TANDEM DIABETES CARE INC 10-K

Item 7A. Quantitative and Qualitative Disclosures about Market Risk. We invest our excess cash primarily in commercial paper, corporate debt securities, U.S. Government-sponsored enterprise securities and U.S. Treasury securities. Some of the financial instruments in which we invest subject us to market risk, in that a change in prevailing interest rates may cause the principal amount of the instrument to fluctuate. Other financial instruments in which we invest subject us to credit risk, in that the value of the instrument may fluctuate based on the issuer’s ability to pay. The primary objectives of our investment activities are to maintain liquidity and preserve principal while maximizing the income we receive from our financial instruments without significantly increasing risk. We have established guidelines regarding approved investments and maturities of investments, which are primarily designed to maintain liquidity and preserve principal. Because of the short-term maturities of our financial instruments, we do not believe that an increase or decrease in market interest rates would have any significant impact on the realized value of our investment portfolio. If a 10% change in interest rates were to have occurred on December 31, 2020, this change would not have had a material effect on the fair value of our investment portfolio as of that date. Our operations are primarily located in the United States, and nearly all of our sales since inception have been made in U.S. dollars. With the exception of a portion of our sales in Canada, our sales outside of the United States are currently made to independent distributors under agreements denominated in U.S. dollars. Accordingly, we believe we do not currently have any material exposure to foreign currency rate fluctuations. As our business in markets outside of the United States increases, we may be exposed to foreign currency exchange risk. We believe this is currently limited to our operations in Canada, where fluctuations in the rate of exchange between the U.S. dollar and the Canadian dollar could adversely affect our financial results. In addition, from time to time, we may have foreign currency exchange risk related to existing assets and liabilities, committed transactions and forecasted future cash flows. In certain circumstances, we may seek to manage such foreign currency exchange risk by using derivative instruments such as foreign currency exchange forward contracts to hedge our risk. In general, we may hedge foreign currency exchange exposures up to 12 months in advance. However, we may choose not to hedge some exposures for a variety of reasons, including prohibitive economic costs. 82 Item 8. Consolidated Financial Statements and Supplementary Data Our consolidated financial statements as of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020, and the Report of the Independent Registered Public Accounting Firm are included in this report as listed in the index. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm 84 Consolidated Balance Sheets as of December 31, 2020 and 2019 87 Consolidated Statements of Operations and Comprehensive Loss for the Years ended December 31, 2020, 2019 and 2018 88 Consolidated Statements of Stockholders’ Equity (Deficit) for the Years ended December 31, 2020, 2019 and 2018 89 Consolidated Statements of Cash Flows for th e Y ears ended December 31, 2020, 2019 and 2018 90 Notes to Consolidated Financial Statements 91 83 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Tandem Diabetes Care, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Tandem Diabetes Care, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows, for each of the three years in the period ended December 31, 2020 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 24, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. 84 Warranty reserve – Estimation of Product Replacement Reserve Description of the Matter As discussed in Note 2 to the consolidated financial statements, the Company has a warranty reserve of $22.1 million. The Company provides insulin pump end customers with a four-year warranty and may replace any pumps that do not function in accordance with the product specifications. Warranty costs are estimated at the time of shipment. Management applies significant judgment to determine relevant assumptions to calculate the reserve, including the assessment of historical warranty experience and replacement cost. Auditing management’s estimate of warranty reserve on pumps was complex and judgmental due to the significant estimation required by management in estimating the value of the warranty reserve. In particular, the warranty reserve estimate is sensitive due to significant assumptions including replacement rates and replacement product costs, especially as it relates to recently released pump versions for which replacement rates specific to that version are not yet known. As such, replacement rates of recently released pumps are based primarily upon historical rates of prior versions which ultimately may not be predictive of the experience of new pumps, due to new features and capabilities of the more recent releases. These assumptions are affected by actual customer experience and changes in these assumptions could have a material impact on the Company’s estimated reserve. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to these determinations and management’s significant assumptions for the warranty reserve. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over the warranty reserve estimation process. For example, we tested controls over management's review and calculation of significant assumptions underlying the warranty reserve, such as replacement rates and actual replacement product costs, and tested controls over the accuracy and completeness of data used. To test the Company’s warranty reserve, we performed audit procedures that included, among others, testing the completeness and accuracy of the underlying data used in the estimation calculation and evaluated the appropriateness of management’s methodology to calculate the warranty reserve. We also evaluated the reasonableness of management’s significant assumptions related to replacement rates and replacement cost, including review for contrary evidence. Evaluating management’s significant assumptions involved evaluating the historical claims data utilized by management in estimating both the replacement rates and costs of known and anticipated claims. We assessed the historical accuracy of management’s estimates by performing a lookback analysis and performing sensitivity analyses of the significant assumptions to evaluate the impact of changes in the warranty reserve that would result from changes in the assumptions. We tested the mathematical accuracy of the warranty reserve calculation and obtained documentation and performed inquiries of Company management to evaluate the completeness of the Company’s estimate. In addition, for revisions made to the estimated reserve, we evaluated the reasonableness of the subsequent changes by comparing the revised assumptions to the original estimated assumptions and evaluated the reasons for the subsequent change. 85 Valuation of Convertible Notes Description of the Matter As described in Note 7 to the consolidated financial statements, in May 2020 the Company issued $287.5 million of convertible senior notes due in 2025 (Convertible Notes), which permit the Company to settle in cash or stock at its option. The Company entered into separate capped call transactions to reduce potential dilution upon conversion of the Convertible Notes. These transactions are collectively referred to as the Convertible Notes Transactions. Auditing the Company’s determination of the value allocated to the liability and equity components was complex and highly judgmental as a result of the significant estimation required to determine the fair value of the liability component, measured at the estimated fair value of similar debt without the conversion option. The difference between the initial proceeds of the Convertible Notes and the value allocated to the liability component being recognized in stockholders’ equity (deficit) as the carrying amount of the equity component. The fair value of similar debt that does not have an associated conversion feature was determined using the Company’s effective interest rate. The effective interest rate for the Convertible Notes was estimated using a binomial lattice model with various assumptions, the most significant assumptions being expected volatility of the Company’s common stock and discount rate. Additionally, the Company performed a detailed analysis of the terms of the Convertible Notes Transactions to identify whether any derivatives that required separate mark-to-market accounting under applicable accounting guidance were present. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s Convertible Notes Transactions. For example, we tested the Company’s controls over the initial recognition and measurement of the Convertible Notes Transactions, including the assessment of the risk adjusted yield and the recording of the associated liability and equity components. Our testing of the Company’s initial accounting for the Convertible Notes Transactions, among other procedures, included reading the underlying agreements and evaluating the Company’s accounting analysis of the initial accounting of the Convertible Notes Transactions, including the determination of the balance sheet classification of each transaction and identification of any derivatives included in the arrangements. To test the estimated fair value of the conversion option, our audit procedures included, among others, evaluating methodologies used in the valuation model and testing the significant assumptions. For example, we compared the discount rate that was adjusted for the Company’s credit risk to the interest rates on comparable debt instruments, and we compared the forward-looking implied volatility to our independently calculated estimated equity volatility specific to the convertible note. In addition, we involved our internal valuation specialists to assist in our evaluation of the significant assumptions and methodologies used by the Company. We have also evaluated the Company’s financial statement disclosures related to these matters included in Note 7 to the consolidated financial statements. /s/ Ernst & Young LLP We have served as the Company's auditor since 2009. San Diego, California February 24, 2021 86 TANDEM DIABETES CARE, INC. CONSOLIDATED BALANCE SHEETS (In thousands except par value) December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 94,613 $ 51,175 Short-term investments 390,323 125,283 Accounts receivable, net 82,195 46,585 Inventories 63,721 49,073 Prepaid and other current assets 6,383 4,025 Total current assets 637,235 276,141 Property and equipment, net 50,022 32,923 Operating lease right-of-use assets 19,773 15,561 Other long-term assets 9,385 1,485 Total assets $ 716,415 $ 326,110 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 17,805 $ 17,745 Accrued expenses 4,783 8,014 Employee-related liabilities 34,159 28,320 Deferred revenue 6,082 3,869 Common stock warrants 14,261 23,509 Operating lease liabilities 9,421 6,320 Other current liabilities 17,341 11,619 Total current liabilities 103,852 99,396 Convertible senior notes, net - long-term 202,984 — Operating lease liabilities - long-term 15,914 14,063 Other long-term liabilities 27,360 17,672 Total liabilities 350,110 131,131 Commitments and contingencies (Note 10) — — Stockholders’ equity: Common stock, $ 0.001 par value; 200,000 shares authorized, 62,335 and 59,396 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively. 62 59 Additional paid-in capital 1,025,233 819,626 Accumulated other comprehensive income 220 122 Accumulated deficit ( 659,210 ) ( 624,828 ) Total stockholders’ equity 366,305 194,979 Total liabilities and stockholders’ equity $ 716,415 $ 326,110 The accompanying notes are an integral part of the consolidated financial statements. 87 TANDEM DIABETES CARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except per share data) Year Ended December 31, 2020 2019 2018 Sales $ 498,830 $ 362,305 $ 183,866 Cost of sales 238,310 168,093 94,044 Gross profit 260,520 194,212 89,822 Operating expenses: Selling, general and administrative 204,903 165,735 105,226 Research and development 63,574 45,199 29,227 Total operating expenses 268,477 210,934 134,453 Operating loss ( 7,957 ) ( 16,722 ) ( 44,631 ) Other income (expense), net: Interest income and other, net 1,567 3,193 1,439 Interest expense ( 12,805 ) — ( 7,561 ) Loss on extinguishment of debt — — ( 5,313 ) Change in fair value of common stock warrants ( 17,087 ) ( 11,075 ) ( 66,494 ) Total other expense, net ( 28,325 ) ( 7,882 ) ( 77,929 ) Loss before income taxes ( 36,282 ) ( 24,604 ) ( 122,560 ) Income tax expense (benefit) ( 1,900 ) 149 51 Net loss $ ( 34,382 ) $ ( 24,753 ) $ ( 122,611 ) Other comprehensive income (loss): Unrealized gain (loss) on short-term investments $ ( 20 ) $ 77 $ ( 13 ) Foreign currency translation gain 118 58 — Comprehensive loss $ ( 34,284 ) $ ( 24,618 ) $ ( 122,624 ) Net loss per share - basic and diluted $ ( 0.56 ) $ ( 0.42 ) $ ( 2.55 ) Weighted average shares used to compute basic and diluted net loss per share 60,990 58,507 48,129 The accompanying notes are an integral part of the consolidated financial statements. 88 TANDEM DIABETES CARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (In thousands) Common Stock Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity (Deficit) Balance at December 31, 2017 10,119 $ 10 $ 448,455 $ — $ ( 477,613 ) $ ( 29,148 ) Exercise of stock options 136 — 1,027 — — 1,027 Issuance of common stock for Employee Stock Purchase Plan 81 — 1,364 — — 1,364 Exercise of common stock warrants 8,603 9 29,566 — — 29,575 Fair value of common stock warrants at time of exercise — — 54,000 — — 54,000 Issuance of common stock in public offering, net of underwriter’s discount and offering costs 38,535 38 172,891 — — 172,929 Stock-based compensation expense 80 — 24,003 — — 24,003 Unrealized loss on short-term investments — — — ( 13 ) — ( 13 ) Adjustment to retained earnings from adoption of ASC 606 — — — — 149 149 Net loss — — — — ( 122,611 ) ( 122,611 ) Balance at December 31, 2018 57,554 $ 57 $ 731,306 $ ( 13 ) $ ( 600,075 ) $ 131,275 Exercise of stock options 1,422 1 17,674 — — 17,675 Issuance of common stock for Employee Stock Purchase Plan 327 1 6,205 — — 6,206 Exercise of common stock warrants 93 — 327 — — 327 Fair value of common stock warrants at time of exercise — — 5,492 — — 5,492 Stock-based compensation expense — — 58,622 — — 58,622 Unrealized gain on short-term investments, net of deferred tax — — — 77 — 77 Foreign currency translation adjustments — — — 58 — 58 Net loss — — — — ( 24,753 ) ( 24,753 ) Balance at December 31, 2019 59,396 $ 59 $ 819,626 $ 122 $ ( 624,828 ) $ 194,979 Issuance of common stock under equity incentive plans 2,341 2 57,748 — — 57,750 Issuance of common stock for Employee Stock Purchase Plan 303 1 9,115 — — 9,116 Exercise of common stock warrants 295 — 2,950 — — 2,950 Fair value of common stock warrants at time of exercise — — 26,335 — — 26,335 Equity component of convertible notes issuance, net of issuance cost — — 85,803 — — 85,803 Purchase of capped call options related to convertible notes — — ( 34,069 ) — — ( 34,069 ) Stock-based compensation expense — — 57,725 — — 57,725 Unrealized loss on short-term investments — — — ( 20 ) — ( 20 ) Foreign currency translation adjustments — — — 118 — 118 Net loss — — — — ( 34,382 ) ( 34,382 ) Balance at December 31, 2020 62,335 $ 62 $ 1,025,233 $ 220 $ ( 659,210 ) $ 366,305 The accompanying notes are an integral part of the consolidated financial statements. 89 TANDEM DIABETES CARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2020 2019 2018 Operating Activities Net loss $ ( 34,382 ) $ ( 24,753 ) $ ( 122,611 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization expense 10,451 6,072 5,821 Amortization of debt discount and debt issuance costs 10,096 — 1,721 Provision for expected credit losses 3,016 2,322 1,448 Provision (recovery) for inventory obsolescence ( 57 ) 2,353 607 Change in fair value of common stock warrants 17,087 11,075 66,494 Amortization of premium (discount) on short-term investments ( 1,296 ) ( 565 ) 539 Benefit for deferred income taxes ( 2,126 ) ( 25 ) — Stock-based compensation expense 58,431 58,071 23,736 Loss on extinguishment of debt — — 5,313 Other 38 ( 295 ) 152 Changes in operating assets and liabilities: Accounts receivable, net ( 38,837 ) ( 13,698 ) ( 15,848 ) Inventories ( 15,361 ) ( 30,975 ) 6,756 Prepaid and other current assets ( 2,427 ) ( 584 ) ( 1,576 ) Other long-term assets 129 ( 580 ) ( 26 ) Accounts payable 1,118 8,910 1,641 Accrued expenses ( 3,256 ) 4,076 1,097 Employee-related liabilities 5,339 4,285 9,542 Deferred revenue 7,029 4,589 2,074 Other current liabilities 5,789 4,216 2,434 Other long-term liabilities 3,888 7,412 2,367 Net cash provided by (used in) operating activities 24,669 41,906 ( 8,319 ) Investing Activities Purchases of short-term investments ( 497,076 ) ( 164,572 ) ( 123,553 ) Proceeds from maturities of short-term investments 180,922 114,908 35,800 Proceeds from sales of short-term investments 52,392 12,250 — Purchases of property and equipment ( 27,408 ) ( 19,541 ) ( 2,986 ) Acquisition of intangible assets ( 4,886 ) — — Net cash used in investing activities ( 296,056 ) ( 56,955 ) ( 90,739 ) Financing Activities Proceeds from issuance of convertible senior notes, net of $ 8,809 debt issuance costs 278,691 — — Purchase of capped call options related to convertible senior notes ( 34,069 ) — — Principal payments on notes payable — — ( 87,711 ) Proceeds from public offerings, net of offering costs — — 172,929 Proceeds from issuance of common stock under Company stock plans 66,866 23,880 2,391 Proceeds from exercise of common stock warrants 2,950 327 29,575 Net cash provided by financing activities 314,438 24,207 117,184 Effect of foreign exchange rate changes on cash 387 191 — Net increase in cash and cash equivalents 43,438 9,349 18,126 Cash and cash equivalents and restricted cash at beginning of period 51,175 41,826 23,700 Cash and cash equivalents at end of period $ 94,613 $ 51,175 $ 41,826 Supplemental disclosures of cash flow information Interest paid $ 2,707 $ — $ 10,805 Income taxes paid $ 177 $ 67 $ 16 Supplemental schedule of non-cash investing and financing activities Right-of-use assets obtained in exchange for operating lease obligations $ 11,022 $ 11,635 $ — Property and equipment included in accounts payable $ 1,082 $ 2,134 $ 125 Intangible costs in accounts payable and other long-term liabilities $ 2,244 $ — $ — The accompanying notes are an integral part of the consolidated financial statements 90 TANDEM DIABETES CARE, INC. NOTES TO 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. The Company is incorporated in the state of Delaware. Unless the context requires otherwise, the terms the “Company” or “Tandem” refer to Tandem Diabetes Care, Inc., together with its wholly-owned 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 feature 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 data management application (t:connect) and the Tandem Device Updater, a Mac and PC-compatible tool for the remote update of the Company’s insulin pump software. 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 consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The 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 comprehensive loss and in accumulated other comprehensive income (loss) in the stockholders' equity section of the Company's 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 consolidated statements of operations. Reclassifications Prior year amounts related to the presentation of other income (expense), net on the Company’s consolidated statements of operations and comprehensive loss, have been reclassified to conform to the current year presentation. Starting with the third quarter of 2020, the first full quarter in which the Company’s convertible senior notes were outstanding, the Company began to present non-operating expenses unrelated to the convertible senior notes with interest income and other, net. In prior periods, other non-operating expenses were combined with interest expense and reported as interest and other expense. 2. Summary of Significant Accounting Policies There have been no material changes to the Company’s significant accounting policies during the year ended December 31, 2020, as compared to those disclosed in this Annual Report with the exception of policies put in place with regards to its convertible senior notes issued in May 2020. 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. 91 Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less from the date of purchase and that can be liquidated without prior notice or penalty to be cash equivalents. Short-Term Investments The Company’s short-term investments are classified as available-for-sale securities. Such securities are carried at fair value as determined by prices for identical or similar securities at the balance sheet date. The Company’s short-term investments consist of Level 1 and Level 2 financial instruments in the fair value hierarchy. The net unrealized gains or losses on available-for-sale securities are reported as a component of other comprehensive gain (loss) within the statements of operations and accumulated other comprehensive gain (loss) as a separate component of stockholders’ equity on the consolidated balance sheets. The Company determines realized gains or losses on the sale of available-for-sale securities using the specific identification method and includes net realized gains and losses as a component of other income or expense within the consolidated statements of operations. The Company periodically reviews available-for-sale securities for other than temporary declines in fair value below the cost basis whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. To date, the Company has not identified any other than temporary declines in fair value of its short-term investments. 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 novel coronavirus pandemic (COVID-19 global pandemic). Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a balance is uncollectible. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company maintains deposit accounts in federally insured financial institutions in excess of federally insured limits. The Company also maintains investments in money market funds that are not federally insured. Additionally, the Company has established guidelines regarding investment instruments and their maturities, which are designed to maintain preservation of principal and liquidity. The following table summarizes customers who accounted for 10% or more of accounts receivable, net: December 31, 2020 2019 Customer A 12.7 % N/A Customer B 12.3 % N/A Customer C N/A 20.4 % Customer D N/A 10.1 % The following table summarizes customers who accounted for 10% or more of total sales for the periods presented: Year Ended December 31, 2020 2019 2018 Customer B 15.9 % 14.8 % 19.4 % Customer C 12.9 % 15.4 % 15.6 % 92 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 at December 31, 2020 to be $ 333.5 million, based on Level 2 quoted market prices as of that date (see Note 6, “Debt”). The estimated fair value of certain of the Company’s common stock warrants was determined using the Black-Scholes pricing model as of December 31, 2020 and 2019 (see Note 4, "Fair Value Measurements"). Valuation of Inventories Inventories are valued at the lower of cost or net realizable value, determined by the first-in, first-out method. Inventory is recorded using standard cost, including material, labor and overhead costs. The Company periodically reviews inventories for potential impairment and adjusts inventory for potentially excess or obsolete goods to state inventories at their net realizable value. Factors influencing these adjustments include quantities on hand and firm purchase commitments, expectations of future use, judgments based on quality control testing data and assessments of the likelihood of scrapping or obsoleting certain inventories based on future demand for its products and market conditions. Long-Lived Assets Property and Equipment Property and equipment, which primarily consist of office furniture and equipment, manufacturing equipment, scientific equipment, computer equipment, and leasehold improvements, are stated at cost, less accumulated depreciation. Property and equipment are depreciated over the estimated useful lives of the assets, generally three to seven years , using the straight-line method. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the remaining lease term. Maintenance and repair costs are expensed as incurred. Operating Lease Right-of-Use Assets and Liabilities In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases . 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. The Company adopted the new standard using the modified retrospective approach and recognized right-of-use leased assets and corresponding operating lease liabilities of $ 12.4 million on the consolidated balance sheet as of January 1, 2019. The Company did not restate prior periods. Deferred rent of $ 1.0 million and $ 3.8 million as of January 1, 2019 was reclassified from other current liabilities and deferred rent long-term, respectively, to a reduction of the right-of-use leased assets in connection with the adoption of the standard. Lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent 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 noncancelable 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. The difference between rent expense and rent paid is accounted for as a component of operating lease right-of-use assets on the Company’s consolidated balance sheet. Landlord improvement allowances and other similar lease incentives are recorded as a reduction of the right-of-use leased assets, and are amortized on a straight-line basis as a reduction to operating lease costs. Intangible Assets Subject to Amortization On June 24, 2020, the Company acquired Sugarmate, Inc. (Sugarmate), the developer of a popular mobile app for people with diabetes who use insulin, which is designed to help people with diabetes visualize diabetes therapy data in innovative ways. The Sugarmate acquisition was accounted for as an acquisition of assets in accordance with ASU No. 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. Substantially all of the fair value was concentrated in a single identifiable asset, a technology-based intangible asset. The purchased intangible is being amortized on a straight-line basis over an estimated useful life of five years . The Company’s results of operations for the year ended December 31, 2020 included the operating results of Sugarmate since the date of acquisition, the amounts of which were not material. 93 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. We review our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company has not recognized any impairment losses through December 31, 2020. Research and Development Costs All research and development costs are charged to expense as incurred. Such costs include personnel-related costs, including stock-based compensation, supplies, license fees, development prototypes, outside design and testing services, depreciation, allocated facilities and information services, clinical trial costs, milestone payments under the Company’s development and commercialization agreements and other indirect costs. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Deferred income tax assets or liabilities are recognized based on the temporary differences between financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Tax law and rate changes are reflected in income in the period such changes are enacted. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. The Company includes interest and penalties related to income taxes, including unrecognized tax benefits, within income tax expense. The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcomes of examinations by tax authorities in determining the adequacy of its provision for income taxes. The Company continually assesses the likelihood and amount of potential revisions and adjusts the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known. Significant judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. Factors reviewed include projections of pre-tax book income for the foreseeable future, determination of cumulative pre-tax book income after permanent differences, earnings history, and reliability of forecasting. The Company will continue to assess the need for a valuation allowance on its deferred tax assets by evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the statement of operations for the period that the adjustment is determined to be required. The Company is required to file federal and state income tax returns in the United States and various other state jurisdictions and, starting with 2018, a corporation income tax return in Canada. The preparation of these income tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. An amount is accrued for the estimate of additional tax liability, including interest and penalties, for any uncertain tax positions taken or expected to be taken in an income tax return. The Company reviews and updates the accrual for uncertain tax positions as more definitive information becomes available. For further information, see Note 8, "Income Taxes." 94 Convertible Senior Notes In accounting for the issuance of the convertible senior notes, the Company separated the notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of similar debt instruments that do not have associated convertible features. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the respective notes. The equity component is not remeasured as long as it continues to meet the condition for equity classification. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the notes. The Company allocated the issuance costs incurred to the liability and equity components of the notes based on their relative fair values. Issuance costs attributable to the liability component were recorded as a reduction to the liability portion of the notes and are being amortized to interest expense over the term of the notes. Issuance costs attributable to the equity component, representing the conversion option, were netted with the equity component in stockholders' equity. Revenue Recognition 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 Performance Obligations The Company considers the individual deliverables in its product offering as separate performance obligations. The transaction price is determined based on the consideration expected to be received, based either on the stated value in contractual arrangements or the estimated cash to be collected in non-contracted arrangements. The Company allocates the consideration to the individual performance obligations and recognizes the consideration based on when the performance obligation is satisfied, considering whether or not this occurs at a point in time or over time. Generally, insulin pumps, cartridges, infusion sets and accessories are deemed performance obligations that are satisfied at a point in time when the customer obtains control of the promised good, which is upon delivery 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. Where 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 December 31, 2020 and 2019 (in thousands): December 31, 2020 December 31, 2019 Deferred revenue $ 5,508 $ 3,465 Other long-term liabilities 10,426 5,656 Total $ 15,934 $ 9,121 Sales Returns The Company offers a 30 -day right of return to customers in the U.S. and Canada from the date of shipment of its insulin pumps, provided a physician’s confirmation of the medical reason for the return is received. Estimated allowances for sales returns are based on historical returned quantities as compared to pump shipments in those same periods of return, 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 December 31, 2020 and 2019, respectively. Actual product returns have not differed materially from estimated amounts recorded in the accompanying consolidated financial statements. 95 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 length of time the pump version has been in the field and future expectations of performance based on new features and capabilities that may become available through Tandem Device Updater. The following table provides a reconciliation of the changes in product warranty liabilities for the years ended December 31, 2020, 2019 and 2018: Year Ended December 31, (in thousands) 2020 2019 2018 Balance at beginning of the year $ 16,724 $ 9,138 $ 5,640 Provision for warranties issued during the period 21,135 18,335 9,617 Settlements made during the period ( 13,736 ) ( 10,167 ) ( 7,797 ) (Decrease) increase in warranty estimates ( 2,048 ) ( 582 ) 1,678 Balance at end of the year $ 22,075 $ 16,724 $ 9,138 As of December 31, 2020 and December 31, 2019, total product warranty reserves of $ 22.1 million and $ 16.7 million, respectively, were included in the following consolidated balance sheet accounts: December 31, (in thousands) 2020 2019 Other current liabilities $ 8,409 $ 4,707 Other long-term liabilities 13,666 12,017 Total warranty reserve $ 22,075 $ 16,724 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. 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. Common Stock Warrant Liabilities The Company accounts for certain stock warrants as a liability in the consolidated financial statements when they contain a provision within the warrant contracts that could require cash settlement in the event the Company did not have an active registration statement. The fair value of these common stock warrants is remeasured at each financial reporting period with any changes in fair value being recognized as a component of other income (expense) in the accompanying statements of operations and comprehensive loss. Shipping and Handling Expenses Shipping and handling expenses associated with product delivery are included within cost of sales in the Company’s statements of operations. Amounts billed to a customer for shipping and handling are reported as revenues. 96 Comprehensive Loss All components of comprehensive loss, including net loss, are reported in the consolidated financial statements in the period in which they are recognized. Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on marketable securities and foreign currency translation adjustments. Net Loss Per Share Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares that were outstanding for the period, without consideration for common stock equivalents. Diluted loss per share reflects the potential dilution that would occur if securities exercisable for or convertible into common stock were exercised for or converted into common stock. Dilutive common share equivalents are comprised of warrants, stock options outstanding under the Company’s equity incentive plans, unvested RSUs, and potential awards granted pursuant to the ESPP, each calculated using the treasury stock method; and shares issuable upon conversion of the senior convertible notes using the if-converted method. For warrants that are recorded as a liability in the accompanying condensed consolidated balance sheets, the calculation of diluted loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of the warrants is dilutive to loss per share for the period, an adjustment is made to net loss used in the calculation to remove the change in fair value of the warrants from the numerator for the period. Likewise, an adjustment to the denominator is required to reflect the related dilutive shares, if any, under the treasury stock method. For the annual periods presented, 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 (see Note 12, "Selected Quarterly Financial Data (Unaudited)" for quarterly details). 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): Year Ended December 31, 2020 2019 2018 Warrants to purchase common stock 379 611 705 Options to purchase common stock 5,021 5,619 3,477 Unvested restricted stock units 78 N/A N/A Awards granted under the ESPP 3 5 4 Convertible senior notes (if-converted) 1,605 N/A N/A 7,086 6,235 4,186 Recent Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which modifies the measurement and recognition of credit losses for most financial assets and certain other instruments. The new standard requires the use of forward-looking expected credit loss models based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount, which may result in earlier recognition of credit losses under the new standard. The new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income (loss) rather than reducing the carrying amount under the prior, other-than-temporary-impairment model. The new standard must be adopted using the modified retrospective approach and was effective for the Company starting in the first quarter of 2020. The Company determined there was no cumulative-effect transition adjustment to the opening balance of accumulated deficit for recognition of additional credit losses upon adoption of this standard as of January 1, 2020 based on its outstanding accounts receivable, the composition and credit quality of its short-term investments, and current economic conditions as of that date. 97 In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement , which adds and modifies certain disclosure requirements for fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public companies will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income. The updated guidance was effective for the Company starting in the first quarter of 2020. As a result, the Company modified certain fair value measurement disclosures primarily related to its Level 3 liabilities (see Note 4, “Fair Value Measurements”). In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes , which is intended to simplify various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted. The Company early adopted the new guidance in the second quarter of 2020. As a result, the Company recognized, on a prospective basis, $ 13,000 of income tax expense in the second quarter of 2020 upon the reversal of tax benefits recorded in the first quarter of 2020 related to unrealized gains on short-term investments. In June 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which is intended to simplify the accounting for convertible instruments. This new guidance eliminates certain models that require separate accounting for embedded conversion features, and eliminates certain of the conditions for equity classification for contracts in an entity’s own equity. Accordingly, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance can be adopted through either a modified retrospective method of transition or a fully retrospective method of transition. ASU 2020-06 is effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company 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. 3. Financial Statement Information Short-Term Investments The Company invests in marketable securities, principally debt instruments of the U.S. Government, financial institutions and corporations with strong credit ratings. The following represents a summary of the estimated fair value of short-term investments at December 31, 2020 and 2019 (in thousands): 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 98 At December 31, 2019 Maturity (in years) Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value Available-for-sale securities: Commercial paper Less than 1 $ 24,147 $ 10 $ — $ 24,157 U.S. Government-sponsored enterprise Less than 2 33,073 26 — 33,099 U.S. 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 other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. Unrealized losses on available-for-sale debt securities at that date were not significant and were due to changes in interest rates, including credit spreads, from perceived increased credit risks as a result of the COVID-19 global pandemic. The Company does not intend to sell the available-for-sale debt securities that are in an unrealized loss position, and it is not more likely than not that the Company will be required to sell these debt securities before recovery of their amortized cost bases, which may be at maturity. Based on the credit quality of the available-for-sale debt securities that are in an unrealized loss position, and the Company’s estimates of future cash flows to be collected from those securities, the Company believes the unrealized losses are not credit losses. Accordingly, the Company has not recognized any impairment losses related to its available-for-sale debt securities at December 31, 2020. Accounts Receivable Accounts receivable consisted of the following (in thousands): December 31, 2020 2019 Accounts receivable $ 86,052 $ 49,889 Less: allowance for credit losses ( 3,857 ) ( 3,304 ) Accounts receivable, net $ 82,195 $ 46,585 Allowance for Credit Losses The following table provides a reconciliation of the changes in the estimated allowance for expected accounts receivable credit losses (formerly the allowance for doubtful accounts) for the years ended December 31, 2020, 2019 and 2018 (in thousands): Year Ended December 31, 2020 2019 2018 Balance at beginning of the year $ 3,304 $ 1,837 $ 1,035 Provision for expected credit losses 3,016 2,322 1,448 Write-offs and adjustments, net of recoveries ( 2,463 ) ( 855 ) ( 646 ) Balance at end of the year $ 3,857 $ 3,304 $ 1,837 99 Inventories Inventories consisted of the following at (in thousands): December 31, 2020 2019 Raw materials $ 30,880 $ 20,699 Work-in-process 15,664 16,532 Finished goods 17,177 11,842 Total inventories $ 63,721 $ 49,073 Property and Equipment Property and equipment consisted of the following at (in thousands): December 31, 2020 2019 Leasehold improvements $ 22,834 $ 13,100 Computer equipment and software 12,219 9,899 Office furniture and equipment 9,876 6,367 Manufacturing and scientific equipment 44,026 33,422 Total cost 88,955 62,788 Less: accumulated depreciation and amortization ( 38,933 ) ( 29,865 ) Total property and equipment, net $ 50,022 $ 32,923 Depreciation and amortization expense related to property and equipment was $ 9.2 million, $ 5.7 million, and $ 5.5 million for the years ended December 31, 2020, 2019, and 2018, respectively. Intangible Assets Subject to Amortization Intangible assets subject to amortization consist of technology-based intangibles related to the Company’s acquisition of Sugarmate, as well as patents purchased or licensed that are related to the Company’s commercialized products. Intangible asset s at December 31, 2020 and 2019, which were included in other long-term assets on the consolidated balance sheets, were as follows (in thousands): December 31, 2020 2019 Intangible assets, gross amount $ 12,502 $ 3,247 Accumulated amortization ( 3,697 ) ( 2,470 ) Intangible assets, net $ 8,805 $ 777 Weighted average remaining amortization period (in months) 52 30 Amortization expense related to intangible assets subject to amortization amounted to $ 1.2 million, $ 0.3 million and $ 0.3 million for the years ended December 31, 2020, 2019, and 2018, respectively. The amortization expense is recorded in cost of sales and selling, general and administrative expense in the consolidated statement of operations. The estimated aggregate amortization expense for each of the five succeeding years is $ 2.2 million for 2021, $ 2.0 million for 2022, $ 1.9 million for each of 2023 and 2024, and $ 0.9 million for 2025. 4. 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 100 liability. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1: Observable inputs such as unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3: Unobservable inputs in which there is little or no market data and that are significant to the fair value of the assets or liabilities, which require the reporting entity to develop its own valuation techniques that require input assumptions. The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 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 December 31, 2020 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 Fair Value Measurements at December 31, 2019 December 31, 2019 Level 1 Level 2 Level 3 Assets Cash equivalents (1) $ 43,520 $ 43,520 $ — $ — Commercial paper 24,157 — 24,157 — U.S. Government-sponsored enterprise 33,099 — 33,099 — U.S. Treasury securities 17,979 17,979 — — Corporate debt securities 50,048 — 50,048 — Total assets $ 168,803 $ 61,499 $ 107,304 $ — Liabilities Common stock warrants $ 23,509 $ — $ — $ 23,509 Total liabilities $ 23,509 $ — $ — $ 23,509 (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. 101 The Company's Level 3 liabilities at December 31, 2020 and 2019 included 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 years ended December 31, 2020 and 2019, the Company issued 262,615 shares and 93,470 shares of common stock, respectively, upon the exercise of Series A warrants. As of December 31, 2020 and 2019, there were Series A warrants outstanding to purchase 154,700 shares and 417,315 shares, respectively, of the Company’s common stock (see Note 7, “Stockholders’ Equity”). The Company reassesses the fair value of the outstanding Series A warrants at each reporting date utilizing a Black-Scholes pricing model. Variables used in the pricing model include the closing market price of the Company’s common stock at the balance sheet date, and estimates of stock price volatility, dividend yield, expected warrant term and risk-free interest rate. The Company develops its estimates based on publicly available historical data. A significant increase (decrease) in any of these inputs in isolation, particularly the market price of the Company’s common stock, would have resulted in a significantly higher (lower) fair value measurement . The assumptions used to estimate the fair values of the outstanding Series A warrants at December 31, 2020 and 2019 are presented below: Series A Warrants December 31, 2020 December 31, 2019 Risk-free interest rate 0.1 % 1.6 % Expected dividend yield 0.0 % 0.0 % Expected volatility 55.3 % 77.2 % Expected term (in years) 1.8 2.8 The following table presents a summary of changes in fair value of the Company’s total Level 3 financial liabilities for the years ended December 31, 2020 and 2019: 2020 2019 Balance at beginning of year $ 23,509 $ 17,926 Loss recognized from the change in fair value of common stock warrants 17,087 11,075 Decrease in fair value from warrants exercised during the period ( 26,335 ) ( 5,492 ) Balance at end of year $ 14,261 $ 23,509 Of the loss recognized from the change in fair value of common stock warrants for the years ended December 31, 2020 and 2019, $ 5.5 million and $ 8.9 million, respectively, was attributable to warrants outstanding as of December 31, 2020 and 2019. 5. 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 from one year to seven years . Leases with an initial term of 12 months or less are expensed as incurred and are not recorded as right-of-use assets on the consolidated balance sheets. Certain leases include an option to renew, with renewal terms that can extend the lease term for additional periods. The exercise of lease renewal options is at the Company's sole discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option that is reasonably certain to be exercised. The Company recognizes lease expense for operating 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. 102 In January 2019, the Company entered into a lease agreement for approximately 25,332 square feet of additional general administrative office space (Initial Premises) located on Vista Sorrento Parkway, in San Diego, California (Vista Sorrento Lease). The lease term for the Initial Premises commenced in March 2019 and expires in September 2022. In May 2019, the Company entered into a First Amendment to the Vista Sorrento Lease (First Amendment) to expand the leased premises by adding approximately 33,681 square feet of additional general administrative office space (Expansion Space), and to extend the lease term for the Initial Premises through January 2023. The lease term for the Expansion Space commenced in May 2019 and expires in January 2023. The Company has a one -time option to extend the term of the Vista Sorrento Lease, covering both the Initial Premises and the Expansion Space, for a period of four years . The Company recognized right-of-use leased assets and corresponding operating lease liabilities of $ 3.1 million on the consolidated balance sheet in the first quarter of 2019 related to the Initial Premises, and $ 4.7 million related to the First Amendment. In March 2019, the Company entered into a lease agreement for approximately 40,490 square feet of space located on Marindustry Place, San Diego, California to house additional operations functions, including warehousing and shipping (Marindustry Place Lease). The lease term commenced in May 2019 and expires in April 2026. The Company has a one -time option to extend the term of the Marindustry Place Lease for a period of no less than three years and no more than five years . The Company recognized right-of-use leased assets and corresponding operating lease liabilities of $ 3.4 million on the consolidated balance sheet on the Commencement Date in the second quarter of 2019. In November 2019, the Company entered into a lease agreement for approximately 94,562 square feet of additional general office space located on Shoreline Drive, in Boise, Idaho (Shoreline Lease). The lease term commenced on July 1, 2020, and expires in June 2027. The Company has a one -time option to extend the term of the Shoreline Lease for a period of three years . The Company recognized right-of-use leased assets and corresponding operating lease liabilities of approximately $ 6.5 million on the consolidated balance sheet on the Commencement Date in the first quarter of 2020. 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 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 consolidated statements of operations was as follows (in thousands): Year Ended December 31, 2020 2019 2018 Operating lease cost $ 7,514 $ 4,542 $ 2,557 Short-term lease cost 219 165 46 Total lease cost $ 7,733 $ 4,707 $ 2,603 103 Maturities of operating lease liabilities at December 31, 2020 were as follows (in thousands): Year Ending December 31, 2021 $ 9,421 2022 8,710 2023 4,386 2024 1,881 2025 1,876 Thereafter 2,099 Total undiscounted lease payments 28,373 Less: amount representing interest ( 3,038 ) Present value of operating lease liabilities 25,335 Less: current portion of operating lease liabilities ( 9,421 ) Operating lease liabilities - long-term $ 15,914 The weighted-average remaining lease term and weighted-average discount rate for operating leases were as follows: December 31, 2020 December 31, 2019 Weighted-average remaining lease term (in years) 3.7 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 $ 8.2 million and $ 4.4 million for the years ended December 31, 2020 and 2019, respectively . 6. Debt 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 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Notes were issued pursuant to an Indenture, dated May 15, 2020, between the Company and U.S. Bank National Association, as trustee (Indenture). The net proceeds from the issuance of the Notes were $ 244.6 million, net of debt issuance costs and cash used to purchase the capped call transactions (Capped Call Transactions) discussed below. The Notes are the Company’s senior unsecured obligations. Interest is payable in cash semi-annually in arrears beginning on November 1, 2020 at a rate of 1.50 % per year. The Notes mature on May 1, 2025 unless repurchased, redeemed, or converted in accordance with their terms prior to the maturity date. The Notes are convertible into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election, at an initial conversion rate of 8.8836 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $ 112.57 (Conversion Price) per share of the Company’s common stock. The conversion rate is subject to customary adjustments for certain events as described in the Indenture. The Company may not redeem the Notes prior to May 6, 2023. The Company has the option to redeem for cash all or any portion of the Notes on or after May 6, 2023 if the last reported sale price of the Company’s common stock has been at least 130 % of the Conversion Price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period, at a redemption price equal to 100 % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest. No sinking fund is provided for the Notes. 104 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, as defined in the Indenture, or in connection with a redemption are entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change, as defined in the Indenture, holders of the Notes may require us to repurchase all or a portion of the Notes at a price equal to 100 % of the principal amount of the Notes, plus any accrued and unpaid interest. In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of similar debt instruments, which do not have an associated convertible feature. The amount of the equity component representing the conversion option for the Notes was $ 88.5 million and was recorded as a debt discount, which is amortized to interest expense at an effective interest rate of 9.9 %. The Company allocated $ 2.7 million of debt issuance costs to the equity component and the remaining debt issuance costs of $ 6.1 million were allocated to the liability component, which are amortized to interest expense under the effective interest rate method. The equity component of the Notes will not be remeasured as long as it continues to meet the conditions for equity classification. It is the Company’s intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. The liability and equity components of the Notes consisted of the following (in thousands): December 31, 2020 Liability: Principal $ 287,500 Unamortized debt discount and debt issuance costs ( 84,516 ) Net carrying amount $ 202,984 Carrying amount of the equity component $ 85,803 As of December 31, 2020, the debt discount and debt issuance costs associated with the Notes will be amortized over the remaining period of approximately 4.3 years using the effective interest method. The following table details interest expense recognized related to the Notes for the year ended December 31, 2020 (in thousands): 105 Year Ended December 31, 2020 Contractual interest expense $ 2,707 Amortization of debt issuance costs 652 Amortization of debt discount 9,446 Total interest expense $ 12,805 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 December 31, 2020, the “if-converted value” did not exceed the principal amount of the Notes. Capped Call Transactions In connection with the issuance of the Notes, the Company entered into Capped Call Transactions with certain counterparties at a net cost of $ 34.1 million. The Capped Call Transactions are intended to reduce potential dilution to holders of the Company’s common stock beyond the conversion price of $ 112.57 , up to a conversion price of $ 173.18 on any conversion of the Notes, or to offset any cash payments the Company is required to make in excess of the principal amount of such converted Notes, as the case may be, with such reduction or offset subject to a cap. The cap price of the Capped Call Transactions is initially $ 173.18 per share of the Company’s common stock, representing a premium of 100% above the last reported sale price of $ 86.59 per share of the Company’s common stock on May 12, 2020, and is subject to certain adjustments under the terms of the Capped Call Transactions. Conditions that cause adjustments to the initial strike price of the Capped Call Transactions mirror conditions that result in corresponding adjustments for the Notes. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the Notes. As these transactions meet certain criteria under the applicable accounting guidance, the Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. The cost of the Capped Call Transactions was recorded as a reduction of the Company’s additional paid-in capital in the Company’s consolidated balance sheet and will not be remeasured. Term Loan Agreement In August 2018, the Company fully repaid the term loan made by Capital Royalty Partners II, L.P. and its affiliated funds (CRG) pursuant to the Amended and Restated Term Loan Agreement (Term Loan Agreement). The balance of the outstanding debt during 2018 up until the time of repayment was $ 82.7 million, and was included in Notes payable long-term in the consolidated balance sheet, offset by the debt discount associated with financing fees and certain debt issuance costs. At the time of repayment, the remaining unamortized debt discount of $ 5.3 million was accelerated and recognized as a loss on extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2018. The total repayment amount of $ 88.8 million included approximately $ 1.1 million in accrued interest, and approximately $ 5.0 million in associated financing fees that became due. Under the Term Loan Agreement, interest was payable at the Company’s option, (i) in cash at a rate of 11.5 % per annum, or (ii) at a rate of 9.5 % of the 11.5 % per annum in cash and 2.0 % of the 11.5 % per annum (PIK Loan) to be added to the principal of the loan and subject to accruing interest. 7. Stockholders’ Equity (Deficit) Public Offerings In the first quarter of 2018, the Company completed a registered public offering of 34,500,000 shares of common stock at a public offering price of $ 2.00 per share. The gross proceeds from the offering were approximately $ 69.0 million, before deducting underwriting discounts and commissions and other offering expenses . In the third quarter of 2018, the Company completed a public offering of 4,035,085 shares of common stock at a public offering price of $ 28.50 per share. The gross proceeds to the Company from the offering were $ 115.0 million, before deducting underwriting discounts and commissions and other offering expenses payable by the Company. 106 Shares Reserved for Future Issuance The following shares of the Company's common stock were reserved for future issuance at December 31, 2020 (in thousands): Shares reserved for issuance upon conversion of Convertible Senior Notes 2,554 Shares underlying outstanding warrants 379 Shares underlying outstanding stock options 5,804 Shares underlying unvested restricted stock units 133 Shares authorized for issuance pursuant to awards granted under the ESPP 1,389 Shares authorized for future equity award grants 2,039 12,298 Common Stock Warrants Warrants outstanding to purchase shares of the Company's common stock as of December 31, 2020 were as follows: Issue Date Exercise Price Per Share Warrants Outstanding Expiration Date October 2017 $ 3.50 154,700 October 2022 March 2017 $ 23.50 193,788 March 2027 August 2011 - August 2012 $ 73.73 30,861 August 2021 - August 2022 379,349 Each warrant allows the holder to purchase one share of the Company's common stock at the exercise price per share of the respective warrant. The Company issued 295,526 and 93,470 shares of its common stock upon the exercise of warrants during the years ended December 31, 2020 and 2019, respectively. Stock Plans In September 2006, the Company adopted the Company’s 2006 Stock Incentive Plan (2006 Plan), under which, as amended, 268,561 shares of common stock were reserved for issuance to employees, non-employee directors and consultants of the Company. The 2006 Plan was closed in 2013 with the approval of the 2013 Plan and no further options will be granted under the 2006 Plan. 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. In June 2018, the Company received approval from its stockholders to increase the number of shares of common stock reserved under the 2013 Plan by 5,500,000 shares. In June 2019, the Company received approval from its stockholders to increase the number of shares of its common stock reserved for issuance under the 2013 Plan by an additional 5,000,000 shares. The Company issued 2,339,467 and 1,418,953 shares of its common stock, respectively, upon the exercise of stock options during the years ended December 31, 2020 and 2019. During the year ended December 31, 2020, the Company issued 1,892 shares of its common stock upon the vesting of RSUs. Common Stock Options The maximum term of stock options granted under the 2006 Plan and 2013 Plan is ten years . Common stock options have an exercise price equal to the closing price of the Company's common stock on the applicable award date, and generally vest over a four year period 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 . 107 The following table summarizes stock option activities for the 2006 Plan and 2013 Plan: Total Options Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2018 5,763,192 $ 23.61 8.94 $ 116,988 Granted 3,026,511 $ 54.62 Exercised ( 1,418,953 ) $ 12.46 $ 71,808 Canceled/forfeited/expired ( 195,823 ) $ 42.93 $ 4,190 Outstanding at December 31, 2019 7,174,927 $ 38.40 8.45 $ 181,408 Granted 1,130,040 $ 83.55 Exercised ( 2,339,467 ) $ 24.69 $ 161,688 Canceled/forfeited/expired ( 161,995 ) $ 27.00 $ 4,516 Outstanding at December 31, 2020 5,803,505 $ 52.08 7.90 $ 268,649 Vested and expected to vest at December 31, 2020 5,732,927 $ 51.93 7.89 $ 266,396 Exercisable at December 31, 2020 2,980,386 $ 40.30 7.17 $ 178,540 Restricted Stock Units (RSUs) RSUs have a grant price equal to the closing price of the Company’s common stock on the award date, and generally vest over a four year period 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 . A summary of RSU activity for the year ended December 31, 2020 is as follows: Total RSUs Weighted-Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) Unvested awards outstanding at December 31, 2019 — $ — $ — Granted 134,694 $ 82.82 Vested ( 1,892 ) $ 95.68 Unvested awards outstanding at December 31, 2020 132,802 $ 82.82 $ 12,706 Employee Stock Purchase Plan In October 2013, the Company adopted the ESPP, which enables eligible employees to purchase shares of the Company’s common stock using their after-tax payroll deductions, subject to certain conditions. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Code. Eligible employees may contribute, through payroll deductions, up to 15 % of their earnings for the purchase of common stock under the ESPP. The purchase price of common stock under the ESPP is the lesser of: (a) 85 % of the fair market value of a share of the Company’s common stock on the first date of an offering or (b) 85 % of the fair market value of a share of the Company’s common stock on the date of purchase. Generally, the ESPP consists of a two-year offering period with four six-month purchase periods. In June 2018, the Company received approval from its stockholders to increase the number of shares reserved for issuance under the ESPP by 2,000,000 shares. During the years ended December 31, 2020 and 2019, 302,509 shares and 329,072 shares of our common stock, respectively, were purchased under the ESPP for proceeds of $ 9.1 million and $ 6.2 million, respectively. 108 Stock-Based Compensation During the year ended December 31, 2019, the Company granted options to purchase 3,026,511 shares of common stock under the 2013 Plan, of which 1,644,715 options 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 the 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. During the year ended December 31, 2018, the Company granted options to purchase 4,730,956 shares of common stock under the 2013 Plan, of which 811,800 options were originally awarded in December 2017, subject to and conditioned upon the approval by its stockholders of an increase in the number of shares of common stock authorized under the 2013 Plan. Stock-based compensation expense was not recognized for the 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 2018. Of the total options granted, options to purchase 4,201,100 shares of common stock, granted in June 2018, vested over a two year period with 50 % of the underlying shares on the first anniversary of the award and the balance of the options vesting monthly over the following year. The following table summarizes the allocation of stock-based compensation expense included in the consolidated statements of operations for all stock-based compensation arrangements (in thousands): Year Ended December 31, 2020 2019 2018 Cost of sales $ 8,210 $ 6,415 $ 2,581 Selling, general & administrative 41,563 42,857 16,824 Research and development 8,658 8,799 4,331 Total stock-based compensation expense $ 58,431 $ 58,071 $ 23,736 The total stock-based compensation capitalized as part of the cost of the Company’s inventories was $ 0.6 million and $ 1.3 million at December 31, 2020 and 2019, respectively. At December 31, 2020, the total unamortized stock-based compensation expense of approximately $ 120.7 million will be recognized over the remaining weighted average vesting term of approximately 2.8 years. The assumptions used in the Black-Scholes option-pricing model are as follows: Stock Options Year Ended December 31, 2020 2019 2018 Weighted average grant date fair value (per share) $ 54.20 $ 39.06 $ 12.94 Risk-free interest rate 0.6 % 2.1 % 2.8 % Expected dividend yield 0.0 % 0.0 % 0.0 % Expected volatility 74.6 % 71.8 % 71.4 % Expected term (in years) 6.1 6.0 5.7 ESPP Year Ended December 31, 2020 2019 2018 Weighted average grant date fair value (per share) $ 36.83 $ 30.32 $ 13.48 Risk-free interest rate 0.2 % 1.9 % 2.5 % Expected dividend yield 0.0 % 0.0 % 0.0 % Expected volatility 60.3 % 69.9 % 81.2 % Expected term (in years) 1.3 1.3 1.3 Risk-free Interest Rate . The risk-free interest rate assumption was based on the United States Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. 109 Expected Dividend Yield . The expected dividend yield is zero because the Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future. Expected Volatility . The expected volatility is estimated based on a weighted-average volatility of the Company’s actual historical volatility since its initial public offering in November 2013, and the historical stock volatilities of a peer group of similar companies whose share prices are publicly available. The peer group consisted of publicly traded companies in the same industry and in a similar stage of development. During 2020, the Company transitioned to solely using the expected volatility of its own common stock. Expected Term . The Company utilized the simplified method for estimating the expected term of stock option grants. Under this approach, the weighted-average expected term is presumed to be the average of the vesting term and the contractual term of the option. The Company estimates the expected term of the ESPP using expected life for each tranche during the two-year offering period. The Company also estimates forfeitures at the time of grant, and revises those estimates in subsequent periods if actual forfeitures differ from its estimates. Historical data was used to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. 110 8. Income Taxes The loss before provision for income taxes for the Company’s domestic and international operations was as follows (in thousands): Year Ended December 31, 2020 2019 2018 U.S. $ ( 36,667 ) $ ( 24,888 ) $ ( 122,560 ) Foreign 385 284 — Loss before provision for income taxes $ ( 36,282 ) $ ( 24,604 ) $ ( 122,560 ) The components of income tax expense (benefit) were as follows (in thousands): Year Ended December 31, 2020 2019 2018 Current: Federal $ — $ — $ — State 75 86 51 Foreign 151 88 — Total current tax expense 226 174 51 Deferred: Federal ( 1,760 ) ( 21 ) — State ( 366 ) ( 4 ) — Foreign — — — Total deferred income tax benefit ( 2,126 ) ( 25 ) — Income tax expense (benefit) $ ( 1,900 ) $ 149 $ 51 The expense (benefit) for income taxes reconciles to the amount computed by applying the federal statutory rate to loss before taxes as follows (in thousands): Year Ended December 31, 2020 2019 2018 Income tax benefit at federal statutory rate (1) $ ( 7,619 ) $ ( 5,167 ) $ ( 25,738 ) State income tax, net of federal benefit ( 2,792 ) ( 1,174 ) ( 1,649 ) Warrants revaluation 3,588 2,326 13,964 Research and development credits ( 5,330 ) ( 2,091 ) ( 1,425 ) Section 382 limitation 1,021 25,043 — Stock-based compensation ( 18,309 ) ( 8,974 ) 1,362 Officers' compensation 2,612 3,133 — Other 479 972 681 Change in valuation allowance 24,450 ( 13,919 ) 12,856 Income tax expense (benefit) $ ( 1,900 ) $ 149 $ 51 (1) For the years ended December 31, 2020, 2019 and 2018, the federal statutory tax rate was 21%. 111 Significant components of the Company’s net deferred income tax assets at December 31, 2020 and 2019 are shown below (in thousands). The Company assesses all available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative book loss incurred over the three-year period ended December 31, 2020. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth. On the basis of this analysis, a valuation allowance of $ 121.6 million and $ 109.6 million at December 31, 2020 and 2019, respectively, has been recorded to offset the net deferred tax asset as realization of such asset is uncertain. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as the Company’s projections for future growth. December 31, 2020 2019 Deferred tax assets: Net operating loss (NOL) carryforwards $ 86,898 $ 66,642 Research and development tax credits carryforwards 11,261 5,931 Capitalized research and development expenses 6,840 8,745 Accrued compensation 24,038 19,794 Lease liabilities 6,112 4,916 Other 12,096 9,350 Total deferred tax assets 147,245 115,378 Deferred tax liabilities: Convertible debt ( 11,224 ) — Fixed assets ( 7,675 ) ( 2,026 ) Other ( 6,719 ) ( 3,753 ) Total deferred tax liabilities ( 25,618 ) ( 5,779 ) Less valuation allowance ( 121,627 ) ( 109,599 ) Net deferred tax assets $ — $ — As of December 31, 2020, the Company had accumulated federal and state NOL carryforwards of approximately $ 340.0 million, and $ 288.7 million, respectively, Of the total federal net operating loss carryforwards, approximately $ 131.5 million were generated after January 1, 2018, and therefore do not expire. NOL generated after January 1, 2018, is subject to 80% limitation in accordance with the Tax Cuts and Jobs Act of 2017. The remaining federal net operating loss carryforwards of $ 208.5 million will begin to expire in 2026, and state tax loss carryforwards begin to expire in 2021, unless previously utilized. The remaining California NOL carryforwards of $ 164.1 million will begin expiring in 2028. The Company has no foreign tax loss carryforwards as of December 31, 2020. The Company also has federal and California research credit carryforwards of approximately $ 7.5 million and $ 11.4 million, respectively, as of December 31, 2020. The federal research credit carryforwards will begin expiring in 2028, unless previously utilized. The California research credit will carry forward indefinitely. Utilization of the Company's net operating loss and research credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitations may result in the expiration of net operating loss carryforwards before utilization. The Company has completed analyses through December 31, 2020 to determine whether its net operating losses and credits are likely to be limited by Section 382. Based on the 2018 study completed in 2019, the Company determined that an ownership change, as defined under Section 382, occurred in 2018 and the resulting limitation significantly reduced the Company’s ability to utilize its net operating loss and credit carryovers before they expire. As a result, in 2019 the Company reduced its deferred tax assets for the net operating loss and research credit carryforwards that were projected to expire unused with a corresponding offset to the valuation allowance recorded against such assets. Additionally, future ownership changes under Section 382 may also limit the Company's ability to fully utilize any remaining tax benefits. 112 The evaluation of uncertainty in a tax position is a two-step process. The first step involves recognition. The Company determines whether it is more likely than not that a tax position will be sustained upon tax examination, including resolution of any related appeals or litigation, based on only the technical merits of the position. The technical merits of a tax position are derived from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 % likely of being realized upon ultimate resolution with a taxing authority. The following table summarizes the activity related to the Company’s gross unrecognized tax benefits at the beginning and end of the years ended December 31, 2020, 2019 and 2018 (in thousands): Year Ended December 31, 2020 2019 2018 Gross unrecognized tax benefits at the beginning of the year 6,580 $ 8,824 $ 8,121 Increases related to current year positions 2,234 1,076 644 Increases (decreases) related to prior year positions 1,293 ( 3,320 ) 59 Gross unrecognized tax benefits at the end of the year $ 10,107 $ 6,580 $ 8,824 As of December 31, 2020, the Company had $ 8.6 million of unrecognized tax benefits that, if recognized and realized would impact the effective tax rate, subject to the valuation allowance. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company had no accrual for interest and penalties on the Company’s consolidated balance sheets and has not recognized interest and penalties in the consolidated statements of operations for the years ended December 31, 2020 and 2019. The Company does not expect any significant increases or decreases, other than the potential reduction as a result of the Section 382 limitation, to its unrecognized tax benefits within the next 12 months. The Company is subject to taxation in the United States and various other state jurisdictions and, starting with 2018, Canada. Prior to 2018, the losses were all domestic. The Company’s tax years from 2006 (inception) are subject to examination by the United States and state authorities due to the carry forward of unutilized NOLs and research and development credits. 9. Employee Benefits Employee 401(k) Plan The Company has a defined contribution 401(k) plan for employees in the United States who are at least 18 years of age. Employees are eligible to participate in the plan beginning on the first day of the calendar month following their date of hire. Unless they affirmatively elect otherwise, employees are automatically enrolled in the plan following 30 days from date of rehire or entry date. Under the terms of the plan, employees may make voluntary contributions as a percent of compensation. The Company does not provide a matching contribution program. 113 10. Commitments and Contingencies Legal and Regulatory Matters In May 2020 the Company was named as a defendant in three California state court class action lawsuits arising from a data breach the Company experienced in January 2020. 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), 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; and (ii) the demurrer of the CCPA, UCL, and contract claims were sustained with leave to amend the pending complaint. A second amended complaint was filed by the plaintiffs on November 25, 2020 and the Company filed a demurrer to such second amended complaint on December 28, 2020. 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 San Diego County. The alleged violations include business and professions code and labor code violations for failure to compensate wages, unpaid meal and rest periods, and failure to reimburse for necessary business-related expenses. The proposed class of plaintiffs includes hourly paid or non-exempt employees of the Company who were employed from April 6, 2016 through the date of adjudication. Although the Company intends to vigorously defend against these claims, there is no guarantee that the Company will prevail. Accordingly, the Company is unable to determine the ultimate outcome of these lawsuits or determine the amount or range of potential losses associated with the lawsuits. From time to time, the Company may be subject to other legal proceedings or regulatory matters arising in the ordinary course of business, including without limitation, actions with respect to intellectual property, employment, regulatory, product liability and contractual matters. In connection with these proceedings or matters, the Company regularly assesses the probability and amount (or range) of possible issues based on the developments in these proceedings or matters. A liability is recorded in the consolidated financial statements if it is determined that it is probable that a loss has been incurred, and that the amount (or range) of the loss can be reasonably estimated. Because of the uncertainties related to any pending proceedings or matters, the Company is currently unable to predict their ultimate outcome and, with respect to any legal proceeding or regulatory matter where no liability has been accrued, to make a reasonable estimate of the possible loss (or range of loss) that could result from an adverse outcome. At December 31, 2020 and 2019, there were no legal proceedings, regulatory matters, or other disputes or claims for which a material loss was considered probable or for which the amount (or range) of loss was reasonably estimable. 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. Operating Leases The Company leases general office space, laboratory, manufacturing and warehouse facilities, and equipment under noncancelable operating leases. Future minimum payments due under noncancelable operating leases were $ 28.4 million as of December 31, 2020 (see Note 5, "Leases" for further details). In connection with one of the operating leases, the Company has a $ 0.5 million unsecured standby letter of credit arrangement with a bank under which the landlord of the building is the beneficiary. The expiration of the standby letter of credit is July 15, 2022. 114 Purchase Obligations The Company has agreements with suppliers and other parties to purchase inventory, other goods and services and long-lived assets. Product inventory obligations primarily consist of purchase commitments for raw materials used in the production of insulin pumps and cartridges, and finished goods infusion sets. Cancellation of outstanding purchase commitments is generally allowed but requires payment of certain costs incurred through the date of cancellation. At December 31, 2020, obligations under our purchase agreements totaled $ 90.8 million, of which approximately $ 85.0 million is due within one-year. 11. Business Segment and Geographic Information Segment Reporting Operating segments are identified as components of an enterprise about which discrete financial information is available for evaluation by the chief operating decision-maker (CODM) in making decisions regarding resource allocation and assessing performance. The Company is organized based on its current product portfolio, which consists primarily of insulin pumps, disposable cartridges and infusion sets for the storage and delivery of insulin. The Company views its operations and manages its business as one segment and a single reporting unit because key operating decisions and resource allocations are made by the CODM using consolidated financial data. Disaggregation of Revenue The Company primarily sells its products through national and regional distributors in the United States on a non-exclusive basis, and through distribution partners outside the United States, including in select European countries, Canada, Australia, New Zealand, and South Africa. In the United States and Canada, the Company utilizes a direct sales force. The Company disaggregates its revenue by geography and by major sales channel as management believes these categories best depict how the nature, amount and timing of revenues and cash flows are affected by economic factors. Revenues by Geographic Region and Customer Sales Channel During the years ended December 31, 2020, 2019 and 2018, 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 our products are shipped. For the Year Ended December 31, (in thousands) 2020 2019 2018 United States $ 415,680 $ 302,084 $ 174,188 International 83,150 60,221 9,678 Total Sales $ 498,830 $ 362,305 $ 183,866 Sales to distributors accounted for 70 %, 73 %, and 78 % of the Company’s total domestic sales for the years ended December 31, 2020, 2019 and 2018, respectively. Sales to distributors accounted for 94 %, 92 %, and 100 % of the Company’s total international sales for the years ended December 31, 2020, 2019 and 2018, respectively. 115 12. Selected Quarterly Financial Data (Unaudited) The following financial information reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results of the interim periods. Quarterly financial information for the years ended December 31, 2020 and 2019 is presented in the following table (in thousands, except per share data): For the Quarter Ended March 31 June 30 September 30 December 31 2020 Sales $ 97,926 $ 109,236 $ 123,603 $ 168,065 Gross profit $ 50,261 $ 54,390 $ 65,313 $ 90,556 Operating expenses $ 63,834 $ 66,427 $ 66,322 $ 71,894 Operating income (loss) $ ( 13,573 ) $ ( 12,037 ) $ ( 1,009 ) $ 18,662 Net income (loss) $ ( 14,867 ) $ ( 27,107 ) $ ( 9,408 ) $ 17,000 Basic net income (loss) per share (1) $ ( 0.25 ) $ ( 0.45 ) $ ( 0.15 ) $ 0.27 Diluted net income (loss) per share (1)(2) $ ( 0.25 ) $ ( 0.45 ) $ ( 0.15 ) $ 0.22 2019 Sales $ 65,995 $ 93,255 $ 94,657 $ 108,398 Gross profit $ 33,353 $ 49,904 $ 50,683 $ 60,272 Operating expenses $ 44,350 $ 51,769 $ 56,687 $ 58,128 Operating income (loss) $ ( 10,997 ) $ ( 1,865 ) $ ( 6,004 ) $ 2,144 Net income (loss) $ ( 22,992 ) $ ( 1,512 ) $ ( 2,901 ) $ 2,652 Basic net income (loss) per share (1) $ ( 0.40 ) $ ( 0.03 ) $ ( 0.05 ) $ 0.04 Diluted net income (loss) per share (1)(2) $ ( 0.40 ) $ ( 0.03 ) $ ( 0.09 ) $ 0.04 (1) Net income (loss) per share is computed independently for each quarter and the full year based upon the respective average shares outstanding in each period. Therefore, the sum of the quarterly per-share calculations may not equal the reported annual per share amounts. (2) With the exception of the fourth quarter of 2020, and the third and fourth quarters of 2019, there is no difference in the weighted average shares used to compute basic and diluted net income (loss) per share. (see Note 2, ''Summary of Significant Accounting Policies'' for further details). The numerator and denominator of the basic and diluted net income (loss) per share computations are calculated as follows for the respective quarters of 2020 and 2019 where basic and diluted net income (loss) per share differ: For the Quarter Ended (in thousands) December 31, 2020 December 31, 2019 September 30, 2019 Net income (loss) $ 17,000 $ 2,652 $ ( 2,901 ) Less: change in fair value of common stock warrants ( 2,819 ) — ( 2,321 ) Net income (loss) - diluted $ 14,181 $ 2,652 $ ( 5,222 ) Weighted average shares outstanding - basic 62,249 59,219 58,801 Dilutive common share equivalents: Warrants to purchase common stock 308 514 394 Options to purchase common stock 2,984 3,140 — Unvested restricted stock units 133 N/A N/A Awards granted under the ESPP 4 11 — Convertible senior notes (if-converted) — N/A N/A Weighted average shares - diluted 65,678 62,884 59,195 116 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable.