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Item 7. Management’s Discussion and Analysis

2023-02-22 compared with 2022-02-22 · 227 added, 300 removed, 225 unchanged (70% 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 “Selected Financial Data” in Part II, Item 6 and our consolidated financial statements and related notes in Part II, Item 8.

You should read the following discussion and analysis together with the “Consolidated Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report.

The following discussion contains forward-looking statements, which statements are subject to considerable risks and uncertainties.

Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption “Risk Factors” in Part I, Item 1A.

Certain statements contained in this Annual Report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, and are subject to the “safe harbor” created by these sections.

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Diabetes management can vary greatly from person-to-person, creating multiple market segments based on clinical needs and personal preferences.

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

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

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

We have commercially launched seven insulin pump configurations in the United States since 2012 and three insulin pump configurations outside the United States since 2018.

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

In the four-year period ended December 31, 2021, we shipped nearly 330,000 insulin pumps, which is representative of our estimated global installed customer base, assuming the typical four-year reimbursement cycle.

Nearly 240,000 of these pumps were shipped to customers in the United States and nearly 90,000 were shipped to international markets.

Today, the t:slim X2 Insulin Delivery System is our flagship technology solution.

In the four-year period ended December 31, 2022, we shipped approximately 420,000 t:slim X2 insulin pumps, which is representative of our estimated global installed customer base, assuming the typical four-year reimbursement cycle.

Approximately 290,000 of these pumps were shipped to customers in the United States and 130,000 were shipped to customers outside the United States.

Our products are currently available in approximately 25 countries outside the United States.

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

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

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

The majority of our customers use the t:slim X2 with continuous glucose monitoring (CGM) integration.

This allows the t:slim X2 to receive CGM sensor readings, which can then be used in our automated insulin dosing (AID) algorithms, including our Control-IQ technology.

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

Multiple studies have demonstrated that use of Control-IQ technology provides people across all demographics with improved clinical outcomes that are both immediate and sustained.

It was the first system cleared by the U.S.

Food and Drug Administration (FDA) to deliver automatic correction boluses in addition to adjusting insulin to help prevent high and low blood sugar based on continuous glucose monitoring (CGM) readings.

Approximately 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 more than 20 countries.

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 with our pump technology.

Food and Drug Administration (FDA) to deliver automatic correction boluses in addition to adjusting insulin to help prevent high and low blood sugar.

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

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

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

Now available in the countries we serve worldwide, our Tandem Device Updater (TDU) that has allowed approximately 200,000 people to update their t:slim X2 software from a personal computer.

This offering is a competitive advantage that allows us to bring our customers clinical and lifestyle enhancements, such as new developments in our AID technology, CGM integrations and mobile app features.

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

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

In addition to insulin pumps, we sell disposable products that are used together with our pumps and are replaced every few days, including cartridges for storing and delivering insulin, and infusion sets that connect the insulin pump to a user’s body.

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

In the United States, we also offer t:connect, our data management web application that provides users, their caregivers and their healthcare providers with a fast, easy and visual way to display diabetes therapy management data from our pumps, integrated CGMs and supported blood glucose meters.

Our primary research and development and administrative headquarters are located in San Diego, California.

We also operate a manufacturing facility and a warehousing facility in San Diego.

In addition, we maintain offices in Boise, Idaho and in Markham, Ontario, Canada.

We employed approximately 2,000 regular full-time employees as of December 31, 2021.

For the years ended December 31, 2021, 2020 and 2019, our consolidated sales were $702.8 million, $498.8 million, and $362.3 million, respectively.

For the year ended December 31, 2021, our net income was $15.6 million.

For the years ended 2020 and 2019, our net loss was $34.4 million, and $24.8 million, respectively.

Worldwide pump sales accounted for 59%, 63%, and 68% of our total sales, respectively, for the years ended December 31, 2021, 2020 and 2019, while pump-related supplies and accessories accounted for the remainder in each year.

Recent Developments

On February 16, 2022, we announced FDA clearance for the t:connect mobile app, which is the first-ever smartphone application capable of initiating insulin delivery on both iOS and Android operating systems.

The updated t:connect mobile app is designed to offer t:slim X2 insulin pump users the ability to program and cancel bolus insulin requests through the convenience of their compatible smartphone.

The new feature will be offered in the United States for no additional cost to new t:slim X2 insulin pump customers, and to in-warranty customers through remote software updates for both the t:slim X2 insulin pump and t:connect mobile app.

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.

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 pending submissions with the FDA, making regulatory timelines increasingly difficult to predict.

We have adapted well in our commercial operations and customer-facing functions.

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

We are currently developing a return-to-work strategy for the rest of the organization that will incorporate a hybrid approach to meet the needs of our employees, as well as optimize usage of our facilities.

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

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

Information about the COVID-19 global pandemic impact and considerations is set forth above under the caption “Risk Factors” in Part I, Item 1A of this Annual Report and is incorporated herein by reference.

Products Under Development

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

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

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

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

The Tandem Mobi is approximately half the size of our t:slim X2 pump, and is designed for people who seek even greater discretion and flexibility with the use of their insulin pump.

Its features include full pump-control from our mobile application, a 200-unit cartridge, an on-pump bolus button, inductive charging, and an AID algorithm.

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

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

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

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

It will allow a Mobi pump to be worn completely on the user’s body with no tubing.

A goal of this design is to allow people living with diabetes to customize the way they wear their pump with each cartridge change, switching between tubed and tubeless wear configurations, to best suit their personal preferences and lifestyle .

This ergonomic, rechargeable patch pump is being designed to reduce the burden of managing diabetes through its use of pre-filled insulin cartridges and compatibility with AID technology.

This replaces our early-stage development of a disposable tubeless solution that was previously under development.

Extended Wear Infusion Sets

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

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, we are currently developing a unique extended wear infusion set technology.

Device Software

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Control-IQ Advancements

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

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

We are continuing to drive innovation in our algorithms, emphasizing automation, personalization and simplification to continue to improve therapeutic outcomes and provide a positive patient experience.

We have recently completed clinical studies to support expanding the indications of our Control-IQ technology to include people with type 1 diabetes ages 2 to 5 years old.

Additionally, we are initiating a pivotal study to support expanding indications to include people living with type 2 diabetes.

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

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

In November 2020, we entered into an agreement with Dexcom to extend our current collaboration to include integration with their future G7 CGM technology.

Following integrated product development work, and required regulatory clearances or approvals, this will be the fourth generation of Dexcom CGM that we intend to integrate with our devices.

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

We have agreements with Dexcom to extend our current collaboration to include integration with their G7 CGM technology.

Following integrated product development work, this will be the fourth generation of Dexcom CGM that we intend to integrate with our devices.

We have an agreement with Abbott Laboratories (Abbott), to develop and commercialize integrated diabetes solutions that combine Abbott’s FreeStyle Libre CGM technology with our insulin delivery systems.

Following the completion of our integrated product development work, and after obtaining required regulatory clearances or approvals, we intend to focus our initial commercial activities on integrated products in the U.S.

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

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

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

Our key objectives include making these insights easy to understand, making the data available in real time, and providing the information in a flexible format with mobile or web apps.

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

Tandem Source

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

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

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

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.

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

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

For additional information, see the section of this Annual Report under the caption “Business” in Part I, Item 1.

Pump Shipments

From inception through June 2018, we derived nearly all of our sales from the shipment of insulin pumps and associated supplies to customers in the United States.

Starting in the third quarter of 2018, we commenced sales of our t:slim X2 insulin pump in select international geographies.

We consider the number of insulin pump units shipped per quarter domestically and internationally to be an important metric for managing our business.

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 began selling our t:slim X2 insulin pump in select geographies outside the United States and our technology solutions are now available in approximately 25 countries worldwide.

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

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

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

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

In the past four years, we have shipped approximately 420,000 insulin pumps worldwide, which is representative of our estimated global in-warranty installed customer base.

Our ending estimated worldwide installed base has increased approximately 29% year over year.

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

While warranties generally expire four years from the original pump shipment date, those customers that renew typically purchase a subsequent pump within one year from the date of warranty expiration.

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

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

Since inception through December 31, 2021, we have shipped approximately 395,000 pumps worldwide, of which nearly 330,000 insulin pumps were shipped in the last four years, which is representative of our estimated global in-warranty installed customer base, assuming the typical four-year reimbursement cycle.

Nearly 240,000 of these pumps were shipped to customers in the United States, and nearly 90,000 were shipped to international markets.

In the year ended December 31, 2021, we shipped 128,312 insulin pumps worldwide, compared to 90,771 insulin pumps shipped in 2020.

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

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

Approximately 290,000 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 current year and previous five years, which aligns more closely with our typical renewal cycle, were as follows:

United States Pump Unit Shipments

for Each of the Three Months Ended in Respective Years

March 31 June 30 September 30 December 31 Total

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2022 18,658 20,818 20,394 23,684 83,554

2018 4,444 5,447 7,379 12,935 30,205

2019 9,669 12,799 13,814 17,453 53,735

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

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

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

Pump Units Shipped for Each of the Three Months Ended in Respective Years - International

Since commencing sales outside the United States in the third quarter of 2018, we shipped approximately 130,000 pumps and our products are now available in approximately 25 countries.

We 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:

Outside the United States Pump Unit Shipments

for Each of the Three Months Ended in Respective Years

March 31 June 30 September 30 December 31 Total

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

Trends Impacting Financial Results

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

Our operating results have historically fluctuated on a quarterly or annual basis, particularly in periods surrounding anticipated regulatory approvals, the commercial launch of new products by us and our competitors, the commercial launch of our products in geographies outside of the United States and due to general seasonality in the United States.

We expect these periodic fluctuations in our operating results to continue.

We believe that our financial condition and operating results, as well as the decision-making process of our current and potential customers, has been and will continue to be impacted by a number of general trends, including the following:

• market acceptance of our products and competitive products by people with insulin-dependent diabetes, their caregivers and healthcare providers;

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

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

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

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

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

• access to adequate coverage and reimbursement for our current and future products by third-party payors, and reimbursement decisions by third-party payors;

• the magnitude and timing of any changes to our facilities, manufacturing operations and other infrastructure, and factors impacting our ability to access our facilities;

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

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

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

• product recalls impacting, or the suspension or withdrawal of regulatory clearance or approval relating to, our products or the products of our competitors.

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

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

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

• anticipated new product launches;

• increased opportunity to achieve customer renewals as customers become eligible for insurance reimbursement to purchase a new insulin pump at the end of the typical four-year reimbursement cycle;

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

• expansion and new product launches in select international geographies, including initial orders to stock inventories;

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

In addition to working to achieve our sales growth expectations, in the long-term we intend to continue to leverage our infrastructure investments to realize additional manufacturing, sales, marketing and administrative cost efficiencies with the goal of improving our operating margins and ultimately achieving sustained profitability.

We achieved profitability for the first time in the fourth quarter of 2018 and again in the fourth quarters of 2019 and 2020, and were profitable for the year ended December 31, 2021.

Though we have yet to achieve profitability consistently from period to period, we believe we can ultimately achieve sustained profitability by driving incremental sales growth in the United States and international markets, meeting our pump renewal sales objectives, maximizing manufacturing efficiencies on increased production volumes, and leveraging the investments made in our sales, clinical, marketing and customer support organizations.

2022 9,437 11,296 12,113 11,939 44,785

Trends and Uncertainties Impacting Financial Results

Our financial condition and operating results have historically fluctuated on a quarterly or annual basis.

We expect these periodic fluctuations will continue to be impacted by a number of trends and uncertainties, including the following:

Regulatory Approvals

• When there are anticipated, and actual, regulatory approvals for our products, or our competitors’ products, customers may reconsider their purchasing decisions and take additional time to consider FDA approval prior to making their purchase, which could adversely impact our revenue and results of operations.

Similarly, our sales outside the United States are subject to local government regulations.

The requirements and the timeline to

receive these approvals substantially vary from country to country and may impact our ability to expand our international customer base and increase our cost of sales.

• The failure to receive regulatory clearances and approvals may lead to product recalls or the suspension of our products.

Even if a clinical trial meets the required success criteria, the FDA may not accept the results of the trial as sufficient to prove the product’s safety and efficacy.

Our competitors are also vulnerable to these uncertainties, which may affect our customer base and sales.

Product Launches

• We expect our business to be impacted by the introduction of new products, treatment techniques or technologies for the treatment of diabetes by us or our competitors.

Customers may defer their purchasing decisions if they believe a new product may be launched in the future.

The success of our products is variable and we believe it correlates to market acceptance, anticipated product launches and commercial availability.

We currently believe our recently announced Tandem Choice program, and its related financial and accounting impact, my continue to materially impact our business going forward.

• Our revenue and results of operations may be impacted by the failure to secure or retain adequate coverage or reimbursement for our current and future products from third-party payors.

Our competitors are also vulnerable to these uncertainties, which may affect our customer base and sales.

Foreign Markets

• We have expanded our business and launched new products in select geographies outside the United States.

The ordering patterns of our distributors outside the United States is highly variable from period to period, particularly as our distributors continue to gain familiarity with the markets they are operating.

The commencement of operations of our European distribution center in the third quarter also led to downward adjustments to inventory levels from our distributors in late 2022 and early 2023.

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

In the United States, we experience a higher volume of pump shipments in the third and fourth quarters due to the nature of the reimbursement environment.

Other factors that may impact sales across the year include the timing of winter, summer and other seasonal holidays, particularly in our markets outside the United States.

Macroeconomic Factors

• Global economic and market uncertainty, such as recessionary concerns, inflation, changes in discretionary spending and increased interest rates have impacted our customers’ purchasing decisions and the buying patterns of our distributors.

• The lingering effects of COVID-19 have continued to disrupt our relationship with suppliers, third-party manufacturers, healthcare providers, distributors and our existing or potential customers.

We are experiencing higher costs as we navigate these global supply chain challenges.

Components of Results of Operations

We offer products for people with insulin-dependent diabetes.

We commenced commercial sales of our original t:slim insulin pump platform in the United States in the third quarter of 2012 and continued to launch various iterations of that platform during the following years.

In October 2016, we began shipping our flagship pump platform, the t:slim X2 insulin pump.

The t:slim X2 insulin pump platform with remote software update capabilities, now represents 100% of our new pump shipments and is used by nearly all of our in-warranty customers.

Our products also include disposable insulin cartridges and infusion sets, as well as our complementary t:connect, TDU and mobile application products.

We also offer additional accessories including protective cases, belt clips, and power adapters, although sales of these products are not significant.

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

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

Our primary end customers are people with insulin-dependent diabetes.

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

We believe we can continue to increase sales by promoting our products to a greater number of potential customers, caregivers and healthcare providers, although the COVID-19 global pandemic has had, and may continue to have, an adverse impact on our sales.

In the third quarter of 2018, we began the launch of our t:slim X2 hardware platform through distribution partners outside the United States.

Our products are now sold in more than 20 countries, including in Canada, France and Germany.

Our independent international distributor partners perform all sales, customer support and training in their respective markets.

In Canada, we market with a direct sales force and, similar to the United States, use a distributor partner for certain billing and fulfillment activities.

Historically, we have experienced consistent levels of reimbursement for our products in the United States, but we expect the average sales price will vary in international markets based on a number of factors, such as the geographical mix, nature of the reimbursement environment, government regulations and the extent to which we rely on distributor relationships to provide sales, clinical and marketing support.

In general, in the United States we have experienced pump shipments being weighted heavily towards the second half of the year, with the highest percentage of pump shipments expected in the fourth quarter due to the nature of the reimbursement environment.

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

Outside the United States, we do not expect this same impact from seasonality associated with reimbursement, although the quarterly sales trends may be impacted by a number of other factors, including summer vacations, the timing of product launches into new geographies and variability in the ordering patterns of our distributor partners.

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

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

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.

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

Separate from any impacts of the COVID-19 global pandemic, our quarterly sales have historically fluctuated, and may continue to fluctuate substantially in the periods surrounding anticipated and actual regulatory approvals and commercial launches of new products by us or our competitors.

We believe customers may defer purchasing decisions if they believe a new product may be launched in the future.

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

For 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.

We offer products for people with insulin-dependent diabetes in approximately 25 countries.

The t:slim X2 insulin pump is our flagship pump platform.

Our other products include disposable insulin cartridges and infusion sets, as well as our complementary t:connect, TDU and mobile application products.

Our primary customers are the end customers who use our products, non-exclusive distribution partners whose level of service varies based on geography, the healthcare professionals who prescribe our products and the healthcare systems or payors who provide insurance coverage and access to our products.

Our sales may fluctuate from period to period, particularly due to seasonality in the United States associated with the timing of insurance deductible resets, which generally result in the lowest percent of sales the first quarter of each calendar year and the highest percent in the fourth quarter.

In September 2022, the Company began offering the Tandem Choice Program to eligible t:slim X2 customers to provide a pathway to ownership of its newest hardware platform for a fee when available.

Tandem Choice expires on December 31, 2024.

The accounting treatment for Tandem Choice is complex.

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

No election is made by the customer at the time of the initial sale, nor does the right offered to the customer impact the economics associated with how or when the initial pump sale is reimbursed.

If a customer elects to participate in Tandem Choice at a future date beginning with the launch of our next generation hardware platform, we will recognize the existing deferral, incremental 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

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 t:sport cartridge manufacturing in the future.

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

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

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

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

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

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

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

When taking into consideration the differences in reimbursement levels and cost structure, pumps have, and are expected to continue to have, a higher gross profit and gross margin percentage than our pump-related supplies.

Therefore, the percentage of pump sales relative to total sales could have a significant impact on our overall gross margin percentage.

In the event that customers delay their pump purchasing decisions or physicians pause in prescribing new pumps, it is possible that we may experience a higher percentage of pump-related supply sales than anticipated, which in turn could adversely impact our overall gross margin percentage.

However, our overall gross margin percentage may fluctuate in future quarterly periods as a result of numerous factors aside from those associated with production volumes and product mix.

For instance, as a result of the COVID-19 global pandemic we implemented temporary operational changes that introduced variability to our cost of sales, such as supplemental staffing, incremental expenses to protect the health, safety and welfare of our employees working on-site and to enable other employees to work remotely.

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

In addition, as demand for our products increases, we may continue to make additional investments in manufacturing capacity or increase our reliance on third parties for manufacturing-related services, either of which could have a negative impact on our gross margins.

Specifically, we have and will continue to evaluate investing in additional manufacturing equipment to substantially increase our existing capacity in order to meet anticipated long-term demand for our cartridges, which may initially place downward pressure on the gross margin percentage associated with our pump-related supplies.

Other factors impacting our overall gross margin percentage may include the changing percentage of products sold to distributors versus directly to individual customers, varying levels of reimbursement among third-party payors in domestic and international markets, the timing and success of new regulatory approvals and product launches, the impact of the valuation and amortization of employee stock awards on non-cash stock-based compensation expense allocated to cost of sales, changes in warranty estimates, training costs, licensing and royalty costs, cost to support our digital health platforms, cost associated with excess and obsolete inventories, and changes in our manufacturing processes, capacity, costs or output.

Selling, General and Administrative

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

We had approximately 95 sales territories in the United States in 2021 and we commenced an expansion in the fourth quarter of 2021 to approximately 110 sales territories.

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

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

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

While we experienced reduced spending in areas such as travel and trade shows in 2020 and 2021 due to the COVID-19 global pandemic, we may experience additional costs as our employees return to work at our offices and as we adapt to alternative hybrid work models, or as needed to respond to general labor shortages and heightened competition for employees with specialized skills.

Overall, we expect our SG&A expenses, including the cost of our customer support infrastructure, to continue to increase as our customer base grows in the United States and international markets.

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 the longer term, SG&A expenses may also increase due to anticipated costs associated with additional compliance and regulatory reporting requirements.

We have approximately 110 sales territories in the United States, which are generally maintained by sales representatives and field clinical specialists, and supported by managed care liaisons, additional sales management and other customer support personnel.

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

Research and Development

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

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

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.

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, issued in May 2020 (our Notes), changes in the fair value of certain warrants issued in connection with our public offering of common stock in October 2017, and interest earned on our cash equivalents and short-term investments.

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

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

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 expired in October 2022.

Income Tax Expense (Benefit)

Because the Company maintains a full valuation allowance against its net deferred tax assets, income tax expense is expected to primarily consist of current state and foreign cash tax expense as a result of taxable income anticipated or incurred in those jurisdictions.

Income tax expense (benefit) may fluctuate in future quarters due to adjustments related to non-recurring transactions and changes in certain tax assessments.

Because the Company maintains a full valuation allowance against its net deferred tax assets, income tax expense is expected to primarily consist of current federal, state and foreign cash tax expense as a result of taxable income anticipated or incurred in those jurisdictions.

Results of Operations

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(in thousands, except percentages) 2022 2021 2020

Domestic $ 524,907 $ 415,680 $ 302,084

International 177,892 83,150 60,221

United States $ 588,765 $ 524,907 $ 415,680

Outside the United States 212,452 177,892 83,150

Total sales 801,217 702,799 498,830

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Research and development 139,114 92,054 63,574

Acquired in-process research and development 31,039 — —

Total operating expenses 505,834 353,562 268,477

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Comparison of Years Ended December 31, 2022 and 2021

For the year ended December 31, 2021, sales were $702.8 million, which included $177.9 million of international sales.

For the year ended December 31, 2020, sales were $498.8 million, which included $83.2 million of international sales.

The increase in worldwide sales of $204.0 million in 2021, as compared to 2020, was driven by a 41% increase in worldwide pump shipments to 128,312 in 2021, compared to 90,771 in 2020, and a 56% increase in pump-related supply sales.

Sales of pump-related supplies increased primarily due to a 52% growth in our estimated worldwide installed base of customers.

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

For the year ended December 31, 2022, sales were $801.2 million, which included $212.5 million of sales outside the United States.

For the year ended December 31, 2022, we deferred $3.5 million of pump sales as the result of our Tandem Choice program which launched in the third quarter of 2022.

For the year ended December 31, 2021, sales were $702.8 million, which included $177.9 million of sales outside the United States.

The increase in worldwide sales of $98.4 million in 2022, as compared to 2021, was driven by a 30% increase in pump-related supply sales, primarily due to 29% growth in our ending estimated worldwide installed base of customers.

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

Year Ended December 31,

2022 2021 % Change

Pump $ 329,061 $ 319,898 3%

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Other 1,488 1,247 19%

Total Domestic Sales $ 524,907 $ 415,680

Domestic pump sales were $319.9 million for the year ended December 31, 2021, compared to $269.9 million in the year ended December 31, 2020, as pump shipments increased 18% compared to the prior year 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.

Domestic pump shipments were 83,317 in the year ended December 31, 2021 compared to 70,825 in 2020.

Sales of pump-related supplies increased primarily due to a 39% increase in our estimated domestic installed base of customers.

Sales to distributors accounted for 67% and 70% of our total domestic sales for the years ended December 31, 2021 and 2020, respectively.

Our percentage of sales to distributors versus individual customers is principally determined by the mix of customers ordering our products within the period and whether or not we have a contractual arrangement with their underlying third-party insurance payor.

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

Adjustment for Tandem Choice program (3,549) — —%

Total Sales in the United States $ 588,765 $ 524,907 12%

Pump shipments in the United States were flat compared to the prior year while pump sales benefited from an improvement in average selling prices due in part to price increases, as well as a decrease in sales through the distribution channel.

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 year.

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 22% increase in our ending estimated installed base of customers in the United States.

Sales to distributors accounted for 65% and 67% of our total sales in the United States for the years ended December 31, 2022 and 2021, respectively.

Sales in the United States for the year ended December 31, 2022 were also reduced by a deferral of $3.5 million as the result of the launch of our Tandem Choice program in the third quarter.

No comparable program existed in 2021.

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

Year Ended December 31,

2022 2021 % Change

Pump $ 102,846 $ 96,458 7%

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Other 721 862 (16)%

Total International Sales $ 177,892 $ 83,150

International pump sales were $96.5 million for the year ended December 31, 2021, compared to $44.9 million in the year ended December 31, 2020.

Pump shipments increased 126% compared to the prior year due to strong demand for our products as we continue to expand the launch of our Control-IQ technology, which began in the third quarter of 2020 outside the United States.

Sales of pump-related supplies increased primarily due to an 102% increase in our estimated international installed base of customers.

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

This variability was compounded by the changing levels of impact of the global pandemic across the international markets.

Sales to distributors accounted for 95% and 94% of our total international sales for the years ended December 31, 2021 and 2020, respectively.

Total Sales Outside the United States $ 212,452 $ 177,892 19%

Pump shipments outside the United States were flat compared to the prior year, with the increase in pump sales attributable to an increase in average selling prices due in part to price increases, as well as positive fluctuations associated with variations in the geographical mix.

Sales of pump-related supplies benefited from a 46% increase in our ending estimated installed base of customers outside the United States.

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.

We also commenced operations of a centralized distribution center in the third quarter of 2022, which resulted in modest disruption to ordering patterns in the fourth quarter as a result of the affected European distributors adjusting their inventory levels for the reduced transit time.

We expect that this will continue to impact sales levels of pumps and supplies in Europe through the middle of 2023.

Sales to distributors accounted for 96% and 95% of our total sales outside the United States for the years ended December 31, 2022 and 2021, respectively.

Cost of Sales and Gross Profit .

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The gross margin for 2022 was 52%, compared to 54% in 2021.

The increase in our gross profit for the year ended December 31, 2021, was primarily the result of the $204.0 million increase in total sales.

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

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

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

Other factors that have and may continue to impact the gross margin percentage are changes in product and geographical mix and the level of non-cash stock-based compensation allocated to cost of sales.

Pump sales, which have the highest gross margin, were 59% of total worldwide sales for the year ended December 31, 2021, compared to 63% in 2020.

Non-cash stock-based compensation expense allocated to cost of sales was $6.4 million for the year ended December 31, 2021, compared to $8.2 million in 2020, representing 1% and 2% of sales in those periods, respectively.

The increase in our gross profit for the year ended December 31, 2022, was primarily the result of the $98.4 million increase in total sales, driven by increased supply sales.

Gross profit and gross margin benefited from an increase in average selling prices as well as improvement in manufacturing efficiencies and leverage of fixed overhead, offsetting the pressure from product mix.

The gross margin decline in 2022 was related primarily to certain COVID-related pressures, as well as the introduction of the Tandem Choice program.

Gross margin was pressured by more than 1 percentage point 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 experienced in 2022.

We anticipate that the pressure from increased supply chain and material costs experienced in 2022 will continue into the first half of 2023 as we continue to navigate the challenges of the global pandemic and the economic environment.

The impact on gross margin from the Tandem Choice program will fluctuate through the expiration of the program based on the timing of availability of a new hardware platform and the number of eligible customers who ultimately elect to participate.

Selling, General and Administrative Expenses.

SG&A expenses increased 28% to $335.7 million for the year ended December 31, 2022, from $261.5 million for the same period in 2021.

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

The increase compared to 2020 was primarily the result of a $43.9 million increase in salaries, incentive compensation and other employee benefits due to an increase in personnel to support additional sales territories, higher sales and other services in support of our growing installed customer base.

We also experienced a $12.7 million increase in other non-employee discretionary spending for software maintenance, outside consulting and services and supplies.

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 $43.8 million increase in salaries, incentive compensation, non-cash stock based compensation, and other employee benefits due primarily to an increase in personnel to expand the number of sales territories in the United States from approximately 95 in 2021 to 110 in 2022, and provide continued support services for our growing installed customer base.

Discretionary expenses included an increase of $21.5 million, of which a $12.4 million non-recurring charge for facilities consolidation was recorded in the fourth quarter of 2022, and $9.1 million of lease expenses were incurred throughout the year during the construction phase of our new Tech Center facility (see Note 6, “Leases”).

We also experienced an $11.6 million increase in other non-employee discretionary spending, primarily attributable to equipment, outside services, and travel.

Research and Development Expenses .

R&D expenses increased 51% to $139.1 million for the year ended December 31, 2022, from $92.1 million for the same period in 2021.

The increase in R&D expenses was primarily the result of an increase of $20.7 million in salaries, incentive compensation and other employee benefits due to an increase in personnel to support our product development efforts, as well as a $7.8 million increase in other non-employee discretionary spending, including outside consulting and services, equipment and supplies attributable to R&D.

The increase in R&D expenses was primarily the result of an increase of $32.4 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.

We also experienced a $15.0 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 year ended December 30, 2022 represented the value of assets acquired, and acquisition related expenses in connection with our acquisition of Capillary Biomedical (see Note 12, “Acquisitions”).

Other Income (Expense) .

Total other expense, net for the year ended December 31, 2021 was $6.8 million, compared to $28.3 million in 2020.

Other expense for 2021 primarily consisted of $6.0 million of interest expense which included the amortization of debt issuance costs related to our Notes issued in the second quarter of 2020, and a $1.4 million revaluation loss from the change in the fair value of certain warrants.

Other expense for 2020 consisted primarily of an $17.1 million revaluation loss from the change in the fair value of certain warrants due to the appreciation in our stock price during 2020, and $12.8 million of interest expense which included the amortization of debt discount and debt issuance costs related to our Notes issued in the second quarter of 2020.

The decrease in interest expense in 2021 was primarily due to the adoption of ASU No.

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

Interest income and other, for the years ended December 31, 2021 and 2020, primarily consisted of interest earned on our cash equivalents and short-term investments, which decreased in 2021 primarily due to the lower interest rate environment as compared to 2020.

Total other expense, net for the year ended December 31, 2022 was $4,000, compared to $6.8 million in 2021.

Other expense for 2022 primarily consisted of $6.2 million of interest expense which included the amortization of debt issuance costs related to our Convertible Senior Notes, offset by $6.1 million of interest income earned on our cash equivalents and short-term investments.

Other expense for 2021 consisted primarily of $6.0 million of interest expense which included amortization of debt issuance costs related to our Notes, and an $1.4 million revaluation loss from the change in the fair value of certain warrants, offset by $0.7 million of interest income earned on our cash equivalents and short-term investments.

Interest income increased in 2022 primarily due to the higher interest rate environment as compared to 2021.

Income Tax Expense (Benefit).

We recognized income tax expense of $0.3 million on pre-tax income of $15.9 million for the year ended December 31, 2021, compared to an income tax benefit of $1.9 million on a pre-tax loss of $36.3 million for the same period in 2020.

The income tax expense for the year ended December 31, 2021 was primarily attributable to state and foreign income tax expense as a result of current taxable income in those jurisdictions.

The income tax benefit for the year ended December 31, 2020 was primarily due to benefit associated with the release of valuation allowance related to the acquisition of Sugarmate, partially offset by state and foreign income tax expense as a result of current taxable income in those jurisdictions.

We recognized income tax expense of $1.7 million on a pre-tax loss of $92.9 million for the year ended December 31, 2022, compared to income tax expense of $0.3 million on a pre-tax gain of $15.9 million for the same period in 2021.

The income tax expense for the year ended December 31, 2022 was primarily attributable to federal, state and foreign income tax expense as a result of current taxable income in those jurisdictions.

Income tax expense for the year ended December 31, 2021 was primarily attributable to state and foreign income tax expense as a result of current taxable income in those jurisdictions.

Comparison of Years Ended December 31, 2021 and 2020

For the year ended December 31, 2020, sales were $498.8 million, which included $83.2 million of international sales.

For the year ended December 31, 2019, sales were $362.3 million, which included $60.2 million of international sales.

The increase in worldwide sales of $136.5 million in 2020, as compared to 2019, was primarily driven by a $69.4 million increase in pump-related supplies sales due to 52% growth in our estimated worldwide installed base of customers, and a $67.1 million increase in pump sales driven by a 24% increase in worldwide pump shipments to 90,771 in 2020, compared to 73,431 in 2019 which benefited from the effect of certain non-recurring international market dynamics..

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

For the year ended December 31, 2021, sales were $702.8 million, which included $177.9 million of sales outside the United States.

For the year ended December 31, 2020, sales were $498.8 million, which included $83.2 million of sales outside the United States.

The increase in worldwide sales of $204.0 million in 2021, as compared to 2020, was primarily driven by a 41% increase in worldwide pump shipments to 128,312 in 2021, compared to 90,771 in 2020, and a 56% increase in pump-related supply sales.

Sales of pump-related supplies increased primarily due to a 52% growth in our ending estimated worldwide installed base of customers.

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

Year Ended December 31,

2021 2020 % Change

Pump $ 319,898 $ 269,856 19%

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Other 1,247 739 69%

Total Domestic Sales $ 415,680 $ 302,084

Domestic pump sales were $269.9 million for the year ended December 31, 2020, compared to $205.5 million in the year ended December 31, 2019, as pump shipments increased 32% compared to the same period in the prior year due to continued strong demand for our products following the January 2020 domestic launch of our t:slim X2 insulin pump with Control-IQ technology.

Domestic pump shipments were 70,825 in the year ended December 31, 2020 compared to 53,735 in 2019.

Sales of pump-related supplies increased primarily due to a 46% increase in our estimated domestic installed base of customers.

Sales to distributors accounted for 70% and 73% of our total domestic sales for the years ended December 31, 2020 and 2019, respectively.

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

Total Sales in the United States $ 524,907 $ 415,680 26%

Pump sales in the United States were $319.9 million for the year ended December 31, 2021, compared to $269.9 million in the year ended December 31, 2020, as pump shipments increased 18% compared to the prior year due to continued strong demand for our t:slim X2 insulin pump with Control-IQ technology despite the challenging COVID-19 environment which impacted the availability of both customers and healthcare providers.

Sales of pump-related supplies increased primarily due to a 39% increase in our ending estimated installed base of customers in the United States.

Sales to distributors accounted for 67% and 70% of our total sales in the United States for the years ended December 31, 2021 and 2020, respectively.

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

Year Ended December 31,

2021 2020 % Change

Pump $ 96,458 $ 44,851 115%

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Other 862 399 116%

Total International Sales $ 83,150 $ 60,221

International pump sales were $44.9 million for the year ended December 31, 2020, compared to $42.1 million in the year ended December 31, 2019.

The first half of 2019 was positively impacted by the transition of former Animas customers to our products and the fulfillment of certain international pump demand from backlog that existed at the end of 2018 due to supply constraints in prior periods.

Sales of pump-related supplies benefited from an 83% increase in our estimated international installed base of customers.

The ordering patterns of our international distributors for pumps and supplies is highly variable from period to period.

This variability was compounded by the varying levels of impact of the global pandemic across the international markets in which we operate.

Sales to distributors accounted for 94% and 92% of our total international sales for the years ended December 31, 2020 and 2019, respectively.

Total Sales Outside the United States $ 177,892 $ 83,150 114%

Pump sales outside the United States were $96.5 million for the year ended December 31, 2021, compared to $44.9 million in the year ended December 31, 2020.

Pump shipments increased 126% compared to the prior year due to strong demand for our products as we continued to expand the launch of our Control-IQ technology, which began in the third quarter of 2020 outside the United States.

Sales of pump-related supplies increased primarily due to an 102% increase in our ending estimated installed base of customers outside the United States.

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

This variability was compounded by the differing levels of impact from the global pandemic with regard to access to both physicians and customers.

Sales to distributors accounted for 95% and 94% of our total sales outside the United States for the years ended December 31, 2021 and 2020, respectively.

Cost of Sales and Gross Profit .

Our cost of sales for the year ended December 31, 2020 was $238.3 million, resulting in gross profit of $260.5 million, compared to cost of sales of $168.1 million for the year ended December 31, 2019, resulting in gross profit of $194.2 million.

Our cost of sales for the year ended December 31, 2021 was $326.6 million, resulting in gross profit of $376.2 million, compared to cost of sales of $238.3 million and gross profit of $260.5 million for the year ended December 31, 2020.

The gross margin for 2021 was 54%, compared to 52% in 2020.

The increase in our gross profit for the year ended December 31, 2021, was primarily the result of the $204.0 million increase in total sales.

Gross profit and gross margin in 2020 were negatively impacted by royalty costs, for which there was no comparable expense in 2019.

During the year ended December 31, 2020, we recognized $6.7 million of product royalty costs, or approximately one percent of sales, associated with sales of pumps with Control-IQ technology launched in the first quarter of 2020, and free software updates downloaded by existing customers in the United States, as well as in certain international markets where we launched Control-IQ beginning in the third quarter of 2020.

Excluding the impact of royalty, gross margins for both pumps and supplies saw improvement compared to the prior year, but were still slightly pressured by the product mix.

Gross margin was also pressured to a lesser extent by other factors that are more temporary in nature or anticipated to be leveraged through growth in future quarters, including costs associated with COVID-19 risk mitigation, managing pump production to achieve desired stocking levels, the expansion of cartridge manufacturing capacity and increased spending to support our digital health product offerings.

Other factors that have and may continue to have an impact on 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 63% of total worldwide sales for the year ended December 31, 2020, versus 68% in 2019.

Non-cash stock-based compensation expense allocated to cost of sales was $8.2 million for the year ended December 31, 2020, compared to $6.4 million in the same period of 2019, representing 2% of sales in both periods.

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

Pump sales, which have the highest gross margin, were 59% of total worldwide sales for the year ended December 31, 2021, compared to 63% in 2020.

Selling, General and Administrative Expenses.

SG&A expenses increased 28% to $261.5 million for the year ended December 31, 2021, from $204.9 million for the same period in 2020.

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

The increase compared to 2019 was primarily the result of a $32.8 million increase in salaries, incentive compensation and other employee benefits due to an increase in personnel to support additional sales territories, higher sales and other services in support of our growing installed customer base, offset by a $1.3 million decrease in non-cash stock-based compensation expense.

Non-cash stock-based compensation expense allocated to SG&A was $41.6 million in 2020, compared to $42.9 million in 2019.

The increase in non-cash stock-based compensation expense associated with increased headcount in 2020 was more than offset by a decrease in non-cash stock-based compensation expense from the valuation of certain 2018 employee stock option grants which are now fully amortized.

We also experienced increased costs for equipment and supplies, and outside consulting and services of $11.2 million, offset by a $2.9 million decrease in travel costs.

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

We also experienced a $12.7 million increase in other non-employee discretionary spending for software maintenance, outside consulting and services and supplies.

Research and Development Expenses .

R&D expenses increased 45% to $92.1 million for the year ended December 31, 2021, from $63.6 million for the same period in 2020.

