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Table of contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________________________
FORM 10-Q
_____________________________________________________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from              to                 
Commission File Number 001-36189
_____________________________________________________________________________________________
Tandem Diabetes Care, Inc.
(Exact name of registrant as specified in its charter)
_____________________________________________________________________________________________
Delaware
 
20-4327508
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
11075 Roselle Street
 
92121
San Diego
California
 
(Zip Code)
(Address of principal executive offices)
 
 
(858) 366-6900
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Symbol
Name of Exchange on Which Registered
Common Stock, par value $0.001 per share
TNDM
NASDAQ Global Market
_____________________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically 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  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.                                                                                                          ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of July 26, 2019, there were 58,652,286 shares of the registrant’s Common Stock outstanding.
 


Table of contents

TABLE OF CONTENTS
 
 
 
 
 
 
 
 


Table of contents

PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
TANDEM DIABETES CARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
 
June 30,
 
December 31,
 
2019
 
2018
 
(Unaudited)
 
(Note 1)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
38,157

 
$
41,826

Short-term investments
93,231

 
87,201

Accounts receivable, net
48,438

 
35,193

Inventories, net
27,341

 
19,896

Prepaid and other current assets
5,989

 
3,769

Total current assets
213,156

 
187,885

Property and equipment, net
22,750

 
17,151

Operating lease right-of-use assets
17,665

 

Patents, net
967

 
1,130

Other long-term assets
543

 
128

Total assets
$
255,081

 
$
206,294

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
9,268

 
$
6,824

Accrued expense
5,786

 
3,930

Employee-related liabilities
23,896

 
24,030

Deferred revenue
7,139

 
4,600

Common stock warrants
25,616

 
17,926

Operating lease liabilities
5,341

 

Other current liabilities
7,168

 
8,978

Total current liabilities
84,214

 
66,288

Deferred rent - long-term

 
3,799

Operating lease liabilities - long-term
16,608

 

Other long-term liabilities
8,914

 
4,932

Total liabilities
109,736

 
75,019

Commitments and contingencies (Note 9)


 


Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 200,000 shares authorized as of June 30, 2019 and December 31, 2018.  58,589 and 57,554 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively.
58

 
57

Additional paid-in capital
769,704

 
731,306

Accumulated other comprehensive income (loss)
162

 
(13
)
Accumulated deficit
(624,579
)
 
(600,075
)
Total stockholders’ equity
145,345

 
131,275

Total liabilities and stockholders’ equity
$
255,081

 
$
206,294

See accompanying notes to unaudited condensed consolidated financial statements.

1

Table of contents

TANDEM DIABETES CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Sales
$
93,255

 
$
34,126

 
$
159,250

 
$
61,402

Cost of sales
43,351

 
19,039

 
75,993

 
34,912

Gross profit
49,904

 
15,087

 
83,257

 
26,490

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
40,565

 
22,628

 
75,524

 
43,541

Research and development
11,204

 
6,456

 
20,594

 
12,431

Total operating expenses
51,769

 
29,084

 
96,118

 
55,972

Operating loss
(1,865
)
 
(13,997
)
 
(12,861
)
 
(29,482
)
Other income (expense), net:
 
 
 
 
 
 
 
Interest and other income
786

 
299

 
1,543

 
390

Interest and other expense
(9
)
 
(3,112
)
 
(16
)
 
(6,184
)
Change in fair value of stock warrants
(424
)
 
(42,549
)
 
(13,170
)
 
(56,777
)
Total other income (expense), net
353

 
(45,362
)
 
(11,643
)
 
(62,571
)
Net loss
$
(1,512
)
 
$
(59,359
)
 
$
(24,504
)
 
$
(92,053
)
Other comprehensive loss:
 
 
 
 
 
 
 
Unrealized gain on short-term investments
$
101

 
$
6

 
$
151

 
$
6

Foreign currency translation
20

 

 
24

 

Comprehensive loss
$
(1,391
)
 
$
(59,353
)
 
$
(24,329
)
 
$
(92,047
)
 
 
 
 
 
 
 
 
Net loss per share, basic and diluted
$
(0.03
)
 
$
(1.17
)
 
$
(0.42
)
 
$
(2.32
)
Weighted average shares used to compute basic and diluted net loss per share
58,219

 
50,948

 
57,996

 
39,594

See accompanying notes to unaudited condensed consolidated financial statements.

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TANDEM DIABETES CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
(In thousands)
Three Months Ended June 30, 2019
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
Balance at March 31, 2019
57,982

 
$
58

 
$
743,930

 
$
41

 
$
(623,067
)
 
$
120,962

Exercise of stock options
364

 

 
5,579

 

 

 
5,579

Exercise of common stock warrants
75

 

 
262

 

 

 
262

Issuance of common stock for Employee Stock Purchase Plan
168

 

 
2,951

 

 

 
2,951

Fair value of common stock warrants at time of exercise

 

 
4,569

 

 

 
4,569

Stock-based compensation

 

 
12,413

 

 

 
12,413

Foreign currency translation

 

 

 
20

 

 
20

Unrealized gain on short-term investments

 

 

 
101

 

 
101

Net loss

 

 

 

 
(1,512
)
 
(1,512
)
Balance at June 30, 2019
58,589

 
$
58

 
$
769,704

 
$
162

 
$
(624,579
)
 
$
145,345



Six Months Ended June 30, 2019
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
Balance at December 31, 2018
57,554

 
$
57

 
$
731,306

 
$
(13
)
 
$
(600,075
)
 
$
131,275

Exercise of stock options
774

 
1

 
7,477

 

 

 
7,478

Exercise of common stock warrants
93

 

 
326

 

 

 
326

Issuance of common stock for Employee Stock Purchase Plan
168

 

 
2,951

 

 

 
2,951

Fair value of common stock warrants at time of exercise

 

 
5,479

 

 

 
5,479

Stock-based compensation

 

 
22,165

 

 

 
22,165

Foreign currency translation

 

 

 
24

 

 
24

Unrealized gain on short-term investments

 

 

 
151

 

 
151

Net loss

 

 

 

 
(24,504
)
 
(24,504
)
Balance at June 30, 2019
58,589

 
$
58

 
$
769,704

 
$
162

 
$
(624,579
)
 
$
145,345




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Table of contents

Three Months Ended June 30, 2018
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
Balance at March 31, 2018
46,636

 
$
47

 
$
521,958

 
$

 
$
(510,158
)
 
$
11,847

Issuance of common stock in public offering, net of underwriter’s discount and offering costs

 

 
(20
)
 

 

 
(20
)
Exercise of stock options
1

 

 
7

 

 

 
7

Exercise of common stock warrants
6,549

 
6

 
22,383

 

 

 
22,389

Fair value of common stock warrants at time of exercise

 

 
48,320

 

 

 
48,320

Stock-based compensation

 

 
2,815

 

 

 
2,815

Unrealized gain on short-term investments

 

 

 
6

 

 
6

Net loss

 

 

 

 
(59,359
)
 
(59,359
)
Balance at June 30, 2018
53,186

 
$
53

 
$
595,463

 
$
6

 
$
(569,517
)
 
$
26,005


Six Months Ended June 30, 2018
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity (Deficit)
 
Shares
 
Amount
Balance at December 31, 2017
10,119

 
$
10

 
$
448,455

 
$

 
$
(477,614
)
 
$
(29,149
)
Adjustment to retained earnings from adoption of ASC 606

 

 

 

 
150

 
150

Issuance of common stock in public offering, net of underwriter’s discount and offering costs
34,500

 
35

 
63,975

 

 

 
64,010

Exercise of stock options
1

 

 
7

 

 

 
7

Exercise of common stock warrants
8,486

 
8

 
29,159

 

 

 
29,167

Fair value of common stock warrants at time of exercise

 

 
49,919

 

 

 
49,919

Stock-based compensation
80

 

 
3,948

 

 

 
3,948

Unrealized gain on short-term investments

 

 

 
6

 

 
6

Net loss

 

 

 

 
(92,053
)
 
(92,053
)
Balance at June 30, 2018
53,186

 
$
53

 
$
595,463

 
$
6

 
$
(569,517
)
 
$
26,005

See accompanying notes to unaudited condensed consolidated financial statements.

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Table of contents

TANDEM DIABETES CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Six Months Ended June 30,
 
2019
 
2018
Operating activities
 
 
 
Net loss
$
(24,504
)
 
$
(92,053
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization expense
2,946

 
2,898

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

 
1,387

Provision for allowance for doubtful accounts
797

 
745

Provision for inventories reserve
1,018

 
184

Change in fair value of common stock warrants
13,170

 
56,777

Amortization of premium (discount) on short-term investments
(166
)
 
298

Stock-based compensation expense
22,156

 
3,890

Other
26

 
151

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(13,988
)
 
6,135

Inventories, net
(8,454
)
 
1,958

Prepaid and other current assets
(2,533
)
 
(821
)
Other long-term assets
(415
)
 
(43
)
Accounts payable
2,206

 
(1,733
)
Accrued expense
1,851

 
1,446

Employee-related liabilities
(140
)
 
(848
)
Deferred revenue
2,539

 
439

Other current liabilities
(1,050
)
 
(49
)
Deferred rent

 
(359
)
Other long-term liabilities
3,985

 
603

Net cash used in operating activities
(556
)
 
(18,995
)
Investing activities
 
 
 
Purchases of short-term investments
(74,164
)
 
(40,500
)
Proceeds from maturities and sales of short-term investments
68,450

 
4,250

Purchase of property and equipment
(8,169
)
 
(1,087
)
Net cash used in investing activities
(13,883
)
 
(37,337
)
Financing activities
 
 
 
Proceeds from public offering, net of offering costs

 
64,008

Proceeds from exercise of common stock warrants
326

 
29,164

Proceeds from issuance of common stock under Company stock plans
10,429

 
8

Net cash provided by financing activities
10,755

 
93,180

Effect of foreign exchange rate changes on cash
15

 

Net (decrease) increase in cash and cash equivalents and restricted cash
(3,669
)
 
36,848

Cash and cash equivalents and restricted cash at beginning of period
41,826

 
23,700

Cash and cash equivalents and restricted cash at end of period
$
38,157

 
$
60,548

Supplemental disclosures of cash flow information
 
 
 
Interest paid
$

 
$
4,784

Supplemental schedule of noncash investing and financing activities
 
 
 
Right-of-use assets obtained in exchange for operating lease obligations
$
11,445

 
$

Debt discount included in other long-term liabilities
$

 
$
4,964

Property and equipment included in accounts payable
$
239

 
$
92

See accompanying notes to unaudited condensed consolidated financial statements.

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Table of contents

TANDEM DIABETES CARE, INC.
NOTES TO UNAUDITED CONDENSED 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 (t:slim X2), the Company’s flagship pump platform that is capable of remote feature updates and designed to display continuous glucose monitoring (CGM), sensor information directly on the pump home screen. 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’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 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 continues to provide ongoing service and support to existing t:slim, t:slim G4 and t:flex customers. In September 2017, the Company received approval by the United States Food and Drug Administration (FDA) for the integration of t:slim X2 with the Dexcom Mobile G5 CGM. In June 2018, the Company received FDA approval for t:slim X2 with Basal-IQ technology, the Company’s first-generation Automated Insulin Delivery (AID) algorithm, and the first insulin pump designated as compatible with integrated CGM (iCGM) devices. The Company commenced commercial sales of this product integrated with the Dexcom G6 CGM 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. Direct sales efforts in Canada began in the fourth quarter of 2018. During the second quarter of 2019, we began selling our t:slim X2 with Basal-IQ technology in select geographies outside the United States.
As of June 30, 2019, the Company had $131.4 million in cash, cash equivalents and short-term investments. The Company has incurred operating losses since its inception and had an accumulated deficit of $624.6 million as of June 30, 2019, which included a net loss of $24.5 million for the six months ended June 30, 2019. Management believes that the cash, 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, 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 offerings of equity securities, and through debt financing which has since been fully repaid. The Company may in the future seek additional capital from public or private offerings of its capital stock, or it may elect to borrow capital 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 or debt service 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.

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Table of contents

Basis of Presentation
The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments which are of a normal and recurring nature, considered necessary for a fair presentation of the financial information contained herein, have been included.
Interim financial results are not necessarily indicative of results anticipated for the full year or any other period(s). These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (Annual Report), from which the balance sheet information herein was derived. These unaudited condensed consolidated financial statements exclude disclosures required by U.S. GAAP for complete financial statements.
The condensed consolidated financial statements 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.
2. Summary of Significant Accounting Policies
There have been no material changes in the Company's significant accounting policies during the six months ended June 30, 2019, as compared with those disclosed in the Annual Report other than adoption of the new lease accounting standard effective January 1, 2019 (See Note 6, “Leases”).
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes as of the date of the consolidated financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions.
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 (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.
Accounts Receivable
The Company grants credit to various customers in the ordinary course of business and is paid directly by customers who use the products, distributors and third-party insurance payors. 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.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expense, and employee-related liabilities are reasonable estimates of their fair values because of the short-term nature of these assets and liabilities. Short-term investments are carried at fair value. The Company believes the fair value of its operating lease liabilities at June 30, 2019 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 June 30, 2019 and December 31, 2018 (see Note 5, “Fair Value Measurements”).

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Table of contents

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.
In January 2018, the Company adopted the Revenue from Contracts with Customers Standard which superseded 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 was 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 impact of the accounting change.   
Prior to the implementation of this new standard, revenue was recognized when persuasive evidence of an arrangement existed, delivery had occurred and title passed, the price was fixed or determinable, and collectability was reasonably assured.
The Company considers the individual deliverables in its product offering as separate performance obligations. The transaction price is determined based on the consideration expected to be received, based either on the stated value in contractual arrangements or the estimated cash to be collected in non-contracted arrangements. The Company allocates the consideration to the individual performance obligations and recognizes the consideration based on when the performance obligation is satisfied, considering whether or not this occurs at a point in time or over time. Generally, insulin pumps, cartridges, infusion sets and accessories are deemed performance obligations that are satisfied at a point in time when the customer obtains control of the promised good, which is 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 typical 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 June 30, 2019 and December 31, 2018, $6.3 million and $3.8 million, respectively, were recorded as deferred revenue for these performance obligations that are satisfied over time.
Additionally, the Company offers a 30-day right of return to its customers from the date of shipment of any of its insulin pumps, provided a physician’s confirmation of the medical reason for the return is received. Estimated allowances for sales returns are based on historical returned quantities as compared to pump shipments in those same periods of return. The return rate is then applied to the sales of the current period to establish a reserve at the end of the period. The return rates used in the reserve are adjusted for known or expected changes in the marketplace when appropriate. The allowance for product returns is recorded as a reduction of revenue and an increase in deferred revenue in the period in which the related sale is recorded. The amount recorded on the Company’s balance sheets for product return allowance was $0.2 million and $0.3 million at June 30, 2019 and December 31, 2018, respectively. Actual product returns have not differed materially from estimated amounts reserved in the accompanying condensed 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 product replacement cost and expected replacement rates based on historical experience. The Company evaluates the reserve quarterly and makes adjustments when appropriate. Changes to the actual replacement rates or the expected product replacement cost could have a material impact on the Company’s estimated warranty reserve. 

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Table of contents

As of June 30, 2019 and December 31, 2018, the warranty reserve was $14.3 million and $9.1 million, respectively. The following table provides a reconciliation of the change in product warranty liabilities from December 31, 2018 through June 30, 2019 (in thousands):
Balance at December 31, 2018
$
9,138

Provision for warranties issued during the period
8,723

Settlements made during the period
(4,611
)
Increases in warranty estimates
1,008

Balance at June 30, 2019
$
14,258

 
 
Current portion
$
5,344

Non-current portion
8,914

Total
$
14,258

Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the estimated fair value of the award, and the portion that is ultimately expected to vest is recognized as compensation expense over the requisite service period on a straight-line basis. The Company estimates the fair value of stock options issued under the Company’s Amended and Restated 2013 Stock Incentive Plan (2013 Plan), and the fair value of the employees’ purchase rights under the Company’s 2013 Employee Stock Purchase Plan (ESPP), using a Black-Scholes option-pricing model on the date of grant. The Black-Scholes option-pricing model requires the use of subjective assumptions about a number of key variables, including stock price volatility, expected term, and risk-free interest rate. For awards that vest based on the achievement of service conditions, the Company recognizes expense using the straight-line method less estimated forfeitures based on historical experience.
Net Loss Per Share
Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares that were outstanding for the period, without consideration for common stock equivalents. Diluted loss per share is calculated in accordance with the treasury stock method and reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted to common stock. Dilutive common share equivalents are comprised of warrants, potential awards granted pursuant to the ESPP, and options outstanding under the Company’s other equity incentive plans. For warrants that are recorded as a liability in the accompanying balance sheet, the calculation of diluted loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of such securities are dilutive to loss per share for the period, an adjustment to net loss used in the calculation is required to remove the change in fair value of the warrants from the numerator for the period. Likewise, an adjustment to the denominator is required to reflect the related dilutive shares, if any, under the treasury stock method. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.
Potentially dilutive securities not included in the calculation of diluted net loss per share (because inclusion would be anti-dilutive) are as follows (in thousands, in common stock equivalent shares):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Warrants to purchase common stock
611

 
628

 
611

 
628

Options to purchase common stock
6,790

 
2,166

 
6,216

 
1,852

ESPP
23

 
1

 
12

 
1

 
7,424

 
2,795

 
6,839

 
2,481



9

Table of contents

Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, 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. This new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income (loss) rather than reducing the carrying amount under the current, other-than-temporary-impairment model. 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 of the adoption of the standard on its consolidated financial statements as well as whether to early adopt the new standard.
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, 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 on 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 consolidated financial statements.
3. Short-Term Investments
The Company invests in marketable 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 as of June 30, 2019 and December 31, 2018 (in thousands):
At June 30, 2019
Maturity
(in years)
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Commercial paper
Less than 1
 
$
23,591

 
$
15

 
$

 
$
23,606

Government sponsored enterprise
Less than 1
 
2,750

 
1

 

 
$
2,751

U.S. Treasury securities
Less than 1
 
9,693

 
21

 

 
9,714

Corporate debt securities
Less than 1
 
57,059

 
101

 

 
57,160

Total
 
 
$
93,093

 
$
138

 
$

 
$
93,231

At December 31, 2018
Maturity
(in years)
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Commercial paper
Less than 1
 
$
53,559

 
$

 
$
(22
)
 
$
53,537

U.S. Treasury securities
Less than 1
 
17,937

 

 
(2
)
 
17,935

Corporate debt securities
Less than 1
 
15,718

 
12

 
(1
)
 
15,729

Total
 
 
$
87,214

 
$
12

 
$
(25
)
 
$
87,201



10

Table of contents

4. Inventories
Inventories consisted of the following as of June 30, 2019 and December 31, 2018 (in thousands):
 
June 30,
2019
 
December 31,
2018
Raw materials
$
10,311

 
$
6,622

Work-in-process
5,300

 
2,710

Finished goods
11,730

 
10,564

Total
$
27,341

 
$
19,896


5. Fair Value Measurements
Authoritative guidance on fair value measurements defines fair value and provides a consistent framework for both measuring fair value as well as for disclosures of each major asset and liability category measured at fair value on either a recurring or a nonrecurring basis. Fair value is intended to reflect an assumed exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance provides 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 June 30, 2019 and December 31, 2018, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):  
 
 
 
Fair Value Measurements at
June 30, 2019
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
Cash equivalents (1)
$
35,771

 
$
35,771

 
$

 
$

Commercial paper
23,606

 

 
23,606

 

Government sponsored enterprise
2,751

 

 
2,751

 

U.S. Treasury securities
9,714

 
9,714

 

 

Corporate debt securities
57,160

 

 
57,160

 

Total assets
$
129,002

 
$
45,485

 
$
83,517

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Common stock warrants
$
25,616

 
$

 
$

 
$
25,616

Total liabilities
$
25,616

 
$

 
$

 
$
25,616


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Fair Value Measurements at
December 31, 2018
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
Cash equivalents (1)
$
37,373

 
$
37,373

 
$

 
$

Commercial paper
53,537

 

 
53,537

 

U.S. Treasury securities
17,935

 
17,935

 

 

Corporate debt securities
15,729

 

 
15,729

 

Total assets
$
124,574

 
$
55,308

 
$
69,266

 
$

Liabilities
 
 
 
 
 
 
 
Common stock warrants
$
17,926

 
$

 
$

 
$
17,926

Total liabilities
$
17,926

 
$

 
$

 
$
17,926

(1)
Generally, cash equivalents include money market funds and investments with a maturity of three months or less from the date of purchase.
The Company’s Level 2 financial instruments are valued using market prices on less active markets with observable valuation inputs such as interest rates and yield curves. The Company obtains the fair value of Level 2 financial instruments from quoted market prices, calculated prices or quotes from third-party pricing services. The Company validates these prices through independent valuation testing and review of portfolio valuations provided by the Company’s investment managers. There were no transfers between Level 1 and Level 2 assets during the six months ended June 30, 2019 and 2018.
The Company’s Level 3 liabilities at June 30, 2019 and December 31, 2018 include the Series A 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 A warrants were initially valued in the aggregate amount of $3.3 million on the date of issuance utilizing a Black-Scholes pricing model.
The Company reassesses the fair value of the outstanding Series A warrants at each reporting date utilizing a Black-Scholes pricing model. Inputs used in the pricing model include the market price of the Company’s common stock and 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 June 30, 2019 and December 31, 2018 are presented below:
 
Series A Warrants
June 30, 2019
 
December 31, 2018
Risk-free interest rate
1.7
%
 
3.0
%
Expected dividend yield
0.0
%
 
0.0
%
Expected volatility
81.2
%
 
78.3
%
Expected term (in years)
3.3

 
3.8


The following table presents a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the six months ended June 30, 2019 and 2018:
 
Six Months Ended June 30,
 
2019
 
2018
Balance at beginning of period
$
17,926

 
$
5,432

Increase in fair value included in change in fair value of common stock warrants
13,170

 
56,777

Decrease in fair value from warrants exercised during the period
(5,480
)
 
(49,918
)
Balance at end of period
$
25,616

 
$
12,291



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During the six months ended June 30, 2019, the Company issued 93,270 shares of common stock upon the exercise of Series A warrants. During the six months ended June 30, 2018, the Company issued 8,485,871 shares of common stock upon the exercise of certain warrants issued in the October 2017 Financing, and 13,450 warrants expired unexercised. As of June 30, 2019, there were Series A warrants outstanding to purchase 417,515 shares of common stock (see Note 8, “Stockholders’ Equity”).
6. Leases
In February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02). ASU 2016-02 and its related amendments (collectively referred to as ASC 842) 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 changed the definition of a lease and expanded the disclosure requirements of lease arrangements. In July 2018, the FASB added a transition option for implementation that allowed 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 was effective for the Company starting in the first quarter of fiscal 2019. The Company elected the transition option and certain practical expedients, and recognized a cumulative-effect transition adjustment for the recognition of right-of-use leased assets and corresponding operating lease liabilities of $12.4 million on the consolidated balance sheet upon adoption of this standard as of January 1, 2019. The Company did not restate prior periods. Deferred rent of $1.0 million and $3.8 million as of January 1, 2019 was 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's leases consist primarily of operating leases for general office space, laboratory, manufacturing, and warehouse facilities, and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. Because the Company's leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The Company used the incremental borrowing rate on January 1, 2019, for operating leases that commenced prior to that date. For lease agreements entered into or reassessed after the adoption of ASC 842, the Company combines lease and non-lease components.
Certain leases include an option to renew, with renewal terms that can extend the lease term for additional periods. The exercise of lease renewal options is at the Company's sole discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option that is reasonably certain to be exercised.
In January 2019, the Company entered into a lease agreement for approximately 25,332 square feet of additional general administrative office space located at 10935 Vista Sorrento Parkway, San Diego, California (the Vista Sorrento Parkway Lease). The initial lease term commenced in March 2019 and expires in September 2022. During the second quarter of 2019, the lease term was extended through December 2022. The Company has a one-time option to extend the term of the Vista Sorrento Parkway Lease for a period of five years. The Company recognized right-of-use leased assets and corresponding operating lease liabilities of $3.1 million on the consolidated balance sheet in the first quarter of 2019 related to commencement, and $0.2 million in the second quarter of 2019 related to the extension, of the Vista Sorrento Parkway Lease.
In March 2019, the Company entered into a lease agreement for approximately 40,490 square feet of space located at 6495 Marindustry Place, San Diego, California to house additional operations functions, including warehousing and shipping (the Marindustry Place Lease). The initial lease term commenced in May 2019 and expires in April 2026. The Company has a one-time option to extend the term of the Marindustry Place Lease for a period of no less than three years and no more than five years. The Company recognized right-of-use leased assets and corresponding operating lease liabilities of $3.4 million on the consolidated balance sheet in the second quarter of 2019 related to the Marindustry Place Lease.
In May 2019, the Company entered into an amendment to the Vista Sorrento Parkway Lease (the Amendment) to expand the leased premises at 10935 Vista Sorrento Parkway, San Diego, California by approximately 33,681 square feet of additional general administrative office space (the Expansion Space). The initial lease term for the Expansion Space commenced in May 2019 and expires in December 2022. The Company has a one-time option to extend the lease term of the Expansion Space for a period of five years. The Company recognized right-of-use leased assets and corresponding operating lease liabilities of $4.3 million on the consolidated balance sheet in the second quarter of 2019 related to the Amendment.

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Future minimum lease payments under non-cancellable operating leases as of June 30, 2019 were as follows (in thousands):
Years Ending December 31,
 
 
2019 (remaining)
 
$
2,005

2020
 
6,816

2021
 
7,085

2022
 
5,874

2023
 
1,991

Thereafter
 
1,578

Total future minimum lease payments
 
25,349

Less: amount representing interest
 
(3,400
)
Present value of future minimum lease payments
 
21,949

Less: current portion of operating lease liabilities
 
(5,341
)
Operating lease liabilities - long-term
 
$
16,608


7. Term Loan Agreement
In August 2018, the Company fully repaid the term loan made by Capital Royalty Partners II, L.P. and its affiliated funds (CRG) pursuant to the Amended and Restated Term Loan Agreement (Term Loan Agreement). The balance of the outstanding debt at the time of repayment and at June 30, 2018 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 June 30, 2019 or 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 (PIK Loan) to be added to the principal of the loan and subject to accruing interest.
The Company entered into a series of amendments to the Term Loan Agreement between 2016 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. As of June 30, 2019, the warrants to purchase 193,788 shares of the Company's common stock at an exercise price of $23.50 per share remained outstanding.
8. Stockholders’ Equity
Public Offerings
In the first quarter of 2018, the Company completed a public offering of 34,500,000 shares of common stock at a public offering price of $2.00 per share. The gross proceeds to the Company from the offering were approximately $69.0 million, before deducting underwriting discounts and commissions and other offering expenses payable by the Company.
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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Table of contents

Shares Reserved for Future Issuance
The following shares of the Company’s common stock were reserved for future issuance as of June 30, 2019 (in thousands):
Shares underlying outstanding warrants
710

Shares underlying outstanding stock options
7,618

Shares authorized for future equity award grants
3,453

Shares authorized for issuance as ESPP awards
1,852

 
13,633


The Company issued 74,985 and 93,270 shares of its common stock upon the exercise of warrants during the three and six months ended June 30, 2019, respectively. The Company issued 8,603,321 shares of its common stock upon the exercise of warrants during the year ended December 31, 2018.
In June 2019 and 2018, the Company received approval from its stockholders to increase the number of shares of common stock reserved under the 2013 Plan by 5,000,000 and 5,500,000 shares, respectively. The Company issued 364,818 and 773,782 shares of its common stock upon the exercise of stock options during the three and six months ended June 30, 2019, respectively. The Company issued 136,042 shares of its common stock upon the exercise of stock options during the year ended December 31, 2018.
The ESPP enables eligible employees to purchase shares of common stock using their after-tax payroll deductions, subject to certain conditions. Historically, offerings under the ESPP consisted of a two-year offering period with four six-month purchase periods which begin in May and November of each year. The Company previously suspended the ESPP in May 2017 due to a lack of available shares. In June 2018, the Company received approval from its stockholders to increase the number of shares reserved for issuance under the ESPP by 2,000,000 shares. A new offering commenced under the ESPP on June 15, 2018, and the first purchase date was November 15, 2018. There were 168,165 shares of common stock purchased under the ESPP in the six months ended June 30, 2019. There were 80,581 shares of common stock purchased under the ESPP during the year ended December 31, 2018.
Stock-Based Compensation
In June 2019, the Company granted options to purchase 1,644,715 shares of common stock, which were originally awarded between February 2019 and June 2019, subject to and conditioned upon the approval by its stockholders of an increase in the number of shares of common stock reserved for issuance under the 2013 Plan. In total, the Company granted options to purchase 2,679,535 shares of common stock under the 2013 Plan during the six months ended June 30, 2019. These options have an exercise price equal to the closing price of the Company's common stock on the applicable award date, and generally vest as to 25% of the underlying shares on the first anniversary of the award, with the balance vesting monthly over the following three years.
In June 2018, the Company granted options to purchase 811,800 shares of common stock under the 2013 Plan, which were originally awarded on December 1, 2017, subject to and conditioned upon the approval by its stockholders of an increase in the number of shares authorized under the 2013 Plan. In addition, in June 2018, the Company granted options to purchase 3,339,300 shares of common stock under the 2013 Plan. These options have an exercise price equal to the closing price of the Company's common stock on the applicable award date, and generally vest as to 50% of the underlying shares on the first anniversary of the award, with the balance vesting monthly over the following year.
The assumptions used in the Black-Scholes option-pricing model are as follows:

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Table of contents

 
Stock Options
Three Months Ended
June 30,
 
Six Months Ended
June 30,
2019
 
2018
 
2019
 
2018
Weighted average grant date fair value (per share)
$
41.38

 
$
11.97

 
$
39.11

 
$
11.89

Risk-free interest rate
1.9
%
 
2.8
%
 
2.5
%
 
2.8
%
Expected dividend yield
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
Expected volatility
71.8
%
 
71.5
%
 
71.8
%
 
71.4
%
Expected term (in years)
6.0

 
5.6

 
6.0

 
5.7

 
ESPP
Three Months Ended
June 30,