Tandem Diabetes Care, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Tandem designs and sells insulin pumps and related supplies, primarily in the United States. Its flagship platform was t:slim X2, including the Dexcom G5-integrated version.
Financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Sales | $27.3 million | $19.0 million |
| Gross profit / margin | $11.4 million / 42% | $6.8 million / 36% |
| Operating expenses | $26.9 million | $28.0 million |
| Operating loss | $15.5 million | $21.2 million |
| Net loss | $32.7 million | $23.8 million |
| Net cash used in operations | $12.3 million | $20.8 million |
- Sales increased 44% year over year. Pump shipments rose 58%, to 4,444 from 2,816. Pump sales were $17.1 million; pump-related supplies were $10.2 million.
- Gross margin improved by six percentage points, reflecting higher volumes and manufacturing efficiencies. SG&A fell 8% to $20.9 million; R&D rose 16% to $6.0 million, mainly due to Basal IQ clinical-trial costs.
- Net loss widened primarily because of a $14.2 million non-cash loss from revaluing common stock warrants. Excluding that item, operating loss improved year over year.
- Cash, cash equivalents and short-term investments totaled $71.9 million, plus $10.0 million of restricted cash, at March 31. Total assets were $144.7 million; total liabilities were $132.9 million.
- Term-loan principal was $82.7 million; the balance-sheet carrying amount was $76.4 million. The loan bears an 11.5% annual rate, is interest-only through December 2019 and matures March 31, 2020. It is secured by all company assets. A 6% back-end financing fee applies under the amended agreement.
Changes, outlook and material items
- The February 2018 public offering of 34.5 million shares at $2.00 per share generated $69.0 million gross and approximately $64.2 million net proceeds. The substantial share issuance is a material source of liquidity and dilution.
- Management said available liquidity should fund operations for at least 12 months from the filing, while also expecting operating losses and negative operating cash flows to continue for at least the next 12 months. Profitability depends on sales growth, pump renewals, supplies growth and manufacturing efficiencies; no numerical revenue or earnings forecast was provided.
- The term-loan covenant requires at least $95 million of annual revenue in 2018 and each year thereafter through maturity. A February amendment waived a potential going-concern-related default and required an equity financing of at least $20 million by August 30, 2018; the February offering satisfied that requirement.
- Management targeted a summer 2018 launch of t:slim X2 with Basal IQ, subject to FDA approval; the PMA was submitted in late February. Control IQ was targeted for the first half of 2019, subject to trial results and approval. The company also planned international launches in select markets during 2018 and a first-generation mobile app in 2018.
- In April 2018, after quarter-end, Tandem initiated a voluntary recall of 55 t:slim G4 pumps shipped from December 16, 2016 to June 21, 2017, citing a higher-than-normal risk of inaccurate battery readings that could unexpectedly suspend insulin delivery. The FDA had previously issued two inspection observations at the new facility and said it would revisit them at a future inspection.
- The company adopted the new revenue-recognition standard in January 2018, recording a $149,000 reduction to opening accumulated deficit; management said most revenue accounting was not affected. The Technology Upgrade Program had expired in September 2017, but its prior-period accounting effects complicate comparisons.
- Other risks include continued losses and financing needs, covenant compliance and debt service, competition and reimbursement restrictions, reliance on distributors and suppliers, regulatory and clinical approval timelines, manufacturing execution, and product safety. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. No legal matter was identified as probable and reasonably estimable at quarter-end.
Investor verification priorities
- Track pump and supply sales, shipment growth, customer renewals, distributor purchases and gross-margin progress.
- Confirm Basal IQ regulatory and launch milestones, international approvals and launches, and Control IQ trial progress.
- Assess cash burn against available unrestricted liquidity, future financing needs and the $95 million annual-revenue covenant; note the $10 million restricted cash balance.
- Review the impact of the large equity issuance, warrant exercises and remaining warrant-related fair-value volatility on dilution and reported losses.
- Monitor recall resolution, FDA follow-up at the Barnes Canyon facility, product quality and supply-chain performance.