What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-04 compared with 2021-05-05 · 162 added, 85 removed, 306 unchanged (45% of the section changed)

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

You should read the following discussion and analysis together with our financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 (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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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.

Our goal is to lead 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) 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.

Since our initial commercial launch, we have rapidly innovated and brought more products to market than our competitors.

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.

We now have nearly 270,000 customers in our global installed base, assuming a typical four year reimbursement cycle, of which 25% are in international markets.

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.

The t:slim X2 is the only pump on which remote software updates have been made 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.

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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.

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 beginning 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.

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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.

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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.

We continue 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 second quarter of 2021, we began limited testing of an initial version of Tandem Source, our second-generation data management platform, in the United Kingdom.

For the six months ended June 30, 2021 and 2020, our consolidated sales were $313.2 million and $207.2 million, respectively.

For the six months ended June 30, 2021 and 2020, our net loss was $1.0 million and $42.0 million, respectively.

Worldwide pump sales accounted for 61% and 60% of our total sales for the six months ended June 30, 2021 and 2020, respectively, while pump-related supplies and accessories accounted for the remainder in each year.

Our accumulated deficit as of June 30, 2021 and December 31, 2020 was $651.2 million and $659.2 million, respectively.

These amounts included $321.2 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 June 30, 2021 and December 31, 2020, 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.

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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.

During the first half of 2021, we saw a gradual increase in the amount of in-person sales and training activities in the United States as vaccination availability expanded and social-distancing requirements were relaxed.

However, we continue to see variability across the country.

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.

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

More recently, recruiting and hiring new employees has proven more difficult due to generalized labor shortages.

There is substantial competition for talent in the markets in which we operate as the economy is entering a recovery phase and businesses increase hiring in general.

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.

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

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.

Until recently, we restricted nearly all non-essential employee travel and banned non-essential visitors from all of our facilities.

We have recently modified those restrictions to allow for some limited employee travel and visitors to our facilities with controls.

For example at our facilities in San Diego, California, those employees who are able to perform their job functions outside of our facilities continue to work in a remote environment, while employees at our facility in Boise, Idaho began a gradual return to the office during the second quarter.

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.

We continue to work closely with our healthcare providers and customers, remaining flexible in our method of interaction, but during the second quarter of 2021 we began seeing an increase in the amount of in-person interactions among our field-based staff.

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.

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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.

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.

however, we have not observed similar patterns in more recent periods.

Nevertheless, our infusion set manufacturer continues to experience certain inventory constraints which have resulted in us asking some customers to accept substitutions of similar products to prevent delays in order fulfillment.

However, we are closely monitoring global shortages for semiconductors and copper, which are essential for the production of our insulin pumps and accessories.

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 but we could experience greater challenges with our supply chain if pump demand meaningfully exceeds our current forecasts.

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.

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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.

During the second quarter of 2021 we began seeing an increase in the amount of in-person interactions among our field-based staff with customers and healthcare providers in the United States.

During the same period, we also began observing more pronounced rates of travel and vacations by both customers and healthcare providers in the United States, coinciding with the increase in vaccination trends and relaxation of COVID-19 related restrictions on travel and social-distancing.

Historically we have seen similar summer vacation seasonality in Europe, but it is possible that we could also experience a more significant summer seasonality in the United States during 2021 due to the lifting of COVID-19 related restrictions.

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

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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 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.

• 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.

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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 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.

In the four-year period ended June 30, 2021, we shipped approximately 269,000 insulin pumps, of which approximately 203,000 were shipped to customers in the United States and approximately 66,000 were shipped to international markets.

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

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

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

2021 16,644 20,665 N/A N/A 37,309

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

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

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

2021 8,708 13,152 N/A N/A 21,860

Trends Impacting Financial Condition and Operating Results

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• 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;

• timing of holidays and summer vacations, which may vary by geography and may be further influenced by the lifting or relaxation of COVID-19 related restrictions during 2021;

• the buying patterns of our distributors and other customers, both domestically and internationally;

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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 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.

We achieved profitability for the first time in the fourth quarters of 2018, 2019 and 2020, and again in the second quarter of 2021.

Though we have yet 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.

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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, 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.

These changes remained in effect during the majority of the first half of 2021, but during the second quarter of 2021 we began seeing an increase in the amount of in-person interactions among our field-based staff with customers and healthcare providers in the United States coincident with the increase in vaccination trends and relaxation of COVID-19 related restrictions on travel and social-distancing.

Beginning in the second quarter of 2021 we also began observing more pronounced rates of travel and vacations by both customers and healthcare providers in the United States.

Historically we have seen similar summer vacation seasonality in Europe, but it is possible that we could also experience more significant summer seasonality in the United States during 2021 due to the lifting of COVID-19 related restrictions.

