What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-03 compared with 2022-05-04 · 147 added, 95 removed, 304 unchanged (44% of the section changed)

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

You should read the following discussion and analysis together with our financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 (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.

19 unchanged sentences

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.

In the four-year period ended June 30, 2022, we shipped more than 375,000 insulin pumps, which is representative of our estimated global installed customer base, assuming the typical four-year reimbursement cycle.

More than 265,000 of these pumps were shipped to customers in the United States and nearly 110,000 were shipped to more than 20 countries in which we operate outside the United States.

4 unchanged sentences

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 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.

Now available in the countries we serve worldwide, our Tandem Device Updater (TDU), is a revolutionary tool that allows 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.

1 unchanged sentence

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.

We launched our mobile bolus feature to all t:slim X2 users in the United States in July 2022, along with the pump software update to use this new feature, at no cost.

Our insulin pump products are generally considered durable medical equipment and have an expected lifespan of at least four years.

2 unchanged sentences

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

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.

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, generalized labor shortages impacting global markets, the timing and extent of vaccine availability and surges in infection and hospitalization rates as new COVID variants have emerged.

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.

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.

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

In addition, we experienced extended regulatory review timelines for new product submissions in the United States.

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

5 unchanged sentences

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.

Formerly referred to by its development name, t:sport, 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.

In addition to being waterproof, Mobi’s features include a 200-unit cartridge, an on-pump bolus button, inductive charging, and an AID algorithm.

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

2 unchanged sentences

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

A goal of this design is to allow 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.

Infusion Sets

Infusion sets provide additional choice and flexibility to people living with diabetes.

Our goals for infusion set innovation focus on solutions that extend wear time and enhance user experience, while reducing occlusions, body burden and waste.

Device Software

31 unchanged sentences

In the past four years, we have shipped more than 375,000 insulin pumps worldwide, which is representative of our estimated global in-warranty installed customer base.

Our estimated worldwide installed base has increased approximately 40% compared to the second quarter of 2021.

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.

12 unchanged sentences

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

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

2022 18,658 20,818 N/A N/A 39,476

Since commencing sales outside the United States in the third quarter of 2018, we have shipped nearly 110,000 pumps to customers in more than 20 countries, and have yet to complete a full four-year reimbursement cycle.

7 unchanged sentences

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

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

2022 9,437 11,296 N/A N/A 20,733

Trends Impacting Financial Results

17 unchanged sentences

In addition to these general trends, we believe the following specific factors have materially impacted, and could continue to materially impact, our business going forward:

• changes in customer purchasing behavior due to the economic environment such as inflation or threat of recession;

• anticipated new product launches and the timing of their commercial availability;

• 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 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;

16 unchanged sentences

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 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.

We believe we can continue to increase sales by promoting our products to a greater number of potential customers, caregivers and healthcare providers, although pressures related to the broader economic environment and the COVID-19 global pandemic have 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.

Today, distributor orders are fulfilled in the United States.

In the first half of 2022, we laid the commercial and operational groundwork, as well as the IT infrastructure, to begin working with a third-party logistics service provider in the Netherlands to support our distributors in Europe with the intent to scale utilization in the next twelve months.

Our independent distributor partners outside the United States and Canada perform all sales, customer support and training in their respective markets.

6 unchanged sentences

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.

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.

8 unchanged sentences

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.

By the end of 2021, the majority of our t:slim cartridge manufacturing capacity transitioned to our partner in order to create capacity for Tandem Mobi cartridge manufacturing in the future.

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

25 unchanged sentences

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

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

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

We also incur R&D expenses for supplies, development prototypes, outside design and testing services, depreciation, allocated facilities and information services, clinical trial costs, payments under our licensing, development and commercialization agreements and other indirect costs.

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

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

For instance, we may experience lower spending associated with delays in the advancement of particular programs, which may be offset by increased spending to support the retention, health, safety and welfare of our employees or to enable development activities under alternative conditions.

Other Income and Expense

7 unchanged sentences

Three Months Ended

June 30, Six Months Ended June 30,

(in thousands, except percentages) 2022 2021 2022 2021

15 unchanged sentences

Total other expense, net (711) (1,363) (1,812) (3,287)

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 $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.

Income (loss) before income taxes (12,950) 4,069 (29,389) 0 (1,092)

Income tax expense (benefit) 2,106 61 382 (56)

Net income (loss) $ (15,056) $ 4,008 $ (29,771) $ (1,036)

Comparison of the Three Months Ended June 30, 2022 and 2021

For the three months ended June 30, 2022, sales were $200.3 million, which included $54.6 million of sales outside the United States.

Sales were $172.1 million for the same period in 2021, which included $44.6 million of sales outside the United States.

The increase in worldwide sales of $28.1 million in the second quarter of 2022, compared to the second quarter of 2021, was driven by a 44% increase in pump-related supply sales, with pump sales consistent period over period.

Sales of pump-related supplies increased primarily due to the 40% growth in our estimated worldwide installed base of customers.

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

5 unchanged sentences

Total Sales in the United States $ 145,667 $ 127,580

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.

Pump sales in the United States were $81.7 million for the second quarter of 2022, compared to $80.0 million in the second quarter of 2021 as pump shipments increased 1% and pump average selling prices improved compared to the same period in 2021.

Pump shipments in the United States were 20,818 in the second quarter of 2022, compared to 20,665 in the second quarter of 2021.

Pump shipments were driven by continued demand for our t:slim X2 insulin pump with Control-IQ technology even with the presence of new competitive product launches during the quarter.

We also faced challenging marketplace dynamics and economic conditions brought on by the global pandemic and a deteriorating macroeconomic environment, with inflation and the threat of recession beginning to impact pump purchasing decisions.

Sales of pump-related supplies increased primarily due to a 32% 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.

Sales to distributors accounted for 65% and 68% of our total sales in the United States for the three months ended June 30, 2022 and 2021, respectively, which contributed to modest improvement in average selling prices across all products.

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.

6 unchanged sentences

Total Sales Outside the United States $ 54,595 $ 44,559

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.

Pump sales outside the United States were $25.8 million for the second quarter of 2022, compared to $27.6 million in the second quarter of 2021.

Pump shipments decreased 14% compared to the same period in the prior year primarily due to variable pump ordering and stocking patterns, offset by improvements in average selling price.

Sales of pump-related supplies benefited from a 67% 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 distributors 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.

Sales to distributors accounted for 96% and 95% of our total sales outside the United States for both of the three-month periods ended June 30, 2022 and 2021, respectively.

Cost of Sales and Gross Profit .

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.

Our cost of sales for the three months ended June 30, 2022 was $98.3 million , resulting in gross profit of $101.9 million, compared to cost of sales of $79.7 million and gross profit of $92.5 million for the same period in 2021.

The gross margin for the three months ended June 30, 2022 and 2021 was 51% and 54%, respectively.

The increase in our gross profit for the three months ended June 30, 2022 was primarily the result of the $28.1 million increase in total sales, driven by increased supply sales.

Gross profit benefited from an increase in average selling prices as well as improvement in per unit labor and overhead costs from manufacturing efficiencies, leverage of fixed overhead and increased volumes from our third-party cartridge manufacturer.

Gross margin was pressured by approximately 2 percentage points from increased pump material costs due to the use of alternative sourcing for certain raw materials to reduce the risk of component shortages in the near-term.

On an aggregate basis, non-manufacturing costs, which primarily consist of warranty, training, royalty and freight, also negatively impacted gross margin as a result of 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 and the challenging economic environment.

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 54% of total worldwide sales in the first quarter of 2022 versus 58% in the first quarter of 2021.

Pump sales, which have the highest gross margin, were 54% of total worldwide sales in the second quarter of 2022 versus 63% in the second quarter of 2021.

Selling, General and Administrative Expenses.

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.

SG&A expenses increased 21% to $80.6 million for the three months ended June 30, 2022, from $66.5 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 2021 was primarily the result of a $10.0 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.

Non-cash stock-based compensation expense allocated to SG&A was $13.7 million for the three months ended June 30, 2022, compared to $10.9 million in the same period in 2021.

We also experienced an $4.1 million increase in facilities and other non-employee discretionary spending, including travel, outside services, equipment and supplies costs.

Research and Development Expenses .

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.

R&D expenses increased 64% to $33.6 million for the three months ended June 30, 2022 from $20.5 million for the same period in 2021.

The increase in R&D expenses was primarily the result of an increase of $7.3 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.

Non-cash stock-based compensation expense allocated to R&D was $4.5 million for the three months ended June 30, 2022 , compared to $2.5 million in the same period in 2021.

We also experienced a $5.8 million increase in other non-employee discretionary spending, including outside consulting and services, clinical trial expenses, information technology and equipment costs attributable to R&D.

Other Income (Expense), Net .

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.

Total other expense, net for the three months ended June 30, 2022 was $0.7 million compared to $1.4 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 income earned on our cash equivalents and short-term investments.

Total other expense, net for the three months ended June 30, 2021 also included a $0.3 million loss on revaluation from the change in fair value of certain warrants.

Income Tax Expense (Benefit ).

We recognized income tax expense of $2.1 million on a pre-tax loss of $13.0 million for the three months ended June 30, 2022, compared to income tax expense of $0.1 million on pre-tax income of $4.1 million for the three months ended June 30, 2021.

The provision for income taxes for the three months ended June 30, 2022 was calculated using the discrete effective tax rate method as the annual effective tax rate method would not provide a reliable estimate.

Income tax expense for the three months ended June 30, 2022 was primarily attributable to the change from the annual effective tax rate method used in the first quarter of 2022 to the discrete effective tax rate method, and state and foreign income tax expense as a result of current taxable income in certain jurisdictions.

The provision for income taxes for the three months ended June 30, 2021 was calculated by applying an estimate of the annual effective tax rate for the full year to ordinary income (loss) adjusted by the tax impact of discrete items.

The income tax expense for the three months ended June 30, 2021 was primarily attributable to state and foreign income tax expense as a result of current taxable income in certain jurisdictions.

Comparison of the Six Months Ended June 30, 2022 and 2021

For the six months ended June 30, 2022, sales were $376.2 million, which included $99.2 million of sales outside the United States.

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

The increase in worldwide sales of $63.0 million in the first six months of 2022 compared to the first six months of 2021, was driven by a 40% increase in pump-related supply sales, primarily due to 40% growth in our estimated worldwide installed base of customers.

We also had a 7% increase in worldwide pump sales in the first six months of 2022, compared to the same period in 2021.

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

Six Months Ended June 30,

Pump $ 155,153 $ 142,953

Infusion sets 83,651 59,526

Cartridges 37,380 27,847

Other 766 593

Total Sales in the United States $ 276,950 $ 230,919

Pump sales in the United States were $155.2 million for the first six months of 2022, compared to $143.0 million in the first six months of 2021, as pump shipments increased 6% compared to the same period in the prior year, and pump average selling prices improved.

Domestic pump shipments were 39,476 in the first six months of 2022 compared to 37,309 in the first six months of 2021.

Sales of pump-related supplies increased primarily due to a 32% increase in our estimated domestic installed base of customers.

Sales to distributors accounted for 65% and 68% of our total domestic sales for the six months ended June 30, 2022 and 2021, respectively, which contributed to modest improvement in average selling prices across all products.

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

Six Months Ended June 30,

Pump $ 48,130 $ 46,538

Infusion sets 35,294 24,899

Cartridges 15,543 10,609

Other 252 211

Total Sales Outside the United States $ 99,219 $ 82,257

Pump sales outside the United States were $48.1 million for the first six months of 2022, compared to $46.5 million in the first six months of 2021, as the 5% decrease in pump shipments was more than offset by an increase in average selling prices compared to the same period in the prior year.

Sales of pump-related supplies increased 43% primarily due to a 67% 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 distributors 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 across the more than 20 markets in which we operate outside the United States.

Sales to distributors accounted for 96% of our total sales outside the United States for the six month period ended June 30, 2022, and 95% for the same period in 2021.

Cost of Sales and Gross Profit .

Our cost of sales for the six months ended June 30, 2022 was $183.1 million resulting in gross profit of $193.0 million, compared to cost of sales of $147.4 million and gross profit of $165.7 million for the same period in 2021.

The gross margin for the six months ended June 30, 2022 was 51% compared to 53% in the same period in 2021.

The increase in our gross profit for the six months ended June 30, 2022 was primarily the result of the $63.0 million increase in total sales.

Gross margin was pressured by increased pump material costs due to the use of alternative sourcing for raw materials to reduce the risk of component shortages in the near-term.

On an aggregate basis, non-manufacturing costs, which primarily consist of warranty, royalty, freight, training and digital health product support costs, were negatively impacted by increased supply chain costs due to the global pandemic.

Pump sales, which have the highest gross margin, were 54% of total worldwide sales in the first six months of 2022 compared to 61% in the same period in 2021.

Selling, General and Administrative Expenses.

SG&A expenses increased 23% to $153.9 million for the six months ended June 30, 2022, from $125.1 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 2021 was primarily the result of a $22.8 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 $25.6 million for the six months ended June 30, 2022, compared to $20.3 million in the same period in 2021.

We also experienced a $6.0 million increase in facilities and non-employee discretionary spending, including outside services, travel, and software maintenance and supplies costs.

Research and Development Expenses .

R&D expenses increased 74% to $66.7 million for the six months ended June 30, 2022, from $38.5 million for the same period in 2021.

The increase in R&D expenses was primarily the result of an increase of $16.3 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 $8.9 million for the six months ended June 30, 2022, compared to $4.6 million in the same period in 2021.

We also experienced a $11.9 million increase in other non-employee discretionary spending, including outside consulting and services, clinical trial expenses, information technology and equipment costs attributable to R&D.

Other Income (Expense), Net .

Total other expense, net for the six months ended June 30, 2022 and 2021 was $1.8 million and $3.3 million, respectively.

Other expense, net for the six months ended June 30, 2022 primarily consisted of $3.0 million of interest expense which included the amortization of debt issuance costs related to our Convertible Senior Notes, partially offset by $1.1 million of interest income earned on our cash equivalents and short-term investments.

Other expense, net for the six months ended June 30, 2021 primarily consisted of $3.0 million of interest expense which included the amortization of debt issuance costs related to our Notes, and a $1.0 million revaluation loss from the change in the fair value of certain common stock warrants, offset by $0.7 million of interest income earned on our cash equivalents and short-term investments.

Income Tax Expense (Benefit ).

We recognized income tax expense of $0.4 million on pre-tax loss of $29.4 million for the six months ended June 30, 2022, compared to an income tax benefit of $0.1 million on a pre-tax loss of $1.1 million for the six months ended June 30, 2021.

The income tax expense for the six months ended June 30, 2022 was primarily attributable to state and foreign income tax expense as a result of current taxable income in certain jurisdictions.

The provision for income taxes for the six months ended June 30, 2022 was calculated using the discrete effective tax rate method as the annual effective tax rate method would not provide a reliable estimate.

The income tax benefit for the six months ended June 30, 2021 was primarily due to our pre-tax loss position, partially offset by state and foreign income tax expense as a result of current taxable income in certain jurisdictions.

The provision (benefit) for income taxes for the six months ended June 30, 2021 was calculated by applying an estimate of the annual effective tax rate for the full year to ordinary income (loss) adjusted by the tax impact of discrete items.

Liquidity and Capital Resources

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.

At June 30, 2022, we had $635.3 million in cash and cash equivalents and short-term investments.

In addition, we have a $100 million Revolving Line of Credit (the Line of Credit), which expires in May 2025 (see Note 7, “Debt”).

At June 30, 2022, no amount was outstanding under the Line of Credit.

We believe that our cash and cash equivalents, short-term investments, borrowing availability under the Line of Credit, 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.

1 unchanged sentence

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,

The following table shows a summary of our cash flows for the six months ended June 30, 2022 and 2021 (in thousands):

Six Months Ended June 30,

Net cash provided by (used in):

5 unchanged sentences

Operating Activities .

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.

Net cash provided by operating activities was $20.7 million for the six months ended June 30, 2022, compared to $57.6 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 28.7 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.

Working capital changes during the six months of 2022, primarily consisted of increases in inventories and accounts payable and accrued expenses, and a decrease in employee-related liabilities.

Accounts receivable decreased to $103.8 million at June 30, 2022, from $110.7 million at December 31, 2021.

Inventories increased to $88.1 million at June 30, 2022 from $68.6 million at December 31, 2021.

Investing Activities .

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.

Net cash provided by investing activities was $11.6 million for the six months ended June 30, 2022, which was primarily related to $256.5 million in proceeds from maturities and sales of short-term investments, offset by $229.7 million of purchases of short-term investments, and $14.8 million in purchases of property and equipment.

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

Financing Activities.

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.

Net cash provided by financing activities was $11.6 million for the six months ended June 30, 2022, which primarily consisted of proceeds from the issuance of common stock under our stock plans.

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

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

6 unchanged sentences

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

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

Both our primary short-term and long-term capital needs are expected to include expenditures related to:

• support of our commercialization efforts related to our current and future products;

5 unchanged sentences

• payments under licensing, development and commercialization agreements.

• acquisition and subsequent integration of businesses, products and technologies.

Although we believe the foregoing items reflect our most likely uses of cash in the short-term, we cannot predict with certainty all of our particular cash uses or the timing or amount of cash used.

1 unchanged sentence

Any such transaction may require short-term expenditures that may impact our capital needs.

If for any reason our cash and cash equivalents balances, or cash generated from operations is insufficient to satisfy our working capital requirements, we may in the future be required to seek additional capital from public or private offerings of our equity or debt securities, or we may elect to borrow capital under new credit arrangements or from other sources.

We may also seek to raise additional capital from such offerings or borrowings on an opportunistic basis when we believe there are suitable opportunities for doing so.

7 unchanged sentences

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):

Cash payments due by calendar year for our Convertible Senior Notes at June 30, 2022 are as follows (in thousands):

Total Remaining in 2022 2023 2024 2025

12 unchanged sentences

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.

As of June 30, 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