TANDEM DIABETES CARE INC 10-Q

Item 1. Financial Statements TANDEM DIABETES CARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value) June 30, December 31, 2021 2020 (Unaudited) (Note 1) Assets Current assets: Cash and cash equivalents $ 98,578 $ 94,613 Short-term investments 446,724 390,323 Accounts receivable, net 80,212 82,195 Inventories 66,705 63,721 Prepaid and other current assets 6,066 6,383 Total current assets 698,285 637,235 Property and equipment, net 48,890 50,022 Operating lease right-of-use assets 31,499 19,773 Other long-term assets 16,576 9,385 Total assets $ 795,250 $ 716,415 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 27,504 $ 17,805 Accrued expenses 6,405 4,783 Employee-related liabilities 36,476 34,159 Deferred revenue 7,953 6,082 Common stock warrants 2,789 14,261 Operating lease liabilities 9,260 9,421 Other current liabilities 18,336 17,341 Total current liabilities 108,723 103,852 Convertible senior notes, net - long-term 280,599 202,984 Operating lease liabilities - long-term 27,376 15,914 Other long-term liabilities 32,467 27,360 Total liabilities 449,165 350,110 Commitments and contingencies (Note 11) Stockholders’ equity: Common stock, $ 0.001 par value; 200,000 shares authorized, 62,952 and 62,335 shares issued and outstanding at June 30, 2021 (unaudited) and December 31, 2020, respectively. 63 62 Additional paid-in capital 997,190 1,025,233 Accumulated other comprehensive income 29 220 Accumulated deficit ( 651,197 ) ( 659,210 ) Total stockholders’ equity 346,085 366,305 Total liabilities and stockholders’ equity $ 795,250 $ 716,415 See accompanying notes to unaudited condensed consolidated financial statements. 1 Table of contents TANDEM DIABETES CARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited) (In thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Sales $ 172,139 $ 109,236 $ 313,176 $ 207,162 Cost of sales 79,685 54,846 147,435 102,511 Gross profit 92,454 54,390 165,741 104,651 Operating expenses: Selling, general and administrative 66,523 50,440 125,086 100,157 Research and development 20,499 15,987 38,460 30,104 Total operating expenses 87,022 66,427 163,546 130,261 Operating income (loss) 5,432 ( 12,037 ) 2,195 ( 25,610 ) Other income (expense), net: Interest income and other, net 418 367 690 1,093 Interest expense ( 1,509 ) ( 3,176 ) ( 3,015 ) ( 3,176 ) Change in fair value of common stock warrants ( 272 ) ( 14,336 ) ( 962 ) ( 16,258 ) Total other expense, net ( 1,363 ) ( 17,145 ) ( 3,287 ) ( 18,341 ) Income (loss) before income taxes 4,069 ( 29,182 ) ( 1,092 ) ( 43,951 ) Income tax expense (benefit) 61 ( 2,075 ) ( 56 ) ( 1,977 ) Net income (loss) $ 4,008 $ ( 27,107 ) $ ( 1,036 ) $ ( 41,974 ) Other comprehensive income (loss): Unrealized gain (loss) on short-term investments $ ( 51 ) $ 105 $ ( 89 ) $ 147 Foreign currency translation gain (loss) ( 26 ) 183 ( 102 ) ( 226 ) Comprehensive income (loss) $ 3,931 $ ( 26,819 ) $ ( 1,227 ) $ ( 42,053 ) Net income (loss) per share, basic $ 0.06 $ ( 0.45 ) $ ( 0.02 ) $ ( 0.70 ) Net income (loss) per share, diluted $ 0.06 $ ( 0.45 ) $ ( 0.02 ) $ ( 0.70 ) Weighted average shares used to compute basic net income (loss) per share 62,717 60,424 62,583 60,082 Weighted average shares used to compute diluted net income (loss) per share 65,663 60,424 62,583 60,082 See accompanying notes to unaudited condensed consolidated financial statements. 2 Table of contents TANDEM DIABETES CARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (In thousands) Three Months Ended June 30, 2021 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at March 31, 2021 62,571 $ 63 $ 968,450 $ 106 $ ( 655,205 ) $ 313,414 Exercise of stock options 252 — 8,172 — — 8,172 Vesting of restricted stock units, net of shares withheld for taxes 29 — ( 867 ) — — ( 867 ) Issuance of common stock for Employee Stock Purchase Plan 100 — 6,317 — — 6,317 Stock-based compensation expense — — 15,118 — — 15,118 Unrealized loss on short-term investments — — — ( 51 ) — ( 51 ) Foreign currency translation adjustments — — — ( 26 ) — ( 26 ) Net income — — — — 4,008 4,008 Balance at June 30, 2021 62,952 $ 63 $ 997,190 $ 29 $ ( 651,197 ) $ 346,085 Six Months Ended June 30, 2021 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at December 31, 2020 62,335 $ 62 $ 1,025,233 $ 220 $ ( 659,210 ) $ 366,305 Effect of change in accounting for convertible senior notes (1) — — ( 85,803 ) — 9,049 ( 76,754 ) Exercise of stock options 363 1 11,307 — — 11,308 Vesting of restricted stock units, net of shares withheld for taxes 29 — ( 867 ) — — ( 867 ) Issuance of common stock for Employee Stock Purchase Plan 100 — 6,317 — — 6,317 Exercise of common stock warrants 125 — 437 — — 437 Fair value of common stock warrants at time of exercise — — 12,434 — — 12,434 Stock-based compensation expense — — 28,132 — — 28,132 Unrealized loss on short-term investments — — — ( 89 ) — ( 89 ) Foreign currency translation adjustments — — — ( 102 ) — ( 102 ) Net loss — — — — ( 1,036 ) ( 1,036 ) Balance at June 30, 2021 62,952 63 997,190 29 ( 651,197 ) $ 346,085 (1) The Company adopted ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity effective January 1, 2021 (see Note 2, “Summary of Significant Accounting Policies”). See accompanying notes to unaudited condensed consolidated financial statements. :AccountingStandardsUpdate202006Member 3 Table of contents Three Months Ended June 30, 2020 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at March 31, 2020 60,071 $ 60 $ 847,056 $ ( 245 ) $ ( 639,695 ) $ 207,176 Exercise of stock options 453 1 12,254 — — 12,255 Issuance of common stock for Employee Stock Purchase Plan 229 — 4,916 — — 4,916 Exercise of common stock warrants 34 — 2,029 — — 2,029 Equity component of convertible senior notes issuance, net of issuance costs — — 85,803 — — 85,803 Payment for capped call transactions related to convertible senior notes — — ( 34,069 ) — — ( 34,069 ) Stock-based compensation expense — — 16,413 — — 16,413 Unrealized gain on short-term investments — — — 105 — 105 Foreign currency translation adjustments — — — 183 — 183 Net loss — — — — ( 27,107 ) ( 27,107 ) Balance at June 30, 2020 60,787 $ 61 $ 934,402 $ 43 $ ( 666,802 ) $ 267,704 Six Months Ended June 30, 2020 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at December 31, 2019 59,396 $ 59 $ 819,626 $ 122 $ ( 624,828 ) $ 194,979 Exercise of stock options 1,126 2 23,728 — — 23,730 Issuance of common stock for Employee Stock Purchase Plan 229 — 4,916 — — 4,916 Exercise of common stock warrants 36 — 2,036 — — 2,036 Fair value of common stock warrants at time of exercise — — 141 — — 141 Equity component of convertible senior notes issuance, net of issuance costs — — 85,803 — — 85,803 Payment for capped call transactions related to convertible senior notes — — ( 34,069 ) — — ( 34,069 ) Stock-based compensation expense — — 32,221 — — 32,221 Unrealized gain on short-term investments — — — 147 — 147 Foreign currency translation adjustments — — — ( 226 ) — ( 226 ) Net loss — — — — ( 41,974 ) ( 41,974 ) Balance at June 30, 2020 60,787 $ 61 $ 934,402 $ 43 $ ( 666,802 ) $ 267,704 See accompanying notes to unaudited condensed consolidated financial statements. 4 Table of contents TANDEM DIABETES CARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended June 30, 2021 2020 Operating Activities Net loss $ ( 1,036 ) $ ( 41,974 ) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization expense 6,925 4,035 Amortization of debt discount and issuance costs 859 2,457 Provision for expected credit losses 874 1,529 Provision for (recovery of) inventory obsolescence 211 ( 81 ) Change in fair value of common stock warrants 962 16,258 Amortization of discount on short-term investments ( 306 ) ( 1,127 ) Benefit for deferred income taxes — ( 2,126 ) Stock-based compensation expense 27,924 32,286 Other ( 106 ) 36 Changes in operating assets and liabilities: Accounts receivable, net 1,046 ( 50 ) Inventories ( 2,965 ) ( 13,181 ) Prepaid and other current assets 411 ( 2,101 ) Other long-term assets ( 159 ) 6 Accounts payable and accrued expenses 11,957 ( 3,779 ) Employee-related liabilities 2,318 ( 3,094 ) Deferred revenue 5,288 2,668 Other current liabilities 1,170 2,428 Other long-term liabilities 2,207 678 Net cash provided (used) by operating activities 57,580 ( 5,132 ) Investing Activities Purchases of short-term investments ( 385,580 ) ( 166,984 ) Proceeds from maturities of short-term investments 308,607 54,709 Proceeds from sales of short-term investments 20,788 35,027 Purchases of property and equipment ( 5,339 ) ( 16,552 ) Acquisition of intangible assets and equity investments ( 9,331 ) ( 4,805 ) Net cash used in investing activities ( 70,855 ) ( 98,605 ) Financing Activities Proceeds from issuance of convertible senior notes, net of $ 8,809 debt issuance costs — 278,691 Payment for capped call transactions related to convertible senior notes — ( 34,069 ) Proceeds from issuance of common stock under Company stock plans, net 16,758 28,645 Proceeds from exercise of common stock warrants 438 2,036 Net cash provided by financing activities 17,196 275,303 Effect of foreign exchange rate changes on cash 44 ( 262 ) Net increase in cash and cash equivalents 3,965 171,304 Cash and cash equivalents at beginning of period 94,613 51,175 Cash and cash equivalents at end of period $ 98,578 $ 222,479 Supplemental disclosures of cash flow information Income taxes paid $ 197 $ 131 Supplemental schedule of non-cash investing and financing activities Right-of-use assets obtained in exchange for operating lease obligations $ 15,087 $ 8,805 Property and equipment included in accounts payable $ 452 $ 977 Intangible costs in other current and other long-term liabilities $ 1,029 $ 2,348 See accompanying notes to unaudited condensed consolidated financial statements. 5 Table of contents TANDEM DIABETES CARE, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Basis of Presentation The Company Tandem Diabetes Care, Inc. is a medical device company with a positively different approach to the design, development and commercialization of products for people with insulin-dependent diabetes. Tandem Diabetes Care, Inc. is incorporated in the state of Delaware. Unless the context requires otherwise, the terms the “Company” or “Tandem” refer to Tandem Diabetes Care, Inc., together with its wholly-owned subsidiaries in the U.S. and Canada. The Company manufactures, sells and supports insulin pump products that are designed to address the evolving needs and preferences of differentiated segments of the insulin-dependent diabetes market. The Company’s manufacturing, sales and support activities principally focus on the t:slim X2 Insulin Delivery System (t:slim X2), the Company’s flagship pump platform which is capable of remote software updates and is designed to display continuous glucose monitoring (CGM) sensor information directly on the pump home screen. The Company’s insulin pump products are compatible with other complementary digital health offerings, such as the t:connect cloud-based diabetes management application (t:connect) and the Tandem Device Updater, a Mac and PC-compatible tool which offers and supports different updates of the Company’s insulin pump software from a personal computer. The Company’s insulin pump products are generally considered durable medical equipment and have an expected lifespan of at least four years . In addition to insulin pumps, the Company sells disposable products that are used together with the pumps and are replaced every few days, including cartridges for storing and delivering insulin, and infusion sets that connect the insulin pump to a user’s body, as well as other accessories for enhanced usability. Basis of Presentation and Principles of Consolidation The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments which are of a normal and recurring nature, considered necessary for a fair presentation of the financial information contained herein, have been included. Interim financial results are not necessarily indicative of results anticipated for the full year or any other period(s). These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (Annual Report), from which the balance sheet information herein was derived. The condensed consolidated financial statements include the accounts of Tandem Diabetes Care, Inc. and its wholly-owned subsidiaries in the U.S. and Canada. All significant intercompany balances and transactions have been eliminated in consolidation. The functional currency of the Company’s foreign subsidiary is the local currency. The Company translates the financial statements of its foreign subsidiary into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates for each period for revenue, costs and expenses. Translation related adjustments are included in other comprehensive loss, and in accumulated other comprehensive income in the stockholders’ equity section of the Company’s condensed consolidated balance sheets. Foreign exchange gains or losses resulting from balances denominated in a currency other than the functional currency are recognized in interest income and other, net in the Company’s condensed consolidated statements of operations. Reclassifications Prior year amounts related to the presentation of other income (expense), net on the Company’s condensed consolidated statement of operations and comprehensive loss, have been reclassified to conform to the current year presentation. Starting with the third quarter of 2020, the first full quarter in which the Company’s convertible senior notes were outstanding, the Company began to present non-operating expenses unrelated to the convertible senior notes with interest income and other, net. In prior periods, other non-operating expenses were combined with interest expense and reported as interest and other expense. 6 Table of contents 2. Summary of Significant Accounting Policies There have been no material changes to the Company’s significant accounting policies during the six months ended June 30, 2021, as compared to those disclosed in the Annual Report, other than the adoption of ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, effective January 1, 2021 (see Note 7, “Convertible Senior Notes”). Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes as of the date of the consolidated financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. Accounts Receivable The Company grants credit to various customers in the ordinary course of business and is paid directly by customers who use the products, distributors and third-party insurance payors. The Company maintains an allowance for its current estimate of expected credit losses. Provisions for expected credit losses are estimated based on historical experience, assessment of specific risk, review of outstanding invoices, forecasts about the future, and various assumptions and estimates that are believed to be reasonable under the circumstances, which included the Company’s estimates of credit risks as a result of the coronavirus pandemic (COVID-19 global pandemic). Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a balance is uncollectible. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and employee-related liabilities are reasonable estimates of their fair values because of the short-term nature of these assets and liabilities. Short-term investments are carried at fair value. The Company determined the fair value of its convertible senior notes to be $ 326.6 million at June 30, 2021, and $ 333.5 million at December 31, 2020, based on Level 2 quoted market prices (see Note 7, “Convertible Senior Notes”). The estimated fair value of certain of the Company’s common stock warrants was determined using the Black-Scholes pricing model as of June 30, 2021 and December 31, 2020 (see Note 5, “Fair Value Measurements”). Operating Lease Right-of-Use Assets and Liabilities Lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized when the Company takes possession of the leased property (the Commencement Date) based on the present value of lease payments over the lease term. For lease agreements entered into or reassessed after the adoption of ASC 842, the Company combines lease and non-lease components. Rent expense on noncancellable leases containing known future scheduled rent increases is recorded on a straight-line basis over the term of the respective leases beginning on the Commencement Date (see Note 6, “Leases”). The difference between rent expense and rent paid is accounted for as a component of operating lease right-of-use assets on the Company’s condensed consolidated balance sheets. Landlord improvement allowances and other similar lease incentives are recorded as property and equipment and as a reduction of the right-of-use leased assets, and are amortized on a straight-line basis as a reduction to operating lease costs. Cost Basis Equity Investment During the second quarter of 2021, the Company made an $ 8.1 million equity investment in a private company, which represented less than 5 % of the outstanding equity of that company. The investment is accounted for using the cost method, as the investment does not have a readily determinable fair value, and is included as a component of other long-term assets on the condensed consolidated balance sheet at June 30, 2021. Intangible Assets Subject to Amortization 7 Table of contents Finite-lived intangible assets are recorded at cost, net of accumulated amortization and, if applicable, impairment charges. Amortization of finite-lived intangible assets is provided over their estimated useful lives on a straight-line basis. The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company did not recognize any impairment losses during the six months ended June 30, 2021 and 2020. On June 24, 2020, the Company acquired Sugarmate, Inc. (Sugarmate), the developer of a mobile app designed to help people visualize diabetes therapy data in innovative ways. The Sugarmate acquisition was accounted for as an acquisition of assets in accordance with Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business . Substantially all of the fair value was concentrated in a single identifiable asset, a technology-based intangible asset. The purchased intangible asset is being amortized on a straight-line basis over an estimated useful life of five years . The Company’s results of operations include the operating results of Sugarmate since the date of acquisition, the amounts of which were not material. Revenue Recognition Revenue is generated primarily from sales of insulin pumps, disposable cartridges and infusion sets to individual customers with third-party insurance coverage and through a network of distributors that resell the products to insulin-dependent diabetes customers. The Company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. Revenue Recognition for Arrangements with Multiple Deliverables The Company considers the individual deliverables in its product offering to be separate performance obligations. The transaction price is determined based on the consideration expected to be received, based either on the stated value in contractual arrangements or the estimated cash to be collected in non-contracted arrangements. The Company allocates the consideration to the individual performance obligations and recognizes the consideration based on when the performance obligation is satisfied, considering whether or not this occurs at a point in time or over time. Generally, insulin pumps, cartridges, infusion sets and accessories are deemed performance obligations that are satisfied at a point in time when the customer obtains control of the promised good, which typically is upon shipment for our distributor arrangements and upon receipt for sales directly to individual customers. Complementary products, such as t:connect and the Tandem Device Updater, are considered performance obligations that are satisfied over time, as access and support for these products is provided throughout the typical four-year warranty period of the insulin pumps. Accordingly, revenue related to the complementary products is deferred and recognized ratably over a four-year period. When there is no standalone value for the complementary product, the Company determines their value by applying the expected cost plus a margin approach and then allocates the residual to the insulin pumps. Deferred revenue related to these performance obligations that are satisfied over time was included in the following consolidated balance sheet accounts in the amounts shown as of June 30, 2021 and December 31, 2020 (in thousands): June 30, 2021 December 31, 2020 Deferred revenue $ 7,471 $ 5,508 Other long-term liabilities 13,841 10,426 Total $ 21,312 $ 15,934 Warranty Reserve The Company generally provides a four-year warranty on its insulin pumps to end-user customers and may replace any pumps that do not function in accordance with the product specifications. Insulin pumps returned to the Company may be refurbished and redeployed. Additionally, the Company offers a six-month warranty on disposable cartridges and infusion sets. Estimated warranty costs are recorded at the time of shipment. The Company evaluates the reserve quarterly. Warranty costs are primarily estimated based on the current expected product replacement cost and expected replacement rates utilizing historical experience. Recently released versions of the pump may not incur warranty costs in a manner similar to previously released pumps, on which the Company initially bases its warranty estimate of newer pumps. The Company may make further adjustments to the warranty reserve when deemed appropriate, giving additional consideration to the length of time the pump version has been in the field and future expectations of performance based on new features and capabilities that may become available through Tandem Device Updater. 8 Table of contents The following table provides a reconciliation of the changes in product warranty liabilities for the three and six months ended June 30, 2021 and 2020 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Balance at beginning of period $ 23,169 $ 16,761 $ 22,075 $ 16,724 Provision for warranties issued during the period 8,020 4,844 13,916 9,658 Settlements made during the period ( 4,751 ) ( 3,331 ) ( 9,007 ) ( 6,721 ) Decrease in warranty estimates ( 770 ) ( 451 ) ( 1,316 ) ( 1,838 ) Balance at end of period $ 25,668 $ 17,823 $ 25,668 $ 17,823 As of June 30, 2021 and December 31, 2020, total product warranty reserves of $ 25.7 million and $ 22.1 million, respectively, were included in the following consolidated balance sheet accounts (in thousands): June 30, 2021 December 31, 2020 Other current liabilities $ 9,795 $ 8,409 Other long-term liabilities 15,873 13,666 Total warranty reserve $ 25,668 $ 22,075 Stock-Based Compensation Stock-based compensation cost is measured at the grant date based on the estimated fair value of the award, and the portion that is ultimately expected to vest is recognized as compensation expense over the requisite service period on a straight-line basis. The Company estimates the fair value of stock options issued under the Company’s Amended and Restated 2013 Stock Incentive Plan (2013 Plan), and the fair value of the employees’ purchase rights under the Company’s 2013 Employee Stock Purchase Plan (ESPP), using the Black-Scholes option-pricing model on the date of grant. The Black-Scholes option-pricing model requires the use of assumptions about a number of variables, including stock price volatility, expected term, dividend yield and risk-free interest rate (see Note 8, “Stockholders’ Equity”). The fair value of restricted stock unit (RSU) awards issued under the 2013 Plan that vest solely based on service is estimated based on the fair market value of the underlying stock on the date of grant. The fair value of RSU awards issued under the 2013 Plan that vest based upon the Company’s actual performance relative to predefined performance metrics is estimated based on the fair market value of the underlying stock on the date of grant and the probability that the specified performance criteria will be met, subject to the awardee’s continuing service through the measurement date. We update our assessment of the probability that the specified performance criteria will be achieved each quarter, and adjust our estimate of the fair value of the performance-based RSUs if necessary. Net Income (Loss) Per Share Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net income per share reflects the potential dilution that would occur if securities exercisable for or convertible into common stock were exercised for or converted into common stock. Dilutive common share equivalents are comprised of stock options and unvested RSUs outstanding under the Company’s stock plans, potential awards to be granted pursuant to the ESPP, and common stock warrants, each calculated using the treasury stock method; and shares issuable upon conversion of the convertible senior notes, calculated using the if-converted method. For common stock warrants that are recorded as a liability in the accompanying condensed consolidated balance sheets, the calculation of diluted loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of the warrants is dilutive to loss per share for the period, an adjustment is made to net loss used in the calculation to remove the change in fair value of the warrants from the numerator for the period. Likewise, an adjustment to the denominator is required to reflect the related dilutive shares, if any, under the treasury stock method. 9 Table of contents For the three months ended June 30, 2020, and the six months ended June 30, 2021 and 2020, there is no difference in the weighted average number of shares used to calculate basic and diluted net loss per share due to the Company’s net loss position. For the three months ended June 30, 2021, the numerator and denominator of the diluted net income per share computation are calculated as follows: Three Months Ended June 30, (in thousands) 2021 Net income - basic and diluted $ 4,008 Weighted average shares outstanding - basic 62,717 Dilutive common share equivalents: Options to purchase common stock 2,550 Unvested restricted stock units 246 Warrants to purchase common stock 148 Awards to be granted under the ESPP 2 Convertible senior notes (if-converted) — Weighted average shares outstanding - diluted 65,663 Potentially dilutive securities outstanding and not included in the calculation of diluted net loss per share (because inclusion would be anti-dilutive) are as follows (in thousands, in common stock equivalent shares): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Options to purchase common stock — 6,195 5,136 5,992 Unvested restricted stock units — 132 170 132 Warrants to purchase common stock 30 640 251 640 Awards to be granted under the ESPP — 8 4 4 Convertible senior notes (if-converted) 2,554 1,375 2,554 688 2,584 8,350 8,115 7,456 Recent Accounting Pronouncements In December 2019, the Financial Accounting Standards Board (FASB) issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes , which is intended to simplify various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted. The Company early adopted the new guidance in the second quarter of 2020. As a result, the Company recognized, on a prospective basis, $ 13,000 of income tax expense in the second quarter of 2020 upon the reversal of tax benefits recorded in the first quarter of 2020 related to unrealized gains on short-term investments. 10 Table of contents In June 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which is intended to simplify the accounting for convertible instruments. This new guidance eliminates certain models that require separate accounting for embedded conversion features, and eliminates certain of the conditions for equity classification for contracts in an entity’s own equity. Accordingly, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance can be adopted through either a modified retrospective method of transition or a fully retrospective method of transition. ASU 2020-06 is effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company elected to early adopt the new standard on January 1, 2021 using the modified retrospective method, and recorded a net reduction to accumulated deficit of $ 9.0 million, a decrease to additional paid-in capital of $ 85.8 million, and an increase to convertible senior notes, net - long-term of $ 76.8 million to reflect the impact of the accounting change (see Note 7, “Convertible Senior Notes”). 3. Short-Term Investments The Company invests in marketable securities primarily consisting of debt instruments of the U.S. Government, U.S. Government-sponsored enterprises, and financial institutions and corporations with strong credit ratings. The following represents a summary of the estimated fair value of short-term investments as of June 30, 2021 and December 31, 2020 (in thousands): At June 30, 2021 Maturity (in years) Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value Available-for-sale securities: Commercial paper Less than 1 $ 222,319 $ 11 $ ( 2 ) $ 222,328 U.S. Government-sponsored enterprise Less than 2 63,175 18 ( 19 ) 63,174 U.S. Treasury securities Less than 2 104,937 2 ( 23 ) 104,916 Corporate debt securities Less than 2 53,303 6 ( 13 ) 53,296 Supranational bonds Less than 1 3,010 — — 3,010 Total $ 446,744 $ 37 $ ( 57 ) $ 446,724 At December 31, 2020 Maturity (in years) Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value Available-for-sale securities: Commercial paper Less than 1 $ 108,892 $ 5 $ ( 1 ) $ 108,896 U.S. Government-sponsored enterprise Less than 2 52,330 21 ( 1 ) 52,350 U.S. Treasury securities Less than 2 143,244 12 ( 2 ) 143,254 Corporate debt securities Less than 2 85,788 48 ( 13 ) 85,823 Total $ 390,254 $ 86 $ ( 17 ) $ 390,323 The Company has classified all marketable securities, regardless of maturity, as short-term investments based upon the Company’s ability and intent to use any of those marketable securities to satisfy the Company’s liquidity requirements. The Company periodically reviews the portfolio of available-for-sale debt securities to determine if any investment is impaired due to changes in credit risk or other potential valuation concerns. Unrealized losses on available-for-sale debt securities at June 30, 2021 were not significant and were due to changes in interest rates, including credit spreads from perceived increased credit risks as a result of the COVID-19 global pandemic. The Company does not intend to sell the available-for-sale debt securities that are in an unrealized loss position, and it is not more likely than not that the Company will be required to sell these debt securities before recovery of their amortized cost bases, which may be at maturity. Based on the credit quality of the available-for-sale debt securities in an unrealized loss position, and the Company’s estimates of future cash flows to be collected from those securities, the Company believes the unrealized losses are not credit losses. Accordingly, the Company did not recognize any impairment losses related to its available-for-sale debt securities at June 30, 2021. 11 Table of contents 4. Accounts Receivable and Inventories Accounts Receivable Accounts receivable consisted of the following (in thousands): June 30, 2021 December 31, 2020 Accounts receivable $ 83,885 $ 86,052 Less: allowance for credit losses ( 3,673 ) ( 3,857 ) Accounts receivable, net $ 80,212 $ 82,195 Allowance for Credit Losses The following table provides a reconciliation of the changes in the estimated allowance for expected accounts receivable credit losses for the three and six months ended June 30, 2021 and 2020 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Balance at beginning of the period $ 3,559 $ 3,384 $ 3,857 $ 3,304 Provision for expected credit losses 731 666 874 1,529 Write-offs and adjustments, net of recoveries ( 617 ) ( 911 ) ( 1,058 ) ( 1,694 ) Balance at end of the period $ 3,673 $ 3,139 $ 3,673 $ 3,139 Inventories Inventories consisted of the following as of June 30, 2021 and December 31, 2020 (in thousands): June 30, 2021 December 31, 2020 Raw materials $ 22,684 $ 30,880 Work-in-process 16,360 15,664 Finished goods 27,661 17,177 Total inventories $ 66,705 $ 63,721 5. Fair Value Measurements Authoritative guidance on fair value measurements defines fair value, and provides a consistent framework for measuring fair value and for disclosures of each major asset and liability category measured at fair value on either a recurring or a nonrecurring basis. Fair value is intended to reflect an assumed exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1: Observable inputs such as unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3: Unobservable inputs in which there is little or no market data and that are significant to the fair value of the assets or liabilities, which require the reporting entity to develop its own valuation techniques that require input assumptions. 12 Table of contents The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands): Fair Value Measurements at June 30, 2021 (Level 1) (Level 2) (Level 3) Assets Cash equivalents (1) $ 94,966 $ 94,966 $ — $ — Commercial paper 222,328 — 222,328 — U.S. Government-sponsored enterprise 63,174 — 63,174 — U.S. Treasury securities 104,916 104,916 — — Corporate debt securities 53,296 — 53,296 — Supranational bonds 3,010 — 3,010 — Total assets $ 541,690 $ 199,882 $ 341,808 $ — Liabilities Common stock warrants $ 2,789 $ — $ — $ 2,789 Total liabilities $ 2,789 $ — $ — $ 2,789 Fair Value Measurements at December 31, 2020 (Level 1) (Level 2) (Level 3) Assets Cash equivalents (1) $ 87,300 $ 87,300 $ — $ — Commercial paper 108,896 — 108,896 — U.S. Government-sponsored enterprise 52,350 — 52,350 — U.S. Treasury securities 143,254 143,254 — — Corporate debt securities 85,823 — 85,823 — Total assets $ 477,623 $ 230,554 $ 247,069 $ — Liabilities Common stock warrants $ 14,261 $ — $ — $ 14,261 Total liabilities $ 14,261 $ — $ — $ 14,261 (1) Generally, cash equivalents include money market funds and investments with a maturity of three months or less from the date of purchase. The Company’s Level 2 financial instruments are valued using market prices on less active markets with observable valuation inputs such as interest rates and yield curves. The Company obtains the fair value of Level 2 financial instruments from quoted market prices, calculated prices or quotes from third-party pricing services. The Company validates these prices through independent valuation testing and review of portfolio valuations provided by the Company’s investment managers. The Company’s Level 3 liabilities at June 30, 2021 and December 31, 2020 include the remaining Series A warrants issued by the Company in connection with the public offering of common stock in October 2017, and which expire in October 2022. As of June 30, 2021 and 2020, there were Series A warrants outstanding to purchase 29,700 shares and 415,200 shares, respectively, of the Company’s common stock (see Note 8, “Stockholders’ Equity”). 13 Table of contents The Company reassesses the fair value of the outstanding Series A warrants at each reporting date utilizing a Black-Scholes pricing model. Variables used in the pricing model include the closing market price of the Company’s common stock at the balance sheet date, and estimates of stock price volatility, dividend yield, remaining warrant term and risk-free interest rate. The Company develops its estimates based on publicly available historical data. A significant increase (decrease) in any of these inputs in isolation, particularly the market price of the Company’s common stock, would have resulted in a significantly higher (lower) fair value measurement. The assumptions used to estimate the fair values of the outstanding Series A warrants at June 30, 2021 and December 31, 2020 are presented below: Series A Warrants June 30, 2021 December 31, 2020 Risk-free interest rate 0.1 % 0.1 % Expected dividend yield 0.0 % 0.0 % Expected volatility 50.3 % 55.3 % Remaining term (in years) 1.3 1.8 The following table presents a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the six months ended June 30, 2021 and 2020: Six Months Ended June 30, 2021 2020 Balance at beginning of the period $ 14,261 $ 23,509 Loss recognized from the change in fair value of common stock warrants 962 16,258 Common stock warrants exercised during the period ( 12,434 ) ( 142 ) Balance at end of the period $ 2,789 $ 39,625 Of the loss recognized from the change in fair value of common stock warrants for the six months ended June 30, 2021 and 2020, $ 0.1 million and $ 16.2 million, respectively, was attributable to warrants outstanding as of June 30, 2021 and 2020. 6. Leases The Company’s leases consist of operating leases for general office space, laboratory, manufacturing and warehouse facilities, and equipment. These noncancellable operating leases have initial lease terms ranging from one year to seven years . Leases with an initial term of 12 months or less are expensed as incurred and are not recorded as right-of-use assets on the Company’s condensed consolidated balance sheets. Certain leases include an option to renew, with renewal terms that can extend the lease term for additional periods. The exercise of lease renewal options is at the Company’s sole discretion. For renewal options that are reasonably certain at the lease Commencement Date of being exercised, the Company includes the renewal option period in the lease term. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option that is reasonably certain to be exercised. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. Because the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at the lease Commencement Date in determining the present value of future lease payments. The Company used the incremental borrowing rate on January 1, 2019 for operating leases that commenced prior to that date. In March 2021, the Company entered into a second amendment (Second Amendment) to its lease agreement covering approximately 59,013 square feet of general administrative office space (Existing Premises) located on Vista Sorrento Parkway, in San Diego, California (Vista Sorrento Lease). The Second Amendment expanded the Existing Premises by adding approximately 14,916 square feet of general administrative office space (Expansion Space), and extended the lease term for the Existing Premises through January 2028. The Expansion Space lease Commencement Date occurred in March 2021, and the lease term expires in January 2028. The Company has two options to extend the term of the Vista Sorrento Lease, covering both the Existing Premises and the Expansion Space, with each option providing for an additional period of five years . The Vista Sorrento Lease term was determined assuming the renewal options would not be exercised. The Company recognized right-of-use leased assets and corresponding operating lease liabilities of $ 15.1 million on the condensed consolidated balance sheet in the first quarter of 2021 related to the Second Amendment. 14 Table of contents The Company’s lease cost recorded in the condensed consolidated statements of operations was as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Operating lease cost $ 2,197 $ 1,899 $ 4,203 $ 3,655 Short-term lease cost 22 71 44 135 Total lease cost $ 2,219 $ 1,970 $ 4,247 $ 3,790 Maturities of operating lease liabilities at June 30, 2021 were as follows (in thousands): Years Ending December 31, 2021 (remaining) $ 4,742 2022 9,129 2023 6,856 2024 5,691 2025 5,801 Thereafter 10,654 Total undiscounted lease payments 42,873 Less: amount representing interest ( 6,237 ) Present value of operating lease liabilities 36,636 Less: current portion of operating lease liabilities ( 9,260 ) Operating lease liabilities - long term $ 27,376 The weighted-average remaining lease term and weighted-average discount rate for operating leases were as follows: June 30, 2021 December 31, 2020 Weighted-average remaining lease term (in years) 5.3 3.6 Weighted-average discount rate used to determine operating lease liabilities 5.6 % 6.6 % Cash paid for amounts included in the measurement of lease liabilities, representing operating cash flows used for operating leases, was $ 4.7 million and $ 2.9 million for the six months ended June 30, 2021 and 2020, respectively. 7. Convertible Senior Notes In May 2020, the Company entered into a purchase agreement with certain counterparties for the sale of an aggregate of $ 287.5 million principal amount of 1.50 % Convertible Senior Notes due 2025 (Notes) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The net proceeds from the issuance of the Notes were $ 244.6 million, net of debt issuance costs and cash used to pay the cost of 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. 15 Table of contents The Notes are convertible into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election, at an initial conversion rate of 8.8836 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $ 112.57 (Conversion Price) per share of the Company’s common stock. The conversion rate is subject to customary adjustments for certain events as described in the Indenture. It is the Company’s intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. The Company may not redeem the Notes prior to May 6, 2023. The Company has the option to redeem for cash all or any portion of the Notes on or after May 6, 2023 if the last reported sale price of the Company’s common stock has been at least 130 % of the Conversion Price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period, at a redemption price equal to 100 % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest. No sinking fund is provided for the Notes. Holders of the Notes may convert all or a portion of their Notes at their option prior to November 1, 2024, in multiples of $1,000 principal amounts, only under the following circumstances: • if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the applicable Conversion Price of the Notes on each such trading day; • during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each day of that five consecutive trading day period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate of the Notes on such trading day; • if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or • on the occurrence of specified corporate events. On or after November 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Holders of the Notes who convert in connection with a make-whole fundamental change or in connection with a redemption are entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change, holders of the Notes may require us to repurchase all or a portion of the Notes at a price equal to 100 % of the principal amount of the Notes, plus any accrued and unpaid interest. Initially, in accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of similar debt instruments, which do not have an associated convertible feature. The carrying amount of the equity component representing the co nversion option for the Notes was $ 85.8 million and was recorded as a debt discount, to be amortized to interest expense at an effective interest rate of 9.9 %. In addition, t he Company allocated $ 2.7 million of debt issuance costs to the equity component and the remaining debt issuance costs of $ 6.1 million were allocated to the liability component, to be amortized to interest expense under the effective interest rate method. On January 1, 2021, the Company early adopted ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which is intended to simplify the accounting for convertible instruments. The ASU eliminates the cash conversion feature models in ASC 470-20, Debt with Conversion and Other Options , which required an issuer of certain convertible debt to separately account for embedded conversion features as a component of equity. Instead, an issuer will account for these securities as a single unit of account, unless the conversion feature meets certain criteria. The Company adopted the new standard using the modified retrospective method, and recorded a net reduction to accumulated deficit of $ 9.0 million, a decrease to additional paid-in capital of $ 85.8 million, and an increase to convertible senior notes, net - long-term of $ 76.8 million to reflect the impact of the accounting change. The Notes are now accounted for as a single liability measured at amortized cost, as no other embedded features require bifurcation and recognition as derivatives. 16 Table of contents The liability and equity components of the Notes consisted of the following (in thousands) at June 30, 2021 and December 31, 2020: June 30, 2021 December 31, 2020 Liability: Principal amount $ 287,500 $ 287,500 Unamortized debt issuance costs ( 6,901 ) ( 5,446 ) Unamortized debt discount — ( 79,070 ) Net carrying amount $ 280,599 $ 202,984 Carrying amount of the equity component $ — $ 85,803 As of June 30, 2021, the unamortized debt issuance costs of $ 6.9 million associated with the Notes will be amortized to interest expense, at an effective interest rate of 2.2 %, over the remaining term of the Notes of approximately 3.8 years. The following table details interest expense recognized related to the Notes for the three and six months ended June 30, 2021 and 2020 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Contractual interest expense $ 1,078 $ 719 $ 2,156 $ 719 Amortization of debt issuance costs 431 159 859 159 Amortization of debt discount N/A 2,298 N/A 2,298 Total interest expense $ 1,509 $ 3,176 $ 3,015 $ 3,176 The Notes will have a dilutive effect to the extent the average market price per share of the Company’s common stock for a given reporting period exceeds the Conversion Price of $ 112.57 . As of June 30, 2021, the “if-converted value” did not exceed the principal amount of the Notes. Capped Call Transactions In connection with the issuance of the Notes, the Company entered into Capped Call Transactions in May of 2020 with certain counterparties at a net cost of $ 34.1 million. The Capped Call Transactions are intended to reduce potential dilution to holders of the Company’s common stock beyond the Conversion Price of $ 112.57 , up to a Conversion Price of $ 173.18 on any conversion of the Notes, or to offset any cash payments the Company is required to make in excess of the principal amount of such converted Notes, as the case may be, with such reduction or offset subject to a cap. The cap price of the Capped Call Transactions is initially $ 173.18 per share of the Company’s common stock, representing a premium of 100% above the last reported sale price of $ 86.59 per share of the Company’s common stock on May 12, 2020, and is subject to certain adjustments under the terms of the Capped Call Transactions. Conditions that cause adjustments to the initial strike price of the Capped Call Transactions mirror conditions that result in corresponding adjustments for the Notes. For accounting purposes, the Capped Call Transactions are separate transactions, and not part of the terms of the Notes. As these transactions meet certain criteria under the applicable accounting guidance, the Capped Call Transactions are recorded in stockholders' equity and are not accounted for as derivatives. The cost of the Capped Call Transactions was recorded as a reduction of the Company’s additional paid-in capital in the Company’s consolidated balance sheet and will not be remeasured. 17 Table of contents 8. Stockholders’ Equity Shares Reserved for Future Issuance The following shares of the Company’s common stock were reserved for future issuance as of June 30, 2021 (in thousands): Shares reserved for issuance upon conversion of Convertible Senior Notes 2,554 Shares underlying outstanding warrants 251 Shares underlying outstanding stock options 5,691 Shares underlying unvested restricted stock units 453 Shares authorized for issuance pursuant to awards granted under the ESPP 1,289 Shares authorized for future equity award grants 1,440 11,678 Common Stock Warrants Warrants outstanding to purchase shares of the Company's common stock as of June 30, 2021 were as follows: Issue Date Exercise Price Per Share Warrants Outstanding Expiration Date October 2017 $ 3.50 29,700 October 2022 March 2017 $ 23.50 193,788 March 2027 August 2011 - August 2012 $ 73.73 27,704 August 2021 - August 2022 251,192 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 522 and 125,522 shares of its common stock, respectively, upon the exercise of warrants during the three and six months ended June 30, 2021, and 32,574 and 34,689 shares of its common stock, respectively, upon the exercise of warrants during the three and six months ended June 30, 2020. Stock Plans The Company’s Amended and Restated 2013 Stock Incentive Plan (2013 Plan) was originally approved by the Company’s board of directors in October 2013. Under the 2013 Plan, the Company may grant stock options, stock appreciation rights, restricted stock and restricted stock units to individuals who are then employees, officers, directors or consultants of the Company. 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. Stock-Based Compensation Common Stock Options The Company granted options to purchase 239,608 and 355,008 shares of common stock, respectively, during the three and six months ended June 30, 2021, and options to purchase 621,045 and 850,956 shares of common stock, respectively, during the three and six months ended June 30, 2020. 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 . 18 Table of contents The Company estimates the fair value of stock options using the Black-Scholes option-pricing model on the grant date. The assumptions used in the Black-Scholes option-pricing model for common stock options were as follows: Stock Options Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Weighted average grant date fair value (per share) $ 54.92 $ 52.50 $ 56.89 $ 50.04 Risk-free interest rate 1.1 % 0.4 % 1.0 % 0.6 % Expected dividend yield 0.0 % 0.0 % 0.0 % 0.0 % Expected volatility 74.9 % 75.0 % 75.1 % 74.3 % Expected term (in years) 6.1 6.0 6.1 6.0 Restricted Stock Units (RSUs) The Company granted 339,386 and 342,594 restricted stock units (RSUs), respectively, during the three and six months ended June 30, 2021, and 131,848 RSUs during the three and six months ended 2020. These RSUs have a grant value equal to the closing price of the Company’s common stock on the award date, and generally 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 25,674 performance-based RSUs during the three months ended June 30, 2021. The performance-based RSUs have a grant value equal to the closing price of the Company’s common stock on the award date, and vest upon the Company’s actual performance relative to predefined performance metrics and subject to the awardee’s continuing service through the December 31, 2024 measurement date. The weighted average grant date fair value of RSUs granted were as follows: Restricted Stock Units Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Weighted average grant date fair value (per share) $ 82.31 $ 82.33 $ 82.41 $ 82.33 Employee Stock Purchase Plan The Company records stock-based compensation expense associated with the ESPP using the Black-Scholes option-pricing model. Valuations are performed on the grant date at the beginning of the purchase period, which generally occurs in May and November of each year. The assumptions used in the Black-Scholes option-pricing model for the ESPP were as follows: ESPP Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Weighted average grant date fair value (per share) $ 29.24 $ 36.18 $ 29.24 $ 36.18 Risk-free interest rate 0.1 % 0.2 % 0.1 % 0.2 % Expected dividend yield 0.0 % 0.0 % 0.0 % 0.0 % Expected volatility 47.5 % 65.7 % 47.5 % 65.7 % Expected term (in years) 1.3 1.3 1.3 1.3 19 Table of contents The following table summarizes the allocation of stock-based compensation expense included in the condensed consolidated statements of operations for all stock-based compensation arrangements (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Cost of sales $ 1,591 $ 2,162 $ 3,067 $ 4,326 Selling, general & administrative 10,881 11,707 20,292 23,210 Research and development 2,505 2,552 4,565 4,750 Total stock-based compensation expense $ 14,977 $ 16,421 $ 27,924 $ 32,286 The total stock-based compensation expense capitalized as part of the cost of the Company’s inventories was $ 0.8 million at June 30, 2021, and $ 0.6 million at December 31, 2020. 9. Income Taxes For the three and six months ended June 30, 2021, the Company recognized income tax expense of $ 0.1 million on pre-tax income of $ 4.1 million, and an income tax benefit of $ 0.1 million on pre-tax loss of $ 1.1 million, respectively. The income tax benefit for the six months ended June 30, 2021 was primarily attributable to the pre-tax loss position and excess tax benefits from stock compensation recorded discretely during the period, partially offset by state and foreign income tax expense as a result of current taxable income in certain jurisdictions. For the three and six months ended June 30, 2020, the Company recognized an income tax benefit of $ 2.1 million on a pre-tax loss of $ 29.2 million, and an income tax benefit of $ 2.0 million on a pre-tax loss of $ 44.0 million, respectively. The income tax benefit for three and six months ended June 30, 2020 was primarily due to benefit associated with the release of valuation allowance related to the acquisition of Sugarmate, partially offset by state and foreign income tax expense as a result of current taxable income in those jurisdictions. The Company calculated the provision (benefit) for income taxes for the three and six months ended June 30, 2021 by applying an estimate of the annual effective tax rate for the full year to ordinary income (loss) adjusted by the tax impact of discrete items. For the three and six months ended June 30, 2020, the Company calculated the provision for income taxes using a discrete effective tax rate method as the annual effective tax rate method would not provide a reliable estimate. The Company continues to maintain a full valuation allowance against its net deferred tax assets as of June 30, 2021, based on the current assessment that it is not more likely than not these future benefits will be realized before expiration. 10. Business Segment and Geographic Information Segment Reporting Operating segments are identified as components of an enterprise about which discrete financial information is available for evaluation by the chief operating decision-maker (CODM) in making decisions regarding resource allocation and assessing performance. The Company is organized based on its current product portfolio, which consists primarily of insulin pumps, disposable cartridges and infusion sets for the storage and delivery of insulin. The Company views its operations and manages its business as one segment and a single reporting unit because key operating decisions and resource allocations are made by the CODM using consolidated financial data. Disaggregation of Revenue The Company primarily sells its products through national and regional distributors in the United States on a non-exclusive basis, and through distribution partners outside the United States, including in select European countries, Canada, Australia, New Zealand, and South Africa. In the United States and Canada, the Company utilizes a direct sales force. The Company disaggregates its revenue by geography and by major sales channel as management believes these categories best depict how the nature, amount and timing of revenues and cash flows are affected by economic factors. 20 Table of contents Revenues by Geographic Region and Customer Sales Channels During the three and six months ended June 30, 2021 and 2020, no individual country outside the United States generated revenue that represented more than 10% of total revenue. The table below sets forth revenues for the Company’s two primary geographical markets, based on the geographic location to which its products are shipped. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 United States $ 127,580 $ 89,277 $ 230,919 $ 168,823 International 44,559 19,959 82,257 38,339 Total Sales $ 172,139 $ 109,236 $ 313,176 $ 207,162 Sales to distributors accounted for 68 % and 71 % of the Company’s total domestic sales for the three months ended June 30, 2021 and 2020, respectively, and 68 % and 70 % of total domestic sales for the six months ended June 30, 2021 and 2020, respectively. Sales to distributors accounted for 95 % and 96 % of the Company’s total international sales for the three months ended June 30, 2021 and 2020, respectively, and 95 % of the Company’s total international sales for both the six months ended June 30, 2021 and 2020. 11. Commitments and Contingencies Legal and Regulatory Matters In April 2020, the Company was named as a defendant in four federal class action lawsuits relating to a data breach it experienced in January 2020, each of which was subsequently dismissed. In addition, in May 2020 the Company was named as a defendant in three California state court class action lawsuits arising from the same data breach. Collectively, these lawsuits seek statutory, compensatory, actual, and punitive damages; equitable relief, including restitution; pre- and post-judgment interest; injunctive relief; and attorney fees, costs, and expenses from the Company. On July 24, 2020, these three pending lawsuits were consolidated into a single case in the Superior Court of the State of California in the County of San Bernardino entitled Joseph Deluna et al v. Tandem Diabetes Care, Inc . The consolidated case alleges violations of the Confidentiality of Medical Information Act (CMIA), California Consumer Privacy Act (CCPA), California’s Unfair Competition Law (UCL), and breach of contract. The Company filed a demurrer seeking dismissal of all claims, which was heard by the Court on October 27, 2020, and which resulted in the following outcome: (i) the demurrer of the CMIA claim was denied; (ii) the demurrer of the CCPA claim was sustained; and (iii) the demurrer of the UCL and contract claims were sustained with leave to amend the pending complaint. A second demurrer was heard by the Court on March 29, 2021 with the following outcome: (i) the demurrer of the CMIA claim was denied; and (ii) the demurrer of the UCL and contract claims were narrowed in scope to dismiss three plaintiffs for either failing to allege cognizable damages or injuries-in-fact, resulting in two remaining plaintiffs. Although the Company intends to vigorously defend against these claims, there is no guarantee that the Company will prevail. The Company presently is unable to determine the ultimate outcome of these lawsuits or determine the amount (or range) of possible losses associated with the lawsuits. In September 2020, the Company was named as a defendant in a lawsuit entitled Buck Walsh, individually and on behalf of others similarly situated v. Tandem Diabetes Care, Inc. , which was filed in the Superior Court of the State of California in the County of San Diego. The alleged violations include business and professions code and labor code violations for failure to compensate wages, unpaid meal and rest periods, and failure to reimburse for necessary business-related expenses. The class of plaintiffs includes hourly paid or non-exempt employees of the Company who were employed from April 6, 2016 through the date of adjudication. The parties recently agreed to resolve the matter on a class-wide basis. The settlement is intended to resolve the claims of the individual plaintiff, as well as the remaining members of the class, unless an individual class member submits a timely request for exclusion. The material terms of the settlement are set forth in a binding Memorandum of Agreement dated as of July 1, 2021, which is subject to the completion of a number of conditions, as well as final approval by the court. There is no guarantee that the conditions will be met or that court approval will be obtained. If the court does not approve the settlement, or if other conditions to approval of the settlement are not met, the case will continue and the Company will continue to vigorously defend against the claims. 21 Table of contents From time to time, the Company is involved in various other legal proceedings, regulatory matters, and other disputes or claims arising from or related to the normal course of our business activities, including actions with respect to intellectual property, data privacy, employment, regulatory, product liability and contractual matters. In connection with these proceedings or matters, the Company regularly assesses the probability and amount (or range) of possible losses based on the developments in these proceedings or matters. A liability is recorded in the consolidated financial statements if it is determined that it is probable that a loss has been incurred, and that the amount (or range) of the loss can be reasonably estimated. Because of the uncertainties related to any pending proceedings or matters, the Company is currently unable to predict their ultimate outcome and, with respect to any proceeding or matter where no liability has been accrued, to make a reasonable estimate of the possible loss (or range of loss) that could result from an adverse outcome. Except as set forth above, as of June 30, 2021 and December 31, 2020, there were no legal proceedings, regulatory matters, or other disputes or claims for which a material loss was considered probable or for which the amount (or range) of loss was reasonably estimable. However, regardless of the merits of the claims raised or the outcome, legal proceedings, regulatory matters, and other disputes and claims may have an adverse impact on the Company because of as a result of defense and settlement costs, diversion of management time and resources, and other factors. 22 Table of contents