DexCom, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2015, compared with the same period in 2014. DexCom develops and commercializes continuous glucose monitoring systems, primarily its G4 PLATINUM product line. The G4 PLATINUM with Share launched in the U.S. during Q1.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $72.8 million | $47.1 million |
| Gross profit | $46.5 million | $29.8 million |
| Gross margin | 63.9% | 63.3% |
| Operating expenses | $59.2 million | $42.1 million |
| Operating loss | $12.7 million | $12.3 million |
| Net loss | $12.9 million | $12.5 million |
| Basic and diluted loss per share | $0.17 | $0.17 |
| Operating cash flow | $3.4 million | $(2.4) million |
| Capital expenditures | $8.0 million | $3.9 million |
Revenue was up approximately 55%, driven mainly by higher durable-system and disposable-sensor sales as the G4 installed base grew. Product revenue was $72.8 million; development and other revenue was nil, versus $0.4 million in Q1 2014. Operating expenses rose to $59.2 million, including R&D of $19.8 million and SG&A of $39.4 million. Gross margin percentages above are calculated from reported revenue and gross profit.
Operating cash flow improved, but included $15.9 million of share-based compensation, a non-cash expense. Investing activities used $25.9 million, primarily for marketable securities and equipment; financing activities provided $4.9 million. Cash and cash equivalents were $54.2 million at quarter-end; short-term marketable securities were $29.6 million, for combined cash, equivalents and securities of $83.8 million, excluding $1.0 million of restricted cash. Working capital was $109.2 million.
Total debt was $4.1 million ($2.4 million current and $1.7 million long-term). The $15.0 million revolving credit line was undrawn and available as of March 31, 2015; it matures in November 2015. Stockholders’ equity was $148.6 million, and accumulated deficit was $510.7 million.
Material changes versus Q1 2014
- Product revenue increased $26.1 million, attributed primarily to increased sales volume of durable systems and sensors.
- Gross profit increased $16.7 million; gross margin was broadly stable. The quarter included $2.7 million of additional cost of goods sold associated primarily with excess and obsolete inventory and a $0.8 million revenue deferral, mainly related to an upgrade program following the Share launch.
- R&D increased $5.3 million, mainly from additional headcount and future-product development. SG&A increased $11.8 million, primarily from selling headcount and IT infrastructure. Share-based compensation expense rose to $15.9 million from $8.7 million.
- Net loss widened by $0.4 million despite strong revenue growth, as operating expenses grew. Loss per share remained $0.17.
- Operating cash flow improved by $5.8 million, primarily reflecting higher non-cash charges, especially share-based compensation.
Outlook, commentary and risks
Management expects continued net losses as commercialization, R&D and infrastructure expand. It believes cash, cash equivalents, marketable securities and projected operating and partnership cash contributions will fund anticipated needs through at least March 31, 2016. No specific revenue or earnings guidance is provided. Management states that profitability depends on revenue becoming sufficient to support the cost structure and that additional financing may be needed; it is not assured on acceptable terms.
Key disclosed risks include limited and potentially constrained manufacturing capacity, reliance on single-source suppliers, product and regulatory risks, competition, and the dependence of adoption on reimbursement. Medicare had not adopted a national coverage decision for CGM; private-payor coverage remained subject to eligibility and documentation requirements. Stocking distributors accounted for 61% of revenue and drop-ship distributors 12% in Q1 2015. The filing identifies Byram and Edgepark as representing approximately 19% and 10% of total revenue, respectively.
As a subsequent event, the FDA completed an inspection in April 2015 and verbally advised DexCom that it had no observations and would issue formal correspondence closing the 2014 Warning Letter concerning administrative deficiencies in medical-device reporting. The filing says formal closure correspondence was still expected. DexCom reported that disclosure controls were effective and that it was in compliance with loan covenants at March 31, 2015.
Important facts for investors to verify
- Whether revenue growth and recurring sensor sales continue, and whether gross margins absorb launch-related inventory costs and revenue deferrals.
- Whether operating expenses, particularly SG&A, grow faster than revenue and how much of operating cash flow depends on non-cash share-based compensation.
- Progress on manufacturing scale, product quality and single-source supply continuity.
- Changes in private-payor coverage, reimbursement access and distributor concentration; Medicare coverage remained uncertain.
- Formal FDA correspondence closing the Warning Letter, and the company’s liquidity and financing needs relative to its stated funding horizon and undrawn credit facility.