TANDEM DIABETES CARE INC 10-Q

Item 1. Financial Statements. TANDEM DIABETES CARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value) September 30, December 31, 2023 2022 Assets (Unaudited) (Note 1) Current assets: Cash and cash equivalents $ 79,611 $ 172,517 Short-term investments 418,547 444,384 Accounts receivable, net 100,318 114,717 Inventories 143,492 111,117 Prepaid and other current assets 16,176 7,241 Total current assets 758,144 849,976 Property and equipment, net 75,760 68,552 Operating lease right-of-use assets 89,434 110,626 Other long-term assets 16,571 23,631 Total assets $ 939,909 $ 1,052,785 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 46,142 $ 55,730 Accrued expenses 14,073 9,595 Employee-related liabilities 43,735 38,682 Operating lease liabilities 17,618 13,121 Deferred revenue 31,610 18,837 Other current liabilities 33,932 29,325 Total current liabilities 187,110 165,290 Convertible senior notes, net - long-term 284,580 283,232 Operating lease liabilities - long-term 116,012 123,524 Deferred revenue - long-term 14,089 16,874 Other long-term liabilities 24,118 23,918 Total liabilities 625,909 612,838 Commitments and contingencies (Note 13) — — Stockholders’ equity: Common stock, $ 0.001 par value; 200,000 shares authorized, 65,191 and 64,513 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively. 65 65 Additional paid-in capital 1,237,939 1,170,888 Accumulated other comprehensive loss ( 2,206 ) ( 1,817 ) Accumulated deficit ( 921,798 ) ( 729,189 ) Total stockholders’ equity 314,000 439,947 Total liabilities and stockholders’ equity $ 939,909 $ 1,052,785 See accompanying notes to unaudited condensed consolidated financial statements. 1 TANDEM DIABETES CARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited) (In thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Sales $ 185,622 $ 204,547 $ 550,922 $ 580,716 Cost of sales 95,869 100,122 276,527 283,252 Gross profit 89,753 104,425 274,395 297,464 Operating expenses: Selling, general and administrative 79,328 84,104 266,752 237,989 Research and development 41,970 36,798 127,063 103,529 Acquired in-process research and development expenses — 31,016 78,750 31,016 Total operating expenses 121,298 151,918 472,565 372,534 Operating loss ( 31,545 ) ( 47,493 ) ( 198,170 ) ( 75,070 ) Other income (expense), net: Interest income and other, net 5,656 1,720 17,305 2,961 Interest expense ( 4,840 ) ( 1,576 ) ( 8,079 ) ( 4,629 ) Total other income (expense), net 816 144 9,226 ( 1,668 ) Loss before income taxes ( 30,729 ) ( 47,349 ) ( 188,944 ) ( 76,738 ) Income tax expense 2,232 1,621 3,665 2,003 Net loss $ ( 32,961 ) $ ( 48,970 ) $ ( 192,609 ) $ ( 78,741 ) Other comprehensive income (loss): Unrealized gain (loss) on short-term investments $ 349 $ ( 258 ) $ 1,800 $ ( 3,899 ) Foreign currency translation losses ( 1,362 ) ( 524 ) ( 2,189 ) ( 549 ) Comprehensive loss $ ( 33,974 ) $ ( 49,752 ) $ ( 192,998 ) $ ( 83,189 ) Net loss per share - basic $ ( 0.51 ) $ ( 0.76 ) $ ( 2.97 ) $ ( 1.23 ) Net loss per share - diluted $ ( 0.51 ) $ ( 0.76 ) $ ( 2.97 ) $ ( 1.23 ) Weighted average shares used to compute basic net loss per share 65,117 64,236 64,834 64,066 Weighted average shares used to compute diluted net loss per share 65,117 64,237 64,834 64,067 See accompanying notes to unaudited condensed consolidated financial statements. 2 TANDEM DIABETES CARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (In thousands) Three Months Ended September 30, 2023 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at June 30, 2023 65,062 $ 65 $ 1,219,199 $ ( 1,193 ) $ ( 888,837 ) $ 329,234 Exercise of stock options 8 — 106 — — 106 Vesting of restricted stock units, net of shares withheld for taxes 121 — ( 1,945 ) — — ( 1,945 ) Stock-based compensation expense — — 20,579 — — 20,579 Unrealized gain on short-term investments — — — 349 — 349 Foreign currency translation losses — — — ( 1,362 ) — ( 1,362 ) Net loss — — — — ( 32,961 ) ( 32,961 ) Balance at September 30, 2023 65,191 $ 65 $ 1,237,939 $ ( 2,206 ) $ ( 921,798 ) $ 314,000 Nine Months Ended September 30, 2023 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at December 31, 2022 64,513 $ 65 $ 1,170,888 $ ( 1,817 ) $ ( 729,189 ) $ 439,947 Exercise of stock options 71 — 1,267 — — 1,267 Vesting of restricted stock units, net of shares withheld for taxes 358 — ( 6,505 ) — — ( 6,505 ) Issuance of common stock under Employee Stock Purchase Plan 249 — 6,804 — — 6,804 Stock-based compensation expense — — 65,485 — — 65,485 Unrealized gain on short-term investments — — — 1,800 — 1,800 Foreign currency translation losses — — — ( 2,189 ) — ( 2,189 ) Net loss — — — — ( 192,609 ) ( 192,609 ) Balance at September 30, 2023 65,191 $ 65 $ 1,237,939 $ ( 2,206 ) $ ( 921,798 ) $ 314,000 See accompanying notes to unaudited condensed consolidated financial statements. 3 Three Months Ended September 30, 2022 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at June 30, 2022 64,210 $ 64 $ 1,118,168 $ ( 4,282 ) $ ( 664,366 ) $ 449,584 Exercise of stock options 26 — 583 — — 583 Vesting of restricted stock units, net of shares withheld for taxes 29 — ( 952 ) — — ( 952 ) Stock-based compensation expense — — 22,359 — — 22,359 Unrealized loss on short-term investments — — — ( 258 ) — ( 258 ) Foreign currency translation losses — — — ( 524 ) — ( 524 ) Net loss — — — — ( 48,970 ) ( 48,970 ) Balance at September 30, 2022 64,265 $ 64 $ 1,140,158 $ ( 5,064 ) $ ( 713,336 ) $ 421,822 Nine Months Ended September 30, 2022 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at December 31, 2021 63,833 $ 64 $ 1,068,259 $ ( 616 ) $ ( 634,595 ) $ 433,112 Exercise of stock options 198 — 6,981 — — 6,981 Vesting of restricted stock units, net of shares withheld for taxes 99 — ( 3,527 ) — — ( 3,527 ) Issuance of common stock under Employee Stock Purchase Plan 129 — 7,915 — — 7,915 Exercise of common stock warrants 6 — 83 — — 83 Stock-based compensation expense — — 60,447 — — 60,447 Unrealized loss on short-term investments — — — ( 3,899 ) — ( 3,899 ) Foreign currency translation losses — — — ( 549 ) — ( 549 ) Net loss — — — — ( 78,741 ) ( 78,741 ) Balance at September 30, 2022 64,265 $ 64 $ 1,140,158 $ ( 5,064 ) $ ( 713,336 ) $ 421,822 See accompanying notes to unaudited condensed consolidated financial statements. 4 TANDEM DIABETES CARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine Months Ended September 30, 2023 2022 Operating Activities Net loss $ ( 192,609 ) $ ( 78,741 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization expense 11,684 10,689 Amortization of debt issuance costs 1,711 1,395 Provision for expected credit losses 4,066 2,955 Provision for inventory obsolescence 332 775 Operating lease impairment charge 14,099 — Amortization of premium on short-term investments 3,177 3,381 Stock-based compensation expense 65,335 60,477 Acquired in-process research and development expenses 78,750 31,016 Other ( 1,769 ) ( 647 ) Changes in operating assets and liabilities: Accounts receivable, net 9,872 ( 4,796 ) Inventories ( 32,714 ) ( 37,062 ) Prepaid and other current assets ( 7,296 ) 1,364 Other long-term assets ( 1,216 ) ( 960 ) Accounts payable and accrued expenses ( 4,574 ) 28,038 Employee-related liabilities 5,571 ( 3,585 ) Deferred revenue 10,042 4,998 Operating leases and other current liabilities 10,745 24,305 Other long-term liabilities 200 1,042 Net cash provided by (used in) operating activities ( 24,594 ) 44,644 Investing Activities Purchases of short-term investments ( 391,025 ) ( 362,494 ) Proceeds from maturities and redemptions of short-term investments 415,485 422,907 Purchases of property and equipment ( 21,605 ) ( 28,470 ) Acquisitions, including in-process research and development, net of cash acquired ( 69,496 ) ( 25,697 ) Purchases of intangible assets and strategic investments ( 2,515 ) ( 8,855 ) Net cash used in investing activities ( 69,156 ) ( 2,609 ) Financing Activities Proceeds from issuance of common stock under Company stock plans, net 1,567 11,369 Proceeds from exercise of common stock warrants — 83 Other financing activities ( 71 ) ( 675 ) Net cash provided by financing activities 1,496 10,777 Effect of foreign exchange rate changes on cash ( 652 ) ( 207 ) Net increase (decrease) in cash and cash equivalents ( 92,906 ) 52,605 Cash and cash equivalents at beginning of period 172,517 71,181 Cash and cash equivalents at end of period $ 79,611 $ 123,786 Supplemental disclosures of cash flow information Income taxes paid $ 1,771 $ 162 Supplemental schedule of non-cash investing and financing activities Operating lease right-of-use assets obtained in exchange for operating lease obligations $ — $ 110,980 Purchases of property and equipment included in accounts payable $ 3,224 $ 4,319 Intangible costs in accounts payable $ — $ 515 See accompanying notes to unaudited condensed consolidated financial statements. 5 TANDEM DIABETES CARE, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Basis of Presentation The Company Tandem Diabetes Care, Inc. is a medical device company focused on the design, development and commercialization of technology solutions for people living with diabetes. Tandem Diabetes Care, Inc. is incorporated in the state of Delaware. Unless the context requires otherwise, the terms the “Company” or “Tandem” refer to Tandem Diabetes Care, Inc., together with its wholly-owned subsidiaries. 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 mobile application, cloud-based diabetes management applications and the Tandem Device Updater, a Mac- and PC-compatible tool that 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 unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments which are of a normal and recurring nature and considered necessary for a fair presentation of the financial information contained herein, have been included. Interim financial results are not necessarily indicative of results anticipated for the full year or any other period(s). These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (Annual Report), from which the balance sheet information herein was derived. The condensed consolidated financial statements include the accounts of Tandem Diabetes Care, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The functional currency of the Company’s foreign subsidiaries is their respective local currency. The Company translates the financial statements of its foreign subsidiaries into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates for each period for revenue, costs and expenses. Translation related adjustments are included in other comprehensive income (loss) in the condensed consolidated statements of operations, and in accumulated other comprehensive income (loss) in the stockholders’ equity section of the Company’s condensed consolidated balance sheets. Foreign exchange gains or losses resulting from balances denominated in a currency other than the functional currency are recognized in interest income and other, net in the Company’s condensed consolidated statements of operations. Reclassifications The change in fair value of common stock warrants for the three and nine months ended September 30, 2022, which was previously reported separately, is now reported as a component of interest income and other, net on the condensed consolidated statements of operations. In addition, certain prior year balances on the condensed consolidated statement of cash flows have been reclassified to conform to the current year presentation. 6 2. Summary of Significant Accounting Policies There have been no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2023, as compared to those disclosed in the Company’s 2022 Annual Report. Use of Estimates The preparation of the condensed 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 condensed consolidated financial statements and accompanying notes as of the date of the condensed consolidated financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. Accounts Receivable The Company grants credit to various customers in the ordinary course of business and is paid directly by customers who use its products, distributors and third-party insurance payors. The Company maintains an allowance for its current estimate of expected credit losses. Provisions for expected credit losses are estimated based on historical experience, assessment of specific customer-related risks, review of outstanding invoices, forecasts about the future, and various other assumptions and estimates that are believed to be reasonable under the circumstances, including changes to credit risks as a result of recessionary concerns, changes in discretionary spending, increased interest rates, and other macroeconomic factors. Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a balance is uncollectible. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and employee-related liabilities are reasonable estimates of their fair values because of the short-term nature of these assets and liabilities. Short-term investments are carried at fair value. The Company’s convertible senior notes are carried at amortized cost on the condensed consolidated balance sheets (see Note 7, “Debt”). The Company measures the fair value of its convertible senior notes for disclosure purposes. The Company estimated the fair value of its convertible senior notes to be $ 273.9 million and $ 260.5 million at September 30, 2023 and December 31, 2022, respectively, based on Level 2 quoted market prices as of those dates. Operating Lease Right-of-Use Assets and Liabilities Operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized when the Company takes possession of the leased property (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 condensed 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. Intangible Assets Subject to Amortizatio n Finite-lived intangible assets are recorded at cost, net of accumulated amortization and, if applicable, impairment charges. Amortization of finite-lived intangible assets is recognized over their estimated useful lives on a straight-line basis. The Company did not recognize any intangible asset impairment losses during the nine months ended September 30, 2023 and 2022. 7 Strategic Investments The Company holds equity investments totaling $ 10.1 million in two separate private companies, each of which represented less than 5 % of the outstanding equity of the respective company as of the date of investment. The investments are carried at cost minus impairment, if any, adjusted for changes in observable prices. The investments were included as a component of other long-term assets on the condensed consolidated balance sheets at September 30, 2023. The Company monitors these investments to evaluate whether a decline in 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. Revenue Recognition for Arrangements with Multiple Performance Obligations The Company considers the individual deliverables in its product offering to be 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, Tandem Source 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. Revenue Recognition for Tandem Choice Program In September 2022, the Company launched a new technology access program referred to as Tandem Choice, that provides eligible, in-warranty t:slim X2 customers in the United States with the flexibility to obtain the newest hardware platform, Tandem Mobi, when it becomes commercially available. Participating customers have the right to purchase the alternative Tandem pump for a fee, referred to as Choice Right. Tandem Choice expires on December 31, 2024. The program was determined to create a material right for which a portion of each t:slim X2 pump transaction price was allocated and deferred. In the third quarter of 2023, the Company announced a reduction in the price of the Tandem Choice program whereby purchasers of the X2 pump can obtain the Tandem Mobi. The change in the program resulted in an increase to the amount of the transaction price allocated to the material right as the Company expects more customers to exercise the right as compared to the prior existing program price. The amount of revenue deferred in the third quarter of 2023 related to the Choice program was $ 8.2 million. For purposes of evaluating 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 contemplated the likelihood that the respective option will be exercised. At September 30, 2023 and December 31, 2022, $ 18.4 million and $ 6.8 million, respectively, were allocated to the material right provided to customers and recorded in current deferred revenue on the condensed consolidated balance sheets. 8 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 using 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 condensed consolidated statements of operations. The following table provides a reconciliation of the changes in product warranty liabilities for the three and nine months ended September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Balance at beginning of the period $ 38,917 $ 31,904 $ 36,537 $ 30,401 Provision for warranties issued during the period 9,601 8,744 26,889 23,224 Settlements made during the period ( 8,986 ) ( 6,148 ) ( 24,054 ) ( 17,856 ) Increases (decreases) in warranty estimates ( 1,775 ) 110 ( 1,615 ) ( 1,159 ) Balance at end of the period $ 37,757 $ 34,610 $ 37,757 $ 34,610 As of September 30, 2023 and December 31, 2022, total product warranty reserves were included in the following condensed consolidated balance sheet accounts (in thousands): September 30, 2023 December 31, 2022 Other current liabilities $ 18,370 $ 17,280 Other long-term liabilities 19,387 19,257 Total warranty reserve $ 37,757 $ 36,537 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 stock incentive plans, and the fair value of the employees’ purchase rights under the Company’s Employee Stock Purchase Plan (ESPP), using the Black-Scholes option pricing model on the date of grant. The Black-Scholes option pricing model requires the use of assumptions about a number of variables, including stock price volatility, expected term, dividend yield and risk-free interest rate (see Note 8, “Stockholders’ Equity”). The fair value of restricted stock unit (RSU) awards issued under the Company’s stock incentive plans 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 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. 9 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 three and nine months ended September 30, 2023, there was no difference in the weighted average number of shares used to calculate basic and diluted net loss per share due to the Company’s net loss position for each of the periods presented. For the three and nine months ended September 30, 2022, the net loss used in the calculation of diluted net loss per share was increased by $ 12,000 and $ 103,000 , respectively, to remove the gain recognized from the change in fair value of certain common stock warrants based on the dilutive effect of assumed exercise, and the denominator was increased by 937 shares and 959 shares, respectively, calculated under the treasury stock method. Potentially dilutive securities outstanding and not included in the calculation of diluted net loss per share (because inclusion would be anti-dilutive) are as follows (in thousands, in common stock equivalent shares): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Options to purchase common stock 135 1,080 135 1,250 Unvested restricted stock units 2,930 1,526 2,011 977 Warrants to purchase common stock 194 195 194 195 Awards granted under the ESPP 173 99 80 73 Convertible senior notes (if-converted) 2,554 2,554 2,554 2,554 5,986 5,454 4,974 5,049 3. Short-Term Investments The Company invests in marketable securities primarily consisting of debt instruments of the U.S. Government, U.S. Government-sponsored enterprises, and financial institutions and corporations with strong credit ratings. The following represents a summary of the estimated fair value of short-term investments at September 30, 2023 and December 31, 2022 (in thousands): At September 30, 2023 Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value Available-for-sale securities: U.S. Government-sponsored enterprises $ 163,806 $ 2 $ ( 751 ) $ 163,057 U.S. Treasury securities 131,939 2 ( 196 ) 131,745 Commercial paper 109,853 — ( 102 ) 109,751 Corporate debt securities 14,006 3 ( 15 ) 13,994 Total $ 419,604 $ 7 $ ( 1,064 ) $ 418,547 10 At December 31, 2022 Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value Available-for-sale securities: U.S. Government-sponsored enterprises $ 100,602 $ 21 $ ( 615 ) $ 100,008 U.S. Treasury securities 213,105 3 ( 1,947 ) 211,161 Commercial paper 112,812 6 ( 208 ) 112,610 Corporate debt securities 18,218 — ( 104 ) 18,114 Supranational bonds 2,504 — ( 13 ) 2,491 Total $ 447,241 $ 30 $ ( 2,887 ) $ 444,384 The contractual maturities of available-for-sale debt securities as of September 30, 2023, were as follows (in thousands): Years to Maturity At September 30, 2023 Within One Year One to Two Years Estimated Fair Value U.S. Government-sponsored enterprises $ 110,863 $ 52,194 $ 163,057 U.S. Treasury securities 98,898 32,847 131,745 Commercial paper 109,751 — 109,751 Corporate debt securities 7,074 6,920 13,994 Total $ 326,586 $ 91,961 $ 418,547 The Company has classified all marketable securities, regardless of maturity, as short-term investments based upon the Company’s ability and intent to use any of those marketable securities to satisfy the Company’s liquidity requirements. The Company reviews the portfolio of available-for-sale debt securities quarterly to determine if any investment is impaired due to changes in credit risk or other potential valuation concerns. Unrealized losses on available-for-sale debt securities at September 30, 2023 were primarily due to an increase in market interest rates after certain debt securities were purchased. The Company does not intend to sell the available-for-sale debt securities that are in an unrealized loss position, and it is not more likely than not that the Company will be required to sell these debt securities before recovery of their amortized cost bases, which may be at maturity. Based on the credit quality of the available-for-sale debt securities in an unrealized loss position, and the Company’s estimates of future cash flows to be collected from those securities, the Company believes the unrealized losses are not credit losses. Accordingly, the Company did not record an allowance for credit losses related to its available-for-sale debt securities at September 30, 2023. 11 4. Composition of Certain Financial Statement Items Accounts Receivable Accounts receivable, net consisted of the following at September 30, 2023 and December 31, 2022 (in thousands): September 30, December 31, 2023 2022 Accounts receivable $ 105,673 $ 119,044 Less: allowance for credit losses ( 5,355 ) ( 4,327 ) Accounts receivable, net $ 100,318 $ 114,717 Allowance for Credit Losses The following table provides a reconciliation of the changes in the allowance for estimated accounts receivable credit losses for the three and nine months ended September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Balance at beginning of the period $ 4,842 $ 4,600 $ 4,327 $ 4,249 Provision for expected credit losses 1,308 965 4,066 2,955 Write-offs and adjustments, net of recoveries ( 795 ) ( 1,292 ) ( 3,038 ) ( 2,931 ) Balance at end of the period $ 5,355 $ 4,273 $ 5,355 $ 4,273 Inventories Inventories consisted of the following at September 30, 2023 and December 31, 2022 (in thousands): September 30, December 31, 2023 2022 Raw materials $ 40,232 $ 39,207 Work-in-process 41,622 18,571 Finished goods 61,638 53,339 Total inventories $ 143,492 $ 111,117 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: 12 Level 1: Observable inputs such as unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3: Unobservable inputs in which there is little or no market data and that are significant to the fair value of the assets or liabilities, which require the reporting entity to develop its own valuation techniques that require input assumptions. The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022, 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 September 30, 2023 Total Level 1 Level 2 Level 3 Assets Cash equivalents (1) $ 63,810 $ 63,810 $ — $ — U.S. Government-sponsored enterprises 163,057 — 163,057 — U.S. Treasury securities 131,745 131,745 — — Commercial paper 109,751 — 109,751 — Corporate debt securities 13,994 — 13,994 — Total assets $ 482,357 $ 195,555 $ 286,802 $ — Fair Value Measurements at December 31, 2022 Total Level 1 Level 2 Level 3 Assets Cash equivalents (1) $ 150,742 $ 150,742 $ — $ — U.S. Government-sponsored enterprises 100,008 — 100,008 — U.S. Treasury securities 211,161 211,161 — — Commercial paper 112,610 — 112,610 — Corporate debt securities 18,114 — 18,114 — Supranational bonds 2,491 — 2,491 — Total assets $ 595,126 $ 361,903 $ 233,223 $ — (1) Generally, cash equivalents include money market funds and investments with a maturity of three months or less from the date of purchase. The Company’s Level 2 financial instruments are valued using market prices on less active markets with observable valuation inputs such as interest rates and yield curves. The Company obtains the fair value of Level 2 financial instruments from quoted market prices, calculated prices or quotes from third-party pricing services. The Company validates these prices through independent valuation testing and review of portfolio valuations provided by the Company’s investment managers. 13 6. Leases The Company's leases consist of operating leases for general office space, research and development, manufacturing and warehouse facilities, and equipment. These noncancellable operating leases have initial lease terms from two years to thirteen years . Leases with an initial term of 12 months or less (Short-term Lease) are expensed as incurred and are not recorded as right-of-use leased assets on the Company’s condensed consolidated balance sheets. The Company is required to recognize operating lease right-of-use assets and liabilities, and begin recording lease expense when the Company takes possession of the leased property (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. 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. Headquarters Lease In September 2021, the Company entered into a lease agreement for 181,949 square feet of general administrative, laboratory, and research and development office space (the Premises) located on High Bluff Drive in San Diego, California (Headquarters Lease), formerly referred to as the Tech Center Lease. Possession of the Premises will 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 Headquarters 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 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 (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 (Phase II Rent Commencement Date). The Headquarters 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 Headquarters Lease term was determined assuming the renewal options would not be exercised. The initial base rent for the Headquarters Lease is approximately $ 906,000 per month beginning on the Phase I Rent Commencement Date, and the base rent increases by approximately $ 255,000 per month on the Phase II Rent Commencement Date. The monthly base rent will increase by 3.0 % on each annual anniversary of the respective Rent Commencement Date. In addition to the monthly base rent, the Company is required to pay its proportionate share of certain ongoing operating expenses throughout the duration of the lease. No base rent, other than the proportionate share of operating expenses, will be due for the Phase I portion of the Premises for months two through nine following the Phase I Rent Commencement Date, and for the Phase II portion of the Premises for months two through five following the Phase II Rent Commencement Date. The Company recognized operating lease right-of-use assets and corresponding operating lease liabilities of $ 107.5 million on the condensed consolidated balance sheet on the Phase I Commencement Date in the first quarter of 2022. In the second quarter of 2023, the Company began using Phase I of the Headquarters Lease for operations that previously occupied 77,458 square feet of leased space located on Roselle Street (Roselle leases) in San Diego, California. The Roselle leases expired in May 2023. Also in the second quarter of 2023, the Company relocated operations that occupied 73,929 square feet of leased space on Vista Sorrento Parkway in San Diego, California (Vista Sorrento Lease) to the new Headquarters Lease location. Operating Lease Impairment Charge During the second quarter of 2023, the Company consolidated facilities by moving the administrative functions and other operations from the Vista Sorrento Lease facility to the new Headquarters Lease location. In connection with permanently ceasing use of the Vista Sorrento facility, the Company recorded a $ 14.1 million impairment charge as the carrying amount of the assets related to the Vista Sorrento Lease exceeded its fair value based on the Company’s estimate of future discounted cash flows related to the leased facility. Estimates used to determine the present value of future cash flows over the remaining lease term included projected sublease income and a discount rate. The $ 14.1 million charge was comprised of an $ 11.2 million impairment of operating lease right-of-use assets and a $ 2.9 million write-off of fixed assets consisting primarily of leasehold improvements, and was recorded as a component of selling, general and administrative expenses in the condensed consolidated statements of operations. 14 Supplemental Lease Disclosure Information The Company’s lease costs recorded in the condensed consolidated statements of operations were as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Operating lease cost $ 3,528 $ 5,097 $ 12,457 $ 13,286 Short-term lease cost 22 36 87 107 Right-of-use asset impairment charge — — 11,224 — Total lease cost $ 3,550 $ 5,133 $ 23,768 $ 13,393 Maturities of operating lease liabilities at September 30, 2023 were as follows (in thousands): Years Ending December 31, 2023 (remaining) $ 4,641 2024 17,198 2025 17,023 2026 17,068 2027 17,333 Thereafter 103,844 Total undiscounted lease payments 177,107 Less: amount representing interest ( 43,477 ) Present value of operating lease liabilities 133,630 Less: current portion of operating lease liabilities ( 17,618 ) Operating lease liabilities - long-term $ 116,012 The weighted-average remaining lease term and weighted-average discount rate for operating leases were as follows: September 30, 2023 December 31, 2022 Weighted-average remaining lease term (in years) 10.4 10.8 Weighted-average discount rate used to determine operating lease liabilities 5.4 % 5.3 % Cash paid for amounts included in the measurement of lease liabilities, representing operating cash flows from operating leases, was $ 9.2 million and $ 9.4 million for the nine months ended September 30, 2023 and 2022, respectively. 15 Lease For Which Accounting Has Not Yet Commenced As of September 30, 2023, the Phase II Commencement Date for the Headquarters Lease had not yet occurred. Accordingly, the condensed consolidated balance sheet at September 30, 2023 does not include operating lease right-of-use assets and operating lease liabilities, and the condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022 do not include any lease costs, related to Phase II of the Headquarters Lease. In addition, the above disclosures of the Company’s lease costs, maturities of operating lease liabilities, weighted-average remaining lease term, and weighted-average discount rate do not include any amounts related to Phase II of the Headquarters 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 Headquarters Lease, are currently estimated to be $ 34.7 million in total from 2025 through 2035, subject to the actual Phase II Commencement Date. 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 before 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 has the option to redeem for cash all or any portion of the Notes on or after May 6, 2023 if the last reported sale price of the Company’s common stock has been at least 130 % of the Conversion Price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period, at a redemption price equal to 100 % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest. No sinking fund is provided for the Notes. Holders of the Notes may convert all or a portion of their Notes at their option before November 1, 2024, in multiples of $1,000 principal amounts, only under the following circumstances: • if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the applicable conversion price of the Notes on each such trading day; • during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each day of that five consecutive trading day period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate of the Notes on such trading day; • if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or • on the occurrence of specified corporate events. 16 On or after November 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Holders of the Notes who convert in connection with a make-whole fundamental change or in connection with a redemption are entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change, holders of the Notes may require us to repurchase all or a portion of the Notes at a price equal to 100 % of the principal amount of the Notes, plus any accrued and unpaid interest. The net carrying amount of the Notes on the condensed consolidated balance sheets consisted of the following (in thousands): September 30, 2023 December 31, 2022 Principal amount $ 287,500 $ 287,500 Unamortized debt issuance costs ( 2,920 ) ( 4,268 ) Net carrying amount $ 284,580 $ 283,232 The Notes will have a dilutive effect to the extent the average market price per share of common stock for a given reporting period exceeds the conversion price of $ 112.57 . As of September 30, 2023 and December 31, 2022, the if-converted value of the Notes did not exceed the principal amount. As of September 30, 2023, the unamortized debt issuance costs of $ 2.9 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 1.6 years. In October 2023, the Company was notified that additional interest beyond the 1.50 % per annum has been accruing on the Notes since May 2021, pursuant to the terms of the indenture. This additional interest continues to accrue at a rate of 0.50 % per annum on the outstanding principal amount of the Notes, and as of September 30, 2023 amounts to approximately $ 3.1 million in the aggregate. The overdue unpaid interest itself accrues interest at a rate of 2.50 % per annum. The Company has deposited the full amount for these payments with the trustee for the Notes and are coordinating with the trustee for the payments to be completed as soon as reasonably practicable in the fourth quarter of 2023. The following table details interest expense related to the Notes recognized for the three and nine months ended September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Contractual interest expense (1) $ 4,138 $ 1,078 $ 6,368 $ 3,234 Amortization of debt issuance costs 702 498 1,711 1,395 Total interest expense $ 4,840 $ 1,576 $ 8,079 $ 4,629 (1) Contractual interest expense for the three and nine months ended September 30, 2023 includes $ 3.1 million of additional interest as discussed above. 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. 17 For accounting purposes, the Capped Call Transactions are separate transactions, and not part of the terms of the Notes, while they are integrated for federal tax purposes. As these transactions met certain criteria under the applicable accounting guidance, the Capped Call Transactions were recorded in stockholders' equity and were not accounted for as derivatives. The cost of the Capped Call Transactions was recorded as a reduction of the Company’s additional paid-in capital in the Company’s condensed consolidated balance sheet and will not be remeasured. Line of Credit On May 18, 2022, the Company entered into a three-year Revolving Line of Credit Agreement that provided the Company with a maximum principal borrowing amount of $ 100.0 million (Line of Credit), reduced by any letters of credit issued and outstanding under a $ 15.0 million letter of credit sub-limit. On August 2, 2023, the Revolving Line of Credit Agreement was amended to reduce the maximum principal borrowing amount to $ 50.0 million for the remainder of the term, limited to a percentage of eligible accounts receivable during the third quarter of 2023. 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 before the May 1, 2025 maturity date of the Company’s Convertible Senior Notes, that the Company does not satisfy a predefined liquidity threshold. The Line of Credit is secured by a first priority security interest in substantially all of the assets of the Company and its subsidiaries. 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 the minimum consolidated interest coverage ratio covenant as of September 30, 2023. The maximum consolidated net leverage ratio will not be tested as of September 30, 2023, in accordance with the August 2, 2023 amendment to the Revolving Line of Credit Agreement. Without the amendment, the Company would have been non-compliant with the maximum consolidated net leverage ratio covenant for the trailing twelve month measurement period ended September 30, 2023. The Company is currently not entitled to borrow any amounts under the Line of Credit as a result of its inadvertent failure to timely pay additional interest under the Notes. Advances drawn under the Line of Credit bear interest at an annual rate of (1) the SOFR Rate (as defined in the Line of Credit); plus (2) an applicable credit spread adjustment ranging from 0.10 % to 0.25 %; plus (3) an applicable margin ranging from 1.25 % to 2.00 %, and each advance will be payable on the Maturity Date with the interest on outstanding advances payable quarterly. The Credit Agreement also includes a commitment fee ranging from 0.20 % to 0.35 % per annum on the average daily unused amount of the Line of Credit, payable quarterly. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time before the maturity date, without premium or penalty. As of September 30, 2023, the Company had no outstanding borrowings under the Line of Credit, and a $ 4.9 million outstanding standby letter of credit. 8. Stockholders’ Equity Shares Reserved for Future Issuance The following shares of the Company's common stock were reserved for future issuance at September 30, 2023 (in thousands): Shares reserved for issuance upon conversion of Convertible Senior Notes 2,554 Shares underlying outstanding warrants 194 Shares underlying outstanding stock options 4,085 Shares underlying unvested restricted stock units 3,049 Shares authorized for issuance pursuant to awards granted under the ESPP 704 Shares authorized for future equity award grants 1,031 Total 11,617 18 Common Stock Warrants Warrants outstanding to purchase shares of the Company's common stock as of September 30, 2023 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 common stock at the per share exercise price of the warrant. Stock Plans In May 2023, the Company’s stockholders approved the 2023 Long-Term Incentive Plan (2023 Plan), under which 2,602,184 shares of common stock were initially reserved for issuance. Under the 2023 Plan, the Company may grant stock options, stock appreciation rights, restricted stock and restricted stock units to individuals who are then employees, officers, directors or consultants of the Company. The 2023 Plan replaced the Company’s Amended and Restated 2013 Stock Incentive Plan (2013 Plan), and no further equity awards will be granted under the 2013 Plan. The Company’s Employee Stock Purchase Plan (ESPP) was approved by the Board in October 2013. The ESPP enables eligible employees to purchase shares of the Company’s common stock using their after-tax payroll deductions, subject to certain conditions. 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, offerings under the ESPP consist of a two-year offering period with four six-month purchase periods which begin in May and November of each year. Stock-Based Compensation Restricted Stock Units Restricted stock units (RSUs) have a grant value equal to the closing price of the Company’s common stock on the award date. RSUs granted before March 2022 generally vest over a four-year period based on continued service to the Company as to 25 % of the underlying shares on the first anniversary of the award, with the balance of the RSUs vesting quarterly over the following three years . RSUs granted in March 2022 and thereafter vest over a three-year period based on continued service to the Company as to 33 % of the underlying shares on the first anniversary of the award, with the balance of the RSUs vesting quarterly over the following two years . In addition, the Company granted 110,074 performance-based RSUs during the nine months ended September 30, 2023, and 53,662 performance-based RSUs during the nine months ended September 30, 2022. 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 respective December 31, 2024 and 2025 measurement dates. The total number of RSUs granted, which includes performance-based RSUs, and the respective weighted average grant date fair value were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 RSUs granted 208,082 330,807 1,997,907 1,338,056 Weighted average grant date fair value (per share) $ 29.19 $ 56.49 $ 28.94 $ 70.33 19 Stock Options Stock options have an exercise price equal to the closing price of the Company's common stock on the applicable grant date, and have a maximum term of ten years . Stock options granted before the second quarter of 2022 generally vest over a four-year period as to 25 % of the underlying shares on the first anniversary of the grant date, with the balance of the options vesting monthly over the following three years . Stock options granted during the second quarter of 2022 and thereafter vest over a three-year period as to 33 % of the underlying shares on the first anniversary of the grant date, with the balance of the options vesting monthly over the following two years . There have been no common stock options granted since the second quarter of 2022. Common stock options granted during the nine months ended September 30, 2022, along with the assumptions used in the Black-Scholes option pricing model were as follows: Nine Months Ended September 30, 2022 Stock options granted 83,008 Weighted average grant date fair value (per share) $ 42.16 Risk-free interest rate 2.7 % Dividend yield 0.00 % Expected volatility 72.0 % Expected term (in years) 5.8 Employee Stock Purchase Plan The Company records stock-based compensation expense associated with the ESPP using the Black-Scholes option pricing model. Valuations are performed on the grant date at the beginning of the purchase period, which generally occurs in May and November of each year. The assumptions used in the Black-Scholes option pricing model for the ESPP were as follows: Nine Months Ended September 30, 2023 2022 Weighted average grant date fair value (per share) $ 12.52 $ 26.57 Risk-free interest rate 4.7 % 2.2 % Dividend yield 0.0 % 0.0 % Expected volatility 60.9 % 47.1 % Expected term (in years) 1.3 1.3 The following table summarizes the allocation of stock-based compensation expense included in the condensed consolidated statements of operations for all stock-based compensation arrangements (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Cost of sales $ 1,812 $ 1,920 $ 5,154 $ 5,666 Selling, general and administrative 12,466 15,125 41,448 40,711 Research and development 6,463 5,191 18,732 14,100 Total stock-based compensation expense $ 20,741 $ 22,236 $ 65,334 $ 60,477 The total stock-based compensation expense capitalized as part of the cost of the Company’s inventories was $ 1.3 million at September 30, 2023, and $ 1.1 million at December 31, 2022. 20 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, starting in 2022, the Company matches a discretionary percentage of employee contributions. 10. Income Taxes For the three and nine months ended September 30, 2023, the Company recognized income tax expense of $ 2.2 million and $ 3.7 million, respectively, on a pre-tax loss of $ 30.7 million and $ 188.9 million, respectively. For the three and nine months ended September 30, 2022, the Company recognized income tax expense of $ 1.6 million and $ 2.0 million, respectively, on a pre-tax loss of $ 47.3 million and $ 76.7 million, respectively. Income tax expense for the three and nine months ended September 30, 2023 and 2022, was primarily attributable to federal, state and foreign income tax expense as a result of current taxable income in certain jurisdictions. For the three and nine months ended September 30, 2023, the Company calculated the provision for income taxes by applying an estimate of the annual effective tax rate for the full year to ordinary income (loss) adjusted by the tax impact of discrete items. For the three and nine months ended September 30, 2022, the Company calculated the provision for income taxes using a discrete effective tax rate method as the annual effective tax rate method would not provide a reliable estimate. The Company continues to maintain a full valuation allowance against its net deferred tax assets as of September 30, 2023, based on the current assessment that it is not more likely than not these future benefits will be realized before expiration. 11. Business Segment and Geographic Information Segment Reporting Operating segments are identified as components of an enterprise about which discrete financial information is available for evaluation by the chief operating decision-maker (CODM) in making decisions regarding resource allocation and assessing performance. The Company is organized based on its current product portfolio, which consists primarily of insulin pumps, disposable insulin cartridges and infusion sets for the storage and delivery of insulin. The Company views its operations and manages its business as one segment and a single reporting unit because key operating decisions and resource allocations are made by the CODM using consolidated financial data. 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 three and nine months ended September 30, 2023 and 2022, no individual country outside the United States generated revenue that represented more than 10% of total revenue. The table below sets forth revenues for the Company’s two primary geographical markets, based on the geographic location to which its products are shipped (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 United States $ 130,222 $ 146,035 $ 403,964 $ 422,985 Outside the United States 55,400 58,512 146,958 157,731 Total Sales $ 185,622 $ 204,547 $ 550,922 $ 580,716 21 Sales to distributors accounted for 64 % and 66 % of the Company’s United States sales for the three months ended September 30, 2023 and 2022, respectively, and 64 % and 65 % of the Company’s United States sales for the nine-month periods ended September 30, 2023 and 2022, respectively. Sales to distributors accounted for 95 % and 96 % of the Company’s sales outside the United States for the three and nine-month periods ended September 30, 2023 and 2022, respectively. 12. Acquisitions AMF Medical Acquisition On December 10, 2022, the Company entered into a Share Purchase Agreement (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 (Transaction). AMF Medical is the developer of the Sigi Patch Pump, which is designed to be an ergonomic, rechargeable patch pump that reduces the burden of managing diabetes through its use of pre-filled insulin cartridges. The Sigi Patch Pump is under development and not commercially available. On January 19, 2023, the Company completed the acquisition of AMF Medical under 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 made in the third quarter of 2022, a cash payment of CHF 62.4 million paid at the closing of the Transaction, and additional contingent earnout payments of up to CHF 129.6 million. The contingent earnout payments 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 from the United States Food and Drug Administration of an automated controller enabled (ACE) pump. The contingent consideration will be recognized as each contingency is resolved and the respective consideration is paid or becomes payable. As of September 30, 2023, the contingencies related to the earnout milestones were not yet resolved and, therefore, the related amounts were not included in the fair value of the asset acquired and were not recognized as a liability on the condensed consolidated balance sheet at September 30, 2023. The Company funded the initial closing payment using existing cash balances. As of December 31, 2022, the previous strategic investment was included as a component of other long-term assets on the condensed consolidated balance sheet. The transaction was accounted for as an asset acquisition as substantially all the value of the gross assets was concentrated in a single asset. The Company recorded a $ 78.8 million charge representing the value of acquired in-process research and development assets with no alternative future use, and acquisition related expenses, on its condensed consolidated statements of operations in acquired in-process research and development expenses. The Company’s results of operations for the three and nine months ended September 30, 2023 included the operating results of AMF Medical since the date of acquisition. Capillary Biomedical Acquisition On July 21, 2022, the Company acquired Capillary Biomedical, Inc. (Capillary Biomedical), an infusion set developer, for total cash consideration of $ 24.7 million, and the assumption of $ 4.7 million of long-term debt. The debt becomes due and payable upon the first sale or license of the commercialized product, and is included as a component of other long-term liabilities on the condensed consolidated balance sheets at September 30, 2023 and 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 was 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 condensed consolidated statements of operations in acquired in-process research and development expenses. The Company’s results of operations for the three and nine months ended September 30, 2023 included the operating results of Capillary Biomedical. 22 13. Commitments and Contingencies Legal and Regulatory Matters In May 2020, the Company was named as a defendant in three California state court class action lawsuits arising from a phishing incident that occurred in January 2020. Collectively, these lawsuits 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. The Company filed a demurrer on all claims, which was heard by the Court on October 20, 2020, and the 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, thereby terminating the case in the Superior Court. On March 7, 2023, the plaintiffs filed a notice of appeal of the Court’s order granting the Company’s motion for summary adjudication. On August 15, 2023, the parties reached a settlement and on August 21, 2023, the Court issued an order dismissing the appeal. On September 8, 2023, a purported stockholder of the Company filed a putative securities class action complaint (captioned Lowe v. Tandem Diabetes Care, Inc., et al, Case No. 23-cv-1657) in the United States District Court for the Southern District of California against the Company and certain of the Company’s current executive officers. The complaint generally alleges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, by failing to properly account for and disclose the full impact that COVID-19, inflation, and the sales of competitors’ products were having on the Company’s sales and revenue. The complaint seeks unspecified monetary damages and other relief. Although the Company intends to vigorously defend against this claim, there is no guarantee that the Company will prevail. Accordingly, the Company is unable to determine the ultimate outcome of this lawsuit or determine the amount or range of potential losses associated with the lawsuit. From time to time, the Company is involved in various other legal proceedings, regulatory matters, and other disputes or claims arising from or related to claims incident to the normal course of the Company’s 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, as of September 30, 2023 the Company believes it is not currently a party to any legal proceedings, regulatory matters, or other disputes or claims for which a material loss was considered probable or for which the amount (or range) of loss was reasonably estimable. However, regardless of the merit of the claims raised or the outcome, legal proceedings may have an adverse impact on the Company as a result of defense and settlement costs, diversion of management time and resources, and other factors. 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. 23