Tandem Diabetes Care, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Interim financial statements are unaudited. Tandem develops and sells insulin pumps and related supplies; its U.S. products included t:slim, t:flex and the CGM-enabled t:slim G4.
Financial results and position
- Q2 revenue: $23.0 million, up 46% from $15.7 million in Q2 2015. Six-month revenue was $43.0 million, up 54% from $28.0 million.
- Shipments: 4,582 pumps in Q2 versus 3,331 a year earlier; 8,624 in the first half versus 5,818. Growth reflected higher pump shipments and supplies sales from the expanding installed base.
- Gross profit and margin: Q2 gross profit was $8.2 million and margin 36%, versus $4.8 million and 31%. First-half gross profit was $15.1 million and margin 35%, versus $7.6 million and 27%. Management attributed improvement mainly to production efficiencies and lower per-unit manufacturing overhead.
- Operating loss and net loss: Q2 operating loss was $17.1 million versus $18.7 million; net loss was $18.3 million, or $0.60 per share, versus $19.5 million, or $0.65. First-half operating loss was $36.3 million versus $39.1 million; net loss was $38.8 million, or $1.28 per share, versus $40.7 million, or $1.47.
- Expenses: Q2 operating expenses were $25.2 million, including $21.1 million SG&A and $4.1 million R&D. First-half operating expenses were $51.4 million. Commercial expansion drove much of the SG&A increase; R&D also rose modestly.
- Cash flow: First-half cash used in operations was $29.4 million versus $34.2 million. Investing activities provided $0.05 million, while financing provided $16.6 million, principally from new debt. Cash and cash equivalents declined $12.8 million to $30.3 million.
- Liquidity: Cash, cash equivalents and short-term investments totaled $56.3 million, including $2.0 million restricted cash; unrestricted cash and investments were approximately $54.3 million. Management believed available resources would meet liquidity needs for at least 12 months.
- Debt: Term-loan borrowings were $45.6 million at June 30, with a 11.5% total annual interest rate; the company elected to pay 9.5% in cash and capitalize 2.0% as payment-in-kind interest. The loan is secured by company assets, has interest-only payments through December 2019 and matures March 31, 2020. The company reported covenant compliance.
- Balance sheet: Total assets were $109.2 million, total liabilities $77.1 million and stockholders’ equity $32.1 million. Accumulated deficit was $359.9 million.
Material changes and notable items
- In January 2016, Tandem drew $15.0 million under an amended term loan and received an option to draw up to a further $35.0 million in $5.0 million increments by December 31, 2016. The lender’s minimum annual revenue covenant is $65 million for 2016, rising to $80 million for 2017.
- UnitedHealthcare’s decision, effective July 1, 2016, to designate a competitor as preferred in-network insulin-pump provider for most members over age 18 was expected to prevent a majority of its members from purchasing Tandem pumps for the foreseeable future.
- In July 2016, Tandem received FDA clearance for its Device Updater, enabling remote software updates. Management planned to begin shipping the t:slim X2 in Q4 2016 and expected G5 sensor integration in 2017, subject to regulatory clearance.
- The Technology Upgrade Program for eligible t:slim and t:slim G4 customers is expected to begin affecting results in Q3 2016. Because participation is difficult to estimate, Tandem expected to defer some or all eligible pump revenue and related cost of sales until obligations are met or the program expires on September 30, 2017. Management cautioned that the program and anticipated t:slim X2 launch could delay purchases, reduce shipments and make results harder to forecast.
- A new facilities lease signed June 30 provides for an expected 84-month term beginning around December 1, 2016. Initial base rent is approximately $45,000 monthly, with annual increases, and Tandem intends to use up to about $3.4 million in tenant-improvement allowance, bearing 8% interest, for facility improvements.
- The JDRF development agreement was terminated by mutual agreement in February 2016; Tandem repaid $0.7 million during Q1.
Outlook, risks and contingencies
- Management expected continued losses for several years and acknowledged that profitability may not be achieved. It cited growth in sales, manufacturing efficiencies and shared product infrastructure as important to the longer-term path to profitability.
- Management expected continued investment in commercialization, R&D, manufacturing capacity and facilities. It noted that further financing could be needed if operating cash and available funding prove insufficient; additional equity could dilute shareholders and debt could impose restrictive covenants.
- Key risks include reimbursement and coverage access, the UnitedHealthcare change, competition, product acceptance, manufacturing scale-up and supplier dependence, regulatory clearance, product quality and liability, and the execution and accounting effects of the upgrade program. Quarterly results may fluctuate with product launches, seasonality, reimbursement and customer purchase timing.
- The term loan includes a back-end financing fee equal to 3% of specified additional-tranche borrowings and related PIK interest; $0.5 million was accrued at June 30, 2016. No material legal matter was reported as probable and estimable, and Tandem stated it was not party to material legal proceedings.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether revenue growth and pump shipments can offset ongoing operating losses and cash burn.
- How the UnitedHealthcare policy affects orders, distributor sales, reimbursement access and future revenue.
- The actual participation, revenue and cost deferrals, and shipment effects of the Technology Upgrade Program.
- Progress and regulatory status of the t:slim X2 and planned CGM integration, as well as execution of the Device Updater.
- Liquidity runway, potential use of the remaining $35 million loan option, covenant headroom and the cost of high-interest secured debt.
- Manufacturing efficiency, warranty costs and facility transition risks, including actual tenant-improvement spending and lease obligations.