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 September 30, 2011
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
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04-3523891 |
| (State or Other Jurisdiction of Incorporation or
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(I.R.S. Employer Identification No.) |
| Organization) |
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| 9 Oak Park Drive |
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| Bedford, Massachusetts
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01730 |
| (Address of Principal Executive Offices)
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(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
þ 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.
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| Large accelerated filer o
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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 November 3, 2011, the registrant had 47,393,824 shares of common stock outstanding.
INSULET CORPORATION
TABLE OF CONTENTS
2
PART I — FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
INSULET CORPORATION
CONSOLIDATED BALANCE SHEETS
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As of |
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As of |
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September 30, |
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December 31, |
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2011 |
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2010 |
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(Unaudited) |
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(In thousands, except 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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$ |
103,812 |
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$ |
113,274 |
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Accounts receivable, net |
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17,269 |
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16,841 |
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Inventories |
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13,123 |
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11,430 |
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Prepaid expenses and other current assets |
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3,653 |
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912 |
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Total current assets |
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137,857 |
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142,457 |
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Property and equipment, net |
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18,295 |
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12,522 |
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Intangible assets, net |
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30,673 |
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Goodwill |
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26,164 |
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Other assets |
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2,791 |
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1,254 |
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Total assets |
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$ |
215,780 |
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$ |
156,233 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities |
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Accounts payable |
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$ |
8,604 |
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$ |
4,895 |
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Accrued expenses |
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12,762 |
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9,808 |
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Deferred revenue |
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2,193 |
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4,247 |
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Other current liabilities |
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1,202 |
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— |
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Total current liabilities |
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24,761 |
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18,950 |
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Long-term debt |
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106,319 |
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69,433 |
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Other long-term liabilities |
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1,260 |
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1,619 |
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Total liabilities |
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132,340 |
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90,002 |
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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 September 30, 2011 and
December 31, 2010. Issued
and outstanding: zero shares
at September 30, 2011 and
December 31, 2010,
respectively |
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— |
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Common stock, $.001 par value: |
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Authorized: 100,000,000
shares at September 30, 2011
and December 31, 2010.
Issued and outstanding: 47,386,448 and 45,440,839
shares at September 30, 2011
and December 31, 2010,
respectively |
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47 |
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45 |
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Additional paid-in capital |
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510,077 |
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450,039 |
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Accumulated deficit |
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(426,684 |
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(383,853 |
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Total stockholders’ equity |
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83,440 |
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66,231 |
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Total liabilities and stockholders’ equity |
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$ |
215,780 |
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$ |
156,233 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
INSULET CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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(Unaudited) |
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(In thousands, except share and per share data) |
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Revenue |
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$ |
44,594 |
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$ |
25,455 |
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$ |
105,063 |
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$ |
69,199 |
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Cost of revenue |
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26,033 |
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13,826 |
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58,431 |
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39,299 |
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Gross profit |
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18,561 |
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11,629 |
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46,632 |
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29,900 |
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Operating expenses: |
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Research and development |
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4,638 |
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3,698 |
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16,059 |
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12,128 |
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General and administrative |
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11,379 |
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7,230 |
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31,585 |
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20,379 |
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Sales and marketing |
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12,312 |
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8,979 |
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30,943 |
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26,301 |
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Total operating expenses |
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28,329 |
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19,907 |
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78,587 |
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58,808 |
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Operating loss |
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(9,768 |
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(8,278 |
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(31,955 |
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(28,908 |
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Interest income |
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31 |
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49 |
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107 |
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109 |
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Interest expense |
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(3,825 |
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(3,871 |
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(10,983 |
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(11,502 |
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Other expense, net |
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(3,794 |
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(3,822 |
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(10,876 |
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(11,393 |
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Net loss |
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$ |
(13,562 |
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$ |
(12,100 |
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$ |
(42,831 |
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$ |
(40,301 |
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Net loss per share basic and diluted |
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$ |
(0.29 |
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$ |
(0.30 |
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$ |
(0.92 |
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$ |
(1.04 |
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Weighted average number of shares
used in calculating basic and
diluted net loss per share |
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47,321,989 |
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40,155,277 |
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46,442,236 |
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38,784,692 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
INSULET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine Months Ended |
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September 30, |
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2011 |
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2010 |
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(Unaudited) |
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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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$ |
(42,831 |
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$ |
(40,301 |
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Adjustments to reconcile net loss to net cash used in operating activities |
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Depreciation and amortization |
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5,683 |
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3,946 |
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Amortization of debt discount |
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4,991 |
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5,511 |
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Stock-based compensation expense |
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5,606 |
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3,957 |
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Provision for bad debts |
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1,700 |
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2,519 |
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Non cash interest expense |
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2,381 |
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654 |
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Impairment of assets |
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— |
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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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3,802 |
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(2,999 |
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Inventories |
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594 |
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(2,823 |
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Deferred revenue |
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(2,054 |
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(144 |
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Prepaid expenses and other current assets |
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851 |
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235 |
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Accounts payable, accrued expenses, and other liabilities |
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1,852 |
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773 |
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Other long term liabilities |
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(359 |
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(271 |
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Net cash used in operating activities |
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(17,784 |
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(27,922 |
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Cash flows from investing activities |
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Purchases of property and equipment |
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(8,838 |
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(3,632 |
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Acquisition of Neighborhood Diabetes |
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(37,855 |
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— |
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Net cash used in investing activities |
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(46,693 |
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(3,632 |
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Cash flows from financing activities |
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Proceeds from issuance of long-term debt, net of issuance costs |
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138,863 |
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Payments to retire long-term debt |
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(88,195 |
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— |
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Payment of transaction fees related to credit facility amendment |
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— |
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(468 |
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Proceeds from issuance of common stock, net of offering expenses |
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4,347 |
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7,944 |
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Net cash provided by financing activities |
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55,015 |
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7,476 |
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Net decrease in cash and cash equivalents |
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(9,462 |
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(24,078 |
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Cash and cash equivalents, beginning of period |
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113,274 |
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127,996 |
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Cash and cash equivalents, end of period |
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$ |
103,812 |
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$ |
103,918 |
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Supplemental disclosure of cash flow information |
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Cash paid for interest |
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$ |
2,284 |
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$ |
4,358 |
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Non-cash investing and financing activities |
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Issuance of common stock for the acquisition of Neighborhood Diabetes |
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$ |
24,432 |
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$ |
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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”) has been 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 five year distribution agreement with Ypsomed
Distribution AG (“Ypsomed”) to become the exclusive distributor of the OmniPod System in eleven
countries. Through the Company’s partnership with Ypsomed, the OmniPod System is now available in
seven markets, namely Germany, the United Kingdom, France, the Netherlands, Sweden, Norway, and
Switzerland. The Company expects that Ypsomed will begin distribution of the OmniPod System,
subject to approved reimbursement, in the other markets under the agreement in 2012. In February
2011, the Company entered into a distribution agreement with GlaxoSmithKline Inc., (“GSK”), to
become the exclusive distributor of the OmniPod System in Canada. The Company shipped OmniPods to
GSK during the second quarter of 2011, and GSK began distributing the OmniPod System during the
third quarter of 2011.
On June 1, 2011, the Company completed the acquisition of Neighborhood Holdings, Inc. and its
wholly-owned subsidiaries (collectively “Neighborhood Diabetes”), a leading durable medical
equipment distributor, specializing in direct to consumer sales of diabetes supplies. Neighborhood
Diabetes is based in Woburn, Massachusetts with additional facilities in Brooklyn, New York and
Orlando, Florida. Neighborhood Diabetes serves more than 60,000 customers with Type 1 and Type 2
diabetes primarily in the northeast and southeast regions of the United States. Neighborhood
Diabetes supplies these customers with blood glucose testing supplies, insulin pumps, pump
supplies, pharmaceuticals, as well as other products for the treatment and management of diabetes.
See Footnote 3 for further description of the acquisition.
2. Summary of Significant Accounting Policies
Basis of Presentation
The unaudited consolidated financial statements in this Quarterly Report on Form 10-Q have
been prepared in accordance with generally accepted accounting principles (“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 nine month periods ended
September 30, 2011, are not necessarily indicative of the results that may be expected for the full
year ending December 31, 2011, or for any other subsequent 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, 2010.
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 and equity
instruments, the lives of property and equipment and intangible assets, 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, third-party
distributors, and government agencies. The allowance for doubtful accounts is recorded in the
period in which 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.
6
Inventories
Inventories are held at the lower of cost or market, determined under the first-in, first-out
(“FIFO”) method. Inventory has been recorded at cost as of September 30, 2011 and December 31,
2010. Work in process is calculated based upon a build up in the stage of completion using
estimated labor inputs for each stage in production. 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.
Intangibles and Other Long-Lived Assets
The Company’s finite-lived intangible assets are stated at cost less accumulated amortization.
The Company assesses its intangible and other long lived assets for impairment whenever events or
changes in circumstances suggest that the carrying value of an asset may not be recoverable. At
September 30, 2011, intangible assets related to the acquisition of Neighborhood Diabetes consisted
of $27.9 million of customer relationships and $2.7 million of tradenames. The Company assesses the
need for an impairment of intangibles and other finite-lived assets if the carrying amount of the
asset is not recoverable based on its undiscounted future cash flows. Any such impairment loss is
measured as the difference between the carrying amount and the fair value of the asset. The
estimation of useful lives and expected cash flows requires the Company to make significant
judgments regarding future periods that are subject to some factors outside its control. Changes in
these estimates can result in significant revisions to the carrying value of these assets and may
result in material charges to the results of operations. The estimated life of the acquired
tradename asset is 15 years. The estimated life of the acquired customer relationships asset is ten
years. Intangible assets with determinable estimated lives are amortized over these lives.
Goodwill
Goodwill represents the excess of the cost of the acquired Neighborhood Diabetes businesses
over the fair value of identifiable net assets acquired. The Company will perform an assessment of
its goodwill for impairment on at least an annual basis or whenever events or changes in
circumstances indicate there might be impairment.
Goodwill is evaluated at the reporting unit level. To test for impairment, the Company
compares the carrying value of the reporting unit to its fair value. If the reporting unit’s
carrying value exceeds its fair value, the Company would record an impairment loss to the extent
that the carrying value of goodwill exceeds its implied fair value.
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. As these estimates are based on historical experience, and the Company continues to
introduce new versions of existing products, the Company also considers the anticipated performance
of the product over its warranty period in estimating warranty reserves.
Revenue Recognition
The Company generates nearly all of its revenue from sales of its OmniPod Insulin Management
System and other diabetes related products including blood glucose testing supplies, insulin pumps,
pump supplies and pharmaceuticals to customers and third-party distributors who resell the product
to patients with diabetes.
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 collectability is reasonably assured. With respect to these criteria:
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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. |
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• |
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Transfer of title and risk and rewards of ownership are passed to the patient or third-party distributor upon shipment of the products. |
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• |
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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 once all elements have been delivered.
The Company offers a 45-day right of return for its OmniPod Insulin Management System 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 collectability 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 five year term of the agreement, and the non-current portion of
the agreement fee is included in other long-term liabilities. In addition, Abbott agreed to pay an
amount to the Company for services performed in connection with each sale of a PDM that includes an
Abbott Discrete Blood Glucose Monitor to customers in certain territories. The Company recognizes
revenue related to this portion of the Abbott agreement at the time it meets the criteria for
revenue recognition, typically at the time the revenue is recognized on the sale of the PDM to the
patient.
In June 2011, the Company entered into a development agreement with a U.S. based
pharmaceutical company (the “Development Agreement”). Under the Development Agreement, the Company
is required to perform design, development, regulatory, and other services to support the
pharmaceutical company as it works to obtain regulatory approval to use the Company’s drug delivery
technology as a delivery method for its pharmaceutical. Over the estimated two year term of the
Development Agreement, the Company will invoice amounts based upon meeting certain deliverable
milestones. Revenue on the Development Agreement is recognized using a proportional performance
methodology based on costs incurred and total payments under the agreement.
The Company had deferred revenue of $2.4 million and $4.8 million as of September 30, 2011 and
December 31, 2010, respectively. The deferred revenue recorded
7
as of September 30, 2011 was
comprised of product-related revenue, unrecognized amounts related to the Development Agreement 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. Although revenue is recognized from shipments directly to
patients or third-party distributors, the majority of shipments are billed to third-party insurance
payors and government agencies. There were no third-party payors or government agencies that
accounted for more than 10% of gross accounts receivable as of September 30, 2011 or December 31,
2010.
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 diabetes-related products and supplies. Therefore, the
Company believes that it operates in one segment.
Income Taxes
FASB Accounting Standard Codification, 740-10, Income Taxes (“FASB ASC 740-10”) clarifies the
accounting for uncertainty in income taxes recognized in an entity’s financial statements. FASB ASC
740-10 prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. In
addition, FASB ASC 740-10 provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, and disclosure and transition.
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 September 30, 2011, interest and penalties were immaterial to the consolidated
financial statements.
Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of FASB Accounting
Standards Codification 718-10, Compensation — Stock Compensation (“FASB ASC 718-10”) requires all
share-based payments to employees, including grants of employee stock options, to be recognized in
the income statement based on their fair values.
The Company uses the Black-Scholes option pricing model to determine the weighted average fair
value of options granted. The Company determines the intrinsic value of restricted stock based on
the closing prices of its common stock on the date of grant. The Company recognizes the
compensation expense of share-based awards on a straight-line basis over the vesting period of the
award.
The determination of the fair value of share-based payment awards utilizing the Black-Scholes
model is affected by the stock price and a number of assumptions, including expected volatility,
expected life, risk-free interest rate and expected dividends. The expected life of the awards is
estimated based on the midpoint between the vesting date and the end of the contractual term. The
risk-free interest rate assumption is based on observed interest rates appropriate for the terms of
the awards. The dividend yield assumption is based on company history and expectation of paying no
dividends. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Stock-based compensation expense
recognized in the financial statements is based on awards that are ultimately expected to vest. The
Company evaluates the assumptions used to value the awards on a quarterly basis and if factors
change and different assumptions are utilized, stock-based compensation expense may differ
significantly from what has been recorded in the past. If there are any modifications or
cancellations of the underlying unvested securities, the Company may be required to accelerate,
increase or cancel any remaining unearned stock-based compensation expense.
See Footnote 12 for a summary of the stock option activity under our stock-based employee
compensation plan.
3. Acquisition of Neighborhood Diabetes
On June 1, 2011, the Company acquired all of the outstanding shares of privately-held
Neighborhood Diabetes, a durable medical equipment distributor specializing in direct to consumer
sales of diabetes supplies, including pharmaceuticals, and support services. Neighborhood Diabetes
serves more than 60,000 customers with Type 1 and Type 2 diabetes primarily in the northeast and
southeast regions of the United States with blood glucose testing supplies, insulin pumps, pump
supplies, pharmaceuticals, as well as other products for the management and treatment of diabetes.
Neighborhood Diabetes is based in Woburn, Massachusetts, with additional offices in Brooklyn, New
York and Orlando, Florida. At the time of the acquisition, Neighborhood Diabetes employed
approximately 200 people across its three locations. The acquisition of Neighborhood Diabetes
provides the Company with full suite diabetes management product offerings, accelerates the
Company’s sales force expansion, strengthens the Company’s back office support capabilities,
expands the Company’s access to insulin dependent patients, and provides pharmacy adjudication
capabilities to drive incremental sales higher. The aggregate purchase price of approximately $62.4
million consisted of approximately $37.9 million in cash paid at closing, 1,197,631 shares of the
Company’s common stock valued at approximately $24.4 million, or $20.40 per share based on the
closing price of the Company’s common stock on the acquisition date, and contingent consideration
with a fair value of approximately $0.1 million. Of the $37.9 million of cash, $6.6 million is
being held in an escrow account to reimburse the Company and its affiliates, if necessary, for
certain claims for which they are entitled to be indemnified pursuant to the terms of the agreement
and plan of merger with Neighborhood Diabetes.
The Company has accounted for the acquisition of Neighborhood Diabetes as a business
combination. Under business combination accounting, the assets and liabilities of Neighborhood
Diabetes were recorded as of the acquisition date, at their respective fair values, and
consolidated with the Company. The excess of the purchase price over the fair value of net assets
acquired was recorded as goodwill. The operating results of Neighborhood Diabetes have been
included in the consolidated financial statements since June 1, 2011, the date the acquisition was
completed. For the three and nine months ended September 30, 2011, the Company included
approximately $10.4 million and $14.1 million, respectively, of revenue from for pharmacy and
testing supplies sold by Neighborhood Diabetes. If the acquisition had occurred as of January 1,
2010, consolidated revenue would have been approximately $130.0 million and $113.1 million for the
nine months ended September 30, 2011 and 2010, respectively. Consolidated net loss would have been
approximately $44.1 million and $38.8 million for the nine months ended September 30, 2011 and
2010, respectively. The purchase price allocation, including an independent appraisal for
intangible assets, has been prepared based on the
information that was available to management at the time the consolidated financial statements were
prepared, and revisions to the preliminary purchase price allocation will be made as additional
information becomes available with respect to the fair value of the net assets. The preliminary
purchase price at June 1, 2011 has been allocated as follows (in thousands):
8
| |
|
|
|
|
Calculation of allocable purchase price: |
|
|
|
|
Cash |
|
$ |
37,855 |
|
Common stock |
|
|
24,432 |
|
Contingent consideration obligations |
|
|
61 |
|
|
|
|
|
Total allocable purchase price |
|
$ |
62,348 |
|
|
|
|
|
|
|
|
|
|
Preliminary allocation of purchase price: |
|
|
|
|
Accounts receivable |
|
$ |
5,387 |
|
Inventories |
|
|
2,336 |
|
Prepaid expenses and other current assets |
|
|
242 |
|
Property and equipment |
|
|
391 |
|
Customer relationships |
|
|
30,100 |
|
Tradenames |
|
|
2,800 |
|
Goodwill |
|
|
26,727 |
|
Other assets |
|
|
233 |
|
Accounts payable |
|
|
4,109 |
|
Accrued expenses |
|
|
1,700 |
|
Other long-term liabilities |
|
|
59 |
|
|
|
|
|
|
|
$ |
62,348 |
|
|
|
|
|
In the three months ended September 30, 2011 the Company recorded certain
adjustments to the initial purchase price accounting. The adjustments to goodwill are as follows
(in thousands):
| |
|
|
|
|
| |
|
Purchase accounting adjustments |
|
| |
|
offset to goodwill |
|
Collection of fully reserved receivable |
|
$ |
(543 |
) |
Other |
|
|
(20 |
) |
|
|
|
|
Total |
|
$ |
(563 |
) |
|
|
|
|
The Company incurred transaction costs of approximately $3.2 million, which
consisted primarily of banking, legal, accounting and other administrative fees. These costs have
been recorded as general and administrative expense in the three and nine months ended September
30, 2011.
4. Other Intangible Assets
Other intangible assets consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
As of |
|
|
|
|
| |
|
|
|
|
|
September 30, 2011 |
|
|
|
|
| |
| |
|
|
|
|
|
Accumulated |
|
|
|
|
| |
|
Cost |
|
|
Amortization |
|
|
Net Book Value |
|
Customer
relationships |
|
$ |
30,100 |
|
|
$ |
(2,165 |
) |
|
$ |
27,935 |
|
Tradename |
|
|
2,800 |
|
|
|
(62 |
) |
|
|
2,738 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
32,900 |
|
|
$ |
(2,227 |
) |
|
$ |
30,673 |
|
|
|
|
|
|
|
|
|
|
|
The Company recorded $32.9 million of other intangible assets in the nine months
ended September 30, 2011 as a result of the acquisition of Neighborhood Diabetes (see Footnote 3
for further description). The Company determined that the estimated useful life of the customer
relationships asset is ten years and that the estimated useful life of the tradename is 15 years
and is amortizing the assets over these estimated lives accordingly. The amortization of other
intangible assets was approximately $1.7 million and $2.2 million for the three and nine months
ended September 30, 2011, respectively. No amortization expense was recorded in any period prior to
the three months ended June 30, 2011. Amortization expense for the year ending December 31, 2011 is
expected to be approximately $3.9 million.
Amortization expense expected for the next five years is as follows (in thousands):
9
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amortization Expense |
|
| Year Ended |
|
Customer |
|
|
|
|
|
|
|
| December 31, |
|
Relationships |
|
|
Tradename |
|
|
Total |
|
2012 |
|
$ |
5,853 |
|
|
$ |
187 |
|
|
$ |
6,040 |
|
2013 |
|
|
4,736 |
|
|
|
187 |
|
|
|
4,923 |
|
2014 |
|
|
3,790 |
|
|
|
187 |
|
|
|
3,977 |
|
2015 |
|
|
3,064 |
|
|
|
187 |
|
|
|
3,251 |
|
2016 |
|
|
2,478 |
|
|
|
187 |
|
|
|
2,665 |
|
5. Long-Term Debt
At September 30, 2011 and December 31, 2010, the Company had outstanding long-term debt and
related deferred financing costs on its balance sheet as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
September 30, 2011 |
|
|
December 31, 2010 |
|
Liabilities: |
|
|
|
|
|
|
|
|
Principal
amount of the
5.375%
Convertible
Notes |
|
$ |
15,000 |
|
|
$ |
85,000 |
|
Principal
amount of the
3.75%
Convertible
Notes |
|
|
143,750 |
|
|
|
— |
|
Unamortized
discount of
liability
component |
|
|
(52,431 |
) |
|
|
(15,567 |
) |
|
|
|
|
|
|
|
|
|
$ |
106,319 |
|
|
$ |
69,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred financing costs |
|
$ |
2,660 |
|
|
$ |
1,173 |
|
Interest expense related to the 5.375% Notes, the 3.75% Notes and the Facility
Agreement referred to below was included in interest expense on the consolidated statements of
operations as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
Contractual coupon interest |
|
$ |
1,549 |
|
|
$ |
1,838 |
|
|
$ |
3,834 |
|
|
$ |
5,501 |
|
Accretion of debt discount |
|
|
2,143 |
|
|
|
1,887 |
|
|
|
4,992 |
|
|
|
5,493 |
|
Amortization of debt issuance costs |
|
|
146 |
|
|
|
214 |
|
|
|
389 |
|
|
|
654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,838 |
|
|
$ |
3,939 |
|
|
$ |
9,215 |
|
|
$ |
11,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.375% 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. The 5.375% Notes
are convertible into the 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.
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. 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 five 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.
10
On June 29, 2011, in connection with the issuance of $143.8 million of 3.75% Convertible Notes
due June 15, 2016 (the “3.75% Notes”), the Company repurchased $70 million in principal amount of
the 5.375% Notes for $85.1 million, a 21.5% premium on the principal amount. The investors that
held the $70 million of repurchased 5.375% Notes purchased $59.5 million in principal amount of the
3.75% Notes and retained approximately $13.5 million of the remaining 5.375% Notes. The investors’
combined $73.0 million of convertible debt ($13.5 million of 5.375% Notes and $59.5 million of
3.75% notes) was considered to be a modification of a portion of the 5.375% Notes. See “3.75%
Convertible Notes” for additional detail on the modification accounting.
Non-cash interest expense related to the amortization of the debt discount and the deferred
financing costs on the $85 million of principal 5.375% Notes was $3.1 million in the nine months
ended September 30, 2011. There was no non-cash interest expense in the three months ended
September 31, 2011. Non-cash interest expense related to the amortization of the debt discount and
the deferred financing costs on the $85 million of principal 5.375% Notes was $1.4 million and $4.1
million in the three and nine months ended September 30, 2010, respectively.
Cash interest expense related to the 5.375% Notes was $0.2 million and $2.5 million in the
three and nine months ended September 30, 2011, respectively. Cash interest expense related to the
5.375% Notes was $1.1 million and $3.4 million for the three and nine months ended September 30,
2010, respectively.
As of September 30, 2011, the Company included approximately $1.3 million on its balance sheet
related to the unmodified portion of the 5.375% Notes. The 5.375% Notes have a remaining term of
1.75 years.
Facility Agreement and Common Stock Warrants
In March 2009, the Company entered into a facility agreement with certain institutional
accredited investors (the “Facility Agreement”), 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.
Total financing costs, including the transaction fee, were $3.0 million and were amortized as
interest expense over the 42 months of the Facility Agreement. In September 2009, the Company
entered into an amendment to the Facility Agreement whereby the Company repaid the $27.5 million
originally drawn and promptly drew down the remaining $32.5 million available under the Facility
Agreement. The annual interest rate was 8.5%, payable quarterly in arrears. 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 was 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 were payable in September 2012.
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. 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 was amortized as non-cash interest
expense over the term of the loan. As of September 30, 2011, all warrants to acquire 3.75 million
shares of the Company’s common stock issued in connection with the Facility Agreement were
exercised.
In December 2010, the Company paid $33.3 million to the lenders, of which $32.5 million
related to principal and $0.8 million related to interest and prepayment fees, to extinguish this
debt. The Company recorded a non-cash interest charge of $7.0 million in the fourth quarter of 2010
related to the write-off of the remaining debt discounts and financing costs included in other
assets which were being amortized to interest expense over the term of the debt. At September 30,
2011 and December 31, 2010, there were no amounts related to the Facility Agreement included in
long-term debt on the Company’s balance sheet.
3.75% Convertible Notes
In June 2011, the Company sold $143.8 million principal amount of the 3.75% Notes. The
interest rate on the notes is 3.75% per annum, payable semi-annually in arrears in cash on December
15 and June 15 of each year. The 3.75% Notes are convertible into the Company’s common stock at an
initial conversion rate of 38.1749 shares of common stock per $1,000 principal amount of the 3.75%
Notes, which is equivalent to a conversion price of approximately $26.20 per share, subject to
adjustment under certain circumstances. The 3.75% Notes are convertible prior to March 15, 2016
only upon the occurrence of certain circumstances. On and after March 15, 2016 and prior to the
close of business on the second scheduled trading day immediately preceding the final maturity date
of the 3.75% Notes, the notes may be converted without regard to the occurrence of any such
circumstances. The 3.75% Notes and any unpaid interest will be convertible at the Company’s option
for cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s
common stock for the principal amount. The Company intends to settle the principal in cash.
The Company may not redeem the 3.75% Notes prior to June 20, 2014. From June 20, 2014 to June
20, 2015 the Company may redeem the 3.75% Notes, at its option, in whole or in part only if the
last reported sale price per share of the Company’s common stock has been at least 130% of the
conversion price then in effect for at least 20 trading days during a period of 30 consecutive
trading days. On and after June 25, 2015, the Company may redeem the 3.75% Notes, at its option
(without regard to such sale price condition), in whole or in part. If a fundamental change, as
defined in the Indenture for the 3.75% Notes, occurs at any time prior to maturity, holders of the
3.75% 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 3.75% Notes to be repurchased, plus accrued and unpaid
interest. If a holder elects to convert its 3.75% Notes upon the occurrence of a make-whole
fundamental change, as defined in the Indenture for the 3.75% 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 3.75% Notes. In no event will the number of shares
issuable upon conversion of a note exceed 50.5816 per $1,000 principal amount (subject to
adjustment as described in the Indenture for the 3.75% Notes). The 3.75% Notes are unsecured and
are equal in right of payment to the 5.375% notes.
The Company evaluated certain features of the 3.75% Notes to determine whether these features
are derivatives which should be bifurcated and accounted for at fair value. The Company identified
certain features related to a portion of the 3.75% Notes, including the holders’ ability to require
the Company to repurchase their notes and the higher interest payments required in an event of
default, which are considered embedded derivatives and should be accounted for at fair value. The
Company assesses the value of each of these embedded derivatives at each balance sheet date. At
September 30, 2011, the Company separately accounted for and determined that these derivatives have
de minimus value.
In connection with the issuance of the 3.75% Notes, the Company repurchased $70 million in
principal amount of the 5.375% Notes for $85.1 million, a 21.5% premium on the principal amount.
The investors that held the $70 million of repurchased 5.375% Notes purchased $59.5 million in
principal amount of the 3.75% Notes and retained approximately $13.5 million of the remaining
5.375% Notes. This transaction was treated as a modification of a portion of the 5.375% Notes. The
Company accounted for this modification of existing debt separately from the issuance of the
remainder of the 3.75% Notes.
Prior to the transaction, the $70 million principal of repurchased 5.375% Notes had a debt
discount of $10.5 million. This amount remained in debt discount related to the modified $13.5
million of 5.375% Notes and $59.5 million of 3.75% Notes. The Company included $46.3 million on its
balance sheet related to these notes at September 30, 2011. The Company recorded additional debt
discount of $15.1 million related to the premium payment in connection with the repurchase and $0.2
million related to the increase in the value of the conversion feature. The offset to the debt
discount related to the value of the conversion feature was recorded as
11
additional paid-in capital.
The total debt discount of $25.8 million related to the modified debt is being amortized as
interest expense at the effective rate of 16.5% over the five year term of the modified debt. The
Company paid transaction fees of approximately $2.0 million related to the modification, which were
recorded as interest expense in the nine months ended September 30, 2011. Non-cash interest
expense related to the amortization of the debt discount and the deferred financing costs on the
$73 million of the modified debt was $1.2 million in the three and nine months ended September 30,
2011. As the debt was considered to be modified in connection with the issuance of the 3.75% Notes
in June 2011, there was no non-cash interest expense related to the modified debt in the three and
nine months ended September 30, 2010.
Of the $143.8 million of 3.75% Notes issued in June 2011, $84.3 million was considered to be
an issuance of new debt. The Company recorded a debt discount of $26.6 million related to the $84.3
million of 3.75% Notes. The Company included $58.7 million on its balance sheet related to these
notes at September 30, 2011. The debt discount was recorded as additional paid-in capital to
reflect the value of its nonconvertible debt based on a borrowing rate of 12.4% per annum. This
debt discount is being amortized as interest expense over the five year term of the 3.75% Notes.
The Company incurred deferred financing costs related to this offering of approximately $2.8
million, of which $0.9 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 3.75%
Notes. Non-cash interest expense related to the amortization of the debt discount and the deferred
financing costs on the new portion of the 3.75% Notes was $1.1 million in the three and nine months
ended September 30, 2011. There was no non-cash interest recorded on the new portion of the 3.75% Notes
in the three and nine months ended September 30, 2010.
Cash interest expense related to the $143.8 million of 3.75% Notes was $1.3 million in the
three and nine months ended September 30, 2011. No cash interest was recorded on the 3.75% Notes
in the three and nine months ended September 30, 2010.
As of September 30, 2011, the 3.75% Notes have a remaining term of 4.75 years.
6. Restructuring Expenses and Impairments of Assets
During the nine months ended September 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 met the capitalization criteria. Accordingly, the Company expensed these costs as
research and development expense in the nine months ended September 30, 2010. The evaluations
performed in the nine months ended September 30, 2011 resulted in no impaired assets being
identified.
7. 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, restricted stock units, 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 nine months ended September 30, 2011 and 2010, 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 Nine Months Ended |
|
| |
|
September 30, |
|
| |
|
2011 |
|
|
2010 |
|
5.375% Convertible notes |
|
|
702,701 |
|
|
|
3,981,969 |
|
3.75% Convertible notes |
|
|
5,487,642 |
|
|
|
— |
|
Unvested restricted stock units |
|
|
648,215 |
|
|
|
374,887 |
|
Outstanding options |
|
|
2,861,536 |
|
|
|
3,370,576 |
|
Outstanding warrants |
|
|
62,752 |
|
|
|
1,687,752 |
|
|
|
|
|
|
|
|
Total |
|
|
9,762,846 |
|
|
|
9,415,184 |
|
|
|
|
|
|
|
|
8. Accounts Receivable
The components of accounts receivable are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2011 |
|
|
2010 |
|
| |
|
(In thousands) |
|
Trade receivables |
|
$ |
23,685 |
|
|
$ |
22,273 |
|
Allowance for doubtful accounts |
|
|
(6,416 |
) |
|
|
(5,432 |
) |
|
|
|
|
|
|
|
|
|
$ |
17,269 |
|
|
$ |
16,841 |
|
|
|
|
|
|
|
|
12
9. Inventories
Inventories consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2011 |
|
|
2010 |
|
| |
|
(In thousands) |
|
Raw materials |
|
$ |
3,929 |
|
|
$ |
1,892 |
|
Work-in-process |
|
|
622 |
|
|
|
2,378 |
|
Finished goods |
|
|
8,572 |
|
|
|
7,160 |
|
|
|
|
|
|
|
|
|
|
$ |
13,123 |
|
|
$ |
11,430 |
|
|
|
|
|
|
|
|
10. Product Warranty Costs
The Company provides a four year warranty on its PDMs and may replace 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 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
| |
|
(In thousands) |
|
|
(In thousands) |
|
Balance at the beginning of period |
|
$ |
1,795 |
|
|
$ |
1,940 |
|
|
$ |
1,873 |
|
|
$ |
1,820 |
|
Warranty expense |
|
|
792 |
|
|
|
347 |
|
|
|
2,171 |
|
|
|
1,316 |
|
Warranty claims settled |
|
|
(725 |
) |
|
|
(502 |
) |
|
|
(2,182 |
) |
|
|
(1,351 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
1,862 |
|
|
$ |
1,785 |
|
|
$ |
1,862 |
|
|
$ |
1,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2011 |
|
|
2010 |
|
| |
|
(In thousands) |
|
Composition of balance: |
|
|
|
|
|
|
|
|
Short-term |
|
$ |
856 |
|
|
$ |
880 |
|
Long-term |
|
|
1,006 |
|
|
|
993 |
|
|
|
|
|
|
|
|
Total warranty balance |
|
$ |
1,862 |
|
|
$ |
1,873 |
|
|
|
|
|
|
|
|
11. Commitments and Contingencies
Operating Leases
The Company leases its facilities in Bedford and Billerica, Massachusetts. In addition, in
connection with its acquisition of Neighborhood Diabetes, the Company acquired leases of facilities
in Woburn, Massachusetts, Brooklyn, New York and Orlando, Florida. The Company’s leases 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. The Company has extended the leases of
its facilities in Bedford and Billerica, Massachusetts. Following the extensions, these leases
expire in September 2014. The leases for Bedford contain a five year renewal option and escalating
payments over the life of the lease. The leases in Woburn, Brooklyn and Orlando expire in June
2013, April 2015 and September 2012, respectively.
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.
Legal Proceedings
In August 2010, Becton, Dickinson and Company, (“BD”), filed a lawsuit in the United States
District Court in the State of New Jersey against the Company alleging that the OmniPod System
infringes three of its patents. BD seeks a declaration that the Company has infringed its patents,
equitable relief, including an injunction that would enjoin the Company from infringing these
patents, and an unspecified award for monetary damages. The Company believes that the OmniPod
System does not infringe these patents. The Company expects that this litigation will not have a
material adverse impact on its financial position or results of operations. The Company
13
believes it
has meritorious defenses to this lawsuit; however, litigation is inherently uncertain and there can
be no assurance as to the ultimate outcome or effect of this action.
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.
12. Equity
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 for an aggregate purchase price of $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.
In December 2010, in a public offering, the Company issued and sold 3,450,000 shares of its
common stock at a price of $13.27 per share. In connection with the offering, the Company received
total gross proceeds of $47.8 million, or approximately $45.4 million in net proceeds after
deducting underwriting discounts and offering expenses.
In June 2011, in connection with the acquisition of Neighborhood Diabetes, the Company issued
1,197,631 shares of its common stock at a price of $20.40 per share, as partial consideration for
the acquisition.
The Company grants share-based awards to employees in the form of options to purchase the
Company’s common stock, the ability to purchase stock at a discounted price under the employee
stock purchase plan and restricted stock units. Stock-based compensation expense related to
share-based awards recognized in the three and nine months ended September 30, 2011 was $1.8
million and $5.6 million, respectively, and was calculated based on awards ultimately expected to
vest. Employee stock-based compensation expense recognized in the three and nine months ended
September 30, 2010 was $1.3 million and $4.0 million, respectively. At September 30, 2011, the
amount of stock-based compensation capitalized as part of inventory was not material. At September
30, 2011, the Company had $19.4 million of total unrecognized compensation expense related to stock
options and restricted stock units.
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, 2010 |
|
|
3,018,469 |
|
|
$ |
8.74 |
|
|
|
|
|
Granted |
|
|
612,500 |
|
|
|
17.78 |
|
|
|
|
|
Exercised |
|
|
(659,084 |
) |
|
|
7.59 |
|
|
$ |
7,656 |
(1) |
Canceled |
|
|
(110,349 |
) |
|
|
12.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2011 |
|
|
2,861,536 |
|
|
$ |
10.79 |
|
|
$ |
15,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested, September 30, 2011 |
|
|
1,614,110 |
|
|
$ |
8.64 |
|
|
$ |
11,643 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest,
September 30, 2011 (3) |
|
|
2,404,247 |
|
|
|
|
|
|
$ |
13,729 |
(2) |
|
|
|
| (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 September 30, 2011, and the
exercise price of the underlying options. |
| |
| (3) |
|
Represents the number of vested options as of September 30,
2011, plus the number of unvested options expected to vest as of
September 30, 2011, based on the unvested options outstanding as
of September 30, 2011, adjusted for the estimated forfeiture
rate of 16%. |
At September 30, 2011 there were 2,861,536 options outstanding with a weighted average
exercise price of $10.79 per share and a weighted average remaining contractual life of 6.9 years.
At September 30, 2011 there were 1,614,110 options exercisable with a weighted average exercise
price of $8.64 per share and a weighted average remaining contractual life of 5.6 years.
Employee stock-based compensation expense related to stock options recognized in the three and
nine months ended September 30, 2011 was $1.1 million and $3.2 million, respectively, and was based
on awards ultimately expected to vest. Employee stock-based compensation expense related to stock
options recognized in the three and nine months ended September 30, 2010 was $1.0 million and $3.2
million, respectively. At September 30, 2011, the Company had $9.9 million of total
14
unrecognized
compensation expense related to stock options that will be recognized over a weighted average
period of 1.2 years.
Employee Stock Purchase Plan
As of September 30, 2011 and 2010, no shares were contingently issued under the employee stock
purchase plan (“ESPP”). In the nine months ended September 30, 2011 and 2010, the Company recorded
no significant stock-based compensation charges related to the ESPP.
Restricted Stock Units
In the nine months ended September 30, 2011, the Company awarded 464,200 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 to four years from the
grant date. The restricted stock units granted have a weighted average fair value of $18.00 per
share based on the closing price of the Company’s common stock on the date of grant. The restricted
stock units granted during the nine months ended September 30, 2011 were valued at approximately
$8.4 million at their grant date, and the Company is recognizing the compensation expense over the
vesting period. Approximately $0.7 million and $2.4 million of stock-based compensation expense
related to the vesting of restricted stock units was recognized in the three and nine months ended
September 30, 2011, respectively. Approximately $0.3 million and $0.7 million of stock-based
compensation expense related to the vesting of restricted stock units was recognized in the three
and nine months ended September 30, 2010, respectively. Approximately $9.5 million of the fair
value of the restricted stock units remained unrecognized as of September 30, 2011. Under the terms
of the award, the Company will issue shares of common stock on each of the vesting dates. During
the nine months ended September 30, 2011, 120,983 restricted stock units originally granted in 2010
vested. The following table summarizes the status of the Company’s restricted stock units:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
| |
|
Number of |
|
|
Average |
|
| |
|
Shares |
|
|
Fair Value |
|
Balance, December 31, 2010 |
|
|
355,999 |
|
|
$ |
14.99 |
|
Granted |
|
|
464,200 |
|
|
|
18.00 |
|
Vested |
|
|
(120,983 |
) |
|
|
14.91 |
|
Forfeited |
|
|
(51,001 |
) |
|
|
16.18 |
|
|
|
|
|
|
|
|
Balance, September 30, 2011 |
|
|
648,215 |
|
|
$ |
17.07 |
|
|
|
|
|
|
|
|
Restricted Common Stock
During the year ended December 31, 2008, the Company awarded 4,000 shares of restricted common
stock to a non-employee. The shares of restricted common stock were granted under the 2007 Plan and
vested over two years. The shares of restricted common stock granted had a weighted average fair
value of $8.04 per share based on the closing price of the Company’s common stock on the date of
grant. The remaining 444 unvested shares at December 31, 2010 vested during the nine months ended
September 30, 2011. The Company recognized the total compensation expense of $32,000 over the two
year vesting period.
13. 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.
15
| 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: risks associated with our dependence on the OmniPod
System; our ability to increase customer orders and manufacturing volumes; adverse changes in
general economic conditions; impact of healthcare reform legislation; our inability to raise
additional funds in the future on acceptable terms or at all; potential supply problems or price
fluctuations with sole source or other
third-party suppliers on which we are dependent; international business risks; our inability to
obtain adequate coverage or 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 with competitors; 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, including claims that our
current or future products infringe the proprietary rights of others; adverse regulatory or legal
actions relating to the OmniPod System; failure to obtain timely regulatory approval for the sale
of the next generation OmniPod System; failure of our contract manufacturers or component suppliers
to comply with FDA’s quality system regulations, the potential violation of federal or state laws
prohibiting “kickbacks” or protecting patient health information, or any challenges to or
investigations into our practices under these laws; product liability lawsuits that may be brought
against us; reduced retention rates; unfavorable results of clinical studies relating to the
OmniPod System or the products of our competitors; potential future publication of articles or
announcement of positions by physician associations or other organizations that are unfavorable to
our products; the expansion, or attempted expansion, into foreign markets; the concentration of
substantially all of our manufacturing capacity at a single location in China and substantially all
of our OmniPod System inventory at a single location in Massachusetts; our ability to attract and
retain key personnel; our ability to manage our growth; failure to integrate successfully the
Neighborhood Diabetes business; intense competition among distributors of diabetes supplies
impairing Neighborhood Diabetes’ business; loss by Neighborhood Diabetes of an opportunity to sell
insulin pumps supplied by our competitors; failure by Neighborhood Diabetes to retain key supplier
and payor partners; failure by Neighborhood Diabetes to retain supplier pricing discounts and
achieve satisfactory gross margins; failure by Neighborhood Diabetes to retain and manage
successfully its Medicare and Medicaid business; existence of unanticipated liabilities arising in
connection with the Neighborhood Diabetes business; fluctuations in quarterly results of
operations; risks associated with potential future acquisitions; our ability to generate sufficient
cash to service all of our indebtedness; the expansion of our distribution network; our ability to
successfully maintain effective internal controls; and other risks and uncertainties described in
our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on
March 10, 2011 in the section entitled “Risk Factors,” and in our other filings from time to time
with the Securities and Exchange Commission. 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.
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 (the “OmniPod System”) consists of our disposable OmniPod insulin infusion device and our
handheld, wireless Personal Diabetes Manager, (‘PDM”). The U.S. Food and Drug Administration,
(“FDA”), approved the OmniPod System in January 2005. In October 2005, we shipped our first
commercial OmniPod System.
We have progressively expanded our marketing efforts from an initial focus in the Eastern
United States to having availability of the OmniPod System across the entire United States. In
January 2010, we entered into a five year distribution agreement with Ypsomed Distribution AG,
(“Ypsomed”), to become the exclusive distributor of the OmniPod System in eleven countries, subject
to approved reimbursement. Through our partnership with Ypsomed, the OmniPod System is now
available in seven markets, namely Germany, the United Kingdom, France, the Netherlands, Sweden,
Norway and Switzerland. We expect that Ypsomed will begin distribution of the OmniPod System,
subject to approved reimbursement, in the other markets under the agreement in 2012. In February
2011, we entered into a distribution agreement with GlaxoSmithKline Inc., (“GSK”), to become the
exclusive distributor of the OmniPod System in Canada. We made an initial shipment of OmniPods to
GSK during the second quarter of 2011, and GSK began distributing the OmniPod System during the
third quarter of 2011. We focus our sales initiatives towards key diabetes practitioners, academic
centers and clinics specializing in the treatment of diabetes patients, as well as individual
diabetes patients.
On June 1, 2011, we completed the acquisition of Neighborhood Holdings, Inc. and its
wholly-owned subsidiaries (collectively, “Neighborhood Diabetes”), a leading durable medical
equipment distributor, specializing in direct to consumer sales of diabetes supplies. Neighborhood
Diabetes is based in Woburn, Massachusetts with additional facilities in Brooklyn, New York and
Orlando, Florida. Neighborhood Diabetes serves more than 60,000 customers with Type 1 and Type 2
diabetes primarily in the northeast and southeast regions of the United States. Neighborhood
Diabetes supplies these customers with blood glucose testing supplies, insulin pumps, pump
supplies, pharmaceuticals, and other products for the management and treatment of diabetes.
We currently produce the OmniPod System on a partially automated manufacturing line at a
facility in China operated by a subsidiary of Flextronics International Ltd. (“Flextronics”). 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. 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 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 introduction of our next generation OmniPod, is important as
we strive to achieve profitability. We believe our current manufacturing capacity is sufficient to
meet our expected 2011 demand for OmniPods.
Neighborhood Diabetes is a distributor of blood glucose testing supplies, insulin pumps, pump
supplies, pharmaceuticals and other products for the management and treatment of diabetes.
Neighborhood Diabetes purchases products from manufacturers at contracted rates and supplies these
products to its customers. Based on market penetration, payor plans and other factors, certain
manufacturers provide rebates based on product sold. Neighborhood Diabetes records these rebates as
a reduction to cost of goods sold as they are earned.
16
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,
government agencies, 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.
Neighborhood Diabetes has built a strong infrastructure in the reimbursement, billing and
collection areas that provide for adjudication of claims as either durable medical equipment or
through pharmacy benefits. Claims are adjudicated under private insurers, Medicaid or Medicare.
Neighborhood Diabetes’ business model requires collaboration with physicians, medical device
manufacturers, pharmaceutical distributors, private insurers and public insurers such as The Center
for Medicare & Medicaid Services, (“CMS”), who we collectively refer to as partners. Neighborhood
Diabetes’ net sales are primarily generated from distributing diabetes supplies and pharmaceuticals
pursuant to agreements with its partners.
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 part of the integration of
Neighborhood Diabetes, we are aligning third-party payor contracts, both ours and those of
Neighborhood Diabetes, to be able to better leverage our cross-selling initiatives. As we expand
our sales and marketing focus, increase our manufacturing capacity, expand to international markets
and leverage the Neighborhood Diabetes model, we will need to maintain and expand available
reimbursement for our product offerings.
Since our inception in 2000, we have incurred losses every quarter. In the three and nine
months ended September 30, 2011, we incurred net losses of $13.6 million and $42.8 million,
respectively. As of September 30, 2011, we had an accumulated deficit of $426.7 million. We have
financed our operations through private placements of debt and equity securities, public offerings
of our common stock and issuances of convertible debt and borrowings under certain other debt
agreements. As of September 30, 2011, we had $158.8 million of convertible debt outstanding. Of the
$158.8 million of convertible debt outstanding, approximately $15 million matures in June 2013 and
approximately $143.8 million matures in June 2016.
Our long-term financial objective is to achieve and sustain profitable growth. Our efforts for
the remainder of 2011 are focused primarily on the development, production and regulatory approval
of our next generation OmniPod System, the expansion of sales by continuing to add new patients as
well as increasing the sales to existing patients by offering additional products and services, and
the integration of Neighborhood Diabetes. Achieving these objectives is expected to require
additional investments in certain personnel and initiatives to allow for us to increase our
penetration in the United States and 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.
We believe that our 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 the next twelve months.
Acquisition of Neighborhood Diabetes
On June 1, 2011, we acquired all of the outstanding shares of Neighborhood Diabetes, a durable
medical equipment distributor specializing in direct to consumer sales of diabetes supplies,
including pharmaceuticals, and support services. Neighborhood Diabetes serves more than 60,000
customers with Type 1 and Type 2 diabetes primarily in the northeast and southeast regions of the
United States with blood glucose testing supplies, insulin pumps, pump supplies, pharmaceuticals,
as well as other products for the management and treatment of diabetes. Neighborhood Diabetes is
based in Woburn, Massachusetts, with additional offices in Brooklyn, New York and Orlando, Florida.
At the time of the acquisition, Neighborhood Diabetes employed approximately 200 people across its
three locations. The acquisition of Neighborhood Diabetes provides us with full suite diabetes
management product offerings, accelerates our sales force expansion, strengthens our back office
support capabilities, expands our access to insulin dependent patients, and provides pharmacy
adjudication capabilities to drive incremental sales higher. The aggregate purchase price of
approximately $62.4 million consisted of approximately $37.9 million in cash paid at closing,
1,197,631 shares of our common stock valued at approximately $24.4 million, or $20.40 per share
based on the closing price of our common stock on the acquisition date, and contingent
consideration with a fair value of approximately $0.1 million. Of the $37.9 million of cash, $6.6
million is being held in an escrow account to reimburse us and our affiliates, if necessary, for
certain claims for which they are entitled to be indemnified pursuant to the terms of the agreement
and plan of merger with Neighborhood Diabetes.
We have accounted for the acquisition of Neighborhood Diabetes as a business combination.
Under business combination accounting, the assets and liabilities of Neighborhood Diabetes were
recorded as of the acquisition date, at their respective fair values, and consolidated with our
results. The excess of the purchase price over the fair value of net assets acquired was recorded
as goodwill. The operating results of Neighborhood Diabetes have been included in the consolidated
financial statements since June 1, 2011, the date the acquisition was completed. If the acquisition
had occurred as of January 1, 2010, consolidated revenue would have been approximately $130.0
million and $113.1 million for the nine months ended September 30, 2011 and 2010, respectively.
Consolidated net loss would have been approximately $44.1 million and $38.8 million for the nine
months ended September 30, 2011 and 2010, respectively. For the three and nine months ended
September 30, 2011, we included approximately $10.4 million and $14.1 million of revenue related to
pharmacy and testing supplies sold by Neighborhood Diabetes, respectively. The purchase price
allocation, including an independent appraisal for intangible assets, has been prepared based on
the information that was available to management at the time the consolidated financial statements
were prepared, and revisions to the preliminary purchase price allocation will be made as
additional information becomes available with respect to the fair value of the net assets acquired.
The preliminary purchase price at June 1, 2011 has been allocated as follows (in thousands):
17
| |
|
|
|
|
|
Calculation of allocable purchase price: |
|
|
|
|
Cash |
|
$ |
37,855 |
|
Common stock |
|
|
24,432 |
|
Contingent consideration obligations |
|
|
61 |
|
|
|
|
|
Total allocable purchase price |
|
$ |
62,348 |
|
|
|
|
|
| |
Preliminary allocation of purchase price: |
|
|
|
|
Accounts receivable |
|
$ |
5,387 |
|
Inventories |
|
|
2,336 |
|
Prepaid expenses and other current assets |
|
|
242 |
|
Property and equipment |
|
|
391 |
|
Customer relationships |
|
|
30,100 |
|
Tradenames |
|
|
2,800 |
|
Goodwill |
|
|
26,727 |
|
Other assets |
|
|
233 |
|
Accounts payable |
|
|
4,109 |
|
Accrued expenses |
|
|
1,700 |
|
Other long-term liabilities |
|
|
59 |
|
|
|
|
|
|
|
$ |
62,348 |
|
|
|
|
|
In the three months ended September 30, 2011 we recorded certain adjustments to the
initial purchase price accounting. The adjustments to goodwill are as follows (in thousands):
| |
|
|
|
|
| |
|
Purchase accounting adjustments |
|
| |
|
offset to goodwill |
|
Collection of fully reserved receivable |
|
$ |
(543 |
) |
Other |
|
|
(20 |
) |
|
|
|
|
Total |
|
$ |
(563 |
) |
|
|
|
|
We incurred transaction costs of approximately $3.2 million, which consisted
primarily of banking, legal, accounting and other administrative fees. These costs have been
recorded as general and administrative expense in the three and nine months ended September 30,
2011.
Financial Operations Overview
Revenue. Prior to the acquisition of Neighborhood Diabetes, we derived nearly all of our
revenue from the sale of the OmniPod System to customers and third-party distributors who resell
the product to customers. Neighborhood Diabetes is a durable medical equipment distributor that
sells other diabetes related products including blood glucose testing supplies, insulin pumps, pump
supplies and pharmaceuticals to customers. 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 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. We are currently selling our OmniPod System
through our partnership with Ypsomed in seven markets, namely Germany, the United Kingdom, France,
the Netherlands, Sweden, Norway and Switzerland. We expect that Ypsomed will begin distributing the
OmniPod System, subject to approved reimbursement, in the other markets under the agreement in
2012. In February 2011, we entered into a distribution agreement with GSK to become the exclusive
distributor of the OmniPod System in Canada. We shipped OmniPods to GSK during the second quarter
2011, and GSK began distributing the OmniPod System in the third quarter 2011. In connection with
our June 1, 2011 acquisition of Neighborhood Diabetes, we also provide more than 60,000 Type 1 and
Type 2 diabetes patients with blood glucose testing supplies, insulin pumps, pump supplies and
pharmaceuticals.
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 five year term of the
agreement. In addition, Abbott
agreed to pay us certain amounts for services performed in connection with each sale of a PDM that
includes an Abbott Discrete Blood Glucose Monitor to customers in certain territories. 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 the patient.
In June 2011, we entered into a development agreement with a U.S. based pharmaceutical company
( the “Development Agreement”). Under the Development Agreement, we are required to perform design,
development, regulatory, and other services to support the pharmaceutical company as it works to
obtain regulatory approval to use our drug delivery technology as a delivery method for its
pharmaceutical. Over the estimated two year term of the Development Agreement, we will invoice
amounts as we meet certain defined deliverable milestones. Revenue on the Development Agreement is
recognized using a proportional performance methodology based on costs incurred and total payments
under the agreement.
As of September 30, 2011 and December 31, 2010, we had deferred revenue of $2.4 million and
$4.8 million, respectively. These amounts include product-related revenue, unrecognized amounts
related to the Development Agreement, as well as the unrecognized portion of the agreement fee
related to the Abbott agreement. For the year ending December 31, 2011, we expect our revenue to
continue to increase as we gain new customers and increase our product offerings to existing
customers in the
18
United States and continue expansion in Europe, Canada and certain other
international markets. Increased revenue will be dependent upon the success of our sales efforts,
our ability to produce OmniPods in sufficient volumes and other risks and uncertainties.
Cost of revenue. Cost of revenue consists primarily of raw material, labor, warranty and
overhead costs such as freight, depreciation and packaging costs, related to the OmniPod System and
the cost for which we acquire our other products from third party suppliers distributed through our
Neighborhood Diabetes business, and costs incurred related to the Development Agreement. On a per
unit basis for the OmniPod System, the cost of revenue is expected to be consistent for the
remainder of the year. Cost of revenue related to the Neighborhood Diabetes business is expected to
reduce our overall gross margin as we resell other diabetes supplies to our combined customers. We
have filed for 510(K) clearance from the FDA on our next generation OmniPod. Once approved, we
expect improvement in our gross margins in connection with the introduction of this next generation
product.
Research and development. Research and development expenses consist primarily of personnel
costs within our product development, regulatory and clinical functions, and the costs of market
studies and product development projects, including regulatory approval of our next generation
product. We expense all research and development costs as incurred. For the year ending December
31, 2011, we expect overall research and development spending to remain higher than in 2010 as we
finalize the validation of our next generation product manufacturing line with Flextronics and work
with the regulatory agencies on obtaining approval of the next generation product.
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. We expect general and administrative
expenses to remain higher in 2011 compared to 2010, mainly as a result of our acquisition of
Neighborhood Diabetes on June 1, 2011.
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. We expect sales and marketing expenses to remain higher in 2011 as
compared to 2010 as a result of the growth of our existing business, our acquisition of
Neighborhood Diabetes as well as our efforts to enhance the products we offer to our existing
patients.
Results of Operations
The following table presents certain statement of operations information for the three and
nine months ended September 30, 2011 and 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2011 |
|
|
2010 |
|
|
%
Change |
|
|
2011 |
|
|
2010 |
|
|
%
Change |
|
| |
|
(in thousands) |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Revenue |
|
$ |
44,594 |
|
|
$ |
25,455 |
|
|
|
75 |
% |
|
$ |
105,063 |
|
|
$ |
69,199 |
|
|
|
52 |
% |
Cost of revenue |
|
|
26,033 |
|
|
|
13,826 |
|
|
|
88 |
% |
|
|
58,431 |
|
|
|
39,299 |
|
|
|
49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
18,561 |
|
|
|
11,629 |
|
|
|
60 |
% |
|
|
46,632 |
|
|
|
29,900 |
|
|
|
56 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
4,638 |
|
|
|
3,698 |
|
|
|
25 |
% |
|
|
16,059 |
|
|
|
12,128 |
|
|
|
32 |
% |
General and administrative |
|
|
11,379 |
|
|
|
7,230 |
|
|
|
57 |
% |
|
|
31,585 |
|
|
|
20,379 |
|
|
|
55 |
% |
Sales and marketing |
|
|
12,312 |
|
|
|
8,979 |
|
|
|
37 |
% |
|
|
30,943 |
|
|
|
26,301 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
28,329 |
|
|
|
19,907 |
|
|
|
42 |
% |
|
|
78,587 |
|
|
|
58,808 |
|
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(9,768 |
) |
|
|
(8,278 |
) |
|
|
18 |
% |
|
|
(31,955 |
) |
|
|
(28,908 |
) |
|
|
11 |
% |
Other expense, net |
|
|
(3,794 |
) |
|
|
(3,822 |
) |
|
|
1 |
% |
|
|
(10,876 |
) |
|
|
(11,393 |
) |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(13,562 |
) |
|
$ |
(12,100 |
) |
|
|
12 |
% |
|
$ |
(42,831 |
) |
|
$ |
(40,301 |
) |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the Three and Nine Months Ended September 30, 2011 and 2010
Revenue
Our total revenue was $44.6 million and $105.1 million for the three and nine months ended
September 30, 2011, compared to $25.5 million and $69.2 million for the same periods in 2010. The
increase in revenue is primarily due to continued adoption of the OmniPod System by patients in the
United States and internationally, as well of the sale of testing and other supplies related to our
acquisition of Neighborhood Diabetes. We expect our revenue to increase as we continue to add new
patients, introduce the OmniPod System in additional territories, generate a higher volume of
reorders based on our expanding patient base and continue to realize revenue growth from our
Neighborhood Diabetes business.
Cost of Revenue
Cost of revenue was $26.0 million and $58.4 million for the three and nine months ended
September 30, 2011, compared to $13.8 million and $39.3 million for the same periods in 2010. The
increase in cost of revenue is primarily due to a significant increase in sales volume offset by
cost efficiencies related to the bill of material and production volume on our OmniPod System as
well as the impact on cost of sales of the lower gross margin profile Neighborhood Diabetes
business. We expect gross margins for the remainder of the year in the range of 42% to 45% of
revenue.
Research and Development
Research and development expenses increased $0.9 million, or 25%, to $4.6 million for the
three months ended September 30, 2011, compared to $3.7 million for the same period in 2010. For
the three months ended September 30, 2011, the increase was primarily a result of $0.9 million of
testing and tooling expenses on the current version of the OmniPod and an increase of $0.6 million
in employee related expenses. These increases are offset by a $0.7 million decrease in expenses
related to our next generation OmniPod System as we move closer to production.
19
Research and development expenses increased $4.0 million, or 32%, to $16.1 million for the
nine months ended September 30, 2011, compared to $12.1 million for the same period in 2010. For
the nine months ended September 30, 2011, the increase was primarily a result of $0.6 million of
additional materials and equipment utilized in the development of our next generation OmniPod
System, a $1.6 million increase in employee related expenses, $0.9 million in other outside
services, and $0.6 million increase in depreciation.
General and Administrative
General and administrative expenses increased $4.2 million, or 57%, to $11.4 million for the
three months ended September 30, 2011, compared to $7.2 million for the same period in 2010. This
increase was primarily a result of an increase in employee related expenses of $2.1 million,
including $1.1 million related to Neighborhood Diabetes and $0.8 million related to new hires,
merit increases and stock based compensation, $0.4 million related to higher legal fees, and a $1.7
million of amortization on acquired intangibles.
General and administrative expenses increased $11.2 million, or 55%, to $31.6 million for the
nine months ended September 30, 2011, compared to $20.4 million for the same period in 2010. This
increase was primarily a result of $3.2 million of transaction costs for the acquisition of
Neighborhood Diabetes, $0.9 million related to higher audit and legal fees, $2.2 million of
amortization on acquired intangibles, and an increase in employee related expenses of $4.9 million,
including $2.0 million related to the acquisition of Neighborhood Diabetes and $2.9 million related
to new hires, merit increases, bonus and stock based compensation.
Sales and Marketing
Sales and marketing expenses increased $3.3 million, or 37%, to $12.3 million for the three
months ended September 30, 2011, compared to $9.0 million for the same period in 2010. This
increase in sales and marketing expenses was due to an increase of $2.0 million in employee related
expenses, including $1.9 million from the acquisition of Neighborhood Diabetes, an increase of $0.4
million in shipping costs related to Neighborhood Diabetes, an increase of $0.3 million in customer
support due to a higher patient volume, and $0.3 million in advertising expenses.
Sales and marketing expenses increased $4.6 million, or 18%, to $30.9 million for the nine
months ended September 30, 2011, compared to $26.3 million for the same period in 2010. The
increase in sales and marketing expenses for the nine months ended September 30, 2011 was due to an
increase of $3.1 million in employee related expenses, including $2.1 million from Neighborhood
Diabetes, an increase of $0.8 million in outside services and an increase of $0.4 million in
shipping costs related to Neighborhood Diabetes, and $0.3 million increase for patient training.
Other Expense, Net
Net interest expense was $3.8 million for the three months ended September 30, 2011, compared
to $3.8 million for the same period in 2010. Net interest expense was $10.9 million for the nine
months ended September 30, 2011, compared to $11.4 million for the same period in 2010. Net
interest expense remained relatively consistent due to additional cash and non-cash interest
expense related to the issuance of the 3.75% Notes which was offset by the decrease in the interest
expense related to the Facility Agreement, which was repaid in 2010 and the repurchase of a portion
of our 5.375% Notes.
Liquidity and Capital Resources
We commenced operations in 2000 and to date we have financed our operations primarily through
private placements of common and preferred stock, secured indebtedness, public offerings of our
common stock and issuances of convertible debt. On June 1, 2011, we acquired all of the outstanding
shares of Neighborhood Diabetes. The aggregate purchase price of approximately $62.4 million
included approximately $37.9 million in cash paid at closing. As of September 30, 2011, we had
$103.8 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 June 2010, the lenders under the Facility Agreement 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.
In December 2010, we issued and sold 3,450,000 shares of our common stock at a price of $13.27
per share. In connection with the offering, we received total gross proceeds of $47.8 million, or
approximately $45.4 million in net proceeds after deducting underwriting discounts and offering
expenses. Approximately $33.3 million of the proceeds was used to repay all amounts outstanding
under our Facility Agreement.
In June 2011, in connection with the acquisition of Neighborhood Diabetes, we issued 1,197,631
shares of our common stock with a value of $20.40 per share on the issuance date, as partial
consideration for the acquisition.
Long-Term Debt
At September 30, 2011 and December 31, 2010, we had outstanding long-term debt and related
deferred financing costs on our balance sheet as follows (in thousands):
20
| |
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
September 30, 2011 |
|
|
December 31, 2010 |
|
Liabilities: |
|
|
|
|
|
|
|
|
Principal
amount of the
5.375%
Convertible
Notes |
|
$ |
15,000 |
|
|
$ |
85,000 |
|
Principal
amount of the
3.75%
Convertible
Notes |
|
|
143,750 |
|
|
|
— |
|
Unamortized
discount of
liability
component |
|
|
(52,431 |
) |
|
|
(15,567 |
) |
|
|
|
|
|
|
|
|
|
$ |
106,319 |
|
|
$ |
69,433 |
|
|
|
|
|
|
|
|
| |
Deferred financing costs |
|
$ |
2,660 |
|
|
$ |
1,173 |
|
Interest expense related to the Notes and Facility Agreement was included in interest
expense on the consolidated statements of operations as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
Contractual coupon interest |
|
$ |
1,549 |
|
|
$ |
1,838 |
|
|
$ |
3,834 |
|
|
$ |
5,501 |
|
Accretion of debt discount |
|
|
2,143 |
|
|
|
1,887 |
|
|
|
4,992 |
|
|
|
5,493 |
|
Amortization of debt issuance costs |
|
|
146 |
|
|
|
214 |
|
|
|
389 |
|
|
|
654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,838 |
|
|
$ |
3,939 |
|
|
$ |
9,215 |
|
|
$ |
11,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.375% 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.
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.
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).
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 five year term 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.
On June 29, 2011, in connection with the issuance of $143.8 million of 3.75% Convertible Notes
due June 2016 (the “3.75% Notes”), we repurchased $70 million in principal amount of the 5.375%
Notes for $85.1 million, a 21.5% premium on the principal amount. The investors that held the $70
million of repurchased 5.375% Notes purchased $59.5 million in principal amount of the 3.75% Notes
and retained approximately $13.5 million of the remaining 5.375% Notes. The investors’ combined
$73.0 million of convertible debt ($13.5 million of 5.375% Notes and $59.5 million of 3.75% Notes)
were considered to be a modification of a portion of the 5.375% Notes. See “3.75% Convertible
Notes” for additional detail on the modification.
Non-cash interest expense related to the amortization of the debt discount and the deferred
financing costs on the $85 million of principal 5.375% Notes was $3.1 million in the nine months
ended September 30, 2011. There was no non-cash interest expense in the three months ended
September 31, 2011. Non-cash interest expense related to the amortization of the debt discount and
the deferred financing costs on the $85 million of principal 5.375% Notes was $1.4 million and $4.1
million in the three and nine months ended September 30, 2010, respectively.
Cash interest expense related to the 5.375% Notes was $0.2 million and $2.5 million in the
three and nine months ended September 30, 2011, respectively. Cash interest expense related to the
5.375% Notes was $1.1 million and $3.4 million for the three and nine months ended September 30,
2010, respectively.
As of September 30, 2011, we included $1.3 million on our balance sheet related to the
unmodified portion of the 5.375% Notes. The 5.375% Notes have a remaining term of 1.75 years.
Facility Agreement and Common Stock Warrants
In March 2009, we entered into the facility agreement with certain institutional accredited
investors (the“Facility Agreement”), 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. Total financing
costs, including the transaction fee, were $3.0 million
21
and were amortized as interest expense over
the 42 months of the Facility Agreement. In September 2009, we entered into an amendment to the
Facility Agreement whereby we repaid the $27.5 million originally drawn and promptly drew down the
remaining $32.5 million available under the Facility Agreement. The annual interest rate was 8.5%,
payable quarterly in arrears. 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 was 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 were payable in September
2012.
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. 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 was amortized as non-cash interest expense over the
term of the loan. As of September 30, 2011, all warrants to acquire 3.75 million shares of our
common stock issued in connection with the Facility Agreement were exercised.
In December 2010, we paid $33.3 million to the lenders, of which $32.5 million related to
principal and $0.8 million related to interest and prepayment fees, to extinguish this debt. We
recorded a non-cash interest charge of $7.0 million in the fourth quarter of 2010 related to the
write-off of the remaining debt discounts and financing costs included in other assets which were
being amortized to interest expense over the term of the debt. At September 30, 2011 and December
31, 2010, there were no amounts related to the Facility Agreement included in long-term debt on our
balance sheet.
As the Facility Agreement was repaid in December 2010, no amounts were included in interest
expense in the consolidated statements of operations in the three and nine months ended September
30, 2011.
3.75% Convertible Notes
In June 2011, we sold $143.8 million principal amount of the 3.75% Notes. The interest rate on
the notes is 3.75% per annum, payable semi-annually in arrears in cash on December 15 and June 15
of each year. The 3.75% Notes are convertible into our common stock at an initial conversion rate
of 38.1749 shares of common stock per $1,000 principal amount of the 3.75% Notes, which is
equivalent to a conversion price of approximately $26.20 per share, subject to adjustment under
certain circumstances. The 3.75% Notes are convertible prior to March 15, 2016 only upon the
occurrence of certain circumstances. On and after March 15, 2016 and prior to the close of business
on the second scheduled trading day immediately preceding the final maturity date of the 3.75%
Notes, the notes may be converted without regard to the occurrence of any such circumstances. The
3.75% Notes and any unpaid interest will be convertible at our option for cash, shares of our
common stock or a combination of cash and shares of our common stock for the principal amount. We
intend to settle the principal in cash.
We may not redeem the 3.75% Notes prior to June 20, 2014. From June 20, 2014 to June 20, 2015,
we may redeem the 3.75% Notes, at our option, in whole or in part only if the last reported sale
price per share of our common stock has been at least 130% of the conversion price then in effect
for at least 20 trading days during a period of 30 consecutive trading days. On and after June 25,
2015, we may redeem the 3.75% Notes, at our option (without regard to such sale price condition),
in whole or in part. If a fundamental change, as defined in the Indenture for the 3.75% Notes,
occurs at any time prior to maturity, holders of the 3.75% 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. If a holder elects to convert its 3.75% Notes upon
the occurrence of a make-whole fundamental change, as defined in the Indenture for the 3.75% 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 3.75% Notes. In no
event will the number of shares issuable upon conversion of a 3.75% Note exceed 50.5816 per $1,000
principal amount (subject to adjustment as described in the Indenture for the 3.75% Notes). The
3.75% Notes are unsecured and are equal in right of payment to the 5.375% Notes.
We evaluated certain features of the 3.75% Notes to determine whether these features are
derivatives which should be bifurcated and valued. We identified certain features related to a
portion of the 3.75% Notes, including the holders’ ability to require us to repurchase their notes
and the higher interest payments required in an event of default, which are considered embedded
derivatives and should be valued. We assess the value of each of these embedded derivatives at each
balance sheet date. At September 30, 2011, we determined that these derivatives have de minimus
value.
In connection with the issuance of the 3.75% Notes, we repurchased $70 million in principal
amount of the 5.375% Notes for $85.1 million, a 21.5% premium on the principal amount. The
investors that held the $70 million of repurchased 5.375% Notes purchased $59.5 million in
principal amount of the 3.75% Notes and retained approximately $13.5 million of the remaining
5.375% Notes. This transaction was treated as a modification of the existing 5.375% Notes. We
accounted for this modification of a portion of the 5.375% Notes separately from the issuance of
the remainder of the 3.75% Notes.
Prior to the transaction, the $70 million principal of repurchased 5.375% Notes had a debt
discount of $10.5 million. This amount remained in debt discount related to the modified $13.5
million of 5.375% Notes and $59.5 million of 3.75% Notes. We recorded additional debt discount of
$15.1 million related to the premium payment in connection with the repurchase and $0.2 million
related to the increase in the value of the conversion feature. The offset to the debt discount
related to the value of the conversion feature was recorded as additional paid-in capital. The
total debt discount of $25.8 million related to the modified debt is being amortized as interest
expense at the effective rate of 16.5% over the five year term of the modified debt. We paid
transaction fees of approximately $2.0 million related to the modification which were recorded as
interest expense in the nine months ended September 30, 2011. Non-cash interest expense related to
the amortization of the debt discount and the deferred financing costs on $73 million of the
modified debt was $1.2 million in the three and nine months ended September 30, 2011 As the debt
was considered to be modified in connection with the issuance of 3.75% Notes in June 2011, there
was no non-cash interest expense related to the modified debt in the three and nine months ended
September 30, 2010.
Of the $143.8 million of 3.75% Notes issued in June 2011, $84.3 million was considered to be
an issuance of new debt. We recorded a debt discount of $26.6 million related to the $84.3 million.
We included $58.7 million on our balance sheet related to these notes at September 30, 2011. The
debt discount was recorded as additional paid-in capital to reflect the value of our nonconvertible
debt borrowing rate of 12.4% per annum. This debt discount is being amortized as interest expense
over the five year term of the 3.75% Notes. We incurred deferred financing costs related to this
offering of approximately $2.8 million, of which $0.9 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 3.75% Notes. Non-cash interest expense related to the amortization of the debt
discount and the deferred financing costs on the new portion of the 3.75% Notes was $1.1 million in
the three and nine months ended September 30, 2011. There was no non-cash interest recorded on the
new portion of the 3.75% Notes in the three and nine months ended September 30, 2010.
Cash interest expense related to the $143.8 million of 3.75% Notes was $1.3 million in the
three and nine months ended September 30, 2011. No cash interest was recorded on the 3.75% Notes in
the three and nine months ended September 30, 2010.
22
As of September 30, 2011, the 3.75% Notes have a remaining term of 4.75 years.
Operating Activities
The following table sets forth the amounts of cash used in operating activities and net loss
for each of the periods indicated:
| |
|
|
|
|
|
|
|
|
| |
|
Nine months ended |
|
| |
|
September 30, |
|
| |
|
2011 |
|
|
2010 |
|
| |
|
(In thousands) |
|
Cash used in operating activities |
|
$ |
(17,784 |
) |
|
$ |
(27,922 |
) |
Net loss |
|
$ |
(42,831 |
) |
|
$ |
(40,301 |
) |
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 expenses.
Adjustments for non-cash items were approximately $20.4 million and $17.6 million in the nine
months ended September 30, 2011 and September 30, 2010, respectively. Non-cash items mainly consist
of depreciation and amortization, stock-based compensation and non-cash interest expense. Uses of
cash from operations in the nine months ended September 30, 2011 include a decrease in deferred
revenue of $2.1 million. Uses of cash from operations in the nine months ended September 30, 2011
were offset by a reduction in accounts receivable of $3.8 million, primarily attributable to
improved collections, and an increase of $1.9 million in accounts payable and accruals.
Investing and Financing 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:
| |
|
|
|
|
|
|
|
|
| |
|
Nine months ended |
|
| |
|
September 30, |
|
| |
|
2011 |
|
|
2010 |
|
| |
|
(In thousands) |
|
Cash used in investing activities |
|
$ |
(46,693 |
) |
|
$ |
(3,632 |
) |
Cash provided by financing activities |
|
$ |
55,015 |
|
|
$ |
7,476 |
|
Cash used in investing activities in the nine months ended September 30, 2011
primarily related to the acquisition of Neighborhood Diabetes. We paid approximately $37.9 million
in cash as partial consideration. In addition, we purchased fixed assets primarily for use in the
development and manufacturing of the OmniPod System. In the nine months ended September 30, 2010,
cash used in investing activities was primarily for the purchase of fixed assets for use in the
development and manufacturing of the OmniPod System. Capital expenditures are expected to continue
to increase in 2011 as we complete our first manufacturing line for our next generation product.
In the nine months ended September 30, 2011 cash provided by financing activities related to
the net proceeds from the issuance of the 3.75% Notes, offset by the repurchase of $70 million
principal of the 5.375% Notes for $85.1 million. Cash provided by financing activities in the nine
months ended September 30, 2010 mainly consisted of the net proceeds from the issuance of common
stock in connection with the exercise of employee stock options.
Contractual 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. In addition, in connection with
our acquisition of Neighborhood Diabetes, we acquired leases of facilities in Woburn,
Massachusetts, Brooklyn, New York and Orlando, Florida. As of September 30, 2011, we had an
outstanding letter of credit which totaled $0.1 million to cover our security deposits for lease
obligations. As a result of the leases acquired, we expect to pay additional rent of $0.1 million
in
2011, $0.5 million in 2012 and $0.3 million in 2013.
As a result of the issuance of the 3.75% Notes and the repurchase of $70 million of the 5.375%
Notes in June 2011, we expect to pay cash interest of $5.4 million in 2011, $6.2 million in 2012,
$5.7 million in 2013, $5.4 million in 2014 and 2015 and $2.5 million in 2016. Additionally we
expect to repay the $15 million of the 5.375% Notes in 2013 and the $143.8 million of the 3.75%
Notes in 2016.
Off-Balance Sheet Arrangements
As of September 30, 2011, 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.
Revenue Recognition
We generate nearly all of our revenue from sales of our OmniPod Insulin Management System and
other diabetes related products including blood glucose testing supplies, insulin pumps, pump
supplies and pharmaceuticals to customers and third-party distributors who resell the product to
patients with diabetes.
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 collectability is reasonably assured. With respect to these criteria:
23
| • |
|
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 patient or third-party distributor typically upon shipment of the products. |
| |
| • |
|
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
once all elements have been delivered.
We offer a 45-day right of return for our OmniPod Insulin Management System 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 collectability 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 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 five year term of the agreement,
and the non-current portion of the agreement fee is included in other long-term liabilities. In
addition, Abbott agreed to pay us certain amounts for services performed in connection with each
sale of a PDM that includes an Abbott Discrete Blood Glucose Monitor to customers in certain
territories. We recognize revenue related to this portion of the Abbott agreement at the time we
meet the criteria for revenue recognition, typically at the time the revenue is recognized on the
sale of the PDM to the patient.
In June 2011, we entered into the Development Agreement. Under the Development Agreement, we
are required to perform design, development, regulatory, and other services to support the
pharmaceutical company as it works to obtain regulatory approval to use our drug delivery
technology as a delivery method for its pharmaceutical. Over the estimated two year term of the
Development Agreement, we will invoice amounts as we meet certain defined deliverable milestones.
Revenue on the Development Agreement is recognized using a proportional performance methodology
based on costs incurred and total payments under the agreement.
We had deferred revenue of $2.4 million as of September 30, 2011. The deferred revenue
recorded as of September 30, 2011 was comprised of product-related revenue, unrecognized amounts
related to the Development Agreement, as well as the non-amortized agreement fee related to the
Abbott agreement.
Income Taxes
FASB Accounting Standards Codification 740-10, Income Taxes (“FASB ASC 740-10”), clarifies the
accounting for uncertainty in income taxes recognized in an entity’s financial statements. FASB ASC
740-10 prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. In
addition, FASB ASC 740-10 provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. As of September 30, 2011, we
had $0.2 million of unrecognized tax benefits recorded.
Stock-Based Compensation
We account for stock-based compensation under the provisions of FASB ASC 718-10, Compensation
— Stock Compensation. (“FASB ASC 718-10”) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income statement based on their
fair values.
We use the Black-Scholes option pricing model to determine the weighted average fair value of
options granted. We determine the intrinsic value of restricted stock and restricted stock units
based on the closing price of our common stock on the date of grant. We recognize the compensation
expense of share-based awards on a straight-line basis over the vesting period of the award.
The determination of the fair value of share-based payment awards utilizing the Black-Scholes
model is affected by the stock price and a number of assumptions, including expected volatility,
expected life, risk-free interest rate and expected dividends. The expected life of the awards is
estimated based on the midpoint between
the vesting date and the end of the contractual term. The risk-free interest rate assumption is
based on observed interest rates appropriate for the terms of the awards. The dividend yield
assumption is based on company history and expectation of paying no dividends. Forfeitures are
estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Stock-based compensation expense recognized in the
financial statements is based on awards that are ultimately expected to vest. We evaluate the
assumptions used to value the awards on a quarterly basis and if factors change and different
assumptions are utilized, stock-based compensation expense may differ significantly from what has
been recorded in the past. If there are any modifications or cancellations of the underlying
unvested securities, we may be required to accelerate, increase or cancel any remaining unearned
stock-based compensation expense.
In the three and nine months ended September 30, 2011, we recorded $1.8 million and $5.6
million of stock based compensation expense, respectively. In the three and nine months ended
September 30, 2010, we recorded $1.3 million and $4.0 million of stock based compensation expense,
respectively.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due from third-party payors, patients, third-party
distributors and government agencies. The allowance for doubtful accounts is recorded in the period
in which 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.
Intangibles and Other Long-Lived Assets
Our finite-lived intangible assets are stated at cost less accumulated amortization. We assess
our intangible and other long-lived assets for impairment, whenever events or changes in
circumstances suggest that the carrying value of an asset may not be recoverable. At September 30,
2011, intangibles assets related to the acquisition of Neighborhood Diabetes and consisted of $27.9
million of customer relationships and $2.7 million of tradenames. We assess the need for an
impairment of intangibles and other long-lived assets if the carrying amount of the asset is not
recoverable based on its undiscounted future cash flows. Any such impairment loss is measured as
the difference between the carrying amount and the fair value of the asset. The estimation of
useful lives and expected cash flows requires us to make significant judgments regarding future
periods that are subject to some factors outside its control. Changes in these estimates can result
in significant revisions to the carrying value of these assets and may result in material charges
to the results of operations. The estimated life of the acquired tradename is fifteen years. The
estimated life of the acquired customer relationships asset is ten years. Intangible assets with
determinable estimated lives are amortized over these lives.
24
Goodwill
Goodwill represents the excess of the cost of the acquired Neighborhood Diabetes business over
the fair value of identifiable net assets acquired. We perform an assessment of our goodwill for
impairment on at least an annual basis or whenever events or changes in circumstances indicate
there might be impairment.
Goodwill is evaluated at the reporting unit level. To test for impairment, we compare the
carrying value of the reporting unit to its fair value. If the reporting unit’s carrying value
exceeds its fair value, we would record an impairment loss to the extent that the carrying value of
goodwill exceeds its implied fair value.
Warranty
We provide a four year warranty on our PDMs and may replace any OmniPods that do not function
in accordance with product specifications. We estimate our warranty 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. As these
estimates are based on historical experience, and we continue to introduce new versions of existing
products, we also consider the anticipated performance of the product over its warranty period in
estimating warranty reserves. At September 30, 2011 and December 31, 2010, the warranty reserve was
$1.9 million.
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 September 30, 2011, we had outstanding debt recorded on our consolidated balance sheet
of $15.0 million related to our 5.375% Notes and $143.8 million related to our 3.75% Notes. These
amounts were offset by related debt discounts of $52.4 million. As the interest rate on the 5.375%
and 3.75% Notes is fixed, changes in interest rates do not affect the value of our debt.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of September 30, 2011, 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 September 30, 2011, our
chief executive officer and chief financial officer concluded that as of such date, our disclosure
controls and procedures were effective to provide reasonable assurance that material information
required to be disclosed in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, including ensuring that such material information is accumulated and
communicated to our management, including our chief executive officer and our chief financial
officer, as appropriate to allow timely decisions regarding required disclosure.
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 September 30, 2011 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
In August 2010, Becton, Dickinson and Company, (“BD”), filed a lawsuit in the United States
District Court in the State of New Jersey against us alleging that the OmniPod Insulin Management
System (the “OmniPod System”) infringes three of its patents. BD seeks a declaration that we have
infringed its patents, equitable relief, including an injunction that would enjoin us from
infringing these patents, and an unspecified award for monetary damages. We believe that the
OmniPod System does not infringe these patents. We do not expect this litigation to have a material
adverse impact on our financial position or results of operations. We believe we have meritorious
defenses to this lawsuit; however, litigation is inherently uncertain and there can be no assurance
as to the ultimate outcome or effect of this action.
We are, from time to time, involved in the normal course of business in various legal
proceedings, including intellectual property, contract employment and product liability suits.
Although we are unable to quantify the exact financial impact of any of these matters, we believe
that none of these currently pending matters will have an outcome material to our financial
condition or business.
Item 1A. Risk Factors
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, 2010 as well as the factors discussed in part II, Item 1A. “Risk Factors”
in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, 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. 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, 2010 and in our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2011.
25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
Item 5. Other Information
None.
Item 6. Exhibits
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Document |
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. |
|
|
|
101§
|
|
The following financial statements from Insulet Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2011, as filed with the SEC on November 8, 2011, formatted in XBRL (eXtensible Business Reporting Language), as follows: |
|
|
|
|
|
(i) Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010 (Unaudited) |
|
|
|
|
|
(ii)
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2011 and September 30, 2010
(Unaudited) |
|
|
|
|
|
(iii) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and September 30, 2010 (Unaudited) |
|
|
|
|
|
(iv) Notes to Condensed Consolidated Financial Statements (Unaudited) |
|
|
|
| § |
|
As provided in Rule 406T of Regulation S-T, this information is
furnished and not filed for purposes of Sections 11 and 12 of the
Securities Act of 1933, as amended, and Section 18 of the
Securities Exchange Act of 1934, as amended. |
26
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: November 8, 2011 |
/s/ Duane DeSisto
|
|
| |
Duane DeSisto |
|
| |
President and Chief Executive Officer
(Principal Executive Officer) |
|
| |
| |
|
|
| Date: November 8, 2011 |
/s/ Brian Roberts
|
|
| |
Brian Roberts |
|
| |
Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
| |
27
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Document |
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. |
|
|
|
101§
|
|
The following financial statements from Insulet Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2011, as filed with the SEC on November 8, 2011, formatted in XBRL (eXtensible Business Reporting Language), as follows: |
|
|
|
|
|
(i) Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010 (Unaudited) |
|
|
|
|
|
(ii)
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2011 and September 30, 2010
(Unaudited) |
|
|
|
|
|
(iii) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and September 30, 2010 (Unaudited) |
|
|
|
|
|
(iv) Notes to Condensed Consolidated Financial Statements (Unaudited) |
|
|
|
| § |
|
As provided in Rule 406T of Regulation S-T, this information is
furnished and not filed for purposes of Sections 11 and 12 of the
Securities Act of 1933, as amended, and Section 18 of the
Securities Exchange Act of 1934, as amended. |
28