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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 March 31, 2021
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 | Trading Symbol(s) | 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 April 30, 2021, there were 62,637,925 shares of the registrant’s Common Stock outstanding.
TABLE OF CONTENTS
| | | | | | | | |
| Financial Information | |
| Financial Statements | |
| Condensed Consolidated Balance Sheets at March 31, 2021 (Unaudited) and December 31, 2020 | |
| Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2021 and 2020 (Unaudited) | |
| Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020 (Unaudited) | |
| Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (Unaudited) | |
| Notes to Unaudited Condensed Consolidated Financial Statements | |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Quantitative and Qualitative Disclosures About Market Risk | |
| Controls and Procedures | |
| | |
| Other Information | |
| Legal Proceedings | |
| Risk Factors | |
| Exhibits | |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TANDEM DIABETES CARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2021 | | 2020 |
| (Unaudited) | | (Note 1) |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 120,791 | | | $ | 94,613 | |
Short-term investments | 392,646 | | | 390,323 | |
Accounts receivable, net | 73,673 | | | 82,195 | |
Inventories | 66,816 | | | 63,721 | |
Prepaid and other current assets | 7,770 | | | 6,383 | |
Total current assets | 661,696 | | | 637,235 | |
Property and equipment, net | 50,445 | | | 50,022 | |
Operating lease right-of-use assets | 33,273 | | | 19,773 | |
Other long-term assets | 8,859 | | | 9,385 | |
Total assets | $ | 754,273 | | | $ | 716,415 | |
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 28,184 | | | $ | 17,805 | |
Accrued expenses | 5,058 | | | 4,783 | |
Employee-related liabilities | 32,711 | | | 34,159 | |
Deferred revenue | 6,670 | | | 6,082 | |
Common stock warrants | 2,517 | | | 14,261 | |
Operating lease liabilities | 9,446 | | | 9,421 | |
Other current liabilities | 18,824 | | | 17,341 | |
Total current liabilities | 103,410 | | | 103,852 | |
Convertible senior notes, net - long-term | 280,168 | | | 202,984 | |
Operating lease liabilities - long-term | 29,011 | | | 15,914 | |
Other long-term liabilities | 28,270 | | | 27,360 | |
Total liabilities | 440,859 | | | 350,110 | |
Commitments and contingencies (Note 11) | | | |
Stockholders’ equity: | | | |
Common stock, $0.001 par value; 200,000 shares authorized, 62,571 and 62,335 shares issued and outstanding at March 31, 2021 (unaudited) and December 31, 2020, respectively. | 63 | | | 62 | |
Additional paid-in capital | 968,450 | | | 1,025,233 | |
Accumulated other comprehensive income | 106 | | | 220 | |
Accumulated deficit | (655,205) | | | (659,210) | |
Total stockholders’ equity | 313,414 | | | 366,305 | |
Total liabilities and stockholders’ equity | $ | 754,273 | | | $ | 716,415 | |
See accompanying notes to unaudited condensed consolidated financial statements.
TANDEM DIABETES CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2021 | | 2020 | | | | | | | | |
Sales | $ | 141,037 | | | $ | 97,926 | | | | | | | | | |
Cost of sales | 67,750 | | | 47,665 | | | | | | | | | |
Gross profit | 73,287 | | | 50,261 | | | | | | | | | |
Operating expenses: | | | | | | | | | | | |
Selling, general and administrative | 58,563 | | | 49,717 | | | | | | | | | |
Research and development | 17,961 | | | 14,117 | | | | | | | | | |
Total operating expenses | 76,524 | | | 63,834 | | | | | | | | | |
Operating loss | (3,237) | | | (13,573) | | | | | | | | | |
Other income (expense), net: | | | | | | | | | | | |
Interest income and other, net | 272 | | | 726 | | | | | | | | | |
Interest expense | (1,506) | | | — | | | | | | | | | |
| | | | | | | | | | | |
Change in fair value of common stock warrants | (690) | | | (1,922) | | | | | | | | | |
Total other expense, net | (1,924) | | | (1,196) | | | | | | | | | |
Loss before income taxes | (5,161) | | | (14,769) | | | | | | | | | |
Income tax expense (benefit) | (117) | | | 98 | | | | | | | | | |
Net loss | $ | (5,044) | | | $ | (14,867) | | | | | | | | | |
Other comprehensive loss: | | | | | | | | | | | |
Unrealized gain (loss) on short-term investments | $ | (38) | | | $ | 42 | | | | | | | | | |
Foreign currency translation loss | (76) | | | (409) | | | | | | | | | |
Comprehensive loss | $ | (5,158) | | | $ | (15,234) | | | | | | | | | |
| | | | | | | | | | | |
Net loss per share, basic and diluted | $ | (0.08) | | | $ | (0.25) | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Weighted average shares used to compute basic and diluted net loss per share | 62,448 | | | 59,740 | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
See accompanying notes to unaudited condensed consolidated financial statements.