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.

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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.

We expect to increase production capacity and volumes at our third-party cartridge manufacturer over the next 24 months and concurrently reduce our t:slim cartridge manufacturing capacity in our existing facility in order to create capacity for t:sport cartridge manufacturing in the future.

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

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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.

For instance, as a result of the COVID-19 global pandemic we implemented temporary operational changes that introduced 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 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.

Specifically, in 2020 and 2021, we have and will continue to evaluate investing 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, cost 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

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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 95 sales territories in the United States as of March 31, 2021.

We have approximately 95 sales territories in the United States as of June 30, 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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Overall, we expect our SG&A expenses, including the cost of our customer support infrastructure, to increase as our customer base grows in the United States and international markets.

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

We may experience additional costs as our employees return to work at our offices and as we adapt to alternative hybrid work models, or as needed to respond to general labor shortages and heightened competition for employees with specialized skills.

In addition, 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 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.

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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.

We expect our R&D expenses to increase as we advance our products under development, develop new products and technologies and support more clinical trials.

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 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.

We expect interest expense in future quarters to be comparable with that of the first and second quarters 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)

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Three Months Ended

June 30, Six Months Ended

(in thousands, except percentages) 2021 2020 2021 2020

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Total operating expenses 87,022 66,427 163,546 130,261

Operating loss (3,237) (13,573)

Operating income (loss) 5,432 (12,037) 2,195 (25,610)

Other income (expense), net:

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Total other expense, net (1,363) (17,145) (3,287) (18,341)

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

Income (loss) before income taxes 4,069 (29,182) (1,092) (43,951)

Income tax expense (benefit) 61 (2,075) (56) (1,977)

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

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.

Net income (loss) $ 4,008 $ (27,107) $ (1,036) $ (41,974)

Comparison of the Three Months Ended June 30, 2021 and 2020

For the three months ended June 30, 2021, sales were $172.1 million, which included $44.6 million of international sales.

Sales were $109.2 million for the same period in 2020, which included $20.0 million of international sales.

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.

The increase in worldwide sales of $62.9 million in the second quarter of 2021 compared to the second quarter of 2020 was driven by an 81% increase in worldwide pump shipments to 33,817 in the second quarter of 2021, compared to 18,687 in the second quarter of 2020, and a 47% increase in pump-related supply sales.

Sales of pump-related supplies increased primarily due to 59% growth in our estimated worldwide installed base of customers.

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Total Domestic Sales $ 127,580 $ 89,277

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.

Domestic pump sales were $80.0 million for the second quarter of 2021, compared to $56.4 million in the second quarter of 2020, as pump shipments increased 40% 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 20,665 in the second quarter of 2021, compared to 14,735 in the second quarter of 2020.

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

Sales to distributors accounted for 68% and 71% of our total domestic sales for the three months ended June 30, 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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Total International Sales $ 44,559 $ 19,959

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.

International pump sales were $27.6 million for the second quarter of 2021, compared to $9.1 million in the second quarter of 2020, as pump shipments increased 233% compared to the same period in the prior year due to strong demand for our products as we continue to expand the launch of Control-IQ technology, which began in the third quarter of 2020, outside the United States, as well as the varying impact of the global pandemic.

Sales of pump-related supplies benefited from a 105% increase in our estimated international installed base of customers.

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

Sales to distributors accounted for 95% and 96% of our total international sales for the three months ended June 30, 2021 and 2020, respectively.

Cost of Sales and Gross Profit .

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.

Our cost of sales for the three months ended June 30, 2021 was $79.7 million , resulting in gross profit of $92.5 million, compared to cost of sales of $54.8 million for the same period in 2020 resulting in gross profit of $54.4 million.

The gross margin for the three months ended June 30, 2021 was 54%, compared to 50% in the same period in 2020.

The increase in our gross profit for the three months ended June 30, 2021 was primarily the result of the $62.9 million increase in total sales.

Gross profit and gross margin both benefited from improvement in the per unit manufacturing costs for pumps and cartridges from efficiencies in the manufacturing process, leverage of fixed overhead and increased volumes from our third-party cartridge manufacturer.

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

To a lesser extent, overall average selling prices slightly pressured gross margin as international pump sales comprised a greater portion of total pump sales compared to the prior year, while supply average selling prices reflected modest benefit from the growth of our international installed base.

Royalty expense was $1.9 million for the three months ended June 30, 2021, compared to $1.7 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.

Pump sales, which have the highest gross margin, were 63% of total worldwide sales in the second quarter of 2021 versus 60% in the second quarter of 2020.

Non-cash stock-based compensation expense allocated to cost of sales was $1.6 million for the three months ended June 30, 2021, compared to $2.2 million in the same period in 2020.

Selling, General and Administrative Expenses.

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.

SG&A expenses increased 32% to $66.5 million for the three months ended June 30, 2021 from $50.4 million for the same period in 2020.

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

The increase compared to 2020 was primarily the result of a $9.6 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 $0.8 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.

Non-cash stock-based compensation expense allocated to SG&A was $10.9 million for the three months ended June 30, 2021, compared to $11.7 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.

We also experienced a $5.8 million increase in other non-employee discretionary spending, including outside services, outside consulting, equipment and travel costs.

Research and Development Expenses .

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.

R&D expenses increased 28% to $20.5 million for the three months ended June 30, 2021 from $16.0 million for the same period in 2020.

The increase in R&D expenses was primarily the result of an increase of $4.5 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.

Non-cash stock-based compensation expense allocated to R&D was $2.5 million for the three months ended June 30, 2021 , compared to $2.6 million in the same period in 2020.

Other Income (Expense), Net .

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.

Total other expense, net for the three months ended June 30, 2021 was $1.4 million compared to $17.1 million in the same period in 2020.

Total other expense, net for the three months ended June 30, 2021 primarily consisted of $1.5 million of interest expense which included the amortization of debt issuance costs related to our Notes issued in the second quarter of 2020, and a $0.3 million revaluation loss from the change in the fair value of certain warrants.

Total other expense, net for the three months ended June 30, 2020 consisted of a $14.3 million loss on revaluation from the change in the fair value of certain warrants, and $3.2 million of interest expense which included the amortization of debt discount and debt issuance costs related to our Notes.

The decrease in interest expense was primarily due to the adoption of ASU No.

2020-06 in the first quarter of 2021 (see Note 7, “Convertible Senior Notes”).

Comparison of the Six Months Ended June 30, 2021 and 2020

For the six months ended June 30, 2021, sales were $313.2 million, which included $82.3 million of international sales.

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

The increase in worldwide sales of $106.0 million in the first six months of 2021 compared to the first six months of 2020 was driven by a 64% increase in worldwide pump shipments to 59,169 in the first six months of 2021, compared to 36,065 in the first six months of 2020, and a 51% increase in pump-related supply sales.

Sales of pump-related supplies increased primarily due to a 59% growth in our estimated worldwide installed base of customers.

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

Six Months Ended

Pump $ 142,953 $ 106,086

Infusion sets 59,526 42,750

Cartridges 27,847 19,651

Other 593 336

Total Domestic Sales $ 230,919 $ 168,823

Domestic pump sales were $143.0 million for the first six months of 2021, compared to $106.1 million in the first six months of 2020, as pump shipments increased 34% 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 37,309 in the first six months of 2021 compared to 27,893 in the first six months of 2020.

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 68% and 70% of our total domestic sales for the six months ended June 30, 2021 and 2020, respectively.

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

Six Months Ended

Pump $ 46,538 $ 18,940

Infusion sets 24,899 13,676

Cartridges 10,609 5,553

Other 211 170

Total International Sales $ 82,257 $ 38,339

International pump sales were $46.5 million for the first six months of 2021, compared to $18.9 million in the first six months of 2020, as pump shipments increased 167% compared to the same period in the prior year due to strong demand for our products as we continue to expand the launch of Control-IQ technology, which began in the third quarter of 2020, outside the United States.

Sales of pump-related supplies increased primarily due to an 105% 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 95% of our total international sales for both of the six month periods ended June 30, 2021 and 2020.

Cost of Sales and Gross Profit .

Our cost of sales for the six months ended June 30, 2021 was $147.4 million resulting in gross profit of $165.7 million, compared to cost of sales of $102.5 million for the same period in 2020 resulting in gross profit of $104.7 million.

The gross margin for the six months ended June 30, 2021 was 53% compared to 51% in the same period in 2020.

The increase in our gross profit for the six months ended June 30, 2021 was primarily the result of the $106.0 million increase in total sales.

Gross profit and gross margin both benefited from improvement in the per unit manufacturing costs for pumps and supplies from efficiencies in the manufacturing process, leverage of fixed overhead, increased volumes from our third-party cartridge manufacturer and material cost reductions.

Royalty expense was $3.5 million for the six months ended June 30, 2021, compared to $3.0 million in the same period in 2020.

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 61% of total worldwide sales in the first six months of 2021 compared to 60% in the same period in 2020.

Non-cash stock-based compensation expense allocated to cost of sales was $3.1 million for the six months ended June 30, 2021, compared to $4.3 million in the same period in 2020.

Selling, General and Administrative Expenses.

SG&A expenses increased 25% to $125.1 million for the six months ended June 30, 2021 from $100.2 million for the same period in 2020.

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

The increase compared to 2020 was primarily the result of a $19.7 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 $2.9 million decrease in non-cash stock-based compensation expense.

Non-cash stock-based compensation expense allocated to SG&A was $20.3 million for the six months ended June 30, 2021, compared to $23.2 million in the same period in 2020.

We also experienced an $8.2 million increase in other non-employee discretionary spending, including outside consulting, software maintenance and outside services.

Research and Development Expenses .

R&D expenses increased 28% to $38.5 million for the six months ended June 30, 2021 from $30.1 million for the same period in 2020.

The increase in R&D expenses was primarily the result of an increase of $8.0 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 $4.6 million for the six months ended June 30, 2021, compared to $4.8 million in the same period in 2020.

Other Income (Expense), Net .

Total other expense, net for the six months ended June 30, 2021 and 2020 was $3.3 million and $18.3 million, respectively.

Other expense for the six months ended June 30, 2021 primarily consisted of $3.0 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 $1.0 million revaluation loss from the change in the fair value of certain warrants.

Other expense for the six months ended June 30, 2020 primarily consisted of a $16.3 million revaluation loss from the change in the fair value of certain warrants and $3.2 million of interest expense which included the amortization of debt discount and debt issuance costs related to our Notes.

Interest income and other, net for the six months ended June 30, 2021 and 2020 primarily consisted of interest earned on our cash equivalents and short-term investments.

Income Tax Expense (Benefit) .

We recognized an income tax benefit of $0.1 million on pre-tax loss of $1.1 million for the six months ended June 30, 2021, compared to an income tax benefit of $2.0 million on a pre-tax loss of $44.0 million for the six months ended June 30, 2020.

The income tax benefit for the six months ended June 30, 2021 was primarily attributable to the pre-tax loss position and excess tax benefits from stock compensation recorded discretely during the period.

The income tax benefit for the six months ended June 30, 2020 was primarily due to benefit associated with the release of valuation allowance related to the acquisition of Sugarmate, partially offset by state and foreign income tax expense as a result of current taxable income in those jurisdictions.

Liquidity and Capital Resources

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

As of June 30, 2021, we had $545.3 million in cash and cash equivalents and short-term investments.

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

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Since the beginning of 2020, we completed the following financing activities:

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

• From January 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.

• 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 pay the cost of the Capped Call Transactions related to the Notes (see Note 7, “Convertible Senior Notes”).

• From January 2020 through June 2021, we issued 2,702,444 shares of common stock upon the exercise of stock options, and 402,312 shares of common stock were purchased under our 2013 Employee Stock Purchase Plan, which generated aggregate proceeds of $83.6 million.

• From January 2020 through June 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 June 30, 2021, there were warrants to purchase 29,700 shares outstanding relating to the October 2017 offering.

• From January 2020 through June 2021, we received proceeds of $2.0 million from the exercise of 71,261 outstanding warrants which were originally issued between August 2011 and August 2012.

As of June 30, 2021, there were warrants to purchase 27,704 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 three months ended March 31, 2021 and 2020:

Three Months Ended

The following table shows a summary of our cash flows for the six months ended June 30, 2021 and 2020:

Six Months Ended

(in thousands) 2021 2020

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Operating Activities .

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.

Net cash provided by operating activities was $57.6 million for the six months ended June 30, 2021, compared to $5.1 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.

Working capital changes during the first six months of 2021 primarily consisted of increases in inventories, accounts payable and accrued expenses, deferred revenue and employee related liabilities related to the growth in our business, and a decrease in accounts receivable related to the timing of sales and cash collections.

Accounts receivable decreased to $80.2 million at June 30, 2021 from $82.2 million at December 31, 2020.

Inventories increased to $66.7 million at June 30, 2021 from $63.7 million at December 31, 2020.

Investing Activities .

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.

Net cash used in investing activities was $70.9 million for the six months ended June 30, 2021, which was primarily related to $385.6 million of purchases of short-term investments, $9.3 million cash paid for the acquisition of intangible assets and equity investments, and $5.3 million in purchases of property and equipment, offset by $329.4 million in proceeds from maturities and sales of short-term investments.

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

Financing Activities.

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.

Net cash provided by financing activities was $17.2 million for the six months ended June 30, 2021, which primarily consisted of proceeds from the issuance of common stock under our stock plans.

Net cash provided by financing activities was $275.3 million for the six months ended June 30, 2020, which primarily consisted of $278.7 million in proceeds from the issuance of the Convertible Senior Notes which was partially offset by $34.1 million in payments related to the Capped Call Transactions, and $28.6 million in proceeds from the issuance of common stock under our stock plans.

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

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

• the relative mix of sales between domestic and international markets;

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

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Off-Balance Sheet Arrangements

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

As of June 30, 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