TANDEM DIABETES CARE INC 10-K

Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Credit and Interest Rate Risks We invest our excess cash in marketable securities consisting primarily of commercial paper, corporate debt securities, U.S. Treasury securities and U.S. Government-sponsored enterprise 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. As a result of the COVID-19 global pandemic and the perceived increased credit risks associated with certain securities, credit rating agencies have, from time to time, issued downgrades or revised outlooks to negative for certain issuers of the debt securities held in our short-term investments portfolio. Unrealized losses on available-for-sale debt securities at December 31, 2021 were not significant. Based on the credit quality of the available-for-sale debt securities that are in an unrealized loss position, and our current estimates of future cash flows to be collected from those securities, we believe the unrealized losses were not credit losses (see Note 3, “Short-Term Investments”). 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, 2021, it would not have had a material effect on the fair value of our investment portfolio as of that date. In May 2020, we issued $287.5 million principal amount of Convertible Senior Notes, which bear interest at a fixed rate of 1.50% per year. Accordingly, we are not subject to interest rate risk as a result of the Convertible Senior Notes (see Note 7, “Debt”). 83 Foreign Currency Exchange Rate Risk 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. As we expand our operations in markets outside the United States, we may be exposed to further foreign currency exchange rate risk. We believe our exposure to foreign currency rate fluctuations 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. 84 Item 8. Consolidated Financial Statements and Supplementary Data. Our consolidated financial statements as of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021, 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 (PCAOB ID: 42 ) 86 Consolidated Balance Sheets as of December 31, 2021 and 2020 88 Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years ended December 31, 2021, 2020 and 2019 89 Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2021, 2020 and 2019 90 Consolidated Statements of Cash Flows for the Years ended December 31, 2021, 2020 and 2019 91 Notes to Consolidated Financial Statements 92 85 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, 2021 and 2020, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2021 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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 22, 2022 expressed an unqualified opinion thereon. Adoption of ASU No. 2020-06 As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for convertible instruments in 2021 due to the adoption of ASU No. 2020-06, Debt–Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging–Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. 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 Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was 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 matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 86 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 $30.4 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 /s/ Ernst & Young LLP We have served as the Company's auditor since 2009. San Diego, California February 22, 2022 87 TANDEM DIABETES CARE, INC. CONSOLIDATED BALANCE SHEETS (In thousands except par value) December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 71,181 $ 94,613 Short-term investments 552,630 390,323 Accounts receivable, net 110,725 82,195 Inventories 68,551 63,721 Prepaid and other current assets 8,433 6,383 Total current assets 811,520 637,235 Property and equipment, net 50,386 50,022 Operating lease right-of-use assets 27,503 19,773 Other long-term assets 15,728 9,385 Total assets $ 905,137 $ 716,415 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 28,032 $ 17,805 Accrued expenses 9,419 4,783 Employee-related liabilities 51,556 34,159 Deferred revenue 10,182 6,082 Common stock warrants 147 14,261 Operating lease liabilities 9,279 9,421 Other current liabilities 23,241 17,341 Total current liabilities 131,856 103,852 Convertible senior notes, net - long-term 281,467 202,984 Operating lease liabilities - long-term 23,922 15,914 Other long-term liabilities 34,780 27,360 Total liabilities 472,025 350,110 Commitments and contingencies (Note 12) — — Stockholders’ equity: Common stock, $ 0.001 par value; 200,000 shares authorized, 63,833 and 62,335 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively. 64 62 Additional paid-in capital 1,068,259 1,025,233 Accumulated other comprehensive income (loss) ( 616 ) 220 Accumulated deficit ( 634,595 ) ( 659,210 ) Total stockholders’ equity 433,112 366,305 Total liabilities and stockholders’ equity $ 905,137 $ 716,415 The accompanying notes are an integral part of the consolidated financial statements. 88 TANDEM DIABETES CARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (In thousands, except per share data) Year Ended December 31, 2021 2020 2019 Sales $ 702,799 $ 498,830 $ 362,305 Cost of sales 326,584 238,310 168,093 Gross profit 376,215 260,520 194,212 Operating expenses: Selling, general and administrative 261,508 204,903 165,735 Research and development 92,054 63,574 45,199 Total operating expenses 353,562 268,477 210,934 Operating income (loss) 22,653 ( 7,957 ) ( 16,722 ) Other income (expense), net: Interest income and other, net 674 1,567 3,193 Interest expense ( 6,040 ) ( 12,805 ) — Change in fair value of common stock warrants ( 1,386 ) ( 17,087 ) ( 11,075 ) Total other expense, net ( 6,752 ) ( 28,325 ) ( 7,882 ) Income (loss) before income taxes 15,901 ( 36,282 ) ( 24,604 ) Income tax expense (benefit) 335 ( 1,900 ) 149 Net income (loss) $ 15,566 $ ( 34,382 ) $ ( 24,753 ) Other comprehensive income (loss): Unrealized gain (loss) on short-term investments $ ( 693 ) $ ( 20 ) $ 77 Foreign currency translation gain (loss) ( 143 ) 118 58 Comprehensive income (loss) $ 14,730 $ ( 34,284 ) $ ( 24,618 ) Net income (loss) per share - basic $ 0.25 $ ( 0.56 ) $ ( 0.42 ) Net income (loss) per share - diluted $ 0.24 $ ( 0.56 ) $ ( 0.42 ) Weighted average shares used to compute basic net income (loss) per share 63,000 60,990 58,507 Weighted average shares used to compute diluted net income (loss) per share 64,349 60,990 58,507 The accompanying notes are an integral part of the consolidated financial statements. 89 TANDEM DIABETES CARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) Common Stock Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity 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 Exercise of stock options 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 senior notes issuance, net of issuance costs — — 85,803 — — 85,803 Payment for capped call transactions related to convertible senior notes — — ( 34,069 ) — — ( 34,069 ) Stock-based compensation expense — — 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 Effect of change in accounting for convertible senior notes (1) — — ( 85,803 ) — 9,049 ( 76,754 ) Exercise of stock options 1,129 2 41,821 — — 41,823 Vesting of restricted stock units, net of shares withheld for taxes 38 — ( 1,551 ) — — ( 1,551 ) Issuance of common stock for Employee Stock Purchase Plan 173 — 11,069 — — 11,069 Exercise of common stock warrants 158 — 899 — — 899 Fair value of common stock warrants at time of exercise — — 15,500 — — 15,500 Stock-based compensation expense — — 61,091 — — 61,091 Unrealized loss on short-term investments — — — ( 693 ) — ( 693 ) Foreign currency translation adjustments — — — ( 143 ) — ( 143 ) Net income — — — — 15,566 15,566 Balance at December 31, 2021 63,833 $ 64 $ 1,068,259 $ ( 616 ) $ ( 634,595 ) $ 433,112 (1) The Company adopted ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity effective January 1, 2021 (see Note 2, “Summary of Significant Accounting Policies”). The accompanying notes are an integral part of the consolidated financial statements. 90 TANDEM DIABETES CARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2021 2020 2019 Operating Activities Net income (loss) $ 15,566 $ ( 34,382 ) $ ( 24,753 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expense 13,845 10,451 6,072 Amortization of debt discount and issuance costs 1,727 10,096 — Provision for expected credit losses 2,333 3,016 2,322 Provision (recovery) for inventory obsolescence 467 ( 57 ) 2,353 Change in fair value of common stock warrants 1,386 17,087 11,075 Amortization of premium (discount) on short-term investments 365 ( 1,296 ) ( 565 ) Benefit for deferred income taxes — ( 2,126 ) ( 25 ) Stock-based compensation expense 60,752 58,431 58,071 Other 546 38 ( 295 ) Changes in operating assets and liabilities: Accounts receivable, net ( 30,980 ) ( 38,837 ) ( 13,698 ) Inventories ( 4,954 ) ( 15,361 ) ( 30,975 ) Prepaid and other current assets ( 1,570 ) ( 2,427 ) ( 584 ) Other long-term assets 1,313 129 ( 580 ) Accounts payable 10,275 1,118 8,910 Accrued expenses 4,640 ( 3,256 ) 4,076 Employee-related liabilities 17,399 5,339 4,285 Deferred revenue 10,611 7,029 4,589 Operating leases and other current liabilities 6,217 5,789 4,216 Other long-term liabilities 1,421 3,888 7,412 Net cash provided by operating activities 111,359 24,669 41,906 Investing Activities Purchases of short-term investments ( 733,388 ) ( 497,076 ) ( 164,572 ) Proceeds from maturities of short-term investments 545,735 180,922 114,908 Proceeds from sales of short-term investments 24,288 52,392 12,250 Purchases of property and equipment ( 14,180 ) ( 27,408 ) ( 19,541 ) Acquisition of intangible assets and equity investments ( 9,331 ) ( 4,886 ) — Net cash used in investing activities ( 186,876 ) ( 296,056 ) ( 56,955 ) Financing Activities Proceeds from issuance of convertible senior notes, net of $ 8,809 debt issuance costs — 278,691 — Payment for capped call transactions related to convertible senior notes — ( 34,069 ) — Proceeds from issuance of common stock under Company stock plans, net 51,340 66,866 23,880 Proceeds from exercise of common stock warrants 592 2,950 327 Net cash provided by financing activities 51,932 314,438 24,207 Effect of foreign exchange rate changes on cash 153 387 191 Net increase (decrease) in cash and cash equivalents ( 23,432 ) 43,438 9,349 Cash and cash equivalents at beginning of period 94,613 51,175 41,826 Cash and cash equivalents at end of period $ 71,181 $ 94,613 $ 51,175 Supplemental disclosures of cash flow information Interest paid $ 4,313 $ 2,707 $ — Income taxes paid $ 260 $ 177 $ 67 Supplemental schedule of non-cash investing and financing activities Right-of-use assets obtained in exchange for operating lease obligations $ 15,191 $ 11,022 $ 11,635 Property and equipment included in accounts payable $ 1,034 $ 1,082 $ 2,134 Intangible costs in accounts payable and other long-term liabilities $ 1,029 $ 2,244 $ — The accompanying notes are an integral part of the consolidated financial statements. 91 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 focused on the design, development and commercialization of technology solutions for people living with diabetes. Tandem Diabetes Care, Inc. is incorporated in the state of Delaware. Unless the context requires otherwise, the terms the “Company” or “Tandem” refer to Tandem Diabetes Care, Inc., together with its wholly-owned subsidiaries in the U.S. and Canada. The Company manufactures, sells and supports insulin pump products that are designed to address the evolving needs and preferences of differentiated segments of the insulin-dependent diabetes market. The Company’s manufacturing, sales and support activities principally focus on the t:slim X2 Insulin Delivery System (t:slim X2), the Company’s flagship pump platform which is capable of remote software updates and is designed to display continuous glucose monitoring (CGM) sensor information directly on the pump home screen. The Company’s insulin pump products are compatible with other complementary digital health offerings, such as the t:connect cloud-based diabetes management application (t:connect) and the Tandem Device Updater, a Mac and PC-compatible tool which offers and supports updates of the Company’s insulin pump software from a personal computer. The Company’s insulin pump products are generally considered durable medical equipment and have an expected lifespan of at least four years . In addition to insulin pumps, the Company sells disposable products that are used together with the pumps and are replaced every few days, including cartridges for storing and delivering insulin, and infusion sets that connect the insulin pump to a user’s body, as well as other accessories for enhanced usability. Basis of Presentation and Principles of Consolidation The Company has prepared the accompanying 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 other comprehensive income (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. 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, 2021, other than the adoption of ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , effective January 1, 2021 (see Note 7, “Debt”). 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. 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. 92 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 that are not related to credit factors are reported as a component of other comprehensive income (loss) within the statements of operations and accumulated other comprehensive income (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 reviews its available-for-sale debt securities for credit losses quarterly, considering a variety of factors, including the significance of the decline in value as compared to the amortized cost basis; underlying factors contributing to a decline in the prices of securities in a single asset class; the security’s relative performance versus its peers, sector or asset class; the market and economy in general; views of external investment managers; news or financial information that has been released specific to the investee; and the outlook for the overall industry in which the investee operates. Losses on available-for-sale debt securities as a result of credit factors are recognized by recording an impairment loss as a component of other income or expense within the consolidated statements of operations and a corresponding allowance for credit losses. The Company has not recognized any impairment losses related to its short-term investments during the years ended December 31, 2021, 2020 and 2019. Accounts Receivable The Company grants credit to various customers in the ordinary course of business and is paid directly by customers who use its products, distributors and third-party insurance payors. The Company maintains an allowance for its current estimate of expected credit losses. Provisions for expected credit losses are estimated based on historical experience, assessment of specific risk, review of outstanding invoices, forecasts about the future, and various assumptions and estimates that are believed to be reasonable under the circumstances, which included the Company’s estimates of credit risks as a result of the coronavirus pandemic (COVID-19 global pandemic). Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a balance is uncollectible. 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, 2021 2020 Customer A * 12.7 % Customer B 11.2 % 12.3 % * Amount related to the respective customer represented less than 10% for the period presented. The following table summarizes customers who accounted for 10% or more of total sales for the periods presented: Year Ended December 31, 2021 2020 2019 Customer B 11.9 % 15.9 % 14.8 % Customer C * 12.9 % 15.4 % * Amount related to the respective customer represented less than 10% for the period presented. 93 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 carrying value and estimated fair value of certain of the Company’s common stock warrants was determined using the Black-Scholes pricing model as of December 31, 2021 and 2020 (see Note 5, “Fair Value Measurements”). The Company’s convertible senior notes are carried at amortized cost on the consolidated balance sheets (see Note 7, “Debt”). The Company determined the fair value of its convertible senior notes to be $ 430.0 million and $ 333.5 million at December 31, 2021 and 2020, respectively, based on Level 2 quoted market prices as of that date . 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 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 Leases , 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 sheets. 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. Cost Basis Equity Investment During the second quarter of 2021, the Company made an $ 8.1 million equity investment in a private company, which represented less than 5 % of the outstanding equity of that company. The investment is recorded using the cost minus impairment adjusted for changes in observable prices and is included as a component of other long-term assets on the consolidated balance sheet at December 31, 2021. We monitor this investment to evaluate whether any increase or decline in its value has occurred, based on the implied value of recent company financings, public market prices of comparable companies and general market conditions. Intangible Assets Subject to Amortization Finite-lived intangible assets are recorded at cost, net of accumulated amortization and, if applicable, impairment charges. Amortization of finite-lived intangible assets is recognized over their estimated useful lives on a straight-line basis. The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company has no t recognized any impairment losses during the years ended December 31, 2021, 2020 and 2019. 94 On June 24, 2020, the Company acquired Sugarmate, Inc. (Sugarmate), the developer of a mobile app designed to help people visualize diabetes therapy data in innovative ways. The Sugarmate acquisition was accounted for as an acquisition of assets in accordance with ASU No. 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business . Substantially all of the fair value was concentrated in a single identifiable asset, a technology-based intangible asset. The purchased intangible asset is being amortized on a straight-line basis over an estimated useful life of five years . The Company’s results of operations include the operating results of Sugarmate since the date of acquisition, the amounts of which were not material. Revenue Recognition Revenue is generated primarily from sales of insulin pumps, disposable insulin 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 control of the 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, net of estimated returns. 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 typically is upon shipment for our distributor arrangements and upon receipt for sales directly to individual customers. Complementary products, such as t:connect and the Tandem Device Updater, are considered distinct 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 over a four-year period. Where there is no standalone value for the complementary product, the Company determines its 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, 2021 and 2020 (in thousands): December 31, 2021 December 31, 2020 Deferred revenue $ 9,625 $ 5,508 Other long-term liabilities 16,940 10,426 Total $ 26,565 $ 15,934 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 $ 0.6 million at December 31, 2021 and 2020, 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 as intended in accordance with the product specifications within the warranty period. Insulin pumps returned to the Company may be refurbished and redeployed. Additionally, the Company offers a six-month warranty on disposable insulin cartridges and infusion sets. Estimated warranty costs are recorded at the time of shipment, and the Company reevaluates the estimate of the warranty reserve obligation at each reporting period. Warranty costs are estimated primarily based on the current expected product replacement cost and expected replacement rates utilizing historical experience. Experience has shown that initial data for any given pump version may be insufficient; therefore, our process relies on long-term historical averages until sufficient data are available. As actual experience becomes available, we use the data to update the historical averages. The Company may make further adjustments to the warranty reserve when deemed appropriate, giving additional consideration to the length of time each pump version has been in the field and revised 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, 2021, 2020 and 2019 (in thousands): Year Ended December 31, 2021 2020 2019 Balance at beginning of the year $ 22,075 $ 16,724 $ 9,138 Provision for warranties issued during the period 27,604 21,135 18,335 Settlements made during the period ( 18,768 ) ( 13,736 ) ( 10,167 ) Decrease in warranty estimates ( 510 ) ( 2,048 ) ( 582 ) Balance at end of the year $ 30,401 $ 22,075 $ 16,724 As of December 31, 2021 and December 31, 2020, total product warranty reserves of $ 30.4 million and $ 22.1 million, respectively, were included in the following consolidated balance sheet accounts (in thousands): December 31, 2021 2020 Other current liabilities $ 13,076 $ 8,409 Other long-term liabilities 17,325 13,666 Total warranty reserve $ 30,401 $ 22,075 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 income (loss). 96 Stock-Based Compensation Stock-based compensation cost is measured at the grant date based on the estimated fair value of the award, and the portion that is ultimately expected to vest is recognized as compensation expense over the requisite service period on a straight-line basis. The Company estimates the fair value of stock options issued under the Company’s Amended and Restated 2013 Stock Incentive Plan (2013 Plan) and the fair value of the employees’ purchase rights under the Company’s 2013 Employee Stock Purchase Plan (ESPP) using the Black-Scholes option-pricing model on the date of grant. The Black-Scholes option-pricing model requires the use of assumptions about a number of variables, including stock price volatility, expected term, dividend yield and risk-free interest rate (see Note 8, “Stockholders’ Equity”). The fair value of restricted stock unit (RSU) awards issued under the 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. The fair value of RSU awards issued under the 2013 Plan that vest based upon the Company’s actual performance relative to predefined performance metrics is estimated based on the fair market value of the underlying stock on the date of grant and the probability that the specified performance criteria will be met, subject to the awardee’s continuing service through the measurement date. At each reporting period, we reassess the probability of the achievement of such performance metrics. Any expense change resulting from an adjustment in the estimated shares to be released is recorded in the period of adjustment. 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. 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 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 using a two-step approach. 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. 97 The Company is required to file federal and state income tax returns in the United States and various other state jurisdictions, and 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 (see Note 10, “Income Taxes.” for further information). Comprehensive Income (Loss) All components of comprehensive income (loss), including net income (loss), are reported in the consolidated financial statements in the period in which they are recognized. Comprehensive income (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 Income (Loss) Per Share Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net income per share reflects the potential dilution that would occur if securities exercisable for or convertible into common stock were exercised for or converted into common stock. Dilutive common share equivalents are comprised of stock options and unvested RSUs outstanding under the Company’s stock plans, potential awards to be granted pursuant to the ESPP, and common stock warrants, each calculated using the treasury stock method; and shares issuable upon conversion of the convertible senior notes calculated using the if-converted method. For common stock warrants that are recorded as a liability in the accompanying 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 years ended December 31, 2020 and 2019, there was no difference in the weighted average number of shares used to calculate basic and diluted net loss per share due to the Company’s net loss position. For the year ended December 31, 2021, the numerator and denominator of the diluted net income per share computation were calculated as follows (in thousands): Year Ended December 31, 2021 Net income - basic and diluted $ 15,566 Weighted average shares outstanding - basic 63,000 Dilutive common share equivalents: Options to purchase common stock 1,129 Unvested restricted stock units 62 Warrants to purchase common stock 157 Awards to be granted under the ESPP 1 Weighted average shares outstanding - diluted 64,349 98 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, 2021 2020 2019 Options to purchase common stock 3,124 5,021 5,619 Unvested restricted stock units — 78 N/A Warrants to purchase common stock 1 379 611 Awards granted under the ESPP — 3 5 Convertible senior notes (if-converted) 2,554 1,605 N/A 5,679 7,086 6,235 Recent Accounting Pronouncements 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 eliminated certain models that require separate accounting for embedded conversion features, and eliminated 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 could be adopted through either a modified retrospective method of transition or a fully retrospective method of transition. ASU 2020-06 is effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company elected to early adopt the new standard on January 1, 2021 using the modified retrospective method and, accordingly, recorded a net reduction to accumulated deficit of $ 9.0 million, a decrease to additional paid-in capital of $ 85.8 million, and an increase to convertible senior notes, net - long-term of $ 76.8 million to reflect the impact of the accounting change (see Note 7, “Debt”). 3. Short-Term Investments The Company invests in marketable securities primarily consisting of debt instruments of the U.S. Government, U.S. Government-sponsored enterprises, and financial institutions and corporations with strong credit ratings. The following represents a summary of the estimated fair value of short-term investments at December 31, 2021 and 2020 (in thousands): At December 31, 2021 Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value Available-for-sale securities: U.S. Treasury securities $ 222,206 $ — $ ( 482 ) $ 221,724 Commercial paper 218,391 14 ( 24 ) 218,381 Corporate debt securities 58,881 — ( 45 ) 58,836 U.S. Government-sponsored enterprises 50,773 1 ( 88 ) 50,686 Supranational bonds 3,003 — — 3,003 Total $ 553,254 $ 15 $ ( 639 ) $ 552,630 At December 31, 2020 Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value Available-for-sale securities: U.S. Treasury securities $ 143,244 $ 12 $ ( 2 ) $ 143,254 Commercial paper 108,892 5 ( 1 ) 108,896 Corporate debt securities 85,788 48 ( 13 ) 85,823 U.S. Government-sponsored enterprises 52,330 21 ( 1 ) 52,350 Total $ 390,254 $ 86 $ ( 17 ) $ 390,323 99 The contractual maturities of available-for-sale debt securities as of December 31, 2021, were as follows (in thousands): Years to Maturity At December 31, 2021 Within One Year One to Two Years Estimated Fair Value U.S. Treasury securities $ 105,231 $ 116,493 $ 221,724 Commercial paper 218,381 — 218,381 Corporate debt securities 58,836 — 58,836 U.S. Government-sponsored enterprises 32,282 18,404 50,686 Supranational bonds 3,003 — 3,003 Total $ 417,733 $ 134,897 $ 552,630 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 reviews the portfolio of available-for-sale debt securities quarterly to determine if any investment is impaired due to changes in credit risk or other potential valuation concerns. Unrealized losses on available-for-sale debt securities at December 31, 2021 were not significant and were primarily due to changes in market interest rates. The Company does not intend to sell the available-for-sale debt securities that are in an unrealized loss position, and it is not more likely than not that the Company will be required to sell these debt securities before recovery of their amortized cost bases, which may be at maturity. Based on the credit quality of the available-for-sale debt securities in an unrealized loss position, and the Company’s estimates of future cash flows to be collected from those securities, the Company believes the unrealized losses are not credit losses. Accordingly, the Company did not recognize any impairment losses related to its available-for-sale debt securities at December 31, 2021. 4. Composition of Certain Financial Statement Items Accounts Receivable Accounts receivable, net consisted of the following at (in thousands): December 31, 2021 2020 Accounts receivable $ 114,974 $ 86,052 Less: allowance for credit losses ( 4,249 ) ( 3,857 ) Accounts receivable, net $ 110,725 $ 82,195 Allowance for Credit Losses The following table provides a reconciliation of the changes in the allowance for estimated accounts receivable credit losses for the years ended December 31, 2021, 2020 and 2019 (in thousands): Year Ended December 31, 2021 2020 2019 Balance at beginning of the year $ 3,857 $ 3,304 $ 1,837 Provision for expected credit losses 2,333 3,016 2,322 Write-offs and adjustments, net of recoveries ( 1,941 ) ( 2,463 ) ( 855 ) Balance at end of the year $ 4,249 $ 3,857 $ 3,304 100 Inventories Inventories consisted of the following at (in thousands): December 31, 2021 2020 Raw materials $ 26,911 $ 30,880 Work-in-process 16,612 15,664 Finished goods 25,028 17,177 Total inventories $ 68,551 $ 63,721 Property and Equipment Property and equipment, net consisted of the following at (in thousands): December 31, 2021 2020 Leasehold improvements $ 25,245 $ 22,834 Office furniture and equipment 9,943 9,876 Computer equipment and software 11,544 12,219 Manufacturing and scientific equipment 52,823 44,026 Total cost 99,555 88,955 Less: accumulated depreciation and amortization ( 49,169 ) ( 38,933 ) Total property and equipment, net $ 50,386 $ 50,022 Depreciation and amortization expense related to property and equipment was $ 11.7 million, $ 9.2 million, and $ 5.7 million for the years ended December 31, 2021, 2020, and 2019, 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 assets at December 31, 2021 and 2020, which were included in other long-term assets on the consolidated balance sheets, were as follows (in thousands): December 31, 2021 2020 Intangible assets, gross amount $ 12,502 $ 12,502 Accumulated amortization ( 5,866 ) ( 3,697 ) Intangible assets, net $ 6,636 $ 8,805 Weighted average remaining amortization period (in months) 41 52 Amortization expense related to intangible assets subject to amortization amounted to $ 2.2 million, $ 1.2 million and $ 0.3 million for the years ended December 31, 2021, 2020, and 2019, 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 $ 1.9 million for 2022, $ 1.9 million for 2023, $ 1.9 million for 2024, and the remaining $ 0.9 million in 2025 . 5. Fair Value Measurements Authoritative guidance on fair value measurements defines fair value, and provides a consistent framework for measuring fair value and for disclosures of each major asset and liability category measured at fair value on either a recurring or a nonrecurring basis. Fair value is intended to reflect an assumed exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: 101 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, 2021 and 2020, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands): Fair Value Measurements at December 31, 2021 Total Level 1 Level 2 Level 3 Assets Cash equivalents (1) $ 48,286 $ 48,286 $ — $ — U.S. Treasury securities 221,724 221,724 — — Commercial paper 218,381 — 218,381 — U.S. Government-sponsored enterprises 50,686 — 50,686 — Corporate debt securities 58,836 — 58,836 — Supranational bonds 3,003 — 3,003 — Total assets $ 600,916 $ 270,010 $ 330,906 $ — Liabilities Common stock warrants $ 147 $ — $ — $ 147 Total liabilities $ 147 $ — $ — $ 147 Fair Value Measurements at December 31, 2020 Total Level 1 Level 2 Level 3 Assets Cash equivalents (1) $ 87,300 $ 87,300 $ — $ — U.S. Treasury securities 143,254 143,254 — — Commercial paper 108,896 — 108,896 — U.S. Government-sponsored enterprises 52,350 — 52,350 — Corporate debt securities 85,823 — 85,823 — Total assets $ 477,623 $ 230,554 $ 247,069 $ — Liabilities Common stock warrants $ 14,261 $ — $ — $ 14,261 Total liabilities $ 14,261 $ — $ — $ 14,261 (1) Generally, cash equivalents include money market funds and investments with a maturity of three months or less from the date of purchase. The Company’s Level 2 financial instruments are valued using market prices on less active markets with observable valuation inputs such as interest rates and yield curves. The Company obtains the fair value of Level 2 financial instruments from quoted market prices, calculated prices or quotes from third-party pricing services. The Company validates these prices through independent valuation testing and review of portfolio valuations provided by the Company’s investment managers. 102 The Company's Level 3 liabilities at December 31, 2021 and 2020 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, provide holders the right to purchase shares of the Company’s common stock at an exercise price of $ 3.50 per share. As of December 31, 2021 and 2020, there were Series A warrants outstanding to purchase 1,000 shares and 154,700 shares, respectively, of the Company’s common stock (see Note 8, “Stockholders’ Equity”). The Company reassesses the fair value of the outstanding Series A warrants at each reporting date utilizing a Black-Scholes pricing model. Variables used in the pricing model include the closing market price of the Company’s common stock at the balance sheet date, as well as estimated stock price volatility, dividend yield, remaining warrant term and risk-free interest rate. 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, 2021 and 2020 are presented below: Series A Warrants December 31, 2021 December 31, 2020 Risk-free interest rate 0.3 % 0.1 % Expected dividend yield 0.0 % 0.0 % Expected volatility 39.1 % 55.3 % Expected term (in years) 0.8 1.8 The following table presents a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the years ended December 31, 2021 and 2020: 2021 2020 Balance at beginning of year $ 14,261 $ 23,509 Loss recognized from the change in fair value of common stock warrants 1,386 17,087 Common stock warrants exercised during the period ( 15,500 ) ( 26,335 ) Balance at end of year $ 147 $ 14,261 Of the loss recognized from the change in fair value of common stock warrants for the years ended December 31, 2021 and 2020, $ 0.1 million and $ 5.5 million, respectively, was attributable to warrants outstanding as of December 31, 2021 and 2020. 6. Leases The Company's leases consist of operating leases for general office space, laboratory, manufacturing and warehouse facilities, and equipment. These noncancellable operating leases have initial lease terms from two years to twelve years, eight months . Leases with an initial term of 12 months or less are expensed as incurred and are not recorded as right-of-use assets on the Company’s consolidated balance sheets. The Company is required to recognize operating lease right-of-use assets and liabilities, and begin recording lease expense when the Company takes possession of the leased property (the Commencement Date). The Company recognizes lease expense for these leases on a straight-line basis over the lease term. Because the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at the lease Commencement Date to determine the operating lease right-of-use assets and liabilities based on the present value of future lease payments over the lease term. The Company used the incremental borrowing rate on January 1, 2019 for operating leases that commenced prior to that date. Certain leases include an option to renew, with renewal terms that can extend the lease term for additional periods. The exercise of lease renewal options is at the Company’s sole discretion. For renewal options that are reasonably certain at the lease Commencement Date of being exercised, the Company includes the renewal option period in the lease term. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option that is reasonably certain to be exercised. 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 began in July 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. 103 In January 2020, the Company entered into a sublease agreement for approximately 30,703 square feet of general office space located on High Bluff Drive, in San Diego, California (High Bluff Sublease). 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 four separate buildings that comprise in aggregate 77,458 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. In March 2021, the Company entered into a second amendment (Second Amendment) to its lease agreement for office space located on Vista Sorrento Parkway in San Diego, California (Vista Sorrento Lease) covering 59,013 square feet of general administrative office space (Existing Premises). The Second Amendment expanded the Existing Premises by adding 14,916 square feet of general administrative office space (Expansion Space), and extended the lease term for the Existing Premises through January 2028. The Expansion Space lease Commencement Date occurred in March 2021, and the lease term expires in January 2028. The Company has two options to extend the term of the Vista Sorrento Lease, covering both the Existing Premises and the Expansion Space, with each option providing for an additional period of five years . The Vista Sorrento Lease term was determined assuming the renewal options would not be exercised. The Company recognized right-of-use leased assets and corresponding operating lease liabilities of $ 15.1 million on the consolidated balance sheet in the first quarter of 2021 related to the Second Amendment. The Company’s lease costs recorded in the consolidated statements of operations were as follows (in thousands): Year Ended December 31, 2021 2020 2019 Operating lease cost $ 8,627 $ 7,514 $ 4,542 Short-term lease cost 90 219 165 Total lease cost $ 8,717 $ 7,733 $ 4,707 104 Maturities of operating lease liabilities at December 31, 2021 were as follows (in thousands): Years Ending December 31, 2022 $ 9,281 2023 6,949 2024 5,744 2025 5,825 2026 5,531 Thereafter 5,144 Total undiscounted lease payments 38,474 Less: amount representing interest ( 5,273 ) Present value of operating lease liabilities 33,201 Less: current portion of operating lease liabilities ( 9,279 ) Operating lease liabilities - long-term $ 23,922 The weighted-average remaining lease term and weighted-average discount rate for operating leases were as follows: December 31, 2021 December 31, 2020 Weighted-average remaining lease term (in years) 5.0 3.7 Weighted-average discount rate used to determine operating lease liabilities 5.6 % 5.9 % Cash paid for amounts included in the measurement of lease liabilities, representing operating cash flows from operating leases, was $ 9.5 million and $ 8.2 million for the years ended December 31, 2021 and 2020, respectively . Leases For Which Accounting Has Not Yet Commenced As of December 31, 2021, the Commencement Date for the High Bluff and Tech Center Leases described below, had not yet occurred. Accordingly, the consolidated balance sheet at December 31, 2021 does not include operating lease right-of-use assets and operating lease liabilities, and the consolidated statement of operations for the year ended December 31, 2021 does not include any lease costs, related to the High Bluff Lease and the Tech Center Lease. In addition, the above disclosures of the Company’s lease costs, maturities of operating lease liabilities, and the weighted-average remaining lease term and weighted-average discount rate, do not include any amounts related to the High Bluff and Tech Center Leases. High Bluff Lease In May 2021, the Company entered into a lease agreement for approximately 31,372 square feet of general office space located on High Bluff Drive, in San Diego, California (High Bluff Lease). The High Bluff Lease is a direct lease agreement for the same property subject to the High Bluff Sublease. The lease term begins in April 2022 following the termination of the High Bluff Sublease in March 2022, and is scheduled to expire in March 2024. The Company expects to recognize right-of-use leased assets and corresponding operating lease liabilities of approximately $ 3.0 million on the consolidated balance sheet on the Commencement Date in the second quarter of 2022. Tech Center Lease In September 2021, the Company entered into a lease agreement for 181,949 square feet of additional general administrative, laboratory, and research and development office space (the Premises) located on High Bluff Drive in San Diego, California (Tech Center Lease). Possession of the Premises is expected to be tendered to the Company by the landlord in two phases, with Phase I consisting of 143,850 rentable square feet, and Phase II consisting of 38,099 rentable square feet. The Company intends to use Phase I of the Tech Center Lease for operations currently located at the Roselle Street Leases. 105 The initial lease term Phase I Commencement Date will occur on the date the Company is tendered possession of the Phase I portion of the Premises (which is currently expected to be in March 2022), and rent payments commence six months thereafter (the Phase I Rent Commencement Date). The Phase II Commencement Date is expected to occur upon the earlier of (i) the date upon which the Company first commences business in the Phase II portion of the Premises, and (ii) May 1, 2025 (the Phase II Rent Commencement Date). The lease will expire twelve years, eight months from the first day of the first full month following the Phase I Rent Commencement Date. The Company has two options to extend the term of the lease, with each option providing for an additional period of five years , by delivering written notice to the landlord in accordance with the terms of the Tech Center Lease. The Tech Center Lease also includes a first right of offer with respect to an additional 34,569 rentable square feet of general office space should the space become available. The lease term and associated base rent for the additional space will not be known until the Company is notified that the additional space has become available, and the Company elects to lease the space on terms mutually satisfactory to the Company and the landlord. The initial base rent for the Tech Center Lease is approximately $ 906,000 per month beginning on the Phase I Rent Commencement Date, and the base rent increases by approximately $ 255,000 per month on the Phase II Rent Commencement Date. The monthly base rent will increase annually by 3.0 % on each annual anniversary of the respective Rent Commencement Date. In addition to the monthly base rent, the Company is required to pay its proportionate share of certain ongoing operating expenses throughout the duration of the lease. No base rent, other than the proportionate share of operating expenses, will be due for the Phase I portion of the Premises for months two through nine of the initial lease term, and for the Phase II portion of the Premises for months two through five following the Phase II Rent Commencement Date. Future minimum payments for monthly base rent due under the respective High Bluff Lease and Tech Center Lease terms, are currently estimated to be as follows (in thousands), subject to a number of factors, including the actual Commencement Date of the lease: Years Ending December 31, High Bluff Lease (1) Tech Center Lease (2) Total 2022 $ 1,029 $ — $ 1,029 2023 1,594 6,453 8,047 2024 403 11,313 11,716 2025 — 12,694 12,694 2026 — 15,181 15,181 2027 through 2035 — 145,583 145,583 Total $ 3,026 $ 191,224 $ 194,250 (1) The Company currently estimates that the Commencement Date will occur in the second quarter of 2022, at which time the operating lease right-of-use assets and liabilities will be recorded. (2) The Company currently estimates that the Phase I Commencement Date will occur in the first quarter of 2022, and the Phase II Commencement Date will occur in the first quarter of 2025, at which time the respective operating lease right-of-use assets and liabilities will be recorded. 7. 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 (Notes) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The proceeds from the issuance of the Notes were $ 244.6 million, net of debt issuance costs and cash used to pay the cost of the capped call transactions (Capped Call Transactions) discussed below. The Notes are the Company’s senior unsecured obligations. Interest is payable in cash semi-annually in arrears beginning on November 1, 2020 at a rate of 1.50 % per year. The Notes mature on May 1, 2025 unless repurchased, redeemed, or converted in accordance with their terms prior to the maturity date. 106 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 $ 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 expects to settle conversions through a combination settlement, which involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. The Company may not redeem the Notes prior to May 6, 2023. The Company has the option to redeem for cash all or any portion of the Notes on or after May 6, 2023 if the last reported sale price of the Company’s common stock has been at least 130 % of the Conversion Price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period, at a redemption price equal to 100 % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest. No sinking fund is provided for the Notes. Holders of the Notes may convert all or a portion of their Notes at their option prior to November 1, 2024, in multiples of $1,000 principal amounts, only under the following circumstances: • if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the applicable conversion price of the Notes on each such trading day; • during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each day of that five consecutive trading day period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate of the Notes on such trading day; • if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or • on the occurrence of specified corporate events. On or after November 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Holders of the Notes who convert in connection with a make-whole fundamental change or in connection with a redemption are entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change, holders of the Notes may require us to repurchase all or a portion of the Notes at a price equal to 100 % of the principal amount of the Notes, plus any accrued and unpaid interest. Initially, in accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of similar debt instruments, which do not have an associated convertible feature. The carrying amount of the equity component representing the co nversion option for the Notes was $ 88.5 million and was recorded as a debt discount, which was being amortized to interest expense at an effective interest rate of 9.9 %. In addition, t he Company allocated $ 2.7 million of debt issuance costs to the equity component and the remaining debt issuance costs of $ 6.1 million were allocated to the liability component, which were being amortized to interest expense under the effective interest rate method. On January 1, 2021, the Company early adopted ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which is intended to simplify the accounting for convertible instruments. The ASU eliminates the cash conversion feature models in ASC 470-20, Debt with Conversion and Other Options , which required an issuer of certain convertible debt to separately account for embedded conversion features as a component of equity. Instead, an issuer will account for these securities as a single unit of account, unless the conversion feature meets certain criteria. The Company adopted the new standard using the modified retrospective method, and recorded a net reduction to accumulated deficit of $ 9.0 million, a decrease to additional paid-in capital of $ 85.8 million, and an increase to convertible senior notes, net - long-term of $ 76.8 million to reflect the impact of the accounting change. The Notes are now accounted for as a single liability measured at amortized cost, as no other embedded features require bifurcation and recognition as derivatives. 107 The liability and equity components of the Notes consisted of the following (in thousands): December 31, 2021 December 31, 2020 Liability: Principal amount $ 287,500 $ 287,500 Unamortized debt issuance costs ( 6,033 ) ( 5,446 ) Unamortized debt discount — $ ( 79,070 ) Net carrying amount $ 281,467 $ 202,984 Carrying amount of the equity component $ — $ 85,803 As of December 31, 2021, the unamortized debt issuance costs of $ 6.0 million associated with the Notes will be amortized to interest expense, at an effective interest rate of 2.2 % over the remaining period of approximately 3.3 years. The following table details interest expense recognized related to the Notes for the years ended December 31, 2021 and 2020 (in thousands): December 31, 2021 December 31, 2020 Contractual interest expense $ 4,313 $ 2,707 Amortization of debt issuance costs 1,727 652 Amortization of debt discount N/A 9,446 Total interest expense $ 6,040 $ 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, 2021, the if-converted value of the Notes exceeded the principal amount by $ 96.9 million. 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 in May 2020 with certain counterparties at a net cost of $ 34.1 million. The Capped Call Transactions are intended to reduce potential dilution to holders of the Company’s common stock beyond the conversion price of $ 112.57 , up to a conversion price of $ 173.18 on any conversion of the Notes, or to offset any cash payments the Company is required to make in excess of the principal amount of such converted Notes, as the case may be, with such reduction or offset subject to a cap. The cap price of the Capped Call Transactions is initially $ 173.18 per share of the Company’s common stock, representing a premium of 100 % above the last reported sale price of $ 86.59 per share of the Company’s common stock on May 12, 2020, and is subject to certain adjustments under the terms of the Capped Call Transactions. Conditions that cause adjustments to the initial strike price of the Capped Call Transactions mirror conditions that result in corresponding adjustments for the Notes. For accounting purposes, the Capped Call Transactions are separate transactions, and not part of the terms of the Notes, while they are integrated for federal tax purposes. As these transactions met certain criteria under the applicable accounting guidance, the Capped Call Transactions were recorded in stockholders' equity and were 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. 108 8. Stockholders’ Equity Shares Reserved for Future Issuance The following shares of the Company's common stock were reserved for future issuance at December 31, 2021 (in thousands): Shares reserved for issuance upon conversion of Convertible Senior Notes 2,554 Shares underlying outstanding warrants 215 Shares underlying outstanding stock options 4,814 Shares underlying unvested restricted stock units 612 Shares authorized for issuance pursuant to awards granted under the ESPP 1,216 Shares authorized for future equity award grants 1,382 10,793 Common Stock Warrants Warrants outstanding to purchase shares of the Company's common stock as of December 31, 2021 were as follows: Issue Date Exercise Price Per Share Warrants Outstanding Expiration Date of Warrants Outstanding October 2017 $ 3.50 1,000 October 2022 March 2017 $ 23.50 193,788 March 2027 August 2011 - August 2012 $ 73.73 19,722 May 2022 - August 2022 214,510 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 155,517 and 295,526 shares of its common stock upon the exercise of warrants during the years ended December 31, 2021 and 2020, respectively. Stock Plans The Company’s Amended and Restated 2013 Stock Incentive Plan (2013 Plan) was originally approved by the Company’s board of directors in October 2013. Under the 2013 Plan, the Company may grant stock options, stock appreciation rights, restricted stock and restricted stock units to individuals who are then employees, officers, directors or consultants of the Company. 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 1,128,791 and 2,339,467 shares of its common stock, respectively, upon the exercise of stock options during the years ended December 31, 2021 and 2020. During the years ended December 31, 2021 and 2020, the Company issued 38,156 and 1,892 shares of its common stock, respectively, 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 . 109 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, 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 Granted 355,008 $ 86.68 Exercised ( 1,128,791 ) $ 37.05 $ 86,149 Canceled/forfeited/expired ( 215,372 ) $ 76.29 $ 6,963 Outstanding at December 31, 2021 4,814,350 $ 57.08 7.07 $ 452,081 Vested and expected to vest at December 31, 2021 4,769,317 $ 56.95 7.06 $ 448,460 Exercisable at December 31, 2021 3,013,030 $ 49.28 6.50 $ 307,235 Restricted Stock Units Restricted stock units (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 . In addition, the Company granted 25,674 performance-based RSUs during the year ended December 31, 2021. The performance-based RSUs have a grant value equal to the closing price of the Company’s common stock on the award date, and vest upon the Company’s actual performance relative to predefined performance metrics and subject to the awardee’s continuing service through the December 31, 2024 measurement date. A summary of RSU activity for the years ended December 31, 2021 and 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 Granted 564,034 $ 96.37 Vested ( 53,957 ) $ 82.74 Canceled/forfeited ( 30,705 ) $ 87.21 Unvested awards outstanding at December 31, 2021 612,174 $ 95.11 $ 92,144 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. During the years ended December 31, 2021 and 2020, 172,694 shares and 302,509 shares of our common stock, respectively, were purchased under the ESPP for proceeds of $ 11.1 million and $ 9.1 million, respectively. 110 Stock-Based Compensation 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, 2021 2020 2019 Cost of sales $ 6,434 $ 8,210 $ 6,415 Selling, general & administrative 43,567 41,563 42,857 Research and development 10,751 8,658 8,799 Total stock-based compensation expense $ 60,752 $ 58,431 $ 58,071 The total stock-based compensation capitalized as part of the cost of the Company’s inventories was $ 1.0 million and $ 0.6 million at December 31, 2021 and 2020, respectively. At December 31, 2021, the total unamortized stock-based compensation expense of approximately $ 129.2 million will be recognized over the remaining weighted average vesting term of approximately 2.6 years. The assumptions used in the Black-Scholes option-pricing model are as follows: Stock Options Year Ended December 31, 2021 2020 2019 Weighted average grant date fair value (per share) $ 56.89 $ 54.20 $ 39.06 Risk-free interest rate 1.0 % 0.6 % 2.1 % Expected dividend yield 0.0 % 0.0 % 0.0 % Expected volatility 75.1 % 74.6 % 71.8 % Expected term (in years) 6.1 6.1 6.0 ESPP Year Ended December 31, 2021 2020 2019 Weighted average grant date fair value (per share) $ 38.19 $ 36.83 $ 30.32 Risk-free interest rate 0.2 % 0.2 % 1.9 % Expected dividend yield 0.0 % 0.0 % 0.0 % Expected volatility 44.2 % 60.3 % 69.9 % 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. 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 for 2021 was estimated based on a weighted-average of the Company’s actual historical volatility of its common stock measured over the expected term. During 2020, the Company transitioned to solely using the expected volatility of its own common stock. Prior to this transition, the expected volatility was estimated based on a weighted-average 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 were publicly available. The peer group consisted of publicly traded companies in the same industry and in a similar stage of development. 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. 111 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. 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, and the Company may elect to match a discretionary percentage of employee contributions. The Company did not provide a matching contribution during the three years ended December 31, 2021, but approved a discretionary match to begin in 2022. 10. Income Taxes The income (loss) before provision for income taxes for the Company’s domestic and international operations was as follows (in thousands): Year Ended December 31, 2021 2020 2019 U.S. $ 15,211 $ ( 36,667 ) $ ( 24,888 ) Foreign 690 385 284 Income (loss) before provision for income taxes $ 15,901 $ ( 36,282 ) $ ( 24,604 ) The components of income tax expense (benefit) were as follows (in thousands): Year Ended December 31, 2021 2020 2019 Current: Federal $ — $ — $ — State 174 75 86 Foreign 161 151 88 Total current tax expense 335 226 174 Deferred: Federal — ( 1,760 ) ( 21 ) State — ( 366 ) ( 4 ) Foreign — — — Total deferred income tax benefit — ( 2,126 ) ( 25 ) Income tax expense (benefit) $ 335 $ ( 1,900 ) $ 149 112 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, 2021 2020 2019 Income tax expense (benefit) at federal statutory rate (1) $ 3,339 $ ( 7,619 ) $ ( 5,167 ) State income tax, net of federal benefit ( 254 ) ( 2,792 ) ( 1,174 ) Warrants revaluation 356 3,588 2,326 Research and development credits ( 5,703 ) ( 5,330 ) ( 2,091 ) Section 382 limitation ( 97 ) 1,021 25,043 Stock-based compensation ( 7,609 ) ( 18,309 ) ( 8,974 ) Officers' compensation 4,024 2,612 3,133 Other 124 479 972 Change in valuation allowance 6,155 24,450 ( 13,919 ) Income tax expense (benefit) $ 335 $ ( 1,900 ) $ 149 (1) For the years ended December 31, 2021, 2020 and 2019, the federal statutory tax rate was 21%. Significant components of the Company’s net deferred income tax assets at December 31, 2021 and 2020 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, 2021. 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 $ 146.4 million and $ 121.6 million at December 31, 2021 and 2020, 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, 2021 2020 Deferred tax assets: Net operating loss (NOL) carryforwards $ 78,961 $ 86,898 Research and development tax credits carryforwards 16,761 11,261 Capitalized research and development expenses 5,135 6,840 Accrued compensation 28,970 24,038 Lease liabilities 8,012 6,112 Other 20,608 12,096 Total deferred tax assets 158,447 147,245 Deferred tax liabilities: Convertible senior notes — ( 11,224 ) Fixed assets ( 3,847 ) ( 7,675 ) Other ( 8,177 ) ( 6,719 ) Total deferred tax liabilities ( 12,024 ) ( 25,618 ) Less valuation allowance ( 146,423 ) ( 121,627 ) Net deferred tax assets $ — $ — 113 As of December 31, 2021, the Company had accumulated federal and state NOL carryforwards of approximately $ 301.2 million, and $ 291.0 million, respectively, Of the total federal net operating loss carryforwards, approximately $ 112.1 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 $ 189.1 million will begin to expire in 2026, and state tax loss carryforwards continue to expire in 2022, unless previously utilized. The remaining California NOL carryforwards of $ 171.8 million will begin expiring in 2028. The Company has no foreign tax loss carryforwards as of December 31, 2021. The Company also has federal and California research credit carryforwards of approximately $ 12.9 million and $ 15.5 million, respectively, as of December 31, 2021. The federal research credit carryforwards will begin expiring in 2038, 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. 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, 2021, 2020 and 2019 (in thousands): Year Ended December 31, 2021 2020 2019 Gross unrecognized tax benefits at the beginning of the year 10,107 $ 6,580 $ 8,824 Increases related to current year positions 3,482 2,234 1,076 Increases (decreases) related to prior year positions — 1,293 ( 3,320 ) Gross unrecognized tax benefits at the end of the year $ 13,589 $ 10,107 $ 6,580 As of December 31, 2021, the Company had $ 11.8 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, 2021 and 2020. 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. 114 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 insulin 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, Saudi Arabia 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, 2021, 2020 and 2019, no individual country outside the United States generated revenue that represented more than 10% of total revenue. The table below sets forth revenues for the Company’s two primary geographical markets, based on the geographic location to which its products are shipped (in thousands). For the Year Ended December 31, 2021 2020 2019 United States $ 524,907 $ 415,680 $ 302,084 International 177,892 83,150 60,221 Total Sales $ 702,799 $ 498,830 $ 362,305 Sales to distributors accounted for 67 %, 70 %, and 73 % of the Company’s total domestic sales for the years ended December 31, 2021, 2020 and 2019, respectively. Sales to distributors accounted for 95 %, 94 %, and 92 % of the Company’s total international sales for the years ended December 31, 2021, 2020 and 2019, respectively. 12. Commitments and Contingencies Legal and Regulatory Matters In April 2020, the Company was named as a defendant in four federal class action lawsuits relating to a data breach it experienced in January 2020, each of which was subsequently dismissed. In addition, in May 2020 the Company was named as a defendant in three California state court class action lawsuits arising from the same data breach. Collectively, these lawsuits seek statutory, compensatory, actual, and punitive damages; equitable relief, including restitution; pre- and post-judgment interest; injunctive relief; and attorney fees, costs, and expenses from the Company. On July 24, 2020, these three pending lawsuits were consolidated into a single case in the Superior Court of the State of California in the County of San Bernardino entitled Joseph Deluna et al v. Tandem Diabetes Care, Inc . The consolidated case alleges violations of the Confidentiality of Medical Information Act (CMIA), California Consumer Privacy Act (CCPA), California’s Unfair Competition Law (UCL), and breach of contract. The Company filed a demurrer seeking dismissal of all claims, which was heard by the Court on October 27, 2020, and which resulted in the following outcome: (i) the demurrer of the CMIA claim was denied; (ii) the demurrer of the CCPA claim was sustained; and (iii) the demurrer of the UCL and contract claims were sustained with leave to amend the pending complaint. A second demurrer was heard by the Court on March 29, 2021 with the following outcome: (i) the demurrer of the CMIA claim was denied; and (ii) the demurrer of the UCL and contract claims were narrowed in scope to dismiss three plaintiffs for either failing to allege cognizable damages or injuries-in-fact, resulting in two remaining plaintiffs. Although the Company intends to vigorously defend against these claims, there is no guarantee that the Company will prevail. The Company presently is unable to determine the ultimate outcome of these lawsuits or determine the amount (or range) of possible losses associated with the lawsuits. 115 In September 2020, the Company was named as a defendant in a lawsuit entitled Buck Walsh, individually and on behalf of others similarly situated v. Tandem Diabetes Care, Inc., which was filed in the Superior Court of the State of California in the County of San Diego. The alleged violations include business and professions code and labor code violations for failure to compensate wages, unpaid meal and rest periods, and failure to reimburse for necessary business-related expenses. The case was brought as a class action and was later amended to also include a representative action under the California Private Attorney General Act, or PAGA. The class of plaintiffs includes hourly paid or non-exempt employees of the Company who were employed from April 6, 2016 through the date of adjudication. The parties recently agreed to resolve all claims in the lawsuit. The settlement of claims covered by the PAGA matter were approved by the Superior Court of the State of California in the County of San Diego on September 21, 2021 and settlement amounts were disbursed in 2021. In October 2021, a settlement of the class action related claims was preliminarily approved by an independent arbitrator mutually acceptable to both parties. The class action is intended to resolve the claims of the individual plaintiff, as well as the remaining members of the class, unless an individual class member submits a timely request for exclusion. The material terms of the settlement are set forth in a binding Memorandum of Agreement dated as of July 1, 2021, which is subject to the completion of a number of conditions, as well as final approval by the independent arbitrator. There is no guarantee that the conditions will be met or that final approval will be obtained. If the final class settlement is not approved, or if other conditions to approval of the settlement are not met, the case will continue and the Company will continue to vigorously defend against the claims. From time to time, the Company is involved in various other legal proceedings, regulatory matters, and other disputes or claims arising from or related to the normal course of our business activities, including actions with respect to intellectual property, data privacy, employment, regulatory, product liability and contractual matters. Although the results of legal proceedings, disputes and other claims cannot be predicted with certainty, the Company believes it is not currently a party to any legal proceeding(s) which, if determined adversely to the Company, would, individually or taken together, have a material adverse effect on the Company’s business, operating results, financial condition or cash flows. However, regardless of the merit of the claims raised or the outcome, legal proceedings may have an adverse impact on the Company as a result of defense and settlement costs, diversion of management time and resources, and other factors. Except as set forth above, as of December 31, 2021 and December 31, 2020, there were no legal proceedings, regulatory matters, or other disputes or claims for which a material loss was considered probable or for which the amount (or range) of loss was reasonably estimable. However, regardless of the merits of the claims raised or the outcome, legal proceedings, regulatory matters, and other disputes and claims may have an adverse impact on the Company because of as a result of defense and settlement costs, diversion of management time and resources, and other factors. Letters of Credit The Company leases general office space, laboratory, manufacturing and warehouse facilities, and equipment under noncancelable operating leases for use in our operations (see Note 6, “Leases”). In connection with one of the operating leases, the Company has a $ 4.9 million unsecured irrevocable standby letter of credit arrangement with a bank, under which the landlord of the building is the beneficiary. The Company is required to maintain the standby letter of credit throughout the term of the lease, which is currently expected to expire in April 2035. 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 consist primarily of purchase order commitments for raw materials used in the production of insulin pumps and cartridges, and finished goods infusion sets. Cancellation of outstanding purchase orders is generally allowed under the standard terms of our purchase order agreements, but may require payment of costs incurred through the date of cancellation. At December 31, 2021, obligations under our purchase agreements totaled approximately $ 255 million, of which approximately $ 251 million is scheduled to be received and become payable within one-year. 116 13. Fourth Quarter Financial Data (Unaudited) The financial information for the three months ended December 31, 2021 and 2020 presented in the following table reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results of the interim periods (in thousands, except per share data): For the Quarter Ended December 31, 2021 December 31, 2020 Sales $ 209,996 $ 168,065 Gross profit $ 113,729 $ 90,556 Operating expenses $ 100,991 $ 71,894 Operating income $ 12,738 $ 18,662 Net income $ 10,808 $ 17,000 Basic net income per share $ 0.17 $ 0.27 Diluted net income per share $ 0.16 $ 0.22 The numerator and denominator of the basic and diluted net income per share computations are calculated as follows for the three months ended December 31, 2021 and 2020: For the Quarter Ended (in thousands) December 31, 2021 December 31, 2020 Net income $ 10,808 $ 17,000 Less: change in fair value of common stock warrants 32 ( 2,819 ) Net income - diluted $ 10,840 $ 14,181 Weighted average shares outstanding - basic 63,650 62,249 Dilutive common share equivalents: Options to purchase common stock 1,877 2,984 Unvested restricted stock units 227 133 Warrants to purchase common stock 170 308 Awards to be granted under the ESPP 3 4 Convertible senior notes (if-converted) — — Weighted average shares outstanding - diluted 65,927 65,678 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable.