TANDEM DIABETES CARE INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis together with our financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 (Quarterly Report). This Quarterly Report contains forward-looking statements within the meaning of the federal securities laws, which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Quarterly Report, other than statements of historical fact, are forward-looking statements. You can identify forward-looking statements by the use of words such as “may,” “will,” “could,” “anticipate,” “expect,” “intend,” “believe,” “continue” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to such statements. In particular, forward-looking statements contained in this Quarterly Report may relate to, among other things, our future or assumed financial condition, results of operations, liquidity, trends impacting our financial results, business forecasts and plans, research and product development plans, product pipelines, development timelines, 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. Our forward-looking statements are based on our management’s current assumptions and expectations about future events and trends, which affect or may affect our business, strategy, operations or financial performance. Although we believe that these forward-looking statements are based upon reasonable assumptions, they are subject to numerous known and unknown risks and uncertainties and are made in light of information currently available to us. Our actual financial condition and results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below in the section entitled “Risk Factors” in 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. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements speak only as of the date they were made and, except to the extent required by law or the rules of the Nasdaq Global Market, we undertake no obligation to update or review any forward-looking statement because of new information, future events or other factors. We qualify all of our forward-looking statements by these cautionary statements. Overview We are a medical device company focused on the design, development and commercialization of technology solutions for people living with diabetes. 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. Our goal is to address the individual needs of people with insulin-dependent diabetes and their care team, by offering flexibility and choice in intelligent insulin delivery systems, through an accessible portfolio of market-leading pumps, applications, and insights. From inception in 2012 through June 2018, we derived nearly all of our sales from the shipment of insulin pumps and associated supplies to customers in the United States. Starting in the third quarter of 2018, we began selling in select geographies outside the United States and our technology solutions are now available in approximately 25 countries worldwide. 24 Through our portfolio approach, we offer people living with diabetes a choice in their therapy management system based on their individual needs and preferences. In support of this strategy, we recently expanded our portfolio which now includes both the t:slim X2 and the Tandem Mobi insulin pumps. The Tandem Mobi insulin pump 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. Since the beginning of 2024, we scaled the commercial release of Tandem Mobi in the United States, first offering integration with the Dexcom G6 sensor beginning in February followed by the Dexcom G7 beginning in June. The vast majority of our customers use their insulin pump with 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. Multiple studies, including three publications in the New England Journal of Medicine, have demonstrated that use of Control-IQ technology provides people across all demographics with improved clinical outcomes that are both immediate and sustained. The t:slim X2 was the first pump in the industry on which remote software updates were made commercially available in the United States and is now also available in the countries we serve worldwide. This has allowed our t:slim X2 and Tandem Mobi customers to update their own pump software. We believe this offering is a competitive advantage that allows us to bring our customers clinical and lifestyle enhancements within their warranty cycle without having to purchase a new pump. These enhancements include new developments in our AID technology, CGM integrations and mobile app features. For example, in 2024 we offered pump software updates to allow Tandem pump users access to integrate with new CGM sensors. For more than a decade we have offered our customers, their caregivers and healthcare providers a data management application to provide a fast, easy and visual way to display diabetes therapy management data from our pumps and integrated CGMs. In the second quarter of 2023, we expanded our digital technology solutions with the launch of Tandem Source in the United States. In addition to displaying diabetes therapy management data, Tandem Source is also designed to serve as a portal for supplies reordering and pump software updates. In the second quarter of 2024, we began a scaled launch of Tandem Source outside the United States. Our Strategy & Future Technology Diabetes management can vary greatly from person-to-person, creating multiple market segments based on clinical needs and personal preferences. Our goal is to address the individual needs of people with insulin-dependent diabetes and their care team, by providing flexibility and choice in intelligent insulin delivery systems through an accessible portfolio of market-leading pumps, applications, and insights. In support of this strategy, our portfolio of future technologies includes: t:slim X3 Advancing our flagship t:slim platform, the t:slim X3 is planned to include enhanced technology, such as greater processing power and capacity to support our advanced algorithms, as well as increased battery life and improved durability. Mobi: Tubeless This offering is intended 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, while still providing the benefit of detachability. A goal of this design is to allow people living with diabetes to customize the way they wear their pump with each cartridge change, switching between tubed and tubeless wear configurations, to best suit their personal preferences and lifestyle . Sigi The ergonomic, rechargeable and detachable Sigi Patch Pump is intended to reduce the burden of managing diabetes through its use of pre-filled insulin cartridges and compatibility with AID technology. 25 Extended Wear Infusion Sets Infusion sets provide additional choice and flexibility to people living with diabetes. We are currently developing extended wear infusion set technology. Our goals for future infusion set innovations include solutions that enhance user experience, while reducing occlusions, body burden and waste. Control-IQ Advancements We are continuing to drive innovation in our algorithms, emphasizing automation, personalization and simplification to continue to improve therapeutic outcomes and provide a positive patient experience. In late 2023, an enhanced version of our Control-IQ technology was cleared with additional features for people with type 1 diabetes age 2 and older. In the third quarter of 2024, we completed a pivotal study to support expanding indications to include people living with type 2 diabetes. We are also pursuing the use of different insulins with our Control-IQ technology. For example, in the first half of 2024 we received approval for both the addition of Trurapi U-100 in Canada and Lyumjev in the European Union as compatible insulins that can be used with our t:slim X2 pump with Control-IQ technology. Pump Reimbursement Cycle Insulin pumps in the markets we serve worldwide are generally subject to a four-year reimbursement cycle, imposed by the third-party insurance carrier, government plan or healthcare system that serves as the primary payor. At the end of 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 take on average 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. At the end of 2023, we had approximately 450,000 users in our in-warranty installed base, approximately one-third of whom live outside 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 United States market. We recently began completing full four-year reimbursement cycles in an increasing number of our markets outside of the United States. Trends and Uncertainties Impacting Financial Results Our financial condition and operating results have historically fluctuated on a quarterly or annual basis. We expect these periodic fluctuations will continue to be impacted by a number of trends and uncertainties, including the following: Regulatory Approvals and Actions • Sales of new products are subject to local government regulations. The requirements and timelines to receive regulatory clearance can vary substantially from country to country and delays may impact our ability to expand our worldwide customer base and bring products to market in a competitive timeframe. These delays, or failure to receive regulatory approval could adversely impact our revenue and results of operations. • Any adverse event involving products that we distribute could result in future corrective actions, such as recalls or customer notifications, or regulatory agency action, which could include inspection, mandatory recall or other enforcement action. Any action by regulatory bodies against us, and any regulatory challenges we encounter could have a negative impact on our product sales and harm our reputation. 26 Markets, Seasonality, Competition, and Product Launches • We expect our business to be impacted by the introduction of new diabetes devices and treatments by us or our competitors. The success of our products is variable and we believe it correlates to market acceptance, anticipated product launches and commercial availability. We anticipate that our Tandem Choice program, and its related financial and accounting impact, may continue to materially impact our business until the conclusion of the program. • 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 second half of the year 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. • We believe our July 2023 announcement of U.S. Food and Drug Administration (FDA) clearance of Tandem Mobi and its anticipated launch impacted the timing of purchasing decisions by our current and prospective customers in the second half of 2023 up through the United States commercial availability of Tandem Mobi in February 2024, resulting in delays that were 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. • In periods following new product launches, particularly with new hardware platforms, our cost of sales may increase on a per unit basis until the new products achieve manufacturing scale and operating expenses may be elevated by increased sales and marketing spend to support the product launches. • We have expanded our business and launched new products in select geographies outside the United States. The ordering patterns of our distributors outside the United States has historically been highly variable from period to period. For example, we began operations of a European distribution center which led to a reduction of inventory levels at our distributors, significantly impacting sales patterns in the second half of 2022 and first half of 2023. Reimbursement • Our insulin pump products are generally considered durable medical equipment (DME) and have an expected lifespan of at least four years. In addition to insulin pumps, we sell single-use 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. Because of the DME classification, our pumps and supplies are typically reimbursed through a medical benefit. As our portfolio expands, we are pursuing a multi-channel managed care strategy and are in discussions to begin serving Mobi customers through the pharmacy channel. • We generally have had broad insurance coverage for our current products from third-party payors. Our revenue and results of operations may be impacted by the failure to secure or retain adequate coverage, changes in reimbursement structures or availability of affordable options for our customers. Macroeconomic Factors • Global economic and market uncertainty, such as recessionary concerns, changes in discretionary spending and increased interest rates have impacted our customers’ purchasing decisions and the buying patterns of our distributors. • High inflation, fluctuations in foreign currency valuations and the effects of other macroeconomic factors and concerns has disrupted and may continue to disrupt our relationships with suppliers, third-party manufacturers, healthcare providers, distributors and our existing or potential customers. 27 Components of Results of Operations Sales We offer products for people with insulin-dependent diabetes, including a portfolio of hardware platforms, single-use insulin cartridges and infusion sets, data management platforms and mobile applications. 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. 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—Seasonality” above. From September 2022 through February 2024, we offered 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. Eligible customers who purchased a t:slim X2 insulin pump during the program period have until December 31, 2024 to exercise the option to switch to the Tandem Mobi for a stated fee. The accounting treatment for Tandem Choice is complex (see Note 2, “Summary of Significant Accounting Policies”). The program required the deferral of some portion of sales for shipments of eligible pumps between the third quarter of 2022 and the first quarter of 2024. No election was made by the customer at the time of the initial sale, nor did the right offered to the customer impact the economics associated with how or when the initial pump sale was reimbursed. If a customer elects to participate in Tandem Choice, we will recognize the existing sales deferral, incremental fees received and the associated costs of goods sold for the new insulin pump, Tandem Mobi, at the time of fulfillment. Qualifying customers were able to elect participation in Tandem Choice starting near the end of the second quarter of 2024. Any remaining deferrals will be recognized when the program ends on December 31, 2024, provided all obligation under the Tandem Choice program are satisfied. The balance of the Tandem Choice deferral was $ 30.1 million as of September 30, 2024. Cost of Sales Cost of sales includes raw materials, labor costs, manufacturing overhead expenses, product training costs, royalties, freight, reserves for expected warranty costs, costs of supporting our digital health platforms, scrap and charges for excess and obsolete inventories. Manufacturing overhead expenses include expenses relating to quality assurance, manufacturing engineering, material procurement, inventory control, facilities, equipment, information technology and operations supervision and management. When taking into consideration the differences in reimbursement levels and cost structure, pumps have, and are expected to continue to have, a higher gross profit and gross margin percentage than our pump-related supplies on a per unit basis. Therefore, the percentage of pump sales relative to total sales could have a significant impact on our overall gross margin percentage. Selling, General and Administrative Our selling, general and administrative (SG&A) expenses primarily consist of salary, cash-based incentive compensation, fringe benefits and non-cash stock-based compensation for our sales, marketing and administrative functions, which also includes our clinical, customer support, technical services, insurance verification and regulatory affairs personnel. Our sales territories in the United States are generally maintained by sales representatives and field clinical specialists, and supported by managed care liaisons, additional sales management and other customer support personnel. Other significant SG&A expenses typically include those incurred for commercialization activities associated with new product launches, travel, trade shows, outside legal fees, independent auditor fees, outside consultant fees, insurance premiums, facilities costs and information technology costs. Research and Development Our research and development (R&D) activities primarily consist of engineering and research programs associated with our hardware, software and digital health products under development, as well as activities associated with our core technologies and processes. R&D expenses are primarily related to employee compensation, including salary, cash-based incentive compensation, fringe benefits and non-cash stock-based compensation. We also incur R&D expenses for supplies, development prototypes, outside design and testing services, depreciation, allocated facilities and information services, clinical trials, payments under our licensing, development and commercialization agreements and other indirect costs. 28 Acquired In-process Research and Development (IPR&D) Acquired IPR&D reflects costs of external research and development projects acquired directly in a transaction other than a business combination, that do not have an alternative future use. Other Income and Expense Other income and expense primarily consists of interest earned on our cash equivalents and short-term investments, foreign currency transaction gains and losses and interest expense which includes the amortization of debt issuance costs related to our convertible senior notes. In October 2023, we were notified that $3.1 million of additional interest beyond the 1.50% per annum had been accruing on the 2025 Notes since May 2021, pursuant to the terms of the indenture (see Note 7, “Debt”). Income Tax Expense (Benefit) Because the Company maintains a full valuation allowance against its net deferred tax assets, income tax expense is expected to primarily consist of current federal, state and foreign cash tax expense as a result of taxable income anticipated or incurred in those jurisdictions. Results of Operations Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except percentages) 2024 2023 2024 2023 Sales: United States $ 171,650 $ 130,222 $ 458,122 $ 403,964 Outside the United States 72,321 55,400 199,433 146,958 Total sales 243,971 185,622 657,555 550,922 Cost of sales 119,318 95,869 325,436 276,527 Gross profit 124,653 89,753 332,119 274,395 Gross margin 51 % 48 % 51 % 50 % Operating expenses: Selling, general and administrative 99,639 79,328 283,987 266,752 Research and development 51,107 41,970 146,677 127,063 Acquired in-process research and development — — — 78,750 Total operating expenses 150,746 121,298 430,664 472,565 Operating loss (26,093) (31,545) (98,545) (198,170) Other income (expense), net: Interest income and other, net 5,344 5,656 13,482 17,305 Interest expense (1,865) (4,840) (5,555) (8,079) Loss on extinguishment of debt — — (1,268) — Total other income (expense), net 3,479 816 6,659 9,226 Loss before income taxes (22,614) (30,729) (91,886) (188,944) Income tax expense 637 2,232 4,894 3,665 Net loss $ (23,251) $ (32,961) $ (96,780) $ (192,609) 29 Comparison of the Three Months Ended September 30, 2024 and 2023 Sales For the three months ended September 30, 2024, we shipped more than 31,000 pumps worldwide. Sales were $244.0 million, which included $72.3 million of sales outside the United States. Sales were $185.6 million for the three months ended September 30, 2023, which included $55.4 million of sales outside the United States. For the three months ended September 30, 2024, we recognized incremental pump sales of $1.0 million as a result of Tandem Choice fulfillments. For the three months ended September 30, 2023, our revenues were reduced by $8.2 million for pump sales as a result of deferrals related to Tandem Choice. The Tandem Choice program launched in the United States in September of 2022 and eligibility to participate in the program (and our associated sales deferrals) ended in February 2024 in conjunction with the launch of Tandem Mobi. Sales by product in the United States were as follows (in thousands): Three Months Ended September 30, 2024 2023 Pump $ 86,722 $ 66,365 Supplies and other 83,889 72,093 Net revenue recognized (deferred) for Tandem Choice program 1,039 (8,236) Total Sales in the United States $ 171,650 $ 130,222 Pump sales in the United States were $86.7 million for the third quarter of 2024, compared to $66.4 million in the third quarter of 2023. Our pump shipments in the United States increased more than 20% to nearly 21,000 pumps in the third quarter of 2024 compared to the third quarter of 2023. We also benefited from an increase in average selling prices across all product lines due to price increases, customer mix and a continued shift to a higher percent of direct sales versus in our distribution channel. Sales to distributors accounted for 61% and 64% of the Company’s United States sales for the three months ended September 30, 2024 and 2023, respectively. Sales of pump-related supplies increased primarily due to a year-over-year increase in our installed base of customers in the United States, as well as an increase in average selling prices. Tandem Choice fulfillments in the third quarter of 2024 resulted in incremental sales of $1.0 million. Sales in the United States for the three months ended September 30, 2023 were reduced by $8.2 million in sales deferrals related to Tandem Choice. Sales by product outside the United States were as follows (in thousands): Three Months Ended September 30, 2024 2023 Pump $ 28,077 $ 21,672 Supplies and other 44,244 33,728 Total Sales Outside the United States $ 72,321 $ 55,400 Pump sales outside the United States were $28.1 million for the third quarter of 2024, compared to $21.7 million in the third quarter of 2023. Our pump shipments outside the United States increased by over 30% to nearly 11,000 pumps for the third quarter of 2024 compared to the third quarter of 2023. We also benefited from an increase in average selling prices due primarily to geographical mix. Sales of pump-related supplies increased due to a year-over-year increase in our installed base of customers outside the United States. Cost of Sales and Gross Profit Our cost of sales for the three months ended September 30, 2024 was $119.3 million , resulting in gross profit of $124.7 million, compared to cost of sales of $95.9 million and gross profit of $89.8 million for the same period in 2023. Cost of sales for the three months ended September 30, 2024 included a charge of $0.7 million for Tandem Choice fulfillments. There was no comparable charge during the same period in 2023. The gross margin for the three-month periods ended September 30, 2024 and 2023 was 51% and 48%, respectively. 30 The effect of our Tandem Choice program on gross profit and gross margin was negligible for the three months ended September 30, 2024. Gross profit for the three months ended September 30, 2023 was reduced by $8.2 million, or approximately two percentage points of gross margin due to Tandem Choice. The impact on gross margin from Tandem Choice will continue to fluctuate through the end of the program based on the number of eligible customers who ultimately elect to participate. Excluding the impact of Tandem Choice, gross margin was flat compared to the prior year period. Gross margin benefited from pricing improvement across all product lines and lower pump materials cost, offset by higher labor and overhead on a per-unit basis as we continued to scale the launch of Tandem Mobi. Gross margin was positively impacted by product mix. Pump sales, which have the highest gross margin, were 47% of total worldwide sales in the third quarter of 2024, compared to 43% in the third quarter of 2023. Excluding the impact of Tandem Choice, pump sales for the third quarter of 2024 were 47% of worldwide sales and 45% of worldwide sales for the third quarter of 2023. Operating Expenses Our operating expenses for the three months ended September 30, 2024 were $150.7 million, compared to $121.3 million for the three months ended September 30, 2023. The $29.4 million increase was primarily driven by increased development efforts for pipeline products as well as the ramp up of sales and marketing for Mobi. Selling, General and Administrative Expenses. SG&A expenses were $99.6 million for the three months ended September 30, 2024, compared to $79.3 million for the same period in 2023. The $20.3 million increase was largely driven by higher employee-related expenses of $12.7 million due to increased headcount and overall higher cost of salaries and benefits. We also experienced a $7.6 million increase in outside consulting and services largely to support business growth. Research and Development Expenses . R&D expenses increased to $51.1 million for the three months ended September 30, 2024, from $42.0 million for the same period in 2023. The increase in R&D expenses was primarily the result of an increase of $6.0 million in employee benefits and salaries due to an increase in personnel to support our product development efforts. We also experienced an increase in other non-employee discretionary spending, including clinical trial expenses, supplies and equipment costs. Other Income (Expense), Net Total other income (expense), net for the three months ended September 30, 2024 was $3.5 million income, compared to $0.8 million income in the same period in 2023. Other income, net for the three months ended September 30, 2024 primarily consisted of $5.6 million of interest income earned on our cash equivalents and short-term investments, and $1.9 million of interest expense which included the amortization of debt issuance costs related to our convertible senior notes due 2025 and 2029 (the 2025 Notes and the 2029 Notes, respectively). 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 accrued interest as discussed above, as well as the amortization of debt issuance costs related to the 2025 Notes. Income Tax Expense We recognized income tax expense of $0.6 million on a pre-tax loss of $22.6 million for the three months ended September 30, 2024, compared to income tax expense of $2.2 million on a pre-tax loss of $30.7 million for the three months ended September 30, 2023. Income tax expense for the three months ended September 30, 2024 and 2023 was primarily attributable to state and foreign income tax expense as a result of current taxable income in certain jurisdictions. Comparison of the Nine Months Ended September 30, 2024 and 2023 Sales For the nine months ended September 30, 2024, we shipped nearly 87,000 pumps worldwide. Sales were $657.6 million, which included $199.4 million of sales outside the United States. For the nine months ended September 30, 2024, there was negligible net impact to our revenues as a result of sales deferrals and fulfillments related to our Tandem Choice program. Pump sales that occurred after February 2024 were not eligible for Tandem Choice. Sales were $550.9 million for the same period in 2023, 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 the result of Tandem Choice. 31 Sales by product in the United States were as follows (in thousands): Nine Months Ended September 30, 2024 2023 Pump $ 230,187 $ 207,180 Supplies and other 227,888 209,352 Net revenue recognized (deferred) for Tandem Choice program 47 (12,568) Total Sales in the United States $ 458,122 $ 403,964 Pump sales in the United States were $230.2 million for the nine months ended September 30, 2024 compared to $207.2 million for the same period in 2023. Our pump shipments in the United States increased by nearly 10% to more than 56,000 pumps for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The scaled launch of Tandem Mobi has impacted, and may continue to impact, the timing of customer purchases across the quarters. For example, Tandem Mobi became commercially available in the United States in February 2024 initially with Dexcom G6 sensor integration, followed by Dexcom G7 sensor integration in June 2024. We also benefited from an increase in average selling prices across all product lines due to price increases, customer mix and a continued shift to a higher percent of direct sales versus in our distribution channel. Sales of pump-related supplies increased primarily due to a year-over-year increase in our ending estimated installed base of customers in the United States, as well as increase in average selling prices. The net sales impact from revenue deferrals and fulfillments of our Tandem Choice program in the United States for the nine months ended September 30, 2024 was negligible. For the nine months ended September 30, 2023, revenues were reduced by $12.6 million as the result of sales deferrals related to Tandem Choice. The decrease in the net revenue deferral for Tandem Choice in 2024 as compared to 2023 was primarily due to the cessation of the sales deferral period in February 2024, which coincided with the launch of Tandem Mobi. Pump sales that occurred after February 2024 were not eligible for Tandem Choice, nor subject to a sales deferral. Sales by product outside the United States were as follows (in thousands): Nine Months Ended September 30, 2024 2023 Pump $ 79,774 $ 67,235 Supplies and other 119,659 79,723 Total Sales Outside the United States $ 199,433 $ 146,958 Our pump shipments outside the United States increased by over 20% to more than 30,000 pumps for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Pump sales outside the United States were $79.8 million for the nine months ended September 30, 2024, compared to $67.2 million for the same period in 2023. Throughout 2024, we have seen increased customer demand for our products. In the first half of 2023, pump and supply shipments were impacted by an operational transition to a centralized European distribution center which resulted in significant disruption in distributor ordering patterns. The transition was completed by the second half of 2023. The increase in pump sales was offset by a slight decrease in pump average selling prices due primarily to geographical mix. In addition to the distribution center transition, sales of pump-related supplies outside the United States increased due to growth in our installed base of customers. Sales to distributors accounted for the overwhelming majority of our total sales outside the United States for the nine-month periods ended September 30, 2024, and 2023. Cost of Sales and Gross Profit Our cost of sales for the nine months ended September 30, 2024 was $325.4 million resulting in gross profit of $332.1 million, compared to cost of sales of $276.5 million and gross profit of $274.4 million for the same period in 2023. The gross margin for the nine months ended September 30, 2024 was 51% compared to 50% in the same period in 2023. The effect of Tandem Choice was negligible for the nine months ended September 30, 2024 compared to a gross margin reduction of approximately 1 percentage point for the nine months ended September 30, 2023. The impact on gross margin from our Tandem Choice program will fluctuate through the expiration of the program based on the number and timing of eligible customers who ultimately elect to participate. 32 Gross margin benefited from pricing improvement and lower materials cost, offset by higher labor and overhead costs on a per-unit basis as we continue to scale the launch of Tandem Mobi. Gross margin was negatively impacted by product mix. Pump sales, which have the highest gross margin, were 47% of total worldwide sales for the nine months ended September 30, 2024, compared to 48% of worldwide sales for the first nine months of 2023. Excluding the impact of Tandem Choice, pump sales for the nine months ended September 30, 2024 were 47% of total worldwide sales compared to 49% in the first nine months of 2023. Operating Expenses Our operating expenses for the nine months ended September 30, 2024 were $430.7 million, compared to $472.6 million for the nine months ended September 30, 2023. The $41.9 million decrease was primarily driven by $78.8 million of acquired in-process research and development expenses incurred in 2023 in connection with our acquisition of AMF Medical, for which there was no comparable expense in 2024. 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. These non-recurring expenses from 2023 were partially offset by higher operating expenses in 2024 related to development efforts for pipeline products as well as the ramp up of sales and marketing for Tandem Mobi. Selling, General and Administrative Expenses. SG&A expenses increased 6% to $284.0 million for the nine months ended September 30, 2024, from $266.8 million for the same period in 2023. Expenses for the nine months ended September 30, 2023 included non-recurring expenses of $14.1 million related to lease impairment charges and $2.1 million in severance costs in 2023. Expenses for the nine months ended September 30, 2024 increased mainly due to higher employee-related, marketing and consulting expenses which related to new product launches. Research and Development Expenses . R&D expenses increased 15% to $146.7 million for the nine months ended September 30, 2024, from $127.1 million for the same period in 2023. The increase in R&D expenses was primarily the result of an increase in salaries and related benefits from our acquisitions and an increase in personnel to support our product development efforts. We also experienced an increase in other non-employee discretionary spending, including clinical trials costs and equipment expenses. Acquired In-Process Research and Development Expenses. 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 (see Note 12, “Acquisitions”). Other Income (Expense), Net Total other income (expense), net for the nine months ended September 30, 2024 was $6.7 million income, compared to $9.2 million income in the same period in 2023. Other income, net for the nine months ended September 30, 2024 primarily consisted of $16.7 million of interest income earned on our cash equivalents and short-term investments, partially offset by $5.6 million of interest expense which included the amortization of debt issuance costs related to our 2025 Notes and 2029 Notes. 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 2025 Notes. Income Tax Expense We recognized income tax expense of $4.9 million on a pre-tax loss of $91.9 million for the nine months ended September 30, 2024, compared to income tax expense of $3.7 million on a pre-tax loss of $188.9 million for the nine months ended September 30, 2023. Income tax expense for the nine months ended September 30, 2024 and 2023 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 September 30, 2024, we had $473.3 million in cash and cash equivalents and short-term investments. We believe that our cash and cash equivalents, short-term investments, and future cash flows from operations will be sufficient to fund our ongoing core business activities for at least the next 12 months. 33 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. 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. We expect to rely on these sources of cash, primarily from product sales, to fund our material cash requirements in both the short and long term. The following table shows a summary of our cash flows for the nine months ended September 30, 2024, and 2023 (in thousands): Nine Months Ended September 30, 2024 2023 Net cash provided by (used in): Operating activities $ 13,508 $ (24,594) Investing activities (28,492) (69,156) Financing activities 6,065 1,496 Effect of foreign exchange rate changes on cash (910) (652) Net decrease in cash and cash equivalents $ (9,829) $ (92,906) Operating Activities . Net cash provided by operating activities was $13.5 million for the nine months ended September 30, 2024, compared to $24.6 million cash used in the same period in 2023. For the nine months ended September 30, 2024, net loss was $96.8 million, net non-cash adjustments were $98.8 million, and change in working capital balances was an increase of $11.5 million. For the nine months ended September 30, 2023, net loss was $192.6 million, net non-cash adjustments were $177.4 million and change in working capital balances was a decrease of $9.4 million. For the nine months ended September 30, 2023, net non-cash adjustments included $78.8 million of acquired in-process research and development expenses related to our acquisition of AMF Medical, and a $14.1 million operating lease impairment charge. Investing Activities . Net cash used in investing activities was $28.5 million for the nine months ended September 30, 2024, which primarily consisted of $251.4 million of purchases of short-term investments, and $16.2 million in purchases of property and equipment, offset by $239.0 million in proceeds from maturities and redemptions of short-term investments. Net cash used in investing activities was 69.2 million for the nine months ended September 30, 2023, which was primarily related to $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, completed in 2023, offset by $415.5 million in proceeds from maturities and redemptions of short-term investments. Financing Activities. Net cash provided by financing activities was $6.1 million for the nine months ended September 30, 2024, which primarily consisted of net proceeds of $306.9 million from the issuance of the 2029 Notes which was partially offset by $246.1 million used in the repurchase of 2025 Notes, $30.0 million used in the repurchase and retirement of common stock and $15.8 million used to purchase Capped Call Options related to the 2029 Notes. In addition, $9.0 million was used in payments for tax withholdings related to the issuance of common stock under our stock plans, net of proceeds received from common stock issuances for the period. 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. Our liquidity position and capital requirements are subject to fluctuation based on a number of factors. In particular, our cash inflows and outflows are principally impacted by the following: • our ability to generate sales, the timing of those sales, the mix of products sold and the collection of receivables from period to period; • contractual debt obligations, including periodic interest payments; • the timing of any additional financings, and the net proceeds raised from such financings; • the timing and amount of proceeds from the issuance of equity awards pursuant to employee stock plans; 34 • fluctuations in gross and operating margins; and • fluctuations in working capital, including changes in accounts receivable, inventories, accounts payable, employee-related liabilities, and operating lease liabilities. Both our primary short-term and long-term capital needs are expected to include expenditures related to: • support of our commercialization efforts related to our current and future products; • expansion of our customer support resources for our growing installed customer base; • research and product development efforts, including clinical trial costs; • acquisitions, 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; • investments for the development, improvement and acquisition of manufacturing, testing and packaging equipment to support business growth and increase capacity; • payments under licensing, development and commercialization agreements; and • integration costs related to acquisitions of businesses, products and technologies. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements and accompanying notes as of the date of the financial statements. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about our financial condition and results of operations that are not readily apparent from other sources. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies Involving Management Estimates and Assumptions,” included in our Annual Report on Form 10-K for the year ended December 31, 2023. 35