What changed in this filing

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Item 1. Financial Statements

2020-07-30 compared with 2020-04-30 · 231 added, 103 removed, 375 unchanged (47% of the section changed)

22 unchanged sentences

Total current liabilities

Convertible senior notes, net - long-term

Operating lease liabilities - long-term

4 unchanged sentences

Common stock, $0.001 par value;

200,000 shares authorized, 60,071 and 59,396 shares issued and outstanding at March 31, 2020 (unaudited) and December 31, 2019, respectively.

200,000 shares authorized, 60,787 and 59,396 shares issued and outstanding at June 30, 2020 (unaudited) and December 31, 2019, respectively.

Additional paid-in capital

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income

Accumulated deficit

5 unchanged sentences

(In thousands, except per share data)

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Cost of sales

8 unchanged sentences

Change in fair value of common stock warrants

Total other expense, net

Total other income (expense), net

Loss before income taxes

Income tax expense

Income tax benefit

Other comprehensive loss:

8 unchanged sentences

(In thousands)

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

Comprehensive

1 unchanged sentence

Stockholders’

Balance at March 31, 2020

Exercise of stock options

Issuance of common stock for Employee Stock Purchase Plan

Exercise of common stock warrants

Equity component of convertible note issuance, net of issuance cost

Purchase of capped call options related to convertible notes

Stock-based compensation

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

Foreign currency translation adjustments

Balance at June 30, 2020

Six Months Ended June 30, 2020

Comprehensive

Income (Loss)

Stockholders’

Balance at December 31, 2019

Exercise of stock options

Issuance of common stock for Employee Stock Purchase Plan

Exercise of common stock warrants

Fair value of common stock warrants at time of exercise

Equity component of convertible note issuance, net of issuance cost

Purchase of capped call options related to convertible notes

Stock-based compensation

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

Unrealized gain on short-term investments

Foreign currency translation adjustments

Balance at June 30, 2020

See accompanying notes to unaudited condensed consolidated financial statements.

Three Months Ended June 30, 2019

Comprehensive

Income (Loss)

Stockholders’

Balance at March 31, 2019

Three Months Ended March 31, 2019

Exercise of stock options

Issuance of common stock for Employee Stock Purchase Plan

Exercise of common stock warrants

Fair value of common stock warrants at time of exercise

Stock-based compensation

Unrealized gain on short-term investments

Foreign currency translation adjustments

Balance at June 30, 2019

Six Months Ended June 30, 2019

Comprehensive

3 unchanged sentences

Exercise of stock options

Issuance of common stock for Employee Stock Purchase Plan

Exercise of common stock warrants

3 unchanged sentences

Foreign currency translation adjustments

Balance at March 31, 2019

Balance at June 30, 2019

See accompanying notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(In thousands)

Three Months Ended March 31,

Six Months Ended June 30,

Operating Activities

1 unchanged sentence

Depreciation and amortization expense

Amortization of debt discount and debt issuance costs

Provision for expected credit losses

Provision (benefit) for inventory obsolescence

Provision (recovery) for inventory obsolescence

Change in fair value of common stock warrants

Amortization of discount on short-term investments

Benefit for deferred income taxes

Stock-based compensation expense

1 unchanged sentence

Accounts receivable, net

Inventories, net

Prepaid and other current assets

12 unchanged sentences

Purchases of property and equipment

Net cash provided by investing activities

Acquisition of intangible assets

Net cash used in investing activities

Financing Activities

Proceeds from exercise of common stock warrants

Proceeds from issuance of convertible senior notes, net of $8,809 debt issuance costs

Purchase of capped call options related to convertible senior notes

Proceeds from issuance of common stock under Company stock plans

Proceeds from exercise of common stock warrants

Net cash provided by financing activities

8 unchanged sentences

Property and equipment included in accounts payable

Intangible costs in accounts payable and other long-term liabilities

See accompanying notes to unaudited condensed consolidated financial statements.

5 unchanged sentences

The Company is incorporated in the state of Delaware.

Unless the context requires otherwise, the terms the “Company” or “Tandem” refer to Tandem Diabetes Care, Inc., together with its wholly-owned subsidiary in Canada.

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.

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.

8 unchanged sentences

and in December 2019, Control-IQ technology for the t:slim X2 insulin pump was the first automated insulin dosing software in a new interoperable automated glycemic controller category.

The Company believes that the three new classifications by the United States Food and Drug Administration (FDA) for the interoperability of devices for AID will help support continued rapid innovation by streamlining the regulatory pathway for integrated products.

As of March 31, 2020 , the Company had $ 160.2 million in cash and cash equivalents and short-term investments.

The Company has incurred operating losses since its inception and had an accumulated deficit of $ 639.7 million as of March 31, 2020 , which included a net loss of $ 14.9 million for the three months ended March 31, 2020 .

As of June 30, 2020 , the Company had $ 426.3 million in cash and cash equivalents and short-term investments.

The Company has incurred operating losses since its inception and had an accumulated deficit of $ 666.8 million as of June 30, 2020 , which included a net loss of $ 42.0 million for the six months ended June 30, 2020 .

Management believes that the cash, cash equivalents and short-term investments on hand will be sufficient to satisfy the Company’s liquidity requirements for at least the next 12 months from the date of this filing.

The Company’s ability to execute on its business strategy, meet its future liquidity requirements, and achieve and maintain profitable operations, is dependent on a number of factors, including its ability to continue to gain market acceptance of its products and achieve a level of revenues adequate to support its cost structure, achieve renewal pump sales objectives, develop and launch new products, expand the commercialization of products into new international markets, maximize manufacturing efficiencies, satisfy increasing production requirements, leverage the investments made in its sales, clinical, marketing and customer support organizations, and operate its business and manufacture and sell products without infringing on third-party intellectual property rights.

The Company has funded its operations primarily through cash collected from product sales, private and public offerings of equity securities, and through debt financing which has since been fully repaid.

The Company has funded its operations primarily through cash collected from product sales, private and public offerings of equity securities, and debt financing.

The Company may in the future seek additional capital from public or private offerings of equity or debt securities, or it may elect to borrow capital under new credit arrangements or from other sources.

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The condensed consolidated financial statements include the accounts of Tandem Diabetes Care, Inc.

and its wholly owned subsidiary in Canada.

and its wholly-owned subsidiaries in the U.S.

All significant intercompany balances and transactions have been eliminated in consolidation.

The functional currency of our foreign subsidiary is the local currency.

The functional currency of the Company’s foreign subsidiary is the local currency.

The Company translates the financial statements of its foreign subsidiary into U.S.

dollars using period-end exchange rates for assets and liabilities and average exchange rates for each period for revenue, costs and expenses.

Translation related adjustments are included in comprehensive loss and in accumulated other comprehensive income (loss) in the equity section of the Company’s condensed consolidated balance sheets.

Translation related adjustments are included in comprehensive loss and in accumulated other comprehensive income (loss) in the stockholders’ equity section of the Company’s condensed consolidated balance sheets.

Foreign exchange gains or losses resulting from balances denominated in a currency other than the functional currency are recognized in interest and other income, or interest and other expense, in the Company’s condensed consolidated statements of operations.

2 unchanged sentences

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, 2020 , as compared to those disclosed in the Annual Report.

There have been no material changes to the Company’s significant accounting policies during the six months ended June 30, 2020 , as compared to those disclosed in the Annual Report, with the exception of policies put in place with regards to the Convertible Senior Notes.

Use of Estimates

9 unchanged sentences

The Company maintains an allowance for its current estimate of expected credit losses.

Provisions for expected credit losses are estimated based on historical experience, assessment of specific risk, review of outstanding invoices, forecasts about the future, and various assumptions and estimates that are believed to be reasonable under the circumstances, which included the Company’s estimates of credit risks as a result of the novel coronavirus pandemic (COVID-19 global pandemic).

Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a balance is uncollectible.

2 unchanged sentences

Short-term investments are carried at fair value.

The Company believes the fair value of its operating lease liabilities at March 31, 2020 approximated their carrying value, based on the borrowing rates that were available for loans with similar terms as of that date.

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, 2020 and December 31, 2019 (see Note 5, “Fair Value Measurements”).

The Company determined the fair value of its convertible senior notes at June 30, 2020 to be $ 329.4 million , based on Level 2 quoted market prices as of that date (see Note 7, “Convertible Senior Notes”).

The estimated fair value of certain of the Company’s common stock warrants was determined using the Black-Scholes pricing model as of June 30, 2020 and December 31, 2019 (see Note 5, “Fair Value Measurements”).

Operating Lease Right-of-Use Assets and Liabilities

In February 2016, the FASB issued ASU No.

2016-02, Leases .

The new standard and its related amendments (collectively referred to as ASC 842) requires lessees to recognize right-of-use assets and corresponding lease liabilities for all leases with lease terms of greater than 12 months.

The new standard was effective for the Company starting in the first quarter of 2019.

The Company adopted the new standard using the modified retrospective approach and recognized right-of-use leased assets and corresponding operating lease liabilities of $ 12.4 million on the consolidated balance sheet as of January 1, 2019.

The Company did not restate prior periods.

Deferred rent of $ 1.0 million and $ 3.8 million as of January 1, 2019 was reclassified from other current liabilities and deferred rent long-term, respectively, to a reduction of the right-of-use leased assets in connection with the adoption of the standard.

Lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent their obligation to make lease payments arising from the lease.

2 unchanged sentences

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 such lease incentives are recorded as property and equipment and as reduction of the right-of-use leased assets, and are amortized on a straight-line basis as a reduction to operating lease costs.

Landlord improvement allowances and other similar lease incentives are recorded as property and equipment and as a reduction of the right-of-use leased assets, and are amortized on a straight-line basis as a reduction to operating lease costs.

Leases with an initial term of 12 months or less are expensed as incurred and are not recorded as right-of-use assets on the consolidated balance sheets (see Note 6, “Leases”).

Intangible Assets Subject to Amortization

Intangible assets subject to amortization consist of developed technology and patents purchased or licensed that are related to the Company’s commercialized products, and are included in other long-term assets on the consolidated balance sheets.

On June 24, 2020, the Company acquired Sugarmate, Inc.

(Sugarmate), the developer of a popular mobile app for people with diabetes who use insulin, which is designed to help people with diabetes visualize diabetes therapy data in innovative ways.

The Sugarmate acquisition was accounted for as an acquisition of assets in accordance with (ASU) No.

2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business.

Substantially all of the purchase price was allocated to a technology-based intangible asset, which is being amortized on a straight-line basis over an estimated useful life of five years .

The Company’s results of operations for the three and six months ended June 30, 2020 included the operating results of Sugarmate since the date of acquisition, the amounts of which were not material.

Convertible Senior Notes

In accounting for the issuance of the convertible senior notes, the Company separated the notes into liability and equity components.

The carrying amount of the liability component was calculated by measuring the fair value of similar debt instruments that do not have associated convertible features.

The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the respective notes.

The equity component is not remeasured as long as it continues to meet the condition for equity classification.

The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the notes.

The Company allocated the issuance costs incurred to the liability and equity components of the notes based on their relative fair values.

Issuance costs attributable to the liability component were recorded as a reduction to the liability portion of the notes and are being amortized to interest expense over the term of the notes.

Issuance costs attributable to the equity component, representing the conversion option, were netted with the equity component in stockholders' equity.

Revenue Recognition

8 unchanged sentences

Accordingly, revenue related to the complementary products is deferred and recognized ratably over a four-year period.

There is no standalone value for these complementary products.

Therefore, 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, 2020 and December 31, 2019 (in thousands):

March 31, 2020

When there is no standalone value for the complementary product, the Company determines their value by applying the expected cost plus a margin approach and then allocates the residual to the insulin pumps.

Deferred revenue related to these performance obligations that are satisfied over time was included in the following consolidated balance sheet accounts in the amounts shown as of June 30, 2020 and December 31, 2019 (in thousands):

June 30, 2020

December 31, 2019

4 unchanged sentences

and Canada from the date of shipment of its insulin pumps, provided a physician’s confirmation of the medical reason for the return is received.

Estimated allowances for sales returns are based on historical returned quantities as compared to pump shipments in those same periods of return.

The return rate is then applied to the sales of the current period to establish a reserve at the end of the period.

The return rates used in the reserve are adjusted for known or expected changes in the marketplace when appropriate.

The allowance for sales returns is recorded as a reduction of revenue and an increase in deferred revenue in the period in which the related sale is recorded.

The amount recorded in deferred revenue on the Company’s consolidated balance sheets for allowances for sales returns was $ 0.5 million and $ 0.4 million at March 31, 2020 and December 31, 2019 , respectively.

Estimated allowances for sales returns are based on historical returned quantities as compared to pump shipments in those same periods of return, adjusted for known or expected changes in the marketplace when appropriate.

The amount recorded in deferred revenue on the Company’s consolidated balance sheets for allowances for sales returns was $ 0.6 million and $ 0.4 million at June 30, 2020 and December 31, 2019 , respectively.

Actual product returns have not differed materially from estimated amounts recorded in the accompanying condensed consolidated financial statements.

4 unchanged sentences

Estimated warranty costs are recorded at the time of shipment.

We evaluate the reserve quarterly.

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.

1 unchanged sentence

The Company may make further adjustments to the warranty reserve when deemed appropriate, giving additional consideration to length of time the pump version has been in the field and future expectations of performance based on new features and capabilities that may become available through Tandem Device Updater.

The following table provides a reconciliation of the change in product warranty liabilities from December 31, 2019 through March 31, 2020 (in thousands):

The following table provides a reconciliation of the change in product warranty liabilities from December 31, 2019 through June 30, 2020 (in thousands):

Balance at December 31, 2019

2 unchanged sentences

Decreases in warranty estimates

Balance at March 31, 2020

As of March 31, 2020 and December 31, 2019 , total product warranty reserves of $16.8 million and $ 16.7 million , respectively, were included in the following consolidated balance sheet accounts (in thousands):

March 31, 2020

Balance at June 30, 2020

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

June 30, 2020

December 31, 2019

1 unchanged sentence

Other long-term liabilities

Total warranty reserves

Total warranty reserve

Stock-Based Compensation

2 unchanged sentences

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”).

For awards that vest based on the achievement of service conditions, the Company recognizes expense using the straight-line method less estimated forfeitures based on historical experience.

The fair value of restricted stock unit (RSU) awards that vest solely based on service are estimated based on the fair market value of the underlying stock on the date of grant.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares that were outstanding for the period, without consideration for common stock equivalents.

Diluted loss per share is calculated in accordance with the treasury stock method and reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted to common stock.

Dilutive common share equivalents are comprised of warrants, potential awards granted pursuant to the ESPP, and stock options outstanding under the Company’s equity incentive plans.

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 months ended March 31, 2020 and 2019 , there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.

For the three and six months ended June 30, 2020 and 2019 , there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.

Potentially dilutive securities not included in the calculation of diluted net loss per share (because inclusion would be anti-dilutive) are as follows (in thousands, in common stock equivalent shares):

Three Months Ended

Six Months Ended

Warrants to purchase common stock

Options to purchase common stock

Unvested restricted stock units

Awards granted under the ESPP

Convertible senior notes (if-converted)

Recent Accounting Pronouncements

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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 fiscal 2020.

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.

4 unchanged sentences

However, public companies will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income.

The updated guidance was effective for the Company starting in the first quarter of fiscal 2020.

The updated guidance was effective for the Company starting in the first quarter of 2020.

As a result, the Company modified certain fair value measurement disclosures primarily related to its Level 3 liabilities (see Note 5, “Fair Value Measurements”).

2 unchanged sentences

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 is in the process of assessing the impact of the adoption of the standard on its consolidated financial statements.

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 .

Short-Term Investments

1 unchanged sentence

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, 2020 and December 31, 2019 (in thousands):

At March 31, 2020

The following represents a summary of the estimated fair value of short-term investments as of June 30, 2020 and December 31, 2019 (in thousands):

At June 30, 2020

Gross Unrealized

15 unchanged sentences

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, 2020 were not significant and were due to changes in interest rates, including credit spreads from perceived increased credit risks as a result of the novel coronavirus (COVID-19) global pandemic.

Unrealized losses on available-for-sale debt securities at June 30, 2020 were not significant and were due to changes in interest rates, including credit spreads from perceived increased credit risks as a result of the COVID-19 global pandemic.

The Company does not intend to sell the available-for-sale debt securities that are in an unrealized loss position, and it is not more likely than not that the Company will be required to sell these debt securities before recovery of their amortized cost bases, which may be at maturity.

Based on the credit quality of the available-for-sale debt securities that are in an unrealized loss position, and the Company’s estimates of future cash flows to be collected from those securities, the Company believes the unrealized losses are not credit losses.

Accordingly, at March 31, 2020, the Company has not recorded an allowance for credit losses related to its available-for-sale debt securities.

Accordingly, at June 30, 2020, the Company has not recognized any impairment losses related to its available-for-sale debt securities.

Accounts Receivable and Inventories

2 unchanged sentences

Accounts receivable

Less allowance for credit losses

allowance for credit losses

Accounts receivable, net

Allowance for Credit Losses

The following table provides a reconciliation of the change in the estimated allowance for expected accounts receivable credit losses for the three months ended March 31, 2020 and 2019 (in thousands):

For the Three Months Ended

March 31, 2020

March 31, 2019

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

Three Months Ended

Six Months Ended

Balance at beginning of the period

2 unchanged sentences

Balance at end of the period

Inventories consisted of the following as of March 31, 2020 and December 31, 2019 (in thousands):

Inventories consisted of the following as of June 30, 2020 and December 31, 2019 (in thousands):

Raw materials

1 unchanged sentence

Finished goods

Total Inventories

Fair Value Measurements

6 unchanged sentences

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, 2020 and December 31, 2019 , and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 , and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):

Fair Value Measurements at

March 31, 2020

June 30, 2020

Cash equivalents (1)

18 unchanged sentences

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, 2020 and December 31, 2019 include the Series A warrants issued by the Company in connection with the public offering of common stock in October 2017.

The Series A warrants have a term of five years and initially provided holders the right to purchase 4,630,000 shares of the Company’s common stock at an exercise price of $ 3.50 per share.

The Company’s Level 3 liabilities at June 30, 2020 and December 31, 2019 include the remaining Series A warrants issued by the Company in connection with the public offering of common stock in October 2017.

The Series A warrants, which expire in October 2022, initially provided holders the right to purchase 4,630,000 shares of the Company’s common stock at an exercise price of $ 3.50 per share.

The Series A warrants were initially valued in the aggregate amount of $ 5.2 million on the date of issuance utilizing a Black-Scholes pricing model.

During the six months ended June 30, 2020 and 2019 , the Company issued 2,115 shares and 93,270 shares of common stock, respectively, upon the exercise of Series A warrants.

As of June 30, 2020 and 2019 , there were Series A warrants outstanding to purchase 415,200 shares and 417,515 shares, respectively, of the Company’s common stock (see Note 8, “Stockholders’ Equity”).

The Company reassesses the fair value of the outstanding Series A warrants at each reporting date utilizing a Black-Scholes pricing model.

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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, 2020 and December 31, 2019 are presented below:

March 31, 2020

The assumptions used to estimate the fair values of the outstanding Series A warrants at June 30, 2020 and December 31, 2019 are presented below:

June 30, 2020

December 31, 2019

3 unchanged sentences

Expected term (in years)

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, 2020 and 2019 :

Three Months Ended March 31,

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 June 30, 2020 and 2019 :

Six Months Ended June 30,

Balance at beginning of the period

2 unchanged sentences

Balance at end of the period

Of the loss recognized from the change in fair value of common stock warrants for the three months ended March 31, 2020 and 2019, $ 1.9 million and $ 12.5 million , respectively, was attributable to the change in the unrealized loss related to warrants outstanding as of March 31, 2020 and 2019.

During the three months ended March 31, 2020 and 2019, the Company issued 2,115 shares and 18,285 shares of common stock, respectively, upon the exercise of Series A warrants issued in October 2017.

As of March 31, 2020 and 2019, there were Series A warrants outstanding to purchase 415,200 shares and 492,500 shares, respectively, of the Company’s common stock (see Note 7, “Stockholders’ Equity”).

In February 2016, the FASB issued ASU No.

2016-02, Leases .

The new standard was effective for the Company starting in the first quarter of fiscal 2019.

The Company did not restate prior periods.

Of the loss recognized from the change in fair value of common stock warrants for the six months ended June 30, 2020 and 2019 , $ 16.2 million and $ 11.0 million , respectively, was attributable to the change in the unrealized loss related to warrants outstanding as of June 30, 2020 and 2019 .

The Company’s leases consist primarily of operating leases for general office space, laboratory, manufacturing and warehouse facilities, and equipment.

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The Company recognized right-of-use leased assets and corresponding operating lease liabilities of $ 3.1 million on the consolidated balance sheet in the first quarter of 2019 related to the Initial Premises, and $ 4.7 million related to the First Amendment.

In March 2019, the Company entered into a lease agreement for approximately 40,490 square feet of space located on Marindustry Place, San Diego, California to house additional operations functions, including warehousing and shipping (Marindustry Place Lease).

The lease term commenced in May 2019 and expires in April 2026.

The Company has a one-time option to extend the term of the Marindustry Place Lease for a period of no less than three years and no more than five years .

The Company recognized right-of-use leased assets and corresponding operating lease liabilities of $ 3.4 million on the consolidated balance sheet on the Commencement Date in the second quarter of 2019.

In November 2019, the Company entered into a lease agreement for approximately 94,562 square feet of additional general office space located on Shoreline Drive, in Boise, Idaho (Shoreline Lease).

Subject to limited exceptions, the initial lease term is expected to begin on the earlier of (i) the date on which the Company substantially completes certain specified work related to tenant improvements, (ii) the date on which the Company begins use of the premises for their intended purpose, or (iii) July 1, 2020, and will expire 84 months from the first day of the first full month following the start of the lease term.

The lease term commenced on July 1, 2020, and expires in June 2027.

The Company has a one-time option to extend the term of the Shoreline Lease for a period of three years .

The Company recognized right-of-use leased assets and corresponding operating lease liabilities of approximately $ 6.5 million on the consolidated balance sheet on the Commencement Date in the first quarter of 2020.

Future minimum payments due under the Shoreline Lease are approximately $ 8.2 million as of March 31, 2020.

In January 2020, the Company entered into a sub-lease agreement for approximately 30,703 square feet of general office space located on High Bluff Drive, in San Diego, California (High Bluff Lease).

In January 2020, the Company entered into a sub-lease agreement for approximately 30,703 square feet of general office space located on High Bluff Drive, in San Diego, California.

The lease term begins in April 2020 and expires in March 2022.

The Company recognized right-of-use leased assets and corresponding operating lease liabilities of approximately $ 2.3 million on the consolidated balance sheet on the Commencement Date in the first quarter of 2020.

Future minimum payments due under the High Bluff Lease are approximately $ 2.4 million as of March 31, 2020.

The Company’s total lease cost recorded in the condensed consolidated statements of operations was $ 1.8 million and $ 0.7 million , respectively, for the three months ended March 31, 2020 and 2019, which included $ 1.7 million and $ 0.7 million , respectively, of operating lease cost and $ 0.1 million of short-term lease cost in 2020.

Cash paid for amounts included in the measurement of lease liabilities, representing operating cash flows from operating leases, was $ 1.6 million and $ 0.9 million for the three months ended March 31, 2020 and 2019, respectively.

Maturities of operating lease liabilities at March 31, 2020 were as follows (in thousands):

The Company’s lease cost recorded in the condensed consolidated statements of operations was as follows (in thousands):

Three Months Ended

Six Months Ended

Operating lease cost

Short-term lease cost

Total lease cost

Maturities of operating lease liabilities at June 30, 2020 were as follows (in thousands):

Years Ending December 31,

5 unchanged sentences

Operating lease liabilities - long-term

As of March 31, 2020, the weighted average remaining lease term for operating leases was 4.1 years and the weighted-average discount rate used to determine the operating lease liabilities was 6.3 % .

As of December 31, 2019, the weighted average remaining lease term for operating leases was 3.6 years and the weighted-average discount rate used to determine the operating lease liabilities was 6.6 % .

The weighted-average remaining lease term and weighted-average discount rate for operating leases were as follows:

Weighted-average remaining lease term (in years)

Weighted-average discount rate used to determine operating lease liabilities

Cash paid for amounts included in the measurement of lease liabilities, representing operating cash flows from operating leases, was $ 2.9 million and $ 2.0 million for the six months ended June 30, 2020 and 2019 , respectively.

Convertible Senior Notes

In May 2020, the Company entered into a purchase agreement with certain counterparties for the sale of an aggregate of $ 250.0 million principal amount of 1.50 % Convertible Senior Notes due 2025 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.

The notes consisted of a $ 250.0 million initial placement (Base Notes) and an over-allotment option that provided the initial purchasers of the Base Notes with the option to purchase an additional $ 37.5 million aggregate principal amount of notes (together with the Base Notes, the Notes), which was fully exercised.

The Notes were issued pursuant to an Indenture, dated May 15, 2020, between the Company and U.S.

Bank National Association, as trustee (Indenture).

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.

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;

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, as defined in the Indenture, or in connection with a redemption are entitled to an increase in the conversion rate.

Additionally, in the event of a fundamental change, as defined in the Indenture, 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.

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, which is amortized to interest expense at an effective interest rate of 9.9 % .

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, which are amortized to interest expense under the effective interest rate method.

The equity component of the Notes will not be remeasured as long as it continues to meet the conditions for equity classification.

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 Notes consisted of the following (in thousands):

June 30, 2020

Unamortized debt discount and debt issuance costs

Net carrying amount

Carrying amount of the equity component

As of June 30, 2020 , the debt discount and debt issuance costs associated with the Notes will be amortized over the remaining period of approximately 4.8 years .

The following table details interest expense recognized related to the Notes for the three months ended June 30, 2020 (in thousands):

Three Months Ended

June 30, 2020

Contractual interest expense

Amortization of debt issuance costs

Amortization of debt discount

The notes will have a dilutive effect to the extent the average market price per share of common stock for a given reporting period exceeds the conversion price of $ 112.57 .

As of June 30, 2020 , 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 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 Calls 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 Calls 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.

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, 2020 (in thousands):

The following shares of the Company’s common stock were reserved for future issuance as of June 30, 2020 (in thousands):

Shares underlying outstanding warrants

Shares underlying outstanding stock options

Shares underlying unvested restricted stock units

Shares authorized for future equity award grants

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Common Stock Warrants

As of March 31, 2020 , there were Series A warrants outstanding to purchase 415,200 shares of the Company’s common stock at an exercise price of $ 3.50 per share, which were issued in connection with a financing in October 2017, and which expire in October 2022.

Also outstanding as of March 31, 2020 , were warrants to purchase 193,788 shares of the Company’s common stock at an exercise price of $ 23.50 per share, which were issued in March 2017, and which expire in March 2027, and warrants to purchase 95,781 shares of the Company’s common stock at an exercise price of $ 73.73 per share, which were issued between August 2011 and August 2012, and which expire between August 2021 and August 2022.

The Company issued 2,320 shares of its common stock upon the exercise of warrants during the three months ended March 31, 2020 , and 18,285 shares of its common stock upon the exercise of warrants during the three months ended March 31, 2019 .

The Company issued 672,442 and 408,964 shares, respectively, of its common stock upon the exercise of stock options during the three months ended March 31, 2020 and 2019 .

As of June 30, 2020 , there were Series A warrants outstanding to purchase 415,200 shares of the Company’s common stock at an exercise price of $ 3.50 per share, which were issued in connection with a financing in October 2017, and which expire in October 2022.

Also outstanding as of June 30, 2020 , were warrants to purchase 193,788 shares of the Company’s common stock at an exercise price of $ 23.50 per share, which were issued in March 2017, and which expire in March 2027, and warrants to purchase 31,166 shares of the Company’s common stock at an exercise price of $ 73.73 per share, which were issued between August 2011 and August 2012, and which expire between August 2021 and August 2022.

The Company issued 32,574 and 34,894 shares of its common stock upon the exercise of warrants during the three and six months ended June 30, 2020 , and 74,985 and 93,270 shares of its common stock upon the exercise of warrants during the three and six months ended June 30, 2019 .

The Company issued 454,045 and 1,126,487 shares, respectively, of its common stock upon the exercise of stock options during the three and six months ended June 30, 2020 .

The Company issued 364,818 and 773,782 shares, respectively, of its common stock upon the exercise of stock options during the three and six months ended June 30, 2019 .

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 in the three months ended March 31, 2020 and 2019 .

During the six months ended June 30, 2020 and 2019, 229,320 and 168,165 shares of the Company’s common stock, respectively, were purchased under the ESPP for proceeds of $ 4.9 million and $ 3.0 million , respectively.

Stock-Based Compensation

The Company granted options to purchase 229,911 shares and 1,294,053 shares of common stock, respectively, under the 2013 Plan during the three months ended March 31, 2020 and 2019 .

The Company granted options to purchase 850,956 shares of common stock under the 2013 Plan during the six months ended June 30, 2020 .

During the six months ended June 30, 2019, the Company granted options to purchase 2,679,535 shares of common stock under the 2013 Plan, of which 1,644,715 were originally awarded between February 2019 and June 2019, subject to and conditioned upon the approval by its stockholders of an increase in the number of shares of common stock reserved for issuance under the 2013 Plan.

Stock-based compensation expense was not recognized for these contingent stock option grants prior to the approval by the Company’s stockholders of the increase in the number of shares of common stock reserved for issuance under the 2013 Plan, which occurred in June 2019.

These options have an exercise price equal to the closing price of the Company’s common stock on the applicable award date, and generally vest as to 25 % of the underlying shares on the first anniversary of the award, with the balance of the options vesting monthly over the following three years.

In addition, during the three months ended March 31, 2019 , the Company awarded stock options to purchase 1,035,000 shares of common stock, which were subject to and conditioned upon the approval by its stockholders of an increase in the number of shares of common stock reserved for issuance under our 2013 Plan prior to December 31, 2019.

No stock-based compensation expense was recognized for these contingent stock option grants during the three months ended March 31, 2019 , because the approval by our stockholders of the increase in the number of shares of common stock reserved for issuance under our 2013 Plan did not occur until June 2019.

The Company also granted 131,848 restricted stock units (RSUs) during the three months ended June 30, 2020.

These RSUs have a grant price equal to the closing price of the Company’s common stock on the award date, and vest based only on service as to 25 % of the underlying shares on the first anniversary of the award, with the balance of the RSUs vesting quarterly over the following three years.

The assumptions used in the Black-Scholes option-pricing model are as follows:

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Three Months Ended

Six Months Ended

Weighted average grant date fair value (per share)

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Expected term (in years)

Three Months Ended

Six Months Ended

Weighted average grant date fair value (per share)

Risk-free interest rate

Expected dividend yield

Expected volatility

Expected term (in years)

The Company records stock-based compensation expense associated with the ESPP using the Black-Scholes option-pricing model.

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Three Months Ended

Six Months Ended

Cost of sales

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Research and development

The total stock-based compensation expense capitalized as part of the cost of the Company’s inventories was $ 1.3 million and $ 1.3 million as of March 31, 2020 and December 31, 2019 , respectively.

For the three months ended March 31, 2020 , the Company’s income tax expense is primarily attributable to state and foreign income tax expense as a result of current taxable income in those jurisdictions.

The total stock-based compensation expense capitalized as part of the cost of the Company’s inventories was $ 1.3 million and $ 1.3 million as of June 30, 2020 and December 31, 2019 , respectively.

For the three and six months ended June 30, 2020 , the Company’s income tax expense is primarily attributable to state and foreign income tax expense as a result of current taxable income in those jurisdictions, as well as benefit associated with release of valuation allowance related to the acquisition of Sugarmate.

The Company used the year-to-date effective tax rate method to determine its interim income tax expense for federal and state jurisdictions where a reliable estimate of the annual effective tax rate could not be made.

The Company maintains a full valuation allowance against its net deferred tax assets as of March 31, 2020 based on the current assessment that it is not more likely than not these future benefits will be realized before expiration.

The Company maintains a full valuation allowance against its net deferred tax assets as of June 30, 2020 based on the current assessment that it is not more likely than not these future benefits will be realized before expiration.

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act).

The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19.

While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions which are expected to impact the Company’s financial statements include removal of certain limitations on utilization of net operating losses, increasing the loss carryback period for certain losses to five years, and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act.

The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of the COVID-19 global pandemic.

While the CARES Act provides sweeping tax changes in response to the COVID-19 global pandemic, some of the more significant provisions which are expected to impact the Company’s financial statements include removal of certain limitations on utilization of net operating losses, increasing the loss carryback period for certain losses to five years, and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act.

Due to the recent enactment of the CARES Act, the Company is unable to quantify the impact, if any, that the CARES Act will have on its financial position, results of operations or cash flows but it is not anticipated to be significant.

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Legal and Regulatory Matters

From time to time, the Company may be subject to legal proceedings or regulatory matters arising in the ordinary course of business, including actions with respect to intellectual property, 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 issues based on the developments in these proceedings or matters.

From time to time, the Company may be subject to legal proceedings or regulatory matters arising in the ordinary course of business, 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 legal proceeding or regulatory 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, 2020 and December 31, 2019 , 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.

As of June 30, 2020 and December 31, 2019 , 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 deemed to be reasonably estimable.

However, regardless of the outcome, legal proceedings, regulatory matters, and other disputes and claims can have an adverse impact on the Company because of legal costs, diversion of management time and resources, and other factors.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements