Tandem Diabetes Care, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing was signed February 24, 2015. The company designs, manufactures and sells insulin pumps and related supplies; substantially all revenue was from U.S. sales of its t:slim pump and supplies.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 | Change / context |
|---|---|---|---|
| Revenue | $49.7 million | $29.0 million | Up 71%; pump shipments rose 67%, from 6,472 to 10,822. |
| Gross profit / margin | $15.2 million / 31% | $6.2 million / 21% | Improved with higher output and manufacturing efficiencies. |
| Operating expenses | $90.9 million | $55.6 million | Up 64%; SG&A rose 69% and R&D rose 43%. |
| Operating loss | $75.7 million | $49.4 million | Loss increased as commercial and development spending grew. |
| Net loss | $79.5 million | $63.1 million | Includes $71,000 income-tax expense in 2014. Accumulated deficit was $248.7 million. |
| Cash used in operations | $61.4 million | $47.8 million | Cash burn increased with expansion and working-capital needs. |
| Cash, cash equivalents and short-term investments | $67.3 million, plus $2.0 million restricted cash | $129.5 million, plus $2.1 million restricted cash | Year-end 2014 total including restricted cash was $69.3 million. |
| Working capital | $72.7 million | $134.4 million | Declined substantially year over year. |
| Debt | $30.0 million principal; $29.4 million carrying value | $29.4 million carrying value | Capital Royalty Partners term loan; 11.5% stated interest rate. |
Fourth-quarter 2014: Revenue was $17.9 million, gross profit $6.5 million, operating loss $17.5 million and net loss $18.5 million. Revenue increased sequentially from $13.5 million in Q3; quarterly net loss narrowed from $19.9 million.
Material changes and notable items
- Sales growth accompanied expansion from 36 to 60 U.S. sales territories. The sales, clinical and marketing organization was approximately 160 people at year-end; total full-time employment was 437.
- Revenue mix shifted toward distributors: distributors accounted for 75% of 2014 sales versus 69% in 2013. The three largest named distributors each represented at least 10% of sales, collectively about 38%; agreements are generally non-exclusive.
- SG&A growth included higher staffing and stock-based compensation. Total stock-based compensation rose to $15.0 million from $4.5 million.
- Other expense fell to $3.8 million from $13.7 million, mainly because 2013 included a $9.0 million warrant revaluation charge; 2014 interest expense was $3.9 million.
- Cash and cash equivalents fell from $124.4 million to $31.2 million, while short-term investments increased from $5.1 million to $36.1 million. Investing cash outflow included net purchases of short-term investments and $4.4 million of property and equipment.
Outlook, risks and contingencies
- Management expected continued net losses for several years and said further financing may be needed. It believed available cash, potential borrowing under the term-loan tranche and option/warrant proceeds would cover liquidity needs for at least 12 months.
- Management expected 2015 SG&A and R&D expenses to increase, but at a lower rate than in 2014. It expected seasonal sales patterns, with sales generally stronger later in the year.
- The FDA cleared t:flex in January 2015; Tandem planned U.S. commercial sales in Q2 2015. The company expected to meet the $50 million minimum 2015 revenue covenant under its existing loan.
- The company filed a PMA for the integrated t:slim G4 CGM system in July 2014 and anticipated a 12–18 month review. It also planned an IDE filing for a partial-automation clinical study in 2015 and a 510(k) submission for Odyssey software updates in Q4 2015. These were expectations, not approvals or guaranteed timelines.
- Key risks include dependence on t:slim and pump-related supplies, sustained losses and cash burn, reimbursement uncertainty, competition, execution of sales-force expansion, manufacturing and supplier constraints, and regulatory delays. Medicare had begun competitive bidding for insulin pumps in limited areas.
- A voluntary recall of selected t:slim cartridge lots began in January 2014 due to potential leaking. Direct costs were approximately $1.7 million; about 13,000 boxes had been shipped to customers or distributors, and approximately 6,000 had been replaced by year-end. The FDA determined the recall was terminated; the company said it did not expect further direct financial impact, but additional returns were uncertain.
- In February 2015, after year-end, the company amended its term loans to extend the interest-only period to December 31, 2019; principal is due at maturity on March 31, 2020. A potential additional $30 million tranche had not been drawn as of the filing date.
- There were no material legal proceedings reported and no material matters for which an adverse outcome was considered probable and estimable. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Whether t:flex launches on schedule and achieves adoption, reimbursement coverage and sales sufficient to meet the $50 million 2015 revenue covenant.
- Cash burn, liquidity runway, access to the undrawn loan tranche or other financing, and compliance with loan covenants.
- Gross-margin sustainability as product mix, distributor share, production volumes and automation change.
- Progress and timing of t:slim G4 regulatory review and other development programs, including clinical and regulatory requirements.
- Any further cartridge recall returns, product-quality issues, warranty costs or safety disclosures.
- Customer and distributor concentration, distributor contract renewals, and the impact of reimbursement or Medicare bidding changes.