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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 June 30, 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 July 30, 2021, there were 63,029,361 shares of the registrant’s Common Stock outstanding.
TABLE OF CONTENTS
| | | | | | | | |
| Financial Information | |
| Financial Statements | |
| Condensed Consolidated Balance Sheets at June 30, 2021 (Unaudited) and December 31, 2020 | |
| Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2021 and 2020 (Unaudited) | |
| Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2021 and 2020 (Unaudited) | |
| Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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)
| | | | | | | | | | | |
| June 30, | | December 31, |
| 2021 | | 2020 |
| (Unaudited) | | (Note 1) |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 98,578 | | | $ | 94,613 | |
Short-term investments | 446,724 | | | 390,323 | |
Accounts receivable, net | 80,212 | | | 82,195 | |
Inventories | 66,705 | | | 63,721 | |
Prepaid and other current assets | 6,066 | | | 6,383 | |
Total current assets | 698,285 | | | 637,235 | |
Property and equipment, net | 48,890 | | | 50,022 | |
Operating lease right-of-use assets | 31,499 | | | 19,773 | |
Other long-term assets | 16,576 | | | 9,385 | |
Total assets | $ | 795,250 | | | $ | 716,415 | |
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 27,504 | | | $ | 17,805 | |
Accrued expenses | 6,405 | | | 4,783 | |
Employee-related liabilities | 36,476 | | | 34,159 | |
Deferred revenue | 7,953 | | | 6,082 | |
Common stock warrants | 2,789 | | | 14,261 | |
Operating lease liabilities | 9,260 | | | 9,421 | |
Other current liabilities | 18,336 | | | 17,341 | |
Total current liabilities | 108,723 | | | 103,852 | |
Convertible senior notes, net - long-term | 280,599 | | | 202,984 | |
Operating lease liabilities - long-term | 27,376 | | | 15,914 | |
Other long-term liabilities | 32,467 | | | 27,360 | |
Total liabilities | 449,165 | | | 350,110 | |
Commitments and contingencies (Note 11) | | | |
Stockholders’ equity: | | | |
Common stock, $0.001 par value; 200,000 shares authorized, 62,952 and 62,335 shares issued and outstanding at June 30, 2021 (unaudited) and December 31, 2020, respectively. | 63 | | | 62 | |
Additional paid-in capital | 997,190 | | | 1,025,233 | |
Accumulated other comprehensive income | 29 | | | 220 | |
Accumulated deficit | (651,197) | | | (659,210) | |
Total stockholders’ equity | 346,085 | | | 366,305 | |
Total liabilities and stockholders’ equity | $ | 795,250 | | | $ | 716,415 | |
See accompanying notes to unaudited condensed consolidated financial statements.
TANDEM DIABETES CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2021 | | 2020 | | 2021 | | 2020 | | | | |
Sales | $ | 172,139 | | | $ | 109,236 | | | $ | 313,176 | | | $ | 207,162 | | | | | |
Cost of sales | 79,685 | | | 54,846 | | | 147,435 | | | 102,511 | | | | | |
Gross profit | 92,454 | | | 54,390 | | | 165,741 | | | 104,651 | | | | | |
Operating expenses: | | | | | | | | | | | |
Selling, general and administrative | 66,523 | | | 50,440 | | | 125,086 | | | 100,157 | | | | | |
Research and development | 20,499 | | | 15,987 | | | 38,460 | | | 30,104 | | | | | |
Total operating expenses | 87,022 | | | 66,427 | | | 163,546 | | | 130,261 | | | | | |
Operating income (loss) | 5,432 | | | (12,037) | | | 2,195 | | | (25,610) | | | | | |
Other income (expense), net: | | | | | | | | | | | |
Interest income and other, net | 418 | | | 367 | | | 690 | | | 1,093 | | | | | |
Interest expense | (1,509) | | | (3,176) | | | (3,015) | | | (3,176) | | | | | |
| | | | | | | | | | | |
Change in fair value of common stock warrants | (272) | | | (14,336) | | | (962) | | | (16,258) | | | | | |
Total other expense, net | (1,363) | | | (17,145) | | | (3,287) | | | (18,341) | | | | | |
Income (loss) before income taxes | 4,069 | | | (29,182) | | | (1,092) | | | (43,951) | | | | | |
Income tax expense (benefit) | 61 | | | (2,075) | | | (56) | | | (1,977) | | | | | |
Net income (loss) | $ | 4,008 | | | $ | (27,107) | | | $ | (1,036) | | | $ | (41,974) | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | |
Unrealized gain (loss) on short-term investments | $ | (51) | | | $ | 105 | | | $ | (89) | | | $ | 147 | | | | | |
Foreign currency translation gain (loss) | (26) | | | 183 | | | (102) | | | (226) | | | | | |
Comprehensive income (loss) | $ | 3,931 | | | $ | (26,819) | | | $ | (1,227) | | | $ | (42,053) | | | | | |
| | | | | | | | | | | |
Net income (loss) per share, basic | $ | 0.06 | | | $ | (0.45) | | | $ | (0.02) | | | $ | (0.70) | | | | | |
Net income (loss) per share, diluted | $ | 0.06 | | | $ | (0.45) | | | $ | (0.02) | | | $ | (0.70) | | | | | |
| | | | | | | | | | | |
Weighted average shares used to compute basic net income (loss) per share | 62,717 | | | 60,424 | | | 62,583 | | | 60,082 | | | | | |
Weighted average shares used to compute diluted net income (loss) per share | 65,663 | | | 60,424 | | | 62,583 | | | 60,082 | | | | | |
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 June 30, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity |
| Shares | | Amount |
Balance at March 31, 2021 | 62,571 | | | $ | 63 | | | $ | 968,450 | | | $ | 106 | | | $ | (655,205) | | | $ | 313,414 | |
Exercise of stock options | 252 | | | — | | | 8,172 | | | — | | | — | | | 8,172 | |
Vesting of restricted stock units, net of shares withheld for taxes | 29 | | | — | | | (867) | | | — | | | — | | | (867) | |
Issuance of common stock for Employee Stock Purchase Plan | 100 | | | — | | | 6,317 | | | — | | | — | | | 6,317 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Stock-based compensation expense | — | | | — | | | 15,118 | | | — | | | — | | | 15,118 | |
Unrealized loss on short-term investments | — | | | — | | | — | | | (51) | | | — | | | (51) | |
Foreign currency translation adjustments | — | | | — | | | — | | | (26) | | | — | | | (26) | |
Net income | — | | | — | | | — | | | — | | | 4,008 | | | 4,008 | |
Balance at June 30, 2021 | 62,952 | | | $ | 63 | | | $ | 997,190 | | | $ | 29 | | | $ | (651,197) | | | $ | 346,085 | |
Six Months Ended June 30, 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 senior notes(1) | — | | | — | | | (85,803) | | | — | | | 9,049 | | | (76,754) | |
Exercise of stock options | 363 | | | 1 | | | 11,307 | | | — | | | — | | | 11,308 | |
Vesting of restricted stock units, net of shares withheld for taxes | 29 | | | — | | | (867) | | | — | | | — | | | (867) | |
Issuance of common stock for Employee Stock Purchase Plan | 100 | | | — | | | 6,317 | | | — | | | — | | | 6,317 | |
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 | — | | | — | | | 28,132 | | | — | | | — | | | 28,132 | |
Unrealized loss on short-term investments | — | | | — | | | — | | | (89) | | | — | | | (89) | |
Foreign currency translation adjustments | — | | | — | | | — | | | (102) | | | — | | | (102) | |
Net loss | — | | | — | | | — | | | — | | | (1,036) | | | (1,036) | |
Balance at June 30, 2021 | 62,952 | | | 63 | | | 997,190 | | | 29 | | | (651,197) | | | $ | 346,085 | |
(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”).
See accompanying notes to unaudited condensed consolidated financial statements.
:AccountingStandardsUpdate202006Member
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 senior notes issuance, net of issuance costs | — | | | — | | | 85,803 | | | — | | | — | | | 85,803 | |
Payment for capped call transactions related to convertible senior notes | — | | | — | | | (34,069) | | | — | | | — | | | (34,069) | |
Stock-based compensation expense | — | | | — | | | 16,413 | | | — | | | — | | | 16,413 | |
Unrealized gain on short-term investments | — | | | — | | | — | | | 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 senior notes issuance, net of issuance costs | — | | | — | | | 85,803 | | | — | | | — | | | 85,803 | |
Payment for capped call transactions related to convertible senior notes | — | | | — | | | (34,069) | | | — | | | — | | | (34,069) | |
Stock-based compensation expense | — | | | — | | | 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.
TANDEM DIABETES CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Operating Activities | | | |
Net loss | $ | (1,036) | | | $ | (41,974) | |
Adjustments to reconcile net loss to net cash provided (used) by operating activities: | | | |
Depreciation and amortization expense | 6,925 | | | 4,035 | |
Amortization of debt discount and issuance costs | 859 | | | 2,457 | |
Provision for expected credit losses | 874 | | | 1,529 | |
Provision for (recovery of) inventory obsolescence | 211 | | | (81) | |
Change in fair value of common stock warrants | 962 | | | 16,258 | |
Amortization of discount on short-term investments | (306) | | | (1,127) | |
Benefit for deferred income taxes | — | | | (2,126) | |
Stock-based compensation expense | 27,924 | | | 32,286 | |
| | | |
Other | (106) | | | 36 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable, net | 1,046 | | | (50) | |
Inventories | (2,965) | | | (13,181) | |
Prepaid and other current assets | 411 | | | (2,101) | |
Other long-term assets | (159) | | | 6 | |
Accounts payable and accrued expenses | 11,957 | | | (3,779) | |
| | | |
Employee-related liabilities | 2,318 | | | (3,094) | |
Deferred revenue | 5,288 | | | 2,668 | |
Other current liabilities | 1,170 | | | 2,428 | |
Other long-term liabilities | 2,207 | | | 678 | |
Net cash provided (used) by operating activities | 57,580 | | | (5,132) | |
Investing Activities | | | |
Purchases of short-term investments | (385,580) | | | (166,984) | |
Proceeds from maturities of short-term investments | 308,607 | | | 54,709 | |
Proceeds from sales of short-term investments | 20,788 | | | 35,027 | |
Purchases of property and equipment | (5,339) | | | (16,552) | |
Acquisition of intangible assets and equity investments | (9,331) | | | (4,805) | |
Net cash used in investing activities | (70,855) | | | (98,605) | |
Financing Activities | | | |
Proceeds from issuance of convertible senior notes, net of $8,809 debt issuance costs | — | | | 278,691 | |
Payment for capped call transactions related to convertible senior notes | — | | | (34,069) | |
| | | |
Proceeds from issuance of common stock under Company stock plans, net | 16,758 | | | 28,645 | |
| | | |
Proceeds from exercise of common stock warrants | 438 | | | 2,036 | |
Net cash provided by financing activities | 17,196 | | | 275,303 | |
Effect of foreign exchange rate changes on cash | 44 | | | (262) | |
Net increase in cash and cash equivalents | 3,965 | | | 171,304 | |
Cash and cash equivalents at beginning of period | 94,613 | | | 51,175 | |
Cash and cash equivalents at end of period | $ | 98,578 | | | $ | 222,479 | |
Supplemental disclosures of cash flow information | | | |
| | | |
Income taxes paid | $ | 197 | | | $ | 131 | |
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 | $ | 452 | | | $ | 977 | |
Intangible costs in other current and other long-term liabilities | $ | 1,029 | | | $ | 2,348 | |
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 six months ended June 30, 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.
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 $326.6 million at June 30, 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 June 30, 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 condensed consolidated balance sheets. 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.
Cost Basis Equity Investment
During the second quarter of 2021, the Company made an $8.1 million equity investment in a private company, which represented less than 5% of the outstanding equity of that company. The investment is accounted for using the cost method, as the investment does not have a readily determinable fair value, and is included as a component of other long-term assets on the condensed consolidated balance sheet at June 30, 2021.
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 did not recognize any impairment losses during the six months ended June 30, 2021 and 2020.
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 Accounting Standards Update (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 to be separate performance obligations. The transaction price is determined based on the consideration expected to be received, based either on the stated value in contractual arrangements or the estimated cash to be collected in non-contracted arrangements. 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 June 30, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 | | | | |
Deferred revenue | $ | 7,471 | | | $ | 5,508 | | | | | |
Other long-term liabilities | 13,841 | | | 10,426 | | | | | |
Total | $ | 21,312 | | | $ | 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 and six months ended June 30, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | | | |
| 2021 | | 2020 | | 2021 | | 2020 | | | | |
Balance at beginning of period | $ | 23,169 | | | $ | 16,761 | | | $ | 22,075 | | | $ | 16,724 | | | | | |
Provision for warranties issued during the period | 8,020 | | | 4,844 | | | 13,916 | | 9,658 | | | | | |
Settlements made during the period | (4,751) | | | (3,331) | | | (9,007) | | | (6,721) | | | | | |
Decrease in warranty estimates | (770) | | | (451) | | | (1,316) | | | (1,838) | | | | | |
Balance at end of period | $ | 25,668 | | | $ | 17,823 | | | $ | 25,668 | | | $ | 17,823 | | | | | |
As of June 30, 2021 and December 31, 2020, total product warranty reserves of $25.7 million and $22.1 million, respectively, were included in the following consolidated balance sheet accounts (in thousands):
| | | | | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 | | | | |
Other current liabilities | $ | 9,795 | | | $ | 8,409 | | | | | |
Other long-term liabilities | 15,873 | | | 13,666 | | | | | |
Total warranty reserve | $ | 25,668 | | | $ | 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 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. The fair value of RSU awards issued under the 2013 Plan that vest based upon the Company’s actual performance relative to predefined performance metrics is estimated based on the fair market value of the underlying stock on the date of grant and the probability that the specified performance criteria will be met, subject to the awardee’s continuing service through the measurement date. We update our assessment of the probability that the specified performance criteria will be achieved each quarter, and adjust our estimate of the fair value of the performance-based RSUs if necessary.
Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net income 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 stock options and unvested RSUs outstanding under the Company’s stock plans, potential awards to be granted pursuant to the ESPP, and common stock warrants, each calculated using the treasury stock method; and shares issuable upon conversion of the convertible senior notes, calculated using the if-converted method. For common stock 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 months ended June 30, 2020, and the six months ended June 30, 2021 and 2020, there is no difference in the weighted average number of shares used to calculate basic and diluted net loss per share due to the Company’s net loss position. For the three months ended June 30, 2021, the numerator and denominator of the diluted net income per share computation are calculated as follows:
| | | | | | | | | | | |
| Three Months Ended June 30, | | |
(in thousands) | 2021 | | | | | | |
Net income - basic and diluted | $ | 4,008 | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted average shares outstanding - basic | 62,717 | | | | | | | |
Dilutive common share equivalents: | | | | | | | |
Options to purchase common stock | 2,550 | | | | | | | |
Unvested restricted stock units | 246 | | | | | | | |
Warrants to purchase common stock | 148 | | | | | | | |
Awards to be granted under the ESPP | 2 | | | | | | | |
Convertible senior notes (if-converted) | — | | | | | | | |
Weighted average shares outstanding - diluted | 65,663 | | | | | | | |
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 June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Options to purchase common stock | — | | | 6,195 | | | 5,136 | | | 5,992 | |
Unvested restricted stock units | — | | | 132 | | | 170 | | | 132 | |
Warrants to purchase common stock | 30 | | | 640 | | | 251 | | | 640 | |
Awards to be granted under the ESPP | — | | | 8 | | | 4 | | | 4 | |
Convertible senior notes (if-converted) | 2,554 | | | 1,375 | | | 2,554 | | | 688 | |
| 2,584 | | | 8,350 | | | 8,115 | | | 7,456 | |
Recent Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (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 primarily consisting of debt instruments of the U.S. Government, U.S. Government-sponsored enterprises, 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, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At June 30, 2021 | Maturity (in years) | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Estimated Fair Value |
Available-for-sale securities: | | | | | | | | | |
Commercial paper | Less than 1 | | $ | 222,319 | | | $ | 11 | | | $ | (2) | | | $ | 222,328 | |
U.S. Government-sponsored enterprise | Less than 2 | | 63,175 | | | 18 | | | (19) | | | 63,174 | |
U.S. Treasury securities | Less than 2 | | 104,937 | | | 2 | | | (23) | | | 104,916 | |
Corporate debt securities | Less than 2 | | 53,303 | | | 6 | | | (13) | | | 53,296 | |
Supranational bonds | Less than 1 | | 3,010 | | | — | | | — | | | 3,010 | |
Total | | | $ | 446,744 | | | $ | 37 | | | $ | (57) | | | $ | 446,724 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 June 30, 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 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 did not recognize any impairment losses related to its available-for-sale debt securities at June 30, 2021.
4. Accounts Receivable and Inventories
Accounts Receivable
Accounts receivable consisted of the following (in thousands):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Accounts receivable | $ | 83,885 | | | $ | 86,052 | |
Less: allowance for credit losses | (3,673) | | | (3,857) | |
Accounts receivable, net | $ | 80,212 | | | $ | 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 and six months ended June 30, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Balance at beginning of the period | $ | 3,559 | | | $ | 3,384 | | | $ | 3,857 | | | $ | 3,304 | |
Provision for expected credit losses | 731 | | | 666 | | | 874 | | | 1,529 | |
Write-offs and adjustments, net of recoveries | (617) | | | (911) | | | (1,058) | | | (1,694) | |
Balance at end of the period | $ | 3,673 | | | $ | 3,139 | | | $ | 3,673 | | | $ | 3,139 | |
Inventories
Inventories consisted of the following as of June 30, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Raw materials | $ | 22,684 | | | $ | 30,880 | |
Work-in-process | 16,360 | | | 15,664 | |
Finished goods | 27,661 | | | 17,177 | |
Total inventories | $ | 66,705 | | | $ | 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 June 30, 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 June 30, 2021 |
| | (Level 1) | | (Level 2) | | (Level 3) |
Assets | | | | | | | |
Cash equivalents(1) | $ | 94,966 | | | $ | 94,966 | | | $ | — | | | $ | — | |
Commercial paper | 222,328 | | | — | | | 222,328 | | | — | |
U.S. Government-sponsored enterprise | 63,174 | | | — | | | 63,174 | | | — | |
U.S. Treasury securities | 104,916 | | | 104,916 | | | — | | | — | |
Corporate debt securities | 53,296 | | | — | | | 53,296 | | | — | |
Supranational bonds | 3,010 | | | — | | | 3,010 | | | — | |
Total assets | $ | 541,690 | | | $ | 199,882 | | | $ | 341,808 | | | $ | — | |
| | | | | | | |
Liabilities | | | | | | | |
Common stock warrants | $ | 2,789 | | | $ | — | | | $ | — | | | $ | 2,789 | |
| | | | | | | |
Total liabilities | $ | 2,789 | | | $ | — | | | $ | — | | | $ | 2,789 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | $ | |