TANDEM DIABETES CARE INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis together with our
financial statements and related notes in Part I, Item 1 of this Quarterly
Report on Form 10-Q for the quarter ended September 30, 2021 (Quarterly Report).
This Quarterly Report contains forward-looking statements within the meaning of
the federal securities laws, which statements are subject to considerable risks
and uncertainties. These forward-looking statements are intended to qualify for
the safe harbor from liability established by the Private Securities Litigation
Reform Act of 1995. All statements included or incorporated by reference in this
Quarterly Report, other than statements of historical fact, are forward-looking
statements. You can identify forward-looking statements by the use of words such
as "may," "will," "could," "anticipate," "expect," "intend," "believe,"
"continue" or the negative of such terms, or other comparable terminology.
Forward-looking statements also include the assumptions underlying or relating
to such statements. In particular, forward-looking statements contained in this
Quarterly Report may relate to, among other things, our future or assumed
financial condition, results of operations, liquidity, trends impacting our
financial results, business forecasts and plans, research and product
development plans, manufacturing plans, strategic plans and objectives, capital
needs and financing plans, product launches, geographic expansion, distribution
plans, production capacity, clinical trials, regulatory approvals, competitive
position and the impact of changes in the competitive environment, the impact of
the COVID-19 global pandemic on our business, supply chain, and the businesses
of our contract manufacturers and suppliers, integration of acquisitions and
partner technologies, and the application of accounting guidance. We caution you
that the foregoing list may not include all of the forward-looking statements
made in this Quarterly Report.
Our forward-looking statements are based on our management's current assumptions
and expectations about future events and trends, which affect or may affect our
business, strategy, operations or financial performance. Although we believe
that these forward-looking statements are based upon reasonable assumptions,
they are subject to numerous known and unknown risks and uncertainties and are
made in light of information currently available to us. Our actual financial
condition and results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth below in the section entitled "Risk Factors" in Part II, Item 1A, and
elsewhere in this Quarterly Report, as well as the other public filings we make
with the Securities and Exchange Commission. You should read this Quarterly
Report with the understanding that our actual future financial condition and
results may be materially different from and worse than what we expect.
Moreover, we operate in an evolving environment. New risk factors and
uncertainties emerge from time to time and it is not possible for our management
to predict all risk factors and uncertainties, nor can we assess the impact of
all factors on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
Forward-looking statements speak only as of the date they were made and, except
to the extent required by law or the rules of the Nasdaq Global Market, we
undertake no obligation to update or review any forward-looking statement
because of new information, future events or other factors.
We qualify all of our forward-looking statements by these cautionary statements.
Overview
We are a medical device company with a positively different approach to the
design, development and commercialization of products for people with
insulin-dependent diabetes. Diabetes management can vary greatly from
person-to-person, creating multiple market segments based on clinical needs and
personal preferences. We aim to improve and simplify the lives of all people
living with insulin-dependent diabetes and those of their healthcare providers,
by delivering innovative hardware and software solutions, as well as
best-in-class customer support. Our goal is to lead insulin therapy management
by building a robust ecosystem and portfolio of data-driven products and
services around our flagship insulin pumps. We believe our competitive advantage
is rooted in our consumer-focused approach and the incorporation of modern and
innovative technology into our product offerings. Our manufacturing, sales and
support activities principally focus on our flagship pump platform, the t:slim
X2 Insulin Delivery System (t:slim X2) and our complementary product offerings.
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 in the United States since 2012 and three insulin
pump configurations outside the United States since 2018. Today, our
software-updatable t:slim X2 hardware platform represents 100% of our new pump
shipments. We now have approximately 296,000 customers in our global installed
base, assuming a typical four year reimbursement cycle, of which 26% are in
international markets.
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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. We have
commercially offered our pump technology integrated with three generations of
Dexcom's continuous glucose monitoring (CGM) sensors. The t:slim X2 is the only
pump on which remote software updates have been made commercially available in
the United States. This experience, which offers and supports different software
updates quickly and easily from a personal computer through the use of our
revolutionary tool referred to as Tandem Device Updater (TDU), is now available
in the countries in which we serve worldwide and provides us with a unique
competitive advantage. Two of our updates provided our users access to our
automated insulin delivery (AID) algorithms, Basal-IQ technology and Control-IQ
technology. Basal-IQ technology launched domestically in the third quarter of
2018 and its international rollout began in the third quarter of 2019. Basal-IQ
is a predictive low glucose suspend feature that is designed to temporarily
suspend insulin delivery to help reduce the frequency and duration of
hypoglycemic events. Control-IQ technology launched domestically in the first
quarter of 2020 and its international rollout began in the third quarter of
2020. Our Control-IQ technology is an advanced hybrid-closed loop feature,
designed to help increase a user's time in their targeted glycemic range. By the
fourth quarter of 2021, we will have substantially completed our scaled launch
of Control-IQ technology outside the United States, which was staged based on
the timing of necessary regulatory clearances or approvals. It is 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. Approximately 200,000 t:slim X2 users worldwide have
our Control-IQ algorithm. However, we continue to offer both AID algorithms to
support the varying needs of people living with diabetes.
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, as
well as a variety of accessories designed for enhanced usability. We also offer
t:connect, a web-based data management application that provides users, their
caregivers and their healthcare providers with a fast, easy and visual way to
display diabetes therapy management data from our pumps, integrated CGMs and
supported blood glucose meters.
In support of our digital health strategy, we continue to offer and improve
t:connect and TDU, and develop and launch other complementary offerings. In the
third quarter of 2020, we launched our first-generation t:connect mobile
application in the United States. This mobile app wirelessly uploads pump data
to our t:connect diabetes management application, receives notification of pump
alerts and alarms, and provides a discrete, secondary display of glucose and
insulin data. The availability of this mobile app is intended to reduce patient
burden and increase healthcare provider office efficiency by reducing the manual
and more time-consuming steps historically required for data extraction. In
addition, in the second quarter of 2020, we acquired Sugarmate, the developer of
a popular app designed to help people visualize diabetes therapy data in
innovative ways that also connects with many other popular, consumer-friendly
devices. We continue to support the Sugarmate app in addition to our t:connect
mobile app to provide a wide variety of features intended to benefit a broad
community of people with diabetes. In the second quarter of 2021, we began
limited testing of an initial version of Tandem Source, our second-generation
data management platform, in the United Kingdom. We continue to develop and test
new features for Tandem Source in anticipation of a future commercial release of
the product.
For the nine months ended September 30, 2021 and 2020, our consolidated sales
were $492.8 million and $330.8 million, respectively. For the nine months ended
September 30, 2021 and 2020, we reported net income of $4.8 million and net loss
of $51.4 million, respectively. Worldwide pump sales accounted for 59% and 62%
of our total sales for the nine months ended September 30, 2021 and 2020,
respectively, while pump-related supplies and accessories accounted for the
remainder in each year. Our accumulated deficit as of September 30, 2021 and
December 31, 2020 was $645.4 million and $659.2 million, respectively. These
amounts included $337.1 million and $292.1 million of accumulated non-cash
stock-based compensation charges and non-cash charges from the change in fair
value of common stock warrants as of September 30, 2021 and December 31, 2020,
respectively.

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In the United States, we have rapidly increased sales since the commercial
launch of our first product by expanding our sales, clinical and marketing
organization, through our development, commercialization and marketing of
multiple differentiated products that utilize our proprietary technology
platform and consumer-focused approach, and by providing strong customer
support. Our sales have further increased following our scaled product launches
in an expanding number of geographies outside the United States. We believe that
by demonstrating our product benefits and the shortcomings of existing insulin
therapies, more people will choose our insulin pumps for their therapy needs,
allowing us to further penetrate and expand the market worldwide. In addition,
we believe publications, such as the results from studies using Control-IQ
technology that were published in the New England Journal of Medicine in October
2019 and August 2020, and post-market real-world data will be valuable in
demonstrating the clinical outcome benefits derived from our system to
healthcare providers and payors. We also believe we are positioned well to
address consumers' needs and preferences with our current products and products
under development and by offering customers access to our future innovations
through TDU as they are approved by the local regulating bodies. At the same
time, by innovating and offering new product features and benefits using our
t:slim X2 platform, we are able to leverage a shared global manufacturing and
supply chain infrastructure. In the United States, we are able to leverage a
single sales, marketing, and clinical organization, as well as our customer
support services to support our business and engage with our consumers,
customers and healthcare providers. In Canada, we have a separate sales
organization and our customer support infrastructure benefits from close
collaboration with our United States organization. In other international
geographies, we have contracted with experienced distribution partners to
commercialize and support our t:slim X2 platform.
COVID-19 Global Pandemic Impact and Considerations
We are deemed an essential healthcare business under applicable governmental
orders based on the critical nature of the products we offer and the communities
we serve. We experienced modest impacts from the COVID-19 global pandemic during
the first quarter of 2020, which became more pronounced beginning in the second
quarter of 2020 and continued through to the current period. 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.
Commercially, during the first nine months of 2021, we saw a gradual increase in
the amount of in-person sales and training activities in the United States as
vaccination availability expanded and social-distancing requirements were
relaxed. During the third quarter of 2021, we also saw reduced availability of
customers and healthcare providers relating to people taking time off to
vacation, which adversely impacted our worldwide sales of new pumps to customers
during the period. This is a common seasonal pattern outside the United States,
but was seen more prominently domestically than in previous years due to the
lessening of COVID-19 restrictions during the quarter. Later in the third
quarter, as diagnosis rates for COVID-19 variants began to increase, we saw
sales activities begin to shift to fewer live interactions once again. In
addition, labor shortages at healthcare prescriber offices related to impacts
from COVID-19 can adversely impact our sales productivity and result in practice
inefficiencies. We continue to see variability across the country and anticipate
fluctuations between in-person and remote interactions will also continue.
We anticipate that our sales and operating results will continue to be adversely
impacted and subject to unpredictable variability for the duration of the
pandemic. For example, during the early stages of the pandemic, we experienced
delays of certain programs of up to six months from when they were originally
planned, such as human factors studies associated with our product development
efforts. More recently, recruiting and hiring new employees has proven more
difficult due to generalized labor shortages impacting global markets. There is
substantial competition for talent in the markets in which we operate as the
economy is entering a recovery phase and businesses increase hiring to meet
heightened demand. In addition, regulatory timelines have been and may continue
to be difficult to predict as the FDA has stated that its review process may
take longer than normal due to the impact of the COVID-19 global pandemic, and
we have experienced delays in the review of pending submissions. The full extent
of the impact of the COVID-19 global 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.
We have taken steps to prioritize the health and safety of our employees and
customers during the COVID-19 global pandemic, while working to maintain a
continuous supply of products, training and customer support. To that end, we
have increased the frequency of our communications to employees, suppliers,
customers, and healthcare providers. Until recently, we restricted nearly all
non-essential employee travel and banned non-essential visitors from all of our
facilities. We have recently modified those restrictions to allow for some
limited employee travel and visitors to our facilities with controls. To help
ensure the safety and health of our employees in manufacturing and warehousing
positions involved in production and fulfillment operations, we have implemented
preventative measures by requiring employees to wear masks and perform
temperature checks before each shift.
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In early 2020, we initiated having regular discussions with our key suppliers
regarding their abilities to fulfill existing orders and assess their ongoing
capacity. During the first six months of 2020, we experienced certain challenges
managing our inventory, primarily due to the impacts of the COVID-19 global
pandemic. For example, in the first quarter of 2020, we observed customers
purchasing cartridges and infusion sets at a higher rate than anticipated;
however, we have not observed similar patterns in more recent periods.
Nevertheless, our infusion set manufacturer continues to experience certain
inventory constraints which have resulted in us asking some customers to accept
substitutions of similar products to prevent delays in order fulfillment.
Additionally, at various times since the beginning of the pandemic, components
of our inventory were below our targeted stocking levels.
We use components from various suppliers 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.
Currently, we do not anticipate a significant disruption in our ability to
manufacture insulin pumps and cartridges, nor do we anticipate our third-party
manufacturers will be unable to provide sufficient quantities to meet product
demand during the remainder of 2021. However, we continue to monitor factors
that could negatively impact our supply chain, such as global shortages of
semiconductors and copper that are needed to manufacture our insulin pumps and
accessories, as well as custom components for our insulin pumps and cartridges
where we rely on a limited number of qualified suppliers. At this time, we
believe many of our suppliers are deemed essential businesses under applicable
governmental orders, and are not at risk of being subject to orders requiring
facility closures. We could experience these or other challenges with our supply
chain if demand for our products meaningfully exceeds our current forecasts, or
if continued proliferation of the virus, resurgences, or the emergence of new
variants results in additional or prolonged restrictions that impact global
supply chains.
We are prudently managing our use of cash and completed a convertible debt
financing in May 2020 to further strengthen our balance sheet. We believe that
our total cash and investments on hand are sufficient to sustain our existing
operations for at least the next 12 months from the date of this filing. In the
meantime, we are focused on making necessary investments in the organization as
originally planned to continue to progress against our long-term sales and
profitability initiatives, including through the recruitment of key employees,
advancement of our research and development pipeline, and implementation of
technology solutions. We will continue to evaluate our business operations and
strategy based on new information as it becomes available and will make changes
that we consider necessary in light of this information.
Products Under Development
Our products under development support our strategy of focusing on both consumer
and clinical needs, and include connected (mobile) health offerings, a
next-generation hardware platform, which we refer to as the t:sport Insulin
Delivery System (t:sport), AID system enhancements, and additional CGM
integrations with our current and future products. We intend to leverage our
consumer-focused approach and proprietary technology platform to continue to
develop products that have the features and functionality that will allow us to
meet the needs of people in differentiated segments of the insulin-dependent
diabetes market, including the following:
•Connected (Mobile) Health Offerings - In the third quarter of 2020, we began
offering the first version of our t:connect mobile application that wirelessly
uploads pump data to our cloud-based t:connect diabetes management application,
receives notification of pump alerts and alarms, and provides a discrete,
secondary display of glucose and insulin data. Future updates of our mobile
application are planned to include mobile bolus delivery, additional pump
control features, integrate other health-related information from third-party
sources and support future capabilities for our products under development. We
are designing our future mobile applications to enhance the user experience,
streamline the pump and supplies purchasing process, and provide internal
efficiencies. We also plan to use data from our centralized system for new
product development, continuous product improvement, and for the generation of
health economic outcomes data, and it may ultimately support other advanced
technology and patient monitoring services.
•t:sport Insulin Delivery System - Approximately half the size of our t:slim X2
pump, the t:sport pump is being designed for people who seek even greater
discretion and flexibility with the use of their insulin pump. We anticipate
that t:sport will feature a 200-unit cartridge, an on-pump bolus button, a
rechargeable battery, an AID algorithm, and a Bluetooth radio. t:sport is being
designed for use with leading U-100 insulins, and we are evaluating the use of
insulin concentrates to provide to people with greater insulin needs. We
anticipate that t:sport will be our first insulin pump to support full
pump-control from our mobile application, subject to FDA review and approval. A
separate controller may be offered in addition to full mobile control
availability.
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•AID Enhancements - We intend to further enhance our automated insulin delivery
system and we are planning and performing numerous clinical studies in diverse
user populations to support the development of expanded labeling indications and
new product features. These include algorithm enhancements intended to improve
clinical outcomes, as well as new features for greater personalization and
refinements to the overall system usability.
•Additional CGM Integration - In June 2020 we announced an agreement with Abbott
to develop and commercialize integrated diabetes solutions that combine Abbott's
CGM technology with our insulin delivery systems to provide more options for
people to manage their diabetes. 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. In November 2020, we entered into an agreement with Dexcom to extend our
current collaboration to include integration with Dexcom's 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.
Pump Shipments
From inception 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 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.
In the four-year period ended September 30, 2021, we shipped approximately
296,000 insulin pumps, of which approximately 219,000 were shipped to customers
in the United States and approximately 77,000 were shipped to international
markets.
Pump shipments to customers in the United States by fiscal quarter were as
follows:
                                                       Pump Units Shipped 

for Each of the Three Months Ended in Respective Years - U.S.

                               March 31                      June 30                     September 30                   December 31                     Total
2012                                      0                             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                           N/A                       57,605

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                                     N/A                     33,122


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Trends Impacting Financial Condition and Operating Results
Overall, we have experienced considerable sales growth since the commercial
launch of our first product in the third quarter of 2012, while incurring
operating losses since our inception. 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 of the United States and due to general seasonality in the 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 the United States associated with annual insurance deductibles
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
during 2021 and broader availability of vaccines;
•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 privacy breaches, which may subject us to legal and
regulatory proceedings and substantial fines, penalties and expenses, as well as
significant 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;
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•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;
•designation by UnitedHealthcare of one of our competitors as its preferred,
in-network durable medical equipment provider of insulin pumps for most
customers age seven and above from July 2016 through June 2020;
•ability to enter into and maintain agreements with CGM partners for CGM
integration;
•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 administration 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 quarters of 2018, 2019 and 2020, and were profitable for the nine
months ended September 30, 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 in U.S. 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.
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 in the United
States in the third quarter of 2012 and continued to launch various iterations
of that platform during the following years. In October 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.
We primarily sell our products through national and regional distributors in the
United States 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 our existing sales,
clinical, and marketing infrastructure will allow us to continue to increase
sales by allowing us to promote 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 outside the United States. Our products
are now sold in more than 20 countries, including in Canada, France and Germany.
The software version on the t:slim X2 hardware platform has progressed from
Dexcom G5 CGM integration at initial launch, followed by Basal-IQ technology
scaling across various international markets beginning in the second quarter of
2019, and most recently we commenced the launch of our Control-IQ technology in
select geographies. Our launch of Control-IQ technology in international markets
will continue to scale across additional geographies throughout 2021 subject to
applicable regulatory and reimbursement approvals.
Our independent international distributor partners perform all sales, customer
support and training in their respective markets. In Canada, we market with a
direct sales force and, similar to the United States, use a distributor partner
for certain billing and fulfillment activities. Historically, we have
experienced consistent levels of reimbursement for our products in the 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.
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In general, in the 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. Internationally, 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 and product launches into new geographies.
Since early 2020, the COVID-19 global pandemic had a major impact on businesses
around the world. We experienced only a modest negative impact from the pandemic
during the first quarter of 2020, which became more pronounced in the second
quarter through the end of the year. 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. Commercially, during the first
nine months of 2021, we saw a gradual increase in the amount of in-person sales
and training activities in the United States as vaccination availability
expanded and social-distancing requirements were relaxed. During the third
quarter, we also saw reduced availability of customers and healthcare providers
relating to people taking time off to vacation, which adversely impacted our
worldwide 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.
Cost of Sales
Historically, we have manufactured our pumps and disposable insulin cartridges
at our manufacturing facility in San Diego, California. Near the end of the
first quarter of 2020, our third-party cartridge manufacturer completed
validation and commenced commercial-scale manufacturing to supplement our
existing cartridge manufacturing capacity. We expect to increase production
capacity and volumes at our third-party cartridge manufacturer over the next 24
months and concurrently reduce our t:slim cartridge manufacturing capacity in
our existing facility 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. We anticipate
that our cost of sales will continue to increase as our product sales increase.
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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 will 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, whether as a result of
the COVID-19 global pandemic, or for other reasons, 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. 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, in 2020 and 2021, 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.
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 executive, financial, legal, marketing, sales,
clinical, customer support, technical services, insurance verification,
regulatory affairs and other administrative functions. We have approximately 95
sales territories in the United States as of September 30, 2021 and have
commenced an expansion in the fourth quarter of 2021 to approximately 110 sales
territories and related customer service functions. 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 in Canada are comprised of
approximately ten sales territories. Other significant SG&A expenses 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. Overall, we expect our SG&A
expenses, including the cost of our customer support infrastructure, to increase
as our customer base grows in the United States and international markets. 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. 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. Additionally, we recognized
higher non-cash stock-based compensation expense through the first half of 2020,
and experienced a reduction in expense beginning in the third quarter of 2020 as
certain 2018 employee stock option grants became fully amortized. We anticipate
that we will continue to see improvement in non-cash stock-based compensation
expense as a percent of sales in future years. Our SG&A expenses may be affected
by our response to the COVID-19 global pandemic, including reduced spending in
areas such as non-essential employee travel, which may be offset by increased
spending to support measures designed to prioritize the retention, health,
safety and welfare of our employees. In the longer term, SG&A expenses may also
increase due to anticipated costs associated with additional compliance and
regulatory reporting requirements.
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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 changes in the fair value of
certain warrants issued in connection with our public offering of common stock
in October 2017, interest expense which includes the amortization of debt
issuance costs related to our 1.50% Convertible Senior Notes due 2025, issued in
May 2020 (our Notes), and interest earned on our cash equivalents and short-term
investments. We expect interest expense in future quarters to be comparable with
that of the first three quarters of 2021, assuming that none of the Notes are
converted or redeemed in future periods. We expect the revaluation of the
outstanding Series A warrants will not have a significant impact on our other
income and expense from the fourth quarter of 2021, through the fourth quarter
of 2022 when the remaining warrants expire.
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

                                                  Three Months Ended                     Nine Months Ended
                                                     September 30,                         September 30,
(in thousands, except percentages)              2021               2020               2021               2020
Sales:
Domestic                                    $ 133,106          $ 107,517          $ 364,025          $ 276,340
International                                  46,521             16,086            128,778             54,425
Total sales                                   179,627            123,603            492,803            330,765
Cost of sales                                  82,882             58,290            230,317            160,801
Gross profit                                   96,745             65,313            262,486            169,964
Gross margin                                       54  %              53  %              53  %              51  %
Operating expenses:
Selling, general and administrative            64,923             50,228            190,009            150,385
Research and development                       24,102             16,094             62,562             46,198
Total operating expenses                       89,025             66,322            252,571            196,583
Operating income (loss)                         7,720             (1,009)             9,915            (26,619)
Other income (expense), net:
Interest income and other, net                     31                143                721              1,235
Interest expense                               (1,511)            (4,855)            (4,526)            (8,030)

Change in fair value of common stock
warrants                                         (392)            (3,648)            (1,354)           (19,906)
Total other expense, net                       (1,872)            (8,360)            (5,159)           (26,701)
Income (loss) before income taxes               5,848             (9,369)             4,756            (53,320)
Income tax expense (benefit)                       54                 39                 (2)            (1,938)
Net income (loss)                           $   5,794          $  (9,408)         $   4,758          $ (51,382)



Comparison of the Three Months Ended September 30, 2021 and 2020
Sales. For the three months ended September 30, 2021, sales were $179.6 million,
which included $46.5 million of international sales. Sales were $123.6 million
for the same period in 2020, which included $16.1 million of international
sales.

The increase in worldwide sales of $56.0 million in the third quarter of 2021
compared to the third quarter of 2020 was driven by a 43% increase in worldwide
pump shipments to 31,558 in the third quarter of 2021, compared to 22,021 in the
third quarter of 2020, and a 71% increase in pump-related supply sales. Sales of
pump-related supplies increased primarily due to 58% growth in our estimated
worldwide installed base of customers.

Domestic sales by product were as follows (in thousands):

                           Three Months Ended
                             September 30,
                          2021           2020
Pump                   $  78,771      $  69,464
Infusion sets             37,725         26,133
Cartridges                16,289         11,767
Other                        321            153
Total Domestic Sales   $ 133,106      $ 107,517


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Domestic pump sales were $78.8 million for the third quarter of 2021, compared
to $69.5 million in the third quarter of 2020. Domestic pump shipments were
20,296 in the third quarter of 2021, compared to 18,380 in the third quarter of
2020. The increase in pump shipments was primarily 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, offset by the impact from increased
travel and vacations by both customers and healthcare providers in the United
States, as well as increased rates of infection related to COVID-19 variants.
Sales of pump-related supplies increased primarily due to a 45% increase in our
estimated domestic installed base of customers. Sales to distributors accounted
for 68% and 74% of our total domestic sales for the three months ended
September 30, 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):

                                Three Months Ended
                                  September 30,
                                2021           2020
Pump                        $   23,762      $  9,045
Infusion sets                   16,175         5,118
Cartridges                       6,269         1,761
Other                              315           162
Total International Sales   $   46,521      $ 16,086


International pump sales were $23.8 million for the third quarter of 2021,
compared to $9.0 million in the third quarter of 2020, as pump shipments
increased 209% compared to the same period in the prior year due to strong
demand for our products as we continue to expand the launch of Control-IQ
technology, which began in the third quarter of 2020, outside the United States,
as well as the varying impact of the global pandemic. Sales of pump-related
supplies benefited from a 115% 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, particularly during
the typical third quarter European holiday season. 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
96% and 91% of our total international sales for the three months ended
September 30, 2021 and 2020, respectively.
Cost of Sales and Gross Profit. Our cost of sales for the three months ended
September 30, 2021 was $82.9 million, resulting in gross profit of $96.7
million, compared to cost of sales of $58.3 million and gross profit of $65.3
million for the same period in 2020. The gross margin for the three months ended
September 30, 2021 was 54%, compared to 53% in the same period in 2020.
The increase in our gross profit for the three months ended September 30, 2021
was primarily the result of the $56.0 million increase in total sales. Gross
profit and gross margin both benefited from improvement in the per unit
manufacturing costs for pumps and cartridges from efficiencies in the
manufacturing process, leverage of fixed overhead and increased volumes from our
third-party cartridge manufacturer. 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.
Royalty expense was $1.9 million for the three months ended September 30, 2021,
compared to $1.7 million in the same period in 2020. Other factors that have and
may continue to have an impact on the gross margin percentage are changes in
product and customer mix. Pump sales, which have the highest gross margin, were
57% of total worldwide sales in the third quarter of 2021 versus 64% in the
third quarter of 2020. Non-cash stock-based compensation expense allocated to
cost of sales was $1.6 million for the three months ended September 30, 2021,
compared to $2.1 million in the same period in 2020.
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Selling, General and Administrative Expenses. SG&A expenses increased 29% to
$64.9 million for the three months ended September 30, 2021 from $50.2 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 $9.2 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, and a $2.4 million increase in non-cash
stock-based compensation expense. Non-cash stock-based compensation expense
allocated to SG&A was $11.3 million for the three months ended September 30,
2021, compared to $8.9 million in the same period in 2020. The increase in
non-cash stock-based compensation expense was associated with increased
headcount in 2020 and 2021. We also experienced a $3.1 million increase in other
non-employee discretionary spending, including information technology, supplies,
outside services and travel costs.
Research and Development Expenses. R&D expenses increased 50% to $24.1 million
for the three months ended September 30, 2021 from $16.1 million for the same
period in 2020. The increase in R&D expenses was primarily the result of an
increase of $4.8 million in salaries, incentive compensation and other employee
benefits due to an increase in personnel to support our product development
efforts. Non-cash stock-based compensation expense allocated to R&D was $2.9
million for the three months ended September 30, 2021, compared to $1.8 million
in the same period in 2020. Non-employee discretionary spending also increased
$2.1 million for product development, facilities and maintenance costs.
Other Income (Expense), Net. Total other expense, net for the three months ended
September 30, 2021 was $1.9 million compared to $8.4 million in the same period
in 2020. Total other expense, net for the three months ended September 30, 2021
primarily consisted of $1.5 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 $0.4 million revaluation loss from the change in the fair
value of certain warrants. Total other expense, net for the three months ended
September 30, 2020 consisted of a $3.6 million loss on revaluation from the
change in the fair value of certain warrants, and $4.9 million of interest
expense which included the amortization of debt discount and debt issuance costs
related to our Notes. The decrease in interest expense was primarily due to the
adoption of ASU No. 2020-06 in the first quarter of 2021 (see Note 7,
"Convertible Senior Notes").


Comparison of the Nine Months Ended September 30, 2021 and 2020
Sales. For the nine months ended September 30, 2021, sales were $492.8 million,
which included $128.8 million of international sales. For the nine months ended
September 30, 2020, sales were $330.8 million, which included $54.4 million of
international sales.
The increase in worldwide sales of $162.0 million in the first nine months of
2021 compared to the first nine months of 2020 was driven by a 56% increase in
worldwide pump shipments to 90,727 in the first nine months of 2021, compared to
58,086 in the first nine months of 2020, and a 58% increase in pump-related
supply sales. Sales of pump-related supplies increased primarily due to a 58%
growth in our estimated worldwide installed base of customers.

Domestic sales by product were as follows (in thousands):

                           Nine Months Ended
                             September 30,
                          2021           2020
Pump                   $ 221,724      $ 175,550
Infusion sets             97,251         68,883
Cartridges                44,136         31,418
Other                        914            489
Total Domestic Sales   $ 364,025      $ 276,340



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Domestic pump sales were $221.7 million for the first nine months of 2021,
compared to $175.6 million in the first nine months of 2020, as pump shipments
increased 24% 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
57,605 in the first nine months of 2021 compared to 46,273 in the first nine
months of 2020. Sales of pump-related supplies increased primarily due to a 45%
increase in our estimated domestic installed base of customers. Sales to
distributors accounted for 68% and 72% of our total domestic sales for the nine
months ended September 30, 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):

                                Nine Months Ended
                                  September 30,
                               2021           2020
Pump                        $  70,300      $ 27,985
Infusion sets                  41,074        18,794
Cartridges                     16,878         7,315
Other                             526           331
Total International Sales   $ 128,778      $ 54,425



International pump sales were $70.3 million for the first nine months of 2021,
compared to $28.0 million in the first nine months of 2020, as pump shipments
increased 180% compared to the same period in the prior year due to strong
demand for our products as we continue to expand the launch of 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 115% 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, particularly during the typical third quarter European holiday
season. 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 95% of our total international sales for the nine
month period ended September 30, 2021, and 93% for the same period in 2020.

Cost of Sales and Gross Profit. Our cost of sales for the nine months ended
September 30, 2021 was $230.3 million resulting in gross profit of $262.5
million, compared to cost of sales of $160.8 million and gross profit of $170.0
million for the same period in 2020. The gross margin for the nine months ended
September 30, 2021 was 53% compared to 51% in the same period in 2020.

The increase in our gross profit for the nine months ended September 30, 2021
was primarily the result of the $162.0 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. Royalty expense was
$5.4 million for the nine months ended September 30, 2021, compared to $4.7
million in the same period in 2020. 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 in the first nine months of 2021 compared to 62% in the same period in
2020. Non-cash stock-based compensation expense allocated to cost of sales was
$4.6 million for the nine months ended September 30, 2021, compared to $6.5
million in the same period in 2020.

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Selling, General and Administrative Expenses. SG&A expenses increased 26% to
$190.0 million for the nine months ended September 30, 2021 from $150.4 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 $25.7 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. Non-cash stock-based compensation
expense allocated to SG&A was $31.6 million for the nine months ended
September 30, 2021, compared to $32.1 million in the same period in 2020. The
increase in non-cash stock-based compensation expense associated with increased
headcount in 2020 and 2021, 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 became fully amortized in the second quarter of 2020.
We also experienced a $14.4 million increase in other non-employee discretionary
spending, including outside consulting, software maintenance and outside
services.
Research and Development Expenses. R&D expenses increased 35% to $62.6 million
for the nine months ended September 30, 2021 from $46.2 million for the same
period in 2020. The increase in R&D expenses was primarily the result of an
increase of $11.8 million in salaries, incentive compensation and other employee
benefits due to an increase in personnel to support our product development
efforts. Non-cash stock-based compensation expense allocated to R&D was $7.5
million for the nine months ended September 30, 2021, compared to $6.6 million
in the same period in 2020. We also experienced a $3.7 million increase in other
non-employee discretionary spending, including software maintenance, equipment
and product development costs.
Other Income (Expense), Net. Total other expense, net for the nine months ended
September 30, 2021 and 2020 was $5.2 million and $26.7 million, respectively.
Other expense for the nine months ended September 30, 2021 primarily consisted
of $4.5 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 the nine months ended September 30, 2020 primarily
consisted of a $19.9 million revaluation loss from the change in the fair value
of certain warrants and $8.0 million of interest expense which included the
amortization of debt discount and debt issuance costs related to our Notes.
Interest income and other, net for the nine months ended September 30, 2021 and
2020 primarily consisted of interest earned on our cash equivalents and
short-term investments. The decrease in interest expense was primarily due to
the adoption of ASU No. 2020-06 in the first quarter of 2021 (see Note 7,
"Convertible Senior Notes").
Income Tax Expense (Benefit). We recognized an income tax benefit of $2,000 on
pre-tax income of $4.8 million for the nine months ended September 30, 2021,
compared to an income tax benefit of $1.9 million on a pre-tax loss of
$53.3 million for the nine months ended September 30, 2020. The income tax
benefit for the nine months ended September 30, 2021 was primarily attributable
to excess tax benefits from stock compensation recorded discretely during the
period, offset by state and foreign income tax expense as a result of current
taxable income in certain jurisdictions. The income tax benefit for the nine
months ended September 30, 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
As of September 30, 2021, we had $595.0 million in cash and cash equivalents and
short-term investments. We believe that our cash and cash equivalents and
short-term investments balance is 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 2020, we
completed the following financing activities:
•In May 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, "Convertible Senior Notes").
•From January 2020 through September 2021, we issued 3,165,455 shares of common
stock upon the exercise of stock options, and 402,312 shares of common stock
were purchased under our 2013 Employee Stock Purchase Plan, which generated
aggregate proceeds of $103.5 million.
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•From January 2020 through September 2021, we received proceeds of $1.5 million
from the exercise of 416,315 outstanding warrants which were originally issued
in connection with our registered public offering of common stock in October
2017. As of September 30, 2021, there were warrants to purchase 1,000 shares
outstanding relating to the October 2017 offering.
•From January 2020 through September 2021, we received proceeds of $2.1 million
from the exercise of 73,985 outstanding warrants which were originally issued
between August 2011 and August 2012. As of September 30, 2021, there were
warrants to purchase 19,722 shares 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, 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.
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. In light of the COVID-19 global pandemic, we are prudently
managing our use of cash. We will continue to evaluate new information as it
becomes available and make changes as are considered necessary.
The following table shows a summary of our cash flows for the nine months ended
September 30, 2021 and 2020:
                                                       Nine Months Ended
                                                         September 30,
(in thousands)                                        2021           2020
Net cash provided by (used in):
Operating activities                               $  91,724      $   9,432
Investing activities                                (110,058)      

(236,430)

Financing activities                                  36,046        305,234
Effect of foreign exchange rate changes on cash           50             70

Net increase in cash and cash equivalents $ 17,762 $ 78,306

Operating Activities. Net cash provided by operating activities was $91.7
million for the nine months ended September 30, 2021, compared to $9.4 million
in the same period in 2020. 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 $37.5 million improvement to net income when
adjusted for non-cash expenses, particularly stock-based compensation expense,
as well as a $44.8 million increase from working capital changes. Working
capital changes during the first nine months of 2021, which primarily consisted
of increases in employee related liabilities, accounts payable and accrued
expenses, deferred revenue, and accounts receivable related to the growth in our
business, provided $28.8 million in cash compared to a use of $16.0 million from
working capital changes in the same period of 2020. Accounts receivable
increased to $87.5 million at September 30, 2021 from $82.2 million at
December 31, 2020. Inventories increased to $65.7 million at September 30, 2021
from $63.7 million at December 31, 2020.
Investing Activities. Net cash used in investing activities was $110.1 million
for the nine months ended September 30, 2021, which was primarily related to
$542.8 million of purchases of short-term investments, $9.3 million cash paid
for the acquisition of intangible assets and equity investments, and $8.4
million in purchases of property and equipment, offset by $450.5 million in
proceeds from maturities and sales of short-term investments. Net cash used
in investing activities was $236.4 million for the nine months ended
September 30, 2020, which was primarily related to $332.0 million of purchases
of short-term investments, $23.3 million in purchases of property and equipment,
and $4.9 million cash paid for the acquisition of intangible assets, offset by
$123.7 million in proceeds from maturities and sales of short-term investments.
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Financing Activities. Net cash provided by financing activities was $36.0
million for the nine months ended September 30, 2021, which primarily consisted
of proceeds from the issuance of common stock under our stock plans. Net cash
provided by financing activities was $305.2 million for the nine months
ended September 30, 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, and
$57.7 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, including 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 relative mix of sales between domestic and international markets;
•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, and manufacturing
equipment to support business growth and increase manufacturing 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.
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Critical Accounting Policies
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 of
America (U.S. GAAP). 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 and
accompanying notes as of the date of the 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 from
these estimates.
There have been no material changes to our critical accounting policies and
estimates from the information provided in Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Critical Accounting Policies Involving Management Estimates and Assumptions,"
included in our Annual Report on Form 10-K for the year ended December 31, 2020,
other than the adoption of ASU No. 2020-06, Accounting for Convertible
Instruments and Contracts in an Entity's Own Equity effective January 1, 2021
(see Note 7, "Convertible Senior Notes").
Off-Balance Sheet Arrangements
As of September 30, 2021, we did not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We invest our excess cash primarily in commercial paper, corporate debt
securities, U.S. Treasury securities and U.S. Government-sponsored enterprise
securities. The primary objectives of our investment activities are to maintain
liquidity and preserve principal while maximizing the income we receive from our
financial instruments without significantly increasing risk. We have established
guidelines regarding approved investments and maturities of investments, which
are primarily designed to maintain liquidity and preserve principal.
Some of the financial instruments in which we invest subject us to market risk,
in that a change in prevailing interest rates may cause the principal amount of
the instrument to fluctuate. Other financial instruments in which we invest
subject us to credit risk, in that the value of the instrument may fluctuate
based on the issuer's ability to pay. As a result of the COVID-19 global
pandemic and the perceived increased credit risks associated with certain
securities, credit rating agencies have, from time to time, issued downgrades or
revised outlooks to negative for certain issuers of the debt securities held in
our short-term investments portfolio. Unrealized losses on available-for-sale
debt securities at September 30, 2021 were not significant. Based on the credit
quality of the available-for-sale debt securities that are in an unrealized loss
position, and our current estimates of future cash flows to be collected from
those securities, we believe the unrealized losses are not credit losses (see
Note 3, "Short-Term Investments").
Because of the short-term maturities of our financial instruments, we do not
believe that an increase or decrease in market interest rates would have a
significant impact on the realized value of our investment portfolio. If a 10%
change in interest rates were to have occurred on September 30, 2021, it would
not have had a material effect on the fair value of our investment portfolio as
of that date.
In May 2020, we issued $287.5 million principal amount of Convertible Senior
Notes, which bear interest at a fixed rate of 1.50% per year. Accordingly, we
are not subject to interest rate risk as a result of the Convertible Senior
Notes (see Note 7, "Convertible Senior Notes").
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Foreign Currency Exchange Rate Risk
Our operations are primarily located in the United States, and nearly all of our
sales since inception have been made in U.S. dollars. With the exception of a
portion of our sales in Canada, our sales outside of the United States are
currently made to independent distributors under agreements denominated in U.S.
dollars. Accordingly, we believe our exposure to foreign currency rate
fluctuations is currently limited to our operations in Canada, where
fluctuations in the rate of exchange between the U.S. dollar and the Canadian
dollar could adversely affect our financial results. We may be exposed to
further foreign currency exchange risk as we expand our operations in markets
outside the United States. In certain circumstances, we may seek to manage such
foreign currency exchange risk by using derivative instruments such as foreign
currency exchange forward contracts to hedge our risk. In general, we may hedge
material foreign currency exchange exposures up to 12 months in advance.
However, we may choose not to hedge some exposures for a variety of reasons,
including prohibitive economic costs.
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