The increase in R&D expenses was primarily the result of an increase of $9.9 million in salaries, incentive compensation and other employee benefits due to an increase in personnel to support our product development efforts, as well as an increase of $8.5 million in outside consulting and services, equipment and supplies attributable to R&D.

Non-cash stock-based compensation expense allocated to R&D was $8.7 million in 2020, compared to $8.8 million in 2019.

Other Income (Expense) .

Total other expense, net for the year ended December 31, 2021 was $6.8 million, compared to $28.3 million in 2020.

Other expense for 2020 primarily consisted of a $17.1 million revaluation loss from the change in the fair value of certain warrants due to the appreciation of our stock price during 2020, and $12.8 million of interest expense which included the amortization of debt discount and debt issuance costs related to our Notes issued in the second quarter of 2020.

Other expense for 2019 consisted primarily of an $11.1 million revaluation loss from the change in the fair value of certain warrants due to the appreciation in our stock price during 2019.

Interest income and other, for the years ended December 31, 2020 and 2019 primarily consisted of interest earned on our cash equivalents and short-term investments, and decreased in 2020 primarily due to the lower interest rate environment as compared to 2019.

Other expense for 2020 consisted primarily of a $17.1 million revaluation loss from the change in the fair value of certain warrants, and $12.8 million of interest expense which included the amortization of debt discount and debt issuance costs related to our Notes.

The decrease in interest expense in 2021 was primarily due to the adoption of ASU No.

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

Income Tax Expense (Benefit) .

We recognized an income tax benefit of $1.9 million on a pre-tax loss of $36.3 million for the year ended December 31, 2020, compared to income tax expense of $0.1 million on a pre-tax loss of $24.6 million for the same period in 2019.

Income tax expense for the year ended December 31, 2021 was primarily attributable to state and foreign income tax expense as a result of current taxable income in those jurisdictions.

Liquidity and Capital Resources

At December 31, 2022, we had $616.9 million in cash and cash equivalents and short-term investments.

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

In addition, we had a total available balance of $95.1 million at December 31, 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.

Since the beginning of 2019, we completed the following financing activities:

• In May 2020, we raised $278.7 million in net proceeds from the issuance of the Notes, and used $34.1 million of the net proceeds to pay the cost of the Capped Call Transactions related to the Notes (see Note 7, “Debt”).

• From January 2019 through December 31, 2021, we issued 4,887,211 shares of common stock upon the exercise of stock options, and 804,275 shares of common stock were purchased under our 2013 Employee Stock Purchase Plan, which generated aggregate proceeds of $143.6 million.

• From January 2019 through December 31, 2021, we received proceeds of $1.8 million from the exercise of 509,785 outstanding warrants which were originally issued in connection with our registered public offering of common stock in October 2017.

As of December 31, 2021, there were warrants to purchase 1,000 shares outstanding relating to the October 2017 offering.

• From January 2019 through December 31, 2021, we received proceeds of $2.1 million from the exercise of 34,728 outstanding warrants which were originally issued between August 2011 and August 2012.

As of December 31, 2021, there were warrants to purchase 19,722 warrants outstanding relating to these issuances.

Our historical cash outflows have primarily been associated with cash used for operating activities such as the development and commercialization of our products, the expansion and support of our sales, marketing, clinical and customer support organizations, the expansion of our R&D activities, the expansion of our commercial activities to select international geographies, the acquisition of intellectual property and equity investments, expenditures related to increases in our manufacturing capacity and improvements to our manufacturing efficiency, overall expansion of our facilities and operations, and other working capital needs.

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

We expect our sales performance and the resulting operating income or loss, as well as the status of each of our new product development programs, will significantly impact our cash flow from operations, liquidity position and cash management decisions.

The following table shows a summary of our cash flows for the years ended December 31, 2021, 2020 and 2019:

Our historical cash outflows have primarily been associated with cash used for operating activities such as research and development activities, sales, marketing and commercialization of our products worldwide, expansion of clinical and customer support organizations, the acquisition of intellectual property, equity investments and acquired assets, capital expenditures and debt service costs.

The following table shows a summary of our cash flows for the years ended December 31, 2022, 2021 and 2020 (in thousands):

Year Ended December 31,

(in thousands) 2021 2020 2019

2022 2021 2020

Net cash provided by (used in):

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Operating activities .

Net cash provided by operating activities was $111.4 million for the year ended December 31, 2021, compared to and $24.7 million and $41.9 million, respectively, for the years ended December 31, 2020 and 2019.

The improvement to net cash provided by operating activities for 2021 compared to 2020 was driven by higher sales and gross profit in 2021, which resulted in a $35.7 million improvement to net income when adjusted for non-cash expenses, particularly stock-based compensation expense and depreciation and amortization expense, as well as a $51.0 million increase from working capital changes.

Working capital changes in 2021 primarily consisted of increases in accounts payable, employee-related liabilities, deferred revenue, and other current and long-term liabilities, offset by increases in accounts receivable and inventories, all of which were related to the growth in our business.

Net cash provided by operating activities was $50.5 million for the year ended December 31, 2022, compared to cash provided of $111.4 million and $24.7 million, respectively, for the years ended December 31, 2021 and 2020.

The reduction in net cash provided by operating activities for 2022 compared to 2021 was primarily a result of the $110.2 million increase in net loss, as well as net working capital changes.

Working capital changes during 2022, primarily consisted of increases in inventories, accounts receivable, accounts payable, and operating leases and other current liabilities.

Accounts receivable increased to $114.7 million at December 31, 2022 from $110.7 million at December 31, 2021, as a result of higher sales in the fourth quarter of 2022 as compared to the fourth quarter of 2021.

Inventories increased to $111.1 million at December 31, 2022 from $68.6 million at December 31, 2021.

The decrease in net cash provided by operating activities for 2020 compared to 2019 was driven by net changes in working capital, partially offset by a reduction in net loss when adjusted for non-cash expenses, particularly stock-based compensation expense, the change in the fair value of common stock warrants and non-cash interest expense.

Working capital changes in 2020 primarily consisted of increases in accounts receivable and inventories, offset by increases in employee-related liabilities, deferred revenue, and other current and long-term liabilities, all of which are related to the growth in our business.

Accounts receivable increased to $82.2 million at December 31, 2020 from $46.6 million at December 31, 2019, as a result of higher sales in the fourth quarter of 2020 as compared to the fourth quarter of 2019.

Inventories increased to $63.7 million at December 31, 2020 from $49.1 million at December 31, 2019, primarily to support the growth in our business.

Investing activities .

Net cash used by investing activities was $186.9 million for the year ended December 31, 2021, which was primarily related to $733.4 million of purchases of short-term investments, $14.2 million in purchases of property and equipment, and $9.3 million cash paid for the acquisition of intangible assets and equity investments, offset by $570.0 million in proceeds from maturities and sales of short-term investments.

Net cash used by investing activities was $296.1 million for the year ended December 31, 2020, which was primarily related to purchases of short-term investments of $497.1 million using the net proceeds from the issuance of our convertible senior notes in May of 2020, and $27.4 million in purchases of property and equipment, offset by $233.3 million in proceeds from maturities and sales of short-term investments.

Net cash used by investing activities was $57.0 million for the year ended December 31, 2019, which was primarily related to purchases of short-term investments of $164.6 million and $19.5 million in purchases of property and equipment, offset by $127.2 million in proceeds from maturities of short-term investments.

Net cash provided by investing activities was $33.2 million for the year ended December 31, 2022, which was primarily related to $569.5 million in proceeds from maturities and redemptions of short-term investments, offset by $467.7 million of purchases of short-term investments, $34.1 million in purchases of property and equipment, $25.7 million for the acquisition of Capillary Biomedical, including $1.0 million of transaction costs, and $8.9 million cash paid for purchases of intangible assets and strategic investments.

Net cash used by investing activities was $186.9 million for the year ended December 31, 2021, which was primarily related to $733.4 million of purchases of short-term investments, $14.2 million in purchases of property and equipment, and $9.3 million cash paid for purchases of intangible assets and strategic investments, offset by $570.0 million in proceeds from maturities and redemptions of short-term investments.

Financing activities .

Net cash provided by financing activities was $16.9 million for the year ended December 31, 2022, which primarily consisted of proceeds from the issuance of common stock under our stock plans.

Net cash provided by financing activities was $51.9 million for the year ended December 31, 2021, which primarily consisted of proceeds from the issuance of common stock under our stock plans.

Net cash provided by financing activities was $314.4 million for the year ended December 31, 2020, which primarily consisted of $278.7 million in proceeds from the issuance of the Convertible Senior Notes which was partially offset by $34.1 million in payments related to the Capped Call Transactions (see Note 7, “Debt”), and $66.9 million in proceeds from the issuance of common stock under our stock plans.

Net cash provided by financing activities was $24.2 million for the year ended December 31, 2019, which was primarily the result of proceeds of $23.9 million 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 timing of any additional financings, and the net proceeds raised from such financings;

• the timing and amount of the exercise of outstanding warrants, and proceeds from the issuance of equity awards pursuant to employee stock plans;

• the timing and amount of proceeds from the issuance of equity awards pursuant to employee stock plans;

• fluctuations in gross margins and operating margins;

• fluctuations in working capital, including changes in accounts receivable, inventories, accounts payable, employee-related liabilities, and operating lease liabilities.

• 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;

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• payments under licensing, development and commercialization agreements.

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

In addition, from time to time we may consider opportunities to acquire or license other products or technologies that may enhance our product platform or technology, expand the breadth of our markets or customer base, or advance our business strategies.

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

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

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

If we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, we may incur significant financing or debt service costs, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders.

There can be no assurance that financing will be available on acceptable terms, or at all.

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

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

The Notes were issued pursuant to an Indenture, dated May 15, 2020, between the Company and U.S.

Bank National Association, as trustee.

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

Convertible Senior Notes

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

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

The Notes are the Company’s senior unsecured obligations.

The Notes are senior unsecured obligations.

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

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Total 2023 2024 2025

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

Principal amount of convertible senior notes (1)

$ 287,500 $ — $ — $ 287,500

Contractual interest 10,782 4,313 4,313 2,156

Total $ 298,282 $ 4,313 $ 4,313 $ 289,656

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

Promissory Note Payable

In connection with our acquisition of Capillary Biomedical, Inc.

(see Note 12, “Acquisitions”), we assumed $ 4.7 million of long-term debt.

The promissory note accrues interest at the rate of 5% per year, becomes due and payable upon the first sale or license of the commercialized product, and is included as a component of other long-term liabilities on the consolidated balance sheet at December 31, 2022.

Contractual Obligations & Off-Balance Sheet Arrangements

Contractual Obligations

The Company leases general office space, laboratory, manufacturing and warehouse facilities, and equipment under noncancelable operating leases for use in our operations.

Operating Lease Obligations

We lease general office space, laboratory, manufacturing and warehouse facilities, and equipment under noncancelable operating leases for use in our operations.

For a description of our contractual obligations related to leases at December 31, 2022, see Note 6 “Leases” to the consolidated financial statements in Part II, Item 8 of this Annual Report.

The Company has agreements with suppliers and other parties to purchase inventory, other goods and services and long-lived assets.

Purchase Order Commitments

We have agreements with suppliers and other parties to purchase inventory, other goods and services and long-lived assets.

For a description of our contractual obligations related to purchase order commitments at December 31, 2022, see Note 13 “Commitments and Contingencies” to the consolidated financial statements in Part II, Item 8 of this Annual Report.

Acquisition-related Contingent Consideration

In connection with our acquisition of AMF Medical SA completed in January of 2023 (see Note 15, “Subsequent Event” to the consolidated financial statements in Part II, Item 8 of this Annual Report), the total consideration includes cash paid at the closing of the transaction and additional contingent earnout payments.

The additional earnout payments of up to CHF 129.6 million, in aggregate, become payable upon the achievement of certain milestones and are comprised of a payment of up to CHF 38.4 million upon the successful completion of key development milestones over the next two years, and a payment of up to CHF 91.2 million upon obtaining regulatory clearance of an automated controller enabled (ACE) pump by the United States Food and Drug Administration.

Off-Balance Sheet Arrangements

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Actual results may differ materially from these estimates.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in this Annual Report, we believe that the following accounting policies are the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

While our significant accounting policies are more fully described in Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in this Annual Report, we believe that the following accounting policies are the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

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When there is no standalone value for the complementary product, we determine its value by applying the expected cost plus a margin approach and then allocate the residual to the insulin pumps.

For purposes of evaluating the Tandem Choice Program, we have determined that the ability for a customer to upgrade to a new technology, represents a material right because the pricing inherent in such option provides the customer with a discount that is incremental to the range of discounts that would otherwise be granted for the related goods and services to comparable customers.

The standalone selling price for the Choice Right was estimated based on the adjusted market assessment approach and contemplates the likelihood that the respective option will be exercised.

Warranty Reserve

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The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.

The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement.

While we believe we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes.

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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-K

Item 7. Management’s Discussion and Analysis