What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-24 compared with 2020-02-24 · 283 added, 177 removed, 251 unchanged (65% of the section changed)

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The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.

We are a medical device company with an innovative approach to the design, development and commercialization of products for people with insulin-dependent diabetes.

We are a medical device company with a positively different approach to the design, development and commercialization of products for people with insulin-dependent diabetes.

Diabetes management can vary greatly person-to-person, creating multiple market segments based on clinical needs and personal preferences.

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

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.

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Our manufacturing, sales and support activities principally focus on our flagship pump platform, the t:slim X2 Insulin Delivery System (t:slim X2) and our complementary product offerings.

The simple-to-use t:slim X2 is based on our proprietary technology platform and is the smallest durable insulin pump available.

It is the only pump currently available in the United States that is capable of remote feature updates, which positions us well to address the evolving needs and preferences of differentiated segments of the insulin-dependent diabetes market.

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 and two pumps outside the United States since 2018.

Four of our insulin pumps have featured integration with continuous glucose monitoring (CGM) technology, and two have featured an automated insulin delivery (AID) algorithm.

We believe that the three new classifications defined by the United States Food and Drug Administration (FDA) for the interoperability of devices for AID will help support continued rapid innovation by streamlining the regulatory pathway for integrated products.

In June 2018, the t:slim X2 was the first insulin pump designated as compatible with integrated continuous glucose monitoring (known as iCGM) devices;

in February 2019, the t:slim X2 was the first in a new device category called Alternate Controller Enabled Infusion Pumps (ACE pumps);

and in December 2019, Control-IQ technology for the t:slim X2 insulin pump was the first automated insulin dosing software in a new interoperable automated glycemic controller category.

In the four-year period ended December 31, 2019 , we shipped approximately 142,000 insulin pumps, which is representative of our estimated global installed customer base on the typical four-year reimbursement cycle.

Approximately 118,000 of these pumps were shipped to customers in the United States, and approximately 24,000 were shipped to international markets.

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

It is the only commercial insulin pump that allows users to update their pumps’ software quickly and easily from a personal computer.

We have offered in-warranty t:slim customers in the United States four different software updates for no-cost using the Tandem Device Updater, including our two AID algorithms, Basal-IQ technology and Control-IQ technology.

We have commercially launched seven insulin pump configurations in the United States since 2012 and three insulin pump configurations outside the United States since 2018.

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

Our simple-to-use t:slim X2 is based on our proprietary technology platform and is the smallest durable insulin pump available.

We have commercially offered our pump technology integrated with three generations of Dexcom’s continuous glucose monitoring (CGM) sensors.

The t:slim X2 is the only pump on which remote software updates have been commercially available in the United States.

This experience, which offers and supports different software updates, provides us with a unique competitive advantage.

Two of our updates provided our users access to our 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 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.

It is the first and only system cleared by the FDA 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 integration in the third quarter of 2018, offering no-cost software updates for Basal-IQ technology in the third quarter of 2019 and for Control-IQ technology beginning in the third quarter of 2020.

We intend to complete our scaled launch of Control-IQ technology outside the United States in the first half of 2021, subject to securing necessary regulatory clearances or approvals.

We continue to offer both AID algorithms on the market to support the varying needs of people living with diabetes.

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.

Our insulin pumps are compatible with the Tandem Device Updater, a revolutionary tool that allows pump users to update their pumps’ software quickly and easily from a personal computer.

This unique offering positions us to bring future innovations, including our next generation AID algorithms, to our in-warranty t:slim X2 customers independent of the typical four-year insurance pump reimbursement cycle, faster than the industry has been able to in the past.

The Tandem Device Updater launched in the United States in the first quarter of 2017 and outside of the United States in the third quarter of 2019.

Since its launch, we have offered in-warranty t:slim customers in the United States four different software updates for no-cost using the Tandem Device Updater, including Basal-IQ technology and, most recently, Control-IQ technology.

Outside the United States we began 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 the second half of 2020, subject to required regulatory and reimbursement approvals.

We also offer t:connect, a web-based data management application that provides users, their caregivers and their healthcare providers with a fast, easy and visual way to display diabetes therapy management data from our pumps, integrated CGMs and supported blood glucose meters.

In the four-year period ended December 31, 2020, we shipped more than 215,000 insulin pumps, which is representative of our estimated global installed customer base, assuming the typical four-year reimbursement cycle.

More than 170,000 of these pumps were shipped to customers in the United States, and nearly 45,000 were shipped to international markets.

For the years ended December 31, 2020, 2019 and 2018, our consolidated sales were $498.8 million, $362.3 million, and $183.9 million, respectively.

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These amounts included $292.1 million and $216.6 million of non-cash stock-based compensation charges and non-cash changes in the fair value of common stock warrants as of December 31, 2020 and 2019, respectively.

In support of our digital health strategy, we continue to offer and improve t:connect and the Tandem Device Updater, and also develop and launch other complementary offerings.

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 wirelessly uploads pump data to our t:connect diabetes management application, receives notification of pump alerts and alarms, and provides 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 of 2020, we acquired Sugarmate, the developer of a popular app designed to help people visualize diabetes therapy data in innovative ways that also connects with many other popular, consumer-friendly devices.

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.

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 studies using Control-IQ technology that were published in the New England Journal of Medicine in October 2019 and August 2020, 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 the United States, we are able to leverage a single sales, marketing, and clinical organization, as well as our 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 communities we serve.

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

We originally anticipated that our sales outside the United States would experience a greater proportional impact due to differences in the sales process in domestic versus international markets.

Initially, the impact on our business was relatively consistent worldwide but we have since seen varying degrees of impact in international markets based on local conditions.

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

For example, we have experienced delays in certain programs of up to three or six months from when they were originally planned, such as human factors studies associated with our product development efforts.

In addition, regulatory timelines may be difficult to predict as the FDA has stated that its review process may take longer than normal due to the impact of the COVID-19 global pandemic.

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 and the relative impact of COVID-19 on the business operations of our contract manufacturers, suppliers and competitors.

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.

Since March 2020, we have 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.

To help ensure the safety and health of 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 require temperature checks of 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.

During the first six months of 2020, we experienced certain challenges managing our inventory, primarily due to the impacts of the COVID-19 global pandemic.

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

In addition, during the second quarter of 2020, our infusion set manufacturer experienced certain inventory constraints which resulted in us asking some customers to accept substitutions of similar products to prevent delays in order fulfillment.

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 experiencing, disruption in our ability to manufacture insulin pumps and cartridges due to component procurement limitations.

Additionally, our third-party cartridge manufacturer completed validation and commenced commercial-scale manufacturing near the end of the first quarter to supplement our existing cartridge manufacturing capacity, which we believe will assist us in meeting product demand in future periods.

Our finished goods and raw material inventory, as well as available manufacturing capacity, position us well to respond to unforeseen disruptions in the near term.

Commercially, we have been communicating with our customers and healthcare providers through social media, direct email outreach and our website, in addition to 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 increasingly utilizing telehealth capabilities in their practices.

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 in the third quarter, we resumed offering in-person trainings under specific conditions.

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 will 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 offerings and a next-generation hardware platform which we call 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.

We plan to transition our mobile health offerings to a single, global digital platform, which is intended to provide all users, including pump users, caregivers and healthcare providers, with a simplified and tailored user experience.

The platform is being designed to enhance the user experience, streamline the pump and supplies purchasing process, and provide internal efficiencies.

In the future, data from our centralized system may be used for new product development, continuous product improvement, and for the generation of health economic outcomes data, and may ultimately support other advanced technology and patient monitoring services.

• 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.

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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.

Connected (Mobile) Health Offerings – We are currently preparing for the launch of a mobile application that has been designed to utilize the capability of the Bluetooth radio integrated with the t:slim X2 to wirelessly upload pump data to t:connect, 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 mobile application in the United States follows the roll-out of our Control-IQ technology and, by allowing for the wireless upload of data to t:connect, 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.

A separate controller may be offered in addition to 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 after obtaining required regulatory clearances or approvals, we intend to focus our initial commercial activities on integrated products in the U.S.

and Canada, with additional geographies considered in the future.

For additional information, see the section of this Annual Report under the caption “Business” in Part I, Item 1.

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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 to be an important metric for managing our business.

In the four-year period ended December 31, 2019 , we shipped approximately 142,000 insulin pumps, of which approximately 118,000 were shipped to customers in the United States, and approximately 24,000 were shipped to international markets.

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

Approximately 170,000 of these pumps were shipped to customers in the United States, and nearly 45,000 were shipped to international markets.

In the year ended December 31, 2020, we shipped 90,771 insulin pumps worldwide, compared to 73,431 insulin pumps shipped in 2019.

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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 18,380 24,552 70,825

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

Technology Upgrade Program

Beginning in the third quarter of 2016 through the third quarter of 2017, we offered a Technology Upgrade Program under a variable pricing structure, as a pathway for certain existing customers to obtain the t:slim X2.

The accounting treatment for the program required us to defer up to 100% of sales at the time of pump shipment and recognize them in a subsequent period, either when the upgrade was fulfilled or at the expiration of the program.

We recognized the deferred amount of sales and cost of sales at the earlier of when the obligations under the program were satisfied or upon the expiration of the program.

If a customer elected to participate in the program, we recognized any upgrade fees that we received and the associated costs at the time of fulfilling the given obligation.

For the year ended December 31, 2017, we recorded incremental net sales of $5.0 million with a corresponding increase of $3.1 million in gross profit as a result of the Technology Upgrade Program.

The program expired on September 30, 2017 and, therefore, had no impact on our 2018 and 2019 financial results.

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 3,641 8,133 19,946

Trends Impacting Financial 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, and the commercial launch of our products in geographies outside of the United States.

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.

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• 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;

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• 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;

• 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;

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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:

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

• 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;

benefit in 2018 and 2019 following the announcement by Johnson & Johnson that it discontinued the operations of Animas Corporation (Animas) and discontinued 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;

• 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;

accounting variability and complexity associated with certain commercial programs, such as the Technology Upgrade Program offered in 2016 and 2017 that provided a pathway for in-warranty customers to our next-generation hardware platform;

• expansion and new product launches in select international geographies, including initial orders to stock inventories;

• 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 both the fourth quarters of 2019 and 2020.

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

In December 2019, the FDA cleared our t:slim X2 insulin pump with Control-IQ technology, an advanced hybrid-closed-loop feature designed to help increase time in range, and the first and only system cleared to deliver automatic correction boluses in addition to adjusting insulin delivery to help prevent high and low blood sugar.

The system integrates with Dexcom G6 continuous glucose monitoring (CGM), which requires no fingersticks for calibration or diabetes treatment decisions.

Components of Results of Operations

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

The t:slim X2 hardware platform, which includes 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.

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.

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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.

In the third quarter of 2018, we began the launch of our t:slim X2 with G5 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.

Our independent 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.

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 more recently our Control-IQ technology beginning in the third quarter of 2020.

Our launch of Control-IQ technology in international markets will continue to scale across all geographies through the first half of 2021, contingent upon regulatory and reimbursement approvals.

In the first quarter of 2020, we expanded into additional international markets, including 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 distribution partners 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, and expect to continue to experience, 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, we also expect domestic pump shipments from the fourth quarter to the following first quarter to decrease significantly.

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

While the opportunity to transition former Animas customers during 2019 positively impacted our quarterly sales trends worldwide, we do not anticipate future significant benefit.

In addition, our quarterly sales have 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.

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 did not see a material benefit in 2020.

During 2020, the COVID-19 global pandemic had a major impact on businesses around the world.

While we experienced only a modest negative impact from the pandemic during the first quarter of 2020, which became more pronounced in the second quarter and remained through the end of the year, and we anticipate that our sales and operating results will continue to be adversely impacted for the duration of the pandemic.

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 may 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.

Initially, the impact was relatively consistent worldwide but we have since seen varying degrees of impact in international markets based on local conditions.

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 scope and duration of the pandemic, varying government responses to the pandemic and potential delays to product development timelines.

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 the anticipated or new approval or product launch in making their purchasing decisions.

For instance, we believe certain customers paused in their decision-making during the second half of 2019 in anticipation of the commercial availability of the t:slim X2 with Control-IQ technology.

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.

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

In 2020, we anticipate outsourcing a portion of our cartridge manufacturing to an experienced third-party contract manufacturer.

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.

We expect to increase production capacity and volumes at our third-party cartridge manufacturer over the next 24 months.

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, freight, reserves for expected warranty costs, scrap and excess and obsolete inventories.

Cost of sales includes raw materials, labor costs, manufacturing overhead expenses, product training costs, royalties, freight, reserves for expected warranty costs, costs of supporting our digital health platforms, scrap and charges for excess and obsolete inventories.

Manufacturing overhead expenses include expenses relating to quality assurance, manufacturing engineering, material procurement, inventory control, facilities, equipment, information technology and operations supervision and management.

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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 than our pump-related supplies.

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

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 may fluctuate in future quarterly periods as a result of numerous factors aside from those associated with production volumes and product mix.

In addition, as demand for our products increases, we have begun, and 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 gross margin in the near-term.

Specifically, in 2020, we plan 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 on our supplies.

Other factors impacting our overall gross margin 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.

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.

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 invested in additional manufacturing equipment to double our existing capacity in order 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 awards on non-cash stock-based compensation expense allocated to cost of sales, changes in warranty estimates, training costs, licensing and royalty costs, increased costs to support our digital health platforms, 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.

Our selling, general and administrative (SG&A) expenses primarily consist of salary, cash-based incentive compensation, fringe benefits and non-cash stock-based compensation, which also includes our clinical, customer support, technical services, and insurance verification.

We began expanding our U.S.

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

We expect to have approximately 90 territories by early 2020.

Our existing territories are maintained by sales representatives and field clinical specialists, and supported by managed care liaisons, additional sales management and other customer support personnel.

Our operations in Canada are supported by a direct sales force of approximately 17 field representatives.

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 December 31, 2020 and are expanding modestly to approximately 95 in 2021.

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 ten 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.

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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 will be sustained through the first half of 2020 and will begin to decline in future quarters.

Our SG&A expenses may also increase due to anticipated costs associated with additional compliance and regulatory reporting requirements.

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 2018 and 2019 employee stock option grants and the impact on the valuation of the significant increase in our stock price over the previous year.

We recognized higher non-cash stock-based compensation expense through the first half of 2020, and experienced a reduction in expense beginning in the third quarter of 2020 as certain 2018 employee stock option grants became fully amortized.

We anticipate that we will continue to see improvement in non-cash stock-based compensation as a percent of sales in future years.

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.

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, 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.

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.

We expect our R&D expenses to increase as we advance our products under development and develop new products and technologies, but will continue to see a reduction in non-cash stock-based compensation as a percent of sales in the longer term.

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 our public offering of common stock in October 2017, and interest earned on our cash equivalents and short-term investments.

In 2018 and 2017, it also included interest expense and amortization of debt discount and debt issuance costs associated with our Amended and Restated Term Loan Agreement (Term Loan Agreement) with Capital Royalty Partners II, L.P.

and its affiliated funds (CRG), and a $5.3 million loss on extinguishment of debt associated with the full repayment of amounts due under the Term Loan Agreement in August 2018.

Prior to the repayment, there was $ 82.7 million of outstanding principal under the Term Loan Agreement, which accrued interest at a rate of 11.5% per annum.

As a result of the full repayment, we did not incur any interest expense or costs associated with the Term Loan Agreement subsequent to the third quarter of 2018.

Other income also includes 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 certain outstanding common stock 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 (Series A Warrants), 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 in future years to be higher than 2020 as our Notes were not outstanding for the entire twelve month period ended December 31, 2020.

We expect total other income and expense, net 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.

Income Tax Expense (Benefit)

Because we are in a net loss position with respect to federal income taxes, income tax expense is expected to primarily consist of state and foreign income tax expense as a result of current taxable income in those jurisdictions.

Income tax expense (benefit) may fluctuate in future quarters due to adjustments related to non-recurring transactions and changes in certain tax assessments.

Results of Operations

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(in thousands, except percentages) 2020 2019 2018

Domestic $ 415,680 $ 302,084 $ 174,188

International 83,150 60,221 9,678

Total sales 498,830 362,305 183,866

Cost of sales 238,310 168,093 94,044

Gross profit 260,520 194,212 89,822

Gross margin 52.2 % 53.6 % 48.9 %

Operating expenses:

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Other income (expense), net:

Interest and other income

Interest and other expense

Interest income and other, net 1,567 3,193 1,439

Interest expense (12,805) — (7,561)

Loss on extinguishment of debt — — (5,313)

Change in fair value of stock warrants

Change in fair value of common stock warrants (17,087) (11,075) (66,494)

Total other expense, net (28,325) (7,882) (77,929)

Loss before income taxes (36,282) (24,604) (122,560)

Income tax expense

Income tax expense (benefit) (1,900) 149 51

Net loss $ (34,382) $ (24,753) $ (122,611)

Comparison of Years Ended December 31, 2020 and 2019

For the year ended December 31, 2020, sales were $498.8 million, which included $83.2 million of international sales.

For the year ended December 31, 2018 , sales were $183.9 million, which included $9.7 million of international sales which commenced in the third quarter of 2018.

The increase in total sales of $178.4 million in 2019 , as compared to 2018 , was primarily driven by a 113% increase in worldwide pump shipments to 73,431 in 2019 , compared to 34,493 in 2018 .

Worldwide pump shipments were positively impacted by strong demand for our products following the August 2018 domestic launch of t:slim X2 with Basal-IQ technology and the commencement of commercial sales of t:slim X2 with G5 integration in select international geographies beginning in the third quarter of 2018, as well as the fulfillment of international pump demand from backlog that existed at the end of 2018 due to supply constraints.

In addition, worldwide sales in 2019 and 2018 were positively impacted by the transition of former Animas customers to our products.

However, we do not anticipate significant benefit from conversion of Animas customers beyond 2019.

Sales from pump-related supplies increased 91% primarily due to an overall increase in our installed base of customers reordering supplies.

The ratio of the number of infusion sets shipped to the number of cartridges shipped was over 100% in both of the years ended December 31, 2019 and 2018 .

For the year ended December 31, 2019, sales were $362.3 million, which included $60.2 million of international sales.

The increase in worldwide sales of $136.5 million in 2020, as compared to 2019, was primarily driven by a $69.4 million increase in pump-related supplies sales due to 52% growth in our estimated worldwide installed base of customers, and a $67.1 million increase in pump sales driven by a 24% increase in worldwide pump shipments to 90,771 in 2020, compared to 73,431 in 2019 which benefited from the effect of certain non-recurring international market dynamics.

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

Year Ended December 31,

Pump $ 269,856 $ 205,492

Infusion sets 99,743 66,034

Cartridges 45,342 30,022

Other 739 536

Total Domestic Sales $ 415,680 $ 302,084

Domestic pump sales were $269.9 million for the year ended December 31, 2020, compared to $205.5 million in the year ended December 31, 2019, as pump shipments increased 32% 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 70,825 in the year ended December 31, 2020 compared to 53,735 in 2019.

Sales of pump-related supplies increased primarily due to a 46% increase in our estimated domestic installed base of customers.

Sales to distributors accounted for 70% and 73% of our total domestic sales for the years ended December 31, 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):

Year Ended December 31,

Pump $ 44,851 $ 42,094

Infusion sets 28,016 11,221

Cartridges 9,884 6,656

Other 399 250

Total International Sales $ 83,150 $ 60,221

Sales to distributors accounted for 73% and 78% of our total domestic sales for the years ended December 31, 2019 and 2018 , respectively.

International pump sales were $44.9 million for the year ended December 31, 2020, compared to $42.1 million in the year ended December 31, 2019.

The first half of 2019 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 benefited from an 83% increase in our estimated international installed base of customers.

The ordering patterns of our international distributors for pumps and supplies is highly variable from period to period.

This variability was compounded by the varying levels of impact of the global pandemic across the international markets in which we operate.

Sales to distributors accounted for 94% and 92% of our total international sales for the years ended December 31, 2020 and 2019, respectively.

Cost of Sales and Gross Profit .

Our cost of sales in 2019 was $168.1 million, resulting in gross profit of $194.2 million, compared to $94.0 million of cost of sales in 2018 resulting in gross profit of $89.8 million.

Our cost of sales for the year ended December 31, 2020 was $238.3 million, resulting in gross profit of $260.5 million, compared to cost of sales of $168.1 million for the year ended December 31, 2019, resulting in gross profit of $194.2 million.

The gross margin for 2020 was 52%, compared to 54% in 2019.

The improvement in both gross profit and gross margin was primarily the result of the increase in insulin pump sales which have a higher gross margin than pump-related supplies.

Gross margin and gross profit also increased as a result of per-unit manufacturing cost improvements from higher production volumes and continued overall manufacturing efficiencies gained from our new manufacturing facility which became fully operational at the beginning of 2018.

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.

Non-cash stock-based compensation expense allocated to cost of sales increased to $6.4 million in 2019 compared to $2.6 million in 2018, due primarily to the valuation of certain 2018 and 2019 employee stock option grants and the impact on the valuation of the significant increase in our stock price.

The increase in our gross profit for the year ended December 31, 2020, was primarily the result of the $136.5 million increase in total sales.

Gross profit and gross margin in 2020 were negatively impacted by royalty costs, for which there was no comparable expense in 2019.

During the year ended December 31, 2020, we recognized $6.7 million of product royalty costs, or approximately one percent of sales, associated with sales of pumps with Control-IQ technology launched in the first quarter of 2020, and free software updates downloaded by existing customers in the United States, as well as in certain international markets where we launched Control-IQ beginning in the third quarter of 2020.

Excluding the impact of royalty, gross margins for both pumps and supplies saw improvement compared to the prior year, but were still slightly pressured by the product mix.

Gross margin was also pressured to a lesser extent by other factors that are more temporary in nature or anticipated to be leveraged through growth in future quarters, including costs associated with COVID-19 risk mitigation, managing pump production to achieve desired stocking levels, the expansion of cartridge manufacturing capacity and increased spending to support our digital health product offerings.

Other factors that have and may continue to have an impact on the gross margin percentage are changes in product and geographical mix and the level of non-cash stock-based compensation allocated to cost of sales.

Pump sales, which have the highest gross margin, were 63% of total worldwide sales for the year ended December 31, 2020, versus 68% in 2019.

Non-cash stock-based compensation expense allocated to cost of sales was $8.2 million for the year ended December 31, 2020, compared to $6.4 million in the same period of 2019, representing 2% of sales in both periods.

Selling, General and Administrative Expenses.

SG&A expenses increase d 58% to $165.7 million in 2019 from $105.2 million in 2018 .

SG&A expenses increased 24% to $204.9 million for the year ended December 31, 2020, from $165.7 million for the same period in 2019.

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

These expenses increase d $49.6 million during 2019 compared to 2018 , which included an increase of $23.6 million in salaries, incentive compensation and other employee benefits due to an increase in personnel to support our growing installed customer base, and a $26.0 million increase in non-cash stock-based compensation expense.

Non-cash stock-based compensation expense allocated to SG&A increased to $42.9 million in 2019, compared to $16.8 million in 2018, due primarily to the valuation of certain 2018 and 2019 employee stock options 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 services, and travel of $10.9 million.

The increase compared to 2019 was primarily the result of a $32.8 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, offset by a $1.3 million decrease in non-cash stock-based compensation expense.

Non-cash stock-based compensation expense allocated to SG&A was $41.6 million in 2020, compared to $42.9 million in 2019.

The increase in non-cash stock-based compensation expense associated with increased headcount in 2020 was more than offset by a decrease in non-cash stock-based compensation expense from the valuation of certain 2018 employee stock option grants which are now fully amortized.

We also experienced increased costs for equipment and supplies, and outside consulting and services of $11.2 million, offset by a $2.9 million decrease in travel costs.

Research and Development Expenses .

R&D expenses increased 55% to $45.2 million in 2019 from $29.2 million in 2018 .

The increase in R&D expenses was primarily the result of an increase of $4.8 million in salaries, incentive compensation and other employee benefits due to an increase in personnel to support our product development efforts, and a $4.5 million increase in non-cash stock-based compensation expense.

Non-cash stock-based compensation expense allocated to R&D increased to $8.8 million in 2019, compared to $4.3 million in 2018, due primarily to the valuation of certain 2018 and 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 outside consulting and services, clinical trials, and supplies of $5.8 million.

R&D expenses increased 41% to $63.6 million for the year ended December 31, 2020, from $45.2 million for the same period in 2019.

The increase in R&D expenses was primarily the result of an increase of $9.9 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 $8.5 million in outside consulting and services, equipment and supplies attributable to R&D.

Non-cash stock-based compensation expense allocated to R&D was $8.7 million in 2020, compared to $8.8 million in 2019.

Other Income (Expense) .

Total other expense in 2019 was $7.9 million, compared to $77.9 million in 2018 .

Other expense in 2019 primarily consisted of a $11.1 million revaluation loss from the change in fair value of certain warrants due to the significant appreciation in our stock price during 2019, offset by interest and other income of $3.3 million .

Other expense in 2018 consisted primarily of a $66.5 million revaluation loss from the change in fair value of certain warrants due to the significant appreciation in our stock price during 2018, $7.6 million of interest expense associated with the Term Loan Agreement, as well as a $5.3 million loss on extinguishment of debt associated with the full repayment of our Term Loan Agreement in August 2018.

Interest and other income primarily consisted of interest earned on our cash equivalents and short-term investments, for which our average invested balances were significantly higher in 2019 as compared to 2018 .

Total other expense, net for the year ended December 31, 2020 was $28.3 million, compared to $7.9 million in 2019.

Other expense for 2020 primarily consisted of a $17.1 million revaluation loss from the change in the fair value of certain warrants due to the appreciation of our stock price during 2020, and $12.8 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 2019 consisted primarily of an $11.1 million revaluation loss from the change in the fair value of certain warrants due to the appreciation in our stock price during 2019.

Interest income and other, for the years ended December 31, 2020 and 2019 primarily consisted of interest earned on our cash equivalents and short-term investments, and decreased in 2020 primarily due to the lower interest rate environment as compared to 2019.

Income Tax Expense (Benefit).

We recognized an income tax benefit of $1.9 million on a pre-tax loss of $36.3 million for the year ended December 31, 2020, compared to income tax expense of $0.1 million on a pre-tax loss of $24.6 million for the same period in 2019.

The income tax benefit for the year ended December 31, 2020 was primarily due to benefit associated with the release of valuation allowance related to the acquisition of certain intangible assets, partially offset by state and foreign income tax expense as a result of current taxable income in those jurisdictions.

Income tax expense for the year ended December 31, 2019 was primarily attributable to state and foreign income tax expense as a result of current taxable income in those jurisdictions.

Comparison of Years Ended December 31, 2019 and 2018

For the year ended December 31, 2019, sales were $362.3 million, which included $60.2 million of international sales.

For the year ended December 31, 2018, sales were $183.9 million, which included $9.7 million of international sales which commenced in the third quarter of 2018.

For the year ended December 31, 2017, sales were $107.6 million, which included incremental net pump sales of $5.0 million as a result of the Technology Upgrade Program in place at that time.

The increase in total sales of $76.3 million in 2018, as compared to 2017, was primarily driven by a 102% increase in worldwide pump shipments to 34,493 in 2018, compared to 17,061 in 2017.

Worldwide pump shipments were positively impacted by strong demand for our products following the August 2018 domestic launch of t:slim X2 with Basal-IQ technology, the August 2017 launch of t:slim X2 with G5 integration, and the commencement of commercial sales in select international geographies beginning in the third quarter of 2018.

Additionally, sales from pump-related supplies increased 66% primarily due to the September 2017 launch of infusion set products using the t:lock connector, as well as an overall increase in our installed customer base of customers reordering supplies.

The ratio of the number of infusion sets shipped to the number of cartridges shipped increased to over 100% in 2018 from 69% in the year ended 2017.

The increase in worldwide sales of $178.4 million in 2019, as compared to 2018, was primarily driven by a $123.6 million increase in pump sales driven by a 113% increase in worldwide pump shipments to 73,431 in 2019, compared to 34,493 in 2018.

In addition, worldwide sales in 2019 and 2018 were positively impacted by the transition of former Animas customers to our products.

Sales of pump-related supplies increased $54.8 million, or 91%, primarily due to an overall increase in our installed base of customers reordering supplies.

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

Year Ended December 31,

Pump $ 205,492 $ 115,719

Infusion sets 66,034 40,260

Cartridges 30,022 17,796

Other 536 413

Total Domestic Sales $ 302,084 $ 174,188

Domestic pump sales were $205.5 million for the year ended December 31, 2019, compared to $115.7 million in the year ended December 31, 2018, as pump shipments increased 78% compared to the same period in the prior year due to continued strong demand for our products following the August 2018 domestic launch of t:slim X2 with Basal-IQ technology.

Domestic pump shipments were 53,735 in the year ended December 31, 2019 compared to 30,205 in 2018.

Sales of pump-related supplies increased primarily due to a 48% increase in our estimated domestic installed base of customers.

Sales to distributors accounted for 73% and 78% of our total domestic sales for the years ended December 31, 2019 and 2018, respectively.

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

Year Ended December 31,

Pump $ 42,094 $ 8,205

Infusion sets 11,221 629

Cartridges 6,656 781

Total International Sales $ 60,221 $ 9,678

(1) International sales commenced in the third quarter of 2018.

We did not have any international sales during the year ended December 31, 2017.

Sales to distributors accounted for 78% and 75% of our total domestic sales for the years ended December 31, 2018 and 2017, respectively.

The percentage was particularly impacted in 2018 by the mid-2017 launch of the t:lock connector, which resulted in greater purchases of infusion sets by our independent distributors during the period as compared to the same period during the prior year.

Sales to distributors accounted for 100% of our total international sales for the year ended December 31, 2018.

International pump sales were $42.1 million for the year ended December 31, 2019, compared to $8.2 million in the year ended December 31, 2018.

Our first full year of international sales was 2019, as we commenced commercial sales of t:slim X2 with G5 integration in select international geographies beginning in the third quarter of 2018.

The first half of 2019 was also 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 benefited from the growing international installed base of customers.

Sales to distributors accounted for 92% and 100% of our total international sales for the years ended December 31, 2019 and 2018, respectively.

Cost of Sales and Gross Profit .

Our cost of sales in 2018 was $94.0 million, resulting in gross profit of $89.8 million, compared to $63.5 million of cost of sales and gross profit of $44.1 million in 2017, which included incremental gross profit of $3.1 million associated with the Technology Upgrade Program.

Our cost of sales for the year ended December 31, 2019 was $168.1 million, resulting in gross profit of $194.2 million, compared to cost of sales of $94.0 million for the year ended December 31, 2018, resulting in gross profit of $89.8 million.

The gross margin for 2019 was 54%, compared to 49% in 2018.

The incremental gross profit associated with the Technology Upgrade Program benefited our 2017 gross margin by one percentage point.

The improvement in both gross profit and gross margin was primarily the result of the increase in insulin pump sales which have a higher gross margin than pump-related supplies, as well as per-unit cost improvements on all products from increased production volumes and manufacturing efficiencies.

The improvement in both gross profit and gross margin was primarily the result of the $123.7 million increase in insulin pump sales which have a higher gross margin than pump-related supplies.

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.

Non-cash stock-based compensation expense allocated to cost of sales increased to $2.6 million in 2018, compared to $1.4 million in 2017, due primarily to the valuation of certain 2018 employee stock option grants and the impact on the valuation of the significant increase in our stock price during 2018.

Selling, General and Administrative Expenses.

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

These expenses increased $18.4 million during 2018 compared to 2017, which included an increase of $11.6 million in salaries, incentive compensation and other employee benefits due in part to an increase in personnel to support our growing installed customer base, as well as the impact of our strong year-over-year sales growth on incentive-based compensation.

Additionally, there was a $6.8 million increase in non-cash stock-based compensation expense.

Non-cash stock-based compensation expense allocated to SG&A increased to $16.8 million in 2018, compared to $10.0 million in 2017, due primarily to the valuation of certain 2018 employee stock option grants and the impact on the valuation of the significant increase in our stock price during 2018.

These expenses increased $49.6 million during 2019, compared to 2018, which included an increase of $23.6 million in salaries, incentive compensation and other employee benefits due to an increase in personnel to support our growing installed customer base, and a $26.0 million increase in non-cash stock-based compensation expense.

We also experienced increased costs for equipment and supplies, outside consulting and services, and travel of $10.9 million.

Research and Development Expenses .

R&D expenses increased 55% to $45.2 million in 2019 from $29.2 million in 2018.

The increase in R&D expenses was primarily the result of an increase of $4.1 million in salaries, incentive compensation and other employee benefits due to an increase in personnel to support our product development efforts, and a $3.1 million increase in non-cash stock-based compensation expense due to the significant increase in our stock price in 2018.

In addition, our strong year-over-year sales growth drove a substantial year-over-year increase in incentive-based compensation.

Non-cash stock-based compensation expense allocated to R&D increased to $4.3 million in 2018, compared to $1.2 million in 2017, due primarily to the valuation of certain 2018 employee stock option grants and the impact on the valuation of the significant increase in our stock price during 2018.

Other Income (Expense) .

Total other expense in 2018 was $77.9 million, compared to $10.1 million in 2017.

Other expense in 2018 primarily consisted of a $66.5 million revaluation loss from the change in fair value of certain warrants due to the significant appreciation in our stock price during 2018, $7.6 million of interest expense associated with the Term Loan Agreement, as well as a $5.3 million loss on extinguishment of debt associated with the full repayment of our Term Loan Agreement in August 2018.

Other expense in 2017 consisted primarily of interest expense associated with the Term Loan Agreement.

The outstanding principal balance under the Term Loan Agreement was $82.7 million prior to the repayment and as of December 31, 2017.

Total other expense, net for the year ended December 31, 2019 was $7.9 million, compared to $77.9 million for the same period in 2018.

Other expense in 2019 primarily consisted of an $11.1 million revaluation loss from the change in the fair value of certain warrants due to the appreciation in our stock price during 2019.

Other expense in 2018 consisted primarily of a $66.5 million revaluation loss from the change in the fair value of certain warrants due to the significant appreciation in our stock price during 2018, and $7.6 million of interest expense associated with the term loan agreement with Capital Royalty Partners and its affiliated funds (the Term Loan Agreement), which was originally executed in in 2012, and was amended multiple times between 2016 and 2018.

Additionally, we recorded a $5.3 million loss on extinguishment of debt associated with the full repayment of our Term Loan Agreement in August 2018.

Interest income and other, net primarily consisted of interest earned on our cash equivalents and short-term investments, and increased in 2019 as our average invested balances were significantly higher as compared to 2018.

Liquidity and Capital Resources

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We believe that our cash and cash equivalents and short-term investments balance will be 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 private placements and public offerings of equity securities, debt financing, and cash collected from product sales.

Since the beginning of 2018, we completed the following financings:

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

Since the beginning of 2018, 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 6, “Debt”).

• From January 2019 through December 31, 2020, we issued 3,758,420 shares of common stock upon the exercise of stock options, and 631,581 shares of common stock were purchased under our 2013 Employee Stock Purchase Plan, which generated aggregate proceeds of $90.7 million.

• In February 2018, we completed a registered public offering of 34,500,000 shares of common stock at a public offering price of $2.00 per share.

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As of December 31, 2020, there were warrants to purchase 154,700 shares outstanding relating to the October 2017 offering.

From January 2018 through December 2019, we issued 1,554,995 shares of common stock upon the exercise of stock options, and 409,653 shares of common stock were purchased under our 2013 Employee Stock Purchase Plan, which generated aggregate proceeds of $26.3 million.

• From January 2019 through December 2020, we received proceeds of $2.0 million from the exercise of 32,911 outstanding warrants which were originally issued between August 2011 and August 2012.

As of December 31, 2020, there were warrants to purchase 30,861 warrants 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.

Additionally, we have used cash to pay the interest expense associated with our Term Loan Agreement.

Additionally, we have used cash to pay the interest expense associated with our convertible senior notes and our Term Loan Agreement.

The outstanding balance associated with the Term Loan Agreement was fully repaid in August 2018, and we have ceased incurring interest expense and other costs associated with the Term Loan Agreement subsequent to the third quarter of 2018.

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Effect of foreign exchange rate changes on cash 387 191 —

Net increase in cash and cash equivalents $ 43,438 $ 9,349 $ 18,126

Operating activities .

Net cash provided by operating activities was $ 41.9 million for the year ended December 31, 2019 , compared to net cash used of $ 8.3 million and $ 66.1 million for the same periods in 2018 and 2017 , respectively.

Net cash provided by operating activities was $24.7 million and $41.9 million for the years ended December 31, 2020 and 2019, respectively, compared to net cash used of $8.3 million for the same period in 2018.

The decrease in net cash provided by operating activities for 2020 compared to 2019 was driven by net changes in working capital, partially offset by a reduction in net loss when adjusted for non-cash expenses, particularly stock-based compensation expense, the change in the fair value of common stock warrants and non-cash interest expense.

Working capital changes in 2020 primarily consisted of increases in accounts receivable and inventories, offset by increases in employee-related liabilities, deferred revenue, and other current and long-term liabilities, all of which are related to the growth in our business.

Accounts receivable increased to $82.2 million at December 31, 2020 from $46.6 million at December 31, 2019, as a result of higher sales in the fourth quarter of 2020 as compared to the fourth quarter of 2019.

Inventories increased to $63.7 million at December 31, 2020 from $49.1 million at December 31, 2019, primarily to support the growth in our business.

The improvement to net cash provided by operating activities for 2019 compared to 2018 was primarily driven by higher sales and gross margins in 2019, which resulted in a significant reduction in net loss when adjusted for non-cash expenses, particularly stock-based compensation expense and the change in the fair value of common stock warrants, offset by net changes in working capital.

Our operating loss for the year ended December 31, 2018 also included $7.6 million in interest expense, and a $5.3 million loss on extinguishment of debt.

Working capital changes in 2019 primarily consisted of increases in accounts receivable and inventories, offset by increases in accounts payable, accrued expenses, employee-related liabilities, deferred revenue, and other long-term liabilities related to warranty reserves for 2019 pump sales.

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Inventories increased to $49.1 million at December 31, 2019 from $19.9 million at December 31, 2018, primarily to support the growth in our business.

The decrease in net cash used in operating activities for 2018 compared to 2017 was primarily associated with a reduction in the net loss when adjusted for non-cash expenses, particularly the change in the fair value of certain common stock warrants, increased stock-based compensation expense, and a $5.3 million loss on extinguishment of debt in 2018, as well as net changes in working capital.

Our operating loss also included $7.6 million and $11.3 million in interest expense during 2018 and 2017, respectively.

Working capital changes were due to an increase in accounts receivable as a result of higher sales, offset by a reduction in inventories and increases in employee related liabilities and deferred revenue.

Inventories decreased to $19.9 million at December 31, 2018 from $27.0 at December 31, 2017 due to an increase in sales demand during the fourth quarter of 2018, and the timing of pump production and certain inventory receipts.

Investing activities .

Net cash used by investing activities was $ 57.0 million for the year ended December 31, 2019 , which was primarily related to purchases of short-term investments of $164.6 million and $19.5 million in purchases of property and equipment, offset by $127.2 million in proceeds from maturities and sales of short-term investments.

Net cash used by investing activities was $296.1 million for the year ended December 31, 2020, which was primarily related to purchases of short-term investments of $497.1 million using the net proceeds from the issuance of our convertible notes in May of 2020, and $27.4 million in purchases of property and equipment, offset by $233.3 million in proceeds from maturities and sales of short-term investments.

Net cash used by investing activities was $57.0 million for the year ended December 31, 2019, which was primarily related to purchases of short-term investments of $164.6 million and $19.5 million in purchases of property and equipment, offset by $127.2 million in proceeds from maturities of short-term investments.

Net cash used by investing activities was $90.7 million for the year ended December 31, 2018, which was primarily related to purchases of short-term investments of $123.6 million using the net proceeds from our public offering of common stock in August of 2018, and $3.0 million in purchases of property and equipment, offset by $35.8 million in proceeds from maturities of short-term investments.

Net cash provided by investing activities was $2.8 million for the year ended December 31, 2017, which was primarily related to proceeds from maturities of short-term investments of $8.5 million offset by $5.7 million in purchases of property and equipment.

Financing activities.

Net cash provided by financing activities was $314.4 million for the year ended December 31, 2020, which primarily consisted of $278.7 million in proceeds from the issuance of the Convertible Senior Notes which was partially offset by $34.1 million in payments for the purchase of the related Capped Call Options (see Note 6, “Debt”), and $66.9 million in proceeds from the issuance of common stock under our stock plans.

Net cash provided by financing activities was $24.2 million for the year ended December 31, 2019, which was primarily the result of proceeds of $23.9 million from the issuance of common stock under our stock plans.

Net cash provided by financing activities was $117.2 million for the year ended December 31, 2018, which was primarily the result of net proceeds of approximately $172.9 million from the public offerings of our common stock in February 2018 and August 2018, as well as proceeds of $29.6 million from the exercise of common stock warrants that were issued in the public offering of common stock in October 2017, offset by the $87.7 million repayment of our term loan and associated financing fees.

Net cash provided by financing activities was $40.4 million for the year ended December 31, 2017, which was primarily the result of net proceeds from the issuance of common stock.

Our liquidity position and capital requirements are subject to fluctuation based on a number of factors.

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

• the impacts and disruptions caused by the COVID-19 global pandemic.

Our primary short-term capital needs are expected to include expenditures related to:

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

acquisitions of equipment, technology, intellectual property and other assets;

• 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;

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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.

In May 2020, the Company entered into a purchase agreement with certain counterparties for the sale of an aggregate of $287.5 million principal amount of 1.50% Convertible Senior Notes due 2025 in a private offering to qualified institutional buyers (the Notes).

The Notes were issued pursuant to an Indenture, dated May 15, 2020, between the Company and U.S.

Bank National Association, as trustee.

The net proceeds from the issuance of the Notes were $244.6 million, net of debt issuance costs and cash used to purchase the capped call transactions (see Note 6, “Debt”).

The Notes are the Company’s senior unsecured obligations.

Interest is payable in cash semi-annually in arrears beginning on November 1, 2020 at a rate of 1.50% per year.

The Notes mature on May 1, 2025 unless repurchased, redeemed, or converted in accordance with their terms prior to the maturity date.

Repayment of Term Loan Agreement

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Payments Due by Period

(in thousands)

Less than 1 year

(in thousands) Total Less than 1 year 1-3 years 3-5 years More than

Operating lease obligations (1)

$ 28,373 $ 9,421 $ 13,096 $ 3,757 $ 2,099

Firm purchase commitments (2)

90,830 84,536 6,294 — —

Convertible senior notes (3)

306,907 4,313 8,625 293,969 —

Total contractual obligations $ 426,110 $ 98,270 $ 28,015 $ 297,726 $ 2,099

(1) Operating lease obligations of $25.3 million were included in operating lease liabilities current and long-term in the consolidated balance sheet at December 31, 2020 (see Note 5, "Leases").

The additional $8.3 million included in the above table consists of $8.2 million due under the lease of additional general office space located on Shoreline Drive, Boise, Idaho (Shoreline Lease), which we entered into in November of 2019, and $0.1 million related to short-term leases.

Minimum annual lease payments under the Shoreline Lease will be approximately $0.5 million in 2020, $1.1 million in 2021 and 2022, $1.2 million in 2023 and 2024, and $3.1 million thereafter.

The Company currently estimates that it will recognize the Shoreline Lease operating lease liabilities on the consolidated balance sheet upon the lease commencement in the first quarter of 2020.

Does not include $2.5 million due under the lease of additional general office space located on High Bluff Drive, San Diego, California, which we entered into in January of 2020.

Minimum annual lease payments under the lease will be approximately $1.0 million in 2020, $1.2 million in 2021, and $0.3 million in 2022.

(2) Includes purchase orders that are cancellable under the standard terms of our purchase order agreements.

In certain cases, cancellation of outstanding purchase commitments may require payment of costs incurred through the date of cancellation.

(3) Amounts represent contractual payments of interest and principal.

Critical Accounting Policies Involving Management Estimates and Assumptions

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This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied.

Revenue recognition for contracts with multiple deliverables is based on the separate satisfaction of each distinct performance obligation within the contract.

Revenue recognition for contracts with multiple performance obligations is based on the separate satisfaction of each distinct performance obligation within the contract.

A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract.

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The annual limitations may result in the expiration of net operating loss carryforwards before utilization.

We have completed an analysis through December 31, 2018 to determine whether our net operating losses and credits are likely to be limited by Section 382.

Based on this study, we determined that an ownership change, as defined under Section 382, occurred in 2018 and the resulting limitation significantly reduced our ability to utilize our net operating loss and credit carryovers before they expire.

As a result, in 2019 we reduced our deferred tax assets for the net operating loss and research credit carryforwards that are projected to expire unused with a corresponding offset to the valuation allowance recorded against such assets.

We have completed analyses through December 31, 2020 to determine whether our net operating losses and credits are likely to be limited by Section 382.

Based on the 2018 study completed in 2019, we determined that an ownership change, as defined under Section 382, occurred in 2018 and the resulting limitation significantly reduced our ability to utilize our net operating loss and credit carryovers before they expire.

As a result, in 2019 we reduced our deferred tax assets for the net operating loss and research credit carryforwards that were projected to expire unused with a corresponding offset to the valuation allowance recorded against such assets.

Additionally, future ownership changes under Section 382 may also limit our ability to fully utilize any remaining tax benefits.

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We continually assess the likelihood and amount of potential revisions and adjust the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.

Convertible Senior Notes

In accounting for the issuance of the convertible senior notes, we separated the notes into liability and equity components.

The carrying amount of the liability component was calculated by measuring the fair value of similar debt instruments that do not have associated convertible features.

The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the respective notes.

The equity component is not remeasured as long as it continues to meet the condition for equity classification.

The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the notes.

We allocated the issuance costs incurred to the liability and equity components of the notes based on their relative fair values.

Issuance costs attributable to the liability component were recorded as a reduction to the liability portion of the notes and are being amortized to interest expense over the term of the notes.

Issuance costs attributable to the equity component, representing the conversion option, were netted with the equity component in stockholders' equity.

Off-Balance Sheet Arrangements

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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-K

Item 7. Management’s Discussion and Analysis