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utreg:sqft tndm:segment xbrli:pure tndm:legal_matter

 
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, 2020
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  x    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 22, 2020, there were 60,906,146 shares of the registrant’s Common Stock outstanding.
 



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,
 
2020
 
2019
 
(Unaudited)
 
(Note 1)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
222,479

 
$
51,175

Short-term investments
203,806

 
125,283

Accounts receivable, net
45,031

 
46,585

Inventories
62,263

 
49,073

Prepaid and other current assets
6,100

 
4,025

Total current assets
539,679

 
276,141

Property and equipment, net
44,385

 
32,923

Operating lease right-of-use assets
21,553

 
15,561

Other long-term assets
10,622

 
1,485

Total assets
$
616,239

 
$
326,110

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
16,371

 
$
17,745

Accrued expenses
4,563

 
8,014

Employee-related liabilities
25,731

 
28,320

Deferred revenue
4,642

 
3,869

Common stock warrants
39,625

 
23,509

Operating lease liabilities
9,306

 
6,320

Other current liabilities
14,069

 
11,619

Total current liabilities
114,307

 
99,396

Convertible senior notes, net - long-term
195,344

 

Operating lease liabilities - long-term
17,632

 
14,063

Other long-term liabilities
21,252

 
17,672

Total liabilities
348,535

 
131,131

Commitments and contingencies (Note 10)


 


Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 200,000 shares authorized, 60,787 and 59,396 shares issued and outstanding at June 30, 2020 (unaudited) and December 31, 2019, respectively.
61

 
59

Additional paid-in capital
934,402

 
819,626

Accumulated other comprehensive income
43

 
122

Accumulated deficit
(666,802
)
 
(624,828
)
Total stockholders’ equity
267,704

 
194,979

Total liabilities and stockholders’ equity
$
616,239

 
$
326,110

See accompanying notes to unaudited condensed consolidated financial statements.

1


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,
 
2020
 
2019
 
2020
 
2019
Sales
$
109,236

 
$
93,255

 
$
207,162

 
$
159,250

Cost of sales
54,846

 
43,351

 
102,511

 
75,993

Gross profit
54,390

 
49,904

 
104,651

 
83,257

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
50,440

 
40,565

 
100,157

 
75,524

Research and development
15,987

 
11,204

 
30,104

 
20,594

Total operating expenses
66,427

 
51,769

 
130,261

 
96,118

Operating loss
(12,037
)
 
(1,865
)
 
(25,610
)
 
(12,861
)
Other income (expense), net:
 
 
 
 
 
 
 
Interest and other income
412

 
786

 
1,138

 
1,543

Interest and other expense
(3,221
)
 
(9
)
 
(3,221
)
 
(16
)
Change in fair value of common stock warrants
(14,336
)
 
(424
)
 
(16,258
)
 
(13,170
)
Total other income (expense), net
(17,145
)
 
353

 
(18,341
)
 
(11,643
)
Loss before income taxes
(29,182
)
 
(1,512
)
 
(43,951
)
 
(24,504
)
Income tax benefit
(2,075
)
 

 
(1,977
)
 

Net loss
$
(27,107
)
 
$
(1,512
)
 
$
(41,974
)
 
$
(24,504
)
Other comprehensive loss:
 
 
 
 
 
 
 
Unrealized gain on short-term investments
$
105

 
$
101

 
$
147

 
$
151

Foreign currency translation gain (loss)
183

 
20

 
(226
)
 
24

Comprehensive loss
$
(26,819
)
 
$
(1,391
)
 
$
(42,053
)
 
$
(24,329
)
 
 
 
 
 
 
 
 
Net loss per share, basic and diluted
$
(0.45
)
 
$
(0.03
)
 
$
(0.70
)
 
$
(0.42
)
Weighted average shares used to compute basic and diluted net loss per share
60,424

 
58,219

 
60,082

 
57,996

See accompanying notes to unaudited condensed consolidated financial statements.

2


TANDEM DIABETES CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)

Three Months Ended June 30, 2020
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
Balance at March 31, 2020
60,071

 
$
60

 
$
847,056

 
$
(245
)
 
$
(639,695
)
 
$
207,176

Exercise of stock options
453

 
1

 
12,254

 

 

 
12,255

Issuance of common stock for Employee Stock Purchase Plan
229

 

 
4,916

 

 

 
4,916

Exercise of common stock warrants
34

 

 
2,029

 

 

 
2,029

Equity component of convertible note issuance, net of issuance cost

 

 
85,803

 

 

 
85,803

Purchase of capped call options related to convertible notes

 

 
(34,069
)
 

 

 
(34,069
)
Stock-based compensation

 

 
16,413

 

 

 
16,413

Unrealized gain on short-term investments, net of deferred tax reversal

 

 

 
105

 

 
105

Foreign currency translation adjustments

 

 

 
183

 

 
183

Net loss

 

 

 

 
(27,107
)
 
(27,107
)
Balance at June 30, 2020
60,787

 
$
61

 
$
934,402

 
$
43

 
$
(666,802
)
 
$
267,704


Six Months Ended June 30, 2020
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
Balance at December 31, 2019
59,396

 
$
59

 
$
819,626

 
$
122

 
$
(624,828
)
 
$
194,979

Exercise of stock options
1,126

 
2

 
23,728

 

 

 
23,730

Issuance of common stock for Employee Stock Purchase Plan
229

 

 
4,916

 

 

 
4,916

Exercise of common stock warrants
36

 

 
2,036

 

 

 
2,036

Fair value of common stock warrants at time of exercise

 

 
141

 

 

 
141

Equity component of convertible note issuance, net of issuance cost

 

 
85,803

 

 

 
85,803

Purchase of capped call options related to convertible notes

 

 
(34,069
)
 

 

 
(34,069
)
Stock-based compensation

 

 
32,221

 

 

 
32,221

Unrealized gain on short-term investments

 

 

 
147

 

 
147

Foreign currency translation adjustments

 

 

 
(226
)
 

 
(226
)
Net loss

 

 

 

 
(41,974
)
 
(41,974
)
Balance at June 30, 2020
60,787

 
$
61

 
$
934,402

 
$
43

 
$
(666,802
)
 
$
267,704

See accompanying notes to unaudited condensed consolidated financial statements.


3


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

Issuance of common stock for Employee Stock Purchase Plan
168

 

 
2,951

 

 

 
2,951

Exercise of common stock warrants
75

 

 
262

 

 

 
262

Fair value of common stock warrants at time of exercise

 

 
4,569

 

 

 
4,569

Stock-based compensation

 

 
12,413

 

 

 
12,413

Unrealized gain on short-term investments

 

 

 
101

 

 
101

Foreign currency translation adjustments

 

 

 
20

 

 
20

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

Issuance of common stock for Employee Stock Purchase Plan
168

 

 
2,951

 

 

 
2,951

Exercise of common stock warrants
93

 

 
326

 

 

 
326

Fair value of common stock warrants at time of exercise

 

 
5,479

 

 

 
5,479

Stock-based compensation

 

 
22,165

 

 

 
22,165

Unrealized gain on short-term investments

 

 

 
151

 

 
151

Foreign currency translation adjustments

 

 

 
24

 

 
24

Net loss

 

 

 

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

 
$
58

 
$
769,704

 
$
162

 
$
(624,579
)
 
$
145,345

See accompanying notes to unaudited condensed consolidated financial statements.


4


TANDEM DIABETES CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Six Months Ended June 30,
 
2020
 
2019
Operating Activities
 
 
 
Net loss
$
(41,974
)
 
$
(24,504
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization expense
4,035

 
2,946

Amortization of debt discount and debt issuance costs
2,457

 

Provision for expected credit losses
1,529

 
797

Provision (recovery) for inventory obsolescence
(81
)
 
1,018

Change in fair value of common stock warrants
16,258

 
13,170

Amortization of discount on short-term investments
(1,127
)
 
(166
)
Benefit for deferred income taxes
(2,126
)
 

Stock-based compensation expense
32,286

 
22,156

Other
36

 
26

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(50
)
 
(13,988
)
Inventories
(13,181
)
 
(8,454
)
Prepaid and other current assets
(2,101
)
 
(2,533
)
Other long-term assets
6

 
(415
)
Accounts payable
(324
)
 
2,206

Accrued expenses
(3,455
)
 
1,851

Employee-related liabilities
(3,094
)
 
(140
)
Deferred revenue
2,668

 
2,539

Other current liabilities
2,428

 
(1,050
)
Other long-term liabilities
678

 
3,985

Net cash used in operating activities
(5,132
)
 
(556
)
Investing Activities
 
 
 
Purchases of short-term investments
(166,984
)
 
(74,164
)
Proceeds from maturities of short-term investments
54,709

 
67,050

Proceeds from sales of short-term investments
35,027

 
1,400

Purchases of property and equipment
(16,552
)
 
(8,169
)
Acquisition of intangible assets
(4,805
)
 

Net cash used in investing activities
(98,605
)
 
(13,883
)
Financing Activities
 
 
 
Proceeds from issuance of convertible senior notes, net of $8,809 debt issuance costs
278,691

 

Purchase of capped call options related to convertible senior notes
(34,069
)
 

Proceeds from issuance of common stock under Company stock plans
28,645

 
10,429

Proceeds from exercise of common stock warrants
2,036

 
326

Net cash provided by financing activities
275,303

 
10,755

Effect of foreign exchange rate changes on cash
(262
)
 
15

Net increase (decrease) in cash and cash equivalents
171,304

 
(3,669
)
Cash and cash equivalents at beginning of period
51,175

 
41,826

Cash and cash equivalents at end of period
$
222,479

 
$
38,157

Supplemental disclosures of cash flow information
 
 
 
Income taxes paid
$
131

 
$
55

Supplemental schedule of non-cash investing and financing activities
 
 
 
Right-of-use assets obtained in exchange for operating lease obligations
$
8,805

 
$
11,445

Property and equipment included in accounts payable
$
977

 
$
239

Intangible costs in accounts payable and other long-term liabilities
$
2,348

 
$

See accompanying notes to unaudited condensed consolidated financial statements.

5


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 with an innovative approach to 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., together with its wholly-owned subsidiaries in the U.S. and Canada.
The Company manufactures, sells and supports insulin pump products that are designed to address the evolving needs and preferences of differentiated segments of the insulin-dependent diabetes market. The Company’s manufacturing, sales and support activities principally focus on the t:slim X2 Insulin Delivery System (t:slim X2), the Company’s flagship pump platform which is capable of remote feature updates and is 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 t:connect cloud-based data management application (t:connect) and the Tandem Device Updater, a Mac and PC-compatible tool for the remote update of the Company’s 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 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 has commercially launched seven insulin pumps in the United States since 2012 and two pumps outside the United States since 2018. Four of the insulin pumps have featured integration with CGM technology, of which two have also featured an automated insulin delivery (AID) algorithm. In June 2018, the t:slim X2 was the first insulin pump designated as compatible with integrated CGM (iCGM) devices; in February 2019, the t:slim X2 was the first insulin pump in a new device category called Alternate Controller Enabled Infusion Pumps (ACE pumps); and in December 2019, Control-IQ technology for the t:slim X2 insulin pump was the first automated insulin dosing software in a new interoperable automated glycemic controller category. The Company believes that the three new classifications by the United States Food and Drug Administration (FDA) for the interoperability of devices for AID will help support continued rapid innovation by streamlining the regulatory pathway for integrated products in the United States.
As of June 30, 2020, the Company had $426.3 million in cash and cash equivalents and short-term investments. The Company has incurred operating losses since its inception and had an accumulated deficit of $666.8 million as of June 30, 2020, which included a net loss of $42.0 million for the six months ended June 30, 2020. 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, expand the commercialization of products into new international markets, 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 on third-party intellectual property rights.
The Company has funded its operations primarily through cash collected from product sales, private and public offerings of equity securities, and debt financing. The Company may in the future seek additional capital from public or private offerings of equity or debt securities, or it may elect to borrow capital under new credit arrangements 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.

6


Basis of Presentation and Principles of Consolidation
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, 2019 (Annual Report), from which the balance sheet information herein was derived.
The condensed consolidated financial statements include the accounts of Tandem Diabetes Care, Inc. and its wholly-owned subsidiaries in the U.S. and Canada. All significant intercompany balances and transactions have been eliminated in consolidation.
The functional currency of the Company’s foreign subsidiary is the local currency. The Company translates the financial statements of its foreign subsidiary into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates for each period for revenue, costs and expenses. Translation related adjustments are included in comprehensive loss and in accumulated other comprehensive income (loss) in the stockholders’ equity section of the Company’s condensed consolidated balance sheets. Foreign exchange gains or losses resulting from balances denominated in a currency other than the functional currency are recognized in interest and other income, or interest and other expense, in the Company’s condensed consolidated statements of operations.
Reclassification
Prior year amounts related to the presentation of proceeds from maturities and sales of short-term investments on the Company’s condensed consolidated statement of cash flows, have been reclassified to conform to the current year presentation.
2. Summary of Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies during the six months ended June 30, 2020, as compared to those disclosed in the Annual Report, with the exception of policies put in place with regards to the Convertible Senior Notes.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP 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 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 is organized based on its current product portfolio, which consists primarily of insulin pumps, disposable cartridges and infusion sets for the storage and delivery of insulin. The Company views its operations and manages its business as one segment because 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 its current estimate of expected credit losses. Provisions for expected credit losses are estimated based on historical experience, assessment of specific risk, review of outstanding invoices, forecasts about the future, and various assumptions and estimates that are believed to be reasonable under the circumstances, which included the Company’s estimates of credit risks as a result of the novel coronavirus pandemic (COVID-19 global pandemic). 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 expenses, 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 determined the fair value of its convertible senior notes at June 30, 2020 to be $329.4 million, based on Level 2 quoted market prices as of that date (see Note 7, “Convertible Senior Notes”). 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, 2020 and December 31, 2019 (see Note 5, “Fair Value Measurements”).
Operating Lease Right-of-Use Assets and Liabilities
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard 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 12 months. The new standard was effective for the Company starting in the first quarter of 2019. The Company adopted the new standard using the modified retrospective approach and recognized right-of-use leased assets and corresponding operating lease liabilities of $12.4 million on the consolidated balance sheet 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 the standard.
Lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent their obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized when the Company takes possession of the leased property (the Commencement Date) based on the present value of lease payments over the lease term. 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 on the Commencement Date. The difference between rent expense and rent paid is accounted for as a component of operating lease right-of-use assets on the Company’s consolidated balance sheet. Landlord improvement allowances and other similar lease incentives are recorded as property and equipment and as a reduction of the right-of-use leased assets, and are amortized on a straight-line basis as a reduction to operating lease costs. Leases with an initial term of 12 months or less are expensed as incurred and are not recorded as right-of-use assets on the consolidated balance sheets (see Note 6, “Leases”).
Intangible Assets Subject to Amortization
Intangible assets subject to amortization consist of developed technology and patents purchased or licensed that are related to the Company’s commercialized products, and are included in other long-term assets on the consolidated balance sheets.
On June 24, 2020, the Company acquired Sugarmate, Inc. (Sugarmate), the developer of a popular mobile app for people with diabetes who use insulin, which is designed to help people with diabetes visualize diabetes therapy data in innovative ways. The Sugarmate acquisition was accounted for as an acquisition of assets in accordance with (ASU) No. 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. Substantially all of the purchase price was allocated to a technology-based intangible asset, which is being amortized on a straight-line basis over an estimated useful life of five years. The Company’s results of operations for the three and six months ended June 30, 2020 included the operating results of Sugarmate since the date of acquisition, the amounts of which were not material.


7


Convertible Senior Notes
In accounting for the issuance of the convertible senior notes, the Company separated the notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of similar debt instruments that do not have associated convertible features. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the respective notes. The equity component is not remeasured as long as it continues to meet the condition for equity classification. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the notes.
The Company allocated the issuance costs incurred to the liability and equity components of the notes based on their relative fair values. Issuance costs attributable to the liability component were recorded as a reduction to the liability portion of the notes and are being amortized to interest expense over the term of the notes. Issuance costs attributable to the equity component, representing the conversion option, were netted with the equity component in stockholders' equity.
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 products to insulin-dependent diabetes customers. 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.
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 at a point in time when the customer obtains control of the promised good, which is upon delivery. Complementary products, such as t:connect and the Tandem Device Updater, are considered performance obligations that are satisfied over time, as access and support for these products is provided throughout the typical four-year warranty period of the insulin pumps. Accordingly, revenue related to the complementary products is deferred and recognized ratably over a four-year period. When there is no standalone value for the complementary product, the Company determines their value by applying the expected cost plus a margin approach and then allocates the residual to the insulin pumps. Deferred revenue related to these performance obligations that are satisfied over time was included in the following consolidated balance sheet accounts in the amounts shown as of June 30, 2020 and December 31, 2019 (in thousands):
 
June 30, 2020
 
December 31, 2019
Deferred revenue
$
4,180

 
$
3,465

Other long-term liabilities
7,528

 
5,656

Total
$
11,708

 
$
9,121


Sales Returns
The Company offers a 30-day right of return to customers in the U.S. and Canada from the date of shipment 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, adjusted for known or expected changes in the marketplace when appropriate. The amount recorded in deferred revenue on the Company’s consolidated balance sheets for allowances for sales returns was $0.6 million and $0.4 million at June 30, 2020 and December 31, 2019, respectively. Actual product returns have not differed materially from estimated amounts recorded in the accompanying condensed consolidated financial statements.

8


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. The Company evaluates the reserve quarterly. Warranty costs are primarily estimated based on the current expected product replacement cost and expected replacement rates utilizing historical experience. Recently released versions of the pump may not incur warranty costs in a manner similar to previously released pumps, on which the Company initially bases its warranty estimate of newer pumps. The Company may make further adjustments to the warranty reserve when deemed appropriate, giving additional consideration to length of time the pump version has been in the field and future expectations of performance based on new features and capabilities that may become available through Tandem Device Updater.
The following table provides a reconciliation of the change in product warranty liabilities from December 31, 2019 through June 30, 2020 (in thousands):
Balance at December 31, 2019
$
16,724

Provision for warranties issued during the period
9,658

Settlements made during the period
(6,721
)
Decreases in warranty estimates
(1,838
)
Balance at June 30, 2020
$
17,823

As of June 30, 2020 and December 31, 2019, total product warranty reserves of $17.8 million and $16.7 million, respectively, were included in the following consolidated balance sheet accounts (in thousands):
 
June 30, 2020
 
December 31, 2019
Other current liabilities
$
6,605

 
$
4,707

Other long-term liabilities
11,218

 
12,017

Total warranty reserve
$
17,823

 
$
16,724


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 the Black-Scholes option-pricing model on the date of grant. The Black-Scholes option-pricing model requires the use of assumptions about a number of variables, including stock price volatility, expected term, dividend yield and risk-free interest rate (see Note 8, “Stockholders’ Equity”). The fair value of restricted stock unit (RSU) awards that vest solely based on service are estimated based on the fair market value of the underlying stock on the date of grant.

9


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 reflects the potential dilution that would occur if securities exercisable for or convertible into common stock were exercised for or converted into common stock. Dilutive common share equivalents are comprised of warrants, stock options outstanding under the Company’s equity incentive plans, unvested RSUs, and potential awards granted pursuant to the ESPP, each calculated using the treasury stock method; and shares issuable upon conversion of the senior convertible notes using the if-converted method. For warrants that are recorded as a liability in the accompanying condensed consolidated balance sheets, 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 the warrants is dilutive to loss per share for the period, an adjustment is made to net loss used in the calculation 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 the three and six months ended June 30, 2020 and 2019, 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,
 
2020
 
2019
 
2020
 
2019
Warrants to purchase common stock
640

 
611

 
640

 
611

Options to purchase common stock
6,195

 
6,790

 
5,992

 
6,216

Unvested restricted stock units
132

 
N/A

 
132

 
N/A

Awards granted under the ESPP
8

 
23

 
4

 
12

Convertible senior notes (if-converted)

 
N/A

 

 
N/A

 
6,975

 
7,424

 
6,768

 
6,839


Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. The 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 prior, other-than-temporary-impairment model. The new standard must be adopted using the modified retrospective approach and was effective for the Company starting in the first quarter of 2020. The Company determined there was no cumulative-effect transition adjustment to the opening balance of accumulated deficit for recognition of additional credit losses upon adoption of this standard as of January 1, 2020 based on its outstanding accounts receivable, the composition and credit quality of its short-term investments, and current economic conditions as of that date.
In August 2018, the FASB issued ASU 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. The updated guidance was effective for the Company starting in the first quarter of 2020. As a result, the Company modified certain fair value measurement disclosures primarily related to its Level 3 liabilities (see Note 5, “Fair Value Measurements”).

10


In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted. The Company early adopted the new guidance in the second quarter of 2020. As a result, the Company recognized, on a prospective basis, $13,000 of income tax expense in the second quarter of 2020 upon the reversal of tax benefits recorded in the first quarter of 2020 related to unrealized gains on short-term investments.
3. Short-Term Investments
The Company invests in marketable securities consisting of 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, 2020 and December 31, 2019 (in thousands):
At June 30, 2020
Maturity
(in years)
 
Amortized
Cost
 
Gross Unrealized
Gain
 
Gross Unrealized
Loss
 
Estimated
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Commercial paper
Less than 1
 
$
67,013

 
$
8

 
$
(6
)
 
$
67,015

U.S. Government-sponsored enterprise
Less than 2
 
22,733

 
44

 
(5
)
 
22,772

U.S. Treasury securities
Less than 1
 
32,036

 
48

 

 
32,084

Corporate debt securities
Less than 1
 
81,788

 
164

 
(17
)
 
81,935

Total
 
 
$
203,570

 
$
264

 
$
(28
)
 
$
203,806

At December 31, 2019
Maturity
(in years)
 
Amortized
Cost
 
Gross Unrealized
Gain
 
Gross Unrealized
Loss
 
Estimated
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Commercial paper
Less than 1
 
$
24,147

 
$
10

 
$

 
$
24,157

U.S. Government-sponsored enterprise
Less than 2
 
33,073

 
26

 

 
33,099

U.S. Treasury securities
Less than 2
 
17,963

 
17

 
(1
)
 
17,979

Corporate debt securities
Less than 2
 
50,011

 
42

 
(5
)
 
50,048

Total
 
 
$
125,194

 
$
95

 
$
(6
)
 
$
125,283


The Company has classified all marketable securities, regardless of maturity, as short-term investments based upon the Company’s ability and intent to use any of those marketable securities to satisfy the Company’s liquidity requirements.

The Company periodically reviews the portfolio of available-for-sale debt securities to determine if any investment is impaired due to changes in credit risk or other potential valuation concerns. Unrealized losses on available-for-sale debt securities at June 30, 2020 were not significant and were due to changes in interest rates, including credit spreads from perceived increased credit risks as a result of the COVID-19 global pandemic. The Company does not intend to sell the available-for-sale debt securities that are in an unrealized loss position, and it is not more likely than not that the Company will be required to sell these debt securities before recovery of their amortized cost bases, which may be at maturity. Based on the credit quality of the available-for-sale debt securities that are in an unrealized loss position, and the Company’s estimates of future cash flows to be collected from those securities, the Company believes the unrealized losses are not credit losses. Accordingly, at June 30, 2020, the Company has not recognized any impairment losses related to its available-for-sale debt securities.


11


4. Accounts Receivable and Inventories

Accounts Receivable
Accounts receivable consisted of the following (in thousands):
 
June 30,
 
December 31,
 
2020
 
2019
Accounts receivable
$
48,170

 
$
49,889

Less: allowance for credit losses
(3,139
)
 
(3,304
)
Accounts receivable, net
$
45,031

 
$
46,585


Allowance for Credit Losses
The following table provides a reconciliation of the change in the estimated allowance for expected accounts receivable credit losses for the three and six month periods ended June 30, 2020 and 2019 (in thousands):

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Balance at beginning of the period
$
3,384

 
$
2,016

 
$
3,304

 
$
1,837

Provision for expected credit losses
666

 
455

 
1,529

 
797

Write-offs and adjustments, net of recoveries
(911
)
 
(277
)
 
(1,694
)
 
(440
)
Balance at end of the period
$
3,139

 
$
2,194

 
$
3,139

 
$
2,194


Inventories
Inventories consisted of the following as of June 30, 2020 and December 31, 2019 (in thousands):
 
June 30,
2020
 
December 31,
2019
Raw materials
$
34,216

 
$
20,699

Work-in-process
12,329

 
16,532

Finished goods
15,718

 
11,842

Total Inventories
$
62,263

 
$
49,073


5. Fair Value Measurements
Authoritative guidance on fair value measurements defines fair value, and provides a consistent framework for measuring fair value and 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 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.

12


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, 2020 and December 31, 2019, 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, 2020
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
Cash equivalents(1)
$
221,360

 
$
221,360

 
$

 
$

Commercial paper
67,015

 

 
67,015

 

U.S. Government-sponsored enterprise
22,772

 

 
22,772

 

U.S. Treasury securities
32,084

 
32,084

 

 

Corporate debt securities
81,935

 

 
81,935

 

Total assets
$
425,166

 
$
253,444

 
$
171,722

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Common stock warrants
$
39,625

 
$

 
$

 
$
39,625

Total liabilities
$
39,625

 
$

 
$

 
$
39,625

 
 
 
Fair Value Measurements at
December 31, 2019
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
Cash equivalents(1)
$
58,938

 
$
58,938

 
$

 
$

Commercial paper
24,157

 

 
24,157

 

U.S. Government-sponsored enterprise
33,099

 

 
33,099

 

U.S. Treasury securities
17,979

 
17,979

 

 

Corporate debt securities
50,048

 

 
50,048

 

Total assets
$
184,221

 
$
76,917

 
$
107,304

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Common stock warrants
$
23,509

 
$

 
$

 
$
23,509

Total liabilities
$
23,509

 
$

 
$

 
$
23,509

(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.
The Company’s Level 3 liabilities at June 30, 2020 and December 31, 2019 include the remaining Series A warrants issued by the Company in connection with the public offering of common stock in October 2017. The Series A warrants, which expire in October 2022, 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 $5.2 million on the date of issuance utilizing a Black-Scholes pricing model.
During the six months ended June 30, 2020 and 2019, the Company issued 2,115 shares and 93,270 shares of common stock, respectively, upon the exercise of Series A warrants. As of June 30, 2020 and 2019, there were Series A warrants outstanding to purchase 415,200 shares and 417,515 shares, respectively, of the Company’s common stock (see Note 8, “Stockholders’ Equity”).

13


The Company reassesses the fair value of the outstanding Series A warrants at each reporting date utilizing a Black-Scholes pricing model. Variables used in the pricing model include the closing market price of the Company’s common stock at the balance sheet date, and estimates of stock price volatility, dividend yield, expected warrant term and risk-free interest rate. The Company develops its estimates based on publicly available historical data. A significant increase (decrease) in any of these inputs in isolation, particularly the market price of the Company’s common stock, would have resulted in a significantly higher (lower) fair value measurement. The assumptions used to estimate the fair values of the outstanding Series A warrants at June 30, 2020 and December 31, 2019 are presented below:
 
June 30, 2020
 
December 31, 2019
Risk-free interest rate
0.2
%
 
1.6
%
Expected dividend yield
0.0
%
 
0.0
%