Washington, D.C. 20549
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.
Note 1. Nature of the Business
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. Software license costs have been reallocated from general and administrative expenses to research and development and sales and marketing expenses based on license usage. These reclassifications have no effect on previously reported net income.
eligible costs related to the implementation of cloud computing arrangements within other current and non-current assets and amortizes thesesuch costs over the expected term ifof the hosting arrangement to the same income statement line as the associated cloud operating expenses. Adoption of this standard resulted in the Company capitalizing $1.3$0.7 million and $2.0 million of cloud computing implementation costs to the consolidated balance sheet for the period ending March 31, 2019.three and six months ended June 30, 2019, respectively.
Note 3. Revenue from Contracts with Customers
The following table summarizes revenue from contracts with customers for the three and six months ended March 31,June 30, 2019 and 2018:
Note 4. Investments and Fair Value
Level 2 — observable inputs other than quoted prices in active markets for identical assets or liabilities;
Note 5. Convertible Debt, Net
The carrying amount and the estimated fair value of the Company's convertible debt, which is based on the Level 2 quoted market prices as of March 31,June 30, 2019 and December 31, 2018 arewere as follows:
Note 6. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period, excluding unvested restricted common shares. Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding and, when dilutive, potential common share equivalents from outstanding stock options and restricted stock units (using the treasury-stock method), and potential common shares from the Company's convertible debt (using the if-converted method).
The number of potential common share equivalents excluded from the computation of diluted net income (loss) per share for the three and six months ended March 31,June 30, 2019 and 2018 are as follows:
Note 7. Accounts Receivable, Net
The components of other intangible assets
areat the end of each period were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| | June 30, 2019 | | December 31, 2018 |
| (in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| Customer and contractual relationships | $ | 9,850 |
| | $ | (2,326 | ) | | $ | 7,524 |
| | $ | 6,109 |
| | $ | (1,880 | ) | | $ | 4,229 |
|
| Internal-use software | 10,581 |
| | (5,940 | ) | | 4,641 |
| | 11,262 |
| | (5,108 | ) | | 6,154 |
|
| Intellectual property | 875 |
| | — |
| | 875 |
| | — |
| | — |
| | — |
|
| Total | $ | 21,306 |
| | $ | (8,266 | ) | | $ | 13,040 |
| | $ | 17,371 |
| | $ | (6,988 | ) | | $ | 10,383 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| | March 31, 2019 | | December 31, 2018 |
| (in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| Customer and contractual relationships | $ | 8,423 |
| | $ | (2,087 | ) | | $ | 6,336 |
| | $ | 6,109 |
| | $ | (1,880 | ) | | $ | 4,229 |
|
| Internal-use software | 10,702 |
| | (5,554 | ) | | 5,148 |
| | 11,262 |
| | (5,108 | ) | | 6,154 |
|
| Total intangible assets | $ | 19,125 |
| | $ | (7,641 | ) | | $ | 11,484 |
| | $ | 17,371 |
| | $ | (6,988 | ) | | $ | 10,383 |
|
Amortization expense for intangible assets was approximately $0.6 million and $0.4 million for the three months ended March 31,June 30, 2019 and 2018, respectively. Amortization expense is recorded in generalfor intangible assets was $1.2 million and administrative expenses in the consolidated statements of operations.
Amortization expense expected$0.8 million for the next five yearssix months ended June 30, 2019 and thereafter is as follows: |
| | | | | | | | | | | |
| (in thousands) | | | | | |
| Years Ending December 31, | Customer and Contractual Relationships | | Internal-Use Software | | Total |
| 2019 (remaining) | $ | 598 |
| | $ | 1,312 |
| | $ | 1,910 |
|
| 2020 | 732 |
| | 1,593 |
| | 2,325 |
|
| 2021 | 668 |
| | 1,154 |
| | 1,822 |
|
| 2022 | 668 |
| | 565 |
| | 1,233 |
|
| 2023 | 668 |
| | 178 |
| | 846 |
|
| Thereafter | 3,002 |
| | 346 |
| | 3,348 |
|
| Total | $ | 6,336 |
| | $ | 5,148 |
| | $ | 11,484 |
|
As of March 31, 2019, the weighted average amortization period of the Company’s customer and contractual relationships intangible assets and internal-use software intangible assets are approximately 9.1 years and 3.6 years,2018, respectively.
Estimated future amortization expense by year is as follows: |
| | | |
| Years Ending December 31, | (in thousands) |
| 2019 (remaining) | $ | 1,405 |
|
| 2020 | 2,547 |
|
| 2021 | 2,043 |
|
| 2022 | 1,460 |
|
| 2023 | 1,021 |
|
| Thereafter | 4,564 |
|
| Total | $ | 13,040 |
|
Note 11.9. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities arewere as follows: |
| | | | | | | |
| | As of |
| (in thousands) | June 30, 2019 | | December 31, 2018 |
| Employee compensation and related costs | $ | 34,348 |
| | $ | 37,822 |
|
| Professional and consulting services | 12,856 |
| | 14,925 |
|
| Supplier purchases | 3,089 |
| | 7,742 |
|
| Value added taxes payable | 3,527 |
| | 8,463 |
|
| Other | 27,201 |
| | 21,205 |
|
| Accrued expenses and other current liabilities | $ | 81,021 |
| | $ | 90,157 |
|
|
| | | | | | | |
| | As of |
| (in thousands) | March 31, 2019 | | December 31, 2018 |
| Employee compensation and related costs | $ | 31,184 |
| | $ | 37,822 |
|
| Professional and consulting services | 15,405 |
| | 14,925 |
|
| Supplier charges | 7,496 |
| | 7,742 |
|
| Value added taxes payable | 7,898 |
| | 8,463 |
|
| Warranty | 2,665 |
| | 2,701 |
|
| Other | 21,297 |
| | 17,320 |
|
| Total accrued expenses and other current liabilities | $ | 85,945 |
| | $ | 88,973 |
|
Product Warranty Costs
The Company generally provides a four-year warranty on its PDMsPersonal Diabetes Managers (“PDMs”) sold in the United States and Europe and a five-year warranty on its PDMs sold in Canada and may replace any OmnipodPods that doesdo not function in accordance with product specifications. The Company estimates its warranty at the time the product is shipped based on historical experience and the estimated cost to service the claims. Since the Company continues to introduce new products and versions, the anticipated performance of the product over the warranty period is also considered in estimating warranty reserves. Warranty expense is recorded in cost of goods sold onin the consolidated statementstatements of operations. Cost to service the claims reflects the current product cost. As these estimates are based on historical experience, and the Company continues to introduce new products and versions, the Company also considers the anticipated performance of the product over its warranty period in estimating warranty reserves.
A reconciliation of the changes in the Company’s product warranty liability is as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| Product warranty liability at beginning of period | $ | 6,283 |
| | $ | 5,386 |
| | $ | 6,379 |
| | $ | 5,337 |
|
| Warranty expense | 3,147 |
| | 1,529 |
| | 5,366 |
| | 3,501 |
|
| Warranty claims settled | (2,791 | ) | | (1,412 | ) | | (5,106 | ) | | (3,335 | ) |
| Product warranty liability at end of period | $ | 6,639 |
| | $ | 5,503 |
| | $ | 6,639 |
| | $ | 5,503 |
|
|
| | | | | | | |
| | Three Months Ended March 31, |
| (in thousands) | 2019 | | 2018 |
| Product warranty liability at the beginning of the period | $ | 6,379 |
| | $ | 5,337 |
|
| Warranty expense | 2,219 |
| | 1,972 |
|
| Warranty claims settled | (2,315 | ) | | (1,923 | ) |
| Product warranty liability at the end of the period | $ | 6,283 |
| | $ | 5,386 |
|
|
| | | | | | | |
| | As of |
| (in thousands) | June 30, 2019 | | December 31, 2018 |
| Accrued expenses and other current liabilities | $ | 2,906 |
| | $ | 2,701 |
|
| Other liabilities | 3,733 |
| | 3,678 |
|
| Total | $ | 6,639 |
| | $ | 6,379 |
|
|
| | | | | | | |
| Composition of balance: | As of |
| (in thousands) | March 31, 2019 | | December 31, 2018 |
| Short-term | $ | 2,665 |
| | $ | 2,701 |
|
| Long-term | 3,618 |
| | 3,678 |
|
| Total warranty liability: | $ | 6,283 |
| | $ | 6,379 |
|
Note 12.10. Commitments and Contingencies
Legal Proceedings
Between May 5, 2015 and June 16, 2015, three class action lawsuits were filed by shareholders in the U.S. District Court, for the District of Massachusetts, against the Company and certain individual current and former executives of the Company. Two suits subsequently were voluntarily dismissed. Arkansas Teacher Retirement System v. Insulet, et al., 1:15-cv-12345, (“ATRS”) alleged that the Company (and certain executives) committed violations of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 by making allegedly false and misleading statements about the Company’s business, operations, and prospects. On February 8, 2018, the parties executed a binding stipulation of settlement, under which all claims were released and a payment was made tointo an escrow account for the plaintiffs and the class they purport to represent. On August 6, 2018, the Court issued an order approving the settlement. The Company had previously accrued fees and expenses in connection with this matter for the amount of the final settlement liability that was not covered by insurance, the amount of which amount was not material to the Company's consolidated financial statements.
In addition, on April 26, 2017, a derivative action (Walker v. DeSisto, et al., 1:17-cv-10738) (“Walker”) was filed, and on October 13, 2017, a second derivative action (Carnazza v. DeSisto, et al., 1:17-cv-11977) (“Carnazza”) was filed, both on behalf of the Company, each by a shareholder in the U.S. District Court for the District of Massachusetts against the Company (as a nominal defendant) and certain individual current and former officers and directors of the Company. The allegations in the actions are substantially similar to those alleged in the securities class action. The actions seek, among other things, damages, disgorgement of certain types of compensation or profits, and attorneys’ fees and costs. On July 11, 2018, the parties executed a binding stipulation of settlement, under which all claims were released and a payment of attorneys’ fees and reimbursement of expenses will be paid to plaintiffs’ counsel, subject to the Court’s approval. On July 13, 2018, the plaintiffs filed a motion for preliminary approval of the settlement, which is pending. The Company expects that such fees and expenses payable to plaintiff's counsel will be covered by the Company's insurance.
The Company is, 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 the Company is unable to quantify the exact financial impact of any of these matters, the Company believes that none of these currently pending matters will have an outcome material to its financial condition or business.
Fees To Former European Distributor
Following the expiration of its distributionan agreement with a former European distributor on June 30, 2018, the Company iswas required to pay to its former European Distributor a quarterly per-unit fee for Omnipod sales by the Company between July 1, 2018 and June 30, 2019 to certain customers of the former European Distributor.distributor for a one-year period through June 30, 2019. The Company is recognizingrecognized a liability and an associated intangible asset for this fee as qualifying sales occur.occurred. The actualmethodology applicable for determining the total fee under under the distribution agreement is subject to an active arbitration proceeding in Switzerland. The final amount of the fee could vary significantly depending on the number of customers who count for purposes of calculating the fee under the terms of the distribution agreement, and the methodology applicable for determining this number under the agreement is subject to an active arbitration proceeding between the parties in Switzerland.agreement. The Company estimates that the final aggregate fee for the applicable twelve-month period could beis in the range of approximately $10$5 million to $55 million. As of March 31,June 30, 2019, the Company hashad recognized approximately $6.4$7.8 million for fees related to Omnipod devices sold to qualifying customers during the period from July 1, 2018 through March 31,June 30, 2019.
Note 13.11. Leases
In February 2016, the FASB issued guidance codifiedAs discussed in Note 2, ASC Topic 842 Leases, which amends the guidance in former ASC Topic 840, Leases. The new standard increases transparency and comparability most significantly by requiring the recognition byrequires lessees of right-of-useto recognize ROU assets and lease liabilities on the balance sheet for those leases classified as operating leases. The Company adopted ASC 842 on January 1, 2019. In accordance with the new lease standard,ASC 842, the Company determines if an arrangement is a lease at inception. Operating leases are included in otherlease ROU assets other current liabilities, and other long-term liabilities on our consolidated balance sheets. The Company does not have any significant finance leases. On January 1, 2019, upon the adoption of ASC 842, the Company recorded right-of-use assets of $8.8 million and an operating lease liability of $10.8 million on its consolidated balance sheet. The difference between the approximate value of the right-of-use assets and the approximate value of the lease obligations is attributable to a cease-use liability and deferred rent.
Operating lease right-of-use assets (ROU) and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company's leases do not provide an implicit rate, theThe Company uses its incremental borrowing rate in determining the present value of future payments.payments since most of its leases do not provide an implicit interest rate. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. On January 1, 2019, upon the adoption of ASC 842, the Company recorded ROU assets of $8.8 million and operating lease liabilities of $10.8 million on its consolidated balance sheet. The difference between the approximate value of the ROU assets and the approximate value of the lease obligations is primarily attributable to a former cease-use liability.
The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
As of March 31, 2019, the Company's right-of-use assets obtained in exchange for lease obligations are $8.3 million included in other assets and total operating lease liabilities of $10.2 million included in other current liabilities and other long-term liabilities on the consolidated balance sheet.
The Company has an operating lease ofleases approximately 100,000 square feet of laboratory and office space in Billerica, Massachusetts. The lease expires in November 2022 and contains escalating payments over its life. Additionally, the Company leases approximately 29,000 square feet of warehousing space in Billerica, Massachusetts under a lease expiring in September 2019. The Company also leases international and certain other U.S. facilities. These operating leases expire at various dates through 2026, some of which may include options to extend the leases for up to 5 years, and some of which may include options to terminate the leases at certain times within the lease term. In the normal course of business, it is expected that these leases will be renewed.
The Company's total operating lease cost, was approximately $0.9 million and $0.8 million for the three months ended March 31, 2019 and March 31, 2018, respectively. Operating lease costwhich is recorded in general and administrative expenses in the consolidated statements of operations.
There have been no material changes tooperations, was $0.9 million and $1.8 million for the Company's lease obligationthree and six months ended June 30, 2019, respectively. Cash paid for amounts included in the measurement of lease liabilities was $0.8 million and $1.6 millionfor three and six months ended March 31, 2019.
June 30, 2019, respectively. The future minimum undiscounted lease payments under operating leases as of March 31,June 30, 2019 are as follows:
|
| | | | | |
| Years Ending December 31, | | (in thousands) | |
| 2019 (remaining) | | $ | 1,659 |
| |
| 2020 | | 2,955 |
| |
| 2021 | | 2,899 |
| |
| 2022 | | 2,575 |
| |
| 2023 | | 269 |
| |
| Thereafter | | 561 |
| |
| Total future minimum lease payments | | 10,918 |
| |
| Less: imputed interest | | (1,089 | ) | |
| Present value of future minimum lease payments | | $ | 9,829 |
| |
| | | | |
|
| | | | | |
| Years Ending December 31, | | (in thousands) | |
| 2019 (remaining) | | $ | 2,484 |
| |
| 2020 | | 2,954 |
| |
| 2021 | | 2,899 |
| |
| 2022 | | 2,575 |
| |
| 2023 | | 269 |
| |
| Thereafter | | 561 |
| |
| Total future minimum lease payments | | 11,742 |
| |
| Less: imputed interest | | (1,548 | ) | |
| Total future minimum lease payments | | $ | 10,194 |
| |
| | | | |
| Amounts recognized in consolidated balance sheet as of March 31, 2019 | | | |
| Other current liabilities | | $ | 2,315 |
| |
| Other long-term liabilities | | 7,879 |
| |
| Total operating lease liabilities | | $ | 10,194 |
| |
The Company's operating cash outflows from operating leases for the three months ended March 31, 2019 and March 31, 2018 were $0.8 million and $0.6 million, respectively.
As of March 31,June 30, 2019, ROU assets and operating lease liabilities were included in the following consolidated balance sheet accounts in the amounts shown:
|
| | | | | |
| As of June 30, 2019 | | (in thousands) | |
| ROU asset: | | | |
| Other assets | | $ | 8,020 |
| |
| | | | |
| Operating lease liabilities: | | | |
| Accrued expenses and other current liabilities | | $ | 2,333 |
| |
| Other liabilities | | 7,496 |
| |
| Total | | $ | 9,829 |
| |
As of June 30, 2019, the weighted average remaining lease term for operating leases is approximately 3.9 years.
As of March 31, 2019,was 3.7 years and the weighted-average discount rate used to determine the operating lease liability iswas 6.7%.
As of March 31, 2019, the Company has no additional operating leases that have not yet commenced.
Note 14.12. Stock-Based Compensation and Stockholder' Equity
The Company grants stock options, and both time-based and performance-based restricted stock units under its 2017 Stock Option and Incentive Plan and offers employees the opportunity to purchase its common stock through an Employee Stock Purchase Plan. The following table reflects the Company's stock-based compensation expense related to share-based awards recognized infor the three and six months ended March 31,June 30, 2019 and 2018: |
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Unamortized Expense | | Weighted Average Remaining Expense Period (Years) |
| ($ in thousands) | 2019 | | 2018 | | 2019 | | 2018 | | At June 30, 2019 |
| Stock options | $ | 1,583 |
| | $ | 2,272 |
| | $ | 3,223 |
| | $ | 4,630 |
| | $ | 10,906 |
| | 2.7 |
| Restricted stock units | 6,393 |
| | 4,371 |
| | 10,137 |
| | 9,899 |
| | 39,369 |
| | 2.2 |
| Employee stock purchase plan | 318 |
| | 294 |
| | 718 |
| | 588 |
| | 739 |
| | 0.4 |
| Total | $ | 8,294 |
| | $ | 6,937 |
| | $ | 14,078 |
| | $ | 15,117 |
| | $ | 51,014 |
| | |
|
| | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Unamortized Expense | | Weighted Average Remaining Expense Period (Years) |
| ($ in thousands) | 2019 | | 2018 | | At March 31, 2019 |
| Stock options | $ | 1,640 |
| | $ | 2,359 |
| | $ | 13,562 |
| | 2.6 |
| Restricted stock units | 3,744 |
| | 5,528 |
| | 38,641 |
| | 2.2 |
| Employee stock purchase plan | 400 |
| | 294 |
| | 267 |
| | 0.2 |
| Total | $ | 5,784 |
| | $ | 8,181 |
| | $ | 52,470 |
| | |
The following summarizes stock option activity duringfor the threesix months ended March 31,June 30, 2019:
|
| | | | | | | | | | | | |
| | Number of Options (#) | | Weighted Average Exercise Price ($) | | Aggregate Intrinsic Value ($ in thousands) | | Weighted Average Remaining Contractual Term (Years) |
| Outstanding at December 31, 2018 | 3,077,624 |
| | $ | 39.16 |
| | | | |
| Granted | 114,040 |
| | 92.16 |
| | | | |
| Exercised | (273,082 | ) | | 34.45 |
| | $ | 15,810 |
| | |
| Cancelled | (35,965 | ) | | 38.32 |
| | | | |
| Outstanding at March 31, 2019 | 2,882,617 |
| | $ | 41.71 |
| | $ | 153,897 |
| | 5.5 |
| Vested, March 31, 2019 | 2,191,005 |
| | $ | 36.21 |
| | $ | 129,008 |
| | 4.6 |
Vested or expected to vest, March 31, 2019 (1) | 2,743,607 |
| |
| | $ | 149,128 |
| | |
|
| | | | | | | | | | | | |
| | Number of Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (in thousands) | | Weighted Average Remaining Contractual Term (years) |
| Outstanding at December 31, 2018 | 3,077,624 |
| | $ | 39.16 |
| | | | |
| Granted | 125,640 |
| | 93.16 |
| | | | |
| Exercised | (721,041 | ) | | 33.42 |
| | $ | 49,242 |
| | |
| Forfeited / Expired | (111,604 | ) | | 48.06 |
| | | | |
| Outstanding at June 30, 2019 | 2,370,619 |
| | $ | 43.35 |
| | $ | 180,231 |
| | 5.3 |
| Vested, June 30, 2019 | 1,839,054 |
| | $ | 37.50 |
| | $ | 150,573 |
| | 4.5 |
Vested or expected to vest, June 30, 2019 (1) | 2,309,525 |
| |
| | $ | 177,471 |
| | |
| |
(1) | Represents total outstanding stock options as of March 31,June 30, 2019, adjusted for estimated forfeitures. |
The following table summarizes the status ofactivity for the Company’s restricted stock units during the threesix months ended March 31,June 30, 2019: |
| | | | | | |
| | Number of Shares | | Weighted Average Fair Value |
| Outstanding at December 31, 2018 | 752,207 |
| | $ | 55.02 |
|
| Granted | 311,950 |
| | 93.79 |
|
| Vested | (307,217 | ) | | 45.36 |
|
| Forfeited | (51,645 | ) | | 63.77 |
|
| Outstanding at June 30, 2019 | 705,295 |
| | $ | 75.73 |
|
|
| | | | | | |
| | Number of Shares (#) | | Weighted Average Fair Value ($) |
| Outstanding at December 31, 2018 | 752,207 |
| | $ | 55.02 |
|
| Granted | 261,650 |
| | 91.64 |
|
| Vested | (266,448 | ) | | 42.70 |
|
| Forfeited | (13,163 | ) | | 64.61 |
|
| Outstanding at March 31, 2019 | 734,246 |
| | $ | 72.37 |
|
Note 15. Income Taxes13. Interest Expense
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes (“ASC 740-10”). The Tax Cuts and Jobs Act ("Tax Reform Act")Interest expense, net of portion capitalized was enacted into law in December 2017. Among other changes, the Tax Reform Act subjects the Company to current tax on global intangible low-taxed income ("GILTI") earned by certain of its foreign subsidiaries. The Company has elected to recognize the income taxas follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| Contractual coupon interest | $ | 2,462 |
| | $ | 2,462 |
| | $ | 4,924 |
| | $ | 4,942 |
|
| Accretion of debt discount | 7,057 |
| | 6,616 |
| | 14,000 |
| | 13,138 |
|
| Amortization of debt issuance costs | 692 |
| | 648 |
| | 1,372 |
| | 1,289 |
|
| Capitalized interest | (2,569 | ) | | (2,436 | ) | | (6,039 | ) | | (4,161 | ) |
| Interest expense, net of portion capitalized | $ | 7,642 |
| | $ | 7,290 |
| | $ | 14,257 |
| | $ | 15,208 |
|
Interest expense related to GILTIconvertible debt for the three and six months ended June 30, 2019 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| (in thousands) | 1.375% | | 1.25% | | 2.0% | | Total | | 1.375% | | 1.25% | | 2.0% | | Total |
| Contractual coupon interest | $ | 1,384 |
| | $ | 1,078 |
| | $ | — |
| | $ | 2,462 |
| | $ | 2,768 |
| | $ | 2,156 |
| | $ | — |
| | $ | 4,924 |
|
| Amortization of debt discount and issuance costs | 3,924 |
| | 3,825 |
| | — |
| | 7,749 |
| | 7,803 |
| | 7,569 |
| | — |
| | 15,372 |
|
| Total | $ | 5,308 |
| | $ | 4,903 |
| | $ | — |
| | $ | 10,211 |
| | $ | 10,571 |
| | $ | 9,725 |
| | $ | — |
| | $ | 20,296 |
|
Interest expense related to convertible debt for the three and six months ended June 30, 2018 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
| (in thousands) | 1.375% | | 1.25% | | 2.0% | | Total | | 1.375% | | 1.25% | | 2.0% | | Total |
| Contractual coupon interest | $ | 1,383 |
| | $ | 1,078 |
| | $ | 1 |
| | $ | 2,462 |
| | $ | 2,767 |
| | $ | 2,156 |
| | $ | 19 |
| | $ | 4,942 |
|
| Amortization of debt discount and issuance costs | 3,654 |
| | 3,589 |
| | 21 |
| | 7,264 |
| | 7,265 |
| | 7,102 |
| | 60 |
| | 14,427 |
|
| Total | $ | 5,037 |
| | $ | 4,667 |
| | $ | 22 |
| | $ | 9,726 |
| | $ | 10,032 |
| | $ | 9,258 |
| | $ | 79 |
| | $ | 19,369 |
|
Note 14. Income Tax Expense
The Company's effective tax rate for the three and six months ended June 30, 2019 was a period expense inpositive rate of 25.6% and 12.3%, compared with a negative rate of 32.2% and 9.9% for the period the tax is incurred or expected to occur. same periods of 2018. The inclusion of GILTI had no impact on the Company's income tax expense ornegative effective tax rate in the period due to the full valuation allowance applied to the U.S. entity.
The Company files federal,2018 periods resulted from recording state income and foreign taxes in jurisdictions with taxable income, mainly the United Kingdom and Canada. Income tax returns. These returns are generally open to examination bybenefits have not been recorded for losses in jurisdictions where valuation allowances exist against net deferred tax assets; primarily in the relevant tax authorities from three to four years from the date they are filed, although there is variation by jurisdiction. The tax filings relating to the Company's US federal and state tax returns are currently open to examination for tax years 2015 through 2017 and 2014 through 2017, respectively. In addition, the Company has generated tax losses since its inception in 2000 until 2018, and beginning in 2018 forward, the Company expects to generate taxable income. The years in which losses were generated may be subject to examination if the losses are carried forward and utilized in future years.
United States. As of March 31,June 30, 2019 and December 31, 2018, the Company has providedmaintained a full valuation allowance against its domestic US federal and stateU.S. net deferred tax asset becauseassets based on the determination that it is not more likely than not that thethese future tax benefitbenefits will be realized. In addition, the Company has a net deferred tax asset in foreign jurisdictions where no valuation allowance is recorded as it is more likely than not that the future tax benefit will be realized. As of March 31, 2019, the Company had no uncertain tax positions.
Income tax expense was $0.3 million and $0.3 million for the three months ended March 31, 2019 and 2018. Income tax expense for both was primarily driven by state taxes in the United States and taxable income generated in foreign jurisdictions, mainly the United Kingdom and Canada. realized before expiration.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements. Forward-looking statements relate to future events orThe following discussion and analysis of our future financial performance. We generally identify forward looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectationscondition and projections about future events and financial trends that we believe may affect our business, results of operations should be read in conjunction with our consolidated financial statements and financial condition.
the accompanying notes included in this quarterly report. The outcomes of the events described in thesefollowing discussion may contain forward-looking statements are subject tothat reflect our plans, estimates and beliefs and involve risks, uncertainties and other factors described in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on February 26, 2019 in the section entitled “Risk Factors" and in other filings made by us from time to time with the Securities and Exchange Commission. Accordingly, you should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur, andassumptions. Our actual results could differ materially from those projecteddiscussed in thethese forward-looking statements. The forward-looking statements madeFactors that could cause or contribute to these differences include those discussed under the headings “Risk Factors” and “Forward-Looking Statements” in both our annual report on Form 10-K for the year ended December 31, 2018 and in this quarterly report on Form 10-Q relate only to events as of the date of this report. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
Executive Level Overview
We are primarily engaged in the development, manufacturing and sale of our proprietary Omnipod System (“Omnipod”), an innovative, discreet and easy-to-use continuous insulin delivery system for people with insulin-dependent diabetes. There are two primary types of insulin therapy practiced today: MDImultiple daily injection (“MDI”) therapy using syringes or insulin pens; and pump therapy using insulin pumps. Insulin pumps are used to perform continuous subcutaneous insulin infusion, or insulin pump therapy, and typically use a programmable device and an infusion set to administer insulin into the person’s body. Insulin pump therapy has been shown to provide people with insulin-dependent diabetes with numerous advantages relative to MDI therapy. We estimate that approximately one-third of the Type 1 diabetes population in the United States and less than one fifthone-fifth of the Type 1 diabetes population outside of the United States use insulin pump therapy. An even smaller portion of the Type 2 diabetes population in and outside of the United States who are insulin-dependent use insulin pump therapy. The Omnipod System features two discreet, easy-to-use devices: a small, lightweight, self-adhesive disposable tubeless Omnipod device which(“Pod”) that is worn on the body for approximately three days at a timetime; and its wireless companion, the handheld PDM.Personal Diabetes Manager (“PDM”). The Omnipod System which features two discreet, easy-to-use devices, communicates wirelessly, provides for virtually pain-free automated cannula insertion and eliminates the need for traditional MDI therapy or the use of traditional pump and tubing. We believe that the Omnipod System’sOmnipod’s unique proprietary design and features allow people with insulin-dependent diabetes to manage their diabetes with unprecedented freedom, comfort, convenience, and ease.
We began commercial sale ofhave been selling the Omnipod in the United States in 2005. Wesince 2005 and currently sell the Omnipod throughboth direct sales to customers, or through our distribution partners.partners and most recently through the pharmacy channel. The Omnipod is currently available in multiple countries in Europe, as well as in the United States, Canada and Israel. On July 1, 2018 we assumed all commercial activities (including, among other things, distribution, sales, marketing, training and support) for our Omnipod System across Europe following the expiration of our prior distributionan agreement with our former European Distributor on June 30, 2018.distributor.
In addition to the diabetes market space, we have partnered with pharmaceutical and biotechnology companies to tailor the Omnipod System technology platform for the delivery of subcutaneous drugs across other therapeutic areas. The majority of our drug delivery revenue currently consists of sales of podsPods to Amgen supplying the Neulasta® Onpro® kit, an innovative delivery system for Amgen’s white blood cell booster to help reduce the risk of infection during intense chemotherapy.
In June 2018, the FDA cleared our Omnipod DASHTM Insulin Management System (“Omnipod DASH”) for commercial distribution. The Omnipod Dash is our next-generation digital mobile Omnipod platform, featuring a secured Bluetooth enabled Pod and PDM with a touch screen color user interface supported by smartphone connectivity. We began a full market release of Omnipod DASH in the United States at the end of the first quarter of 2019.
We have substantially completedDuring the constructionsecond quarter of a2019, we began producing product from our new highly-automated manufacturing facility in Acton, Massachusetts, with planned production out of the facility beginning in the second quarter of 2019. The facility also serves as our global headquarters.Massachusetts. We expect that, following start up related activities, the new facility will allow us to lower our manufacturing costs, increase supply redundancy, add capacity closer to our largest customer base and support growth. From the purchase of this facility in late 2016 through March 31, 2019, capital expenditures for the construction of the Acton facility and related equipment purchases have been approximately $233 million. In 2019, we expect to invest additional capital in this facility to support our growth, funded by our existing cash and investments.
In January 2018, we announced that the Centers for Medicare & Medicaid Services ("CMS") has issued guidance clarifying that Medicare Part D Plan Sponsors may provide coverage for products such as the Omnipod System under the Medicare Part D (prescription drug) program. We have been securing coverage with Medicare Part D carriers to ensure beneficiaries living with diabetes have access to the Omnipod System. Securing Medicare Part D coverage also provides us with a direct pathway to increased Medicaid coverage at the state level, as many state-run Medicaid programs follow CMS prescription drug guidance to determine coverage. This allows access for lower-income individuals and families on Medicaid for whom Omnipod currently is not a covered option. In April 2018, we also significantly increased our market access when we secured in-network coverage of Omnipod with United Healthcare, the largest commercial payer in the United States.
In June 2018, the FDA provided clearance for the commercial distribution of our DASH TM System, which is our next-generation digital mobile Omnipod platform, featuring a secured Bluetooth enabled Pod and PDM with a touch screen color user interface supported by smartphone connectivity. We began a U.S. full market release of Omnipod DASH TM at the end of the first quarter of 2019.
FirstSecond Quarter 2019 Revenue Results:
Total revenue increased 43% year over year to $177.1 million and consisted of $159.6 millionthe following:
U.S. Omnipod revenue of $86.1$98.1 million,
an increase of 26%;International Omnipod revenue of $56.9$62.7 million,
an increase of 120%; andDrug Delivery revenue of $16.6$16.3 million,
a decrease of 8%.Our long-term financial objective is to sustain profitable growth. We expect our efforts infor the remainder of 2019 to focus primarily on constructingproduct and commissioning our U.S. manufacturing facility, continuing to establish our European operations, launching new products, such as the DASH TM Omnipod System, continuing ourbusiness model innovation and product development, efforts, andincluding the continued roll out of Omnipod DASH, expanding penetration in our existing markets, working with Medicare, Medicaid and commercial payors and intermediaries to further expand access.access, and ramping up production at our new, highly automated U.S. manufacturing facility. Achieving these objectives is expected to require additional investments in certain initiatives and personnel, as well as enhancements to our supply chain operation capacity, efficiency and effectiveness.
Components of Financial Operations
Revenue. We derive the majority of our revenue from global sales of the Omnipod System.sales. We also sell devices based on the Omnipod System technology to global pharmaceutical and biotechnology companies for the delivery of their drugs across therapeutic areas.
Cost of revenue. Cost of revenue consists primarily of raw material, labor, warranty, inventory scrap and excess and obsolescence adjustments, and overhead costs such as freight-in and depreciation, and the cost of products we acquire from third partythird-party suppliers.
Research and development. Research and development expenses consist primarily of personnel costs, license fees and outside service expenses within our product development, regulatory and clinical functions, as well as innovations related to our global supply chain and manufacturing process. Research and development expenses also include engineering and operational costs, such as training and start up activities, associated with our newly constructed U.S. manufacturing facility. We generally expense research and developmentfacility up until the date we produce salable product. After this date, these operational costs as incurred.are included in cost of revenue.
Sales and marketing. Sales and marketing expenses consist primarily of personnel costs within our sales, marketing, reimbursement support and customer care functions, as well as sales commissions paid to our sales representatives, and costs associated with promotional activities and participation in industry trade shows. Commission costs that are direct and incremental to obtaining a new customer are capitalized and amortized to sales and marketing expense over the expected period of benefit.
General and administrative. General and administrative expenses consist primarily of salaries and other related costs for personnel serving the executive, finance, legal, information technology support and human resource functions, as well as legal fees, accounting fees, insurance costs, bad debt expenses, shipping and handling costs, and facilities-related costs, including depreciation of office facility-related property and equipment.
Results of Operations
This section discusses our consolidated results of operations |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | 2019 | | 2018 | | Change $ | | Change % | | 2019 | | 2018 | | Change $ | | Change % |
| Revenue: | | | | | | | | | | | | | | | |
| U.S. Omnipod | $ | 98,074 |
| | $ | 78,047 |
| | $ | 20,027 |
| | 26 | % | | $ | 184,177 |
| | $ | 148,319 |
| | $ | 35,858 |
| | 24 | % |
| International Omnipod | 62,736 |
| | 28,509 |
| | 34,227 |
| | 120 | % | | 119,624 |
| | 66,913 |
| | 52,711 |
| | 79 | % |
| Total Diabetes Revenue | 160,810 |
| | 106,556 |
| | 54,254 |
| | 51 | % | | 303,801 |
| | 215,232 |
| | 88,569 |
| | 41 | % |
| Drug Delivery | 16,326 |
| | 17,706 |
| | (1,380 | ) | | (8 | )% | | 32,890 |
| | 32,608 |
| | 282 |
| | 1 | % |
| Total revenue | 177,136 |
| | 124,262 |
| | 52,874 |
| | 43 | % | | 336,691 |
| | 247,840 |
| | 88,851 |
| | 36 | % |
| Cost of revenue | 60,718 |
| | 42,190 |
| | 18,528 |
| | 44 | % | | 113,577 |
| | 89,953 |
| | 23,624 |
| | 26 | % |
| Gross profit | 116,418 |
| | 82,072 |
| | 34,346 |
| | 42 | % | | 223,114 |
| | 157,887 |
| | 65,227 |
| | 41 | % |
| Gross margin | 65.7 | % | | 66.0 | % | | | |
|
| | 66.3 | % | | 63.7 | % | |
|
| |
|
|
| Operating expenses: | | | | | | | | | | | | |
|
| |
|
|
| Research and development | 32,264 |
| | 18,801 |
| | 13,463 |
| | 72 | % | | 64,218 |
| | 39,068 |
| | 25,150 |
| | 64 | % |
| Sales and marketing | 47,401 |
| | 36,575 |
| | 10,826 |
| | 30 | % | | 89,017 |
| | 69,624 |
| | 19,393 |
| | 28 | % |
| General and administrative | 29,150 |
| | 22,371 |
| | 6,779 |
| | 30 | % | | 55,011 |
| | 44,870 |
| | 10,141 |
| | 23 | % |
| Total operating expenses | 108,815 |
| | 77,747 |
| | 31,068 |
| | 40 | % | | 208,246 |
| | 153,562 |
| | 54,684 |
| | 36 | % |
| Operating income | 7,603 |
| | 4,325 |
| | 3,278 |
| | 76 | % | | 14,868 |
| | 4,325 |
| | 10,543 |
| | 244 | % |
| Interest expense and other, net | (5,719 | ) | | (5,604 | ) | | (115 | ) | | 2 | % | | (8,280 | ) | | (11,840 | ) | | 3,560 |
| | (30 | )% |
| Income (loss) before income taxes | 1,884 |
| | (1,279 | ) | | 3,163 |
| | 247 | % | | 6,588 |
| | (7,515 | ) | | 14,103 |
| | 188 | % |
| Income tax expense | 482 |
| | 412 |
| | 70 |
| | 17 | % | | 808 |
| | 745 |
| | 63 |
| | 8 | % |
| Net income (loss) | $ | 1,402 |
| | $ | (1,691 | ) | | $ | 3,093 |
| | 183 | % | | $ | 5,780 |
| | $ | (8,260 | ) | | $ | 14,040 |
| | 170 | % |
Revenue
Total revenue for the first quarter and the three months ended March 31,June 30, 2019 compared to the same period of 2018, and should be read in conjunction with the consolidated financial statements and accompanying condensed notes included in this Form 10-Q.
| TABLE 1: RESULTS OF OPERATIONS |
| | | | | | | | | | | | | | |
| (Unaudited) | Three Months Ended March 31, |
| (in thousands) | 2019 | | 2018 | | Change $ | | Change % |
| Revenue: | | | | | | | |
| U.S. Omnipod | $ | 86,103 |
| | $ | 70,272 |
| | $ | 15,831 |
| | 23 | % |
| International Omnipod | 56,888 |
| | 38,404 |
| | 18,484 |
| | 48 | % |
| Total Diabetes Revenue | 142,991 |
| | 108,676 |
| | 34,315 |
| | 32 | % |
| Drug Delivery | 16,564 |
| | 14,902 |
| | 1,662 |
| | 11 | % |
| Total revenue | 159,555 |
| | 123,578 |
| | 35,977 |
| | 29 | % |
| Cost of revenue | 52,859 |
| | 47,763 |
| | 5,096 |
| | 11 | % |
| Gross profit | 106,696 |
| | 75,815 |
| | 30,881 |
| | 41 | % |
| Gross margin | 66.9 | % | | 61.4 | % | | | |
|
|
| Operating expenses: | | | | | | | |
| Research and development | 31,954 |
| | 20,267 |
| | 11,687 |
| | 58 | % |
| Sales and marketing | 41,616 |
| | 33,049 |
| | 8,567 |
| | 26 | % |
| General and administrative | 25,861 |
| | 22,499 |
| | 3,362 |
| | 15 | % |
| Total operating expenses | 99,431 |
| | 75,815 |
| | 23,616 |
| | 31 | % |
| Operating income (loss) | 7,265 |
| | — |
| | 7,265 |
| |
|
|
| Interest expense and other, net | 2,561 |
| | 6,236 |
| | (3,675 | ) | | (59 | )% |
| Income (loss) before income taxes | 4,704 |
| | (6,236 | ) | | 10,940 |
| | 175 | % |
| Income tax expense | 326 |
| | 333 |
| | (7 | ) | | (2 | )% |
| Net income (loss) | $ | 4,378 |
| | $ | (6,569 | ) | | $ | 10,947 |
| | 167 | % |
Revenue
Our total revenue increased to $159.6 million, up $36.0$52.9 million, or 29%43%, in the first quarter of 2019to $177.1 million, compared to the first quarter ofwith three months ended June 30, 2018, primarily due to continued growth in our International and U.S. Omnipod revenue. Our International Omnipod revenue increased to $56.9 million, up $18.5$34.2 million, or 48%120%, to $62.7 million over the same period in 2018. The growth in our internationalInternational Omnipod revenue was driven by an increase in our customer base as we continue to expand awareness and access to the Omnipod as well as favorable pricing as a result of our commencement ofshift to direct sales of ourthe Omnipod System acrossin Europe following the expiration of our distribution agreement with our former European Distributor on June 30, 2018. Our U.S. Omnipod revenue increased to $86.1 million, up $15.8$20.0 million, or 23%26%, to $98.1 million, primarily due to higher volumes, including the launch of Omnipod DASH. Drug Delivery revenue decreased $1.4 million, or 8%, to $16.3 million over the same period in 2018 due to lower volume during the current period.
Total revenue for the six months ended June 30, 2019 increased $88.9 million, or 36%, to $336.7 million, compared with the six months ended June 30, 2018, due to strong growth in our International and U.S. Omnipod revenue. International Omnipod revenue increased $52.7 million, or 79%, to $119.6 million, due to the continued adoption of our product in existing international markets and more favorable pricing as a result of our shift to direct sales of the Omnipod in Europe. U.S. Omnipod revenue increased $35.9
million, or 24%, to $184.2 million, primarily due to growth in our Omnipod customer base as we continue to expand awareness of and access to the Omnipod System. Our drug deliveryOmnipod. Drug Delivery revenue increased to $16.6 million,was up $1.7 million, or 11%1% year over the same period in 2018. The growth in our drug delivery revenue is due to higher volume during the period.
year.
For 2019, we expect strong Omnipod revenue growth driven by continued Omnipod expansion globally,penetration in our existing markets, partially offset by lower drug deliveryDrug Delivery revenue. Internationally, we expect higher revenues primarily due to increasing sales volume as a result of greater awareness and availability forof the Omnipod and the full year effect of more favorable pricing for the first half of the year as a result of our mid-2018 transition to direct commercial operationssales in Europe. In the U.S., we expect higher revenues primarily due to increasingan increase in sales volume as a result of expanded payor coverage, greater awareness and availability forof the Omnipod, the launch of Omnipod DASH and additional expansion of our U.S. sales force and customer support personnel to support our continued growth.force.
Cost of Revenue
Cost of revenue for the three months ended June 30, 2019 increased to $52.9 million, up $5.1$18.5 million, or 11%44%, in the first quarter of 2019to $60.7 million, compared towith the same period in 2018 dueand increased $23.6 million, or 26%, to increased$113.6 million for the six months ended June 30, 2019, compared with the same prior year period. These increases in cost of revenue were driven by higher sales volumes as well as start-up costs and inefficiencies related to our new U.S. manufacturing operations, partially offset by continued improvements in manufacturing and supply chain operations.
Gross Margin
Gross margin increased to 66.9%, up 550for the three months ended June 30, 2019 decreased 30 basis points to 65.7%, compared with the same period in 2018. The slight decrease in gross margin, which we expected, was primarily due to start-up costs and inefficiencies related to our new U.S. manufacturing operations.
Gross margin for the first quarter ofsix months ended June 30, 2019 increased 260 basis points to 66.3%, compared towith the same period in 2018. The increase in gross margin was primarily due primarily to (i) favorable pricing following the expiration of our former distributordistribution agreement in Europe and (ii) lower product cost as a result of continued improvements in manufacturing and supply chain operations. For 2019, weAs expected, these increases were partially offset by start-up costs and inefficiencies related to our new U.S. manufacturing operations. We expect full year 2019 gross marginsmargin to be relatively consistentlevel with 2018, as the benefits of continued improvements in manufacturing and supply chain operations and the full year effect of our mid-2018 assumption oftransition to direct commercial operations in Europe is expected to be offset by start-up costs and inefficiencies as we ramp up our new U.S. manufacturing operations.
Research and Development
Research and development expenses increased to $32.0 million, up $11.7 million, or 58%, for the three month periodmonths ended March 31,June 30, 2019 increased $13.5 million, or 72%, to $32.3 million, compared towith the same period in 2018. The2018 and increased $25.2 million or 64%, to $64 million for the six months ended June 30, 2019, compared with the same prior year period. These increases were primarily due to an increase in research and development expenses was primarily due to an increase in expenses related to our development projects, including Omnipod DASH and our Omnipod® HorizonTM automated insulin delivery system. Research and development expenses also increased due to engineering and operational costs, such as training and start up activities, associated with our newly constructed U.S. manufacturing facility, with planned production beginning in the second quarter of 2019. For 2019, wefacility. We expect overall research and development spending for the full year 2019 to increase as compared to 2018 primarily due to the development efforts for our ongoing projects.with 2018.
Sales and Marketing
Sales and marketing expenses increased to $41.6 million, up $8.6 million, or 26%, for the three month periodmonths ended March 31,June 30, 2019 increased $10.8 million, or 30%, to $47.4 million, compared towith the same period in 2018.2018 and increased $19.4 million, or 28%, to $89.0 million for the six months ended June 30, 2019, compared with the same prior year period. These increases were primarily attributable to investments to support our assumption in mid-2018 oftransition to direct commercial support forsales of Omnipod in Europe as well as the expansion of our U.S. sales force and customer support personnel.force. We expect sales and marketing expenses infor the full year 2019 to increase as compared towith 2018 due to additional expansion of our U.S. sales force and customer support personnel to support our continued growth and the full year effect of our mid-2018 assumption oftransition to direct commercial operationssales in Europe.
General and Administrative
General and administrative expenses increased to $25.9 million, up $3.4 million, or 15%, for the three month periodmonths ended March 31,June 30, 2019 increased $6.8 million, or 30%, to $29.2 million, compared towith the same period in 2018. This increase was2018 and increased $10.1 million, or 23%, to $55.0 million for the six months ended June 30, 2019, compared with the same prior year period. These increases were primarily attributable to severance-related charges for certain executives as well as increased personnel-related costs and fees related to 2018 hires to support the establishment of our assumption in mid-2018 of direct support for Omnipodoperations in Europe. For 2019, weWe expect overall general and administrative expenses for 2019 to increase as compared towith 2018 as we continue to grow theour business and make investments in our operating structure to support continued growth as well as due to the full-year effect of our establishment oftransition to direct commercial operations in Europe in 2018.Europe.
Interest Expense and Other, Net
Interest expense and other, net, decreased to $2.6 million, down $3.7 million, or 59%, for the three month periodmonths ended March 31,June 30, 2019 increased $0.1 million, or 2%, to $5.7 million, compared towith the same period in 2018.2018 and decreased $3.6 million, or 30%, to $8.3 million for the six months ended June 30, 2019 compared with the same prior year period. The decrease isfor the sixth-month period was primarily due to ana $1.9 million increase in interest capitalized as part ofassociated with the costconstruction of our U.S. manufacturing facility along with an insurance recovery settlement received ofand a $1.8 million for damaged inventory in excess of our cost.insurance settlement received.
Liquidity and Capital Resources
As of March 31,June 30, 2019, we had $129.3$119.9 million in cash and cash equivalents and $263.9$252.6 million of investments in marketable securities. We believe that our current liquidity will be sufficient to meet our projected operating, investing and debt service requirements for at least the next twelve months.
To lower our manufacturing costs, increase supply redundancy, add capacity closer to our largest customer base and support growth, we are constructingconstructed a highly-automated manufacturing facility in Acton, Massachusetts, with planned production out of the facility beginning infrom which we began producing product during the second quarter of 2019. This facility also serves as our global headquarters. As a result, capitalCapital expenditures have increasedin both 2018 and 2019 were above historic levels due to fundfunding the construction of the Acton facility and related equipment purchases. AsFrom the purchase of March 31,the facility in late 2016 through June 30, 2019, investments incapital expenditures for the construction of the Acton facility and related equipment purchases have been approximately $270 million. In 2019, we expect to invest additional capital in this facility to support our growth, funded by our existing cash and investments as well as cash generated from operations. As of June 30, 2019, we had approximately $30 million in capital commitments.
Convertible Debt
To finance our operations and global expansion, we have periodically issued convertible senior notes, which are convertible into our common stock. As of June 30, 2019, the following notes were approximately $233 million. Weoutstanding:
|
| | | | | | | |
| Issuance Date | Coupon | Principal Outstanding (in thousands) | Due Date | Initial Conversion Rate per Share of Common Stock | Conversion Price per Share of Common Stock |
| September 2016 | 1.250% | $ | 344,992 |
| September 2021 | 17.1332 | $58.37 |
| November 2017 | 1.375% | 402,500 |
| November 2024 | 10.7315 | $93.18 |
| Total | | $ | 747,492 |
| | | |
|
| | | | | | | | |
| | | Six Months Ended June 30, |
| (in thousands) | | 2019 | | 2018 |
| Cash provided by (used in): | | | | |
| Operating activities | | $ | 20,277 |
| | $ | (10,395 | ) |
| Investing activities | | (31,793 | ) | | (117,103 | ) |
| Financing activities | | 17,747 |
| | (8,172 | ) |
| Effect of exchange rate changes on cash | | (270 | ) | | (661 | ) |
| Net increase (decrease) in cash and cash equivalents | | $ | 5,961 |
| | $ | (136,331 | ) |
Operating Activities
Net cash provided by operating activities was $20.3 million for the six months ended June 30, 2019,compared withnet cash used in operating activities of $10.4 million for the six months ended June 30, 2018. The $30.7 million increase in cash provided by operating activities was primarily due to the generation of $5.8 million of net income for the six months ended June 30, 2019, compared with an $8.3 million net loss in the comparative prior year period as well as favorable working capital.
Investing Activities
During the six months ended June 30, 2019, net cash used in investing activities was $31.8 million, compared with net cash used in investing activities of $117.1 million for the six months ended June 30, 2018.
Capital Spending—Capital expenditures were $91.9 million and $87.7 million for the six months ended June 30, 2019 and 2018, respectively, primarily associated with the construction of our manufacturing and corporate headquarters facility in Acton, Massachusetts. For the full year 2019, we expect capital expenditures in 2019 to be relatively consistent with 2018 as we continue to expand capacity in our U.S. operations into support of our growth and profitability objectives. We expect to fund our capital expenditures using a combination of existing cash and investments as well as cash generated from operations.
In connectionPurchases and Sales of Investments—During the six months ended June 30, 2019, net sales of marketable securities were $65.1 million, compared with our assumption on July 1, 2018,net purchases of all commercialmarketable securities of $27.2 million for the six months ended June 30, 2018.
Financing Activities
During the six months ended June 30, 2019, net cash provided by financing activities was $17.7 million, compared with net cash used in financing activities of $8.2 million for the six months ended June 30, 2018.
Option Exercises and Issuance of Shares Under Employee Stock Purchase Plan (“ESPP”)—Total proceeds from option exercises and issuance of common stock under ESPP were $25.7 million and $11.2 million for the six months ended June 30, 2019 and 2018, respectively. Payments for taxes related to net restricted share settlements were $7.9 million and $12.7 million for the six months ended June 30, 2019 and 2018, respectively.
Debt Repayment—During the six months ended June 30, 2018, we paid $6.7 million to settle all of our Omnipod System across Europe followingoutstanding 2% Notes.
Commitments and Contingencies
Following the expiration of our distributionan agreement with oura former European Distributordistributor on June 30, 2018, we arewere required to pay to the former
European Distributor a quarterly per-unit fee for Omnipod sales by us between July 1, 2018 and June 30, 2019 to certain customers of the former European Distributor.distributor for a one-year period through June 30, 2019. We are recognizingrecognized a liability and an associated intangible asset for this fee as qualifying sales occur.occurred. The actualmethodology applicable for determining the total fee under the distribution agreement is subject to an active arbitration proceeding in Switzerland. The final amount of the fee could vary significantly depending on the number of customers who count for purposes of calculating the fee under the terms of the distribution agreement, and the methodology applicable for determining this number under the agreement is subject to an active arbitration proceeding between the parties in Switzerland.agreement. We estimate that the final aggregate fee for the applicable twelve-month period could be in the range of approximately $10$5 million to $55 million.million, of which $3.8 million had been paid as of June 30, 2019.
Convertible Debt
To finance our operations and global expansion, we have periodically issued and sold Convertible Senior Notes, which are convertible into our common stock. As of March 31, 2019, the following notes were outstanding:
|
| | | | | | | |
| Issuance Date | Coupon | Principal Outstanding (in thousands) | Due Date | Initial Conversion Rate per Share of Common Stock | Conversion Price per Share of Common Stock |
| September 2016 | 1.250% | $ | 344,992 |
| September 15, 2021 | 17.1332 | $58.37 |
| November 2017 | 1.375% | 402,500 |
| November 15, 2024 | 10.7315 | $93.18 |
| Total | | $ | 747,492 |
| | | |
We called our 2% Notes in March 2018 and settled the outstanding notes in May 2018. Additional information regarding our debt issuances is provided in Note 5 to the consolidated financial statements included in this Form 10-Q.
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| | | | | | | | |
| | | Three Months Ended March 31, |
| (In thousands) | | 2019 | | 2018 |
| Cash provided by (used in): | | | | |
| Operating activities | | $ | 6,367 |
| | $ | (4,266 | ) |
| Investing activities | | 7,620 |
| | (55,988 | ) |
| Financing activities | | 1,549 |
| | (8,870 | ) |
| Effect of exchange rate changes on cash | | (188 | ) | | (307 | ) |
| Net increase (decrease) in cash and cash equivalents | | $ | 15,348 |
| | $ | (69,431 | ) |
Operating Activities
Our net cash provided by operating activities for thethree months ended March 31, 2019 was $6.4 million,compared tonet cash used in operating activities of $4.3 million in the same period of 2018. The increase in cash provided by operating activities in the current period is primarily due to the generation of positive net income in the period compared to a net loss in the same period of 2018 as well as favorable working capital.
Investing Activities
Our net cash provided by investing activities for thethree months ended March 31, 2019 was $7.6 million compared to net cash used in investing activities of $56.0 million in the same period of 2018. The decrease in investing activities in the current year is primarily due to lower net purchases of marketable securities, partially offset by an increase in capital expenditures in the current period, primarily associated with the construction of our manufacturing and corporate headquarters facility in Acton, Massachusetts.
Financing Activities
Our net cash provided by financing activities for thethree months ended March 31, 2019 was $1.5 million as compared to net cash used in financing activities of $8.9 million in the same period of 2018. The change was primarily attributable to higher proceeds from exercise of employee stock options, net of payments made for withholding taxes in connection with vesting of restricted stock units.
Commitments and Contingencies
We primarily lease our facilities in Massachusetts, California, and the United Kingdom. Refer to Note 1311 to the consolidated financial statements included in this Form 10-Q for further information regarding our leases.Legal Proceedings
The significant estimates and judgments related withto establishing litigation reserves are discussed under "Legal Proceedings"“Legal Proceedings” in Note 1210 to the consolidated financial statements included in this Form 10-Q.
Off-Balance Sheet Arrangements
As of March 31,June 30, 2019, we did not have any off-balance sheet financing arrangements.
Critical Accounting Policies and Estimates
OurThe preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.
We believe that our accounting policies for revenue recognition, fair value measurements, accounts receivable and allowance for doubtful accounts, inventories, product warranty costs, convertible debt, commitments and contingencies and stock-based compensation are based on, the selection and application of generally accepted accounting principles, which require us to make estimatesamong other things, judgments and assumptions made by management that include inherent risks and uncertainties. There have been no significant changes to the above critical accounting policies or in the underlying accounting assumptions and estimates used in such policies from those disclosed in our annual consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K filed for the year ended December 31, 2018.
Accounting Standards Issued and Not Yet Adopted
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 requires an entity to measure the impairment of goodwill assigned to a reporting unit as the amount by which the carrying value of the assets and liabilities of the reporting unit, including goodwill, exceeds the reporting unit's fair value. The guidance is effective for us beginning in the first quarter of 2020. Early adoption is permitted. We do not expect the adoption of this guidance to impact our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Credit Losses(Topic 326) (“ASU 2016-13”). ASU 2016-13 requires financial assets measured at amortized cost, such as trade receivables and contract assets, to be presented net of expected credit losses, which may be estimated based on relevant information such as historical experience, current conditions, and future expectation for each pool of similar financial assets. The new guidance also requires enhanced disclosures related to trade receivables and associated credit losses. The guidance is effective for us beginning in the first quarter of 2020. The adoption of this guidance is expected to increase the level of disclosures related to our trade receivables, but is not expected to have a material impact on our consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. We have based
these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, results of operations and financial condition.
The outcomes of the amounts reportedevents described in these forward-looking statements are subject to risks, uncertainties and assumptions. These risks and uncertainties include, but are not limited to:
risks associated with our dependence on our principal product platform, the Omnipod;
risks associated with our ability to design, develop, manufacture and commercialize future products;
our ability to reduce production costs and increase customer orders and manufacturing volumes;
adverse changes in general economic conditions;
impact of healthcare reform laws;
our ability to raise additional funds in the future on acceptable terms or at all;
supply problems or price fluctuations with sole source or third-party suppliers on which we are dependent;
the potential establishment of a competitive bid program for conventional insulin pumps;
failure to retain supplier pricing discounts and achieve satisfactory gross margins;
failure to retain key suppliers;
international business risks;
our inability to effectively operate and grow our business in Europe following the expiration of an agreement with our former European distributor on June 30, 2018;
regulatory, commercial and logistics risks associated with selling our products in Europe in light of the uncertainty related to the timing and terms of the separation of the United Kingdom from the European Union (Brexit);
our inability to secure and retain adequate coverage or reimbursement from third-party payors for the Omnipod or future products and potential adverse changes in reimbursement rates or policies relating to the Omnipod or future products;
failure to retain key payor partners and their members;
adverse effects resulting from competition;
technological change and product innovation adversely affecting our business;
changes to or termination of our license to incorporate a blood glucose meter into the Omnipod or our inability to enter into new license or other agreements with respect to the Omnipod's current or future features;
challenges to the future development of our non-insulin drug delivery business;
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 or misappropriate the proprietary rights of others;
adverse regulatory or legal actions relating to the Omnipod or future products;
failure of our contract manufacturers or component suppliers to comply with the U.S Food and Drug Administration's quality system regulations;
the potential violation of the Foreign Corrupt Practices Act or any other international, federal or state laws prohibiting "kickbacks" or protecting the confidentiality of patient health information or other protected personal information, or any challenge to or investigation into our practices under these laws;
product liability lawsuits that may be brought against us, including stemming from off-label use of our product;
breaches or failures of our product or information technology systems, including by cyberattack;
reduced retention rates of our customer base;
unfavorable results of clinical studies relating to the Omnipod or future products, or the products of our competitors;
future publication of articles or announcement of positions by diabetes associations or other organizations that are unfavorable to the Omnipod;
the concentration of substantially all of our manufacturing operations at a single location in China and substantially all of Insulet's inventory at a single location in Massachusetts;
our ability to attract and retain personnel;
our ability to manage our growth;
fluctuations in quarterly results of operations;
risks associated with potential future acquisitions or investments in new businesses;
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 control over financial reporting;
the volatility of the trading price of our common stock;
risks related to future sales of our common stock or the conversion of any of our convertible debt;
potential limitations on our ability to use our net operating loss carryforwards; and
anti-takeover provisions in our financial statements and the accompanying condensed 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.organizational documents.
We have reviewed our policies and estimates to determine our critical accounting policies for the three months ended March 31, 2019. We have made no material changes to the critical accounting policies describedThe risk factors discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 and in this Quarterly Report could cause our results to differ materially from those expressed in forward-looking statements. In addition, there may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. Actual results could differ materially from those projected in the forward-looking statements; accordingly, you should not rely upon forward-looking statements as predictions of future events. We expressly disclaim any obligation to update these forward-looking statements other than our accounting policies related to leases as a result of the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842), which was adopted on January 1, 2019 as further described in Note 13 to the consolidated financial statements included in this Form 10-Q.
Recent Accounting Pronouncements
Information with respect to recent accounting pronouncements is provided in Note 2 to the consolidated financial statements included in this Form 10-Q.
required by law.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We currently do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash, cash equivalents, short-term and long-term investments, accounts receivable, accounts payable, accrued expenses, debt and long-term obligations. 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 short-term investments and 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 March 31,June 30, 2019, we had outstanding convertible debt related to our Convertible Senior Notes recorded on our consolidated balance sheet of $599.6$607.4 million, net of unamortized discount and issuance costs totaling $147.9$140.1 million. Changes in the fair value of our outstanding debt, which could be impacted by changes in interest rates, are not recorded in these consolidated financial statements as the debt is accounted for at cost less unamortized discount and issuance costs. The fair value of the debt, which is disclosed in Note 5 to the consolidated financial statements, is also impacted by changes onin our stock price.
Our business is subject to risks, including, but not limited to: unique economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. A substantial portion of our operations are located in the United States, and the majority of our sales since inception have been made in United States dollars. Accordingly, we have assessed that we do not have any material net exposure to foreign currency exchange rate fluctuations at this time. However,States; however, as our business in markets outside of the United States continues to increase, we will be increasingly exposed to foreign currency exchange risk related to our foreign operations. Fluctuations in the rate of exchange between the United States dollar and foreign currencies, primarily the Euro, British Pound and Canadian Dollar, and the British Pound, could adversely affect our financial results, including our revenues, revenue growth rates, gross margins, income and losses as well as assets and liabilities.
We will continue to monitor and evaluate our internal processes relating to foreign currency exchange, including the potential use of hedging strategies.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31,June 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits 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. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on
the evaluation of our disclosure controls and procedures as of March 31,June 30, 2019, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.
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 March 31,June 30, 2019 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
Information regarding our material pending legal proceedings, which is incorporated herein by reference, is provided in Note 1210 to the consolidated financial statements in this Form 10-Q.
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, 2018, 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 into our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018. Refer to Part I, Item 1A. “Risks Factors” in our Annual Report for a discussion of risks to which our business, financial condition, results of operations and cash flows are subject.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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| | |
| Number | | Description |
| | | |
| | Offer Letter between Wayde D. McMillan and Insulet Corporation, dated January 3, 2019 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 7, 2019).
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| | |
| | Offer Letter between John W. Kapples and Insulet Corporation, dated January 22, 2019.
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| | |
| | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer. |
| | | |
| | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer. |
| | | |
| | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer and Chief Financial Officer. |
| | | |
| 101 | | The following materials from Insulet Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31,June 30, 2019 formatted in XBRL (eXtensibleiXBRL (Inline eXtensible Business Reporting Language), as follows: |
| | | |
| | | (i) Consolidated Balance Sheets (Unaudited) as of March 31,June 30, 2019 (Unaudited) and December 31, 2018 |
| | | |
| | | (ii) Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended March 31,June 30, 2019 and 2018 (Unaudited) |
| | | |
| | | (iii) Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Six Months Ended March 31,June 30, 2019 and 2018 (Unaudited) |
| | | |
| | | (iv) Consolidated Statements of Stockholders' Equity (Unaudited) for the Three and Six Months Ended March 31,June 30, 2019 and 2018 (Unaudited) |
| | | |
| | | (v) Consolidated Statements of Cash Flows (Unaudited) for the ThreeSix Months Ended March 31,June 30, 2019 and 2018 (Unaudited) |
| | | |
| | | (vi) Condensed Notes (Unaudited) to Consolidated Financial Statements (Unaudited) |
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| * | | This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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| | |
| | | INSULET CORPORATION (Registrant) |
| | | |
| Date: | May 2,August 5, 2019 | /s/ Shacey Petrovic |
| | | Shacey Petrovic |
| | | Chief Executive Officer (Principal Executive Officer) |
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| | |
| | | |
| Date: | May 2,August 5, 2019 | /s/ Wayde McMillan |
| | | Wayde McMillan |
| | | Chief Financial Officer (Principal Financial Officer) |