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Item 2. Management’s Discussion and Analysis

2022-05-04 compared with 2021-11-03 · 222 added, 300 removed, 177 unchanged (75% of the section changed)

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

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

13 unchanged sentences

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

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.

We are a medical device company focused on the design, development and commercialization of technology solutions for people living with 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.

Our goal is to lead in insulin therapy management across multiple of these market segments by providing a portfolio of delivery devices, software, and data insight solutions to people living with diabetes, as well as their caregivers and healthcare providers.

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 approximately 296,000 customers in our global installed base, assuming a typical four year reimbursement cycle, of which 26% are in international markets.

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

In the four-year period ended March 31, 2022, we shipped more than 350,000 insulin pumps, which is representative of our estimated global installed customer base, assuming the typical four-year reimbursement cycle.

More than 250,000 of these pumps were shipped to customers in the United States and nearly 100,000 were shipped to more than 20 countries in which we operate outside the United States.

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

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

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), is now available in the countries in which we serve worldwide and 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 tech nology.

Basal-IQ technology launched domestically in the third quarter of 2018 and its international rollout began in the third quarter of 2019.

Basal-IQ 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 domestically in the first quarter of 2020 and its international rollout began in the third quarter of 2020.

Our Control-IQ technology is an advanced hybrid-c losed loop feature, designed to help increase a user's time in their targeted glycemic range.

By the fourth quarter of 2021, we will have substantially completed our scaled launch of Control-IQ technology outside the United States, which was staged based on the timing of necessary regulatory clearances or approvals.

It is the first 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.

Approximately 200,000 t:slim X2 users worldwide have our Control-IQ algorithm.

However, we continue to offer both AID algorithms to support the varying needs of people living with diabetes.

We have commercially offered two different automated insulin dosing (AID) algorithms on t:slim X2, including our Control-IQ technology, which is an advanced hybrid-closed loop feature, designed to help increase a user's time in their targeted glycemic range.

It was the first 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 based on continuous glucose monitoring (CGM) readings.

More than 200,000 t:slim X2 users have our Control-IQ technology, which launched in the United States in the first quarter of 2020, and is now available in all of the countries in which we operate.

Our Control-IQ technology uses information from Dexcom Inc.’s (Dexcom) G6 sensor, which is the third generation of Dexcom CGM that we have integrated and commercially launched with our pump technology.

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

Now available in the countries we serve worldwide, our Tandem Device Updater (TDU), is a revolutionary tool that has allowed more than 130,000 people to update their t:slim X2 software from a personal computer.

This offering is a competitive advantage as it allows us to bring new features, such as our AID technology and CGM integration, to our customers faster than the industry has been able to do historically.

In February 2022, the FDA provided clearance for our t:slim X2 pump users to bolus insulin from a compatible smartphone.

This is the first-ever FDA-cleared smartphone app capable of initiating insulin delivery on both iOS and Android operating systems.

We intend to offer in-warranty t:slim X2 users in the United States with the pump software update to use this new feature at no cost through TDU.

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 develop and launch other complementary offerings.

In the third quarter of 2020, we launched our first-generation t:connect mobile application in the United States.

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.

We continue to develop and test new features for Tandem Source in anticipation of a future commercial release of the product.

For the nine months ended September 30, 2021 and 2020, our consolidated sales were $492.8 million and $330.8 million, respectively.

For the nine months ended September 30, 2021 and 2020, we reported net income of $4.8 million and net loss of $51.4 million, respectively.

Worldwide pump sales accounted for 59% and 62% of our total sales for the nine months ended September 30, 2021 and 2020, respectively, while pump-related supplies and accessories accounted for the remainder in each year.

Our accumulated deficit as of September 30, 2021 and December 31, 2020 was $645.4 million and $659.2 million, respectively.

These amounts included $337.1 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 September 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, through our development, commercialization and marketing of 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 to support our business and engage with our consumers, customers and healthcare providers.

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.

Additionally, we sell accessories such as belt clips and cases for use with pumps which are designed to enhance usability.

In the United States, we also offer t:connect, our data management web 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.

For the three months ended March 31, 2022 and 2021, our consolidated sales were $175.9 million, and $141.0 million, respectively.

For the three months ended March 31, 2022 and 2021, our net loss was $14.7 million, and $5.0 million, respectively.

Pump sales accounted for 54% and 58%, of our total worldwide sales, for the three months ended March 31, 2022 and 2021, respectively, while pump-related supplies and accessories accounted for the remainder in each year.

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 of 2020 and continued through to the current period.

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

Commercially, during the first nine months 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.

During the third quarter of 2021, we also saw reduced availability of customers and healthcare providers relating to people taking time off to vacation, which adversely impacted our worldwide sales of new pumps to customers during the period.

This is a common seasonal pattern outside the United States, but was seen more prominently domestically than in previous years due to the lessening of COVID-19 restrictions during the quarter.

Later in the third quarter, as diagnosis rates for COVID-19 variants began to increase, we saw sales activities begin to shift to fewer live interactions once again.

In addition, labor shortages at healthcare prescriber offices related to impacts from COVID-19 can adversely impact our sales productivity and result in practice inefficiencies.

We continue to see variability across the country and anticipate fluctuations between in-person and remote interactions will also continue.

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 of 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 impacting global markets.

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 to meet heightened demand.

In addition, regulatory timelines have been and may continue to be difficult to predict as the FDA has stated that its review process may take longer than normal due to the impact of the COVID-19 global pandemic, and we have experienced delays in the review of pending submissions.

The full extent of the impact of the COVID-19 global pandemic on our future business and operations is difficult to estimate and will depend on a number of factors including the scope and duration of the COVID-19 global pandemic, and the relative impact of COVID-19 on the business operations of our contract manufacturers, suppliers and competitors.

We have taken steps to prioritize the health and safety of our employees and customers during the COVID-19 global pandemic, while working to maintain a continuous supply of products, training and customer support.

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

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.

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 by requiring employees to wear masks and perform temperature checks before each shift.

In early 2020, we initiated having regular discussions with our key suppliers regarding their abilities to fulfill existing orders and assess their ongoing 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.

Additionally, at various times since the beginning of the pandemic, components of our inventory were below our targeted stocking levels.

We use components from various suppliers to build our products.

Our business has been impacted in a variety of ways since the onset of the COVID-19 global pandemic in early 2020, and will likely continue to be impacted for the remainder of 2022.

Specific factors that have influenced our financial results and the way in which we operate include fluctuations in shelter-in-place restrictions, supply chain constraints, labor shortages, the timing and extent of vaccine availability and surges in infection and hospitalization rates as new COVID variants have emerged.

Throughout this time, we have responded to each of these unique challenges, while prioritizing the health and safety of our employees and customers and working diligently to maintain a continuous supply of products, training and customer support.

Most notably, our sales results reflected a high degree of variability across the quarters during this time, unlike historical seasonal trends.

We experienced a modest impact early in 2020, which became more pronounced and continued in varying degrees as the pandemic progressed.

Initially, the impact on our business was relatively consistent worldwide but we have since seen variations in individual markets based on local conditions and anticipate ongoing fluctuations may continue.

Our inventory levels have also fluctuated as we respond to supply chain constraints, due to availability of components from the various suppliers we use to build our products.

While we have adequate raw material inventory for a substantial portion of our pump and cartridge components, we are below our targeted stocking levels for others.

Currently, we do not anticipate a significant disruption in our ability to manufacture insulin pumps and cartridges, nor do we anticipate our third-party manufacturers will be unable to provide sufficient quantities to meet product demand during the remainder of 2021.

However, we continue to monitor factors that could negatively impact our supply chain, such as global shortages of semiconductors and copper that are needed to manufacture our insulin pumps and accessories, as well as custom components for our insulin pumps and cartridges where we rely on a limited number of qualified suppliers.

At this time, we believe many of our suppliers are deemed essential businesses under applicable governmental orders, and are not at risk of being subject to orders requiring facility closures.

We could experience these or other challenges with our supply chain if demand for our products meaningfully exceeds our current forecasts, or if continued proliferation of the virus, resurgences, or the emergence of new variants results in additional or prolonged restrictions that impact global supply chains.

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.

In early 2020, we initiated regular discussions with our key suppliers regarding their abilities to fulfill existing orders and assess their ongoing capacity.

Over the course of the pandemic, we have increased the frequency of those communications.

We continue to monitor factors that could negatively impact our supply chain, such as global shortages of semiconductors, copper and paper, as well as custom components for our insulin pumps and cartridges where we rely on a limited number of qualified suppliers.

We anticipate experiencing continued challenges managing supply chain constraints, including the potential for limitations on availability of components as well as increased purchase costs.

Generally, our entire operation has been impacted as we navigate the generalized labor shortages impacting global markets.

The labor challenges affect our ability to recruit and hire key talent at the same pace as in years past, but we remain active in our recruiting efforts and competitive in our offerings.

In particular, these labor challenges combined with regulatory delays have impacted our product development and launch timelines.

The FDA has generally stated that its review process may take longer than normal due to prioritization of COVID-related products and services.

We have experienced lengthy delays in the review of submissions with the FDA, making regulatory timelines difficult to predict.

We have adapted well in our commercial operations and customer-facing functions to the challenges presented by the pandemic.

Our sales organization balances remote and in-person interactions based on the needs and requirements of the customers with whom they interact.

For example, prior to the onset of the pandemic, nearly all trainings for customers purchasing our pump platform were in-person.

We quickly pivoted to nearly all trainings being provided on remote platforms.

Since that time, we have achieved a balance that includes options for the individual based on their unique needs.

We continue to see variability across the markets in which we operate and anticipate these fluctuations between in-person and remote interactions will continue.

Our facilities have been closed for non-essential purposes throughout most of the pandemic, while our manufacturing operations were deemed essential due to the critical nature of our product and the communities that we serve.

To help ensure the safety and health of those employees working in our facilities, we have implemented various preventative measures throughout the pandemic.

In the first quarter of 2022, we began implementing a return-to-office strategy for the rest of the organization that incorporates a hybrid approach to meet the needs of our employees, as well as optimize usage of our facilities.

Overall, we anticipate that our sales and operating results will continue to be impacted and subject to unpredictable variability.

The full extent of the impact of the 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.

Products Under Development

Our products under development support our strategy of focusing on both consumer and clinical needs, and include connected (mobile) health offerings, a next-generation hardware platform, which we refer to as the t:sport Insulin Delivery System (t:sport), AID system enhancements, and additional CGM integrations with our current and future products.

We intend to leverage our consumer-focused approach and proprietary technology platform to continue to develop products that have the features and functionality that will allow us to meet the needs of people in differentiated segments of the insulin-dependent diabetes market, including the following:

• Connected (Mobile) Health Offerings – In the third quarter 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 are designing our future mobile applications to enhance the user experience, streamline the pump and supplies purchasing process, and provide internal efficiencies.

We also plan to use data from our centralized system for new product development, continuous product improvement, and for the generation of health economic outcomes data, and it 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 we are planning and performing numerous clinical studies in diverse user populations to support the development of expanded labeling indications and new product features.

These include algorithm enhancements intended to improve clinical outcomes, as well as 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.

Our products under development support our strategy of developing insulin delivery systems as part of a therapy management portfolio that is designed to improve patient experience and outcomes.

Our product development efforts fall into three pillars of innovation:

delivery devices, device software including algorithms, and data and insights.

Delivery Devices

We are developing a family of delivery device solutions to meet the varying needs of people living with type 1 and type 2 diabetes by providing choice within our own portfolio.

Preferences in the size, shape, and mode of operation that comprise an insulin pump’s hardware often impact a person’s pump purchasing decision and overall user experience.

Formerly referred to under its development name, t:sport, the Tandem Mobi is approximately half the size of our t:slim X2 pump, and is being designed for people who seek even greater discretion and flexibility with the use of their insulin pump.

Its features include a 200-unit cartridge, an on-pump bolus button, inductive charging, an AID algorithm, and is waterproof.

We anticipate that Mobi will be our first insulin pump to support full pump-control from our mobile application.

Advancing our flagship t:slim platform, the t:slim X3 is being designed to provide a modernized user interface and even greater usability for our planned feature updates.

It is also being designed to include enhanced technology, such as greater processing power and capacity to support our advanced algorithms, as well as increased battery life, improved durability, and wireless software update capabilities.

This offering is being developed to provide an alternative tubeless infusion site option for Mobi pump users.

A goal of this design is to allow for people living with diabetes to customize the way they wear their pump with each cartridge change to best suit their personal preferences and lifestyle

Our patch pump design is in its early stages and is being developed for people living with diabetes who want a disposable tubeless solution.

Device Software

Our device software is used to control our pumps either directly through the pump’s interface or through our mobile application.

It also includes our AID technology and the software used to support remote pump updatability.

Control-IQ Advancements

We are driving innovation in our algorithms, emphasizing automation, personalization and simplification, all intended to continue to improve therapeutic outcomes and provide a positive patient experience characterized by simplicity and ease of use.

Additionally, we have initiated clinical studies to expand the indications of our Control-IQ technology to include people with type 1 diabetes ages 2 to 5 years old, as well as people living with type 2 diabetes.

We are also researching the use of different insulins with our Control-IQ technology.

Mobile Control

We are working to expand our mobile control capability.

In the future, our t:connect mobile app is planned to include additional pump control features, such as full operation of our Mobi pump.

Building a robust ecosystem and portfolio around our flagship insulin pumps requires product development efforts to integrate, add and enhance complementary system components.

In November 2020, we entered into an agreement with Dexcom to extend our current collaboration to include integration with their 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.

In June 2020, we announced an agreement with Abbott Laboratories (Abbott), to develop and commercialize integrated diabetes solutions that combine Abbott’s CGM technology with our insulin delivery systems.

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.

Data and Insights

Our goal is to innovate across our digital health platforms by using the vast amount of data that we collect, in combination with technology such as artificial intelligence or machine learning, to provide information and insights to people living with diabetes, their caregivers and healthcare providers and insurance payors.

Key areas of development include making these insights easy to understand, provided in a flexible format with mobile or web apps, and available real time.

In addition, we are working to integrate health-related information from third-party sources and use our data to support current and future products under development.

Tandem Source

Expanding the capabilities of our t:connect data management application available for customers in the United States, Tandem Source is our second-generation web-based data management application that is being designed to become our single, global platform.

This application enhances clinical data visualization, provides added interface customization for users to personalize how they engage with their data and for healthcare providers to better manage their care.

In the second quarter of 2021, we began limited testing of an initial version of Tandem Source in the United Kingdom.

Settings Automation

Our automation research and development activities center around opportunities for enhanced user and healthcare provider experience, and improved clinical outcomes.

In support of this effort, we are working to automate our pump settings adjustments to further enhance ease of use and expand adoption of our insulin pump products.

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 September 30, 2021, we shipped approximately 296,000 insulin pumps, of which approximately 219,000 were shipped to customers in the United States and approximately 77,000 were shipped to international markets.

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

Pump Units Shipped for Each of the Three Months Ended in Respective Years - U.S.

From inception in 2012 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 geographies outside the United States and now offer our technology solutions in more than 20 countries worldwide.

We consider the number of insulin pump units shipped to be an important metric for managing our business.

Insulin pumps in the markets we serve worldwide are generally subject to a four-year reimbursement cycle, imposed by the third-party insurance carrier, government plan or healthcare system that serves as the primary payor.

In the past four years, we have shipped more than 350,000 insulin pumps worldwide, which is representative of our estimated global in-warranty installed customer base.

At the end of the typical four-year reimbursement cycle, customers may be eligible for the purchase of a new insulin pump, subject to the rules and requirements of their primary insurance payor.

While warranties generally expire four years from the original pump shipment date, our typical renewal cycle, or time from original pump purchase to a subsequent pump purchase by the same customer, averages five years.

The majority of our insulin pump sales through the current period have been generated by new customers, but the opportunity for existing customers to purchase a renewal insulin pump increases each period as additional customer warranties expire.

With programs dedicated to customer retention efforts, we expect such renewal purchases to represent a more significant portion of our shipments in the long-term.

More than 250,000 of pumps were shipped to customers in the United States in the past four years, which aligns with the standard four-year warranty period.

Pump shipments to customers in the United States by fiscal quarter for the last five years, which aligns more closely with our typical renewal cycle, were as follows:

United States Pump Unit Shipments

for Each of the Three Months Ended in Respective Years

March 31 June 30 September 30 December 31 Total

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2021 16,644 20,665 20,296 25,712 83,317

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 20,296 N/A 57,605

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

2022 18,658 N/A N/A N/A 18,658

Since commencing sales outside the United States in the third quarter of 2018, we have shipped nearly 100,000 pumps to customers in more than 20 countries, and have yet to complete a full four-year reimbursement cycle.

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

Outside the United States Pump Unit Shipments

for Each of the Three Months Ended in Respective Years

March 31 June 30 September 30 December 31 Total

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

2021 8,708 13,152 11,262 N/A 33,122

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.

2021 8,708 13,152 11,262 11,873 44,995

2022 9,437 N/A N/A N/A 9,437

Trends Impacting Financial Results

Overall, we have experienced considerable sales growth each year since the commercial launch of our first product in the third quarter of 2012, only recognizing an operating profit on a full year basis for the first time in 2021.

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.

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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, or create uncertainty or delay with respect to regulatory approvals;

• 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 and broader availability of vaccines;

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

• 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 and broader availability of vaccines;

• the buying patterns of our distributors and other customers;

• changes in the competitive landscape, including as a result of companies entering or exiting the diabetes therapy market;

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• 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;

• the impact of any potential claims, investigations, information requests, or legal, regulatory or administrative proceedings with respect to potential or asserted violations of law, including:

sales and marketing practices, anti-corruption and the Foreign Corrupt Practices Act, antitrust, securities, employment, product liability, environmental, data privacy breaches and patent infringement, which may subject us to fines, penalties, expenses, or reputational harm;

• anticipated and actual regulatory approvals of our products and competitive products;

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• the disruptions caused by the COVID-19 global pandemic on suppliers, third-party manufacturers, healthcare providers, distributors and our existing or potential customers;

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

• continued increase in demand following the commercial launch of t:slim X2 with Control-IQ technology in additional geographies, and the ability to access new pump software using 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;

• ability to enter into, maintain agreements, and accomplish continued success in current and future product integrations with CGM partners;

• expansion and new product launches in select geographies outside the United States, including initial orders to stock inventories;

• ability to effectively scale our operations to support rapid growth, including expanding our facilities, advancing our research and development efforts, increasing manufacturing capacity through third-party manufacturers, and hiring and retaining employees in customer service and support functions.

In addition to working to achieve our sales growth expectations, 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 were profitable for the nine months ended September 30, 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.

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 administrative cost efficiencies with the goal of improving our operating margins and ultimately achieving sustained profitability.

While we have achieved profitability in each fourth quarter since 2018, we were profitable for the first time on a full-year basis in 2021.

We believe we can ultimately achieve sustained profitability by driving incremental sales growth in markets worldwide, 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.

Components of Results of Operations

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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.

In the United States, we primarily sell our products through national and regional distributors on a non-exclusive basis.

These distributors are generally providers of medical equipment and supplies to individuals with diabetes.

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Similar to other durable medical equipment, the primary payor is generally a third-party insurance carrier and the customer is usually responsible for any medical insurance plan copay or coinsurance requirements.

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.

We believe we can continue to increase sales by promoting 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.

Our independent distributor partners outside the United States and Canada 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.

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 markets outside the United States 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.

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

We experienced only a modest negative impact from the pandemic during the first quarter of 2020, which became more pronounced in the second quarter through the end of the year.

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

Outside the United States, 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, the timing of product launches into new geographies and variability in the ordering patterns of our distributor partners.

Since early 2020, the COVID-19 global pandemic had a major impact on businesses around the world, as well as our own quarterly trends.

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

During the third quarter, we also saw reduced availability of customers and healthcare providers relating to people taking time off to vacation, which adversely impacted our worldwide sales of new pumps to customers during the period.

For example, during 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.

During the second half of 2021, we saw reduced availability of customers and healthcare providers relating to people taking time off to vacation, which adversely impacted our sales of new pumps to customers during the period.

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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Historically, we have manufactured our pumps and disposable insulin 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.

In early 2020, our third-party cartridge manufacturer completed validation and commenced commercial-scale manufacturing to supplement our existing cartridge manufacturing capacity.

By the end of 2021, the majority of our t:slim cartridge manufacturing capacity transitioned to our partner 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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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.

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.

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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.

Therefore, the percentage of pump sales relative to total sales could 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, 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.

We are also experiencing higher costs as we manage global supply challenges and anticipate that this will continue for the remainder of 2022.

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.

Specifically, 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 individual markets worldwide, 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 have approximately 95 sales territories in the United States as of September 30, 2021 and have commenced an expansion in the fourth quarter of 2021 to approximately 110 sales territories and related customer service functions.

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

We had approximately 110 sales territories in the United States in the first quarter of 2022, up from approximately 95 in 2021.

Our existing territories are generally maintained by sales representatives and field clinical specialists, and supported by managed care liaisons, additional sales management and other customer support personnel, which have also been rapidly expanding to support our growing installed base.

Our operations in Canada are comprised of approximately ten sales territories.

Other significant SG&A expenses include those incurred for product demonstration samples, commercialization activities associated with new product launches, travel, trade shows, outside legal fees, independent auditor fees, outside consultant fees, insurance premiums, facilities costs and information technology costs.

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.

Other significant SG&A expenses typically 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.

While we experienced reduced spending in areas such as travel and trade shows in 2021 due to the COVID-19 global pandemic, 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.

Overall, we expect our SG&A expenses, including the cost of our customer support infrastructure, to continue to increase as our customer base grows worldwide.

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.

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Other Income and Expense

Other income and expense primarily consists of changes in the fair value of certain warrants issued in connection with our public offering of common stock in October 2017, interest expense which includes the amortization of debt 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 three quarters of 2021, assuming that none of the Notes are converted or redeemed in future periods.

We expect the revaluation of the outstanding Series A warrants will not have a significant impact on our other income and expense from the fourth quarter of 2021, through the fourth quarter of 2022 when the remaining warrants expire.

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

We expect interest expense in future quarters to be comparable with the amount expensed in 2021, through the date of conversion or redemption of the Notes.

We expect the revaluation of the outstanding Series A warrants will not have a significant impact on our other income and expense through their expiration in the fourth quarter of 2022.

Income Tax Expense (Benefit)

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Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands, except percentages) 2022 2021

Domestic $ 133,106 $ 107,517 $ 364,025 $ 276,340

International 46,521 16,086 128,778 54,425

United States $ 131,283 $ 103,339

Outside the United States 44,624 37,698

Total sales 175,907 141,037

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Total operating expenses 106,431 76,524

Operating income (loss) 7,720 (1,009) 9,915 (26,619)

Operating loss (15,338) (3,237)

Other income (expense), net:

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Total other expense, net (1,101) (1,924)

Income (loss) before income taxes 5,848 (9,369) 4,756 (53,320)

Income tax expense (benefit) 54 39 (2) (1,938)

Net income (loss) $ 5,794 $ (9,408) $ 4,758 $ (51,382)

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

For the three months ended September 30, 2021, sales were $179.6 million, which included $46.5 million of international sales.

Loss before income taxes (16,439) (5,161)

Income tax benefit (1,724) (117)

Net loss $ (14,715) $ (5,044)

Comparison of the Three Months Ended March 31, 2022 and 2021

For the three months ended March 31, 2022, sales were $175.9 million, which included $44.6 million of sales outside the United States.

Sales were $141.0 million for the same period in 2021, which included $37.7 million of international sales.

The increase in worldwide sales of $56.0 million in the third quarter of 2021 compared to the third quarter of 2020 was driven by a 43% increase in worldwide pump shipments to 31,558 in the third quarter of 2021, compared to 22,021 in the third quarter of 2020, and a 71% increase in pump-related supply sales.

The increase in worldwide sales of $34.9 million in the first quarter of 2022, compared to the first quarter of 2021, was driven by an 11% increase in worldwide pump shipments to 28,095 in the first quarter of 2022, compared to 25,352 in the first quarter of 2021, and a 35% increase in pump-related supply sales.

Sales of pump-related supplies increased primarily due to 47% growth in our estimated worldwide installed base of customers.

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

Sales by product in the United States were as follows (in thousands):

Three Months Ended

September 30,

Pump $ 73,497 $ 62,912

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Other 368 270

Total Domestic Sales $ 133,106 $ 107,517

Domestic pump sales were $78.8 million for the third quarter of 2021, compared to $69.5 million in the third quarter of 2020.

Domestic pump shipments were 20,296 in the third quarter of 2021, compared to 18,380 in the third quarter of 2020.

The increase in pump shipments was primarily 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, offset by the impact from increased travel and vacations by both customers and healthcare providers in the United States, as well as increased rates of infection related to COVID-19 variants.

Sales of pump-related supplies increased primarily due to a 45% increase in our estimated domestic installed base of customers.

Sales to distributors accounted for 68% and 74% of our total domestic sales for the three months ended September 30, 2021 and 2020, respectively.

Total Sales in the United States $ 131,283 $ 103,339

Pump sales in the United States were $73.5 million for the first quarter of 2022, compared to $62.9 million in the first quarter of 2021.

Pump shipments in the United States were 18,658 in the first quarter of 2022, compared to 16,644 in the first quarter of 2021.

The increase in pump shipments was primarily due to continued strong demand for our t:slim X2 insulin pump with Control-IQ technology despite the challenging COVID-19 environment which has impacted the availability of both customers and healthcare providers.

Sales of pump-related supplies increased primarily due to a 36% increase year over year in our estimated installed base of customers in the United States.

Sales to distributors accounted for 65% and 68% of our total sales in the United States for the three months ended March 31, 2022 and 2021, 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):

Sales by product outside the United States were as follows (in thousands):

Three Months Ended

September 30,

Pump $ 22,332 $ 18,908

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Other 116 107

Total International Sales $ 46,521 $ 16,086

International pump sales were $23.8 million for the third quarter of 2021, compared to $9.0 million in the third quarter of 2020, as pump shipments increased 209% 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 115% 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 96% and 91% of our total international sales for the three months ended September 30, 2021 and 2020, respectively.

Cost of Sales and Gross Profit .

Our cost of sales for the three months ended September 30, 2021 was $82.9 million , resulting in gross profit of $96.7 million, compared to cost of sales of $58.3 million and gross profit of $65.3 million for the same period in 2020.

The gross margin for the three months ended September 30, 2021 was 54%, compared to 53% in the same period in 2020.

The increase in our gross profit for the three months ended September 30, 2021 was primarily the result of the $56.0 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 September 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 57% of total worldwide sales in the third quarter of 2021 versus 64% in the third quarter of 2020.

Non-cash stock-based compensation expense allocated to cost of sales was $1.6 million for the three months ended September 30, 2021, compared to $2.1 million in the same period in 2020.

Selling, General and Administrative Expenses.

SG&A expenses increased 29% to $64.9 million for the three months ended September 30, 2021 from $50.2 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 $9.2 million increase in salaries, incentive compensation and other employee benefits due to an increase in personnel to support additional sales territories, higher sales and other services in support of our growing installed customer base, and a $2.4 million increase in non-cash stock-based compensation expense.

Non-cash stock-based compensation expense allocated to SG&A was $11.3 million for the three months ended September 30, 2021, compared to $8.9 million in the same period in 2020.

The increase in non-cash stock-based compensation expense was associated with increased headcount in 2020 and 2021.

We also experienced a $3.1 million increase in other non-employee discretionary spending, including information technology, supplies, outside services and travel costs.

Research and Development Expenses .

R&D expenses increased 50% to $24.1 million for the three months ended September 30, 2021 from $16.1 million for the same period in 2020.

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

Non-cash stock-based compensation expense allocated to R&D was $2.9 million for the three months ended September 30, 2021 , compared to $1.8 million in the same period in 2020.

Non-employee discretionary spending also increased $2.1 million for product development, facilities and maintenance costs.

Other Income (Expense), Net .

Total other expense, net for the three months ended September 30, 2021 was $1.9 million compared to $8.4 million in the same period in 2020.

Total other expense, net for the three months ended September 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 $0.4 million revaluation loss from the change in the fair value of certain warrants.

Total other expense, net for the three months ended September 30, 2020 consisted of a $3.6 million loss on revaluation from the change in the fair value of certain warrants, and $4.9 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 Nine Months Ended September 30, 2021 and 2020

For the nine months ended September 30, 2021, sales were $492.8 million, which included $128.8 million of international sales.

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

The increase in worldwide sales of $162.0 million in the first nine months of 2021 compared to the first nine months of 2020 was driven by a 56% increase in worldwide pump shipments to 90,727 in the first nine months of 2021, compared to 58,086 in the first nine months of 2020, and a 58% increase in pump-related supply sales.

Sales of pump-related supplies increased primarily due to a 58% growth in our estimated worldwide installed base of customers.

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

Nine Months Ended

September 30,

Pump $ 221,724 $ 175,550

Infusion sets 97,251 68,883

Cartridges 44,136 31,418

Other 914 489

Total Domestic Sales $ 364,025 $ 276,340

Domestic pump sales were $221.7 million for the first nine months of 2021, compared to $175.6 million in the first nine months of 2020, as pump shipments increased 24% compared to the same period in the prior year due to continued strong demand for our products following the January 2020 domestic launch of our t:slim X2 insulin pump with Control-IQ technology.

Domestic pump shipments were 57,605 in the first nine months of 2021 compared to 46,273 in the first nine months of 2020.

Sales of pump-related supplies increased primarily due to a 45% increase in our estimated domestic installed base of customers.

Sales to distributors accounted for 68% and 72% of our total domestic sales for the nine months ended September 30, 2021 and 2020, respectively.

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

Nine Months Ended

September 30,

Pump $ 70,300 $ 27,985

Infusion sets 41,074 18,794

Cartridges 16,878 7,315

Other 526 331

Total International Sales $ 128,778 $ 54,425

International pump sales were $70.3 million for the first nine months of 2021, compared to $28.0 million in the first nine months of 2020, as pump shipments increased 180% 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 115% 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 the nine month period ended September 30, 2021, and 93% for the same period in 2020.

Total Sales Outside the United States $ 44,624 $ 37,698

Pump sales outside the United States were $22.3 million for the first quarter of 2022, compared to $18.9 million in the first quarter of 2021.

Pump shipments increased 8% 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 outside the United States, which began in the first quarter of 2020.

Sales of pump-related supplies benefited from an 87% increase in our estimated installed base of customers outside the United States.

The ordering patterns of our distributors outside the United States for pumps and supplies is highly variable from period to period as they continue to gain familiarity with the markets in which they operate and the acceptance of our products in those markets.

This variability was compounded during the period by the differing levels of impact from the global pandemic with regard to both access to physicians and customers, as well as shipping logistics.

Sales to distributors accounted for 96% of our total sales outside the United States for both of the three month periods ended March 31, 2022 and 2021.

Cost of Sales and Gross Profit .

Our cost of sales for the nine months ended September 30, 2021 was $230.3 million resulting in gross profit of $262.5 million, compared to cost of sales of $160.8 million and gross profit of $170.0 million for the same period in 2020.

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

The increase in our gross profit for the nine months ended September 30, 2021 was primarily the result of the $162.0 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 as well as labor and material cost reductions.

Royalty expense was $5.4 million for the nine months ended September 30, 2021, compared to $4.7 million in the same period in 2020.

Our cost of sales for the three months ended March 31, 2022 was $84.8 million , resulting in gross profit of $91.1 million, compared to cost of sales of $67.8 million and gross profit of $73.3 million for the same period in 2021.

The gross margin for the three months ended March 31, 2022 and 2021 was 52%.

The increase in our gross profit for the three months ended March 31, 2022 was primarily the result of the $34.9 million increase in total sales.

Gross margin benefited from an increase in average selling prices as well as improvement in per unit manufacturing costs across all products from manufacturing efficiencies, 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, training, royalty and freight, were negatively impacted by increased supply chain costs due to the global pandemic.

We anticipate continued pressure from increased supply chain and material costs through the end of this year as we continue to navigate the challenges of the global pandemic.

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 59% of total worldwide sales in the first nine months of 2021 compared to 62% in the same period in 2020.

Non-cash stock-based compensation expense allocated to cost of sales was $4.6 million for the nine months ended September 30, 2021, compared to $6.5 million in the same period in 2020.

Pump sales, which have the highest gross margin, were 54% of total worldwide sales in the first quarter of 2022 versus 58% in the first quarter of 2021.

Selling, General and Administrative Expenses.

SG&A expenses increased 26% to $190.0 million for the nine months ended September 30, 2021 from $150.4 million for the same period in 2020.

SG&A expenses increased 25% to $73.3 million for the three months ended March 31, 2022, from $58.6 million for the same period in 2021.

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 $25.7 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.

Non-cash stock-based compensation expense allocated to SG&A was $31.6 million for the nine months ended September 30, 2021, compared to $32.1 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 became fully amortized in the second quarter of 2020.

We also experienced a $14.4 million increase in other non-employee discretionary spending, including outside consulting, software maintenance and outside services.

The increase compared to 2021 was primarily the result of a $12.8 million increase in salaries, incentive compensation, non-cash stock-based 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.

Non-cash stock-based compensation expense allocated to SG&A was $11.9 million for the three months ended March 31, 2022, compared to $9.4 million in the same period in 2021.

We also experienced a $1.8 million increase in other non-employee discretionary spending, including outside services, and supplies costs.

Research and Development Expenses .

R&D expenses increased 35% to $62.6 million for the nine months ended September 30, 2021 from $46.2 million for the same period in 2020.

The increase in R&D expenses was primarily the result of an increase of $11.8 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 $7.5 million for the nine months ended September 30, 2021, compared to $6.6 million in the same period in 2020.

We also experienced a $3.7 million increase in other non-employee discretionary spending, including software maintenance, equipment and product development costs.

R&D expenses increased 85% to $33.2 million for the three months ended March 31, 2022 from $18.0 million for the same period in 2021.

The increase in R&D expenses was primarily the result of an increase of $8.9 million in salaries, incentive compensation, non-cash stock-based 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 $4.4 million for the three months ended March 31, 2022 , compared to $2.1 million in the same period in 2021.

We also experienced a $6.3 million increase in other non-employee discretionary spending, including clinical trial expenses, outside consulting and services, information technology and equipment costs attributable to R&D.

Other Income (Expense), Net .

Total other expense, net for the nine months ended September 30, 2021 and 2020 was $5.2 million and $26.7 million, respectively.

Other expense for the nine months ended September 30, 2021 primarily consisted of $4.5 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 $1.4 million revaluation loss from the change in the fair value of certain warrants.

Other expense for the nine months ended September 30, 2020 primarily consisted of a $19.9 million revaluation loss from the change in the fair value of certain warrants and $8.0 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 nine months ended September 30, 2021 and 2020 primarily consisted of interest earned on our cash equivalents and short-term investments.

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”).

Income Tax Expense (Benefit) .

We recognized an income tax benefit of $2,000 on pre-tax income of $4.8 million for the nine months ended September 30, 2021, compared to an income tax benefit of $1.9 million on a pre-tax loss of $53.3 million for the nine months ended September 30, 2020.

The income tax benefit for the nine months ended September 30, 2021 was primarily attributable to excess tax benefits from stock compensation recorded discretely during the period, offset by state and foreign income tax expense as a result of current taxable income in certain jurisdictions.

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

Total other expense, net for the three months ended March 31, 2022 was $1.1 million compared to $1.9 million in the same period in 2021.

Total other expense, net for both periods primarily consisted of $1.5 million of interest expense which included the amortization of debt issuance costs related to our Notes, partially offset by interest earned on our cash equivalents and short-term investments.

Total other expense, net for the three months ended March 31, 2021 also included a $0.7 million loss on revaluation from the change in fair value of certain warrants.

Liquidity and Capital Resources

As of September 30, 2021, we had $595.0 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.

At March 31, 2022, we had $635.4 million in cash and cash equivalents and short-term investments.

We believe that our cash and cash equivalents, short-term investments, and future cash flows from operations will be sufficient to fund our ongoing core business activities.

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 September 2021, we issued 3,165,455 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 $103.5 million.

• From January 2020 through September 2021, we received proceeds of $1.5 million from the exercise of 416,315 outstanding warrants which were originally issued in connection with our registered public offering of common stock in October 2017.

As of September 30, 2021, there were warrants to purchase 1,000 shares outstanding relating to the October 2017 offering.

• From January 2020 through September 2021, we received proceeds of $2.1 million from the exercise of 73,985 outstanding warrants which were originally issued between August 2011 and August 2012.

As of September 30, 2021, there were warrants to purchase 19,722 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 nine months ended September 30, 2021 and 2020:

Nine Months Ended

September 30,

(in thousands) 2021 2020

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 geographies outside the United States, the acquisition of intellectual property and equity investments, expenditures related to increases in our manufacturing capacity and improvements to our manufacturing efficiency, overall expansion of our facilities and operations, and other working capital needs.

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

The following table shows a summary of our cash flows for the three months ended March 31, 2022 and 2021 (in thousands):

Three Months Ended March 31,

Net cash provided by (used in):

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Operating Activities .

Net cash provided by operating activities was $91.7 million for the nine months ended September 30, 2021, compared to $9.4 million 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 $37.5 million improvement to net income when adjusted for non-cash expenses, particularly stock-based compensation expense, as well as a $44.8 million increase from working capital changes.

Working capital changes during the first nine months of 2021, which primarily consisted of increases in employee related liabilities, accounts payable and accrued expenses, deferred revenue, and accounts receivable related to the growth in our business, provided $28.8 million in cash compared to a use of $16.0 million from working capital changes in the same period of 2020.

Accounts receivable increased to $87.5 million at September 30, 2021 from $82.2 million at December 31, 2020.

Inventories increased to $65.7 million at September 30, 2021 from $63.7 million at December 31, 2020.

Net cash provided by operating activities was $13.8 million for the three months ended March 31, 2022, compared to $28.7 million in the same period in 2021.

The reduction in net cash provided by operating activities for 2022 compared to 2021 was primarily a result of a $9.7 million increase in net loss as well as working capital changes.

Working capital changes during the first three months of 2022, primarily consisted of decreases in accounts receivable and employee-related liabilities, and increases in inventories and accounts payable and accrued expenses.

Accounts receivable decreased to $94.1 million at March 31, 2022, from $110.7 million at December 31, 2021, as a result of lower sales in the first quarter of 2022 as compared to the fourth quarter of 2021.

Inventories increased to $80.0 million at March 31, 2022 from $68.6 million at December 31, 2021.

Investing Activities .

Net cash used in investing activities was $110.1 million for the nine months ended September 30, 2021, which was primarily related to $542.8 million of purchases of short-term investments, $9.3 million cash paid for the acquisition of intangible assets and equity investments, and $8.4 million in purchases of property and equipment, offset by $450.5 million in proceeds from maturities and sales of short-term investments.

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

Net cash provided by investing activities was $5.2 million for the three months ended March 31, 2022, which was primarily related to $118.6 million in proceeds from maturities and sales of short-term investments, offset by $110.7 million of purchases of short-term investments, and $2.6 million in purchases of property and equipment.

Net cash used by 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.

Financing Activities.

Net cash provided by financing activities was $36.0 million for the nine months ended September 30, 2021, which primarily consisted of proceeds from the issuance of common stock under our stock plans.

Net cash provided by financing activities was $305.2 million for the nine months ended September 30, 2020, which primarily consisted of $278.7 million in proceeds from the issuance of the Convertible Senior Notes which was partially offset by $34.1 million in payments related to the Capped Call Transactions, and $57.7 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:

Net cash provided by financing activities was $3.5 million for the three months ended March 31, 2022, which primarily consisted of proceeds from the issuance of common stock under our stock plans.

Net cash provided by financing activities was $3.6 million for the three months ended March 31, 2021, which consisted of $3.1 million in proceeds from the issuance of common stock under our stock plans, and $0.4 million in proceeds from the exercise of common stock warrants.

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

In particular, our cash inflows and outflows are principally impacted by 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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• 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;

• additional facilities leases and related tenant improvements;

• investments for the development, improvement and acquisition of manufacturing, testing and packaging equipment to support business growth and increase capacity;

• payments under licensing, development and commercialization agreements.

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Our ability to raise additional financing may be negatively impacted by a number of factors, including our recent and projected financial results, recent changes in and volatility of our stock price, perceptions about the dilutive impact of financing transactions, the competitive environment in our industry, uncertainties regarding the regulatory environment in which we operate and conditions impacting the capital markets more generally, including economic weakness, inflation, political instability, war and terrorism, natural disasters, incidence of illness or disease, or other events beyond our control.

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

The proceeds from the issuance of the Notes were $244.6 million, net of debt issuance costs and cash used to pay the cost of the Capped Call Transactions (see Note 7, “Debt”).

The Notes are the Company’s senior unsecured obligations.

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

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

Cash payments due by calendar year for our Convertible Senior Notes at March 31, 2022 are as follows (in thousands):

Total Remaining in 2022 2023 2024 2025

Contractual interest $ 14,357 $ 4,313 $ 4,313 $ 4,313 $ 1,418

Principal amount of convertible senior notes (1)

287,500 — — — 287,500

Total $ 301,857 $ 4,313 $ 4,313 $ 4,313 $ 288,918

(1) The Convertible Senior Notes may be settled in cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election.

Critical Accounting Policies

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Actual results may differ from these estimates.

There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies Involving Management Estimates and Assumptions,” included in our Annual Report on Form 10-K for the year ended December 31, 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 September 30, 2021, we did not have any off-balance sheet arrangements.

As of March 31, 2022, we are a party to certain standby letter of credit arrangements in support of our operating lease obligations.

For a description of the arrangements we consider significant, see Note 12 “Commitments and Contingencies” to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report.

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