Tandem Diabetes Care, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed March 8, 2017. This is an annual report, not a standalone fourth-quarter filing. Tandem develops and sells insulin pumps and related supplies. In October 2016 it launched its t:slim X2 flagship pump and discontinued new sales of t:slim.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Sales | $84.2 million | $72.9 million |
| Gross profit / margin | $23.6 million / 28% | $26.6 million / 36% |
| Operating loss | $78.1 million | $69.0 million |
| Net loss | $83.4 million | $72.4 million |
| Net loss per share | $2.73 | $2.50 |
| Cash used in operating activities | $61.2 million | $58.8 million |
- Sales rose 15.6%; pump shipments increased 9%, from 15,483 to 16,938. Pump-related supplies contributed $21.4 million of 2016 sales, versus $11.9 million in 2015.
- Cash and short-term investments totaled $53.5 million at year-end, excluding $2.0 million of restricted cash; total including restricted cash was $55.5 million. Working capital was $60.6 million, down from $80.5 million.
- Term-loan borrowings were $81.1 million at year-end; the balance sheet reported $79.0 million of long-term notes payable, net. Interest was 11.5% annually, with the company electing to pay 9.5% in cash and add 2.0% to principal. The debt is secured by all company assets.
- Stockholders’ equity moved from $63.5 million to a deficit of $5.9 million. Accumulated deficit reached $404.6 million.
- Q4 2016: Revenue was $28.9 million, gross profit $10.1 million, operating loss $13.3 million and net loss $14.8 million. Q4 2015 revenue was $29.1 million and net loss was $12.1 million.
Changes and unusual items
- Gross margin fell to 28% from 36%. The Technology Upgrade Program reduced 2016 gross profit by a net $4.6 million and gross margin by about four percentage points. The company deferred $4.3 million of net sales and $0.8 million of cost of sales, and recognized $1.1 million of incremental cost for 1,413 pump upgrades.
- A $2.8 million inventory excess-and-obsolescence charge—associated with the t:slim X2 launch, the upgrade program and lower-than-anticipated t:slim G4 sales—reduced gross margin by about three percentage points.
- Sales and shipments were affected by customers delaying purchases ahead of the t:slim X2 launch and by UnitedHealthcare’s decision, effective July 2016, to prefer a competitor’s pump for most members over age 18. Two distributors accounted for 32.7% of sales in 2016.
- Research and development expense rose to $18.8 million from $17.0 million; selling, general and administrative expense rose to $82.8 million from $78.6 million.
Liquidity, outlook and principal risks
- Going concern: Management concluded available cash and expected operating cash flows would not fund operations through December 31, 2017 without additional financing. The auditor’s report includes an explanatory paragraph stating that substantial doubt exists about the company’s ability to continue as a going concern. The financial statements do not include adjustments that might result if the company cannot continue as a going concern.
- Management said it believed an equity financing would be necessary; it provided no specific revenue or earnings guidance. It expected 2017 sales to be weighted toward the second half, partly reflecting anticipated G5 integration, improving sales-force productivity and a return to historical customer purchasing patterns. These plans depended on regulatory approval and other execution factors.
- In a March 7, 2017 amendment, lenders waived a potential default related to the going-concern paragraph. Tandem agreed to raise at least $30 million in gross equity proceeds by January 15, 2018, maintain at least $10 million in cash, issue warrants for 1,937,890 shares at $2.35, and accept an increase in the back-end financing fee from 3% to 5% of outstanding borrowings. Failure to meet covenants could accelerate repayment.
- Product development priorities included t:slim X2 with DexCom G5 integration, predictive low-glucose suspend, a TypeZero automated insulin delivery system and the smaller t:sport pump. Timing and commercial availability were subject to trials, FDA review and other uncertainties. The company also planned a manufacturing-facility transition during 2017, with expected temporary duplication and incremental costs.
- Key risks include continued large operating losses and cash burn; the need for financing and potential shareholder dilution; debt service and covenant compliance; reimbursement and distributor concentration; competitive products and pricing; regulatory and clinical-trial delays; manufacturing and supplier constraints; product reliability and liability; and the uncertain accounting and customer response to the upgrade program.
Important facts for investors to verify
- Whether Tandem completed the required $30 million equity financing by the lender deadline and maintained the amended minimum cash balance.
- Subsequent cash burn, liquidity, debt terms, covenant compliance and any updated going-concern disclosure.
- Actual customer participation and eventual revenue and cost recognition under the Technology Upgrade Program, including any further margin effects.
- Progress and FDA status of G5 integration and automated-delivery products, and whether launch timelines or clinical evidence changed.
- Sales and reimbursement trends following UnitedHealthcare’s restriction, distributor concentration, and the t:lock connector and facility-transition execution.