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 investment portfolio. We review our 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, 2023 were primarily due to an increase in market interest rates after certain debt securities were purchased. Based on the credit quality of the available-for-sale debt securities 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 a significant impact on the realized value of our investment portfolio. A hypothetical 100 basis-point (one percentage point) increase or decrease in interest rates compared to actual rates at December 31, 2023, would have affected the estimated fair value of our investments portfolio by approximately $3.6 million. 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 related to 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, a distribution center in the Netherlands and, beginning in 2023, a research and development facility in Switzerland associated with the acquisition of AMF Medical. Our sales to customers in the United States are made in U.S. dollars. Sales from our distribution center in the Netherlands are made to independent distributors under agreements denominated in Euros, and our sales in Canada are denominated in Canadian dollars. Approximately 20% of our revenue was denominated in foreign currencies for the year ended December 31, 2023. In addition, we purchase certain inventory from a third-party contract manufacturer located in Mexico. We believe our exposure to foreign currency rate fluctuations is primarily related to our operations in Europe and Canada, and acquisition related contingent earnout payments (see Note 12, “Acquisitions”), where fluctuations in the rate of exchange between the U.S. dollar and the local currency could adversely affect our financial results, including income and losses as well as assets and liabilities. 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 have foreign currency exchange risk related to existing assets and liabilities, certain inventory purchase agreements, other 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. 73 Item 8. Consolidated Financial Statements and Supplementary Data. Our consolidated financial statements as of December 31, 2023 and 2022 and for each of the three years in the period ended December 31, 2023, 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 ) 75 Consolidated Balance Sheets as of December 31, 2023 and 2022 77 Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years ended December 31, 2023 , 2022 and 2021 78 Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2023 , 2022 and 2021 79 Consolidated Statements of Cash Flows for the Years ended December 31, 2023 , 2022 and 2021 80 Notes to Consolidated Financial Statements 81 74 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, 2023 and 2022, 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, 2023 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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, 2023, 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 21, 2024 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. 75 Warranty reserve – Estimation of Expected Replacement Rates Description of the Matter As discussed in Note 2 to the consolidated financial statements, the Company has a warranty reserve of $37.2 million. The Company accrues for costs related to the warranty reserve liability at the time of shipment. Warranty costs are estimated primarily based on the expected replacement rates utilizing historical experience. Auditing management’s expected replacement rates on pumps was complex as it required a significant level of effort due to the amount of data utilized in determining the expected replacement rates. Management’s estimate considers historical claims experience and the assumption of historical data predictive of future activity and events, in particular, the number of historical periods used and the weighing of historical data. It is possible that the future replacement rates may not be reflective of historical product replacement rates and changes in this assumption could have a material impact on the Company’s estimated 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 process. Specifically, we tested controls over management's review and calculation of the expected replacement rates, including controls over the accuracy and completeness of data used. To test the Company’s expected replacement rates we performed audit procedures that included, among others, testing the completeness and accuracy of the underlying data used in the calculation. We involved our data science professionals to evaluate the methodologies and assumptions and test the calculations used by the Company. We recalculated the warranty expected replacement rates using historical data. We performed sensitivity analyses of the expected replacement rates assumption to evaluate the impact of changes in the warranty reserve. /s/ Ernst & Young LLP We have served as the Company's auditor since 2009. San Diego, California February 21, 2024 76 TANDEM DIABETES CARE, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except par value) December 31, December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 58,868 $ 172,517 Short-term investments 409,044 444,384 Accounts receivable, net 105,555 114,717 Inventories 157,937 111,117 Prepaid and other current assets 16,585 7,241 Total current assets 747,989 849,976 Property and equipment, net 76,542 68,552 Operating lease right-of-use assets 87,791 110,626 Other long-term assets 40,336 23,631 Total assets $ 952,658 $ 1,052,785 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 49,586 $ 55,730 Accrued expenses 12,726 9,595 Employee-related liabilities 43,430 38,682 Operating lease liabilities 17,060 13,121 Deferred revenue 43,994 18,837 Other current liabilities 28,462 29,325 Total current liabilities 195,258 165,290 Convertible senior notes, net - long-term 285,035 283,232 Operating lease liabilities - long-term 113,572 123,524 Deferred revenue - long-term 13,331 16,874 Other long-term liabilities 31,830 23,918 Total liabilities 639,026 612,838 Commitments and contingencies (Note 13) — — Stockholders’ equity: Common stock, $ 0.001 par value; 200,000 shares authorized, 65,552 and 64,513 shares issued and outstanding at December 31, 2023 and 2022, respectively. 66 65 Additional paid-in capital 1,263,997 1,170,888 Accumulated other comprehensive income (loss) 1,369 ( 1,817 ) Accumulated deficit ( 951,800 ) ( 729,189 ) Total stockholders’ equity 313,632 439,947 Total liabilities and stockholders’ equity $ 952,658 $ 1,052,785 The accompanying notes are an integral part of the consolidated financial statements. 77 TANDEM DIABETES CARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (In thousands, except per share data) Year Ended December 31, 2023 2022 2021 Sales $ 747,718 $ 801,217 $ 702,799 Cost of sales 380,028 388,231 326,584 Gross profit 367,690 412,986 376,215 Operating expenses: Selling, general and administrative 352,503 335,681 261,508 Research and development 169,667 139,114 92,054 Acquired in-process research and development expenses 78,750 31,039 — Total operating expenses 600,920 505,834 353,562 Operating income (loss) ( 233,230 ) ( 92,848 ) 22,653 Other income (expense), net: Interest income and other, net 22,858 6,057 674 Interest expense ( 9,882 ) ( 6,208 ) ( 6,040 ) Change in fair value of common stock warrants — 147 ( 1,386 ) Total other income (expense), net 12,976 ( 4 ) ( 6,752 ) Income (loss) before income taxes ( 220,254 ) ( 92,852 ) 15,901 Income tax expense 2,357 1,742 335 Net income (loss) $ ( 222,611 ) $ ( 94,594 ) $ 15,566 Other comprehensive income (loss): Unrealized gain (loss) on short-term investments $ 3,606 $ ( 2,233 ) $ ( 693 ) Foreign currency translation gains (losses) ( 420 ) 1,032 ( 143 ) Comprehensive income (loss) $ ( 219,425 ) $ ( 95,795 ) $ 14,730 Net income (loss) per share - basic $ ( 3.43 ) $ ( 1.47 ) $ 0.25 Net income (loss) per share - diluted $ ( 3.43 ) $ ( 1.47 ) $ 0.24 Weighted average shares used to compute basic net income (loss) per share 64,969 64,146 63,000 Weighted average shares used to compute diluted net income (loss) per share 64,969 64,146 64,349 The accompanying notes are an integral part of the consolidated financial statements. 78 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, 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 Exercise of stock options 73 — 1,295 — — 1,295 Vesting of restricted stock units, net of shares withheld for taxes 467 — ( 7,790 ) — — ( 7,790 ) Issuance of common stock under Employee Stock Purchase Plan 499 1 10,678 — — 10,679 Stock-based compensation expense — — 88,926 — — 88,926 Unrealized gain on short-term investments — — — 3,606 — 3,606 Foreign currency translation losses — — — ( 420 ) — ( 420 ) Net loss — — — — ( 222,611 ) ( 222,611 ) Balance at December 31, 2023 65,552 $ 66 $ 1,263,997 $ 1,369 $ ( 951,800 ) $ 313,632 (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. 79 TANDEM DIABETES CARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2023 2022 2021 Operating Activities Net income (loss) $ ( 222,611 ) $ ( 94,594 ) $ 15,566 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization expense 15,715 14,330 13,845 Amortization of debt issuance costs 2,204 1,896 1,727 Provision for expected credit losses 5,540 4,782 2,333 Operating lease termination and impairment charges 14,099 7,567 — Amortization of premium on short-term investments 3,587 4,187 365 Stock-based compensation expense 88,076 84,918 60,752 Acquired in-process research and development expenses 78,750 31,039 — Other 515 988 2,399 Changes in operating assets and liabilities: Accounts receivable, net 4,277 ( 7,830 ) ( 30,980 ) Inventories ( 46,053 ) ( 42,452 ) ( 4,954 ) Prepaid and other current assets ( 9,139 ) ( 58 ) ( 1,570 ) Other long-term assets ( 3,187 ) ( 1,207 ) 1,313 Accounts payable ( 4,864 ) 24,493 10,275 Accrued expenses 2,537 ( 461 ) 4,640 Employee-related liabilities 5,167 ( 12,869 ) 17,399 Deferred revenue 21,525 8,358 10,611 Operating leases and other current liabilities 4,302 25,445 6,217 Other long-term liabilities 7,750 1,932 1,421 Net cash provided by (used in) operating activities ( 31,810 ) 50,464 111,359 Investing Activities Purchases of short-term investments ( 510,859 ) ( 467,652 ) ( 733,388 ) Proceeds from maturities and redemptions of short-term investments 546,218 569,492 570,023 Purchases of property and equipment ( 26,804 ) ( 34,097 ) ( 14,180 ) Acquisitions, including in-process research and development, net of cash acquired ( 69,496 ) ( 25,720 ) — Purchases of intangible assets and strategic investments ( 24,799 ) ( 8,855 ) ( 9,331 ) Net cash used in investing activities ( 85,740 ) 33,168 ( 186,876 ) Financing Activities Proceeds from issuance of common stock under Company stock plans, net 4,184 17,469 51,340 Proceeds from exercise of common stock warrants — 83 592 Other financing activities ( 71 ) ( 675 ) — Net cash provided by financing activities 4,113 16,877 51,932 Effect of foreign exchange rate changes on cash ( 212 ) 827 153 Net increase (decrease) in cash and cash equivalents ( 113,649 ) 101,336 ( 23,432 ) Cash and cash equivalents at beginning of period 172,517 71,181 94,613 Cash and cash equivalents at end of period $ 58,868 $ 172,517 $ 71,181 Supplemental disclosures of cash flow information Interest paid $ 7,565 $ 4,313 $ 4,313 Income taxes paid $ 1,923 $ 411 $ 260 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 Purchases of property and equipment included in accounts payable $ 2,946 $ 4,237 $ 1,034 Intangible costs in accounts payable $ — $ 515 $ 1,029 The accompanying notes are an integral part of the consolidated financial statements. 80 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. 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 have been principally focused on the t:slim X2 Insulin Delivery System (t:slim X2), which has been the Company’s flagship pump platform and 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. In February 2024, the Company expanded its pump portfolio with the U.S. launch of Tandem Mobi. 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 single-use 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, Netherlands, and Switzerland. 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 Certain prior year balances on the consolidated statements of cash flows have been reclassified to conform to the current year presentation. 81 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, 2023, except for adding the accounting policy for sales rebates, which is included herein. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes as of the date of the consolidated financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. 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 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 $ 271.7 million and $ 260.5 million at December 31, 2023 and 2022, respectively, based on Level 2 quoted market prices as of those dates. 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, 2023, 2022 and 2021. 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. 82 Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company maintains deposit accounts in federally insured financial institutions in excess of federally insured limits. The Company also maintains investments in money market funds that are not federally insured. Additionally, the Company has established guidelines regarding investment instruments and their maturities, which are designed to maintain preservation of principal and liquidity. The following table summarizes 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, 2023 2022 2021 2023 2022 Distributor B 12.2 % 11.6 % 11.9 % 10.0 % 12.8 % Distributor C * * * 10.5 % * Distributor D * * * 10.6 % 10.4 % Distributor E 10.8 % 14.4 % 14.0 % 11.5 % 16.2 % * Amount related to the respective customer represented less than 10% for the period presented. 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 (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. 83 Intangible Assets Subject to Amortization Finite-lived intangible assets are recorded at cost, net of accumulated amortization and, if applicable, impairment charges. Amortization of finite-lived intangible assets is recognized over their estimated useful lives on a straight-line basis. The Company did not recognize any intangible asset impairment losses during the years ended December 31, 2023, 2022 and 2021. 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 and related leasehold improvements and furniture and fixtures recognized in 2023 and 2022 (see Note 6, “Leases”), there were no impairments of long-lived assets, including acquired intangible assets, during the years ended December 31, 2023, 2022 and 2021. Strategic Investments The Company held equity investments totaling $ 10.1 million and $ 16.4 million in two separate private companies at December 31, 2023 and 2022, respectively, 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 Company monitors these investments 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. The investments were included as a component of other long-term assets on the consolidated balance sheets at December 31, 2023 and 2022. In November 2023, the Company made an additional investment of approximately $ 22.3 million in subordinated convertible notes of one of its private investee companies. The subordinated notes are convertible into equity of the private company upon certain qualifying events, including at their final maturity in 2024. The subordinated convertible notes are non-interest bearing, and are only repayable before conversion into equity upon a change in control of the private company. At December 31, 2023, the $ 22.3 million subordinated convertible notes investment was included as a component of other long-term assets on the consolidated balance sheet. Revenue Recognition Revenue is generated primarily from sales of insulin pumps, single-use 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 rebates and returns. 84 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. During the third and fourth quarters of 2023, the Company reduced the fee for the Tandem Choice program. 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. 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 December 31, 2023 and 2022, $ 30.6 million and $ 6.8 million, respectively, were allocated to the material right provided to customers and recorded in current deferred revenue on the consolidated balance sheets. Sales Rebates The Company is subject to certain rebates on pricing programs with managed care organizations, such as governmental and third-party commercial payors. The Company estimates provisions for rebates based on contractual arrangements, estimates of products sold subject to rebate, known events or trends and channel inventory data. At December 31, 2023, estimated sales rebates of $ 8.5 million were recorded on the consolidated balance sheet, of which $ 8.0 million was included in other long-term liabilities as the estimated payment due date was beyond twelve months from the balance sheet date. Accordingly, actual rebates paid may differ from estimated amounts recorded in the accompanying consolidated financial statements. The Company did not provide sales rebates before the fourth quarter of 2023. 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 $0.4 million and $0.5 million at December 31, 2023 and 2022, respectively. Actual product returns have not differed materially from estimated amounts recorded in the accompanying consolidated financial statements. 85 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 single-use 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 or pump platform 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. The following table provides a reconciliation of the changes in product warranty liabilities for the years ended December 31, 2023, 2022 and 2021 (in thousands): Year Ended December 31, 2023 2022 2021 Balance at beginning of the period $ 36,537 $ 30,401 $ 22,075 Provision for warranties issued during the period 35,690 32,699 27,604 Settlements made during the period ( 32,617 ) ( 25,447 ) ( 18,768 ) Decreases in warranty estimates ( 2,437 ) ( 1,116 ) ( 510 ) Balance at end of the period $ 37,173 $ 36,537 $ 30,401 As of December 31, 2023 and 2022, total product warranty reserves were included in the following consolidated balance sheet accounts (in thousands): December 31, 2023 December 31, 2022 Other current liabilities $ 18,135 $ 17,280 Other long-term liabilities 19,038 19,257 Total warranty reserve $ 37,173 $ 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 generally 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. 86 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. 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 incentive 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, 2023, 2022 and 2021, the numerator and denominator of the diluted net income (loss) per share computation were calculated as follows (in thousands): 87 Year Ended December 31, 2023 2022 2021 Net income (loss) - basic and diluted $ ( 222,611 ) $ ( 94,594 ) $ 15,566 Weighted average shares outstanding - basic 64,969 64,146 63,000 Dilutive common share equivalents: Options to purchase common stock — — 1,129 Unvested restricted stock units — — 62 Warrants to purchase common stock — — 157 Awards to be granted under the ESPP — — 1 Weighted average shares outstanding - diluted 64,969 64,146 64,349 Potentially dilutive securities outstanding and not included in the calculation of diluted net loss per share (because inclusion would be anti-dilutive) are as follows (in thousands, in common stock equivalent shares): Year Ended December 31, 2023 2022 2021 Options to purchase common stock 135 1,138 3,124 Unvested restricted stock units 2,089 1,118 — Warrants to purchase common stock 194 194 1 Awards granted under the ESPP 14 8 — Convertible senior notes (if-converted) 2,554 2,554 2,554 4,986 5,012 5,679 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, 2023 and 2022 (in thousands): At December 31, 2023 Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value Available-for-sale securities: U.S. Government-sponsored enterprises $ 181,851 $ 518 $ ( 215 ) $ 182,154 U.S. Treasury securities 114,714 318 ( 28 ) 115,004 Commercial paper 72,505 33 ( 27 ) 72,511 Corporate debt securities 39,225 156 ( 6 ) 39,375 Total $ 408,295 $ 1,025 $ ( 276 ) $ 409,044 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 88 The contractual maturities of available-for-sale debt securities as of December 31, 2023, were as follows (in thousands): Years to Maturity At December 31, 2023 Within One Year One to Two Years Two to Three Years Estimated Fair Value U.S. Government-sponsored enterprises $ 86,875 $ 56,647 $ 38,632 $ 182,154 U.S. Treasury securities 74,214 40,790 — 115,004 Commercial paper 72,511 — — 72,511 Corporate debt securities 12,620 26,755 — 39,375 Total $ 246,220 $ 124,192 $ 38,632 $ 409,044 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, 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 December 31, 2023 and 2022. 4. Composition of Certain Financial Statement Items Accounts Receivable Accounts receivable, net consisted of the following at December 31, 2023 and 2022 (in thousands): December 31, December 31, 2023 2022 Accounts receivable $ 110,453 $ 119,044 Less: allowance for credit losses ( 4,898 ) ( 4,327 ) Accounts receivable, net $ 105,555 $ 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 years ended December 31, 2023, 2022 and 2021 (in thousands): Year Ended December 31, 2023 2022 2021 Balance at beginning of the period $ 4,327 $ 4,249 $ 3,857 Provision for expected credit losses 5,540 4,782 2,333 Write-offs and adjustments, net of recoveries ( 4,969 ) ( 4,704 ) ( 1,941 ) Balance at end of the period $ 4,898 $ 4,327 $ 4,249 89 Inventories Inventories consisted of the following at December 31, 2023 and 2022 (in thousands): December 31, 2023 2022 Raw materials $ 42,783 $ 39,207 Work-in-process 44,026 18,571 Finished goods 71,128 53,339 Total inventories $ 157,937 $ 111,117 Property and Equipment Property and equipment, net consisted of the following at December 31, 2023 and 2022 (in thousands): December 31, 2023 2022 Leasehold improvements $ 37,565 $ 35,828 Office furniture and equipment 11,842 13,772 Computer equipment and software 10,340 12,330 Manufacturing and scientific equipment 69,589 62,797 Total cost 129,336 124,727 Less: accumulated depreciation and amortization ( 52,794 ) ( 56,175 ) Total property and equipment, net $ 76,542 $ 68,552 Depreciation and amortization expense related to property and equipment was $ 13.8 million, $ 12.3 million, and $ 11.7 million for the years ended December 31, 2023, 2022 and 2021, respectively. Intangible Assets Subject to Amortization Intangible assets subject to amortization consist of technology-based intangibles related to the Company’s acquisition of Sugarmate, as well as patents purchased or licensed that are related to the Company’s commercialized products. Intangible assets at December 31, 2023 and 2022, which were included in other long-term assets on the consolidated balance sheets, were as follows (in thousands): December 31, 2023 2022 Intangible assets, gross amount $ 12,502 $ 12,502 Accumulated amortization ( 9,726 ) ( 7,875 ) Intangible assets, net $ 2,776 $ 4,627 Weighted average remaining amortization period (in months) 18 30 Amortization expense related to intangible assets subject to amortization amounted to $ 1.9 million, $ 2.0 million and $ 2.2 million for the years ended December 31, 2023, 2022 and 2021, 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 future amortization expense is $ 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 . 90 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, 2023 and 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 December 31, 2023 Total Level 1 Level 2 Level 3 Assets Cash equivalents (1) $ 48,033 $ 48,033 $ — $ — U.S. Government-sponsored enterprises 182,154 — 182,154 — U.S. Treasury securities 115,004 115,004 — — Commercial paper 72,511 — 72,511 — Corporate debt securities 39,375 — 39,375 — Total assets $ 457,077 $ 163,037 $ 294,040 $ — 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. 91 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 and lease liabilities 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 (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). 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 16,154 rentable square feet of general office space at December 31, 2023, 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 consolidated balance sheet on the Phase I Commencement Date in the first quarter of 2022. In December 2023, the Company entered into an agreement to sublease the Phase II portion of the Premises under its Headquarters Lease from January 2025 through March 2029. Future minimum payments for base rent due under Phase II of the Headquarters Lease, net of sublease rent, are estimated to be $ 2.2 million in total for 2025 through 2028, and $ 23.2 million in total for 2029 through 2035. Operating Lease Termination and Impairment Charges 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. 92 During the second quarter of 2023, 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 consolidated statement of operations. During the fourth quarter of 2022, the Company recorded $ 12.4 million of lease termination and impairment charges primarily related to its 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 was recorded as a component of selling, general and administrative expenses in the consolidated statement of operations. Lease Costs The Company’s lease costs recorded in the consolidated statements of operations were as follows (in thousands): Year Ended December 31, 2023 2022 2021 Operating lease cost $ 15,971 $ 18,432 $ 8,627 Short-term lease cost 108 142 90 Loss on lease termination and right-of-use asset impairment charges 11,224 5,699 — Total lease cost $ 27,303 $ 24,273 $ 8,717 Lease Liabilities Maturities of operating lease liabilities at December 31, 2023 were as follows (in thousands): Years Ending December 31, 2024 $ 17,065 2025 17,023 2026 17,068 2027 17,333 2028 13,840 Thereafter 90,004 Total undiscounted lease payments 172,333 Less: amount representing interest ( 41,701 ) Present value of operating lease liabilities 130,632 Less: current portion of operating lease liabilities ( 17,060 ) Operating lease liabilities - long-term $ 113,572 The weighted-average remaining lease term and weighted-average discount rate for operating leases were as follows: December 31, 2023 December 31, 2022 Weighted-average remaining lease term (in years) 10.2 10.8 Weighted-average discount rate used to determine operating lease liabilities 5.4 % 5.3 % Lease Payments Cash paid for amounts included in the measurement of lease liabilities, representing operating cash flows, were as follows (in thousands): 93 Year Ended December 31, 2023 2022 2021 Operating lease payments $ 13,864 $ 11,960 $ 9,462 Operating lease termination payments — 4,769 — Total cash payments $ 13,864 $ 16,729 $ 9,462 Leases For Which Accounting Has Not Yet Commenced As of December 31, 2023, the Phase II Commencement Date for the Headquarters Lease had not yet occurred. Accordingly, the consolidated balance sheet at December 31, 2023 does not include operating lease right-of-use assets and operating lease liabilities, and the consolidated statements of operations for the years ended December 31, 2023, 2022 and 2021 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. Because the incremental borrowing rate will not be available until the Phase II Commencement Date, which is currently estimated to occur in the first quarter of 2025, 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 completed an offering of $ 287.5 million aggregate principal amount of unsecured Convertible Senior Notes with a stated interest rate of 1.50 % and a maturity date of May 1, 2025 (Notes). 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. 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 before the close of business on the scheduled trading day immediately preceding the redemption date; or 94 • 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. Beginning January 1, 2021, the Notes have been 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, 2023 December 31, 2022 Principal amount $ 287,500 $ 287,500 Unamortized debt issuance costs ( 2,465 ) ( 4,268 ) Net carrying amount $ 285,035 $ 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 December 31, 2023 and 2022, the if-converted value of the Notes did not exceed the principal amount. As of December 31, 2023, the unamortized debt issuance costs of $ 2.5 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 1.3 years. In October 2023, the Company was notified that additional interest beyond the 1.50 % per annum had been accruing on the Notes since May 2021, pursuant to the terms of the indenture. This additional interest continued to accrue at a rate of 0.50 % per annum on the outstanding principal amount of the Notes until November 2, 2023. The overdue unpaid interest itself accrued interest at a rate of 2.50 % per annum. The Company paid all overdue amounts related to this matter in November 2023. The following table details interest expense related to the Notes recognized for the years ended December 31, 2023, 2022 and 2021 (in thousands): Year Ended December 31, 2023 2022 2021 Contractual interest expense (1) $ 7,565 $ 4,313 $ 4,313 Amortization of debt issuance costs 1,803 1,896 1,727 Total interest expense $ 9,368 $ 6,209 $ 6,040 (1) Contractual interest expense for the year ended December 31, 2023 includes $ 3.3 million of additional interest as discussed above. 95 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 In the second quarter of 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 Company terminated the Revolving Line of Credit Agreement in January 2024, with no borrowings made thereunder. Promissory Note Payable In connection with the acquisition of Capillary Biomedical, Inc. (see Note 12, “Acquisitions”), the Company assumed a $ 4.7 million promissory note payable. The promissory note accrues interest at the rate of 5.0 % per year, and becomes due and payable upon the first sale or license of the commercialized product. At December 31, 2023 and 2022, the loan balance of $ 4.7 million was included as a component of other long-term liabilities on the consolidated balance sheets. 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, 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 3,896 Shares underlying unvested restricted stock units 3,176 Shares authorized for issuance pursuant to awards granted under the ESPP 454 Shares authorized for future equity award grants 702 Total 10,976 96 Common Stock Warrants Warrants outstanding to purchase shares of the Company's common stock as of December 31, 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 Incentive 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. Stock Options The maximum term of stock options granted under the Company’s active plans is ten years . Stock options have an exercise price equal to the closing price of the Company's common stock on the applicable award date. Stock options granted before the second quarter of 2022 generally vest over a four-year period as to 25 % of the underlying shares on the first anniversary of the grant date, with the balance of the options vesting monthly over the following three years . Stock options granted during the second quarter of 2022 and thereafter vest over a three-year period as to 33 % of the underlying shares on the first anniversary of the grant date, with the balance of the options vesting monthly over the following two years . The following table summarizes stock option activities under the Company’s stock incentive plans: Total Stock Options Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) 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 Granted — $ — Exercised ( 72,536 ) $ 17.86 $ 1,400 Canceled/forfeited/expired ( 473,773 ) $ 90.14 $ 95 Outstanding at December 31, 2023 3,896,004 $ 54.79 5.30 $ 11,703 Vested and expected to vest at December 31, 2023 3,890,496 $ 54.75 5.30 $ 11,703 Exercisable at December 31, 2023 3,675,678 $ 53.11 5.19 $ 11,703 97 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 continuous 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 continuous 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 , 53,662 and 25,674 performance-based RSUs during the years ended December 31, 2023, 2022 and 2021, respectively. The Company estimated the fair value of performance-based RSUs at the date of grant using the intrinsic value method and the probability that the specified performance metrics will be met. These awards vest upon the Company’s actual performance relative to predefined performance metrics and subject to the awardee’s continuous service through the respective December 31, 2024 and 2025 measurement dates as defined in the award agreements. For certain performance-based RSUs with market-based criteria, the Company used a Monte Carlo methodology to estimate the fair value at the date of grant. The following table summarizes RSU activities, which includes performance-based RSUs, for the Company’s stock incentive plans: Total RSUs Weighted-Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) 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 Granted 2,359,907 $ 28.13 Vested ( 735,155 ) $ 73.17 Canceled/forfeited ( 282,425 ) $ 59.17 Unvested awards outstanding at December 31, 2023 3,176,159 $ 40.61 $ 93,951 Awards expected to vest at December 31, 2023 3,088,745 $ 40.50 $ 91,365 The aggregate fair value of RSUs that vested during the years ended December 31, 2023, 2022 and 2021 was $ 21.2 million, $ 12.7 million, and $ 5.1 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 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 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, 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. During the years ended December 31, 2023, 2022 and 2021, 499,431 , 262,936 and 172,694 shares of our common stock, respectively, were purchased under the ESPP for proceeds of $ 10.7 million, $ 12.7 million and $ 11.1 million, respectively. 98 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, 2023 2022 2021 Cost of sales $ 6,212 $ 7,685 $ 6,434 Selling, general and administrative 56,304 57,196 43,567 Research and development 25,561 20,037 10,751 Total stock-based compensation expense $ 88,077 $ 84,918 $ 60,752 The total stock-based compensation expense capitalized as part of the cost of the Company’s inventories was $ 2.0 million at December 31, 2023, and $ 1.1 million at December 31, 2022. At December 31, 2023, the total unamortized stock-based compensation expense of approximately $ 116.7 million will be recognized over the remaining weighted average vesting term of approximately 1.9 years. 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, 2023 2022 2021 Weighted average grant date fair value (per share) N/A $ 42.16 $ 56.89 Risk-free interest rate N/A 2.7 % 1.0 % Dividend yield N/A 0.0 % 0.0 % Expected volatility N/A 72.0 % 75.1 % Expected term (in years) N/A 5.8 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, 2023 2022 2021 Weighted average grant date fair value (per share) $ 10.35 $ 21.89 $ 38.19 Risk-free interest rate 4.9 % 3.4 % 0.2 % Dividend yield 0.0 % 0.0 % 0.0 % Expected volatility 63.9 % 56.9 % 44.2 % 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. 99 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 cost recognized by the Company for the 401(k) plan was $ 4.2 million and $ 4.2 million, respectively, for the years ended December 31, 2023 and 2022. The Company did not provide a matching contribution prior to 2022. 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, 2023 2022 2021 United States $ ( 135,411 ) $ ( 94,033 ) $ 15,211 Foreign ( 84,843 ) 1,181 690 Income (loss) before provision for income taxes $ ( 220,254 ) $ ( 92,852 ) $ 15,901 The components of income tax expense were as follows (in thousands): Year Ended December 31, 2023 2022 2021 Current: Federal $ 308 $ 216 $ — State 345 1,228 174 Foreign 1,704 298 161 Total current tax expense 2,357 1,742 335 Deferred: Federal — — — State — — — Foreign — — — Total deferred income tax benefit — — — Income tax expense $ 2,357 $ 1,742 $ 335 100 The expense 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, 2023 2022 2021 Income tax expense (benefit) at federal statutory rate (1) $ ( 46,253 ) $ ( 19,499 ) $ 3,339 State income tax, net of federal benefit ( 1,313 ) ( 926 ) ( 254 ) Warrants revaluation — ( 31 ) 356 Research and development credits ( 6,283 ) ( 6,263 ) ( 5,703 ) Section 382 limitation ( 5 ) — ( 97 ) Stock-based compensation 14,904 2,282 ( 7,609 ) Officers' compensation 1,547 2,931 4,024 Recognition of acquired deferred tax assets ( 5,048 ) — — Acquired IPR&D expenses 14,938 6,518 — Other 1,074 962 124 Change in valuation allowance 28,796 15,768 6,155 Income tax expense $ 2,357 $ 1,742 $ 335 (1) For the years ended December 31, 2023, 2022 and 2021, the federal statutory tax rate was 21%. Significant components of the Company’s net deferred income tax assets at December 31, 2023 and 2022 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, 2023. 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 $ 190.7 million and $ 162.7 million at December 31, 2023 and 2022, 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, 2023 2022 Deferred tax assets: Net operating loss (NOL) carryforwards $ 54,802 $ 54,598 Research and development tax credits carryforwards 27,516 22,400 Capitalized research and development expenses 52,875 29,760 Accrued compensation 32,097 34,378 Lease liabilities 31,037 32,738 Other 20,778 20,927 Total deferred tax assets 219,105 194,801 Deferred tax liabilities: Operating lease right-of-use assets ( 20,869 ) ( 26,505 ) Fixed assets ( 6,916 ) ( 4,467 ) Other ( 656 ) ( 1,103 ) Total deferred tax liabilities ( 28,441 ) ( 32,075 ) Less valuation allowance ( 190,664 ) ( 162,726 ) Net deferred tax assets $ — $ — 101 As of December 31, 2023, the Company had accumulated federal and state NOL carryforwards of approximately $ 168.0 million, and $ 262.4 million, respectively. Of the total federal net operating loss carryforwards, approximately $ 78.4 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 $ 89.6 million will begin to expire in 2033, and state tax loss carryforwards continue to expire in 2024, unless previously utilized. The remaining California NOL carryforwards of $ 177.6 million will begin expiring in 2031. The Company had approximately $ 19.9 million of foreign tax loss carryforwards as of December 31, 2023. The foreign tax loss carryforwards begin to expire in 2024, unless previously utilized. The Company also has federal and California research credit carryforwards of approximately $ 24.2 million and $ 24.2 million, respectively, as of December 31, 2023. The federal research credit carryforwards will begin expiring in 2039, 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, 2022 to determine whether its net operating losses and credits are likely to be limited by Section 382. Based on this study, 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. In 2022, as part of the Capillary Biomedical, Inc. transaction, the Company acquired deferred tax assets consisting of federal and state net operation loss carryovers, research tax credit carryovers, and other tax attributes of approximately $ 7.8 million. These deferred tax assets are subject to limitations on future use under Section 382 and some of the attributes may expire unused. The Company completed an analysis under Section 382. As a result, the Company recognized deferred tax assets, net of contra reserve, of approximately $ 5.0 million in 2023. The Company included these deferred tax assets in its components of deferred tax assets in the table above, to the extent that such deferred tax assets are available for future utilization, and the balances are fully offset by valuation allowance as of December 31, 2023. 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, 2023, 2022 and 2021 (in thousands): Year Ended December 31, 2023 2022 2021 Gross unrecognized tax benefits at the beginning of the year $ 16,986 $ 13,589 $ 10,107 Increases related to current year positions 3,961 3,403 3,482 Increases (decreases) related to prior year positions 580 ( 6 ) — Gross unrecognized tax benefits at the end of the year $ 21,527 $ 16,986 $ 13,589 As of December 31, 2023 and December 31, 2022, the Company had $ 19.2 million and $ 15.0 million of unrecognized tax benefits, respectively, that, if recognized and realized would impact the effective tax rate, subject to the valuation allowance. 102 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, 2023, 2022 and 2021. 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. Before 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, single-use 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 years ended December 31, 2023, 2022 and 2021, no individual country outside the United States generated revenue that represented more than 10% of total revenue. The table below sets forth revenues for the Company’s two primary geographical markets, based on the geographic location to which its products are shipped (in thousands): Year Ended December 31, 2023 2022 2021 United States $ 554,878 $ 588,765 $ 524,907 Outside the United States 192,840 212,452 177,892 Total Sales $ 747,718 $ 801,217 $ 702,799 Sales to distributors accounted for 64 %, 65 %, and 67 % of the Company’s total United States sales for the years ended December 31, 2023, 2022 and 2021, respectively. Sales to distributors accounted for 99 %, 96 %, and 95 % of the Company’s total sales outside the United States for the years ended December 31, 2023, 2022 and 2021, 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. 103 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 two years following the closing date of the Transaction, 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 December 31, 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 consolidated balance sheet at December 31, 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 consolidated balance sheet (see Note 2, “Summary of Significant Accounting Policies”). 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 in 2023 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, 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 (see Note 7, “Debt”). 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 in 2022 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. 13. Commitments and Contingencies Legal and Regulatory Matters 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 December 31, 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. 104 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, 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, 2023, obligations under our purchase agreements totaled approximately $ 189.2 million, of which approximately $ 181.5 million is scheduled to be received and become payable within one-year. 14. Fourth Quarter Financial Data (Unaudited) The financial information for the three months ended December 31, 2023 and 2022 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, 2023 December 31, 2022 Sales $ 196,796 $ 220,502 Gross profit $ 93,295 $ 115,523 Operating expenses $ 128,355 $ 133,300 Operating loss $ ( 35,060 ) $ ( 17,777 ) Net loss $ ( 30,002 ) $ ( 15,852 ) Net loss per share, basic and diluted $ ( 0.46 ) $ ( 0.25 ) Weighted average shares used to compute basic and diluted net loss per share 65,369 64,384 For the three months ended December 31, 2023 and 2022, 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. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable.