TANDEM DIABETES CARE INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis together with our financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q for the quarter ended June 30, 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. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Quarterly Report, other than statements of historical fact, are forward-looking statements. You can identify forward-looking statements by the use of words such as “may,” “will,” “could,” “anticipate,” “expect,” “intend,” “believe,” “continue” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to such statements. In particular, forward-looking statements contained in this Quarterly Report may relate to, among other things, our future or assumed financial condition, results of operations, liquidity, 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. Our forward-looking statements are based on our management’s current assumptions and expectations about future events and trends, which affect or may affect our business, strategy, operations or financial performance. Although we believe that these forward-looking statements are based upon reasonable assumptions, they are subject to numerous known and unknown risks and uncertainties and are made in light of information currently available to us. Our actual financial condition and results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below in the section entitled “Risk Factors” in Part II, Item 1A, and elsewhere in this Quarterly Report, as well as the other public filings we make with the Securities and Exchange Commission. You should read this Quarterly Report with the understanding that our actual future financial condition and results may be materially different from and worse than what we expect. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements speak only as of the date they were made and, except to the extent required by law or the rules of the Nasdaq Global Market, we undertake no obligation to update or review any forward-looking statement because of new information, future events or other factors. We qualify all of our forward-looking statements by these cautionary statements. Overview We are a medical device company with 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 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 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. 23 Table of contents 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 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. 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 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 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. 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, as well as a variety of accessories designed for enhanced usability. 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 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. This mobile app wirelessly uploads pump data to our t:connect diabetes management application, receives notification of pump alerts and alarms, and provides a discrete, secondary display of glucose and insulin data. The availability of this mobile app is intended to reduce patient burden and increase healthcare provider office efficiency by reducing the manual and more time-consuming steps historically required for data extraction. In addition, in the second quarter of 2020, we acquired Sugarmate, the developer of a popular app designed to help people visualize diabetes therapy data in innovative ways that also connects with many other popular, consumer-friendly devices. We 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. 24 Table of contents In the United States, we have rapidly increased sales since the commercial launch of our first product by expanding our sales, clinical and marketing organization, by developing, commercializing and marketing multiple differentiated products that utilize our proprietary technology platform and consumer-focused approach, and by providing strong customer support. Our sales have further increased following our scaled product launches in 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 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 customer support services. In Canada, we have a separate sales organization and our customer support infrastructure benefits from close collaboration with our United States organization. In other international geographies, we have contracted with experienced distribution partners to commercialize and support our t:slim X2 platform. COVID-19 Global Pandemic Impact and Considerations We are deemed an essential healthcare business under applicable governmental orders based on the critical nature of the products we offer and the communities we serve. We experienced 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. 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, 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. 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. 25 Table of contents 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. 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, 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. In response to developments surrounding the COVID-19 global pandemic, we initiated discussions with our key suppliers in early 2020 regarding their abilities to fulfill existing orders, and we have continued to regularly assess their capacity. During the first six months of 2020, we experienced certain challenges managing our inventory, primarily due to the impacts of the COVID-19 global pandemic. For example, in the first quarter of 2020, we observed customers purchasing cartridges and infusion sets at a higher rate than anticipated; 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. 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 in general. 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. 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. 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. 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 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 Our products under development support our strategy of focusing on both consumer and clinical needs, and include a connected (mobile) health offering, a next-generation hardware platform, which we refer to as the t:sport Insulin Delivery System (t:sport), AID system enhancements, and additional CGM integrations with our current and future products. We intend to leverage our consumer-focused approach and proprietary technology platform to continue to develop products that have the features and functionality that will allow us to meet the needs of people in differentiated segments of the insulin-dependent diabetes market, including the following: 26 Table of contents • Connected (Mobile) Health Offerings – In July of 2020, we began offering the first version of our t:connect mobile application that wirelessly uploads pump data to our cloud-based t:connect diabetes management application, receives notification of pump alerts and alarms, and provides a discrete, secondary display of glucose and insulin data. Future updates of our mobile application are planned to include mobile bolus delivery, additional pump control features, integrate other health-related information from third-party sources and support future capabilities for our products under development. We plan to transition our mobile health offerings to a single, global digital platform, which is intended to provide all users, including pump users, caregivers and healthcare providers, with a simplified and tailored user experience. The platform is being designed to enhance the user experience, streamline the pump and supplies purchasing process, and provide internal efficiencies. In the future, data from our centralized system may be used for new product development, continuous product improvement, and for the generation of health economic outcomes data, and may ultimately support other advanced technology and patient monitoring services. • t:sport Insulin Delivery System – Approximately half the size of our t:slim X2 pump, the t:sport pump is being designed for people who seek even greater discretion and flexibility with the use of their insulin pump. We anticipate that t:sport will feature a 200-unit cartridge, an on-pump bolus button, a rechargeable battery, an AID algorithm, and a Bluetooth radio. t:sport is being designed for use with leading U-100 insulins, and we are evaluating the use of insulin concentrates to provide to people with greater insulin needs. We anticipate that t:sport will be our first insulin pump to support full pump-control from our mobile application, subject to FDA review and approval. A separate controller may be offered in addition to full mobile control availability. • AID Enhancements – We intend to further enhance our automated insulin delivery system and are considering alternative strategies to deliver new features and benefits to our customers on a regular basis. In addition to algorithm enhancements intended to improve clinical outcomes, we are also developing new features for greater personalization and refinements to the overall system usability. • Additional CGM Integration – In June 2020 we announced an agreement with Abbott to develop and commercialize integrated diabetes solutions that combine Abbott’s CGM technology with our insulin delivery systems to provide more options for people to manage their diabetes. Following the completion of our integrated product development work, and after obtaining required regulatory clearances or approvals, we intend to focus our initial commercial activities on integrated products in the U.S. and Canada, with additional geographies considered in the future. 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 From inception through June 2018, we derived nearly all of our sales from the shipment of insulin pumps and associated supplies to customers in the United States. Starting in the third quarter of 2018, we commenced sales of our t:slim X2 insulin pump in select international geographies. We consider the number of insulin pump units shipped per quarter domestically and internationally to be an important metric for managing our business. 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. 27 Table of contents Pump shipments to customers in the United States by fiscal quarter were as follows: Pump Units Shipped for Each of the Three Months Ended in Respective Years - U.S. March 31 June 30 September 30 December 31 Total 2012 0 9 204 844 1,057 2013 852 1,363 1,851 2,406 6,472 2014 1,723 2,235 2,935 3,929 10,822 2015 2,487 3,331 3,431 6,234 15,483 2016 4,042 4,582 3,896 4,418 16,938 2017 2,816 3,427 3,868 6,950 17,061 2018 4,444 5,447 7,379 12,935 30,205 2019 9,669 12,799 13,814 17,453 53,735 2020 13,158 14,735 18,380 24,552 70,825 2021 16,644 20,665 N/A N/A 37,309 Pump shipments to international customers by fiscal quarter were as follows: Pump Units Shipped for Each of the Three Months Ended in Respective Years - International March 31 June 30 September 30 December 31 Total 2018 N/A N/A 1,055 3,233 4,288 2019 5,063 8,459 4,025 2,149 19,696 2020 4,220 3,952 3,641 8,133 19,946 2021 8,708 13,152 N/A N/A 21,860 Trends Impacting Financial Condition and Operating Results Overall, we have experienced considerable sales growth since the commercial launch of our first product in the third quarter of 2012, while incurring operating losses since our inception. Our operating results have historically fluctuated on a quarterly or annual basis, particularly in periods surrounding anticipated regulatory approvals, the commercial launch of new products by us and our competitors, the commercial launch of our products in geographies outside of the United States and due to general seasonality in the United States. We expect these periodic fluctuations in our operating results to continue. We believe that our financial condition and operating results, as well as the decision-making process of our current and potential customers, has been and will continue to be impacted by a number of general trends, including the following: • market acceptance of our products and competitive products by people with insulin-dependent diabetes, their caregivers and healthcare providers; • the introduction of new products, treatment techniques or technologies for the treatment of diabetes, including the timing of the commercialization of new products by us and our competitors; • seasonality in the United States associated with annual insurance deductibles and coinsurance requirements associated with the medical insurance plans utilized by our customers and the customers of our distributors; • incidence of disease or illness, including the COVID-19 global pandemic, that may impact customer purchasing patterns or disrupt our supply chain; • timing of holidays and summer vacations, which may vary by geography 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; 28 Table of contents • changes in the competitive landscape, including as a result of companies entering or exiting the diabetes therapy market; • access to adequate coverage and reimbursement for our current and future products by third-party payors, and reimbursement decisions by third-party payors; • the magnitude and timing of any changes to our facilities, manufacturing operations and other infrastructure, and factors impacting our ability to access our facilities; • the impact of any privacy breaches, which may subject us to legal and regulatory proceedings and substantial fines, penalties and expenses, as well as significant reputational harm; • anticipated and actual regulatory approvals of our products and competitive products; and • product recalls impacting, or the suspension or withdrawal of regulatory clearance or approval relating to, our products or the products of our competitors. In addition to these general trends, we believe the following specific factors have materially impacted, and could continue to materially impact, our business going forward: • the disruptions caused by the COVID-19 global pandemic on suppliers, third-party manufacturers, healthcare providers, distributors and our existing or potential customers; • continued increase in demand following the commercial launch of t:slim X2 with Control-IQ technology 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; • designation by UnitedHealthcare of one of our competitors as its preferred, in-network durable medical equipment provider of insulin pumps for most customers age seven and above from July 2016 through June 2020; • ability to enter into and maintain agreements with CGM partners for CGM integration; • expansion and new product launches in select international geographies, including initial orders to stock inventories; and • ability to effectively scale our operations to support rapid growth, including expanding our facilities, advancing our research and development efforts, increasing manufacturing capacity through third-party manufacturers, and hiring and retaining employees in customer service and support functions. In addition to working to achieve our sales growth expectations, in the long-term we intend to continue to leverage our infrastructure investments to realize additional manufacturing, sales, marketing and administration cost efficiencies with the goal of improving our operating margins and ultimately achieving sustained profitability. We achieved profitability for the first time in the fourth 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. 29 Table of contents Components of Results of Operations Sales We offer products for people with insulin-dependent diabetes. We commenced commercial sales of our original t:slim insulin pump platform in the United States in the third quarter of 2012 and continued to launch various iterations of that platform during the following years. In October 2016, we began shipping our flagship pump platform, the t:slim X2 insulin pump. The t:slim X2 insulin pump platform with remote software update capabilities, now represents 100% of our new pump shipments and is used by nearly all of our in-warranty customers. Our products also include disposable cartridges and infusion sets, as well as our complementary t:connect, Tandem Device Updater and mobile application products. We also offer additional accessories including protective cases, belt clips, and power adapters, although sales of these products are not significant. We primarily sell our products through national and regional distributors in the United States on a non-exclusive basis. These distributors are generally providers of medical equipment and supplies to individuals with diabetes. Our primary end customers are people with insulin-dependent diabetes. Similar to other durable medical equipment, the primary payor is generally a third-party insurance carrier and the customer is usually responsible for any medical insurance plan copay or coinsurance requirements. We believe our existing sales, clinical, and marketing infrastructure will allow us to continue to increase sales by allowing us to promote our products to a greater number of potential customers, caregivers and healthcare providers, although the COVID-19 global pandemic has had, and may continue to have, an adverse impact on our sales. In the third quarter of 2018, we began the launch of our t:slim X2 hardware platform through distribution partners outside the United States. Our products are now sold in more than 20 countries, including in Canada, France and Germany. 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 select geographies. 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. In Canada, we market with a direct sales force and, similar to the United States, use a distributor partner for certain billing and fulfillment activities. Historically, we have experienced consistent levels of reimbursement for our products in the United States, but we expect the average sales price will vary in international markets based on a number of factors, such as the geographical mix, nature of the reimbursement environment, government regulations and the extent to which we rely on distributor relationships to provide sales, clinical and marketing support. In general, in the United States we have experienced pump shipments being weighted heavily towards the second half of the year, with the highest percentage of pump shipments expected in the fourth quarter due to the nature of the reimbursement environment. Consistent with these historical seasonality trends, our domestic pump shipments have typically decreased significantly from the fourth quarter to the following first quarter. Internationally, we do not expect this same impact from seasonality associated with reimbursement, although the quarterly sales trends may be impacted by a number of other factors, including summer vacations and product launches into new geographies. 30 Table of contents During 2020, the COVID-19 global pandemic had a major impact on businesses around the world. While we experienced only a modest negative impact from the pandemic during the first quarter of 2020, which became more pronounced in the second quarter and remained through the end of the year, 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 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. Our sales outside the United States have been negatively impacted due to similar disruptions. Initially, the impact was relatively consistent worldwide but we have since seen varying degrees of impact in international markets based on local conditions. The full extent of the impact of the COVID-19 global pandemic on our business and operations will depend on a number of factors, including the scope and duration of the pandemic, varying government responses to the pandemic and potential delays to product development timelines. Separate from any impacts of the COVID-19 global pandemic, our quarterly sales have historically fluctuated, and may continue to fluctuate substantially in the periods surrounding anticipated and actual regulatory approvals and commercial launches of new products by us or our competitors. We believe customers may defer purchasing decisions if they believe a new product may be launched in the future. Additionally, upon the announcement of FDA approval or commercial launch of a new product, either by us or one of our competitors, potential new customers may reconsider their purchasing decisions or take additional time to consider such FDA approval or product launch before making their purchasing decisions. For instance, we believe certain customers paused their decision-making during the second half of 2019 in anticipation of the commercial availability of the t:slim X2 with Control-IQ technology. However, it is difficult to quantify the extent of the impact of these or similar events on future purchasing decisions. Cost of Sales Historically, we have manufactured our pumps and disposable cartridges at our manufacturing facility in San Diego, California. Near the end of the first quarter of 2020, our third-party cartridge manufacturer completed validation and commenced commercial-scale manufacturing to supplement our existing cartridge manufacturing capacity. 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. Cost of sales includes raw materials, labor costs, manufacturing overhead expenses, product training costs, royalties, freight, reserves for expected warranty costs, costs of supporting our digital health platforms, scrap and charges for excess and obsolete inventories. Manufacturing overhead expenses include expenses relating to quality assurance, manufacturing engineering, material procurement, inventory control, facilities, equipment, information technology and operations supervision and management. We anticipate that our cost of sales will continue to increase as our product sales increase. 31 Table of contents Over the long term, we expect our overall gross margin percentage, which for any given period is calculated as sales less cost of sales divided by sales, to improve, as our sales increase and our overhead costs are spread over larger production volumes. We expect we will be able to leverage our manufacturing cost structure across our products that utilize the same technology platform and manufacturing infrastructure and will be able to further reduce per unit costs with increased automation, process improvements and raw materials cost reductions. 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. Therefore, the percentage of pump sales relative to total sales will have a significant impact on our overall gross margin percentage. In the event that customers delay their pump purchasing decisions or physicians pause in prescribing new pumps, whether as a result of the COVID-19 global pandemic, or for other reasons, it is possible that we may experience a higher percentage of pump-related supply sales than anticipated, which in turn could adversely impact our overall gross margin percentage. However, our overall gross margin percentage may fluctuate in future quarterly periods as a result of numerous factors aside from those associated with production volumes and product mix. For instance, as a result of the COVID-19 global pandemic we 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 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 Our selling, general and administrative (SG&A) expenses primarily consist of salary, cash-based incentive compensation, fringe benefits and non-cash stock-based compensation for our executive, financial, legal, marketing, sales, clinical, customer support, technical services, insurance verification, regulatory affairs and other administrative functions. We began expanding our U.S. field sales and clinical organization during the third quarter of 2019 to support an expected increase in demand for our products. We 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. Our operations in Canada are comprised of approximately ten sales territories. Other significant SG&A expenses include those incurred for product demonstration samples, commercialization activities associated with new product launches, travel, trade shows, outside legal fees, independent auditor fees, outside consultant fees, insurance premiums, facilities costs and information technology costs. 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 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. 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. In the longer term, SG&A expenses may also increase due to anticipated costs associated with additional compliance and regulatory reporting requirements. 32 Table of contents Research and Development 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, 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. For instance, we may experience lower spending associated with delays in the advancement of particular programs, which may be offset by increased spending to support the retention, health, safety and welfare of our employees or to enable development activities under alternative conditions. Other Income and Expense Other income and expense primarily consists of changes in the fair value of certain warrants issued in connection with our public offering of common stock in October 2017, interest expense which includes the amortization of debt 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 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) 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. 33 Table of contents Results of Operations Three Months Ended June 30, Six Months Ended June 30, (in thousands, except percentages) 2021 2020 2021 2020 Sales: Domestic $ 127,580 $ 89,277 $ 230,919 $ 168,823 International 44,559 19,959 82,257 38,339 Total sales 172,139 109,236 313,176 207,162 Cost of sales 79,685 54,846 147,435 102,511 Gross profit 92,454 54,390 165,741 104,651 Gross margin 54 % 50 % 53 % 51 % Operating expenses: Selling, general and administrative 66,523 50,440 125,086 100,157 Research and development 20,499 15,987 38,460 30,104 Total operating expenses 87,022 66,427 163,546 130,261 Operating income (loss) 5,432 (12,037) 2,195 (25,610) Other income (expense), net: Interest income and other, net 418 367 690 1,093 Interest expense (1,509) (3,176) (3,015) (3,176) Change in fair value of common stock warrants (272) (14,336) (962) (16,258) Total other expense, net (1,363) (17,145) (3,287) (18,341) Income (loss) before income taxes 4,069 (29,182) (1,092) (43,951) Income tax expense (benefit) 61 (2,075) (56) (1,977) Net income (loss) $ 4,008 $ (27,107) $ (1,036) $ (41,974) Comparison of the Three Months Ended June 30, 2021 and 2020 Sales . 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 $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. Domestic sales by product were as follows (in thousands): Three Months Ended June 30, 2021 2020 Pump $ 80,041 $ 56,367 Infusion sets 32,134 22,536 Cartridges 15,082 10,196 Other 323 178 Total Domestic Sales $ 127,580 $ 89,277 34 Table of contents 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 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. International sales by product were as follows (in thousands): Three Months Ended June 30, 2021 2020 Pump $ 27,630 $ 9,124 Infusion sets 12,165 7,430 Cartridges 4,660 3,321 Other 104 84 Total International Sales $ 44,559 $ 19,959 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. 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 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 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 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. 35 Table of contents Selling, General and Administrative Expenses. 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 $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 $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 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 $2.5 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 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 Sales . 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 June 30, 2021 2020 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 36 Table of contents 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. Our percentage of sales to distributors versus individual customers is principally determined by the mix of customers ordering our products within the period and whether or not we have a contractual arrangement with their underlying third-party insurance payor. International sales by product were as follows (in thousands): Six Months Ended June 30, 2021 2020 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. 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 $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. 37 Table of contents 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. 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 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 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. Historically, our principal sources of cash have included cash collected from product sales, private and public offerings of equity securities, exercises of employee stock awards, and debt financing. Since the beginning of 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 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. 38 Table of contents • 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. We expect our sales performance and the resulting operating income or loss, as well as the status of each of our new product development programs, will significantly impact our cash flow from operations, liquidity position and cash management decisions. In light of the COVID-19 global pandemic, we are prudently managing our use of cash. We will continue to evaluate new information as it becomes available and make changes as are considered necessary. The following table shows a summary of our cash flows for the six months ended June 30, 2021 and 2020: Six Months Ended June 30, (in thousands) 2021 2020 Net cash provided by (used in): Operating activities $ 57,580 $ (5,132) Investing activities (70,855) (98,605) Financing activities 17,196 275,303 Effect of foreign exchange rate changes on cash 44 (262) Net increase in cash and cash equivalents $ 3,965 $ 171,304 Operating Activities . 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 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 $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 $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. 39 Table of contents 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; • the timing and amount of the exercise of outstanding warrants, and proceeds from the issuance of equity awards pursuant to employee stock plans; • fluctuations in gross margins and operating margins; • fluctuations in working capital, including changes in accounts receivable, inventories, accounts payable, employee-related liabilities, and operating lease liabilities; and • the impacts and disruptions caused by the COVID-19 global pandemic. Our primary short-term capital needs are expected to include expenditures related to: • support of our commercialization efforts related to our current and future products; • expansion of our customer support resources for our growing installed customer base; • research and product development efforts, including clinical trial costs; • acquisitions, leasing or licensing of equipment, technology, intellectual property and other assets; • additional facilities leases and related tenant improvements, and manufacturing equipment to support business growth and increase manufacturing capacity; and • payments under licensing, development and commercialization agreements. Although we believe the foregoing items reflect our most likely uses of cash in the short-term, we cannot predict with certainty all of our particular cash uses or the timing or amount of cash used. In addition, from time to time we may consider opportunities to acquire or license other products or technologies that may enhance our product platform or technology, expand the breadth of our markets or customer base, or advance our business strategies. Any such transaction may require short-term expenditures that may impact our capital needs. If for any reason our cash and cash equivalents balances, or cash generated from operations is insufficient to satisfy our working capital requirements, we may in the future be required to seek additional capital from public or private offerings of our equity or debt securities, or we may elect to borrow capital under new credit arrangements or from other sources. We may also seek to raise additional capital from such offerings or borrowings on an opportunistic basis when we believe there are suitable opportunities for doing so. If we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, we may incur significant financing or debt service costs, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. There can be no assurance that financing will be available on acceptable terms, or at all. Our ability to raise additional financing may be negatively impacted by a number of factors, including our recent and projected financial results, recent changes in and volatility of our stock price, perceptions about the dilutive impact of financing transactions, the competitive environment in our industry, uncertainties regarding the regulatory environment in which we operate and conditions impacting the capital markets more generally, including economic weakness, inflation, political instability, war and terrorism, natural disasters, incidence of illness or disease, or other events beyond our control. 40 Table of contents Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements and accompanying notes as of the date of the consolidated financial statements. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about our financial condition and results of operations that are not readily apparent from other sources. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies Involving Management Estimates and Assumptions,” included in our Annual Report on Form 10-K for the year ended December 31, 2020, other than the adoption of ASU No. 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 June 30, 2021, we did not have any off-balance sheet arrangements.