TANDEM DIABETES CARE INC 10-K

Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Credit and Interest Rate Risks We invest our excess cash in marketable securities consisting primarily of 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. 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”). The primary objectives of our investment activities are to maintain liquidity and preserve principal while maximizing the income we receive from our financial instruments without significantly increasing risk. We have established guidelines regarding approved investments and maturities of investments, which are primarily designed to maintain liquidity and preserve principal. Because of the short-term maturities of our financial instruments, we do not believe that an increase or decrease in market interest rates would have any significant impact on the realized value of our investment portfolio. If a 10% change in interest rates were to have occurred on December 31, 2022, it would not have had a material effect on the fair value of our investment portfolio as of that date. In May 2020, we issued $287.5 million principal amount of Convertible Senior Notes, which bear interest at a fixed rate of 1.50% per year. Accordingly, we are not subject to interest rate risk as a result of the Convertible Senior Notes (see Note 7, “Debt”). Foreign Currency Exchange Rate Risk 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. dollars. 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. dollars. 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. However, we may choose not to hedge some exposures for a variety of reasons, including prohibitive economic costs. 69 Item 8. Consolidated Financial Statements and Supplementary Data. Our consolidated financial statements as of December 31, 2022 and 2021 and for each of the three years in the period ended December 31, 2022, and the Report of the Independent Registered Public Accounting Firm are included in this report as listed in the index. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 71 Consolidated Balance Sheets as of December 31, 2022 and 2021 73 Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years ended December 31, 2022, 2021 and 2020 74 Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2022, 2021 and 2020 75 Consolidated Statements of Cash Flows for the Years ended December 31, 2022, 2021 and 2020 76 Notes to Consolidated Financial Statements 77 70 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Tandem Diabetes Care, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Tandem Diabetes Care, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2022 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 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. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 71 Warranty reserve – Estimation of Product Replacement Reserve Description of the Matter As discussed in Note 2 to the consolidated financial statements, the Company has a warranty reserve of $36.5 million. The Company provides insulin pump end customers with a four-year warranty and may replace any pumps that do not function in accordance with the product specifications. Warranty costs are estimated at the time of shipment. Management applies significant judgment to determine 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 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. 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 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 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. 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 We have served as the Company's auditor since 2009. San Diego, California February 22, 2023 72 TANDEM DIABETES CARE, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except par value) December 31, December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 172,517 $ 71,181 Short-term investments 444,384 552,630 Accounts receivable, net 114,717 110,725 Inventories 111,117 68,551 Prepaid and other current assets 7,241 8,433 Total current assets 849,976 811,520 Property and equipment, net 68,552 50,386 Operating lease right-of-use assets 110,626 27,503 Other long-term assets 23,631 15,728 Total assets $ 1,052,785 $ 905,137 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 55,730 $ 28,032 Accrued expenses 9,595 9,419 Employee-related liabilities 38,682 51,556 Operating lease liabilities 13,121 9,279 Deferred revenue 18,837 10,182 Other current liabilities 29,325 23,388 Total current liabilities 165,290 131,856 Convertible senior notes, net - long-term 283,232 281,467 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 Total liabilities 612,838 472,025 Commitments and contingencies (Note 13) — — Stockholders’ equity: Common stock, $ 0.001 par value; 200,000 shares authorized, 64,513 and 63,833 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively. 65 64 Additional paid-in capital 1,170,888 1,068,259 Accumulated other comprehensive loss ( 1,817 ) ( 616 ) Accumulated deficit ( 729,189 ) ( 634,595 ) Total stockholders’ equity 439,947 433,112 Total liabilities and stockholders’ equity $ 1,052,785 $ 905,137 The accompanying notes are an integral part of the consolidated financial statements. 73 TANDEM DIABETES CARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (In thousands, except per share data) Year Ended December 31, 2022 2021 2020 Sales $ 801,217 $ 702,799 $ 498,830 Cost of sales 388,231 326,584 238,310 Gross profit 412,986 376,215 260,520 Operating expenses: Selling, general and administrative 335,681 261,508 204,903 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 Operating income (loss) ( 92,848 ) 22,653 ( 7,957 ) Other income (expense), net: Interest income and other, net 6,057 674 1,567 Interest expense ( 6,208 ) ( 6,040 ) ( 12,805 ) Change in fair value of common stock warrants 147 ( 1,386 ) ( 17,087 ) Total other expense, net ( 4 ) ( 6,752 ) ( 28,325 ) Income (loss) before income taxes ( 92,852 ) 15,901 ( 36,282 ) Income tax expense (benefit) 1,742 335 ( 1,900 ) Net income (loss) $ ( 94,594 ) $ 15,566 $ ( 34,382 ) Other comprehensive income (loss): 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 ) Net income (loss) per share - basic $ ( 1.47 ) $ 0.25 $ ( 0.56 ) Net income (loss) per share - diluted $ ( 1.47 ) $ 0.24 $ ( 0.56 ) Weighted average shares used to compute basic net income (loss) per share 64,146 63,000 60,990 Weighted average shares used to compute diluted net income (loss) per share 64,146 64,349 60,990 The accompanying notes are an integral part of the consolidated financial statements. 74 TANDEM DIABETES CARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) Common Stock Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Balance at December 31, 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 under Employee Stock Purchase Plan 303 1 9,115 — — 9,116 Exercise of common stock warrants 295 — 2,950 — — 2,950 Fair value of common stock warrants at time of exercise — — 26,335 — — 26,335 Equity component of convertible senior notes issuance, net of issuance costs — — 85,803 — — 85,803 Payment for capped call transactions related to convertible senior notes — — ( 34,069 ) — — ( 34,069 ) Stock-based compensation expense — — 57,725 — — 57,725 Unrealized loss on short-term investments — — — ( 20 ) — ( 20 ) Foreign currency translation gains — — — 118 — 118 Net loss — — — — ( 34,382 ) ( 34,382 ) Balance at December 31, 2020 62,335 $ 62 $ 1,025,233 $ 220 $ ( 659,210 ) $ 366,305 Effect of change in accounting for convertible senior notes (1) — — ( 85,803 ) — 9,049 ( 76,754 ) Exercise of stock options 1,129 2 41,821 — — 41,823 Vesting of restricted stock units, net of shares withheld for taxes 38 — ( 1,551 ) — — ( 1,551 ) Issuance of common stock under Employee Stock Purchase Plan 173 — 11,069 — — 11,069 Exercise of common stock warrants 158 — 899 — — 899 Fair value of common stock warrants at time of exercise — — 15,500 — — 15,500 Stock-based compensation expense — — 61,091 — — 61,091 Unrealized loss on short-term investments — — — ( 693 ) — ( 693 ) Foreign currency translation 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 7, “Debt”). The accompanying notes are an integral part of the consolidated financial statements. 