Tandem Diabetes Care, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts below are in millions of dollars unless noted. Financial statements are unaudited.
Business context
Tandem develops and sells insulin pumps and related supplies in the United States. During 2015 it launched the t:flex pump for people with greater insulin needs and, in September, the t:slim G4 pump integrated with DexCom’s CGM system. The company reported more than 28,000 pumps shipped since commercialization.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Sales | $15.7 | $13.5 | $43.7 | $31.8 |
| Gross profit | $5.5 | $4.4 | $13.1 | $8.7 |
| Gross margin | 35% | 33% | 30% | 27% |
| Operating loss | $(18.7) | $(19.0) | $(57.8) | $(58.2) |
| Net loss | $(19.6) | $(19.9) | $(60.3) | $(61.1) |
| Net loss per share, diluted | $(0.65) | $(0.85) | $(2.12) | $(2.64) |
- Q3 pump shipments rose 17% to 3,431; nine-month shipments rose 34% to 9,249. Q3 2015 sales included $8.7 million from t:slim, $2.2 million from t:flex and $1.9 million from t:slim G4.
- Operating expenses were $24.2 million in Q3 and $70.9 million for nine months. SG&A was $19.1 million and $58.1 million, respectively; R&D was $5.1 million and $12.8 million.
- Cash used in operating activities was $48.5 million for nine months, versus $47.8 million a year earlier. Capital expenditures were $4.1 million.
- At September 30, cash and cash equivalents were $43.2 million, short-term investments $38.5 million, and restricted cash $2.0 million. Management reported $83.8 million in total cash, cash equivalents and short-term investments including restricted cash, and said resources were expected to cover liquidity needs for at least 12 months.
- Total assets were $128.5 million; current assets $110.9 million and current liabilities $22.3 million. Total liabilities were $57.3 million.
- Long-term notes payable were $29.5 million, representing $30.0 million principal outstanding. The loan bears 11.5% cash interest; interest-only payments run through December 31, 2019, with principal due March 31, 2020. Debt is secured by all company assets.
Changes, outlook and material items
- Nine-month sales increased 37%, mainly reflecting 34% more pump shipments and the addition of t:flex and t:slim G4. Gross margin improved, which management attributed chiefly to higher production volumes and manufacturing efficiencies. The company remained substantially loss-making.
- Management said anticipated t:slim G4 approval and launch delayed some customer purchasing decisions in Q3; post-launch customers also needed time for product evaluation and insurance approvals. Management expected 2015 sales to be weighted more heavily toward Q4, but provided no numeric sales or earnings guidance.
- The t:slim G4 exchange program ended in early October. The company expected 178 recently shipped t:slim or t:flex pumps to be exchanged. It deferred $0.7 million of revenue and $0.23 million of cost of sales; related amounts were expected to be recognized on exchange fulfillment, anticipated in Q4.
- The Capital Royalty loan requires minimum annual revenue of $50 million in 2015, rising to $65 million in 2016 and $80 million in 2017. Tandem said it was in compliance with all loan covenants at September 30, 2015.
- In October 2015, JDRF asserted that an interruption had occurred under the t:dual development agreement and requested $1.3 million, or resumption of development. Dispute-resolution procedures began. Tandem had not accrued a potential loss at September 30; it said the outcome and any liability could not then be predicted.
- Management expected losses to continue for several years and said additional capital might be needed. Key risks include product adoption and reimbursement, competition, manufacturing and supplier capacity, regulatory compliance, product safety and recalls, and dependence on distributor channels. The 2014 cartridge recall had been terminated by the FDA as of December 31, 2014.
Most important facts for investors to verify
- Whether Q4 sales met the loan’s $50 million minimum annual revenue covenant and how the new products affected demand and margins.
- Actual cash burn, available unrestricted liquidity, and the timing of any additional financing needs.
- The final number and financial impact of t:slim G4 exchanges, including recognition of the deferred revenue and cost of sales.
- The resolution of the JDRF dispute and whether it results in a payment, resumed development, or other obligations.
- Whether reimbursement coverage, manufacturing scale-up, product quality and distributor relationships support continued shipment growth.