dependent diabetes, their
caregivers and healthcare providers that represent only a small percentage of the overall insulin-dependent diabetes market. As a
result, the responses we received may not be reflective of the broader market and may not provide us accurate insight into the desires
of people with insulin-dependent diabetes. In addition, understanding the meaning and significance of the responses received during
our market research necessarily requires that analysis be conducted and conclusions be drawn. We may not be able perform an
analysis that yields meaningful results, or the conclusions we draw from the analysis could be misleading or incorrect. Moreover, even
if our market research has allowed us to better understand the features and functionality consumers are seeking in an insulin pump to
improve management of their diabetes therapy, there can be no assurance that consumers will actually purchase our products or that
our competitors will not develop products with similar features.
We expect to face complexities frequently encountered by companies in competitive and rapidly-evolving markets, which may make
it difficult to evaluate our business and forecast our future sales and operating results.
We operate in a competitive and rapidly-evolving market. Important industry changes, such as the FDA approval and launch of
new products by our competitors and the announcement by Johnson & Johnson that it is discontinuing the operations of Animas and
exiting the insulin pump business, as well changes specific to our business, such as the approval of t:slim X2 with Basal-IQ
technology and our commencement of commercial sales in international markets during the third quarter of 2018, combine to make it
more difficult for us to predict our future sales and operating results, as well as our expected timeframe to achieve profitability. In
assessing our business prospects, you should consider these factors as well as the various risks and difficulties frequently encountered
by companies in competitive and rapidly evolving markets, particularly those facing emerging growth companies that manufacture
and sell medical devices.
These risks include our ability to:
•
implement and execute our business strategy;
• manage and improve the productivity of our sales, clinical and marketing and customer service infrastructure to grow
sales of our existing and proposed products, and enhance our ability to provide service and support to our customers;
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•
•
•
•
•
•
•
•
achieve and maintain market acceptance of our products and increase awareness of our brand among people with
insulin-dependent diabetes, their caregivers and healthcare providers;
comply with a broad range of regulatory requirements within a highly regulated industry;
enhance our manufacturing capabilities, increase production of products efficiently while maintaining quality
standards, and adapt our manufacturing facilities to the production of new products;
respond effectively to competitive pressures and developments;
enhance our existing products and develop proposed products;
obtain and maintain regulatory clearance or approval to enhance our existing products and commercialize proposed
products;
perform clinical trials with respect to our existing products and proposed products; and
attract, retain and motivate qualified personnel in various areas of our business.
As a result of these or other risks, we may not be able to execute key components of our business strategy, and our business,
financial condition and operating results may suffer
The Technology Upgrade Program resulted in accounting complexities that may lead to confusion when comparing our historical
and future financial results.
While our Technology Upgrade Program expired on September 30, 2017, it resulted in a number of accounting complexities that
will continue to make comparisons of our historical and future financial results more difficult. In particular, during the term of the
Technology Upgrade Program, U.S. GAAP prevented us from recognizing, at the time of sale, up to 100% of the sales and cost of
sales associated with the sale of our insulin pumps to eligible customers. Instead, depending on the type of pump sold, we were
required to defer some or all of the sales and cost of sales until a later date. In light of the expiration of the Program, we are no longer
subject to these accounting deferrals. However, in evaluating our 2017 financial results through December 31, 2017, as a result of the
Technology Upgrade Program we recorded incremental net sales of $5.0 million that were previously deferred, with a corresponding
increase of $3.1 million in gross profit. It is possible that we may offer other consumer-directed programs in the future, which may
result in similar or additional accounting complexities.
Despite our efforts to explain the required accounting treatment for the Technology Upgrade Program, it is possible that there
may be confusion when comparing our historical and future financial results, which may cause investors to avoid investing in our
common stock and adversely impact our stock price.
Manufacturing risks may adversely affect our ability to manufacture products, which could negatively impact our sales and
operating margins.
Our business strategy depends on our ability to manufacture our current and proposed products in sufficient quantities and on a
timely basis so as to meet consumer demand, while adhering to product quality standards, complying with regulatory requirements and
managing manufacturing costs. We are subject to numerous risks related to our manufacturing capabilities, including:
•
•
•
•
•
quality or reliability defects in product components that we source from third-party suppliers;
our inability to secure product components in a timely manner, in sufficient quantities and on commercially reasonable
terms;
difficulty identifying and qualifying alternative suppliers for components in a timely manner;
implementing and maintaining acceptable quality systems while experiencing rapid growth;
our failure to increase production of products to meet demand;
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•
•
•
our inability to modify production lines and expand manufacturing facilities to enable us to efficiently produce future
products or implement changes in current products in response to consumer demand or regulatory requirements;
our inability to manufacture multiple products simultaneously while utilizing common manufacturing equipment; and
potential damage to or destruction of our manufacturing equipment or manufacturing facility.
As demand for our products increases, and as the number of our commercial products expands, we will have to invest additional
resources to purchase components, hire and train employees, and enhance our manufacturing processes and quality systems. In
addition, although we expect some of our products under development to share product features and components with our current
products, manufacturing of these products may require modification of our production lines, hiring of specialized employees,
identification of new suppliers for specific components, implementing additional equipment and procedures, obtaining new regulatory
approvals, or developing new manufacturing technologies. Ultimately, it may not be possible for us to manufacture these products at a
cost or in quantities sufficient to make these products commercially viable.
If we fail to increase our production capacity to meet consumer demand while also maintaining product quality standards,
obtaining and maintaining regulatory approvals, and efficiently managing costs, our sales and operating margins could be negatively
impacted, which would have an adverse impact on our financial condition and operating results.
We depend on a limited number of third-party suppliers for certain components and products, and the loss of any of these
suppliers, or their inability to provide us with an adequate supply of components or products, could harm our business.
We currently rely, and expect to continue to rely, on third-party suppliers to supply components of our current products and our
potential future products, including our disposable cartridges. For example, we rely on plastic injection molding companies to provide
plastic molded components, electronic manufacturing suppliers to provide electronic assemblies, and machining companies to provide
machined mechanical components. We also purchase all of our infusion sets and pump accessories from third-party suppliers. For our
business strategy to be successful, our suppliers must be able to provide us with components and products in sufficient quantities, in
compliance with regulatory requirements and quality control standards, in accordance with agreed-upon specifications, at acceptable
costs and on a timely basis.
Although we have long-term supply agreements with many of our suppliers, these agreements do not include long-term capacity
commitments. Under most of our supply agreements, we make purchases on a purchase order basis and have no obligation to buy any
given quantity of components or products until we place written orders, and our suppliers have no obligation to manufacture for us or
sell to us any given quantity of components or products until they accept an order. In addition, our suppliers may encounter problems
that limit their ability to manufacture components or products for us, including financial difficulties or damage to their manufacturing
equipment or facilities. As a result, our ability to purchase adequate quantities of our components or products may be limited. If we
fail to obtain sufficient quantities of high-quality components to meet demand on a timely basis, we could lose customer orders, our
reputation may be harmed and our business could suffer. Furthermore, negative perceptions among our suppliers regarding our
financial stability, and our ability to sustain our business operations on a long-term basis, may cause one or more of our suppliers to
terminate their relationship with us, or claim that our financial condition causes them to demand different payment terms.
We generally use a small number of suppliers for our components and products. Depending on a limited number of suppliers
exposes us to risks, including limited control over cost, availability, quality and delivery schedules. Moreover, in some cases, we do
not have long-standing relationships with our manufacturers and may not be able to convince suppliers to continue to make
components available to us unless there is demand for such components from their other customers. As a result, there is a risk that
certain components could be discontinued and no longer available to us. We have in the past been, and we may in the future be,
required to make significant “last time” purchases of component inventory that is being discontinued by the manufacturer to ensure
supply continuity. If any one or more of our suppliers cease to provide us with sufficient quantities of components in a timely manner
or on terms acceptable to us, we would have to seek alternative sources of supply. Because of factors such as the proprietary nature of
our products, our quality control standards and applicable regulatory requirements, we cannot quickly engage additional or
replacement suppliers for some of our critical components. Failure of any of our suppliers to deliver products at the level our business
requires could harm our reputation and limit our ability to meet our sales projections, which could have a material adverse effect on
our business.
We may also have difficulty obtaining similar components from other suppliers that are acceptable to the FDA, or other
regulatory agencies, and the failure of our suppliers to comply with regulatory requirements could expose us to regulatory action
including warning letters, product recalls, termination of distribution, product seizures or civil penalties. Such a failure by our
suppliers could also require us to cease using the components, seek alternative components or technologies, and modify our products
to incorporate alternative components or technologies, which could necessitate additional regulatory approvals. Any disruption of this
nature, or any increased expenses associated with any such disruption, could negatively impact our ability to manufacture our products
on a timely basis, in sufficient quantities, or at all, which could harm our commercialization efforts and have a material adverse impact
on our operating results.
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If we cannot reliably manufacture our new infusion set connector, or if it does not achieve market acceptance, we may not achieve
our financial projections.
In September 2017, we began commercial sales in the United States of products with t:lock, which replaced the standard Luer-
lok connector that historically joined an infusion set to our proprietary disposable insulin cartridges. Concurrently, we began selling
infusion sets that are compatible with t:lock.
We believe the transition period for our direct customers and distributors in the United States to utilize their inventory on hand
before transitioning to t:lock is substantially complete. In addition, we are initially offering standard Luer-lok cartridges and infusion
sets in select international markets, and expect to transition to our t:lock connector in international markets during 2019. Accordingly,
we may continue offering both styles of cartridges and infusion sets to facilitate the transition of customer supplies through 2019,
although there may be circumstances that require additional time for some direct customers and distributors to complete the transition.
Our supplier of infusion sets must manufacture a variety of lengths and styles of infusion sets with t:lock that match our cartridges.
Failure to do so, or to do so at the necessary production volumes, may result in our inability to convert customers to t:lock when
anticipated, which would negatively impact our ability to achieve our financial projections. Due to the variability in purchasing
patterns, standard Luer-lok inventory may not be consumed at the predicted rates and we may be required to offer both styles of
insulin cartridges and infusion sets for a longer period than anticipated or we may be left with excess quantities of standard Luer-
lok inventory that we cannot sell at standard prices or at all, which would negatively impact our results of operations.
While t:lock was designed based on customer feedback, and all standard Luer-lok infusion sets that we currently offer are also
available with t:lock, it is possible that t:lock may not continue to gain market acceptance by current or potential customers, their
caregivers, or healthcare providers. Any negative market response to t:lock may impact a current customer’s decision to purchase a
new pump from us at the time of renewal. In addition, potential customers may decide not to purchase our insulin pumps if they do not
prefer t:lock or t:lock compatible infusion sets, which could have a material adverse impact on our business, financial condition and
operating results.
We currently operate primarily at two locations in San Diego, California, and any disruption at these locations could adversely
affect our business and operating results.
Substantially all of our operations are conducted at two locations in San Diego, California, including our manufacturing
processes, research and development activities, customer and technical support, and management and administrative functions. In
addition, the majority of our inventory of component supplies and finished goods is stored at one of these locations. We also store
finished goods at third-party warehouses in Carson, California and Austin, Texas for the fulfillment of certain customer orders. We
take precautions to safeguard our facilities, including by acquiring insurance, employing back-up generators, adopting health and
safety protocols and utilizing off-site storage of computer data. However, vandalism, terrorism or a natural disaster, such as an
earthquake, fire or flood, or other catastrophic event, could damage or destroy our manufacturing equipment or our inventory of
component supplies and finished goods, cause substantial delays in our operations, result in the loss of key information, result in
reduced sales, and cause us to incur additional expenses. Our insurance coverage may not be sufficient to provide coverage with
respect to the damages incurred in any particular case, and our insurance carrier may deny coverage with respect to all or a portion of
our claims. Regardless of the level of insurance coverage or other precautions taken, damage to our facilities may have a material
adverse effect on our business, financial condition and operating results.
We may not experience the anticipated operating efficiencies from the transition of our manufacturing operations to our new
facility.
At the beginning of 2018, we completed the transition of our manufacturing operations to our Barnes Canyon facility that we
expect will allow for future product manufacturing expansion. However, we may not experience the anticipated operating efficiencies
at the new facility, or we may experience efficiencies to a lesser extent than projected. If we fail to achieve the operating efficiencies
that we anticipate, our manufacturing and operating costs may be greater than expected, which would have a material adverse impact
on our operating results.
In September 2017, following a site inspection of our Barnes Canyon facility, the FDA issued a Form 483, List of Inspectional
Observations, containing two observations. Following our receipt of the Form 483, we began implementing corrective and preventive
actions to fully address the FDA observations, and in October 2017, we provided a written response to the FDA. In December 2017,
we received a letter from the FDA stating that our initial written response did not fully address the FDA observations, and that the
FDA would address the observations during its next regularly scheduled inspection of our facilities. If the FDA is not satisfied, it may
issue a warning letter to us or may take other actions, any of which could have a material adverse effect on our business. On August
15, 2018, we closed the voluntary recall initiated on April 12, 2018 for 55 t:slim G4 pumps.
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We expect that the management and support of our new manufacturing facility and the increase of our manufacturing volumes
will place significant burdens on our management team, particularly in areas relating to operations, quality, regulatory, facilities and
information technology. We may not be able to effectively manage our ongoing manufacturing operations and we may not achieve the
operating efficiencies that we anticipate from the new facility. Further, additional increases in demand for our products may require
that we further expand our business operations, which may require that we obtain additional facilities or make additional investments
in capital equipment.
If we do not enhance our product offerings through our research and development efforts, we may fail to effectively compete,
which may impede our ability to become profitable.
In order to increase our sales and market share in the insulin-dependent diabetes market, we must enhance and broaden our
product offerings in response to the evolving demands of people with insulin-dependent diabetes, their caregivers and healthcare
providers, as well as competitive pressures and technologies. We may not be successful in developing, obtaining regulatory approval
for, or marketing our proposed products when anticipated, or at all. In addition, notwithstanding our market research efforts, our future
products may not be accepted by people with insulin-dependent diabetes, their caregivers, healthcare providers or third-party payors.
The success of any proposed product offerings will depend on numerous factors, including our ability to:
•
•
•
identify the product features and functionality that people with insulin-dependent diabetes, their caregivers and
healthcare providers are seeking in an insulin pump, and successfully incorporate those features into our products;
develop and introduce products in sufficient quantities and in a timely manner;
offer products at a price that is competitive with other products then available;
• work with third-party payors to obtain reimbursement for our products;
•
•
•
adequately protect our intellectual property and avoid infringing upon the intellectual property rights of third parties;
demonstrate the safety and efficacy of proposed products; and
obtain the necessary regulatory approvals for proposed products.
If we fail to generate demand by continuing to develop products that incorporate features and functionality requested by people
with insulin-dependent diabetes, their caregivers or healthcare providers, or if we do not obtain regulatory clearance or approval for
proposed products in time to meet market demand, we may be unable to compete and may fail to generate sales sufficient to achieve
or maintain profitability. We have in the past experienced, and may in the future experience, delays in various phases of product
development and commercialization, including during research and development, manufacturing, limited release testing, marketing
and customer education efforts. Any delays in our anticipated regulatory submissions or approvals, or subsequent product launches,
may significantly impede our ability to successfully compete in our markets. In particular, such delays could cause customers to delay
or forego purchases of our products, or to purchase our competitors’ products. Even if we are able to successfully develop proposed
products when anticipated, these products may not produce sales in excess of the costs of development, and they may be quickly
rendered obsolete by changing consumer preferences or the introduction by our competitors of products embodying new technologies
or features, or alternative methods for the treatment of diabetes.
The safety and efficacy of our products is not supported by long-term clinical data, which could limit sales, and our products could
cause unforeseen negative effects.
Our t:slim X2 insulin pump received pre-market clearance under Section 510(k) of the U.S. Federal Food, Drug, and Cosmetic
Act, or FDCA. The 510(k) clearance process is shorter and typically requires the submission of less supporting documentation than
other FDA approval processes and does not always require long-term clinical studies. t:slim X2 with G5 integration and t:slim X2
with Basal-IQ technology received FDA approval under a PMA application. However, currently there are only limited published
studies to evaluate the safety or effectiveness of our PMA-approved products in a controlled setting. As a result, we currently lack the
breadth of published long-term clinical data supporting the safety and efficacy of our products and the benefits they offer. For these
reasons, people with insulin-dependent diabetes and healthcare providers may be slower to adopt or recommend our products, we may
not have comparative data that our competitors have or are generating, third-party payors may not be willing to provide coverage or
reimbursement for our products and we may be subject to greater regulatory and product liability risks. These and other factors could
slow the adoption of our products and result in our sales being lower than anticipated. In addition, future studies or clinical experience
may indicate that treatment with our products is not superior to treatment with competitive products. Such results could slow the
adoption of our products and significantly reduce our sales, which could prevent us from achieving our forecasted sales targets or
achieving or sustaining profitability.
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If the results of clinical studies or other experience, such as our monitoring or investigation of customer complaints, indicate that
our products may cause or create an unacceptable risk of unexpected or serious complications or other unforeseen negative effects, we
could be required to inform our customers of these risks or complications or, in more serious circumstances, we could be subject to
mandatory product recalls, suspension or withdrawal of FDA clearance or approval, which could result in significant legal liability,
harm to our reputation, and a decline in our product sales.
Any alleged illness or injury associated with any of our products or product recalls may negatively impact our financial results
and business prospects depending on a number of factors, including the scope and seriousness of the problem, degree of publicity,
reaction of our customers and healthcare professionals, competitive response, and consumer perceptions generally. Even if such an
allegation or product liability claim lacks merit, cannot be substantiated, is unsuccessful or is not fully pursued, the negative publicity
surrounding any assertion that our products caused illness, injury or death could adversely affect our reputation with customers,
healthcare professionals, third-party payors, and existing and potential collaborators, and could adversely affect our operating results
and cause a decline in our stock price.
We may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships with third parties
that may not result in the development of commercially viable products or the generation of significant future revenues.
In the ordinary course of our business, we may enter into collaborations, in-licensing arrangements, joint ventures, strategic
alliances or partnerships to develop proposed products and to pursue new markets, or we may amend or modify similar agreements
that we already have in place. Proposing, negotiating and implementing collaborations, in-licensing arrangements, joint ventures,
strategic alliances or partnerships may be a lengthy and complex process. Other companies, including those with substantially greater
financial, marketing, sales, technology or other business resources, may compete with us for these opportunities. We may not identify
or complete any such transactions or arrangements in a timely manner, on a cost-effective basis, on acceptable terms or at all. In
addition, we may not realize the anticipated benefits of any such transaction or arrangement that we do identify and complete. In
particular, these collaborations may not result in the development of products that achieve commercial success or result in positive
financial results and could be terminated prior to developing any products.
Additionally, we may not be in a position to exercise sole decision-making authority regarding the transaction or arrangement,
which could create the potential risk of creating impasses on decisions, and our collaborators may have economic or business interests
or goals that are, or that may become, inconsistent with our business interests or goals. It is possible that conflicts may arise with our
collaborators, such as conflicts concerning the achievement of performance milestones, or the interpretation of significant terms under
any agreement, such as those related to financial obligations, termination rights or the ownership or control of intellectual property
developed during the collaboration. If any conflicts arise with our current or future collaborators, they may act in their self-interest,
which may be adverse to our best interest, and they may breach their obligations to us. In addition, we have limited control over the
amount and timing of resources that our current collaborators, such as Dexcom and TypeZero, or any future collaborators devote to
our arrangement with them or our future products. Disputes between us and our collaborators may result in litigation or arbitration
which would increase our expenses and divert the attention of our management. Further, these transactions and arrangements are
contractual in nature and may be terminated or dissolved under the terms of the applicable agreements and, in such event, we may not
continue to have rights to the products relating to such transaction or arrangement or may need to purchase such rights at a premium.
For example, we have entered into multiple development agreements with Dexcom, which provide us non-exclusive licenses to
integrate various currently available generations of Dexcom CGM technology with our insulin pump products. Our agreements with
Dexcom currently run until June 2020 with automatic one-year renewals unless a party provides prior notice to the contrary. Under
certain circumstances, these agreements may be terminated by either party without cause or on short notice. Our current agreements
with Dexcom do not grant us rights to integrate future generations of Dexcom CGM technology with any of our current or future
products. Termination of any of our agreements with Dexcom would require us to redesign certain current products and products
under development, and attempt to integrate an alternative CGM system into our insulin pump systems, which would require
significant development and regulatory activities that could result in an interruption or substantial delay in the availability of the
product to our customers. The termination of our commercial agreements with Dexcom would disrupt our ability to commercialize our
existing products and our development of future products, which could have a material adverse impact on our financial condition and
results of operations, negatively impact our ability to compete and cause our stock price to decline.
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We operate our business in regions subject to natural disasters and other catastrophic events, and any disruption to our business
resulting from natural disasters will adversely affect our revenue and results of operations.
We operate our business in regions subject to natural disasters, including earthquakes, hurricanes, floods, fires and other
catastrophic events. For example, our administrative offices located in San Diego are in an area that is prone to flooding, which has
occasionally temporarily disrupted our business operations. Any natural disaster could adversely affect our ability to conduct business
and provide products and services to our customers, and the insurance we maintain may not be adequate to cover our losses resulting
from any business interruption resulting from a natural disaster or other catastrophic events. Any future disruptions to our operations
could have a material adverse impact on our financial condition and results of operations in future periods.
Any significant disruptions to our information technology systems, or failures of our pumps’ software to perform as we anticipate,
could have an adverse effect on our business, financial condition and operating results.
The efficient operation of our business depends on our information technology systems. We rely on our information technology
systems to effectively manage sales and marketing data, accounting and financial functions, manufacturing and quality records,
inventory management, product development tasks, research and development data, customer service and technical support functions.
Our information technology systems, including those that support t:connect, our current and future mobile applications, as well as
those involved in the operation of our Tandem Device Updater, are vulnerable to damage or interruption from earthquakes, fires,
floods and other natural disasters, terrorist attacks, attacks by computer viruses or hackers, power losses, and computer system or data
network failures. In addition, our currently-marketed insulin pumps and our products currently under development contain software
which could be subject to computer virus, hacker attacks or other failures. These risks significantly increased after July 2016, when we
received FDA clearance of our Tandem Device Updater, which enables customers to remotely update software on their insulin pumps.
We may also face new risks relating to our information technology systems as we begin to commercialize our products outside the
United States and are subject to additional regulations relating to the use and protection of personal information and as we launch new
mobile applications.
The failure of our or our service providers’ information technology systems or our pumps’ software or other mobile applications
to perform as we anticipate or our failure to effectively implement new information technology systems and privacy policies and
controls could disrupt our entire operation or adversely affect our software products. For example, we market our Tandem Device
Updater as having the unique capability to deploy software updates to our pumps, which may allow customers remote access to new
and enhanced features. The failure of our Tandem Device Updater to provide software updates as we anticipate, including as a result
of our inability to secure and maintain necessary regulatory approvals, the inability of our pumps to properly receive software updates,
errors or viruses embedded within the software being transmitted, or the failure of our customers to properly utilize the system to
complete the update, could result in decreased sales, increased warranty costs, and harm to our reputation, all of which could have a
material adverse effect on our business, financial condition and operating results.
We depend on the knowledge and skills of our senior management and other key employees, and if we are unable to retain and
motivate them or recruit additional qualified personnel, our business may suffer.
We have benefited substantially from the leadership and performance of our senior management, as well as certain key
employees. For example, key members of our management have experience successfully scaling an early stage medical device
company to achieve profitability. Our success will depend on our ability to retain our current management and key employees, and to
attract and retain qualified personnel in the future. Competition for senior management and key employees in our industry is intense
and we cannot guarantee that we will be able to retain our personnel or attract new, qualified personnel. The loss of the services of
certain members of our senior management or key employees could prevent or delay the implementation and completion of our
strategic objectives, or divert management’s attention to seeking qualified replacements. Each member of senior management, as well
as our key employees may terminate employment without notice and without cause or good reason. The members of our senior
management are not subject to non-competition agreements. Accordingly, the adverse effect resulting from the loss of certain
members of senior management could be compounded by our inability to prevent them from competing with us.
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We depend upon key employees in a competitive market, and if we are unable to provide meaningful equity incentives to retain key
personnel, it could adversely affect our ability to execute our business strategy.
We are highly dependent upon the members of our management team, as well as other key employees. Many of these
individuals have been employed by us for many years, have played integral roles in the growth of our business, and will continue to
provide value to us. In our industry, it is common to attract and retain executive talent and other employees with compensation
packages that include a significant equity component. At this time, a substantial number of our outstanding equity awards issued prior
to 2017, which generally were issued in the form of stock options, are significantly out of the money and unlikely to be exercised in
the future. We have issued, and may continue to issue, additional equity incentives that we believe will enhance our ability to retain
our current key employees and attract the necessary additional executive talent. However, even if we issue significant additional
equity incentives, there can be no assurance that we will be able to attract and retain key executive talent. A loss of any of our key
personnel, or our inability to hire new personnel, may have a material adverse effect on our ability to execute our business strategy.
If we are found to have violated laws protecting the confidentiality of patient health information or other personal information, we
could be subject to civil or criminal penalties, which could increase our liabilities and harm our reputation or our business.
There are a number of domestic and international laws protecting the confidentiality and security of personal information,
including laws and regulations under HIPAA, PIPEDA, and GDPR. These requirements seek to protect medical records and other
personal information from unauthorized access and to ensure that individuals know how we collect, use, store, and transfer their
personal information.
If we, or any of our service providers who have access to the personal data for which we are responsible, are found to be in
violation of the privacy and security requirements of HIPAA, PIPEDA, or GDPR, we could be subject to civil or criminal penalties,
which could increase our liabilities, harm our reputation and have a material adverse effect on our business, financial condition and
operating results. We believe we are in substantial compliance with the privacy and security requirements of these laws, however,
even compliant entities can experience security breaches or have inadvertent failures that may result in potential claims and liability
under such laws.
We may also face new risks relating to security laws and privacy rights as individual U.S states, E.U. member states, and other
international jurisdictions adopt new data privacy laws and regulations as we begin to commercialize our products worldwide. As we
continue to expand internationally, our business will need to be adapted to meet these and other similar legal requirements.
We are seeking approval to commercialize our products outside of the United States, which may result in a variety of risks
associated with international operations that could materially adversely affect our business.
During 2018, we began commercialization of the t:slim X2 insulin pump in select geographies outside of the United States. We
have limited experience commercializing our products outside of the United States and expect that we will be subject to additional
risks related to international business markets, including:
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different regulatory requirements for product approvals in foreign countries;
differing U.S. and foreign medical device import and export rules;
• more restrictive privacy laws relating to personal information of end users and employees, including the GDPR;
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reduced protection for our intellectual property rights in foreign countries;
unexpected changes in tariffs, trade barriers and regulatory requirements;
different reimbursement systems;
economic weakness, including inflation, or political instability in particular foreign economies and markets;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad or with U.S.
regulations that would apply to activities in such foreign jurisdictions, such as the FCPA;
foreign taxes, including withholding of payroll taxes;
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foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other
obligations incident to doing business in another country; and
business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters.
In addition, entry into international markets may require significant financial resources, impose additional demands on our
manufacturing, quality, regulatory, customer support and other general and administrative personnel, and could divert management’s
attention from managing our core business. We have limited experience with regulatory environments and market practices
internationally, and we may not be able to penetrate or successfully operate in new markets. Accordingly, if we are unable to expand
internationally, manage the complexity of our global operations successfully or if we incur unanticipated expenses, we may not
achieve the expected benefits of this expansion and our financial condition and results of operations could be materially and adversely
impacted.
We may seek to grow our business through acquisitions of complementary products or technologies, and the failure to successfully
manage acquisitions, or the failure to integrate them with our existing business, could have a material adverse effect on our
business, financial condition and operating results.
From time to time, we may consider opportunities to acquire other products or technologies that may enhance our product
platform or technology, expand the breadth of our markets or customer base, or advance our business strategies. Potential acquisitions
involve numerous risks, including:
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problems assimilating the acquired products or technologies;
issues maintaining uniform standards, procedures, controls and policies;
unanticipated costs associated with acquisitions;
diversion of management’s attention from our existing business;
risks associated with entering new markets in which we have limited or no experience; and
increased legal and accounting costs relating to the acquisitions or to compliance with regulatory matters.
We have no current commitments with respect to any acquisition. We do not know if we will be able to identify acquisitions we
deem suitable, whether we will be able to successfully complete any such acquisitions on favorable terms or at all, or whether we will
be able to successfully integrate any acquired products or technologies into our business. Our potential inability to integrate any
acquired products or technologies effectively may adversely affect our business, operating results and financial condition.
Risks Related to our Financial Results and Need for Financing
We may need to raise additional funds in the future and if we are unable to raise additional funds when necessary, we may not be
able to achieve our strategic objectives.
At December 31, 2018, we had $129.0 million in cash, cash equivalents and short-term investments. Our management expects
the continued growth of our business, including the expansion of our customer service infrastructure to support our growing base of
customers, our plans to expand commercial sales of our products outside the United States, the growth of our manufacturing and
warehousing operations and additional research and development activities, will continue to increase our expenses. In addition, the
amount of our future product sales is difficult to predict and actual sales may not be in line with our forecasts. Accordingly, our future
capital requirements will depend on many factors, including:
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the revenue generated by sales of our insulin pump products, and the related insulin cartridges and infusion sets, and
any other future products that we may develop and commercialize;
the gross profits and gross margin we realize from the sales we generate;
the costs associated with maintaining an appropriate sales, clinical and marketing infrastructure;
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the expenses we incur or other capital expenditures we make to maintain or enhance our manufacturing operations,
including the hiring of additional personnel, purchasing manufacturing equipment and other measures to add
manufacturing capacity;
the expenses associated with developing and commercializing our proposed products or technologies;
the costs associated with maintaining and expanding our customer service infrastructure;
the cost of obtaining and maintaining regulatory clearance or approval for our products and our manufacturing
facilities;
the cost of ongoing compliance with legal and regulatory requirements;
the expenses we incur in connection with potential litigation or governmental investigations;
expenses we may incur or other financial commitments we may make in connection with current and potential new
business or commercial collaborations, development agreements or licensing arrangements;
anticipated or unanticipated capital expenditures; and
unanticipated general and administrative expenses.
As a result of these and other factors we may in the future seek additional capital from public or private offerings of our capital
stock, or from other sources. If we issue equity or debt securities to raise additional funds, our existing stockholders may experience
dilution, we may incur significant financing costs, and the new equity or debt securities may have rights, preferences and privileges
senior to those of our existing stockholders. In addition, if we raise additional funds through collaborations, licensing, joint ventures,
strategic alliances, partnership arrangements or other similar arrangements, it may be necessary to relinquish valuable rights to our
potential future products or proprietary technologies, or grant licenses on terms that are not favorable to us.
If we are unable to raise additional capital when necessary, we may not be able to maintain our existing sales, marketing,
clinical and customer service infrastructure, enhance our current products or develop new products, take advantage of future
opportunities, respond to competitive pressures, changes in supplier relationships, or unanticipated changes in customer demand. Any
of these events could adversely affect our ability to achieve our strategic objectives, which could have a material adverse effect on our
business, financial condition and operating results.
Our operating results may fluctuate significantly from quarter to quarter.
There has been and may continue to be meaningful variability in our operating results from quarter to quarter, as well as within
each quarter, especially around the time of anticipated new product launches or regulatory approvals by us or our competitors. Our
operating results, and the variability of these operating results, will be affected by numerous factors, including:
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our ability to increase sales and gross profit from our insulin pump products, including the related insulin cartridges
and infusion sets, and to commercialize and sell our future products;
the number and mix of our products sold in each quarter;
acceptance of our products by people with insulin-dependent diabetes, their caregivers, healthcare providers and third-
party payors;
the pricing of our products and competitive products, including the use of discounts, rebates or other financial
incentives by us or our competitors;
the effect of third-party coverage and reimbursement policies;
our ability to maintain our existing infrastructure;
the amount of, and the timing of the payment for, insurance deductibles required to be paid by our customers and
potential customers under their existing insurance plans;
interruption in the manufacturing or distribution of our products;
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our ability to simultaneously manufacture multiple products that meet quality, reliability and regulatory requirements;
seasonality and other factors affecting the timing of purchases of our products;
timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;
results of clinical research and trials on our existing and future products;
the ability of our suppliers to timely provide us with an adequate supply of components that meet our requirements;
regulatory clearance or approvals affecting our products or those of our competitors; and
the timing of revenue and expense recognition associated with our product sales pursuant to applicable accounting
standards.
In addition, we expect our operating expenses will continue to increase as we expand our business, which may exacerbate the
quarterly fluctuations in our operating results. If our quarterly or annual operating results fall below the expectation of investors or
securities analysts, the price of our common stock could decline substantially. Further, any quarterly or annual fluctuations in our
operating results may, in turn, cause the price of our common stock to fluctuate substantially, and these price fluctuations could result
in further pressure on our stock price. We believe quarterly comparisons of our financial results are not necessarily meaningful and
should not be relied upon as an indication of our future performance.
Risks Related to our Intellectual Property and Potential Litigation
Our ability to protect our intellectual property and proprietary technology is uncertain.
We rely primarily on patent, trademark and trade secret laws, as well as confidentiality and non-disclosure agreements, to
protect our proprietary technologies. As of December 31, 2018, our patent portfolio consisted of approximately 68 issued U.S. patents
and 68 pending U.S. patent applications. Of these, our issued U.S. patents expire between approximately 2021 and 2036. We also have
and are seeking patent protection for our proprietary technologies in other countries throughout the world. In addition, we have 10
U.S. trademark registrations and 13 foreign trademark registrations.
We have applied for patent protection relating to certain existing and proposed products and processes. If we fail to file a patent
application timely in any jurisdiction, we may be precluded from doing so at a later date. Further, we cannot assure you that any of our
patent applications will be approved in a timely manner or at all. The rights granted to us under our patents, and the rights we are
seeking to have granted in our pending patent applications, may not be meaningful or provide us with any commercial advantage. In
addition, those rights could be opposed, contested or circumvented by our competitors, or be declared invalid or unenforceable in
judicial or administrative proceedings. The failure of our patents to adequately protect our technology might make it easier for our
competitors to offer the same or similar products or technologies. Even if we are successful in receiving patent protection for certain
products and processes, our competitors may be able to design around our patents or develop products that provide outcomes which
are comparable to ours without infringing on our intellectual property rights. Due to differences between foreign and U.S. patent laws,
our patented intellectual property rights may not receive the same degree of protection in foreign countries as they would in the United
States. Even if patents are granted outside of the United States, effective enforcement in those countries may not be available.
We rely on our trademarks and trade names to distinguish our products from the products of our competitors, and have
registered or applied to register many of these trademarks. We cannot assure you that our current or future trademark applications will
be approved in a timely manner or at all. From time to time, third parties oppose our trademark applications, or otherwise challenge
our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products,
which could result in loss of brand recognition, and could require us to devote additional resources to marketing new brands. Further,
we cannot assure you that competitors will not infringe upon our trademarks, or that we will have adequate resources to enforce our
trademarks.
We have entered into confidentiality agreements and intellectual property assignment agreements with our officers, employees,
temporary employees and consultants regarding our intellectual property and proprietary technology. In the event of unauthorized use
or disclosure or other breaches of those agreements, we may not be provided with meaningful protection for our trade secrets or other
proprietary information.
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If a competitor infringes upon one of our patents, trademarks or other intellectual property rights, enforcing those patents,
trademarks and other rights may be difficult, expensive and time consuming. Patent law relating to the scope of claims in the industry
in which we operate is subject to rapid change and constant evolution and, consequently, patent positions in our industry can be
uncertain. Even if successful, litigation to defend our patents and trademarks against challenges or to enforce our intellectual property
rights could divert management’s attention from managing our business. Moreover, we may not have sufficient resources or incentive
to defend our patents or trademarks against challenges or to enforce our intellectual property rights. Litigation also puts our patents at
risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, pursuing litigation
may provoke third parties to assert counterclaims against us. We may not prevail in any lawsuits that we initiate and the damages or
other remedies awarded, if any, may not be commercially valuable. The occurrence of any of these events may have a material adverse
effect on our business, financial condition and operating results.
The medical device industry is characterized by patent litigation, and from time to time, we may be subject to litigation that could
be costly, result in the diversion of management’s time and efforts, or require us to pay damages.
Our success will depend in part on not infringing the patents or violating the other proprietary rights of third parties. Significant
litigation regarding patent rights exists in our industry. Our competitors in both the United States and abroad, many of which have
substantially greater resources and have made substantial investments in competing technologies, may have applied for or obtained or
may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to make and sell our
products. The large number of patents, the rapid rate of new patent issuances, and the complexities of the technology involved
increase the risk of patent litigation.
From time to time, we may receive communications from third parties alleging our infringement of their intellectual property
rights or offering a license to intellectual property that is alleged to relate to products that we are currently developing. Any
intellectual property-related discussions, disputes or litigation could force us to do one or more of the following:
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stop selling our products or using technology that contains the allegedly infringing intellectual property;
prevent or limit our ability to sell a product that we are currently developing;
incur significant legal expenses;
pay substantial damages to the party whose intellectual property rights we are allegedly infringing;
redesign those products that contain the allegedly infringing intellectual property; or
attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on
reasonable terms or at all.
We do not currently maintain insurance to cover the expense or any liability that may arise from an intellectual property dispute
with a third party. Any litigation or claim against us, even those without merit, or even preparing for a potential dispute or litigation
before it arises, may cause us to incur substantial costs, and could place a significant strain on our financial resources and divert the
attention of management from our core business. Any litigation or claim against us may also harm our reputation. Further, as we
launch new products and increase our sales, and the number of participants in the diabetes market increases, we believe the possibility
of our involvement in intellectual property disputes will increase.
We may be subject to damages resulting from claims that we, or our employees, have wrongfully used or disclosed alleged trade
secrets of our competitors or are in breach of non-competition or non-solicitation agreements with our competitors.
Many of our employees were previously employed at other medical device companies, including those that are our direct
competitors or could potentially become our direct competitors. In some cases, those employees joined our company recently. We
may be subject to claims that we, or our employees, have inadvertently or otherwise used or disclosed trade secrets or other
proprietary information of these former employers or competitors. In addition, we have been and may in the future be subject to
allegations that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement. Litigation
may be necessary to defend against these claims. Even if we successfully defend against these claims, litigation could cause us to
incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our
core business and harm our reputation. If our defense to those claims fails, in addition to paying monetary damages, we may lose
valuable intellectual property rights or personnel. We cannot guarantee that this type of litigation will not continue, and any future
litigation or the threat thereof may adversely affect our ability to hire additional direct sales representatives. A loss of key personnel or
their work product could hamper or prevent our ability to commercialize proposed products, which could have an adverse effect on
our business, financial condition and operating results.
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We may incur product liability losses, and insurance coverage may be inadequate or unavailable to cover these losses.
Our business exposes us to potential product liability claims that are inherent in the design, manufacture, testing and sale of
medical devices. We are subject to product liability lawsuits alleging that component failures, manufacturing flaws, design defects or
inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition, injury or death to
customers. The risk of one or more product liability claims or lawsuits may be even greater after we launch new products with new
features or enter new markets where we have no prior experience selling our products and rely on newly-hired staff or new
independent distributors or contractors to provide new customer training and customer support. In addition, the misuse of our products
or the failure of customers to adhere to operating guidelines could cause significant harm to customers, including death, which could
result in product liability claims. We may also identify deficiencies in our products that we determine are immaterial and do not pose
safety risks, and therefore decide not to initiate a voluntary recall. However, any such deficiency may be more significant than we
expect and lead to product liability claims. Product liability lawsuits and claims, safety alerts or product recalls, with or without merit,
could cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of
management from our core business, harm our reputation and adversely affect our ability to attract and retain customers, any of which
could have a material adverse effect on our business, financial condition and operating results.
Although we maintain third-party product liability insurance coverage, it is possible that claims against us may exceed the
coverage limits of our insurance policies. Even if any product liability loss is covered by an insurance policy, these policies typically
have substantial deductibles for which we are responsible. In addition, we expect the cost of our product liability insurance will
increase as our product sales increase and we may also increase the amount of our deductibles over time. Product liability claims in
excess of applicable insurance coverage could have a material adverse effect on our business, financial condition and operating results.
In addition, any product liability claim brought against us, with or without merit, could result in further increases of our product
liability insurance premiums. Insurance coverage varies in cost and can be difficult to obtain, and we cannot guarantee that we will be
able to obtain insurance coverage in the future on terms acceptable to us or at all. Our inability to obtain sufficient insurance coverage
to protect again potential product liability claims could prevent or limit our commercialization of current products or products
currently under development.
Risks Related to our Legal and Regulatory Environment
Our products and operations are subject to extensive governmental regulation, and failure to comply with applicable requirements
could cause our business to suffer.
The medical device industry is regulated extensively by governmental authorities, principally the FDA and corresponding state
regulatory agencies. The regulations are very complex and are subject to rapid change and varying interpretations. Regulatory
restrictions or changes could limit our ability to carry on or expand our operations or result in higher than anticipated costs or lower
than anticipated sales. The FDA and other U.S. governmental agencies regulate numerous elements of our business, including:
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product design and development;
pre-clinical and clinical testing and trials;
product safety;
establishment registration and product listing;
labeling and storage;
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pre-market clearance or approval;
servicing and post-market surveillance;
advertising and promotion; and
recalls and field safety corrective actions.
Before we can market or sell a new regulated product or a significant modification to an existing product in the United States,
we must obtain either clearance under Section 510(k) of the FDCA or approval of a PMA application from the FDA, unless an
exemption from pre-market review applies. In the 510(k) clearance process, the FDA must determine that a proposed device is
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“substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology
and safety and effectiveness, in order to clear the proposed device for marketing. Clinical data is sometimes required to support
substantial equivalence. The PMA pathway requires an applicant to demonstrate the safety and effectiveness of the device based on
extensive data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining,
life-supporting or implantable devices. We received approval of our PMA for t:slim G4 in September 2015 and of our PMA
supplement for the t:slim X2 with G5 integration in August 2017. More recently, in June 2018, we received approval of our PMA for
the t:slim X2 with Basal-IQ technology. Products that are approved through a PMA application generally need FDA approval before
they can be modified. Similarly, some modifications made to products cleared through the 510(k) clearance process may require a new
510(k) submission. The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time-
consuming, and we may not be able to obtain these clearances or approvals on a timely basis or at all for our proposed products.
We may pursue 510(k) clearance for additional products or product modifications in the future. If the FDA requires us to go
through a more rigorous examination for future products or modifications to existing products than we had expected, our product
introductions or modifications could be delayed or canceled, which could cause our sales to decline or to not increase in line with our
forecasts. We anticipate that certain of our products currently under development will require the more costly, lengthy and uncertain
PMA approval process.
The FDA can delay, limit or deny clearance or approval of one of our devices for many reasons, including:
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our inability to demonstrate that our products are safe and effective for their intended users;
the data from our clinical trials may be insufficient to support clearance or approval; and
failure of the manufacturing process or facilities we use to meet applicable requirements.
In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations,
or take other actions which may prevent or delay approval or clearance of our products under development or impact our ability to
modify our currently cleared or approved products on a timely basis. For example, based on feedback from the FDA, we recently
received approval of a de novo 510(k) application to down-classify the t:slim X2 to a Class II device, under the new insulin pump
classification referred to as ACE pumps, and we intend to separately file a PMA for our implementation of the Control-IQ technology.
Ultimately, the FDA may not support our new regulatory filing strategy.
Any delay in, or failure to receive or maintain, clearance or approval for our products under development could prevent us from
generating revenue from these products or achieving profitability. Additionally, the FDA and other regulatory authorities have broad
enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny on us, could dissuade some customers from
using our products and adversely affect our reputation and the perceived safety and efficacy of our products.
Failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions
such as fines, civil penalties, injunctions, warning letters, recalls of products, delays in the introduction of products into the market,
refusal of the FDA or other regulators to grant future clearances or approvals, delays by the FDA or other regulators in granting
clearances or approvals, and the suspension or withdrawal of existing approvals by the FDA or other regulators. Any of these
sanctions could result in higher than anticipated costs, lower than anticipated sales, and diversion of management time and resources,
any of which could have a material adverse effect on our reputation, business, financial condition and operating results.
Further, we commenced commercial sales of our products in select international markets during the third quarter of 2018. As we
expand our operations outside of the United States, we will become subject to various additional regulatory and legal requirements
under the applicable laws and regulations of the international markets we enter. These additional regulatory requirements may involve
significant costs and expenditures and, if we are not able to comply with any such requirements, our international expansion and
business could be significantly harmed.
54
Modifications to our products may require new 510(k) clearances or PMAs, or may require us to cease marketing or recall the
modified products until clearances are obtained.
Any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, design, or manufacture, requires a new 510(k) clearance or, possibly, a PMA. The FDA requires
every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision. The FDA
may not agree with our decisions regarding whether new clearances or approvals are necessary for changes that we have made to our
products. If the FDA disagrees with our determination and requires us to submit new 510(k) notifications or PMAs for modifications
to our previously cleared or approved products, for which we concluded that new clearances or approvals were not necessary, we may
be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to
significant regulatory fines or penalties.
Further, the FDA’s ongoing review of and potential changes to the 510(k) program may make it more difficult for us to modify
our previously cleared products, either by imposing stricter requirements on when a new 510(k) for a modification to a previously
cleared product must be submitted, or by applying more onerous review criteria to such submissions.
If we or our third-party suppliers fail to comply with the FDA’s good manufacturing practice regulations, this could impair our
ability to market our products in a cost-effective and timely manner.
We and our third-party suppliers are required to comply with the FDA’s Quality System Regulation, or the QSR, which covers
the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage
and shipping of our products. The FDA audits compliance with the QSR through periodic announced and unannounced inspections of
manufacturing and other facilities. The FDA may impose inspections or audits at any time. If we or our suppliers have significant non-
compliance issues or if any corrective action plan that we or our suppliers propose in response to observed deficiencies is not
sufficient, the FDA could take enforcement action against us. Any of the foregoing actions could have a material adverse effect on our
reputation, business, financial condition and operating results.
A recall of our products, or the discovery of serious safety issues with our products, could have a significant negative impact on us.
The FDA has the authority to require the recall of commercialized products in the event of material deficiencies or defects in
design or manufacture or in the event that a product poses an unacceptable risk to health. The FDA has broad discretion to require the
recall of a product or to require that manufacturers alert customers of safety risks, and may do so even in circumstances where we do
not believe our product poses an unacceptable risk to health. In addition, manufacturers may, under their own initiative, recall a
product if any material deficiency in a product is found or alert customers of unanticipated safety risks. A government-mandated or
voluntary recall by us, one of our distributors or any of our other third-party suppliers could occur as a result of an unacceptable risk to
health, component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls or notices relating
to any products that we distribute would divert managerial and financial resources, and have an adverse effect on our reputation,
financial condition and operating results.
Further, under the FDA’s MDR regulations, we are required to report to the FDA any incident in which our product may have
caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would
likely cause or contribute to death or serious injury. Repeated product malfunctions may result in a voluntary or involuntary product
recall, which could divert managerial and financial resources, impair our ability to manufacture our products in a cost-effective and
timely manner and have an adverse effect on our reputation, financial condition and operating results.
Any adverse event involving any products that we distribute could result in future voluntary corrective actions, such as recalls or
customer notifications, or regulatory agency action, which could include inspection, mandatory recall or other enforcement action.
Any corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, distract management from
operating our business and may harm our reputation and financial results.
Our failure to comply with U.S. federal and state fraud and abuse laws, including anti-kickback laws and other U.S. federal and
state anti-referral laws, could have a material, adverse impact on our business.
There are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws,
physician self-referral laws, and false claims laws. Our relationships with healthcare providers and other third parties are subject to
scrutiny under these laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances,
imprisonment and exclusion from participation in federal and state healthcare programs, including the Medicare, Medicaid and
Veterans Administration health programs.
55
Healthcare fraud and abuse regulations are complex, and even minor irregularities can potentially give rise to claims that a
statute or prohibition has been violated. The laws that may affect our ability to operate include:
•
•
•
•
•
•
•
•
the federal healthcare programs’ Anti-Kickback Statute, which prohibits, among other things, persons from knowingly
and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, in exchange for or to
induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for
which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;
federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or
causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or
fraudulent;
federal and state physician referral laws, such as the Stark Law, that prohibit a physician from referring Medicare or
Medicaid patients to an entity providing “designated health services,” including a company that furnishes durable
medical equipment, with which the physician has a financial relationship;
federal criminal laws enacted as part of HIPAA that prohibit executing a scheme to defraud any healthcare benefit
program or making false statements relating to healthcare matters;
federal disclosure laws, such as the Physician Payments Sunshine Act, which require certain manufacturers, including
medical device manufacturers, to submit annual data pertaining to payments or other transfers of value to covered
recipients, including physicians;
the Federal Trade Commission Act and similar laws regulating advertisement and consumer protections;
foreign and U.S. state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws
which may apply to items or services reimbursed by any third-party payor, including commercial insurers; and
federal and state laws governing the use, disclosure and security of protected health information, such as HIPAA and
the Health Information Technology for Economic and Clinical Health, or HITECH.
Further, the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Affordability
Reconciliation Act, or, collectively, the PPACA, among other things, amends the intent requirement of the federal anti-kickback and
criminal healthcare fraud statutes. An individual or entity can now be found guilty under the PPACA without actual knowledge of the
statute or specific intent to violate it. In addition, the PPACA provides that claims submitted in violation of the Anti-Kickback Statute
automatically constitute false claims for purposes of the False Claims Act. Possible sanctions for violation of these laws include
monetary fines, civil and criminal penalties, exclusion from Medicare, Medicaid and other federal healthcare programs, and forfeiture
of amounts collected in violation of those prohibitions. Any violation of these laws, or any action against us for violation of these
laws, even if we successfully defend against it, could result in a material adverse effect on our reputation, business, financial condition
and operating results.
To enforce compliance with the federal laws, the U.S. Department of Justice, or the DOJ, has increased its scrutiny of
interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions,
convictions and settlements in the healthcare industry. Dealing with investigations can be time- and resource-consuming and can
divert management’s attention from our core business. Additionally, if a healthcare company settles an investigation with the DOJ or
other law enforcement agencies, we may be forced to agree to additional onerous compliance and reporting requirements as part of a
consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an
adverse effect on our business.
The scope and enforcement of these laws is uncertain and subject to rapid change in the current environment of healthcare
reform. Federal or state regulatory authorities might challenge our current or future activities under these laws. Any of these
challenges could have a material adverse effect on our reputation, business, financial condition and operating results. Any state or
federal regulatory review of us, regardless of the outcome, would be costly and time-consuming. Additionally, we cannot predict the
impact of any changes in these laws, whether or not retroactive.
56
We may be liable if we engage in the promotion of the off-label use of our products.
Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including
the prohibition against the promotion of the off-label use of our products or the pre-promotion of unapproved products. Healthcare
providers may use our products off-label, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice
of medicine. However, if the FDA determines that our promotional materials or training constitutes promotion of an off-label use or
the pre-promotion of an unapproved product, it could request that we modify our training or promotional materials or subject us to
regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and
criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our
promotional or training materials to constitute promotion of an unapproved use, which could result in significant fines or penalties.
Although our policy is to refrain from statements that could be considered off-label promotion of our products or pre-promotion of an
unapproved product, the FDA or another regulatory agency could disagree and conclude that we have engaged in improper
promotional activities. In addition, the off-label use of our products may increase the risk of product liability claims, which are
expensive to defend and could result in substantial damage awards against us and harm our reputation.
Legislative or regulatory healthcare reforms may result in downward pressure on the price of and decrease reimbursement for our
products, and uncertainty regarding the healthcare regulatory environment could have a material adverse effect on our business.
The sales of our products depend in part on the availability of coverage and reimbursement from third-party payors such as
government health administration authorities, private health insurers, health maintenance organizations and other healthcare-related
organizations. Both the federal and state governments in the United States continue to propose and pass new legislation and
regulations designed to, among other things, expand healthcare coverage to more individuals, contain or reduce the cost of healthcare,
and improve the quality of healthcare outcomes. This legislation and regulation may result in decreased reimbursement for medical
devices, which may create additional pressure to reduce the prices charged for medical devices. Reduced reimbursement rates could
significantly decrease our revenue, which in turn would place significant downward pressure on our gross margins and impede our
ability to become profitable.
The PPACA substantially changed the way healthcare is financed by both governmental and private insurers, encourages
improvements in the quality of healthcare items and services, and significantly impacts the medical device industry. However, a
number of legislative changes have been proposed and adopted since the PPACA was enacted, and legislation has recently been
proposed that could modify or repeal the PPACA. The uncertainties regarding the future of the PPACA, and other healthcare reform
initiatives, may have an adverse effect on our customers’ purchasing decisions regarding our products.
In the future, additional changes could be made to governmental healthcare programs that could significantly impact the success
of our products. Cost control initiatives could decrease the price that we receive for our products. At this time, we cannot predict
which, if any, additional healthcare reform proposals will be adopted, when they may be adopted or what impact they may have on the
existing regulatory environment, or our ability to operate our business. Any of these factors could have a material adverse effect on
our operating results and financial condition.
Our financial performance may be adversely affected by medical device tax provisions in the healthcare reform laws.
The PPACA imposes, among other things, an excise tax of 2.3% on any entity that manufactures or imports medical devices
offered for sale in the United States, although this tax has been suspended for calendar years 2016, 2017, 2018 and 2019. It is unclear
at this time if the moratorium will be further extended. We do not believe that our products are subject to this tax based on the retail
exemption under applicable Treasury Regulations. However, the availability of this exemption is subject to interpretation by the IRS,
and the IRS may disagree with our analysis. Absent further legislative action, the medical device excise tax applies to sales of taxable
medical devices beginning on January 1, 2020, and future products that we manufacture, produce or import may be subject to this tax
(unless the retail exemption or other applicable exemption applies). The financial impact this tax may have on our business is unclear
and there can be no assurance that our business will not be materially adversely affected by it. Additionally, Congress could terminate
the moratorium or further change the law related to the medical device tax in a manner that could adversely affect us.
Risks Related to our Common Stock
The price of our common stock may continue to fluctuate significantly.
The trading price of our common stock has been volatile in recent years. We believe our stock price has been, and will continue
to be, subject to wide fluctuations in response to a variety of factors, including the following:
•
actual or anticipated fluctuations in our financial and operating results from period to period;
57
•
•
our actual or perceived need for additional capital to fund our operations;
perceptions about our financial stability generally, and relative to our competitors, including our ability to sustain our
business operations and achieve profitability;
• market acceptance of our current products and products under development, and the recognition of our brand;
•
•
•
•
•
•
•
•
introduction of proposed products, technologies or treatment techniques by us or our competitors;
announcements of significant contracts, acquisitions or divestitures by us or our competitors;
regulatory approval of our products or the products of our competitors, or the failure to obtain such approvals on the
projected timeline or at all;
speculative trading practices of market participants;
issuance of securities analysts’ reports or recommendations;
threatened or actual litigation and government investigations;
sales of shares of our common stock by our employees, directors or principal stockholders; and
general political or economic conditions.
These and other factors might cause the market price of our common stock to fluctuate substantially. Fluctuations in our stock
price may negatively affect the liquidity of our common stock, which could further impact our stock price.
In recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant
impact on the market price of securities issued by many companies across many industries. These changes may occur without regard
to the financial condition or operating performance of the affected companies. Accordingly, the price of our common stock could
fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce the
market price of our common stock.
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even
if an acquisition would be beneficial to our stockholders, which could reduce our stock price and prevent our stockholders from
replacing or removing our current management.
Our amended and restated certificate of incorporation and bylaws contain provisions that could delay or prevent a change of
control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions:
•
•
•
•
•
•
•
authorize the issuance of preferred stock with powers, preferences and rights that may be senior to our common stock,
which can be created and issued by the board of directors without prior stockholder approval;
provide for the adoption of a staggered board of directors whereby the board is divided into three classes each of
which has a different three-year term;
provide that the number of directors shall be fixed by the board;
prohibit our stockholders from filling board vacancies;
provide for the removal of a director only with cause and then by the affirmative vote of the holders of a majority of
the outstanding shares;
prohibit stockholders from calling special stockholder meetings;
prohibit stockholders from acting by written consent without holding a meeting of stockholders;
58
•
•
require the vote of at least two-thirds of the outstanding shares to approve amendments to the certificate of
incorporation or bylaws; and
require advance written notice of stockholder proposals and director nominations.
We are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business
combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our amended and
restated certificate of incorporation, bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to
obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including a merger,
tender offer or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our
board of directors could cause the market price of our common stock to decline.
Our board of directors is authorized to issue and designate shares of our preferred stock in additional series without stockholder
approval.
Our amended and restated certificate of incorporation authorizes our board of directors, without the approval of our
stockholders, to issue 5,000,000 shares of our preferred stock, subject to limitations prescribed by applicable law, rules and regulations
and the provisions of our amended and restated certificate of incorporation, as shares of preferred stock in series, and to establish from
time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the
shares of each such series and the qualifications, limitations or restrictions thereof. The powers, preferences and rights of these
additional series of preferred stock may be senior to or on parity with our common stock, and the issuance of such shares in the future
may reduce the value of our common stock.
U.S. federal income tax reform could adversely affect us and our stockholders.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, or the TCJA, which significantly reforms
the Internal Revenue Code of 1986, as amended, or the Code. The TCJA, among other things, includes changes to U.S. federal tax
rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, and
puts into effect the migration from a “worldwide” system of taxation to a territorial system. We do not expect tax reform to have a
material impact on our projection of minimal cash taxes. Our net deferred tax assets and liabilities were revalued at the newly-enacted
U.S. corporate rate, and the impact was recognized in our tax expense, offset by a full valuation allowance, in the year of enactment.
We continue to examine the impact that this tax reform legislation may have on our business. The impact of this tax reform on holders
of our common stock is uncertain and could be adverse.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2018, we had federal net operating loss, or NOL, carryforwards of approximately $352.7 million, not
considering the limitation discussed below. The federal tax loss carryforwards begin to expire in 2026, unless previously utilized. In
addition, if there is an “ownership change” with respect to our company, as defined under Section 382 of the Code the utilization of
our NOL carryforwards may be subject to substantial limitations imposed by the Code, and similar state provisions. In general, an
ownership change occurs whenever there is a shift in ownership of our company by more than 50% by one or more 5% stockholders
over a specified time period.
Although we have not yet completed an update of our Section 382 analysis subsequent to December 31, 2017, offerings of our
securities following that date may have caused an ownership change or could increase the likelihood that we undergo an ownership
change for purposes of Section 382 of the Code in the future. Based on preliminary results of the Section 382 analysis, the Company
anticipates that an ownership change may have occurred in 2018 and that the resulting limitation would significantly reduce the
Company’s ability to utilize its net operating loss and credit carryovers before they expire. Limitations imposed on our ability to
utilize NOL carryforwards could cause U.S. federal income taxes to be paid earlier than would be paid if such limitations were not in
effect and could cause such NOL carryforwards to expire unused, in each case reducing or eliminating the benefit of such NOL
carryforwards.
With respect to our NOLs generated in 2018 and thereafter, the TCJA may reduce the tax benefit of our NOLs. Under the TCJA,
our ability to carry back NOLs incurred after December 31, 2017 to previous tax years is eliminated. Under prior law, we could carry
back NOLs for two years and carry forward NOLs for 20 years. Under the TCJA, NOL carryforwards may be carried forward
indefinitely. However, for NOLs arising after December 31, 2017, NOL carryforwards will be limited to 80% of our taxable income.
Our NOLs generated in 2017 and in prior years will not be subject to the limitations under the TCJA.
We do not intend to pay cash dividends.
59
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any
future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Accordingly, investors may have to sell some or all of their shares of our common stock in order to generate cash
flow from their investment.
The requirements of being a public company have increased our costs and will continue to strain our resources and divert
management’s attention.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Dodd-Frank Wall Street Reform
and Consumer Protection Act, or the Dodd-Frank Act, the listing requirements of the NASDAQ Global Market and other applicable
securities rules and regulations. Compliance with these rules and regulations has increased our legal and financial compliance costs,
made some activities more difficult, time-consuming or costly, and increased demand on our systems and resources.
The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires, among other things, that we maintain effective disclosure
controls and procedures and internal control over financial reporting. In order to meet these additional requirements, significant
resources and management oversight may be required. As a result, management’s attention may be diverted from other business
concerns, which could harm our business and operating results. Although we have hired additional employees to help us comply with
these requirements, in the future we may need to hire more employees or utilize external consultants in order to further support our
efforts, which will increase our expenses.
Regulations related to “conflict minerals” may cause us to incur additional expenses and could limit the supply and increase the
cost of certain metals used in manufacturing our products.
The SEC adopted a rule requiring disclosures by public companies of specified minerals, known as conflict minerals, that are
necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires companies
to perform due diligence, disclose and annually report to the SEC whether or not such minerals originate from the Democratic
Republic of Congo or an adjoining country. The rule could affect sourcing at competitive prices and availability in sufficient quantities
of certain minerals used in the manufacture of our products, which could increase our expenses. In addition, there may be material
costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals
used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such
verification activities.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our
financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting,
which would harm our business and the trading price of our common stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with
adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved
controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any
testing by us conducted in connection with Section 404(a) of the Sarbanes-Oxley Act, or the subsequent testing by our independent
registered public accounting firm conducted in connection with Section 404(b) of the Sarbanes-Oxley Act may reveal deficiencies in
our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive
changes to our consolidated financial statements or identify other areas for further attention or improvement. Inferior internal controls
could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading
price of our common stock.
We are required to disclose changes made to our internal control procedures on a quarterly basis and our management is
required to assess the effectiveness of these controls annually. Undetected material weaknesses in our internal controls could lead to
financial statement restatements and require us to incur the expense of remediation.
We may be at increased risk of securities class action litigation.
In the past, securities class action litigation has been instituted against companies following periods of volatility in the overall
market and in the price of a company’s securities. We believe this risk may be particularly relevant to us as we have experienced
significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of
management’s attention and resources, which could harm our business, financial condition and results of operations. Our stock price
volatility and the increase in our market capitalization during the past year may also result in higher expenses associated with our
directors’ and officers’ liability insurance program.
60
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our
stock price and trading volume could decline.
The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts
publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or
unfavorable research about our business, our stock price would likely decline. In addition, if our operating results fail to meet the
forecasts of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to
publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price and trading volume
to decline.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2.
Properties.
As of December 31, 2018, we leased an aggregate of approximately 88,000 square feet of general office and laboratory space
located on Roselle Street in San Diego, California. All of our existing leases for facilities on Roselle Street are scheduled to expire in
May 2022. We have a one-time option to terminate our Roselle Street leases effective as of May 2021 upon delivery of advance notice
to the landlord and the payment of an early termination fee.
As of December 31, 2018, we also leased approximately 48,880 square feet of general office, manufacturing and warehouse
space located on Barnes Canyon Road in San Diego, California, or the Barnes Canyon Lease, which is scheduled to expire in
November 2023. We have a one-time option to extend the term of the Barnes Canyon Lease for a period of not less than 36 months
and not greater than 60 months, by delivering notice to the landlord at least nine months and not more than 12 months prior to the
expiration of the lease.
On January 22, 2019, we entered into a lease agreement for approximately 25,332 square feet of general office space located on
10935 Vista Sorrento Parkway in San Diego, California, or the Pacific Plaza Lease. The Pacific Plaza Lease is scheduled to expire in
2022. We have a one-time option to extend the term of the lease for a period of five years, by delivering prior written notice to
the landlord in accordance with the terms of the lease. We intend to transition certain of our administrative operations from our
Roselle Street facilities into the Pacific Plaza building during the second quarter of 2019.
Substantially all of our operations are currently conducted at these facilities, including our manufacturing processes, research
and development activities, customer and technical support, and management and administrative functions.
We believe that the facilities that we presently occupy together with the additional facilities that we expect to occupy under the
Pacific Plaza Lease will be sufficient to support our current operations and that suitable additional facilities would be available to us
should our operations require it.
Item 3.
Legal Proceedings.
From time to time, we are involved in various legal proceedings arising from or related to claims incident to the normal course
of our business activities. Although the results of such legal proceedings and claims cannot be predicted with certainty, we believe we
are not currently a party to any legal proceeding(s) which, if determined adversely to us, would, individually or taken together, have a
material adverse effect on our business, operating results, financial condition or cash flows. However, regardless of the merit of the
claims raised or the outcome, legal proceedings may have an adverse impact on us as a result of defense and settlement costs,
diversion of management resources and other factors.
Item 4.
Mine Safety Disclosures.
Not applicable.
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PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock began trading on the NASDAQ Global Market on November 14, 2013 under the symbol “TNDM.” Prior to
such time, there was no public market for our common stock. The following table sets forth intraday the high and low sales prices per
share of our common stock as reported on the NASDAQ Global Market for the period indicated.
Year Ended December 31, 2018:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2017:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders of Record
Price Range
High
Low
$
$
$
$
$
$
$
$
5.23
25.50
52.55
44.10
30.00
13.00
12.20
8.88
$
$
$
$
$
$
$
$
2.14
4.75
20.08
26.40
11.00
7.63
3.90
2.15
As of February 19, 2019, there were approximately 53 holders of record of our common stock. The actual number of common
stockholders is greater than the number of record holders, and includes stockholders who are beneficial owners, but whose shares are
held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares
may be held in trust by other entities.
Securities Authorized for Issuance under Equity Compensation Plans
Information about our equity compensation plans, as set forth in this Annual Report under the caption “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters” in Part III, Item 12, is incorporated herein by
reference.
Unregistered Sales of Equity Securities
None.
Repurchases of Equity Securities
We did not repurchase any of our equity securities during 2018 or 2017.
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Item 6.
Selected Financial Data.
The selected financial data presented below under the heading “Statements of Operations Data” for the years ended
December 31, 2018, 2017, and 2016 and the selected financial data presented below under the heading “Balance Sheet Data” as of
December 31, 2018 and 2017 have been derived from our audited consolidated financial statements included elsewhere in this Annual
Report. The selected financial data presented below under the heading “Statements of Operations Data” for the years ended
December 31, 2015 and 2014 and the selected financial data presented below under the heading “Balance Sheet Data” as of
December 31, 2016, 2015 and 2014 are derived from our audited consolidated financial statements not included in this Annual Report.
The selected financial data presented below should be read in conjunction with the information included under the heading
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and the consolidated
financial statements and the related notes in Part II, Item 8. Our historical results for any prior period are not necessarily indicative
of results to be expected in any future period.
Consolidated Statements of Operations Data:
(in thousands, except per share data)
Sales
Cost of sales
Gross profit (loss)
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
Operating loss
Total other income (expense), net:
Net loss before taxes
Provision for income tax (benefit) expense
Net loss
Net loss per share, basic and diluted(1):
Weighted average shares used to compute basic and
diluted net loss per share(1):
Consolidated Balance Sheet Data:
(in thousands)
Cash and cash equivalents
Short-term investments
Working capital
Property and equipment, net
Total assets
Notes payable
Total stockholders’ equity (deficit)
Year Ended December 31,
2016
$
2018
183,866 $
94,044
89,822
2017
107,601 $
63,507
44,094
105,226
29,227
134,453
(44,631)
(77,929)
$ (122,560) $
86,377
20,661
107,038
(62,944)
(10,081)
(73,025) $
51
$ (122,611) $
8
(73,033) $
84,248 $
60,656
23,592
82,834
18,809
101,643
(78,051)
(5,411)
(83,462) $
(15)
(83,447) $
$
(2.55) $
(12.87) $
(27.30) $
2014
2015
72,850 $ 49,722
46,270
34,474
26,580
15,248
78,621
75,121
16,963
15,791
95,584
90,912
(69,004)
(75,664)
(3,404)
(3,789)
(72,408) $ (79,453)
71
(72,418) $ (79,524)
(25.04) $ (34.17)
10
48,129
5,677
3,057
2,892
2,327
2018
41,826 $
87,201 $
121,597 $
17,151 $
206,294 $
— $
131,275 $
$
$
$
$
$
$
$
As of December 31,
2017
13,700 $
479 $
28,071 $
19,631 $
95,346 $
76,541 $
(29,148) $
2016
44,678 $
8,860 $
60,616 $
18,409 $
112,392 $
78,960 $
(5,927) $
2015
43,088 $
28,018 $
80,464 $
15,526 $
124,725 $
29,275 $
63,468 $
2014
31,176
36,106
72,657
12,581
106,464
29,440
54,572
63
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis together with “Selected Financial Data” in Part II, Item 6 and our
consolidated financial statements and related notes in Part II, Item 8. The following discussion contains forward-looking statements,
which statements are subject to considerable 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 I, Item 1A.
Certain statements contained in this Annual Report are “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of 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” in Part I, Item 1A, and elsewhere in this Annual
Report. 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 believe our competitive advantage is rooted in our unique consumer-focused approach,
and the incorporation of modern and innovative technology into our product offerings. Our manufacturing, sales and support activities
exclusively focus on our flagship pump platform, the t:slim X2 Insulin Delivery System, or t:slim X2, and our complementary product
offerings. The simple-to-use t:slim X2 is based on our proprietary technology platform and is the smallest durable insulin pump
available. It is the only pump currently available in the United States that is capable of remote feature updates, which positions us well
to address the evolving needs and preferences of differentiated segments of the insulin-dependent diabetes market. By delivering
innovative hardware and software solutions, as well as best-in-class customer support, we aim to improve and simplify the lives of
people with diabetes and their healthcare providers.
We have commercially launched six insulin pumps in the United States since inception, all of which have been developed using
our proprietary technology platform. Three of these pumps have featured continuous glucose monitoring technology, or CGM. In the
past four years, we have shipped approximately 84,000 pumps, over 4,000 of which were in international markets, which is
representative of our estimated global installed customer base on the typical four-year reimbursement cycle.
Domestically, we began commercial sales of our first insulin pump product, t:slim, in August 2012 and subsequently
commercialized t:flex in May 2015, t:slim G4 in September 2015, t:slim X2 in October 2016, t:slim X2 with Dexcom G5 Mobile
CGM integration, or t:slim X2 with G5, in September of 2017 and t:slim X2 with Basal-IQ technology in August 2018. The Basal-IQ
technology is our first-generation Automated Insulin Delivery, or AID, algorithm. This system uses Dexcom’s G6 CGM sensor values
to temporarily suspend insulin delivery to help minimize the frequency and/or duration of hypoglycemic events. In the second quarter
of 2018, the United States Food and Drug Administration, or the FDA, also created a new interoperability designation for integrated
continuous glucose monitoring, or iCGM, devices. The t:slim X2 with Basal-IQ technology was the first insulin pump to receive
approval for iCGM compatibility, which we expect will streamline the regulatory pathway for integration with future iCGM products
as they are approved by the FDA. More recently, in early 2019 the FDA classified our t:slim X2 as the first insulin pump in a new
device category referred to as Alternative Controller Enabled infusion pumps, or ACE pumps. We expect this new classification of the
t:slim X2 will provide us with more flexibility as we make improvements to current products, create new products and collaborate
with third-parties in the development of future AID systems. Interoperability with iCGM and other compatible devices will still
require development effort and business agreements; however, the regulatory process can be lengthy and unpredictable, so we believe
the FDA’s designation of iCGM products and ACE pumps will, collectively, reduce the overall timeline to commercialize
interoperable devices.
In the second half of 2018, we began selling the t:slim X2 with G5, in select geographies outside the United States, including
Canada. We have discontinued sales of our original t:slim, t:flex and t:slim G4 pumps, and our t:slim X2 hardware platform now
represents 100% of new pump shipments. However, we continue to provide ongoing service and support for our earlier products.
Our insulin pump products are generally considered durable medical equipment and have an expected lifespan of at least four
years. In addition to selling insulin pumps, we sell disposable products that are used together with our pumps and replaced every few
days, including cartridges for storing and delivering insulin, and infusion sets that connect the insulin pump to a user’s body.
64
In the United States, our insulin pumps are compatible with the Tandem Device Updater, a revolutionary tool that allows pump
users to update their pumps’ software quickly and easily from a personal computer. The Tandem Device Updater provides our in-
warranty domestic customers potential access to new and enhanced features and functionality faster than the industry has been able to
in the past. The first use of our Tandem Device Updater was for our deployment of the latest t:slim software to in-warranty t:slim
pumps purchased before April 2015. Since that time, we set a new standard of care in our industry by offering all existing in-warranty
t:slim X2 customers in the United States two significant software updates: (i) integration with the Dexcom G5 Mobile CGM system in
September 2017; and (ii) an upgrade to our new Basal-IQ technology and integration with Dexcom’s G6 CGM in August 2018. Our
Tandem Device Updater positions us to bring future innovations and AID algorithms to t:slim X2 customers, independent of the
typical four-year insurance pump reimbursement cycle. Though we have not utilized our Tandem Device Updater to perform software
updates for devices outside the United States, we are currently developing that capability, and intend to do so in the future.
For the years ended December 31, 2018, 2017 and 2016, our consolidated sales were $183.9 million, $107.6 million, and $84.2
million, respectively. For the years ended December 31, 2018, 2017 and 2016, our net loss was $122.6 million, $73.0 million, and
$83.4 million, respectively. Worldwide pump sales accounted for 67%, 66%, and 74% of our total sales, respectively, for the years
ended December 31, 2018, 2017 and 2016, while pump-related supplies and accessories accounted for the remainder in each year. Our
accumulated deficit as of December 31, 2018 and December 31, 2017 was $600.1 million and $477.6 million, respectively. This
included $147.4 million and $56.9 million of non-cash stock-based compensation charges and non-cash changes in the fair value of
common stock warrants as of December 31, 2018 and 2017, respectively.
In the United States, we have rapidly increased sales since our commercial launch by expanding our sales, clinical and
marketing organization, by developing, commercializing and marketing multiple differentiated products that utilize our proprietary
technology platform and consumer-focused approach, and by providing strong customer support. More recently, our sales have also
rapidly increased following the scaled launch of t:slim X2 in geographies outside the United States. We believe that by demonstrating
our product benefits and the shortcomings of existing insulin therapies, more people will choose our insulin pumps for their therapy
needs, allowing us to further penetrate and expand the market both domestically and outside of the United States. We also believe we
are well positioned to address consumers’ needs and preferences with our current products and products under development and by
offering customers access to our future innovations through the Tandem Device Updater, as they are approved by the FDA, and as we
develop the capability to offer the Tandem Device Updater outside the United States. At the same time, by rapidly innovating and
offering new product features and benefits through the t:slim X2 platform, we are able to leverage a shared global manufacturing and
supply chain infrastructure. In the United States, we are able to leverage a single sales, marketing, and clinical organization, as well as
our domestic customer support services. In Canada, we have a separate sales organization and customer support infrastructure, both of
which benefit from close collaboration with our United States organization. In other international geographies, we have contracted
with experienced distribution partners to commercialize and support our t:slim X2 platform.
Products under Development
Our products under development support our strategy of focusing on both consumer and clinical needs, and include new AID
systems, a next-generation hardware platform, and connected (mobile) health offerings. We intend to leverage our consumer-focused
approach and proprietary technology platform to continue to develop products that have the features and functionalities that will allow
us to meet the needs of people in differentiated segments of the insulin-dependent diabetes market.
Our current products under development include:
•
t:slim X2 with Control IQ Technology: Our second-generation AID system is expected to integrate the t:slim X2 with the
technology that we licensed from TypeZero and Dexcom’s G6 CGM sensor. The iCGM designation for the system also
provides the opportunity for integration development efforts with future iCGM sensors that may become available in the
market. With our implementation of TypeZero’s inControl AID algorithms, our product is intended to both increase and
decrease basal insulin based on a user’s predicted blood glucose levels from a compatible iCGM sensor, as well as deliver
automated correction boluses. In conjunction with Dexcom and TypeZero, which was acquired by Dexcom in August 2018,
we have integrated our technologies into the U.S. portion of the Clinical Acceptance of the Artificial Pancreas, or DCLP3,
portion of the International Diabetes Closed Loop, or the IDCL, trial. Enrollment for the 6-month study was completed in
October 2018. Our t:slim X2 with Control-IQ technology has also been evaluated in several early pediatric studies and we
intend to support a pivotal study among pediatric patients with type 1 diabetes that will commence in the first half of 2019.
Our goal is to commence commercial sales of the t:slim X2 with Control-IQ technology in the United States in the second
half of 2019, followed by an international launch in 2020.
65
•
•
t:sport Insulin Delivery System: Expected to be half the size of our t:slim X2 pump, the t:sport pump is being designed for
people who seek even greater discretion and flexibility with the use of their insulin pump. We anticipate that t:sport will
feature a 200-unit cartridge, an on-pump bolus button, a rechargeable battery, an AID algorithm, and a Bluetooth radio.
t:sport is being designed for use with leading U-100 insulins, and we are evaluating the use of insulin concentrates to provide
people with greater insulin needs. t:sport will utilize a pumping mechanism that differs from our current Micro-Delivery
technology.
Connected (Mobile) Health Offerings: We are currently developing a mobile application that is being designed to utilize the
capability of the Bluetooth radio to wirelessly upload pump data to t:connect, receive notification of pump alerts and alarms,
integrate other health-related information from third party sources, and support future pump-control capabilities for our
products under development. Subject to FDA approval, we intend to launch the first generation of our mobile application
with a subset of these features in the United States in 2019.
For additional information, see the section of this Annual Report under the caption “Business” in Part I, Item 1.
Pump Shipments
Since inception, we have derived nearly all of our sales from the shipment of insulin pumps and associated supplies in the
United States. Starting in the third quarter of 2018, we commenced sales of our t:slim X2 insulin pump in select international
geographies. We consider the number of units shipped per quarter to be an important metric for managing our business.
In 2018, we shipped 34,493 insulin pumps worldwide compared to 17,061 insulin pumps shipped in 2017. In the United States
we have shipped more than 79,000 pumps within the four-year period ended December 31, 2018. Pump shipments in the United States
by fiscal quarter were as follows:
2012
2013
2014
2015
2016(2)
2017(2)
2018
Pump Units Shipped for Each of the Three Months Ended in Respective Years (1) - U.S.
March 31
June 30
September 30
December 31
Total
—
852
1,723
2,487
4,042
2,816
4,444
9
1,363
2,235
3,331
4,582
3,427
5,447
204
1,851
2,935
3,431
3,896
3,868
7,379
844
2,406
3,929
6,234
4,418
6,950
12,935
1,057
6,472
10,822
15,483
16,938
17,061
30,205
Pump shipments to international customers by fiscal quarter were as follows:
2018
Pump Units Shipped for Each of the Three Months Ended in Respective Years (1) - International
March 31
June 30
September 30
December 31
Total
N/A
N/A
1,055
3,233
4,288
(1) The pump units shipped do not reflect returns or exchanges of pump products that occur in the ordinary course of business.
(2) 2016 and 2017 U.S. shipments do not include approximately 3,300 trade-ins fulfilled under the Technology Upgrade
Program (discussed below) related to our commercial launch of t:slim X2.
66
Technology Upgrade Program
Beginning in the third quarter of 2016 through the third quarter of 2017, we offered a Technology Upgrade Program under a
variable pricing structure, as a pathway for certain existing customers to obtain the t:slim X2. Due to the high degree of accounting
complexity, the program created unpredictable financial results under U.S. GAAP for the duration of the program. The accounting
treatment for the program required us to defer up to 100% of sales at the time of pump shipment and recognize them in a subsequent
period, either when the upgrade was fulfilled or at the expiration of the program. We recognized the deferred amount of sales and cost
of sales at the earlier of when the obligations under the program were satisfied or upon the expiration of the program. If a customer
elected to participate in the program, we recognized any upgrade fees that we received and the associated costs at the time of fulfilling
the given obligation. For the year ended December 31, 2017, we recorded incremental net sales of $5.0 million with a corresponding
increase of $3.1 million in gross profit as a result of the Technology Upgrade Program. For the year ended December 31, 2016, we
recorded a deferral of sales of $4.3 million and a net decrease in gross profit of $4.6 million as a result of the program. The program
expired on September 30, 2017 and, therefore, has no impact on our 2018 financial results.
Trends Impacting Financial Results
Overall, we have experienced considerable sales growth since the commercial launch of our first product in the third quarter of
2012, while incurring operating losses since our inception. Our operating results have historically fluctuated on a quarterly or annual
basis, particularly in periods surrounding anticipated regulatory approvals, and the commercial launch of products by us and our
competitors.
We believe that our business condition and financial results, as well as the decision-making process of our customers, has been
and will continue to be impacted by a number of general trends and factors, including the following:
• market acceptance of our products and competitive products by people with insulin-dependent diabetes, their caregivers and
healthcare providers;
•
•
•
•
•
•
•
•
seasonality in the United States associated with annual insurance deductibles and coinsurance requirements associated with
the medical insurance plans utilized by our customers and the customers of our distributors;
timing of holidays and summer vacations which vary by geography;
the buying patterns of our distributors and other customers;
the timing of the commercialization of new products by us or our competitors;
changes in the competitive landscape, including as a result of companies entering or exiting the diabetes therapy market;
access to adequate coverage and reimbursement for our current and future products by third-party payors, and reimbursement
decisions by third-party payors;
the magnitude and timing of any changes to our facilities, manufacturing operations and other infrastructure; and
anticipated and actual regulatory approvals of our products and competitive products.
In particular, we believe the following specific trends and factors have impacted, and could continue to materially impact our
financial results going forward:
•
•
•
•
•
continued increase in demand following the commercial launch of t:slim X2 and the demonstrated success of our Tandem
Device Updater, which we expect will positively impact our sales;
anticipated new product launches;
increased opportunity to achieve customer renewals as customers become eligible for insurance reimbursement to purchase a
new insulin pump at the end of the typical four-year reimbursement cycle;
opportunity to attract Animas customers, following the announcement by Johnson & Johnson that it discontinued the
operations of Animas and will discontinue availability of pump supplies in late 2019;
designation by UnitedHealthcare of one of our competitors as its preferred, in-network durable medical equipment provider
of insulin pumps for most customers age seven and above, and;
67
•
expansion in select international geographies, which began in the third quarter of 2018.
In addition to working to achieve our sales growth expectations, we intend to continue to leverage our infrastructure investments
to realize additional manufacturing, sales, marketing and administration cost efficiencies to improve our operating margins, including
costs associated with our international launch plans. In the fourth quarter of 2018, we achieved profitability for the first time.
However, this may not be sustained in the near term. We believe we can ultimately achieve sustained profitability by driving
incremental sales growth, meeting our pump renewal sales objectives, increasing gross profits from additional sales of infusion sets,
maximizing manufacturing efficiencies on increased production volumes and leveraging the investments made in our sales, clinical,
marketing and customer support organizations.
Subsequent Events
In January 2019, we entered into a lease agreement for 25,332 square feet of additional general administrative office space
located at 10935 Vista Sorrento Parkway, San Diego, California. Subject to limited exceptions, the initial lease term is expected to
commence on the later of (i) March 1, 2019, or (ii) the date on which the landlord substantially completes certain specified work
related to tenant improvements, such date, the Commencement Date, and will expire 42 months from the first day of the first full
month following the Commencement Date. We also have a one-time option to extend the term of the lease for a period of five years
by delivering prior written notice to the landlord in accordance with the terms of the lease.
Components of Results of Operations
Sales
We offer products for people with insulin-dependent diabetes. We commenced commercial sales of our original t:slim insulin
pump platform in the United States in the third quarter of 2012 and continued to launch various iterations of that platform the
following years. In October 2016, we began shipping our flagship pump platform, the t:slim X2 insulin pump. The t:slim X2 hardware
platform, which includes remote software update capabilities, now represents 100% of our new pump shipments. Accordingly, in the
third quarter of 2018 we discontinued new sales of all prior platform versions. Our products also include disposable cartridges and
infusion sets. In addition, we offer accessories including protective cases, belt clips, and power adapters, although such sales are not
significant.
We primarily sell our products through national and regional distributors in the United States on a non-exclusive basis. These
distributors are generally providers of medical equipment and supplies to individuals with diabetes. Our primary end customers are
people with insulin-dependent diabetes. Similar to other durable medical equipment, the primary payor is generally a third-party
insurance carrier and the customer is usually responsible for any medical insurance plan copay or coinsurance requirements. We
believe our existing sales, clinical, and marketing infrastructure will allow us to continue to increase sales by allowing us to promote
our products to a greater number of potential customers, caregivers and healthcare providers.
In the third quarter of 2018, we commenced commercial sales of t:slim X2 with G5 in select international geographies. With the
exception of Canada where we intend to market with a direct sales force, we expect that most of our commercial sales outside the
United States will initially be to independent distributors who will perform all sales, customer support and training in their respective
territories. Historically, we have experienced consistent levels of reimbursement for our products in the United States, but the average
sales price will vary in international markets based on a number of factors, such as the nature of the reimbursement environment,
government regulations and the extent to which we rely on distributor relationships to provide sales, clinical and marketing support.
In general, in the United States we have experienced, and expect to continue to experience, product shipments being weighted
heavily towards the second half of the year, with the highest percentage of product shipments expected in the fourth quarter of the year
due to the nature of the reimbursement environment. Consistent with our historical seasonality, we also expect domestic product
shipments from the fourth quarter to the following first quarter to decrease significantly. Internationally, we do not expect this same
impact from seasonality. However, the opportunity for the transition of former Animas customers in 2019 may also impact our
quarterly sales trends worldwide.
In addition, our quarterly sales have fluctuated, and may continue to fluctuate, substantially in the periods surrounding
anticipated and actual regulatory approvals and commercial launches of new products by us or our competitors. For instance,
customers may defer a purchasing decision if they believe that a new product may be launched in the future. Additionally, upon the
announcement of FDA approval or commercial launch of a new product, either by us or one of our competitors, potential new
customers may reconsider their purchasing decision or take additional time to consider the anticipated or new approval or product
launch in their purchasing decision. However, we are not able to quantify the extent of the impact of these or similar events on future
purchasing decisions.
68
Cost of Sales
We manufacture our pumps and disposable cartridges at our manufacturing facility in San Diego, California. Infusion sets and
pump accessories are manufactured by third-party suppliers. Cost of sales includes raw materials, labor costs, manufacturing overhead
expenses, product training costs, reserves for expected warranty costs, freight, scrap and inventory excess and obsolescence.
Manufacturing overhead expenses include expenses relating to quality assurance, manufacturing engineering, material procurement,
inventory control, facilities, equipment, information technology and operations supervision and management. We anticipate that our
cost of sales will continue to increase as our products gain broader market acceptance and our product sales increase.
We expect our overall gross margin percentage, which for any given period is calculated as sales less cost of sales divided by
sales, to improve over the long-term, as our sales increase and our overhead costs are spread over larger production volumes. We
expect we will be able to leverage our manufacturing cost structure across our products that utilize the same proprietary technology
platform and manufacturing infrastructure, and will be able to further reduce costs with increased automation, process improvements
and raw materials cost reductions. Pumps have, and are expected to continue to have, a higher gross margin than our pump-related
supplies. Therefore, the percentage of pump sales relative to total sales will have a significant impact on gross margin. We also expect
our warranty costs per unit to decrease as we release product features and functionality utilizing the Tandem Device Updater.
However, our overall gross margin may fluctuate in future quarterly periods as a result of numerous factors aside from those
associated with production volumes and product mix. .
Other factors impacting our overall gross margin may include, the changing percentage of products sold to distributors versus
directly to individual customers, varying levels of reimbursement among third-party payors and in international markets, the timing
and success of new regulatory approvals and product launches, the impact of changes in our stock price on non-cash stock-based
compensation, warranty and training costs, inventory obsolescence and changes in our manufacturing processes, capacity, costs or
output.
Selling, General and Administrative
Our selling, general and administrative, or SG&A, expenses primarily consist of salary, cash-based incentive compensation,
fringe benefits and non-cash stock-based compensation for our executive, financial, legal, marketing, sales, clinical, customer support,
technical services, insurance verification, regulatory affairs and other administrative functions. In particular, our sales and clinical
organization consisted of approximately 70 territories as of December 31, 2018 and our operations in Canada will be supported by a
direct sales force of approximately 10 field representatives. Territories in the United States are maintained by sales representatives and
field clinical specialists, and supported by managed care liaisons, additional sales management and other customer support
personnel. We expect to modestly increase our number of sales personnel in the near term in order to optimize the coverage of our
existing territories. Other significant SG&A expenses include those incurred for product demonstration samples, commercialization
activities associated with new product launches, travel, trade shows, outside legal fees, independent auditor fees, outside consultant
fees, insurance premiums, facilities costs and information technology costs. Overall, we expect our SG&A expenses, including the
cost of our customer support infrastructure, to increase as our customer base grows in the United States and in international
geographies. Additionally, we realized a notable increase in non-cash stock-based compensation expense beginning in the third quarter
of 2018 from the increase in our stock price over the past year. We expect higher non-cash stock-based compensation expense will be
sustained in future quarters as a result of the valuation of certain employee option grants. Our SG&A expenses may also increase due
to anticipated costs associated with additional compliance and regulatory reporting requirements.
Research and Development
Our research and development, or R&D, activities primarily consist of engineering and research programs associated with our
products under development, as well as activities associated with our core technologies and processes. R&D expenses are primarily
related to employee compensation, including salary, fringe benefits, non-cash stock-based compensation and temporary employee
expenses. We also incur R&D expenses for supplies, development prototypes, outside design and testing services, depreciation,
allocated facilities and information services, clinical trial costs, payments under our licensing, development and commercialization
agreements and other indirect costs. We expect our R&D expenses to increase as we advance our products under development and
develop new products and technologies, as well as continue to reflect a notable increase in non-cash stock-based compensation due
to the impact of the increase in our stock price over the past year.
Other Income and Expense
Other income and expense primarily consists of changes in the fair value of the Series A and Series B warrants issued in our
public offering of common stock in October 2017, as well as interest expense and amortization of debt discount and issuance costs
associated with our Amended and Restated Term Loan Agreement, or the Term Loan Agreement, with Capital Royalty Partners II,
L.P. and its affiliated funds, or CRG. In August 2018, we fully repaid amounts due under the Term Loan Agreement. Prior to that,
there was $82.7 million of outstanding principal under the Term Loan Agreement, which accrued interest at a coupon rate of
69
11.5% per annum. As a result, we recognized a loss on extinguishment of debt in 2018, but there will be no related interest expense or
costs associated with the Term Loan Agreement in future years. Our interest and other income also includes interest earned on our
cash equivalents and short-term investments. We expect other income and expense to fluctuate from period to period due to
revaluations of the outstanding Series A warrants, which expire in the fourth quarter of 2022.
Results of Operations
(in thousands, except percentages)
Sales:
Pump sales
Pump supplies and other
Total domestic sales
Pump sales
Pump supplies and other
Total international sales
Total sales
Cost of sales
Gross profit
Gross margin
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
Operating loss
Other income (expense), net:
Interest and other income
Interest and other expense
Loss on extinguishment of debt
Change in fair value of stock warrants
Total other expense, net
Net loss before taxes
Provision for income taxes (benefit)
Net loss
Year Ended December 31,
2018
2017
2016
$
$
$
$
115,719
58,469
174,188
8,205
1,473
9,678
183,866
94,044
89,822
$
71,518
36,083
107,601
—
—
—
107,601
63,507
44,094
49%
41%
105,226
29,227
134,453
(44,631)
1,462
(7,584)
(5,313)
(66,494)
(77,929)
(122,560) $
51
(122,611) $
86,377
20,661
107,038
(62,944)
239
(11,341)
—
1,021
(10,081)
(73,025) $
8
(73,033) $
62,507
21,741
84,248
—
—
—
84,248
60,656
23,592
28%
82,834
18,809
101,643
(78,051)
296
(5,707)
—
—
(5,411)
(83,462)
(15)
(83,447)
Comparison of Years Ended December 31, 2018 and 2017
Sales. For the year ended December 31, 2018, sales were $183.9 million, which included $9.7 million from international sales
that commenced in the third quarter of 2018. For the year ended December 31, 2017, sales were $107.6 million, which included
incremental net pump sales of $5.0 million as a result of the Technology Upgrade Program in place at that time.
Total sales increased $76.3 million in 2018 compared to 2017, primarily driven by a 102% increase in worldwide pump
shipments to 34,493 in the year ended 2018, compared to 17,061 in the year ended 2017. Worldwide pump shipments were positively
impacted by strong demand for our products following the August 2018 launch of t:slim X2 with Basal-IQ technology, the August
2017 launch of t:slim X2 with G5 integration, and the commencement of international sales in the third quarter of 2018.
Additionally, sales from pump-related supplies increased 66% due to the September 2017 launch of infusion set products using the
t:lock connector, as well as an overall increase in our installed customer base of customers reordering supplies. The ratio of the
number of infusion sets shipped to the number of cartridges shipped increased to over 100% in 2018 from 69% in the year ended
2017.
Sales to domestic distributors accounted for 78% and 75% of our total sales for the years ended December 31, 2018 and 2017,
respectively. Our percentage of sales to distributors versus individual customers is principally determined by the mix of customers
ordering our products within the period and whether or not we have a contractual arrangement with their underlying third-party
insurance payor. The percentage was particularly impacted in 2018 by the mid-2017 launch of the t:lock connector, which resulted in
greater purchases of infusion sets by our independent distributors during the period as compared to the same period during the prior
year. Sales to international distributors accounted for 100% of our total international sales for the year ended December 31, 2018.
70
Cost of Sales and Gross Profit. Our cost of sales in 2018 was $94.0 million, resulting in gross profit of $89.8 million, compared
to $63.5 million of cost of sales and gross profit of $44.1 million in 2017, which included incremental gross profit of $3.1 million
associated with the Technology Upgrade Program.
The gross margin for 2018 was 49%, compared to 41% in 2017. The incremental gross profit associated with the Technology
Upgrade Program benefited our 2017 gross margin by one percentage point.
The improvement in both gross profit and gross margin was primarily the result of the increase in pump shipments which have a
higher gross margin than pump-related supplies, as well as per-unit cost improvements on all products from increased production
volumes and manufacturing efficiencies. As a whole, other non-manufacturing costs, which primarily consist of warranty, freight and
training costs, also reflected improvement.
Selling, General and Administrative Expenses. SG&A expenses increased 22% to $105.2 million in 2018 from $86.4 million in
2017. Employee-related expenses for our SG&A functions comprise the majority of the SG&A expenses. These expenses increased
$18.4 million during 2018 compared to 2017, including an increase of $11.6 million in salaries, incentive compensation and other
employee benefits due to an increase in personnel to support our growing installed customer base. In addition, our strong year-over-
year sales growth drove a substantial year-over-year increase in incentive-based compensation. Additionally, this included an increase
of $6.8 million in non-cash stock-based compensation due to the significant increase in our stock price in 2018.
Research and Development Expenses. R&D expenses increased 41% to $29.2 million in 2018 from $20.7 million in 2017. This
increase was primarily the result of an increase of employee-related expenses. This includes a $4.1 million increase in salaries,
incentive compensation and other employee benefits due to an increase in personnel to support our product development efforts. In
addition, our strong year-over-year sales growth drove a substantial year-over-year increase in incentive-based compensation. There
was also an increase of $3.1 million in non-cash stock-based compensation due to the significant increase in our stock price in 2018.
Other Income (Expense). Other expense in 2018 was $77.9 million, compared to $10.1 million in 2017. Other expense in 2018
primarily consisted of a $66.5 million revaluation loss from the change in fair value of the Series A and Series B warrants due to the
significant appreciation in our stock price during 2018, $7.6 million of interest expense associated with the Term Loan Agreement, as
well as a $5.3 million loss on extinguishment of debt associated with the full repayment of our Term Loan Agreement in August 2018.
Other expense in 2017 consisted primarily of interest expense associated with the Term Loan Agreement. The outstanding principal
balance under the Term Loan Agreement was $82.7 million prior to the repayment and as of December 31, 2017. There will be no
interest expense or other costs associated with the Term Loan Agreement in future periods. Other income consists primarily of interest
earned on our cash equivalents and short-term investments, for which our average invested balances were significantly higher in 2018
as compared to 2017.
Comparison of Years Ended December 31, 2017 and 2016
Sales. For the year ended December 31, 2017, sales were $107.6 million, which included the recognition of $5.0 million of
pump sales originally deferred in prior periods and upgrade fees received as a result of the Technology Upgrade Program. For the year
ended December 31, 2016, sales were $84.2 million, reduced by $4.3 million of deferred pump sales as a result of our Technology
Upgrade Program.
Sales of insulin pumps were $71.5 million and $62.5 million, respectively, for the years ended December 31, 2017 and 2016.
For the year ended December 31, 2017, sales of pump-related supplies were $35.6 million, of which $21.4 million were sales of
infusion sets and $14.2 million were sales of cartridges. For the year ended December 31, 2016, sales of pump-related supplies were
$21.4 million, of which $9.7 million were sales of infusion sets and $11.7 million were sales of cartridges. The ratio of the number of
infusion sets shipped to the number of cartridges shipped increased to 69% for the year ended December 31, 2017, and approached
100% during December, compared to 31% in 2016. Sales of accessories were not significant in either year.
Excluding the impact of the Technology Upgrade Program, the increase in sales was primarily driven by an increase in sales of
infusion sets to our distributors, as well as an increase in the sale of pump-related supplies to our growing customer base. Pump
shipments only slightly increased in the year ended December 31, 2017 to 17,061 from 16,938 in 2016, which we believe was the
result of a number of factors including the highly competitive market, the timing of FDA approval of t:slim X2 with G5, and negative
perceptions regarding our financial stability compared to that of our competitors.
Sales to distributors accounted for 75% and 74% of our total sales for the years ended December 31, 2017 and 2016,
respectively. Our percentage of sales to distributors versus individual customers is principally determined by the mix of customers
ordering our products within the period and whether or not we have a contractual arrangement with their underlying third-party
insurance payor.
71
Cost of Sales and Gross Profit. Our cost of sales in 2017 was $63.5 million, resulting in gross profit of $44.1 million, which
included incremental gross profit of $3.1 million associated with the Technology Upgrade Program. Our cost of sales in 2016 was
$60.7 million, resulting in gross profit of $23.6 million in 2016, which included a reduction in gross profit of $4.6 million associated
with the Technology Upgrade Program.
The gross margin in 2017 was 41%, compared to 28% in 2016. The incremental gross profit associated with the Technology
Upgrade Program benefited our 2017 gross margin by one percentage point. The net reduction of gross profit associated with the
Technology Upgrade Program negatively affected our gross margin for 2016 by four percentage points.
Excluding the impact of the Technology Upgrade Program, the improvement in both gross profit and gross margin was
primarily the result of per-unit manufacturing cost improvements, including significant raw material cost reductions for pumps and
overall manufacturing efficiencies for both pumps and cartridges, as well as contribution from the incremental sales of infusion sets.
Other non-manufacturing costs, which primarily consist of warranty, freight and training, also improved.
In addition, in 2016 we recorded a $2.8 million charge for inventory excess and obsolescence as the result of the
commercialization of t:slim X2, the launch of the Technology Upgrade Program and the larger than anticipated decrease in t:slim G4
sales in the second half of the year. This inventory excess and obsolescence charge negatively affected our gross margin for 2016 by
three percentage points.
Selling, General and Administrative Expenses. SG&A expenses increased 4% to $86.4 million in 2017 from $82.8 million in
2016. Employee-related expenses for our SG&A functions comprise the majority of the SG&A expenses. These expenses increased
$3.7 million during 2017 compared to 2016, including an increase of $0.9 million in salaries and fringe benefits, as well as an increase
in cash-based incentive compensation of $2.1 million and stock-based compensation of $0.7 million.
Research and Development Expenses. R&D expenses increased 10% to $20.7 million in 2017 from $18.8 million in 2016. This
increase was primarily the result of an increase of employee-related expenses of $1.6 million and $0.9 million in outside consulting
expense, including clinical trial costs, which was partially offset by a decrease in expenses associated with supplies and other services.
Other Income (Expense). Other expense in 2017 was $10.1 million, compared to $5.4 million in 2016. Other expense in 2017
and 2016 primarily consisted of interest expense associated with the Term Loan Agreement. The outstanding principal balances under
the Term Loan Agreement were $82.7 million and $81.1 million as of December 31, 2017 and December 31, 2016, respectively. In
2017, we also recorded a $1.0 million gain from the change in fair value of the common stock warrants. Other income in 2017 and
2016 was not significant.
Liquidity and Capital Resources
At December 31, 2018, we had $129.0 million in cash and cash equivalents and short-term investments. We believe that our
cash and cash equivalents and short-term investments balance will be sufficient to satisfy our liquidity requirements for at least the
next 12 months from the date of this filing.
Historically, our principal sources of cash have included private placements and public offerings of equity securities, debt
financing, and cash collected from product sales. Since the beginning of 2017, we completed the following financings:
•
•
•
In August 2018, we completed a registered public offering of 4,035,085 shares of our common stock at a public offering
price of $28.50 per share. The gross proceeds from the offering were approximately $115.0 million, before deducting
underwriting discounts and commissions and other offering expenses payable by us.
In February 2018, we completed a registered public offering of 34,500,000 shares of our common stock at a public offering
price of $2.00 per share. The gross proceeds from the offering were approximately $69.0 million, before deducting
underwriting discounts and commissions and other offering expenses payable by us.
In October 2017, we completed a registered public offering of our common stock, pursuant to which we sold 4,630,000
shares of our common stock, Series A warrants to purchase up to 4,630,000 shares of our common stock and Series B
warrants to purchase up to 4,630,000 shares of our common stock at a public offering price of $3.50 per share and
accompanying warrants. The gross proceeds to us from this financing were approximately $16.2 million, before deducting
underwriting discounts and commissions and other offering expenses payable by us. During the year ended December 31,
2018, we received proceeds of $29.6 million from the exercise of 8,735,765 outstanding Series A and Series B warrants. As
of December 31, 2018, there were Series A warrants to purchase 510,785 shares outstanding and there were no Series B
warrants outstanding.
72
• During the three months ended September 30, 2017, we sold 464,108 shares of our common stock under our “at the market”
program, or the ATM Offering, at prices ranging from $5.64 to $10.54 per share. The gross proceeds to us from the offering
were $4.3 million, before deducting underwriting discounts and commissions and other offering expenses payable by us. The
ATM Offering was terminated in December 2017.
•
In March 2017, we completed a registered public offering of 1,850,000 shares of our common stock at a public offering price
of $12.50 per share. The gross proceeds to us from the offering were approximately $23.1 million, before deducting
underwriting discounts and commissions and other offering expenses payable by us.
Our historical cash outflows have primarily been associated with cash used for operating activities such as the development and
commercialization of our products and expansion and support of our sales, marketing, clinical and customer support organizations, an
increase in our R&D activities, the acquisition of intellectual property, expenditures related to increases in our manufacturing capacity
and improvements to our manufacturing efficiency, overall facility expansion, and other working capital needs. Additionally, we have
used cash to pay the interest expense associated with our Term Loan Agreement. The outstanding balance associated with the Term
Loan Agreement was fully repaid in August 2018, which will result in no interest expense or other costs associated with the Term
Loan Agreement in future periods.
We expect our sales performance and the resulting operating income or loss, as well as the status of each of our new product
development programs, will significantly impact our cash flow from operations, liquidity position and cash management decisions.
Our ability to raise additional financing may be negatively impacted by a number of factors, including our recent and projected
financial results, recent changes in and volatility of our stock price, perceptions about the dilutive impact of financing transactions, the
competitive environment in our industry, and uncertainties regarding the regulatory environment.
The following table shows a summary of our cash flows for the years ended December 31, 2018, 2017 and 2016:
(in thousands)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Total
2018
Year Ended December 31,
2017
2016
$
$
(8,319) $
(90,739)
117,184
18,126 $
(66,136) $
2,782
40,376
(22,978) $
(61,173)
10,448
52,315
1,590
Operating activities. Net cash used in operating activities was $8.3 million for the year ended December 31, 2018, compared to
$66.1 million and $61.2 million for the same periods in 2017 and 2016, respectively.
The decrease in net cash used in operating activities for 2018 compared to 2017 was primarily associated with a reduction in the
net loss when adjusted for non-cash expenses, particularly the change in the fair value of Series A and Series B warrants, increased
stock-based compensation expense, and the loss on extinguishment of debt, as well as net changes in working capital. Our operating
loss included $10.8 million and $7.9 million in cash paid for interest in 2018 and 2017, respectively. Working capital changes were
due to an increase in accounts receivable as a result of higher sales, offset by a reduction in inventory and increases in employee
related liabilities and deferred revenue. Inventory decreased to $19.9 million at December 31, 2018 from $27.0 at December 31, 2017
due to an increase in pump production and sales demand during the fourth quarter of 2018, and the timing of certain inventory receipts.
The increase in net cash used in operating activities for 2017 compared to 2016 was primarily due to changes in working capital,
offset by an improvement in our operating loss of $10.5 million. Our operating loss included $7.9 million and $4.4 million in cash
paid for interest in 2017 and 2016, respectively. Working capital changes were due to lower cash collections from accounts receivable
and a reduction in deferred revenue, offset by increases in employee-related and other liabilities and decreases in prepaid and other
current assets.
Investing activities. Net cash used by investing activities was $90.7 million for the year ended December 31, 2018, which was
primarily related to purchases of short-term investments of $123.6 million using the net proceeds from our public offering of common
stock in August of 2018, and $3.0 million in purchases of property and equipment, offset by $35.8 million in proceeds from sales and
maturities of short-term investments. Net cash provided by investing activities was $2.8 million for the year ended December 31,
2017, which was primarily related to proceeds from sales and maturities of short-term investments of $8.5 million offset by $5.7
million in purchases of property and equipment. Net cash provided by investing activities was $10.4 million for the year ended
December 31, 2016, which was primarily related to proceeds from sales and maturities of short-term investments of $50.0 million
offset by the net purchase of $30.6 million in short-term investments and $8.9 million in purchases of property and equipment.
73
Financing activities. Net cash provided by financing activities was $117.2 million for the year ended December 31, 2018, which
was primarily the result of net proceeds of approximately $172.9 million from the public offerings of our common stock in February
2018 and August 2018, as well as proceeds of $29.6 million from the exercise of Series A and Series B warrants that were issued in
the public offering of common stock in October 2017, offset by the $87.7 million repayment of our term loan and associated financing
fees. Net cash provided by financing activities was $40.4 million for the year ended December 31, 2017, which was due to net
proceeds from the issuance of common stock. Net cash provided by financing activities was $52.3 million for the year ended
December 31, 2016, which was primarily due to net proceeds from issuance of debt under the Term Loan Agreement in the amount of
$50.0 million and $2.3 million in proceeds from participation in our employee stock plans.
Our liquidity position and capital requirements are subject to fluctuation based on a number of factors. In particular, our cash
inflows and outflows are principally impacted by the following:
(cid:5)
(cid:5)
(cid:5)
(cid:5)
(cid:5)
(cid:5)
(cid:5)
(cid:5)
our ability to generate sales, the timing of those sales and the collection of receivables generated from those sales from period
to period;
the timing and amount of any additional financings, including the exercise of warrants and proceeds from employee stock
incentive plans;
fluctuations in gross margins and operating margins; 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;
research and product development efforts, including clinical trial costs;
acquisition of equipment and other fixed assets; and
payments under licensing, development and commercialization 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 cash uses or the timing or amount of cash used. In addition, from time to time we may consider opportunities to
acquire other products or technologies that may enhance our product platform or technology, expand the breadth of our markets or
customer base, or advance our business strategies. Any such transaction may require short-term expenditures that may impact our
capital needs. If for any reason cash generated from operations is insufficient to satisfy our working capital requirements, we may in
the future be required to seek additional capital from public or private offerings of our capital stock, or we may elect to borrow
amounts under new credit lines or from other sources. If we issue equity or debt securities to raise additional funds, our existing
stockholders may experience dilution, we may incur significant financing or debt service costs, and the new equity or debt securities
may have rights, preferences and privileges senior to those of our existing stockholders. There can be no assurance that financing will
be available on acceptable terms, or at all.
Indebtedness
Repayment of Term Loan Agreement
In August 2018, we fully repaid our term loan with CRG pursuant to the Term Loan Agreement. The balance of the outstanding
debt at the time of repayment was $82.7 million. The repayment included approximately $1.1 million in accrued interest and $5.0
million in associated financing fees that became due. Therefore, we did not have any borrowings outstanding under the Term Loan
Agreement as of December 31, 2018. At the time of repayment, the remaining $5.3 million debt discount balance associated with the
financing fees and certain debt issuance costs was accelerated and recognized as a loss on extinguishment of debt for the year ended
December 31, 2018. We had $82.7 million of aggregate borrowings outstanding at December 31, 2017 and a $4.1 million liability for
financing fees.
Under the Term Loan Agreement, interest was payable at our option, (i) in cash at a rate of 11.5% per annum, or (ii) at a rate of
9.5% of the 11.5% per annum in cash and 2.0% of the 11.5% per annum, or the PIK Loan, to be added to the principal of the loan and
subject to accruing interest. Interest-only payments were due quarterly on March 31, June 30, September 30 and December 31 of each
year of the interest-only payment period, which would have ended on December 31, 2019. The principal balance was due in full at the
end of the term of the loan, which was March 31, 2020, or the Maturity Date. We had elected to pay interest in cash at a rate of 11.5%
per annum through September 30, 2015. From October 1, 2015 through December 31, 2017, we elected to pay interest in cash at a rate
of 9.5% per annum and for a rate of 2.0% per annum to be added to the principal of the loan. As a result, $2.7 million was added to the
principal of the loan during that time period, collectively, the PIK Loans.
74
We entered into a series of amendments to the Term Loan Agreement in 2016, 2017 and 2018, which included the addition of
a financing fee payable at the maturity of the term loans, the issuance of warrants to purchase 193,788 shares of our common stock at
an exercise price of $23.50 per share, or the CRG Warrant, and certain other minimum financing covenants. The CRG Warrant had a
term of 10 years from the date of issuance and would have expired on March 7, 2027. The financing fee was applicable to the entire
aggregate principal amount of borrowings outstanding, including total PIK Loans issued.
Contractual Obligations & Commitments
The following table summarizes our long-term contractual obligations as of December 31, 2018:
(in thousands)
Operating lease obligations
related to facilities (1)(2)
Firm purchase commitments (3)
Total contractual obligations
$
$
Total
Less than 1 year
1-3 years
3-5 years
More than
5 years
Payments Due by Period
10,831
14,541
25,372
$
$
2,743
10,578
13,321
$
$
5,802
3,963
9,765
$
$
2,286
—
2,286
$
$
—
—
—
(1) The Barnes Canyon Lease provided for a tenant improvement allowance, or the TI Allowance, of up to approximately $3.4
million to be applied to non-structural improvements to the Barnes Canyon Building, which we fully utilized. The amounts
funded by the landlord are subject to an interest accrual at a rate of 8.0% per annum and must be repaid in full during the base
term in monthly installments (TI Rent), paid concurrently with the base rent. TI Rent is not included in the table above. TI
Rent is expected to be $0.6 million for each of the years ended December 31, 2019 through 2023.
(2) The above table does not include amounts due under the lease of additional administrative office space located at 10935 Vista
Sorrento Parkway, San Diego, California, which we entered into in January 2019. Minimum annual lease payments under the
new lease will be approximately $0.4 million in 2019, $1.1 million in 2020, $1.2 million in 2021, and $0.8 million in 2022.
The Company will also have a one-time option to extend the term of the lease for a period of five years with prior written
notice in accordance with the terms of the lease.
(3) Includes purchase orders that are cancellable under the standard terms of our purchase order agreements. In certain cases,
cancelation of outstanding purchase commitments may require payment of costs incurred through the date of cancelation.
Critical Accounting Policies Involving Management Estimates and Assumptions
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these consolidated 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 consolidated 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.
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in
this Annual Report, we believe that the following accounting policies are the most critical to the judgments and estimates used in the
preparation of our consolidated financial statements.
Revenue Recognition
Our revenue is generated primarily from sales of our insulin pumps, disposable cartridges and infusion sets to individual
customers and third-party distributors that resell the product to insulin-dependent diabetes customers. We are paid directly by
customers who use the products, distributors and third-party insurance payors.
75
In January 2018, we adopted the Revenue from Contracts with Customers Standard which supersedes existing revenue guidance
under U.S. GAAP and International Financial Reporting Standards. Accordingly, subsequent to January 1, 2018, we recognize
revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to
be entitled in exchange for those goods or services. We elected to implement this new standard utilizing the modified retrospective
method. Under this approach, we applied the new standard to all new contracts initiated on or after the effective date, and, for
contracts which had remaining obligations as of the effective date, we recorded an adjustment to the opening balance of accumulated
deficit. The accounting for the significant majority of our revenues is not impacted by the new guidance. As a result, on January 1,
2018, we recorded a net reduction to accumulated deficit in the amount of $149,000, reflecting the accounting change.
Prior to the implementation of this new standard, we recognized revenue when persuasive evidence of an arrangement existed,
delivery had occurred and title passed, the price was fixed or determinable, and collectability was reasonably assured.
Revenue Recognition for Arrangements with Multiple Deliverables
We consider the deliverables in our product offering to be separate performance obligations. The transaction price is determined
based on the consideration expected to be received, based either on the stated value in contractual arrangements or the estimated cash
to be collected in non-contracted arrangements. We allocate the consideration to the individual performance obligations and recognize
the consideration based on when the performance obligation is satisfied, considering whether or not this occurs at a point in time or
over time.
Generally, insulin pumps, cartridges, infusion sets and accessories are deemed performance obligations that are satisfied upon
delivery, while access to the complementary products, such as the t:connect cloud-based data management application and the
Tandem Device Updater, are considered performance obligations satisfied over the four-year warranty period of the insulin pumps.
There is no standalone value for these complementary products. Therefore, the Company determines their value by applying the
expected cost-plus margin approach and then allocates the residual to the insulin pumps.
Product Returns
We offer a 30-day right of return to our customers from the date of shipment of any of our insulin pumps, provided a physician’s
confirmation of the medical reason for the return is received. Estimated allowances for sales returns recorded as a reduction in revenue
are based on historical returned quantities as compared to pump shipments in those same periods of return. The return rate is then
applied to the sales of the current period to establish a reserve at the end of the period. The return rates used in the reserve are adjusted
for known or expected changes in the marketplace when appropriate.
Warranty Reserve
We generally provide a four-year warranty on our insulin pumps to end user customers and may replace any pumps that do not
function in accordance with the product specifications. Insulin pumps returned to us may be refurbished and redeployed. Additionally,
we offer a six-month warranty on disposable cartridges and infusion sets. Estimated warranty costs are recorded at the time of
shipment to cost of sales. Warranty costs are estimated based on the current expected replacement product cost and expected
replacement rates based on historical experience. We evaluate the reserve quarterly and make adjustments when appropriate. Changes
to the actual replacement rates could have a material impact on our estimated warranty reserve.
Off-Balance Sheet Arrangements
As of December 31, 2018, we did not have any off-balance sheet arrangements.
JumpStart Our Business Startups Act of 2012 (JOBS Act)
We completed our initial public offering in November 2013. Accordingly, 2018 was our fifth year as an “emerging growth
company” under the JOBS Act. As such, we are required to obtain an audit of our internal control over financial reporting pursuant to
Section 404(b) of the Sarbanes-Oxley Act commencing with the audit of our consolidated financial statements for the fiscal year
ending December 31, 2018.
76
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
We invest our excess cash primarily in commercial paper, corporate debt, government-sponsored enterprise securities and U.S.
government treasury 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 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 market
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 December 31, 2018, this change would not have had a material effect on the fair value of our investment
portfolio as of that date.
Our operations are primarily located in the United States, and nearly all of our sales since inception have been made in
U.S. dollars. With the exception of Canada, our sales outside the United States are currently made to independent distributors under
agreements denominated in U.S. dollars. Accordingly, we have assessed that we do not currently have any material exposure to
foreign currency rate fluctuations. As our business in markets outside of the United States increases, we may be exposed to foreign
currency exchange risk. We believe this is currently limited to our operations in Canada, where fluctuations in the rate of exchange
between the U.S. dollar and the Canadian dollar, could adversely affect our financial results. In addition, 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. In certain circumstances, we may seek to manage such foreign exchange risk by using derivative
instruments such as foreign exchange forward contracts to hedge our risk. In general, we may hedge material foreign exchange
exposures up to 12 months in advance. However, we may choose not to hedge some exposures for a variety of reasons including
prohibitive economic costs.
77
Item 8.
Consolidated Financial Statements and Supplementary Data
Our consolidated financial statements as of December 31, 2018 and 2017 and for each of the three years in the period
ended December 31, 2018, and the Report of the Independent Registered Public Accounting Firm are included in this report as listed
in the index.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm..................................................................................................................
79
Consolidated Balance Sheets as of December 31, 2018 and 2017 ........................................................................................................
80
Consolidated Statements of Operations and Comprehensive Loss for the Years ended December 31, 2018, 2017 and 2016.............
81
Consolidated Statements of Stockholders’ Equity (Deficit) for the Years ended December 31, 2018, 2017 and 2016 .......................
82
Consolidated Statements of Cash Flows for the Years ended December 31, 2018, 2017 and 2016 .....................................................
83
Notes to Consolidated Financial Statements .........................................................................................................................................
84
78
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Tandem Diabetes Care, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Tandem Diabetes Care, Inc. (the Company) as of December 31,
2018 and 2017, the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash
flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the
“financial statements“). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2018, in conformity with US generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company‘s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)
and our report dated February 26, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2009.
San Diego, California
February 26, 2019
79
TANDEM DIABETES CARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except par values)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventory, net
Prepaid and other current assets
Total current assets
Property and equipment, net
Patents, net
Restricted cash - long-term
Other long-term assets
Total assets
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable
Accrued expense
Employee-related liabilities
Deferred revenue
Common stock warrants
Other current liabilities
Total current liabilities
Notes payable—long-term
Deferred rent—long-term
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 10)
Stockholders’ equity (deficit):
Common stock, $0.001 par value; 200,000 and 100,000 shares authorized as of
December 31, 2018 and December 31, 2017, respectively. 57,554 and 10,119 shares
issued and outstanding at December 31, 2018 and December 31, 2017, respectively.
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity (deficit)
Total liabilities and stockholders’ equity (deficit)
December 31,
2018
2017
41,826 $
87,201
35,193
19,896
3,769
187,885
17,151
1,130
—
128
206,294 $
6,824 $
3,930
24,030
4,600
17,926
8,978
66,288
—
3,799
4,932
75,019
13,700
479
20,793
26,993
2,191
64,156
19,631
1,457
10,000
102
95,346
5,150
2,832
14,488
2,526
5,432
5,657
36,085
76,541
4,687
7,181
124,494
57
731,306
(13)
(600,075)
131,275
206,294 $
10
448,455
—
(477,613)
(29,148)
95,346
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
80
TANDEM DIABETES CARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
Sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
Operating loss
Other income (expense), net
Interest and other income
Interest and other expense
Loss on extinguishment of debt
Change in fair value of stock warrants
Total other expense, net
Loss before taxes
Provision for income tax (benefit) expense
Net loss
Other comprehensive loss:
Unrealized gain (loss) on short-term investments
Comprehensive loss
Net loss per share - basic and diluted
Weighted average shares used to compute basic and diluted net loss per
share
$
$
$
$
$
Year Ended December 31,
2018
2017
2016
183,866 $
94,044
89,822
105,226
29,227
134,453
(44,631)
1,462
(7,584)
(5,313)
(66,494)
(77,929)
(122,560)
51
(122,611) $
107,601 $
63,507
44,094
86,377
20,661
107,038
(62,944)
239
(11,341)
—
1,021
(10,081)
(73,025)
8
(73,033) $
(13) $
(122,624) $
1 $
(73,032) $
84,248
60,656
23,592
82,834
18,809
101,643
(78,051)
296
(5,707)
—
—
(5,411)
(83,462)
(15)
(83,447)
(21)
(83,468)
(2.55) $
(12.87) $
(27.30)
48,129
5,677
3,057
The accompanying notes are an integral part of the consolidated financial statements.
81
TANDEM DIABETES CARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands)
Common Stock
Additional
Paid-in
Accumulated
Other
Comprehensive
Accumulated
Total
Stockholders’
Equity (Deficit)
63,468
$
170
Balance at December 31, 2015
Exercise of stock options
Issuance of common stock for Employee Stock
Purchase Plan
Stock-based compensation
Unrealized loss on short-term investments
Net loss
Balance at December 31, 2016
Exercise of stock options
Issuance of common stock in public offering, net of
underwriter’s discount and offering costs
Issuance of common stock warrants in connection with
term loan
Issuance of common stock for Employee Stock
Purchase Plan
Stock-based compensation
Unrealized gain on short-term investments
Net loss
Balance at December 31, 2017
Exercise of stock options
Exercise of common stock warrants
Issuance of common stock in public offering, net of
underwriter’s discount and offering costs
Fair value of common stock warrants at time of exercise
Issuance of common stock for Employee Stock
Purchase Plan
Stock-based compensation
Unrealized loss on short-term investments
Adjustment to retained earnings from adoption of ASC 606
Net loss
Balance at December 31, 2018
Shares
3,026
15
69
—
—
—
3,110
24
6,946
—
39
—
—
—
10,119
136
8,603
38,535
—
81
80
—
—
—
57,554
Amount
$
3
—
Capital
$
384,578
170
Income (Loss)
20
$
—
$
Deficit
(321,133)
—
—
—
—
—
3
—
7
—
—
—
—
—
10
—
9
39
—
—
—
—
—
—
57
$
$
$
2,151
11,752
—
—
398,651
270
33,346
3,331
300
12,557
—
—
448,455
1,027
29,566
172,890
54,000
1,364
24,003
—
—
—
731,306
$
$
$
$
$
$
$
$
—
—
(21)
—
(1)
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
(83,447)
(404,580)
$
—
—
—
—
—
—
(73,033)
(477,613)
$
—
—
—
—
—
—
(13)
—
—
(13)
$
—
—
149
(122,611)
(600,075)
$
2,151
11,752
(21)
(83,447)
(5,927)
270
33,353
3,331
300
12,557
1
(73,033)
(29,148)
1,027
29,575
172,929
54,000
1,364
24,003
(13)
149
(122,611)
131,275
The accompanying notes are an integral part of the consolidated financial statements.
82
TANDEM DIABETES CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
2018
Year Ended December 31,
2017
2016
$
(122,611) $
(73,033) $
(83,447)
Operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense
Interest expense related to amortization of debt discount and debt issuance costs
Payment in kind interest accrual of notes payable
Provision for allowance for doubtful accounts
Provision for inventory reserve
Change in fair value of common stock warrants
Amortization of premium (discount) on short-term investments
Stock-based compensation expense
Loss on extinguishment of debt
Other
Changes in operating assets and liabilities:
Accounts receivable, net
Inventory, net
Prepaid and other current assets
Other long-term assets
Accounts payable
Accrued expense
Employee-related liabilities
Deferred revenue
Other current liabilities
Deferred rent
Other long-term liabilities
Net cash used in operating activities
Investing activities
Purchases of short-term investments
Proceeds from sales and maturities of short-term investments
Purchase of property and equipment
Net cash provided by (used in) investing activities
Financing activities
Issuance of notes payable, net of issuance costs
Principal payments on notes payable
Proceeds from public offering, net of offering costs
Proceeds from issuance of common stock under Company stock plans
Proceeds from exercise of common stock warrants
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash at beginning of period
Cash and cash equivalents and restricted cash at end of period
Supplemental disclosures of cash flow information
Interest paid
Income taxes paid
Supplemental schedule of noncash investing and financing activities
Lease incentive - lessor-paid tenant improvements
Property and equipment included in accounts payable & other current liabilities
Debt discount included in other long-term liabilities
Common stock warrants issued in connection with term loan
Unsettled purchase of investments classified as cash equivalents in other current liabilities
$
$
$
$
$
$
$
$
5,821
1,721
—
1,448
607
66,494
539
23,736
5,313
152
(15,848)
6,756
(1,576)
(26)
1,641
1,097
9,542
2,074
3,219
(785)
2,367
(8,319)
(123,553)
35,800
(2,986)
(90,739)
—
(87,711)
172,929
2,391
29,575
117,184
18,126
23,700
41,826 $
10,805 $
16
$
13 $
125 $
— $
— $
1,708 $
6,866
1,883
1,657
824
26
(1,021)
(16)
12,628
—
159
(10,445)
(5,894)
1,831
4
(1,953)
1,203
3,873
(3,906)
260
(692)
(390)
(66,136)
—
8,500
(5,718)
2,782
—
—
39,806
570
—
40,376
(22,978)
46,678
23,700 $
7,876 $
22
$
3,292 $
92 $
4,137 $
3,331 $
— $
5,489
274
927
632
3,343
—
(85)
11,660
—
(78)
2,251
(6,904)
(2,466)
(2)
3,234
(497)
(1,578)
4,610
573
1
890
(61,173)
(30,622)
50,000
(8,930)
10,448
49,994
—
—
2,321
—
52,315
1,590
45,088
46,678
4,401
23
—
501
1,509
—
—
The accompanying notes are an integral part of the consolidated financial statements.
83
TANDEM DIABETES CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
The Company
Tandem Diabetes Care, Inc. is a medical device company focused on the design, development and commercialization of
products for people with insulin-dependent diabetes. The Company is incorporated in the state of Delaware. Unless the context
requires otherwise, the terms the “Company” or “Tandem” refer to Tandem Diabetes Care, Inc.
The Company manufactures and sells insulin pump products that are designed to address large and differentiated needs of the
insulin-dependent diabetes market. The Company’s manufacturing and sales activities primarily focus on the t:slim X2 Insulin
Delivery System, or t:slim X2, the Company’s flagship pump platform that is capable of remote feature updates and designed to
display continuous glucose monitoring, or CGM, sensor information directly on the pump home screen. The Company’s insulin pump
products are generally considered durable medical equipment, and have an expected lifespan of at least four years. In addition to
selling insulin pumps, the Company sells disposable products that are used together with the pumps and are replaced every few days,
including cartridges for storing and delivering insulin, and infusion sets that connect the insulin pump to a user’s body. The
Company’s insulin pump products are compatible with the Tandem Device Updater, a Mac and PC-compatible tool for the remote
update of Tandem insulin pump software.
The Company began commercial sales of its first product, t:slim, in August 2012 and subsequently commercialized t:flex in
May 2015, t:slim G4 in September 2015 and t:slim X2 in October 2016. The t:slim X2 hardware platform now represents 100% of
new pump shipments, but the Company will continue to provide ongoing service and support to existing t:slim, t:slim G4 and t:flex
customers. In June 2018, the Company received approval by the United States Food and Drug Administration, or FDA, for t:slim X2
with Basal-IQ technology, the Company’s first-generation Automated Insulin Delivery, or AID, algorithm, and commenced
commercial sales of this product in August 2018.
During the third quarter of 2018, the Company commenced sales of the t:slim X2 in select geographies outside the United
States, including Australia, Italy, New Zealand, Scandinavia (Denmark, Norway and Sweden), South Africa, Spain, and the United
Kingdom.
The consolidated financial statements included in this Annual Report have been prepared on a basis that assumes that the
Company will continue as a going concern, and do not include any adjustments that may result from the outcome of this uncertainty.
This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of the Company’s liabilities and
commitments in the normal course of business and does not include any adjustments to reflect the possible future effects of the
recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
At December 31, 2018, the Company had $129.0 million in cash and cash equivalents and short-term investments. The
Company has incurred operating losses since its inception and, as reflected in the accompanying consolidated financial statements, the
Company had an accumulated deficit of $600.1 million as of December 31, 2018. Management believes that cash and cash equivalents
and short-term investments on hand will be sufficient to satisfy the Company’s liquidity requirements for at least the next 12 months
from the date of this filing.
The Company’s ability to execute on its business strategy, meet its future liquidity requirements, and achieve and maintain
profitable operations, is dependent on a number of factors, including its ability to continue to gain market acceptance of its products
and achieve a level of revenues adequate to support its cost structure, achieve renewal pump sales objectives, develop and launch new
products, increase gross profits from higher sales of infusion sets, maximize manufacturing efficiencies, satisfy increasing production
requirements, leverage the investments made in its sales, clinical, marketing and customer support organizations and operate its
business and manufacture and sell products without infringing third party intellectual property rights.
The Company has funded its operations primarily through private and public equity and debt financing. The Company may in
the future seek additional capital from public or private offerings of its capital stock, or it may elect to borrow additional amounts
under new credit lines or from other sources. If the Company issues equity or debt securities to raise additional funds, its existing
stockholders may experience dilution, it may incur significant financing costs, and the new equity or debt securities may have rights,
preferences and privileges senior to those of its existing stockholders. There can be no assurance that equity or debt financing will be
available on acceptable terms, or at all.
84
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America, or GAAP, and include the accounts of Tandem Diabetes Care, Inc. and its wholly owned
subsidiary in Canada. All significant intercompany balances and transactions have been eliminated in consolidation.
Reverse Stock Split
On October 9, 2017, the Company effected a 1-for-10 reverse stock split of its issued and outstanding shares of common stock.
The par value per share and the authorized number of shares of common stock and preferred stock were not adjusted as a result of the
reverse stock split. All common stock share and per-share amounts for all periods presented in these consolidated financial statements
have been adjusted to reflect the reverse stock split.
Reclassifications
Certain reclassifications of prior year amounts related to the presentation of restricted cash on the statement of cash flows have
been made to conform to the current year presentation.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make informed
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of
contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes as of the date of the
consolidated financial statements. Actual results could differ materially from those estimates and assumptions.
Segment Reporting
Operating segments are identified as components of an enterprise about which discrete financial information is available for
evaluation by the chief operating decision-maker, or the CODM in making decisions regarding resource allocation and assessing
performance. The Company’s current product offering consists primarily of insulin pumps, disposable cartridges and infusion sets for
the storage and delivery of insulin. The Company has viewed its operations and managed its business as one segment as key operating
decisions and resource allocations are made by the CODM using consolidated financial data.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less from the date of purchase and that
can be liquidated without prior notice or penalty, to be cash equivalents.
Short-Term Investments
Based on the nature of the assets, the Company’s short-term investments are classified as either available-for-sale or trading
securities. Such securities are carried at fair value as determined by prices for identical or similar securities at the balance sheet date.
The Company’s short-term investments consist of Level 1 and Level 2 financial instruments in the fair value hierarchy. The net
unrealized gains or losses on available-for-sale securities are reported as a component of other comprehensive loss within the
statements of operations and accumulated other comprehensive loss as a separate component of stockholders’ equity (deficit) on the
consolidated balance sheets. Unrealized gains or losses on trading securities are reported as a component of other income or expense
within the consolidated statements of operations. The Company determines the realized gains or losses of available-for-sale securities
using the specific identification method and includes net realized gains and losses as a component of other income or expense within
the consolidated statements of operations. The Company periodically reviews available-for-sale securities for other than temporary
declines in fair value below the cost basis whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. To date, the Company has not identified any other than temporary declines in fair value of its short-term
investments.
85
Restricted Cash
The Company recorded $10.0 million of restricted cash as of December 31, 2017, for the minimum cash balance requirement in
connection with the Term Loan Agreement (see Note 5, Term Loan Agreement). Due to the full repayment of the term loan in August
2018, no restricted cash balance was required at December 31, 2018.
In January 2018, the Company adopted new guidance from the Financial Accounting Standards Board or the FASB that
clarified how entities should classify certain cash receipts and cash payments on the statement of cash flows. As a result, the restricted
cash balance that existed in prior periods is included as a component of cash and cash equivalents and restricted cash on the statement
of cash flows in the relevant periods presented.
Accounts Receivable
The Company grants credit to various customers in the ordinary course of business. The Company maintains an allowance for
doubtful accounts for potential credit losses. Provisions are made based on historical experience, assessment of specific risk, review of
outstanding invoices, and various assumptions and estimates that are believed to be reasonable under the circumstances. Uncollectible
accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a
balance is uncollectible.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash
equivalents, short-term investments and accounts receivable. The Company maintains deposit accounts in federally insured financial
institutions in excess of federally insured limits. The Company also maintains investments in money market funds that are not
federally insured. Additionally, the Company has established guidelines regarding investment instruments and their maturities, which
are designed to maintain preservation of principal and liquidity.
The following table summarizes customers who accounted for 10% or more of net accounts receivable:
Byram Healthcare
CCS Medical, Inc.
Edgepark Medical Supplies, Inc.
December 31,
2018
2017
15.5%
10.1%
N/A
The following table summarizes customers who accounted for 10% or more of sales for the periods presented:
Edgepark Medical Supplies, Inc.
Byram Healthcare
Solara Medical Supplies, Inc.
CCS Medical
Fair Value of Financial Instruments
2018
Year Ended December 31,
2017
2016
19.4%
15.6%
N/A
N/A
21.5%
14.0%
N/A
10.3%
17.2%
16.2%
17.7%
18.7%
14.0%
10.7%
N/A
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expense, and employee-
related liabilities are reasonable estimates of their fair values because of the short-term nature of these assets and liabilities. Short-term
investments are carried at fair value. The Company believes the fair value of its long-term notes payable at December 31, 2017
approximated its carrying value, based on the borrowing rates that were available for loans with similar terms. The estimated fair
value of certain of the Company’s common stock warrants was determined using the Black-Scholes pricing model as of December 31,
2018 and 2017, as discussed in Note 4.
Certain trade-in rights previously offered by the Company pursuant to the Technology Upgrade Program to certain eligible
customers were determined to be guarantees under applicable accounting guidance. The Company recorded a liability for the
estimated fair value of the guarantees at their inception. The Program expired on September 30, 2017, at which time the remaining
guarantee liabilities of $1.1 were recognized as sales.
86
Valuation of Inventory
Inventories are valued at the lower of cost or net realizable value, determined by the first-in, first-out method. Inventory is
recorded using standard cost, including material, labor and overhead costs. The Company periodically reviews inventories for
potential impairment and adjust inventory to its net realizable value, based on quantities on hand and firm purchase commitments,
expectations of future use, judgments based on quality control testing data and assessments of the likelihood of scrapping or
obsoleting certain inventories based on future demand for its products and market conditions.
Long Lived Assets
Property and Equipment
Property and equipment, which primarily consist of office furniture and equipment, manufacturing equipment, scientific
equipment, computer equipment, and leasehold improvements, are stated at cost, less accumulated depreciation. Property and
equipment are depreciated over the estimated useful lives of the assets, generally three to seven years, using the straight-line method.
Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the remaining lease term.
Maintenance and repair costs are expensed as incurred.
Patents
Costs associated with the purchase or licensing of patents associated with the Company’s commercialized products are
capitalized. The Company reviews its capitalized patent costs periodically to determine that they have future value and an alternative
future use. Costs related to patents that the Company is not actively pursuing for commercial purposes are expensed. The Company
amortizes patent costs over the lesser of the duration of the patent term or the estimated useful lives of 10 years, beginning with the
date the patents are issued or acquired.
The Company periodically re-evaluates the original assumptions and rationale utilized in the establishment of the carrying value
and estimated lives of all of its long-lived assets, including property and equipment and acquired patents. The determinants used for
this evaluation include management’s estimate of the asset’s ability to generate positive income from operations and positive cash
flow in future periods as well as the strategic significance of the asset to the Company’s business objective. The Company has not
recognized any impairment losses through December 31, 2018.
Deferred Rent
Rent expense on noncancelable leases containing known future scheduled rent increases is recorded on a straight-line basis over
the term of the respective leases beginning when the Company takes possession of the leased property. The difference between rent
expense and rent paid is accounted for as deferred rent. The current portion of deferred rent is included in other current liabilities on
the Company’s consolidated balance sheet. Landlord improvement allowances and other such lease incentives are recorded as
property and equipment and as deferred rent and are amortized on a straight-line basis as a reduction to rent expense.
Research and Development Costs
All research and development costs are charged to expense as incurred. Such costs include personnel-related costs, including
stock-based compensation, supplies, license fees, development prototypes, outside design and testing services, depreciation, allocated
facilities and information services, clinical trial costs, milestone payments under the Company’s development and commercialization
agreements and other indirect costs.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred income tax assets or liabilities are
recognized based on the temporary differences between financial statement and income tax bases of assets and liabilities using enacted
tax rates in effect for the years in which the differences are expected to reverse. Tax law and rate changes are reflected in income in
the period such changes are enacted. A valuation allowance is recorded when it is more likely than not that some of the deferred tax
assets will not be realized. The Company includes interest and penalties related to income taxes, including unrecognized tax benefits,
within income tax expense.
87
The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal
Revenue Service and other tax authorities. In addition, the calculation of the Company’s tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions based on a
two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized
upon settlement. While the Company believes it has appropriate support for the positions taken on its tax returns, the Company
regularly assesses the potential outcomes of examinations by tax authorities in determining the adequacy of its provision for income
taxes. The Company continually assesses the likelihood and amount of potential revisions and adjusts the income tax provision,
income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.
Significant judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and
the valuation allowance recorded against net deferred tax assets. Deferred tax assets and liabilities are determined using the enacted
tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is
more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for
a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative
evidence. Factors reviewed include projections of pre-tax book income for the foreseeable future, determination of cumulative pre-tax
book income after permanent differences, earnings history, and reliability of forecasting. The Company will continue to assess the
need for a valuation allowance on its deferred tax assets by evaluating both positive and negative evidence that may exist. Any
adjustment to the net deferred tax asset valuation allowance would be recorded in the statement of operations for the period that the
adjustment is determined to be required.
The Company is required to file federal and state income tax returns in the United States and various other state jurisdictions
and, starting with 2018, a corporation income tax return in Canada. The preparation of these income tax returns requires the Company
to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the
Company. An amount is accrued for the estimate of additional tax liability, including interest and penalties, for any uncertain tax
positions taken or expected to be taken in an income tax return. The Company reviews and updates the accrual for uncertain tax
positions as more definitive information becomes available. For further information, see Note 7, Income Taxes.
Revenue Recognition
Revenue is generated primarily from sales of insulin pumps, disposable cartridges and infusion sets to individual customers and
third-party distributors that resell the product to insulin-dependent diabetes customers. The Company is paid directly by customers
who use the products, distributors and third-party insurance payors.
In January 2018, the Company adopted the Revenue from Contracts with Customers Standard which supersedes existing
revenue guidance under U.S. GAAP and International Financial Reporting Standards. Pursuant to the Revenue from Contracts with
Customers Standard’s core principle, subsequent to January 1, 2018, the Company recognizes revenue when it transfers promised
goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange
for those goods or services. The Company elected to implement this new standard utilizing the modified retrospective method. Under
this approach, the Company applied the new standard to all new contracts initiated on or after the effective date, and, for contracts
which had remaining obligations as of the effective date, the Company recorded an adjustment to the opening balance of accumulated
deficit. The accounting for the significant majority of the Company’s revenues is not impacted by the new guidance. As a result, on
January 1, 2018, the Company recorded a net reduction to accumulated deficit in the amount of $149,000, reflecting the accounting
change.
Prior to the implementation of this new standard, revenue was recognized when persuasive evidence of an arrangement existed,
delivery had occurred and title passed, the price was fixed or determinable, and collectability was reasonably assured.
Trade-In Rights
The Company launched a Technology Upgrade Program in 2016, which expired September 30, 2017. The trade-in rights
associated with the Program were accounted for as guarantees or rights to return based on specific factors and circumstances,
including the period of time the trade-in rights were exercisable, the likelihood that the trade-in rights would be exercised, and the
amount of the specified-price trade-in value.
88
The Company determined that trade-in rights for t:slim G4 Pump customers were generally guarantees. The Company
accounted for the guarantees under applicable accounting standards, which require a guarantor to recognize, at the inception of the
guarantees, a liability for the estimated fair value of the obligation undertaken in issuing the guarantees. Subsequently, the initial
liability recognized for the guarantees was reduced as the Company was released from the risk under the guarantees, which was when
the trade-in right was exercised or the right expired. The guarantees were accounted for as an element of a multiple element
arrangement. The estimated fair value of the guarantees was based on various economic and customer behavioral assumptions,
including the probability that a trade-in right would be exercised, the specified trade-in amount, the expected fair value of the used
t:slim G4 Pump at trade-in and the expected sales price of a t:slim X2. Upon expiration of the Program at September 30, 2017, the
remaining guarantee liabilities of $1.1 were recognized as sales. There were no guarantee liabilities at December 31, 2018 or
December 31, 2017.
The Company determined that t:slim Pump trade-in rights were in-substance rights to return products. Such rights to return were
accounted for pursuant to the right of return accounting guidance. As the Company did not have sufficient history to reasonably
estimate returns associated with trade-in rights, all eligible t:slim Pump sales between July 2016 and October 2016, which was when
the company discontinued new shipments of t:slim, were recorded as deferred revenue until the trade-in right was exercised or the
right expired. At December 31, 2018, the Company had no trade-in rights reserve balance. At December 31, 2017, there was $65,000,
recorded as a trade-in rights reserve in deferred revenue on the accompanying consolidated balance sheet.
Revenue Recognition for Arrangements with Multiple Deliverables
The Company considers the individual deliverables in its product offering as separate performance obligations. The transaction
price is determined based on the consideration expected to be received, based either on the stated value in contractual arrangements or
the estimated cash to be collected in non-contracted arrangements. The Company allocates the consideration to the individual
performance obligations and recognizes the consideration based on when the performance obligation is satisfied, considering whether
or not this occurs at a point in time or over time. Generally, insulin pumps, cartridges, infusion sets and accessories are deemed
performance obligations that are satisfied upon delivery, while access to the complementary products, such as the t:connect cloud-
based data management application and the Tandem Device Updater, are considered performance obligations satisfied over the four-
year warranty period of the insulin pumps. There is no standalone value for these complementary products. Therefore, the Company
determines their value by applying the expected cost-plus margin approach and then allocates the residual to the insulin pumps. At
December 31, 2018 and 2017, $3.8 million and $2.0 million were recorded as deferred revenue for these performance obligations that
are satisfied over time.
Product Returns
The Company offers a 30-day right of return to its customers from the date of shipment of any of its insulin pumps, provided a
physician’s confirmation of the medical reason for the return is received. Estimated allowances for sales returns are based on historical
returned quantities as compared to pump shipments in those same periods of return. The return rate is then applied to the sales of the
current period to establish a reserve at the end of the period. The return rates used in the reserve are adjusted for known or expected
changes in the marketplace when appropriate. The allowance for product returns is recorded as a reduction of revenue and accounts
receivable in the period in which the related sale is recorded. The amount recorded on the Company’s consolidated balance sheets for
product return allowance was $0.3 million and $0.2 million at December 31, 2018 and 2017, respectively. Actual product returns have
not differed materially from estimated amounts reserved in the accompanying consolidated financial statements.
Warranty Reserve
The Company generally provides a four-year warranty on its insulin pumps to end user customers and may replace any pumps
that do not function in accordance with the product specifications. Insulin pumps returned to the Company may be refurbished and
redeployed. Additionally, the Company offers a six-month warranty on disposable cartridges and infusion sets. Estimated warranty
costs are recorded at the time of shipment. Warranty costs are estimated based on the current expected replacement product cost and
expected replacement rates based on historical experience. The Company evaluates the reserve quarterly and makes adjustments when
appropriate. Changes to the actual replacement rates and actual replacement product costs could have a material impact on the
Company’s estimated liability.
89
At December 31, 2018 and December 31, 2017, the warranty reserve was $9.1 million and $5.6 million, respectively. The
following table provides a reconciliation of the change in estimated warranty liabilities for the years ended December 31, 2018 and
2017:
(in thousands)
Balance at beginning of the year
Provision for warranties issued during the period
Settlements made during the period
Increases in warranty estimates
Balance at end of the year
Current portion
Non-current portion
Total
Stock-Based Compensation
December 31,
2018
2017
$
$
$
$
5,640 $
9,617
(7,797)
1,678
9,138 $
4,206 $
4,932
9,138 $
5,690
5,613
(6,742)
1,079
5,640
2,596
3,044
5,640
Stock-based compensation cost is measured at the grant date based on the estimated fair value of the award, and the portion that
is ultimately expected to vest is recognized as compensation expense over the requisite service period on a straight-line basis. The
Company estimates the fair value of stock options issued under the Company’s 2013 Stock Incentive Plan or the 2013 Plan, and shares
issued under the Company’s 2013 Employee Stock Purchase Plan, or the 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 interest rate. For awards that vest based on service conditions, the Company recognizes expense using the straight-line
method less estimated forfeitures based on historical experience.
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.
Warrant Liabilities
The Company accounts for certain warrants as a liability in the consolidated financial statements when they contain a provision
within the warrant contracts that could require cash settlement in the event the Company did not have an active registration statement.
The fair value of these warrants is remeasured at each financial reporting period with any changes in fair value being recognized as a
component of other income (expense) in the accompanying statements of operations and comprehensive loss.
Advertising Costs
The Company expenses advertising costs as they are incurred. For the years ended December 31, 2018, 2017 and 2016,
advertising costs were $0.9 million, $1.1 million, and $0.9 million, respectively.
Shipping and Handling Expenses
Shipping and handling expenses associated with product delivery are included within cost of sales in the Company’s statements
of operations.
Comprehensive Loss
All components of comprehensive loss, including net loss, are reported in the consolidated financial statements in the period in
which they are recognized. Comprehensive loss is defined as the change in equity during a period from transactions and other events
and circumstances from non-owner sources, including unrealized gains and losses on marketable securities.
90
Net Loss Per Share
Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares that were
outstanding for the period, without consideration for common stock equivalents. Diluted loss per share is calculated in accordance
with the treasury stock method and reflects the potential dilution that would occur if securities or other contracts to issue common
stock were exercised or converted to common stock. Dilutive common share equivalents are comprised of warrants, potential awards
granted pursuant to the ESPP, and options outstanding under the Company’s other equity incentive plans. For warrants that are
recorded as a liability in the accompanying consolidated balance sheet, the calculation of diluted loss per share requires that, to the
extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the
presumed exercise of such securities are dilutive to loss per share for the period, an adjustment to net loss used in the calculation is
required to remove the change in fair value of the warrants from the numerator for the period. Likewise, an adjustment to the
denominator is required to reflect the related dilutive shares, if any, under the treasury stock method. With the exception of the fourth
quarter of 2018, 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. Refer to Note 11. Selected Quarterly Financial Data (Unaudited) for further details.
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, in thousands):
Warrants for common stock
Common stock options
ESPP
2018
Year Ended December 31,
2017
2016
705
3,477
4
4,186
—
—
—
—
—
151
2
153
Accounting Pronouncements Issued and Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases or ASU 2016-02. ASU 2016-02 and its related amendments
(collectively referred to as ASC 842). The new guidance requires lessees to recognize right-of-use assets and corresponding lease
liabilities for all leases with lease terms of greater than twelve months. It also changes the definition of a lease and expands the
disclosure requirements of lease arrangements. In July 2018, the FASB added a transition option for implementation that allows
companies to continue to use the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative
periods presented in the year of adoption. The new accounting standard must be adopted using the modified retrospective approach
and will be effective for the Company starting in the first quarter of fiscal 2019. We have elected the transition option and certain
practical expedients, and expect that the adoption of this standard will result in a cumulative-effect transition adjustment for the
recognition of right-of-use leased assets and corresponding lease liabilities of approximately $12 million on the consolidated balance
sheet as of January 1, 2019 related to lease commitments, which consist primarily of operating leases for facilities, and will not restate
prior periods. Deferred rent of $1.0 million and $3.8 million as of January 1, 2019 will be reclassified from other current liabilities and
deferred rent long-term, respectively, to a reduction of the right-of-use leased assets in connection with the adoption of this standard.
The Company is finalizing its implementation related to policies, processes and internal controls to comply with the guidance. The
January 1, 2019 transition adjustment does not include amounts related to the facility lease entered into in January 2019 (see Note 12,
Subsequent Event)
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments, or ASU 2016-13, which modifies the measurement and recognition of credit losses for most
financial assets and certain other instruments. The new standard requires the use of forward-looking expected credit loss models based
on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported
amount, which may result in earlier recognition of credit losses under the new standard. The standard is effective for public business
entities for annual periods beginning after December 15, 2019, and interim periods within those years. The Company plans to
implement the new standard in the first quarter of 2020, and is in the process of reviewing its credit loss models to assess the impact of
the adoption of the standard on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement: Disclosure Framework
– Changes to the Disclosure Requirements for Fair Value Measurement, which adds and modifies certain disclosure requirements for
fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for
transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements.
However, public companies will be required to disclose the range and weighted average of significant unobservable inputs used to
develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income.
This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early
adoption is permitted. The Company is in the process of determining the impact the adoption will have on its Consolidated Financial
Statements as well as whether to early adopt the new guidance.
91
In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement That Is a Service Contract, or ASU 2018-15, that changes the accounting for implementation costs incurred
in a cloud computing arrangement that is a service contract. The update aligns the requirements for capitalizing implementation costs
incurred in a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-
use software. The implementation costs should be presented as a prepaid asset in the balance sheet and expensed over the term of the
hosting arrangement. The standard is effective for annual periods, including interim periods within those annual periods, beginning
after December 15, 2019. Early adoption is permitted. The Company is in the process of assessing the impact of the adoption of the
standard on its financial statements.
3. Financial Statement Information
Short-term investments
The Company invests in investment securities, principally debt instruments of the U.S. Government, and financial institutions
and corporations with strong credit ratings. The following represents a summary of the estimated fair value of short-term investments
at December 31, 2018 and 2017 (in thousands):
At December 31, 2018
Available-for-sale investment securities
Commercial paper
U.S. Treasury securities
Corporate debt securities
Total
At December 31, 2017
Trading securities:
Mutual funds held for nonqualified deferred
compensation plan participants
Total
Accounts Receivable
Maturity
(in years)
Amortized
Cost
Unrealized
Gain
Unrealized
Loss
Estimated
Fair Value
Less than 1 $
Less than 1
Less than 1
$
53,559 $
17,937
15,718
87,214 $
$
—
—
12
12 $
(22) $
(2)
(1)
(25) $
53,537
17,935
15,729
87,201
Maturity
(in years)
Amortized
Cost
Unrealized
Gain
Unrealized
Loss
Estimated
Fair Value
$
$
459 $
459 $
20
$
20 $
— $
— $
479
479
Accounts receivable consisted of the following (in thousands):
Accounts receivable
Less allowance for doubtful accounts, and product returns
Total
December 31,
2018
2017
$
$
37,030 $
(1,837)
35,193 $
22,071
(1,278)
20,793
The following table provides a reconciliation of the change in estimated allowance for doubtful accounts for the years ended
December 31, 2018, 2017 and 2016 (in thousands):
Balance at December 31, 2015
Provision for doubtful accounts
Write-offs and adjustments, net of recoveries
Balance at December 31, 2016
Provision for doubtful accounts
Write-offs and adjustments, net of recoveries
Balance at December 31, 2017
Provision for doubtful accounts
Write-offs and adjustments, net of recoveries
Balance at December 31, 2018
92
Allowance for
Doubtful Accounts
221
632
(118)
735
824
(524)
1,035
1,448
(646)
1,837
$
$
$
$
Inventory
Inventory consisted of the following at (in thousands):
Raw materials
Work-in-process
Finished goods
Total
Property and Equipment
Property and equipment consisted of the following at (in thousands):
Leasehold improvements
Computer equipment and software
Office furniture and equipment
Manufacturing and scientific equipment
Less accumulated depreciation and amortization
Total
December 31,
2018
2017
6,622 $
2,710
10,564
19,896 $
10,328
3,812
12,853
26,993
December 31,
2018
2017
11,313 $
8,745
4,415
18,306
42,779
(25,628)
17,151 $
13,924
9,040
4,686
17,505
45,155
(25,524)
19,631
$
$
$
$
Depreciation and amortization expense related to property and equipment was $5.5 million, $6.5 million, and $5.2 million for
the years ended December 31, 2018, 2017, and 2016, respectively.
Intangible Assets Subject to Amortization
Intangible assets subject to amortization consist of patents purchased or licensed that are related to the Company’s
commercialized products. The following represents the capitalized patents at December 31, 2018 and 2017 (in thousands):
Gross amount
Accumulated amortization
Total
Weighted average remaining amortization
period (in months)
$
$
December 31,
2018
2017
3,247 $
(2,117)
1,130 $
42
3,247
(1,790)
1,457
54
Amortization expense related to intangible assets subject to amortization amounted to $0.3 million for each of the years ended
December 31, 2018, 2017, and 2016. The amortization expense is recorded in cost of sales in the consolidated statement of operations.
The estimated annual amortization is $0.3 million for periods 2019 through 2021, and $0.2 million in 2022.
93
4. Fair Value Measurements
Authoritative guidance on fair value measurements defines fair value, establishes a consistent framework for measuring fair
value, and expands disclosures for each major asset and liability category measured at fair value on either a recurring or a
nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such
assumptions, the authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair
value as follows:
Level 1: Observable inputs such as unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
Level 2:
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly for substantially the full
term of the asset or liability.
Level 3: Unobservable inputs in which there is little or no market data and that are significant to the fair value of the assets or
liabilities, which require the reporting entity to develop its own valuation techniques that require input assumptions.
The following table presents information about the Company’s financial assets and liabilities measured at fair value on a
recurring basis as of December 31, 2018 and 2017, and indicates the fair value hierarchy of the valuation techniques utilized by the
Company to determine such fair value (in thousands):
Assets
Cash equivalents (1)
Commercial paper
U.S. Treasury securities
Corporate debt securities
Total assets
Liabilities
Common stock warrants
Total liabilities
Fair Value Measurements at
December 31, 2018
December 31,
2018
Level 1
Level 2
Level 3
$
$
$
$
37,373 $
53,537
17,935
15,729
124,574 $
37,373 $
—
17,935
55,308 $
— $
53,537
—
15,729
69,266 $
—
—
—
—
—
17,926 $
17,926 $
— $
— $
— $
— $
17,926
17,926
Fair Value Measurements at
December 31, 2017
December 31,
2017
Level 1
Level 2
Level 3
Assets
Cash equivalents (1)
Mutual funds held for nonqualified deferred compensation plan
participants (2)
Total assets
Liabilities
Common stock warrants
Deferred compensation (2)
Total liabilities
$
23,700 $
23,700 $
479
24,179 $
479
24,179 $
5,432 $
479 $
5,911 $
— $
479 $
479 $
$
$
$
— $
—
— $
— $
— $
— $
—
—
—
5,432
—
5,432
(1) Cash equivalents included money market funds and commercial paper with a maturity of three months or less from the date
of purchase. As of December 31, 2017, $13.7 million was included as a component of cash and cash equivalents on the
balance sheet, and $10.0 million was classified as restricted cash – long-term.
94
(2) The deferred compensation plan was directed by the Company and structured as a Rabbi Trust for the benefit of certain
executives and non-employee directors. The investment assets of the Rabbi Trust were valued using quoted market prices
multiplied by the number of shares held in each trust account. The related deferred compensation liability at December 31,
2017 represented the fair value of the investment assets. The Company cancelled the deferred compensation plan in 2017 and
all deferred compensation amounts were distributed to participants during the second quarter of 2018.
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 years ended December 31, 2018 and 2017.
Level 3 liabilities at December 31, 2018 and 2017 include the Series A and Series B common stock warrants issued by the
Company in connection with the public offering of common stock in October 2017. The Series A warrants have a term of five years
and initially provided holders the right to purchase 4,630,000 shares of the Company’s common stock at an exercise price of $3.50 per
share. The Series B warrants had a term of six months and initially provided holders the right to purchase 4,630,000 shares of the
Company’s common stock at an exercise price of $3.50 per share. The Series A and Series B warrants were initially valued in the
aggregate amount of $6.5 million on the date of issuance utilizing a Black-Scholes pricing model. As of December 31, 2018, there
were Series A warrants to purchase 510,785 shares of common stock outstanding and no Series B warrants outstanding.
The Company reassesses the fair value of the outstanding Series A and Series B warrants at each reporting date utilizing a
Black-Scholes pricing model. Inputs used in the pricing model include estimates of stock price volatility, expected warrant life and
risk-free interest rate. The Company develops its estimates based on publicly available historical data. The assumptions used to
estimate the fair values of the common stock warrants at December 31, 2018 and 2017 are presented below:
Risk-free interest rate
Expected dividend yield
Expected volatility
Expected term (in years)
Risk-free interest rate
Expected dividend yield
Expected volatility
Expected term (in years)
December 31, 2018
December 31, 2017
Series A Warrants
3.0%
0.0%
78.3%
3.8
Series B Warrants
December 31, 2017
December 31, 2018
N/A
N/A
N/A
N/A
2.2%
0.0%
63.5%
4.8
1.4%
0.0%
80.3%
0.3
The following table presents a summary of changes in fair value of the Company’s total Level 3 financial assets for the years
ended December 31, 2018 and 2017:
Balance at beginning of period
Increase (decrease) in fair value included in change
in fair value of common stock warrants
Decrease in fair value from warrants exercised
during the period
Balance at end of period
2018
2017
$
5,432 $
66,494
(54,000)
17,926 $
$
6,453
(1,021)
—
5,432
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5. Term Loan Agreement
In August 2018, the Company fully repaid the term loan made by CRG pursuant to the Term Loan Agreement and terminated
the agreement. The term loan was collateralized by all assets of the Company. The balance of the outstanding debt at the time of
repayment was $82.7 million. The repayment included approximately $1.1 million in accrued interest and $5.0 million in associated
financing fees that became due. As a result of the repayment, the Company did not have any borrowings outstanding under the Term
Loan Agreement as of December 31, 2018. The Company had aggregate borrowings under the Term Loan Agreement of $82.7 million
as of December 31, 2017. Notes payable-long term on the accompanying consolidated balance sheet reflected these aggregate
borrowings, offset by a $6.2 million debt discount associated with the financing fees and certain debt issuance costs at December 31,
2017. Such discounts were amortized to interest expense over the term of the loan using the effective interest method. At the time of
repayment, the remaining balance of $5.3 million was accelerated and recognized as a loss on extinguishment of debt in the
consolidated statement of operations for the year ended, December 31, 2018.
Under the Term Loan Agreement, interest was payable at the Company’s option, (i) in cash at a rate of 11.5% per annum, or (ii)
at a rate of 9.5% of the 11.5% per annum in cash and 2.0% of the 11.5% per annum or the PIK Loan to be added to the principal of the
loan and subject to accruing interest. Interest-only payments were due quarterly on March 31, June 30, September 30 and December
31 of each year of the interest-only payment period, which would have ended on December 31, 2019. The principal balance was due
in full at the end of the term of the loan, which was March 31, 2020, or the Maturity Date. The Company had elected to pay interest in
cash at a rate of 11.5% per annum through September 30, 2015. From October 1, 2015 through December 31, 2017, the Company
elected to pay interest in cash at a rate of 9.5% per annum and for a rate of 2.0% per annum to be added to the principal of the loan. As
a result, $2.7 million was added to the principal of the loan during that time period, collectively, the PIK Loans.
The Company entered into a series of amendments to the Term Loan Agreement in 2016, 2017 and 2018, which included the
addition of a financing fee payable at the maturity of the Company’s loans, the issuance of 193,788 ten-year warrants to CRG to
purchase shares of the Company’s common stock at an exercise price of $23.50 per share and certain other minimum financing
covenants. The financing fee was applicable to the entire aggregate principal amount of borrowings outstanding, including total PIK
Loans issued. The Company treated the execution of each of the Third, Fourth and Fifth Amendments as a modification for accounting
purposes. The present value of the future cash flows under these amendments did not exceed the present value of the future cash flows
under the previous terms by more than 10%.
At December 31, 2017, the Company had accrued $4.1 million for the financing fee of 5%, which was subsequently increased to
$5.0 million, or 6%, in February 2018. These fees were included in other long-term liabilities and as contra-debt in notes payable-long
term on the accompanying consolidated balance sheet.
6. Stockholders’ Equity (Deficit)
Public Offerings
In the first quarter of 2017, the Company completed a registered public offering of 1,850,000 shares of common stock at a
public offering price of $12.50 per share. The gross proceeds from the offering were approximately $23.1 million, before deducting
underwriting discounts and commissions and other offering expenses.
From July 2017 through September 2017, the Company sold 464,108 shares of common stock under our “at-the-market”
offering program at prices ranging from $5.64 to $10.54. The gross proceeds from the offering were $4.3 million, before deducting
underwriting discounts and commissions and other offering expenses.
In the fourth quarter of 2017, the Company completed the October Financing, pursuant to which it sold 4,630,000 shares of
common stock, Series A warrants to purchase up to 4,630,000 shares of our common stock and Series B warrants to purchase up to
4,630,000 shares of common stock at a public offering price of $3.50 per share and accompanying warrants. The gross proceeds from
the October Financing were approximately $16.2 million, before deducting underwriting discounts and commissions and other
offering expenses.
In the first quarter of 2018, the Company completed a registered public offering of 34,500,000 shares of common stock at a
public offering price of $2.00 per share. The gross proceeds from the offering were approximately $69.0 million, before deducting
underwriting discounts and commissions and other offering expenses.
In the third quarter of 2018, the Company completed a public offering of 4,035,085 shares of common stock at a public offering
price of $28.50 per share. The gross proceeds to the Company from the offering were $115.0 million, before deducting underwriting
discounts and commissions and other offering expenses payable by the Company.
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Stock Plans
In September 2006, the Company adopted the Company’s 2006 Stock Incentive Plan, or the 2006 Plan, under which, as
amended, 268,561 shares of common stock were reserved for issuance to employees, non-employee directors and consultants of the
Company. The 2006 Plan was closed in 2013 with the approval of the 2013 Stock and no further options will be granted under the
2006 Plan.
In October 2013, the Company’s board of directors approved the 2013 Plan. The 2013 Plan became effective immediately prior
to the completion of the initial public offering. An initial 480,900 shares of common stock were reserved for issuance under the 2013
Plan. Under the 2013 Plan, the Company may grant stock options, stock appreciation rights, restricted stock and restricted stock units
to individuals who are then employees, officers, directors or consultants of the Company. The 2013 Plan also included an “evergreen”
provision, which automatically increased the shares available for issuance January 1 of each year by 4% of common shares
outstanding. Accordingly, the shares available for issuance under the 2013 Plan were increased by 404,776 shares and 124,382 shares
on January 1, 2018 and 2017, respectively. In June 2018, the Company received approval from its stockholders to increase the number
of shares of common stock reserved under the 2013 Plan by 5,500,000 shares, and to remove the evergreen provision.
The Company issued 8,603,321 shares of common stock upon the exercise of warrants, and 136,042 shares of common stock
upon the exercise of stock options during the year ended December 31, 2018. The Company did not issue any shares of common stock
upon the exercise of warrants, and issued 24,406 shares of common stock upon the exercise of stock options during the year
ended December 31, 2017.
As of December 31, 2018, 969,445 shares were available for future issuance under the 2013 Plan, and options to purchase
5,763,192 shares have been granted and are outstanding under the 2006 Plan and 2013 Plan.
Common Stock Options
The maximum term of stock options granted under the 2006 Plan and 2013 Plan is ten years. The options generally vest 25% on
the first anniversary of the original vesting date, with the balance vesting monthly over the remaining three years.
The following table summarizes stock option activities for the 2006 Plan and 2013 Plan:
Outstanding at December 31, 2016
Granted
Exercised
Canceled/forfeited/expired
Outstanding at December 31, 2017
Granted
Exercised
Canceled/forfeited/expired
Outstanding at December 31, 2018
Vested and expected to vest at December 31, 2018
Exercisable at December 31, 2018
Employee Stock Purchase Plan
Weighted-
Average
Exercise
Price Per
Share
84.05
4.69
11.06
110.21
47.11
20.34
7.55
45.46
23.61
23.73
43.40
Total
Options
$
822,265
$
615,067
$
(24,406)
$
(81,657)
$
1,331,269
$
4,730,956
$
(136,042)
$
(162,991)
$
5,763,192
5,643,473
$
1,215,287 $
Weighted-
Average
Remaining
Contractual
Life (in years)
7.92
$
$
8.08
$
$
$
$
8.94
8.94
$
7.34 $
Aggregate
Intrinsic
Value (in
thousands)
1,593
338
—
3,953
1,466
116,988
114,547
25,852
In October 2013, the Company adopted the ESPP, which enables eligible employees to purchase shares of the Company’s
common stock using their after-tax payroll deductions, subject to certain conditions. The ESPP is intended to qualify as an “employee
stock purchase plan” within the meaning of Section 423 of the Code. Eligible employees may contribute, normally through payroll
deductions, up to 15% of their earnings for the purchase of common stock under the ESPP. The purchase price of common stock under
the ESPP is the lesser of: (a) 85% of the fair market value of a share of the Company’s common stock on the first date of an offering
or (b) 85% of the fair market value of a share of the Company’s common stock on the date of purchase. Generally, the ESPP consists
of a two-year offering period with four six-month purchase periods.
97
The ESPP initially authorized the issuance of 55,600 shares of common stock pursuant to purchase rights granted to employees.
The number of shares of common stock reserved for issuance increased on January 1 of each calendar year, from January 1, 2014
through January 1, 2018, by the lesser of (a) one percent (1%) of the number of shares issued and outstanding on the immediately
preceding December 31, or (b) such lesser number of shares as determined by the Administrator. On January 1, 2017 and 2018, the
number of shares of common stock reserved for issuance under the ESPP was automatically increased by 101,194 and 31,096 shares
respectively. In the years ended December 31, 2018 and 2017, 80,581 shares and 38,929 shares of our common stock, respectively,
were purchased under the ESPP.
The Company announced the suspension of the ESPP as of May 16, 2017 due to a lack of available shares. The suspension was
accounted for as a cancellation of an award with no consideration. The previously unrecognized compensation cost as of the
suspension date of $2.4 million was fully expensed during the second quarter of 2017. In June 2018, the Company received approval
from its stockholders to increase the number of shares reserved for issuance under the ESPP by an additional 2,000,000 shares and to
remove the evergreen provision.
In the years ended December 31, 2018 and 2017, 80,581 shares and 38,929 shares of our common stock, respectively, were
purchased under the ESPP. As of December 31, 2018, 2,020,626 shares remained available for issuance under the ESPP.
Stock-Based Compensation.
The compensation cost that has been included in the consolidated statement of operations for all stock-based compensation
arrangements was as follows (in thousands):
Cost of sales
Selling, general & administrative
Research and development
Total
2018
Year Ended December 31,
2017
2016
$
$
2,581
16,824
4,331
23,736
$
$
1,360
10,020
1,248
12,628
$
$
1,016
9,360
1,284
11,660
The total stock-based compensation capitalized as part of the cost of the Company’s inventory was $0.2 million and $0.2 million
at December 31, 2018 and 2017, respectively.
There were no stock option grants to non-employees and no expense during the years ended December 31, 2018, 2017 and
2016.
At December 31, 2018, the total unamortized stock-based compensation expense of approximately $45.3 million will be
recognized over the remaining weighted average vesting term of approximately 1.7 years.
The assumptions used in the Black-Scholes option-pricing model are as follows:
Weighted average grant date fair value (per share)
Risk-free interest rate
Expected dividend yield
Expected volatility
Expected term (in years)
Weighted average grant date fair value (per share)
Risk-free interest rate
Expected dividend yield
Expected volatility
Expected term (in years)
2018
$
Stock Option
Year Ended December 31,
2017
2016
12.94
$
2.8%
0.0%
71.4%
5.7
2.65
$
2.1%
0.0%
60.8%
5.8
24.30
1.7%
0.0%
57.5%
5.8
ESPP
Year Ended December 31,
2018
$
13.48
2.5%
0.0%
81.2%
1.25
2017(1)
N/A
N/A
N/A
N/A
N/A
(1) There were no grants made pursuant to the ESPP during the year ended December 31, 2017.
98
Risk-free Interest Rate. The risk-free interest rate assumption was based on the United States Treasury’s rates for U.S. Treasury
zero-coupon bonds with maturities similar to those of the expected term of the award being valued.
Expected Dividend Yield. The expected dividend yield is zero because the Company has never declared or paid any cash
dividends and does not presently plan to pay cash dividends in the foreseeable future.
Expected Volatility. The expected volatility is estimated based on a weighted-average volatility of the Company’s actual
historical volatility since its initial public offering in November 2013 and the historical stock volatilities of a peer group of similar
companies whose share prices are publicly available. The Company continues to use the historical volatility of peer entities due to the
lack of sufficient historical data of its stock price. The peer group consisted of other publicly traded companies in the same industry
and in a similar stage of development. The Company will continue to apply this process until a sufficient amount of historical
information regarding the volatility of its own stock price becomes available.
Expected Term. The Company utilized the simplified method for estimating the expected term of stock option grants. Under this
approach, the weighted-average expected term is presumed to be the average of the vesting term and the contractual term of the
option. The Company estimates the expected term of the ESPP using expected life for each tranche during the two-year offering
period.
The Company also estimates forfeitures at the time of grant, and revises those estimates in subsequent periods if actual
forfeitures differ from its estimates. Historical data was used to estimate pre-vesting option forfeitures and record stock-based
compensation expense only for those awards that are expected to vest.
Common Stock Reserved for Future Issuance
The following shares of common stock were reserved for future issuance at December 31, 2018 (in thousands):
Common stock warrants outstanding
Stock options issued and outstanding
Authorized for future option grants
Employee stock purchase plan
7. Income Taxes
804
5,769
969
2,021
9,563
The expense (benefit) for income taxes reconciles to the amount computed by applying the federal statutory rate to income
before taxes as follows (in thousands):
Income tax benefit at federal statutory rate
State income tax, net of federal benefit
Warrants revaluation
Research and development credits
Stock-based compensation
Tax Cuts and Jobs Acts
Other
Change in valuation allowance
Income tax expense (benefit)
2018
Year Ended December 31,(1)
2017
2016
$
$
(25,738) $
(1,649)
13,964
(1,425)
1,362
—
681
12,856
51 $
(24,829) $
(2,034)
(347)
(480)
3,214
51,577
138
(27,231)
8 $
(28,362)
(2,393)
—
(720)
1,686
—
456
29,318
(15)
(1) For the year ended December 31, 2018 as a result of the Tax Cuts and Jobs Act, the statutory rate was 21%. For the years
ended December 31, 2017 and 2016, the statutory rate was 34%.
99
Significant components of the Company’s net deferred income tax assets at December 31, 2018 and 2017 are shown below (in
thousands). A valuation allowance has been recorded to offset the net deferred tax asset as of December 31, 2018 and 2017, as the
realization of such assets does not meet the more-likely-than-not threshold.
Deferred tax assets:
Net operating loss (NOL) carryforwards
Research and development tax credits carryforwards
Capitalized research and development expenses
Accrued compensation
Other
Total deferred tax assets
Less valuation allowance
Net deferred tax assets
December 31,
2018
2017
$
$
85,761
4,942
10,759
13,816
8,238
123,516
(123,516)
—
$
$
81,483
3,517
12,746
8,809
4,139
110,694
(110,694)
—
As of December 31, 2018, the Company has accumulated federal, state and foreign NOL carryforwards of approximately
$352.7 million, $313.5 million, and $1.1 million, respectively, not considering the annual limitations of Section 382 of the Internal
Revenue Code of 1986, as amended, or the Code, as discussed below. The federal and state tax loss carryforwards begin to expire in
2026 and 2019, respectively, unless previously utilized. The remaining California NOL carry forwards of $183.9 million will expire
beginning in 2028. The foreign tax loss carryforwards begin to expire in 2038, unless previously utilized.
The Company also has federal and California research credit carryforwards of approximately $5.7 million and $6.3 million,
respectively. The federal research credit carryforwards will begin expiring in 2028 unless previously utilized. The California research
credit will carry forward indefinitely.
In March 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting (''ASU 2016-09'').
ASU 2016-09 simplifies how several aspects of share-based payments are accounted for and presented in the consolidated financial
statements. ASU 2016-09 is effective for public companies and was adopted by the Company in 2017. The Company has excess tax
benefits for which a benefit could not be previously recognized of approximately $1.8 million. Upon adoption, the balance of the
unrecognized excess tax benefits was reversed with the impact recorded to retained earnings which was fully offset by a change to the
valuation allowance.
Utilization of the Company's net operating loss carryforwards may be subject to a substantial annual limitation due to ownership
change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The
annual limitations may result in the expiration of net operating loss carryforwards before utilization. The Company has started but has
not completed an analysis to determine whether its net operating losses and credits generated through December 31, 2018 are likely to
be limited by Section 382. Based on preliminary results of this analysis, the Company anticipates that an ownership change as defined
under Section 382 may have occurred in 2018 and that the resulting limitation would significantly reduce the Company’s ability to
utilize its net operating loss and credit carryovers before they expire. Additionally, future ownership changes under Section 382 may
also limit the Company's ability to fully utilize any remaining tax benefits. The Company's net deferred income tax assets have been
fully offset by a valuation allowance. Therefore, any resulting reduction to the Company's net operating loss and credit carryovers
once the analysis is complete will be fully offset by a corresponding reduction of the valuation allowance and there would be no
impact on the Company's balance sheet, statement of operations, or cash flows.
The evaluation of uncertainty in a tax position is a two-step process. The first step involves recognition. The Company
determines whether it is more likely than not that a tax position will be sustained upon tax examination, including resolution of any
related appeals or litigation, based on only the technical merits of the position. The technical merits of a tax position are derived from
both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and their
applicability to the facts and circumstances of the tax position. If a tax position does not meet the more-likely-than-not recognition
threshold, the benefit of that position is not recognized in the financial statements. The second step is measurement. A tax position that
meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial
statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon
ultimate resolution with a taxing authority.
The following table summarizes the activity related to the Company’s gross unrecognized tax benefits at the beginning and end
of the years ended December 31, 2018, 2017 and 2016 (in thousands):
Year Ended December 31,
100
Gross unrecognized tax benefits at the beginning of the year
Increases related to current year positions
Increases (decreases) related to prior year positions
Gross unrecognized tax benefits at the end of the year
2018
2017
2016
$
$
8,121 $
644
59
8,824 $
8,167 $
411
(457)
8,121 $
7,594
580
(7)
8,167
As of December 31, 2018, the Company had $7.3 million of unrecognized tax benefits that, if recognized and realized would
impact the effective tax rate, subject to the valuation allowance.
The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense. The
Company had no accrual for interest and penalties on the Company’s consolidated balance sheets and has not recognized interest and
penalties in the statements of operations for the years ended December 31, 2018 and 2017. The Company does not expect any
significant increases or decreases, other than the potential reduction as a result of the Section 382 limitation, to its unrecognized tax
benefits within the next 12 months.
The Company is subject to taxation in the United States and various other state jurisdictions and, starting with 2018, Canada.
For the year ended December 31, 2018, the domestic and foreign components of loss before income taxes were $122.0 million and
$1.0 million, respectively. Prior to 2018, the losses were all domestic. The Company’s tax years from 2006 (inception) are subject to
examination by the United States and state authorities due to the carry forward of unutilized NOLs and research and development
credits.
In December 2017, the Tax Cuts and Jobs Act, or the 2017 Act, was enacted. The 2017 Tax Act includes a number of changes to
existing U.S. tax laws that impact the company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21
percent for tax years beginning after December 31, 2017. The 2017 Tax Act also provides for the acceleration of depreciation for
certain assets placed in service after September 27, 2017 as well as prospective changes beginning in 2018, including additional
limitations on executive compensation, limitations on the deductibility of interest and capitalization of research and development
expenditures.
Reduction of the U.S. Corporate Income Tax Rate: The Company measures deferred tax assets and liabilities using enacted tax
rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company's
deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from the highest
graduated tax 35% to a 21% flat tax. As a result of the tax rate, in 2017 we recorded a decrease to our deferred tax assets of $51.6
million and the valuation allowance was decreased by the same amount, resulting in no net tax expense.
The Act will no longer allow deductions for compensation in excess of $1.0 million for certain employees, even if paid as
commissions or performance-based compensation. It also subjects the principal executive officer, principal financial officer and three
other highest paid officers to the limitation and once the individual becomes a covered person, the individual will remain a covered
person for all future years.
The Act allows Companies to claim bonus depreciation to accelerate the expensing of the cost of certain qualified property
placed in service after September 27, 2017 and before January 1, 2024. The Company recognized a provisional increase in net
deferred tax liabilities attributable to the accelerated depreciation for certain assets placed into service after September 27, 2017. Due
to the valuation allowance, the provisional adjustments have no impact on income tax expense or income tax payable.
The company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with Staff
Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the
reporting period in which the 2017 Act was signed into law. In accordance with Staff Accounting Bulletin No. 118, as of December
31, 2018, we have completed our accounting for the tax effects of enactment of the Act and no adjustments to the provisional income
tax effects were required.
8. Collaborations
DexCom Development and Commercialization Agreement
In February 2012, the Company entered into a Development and Commercialization Agreement (the “DexCom Agreement”)
with DexCom, Inc., or DexCom, 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 CGM system.
101
Between 2012 and 2015, the Company paid to DexCom a total of $3.0 million in licensing fees. Additionally, upon
commercialization of t:slim G4, and as compensation for non-exclusive license rights, under the original DexCom Agreement, the
Company agreed to pay DexCom a royalty calculated at $100 per integrated system sold.
In September 2015, the Company entered into an amendment to the DexCom Agreement, or the Amendment. Pursuant to the
Amendment, in lieu of the $100 royalty payment for each integrated system sold, the Company agreed to commit $100 of each t:slim
G4 integrated system sold to incremental marketing activities associated with t:slim G4 integrated systems that are in addition to a
level of ordinary course marketing activities or marketing activities to support other Company and DexCom jointly funded
development projects. The committed marketing fund is recognized as cost of sales and other current liabilities in the period the
related t:slim G4 Pump sale is recorded. The Company recorded such marketing fund commitment of $0.1 million and $1.1 million in
the years ended December 31, 2018 and 2017, respectively.
9. Employee Benefits
Employee 401(k) Plan
The Company has a defined contribution 401(k) plan for employees who are at least 18 years of age. Employees are eligible to
participate in the plan beginning on the first day of the calendar month following their date of hire. Unless they affirmatively elect
otherwise, employees are automatically enrolled in the plan following 30 days from date of rehire or entry date. Under the terms of the
plan, employees may make voluntary contributions as a percent of compensation. The Company does not provide a matching
contribution program.
10. 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 regularly assesses the probability and range of possible loss based on the
developments in these matters. A liability is recorded in the consolidated financial statements if it is determined that it is probable that
a loss has been incurred, and that the amount or range of the loss can be reasonably estimated. Because of the uncertainties related to
any pending actions, the Company is currently unable to predict their ultimate outcome, and, with respect to any legal proceeding or
claim where no liability has been accrued, to make a meaningful estimate of the reasonably possible loss or range of loss that could
result from an adverse outcome. At December 31, 2018 and 2017, there were no legal proceedings, disputes, or other claims for which
a material loss was considered probable or for which the amount or range of loss was reasonably estimable.
Operating leases
Under a noncancelable operating lease agreement, or the Existing Operating Lease, the Company leases manufacturing,
laboratory and general office spaces in San Diego, California. On December 27, 2017, the Company entered into an amendment to the
Existing Operating Lease which terminated the lease with respect to the building located at 11045 Roselle Street as of January 31,
2018, and extended the Existing Operating Lease term for the remaining buildings through May 2022. The building located at 11045
Roselle Street, which primarily housed the Company’s manufacturing and related operations, was replaced by a facility located on
Barnes Canyon Road in San Diego, California, collectively, the Barnes Canyon Lease. Pursuant to the amendment, the Company has
the right to terminate the lease on the remaining buildings effective May 31, 2021 upon (i) delivery of written notice to the landlord no
later than June 1, 2020, and (ii) an early termination payment to the landlord of approximately $0.4 million.
In connection with the Existing Operating Lease, the Company has a $0.3 million unsecured standby letter of credit arrangement
with a bank under which the landlord of the building is the beneficiary. The expiration of the standby letter of credit is July 15, 2022.
On June 30, 2016, the Company entered into the Barnes Canyon Lease. The Barnes Canyon Lease is scheduled to expire in
November 2023. The Company will also have a one-time option to extend the term of the lease for a period of not less than 36 months
and not greater than 60 months, by delivering notice to the landlord at least nine months and not more than 12 months prior to the
expiration of the lease.
The Barnes Canyon Lease allowed for a Tenant Improvement Allowance, or the TI Allowance of up to approximately $3.4
million to be applied to non-structural improvements to the building. Amounts utilized by the Company from the TI Allowance are
subject to an interest accrual at a rate of 8.0% per annum and must be repaid in full during the lease term in monthly installments, or
the TI Rent concurrently with the base rent. During the years ended December 31, 2017 and 2016, costs incurred for non-structural
improvements to the facility were $3.9 million and $1.0 million, respectively, of which $2.6 million and $0.7 million, respectively,
were funded by the landlord. The Company retains the right at any time during the lease term to prepay all or any portion of the TI
Allowance drawn and outstanding without penalty, in which case the outstanding TI Rent would be reduced to reflect the TI
Allowance prepayment and interest would cease to accrue on the prepaid portion of the TI Allowance.
102
The monthly rent, except TI Rent mentioned above, increases by a fixed percentage each year on the anniversary of the
respective rent commencement date of the Existing Operating Lease and Barnes Canyon Lease. The difference between the straight-
line expense over the term of the lease and actual amounts paid are recorded as deferred rent. Deferred rent arising from rent
escalation provisions and lease incentives totaled $4.8 million and $5.6 million at December 31, 2018 and 2017, respectively. Rent
expense for the three years ended December 31, 2018, 2017 and 2016, was $2.6 million, $3.5 million, and $3.1 million, respectively.
Future minimum payments under the aforementioned noncancelable operating leases for each of the five succeeding years
following December 31, 2018 are as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
$
$
2,743
2,858
2,944
1,644
642
—
10,831
Not included in the table above is the Barnes Canyon Lease TI Rent, which totaled $0.7 million and $0.4 million during the
years ended December 31, 2018 and 2017, respectively. TI Rent will be approximately $0.7 million for each of the years ended
December 31, 2019 through 2023.
11. Selected Quarterly Financial Data (Unaudited)
The following financial information reflects all normal recurring adjustments that are, in the opinion of management, necessary
for a fair statement of the results of the interim periods. Quarterly financial information for fiscal 2018 and 2017 is presented in the
following table, in thousands, except per share data:
2018:
Revenue
Gross profit
Operating expenses
Operating income (loss)
Net income (loss)
Basic net income (loss) per share (1)
Diluted net income (loss) per share (1)
2017:
Revenue
Gross profit
Operating expenses
Operating loss
Net loss
Basic and diluted net loss per share (1)
March 31
June 30
September 30
December 31
For the Quarter Ending
$
$
$
$
$
$
$
$
$
$
$
$
$
27,277
11,404
26,889
(15,485)
(32,693)
(1.82)
(1.82)
18,977
6,753
27,979
(21,226)
(23,792)
(7.46)
$
$
$
$
$
$
$
$
$
$
$
$
$
34,126
15,087
29,084
(13,997)
(59,359)
(1.17)
(1.17)
21,327
8,001
26,970
(18,969)
(21,801)
(4.36)
$
$
$
$
$
$
$
$
$
$
$
$
$
46,264
21,796
37,505
(15,709)
(34,245)
(0.62)
(0.62)
27,003
11,873
25,039
(13,166)
(16,034)
(3.09)
$
$
$
$
$
$
$
$
$
$
$
$
$
76,199
41,535
40,975
560
3,686
0.06
0.02
40,294
17,468
27,050
(9,583)
(11,406)
(1.23)
(1) Net income (loss) per share is computed independently for each quarter and the full year based upon the respective average
shares outstanding in each period. Therefore, the sum of the quarterly per-share calculations may not equal the reported
annual per share amounts.
12. Subsequent Event
In January 2019, the Company entered into a lease agreement for 25,332 square feet of additional general administrative office
space located at 10935 Vista Sorrento Parkway, San Diego, California. Subject to limited exceptions, the initial lease term is expected
to commence on the later of (i) March 1, 2019, or (ii) the date on which the landlord substantially completes certain specified work
related to tenant improvements, such date the Commencement Date, and will expire 42 months from the first day of the first full
month following the Commencement Date. The Company also has a one-time option to extend the term of the lease for a period of
five years by delivering prior written notice to the Landlord in accordance with the terms of the lease. Future minimum payments
under the lease, which include reimbursement of certain landlord operating expenses, are approximately $3.5 million.
103
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
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.
As of December 31, 2018, 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 a
reasonable assurance level as of December 31, 2018.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the
supervision and with the participation of our management, including our principal executive officer and principle financial officer, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements
for external purposes in accordance with accounting principles generally accepted in the United States of America.
As of December 31, 2018, our management assessed the effectiveness of our internal control over financial reporting using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated
Framework, or 2013 Framework. Based on this assessment, our management concluded that, as of December 31, 2018, our internal
control over financial reporting was effective based on those criteria.
Ernst & Young LLP, an independent registered public accounting firm, has issued an attestation report on the effectiveness of
our internal control over financial reporting as of December 31, 2018 as stated in its report, which is included herein.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules
13a-15(d) or 15d-15(d) of the Exchange Act during our last fiscal quarter that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Limitation on Effectiveness of Controls
In designing and evaluating our 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. There are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error and the circumvention or overriding of the 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 that any design will succeed in achieving its stated goals under all potential future conditions. Over time,
controls 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 discussed above, Mr. Sheridan, who is expected to commence serving as our principal executive officer as of March 1, 2019,
and Ms. Vosseller, who is currently serving as our principal financial and accounting officer, have informed us that they are involved
in a personal relationship. While our board of directors is informed of the relationship and appropriate actions have been taken to
ensure compliance with Company policies and procedures, the existence of this relationship may create additional risk, or the
perception of additional risk, that our controls and procedures may not be effective.
104
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Tandem Diabetes Care, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Tandem Diabetes Care Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, Tandem Diabetes Care Inc. (the Company) maintained in all
material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the consolidated balance sheets of the Company as of December 31, 2018 and 2017, and the related consolidated statements of
operations and comprehensive loss, cash flows and changes in stockholders’ equity (deficit) for each of the three years in the period
ended December 31, 2018, and the related notes, and our report dated February 26, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Diego, California
February 26, 2019
105
Item 9B. Other Information.
Not applicable.
106
Item 10.
Directors, Executive Officers and Corporate Governance.
PART III
Certain information regarding our executive officers and family relationships is set forth in the section of this Annual Report
entitled “Business” in Part I, Item 1.
We have adopted a code of business conduct and ethics that applies to our Chief Executive Officer and other senior financial
officers (our Chief Financial Officer, Vice President of Finance, Controller and other senior financial officers performing similar
functions), which we refer to as the Code of Ethics (Senior Financial Officers). Our Code of Ethics (Senior Financial Officers) is
designed to meet the requirements of Section 406 of Regulation S-K and the rules promulgated thereunder. We will promptly disclose
on our website (i) the nature of any amendment to this Code of Ethics (Senior Financial Officers) that applies to any covered person,
and (ii) the nature of any waiver, including an implicit waiver, from a provision of this Code of Ethics (Senior Financial Officers) that
is granted to one of the covered persons. We have also adopted a code of business conduct and ethics that applies to all of our directors
and employees, which we refer to as the Code of Ethics (Directors and Employees). The Code of Ethics (Senior Financial Officers)
and the Code of Ethics (Directors and Employees) are available on our website at www.tandemdiabetes.com under the Investor Center
section of the website. However, the information contained on or accessed through our website does not constitute part of this Annual
Report, and references to our website address in this Annual Report are inactive textual references only.
The information required by this item that is not referenced or set forth above, will be set forth in our definitive Proxy Statement
for our 2019 Annual Meeting of Stockholders, or our Proxy Statement, or in an amendment to this Annual Report, to be filed with the
SEC not later than 120 days after the end of the fiscal year ended December 31, 2018, and is incorporated herein by reference.
Item 11.
Executive Compensation.
The information required by this item will be set forth in our Proxy Statement and is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item will be set forth in our Proxy Statement and is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this item will be set forth in our Proxy Statement and is incorporated herein by reference.
Item 14.
Principal Accounting Fees and Services.
The information required by this item will be set forth in our Proxy Statement and is incorporated herein by reference.
107
Item 15.
Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report:
PART IV
1. Financial Statements. The following documents are included in Part II, Item 8 of this Annual Report and are incorporated by
reference herein:
Report of Independent Registered Public Accounting Firm................................................................................................................
Consolidated Balance Sheets ...............................................................................................................................................................
Consolidated Statements of Operations and Comprehensive Loss......................................................................................................
Consolidated Statements of Stockholders’ Equity (Deficit) ................................................................................................................
Consolidated Statements of Cash Flows..............................................................................................................................................
Notes to Consolidated Financial Statements........................................................................................................................................
Page
79
80
81
82
83
84
108
2. Financial Statement Schedules. Financial statement schedules have been omitted because they are not required or are not
applicable, or the required information is shown in the consolidated financial statements or notes thereto.
3. Exhibits.
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2
10.3
10.4
10.5
Exhibit Description
Amended and Restated Certificate of
Incorporation (as amended through August 17,
2018 and currently in effect)
Amended and Restated Bylaws as currently in
effect.
Form of Common Stock Certificate.
Third Amended and Restated Investors’ Rights
Agreement, dated August 30, 2012.
Form of Warrant to Purchase Stock
Form of Preferred Stock Warrant.
Form of Series A Warrant to Purchase
Common Stock
Form of Series B Warrant to Purchase
Common Stock
Amended and Restated Term Loan Agreement,
dated April 4, 2014, by and among Tandem
Diabetes Care, Inc., Capital Royalty Partners II
L.P., Capital Royalty Partners II—Parallel
Fund “A” L.P., Capital Royalty Partners II
(Cayman) L.P. and Capital Royalty Partners
II—Parallel Fund “B” (Cayman) L.P.
Term Loan Agreement, dated April 4, 2014, by
and among Tandem Diabetes Care, Inc.,
Capital Royalty Partners II, L.P., Capital
Royalty Partners II—Parallel Fund “A” L.P.,
Parallel Investment Opportunities Partners II
L.P. and Capital Royalty Partners II (Cayman)
L.P.
Consent and Amendment Agreement, dated
June 20, 2014, by and among Tandem Diabetes
Care, Inc., Capital Royalty Partners II L.P.,
Capital Royalty Partners II—Parallel Fund “A”
L.P., Capital Royalty Partners II (Cayman)
L.P., Capital Royalty Partners II—Parallel
Fund “B” (Cayman) L.P. and Parallel
Investment Opportunities Partners II L.P.
Omnibus Amendment Agreement No. 2, dated
February 23, 2015, by and among Tandem
Diabetes Care, Inc., Capital Royalty Partners II
L.P., Capital Royalty Partners II—Parallel
Fund “A” L.P., Capital Royalty Partners II
(Cayman) L.P., Capital Royalty Partners II—
Parallel Fund “B” (Cayman) L.P. and Parallel
Investment Opportunities Partners II L.P.
Amendment No. 3 to Term Loan Agreement,
dated January 8, 2016, by and among Tandem
Diabetes Care, Inc., Capital Royalty Partners II
L.P., Capital Royalty Partners II—Parallel
Fund “A” L.P., Capital Royalty Partners II
(Cayman) L.P., and Capital Royalty Partners
II—Parallel Fund “B” (Cayman) L.P.
Incorporated by Reference
Form File No.
Date of First
Filing
Exhibit
Number
Provided
Herewith
10-Q
001-36189
1-Nov-18
S-1/A
333-191601
1-Nov-13
S-1/A
333-191601
1-Nov-13
S-1
S-1
S-1
8-K
8-K
333-191601
7-Oct-13
333-216531
333-191601
8-Mar-17
7-Oct-13
001-36189
13-Oct-17
001-36189
13-Oct-17
3.1
3.5
4.1
4.2
4.3
4.4
4.1
4.2
10-Q
001-36189
6-May-14
10.1
10-Q
001-36189
6-May-14
10.2
10-Q
001-36189
31-Jul-14
10.3
10-Q
001-36189
30-Apr-15
10.1
10-K
001-36189
24-Feb-16
10.5
109
10.6
10.7
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
Waiver and Amendment No. 4 to Term Loan
Agreement, dated March 7, 2017, by and
among Tandem Diabetes Care, Inc., Capital
Royalty Partners II L.P., Capital Royalty
Partners II—Parallel Fund “A” L.P., Capital
Royalty Partners II (Cayman) L.P., and Capital
Royalty Partners II—Parallel Fund “B”
(Cayman) L.P.
Waiver and Amendment No. 5 to Term Loan
Agreement, dated February 5, 2018, by and
among Tandem Diabetes Care, Inc., Capital
Royalty Partners II L.P., Capital Royalty
Partners II—Parallel Fund “A” L.P., Capital
Royalty Partners II (Cayman) L.P., and Capital
Royalty Partners II—Parallel Fund “B”
(Cayman) L.P.
Tandem Diabetes Care, Inc. 2006 Stock
Incentive Plan.
Form of Stock Option Agreement under 2006
Stock Incentive Plan.
Form of Restricted Stock Purchase Agreement
under 2006 Stock Incentive Plan.
Tandem Diabetes Care, Inc. Amended and
Restated 2013 Stock Incentive Plan.
Form of Stock Option Agreement under 2013
Stock Incentive Plan.
Form of Stock Option Agreement under 2013
Stock Incentive Plan (Non-Employee
Directors).
Tandem Diabetes Care, Inc. Amended and
Restated 2013 Employee Stock Purchase Plan.
Tandem Diabetes Care, Inc. 2018 Cash Bonus
Plan.
Employee Offer Letter, dated July 8, 2013, by
and between Tandem Diabetes Care, Inc. and
David B. Berger.
Employee Offer Letter, dated February 1, 2013,
by and between Tandem Diabetes Care, Inc.
and John F. Sheridan.
Employee Offer Letter, dated January 12, 2016,
by and between Tandem Diabetes Care, Inc.
and Brian B. Hansen.
Employment Severance Agreement, dated
February 1, 2016, by and between Tandem
Diabetes Care, Inc. and Brian B. Hansen.
Amended and Restated Employment Severance
Agreement, dated November 4, 2013, by and
between Tandem Diabetes Care, Inc. and
Kim D. Blickenstaff.
2018 Compensation Agreement, effective as of
January 5, 2018, by and between Tandem
Diabetes Care, Inc. and Kim D. Blickenstaff.
Retirement and Separation Agreement, dated
December 7, 2017, by and between Tandem
Diabetes Care, Inc. and John Cajigas.
Amended and Restated Employment Severance
Agreement, dated November 4, 2013, by and
between Tandem Diabetes Care, Inc. and
John F. Sheridan.
S-1
333-216531
8-Mar-17
10.6
8-K
001-36189
7-Feb-18
10.1
S-1
S-1
S-1
333-191601
7-Oct-13
333-191601
7-Oct-13
333-191601
7-Oct-13
10.3
10.4
10.5
DEF 14A
001-36189
26-Apr-18
Appendix
B
S-1/A
333-191601
1-Nov-13
10.7
S-1/A
333-191601
1-Nov-13
10.8
DEF 14A
001-36189
26-Apr-18
Appendix
C
10-Q
001-36189
30-Jul-18
10.4
S-1
333-191601
7-Oct-13
10.12
S-1
333-191601
7-Oct-13
10.13
8-K
001-36189
2-Feb-16
10.1
8-K
001-36189
2-Feb-16
10.2
S-1/A
333-191601
8-Nov-13
10.14
10-Q
001-36189
30-Jul-18
10.3
S-1
333-222553
16-Jan-18
10.24
S-1/A
333-191601
8-Nov-13
10.17
110
10.24*
10.24*
10.25*
10.26
10.27**
10.28**
10.29**
10.30**
10.31
10.32
10.33
10.34
10.35
23.1
24.1
31.1
31.2
Amended and Restated Employment Severance
Agreement, dated November 4, 2013, by and
between Tandem Diabetes Care, Inc. and
David B. Berger.
Amended and Restated Employment Severance
Agreement, dated November 4, 2013, by and
between Tandem Diabetes Care, Inc. and
Susan M. Morrison.
Amended and Restated Employment Severance
Agreement dated August 2, 2017, by and
between the Company and Leigh A. Vosseller.
Form of Indemnification Agreement.
Confidential Intellectual Property Agreement,
dated July 10, 2012, by and between Tandem
Diabetes Care, Inc. and Smiths Medical ASD,
Inc.
Amended and Restated Development and
Commercialization Agreement, dated
January 4, 2013, by and between Tandem
Diabetes Care, Inc. and DexCom, Inc.
Amendment No. 1 to Amended and Restated
Development and Commercialization
Agreement, dated September 24, 2015, by and
between Tandem Diabetes Care, Inc. and
DexCom, Inc.
Development Agreement, dated June 4, 2015
by and between Tandem Diabetes Care, Inc.
and Dexcom, Inc.
Lease Agreement, dated March 7, 2012, as
amended through November 5, 2013, by and
between Tandem Diabetes Care, Inc. and ARE-
11025/11075 Roselle Street, LLC.
Fourth Amendment to Lease, dated December
27, 2017, by and between Tandem Diabetes
Care, Inc. and ARE-11025/11075 Roselle
Street, LLC
Lease Agreement, dated November 5, 2013, by
and between Tandem Diabetes Care, Inc. and
ARE-11025/11075 Roselle Street, LLC.
First Amendment to Lease, dated December 27,
2017, by and between Tandem Diabetes Care,
Inc. and ARE-11025/11075 Roselle Street,
LLC
Lease Agreement, dated June 30, 2016, by and
between Tandem Diabetes Care, Inc. and ARE-
SD REGION NO. 36, LLC.
Consent of Independent Registered Public
Accounting Firm.
Power of Attorney (included on the signature
page).
Certification of Kim D. Blickenstaff, Chief
Executive Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Certification of Leigh A. Vosseller, Chief
Financial Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
S-1/A
333-191601
8-Nov-13
10.18
S-1/A
333-191601
8-Nov-13
10.19
S-1
S-1
333-222553
16-Jan-18
10.25
333-191601
7-Oct-13
10.11
S-1/A
333-191601
8-Nov-13
10.20
10-Q
001-36189
29-Oct-15
10.1
10-Q
001-36189
29-Oct-15
10.2
10-Q/A
001-36189
9-Nov-18
10.5
S-1/A
333-191601
8-Nov-13
10.1
8-K
001-36189
3-Jan-2018
10.2
S-1/A
333-191601
8-Nov-13
10.21
8-K
001-36189
3-Jan-2018
10.1
10-Q
001-36189
28-Jul-16
10.3
111
X
X
X
X
32.1***
32.2***
Certification of Kim D. Blickenstaff, Chief
Executive Officer, pursuant to U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
Certification of Leigh A. Vosseller, Chief
Financial Officer, pursuant to U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
101.INS XBRL Instance Document.
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Taxonomy Extension Schema
Document.
XBRL Taxonomy Extension Calculation
Linkbase Document.
XBRL Taxonomy Extension Definition
Linkbase Document.
XBRL Taxonomy Extension Label Linkbase
Document.
XBRL Taxonomy Extension Presentation
Linkbase Document.
X
X
X
X
X
X
X
X
Indicates management contract or compensatory plan.
*
** Confidential treatment has been granted with respect to certain portions of this exhibit pursuant to an application for confidential
treatment sent to the Securities and Exchange Commission. Such portions are omitted from this filing and have been filed
separately with the Securities and Exchange Commission.
*** This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the
liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act
of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates it by reference.
112
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Tandem Diabetes Care, Inc.
By:
/s/ Kim D. Blickenstaff
Kim D. Blickenstaff
President, Chief Executive Officer and Director
(Principal Executive Officer)
Dated: February 26, 2019
113
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and
appoints Kim D. Blickenstaff and Leigh A. Vosseller, and each of them individually, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and
all amendments to this Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ KIM D. BLICKENSTAFF
Kim D. Blickenstaff
/s/ LEIGH A. VOSSELLER
Leigh A. Vosseller
/s/ DICK P. ALLEN
Dick P. Allen
President, Chief Executive Officer and Director (Principal
Executive Officer)
February 26, 2019
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
February 26, 2019
Director and Chairman of the Board
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
/s/ EDWARD L. CAHILL
Director
Edward L. Cahill
/s/ FRED E. COHEN
Director
Fred E. Cohen, M.D., D.Phil.
/s/ HOWARD E. GREENE, JR.
Director
Howard E. Greene, Jr.
/s/ REBECCA ROBERTSON
Director
Rebecca Robertson
/s/ DOUGLAS A. ROEDER
Director
Douglas A. Roeder
/s/ CHRISTOPHER J. TWOMEY
Director
Christopher J. Twomey
/s/ RICHARD VALENCIA
Director
Richard Valencia
114
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kim D. Blickenstaff, certify that:
1. I have reviewed this Annual Report on Form 10-K of Tandem Diabetes Care, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: February 26, 2019
Tandem Diabetes Care, Inc.
By: /s/ Kim D. Blickenstaff
Kim D. Blickenstaff
President, Chief Executive Officer and Director
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Leigh A. Vosseller, certify that:
1. I have reviewed this Annual Report on Form 10-K of Tandem Diabetes Care, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: February 26, 2019
Tandem Diabetes Care, Inc.
By: /s/ Leigh A. Vosseller
Leigh A. Vosseller
Executive Vice President, Chief Financial
Officer and Treasurer
Exhibit 32.1
CERTIFICATION
Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K of Tandem Diabetes Care, Inc. (the “Company”) for the year ended
December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kim D. Blickenstaff,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company as of the dates and for the periods presented.
Date: February 26, 2019
/s/ Kim D. Blickenstaff
Kim D. Blickenstaff
President, Chief Executive Officer and Director
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, and is not
being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference
into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such
filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by
the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION
Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K of Tandem Diabetes Care, Inc. (the “Company”) for the year ended
December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Leigh A. Vosseller,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company as of the dates and for the periods presented.
Date: February 26, 2019
/s/ Leigh A. Vosseller
Leigh A. Vosseller
Executive Vice President, Chief Financial Officer and
Treasurer
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, and is not
being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference
into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such
filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by
the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXECUTIVE TEAM
Kim Blickenstaff
Kim Blickenstaff
Executive Chairman
Executive Chairman
Jim Leal
Jim Leal
SVP, Operations
SVP, Operations
John Sheridan
John Sheridan
President and Chief Executive Officer
President and Chief Executive Officer
Manuel Jaime
Manuel Jaime
SVP, Technology and Digital Health
SVP, Technology and Digital Health
David Berger
David Berger
EVP and General Counsel
EVP and General Counsel
Julia Kensick
Julia Kensick
VP, Quality
VP, Quality
Susan Morrison
EVP and Chief Administrative Officer
Leigh Vosseller
EVP and Chief Financial Officer
Brian Hansen
Brian Hansen
EVP and Chief Commercial Officer
EVP and Chief Commercial Officer
Tom Fox
Tom Fox
VP, Human Resources and Organizational Development
VP, Human Resources and Organizational Development
BOARD OF DIRECTORS
Kim Blickenstaff
Executive Chairman
Dick Allen
Lead Independent Director
Edward Cahill
Edward Cahill
Douglas Roeder
Douglas Roeder
Fred Cohen, MD, DPhil, FACP
Fred Cohen, MD, DPhil, FACP
Christopher Twomey
Christopher Twomey
Howard (Ted) Greene, Jr.
Howard (Ted) Greene, Jr.
Richard Valencia
Richard Valencia
Rebecca Robertson
Rebecca Robertson
COMPANY & INVESTOR INFORMATION
Corporate Headquarters
11075 Roselle Street
San Diego, CA 92121
(858) 366-6900
Annual Meeting
The annual meeting of Tandem Diabetes
Care stockholders will be held on Wednesday,
May 22, 2019 at 3:00 p.m. Pacific Time at the
Company’s headquarters.
Common Stock Listing
Ticker symbol: TNDM
The NASDAQ Global Market
Transfer Agent
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
www.astfinancial.com
Independent Registered
Public Accounting Firm
Ernst & Young LLP
4370 La Jolla Village Drive, Suite 500
San Diego, CA 92122
Stockholder Inquiries
Stockholders may obtain copies of our news
releases, Securities and Exchange Commission
filings, including Forms 10-K, 10-Q, and 8-K,
and other Company information by accessing
our website at www.tandemdiabetes.com
or by contacting Investor Relations at
(858) 366-6900 x7005.
Forward-looking Statements
This annual report contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as
amended. All statements included or incorporated by
reference in this Annual Report other than statements
of historical fact, are forward-looking statements.
You can identify these and other forward-looking
statements by the use of words such as “may,” “will,”
“could,” “anticipate,” “expect,” “intend,” “believe,”
“continue” or the negative of such terms, or other
comparable terminology. Forward-looking statements
also include the assumptions underlying or relating to
such statements.
Our actual results could differ materially from those
anticipated in these forward-looking statements as
a result of various factors. 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 except
as required by law.
© 2019 Tandem Diabetes Care, Inc. All rights reserved.
Tandem Diabetes Care, Basal-IQ and our company logo
are registered trademarks and t:slim X2 and Control-IQ
are trademarks of Tandem Diabetes Care, Inc. All other
trademarks are the property of their respective owners.
11075 Roselle Street
San Diego, CA 92121
tandemdiabetes.com