75 TANDEM DIABETES CARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2022 2021 2020 Operating Activities Net income (loss) $ ( 94,594 ) $ 15,566 $ ( 34,382 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expense 14,330 13,845 10,451 Amortization of debt discount and issuance costs 1,896 1,727 10,096 Provision for expected credit losses 4,782 2,333 3,016 Lease termination and impairment charges 7,567 — — Change in fair value of common stock warrants ( 147 ) 1,386 17,087 Amortization of premium (discount) on short-term investments 4,187 365 ( 1,296 ) Benefit for deferred income taxes — — ( 2,126 ) 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 ) Changes in operating assets and liabilities: Accounts receivable, net ( 7,830 ) ( 30,980 ) ( 38,837 ) Inventories ( 42,452 ) ( 4,954 ) ( 15,361 ) Prepaid and other current assets ( 58 ) ( 1,570 ) ( 2,427 ) Other long-term assets ( 1,207 ) 1,313 129 Accounts payable 24,493 10,275 1,118 Accrued expenses ( 461 ) 4,640 ( 3,256 ) Employee-related liabilities ( 12,869 ) 17,399 5,339 Deferred revenue 8,358 10,611 7,029 Operating leases and other current liabilities 25,445 6,217 5,789 Other long-term liabilities 1,932 1,421 3,888 Net cash provided by operating activities 50,464 111,359 24,669 Investing Activities Purchases of short-term investments ( 467,652 ) ( 733,388 ) ( 497,076 ) 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, 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 Proceeds from issuance of convertible senior notes, net of $ 8,809 debt issuance costs — — 278,691 Payment for capped call transactions related to convertible senior notes — — ( 34,069 ) Proceeds from issuance of common stock under Company stock plans, net 17,469 51,340 66,866 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 Effect of foreign exchange rate changes on cash 827 153 387 Net increase (decrease) in cash and cash equivalents 101,336 ( 23,432 ) 43,438 Cash and cash equivalents at beginning of period 71,181 94,613 51,175 Cash and cash equivalents at end of period $ 172,517 $ 71,181 $ 94,613 Supplemental disclosures of cash flow information Interest paid $ 4,313 $ 4,313 $ 2,707 Income taxes paid $ 411 $ 260 $ 177 Supplemental schedule of non-cash investing and financing activities 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 The accompanying notes are an integral part of the consolidated financial statements. 76 TANDEM DIABETES CARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Basis of Presentation The Company Tandem Diabetes Care, Inc. is a medical device company focused on the design, development and commercialization of technology solutions for people living with diabetes. Tandem Diabetes Care, Inc. is incorporated in the state of Delaware. Unless the context requires otherwise, the terms the “Company” or “Tandem” refer to Tandem Diabetes Care, Inc., together with its wholly-owned subsidiaries in the United States, Canada and the Netherlands. The Company manufactures, sells, and supports insulin pump products that are designed to address the evolving needs and preferences of differentiated segments of the insulin-dependent diabetes market. The Company’s manufacturing, sales and support activities principally focus on the t:slim X2 Insulin Delivery System (t:slim X2), the Company’s flagship pump platform which has an advanced algorithm for managing insulin delivery, and is designed to display continuous glucose monitoring (CGM) sensor information directly on the pump home screen. The Company’s insulin pump products are compatible with other complementary digital health offerings, such as the t:connect mobile app and cloud-based diabetes management application (t:connect), and the Tandem Device Updater, a Mac- and PC-compatible tool which offers and supports remote updates of the Company’s insulin pump software from a personal computer. The Company’s insulin pump products are generally considered durable medical equipment and have an expected lifespan of at least four years . In addition to insulin pumps, the Company sells disposable products that are used together with the pumps and are replaced every few days, including cartridges for storing and delivering insulin, and infusion sets that connect the insulin pump to a user’s body. Basis of Presentation and Principles of Consolidation The Company has prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The statements include the accounts of Tandem Diabetes Care, Inc. and its wholly-owned subsidiaries in the 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 subsidiaries is their respective local currency. The Company translates the financial statements of its foreign subsidiaries into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates for each period for revenue, costs and expenses. Translation related adjustments are included in other comprehensive income (loss), and in accumulated other comprehensive income (loss) in the stockholders’ equity section of the Company’s consolidated balance sheets. Foreign exchange gains or losses resulting from balances denominated in a currency other than the functional currency are recognized in interest income and other, net in the Company’s consolidated statements of operations. Reclassifications 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. 2. Summary of Significant Accounting Policies There have been no material changes to the Company’s significant accounting policies during the year ended December 31, 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. 77 Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes as of the date of the consolidated financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less from the date of purchase and that can be liquidated without prior notice or penalty to be cash equivalents. Short-Term Investments The Company’s short-term investments are classified as available-for-sale securities. Such securities are carried at fair value as determined by prices for identical or similar securities at the balance sheet date. The Company’s short-term investments consist of Level 1 and Level 2 financial instruments in the fair value hierarchy. The net unrealized gains or losses on available-for-sale securities that are not related to credit factors are reported as a component of other comprehensive income (loss) within the statements of operations and accumulated other comprehensive income (loss) as a separate component of stockholders’ equity on the consolidated balance sheets. The Company determines realized gains or losses on the sale of available-for-sale securities using the specific identification method and includes net realized gains and losses as a component of other income or expense within the consolidated statements of operations. The Company reviews its available-for-sale debt securities for credit losses quarterly, considering a variety of factors, including the significance of the decline in value as compared to the amortized cost basis; underlying factors contributing to a decline in the prices of securities in a single asset class; the security’s relative performance versus its peers, sector or asset class; the market and economy in general; views of external investment managers; news or financial information that has been released specific to the investee; and the outlook for the overall industry in which the investee operates. Losses on available-for-sale debt securities as a result of credit factors are recognized by recording an impairment loss as a component of other income or expense within the consolidated statements of operations and a corresponding allowance for credit losses. The Company has not recognized any impairment losses related to its short-term investments during the years ended December 31, 2022, 2021 and 2020. Accounts Receivable The Company grants credit to various customers in the ordinary course of business and is paid directly by customers who use its products, distributors and third-party insurance payors. The Company maintains an allowance for its current estimate of expected credit losses. Provisions for expected credit losses are estimated based on historical experience, assessment of specific risk, review of outstanding invoices, forecasts about the future, and various assumptions and estimates that are believed to be reasonable under the circumstances, including credit risks as a result of the coronavirus pandemic, recessionary concerns, changes in discretionary spending, increased interest rates, and other macroeconomic factors. Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a balance is uncollectible. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company maintains deposit accounts in federally insured financial institutions in excess of federally insured limits. The Company also maintains investments in money market funds that are not federally insured. Additionally, the Company has established guidelines regarding investment instruments and their maturities, which are designed to maintain preservation of principal and liquidity. 78 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 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. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and employee-related liabilities are reasonable estimates of their fair values because of the short-term nature of these assets and liabilities. Short-term investments are carried at fair value. The carrying value and estimated fair value of certain of the Company’s common stock warrants was determined using the Black-Scholes pricing model as of December 31, 2021 (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 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 Inventories are valued at the lower of cost or net realizable value, determined by the first-in, first-out method. Inventory is recorded using standard cost, including material, labor and overhead costs. The Company periodically reviews inventories for potential impairment and adjusts inventory for potentially excess or obsolete goods to state inventories at their net realizable value. Factors influencing these adjustments include quantities on hand and firm purchase commitments, expectations of future use, judgments based on quality control testing data and assessments of the likelihood of scrapping or obsoleting certain inventories based on future demand for its products and market conditions. Long-Lived Assets Property and Equipment Property and equipment, which primarily consist of office furniture and equipment, manufacturing equipment, scientific equipment, computer equipment, and leasehold improvements, are stated at cost, less accumulated depreciation. Property and equipment are depreciated over the estimated useful lives of the assets, generally three to seven years , using the straight-line method. Leasehold improvements 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 Operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized when the Company takes possession of the leased property (the Commencement Date) based on the present value of lease payments over the lease term. For lease agreements entered into or reassessed after the adoption of ASC 842 Leases , the Company combines lease and non-lease components. Rent expense on noncancelable leases containing known future scheduled rent increases is recorded on a straight-line basis over the term of the respective leases beginning on the Commencement Date. The difference between rent expense and rent paid is accounted for as a component of operating lease right-of-use assets on the Company’s consolidated balance sheets. Landlord improvement allowances and other similar lease incentives are recorded as a reduction of the right-of-use leased assets, and are amortized on a straight-line basis as a reduction to operating lease costs. 79 Intangible Assets Subject to Amortization 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. 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 Revenue is generated primarily from sales of insulin pumps, disposable insulin cartridges and infusion sets to individual customers with third-party insurance coverage and through a network of distributors that resell the products to insulin-dependent diabetes customers. The Company recognizes revenue when it transfers control of the promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services, net of estimated returns. 80 Revenue Recognition for Arrangements with Multiple Performance Obligations The Company considers the individual deliverables in its product offering as separate performance obligations. The transaction price is determined based on the consideration expected to be received, based either on the stated value in contractual arrangements or the estimated cash to be collected in non-contracted arrangements. The Company allocates the consideration to the individual performance obligations and recognizes the consideration based on when the performance obligation is satisfied, considering whether or not this occurs at a point in time or over time. Generally, insulin pumps, cartridges, infusion sets, and accessories are deemed performance obligations that are satisfied at a point in time when the customer obtains control of the promised good, which typically is upon shipment for our distributor arrangements and upon receipt for sales directly to individual customers. Complementary products, such as t:connect and the Tandem Device Updater, are considered distinct performance obligations that are satisfied over time, as access and support for these products is provided throughout the typical four-year warranty period of the insulin pumps. Accordingly, revenue related to the complementary products is deferred and recognized over a four-year period. Where there is no standalone value for the complementary product, the Company determines its value by applying the expected cost plus a margin approach and then allocates the residual to the insulin pumps. 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 The Company offers a 90-day right of return to customers in the U.S. and Canada from the date of shipment of its insulin pumps, provided a physician’s confirmation of the medical reason for the return is received. Estimated allowances for sales returns are based on historical returned quantities as compared to pump shipments in those same periods of return, adjusted for known or expected changes in the marketplace when appropriate. The amount recorded in deferred revenue on the Company’s consolidated balance sheets for allowances for sales returns was $ 0.5 million and $ 0.6 million at December 31, 2022 and 2021, respectively. Actual product returns have not differed materially from estimated amounts recorded in the accompanying consolidated financial statements. Warranty Reserve The Company generally provides a four-year warranty on its insulin pumps to end-user customers and may replace any pumps that do not function as intended in accordance with the product specifications within the warranty period. Additionally, the Company offers a six-month warranty on disposable insulin cartridges and infusion sets. Estimated warranty costs are recorded at the time of shipment, and the Company reevaluates the estimate of the warranty reserve obligation at each reporting period. Warranty costs are estimated primarily based on the current expected product replacement cost and expected replacement rates utilizing historical experience. Insulin pumps returned to the Company may be refurbished and redeployed. Experience has shown that initial data for any given pump version may be insufficient; therefore, the Company’s process relies on long-term historical averages until sufficient data are available. As actual experience becomes available, the Company uses the data to update the historical averages. The Company may make further adjustments to the warranty reserve when deemed appropriate, giving additional consideration to 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. 81 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 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 ) 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 Other long-term liabilities 19,257 17,325 Total warranty reserve $ 36,537 $ 30,401 Stock-Based Compensation Stock-based compensation cost is measured at the grant date based on the estimated fair value of the award, and the portion that is ultimately expected to vest is recognized as compensation expense over the requisite service period on a straight-line basis. The Company estimates the fair value of stock options issued under the Company’s Amended and Restated 2013 Stock Incentive Plan (2013 Plan) and the fair value of the employees’ purchase rights under the Company’s 2013 Employee Stock Purchase Plan (ESPP) using the Black-Scholes option-pricing model on the date of grant. The Black-Scholes option-pricing model requires the use of assumptions about a number of variables, including stock price volatility, expected term, dividend yield and risk-free interest rate (see Note 8, “Stockholders’ Equity”). The fair value of restricted stock unit (RSU) awards issued under the 2013 Plan that vest solely based on service is estimated based on the fair market value of the underlying stock on the date of grant. The fair value of RSU awards issued under the 2013 Plan that vest based upon the Company’s actual performance relative to predefined performance metrics, and the awardee’s continuing service through the measurement date, is estimated based on the fair market value of the underlying stock on the date of grant and the probability that the specified performance criteria will be met. At each reporting period, the Company reassesses the probability of the achievement of such performance metrics. Any expense change resulting from an adjustment in the estimated shares to be released is recorded in the period of adjustment. Shipping and Handling Expenses Shipping and handling expenses associated with product delivery are included within cost of sales in the Company’s statements of operations. Amounts billed to a customer for shipping and handling are reported as revenues. Research and Development Costs All research and development costs are charged to expense as incurred. Such costs include personnel-related costs, including stock-based compensation, supplies, license fees, development prototypes, outside design and testing services, depreciation, allocated facilities and information services, clinical trial costs, milestone payments under the Company’s 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. 82 Income Taxes The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets or liabilities are recognized based on the temporary differences between financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Tax law and rate changes are reflected in income in the period such changes are enacted. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. The 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. In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely 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. The Company includes interest and penalties related to income taxes, including unrecognized tax benefits, within income tax expense. Comprehensive Income (Loss) All components of comprehensive income (loss), including net income (loss), are reported in the consolidated financial statements in the period in which they are recognized. Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on marketable securities and foreign currency translation adjustments. Net Income (Loss) Per Share Basic net income (loss) per share is calculated by dividing the net income 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 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): 83 Year Ended December 31, 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 Dilutive common share equivalents: Options to purchase common stock — 1,129 — Unvested restricted stock units — 62 — Warrants to purchase common stock — 157 — Awards to be granted under the ESPP — 1 — Weighted average shares outstanding - diluted 64,146 64,349 60,990 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, 2022 2021 2020 Options to purchase common stock 1,138 3,124 5,021 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 2,554 1,605 5,012 5,679 7,086 3. Short-Term Investments The Company invests in marketable securities primarily consisting of debt instruments of the U.S. Government, U.S. Government-sponsored enterprises, and financial institutions and corporations with strong credit ratings. The following represents a summary of the estimated fair value of short-term investments at December 31, 2022 and December 31, 2021 (in thousands): At December 31, 2022 Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value Available-for-sale securities: U.S. Treasury securities $ 213,105 $ 3 $ ( 1,947 ) $ 211,161 Commercial paper 112,812 6 ( 208 ) 112,610 U.S. Government-sponsored enterprises 100,602 21 ( 615 ) 100,008 Corporate debt securities 18,218 — ( 104 ) 18,114 Supranational bonds 2,504 — ( 13 ) 2,491 Total $ 447,241 $ 30 $ ( 2,887 ) $ 444,384 84 At December 31, 2021 Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value Available-for-sale securities: U.S. Treasury securities $ 222,206 $ — $ ( 482 ) $ 221,724 Commercial paper 218,391 14 ( 24 ) 218,381 U.S. 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 The contractual maturities of available-for-sale debt securities as of December 31, 2022, were as follows (in thousands): Years to Maturity At December 31, 2022 Within One Year One to Two Years Estimated Fair Value U.S. Treasury securities $ 202,855 $ 8,306 $ 211,161 Commercial paper 112,610 — 112,610 U.S. Government-sponsored enterprises 73,292 26,716 100,008 Corporate debt securities 13,190 4,924 18,114 Supranational bonds 2,491 — 2,491 Total $ 404,438 $ 39,946 $ 444,384 The Company has classified all marketable securities, regardless of maturity, as short-term investments based upon the Company’s ability and intent to use any of those marketable securities to satisfy the Company’s liquidity requirements. The Company reviews the portfolio of available-for-sale debt securities quarterly to determine if any investment is impaired due to changes in credit risk or other potential valuation concerns. Unrealized losses on available-for-sale debt securities at December 31, 2022 were primarily due to the recent increase in market interest rates. The Company does not intend to sell the available-for-sale debt securities that are in an unrealized loss position, and it is not more likely than not that the Company will be required to sell these debt securities before recovery of their amortized cost bases, which may be at maturity. Based on the credit quality of the available-for-sale debt securities in an unrealized loss position, and the Company’s estimates of future cash flows to be collected from those securities, the Company believes the unrealized losses are not credit losses. Accordingly, the Company did not record an allowance for credit losses related to its available-for-sale debt securities at December 31, 2022. 4. Composition of Certain Financial Statement Items Accounts Receivable Accounts receivable, net consisted of the following at December 31, 2022 and December 31, 2021 (in thousands): December 31, 2022 2021 Accounts receivable $ 119,044 $ 114,974 Less: allowance for credit losses ( 4,327 ) ( 4,249 ) Accounts receivable, net $ 114,717 $ 110,725 85 Allowance for Credit Losses The following table provides a reconciliation of the changes in the allowance for estimated accounts receivable credit losses for the years ended December 31, 2022 and 2021 (in thousands): Year Ended December 31, 2022 2021 2020 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 period $ 4,327 $ 4,249 $ 3,857 Inventories Inventories consisted of the following at December 31, 2022 and December 31, 2021 (in thousands): December 31, 2022 2021 Raw materials $ 39,207 $ 26,911 Work-in-process 18,571 16,612 Finished goods 53,339 25,028 Total inventories $ 111,117 $ 68,551 Property and Equipment Property and equipment, net consisted of the following at (in thousands): December 31, 2022 2021 Leasehold improvements $ 35,828 $ 25,245 Office furniture and equipment 13,772 9,943 Computer equipment and software 12,330 11,544 Manufacturing and scientific equipment 62,797 52,823 Total cost 124,727 99,555 Less: accumulated depreciation and amortization ( 56,175 ) ( 49,169 ) Total property and equipment, net $ 68,552 $ 50,386 Depreciation and amortization expense related to property and equipment was $ 12.3 million, $ 11.7 million, and $ 9.2 million for the years ended December 31, 2022, 2021, and 2020, respectively. 86 Intangible Assets Subject to Amortization Intangible assets subject to amortization consist of technology-based intangibles related to the Company’s acquisition of Sugarmate, as well as patents purchased or licensed that are related to the Company’s commercialized products. Intangible assets at December 31, 2022 and 2021, which were included in other long-term assets on the consolidated balance sheets, were as follows (in thousands): December 31, 2022 2021 Intangible assets, gross amount $ 12,502 $ 12,502 Accumulated amortization ( 7,875 ) ( 5,866 ) Intangible assets, net $ 4,627 $ 6,636 Weighted average remaining amortization period (in months) 30 41 Amortization expense related to intangible assets subject to amortization amounted to $ 2.0 million, $ 2.2 million and $ 1.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. The amortization expense is recorded in cost of sales and selling, general and administrative expense in the consolidated statement of operations. The estimated aggregate amortization expense for each of the 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 . 5. Fair Value Measurements Authoritative guidance on fair value measurements defines fair value, and provides a consistent framework for measuring fair value and for disclosures of each major asset and liability category measured at fair value on either a recurring or a nonrecurring basis. Fair value is intended to reflect an assumed exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1: Observable inputs such as unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3: Unobservable inputs in which there is little or no market data and that are significant to the fair value of the assets or liabilities, which require the reporting entity to develop its own valuation techniques that require input assumptions. The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of 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 December 31, 2022 Total Level 1 Level 2 Level 3 Assets Cash equivalents (1) $ 150,742 $ 150,742 $ — $ — U.S. Treasury securities 211,161 211,161 — — Commercial paper 112,610 — 112,610 — U.S. Government-sponsored enterprises 100,008 — 100,008 — Corporate debt securities 18,114 — 18,114 — Supranational bonds 2,491 — 2,491 — Total assets $ 595,126 $ 361,903 $ 233,223 $ — 87 Fair Value Measurements at December 31, 2021 Total Level 1 Level 2 Level 3 Assets Cash equivalents (1) $ 48,286 $ 48,286 $ — $ — U.S. Treasury securities 221,724 221,724 — — Commercial paper 218,381 — 218,381 — U.S. Government-sponsored enterprises 50,686 — 50,686 — Corporate debt securities 58,836 — 58,836 — Supranational bonds 3,003 — 3,003 — Total assets $ 600,916 $ 270,010 $ 330,906 $ — Liabilities Common stock warrants (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. The Company obtains the fair value of Level 2 financial instruments from quoted market prices, calculated prices or quotes from third-party pricing services. The Company validates these prices through independent valuation testing and review of portfolio valuations provided by the Company’s investment managers. The Company's Level 3 liabilities at 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 % 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, 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 period $ — $ 147 $ 14,261 88 6. Leases The Company's leases consist of operating leases for general office space, research and development, manufacturing and warehouse facilities, and equipment. These noncancellable operating leases have initial lease terms from two years to thirteen years . Leases with an initial term of 12 months or less (Short-term Lease) are expensed as incurred and are not recorded as right-of-use leased assets on the Company’s consolidated balance sheets. The Company is required to recognize operating lease right-of-use assets and liabilities, and begin recording lease expense when the Company takes possession of the leased property (the Commencement Date). The Company recognizes lease expense for these leases on a straight-line basis over the lease term. Because the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at the lease Commencement Date to determine the operating lease right-of-use assets and liabilities based on the present value of future lease payments over the lease term. The Company used the incremental borrowing rate on January 1, 2019 for operating leases that commenced before that date. Certain leases include an option to renew, with renewal terms that can extend the lease term for additional periods. The exercise of lease renewal options is at the Company’s sole discretion. For renewal options that are reasonably certain at the lease Commencement Date of being exercised, the Company includes the renewal option period in the lease term. Vista Sorrento Lease In March 2021, the Company entered into a second amendment (Second Amendment) to its lease agreement for office space located on Vista Sorrento Parkway in San Diego, California (Vista Sorrento Lease) covering 59,013 square feet of general administrative office space (Existing Premises). The Second Amendment expanded the Existing Premises by adding 14,916 square feet of general administrative office space (Expansion Space), and extended the lease term for the Existing Premises through January 2028. The Expansion Space lease Commencement Date occurred in March 2021, and the lease term expires in January 2028. The Company has two options to extend the term of the Vista Sorrento Lease, covering both the Existing Premises and the Expansion Space, with each option providing for an additional period of five years . The Vista Sorrento Lease term was determined assuming the renewal options would not be exercised. The Company recognized operating lease right-of-use assets and corresponding operating lease liabilities of $ 15.1 million on the 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. 89 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): Year Ended December 31, 2022 2021 2020 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 Total lease cost $ 24,273 $ 8,717 $ 7,733 Maturities of operating lease liabilities at December 31, 2022 were as follows (in thousands): Years Ending December 31, 2023 $ 13,133 2024 17,198 2025 17,023 2026 17,068 2027 17,333 Thereafter 103,844 Total undiscounted lease payments 185,599 Less: amount representing interest ( 48,954 ) Present value of operating lease liabilities 136,645 Less: current portion of operating lease liabilities ( 13,121 ) Operating lease liabilities - long-term $ 123,524 90 The weighted-average remaining lease term and weighted-average discount rate for operating leases were as follows: December 31, 2022 December 31, 2021 Weighted-average remaining lease term (in years) 10.8 5.0 Weighted-average discount rate used to determine operating lease liabilities 5.3 % 5.6 % Cash paid for amounts included in the measurement of lease liabilities, representing operating cash flows from operating leases, was $ 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. In addition, the above disclosures of the Company’s lease costs, maturities of operating lease liabilities, and the weighted-average remaining lease term and weighted-average discount rate, do not include any amounts related to Phase II of the Tech Center Lease. The Company currently estimates that Phase II Commencement Date will occur in the first quarter of 2025, at which time the Phase II operating lease right-of-use assets and liabilities will be recorded. Future minimum payments for monthly base rent due under Phase II of the Tech Center Lease, are currently estimated to total $ 34.7 million from 2025 through 2035, subject to a number of factors, including the actual Commencement Date of Phase II. Because the incremental borrowing rate will not be available until the Phase II Commencement Date, we are not yet able to determine the Phase II operating lease right-of-use assets and liabilities. 7. Debt Convertible Senior Notes In May 2020, the Company entered into a purchase agreement with certain counterparties for the sale of an aggregate of $ 287.5 million principal amount of 1.50 % Convertible Senior Notes due 2025 (Notes) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The proceeds from the issuance of the Notes were $ 244.6 million, net of debt issuance costs and cash used to pay the cost of the capped call transactions (Capped Call Transactions) discussed below. The Notes are the Company’s senior unsecured obligations. Interest is payable in cash semi-annually in arrears beginning on November 1, 2020 at a rate of 1.50 % per year. The Notes mature on May 1, 2025 unless repurchased, redeemed, or converted in accordance with their terms prior to the maturity date. The Notes are convertible into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election, at an initial conversion rate of 8.8836 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of $ 112.57 (Conversion Price) per share of the Company’s common stock. The conversion rate is subject to customary adjustments for certain events as described in the Indenture governing the Notes. The Company expects to settle conversions through a combination settlement, which involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. The Company may not redeem the Notes before May 6, 2023. The Company has the option to redeem for cash all or any portion of the Notes on or after May 6, 2023 if the last reported sale price of the Company’s common stock has been at least 130 % of the Conversion Price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period, at a redemption price equal to 100 % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest. No sinking fund is provided for the Notes. Holders of the Notes may convert all or a portion of their Notes at their option before November 1, 2024, in multiples of $1,000 principal amounts, only under the following circumstances: 91 • if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the applicable conversion price of the Notes on each such trading day; • during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each day of that five consecutive trading day period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate of the Notes on such trading day; • if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or • on the occurrence of specified corporate events. On or after November 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Holders of the Notes who convert in connection with a make-whole fundamental change or in connection with a redemption are entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change, holders of the Notes may require us to repurchase all or a portion of the Notes at a price equal to 100 % of the principal amount of the Notes, plus any accrued and unpaid interest. 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 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 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 Principal amount $ 287,500 $ 287,500 Unamortized debt issuance costs ( 4,268 ) ( 6,033 ) Net carrying amount $ 283,232 $ 281,467 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. 92 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 (1) N/A N/A 9,446 Total interest expense $ 6,209 $ 6,040 $ 12,805 (1) The debt discount was reversed upon the adoption of ASU No. 2020-06. Capped Call Transactions In connection with the issuance of the Notes, the Company entered into Capped Call Transactions in May 2020 with certain counterparties at a net cost of $ 34.1 million. The Capped Call Transactions are intended to reduce potential dilution to holders of the Company’s common stock beyond the conversion price of $ 112.57 , up to a conversion price of $ 173.18 on any conversion of the Notes, or to offset any cash payments the Company is required to make in excess of the principal amount of such converted Notes, as the case may be, with such reduction or offset subject to a cap. The cap price of the Capped Call Transactions is initially $ 173.18 per share of the Company’s common stock, representing a premium of 100 % above the last reported sale price of $ 86.59 per share of the Company’s common stock on May 12, 2020, and is subject to certain adjustments under the terms of the Capped Call Transactions. Conditions that cause adjustments to the initial strike price of the Capped Call Transactions mirror conditions that result in corresponding adjustments for the Notes. For accounting purposes, the Capped Call Transactions are separate transactions, and not part of the terms of the Notes, while they are integrated for federal tax purposes. As these transactions met certain criteria under the applicable accounting guidance, the Capped Call Transactions were recorded in stockholders' equity and were not accounted for as derivatives. The cost of the Capped Call Transactions was recorded as a reduction of the Company’s additional paid-in capital in the Company’s consolidated balance sheet and will not be remeasured. 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. 93 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 Less: Outstanding borrowings — Outstanding letters of credit 4.9 Total available balance $ 95.1 8. Stockholders’ Equity Shares Reserved for Future Issuance The following shares of the Company's common stock were reserved for future issuance at December 31, 2022 (in thousands): Shares reserved for issuance upon conversion of Convertible Senior Notes 2,554 Shares underlying outstanding warrants 194 Shares underlying outstanding stock options 4,442 Shares underlying unvested restricted stock units 1,834 Shares authorized for issuance pursuant to awards granted under the ESPP 953 Shares authorized for future equity award grants 119 Total 10,096 Common Stock Warrants Warrants outstanding to purchase shares of the Company's common stock as of December 31, 2022 were as follows: Issue Date Exercise Price Per Share Warrants Outstanding Expiration Date of Warrants Outstanding March 2017 $ 23.50 193,788 March 2027 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. Stock Plans The Company’s Amended and Restated 2013 Stock Incentive Plan (2013 Plan) was originally approved by the Company’s board of directors in October 2013. Under the 2013 Plan, the Company may grant stock options, stock appreciation rights, restricted stock and restricted stock units to individuals who are then employees, officers, directors or consultants of the Company. 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. 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 . 94 The following table summarizes stock option activities for the 2006 Plan and 2013 Plan: Total Options Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2019 7,174,927 $ 38.40 8.45 $ 181,408 Granted 1,130,040 $ 83.55 Exercised ( 2,339,467 ) $ 24.69 $ 161,688 Canceled/forfeited/expired ( 161,995 ) $ 27.00 $ 4,516 Outstanding at December 31, 2020 5,803,505 $ 52.08 7.90 $ 268,649 Granted 355,008 $ 86.68 Exercised ( 1,128,791 ) $ 37.05 $ 86,149 Canceled/forfeited/expired ( 214,876 ) $ 76.29 $ 6,963 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 Exercisable at December 31, 2022 3,701,918 $ 54.08 5.82 $ 30,234 Restricted Stock Units Restricted stock units (RSUs) have a grant value equal to the closing price of the Company’s common stock on the award date. RSUs granted before March 2022 generally vest over a four-year period based 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. The following table summarizes RSU activities, which includes performance-based RSUs, for the 2013 Plan: 95 Total RSUs Weighted-Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) Unvested awards outstanding at December 31, 2019 — $ — $ — Granted 134,694 $ 82.82 Vested ( 1,892 ) $ 82.34 Unvested awards outstanding at December 31, 2020 132,802 $ 82.82 $ 12,706 Granted 564,034 $ 96.37 Vested ( 53,957 ) $ 82.74 Canceled/forfeited ( 32,148 ) $ 87.21 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 In October 2013, the Company adopted the ESPP, which enables eligible employees to purchase shares of the Company’s common stock using their after-tax payroll deductions, subject to certain conditions. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Code. Eligible employees may contribute, through payroll deductions, up to 15 % of their earnings for the purchase of common stock under the ESPP. The purchase price of common stock under the ESPP is the lesser of: (a) 85 % of the fair market value of a share of the Company’s common stock on the first date of an offering or (b) 85 % of the fair market value of a share of the Company’s common stock on the date of purchase. Generally, the ESPP consists of a two-year offering period with four six-month purchase periods. During the years ended December 31, 2022 and 2021, 262,936 shares and 172,694 shares of our common stock, respectively, were purchased under the ESPP for proceeds of $ 12.7 million and $ 11.1 million, respectively. Stock-Based Compensation The following table summarizes the allocation of stock-based compensation expense included in the consolidated statements of operations for all stock-based compensation arrangements (in thousands): Year Ended December 31, 2022 2021 2020 Cost of sales $ 7,685 $ 6,434 $ 8,210 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 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. 96 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 Year Ended December 31, 2022 2021 2020 Weighted average grant date fair value (per share) $ 42.16 $ 56.89 $ 54.20 Risk-free interest rate 2.7 % 1.0 % 0.6 % 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: ESPP Year Ended December 31, 2022 2021 2020 Weighted average grant date fair value (per share) $ 21.89 $ 38.19 $ 36.83 Risk-free interest rate 3.4 % 0.2 % 0.2 % Dividend yield 0.0 % 0.0 % 0.0 % Expected volatility 56.9 % 44.2 % 60.3 % Expected term (in years) 1.3 1.3 1.3 Risk-free Interest Rate . The risk-free interest rate assumption was based on the United States Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. Expected Dividend Yield . The 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 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 . The Company utilized the simplified method for estimating the expected term of stock option grants. Under this approach, the weighted-average expected term is presumed to be the average of the vesting term and the contractual term of the option. The Company estimates the expected term of the ESPP using expected life for each tranche during the two-year offering period. The Company also estimates forfeitures at the time of grant, and revises those estimates in subsequent periods if actual forfeitures differ from its estimates. Historical data was used to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. 9. Employee Benefits Employee 401(k) Plan The Company has a defined contribution 401(k) plan for employees in the United States who are at least 18 years of age. Employees are eligible to participate in the plan beginning on the first day of the calendar month following their date of hire. Unless they affirmatively elect otherwise, employees are automatically enrolled in the plan following 30 days from date of rehire or entry date. Under the terms of the plan, employees may make voluntary contributions as a percent of compensation, and the Company may elect to match a discretionary percentage of employee contributions. The 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. 97 10. Income Taxes 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 United States $ ( 94,033 ) $ 15,211 $ ( 36,667 ) Foreign 1,181 690 385 Income (loss) before provision for income taxes $ ( 92,852 ) $ 15,901 $ ( 36,282 ) The components of income tax expense (benefit) were as follows (in thousands): Year Ended December 31, 2022 2021 2020 Current: Federal $ 216 $ — $ — State 1,228 174 75 Foreign 298 161 151 Total current tax expense 1,742 335 226 Deferred: Federal — — ( 1,760 ) State — — ( 366 ) Foreign — — — Total deferred income tax benefit — — ( 2,126 ) Income tax expense (benefit) $ 1,742 $ 335 $ ( 1,900 ) The expense (benefit) for income taxes reconciles to the amount computed by applying the federal statutory rate to loss before taxes as follows (in thousands): Year Ended December 31, 2022 2021 2020 Income tax expense (benefit) at federal statutory rate (1) $ ( 19,499 ) $ 3,339 $ ( 7,619 ) State income tax, net of federal benefit ( 926 ) ( 254 ) ( 2,792 ) Warrants revaluation ( 31 ) 356 3,588 Research and development credits ( 6,263 ) ( 5,703 ) ( 5,330 ) Section 382 limitation — ( 97 ) 1,021 Stock-based compensation 2,282 ( 7,609 ) ( 18,309 ) Officers' compensation 2,931 4,024 2,612 Acquired IPR&D expenses 6,518 — — Other 962 124 479 Change in valuation allowance 15,768 6,155 24,450 Income tax expense (benefit) $ 1,742 $ 335 $ ( 1,900 ) (1) For the years ended December 31, 2022, 2021 and 2020, the federal statutory tax rate was 21%. 98 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. A significant piece of objective negative evidence evaluated was the cumulative book loss incurred over the three-year period ended December 31, 2022. 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 $ 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. December 31, 2022 2021 Deferred tax assets: Net operating loss (NOL) carryforwards $ 54,598 $ 78,961 Research and development tax credits carryforwards 22,400 16,761 Capitalized research and development expenses 29,760 5,135 Accrued compensation 34,378 28,970 Lease liabilities 32,738 8,012 Other 20,927 20,608 Total deferred tax assets 194,801 158,447 Deferred tax liabilities: Operating lease right-of-use assets ( 26,505 ) ( 6,637 ) Fixed assets ( 4,467 ) ( 3,847 ) Other ( 1,103 ) ( 1,540 ) Total deferred tax liabilities ( 32,075 ) ( 12,024 ) Less valuation allowance ( 162,726 ) ( 146,423 ) Net deferred tax assets $ — $ — As of December 31, 2022, the Company had accumulated federal and state NOL carryforwards of approximately $ 193.1 million, and $ 255.9 million, respectively, Of the total federal net operating loss carryforwards, approximately $ 95.6 million were generated after January 1, 2018, and therefore do not expire. NOL generated after January 1, 2018, is subject to 80% limitation in accordance with the Tax Cuts and Jobs Act of 2017. The remaining federal net operating loss carryforwards of $ 97.5 million will begin to expire in 2033, and state tax loss carryforwards continue to expire in 2023, unless previously utilized. The remaining California NOL carryforwards of $ 169.5 million will begin expiring in 2031. 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. The federal research credit carryforwards will begin expiring in 2038, unless previously utilized. The California research credit will carry forward indefinitely. Utilization of the Company's net operating loss and research credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitations may result in the expiration of net operating loss carryforwards before utilization. The Company has completed analyses through December 31, 2021 to determine whether its net operating losses and credits are likely to be limited by Section 382. Based on the 2018 study completed in 2019, the Company determined that an ownership change, as defined under Section 382, occurred in 2018 and the resulting limitation significantly reduced the Company’s ability to utilize its net operating loss and credit carryovers before they expire. As a result, in 2019 the Company reduced its deferred tax assets for the net operating loss and research credit carryforwards that were projected to expire unused with a corresponding offset to the valuation allowance recorded against such assets. Additionally, future ownership changes under Section 382 may also limit the Company's ability to fully utilize any remaining tax benefits. 99 The evaluation of uncertainty in a tax position is a two-step process. The first step involves recognition. The Company determines whether it is more likely than not that a tax position will be sustained upon tax examination, including resolution of any related appeals or litigation, based on only the technical merits of the position. The technical merits of a tax position are derived from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 % likely of being realized upon ultimate resolution with a taxing authority. The following table summarizes the activity related to the Company’s gross unrecognized tax benefits at the beginning and end of the years ended December 31, 2022, 2021 and 2020 (in thousands): Year Ended December 31, 2022 2021 2020 Gross unrecognized tax benefits at the beginning of the year $ 13,589 $ 10,107 $ 6,580 Increases related to current year positions 3,403 3,482 2,234 Increases (decreases) related to prior year positions ( 6 ) — 1,293 Gross unrecognized tax benefits at the end of the year $ 16,986 $ 13,589 $ 10,107 As of December 31, 2022, the Company had $ 15.0 million of unrecognized tax benefits that, if recognized and realized would impact the effective tax rate, subject to the valuation allowance. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company had no accrual for interest and penalties on the Company’s consolidated balance sheets and has not recognized interest and penalties in the consolidated statements of operations for the years ended December 31, 2022, 2021 and 2020. The Company does not expect any significant increases or decreases, other than the potential reduction as a result of the Section 382 limitation, to its unrecognized tax benefits within the next 12 months. The Company is subject to taxation in the United States and various 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. 11. Business Segment and Geographic Information Segment Reporting Operating segments are identified as components of an enterprise about which discrete financial information is available for evaluation by the chief operating decision-maker (CODM) in making decisions regarding resource allocation and assessing performance. The Company is organized based on its current product portfolio, which consists primarily of insulin pumps, disposable insulin cartridges and infusion sets for the storage and delivery of insulin. The Company views its operations and manages its business as one segment and a single reporting unit because key operating decisions and resource allocations are made by the CODM using consolidated financial data. 100 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. 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. Revenues by Geographic Region and Customer Sales Channel During the years ended December 31, 2022, 2021 and 2020, no individual country outside the United States generated revenue that represented more than 10% of total revenue. The table below sets forth revenues for the Company’s two primary geographical markets, based on the geographic location to which its products are shipped (in thousands): Year Ended December 31, 2022 2021 2020 United States $ 588,765 $ 524,907 $ 415,680 Outside the United States 212,452 177,892 83,150 Total Sales $ 801,217 $ 702,799 $ 498,830 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. 12. Acquisitions 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. 101 13. Commitments and Contingencies Legal and Regulatory Matters 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; pre- and post-judgment interest; injunctive relief; 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. v. Tandem Diabetes Care, Inc. 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 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 The Company has agreements with suppliers and other parties to purchase inventory, other goods and services and long-lived assets. Product inventory obligations consist primarily of purchase order commitments for raw materials used in the production of insulin pumps and cartridges, and finished goods infusion sets. Cancellation of outstanding purchase orders is generally allowed under the standard terms of our purchase order agreements, but may require payment of costs incurred through the date of cancellation. At December 31, 2022, obligations under our purchase agreements totaled approximately $ 351.4 million, of which approximately $ 320.3 million is scheduled to be received and become payable within one-year. 102 14. Fourth Quarter Financial Data (Unaudited) The financial information for the three months ended December 31, 2022 and 2021 presented in the following table reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results of the interim periods (in thousands, except per share data): For the Quarter Ended December 31, 2022 December 31, 2021 Sales $ 220,502 $ 209,996 Gross profit $ 115,523 $ 113,729 Operating expenses $ 133,300 $ 100,991 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 December 31, 2022 December 31, 2021 Net income (loss) - basic $ ( 15,853 ) $ 10,808 Less: change in fair value of common stock warrants — 32 Net income (loss) - diluted $ ( 15,853 ) $ 10,840 Weighted average shares outstanding - basic 64,384 63,650 Dilutive common share equivalents: Options to purchase common stock — 1,877 Unvested restricted stock units — 227 Warrants to purchase common stock — 170 Awards to be granted under the ESPP — 3 Weighted average shares outstanding - diluted 64,384 65,927 15. 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. 103 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable.