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 the
"Consolidated Financial Statements and Supplementary Data" in Part II, Item 8 of
this Annual Report. 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 of
this Annual Report.

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 robust ecosystem and a portfolio of delivery devices, software, and
data insight solutions to people living with diabetes, as well as their
caregivers and healthcare providers.

Since our initial commercial launch, we have rapidly innovated and brought more
products to market than our competitors. Today, the t:slim X2 Insulin Delivery
System is our flagship technology solution. In the four-year period ended
December 31, 2022, we shipped approximately 420,000 t:slim X2 insulin pumps,
which is representative of our estimated global installed customer base,
assuming the typical four-year reimbursement cycle. Approximately 290,000 of
these pumps were shipped to customers in the United States and 130,000 were
shipped to customers outside the United States. Our products are currently
available in approximately 25 countries outside the United States.

Our manufacturing, sales and support activities principally focus on our
flagship pump platform, the t:slim X2 and our complementary product offerings.
Our simple-to-use t:slim X2 is based on our proprietary technology platform and
is the smallest durable insulin pump available in the United States. The
majority of our customers use the t:slim X2 with continuous glucose monitoring
(CGM) integration. This allows the t:slim X2 to receive CGM sensor readings,
which can then be used in our automated insulin dosing (AID) algorithms,
including our Control-IQ technology. Control-IQ is an advanced hybrid-closed
loop feature designed to help increase a user's time in their targeted glycemic
range. Multiple studies have demonstrated that use of Control-IQ technology
provides people across all demographics with improved clinical outcomes that are
both immediate and sustained. It was the first system cleared by the U.S. Food
and Drug Administration (FDA) to deliver automatic correction boluses in
addition to adjusting insulin to help prevent high and low blood sugar.

The t:slim X2 is unique in that it is the only pump on which remote software
updates have been made commercially available in the United States. Now
available in the countries we serve worldwide, our Tandem Device Updater (TDU)
that has allowed approximately 200,000 people to update their t:slim X2 software
from a personal computer. This offering is a competitive advantage that allows
us to bring our customers clinical and lifestyle enhancements, such as new
developments in our AID technology, CGM integrations and mobile app features. In
July 2022, we launched a new pump software update through TDU to allow all
t:slim X2 pump users in the United States to bolus insulin using our smartphone
app that is available on compatible iOS and Android devices.

Our insulin pump products are generally considered durable medical equipment and
have an expected lifespan of at least four years. In addition to insulin pumps,
we sell disposable products that are used together with our pumps and are
replaced every few days, including cartridges for storing and delivering
insulin, and infusion sets that connect the insulin pump to a user's body. In
the United States, we also offer t:connect, our data management web application
that provides users, their caregivers and their healthcare providers with a
fast, easy and visual way to display diabetes therapy management data from our
pumps, integrated CGMs and supported blood glucose meters.


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COVID-19 Global Pandemic Impact and Considerations

Information about the COVID-19 global pandemic impact and considerations is set
forth above under the caption "Risk Factors" in Part I, Item 1A of this Annual
Report and is incorporated herein by reference.

Products Under Development

Our products under development support our strategy of developing insulin
delivery systems as part of a therapy management portfolio that is designed to
improve patient experience and outcomes. Our product development efforts fall
into three pillars of innovation: delivery devices, device software including
algorithms, and data and insights.

Delivery Devices

We are developing a family of delivery device solutions to meet the varying
needs of people living with type 1 and type 2 diabetes by providing choice
within our 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

The Tandem Mobi is approximately half the size of our t:slim X2 pump, and is
designed for people who seek even greater discretion and flexibility with the
use of their insulin pump. Its features include full pump-control from our
mobile application, a 200-unit cartridge, an on-pump bolus button, inductive
charging, and an AID algorithm.

t:slim X3

Advancing our flagship t:slim platform, the t:slim X3 is being designed to
provide a modernized user interface and even greater usability for our planned
feature updates. It is also being designed to include enhanced technology, such
as greater processing power and capacity to support our advanced algorithms, as
well as increased battery life, improved durability, and wireless software
update capabilities.

Mobi: Tubeless

This offering is being developed to provide an alternative tubeless infusion
site option for Mobi pump users. It will allow a Mobi pump to be worn completely
on the user's body with no tubing. A goal of this design is to allow people
living with diabetes to customize the way they wear their pump with each
cartridge change, switching between tubed and tubeless wear configurations, to
best suit their personal preferences and lifestyle.

Sigi

This ergonomic, rechargeable patch pump is being designed to reduce the burden
of managing diabetes through its use of pre-filled insulin cartridges and
compatibility with AID technology. This replaces our early-stage development of
a disposable tubeless solution that was previously under development.

Extended Wear Infusion Sets

Infusion sets provide additional choice and flexibility to people living with
diabetes. Our goals for infusion set innovations focus on solutions that extend
wear time and enhance user experience, while reducing occlusions, body burden
and waste. In support of this effort, we are currently developing a unique
extended wear infusion set technology.

Device Software

Our device software is used to control our pumps either directly through the
pump's interface or through our mobile application. It also includes our AID
technology and the software used to support remote pump updatability.
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Control-IQ Advancements

We are continuing to drive innovation in our algorithms, emphasizing automation,
personalization and simplification to continue to improve therapeutic outcomes
and provide a positive patient experience. We have recently completed clinical
studies to support expanding the indications of our Control-IQ technology to
include people with type 1 diabetes ages 2 to 5 years old. Additionally, we are
initiating a pivotal study to support expanding indications to include people
living with type 2 diabetes. We are also researching the use of different
insulins with our Control-IQ technology.

Mobile Control

We are working to expand our mobile control capability. In the future, our
t:connect mobile app is planned to include additional pump control features,
such as full operation of our Mobi pump.

Integration

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

Dexcom CGM: We have agreements with Dexcom to extend our current collaboration
to include integration with their G7 CGM technology. Following integrated
product development work, this will be the fourth generation of Dexcom CGM that
we intend to integrate with our devices.

Abbott CGM: We have an agreement with Abbott Laboratories (Abbott), to develop
and commercialize integrated diabetes solutions that combine Abbott's FreeStyle
Libre CGM technology with our insulin delivery systems. Following the completion
of our integrated product development work, and after obtaining required
regulatory clearances or approvals, we intend to focus our initial commercial
activities on integrated products in the U.S. and Canada, 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. Our key objectives include making these insights easy to
understand, making the data available in real time, and providing the
information in a flexible format with mobile or web apps. In addition, we are
working to integrate health-related information from third-party sources and to
use our data to support current and future products under development.

Tandem Source

Expanding the capabilities of our t:connect data management application
available for customers in the United States, Tandem Source is our
second-generation web-based data management application that is being designed
to be deployed globally. This application enhances clinical data visualization,
and provides added interface customization for users to personalize how they
engage with their data and for healthcare providers to better manage their care.
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.

Pump Shipments

From inception in 2012 through June 2018, we derived nearly all of our sales
from the shipment of insulin pumps and associated supplies to customers in the
United States. Starting in the third quarter of 2018, we began selling our
t:slim X2 insulin pump in select geographies outside the United States and our
technology solutions are now available in approximately 25 countries worldwide.
We consider the number of insulin pump units shipped to be an important metric
for managing our business.
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Insulin pumps in the markets we serve worldwide are generally subject to a
four-year reimbursement cycle, imposed by the third-party insurance carrier,
government plan or healthcare system that serves as the primary payor. In the
past four years, we have shipped approximately 420,000 insulin pumps worldwide,
which is representative of our estimated global in-warranty installed customer
base. Our ending estimated worldwide installed base has increased approximately
29% year over year.

At the end of the typical four-year reimbursement cycle, customers may be
eligible for the purchase of a new insulin pump, subject to the rules and
requirements of their primary insurance payor. While warranties generally expire
four years from the original pump shipment date, those customers that renew
typically purchase a subsequent pump within one year from the date of warranty
expiration. The majority of our insulin 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 escalating number of
additional 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.

Approximately 290,000 pumps were shipped to customers in the United States in
the past four years, which aligns with the standard four-year warranty period.
Pump shipments to customers in the United States by fiscal quarter for the
current year and previous five years, which aligns more closely with our typical
renewal cycle, were as follows:

                                                                          

United States Pump Unit Shipments

                                                                for Each of 

the Three Months Ended in Respective Years

                                  March 31                  June 30                 September 30                December 31                  Total

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



Since commencing sales outside the United States in the third quarter of 2018,
we shipped approximately 130,000 pumps and our products are now available in
approximately 25 countries. We are only beginning to complete a full four-year
reimbursement cycle in certain of our markets outside of the United States. Pump
shipments to customers outside the United States by fiscal quarter were as
follows:

                                  Outside the United States Pump Unit Shipments
                              for Each of the Three Months Ended in Respective Years
        March 31             June 30             September 30            December 31               Total
2018          N/A                  N/A             1,055                   3,233                  4,288
2019        5,063            8,459                 4,025                   2,149                 19,696
2020        4,220            3,952                 3,641                   8,133                 19,946
2021        8,708           13,152                11,262                  11,873                 44,995
2022        9,437           11,296                12,113                  11,939                 44,785

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

•When there are anticipated, and actual, regulatory approvals for our products,
or our competitors' products, customers may reconsider their purchasing
decisions and take additional time to consider FDA approval prior to making
their purchase, which could adversely impact our revenue and results of
operations. Similarly, our sales outside the United States are subject to local
government regulations. The requirements and the timeline to
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receive these approvals substantially vary from country to country and may
impact our ability to expand our international customer base and increase our
cost of sales.

•The failure to receive regulatory clearances and approvals may lead to product
recalls or the suspension of our products. Even if a clinical trial meets the
required success criteria, the FDA may not accept the results of the trial as
sufficient to prove the product's safety and efficacy. Our competitors are also
vulnerable to these uncertainties, which may affect our customer base and sales.

Product Launches

•We expect our business to be impacted by the introduction of new products,
treatment techniques or technologies for the treatment of diabetes by us or our
competitors. Customers may defer their purchasing decisions if they believe a
new product may be launched in the future. The success of our products is
variable and we believe it correlates to market acceptance, anticipated product
launches and commercial availability. We currently believe our recently
announced Tandem Choice program, and its related financial and accounting
impact, my continue to materially impact our business going forward.

•Our revenue and results of operations may be impacted by the failure to secure
or retain adequate coverage or reimbursement for our current and future products
from third-party payors. Our competitors are also vulnerable to these
uncertainties, which may affect our customer base and sales.

Foreign Markets

•We have expanded our business and launched new products in select geographies
outside the United States. The ordering patterns of our distributors outside the
United States is highly variable from period to period, particularly as our
distributors continue to gain familiarity with the markets they are operating.
The commencement of operations of our European distribution center in the third
quarter also led to downward adjustments to inventory levels from our
distributors in late 2022 and early 2023.

Seasonality

•Seasonality in the United States is associated with annual insurance
deductibles and coinsurance requirements of the medical insurance plans used by
our customers and the customers of our distributors. In the United States, we
experience a higher volume of pump shipments in the third and fourth quarters
due to the nature of the reimbursement environment. Other factors that may
impact sales across the year include the timing of winter, summer and other
seasonal holidays, particularly in our markets outside the United States.

Macroeconomic Factors

•Global economic and market uncertainty, such as recessionary concerns,
inflation, changes in discretionary spending and increased interest rates have
impacted our customers' purchasing decisions and the buying patterns of our
distributors.

•The lingering effects of COVID-19 have continued to disrupt our relationship
with suppliers, third-party manufacturers, healthcare providers, distributors
and our existing or potential customers. We are experiencing higher costs as we
navigate these global supply chain challenges.

Components of Results of Operations

Sales

We offer products for people with insulin-dependent diabetes in approximately 25
countries. The t:slim X2 insulin pump is our flagship pump platform. Our other
products include disposable insulin cartridges and infusion sets, as well as our
complementary t:connect, TDU and mobile application products. Our primary
customers are the end customers who use our products, non-exclusive distribution
partners whose level of service varies based on geography, the healthcare
professionals who prescribe our products and the healthcare systems or payors
who provide insurance coverage and access to our products. Our sales may
fluctuate from period to period, particularly due to seasonality in the United
States associated with the timing of insurance deductible resets, which
generally result in the lowest percent of sales the first quarter of each
calendar year and the highest percent in the fourth quarter.
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In September 2022, the Company began offering the Tandem Choice Program to
eligible t:slim X2 customers to provide a pathway to ownership of its newest
hardware platform for a fee when available. Tandem Choice expires on December
31, 2024. The accounting treatment for Tandem Choice is complex. Initially, the
program requires the deferral of some portion of sales for shipments of eligible
pumps beginning in the third quarter of 2022. No election is made by the
customer at the time of the initial sale, nor does the right offered to the
customer impact the economics associated with how or when the initial pump sale
is reimbursed. If a customer elects to participate in Tandem Choice at a future
date beginning with the launch of our next generation hardware platform, we will
recognize the existing deferral, incremental fees received and the associated
costs of providing the new hardware at the time of fulfillment. Any remaining
deferrals will be recognized at program expiration. At this time, we are not
able to estimate the financial impact for the duration of Tandem Choice.

Cost of Sales

Cost of sales includes raw materials, labor costs, manufacturing overhead
expenses, product training costs, royalties, freight, reserves for expected
warranty costs, costs of supporting our digital health platforms, scrap and
charges for excess and obsolete inventories. Manufacturing overhead expenses
include expenses relating to quality assurance, manufacturing engineering,
material procurement, inventory control, facilities, equipment, information
technology and operations supervision and management. When taking into
consideration the differences in reimbursement levels and cost structure, pumps
have, and are expected to continue to have, a higher gross profit and gross
margin percentage than our pump-related supplies. Therefore, the percentage of
pump sales relative to total sales could have a significant impact on our
overall gross margin percentage.

Selling, General and Administrative

Our selling, general and administrative (SG&A) expenses primarily consist of
salary, cash-based incentive compensation, fringe benefits and non-cash
stock-based compensation for our sales, marketing and administrative functions,
which also includes our clinical, customer support, technical services,
insurance verification and regulatory affairs personnel. We have approximately
110 sales territories in the United States, which are generally maintained by
sales representatives and field clinical specialists, and supported by managed
care liaisons, additional sales management and other customer support personnel.
Other significant SG&A expenses typically include those incurred for
commercialization activities associated with new product launches, travel, trade
shows, outside legal fees, independent auditor fees, outside consultant fees,
insurance premiums, facilities costs and information technology costs.

Research and Development

Our research and development (R&D) activities primarily consist of engineering
and research programs associated with our hardware, software and digital health
products under development, as well as activities associated with our core
technologies and processes. R&D expenses are primarily related to employee
compensation, including salary, cash-based incentive compensation, fringe
benefits and non-cash stock-based compensation. We also incur R&D expenses for
supplies, development prototypes, outside design and testing services,
depreciation, allocated facilities and information services, clinical trial
costs, payments under our licensing, development and commercialization
agreements and other indirect costs.

Acquired In-process Research and Development (IPR&D) Expenses

Acquired IPR&D reflects costs of external research and development projects
acquired directly in a transaction other than a business combination, that do
not have an alternative future use.

Other Income and Expense

Other income and expense primarily consists of interest expense which includes
the amortization of debt issuance costs related to our 1.50% Convertible Senior
Notes due 2025, interest earned on our cash equivalents and short-term
investments, and changes in the fair value of certain common stock warrants
which were issued in October 2017 and expired in October 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 federal, state and foreign cash tax expense as a result of taxable
income anticipated or incurred in those jurisdictions.

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Results of Operations

                                                          Year Ended December 31,
(in thousands, except percentages)                  2022            2021            2020
Sales:
United States                                   $ 588,765       $ 524,907       $ 415,680
Outside the United States                         212,452         177,892          83,150
Total sales                                       801,217         702,799         498,830
Cost of sales                                     388,231         326,584         238,310
Gross profit                                      412,986         376,215         260,520
Gross margin                                           52  %           54  %           52  %
Operating expenses:
Selling, general and administrative               335,681         261,508   

204,903

Research and development                          139,114          92,054   

63,574

 Acquired in-process research and development      31,039               -               -
Total operating expenses                          505,834         353,562         268,477
Operating income (loss)                           (92,848)         22,653          (7,957)
Other income (expense), net:
Interest income and other, net                      6,057             674   

1,567

Interest expense                                   (6,208)         (6,040)  

(12,805)

Change in fair value of common stock warrants 147 (1,386)

(17,087)

Total other expense, net                               (4)         (6,752)  

(28,325)

Income (loss) before income taxes                 (92,852)         15,901         (36,282)
Income tax expense (benefit)                        1,742             335          (1,900)
Net income (loss)                               $ (94,594)      $  15,566       $ (34,382)

Comparison of Years Ended December 31, 2022 and 2021

Sales. For the year ended December 31, 2022, sales were $801.2 million, which
included $212.5 million of sales outside the United States. For the year ended
December 31, 2022, we deferred $3.5 million of pump sales as the result of our
Tandem Choice program which launched in the third quarter of 2022. For the year
ended December 31, 2021, sales were $702.8 million, which included $177.9
million of sales outside the United States.

The increase in worldwide sales of $98.4 million in 2022, as compared to 2021,
was driven by a 30% increase in pump-related supply sales, primarily due to 29%
growth in our ending estimated worldwide installed base of customers.

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

                                                 Year Ended December 31,
                                                   2022               2021         % Change
    Pump                                   $     329,061           $ 319,898          3%
    Infusion sets                                181,578             140,387          29%
    Cartridges                                    80,187              63,375          27%
    Other                                          1,488               1,247          19%
    Adjustment for Tandem Choice program          (3,549)                  

- -%

    Total Sales in the United States       $     588,765           $ 

524,907 12%

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Pump shipments in the United States were flat compared to the prior year while
pump sales benefited from an improvement in average selling prices due in part
to price increases, as well as a decrease in sales through the distribution
channel. Pump shipments were driven by continued demand for our t:slim X2
insulin pump with Control-IQ technology even with the presence of new
competitive product launches during the year. We also faced challenging
marketplace dynamics and economic conditions brought on by the global pandemic
and a deteriorating macroeconomic environment, with inflation and the threat of
recession beginning to impact pump purchasing decisions. Sales of pump-related
supplies increased primarily due to a 22% increase in our ending estimated
installed base of customers in the United States. Sales to distributors
accounted for 65% and 67% of our total sales in the United States for the years
ended December 31, 2022 and 2021, respectively. Sales in the United States for
the year ended December 31, 2022 were also reduced by a deferral of $3.5 million
as the result of the launch of our Tandem Choice program in the third quarter.
No comparable program existed in 2021.

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

                                                  Year Ended December 31,
                                                    2022               2021         % Change
   Pump                                     $     102,846           $  96,458          7%
   Infusion sets                                   76,912              57,063          35%
   Cartridges                                      31,973              23,509          36%
   Other                                              721                 862         (16)%
   Total Sales Outside the United States    $     212,452           $ 

177,892 19%

Pump shipments outside the United States were flat compared to the prior year,
with the increase in pump sales attributable to an increase in average selling
prices due in part to price increases, as well as positive fluctuations
associated with variations in the geographical mix. Sales of pump-related
supplies benefited from a 46% increase in our ending estimated installed base of
customers outside the United States. The ordering patterns of our distributors
outside the United States for pumps and supplies has been, and may continue to
be, highly variable from period to period as distributors continue to gain
familiarity with the markets in which they operate and the acceptance of our
products in those markets evolves. This variability has been compounded by the
differing levels of impact from the global pandemic with regard to access to
both physicians and customers, as well as shipping logistics. We also commenced
operations of a centralized distribution center in the third quarter of 2022,
which resulted in modest disruption to ordering patterns in the fourth quarter
as a result of the affected European distributors adjusting their inventory
levels for the reduced transit time. We expect that this will continue to impact
sales levels of pumps and supplies in Europe through the middle of 2023. Sales
to distributors accounted for 96% and 95% of our total sales outside the United
States for the years ended December 31, 2022 and 2021, respectively.

Cost of Sales and Gross Profit. Our cost of sales for the year ended December
31, 2022 was $388.2 million, resulting in gross profit of $413.0 million,
compared to cost of sales of $326.6 million and gross profit of $376.2 million
for the year ended December 31, 2021. The gross margin for 2022 was 52%,
compared to 54% in 2021.

The increase in our gross profit for the year ended December 31, 2022, was
primarily the result of the $98.4 million increase in total sales, driven by
increased supply sales. Gross profit and gross margin benefited from an increase
in average selling prices as well as improvement in manufacturing efficiencies
and leverage of fixed overhead, offsetting the pressure from product mix. The
gross margin decline in 2022 was related primarily to certain COVID-related
pressures, as well as the introduction of the Tandem Choice program. Gross
margin was pressured by more than 1 percentage point from increased pump
material costs due to the use of alternative sourcing for raw materials to
reduce the risk of component shortages in the near-term and higher freight costs
we experienced in 2022. We anticipate that the pressure from increased supply
chain and material costs experienced in 2022 will continue into the first half
of 2023 as we continue to navigate the challenges of the global pandemic and the
economic environment. The impact on gross margin from the Tandem Choice program
will fluctuate through the expiration of the program based on the timing of
availability of a new hardware platform and the number of eligible customers who
ultimately elect to participate.
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Selling, General and Administrative Expenses. SG&A expenses increased 28% to
$335.7 million for the year ended December 31, 2022, from $261.5 million for the
same period in 2021. Employee-related expenses for our SG&A functions comprise
the majority of SG&A expenses. The increase compared to 2021 was primarily the
result of a $43.8 million increase in salaries, incentive compensation, non-cash
stock based compensation, and other employee benefits due primarily to an
increase in personnel to expand the number of sales territories in the United
States from approximately 95 in 2021 to 110 in 2022, and provide continued
support services for our growing installed customer base. Discretionary expenses
included an increase of $21.5 million, of which a $12.4 million non-recurring
charge for facilities consolidation was recorded in the fourth quarter of 2022,
and $9.1 million of lease expenses were incurred throughout the year during the
construction phase of our new Tech Center facility (see Note 6, "Leases"). We
also experienced an $11.6 million increase in other non-employee discretionary
spending, primarily attributable to equipment, outside services, and travel.

Research and Development Expenses. R&D expenses increased 51% to $139.1 million
for the year ended December 31, 2022, from $92.1 million for the same period in
2021. The increase in R&D expenses was primarily the result of an increase of
$32.4 million in salaries, incentive compensation, non-cash stock based
compensation, and other employee benefits due to an increase in personnel to
support our product development efforts. We also experienced a $15.0 million
increase in other non-employee discretionary spending, including outside
consulting and services, clinical trial expenses, information technology and
equipment costs attributable to R&D.

Acquired In-Process Research and Development Expenses. Acquired IPR&D expenses
of $31.0 million for the year ended December 30, 2022 represented the value of
assets acquired, and acquisition related expenses in connection with our
acquisition of Capillary Biomedical (see Note 12, "Acquisitions").

Other Income (Expense). Total other expense, net for the year ended December 31,
2022 was $4,000, compared to $6.8 million in 2021. Other expense for 2022
primarily consisted of $6.2 million of interest expense which included the
amortization of debt issuance costs related to our Convertible Senior Notes,
offset by $6.1 million of interest income earned on our cash equivalents and
short-term investments. Other expense for 2021 consisted primarily of $6.0
million of interest expense which included amortization of debt issuance costs
related to our Notes, and an $1.4 million revaluation loss from the change in
the fair value of certain warrants, offset by $0.7 million of interest income
earned on our cash equivalents and short-term investments. Interest income
increased in 2022 primarily due to the higher interest rate environment as
compared to 2021.

Income Tax Expense (Benefit). We recognized income tax expense of $1.7 million
on a pre-tax loss of $92.9 million for the year ended December 31, 2022,
compared to income tax expense of $0.3 million on a pre-tax gain of $15.9
million for the same period in 2021. The income tax expense for the year ended
December 31, 2022 was primarily attributable to federal, 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, 2021 was primarily
attributable to state and foreign income tax expense as a result of current
taxable income in those jurisdictions.

Comparison of Years Ended December 31, 2021 and 2020

Sales. For the year ended December 31, 2021, sales were $702.8 million, which
included $177.9 million of sales outside the United States. For the year ended
December 31, 2020, sales were $498.8 million, which included $83.2 million of
sales outside the United States.

The increase in worldwide sales of $204.0 million in 2021, as compared to 2020,
was primarily 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 ending estimated worldwide installed base of customers.

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

                                               Year Ended December 31,
                                                 2021               2020         % Change
      Pump                               $     319,898           $ 269,856          19%
      Infusion sets                            140,387              99,743          41%
      Cartridges                                63,375              45,342          40%
      Other                                      1,247                 739          69%
      Total Sales in the United States   $     524,907           $ 415,680          26%


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Pump sales in the United States were $319.9 million for the year ended December
31, 2021, compared to $269.9 million in the year ended December 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 impacted the availability of both
customers and healthcare providers. Sales of pump-related supplies increased
primarily due to a 39% increase in our ending estimated installed base of
customers in the United States. Sales to distributors accounted for 67% and 70%
of our total sales in the United States for the years ended December 31, 2021
and 2020, respectively.

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

                                                  Year Ended December 31,
                                                    2021                2020        % Change
   Pump                                     $      96,458            $ 44,851         115%
   Infusion sets                                   57,063              28,016         104%
   Cartridges                                      23,509               9,884         138%
   Other                                              862                 399         116%
   Total Sales Outside the United States    $     177,892            $ 

83,150 114%

Pump sales outside the United States 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 continued 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 ending estimated installed base of customers outside the United States. The
ordering patterns of our distributors outside the United States 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 differing
levels of impact from the global pandemic with regard to access to both
physicians and customers. Sales to distributors accounted for 95% and 94% of our
total sales outside the United States 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 pump sales outside the United States
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 installed base of customers outside the United States. 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 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.

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.
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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 a $17.1
million revaluation loss from the change in the fair value of certain warrants,
and $12.8 million of interest expense which included the amortization of debt
discount and debt issuance costs related to our Notes. 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. 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.

Liquidity and Capital Resources

At December 31, 2022, we had $616.9 million in cash and cash equivalents and
short-term investments. In addition, we had a total available balance of $95.1
million at December 31, 2022 under our Revolving Line of Credit (the Line of
Credit), which expires in May 2025 (see Note 7, "Debt"). We believe that our
cash and cash equivalents, short-term investments, borrowing availability under
the Line of Credit, and future cash flows from operations will be sufficient to
fund our ongoing core business activities.

Historically, our principal sources of cash have included cash collected from
product sales, private and public offerings of equity securities, exercises of
employee stock awards, and debt financing.

Our historical cash outflows have primarily been associated with cash used for
operating activities such as research and development activities, sales,
marketing and commercialization of our products worldwide, expansion of clinical
and customer support organizations, the acquisition of intellectual property,
equity investments and acquired assets, capital expenditures and debt service
costs.

The following table shows a summary of our cash flows for the years ended
December 31, 2022, 2021 and 2020 (in thousands):

                                                                Year Ended 

December 31,

                                                          2022           2021           2020
Net cash provided by (used in):
Operating activities                                   $  50,464      $ 111,359      $  24,669
Investing activities                                      33,168       (186,876)      (296,056)
Financing activities                                      16,877         51,932        314,438
Effect of foreign exchange rate changes on cash              827            153            387

Net increase (decrease) in cash and cash equivalents $ 101,336 $ (23,432) $ 43,438

Operating activities. Net cash provided by operating activities was $50.5
million for the year ended December 31, 2022, compared to cash provided of
$111.4 million and $24.7 million, respectively, for the years ended December 31,
2021 and 2020.

The reduction in net cash provided by operating activities for 2022 compared to
2021 was primarily a result of the $110.2 million increase in net loss, as well
as net working capital changes. Working capital changes during 2022, primarily
consisted of increases in inventories, accounts receivable, accounts payable,
and operating leases and other current liabilities. Accounts receivable
increased to $114.7 million at December 31, 2022 from $110.7 million at December
31, 2021, as a result of higher sales in the fourth quarter of 2022 as compared
to the fourth quarter of 2021. Inventories increased to $111.1 million at
December 31, 2022 from $68.6 million at December 31, 2021.

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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 net 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.

Investing activities. Net cash provided by investing activities was $33.2
million for the year ended December 31, 2022, which was primarily related to
$569.5 million in proceeds from maturities and redemptions of short-term
investments, offset by $467.7 million of purchases of short-term investments,
$34.1 million in purchases of property and equipment, $25.7 million for the
acquisition of Capillary Biomedical, including $1.0 million of transaction
costs, and $8.9 million cash paid for purchases of intangible assets and
strategic investments. Net cash used by investing activities was $186.9 million
for the year ended December 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 purchases of intangible
assets and strategic investments, offset by $570.0 million in proceeds from
maturities and redemptions of short-term investments. Net cash used by investing
activities was $296.1 million for the year ended December 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 redemptions of short-term investments.

Financing activities. Net cash provided by financing activities was $16.9
million for the year ended December 31, 2022, which primarily consisted of
proceeds from the issuance of common stock under our stock plans. Net cash
provided by financing activities was $51.9 million for the year ended December
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 ended December 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.

Our liquidity position and capital requirements are subject to fluctuation based
on a number of factors. In particular, our cash inflows and outflows are
principally impacted by the following:

•our ability to generate sales, the timing of those sales, the mix of products
sold and the collection of receivables from period to period;

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

•the timing and amount of proceeds from the issuance of equity awards pursuant
to employee stock plans;

•fluctuations in gross margins and operating margins; and

•fluctuations in working capital, including changes in accounts receivable,
inventories, accounts payable, employee-related liabilities, and operating lease
liabilities.

Both our primary short-term and long-term capital needs are expected to include
expenditures related to:

•support of our commercialization efforts related to our current and future
products;

•expansion of our customer support resources for our growing installed customer
base;

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

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

•additional facilities leases and related tenant improvements;

•investments for the development, improvement and acquisition of manufacturing,
testing and packaging equipment to support business growth and increase
capacity; and

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•payments under licensing, development and commercialization agreements.

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

Indebtedness

Convertible Senior Notes

In May 2020, we 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 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 senior
unsecured obligations. Interest is payable in cash semi-annually in arrears
beginning on November 1, 2020 at a rate of 1.50% per year. The Notes mature on
May 1, 2025 unless repurchased, redeemed, or converted in accordance with their
terms prior to the maturity date.

Cash payments due by calendar year for our Convertible Senior Notes at
December 31, 2022 are as follows (in thousands):

                                                Total                    2023              2024               2025
Principal amount of convertible senior
notes(1)                                     $ 287,500                $      -          $      -          $ 287,500
Contractual interest                            10,782                   4,313             4,313              2,156
Total                                        $ 298,282                $  4,313          $  4,313          $ 289,656

(1) The Convertible Senior Notes may be settled in cash, shares of our common
stock, or a combination of cash and shares of our common stock, at our election.

Promissory Note Payable

In connection with our acquisition of Capillary Biomedical, Inc. (see Note 12,
"Acquisitions"), we assumed $4.7 million of long-term debt. The promissory note
accrues interest at the rate of 5% per year, becomes due and payable upon the
first sale or license of the commercialized product, and is included as a
component of other long-term liabilities on the consolidated balance sheet at
December 31, 2022.

Contractual Obligations & Off-Balance Sheet Arrangements

Contractual Obligations

Operating Lease Obligations

We lease 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
at December 31, 2022, see Note 6 "Leases" to the consolidated financial
statements in Part II, Item 8 of this Annual Report.

Purchase Order Commitments

We have 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 December 31, 2022, see Note
13 "Commitments and Contingencies" to the consolidated financial statements in
Part II, Item 8 of this Annual Report.

Acquisition-related Contingent Consideration

In connection with our acquisition of AMF Medical SA completed in January of
2023 (see Note 15, "Subsequent Event" to the consolidated financial statements
in Part II, Item 8 of this Annual Report), the total consideration includes cash
paid at the closing of the transaction and additional contingent earnout
payments. The additional earnout payments of up to CHF 129.6 million, in
aggregate, become payable upon the achievement of certain milestones and are
comprised of a payment of up to CHF 38.4 million upon the successful completion
of key development milestones over the next two years, and a payment of up to
CHF 91.2 million upon obtaining regulatory clearance of an automated controller
enabled (ACE) pump by the United States Food and Drug Administration.
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Off-Balance Sheet Arrangements

As of December 31, 2022, we are a party to certain standby letter of credit
arrangements in support of our operating lease obligations. For a description of
the arrangements we consider significant, see Note 13 "Commitments and
Contingencies" to the 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 in the 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
"Summary of Significant Accounting Policies" 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.

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.

For purposes of evaluating the Tandem Choice Program, we have determined that
the ability for a customer to upgrade to a new technology, represents a material
right because the pricing inherent in such option provides the customer with a
discount that is incremental to the range of discounts that would otherwise be
granted for the related goods and services to comparable customers. The
standalone selling price for the Choice Right was estimated based on the
adjusted market assessment approach and contemplates the likelihood that the
respective option will be exercised.
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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.

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
through December 31, 2021 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 to be 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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