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Item 2. Management’s Discussion and Analysis

2023-11-01 compared with 2023-08-03 · 138 added, 124 removed, 254 unchanged (51% of the section changed)

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

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

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), in the section entitled “Risk Factors” in Part II, Item 1A, of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, 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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We are a medical device company focused on the design, development and commercialization of technology solutions for people living with diabetes.

We consider our primary addressable market to be people who live with type 1 diabetes.

Through our product development efforts, we are seeking to expand our addressable market to include people living with type 2 diabetes who require intensive insulin therapy.

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

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

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.

In the four-year period ended September 30, 2023, we shipped approximately 444,000 t:slim X2 insulin pumps, which is representative of our in-warranty global installed customer base assuming the typical four-year reimbursement cycle.

Approximately 308,000 of these pumps were shipped to customers in the United States and approximately 136,000 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 currently 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.

The vast majority of our customers worldwide are people living with type 1 diabetes.

In addition, in July 2023, the FDA provided clearance for the Tandem Mobi insulin pump, which is the world’s smallest durable automated insulin delivery (AID) system.

At approximately half the size of our t:slim X2 pump, Tandem Mobi is designed for people who seek even greater discretion and flexibility, and includes features such as expanded pump-control from our iOS mobile application, inductive charging, and an on-pump button that can be used for bolusing and other actions.

A limited release of Tandem Mobi in the United States began in the fourth quarter of 2023 with full commercial availability expected to begin in early 2024.

Our manufacturing, sales and support activities are scaling in anticipation of offering people living with diabetes a choice between the t:slim X2 and Tandem Mobi insulin pumps based on their individual needs and preferences.

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

This allows their insulin pump to receive CGM sensor readings, which can then be used in our 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.

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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 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.

The t:slim X2 was the first pump on which remote software updates were made commercially available in the United States and Tandem Mobi will offer the same capability.

Now available for t:slim X2 in the countries we serve worldwide, our Tandem Device Updater (TDU) has allowed hundreds of thousands of people to update their pump 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 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.

In the third quarter of 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.

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.

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

Our first-generation data management application, t:connect, was commercially introduced in the United States in 2013.

In the second quarter of 2023, we began a scaled global launch of our second-generation data management application, Tandem Source.

Products Under Development

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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 began a pivotal study to support expanding indications to include people living with type 2 diabetes.

We recently 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.

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(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.

This will be the fourth generation of Dexcom CGM that we integrate with our devices.

Integration of the t:slim X2 with Dexcom’s G7 is in the release process, which we plan to scale for full availability in the United States, followed by a rolling launch in international markets.

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.

This will be the first-generation of the Abbott Freestyle Libre CGM integrated with our t:slim X2.

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

Data and Insights

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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 437,000 insulin pumps worldwide, which is representative of our global in-warranty installed customer base.

In the four-year period ended September 30, 2023, we shipped approximately 444,000 insulin pumps worldwide, which is representative of our global in-warranty installed customer base.

Our ending estimated worldwide installed base increased approximately 11% 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.

At the end of the typical four-year reimbursement cycle, customers may be eligible to purchase 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 take up to one year from date of warranty expiration to purchase a subsequent pump.

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 305,000 pumps were shipped to customers in the United States in the past four years, which aligns with the standard four-year warranty period.

Approximately 308,000 pumps were shipped to customers in the United States in the four-year period ended September 30, 2023, which is representative of our U.S.

installed customer base.

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:

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

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

2023 17,003 18,964 16,842 N/A 52,809

Since beginning sales outside the United States in the third quarter of 2018, we shipped approximately 136,000 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.

The ordering patterns of, and levels of inventory carried by, our distributors outside the United States for pumps and supplies have 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 due to supply chain logistics, particularly during the global pandemic.

This also influences the timing in which renewal eligibility begins for existing customers, which may not initially be consistent with trends in the U.S.

We recently began completing a full four-year reimbursement cycle in an increasing number 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 previous five years, were as follows:

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

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

2023 6,052 10,530 7,989 N/A 24,571

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, may continue to materially impact our business until the conclusion of the program.

We anticipate that our 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.

We believe our recently announced FDA clearance of Tandem Mobi and its anticipated launch has impacted and may impact the future timing of purchasing decisions by our current and prospective customers as the full commercial 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.

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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 primary customers are the end users of 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.

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Tandem Choice expires on December 31, 2024.

The accounting treatment for Tandem Choice is complex.

The accounting treatment for Tandem Choice is complex (see Note 2, “Summary of Significant Accounting Policies”).

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

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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.

On or about October 24, 2023, we were notified that additional interest beyond the 1.50% per annum has been accruing on the Notes since May 2021, pursuant to the terms of the indenture.

This additional interest continues to accrue at a rate of 0.50% per annum on the outstanding principal amount of the Notes, and as of November 1, 2023 amounts to approximately $3.2 million in the aggregate.

The overdue unpaid interest itself accrues interest at a rate of 2.50% per annum.

We are coordinating with the trustee for the Notes to pay all overdue amounts as soon as reasonably practicable in the fourth quarter of 2023.

See “Risk Factors—An event of default has occurred under the indenture governing our 1.50% Convertible Senior Notes due 2025.”

Income Tax Expense (Benefit)

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Three Months Ended

June 30, Six Months Ended June 30,

September 30, Nine Months Ended September 30,

(in thousands, except percentages) 2023 2022 2023 2022

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Net loss $ (32,961) $ (48,970) $ (192,609) $ (78,741)

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.

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

For the three months ended September 30, 2023, sales were $185.6 million, which included $55.4 million of sales outside the United States.

For the three months ended September 30, 2023, we deferred $8.2 million of pump sales as the result of Tandem Choice, which launched in the United States in September of 2022.

Sales were $204.5 million for the same period in 2022, which included $58.5 million of sales outside the United States.

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Three Months Ended

September 30,

2023 2022 % Change

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Total Sales in the United States $ 130,222 $ 146,035 (11)%

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 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.

Pump sales in the United States were $66.4 million for the third quarter of 2023, compared to $81.3 million in the third quarter of 2022 as pump shipments decreased 17% compared to the same period in 2022.

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

Additionally, we believe the anticipation for the full release of the Dexcom G7 sensor integration with t:slim X2 and the recent FDA clearance of Tandem Mobi have begun to impact the timing of purchasing decisions for those who prefer those offerings, resulting in some customers delaying current purchases until full commercial availability of each product in future periods.

Sales of pump-related supplies increased 10% primarily due to a 10% year-over-year increase in our ending estimated installed base of customers in the United States.

Sales to distributors accounted for 64% and 66% of our total sales in the United States for the three months ended September 30, 2023 and 2022, respectively.

Sales in the United States for the three months ended September 30, 2023 and 2022 were reduced by a deferral of $8.2 million and $0.6 million, respectively, as the result of our Tandem Choice program which launched in September of 2022.

The increase in the revenue deferral for Tandem Choice in 2023 as compared to 2022, was primarily a result of a reduction in the Tandem Choice program price which became effective in the third quarter of 2023, resulting in an increase to our estimate of the future customer participation rate and, therefore, a higher deferral per pump sold, coupled with the Tandem Choice program being in effect for the entire third quarter of 2023.

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

Three Months Ended

September 30,

2023 2022 % Change

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Total Sales Outside the United States $ 55,400 $ 58,512 (5)%

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 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.

Pump sales outside the United States were $21.7 million for the third quarter of 2023, compared to $27.4 million in the third quarter of 2022.

Pump shipments decreased 34% compared to the same period in the prior year.

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

Sales of pump-related supplies increased 8% primarily due to a 13% year-over-year increase in our ending estimated installed base of customers outside the United States.

The year-over-year changes in pump and supply shipments were not necessarily indicative of actual customer demand, as they were heavily influenced by variability in historical ordering patterns of our distributors prior to commencement of operations at our centralized European distribution center in late 2022.

Sales to distributors accounted for 95% and 96% of our total sales outside the United States for the three-month periods ended September 30, 2023 and 2022, respectively.

Cost of Sales and Gross Profit

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.

Our cost of sales for the three months ended September 30, 2023 was $95.9 million , resulting in gross profit of $89.8 million, compared to cost of sales of $100.1 million and gross profit of $104.4 million for the same period in 2022.

The gross margin for the three months ended September 30, 2023 and 2022 was 48% and 51%, respectively.

Gross profit for the three months ended September 30, 2023 was reduced by $8.2 million from the impact of Tandem Choice, resulting in a gross margin reduction of more than two percentage points.

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.

Excluding the impact of Tandem Choice, gross margin was consistent with the prior year.

Gross margin benefited from progress in underlying fundamentals, including an increase in average selling prices and manufacturing efficiencies, as well as leverage of fixed overhead.

Gross margin further benefited from reduction in the impact of certain high-cost raw materials acquired in the prior year.

More specifically, the higher cost of raw materials acquired in the prior year stemmed from supply chain challenges during the COVID-19 global pandemic, where certain pump materials were sourced from alternative suppliers to reduce the risk of component shortages.

The impact in the quarter of these high-cost raw materials was reduced to less than one percent of sales.

These benefits were offset by the impact of product and geographical mix.

Pump sales, which have the highest gross margin, were 43% of total worldwide sales, excluding the impact of Tandem Choice, in the third quarter of 2023, compared to 53% in the third quarter of 2022.

Operating Expenses

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.

Our operating expenses for the three months ended September 30, 2023 were $121.3 million, compared to $151.9 million for the three months ended September 30, 2022.

The $30.6 million decrease was primarily driven by $31.0 million of acquired in-process research and development expenses incurred in 2022 in connection with our acquisition of Capillary Biomedical (see Note 12, “Acquisitions”).

Selling, General and Administrative Expenses.

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.

SG&A expenses decreased 6% to $79.3 million for the three months ended September 30, 2023, from $84.1 million for the same period in 2022.

The decrease of $4.8 million was largely driven by lower employee-related expenses of $2.3 million, as well as reduced costs pertaining to certain facilities expense savings from our facilities consolidation initiatives.

Research and Development Expenses .

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.

R&D expenses increased 14% to $42.0 million for the three months ended September 30, 2023, from $36.8 million for the same period in 2022.

The increase in R&D expenses was primarily the result of a $3.2 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.

We also experienced a $2.0 million increase in other non-employee discretionary spending, including supplies, outside services and equipment costs.

Acquired In-Process Research and Development Expenses.

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

Other Income (Expense), Net

Total other income (expense), net for the three months ended 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.

Total other income (expense), net for the three months ended September 30, 2023 was $0.8 million income, compared to $0.1 million expense in the same period in 2022.

Other income, net for the three months ended September 30, 2023 primarily consisted of $5.9 million of interest income earned on our cash equivalents and short-term investments, partially offset by $4.8 million of interest expense which included $3.1 million of additional interest as discussed above and the amortization of debt issuance costs related to our Convertible Senior Notes.

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

We recognized income tax expense of $2.2 million on a pre-tax loss of $30.7 million for the three months ended September 30, 2023, compared to income tax expense of $1.6 million on a pre-tax loss of $47.3 million for the three months ended September 30, 2022.

Income tax expense for the three months ended September 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.

Comparison of the Nine Months Ended September 30, 2023 and 2022

For the nine months ended September 30, 2023, sales were $550.9 million, which included $147.0 million of sales outside the United States.

For the nine months ended September 30, 2023, we deferred $12.6 million of pump sales as a result of Tandem Choice, which launched in the United States in September of 2022.

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

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

Six Months Ended June 30,

Nine Months Ended September 30,

2023 2022 % Change

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Total Sales in the United States $ 403,964 $ 422,985 (4)%

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.

Pump sales in the United States were $207.2 million for the first nine months of 2023, compared to $236.4 million in the first nine months of 2022, as pump shipments decreased 12% 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.

Additionally, we believe the anticipation for the full release of the Dexcom G7 sensor integration with t:slim X2 and the FDA clearance of Tandem Mobi in the third quarter of 2023 have begun to impact the timing of purchasing decisions for those who prefer those offerings, resulting in some customers delaying current purchases until full commercial availability of those products in future periods.

Sales of pump-related supplies increased primarily due to a 10% year-over-year increase 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 nine months ended September 30, 2023 and 2022, respectively.

Sales in the United States for the nine months ended September 30, 2023 and 2022 were reduced by a deferral of $12.6 million and $0.6 million, respectively, as the result of our Tandem Choice program which launched in September of 2022.

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

Six Months Ended June 30,

Nine Months Ended September 30,

2023 2022 % Change

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Total Sales Outside the United States $ 146,958 $ 157,731 (7)%

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.

Pump sales outside the United States were $67.2 million for the first nine months of 2023, compared to $75.5 million in the first nine 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 25% 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 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.

Sales to distributors accounted for 94% of our total sales outside the United States for the nine-month period ended September 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.

Our cost of sales for the nine months ended September 30, 2023 was $276.5 million resulting in gross profit of $274.4 million, compared to cost of sales of $283.3 million and gross profit of $297.5 million for the same period in 2022.

The gross margin for the nine months ended September 30, 2023 was 50% compared to 51% in the same period in 2022.

Gross profit for the nine months ended September 30, 2023 was reduced by $12.6 million from the impact of Tandem Choice, resulting in a gross margin reduction of approximately one percentage point, as well as the decrease in sales in the first half of 2023 associated with the European distribution center transition.

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.

Excluding the impact of Tandem Choice, gross margin for the nine months ended September 30, 2023 was consistent with the same period in 2022.

Gross margin benefited from progress in underlying fundamentals, including an increase in average selling prices and manufacturing efficiencies, as well as leverage of fixed overhead.

Gross margin further benefited from the lower impact of certain high-cost raw materials acquired during the pandemic.

These benefits were offset by the impact of product mix and geographical mix.

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.

Our operating expenses for the nine months ended September 30, 2023 were $472.6 million, compared to $372.5 million for the nine months ended September 30, 2022.

A significant portion of the increase was driven by certain unique or non-recurring transactions.

In 2023, we incurred $78.8 million of acquired in-process research and development expenses in connection with our recent acquisition of AMF Medical, compared to $31.0 million of acquired IPR&D expenses in connection with our acquisition of Capillary Biomedical in 2022 (see Note 12, “Acquisitions”).

As a part of continued operating efficiency measures, in 2023 we also incurred a non-recurring operating lease impairment charge in SG&A of $14.1 million as a result of a facilities consolidation (see Note 6, “Leases”), 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 $15.2 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.

SG&A expenses increased 12% to $266.8 million for the nine months ended September 30, 2023, from $238.0 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 $12.6 million was largely driven by $9.8 million in employee-related expenses.

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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.

R&D expenses increased 23% to $127.1 million for the nine months ended September 30, 2023, from $103.5 million for the same period in 2022.

The increase in R&D expenses was primarily the result of a $17.4 million increase in salaries and related benefits from our acquisitions and an increase in personnel to support our product development efforts.

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Acquired In-Process Research and Development Expenses.

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”).

Acquired IPR&D expenses of $78.8 million for the nine months ended September 30, 2023 represented the value of assets acquired, and acquisition related expenses, in connection with our acquisition of AMF Medical.

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

Other Income (Expense), Net

Total other 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.

Total other income (expense), net for the nine months ended September 30, 2023 was $9.2 million income, compared to $1.7 million expense in the same period in 2022.

Other income, net for the nine months ended September 30, 2023 primarily consisted of $15.2 million of interest income earned on our cash equivalents and short-term investments, and $2.0 million in foreign currency transaction gains, partially offset by $8.1 million of interest expense which included $3.1 million of additional interest as discussed above and the amortization of debt issuance costs related to our Notes.

Other expense, net for the nine months ended September 30, 2022 primarily consisted of $4.6 million of interest expense which included the amortization of debt issuance costs related to our Notes, partially offset by $2.9 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.

We recognized income tax expense of $3.7 million on a pre-tax loss of $188.9 million for the nine months ended September 30, 2023, compared to income tax expense of $2.0 million on a pre-tax loss of $76.7 million for the nine months ended September 30, 2022.

Income tax expense for the nine months ended September 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 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.

At September 30, 2023, we had $498.2 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, provided we are currently not entitled to borrow any amounts under the Line of Credit as a result of our inadvertent failure to timely pay additional interest under the Notes.

See above under “Other Income and Expense”.

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 for at least the next twelve months.

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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 six months ended June 30, 2023 and 2022 (in thousands):

Six Months Ended June 30,

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

Nine Months Ended September 30,

Net cash provided by (used in):

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Operating Activities .

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.

Net cash used in operating activities was $24.6 million for the nine months ended September 30, 2023, compared to $44.6 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 and a $14.1 million operating lease impairment charge in 2023, as well as working capital changes.

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.

Working capital changes during the first nine months of 2023 primarily consisted of increases in inventories and prepaids and other current assets, partially offset by a decrease in accounts receivable and an increase in deferred revenue.

Accounts receivable decreased to $100.3 million at September 30, 2023, from $114.7 million at December 31, 2022.

Inventories increased to $143.5 million at September 30, 2023, from $111.1 million at December 31, 2022 primarily due to a return to target stocking levels post-pandemic as supply chain constraints subsided, as well as the scaling up of inventory to meet anticipated demand for Tandem Mobi.

Investing Activities .

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.

Net cash used in investing activities was $69.2 million for the nine months ended September 30, 2023, which primarily consisted of $391.0 million of purchases of short-term investments, $69.5 million for the acquisition of AMF Medical, including transaction costs (see Note 12, “Acquisitions”), and $21.6 million in purchases of property and equipment of which $8.7 million was associated with improvements to the new Headquarters lease facility which is now complete (see Note 6, “Leases”), offset by $415.5 million in proceeds from maturities and redemptions of short-term investments.

Net cash used in investing activities was $2.6 million for the nine months ended September 30, 2022, which primarily consisted of $362.5 million of purchases of short-term investments, $28.5 million in purchases of property and equipment, and $25.7 million paid for the acquisition of Capillary Biomedical, including transaction costs (see Note 12, “Acquisitions”), offset by $422.9 million in proceeds from maturities and redemptions of short-term investments.

Financing Activities.

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.

Net cash provided by financing activities was $1.5 million for the nine months ended September 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 $10.8 million for the nine months ended September 30, 2022, which primarily consisted of proceeds from the issuance of common stock under our stock plans, net 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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• our ability to generate sales, the timing of those sales, the mix of products sold and the collection of receivables from period to period;

• contractual debt obligations, including periodic interest payments;

• the timing of any additional financings, and the net proceeds raised from such financings;

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• research and product development efforts, including clinical trial costs;

• acquisitions, leasing or licensing of equipment, technology, intellectual property and other assets;

• acquisitions, including contingent earnout payments that become payable upon the achievement of certain milestones;

• leasing or licensing of equipment, technology, intellectual property and other assets;

• additional facilities leases and related tenant improvements;

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• payments under licensing, development and commercialization agreements;

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

• integration costs related to acquisitions of businesses, products and technologies.

Critical Accounting Policies

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis