Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis together with the “Consolidated Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report. The following discussion contains forward-looking statements, which statements are subject to considerable risks and uncertainties. Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption “Risk Factors” in Part I, Item 1A of this Annual Report.

Certain statements contained in this Annual Report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, and are subject to the “safe harbor” created by these sections. Future filings with the SEC, future press releases and future oral or written statements made by us or with our approval, which are not statements of historical fact, may also contain forward-looking statements. Because such statements include risks and uncertainties, many of which are beyond our control, actual results may differ materially from those expressed or implied by such forward-looking statements. Some of the factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements can be found under the caption “Risk Factors” in Part I, Item 1A, and elsewhere in this Annual Report. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.

Overview

We are a medical device company focused on the design, development and commercialization of technology solutions for people living with diabetes. Diabetes management can vary greatly from person-to-person, creating multiple market segments based on clinical needs and personal preferences. Our goal is to lead in insulin therapy management across multiple of these market segments by providing a robust ecosystem and a portfolio of delivery devices, software, and data insight solutions to people living with diabetes, as well as their caregivers and healthcare providers.

Since our initial commercial launch, we have rapidly innovated and brought more products to market than our competitors. Today, the t:slim X2 Insulin Delivery System is our flagship technology solution. In the four-year period ended December 31, 2022, we shipped approximately 420,000 t:slim X2 insulin pumps, which is representative of our estimated global installed customer base, assuming the typical four-year reimbursement cycle. Approximately 290,000 of these pumps were shipped to customers in the United States and 130,000 were shipped to customers outside the United States. Our products are currently available in approximately 25 countries outside the United States.

Our manufacturing, sales and support activities principally focus on our flagship pump platform, the t:slim X2 and our complementary product offerings. Our simple-to-use t:slim X2 is based on our proprietary technology platform and is the smallest durable insulin pump available in the United States. The majority of our customers use the t:slim X2 with continuous glucose monitoring (CGM) integration. This allows the t:slim X2 to receive CGM sensor readings, which can then be used in our automated insulin dosing (AID) algorithms, including our Control-IQ technology. Control-IQ is an advanced hybrid-closed loop feature designed to help increase a user's time in their targeted glycemic range. Multiple studies have demonstrated that use of Control-IQ technology provides people across all demographics with improved clinical outcomes that are both immediate and sustained. It was the first system cleared by the U.S. Food and Drug Administration (FDA) to deliver automatic correction boluses in addition to adjusting insulin to help prevent high and low blood sugar.

The t:slim X2 is unique in that it is the only pump on which remote software updates have been made commercially available in the United States. Now available in the countries we serve worldwide, our Tandem Device Updater (TDU) that has allowed approximately 200,000 people to update their t:slim X2 software from a personal computer. This offering is a competitive advantage that allows us to bring our customers clinical and lifestyle enhancements, such as new developments in our AID technology, CGM integrations and mobile app features. In July 2022, we launched a new pump software update through TDU to allow all t:slim X2 pump users in the United States to bolus insulin using our smartphone app that is available on compatible iOS and Android devices.

Our insulin pump products are generally considered durable medical equipment and have an expected lifespan of at least four years. In addition to insulin pumps, we sell disposable products that are used together with our 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. In the United States, we also offer t:connect, our data management web application that provides users, their caregivers and their healthcare providers with a fast, easy and visual way to display diabetes therapy management data from our pumps, integrated CGMs and supported blood glucose meters.

COVID-19 Global Pandemic Impact and Considerations

Information about the COVID-19 global pandemic impact and considerations is set forth above under the caption “Risk Factors” in Part I, Item 1A of this Annual Report and is incorporated herein by reference.

Products Under Development

Our products under development support our strategy of developing insulin delivery systems as part of a therapy management portfolio that is designed to improve patient experience and outcomes. Our product development efforts fall into three pillars of innovation: delivery devices, device software including algorithms, and data and insights.

Delivery Devices

We are developing a family of delivery device solutions to meet the varying needs of people living with type 1 and type 2 diabetes by providing choice within our own portfolio. Preferences in the size, shape, and mode of operation that comprise an insulin pump’s hardware often impact a person’s pump purchasing decision and overall user experience.

Mobi

The Tandem Mobi is approximately half the size of our t:slim X2 pump, and is designed for people who seek even greater discretion and flexibility with the use of their insulin pump. Its features include full pump-control from our mobile application, a 200-unit cartridge, an on-pump bolus button, inductive charging, and an AID algorithm.

t:slim X3

Advancing our flagship t:slim platform, the t:slim X3 is being designed to provide a modernized user interface and even greater usability for our planned feature updates. It is also being designed to include enhanced technology, such as greater processing power and capacity to support our advanced algorithms, as well as increased battery life, improved durability, and wireless software update capabilities.

Mobi: Tubeless

This offering is being developed to provide an alternative tubeless infusion site option for Mobi pump users. It will allow a Mobi pump to be worn completely on the user’s body with no tubing. A goal of this design is to allow people living with diabetes to customize the way they wear their pump with each cartridge change, switching between tubed and tubeless wear configurations, to best suit their personal preferences and lifestyle.

Sigi

This ergonomic, rechargeable patch pump is being designed to reduce the burden of managing diabetes through its use of pre-filled insulin cartridges and compatibility with AID technology. This replaces our early-stage development of a disposable tubeless solution that was previously under development.

Extended Wear Infusion Sets

Infusion sets provide additional choice and flexibility to people living with diabetes. Our goals for infusion set innovations focus on solutions that extend wear time and enhance user experience, while reducing occlusions, body burden and waste. In support of this effort, we are currently developing a unique extended wear infusion set technology.

Device Software

Our device software is used to control our pumps either directly through the pump’s interface or through our mobile application. It also includes our AID technology and the software used to support remote pump updatability.

Control-IQ Advancements

We are continuing to drive innovation in our algorithms, emphasizing automation, personalization and simplification to continue to improve therapeutic outcomes and provide a positive patient experience. We have recently completed clinical studies to support expanding the indications of our Control-IQ technology to include people with type 1 diabetes ages 2 to 5 years old. Additionally, we are initiating a pivotal study to support expanding indications to include people living with type 2 diabetes. We are also researching the use of different insulins with our Control-IQ technology.

Mobile Control

We are working to expand our mobile control capability. In the future, our t:connect mobile app is planned to include additional pump control features, such as full operation of our Mobi pump.

Integration

Building a robust ecosystem and portfolio around our flagship insulin pumps requires product development efforts to integrate, add, and enhance complementary system components.

Dexcom CGM: We have agreements with Dexcom to extend our current collaboration to include integration with their G7 CGM technology. Following integrated product development work, this will be the fourth generation of Dexcom CGM that we intend to integrate with our devices.

Abbott CGM: We have an agreement with Abbott Laboratories (Abbott), to develop and commercialize integrated diabetes solutions that combine Abbott’s FreeStyle Libre CGM technology with our insulin delivery systems. Following the completion of our integrated product development work, and after obtaining required regulatory clearances or approvals, we intend to focus our initial commercial activities on integrated products in the U.S. and Canada, with additional geographies considered in the future.

Data and Insights

Our goal is to innovate across our digital health platforms by using the vast amount of data that we collect, in combination with technology such as artificial intelligence or machine learning, to provide information and insights to people living with diabetes, their caregivers and healthcare providers and insurance payors. Our key objectives include making these insights easy to understand, making the data available in real time, and providing the information in a flexible format with mobile or web apps. In addition, we are working to integrate health-related information from third-party sources and to use our data to support current and future products under development.

Tandem Source

Expanding the capabilities of our t:connect data management application available for customers in the United States, Tandem Source is our second-generation web-based data management application that is being designed to be deployed globally. This application enhances clinical data visualization, and provides added interface customization for users to personalize how they engage with their data and for healthcare providers to better manage their care. We continue to develop and test new features for Tandem Source in anticipation of a future commercial release of the product.

Settings Automation

Our automation research and development activities center around opportunities for enhanced user and healthcare provider experience and improved clinical outcomes. In support of this effort, we are working to automate our pump settings adjustments to further enhance ease of use and expand adoption of our insulin pump products.

Pump Shipments

From inception in 2012 through June 2018, we derived nearly all of our sales from the shipment of insulin pumps and associated supplies to customers in the United States. Starting in the third quarter of 2018, we began selling our t:slim X2 insulin pump in select geographies outside the United States and our technology solutions are now available in approximately 25 countries worldwide. We consider the number of insulin pump units shipped to be an important metric for managing our business.

Insulin pumps in the markets we serve worldwide are generally subject to a four-year reimbursement cycle, imposed by the third-party insurance carrier, government plan or healthcare system that serves as the primary payor. In the past four years, we have shipped approximately 420,000 insulin pumps worldwide, which is representative of our estimated global in-warranty installed customer base. Our ending estimated worldwide installed base has increased approximately 29% year over year.

At the end of the typical four-year reimbursement cycle, customers may be eligible for the purchase of a new insulin pump, subject to the rules and requirements of their primary insurance payor. While warranties generally expire four years from the original pump shipment date, those customers that renew typically purchase a subsequent pump within one year from the date of warranty expiration. The majority of our insulin pump sales through the current period have been generated by new customers, but the opportunity for existing customers to purchase a renewal insulin pump increases each period as escalating number of additional customer warranties expire. With programs dedicated to customer retention efforts, we expect such renewal purchases to represent a more significant portion of our shipments in the long-term.

Approximately 290,000 pumps were shipped to customers in the United States in the past four years, which aligns with the standard four-year warranty period. Pump shipments to customers in the United States by fiscal quarter for the current year and previous five years, which aligns more closely with our typical renewal cycle, were as follows:

March 31 June 30 September 30 December 31 Total

Since commencing sales outside the United States in the third quarter of 2018, we shipped approximately 130,000 pumps and our products are now available in approximately 25 countries. We are only beginning to complete a full four-year reimbursement cycle in certain of our markets outside of the United States. Pump shipments to customers outside the United States by fiscal quarter were as follows:

March 31 June 30 September 30 December 31 Total

Trends and Uncertainties Impacting Financial Results

Our financial condition and operating results have historically fluctuated on a quarterly or annual basis. We expect these periodic fluctuations will continue to be impacted by a number of trends and uncertainties, including the following:

Regulatory Approvals

•When there are anticipated, and actual, regulatory approvals for our products, or our competitors’ products, customers may reconsider their purchasing decisions and take additional time to consider FDA approval prior to making their purchase, which could adversely impact our revenue and results of operations. Similarly, our sales outside the United States are subject to local government regulations. The requirements and the timeline to

receive these approvals substantially vary from country to country and may impact our ability to expand our international customer base and increase our cost of sales.

•The failure to receive regulatory clearances and approvals may lead to product recalls or the suspension of our products. Even if a clinical trial meets the required success criteria, the FDA may not accept the results of the trial as sufficient to prove the product’s safety and efficacy. Our competitors are also vulnerable to these uncertainties, which may affect our customer base and sales.

Product Launches

•We expect our business to be impacted by the introduction of new products, treatment techniques or technologies for the treatment of diabetes by us or our competitors. Customers may defer their purchasing decisions if they believe a new product may be launched in the future. The success of our products is variable and we believe it correlates to market acceptance, anticipated product launches and commercial availability. We currently believe our recently announced Tandem Choice program, and its related financial and accounting impact, my continue to materially impact our business going forward.

•Our revenue and results of operations may be impacted by the failure to secure or retain adequate coverage or reimbursement for our current and future products from third-party payors. Our competitors are also vulnerable to these uncertainties, which may affect our customer base and sales.

Foreign Markets

•We have expanded our business and launched new products in select geographies outside the United States. The ordering patterns of our distributors outside the United States is highly variable from period to period, particularly as our distributors continue to gain familiarity with the markets they are operating. The commencement of operations of our European distribution center in the third quarter also led to downward adjustments to inventory levels from our distributors in late 2022 and early 2023.

Seasonality

•Seasonality in the United States is associated with annual insurance deductibles and coinsurance requirements of the medical insurance plans used by our customers and the customers of our distributors. In the United States, we experience a higher volume of pump shipments in the third and fourth quarters due to the nature of the reimbursement environment. Other factors that may impact sales across the year include the timing of winter, summer and other seasonal holidays, particularly in our markets outside the United States.

Macroeconomic Factors

•Global economic and market uncertainty, such as recessionary concerns, inflation, changes in discretionary spending and increased interest rates have impacted our customers’ purchasing decisions and the buying patterns of our distributors.

•The lingering effects of COVID-19 have continued to disrupt our relationship with suppliers, third-party manufacturers, healthcare providers, distributors and our existing or potential customers. We are experiencing higher costs as we navigate these global supply chain challenges.

Components of Results of Operations

Sales

We offer products for people with insulin-dependent diabetes in approximately 25 countries. The t:slim X2 insulin pump is our flagship pump platform. Our other products include disposable insulin cartridges and infusion sets, as well as our complementary t:connect, TDU and mobile application products. Our primary customers are the end customers who use our products, non-exclusive distribution partners whose level of service varies based on geography, the healthcare professionals who prescribe our products and the healthcare systems or payors who provide insurance coverage and access to our products. Our sales may fluctuate from period to period, particularly due to seasonality in the United States associated with the timing of insurance deductible resets, which generally result in the lowest percent of sales the first quarter of each calendar year and the highest percent in the fourth quarter.

In September 2022, the Company began offering the Tandem Choice Program to eligible t:slim X2 customers to provide a pathway to ownership of its newest hardware platform for a fee when available. Tandem Choice expires on December 31, 2024. The accounting treatment for Tandem Choice is complex. Initially, the program requires the deferral of some portion of sales for shipments of eligible pumps beginning in the third quarter of 2022. No election is made by the customer at the time of the initial sale, nor does the right offered to the customer impact the economics associated with how or when the initial pump sale is reimbursed. If a customer elects to participate in Tandem Choice at a future date beginning with the launch of our next generation hardware platform, we will recognize the existing deferral, incremental fees received and the associated costs of providing the new hardware at the time of fulfillment. Any remaining deferrals will be recognized at program expiration. At this time, we are not able to estimate the financial impact for the duration of Tandem Choice.

Cost of Sales

Cost of sales includes raw materials, labor costs, manufacturing overhead expenses, product training costs, royalties, freight, reserves for expected warranty costs, costs of supporting our digital health platforms, scrap and charges for excess and obsolete inventories. Manufacturing overhead expenses include expenses relating to quality assurance, manufacturing engineering, material procurement, inventory control, facilities, equipment, information technology and operations supervision and management. When taking into consideration the differences in reimbursement levels and cost structure, pumps have, and are expected to continue to have, a higher gross profit and gross margin percentage than our pump-related supplies. Therefore, the percentage of pump sales relative to total sales could have a significant impact on our overall gross margin percentage.

Selling, General and Administrative

Our selling, general and administrative (SG&A) expenses primarily consist of salary, cash-based incentive compensation, fringe benefits and non-cash stock-based compensation for our sales, marketing and administrative functions, which also includes our clinical, customer support, technical services, insurance verification and regulatory affairs personnel. We have approximately 110 sales territories in the United States, which are generally maintained by sales representatives and field clinical specialists, and supported by managed care liaisons, additional sales management and other customer support personnel. Other significant SG&A expenses typically include those incurred for commercialization activities associated with new product launches, travel, trade shows, outside legal fees, independent auditor fees, outside consultant fees, insurance premiums, facilities costs and information technology costs.

Research and Development

Our research and development (R&D) activities primarily consist of engineering and research programs associated with our hardware, software and digital health products under development, as well as activities associated with our core technologies and processes. R&D expenses are primarily related to employee compensation, including salary, cash-based incentive compensation, fringe benefits and non-cash stock-based compensation. We also incur R&D expenses for supplies, development prototypes, outside design and testing services, depreciation, allocated facilities and information services, clinical trial costs, payments under our licensing, development and commercialization agreements and other indirect costs.

Acquired In-process Research and Development (IPR&D) Expenses

Acquired IPR&D reflects costs of external research and development projects acquired directly in a transaction other than a business combination, that do not have an alternative future use.

Other Income and Expense

Other income and expense primarily consists of interest expense which includes the amortization of debt issuance costs related to our 1.50% Convertible Senior Notes due 2025, interest earned on our cash equivalents and short-term investments, and changes in the fair value of certain common stock warrants which were issued in October 2017 and expired in October 2022.

Income Tax Expense (Benefit)

Because the Company maintains a full valuation allowance against its net deferred tax assets, income tax expense is expected to primarily consist of current federal, state and foreign cash tax expense as a result of taxable income anticipated or incurred in those jurisdictions.

Results of Operations

Year Ended December 31,

Sales:

Operating expenses:

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

Other income (expense), net:

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

Comparison of Years Ended December 31, 2022 and 2021

Sales. For the year ended December 31, 2022, sales were $801.2 million, which included $212.5 million of sales outside the United States.For the year ended December 31, 2022, we deferred $3.5 million of pump sales as the result of our Tandem Choice program which launched in the third quarter of 2022. For the year ended December 31, 2021, sales were $702.8 million, which included $177.9 million of sales outside the United States.

The increase in worldwide sales of $98.4 million in 2022, as compared to 2021, was driven by a 30% increase in pump-related supply sales, primarily due to 29% growth in our ending estimated worldwide installed base of customers.

Sales by product in the United States were as follows (in thousands):

Year Ended December 31,

Adjustment for Tandem Choice program (3,549) — —%

Pump shipments in the United States were flat compared to the prior year while pump sales benefited from an improvement in average selling prices due in part to price increases, as well as a decrease in sales through the distribution channel. Pump shipments were driven by continued demand for our t:slim X2 insulin pump with Control-IQ technology even with the presence of new competitive product launches during the year. We also faced challenging marketplace dynamics and economic conditions brought on by the global pandemic and a deteriorating macroeconomic environment, with inflation and the threat of recession beginning to impact pump purchasing decisions. Sales of pump-related supplies increased primarily due to a 22% increase in our ending estimated installed base of customers in the United States. Sales to distributors accounted for 65% and 67% of our total sales in the United States for the years ended December 31, 2022 and 2021, respectively. Sales in the United States for the year ended December 31, 2022 were also reduced by a deferral of $3.5 million as the result of the launch of our Tandem Choice program in the third quarter. No comparable program existed in 2021.

Sales by product outside the United States were as follows (in thousands):

Year Ended December 31,

Pump shipments outside the United States were flat compared to the prior year, with the increase in pump sales attributable to an increase in average selling prices due in part to price increases, as well as positive fluctuations associated with variations in the geographical mix. Sales of pump-related supplies benefited from a 46% increase in our ending estimated installed base of customers outside the United States. The ordering patterns of our distributors outside the United States for pumps and supplies has been, and may continue to be, highly variable from period to period as distributors continue to gain familiarity with the markets in which they operate and the acceptance of our products in those markets evolves. This variability has been compounded by the differing levels of impact from the global pandemic with regard to access to both physicians and customers, as well as shipping logistics. We also commenced operations of a centralized distribution center in the third quarter of 2022, which resulted in modest disruption to ordering patterns in the fourth quarter as a result of the affected European distributors adjusting their inventory levels for the reduced transit time. We expect that this will continue to impact sales levels of pumps and supplies in Europe through the middle of 2023. Sales to distributors accounted for 96% and 95% of our total sales outside the United States for the years ended December 31, 2022 and 2021, respectively.

Cost of Sales and Gross Profit. Our cost of sales for the year ended December 31, 2022was$388.2 million, resulting in gross profit of$413.0 million, compared to cost of sales of$326.6million and gross profit of$376.2million for the year ended December 31,2021. The gross margin for 2022 was 52%, compared to 54% in 2021.

The increase in our gross profit for the year ended December 31, 2022, was primarily the result of the $98.4 million increase in total sales, driven by increased supply sales. Gross profit and gross margin benefited from an increase in average selling prices as well as improvement in manufacturing efficiencies and leverage of fixed overhead, offsetting the pressure from product mix. The gross margin decline in 2022 was related primarily to certain COVID-related pressures, as well as the introduction of the Tandem Choice program. Gross margin was pressured by more than 1 percentage point from increased pump material costs due to the use of alternative sourcing for raw materials to reduce the risk of component shortages in the near-term and higher freight costs we experienced in 2022. We anticipate that the pressure from increased supply chain and material costs experienced in 2022 will continue into the first half of 2023 as we continue to navigate the challenges of the global pandemic and the economic environment. The impact on gross margin from the Tandem Choice program will fluctuate through the expiration of the program based on the timing of availability of a new hardware platform and the number of eligible customers who ultimately elect to participate.

Selling, General and Administrative Expenses. SG&A expenses increased 28% to $335.7 million for the year ended December 31, 2022, from $261.5 million for the same period in 2021. Employee-related expenses for our SG&A functions comprise the majority of SG&A expenses. The increase compared to 2021 was primarily the result of a$43.8 million increase in salaries, incentive compensation, non-cash stock based compensation, and other employee benefits due primarily to an increase in personnel to expand the number of sales territories in the United States from approximately 95 in 2021 to 110 in 2022, and provide continued support services for our growing installed customer base. Discretionary expenses included an increase of $21.5 million, of which a $12.4 million non-recurring charge for facilities consolidation was recorded in the fourth quarter of 2022, and $9.1 million of lease expenses were incurred throughout the year during the construction phase of our new Tech Center facility (see Note 6, “Leases”). We also experienced an $11.6 million increase in other non-employee discretionary spending, primarily attributable to equipment, outside services, and travel.

Research and Development Expenses. R&D expenses increased 51% to $139.1 million for the year ended December 31, 2022, from $92.1 million for the same period in 2021. The increase in R&D expenses wasprimarily the result of an increase of $32.4 million in salaries, incentive compensation, non-cash stock based compensation, and other employee benefitsdue to an increase in personnel to support ourproduct development efforts. We also experienced a $15.0 million increase in other non-employee discretionary spending, including outside consulting and services, clinical trial expenses, information technology and equipment costs attributable to R&D.

Acquired In-Process Research and Development Expenses. Acquired IPR&D expenses of $31.0 million for the year ended December 30, 2022 represented the value of assets acquired, and acquisition related expenses in connection with our acquisition of Capillary Biomedical (see Note 12, “Acquisitions”).

Other Income (Expense). Total other expense, net for the year ended December 31, 2022 was $4,000, compared to $6.8 million in 2021. Other expense for 2022 primarily consisted of $6.2 million of interest expense which included the amortization of debt issuance costs related to our Convertible Senior Notes, offset by $6.1 million of interest income earned on our cash equivalents and short-term investments. Other expense for 2021 consisted primarily of $6.0 million of interest expense which included amortization of debt issuance costs related to our Notes, and an $1.4 million revaluation loss from the change in the fair value of certain warrants, offset by $0.7 million of interest income earned on our cash equivalents and short-term investments. Interest income increased in 2022 primarily due to the higher interest rate environment as compared to 2021.

Income Tax Expense (Benefit). We recognized income tax expense of $1.7 million on a pre-tax loss of $92.9 million for the year ended December 31, 2022, compared to income tax expense of $0.3 million on a pre-tax gain of $15.9 million for the same period in 2021. The income tax expense for the year ended December 31, 2022 was primarily attributable to federal, state and foreign income tax expense as a result of current taxable income in those jurisdictions. Income tax expense for the year ended December 31, 2021 was primarily attributable to state and foreign income tax expense as a result of current taxable income in those jurisdictions.

Comparison of Years Ended December 31, 2021 and 2020

Sales. For the year ended December 31, 2021, sales were $702.8 million, which included $177.9 million of sales outside the United States. For the year ended December 31, 2020, sales were $498.8 million, which included $83.2 million of sales outside the United States.

The increase in worldwide sales of $204.0 million in 2021, as compared to 2020, was primarily driven by a 41% increase in worldwide pump shipments to 128,312 in 2021, compared to 90,771 in 2020, and a 56% increase in pump-related supply sales. Sales of pump-related supplies increased primarily due to a 52% growth in our ending estimated worldwide installed base of customers.

Sales by product in the United States were as follows (in thousands):

Year Ended December 31,

Pump sales in the United States were $319.9 million for the year ended December 31, 2021, compared to $269.9 million in the year ended December 31, 2020, as pump shipments increased 18% compared to the prior year due to continued strong demand for our t:slim X2 insulin pump with Control-IQ technology despite the challenging COVID-19 environment which impacted the availability of both customers and healthcare providers. Sales of pump-related supplies increased primarily due to a 39% increase in our ending estimated installed base of customers in the United States. Sales to distributors accounted for 67% and 70% of our total sales in the United States for the years ended December 31, 2021 and 2020, respectively.

Sales by product outside the United States were as follows (in thousands):

Year Ended December 31,

Pump sales outside the United States were $96.5 million for the year ended December 31, 2021, compared to $44.9 million in the year ended December 31, 2020. Pump shipments increased 126% compared to the prior year due to strong demand for our products as we continued to expand the launch of our Control-IQ technology, which began in the third quarter of 2020 outside the United States. Sales of pump-related supplies increased primarily due to an 102% increase in our ending estimated installed base of customers outside the United States. The ordering patterns of our distributors outside the United States for pumps and supplies is highly variable from period to period as they continue to gain familiarity with the markets in which they operate and the acceptance of our products in those markets. This variability was compounded by the differing levels of impact from the global pandemic with regard to access to both physicians and customers. Sales to distributors accounted for 95% and 94% of our total sales outside the United States for the years ended December 31, 2021 and 2020, respectively.

Cost of Sales and Gross Profit. Our cost of sales for the year ended December 31, 2021 was $326.6 million, resulting in gross profit of $376.2 million, compared to cost of sales of $238.3 million and gross profit of $260.5 million for the year ended December 31, 2020. The gross margin for 2021 was 54%, compared to 52% in 2020.

The increase in our gross profit for the year ended December 31, 2021, was primarily the result of the $204.0 million increase in total sales. Gross profit and gross margin both benefited from improvement in the per unit manufacturing costs for pumps and supplies from efficiencies in the manufacturing process, leverage of fixed overhead, increased volumes from our third-party cartridge manufacturer as well as labor and material cost reductions. On an aggregate basis, non-manufacturing costs, which primarily consist of warranty, royalty, freight, training and digital health product support costs, also reflected improvement on a per unit basis. To a lesser extent, overall average selling prices slightly pressured gross margin as pump sales outside the United States comprised a greater portion of total pump sales compared to the prior year, while supply average selling prices reflected modest benefit from the growth of our installed base of customers outside the United States. Pump sales, which have the highest gross margin, were 59% of total worldwide sales for the year ended December 31, 2021, compared to 63% in 2020. Non-cash stock-based compensation expense allocated to cost of sales was $6.4 million for the year ended December 31, 2021, compared to $8.2 million in 2020, representing 1% and 2% of sales in those periods, respectively.

Selling, General and Administrative Expenses. SG&A expenses increased 28% to $261.5 million for the year ended December 31, 2021, from $204.9 million for the same period in 2020. Employee-related expenses for our SG&A functions comprise the majority of SG&A expenses. The increase compared to 2020 was primarily the result of a $43.9 million increase in salaries, incentive compensation and other employee benefits due to an increase in personnel to support additional sales territories, higher sales and other services in support of our growing installed customer base. We also experienced a $12.7 million increase in other non-employee discretionary spending for software maintenance, outside consulting and services and supplies.

Research and Development Expenses. R&D expenses increased 45% to $92.1 million for the year ended December 31, 2021, from $63.6 million for the same period in 2020. The increase in R&D expenses was primarily the result of an increase of $20.7 million in salaries, incentive compensation and other employee benefits due to an increase in personnel to support our product development efforts, as well as a $7.8 million increase in other non-employee discretionary spending, including outside consulting and services, equipment and supplies attributable to R&D.

Other Income (Expense). Total other expense, net for the year ended December 31, 2021 was $6.8 million, compared to $28.3 million in 2020. Other expense for 2021 primarily consisted of $6.0 million of interest expense which included the amortization of debt issuance costs related to our Notes issued in the second quarter of 2020, and a $1.4 million revaluation loss from the change in the fair value of certain warrants. Other expense for 2020 consisted primarily of a $17.1 million revaluation loss from the change in the fair value of certain warrants, and $12.8 million of interest expense which included the amortization of debt discount and debt issuance costs related to our Notes. The decrease in interest expense in 2021 was primarily due to the adoption of ASU No. 2020-06 in the first quarter of 2021 (see Note 7, “Debt”). Interest income and other, for the years ended December 31, 2021 and 2020, primarily consisted of interest earned on our cash equivalents and short-term investments, which decreased in 2021 primarily due to the lower interest rate environment as compared to 2020.

Income Tax Expense (Benefit). We recognized income tax expense of $0.3 million on pre-tax income of $15.9 million for the year ended December 31, 2021, compared to an income tax benefit of $1.9 million on a pre-tax loss of $36.3 million for the same period in 2020. Income tax expense for the year ended December 31, 2021 was primarily attributable to state and foreign income tax expense as a result of current taxable income in those jurisdictions. The income tax benefit for the year ended December 31, 2020 was primarily due to benefit associated with the release of valuation allowance related to the acquisition of Sugarmate, partially offset by state and foreign income tax expense as a result of current taxable income in those jurisdictions.

Liquidity and Capital Resources

At December 31, 2022, we had $616.9 million in cash and cash equivalents and short-term investments. In addition, we had a total available balance of $95.1 million at December 31, 2022 under our Revolving Line of Credit (the Line of Credit), which expires in May 2025 (see Note 7, “Debt”). We believe that our cash and cash equivalents, short-term investments, borrowing availability under the Line of Credit, and future cash flows from operations will be sufficient to fund our ongoing core business activities.

Historically, our principal sources of cash have included cash collected from product sales, private and public offerings of equity securities, exercises of employee stock awards, and debt financing.

Our historical cash outflows have primarily been associated with cash used for operating activities such as research and development activities, sales, marketing and commercialization of our products worldwide, expansion of clinical and customer support organizations, the acquisition of intellectual property, equity investments and acquired assets, capital expenditures and debt service costs.

The following table shows a summary of our cash flows for the years ended December 31, 2022, 2021 and 2020 (in thousands):

Year Ended December 31,

Net cash provided by (used in):

Effect of foreign exchange rate changes on cash 827 153 387

Operating activities. Net cash provided by operating activities was $50.5 million for the year ended December 31, 2022, compared to cash provided of $111.4 million and $24.7 million, respectively, for the years ended December 31, 2021 and 2020.

The reduction in net cash provided by operating activities for 2022 compared to 2021 was primarily a result of the $110.2 million increase in net loss, as well as net working capital changes. Working capital changes during 2022, primarily consisted of increases in inventories, accounts receivable, accounts payable, and operating leases and other current liabilities. Accounts receivable increased to $114.7 million at December 31, 2022 from $110.7 million at December 31, 2021, as a result of higher sales in the fourth quarter of 2022 as compared to the fourth quarter of 2021. Inventories increased to $111.1 million at December 31, 2022 from $68.6 million at December 31, 2021.

The improvement to net cash provided by operating activities for 2021 compared to 2020 was driven by higher sales and gross profit in 2021, which resulted in a $35.7 million improvement to net income when adjusted for non-cash expenses, particularly stock-based compensation expense and depreciation and amortization expense, as well as a $51.0 million increase from net working capital changes. Working capital changes in 2021 primarily consisted of increases in accounts payable, employee-related liabilities, deferred revenue, and other current and long-term liabilities, offset by increases in accounts receivable and inventories, all of which were related to the growth in our business.

Investingactivities. Net cash provided by investing activities was $33.2 million for the year ended December 31, 2022, which was primarily related to $569.5 million in proceeds from maturities and redemptions of short-term investments, offset by $467.7 million of purchases of short-term investments, $34.1 million in purchases of property and equipment, $25.7 million for the acquisition of Capillary Biomedical, including $1.0 million of transaction costs, and $8.9 million cash paid for purchases of intangible assets and strategic investments. Net cash used by investing activities was $186.9 million for the year ended December 31, 2021, which was primarily related to $733.4 million of purchases of short-term investments, $14.2 million in purchases of property and equipment, and $9.3 million cash paid for purchases of intangible assets and strategic investments, offset by $570.0 million in proceeds from maturities and redemptions of short-term investments. Net cash used by investing activities was $296.1 million for the year ended December 31, 2020, which was primarily related to purchases of short-term investments of $497.1 million using the net proceeds from the issuance of our convertible senior notes in May of 2020, and $27.4 million in purchases of property and equipment, offset by $233.3 million in proceeds from maturities and redemptions of short-term investments.

Financingactivities. Net cash provided by financing activities was $16.9 million for the year ended December 31, 2022, which primarily consisted of proceeds from the issuance of common stock under our stock plans. Net cash provided by financing activities was $51.9 million for the year ended December 31, 2021, which primarily consisted of proceeds from the issuance of common stock under our stock plans. Net cash provided by financing activities was $314.4 million for the year ended December 31, 2020, which primarily consisted of $278.7 million in proceeds from the issuance of the Convertible Senior Notes which was partially offset by $34.1 million in payments related to the Capped Call Transactions (see Note 7, “Debt”), and $66.9 million in proceeds from the issuance of common stock under our stock plans.

Our liquidity position and capital requirements are subject to fluctuation based on a number of factors. In particular, our cash inflows and outflows are principally impacted by the following:

•our ability to generate sales, the timing of those sales, the mix of products sold and the collection of receivables from period to period;

•the timing of any additional financings, and the net proceeds raised from such financings;

•the timing and amount of proceeds from the issuance of equity awards pursuant to employee stock plans;

•fluctuations in gross margins and operating margins; and

•fluctuations in working capital, including changes in accounts receivable, inventories, accounts payable, employee-related liabilities, and operating lease liabilities.

Both our primary short-term and long-term capital needs are expected to include expenditures related to:

•support of our commercialization efforts related to our current and future products;

•expansion of our customer support resources for our growing installed customer base;

•research and product development efforts, including clinical trial costs;

•acquisitions, leasing or licensing of equipment, technology, intellectual property and other assets;

•additional facilities leases and related tenant improvements;

•investments for the development, improvement and acquisition of manufacturing, testing and packaging equipment to support business growth and increase capacity; and

•payments under licensing, development and commercialization agreements.

•acquisition and subsequent integration of businesses, products and technologies.

Indebtedness

Convertible Senior Notes

In May 2020, we entered into a purchase agreement with certain counterparties for the sale of an aggregate of $287.5 million principal amount of 1.50% Convertible Senior Notes due 2025 in a private offering to qualified institutional buyers (the 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 (see Note 7, “Debt”). The Notes are senior unsecured obligations. Interest is payable in cash semi-annually in arrears beginning on November 1, 2020 at a rate of 1.50% per year. The Notes mature on May 1, 2025 unless repurchased, redeemed, or converted in accordance with their terms prior to the maturity date.

Cash payments due by calendar year for our Convertible Senior Notes at December 31, 2022 are as follows (in thousands):

Principal amount of convertible senior notes(1) $ 287,500 $ — $ — $ 287,500

(1) The Convertible Senior Notes may be settled in cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election.

Promissory Note Payable

In connection with our acquisition of Capillary Biomedical, Inc. (see Note 12, “Acquisitions”), we assumed $4.7 million of long-term debt. The promissory note accrues interest at the rate of 5% per year, becomes due and payable upon the first sale or license of the commercialized product, and is included as a component of other long-term liabilities on the consolidated balance sheet at December 31, 2022.

Contractual Obligations & Off-Balance Sheet Arrangements

Contractual Obligations

Operating Lease Obligations

We lease general office space, laboratory, manufacturing and warehouse facilities, and equipment under noncancelable operating leases for use in our operations. For a description of our contractual obligations related to leases at December 31, 2022, see Note 6 “Leases” to the consolidated financial statements in Part II, Item 8 of this Annual Report.

Purchase Order Commitments

We have agreements with suppliers and other parties to purchase inventory, other goods and services and long-lived assets. For a description of our contractual obligations related to purchase order commitments at December 31, 2022, see Note 13 “Commitments and Contingencies” to the consolidated financial statements in Part II, Item 8 of this Annual Report.

Acquisition-related Contingent Consideration

In connection with our acquisition of AMF Medical SA completed in January of 2023 (see Note 15, “Subsequent Event” to the consolidated financial statements in Part II, Item 8 of this Annual Report), the total consideration includes cash paid at the closing of the transaction and additional contingent earnout payments. The additional earnout payments of up to CHF 129.6 million, in aggregate, become payable upon the achievement of certain milestones and are comprised of a payment of up to CHF 38.4 million upon the successful completion of key development milestones over the next two years, and a payment of up to CHF 91.2 million upon obtaining regulatory clearance of an automated controller enabled (ACE) pump by the United States Food and Drug Administration.

Off-Balance Sheet Arrangements

As of December 31, 2022, we are a party to certain standby letter of credit arrangements in support of our operating lease obligations. For a description of the arrangements we consider significant, see Note 13 “Commitments and Contingencies” to the consolidated financial statements in Part II, Item 8 of this Annual Report.

Critical Accounting Policies Involving Management Estimates and Assumptions

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements 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 our consolidated financial statements. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about our financial condition and results of operations that are not readily apparent from other sources. Actual results may differ materially from these estimates.

While our significant accounting policies are more fully described in Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in this Annual Report, we believe that the following accounting policies are the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

Our revenue is generated primarily from sales of our insulin pumps, disposable insulin cartridges and infusion sets to individual customers with third-party insurance coverage and through a network of distributors that resell the products to insulin-dependent diabetes customers. We are paid directly by customers who use the products, distributors and third-party insurance payors. We recognize revenue when control of our products is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products, net of estimated returns. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. Revenue recognition for contracts with multiple performance obligations is based on the separate satisfaction of each distinct performance obligation within the contract. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of a product to the customer, meaning the customer has the ability to direct the use of and obtain the benefit from the product. Complementary products, such as the t:connect cloud-based data management application and the Tandem Device Updater, are considered distinct performance obligations 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. When there is no standalone value for the complementary product, we determine its value by applying the expected cost plus a margin approach and then allocate the residual to the insulin pumps.

For purposes of evaluating the Tandem Choice Program, we have determined that the ability for a customer to upgrade to a new technology, represents a material right because the pricing inherent in such option provides the customer with a discount that is incremental to the range of discounts that would otherwise be granted for the related goods and services to comparable customers. The standalone selling price for the Choice Right was estimated based on the adjusted market assessment approach and contemplates the likelihood that the respective option will be exercised.

Warranty Reserve

We generally provide a four-year assurance type warranty on our insulin pumps to end user customers and may replace any pumps that do not function as intended in accordance with the product specifications within the warranty period. Insulin pumps returned to us may be refurbished and redeployed. We establish the warranty reserve liability when control of the pump is transferred to the customer, and we reevaluate our estimate of the warranty obligation at each reporting period. Warranty costs are estimated primarily based on the current expected product replacement cost and expected replacement rates utilizing historical experience. Experience has shown that initial data for any given pump version may be insufficient; therefore, our process relies on long-term historical averages until sufficient data are available. As actual experience becomes available, we use the data to update the historical averages. Changes to the actual replacement rates or the expected product replacement cost could cause a material increase or decrease to our estimated warranty reserve and related cost of goods sold. We may make further adjustments to the warranty reserve when deemed appropriate, giving additional consideration to the length of time each pump version has been in the field and revised future expectations of performance based on new features and capabilities that may become available through Tandem Device Updater.

Income Taxes

Significant judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. We use the asset and liability approach to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. Significant judgment is required to evaluate the need for a valuation allowance. 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 determination of cumulative pre-tax book income after permanent differences, projections of pre-tax book income for the foreseeable future, earnings history, and reliability of forecasting. We will continue to assess the need for a valuation allowance on our deferred tax assets by evaluating both positive and negative evidence that may exist. Changes in the recognition or measurement of valuation allowance could result in material increases or decreases in our income tax expense in the period in which we make a change, which could have a material impact on our effective tax rate and operating results.

Utilization of our 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. We have completed analyses through December 31, 2021 to determine whether our net operating losses and credits are likely to be limited by Section 382. Based on the 2018 study completed in 2019, we determined that an ownership change, as defined under Section 382, occurred in 2018 and the resulting limitation significantly reduced our ability to utilize our net operating loss and credit carryovers before they expire. As a result, in 2019 we reduced our 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 our ability to fully utilize any remaining tax benefits.

We recognize 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 we believe we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential revisions and adjust 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.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Credit and Interest Rate Risks

We invest our excess cash in marketable securities consisting primarily of U.S. Treasury securities, U.S. Government-sponsored enterprise securities, commercial paper and corporate debt securities. Some of the financial instruments in which we invest subject us to market risk, in that a change in prevailing interest rates may cause the principal amount of the instrument to fluctuate. Other financial instruments in which we invest subject us to credit risk, in that the value of the instrument may fluctuate based on the issuer’s ability to pay. Credit rating agencies have, from time to time, issued downgrades or revised outlooks to negative for certain issuers of the debt securities held in our short-term investments portfolio. Unrealized losses on available-for-sale debt securities at December 31, 2022 were primarily due to the recent increase in market interest rates. Based on the credit quality of the available-for-sale debt securities that are in an unrealized loss position, and our current estimates of future cash flows to be collected from those securities, we believe the unrealized losses were not credit losses (see Note 3, “Short-Term Investments”).

The primary objectives of our investment activities are to maintain liquidity and preserve principal while maximizing the income we receive from our financial instruments without significantly increasing risk. We have established guidelines regarding approved investments and maturities of investments, which are primarily designed to maintain liquidity and preserve principal.

Because of the short-term maturities of our financial instruments, we do not believe that an increase or decrease in market interest rates would have any significant impact on the realized value of our investment portfolio. If a 10% change in interest rates were to have occurred on December 31, 2022, it would not have had a material effect on the fair value of our investment portfolio as of that date.

In May 2020, we issued $287.5 million principal amount of Convertible Senior Notes, which bear interest at a fixed rate of 1.50% per year. Accordingly, we are not subject to interest rate risk as a result of the Convertible Senior Notes (see Note 7, “Debt”).

Foreign Currency Exchange Rate Risk

Our operations are primarily located in the United States. In addition, we have a sales and marketing office in Canada and, beginning in 2022, a distribution center in the Netherlands. Our sales to customers in the United States are made in U.S. dollars. With the exception of sales from our distribution center in the Netherlands and a portion of our sales in Canada, our sales to customers outside of the United States are currently made to independent distributors under agreements denominated in U.S. dollars. Accordingly, we believe our exposure to foreign currency rate fluctuations is currently limited to our operations in Canada and the Netherlands, where fluctuations in the rate of exchange between the U.S. dollar and the local currency could adversely affect our financial results. As we expand and further develop our operations in markets outside the United States, particularly in Europe, we will be exposed to additional foreign currency exchange rate risk. In addition, from time to time, we may have foreign currency exchange risk related to existing assets and liabilities, committed transactions and forecasted future cash flows. In certain circumstances, we may seek to manage such foreign currency exchange risk by using derivative instruments such as foreign currency exchange forward contracts to hedge our risk. However, we may choose not to hedge some exposures for a variety of reasons, including prohibitive economic costs.

Item 8. Consolidated Financial Statements and Supplementary Data.

Our consolidated financial statements as of December 31, 2022 and 2021 and for each of the three years in the period ended December 31, 2022, and the Report of the Independent Registered Public Accounting Firm are included in this report as listed in the index.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 71

Consolidated Balance Sheets as of December 31, 2022 and 2021 73

Notes to Consolidated Financial Statements 77

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Tandem Diabetes Care, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Tandem Diabetes Care, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2022 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 2023 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Warranty reserve – Estimation of Product Replacement Reserve

/s/ Ernst & Young LLP

We have served as the Company's auditor since 2009.

San Diego, California

February 22, 2023

TANDEM DIABETES CARE, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

December 31, December 31,

Assets

Current assets:

Prepaid and other current assets 7,241 8,433

Liabilities and Stockholders’ Equity

Current liabilities:

Commitments and contingencies (Note 13) — —

Stockholders’ equity:

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

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

TANDEM DIABETES CARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

Year Ended December 31,

Operating expenses:

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

Other income (expense), net:

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

Other comprehensive income (loss):

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

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

Net income (loss) per share - basic $ (1.47) $ 0.25 $ (0.56)

Net income (loss) per share - diluted $ (1.47) $ 0.24 $ (0.56)

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

TANDEM DIABETES CARE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

Common Stock

Fair value of common stock warrants at time of exercise — — 26,335 — — 26,335

Stock-based compensation expense — — 57,725 — — 57,725

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

Foreign currency translation gains — — — 118 — 118

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)

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

(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.

TANDEM DIABETES CARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Year Ended December 31,

Operating Activities

Amortization of debt discount and issuance costs 1,896 1,727 10,096

Lease termination and impairment charges 7,567 — —

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

Amortization of premium (discount) on short-term investments 4,187 365 (1,296)

Benefit for deferred income taxes — — (2,126)

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

Changes in operating assets and liabilities:

Prepaid and other current assets (58) (1,570) (2,427)

Investing Activities

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

Financing Activities

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

Other financing activities (675) — —

Effect of foreign exchange rate changes on cash 827 153 387

Supplemental disclosures of cash flow information

Supplemental schedule of non-cash investing and financing activities

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

TANDEM DIABETES CARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Basis of Presentation

The Company

Tandem Diabetes Care, Inc. is a medical device company focused on the design, development and commercialization of technology solutions for people living with diabetes. Tandem Diabetes Care, Inc. is incorporated in the state of Delaware. Unless the context requires otherwise, the terms the “Company” or “Tandem” refer to Tandem Diabetes Care, Inc., together with its wholly-owned subsidiaries in the United States, Canada and the Netherlands.

The Company manufactures, sells, and supports insulin pump products that are designed to address the evolving needs and preferences of differentiated segments of the insulin-dependent diabetes market. The Company’s manufacturing, sales and support activities principally focus on the t:slim X2 Insulin Delivery System (t:slim X2), the Company’s flagship pump platform which has an advanced algorithm for managing insulin delivery, and is designed to display continuous glucose monitoring (CGM) sensor information directly on the pump home screen. The Company’s insulin pump products are compatible with other complementary digital health offerings, such as the t:connect mobile app and cloud-based diabetes management application (t:connect), and the Tandem Device Updater, a Mac- and PC-compatible tool which offers and supports remote updates of the Company’s insulin pump software from a personal computer. The Company’s insulin pump products are generally considered durable medical equipment and have an expected lifespan of at least four years. In addition to insulin pumps, the Company sells disposable products that are used together with the pumps and are replaced every few days, including cartridges for storing and delivering insulin, and infusion sets that connect the insulin pump to a user’s body.

Basis of Presentation and Principles of Consolidation

The Company has prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The statements include the accounts of Tandem Diabetes Care, Inc. and its wholly-owned subsidiaries in the United States, Canada, and the Netherlands. All significant intercompany balances and transactions have been eliminated in consolidation.

The functional currency of the Company’s foreign subsidiaries is their respective local currency. The Company translates the financial statements of its foreign subsidiaries into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates for each period for revenue, costs and expenses. Translation related adjustments are included in other comprehensive income (loss), and in accumulated other comprehensive income (loss) in the stockholders’ equity section of the Company’s consolidated balance sheets. Foreign exchange gains or losses resulting from balances denominated in a currency other than the functional currency are recognized in interest income and other, net in the Company’s consolidated statements of operations.

Reclassifications

Deferred revenue long-term, which was reported as a component of other long-term liabilities in 2021, is now separately reported on the consolidated balance sheet. The Company also reclassified the 2021 liability of $0.1 million related to common stock warrants (see Note 5, “Fair Value Measurements”), which was previously reported separately, to other current liabilities on the Company’s consolidated balance sheet. In addition, certain prior year balances on the consolidated statements of cash flows have been reclassified to conform to the current year presentation.

2. Summary of Significant Accounting Policies

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

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes as of the date of the consolidated financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions.

Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less from the date of purchase and that can be liquidated without prior notice or penalty to be cash equivalents.

Short-Term Investments

The Company’s short-term investments are classified as available-for-sale securities. Such securities are carried at fair value as determined by prices for identical or similar securities at the balance sheet date. The Company’s short-term investments consist of Level 1 and Level 2 financial instruments in the fair value hierarchy. The net unrealized gains or losses on available-for-sale securities that are not related to credit factors are reported as a component of other comprehensive income (loss) within the statements of operations and accumulated other comprehensive income (loss) as a separate component of stockholders’ equity on the consolidated balance sheets. The Company determines realized gains or losses on the sale of available-for-sale securities using the specific identification method and includes net realized gains and losses as a component of other income or expense within the consolidated statements of operations.

The Company reviews its available-for-sale debt securities for credit losses quarterly, considering a variety of factors, including the significance of the decline in value as compared to the amortized cost basis; underlying factors contributing to a decline in the prices of securities in a single asset class; the security’s relative performance versus its peers, sector or asset class; the market and economy in general; views of external investment managers; news or financial information that has been released specific to the investee; and the outlook for the overall industry in which the investee operates. Losses on available-for-sale debt securities as a result of credit factors are recognized by recording an impairment loss as a component of other income or expense within the consolidated statements of operations and a corresponding allowance for credit losses. The Company has not recognized any impairment losses related to its short-term investments during the years ended December 31, 2022, 2021 and 2020.

Accounts Receivable

The Company grants credit to various customers in the ordinary course of business and is paid directly by customers who use its products, distributors and third-party insurance payors. The Company maintains an allowance for its current estimate of expected credit losses. Provisions for expected credit losses are estimated based on historical experience, assessment of specific risk, review of outstanding invoices, forecasts about the future, and various assumptions and estimates that are believed to be reasonable under the circumstances, including credit risks as a result of the coronavirus pandemic, recessionary concerns, changes in discretionary spending, increased interest rates, and other macroeconomic factors. Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a balance is uncollectible.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company maintains deposit accounts in federally insured financial institutions in excess of federally insured limits. The Company also maintains investments in money market funds that are not federally insured. Additionally, the Company has established guidelines regarding investment instruments and their maturities, which are designed to maintain preservation of principal and liquidity.

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,

Distributor C * * 12.9 % * *

Distributor D * * * 10.4 % *

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

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and employee-related liabilities are reasonable estimates of their fair values because of the short-term nature of these assets and liabilities. Short-term investments are carried at fair value. The carrying value and estimated fair value of certain of the Company’s common stock warrants was determined using the Black-Scholes pricing model as of December 31, 2021 (see Note 5, “Fair Value Measurements”).

The Company’s convertible senior notes are carried at amortized cost on the consolidated balance sheets (see Note 7, “Debt”). The Company measures the fair value of its convertible senior notes for disclosure purposes. The Company estimated the fair value of its convertible senior notes to be $260.5 million and $430.0 million at December 31, 2022 and December 31, 2021, respectively, based on Level 2 quoted market prices as of those dates.

Valuation of Inventories

Inventories are valued at the lower of cost or net realizable value, determined by the first-in, first-out method. Inventory is recorded using standard cost, including material, labor and overhead costs. The Company periodically reviews inventories for potential impairment and adjusts inventory for potentially excess or obsolete goods to state inventories at their net realizable value. Factors influencing these adjustments include quantities on hand and firm purchase commitments, expectations of future use, judgments based on quality control testing data and assessments of the likelihood of scrapping or obsoleting certain inventories based on future demand for its products and market conditions.

Long-Lived Assets

Property and Equipment

Property and equipment, which primarily consist of office furniture and equipment, manufacturing equipment, scientific equipment, computer equipment, and leasehold improvements, are stated at cost, less accumulated depreciation. Property and equipment are depreciated over the estimated useful lives of the assets, generally three to seven years, using the straight-line method. Leasehold improvements and related equipment are amortized over the lesser of the estimated useful lives of the assets or the remaining lease term, unless there is a transfer of title or purchase option that is reasonably certain to be exercised. Maintenance and repair costs are expensed as incurred.

Operating Lease Right-of-Use Assets and Liabilities

Operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized when the Company takes possession of the leased property (the Commencement Date) based on the present value of lease payments over the lease term. For lease agreements entered into or reassessed after the adoption of ASC 842 Leases, the Company combines lease and non-lease components. Rent expense on noncancelable leases containing known future scheduled rent increases is recorded on a straight-line basis over the term of the respective leases beginning on the Commencement Date. The difference between rent expense and rent paid is accounted for as a component of operating lease right-of-use assets on the Company’s consolidated balance sheets. Landlord improvement allowances and other similar lease incentives are recorded as a reduction of the right-of-use leased assets, and are amortized on a straight-line basis as a reduction to operating lease costs.

Intangible Assets Subject to Amortization

Finite-lived intangible assets (see Note 4, “Composition of Certain Financial Statement Items”) are recorded at cost, net of accumulated amortization and, if applicable, impairment charges. Amortization of finite-lived intangible assets is recognized over their estimated useful lives on a straight-line basis.

Impairment of Long-Lived Assets

Long-lived assets, such as property and equipment, right-of-use lease assets, and acquired intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined using unobservable (Level 3) inputs, including discounted cash flow models, future estimated sublease income, and third-party independent appraisals, as considered necessary. There is uncertainty in the projected undiscounted future cash flows used in the Company’s impairment review analysis, which requires the use of estimates and assumptions. If actual performance does not achieve the projections, or if the assumptions used change in the future, the Company may be required to recognize additional impairment charges in future periods. Other than the impairment of operating lease right-of-use assets recognized in the fourth quarter of 2022 (see Note 6, “Leases”), there were no impairments of long-lived assets, including acquired intangible assets, during the years ended December 31, 2022 and 2021.

Strategic Investments

During the third quarter of 2022, the Company made an investment of Swiss Francs (“CHF”) 8.0 million, or $8.3 million, in AMF Medical SA (“AMF Medical”), a privately held company. The investment is included as a component of other long-term assets on the consolidated balance sheet at December 31, 2022. On January 19, 2023, the Company completed the acquisition of AMF Medical, pursuant to the terms of the Purchase Agreement entered into on December 13, 2022 (see Note 15, “Subsequent Event”).

During the second quarter of 2021, the Company made an $8.1 million equity investment in a private company, which represented less than 5% of the outstanding equity of that company as of the date of investment. The investment is carried at cost minus impairment, if any, adjusted for changes in observable prices and is included as a component of other long-term assets on the consolidated balance sheets. The Company monitors this investment to evaluate whether any increase or decline in its value has occurred, based on the implied value of recent company financings, public market prices of comparable companies and general market conditions.

Revenue Recognition

Revenue is generated primarily from sales of insulin pumps, disposable insulin cartridges and infusion sets to individual customers with third-party insurance coverage and through a network of distributors that resell the products to insulin-dependent diabetes customers. The Company recognizes revenue when it transfers control of the promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services, net of estimated returns.

Revenue Recognition for Arrangements with Multiple Performance Obligations

The Company considers the individual deliverables in its product offering as separate performance obligations. The transaction price is determined based on the consideration expected to be received, based either on the stated value in contractual arrangements or the estimated cash to be collected in non-contracted arrangements. The Company allocates the consideration to the individual performance obligations and recognizes the consideration based on when the performance obligation is satisfied, considering whether or not this occurs at a point in time or over time. Generally, insulin pumps, cartridges, infusion sets, and accessories are deemed performance obligations that are satisfied at a point in time when the customer obtains control of the promised good, which typically is upon shipment for our distributor arrangements and upon receipt for sales directly to individual customers. Complementary products, such as t:connect and the Tandem Device Updater, are considered distinct performance obligations that are satisfied over time, as access and support for these products is provided throughout the typical four-year warranty period of the insulin pumps. Accordingly, revenue related to the complementary products is deferred and recognized over a four-year period. Where there is no standalone value for the complementary product, the Company determines its value by applying the expected cost plus a margin approach and then allocates the residual to the insulin pumps.

Tandem Choice Program

In September 2022, the Company announced and launched a new technology access program, (Tandem Choice) that provides eligible, in-warranty t:slim X2 customers in the United States with the flexibility to obtain the newest hardware platform when it is commercially available. Participating customers have the right to purchase the alternative Tandem pump for a fee (the Choice Right). The Tandem Choice expires on December 31, 2024.

For purposes of evaluating the Tandem Choice, in accordance with ASC 606, the Company has determined that the ability for a customer to upgrade to a new technology, represents a material right because the pricing inherent in such option provides the customer with a discount that is incremental to the range of discounts that would otherwise be granted for the related goods and services to comparable customers. The standalone selling price for the Choice Right was estimated based on the adjusted market assessment approach and contemplates the likelihood that the respective option will be exercised. At December 31, 2022, $6.8 million was allocated to the material right and recorded in current deferred revenue on the consolidated balance sheet.

Sales Returns

The Company offers a 90-day right of return to customers in the U.S. and Canada from the date of shipment of its insulin pumps, provided a physician’s confirmation of the medical reason for the return is received. Estimated allowances for sales returns are based on historical returned quantities as compared to pump shipments in those same periods of return, adjusted for known or expected changes in the marketplace when appropriate. The amount recorded in deferred revenue on the Company’s consolidated balance sheets for allowances for sales returns was $0.5 million and $0.6 million at December 31, 2022 and 2021, respectively. Actual product returns have not differed materially from estimated amounts recorded in the accompanying consolidated financial statements.

Warranty Reserve

The Company generally provides a four-year warranty on its insulin pumps to end-user customers and may replace any pumps that do not function as intended in accordance with the product specifications within the warranty period. Additionally, the Company offers a six-month warranty on disposable insulin cartridges and infusion sets. Estimated warranty costs are recorded at the time of shipment, and the Company reevaluates the estimate of the warranty reserve obligation at each reporting period. Warranty costs are estimated primarily based on the current expected product replacement cost and expected replacement rates utilizing historical experience. Insulin pumps returned to the Company may be refurbished and redeployed. Experience has shown that initial data for any given pump version may be insufficient; therefore, the Company’s process relies on long-term historical averages until sufficient data are available. As actual experience becomes available, the Company uses the data to update the historical averages. The Company may make further adjustments to the warranty reserve when deemed appropriate, giving additional consideration to revised future expectations of performance based on enhanced hardware components, or new features and capabilities that may become available through Tandem Device Updater. Warranty expense is recorded as a component of cost of sales in the consolidated statements of operations.

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

Year Ended December 31,

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

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date based on the estimated fair value of the award, and the portion that is ultimately expected to vest is recognized as compensation expense over the requisite service period on a straight-line basis. The Company estimates the fair value of stock options issued under the Company’s Amended and Restated 2013 Stock Incentive Plan (2013 Plan) and the fair value of the employees’ purchase rights under the Company’s 2013 Employee Stock Purchase Plan (ESPP) using the Black-Scholes option-pricing model on the date of grant. The Black-Scholes option-pricing model requires the use of assumptions about a number of variables, including stock price volatility, expected term, dividend yield and risk-free interest rate (see Note 8, “Stockholders’ Equity”). The fair value of restricted stock unit (RSU) awards issued under the 2013 Plan that vest solely based on service is estimated based on the fair market value of the underlying stock on the date of grant. The fair value of RSU awards issued under the 2013 Plan that vest based upon the Company’s actual performance relative to predefined performance metrics, and the awardee’s continuing service through the measurement date, is estimated based on the fair market value of the underlying stock on the date of grant and the probability that the specified performance criteria will be met. At each reporting period, the Company reassesses the probability of the achievement of such performance metrics. Any expense change resulting from an adjustment in the estimated shares to be released is recorded in the period of adjustment.

Shipping and Handling Expenses

Shipping and handling expenses associated with product delivery are included within cost of sales in the Company’s statements of operations. Amounts billed to a customer for shipping and handling are reported as revenues.

Research and Development Costs

All research and development costs are charged to expense as incurred. Such costs include personnel-related costs, including stock-based compensation, supplies, license fees, development prototypes, outside design and testing services, depreciation, allocated facilities and information services, clinical trial costs, milestone payments under the Company’s licensing, development and commercialization agreements, and other indirect costs.

Acquired In-Process Research and Development Expenses

Acquired in-process research and development (IPR&D) expenses reflect the costs of externally developed IPR&D projects acquired directly in a transaction other than a business combination that do not have an alternative future use, including the initial costs of rights to IPR&D projects. The acquired IPR&D is expensed on acquisition date. Future costs to develop these IPR&D projects are recorded in research and development expenses on the consolidated statements of operations as incurred.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets or liabilities are recognized based on the temporary differences between financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Tax law and rate changes are reflected in income in the period such changes are enacted. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. Factors reviewed include projections of pre-tax book income for the foreseeable future, determination of cumulative pre-tax book income after permanent differences, earnings history, and reliability of forecasting. The Company will continue to assess the need for a valuation allowance on its deferred tax assets by evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the statement of operations for the period that the adjustment is determined to be required.

The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. While the Company believes it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcomes of examinations by tax authorities in determining the adequacy of its provision for income taxes. The Company continually assesses the likelihood and amount of potential revisions and adjusts the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known. The Company includes interest and penalties related to income taxes, including unrecognized tax benefits, within income tax expense.

Comprehensive Income (Loss)

All components of comprehensive income (loss), including net income (loss), are reported in the consolidated financial statements in the period in which they are recognized. Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on marketable securities and foreign currency translation adjustments.

Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing the net income or loss by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net income (loss) per share reflects the potential dilution that would occur if securities exercisable for or convertible into common stock were exercised for or converted into common stock. Dilutive common share equivalents are comprised of stock options and unvested RSUs outstanding under the Company’s stock plans, potential awards to be granted pursuant to the ESPP, and common stock warrants, each calculated using the treasury stock method; and shares issuable upon conversion of the convertible senior notes calculated using the if-converted method.

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

Year Ended December 31,

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 —

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

Year Ended December 31,

Unvested restricted stock units 1,118 — 78

Warrants to purchase common stock 194 1 379

Awards granted under the ESPP 8 — 3

3. Short-Term Investments

The Company invests in marketable securities primarily consisting of debt instruments of the U.S. Government, U.S. Government-sponsored enterprises, and financial institutions and corporations with strong credit ratings. The following represents a summary of the estimated fair value of short-term investments at December 31, 2022 and December 31, 2021 (in thousands):

Available-for-sale securities:

The contractual maturities of available-for-sale debt securities as of December 31, 2022, were as follows (in thousands):

Years to Maturity

At December 31, 2022 Within One Year One to Two Years Estimated Fair Value

The Company has classified all marketable securities, regardless of maturity, as short-term investments based upon the Company’s ability and intent to use any of those marketable securities to satisfy the Company’s liquidity requirements.

The Company reviews the portfolio of available-for-sale debt securities quarterly to determine if any investment is impaired due to changes in credit risk or other potential valuation concerns. Unrealized losses on available-for-sale debt securities at December 31, 2022 were primarily due to the recent increase in market interest rates. The Company does not intend to sell the available-for-sale debt securities that are in an unrealized loss position, and it is not more likely than not that the Company will be required to sell these debt securities before recovery of their amortized cost bases, which may be at maturity. Based on the credit quality of the available-for-sale debt securities in an unrealized loss position, and the Company’s estimates of future cash flows to be collected from those securities, the Company believes the unrealized losses are not credit losses. Accordingly, the Company did not record an allowance for credit losses related to its available-for-sale debt securities at December 31, 2022.

4. Composition of Certain Financial Statement Items

Accounts Receivable

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

December 31,

Less: allowance for credit losses (4,327) (4,249)

Allowance for Credit Losses

The following table provides a reconciliation of the changes in the allowance for estimated accounts receivable credit losses for the years ended December 31, 2022 and 2021 (in thousands):

Year Ended December 31,

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

Inventories

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

December 31,

Property and Equipment

Property and equipment, net consisted of the following at (in thousands):

December 31,

Manufacturing and scientific equipment 62,797 52,823

Less: accumulated depreciation and amortization (56,175) (49,169)

Total property and equipment, net $ 68,552 $ 50,386

Depreciation and amortization expense related to property and equipment was $12.3 million, $11.7 million, and $9.2 million for the years ended December 31, 2022, 2021, and 2020, respectively.

Intangible Assets Subject to Amortization

Intangible assets subject to amortization consist of technology-based intangibles related to the Company’s acquisition of Sugarmate, as well as patents purchased or licensed that are related to the Company’s commercialized products. Intangible assets at December 31, 2022 and 2021, which were included in other long-term assets on the consolidated balance sheets, were as follows (in thousands):

December 31,

Weighted average remaining amortization period (in months) 30 41

Amortization expense related to intangible assets subject to amortization amounted to $2.0 million, $2.2 million and $1.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. The amortization expense is recorded in cost of sales and selling, general and administrative expense in the consolidated statement of operations. The estimated aggregate amortization expense for each of the three succeeding years is $1.9 million for 2023, $1.9 million for 2024, and the remaining $0.9 million in 2025, all of which will be recorded in selling, general and administrative expense in the consolidated statement of operations.

5. Fair Value Measurements

Authoritative guidance on fair value measurements defines fair value, and provides a consistent framework for measuring fair value and for disclosures of each major asset and liability category measured at fair value on either a recurring or a nonrecurring basis. Fair value is intended to reflect an assumed exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and December 31, 2021, and indicates the fair value hierarchy of the valuation techniques used by the Company to determine such fair value (in thousands):

Fair Value Measurements atDecember 31, 2022

Total Level 1 Level 2 Level 3

Assets

Fair Value Measurements atDecember 31, 2021

Total Level 1 Level 2 Level 3

Assets

U.S. Government-sponsored enterprises 50,686 — 50,686 —

Liabilities

Common stock warrants(2) $ 147 $ — $ — $ 147

Total liabilities $ 147 $ — $ — $ 147

(1)Generally, cash equivalents include money market funds and investments with a maturity of three months or less from the date of purchase.

(2)Included in other current liabilities on the Company’s consolidated balance sheet.

The Company’s Level 2 financial instruments are valued using market prices on less active markets with observable valuation inputs such as interest rates and yield curves. The Company obtains the fair value of Level 2 financial instruments from quoted market prices, calculated prices or quotes from third-party pricing services. The Company validates these prices through independent valuation testing and review of portfolio valuations provided by the Company’s investment managers.

The Company's Level 3 liabilities at December 31, 2021 included outstanding Series A warrants to purchase 1,000 shares of the Company’s common stock, issued by the Company in connection with the public offering of common stock in October 2017 and which expired in October 2022. The fair value of the outstanding Series A common stock warrants was remeasured at each financial reporting date using a Black-Scholes pricing model with any changes in fair value being recognized as a component of other income (expense) in the consolidated statements of operations and comprehensive income (loss). The assumptions used to estimate the fair values of the outstanding Series A warrants at December 31, 2021 were as follows:

Risk-free interest rate 0.3 %

Dividend yield 0.0%

Expected volatility 39.1 %

Expected term (in years) 0.8

The following table presents a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the years ended December 31, 2022, 2021 and 2020 (in thousands):

Year Ended December 31,

Common stock warrants exercised during the period — (15,500) (26,335)

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

6. Leases

The Company's leases consist of operating leases for general office space, research and development, manufacturing and warehouse facilities, and equipment. These noncancellable operating leases have initial lease terms from two years to thirteen years. Leases with an initial term of 12 months or less (Short-term Lease) are expensed as incurred and are not recorded as right-of-use leased assets on the Company’s consolidated balance sheets. The Company is required to recognize operating lease right-of-use assets and liabilities, and begin recording lease expense when the Company takes possession of the leased property (the Commencement Date). The Company recognizes lease expense for these leases on a straight-line basis over the lease term. Because the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at the lease Commencement Date to determine the operating lease right-of-use assets and liabilities based on the present value of future lease payments over the lease term. The Company used the incremental borrowing rate on January 1, 2019 for operating leases that commenced before that date.

Certain leases include an option to renew, with renewal terms that can extend the lease term for additional periods. The exercise of lease renewal options is at the Company’s sole discretion. For renewal options that are reasonably certain at the lease Commencement Date of being exercised, the Company includes the renewal option period in the lease term.

Vista Sorrento Lease

In March 2021, the Company entered into a second amendment (Second Amendment) to its lease agreement for office space located on Vista Sorrento Parkway in San Diego, California (Vista Sorrento Lease) covering 59,013 square feet of general administrative office space (Existing Premises). The Second Amendment expanded the Existing Premises by adding 14,916 square feet of general administrative office space (Expansion Space), and extended the lease term for the Existing Premises through January 2028. The Expansion Space lease Commencement Date occurred in March 2021, and the lease term expires in January 2028. The Company has two options to extend the term of the Vista Sorrento Lease, covering both the Existing Premises and the Expansion Space, with each option providing for an additional period of five years. The Vista Sorrento Lease term was determined assuming the renewal options would not be exercised. The Company recognized operating lease right-of-use assets and corresponding operating lease liabilities of $15.1 million on the consolidated balance sheet in the first quarter of 2021 related to the Second Amendment.

Tech Center Lease

In September 2021, the Company entered into a lease agreement for 181,949 square feet of additional general administrative, laboratory, and research and development office space (the Premises) located on High Bluff Drive in San Diego, California (Tech Center Lease). Possession of the Premises is expected to be tendered to the Company by the landlord in two phases, with Phase I consisting of 143,850 rentable square feet, and Phase II consisting of 38,099 rentable square feet. The Company intends to use Phase I of the Tech Center Lease for operations currently occupying 77,458 square feet of leased space, located on Roselle Street in San Diego, California, that is scheduled to expire in May 2023. The Tech Center Lease also includes a first right of offer with respect to an additional 34,569 rentable square feet of general office space should the space become available.

The initial lease term Phase I Commencement Date occurred in March 2022 when the Company was tendered possession of the Phase I portion of the Premises, and rent payments commenced in September 2022 (the Phase I Rent Commencement Date). The Phase II Commencement Date is expected to occur upon the earlier of (i) the date upon which the Company first commences business in the Phase II portion of the Premises, and (ii) May 1, 2025 (the Phase II Rent Commencement Date). The Tech Center Lease term expires in April 2035. The Company has two options to extend the term of the lease, with each option providing for an additional period of five years. The Tech Center Lease term was determined assuming the renewal options would not be exercised.

The initial base rent for the Tech Center Lease is approximately $906,000 per month beginning on the Phase I Rent Commencement Date, and the base rent increases by approximately $255,000 per month on the Phase II Rent Commencement Date. The monthly base rent will increase by 3.0% on each annual anniversary of the respective Rent Commencement Date. In addition to the monthly base rent, the Company is required to pay its proportionate share of certain ongoing operating expenses throughout the duration of the lease. No base rent, other than the proportionate share of operating expenses, will be due for the Phase I portion of the Premises for months two through nine following the Phase I Rent Commencement Date, and for the Phase II portion of the Premises for months two through five following the Phase II Rent Commencement Date. The Company recognized operating lease right-of-use assets and corresponding operating lease liabilities of $107.5 million on the consolidated balance sheet on the Phase I Commencement Date in the first quarter of 2022.

High Bluff Lease

In May 2021, the Company entered into a lease agreement for approximately 31,372 square feet of general office space located on High Bluff Drive, in San Diego, California (High Bluff Lease). The High Bluff Lease is a direct lease agreement for property the Company previously occupied subject to a sublease agreement. The lease term began in April 2022 following the termination of the High Bluff sublease in March 2022, and is scheduled to expire in March 2024. The Company recognized operating lease right-of-use assets and corresponding operating lease liabilities of $3.0 million on the consolidated balance sheet on the Commencement Date in the second quarter of 2022.

Barnes Canyon Lease

In November 2022, the Company exercised its one-time option to extend the term of the lease covering 48,880 square feet of general office, manufacturing and warehouse space located on Barnes Canyon Road in San Diego, California (Barnes Canyon Lease) for an additional five years from November 2023 to November 2028. The Company recognized operating lease right-of-use assets and corresponding operating lease liabilities of $3.0 million on the consolidated balance sheet in the fourth quarter of 2022 related to the Barnes Canyon Lease term extension.

Lease Termination and Impairment Charges

During the fourth quarter of 2022, the Company recorded $12.4 million of lease termination and impairment charges primarily related to our customer and technical support office space in Boise, Idaho. The $12.4 million charge consisted of a $6.7 million loss on disposal of fixed assets, including leasehold improvements, furniture and fixtures, $3.8 million net loss on lease termination, and $1.9 million impairment of operating lease right-of-use assets, and is recorded as a component of selling, general and administrative expenses in the consolidated statement of operations.

Supplemental Lease Disclosure Information

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

Year Ended December 31,

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

Maturities of operating lease liabilities at December 31, 2022 were as follows (in thousands):

Years Ending December 31,

Total undiscounted lease payments 185,599

Less: amount representing interest (48,954)

Present value of operating lease liabilities 136,645

Less: current portion of operating lease liabilities (13,121)

Operating lease liabilities - long-term $ 123,524

The weighted-average remaining lease term and weighted-average discount rate for operating leases were as follows:

Weighted-average remaining lease term (in years) 10.8 5.0

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

Lease For Which Accounting Has Not Yet Commenced

As of December 31, 2022, the Commencement Date for Phase II of the Tech Center Lease had not yet occurred. Accordingly, the consolidated balance sheet at December 31, 2022 does not include operating lease right-of-use assets and operating lease liabilities, and the consolidated statement of operations for the year ended December 31, 2022 does not include any lease costs, related to Phase II of the Tech Center Lease. In addition, the above disclosures of the Company’s lease costs, maturities of operating lease liabilities, and the weighted-average remaining lease term and weighted-average discount rate, do not include any amounts related to Phase II of the Tech Center Lease.

The Company currently estimates that Phase II Commencement Date will occur in the first quarter of 2025, at which time the Phase II operating lease right-of-use assets and liabilities will be recorded. Future minimum payments for monthly base rent due under Phase II of the Tech Center Lease, are currently estimated to total $34.7 million from 2025 through 2035, subject to a number of factors, including the actual Commencement Date of Phase II. Because the incremental borrowing rate will not be available until the Phase II Commencement Date, we are not yet able to determine the Phase II operating lease right-of-use assets and liabilities.

7. Debt

Convertible Senior Notes

In May 2020, the Company entered into a purchase agreement with certain counterparties for the sale of an aggregate of $287.5 million principal amount of 1.50% Convertible Senior Notes due 2025 (Notes) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The proceeds from the issuance of the Notes were $244.6 million, net of debt issuance costs and cash used to pay the cost of the capped call transactions (Capped Call Transactions) discussed below.

The Notes are the Company’s senior unsecured obligations. Interest is payable in cash semi-annually in arrears beginning on November 1, 2020 at a rate of 1.50% per year. The Notes mature on May 1, 2025 unless repurchased, redeemed, or converted in accordance with their terms prior to the maturity date.

The Notes are convertible into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election, at an initial conversion rate of 8.8836 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of $112.57 (Conversion Price) per share of the Company’s common stock. The conversion rate is subject to customary adjustments for certain events as described in the Indenture governing the Notes. The Company expects to settle conversions through a combination settlement, which involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion.

The Company may not redeem the Notes before May 6, 2023. The Company has the option to redeem for cash all or any portion of the Notes on or after May 6, 2023 if the last reported sale price of the Company’s common stock has been at least 130% of the Conversion Price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest. No sinking fund is provided for the Notes.

Holders of the Notes may convert all or a portion of their Notes at their option before November 1, 2024, in multiples of $1,000 principal amounts, only under the following circumstances:

•if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the applicable conversion price of the Notes on each such trading day;

•during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each day of that five consecutive trading day period was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate of the Notes on such trading day;

•if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or

•on the occurrence of specified corporate events.

On or after November 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances.

Holders of the Notes who convert in connection with a make-whole fundamental change or in connection with a redemption are entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change, holders of the Notes may require us to repurchase all or a portion of the Notes at a price equal to 100% of the principal amount of the Notes, plus any accrued and unpaid interest.

In accounting for the issuance of the Notes in 2020, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of similar debt instruments, which do not have an associated convertible feature. The carrying amount of the equity component representing the conversion option for the Notes was recorded as a debt discount, which was being amortized to interest expense. On January 1, 2021, the Company early adopted ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which is intended to simplify the accounting for convertible instruments. The Company adopted the new standard using the modified retrospective method, and accordingly, recorded a net reduction to accumulated deficit of $9.0 million, a decrease to additional paid-in capital of $85.8 million, and an increase to convertible senior notes, net - long-term of $76.8 million to reflect the impact of the accounting change. As of January 1, 2021, the Notes are accounted for as a single liability measured at amortized cost, as no other embedded features require bifurcation and recognition as derivatives.

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

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

The Notes will have a dilutive effect to the extent the average market price per share of common stock for a given reporting period exceeds the conversion price of $112.57. As of December 31, 2022, the if-converted value of the Notes did not exceed the principal amount. As of December 31, 2021, the if-converted value of the Notes exceeded the principal amount by $96.9 million.

As of December 31, 2022, the unamortized debt issuance costs of $4.3 million associated with the Notes will be amortized to interest expense, at an effective interest rate of 2.2% over the remaining period of approximately 2.3 years.

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

Year Ended December 31,

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

(1) The debt discount was reversed upon the adoption of ASU No. 2020-06.

Capped Call Transactions

In connection with the issuance of the Notes, the Company entered into Capped Call Transactions in May 2020 with certain counterparties at a net cost of $34.1 million. The Capped Call Transactions are intended to reduce potential dilution to holders of the Company’s common stock beyond the conversion price of $112.57, up to a conversion price of $173.18 on any conversion of the Notes, or to offset any cash payments the Company is required to make in excess of the principal amount of such converted Notes, as the case may be, with such reduction or offset subject to a cap. The cap price of the Capped Call Transactions is initially $173.18 per share of the Company’s common stock, representing a premium of 100% above the last reported sale price of $86.59 per share of the Company’s common stock on May 12, 2020, and is subject to certain adjustments under the terms of the Capped Call Transactions. Conditions that cause adjustments to the initial strike price of the Capped Call Transactions mirror conditions that result in corresponding adjustments for the Notes.

For accounting purposes, the Capped Call Transactions are separate transactions, and not part of the terms of the Notes, while they are integrated for federal tax purposes. As these transactions met certain criteria under the applicable accounting guidance, the Capped Call Transactions were recorded in stockholders' equity and were not accounted for as derivatives. The cost of the Capped Call Transactions was recorded as a reduction of the Company’s additional paid-in capital in the Company’s consolidated balance sheet and will not be remeasured.

Line of Credit

On May 18, 2022, the Company entered into a three-year Revolving Line of Credit Agreement that provides the Company with a maximum principal borrowing amount of $100.0 million (the Line of Credit), reduced by any letters of credit issued and outstanding under a $15.0 million letter of credit sub-limit. The Line of Credit allows the Company to request advances thereunder, and to use the proceeds of such advances for general corporate purposes, including working capital and capital expenditures. The Line of Credit matures on the earlier of (i) May 18, 2025 or (ii) the Springing Maturity Date, unless renewed at maturity upon approval by the Company’s board of directors and the lender. The Springing Maturity Date is any date during the 91 days prior to the May 1, 2025 maturity date of the Company’s Convertible Senior Notes, that the Company does not satisfy a predefined liquidity threshold. During the term of the Line of Credit, the Company is required to maintain compliance with two financial maintenance covenants: a minimum consolidated interest coverage ratio and a maximum consolidated net leverage ratio. The Company was in compliance with these financial maintenance covenants as of December 31, 2022. The Line of Credit is secured by a first priority security interest in substantially all of the assets of the Company and its subsidiaries.

Advances drawn under the Line of Credit bear interest at an annual rate of (1) the SOFR Rate (as defined in the Line of Credit); plus (2) an applicable credit spread adjustment ranging from 0.10% to 0.25%; plus (3) an applicable margin ranging from 1.25% to 2.00%, and each advance will be payable on the Maturity Date with the interest on outstanding advances payable quarterly. The Credit Agreement also includes a commitment fee ranging from 0.20% to 0.35% per annum on the average daily unused amount of the Line of Credit, payable quarterly. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time before the maturity date, without premium or penalty.

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

Maximum principal borrowing amount $ 100.0

Less:

Outstanding borrowings —

Outstanding letters of credit 4.9

Total available balance $ 95.1

8. Stockholders’ Equity

Shares Reserved for Future Issuance

The following shares of the Company's common stock were reserved for future issuance at December 31, 2022 (in thousands):

Shares reserved for issuance upon conversion of Convertible Senior Notes 2,554

Shares underlying outstanding warrants 194

Shares underlying outstanding stock options 4,442

Shares underlying unvested restricted stock units 1,834

Shares authorized for issuance pursuant to awards granted under the ESPP 953

Shares authorized for future equity award grants 119

Common Stock Warrants

Warrants outstanding to purchase shares of the Company's common stock as of December 31, 2022 were as follows:

Each warrant allows the holder to purchase one share of the Company's common stock at the exercise price per share of the warrant. The Company issued 5,678 shares and 155,517 shares of its common stock, respectively, upon the exercise of warrants during the years ended December 31, 2022, and 2021, respectively.

Stock Plans

The Company’s Amended and Restated 2013 Stock Incentive Plan (2013 Plan) was originally approved by the Company’s board of directors in October 2013. Under the 2013 Plan, the Company may grant stock options, stock appreciation rights, restricted stock and restricted stock units to individuals who are then employees, officers, directors or consultants of the Company.

Common Stock Options

The maximum term of stock options granted under the 2006 Plan and 2013 Plan is ten years. Common stock options have an exercise price equal to the closing price of the Company's common stock on the applicable award date. Stock options granted before the second quarter of 2022 generally vest over a four-year period as to 25% of the underlying shares on the first anniversary of the grant date, with the balance of the options vesting monthly over the following three years. Stock options granted during the second quarter of 2022 and thereafter vest over a three-year period as to 33% of the underlying shares on the first anniversary of the grant date, with the balance of the options vesting monthly over the following two years.

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

Restricted Stock Units

Restricted stock units (RSUs) have a grant value equal to the closing price of the Company’s common stock on the award date. RSUs granted before March 2022 generally vest over a four-year period based only on service as to 25% of the underlying shares on the first anniversary of the award, with the balance of the RSUs vesting quarterly over the following three years. RSUs granted in March 2022 and thereafter generally vest over a three-year period based on continued service to the Company as to 33% of the underlying shares on the first anniversary of the award, with the balance of the RSUs vesting quarterly over the following two years. In addition, the Company granted 53,662 and 25,674 performance-based RSUs during the years ended December 31, 2022 and 2021, respectively. The performance-based RSUs have a grant value equal to the closing price of the Company’s common stock on the award date, and vest upon the Company’s actual performance relative to predefined performance metrics and subject to the awardee’s continuing service through the December 31, 2024 measurement date.

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

Unvested awards outstanding at December 31, 2019 — $ — $ —

The aggregate fair value of RSUs that vested during the years ended December 31, 2022, 2021 and 2020 was $12.7 million, $5.1 million, and $0.2 million, respectively, which represents the market value of the Company’s common stock on the date the RSUs vested. The number of RSUs vested includes shares of common stock the Company withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements. RSUs that are expected to vest are net of estimated future forfeitures.

Employee Stock Purchase Plan

In October 2013, the Company adopted the ESPP, which enables eligible employees to purchase shares of the Company’s common stock using their after-tax payroll deductions, subject to certain conditions. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Code. Eligible employees may contribute, through payroll deductions, up to 15% of their earnings for the purchase of common stock under the ESPP. The purchase price of common stock under the ESPP is the lesser of: (a) 85% of the fair market value of a share of the Company’s common stock on the first date of an offering or (b) 85% of the fair market value of a share of the Company’s common stock on the date of purchase. Generally, the ESPP consists of a two-year offering period with foursix-month purchase periods.

During the years ended December 31, 2022 and 2021, 262,936 shares and 172,694 shares of our common stock, respectively, were purchased under the ESPP for proceeds of $12.7 million and $11.1 million, respectively.

Stock-Based Compensation

The following table summarizes the allocation of stock-based compensation expense included in the consolidated statements of operations for all stock-based compensation arrangements (in thousands):

Year Ended December 31,

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

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

The 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,

Weighted average grant date fair value (per share) $ 42.16 $ 56.89 $ 54.20

Risk-free interest rate 2.7 % 1.0 % 0.6 %

Dividend yield 0.0 % 0.0 % 0.0 %

Expected term (in years) 5.8 6.1 6.1

The Company records stock-based compensation expense associated with the ESPP using the Black-Scholes option-pricing model. Valuations are performed on the grant date at the beginning of the purchase period, which generally occurs in May and November of each year. The assumptions used in the Black-Scholes option-pricing model for the ESPP were as follows:

ESPP

Year Ended December 31,

Weighted average grant date fair value (per share) $ 21.89 $ 38.19 $ 36.83

Risk-free interest rate 3.4 % 0.2 % 0.2 %

Dividend yield 0.0 % 0.0 % 0.0 %

Expected 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 basedon a weighted-average of the Company’s actual historical volatility of its common stock measured over the expected term.

Expected Term. The Company utilized the simplified method for estimating the expected term of stock option grants. Under this approach, the weighted-average expected term is presumed to be the average of the vesting term and the contractual term of the option. The Company estimates the expected term of the ESPP using expected life for each tranche during the two-year offering period.

The Company also estimates forfeitures at the time of grant, and revises those estimates in subsequent periods if actual forfeitures differ from its estimates. Historical data was used to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.

9. Employee Benefits

Employee 401(k) Plan

The Company has a defined contribution 401(k) plan for employees in the United States who are at least 18 years of age. Employees are eligible to participate in the plan beginning on the first day of the calendar month following their date of hire. Unless they affirmatively elect otherwise, employees are automatically enrolled in the plan following 30 days from date of rehire or entry date. Under the terms of the plan, employees may make voluntary contributions as a percent of compensation, and the Company may elect to match a discretionary percentage of employee contributions. The total amount contributed by the Company to the 401(k) plan was $4.2 million for the year ended December 31, 2022. The Company did not provide a matching contribution prior to 2022.

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,

Income (loss) before provision for income taxes $ (92,852) $ 15,901 $ (36,282)

The components of income tax expense (benefit) were as follows (in thousands):

Year Ended December 31,

Current:

Federal $ 216 $ — $ —

Deferred:

Foreign — — —

Total deferred income tax benefit — — (2,126)

The expense (benefit) for income taxes reconciles to the amount computed by applying the federal statutory rate to loss before taxes as follows (in thousands):

Year Ended December 31,

State income tax, net of federal benefit (926) (254) (2,792)

Acquired IPR&D expenses 6,518 — —

(1)For the years ended December 31, 2022, 2021 and 2020, the federal statutory tax rate was 21%.

TNDM US Equity

TNDM · 10-K · period ended 2022-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Item 8. Consolidated Financial Statements and Supplementary Data.

TNDM US Equity☆

TNDM · 10-K · period ended 2022-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Item 8. Consolidated Financial Statements and Supplementary Data.

TNDM US Equity