What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-05 compared with 2020-11-05 · 134 added, 203 removed, 257 unchanged (57% of the section changed)

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

You should read the following discussion and analysis together with our financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 (Quarterly Report).

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

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Forward-looking statements also include the assumptions underlying or relating to such statements.

In particular, forward-looking statements contained in this Quarterly Report may relate to, among other things, our future or assumed financial condition, results of operations, liquidity, trends impacting our financial results, business forecasts and plans, research and product development plans, manufacturing plans, strategic plans and objectives, capital needs and financing plans, product launches, geographic expansion, distribution plans, production capacity, clinical trials, regulatory approvals, competitive position and the impact of changes in the competitive environment, the impact of the COVID-19 global pandemic, integration of acquisitions and partner technologies, and the application of accounting guidance.

We caution you that the foregoing list may not include all of the forward-looking statements made in this Quarterly Report.

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

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

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

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We qualify all of our forward-looking statements by these cautionary statements.

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 from 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.

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

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

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

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.

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

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

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

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

This interoperability designation is comprised of three categories:

alternate controller enabled (ACE) infusion pumps, integrated continuous glucose monitor (iCGM) devices, and interoperable automated glycemic controller (iAGC) technology.

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

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

In the four-year period ended September 30, 2020, we shipped approximately 188,000 insulin pumps, which is representative of our estimated global installed customer base, assuming the typical four-year reimbursement cycle.

Approximately 152,000 of these pumps were shipped to customers in the United States and approximately 36,000 were shipped to international markets.

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

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

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

We have offered in-warranty t:slim customers in the United States four different software updates for no-cost since the Tandem Device Updater was approved in July 2016, including our two AID algorithms, Basal-IQ technology and Control-IQ technology.

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 quickly and easily from a personal computer through the use of our revolutionary tool referred to as Tandem Device Updater (TDU), provides us with a unique competitive advantage.

Two of our updates provided our users access to our automated insulin delivery (AID), algorithms, Basal-IQ technology and Control-IQ technology.

Basal-IQ technology launched in August 2018 and is a predictive low glucose suspend feature that is designed to temporarily suspend insulin delivery to help reduce the frequency and duration of hypoglycemic events.

Control-IQ technology launched in January 2020 and is an advanced hybrid-closed loop feature, designed to help increase a user’s time in targeted glycemic range.

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

Outside the United States we began selling efforts with t:slim X2 with Dexcom G5 CGM integration in the third quarter of 2018, and began offering Basal-IQ technology in the third quarter of 2019.

In July 2020, we initiated our scaled launch of Control-IQ technology in select geographies, which we plan to continue subject to required regulatory and reimbursement approvals.

Control-IQ technology launched in January 2020 and is an advanced hybrid-closed loop feature, designed to help increase a user's time in their targeted glycemic range.

It is the first and only system cleared by the U.S.

Food and Drug Administration (FDA) to deliver automatic correction boluses in addition to adjusting insulin to help prevent high and low blood sugar.

Outside the United States we began selling 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 continue our scaled launch of Control-IQ technology outside the United States throughout the remainder 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.

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

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 March 31, 2021, we shipped approximately 239,000 insulin pumps, which is representative of our estimated global installed customer base, assuming the typical four-year reimbursement cycle.

Approximately 186,000 of these pumps were shipped to customers in the United States and approximately 53,000 were shipped to international markets.

For the three months ended March 31, 2021 and 2020, our consolidated sales were $141.0 million and $97.9 million, respectively.

For the three months ended March 31, 2021 and 2020, our net loss was $5.0 million and $14.9 million, respectively.

Worldwide pump sales accounted for 58% and 63% of our total sales for the three months ended March 31, 2021 and 2020, respectively, while pump-related supplies and accessories accounted for the remainder in each year.

Our accumulated deficit as of March 31, 2021 and December 31, 2020 was $655.2 million and $659.2 million, respectively.

These amounts included $305.8 million and $292.1 million of accumulated non-cash stock-based compensation charges and non-cash charges from the change in fair value of common stock warrants as of March 31, 2021 and December 31, 2020, respectively.

In support of our digital health strategy, we continue to offer and improve t:connect and TDU, 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.

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

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

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.

For the nine months ended September 30, 2020 and 2019, our consolidated sales were $330.8 million and $253.9 million, respectively.

For the nine months ended September 30, 2020 and 2019, our net loss was $51.4 million and $27.4 million, respectively.

Worldwide pump sales accounted for 62% and 69% of our total sales, respectively, for the nine months ended September 30, 2020 and 2019, while pump-related supplies and accessories accounted for the remainder in each year.

Our accumulated deficit as of September 30, 2020 and December 31, 2019 was $676.2 million and $624.8 million, respectively.

These amounts included $281.6 million and $216.6 million of accumulated non-cash stock-based compensation charges and non-cash charges from the change in fair value of common stock warrants as of September 30, 2020 and December 31, 2019, respectively.

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

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

Our sales have further increased following our scaled product launches in an expanding number of 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 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.

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 TDU, 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.

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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 in the second and third quarters.

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

The impact from COVID-19 on our sales outside the United States during the fourth quarter of 2020 may be even more difficult to estimate due to the recent announcements of additional restrictions and lock-downs in multiple European countries.

We experienced modest impacts 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 current period.

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, certain programs originally planned to begin in the second quarter of 2020 were delayed until the second half of the year, such as human factors studies associated with our product development efforts.

Programs originally planned to be begin or to be completed in the second half of 2020 may also be delayed until future periods.

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 competitors.

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 have been and may continue to 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, and we have experienced delays in the review of pending submissions.

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.

We continue to restrict non-essential employee travel and ban non-essential visitors from all of our facilities.

Those employees who are able to perform their job functions outside of our facilities continue to work in a remote environment.

We are planning for employees to return to our offices in a limited capacity over a period of several months.

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.

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

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

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

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 primary infusion set manufacturer experienced certain inventory constraints which resulted in our having to ask some customers to accept substitutions of similar products to prevent delays in order fulfillment.

Our infusion set inventory has returned to more normal levels and we continue to focus on building and maintaining adequate levels of inventory for finished cartridges.

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.

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.

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 also leveraging our technology platforms, such as our t:connect diabetes management application, to support healthcare providers 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 of 2020, 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 we intend to make changes that we consider necessary in light of this information.

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 through the recruitment of key employees, advancement of our research and development 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

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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.

• Connected (Mobile) Health Offerings – In July 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, add further pump control features, integrate other health-related information from third-party sources and support future capabilities for our products under development.

In the future, we plan to provide mobile health offerings to all users, including pump users, caregivers and healthcare providers, with a simplified and tailored user experience.

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

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

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.

In November 2020, we entered into an agreement with Dexcom to extend our current collaboration to include integration with Dexcom’s future G7 CGM technology.

Following integrated product development work, and required regulatory clearances or approvals, this will be the fourth generation of Dexcom CGM that we intend to integrate with our devices.

Pump Shipments

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

In the four-year period ended September 30, 2020, we shipped approximately 188,000 insulin pumps, of which approximately 152,000 were shipped to customers in the United States and approximately 36,000 were shipped to international markets.

In the four-year period ended March 31, 2021, we shipped approximately 239,000 insulin pumps, of which approximately 186,000 were shipped to customers in the United States and approximately 53,000 were shipped to international markets.

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

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2019 9,669 12,799 13,814 17,453 53,735

2020 13,158 14,735 18,380 N/A 46,273

2020 13,158 14,735 18,380 24,552 70,825

2021 16,644 N/A N/A N/A 16,644

Pump shipments to international customers by fiscal quarter were as follows:

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2019 5,063 8,459 4,025 2,149 19,696

2020 4,220 3,952 3,641 N/A 11,813

2020 4,220 3,952 3,641 8,133 19,946

2021 8,708 N/A N/A N/A 8,708

Trends Impacting Financial Condition and Operating Results

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• 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;

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

• anticipated new product launches;

• increased opportunity to achieve customer renewals as customers become eligible for insurance reimbursement to purchase a new insulin pump at the end of the typical four-year reimbursement cycle;

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

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

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

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

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

NEJM Publication of Pediatric Study Demonstrating Increased Time-In-Range Using the t:slim X2 Insulin Pump with Control-IQ Technology

In August 2020, we announced publication by the New England Journal of Medicine (NEJM) of results from the Protocol 5 study (DCLP5) of the International Diabetes Closed Loop (iDCL) trial.

Results demonstrated increased time spent in range (70-180 mg/dL) in children ages six to 13 years old using the t:slim X2 insulin pump with Control-IQ advanced hybrid closed-loop technology.

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 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.

The t:slim X2 insulin pump platform with 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.

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

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

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

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

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

In the third quarter of 2018, we began the launch of our t:slim X2 hardware platform through distribution partners outside the United States.

Our products are now sold in more than 20 countries, including in Canada, France and Germany.

Our launch of Control-IQ technology in international markets will continue to scale across additional geographies throughout 2021 subject to applicable regulatory and reimbursement approvals.

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

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

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

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

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 other factors, including summer vacations and product launches into new geographies.

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, the negative impact during the second and third quarters of 2020 was more pronounced, and we anticipate that our sales and operating results will continue to be adversely impacted in future periods.

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

These changes primarily remain in effect as of the date of this report and, while we are planning for employees to return to our offices in a limited capacity, 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 may be subject to unpredictable variability in the coming months based on varying levels of impact of the global pandemic across the markets in which we operate.

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

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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.

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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.

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

Pumps have, and are expected to continue to have, a higher gross margin percentage than our pump-related supplies.

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

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

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

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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 began investing in additional manufacturing equipment that will double our existing capacity 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.

Specifically, in 2020, we invested in additional manufacturing equipment to substantially increase 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.

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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 September 30, 2020.

We had approximately 95 sales territories in the United States as of March 31, 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.

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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 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 the third quarter of 2020 as certain 2018 employee stock option grants are now fully amortized.

Additionally, 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 expense 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.

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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.

Our research and development (R&D) activities primarily consist of engineering and research programs associated with our hardware, software and digital health products under development, as well as activities associated with our core technologies and processes.

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

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

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Other Income and Expense

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

We expect interest expense in future quarters to be comparable with that of the third quarter of 2020 as our Notes were outstanding for the entire period, and 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.

Other income and expense primarily consists of changes in the fair value of certain warrants issued in connection with our public offering of common stock in October 2017, interest expense which includes the amortization of debt issuance costs related to our 1.50% Convertible Senior Notes due 2025, issued in May 2020 (our Notes), and interest earned on our cash equivalents and short-term investments.

We expect interest expense in future quarters to be comparable with that of the first quarter of 2021, assuming that none of the Notes are converted or redeemed, and 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.

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

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Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands, except percentages) 2021 2020

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Change in fair value of common stock warrants (690) (1,922)

Total other income (expense), net (8,360) 3,175 (26,701) (8,468)

Total other expense, net (1,924) (1,196)

Loss before income taxes (5,161) (14,769)

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Net loss $ (5,044) $ (14,867)

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

For the three months ended September 30, 2020, sales were $123.6 million, which included $16.1 million of international sales.

Comparison of the Three Months Ended March 31, 2021 and 2020

For the three months ended March 31, 2021, sales were $141.0 million, which included $37.7 million of international sales.

Sales were $97.9 million for the same period in 2020, which included $18.4 million of international sales.

The increase in worldwide sales of $28.9 million in the third quarter of 2020 compared to the third quarter of 2019 was primarily driven by a 23% increase in worldwide pump shipments to 22,021 in the third quarter of 2020, compared to 17,839 in the third quarter of 2019, and a 43% increase in pump-related supply sales.

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

The increase in worldwide sales of $43.1 million in the first quarter of 2021 compared to the first quarter of 2020 was driven by a 46% increase in worldwide pump shipments to 25,352 in the first quarter of 2021, compared to 17,378 in the first quarter of 2020, and a 54% increase in pump-related supply sales.

Sales of pump-related supplies increased primarily due to 53% growth in our estimated worldwide installed base of customers.

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

Three Months Ended

September 30,

Pump $ 62,912 $ 49,719

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Total Domestic Sales $ 103,339 $ 79,546

Domestic pump sales were $69.5 million for the third quarter of 2020, compared to $52.9 million in the third quarter of 2019, as pump shipments increased 31% 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 18,380 in the third quarter of 2020 compared to 13,814 in the third quarter of 2019.

Domestic pump sales were $62.9 million for the first quarter of 2021, compared to $49.7 million in the first quarter of 2020, as pump shipments increased 27% 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 16,644 in the first quarter of 2021, compared to 13,158 in the first quarter of 2020.

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 74% and 72% of our total domestic sales for the three months ended September 30, 2020 and 2019, respectively.

Sales to distributors accounted for 68% and 69% of our total domestic sales for the three months ended March 31, 2021 and 2020, 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.

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Three Months Ended

September 30,

Pump $ 18,908 $ 9,816

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Total International Sales $ 37,698 $ 18,380

International pump sales were $9.0 million for the third quarter of 2020, compared to $10.3 million in the third quarter of 2019, as pump shipments declined 10% compared to the same period in the prior year.

International pump sales were $18.9 million for the first quarter of 2021, compared to $9.8 million in the first quarter of 2020, as pump shipments increased 106% compared to the same period in the prior year.

Sales of pump-related supplies benefited from a 102% 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, particularly during the typical third quarter European holiday season.

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 91% and 89% of our total international sales for the three months ended September 30, 2020 and 2019, respectively.

Cost of Sales and Gross Profit .

Our cost of sales for the three months ended September 30, 2020 was $58.3 million , resulting in gross profit of $65.3 million, compared to cost of sales of $44.0 million for the same period in 2019 resulting in gross profit of $50.7 million.

The gross margin percentage for the three months ended September 30, 2020 was 53%, compared to 54% in the same period in 2019.

The increase in our gross profit for the three months ended September 30, 2020 was primarily the result of the $28.9 million increase in total sales.

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

We recognized $1.7 million of product royalty costs in the third quarter of 2020 associated with sales of products with Control-IQ technology and free software updates downloaded by existing customers in the United States, as well as in certain international markets where we launched Control-IQ in the third quarter.

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

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 impact 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 64% of total worldwide sales in the third quarter of 2020 versus 67% in the third quarter of 2019.

Non-cash stock-based compensation expense allocated to cost of sales was $2.1 million for the three months ended September 30, 2020, compared to $1.8 million in the same period of 2019, representing 2% of sales in both periods.

Selling, General and Administrative Expenses.

SG&A expenses increased 12% to $50.2 million for the three months ended September 30, 2020 from $44.6 million for the same period in 2019.

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

The increase compared to 2019 was primarily the result of an $8.5 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 decrease of $4.2 million in non-cash stock-based compensation.

Non-cash stock-based compensation expense allocated to SG&A was $8.9 million for the three months ended September 30, 2020, compared to $13.1 million in the same period in 2019.

The higher non-cash stock-based compensation expense in the prior year was primarily due to the valuation of certain 2018 employee stock option grants which are now fully amortized, partially offset by non-cash stock-based compensation expense associated with increased headcount in 2020.

We also experienced increased costs for software maintenance, facilities maintenance, and outside consulting of $3.1 million, offset by a $1.2 million decrease in travel and entertainment, and outside services expenses.

Research and Development Expenses .

R&D expenses increased 34% to $16.1 million for the three months ended September 30, 2020 from $12.0 million for the same period in 2019.

The increase in R&D expenses was primarily the result of an increase of $2.2 million in salaries, incentive compensation and other employee benefits due to an increase in personnel to support our product development efforts, offset by a decrease of $0.6 million in non-cash stock-based compensation.

Non-cash stock-based compensation expense allocated to R&D was $1.8 million for the three months ended September 30, 2020 , compared to $2.4 million in the same period in 2019.

We also experienced increased costs for consulting services and equipment and maintenance attributable to R&D of $2.3 million.

Other Income (Expense), Net .

Total other expense, net for the three months ended September 30, 2020 was $8.4 million compared to total other income, net of $3.2 million in the same period in 2019.

Total other expense, net for the three months ended September 30, 2020 primarily consisted of a $3.6 million revaluation loss from the change in the fair value of certain warrants due to the appreciation of our stock price, and $4.9 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.

Total other income, net for the three months ended September 30, 2019 primarily consisted of a $2.3 million gain on revaluation from the change in the fair value of certain warrants, and interest earned on our cash equivalents and short-term investments.

Comparison of the Nine Months Ended September 30, 2020 and 2019

For the nine months ended September 30, 2020, sales were $330.8 million, which included $54.4 million of international sales.

For the nine months ended September 30, 2019, sales were $253.9 million, which included $50.0 million of international sales.

The increase in worldwide sales of $76.9 million in the first nine months of 2020 compared to the first nine months of 2019 was primarily driven by $127.2 million in pump-related supplies sales from a 46% growth in the worldwide installed base and an increase in domestic pump sales of $36.9 million, offset by the effect of international product mix and non-recurring market dynamics in the prior year.

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

Nine Months Ended

September 30,

Pump $ 175,550 $ 138,624

Infusion sets 68,883 44,335

Cartridges 31,418 20,530

Other 489 378

Total Domestic Sales $ 276,340 $ 203,867

Domestic pump sales were $175.6 million for the first nine months of 2020, compared to $138.6 million in the first nine months of 2019, as pump shipments increased 28% 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 46,273 in the first nine months of 2020 compared to 36,282 in the first nine months of 2019.

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

Sales to distributors accounted for 72% and 73% of our total domestic sales for the nine months ended September 30, 2020 and 2019, respectively.

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

Nine Months Ended

September 30,

Pump $ 27,985 $ 36,472

Infusion sets 18,794 8,225

Cartridges 7,315 5,130

Other 331 213

Total International Sales $ 54,425 $ 50,040

International pump sales were $28.0 million for the first nine months of 2020, compared to $36.5 million in the first nine months of 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 increased primarily due to an 64% 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, particularly during the typical third quarter European holiday season.

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 93% and 93% of our total international sales for the nine months ended September 30, 2020 and 2019, respectively.

Sales to distributors accounted for 96% and 93% of our total international sales for the three months ended March 31, 2021 and 2020, respectively.

Cost of Sales and Gross Profit .

Our cost of sales for the nine months ended September 30, 2020 was $160.8 million resulting in gross profit of $170.0 million, compared to $120.0 million of cost of sales for the same period in 2019 resulting in gross profit of $133.9 million.

The gross margin percentage for the nine months ended September 30, 2020 was 51% compared to 53% in the same period in 2019.

The increase in our gross profit for the nine months ended September 30, 2020 was primarily the result of the $76.9 million increase in total sales, including higher volumes shipped and improvement in pump average selling prices.

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

We recognized $4.7 million of product royalty costs in the first nine months of 2020 associated with the first quarter launch of Control-IQ technology in the United States and a staged introduction in international markets beginning in the third quarter.

On an aggregate basis, other non-manufacturing costs, which primarily consist of warranty, freight, training and digital health product support costs, reflected improvement on a per unit basis, as well as per unit manufacturing costs for pumps.

Pump sales, which have the highest gross margin, were 62% of total worldwide sales in the first nine months of 2020 compared to 69% in the same period in 2019.

Non-cash stock-based compensation expense allocated to cost of sales was $6.5 million for the nine months ended September 30, 2020, compared to $4.2 million in the same period in 2019.

Our cost of sales for the three months ended March 31, 2021 was $67.8 million , resulting in gross profit of $73.3 million, compared to cost of sales of $47.7 million for the same period in 2020 resulting in gross profit of $50.3 million.

The gross margin for the three months ended March 31, 2021 was 52%, compared to 51% in the same period in 2020.

The increase in our gross profit for the three months ended March 31, 2021 was primarily the result of the $43.1 million increase in total sales.

Gross profit and gross margin both benefited from improvement in the cost per unit of our supplies from efficiencies in the manufacturing process, leverage of fixed overhead and material cost reductions.

This increase was partially offset by lower worldwide pump average selling prices as international sales comprised a greater portion of total sales compared to the prior year.

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 and the substantial expansion of cartridge manufacturing capacity in 2020 from which we anticipate continued leverage.

Royalty expense was $1.6 million for the three months ended March 31, 2021, compared to $1.3 million in the same period in 2020.

Other factors that have and may continue to have an impact on the gross margin percentage are changes in product and customer mix.

Pump sales, which have the highest gross margin, were 58% of total worldwide sales in the first quarter of 2021 versus 61% in the first quarter of 2020.

Selling, General and Administrative Expenses.

SG&A expenses increased 25% to $150.4 million for the nine months ended September 30, 2020 from $120.2 million for the same period in 2019.

SG&A expenses increased 18% to $58.6 million for the three months ended March 31, 2021 from $49.7 million for the same period in 2020.

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

The increase compared to 2019 was primarily the result of a $25.4 million increase in salaries, incentive compensation and other employee benefits due to an increase in personnel to support additional sales territories, higher sales and our growing installed customer base, which included an increase of $3.0 million in non-cash stock-based compensation.

Non-cash stock-based compensation expense allocated to SG&A was $32.1 million for the nine months ended September 30, 2020, compared to $29.1 million in the same period in 2019.

The increase in non-cash stock-based compensation expense was primarily due to increased headcount, as well as the valuation of certain 2019 employee stock option grants and the impact on the valuation of the significant increase in our stock price over the previous year.

We also experienced increased costs for software maintenance, supplies, and outside consulting of $7.6 million, offset by decreased costs for travel and outside services of $2.3 million.

The increase compared to 2020 was primarily the result of a $9.2 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 $2.1 million decrease in non-cash stock-based compensation expense.

Non-cash stock-based compensation expense allocated to SG&A was $9.4 million for the three months ended March 31, 2021, compared to $11.5 million in the same period in 2020.

The increase in non-cash stock-based compensation expense associated with increased headcount in 2020 and 2021 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 a decrease in travel costs of $1.2 million.

Research and Development Expenses .

R&D expenses increased 42% to $46.2 million for the nine months ended September 30, 2020 from $32.6 million for the same period in 2019.

The increase in R&D expenses was primarily the result of an increase of $6.1 million in salaries, incentive compensation and other employee benefits due to an increase in personnel to support our product development efforts, as well as an increase of $7.5 million in consulting services, supplies, and equipment and maintenance costs attributable to R&D.

Non-cash stock-based compensation expense allocated to R&D was $6.6 million for the nine months ended September 30, 2020, compared to $6.1 million in the same period in 2019.

R&D expenses increased 27% to $18.0 million for the three months ended March 31, 2021 from $14.1 million for the same period in 2020.

The increase in R&D expenses was primarily the result of an increase of $3.4 million in salaries, incentive compensation and other employee benefits due to an increase in personnel to support our product development efforts.

Non-cash stock-based compensation expense allocated to R&D was $2.1 million for the three months ended March 31, 2021 , compared to $2.2 million in the same period in 2020.

Other Income (Expense), Net .

Total other expense, net for the nine months ended September 30, 2020 and 2019 was $26.7 million and $8.5 million, respectively.

Other expense for the nine months ended September 30, 2020 primarily consisted of a $19.9 million revaluation loss from the change in the fair value of certain warrants due to the significant appreciation of our stock price during the first nine months of 2020, and $8.0 million of interest expense which includes the amortization of debt discount and debt issuance costs related to our Notes issued in the second quarter of 2020.

Other expense for the nine months ended September 30, 2019 primarily consisted of a $10.8 million revaluation loss from the change in the fair value of certain warrants.

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

Income Tax Expense (Benefit) .

We recognized an income tax benefit of $1.9 million on pre-tax loss of $53.3 million for the nine months ended September 30, 2020, compared to income tax expense of $0.1 million on a pre-tax loss of $27.3 million for the nine months ended September 30, 2019.

The income tax benefit for the nine months ended September 30, 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 nine months ended September 30, 2019 was primarily attributable to state and foreign income tax expense as a result of current taxable income in those jurisdictions.

Total other expense, net for the three months ended March 31, 2021 was $1.9 million compared to $1.2 million in the same period in 2020.

Total other expense, net for the three months ended March 31, 2021 primarily consisted of $1.5 million of interest expense which includes the amortization of debt issuance costs related to our Notes issued in the second quarter of 2020, and a $0.7 million revaluation loss from the change in the fair value of certain warrants.

Total other expense, net for the three months ended March 31, 2020 consisted of a $1.9 million loss on revaluation from the change in the fair value of certain warrants, partially offset by $0.7 million of interest earned on our cash equivalents and short-term investments.

Liquidity and Capital Resources

As of September 30, 2020, we had $464.5 million in cash and cash equivalents and short-term investments.

As of March 31, 2021, we had $513.4 million in cash and cash equivalents and short-term investments.

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

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

• From January 2019 through September 2020, we issued 3,617,939 shares of common stock upon the exercise of stock options, and 558,392 shares of common stock were purchased under our 2013 Employee Stock Purchase Plan, which generated aggregate proceeds of $81.6 million.

• From January 2019 through September 2020, we received proceeds of $1.2 million from the exercise of 352,585 outstanding warrants which were originally issued in connection with our registered public offering of common stock in October 2017.

As of September 30, 2020, there were warrants to purchase 158,200 shares outstanding relating to the October 2017 offering.

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

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

• From January 2020 through March 2021, we issued 2,449,891 shares of common stock upon the exercise of stock options, and 302,509 shares of common stock were purchased under our 2013 Employee Stock Purchase Plan, which generated aggregate proceeds of $70.0 million.

• From January 2020 through March 2021, we received proceeds of $1.4 million from the exercise of 387,615 outstanding warrants which were originally issued in connection with our registered public offering of common stock in October 2017.

As of March 31, 2021, there were warrants to purchase 29,700 shares outstanding relating to the October 2017 offering.

• From January 2020 through March 2021, we received proceeds of $2.0 million from the exercise of 68,104 outstanding warrants which were originally issued between August 2011 and August 2012.

As of March 31, 2021, there were warrants to purchase 30,861 shares outstanding relating to these issuances.

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

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

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

Nine Months Ended

September 30,

The following table shows a summary of our cash flows for the three months ended March 31, 2021 and 2020:

Three Months Ended

(in thousands) 2021 2020

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Operating Activities .

Net cash provided by operating activities was $9.4 million for the nine months ended September 30, 2020, compared to $22.5 million in the same period in 2019.

The decrease in net cash provided by operating activities was due to an increase in our operating loss on higher operating expenses, as well as working capital changes primarily related to accounts payable and accrued expenses.

Working capital changes during the first nine months of 2020 primarily consisted of increases in accounts receivable, inventories, accounts payable, deferred revenue, and other current liabilities, all of which are related to the growth in our business.

Accounts receivable increased to $52.1 million at September 30, 2020 from $46.6 million at December 31, 2019, as a result of higher sales in the third quarter of 2020 as compared to the fourth quarter of 2019.

Inventories increased to $70.6 million at September 30, 2020 from $49.1 million at December 31, 2019, primarily to support the growth in our business.

Net cash provided by operating activities was $28.7 million for the three months ended March 31, 2021, compared to $20.6 million net cash used by operating activities in the same period in 2020.

The improvement to net cash provided by operating activities for 2021 compared to 2020 was driven by higher sales and gross profit in 2021, which resulted in a reduction in net loss when adjusted for non-cash expenses, particularly stock-based compensation expense, as well as working capital changes.

Working capital changes during the first three months of 2021 primarily consisted of increases in inventories, accounts payable and deferred revenue related to the growth in our business, and a decrease in accounts receivable related to the timing of sales.

Accounts receivable decreased to $73.7 million at March 31, 2021 from $82.2 million at December 31, 2020, as a result of higher sales in the fourth quarter of 2020 as compared to the first quarter of 2021.

Inventories increased to $66.8 million at March 31, 2021 from $63.7 million at December 31, 2020, primarily to support the growth in our business.

Investing Activities .

Net cash used in investing activities was $236.4 million for the nine months ended September 30, 2020, which was primarily related to $332.0 million of purchases of short-term investments, $23.3 million in purchases of property and equipment, and $4.9 million cash paid for the acquisition of intangible assets, offset by $123.7 million in proceeds from maturities and sales of short-term investments.

Net cash used in investing activities was $36.1 million for the nine months ended September 30, 2019, which was primarily related to $126.3 million of purchases of short-term investments and $12.8 million in purchases of property and equipment, offset by $103.0 million in proceeds from maturities and sales of short-term investments.

Net cash used in investing activities was $6.1 million for the three months ended March 31, 2021, which was primarily related to $154.3 million of purchases of short-term investments, and $3.5 million in purchases of property and equipment, offset by $151.7 million in proceeds from maturities and sales of short-term investments.

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

Financing Activities.

Net cash provided by financing activities was $305.2 million for the nine months ended September 30, 2020, which primarily consisted of $278.7 million in proceeds from the issuance of the Convertible Senior Notes which was partially offset by $34.1 million in payments for the purchase of the related Capped Call Options, and $57.7 million in proceeds from the issuance of common stock under our stock plans.

Net cash provided by financing activities was $17.8 million for the nine months ended September 30, 2019, which primarily consisted of proceeds from the issuance of common stock under our stock plans.

Net cash provided by financing activities was $3.6 million for the three months ended March 31, 2021, which primarily consisted of $3.1 million in proceeds from the issuance of common stock under our stock plans.

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

Our liquidity position and capital requirements are subject to fluctuation based on a number of factors, including the following:

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Actual results may differ from these estimates.

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

2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity effective January 1, 2021 (see Note 7, “Convertible Senior Notes”).

Off-Balance Sheet Arrangements

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

As of March 31, 2021, we did not have any off-balance sheet arrangements.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis