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Item 2. Management’s Discussion and Analysis

2023-05-03 compared with 2022-11-02 · 164 added, 304 removed, 157 unchanged (75% of the section changed)

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

You should read the following discussion and analysis together with our financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (Quarterly Report).

This Quarterly Report contains forward-looking statements within the meaning of the federal securities laws, which statements are subject to considerable risks and uncertainties.

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Although we believe that these forward-looking statements are based upon reasonable assumptions, they are subject to numerous known and unknown risks and uncertainties and are made in light of information currently available to us.

Our actual financial condition and results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below in the section entitled “Risk Factors” in Part II, Item 1A, and elsewhere in this Quarterly Report, as well as the other public filings we make with the Securities and Exchange Commission.

Our actual financial condition and results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below in the section entitled “Risk Factors” in Part II, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2022 (Annual Report), which is incorporated herein by reference, as well as in the other public filings we make with the Securities and Exchange Commission.

You should read this Quarterly Report with the understanding that our actual future financial condition and results may be materially different from and worse than what we expect.

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

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

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

In the four-year period ended March 31, 2023, we shipped approximately 430,000 t:slim X2 insulin pumps, which is representative of our in-warranty global installed customer base, assuming the typical four-year reimbursement cycle.

Approximately 300,000 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.

Our Control-IQ technology launched in the United States in the first quarter of 2020, and is now available in all of the countries in which we operate.

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

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 allows people to update their t:slim X2 software from a personal computer.

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

Now available in the countries we serve worldwide, our Tandem Device Updater (TDU) 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.

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

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

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

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

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.

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 and any resulting changes to general economic conditions in the countries in which we operate and sell our products.

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

Products Under Development

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Delivery Devices

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

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

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

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

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

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

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 people living with diabetes to customize the way they wear their pump with each cartridge change to best suit their personal preferences and lifestyle.

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

Infusion Sets

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 Sigi™ 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 product replaces our early-stage 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, in July 2022 we acquired infusion set developer, Capillary Biomedical, Inc.

(Capillary Biomedical).

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

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 recently completed clinical studies to support expanding the indications of our Control-IQ technology to include children 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.

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

and Canada, with additional geographies considered in the future.

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, we intend to launch in the United States, and expand to additional geographies after obtaining regulatory clearances or approvals, where required.

Data and Insights

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

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

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

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 through 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 be deployed globally.

Expanding the capabilities of our t:connect data management application, which is available for customers in the United States, Tandem Source is our second-generation web-based data management application that is being designed to be deployed globally.

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.

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From inception in 2012 through June 2018, we derived nearly all of our sales from the shipment of insulin pumps and associated supplies to customers in the United States.

Starting in the third quarter of 2018, we began selling our t:slim X2 insulin pump in select geographies outside the United States and now offer our technology solutions in more than 20 countries worldwide.

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.

In the past four years, we have shipped more than 400,000 insulin pumps worldwide, which is representative of our estimated global in-warranty installed customer base.

Our estimated worldwide installed base has increased approximately 35% compared to the third quarter of 2021.

In the past four years, we have shipped approximately 430,000 insulin pumps worldwide, which is representative of our global in-warranty installed customer base.

Our ending estimated worldwide installed base increased approximately 22% 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, our typical renewal cycle, or time from original pump purchase to a subsequent pump purchase by the same customer, averages five years.

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

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

More than 280,000 pumps were shipped to customers in the United States in the past four years, which aligns with the standard four-year warranty period.

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

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

While the majority of our insulin pump sales from initial commercialization through the current period have been generated by sales to new customers, the opportunity to make subsequent sales of renewal insulin pumps to existing customers increases each period as an escalating number of customer warranties expire.

With programs dedicated to customer retention efforts, we expect such renewal purchases to represent an increasing portion of our pump shipments over time.

Approximately 300,000 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 each of the previous five years, which aligns more closely with our typical renewal cycle, were as follows:

United States Pump Unit Shipments

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

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

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

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

2023 17,003 N/A N/A N/A 17,003

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.

The ordering patterns of our distributors outside the United States for pumps and supplies has historically been highly variable from period to period due to a number of factors including summer vacations, the timing of product launches into new geographies and variability in the ordering patterns of our distributor partners.

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 for the current year and each of the prior five years were as follows:

Outside the United States Pump Unit Shipments

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

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

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 of the medical insurance plans used by our customers and the customers of our distributors;

• incidence of disease or illness, including the COVID-19 global pandemic, that may impact customer purchasing patterns or disrupt our supply chain, or create uncertainty or delay with respect to regulatory approvals;

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

• the timing of holidays and summer vacations, which may vary by geography and may be further influenced by the lifting or relaxation of COVID-19 related restrictions and broader availability of vaccines;

• the buying patterns of our distributors and other customers;

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

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

• 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:

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

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

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

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

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

• 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 geographies outside the United States, including initial orders to stock inventories;

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

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

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

We believe we can ultimately achieve sustained profitability by driving incremental sales growth in markets worldwide, meeting our pump renewal sales objectives, maximizing manufacturing efficiencies on increased production volumes, and leveraging the investments made in our sales, clinical, marketing and customer support organizations.

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

2023 6,052 N/A N/A N/A 6,052

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 and Actions

• Sales of new products are subject to local government regulations.

The requirements and timelines to receive regulatory clearance can vary substantially from country to country and delays may impact our ability to expand our worldwide customer base and bring products to market in a competitive timeframe.

These delays, or failure to receive regulatory approval could adversely impact our revenue and results of operations.

• Any adverse event involving any products that we distribute could result in future corrective actions, such as recalls or customer notifications, or regulatory agency action, which could include inspection, mandatory recall or other enforcement action.

Any action by regulatory bodies against us, and any regulatory challenges we encounter could have a negative impact on our product sales and harm our reputation.

Product - Launches and Reimbursement

• We expect our business to be impacted by the introduction of new diabetes devices and treatments by us or our competitors.

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

We anticipate that our recently announced Tandem Choice program, and its related financial and accounting impact, my continue to materially impact our business until the conclusion of the program.

• 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.

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.

The commencement of utilizing a European distribution center beginning in the third quarter of 2022 also led to downward adjustments of 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 typically 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 rising rate of inflation and 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 macroeconomic 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 pressures related to the broader economic environment, new competitive product launches and the COVID-19 global pandemic have had, and may continue to have, an adverse impact on our sales.

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

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

Today, distributor orders are primarily fulfilled in the United States.

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

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

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

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

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

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

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

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

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

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

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

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.

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

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 reflect in a significant decline in pump shipments from any fourth quarter to the following first quarter.

Therefore, the lowest percentage of sales is reported in the first quarter of each calendar year and the highest percentage in the fourth quarter.

In September 2022, we 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 has a high degree of complexity.

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

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

The accounting treatment for Tandem Choice is complex.

Initially, the program requires the deferral of some portion of sales for shipments of eligible pumps, which began 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.

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

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 to create capacity for Tandem Mobi cartridge manufacturing in the future.

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

Over the long term, we expect our overall gross margin percentage, which for any given period is calculated as sales less cost of sales divided by sales, to improve, as our pump sales increase, as we launch new portfolio products with lower costs to manufacture, improved average selling prices and leverage of our fixed overhead costs.

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

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

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

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 are experiencing higher costs as we manage global supply challenges and anticipate that this will continue for the remainder of 2022 and first half of 2023.

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

Other factors impacting our overall gross margin percentage may include the changing percentage of products sold to distributors versus directly to individual customers, varying levels of reimbursement among third-party payors in individual markets worldwide, the timing and success of new regulatory approvals and product launches, changes in warranty estimates, training costs, licensing and royalty costs, cost to support our digital health platforms, cost associated with excess and obsolete inventories, and changes in our manufacturing processes, capacity, costs or output.

Selling, General and Administrative

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

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

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

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 2021 due to the COVID-19 global pandemic, we may experience additional costs as our employees return to work at our offices and as we adapt to alternative hybrid work models, or as needed to respond to general labor shortages and heightened competition for employees with specialized skills.

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

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

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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.

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

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

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

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

Other income and expense primarily consists of interest earned on our cash equivalents and short-term investments, foreign currency transaction gains and losses, and interest expense which includes the amortization of debt issuance costs related to our 1.50% Convertible Senior Notes due May 2025.

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

Three Months Ended

September 30, Nine Months Ended September 30,

(in thousands, except percentages) 2023 2022

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Total operating expenses 210,724 106,431

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

Operating loss (127,817) (15,338)

Other income (expense), net:

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Interest expense (1,634) (1,516)

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

Total other income (expense), net 4,231 (1,101)

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

Loss before income taxes (123,586) (16,439)

Income tax expense (benefit) 287 (1,724)

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

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

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

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

Net loss $ (123,873) $ (14,715)

Comparison of the Three Months Ended March 31, 2023 and 2022

For the three months ended March 31, 2023, sales were $169.4 million, which included $38.1 million of sales outside the United States.

For the three months ended March 31, 2023, we deferred $2.0 million of pump sales as the result of Tandem Choice, which launched in the third quarter of 2022.

Sales were $175.9 million for the same period in 2022, which included $44.6 million of sales outside the United States.

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

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

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

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

Three Months Ended

September 30,

2023 2022 % Change

Pump $ 66,457 $ 73,497 (10)%

Infusion sets 44,839 37,725

Cartridges 20,122 16,289

Other 378 321

Supplies and other 66,808 57,786 16%

Deferral for Tandem Choice program (2,023) — —%

Total Sales in the United States $ 131,242 $ 131,283 —%

Pump sales in the United States were $80.7 million for the third quarter of 2022, compared to $78.8 million in the third quarter of 2021 as pump shipments increased 1% and pump average selling prices improved compared to the same period in 2021.

Pump shipments in the United States were 20,394 in the third quarter of 2022, compared to 20,296 in the third quarter of 2021.

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

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 28% increase year over year in our estimated installed base of customers in the United States.

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

Pump sales in the United States were $66.5 million for the first quarter of 2023, compared to $73.5 million in the first quarter of 2022 as pump shipments decreased 9% compared to the same period in 2022.

We continued to face challenging marketplace dynamics and economic conditions, with inflation and the threat of recession impacting pump purchasing decisions.

Sales of pump-related supplies increased 15% primarily due to an 18% increase year over year in our ending estimated installed base of customers in the United States.

Sales to distributors accounted for 65% and 65% of our total sales in the United States for the three months ended March 31, 2023 and 2022, respectively.

Sales in the United States for the three months ended March 31, 2023 were reduced by a deferral of $2.0 million as the result of our Tandem Choice program which launched in the third quarter of 2022.

No comparable program existed in the first quarter of 2022.

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

Three Months Ended

September 30,

Pump $ 27,385 $ 23,762

Infusion sets 21,964 16,175

Cartridges 8,996 6,269

Other 167 315

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

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

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

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

Sales of pump-related supplies benefited from a 57% increase in our estimated installed base of customers outside the United States.

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

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

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

Cost of Sales and Gross Profit .

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

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

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

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

More specifically, gross margin was pressured by approximately 2 percentage points from increased pump material costs due to the use of alternative sourcing for certain raw materials to reduce the risk of component shortages in the near-term and higher freight costs consistent with our experience in the second quarter of 2022.

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

Other factors that have and may continue to impact the gross margin percentage are changes in product and geographical mix.

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

Selling, General and Administrative Expenses.

SG&A expenses increased 30% to $84.1 million for the three months ended September 30, 2022, from $64.9 million for the same period in 2021.

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

The increase compared to 2021 was primarily the result of an $11.8 million increase in salaries, incentive compensation, non-cash stock-based compensation, and other employee benefits due to an increase in personnel to support additional sales territories, higher sales and other services in support of our growing installed customer base.

Non-cash stock-based compensation expense allocated to SG&A was $15.1 million for the three months ended September 30, 2022, compared to $11.3 million in the same period in 2021.

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

Research and Development Expenses .

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

The increase in R&D expenses was primarily the result of an increase of $8.1 million in salaries, incentive compensation, non-cash stock-based compensation, and other employee benefits due to an increase in personnel to support our product development efforts.

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

We also experienced a $4.6 million increase in other non-employee discretionary spending, including outside consulting and services, clinical trial expenses, information technology and equipment costs attributable to R&D.

Acquired In-Process Research and Development Expenses.

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

Other Income (Expense), Net .

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

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

Other expense, net for the three months ended September 30, 2021 primarily consisted of $1.5 million of interest expense which included the amortization of debt issuance costs related to our Notes.

Income Tax Expense (Benefit ).

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

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

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

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

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

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

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

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

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

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

Nine Months Ended September 30,

Pump $ 235,849 $ 221,724

Infusion sets 128,490 97,251

Cartridges 57,502 44,136

Other 1,144 914

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

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

Pump average selling prices also improved over the prior period.

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

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

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

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

Nine Months Ended September 30,

2023 2022 % Change

Pump $ 18,247 $ 22,332 (18)%

Infusion sets 57,258 41,074

Cartridges 24,539 16,878

Other 419 526

Supplies and other 19,894 22,292 (11)%

Total Sales Outside the United States $ 38,141 $ 44,624 (15)%

Pump sales outside the United States were $75.5 million for the first nine months of 2022, compared to $70.3 million in the first nine months of 2021, as the 1% decrease in pump shipments was more than offset by an increase in average selling prices compared to the same period in the prior year.

Sales of pump-related supplies increased 41% primarily due to a 57% increase in our estimated installed base of customers outside the United States.

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

This variability was compounded during the period by the differing levels of impact from the global pandemic with regard to both access to physicians and customers, as well as shipping logistics across the more than 20 markets in which we operate outside the United States.

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

Pump sales outside the United States were $18.2 million for the first quarter of 2023, compared to $22.3 million in the first quarter of 2022.

We commenced operations of a centralized European distribution center in late 2022, which resulted in significant disruption to distributor ordering patterns in the first quarter of 2023 as affected distributors reduced their inventory levels to accommodate for the reduced transit time.

As a result, pump shipments decreased 36% compared to the same period in the prior year and supply orders declined as well.

We expect that this transition will continue to impact sales of pumps and supplies in Europe through the second quarter of 2023.

The decrease in pump sales was offset by a 27% increase in average selling prices due primarily to geographical mix.

Sales of pump-related supplies benefited from a 33% increase in our ending estimated installed base of customers outside the United States.

Sales to distributors accounted for 94% and 96% of our total sales outside the United States for the three-month periods ended March 31, 2023 and 2022, respectively.

Cost of Sales and Gross Profit

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

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

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

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

Gross margin was pressured by approximately 2 percentage points from increased pump material costs due to the use of alternative sourcing for raw materials to reduce the risk of component shortages in the near-term and higher freight costs we are experiencing in 2022.

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

Pump sales, which have the highest gross margin, were 54% of total worldwide sales in the first nine months of 2022 compared to 59% in the same period in 2021.

Our cost of sales for the three months ended March 31, 2023 was $86.5 million , resulting in gross profit of $82.9 million, compared to cost of sales of $84.8 million and gross profit of $91.1 million for the same period in 2022.

The gross margin for the three months ended March 31, 2023 and 2022 was 49% and 52%, respectively.

Gross profit for the three months ended March 31, 2023 was most meaningfully impacted by the decrease in sales associated with the European distribution center transition.

Furthermore, gross profit was reduced by $2.0 million from the impact of Tandem Choice, resulting in a gross margin reduction of 1 percentage point.

The impact on gross margin from our 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.

Gross margin benefited from improvement in average selling prices and reduced manufacturing costs, offset by certain high-cost raw materials, unfavorable product mix and fluctuations in other non-manufacturing costs associated with lower sales.

More specifically, the higher cost of raw materials stemmed from supply chain challenges in the pandemic, where certain pump materials were sourced from alternative suppliers to reduce the risk of component shortages.

Consistent with recent quarters, these higher supply and freight costs resulted in a one percentage point reduction to gross margin.

The remaining high-cost inventory is anticipated to be consumed by mid-2023.

Operating Expenses

Our operating expenses for the three months ended March 31, 2023 were $210.7 million, compared to $106.4 million for the three months ended March 31, 2022.

The increase was mainly driven by $78.8 million of in-process research and development expenses in connection with our recent acquisition of AMF Medical, for which there was no comparable expense in the first quarter of 2022.

Incremental personnel and discretionary spending attributable to our recent acquisitions was $4.0 million.

Additionally, we incurred certain non-recurring employee severance costs of $2.7 million in the first quarter of 2023, with no comparable expense in 2022.

Selling, General and Administrative Expenses.

SG&A expenses increased 25% to $238.0 million for the nine months ended September 30, 2022, from $190.0 million for the same period in 2021.

SG&A expenses increased 23% to $89.8 million for the three months ended March 31, 2023, from $73.3 million for the same period in 2022.

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

The increase compared to 2021 was primarily the result of a $34.7 million increase in salaries, incentive compensation, non-cash stock-based compensation, and other employee benefits due to an increase in personnel to support additional sales territories, higher sales and other services in support of our growing installed customer base.

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

We also experienced a $13.3 million increase in facilities and non-employee discretionary spending, including outside services, travel, and software maintenance and supplies costs.

The increase compared to 2022 was primarily the result of an $8.6 million increase in salaries, incentive compensation, non-cash stock-based compensation, and other employee benefits due primarily to an increase in personnel to provide continued support services for our growing installed customer base.

SG&A expenses for the first quarter of 2023 also included a non-recurring charge of $2.1 million recorded in connection with certain severance costs.

We also experienced a $5.8 million increase in facilities and other non-employee discretionary spending, primarily attributable to outside consulting, outside services and travel.

Research and Development Expenses .

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

The increase in R&D expenses was primarily the result of an increase of $24.4 million in salaries, incentive compensation, non-cash stock-based compensation, and other employee benefits due to an increase in personnel to support our product development efforts.

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

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

R&D expenses increased 27% to $42.2 million for the three months ended March 31, 2023, from $33.2 million for the same period in 2022.

The increase in R&D expenses was primarily the result of a $7.1 million increase in salaries, incentive compensation, non-cash stock-based compensation, severance, and other employee benefits due to an increase in personnel to support our product development efforts.

We also experienced a $1.9 million increase in other non-employee discretionary spending, including clinical trial expenses and equipment costs.

Acquired In-Process Research and Development Expenses.

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

Acquired IPR&D expenses of $78.8 million for the three months ended March 31, 2023 represented the value of assets acquired, and acquisition related expenses, in connection with our acquisition of AMF Medical (see Note 12, “Acquisitions”).

Other Income (Expense), Net

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

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

Other expense, net for the nine months ended September 30, 2021 primarily consisted of $4.5 million of interest expense which included the amortization of debt issuance costs related to our Notes, and a $1.4 million revaluation loss from the change in the fair value of certain common stock warrants, offset by $0.7 million of interest income earned on our cash equivalents and short-term investments.

Total other income (expense), net for the three months ended March 31, 2023 was $4.2 million income, compared to $1.1 million expense in the same period in 2022.

Other income, net for the three months ended March 31, 2023 primarily consisted of $4.2 million of interest income earned on our cash equivalents and short-term investments, and $1.6 million in foreign currency transaction gains, partially offset by $1.6 million of interest expense which included the amortization of debt issuance costs related to our Convertible Senior Notes.

Other expense, net for the three months ended March 31, 2022 primarily consisted of $1.5 million of interest expense which included the amortization of debt issuance costs related to our Notes.

Income Tax Expense (Benefit)

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

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

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

We recognized income tax expense of $0.3 million on a pre-tax loss of $123.6 million for the three months ended March 31, 2023, compared to an income tax benefit of $1.7 million on pre-tax loss of $16.4 million for the three months ended March 31, 2022.

Income tax expense for the three months ended March 31, 2023 was primarily attributable to state and foreign income tax expense as a result of current taxable income in certain jurisdictions.

The income tax benefit for the three months ended March 31, 2022 was primarily attributable to the Company’s pre-tax loss position, offset by state and foreign income tax expense as a result of current taxable income in certain jurisdictions.

Liquidity and Capital Resources

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

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

At March 31, 2023, we had $519.6 million in cash and cash equivalents and short-term investments.

In addition, we had a total available balance of $95.1 million at March 31, 2023 under our Revolving Line of Credit (Line of Credit), which expires in May 2025 (see Note 7, “Debt”).

We believe that our cash and cash equivalents, short-term investments, borrowing availability under the Line of Credit, and future cash flows from operations will be sufficient to fund our ongoing core business activities.

Historically, our principal sources of cash have included cash collected from product sales, private and public offerings of equity securities, exercises of employee stock awards, and debt financing.

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

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

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

Nine Months Ended September 30,

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 three months ended March 31, 2023 and 2022 (in thousands):

Three Months Ended March 31,

Net cash provided by (used in):

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Effect of foreign exchange rate changes on cash 441 3

Net increase in cash and cash equivalents $ 52,605 $ 17,762

Net increase (decrease) in cash and cash equivalents $ (44,755) $ 22,500

Operating Activities .

Net cash provided by operating activities was $44.6 million for the nine months ended September 30, 2022, compared to $91.7 million in the same period in 2021.

The reduction in net cash provided by operating activities for 2022 compared to 2021 was primarily a result of the $83.5 million increase in net loss as well as working capital changes.

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

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

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

Net cash used in operating activities was $18.3 million for the three months ended March 31, 2023, compared to $13.8 million cash provided by operating activities in the same period in 2022.

The reduction in net cash provided by operating activities for 2023 compared to 2022 was primarily a result of the increase in net loss, which included $78.8 million of acquired in-process research and development expenses in 2023, as well as working capital changes.

Working capital changes during the three months of 2023 primarily consisted of increases in inventories and prepaid and other current assets, offset by a decrease in accounts receivable.

Accounts receivable decreased to $91.4 million at March 31, 2023, from $114.7 million at December 31, 2022.

Inventories increased to $131.6 million at March 31, 2023 from $111.1 million at December 31, 2022.

Investing Activities .

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

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

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

Net cash used in investing activities was $26.3 million for the three months ended March 31, 2023, which was primarily related to $109.1 million of purchases of short-term investments, $69.5 million for the acquisition of AMF Medical, including transaction costs (see Note 12, “Acquisitions”), and $8.8 million in purchases of property and equipment, offset by $163.1 million in proceeds from maturities and redemptions of short-term investments.

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

Financing Activities.

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

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

Net cash used in financing activities was $0.5 million for the three months ended March 31, 2023, which primarily consisted of payments for tax withholdings related to the issuance of common stock under our stock plans.

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

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.

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

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

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

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

The Notes are the Company’s senior unsecured obligations.

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

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

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

Total Remaining in 2022 2023 2024 2025

Contractual interest $ 12,938 $ 2,156 $ 4,313 $ 4,313 $ 2,156

Principal amount of convertible senior notes (1)

287,500 — — — 287,500

Total $ 300,438 $ 2,156 $ 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.

Critical Accounting Policies

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

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

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

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

We evaluate our estimates and judgments on an ongoing basis.

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

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

There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies Involving Management Estimates and Assumptions,” included in our Annual Report on Form 10-K for the year ended December 31, 2021, except for the accounting policies and estimates related to an asset acquisition and Tandem Choice, which are included in Note 2, “Summary of Significant Accounting Policies” in Part I, Item 1 of this Quarterly Report.

Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions.

Off-Balance Sheet Arrangements

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

As of March 31, 2023, we are a party to certain standby letter of credit arrangements in support of our operating lease obligations.

For a description of the arrangements we consider significant, see Note 13 “Commitments and Contingencies” to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis