TANDEM DIABETES CARE INC 10-Q

Item 2. 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 June 30, 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. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Quarterly Report, other than statements of historical fact, are forward-looking statements. You can identify forward-looking statements by the use of words such as “may,” “will,” “could,” “anticipate,” “expect,” “intend,” “believe,” “continue” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to such statements. In particular, forward-looking statements contained in this Quarterly Report may relate to, among other things, our future or assumed financial condition, results of operations, liquidity, business forecasts and plans, research and product development plans, manufacturing plans, strategic plans and objectives, capital needs, financing plans and objectives, product launches, distribution plans, clinical trials, regulatory approvals and competitive environment. We caution you that the foregoing list may not include all of the forward-looking statements made in this Quarterly Report. Our forward-looking statements are based on our management’s current assumptions and expectations about future events and trends, which affect or may affect our business, strategy, operations or financial performance. Although we believe that these forward-looking statements are based upon reasonable assumptions, they are subject to numerous known and unknown risks and uncertainties and are made in light of information currently available to us. 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, 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. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements speak only as of the date they were made and, except to the extent required by law or the rules of the NASDAQ Global Market, we undertake no obligation to update or review any forward-looking statement because of new information, future events or other factors. We qualify all of our forward-looking statements by these cautionary statements. Overview We are a medical device company with an innovative approach to the design, development and commercialization of products for people with insulin-dependent diabetes. Our goal is to lead in insulin therapy management by building a robust ecosystem and portfolio of data-driven products and services around our flagship insulin pumps. 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 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. 21 Table of contents 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, 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 in the United States. This interoperability designation is comprised of three categories: alternate controller enabled (ACE) infusion pumps, integrated continuous glucose monitor (iCGM) devices, and interoperable automated glycemic controller (iAGC) technology. 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 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 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. This unique offering positions us to bring future innovations, including our next generation AID algorithms, to our in-warranty t:slim X2 customers faster than the industry has been able to in the past and independent of the typical four-year insurance pump reimbursement cycle. We have offered in-warranty t:slim customers in the United States four different software updates for no-cost since the Tandem Device Updater was approved in July 2016, including our two AID algorithms, Basal-IQ technology and Control-IQ technology. Basal-IQ technology launched in August 2018 and is a predictive low glucose suspend feature that is designed to temporarily suspend insulin delivery to help reduce the frequency and duration of hypoglycemic events. Control-IQ technology launched in January 2020 and is an advanced hybrid-closed loop feature, designed to help increase a user’s time in targeted glycemic range. 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 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. 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. 22 Table of contents 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 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, 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. At the same time, by innovating and offering new product features and benefits using our t:slim X2 platform, we are able to leverage a shared global manufacturing and supply chain infrastructure. In the United States, we are able to leverage a single sales, marketing, and clinical organization, as well as our domestic customer support services. In Canada, we have a separate sales organization and our customer support infrastructure benefits from close collaboration with our United States organization. In other international geographies, we have contracted with experienced distribution partners to commercialize and support our t:slim X2 platform. 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. 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. 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 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. 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. 23 Table of contents 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 sent by our sales and clinical employees. 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 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. We anticipate that t:sport will feature a 200-unit cartridge, an on-pump bolus button, a rechargeable battery, an AID algorithm, and a Bluetooth radio. t:sport is being designed for use with leading U-100 insulins, and we are evaluating the use of insulin concentrates to provide to people with greater insulin needs. We anticipate that t:sport will be our first insulin pump to support full pump-control from our mobile application, subject to FDA review and approval. A separate controller may be offered in addition to or in advance of full mobile control availability. • 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 From inception 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 commenced sales of our t:slim X2 insulin pump in select international geographies. We consider the number of insulin pump units shipped per quarter domestically and internationally to be an important metric for managing our business. 24 Table of contents 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: Pump Units Shipped for Each of the Three Months Ended in Respective Years - U.S. March 31 June 30 September 30 December 31 Total 2012 — 9 204 844 1,057 2013 852 1,363 1,851 2,406 6,472 2014 1,723 2,235 2,935 3,929 10,822 2015 2,487 3,331 3,431 6,234 15,483 2016 4,042 4,582 3,896 4,418 16,938 2017 2,816 3,427 3,868 6,950 17,061 2018 4,444 5,447 7,379 12,935 30,205 2019 9,669 12,799 13,814 17,453 53,735 2020 13,158 14,735 N/A N/A 27,893 Pump shipments to international customers by fiscal quarter were as follows: Pump Units Shipped for Each of the Three Months Ended in Respective Years - International March 31 June 30 September 30 December 31 Total 2018 N/A N/A 1,055 3,233 4,288 2019 5,063 8,459 4,025 2,149 19,696 2020 4,220 3,952 N/A N/A 8,172 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. Our operating results have historically fluctuated on a quarterly or annual basis, particularly in periods surrounding anticipated regulatory approvals, the commercial launch of new products by us and our competitors, the commercial launch of our products in geographies outside of the United States and due to general seasonality in the United States. We expect these periodic fluctuations in our operating results to continue. We believe that our financial condition and operating results, as well as the decision-making process of our current and potential customers, has been and will continue to be impacted by a number of general trends, including the following: • market acceptance of our products and competitive products by people with insulin-dependent diabetes, their caregivers and healthcare providers; • the introduction of new products, treatment techniques or technologies for the treatment of diabetes, including the timing of the commercialization of new products by us and our competitors; • 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 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; • the buying patterns of our distributors and other customers, both domestically and internationally; 25 Table of contents • changes in the competitive landscape, including as a result of companies entering or exiting the diabetes therapy market; • access to adequate coverage and reimbursement for our current and future products by third-party payors, and reimbursement decisions by third-party payors; • the magnitude and timing of any changes to our facilities, manufacturing operations and other infrastructure, and factors impacting our ability to access our facilities; • the impact of any privacy breaches, which may subject us to legal and regulatory proceedings and substantial fines, penalties and expenses, as well as significant reputational harm; • anticipated and actual regulatory approvals of our products and competitive products; and • product recalls impacting, or the suspension or withdrawal of regulatory clearance or approval relating to, our products or the products of our competitors. In addition to these general trends, we believe the following specific factors have materially impacted, and could continue to materially impact, our business going forward: • 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 with Control-IQ technology, and the demonstrated success of our Tandem Device Updater; • anticipated new product launches; • increased opportunity to achieve customer renewals as customers become eligible for insurance reimbursement to purchase a new insulin pump at the end of the typical four-year reimbursement cycle; • 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 from July 2016 through June 2020; • ability to enter into and maintain agreements with CGM partners for CGM integration; • expansion and new product launches in select international geographies, including initial orders to stock inventories; and • 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, 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. 26 Table of contents Recent Developments 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 Sales We offer products for people with insulin-dependent diabetes. We commenced commercial sales of our original t:slim insulin pump platform in the United States in the third quarter of 2012 and continued to launch various iterations of that platform during the following years. 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 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. These distributors are generally providers of medical equipment and supplies to individuals with diabetes. Our primary end customers are people with insulin-dependent diabetes. 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 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. 27 Table of contents 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. Historically, we have experienced consistent levels of reimbursement for our products in the United States, but we expect the average sales price will vary in international markets based on a number of factors, such as the geographical mix, nature of the reimbursement environment, government regulations and the extent to which we rely on distributor relationships to provide sales, clinical and marketing support. 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 these historical seasonality trends, our domestic pump shipments have typically decreased significantly from the fourth quarter to the following first quarter. 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 product launches into new geographies. 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 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 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. Additionally, upon the announcement of FDA approval or commercial launch of a new product, either by us or one of our competitors, potential new customers may reconsider their purchasing decisions or take additional time to consider such FDA approval or product launch before making their purchasing decisions. For instance, we believe certain customers paused their decision-making during the second half of 2019 in anticipation of the commercial availability of the t:slim X2 with Control-IQ technology. However, it is difficult to quantify the extent of the impact of these or similar events on future purchasing decisions. Cost of Sales Historically, we have manufactured our pumps and disposable cartridges at our manufacturing facility in San Diego, California. 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. Infusion sets and pump accessories are manufactured by third-party suppliers. Cost of sales includes raw materials, labor costs, manufacturing overhead expenses, product training costs, royalties, freight, reserves for expected warranty costs, 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. We anticipate that our cost of sales will continue to increase as our product sales increase. 28 Table of contents Over the long term, we expect our overall gross margin percentage, which for any given period is calculated as sales less cost of sales divided by sales, to improve, as our sales increase and our overhead costs are spread over larger production volumes. We expect we will be able to leverage our manufacturing cost structure across our products that utilize the same technology platform and manufacturing infrastructure and will be able to further reduce per unit costs with increased automation, process improvements and raw materials cost reductions. Pumps have, and are expected to continue to have, a higher gross margin percentage than our pump-related supplies. 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, 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 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. 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. 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 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 executive, financial, legal, marketing, sales, clinical, customer support, technical services, insurance verification, regulatory affairs and other administrative functions. We began expanding our U.S. 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 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. Our operations in Canada are comprised of approximately 10 sales territories. Other significant SG&A expenses include those incurred for product demonstration samples, 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. Overall, we expect our SG&A expenses, including the cost of our customer support infrastructure, to increase as our customer base grows in the United States and international markets. 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 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. In the longer term, SG&A expenses may also increase due to anticipated costs associated with additional compliance and regulatory reporting requirements. 29 Table of contents Research and Development 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, 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. We expect our R&D expenses to increase as we advance our products under development and develop new products and technologies, partially offset by future expected declines in non-cash stock-based compensation. 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 or to enable development activities under alternative conditions. Other Income and Expense 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 June 30, Six Months Ended June 30, (in thousands, except percentages) 2020 2019 2020 2019 Sales: Domestic $ 89,277 $ 70,371 $ 168,823 $ 125,025 International 19,959 22,884 38,339 34,225 Total sales 109,236 93,255 207,162 159,250 Cost of sales 54,846 43,351 102,511 75,993 Gross profit 54,390 49,904 104,651 83,257 Gross margin 50 % 54 % 51 % 52 % Operating expenses: Selling, general and administrative 50,440 40,565 100,157 75,524 Research and development 15,987 11,204 30,104 20,594 Total operating expenses 66,427 51,769 130,261 96,118 Operating loss (12,037 ) (1,865 ) (25,610 ) (12,861 ) Other income (expense), net: Interest and other income 412 786 1,138 1,543 Interest and other expense (3,221 ) (9 ) (3,221 ) (16 ) Change in fair value of common stock warrants (14,336 ) (424 ) (16,258 ) (13,170 ) Total other expense, net (17,145 ) 353 (18,341 ) (11,643 ) Loss before income taxes (29,182 ) (1,512 ) (43,951 ) (24,504 ) Income tax benefit (2,075 ) — (1,977 ) — Net loss $ (27,107 ) $ (1,512 ) $ (41,974 ) $ (24,504 ) Comparison of the Three Months Ended June 30, 2020 and 2019 Sales . 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. 30 Table of contents 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): Three Months Ended June 30, 2020 2019 Pump $ 56,367 $ 48,806 Infusion sets 22,536 14,735 Cartridges 10,196 6,710 Other 178 120 Total Domestic Sales $ 89,277 $ 70,371 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. International sales by product were as follows (in thousands): Three Months Ended June 30, 2020 2019 Pump $ 9,124 $ 16,955 Infusion sets 7,430 3,484 Cartridges 3,321 2,290 Other 84 155 Total International Sales $ 19,959 $ 22,884 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 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 . 31 Table of contents 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 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 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 Sales . 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. 32 Table of contents Domestic sales by product were as follows (in thousands): Six Months Ended June 30, 2020 2019 Pump $ 106,086 $ 85,709 Infusion sets 42,750 26,689 Cartridges 19,651 12,381 Other 336 246 Total Domestic Sales $ 168,823 $ 125,025 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. 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. International sales by product were as follows (in thousands): Six Months Ended June 30, 2020 2019 Pump $ 18,940 $ 26,161 Infusion sets 13,676 4,781 Cartridges 5,553 3,112 Other 170 171 Total International Sales $ 38,339 $ 34,225 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. 33 Table of contents 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. 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 equipment and supplies, outside consulting and outside services of $3.6 million. Research and Development Expenses . 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 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 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. Historically, our principal sources of cash have included cash collected from product sales, private and public offerings of equity securities, and debt financing. Since the beginning of 2019, we completed the following financing activities: • 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. 34 Table of contents 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. We expect our sales performance and the resulting operating income or loss, as well as the status of each of our new product development programs, will significantly impact our cash flow from operations, liquidity position and cash management decisions. In light of the COVID-19 global pandemic, we are prudently managing our use of cash. 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 six months ended June 30, 2020 and 2019 : Six Months Ended June 30, (in thousands) 2020 2019 Net cash provided by (used in): Operating activities $ (5,132 ) $ (556 ) Investing activities (98,605 ) (13,883 ) Financing activities 275,303 10,755 Effect of foreign exchange rate changes on cash (262 ) 15 Total $ 171,304 $ (3,669 ) Operating Activities . 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 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 $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: • 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 the exercise of outstanding warrants, and proceeds from the issuance of equity awards pursuant to employee stock plans; 35 Table of contents • fluctuations in gross margins and operating margins; • fluctuations in working capital, including changes in accounts receivable, inventories, accounts payable, employee-related liabilities, and operating lease liabilities; and • the impacts and disruptions caused by the COVID-19 global pandemic. Our primary short-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, and manufacturing equipment to support business growth and increase manufacturing capacity; and • payments under licensing, development and commercialization agreements. Although we believe the foregoing items reflect our most likely uses of cash in the short-term, we cannot predict with certainty all of our particular cash uses or the timing or amount of cash used. In addition, from time to time we may consider opportunities to acquire or license other products or technologies that may enhance our product platform or technology, expand the breadth of our markets or customer base, or advance our business strategies. Any such transaction may require short-term expenditures that may impact our capital needs. If for any reason our cash and cash equivalents balances, or cash generated from operations is insufficient to satisfy our working capital requirements, we may in the future be required to seek additional capital from public or private offerings of our equity or debt securities, or we may elect to borrow capital under new credit arrangements or from other sources. We may also seek to raise additional capital from such offerings or borrowings on an opportunistic basis when we believe there are suitable opportunities for doing so. If we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, we may incur significant financing or debt service costs, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. There can be no assurance that financing will be available on acceptable terms, or at all. Our ability to raise additional financing may be negatively impacted by a number of factors, including our recent and projected financial results, recent changes in and volatility of our stock price, perceptions about the dilutive impact of financing transactions, the competitive environment in our industry, uncertainties regarding the regulatory environment in which we operate and conditions impacting the capital markets more generally, including economic weakness, inflation, political instability, war and terrorism, natural disasters, incidence of illness or disease, or other events beyond our control. Critical Accounting Policies 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 of America (U.S. GAAP). 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 and accompanying notes as of the date of the 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 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 , with the exception of policies put in place with regards to the Convertible Senior Notes. 36 Table of contents Off-Balance Sheet Arrangements As of June 30, 2020 , we did not have any off-balance sheet arrangements.