TANDEM DIABETES CARE INC – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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You should read the following discussion and analysis together with "Selected
Financial Data" in Part II, Item 6 and our consolidated financial statements and
related notes in Part II, Item 8. The following discussion contains
forward-looking statements, which statements are subject to considerable risks
and uncertainties. Our actual results could differ materially from those
expressed or implied in any forward-looking statements as a result of various
factors, including those set forth under the caption "Risk Factors" in Part I,
Item 1A.
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Certain statements contained in this Annual Report are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Exchange Act, and are subject to the "safe
harbor" created by these sections. Future filings with the SEC, future press
releases and future oral or written statements made by us or with our approval,
which are not statements of historical fact, may also contain forward-looking
statements. Because such statements include risks and uncertainties, many of
which are beyond our control, actual results may differ materially from those
expressed or implied by such forward-looking statements. Some of the factors
that could cause actual results to differ materially from those expressed or
implied by such forward-looking statements can be found under the caption "Risk
Factors" in Part I, Item 1A, and elsewhere in this Annual Report. The
forward-looking statements speak only as of the date on which they are made, and
we undertake no obligation to update such statements to reflect events that
occur or circumstances that exist after the date on which they are made.

Overview

We are a medical device company focused on the design, development and
commercialization of technology solutions for people living with diabetes.
Diabetes management can vary greatly from person-to-person, creating multiple
market segments based on clinical needs and personal preferences. Our goal is to
lead in insulin therapy management across multiple of these market segments by
providing a portfolio of delivery devices, software, and data insight solutions
to people living with diabetes, as well as their caregivers and healthcare
providers.

Since our initial commercial launch, we have rapidly innovated and brought more
products to market than our competitors. We have commercially launched seven
insulin pump configurations in the United States since 2012 and three insulin
pump configurations outside the United States since 2018. Today, our
software-updatable t:slim X2 Insulin Delivery System (t:slim X2) hardware
platform represents 100% of our new pump shipments. In the four-year period
ended December 31, 2021, we shipped nearly 330,000 insulin pumps, which is
representative of our estimated global installed customer base, assuming the
typical four-year reimbursement cycle. Nearly 240,000 of these pumps were
shipped to customers in the United States and nearly 90,000 were shipped to
international markets.

Our manufacturing, sales and support activities principally focus on our
flagship pump platform, the t:slim X2 and our complementary product offerings.
Our simple-to-use t:slim X2 is based on our proprietary technology platform and
is the smallest durable insulin pump available in the United States. We have
commercially offered two different automated insulin dosing (AID) algorithms on
t:slim X2, including our Control-IQ technology, which is an advanced
hybrid-closed loop feature, designed to help increase a user's time in their
targeted glycemic range. It was the first system cleared by 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 based on continuous
glucose monitoring (CGM) readings. Approximately 200,000 t:slim X2 users have
our Control-IQ technology, which launched in the United States in the first
quarter of 2020, and is now available in more than 20 countries. Our Control-IQ
technology uses information from Dexcom Inc.'s (Dexcom) G6 sensor, which is the
third generation of Dexcom CGM that we have integrated with our pump technology.

The t:slim X2 is unique in that it is the only pump on which remote software
updates have been made commercially available in the United States. Now
available in the countries we serve worldwide, our Tandem Device Updater (TDU),
is a revolutionary tool that has allowed more than 130,000 people to update
their t:slim X2 software from a personal computer. This offering is a
competitive advantage as it allows us to bring new features, such as our AID
technology and CGM integration, to our customers faster than the industry has
been able to historically.

Our insulin pump products are generally considered durable medical equipment and
have an expected lifespan of at least four years. In addition to insulin pumps,
we sell disposable products that are used together with our pumps and are
replaced every few days, including cartridges for storing and delivering
insulin, and infusion sets that connect the insulin pump to a user's body.
Additionally, we sell accessories such as belt clips and cases for use with
pumps which are designed to enhance usability. 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.

Our primary research and development and administrative headquarters are located
in San Diego, California. We also operate a manufacturing facility and a
warehousing facility in San Diego. In addition, we maintain offices in Boise,
Idaho and in Markham, Ontario, Canada. We employed approximately 2,000 regular
full-time employees as of December 31, 2021.

For the years ended December 31, 2021, 2020 and 2019, our consolidated sales
were $702.8 million, $498.8 million, and $362.3 million, respectively. For the
year ended December 31, 2021, our net income was $15.6 million. For the years
ended 2020 and 2019, our net loss was $34.4 million, and $24.8 million,
respectively. Worldwide pump sales accounted for 59%, 63%, and 68% of our total
sales, respectively, for the years ended December 31, 2021, 2020 and 2019, while
pump-related supplies and accessories accounted for the remainder in each year.
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RECENT DEVELOPMENTS

On February 16, 2022, we announced FDA clearance for the t:connect mobile app,
which is the first-ever smartphone application capable of initiating insulin
delivery on both iOS and Android operating systems. The updated t:connect mobile
app is designed to offer t:slim X2 insulin pump users the ability to program and
cancel bolus insulin requests through the convenience of their compatible
smartphone. The new feature will be offered in the United States for no
additional cost to new t:slim X2 insulin pump customers, and to in-warranty
customers through remote software updates for both the t:slim X2 insulin pump
and t:connect mobile app.

Impact and Considerations of the Global COVID-19 Pandemic

Our business has been impacted in a variety of ways since the onset of the
COVID-19 global pandemic in early 2020, and will likely continue to be impacted
for the remainder of 2022. Specific factors that have influenced our financial
results and the way in which we operate include fluctuations in shelter-in-place
restrictions, supply chain constraints, labor shortages, the timing and extent
of vaccine availability and surges in infection and hospitalization rates as new
COVID variants have emerged. Throughout this time, we have responded to each of
these unique challenges, while prioritizing the health and safety of our
employees and customers and working diligently to maintain a continuous supply
of products, training and customer support.

Most notably, our sales results reflected a high degree of variability across
the quarters during this time, unlike historical seasonal trends. We experienced
a modest impact early in 2020, which became more pronounced and continued in
varying degrees as the pandemic progressed. Initially, the impact on our
business was relatively consistent worldwide but we have since seen variations
in individual markets based on local conditions and anticipate ongoing
fluctuations may continue.

Our inventory levels have also fluctuated as we respond to supply chain
constraints, due to availability of components from the various suppliers we use
to build our products. While we have adequate raw material inventory for a
substantial portion of our pump and cartridge components, we are below our
targeted stocking levels for others. In early 2020, we initiated regular
discussions with our key suppliers regarding their abilities to fulfill existing
orders and assess their ongoing capacity. Over the course of the pandemic, we
have increased the frequency of those communications. We continue to monitor
factors that could negatively impact our supply chain, such as global shortages
of semiconductors, copper and paper, as well as custom components for our
insulin pumps and cartridges where we rely on a limited number of qualified
suppliers. We anticipate experiencing continued challenges managing supply chain
constraints, including the potential for limitations on availability of
components as well as increased purchase costs.

Generally, our entire operation has been impacted as we navigate the generalized
labor shortages impacting global markets. The labor challenges affect our
ability to recruit and hire key talent at the same pace as in years past, but we
remain active in our recruiting efforts and competitive in our offerings. In
particular, these labor challenges combined with regulatory delays have impacted
our product development and launch timelines. The FDA has generally stated that
its review process may take longer than normal due to prioritization of
COVID-related products and services. We have experienced lengthy delays in the
review of pending submissions with the FDA, making regulatory timelines
increasingly difficult to predict.

We have adapted well in our commercial operations and customer-facing functions.
Our sales organization balances remote and in-person interactions based on the
needs and requirements of the customers with whom they interact. For example,
prior to the onset of the pandemic, nearly all trainings for customers
purchasing our pump platform were in-person. We quickly pivoted to nearly all
trainings being provided on remote platforms. Since that time, we have achieved
a balance that includes options for the individual based on their unique needs.
We continue to see variability across the markets in which we operate and
anticipate these fluctuations between in-person and remote interactions will
continue.

Our facilities have been closed for non-essential purposes throughout most of
the pandemic, while our manufacturing operations were deemed essential due to
the critical nature of our product and the communities that we serve. To help
ensure the safety and health of those employees working in our facilities, we
have implemented preventative measures by requiring employees to wear masks and
perform temperature checks before each shift. We are currently developing a
return-to-work strategy for the rest of the organization that will incorporate a
hybrid approach to meet the needs of our employees, as well as optimize usage of
our facilities.

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Overall, we anticipate that our sales and operating results will continue to be
impacted and subject to unpredictable variability. The full extent of the impact
of the pandemic on our future business and operations is difficult to estimate
and will depend on a number of factors including the scope and duration of the
COVID-19 global pandemic, and the relative impact of COVID-19 on the business
operations of our contract manufacturers, suppliers and competitors.

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

Advertising

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.

Mobile

Formerly referred to under its development name, t:sport, the Tandem Mobi is
approximately half the size of our t:slim X2 pump, and is being designed for
people who seek even greater discretion and flexibility with the use of their
insulin pump. Its features include a 200-unit cartridge, an on-pump bolus
button, inductive charging, an AID algorithm, and is waterproof. We anticipate
that Mobi will be our first insulin pump to support full pump-control from our
mobile application.

t:slim X3

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

Mobile: Tubeless

This offering is being developed to provide an alternative tubeless infusion
site option for Mobi pump users. A goal of this design is to allow for people
living with diabetes to customize the way they wear their pump with each
cartridge change to best suit their personal preferences and lifestyle

Room

Our patch pump design is in its infancy and is being developed for people
living with diabetes and wanting a disposable tubeless solution.

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.


Progress of Control-IQ

We are driving innovation in our algorithms, emphasizing automation,
personalization and simplification, all intended to continue to improve
therapeutic outcomes and provide a positive patient experience characterized by
simplicity and ease of use. Additionally, we have initiated clinical studies to
expand the indications of our Control-IQ technology to include people with type
1 diabetes ages 2 to 5 years old, as well as people living with type 2 diabetes.
We are also researching the use of different insulins with our Control-IQ
technology.

Mobile control

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

The integration

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

Dexcom CGM: In November 2020, we entered into an agreement with Dexcom to extend
our current collaboration to include integration with their future G7 CGM
technology. Following integrated product development work, and required
regulatory clearances or approvals, this will be the fourth generation of Dexcom
CGM that we intend to integrate with our devices.

Abbott CGM: In June 2020, we announced an agreement with Abbott Laboratories
(Abbott), to develop and commercialize integrated diabetes solutions that
combine Abbott's CGM technology with our insulin delivery systems. Following the
completion of our integrated product development work, and after obtaining
required regulatory clearances or approvals, we intend to focus our initial
commercial activities on integrated products in the U.S. and Canada, with
additional geographies considered in the future.

Data and information

Our goal is to innovate across our digital health platforms by using the vast
amount of data that we collect, in combination with technology such as
artificial intelligence or machine learning, to provide information and insights
to people living with diabetes, their caregivers and healthcare providers and
insurance payors. Key areas of development include making these insights easy to
understand, provided in a flexible format with mobile or web apps, and available
real time. In addition, we are working to integrate health-related information
from third-party sources and use our data to support current and future products
under development.

Tandem Source

Expanding the capabilities of our t:connect data management application
available for customers in the United States, Tandem Source is our
second-generation web-based data management application that is being designed
to become our single, global platform. This application enhances clinical data
visualization, provides added interface customization for users to personalize
how they engage with their data and for healthcare providers to better manage
their care. In the second quarter of 2021, we began limited testing of an
initial version of Tandem Source in the United Kingdom. We continue to develop
and test new features for Tandem Source in anticipation of a future commercial
release of the product.

Settings Automation

Our automation research and development activities center around opportunities
for enhanced user and healthcare provider experience, and improved clinical
outcomes. In support of this effort, we are working to automate our pump
settings adjustments to further enhance ease of use and expand adoption of our
insulin pump products.

For more information, see the section of this annual report under
the caption “Company” in Part I, point 1.

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.

Insulin pumps in the markets we serve worldwide are generally subject to a
four-year reimbursement cycle, imposed by the third-party insurance carrier,
government plan or healthcare system that serves as the primary payor. At the
end of each four-year cycle, customers may be eligible for the purchase of a new
insulin pump, subject to the rules and requirements of the primary payor. The
majority of our pump sales through the current period have been generated by new
customers, but the opportunity for existing customers to purchase a renewal
insulin pump increases each period as individual customer warranties expire.
With programs dedicated to customer retention efforts, we expect such renewal
purchases to represent a more significant portion of our shipments in the
long-term.
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Since inception through December 31, 2021, we have shipped approximately 395,000
pumps worldwide, of which nearly 330,000 insulin pumps were shipped in the last
four years, which is representative of our estimated global in-warranty
installed customer base, assuming the typical four-year reimbursement cycle.
Nearly 240,000 of these pumps were shipped to customers in the United States,
and nearly 90,000 were shipped to international markets. In the year ended
December 31, 2021, we shipped 128,312 insulin pumps worldwide, compared to
90,771 insulin pumps shipped in 2020.

Pump shipments to customers of United States per fiscal quarter were also
follows:

                                                          Pump Units 

Ships for each of the three months ended in the respective years – we

                                   March 31                      June 30                    September 30                  December 31                     Total
2012                                     -                             9                          204                           844                        1,057
2013                                   852                         1,363                        1,851                         2,406                        6,472
2014                                 1,723                         2,235                        2,935                         3,929                       10,822
2015                                 2,487                         3,331                        3,431                         6,234                       15,483
2016                                 4,042                         4,582                        3,896                         4,418                       16,938
2017                                 2,816                         3,427                        3,868                         6,950                       17,061
2018                                 4,444                         5,447                        7,379                        12,935                       30,205
2019                                 9,669                        12,799                       13,814                        17,453                       53,735
2020                                13,158                        14,735                       18,380                        24,552                       70,825
2021                                     16,644                        20,665                        20,296                  25,712                       83,317


Pump shipments to international customers by fiscal quarter were as follows:

                                                             Pump Units Shipped for Each of the Three Months Ended in Respective Years - International
                                   March 31                          June 30                           September 30                        December 31                     Total
2018                                         N/A                               N/A                           1,055                            3,233                         4,288
2019                                 5,063                             8,459                                 4,025                            2,149                        19,696
2020                                 4,220                             3,952                                 3,641                            8,133                        19,946
2021                                       8,708                      13,152                                11,262                           11,873                        44,995

Trends Affecting Financial Results

Overall, we have experienced considerable sales growth each year since the
commercial launch of our first product in the third quarter of 2012, only
recognizing an operating profit on a full year basis for the first time in 2021.
Our operating results have historically fluctuated on a quarterly or annual
basis, particularly in periods surrounding anticipated regulatory approvals, the
commercial launch of new products by us and our competitors, the commercial
launch of our products in geographies outside 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 of competitors’ products by people
insulin-dependent diabetes, their carers and healthcare providers;

•the introduction of new products, techniques or treatment technologies to
treatment of diabetes, including the timing of marketing of new
produced by us and our competitors;

• seasonality in United States associated with annual insurance deductibles
and coinsurance requirements associated with medical insurance plans
used by our customers and the customers of our distributors;

•incidence of disease or illness, including the COVID-19 global pandemic, that
may impact customer purchasing patterns or disrupt our supply chain, or create
uncertainty or delay with respect to regulatory approvals;

•timing of holidays and summer vacations, which may vary by geography and may be
further influenced by the lifting or relaxation of COVID-19 related restrictions
and broader availability of vaccines;
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• the buying habits of our distributors and other customers, both nationally
and internationally;

• changes in the competitive landscape, including from companies
entering or exiting the diabetes therapy market;

• access to adequate coverage and reimbursement for our current and future expenses
products by third-party payers and reimbursement decisions by third parties
payers;

• the extent and timing of any changes to our facilities, manufacturing
operations and other infrastructure, and factors affecting our ability to access
Our infrastructure;

•the impact of any potential claims, investigations, information requests, or
legal, regulatory or administrative proceedings with respect to potential or
asserted violations of law, including: sales and marketing practices,
anti-corruption and FCPA, antitrust, securities, employment, product liability,
environmental, data privacy breaches and patent infringement, which may subject
us to fines, penalties, expenses, or reputational harm;

• planned and actual regulatory approvals of our products and our competitors
some products; and

• impacting product recalls, or the suspension or withdrawal of regulations
authorization 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:

•disruptions caused by the global COVID-19 pandemic on suppliers,
third-party manufacturers, healthcare providers, distributors and our
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;

•planned new product launches;

•increased opportunity to achieve customer renewals as customers become eligible
for insurance reimbursement to purchase a new insulin pump at the end of the
typical four-year reimbursement cycle;

• ability to enter into, maintain agreements and achieve continued success in
current and future product integrations with CGM partners;

• expansion and new product launches in certain international geographies,
including initial orders to stock inventory; and

•ability to effectively scale our operations to support rapid growth, including
expanding our facilities, advancing our research and development efforts,
increasing manufacturing capacity through third-party manufacturers, and hiring
and retaining employees in customer service and support functions.

In addition to working to achieve our sales growth expectations, in the
long-term we intend to continue to leverage our infrastructure investments to
realize additional manufacturing, sales, marketing and administrative cost
efficiencies with the goal of improving our operating margins and ultimately
achieving sustained profitability. We achieved profitability for the first time
in the fourth quarter of 2018 and again in the fourth quarters of 2019 and 2020,
and were profitable for the year ended December 31, 2021. Though we have yet to
achieve profitability consistently from period to period, we believe we can
ultimately achieve sustained profitability by driving incremental sales growth
in the United States and international markets, meeting our pump renewal sales
objectives, maximizing manufacturing efficiencies on increased production
volumes, and leveraging the investments made in our sales, clinical, marketing
and customer support organizations.

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Components of operating results

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.

In the United States, we primarily sell our products through national and
regional distributors on a non-exclusive basis. These distributors are generally
providers of medical equipment and supplies to individuals with diabetes. Our
primary end customers are people with insulin-dependent diabetes. Similar to
other durable medical equipment, the primary payor is generally a third-party
insurance carrier and the customer is usually responsible for any medical
insurance plan copay or coinsurance requirements. We believe we can continue to
increase sales by promoting our products to a greater number of potential
customers, caregivers and healthcare providers, although the COVID-19 global
pandemic has had, and may continue to have, an adverse impact on our sales.

In the third quarter of 2018, we began the launch of our t:slim X2 hardware
platform through distribution partners outside the United States. Our products
are now sold in more than 20 countries, including in Canada, France and Germany.
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.

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. Outside the United States, we
do not expect this same impact from seasonality associated with reimbursement,
although the quarterly sales trends may be impacted by a number of other
factors, including summer vacations, the timing of product launches into new
geographies and variability in the ordering patterns of our distributor
partners.

Since early 2020, the COVID-19 global pandemic had a major impact on businesses
around the world, as well as our own quarterly trends. Initially, the impact on
our business was relatively consistent worldwide but we have since seen varying
degrees of impact in individual markets based on local conditions. For example,
during 2021, we saw a gradual increase in the amount of in-person sales and
training activities in the United States as vaccination availability expanded
and social-distancing requirements were relaxed. During the second half of 2021,
we saw reduced availability of customers and healthcare providers relating to
people taking time off to vacation, which adversely impacted our sales of new
pumps to customers during the period. We anticipate that our sales may not
follow historical trends and may be subject to unpredictable variability in the
coming months based on varying levels of impact of the global pandemic across
the markets in which we operate. The full extent of the impact of the COVID-19
global pandemic on our business and operations will depend on a number of
factors, including the scope and duration of the pandemic, varying government
responses to the pandemic and potential delays to product development timelines.

Separate from any impacts of the COVID-19 global pandemic, our quarterly sales
have historically fluctuated, and may continue to fluctuate substantially in the
periods surrounding anticipated and actual regulatory approvals and commercial
launches of new products by us or our competitors. We believe customers may
defer purchasing decisions if they believe a new product may be launched in the
future. Additionally, upon the announcement of FDA approval or commercial launch
of a new product, either by us or one of our competitors, potential new
customers may reconsider their purchasing decisions or take additional time to
consider such FDA approval or product launch before making their purchasing
decisions. For example, we believe certain customers paused their
decision-making during the second half of 2019 in anticipation of the commercial
availability of the t:slim X2 with Control-IQ technology, and similar
occurrences may occur in future periods. However, it is difficult to quantify
the extent of the impact of these or similar events on future purchasing
decisions.
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Cost of sales

Historically, we have manufactured our pumps and disposable insulin cartridges
at our manufacturing facility in San Diego, California. In early 2020, our
third-party cartridge manufacturer completed validation and commenced
commercial-scale manufacturing to supplement our existing cartridge
manufacturing capacity. By the end of 2021, the majority of our t:slim cartridge
manufacturing capacity transitioned to our partner in order to create capacity
for t:sport cartridge manufacturing in the future. Infusion sets and pump
accessories are manufactured by third-party suppliers. Cost of sales includes
raw materials, labor costs, manufacturing overhead expenses, product training
costs, royalties, freight, reserves for expected warranty costs, costs of
supporting our digital health platforms, scrap and charges for excess and
obsolete inventories. Manufacturing overhead expenses include expenses relating
to quality assurance, manufacturing engineering, material procurement, inventory
control, facilities, equipment, information technology and operations
supervision and management.

Over the long term, we expect our overall gross margin percentage, which for any
given period is calculated as sales less cost of sales divided by sales, to
improve, as our sales increase and our overhead costs are spread over larger
production volumes. We expect we will be able to leverage our manufacturing cost
structure across our products that utilize the same technology platform and
manufacturing infrastructure and will be able to further reduce per unit costs
with increased automation, process improvements and raw materials cost
reductions. We also expect our warranty cost per unit to decrease as we release
additional product features and functionality utilizing the Tandem Device
Updater. Pumps have, and are expected to continue to have, a higher gross margin
percentage than our pump-related supplies. Therefore, the percentage of pump
sales relative to total sales could have a significant impact on our overall
gross margin percentage. In the event that customers delay their pump purchasing
decisions or physicians pause in prescribing new pumps, it is possible that we
may experience a higher percentage of pump-related supply sales than
anticipated, which in turn could adversely impact our overall gross margin
percentage. However, our overall gross margin percentage may fluctuate in future
quarterly periods as a result of numerous factors aside from those associated
with production volumes and product mix. For instance, as a result of the
COVID-19 global pandemic we implemented temporary operational changes that
introduced variability to our cost of sales, such as supplemental staffing,
incremental expenses to protect the health, safety and welfare of our employees
working on-site and to enable other employees to work remotely. We are also
experiencing higher costs as we manage global supply challenges and anticipate
that this will continue for the remainder of 2022. In addition, as demand for
our products increases, we may continue to make additional investments in
manufacturing capacity or increase our reliance on third parties for
manufacturing-related services, either of which could have a negative impact on
our gross margins. Specifically, we have and will continue to evaluate investing
in additional manufacturing equipment to substantially increase our existing
capacity in order to meet anticipated long-term demand for our cartridges, which
may initially place downward pressure on the gross margin percentage associated
with our pump-related supplies.

Other factors impacting our overall gross margin percentage may include the
changing percentage of products sold to distributors versus directly to
individual customers, varying levels of reimbursement among third-party payors
in domestic and international markets, the timing and success of new regulatory
approvals and product launches, the impact of the valuation and amortization of
employee stock awards on non-cash stock-based compensation expense allocated to
cost of sales, changes in warranty estimates, training costs, licensing and
royalty costs, cost to support our digital health platforms, cost associated
with excess and obsolete inventories, and changes in our manufacturing
processes, capacity, costs or output.
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Selling, general and administrative expenses

Our selling, general and administrative (SG&A) expenses primarily consist of
salary, cash-based incentive compensation, fringe benefits and non-cash
stock-based compensation for our sales, marketing and administrative functions,
which also includes our clinical, customer support, technical services,
insurance verification and regulatory affairs personnel. We had approximately 95
sales territories in the United States in 2021 and we commenced an expansion in
the fourth quarter of 2021 to approximately 110 sales territories. Our existing
territories are generally maintained by sales representatives and field clinical
specialists, and supported by managed care liaisons, additional sales management
and other customer support personnel, which have also been rapidly expanding to
support our growing installed base. Our operations in Canada are comprised of
approximately ten sales territories. Other significant SG&A expenses typically
include those incurred for product demonstration samples, commercialization
activities associated with new product launches, travel, trade shows, outside
legal fees, independent auditor fees, outside consultant fees, insurance
premiums, facilities costs and information technology costs. While we
experienced reduced spending in areas such as travel and trade shows in 2020 and
2021 due to the COVID-19 global pandemic, we may experience additional costs as
our employees return to work at our offices and as we adapt to alternative
hybrid work models, or as needed to respond to general labor shortages and
heightened competition for employees with specialized skills. Overall, we expect
our SG&A expenses, including the cost of our customer support infrastructure, to
continue to increase as our customer base grows in the United States and
international markets. In addition, we will continue to evaluate, and may
further increase, the number of our field sales and clinical personnel in order
to optimize the coverage of our existing territories. In the longer term, SG&A
expenses may also increase due to anticipated costs associated with additional
compliance and regulatory reporting requirements.

Research and development

Our research and development (R&D) activities primarily consist of engineering
and research programs associated with our hardware, software and digital health
products under development, as well as activities associated with our core
technologies and processes. R&D expenses are primarily related to employee
compensation, including salary, cash-based incentive compensation, fringe
benefits, non-cash stock-based compensation and temporary employee expenses. We
also incur R&D expenses for supplies, development prototypes, outside design and
testing services, depreciation, allocated facilities and information services,
clinical trial costs, payments under our licensing, development and
commercialization agreements and other indirect costs. We expect our R&D
expenses to increase as we advance our products under development, develop new
products and technologies and support more clinical trials. Similar to our SG&A
expenses, our future R&D spending may be impacted by the COVID-19 global
pandemic. For instance, we may experience lower spending associated with delays
in the advancement of particular programs, which may be offset by increased
spending to support the retention, health, safety and welfare of our employees
or to enable development activities under alternative conditions.

Other income and expenses

Other income and expense primarily consists of interest expense which includes
the amortization of debt issuance costs related to our 1.50% Convertible Senior
Notes due 2025, issued in May 2020 (our Notes), changes in the fair value of
certain warrants issued in connection with our public offering of common stock
in October 2017, and interest earned on our cash equivalents and short-term
investments. We expect interest expense in future quarters to be comparable with
the amount expensed in 2021, through the date of conversion or redemption of the
Notes. We expect the revaluation of the outstanding Series A warrants will not
have a significant impact on our other income and expense through their
expiration in the fourth quarter of 2022.

Income tax expense (benefit)

As the Company maintains a full valuation allowance against its
deferred tax assets, the income tax expense is expected to be primarily
Current state and foreign cash tax expense resulting from taxable income
expected or incurred in such jurisdictions. The income tax charge (benefit) may
fluctuate over the next few quarters due to adjustments related to
transactions and changes to certain tax assessments.

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Operating results

                                                          Year Ended December 31,
(in thousands, except percentages)                  2021            2020            2019
Sales:
Domestic                                        $ 524,907       $ 415,680       $ 302,084
International                                     177,892          83,150          60,221
Total sales                                       702,799         498,830         362,305
Cost of sales                                     326,584         238,310         168,093
Gross profit                                      376,215         260,520         194,212
Gross margin                                           54  %           52  %           54  %
Operating expenses:
Selling, general and administrative               261,508         204,903         165,735
Research and development                           92,054          63,574          45,199
Total operating expenses                          353,562         268,477         210,934
Operating income (loss)                            22,653          (7,957)        (16,722)
Other income (expense), net:
Interest income and other, net                        674           1,567   

3,193

Interest expense                                   (6,040)        (12,805)              -

Change in fair value of ordinary share subscription warrants (1,386) (17,087)

(11,075)

Total other expense, net                           (6,752)        (28,325)  

(7,882)

Income (loss) before income taxes                  15,901         (36,282)        (24,604)
Income tax expense (benefit)                          335          (1,900)            149
Net income (loss)                               $  15,566       $ (34,382)      $ (24,753)


Comparison of completed exercises December 31, 2021 and 2020

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

The increase in worldwide sales of $204.0 million in 2021, as compared to 2020,
was driven by a 41% increase in worldwide pump shipments to 128,312 in 2021,
compared to 90,771 in 2020, and a 56% increase in pump-related supply sales.
Sales of pump-related supplies increased primarily due to a 52% growth in our
estimated worldwide installed base of customers.

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

                                             Year Ended December 31,
                                               2021               2020
                Pump                   $     319,898           $ 269,856
                Infusion sets                140,387              99,743
                Cartridges                    63,375              45,342
                Other                          1,247                 739
                Total Domestic Sales   $     524,907           $ 415,680


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Domestic pump sales 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 has impacted the availability of both
customers and healthcare providers. Domestic pump shipments were 83,317 in the
year ended December 31, 2021 compared to 70,825 in 2020. Sales of pump-related
supplies increased primarily due to a 39% increase in our estimated domestic
installed base of customers. Sales to distributors accounted for 67% and 70% of
our total domestic sales for the years ended December 31, 2021 and 2020,
respectively. Our percentage of sales to distributors versus individual
customers is principally determined by the mix of customers ordering our
products within the period and whether or not we have a contractual arrangement
with their underlying third-party insurance payor.

International sales by product are as follows (in thousands):

                                                Year Ended December 31,
                                                  2021                2020
             Pump                         $      96,458            $ 44,851
             Infusion sets                       57,063              28,016
             Cartridges                          23,509               9,884
             Other                                  862                 399
             Total International Sales    $     177,892            $ 83,150


International pump sales were $96.5 million for the year ended December 31,
2021, compared to $44.9 million in the year ended December 31, 2020. Pump
shipments increased 126% compared to the prior year due to strong demand for our
products as we continue to expand the launch of our Control-IQ technology, which
began in the third quarter of 2020 outside the United States. Sales of
pump-related supplies increased primarily due to an 102% increase in our
estimated international installed base of customers. The ordering patterns of
our international distributors for pumps and supplies is highly variable from
period to period as they continue to gain familiarity with the markets in which
they operate and the acceptance of our products in those markets. This
variability was compounded by the changing levels of impact of the global
pandemic across the international markets. Sales to distributors accounted for
95% and 94% of our total international sales for the years ended December 31,
2021 and 2020, respectively.

Cost of Sales and Gross Profit. Our cost of sales for the year ended December
31, 2021 was $326.6 million, resulting in gross profit of $376.2 million,
compared to cost of sales of $238.3 million and gross profit of $260.5 million
for the year ended December 31, 2020. The gross margin for 2021 was 54%,
compared to 52% in 2020.

The increase in our gross profit for the year ended December 31, 2021, was
primarily the result of the $204.0 million increase in total sales. Gross profit
and gross margin both benefited from improvement in the per unit manufacturing
costs for pumps and supplies from efficiencies in the manufacturing process,
leverage of fixed overhead, increased volumes from our third-party cartridge
manufacturer as well as labor and material cost reductions. On an aggregate
basis, non-manufacturing costs, which primarily consist of warranty, royalty,
freight, training and digital health product support costs, also reflected
improvement on a per unit basis. To a lesser extent, overall average selling
prices slightly pressured gross margin as international pump sales comprised a
greater portion of total pump sales compared to the prior year, while supply
average selling prices reflected modest benefit from the growth of our
international installed base. Other factors that have and may continue to impact
the gross margin percentage are changes in product and geographical mix and the
level of non-cash stock-based compensation allocated to cost of sales. Pump
sales, which have the highest gross margin, were 59% of total worldwide sales
for the year ended December 31, 2021, compared to 63% in 2020. Non-cash
stock-based compensation expense allocated to cost of sales was $6.4 million for
the year ended December 31, 2021, compared to $8.2 million in 2020, representing
1% and 2% of sales in those periods, respectively.

Selling, General and Administrative Expenses. SG&A expenses increased 28% to
$261.5 million for the year ended December 31, 2021, from $204.9 million for the
same period in 2020. Employee-related expenses for our SG&A functions comprise
the majority of the SG&A expenses. The increase compared to 2020 was primarily
the result of a $43.9 million increase in salaries, incentive compensation and
other employee benefits due to an increase in personnel to support additional
sales territories, higher sales and other services in support of our growing
installed customer base. We also experienced a $12.7 million increase in other
non-employee discretionary spending for software maintenance, outside consulting
and services and supplies.
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Research and Development Expenses. R&D expenses increased 45% to $92.1 million
for the year ended December 31, 2021, from $63.6 million for the same period in
2020. The increase in R&D expenses was primarily the result of an increase of
$20.7 million in salaries, incentive compensation and other employee benefits
due to an increase in personnel to support our product development efforts, as
well as a $7.8 million increase in other non-employee discretionary spending,
including outside consulting and services, equipment and supplies attributable
to R&D.

Other Income (Expense). Total other expense, net for the year ended December 31,
2021 was $6.8 million, compared to $28.3 million in 2020. Other expense for 2021
primarily consisted of $6.0 million of interest expense which included the
amortization of debt issuance costs related to our Notes issued in the second
quarter of 2020, and a $1.4 million revaluation loss from the change in the fair
value of certain warrants. Other expense for 2020 consisted primarily of an
$17.1 million revaluation loss from the change in the fair value of certain
warrants due to the appreciation in our stock price during 2020, and $12.8
million of interest expense which included the amortization of debt discount and
debt issuance costs related to our Notes issued in the second quarter of 2020.
The decrease in interest expense in 2021 was primarily due to the adoption of
ASU No. 2020-06 in the first quarter of 2021 (see Note 7, "Debt"). Interest
income and other, for the years ended December 31, 2021 and 2020, primarily
consisted of interest earned on our cash equivalents and short-term investments,
which decreased in 2021 primarily due to the lower interest rate environment as
compared to 2020.

Income Tax Expense (Benefit). We recognized income tax expense of $0.3 million
on pre-tax income of $15.9 million for the year ended December 31, 2021,
compared to an income tax benefit of $1.9 million on a pre-tax loss of $36.3
million for the same period in 2020. The income tax expense for the year ended
December 31, 2021 was primarily attributable to state and foreign income tax
expense as a result of current taxable income in those jurisdictions. The income
tax benefit for the year ended December 31, 2020 was primarily due to benefit
associated with the release of valuation allowance related to the acquisition of
Sugarmate, partially offset by state and foreign income tax expense as a result
of current taxable income in those jurisdictions.

Comparison of completed exercises December 31, 2020 and 2019

Sales. For the year ended December 31, 2020, sales were $498.8 million, which
included $83.2 million of international sales. For the year ended December 31,
2019, sales were $362.3 million, which included $60.2 million of international
sales.

The increase in worldwide sales of $136.5 million in 2020, as compared to 2019,
was primarily driven by a $69.4 million increase in pump-related supplies sales
due to 52% growth in our estimated worldwide installed base of customers, and a
$67.1 million increase in pump sales driven by a 24% increase in worldwide pump
shipments to 90,771 in 2020, compared to 73,431 in 2019 which benefited from the
effect of certain non-recurring international market dynamics..

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

                                             Year Ended December 31,
                                               2020               2019
                Pump                   $     269,856           $ 205,492
                Infusion sets                 99,743              66,034
                Cartridges                    45,342              30,022
                Other                            739                 536
                Total Domestic Sales   $     415,680           $ 302,084


Domestic pump sales were $269.9 million for the year ended December 31, 2020,
compared to $205.5 million in the year ended December 31, 2019, as pump
shipments increased 32% compared to the same period in the prior year due to
continued strong demand for our products following the January 2020 domestic
launch of our t:slim X2 insulin pump with Control-IQ technology. Domestic pump
shipments were 70,825 in the year ended December 31, 2020 compared to 53,735 in
2019. Sales of pump-related supplies increased primarily due to a 46% increase
in our estimated domestic installed base of customers. Sales to distributors
accounted for 70% and 73% of our total domestic sales for the years ended
December 31, 2020 and 2019, respectively. Our percentage of sales to
distributors versus individual customers is principally determined by the mix of
customers ordering our products within the period and whether or not we have a
contractual arrangement with their underlying third-party insurance payor.

International sales by product are as follows (in thousands):

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                                                Year Ended December 31,
                                                   2020                2019
             Pump                         $      44,851             $ 42,094
             Infusion sets                       28,016               11,221
             Cartridges                           9,884                6,656
             Other                                  399                  250
             Total International Sales    $      83,150             $ 60,221


International pump sales were $44.9 million for the year ended December 31,
2020, compared to $42.1 million in the year ended December 31, 2019. The first
half of 2019 was positively impacted by the transition of former Animas
customers to our products and the fulfillment of certain international pump
demand from backlog that existed at the end of 2018 due to supply constraints in
prior periods. Sales of pump-related supplies benefited from an 83% increase in
our estimated international installed base of customers. The ordering patterns
of our international distributors for pumps and supplies is highly variable from
period to period. This variability was compounded by the varying levels of
impact of the global pandemic across the international markets in which we
operate. Sales to distributors accounted for 94% and 92% of our total
international sales for the years ended December 31, 2020 and 2019,
respectively.

Cost of Sales and Gross Profit. Our cost of sales for the year ended December
31, 2020 was $238.3 million, resulting in gross profit of $260.5 million,
compared to cost of sales of $168.1 million for the year ended December 31,
2019, resulting in gross profit of $194.2 million. The gross margin for 2020 was
52%, compared to 54% in 2019.

The increase in our gross profit for the year ended December 31, 2020, was
primarily the result of the $136.5 million increase in total sales. Gross profit
and gross margin in 2020 were negatively impacted by royalty costs, for which
there was no comparable expense in 2019. During the year ended December 31,
2020, we recognized $6.7 million of product royalty costs, or approximately one
percent of sales, associated with sales of pumps with Control-IQ technology
launched in the first quarter of 2020, and free software updates downloaded by
existing customers in the United States, as well as in certain international
markets where we launched Control-IQ beginning in the third quarter of 2020.
Excluding the impact of royalty, gross margins for both pumps and supplies saw
improvement compared to the prior year, but were still slightly pressured by the
product mix. Gross margin was also pressured to a lesser extent by other factors
that are more temporary in nature or anticipated to be leveraged through growth
in future quarters, including costs associated with COVID-19 risk mitigation,
managing pump production to achieve desired stocking levels, the expansion of
cartridge manufacturing capacity and increased spending to support our digital
health product offerings. Other factors that have and may continue to have an
impact on the gross margin percentage are changes in product and geographical
mix and the level of non-cash stock-based compensation allocated to cost of
sales. Pump sales, which have the highest gross margin, were 63% of total
worldwide sales for the year ended December 31, 2020, versus 68% in 2019.
Non-cash stock-based compensation expense allocated to cost of sales was $8.2
million for the year ended December 31, 2020, compared to $6.4 million in the
same period of 2019, representing 2% of sales in both periods.

Selling, General and Administrative Expenses. SG&A expenses increased 24% to
$204.9 million for the year ended December 31, 2020, from $165.7 million for the
same period in 2019. Employee-related expenses for our SG&A functions comprise
the majority of the SG&A expenses. The increase compared to 2019 was primarily
the result of a $32.8 million increase in salaries, incentive compensation and
other employee benefits due to an increase in personnel to support additional
sales territories, higher sales and other services in support of our growing
installed customer base, offset by a $1.3 million decrease in non-cash
stock-based compensation expense. Non-cash stock-based compensation expense
allocated to SG&A was $41.6 million in 2020, compared to $42.9 million in 2019.
The increase in non-cash stock-based compensation expense associated with
increased headcount in 2020 was more than offset by a decrease in non-cash
stock-based compensation expense from the valuation of certain 2018 employee
stock option grants which are now fully amortized. We also experienced increased
costs for equipment and supplies, and outside consulting and services of $11.2
million, offset by a $2.9 million decrease in travel costs.

Research and Development Expenses. R&D expenses increased 41% to $63.6 million
for the year ended December 31, 2020, from $45.2 million for the same period in
2019. The increase in R&D expenses was primarily the result of an increase of
$9.9 million in salaries, incentive compensation and other employee benefits due
to an increase in personnel to support our product development efforts, as well
as an increase of $8.5 million in outside consulting and services, equipment and
supplies attributable to R&D. Non-cash stock-based compensation expense
allocated to R&D was $8.7 million in 2020, compared to $8.8 million in 2019.
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Other Income (Expense). Total other expense, net for the year ended December 31,
2020 was $28.3 million, compared to $7.9 million in 2019. Other expense for 2020
primarily consisted of a $17.1 million revaluation loss from the change in the
fair value of certain warrants due to the appreciation of our stock price during
2020, and $12.8 million of interest expense which included the amortization of
debt discount and debt issuance costs related to our Notes issued in the second
quarter of 2020. Other expense for 2019 consisted primarily of an $11.1 million
revaluation loss from the change in the fair value of certain warrants due to
the appreciation in our stock price during 2019. Interest income and other, for
the years ended December 31, 2020 and 2019 primarily consisted of interest
earned on our cash equivalents and short-term investments, and decreased in 2020
primarily due to the lower interest rate environment as compared to 2019.

Income Tax Expense (Benefit). We recognized an income tax benefit of $1.9
million on a pre-tax loss of $36.3 million for the year ended December 31, 2020,
compared to income tax expense of $0.1 million on a pre-tax loss of $24.6
million for the same period in 2019. The income tax benefit for the year ended
December 31, 2020 was primarily due to benefit associated with the release of
valuation allowance related to the acquisition of Sugarmate, partially offset by
state and foreign income tax expense as a result of current taxable income in
those jurisdictions. Income tax expense for the year ended December 31, 2019 was
primarily attributable to state and foreign income tax expense as a result of
current taxable income in those jurisdictions.

Cash and capital resources

AT December 31, 2021we have had $623.8 million in cash and cash equivalents and
short-term investments. We believe that our cash and cash equivalents and
the balance of short-term investments will be sufficient to satisfy our liquidity
requirements for at least the next 12 months from the date of this filing.

Historically, our principal sources of cash have included cash collected from
product sales, private and public offerings of equity securities, exercises of
employee stock awards, and debt financing. Since the beginning of 2019, we
completed the following financing activities:

•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, "Debt").

•From January 2019 through December 31, 2021, we issued 4,887,211 shares of
common stock upon the exercise of stock options, and 804,275 shares of common
stock were purchased under our 2013 Employee Stock Purchase Plan, which
generated aggregate proceeds of $143.6 million.

•From January 2019 through December 31, 2021, we received proceeds of $1.8
million from the exercise of 509,785 outstanding warrants which were originally
issued in connection with our registered public offering of common stock in
October 2017. As of December 31, 2021, there were warrants to purchase 1,000
shares outstanding relating to the October 2017 offering.

•From January 2019 through December 31, 2021, we received proceeds of $2.1
million from the exercise of 34,728 outstanding warrants which were originally
issued between August 2011 and August 2012. As of December 31, 2021, there were
warrants to purchase 19,722 warrants outstanding relating to these issuances.

Our historical cash outflows have primarily been associated with cash used for
operating activities such as the development and commercialization of our
products, the expansion and support of our sales, marketing, clinical and
customer support organizations, the expansion of our R&D activities, the
expansion of our commercial activities to select international geographies, the
acquisition of intellectual property and equity investments, expenditures
related to increases in our manufacturing capacity and improvements to our
manufacturing efficiency, overall expansion of our facilities and operations,
and other working capital needs. Additionally, we have used cash to pay the
interest expense associated with our convertible senior notes.

We expect our sales performance and the resulting operating income or loss, as
well as the status of each of our new product development programs, will
significantly impact our cash flow from operations, liquidity position and cash
management decisions.
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The following table presents a summary of our cash flows for the years ended
December 31, 20212020 and 2019:

                                                               Year Ended December 31,
(in thousands)                                            2021           2020           2019
Net cash provided by (used in):
Operating activities                                   $ 111,359      $  24,669      $ 41,906
Investing activities                                    (186,876)      (296,056)      (56,955)
Financing activities                                      51,932        314,438        24,207
Effect of foreign exchange rate changes on cash              153            387           191

Net increase (decrease) in cash and cash equivalents $(23,432) $43,438 $9,349

Operating activities. Net cash provided by operating activities was $111.4
million
for the year ended December 31, 2021compared to and $24.7 million and
$41.9 millionrespectively, for completed fiscal years December 31, 2020 and 2019.

The improvement to net cash provided by operating activities for 2021 compared
to 2020 was driven by higher sales and gross profit in 2021, which resulted in a
$35.7 million improvement to net income when adjusted for non-cash expenses,
particularly stock-based compensation expense and depreciation and amortization
expense, as well as a $51.0 million increase from working capital
changes. Working capital changes in 2021 primarily consisted of increases in
accounts payable, employee-related liabilities, deferred revenue, and other
current and long-term liabilities, offset by increases in accounts receivable
and inventories, all of which were related to the growth in our business.
Accounts receivable increased to $110.7 million at December 31, 2021 from $82.2
million at December 31, 2020, as a result of higher sales in the fourth quarter
of 2021 as compared to the fourth quarter of 2020. Inventories increased
to $68.6 million at December 31, 2021 from $63.7 million at December 31, 2020.

The decrease in net cash provided by operating activities for 2020 compared to
2019 was driven by net changes in working capital, partially offset by a
reduction in net loss when adjusted for non-cash expenses, particularly
stock-based compensation expense, the change in the fair value of common stock
warrants and non-cash interest expense. Working capital changes in 2020
primarily consisted of increases in accounts receivable and inventories, offset
by increases in employee-related liabilities, deferred revenue, and other
current and long-term liabilities, all of which are related to the growth in our
business. Accounts receivable increased to $82.2 million at December 31, 2020
from $46.6 million at December 31, 2019, as a result of higher sales in the
fourth quarter of 2020 as compared to the fourth quarter of 2019. Inventories
increased to $63.7 million at December 31, 2020 from $49.1 million at December
31, 2019, primarily to support the growth in our business.

Investing activities. Net cash used by investing activities was $186.9 million
for the year 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 the acquisition of
intangible assets and equity investments, offset by $570.0 million in proceeds
from maturities and sales of short-term investments. Net cash used by investing
activities was $296.1 million for the year 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 sales of short-term investments. Net
cash used by investing activities was $57.0 million for the year ended December
31, 2019, which was primarily related to purchases of short-term investments of
$164.6 million and $19.5 million in purchases of property and equipment, offset
by $127.2 million in proceeds from maturities of short-term investments.

Financing activities. Net cash provided by financing activities was $51.9
million for the year 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. Net cash provided by financing activities was $24.2 million for
the year ended December 31, 2019, which was primarily the result of proceeds of
$23.9 million from the issuance of common stock under our stock plans.

Our liquidity position and our capital requirements are subject to fluctuations depending on
on a number of factors. In particular, our cash inflows and outflows are
mainly impacted by the following elements:

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

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• the timing of additional financing, and the net proceeds generated by these
financing;

• the timing and amount of the exercise of the outstanding warrants, and the proceeds
issuing stock awards pursuant to employee stock ownership 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 global COVID-19 pandemic.

Our major short-term capital needs should include expenses
relative to:

•supporting our marketing efforts related to our current and future activities
some products;

• expanding our customer support resources for our growing installed base
based;

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

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

•additional facility leases and related tenant improvements;

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

•payments under licensing, development and marketing contracts.

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.

Debt

In May 2020, the Company entered into a purchase agreement with certain
counterparties for the sale of an aggregate of $287.5 million principal amount
of 1.50% Convertible Senior Notes due 2025 in a private offering to qualified
institutional buyers (the Notes). The Notes were issued pursuant to an
Indenture, dated May 15, 2020, between the Company and U.S. Bank National
Association, as trustee. The proceeds from the issuance of the Notes were $244.6
million, net of debt issuance costs and cash used to pay the cost of the Capped
Call Transactions (see Note 7, "Debt"). The Notes are the Company's senior
unsecured obligations. Interest is payable in cash semi-annually in arrears
beginning 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.
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Cash payments due per calendar year for our Senior Convertible Notes at
December 31, 2021 are as follows (in thousands):

                                      Total              2022              2023              2024               2025
Contractual interest               $  14,357          $  4,313          $  4,313          $  4,313          $   1,418
Principal amount of convertible
senior notes                         287,500                 -                 -                 -            287,500
Total                              $ 301,857          $  4,313          $  4,313          $  4,313          $ 288,918


Contractual obligations and off-balance sheet arrangements

Contractual obligations

The Company leases general office space, laboratory, manufacturing and warehouse
facilities, and equipment under noncancelable operating leases for use in our
operations. For a description of our contractual obligations related to leases
at December 31, 2021, see Note 6 "Leases" to the consolidated financial
statements in Part II, Item 8 of this Annual Report.

The Company has agreements with suppliers and other parties to purchase
inventories, other goods and services and long-lived assets. For a description of
our contractual obligations related to order commitments to
December 31, 2021see Note 12 “Commitments and contingencies” of
consolidated accounts in part II, point 8 of this annual report.

Off-balance sheet arrangements

As of December 31, 2021, we are a party to certain standby letter of credit
arrangements in support of our operating lease obligations. For a description of
the arrangements we consider significant, see Note 12 "Commitments and
Contingencies" to the consolidated financial statements in Part II, Item 8 of
this Annual Report.

Critical accounting policies involving management estimates and assumptions

Our discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted 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 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.
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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.

Guarantee 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.

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Utilization of our net operating loss and research credit carryforwards may be
subject to a substantial annual limitation due to ownership change limitations
provided by Section 382 of the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitations may result in the expiration of
net operating loss carryforwards before utilization. We have completed analyses
through December 31, 2020 to determine whether our net operating losses and
credits are likely to be limited by Section 382. Based on the 2018 study
completed in 2019, we determined that an ownership change, as defined under
Section 382, occurred in 2018 and the resulting limitation significantly reduced
our ability to utilize our net operating loss and credit carryovers before they
expire. As a result, in 2019 we reduced our deferred tax assets for the net
operating loss and research credit carryforwards that were projected to expire
unused with a corresponding offset to the valuation allowance recorded against
such assets. Additionally, future ownership changes under Section 382 may also
limit our ability to fully utilize any remaining tax benefits.

We recognize liabilities for uncertain tax positions using a two-step approach.
The first step is to evaluate the tax position for recognition by determining if
the weight of available evidence indicates that it is more likely than not that
the position will be sustained on audit, including resolution of related appeals
or litigation processes, if any. The second step is to measure the tax benefit
as the largest amount that is more than 50% likely of being realized upon
settlement. While we believe we have appropriate support for the positions taken
on our tax returns, we regularly assess the potential outcomes of examinations
by tax authorities in determining the adequacy of our provision for income
taxes. We continually assess the likelihood and amount of potential revisions
and adjust the income tax provision, income taxes payable and deferred taxes in
the period in which the facts that give rise to a revision become known.
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