# TANDEM DIABETES CARE INC (TNDM) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from TANDEM DIABETES CARE INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1438133/000143813324000028/tndm-20231231.htm
Accession: 0001438133-24-000028
Filing date: 2024-02-21
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/TNDM/
All MD&A years: /company/TNDM/mda/
Previous year: /company/TNDM/mda/fy2022/ (FY 2022)
Next year: /company/TNDM/mda/fy2024/ (FY 2024)

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis together with the “Consolidated Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report. The following discussion contains forward-looking statements, which statements are subject to considerable risks and uncertainties. For additional information, see “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this Annual Report.

A discussion of changes in our results of operations during the year ended December 31, 2022 compared with the year ended December 31, 2021 has been omitted from this Annual Report on Form 10-K but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 22, 2023, which discussion is incorporated herein by reference and which is available free of charge on the SEC’s website at www.sec.gov.

Overview

We are a medical device company focused on the design, development and commercialization of technology solutions for people living with diabetes. We consider our primary addressable market to be people who live with type 1 diabetes. Through our product development efforts, we are seeking to expand our addressable market to include people living with type 2 diabetes who require intensive insulin therapy. Diabetes management can vary greatly from person-to-person, creating multiple market segments based on clinical needs and personal preferences. Our goal is to address the individual needs of people with insulin-dependent diabetes and their care team flexibility and choice in intelligent insulin delivery systems, through an accessible portfolio of market-leading pumps, applications, and insights.

From inception in 2012 through June 2018, we derived nearly all of our sales from the shipment of insulin pumps and associated supplies to customers in the United States. Starting in the third quarter of 2018, we began selling in select geographies outside the United States and our technology solutions are now available in approximately 25 countries worldwide. In the four-year period ended December 31, 2023, we shipped approximately 450,000 insulin pumps, which is representative of our in-warranty global installed customer base assuming the typical four-year reimbursement cycle.

The t:slim X2 has been our flagship technology solution. In February 2024, we expanded our pump portfolio with commercial U.S. availability of the Tandem Mobi insulin pump, which is the world’s smallest durable automated insulin delivery (AID) system. At approximately half the size of our t:slim X2 pump, Tandem Mobi is designed for people who seek even greater discretion and flexibility, and includes features such as expanded pump-control from our iOS mobile application, inductive charging, and an on-pump button that can be used for bolusing and other actions. In the United States, a limited release of Tandem Mobi began in the fourth quarter of 2023 and commercial availability began in February 2024.

With both the t:slim X2 and Tandem Mobi in our product portfolio, we are offering people living with diabetes a choice between the t:slim X2 and Tandem Mobi insulin pumps based on their individual needs and preferences in insulin delivery.

The majority of our customers use their insulin pump with continuous glucose monitoring (CGM) integration. This allows their insulin pump to receive CGM sensor readings, which can then be used in our AID algorithms, including our Control-IQ technology. Control-IQ is an advanced hybrid-closed loop feature designed to help increase a user’s time in their targeted glycemic range. Multiple studies have demonstrated that use of Control-IQ technology provides people across all demographics with improved clinical outcomes that are both immediate and sustained. It was the first system cleared by the FDA to deliver automatic correction boluses in addition to adjusting insulin to help prevent high and low blood sugar.

The t:slim X2 was the first pump on which remote software updates were made commercially available in the United States and is now also available in the countries we serve worldwide. Our Tandem Device Updater (TDU) has allowed our t:slim X2 customers to update their pump software from a personal computer. Tandem Mobi offers the same update capability with wireless, remote updates. This offering is a competitive advantage that allows us to bring our customers clinical and lifestyle enhancements, such as new developments in our AID technology, CGM integrations and mobile app features. As an example, we recently launched a pump software update through TDU to allow all t:slim X2 pump users in the United States access to integration with two new CGM sensor offerings.

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 single-use products that are used together with our pumps and are replaced every few days, including cartridges for storing and delivering insulin, and infusion sets that connect the insulin pump to a user’s body.

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In the United States, we also offer a 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 first-generation data management application, t:connect, was commercially introduced in the United States in 2013. In the second quarter of 2023, we began a scaled global launch, starting with the United States, of our second-generation data management application, Tandem Source.

Recent Developments

Tandem Diabetes Care Launches Tandem Mobi, the World’s Smallest, Durable Automated Insulin Delivery System

In February 2024, we announced the United States commercial launch of our new Tandem Mobi, the world’s smallest, durable automated insulin delivery system for people living with diabetes. We have begun taking orders and shipping to eligible customers in the United States.

Integration of t:slim X2 with Abbott’s FreeStyle Libre 2 Plus Sensor

In January 2024, we announced that the t:slim X2 insulin pump with Control-IQ technology became the first AID system to integrate with newly available FreeStyle Libre 2 Plus sensor, Abbott’s latest CGM technology. Users in the United States are now able to experience the therapeutic benefits of a hybrid closed-loop system that helps predict and prevent high and low blood sugar. Tandem’s t:slim X2 insulin pump connects wirelessly to the FreeStyle Libre 2 Plus sensor, which sends automatic glucose readings every minute to the pump.

Pump Reimbursement Cycle

Insulin pumps in the markets we serve worldwide are generally subject to a four-year reimbursement cycle, imposed by the third-party insurance carrier, government plan or healthcare system that serves as the primary payor. At the end of the typical four-year reimbursement cycle, customers may be eligible to purchase a new insulin pump, subject to the rules and requirements of their primary insurance payor. While warranties generally expire four years from the original pump shipment date, those customers that renew typically take up to one year from date of warranty expiration to purchase a subsequent pump. While the majority of our insulin pump sales from initial commercialization through the current period have been generated by sales to new customers, the opportunity to make subsequent sales of renewal insulin pumps to existing customers increases each period as an escalating number of customer warranties expire. With programs dedicated to customer retention efforts, we expect such renewal purchases to represent an increasing portion of our pump shipments over time.

In the four-year period ended December 31, 2023, we shipped more than 450,000 insulin pumps worldwide, which is representative of our global in-warranty installed customer base. Our ending estimated worldwide installed customer base increased approximately 7% year over year.

Over 310,000 pumps were shipped to customers in the United States in the four-year period ended December 31, 2023, which is representative of our U.S. installed customer base.

We shipped approximately 140,000 pumps outside the United States in the four-year period ended December 31, 2023 and our products are now available in approximately 25 countries. The ordering patterns of, and levels of inventory carried by, our distributors outside the United States for pumps and supplies have historically been highly variable from period to period due to a number of factors, including summer vacations, the timing of product launches into new geographies and variability due to supply chain logistics, particularly during the global pandemic. This also influences the timing in which renewal eligibility begins for existing customers, which may not initially be consistent with trends in the U.S. market. We recently began completing a full four-year reimbursement cycle in an increasing number of our markets outside of the United States.

Trends and Uncertainties Impacting Financial Results

Our financial condition and operating results have historically fluctuated on a quarterly or annual basis. We expect these periodic fluctuations will continue to be impacted by a number of trends and uncertainties, including the following:

Regulatory Approvals and Actions

•Sales of new products are subject to local government regulations. The requirements and timelines to receive regulatory clearance can vary substantially from country to country and delays may impact our ability to expand

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our worldwide customer base and bring products to market in a competitive timeframe. These delays, or failure to receive regulatory approval could adversely impact our revenue and results of operations.

•Any adverse event involving any products that we distribute could result in future corrective actions, such as recalls or customer notifications, or regulatory agency action, which could include inspection, mandatory recall or other enforcement action. Any action by regulatory bodies against us, and any regulatory challenges we encounter could have a negative impact on our product sales and harm our reputation.

Product - Launches and Reimbursement

•We expect our business to be impacted by the introduction of new diabetes devices and treatments by us or our competitors. The success of our products is variable and we believe it correlates to market acceptance, anticipated product launches and commercial availability. We anticipate that our Tandem Choice program, and its related financial and accounting impact, may continue to materially impact our business until the conclusion of the program.

•We have historically experienced higher net sales in our third and fourth quarters compared to the first half of the year. We believe our July 2023 announcement of FDA clearance of Tandem Mobi and its anticipated launch impacted the timing of purchasing decisions by our current and prospective customers in the second half of 2023 up through the U.S. commercial availability of Tandem Mobi in February 2024, resulting in delays that were unlike historical seasonal patterns or purchasing behaviors. Regulatory approval and/or upcoming launches of other new Tandem or competitor products could also adversely impact timing of purchasing decisions.

•In periods following new product launches, particularly with new hardware platforms, our cost of sales may increase on a per unit basis until the new products achieve manufacturing scale and operating expenses may be elevated by increased sales and marketing spend to support the product launches.

•Our revenue and results of operations may be impacted by the failure to secure or retain adequate coverage or reimbursement for our current and future products from third-party payors, as well as changes in reimbursement structures.

Foreign Markets

•We have expanded our business and launched new products in select geographies outside the United States. The ordering patterns of our distributors outside the United States is highly variable from period to period. For example, we began operations of a European distribution center beginning in the third quarter of 2022, which led to downward adjustments of inventory levels at our distributors starting in late 2022 and continuing through the first half of 2023.

Seasonality

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

Macroeconomic Factors

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

•High inflation and the effects of other macroeconomic factors and concerns have continued to disrupt our relationships with suppliers, third-party manufacturers, healthcare providers, distributors and our existing or potential customers. We are experiencing higher costs as we navigate these global macroeconomic challenges.

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Components of Results of Operations

Sales

We offer products for people with insulin-dependent diabetes in approximately 25 countries. The t:slim X2 insulin pump has been our flagship pump platform. Our other products include single-use insulin cartridges and infusion sets, as well as our complementary t:connect, TDU and mobile application products. Our primary customers are the end users of our products, non-exclusive distribution partners whose level of service varies based on geography, the healthcare professionals who prescribe our products and the healthcare systems or payors who provide insurance coverage and access to our products. Our sales may fluctuate from period to period, particularly due to seasonality in the United States associated with the timing of insurance deductible resets, which generally reflect in a significant decline in pump shipments from any fourth quarter to the following first quarter. Therefore, the lowest percentage of sales is typically reported in the first quarter of each calendar year and the highest percentage is typically reported in the fourth quarter. See also “Trends and Uncertainties Impacting Financial Results—Seasonality” above.

In September 2022, we began offering the Tandem Choice program to eligible t:slim X2 customers to provide a pathway to ownership of our newest hardware platform, Tandem Mobi, for a fee when available. Tandem Choice expires on December 31, 2024. The accounting treatment for Tandem Choice is complex (see Note 2, “Summary of Significant Accounting Policies”). Initially, the program requires the deferral of some portion of sales for shipments of eligible pumps, which began in the third quarter of 2022. No election is made by the customer at the time of the initial sale, nor does the right offered to the customer impact the economics associated with how or when the initial pump sale is reimbursed. If a customer elects to participate in Tandem Choice at a future date beginning with the launch of our next generation hardware platform, Tandem Mobi, we will recognize the existing deferral, incremental fees received and the associated costs of providing the new hardware, Tandem Mobi, at the time of fulfillment. Any remaining deferrals will be recognized at program expiration. At this time, we are not able to estimate the financial impact for the remainder of the Tandem Choice period.

Cost of Sales

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

Selling, General and Administrative

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

Research and Development

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

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

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

Other Income and Expense

Other income and expense primarily consists of interest earned on our cash equivalents and short-term investments, foreign currency transaction gains and losses, and interest expense which includes the amortization of debt issuance costs related to our 1.50% Convertible Senior Notes due May 2025 (Notes).

In October 2023, we were notified that additional interest beyond the 1.50% per annum had been accruing on the Notes since May 2021, pursuant to the terms of the indenture. The additional accrued interest of $3.3 million was fully paid in November 2023 (see Note 7, “Debt”).

Income Tax Expense (Benefit)

Because the Company maintains a full valuation allowance against its net deferred tax assets, income tax expense is expected to primarily consist of current federal, state and foreign cash tax expense as a result of taxable income anticipated or incurred in those jurisdictions.

Results of Operations

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[[/GREPCENT_TABLE]]

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Comparison of Years Ended December 31, 2023 and 2022

Sales

For the year ended December 31, 2023, sales were $747.7 million, which included $192.8 million of sales outside the United States. For the year ended December 31, 2023, we deferred $25.1 million of pump sales as the result of our Tandem Choice program which launched in the United States in the third quarter of 2022. In addition, for the year ended December 31, 2023, we recorded a reduction to sales of $8.5 million for a new rebate structure implemented in a market outside of the United States. For the year ended December 31, 2022, sales were $801.2 million, which included $212.5 million of sales outside the United States, and we deferred $3.5 million of pump sales as a result of our Tandem Choice program.

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

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Pump sales in the United States were $289.5 million for the year ended December 31, 2023 compared to $329.1 million for the year ended December 31, 2022, as pump shipments decreased 12% compared to the year ended December 31, 2022. Throughout 2023, we faced challenging marketplace dynamics and economic conditions, with inflation and the threat of recession impacting pump purchasing decisions. Additionally, we believe the anticipation of the full release of new CGM sensor integrations with t:slim X2 and the FDA clearance of Tandem Mobi in July 2023 impacted the timing of purchasing decisions for those offerings, resulting in some customers delaying current purchases until commercial availability of these products in future periods. Sales of pump-related supplies increased primarily due to a 7% year-over-year increase in our ending estimated installed base of customers in the United States. Sales to distributors accounted for 64% and 65% of our total sales in the United States for the years ended December 31, 2023 and 2022, respectively.

Sales in the United States for the years ended December 31, 2023 and 2022 were reduced by a deferral of $25.1 million and $3.5 million, respectively, as the result of our Tandem Choice program which launched in September of 2022. The increase in the sales deferral for Tandem Choice in 2023 as compared to 2022 was primarily related to a reduction in the Tandem Choice program price. This change became effective in the third quarter of 2023, resulting in an increase to our estimate of the future customer participation rate and, therefore, a higher deferral per pump sold, coupled with the Tandem Choice program being in effect for the entire year of 2023.

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

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[["","Year Ended December 31,"],["","2023","","2022","","% Change"],["Pumps shipped","30,000","","","44,000","","","(32)%"],["Sales:"],["Pump","$","84,748","","","$","102,846","","","(18)%"],["Pump rebate","(8,452)","","","\u2014","","","\u2014%"],["Supplies and other","116,544","","","109,606","","","6%"],["Total Sales Outside the United States","$","192,840","","","$","212,452","","","(9)%"]]
[[/GREPCENT_TABLE]]

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Pump sales outside the United States were $76.3 million for the year ended December 31, 2023, compared to $102.8 million in the prior year. We began operations of a centralized European distribution center in late 2022. This resulted in a material disruption to distributor ordering patterns in the first half of 2023 as affected distributors reduced their pump and supply inventory levels to adjust for the reduced transit time. As a result, pump shipments decreased 32% compared to the year ended December 31, 2022. The year-over-year changes in pump and supply shipments were not directly correlated with actual customer demand. The decrease in pump sales was partially offset by an increase in average selling prices due primarily to geographical mix. Pump sales outside the United States also included a reduction to sales of $8.5 million for a new rebate structure implemented in a single market. Sales to distributors accounted for 99% and 96% of our total sales outside the United States for the years ended December 31, 2023 and 2022, respectively.

Cost of Sales and Gross Profit

Our cost of sales for the year ended December 31, 2023 was $380.0 million, resulting in gross profit of $367.7 million, compared to cost of sales of $388.2 million and gross profit of $413.0 million for the year ended December 31, 2022. The gross margin for 2023 was 49%, compared to 52% in 2022.

The decrease in our gross profit for the year ended December 31, 2023 was primarily the result of the $53.5 million decrease in total sales, driven by lower pump shipments and an increase in sales deferral related to the Tandem Choice Program. Amounts deferred were $25.1 million and $3.5 million for the years ended December 31, 2023 and 2022, respectively. This deferral reduced gross margin by approximately two percentage points in 2023, but had negligible impact in 2022. The impact on gross margin from our Tandem Choice program will fluctuate through the expiration of the program based on the timing of availability of Tandem Mobi and the number of eligible customers who ultimately elect to participate. In addition, the sales rebate of $8.5 million also negatively impacted gross margin by nearly one percentage point.

Gross margin benefited from progress in underlying fundamentals, including lower material cost, an increase in average selling prices and manufacturing efficiencies, as well as leverage of fixed overhead. These benefits were offset by the impact of product and geographical mix. Pump sales, which have the highest gross margin, were 46% of total worldwide sales, excluding the impact of Tandem Choice in 2023, compared to 53% in 2022.

Operating Expenses

Our operating expenses for the year ended December 31, 2023 were $600.9 million, compared to $505.8 million for the year ended December 31, 2022. A significant portion of the increase was driven by certain unique or non-recurring transactions. In 2023, we incurred $78.8 million of acquired in-process research and development expenses in connection with our acquisition of AMF Medical, compared to $31.0 million of acquired IPR&D expenses in connection with our acquisition of Capillary Biomedical in 2022 (see Note 12, “Acquisitions”). Additionally, personnel and discretionary spending attributable to these acquisitions, in both SG&A and R&D, was $22.4 million in 2023 and $3.3 million in 2022. As a part of continued operating efficiency measures in 2023 and 2022, we incurred non-recurring operating lease impairment charges in SG&A of $14.1 million and $12.4 million, respectively, from a facilities consolidation (see Note 6, “Leases”). In 2023, we also incurred employee severance costs of $2.7 million.

Selling, General and Administrative Expenses. SG&A expenses increased 5% to $352.5 million for the year ended December 31, 2023, from $335.7 million for the same period in 2022. Employee-related expenses for our SG&A functions comprise the majority of SG&A expenses. Excluding the severance costs described above, the remaining increase of $11.9 million in salaries, incentive compensation, and other employee benefits was primarily the result of continued support services for our growing installed customer base. We also experienced a $2.8 million increase in other non-employee discretionary spending, primarily attributable to outside consulting, outside services, and travel, in addition to the impact of facilities consolidation charges described above.

Research and Development Expenses. R&D expenses increased 22% to $169.7 million for the year ended December 31, 2023, from $139.1 million for the same period in 2022. The increase in R&D expenses was primarily the result of a $23.0 million increase in salaries and related benefits due to our acquisitions, as well as an increase in personnel to support our product development efforts. We also experienced a $7.5 million increase in other non-employee discretionary spending, including equipment and supplies costs, clinical trial expenses, and information technology costs attributable to R&D.

Acquired In-Process Research and Development Expenses. Acquired IPR&D expenses of $78.8 million for the year ended December 31, 2023 represented the value of assets acquired, and acquisition-related expenses, in connection with our acquisition of AMF Medical (see Note 12, “Acquisitions”). Acquired IPR&D expenses of $31.0 million for the year ended December 31, 2022 represented the value of assets acquired, and acquisition-related expenses in connection with our acquisition of Capillary Biomedical.

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Other Income (Expense), Net

Total other income, net for the year ended December 31, 2023 was $13.0 million, compared to expense of $4,000 in 2022. Other income, net for 2023 primarily consisted of $21.2 million of interest income earned on our cash equivalents and short-term investments, and $1.5 million in foreign currency transaction gains, partially offset by $9.9 million of interest expense which included $3.3 million of additional interest as discussed above and the amortization of debt issuance costs related to our Convertible Senior Notes. Other expense, net for 2022 consisted primarily of $6.2 million of interest expense related to our Convertible Senior Notes, offset by $6.1 million of interest income earned on our cash equivalents and short-term investments. Interest income increased in 2023 primarily due to the higher interest rate environment as compared to 2022.

Income Tax Expense

We recognized income tax expense of $2.4 million on a pre-tax loss of $220.3 million for the year ended December 31, 2023, compared to income tax expense of $1.7 million on a pre-tax loss of $92.9 million for the year ended December 31, 2022. Income tax expense for the years ended December 31, 2023 and 2022 was primarily attributable to federal, state and foreign income tax expense as a result of current taxable income in certain jurisdictions.

Liquidity and Capital Resources

At December 31, 2023, we had $467.9 million in cash and cash equivalents and short-term investments. We believe that our cash and cash equivalents, short-term investments, and future cash flows from operations will be sufficient to fund our ongoing core business activities for at least the next 12 months.

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

Historically, our principal sources of cash have included cash collected from product sales, private and public offerings of equity securities, exercises of employee stock awards, and debt financing. We expect to rely on these sources of cash, primarily from product sales, to fund our material cash requirements in both the short and long term.

The following table shows a summary of our cash flows for the years ended December 31, 2023, 2022 and 2021 (in thousands):

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[["","Year Ended December 31,"],["","2023","","2022","","2021"],["Net cash provided by (used in):"],["Operating activities","$","(31,810)","","","$","50,464","","","$","111,359"],["Investing activities","(85,740)","","","33,168","","","(186,876)"],["Financing activities","4,113","","","16,877","","","51,932"],["Effect of foreign exchange rate changes on cash","(212)","","","827","","","153"],["Net increase (decrease) in cash and cash equivalents","$","(113,649)","","","$","101,336","","","$","(23,432)"]]
[[/GREPCENT_TABLE]]

Operating activities. Net cash used in operating activities was $31.8 million for the year ended December 31, 2023, compared to cash provided by operating activities of $50.5 million and $111.4 million, respectively, for the years ended December 31, 2022 and 2021. The reduction in net cash provided by operating activities for 2023 compared to 2022 was primarily a result of the $128.0 million increase in net loss, offset by increase of $58.8 million net non-cash adjustments. Net non-cash adjustments were primarily related to acquired in-process research and development expenses, operating lease termination and impairment charges and stock-based compensation expense. In addition, a net decrease of $17.7 million in changes of working capital balances. Changes of working capital balances primarily consisted of increases in inventories, prepaid and other current assets, and deferred revenue. Inventories increased to $157.9 million at December 31, 2023 from $111.1 million at December 31, 2022, primarily due to a return to target stocking levels post-pandemic as supply chain constraints subsided, as well as the scaling up of inventory to meet anticipated demand for Tandem Mobi.

The reduction in net cash provided by operating activities for 2022 compared to 2021 was primarily a result of the $110.2 million increase in net loss, as well as net working capital changes. Working capital changes during 2022, primarily consisted of increases in inventories, accounts receivable, accounts payable, and operating leases and other current liabilities.

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Investing activities. Net cash used in investing activities was $85.7 million for the year ended December 31, 2023, which primarily consisted of $69.5 million cash paid for the acquisition of AMF Medical, including transaction costs (see Note 12, “Acquisitions”), $26.8 million in purchases of property and equipment of which $8.7 million was associated with improvements to the now completed new Headquarters lease facility (see Note 6, “Leases”), and $24.8 million cash paid for purchases of intangible assets and strategic investments, offset by $35.4 million provided by short-term investments activity as proceeds from maturities and redemptions exceeded purchases. Net cash provided by investing activities was $33.2 million for the year ended December 31, 2022, which primarily consisted of $101.8 million provided by short-term investments activity as proceeds from maturities and redemptions exceeded purchases, offset by $34.1 million in purchases of property and equipment, $25.7 million for the acquisition of Capillary Biomedical, including $1.0 million of transaction costs, and $8.9 million cash paid for purchases of intangible assets and strategic investments. Net cash used by investing activities was $186.9 million for the year ended December 31, 2021, which primarily consisted of $163.4 million used by short-term investments activity as purchases exceeded maturities and redemptions, $14.2 million in purchases of property and equipment, and $9.3 million cash paid for purchases of intangible assets and strategic investments.

Financing activities. Net cash provided by financing activities was $4.1 million for the year ended December 31, 2023, which primarily consisted of proceeds from the issuance of common stock under our stock plans, net of payments for related tax withholdings. Net cash provided by financing activities was $16.9 million and $51.9 million, respectively, for the years ended December 31, 2022 and 2021, which primarily consisted of proceeds from the issuance of common stock under our stock plans, net of payments for related tax withholdings. The reduction in proceeds from the issuance of common stock under our stock plans was primarily due to the decrease in the market price of our common stock and fewer employee stock options exercised.

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

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

•contractual debt obligations, including periodic interest payments;

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

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

•fluctuations in gross margins and operating margins; and

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

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

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

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

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

•acquisitions, including contingent earnout payments that become payable upon the achievement of certain milestones;

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

•additional facilities leases and related tenant improvements;

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

•payments under licensing, development and commercialization agreements; and

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•integration costs related to acquisitions of businesses, products and technologies.

Indebtedness

Convertible Senior Notes

In May 2020, we entered into a purchase agreement with certain counterparties for the sale of an aggregate of $287.5 million principal amount of 1.50% Convertible Senior Notes due 2025 in a private offering to qualified institutional buyers (the Notes). The proceeds from the issuance of the Notes were $244.6 million, net of debt issuance costs and cash used to pay the cost of the Capped Call Transactions (see Note 7, “Debt”). The Notes are senior unsecured obligations. Interest is payable in cash semi-annually in arrears on May 1 and November 1 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 before the maturity date.

Cash payments due by calendar year for our Convertible Senior Notes at December 31, 2023, are as follows (in thousands):

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

We may from time to time seek to retire or purchase our outstanding debt, including the Notes, through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material.

Promissory Note Payable

In connection with our acquisition of Capillary Biomedical, Inc. (see Note 12, “Acquisitions”), we assumed a $4.7 million promissory note payable. The promissory note accrues interest at the rate of 5% per year, and becomes due and payable upon the first sale or license of the commercialized product. At December 31, 2023, $4.7 million was included as a component of other long-term liabilities on the consolidated balance sheet.

Critical Accounting Policies Involving Management Estimates and Assumptions

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about our financial condition and results of operations that are not readily apparent from other sources. Actual results may differ materially from these estimates.

While our significant accounting policies are more fully described in Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in this Annual Report, we believe that the following accounting policies are the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

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Revenue Recognition

Our revenue is generated primarily from sales of our insulin pumps, single-use 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 and rebates. 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, Tandem Source and the Tandem Device Updater, are considered distinct performance obligations satisfied over time, as access and support for these products is provided throughout the typical four-year warranty period of the insulin pumps. Accordingly, revenue related to the complementary products is deferred and recognized over a four-year period. When there is no standalone value for the complementary product, we determine its value by applying the expected cost plus a margin approach and then allocate the residual to the insulin pumps.

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

Warranty Reserve

We generally provide a four-year assurance type warranty on our insulin pumps to end user customers and may replace any pumps that do not function as intended in accordance with the product specifications within the warranty period. Insulin pumps returned to us may be refurbished and redeployed. We establish the warranty reserve liability when control of the pump is transferred to the customer, and we reevaluate our estimate of the warranty obligation at each reporting period. Warranty costs are estimated primarily based on the current expected product replacement cost and expected replacement rates utilizing historical experience. Experience has shown that initial data for any given pump version or pump platform 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, 2022 to determine whether our net operating losses and credits are likely to be limited by Section 382. Based on this study, we determined that an ownership change, as defined under Section 382, occurred in 2018 and the resulting limitation significantly reduced our ability to utilize our net operating loss and credit carryovers before they expire. As a result, in 2019 we reduced our deferred tax assets for the net operating loss and research credit carryforwards that were projected to expire unused with a corresponding offset to the valuation allowance recorded against such assets. Additionally, future ownership changes under Section 382 may also limit our ability to fully utilize any remaining tax benefits.

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

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, which present a significant level of estimation uncertainty and 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 and have a material impact on our financial condition and results of operations.

Contractual Obligations & Off-Balance Sheet Arrangements

Contractual Obligations

Operating Lease Obligations

We lease general office space, laboratory, manufacturing and warehouse facilities, and equipment under noncancelable operating leases for use in our operations. For a description of our contractual obligations related to leases at December 31, 2023, see Note 6 “Leases” to the consolidated financial statements in Part II, Item 8 of this Annual Report.

Purchase Order Commitments

We have agreements with suppliers and other parties to purchase inventory, other goods and services and long-lived assets. For a description of our contractual obligations related to purchase order commitments at December 31, 2023, see Note 13 “Commitments and Contingencies” to the consolidated financial statements in Part II, Item 8 of this Annual Report.

Acquisition-related Contingent Consideration

In connection with our acquisition of AMF Medical SA completed in January of 2023 (see Note 12, “Acquisitions” to the consolidated financial statements in Part II, Item 8 of this Annual Report), the total consideration includes cash paid at the closing of the transaction and additional contingent earnout payments. The additional earnout payments of up to CHF 129.6 million, in aggregate, become payable upon the achievement of certain milestones and are comprised of a payment of up to CHF 38.4 million upon the successful completion of key development milestones over the two years following the acquisition, and a payment of up to CHF 91.2 million upon obtaining regulatory clearance of an automated controller enabled (ACE) pump by the United States Food and Drug Administration.

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Off-Balance Sheet Arrangements

As of December 31, 2023, we are party to a standby letter of credit arrangement in support of certain operating lease obligations (See Note 13 “Commitments and Contingencies” to the consolidated financial statements in Part II, Item 8 of this Annual Report).