Tandem Diabetes Care, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Tandem designs and sells insulin pumps, related disposable supplies, and diabetes-management software. Financial statements are unaudited.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Sales | $169.4 million | $175.9 million |
| Gross profit / margin | $82.9 million / 49% | $91.1 million / 52% |
| Operating loss | $127.8 million | $15.3 million |
| Net loss / diluted loss per share | $123.9 million / $1.92 | $14.7 million / $0.23 |
| Cash from operating activities | $(18.3) million | $13.8 million |
Sales declined 4% year over year. U.S. sales were essentially flat at $131.2 million, while sales outside the U.S. fell 15% to $38.1 million. U.S. pump sales declined 10%; supplies and other sales rose 16%. Outside the U.S., pump shipments fell 36%, with distributor ordering disrupted by the European distribution-center transition. Worldwide ending estimated installed base increased approximately 22% year over year.
Gross margin fell three percentage points. Management cited lower sales related to the European transition, a one-point margin impact from Tandem Choice, unfavorable mix and higher-cost raw materials and freight; improved average selling prices and lower manufacturing costs partly offset these pressures.
Operating expenses rose to $210.7 million from $106.4 million, primarily reflecting a $78.8 million acquired in-process R&D charge related to AMF Medical, as well as higher personnel and discretionary spending and $2.7 million of non-recurring severance costs. Net loss also reflects higher SG&A and R&D and was partly offset by $4.2 million of net other income, including interest income and foreign-currency gains.
Liquidity, debt and capital allocation
At March 31, 2023, cash and cash equivalents were $127.8 million and short-term investments were $391.8 million, totaling $519.6 million. Cash and cash equivalents declined $44.8 million from year-end 2022. The company reported $18.3 million of operating cash use and $26.3 million of investing cash use in the quarter; investing outflows included the AMF Medical acquisition and property purchases, offset by investment maturities.
Convertible notes had $287.5 million principal outstanding, with a net carrying value of $283.7 million, bear 1.50% interest and mature May 1, 2025. The $100 million revolving credit facility had no borrowings and $95.1 million available after $4.9 million of letters of credit. The company was in compliance with the interest-coverage covenant. The lender waived testing of the maximum net-leverage covenant for March 31, 2023; management stated it believes it would otherwise have been non-compliant.
Management believes cash, investments, available credit and future operating cash flows will be sufficient to fund ongoing core business activities. Total liabilities were $615.4 million and stockholders’ equity was $338.8 million at quarter-end.
Material developments, outlook and risks
- AMF Medical: Acquired in January for an initial cash payment of CHF 62.4 million, in addition to a prior CHF 8.0 million strategic investment. Potential milestone payments total up to CHF 129.6 million and were not recorded as liabilities because the contingencies were unresolved. The Sigi patch pump remains in development.
- Near-term sales: Management expects the European distribution-center transition to continue affecting pump and supply sales through Q2 2023. Remaining higher-cost inventory is expected to be consumed by mid-2023.
- Tandem Choice: The program defers some eligible pump revenue; $2.0 million was deferred in Q1 2023. It runs through December 31, 2024, and management cannot estimate its total financial impact. The impact depends partly on the timing of a new hardware platform and customer participation.
- Products in development: The filing discusses Mobi, t:slim X3, Sigi, extended-wear infusion sets, and integrations with Dexcom G7 and Abbott CGM technologies. No specific financial guidance or launch dates are provided here.
- Risks: Management cites macroeconomic pressures, customer purchasing and distributor ordering variability, reimbursement, product-launch and regulatory uncertainties, seasonality, supply-chain costs, and foreign-exchange exposure. Future contingent acquisition payments are also exposed to foreign-currency fluctuations.
- Legal matter: A California class-action case relating to a 2020 phishing incident was dismissed at the trial-court level in February 2023; plaintiffs appealed in March. The company says the ultimate outcome and potential loss cannot be determined. It did not identify other matters for which a material loss was considered probable or estimable.
Important facts for investors to verify
- Whether the European distributor inventory reset concludes as expected and sales recover after Q2.
- Future pump shipments, renewal demand, and the mix of pump versus higher-margin supply sales.
- Impact of Tandem Choice on deferred revenue, margins and cash generation as the program continues.
- Compliance with the revolving-credit covenants after the temporary waiver, and liquidity needs around the May 2025 notes maturity.
- AMF Medical development milestones, potential earnout payments and progress toward regulatory clearance.
- Developments in the phishing-case appeal and any change to the company’s assessment of potential exposure.