What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-07-30 compared with 2020-04-30 · 209 added, 140 removed, 211 unchanged (62% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis together with our financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (Quarterly Report).

This Quarterly Report contains forward-looking statements within the meaning of the federal securities laws, which statements are subject to considerable risks and uncertainties.

8 unchanged sentences

Our actual financial condition and results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below in the section entitled “Risk Factors” in Part II, Item 1A, and elsewhere in this Quarterly Report, as well as the other public filings we make with the Securities and Exchange Commission.

In particular, as discussed in greater detail below, our financial condition and results could be materially adversely affected by the impacts and disruptions caused by the novel coronavirus (COVID-19) global pandemic.

In particular, as discussed in greater detail below, our financial condition, operating results, liquidity and business prospects could be materially adversely affected by the impacts and disruptions caused by the novel coronavirus pandemic (COVID-19 global pandemic).

You should read this Quarterly Report with the understanding that our actual future financial condition and results may be materially different from and worse than what we expect.

6 unchanged sentences

We believe our competitive advantage is rooted in our consumer-focused approach, and the incorporation of modern and innovative technology into our product offerings.

Our manufacturing, sales and support activities principally focus on our flagship pump platform, the t:slim X2 Insulin Delivery System (t:slim X2), which is capable of remote feature updates and is designed to display continuous glucose monitoring (CGM) sensor information directly on the pump home screen, as well as our complementary product offerings, such as our t:connect data management application (t:connect) and the Tandem Device Updater.

Our manufacturing, sales and support activities principally focus on our flagship pump platform, the t:slim X2 Insulin Delivery System (t:slim X2), which is capable of remote feature updates and is designed to display continuous glucose monitoring (CGM) sensor information directly on the pump home screen, as well as our complementary product offerings, such as our cloud-based t:connect data management application (t:connect) and the Tandem Device Updater.

We aim to improve and simplify the lives of people with diabetes and those of their healthcare providers, by delivering innovative hardware and software solutions, as well as best-in-class customer support.

Since our initial commercial launch, we have been able to rapidly innovate and bring more products to market than our competitors.

We have commercially launched seven insulin pumps in the United States since 2012, two of which we also launched outside the United States since 2018.

We have commercially launched seven insulin pumps in the United States since 2012, three of which we also launched outside the United States since 2018.

Four of our insulin pumps have featured integration with CGM technology, of which two have also featured an automated insulin delivery (AID) algorithm.

The United States Food and Drug Administration (FDA) has defined requirements for the interoperability of devices as a complete AID system, which we believe will help support continued rapid innovation by streamlining the regulatory pathway for integrated products.

This interoperability designation is comprised of three categories:

1 unchanged sentence

In June 2018, the t:slim X2 was the first insulin pump designated as compatible with iCGM devices;

in February 2019 the t:slim X2 was the first insulin pump to receive ACE pump designation, and in December 2019 our Control-IQ technology for the t:slim X2 was cleared as the first iAGC.

In the four-year period ended March 31, 2020 , we shipped approximately 155,000 insulin pumps, which is representative of our estimated global installed customer base, assuming the typical four-year reimbursement cycle.

in February 2019 the t:slim X2 was the first insulin pump to receive ACE pump designation, and in December 2019 our Control-IQ technology for the t:slim X2 was cleared as the first iAGC for users age 14 and older.

In June 2020, we received an expanded indication for our Control-IQ technology for users age six and older.

In the four-year period ended June 30, 2020 , we shipped approximately 169,000 insulin pumps, which is representative of our estimated global installed customer base, assuming the typical four-year reimbursement cycle.

Approximately 137,000 of these pumps were shipped to customers in the United States and approximately 32,000 were shipped to international markets.

Today, our t:slim X2 hardware platform represents 100% of our new pump shipments.

Today, our t:slim X2 hardware platform represents 100% of our new pump shipments and now nearly all of our in-warranty customers benefit from having the X2 platform.

The simple-to-use t:slim X2 is the smallest durable insulin pump available, and the only commercial insulin pump that allows users to update their pumps’ software quickly and easily from a personal computer using our revolutionary Tandem Device Updater tool.

4 unchanged sentences

It is the first and only system cleared to deliver automatic correction boluses in addition to adjusting insulin to help prevent high and low blood sugar.

Outside the United States we began selling efforts with t:slim X2 with Dexcom G5 CGM integration in the third quarter of 2018, offering no-cost software updates for Basal-IQ technology in the third quarter of 2019, and intend to begin offering Control-IQ technology updates in select geographies in the second half of 2020, subject to required regulatory and reimbursement approvals.

Outside the United States we began selling efforts with t:slim X2 with Dexcom G5 CGM integration in the third quarter of 2018, offering no-cost software updates for Basal-IQ technology in the third quarter of 2019, and initiated our scaled launch of Control-IQ technology updates in select geographies in July 2020, which we plan to continue throughout the second half of 2020, subject to required regulatory and reimbursement approvals.

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.

For the three months ended March 31, 2020 and 2019 , our consolidated sales were $97.9 million and $66.0 million , respectively.

For the three months ended March 31, 2020 and 2019 , our net loss was $14.9 million and $23.0 million , respectively.

Worldwide pump sales accounted for 61% and 70% of our total sales, respectively, for the three months ended March 31, 2020 and 2019 , while pump-related supplies and accessories accounted for the remainder in each year.

Our accumulated deficit as of March 31, 2020 and December 31, 2019 was $639.7 million and $624.8 million , respectively.

These amounts included $234.4 million and $216.6 million of accumulated non-cash stock-based compensation charges and non-cash charges from the change in fair value of common stock warrants as of March 31, 2020 and December 31, 2019 , respectively.

We continue to deliver complementary offerings in support of our digital health strategy, beyond t:connect and the Tandem Device Updater.

In the first quarter of 2020, we began a limited launch in the United States of our first-generation t:connect mobile application, followed by general availability in July 2020.

This mobile app was designed to wirelessly upload pump data to our t:connect diabetes management application, receive notification of pump alerts and alarms, and provide a discrete, secondary display of glucose and insulin data.

The availability of this mobile app is intended to reduce patient burden and increase healthcare provider office efficiency by reducing the manual and more time-consuming steps historically required for data extraction.

In addition, in the second quarter, we acquired Sugarmate, a popular app designed to help people visualize diabetes therapy data in innovative ways.

We intend to support the Sugarmate app in addition to our t:connect mobile app to provide a wide variety of features intended to benefit a broad community of people with diabetes.

For the six months ended June 30, 2020 and 2019 , our consolidated sales were $207.2 million and $159.3 million , respectively.

For the six months ended June 30, 2020 and 2019 , our net loss was $42.0 million and $24.5 million , respectively.

Worldwide pump sales accounted for 60% and 71% of our total sales, respectively, for the six months ended June 30, 2020 and 2019 , while pump-related supplies and accessories accounted for the remainder in each year.

Our accumulated deficit as of June 30, 2020 and December 31, 2019 was $666.8 million and $624.8 million , respectively.

These amounts included $265.2 million and $216.6 million of accumulated non-cash stock-based compensation charges and non-cash charges from the change in fair value of common stock warrants as of June 30, 2020 and December 31, 2019 , respectively.

In the United States, we have rapidly increased sales since the commercial launch of our first product by expanding our sales, clinical and marketing organization, by developing, commercializing and marketing multiple differentiated products that utilize our proprietary technology platform and consumer-focused approach, and by providing strong customer support.

Our sales have further increased following our scaled product launches in geographies outside of the United States.

Our sales have further increased following our scaled product launches in geographies outside the United States.

We believe that by demonstrating our product benefits and the shortcomings of existing insulin therapies, more people will choose our insulin pumps for their therapy needs, allowing us to further penetrate and expand the market worldwide.

In addition, we believe publications, such as the results from the study using Control-IQ technology that was published in the New England Journal of Medicine in October 2019, will be valuable in demonstrating the clinical outcome benefits derived from our system to healthcare providers and payors.

In addition, we believe publications, such as the results from the study using Control-IQ technology that was published in the New England Journal of Medicine in October 2019, and post-market real-world data will be valuable in demonstrating the clinical outcome benefits derived from our system to healthcare providers and payors.

We also believe we are positioned well to address consumers’ needs and preferences with our current products and products under development and by offering customers access to our future innovations through the Tandem Device Updater, as they are approved by the local regulating bodies.

3 unchanged sentences

In other international geographies, we have contracted with experienced distribution partners to commercialize and support our t:slim X2 platform.

COVID-19 Impact and Considerations

COVID-19 Global Pandemic Impact and Considerations

We are deemed an essential healthcare business under applicable governmental orders based on the critical nature of the products we offer and the community we serve.

During the first quarter of 2020, we experienced a modest impact from the COVID-19 global pandemic.

However we anticipate that our sales and operating results will be adversely impacted in the coming months.

We currently anticipate our sales outside the United States may experience a greater proportional impact due to differences in the sales process in domestic versus international markets.

Additionally, the initiation of certain programs planned for the second quarter, such as human factors studies associated with our product development efforts, will likely be delayed.

The full extent of the impact of COVID-19 on our business and operations is currently not estimable and will depend on a number of factors including the scope and duration of the global pandemic.

We have taken steps to prioritize the health and safety of our employees and customers during this pandemic, while working to maintain a continuous supply of products, training and customer support.

We experienced a modest impact from the COVID-19 global pandemic during the first quarter of 2020, which became more pronounced in the second quarter.

We originally anticipated that our sales outside the United States may experience a greater proportional impact due to differences in the sales process in domestic versus international markets, but the impact was relatively consistent worldwide.

We anticipate that our sales and operating results will continue to be adversely impacted for the duration of the pandemic.

Additionally, certain programs originally planned to begin in the second quarter were delayed, such as human factors studies associated with our product development efforts.

We recently commenced some of these studies in a limited fashion.

The full extent of the impact of the COVID-19 global pandemic on our future business and operations is difficult to estimate and will depend on a number of factors including the scope and duration of the COVID-19 global pandemic.

We have taken steps to prioritize the health and safety of our employees and customers during the COVID-19 global pandemic, while working to maintain a continuous supply of products, training and customer support.

To that end, we have increased the frequency of our communications to employees, suppliers, customers, and healthcare providers.

In March 2020, we restricted non-essential employee travel, banned visitors from all of our facilities, and transitioned those employees able to perform their job function outside of our facilities to a remote work environment.

For our field-based sales and clinical employees, we have discontinued in-person activities and are utilizing technology to remotely engage healthcare providers and customers.

For our employees in manufacturing and warehousing positions involved in production and fulfillment operations, we have implemented preventative measures to comply with social distancing requirements and have taken measures to help ensure safety, including requiring temperature checks for our employees before each shift.

Starting in March 2020, we restricted non-essential employee travel, banned visitors from all of our facilities, and transitioned those employees able to perform their job function outside of our facilities to a remote work environment.

For our field-based sales and clinical employees, we initially discontinued all in-person activities and began utilizing technology to remotely engage healthcare providers and customers.

We continue to work closely with our healthcare providers and customers, remaining flexible in our method of interaction.

For our employees in manufacturing and warehousing positions involved in production and fulfillment operations, we implemented preventative measures to comply with social distancing requirements and have taken measures to help ensure safety, including requiring temperature checks for our employees before each shift.

In response to developments surrounding the COVID-19 global pandemic, we initiated discussions with our key suppliers in early 2020 regarding their abilities to fulfill existing orders, and we have continued to regularly assess their capacity.

At this time, we believe many of our suppliers are deemed essential businesses under applicable governmental orders, and we do not anticipate disruption in our ability to manufacture insulin pumps and cartridges due to component procurement limitations.

At this time, we believe many of our suppliers are deemed essential businesses under applicable governmental orders, and we have not experienced and do not anticipate disruption in our ability to manufacture insulin pumps and cartridges due to component procurement limitations.

Our finished goods and raw material inventory for insulin pumps, as well as available manufacturing capacity, meet or exceed our target levels and position us well to respond to unforeseen disruptions in the near term.

More recently, we observed customers purchasing cartridges and infusion sets at a higher rate than anticipated.

Currently, our inventory for finished cartridges and infusion sets is below our targeted level.

Near the end of the first quarter, our third-party cartridge manufacturer completed validation and commenced commercial-scale manufacturing to supplement our existing cartridge manufacturing capacity, which we believe will assist us in meeting product demand and allow us to build inventory levels in line with our targets.

In addition, our primary infusion set manufacturer is currently working through inventory constraints and we have asked some customers to accept substitutions of similar products to prevent delays in order fulfillment.

In the first quarter of 2020, we observed customers purchasing cartridges and infusion sets at a higher rate than anticipated.

We continue to focus on building up our inventory for finished cartridges and infusion sets to targeted levels.

Near the end of the first quarter of 2020, our third-party cartridge manufacturer completed validation and commenced commercial-scale manufacturing to supplement our existing cartridge manufacturing capacity, which we believe will assist us in meeting product demand and allow us to build up inventory levels in line with our targets.

In addition, our primary infusion set manufacturer continues to work through inventory constraints and we have asked some customers to accept substitutions of similar products to prevent delays in order fulfillment.

We are carefully managing our pump supplies inventory while we work to overcome these temporary challenges.

Commercially, we have been communicating with our customers and healthcare providers through social media, direct email outreach and our website, in addition to the regular communications from the supporting sales and clinical employees.

We are leveraging the availability of our technology platforms, such as our t:connect diabetes management application, to support healthcare providers as many of them are expanding telehealth capabilities in their practices.

By the end of the first quarter, we also expanded our remote new pump training offering to 100% of customers who purchase a t:slim X2 insulin pump.

We are prudently managing our use of cash and we believe that our total cash and investments on hand are sufficient to sustain our existing operations for at least the next 12 months from the date of this filing.

In the meantime, we are focused on making necessary investments in the organization as originally planned to continue to progress against our long-term sales and profitability initiatives, including recruitment of key employees, advancement of the R&D pipeline and implementation of technology solutions.

We will continue to evaluate our business operations based on new information as it becomes available and we intend to make changes that we consider necessary in light of this information.

We are also leveraging our technology platforms, such as our t:connect diabetes management application, to support healthcare providers as many of them are utilizing telehealth capabilities in their practices at increased levels.

By the end of the first quarter of 2020, we expanded our remote new pump training offering to all customers who purchased a t:slim X2 insulin pump, and more recently have begun offering in-person trainings on a limited basis.

We are prudently managing our use of cash and completed a convertible debt financing in May 2020 to further strengthen our balance sheet.

We believe that our total cash and investments on hand are sufficient to sustain our existing operations for at least the next 12 months from the date of this filing.

In the meantime, we are focused on making necessary investments in the organization as originally planned to continue to progress against our long-term sales and profitability initiatives, including recruitment of key employees, advancement of our R&D pipeline, and implementation of technology solutions.

We will continue to evaluate our business operations and strategy based on new information as it becomes available and we intend to make changes that we consider necessary in light of this information.

Products Under Development

Our products under development support our strategy of focusing on both consumer and clinical needs, and include AID system enhancements, a connected (mobile) health offering and a next-generation hardware platform, which we refer to as the t:sport Insulin Delivery System (t:sport).

Our products under development support our strategy of focusing on both consumer and clinical needs, and include a connected (mobile) health offering, a next-generation hardware platform, which we refer to as the t:sport Insulin Delivery System (t:sport), AID system enhancements, and additional CGM integrations with our current and future products.

We intend to leverage our consumer-focused approach and proprietary technology platform to continue to develop products that have the features and functionality that will allow us to meet the needs of people in differentiated segments of the insulin-dependent diabetes market, including the following:

Connected (Mobile) Health Offerings – In July of 2020 we began offering the first version of our t:connect mobile application that wirelessly uploads pump data to our cloud-based t:connect diabetes management application, receives notification of pump alerts and alarms, and provides a discrete, secondary display of glucose and insulin data.

Future updates of our mobile application are planned to include mobile bolus delivery, additional pump control features, integrate other health-related information from third-party sources and support future capabilities for our products under development.

t:sport Insulin Delivery System – Approximately half the size of our t:slim X2 pump, the t:sport pump is being designed for people who seek even greater discretion and flexibility with the use of their insulin pump.

3 unchanged sentences

A separate controller may be offered in addition to or in advance of full mobile control availability.

Connected (Mobile) Health Offerings – We began a limited launch in the first quarter of 2020 and we are preparing for a full commercial launch in the second quarter of a mobile application that has been designed to utilize the Bluetooth radio integrated with the t:slim X2 to wirelessly upload pump data to the cloud-based t:connect diabetes management application, receive notification of pump alerts and alarms, and provide a discrete, secondary display of glucose and insulin data.

Future updates of this app will integrate other health-related information from third-party sources and support future pump-control capabilities for our products under development.

The launch of the first generation of this app in the United States allows for the wireless upload of data to t:connect and is intended to reduce patient burden and increase healthcare provider office efficiency by reducing the manual steps historically required for data extraction.

Over time, we also intend to offer additional features and enhancements to the mobile application, including partial or full control of pump features.

AID Enhancements – We intend to further enhance our automated insulin delivery system and are considering alternative strategies to deliver new features and benefits to our customers on a regular basis.

In addition to algorithm enhancements intended to improve clinical outcomes, we are also developing new features for greater personalization and refinements to the overall system usability.

Additional CGM Integration – In June 2020 we announced an agreement with Abbott to develop and commercialize integrated diabetes solutions that combine Abbott’s CGM technology with our insulin delivery systems to provide more options for people to manage their diabetes.

Following the completion of our integrated product development work, and required regulatory clearances or approvals, we intend to focus our initial commercial activities for integrated products in the U.S.

and Canada, with additional geographies considered in the future.

Pump Shipments

2 unchanged sentences

We consider the number of insulin pump units shipped per quarter domestically and internationally to be an important metric for managing our business.

In the four-year period ended March 31, 2020 , we shipped approximately 155,000 insulin pumps, of which approximately 127,000 were shipped to customers in the United States and approximately 28,000 were shipped to international markets.

In the first quarter of 2020, we shipped 17,378 insulin pumps worldwide compared to 14,732 insulin pumps shipped in the first quarter of 2019.

In the four-year period ended June 30, 2020 , we shipped approximately 169,000 insulin pumps, of which approximately 137,000 were shipped to customers in the United States and approximately 32,000 were shipped to international markets.

Pump shipments to customers in the United States by fiscal quarter were as follows:

2 unchanged sentences

Pump Units Shipped for Each of the Three Months Ended in Respective Years - International

Trends Impacting Financial Results

Trends Impacting Financial Condition and Operating Results

Overall, we have experienced considerable sales growth since the commercial launch of our first product in the third quarter of 2012, while incurring operating losses since our inception.

5 unchanged sentences

seasonality in the United States associated with annual insurance deductibles and coinsurance requirements associated with the medical insurance plans utilized by our customers and the customers of our distributors;

incidence of disease or illness, including regional or global pandemics that may impact customer purchasing patterns or disrupt our supply chain;

incidence of disease or illness, including the COVID-19 global pandemic, that may impact customer purchasing patterns or disrupt our supply chain;

timing of holidays and summer vacations, which may vary by geography;

8 unchanged sentences

the disruptions caused by the COVID-19 global pandemic on suppliers, third-party manufacturers, healthcare providers, distributors and our existing or potential customers;

continued increase in demand following the commercial launch of t:slim X2 and the demonstrated success of our Tandem Device Updater;

continued increase, in demand following the commercial launch of t:slim X2 with Control-IQ technology, and the demonstrated success of our Tandem Device Updater;

anticipated new product launches;

1 unchanged sentence

opportunity to transition former customers of Animas Corporation (Animas) to our t:slim X2 insulin pump in 2018 and 2019 following the announcement by Johnson & Johnson that it had discontinued the operations of Animas and discontinued the availability of Animas pump supplies in September 2019;

designation by UnitedHealthcare of one of our competitors as its preferred, in-network durable medical equipment provider of insulin pumps for most customers age seven and above;

designation by UnitedHealthcare of one of our competitors as its preferred, in-network durable medical equipment provider of insulin pumps for most customers age seven and above from July 2016 through June 2020;

ability to enter into and maintain agreements with CGM partners for CGM integration;

1 unchanged sentence

ability to effectively scale our operations to support rapid growth, including expanding our facilities, advancing our research and development efforts, increasing manufacturing capacity through third-party manufacturers, and hiring and retaining employees in customer service and support functions.

In addition to working to achieve our sales growth expectations, we intend to continue to leverage our infrastructure investments to realize additional manufacturing, sales, marketing and administration cost efficiencies with the goal of improving our operating margins and ultimately achieving sustained profitability.

We achieved profitability for the first time in the fourth quarter of 2018, and again in the fourth quarter of 2019, though we may be unable to achieve profitability consistently from period to period.

We believe we can ultimately achieve sustained profitability by driving incremental sales growth in U.S.

In addition to working to achieve our sales growth expectations, in the long-term we intend to continue to leverage our infrastructure investments to realize additional manufacturing, sales, marketing and administration cost efficiencies with the goal of improving our operating margins and ultimately achieving sustained profitability.

We achieved profitability for the first time in the fourth quarter of 2018, and again in the fourth quarter of 2019.

Though we may be unable to achieve profitability consistently from period to period, we believe we can ultimately achieve sustained profitability by driving incremental sales growth in U.S.

and international markets, meeting our pump renewal sales objectives, maximizing manufacturing efficiencies on increased production volumes, and leveraging the investments made in our sales, clinical, marketing and customer support organizations.

Recent Developments

Commercial Launch of the t:slim X2 Insulin Pump with Control-IQ Technology in the United States

In January 2020, we began shipping our t:slim X2 insulin pumps pre-loaded with Control-IQ technology, an advanced hybrid-closed loop feature designed to help increase time in range (70-180 mg/dL), to new customers in the United States.

The t:slim X2 is the first and only system cleared to deliver automatic correction boluses in addition to adjusting insulin to help prevent high and low blood sugar.

The system integrates with the Dexcom G6 CGM.

In addition, we communicated the availability of Control-IQ technology to all of our in-warranty t:slim X2 customers in the United States, who have the option to add the new feature free of charge via the Tandem Device Updater.

Customers interested in the remote software update are first required to obtain a prescription from their healthcare provider and complete a set of online training modules.

FDA Designation of Basal-IQ Technology as an Interoperable Automated Glycemic Controller

In February 2020, the FDA cleared our Basal-IQ technology as an iAGC.

This is the second system to receive iAGC designation by the FDA, following the Company’s clearance of the t:slim X2 insulin pump with Control-IQ technology in December 2019.

Cartridge Manufacturing Commences at Third-Party Contract Manufacturer

In the first quarter of 2020, we outsourced a portion of our cartridge manufacturing demand to an experienced third-party contract manufacturer.

We believe our relationship with this contract manufacturer provides us additional flexibility in scaling our business and also mitigates some risk of having only a single site for cartridge manufacturing.

We anticipate that this new manufacturing model will enable us to significantly increase our cartridge manufacturing capacity in the long term, without meaningfully increasing the cost of overhead associated with our manufacturing facilities.

Expanded Pediatric Indication of the t:slim X2 Insulin Pump with Control-IQ Technology

In June 2020, we announced U.S.

FDA clearance of an expanded pediatric indication for the t:slim X2 insulin pump with Control-IQ technology to children age six and older.

The product was previously approved for ages 14 and older.

Control-IQ technology is an advanced hybrid closed-loop feature designed to increase time in range (70-180 mg/dL).

Acquisition of Sugarmate

In June 2020, we acquired Sugarmate, a popular mobile app for people with diabetes who use insulin.

The Sugarmate app (www.sugarmate.io) is designed to help people with diabetes visualize diabetes therapy data in innovative ways.

It allows users to log glucose data and health and nutrition information, and can provide notifications and alerts to users, their family, and their caregivers.

Collaboration with Abbott

In June 2020, we announced that we finalized an agreement to develop and commercialize integrated diabetes solutions that combine Abbott Laboratories world-leading continuous glucose monitoring technology with our innovative insulin delivery systems to provide more options for people to manage their diabetes.

UnitedHealthcare

UnitedHealthcare issued a network bulletin that includes Tandem Diabetes Care, Inc.

as a network provider, effective July 1, 2020.

Patent Cross-License Agreement with Medtronic

In July 2020, we announced that we entered into a non-exclusive patent cross-license agreement with Medtronic plc for certain technologies in the field of diabetes.

With certain exclusions, this agreement applies to the companies’ existing products, as well as new products for at least the next five years, and also includes a provision not to clone one another’s products.

Components of Results of Operations

2 unchanged sentences

In October 2016, we began shipping our flagship pump platform, the t:slim X2 insulin pump.

The t:slim X2 insulin pump platform with advanced software algorithms and remote software update capabilities, now represents 100% of our new pump shipments.

Accordingly, in the third quarter of 2018 we discontinued new sales of all prior platform versions.

Our products also include disposable cartridges and infusion sets, as well as our complementary t:connect and Tandem Device Updater products.

In addition, we offer accessories including protective cases, belt clips, and power adapters, although sales of these products are not significant.

The t:slim X2 insulin pump platform with advanced software algorithms and remote software update capabilities, now represents 100% of our new pump shipments and is used by nearly all of our in-warranty customers.

Our products also include disposable cartridges and infusion sets, as well as our complementary t:connect, Tandem Device Updater and mobile application products.

We also offer additional accessories including protective cases, belt clips, and power adapters, although sales of these products are not significant.

We primarily sell our products through national and regional distributors in the United States on a non-exclusive basis.

2 unchanged sentences

Similar to other durable medical equipment, the primary payor is generally a third-party insurance carrier and the customer is usually responsible for any medical insurance plan copay or coinsurance requirements.

We believe our existing sales, clinical, and marketing infrastructure will allow us to continue to increase sales by allowing us to promote our products to a greater number of potential customers, caregivers and healthcare providers, although the COVID-19 global pandemic may have a material adverse impact on our sales in future periods.

In the third quarter of 2018, we began the launch of our t:slim X2 with Dexcom G5 CGM integration through distribution partners outside the United States, including in select European countries, Australia, New Zealand, and South Africa.

During the second quarter of 2019, we began selling our t:slim X2 with Basal-IQ technology in certain of these geographies.

In the first quarter of 2020, we delivered initial orders to support launches in Germany and France that are expected to occur in the second quarter of 2020.

Our independent distributor partners perform all sales, customer support and training in their respective markets.

We believe our existing sales, clinical, and marketing infrastructure will allow us to continue to increase sales by allowing us to promote our products to a greater number of potential customers, caregivers and healthcare providers, although the COVID-19 global pandemic has had, and may continue to have, an adverse impact on our sales.

In the third quarter of 2018, we began the launch of our t:slim X2 hardware platform through distribution partners outside the United States, including in select European countries, Australia, New Zealand, and South Africa.

The software version on the t:slim X2 hardware platform has progressed from Dexcom G5 CGM integration at initial launch, followed by Basal-IQ technology scaling across various international markets beginning in the second quarter of 2019, and most recently we commenced the launch of our Control-IQ technology in limited geographies.

Our launch of Control-IQ technology in international markets will scale through the remainder of 2020, contingent upon regulatory and reimbursement approvals.

In the first quarter of 2020, we expanded into additional international markets by delivering initial orders to support product launches in France and Germany occurring in the second and third quarters of 2020, respectively.

Our independent international distributor partners perform all sales, customer support and training in their respective markets.

In Canada, we market with a direct sales force and, similar to the United States, use a distributor partner for certain billing and fulfillment activities.

1 unchanged sentence

In general, in the United States we have experienced pump shipments being weighted heavily towards the second half of the year, with the highest percentage of pump shipments expected in the fourth quarter due to the nature of the reimbursement environment.

Consistent with our historical seasonality, domestic pump shipments from the fourth quarter to the following first quarter decrease significantly.

Internationally, we do not expect this same impact from seasonality associated with reimbursement, although the quarterly sales trends may be impacted by a number of factors, including summer vacations and launches into new geographies.

Consistent with these historical seasonality trends, our domestic pump shipments have typically decreased significantly from the fourth quarter to the following first quarter.

While the opportunity to transition former Animas customers positively impacted our 2019 quarterly sales trends worldwide, we do not anticipate that this trend will continue to have a significant impact.

In the first quarter of 2020, the COVID-19 global pandemic had a major impact on businesses around the world.

Although we experienced only a modest impact on our first quarter financial results, in March 2020 we ceased in-person sales, marketing and training activities and adopted numerous other changes to our daily business operations.

These changes remain in effect as of the date of this report and it remains uncertain when we may be able to resume our normal operations.

In the first half of 2020, the COVID-19 global pandemic had a major impact on businesses around the world.

Although we experienced only a modest impact on our first quarter financial results, the impact in the second quarter was more pronounced.

Starting in March 2020 we ceased nearly all in-person sales, marketing and training activities and adopted numerous other changes to our daily business operations.

These changes primarily remain in effect as of the date of this report and it remains uncertain when we may be able to resume our normal operations.

Accordingly, we anticipate that our sales will not follow historical trends and will be adversely impacted in the coming months as customers delay their purchasing decisions or physicians pause their prescriptions of new products.

Our sales outside the United States may experience a greater proportional impact due to differences in the sales process in domestic versus international markets.

The full extent of the impact of COVID-19 on our business and operations will depend on a number of factors, including the depth and duration of the global pandemic.

Separate of any impacts from COVID-19, our quarterly sales have historically fluctuated, and may continue to fluctuate, substantially in the periods surrounding anticipated and actual regulatory approvals and commercial launches of new products by us or our competitors.

Our sales outside the United States have been negatively impacted due to similar disruptions.

The full extent of the impact of the COVID-19 global pandemic on our business and operations will depend on a number of factors, including the depth and duration of the COVID-19 global pandemic.

Separate from any impacts of the COVID-19 global pandemic, our quarterly sales have historically fluctuated, and may continue to fluctuate, substantially in the periods surrounding anticipated and actual regulatory approvals and commercial launches of new products by us or our competitors.

We believe customers may defer purchasing decisions if they believe a new product may be launched in the future.

4 unchanged sentences

Historically, we have manufactured our pumps and disposable cartridges at our manufacturing facility in San Diego, California.

Infusion sets and pump accessories are manufactured by third-party suppliers.

6 unchanged sentences

Therefore, the percentage of pump sales relative to total sales will have a significant impact on our overall gross margin percentage.

In the event that customers delay their pump purchasing decisions or physicians pause in prescribing new pumps as a result of COVID-19, or for other reasons, it is possible that we may experience a higher percentage of pump-related supply sales than anticipated, which in turn could adversely impact our overall gross margin percentage.

In the event that customers delay their pump purchasing decisions or physicians pause in prescribing new pumps, whether as a result of the COVID-19 global pandemic, or for other reasons, it is possible that we may experience a higher percentage of pump-related supply sales than anticipated, which in turn could adversely impact our overall gross margin percentage.

We also expect our warranty cost per unit to decrease as we release additional product features and functionality utilizing the Tandem Device Updater.

However, our overall gross margin percentage may fluctuate in future quarterly periods as a result of numerous factors aside from those associated with production volumes and product mix.

For instance, as a result of COVID-19 we have implemented operational changes that may introduce unpredictable variability to our cost of sales, such as incremental expenses to protect the health, safety and welfare of our employees working on-site and to enable other employees to work remotely.

In addition, as demand for our products increases, we may continue to make additional investments in manufacturing capacity or increase our reliance on third parties for manufacturing-related services, either of which could have a negative impact on our gross margins in the near-term.

Specifically, in 2020, we are investing in additional manufacturing equipment to meet anticipated long-term demand for our cartridges, which may initially place downward pressure on the gross margin percentage associated with our pump-related supplies.

Other factors impacting our overall gross margin percentage may include the changing percentage of products sold to distributors versus directly to individual customers, varying levels of reimbursement among third-party payors in domestic and international markets, the timing and success of new regulatory approvals and product launches, the impact of the valuation and amortization of employee stock option grants on non-cash stock-based compensation expense allocated to cost of sales, changes in warranty estimates, training costs, licensing and royalty costs, cost associated with excess and obsolete inventories, and changes in our manufacturing processes, capacity, costs or output.

For instance, as a result of the COVID-19 global pandemic we have implemented operational changes that may introduce unpredictable variability to our cost of sales, such as supplemental staffing, incremental expenses to protect the health, safety and welfare of our employees working on-site and to enable other employees to work remotely.

Specifically, in 2020, we intend to invest in additional manufacturing equipment to meet anticipated long-term demand for our cartridges, which may initially place downward pressure on the gross margin percentage associated with our pump-related supplies.

Other factors impacting our overall gross margin percentage may include the changing percentage of products sold to distributors versus directly to individual customers, varying levels of reimbursement among third-party payors in domestic and international markets, the timing and success of new regulatory approvals and product launches, the impact of the valuation and amortization of employee stock option and RSU awards on non-cash stock-based compensation expense allocated to cost of sales, changes in warranty estimates, training costs, licensing and royalty costs, cost associated with excess and obsolete inventories, and changes in our manufacturing processes, capacity, costs or output.

Selling, General and Administrative

2 unchanged sentences

field sales and clinical organization during the third quarter of 2019 to support an expected increase in demand for our products.

We had approximately 90 sales territories as of March 31, 2020 .

We had approximately 90 sales territories in the United States as of June 30, 2020 .

Our existing territories are generally maintained by sales representatives and field clinical specialists, and supported by managed care liaisons, additional sales management and other customer support personnel, which have also been rapidly expanding to support our growing installed base.

3 unchanged sentences

We will continue to evaluate, and may further increase, the number of our field sales and clinical personnel in order to optimize the coverage of our existing territories.

Additionally, we realized a notable increase in non-cash stock-based compensation expense allocated to SG&A beginning in the third quarter of 2018, and again in the second quarter of 2019, due to the valuation of certain employee stock option grants and the impact on the valuation from the significant increase in our stock price over the previous year.

We expect higher non-cash stock-based compensation expense will be sustained through the first half of 2020 and will begin to decline in future quarters.

Additionally, we realized a notable increase in non-cash stock-based compensation expense allocated to SG&A beginning in the third quarter of 2018, and again in the second quarter of 2019, due to the valuation of certain employee stock option grants and the impact on the valuation of the significant increase in our stock price over the previous year.

We expect higher non-cash stock-based compensation expense, which was sustained through the first half of 2020, will begin to decline in future quarters.

Our SG&A expenses may be affected by our response to the COVID-19 global pandemic, including reduced spending in areas such as non-essential employee travel, which may be offset by increased spending to support measures designed to prioritize the retention, health, safety and welfare of our employees.

2 unchanged sentences

Our research and development (R&D) activities primarily consist of engineering and research programs associated with our 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, fringe benefits, non-cash stock-based compensation and temporary employee expenses.

R&D expenses are primarily related to employee compensation, including salary, cash-based incentive compensation, fringe benefits, non-cash stock-based compensation and temporary employee expenses.

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.

1 unchanged sentence

Similar to our SG&A expenses, our future R&D spending may be impacted by the COVID-19 global pandemic.

For instance, we may experience lower spending associated with delays in the advancement of particular programs, which may be offset by increased spending to support the retention, health, safety and welfare of our employees.

Other Income and Expense

Other income and expense primarily consists of changes in the fair value of certain warrants issued in our public offering of common stock in October 2017, and interest earned on our cash equivalents and short-term investments.

We expect other income and expense to fluctuate from period to period primarily due to the revaluation of the outstanding Series A warrants, which expire in the fourth quarter of 2022.

Other income and expense primarily consists of changes in the fair value of certain warrants issued in connection with our public offering of common stock in October 2017, interest expense which includes the amortization of debt discount and debt issuance costs related to our Convertible Senior Notes issued in May 2020 (our Notes), and interest earned on our cash equivalents and short-term investments.

We expect interest expense to increase in the third quarter of 2020 as our Notes will be outstanding for the entire period, and other income and expense to fluctuate from period to period primarily due to the revaluation of the outstanding Series A warrants, which expire in the fourth quarter of 2022.

Results of Operations

Three Months Ended

Six Months Ended

(in thousands, except percentages)

12 unchanged sentences

Loss before income taxes

Income tax expense

Comparison of the Three Months Ended March 31, 2020 and 2019

For the three months ended March 31, 2020 , sales were $97.9 million , which included $18.4 million of international sales.

Income tax benefit

Comparison of the Three Months Ended June 30, 2020 and 2019

For the three months ended June 30, 2020 , sales were $109.2 million , which included $20.0 million of international sales.

Sales were $93.3 million for the same period in 2019 , which included $22.9 million of international sales.

The increase in total sales of $31.9 million was primarily driven by an 18% increase in worldwide pump shipments to 17,378 in the first quarter of 2020 compared to 14,732 in the first quarter of 2019 , and a 93% increase in pump-related supply sales.

Sales of pump-related supplies increased primarily due to a 61% increase in our estimated installed base of customers, as well as a more recent trend of customers purchasing cartridges and infusion sets at a higher rate than anticipated, which we believe may be associated with COVID-19.

The increase in worldwide sales of $16.0 million in the second quarter of 2020 compared to the second quarter of 2019 was primarily driven by an increase in domestic sales of $18.9 million on higher pump shipments, offset by a decrease in international sales of $2.9 million associated with non-recurring market dynamics in the prior year.

Domestic sales by product were as follows (in thousands):

2 unchanged sentences

Total Domestic Sales

Domestic pump shipments were positively impacted by continued strong demand for our products following the January 2020 domestic launch of our t:slim X2 insulin pump with Control-IQ technology.

Sales to distributors accounted for 69% and 74% of our total domestic sales for the three months ended March 31, 2020 and 2019 , respectively.

Domestic pump sales were $56.4 million for the second quarter of 2020, compared to $48.8 million in the second quarter of 2019, as pump shipments increased 15% compared to the same period in the prior year due to continued strong demand for our products following the January 2020 domestic launch of our t:slim X2 insulin pump with Control-IQ technology.

Domestic pump shipments were 14,735 in the second quarter of 2020 compared to 12,799 in the second quarter of 2019.

Sales of pump-related supplies increased primarily due to a 42% increase in our estimated domestic installed base of customers.

Sales to distributors accounted for 71% and 74% of our total domestic sales for the three months ended June 30, 2020 and 2019 , respectively.

Our percentage of sales to distributors versus individual customers is principally determined by the mix of customers ordering our products within the period and whether or not we have a contractual arrangement with their underlying third-party insurance payor.

3 unchanged sentences

Total International Sales

International pump shipments for the three months ended March 31, 2020 benefited from initial orders shipped to independent distributors in new geographies.

Pump shipments in 2019 were positively impacted by the transition of former Animas customers to our products, and the fulfillment of certain international pump demand from backlog that existed at the end of 2018 due to supply constraints.

Sales to distributors accounted for 93% and 98% of our total international sales for the three months ended March 31, 2020 and 2019 , respectively.

International pump sales were $9.1 million for the second quarter of 2020, compared to $17.0 million in the second quarter of 2019, which was positively impacted by the transition of former Animas customers to our products and the fulfillment of pump demand from backlog that existed at the end of 2018 due to supply constraints.

Sales of pump-related supplies increased primarily due to an 81% increase in our estimated international installed base of customers.

Sales to distributors accounted for 96% and 93% of our total international sales for the three months ended June 30, 2020 and 2019 , respectively.

Cost of Sales and Gross Profit .

Our cost of sales for the three months ended March 31, 2020 was $47.7 million , resulting in gross profit of $50.3 million , compared to $32.6 million of cost of sales for the same period in 2019 resulting in gross profit of $33.4 million .

The gross margin percentage for the three months ended March 31, 2020 was 51% , consistent with the same period in 2019 .

The increase in our gross profit for the three months ended March 31, 2020 was primarily the result of an 18% increase in pump shipments.

Per unit manufacturing cost improvements from higher production volumes and continued overall manufacturing efficiencies also generated improvements in the gross margin percentage.

The impact of these improvements was offset by changes in product mix.

Pump sales, which have the highest gross margin, were 61% of total sales in the first quarter of 2020 versus 70% in the first quarter of 2019.

Non-cash stock-based compensation expense allocated to cost of sales was $2.2 million for the three months ended March 31, 2020 , compared to $1.1 million in the same period in 2019 .

Additionally, we recognized $1.3 million of product royalty costs in the first quarter of 2020 associated with the launch of Control-IQ technology in the United States.

On an aggregate basis, other non-manufacturing costs, which primarily consist of warranty, freight and training costs, also reflected improvement on a per unit basis.

Our cost of sales for the three months ended June 30, 2020 was $54.8 million , resulting in gross profit of $54.4 million , compared to cost of sales of $43.4 million for the same period in 2019 resulting in gross profit of $49.9 million .

The gross margin percentage for the three months ended June 30, 2020 was 50% , compared to 54% in the same period in 2019 .

The increase in our gross profit for the three months ended June 30, 2020 was primarily the result of the $16.0 million increase in total sales.

Gross profit and gross margin were negatively impacted by an increase in royalty and stock-based compensation costs, and to a lesser extent, costs associated with retaining incremental direct labor employees for risk mitigation in the COVID-19 environment, the expansion of cartridge manufacturing capacity and increased spending to support our digital health product offerings.

These cost increases were partially offset by an increase in pump average selling prices.

We recognized $1.7 million of product royalty costs in the second quarter of 2020 associated with sales of products with Control-IQ technology and free software updates offered to customers in the United States.

Non-cash stock-based compensation expense allocated to cost of sales was $2.2 million for the three months ended June 30, 2020 , compared to $1.3 million in the same period in 2019 .

Additionally, per unit overhead manufacturing costs for pumps increased in the second quarter of 2020 due to the differing sales dynamics compared to the same period in 2019.

In 2019, pumps were being manufactured at a significantly higher rate to fulfill the existing backlog and increase inventory to desired stocking levels.

In 2020, production levels declined from lower sales demand attributable to the COVID-19 global pandemic.

The gross margin percentage was also pressured by changes in product mix from these sales dynamics.

Pump sales, which have the highest gross margin, were 60% of total sales in the second quarter of 2020 versus 71% in the second quarter of 2019.

Selling, General and Administrative Expenses.

SG&A expenses increased 42% to $49.7 million for the three months ended March 31, 2020 from $35.0 million for the same period in 2019 .

SG&A expenses increased 24% to $50.4 million for the three months ended June 30, 2020 from $40.6 million for the same period in 2019 .

Employee-related expenses for our SG&A functions comprise the majority of SG&A expenses.

The increase compared to 2019 was primarily the result of an $11.9 million increase in salaries, incentive compensation and other employee benefits due to an increase in personnel to support higher sales and our growing installed customer base, which included an increase of $4.5 million in non-cash stock-based compensation.

Non-cash stock-based compensation expense allocated to SG&A was $11.5 million for the three months ended March 31, 2020 , compared to $7.0 million in the same period in 2019 .

The increase compared to 2019 was primarily the result of a $9.3 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, which included an increase of $2.7 million in non-cash stock-based compensation.

Non-cash stock-based compensation expense allocated to SG&A was $11.7 million for the three months ended June 30, 2020 , compared to $9.0 million in the same period in 2019 .

The increase in non-cash stock-based compensation expense was primarily due to the valuation of certain 2019 employee stock option grants and the impact on the valuation of the significant increase in our stock price.

We also experienced increased costs for software maintenance, facilities maintenance, and outside consulting of $2.1 million, offset by a $1.2 million decrease in travel and entertainment, supplies and outside services expenses.

Research and Development Expenses .

R&D expenses increase d 43% to $16.0 million for the three months ended June 30, 2020 from $11.2 million for the same period in 2019 .

The increase in R&D expenses was primarily the result of an increase of $2.3 million in salaries, incentive compensation and other employee benefits due to an increase in personnel to support our product development efforts, as well as an increase of $2.3 million in outside services, consulting services and equipment and maintenance costs attributable to R&D.

Non-cash stock-based compensation expense allocated to R&D was $2.6 million for the three months ended June 30, 2020 , compared to $2.1 million in the same period in 2019 .

Other Income and Expense .

Total other expense for the three months ended June 30, 2020 was $17.1 million compared to total other income of $0.4 million in the same period in 2019 .

Other expense for the three months ended June 30, 2020 primarily consisted of a $14.3 million revaluation loss from the change in the fair value of certain warrants due to the significant appreciation of our stock price, and $3.2 million of interest expense which includes the amortization of debt discount and debt issuance costs related to our Notes issued in the second quarter of 2020.

Other income for the three months ended June 30, 2019 primarily consisted of interest earned on our cash equivalents and short-term investments, offset by a $0.4 million revaluation loss from the change in the fair value of certain warrants.

Comparison of the Six Months Ended June 30, 2020 and 2019

For the six months ended June 30, 2020 , sales were $207.2 million , which included $38.3 million of international sales.

For the six months ended June 30, 2019 , sales were $159.3 million , which included $34.2 million of international sales.

The increase in worldwide sales of $47.9 million in the first half of 2020 compared to the first half of 2019 was primarily driven by $43.7 million in pump-related supplies sales from a 48% growth in the worldwide installed base and an increase in domestic pump sales of $20.4 million , offset by the effect of international product mix and non-recurring market dynamics in the prior year.

Domestic sales by product were as follows (in thousands):

Six Months Ended

Infusion sets

Total Domestic Sales

Domestic pump sales were $106.1 million for the first half of 2020, compared to $85.7 million in the first half of 2019, as pump shipments increased 24% compared to the same period in the prior year due to continued strong demand for our products following the January 2020 domestic launch of our t:slim X2 insulin pump with Control-IQ technology.

Domestic pump shipments were 27,893 in the first half of 2020 compared to 22,468 in the first half of 2019.

Sales of pump-related supplies increased primarily due to a 42% increase in our estimated domestic installed base of customers.

Sales to distributors accounted for 70% and 74% of our total domestic sales for the six months ended June 30, 2020 and 2019 , respectively.

International sales by product were as follows (in thousands):

Six Months Ended

Infusion sets

Total International Sales

International pump sales were $18.9 million for the first half of 2020, compared to $26.2 million in the first half of 2019, which was positively impacted by the transition of former Animas customers to our products, and the fulfillment of certain international pump demand from backlog that existed at the end of 2018 due to supply constraints in prior periods.

Sales of pump-related supplies increased primarily due to an 81% increase in our estimated international installed base of customers.

Sales to distributors accounted for 95% and 95% of our total international sales for the six months ended June 30, 2020 and 2019 , respectively.

Cost of Sales and Gross Profit .

Our cost of sales for the six months ended June 30, 2020 was $102.5 million resulting in gross profit of $104.7 million , compared to $76.0 million of cost of sales for the same period in 2019 resulting in gross profit of $83.3 million .

The gross margin percentage for the six months ended June 30, 2020 was 51% compared to 52% in the same period in 2019 .

The increase in our gross profit for the six months ended June 30, 2020 was primarily the result of the $47.9 million increase in total sales.

Gross profit and gross margin were primarily impacted by an increase in royalty and stock-based compensation costs, partially offset by an improvement in other per unit manufacturing costs, as well as other non-manufacturing costs which primarily consist of warranty, freight and training.

We recognized $3.0 million of product royalty costs in the first six months of 2020 associated with the first quarter launch of Control-IQ technology in the United States.

Additionally, non-cash stock-based compensation expense allocated to cost of sales was $4.3 million for the six months ended June 30, 2020 , compared to $2.4 million in the same period in 2019.

The gross margin percentage was also pressured by changes in product mix compared to the same period of the prior year.

Pump sales, which have the highest gross margin, were 60% of total sales in the first six months of 2020 compared to 70% in the same period in 2019.

Selling, General and Administrative Expenses.

SG&A expenses increase d 33% to $100.2 million for the six months ended June 30, 2020 from $75.5 million for the same period in 2019 .

Employee-related expenses for our SG&A functions comprise the majority of SG&A expenses.

The increase compared to 2019 was primarily the result of a $21.1 million increase in salaries, incentive compensation and other employee benefits due to an increase in personnel to support additional sales territories, higher sales and our growing installed customer base, which included an increase of $7.2 million in non-cash stock-based compensation.

Non-cash stock-based compensation expense allocated to SG&A was $23.2 million for the six months ended June 30, 2020, compared to $16.0 million in the same period in 2019.

We also experienced increased costs for equipment and supplies, outside consulting and outside services of $3.6 million.

Research and Development Expenses .

R&D expenses increase d 50% to $14.1 million for the three months ended March 31, 2020 from $9.4 million for the same period in 2019 .

The increase in R&D expenses was primarily the result of an increase of $2.1 million in salaries, incentive compensation and other employee benefits due to an increase in personnel to support our product development efforts, as well as an increase of $2.6 million increase in clinical trials, outside services consulting services and equipment and maintenance attributable to R&D.

Non-cash stock-based compensation expense allocated to R&D was $2.2 million for the three months ended March 31, 2020 , compared to $1.7 million in the same period in 2019 .

R&D expenses increase d 46% to $30.1 million for the six months ended June 30, 2020 from $20.6 million for the same period in 2019 .

The increase in R&D expenses was primarily the result of an increase of $4.4 million in salaries, incentive compensation and other employee benefits due to an increase in personnel to support our product development efforts, as well as an increase of $5.1 million in outside services, consulting services and equipment and maintenance costs attributable to R&D.

Non-cash stock-based compensation expense allocated to R&D was $4.8 million for the six months ended June 30, 2020 , compared to $3.8 million in the same period in 2019 .

Other Income and Expense .

Total other expense for the three months ended March 31, 2020 was $1.2 million compared to total other expense of $12.0 million in the same period in 2019 .

Other expense for the three months ended March 31, 2020 primarily consisted of a $1.9 million revaluation loss from the change in the fair value of certain warrants.

Other expense for the three months ended March 31, 2019 primarily consisted of a $12.7 million revaluation loss from the change in the fair value of certain warrants due to the significant appreciation of our stock price.

Interest and other income for the three months ended March 31, 2020 and 2019 primarily consisted of interest earned on our cash equivalents and short-term investments.

Total other expense for the six months ended June 30, 2020 and 2019 was $18.3 million and $11.6 million , respectively.

Other expense for the six months ended June 30, 2020 primarily consisted of a $16.3 million revaluation loss from the change in the fair value of certain warrants due to the significant appreciation of our stock price during the first six months of 2020, and $3.2 million of interest expense which includes the amortization of debt discount and debt issuance costs related to our Notes issued in the second quarter of 2020 .

Other expense for the six months ended June 30, 2019 primarily consisted of a $13.2 million revaluation loss from the change in the fair value of certain warrants.

Interest and other income for the six months ended June 30, 2020 and 2019 primarily consisted of interest earned on our cash equivalents and short-term investments.

Liquidity and Capital Resources

As of March 31, 2020 , we had $160.2 million in cash and cash equivalents and short-term investments.

As of June 30, 2020 , we had $426.3 million in cash and cash equivalents and short-term investments.

We believe that our cash and cash equivalents and short-term investments balance is sufficient to satisfy our liquidity requirements for at least the next 12 months from the date of this filing.

1 unchanged sentence

Since the beginning of 2019, we completed the following financing activities:

Between January 2019 and March 2020, we issued 2,091,395 shares of common stock upon the exercise of stock options, and 329,072 shares of common stock were purchased under our 2013 Employee Stock Purchase Plan, which generated aggregate proceeds of $35.7 million.

Between January 2019 and March 2020, we received proceeds of $0.3 million from the exercise of 95,585 outstanding warrants which were originally issued in a registered public offering of common stock in October 2017.

As of March 31, 2020 , there were warrants to purchase 415,200 shares outstanding relating to the October 2017 offering.

In May 2020, we raised $278.7 million in net proceeds from the issuance of the Notes, and used $34.1 million of the net proceeds to purchase capped call options in connection with the transaction (see Note 7, “Convertible Senior Notes”).

From January 2019 through June 2020, we issued 2,545,440 shares of common stock upon the exercise of stock options, and 558,392 shares of common stock were purchased under our 2013 Employee Stock Purchase Plan, which generated aggregate proceeds of $52.5 million.

From January 2019 through June 2020, we received proceeds of $0.3 million from the exercise of 95,585 outstanding warrants which were originally issued in connection with our registered public offering of common stock in October 2017.

As of June 30, 2020 , there were warrants to purchase 415,200 shares outstanding relating to the October 2017 offering.

From January 2020 through June 2020, we received proceeds of $2.0 million from the exercise of 67,799 outstanding warrants which were originally issued between August 2011 and August 2012.

As of June 30, 2020 , there were warrants to purchase 31,166 shares outstanding relating to these issuances.

Our historical cash outflows have primarily been associated with cash used for operating activities such as the development and commercialization of our products, the expansion and support of our sales, marketing, clinical and customer support organizations, the expansion of our R&D activities, the expansion of our commercial activities to select international geographies, the acquisition of intellectual property, expenditures related to increases in our manufacturing capacity and improvements to our manufacturing efficiency, overall expansion of our facilities and operations, and other working capital needs.

2 unchanged sentences

We will continue to evaluate new information as it becomes available and make changes as are considered necessary.

The following table shows a summary of our cash flows for the three months ended March 31, 2020 and 2019 :

Three Months Ended

The following table shows a summary of our cash flows for the six months ended June 30, 2020 and 2019 :

Six Months Ended

(in thousands)

5 unchanged sentences

Operating Activities .

Net cash used in operating activities was $20.6 million for the three months ended March 31, 2020 , compared to $4.1 million in the same period in 2019.

The increase in net cash used in operating activities was primarily driven by changes in working capital requirements.

Working capital changes in 2020 primarily consisted of increases in accounts receivable and inventories, and a decrease in employee-related liabilities, partially offset by an increase in accounts payable.

Accounts receivable increased to $54.0 million at March 31, 2020 from $46.6 million at December 31, 2019 , primarily due to the timing of sales.

Inventories increased to $60.5 million at March 31, 2020 from $49.1 million at December 31, 2019 , primarily to support the growth in our business.

Net cash used in operating activities was $5.1 million for the six months ended June 30, 2020 , compared to $0.6 million in the same period in 2019 .

The increase in net cash used in operating activities was primarily driven by an increase in net loss, driven by increased operating expenses, particularly SG&A expenses and research and development.

Working capital changes during the first half of 2020 primarily consisted of an increase in inventories, as decreases in accrued expenses and employee-related liabilities were substantially offset by increases in deferred revenue and other current liabilities.

Accounts receivable decreased to $45.0 million at June 30, 2020 from $46.6 million at December 31, 2019 , primarily due to the timing of sales and collections.

Inventories increased to $62.3 million at June 30, 2020 from $49.1 million at December 31, 2019 , primarily to support the growth in our business.

Investing Activities .

Net cash provided by investing activities was $32.9 million for the three months ended March 31, 2020 , which was primarily related to $49.4 million in proceeds from maturities and sales of short-term investments, offset by $9.7 million of purchases of short-term investments and $6.8 million in purchases of property and equipment.

Net cash provided by investing activities was $0.8 million for the three months ended March 31, 2019 , which was primarily related to $45.1 million in proceeds from maturities and sales of short-term investments, offset by $42.9 million of purchases of short-term investments and $1.4 million in purchases of property and equipment.

Net cash used in investing activities was $98.6 million for the six months ended June 30, 2020 , which was primarily related to $167.0 million of purchases of short-term investments, $16.6 million in purchases of property and equipment, and $4.8 million cash paid for the acquisition of intangible assets, offset by $89.7 million in proceeds from maturities and sales of short-term investments.

Net cash used in investing activities was $13.9 million for the six months ended June 30, 2019 , which was primarily related to $74.2 million of purchases of short-term investments and $8.2 million in purchases of property and equipment, offset by $68.5 million in proceeds from maturities and sales of short-term investments.

Financing Activities.

Net cash provided by financing activities was $11.5 million for the three months ended March 31, 2020 , which primarily consisted of proceeds from the issuance of common stock under our stock plans.

Net cash provided by financing activities was $2.0 million for the three months ended March 31, 2019 , which primarily consisted of proceeds from the issuance of common stock under our stock plans.

Net cash provided by financing activities was $275.3 million for the six months ended June 30, 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 Options, and $28.6 million in proceeds from the issuance of common stock under our stock plans.

Net cash provided by financing activities was $10.8 million for the six months ended June 30, 2019 , which primarily consisted of 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, including the following:

26 unchanged sentences

Actual results may differ from these estimates.

There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies Involving Management Estimates and Assumptions,” included in our Annual Report on Form 10-K for the year ended December 31, 2019 .

Off-Balance Sheet Arrangements

As of March 31, 2020 , we did not have any off-balance sheet arrangements.

As of June 30, 2020 , we did not have any off-balance sheet arrangements.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis