Tandem Diabetes Care, Inc. — Q3 2017 Form 10-Q
Business context and period. Tandem designs, manufactures and sells insulin pumps and related supplies, primarily in the United States. This unaudited report covers the three and nine months ended September 30, 2017; comparisons are with the same 2016 periods. Amounts below are in U.S. dollars. The company effected a 1-for-10 reverse stock split on October 9, 2017, and reported share and per-share figures have been adjusted accordingly.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $27.0m | $12.3m | $67.3m | $55.3m |
| Gross profit (loss) | $11.9m | $(1.6)m | $26.6m | $13.5m |
| Gross margin | 44% | (13)% | 40% | 24% |
| Operating expenses | $25.0m | $26.8m | $80.0m | $78.2m |
| Operating loss | $(13.2)m | $(28.4)m | $(53.4)m | $(64.7)m |
| Net loss | $(16.0)m | $(29.8)m | $(61.6)m | $(68.6)m |
- Q3 sales included $3.3m recognized from the Technology Upgrade Program; nine-month sales included $4.8m related to the program. The program’s expiration on September 30 released most remaining deferred sales and costs, complicating year-over-year comparisons.
- Q3 pump shipments were 3,868, nearly unchanged from 3,896 a year earlier. Nine-month shipments fell 19%, to 10,111 from 12,520. Pump sales for the nine-month period declined, while pump-supply sales rose, particularly infusion sets.
- Management attributed improved gross profit to program-related recognition, manufacturing efficiencies and lower warranty costs. The comparable 2016 periods included a $1.1m inventory-obsolescence charge. Supply sales generally carry lower margins than pump sales.
- Q3 SG&A decreased 3% to $20.1m and R&D decreased 20% to $4.9m. Nine-month SG&A rose 2% to $65.1m and R&D rose 3% to $14.9m; 2017 expenses included charges following suspension of the employee stock purchase plan.
- Operating cash use was $54.5m for the first nine months, versus $47.6m in 2016. Investing activities provided $4.2m and financing provided $17.7m; cash and cash equivalents declined by $32.6m to $12.1m.
- At September 30, cash, cash equivalents and short-term investments totaled about $22.5m including $10.0m of restricted cash; excluding restricted cash, these resources were about $12.5m. Inventory was $30.0m, up from $21.2m at year-end, primarily due to the t:lock launch.
- Term-loan borrowings were $82.3m in principal; the balance-sheet carrying amount was $75.6m after discounts and fees. The loan bears 11.5% annual interest, with principal due March 31, 2020. Interest-only payments run through December 2019; the loan is secured by all company assets.
- Accumulated deficit was $466.2m at September 30. The company reported a substantial doubt about its ability to continue as a going concern without additional financing.
Changes, outlook and material matters
- Products and market. Tandem began selling the t:slim X2 with Dexcom G5 integration in August 2017 and t:lock-compatible supplies in September; it discontinued new sales of t:slim G4. The Technology Upgrade Program expired at quarter-end.
- Factors affecting sales. Management cited the timing of the G5 approval, hurricanes Harvey and Irma, competitive conditions, and customer concerns about Tandem’s financial stability. UnitedHealthcare’s 2016 preferred-provider decision continued to restrict access for most of its members. Following Animas’ announced exit from insulin pumps in October 2017, Tandem reported increased inquiries but said the eventual business impact was uncertain.
- Financing after quarter-end. On October 17, Tandem completed an offering of 4.63m shares with Series A and Series B warrants for gross proceeds of approximately $16.2m, before expenses. Full exercise of each warrant series could produce a further $16.2m gross per series; exercise is not assured. Together with 2017 equity proceeds, the offering satisfied the loan agreement’s $30m equity-financing covenant, but other covenants remain. The company said further funding would still be necessary.
- Debt and liquidity risk. The loan requires minimum annual revenue of $80m in 2017 and $95m in each subsequent year through maturity. An amendment increased the back-end financing fee to 5% of aggregate principal and imposed other restrictions, including a $10m restricted-cash requirement. Failure to satisfy loan covenants could trigger default and accelerated repayment.
- Product development outlook. Management’s stated goals, subject to successful trials and FDA approval, were a t:slim X2 predictive low glucose suspend product in summer 2018 and a TypeZero-integrated automated insulin delivery product in the first half of 2019. A first-generation mobile application was targeted for 2018; timing for the t:sport pump depended on resources and FDA discussions. These are goals, not guaranteed launch dates.
- Manufacturing and regulatory. Tandem was transitioning manufacturing to a new facility and expected to complete the move by year-end 2017. An FDA inspection generated a Form 483 with two observations; corrective actions were underway, with the outcome uncertain. Delays, additional costs or further FDA action could affect operations.
- Other items. The company recognized $1.1m of remaining guarantee liabilities as sales when the upgrade program expired. It reported no legal matters for which loss was considered probable or estimable. Disclosure controls were judged effective as of September 30, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of reported sales and gross-margin improvement reflects recurring product demand and manufacturing performance versus the one-time expiration accounting for the Technology Upgrade Program.
- Whether available unrestricted liquidity, including net proceeds from the October offering, can fund operations and whether additional financing can be raised on acceptable terms.
- Progress against the loan’s $80m 2017 revenue covenant, minimum liquidity requirements and all remaining debt covenants.
- Whether t:slim X2 with G5 and t:lock drive sustained pump and supply adoption, given flat Q3 pump shipments and lower year-to-date shipments.
- The outcome of FDA follow-up on the two Form 483 observations and the timing, cost and operational effects of the new-facility transition.
- Clinical, regulatory and commercial progress for products under development, and the potential effects of competition, reimbursement decisions and the Animas transition.