Tandem Diabetes Care, Inc. — Q3 2016 Form 10-Q
Business context and period. Tandem designs, manufactures and sells insulin pumps and related supplies in the United States. This unaudited report covers the quarter and nine months ended September 30, 2016; balance-sheet comparisons are with December 31, 2015. The company reported ongoing operating losses and depended primarily on pump and supply sales.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $12.3 million | $15.7 million | $55.3 million | $43.7 million |
| Gross profit (loss) | $(1.6) million | $5.5 million | $13.5 million | $13.1 million |
| Gross margin | (13)% | 35% | 24% | 30% |
| Operating expenses | $26.8 million | $24.2 million | $78.2 million | $70.9 million |
| Operating loss | $(28.4) million | $(18.7) million | $(64.7) million | $(57.8) million |
| Net loss | $(29.8) million | $(19.6) million | $(68.6) million | $(60.3) million |
| Basic and diluted loss per share | $(0.97) | $(0.65) | $(2.25) | $(2.12) |
Cash flow and liquidity. For the nine months, operating cash use was $47.6 million, investing activities provided $5.9 million and financing activities provided $16.6 million; cash and cash equivalents declined $25.1 million. At September 30, cash and cash equivalents were $18.0 million, short-term investments $16.1 million and restricted cash $2.0 million, or $36.1 million combined including restricted cash. Current assets were $71.0 million versus current liabilities of $34.8 million.
Debt and capital. Aggregate term-loan borrowings were $45.8 million at September 30; the balance-sheet carrying amount was $44.7 million. The loan is secured by all company assets, bears 11.5% annual interest (with a portion permitted to be paid in kind), has interest-only payments through December 2019 and matures March 31, 2020. Stockholders’ equity was $5.2 million, down from $63.5 million at year-end 2015.
Changes versus prior comparable periods
- Q3 reported sales fell 22% year over year, even though aggregate pump shipments rose 14% to 3,896. Nine-month sales rose 27%, and pump shipments rose 35% to 12,520.
- The Technology Upgrade Program caused $8.4 million of Q3 eligible pump sales and $1.4 million of cost of sales to be deferred. Management attributed a net $7.0 million reduction in gross profit to the program. A separate $1.1 million inventory-obsolescence charge reduced Q3 gross margin by nine percentage points.
- Nine-month gross margin declined to 24% from 30%, despite slightly higher gross profit, as sales growth was accompanied by higher costs and upgrade-program effects.
- Net loss widened in both the quarter and nine-month period. SG&A and R&D expenses increased, while interest expense also rose following the January 2016 $15.0 million loan draw.
- Cash and cash equivalents fell from $43.1 million at December 31, 2015 to $18.0 million at September 30, 2016; total assets fell from $124.7 million to $90.3 million.
Outlook, commentary and risks
- Management said available cash, operating cash, potential loan availability and other sources were expected to meet liquidity needs for at least the next 12 months. The company nevertheless expected losses for the next several years and said additional capital might be needed; no specific revenue or earnings guidance was provided.
- The company had a one-time option to draw up to another $35 million under its term loan in $5 million increments by December 31, 2016. It reported compliance with loan covenants at September 30. Minimum annual revenue covenants are $65 million for 2016 and $80 million for 2017.
- The upgrade program, running through September 30, 2017, creates substantial uncertainty in reported sales and margins. The company said it could not estimate when deferred sales and costs would be recognized or how many customers would exercise trade-in rights. At quarter-end, $7.6 million was recorded as a trade-in reserve in deferred revenue and $0.9 million as a guarantee liability.
- In July, Tandem received FDA clearance for its Device Updater. In October 2016, after quarter-end, it began shipping the t:slim X2 and discontinued new shipments of the original t:slim; existing customers would continue to receive service and support. The X2 was designed for software updates, but the filing said future features were not then available.
- Management said the launch timing and upgrade program likely delayed some purchases. It also cited competitor launches and UnitedHealthcare’s July 2016 designation of a competitor as its preferred in-network insulin-pump provider for most members over age 18, which management expected to limit access to Tandem products for a majority of those members.
- Key risks include continued losses and cash burn, uncertain upgrade-program accounting and fulfillment costs, reimbursement and payor access, competition, manufacturing and supplier execution, product and regulatory risks, and the ability to raise additional capital. The filing reported no material legal matter for which loss was considered probable or estimable. Disclosure controls were assessed as effective; new financial-reporting procedures were implemented for the upgrade program.
Important facts for investors to verify
- Subsequent results: X2 shipments, pump volumes and demand following the October launch, alongside any further product transitions or competitor launches.
- Upgrade-program accounting: trade-in participation, deferred revenue and costs, liabilities, fulfillment spending, and when deferred amounts are recognized.
- Liquidity and financing: cash burn, unrestricted liquidity, any additional term-loan draw or equity financing, and covenant compliance against the 2016 revenue threshold.
- Payor access: the impact of UnitedHealthcare’s preferred-provider decision and any changes in other reimbursement contracts or coverage.
- Margin recovery: inventory obsolescence, warranty costs, product mix, manufacturing efficiency and the effect of deferred upgrade-program sales.