What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-02 compared with 2022-08-03 · 142 added, 132 removed, 319 unchanged (46% 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 June 30, 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.

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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 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.

In the four-year period ended September 30, 2022, we shipped more than 400,000 insulin pumps, which is representative of our estimated global installed customer base, assuming the typical four-year reimbursement cycle.

More than 280,000 of these pumps were shipped to customers in the United States and over 120,000 were shipped in the more than 20 countries in which we operated in the third quarter of 2022 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.

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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.

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 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.

In July 2022, we launched a new pump software update though TDU to allow all t:slim X2 pump users in the United States to bolus insulin using our smartphone app that is available on both iOS and Android device models.

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

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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.

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

In support of this effort, in July 2022 we acquired infusion set developer, Capillary Biomedical, Inc.

(Capillary Biomedical).

Capillary Biomedical’s unique extended wear infusion set technology is currently in development.

Device Software

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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.

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

Settings Automation

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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.

Starting in the third quarter of 2018, we began selling 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.

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In the past four years, we have shipped more than 400,000 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.

Our estimated worldwide installed base has increased approximately 35% compared to the third 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.

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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 265,000 of pumps were shipped to customers in the United States in the past four years, which aligns with the standard four-year warranty period.

More than 280,000 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:

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

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.

2022 18,658 20,818 20,394 N/A 59,870

Since commencing sales outside the United States in the third quarter of 2018, we shipped over 120,000 pumps to customers in more than 20 countries, and are only beginning to complete a full four-year reimbursement cycle in certain of our markets outside of the United States.

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

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

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

2022 9,437 11,296 12,113 N/A 32,846

Trends Impacting Financial Results

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• the introduction of new products, treatment techniques or technologies for the treatment of diabetes, including the timing of the commercialization of new products by us and our competitors;

• seasonality in the United States associated with annual insurance deductibles and coinsurance requirements associated with the medical insurance plans utilized by our customers and the customers of our distributors;

• seasonality in the United States associated with annual insurance deductibles and coinsurance requirements of the medical insurance plans used by our customers and the customers of our distributors;

• incidence of disease or illness, including the COVID-19 global pandemic, that may impact customer purchasing patterns or disrupt our supply chain, 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 and broader availability of vaccines;

• global economic and market uncertainty such as recessionary concerns, rising inflation rates, changes in discretionary spending, increased interest rates, and other macroeconomic factors;

• the 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;

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

• our recently announced Tandem Choice program and its related financial and accounting impact;

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

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• 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.

• 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, financial impact and integration of acquired assets or businesses, 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 administrative cost efficiencies with the goal of improving our operating margins and ultimately achieving sustained profitability.

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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 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.

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, new competitive product launches 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.

Today, distributor orders are primarily 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.

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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.

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.

We anticipate that our sales may not follow historical trends and may continue to be subject to unpredictable variability across the markets in which we operate.

The full extent of the impact of the COVID-19 global pandemic on our business and operations will depend on a number of factors, including the scope and duration of the pandemic, varying government responses to the pandemic and potential delays to product development timelines.

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Additionally, upon the announcement of FDA approval or commercial launch of a new product, either by us or one of our competitors, potential new customers may reconsider their purchasing decisions or take additional time to consider such FDA approval or product launch before making their purchasing decisions.

For example, we believe certain customers paused their decision-making during the second half of 2019 in anticipation of the commercial availability of the t:slim X2 with Control-IQ technology, and similar occurrences may occur in future periods.

However, it is difficult to quantify the extent of the impact of these or similar events on future purchasing decisions.

In September 2022, we launched Tandem Choice, a technology access program that provides in-warranty eligible t:slim X2 customers a path towards ownership of the next generation hardware platform for a fee when available.

Tandem Choice expires on December 31, 2024.

The accounting treatment for Tandem Choice has a high degree of complexity.

Initially, the program requires the deferral of some portion of sales for shipments of eligible pumps beginning in the third quarter of 2022.

If a customer elects to participate in Tandem Choice upon launch of our next generation hardware platform, we will recognize the existing deferral, fees received and the associated costs of providing the new hardware at the time of fulfillment.

Any remaining deferrals will be recognized at program expiration.

At this time, we are not able to estimate the financial impact for the duration of Tandem Choice.

Cost of Sales

Cost of sales includes raw materials, labor costs, manufacturing overhead expenses, product training costs, royalties, freight, reserves for expected warranty costs, costs of supporting our digital health platforms, scrap and charges for excess and obsolete inventories.

Manufacturing overhead expenses include expenses relating to quality assurance, manufacturing engineering, material procurement, inventory control, facilities, equipment, information technology and operations supervision and management.

Historically, we have manufactured our pumps and disposable insulin cartridges at our manufacturing facility in San Diego, California.

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 Tandem Mobi cartridge manufacturing in the future.

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

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

Over the long term, we expect our overall gross margin percentage, which for any given period is calculated as sales less cost of sales divided by sales, to improve, as our sales increase and our overhead costs are spread over larger production volumes.

We expect we will be able to leverage our manufacturing cost structure across our products that utilize the same technology platform and manufacturing infrastructure and will be able to further reduce per unit costs with increased automation, process improvements and raw materials cost reductions.

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

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 pump sales increase, as we launch new portfolio products with lower costs to manufacture, improved average selling prices and leverage of our fixed overhead costs.

We expect we will be able to achieve this leverage with products that use the same technology platform and manufacturing infrastructure, as well as increased automation, process improvements and raw materials cost reductions.

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

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

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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.

For instance, as a result of the COVID-19 global pandemic, we are experiencing higher costs as we manage global supply challenges and anticipate that this will continue for the remainder of 2022 and first half of 2023.

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, 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.

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, 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 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.

We had approximately 110 sales territories in the United States in the third 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.

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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.

In addition, we will continue to evaluate, and may further increase, the number of our field sales and clinical personnel to optimize the coverage of our existing territories.

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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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.

Acquired In-process Research and Development (IPR&D) Expenses

Acquired IPR&D reflects costs of external research and development projects acquired directly in a transaction other than a business combination, that do not have an alternative future use.

Other Income and Expense

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.

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, interest earned on our cash equivalents and short-term investments, and changes in the fair value of certain common stock warrants which were issued in October 2017 and expire in October 2022.

We expect interest income in future quarters to fluctuate depending on the total amount of cash equivalents and short-term investments and market interest rates.

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

June 30, Six Months Ended June 30,

September 30, Nine Months Ended September 30,

(in thousands, except percentages) 2022 2021 2022 2021

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Research and development 36,798 24,102 103,529 62,562

Acquired in-process research and development 31,016 — 31,016 —

Total operating expenses 151,918 89,025 372,534 252,571

Operating loss (12,239) 5,432 (27,577) 2,195

Operating income (loss) (47,493) 7,720 (75,070) 9,915

Other income (expense), net:

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Change in fair value of common stock warrants 12 (392) 103 (1,354)

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

Total other income (expense), net 144 (1,872) (1,668) (5,159)

Income (loss) before income taxes (47,349) 5,848 (76,738) 4,756

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Net income (loss) $ (48,970) $ 5,794 $ (78,741) $ 4,758

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.

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

For the three months ended September 30, 2022, sales were $204.5 million, which included $58.5 million of sales outside the United States.

For the three months ended September 30, 2022, we deferred $0.6 million of pump sales as the result of our recently launched Tandem Choice.

Sales were $179.6 million for the same period in 2021, which included $46.5 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.

The increase in worldwide sales of $24.9 million in the third quarter of 2022, compared to the third quarter of 2021, was primarily driven by a 25% increase in pump-related supply sales.

Sales of pump-related supplies increased primarily due to the 35% growth in our estimated worldwide installed base of customers.

Pump sales increased 5% in the third quarter of 2022, net of the deferral associated with the Tandem Choice, which began during the third quarter of 2022.

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

Three Months Ended

September 30,

Pump $ 80,696 $ 78,771

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Total Sales in the United States $ 146,035 $ 133,106

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 sales in the United States were $80.7 million for the third quarter of 2022, compared to $78.8 million in the third 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 20,394 in the third quarter of 2022, compared to 20,296 in the third 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.

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Sales of pump-related supplies increased primarily due to a 28% 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 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.

Sales to distributors accounted for 66% and 68% of our total sales in the United States for the three months ended September 30, 2022 and 2021, respectively, which contributed to modest improvement in average selling prices across all products.

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

Three Months Ended

September 30,

Pump $ 27,385 $ 23,762

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Total Sales Outside the United States $ 58,512 $ 46,521

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.

Pump sales outside the United States were $27.4 million for the third quarter of 2022, compared to $23.8 million in the third quarter of 2021.

Pump shipments increased 8% compared to the same period in the prior year due to continued strong demand for our t:slim X2 insulin pump with Control-IQ technology, which is now available in all of the markets we serve.

The increase in pump sales was also attributable to an increase in average selling prices.

Sales of pump-related supplies benefited from a 57% 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% and 95% of our total sales outside the United States for both of the three-month periods ended June 30, 2022 and 2021, respectively.

The ordering patterns of our distributors outside the United States for pumps and supplies has been, and may continue to be, 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 evolves.

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

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

Cost of Sales and Gross Profit .

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 second quarter of 2022 versus 63% in the second quarter of 2021.

Our cost of sales for the three months ended September 30, 2022 was $100.1 million , resulting in gross profit of $104.4 million, compared to cost of sales of $82.9 million and gross profit of $96.7 million for the same period in 2021.

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

The increase in our gross profit for the three months ended September 30, 2022 was primarily the result of the $24.9 million increase in total sales, driven by increased supply sales.

Gross margin benefits from progress in underlying fundamentals, including an increase in average selling prices and manufacturing efficiencies, as well as leverage of fixed overhead, were more than offset by increased costs associated with global supply chain challenges.

More specifically, 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 and higher freight costs consistent with our experience in the second quarter of 2022.

We anticipate continued pressure from increased supply chain and material costs through the end of this year into next 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.

Pump sales, which have the highest gross margin, were 53% of total worldwide sales in the third quarter of 2022, versus 57% in the third quarter of 2021.

Selling, General and Administrative Expenses.

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.

SG&A expenses increased 30% to $84.1 million for the three months ended September 30, 2022, from $64.9 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 $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.

The increase compared to 2021 was primarily the result of an $11.8 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 $15.1 million for the three months ended September 30, 2022, compared to $11.3 million in the same period in 2021.

We also experienced a $7.4 million increase in facilities and other non-employee discretionary spending, including outside consulting, outside services, travel, and equipment costs.

Research and Development Expenses .

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.

R&D expenses increased 53% to $36.8 million for the three months ended September 30, 2022 from $24.1 million for the same period in 2021.

The increase in R&D expenses was primarily the result of an increase of $8.1 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 $4.5 million for the three months ended June 30, 2022 , compared to $2.5 million in the same period in 2021.

Non-cash stock-based compensation expense allocated to R&D was $5.2 million for the three months ended September 30, 2022 , compared to $2.9 million in the same period in 2021.

We also experienced a $4.6 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.

Acquired In-Process Research and Development Expenses.

Acquired IPR&D expenses of $31.0 million for the three months ended September 30, 2022 represented the value of assets acquired, and acquisition related expenses, in connection with our acquisition of Capillary Biomedical.

Other Income (Expense), Net .

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.

Total other income (expense), net for the three months ended September 30, 2022 was $0.1 million income, compared to $1.9 million expense in the same period in 2021.

Other income, net for the three months ended September 30, 2022 primarily consisted of $1.7 million of interest income earned on our cash equivalents and short-term investments, partially offset by $1.6 million of interest expense which included the amortization of debt issuance costs related to our Convertible Senior Notes.

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.

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.

We recognized income tax expense of $1.6 million on a pre-tax loss of $47.3 million for the three months ended September 30, 2022, compared to income tax expense of $0.1 million on pre-tax income of $5.8 million for the three months ended September 30, 2021.

Income tax expense for the three months ended September 30, 2022 was primarily attributable to federal, state and foreign income tax expense as a result of current taxable income in certain jurisdictions.

Income tax expense for the three months ended September 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 Nine Months Ended September 30, 2022 and 2021

For the nine months ended September 30, 2022, sales were $580.7 million, which included $157.7 million of sales outside the United States.

For the nine months ended September 30, 2022 we deferred $0.6 million of pump sales as a result of Tandem Choice, launched in late September 2022.

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

The increase in worldwide sales of $87.9 million in the first nine months of 2022 compared to the first nine months of 2021, was driven by a 34% increase in pump-related supply sales, primarily due to 35% growth in our estimated worldwide installed base of customers.

We also had a 7% increase in worldwide pump sales in the first nine months of 2022, compared to the same period in 2021, net of the deferral associated with the Tandem Choice.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Pump $ 235,849 $ 221,724

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Total Sales in the United States $ 422,985 $ 364,025

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.

Pump sales in the United States were $235.8 million for the first nine months of 2022, compared to $221.7 million in the first nine months of 2021, as pump shipments increased 4% compared to the same period in the prior year, net of the deferral associated with the Tandem Choice, which began during the third quarter of 2022.

Pump average selling prices also improved over the prior period.

Domestic pump shipments were 59,870 in the first nine months of 2022 compared to 57,605 in the first nine months of 2021.

Sales of pump-related supplies increased primarily due to a 28% increase in our estimated domestic installed base of customers compared to September 30, 2021.

Sales to distributors accounted for 65% and 68% of our total domestic sales for the nine months ended September 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,

Nine Months Ended September 30,

Pump $ 75,515 $ 70,300

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Total Sales Outside the United States $ 157,731 $ 128,778

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.

Pump sales outside the United States were $75.5 million for the first nine months of 2022, compared to $70.3 million in the first nine months of 2021, as the 1% 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 41% primarily due to a 57% increase in our estimated installed base of customers outside the United States.

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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.

Sales to distributors accounted for 96% of our total sales outside the United States for the nine month period ended September 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.

Our cost of sales for the nine months ended September 30, 2022 was $283.3 million resulting in gross profit of $297.5 million, compared to cost of sales of $230.3 million and gross profit of $262.5 million for the same period in 2021.

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

The increase in our gross profit for the nine months ended September 30, 2022 was primarily the result of the $87.9 million increase in total sales.

Gross profit benefited from an increase in average selling prices as well as improvement in manufacturing efficiencies and leverage of fixed overhead.

Gross margin was pressured by approximately 2 percentage points from 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 and higher freight costs we are experiencing in 2022.

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.

Pump sales, which have the highest gross margin, were 54% of total worldwide sales in the first nine months of 2022 compared to 59% 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.

SG&A expenses increased 25% to $238.0 million for the nine months ended September 30, 2022, from $190.0 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 $34.7 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.

Non-cash stock-based compensation expense allocated to SG&A was $40.7 million for the nine months ended September 30, 2022, compared to $31.6 million in the same period in 2021.

We also experienced a $13.3 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.

R&D expenses increased 65% to $103.5 million for the nine months ended September 30, 2022, from $62.6 million for the same period in 2021.

The increase in R&D expenses was primarily the result of an increase of $24.4 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.

Non-cash stock-based compensation expense allocated to R&D was $14.1 million for the nine months ended September 30, 2022, compared to $7.5 million in the same period in 2021.

We also experienced a $16.6 million increase in other non-employee discretionary spending, including outside consulting and services, clinical trial expenses, information technology, facilities and equipment costs attributable to R&D.

Acquired In-Process Research and Development Expenses.

Acquired IPR&D expenses of $31.0 million for the nine months ended September 30, 2022 represented the value of IPR&D assets acquired, and acquisition related expenses, in connection with our acquisition of Capillary Biomedical.

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.

Total other expense, net for the nine months ended September 30, 2022 and 2021 was $1.7 million and $5.2 million, respectively.

Other expense, net for the nine months ended September 30, 2022 primarily consisted of $4.6 million of interest expense which included the amortization of debt issuance costs related to our Convertible Senior Notes, partially offset by $2.9 million of interest income earned on our cash equivalents and short-term investments.

Other expense, net 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, and a $1.4 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.

We recognized income tax expense of $2.0 million on pre-tax loss of $76.7 million for the nine months ended September 30, 2022, compared to an income tax benefit of $2,000 on pre-tax income of $4.8 million for the nine months ended September 30, 2021.

Income tax expense for the nine months ended September 30, 2022 was primarily attributable to federal, state and foreign income tax expense as a result of current taxable income in certain jurisdictions.

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

Liquidity and Capital Resources

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.

At September 30, 2022, we had $608.7 million in cash and cash equivalents and short-term investments.

In addition, we had a total available balance of $95.1 million at September 30, 2022 under our Revolving Line of Credit (the Line of Credit), which expires in May 2025 (see Note 7, “Debt”).

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.

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.

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, equity investments and acquired assets, 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 six months ended June 30, 2022 and 2021 (in thousands):

Six Months Ended June 30,

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

Nine Months Ended September 30,

Net cash provided by (used in):

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Operating Activities .

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 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.

Net cash provided by operating activities was $44.6 million for the nine months ended September 30, 2022, compared to $91.7 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 the $83.5 million increase in net loss as well as working capital changes.

Working capital changes during the nine months of 2022, primarily consisted of increases in inventories, accounts payable and accrued expenses, and operating leases and other current liabilities.

Accounts receivable increased to $112.8 million at September 30, 2022, from $110.7 million at December 31, 2021.

Inventories increased to $104.8 million at September 30, 2022 from $68.6 million at December 31, 2021.

Investing Activities .

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.

Net cash used in investing activities was $2.6 million for the nine months ended September 30, 2022, which was primarily related to $362.5 million of purchases of short-term investments, $28.5 million in purchases of property and equipment, and $25.7 million paid for the acquisition of Capillary Biomedical, including $1.0 million transaction cost.

(see Note 2, “Summary of Significant Accounting Policies”), offset by $422.9 million in proceeds from maturities and sales of short-term investments.

Net cash used by 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, 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.

Financing Activities.

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.

Net cash provided by financing activities was $10.8 million for the nine months ended September 30, 2022, which primarily consisted of proceeds from the issuance of common stock under our stock plans.

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.

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

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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 June 30, 2022 are as follows (in thousands):

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

Total Remaining in 2022 2023 2024 2025

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Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.

The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements and accompanying notes as of the date of the consolidated financial statements.

The preparation of these consolidated financial statements requires management to make estimates and judgments, which present a significant level of estimation uncertainty and that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements and accompanying notes as of the date of the consolidated financial statements.

We evaluate our estimates and judgments on an ongoing basis.

We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about our financial condition and results of operations that are not readily apparent from other sources.

Actual results may differ from these estimates.

Actual results may differ from these estimates and have a material impact on our financial condition and results of operations.

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, 2021, except for the accounting policies and estimates related to an asset acquisition and Tandem Choice, which are included in Note 2, “Summary of Significant Accounting Policies” in Part I, Item 1 of this Quarterly Report.

Off-Balance Sheet Arrangements

As of June 30, 2022, we are a party to certain standby letter of credit arrangements in support of our operating lease obligations.

As of September 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