TANDEM DIABETES CARE INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis together with our financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (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. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Quarterly Report, other than statements of historical fact, are forward-looking statements. You can identify forward-looking statements by the use of words such as “may,” “will,” “could,” “anticipate,” “expect,” “intend,” “believe,” “continue” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to such statements. In particular, forward-looking statements contained in this Quarterly Report may relate to, among other things, our future or assumed financial condition, results of operations, liquidity, trends impacting our financial results, business forecasts and plans, research and product development plans, manufacturing plans, strategic plans and objectives, capital needs and financing plans, product launches, geographic expansion, distribution plans, production capacity, clinical trials, regulatory approvals, competitive position and the impact of changes in the competitive environment, the impact of the COVID-19 global pandemic on our business, supply chain, and the businesses of our contract manufacturers and suppliers, integration of acquisitions and partner technologies, and the application of accounting guidance. We caution you that the foregoing list may not include all of the forward-looking statements made in this Quarterly Report. Our forward-looking statements are based on our management’s current assumptions and expectations about future events and trends, which affect or may affect our business, strategy, operations or financial performance. 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, 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. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements speak only as of the date they were made and, except to the extent required by law or the rules of the Nasdaq Global Market, we undertake no obligation to update or review any forward-looking statement because of new information, future events or other factors. We qualify all of our forward-looking statements by these cautionary statements. Overview We are a medical device company focused on the design, development and commercialization of technology solutions for people living with diabetes. Diabetes management can vary greatly from person-to-person, creating multiple market segments based on clinical needs and personal preferences. 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. 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. 22 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. 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. 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) 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. 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 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 Our products under development support our strategy of developing insulin delivery systems as part of a therapy management portfolio that is designed to improve patient experience and outcomes. Our product development efforts fall into three pillars of innovation: delivery devices, device software including algorithms, and data and insights. Delivery Devices We are developing a family of delivery device solutions to meet the varying needs of people living with type 1 and type 2 diabetes by providing choice within our 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. Mobi 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. t:slim X3 Advancing our flagship t:slim platform, the t:slim X3 is being designed to provide a modernized user interface and even greater usability for our planned feature updates. It is also being designed to include enhanced technology, such as greater processing power and capacity to support our advanced algorithms, as well as increased battery life, improved durability, and wireless software update capabilities. 23 Mobi: Tubeless This offering is being developed to provide an alternative tubeless infusion site option for Mobi pump users. 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 . Sigi 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, we are currently developing a unique extended wear infusion set technology. Device Software Our device software is used to control our pumps either directly through the pump’s interface or through our mobile application. It also includes our AID technology and the software used to support remote pump updatability. Control-IQ Advancements We are 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. Mobile Control We are working to expand our mobile control capability. In the future, our t:connect mobile app is planned to include additional pump control features, such as full operation of our Mobi pump. Integration Building a robust ecosystem and portfolio around our flagship insulin pumps requires product development efforts to integrate, add, and enhance complementary system components. Dexcom CGM : 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. Abbott CGM : 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. 24 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. 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, 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. Settings Automation Our automation research and development activities center around opportunities for enhanced user and healthcare provider experience and improved clinical outcomes. In support of this effort, we are working to automate our pump settings adjustments to further enhance ease of use and expand adoption of our insulin pump products. Pump Shipments From inception 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. 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, 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 for Each of the Three Months Ended in Respective Years March 31 June 30 September 30 December 31 Total 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 2022 18,658 20,818 20,394 23,684 83,554 2023 17,003 N/A N/A N/A 17,003 25 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 for Each of the Three Months Ended in Respective Years March 31 June 30 September 30 December 31 Total 2018 N/A N/A 1,055 3,233 4,288 2019 5,063 8,459 4,025 2,149 19,696 2020 4,220 3,952 3,641 8,133 19,946 2021 8,708 13,152 11,262 11,873 44,995 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. 26 Seasonality • 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 Sales 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 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. At this time, we are not able to estimate the financial impact for the duration of Tandem Choice. Cost of Sales Cost of sales includes raw materials, labor costs, manufacturing overhead expenses, product training costs, royalties, freight, reserves for expected warranty costs, costs of supporting our digital health platforms, scrap and charges for excess and obsolete inventories. Manufacturing overhead expenses include expenses relating to quality assurance, manufacturing engineering, material procurement, inventory control, facilities, equipment, information technology and operations supervision and management. 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. 27 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 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 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. 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 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 federal, state and foreign cash tax expense as a result of taxable income anticipated or incurred in those jurisdictions. 28 Results of Operations Three Months Ended March 31, (in thousands, except percentages) 2023 2022 Sales: United States $ 131,242 $ 131,283 Outside the United States 38,141 44,624 Total sales 169,383 175,907 Cost of sales 86,476 84,814 Gross profit 82,907 91,093 Gross margin 49 % 52 % Operating expenses: Selling, general and administrative 89,814 73,271 Research and development 42,160 33,160 Acquired in-process research and development 78,750 — Total operating expenses 210,724 106,431 Operating loss (127,817) (15,338) Other income (expense), net: Interest income and other, net 5,865 415 Interest expense (1,634) (1,516) Total other income (expense), net 4,231 (1,101) Loss before income taxes (123,586) (16,439) Income tax expense (benefit) 287 (1,724) Net loss $ (123,873) $ (14,715) Comparison of the Three Months Ended March 31, 2023 and 2022 Sales 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. Sales by product in the United States were as follows (in thousands): Three Months Ended March 31, 2023 2022 % Change Pump $ 66,457 $ 73,497 (10)% 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 $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. 29 Sales by product outside the United States were as follows (in thousands): Three Months Ended March 31, 2023 2022 % Change Pump $ 18,247 $ 22,332 (18)% 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 $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 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. 30 Selling, General and Administrative Expenses. 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 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 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 $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 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 $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 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 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. 31 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, 2023 2022 Net cash provided by (used in): Operating activities $ (18,326) $ 13,800 Investing activities (26,329) 5,197 Financing activities (541) 3,500 Effect of foreign exchange rate changes on cash 441 3 Net increase (decrease) in cash and cash equivalents $ (44,755) $ 22,500 Operating Activities . 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 $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 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. In particular, our cash inflows and outflows are principally impacted by the following: • our ability to generate sales, the timing of those sales, the mix of products sold and the collection of receivables from period to period; • the timing of any additional financings, and the net proceeds raised from such financings; • the timing and amount of proceeds from the issuance of equity awards pursuant to employee stock plans; • fluctuations in gross margins and operating margins; and • fluctuations in working capital, including changes in accounts receivable, inventories, accounts payable, employee-related liabilities, and operating lease liabilities. 32 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; • expansion of our customer support resources for our growing installed customer base; • research and product development efforts, including clinical trial costs; • acquisitions, leasing or licensing of equipment, technology, intellectual property and other assets; • additional facilities leases and related tenant improvements; • investments for the development, improvement and acquisition of manufacturing, testing and packaging equipment to support business growth and increase capacity; • payments under licensing, development and commercialization agreements; and • acquisition and subsequent integration of businesses, products and technologies. Critical Accounting Policies 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. GAAP). 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. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. 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, 2022. Off-Balance Sheet Arrangements 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. 33