What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-11-05 compared with 2020-07-30 · 205 added, 120 removed, 486 unchanged (40% of the section changed)

3 unchanged sentences

(In thousands, except par value)

September 30, December 31,

(Unaudited) (Note 1)

Current assets:

2 unchanged sentences

Accounts receivable, net 52,104 46,585

Inventories 70,644 49,073

Prepaid and other current assets 5,023 4,025

3 unchanged sentences

Other long-term assets 10,050 1,485

Total assets $ 672,988 $ 326,110

Liabilities and Stockholders’ Equity

15 unchanged sentences

Common stock, $ 0.001 par value;

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

200,000 shares authorized, 62,116 and 59,396 shares issued and outstanding at September 30, 2020 (unaudited) and December 31, 2019, respectively.

Additional paid-in capital 1,002,502 819,626

7 unchanged sentences

(In thousands, except per share data)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Sales $ 123,603 $ 94,657 $ 330,765 $ 253,907

Cost of sales 58,290 43,974 160,801 119,967

Gross profit 65,313 50,683 169,964 133,940

Operating expenses:

4 unchanged sentences

Other income (expense), net:

Interest and other income

Interest and other expense

Interest income and other, net 143 854 1,235 2,381

Interest expense ( 4,855 ) — ( 8,030 ) —

Change in fair value of common stock warrants ( 3,648 ) 2,321 ( 19,906 ) ( 10,849 )

1 unchanged sentence

Loss before income taxes ( 9,369 ) ( 2,829 ) ( 53,320 ) ( 27,333 )

Income tax benefit

Income tax expense (benefit) 39 72 ( 1,938 ) 72

Net loss $ ( 9,408 ) $ ( 2,901 ) $ ( 51,382 ) $ ( 27,405 )

Other comprehensive loss:

Unrealized gain on short-term investments

Unrealized gain (loss) on short-term investments $ ( 69 ) $ ( 60 ) $ 78 $ 91

Foreign currency translation gain (loss) 216 ( 11 ) ( 10 ) 13

Comprehensive loss $ ( 9,261 ) $ ( 2,972 ) $ ( 51,314 ) $ ( 27,301 )

Net loss per share, basic and diluted

Weighted average shares used to compute basic and diluted net loss per share

Net loss per share, basic $ ( 0.15 ) $ ( 0.05 ) $ ( 0.85 ) $ ( 0.47 )

Net loss per share, diluted $ ( 0.15 ) $ ( 0.09 ) $ ( 0.85 ) $ ( 0.47 )

Weighted average shares used to compute basic net loss per share 61,529 58,801 60,568 58,268

Weighted average shares used to compute diluted net loss per share 61,529 59,196 60,568 58,268

See accompanying notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(In thousands)

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

Common Stock Additional

Capital Accumulated

Comprehensive

Income (Loss)

Income (Loss) Accumulated

Deficit Total

Stockholders’

Balance at March 31, 2020

Shares Amount

Balance at June 30, 2020 60,787 $ 61 $ 934,402 $ 43 $ ( 666,802 ) $ 267,704

Exercise of stock options 1,072 1 29,030 — — 29,031

Issuance of common stock for Employee Stock Purchase Plan

Exercise of common stock warrants 257 — 899 — — 899

Equity component of convertible note issuance, net of issuance cost

Purchase of capped call options related to convertible notes

Fair value of common stock warrants at time of exercise — — 25,870 — — 25,870

Stock-based compensation — — 12,301 — — 12,301

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

Unrealized (loss) on short-term investments — — — ( 69 ) — ( 69 )

Foreign currency translation adjustments — — — 216 — 216

Balance at June 30, 2020

Six Months Ended June 30, 2020

Net loss — — — — ( 9,408 ) ( 9,408 )

Balance at September 30, 2020 62,116 $ 62 $ 1,002,502 $ 190 $ ( 676,210 ) $ 326,544

Nine Months Ended September 30, 2020

Common Stock Additional

Capital Accumulated

Comprehensive

Income (Loss)

Income (Loss) Accumulated

Deficit Total

Stockholders’

Shares Amount

Balance at December 31, 2019 59,396 $ 59 $ 819,626 $ 122 $ ( 624,828 ) $ 194,979

8 unchanged sentences

Foreign currency translation adjustments — — — ( 10 ) — ( 10 )

Balance at June 30, 2020

Net loss — — — — ( 51,382 ) ( 51,382 )

Balance at September 30, 2020 62,116 $ 62 $ 1,002,502 $ 190 $ ( 676,210 ) $ 326,544

See accompanying notes to unaudited condensed consolidated financial statements.

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

Common Stock Additional

Capital Accumulated

Comprehensive

Income (Loss)

Deficit Total

Stockholders’

Balance at March 31, 2019

Shares Amount

Balance at June 30, 2019 58,589 $ 58 $ 769,704 $ 162 $ ( 624,579 ) $ 145,345

Exercise of stock options 440 1 7,033 — — 7,034

Issuance of common stock for Employee Stock Purchase Plan

Exercise of common stock warrants

Fair value of common stock warrants at time of exercise — — 13 — — 13

Stock-based compensation — — 17,574 — — 17,574

Unrealized gain on short-term investments

Unrealized loss on short-term investments — — — ( 60 ) — ( 60 )

Foreign currency translation adjustments — — — ( 11 ) — ( 11 )

Balance at June 30, 2019

Six Months Ended June 30, 2019

Net loss — — — — ( 2,901 ) ( 2,901 )

Balance at September 30, 2019 59,029 $ 59 $ 794,324 $ 91 $ ( 627,480 ) $ 166,994

Nine Months Ended September 30, 2019

Common Stock Additional

Capital Accumulated

Comprehensive

Income (Loss)

Deficit Total

Stockholders’

Shares Amount

Balance at December 31, 2018 57,554 $ 57 $ 731,306 $ ( 13 ) $ ( 600,075 ) $ 131,275

6 unchanged sentences

Foreign currency translation adjustments — — — 13 — 13

Balance at June 30, 2019

Net loss — — — — ( 27,405 ) ( 27,405 )

Balance at September 30, 2019 59,029 $ 59 $ 794,324 $ 91 $ ( 627,480 ) $ 166,994

See accompanying notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Operating Activities

Adjustments to reconcile net loss to net cash used in operating activities:

Net loss $ ( 51,382 ) $ ( 27,405 )

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization expense 7,024 4,430

8 unchanged sentences

Accounts receivable, net ( 7,820 ) ( 11,588 )

Inventories ( 22,052 ) ( 21,990 )

Prepaid and other current assets ( 1,082 ) ( 17 )

6 unchanged sentences

Other long-term liabilities 2,381 5,198

Net cash used in operating activities

Net cash provided by operating activities 9,432 22,463

Investing Activities

12 unchanged sentences

Effect of foreign exchange rate changes on cash 70 36

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents 78,306 4,234

Cash and cash equivalents at beginning of period 51,175 41,826

19 unchanged sentences

In addition to insulin pumps, the Company sells disposable products that are used together with the pumps and are replaced every few days, including cartridges for storing and delivering insulin, and infusion sets that connect the insulin pump to a user’s body.

The Company has commercially launched seven insulin pumps in the United States since 2012 and two pumps outside the United States since 2018.

The Company has commercially launched seven insulin pumps in the United States since 2012 and three pumps outside the United States since 2018.

Four of the insulin pumps have featured integration with CGM technology, of which two have also featured an automated insulin delivery (AID) algorithm.

3 unchanged sentences

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

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

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

As of September 30, 2020, the Company had $ 464.5 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 $ 676.2 million as of September 30, 2020, which included a net loss of $ 51.4 million for the nine months ended September 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.

19 unchanged sentences

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.

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.

Reclassification

Prior year amounts related to the presentation of proceeds from maturities and sales of short-term investments on the Company’s condensed consolidated statement of cash flows, have been reclassified to conform to the current year presentation.

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.

Summary of Significant Accounting Policies

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

There have been no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2020, as compared to those disclosed in the Annual Report, with the exception of policies put in place with regards to its convertible senior notes issued in May 2020.

Use of Estimates

14 unchanged sentences

Short-term investments are carried at fair value.

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

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

The Company determined the fair value of its convertible senior notes at September 30, 2020 to be $ 367.2 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 September 30, 2020 and December 31, 2019 (see Note 5, “Fair Value Measurements”).

Operating Lease Right-of-Use Assets and Liabilities

1 unchanged sentence

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 and its related amendments (collectively referred to as ASC 842) require 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.

15 unchanged sentences

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.

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

Convertible Senior Notes

18 unchanged sentences

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

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

June 30, 2020

December 31, 2019

Deferred revenue 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 September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020 December 31, 2019

Deferred revenue $ 4,608 $ 3,465

Other long-term liabilities 8,499 5,656

Total $ 13,107 $ 9,121

Sales Returns

2 unchanged sentences

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.

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 September 30, 2020 and December 31, 2019, respectively.

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

8 unchanged sentences

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

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

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

Balance at December 31, 2019 $ 16,724

2 unchanged sentences

Decreases in warranty estimates ( 2,902 )

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

Balance at September 30, 2020 $ 18,193

As of September 30, 2020 and December 31, 2019, total product warranty reserves of $ 18.2 million and $ 16.7 million, respectively, were included in the following consolidated balance sheet accounts (in thousands):

September 30, 2020 December 31, 2019

Other current liabilities $ 6,964 $ 4,707

5 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”).

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.

The fair value of restricted stock unit (RSU) awards issued under the Company’s 2013 Plan that vest solely based on service is estimated based on the fair market value of the underlying stock on the date of grant.

Net Loss Per Share

5 unchanged sentences

Likewise, an adjustment to the denominator is required to reflect the related dilutive shares, if any, under the treasury stock method.

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

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

For all periods presented other than the three months ended September 30, 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 months ended September 30, 2019, the net loss used in the calculation of diluted net loss per share was increased by $ 2.3 million to remove the decrease in fair value of common stock warrants based on the dilutive effect of assumed exercise, and the denominator was increased by 394,433 shares calculated under the treasury stock method.

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

Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Warrants to purchase common stock 383 293 383 710

Options to purchase common stock 5,548 6,234 5,128 5,868

Unvested restricted stock units

Unvested restricted stock units 134 N/A 61 N/A

Awards granted under the ESPP 42 134 21 45

Convertible senior notes (if-converted)

Convertible senior notes (if-converted) 2,554 N/A 1,286 N/A

8,661 6,661 6,879 6,623

Recent Accounting Pronouncements

18 unchanged sentences

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 is in the process of determining the impact of the adoption of the standard on its consolidated financial statements as well as whether to early adopt the new standard.

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 June 30, 2020 and December 31, 2019 (in thousands):

At June 30, 2020

Gross Unrealized

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

At September 30, 2020 Maturity

(in years) Amortized

Cost Gross Unrealized

Gain Gross Unrealized

Loss Estimated

Available-for-sale securities:

Commercial paper

Government-sponsored enterprise

Treasury securities

Corporate debt securities

At December 31, 2019

Gross Unrealized

Commercial paper Less than 1

$ 94,076 $ 9 $ ( 1 ) $ 94,084

Government-sponsored enterprise Less than 2

32,157 23 ( 1 ) 32,179

Treasury securities Less than 1

105,779 36 — 105,815

Corporate debt securities Less than 2

102,862 107 ( 6 ) 102,963

Total $ 334,874 $ 175 $ ( 8 ) $ 335,041

At December 31, 2019 Maturity

(in years) Amortized

Cost Gross Unrealized

Gain Gross Unrealized

Loss Estimated

Available-for-sale securities:

Commercial paper

Government-sponsored enterprise

Treasury securities

Corporate debt securities

Commercial paper Less than 1

$ 24,147 $ 10 $ — $ 24,157

Government-sponsored enterprise Less than 2

33,073 26 — 33,099

Treasury securities Less than 2

17,963 17 ( 1 ) 17,979

Corporate debt securities Less than 2

50,011 42 ( 5 ) 50,048

Total $ 125,194 $ 95 $ ( 6 ) $ 125,283

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

The Company periodically reviews the portfolio of available-for-sale debt securities to determine if any investment is impaired due to changes in credit risk or other potential valuation concerns.

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

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

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

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

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

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

Accounts Receivable and Inventories

1 unchanged sentence

Accounts receivable consisted of the following (in thousands):

September 30, December 31,

Accounts receivable $ 55,568 $ 49,889

2 unchanged sentences

Allowance for Credit Losses

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

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

Three Months Ended

Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Balance at beginning of the period $ 3,139 $ 2,194 $ 3,304 $ 1,837

2 unchanged sentences

Balance at end of the period $ 3,464 $ 2,692 $ 3,464 $ 2,692

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

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

September 30,

2020 December 31,

Raw materials $ 36,111 $ 20,699

10 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 June 30, 2020 and December 31, 2019 , and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):

Fair Value Measurements at

June 30, 2020

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 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 September 30, 2020

(Level 1) (Level 2) (Level 3)

Cash equivalents (1)

$ 127,732 $ 127,732 $ — $ —

Commercial paper 94,084 — 94,084 —

2 unchanged sentences

Corporate debt securities 102,963 — 102,963 —

Total assets $ 462,773 $ 233,547 $ 229,226 $ —

Common stock warrants $ 17,404 $ — $ — $ 17,404

Total liabilities $ 17,404 $ — $ — $ 17,404

Fair Value Measurements at

December 31, 2019

Fair Value Measurements at December 31, 2019

(Level 1) (Level 2) (Level 3)

Cash equivalents (1)

$ 33,844 $ 33,844 $ — $ —

Commercial paper 24,157 — 24,157 —

2 unchanged sentences

Corporate debt securities 50,048 — 50,048 —

Total assets $ 159,127 $ 51,823 $ 107,304 $ —

Common stock warrants $ 23,509 $ — $ — $ 23,509

4 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 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 Company’s Level 3 liabilities at September 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”).

During the nine months ended September 30, 2020 and 2019, the Company issued 259,115 shares and 93,470 shares of common stock, respectively, upon the exercise of Series A warrants.

As of September 30, 2020 and 2019, there were Series A warrants outstanding to purchase 158,200 shares and 417,315 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.

2 unchanged sentences

A significant increase (decrease) in any of these inputs in isolation, particularly the market price of the Company’s common stock, would have resulted in a significantly higher (lower) fair value measurement.

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

June 30, 2020

December 31, 2019

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

September 30, 2020 December 31, 2019

Risk-free interest rate 0.1 % 1.6 %

2 unchanged sentences

Expected term (in years) 2.0 2.8

The following table presents a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the three months ended June 30, 2020 and 2019 :

Six Months Ended June 30,

The following table presents a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the nine months ended September 30, 2020 and 2019:

Nine Months Ended September 30,

Balance at beginning of the period $ 23,509 $ 17,926

2 unchanged sentences

Balance at end of the period $ 17,404 $ 23,283

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.

Of the loss recognized from the change in fair value of common stock warrants for the nine months ended September 30, 2020 and 2019, $ 8.5 million and $ 8.6 million, respectively, was attributable to warrants outstanding as of September 30, 2020 and 2019.

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

The Company recognizes lease expense for these leases on a straight-line basis over the lease term.

20 unchanged sentences

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 lease term began 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.

In September 2020, the Company amended certain leases covering approximately 77,000 square feet of general office and laboratory space located on Roselle Street in San Diego, California (Roselle Street Leases).

The lease amendments extended the term of each lease for an additional period of one year, and included a rent increase during the additional lease term.

The Roselle Street Leases, which would have expired in May 2022, are now scheduled to expire in May 2023.

The Company recognized additional right-of-use leased assets and corresponding operating lease liabilities of $ 2.2 million on the consolidated balance sheet in the third quarter of 2020 related to the amendment of the Roselle Street Leases.

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

Three Months Ended

Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Operating lease cost $ 1,914 $ 1,372 $ 5,569 $ 3,208

1 unchanged sentence

Total lease cost $ 1,977 $ 1,411 $ 5,767 $ 3,292

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

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

Years Ending December 31,

2020 (remaining) $ 2,314

Thereafter 3,975

Total undiscounted lease payments 30,687

4 unchanged sentences

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

September 30,

2020 December 31,

Weighted-average remaining lease term (in years) 3.9 3.6

Weighted-average discount rate used to determine operating lease liabilities 5.9 % 6.6 %

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.

Cash paid for amounts included in the measurement of lease liabilities, representing operating cash flows from operating leases, was $ 5.9 million and $ 3.1 million for the nine months ended September 30, 2020 and 2019, respectively.

Convertible Senior Notes

27 unchanged sentences

The Notes consisted of the following (in thousands):

June 30, 2020

September 30, 2020

Principal $ 287,500

Unamortized debt discount and debt issuance costs ( 88,380 )

1 unchanged sentence

Carrying amount of the equity component $ 85,803

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):

As of September 30, 2020, the debt discount and debt issuance costs associated with the Notes will be amortized over the remaining period of approximately 4.6 years.

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

Three Months Ended

June 30, 2020

September 30, 2020 Nine Months Ended

September 30, 2020

Contractual interest expense $ 1,078 $ 1,797

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Amortization of debt discount 3,533 5,830

Total interest expense $ 4,855 $ 8,030

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.

As of September 30, 2020, the “if-converted value” did not exceed the principal amount of the Notes.

Capped Call Transactions

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Shares Reserved for Future Issuance

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

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

Shares underlying outstanding warrants 383

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Common Stock Warrants

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 .

Warrants outstanding to purchase shares of the Company's common stock as of September 30, 2020 were as follows:

Issue Date Exercise Price Per Share Warrants Outstanding Expiration Date

October 2017 $ 3.50 158,200 October 2022

March 2017 $ 23.50 193,788 March 2027

August 2011 - August 2012 $ 73.73 31,166 August 2021 - August 2022

Each warrant allows the holder to purchase one share of the Company's common stock at the exercise price per share of the respective warrant.

The Company issued 257,000 and 291,894 shares of its common stock upon the exercise of warrants during the three and nine months ended September 30, 2020, and 200 and 93,470 shares of its common stock upon the exercise of warrants during the three and nine months ended September 30, 2019.

The Company issued 1,072,499 and 2,198,986 shares, respectively, of its common stock upon the exercise of stock options during the three and nine months ended September 30, 2020.

The Company issued 439,646 and 1,213,428 shares, respectively, of its common stock upon the exercise of stock options during the three and nine months ended September 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.

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.

During the nine months ended September 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 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.

The Company granted options to purchase 1,010,996 shares of common stock under the 2013 Plan during the nine months ended September 30, 2020.

During the nine months ended September 30, 2019, the Company granted options to purchase 2,916,906 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 .

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 Company also granted 2,846 and 134,694 restricted stock units (RSUs), respectively, during the three and nine months ended September 30, 2020.

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

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Three Months Ended

Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Weighted average grant date fair value (per share) $ 67.64 $ 38.74 $ 52.83 $ 39.08

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Expected term (in years) 6.1 6.1 6.1 6.0

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Weighted average grant date fair value (per share) $ 36.18 $ 33.49

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Three Months Ended

Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Cost of sales $ 2,138 $ 1,751 $ 6,464 $ 4,178

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Research and development 1,833 2,369 6,582 6,148

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.

Total $ 12,837 $ 17,230 $ 45,123 $ 39,386

The total stock-based compensation expense capitalized as part of the cost of the Company’s inventories was $ 0.7 million and $ 1.3 million as of September 30, 2020 and December 31, 2019, respectively.

For the three and nine months ended September 30, 2020 and 2019, the Company’s income tax expense was primarily attributable to state and foreign income tax expense as a result of current taxable income in those jurisdictions.

The nine months ended September 30, 2020 also included a benefit associated with release of valuation allowance related to the acquisition of Sugarmate during the second quarter of 2020.

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 June 30, 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 September 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).

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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 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.

As of September 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