What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2023-02-22 compared with 2022-02-22 · 328 added, 322 removed, 731 unchanged (47% of the section changed)

1 unchanged sentence

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.

We invest our excess cash in marketable securities consisting primarily of U.S.

Treasury securities, U.S.

Government-sponsored enterprise securities, commercial paper and corporate debt 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.

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, 2022 were primarily due to the recent increase in market interest rates.

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”).

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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.

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.

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.

Our operations are primarily located in the United States.

In addition, we have a sales and marketing office in Canada and, beginning in 2022, a distribution center in the Netherlands.

Our sales to customers in the United States are made in U.S.

With the exception of sales from our distribution center in the Netherlands and a portion of our sales in Canada, our sales to customers outside of the United States are currently made to independent distributors under agreements denominated in U.S.

Accordingly, we believe our exposure to foreign currency rate fluctuations is currently limited to our operations in Canada and the Netherlands, where fluctuations in the rate of exchange between the U.S.

dollar and the local currency could adversely affect our financial results.

As we expand and further develop our operations in markets outside the United States, particularly in Europe, we will be exposed to additional foreign currency exchange rate risk.

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.

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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, 2022, 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, 2023 expressed an unqualified opinion thereon.

Adoption of ASU No.

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

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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.

Management applies significant judgment to determine the expected warranty replacement rates.

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.

In particular, the warranty reserve estimate is sensitive due to the significant assumption of replacement rates, 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.

This assumption is affected by actual customer experience and changes in this assumption 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 this determination and management’s significant assumption 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.

For example, we tested controls over management's review and calculation of the significant assumption underlying the warranty reserve, 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 also evaluated the reasonableness of management’s significant assumption related to replacement rates, including review for contrary evidence.

Evaluating management’s significant assumption involved evaluating the historical claims data utilized by management in estimating the replacement rates.

We involved our valuation professionals to assist in the assessment of the estimation methodology and the significant assumption used in determining the warranty reserve.

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

We performed sensitivity analyses of the significant assumption to evaluate the impact of changes in the warranty reserve that would result from changes in the assumption.

/s/ Ernst & Young LLP

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(In thousands, except par value)

December 31, December 31,

Current assets:

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Employee-related liabilities 38,682 51,556

Deferred revenue 10,182 6,082

Common stock warrants 147 14,261

Operating lease liabilities 13,121 9,279

Deferred revenue 18,837 10,182

Other current liabilities 29,325 23,388

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Operating lease liabilities - long-term 123,524 23,922

Deferred revenue - long-term 16,874 16,940

Other long-term liabilities 23,918 17,840

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Additional paid-in capital 1,170,888 1,068,259

Accumulated other comprehensive income (loss) ( 616 ) 220

Accumulated other comprehensive loss ( 1,817 ) ( 616 )

Accumulated deficit ( 729,189 ) ( 634,595 )

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Research and development 139,114 92,054 63,574

Acquired in-process research and development expenses 31,039 — —

Total operating expenses 505,834 353,562 268,477

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Other comprehensive income (loss):

Unrealized gain (loss) on short-term investments $ ( 693 ) $ ( 20 ) $ 77

Foreign currency translation gain (loss) ( 143 ) 118 58

Unrealized loss on short-term investments $ ( 2,233 ) $ ( 693 ) $ ( 20 )

Foreign currency translation gains (losses) 1,032 ( 143 ) 118

Comprehensive income (loss) $ ( 95,795 ) $ 14,730 $ ( 34,284 )

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Exercise of stock options 2,341 2 57,748 — — 57,750

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

Issuance of common stock under Employee Stock Purchase Plan 303 1 9,115 — — 9,116

Exercise of common stock warrants 295 — 2,950 — — 2,950

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Unrealized loss on short-term investments — — — ( 20 ) — ( 20 )

Foreign currency translation adjustments — — — 118 — 118

Foreign currency translation gains — — — 118 — 118

Net loss — — — — ( 34,382 ) ( 34,382 )

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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

Issuance of common stock under Employee Stock Purchase Plan 173 — 11,069 — — 11,069

Exercise of common stock warrants 158 — 899 — — 899

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Unrealized loss on short-term investments — — — ( 693 ) — ( 693 )

Foreign currency translation adjustments — — — ( 143 ) — ( 143 )

Foreign currency translation losses — — — ( 143 ) — ( 143 )

Net income — — — — 15,566 15,566

Balance at December 31, 2021 63,833 $ 64 $ 1,068,259 $ ( 616 ) $ ( 634,595 ) $ 433,112

Exercise of stock options 280 1 9,130 — — 9,131

Vesting of restricted stock units, net of shares withheld for taxes 131 — ( 4,374 ) — — ( 4,374 )

Issuance of common stock under Employee Stock Purchase Plan 263 — 12,713 — — 12,713

Exercise of common stock warrants 6 — 83 — — 83

Stock-based compensation expense — — 85,077 — — 85,077

Unrealized loss on short-term investments — — — ( 2,233 ) — ( 2,233 )

Foreign currency translation gains — — — 1,032 — 1,032

Net loss — — — — ( 94,594 ) ( 94,594 )

Balance at December 31, 2022 64,513 $ 65 $ 1,170,888 $ ( 1,817 ) $ ( 729,189 ) $ 439,947

(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”).

2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, effective January 1, 2021 (see Note 7, “Debt”).

The accompanying notes are an integral part of the consolidated financial statements.

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Provision for expected credit losses 4,782 2,333 3,016

Provision (recovery) for inventory obsolescence 467 ( 57 ) 2,353

Lease termination and impairment charges 7,567 — —

Change in fair value of common stock warrants ( 147 ) 1,386 17,087

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Stock-based compensation expense 84,918 60,752 58,431

Acquired in-process research and development expenses 31,039 — —

Other 1,135 1,013 ( 19 )

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Purchases of short-term investments ( 467,652 ) ( 733,388 ) ( 497,076 )

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

Proceeds from maturities and redemptions of short-term investments 569,492 570,023 233,314

Purchases of property and equipment ( 34,097 ) ( 14,180 ) ( 27,408 )

Acquisition of intangible assets and equity investments ( 9,331 ) ( 4,886 ) —

Net cash used in investing activities ( 186,876 ) ( 296,056 ) ( 56,955 )

Acquisition, including in-process research and development, net of cash acquired ( 25,720 ) — —

Purchases of intangible assets and strategic investments ( 8,855 ) ( 9,331 ) ( 4,886 )

Net cash provided by (used in) investing activities 33,168 ( 186,876 ) ( 296,056 )

Financing Activities

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Proceeds from exercise of common stock warrants 83 592 2,950

Other financing activities ( 675 ) — —

Net cash provided by financing activities 16,877 51,932 314,438

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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

Operating lease right-of-use assets obtained in exchange for operating lease obligations $ 114,003 $ 15,191 $ 11,022

Purchase of property and equipment included in accounts payable $ 4,237 $ 1,034 $ 1,082

Intangible costs in accounts payable and other long-term liabilities $ 515 $ 1,029 $ 2,244

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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.

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 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 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

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The statements include the accounts of Tandem Diabetes Care, Inc.

and its wholly-owned subsidiaries in the U.S.

and its wholly-owned subsidiaries in the United States, Canada, and the Netherlands.

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.

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.

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Foreign exchange gains or losses resulting from balances denominated in a currency other than the functional currency are recognized in interest income and other, net in the Company’s consolidated statements of operations.

Reclassifications

Deferred revenue long-term, which was reported as a component of other long-term liabilities in 2021, is now separately reported on the consolidated balance sheet.

The Company also reclassified the 2021 liability of $ 0.1 million related to common stock warrants (see Note 5, “Fair Value Measurements”), which was previously reported separately, to other current liabilities on the Company’s consolidated balance sheet.

In addition, certain prior year balances on the consolidated statements of cash flows have been reclassified to conform to the current year presentation.

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”).

There have been no material changes to the Company’s significant accounting policies during the year ended December 31, 2022, except for adding the accounting policies related to an asset acquisition and the recently launched Tandem Choice technology access program (Tandem Choice), which are included herein.

Use of Estimates

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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).

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.

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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:

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,

The following table summarizes the percentages of total sales and accounts receivable, net for customers who accounted for 10% or more of the respective amounts for the periods presented:

Total Sales Accounts Receivable, net

Year Ended December 31, December 31,

2022 2021 2020 2022 2021

Customer B 11.9 % 15.9 % 14.8 %

Customer C * 12.9 % 15.4 %

Distributor B 11.6 % 11.9 % 15.9 % 12.8 % 11.2 %

Distributor C * * 12.9 % * *

Distributor D * * * 10.4 % *

* Amount related to the respective customer represented less than 10% for the period presented.

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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 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 (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 .

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 $ 260.5 million and $ 430.0 million at December 31, 2022 and December 31, 2021, respectively, based on Level 2 quoted market prices as of those dates .

Valuation of Inventories

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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.

Leasehold improvements and related equipment are amortized over the lesser of the estimated useful lives of the assets or the remaining lease term, unless there is a transfer of title or purchase option that is reasonably certain to be exercised.

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 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.

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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.

Finite-lived intangible assets (see Note 4, “Composition of Certain Financial Statement Items”) 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.

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.

Impairment of Long-Lived Assets

Long-lived assets, such as property and equipment, right-of-use lease assets, and acquired intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount.

If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value.

Fair value is determined using unobservable (Level 3) inputs, including discounted cash flow models, future estimated sublease income, and third-party independent appraisals, as considered necessary.

There is uncertainty in the projected undiscounted future cash flows used in the Company’s impairment review analysis, which requires the use of estimates and assumptions.

If actual performance does not achieve the projections, or if the assumptions used change in the future, the Company may be required to recognize additional impairment charges in future periods.

Other than the impairment of operating lease right-of-use assets recognized in the fourth quarter of 2022 (see Note 6, “Leases”), there were no impairments of long-lived assets, including acquired intangible assets, during the years ended December 31, 2022 and 2021.

Strategic Investments

During the third quarter of 2022, the Company made an investment of Swiss Francs (“CHF”) 8.0 million, or $ 8.3 million, in AMF Medical SA (“AMF Medical”), a privately held company.

The investment is included as a component of other long-term assets on the consolidated balance sheet at December 31, 2022.

On January 19, 2023, the Company completed the acquisition of AMF Medical, pursuant to the terms of the Purchase Agreement entered into on December 13, 2022 (see Note 15, “Subsequent Event”).

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 carried at 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 .

Revenue Recognition

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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

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 newest hardware platform when it is commercially available.

Participating customers have the right to purchase the alternative 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 December 31, 2022, $ 6.8 million was allocated to the material right and recorded in current deferred revenue on the consolidated balance sheet.

Sales Returns

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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.

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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, 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):

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 revised future expectations of performance based on enhanced hardware components, or new features and capabilities that may become available through Tandem Device Updater.

Warranty expense is recorded as a component of cost of sales in the consolidated statements of operations.

The following table provides a reconciliation of the changes in product warranty liabilities for the years ended months ended December 31, 2022 and 2021 (in thousands):

Year Ended December 31,

2022 2021 2020

Balance at beginning of the year $ 22,075 $ 16,724 $ 9,138

Balance at beginning of the period $ 30,401 $ 22,075 $ 16,724

Provision for warranties issued during the period 32,699 27,604 21,135

Settlements made during the period ( 25,447 ) ( 18,768 ) ( 13,736 )

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):

Decreases in warranty estimates ( 1,116 ) ( 510 ) ( 2,048 )

Balance at end of the period $ 36,537 $ 30,401 $ 22,075

As of December 31, 2022 and December 31, 2021, total product warranty reserves were included in the following consolidated balance sheet accounts (in thousands):

December 31, 2022 December 31, 2021

Other current liabilities $ 17,280 $ 13,076

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Total warranty reserve $ 36,537 $ 30,401

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).

Stock-Based Compensation

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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.

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.

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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.

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 licensing, development and commercialization agreements, and other indirect costs.

Acquired In-Process Research and Development Expenses

Acquired in-process research and development (IPR&D) expenses reflect the costs of externally developed IPR&D projects acquired directly in a transaction other than a business combination that do not have an alternative future use, including the initial costs of rights to IPR&D projects.

The acquired IPR&D is expensed on acquisition date.

Future costs to develop these IPR&D projects are recorded in research and development expenses on the consolidated statements of operations as incurred.

The Company uses the asset and liability method of accounting for income taxes.

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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 evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence.

Factors reviewed include projections of pre-tax book income for the foreseeable future, determination of cumulative pre-tax book income after permanent differences, earnings history, and reliability of forecasting.

The Company will continue to assess the need for a valuation allowance on its deferred tax assets by evaluating both positive and negative evidence that may exist.

Any adjustment to the net deferred tax asset valuation allowance would be recorded in the statement of operations for the period that the adjustment is determined to be required.

The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities.

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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.

The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be 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.

The Company will continue to assess the need for a valuation allowance on its deferred tax assets by evaluating both positive and negative evidence that may exist.

Any adjustment to the net deferred tax asset valuation allowance would be recorded in the statement of operations for the period that the adjustment is determined to be required.

The Company is required to file federal and state income tax returns in the United States and various other state jurisdictions, and 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).

The Company includes interest and penalties related to income taxes, including unrecognized tax benefits, within income tax expense.

Comprehensive Income (Loss)

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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.

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 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):

For the years ended December 31, 2022, 2021 and 2020, the numerator and denominator of the diluted net income (loss) per share computation were calculated as follows (in thousands):

Year Ended December 31,

Net income - basic and diluted $ 15,566

2022 2021 2020

Net income (loss) - basic and diluted $ ( 94,594 ) $ 15,566 $ ( 34,382 )

Weighted average shares outstanding - basic 64,146 63,000 60,990

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Weighted average shares outstanding - diluted 64,146 64,349 60,990

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):

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

Year Ended December 31,

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Options to purchase common stock 1,138 3,124 5,021

Unvested restricted stock units — 78 N/A

Unvested restricted stock units 1,118 — 78

Warrants to purchase common stock 194 1 379

Awards granted under the ESPP 8 — 3

Convertible senior notes (if-converted) 2,554 1,605 N/A

Convertible senior notes (if-converted) 2,554 2,554 1,605

5,012 5,679 7,086

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”).

Short-Term Investments

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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):

The following represents a summary of the estimated fair value of short-term investments at December 31, 2022 and December 31, 2021 (in thousands):

At December 31, 2022 Amortized

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Commercial paper 112,812 6 ( 208 ) 112,610

Corporate debt securities 58,881 — ( 45 ) 58,836

Government-sponsored enterprises 100,602 21 ( 615 ) 100,008

Corporate debt securities 18,218 — ( 104 ) 18,114

Supranational bonds 2,504 — ( 13 ) 2,491

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Commercial paper 218,391 14 ( 24 ) 218,381

Corporate debt securities 85,788 48 ( 13 ) 85,823

Government-sponsored enterprises 50,773 1 ( 88 ) 50,686

Corporate debt securities 58,881 — ( 45 ) 58,836

Supranational bonds 3,003 — — 3,003

Total $ 553,254 $ 15 $ ( 639 ) $ 552,630

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Commercial paper 112,610 — 112,610

Corporate debt securities 58,836 — 58,836

Government-sponsored enterprises 73,292 26,716 100,008

Corporate debt securities 13,190 4,924 18,114

Supranational bonds 2,491 — 2,491

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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.

Unrealized losses on available-for-sale debt securities at December 31, 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 recognize any impairment losses related to its available-for-sale debt securities at December 31, 2021.

Accordingly, the Company did not record an allowance for credit losses related to its available-for-sale debt securities at December 31, 2022.

Composition of Certain Financial Statement Items

Accounts Receivable

Accounts receivable, net consisted of the following at (in thousands):

Accounts receivable, net consisted of the following at December 31, 2022 and December 31, 2021 (in thousands):

Accounts receivable $ 119,044 $ 114,974

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2022 2021 2020

Balance at beginning of the year $ 3,857 $ 3,304 $ 1,837

Balance at beginning of the period $ 4,249 $ 3,857 $ 3,304

Provision for expected credit losses 4,782 2,333 3,016

Write-offs and adjustments, net of recoveries ( 4,704 ) ( 1,941 ) ( 2,463 )

Balance at end of the year $ 4,249 $ 3,857 $ 3,304

Inventories consisted of the following at (in thousands):

Balance at end of the period $ 4,327 $ 4,249 $ 3,857

Inventories consisted of the following at December 31, 2022 and December 31, 2021 (in thousands):

Raw materials $ 39,207 $ 26,911

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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 .

The estimated aggregate amortization expense for each of the three succeeding years is $ 1.9 million for 2023, $ 1.9 million for 2024, and the remaining $ 0.9 million in 2025, all of which will be recorded in selling, general and administrative expense in the consolidated statement of operations .

Fair Value Measurements

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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):

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, 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):

Fair Value Measurements at

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Total assets $ 595,126 $ 361,903 $ 233,223 $ —

Common stock warrants $ 147 $ — $ — $ 147

Total liabilities $ 147 $ — $ — $ 147

Fair Value Measurements at

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Corporate debt securities 58,836 — 58,836 —

Supranational bonds 3,003 — 3,003 —

Total assets $ 600,916 $ 270,010 $ 330,906 $ —

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 consolidated balance sheet.

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.

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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 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

The Company's Level 3 liabilities at December 31, 2021 included outstanding Series A warrants to purchase 1,000 shares of the Company’s common stock, issued by the Company in connection with the public offering of common stock in October 2017 and which expired in October 2022.

The fair value of the outstanding Series A common stock warrants was remeasured at each financial reporting date using a Black-Scholes pricing model with any changes in fair value being recognized as a component of other income (expense) in the consolidated statements of operations and comprehensive income (loss) .

The assumptions used to estimate the fair values of the outstanding Series A warrants at December 31, 2021 were as follows:

December 31, 2021

Risk-free interest rate 0.3 %

Expected dividend yield 0.0 % 0.0 %

Dividend yield 0.0 %

Expected volatility 39.1 %

Expected term (in years) 0.8

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:

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

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, 2022, 2021 and 2020 (in thousands):

Year Ended December 31,

2022 2021 2020

Balance at beginning of period $ 147 $ 14,261 $ 23,509

(Gain) loss recognized from the change in fair value of common stock warrants ( 147 ) 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.

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.

Balance at end of period $ — $ 147 $ 14,261

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 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).

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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.

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.

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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.

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.

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).

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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 recognized operating lease right-of-use 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.

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 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 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 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 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 consolidated balance sheet on the Commencement Date in the second quarter of 2022.

Barnes Canyon Lease

In November 2022, the Company exercised its one-time option to extend the term of the lease covering 48,880 square feet of general office, manufacturing and warehouse space located on Barnes Canyon Road in San Diego, California (Barnes Canyon Lease) for an additional five years from November 2023 to November 2028.

The Company recognized operating lease right-of-use assets and corresponding operating lease liabilities of $ 3.0 million on the consolidated balance sheet in the fourth quarter of 2022 related to the Barnes Canyon Lease term extension.

Lease Termination and Impairment Charges

During the fourth quarter of 2022, the Company recorded $ 12.4 million of lease termination and impairment charges primarily related to our customer and technical support office space in Boise, Idaho.

The $ 12.4 million charge consisted of a $ 6.7 million loss on disposal of fixed assets, including leasehold improvements, furniture and fixtures, $ 3.8 million net loss on lease termination, and $ 1.9 million impairment of operating lease right-of-use assets, and is recorded as a component of selling, general and administrative expenses in the consolidated statement of operations.

Supplemental Lease Disclosure Information

The Company’s lease costs recorded in the consolidated statements of operations were as follows (in thousands):

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Operating lease cost $ 18,432 $ 8,627 $ 7,514

Loss on lease termination and right-of-use asset impairment charge 5,699 — —

Short-term lease cost 142 90 219

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Years Ending December 31,

2023 $ 13,133

Thereafter 103,844

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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 $ 9.5 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

The Company intends to use Phase I of the Tech Center Lease for operations currently located at the Roselle Street Leases.

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 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 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)

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.

Cash paid for amounts included in the measurement of lease liabilities, representing operating cash flows from operating leases, was $ 16.7 million, which included a $ 4.8 million lease termination payment, $ 9.5 million, and $ 8.2 million for the years ended December 31, 2022, 2021, and 2020, respectively.

Lease For Which Accounting Has Not Yet Commenced

As of December 31, 2022, the Commencement Date for Phase II of the Tech Center Lease had not yet occurred.

Accordingly, the consolidated balance sheet at December 31, 2022 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, 2022 does not include any lease costs, 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.

Convertible Senior Notes

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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 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 prior to May 6, 2023.

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 prior to November 1, 2024, in multiples of $1,000 principal amounts, only under the following circumstances:

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;

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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.

In accounting for the issuance of the Notes in 2020, 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.

The carrying amount of the equity component representing the conversion option for the Notes was recorded as a debt discount, which was being amortized to interest expense.

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.

The liability and equity components of the Notes consisted of the following (in thousands):

The Company adopted the new standard 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.

As of January 1, 2021, the Notes are accounted for as a single liability measured at amortized cost, as no other embedded features require bifurcation and recognition as derivatives.

The net carrying amount of the Notes on the consolidated balance sheets consisted of the following (in thousands):

December 31, 2022 December 31, 2021

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Unamortized debt issuance costs ( 4,268 ) ( 6,033 )

Unamortized debt discount — $ ( 79,070 )

Net carrying amount $ 283,232 $ 281,467

Carrying amount of the equity component $ — $ 85,803

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, 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.

As of December 31, 2022, the unamortized debt issuance costs of $ 4.3 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 2.3 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

The following table details interest expense related to the Notes recognized for the years ended December 31, 2022 and 2021 (in thousands):

Year Ended December 31,

2022 2021 2020

Contractual interest expense $ 4,313 $ 4,313 $ 2,707

Amortization of debt issuance costs 1,896 1,727 652

Amortization of debt discount N/A 9,446

Amortization of debt discount (1) N/A N/A 9,446

Total interest expense $ 6,209 $ 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.

(1) The debt discount was reversed upon the adoption of ASU No.

Capped Call Transactions

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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.

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 December 31, 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 December 31, 2022, the Company’s outstanding borrowings and available balance under the Line of Credit were as follows (in millions):

Maximum principal borrowing amount $ 100.0

Outstanding borrowings —

Outstanding letters of credit 4.9

Total available balance $ 95.1

Stockholders’ Equity

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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

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.

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

The Company issued 5,678 shares and 155,517 shares of its common stock, respectively, upon the exercise of warrants during the years ended December 31, 2022, and 2021, respectively.

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 .

Common stock options have an exercise price equal to the closing price of the Company's common stock on the applicable award date.

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 .

The following table summarizes stock option activities for the 2006 Plan and 2013 Plan:

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Outstanding at December 31, 2021 4,814,846 $ 57.08 7.07 $ 452,081

Granted 83,008 $ 65.28

Exercised ( 280,275 ) $ 32.58 $ 13,473

Canceled/forfeited/expired ( 175,266 ) $ 77.93 $ 2,143

Outstanding at December 31, 2022 4,442,313 $ 57.95 6.12 $ 30,236

Vested and expected to vest at December 31, 2022 4,423,803 $ 57.87 6.12 $ 30,236

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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.

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 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 .

RSUs granted in March 2022 and thereafter generally 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 during the years ended December 31, 2022 and 2021, respectively.

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:

The following table summarizes RSU activities, which includes performance-based RSUs, for the 2013 Plan:

Total RSUs Weighted-Average Grant Date Fair Value Aggregate Intrinsic Value

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Unvested awards outstanding at December 31, 2021 610,731 $ 95.08 $ 91,927

Granted 1,542,859 $ 67.09

Vested ( 202,215 ) $ 91.99

Canceled/forfeited ( 117,543 ) $ 84.20

Unvested awards outstanding at December 31, 2022

1,833,832 $ 72.57 $ 82,431

Awards expected to vest at December 31, 2022 1,797,999 $ 72.62 $ 80,820

The aggregate fair value of RSUs that vested during the years ended December 31, 2022, 2021 and 2020 was $ 12.7 million, $ 5.1 million, and $ 0.2 million, respectively, which represents the market value of the Company’s common stock on the date the RSUs vested.

The number of RSUs vested includes shares of common stock the Company withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements.

RSUs that are expected to vest are net of estimated future forfeitures.

Employee Stock Purchase Plan

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Cost of sales $ 7,685 $ 6,434 $ 8,210

Selling, general & administrative 43,567 41,563 42,857

Selling, general and administrative 57,196 43,567 41,563

Research and development 20,037 10,751 8,658

Total stock-based compensation expense $ 84,918 $ 60,752 $ 58,431

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.

The total stock-based compensation expense capitalized as part of the cost of the Company’s inventories was $ 1.1 million at December 31, 2022, and $ 1.0 million at December 31, 2021.

At December 31, 2022, the total unamortized stock-based compensation expense of approximately $ 143.9 million will be recognized over the remaining weighted average vesting term of approximately 2.3 years.

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

The Company estimates the fair value of stock options using the Black-Scholes option-pricing model on the grant date.

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

Stock Options

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Risk-free interest rate 2.7 % 1.0 % 0.6 %

Expected dividend yield 0.0 % 0.0 % 0.0 %

Dividend yield 0.0 % 0.0 % 0.0 %

Expected volatility 72.0 % 75.1 % 74.6 %

Expected term (in years) 5.8 6.1 6.1

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:

Year Ended December 31,

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Risk-free interest rate 3.4 % 0.2 % 0.2 %

Expected dividend yield 0.0 % 0.0 % 0.0 %

Dividend yield 0.0 % 0.0 % 0.0 %

Expected volatility 56.9 % 44.2 % 60.3 %

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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.

The 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.

The expected volatility was estimated based on a weighted-average of the Company’s actual historical volatility of its common stock measured over the expected term.

Expected Term .

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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.

The income (loss) before provision for income taxes for the Company’s domestic and international operations was as follows (in thousands):

The total amount contributed by the Company to the 401(k) plan was $ 4.2 million for the year ended December 31, 2022.

The Company did not provide a matching contribution prior to 2022.

The income (loss) before provision for income taxes for the Company’s operations was as follows (in thousands):

Year Ended December 31,

2022 2021 2020

$ 15,211 $ ( 36,667 ) $ ( 24,888 )

United States $ ( 94,033 ) $ 15,211 $ ( 36,667 )

Foreign 1,181 690 385

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Officers' compensation 2,931 4,024 2,612

Acquired IPR&D expenses 6,518 — —

Other 962 124 479

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(1) For the years ended December 31, 2022, 2021 and 2020, 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).

Significant components of the Company’s net deferred income tax assets at December 31, 2022 and 2021 are shown in the table 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.

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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.

On the basis of this analysis, a valuation allowance of $ 162.7 million and $ 146.4 million at December 31, 2022 and 2021, respectively, was recorded to offset the net deferred tax asset as realization of such asset is uncertain.

However, the amount of the deferred tax asset considered realizable 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.

Deferred tax assets:

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Deferred tax liabilities:

Convertible senior notes — ( 11,224 )

Operating lease right-of-use assets ( 26,505 ) ( 6,637 )

Fixed assets ( 4,467 ) ( 3,847 )

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The remaining California NOL carryforwards of $ 169.5 million will begin expiring in 2031.

The Company has no foreign tax loss carryforwards as of December 31, 2021.

The Company had no foreign tax loss carryforwards as of December 31, 2022.

The Company also has federal and California research credit carryforwards of approximately $ 18.1 million and $ 20.1 million, respectively, as of December 31, 2022.

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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 is subject to taxation in the United States and various foreign and state jurisdictions.

Prior to 2018, the losses were all attributable to the United States.

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.

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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 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.

In the United States and Canada, the Company also 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.

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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,

Year Ended December 31,

2022 2021 2020

United States $ 588,765 $ 524,907 $ 415,680

International 177,892 83,150 60,221

Outside the United States 212,452 177,892 83,150

Total Sales $ 801,217 $ 702,799 $ 498,830

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.

Sales to distributors accounted for 65 %, 67 %, and 70 % of the Company’s total United States sales for the years ended December 31, 2022, 2021 and 2020, respectively.

Sales to distributors accounted for 96 %, 95 %, and 94 % of the Company’s total sales outside the United States for the years ended December 31, 2022, 2021 and 2020, respectively.

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 consolidated balance sheet at December 31, 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.

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, on its consolidated statements of operations in acquired in-process research and development expenses.

The Company’s results of operations for the year ended December 31, 2022 included the operating results of Capillary Biomedical since the date of acquisition, the amounts of which were not material.

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;

In May 2020, we were 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 sought statutory, compensatory, actual, and punitive damages;

equitable relief, including restitution;

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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.

and attorney fees, costs, and expenses from us.

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.

Tandem Diabetes Care, Inc.

The consolidated case alleges violations of the Confidentiality of Medical Information Act (CMIA), California Consumer Privacy Act (CCPA), California’s Unfair Competition Law (UCL), and breach of contract.

The Company filed a demurrer seeking dismissal of all claims, which was heard by the Court on October 27, 2020, and which resulted in the following outcome:

(i) the demurrer of the CMIA claim was denied;

(ii) the demurrer of the CCPA claim was sustained;

and (iii) the demurrer of the UCL and contract claims were sustained with leave to amend the pending complaint.

A second demurrer was heard by the Court on March 29, 2021 with the following outcome:

(i) the demurrer of the CMIA claim was denied;

and (ii) the demurrer of the UCL and contract claims were narrowed in scope to dismiss three plaintiffs for either failing to allege cognizable damages or injuries-in-fact, resulting in two remaining plaintiffs.

Although the Company intends to vigorously defend against these claims, there is no guarantee that the Company will prevail.

The Company presently is unable to determine the ultimate outcome of these lawsuits or determine the amount (or range) of possible losses associated with the lawsuits.

In September 2020, the Company was named as a defendant in a lawsuit entitled Buck Walsh, individually and on behalf of others similarly situated v.

Tandem Diabetes Care, Inc., which was filed in the Superior Court of the State of California in the County of San Diego.

The alleged violations include business and professions code and labor code violations for failure to compensate wages, unpaid meal and rest periods, and failure to reimburse for necessary business-related expenses.

The 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.

The consolidated case alleged violations of the Confidentiality of Medical Information Act (CMIA), CCPA, California’s Unfair Competition Law (UCL), and breach of contract.

We filed a demurrer on all claims, which was heard by the Court on October 20, 2020, and our demurrer to the CCPA claim was sustained.

The plaintiffs filed a motion for class certification on January 7, 2022 and we filed a motion for summary adjudication on the CMIA claim on April 7, 2022.

On February 8, 2023, the Court granted plaintiffs’ request to dismiss their remaining two claims with prejudice, and dismissed the motion for class certification, terminating the case in the Superior Court.

The plaintiffs have to decide whether to appeal the Court’s decision granting our motion for summary adjudication.

Although we intend to vigorously defend against these claims, there is no guarantee that we will prevail.

Accordingly, we are unable to determine the ultimate outcome of these lawsuits or determine the amount or range of potential losses associated with the lawsuits.

From time to time, we are involved in various other legal proceedings, regulatory matters, and other disputes or claims arising from or related to claims incident 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 such legal proceedings and claims cannot be predicted with certainty, we believe we are not currently a party to any legal proceeding(s) which, if determined adversely to us, would, individually or taken together, have a material adverse effect on our 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 us 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.

In connection with one of the Company’s operating leases (see Note 6, “Leases”), the Company has a $ 4.9 million unsecured irrevocable standby letter of credit arrangement with a bank (see Note 7, “Debt”), 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.

Purchase Obligations

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Operating expenses $ 133,300 $ 100,991

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:

Operating income (loss) $ ( 17,777 ) $ 12,738

Net income (loss) $ ( 15,852 ) $ 10,808

Basic net income (loss) per share $ ( 0.25 ) $ 0.17

Diluted net income (loss) per share $ ( 0.25 ) $ 0.16

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, 2022 and 2021 (in thousands):

For the Quarter Ended

(in thousands) December 31, 2021 December 31, 2020

Net income $ 10,808 $ 17,000

December 31, 2022 December 31, 2021

Net income (loss) - basic $ ( 15,853 ) $ 10,808

change in fair value of common stock warrants — 32

Net income - diluted $ 10,840 $ 14,181

Net income (loss) - diluted $ ( 15,853 ) $ 10,840

Weighted average shares outstanding - basic 64,384 63,650

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Awards to be granted under the ESPP — 3

Convertible senior notes (if-converted) — —

Weighted average shares outstanding - diluted 64,384 65,927

Subsequent Event

AMF Medical Acquisition

On December 10, 2022, the Company, entered into a Share Purchase Agreement (the “Purchase Agreement”) with AMF Medical SA, a corporation organized and existing under the laws of Switzerland (“AMF Medical”), and its shareholders to acquire all of the registered shares of AMF Medical (the “Transaction”), the privately held Swiss developer of the Sigi Patch Pump.

The Sigi Patch Pump, designed to be an ergonomic, rechargeable patch pump that reduces the burden of managing diabetes through its use of pre-filled insulin cartridges, is under development and not commercially available.

On January 19, 2023, the Company completed the acquisition of AMF Medical, pursuant to the terms of the Purchase Agreement.

The total aggregate consideration for the Transaction includes a previous strategic investment of Swiss Francs (“CHF”) 8.0 million paid in the third quarter of 2022 (see Note 2, “Strategic Investments”), a cash payment of CHF 62.4 million paid at the closing of the Transaction, and additional contingent earnout payments.

The additional earnout payments of up to CHF 129.6 million, in aggregate, become payable upon the achievement of certain milestones and are comprised of a payment of up to CHF 38.4 million upon the successful completion of key development milestones over the next two years, and a payment of up to CHF 91.2 million upon obtaining regulatory clearance of an automated controller enabled (ACE) pump by the United States Food and Drug Administration.

The Company funded the initial closing payment using existing cash balances, and is in the process of determining the accounting treatment for the acquisition.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk