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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-03 · 153 added, 96 removed, 225 unchanged (53% of the section changed)

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

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

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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.

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, 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.

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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, 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.

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 in the section entitled “Risk Factors” in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2022 (Annual Report), and below in the section entitled “Risk Factors” in this Quarterly Report, 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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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.

In the four-year period ended June 30, 2023, we shipped approximately 437,000 t:slim X2 insulin pumps, which is representative of our in-warranty global installed customer base, assuming the typical four-year reimbursement cycle.

Approximately 305,000 of these pumps were shipped to customers in the United States and 132,000 were shipped to customers outside the United States.

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

In addition, in July 2023, the FDA provided clearance for the Tandem Mobi insulin pump, which is approximately half the size of our t:slim X2 pump.

A limited release of Tandem Mobi in the United States is expected to start in late 2023 with full commercial availability planned in early 2024.

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.

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

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

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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.

The t:slim X2 was the first pump on which remote software updates were made commercially available in the United States.

Now available in the countries we serve worldwide, our Tandem Device Updater (TDU) has allowed hundreds of thousands of 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.

In the third quarter 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.

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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.

In the second quarter of 2023, we began scaling the U.S.

launch of Tandem Source, 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.

Recent Developments

In July 2023, the FDA provided clearance for the Tandem Mobi insulin pump, which is approximately half the size of our t:slim X2 pump.

This is the world’s smallest durable automated insulin delivery system and is designed for people who seek even greater discretion and flexibility with the use of their insulin pump.

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

A limited release of Tandem Mobi in the United States is expected to start in late 2023 with full commercial availability planned in early 2024.

Expanding the capabilities of our application, Tandem Source is our second-generation web-based data management application that 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.

This application was designed to be deployed globally, beginning with a limited release in the United States which started in June 2023.

Products Under Development

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

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.

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.

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.

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

It will allow a Tandem 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

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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.

Additionally, we began 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.

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

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

We have agreements with Dexcom, Inc.

(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.

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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.

Settings Automation

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

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.

2023 17,003 18,964 N/A N/A 35,967

Since beginning sales outside the United States in the third quarter of 2018, we shipped approximately 132,000 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:

Pump shipments to customers outside the United States by fiscal quarter for the current year and each of the previous five years, were as follows:

Outside the United States Pump Unit Shipments

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

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

2023 6,052 10,530 N/A N/A 16,582

Trends and Uncertainties Impacting Financial Results

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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.

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

• We have historically experienced higher net sales in our third and fourth quarters compared to the first half of the year.

Our recently announced FDA clearance of Tandem Mobi and the anticipated launch may impact the timing of purchasing decisions by our current and prospective customers as the launch date approaches, resulting in delays that are unlike historical seasonal patterns or purchasing behaviors.

Regulatory approval and/or upcoming launches of other new Tandem or competitor products could also adversely impact timing of purchasing decisions.

• 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.

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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.

We commenced operations of a European distribution center beginning in the third quarter of 2022, which led to downward adjustments of inventory levels at our distributors in late 2022 and in the first half of 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.

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, as well as the anticipated launch of new products.

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.

• High inflation and the effects of other macroeconomic factors and concerns have continued to disrupt our relationships 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.

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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.

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

See also “Trends and Uncertainties Impacting Financial Results—Product Launches and Reimbursement,” above.

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

Tandem Choice expires on December 31, 2024.

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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.

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

Any remaining deferrals will be recognized at program expiration.

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Three Months Ended

June 30, Six Months Ended June 30,

(in thousands, except percentages) 2023 2022 2023 2022

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Loss before income taxes (34,629) (12,950) (158,215) (29,389)

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

Income tax expense 1,146 2,106 1,433 382

Net loss $ (35,775) $ (15,056) $ (159,648) $ (29,771)

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.

Comparison of the Three Months Ended June 30, 2023 and 2022

For the three months ended June 30, 2023, sales were $195.9 million, which included $53.4 million of sales outside the United States.

For the three months ended June 30, 2023, we deferred $2.3 million of pump sales as the result of Tandem Choice, which launched in the United States in the third quarter of 2022.

Sales were $200.3 million for the same period in 2022, which included $54.6 million of sales outside the United States.

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Total Sales in the United States $ 142,501 $ 145,667 (2)%

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.

Pump sales in the United States were $74.4 million for the second quarter of 2023, compared to $81.7 million in the second 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 of pump-related supplies increased 10% primarily due to a 14% increase year over year in our ending estimated installed base of customers in the United States.

Sales to distributors accounted for 64% and 65% of our total sales in the United States for the three months ended June 30, 2023 and 2022, respectively.

Sales in the United States for the three months ended June 30, 2023 were reduced by a deferral of $2.3 million as the result of our Tandem Choice program which launched in the third quarter of 2022.

No comparable program existed in the second quarter of 2022.

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

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Total Sales Outside the United States $ 53,416 $ 54,595 (2)%

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.

Pump sales outside the United States were $27.3 million for the second quarter of 2023, compared to $25.8 million in the second quarter of 2022.

We commenced operations of a centralized European distribution center in late 2022, which resulted in a material disruption to distributor ordering patterns in the first half of 2023 as affected distributors lowered their pump and supply inventory levels to adjust for the reduced transit time.

This disruption was more significant in the first quarter of 2023, impacting the second quarter to a lesser degree.

As a result, pump shipments decreased 7% compared to the same period in the prior year and supply order shipments declined as well.

The decrease in pump sales was offset by a 14% 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.

Sales to distributors accounted for 94% and 96% of our total sales outside the United States for the three-month periods ended June 30, 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.

Our cost of sales for the three months ended June 30, 2023 was $94.2 million , resulting in gross profit of $101.7 million, compared to cost of sales of $98.3 million and gross profit of $101.9 million for the same period in 2022.

The gross margin for the three months ended June 30, 2023 and 2022 was 52% and 51%, respectively.

Gross profit for the three months ended June 30, 2023 was reduced by $2.3 million from the impact of Tandem Choice, resulting in a gross margin reduction of approximately one 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, Tandem Mobi, and the number of eligible customers who ultimately elect to participate.

Gross margin benefited from reductions in manufacturing costs, largely due to the lower impact of certain high-cost raw materials acquired in the prior year, as well as continued operational efficiencies, partially offset by fluctuations in other non-manufacturing costs and product mix.

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

The impact in the quarter was reduced to less than one percent of sales and we do not anticipate a material impact in future quarters based on our remaining inventory levels.

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.

Our operating expenses for the three months ended June 30, 2023 were $140.5 million, compared to $114.2 million for the three months ended June 30, 2022.

More than half of the $26.3 million increase was driven by a non-recurring operating lease impairment charge in SG&A of $14.1 million in the second quarter of 2023, as a result of our facilities consolidation (see Note 6, “Leases”), with no comparable expense in 2022.

Additionally, incremental personnel and discretionary spending attributable to our recent acquisitions in both SG&A and R&D was $4.9 million.

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.

SG&A expenses increased 21% to $97.6 million for the three months ended June 30, 2023, from $80.6 million for the same period in 2022.

Excluding the impact of the $14.1 million lease impairment charge, the increase of $2.9 million was largely driven by higher employee-related expenses to provide continued support services for our growing installed customer base, partially offset by certain facilities expense savings from our facilities consolidation initiatives.

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.

R&D expenses increased 28% to $42.9 million for the three months ended June 30, 2023, from $33.6 million for the same period in 2022.

The increase in R&D expenses was primarily the result of a $7.5 million increase in salaries and related benefits due to our acquisitions and an increase in personnel to support our product development efforts.

We also experienced a $1.8 million increase in other non-employee discretionary spending, including equipment and clinical trials costs.

Other Income (Expense), Net

Total other income (expense), net for the three months ended June 30, 2023 was $4.2 million income, compared to $0.7 million expense in the same period in 2022.

Other income, net for the three months ended June 30, 2023 primarily consisted of $5.1 million of interest income earned on our cash equivalents and short-term investments, and $0.7 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 June 30, 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

We recognized income tax expense of $1.1 million on a pre-tax loss of $34.6 million for the three months ended June 30, 2023, compared to income tax expense of $2.1 million on a pre-tax loss of $13.0 million for the three months ended June 30, 2022.

Income tax expense for the three months ended June 30, 2023 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 June 30, 2022 was primarily attributable to the change from the annual effective tax rate method used in the first quarter of 2022 to the discrete effective tax rate method, and state and foreign income tax expense as a result of current taxable income in certain jurisdictions.

Comparison of the Six Months Ended June 30, 2023 and 2022

For the six months ended June 30, 2023, sales were $365.3 million, which included $91.6 million of sales outside the United States.

For the six months ended June 30, 2023 we deferred $4.3 million of pump sales as a result of Tandem Choice, which launched in the United States in the third quarter of 2022.

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

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

Six Months Ended June 30,

2023 2022 % Change

Pump $ 140,816 $ 155,153 (9)%

Supplies and other 137,259 121,797 13%

Deferral for Tandem Choice program (4,332) — —%

Total Sales in the United States $ 273,743 $ 276,950 (1)%

Pump sales in the United States were $140.8 million for the first six months of 2023, compared to $155.2 million in the first six months of 2022, as pump shipments decreased 9% compared to the same period in the prior year.

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 primarily due to a 14% 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 six months ended June 30, 2023 and 2022, respectively.

Sales in the United States for the six months ended June 30, 2023 were reduced by a deferral of $4.3 million as the result of our Tandem Choice program which launched in the third quarter of 2022.

No comparable program existed in the first six months of 2022.

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

Six Months Ended June 30,

2023 2022 % Change

Pump $ 45,563 $ 48,130 (5)%

Supplies and other 45,994 51,089 (10)%

Total Sales Outside the United States $ 91,557 $ 99,219 (8)%

Pump sales outside the United States were $45.6 million for the first six months of 2023, compared to $48.1 million in the first six months of 2022.

We commenced operations of a centralized European distribution center in late 2022, which resulted in a material disruption to distributor ordering patterns in the first half of 2023 as affected distributors reduced their pump and supply inventory levels to adjust for the reduced transit time.

This disruption was more significant in the first quarter of 2023, impacting the second quarter to a lesser degree.

As a result, pump shipments decreased 20% compared to the same period in the prior year and supply orders declined as well.

We believe that this transition was substantially completed by the end of the second quarter of 2023.

The decrease in pump sales was offset by an 18% increase in average selling prices due primarily to geographical mix.

Sales to distributors accounted for 94% of our total sales outside the United States for the six-month period ended June 30, 2023, and 96% for the same period in 2022.

Cost of Sales and Gross Profit

Our cost of sales for the six months ended June 30, 2023 was $180.7 million resulting in gross profit of $184.6 million, compared to cost of sales of $183.1 million and gross profit of $193.0 million for the same period in 2022.

The gross margin for the six months ended June 30, 2023 was 51% compared to 51% in the same period in 2022.

Gross profit for the six months ended June 30, 2023 was most meaningfully impacted by the decrease in sales associated with the European distribution center transition.

Furthermore, gross profit was reduced by $4.3 million from the impact of Tandem Choice, resulting in a gross margin reduction of approximately one 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 Tandem Mobi and the number of eligible customers who ultimately elect to participate.

Gross margin benefited from reductions in manufacturing costs due to the lower impact of certain high-cost raw materials acquired in the prior year, as well as continued operational efficiencies, partially offset by fluctuations in other non-manufacturing costs and product mix.

The impact in the first six months of 2023 was reduced to less than one percent of sales and we do not anticipate a material impact in future quarters based on our remaining inventory levels.

Operating Expenses

Our operating expenses for the six months ended June 30, 2023 were $351.3 million, compared to $220.6 million for the six months ended June 30, 2022.

A significant portion of the increase was driven by certain non-recurring transactions, for which there was no comparable expense in 2022.

We incurred $78.8 million of acquired in-process research and development expenses in connection with our recent acquisition of AMF Medical.

As a part of continued operating efficiency measures, we also incurred an operating lease impairment charge in SG&A of $14.1 million as a result of a facilities consolidation, and employee severance costs of $2.7 million.

Additionally, incremental personnel and discretionary spending attributable to our recent acquisitions in both SG&A and R&D was $8.9 million.

Selling, General and Administrative Expenses.

SG&A expenses increased 22% to $187.4 million for the six months ended June 30, 2023, from $153.9 million for the same period in 2022.

Excluding the impact of the $14.1 million lease impairment charge and $2.1 million in severance costs, the increase of $17.3 million was largely driven by $14.0 million in employee-related expenses.

This was primarily the result of higher salaries and related benefits to provide continued support services for our growing installed customer base.

Research and Development Expenses .

R&D expenses increased 28% to $85.1 million for the six months ended June 30, 2023, from $66.7 million for the same period in 2022.

The increase in R&D expenses was primarily the result of a $16.0 million increase in salaries and related benefits from our acquisitions and an increase in personnel to support our product development efforts.

We also experienced a $2.4 million increase in other non-employee discretionary spending, including equipment, supplies and clinical trials 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”).

Acquired IPR&D expenses of $78.8 million for the six months ended June 30, 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.

Total other income (expense), net for the six months ended June 30, 2023 and 2022 was income of $8.4 million and expense of $1.8 million, respectively.

Other income, net for the six months ended June 30, 2023 primarily consisted of $9.3 million of interest income earned on our cash equivalents and short-term investments, and $2.3 million in foreign currency transaction gains, partially offset by $3.2 million of interest expense which included the amortization of debt issuance costs related to our Convertible Senior Notes.

Other expense, net for the six months ended June 30, 2022 primarily consisted of $3.1 million of interest expense which included the amortization of debt issuance costs related to our Notes, partially offset by $1.2 million of interest income earned on our cash equivalents and short-term investments.

Income Tax Expense

We recognized income tax expense of $1.4 million on pre-tax loss of $158.2 million for the six months ended June 30, 2023, compared to income tax expense of $0.4 million on a pre-tax loss of $29.4 million for the six months ended June 30, 2022.

Income tax expense for the six months ended June 30, 2023 and 2022 was primarily attributable to federal, 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.

At June 30, 2023, we had $507.2 million in cash and cash equivalents and short-term investments.

In addition, we have a Revolving Line of Credit (Line of Credit), which expires in May 2025 (see Note 7, “Debt”), under which we may borrow up to $50.0 million, less the amount of our standby letter of credit, subject to a reduced borrowing base through the third quarter of 2023.

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.

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,

The following table shows a summary of our cash flows for the six months ended June 30, 2023 and 2022 (in thousands):

Six Months Ended June 30,

Net cash provided by (used in):

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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.

Net cash used in operating activities was $24.6 million for the six months ended June 30, 2023, compared to $20.7 million cash provided by operating activities in the same period in 2022.

Working capital changes during the first six months of 2023 primarily consisted of an increase in inventories, partially offset by a decrease in accounts receivable.

Accounts receivable decreased to $98.7 million at June 30, 2023, from $114.7 million at December 31, 2022.

Inventories increased to $147.6 million at June 30, 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.

Net cash used in investing activities was $20.6 million for the six months ended June 30, 2023, which was primarily related to $235.5 million of purchases of short-term investments, $69.5 million for the acquisition of AMF Medical, including transaction costs (see Note 12, “Acquisitions”), and $16.2 million in purchases of property and equipment, offset by $303.1 million in proceeds from maturities and redemptions of short-term investments.

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

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.

Net cash provided by financing activities was $3.4 million for the six months ended June 30, 2023, which primarily consisted of proceeds from the issuance of common stock under our stock plans, net of payments for related tax withholdings.

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

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

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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.

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 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.

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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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis