TANDEM DIABETES CARE INC 10-Q

Item 1. Financial Statements TANDEM DIABETES CARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value) September 30, December 31, 2022 2021 Assets (Unaudited) (Note 1) Current assets: Cash and cash equivalents $ 123,786 $ 71,181 Short-term investments 484,941 552,630 Accounts receivable, net 112,805 110,725 Inventories 104,774 68,551 Prepaid and other current assets 7,997 8,433 Total current assets 834,303 811,520 Property and equipment, net 72,905 50,386 Operating lease right-of-use assets 116,474 27,503 Other long-term assets 23,838 15,728 Total assets $ 1,047,520 $ 905,137 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 61,531 $ 28,032 Accrued expenses 7,898 9,419 Employee-related liabilities 47,967 51,556 Operating lease liabilities 12,120 9,279 Deferred revenue 12,974 10,182 Other current liabilities 31,140 23,388 Total current liabilities 173,630 131,856 Convertible senior notes, net - long-term 282,787 281,467 Operating lease liabilities - long-term 127,109 23,922 Deferred revenue - long-term 19,143 16,940 Other long-term liabilities 23,029 17,840 Total liabilities 625,698 472,025 Commitments and contingencies (Note 12) — — Stockholders’ equity: Common stock, $ 0.001 par value; 200,000 shares authorized, 64,265 and 63,833 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively. 64 64 Additional paid-in capital 1,140,158 1,068,259 Accumulated other comprehensive loss ( 5,064 ) ( 616 ) Accumulated deficit ( 713,336 ) ( 634,595 ) Total stockholders’ equity 421,822 433,112 Total liabilities and stockholders’ equity $ 1,047,520 $ 905,137 See accompanying notes to unaudited condensed consolidated financial statements. 1 TANDEM DIABETES CARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited) (In thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Sales $ 204,547 $ 179,627 $ 580,716 $ 492,803 Cost of sales 100,122 82,882 283,252 230,317 Gross profit 104,425 96,745 297,464 262,486 Operating expenses: Selling, general and administrative 84,104 64,923 237,989 190,009 Research and development 36,798 24,102 103,529 62,562 Acquired in-process research and development expenses 31,016 — 31,016 — Total operating expenses 151,918 89,025 372,534 252,571 Operating income (loss) ( 47,493 ) 7,720 ( 75,070 ) 9,915 Other income (expense), net: Interest income and other, net 1,708 31 2,858 721 Interest expense ( 1,576 ) ( 1,511 ) ( 4,629 ) ( 4,526 ) Change in fair value of common stock warrants 12 ( 392 ) 103 ( 1,354 ) Total other income (expense), net 144 ( 1,872 ) ( 1,668 ) ( 5,159 ) Income (loss) before income taxes ( 47,349 ) 5,848 ( 76,738 ) 4,756 Income tax expense (benefit) 1,621 54 2,003 ( 2 ) Net income (loss) $ ( 48,970 ) $ 5,794 $ ( 78,741 ) $ 4,758 Other comprehensive income (loss): Unrealized gain (loss) on short-term investments $ ( 258 ) $ 8 $ ( 3,899 ) $ ( 81 ) Foreign currency translation loss ( 524 ) ( 23 ) ( 549 ) ( 125 ) Comprehensive income (loss) $ ( 49,752 ) $ 5,779 $ ( 83,189 ) $ 4,552 Net income (loss) per share, basic $ ( 0.76 ) $ 0.09 $ ( 1.23 ) $ 0.08 Net income (loss) per share, diluted $ ( 0.76 ) $ 0.09 $ ( 1.23 ) $ 0.07 Weighted average shares used to compute basic net income (loss) per share 64,236 63,167 64,066 62,780 Weighted average shares used to compute diluted net income (loss) per share 64,237 64,784 64,067 64,198 See accompanying notes to unaudited condensed consolidated financial statements. 2 TANDEM DIABETES CARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (In thousands) Three Months Ended September 30, 2022 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at June 30, 2022 64,210 $ 64 $ 1,118,168 $ ( 4,282 ) $ ( 664,366 ) $ 449,584 Exercise of stock options 26 — 583 — — 583 Vesting of restricted stock units, net of shares withheld for taxes 29 — ( 952 ) — — ( 952 ) Stock-based compensation expense — — 22,359 — — 22,359 Unrealized loss on short-term investments — — — ( 258 ) — ( 258 ) Foreign currency translation adjustments — — — ( 524 ) — ( 524 ) Net loss — — — — ( 48,970 ) ( 48,970 ) Balance at September 30, 2022 64,265 $ 64 $ 1,140,158 $ ( 5,064 ) $ ( 713,336 ) $ 421,822 Nine Months Ended September 30, 2022 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at December 31, 2021 63,833 $ 64 $ 1,068,259 $ ( 616 ) $ ( 634,595 ) $ 433,112 Exercise of stock options 198 — 6,981 — — 6,981 Vesting of restricted stock units, net of shares withheld for taxes 99 — ( 3,527 ) — — ( 3,527 ) Issuance of common stock under Employee Stock Purchase Plan 129 — 7,915 — — 7,915 Exercise of common stock warrants 6 — 83 — — 83 Stock-based compensation expense — — 60,447 — — 60,447 Unrealized loss on short-term investments — — — ( 3,899 ) — ( 3,899 ) Foreign currency translation adjustments — — — ( 549 ) — ( 549 ) Net loss — — — — ( 78,741 ) ( 78,741 ) Balance at September 30, 2022 64,265 $ 64 $ 1,140,158 $ ( 5,064 ) $ ( 713,336 ) $ 421,822 See accompanying notes to unaudited condensed consolidated financial statements. 3 Three Months Ended September 30, 2021 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at June 30, 2021 62,952 $ 63 $ 997,190 $ 29 $ ( 651,197 ) $ 346,085 Exercise of stock options 464 — 18,992 — — 18,992 Vesting of restricted stock units, net of shares withheld for taxes 5 — ( 297 ) — — ( 297 ) Exercise of common stock warrants 30 — 156 — — 156 Fair value of common stock warrants at time of exercise — — 3,066 — — 3,066 Stock-based compensation expense — — 15,873 — — 15,873 Unrealized gain on short-term investments — — — 8 — 8 Foreign currency translation adjustments — — — ( 23 ) — ( 23 ) Net income — — — — 5,794 5,794 Balance at September 30, 2021 63,451 $ 63 $ 1,034,980 $ 14 $ ( 645,403 ) $ 389,654 Nine Months Ended September 30, 2021 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at December 31, 2020 62,335 $ 62 $ 1,025,233 $ 220 $ ( 659,210 ) $ 366,305 Effect of change in accounting for convertible senior notes (1) — — ( 85,803 ) — 9,049 ( 76,754 ) Exercise of stock options 826 1 30,300 — — 30,301 Vesting of restricted stock units, net of shares withheld for taxes 34 — ( 1,164 ) — — ( 1,164 ) Issuance of common stock under Employee Stock Purchase Plan 100 — 6,317 — — 6,317 Exercise of common stock warrants 156 — 593 — — 593 Fair value of common stock warrants at time of exercise — — 15,499 — — 15,499 Stock-based compensation expense — — 44,005 — — 44,005 Unrealized loss on short-term investments — — — ( 81 ) — ( 81 ) Foreign currency translation adjustments — — — ( 125 ) — ( 125 ) Net income — — — — 4,758 4,758 Balance at September 30, 2021 63,451 $ 63 $ 1,034,980 $ 14 $ ( 645,403 ) $ 389,654 (1) The Company adopted ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , effective January 1, 2021 (see Note 2, “Summary of Significant Accounting Policies”). See accompanying notes to unaudited condensed consolidated financial statements. 4 TANDEM DIABETES CARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine Months Ended September 30, 2022 2021 Operating Activities Net income (loss) $ ( 78,741 ) $ 4,758 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expense 10,689 10,325 Amortization of debt issuance costs 1,395 1,292 Provision for expected credit losses 2,955 1,462 Provision for inventory obsolescence 775 279 Change in fair value of common stock warrants ( 103 ) 1,354 Amortization of premium (discount) on short-term investments 3,381 ( 83 ) Stock-based compensation expense 60,477 43,653 Acquired in-process research and development expenses 31,016 — Other ( 544 ) ( 132 ) Changes in operating assets and liabilities: Accounts receivable, net ( 4,796 ) ( 6,773 ) Inventories ( 37,062 ) ( 1,930 ) Prepaid and other current assets 1,364 ( 157 ) Other long-term assets ( 960 ) ( 154 ) Accounts payable and Accrued expenses 28,038 10,854 Employee-related liabilities ( 3,585 ) 13,061 Deferred revenue 4,998 7,774 Operating leases and Other current liabilities 24,305 3,561 Other long-term liabilities 1,042 2,580 Net cash provided by operating activities 44,644 91,724 Investing Activities Purchases of short-term investments ( 362,494 ) ( 542,838 ) Proceeds from maturities of short-term investments 401,062 427,257 Proceeds from sales of short-term investments 21,845 23,288 Purchases of property and equipment ( 28,470 ) ( 8,434 ) Acquisition, including in-process research and development, net of cash acquired ( 25,697 ) — Acquisition of intangible assets and strategic investments ( 8,855 ) ( 9,331 ) Net cash used in investing activities ( 2,609 ) ( 110,058 ) Financing Activities Proceeds from issuance of common stock under Company stock plans, net 11,369 35,453 Proceeds from exercise of common stock warrants 83 593 Other financing activities ( 675 ) — Net cash provided by financing activities 10,777 36,046 Effect of foreign exchange rate changes on cash ( 207 ) 50 Net increase in cash and cash equivalents 52,605 17,762 Cash and cash equivalents at beginning of period 71,181 94,613 Cash and cash equivalents at end of period $ 123,786 $ 112,375 Supplemental disclosures of cash flow information Interest paid $ 2,156 $ 2,156 Income taxes paid $ 162 $ 260 Supplemental schedule of non-cash investing and financing activities Operating lease right-of-use assets obtained in exchange for operating lease obligations $ 110,980 $ 15,087 Purchase of property and equipment included in accounts payable $ 4,319 $ 945 Intangible costs in accounts payable and other long-term liabilities $ 515 $ 1,029 See accompanying notes to unaudited condensed consolidated financial statements. 5 TANDEM DIABETES CARE, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Basis of Presentation The Company Tandem Diabetes Care, Inc. is a medical device company 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 United States, Canada and the Netherlands. 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 has an advanced algorithm for managing insulin delivery, 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 mobile app and cloud-based diabetes management application (t:connect), and the Tandem Device Updater, a Mac- and PC-compatible tool which offers and supports remote updates of the Company’s insulin pump software from a personal computer. The Company’s insulin pump products are generally considered durable medical equipment and have an expected lifespan of at least four years . In addition to insulin pumps, the Company sells disposable products that are used together with the pumps and are replaced every few days, including cartridges for storing and delivering insulin, and infusion sets that connect the insulin pump to a user’s body, as well as other accessories for enhanced usability. Basis of Presentation and Principles of Consolidation The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments which are of a normal and recurring nature, considered necessary for a fair presentation of the financial information contained herein, have been included. Interim financial results are not necessarily indicative of results anticipated for the full year or any other period(s). These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (Annual Report), from which the balance sheet information herein was derived. The condensed consolidated financial statements include the accounts of Tandem Diabetes Care, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The functional currency of the Company’s foreign subsidiaries is their respective local currency. The Company translates the financial statements of its foreign subsidiaries 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) in the condensed consolidated statements of operations, and in accumulated other comprehensive income (loss) in the stockholders’ equity section of the Company’s condensed consolidated balance sheets. Foreign exchange gains or losses resulting from balances denominated in a currency other than the functional currency are recognized in interest income and other, net in the Company’s condensed consolidated statements of operations. Reclassifications Starting with the first quarter of 2022, the Company included the liability related to common stock warrants (see Note 5, “Fair Value Measurements”) as a component of other current liabilities on the Company’s condensed consolidated balance sheet. In addition, deferred revenue long-term, which was previously reported as a component of other long-term liabilities, is now separately reported on the condensed consolidated balance sheet. The corresponding balances at December 31, 2021, have been reclassified to conform to the current year presentation . 6 2. Summary of Significant Accounting Policies There have been no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2022, as compared to those disclosed in the Company’s 2021 Annual Report, except for adding the accounting policies related to an asset acquisition and recently launched Tandem Choice technology access program (Tandem Choice), which are included herein. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes as of the date of the consolidated financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. Accounts Receivable The Company grants credit to various customers in the ordinary course of business and is paid directly by customers who use 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, including credit risks as a result of the coronavirus pandemic, recessionary concerns, changes in discretionary spending, increased interest rates, and other macroeconomic factors. Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a balance is uncollectible. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and employee-related liabilities are reasonable estimates of their fair values because of the short-term nature of these assets and liabilities. Short-term investments are carried at fair value. The 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 September 30, 2022 and December 31, 2021 (see Note 5, “Fair Value Measurements”). The Company’s convertible senior notes are carried at amortized cost on the condensed consolidated balance sheets (see Note 7, “Debt”). The Company measures the fair value of its convertible senior notes for disclosure purposes. The Company estimated the fair value of its convertible senior notes to be $ 257.6 million and $ 430.0 million at September 30, 2022 and December 31, 2021, respectively, based on Level 2 quoted market prices as of those dates . Operating Lease Right-of-Use Assets and Liabilities Operating 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. 7 Strategic Investments During the third quarter of 2022, the Company made an $ 8.3 million investment in a private company. The investment is accounted for using the cost method, as the investment does not have a readily determinable fair value, and is included as a component of other long-term assets on the condensed consolidated balance sheet at September 30, 2022. 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 as of the date of investment. The investment is accounted for using the cost minus impairment, if any, adjusted for changes in observable prices and is included as a component of other long-term assets on the consolidated balance sheets. The Company monitors 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 . Capillary Biomedical Acquisition On July 21, 2022, the Company acquired Capillary Biomedical, Inc. (Capillary Biomedical) an infusion set developer, for total cash consideration of $ 24.7 million, and the assumption of $ 4.7 million of long-term debt. The debt becomes due and payable upon the first sale or license of the commercialized product, and is included as a component of other long-term liabilities on the condensed consolidated balance sheet at September 30, 2022. Capillary Biomedical’s extended-wear infusion set technology is currently in development and is not yet commercially available. The Company funded the purchase price using existing cash balances. The transaction was accounted for as an asset acquisition as substantially all the value of the gross assets were concentrated in a single asset. At the acquisition date, the Company recorded a $ 31.0 million charge representing the value of acquired in-process research and development assets with no alternative future use, and acquisition related expenses, in acquired in-process research and development expenses on its condensed consolidated statements of operations. 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 did no t recognize any impairment losses during the nine months ended September 30, 2022 and 2021. 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. 8 Tandem Choice Program In September 2022, the Company announced and launched a new technology access program, (Tandem Choice) that provides eligible, in-warranty t:slim X2 customers in the United States with the flexibility to obtain the next generation hardware platform when it is commercially available. Participating customers have the right to purchase the next generation Tandem pump for a fee (the Choice Right). The Tandem Choice expires on December 31, 2024. For purposes of evaluating the Tandem Choice, in accordance with ASC 606, the Company has determined that the ability for a customer to upgrade to a new technology, represents a material right because the pricing inherent in such option provides the customer with a discount that is incremental to the range of discounts that would otherwise be granted for the related goods and services to comparable customers. The standalone selling price for the Choice Right was estimated based on the adjusted market assessment approach and contemplates the likelihood that the respective option will be exercised. At September 30, 2022, $ 0.6 million was allocated to the material right and recorded in current deferred revenue on the condensed consolidated balance sheet. 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. 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. Insulin pumps returned to the Company may be refurbished and redeployed. Experience has shown that initial data for any given pump version may be insufficient; therefore, the Company’s process relies on long-term historical averages until sufficient data are available. As actual experience becomes available, the Company uses 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 three and nine months ended September 30, 2022 and 2021 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Balance at beginning of the period $ 31,904 $ 25,668 $ 30,401 $ 22,075 Provision for warranties issued during the period 8,744 6,622 23,224 20,538 Settlements made during the period ( 6,148 ) ( 4,665 ) ( 17,856 ) ( 13,672 ) Increases (decreases) in warranty estimates 110 ( 80 ) ( 1,159 ) ( 1,396 ) Balance at end of the period $ 34,610 $ 27,545 $ 34,610 $ 27,545 As of September 30, 2022 and December 31, 2021, total product warranty reserves were included in the following consolidated balance sheet accounts (in thousands): September 30, 2022 December 31, 2021 Other current liabilities $ 16,244 $ 13,076 Other long-term liabilities 18,366 17,325 Total warranty reserve $ 34,610 $ 30,401 9 Stock-Based Compensation Stock-based compensation cost is measured at the grant date based on the estimated fair value of the award, and the portion that is ultimately expected to vest is recognized as compensation expense over the requisite service period on a straight-line basis. The Company estimates the fair value of stock options issued under the Company’s Amended and Restated 2013 Stock Incentive Plan (2013 Plan) and the fair value of the employees’ purchase rights under the Company’s 2013 Employee Stock Purchase Plan (ESPP) using the Black-Scholes option-pricing model on the date of grant. The Black-Scholes option-pricing model requires the use of assumptions about a number of variables, including stock price volatility, expected term, dividend yield and risk-free interest rate (see Note 8, “Stockholders’ Equity”). The fair value of restricted stock unit (RSU) awards issued under the 2013 Plan that vest solely based on service is estimated based on the fair market value of the underlying stock on the date of grant. The fair value of RSU awards issued under the 2013 Plan that vest based upon the Company’s actual performance relative to predefined performance metrics, and the awardee’s continuing service through the measurement date, 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. At each reporting period, the Company reassesses 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. Net Income (Loss) Per Share Basic net income (loss) per share is calculated by dividing the net income or loss by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net income (loss) per share reflects the potential dilution that would occur if securities exercisable for or convertible into common stock were exercised for or converted into common stock. Dilutive common share equivalents are comprised of stock options and unvested RSUs outstanding under the Company’s stock plans, potential awards to be granted pursuant to the ESPP, and common stock warrants, each calculated using the treasury stock method; and shares issuable upon conversion of the convertible senior notes calculated using the if-converted method. For common stock warrants that are recorded as a liability in the accompanying condensed consolidated balance sheets, the calculation of diluted loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of the warrants is dilutive to loss per share for the period, an adjustment is made to net loss used in the calculation to remove the change in fair value of the warrants from the numerator for the period. Likewise, an adjustment to the denominator is required to reflect the related dilutive shares, if any, under the treasury stock method. For the three and nine months ended September 30, 2022, the net loss used in the calculation of diluted net loss per share was increased by $ 12,000 and $ 0.1 million, respectively, to remove the gain recognized from the change in fair value of certain common stock warrants based on the dilutive effect of assumed exercise, and the denominator was increased by 937 shares and 959 shares, respectively, calculated under the treasury stock method. For the three and nine months ended September 30, 2021, the numerator and denominator of the diluted net income per share computation were calculated as follows (in thousands): Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021 Net income - basic and diluted $ 5,794 $ 4,758 Weighted average shares outstanding - basic 63,167 62,780 Dilutive common share equivalents: Options to purchase common stock 1,297 1,239 Unvested restricted stock units 135 17 Warrants to purchase common stock 159 152 Awards to be granted under the ESPP 26 10 Weighted average shares outstanding - diluted 64,784 64,198 10 Potentially dilutive securities outstanding and not included in the calculation of diluted net loss per share (because inclusion would be anti-dilutive) are as follows (in thousands, in common stock equivalent shares): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Options to purchase common stock 1,080 3,494 1,250 3,283 Unvested restricted stock units 1,526 — 977 — Warrants to purchase common stock 195 1 195 1 Awards granted under the ESPP 99 — 73 — Convertible senior notes (if-converted) 2,554 2,554 2,554 2,554 5,454 6,049 5,049 5,838 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 September 30, 2022 and December 31, 2021 (in thousands): At September 30, 2022 Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value Available-for-sale securities: U.S. Treasury securities $ 259,258 $ — $ ( 3,302 ) $ 255,956 Commercial paper 143,196 — ( 290 ) 142,906 Corporate debt securities 17,549 — ( 172 ) 17,377 U.S. Government-sponsored enterprises 66,953 — ( 736 ) 66,217 Supranational bonds 2,508 — ( 23 ) 2,485 Total $ 489,464 $ — $ ( 4,523 ) $ 484,941 11 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 The contractual maturities of available-for-sale debt securities as of September 30, 2022, were as follows (in thousands): Years to Maturity At September 30, 2022 Within One Year One to Two Years Estimated Fair Value U.S. Treasury securities $ 245,708 $ 10,248 $ 255,956 Commercial paper 142,906 — 142,906 Corporate debt securities 13,125 4,252 17,377 U.S. Government-sponsored enterprises 53,015 13,202 66,217 Supranational bonds 2,485 — 2,485 Total $ 457,239 $ 27,702 $ 484,941 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 September 30, 2022 were primarily due to the recent increase 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 record an allowance for credit losses related to its available-for-sale debt securities at September 30, 2022. 4. Composition of Certain Financial Statement Items Accounts Receivable Accounts receivable, net consisted of the following at September 30, 2022 and December 31, 2021 (in thousands): September 30, 2022 December 31, 2021 Accounts receivable $ 117,078 $ 114,974 Less: allowance for credit losses ( 4,273 ) ( 4,249 ) Accounts receivable, net $ 112,805 $ 110,725 12 Allowance for Credit Losses The following table provides a reconciliation of the changes in the allowance for estimated accounts receivable credit losses for the three and nine months ended September 30, 2022 and 2021 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Balance at beginning of the period $ 4,600 $ 3,673 $ 4,249 $ 3,857 Provision for expected credit losses 965 588 2,955 1,462 Write-offs and adjustments, net of recoveries ( 1,292 ) ( 467 ) ( 2,931 ) ( 1,525 ) Balance at end of the period $ 4,273 $ 3,794 $ 4,273 $ 3,794 Inventories Inventories consisted of the following at September 30, 2022 and December 31, 2021 (in thousands): September 30, 2022 December 31, 2021 Raw materials $ 40,841 $ 26,911 Work-in-process 19,210 16,612 Finished goods 44,723 25,028 Total inventories $ 104,774 $ 68,551 5. Fair Value Measurements Authoritative guidance on fair value measurements defines fair value, and provides a consistent framework for measuring fair value and for disclosures of each major asset and liability category measured at fair value on either a recurring or a nonrecurring basis. Fair value is intended to reflect an assumed exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1: Observable inputs such as unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3: Unobservable inputs in which there is little or no market data and that are significant to the fair value of the assets or liabilities, which require the reporting entity to develop its own valuation techniques that require input assumptions. The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021, and indicates the fair value hierarchy of the valuation techniques used by the Company to determine such fair value (in thousands): 13 Fair Value Measurements at September 30, 2022 Total Level 1 Level 2 Level 3 Assets Cash equivalents (1) $ 76,749 $ 76,749 $ — $ — U.S. Treasury securities 255,956 255,956 — — Commercial paper 142,906 — 142,906 — Corporate debt securities 17,377 — 17,377 — U.S. Government-sponsored enterprises 66,217 — 66,217 — Supranational bonds 2,485 — 2,485 — Total assets $ 561,690 $ 332,705 $ 228,985 $ — Liabilities Common stock warrants (2) $ 44 $ — $ — $ 44 Total liabilities $ 44 $ — $ — $ 44 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 — Corporate debt securities 58,836 — 58,836 — U.S. Government-sponsored enterprises 50,686 — 50,686 — Supranational bonds 3,003 — 3,003 — Total assets $ 600,916 $ 270,010 $ 330,906 $ — Liabilities Common stock warrants (2) $ 147 $ — $ — $ 147 Total liabilities $ 147 $ — $ — $ 147 (1) Generally, cash equivalents include money market funds and investments with a maturity of three months or less from the date of purchase. (2) Included in other current liabilities on the Company’s condensed consolidated balance sheets. The Company’s Level 2 financial instruments are valued using market prices on less active markets with observable valuation inputs such as interest rates and yield curves. The Company obtains the fair value of Level 2 financial instruments from quoted market prices, calculated prices or quotes from third-party pricing services. The Company validates these prices through independent valuation testing and review of portfolio valuations provided by the Company’s investment managers. The Company's Level 3 liabilities at September 30, 2022 and December 31, 2021 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 September 30, 2022 and December 31, 2021, there were Series A warrants outstanding to purchase 1,000 shares of the Company’s common stock (see Note 8, “Stockholders’ Equity”). 14 The Company reassesses the fair value of the outstanding Series A warrants at each reporting date using 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 September 30, 2022 and December 31, 2021 are presented below: Series A Warrants September 30, 2022 December 31, 2021 Risk-free interest rate 2.8 % 0.3 % Dividend yield 0.0 % 0.0 % Expected volatility 71.8 % 39.1 % Expected term (in years) 0.1 0.8 The following table presents a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the nine months ended September 30, 2022 and 2021 (in thousands): Nine Months Ended September 30, 2022 2021 Balance at beginning of period $ 147 $ 14,261 (Gain) loss recognized from the change in fair value of common stock warrants ( 103 ) 1,354 Common stock warrants exercised during the period — ( 15,499 ) Balance at end of period $ 44 $ 116 6. Leases The Company's leases consist of operating leases for general office space, research and development, manufacturing and warehouse facilities, and equipment. These noncancellable operating leases have initial lease terms from two years to thirteen years . Leases with an initial term of 12 months or less (Short-term Lease) are expensed as incurred and are not recorded as right-of-use leased assets on the Company’s condensed 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 before 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. Vista Sorrento Lease 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 operating lease right-of-use assets and corresponding operating lease liabilities of $ 15.1 million on the condensed consolidated balance sheet in the first quarter of 2021 related to the Second Amendment. 15 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 occupying 77,458 square feet of leased space, located on Roselle Street in San Diego, California, that is scheduled to expire in May 2023. The initial lease term Phase I Commencement Date occurred in March 2022 when the Company was tendered possession of the Phase I portion of the Premises, and rent payments commenced in September 2022 (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 Tech Center Lease term expires in April 2035. The Company has two options to extend the term of the lease, with each option providing for an additional period of five years . The Tech Center Lease term was determined assuming the renewal options would not be exercised. 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 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 following the Phase I Rent Commencement Date, and for the Phase II portion of the Premises for months two through five following the Phase II Rent Commencement Date. The Company recognized operating lease right-of-use assets and corresponding operating lease liabilities of $ 107.5 million on the condensed consolidated balance sheet on the Phase I Commencement Date in the first quarter of 2022. 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 property the Company previously occupied subject to a sublease agreement. The lease term began in April 2022 following the termination of the High Bluff sublease in March 2022, and is scheduled to expire in March 2024. The Company recognized operating lease right-of-use assets and corresponding operating lease liabilities of $ 3.0 million on the condensed consolidated balance sheet on the Commencement Date in the second quarter of 2022. Supplemental Lease Disclosure Information The Company’s lease costs recorded in the condensed consolidated statements of operations were as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Operating lease cost $ 5,097 $ 2,213 $ 13,286 $ 6,415 Short-term lease cost 36 22 107 67 Total lease cost $ 5,133 $ 2,235 $ 13,393 $ 6,482 16 Maturities of operating lease liabilities at September 30, 2022 were as follows (in thousands): Years Ending December 31, 2022 (remaining) $ 2,341 2023 14,614 2024 17,643 2025 17,475 2026 17,528 Thereafter 120,235 Total undiscounted lease payments 189,836 Less: amount representing interest ( 50,607 ) Present value of operating lease liabilities 139,229 Less: current portion of operating lease liabilities ( 12,120 ) Operating lease liabilities - long-term $ 127,109 The weighted-average remaining lease term and weighted-average discount rate for operating leases were as follows: September 30, 2022 December 31, 2021 Weighted-average remaining lease term (in years) 10.9 5.0 Weighted-average discount rate used to determine operating lease liabilities 5.3 % 5.6 % Cash paid for amounts included in the measurement of lease liabilities, representing operating cash flows from operating leases, was $ 9.4 million and $ 7.1 million for the nine months ended September 30, 2022 and 2021, respectively . Lease For Which Accounting Has Not Yet Commenced As of September 30, 2022, the Commencement Date for Phase II of the Tech Center Lease had not yet occurred. Accordingly, the condensed consolidated balance sheet at September 30, 2022 does not include operating lease right-of-use assets and operating lease liabilities, and the condensed consolidated statements of operations for the three and nine months ended September 30, 2022 do not include any lease costs, related to Phase II of 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 Phase II of the Tech Center Lease. The Company currently estimates that Phase II Commencement Date will occur in the first quarter of 2025, at which time the Phase II operating lease right-of-use assets and liabilities will be recorded. Future minimum payments for monthly base rent due under Phase II of the Tech Center Lease, are currently estimated to total $ 34.7 million from 2025 through 2035, subject to a number of factors, including the actual Commencement Date of Phase II. Because the incremental borrowing rate will not be available until the Phase II Commencement Date, we are not yet able to determine the Phase II operating lease right-of-use assets and liabilities. 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. 17 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 governing the Notes. 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 before 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 before 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. The net carrying amount of the Notes on the condensed consolidated balance sheets consisted of the following (in thousands): September 30, 2022 December 31, 2021 Principal amount $ 287,500 $ 287,500 Unamortized debt issuance costs ( 4,713 ) ( 6,033 ) Net carrying amount $ 282,787 $ 281,467 As of September 30, 2022, the unamortized debt issuance costs of $ 4.7 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 2.7 years. 18 The following table details interest expense related to the Notes recognized for the three and nine months ended September 30, 2022 and 2021 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Contractual interest expense $ 1,078 $ 1,078 $ 3,234 $ 3,234 Amortization of debt issuance costs 499 433 1,395 1,292 Total interest expense $ 1,577 $ 1,511 $ 4,629 $ 4,526 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 September 30, 2022, the if-converted value of the Notes did not exceed the principal amount. As of December 31, 2021, the if-converted value of the Notes exceeded the principal amount by $ 96.9 million. 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 condensed consolidated balance sheet and will not be remeasured. Line of Credit On May 18, 2022, the Company entered into a three-year Revolving Line of Credit Agreement that provides the Company with a maximum principal borrowing amount of $ 100.0 million (the Line of Credit), reduced by any letters of credit issued and outstanding under a $ 15.0 million letter of credit sub-limit. The Line of Credit allows the Company to request advances thereunder, and to use the proceeds of such advances for general corporate purposes, including working capital and capital expenditures. The Line of Credit matures on the earlier of (i) May 18, 2025 or (ii) the Springing Maturity Date, unless renewed at maturity upon approval by the Company’s board of directors and the lender. The Springing Maturity Date is any date during the 91 days prior to the May 1, 2025 maturity date of the Company’s Convertible Senior Notes, that the Company does not satisfy a predefined liquidity threshold. During the term of the Line of Credit, the Company is required to maintain compliance with two financial maintenance covenants: a minimum consolidated interest coverage ratio and a maximum consolidated net leverage ratio. The Company was in compliance with these financial maintenance covenants as of September 30, 2022. The Line of Credit is secured by a first priority security interest in substantially all of the assets of the Company and its subsidiaries. Advances drawn under the Line of Credit bear interest at an annual rate of (1) the SOFR Rate (as defined in the Line of Credit); plus (2) an applicable credit spread adjustment ranging from 0.10 % to 0.25 %; plus (3) an applicable margin ranging from 1.25 % to 2.00 %, and each advance will be payable on the Maturity Date with the interest on outstanding advances payable quarterly. The Credit Agreement also includes a commitment fee ranging from 0.20 % to 0.35 % per annum on the average daily unused amount of the Line of Credit, payable quarterly. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time before the maturity date, without premium or penalty. As of September 30, 2022, the Company’s outstanding borrowings and available balance under the Line of Credit were as follows (in millions): 19 Available principal amount $ 100.0 Outstanding borrowings — Outstanding letters of credit 4.9 Total available balance $ 95.1 8. Stockholders’ Equity Shares Reserved for Future Issuance The following shares of the Company's common stock were reserved for future issuance at September 30, 2022 (in thousands): Shares reserved for issuance upon conversion of Convertible Senior Notes 2,554 Shares underlying outstanding warrants 195 Shares underlying outstanding stock options 4,582 Shares underlying unvested restricted stock units 1,717 Shares authorized for issuance pursuant to awards granted under the ESPP 1,087 Shares authorized for future equity award grants 211 Total 10,346 Common Stock Warrants Warrants outstanding to purchase shares of the Company's common stock as of September 30, 2022 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 194,788 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 zero shares and 5,678 shares of its common stock, respectively, upon the exercise of warrants during the three and nine months ended September 30, 2022, and 29,985 and 155,517 shares of its common stock, respectively, upon the exercise of warrants during the three and nine months ended September 30, 2021. Stock Plans The Company’s Amended and Restated 2013 Stock Incentive Plan (2013 Plan) was originally approved by the Company’s board of directors in October 2013. Under the 2013 Plan, the Company may grant stock options, stock appreciation rights, restricted stock and restricted stock units to individuals who are then employees, officers, directors or consultants of the Company. The ESPP enables eligible employees to purchase shares of the Company’s common stock using their after-tax payroll deductions, subject to certain conditions. Generally, offerings under the ESPP consist of a two-year offering period with four six-month purchase periods which begin in May and November of each year. Stock-Based Compensation Common Stock Options Common stock options have an exercise price equal to the closing price of the Company's common stock on the applicable grant date, and have a maximum term of ten years . Stock options granted before the second quarter of 2022, generally vest over a four-year period as to 25 % of the underlying shares on the first anniversary of the grant date, with the balance of the options vesting monthly over the following three years . Stock options granted during the second quarter of 2022 and thereafter vest over a three-year period as to 33 % of the underlying shares on the first anniversary of the grant date, with the balance of the options vesting monthly over the following two years . 20 The Company estimates the fair value of stock options using the Black-Scholes option-pricing model on the grant date. The total number of common stock options granted and the respective assumptions used in the Black-Scholes option-pricing model were as follows: Nine Months Ended September 30, 2022 2021 Stock options granted 83,008 355,008 Weighted average grant date fair value (per share) $ 42.16 $ 56.89 Risk-free interest rate 2.7 % 1.0 % Dividend yield 0.0 % 0.0 % Expected volatility 72.0 % 75.1 % Expected term (in years) 5.8 6.1 Restricted Stock Units Restricted stock units (RSUs) have a grant value equal to the closing price of the Company’s common stock on the award date. RSUs granted before March 2022, generally vest over a four-year period based on continued service to the Company 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 . RSUs granted in March 2022 and thereafter vest over a three-year period based on continued service to the Company as to 33 % of the underlying shares on the first anniversary of the award, with the balance of the RSUs vesting quarterly over the following two years . In addition, the Company granted 53,662 and 25,674 performance-based RSUs, respectively, during the nine months ended September 30, 2022 and 2021. The performance-based RSUs have a grant value equal to the closing price of the Company’s common stock on the award date, and vest upon the Company’s actual performance relative to predefined performance metrics and subject to the awardee’s continuing service through the December 31, 2024 measurement date. The total number of RSUs granted, which includes performance-based RSUs, and the respective weighted average grant date fair value were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 RSUs granted 330,807 94,746 1,338,056 437,340 Weighted average grant date fair value (per share) $ 56.49 $ 109.63 $ 70.33 $ 87.98 Employee Stock Purchase Plan The Company records stock-based compensation expense associated with the ESPP using the Black-Scholes option-pricing model. Valuations are performed on the grant date at the beginning of the purchase period, which generally occurs in May and November of each year. The assumptions used in the Black-Scholes option-pricing model for the ESPP were as follows: Nine Months Ended September 30, 2022 2021 Weighted average grant date fair value (per share) $ 26.57 $ 29.24 Risk-free interest rate 2.2 % 0.1 % Dividend yield 0.0 % 0.0 % Expected volatility 47.1 % 47.5 % Expected term (in years) 1.3 1.3 21 The following table summarizes the allocation of stock-based compensation expense included in the condensed consolidated statements of operations for all stock-based compensation arrangements (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Cost of sales $ 1,920 $ 1,557 $ 5,666 $ 4,624 Selling, general and administrative 15,125 11,278 40,711 31,570 Research and development 5,192 2,894 14,100 7,459 Total stock-based compensation expense $ 22,237 $ 15,729 $ 60,477 $ 43,653 The total stock-based compensation expense capitalized as part of the cost of the Company’s inventories was $ 0.9 million at September 30, 2022, and $ 1.0 million at December 31, 2021. 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 before 2022, but began making a discretionary match in the first quarter of 2022. 10. Income Taxes For the three and nine months ended September 30, 2022, the Company recognized income tax expense of $ 1.6 million and $ 2.0 million, respectively, on a pre-tax loss of $ 47.3 million and $ 76.7 million. Income tax expense for the three and nine months ended September 30, 2022 was primarily attributable to federal, state and foreign income tax expense as a result of current taxable income in certain jurisdictions. For the three and nine months ended September 30, 2021, the Company recognized income tax expense of $ 0.1 million on a pre-tax income of $ 5.8 million, and an income tax benefit of $ 2,000 on pre-tax income of $ 4.8 million, respectively. The income tax benefit for the nine months ended September 30, 2021 was primarily attributable to excess tax benefits from stock compensation, offset by state and foreign income tax expense as a result of current taxable income in certain jurisdictions. The Company calculated the provision (benefit) for income taxes for the three and nine months ended September 30, 2022 and 2021, by applying an estimate of the annual effective tax rate for the full year to ordinary income (loss) adjusted by the tax impact of discrete items. The Company continues to maintain a full valuation allowance against its net deferred tax assets as of September 30, 2022, based on the current assessment that it is not more likely than not these future benefits will be realized before expiration. 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. 22 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 uses 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 three and nine months ended September 30, 2022 and 2021, 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). Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 United States $ 146,035 $ 133,106 $ 422,985 $ 364,025 Outside the United States 58,512 46,521 157,731 128,778 Total Sales $ 204,547 $ 179,627 $ 580,716 $ 492,803 Sales to distributors accounted for 66 % and 68 % of the Company’s total United States sales for the three months ended September 30, 2022 and 2021, respectively, and 65 % and 68 % of the Company’s total United States sales for the nine months ended September 30, 2022 and 2021, respectively. Sales to distributors accounted for 96 % and 96 % of the Company’s total sales outside the United States for the three months ended September 30, 2022 and 2021, respectively, and 96 % and 95 % of the Company’s total sales outside the United States for the nine months ended September 30, 2022 and 2021, respectively. 12. Commitments and Contingencies Legal and Regulatory Matters In May 2020, the Company was named as a defendant in three California state court class action lawsuits arising from a phishing incident that occurred in January 2020. Collectively, these lawsuits seek statutory, compensatory, actual, and punitive damages; equitable relief, including restitution; pre- and post-judgment interest; injunctive relief; and attorney fees, costs, and expenses from the Company. On July 24, 2020, these three 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 to the CMIA claim was denied; (ii) the demurrer to the CCPA claim was sustained; and (iii) the demurrer to 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 to the CMIA claim was denied; and (ii) the demurrer to the UCL and contract claims was sustained without leave to amend as to three of the named plaintiffs. The plaintiffs filed a motion for class certification on January 7, 2021 and the Company filed a motion for summary adjudication on plaintiffs’ CMIA claim on April 7, 2022. Both motions are fully briefed. The Company anticipates the Court will hear argument on both motions in the fourth quarter of 2022 or the first quarter of 2023. Although the Company continues 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. 23 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 its 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 other 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 September 30, 2022, 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, research and development, manufacturing and warehouse facilities, and equipment under noncancelable operating leases for use in its 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 expires in April 2035. 24