Tandem Diabetes Care, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Tandem designs, manufactures and sells insulin pumps and related supplies in the U.S.; products included t:slim X2, t:flex and t:slim G4.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales | $21.3 million | $23.0 million | $40.3 million | $43.0 million |
| Gross profit / margin | $8.0 million / 38% | $8.2 million / 36% | $14.8 million / 37% | $15.1 million / 35% |
| Operating loss | $(19.0) million | $(17.1) million | $(40.2) million | $(36.3) million |
| Net loss | $(21.8) million | $(18.3) million | $(45.6) million | $(38.8) million |
| Net loss per share, basic and diluted | $(0.44) | $(0.60) | $(1.11) | $(1.28) |
- Q2 sales fell about 7% year over year; first-half sales fell about 6%. Pump shipments declined 25% in Q2 and 28% for the first half. Greater pump-supply sales partially offset lower pump sales.
- Gross margin improved, principally from lower per-unit costs, manufacturing efficiencies and reduced warranty costs. Operating expenses rose: first-half SG&A was $45.0 million and R&D was $10.0 million.
- Net cash used in operations was $35.5 million in the first half, versus $29.4 million a year earlier. Capital expenditures were $4.1 million. Cash and cash equivalents were $27.4 million; short-term investments were $0.4 million. The reported $37.8 million total including restricted cash is not wholly available for operations; $10.0 million was restricted under the loan agreement.
- Term-loan principal was $81.9 million, bearing 11.5% annual interest; the balance-sheet carrying amount was $74.7 million. Interest-only payments run through December 2019, with principal due March 2020. Total liabilities were $116.8 million and stockholders’ deficit was $18.3 million.
- In March, Tandem raised $21.1 million net through a public offering of 18.5 million shares at $1.25 each. Shares issued and outstanding increased to 50.2 million from 31.1 million at year-end 2016.
Material changes and unusual items
- UnitedHealthcare’s decision to make a competitor its preferred in-network insulin-pump provider for most members over age 18, effective July 2016, restricted access to Tandem pumps and contributed to lower pump sales.
- The Technology Upgrade Program, expiring September 30, 2017, creates revenue and cost deferrals. It added approximately $1.5 million to first-half sales and $0.6 million to gross profit. Tandem expected to recognize most remaining deferred sales and costs in Q3 2017; amounts depend on customer elections and program accounting.
- Tandem suspended its Employee Stock Purchase Plan in May due to a lack of available shares. Previously unrecognized compensation cost of $2.4 million was expensed in Q2, contributing to higher reported stock-based compensation.
- Interest and other expense for the first half rose to $5.5 million from $2.7 million, primarily reflecting higher borrowing and related debt costs.
Outlook, financing and risks
- Going concern: Management concluded that available funds were insufficient to finance operations for the next 12 months without additional funding, creating substantial doubt about Tandem’s ability to continue as a going concern. Management said additional capital was necessary; no assurance was given that financing would be available on acceptable terms or at all.
- The loan amendment requires at least $30 million of gross equity-financing proceeds by January 15, 2018; the March offering did not satisfy the covenant. The amendment also raised the back-end financing fee to 5% of aggregate principal, imposed additional restrictions, and required $10 million of restricted cash. The term loan is secured by all company assets and includes minimum annual revenue covenants of $80 million for 2017 and $95 million annually thereafter.
- Management expected 2017 sales to be weighted toward the second half, citing anticipated t:slim X2 with G5 timing and a return toward historical customer purchasing patterns. It expected t:lock Connector transition to support infusion-set sales from the second half. These expectations are subject to regulatory approval, execution and market acceptance; the filing gives no clear full-year revenue or earnings guidance.
- Product-development milestones included t:slim X2 with G5 under FDA review, with a planned launch within 30 days after approval; a pivotal trial of the predictive low-glucose-suspend system expected to begin in Q3 2017, with a targeted summer 2018 launch; and a TypeZero-based system targeted for the end of 2018, subject to trial results and FDA approval. These are company targets, not assured outcomes.
- Key risks include continuing losses and cash burn, financing and debt-covenant requirements, competitive pressure and reimbursement access, Technology Upgrade Program accounting, manufacturing relocation costs, regulatory and clinical-trial delays, and supplier dependence. Tandem also disclosed a NASDAQ minimum-bid-price deficiency notice received June 14, 2017 and proposed a possible reverse stock split. No legal matters were identified as both probable and estimable; no off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether Tandem secured sufficient financing to fund operations and met the $30 million equity-financing covenant by January 15, 2018.
- Cash runway after excluding restricted funds, subsequent operating cash use, and compliance with loan covenants and minimum revenue requirements.
- Actual pump shipments, sales trends and payor access, including the impact of UnitedHealthcare and growth in recurring supplies.
- Q3 recognition and customer participation outcomes under the Technology Upgrade Program, which expired September 30, 2017.
- FDA decisions and launch timing for G5 integration, t:lock and the pipeline systems, alongside manufacturing-transition costs and NASDAQ listing compliance.