TANDEM DIABETES CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
Three Months Ended March 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity |
| Shares | | Amount |
Balance at December 31, 2020 | 62,335 | | | $ | 62 | | | $ | 1,025,233 | | | $ | 220 | | | $ | (659,210) | | | $ | 366,305 | |
Effect of change in accounting for convertible debt(1) | — | | | — | | | (85,803) | | | — | | | 9,049 | | | (76,754) | |
Exercise of stock options | 111 | | | 1 | | | 3,135 | | | — | | | — | | | 3,136 | |
| | | | | | | | | | | |
Exercise of common stock warrants | 125 | | | — | | | 437 | | | — | | | — | | | 437 | |
Fair value of common stock warrants at time of exercise | — | | | — | | | 12,434 | | | — | | | — | | | 12,434 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Stock-based compensation expense | — | | | — | | | 13,014 | | | — | | | — | | | 13,014 | |
Unrealized loss on short-term investments | — | | | — | | | — | | | (38) | | | — | | | (38) | |
Foreign currency translation adjustments | — | | | — | | | — | | | (76) | | | — | | | (76) | |
Net loss | — | | | — | | | — | | | — | | | (5,044) | | | (5,044) | |
Balance at March 31, 2021 | 62,571 | | | $ | 63 | | | $ | 968,450 | | | $ | 106 | | | $ | (655,205) | | | $ | 313,414 | |
Three Months Ended March 31, 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 | 673 | | | 1 | | | 11,474 | | | — | | | — | | | 11,475 | |
| | | | | | | | | | | |
Exercise of common stock warrants | 2 | | | — | | | 7 | | | — | | | — | | | 7 | |
Fair value of common stock warrants at time of exercise | — | | | — | | | 141 | | | — | | | — | | | 141 | |
Stock-based compensation expense | — | | | — | | | 15,808 | | | — | | | — | | | 15,808 | |
Unrealized gain on short-term investments | — | | | — | | | — | | | 42 | | | — | | | 42 | |
Foreign currency translation adjustments | — | | | — | | | — | | | (409) | | | — | | | (409) | |
Net loss | — | | | — | | | — | | | — | | | (14,867) | | | (14,867) | |
Balance at March 31, 2020 | 60,071 | | | $ | 60 | | | $ | 847,056 | | | $ | (245) | | | $ | (639,695) | | | $ | 207,176 | |
(1) The Company adopted ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity effective January 1, 2021 (see Note 2, “Summary of Significant Accounting Policies”).
TANDEM DIABETES CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
Operating Activities | | | |
Net loss | $ | (5,044) | | | $ | (14,867) | |
Adjustments to reconcile net loss to net cash provided (used) by operating activities: | | | |
Depreciation and amortization expense | 3,485 | | | 1,830 | |
Amortization of debt issuance costs | 428 | | | — | |
Provision for expected credit losses | 143 | | | 862 | |
Provision (recovery) for inventory obsolescence | 64 | | | (363) | |
Change in fair value of common stock warrants | 690 | | | 1,922 | |
Amortization of premium (discount) on short-term investments | 209 | | | (66) | |
| | | |
Stock-based compensation expense | 12,947 | | | 15,865 | |
| | | |
Other | (73) | | | 19 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable, net | 8,389 | | | (8,292) | |
Inventories | (3,084) | | | (11,095) | |
Prepaid and other current assets | (1,412) | | | (2,231) | |
Other long-term assets | (17) | | | (383) | |
Accounts payable | 10,537 | | | 4,294 | |
Accrued expenses | 278 | | | (2,124) | |
Employee-related liabilities | (1,448) | | | (6,253) | |
Deferred revenue | 1,871 | | | 1,524 | |
Other current liabilities | 1,094 | | | 431 | |
Other long-term liabilities | (372) | | | (1,704) | |
Net cash provided (used) by operating activities | 28,685 | | | (20,631) | |
Investing Activities | | | |
Purchases of short-term investments | (154,300) | | | (9,727) | |
Proceeds from maturities of short-term investments | 140,200 | | | 30,859 | |
Proceeds from sales of short-term investments | 11,530 | | | 18,550 | |
Purchases of property and equipment | (3,524) | | | (6,766) | |
| | | |
Net cash (used in) provided by investing activities | (6,094) | | | 32,916 | |
Financing Activities | | | |
| | | |
| | | |
| | | |
Proceeds from issuance of common stock under Company stock plans | 3,135 | | | 11,474 | |
Proceeds from exercise of common stock warrants | 438 | | | 7 | |
Net cash provided by financing activities | 3,573 | | | 11,481 | |
Effect of foreign exchange rate changes on cash | 14 | | | (456) | |
Net increase in cash and cash equivalents | 26,178 | | | 23,310 | |
Cash and cash equivalents at beginning of period | 94,613 | | | 51,175 | |
Cash and cash equivalents at end of period | $ | 120,791 | | | $ | 74,485 | |
Supplemental disclosures of cash flow information | | | |
| | | |
Income taxes paid | $ | 197 | | | $ | 91 | |
Supplemental schedule of non-cash investing and financing activities | | | |
Right-of-use assets obtained in exchange for operating lease obligations | $ | 15,087 | | | $ | 8,805 | |
| | | |
Property and equipment included in accounts payable | $ | 924 | | | $ | 1,880 | |
Intangible costs in accounts payable and other long-term liabilities | $ | 2,244 | | | $ | — | |
See accompanying notes to unaudited condensed consolidated financial statements.
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 a positively different approach to the design, development and commercialization of products for people with insulin-dependent diabetes. Tandem Diabetes Care, Inc. 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 software 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 other complementary digital health offerings, such as the t:connect cloud-based diabetes management application (t:connect) and the Tandem Device Updater, a Mac and PC-compatible tool which offers and supports different updates of the Company’s insulin pump software from a personal computer. 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, as well as other accessories for enhanced usability.
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, 2020 (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 other comprehensive loss, and in accumulated other comprehensive income 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 income and other, net in the Company’s condensed consolidated statements of operations.
Reclassifications
Prior year amounts related to the presentation of other income (expense), net on the Company’s condensed consolidated statement of operations and comprehensive loss, have been reclassified to conform to the current year presentation. Starting with the third quarter of 2020, the first full quarter in which the Company’s convertible senior notes were outstanding, the Company began to present non-operating expenses unrelated to the convertible senior notes with interest income and other, net. In prior periods, other non-operating expenses were combined with interest expense and reported as interest and other expense.
2. Summary of Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies during the three months ended March 31, 2021, as compared to those disclosed in the Annual Report, other than the adoption of ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, effective January 1, 2021 (see Note 7, “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.
Restricted Cash
The Company recorded $8.0 million of restricted cash as of March 31, 2021, representing funds deposited and held in escrow in connection with an investment commitment. The restricted cash balance is included as a component of cash and cash equivalents on the condensed consolidated balance sheet at March 31, 2021, and the condensed consolidated statement of cash flows for the three months ended March 31, 2021.
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 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 to be $306.2 million at March 31, 2021, and $333.5 million at December 31, 2020, based on Level 2 quoted market prices (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 March 31, 2021 and December 31, 2020 (see Note 5, “Fair Value Measurements”).
Operating Lease Right-of-Use Assets and Liabilities
Lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its 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. For lease agreements entered into or reassessed after the adoption of ASC 842, the Company combines lease and non-lease components. Rent expense on noncancellable 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 (see Note 6, “Leases”). 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.
Intangible Assets Subject to Amortization
Finite-lived intangible assets are recorded at cost, net of accumulated amortization and, if applicable, impairment charges. Amortization of finite-lived intangible assets is provided over their estimated useful lives on a straight-line basis. The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company has not recognized any impairment losses through March 31, 2021.
On June 24, 2020, the Company acquired Sugarmate, Inc. (Sugarmate), the developer of a mobile app designed to help people 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 fair value was concentrated in a single identifiable asset, a technology-based intangible asset. The purchased intangible asset is being amortized on a straight-line basis over an estimated useful life of five years. The Company’s results of operations include the operating results of Sugarmate since the date of acquisition, the amounts of which were not material.
Revenue Recognition
Revenue is generated primarily from sales of insulin pumps, disposable cartridges and infusion sets to individual customers with third-party insurance coverage and through a network of 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 typically is upon shipment for our distributor arrangements and upon receipt for sales directly to individual customers. 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 March 31, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 | | | | |
Deferred revenue | $ | 6,313 | | | $ | 5,508 | | | | | |
Other long-term liabilities | 11,709 | | | 10,426 | | | | | |
Total | $ | 18,022 | | | $ | 15,934 | | | | | |
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 the 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 changes in product warranty liabilities for the three months ended March 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2021 | | 2020 | | | | |
Balance at beginning of period | $ | 22,075 | | | $ | 16,724 | | | | | |
Provision for warranties issued during the period | 5,896 | | | 4,814 | | | | | |
Settlements made during the period | (4,256) | | | (3,390) | | | | | |
Decreases in warranty estimates | (546) | | | (1,387) | | | | | |
Balance at end of period | $ | 23,169 | | | $ | 16,761 | | | | | |
As of March 31, 2021 and December 31, 2020, total product warranty reserves of $23.2 million and $22.1 million, respectively, were included in the following consolidated balance sheet accounts (in thousands):
| | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 | | | | |
Other current liabilities | $ | 9,316 | | | $ | 8,409 | | | | | |
Other long-term liabilities | 13,853 | | | 13,666 | | | | | |
Total warranty reserve | $ | 23,169 | | | $ | 22,075 | | | | | |
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 issued under the Company’s 2013 Plan that vest solely based on service is estimated based on the fair market value of the underlying stock on the date of grant.
Net Loss Per Share
Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares that were outstanding for the period, without consideration for common stock equivalents. Diluted 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 month periods ended March 31, 2021 and 2020, 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 outstanding and 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 March 31, | | |
| 2021 | | 2020 | | | | |
Warrants to purchase common stock | 379 | | | 609 | | | | | |
Options to purchase common stock | 5,068 | | | 5,710 | | | | | |
Unvested restricted stock units | 133 | | | N/A | | | | |
Awards granted under the ESPP | 78 | | | 198 | | | | | |
Convertible senior notes (if-converted) | 2,554 | | | N/A | | | | |
| 8,212 | | | 6,517 | | | | | |
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 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.
In June 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in
an Entity’s Own Equity, which is intended to simplify the accounting for convertible instruments. This new guidance eliminates certain models that require separate accounting for embedded conversion features, and eliminates certain of the conditions for equity classification for contracts in an entity’s own equity. Accordingly, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance can be adopted through either a modified retrospective method of transition or a fully retrospective method of transition. ASU 2020-06 is effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company elected to early adopt the new standard on January 1, 2021 using the modified retrospective method, and recorded a net reduction to accumulated deficit of $9.0 million, a decrease to additional paid-in capital of $85.8 million, and an increase to convertible senior notes, net - long-term of $76.8 million to reflect the impact of the accounting change (see Note 7, “Convertible Senior Notes”).
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 March 31, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At March 31, 2021 | Maturity (in years) | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Estimated Fair Value |
Available-for-sale securities: | | | | | | | | | |
Commercial paper | Less than 1 | | $ | 126,705 | | | $ | 8 | | | $ | (2) | | | $ | 126,711 | |
U.S. Government-sponsored enterprise | Less than 2 | | 56,028 | | | 24 | | | (6) | | | 56,046 | |
U.S. Treasury securities | Less than 1 | | 140,183 | | | 14 | | | — | | | 140,197 | |
Corporate debt securities | Less than 2 | | 66,684 | | | 7 | | | (13) | | | 66,678 | |
Supranational bonds | Less than 2 | | 3,015 | | | — | | | (1) | | | 3,014 | |
Total | | | $ | 392,615 | | | $ | 53 | | | $ | (22) | | | $ | 392,646 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2020 | Maturity (in years) | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Estimated Fair Value |
Available-for-sale securities: | | | | | | | | | |
Commercial paper | Less than 1 | | $ | 108,892 | | | $ | 5 | | | $ | (1) | | | $ | 108,896 | |
U.S. Government-sponsored enterprise | Less than 2 | | 52,330 | | | 21 | | | (1) | | | 52,350 | |
U.S. Treasury securities | Less than 2 | | 143,244 | | | 12 | | | (2) | | | 143,254 | |
Corporate debt securities | Less than 2 | | 85,788 | | | 48 | | | (13) | | | 85,823 | |
Total | | | $ | 390,254 | | | $ | 86 | | | $ | (17) | | | $ | 390,323 | |
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 March 31, 2021 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, the Company has not recognized any impairment losses related to its available-for-sale debt securities at March 31, 2021.
4. Accounts Receivable and Inventories
Accounts Receivable
Accounts receivable consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Accounts receivable | $ | 77,232 | | | $ | 86,052 | |
Less: allowance for credit losses | (3,559) | | | (3,857) | |
Accounts receivable, net | $ | 73,673 | | | $ | 82,195 | |
Allowance for Credit Losses
The following table provides a reconciliation of the changes in the estimated allowance for expected accounts receivable credit losses for the three months ended March 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Balance at beginning of the period | $ | 3,857 | | | $ | 3,304 | | | | | |
Provision for expected credit losses | 143 | | | 862 | | | | | |
Write-offs and adjustments, net of recoveries | (441) | | | (782) | | | | | |
Balance at end of the period | $ | 3,559 | | | $ | 3,384 | | | | | |
Inventories
Inventories consisted of the following as of March 31, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Raw materials | $ | 27,001 | | | $ | 30,880 | |
Work-in-process | 15,327 | | | 15,664 | |
Finished goods | 24,488 | | | 17,177 | |
Total inventories | $ | 66,816 | | | $ | 63,721 | |
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.
The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at March 31, 2021 |
| | (Level 1) | | (Level 2) | | (Level 3) |
Assets | | | | | | | |
Cash equivalents(1) | $ | 110,616 | | | $ | 110,616 | | | $ | — | | | $ | — | |
Commercial paper | 126,711 | | | — | | | 126,711 | | | — | |
U.S. Government-sponsored enterprise | 56,046 | | | — | | | 56,046 | | | — | |
U.S. Treasury securities | 140,197 | | | 140,197 | | | — | | | — | |
Corporate debt securities | 66,678 | | | — | | | 66,678 | | | — | |
Supranational bonds | 3,014 | | | — | | | 3,014 | | | — | |
Total assets | $ | 503,262 | | | $ | 250,813 | | | $ | 252,449 | | | $ | — | |
| | | | | | | |
Liabilities | | | | | | | |
Common stock warrants | $ | 2,517 | | | $ | — | | | $ | — | | | $ | 2,517 | |
| | | | | | | |
Total liabilities | $ | 2,517 | | | $ | — | | | $ | — | | | $ | 2,517 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2020 |
| | (Level 1) | | (Level 2) | | (Level 3) |
Assets | | | | | | | |
Cash equivalents(1) | $ | 87,300 | | | $ | 87,300 | | | $ | — | | | $ | — | |
Commercial paper | 108,896 | | | — | | | 108,896 | | | — | |
U.S. Government-sponsored enterprise | 52,350 | | | — | | | 52,350 | | | — | |
U.S. Treasury securities | 143,254 | | | 143,254 | | | — | | | — | |
Corporate debt securities | 85,823 | | | — | | | 85,823 | | | — | |
Total assets | $ | 477,623 | | | $ | 230,554 | | | $ | 247,069 | | | $ | — | |
| | | | | | | |
Liabilities | | | | | | | |
Common stock warrants | $ | 14,261 | | | $ | — | | | $ | — | | | $ | 14,261 | |
Total liabilities | $ | 14,261 | | | $ | — | | | $ | — | | | $ | 14,261 | |
(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 March 31, 2021 and December 31, 2020 include the remaining Series A warrants issued by the Company in connection with the public offering of common stock in October 2017, and which expire in October 2022. As of March 31, 2021 and 2020, there were Series A warrants outstanding to purchase 29,700 shares and 415,200 shares, respectively, of the Company’s common stock (see Note 8, “Stockholders’ Equity”).
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 March 31, 2021 and December 31, 2020 are presented below:
| | | | | | | | | | | |
| Series A Warrants |
| March 31, 2021 | | December 31, 2020 |
Risk-free interest rate | 0.1 | % | | 0.1 | % |
Expected dividend yield | 0.0 | % | | 0.0 | % |
Expected volatility | 54.0 | % | | 55.3 | % |
Expected term (in years) | 1.5 | | 1.8 |
The following table presents a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the three months ended March 31, 2021 and 2020:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
Balance at beginning of the period | $ | 14,261 | | | $ | 23,509 | |
Loss recognized from the change in fair value of common stock warrants | 690 | | | 1,922 | |
Decrease in fair value from warrants exercised during the period | (12,434) | | | (141) | |
Balance at end of the period | $ | 2,517 | | | $ | 25,290 | |
Of the loss recognized from the change in fair value of common stock warrants for the three months ended March 31, 2021 and 2020, a gain of $0.2 million and a loss of $1.9 million was attributable to warrants outstanding as of March 31, 2021 and 2020, respectively.
6. Leases
The Company’s leases consist of operating leases for general office space, laboratory, manufacturing and warehouse facilities, and equipment. These noncancellable operating leases have initial lease terms ranging from one year to seven years. 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. 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.
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.
In March 2021, the Company entered into a second amendment (Second Amendment) to its lease agreement covering approximately 59,013 square feet of general administrative office space (Existing Premises) located on Vista Sorrento Parkway, in San Diego, California (Vista Sorrento Lease). The Second Amendment expanded the Existing Premises by adding approximately 14,916 square feet of general administrative office space (Expansion Space), and extended the lease term for the Existing Premises through January 2028. The Expansion Space lease Commencement Date occurred in March 2021, and the lease term expires in January 2028. The Company has two options to extend the term of the Vista Sorrento Lease, covering both the Existing Premises and the Expansion Space, each option providing for an additional period of five years. The Company recognized right-of-use leased assets and corresponding operating lease liabilities of $15.1 million on the consolidated balance sheet in the first quarter of 2021 related to the Second Amendment.
The Company’s lease cost recorded in the condensed consolidated statements of operations was as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Operating lease cost | $ | 2,006 | | | $ | 1,756 | | | | | |
Short-term lease cost | 22 | | | 64 | | | | | |
Total lease cost | $ | 2,028 | | | $ | 1,820 | | | | | |
Maturities of operating lease liabilities at March 31, 2021 were as follows (in thousands):
| | | | | |
Years Ending December 31, | |
2021 (remaining) | $ | 7,096 | |
2022 | 9,129 | |
2023 | 6,856 | |
2024 | 5,691 | |
2025 | 5,801 | |
Thereafter | 10,654 | |
Total undiscounted lease payments | 45,227 | |
Less: amount representing interest | (6,770) | |
Present value of operating lease liabilities | 38,457 | |
Less: current portion of operating lease liabilities | (9,446) | |
Operating lease liabilities - long term | $ | 29,011 | |
The weighted-average remaining lease term and weighted-average discount rate for operating leases were as follows:
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Weighted-average remaining lease term (in years) | 5.4 | | 3.6 |
Weighted-average discount rate used to determine operating lease liabilities | 5.6 | % | | 6.6 | % |
Cash paid for amounts included in the measurement of lease liabilities, representing operating cash flows used for operating leases, was $2.3 million and $1.6 million for the three months ended March 31, 2021 and 2020, respectively.
7. Convertible Senior Notes
In May 2020, the Company entered into a purchase agreement with certain counterparties for the sale of an aggregate of $287.5 million principal amount of 1.50% Convertible Senior Notes due 2025 (Notes) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The net proceeds from the issuance of the Notes were $244.6 million, net of debt issuance costs and cash used to purchase the capped call transactions (Capped Call Transactions) discussed below.
The Notes are the Company’s senior unsecured obligations. Interest is payable in cash semi-annually in arrears beginning on November 1, 2020 at a rate of 1.50% per year. The Notes mature on May 1, 2025 unless repurchased, redeemed, or converted in accordance with their terms prior to the maturity date.
The Notes are convertible into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election, at an initial conversion rate of 8.8836 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $112.57 (Conversion Price) per share of the Company’s common stock. The conversion rate is subject to customary adjustments for certain events as described in the Indenture. It is the Company’s intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion.
The Company may not redeem the Notes prior to May 6, 2023. The Company has the option to redeem for cash all or any portion of the Notes on or after May 6, 2023 if the last reported sale price of the Company’s common stock has been at least 130% of the Conversion Price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest. No sinking fund is provided for the Notes.
Holders of the Notes may convert all or a portion of their Notes at their option prior to November 1, 2024, in multiples of $1,000 principal amounts, only under the following circumstances:
•if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the applicable Conversion Price of the Notes on each such trading day;
•during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each day of that five consecutive trading day period was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate of the Notes on such trading day;
•if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
•on the occurrence of specified corporate events.
On or after November 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances.
Holders of the Notes who convert in connection with a make-whole fundamental change or in connection with a redemption are entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change, holders of the Notes may require us to repurchase all or a portion of the Notes at a price equal to 100% of the principal amount of the Notes, plus any accrued and unpaid interest.
Initially, in accounting for the issuance of the 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, which do not have an associated convertible feature. The carrying amount of the equity component representing the conversion option for the Notes was $85.8 million and was recorded as a debt discount, to be amortized to interest expense at an effective interest rate of 9.9%. In addition, the Company allocated $2.7 million of debt issuance costs to the equity component and the remaining debt issuance costs of $6.1 million were allocated to the liability component, to be amortized to interest expense under the effective interest rate method.
On January 1, 2021, the Company early adopted ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which is intended to simplify the accounting for convertible instruments. The ASU eliminates the cash conversion feature models in ASC 470-20, Debt with Conversion and Other Options, which required an issuer of certain convertible debt to separately account for embedded conversion features as a component of equity. Instead, an issuer will account for these securities as a single unit of account, unless the conversion feature meets certain criteria. The Company adopted the new standard using the modified retrospective method, and recorded a net reduction to accumulated deficit of $9.0 million, a decrease to additional paid-in capital of $85.8 million, and an increase to convertible senior notes, net - long-term of $76.8 million to reflect the impact of the accounting change. The Notes are now accounted for as a single liability measured at amortized cost, as no other embedded features require bifurcation and recognition as derivatives.
The liability and equity components of the Notes consisted of the following (in thousands) at March 31, 2021 and December 31, 2020:
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Liability: | | | |
Principal amount | $ | 287,500 | | | $ | 287,500 | |
Unamortized debt discount and debt issuance costs | (7,332) | | | (84,516) | |
Net carrying amount | $ | 280,168 | | | $ | 202,984 | |
Carrying amount of the equity component | $ | — | | | $ | 85,803 | |
As of March 31, 2021, the unamortized debt issuance costs of $7.3 million associated with the Notes will be amortized to interest expense, at an effective interest rate of 2.2%, over the remaining term of the Notes of approximately 4.1 years.
The following table details interest expense recognized related to the Notes for the three months ended March 31, 2021 (in thousands):
| | | | | | | |
| Three Months Ended March 31, 2021 |
Contractual interest expense | $ | 1,078 | | | |
Amortization of debt issuance costs | 428 | | | |
Total interest expense | $ | 1,506 | | | |
The Notes will have a dilutive effect to the extent the average market price per share of the Company’s common stock for a given reporting period exceeds the Conversion Price of $112.57. As of March 31, 2021, the “if-converted value” did not exceed the principal amount of the Notes.
Capped Call Transactions
In connection with the issuance of the Notes, the Company entered into Capped Call Transactions in May of 2020 with certain counterparties at a net cost of $34.1 million. The Capped Call Transactions are intended to reduce potential dilution to holders of the Company’s common stock beyond the Conversion Price of $112.57, up to a Conversion Price of $173.18 on any conversion of the Notes, or to offset any cash payments the Company is required to make in excess of the principal amount of such converted Notes, as the case may be, with such reduction or offset subject to a cap. The cap price of the Capped Call Transactions is initially $173.18 per share of the Company’s common stock, representing a premium of 100% above the last reported sale price of $86.59 per share of the Company’s common stock on May 12, 2020, and is subject to certain adjustments under the terms of the Capped Call Transactions. Conditions that cause adjustments to the initial strike price of the Capped Call Transactions mirror conditions that result in corresponding adjustments for the Notes.
For accounting purposes, the Capped Call Transactions are separate transactions, and not part of the terms of the Notes. As these transactions meet certain criteria under the applicable accounting guidance, the Capped Call Transactions are recorded in stockholders' equity and are not accounted for as derivatives. The cost of the Capped Call Transactions was recorded as a reduction of the Company’s additional paid-in capital in the Company’s consolidated balance sheet and will not be remeasured.
8. Stockholders’ Equity
Shares Reserved for Future Issuance
The following shares of the Company’s common stock were reserved for future issuance as of March 31, 2021 (in thousands):
| | | | | |
Shares reserved for issuance upon conversion of Convertible Senior Notes | 2,554 | |
Shares underlying outstanding warrants | 254 | |
Shares underlying outstanding stock options | 5,772 | |
Shares underlying unvested restricted stock units | 136 | |
Shares authorized for issuance pursuant to awards granted under the ESPP | 1,389 | |
Shares authorized for future equity award grants | 1,957 | |
| 12,062 | |
Common Stock Warrants
Warrants outstanding to purchase shares of the Company's common stock as of March 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
Issue Date | | Exercise Price Per Share | | Warrants Outstanding | | | | | Expiration Date |
October 2017 | | $ | 3.50 | | | 29,700 | | | | | | October 2022 |
March 2017 | | $ | 23.50 | | | 193,788 | | | | | | March 2027 |
August 2011 - August 2012 | | $ | 73.73 | | | 30,861 | | | | | | August 2021 - August 2022 |
| | | | 254,349 | | | | | | |
Each warrant allows the holder to purchase one share of the Company's common stock at the exercise price per share of the respective warrant. The Company issued 125,000 and 2,320 shares of its common stock, respectively, upon the exercise of warrants during the three months ended March 31, 2021 and March 31, 2020.
Stock Plans
The Company issued 110,424 and 672,442 shares of its common stock, respectively, upon the exercise of stock options during the three months ended March 31, 2021 and 2020.
The ESPP enables eligible employees to purchase shares of the Company’s common stock using their after-tax payroll deductions, subject to certain conditions. Generally, offerings under the ESPP consist of a two-year offering period with four six-month purchase periods which begin in May and November of each year. There were no shares of common stock purchased under the ESPP during the three months ended March 31, 2021 and 2020.
Stock-Based Compensation
During the three months ended March 31, 2021 and 2020, the Company granted options to purchase 115,400 and 229,911 shares of common stock under the 2013 Plan, respectively. 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 of the options vesting monthly over the following three years.
The Company also granted 3,208 restricted stock units (RSUs) during the three months ended March 31, 2021. These RSUs have a grant value equal to the closing price of the Company’s common stock on the award date, and vest in annual installments over a period of three years.
The assumptions used in the Black-Scholes option-pricing model were as follows:
| | | | | | | | | | | | | | | |
| Stock Options |
Three Months Ended March 31, | | |
2021 | | 2020 | | | | |
Weighted average grant date fair value (per share) | $ | 60.98 | | | $ | 43.40 | | | | | |
Risk-free interest rate | 0.9 | % | | 1.1 | % | | | | |
Expected dividend yield | 0.0 | % | | 0.0 | % | | | | |
Expected volatility | 75.6 | % | | 72.5 | % | | | | |
Expected term (in years) | 6.1 | | 6.1 | | | | |
The Company records stock-based compensation expense associated with the ESPP using the Black-Scholes option-pricing model. Valuations are performed on the grant date at the beginning of the purchase period, which generally occurs in May and November of each year.
The following table summarizes the allocation of stock-based compensation expense included in the condensed consolidated statement of operations for all stock-based compensation arrangements (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Cost of sales | $ | 1,476 | | | $ | 2,164 | | | | | |
Selling, general & administrative | 9,409 | | | 11,501 | | | | | |
Research and development | 2,062 | | | 2,200 | | | | | |
Total stock-based compensation expense | $ | 12,947 | | | $ | 15,865 | | | | | |
The total stock-based compensation expense capitalized as part of the cost of the Company’s inventories was $0.7 million and $0.6 million at March 31, 2021 and December 31, 2020, respectively.
9. Income Taxes
The Company recognized an income tax benefit of $0.1 million on a pre-tax loss of $5.2 million for the three months ended March 31, 2021, compared to income tax expense of $0.1 million on a pre-tax loss of $14.8 million for the three months ended March 31, 2020. The income tax benefit for the three months ended March 31, 2021 was primarily attributable to the pre-tax loss position and excess tax benefits from stock compensation recorded discretely during the quarter. Income tax expense for the three months ended March 31, 2020 was primarily attributable to state and foreign income tax expense as a result of current taxable income in those jurisdictions.
For the three months ended March 31, 2021, the Company calculated the provision (benefit) for income taxes by applying an estimate of the annual effective tax rate for the full year to ordinary income (loss) adjusted by the tax impact of discrete items. For the three months ended March 31, 2020, the Company calculated the provision for income taxes using a discrete effective tax rate method as the annual effective tax rate method would not provide a reliable estimate.
The Company continues to maintain a full valuation allowance against its net deferred tax assets as of March 31, 2021, based on the current assessment that it is not more likely than not these future benefits will be realized before expiration.
10. Business Segment and Geographic Information
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 and a single reporting unit because key operating decisions and resource allocations are made by the CODM using consolidated financial data.
Disaggregation of Revenue
The Company primarily sells its products through national and regional distributors in the United States on a non-exclusive basis, and through distribution partners outside the United States, including in select European countries, Canada, Australia, New Zealand, and South Africa. In the United States and Canada, the Company utilizes a direct sales force. The Company disaggregates its revenue by geography and by major sales channel as management believes these categories best depict how the nature, amount and timing of revenues and cash flows are affected by economic factors.
Revenues by Geographic Region and Customer Sales Channel
During the three months ended March 31, 2021 and 2020, no individual country outside the United States generated revenue that represented more than 10% of total revenue. The table below sets forth revenues for the Company’s two primary geographical markets, based on the geographic location to which its products are shipped.
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
United States | $ | 103,339 | | | $ | 79,546 | |
International | 37,698 | | | 18,380 | |
Total Sales | $ | 141,037 | | | $ | 97,926 | |
Sales to distributors accounted for 68% and 69% of the Company’s total domestic sales for the three months ended March 31, 2021 and 2020, respectively. Sales to distributors accounted for 96% and 93% of the Company’s total international sales for the three months ended March 31, 2021 and 2020, respectively.
11. Commitments and Contingencies
Legal and Regulatory Matters
In April 2020, the Company was named as a defendant in four federal class action lawsuits relating to a data breach it experienced in January 2020, each of which was subsequently dismissed.
In addition, in May 2020 the Company was named as a defendant in three California state court class action lawsuits arising from the same data breach. Collectively, these lawsuits seek statutory, compensatory, actual, and punitive damages; equitable relief, including restitution; pre- and post-judgment interest; injunctive relief; and attorney fees, costs, and expenses from the Company. On July 24, 2020, these three pending lawsuits were consolidated into a single case in the Superior Court of the State of California in the County of San Bernardino entitled Joseph Deluna et al v. Tandem Diabetes Care, Inc. The consolidated case alleges violations of the Confidentiality of Medical Information Act (CMIA), California Consumer Privacy Act (CCPA), California’s Unfair Competition Law (UCL), and breach of contract. The Company filed a demurrer seeking dismissal of all claims, which was heard by the Court on October 27, 2020, and which resulted in the following outcome: (i) the demurrer of the CMIA claim was denied; (ii) the demurrer of the CCPA claim was sustained; and (iii) the demurrer of the UCL and contract claims were sustained with leave to amend the pending complaint. A second demurrer was heard by the Court on March 29, 2021 with the following outcome: (i) the demurrer of the CMIA claim was denied; and (ii) the demurrer of the UCL and contract claims were narrowed in scope to dismiss three plaintiffs for either failing to allege cognizable damages or injuries-in-fact, resulting in two remaining plaintiffs.
In September 2020, the Company was named as a defendant in a lawsuit entitled Buck Walsh, individually and on behalf of others similarly situated v. Tandem Diabetes Care, Inc., which was filed in the Superior Court of the State of California in the County of San Diego. The alleged violations include business and professions code and labor code violations for failure to compensate wages, unpaid meal and rest periods, and failure to reimburse for necessary business-related expenses. The proposed class of plaintiffs includes hourly paid or non-exempt employees of the Company who were employed from April 6, 2016 through the date of adjudication.
Although the Company intends to vigorously defend against these claims, there is no guarantee that the Company will prevail. The Company presently is unable to determine the ultimate outcome of these lawsuits or determine the amount (or range) of possible losses associated with the lawsuits.
From time to time, the Company is involved in various other legal proceedings, regulatory matters, and other disputes or claims arising from or related to the normal course of our business activities, including actions with respect to intellectual property, data privacy, employment, regulatory, product liability and contractual matters. In connection with these proceedings or matters, the Company regularly assesses the probability and amount (or range) of possible losses based on the developments in these proceedings or matters. A liability is recorded in the consolidated financial statements if it is determined that it is probable that a loss has been incurred, and that the amount (or range) of the loss can be reasonably estimated. Because of the uncertainties related to any pending proceedings or matters, the Company is currently unable to predict their ultimate outcome and, with respect to any proceeding or matter where no liability has been accrued, to make a reasonable estimate of the possible loss (or range of loss) that could result from an adverse outcome.
As of March 31, 2021 and December 31, 2020, there were no legal proceedings, regulatory matters, or other disputes or claims for which a material loss was considered probable or for which the amount (or range) of loss was reasonably estimable. However, regardless of the merits of the claims raised or the outcome, legal proceedings, regulatory matters, and other disputes and claims may have an adverse impact on the Company because of as a result of defense and settlement costs, diversion of management time and resources, and other factors.