Tandem Diabetes Care, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; balance-sheet comparisons are to December 31, 2013. Tandem is a medical-device company whose revenue primarily comes from U.S. sales of its t:slim insulin pump and related supplies.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Sales | $10.3m | $5.5m | $18.3m | $11.0m |
| Gross profit | $3.4m | $0.4m | $4.3m | $2.4m |
| Gross margin | 34% | 7% | 24% | 22% |
| Operating expenses | $21.8m | $14.1m | $43.5m | $23.3m |
| Operating loss | $(18.3)m | $(13.7)m | $(39.2)m | $(20.8)m |
| Net loss | $(19.2)m | $(15.3)m | $(41.2)m | $(26.5)m |
- Q2 sales increased 86% year over year; six-month sales increased 67%. Tandem shipped 2,235 pumps in Q2 and 3,958 in the first half of 2014, versus 1,363 and 2,215, respectively, in the comparable 2013 periods.
- Management attributed Q2 gross-margin improvement mainly to higher production volumes and manufacturing efficiencies. First-half 2014 margin included about $0.3m of recall costs; 2013 margin benefited from recognition of previously deferred sales and costs.
- SG&A rose 60% in Q2 and 98% in the first half, largely reflecting commercial expansion, increased staffing, marketing and stock-based compensation. R&D increased 34% and 45%, respectively.
- Cash used in operating activities was $32.7m in the first half, compared with $24.0m a year earlier. Investing cash outflow was $29.4m, including a net $25.0m purchase of short-term investments and $4.3m of property and equipment. Financing provided $1.9m; cash and cash equivalents fell by $60.2m to $64.2m.
Liquidity, debt and balance sheet
- At June 30, cash, cash equivalents and short-term investments totaled $94.3m; including $2.0m of restricted cash, total cash-like balances were $96.3m. Current assets were $114.4m and current liabilities $13.2m.
- Long-term notes payable were $29.4m carrying value, with $30.0m principal outstanding under the Capital Royalty term loan. The April amendment reduced the stated interest rate from 14% to 11.5% and extended the interest-only period through March 31, 2018; maturity is March 31, 2020. The company may pay interest in cash or pay 9.5% in cash and capitalize the remaining 2%.
- A separate agreement permits up to an additional $30m borrowing on or before March 31, 2015. The term loan includes minimum annual revenue covenants: $30m in 2014, rising to $50m in 2015, $65m in 2016 and $80m in 2017. The filing says management believed available liquidity would cover requirements for at least 18 months.
Changes, outlook and material risks
- The company continued expanding its sales force, reaching 60 territories by quarter-end versus 36 at 2013 year-end. Management linked sales growth to this expansion, while noting territory realignment initially disrupted sales productivity.
- Management expected continued net losses for several years and anticipated increased spending on commercialization, R&D and manufacturing. No specific revenue or earnings guidance for future periods is provided.
- In January 2014, Tandem recalled selected t:slim cartridge lots due to potential leakage. Direct costs were approximately $1.7m, including field replacements and inventory write-offs; management did not expect further direct financial impact. The filing notes possible product-safety, regulatory, reputation and sales consequences.
- Nearly all revenue depended on t:slim and related supplies. Key risks include reimbursement and coverage decisions, competition, manufacturing and supplier capacity, product quality, regulatory clearances, and the ability to fund ongoing losses. Two distributors each accounted for over 10% of Q2 sales, underscoring customer concentration.
- In July 2014, after quarter-end, Tandem paid DexCom $1.0m for a milestone related to submission of a PMA application for t:slim G4. No material legal proceedings were reported; no probable, estimable litigation losses were accrued.
- Management reported disclosure controls were effective as of June 30, 2014 and no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether pump shipment growth and the expanded sales force translate into durable revenue growth and improving operating leverage.
- Whether gross-margin gains persist as production scales, product mix changes and manufacturing capacity expands.
- Liquidity and financing needs relative to operating cash burn, the stated 18-month liquidity estimate, and the loan’s revenue covenants and additional borrowing availability.
- Progress and regulatory status of t:slim G4, and any subsequent product-quality or recall developments.
- Changes in third-party reimbursement, distributor concentration, and customer retention and recurring supplies sales.