e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-33462
INSULET CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware
(State or Other Jurisdiction of Incorporation or
Organization)
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04-3523891
(I.R.S. Employer Identification No.) |
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9 Oak Park Drive
Bedford, Massachusetts
(Address of Principal Executive Offices)
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01730
(Zip Code) |
Registrant’s Telephone Number, Including Area Code: (781) 457-5000
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
As of August 4, 2010, the registrant had 40,143,138 shares of common stock outstanding.
INSULET CORPORATION
TABLE OF CONTENTS
2
PART I — FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
INSULET CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
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As of |
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As of |
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December 31, |
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June 30, |
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2009 |
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2010 |
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(Restated) |
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(In thousands, except share and per share data) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
118,071 |
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$ |
127,996 |
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Accounts receivable, net |
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15,801 |
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14,962 |
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Inventories |
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10,231 |
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10,086 |
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Prepaid expenses and other current assets |
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1,499 |
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1,260 |
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Total current assets |
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145,602 |
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154,304 |
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Property and equipment, net |
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13,751 |
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15,482 |
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Other assets |
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2,637 |
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3,072 |
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Total assets |
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$ |
161,990 |
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$ |
172,858 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities |
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Accounts payable |
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$ |
9,128 |
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$ |
5,870 |
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Accrued expenses |
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9,814 |
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9,973 |
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Deferred revenue |
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4,818 |
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3,970 |
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Total current liabilities |
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23,760 |
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19,813 |
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Long-term debt, net of current portion |
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92,292 |
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89,136 |
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Other long-term liabilities |
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1,957 |
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1,999 |
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Total liabilities |
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118,009 |
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110,948 |
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Stockholders’ Equity |
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Preferred stock, $.001 par value: |
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Authorized: 5,000,000 shares at
June 30, 2010 and
December 31, 2009.
Issued and
outstanding: zero
shares at June 30,
2010 and December
31, 2009,
respectively |
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Common stock, $.001 par value: |
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Authorized: 100,000,000 shares
at June 30, 2010 and
December 31, 2009.
Issued and
outstanding: 40,121,272 and
37,755,254 shares at
June 30, 2010 and
December 31, 2009,
respectively |
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41 |
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39 |
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Additional paid-in capital |
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394,835 |
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384,565 |
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Accumulated deficit |
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(350,895 |
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(322,694 |
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Total stockholders’ equity |
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43,981 |
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61,910 |
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Total liabilities and
stockholders’ equity |
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$ |
161,990 |
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$ |
172,858 |
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December 31, 2009 balances have been restated to reflect the correction of the accounting
treatment for the modification of the Facility Agreement as described
in Note 13.
The accompanying notes are an integral part of these consolidated financial statements.
3
INSULET CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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(In thousands, except share and per share data) |
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Revenue |
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$ |
22,937 |
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$ |
14,617 |
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$ |
43,744 |
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$ |
27,086 |
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Cost of revenue |
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13,051 |
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11,448 |
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25,473 |
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21,922 |
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Gross profit |
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9,886 |
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3,169 |
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18,271 |
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5,164 |
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Operating expenses: |
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Research and development |
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4,583 |
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3,272 |
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8,430 |
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6,476 |
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General and administrative |
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6,190 |
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5,838 |
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13,149 |
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13,329 |
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Sales and marketing |
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9,013 |
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10,504 |
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17,322 |
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19,276 |
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Total operating expenses |
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19,786 |
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19,614 |
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38,901 |
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39,081 |
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Operating loss |
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(9,900 |
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(16,445 |
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(20,630 |
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(33,917 |
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Interest income |
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36 |
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81 |
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60 |
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182 |
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Interest expense |
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(3,847 |
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(3,875 |
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(7,631 |
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(6,149 |
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Net interest expense |
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(3,811 |
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(3,794 |
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(7,571 |
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(5,967 |
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Net loss |
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$ |
(13,711 |
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$ |
(20,239 |
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$ |
(28,201 |
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$ |
(39,884 |
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Net loss per share basic and
diluted |
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$ |
(0.36 |
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$ |
(0.73 |
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$ |
(0.74 |
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$ |
(1.43 |
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Weighted average number of
shares used in calculating basic
and diluted net loss per share |
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38,285,628 |
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27,869,159 |
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38,088,041 |
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27,836,869 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
INSULET CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
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Six Months Ended |
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June 30, |
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2010 |
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2009 |
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(In thousands) |
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Cash flows from operating activities |
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Net loss |
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$ |
(28,201 |
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$ |
(39,884 |
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Adjustments to reconcile net loss to net cash used in operating activities |
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Depreciation |
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2,696 |
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2,631 |
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Amortization of debt discount |
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3,624 |
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2,672 |
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Stock compensation expense |
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2,685 |
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2,231 |
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Provision for bad debts |
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1,685 |
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1,670 |
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Non cash interest expense |
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440 |
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319 |
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Impairment of assets |
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1,021 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(2,523 |
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(5,241 |
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Inventories |
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(145 |
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6,461 |
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Prepaid
expenses and other current assets |
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(244 |
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927 |
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Accounts payable and accrued expenses |
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3,098 |
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(857 |
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Other long term liabilities |
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(42 |
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(65 |
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Deferred revenue, short term |
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848 |
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673 |
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Net cash used in operating activities |
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(15,058 |
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(28,463 |
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Cash flows from investing activities |
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Purchases of property and equipment |
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(1,986 |
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(756 |
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Net cash used in investing activities |
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(1,986 |
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(756 |
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Cash flows from financing activities |
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Proceeds from issuance of facility agreement, net of financing expenses |
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— |
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24,513 |
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Payment of transaction fees related to credit facility amendment |
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(468 |
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Proceeds from issuance of common stock, net of offering expenses |
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7,587 |
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405 |
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Net cash provided by financing activities |
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7,119 |
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24,918 |
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Net decrease in cash and cash equivalents |
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(9,925 |
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(4,301 |
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Cash and cash equivalents, beginning of period |
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127,996 |
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56,663 |
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Cash and cash equivalents, end of period |
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$ |
118,071 |
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$ |
52,362 |
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Supplemental disclosure of cash flow information |
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Cash paid for interest |
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$ |
3,662 |
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$ |
2,882 |
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Non-cash financing activities |
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Allocation of fair value of warrants from net proceeds from issuance of
facility agreement |
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$ |
— |
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$ |
6,065 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
INSULET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of the Business
Insulet Corporation (the “Company”) is principally engaged in the development, manufacture and
marketing of an insulin infusion system for people with insulin-dependent diabetes. The Company was
incorporated in Delaware in 2000 and has its corporate headquarters in Bedford, Massachusetts.
Since inception, the Company has devoted substantially all of its efforts to designing, developing,
manufacturing and marketing the OmniPod Insulin Management System (“OmniPod”), which consists of
the OmniPod disposable insulin infusion device and the handheld, wireless Personal Diabetes Manager
(“PDM”). The Company commercially launched the OmniPod Insulin Management System in August 2005
after receiving FDA 510(k) approval in January 2005. The first commercial product was shipped in
October 2005.
In January 2010, the Company entered into a 5 year distribution agreement with Ypsomed
Distribution AG, or Ypsomed, to become the exclusive distributor of the OmniPod System in eleven
countries. Ypsomed obtained reimbursement approval in both Germany and the United Kingdom in the
second quarter of 2010, and accordingly, the Company shipped product for distribution in these
countries to Ypsomed. The Company expects that Ypsomed will begin distributing the OmniPod System,
subject to approved reimbursement, in several other markets in the second half of 2010 and in the
first half of 2011. The Company has not recorded revenue related to the Ypsomed agreement.
The Company has fully adopted the Financial Accounting Standard Board Accounting Standards
Codification. The FASB Accounting Standards Codification (“Codification”) has become the single
source of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in accordance with accounting
principles generally accepted in the United States (“GAAP”). All existing accounting standard
documents are superseded by the Codification and any accounting literature not included in the
Codification will not be authoritative. However, rules and interpretive releases of the Securities
and Exchange Commission (“SEC”) issued under the authority of federal securities laws will continue
to be sources of authoritative GAAP for SEC registrants. All references made to GAAP in the
Company’s consolidated financial statements now use the new Codification numbering system. The
Codification does not change or alter existing GAAP and, therefore, did not have a material impact
on its consolidated financial statements.
2. Summary of Significant Accounting Policies
Restatement
of Previously Issued Financial Statements
As
discussed below and further described in Note 13, the Company
restated its financial results in prior periods to reflect the correction of the accounting treatment for the
modification of the Facility Agreement.
In September 2009, the Company entered into an amendment to its existing Facility Agreement which
was determined at the time to be an early extinguishment of the debt borrowed thereunder. As a
result, the Company expensed $7.6 million of non-cash interest related to the write-off of
remaining debt discount and related fees such as deferred financing costs on the original loan.
Upon subsequent review, the Company determined on July 29, 2010, that the amendment should have
been treated as a modification of the original loan as compared to an early extinguishment in its
previously issued financial statements. A debt modification recognizes debt discount and related
fees relating to the original borrowings over the term of the new borrowing, as well as additional
discount on the new borrowing as a non-cash adjustment to interest expense rather than as a
non-cash loss on debt extinguishment at the time the original borrowing is amended. Accordingly,
the Company has concluded that a correction is required to recognize the amendment as a
modification and recognize as non-cash interest expense the debt discount and related fees on the
original debt from the date of the amendment in September 2009 through the maturity of the Facility
Agreement in September 2012.
The restatement resulted in an increase in other assets of $1.2 million at December 31, 2009,
related to the capitalization of issuance costs incurred net of interest expense recognized over
the term of the loan and a decrease of long-term debt of $7.8 million related to the debt discount
on the warrants and shares issued in connection with the Facility Agreement, net of interest
expense recognized. The restatement resulted in an increase in interest expense of $0.6 million in
the three months ended March 31, 2010, with an equivalent increase in net interest expense and net
loss. The restatement had no effect on any amounts reported in periods prior to the quarter ended
September 30, 2009.
Basis of Presentation
The unaudited consolidated financial statements in this Quarterly Report on Form 10-Q have
been prepared in accordance with GAAP for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these unaudited consolidated financial
statements do not include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation have been included. Operating results for
the three and six month periods ended June 30, 2010, are not necessarily indicative of the results
that may be expected for the full year ending December 31, 2010, or for any other subsequent
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interim period.
The unaudited consolidated financial statements in this Quarterly Report on Form 10-Q should
be read in conjunction with the Company’s consolidated financial statements and notes thereto
contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenue and expense during the reporting periods. The most significant estimates used in
these financial statements include the valuation of inventories, accounts receivable, equity
instruments, the lives of property and equipment, as well as warranty reserves and allowance for
doubtful accounts calculations. Actual results may differ from those estimates.
Principles of Consolidation
The unaudited consolidated financial statements in this Quarterly Report on Form 10-Q include
the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances
and transactions have been eliminated in consolidation.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due from third-party payors, patients and third-party
distributors. The allowance for doubtful accounts is recorded in the period in which the revenue is
recorded or at the time potential collection risk is identified. The Company estimates its
allowance based on historical experience, assessment of specific risk, discussions with individual
customers and various assumptions and estimates that are believed to be reasonable under the
circumstances.
Inventories
Inventories are stated at the lower of cost or market, determined under the first-in,
first-out (“FIFO”) method. Inventory has been recorded at cost as of June 30, 2010 and December 31,
2009. Work in process is calculated based upon a build up in the stage of completion using
estimated labor inputs for each stage in production. Costs for PDMs and OmniPods include raw
material, labor and manufacturing overhead. The Company periodically reviews inventories for
potential impairment based on quantities on hand and expectations of future use.
Property and Equipment
Property and equipment is stated at cost and depreciated using the straight-line method over
the estimated useful lives of the respective assets. Leasehold improvements are amortized over
their useful life or the life of the lease, whichever is shorter. Assets capitalized under capital
leases are amortized in accordance with the respective class of owned assets and the amortization
is included with depreciation expense. Maintenance and repair costs are expensed as incurred.
Warranty
The Company provides a four-year warranty on its PDMs and may replace any OmniPods that do not
function in accordance with product specifications. The Company estimates its warranty reserves at
the time the product is shipped based on historical experience and the estimated cost to service
the claims. Cost to service the claims reflects the current product cost which has been decreasing
over time. Because the Company continues to introduce new products and new versions of existing
products, the Company also considers the anticipated performance of the product over its warranty
period in estimating warranty reserves.
Restructuring Expenses and Impairment of Assets
In connection with its efforts to pursue improved gross margins, leverage operational
efficiencies and better pursue opportunities for low-cost supplier sourcing of asset costs, the
Company periodically performs an evaluation of its manufacturing processes and reviews the carrying
value of its property and equipment to assess the recoverability of these assets whenever events
indicate that impairment may have occurred. As part of this assessment, the Company reviews the
future undiscounted operating cash flows expected to be generated by those assets. If impairment is
indicated through this review, the carrying amount of the asset would be reduced to its estimated
fair value. This review of manufacturing processes and equipment can result in restructuring
activity or an impairment of assets based on current net book value and potential future use of the
assets.
The Company’s restructuring expenses may also include workforce reduction and related costs
for one-time termination benefits provided to employees who are involuntarily terminated under the
terms of a one-time benefit arrangement. The Company records these one-time termination benefits
upon incurring the liability provided that the employees are notified, the plan is approved by the
appropriate level of management, the employees to be terminated and the expected completion date
are identified, and the benefits the identified employees will be paid are established. Significant
changes to the plan are not expected when the Company records the costs. In recording the workforce
reduction and related costs, the Company estimates related costs such as taxes and outplacement
7
services which may be provided under the plan. If changes in these estimated services occur, the
Company may be required to record or reverse restructuring expenses associated with these workforce
reduction and related costs.
Asset Valuation
Asset valuation includes assessing the recorded value of certain assets, including accounts
receivable, inventory and fixed assets. The Company uses a variety of factors to assess valuation,
depending upon the asset. Actual values may differ materially from the Company’s estimates.
Property and equipment is stated at cost and depreciated using the straight-line method over the
estimated useful lives of the respective assets. Leasehold improvements are amortized over their
useful life or the life of the lease, whichever is shorter. The Company reviews long-lived assets,
including property and equipment and intangibles, for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the assets may not be fully
recoverable. The Company also reviews assets under construction to ensure certainty of their future
installation and integration into the manufacturing process. An impairment loss would be recognized
when estimated undiscounted future cash flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount. Impairment, if any, is measured as the
amount by which the carrying amount of a long-lived asset exceeds its fair value.
Revenue Recognition
The Company generates nearly all of its revenue from sales of its OmniPod Insulin Management
System to diabetes patients and third-party distributors who resell the product to diabetes
patients. The initial sale to a new customer or third party distributor typically includes OmniPods
and a Starter Kit, which includes the PDM, the OmniPod System User Guide and the OmniPod System
Interactive Training CD. Subsequent sales to existing customers typically consist of additional
OmniPods.
Revenue recognition requires that persuasive evidence of a sales arrangement exists, delivery
of goods occurs through transfer of title and risk and rewards of ownership, the selling price is
fixed or determinable and collectibility is reasonably assured. With respect to these criteria:
| |
• |
|
The evidence of an arrangement generally consists of a physician order
form, a patient information form, and if applicable, third-party
insurance approval for sales directly to patients or a purchase order
for sales to a third-party distributor. |
| |
| |
• |
|
Transfer of title and risk and rewards of ownership are passed to the
customer typically upon transfer to the third party carrier. |
| |
| |
• |
|
The selling prices for all sales are fixed and agreed with the patient
or third-party distributor, and, if applicable, the patient’s
third-party insurance provider(s), prior to shipment and are based on
established list prices or, in the case of certain third-party
insurers, contractually agreed upon prices. Provisions for discounts
and rebates to customers are established as a reduction to revenue in
the same period the related sales are recorded. |
The Company assesses whether different elements qualify for separate accounting. The Company
recognizes revenue for the initial shipment to a patient or other third party once all elements
have been delivered.
The Company offers a 45-day right of return for its Starter Kits sales, and defers revenue to
reflect estimated sales returns in the same period that the related product sales are recorded.
Returns are estimated through a comparison of the Company’s historical return data to their related
sales. Historical rates of return are adjusted for known or expected changes in the marketplace
when appropriate. When doubt exists about reasonable assuredness of collectibility from specific
customers, the Company defers revenue from sales of products to those customers until payment is
received.
In March 2008, the Company received a cash payment from Abbott Diabetes Care, Inc. (“Abbott”)
for an agreement fee in connection with execution of the first amendment to the development and
license agreement between the Company and Abbott. The Company recognizes revenue on the agreement
fee from Abbott over the initial 5-year term of the agreement, and the non-current portion of the
agreement fee is included in other long-term liabilities. Under the amended Abbott agreement,
beginning July 1, 2008, Abbott agreed to pay certain amounts to the Company for services performed
by Insulet in connection with each sale of a PDM that includes an Abbott Discrete Blood Glucose
Monitor to certain customers in the United States and Israel. The Company recognizes the revenue
related to this portion of the Abbott agreement at the time it meets the criteria for revenue
recognition, typically at the time of sale of the PDM to the patient. In the three and six month
periods ended June 30, 2010, the Company recognized revenue related to the amended Abbott agreement
of $1.3 million and $2.4 million, respectively. In the three and six month periods ended June 30,
2009, the Company recognized revenue related to the amended Abbott agreement of $1.0 million and
$2.1 million, respectively. There was no impact to cost of revenue related to this agreement.
In July 2010, the Company entered into the second amendment to the development and license
agreement with Abbott Diabetes Care, Inc. Under the second amendment, Abbott agreed to pay certain
amounts to the Company for services performed by Insulet in connection with each sale of a PDM that
includes an Abbott Discrete Blood Glucose Monitor to customers in certain additional territories.
8
The Company had deferred revenue of $5.7 million and $5.1 million as of June 30, 2010 and
December 31, 2009, respectively. The deferred revenue recorded as of June 30, 2010 was comprised of
product-related revenue as well as the non-amortized agreement fee related to the Abbott agreement.
Concentration of Credit Risk
Financial instruments that subject the Company to credit risk primarily consist of cash, cash
equivalents and accounts receivable. The Company maintains the majority of its cash with two
accredited financial institutions. Although revenue is recognized from shipments directly to
patients or third-party distributors, the majority of shipments are billed to third-party insurance
payors. There were no third-party payors that accounted for more than 10% of gross accounts
receivable as of June 30, 2010 or December 31, 2009.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial
information is available that is evaluated on a regular basis by the chief operating
decision-maker, or decision making group, in deciding how to allocate resources to an individual
segment and in assessing performance of the segment. In light of the Company’s current product
offering, and other considerations, management has determined that the primary form of internal
reporting is aligned with the offering of the OmniPod System. Therefore, the Company believes that
it operates in one segment. For the three and six month periods ended June 30, 2010, substantially
all of the Company’s revenue was generated from sales within the United States.
Income Taxes
The Company has accumulated significant losses since its inception in 2000. Since the net
operating losses may potentially be utilized in future years to reduce taxable income (subject to
any applicable limitations), all of the Company’s tax years remain open to examination by the major
taxing jurisdictions to which the Company is subject.
The Company recognizes estimated interest and penalties for uncertain tax positions in income
tax expense. As of June 30, 2010, the Company had no interest and penalty accrual or expense.
3. Facility Agreement and Common Stock Warrants
In March 2009, the Company entered into a Facility Agreement with certain institutional
accredited investors, pursuant to which the investors agreed to loan the Company up to $60 million,
subject to the terms and conditions set forth in the Facility Agreement. Following the initial
disbursement of $27.5 million on March 31, 2009, the Company could, but was not required to, draw
down on the facility in $6.5 million increments at any time until November 2010 provided that the
Company met certain financial performance milestones. In connection with this financing, the
Company paid Deerfield Management Company, L.P., an affiliate of the lead lender, a one-time
transaction fee of $1.2 million. Total financing costs, including the transaction fee, were $3.0
million and are being amortized as interest expense over the 42 months of the Facility Agreement.
In connection with the execution of the Facility Agreement, the Company issued to the lenders
fully exercisable warrants to purchase an aggregate of 3.75 million shares of common stock of the
Company at an exercise price of $3.13 per share. Pursuant to the original terms of the Facility
Agreement, the Company would have been required to issue additional warrants to purchase 1.5
million shares upon drawing down the remaining $32.5 million under the facility. The warrants
qualified for permanent treatment as equity, and their relative fair value of $6.1 million on the
issuance date was recorded as additional paid-in capital and debt discount. The debt discount is
being amortized as non-cash interest expense over the term of the loan.
The amounts initially drawn under the Facility Agreement accrued interest at a rate of 9.75%
per annum, and the undrawn amounts under the Facility Agreement accrued interest at a rate of 2.75%
per annum. Accrued interest is payable quarterly in cash in arrears.
In September 2009, the Company entered into an Amendment to the Facility Agreement whereby the
Company repaid the $27.5 million of outstanding debt and promptly drew down the remaining $32.5
million available under the Facility Agreement. The lenders eliminated all future performance
milestones associated with the remaining $32.5 million available on the credit facility and reduced
the annual interest rate to 8.5%. In connection with the Amendment to the Facility Agreement, the
Company entered into a Securities Purchase Agreement with the lenders whereby the Company sold
2,855,659 shares of its common stock to the lenders at $9.63 per share, a $1.9 million discount
based on the closing price of the Company’s common stock of $10.28 on that date. The Company
recorded the $1.9 million as a debt discount which is being amortized as interest expense over the
remaining term of the loan. The Company received aggregate proceeds of $27.5 million in connection
with the sale of its shares.
All principal amounts outstanding under the Facility Agreement are payable in September 2012.
Any amounts drawn under the Facility Agreement may become immediately due and payable upon (i) an
“event of default,” as defined in the Facility Agreement, in which case the lenders would have the
right to require the Company to re-pay 100% of the principal amount of the loan, plus any accrued
and unpaid interest thereon, or (ii) the consummation of certain change of control transactions, in
which case the lenders would have the right to require the Company to re-pay 106% of the
outstanding principal amount of the loan, plus any accrued and unpaid interest thereon. The
Facility Agreement also provides for certain prepayment penalties in the event that the Company
repays the debt prior to its maturity.
9
In June 2010, the Company entered into a Second Amendment to its amended Facility Agreement
whereby the Company paid a $0.5 million amendment fee in exchange for the reduction of the
prepayment penalties and the modification of certain other terms of the Agreement. The fee was
recorded as a debt discount and is being amortized as interest expense over the remaining term of
the loan.
All references herein to the “Facility Agreement” refer to the Facility Agreement entered into
in March 2009 and amended in September 2009 and June 2010.
Because the consummation of certain change in control transactions would result in the payment
of a premium of the outstanding principal, the premium feature is a derivative that is required to
be bifurcated from the host debt instrument and recorded at fair value at each quarter end. As a
prepayment penalty could be paid by the Company in the event that it repays the debt prior to
maturity, the prepayment penalty is also considered a derivative. The prepayment penalty does not
meet the criteria to be accounted for separately. Any changes in fair value of the premium feature
will be recorded as interest expense. The difference between the face value of the outstanding
principal on the Facility Agreement and the amount remaining after the bifurcation will be recorded
as a discount to be amortized over the term of the Facility Agreement. As of June 30, 2010, the
premium feature associated with the Facility Agreement had no value as the Company does not
currently expect a change in control transaction to occur. The embedded derivatives related to the
Facility Agreement will be reassessed and marked-to-market through earnings on a quarterly basis.
As of June 30, 2010 and December 31, 2009, outstanding debt related to the Facility Agreement
of $25.3 million and $24.7 million, respectively, is included in long-term debt in the consolidated
balance sheet.
In the three and six months ended June 30, 2010, cash interest related to the Facility
Agreement of approximately $0.7 million and $1.4 million, respectively, was recorded. In addition,
in the three and six months ended June 30, 2010, non-cash interest of approximately $0.7 million
and $1.3 million, respectively, was recorded. Non-cash interest in the three and six months ended
June 30, 2010 consists of amortization of the debt discount from the issuance of warrants and
transaction fee in March 2009, from the discount on the shares sold in connection with the
amendment in September 2009, from the transaction fee in connection with the amendment in June 2010
and amortization of the issuance costs associated with the debt.
In the three and six months ended June 30, 2009, cash interest related to the Facility
Agreement of approximately $0.9 million of interest expense was recorded. In addition, in the
three and six months ended June 30, 2009, non-cash interest of approximately $0.6 million was
recorded. Non-cash interest in the three and six months ended June 30, 2009 consists of
amortization of the debt discount from the issuance of warrants and transaction fee in March 2009
and amortization of the issuance costs associated with the debt.
In March 2009, in connection with the execution of the Facility Agreement, the Company issued
to the lenders fully exercisable warrants to purchase an aggregate of 3.75 million shares of common
stock of the Company at an exercise price of $3.13 per share. Pursuant to the original terms of the
Facility Agreement, the Company would have been required to issue additional warrants to purchase
1.5 million shares upon drawing down the remaining $32.5 million under the facility. In connection
with the Amendment to the Facility Agreement in September 2009, the lenders agreed to forego the
remaining 1.5 million additional warrants that would have been issued upon these future draws. The
warrants issued in connection with the Facility Agreement qualify for permanent classification as
equity and their relative fair value of $6.1 million on the issuance date was recorded as
additional paid in capital and debt discount. The debt discount is being amortized as non-cash
interest expense over the term of the loan. In June 2010, the lenders exercised warrants to
acquire 2,125,000 shares of the Company’s common stock at an exercise price of $3.13 in cash. The
Company received cash totaling $6.7 million as a result of this exercise.
As of June 30, 2010, warrants to acquire 1,625,000 shares of the Company’s common stock issued
under the Facility Agreement remain unexercised, expire on March 13, 2015 and contain certain
limitations that prevent the holder from acquiring shares upon exercise of a warrant that would
result in the number of shares beneficially owned by it to exceed 9.98% of the total number of
shares of the Company’s common stock then issued and outstanding.
In addition, upon certain change of control transactions, or upon certain “events of default”
(as defined in the warrant agreement), the holder has the right to net exercise the warrants for an
amount of shares of the Company’s common stock equal to the Black-Scholes value of the shares
issuable under the warrants divided by 95% of the closing price of the common stock on the day
immediately prior to the consummation of such change of control or event of default, as applicable.
In certain circumstances where a warrant or portion of a warrant is not net exercised in connection
with a change of control or event of default, the holder will be paid an amount in cash equal to
the Black-Scholes value of such portion of the warrant not treated as a net exercise.
4. Convertible Notes
In June 2008, the Company sold $85.0 million principal amount of 5.375% Convertible Senior
Notes due June 15, 2013 (the “5.375% Notes”) in a private placement to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The interest rate on the
notes is 5.375% per annum on the principal amount from June 16, 2008, payable semi-annually in
arrears in cash on December 15 and June 15 of each year, beginning December 15, 2008. The 5.375%
Notes are convertible into the
10
Company’s common stock at an initial conversion rate of 46.8467 shares of common stock per $1,000
principal amount of the 5.375% Notes, which is equivalent to a conversion price of approximately
$21.35 per share, representing a conversion premium of 34% to the last reported sale price of the
Company’s common stock on the NASDAQ Global Market on June 10, 2008, subject to adjustment under
certain circumstances, at any time beginning on March 15, 2013 or under certain other circumstances
and prior to the close of business on the business day immediately preceding the final maturity
date of the notes. The 5.375% Notes will be convertible for cash up to their principal amount and
shares of the Company’s common stock for the remainder of the conversion value in excess of the
principal amount. The Company does not have the right to redeem any of the 5.375% Notes prior to
maturity. If a fundamental change, as defined in the Indenture for the 5.375% Notes, occurs at any
time prior to maturity, holders of the 5.375% Notes may require the Company to repurchase their
notes in whole or in part for cash equal to 100% of the principal amount of the notes to be
repurchased, plus accrued and unpaid interest, including any additional interest, to, but
excluding, the date of repurchase.
11
If a holder elects to convert its 5.375% Notes upon the occurrence of a make-whole fundamental
change, as defined in the Indenture for the 5.375% Notes, the holder may be entitled to receive an
additional number of shares of common stock on the conversion date. These additional shares are
intended to compensate the holders for the loss of the time value of the conversion option and are
set forth in the Indenture to the 5.375% Notes. In no event will the number of shares issuable upon
conversion of a note exceed 62.7746 per $1,000 principal amount (subject to adjustment as described
in the Indenture for the 5.375% Notes).
The Company recorded a debt discount of $26.9 million to equity to reflect the value of its
nonconvertible debt borrowing rate of 14.5% per annum. This debt discount is being amortized as
interest expense over the 5 year term of the 5.375% Notes.
The Company incurred deferred financing costs related to this offering of approximately $3.5
million, of which $1.1 million has been reclassified as an offset to the value of the amount
allocated to equity. The remainder is recorded as other assets in the consolidated balance sheet
and is being amortized as a component of interest expense over the five year term of the 5.375%
Notes. The Company incurred interest expense related to the 5.375% Notes of approximately $2.5
million and $5.0 million for the three and six months ended June 30, 2010, respectively. Of the
$2.5 million recorded in the three months ended June 30, 2010, approximately $1.4 million relates
to amortization of the debt discount and deferred financing costs and $1.1 million relates to cash
interest. Of the $5.0 million recorded in the six months ended June 30, 2010, approximately $2.7
million relates to amortization of the debt discount and deferred financing costs and $2.3 million
relates to cash interest. For the three and six months ended June 30, 2009, the Company incurred
interest expense related to the 5.375% Notes of approximately $2.2 million and $4.4 million,
respectively. Of the $2.2 million recorded in the three months ended June 30, 2009, approximately
$1.1 million relates to amortization of the debt discount and deferred financing costs and $1.1
million relates to cash interest. Of the $4.4 million recorded in the six months ended June 30,
2009, approximately $2.2 million relates to amortization of the debt discount and deferred
financing costs and $2.2 million relates to cash interest.
As of June 30, 2010, the outstanding amounts related to the 5.375% Notes of $67.0 million are
included in long-term debt in the consolidated balance sheet and reflect the debt discount of $18.0
million. As of December 31, 2009, the outstanding amounts related to the 5.375% Notes of $64.5
million are included in long-term debt and reflect the debt discount of $20.5 million. The debt
discount includes the equity allocation of $25.8 million (which represents $26.9 million less the
$1.1 million of allocated financing costs) offset by the accretion of the debt discount through
interest expense from the issuance date over the 5 year term of the notes. The Company recorded
$1.2 million and $2.5 million of interest expense related to the debt discount in the three and six
months ended June 30, 2010, respectively. The Company recorded $1.1 million and $2.2 million of
interest expense related to the debt discount in the three and six months ended June 30, 2009,
respectively. As of June 30, 2010, the 5.375% Notes have a remaining term of 3 years.
The Company received net proceeds of approximately $81.5 million from this offering.
Approximately $23.2 million of the proceeds from this offering was used to repay and terminate the
Company’s then-existing term loan, including outstanding principal and accrued and unpaid interest
of $21.8 million, a prepayment fee related to the term loan of approximately $0.4 million and a
termination fee of $0.9 million. The Company is using the remainder for general corporate purposes.
In connection with this term loan, the Company issued warrants to the lenders to purchase up to
247,252 shares of Series E preferred stock at a purchase price of $3.64 per share. The warrants
automatically converted into warrants to purchase common stock on a 1-for-2.6267 basis at a
purchase price of $9.56 per share at the closing of the Company’s initial public offering in May
2007. As of June 30, 2010, warrants to purchase 62,752 shares of common stock remain outstanding
and exercisable at a price of $9.56 per share.
5. Restructuring Expenses and Impairments of Assets
As of June 30, 2009, the Company’s accrued expenses for restructuring was $0.3 million for
final payments of severance. These amounts were paid in full in 2009. The Company had no accrued
expenses for restructuring at June 30, 2010 or December 31, 2009.
The following is a summary of restructuring activity for the three and six months ended June
30, 2009.
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended June |
|
| |
|
June 30, 2009 |
|
|
30, 2009 |
|
| |
|
Workforce and related |
|
|
Workforce and related |
|
Balance at the beginning of period |
|
$ |
401 |
|
|
$ |
612 |
|
Restructuring expense |
|
|
— |
|
|
|
— |
|
Payments |
|
|
(139 |
) |
|
|
(350 |
) |
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
262 |
|
|
$ |
262 |
|
|
|
|
|
|
|
|
During the three months ended June 30, 2010, the Company performed an evaluation of its
Construction in Process related to its manufacturing equipment for its next generation OmniPod. As
a result of this evaluation as well as the additional information obtained in connection with the
completion of the Company’s pilot manufacturing line for its next generation OmniPod, the Company
determined that approximately $1.0 million of previously capitalized costs relating to the
project no longer meet the capitalization criteria. Accordingly, the Company expensed these costs
as research and development expense in the three months ended June 30, 2010.
12
6. Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of
common shares outstanding for the period, excluding unvested restricted common shares. Diluted net
loss per share is computed using the weighted average number of common shares outstanding and, when
dilutive, potential common share equivalents from options and warrants (using the treasury-stock
method), and potential common shares from convertible securities (using the if-converted method).
Because the Company reported a net loss for the three and six months ended June 30, 2010 and 2009,
all potential common shares have been excluded from the computation of the diluted net loss per
share for all periods presented, as the effect would have been anti-dilutive. Such potentially
dilutive common share equivalents consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
Three and Six Months Ended |
|
| |
|
June 30, |
|
| |
|
2010 |
|
|
2009 |
|
Convertible notes |
|
|
3,981,969 |
|
|
|
3,981,969 |
|
Unvested restricted common shares |
|
|
396,331 |
|
|
|
3,108 |
|
Outstanding options |
|
|
3,524,285 |
|
|
|
3,547,547 |
|
Outstanding warrants |
|
|
1,687,752 |
|
|
|
3,812,752 |
|
|
|
|
|
|
|
|
Total |
|
|
9,590,337 |
|
|
|
11,345,376 |
|
|
|
|
|
|
|
|
7. Accounts Receivable
The components of accounts receivable are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
June 30, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
| |
|
(In thousands) |
|
Trade receivables |
|
$ |
22,328 |
|
|
$ |
22,152 |
|
Allowance for doubtful accounts |
|
|
(6,527 |
) |
|
|
(7,190 |
) |
|
|
|
|
|
|
|
|
|
$ |
15,801 |
|
|
$ |
14,962 |
|
|
|
|
|
|
|
|
8. Inventories
Inventories consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
June 30, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
| |
|
(In thousands) |
|
Raw materials |
|
$ |
1,523 |
|
|
$ |
1,657 |
|
Work-in-process |
|
|
1,630 |
|
|
|
496 |
|
Finished goods |
|
|
7,078 |
|
|
|
7,933 |
|
|
|
|
|
|
|
|
|
|
$ |
10,231 |
|
|
$ |
10,086 |
|
|
|
|
|
|
|
|
The Company is currently producing the OmniPod on a partially automated manufacturing line at
a facility in China, operated by a subsidiary of Flextronics International Ltd. The Company also
produces certain sub-assemblies for the OmniPod and maintains packaging operations in its facility
in Bedford, Massachusetts. The Company purchases complete OmniPods from Flextronics.
9. Product Warranty Costs
The Company provides a four-year warranty on its PDMs and replaces any OmniPods that do not
function in accordance with product specifications. Warranty expense is estimated and recorded in
the period that shipment occurs. The expense is based on the Company’s historical experience and
the estimated cost to service the claims. A reconciliation of the changes in the Company’s product
warranty liability follows:
13
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
| |
|
(In thousands) |
|
|
(In thousands) |
|
Balance at the beginning of period |
|
$ |
1,748 |
|
|
$ |
2,672 |
|
|
$ |
1,820 |
|
|
$ |
2,268 |
|
Warranty expense |
|
|
649 |
|
|
|
793 |
|
|
|
969 |
|
|
|
1,936 |
|
Warranty claims settled |
|
|
(457 |
) |
|
|
(856 |
) |
|
|
(849 |
) |
|
|
(1,595 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
1,940 |
|
|
$ |
2,609 |
|
|
$ |
1,940 |
|
|
$ |
2,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of balance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term |
|
|
849 |
|
|
|
1,040 |
|
|
|
849 |
|
|
|
1,040 |
|
Long-term |
|
|
1,091 |
|
|
|
1,569 |
|
|
|
1,091 |
|
|
|
1,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total warranty balance |
|
$ |
1,940 |
|
|
$ |
2,609 |
|
|
$ |
1,940 |
|
|
$ |
2,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Commitments and Contingencies
Operating Leases
The Company leases its facilities, which are accounted for as operating leases. The leases
generally provide for a base rent plus real estate taxes and certain operating expenses related to
the leases. In February 2008, the Company entered into a non-cancelable lease for additional office
space in Bedford, Massachusetts. The lease expires in September 2010 and provides a renewal option
of five years and escalating payments over the life of the lease. In March 2008, the Company
extended the lease of its Bedford, Massachusetts headquarters facility containing research and
development and manufacturing space. Following the extension, the lease expires in September 2014.
The lease is non-cancelable and contains a five year renewal option and escalating payments over
the life of the lease. The Company also leases warehouse facilities in Billerica, Massachusetts.
This lease expires in December 2012.
The Company’s operating lease agreements contain scheduled rent increases which are being
amortized over the terms of the agreement using the straight-line method and are included in other
liabilities in the accompanying consolidated balance sheet.
Indemnifications
In the normal course of business, the Company enters into contracts and agreements that
contain a variety of representations and warranties and provide for general indemnifications. The
Company’s exposure under these agreements is unknown because it involves claims that may be made
against the Company in the future, but have not yet been made. To date, the Company has not paid
any claims or been required to defend any action related to its indemnification obligations.
However, the Company may record charges in the future as a result of these indemnification
obligations.
In accordance with its bylaws, the Company has indemnification obligations to its officers and
directors for certain events or occurrences, subject to certain limits, while they are serving at
the Company’s request in such capacity. There have been no claims to date and the Company has a
director and officer insurance policy that enables it to recover a portion of any amounts paid for
future claims.
11. Equity
In October 2009, in a public offering, the Company issued and sold 6,900,000 shares of its
common stock at a price to the public of $10.25 per share. In connection with the offering, the
Company received total gross proceeds of $70.7 million, or approximately $66.1 million in net
proceeds after deducting underwriting discounts and offering expenses.
In June 2010, the lenders in the Company’s Facility Agreement exercised warrants to purchase
2,125,000 shares of the Company’s common stock in exchange for $6.7 million. The Company had
originally granted warrants to purchase 3,750,000 shares of its common stock at $3.13 per share in
connection with the Facility Agreement.
Restricted Stock Units
In the six months ended June 30, 2010, the Company awarded 394,999 restricted stock units to
certain employees. The restricted stock units were granted under the Company’s 2007 Stock Option
and Incentive Plan (the “2007 Plan”) and vest annually over three years from the grant date. The
restricted stock units granted have a weighted average fair value of $15.01 based on the closing
price of the Company’s common stock on the date of grant. The restricted stock units were valued
at approximately $5.9 million at their grant dates, and the Company is recognizing the compensation
expense over the three year vesting period. Approximately $0.3 million and $0.4 million of
stock-based compensation expense related to the vesting of restricted stock units was recognized in
the three and six months ended June 30, 2010, respectively, and approximately $5.5 million of the
fair value of the restricted stock units remained unrecognized as of June 30, 2010. Under the
terms of the award, the Company will issue shares of common stock on each of the vesting dates.
None of the restricted stock units awarded to employees vested during the three and six months
ended June 30, 2010.
14
The following table summarizes the status of the Company’s restricted stock units:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
| |
|
Number of |
|
|
Average |
|
| |
|
Shares |
|
|
Fair Value |
|
Balance, December 31, 2009 |
|
|
— |
|
|
$ |
— |
|
Granted |
|
|
394,999 |
|
|
|
15.01 |
|
Vested |
|
|
— |
|
|
|
— |
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Balance, June 30, 2010 |
|
|
394,999 |
|
|
$ |
15.01 |
|
|
|
|
|
|
|
|
Restricted Common Stock
During the year ended December 31, 2008, the Company awarded 4,000 shares of restricted common
stock to a non-employee in exchange for $0.001 per share. The shares of restricted common stock
were granted under the 2007 Plan and vest over two years. The shares of restricted common stock
granted had a weighted average fair value of $8.04 based on the closing price of the Company’s
common stock on the date of grant. The Company is recognizing the total compensation expense of
$32,000 over the two year vesting period.
The following table summarizes the status of the Company’s restricted common stock:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
| |
|
Number of |
|
|
Average |
|
| |
|
Shares |
|
|
Fair Value |
|
Balance, December 31, 2009 |
|
|
2,220 |
|
|
$ |
8.04 |
|
Granted |
|
|
— |
|
|
|
— |
|
Vested |
|
|
(888 |
) |
|
|
8.04 |
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Balance, June 30, 2010 |
|
|
1,332 |
|
|
$ |
8.04 |
|
|
|
|
|
|
|
|
Stock Options
The following summarizes the activity under the Company’s stock option plans:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
|
|
|
|
Average |
|
|
Aggregate |
|
| |
|
Number of |
|
|
Exercise |
|
|
Intrinsic |
|
| |
|
Options |
|
|
Price |
|
|
Value |
|
| |
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Balance, December 31, 2009 |
|
|
3,542,590 |
|
|
$ |
8.36 |
|
|
|
|
|
Granted |
|
|
291,500 |
|
|
|
14.91 |
|
|
|
|
|
Exercised |
|
|
(242,986 |
) |
|
|
4.08 |
|
|
$ |
2,621 |
(1) |
Canceled |
|
|
(66,819 |
) |
|
|
14.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2010 |
|
|
3,524,285 |
|
|
$ |
9.09 |
|
|
$ |
22,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested, June 30, 2010 |
|
|
1,897,476 |
|
|
$ |
8.18 |
|
|
$ |
13,966 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest, June 30, 2010 (3) |
|
|
2,935,000 |
|
|
|
|
|
|
$ |
19,488 |
|
|
|
|
| (1) |
|
The aggregate intrinsic value was calculated based on the
positive difference between the fair market value of the
Company’s common stock as of the date of exercise and the
exercise price of the underlying options. |
| |
| (2) |
|
The aggregate intrinsic value was calculated based on the
positive difference between the fair market value of the
Company’s common stock as of June 30, 2010, and the exercise
price of the underlying options. |
| |
| (3) |
|
Represents the number of vested options as of June 30, 2010, plus
the number of unvested options expected to vest as of June 30,
2010, based on the unvested options outstanding as of June 30,
2010, adjusted for the estimated forfeiture rate of 16%. |
15
At the time of grant, options granted under the Company’s 2000 Stock Option and Incentive Plan
(the “2000 Plan”) are typically immediately exercisable, but subject to restrictions. Therefore,
under the 2000 Plan, the number of options exercisable is greater than the number of options vested
until all options are fully vested.
As of June 30, 2010 and 2009, 7,618 and 22,367 shares were contingently issued under the
employee stock purchase plan (“ESPP”), respectively. In the three and six months ended June 30,
2010 and 2009, the Company recorded no significant stock-based compensation charges related to the
ESPP.
Employee stock-based compensation expense recognized in the three and six months ended June
30, 2010 was $1.3 million and $2.7 million, respectively. Employee stock-based compensation
expense recognized in the three and six months ended June 30, 2009 was $1.0 million and $2.2
million, respectively. The employee stock-based compensation expense relates to all stock awards
granted.
12. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. The Company provided a valuation allowance for the full amount of its net
deferred tax asset for all periods because realization of any future tax benefit cannot be
determined as more likely than not, as the Company does not expect income in the near-term.
13. Restatement of Previously Issued Financial Statements
Subsequent to the issuance of the Company’s Quarterly Report on Form 10-Q for the three months
ended March 31, 2010, the Company and its audit committee concluded that it should restate its
consolidated balance sheet at December 31, 2009, and its consolidated statements of operations and
cash flows, for the quarter ended March 31, 2010 to correct the following error:
In September 2009, the Company entered into an amendment to its existing Facility Agreement
which was determined at the time to be an early extinguishment of the debt borrowed thereunder. As
a result, the Company expensed $7.6 million of non-cash interest related to the write-off of
remaining debt discount and related fees such as deferred financing costs on the original loan.
Upon subsequent review the Company determined on July 29, 2010, that the amendment should have been
treated as a modification of the original loan as compared to an early extinguishment in its
previously issued financial statements. A debt modification recognizes debt discount and related
fees relating to the original borrowings over the term of the new
borrowing, as well as additional discount on the new borrowing, as a non-cash
adjustment to interest expense rather than as a non-cash loss on debt extinguishment at the time
the original borrowing is amended. Accordingly, the Company has concluded that a correction was
required to recognize the amendment as a modification and recognize as non-cash interest expense
the debt discount and related fees on the original debt from the date of the amendment in September
2009 through the maturity of the Facility Agreement in September 2012.
The following tables summarize the effect of the restatement by major financial statement line
item for the relevant periods (in thousands). The restatement resulted in an increase in other
assets of $1.2 million at December 31, 2009 related to the capitalization of issuance costs
incurred net of interest expense recognized over the term of the loan and an decrease of long-term
debt of $7.8 million related to the debt discount on the warrants and shares issued in connection
with the Facility Agreement, net of interest expense recognized. The restatement resulted in an
increase in interest expense of $0.6 million in the three months ended March 31, 2010 with an
equivalent increase in net interest expense and net loss. The restatement had no effect on any
additional amounts reported in periods prior to the quarter ended September 30, 2009.
16
Consolidated Balance Sheet
| |
|
|
|
|
|
|
|
|
| |
|
December 31, 2009 |
| |
|
As Previously |
|
|
| |
|
Reported |
|
As Restated |
Other assets |
|
$ |
1,862 |
|
|
$ |
3,072 |
|
Total assets |
|
|
171,648 |
|
|
|
172,858 |
|
Long-term debt, net of current portion |
|
|
96,979 |
|
|
|
89,136 |
|
Total liabilities |
|
|
118,791 |
|
|
|
110,948 |
|
Additional paid-in capital |
|
|
382,709 |
|
|
|
384,565 |
|
Accumulated deficit |
|
|
(329,891 |
) |
|
|
(322,694 |
) |
Total stockholders’ equity |
|
|
52,857 |
|
|
|
61,910 |
|
Total liabilities and stockholders’ equity |
|
|
171,648 |
|
|
|
172,858 |
|
Consolidated Statement of Operations
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, 2010 |
| |
|
As Previously |
|
|
| |
|
Reported |
|
As Restated |
Interest expense |
|
$ |
(3,149 |
) |
|
$ |
(3,785 |
) |
Net interest expense |
|
|
(3,125 |
) |
|
|
(3,761 |
) |
Net loss |
|
|
(13,855 |
) |
|
|
(14,491 |
) |
Net loss per share basic and diluted |
|
|
(0.37 |
) |
|
|
(0.38 |
) |
Consolidated Statement of Cash Flows
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, 2010 |
| |
|
As Previously |
|
|
| |
|
Reported |
|
As Restated |
Net loss |
|
$ |
(13,855 |
) |
|
$ |
(14,491 |
) |
Amortization of debt discount |
|
|
1,238 |
|
|
|
1,789 |
|
Non cash interest expense |
|
|
132 |
|
|
|
217 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
You should read the following discussion of our financial condition and results of operations
in conjunction with our consolidated financial statements and the accompanying notes to those
financial statements included in this Quarterly Report on Form 10-Q. This Quarterly Report on Form
10-Q contains forward-looking statements. These forward-looking statements are based on our current
expectations and beliefs concerning future developments and their potential effects on us. There
can be no assurance that future developments affecting us will be those that we have anticipated.
These forward-looking statements involve a number of risks, uncertainties (some of which are beyond
our control) or other assumptions that may cause actual results or performance to be materially
different from those expressed or implied by these forward-looking statements. These risks and
uncertainties include, but are not limited to: our historical operating losses; our dependence on
the OmniPod System; our ability to achieve and maintain market acceptance of the OmniPod System;
our ability to increase customer orders and manufacturing volume; adverse changes in general
economic conditions; our ability to raise additional funds in the future; our ability to anticipate
and effectively manage risks associated with doing business internationally, particularly in China;
our dependence on third-party suppliers; our ability to obtain favorable reimbursement from
third-party payors for the OmniPod System and potential adverse changes in reimbursement rates or
policies relating to the OmniPod; potential adverse effects resulting from competition;
technological innovations adversely affecting our business; potential termination of our license to
incorporate a blood glucose meter into the OmniPod System; our ability to protect our intellectual
property and other proprietary rights; conflicts with the intellectual property of third parties;
adverse regulatory or legal actions relating to the OmniPod System; the potential violation of
federal or state laws prohibiting “kickbacks” and false and fraudulent claims or adverse affects of
challenges to or investigations into our practices under these laws; product liability lawsuits
that may be brought against us; unfavorable results of clinical studies relating to the OmniPod
System or the products of our competitors; our ability to attract and retain key personnel; our
ability to manage our growth; our ability to maintain compliance with the restrictions and related
to our indebtedness; our ability to successfully maintain effective internal controls; the
volatility of the price of our common stock; and other risks and uncertainties described in our
Annual Report on Form 10-K for the
17
year ended December 31, 2009, which was filed with the
Securities and Exchange Commission on March 9, 2010 as updated by Part II, Item 1A., “Risk Factors”
of this Quarterly Report on Form 10-Q. Should one or more of these risks or uncertainties
materialize, or should any of our assumptions prove incorrect, actual results may vary in material
respects from those projected in these forward-looking statements. We undertake no obligation to
publicly update or revise any forward-looking statements.
Restatement of Previously Issued Financial Statements
Financial data when presented throughout the MD&A includes the effect of the restatement of
certain prior period amounts, as described in Note 13 to our consolidated financial statements.
The restatement resulted in an increase in other assets of $1.2 million at December 31, 2009
related to the capitalization of issuance costs incurred net of interest expense recognized over
the term of the loan and a decrease of long-term debt of $7.8 million related to the debt discount
on the warrants and shares issued in connection with the Facility Agreement, net of interest
expense recognized. The restatement resulted in an increase in interest expense of $0.6 million in
the three months ended March 31, 2010 with an equivalent increase in net interest expense and net
loss. The restatement had no effect on any amounts reported in periods prior to the quarter ended
September 30, 2009.
Consolidated Balance Sheet
| |
|
|
|
|
|
|
|
|
| |
|
December 31, 2009 |
| |
|
As Previously |
|
|
| |
|
Reported |
|
As Restated |
Other assets |
|
$ |
1,862 |
|
|
$ |
3,072 |
|
Total assets |
|
|
171,648 |
|
|
|
172,858 |
|
Long-term debt, net of current portion |
|
|
96,979 |
|
|
|
89,136 |
|
Total liabilities |
|
|
118,791 |
|
|
|
110,948 |
|
Additional paid-in capital |
|
|
382,709 |
|
|
|
384,565 |
|
Accumulated deficit |
|
|
(329,891 |
) |
|
|
(322,694 |
) |
Total stockholders’ equity |
|
|
52,857 |
|
|
|
61,910 |
|
Total liabilities and stockholders’ equity |
|
|
171,648 |
|
|
|
172,858 |
|
Consolidated Statement of Operations
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, 2010 |
| |
|
As Previously |
|
|
| |
|
Reported |
|
As Restated |
Interest expense |
|
$ |
(3,149 |
) |
|
$ |
(3,785 |
) |
Net interest expense |
|
|
(3,125 |
) |
|
|
(3,761 |
) |
Net loss |
|
|
(13,855 |
) |
|
|
(14,491 |
) |
Net loss per share basic and diluted |
|
|
(0.37 |
) |
|
|
(0.38 |
) |
Consolidated Statement of Cash Flows
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, 2010 |
| |
|
As Previously |
|
|
| |
|
Reported |
|
As Restated |
Net loss |
|
$ |
(13,855 |
) |
|
$ |
(14,491 |
) |
Amortization of debt discount |
|
|
1,238 |
|
|
|
1,789 |
|
Non cash interest expense |
|
|
132 |
|
|
|
217 |
|
18
Overview
We are a medical device company that develops, manufactures and markets an insulin infusion
system for people with insulin-dependent diabetes. Our proprietary OmniPod Insulin Management
System consists of our disposable OmniPod insulin infusion device and our handheld, wireless
Personal Diabetes Manager.
The U.S. Food and Drug Administration, or FDA, approved the OmniPod System in January 2005,
and we began commercial sale of the OmniPod System in the United States in October 2005. We have
progressively expanded our marketing and sales efforts from an initial focus in the Eastern United
States, to having availability of the OmniPod System in the entire United States through internal
sales and distribution channels as well as third-party distributors. In January 2010, we entered
into a five-year exclusive distribution agreement with Ypsomed Distribution AG, or Ypsomed, which
intends to distribute and sell our OmniPod System in eleven countries, subject to approved
reimbursement. We focus our sales towards key diabetes practitioners, academic centers and clinics
specializing in the treatment of diabetes patients, as well as individual diabetes patients.
We currently produce the OmniPod on a partially automated manufacturing line at a facility in
China operated by a subsidiary of Flextronics International Ltd. We purchase complete OmniPods
pursuant to our agreement with Flextronics. Under the agreement, Flextronics has agreed to supply
us, as a non-exclusive supplier, with OmniPods at agreed upon prices per unit pursuant to a rolling
12-month forecast that we provide to Flextronics. The initial term of the agreement was three years
from January 3, 2007, with automatic one-year renewals. The agreement may be terminated at any time
by either party upon prior written notice given no less than a specified number of days prior to
the date of termination. The specified number of days is intended to provide the parties with
sufficient time to make alternative arrangements in the event of termination. By purchasing
OmniPods manufactured by Flextronics in China, we have been able to substantially increase
production volumes for the OmniPod and reduce our per unit production cost.
To achieve profitability, we continue to seek to increase manufacturing volume and reduce the
per unit production cost for the OmniPod by collaborating with contract manufacturers and reducing
the cost of raw materials and sub-assemblies. By increasing production volumes of the OmniPod, we
have been able to reduce our per-unit raw material costs and improve absorption of manufacturing
overhead costs. This, as well as the continued collaboration with contract manufacturers to reduce
the cost of supplies of raw materials and sub-assemblies are important as we strive to achieve
profitability. We believe our manufacturing capacity is sufficient to meet our expected 2010
demand for OmniPods.
Our sales and marketing effort is focused on generating demand and acceptance of the OmniPod
System among healthcare professionals, people with insulin-dependent diabetes, third-party payors
and third-party distributors. Our marketing strategy is to build awareness for the benefits of the
OmniPod System through a wide range of education programs, social networking, patient demonstration
programs, support materials, media advertisements and events at the national, regional and local
levels. We are using third-party distributors to improve our access to managed care and government
reimbursement programs, expand our commercial presence and provide access to additional potential
patients. In addition, we entered into a distribution agreement with Ypsomed to become the
exclusive distributor of the OmniPod System in eleven countries. Ypsomed obtained reimbursement
approval in both Germany and the United Kingdom in the second quarter of 2010 and accordingly, we
shipped product for distribution in these countries to Ypsomed. We expect that Ypsomed will begin
distributing the OmniPod System, subject to approved reimbursement, in several other markets in the
second half of 2010 and in the first half of 2011. We expect Ypsomed to work with the appropriate
agencies to establish an appropriate distribution and reimbursement process in the remainder of
these countries.
As a medical device company, reimbursement from third-party payors is an important element of
our success. If patients are not adequately reimbursed for the costs of using the OmniPod System,
it will be much more difficult for us to penetrate the market. We continue to negotiate contracts
establishing reimbursement for the OmniPod System with national and regional third-party payors. As
we expand our sales and marketing focus, increase our manufacturing capacity and expand to
international markets, we will need to maintain and expand available reimbursement for the OmniPod
System.
Our continued growth is dependent on our ability to generate interest in our products through
sales and marketing activities. We are also dependent on our ability to effectively and correctly
evaluate the extent of patients’ reimbursement coverage under applicable reimbursement programs in
order to convert customer inquiries into shipments and revenue.
Since our inception in 2000, we have incurred losses every quarter. In the three and six
months ended June 30, 2010, we incurred net losses of $13.7 million and $28.2 million,
respectively. As of June 30, 2010, we had an accumulated deficit of $350.9 million. We have
financed our operations through the private placement of debt and equity securities, public
offerings of our common stock, a private placement of our convertible debt and borrowings under
certain debt agreements. In October 2009, we issued and sold 6,900,000 shares of our common stock
at a price to the public of $10.25 per share. In connection with the offering, we received total
gross proceeds of $70.7 million, or approximately $66.1 million in net proceeds after deducting
underwriting discounts and offering expenses. As of June 30, 2010, we had $85.0 million of
convertible debt outstanding and $32.5 million of outstanding debt relating to a Facility Agreement
entered into March 13, 2009 and amended on September 25, 2009 and June 17, 2010.
Our long-term financial objective is to achieve and sustain profitable growth. Our efforts for
the remainder of 2010 will be focused primarily on finalizing our next generation OmniPod,
continuing to reduce our per-unit production costs, expanding sales to international markets and
reducing our spending on manufacturing overhead and operating expenses as a percentage of revenue.
The
19
introduction of our next generation OmniPod and the continued expansion of our manufacturing
capacity will help us to achieve lower material costs due to design modification on the new
version, volume purchase discounts and improved absorption of manufacturing overhead costs,
reducing our cost of revenue as a percentage of revenue. Achieving these objectives is expected to
require additional investments in certain personnel and initiatives to allow for us to increase our
market penetration in the United States market and enter certain international markets. We believe
that we will continue to incur net losses in the near term in order to achieve these objectives.
However, we believe that the accomplishment of our near term objectives will have a positive impact
on our financial condition in the future.
Facility Agreement and Common Stock Warrants
In March 2009, we entered into a Facility Agreement with certain institutional accredited
investors, pursuant to which the investors agreed to loan us up to $60 million, subject to the
terms and conditions set forth in the Facility Agreement. Following the initial disbursement of
$27.5 million on March 31, 2009, we could, but were not required to, draw down on the facility in
$6.5 million increments at any time until November 2010 provided that we met certain financial
performance milestones. In connection with this financing, we paid Deerfield Management Company,
L.P., an affiliate of the lead lender, a one-time transaction fee of $1.2 million. Total financing
costs, including the transaction fee, were $3.0 million and are being amortized as interest expense
over the 42 month term of the Facility Agreement.
In connection with the execution of the Facility Agreement, we issued to the lenders fully
exercisable warrants to purchase an aggregate of 3.75 million shares of our common stock at an
exercise price of $3.13 per share. Pursuant to the original terms of the Facility Agreement, we
would have been required to issue additional warrants to purchase 1.5 million shares upon drawing
down the remaining $32.5 million under the facility. The warrants qualified for permanent
treatment as equity, and their relative fair value of $6.1 million on the issuance date was
recorded as additional paid-in capital and debt discount. The debt discount is being amortized as
interest expense over the term of the loan.
The amounts initially drawn under the Facility Agreement accrued interest at a rate of 9.75%
per annum, and the undrawn amounts under the Facility Agreement accrued interest at a rate of 2.75%
per annum. Accrued interest is payable quarterly in cash in arrears.
In September 2009, we entered into an Amendment to the Facility Agreement whereby we repaid
the $27.5 million of outstanding debt and promptly drew down the remaining $32.5 million available
under the Facility Agreement. The lender eliminated all future performance milestones associated
with the remaining $32.5 million available on the credit facility and reduced the annual interest
rate on any borrowed funds to 8.5%. In connection with the Amendment to the Facility Agreement, we
entered into a Securities Purchase Agreement with the lenders whereby we sold 2,855,659 shares of
our common stock to the lenders at $9.63 per share, a $1.9 million discount based on the closing
price of our common stock of $10.28 on that date. We recorded the $1.9 million as a debt discount
which is being amortized as interest expense over the remaining term of the loan. We received
aggregate proceeds of $27.5 million in connection with the sale of our shares.
All principal amounts outstanding under the Facility Agreement are payable in September 2012.
Any amounts drawn under the Facility Agreement may become immediately due and payable upon (i) an
“event of default,” as defined in the Facility Agreement, in which case the lenders would have the
right to require us to re-pay 100% of the principal amount of the loan, plus any accrued and unpaid
interest thereon, or (ii) the consummation of certain change of control transactions, in which case
the lenders would have the right to require us to re-pay 106% of the outstanding principal amount
of the loan, plus any accrued and unpaid interest thereon. The amended Facility Agreement also
provides for certain prepayment penalties in the event that we repay the debt prior to its
maturity.
In June 2010, we entered into a Second Amendment to the Facility Agreement whereby we paid a
$0.5 million amendment fee to the lenders in exchange for the
reduction of the prepayment penalties we must pay in certain events as well as the modification of certain other terms in the
Facility Agreement. The fee was recorded as a debt discount and is being amortized to interest
expense over the remaining term of the loan.
All references herein to the “Facility Agreement” refer to the Facility Agreement entered into
in March 2009 and amended in September 2009 and June 2010.
Because the consummation of certain change of control transactions would result in the payment
of a premium of the outstanding principal, the premium feature is a derivative that is required to
be bifurcated from the host debt instrument and recorded at fair value at each quarter end. As a
prepayment penalty could be paid by us in the event that we repay the debt prior to maturity, the
prepayment penalty is also considered a derivative. The prepayment penalty does not meet the
criteria to be accounted for separately. Any changes in fair value of the premium feature will be
recorded as interest expense. The difference between the face value of the outstanding principal
on the Facility Agreement and the amount remaining after the bifurcation will be recorded as a
discount to be amortized over the term of the Facility Agreement. As of June 30, 2010, the premium
feature associated with the Facility Agreement had no value as we do not currently expect a change
in control transaction to occur. The embedded derivatives related to the Facility Agreement will be
reassessed and marked-to-market through earnings on a quarterly basis.
As of June 30, 2010 and December 31, 2009, outstanding debt related to the Facility Agreement
of $25.3 million and $24.7 million, respectively, was included in long-term debt in the consolidated
balance sheet, respectively.
20
In the three and six months ended June 30, 2010, cash interest related to the Facility
Agreement of approximately $0.7 million and $1.4 million, respectively, was recorded. In addition,
in the three and six months ended June 30, 2010, non-cash interest of approximately $0.7 million
and $1.3 million, respectively, was recorded. Non-cash interest in the three and six months ended
June 30, 2010 consists of amortization of the debt discount from the issuance of warrants and
transaction fee in March 2009, from the discount on the shares sold in connection with the
amendment in September 2009, from the transaction fee in connection with the amendment in June 2010
and amortization of the issuance costs associated with the debt.
In the three and six months ended June 30, 2009, cash interest related to the Facility
Agreement of approximately $0.9 million was recorded. In addition, in the three and six months
ended June 30, 2009, non-cash interest of approximately $0.6 million was recorded. Non-cash
interest in the three and six months ended June 30, 2009 consists of amortization of the debt
discount from the issuance of warrants and transaction fee in March 2009 and amortization of the
issuance costs associated with the debt.
In March 2009, in connection with the execution of the Facility Agreement, we issued to the
lenders fully exercisable warrants to purchase an aggregate of 3.75 million shares of common stock
at an exercise price of $3.13 per share. Pursuant to the original terms of the Facility Agreement,
we would have been required to issue additional warrants to purchase 1.5 million shares upon
drawing down the remaining $32.5 million under the facility. In connection with the Amendment to
the Facility Agreement in September 2009, the lenders agreed to forego the remaining 1.5 million
additional warrants that would have been issued upon future draws. The warrants issued in
connection with the Facility Agreement qualify for permanent classification as equity and their
relative fair value of $6.1 million on issuance date was recorded as additional paid in capital and
debt discount. In June 2010, the lenders exercised warrants to acquire 2,125,000 shares of our
common stock at an exercise price of $3.13 in cash. We received cash totaling $6.7 million as a
result of this exercise.
As of June 30, 2010, warrants to acquire 1,625,000 shares of our common stock issued under the
Facility Agreement remain unexercised, expire on March 13, 2015 and contain certain limitations
that prevent the holder from acquiring shares upon exercise of a warrant that would result in the
number of shares beneficially owned by it to exceed 9.98% of the total number of shares of our
common stock then issued and outstanding.
In addition, upon certain change of control transactions, or upon certain “events of default”
(as defined in the warrant agreement), the holder has the right to net exercise the warrants for an
amount of shares of our common stock equal to the Black-Scholes value of the shares issuable under
the warrants divided by 95% of the closing price of the common stock on the day immediately prior
to the consummation of such change of control or event of default, as applicable. In certain
circumstances where a warrant or portion of a warrant is not net exercised in connection with a
change of control or event of default, the holder will be paid an amount in cash equal to the
Black-Scholes value of such portion of the warrant not treated as a net exercise.
Convertible Notes
In June 2008, we sold $85.0 million principal amount of 5.375% Convertible Senior Notes due
June 15, 2013 (the “5.375% Notes”) in a private placement to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended. The interest rate on the notes
is 5.375% per annum on the principal amount from June 16, 2008, payable semi-annually in arrears in
cash on December 15 and June 15 of each year. The 5.375% Notes are convertible into our common
stock at an initial conversion rate of 46.8467 shares of common stock per $1,000 principal amount
of the 5.375% Notes, which is equivalent to a conversion price of approximately $21.35 per share,
representing a conversion premium of 34% to the last reported sale price of our common stock on the
NASDAQ Global Market on June 10, 2008, subject to adjustment under certain circumstances, at any
time beginning on March 15, 2013 or under certain other circumstances and prior to the close of
business on the business day immediately preceding the final maturity date of the notes. The 5.375%
Notes will be convertible for cash up to their principal amount and shares of our common stock for
the remainder of the conversion value in excess of the principal amount. We do not have the right
to redeem any of the 5.375% Notes prior to maturity. If a fundamental change, as defined in the
Indenture for the 5.375% Notes, occurs at any time prior to maturity, holders of the 5.375% Notes
may require us to repurchase their notes in whole or in part for cash equal to 100% of the
principal amount of the notes to be repurchased, plus accrued and unpaid interest, including any
additional interest, but excluding, the date of repurchase.
If a holder elects to convert its 5.375% Notes upon the occurrence of a make-whole fundamental
change, as defined in the Indenture for the 5.375% Notes, the holder may be entitled to receive an
additional number of shares of common stock on the conversion date. These additional shares are
intended to compensate the holders for the loss of the time value of the conversion option and are
set forth in the Indenture for the 5.375% Notes. In no event will the number of shares issuable
upon conversion of a note exceed 62.7746 per $1,000 principal amount (subject to adjustment as
described in the Indenture for the 5.375% Notes).
We recorded a debt discount of $26.9 million to equity to reflect the value of our
nonconvertible debt borrowing rate of 14.5% per annum. This debt discount is being amortized as
interest expense over the 5 year life of the 5.375% Notes.
We incurred deferred financing costs related to this offering of approximately $3.5 million,
of which $1.1 million has been reclassified as an offset to the value of the amount allocated to
equity. The remainder is recorded as other assets in the consolidated balance sheet and is being
amortized as a component of interest expense over the five year term of the 5.375% Notes. We
incurred interest expense related to the 5.375% Notes of approximately $2.5 million and $5.0
million for the three and six months ended June 30, 2010, respectively. Of the $2.5 million
recorded in the three months ended June 30, 2010, approximately $1.4 million relates to
21
amortization of the debt discount and deferred financing costs and $1.1 million relates to
cash interest. Of the $5.0 million recorded in the six months ended June 30, 2010, approximately
$2.7 million relates to amortization of the debt discount and deferred financing costs and $2.3
million relates to cash interest. For the three and six months ended June 30, 2009,we incurred
interest expense related to the 5.375% Notes of approximately $2.2 million and $4.4 million,
respectively. Of the $2.2 million recorded in the three months ended June 30, 2009, approximately
$1.1 million relates to amortization of the debt discount and deferred financing cost and $1.1
million relates to cash interest. Of the $4.4 million recorded in the six months ended June 30,
2009, approximately $2.2 million relates to amortization of the debt discount and deferred
financing cost and $2.2 million relates to cash interest.
As of June 30, 2010, the outstanding amounts related to the 5.375% Notes of $67.0 million are
included in long-term debt in the consolidated balance sheet and reflect the debt discount of $18.0
million. As of December 31, 2009, the outstanding amounts related to the 5.375% Notes of $64.5
million are included in long-term debt and reflect the debt discount of $20.5 million. The debt
discount includes the equity allocation of $25.8 million (which represents $26.9 million less the
$1.1 million of allocated financing costs) offset by the accretion of the debt discount through
interest expense from the issuance date over the 5 year term of the notes. We recorded $1.2 million
and $2.5 million of interest expense related to the debt discount in the three and six months ended
June 30, 2010, respectively. We recorded $1.1 million and $2.2 million of interest expense related
to the debt discount in the three and six months ended June 30, 2009, respectively. As of June 30,
2010, the 5.375% Notes have a remaining term of 3 years.
We received net proceeds of approximately $81.5 million from this offering. Approximately
$23.2 million of the proceeds from this offering were used to repay and terminate our then-existing
term loan, including outstanding principal and accrued and unpaid interest of $21.8 million, a
prepayment fee related to the term loan of approximately $0.4 million and a termination fee related
to the term loan of $0.9 million. We are using the remainder for general corporate purposes. In
connection with this term loan, we issued warrants to the lenders to purchase up to 247,252 shares
of Series E preferred stock at a purchase price of $3.64 per share. The warrants automatically
converted into warrants to purchase common stock on a 1-for-2.6267 basis at a purchase price of
$9.56 per share at the closing of our initial public offering in May 2007. At June 30, 2010,
warrants to purchase 62,752 shares of common stock remain outstanding and exercisable at a price of
$9.56 per share.
Financial Operations Overview
Revenue. We derive nearly all of our revenue from the sale of the OmniPod System directly to
patients and third-party distributors who resell the product to diabetes patients. The OmniPod
System is comprised of two devices: the OmniPod, a disposable insulin infusion device that the
patient wears for up to three days and then replaces; and the Personal Diabetes Manager (“PDM”), a
handheld device much like a personal digital assistant that wirelessly programs the OmniPod with
insulin delivery instructions, assists the patient with diabetes management and incorporates a
blood glucose meter. Revenue is derived from the sale to new customers or third-party distributors
of OmniPods and Starter Kits, which include the PDM, the OmniPod System User Guide and our OmniPod
System Interactive Training CD, and from the subsequent sales of additional OmniPods to existing
customers. Customers generally order a three-month supply of OmniPods. In January 2010, we entered
into an exclusive distribution agreement with Ypsomed which intends to distribute and sell the
OmniPod System, subject to approved reimbursement, in eleven countries. Ypsomed obtained
reimbursement approval in both Germany and the United Kingdom in the second quarter of 2010, and
accordingly, we shipped product for distribution in these countries to Ypsomed. We expect that
Ypsomed will begin distributing the OmniPod System, subject to approved reimbursement, in several
other markets in the second half of 2010 and in the first half of 2011. We have not recorded
revenue related to the Ypsomed agreement. For the three months ended June 30, 2010, and for
preceding periods, materially all of our revenue was derived from sales within the United States.
In March 2008, we received a cash payment from Abbott Diabetes Care, Inc. (“Abbott”) for an
agreement fee in connection with execution of the first amendment to the development and license
agreement with Abbott. We are recognizing the payment as revenue over the 5 year term of the
agreement. Under the amended Abbott agreement, beginning July 1, 2008, Abbott agreed to pay us
certain amounts for services performed by us in connection with each sale of a PDM that includes an
Abbott Discrete Blood Glucose Monitor to certain customers in the United States and Israel. We
recognize the revenue related to this portion of the Abbott agreement at the time we meet the
criteria for revenue recognition, typically at the time of the sale of the PDM to a new patient. In
the three and six months ended June 30, 2010 we recognized revenue related to the amended Abbott
agreement of $1.3 million and $2.4 million, respectively. In the three and six months ended June
30, 2009 we recognized revenue related to the amended Abbott agreement of $1.0 million and $2.1
million, respectively. There was no impact to cost of revenue related to this agreement.
In July 2010, we entered into the second amendment to the development and license agreement
with Abbott. Under the second amendment, Abbott agreed to pay certain amounts
to us for services we performed in connection with each sale of a PDM that includes an Abbott
Discrete Blood Glucose Monitor to customers in certain additional territories.
As of June 30, 2010 and December 31, 2009, we had deferred revenue of $5.7 million and $5.1
million, respectively, which includes product-related revenue as well as the unrecognized portion
of the agreement fee related to the Abbott agreement. For the year ending December 31, 2010, we
expect our revenue to continue to increase as we continue to gain new customers in the United
States and expand to Germany, the United Kingdom, and certain other international markets.
Cost of revenue. Cost of revenue consists primarily of raw materials, labor, warranty and
overhead costs related to the OmniPod System. Cost of revenue also includes depreciation, freight
and packaging costs. The increase in our OmniPod production volume, as well as our ability to gain
cost savings on our bill of materials, is expected to reduce the per-unit cost of manufacturing the
OmniPods
22
by allowing us to reduce our direct costs and spread our fixed and semi-fixed overhead costs over a
greater number of units.
Research and development. Research and development expenses consist primarily of personnel
costs within our product development, regulatory and clinical functions, as well as the costs of
market studies and product development projects. We expense all research and development costs as
incurred. In the first half of 2010, we incurred higher levels of spending on our research and
development efforts, which are focused primarily on increased functionality, improved design for
patient convenience, ease of use, and reduction of production costs, as well as developing a new
OmniPod System that incorporates continuous glucose monitoring technology. We expect this level of
spending will continue in the second half of this year.
General and administrative. General and administrative expenses consist primarily of salaries
and other related costs for personnel serving the executive, finance, information technology and
human resource functions, as well as legal fees, accounting fees, insurance costs, bad debt
expenses, shipping, handling and facilities-related costs. For the remainder of 2010, we expect
general and administrative expenses to decrease slightly from current levels as we continue to
drive efficiencies in our administrative functions.
Sales and marketing. Sales and marketing expenses consist primarily of personnel costs within
our sales, marketing, reimbursement support, customer support and training functions, sales
commissions paid to our sales representatives and costs associated with participation in medical
conferences, physician symposia and promotional activities, including distribution of units used in
our demonstration kit programs. For the remainder of 2010, we expect sales and marketing expenses
to increase compared to current levels as we expand our sales and marketing efforts to
meet our business needs and international expansion.
Results of Operations
The following table presents certain statement of operations information for the three and six
months ended June 30, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| |
|
2010 |
|
|
2009 |
|
|
% Change |
|
|
2010 |
|
|
2009 |
|
|
% Change |
|
| |
|
(in thousands) |
|
Revenue |
|
$ |
22,937 |
|
|
$ |
14,617 |
|
|
|
57 |
% |
|
$ |
43,744 |
|
|
$ |
27,086 |
|
|
|
62 |
% |
Cost of revenue |
|
|
13,051 |
|
|
|
11,448 |
|
|
|
14 |
% |
|
|
25,473 |
|
|
|
21,922 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
9,886 |
|
|
|
3,169 |
|
|
|
212 |
% |
|
|
18,271 |
|
|
|
5,164 |
|
|
|
254 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
4,583 |
|
|
|
3,272 |
|
|
|
40 |
% |
|
|
8,430 |
|
|
|
6,476 |
|
|
|
30 |
% |
General and administrative |
|
|
6,190 |
|
|
|
5,838 |
|
|
|
6 |
% |
|
|
13,149 |
|
|
|
13,329 |
|
|
|
1 |
% |
Sales and marketing |
|
|
9,013 |
|
|
|
10,504 |
|
|
|
14 |
% |
|
|
17,322 |
|
|
|
19,276 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
19,786 |
|
|
|
19,614 |
|
|
|
1 |
% |
|
|
38,901 |
|
|
|
39,081 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(9,900 |
) |
|
|
(16,445 |
) |
|
|
40 |
% |
|
|
(20,630 |
) |
|
|
(33,917 |
) |
|
|
39 |
% |
Other expense, net |
|
|
(3,811 |
) |
|
|
(3,794 |
) |
|
|
0 |
% |
|
|
(7,571 |
) |
|
|
(5,967 |
) |
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(13,711 |
) |
|
$ |
(20,239 |
) |
|
|
32 |
% |
|
$ |
(28,201 |
) |
|
$ |
(39,884 |
) |
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the Three and Six Months Ended June 30, 2010 and 2009
Revenue
Our total revenue was $22.9 million and $43.7 million for the three and six months ended June
30, 2010, compared to $14.6 million and $27.1 million for the same periods in 2009. The increase in
revenue is primarily due to an increased number of patients using the OmniPod System and an
increase in sales to distributors. We expect our revenue to continue to increase as we continue to
add new patients, both in the United States and internationally, and generate a higher volume of
reorders based on our expanding patient base. In addition, we expect to continue to recognize
additional revenue related to the Abbott agreement.
Cost of Revenue
Cost of revenue was $13.1 million and $25.5 million for the three and six months ended June
30, 2010, compared to $11.4 million and $21.9 million for the same period in 2009. The increase in
cost of revenue is primarily due to the significantly increased sales volume. This increase was
partially offset by a decrease in per-unit costs to manufacture the OmniPod in the three and six
months ended June 30, 2010, as compared to the same periods in 2009. The decrease in our per-unit
cost was a result of cost savings on raw materials, volume discounts from our suppliers and
increased production volumes. We experienced continuing improvement of our gross margin as a result
of the increase in revenue as well as the decrease in the per-unit cost to manufacture the OmniPod
for the three and six months ended June 30, 2010 compared to the same periods in 2009.
23
Research and Development
Research and development expenses increased $1.3 million, or 40%, to $4.6 million for the
three months ended June 30, 2010 compared to $3.3 million for the same period in 2009. Research and
development expenses increased $2.0 million, or 30%, to $8.4 million for the six months ended June
30, 2010 compared to $6.5 million for the same period in 2009. For the three months ended June 30,
2010, the increase in research and development expenses was attributable to an increase of $1.0
million related to the expensing of costs previously capitalized for the development of our next
generation OmniPod, $0.5 million in outside services and $0.1 million in supplies and consumables.
These increases were offset by a decrease in employee related expenses including stock-based
compensation of $0.3 million. For the six months ended June 30, 2010, the increase in research and
development expenses was primarily attributable to an increase of $1.0 million related to the
expensing of costs previously capitalized for the development of our next generation OmniPod, $1.3
million in outside services and $0.4 million in supplies and consumables. The increased costs were
offset by a $0.7 million decrease in employee related expenses including stock-based compensation.
General and Administrative
General and administrative expenses increased $0.4 million, or 6%, to $6.2 million for the
three months ended June 30, 2010, compared to $5.8 million for the same period in 2009. General and
administrative expenses decreased $0.2 million, or 1%, to $13.1 million for the six months ended
June 30, 2010, compared to $13.3 million for the same period in 2009. For the three months ended
June 30, 2010, the increase in general and administrative expenses was primarily due to an increase
of $0.2 million in outside services and a $0.2 million increase in allowances and write-offs of
trade accounts receivable. These increases were offset by a decrease of $0.1 million in employee
compensation and benefit costs, including stock-based compensation. For the six months ended June
30, 2010, the decrease in general and administrative expenses was attributable to a decrease in
supplies and consumables of $0.2 million and a decrease in depreciation expense of $0.1 million.
The decreases were offset by an increase of $0.1 million in employee related expenses including
stock-based compensation.
Sales and Marketing
Sales and marketing expenses decreased $1.5 million, or 14%, to $9.0 million for the three
months ended June 30, 2010, compared to $10.5 million for the same period in 2009. Sales and
marketing expenses decreased $2.0 million, or 10%, to $17.3 million for the six months ended June
30, 2010, compared to $19.3 million for the same period in 2009. For the three months ended June
30, 2010, the decrease in sales and marketing expenses was primarily due to a decrease of $0.9
million in samples and Patient Demonstration Kits, a decrease of $0.6 million in outside services
and a decrease of $0.3 million in travel related expenses. These decreases were partially offset by
a $0.3 million increase in employee related expenses including stock-based compensation. For the
six months ended June 30, 2010, the decrease in sales and marketing was primarily due to a decrease
of $1.3 million in samples and Patient Demonstration Kits, a decrease of $0.5 million in outside
services and a decrease of $0.4 million in travel related expenses. The decreases were offset by
an increase of $0.3 million in employee related expenses including stock-based compensation.
Other Income (Expense)
Net interest expense was $3.8 million for both the three months ended June 30, 2010 and June
30, 2009. Net interest expense was $7.6 million for the six months ended June 30, 2010, compared to
$6.0 million for the same period in 2009. For the three months ended June 30, 2010, the slight
increase in net interest expense was primarily due to the additional non-cash interest associated
with the Amendment to the Facility Agreement in September 2009 and June 2010. For the six months
ended June 30, 2010, the increase in net interest expense was primarily due to amortization of the
debt discount related to our 5.375% Notes and additional non-cash interest associated with the
amendments to the Facility Agreement in September 2009 and June 2010.
Liquidity and Capital Resources
We commenced operations in 2000 and to date we have financed our operations primarily through
private placement of common and preferred stock, secured indebtedness, public offerings of our
common stock and issuance of convertible debt. As of June 30, 2010, we had $118.1 million in cash
and cash equivalents. We believe that our current cash and cash equivalents, together with the cash
expected to be generated from product sales, will be sufficient to meet our projected operating and
debt service requirements for at least the next twelve months.
Equity
In October 2009, in a public offering, we issued and sold 6,900,000 shares of our common stock
at a price to the public of $10.25 per share. In connection with this offering, we received total
gross proceeds of $70.7 million, or approximately $66.1 million in net proceeds after deducting
underwriter discounts and offering expenses.
Facility Agreement
In March 2009, we entered into a Facility Agreement with certain institutional accredited
investors, pursuant to which the investors agreed to loan us up to $60 million, subject to the
terms and conditions set forth in the Facility Agreement. Following the initial disbursement of
$27.5 million on March 31, 2009, we could, but were not required to, draw down on the facility in
$6.5 million
24
increments at any time until November 2010 provided that we met certain financial performance
milestones. In connection with this financing, we paid Deerfield Management Company, L.P., an
affiliate of the lead lender, a one-time transaction fee of $1.2 million. Total financing costs,
including the transaction fee, as of June 30, 2009 were $3.0 million. The amounts initially drawn
under the Facility Agreement accrued interest at a rate of 9.75% per annum, and the undrawn amounts
under the Facility Agreement accrued interest at a rate of 2.75% per annum. Accrued interest is
payable quarterly in cash in arrears.
In September 2009, we entered into an Amendment to the Facility Agreement whereby we repaid
the $27.5 million of outstanding debt and promptly drew down the remaining $32.5 million available
under the Facility Agreement. The lender eliminated all future performance-related milestones
associated with the remaining $32.5 million available on the credit facility and reduced the annual
interest rate to 8.5%. In connection with the Amendment to the Facility Agreement, we entered into
a Securities Purchase Agreement with the lenders whereby we sold 2,855,659 shares of our common
stock to the lenders at $9.63 per share, a $1.9 million discount based on the closing price of our
common stock of $10.28 on that date. We recorded the $1.9 million as a debt discount which is
being amortized to interest expense over the remaining term of the loan. We received aggregate
proceeds of $27.5 million in connection with the sale of our shares. All principal amounts
outstanding under the Facility Agreement are payable in September 2012.
In June 2010, we entered into a Second Amendment to the Facility Agreement whereby we paid a
$0.5 million amendment fee in exchange for the reduction of the
prepayment penalties as well as the
modification of certain other terms of the Agreement. The fee was recorded as a debt discount and
is being amortized as interest expense over the remaining term of the loan.
Common Stock Warrants
In March 2009, in connection with the execution of the Facility Agreement, we issued to the
lenders fully exercisable warrants to purchase an aggregate of 3.75 million shares of common stock
at an exercise price of $3.13 per share. The warrants qualified for permanent treatment as equity,
and their relative fair value of $6.1 million on the issuance date was recorded as additional
paid-in capital and debt discount. The debt discount is being amortized as interest expense over
the term of the loan. Pursuant to the Facility Agreement, we would have been required to issue
additional warrants to purchase 1.5 million shares upon drawing down the remaining $32.5 million
under the facility. In connection with the Amendment of the Facility Agreement in September 2009,
the lenders agreed to forego the remaining 1.5 million additional warrants that would have been
issued upon future draws. In June 2010, the lenders exercised warrants to acquire 2,125,000 shares
of our common stock at an exercise price of $3.13 per share. We received cash totaling $6.7
million as a result of this exercise. As of June 30, 2010, warrants issued under the Facility
Agreement to acquire 1,625,000 shares of our common stock remain unexercised.
Convertible Notes
In June 2008, we sold $85.0 million principal amount of 5.375% Notes due June 15, 2013 (the
“5.375% Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended. The interest rate on the notes is 5.375% per annum on
the principal amount from June 16, 2008, payable semi-annually in arrears in cash on December 15
and June 15 of each year. The 5.375% Notes are convertible into our common stock at an initial
conversion rate of 46.8467 shares of common stock per $1,000 principal amount of the 5.375% Notes,
which is equivalent to a conversion price of approximately $21.35 per share, representing a
conversion premium of 34% to the last reported sale price of our common stock on the NASDAQ Global
Market on June 10, 2008, per $1,000 principal amount of the 5.375% Notes, subject to adjustment
under certain circumstances, at any time beginning on March 15, 2013 or under certain other
circumstances and prior to the close of business on the business day immediately preceding the
final maturity date of the notes. The 5.375% Notes will be convertible for cash up to their
principal amount and shares of our common stock for the remainder of the conversion value in excess
of the principal amount. We do not have the right to redeem any of the 5.375% Notes prior to
maturity. If a fundamental change, as defined in the Indenture for the 5.375% Notes, occurs at any
time prior to maturity, holders of the 5.375% Notes may require us to repurchase their notes in
whole or in part for cash equal to 100% of the principal amount of the notes to be repurchased,
plus accrued and unpaid interest, including any additional interest, to, but excluding, the date of
repurchase.
We received net proceeds of approximately $81.5 million from this offering. We used a portion
of the net proceeds to repay the entire outstanding principal balance, plus accrued and unpaid
interest, under our then-existing term loan in the aggregate of approximately $21.8 million in its
entirety. Additionally, we paid a prepayment fee related to the term loan of approximately $0.4
million, a termination fee related to the term loan of $0.9 million, and incurred certain other
expenses related to the repayment and termination of the term loan.
25
Operating Activities
The following table sets forth the amounts of cash used in operating activities and net loss
for each of the periods indicated:
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, |
|
| |
|
2010 |
|
|
2009 |
|
| |
|
(In thousands) |
|
Cash used in operating activities |
|
$ |
(15,058 |
) |
|
$ |
(28,463 |
) |
Net loss |
|
$ |
(28,201 |
) |
|
$ |
(39,884 |
) |
For each of the periods above, the net cash used in operating activities was attributable
primarily to the growth of our operations after adjustment for non-cash charges, such as
depreciation, amortization of the debt discount and stock-based compensation expense as well as
changes to working capital. During the six months ended June 30, 2010, we recorded a non-cash
charge to operations of approximately $1.0 million related to our review of costs incurred on
capital projects in process that we determined are no longer appropriate to capitalize.
Significant uses of cash from operations include an increase in accounts receivable, offset by
increases in accounts payable and accrued expenses and deferred revenue. The increase in accounts
receivable is primarily attributable to our increased sales. Accounts receivables are shown net of
allowances for doubtful accounts in the consolidated balance sheets. The increase in accounts
payable and accrued expenses are primarily attributed to timing on payments to our contract
manufacturers.
Investing Activities
The following table sets forth the amounts of cash used in investing activities and cash
provided by financing activities for each of the periods indicated:
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, |
|
| |
|
2010 |
|
|
2009 |
|
| |
|
(In thousands) |
|
Cash used in investing activities |
|
$ |
(1,986 |
) |
|
$ |
(756 |
) |
Cash provided by financing activities |
|
$ |
7,119 |
|
|
$ |
24,918 |
|
Cash used in investing activities in both periods was primarily for the purchase of fixed
assets for use in the development and manufacturing of the OmniPod System. Our cash used in
investing activities has increased significantly in the six months ended June 30, 2010, compared to
the six months ended June 30, 2009, as we increased spending on equipment to be used to manufacture
our next generation of the OmniPod. Capital expenditures are expected to continue to increase in
2010 compared to 2009. Cash provided by financing activities in the six months ended June 30, 2010
mainly consisted of the net proceeds from the issuance of common stock in connection with the
exercise of warrants to purchase 2,125,000 shares of common stock and employee stock options.
Cash provided by financing activities in the six months ended June 30, 2009 was mainly related to
the net proceeds from the Facility Agreement entered into in March 2009.
Lease Obligations
We lease our facilities, which are accounted for as operating leases. The lease of our
facilities in Bedford and Billerica, Massachusetts, generally provides for a base rent plus real
estate taxes and certain operating expenses related to the lease. All operating leases contain
renewal options and escalating payments over the term of the lease. As of June 30, 2010, we had an
outstanding letter of credit which totaled $0.2 million to cover our security deposits for lease
obligations.
Off-Balance Sheet Arrangements
As of June 30, 2010, we did not have any off-balance sheet financing arrangements.
Critical Accounting Policies and Estimates
Our financial statements are based on the selection and application of generally accepted
accounting principles, which require us to make estimates and assumptions about future events that
affect the amounts reported in our financial statements and the accompanying notes. Future events
and their effects cannot be determined with certainty. Therefore, the determination of estimates
requires the
exercise of judgment. Actual results could differ from those estimates, and any such differences
may be material to our financial statements. We believe that the policies set forth below may
involve a higher degree of judgment and complexity in their application than our other accounting
policies and represent the critical accounting policies and estimates used in the preparation of
our financial statements. If different assumptions or conditions were to prevail, the results could
be materially different from our reported results.
26
Revenue Recognition
We generate nearly all of our revenue from sales of our OmniPod Insulin Management System to
diabetes patients and third-party distributors who resell the product to diabetes patients. The
initial sale to a new customer or a third-party distributor typically includes OmniPods and a
Starter Kit, which includes the PDM, the OmniPod System User Guide and our OmniPod System
Interactive Training CD. Subsequent sales to existing customers typically consist of additional
OmniPods.
Revenue recognition requires that persuasive evidence of a sales arrangement exists, delivery
of goods occurs through transfer of title and risk and rewards of ownership, the selling price is
fixed or determinable and collectibility is reasonably assured. With respect to these criteria:
| |
• |
|
The evidence of an arrangement generally consists of a physician order
form, a patient information form, and if applicable, third-party
insurance approval for sales directly to patients or a purchase order
for sales to a third-party distributor. |
| |
| |
• |
|
Transfer of title and risk and rewards of ownership are passed to the
customer typically upon transfer to the third party carrier. |
| |
| |
• |
|
The selling prices for all sales are fixed and agreed with the patient
or third-party distributor, and, if applicable, the patient’s
third-party insurance provider(s) prior to shipment and are based on
established list prices or, in the case of certain third-party
insurers, contractually agreed upon prices. Provisions for discounts
and rebates to customers are established as a reduction to revenue in
the same period the related sales are recorded. |
We assess whether the different elements qualify for separate accounting. We recognize revenue
for the initial shipment to a patient or other third party once all elements have been delivered.
We offer a 45-day right of return for our Starter Kits sales, and we defer revenue to reflect
estimated sales returns in the same period that the related product sales are recorded. Returns are
estimated through a comparison of historical return data to their related sales. Historical rates
of return are adjusted for known or expected changes in the marketplace when appropriate.
Historically, sales returns have amounted to approximately 3% of gross product sales.
When doubt exists about reasonable assuredness of collectibility from specific customers, we
defer revenue from sales of products to those customers until payment is received.
In March 2008, we received a cash payment from Abbott Diabetes Care, Inc. (“Abbott”) for an
agreement fee in connection with execution of the first amendment to the development and license
agreement between us and Abbott. We recognize the agreement fee received from Abbott over the
initial 5-year term of the agreement, and the non-current portion of the agreement fee is included
in other long-term liabilities. Under the amended Abbott agreement, beginning July 1, 2008, Abbott
agreed to pay us certain amounts for services performed by us in connection with each sale of a PDM
that includes an Abbott Discrete Blood Glucose Monitor to certain customers. We recognize the
revenue related to this portion of the Abbott agreement at the time we meet the criteria for
revenue recognition, typically at the time of sale of the PDM to the patient. In the three and six
month periods ended June 30, 2010, we recognized revenue related to the amended Abbott agreement of
$1.3 million and $2.4 million, respectively. In the three and six month periods ended June 30,
2009, we recognized revenue related to the amended Abbott agreement of $1.0 million and $2.1
million, respectively. There was no impact to cost of revenue related to this agreement.
We had deferred revenue of $5.7 million and $5.1 million as of June 30, 2010 and December 31,
2009, respectively. The deferred revenue recorded as of June 30, 2010 was comprised of
product-related revenue as well as the non-amortized agreement fee related to the Abbott agreement.
Restructuring Expense and Impairment of Assets
In connection with our efforts to pursue improved gross margins, leverage operational
efficiencies and better pursue opportunities for low-cost supplier sourcing of asset costs, we
periodically perform an evaluation of our manufacturing processes and review the carrying value of
our property and equipment to assess the recoverability of these assets whenever events indicate
that impairment may have occurred. As part of this assessment, we review the future undiscounted
operating cash flows expected to be generated by those assets. If impairment is indicated through
this review, the carrying amount of the asset would be reduced to its estimated fair value. This
review of manufacturing processes and equipment can result in restructuring activity or an
impairment of assets based on
current net book value and potential future use of the assets.
Our restructuring expenses may also include workforce reduction and related costs for one-time
termination benefits provided to employees who are involuntarily terminated under the terms of a
one-time benefit arrangement. We record these one-time termination benefits upon incurring the
liability provided that the employees are notified, the plan is approved by the appropriate level
of management, the employees to be terminated and the expected completion date are identified and
the benefits the identified employees
27
will be paid are established. Significant changes to the plan
are not expected when we record the costs. In recording the workforce reduction and related costs,
we estimate related costs such as taxes and outplacement services which may be provided under the
plan. If changes in these estimated services occur, we may be required to record or reverse
restructuring expenses associated with these workforce reduction and related costs.
Asset Valuation
Asset valuation includes assessing the recorded value of certain assets, including accounts
receivable, inventory and fixed assets. We use a variety of factors to assess valuation, depending
upon the asset. Actual results may differ materially from our estimates. Property and equipment is
stated at cost and depreciated using the straight-line method over the estimated useful lives of
the respective assets. Leasehold improvements are amortized over their useful life or the life of
the lease, whichever is shorter. We review long-lived assets, including property and equipment and
intangibles, for impairment whenever events or changes in business circumstances indicate that the
carrying amount of the assets may not be fully recoverable. We also review assets under
construction to ensure certainty of their future installation and integration into the
manufacturing process. An impairment loss would be recognized when estimated undiscounted future
cash flows expected to result from the use of the asset and its eventual disposition is less than
its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of
a long-lived asset exceeds its fair value.
Income Taxes
We file federal and state tax returns. We have accumulated significant losses since our
inception in 2000. Since the net operating losses may potentially be utilized in future years to
reduce taxable income (subject to any applicable limitations), all of our tax years remain open to
examination by the major taxing jurisdictions to which we are subject.
We recognize estimated interest and penalties for uncertain tax positions in income tax
expense. As of June 30, 2010, we had no interest and penalty accrual or expense.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due from third-party payors, patients and third-party
distributors. The allowance for doubtful accounts is recorded in the period in which the revenue is
recorded or at the time potential collection risk is identified. We estimate our allowance based
on historical experience, assessment of specific risk, discussions with individual customers and
various assumptions and estimates that we believe to be reasonable under the circumstances.
|
|
| Item 3. |
Quantitative and Qualitative Disclosures about Market Risk |
We do not use derivative financial instruments in our investment portfolio and have no foreign
exchange contracts. Our financial instruments consist of cash, cash equivalents, accounts
receivable, accounts payable, accrued expenses and long-term obligations. We consider investments
that, when purchased, have a remaining maturity of 90 days or less to be cash equivalents. The
primary objectives of our investment strategy are to preserve principal, maintain proper liquidity
to meet operating needs and maximize yields. To minimize our exposure to an adverse shift in
interest rates, we invest mainly in cash equivalents. We do not believe that a 10% change in
interest rates would have a material impact on the fair value of our investment portfolio or our
interest income.
As of June 30, 2010, we had outstanding debt recorded on our consolidated balance sheet of
$67.0 million related to our 5.375% Notes and $25.3 million related to our Facility Agreement. As
the interest rates on the 5.375% Notes and the Facility Agreement are fixed, changes in interest
rates do not affect the value of our debt.
|
|
| Item 4. |
Controls and Procedures |
Disclosure Controls and Procedures
As of June 30, 2010, our management conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures, (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) under the
supervision and with the participation of our chief executive officer and chief financial officer.
In designing and evaluating our disclosure controls and procedures, we and our management recognize
that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and our management
necessarily was required to apply its judgment in evaluating and implementing possible
controls and procedures. Based upon that evaluation of our disclosure controls and procedures as of
June 30, 2010, our chief executive officer and chief financial officer concluded that they believe
that, as of such date, our disclosure controls and procedures were effective at the reasonable
assurance level. Subsequently, we became aware of a material weakness in our internal control over
financial reporting; namely, that we did not maintain effective internal controls over the accuracy of our accounting for the
modification of debt. Specifically, the material weakness related to our consideration of the Debt
Modifications and Extinguishments Subtopic of the FASB Accounting Standards Codification and its
application in performing the calculation of the present value of the cash flows in determining whether the
new debt instrument is substantially different than the old debt instrument.
28
Solely as a result of this material weakness, our management has concluded that our disclosure controls and procedures were not
effective as of June 30, 2010.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
the three months ended June 30, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
In August 2010, the Company implemented a change to its internal control over financial reporting
regarding the procedures used by the Company in evaluating an amendment to an existing debt agreement
to determine if the amendment qualifies as a modification or an early extinguishment of debt. This change
included improving the Company’s consideration of the Debt Modifications and Extinguishments Subtopic
of the FASB Accounting Standards Codification. Specifically, the Company implemented a procedure to
ensure that in the event of future modifications to its debt instruments that it considers the various elements
that could impact the calculations of the cash flows in determining whether the new debt instrument is
substantially different than the old debt instrument including the effect of debt discounts and prepayment
features as contemplated by ASC 470-50 Debt — Modifications and Extinguishments. In addition, the
Company has initiated revisions to its internal training program to ensure that the appropriate finance
personnel have been specifically trained on this new internal control.
Other than described above, there have been no changes in our internal control over financial
reporting that occurred subsequent to June 30, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
|
|
| Item 1. |
Legal Proceedings |
None.
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the
year ended December 31, 2009, which could materially affect our business, financial condition or
future results. These risks are not the only risks we face. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may materially adversely
affect our business, financial condition and/or operating results. Other than as set forth below,
there have been no material changes in our risk factors from those disclosed in our Annual Report
on Form 10-K for the year ended December 31, 2009 and as updated in
our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.
29
|
|
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
None.
30
|
|
| Item 3. |
Defaults Upon Senior Securities |
None.
|
|
| Item 4. |
(Removed and Reserved) |
|
|
| Item 5. |
Other Information |
None.
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Document |
10.1*
|
|
Amendment No. 2 to Development and License Agreement, dated as of
June 30, 2010, by and between Abbott Diabetes Care, Inc., formerly
known as TheraSense, Inc., and Insulet Corporation. |
|
|
|
31.1
|
|
Certification of Duane DeSisto, President and Chief Executive
Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Brian Roberts, Chief Financial Officer, pursuant
to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Duane DeSisto, President and Chief Executive
Officer, and Brian Roberts, Chief Financial Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
| * |
|
Portions of this exhibit have been redacted pursuant to a request for confidential treatment
submitted to the Securities Exchange Commission. |
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
|
| |
INSULET CORPORATION
(Registrant)
|
|
| Date: August 9, 2010 |
/s/ Duane DeSisto
|
|
| |
Duane DeSisto |
|
| |
President and Chief Executive Officer
(Principal Executive Officer) |
|
| |
| |
|
|
| Date: August 9, 2010 |
/s/ Brian Roberts
|
|
| |
Brian Roberts |
|
| |
Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
32
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Document |
10.1*
|
|
Amendment No. 2 to Development and License Agreement, dated as of
June 30, 2010, by and between Abbott Diabetes Care, Inc., formerly
known as TheraSense, Inc., and Insulet Corporation. |
|
|
|
31.1
|
|
Certification of Duane DeSisto, President and Chief Executive
Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Brian Roberts, Chief Financial Officer, pursuant
to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Duane DeSisto, President and Chief Executive
Officer, and Brian Roberts, Chief Financial Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
| * |
|
Portions of this exhibit have been redacted pursuant to a request for confidential
treatment submitted to the Securities Exchange Commission. |
33