Tandem Diabetes Care, Inc. — Q1 2017 Form 10-Q
Business context and period. Medical-device company selling insulin pumps and related supplies in the U.S. The quarter ended March 31, 2017; comparisons are with Q1 2016 unless stated. Products included t:slim X2, t:flex and t:slim G4. The company reported more than 53,000 pumps shipped since launch.
Financial performance
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Sales | $19.0 million | $20.1 million |
| Gross profit; gross margin | $6.8 million; 36% | $6.9 million; 35% |
| Operating expenses | $28.0 million | $26.2 million |
| Operating loss | $21.2 million | $19.2 million |
| Net loss; loss per share | $23.8 million; $0.75 | $20.5 million; $0.68 |
| Cash used in operations | $20.8 million | $15.9 million |
| Cash and cash equivalents at quarter-end | $40.3 million | $44.7 million at Dec. 31, 2016 |
| Cash, cash equivalents and short-term investments, including restricted cash | $54.0 million | — |
| Term-loan borrowings outstanding | $81.5 million | $81.1 million at Dec. 31, 2016 |
At March 31, cash and cash equivalents were $40.3 million, short-term investments $3.7 million and restricted cash $10.0 million. Total current liabilities were $29.2 million; the balance sheet reported total liabilities of $114.6 million and a stockholders’ deficit of $1.9 million. Capital spending was $2.6 million. Financing provided $13.9 million net, including public-offering proceeds and an $8.0 million increase in restricted cash.
Material changes and management commentary
- Sales fell 5% year over year, while pump shipments declined 30%, from 4,042 to 2,816. Pump sales decreased from $16.2 million to $12.5 million; supplies sales increased from $3.9 million to $6.4 million.
- The company said the decline reflected lower pump shipments, including effects from the t:slim X2 launch and UnitedHealthcare’s restriction on access to the company’s pumps for most members over age 18. Increased supplies sales and $1.5 million of incremental net sales recognized under the Technology Upgrade Program partly offset the decline.
- Gross margin improved to 36% from 35%, which management attributed in part to manufacturing efficiencies, lower warranty costs and recognition of previously deferred program sales. Gross profit nevertheless decreased slightly.
- SG&A rose 4% to $22.8 million, primarily due to customer and technical support staffing. R&D rose 23% to $5.1 million, reflecting product-development costs. Net interest and other expense increased to $2.6 million from $1.2 million, largely because of higher term-loan debt.
- The March public offering sold 18.5 million shares at $1.25 each for $23.1 million gross proceeds. The filing reports differing net-proceeds figures: approximately $21.2 million in MD&A and $21.6 million in the cash-flow statement.
Outlook, financing and risks
- Going concern: Management concluded available cash was insufficient to fund operations for the next 12 months without additional financing, creating substantial doubt about the company’s ability to continue as a going concern. The financial statements assume continued operations and do not reflect possible adjustments if that assumption fails.
- Financing covenant: The March 2017 loan amendment requires at least $30 million in gross proceeds from an equity financing by January 15, 2018; the recent offering did not satisfy this requirement. The amendment also raised the back-end financing fee to 5% of aggregate principal and required restricted cash of $10 million.
- The term loan had an 11.5% stated annual interest rate, interest-only payments through December 31, 2019 and a March 31, 2020 maturity. It is secured by all company assets. Revenue covenants require at least $80 million in 2017 and $95 million annually thereafter.
- Management expected 2017 sales to be weighted toward the second half, partly due to anticipated DexCom G5 integration for t:slim X2 and customers returning to historical purchasing patterns. It anticipated increased infusion-set sales following a planned second-half t:lock connector transition. These plans depend on regulatory clearances, execution and market acceptance; no formal earnings guidance is provided in the supplied filing text.
- The Technology Upgrade Program, expiring September 30, 2017, makes revenue and cost-of-sales timing difficult to forecast; eligible sales may be deferred until obligations are fulfilled or the program expires. Management also cited near-term costs and possible inefficiencies from relocating manufacturing operations by year-end 2017.
- Other key risks include continued operating losses, high cash burn and debt service, inability to raise capital or meet loan covenants, competition and reimbursement restrictions, product and regulatory risks, supplier dependence, and execution of product development and manufacturing transitions. No legal matters were identified as probable and estimable at quarter-end.
Important facts for investors to verify
- Cash runway, financing plans and progress toward the $30 million equity-financing covenant deadline.
- Loan covenant compliance, liquidity restrictions, debt service and the effect of the 5% back-end financing fee.
- Underlying sales and shipment trends, including UnitedHealthcare access, supply-sales growth and the timing and accounting effects of the Technology Upgrade Program.
- Regulatory status and launch timing for DexCom G5 integration and the t:lock connector, and costs or disruption from the facility transition.
- Public-offering net proceeds: the filing cites approximately $21.2 million in MD&A and $21.6 million in the cash-flow statement.