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TANDEM DIABETES CARE INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis together with "Selected
Financial Data" in Part II, Item 6 and our consolidated financial statements and
related notes in Part II, Item 8. The following discussion contains
forward-looking statements, which statements are subject to considerable risks
and uncertainties. Our actual results could differ materially from those
expressed or implied in any forward-looking statements as a result of various
factors, including those set forth under the caption "Risk Factors" in Part I,
Item 1A.
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Certain statements contained in this Annual Report are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Exchange Act, and are subject to the "safe
harbor" created by these sections. Future filings with the SEC , future press
releases and future oral or written statements made by us or with our approval,
which are not statements of historical fact, may also contain forward-looking
statements. Because such statements include risks and uncertainties, many of
which are beyond our control, actual results may differ materially from those
expressed or implied by such forward-looking statements. Some of the factors
that could cause actual results to differ materially from those expressed or
implied by such forward-looking statements can be found under the caption "Risk
Factors" in Part I, Item 1A, and elsewhere in this Annual Report. The
forward-looking statements speak only as of the date on which they are made, and
we undertake no obligation to update such statements to reflect events that
occur or circumstances that exist after the date on which they are made.
Overview
We are a medical device company focused on the design, development and commercialization of technology solutions for people living with diabetes. Diabetes management can vary greatly from person-to-person, creating multiple market segments based on clinical needs and personal preferences. Our goal is to lead in insulin therapy management across multiple of these market segments by providing a portfolio of delivery devices, software, and data insight solutions to people living with diabetes, as well as their caregivers and healthcare providers. Since our initial commercial launch, we have rapidly innovated and brought more products to market than our competitors. We have commercially launched seven insulin pump configurations inthe United States since 2012 and three insulin pump configurations outsidethe United States since 2018. Today, our software-updatable t:slim X2 Insulin Delivery System (t:slim X2) hardware platform represents 100% of our new pump shipments. In the four-year period endedDecember 31, 2021 , we shipped nearly 330,000 insulin pumps, which is representative of our estimated global installed customer base, assuming the typical four-year reimbursement cycle. Nearly 240,000 of these pumps were shipped to customers inthe United States and nearly 90,000 were shipped to international markets. Our manufacturing, sales and support activities principally focus on our flagship pump platform, the t:slim X2 and our complementary product offerings. Our simple-to-use t:slim X2 is based on our proprietary technology platform and is the smallest durable insulin pump available inthe United States . We have commercially offered two different automated insulin dosing (AID) algorithms on t:slim X2, including our Control-IQ technology, which is an advanced hybrid-closed loop feature, designed to help increase a user's time in their targeted glycemic range. It was the first system cleared by theU.S. Food and Drug Administration (FDA) to deliver automatic correction boluses in addition to adjusting insulin to help prevent high and low blood sugar based on continuous glucose monitoring (CGM) readings. Approximately 200,000 t:slim X2 users have our Control-IQ technology, which launched inthe United States in the first quarter of 2020, and is now available in more than 20 countries. Our Control-IQ technology uses information from Dexcom Inc.'s (Dexcom) G6 sensor, which is the third generation of Dexcom CGM that we have integrated with our pump technology. The t:slim X2 is unique in that it is the only pump on which remote software updates have been made commercially available inthe United States . Now available in the countries we serve worldwide, our Tandem Device Updater (TDU), is a revolutionary tool that has allowed more than 130,000 people to update their t:slim X2 software from a personal computer. This offering is a competitive advantage as it allows us to bring new features, such as our AID technology and CGM integration, to our customers faster than the industry has been able to historically. Our insulin pump products are generally considered durable medical equipment and have an expected lifespan of at least four years. In addition to insulin pumps, we sell disposable products that are used together with our pumps and are replaced every few days, including cartridges for storing and delivering insulin, and infusion sets that connect the insulin pump to a user's body. Additionally, we sell accessories such as belt clips and cases for use with pumps which are designed to enhance usability. Inthe 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. Our primary research and development and administrative headquarters are located inSan Diego, California . We also operate a manufacturing facility and a warehousing facility inSan Diego . In addition, we maintain offices inBoise, Idaho and inMarkham, Ontario, Canada . We employed approximately 2,000 regular full-time employees as ofDecember 31, 2021 . For the years endedDecember 31, 2021 , 2020 and 2019, our consolidated sales were$702.8 million ,$498.8 million , and$362.3 million , respectively. For the year endedDecember 31, 2021 , our net income was$15.6 million . For the years ended 2020 and 2019, our net loss was$34.4 million , and$24.8 million , respectively. Worldwide pump sales accounted for 59%, 63%, and 68% of our total sales, respectively, for the years endedDecember 31, 2021 , 2020 and 2019, while pump-related supplies and accessories accounted for the remainder in each year. 65 --------------------------------------------------------------------------------
Recent Developments
OnFebruary 16, 2022 , we announced FDA clearance for the t:connect mobile app, which is the first-ever smartphone application capable of initiating insulin delivery on both iOS and Android operating systems. The updated t:connect mobile app is designed to offer t:slim X2 insulin pump users the ability to program and cancel bolus insulin requests through the convenience of their compatible smartphone. The new feature will be offered inthe United States for no additional cost to new t:slim X2 insulin pump customers, and to in-warranty customers through remote software updates for both the t:slim X2 insulin pump and t:connect mobile app.
COVID-19 Global Pandemic Impact and Considerations
Our business has been impacted in a variety of ways since the onset of the
COVID-19 global pandemic in early 2020, and will likely continue to be impacted
for the remainder of 2022. Specific factors that have influenced our financial
results and the way in which we operate include fluctuations in shelter-in-place
restrictions, supply chain constraints, labor shortages, the timing and extent
of vaccine availability and surges in infection and hospitalization rates as new
COVID variants have emerged. Throughout this time, we have responded to each of
these unique challenges, while prioritizing the health and safety of our
employees and customers and working diligently to maintain a continuous supply
of products, training and customer support.
Most notably, our sales results reflected a high degree of variability across
the quarters during this time, unlike historical seasonal trends. We experienced
a modest impact early in 2020, which became more pronounced and continued in
varying degrees as the pandemic progressed. Initially, the impact on our
business was relatively consistent worldwide but we have since seen variations
in individual markets based on local conditions and anticipate ongoing
fluctuations may continue.
Our inventory levels have also fluctuated as we respond to supply chain
constraints, due to availability of components from the various suppliers we use
to build our products. While we have adequate raw material inventory for a
substantial portion of our pump and cartridge components, we are below our
targeted stocking levels for others. In early 2020, we initiated regular
discussions with our key suppliers regarding their abilities to fulfill existing
orders and assess their ongoing capacity. Over the course of the pandemic, we
have increased the frequency of those communications. We continue to monitor
factors that could negatively impact our supply chain, such as global shortages
of semiconductors, copper and paper, as well as custom components for our
insulin pumps and cartridges where we rely on a limited number of qualified
suppliers. We anticipate experiencing continued challenges managing supply chain
constraints, including the potential for limitations on availability of
components as well as increased purchase costs.
Generally, our entire operation has been impacted as we navigate the generalized
labor shortages impacting global markets. The labor challenges affect our
ability to recruit and hire key talent at the same pace as in years past, but we
remain active in our recruiting efforts and competitive in our offerings. In
particular, these labor challenges combined with regulatory delays have impacted
our product development and launch timelines. The FDA has generally stated that
its review process may take longer than normal due to prioritization of
COVID-related products and services. We have experienced lengthy delays in the
review of pending submissions with the FDA, making regulatory timelines
increasingly difficult to predict.
We have adapted well in our commercial operations and customer-facing functions.
Our sales organization balances remote and in-person interactions based on the
needs and requirements of the customers with whom they interact. For example,
prior to the onset of the pandemic, nearly all trainings for customers
purchasing our pump platform were in-person. We quickly pivoted to nearly all
trainings being provided on remote platforms. Since that time, we have achieved
a balance that includes options for the individual based on their unique needs.
We continue to see variability across the markets in which we operate and
anticipate these fluctuations between in-person and remote interactions will
continue.
Our facilities have been closed for non-essential purposes throughout most of
the pandemic, while our manufacturing operations were deemed essential due to
the critical nature of our product and the communities that we serve. To help
ensure the safety and health of those employees working in our facilities, we
have implemented preventative measures by requiring employees to wear masks and
perform temperature checks before each shift. We are currently developing a
return-to-work strategy for the rest of the organization that will incorporate a
hybrid approach to meet the needs of our employees, as well as optimize usage of
our facilities.
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Overall, we anticipate that our sales and operating results will continue to be
impacted and subject to unpredictable variability. The full extent of the impact
of the pandemic on our future business and operations is difficult to estimate
and will depend on a number of factors including the scope and duration of the
COVID-19 global pandemic, and the relative impact of COVID-19 on the business
operations of our contract manufacturers, suppliers and competitors.
Our products under development support our strategy of developing insulin delivery systems as part of a therapy management portfolio that is designed to improve patient experience and outcomes. Our product development efforts fall into three pillars of innovation: delivery devices, device software including algorithms, and data and insights.
Delivery Devices
We are developing a family of delivery device solutions to meet the varying needs of people living with type 1 and type 2 diabetes by providing choice within our own portfolio. Preferences in the size, shape, and mode of operation that comprise an insulin pump's hardware often impact a person's pump purchasing decision and overall user experience.
Mobi
Formerly referred to under its development name, t:sport, the Tandem Mobi is approximately half the size of our t:slim X2 pump, and is being designed for people who seek even greater discretion and flexibility with the use of their insulin pump. Its features include a 200-unit cartridge, an on-pump bolus button, inductive charging, an AID algorithm, and is waterproof. We anticipate that Mobi will be our first insulin pump to support full pump-control from our mobile application. t:slim X3 Advancing our flagship t:slim platform, the t:slim X3 is being designed to provide a modernized user interface and even greater usability for our planned feature updates. It is also being designed to include enhanced technology, such as greater processing power and capacity to support our advanced algorithms, as well as increased battery life, improved durability, and wireless software update capabilities.
Mobi: Tubeless
This offering is being developed to provide an alternative tubeless infusion site option for Mobi pump users. A goal of this design is to allow for people living with diabetes to customize the way they wear their pump with each cartridge change to best suit their personal preferences and lifestyle
Patch
Our patch pump design is in its early stages and is being developed for people
living with diabetes who want a disposable tubeless solution.
Our device software is used to control our pumps either directly through the pump's interface or through our mobile application. It also includes our AID technology and the software used to support remote pump updatability.
Control-IQ Advancements
We are driving innovation in our algorithms, emphasizing automation, personalization and simplification, all intended to continue to improve therapeutic outcomes and provide a positive patient experience characterized by simplicity and ease of use. Additionally, we have initiated clinical studies to expand the indications of our Control-IQ technology to include people with type 1 diabetes ages 2 to 5 years old, as well as people living with type 2 diabetes. We are also researching the use of different insulins with our Control-IQ technology.
Mobile Control
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We are working to expand our mobile control capability. In the future, our
t:connect mobile app is planned to include additional pump control features,
such as full operation of our Mobi pump.
Integration
Building a robust ecosystem and portfolio around our flagship insulin pumps
requires product development efforts to integrate, add and enhance complementary
system components.
Dexcom CGM: InNovember 2020 , we entered into an agreement with Dexcom to extend our current collaboration to include integration with their future G7 CGM technology. Following integrated product development work, and required regulatory clearances or approvals, this will be the fourth generation of Dexcom CGM that we intend to integrate with our devices. Abbott CGM: InJune 2020 , we announced an agreement with Abbott Laboratories (Abbott ), to develop and commercialize integrated diabetes solutions that combineAbbott's CGM technology with our insulin delivery systems. Following the completion of our integrated product development work, and after obtaining required regulatory clearances or approvals, we intend to focus our initial commercial activities on integrated products in theU.S. andCanada , with additional geographies considered in the future.
Data and Insights
Our goal is to innovate across our digital health platforms by using the vast amount of data that we collect, in combination with technology such as artificial intelligence or machine learning, to provide information and insights to people living with diabetes, their caregivers and healthcare providers and insurance payors. Key areas of development include making these insights easy to understand, provided in a flexible format with mobile or web apps, and available real time. In addition, we are working to integrate health-related information from third-party sources and use our data to support current and future products under development. Tandem Source Expanding the capabilities of our t:connect data management application available for customers inthe United States , Tandem Source is our second-generation web-based data management application that is being designed to become our single, global platform. This application enhances clinical data visualization, provides added interface customization for users to personalize how they engage with their data and for healthcare providers to better manage their care. In the second quarter of 2021, we began limited testing of an initial version of Tandem Source in theUnited Kingdom . We continue to develop and test new features for Tandem Source in anticipation of a future commercial release of the product. Settings Automation Our automation research and development activities center around opportunities for enhanced user and healthcare provider experience, and improved clinical outcomes. In support of this effort, we are working to automate our pump settings adjustments to further enhance ease of use and expand adoption of our insulin pump products.
For additional information, see the section of this Annual Report under the
caption "Business" in Part I, Item 1.
Pump Shipments
From inception throughJune 2018 , we derived nearly all of our sales from the shipment of insulin pumps and associated supplies to customers inthe United States . Starting in the third quarter of 2018, we commenced sales of our t:slim X2 insulin pump in select international geographies. We consider the number of insulin pump units shipped per quarter domestically and internationally to be an important metric for managing our business. Insulin pumps in the markets we serve worldwide are generally subject to a four-year reimbursement cycle, imposed by the third-party insurance carrier, government plan or healthcare system that serves as the primary payor. At the end of each four-year cycle, customers may be eligible for the purchase of a new insulin pump, subject to the rules and requirements of the primary payor. The majority of our pump sales through the current period have been generated by new customers, but the opportunity for existing customers to purchase a renewal insulin pump increases each period as individual customer warranties expire. With programs dedicated to customer retention efforts, we expect such renewal purchases to represent a more significant portion of our shipments in the long-term. 68 -------------------------------------------------------------------------------- Since inception throughDecember 31, 2021 , we have shipped approximately 395,000 pumps worldwide, of which nearly 330,000 insulin pumps were shipped in the last four years, which is representative of our estimated global in-warranty installed customer base, assuming the typical four-year reimbursement cycle. Nearly 240,000 of these pumps were shipped to customers inthe United States , and nearly 90,000 were shipped to international markets. In the year endedDecember 31, 2021 , we shipped 128,312 insulin pumps worldwide, compared to 90,771 insulin pumps shipped in 2020.
Pump shipments to customers in
follows:
Pump Units
Shipped for Each of the Three Months Ended in Respective Years -
March 31 June 30 September 30 December 31 Total 2012 - 9 204 844 1,057 2013 852 1,363 1,851 2,406 6,472 2014 1,723 2,235 2,935 3,929 10,822 2015 2,487 3,331 3,431 6,234 15,483 2016 4,042 4,582 3,896 4,418 16,938 2017 2,816 3,427 3,868 6,950 17,061 2018 4,444 5,447 7,379 12,935 30,205 2019 9,669 12,799 13,814 17,453 53,735 2020 13,158 14,735 18,380 24,552 70,825 2021 16,644 20,665 20,296 25,712 83,317
Pump shipments to international customers by fiscal quarter were as follows:
Pump Units Shipped for Each of the Three Months Ended in Respective Years - International
March 31 June 30 September 30 December 31 Total
2018 N/A N/A 1,055 3,233 4,288
2019 5,063 8,459 4,025 2,149 19,696
2020 4,220 3,952 3,641 8,133 19,946
2021 8,708 13,152 11,262 11,873 44,995
Trends Impacting Financial Results
Overall, we have experienced considerable sales growth each year since the commercial launch of our first product in the third quarter of 2012, only recognizing an operating profit on a full year basis for the first time in 2021. Our operating results have historically fluctuated on a quarterly or annual basis, particularly in periods surrounding anticipated regulatory approvals, the commercial launch of new products by us and our competitors, the commercial launch of our products in geographies outside ofthe United States and due to general seasonality inthe United States . We expect these periodic fluctuations in our operating results to continue. We believe that our financial condition and operating results, as well as the decision-making process of our current and potential customers, has been and will continue to be impacted by a number of general trends, including the following:
•market acceptance of our products and competitive products by people with
insulin-dependent diabetes, their caregivers and healthcare providers;
•the introduction of new products, treatment techniques or technologies for the
treatment of diabetes, including the timing of the commercialization of new
products by us and our competitors;
•seasonality in
and coinsurance requirements associated with the medical insurance plans
utilized by our customers and the customers of our distributors;
•incidence of disease or illness, including the COVID-19 global pandemic, that
may impact customer purchasing patterns or disrupt our supply chain, or create
uncertainty or delay with respect to regulatory approvals;
•timing of holidays and summer vacations, which may vary by geography and may be
further influenced by the lifting or relaxation of COVID-19 related restrictions
and broader availability of vaccines;
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•the buying patterns of our distributors and other customers, both domestically
and internationally;
•changes in the competitive landscape, including as a result of companies
entering or exiting the diabetes therapy market;
•access to adequate coverage and reimbursement for our current and future
products by third-party payors, and reimbursement decisions by third-party
payors;
•the magnitude and timing of any changes to our facilities, manufacturing
operations and other infrastructure, and factors impacting our ability to access
our facilities;
•the impact of any potential claims, investigations, information requests, or legal, regulatory or administrative proceedings with respect to potential or asserted violations of law, including: sales and marketing practices, anti-corruption and FCPA, antitrust, securities, employment, product liability, environmental, data privacy breaches and patent infringement, which may subject us to fines, penalties, expenses, or reputational harm;
•anticipated and actual regulatory approvals of our products and competitive
products; and
•product recalls impacting, or the suspension or withdrawal of regulatory
clearance or approval relating to, our products or the products of our
competitors.
In addition to these general trends, we believe the following specific factors have materially impacted, and could continue to materially impact, our business going forward:
•the disruptions caused by the COVID-19 global pandemic on suppliers,
third-party manufacturers, healthcare providers, distributors and our existing
or potential customers;
•continued increase in demand following the commercial launch of t:slim X2 with Control-IQ technology in additional geographies, and the demonstrated success of our Tandem Device Updater;
•anticipated new product launches;
•increased opportunity to achieve customer renewals as customers become eligible for insurance reimbursement to purchase a new insulin pump at the end of the typical four-year reimbursement cycle;
•ability to enter into, maintain agreements, and accomplish continued success in
current and future product integrations with CGM partners;
•expansion and new product launches in select international geographies,
including initial orders to stock inventories; and
•ability to effectively scale our operations to support rapid growth, including expanding our facilities, advancing our research and development efforts, increasing manufacturing capacity through third-party manufacturers, and hiring and retaining employees in customer service and support functions. In addition to working to achieve our sales growth expectations, in the long-term we intend to continue to leverage our infrastructure investments to realize additional manufacturing, sales, marketing and administrative cost efficiencies with the goal of improving our operating margins and ultimately achieving sustained profitability. We achieved profitability for the first time in the fourth quarter of 2018 and again in the fourth quarters of 2019 and 2020, and were profitable for the year endedDecember 31, 2021 . Though we have yet to achieve profitability consistently from period to period, we believe we can ultimately achieve sustained profitability by driving incremental sales growth inthe United States and international markets, meeting our pump renewal sales objectives, maximizing manufacturing efficiencies on increased production volumes, and leveraging the investments made in our sales, clinical, marketing and customer support organizations. 70 --------------------------------------------------------------------------------
Components of Results of Operations
Sales
We offer products for people with insulin-dependent diabetes. We commenced commercial sales of our original t:slim insulin pump platform inthe United States in the third quarter of 2012 and continued to launch various iterations of that platform during the following years. InOctober 2016 , we began shipping our flagship pump platform, the t:slim X2 insulin pump. The t:slim X2 insulin pump platform with remote software update capabilities, now represents 100% of our new pump shipments and is used by nearly all of our in-warranty customers. Our products also include disposable insulin cartridges and infusion sets, as well as our complementary t:connect, TDU and mobile application products. We also offer additional accessories including protective cases, belt clips, and power adapters, although sales of these products are not significant. Inthe United States , we primarily sell our products through national and regional distributors on a non-exclusive basis. These distributors are generally providers of medical equipment and supplies to individuals with diabetes. Our primary end customers are people with insulin-dependent diabetes. Similar to other durable medical equipment, the primary payor is generally a third-party insurance carrier and the customer is usually responsible for any medical insurance plan copay or coinsurance requirements. We believe we can continue to increase sales by promoting our products to a greater number of potential customers, caregivers and healthcare providers, although the COVID-19 global pandemic has had, and may continue to have, an adverse impact on our sales. In the third quarter of 2018, we began the launch of our t:slim X2 hardware platform through distribution partners outsidethe United States . Our products are now sold in more than 20 countries, including inCanada ,France andGermany . Our independent international distributor partners perform all sales, customer support and training in their respective markets. InCanada , we market with a direct sales force and, similar tothe United States , use a distributor partner for certain billing and fulfillment activities. Historically, we have experienced consistent levels of reimbursement for our products inthe United States , but we expect the average sales price will vary in international markets based on a number of factors, such as the geographical mix, nature of the reimbursement environment, government regulations and the extent to which we rely on distributor relationships to provide sales, clinical and marketing support. In general, inthe United States we have experienced pump shipments being weighted heavily towards the second half of the year, with the highest percentage of pump shipments expected in the fourth quarter due to the nature of the reimbursement environment. Consistent with these historical seasonality trends, our domestic pump shipments have typically decreased significantly from the fourth quarter to the following first quarter. Outsidethe United States , we do not expect this same impact from seasonality associated with reimbursement, although the quarterly sales trends may be impacted by a number of other factors, including summer vacations, the timing of product launches into new geographies and variability in the ordering patterns of our distributor partners. Since early 2020, the COVID-19 global pandemic had a major impact on businesses around the world, as well as our own quarterly trends. Initially, the impact on our business was relatively consistent worldwide but we have since seen varying degrees of impact in individual markets based on local conditions. For example, during 2021, we saw a gradual increase in the amount of in-person sales and training activities inthe United States as vaccination availability expanded and social-distancing requirements were relaxed. During the second half of 2021, we saw reduced availability of customers and healthcare providers relating to people taking time off to vacation, which adversely impacted our sales of new pumps to customers during the period. We anticipate that our sales may not follow historical trends and may be subject to unpredictable variability in the coming months based on varying levels of impact of the global pandemic across the markets in which we operate. The full extent of the impact of the COVID-19 global pandemic on our business and operations will depend on a number of factors, including the scope and duration of the pandemic, varying government responses to the pandemic and potential delays to product development timelines. Separate from any impacts of the COVID-19 global pandemic, our quarterly sales have historically fluctuated, and may continue to fluctuate substantially in the periods surrounding anticipated and actual regulatory approvals and commercial launches of new products by us or our competitors. We believe customers may defer purchasing decisions if they believe a new product may be launched in the future. Additionally, upon the announcement of FDA approval or commercial launch of a new product, either by us or one of our competitors, potential new customers may reconsider their purchasing decisions or take additional time to consider such FDA approval or product launch before making their purchasing decisions. For example, we believe certain customers paused their decision-making during the second half of 2019 in anticipation of the commercial availability of the t:slim X2 with Control-IQ technology, and similar occurrences may occur in future periods. However, it is difficult to quantify the extent of the impact of these or similar events on future purchasing decisions. 71 --------------------------------------------------------------------------------
Cost of Sales
Historically, we have manufactured our pumps and disposable insulin cartridges at our manufacturing facility inSan Diego, California . In early 2020, our third-party cartridge manufacturer completed validation and commenced commercial-scale manufacturing to supplement our existing cartridge manufacturing capacity. By the end of 2021, the majority of our t:slim cartridge manufacturing capacity transitioned to our partner in order to create capacity for t:sport cartridge manufacturing in the future. Infusion sets and pump accessories are manufactured by third-party suppliers. 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. Over the long term, we expect our overall gross margin percentage, which for any given period is calculated as sales less cost of sales divided by sales, to improve, as our sales increase and our overhead costs are spread over larger production volumes. We expect we will be able to leverage our manufacturing cost structure across our products that utilize the same technology platform and manufacturing infrastructure and will be able to further reduce per unit costs with increased automation, process improvements and raw materials cost reductions. We also expect our warranty cost per unit to decrease as we release additional product features and functionality utilizing the Tandem Device Updater. Pumps have, and are expected to continue to have, a higher gross margin percentage than our pump-related supplies. Therefore, the percentage of pump sales relative to total sales could have a significant impact on our overall gross margin percentage. In the event that customers delay their pump purchasing decisions or physicians pause in prescribing new pumps, it is possible that we may experience a higher percentage of pump-related supply sales than anticipated, which in turn could adversely impact our overall gross margin percentage. However, our overall gross margin percentage may fluctuate in future quarterly periods as a result of numerous factors aside from those associated with production volumes and product mix. For instance, as a result of the COVID-19 global pandemic we implemented temporary operational changes that introduced variability to our cost of sales, such as supplemental staffing, incremental expenses to protect the health, safety and welfare of our employees working on-site and to enable other employees to work remotely. We are also experiencing higher costs as we manage global supply challenges and anticipate that this will continue for the remainder of 2022. In addition, as demand for our products increases, we may continue to make additional investments in manufacturing capacity or increase our reliance on third parties for manufacturing-related services, either of which could have a negative impact on our gross margins. Specifically, we have and will continue to evaluate investing in additional manufacturing equipment to substantially increase our existing capacity in order to meet anticipated long-term demand for our cartridges, which may initially place downward pressure on the gross margin percentage associated with our pump-related supplies. Other factors impacting our overall gross margin percentage may include the changing percentage of products sold to distributors versus directly to individual customers, varying levels of reimbursement among third-party payors in domestic and international markets, the timing and success of new regulatory approvals and product launches, the impact of the valuation and amortization of employee stock awards on non-cash stock-based compensation expense allocated to cost of sales, changes in warranty estimates, training costs, licensing and royalty costs, cost to support our digital health platforms, cost associated with excess and obsolete inventories, and changes in our manufacturing processes, capacity, costs or output. 72 --------------------------------------------------------------------------------
Selling, General and Administrative
Our selling, general and administrative (SG&A) expenses primarily consist of salary, cash-based incentive compensation, fringe benefits and non-cash stock-based compensation for our sales, marketing and administrative functions, which also includes our clinical, customer support, technical services, insurance verification and regulatory affairs personnel. We had approximately 95 sales territories inthe United States in 2021 and we commenced an expansion in the fourth quarter of 2021 to approximately 110 sales territories. Our existing territories are generally maintained by sales representatives and field clinical specialists, and supported by managed care liaisons, additional sales management and other customer support personnel, which have also been rapidly expanding to support our growing installed base. Our operations inCanada are comprised of approximately ten sales territories. Other significant SG&A expenses typically include those incurred for product demonstration samples, commercialization activities associated with new product launches, travel, trade shows, outside legal fees, independent auditor fees, outside consultant fees, insurance premiums, facilities costs and information technology costs. While we experienced reduced spending in areas such as travel and trade shows in 2020 and 2021 due to the COVID-19 global pandemic, we may experience additional costs as our employees return to work at our offices and as we adapt to alternative hybrid work models, or as needed to respond to general labor shortages and heightened competition for employees with specialized skills. Overall, we expect our SG&A expenses, including the cost of our customer support infrastructure, to continue to increase as our customer base grows inthe United States and international markets. In addition, we will continue to evaluate, and may further increase, the number of our field sales and clinical personnel in order to optimize the coverage of our existing territories. In the longer term, SG&A expenses may also increase due to anticipated costs associated with additional compliance and regulatory reporting requirements.
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, non-cash stock-based compensation and temporary employee expenses. We also incur R&D expenses for supplies, development prototypes, outside design and testing services, depreciation, allocated facilities and information services, clinical trial costs, payments under our licensing, development and commercialization agreements and other indirect costs. We expect our R&D expenses to increase as we advance our products under development, develop new products and technologies and support more clinical trials. Similar to our SG&A expenses, our future R&D spending may be impacted by the COVID-19 global pandemic. For instance, we may experience lower spending associated with delays in the advancement of particular programs, which may be offset by increased spending to support the retention, health, safety and welfare of our employees or to enable development activities under alternative conditions.
Other Income and Expense
Other income and expense primarily consists of interest expense which includes the amortization of debt issuance costs related to our 1.50% Convertible Senior Notes due 2025, issued inMay 2020 (our Notes), changes in the fair value of certain warrants issued in connection with our public offering of common stock inOctober 2017 , and interest earned on our cash equivalents and short-term investments. We expect interest expense in future quarters to be comparable with the amount expensed in 2021, through the date of conversion or redemption of the Notes. We expect the revaluation of the outstanding Series A warrants will not have a significant impact on our other income and expense through their expiration in the fourth quarter of 2022.
Income Tax Expense (Benefit)
Because the Company maintains a full valuation allowance against its net
deferred tax assets, income tax expense is expected to primarily consist of
current state and foreign cash tax expense as a result of taxable income
anticipated or incurred in those jurisdictions. Income tax expense (benefit) may
fluctuate in future quarters due to adjustments related to non-recurring
transactions and changes in certain tax assessments.
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Results of Operations
Year Ended December 31,
(in thousands, except percentages) 2021 2020 2019
Sales:
Domestic $ 524,907 $ 415,680 $ 302,084
International 177,892 83,150 60,221
Total sales 702,799 498,830 362,305
Cost of sales 326,584 238,310 168,093
Gross profit 376,215 260,520 194,212
Gross margin 54 % 52 % 54 %
Operating expenses:
Selling, general and administrative 261,508 204,903 165,735
Research and development 92,054 63,574 45,199
Total operating expenses 353,562 268,477 210,934
Operating income (loss) 22,653 (7,957) (16,722)
Other income (expense), net:
Interest income and other, net 674 1,567
3,193
Interest expense (6,040) (12,805) -
Change in fair value of common stock warrants (1,386) (17,087)
(11,075)
Total other expense, net (6,752) (28,325)
(7,882)
Income (loss) before income taxes 15,901 (36,282) (24,604) Income tax expense (benefit) 335 (1,900) 149 Net income (loss)$ 15,566 $ (34,382) $ (24,753)
Comparison of Years Ended
Sales. For the year endedDecember 31, 2021 , sales were$702.8 million , which included$177.9 million of international sales. For the year endedDecember 31, 2020 , sales were$498.8 million , which included$83.2 million of international sales. The increase in worldwide sales of$204.0 million in 2021, as compared to 2020, was driven by a 41% increase in worldwide pump shipments to 128,312 in 2021, compared to 90,771 in 2020, and a 56% increase in pump-related supply sales. Sales of pump-related supplies increased primarily due to a 52% growth in our estimated worldwide installed base of customers.
Domestic sales by product were as follows (in thousands):
Year Ended December 31,
2021 2020
Pump $ 319,898 $ 269,856
Infusion sets 140,387 99,743
Cartridges 63,375 45,342
Other 1,247 739
Total Domestic Sales $ 524,907 $ 415,680
74
-------------------------------------------------------------------------------- Domestic pump sales were$319.9 million for the year endedDecember 31, 2021 , compared to$269.9 million in the year endedDecember 31, 2020 , as pump shipments increased 18% compared to the prior year due to continued strong demand for our t:slim X2 insulin pump with Control-IQ technology despite the challenging COVID-19 environment which has impacted the availability of both customers and healthcare providers. Domestic pump shipments were 83,317 in the year endedDecember 31, 2021 compared to 70,825 in 2020. Sales of pump-related supplies increased primarily due to a 39% increase in our estimated domestic installed base of customers. Sales to distributors accounted for 67% and 70% of our total domestic sales for the years endedDecember 31, 2021 and 2020, respectively. Our percentage of sales to distributors versus individual customers is principally determined by the mix of customers ordering our products within the period and whether or not we have a contractual arrangement with their underlying third-party insurance payor.
International sales by product were as follows (in thousands):
Year Ended December 31,
2021 2020
Pump $ 96,458 $ 44,851
Infusion sets 57,063 28,016
Cartridges 23,509 9,884
Other 862 399
Total International Sales $ 177,892 $ 83,150
International pump sales were $96.5 million for the year ended December 31,
2021 , compared to $44.9 million in the year ended December 31, 2020 . Pump
shipments increased 126% compared to the prior year due to strong demand for our
products as we continue to expand the launch of our Control-IQ technology, which
began in the third quarter of 2020 outside the United States . Sales of
pump-related supplies increased primarily due to an 102% increase in our
estimated international installed base of customers. The ordering patterns of
our international distributors for pumps and supplies is highly variable from
period to period as they continue to gain familiarity with the markets in which
they operate and the acceptance of our products in those markets. This
variability was compounded by the changing levels of impact of the global
pandemic across the international markets. Sales to distributors accounted for
95% and 94% of our total international sales for the years ended December 31,
2021 and 2020, respectively.
Cost of Sales and Gross Profit. Our cost of sales for the year ended December
31, 2021 was $326.6 million , resulting in gross profit of $376.2 million ,
compared to cost of sales of $238.3 million and gross profit of $260.5 million
for the year ended December 31, 2020 . The gross margin for 2021 was 54%,
compared to 52% in 2020.
The increase in our gross profit for the year ended December 31, 2021 , was
primarily the result of the $204.0 million increase in total sales. Gross profit
and gross margin both benefited from improvement in the per unit manufacturing
costs for pumps and supplies from efficiencies in the manufacturing process,
leverage of fixed overhead, increased volumes from our third-party cartridge
manufacturer as well as labor and material cost reductions. On an aggregate
basis, non-manufacturing costs, which primarily consist of warranty, royalty,
freight, training and digital health product support costs, also reflected
improvement on a per unit basis. To a lesser extent, overall average selling
prices slightly pressured gross margin as international pump sales comprised a
greater portion of total pump sales compared to the prior year, while supply
average selling prices reflected modest benefit from the growth of our
international installed base. Other factors that have and may continue to impact
the gross margin percentage are changes in product and geographical mix and the
level of non-cash stock-based compensation allocated to cost of sales. Pump
sales, which have the highest gross margin, were 59% of total worldwide sales
for the year ended December 31, 2021 , compared to 63% in 2020. Non-cash
stock-based compensation expense allocated to cost of sales was $6.4 million for
the year ended December 31, 2021 , compared to $8.2 million in 2020, representing
1% and 2% of sales in those periods, respectively.
Selling, General and Administrative Expenses. SG&A expenses increased 28% to
$261.5 million for the year ended December 31, 2021 , from $204.9 million for the
same period in 2020. Employee-related expenses for our SG&A functions comprise
the majority of the SG&A expenses. The increase compared to 2020 was primarily
the result of a $43.9 million increase in salaries, incentive compensation and
other employee benefits due to an increase in personnel to support additional
sales territories, higher sales and other services in support of our growing
installed customer base. We also experienced a $12.7 million increase in other
non-employee discretionary spending for software maintenance, outside consulting
and services and supplies.
75
--------------------------------------------------------------------------------
Research and Development Expenses. R&D expenses increased 45% to $92.1 million
for the year ended December 31, 2021 , from $63.6 million for the same period in
2020. The increase in R&D expenses was primarily the result of an increase of
$20.7 million in salaries, incentive compensation and other employee benefits
due to an increase in personnel to support our product development efforts, as
well as a $7.8 million increase in other non-employee discretionary spending,
including outside consulting and services, equipment and supplies attributable
to R&D.
Other Income (Expense). Total other expense, net for the year ended December 31,
2021 was $6.8 million , compared to $28.3 million in 2020. Other expense for 2021
primarily consisted of $6.0 million of interest expense which included the
amortization of debt issuance costs related to our Notes issued in the second
quarter of 2020, and a $1.4 million revaluation loss from the change in the fair
value of certain warrants. Other expense for 2020 consisted primarily of an
$17.1 million revaluation loss from the change in the fair value of certain
warrants due to the appreciation in our stock price during 2020, and $12.8
million of interest expense which included the amortization of debt discount and
debt issuance costs related to our Notes issued in the second quarter of 2020.
The decrease in interest expense in 2021 was primarily due to the adoption of
ASU No. 2020-06 in the first quarter of 2021 (see Note 7, "Debt"). Interest
income and other, for the years ended December 31, 2021 and 2020, primarily
consisted of interest earned on our cash equivalents and short-term investments,
which decreased in 2021 primarily due to the lower interest rate environment as
compared to 2020.
Income Tax Expense (Benefit). We recognized income tax expense of $0.3 million
on pre-tax income of $15.9 million for the year ended December 31, 2021 ,
compared to an income tax benefit of $1.9 million on a pre-tax loss of $36.3
million for the same period in 2020. The income tax expense for the year ended
December 31, 2021 was primarily attributable to state and foreign income tax
expense as a result of current taxable income in those jurisdictions. The income
tax benefit for the year ended December 31, 2020 was primarily due to benefit
associated with the release of valuation allowance related to the acquisition of
Sugarmate, partially offset by state and foreign income tax expense as a result
of current taxable income in those jurisdictions.
Comparison of Years Ended
Sales. For the year endedDecember 31, 2020 , sales were$498.8 million , which included$83.2 million of international sales. For the year endedDecember 31, 2019 , sales were$362.3 million , which included$60.2 million of international sales. The increase in worldwide sales of$136.5 million in 2020, as compared to 2019, was primarily driven by a$69.4 million increase in pump-related supplies sales due to 52% growth in our estimated worldwide installed base of customers, and a$67.1 million increase in pump sales driven by a 24% increase in worldwide pump shipments to 90,771 in 2020, compared to 73,431 in 2019 which benefited from the effect of certain non-recurring international market dynamics..
Domestic sales by product were as follows (in thousands):
Year Ended December 31,
2020 2019
Pump $ 269,856 $ 205,492
Infusion sets 99,743 66,034
Cartridges 45,342 30,022
Other 739 536
Total Domestic Sales $ 415,680 $ 302,084
Domestic pump sales were $269.9 million for the year ended December 31, 2020 ,
compared to $205.5 million in the year ended December 31, 2019 , as pump
shipments increased 32% compared to the same period in the prior year due to
continued strong demand for our products following the January 2020 domestic
launch of our t:slim X2 insulin pump with Control-IQ technology. Domestic pump
shipments were 70,825 in the year ended December 31, 2020 compared to 53,735 in
2019. Sales of pump-related supplies increased primarily due to a 46% increase
in our estimated domestic installed base of customers. Sales to distributors
accounted for 70% and 73% of our total domestic sales for the years ended
December 31, 2020 and 2019, respectively. Our percentage of sales to
distributors versus individual customers is principally determined by the mix of
customers ordering our products within the period and whether or not we have a
contractual arrangement with their underlying third-party insurance payor.
International sales by product were as follows (in thousands):
76 --------------------------------------------------------------------------------
Year Ended December 31,
2020 2019
Pump $ 44,851 $ 42,094
Infusion sets 28,016 11,221
Cartridges 9,884 6,656
Other 399 250
Total International Sales $ 83,150 $ 60,221
International pump sales were $44.9 million for the year ended December 31,
2020 , compared to $42.1 million in the year ended December 31, 2019 . The first
half of 2019 was positively impacted by the transition of former Animas
customers to our products and the fulfillment of certain international pump
demand from backlog that existed at the end of 2018 due to supply constraints in
prior periods. Sales of pump-related supplies benefited from an 83% increase in
our estimated international installed base of customers. The ordering patterns
of our international distributors for pumps and supplies is highly variable from
period to period. This variability was compounded by the varying levels of
impact of the global pandemic across the international markets in which we
operate. Sales to distributors accounted for 94% and 92% of our total
international sales for the years ended December 31, 2020 and 2019,
respectively.
Cost of Sales and Gross Profit. Our cost of sales for the year ended December
31, 2020 was $238.3 million , resulting in gross profit of $260.5 million ,
compared to cost of sales of $168.1 million for the year ended December 31,
2019 , resulting in gross profit of $194.2 million . The gross margin for 2020 was
52%, compared to 54% in 2019.
The increase in our gross profit for the year ended December 31, 2020 , was
primarily the result of the $136.5 million increase in total sales. Gross profit
and gross margin in 2020 were negatively impacted by royalty costs, for which
there was no comparable expense in 2019. During the year ended December 31,
2020 , we recognized $6.7 million of product royalty costs, or approximately one
percent of sales, associated with sales of pumps with Control-IQ technology
launched in the first quarter of 2020, and free software updates downloaded by
existing customers in the United States , as well as in certain international
markets where we launched Control-IQ beginning in the third quarter of 2020.
Excluding the impact of royalty, gross margins for both pumps and supplies saw
improvement compared to the prior year, but were still slightly pressured by the
product mix. Gross margin was also pressured to a lesser extent by other factors
that are more temporary in nature or anticipated to be leveraged through growth
in future quarters, including costs associated with COVID-19 risk mitigation,
managing pump production to achieve desired stocking levels, the expansion of
cartridge manufacturing capacity and increased spending to support our digital
health product offerings. Other factors that have and may continue to have an
impact on the gross margin percentage are changes in product and geographical
mix and the level of non-cash stock-based compensation allocated to cost of
sales. Pump sales, which have the highest gross margin, were 63% of total
worldwide sales for the year ended December 31, 2020 , versus 68% in 2019.
Non-cash stock-based compensation expense allocated to cost of sales was $8.2
million for the year ended December 31, 2020 , compared to $6.4 million in the
same period of 2019, representing 2% of sales in both periods.
Selling, General and Administrative Expenses. SG&A expenses increased 24% to
$204.9 million for the year ended December 31, 2020 , from $165.7 million for the
same period in 2019. Employee-related expenses for our SG&A functions comprise
the majority of the SG&A expenses. The increase compared to 2019 was primarily
the result of a $32.8 million increase in salaries, incentive compensation and
other employee benefits due to an increase in personnel to support additional
sales territories, higher sales and other services in support of our growing
installed customer base, offset by a $1.3 million decrease in non-cash
stock-based compensation expense. Non-cash stock-based compensation expense
allocated to SG&A was $41.6 million in 2020, compared to $42.9 million in 2019.
The increase in non-cash stock-based compensation expense associated with
increased headcount in 2020 was more than offset by a decrease in non-cash
stock-based compensation expense from the valuation of certain 2018 employee
stock option grants which are now fully amortized. We also experienced increased
costs for equipment and supplies, and outside consulting and services of $11.2
million , offset by a $2.9 million decrease in travel costs.
Research and Development Expenses. R&D expenses increased 41% to $63.6 million
for the year ended December 31, 2020 , from $45.2 million for the same period in
2019. The increase in R&D expenses was primarily the result of an increase of
$9.9 million in salaries, incentive compensation and other employee benefits due
to an increase in personnel to support our product development efforts, as well
as an increase of $8.5 million in outside consulting and services, equipment and
supplies attributable to R&D. Non-cash stock-based compensation expense
allocated to R&D was $8.7 million in 2020, compared to $8.8 million in 2019.
77
--------------------------------------------------------------------------------
Other Income (Expense). Total other expense, net for the year ended December 31,
2020 was $28.3 million , compared to $7.9 million in 2019. Other expense for 2020
primarily consisted of a $17.1 million revaluation loss from the change in the
fair value of certain warrants due to the appreciation of our stock price during
2020, and $12.8 million of interest expense which included the amortization of
debt discount and debt issuance costs related to our Notes issued in the second
quarter of 2020. Other expense for 2019 consisted primarily of an $11.1 million
revaluation loss from the change in the fair value of certain warrants due to
the appreciation in our stock price during 2019. Interest income and other, for
the years ended December 31, 2020 and 2019 primarily consisted of interest
earned on our cash equivalents and short-term investments, and decreased in 2020
primarily due to the lower interest rate environment as compared to 2019.
Income Tax Expense (Benefit). We recognized an income tax benefit of $1.9
million on a pre-tax loss of $36.3 million for the year ended December 31, 2020 ,
compared to income tax expense of $0.1 million on a pre-tax loss of $24.6
million for the same period in 2019. The income tax benefit for the year ended
December 31, 2020 was primarily due to benefit associated with the release of
valuation allowance related to the acquisition of Sugarmate, partially offset by
state and foreign income tax expense as a result of current taxable income in
those jurisdictions. Income tax expense for the year ended December 31, 2019 was
primarily attributable to state and foreign income tax expense as a result of
current taxable income in those jurisdictions.
Liquidity and Capital Resources
At
short-term investments. We believe that our cash and cash equivalents and
short-term investments balance will be sufficient to satisfy our liquidity
requirements for at least the next 12 months from the date of this filing.
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. Since the beginning of 2019, we completed the following financing activities: •InMay 2020 , we raised$278.7 million in net proceeds from the issuance of the Notes, and used$34.1 million of the net proceeds to pay the cost of the Capped Call Transactions related to the Notes (see Note 7, "Debt"). •FromJanuary 2019 throughDecember 31, 2021 , we issued 4,887,211 shares of common stock upon the exercise of stock options, and 804,275 shares of common stock were purchased under our 2013 Employee Stock Purchase Plan, which generated aggregate proceeds of$143.6 million . •FromJanuary 2019 throughDecember 31, 2021 , we received proceeds of$1.8 million from the exercise of 509,785 outstanding warrants which were originally issued in connection with our registered public offering of common stock inOctober 2017 . As ofDecember 31, 2021 , there were warrants to purchase 1,000 shares outstanding relating to theOctober 2017 offering. •FromJanuary 2019 throughDecember 31, 2021 , we received proceeds of$2.1 million from the exercise of 34,728 outstanding warrants which were originally issued betweenAugust 2011 andAugust 2012 . As ofDecember 31, 2021 , there were warrants to purchase 19,722 warrants outstanding relating to these issuances. Our historical cash outflows have primarily been associated with cash used for operating activities such as the development and commercialization of our products, the expansion and support of our sales, marketing, clinical and customer support organizations, the expansion of our R&D activities, the expansion of our commercial activities to select international geographies, the acquisition of intellectual property and equity investments, expenditures related to increases in our manufacturing capacity and improvements to our manufacturing efficiency, overall expansion of our facilities and operations, and other working capital needs. Additionally, we have used cash to pay the interest expense associated with our convertible senior notes. We expect our sales performance and the resulting operating income or loss, as well as the status of each of our new product development programs, will significantly impact our cash flow from operations, liquidity position and cash management decisions. 78 --------------------------------------------------------------------------------
The following table shows a summary of our cash flows for the years ended
Year Ended December 31,
(in thousands) 2021 2020 2019
Net cash provided by (used in):
Operating activities $ 111,359 $ 24,669 $ 41,906
Investing activities (186,876) (296,056) (56,955)
Financing activities 51,932 314,438 24,207
Effect of foreign exchange rate changes on cash 153 387 191
Net increase (decrease) in cash and cash equivalents
Operating activities. Net cash provided by operating activities was
million
The improvement to net cash provided by operating activities for 2021 compared to 2020 was driven by higher sales and gross profit in 2021, which resulted in a$35.7 million improvement to net income when adjusted for non-cash expenses, particularly stock-based compensation expense and depreciation and amortization expense, as well as a$51.0 million increase from working capital changes. Working capital changes in 2021 primarily consisted of increases in accounts payable, employee-related liabilities, deferred revenue, and other current and long-term liabilities, offset by increases in accounts receivable and inventories, all of which were related to the growth in our business. Accounts receivable increased to$110.7 million atDecember 31, 2021 from$82.2 million atDecember 31, 2020 , as a result of higher sales in the fourth quarter of 2021 as compared to the fourth quarter of 2020. Inventories increased to$68.6 million atDecember 31, 2021 from$63.7 million atDecember 31, 2020 . The decrease in net cash provided by operating activities for 2020 compared to 2019 was driven by net changes in working capital, partially offset by a reduction in net loss when adjusted for non-cash expenses, particularly stock-based compensation expense, the change in the fair value of common stock warrants and non-cash interest expense. Working capital changes in 2020 primarily consisted of increases in accounts receivable and inventories, offset by increases in employee-related liabilities, deferred revenue, and other current and long-term liabilities, all of which are related to the growth in our business. Accounts receivable increased to$82.2 million atDecember 31, 2020 from$46.6 million atDecember 31, 2019 , as a result of higher sales in the fourth quarter of 2020 as compared to the fourth quarter of 2019. Inventories increased to$63.7 million atDecember 31, 2020 from$49.1 million atDecember 31, 2019 , primarily to support the growth in our business. Investing activities. Net cash used by investing activities was$186.9 million for the year endedDecember 31, 2021 , which was primarily related to$733.4 million of purchases of short-term investments,$14.2 million in purchases of property and equipment, and$9.3 million cash paid for the acquisition of intangible assets and equity investments, offset by$570.0 million in proceeds from maturities and sales of short-term investments. Net cash used by investing activities was$296.1 million for the year endedDecember 31, 2020 , which was primarily related to purchases of short-term investments of$497.1 million using the net proceeds from the issuance of our convertible senior notes in May of 2020, and$27.4 million in purchases of property and equipment, offset by$233.3 million in proceeds from maturities and sales of short-term investments. Net cash used by investing activities was$57.0 million for the year endedDecember 31, 2019 , which was primarily related to purchases of short-term investments of$164.6 million and$19.5 million in purchases of property and equipment, offset by$127.2 million in proceeds from maturities of short-term investments. Financing activities. Net cash provided by financing activities was$51.9 million for the year endedDecember 31, 2021 , which primarily consisted of proceeds from the issuance of common stock under our stock plans. Net cash provided by financing activities was$314.4 million for the year endedDecember 31, 2020 , which primarily consisted of$278.7 million in proceeds from the issuance of the Convertible Senior Notes which was partially offset by$34.1 million in payments related to the Capped Call Transactions (see Note 7, "Debt"), and$66.9 million in proceeds from the issuance of common stock under our stock plans. Net cash provided by financing activities was$24.2 million for the year endedDecember 31, 2019 , which was primarily the result of proceeds of$23.9 million from the issuance of common stock under our stock plans.
Our liquidity position and capital requirements are subject to fluctuation based
on a number of factors. In particular, our cash inflows and outflows are
principally impacted by the following:
•our ability to generate sales, the timing of those sales, the mix of products
sold and the collection of receivables from period to period;
79 --------------------------------------------------------------------------------
•the timing of any additional financings, and the net proceeds raised from such
financings;
•the timing and amount of the exercise of outstanding warrants, and proceeds
from the issuance of equity awards pursuant to employee stock plans;
•fluctuations in gross margins and operating margins;
•fluctuations in working capital, including changes in accounts receivable, inventories, accounts payable, employee-related liabilities, and operating lease liabilities; and
•the impacts and disruptions caused by the COVID-19 global pandemic.
Our primary short-term capital needs are expected to include expenditures
related to:
•support of our commercialization efforts related to our current and future
products;
•expansion of our customer support resources for our growing installed customer
base;
•research and product development efforts, including clinical trial costs;
•acquisitions, leasing or licensing of equipment, technology, intellectual
property and other assets;
•additional facilities leases and related tenant improvements;
•investments for the development, improvement and acquisition of manufacturing,
testing and packaging equipment to support business growth and increase
capacity; and
•payments under licensing, development and commercialization agreements.
Although we believe the foregoing items reflect our most likely uses of cash in the short-term, we cannot predict with certainty all of our particular cash uses or the timing or amount of cash used. In addition, from time to time we may consider opportunities to acquire or license other products or technologies that may enhance our product platform or technology, expand the breadth of our markets or customer base, or advance our business strategies. Any such transaction may require short-term expenditures that may impact our capital needs. If for any reason our cash and cash equivalents balances, or cash generated from operations is insufficient to satisfy our working capital requirements, we may in the future be required to seek additional capital from public or private offerings of our equity or debt securities, or we may elect to borrow capital under new credit arrangements or from other sources. We may also seek to raise additional capital from such offerings or borrowings on an opportunistic basis when we believe there are suitable opportunities for doing so. If we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, we may incur significant financing or debt service costs, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. There can be no assurance that financing will be available on acceptable terms, or at all. Our ability to raise additional financing may be negatively impacted by a number of factors, including our recent and projected financial results, recent changes in and volatility of our stock price, perceptions about the dilutive impact of financing transactions, the competitive environment in our industry, uncertainties regarding the regulatory environment in which we operate and conditions impacting the capital markets more generally, including economic weakness, inflation, political instability, war and terrorism, natural disasters, incidence of illness or disease, or other events beyond our control.
Indebtedness
InMay 2020 , the Company entered into a purchase agreement with certain counterparties for the sale of an aggregate of$287.5 million principal amount of 1.50% Convertible Senior Notes due 2025 in a private offering to qualified institutional buyers (the Notes). The Notes were issued pursuant to an Indenture, datedMay 15, 2020 , between the Company andU.S. Bank National Association , as trustee. The proceeds from the issuance of the Notes were$244.6 million , net of debt issuance costs and cash used to pay the cost of the Capped Call Transactions (see Note 7, "Debt"). The Notes are the Company's senior unsecured obligations. Interest is payable in cash semi-annually in arrears beginning onNovember 1, 2020 at a rate of 1.50% per year. The Notes mature onMay 1, 2025 unless repurchased, redeemed, or converted in accordance with their terms prior to the maturity date. 80 --------------------------------------------------------------------------------
Cash payments due by calendar year for our Convertible Senior Notes at
Total 2022 2023 2024 2025
Contractual interest $ 14,357 $ 4,313 $ 4,313 $ 4,313 $ 1,418
Principal amount of convertible
senior notes 287,500 - - - 287,500
Total $ 301,857 $ 4,313 $ 4,313 $ 4,313 $ 288,918
Contractual Obligations & Off-Balance Sheet Arrangements
Contractual Obligations
The Company leases general office space, laboratory, manufacturing and warehouse facilities, and equipment under noncancelable operating leases for use in our operations. For a description of our contractual obligations related to leases atDecember 31, 2021 , see Note 6 "Leases" to the consolidated financial statements in Part II, Item 8 of this Annual Report.
The Company has agreements with suppliers and other parties to purchase
inventory, other goods and services and long-lived assets. For a description of
our contractual obligations related to purchase order commitments at
consolidated financial statements in Part II, Item 8 of this Annual Report.
Off-Balance Sheet Arrangements
As ofDecember 31, 2021 , we are a party to certain standby letter of credit arrangements in support of our operating lease obligations. For a description of the arrangements we consider significant, see Note 12 "Commitments and Contingencies" to the consolidated financial statements in Part II, Item 8 of this Annual Report.
Critical Accounting Policies Involving Management Estimates and Assumptions
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these 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 consolidated financial statements. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about our financial condition and results of operations that are not readily apparent from other sources. Actual results may differ materially from these estimates. While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in this Annual Report, we believe that the following accounting policies are the most critical to the judgments and estimates used in the preparation of our consolidated financial statements. 81 --------------------------------------------------------------------------------
Revenue Recognition
Our revenue is generated primarily from sales of our insulin pumps, disposable insulin cartridges and infusion sets to individual customers with third-party insurance coverage and through a network of distributors that resell the products to insulin-dependent diabetes customers. We are paid directly by customers who use the products, distributors and third-party insurance payors. We recognize revenue when control of our products is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products, net of estimated returns. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. Revenue recognition for contracts with multiple performance obligations is based on the separate satisfaction of each distinct performance obligation within the contract. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of a product to the customer, meaning the customer has the ability to direct the use of and obtain the benefit from the product. Complementary products, such as the t:connect cloud-based data management application and the Tandem Device Updater, are considered distinct performance obligations satisfied over time, as access and support for these products is provided throughout the typical four-year warranty period of the insulin pumps. Accordingly, revenue related to the complementary products is deferred and recognized over a four-year period. When there is no standalone value for the complementary product, we determine its value by applying the expected cost plus a margin approach and then allocate the residual to the insulin pumps.
Warranty Reserve
We generally provide a four-year assurance type warranty on our insulin pumps to end user customers and may replace any pumps that do not function as intended in accordance with the product specifications within the warranty period. Insulin pumps returned to us may be refurbished and redeployed. We establish the warranty reserve liability when control of the pump is transferred to the customer, and we reevaluate our estimate of the warranty obligation at each reporting period. Warranty costs are estimated primarily based on the current expected product replacement cost and expected replacement rates utilizing historical experience. Experience has shown that initial data for any given pump version may be insufficient; therefore, our process relies on long-term historical averages until sufficient data are available. As actual experience becomes available, we use the data to update the historical averages. Changes to the actual replacement rates or the expected product replacement cost could cause a material increase or decrease to our estimated warranty reserve and related cost of goods sold. We may make further adjustments to the warranty reserve when deemed appropriate, giving additional consideration to the length of time each pump version has been in the field and revised future expectations of performance based on new features and capabilities that may become available through Tandem Device Updater.
Income Taxes
Significant judgment is required in determining our provision for income taxes,
deferred tax assets and liabilities and the valuation allowance recorded against
net deferred tax assets. We use the asset and liability approach to recognize
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities. Deferred tax assets and liabilities are determined using the
enacted tax rates in effect for the years in which those tax assets are expected
to be realized. A valuation allowance is established when it is more likely than
not the future realization of all or some of the deferred tax assets will not be
achieved. Significant judgment is required to evaluate the need for a valuation
allowance. The evaluation of the need for a valuation allowance is performed on
a jurisdiction-by-jurisdiction basis, and includes a review of all available
positive and negative evidence. Factors reviewed include determination of
cumulative pre-tax book income after permanent differences, projections of
pre-tax book income for the foreseeable future, earnings history, and
reliability of forecasting. We will continue to assess the need for a valuation
allowance on our deferred tax assets by evaluating both positive and negative
evidence that may exist. Changes in the recognition or measurement of valuation
allowance could result in material increases or decreases in our income tax
expense in the period in which we make a change, which could have a material
impact on our effective tax rate and operating results.
82
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Utilization of our net operating loss and research credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitations may result in the expiration of net operating loss carryforwards before utilization. We have completed analyses throughDecember 31, 2020 to determine whether our net operating losses and credits are likely to be limited by Section 382. Based on the 2018 study completed in 2019, we determined that an ownership change, as defined under Section 382, occurred in 2018 and the resulting limitation significantly reduced our ability to utilize our net operating loss and credit carryovers before they expire. As a result, in 2019 we reduced our deferred tax assets for the net operating loss and research credit carryforwards that were projected to expire unused with a corresponding offset to the valuation allowance recorded against such assets. Additionally, future ownership changes under Section 382 may also limit our ability to fully utilize any remaining tax benefits. We recognize liabilities for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While we believe we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential revisions and adjust the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.
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