Susan Morrison - CAO Kim Blickenstaff - President and CEO John Cajigas - CFO.

Tom Bakas - Piper Jaffray & Co. Ben Andrew - William Blair.

Good day, ladies and gentlemen. Welcome to the Tandem Diabetes Care Fourth Quarter 2016 Earnings Conference Call. At this time, all participant lines are in a listen-only mode to reduce background noise, but later we'll be holding a question-and-answer session after the prepared remarks and instructions will follow at that time.

[Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Susan Morrison. You have the floor..

Thank you. Good afternoon everyone and thanks for joining Tandem's fourth quarter and full year 2016 earnings conference call. Today's discussions may include forward-looking statements.

These statements reflect management's expectations about future events, product development timelines, and financial performance and operating plans and speak only as of today's date. There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements.

A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is highlighted in the press release announcing our fourth quarter and 2016 earnings, which was issued earlier today, and under the risk factors portion and elsewhere in our most recent annual report on Form 10-K and in our SEC filings.

We assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or other factors. In addition, today's discussion will include references to a number of GAAP and non-GAAP financial measures.

Non-GAAP financial measures are provided to give our investors information that we believe is indicative of our core operating performance and reflects our ongoing business operations. We believe these non-GAAP financial measures facilitate better comparisons of operating results across reporting periods.

For additional information about our use of non-GAAP financial measures, please see the information under the heading use of non-GAAP financial measures in our press release. The company also announced today, in a separate press release, the commencement of an underwritten public offering of its common stock.

The focus of this call is to discuss the company's financial results for the year and quarter ended December 31, 2016. In light of that and SEC rules and regulations, the company will not be discussing or answering questions about the proposed financing. Kim Blickenstaff, Tandem's President CEO will be leading today's call.

And at this time, I'll turn over to Kim..

Thank you, Susan. Hello everyone and thank you for joining us on today's call. With me is John Cajigas, our Chief Financial Officer. I'd like to take a few moments to talk about 2016 as well as our overall progress since the launch of our first product in late 2012.

Then I will be providing some perspective on how we are well-positioned to execute on multiple strategies in 2017 that set our business up for long-term success.

First, in looking back at the highlights of 2016, we have continued above-market growth rates in sales, we furthered our product development efforts, and we made significant operational progress.

We also saw the launch of our next generation t:slim X2 Pump and received FDA clearance for a Tandem Device Updater, which for the first time allows us to provide customers with software upgrades remotely using their personal computer. These last two achievements are particularly meaningful as they are the cornerstone of our growth strategy.

As we discussed on our last call, we also face some challenges that had a significant impact on our performance in the second half of 2016.

Most notably were United Healthcare's decision that restricted most of their members from accessing Tandem's pumps as a covered benefit and new pump offerings and aggressive sales tactics that contributed to an increasingly competitive environment.

If we take a step back further and look at Tandem's performance from a broader perspective, it highlights how far our company has progressed in only four years of commercialization.

For example, I am very proud that more than 50,000 people have chosen a Tandem pump and approximately half of our customers report being new to pump therapy from multiple daily injection. This demonstrates that we are making a meaningful progress in our long-standing goal of bringing the benefits of pump therapy to more people with diabetes.

During the past four years, we also received regulatory approval for and delivered four new insulin pumps on time, including our first PMA product. We've also received clearance for and launched multiple companion products for our pumps, including t:connect, with its new HCP portal that we began rolling out in 2016 and our Tandem Device Updater.

Now looking forward, as I mentioned 2017 presents us with a number of key opportunities that help position our business for long-term success. Very importantly, we recently filed our PMA supplement for the t:slim X2, with Dexcom G5 CGM integration.

Subject to FDA approval, we expect the launch of this product will demonstrate the significant capability of our Device Updater. We also anticipate that the launch of the new t:lock custom infusion set connector will be meaningful, as will our continued demonstration of the clinical benefits of our easy-to-use insulin pump.

In addition, 2017 is the first full year that we have customers eligible for insurance renewal, which presents us with an additional source of new business. Lastly and most important to our long-term success, will be continuing to drive and advance our automated insulin delivery products in development.

The combination of these opportunities creates an inflection point for our company that is fundamental to furthering our growth trajectory as we manage our business towards positive cash flow and ultimately profitability. Today, Tandem customers represent nearly 10% of the insulin pump market.

Based on our successful execution of the key opportunities I outlined for 2017, we believe we can reach sustained profitability once our install base surpasses 15% of the insulin pump market.

Since these opportunities are the foundation to our growth in 2017 and beyond, I'd now like to take a few minutes to talk through each of them in a bit more detail.

Starting with our infusion set strategy, as we announced in this morning press release, I am excited to share that this year we're launching t:lock, a new custom infusion set connector we've developed through direct customer input. At Tandem, we've always applied a unique customer-focused approach to our product development.

In looking at our annual customer survey for the past several years, a top suggestion we've received to the question of what could make your tandem pump better is faster cartridge filling process and less wasted insulin in the fill process.

t:lock reduces the time required to fill the infusion set tubing by more than 30 seconds and reduces the amount of insulin used in the process by approximately four units. This improvement reduces the time and wasted insulin involved with the fill sequence.

All infusion sets currently offered by Tandem will be made available with the new t:lock Connector. We plan to begin implementing the new t:lock sets in a gradual rollout through the second half of the year to allow customers the transition period to use up their current inventory before switching over.

By the end of the year, we anticipate nearly 100% will have converted to our custom t:lock Connector.

It's a strategy that allows us to accomplish two important goals; to provide continuous improvement to our customers based on their feedback, as well as address a business issue that has challenged us throughout the past few years, that John will discuss in more detail.

Our next key opportunity for 2017 is renewals, as it's the first full year Tandem customers will be eligible for standard insurance renewal. Several hundred of our customers were eligible for renewal in the latter part of 2016, and we were pleased with the high number of early renewals.

However, it's too soon to speak to these as an indicator of future trend. In 2017, customers who are renewing with Tandem will become a more meaningful portion of our business as it will each year moving forward. Contributing to customer renewals will be the future benefits of the t:slim X2 Pump.

The t:slim X2 represented approximately 84% of our shipment from the fourth quarter, which I believe is a reflection of people seeing the value and power of the pump that can receive software updates using a personal computer.

Tandem is uniquely positioned with our Tandem Device Updater to be the only pump company that will provide customers the tool to update their pumps to include new algorithms and technologies as they are approved and launched.

While today the t:slim X2 primarily offers the same features and benefits as our t:slim; namely being that it is slim, sleek and easy-to-use, we've been gathering mounting evidence that our easy-to-use interface may also provide our customers with improved clinical outcomes.

Last year, we did a special survey with more than 2,000 of our customers on their use of advanced features on our pumps such as the extended bolus, temporary basal rate, and personal profile. About half of the respondents said they have increased their use with advanced features since switching to our pump.

Of the people who said they have increased their use of advanced features, nearly 80% said they believed use of these features has led to better control and people who used advanced features self-reported that their HbA1cs decreased nearly 1%.

This data suggests that our simple to use advanced features, made possible by the touch screen interface and intuitive software, may translate to improve clinical outcomes for people with diabetes. Furthermore, last month we shared some compelling data at the Annual Advanced Technologies and Treatments for Diabetes International Conference in Paris.

The data compared retrospective user data from sensor-augmented pumps made by Tandem and Medtronic MiniMed. A sensor-augmented pump or SAP is a pump that receives CGM data from a sensor.

Our pumps demonstrated statistically significant clinical advantages including reduced hypoglycemia, increased diamond range, and improved overall glycemic control, despite approximately half the Medtronic SAP users actively using their threshold suspend feature. This data further supports that ease of use correlates with clinical outcome.

Finally, in a second poster presentation at ATTD, data were presented from a study demonstrating a reduced risk of hypoglycemia associated with Tandem pump use, compared to previous methods of diabetes therapy. On average, patients reported a clinically significant reduction in hypoglycemic events ranging from mild to severe.

More specifically, Tandem pump users reported a statistically significant 52% reduction in severe hypoglycemia compared to previous methods of diabetes therapy. There was also a statistically significant 58% reduction in ambulance rides due to severe hypoglycemia, and a 50% reduction in days spent at the hospital due to severe hypoglycemia.

Tandem pumps have historically gotten credit for their modern appearance, but we're very excited to share this clinical outcomes data. Gathering and publishing clinical data will increasingly be a part of our strategy moving forward.

This is particularly true in light of our upcoming automated insulin delivery trials for algorithms we plan to launch on our t:slim X2 platform, which brings me to our next key opportunity, Tandem's near-term pipeline. The first software update we plan to launch of the t:slim X2 is integration with Dexcom's G5 sensor.

We recently filed a PMA supplement with the FDA for this product and are still preparing for a launch in mid-2017 pending FDA approval, which is consistent with guidance we provided in the past.

Similar to how we launched our t:slim G4 products in 2015, we're also working to be ready to launch our t:slim X2 with G5 within 30 days following FDA approval.

Subject to approval, customers who purchased the t:slim X2 prior to the availability of G5 CGM integration, will be able to update their software using the Device Updater to add this feature for no cost. Bringing automated insulin delivery algorithms to market continues to be the top product development priority for our company in 2017.

The t:slim X2 we are selling today is designed to support our automated insulin delivery algorithms. We believe that people should not have to sacrifice pump size or modern features such as easy-to-use touch screen and rechargeable battery in order to have access to an algorithm.

As we've discussed historically, we also believe that a system that automates insulin delivery can only be as good as the CGM data that drives its performance.

Our PLGS algorithm for the t:slim X2 platform will be our first automated insulin delivery algorithm and will use information from the Dexcom G5, which is the most accurate sensor approved by the FDA and the first and only CGM system approved to replace finger stick testing for diabetes treatment decisions.

We've been in active discussions with the FDA about our automated insulin delivery strategy and in December, we held a pre-submission meeting with them regarding our pivotal study for t:slim X2 with PLGS.

The five clinical trial sites for the study are now identified and we anticipate it will be completed in the third quarter of 2017 and we're preparing for launch in early 2018.

As a reminder, we anticipate a six-month review process for our t:slim X2 with PLGS because it will come shortly after an FDA review of the t:slim X2 with Dexcom's G5 integration. The only different feature will be the PLGS algorithm.

Activities are also underway surrounding our second-generation automated insulin delivery algorithm which will include our t:slim X2 platform with the treat-to-range technology that we licensed from TypeZero, as well as Dexcom's G6 CGM.

With TypeZero's technology, our products will be differentiated because it will deliver automated correction boluses in addition to adjusting basal [Indiscernible]. As a reminder we are participating in the NIH-funded International Diabetes Closed-Loop Trial alongside TypeZero and Dexcom, which is designed as a pivotal trial.

The trial includes seven institutions in the U.S. and three in Europe led by the University of Virginia and it is expected to enroll 240 adults with Type 1 diabetes. The trial is structured in two phases.

The first phase will use t:slim and Dexcom's G5 sensor as a part of a blood glucose control system that combines these devices with a smartphone running TypeZero's inControl closed loop algorithm.

The system will predict high and low blood sugar levels and adjust insulin delivery accordingly throughout the day while still allowing the user to manually bolus for meals. In the second phase, Dexcom's G6 and TypeZero's inControl algorithm will be integrated directly into our t:slim X2.

We plan to use the data from this trial as a pivotal trial data in a PMA filing with the FDA. Based on traditional review times, we are targeting launch of the TypeZero algorithm on our t:slim X2 platform by the end of 2018. As you can see, we are well-positioned to continue making meaningful progress throughout our business.

Nevertheless, we anticipate the recent headwinds we faced will continue in the near-term, particularly until the launch of our t:slim X2 with G5. But through these challenges, we will grow our business to achieve the annual sales guidance we've provided of $100 million to $107 million.

The key opportunities we have this year position our business for long-term success and it's also a year in which we expect to reach meaningful volume that will allow us to start better leveraging our infrastructure.

As a result, we remain confident that our differentiated insulin pumps, the power of our Tandem Device Updater, and our robust pipeline position us well to compete both in the near and long-term. I'll now turn the call over to John, who will provide further detail on our results for the quarter and our financial guidance..

Thanks Kim. Good afternoon everyone. Today I'll be reviewing the 2016 and Q4 results on both a GAAP and non-GAAP basis and discussing our 2017 guidance and cash flow expectations.

In light of our technology upgrade program impacting our operations and financial results starting in Q3 last year, we believe that looking at our operating results on a non-GAAP basis provides useful information in comparing our financial results to periods prior to Q3 2016. So, today I'll be discussing both GAAP and non-GAAP financial metrics.

Our non-GAAP results are adjusted from our GAAP results by excluding the impact of the technology upgrade program.

In Q4, these adjustments included a deferral of pump revenues and cost of sales per shipment to customers eligible for an upgrade as well as the recognition of revenues and cost of sales previously deferred while we completed our upgrade obligations during Q4 as well as the incremental upgrade fees earned and the product cost incurred to fulfill the upgrade obligations.

Until the technology upgrade program expires in September 2017, we will continue to show adjustments in future quarters. The reconciliation of our GAAP results to our non-GAAP results is included as an exhibit to today's earnings press release.

Also as I discussed comparative metrics between Q4 and Q4 2015, I want to remind everyone that we launched the t:slim G4 in 2015 and the t:slim X2 in October 2016.

Both of these product launches created changes in the normal sales in gross margin patterns for various reasons such as individual customers pausing and distributors adjusting their orders in anticipation of product launches and the pent-up demand product launches typically create.

We believe there is more of a significant pent-up demand and have post-launch interest in the t:slim G4, as it was our first product integration with Dexcom CGM technology. And because we only had a limited exchange program in place at that time, we believe customers were more likely to wait until after it launched to make a buying decision.

Overall, our 2016 pump sales growth was lower than what we've experienced historically. However, we saw a meaningful increase in our pump supply sales during the year, in particular infusion sets. And for the first time, we achieved a positive gross margin on our pump supplies in Q4.

Looking at our sales and pump shipments for 2016, albeit some particulars for Q4. For the year, our GAAP sales for 2016 were $84.2 million, an increase of 16% from $72.9 million in 2015. Sales for 2016 reflected a net deferral of $4.3 million associated with the upgrade programs.

Our non-GAAP sales for 2016 were $88.5 million, an increase of 22% from $72.9 million in 2015. Pump shipments for 2016 totaled 16,938, an increase of 9% from 2015.

For our 2016 shipments, we have estimated that approximately 50% of our pump shipments were to individuals who are new to insulin pump therapy, demonstrating we continue to be successful in expanding the insulin pump market. As of the end of 2016, our cumulative pump shipments have grown to more than 50,000 pumps.

With respect to our sales of our pump supplies, sales of our cartridges and infusion sets in 2016 were $21.7 million compared to $12 million in 2015. The 80% increase was attributed to the growth of our install base as well as greater sales in infusion sets to our distributors.

As a reminder, Tandem's commercial team generates essentially all of our sales orders. However, to provide customers access to in-network pricing, under various peer plans, we partner with distributors when we don't have a peer contract. Over the past four years, greater than 70% of our shipments have been processed through distributors.

This has impacted us financially in two ways. First, we give up a logistical margin to our distributors for providing the service; second, because our current infusion set has a standard connector, distributors typically purchase the compatible infusion sets from a lower-priced supplier.

In addition to our planned launch of the t:lock Connector that Kim mentioned, we entered into contractual agreements with distributors in 2016 for infusion set sales that have increasingly allowed us to capture more sales and gross profits from the disposal portion of the revenue streams within our business model.

We've had some success with this process and it has contributed to more than tripling our infusion set volume in the fourth quarter when compared to last year. Even with that increase, we still see a greater opportunity to capture even more pump supply sales and gross profits for our business over time.

Looking at our Q4 sales and pump shipments, our GAAP sales were $28.9 million, compared to $29.1 million in Q4 2015. Our GAAP sales for Q4 reflect the deferral of $1.4 million of t:slim and t:slim G4 sales related to our upgrade program.

We completed approximately 1,400 pump exchanges under the upgrade program during Q4, and recognized $5.4 million of pump sales previously deferred in Q3 as well as another $130,000 of upgrade fees. Our non-GAAP sales were $24.8 million, a decrease of 15% compared to $29.1 million in Q4 2015.

When comparing to the fourth quarter 2015, I would again remind everyone that Q4 2015 benefited from the launch of the t:slim G4 pump. This resulted in a significant increase in sales in both Q4 2015 and Q1 2016, including the recognition of $700,000 of deferred revenue in Q4 2015 associated with our limited exchange program.

We believe there was a substantial pent-up demand for this product because people were anticipating the FDA approval of the t:slim G4 and waited until after its launch to make a buying decision. During Q4 2016 we shipped a total of 4,418 pumps, of which 3,699 were t:slim X2, 354 were t:flex, 289 were t:slim G4, and 76 were t:slim.

Our pump sales mix is continuing to shift from being highly concentrated towards t:slim G4 to our t:slim X2, which we launched in October. Pump sales accounted for 73% of our Q4 GAAP sales, but were 69% of our Q4 non-GAAP sales compared to 86% Q4 2015.

With respect to sales of our pump supplies, sales of our infusion sets in Q4 increased 170% compared to Q4 2015, while sales of our cartridges in Q4 increased 39% compared to Q4 2015. Also, the ratio of the number of infusion sets shipped to the number of cartridges shipped increased to 45% in Q4 from 18% in Q4 2015.

This illustrates we're already capturing more of the potential infusion set revenue stream through our distributors. Moving on to cost of sales and gross margins, our GAAP gross margin for 2016 was 28% compared to 36% for 2015. Our GAAP gross profits during this period decreased to $23.6 million from $26.6 million.

2016 gross profit reflects a $4.6 million reduction associated with the upgrade program resulting in a four point reduction in the GAAP gross margin. This reduction includes $1 million of costs net of upgrade fees associated with the fulfillment of the upgrades. Our non-GAAP gross margin for 2016 was 32%.

Our non-GAAP gross profits during those periods increased to $28.2 million from $26.6 million in 2015. The decline in both the GAAP and non-GAAP gross margins compared to 2015 was due in large part to an excess and obsolescence charge of $2.8 million, or three margin points.

This charge related to raw materials inventory used exclusively in the production of the t:slim G4 pumps and the greater than expected reduction in the level of t:slim G4 shipments in Q3 and Q4 as our t:slim X2 has become the dominant product offering.

Prior to the announcement in Q3 of our intention to launch t:slim X2, our t:slim G4 Pump represented approximately 60% of our pump shipment. Subsequent to the announcement during Q3, our product sales mix dramatically shifted towards the t:slim, which had an upgrade path to the t:slim X2.

In Q4, t:slim G4 shipments only represented 7% of our pump shipments, while t:slim X2 represented 84%. Pump supply sales in 2016 represented a greater percent of overall sales than in the past, primarily due to the increased sales of infusion sets. Our pump gross margins are significantly higher than our supply gross margins.

Therefore, while the shift in our product mix reduced our overall gross margin, it added to our overall gross profit. We also see significant opportunity to further increase our gross profits and improve our gross margins over the long-term.

We expect volume increases, including pump renewals and infusion sets as well as the lower material cost for the t:slim X2 and our efforts to reduce our warranty costs will be impactful in 2017. We made tremendous progress in the pump supply gross margin in 2016.

Previously, our gross margin for pump supply as a whole was negative, but we achieved a breakeven gross margin in Q3 and a positive gross margin in Q4. We saw a 46 point annual gross margin improvement for pump supply that was driven by two major factors; volume increases and reduced variable costs.

Our cartridge shipments increased 52% and shipments of our infusion sets increased 159% in 2016 compared to 2015. And we experienced higher yields, greater efficiencies, and increased equipment up-time in the manufacturing of our cartridge.

With respect to pumps, we have realized approximately 20% lower material costs for our t:slim X2 and t:flex, compared to our t:slim G4. The lower manufacturing cost for these pumps also reduces our expected future warranty costs.

A significant portion of our warranty cost for 2016 were associated with new products we had launched in 2015; the t:slim G4 and the t:flex. By the end of 2016, we had operationally addressed the most significant items that were driving the increased warranty costs. These improvements were incorporated into the design of our t:slim X2 Pump.

However, the potential financial benefits associated with these improvements are likely to be realizes over several quarters in 2017 as we measure the impact of these improvements on our warranty reserves. Our GAAP gross margin in Q4 was 35% compared to 46% in Q4 2015. Our non-GAAP gross margin was 31% in Q4.

In Q4, we recognized deferrals of gross profits from Q3 associated with the upgrade program. These were reduced by the cost of fulfilling approximately 1,400 upgrades in Q4, resulting in a four point increase in our GAAP gross margin.

The Q4 gross margin was also impacted by an excess and obsolescence charge that I discussed earlier, which was approximately $1.7 million in Q4. This resulted in a reduction of six gross margin points for GAAP purposes and seven gross margin points for non-GAAP purposes.

Similar to my comments regarding factors that impacted our full year 2016 gross margin, in Q4 2016, pump supply sales represented a higher percentage of our overall mix of sales.

Also when comparing it to Q4 2015, remember we had substantially higher levels of pump shipments as a result of the t:slim G4 launch, which impacted our product sales mix and therefore benefited our overall gross margin for Q4 2015. Looking at the rest of our P&L, our GAAP operating loss for 2016 was $78.1 million, compared to $69 million for 2015.

Resulting operating margin was negative 93% for 2016 compared to negative 95% for 2015. Our non-GAAP operating loss for 2016 was $73.5 million, with the resulting negative operating margin of 83% for 2016.

Our 2016 operating loss includes non-cash expenses of $11.7 million for stock-based compensation and $5.5 million for depreciation and amortization. For 2015 our stock-based compensation was $13.1 million and our depreciation and amortization was $4.8 million.

During 2016, our operating expenses only increased 6% compared to 2015 while our GAAP sales grew 16% and our non-GAAP sales grew 22%. Our GAAP operating loss for Q4 was $13.3 million, resulting in an operating margin of negative 46%. Our non-GAAP operating loss was $15.7 million, resulting in an operating margin of negative 63%.

These measures both compare to our Q4 2015 operating margin of negative 39%. Our operating expenses decreased 5% in Q4 as compared to Q4 2015. The primary reason for the year-over-year reduction in our operating expenses was a reduction in our incentive compensation.

With respect to cash, at the end of 2016 our cash and investment balance was approximately $55 million. During Q4, we drew the additional $35 million under our debt arrangement with CRG.

Excluding the $35 million cash draw from CRG, our cash and investments decreased sequentially by $15.5 million in Q4 compared to decreasing $20.2 million in Q3 and $10.6 million during Q4 2015.

The sequential decrease in our cash burn in Q4 was primarily attributed to the higher sales and gross profits generated during the quarter and changes in working capital. As we announced separately earlier today, we are looking to further strengthen our balance sheet in the near-term.

Moving on to guidance, today we are providing annual 2017 non-GAAP sales and operating margin guidance. First, I need to highlight that the guidance we are providing today excludes any estimate of the cost in accounting of our technology upgrade program.

As previously discussed, the upgrade program creates a number of accounting complexities that make analytical relationships between our historical metrics and trends not meaningfully comparable to our GAAP results and trends for the duration of this program.

It is difficult to estimate or predict the timing and utilization of the upgrade program by our customers. As a result, it is not possible for us to provide GAAP guidance on sales and operating margins for 2017, or to provide a reconciliation of GAAP guidance to non-GAAP guidance with any degree of certainty.

In the future, we will continue to provide operating results on both a GAAP and non-GAAP basis and annual financial guidance on a non-GAAP basis. We expect our full year 2017 non-GAAP sales guidance to be in the range of $100 million to $107 million for all products, which excludes the financial and accounting impact of the upgrade program.

Consistent with prior years, we expect the year will be heavily back-end loaded, particularly towards Q4. This is due to our typical seasonality and three incremental sources of revenue for which we expect to see an impact, primarily during the second half of 2017.

These include pump renewals, sales of our t:lock Infusion Sets, and our anticipated launch of the t:slim X2 with G5 integration. Generally, we expect our pump renewal opportunities to occur every four years.

In 2013, we shipped approximately 6,500 pumps that we see as incremental sales opportunities in addition to the organic growth we have experienced in the past. Those sales opportunities will be back-end loaded towards the second half of the year, especially towards Q4.

We expect to begin shipping the t:lock Infusion Sets in Q3, and transition nearly all of our customers to the new infusion sets by the end of the year. And based on our market research, we also believe that the t:slim X2 with G5 will be well-received once it is launched.

For these reasons as well as the current competitive environment, we expect to generate 15% of our 2017 sales guidance in the first quarter. This is similar to the percent of Q1 sales we generated in the last several years, with the exception of 2016 when we were still fulfilling the pent-up demand for t:slim G4.

We expect our non-GAAP operating margins to be in the range of negative 65% to negative 70% for the full year 2017. The guidance includes non-cash operating expenses of approximately $11 million for stock-based compensation and approximately $6 million to $7 million for depreciation and amortization.

We expect our core operating expenses for 2017 will increase at a similar rate to what we experienced in 2016 and 2015. We do expect to incur incremental operating expenses between $2 million and $4 million in aggregate for our clinical trial costs and milestone payments under our TypeZero agreement.

With respect to our cash, at the end of 2016, we maintained cash and investments of approximately $55 million. We believe that the addition of pump renewals and sales of infusion sets will have a positive impact on sales, gross profits and cash flow in the latter part of 2017 and in future years.

Additionally, we believe that the FDA approval of our t:slim X2 with G5 will allow us to compete more effectively. We anticipate our use-of-cash in 2017 will be less than 2016.

However, Q1 is likely to be higher than the prior quarter due to seasonality as well as the timing of the payout of the 2016 sales commissions and annual bonuses that we expensed in 2016, as well as the investments in tenant improvements for our new manufacturing facility.

Longer term, as Kim mentioned, we believe we can become profitable when we surpass a market penetration of 15%. At that time, we anticipate our gross margin will be approximately 55%. As we've discussed on today's call, 2017 is an important year for us as we execute on multiple strategies that will position us for both near-term and long-term success.

Our number one product and customer support rating for four consecutive years are solely attributed to the hard work, talent, and dedication of our employees, who are passionate about improving the lives of people with diabetes and we greatly appreciate all their efforts.

Together, we plan to continue delivering exciting and new innovations to the diabetes community and continue our momentum as the fastest growing insulin pump company. With that, I'll turn it over to the operator for questions..

Ladies and gentlemen, the question-and-answer session queue is now open. [Operator Instructions] We'll be taking our first question from the line of Tom Bakas from Piper Jaffray. Your line is open..

Hi guys. Good afternoon. Thanks for taking my questions. .

No problem..

Hi Tom..

Maybe if I could start with guidance.

Could you just give us a little bit of color on the drivers behind the full year range? Just given all that has been going on in the market and the backdrop with the 670G launch in the next seven months, just -- can you help us understand what's baked into your assumptions?.

Sure. As we look at the full year, we think that the first half of the year, primarily the time prior to us launching our G5 integrated product with the t:slim X2 is going to be a continuation of the competitive environment that we've seen so far in Q4 and Q3. So that will be sort of the challenging time of the year.

Once we get past that point, we do see the opportunities that I outlined in my comments, in particular pump renewals as well as t:lock Infusion Sets coming into the market and our ability to sort of compete at that point in time and to have the potential -- of our pipeline potentially come into play early 2018..

I'll make another comment. When we just heard this morning that Medtronic is launching the 670G sometime right about now in a limited launch called priority access and we don't know how many people are in that. And then they are going to expand it in the June timeframe.

So, they are sort of on the timing that we had in the planning cycle, but we really don't know the numbers and the extent to what this is going to be rolled out in a full-blown way until probably June..

Okay. That's very helpful. Thanks. And then maybe switching over to gross margin.

Just -- regarding, John, you're prepared comments on X2 platform, just the 20% reduction in the input cost, if I caught that correctly, as the mix shift to X2 continues, how should we think about gross margin throughout the year, maybe even looking out a bit further? And then along those lines, is there an improvement in the margin contribution from the t:lock?.

Sure, so let's take those out one piece at a time. The 20% reduction that you are returning to is in the material cost for the t:slim X2 as compared to our prior pumps and that is an absolute cost reduction it's in play today.

It's just harder to see that in the 84% of our volume was t:slim X2 during the fourth quarter and we expect that the high percentage of our sales in 2017 will be driven towards X2s and maybe t:flex.

And once we have the G5 integrated I think that will just push that percentage even more towards the X2 product and we'll see the overall benefit of having a material cost reduction compared to our [Technical Difficulty] products.

Other things that are going to put into play in 2017, I mentioned that with our warranty cost, there were some warranty issues associated with our newer products, the t:slim G2 and t:flex and as those volumes becomes smaller and smaller percentage of our overall sales that will create a positive impact on our warranty costs as we move forward, that in addition to the actual improvements that we put into place for those products.

So, I think that's going to have a positive impact as well. Your question regarding what will the t:lock do from a margin standpoint, I would assume that those continue to be consistent with the margins that we've experienced here with the previous infusion sets..

Thank you very much..

Yes, I just want to add one last thing on that while I did point this out in my prepared comments is while we'll gain greater percentage of our product mix into the infusion sets and pump supply and that may have a suppressing impact on our overall gross margins, I think the gross profit contribution is dramatic and very helpful to our drive to become profitable..

Okay. That makes sense. Thanks. I'll jump in the queue..

Thanks Tom..

Thank you. Our next question comes from the line of Ben Andrew from William Blair. Your line is open..

Well, good afternoon guys. Thanks so much for taking the questions..

Hi Ben..

John thinking about the gross margin targets you gave us of about 55% and 15% market share, how would that break down between pumps and consumables at that point?.

Well, I still think that pumps will be a lion share of our product mix as we continue to have organic growth, as we launch the t:slim X2 with the PLGS and TypeZero sort of algorithm with it, I think it will help our mix. We are now just entering the phase where renewals are becoming a significant portion and opportunity for us.

I think we have 6,500 pumps this year as an opportunity. Next year, that moves closer to 11,000. So, those are meaningful numbers that continue to drive our sales mix towards the pumps. But I do see a positive gross profit impact of having more and more of the disposable revenue stream coming to Tandem, in particular, the infusion sets..

And to that point, I was curious if you can characterize a bit the conversations with the current distributors about what would cause them to give up that volume in favor of you guys actually distributing the sets to more of the patients that you've been engaged in?.

Sure, I think it's really a contractual arrangement that I don't want to get into from a competitive standpoint, but I think they also see the benefits of what we can provide with the infusion set and the custom lower and what the customers are actually looking forward from the benefit standpoint with our new infusion sets..

Okay. That's helpful. And then I don't know if it's you or Kim or who would comment on this, but can you characterize at all a bit more of the impact of the United exclusive Medtronic, because I know you had a pediatric carve-out within that.

Did you sell many or any units to that part of the channel in the back half?.

Well, there is an exception process and we did work through that, but I don't think we've quantified how extensive that was.

Do you have any comments on that, John?.

Yes. There is an appeals process that we do pass on behalf of our customers that participate through. So, if they are interested in doing that, we'll help them move through that. Those are very individualized, so they are more one-off situation.

Carve-outs are for individuals that are 18 or younger, we continue to sell to that segment of the market as well as those that are part of the Federally funded program, the Medicare Medicaid..

Okay.

And then just -- you kind of said right into the next question, so with the G5 getting the Medicare reimbursements now, how does that affect your planning for the launch of the product as you get approval of the PMA supplement later this year?.

Well, haven’t we disclosed what percent of our base is, so -- Medicare, Medicaid, John?.

It's roughly 15%..

Yes. So, -- that's obviously helpful to those that want to use both CGM and the pump and we think the two together will give better outcomes. But we haven’t brought that -- broken that out as a separate contribution to our growth next year..

Okay..

I think what helps us is Ben, is just to be able to go into the HCP office and be able to address the entire population of demographics versus having to carve out certain either age sort of limitations or payer plan..

Yes. And the same for Dexcom because as they are trying to get into the Type 2 market more heavily as well as the Type 1 and Type 1 users are using pumps. So, that was good news for them and good news for us..

Indeed. Thank you..

Thank you..

Our next question comes from the line of Kristen Stewart from Deutsche Bank. Your line is open..

Hi, this is Samantha in for Kristen. Thanks taking the questions..

Okay..

I realize you won't be talking about the raise that you just announced to us to close today, but how should we be thinking about when that might factor into you reaching a breakeven? In your prepared remarks, you mentioned you might see profitability when you hit 15% of the insulin pump opportunities.

So, I guess how should we think about that and when do you expect to get to that point? And what are the drivers there? Thanks..

Sure. I'd like to be careful about what we discuss here in relation to the financing and SEC rules regarding sort of the talking about the financing.

I will say that we do believe that at the point that we achieve 15% market share, of which we are probably in the high teens -- I'm sorry the high single-digits today that we will have a 55% gross margin. And that's -- in 2017, we do expect the burn less cash than what we had burned in 2016. In 2016, we burned about $68 million.

So, that's probably all I can really say at this point in time..

All right. And then just a quick follow-up in your prepared remarks, you mentioned how clinical data was going to be more of an important part of the strategy. Can you provide just the bit more detail around that? And what kind of data we can expect from you guys this year? Thanks..

We'll have the results from our PLGS trials as well as our TypeZero trials that will be this year and next year. And that will be the -- really the first sort of multi-centered trial data that has control arms that we can point to better outcomes.

We haven’t had that in the past because we've the basically on five 10-K tracks and we haven’t had to do clinicals.

We also have through t:connect been able to mine patient outcomes for payers and so they find that very helpful in understanding whether we're contributing to better clinical benefits, because we can actually go in without doing a study, not in their center, we can show them what's happening with their patients over time.

So, that's the kind of thing that we really are focusing on in conjunction with product features, ease-of-use, use of more advanced features, and that sort of thing.

Does that answer your question?.

Yes. Thanks so much..

Great. Okay..

Thanks..

[Operator Instructions] Looks like we don't have any other questioners in the queue at this time. So, I'd like to turn the call back over to Kim Blickenstaff for closing remarks..

Thank you everybody for joining us today. We look forward to talking to you next quarter about our progress on all of these initiatives that we've talked about and we'll speak with you then. Thanks..

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may now disconnect at this time. Everyone have a great day..