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, 2009
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-33462
INSULET CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware
(State or Other Jurisdiction of Incorporation or
Organization)
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04-3523891
(I.R.S. Employer Identification No.) |
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9 Oak Park Drive
Bedford, Massachusetts
(Address of Principal Executive Offices)
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01730
(Zip Code) |
Registrant’s Telephone Number, Including Area Code: (781) 457-5000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
Smaller reporting company o |
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 October 22, 2009, the registrant had 30,793,863 shares of common stock outstanding.
INSULET CORPORATION
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
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| Item 1. |
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Condensed Consolidated Financial Statements |
INSULET CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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As of |
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As of |
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December 31, |
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September 30, |
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2008 |
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2009 |
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(Restated) |
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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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$ |
72,694 |
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$ |
56,663 |
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Accounts receivable, net |
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16,357 |
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11,938 |
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Inventories |
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9,175 |
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16,870 |
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Prepaid expenses and other current assets |
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1,565 |
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3,028 |
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Total current assets |
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99,791 |
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88,499 |
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Property and equipment, net |
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15,531 |
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17,564 |
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Other assets |
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1,806 |
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2,170 |
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Total assets |
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$ |
117,128 |
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$ |
108,233 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities |
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Accounts payable |
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$ |
5,183 |
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$ |
7,291 |
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Accrued expenses |
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9,623 |
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7,300 |
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Deferred revenue |
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3,411 |
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2,377 |
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Total current liabilities |
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18,217 |
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16,968 |
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Long-term debt, net of current portion |
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95,902 |
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60,172 |
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Other long-term liabilities |
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2,706 |
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2,987 |
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Total liabilities |
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116,825 |
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80,127 |
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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, 2009 and
December 31, 2008. |
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Issued and outstanding: zero
shares at September 30, 2009 and
December 31, 2008,
respectively |
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— |
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Common stock, $.001 par value: |
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Authorized: 100,000,000
shares at September 30, 2009
and December 31,
2008 |
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Issued and outstanding: 30,789,239 and 27,778,921
shares at September 30, 2009
and December 31, 2008,
respectively |
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32 |
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29 |
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Additional paid-in capital |
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315,230 |
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278,427 |
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Accumulated deficit |
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(314,959 |
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(250,350 |
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Total stockholders’ equity |
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303 |
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28,106 |
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Total liabilities and stockholders’ equity |
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$ |
117,128 |
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$ |
108,233 |
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December 31, 2008 balances have been restated to reflect the retrospective adoption of certain
provisions of FASB ASC 470-20.
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
INSULET CORPORATION
CONDENSED 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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2008 |
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2008 |
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2009 |
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(Restated) |
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2009 |
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(Restated) |
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(In thousands, except share and per share data) |
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(Unaudited) |
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Revenue |
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$ |
18,735 |
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$ |
10,110 |
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$ |
45,821 |
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$ |
24,198 |
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Cost of revenue |
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12,936 |
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10,197 |
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34,858 |
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29,980 |
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Gross profit (loss) |
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5,799 |
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(87 |
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10,963 |
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(5,782 |
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Operating expenses: |
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Research and development |
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3,404 |
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3,263 |
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9,880 |
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9,569 |
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General and administrative |
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6,246 |
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6,308 |
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19,575 |
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16,900 |
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Sales and marketing |
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9,629 |
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10,176 |
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28,905 |
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29,735 |
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Total operating expenses |
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19,279 |
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19,747 |
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58,360 |
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56,204 |
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Operating loss |
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(13,480 |
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(19,834 |
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(47,397 |
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(61,986 |
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Interest income |
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22 |
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481 |
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204 |
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1,554 |
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Interest expense |
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(11,267 |
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(2,313 |
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(17,416 |
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(5,142 |
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Net interest expense |
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(11,245 |
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(1,832 |
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(17,212 |
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(3,588 |
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Net loss |
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$ |
(24,725 |
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$ |
(21,666 |
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$ |
(64,609 |
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$ |
(65,574 |
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Net loss per share basic and diluted |
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$ |
(0.88 |
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$ |
(0.78 |
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$ |
(2.32 |
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$ |
(2.38 |
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Weighted average number of shares
used in calculating basic and
diluted net loss per share |
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28,008,699 |
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27,716,473 |
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27,894,775 |
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27,560,258 |
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Results for the three and nine months ended September 30, 2008 have been restated to reflect the
retrospective adoption of certain provisions of FASB ASC 470-20.
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
INSULET CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
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Nine Months Ended |
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September 30, |
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2008 |
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2009 |
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(Restated) |
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(In thousands) |
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(Unaudited) |
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Cash flows from operating activities |
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Net loss |
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$ |
(64,609 |
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$ |
(65,574 |
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Adjustments to reconcile net loss to net cash used in operating activities |
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Depreciation |
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4,001 |
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4,665 |
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Amortization of debt discount |
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10,495 |
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1,726 |
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Stock compensation expense |
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3,185 |
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2,618 |
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Provision for bad debts |
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2,820 |
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2,012 |
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Non cash interest expense |
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1,757 |
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856 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(7,239 |
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(9,071 |
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Inventory |
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7,695 |
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(8,477 |
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Prepaids and other current assets |
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1,463 |
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(2,185 |
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Accounts payable and accrued expenses |
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214 |
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4,544 |
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Other long term liabilities |
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(281 |
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2,330 |
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Deferred revenue, short term |
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1,034 |
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921 |
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Net cash used in operating activities |
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(39,465 |
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(65,635 |
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Cash flows from investing activities |
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Purchases of property and equipment |
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(1,968 |
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(9,441 |
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Net cash used in investing activities |
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(1,968 |
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(9,441 |
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Cash flows from financing activities |
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Principal payments of long term loan |
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— |
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(5,454 |
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Proceeds from convertible note offering, net of financing expenses |
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— |
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81,532 |
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Proceeds from issuance of facility agreement, net of financing expenses |
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57,015 |
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— |
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Repayment of long term loan |
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(27,500 |
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(22,719 |
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Proceeds from issuance of common stock, net of offering expenses |
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27,949 |
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1,254 |
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Proceeds from payment of subscription receivable |
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— |
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9 |
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Net cash provided by financing activities |
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57,464 |
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54,622 |
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Net increase (decrease) in cash and cash equivalents |
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16,031 |
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(20,454 |
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Cash and cash equivalents, beginning of period |
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56,663 |
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94,588 |
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Cash and cash equivalents, end of period |
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$ |
72,694 |
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$ |
74,134 |
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Supplemental disclosure of cash flow information |
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Cash paid for interest |
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$ |
4,077 |
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$ |
1,746 |
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Non-cash financing activities |
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Allocation of fair value of warrants from net proceeds from issuance of
facility agreement |
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$ |
6,065 |
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$ |
— |
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Results for the nine months ended September 30, 2008 have been restated to reflect the
retrospective adoption of certain provisions of FASB ASC 470-20.
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
INSULET CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business
Insulet Corporation (the “Company”) is principally engaged in the development, manufacture and
marketing of an insulin infusion system for people with insulin-dependent diabetes. The Company was
incorporated in Delaware in 2000 and has its corporate headquarters in Bedford, Massachusetts.
Since inception, the Company has devoted substantially all of its efforts to designing, developing,
manufacturing and marketing the OmniPod Insulin Management System (“OmniPod”), which consists of
the OmniPod disposable insulin infusion device and the handheld, wireless Personal Diabetes Manager
(“PDM”). The Company commercially launched the OmniPod Insulin Management System in August 2005
after receiving FDA 510(k) approval in January 2005. The first commercial product was shipped in
October 2005.
2. Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements in this Quarterly Report on Form
10-Q have been prepared in accordance with accounting principles generally accepted in the United
States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they 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, 2009, are not
necessarily indicative of the results that may be expected for the full year ending December 31,
2009, or for any other subsequent interim period.
The condensed 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, 2008.
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, stock options
and warrants, the lives of property and equipment, and warranty and doubtful account allowance
reserve calculations. Actual results may differ from those estimates.
Principles of Consolidation
The consolidated financial statements in this Quarterly Report on Form 10-Q include the
accounts of the Company and its wholly-owned subsidiary, Sub-Q Solutions, Inc. All material
intercompany balances and transactions have been eliminated in consolidation. To date there has
been minimal activity in Sub-Q Solutions, Inc.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the current year
presentation.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due from third-party payors, patients and third-party
distributors. In estimating whether accounts receivable can be collected, the Company performs
evaluations of third-party payors, patients and third-party distributors and continuously monitors
collections and payments and estimates an allowance for doubtful accounts based on the aging of the
underlying invoices, experience to date and any payor-specific collection issues that have been
identified.
Inventories
Inventories are stated at the lower of cost or market, determined under the first-in,
first-out (“FIFO”) method. Inventory has been recorded at cost at December 31, 2008 and September
30, 2009. Work in process is calculated based upon a build-up in the stage of completion using
estimated labor inputs for each stage in production. Costs for PDMs and OmniPods include raw
material, labor and manufacturing overhead. In the second quarter of 2009, the Company introduced a
new version of its PDM. The Company evaluates inventory valuation on a quarterly basis for
obsolete or slow-moving items. The Company expects to use the majority of the remaining earlier
version PDMs to satisfy warranty obligations.
5
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.
Restructuring Expenses and Impairment of Assets
In connection with its efforts to pursue improved gross margins, leverage operational
efficiencies and better pursue opportunities for low-cost supplier sourcing of asset costs, the
Company periodically performs an evaluation of its manufacturing processes and reviews the carrying
value of its property and equipment to assess the recoverability of these assets whenever events
indicate that impairment may have occurred. As part of this assessment, the Company reviews the
future undiscounted operating cash flows expected to be generated by those assets. If impairment is
indicated through this review, the carrying amount of the asset would be reduced to its estimated
fair value. This review of manufacturing processes and equipment can result in restructuring
activity or an impairment of assets based on current net book value and potential future use of the
assets.
The Company’s restructuring expenses may also include workforce reduction and related costs
for one-time termination benefits provided to employees who are involuntarily terminated under the
terms of a one-time benefit arrangement. The Company records these one-time termination benefits
upon incurring the liability provided that the employees are notified, the plan is approved by the
appropriate level of management, the employees to be terminated and the expected completion date
are identified, and the benefits that the identified employees will be paid are established. Significant
changes to the plan are not expected when the Company records the costs. In recording the workforce
reduction and related costs, the Company estimates related costs such as taxes and outplacement
services which may be provided under the plan. If changes in these estimated services occur, the
Company may be required to record or reverse restructuring expenses associated with these workforce
reduction and related costs.
Revenue Recognition
The Company generates nearly all of its revenue from sales of its OmniPod Insulin Management
System to diabetes patients and third-party distributors who resell the product to diabetes
patients. The initial sale to a new customer typically includes OmniPods and a Starter Kit, which
is comprised of the PDM, two OmniPods, the OmniPod System User Guide and the OmniPod System
Interactive Training CD. Subsequent sales to existing customers typically consist of additional
OmniPods.
Revenue is recognized in accordance with FASB ASC 605-10, Revenue Recognition — Overall,
which requires that persuasive evidence of a sales arrangement exists, delivery of goods occurs
through transfer of title and risk and rewards of ownership, the selling price is fixed or
determinable and collectibility is reasonably assured. With respect to these criteria:
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• |
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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 upon transfer to the third party
carrier; transfer of title and risk and rewards of
ownership are passed to the distributor typically upon
their receipt 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 has considered the requirements of FASB ASC 605-25 Revenue Recognition — Multiple
Element Arrangements, when accounting for the OmniPods and Starter Kits. FASB ASC 605-25 requires
the Company to assess whether the different elements qualify for separate accounting. The Company
recognizes revenue for the initial shipment to a patient or other third party once all elements
have been delivered.
The Company offers a 45-day right of return for its Starter Kits sales, and, in accordance
with FASB ASC 605-15 Revenue Recognition — Products, the Company 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. Historically, sales returns have amounted to approximately 3% of gross product sales.
When doubt exists about reasonable assuredness of collectibility from specific customers, the
Company defers revenue from sales of products to those customers until payment is received.
In March 2008, the Company received a cash payment from Abbott Diabetes Care, Inc. (“Abbott”)
for an agreement fee in connection with execution of the first amendment to the development and
license agreement between the Company and Abbott. The Company recognizes revenue on the agreement
fee from Abbott over the initial 5-year term of the agreement, and the non-current portion of the
agreement fee is included in other long-term liabilities. Under the amended Abbott agreement,
beginning July 1, 2008, Abbott agreed to pay an amount to the Company for services performed by
Insulet in connection with each sale of a PDM that includes an Abbott Discrete Blood Glucose
Monitor to certain customers. The Company recognizes the revenue related to this portion of the
Abbott agreement at the time it meets the criteria for revenue recognition, typically at the time
revenue is recognized on the sale
6
of the PDM to a new patient. In the three and nine months ended September 30, 2009, the Company
recognized $2.3 million and $4.5 million of revenue related to the Abbott agreement, respectively.
In the three and nine months ended September 30, 2008, the
Company recognized $1.2 million and $1.4
million of revenue related to the Abbott agreement, respectively. There was no impact to cost of
revenue related to this agreement.
The Company had deferred revenue of $4.6 million and $4.0 million as of September 30, 2009
and December 31, 2008, respectively. The deferred revenue recorded as of September 30, 2009 was
comprised of product-related revenue as well as the unrecognized portion of the agreement fee
related to the Abbott agreement.
Concentration of Credit Risk
Financial instruments that subject the Company to credit risk primarily consist of cash, cash
equivalents and accounts receivable. The Company maintains the majority of its cash with one
accredited financial institution. Although revenue is recognized from shipments directly to
patients or third-party distributors, the majority of shipments are billed to third-party insurance
payors. There were no third-party payors that account for more than 10% of gross accounts
receivable at September 30, 2009 or December 31, 2008.
Income Taxes
The Company files federal and state tax returns. 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, 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, 2009, the Company had no interest and penalty accrual or expense.
Adoption of New Accounting Standards
FASB ASC 470-20 Debt — Debt with Conversion and Other Options clarifies that convertible
debt instruments that may be settled in cash upon conversion should be separated between the
liability and equity components in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. These provisions of FASB ASC
470-20 were applied retrospectively to all periods presented. The cumulative effect of the change
in accounting principle on prior periods was recognized as of the beginning of the first period
presented. The Company adopted these provisions of FASB ASC 470-20 as of January 1, 2009 and has
reclassified $26.9 million of its long-term debt to equity as of the issuance date of the
convertible notes. During the three and nine months ended September 30, 2009, the Company recorded
$1.1 million and $3.2 million, respectively, of additional interest expense related to these
provisions of FASB ASC 470-20. During the three and nine months ended September 30, 2008, the
Company recorded $1.0 million and $1.1 million, respectively, of additional interest expense
related to the provisions of FASB ASC 470-20.
The Company adopted certain provisions of FASB ASC 825-10, Subsequent Events — Overall as of
June 30, 2009. FASB ASC 825-10 provides guidance to establish general standards of accounting for
and disclosures of events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. FASB ASC 825-10 also requires entities to disclose the
date through which subsequent events were evaluated as well as the rationale for why that date was
selected. This disclosure should alert all users of financial statements that an entity has not
evaluated subsequent events after that date in the set of financial statements being presented.
FASB ASC 825-10 requires additional disclosures only, and therefore did not have an impact on the
Company’s condensed consolidated financial statements. The Company has evaluated
subsequent events through October 26, 2009, the date it has issued this Quarterly Report on Form
10-Q.
The
Company adopted the Financial Accounting Standard Board Accounting
Standards Codification in the three months ended September 30, 2009. The FASB Accounting Standards Codification (“Codification”) has become the
single source of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in accordance with GAAP. All
existing accounting standard documents are superseded by the Codification and any accounting
literature not included in the Codification will not be authoritative. However, rules and
interpretive releases of the Securities and Exchange Commission (“SEC”) issued under the authority
of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants.
All references
made to GAAP in the Company’s consolidated financial statements now use the new Codification
numbering system. The Codification does not change or alter existing GAAP and, therefore, did not
have a material impact on the Company’s condensed consolidated financial statements.
3. Facility Agreement and Common Stock Warrants
On March 13, 2009, the Company entered into a Facility Agreement with certain institutional
accredited investors, pursuant to which the investors agreed to loan the Company up to $60 million,
subject to the terms and conditions set forth in the Facility Agreement. Following the initial
disbursement of $27.5 million on March 31, 2009, the Company could, but was not required to, draw
down on the facility in $6.5 million increments at any time until November 2010 provided that the
Company met certain financial performance milestones. In connection with this Financing, the
Company paid Deerfield Management Company, L.P., an affiliate of the lead lender, a one-time
transaction fee of $1.2 million. Total financing costs, including the transaction fee, were $3.0
million and were being amortized as interest expense over the 42 months of the Facility Agreement.
The amounts initially drawn under the
7
Facility Agreement accrued interest at a rate of 9.75% per annum, and the undrawn amounts under the
Facility Agreement accrued interest at a rate of 2.75% per annum. Accrued interest is payable
quarterly in cash in arrears beginning on June 1, 2009. The Company had the right to prepay any
amounts owed without penalty unless the prepayment is in connection with a major transaction.
On September 25, 2009, the Company entered into an Amendment to the Facility Agreement whereby
the Company agreed to repay the $27.5 million of outstanding debt and promptly draw down the
remaining $32.5 million available under the Facility Agreement. The lender agreed to eliminate all
future performance milestones associated with the remaining $32.5 million available on the credit
facility and reduce the annual interest rate on any borrowed funds to 8.5%. In addition, the
lender agreed to forego the remaining warrants to purchase an additional 1.5 million shares of
common stock that would have been issued upon future draws. 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. The Amendment to the Facility Agreement
closed on September 30, 2009.
The Company received aggregate proceeds of $27.5 million in connection with the sale of its shares.
All references herein to the “Facility Agreement” refer to the Facility Agreement entered into on
March 13, 2009 and amended on September 25, 2009.
All principal amounts outstanding under the Facility Agreement are payable in September 2012.
Any amounts drawn under the Facility Agreement may become immediately due and payable upon (i) an
“event of default,” as defined in the Facility Agreement, in which case the lenders would have the
right to require the Company to re-pay 100% of the principal amount of the loan, plus any accrued
and unpaid interest thereon, or (ii) the consummation of certain change of control transactions, in
which case the lenders would have the right to require the Company to re-pay 106% of the
outstanding principal amount of the loan, plus any accrued and unpaid interest thereon. The
Facility Agreement also provides for higher interest rates to be paid by the Company in certain
events.
Because the consummation of certain change in control transactions would result in the payment
of a premium on the outstanding principal, the premium feature is a derivative that is required to
be bifurcated from the host debt instrument and recorded at fair value at each quarter end. As a
higher interest rate could be paid by the Company upon the occurrence of certain events, the higher
interest feature is also considered a derivative. The higher interest payment does not meet the
criteria to be accounted for separately. Any changes in fair value of the premium feature will be
recorded as interest expense and the difference between the face value of the outstanding principal
on the Facility Agreement and the amount remaining after the bifurcation will be recorded as a
discount to be amortized over the term of the Facility Agreement. At September 30, 2009, the
premium feature associated with the Facility Agreement had no value as the Company does not
currently expect a change in control transaction to occur. The premium feature related to the
Facility Agreement will be reassessed and marked-to-market through earnings on a quarterly basis.
At September 30, 2009, $32.5 million of outstanding debt related to the Facility Agreement is
included in long-term debt in the condensed consolidated balance sheet. Upon repayment of the
initial tranche of the Facility Agreement, the Company recognized approximately $7.6 million as
interest expense. Of the $7.6 million of interest expense, $6.4 million related to the debt
discount for the unamortized balance of the fair value of the warrants issued on March 13, 2009 and
the transaction fee paid to the lenders and $1.2 million related to the remaining deferred
financing costs. Approximately $9.0 million and $10.5 million of interest expense was recorded in
the three and nine months ended September 30, 2009, respectively. Of the $9.0 million recorded in
the three months ended September 30, 2009, approximately $0.9 million relates to cash interest,
$0.5 million relates to amortization of the debt discount and deferred financing costs and $7.6
million relates to the charge taken related to the unamortized portion of the debt discount and
deferred financing costs. Of the $10.5 million recorded in the nine months ended September 30,
2009, approximately $1.8 million relates to cash interest, $1.1 million relates to amortization of
the debt discount and deferred financing costs and $7.6 million relates to the charge taken related
to the unamortized portion of the debt discount and deferred financing costs. The difference
between the amount paid and the carrying value of the outstanding amounts under the Facility
Agreement was recognized as a $7.6 million loss from extinguishment of debt.
Common Stock Warrants
On March 13, 2009, in connection with the execution of the Facility Agreement, the Company
issued to the lenders fully exercisable warrants to purchase an aggregate of 3.75 million shares of
common stock of the Company at an exercise price of $3.13 per share. Pursuant to the Facility
Agreement, the Company would have been required to issue additional warrants to purchase 1.5
million shares upon drawing down the remaining $32.5 million under the facility. In connection
with the Amendment to the Facility Agreement in September 2009, the lenders agreed to forego the
additional warrants that would have been issued upon these future draws.
If the Company issues or sells shares of its common stock (other than (i) pursuant to a
registered public offering or shelf takedown, (ii) in a transaction that does not require
shareholder approval, (iii) to partners in connection with a joint venture, distribution or other
partnering arrangement in a transaction that does not require shareholder approval, (iv) upon the
exercise of options granted to our employees, officers, directors and consultants, (v) of
restricted stock to, or purchases of, our common stock under our employee stock purchase plan by
employees, officers, directors or consultants or (vi) upon the exercise of the warrants) after
March 13, 2009, the Company will issue concurrently therewith additional warrants to purchase such
number of shares of common stock as will entitle the lenders to maintain the same beneficial
ownership in the Company after the issuance as they had prior to such issuance, as adjusted on a
pro rata basis for repayments of the outstanding principal amount under the loan, with such
warrants being issued at an exercise price equal to the greater of $3.13 per share and the closing
price of the common stock on the date immediately prior to the issuance.
All warrants issued under the Facility Agreement remain unexercised as of September 30, 2009,
expire on March 13, 2015 and contain certain limitations that prevent the holder from acquiring
shares upon exercise of a warrant that would result in the number of shares beneficially owned by
it to exceed 9.98% of the total number of shares of Company common stock then issued and
outstanding.
8
In addition, upon certain change of control transactions, or upon certain “events of default”
(as defined in the warrant agreement), the holder has the right to net exercise the warrants for an
amount of shares of Company common stock equal to the Black-Scholes value of the shares issuable
under the warrants divided by 95% of the closing price of the common stock on the day immediately
prior to the consummation of such change of control or event of default, as applicable. In certain
circumstances where a warrant or portion of a warrant is not net exercised in connection with a
change of control or event of default, the holder will be paid an amount in cash equal to the
Black-Scholes value of such portion of the warrant not treated as a net exercise.
In accordance with FASB ASC 460-10 Guarantees — Overall, the warrants issued in connection
with the Facility Agreement qualify for permanent classification as equity and their relative fair
value of $6.1 million on issuance date was recorded as additional paid in capital and debt
discount. The unamortized value of the warrants was recorded as interest expense in the quarter
ended September 30, 2009, in connection with the repayment and termination of the initial
disbursement.
4. Convertible Notes and Repayment and Termination of Term Loan
In June 2008, the Company sold $85 million principal amount of 5.375% Convertible Senior Notes
due June 15, 2013 (the “5.375% Notes”) in a private placement to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended. The interest rate on the notes
is 5.375% per annum on the principal amount from June 16, 2008, payable semi-annually in arrears in
cash on December 15 and June 15 of each year, beginning December 15, 2008. The 5.375% Notes are
convertible into the Company’s common stock at an initial conversion rate of 46.8467 shares of
common stock per $1,000 principal amount of the 5.375% Notes, which is equivalent to a conversion
price of approximately $21.35 per share, representing a conversion premium of 34% to the last
reported sale price of the Company’s common stock on the NASDAQ Global Market on June 10, 2008,
subject to adjustment under certain circumstances, at any time beginning on March 15, 2013 or under
certain other circumstances and prior to the close of business on the business day immediately
preceding the final maturity date of the notes. The 5.375% Notes will be convertible for cash up to
their principal amount and shares of the Company’s common stock for the remainder of the conversion
value in excess of the principal amount. The Company does not have the right to redeem any of the
5.375% Notes prior to maturity. If a fundamental change, as defined in the Indenture for the 5.375%
Notes, occurs at any time prior to maturity, holders of the 5.375% Notes may require the Company to
repurchase their notes in whole or in part for cash equal to 100% of the principal amount of the
notes to be repurchased, plus accrued and unpaid interest, including any additional interest, to,
but excluding, the date of repurchase.
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 adopted certain provisions of FASB ASC 470-20 on January 1, 2009. FASB ASC 470-20
clarifies that convertible debt instruments that may be settled in cash upon conversion should be
separated between the liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FASB ASC
470-20 was applied retrospectively to all periods presented. Accordingly, 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 beginning June
15, 2008 over the 5 year life of the 5.375% Notes.
The Company incurred interest expense of approximately $2.2 million and $6.7 million for the
three and nine months ended September 30, 2009, respectively, related to the 5.375% Notes. Of the
$2.2 million recorded in the three months ended September 30, 2009, approximately $1.1 million
relates to additional interest expense recognized under the provisions of FASB ASC 470-20. Of the
$6.7 million recorded in the nine months ended September 30, 2009, approximately $3.2 million
relates to additional interest expense recognized under the provisions of FASB ASC 470-20. 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 in the condensed consolidated balance sheet and is being
amortized as a component of interest expense over the five year term of the 5.375% Notes.
At September 30, 2009, the outstanding amounts related to the 5.375% Notes of $63.4 million
are included in long-term debt in the condensed consolidated balance sheet and reflect the debt
discount of $21.6 million. At December 31, 2008, the outstanding amounts related to the 5.375%
Notes of $60.2 million are included in long-term debt and have been retroactively restated as
required by FASB ASC 470-20 to reflect the debt discount of $24.8 million. The debt discount
includes the equity allocation of $25.8 million ($26.9 million less the financing costs allocated
to the equity of $1.1 million) offset by the accretion of the debt discount through interest
expense from the issuance date in 2008 over the 5 year life of the notes. The Company recorded $1.1
million and $3.2 million of interest expense related to the debt discount in the three and nine
months ended September 30, 2009, respectively. At September 30, 2009, the 5.375% Notes have a
remaining life of 3.75 years. The statement of operations for the 2008 periods subsequent to the
debt issuance on June 15, 2008, has been retroactively restated to reflect the additional interest
expense pursuant to FASB ASC 470-20. The Company recorded $1.0 million and $1.1 million of interest
expense related to the debt discount in the three and nine months ended September 30, 2008,
respectively.
The Company received net proceeds of approximately $81.5 million from this offering.
Approximately $23.2 million of the proceeds from this offering were used to repay and terminate the
Company’s outstanding term loan and the Company is using the remainder for general corporate
purposes. On June 16, 2008, the Company repaid the entire outstanding principal balance, plus
accrued and unpaid interest, under its existing term loan in the aggregate of approximately $21.8
million. Additionally, the Company
9
paid a prepayment fee related to the term loan of approximately $0.4 million, a termination fee
related to the term loan of $0.9 million, and incurred certain other expenses related to the
repayment and termination of the term loan. The Company incurred interest expense related to the
term loan of approximately $0 and $1.5 million for the three and nine months ended September 30,
2008, respectively. The term loan was subject to a loan origination fee of $0.9 million, which was
recorded in the condensed consolidated balance sheet and was amortized as a component of interest
expense over the term of the loan. The remaining balance of deferred financing costs of
approximately $0.6 million was written off at the repayment and termination date. In connection
with this term loan, the Company issued warrants to the lenders to purchase up to 247,252 shares of
Series E preferred stock at a purchase price of $3.64 per share. The warrants automatically
converted into warrants to purchase common stock on a 1-for-2.6267 basis at a purchase price of
$9.56 per share at the closing of the Company’s initial public offering in May 2007. The Company
recorded the $0.8 million fair value of the warrants as a discount to the term loan. Upon repayment
and termination of the term loan, the Company recognized approximately $0.5 million as interest
expense for the unamortized balance of the warrants’ fair value. The difference between the amount
paid, including the prepayment fee, and the carrying value of the term loan, including the
remaining deferred financing costs and unamortized warrants to purchase common stock, was
recognized as a $1.5 million loss from early extinguishment of the term loan.
5. Restructuring Expenses and Impairments of Assets
In December 2008, the Company recorded restructuring and impairment charges of $8.2 million
for the impairment of certain manufacturing equipment no longer in use as well as workforce
reduction and related costs. As part of the Company’s strategic goal to pursue improved gross
margins, leverage operational efficiencies and better pursue opportunities for low-cost supplier
sourcing, the Company transitioned the manufacturing of completed OmniPods to Flextronics
International Ltd., which is located in China. The Company determined that it would no longer use
certain manufacturing equipment located in its Bedford facility. In addition, this transition
resulted in a reduction in workforce of approximately 30 employees, mainly in the manufacturing and
quality departments in response to the successful transition of portions of the manufacturing
process to Flextronics as well as on-going alignment of the Company’s infrastructure.. As a result
of these actions, the Company recorded $7.4 million as a non-cash charge related to impairments of
assets and $0.8 million in workforce and related charges.
During the third quarter of 2008, the Company successfully transitioned its production of
completed OmniPods to the manufacturing line operated by Flextronics. Pursuant to the Company’s
agreement with Flextronics, Flextronics will supply, as a non-exclusive supplier, OmniPods at
agreed upon prices per unit pursuant to a rolling 12-month forecast provided by the Company. The
initial term of the agreement is three years from January 3, 2007, with automatic one-year
renewals. The agreement may be terminated at any time by either party upon prior written notice
given no less than a specified number of days prior to the date of termination. The Company
continues to manufacture certain sub-assemblies and maintain packaging operations in its Bedford,
Massachusetts facility.
The Company ceased to use certain assets in its Bedford facility in connection with the
transition of manufacturing to Flextronics. The Company continued to evaluate Flextronics’ ability
to manufacture completed OmniPods against the rolling forecast as well as anticipated capacity and
demand throughout the fourth quarter of 2008. During the fourth quarter of 2008 the Company
concluded that the capacity of the manufacturing line operated by Flextronics is considered
adequate to meet anticipated demand and quality standards in the future. As the Company determined
that it would no longer use the Bedford equipment on December 1, 2008, the Company recorded an
impairment charge for the remaining net book value of the assets of $7.4 million on that date. The
equipment has no expected salvage value as it is highly customized equipment that can only be used
for the manufacture of OmniPods.
At September 30, 2009 and December 31, 2008, the Company’s accrued expense for restructuring
was $0.1 million and $0.6 million, respectively, for final payments of severance and will be fully
utilized in 2009.
The following is a summary of restructuring activity for the three and nine months ended
September 30, 2009.
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, 2009 |
|
|
September 30, 2009 |
|
| |
|
(In thousands) |
|
Beginning balance |
|
$ |
262 |
|
|
$ |
612 |
|
Expense |
|
|
— |
|
|
|
— |
|
Payments |
|
|
(129 |
) |
|
|
(479 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
133 |
|
|
$ |
133 |
|
|
|
|
|
|
|
|
In
September 2009, the Company recorded a charge to operating expenses of $0.6 million for
workforce reduction and related costs as part of the Company’s continued focus on aligning the
Company’s infrastructure. This focus resulted in a reduction of workforce of approximately 30
employees throughout the organization, including certain members of
senior management. At September 30, 2009, the Company has accrued
severance of approximately $0.6 million related to the workforce
reduction.
6. Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of
common shares outstanding for the period, excluding unvested restricted common shares. Diluted net
loss per share is computed using the weighted average number of common shares outstanding and, when
dilutive, potential common share equivalents from options and warrants (using the treasury-stock
method), and potential common shares from convertible securities (using the if-converted method).
Because the Company
10
reported a net loss for the three and nine months ended September 30, 2009 and 2008, 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 Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Convertible notes |
|
|
3,981,969 |
|
|
|
3,981,969 |
|
|
|
3,981,969 |
|
|
|
3,981,969 |
|
Unvested restricted common shares |
|
|
2,664 |
|
|
|
— |
|
|
|
2,664 |
|
|
|
— |
|
Outstanding options |
|
|
3,627,277 |
|
|
|
2,887,178 |
|
|
|
3,627,277 |
|
|
|
2,887,178 |
|
Outstanding warrants |
|
|
3,812,752 |
|
|
|
62,752 |
|
|
|
3,812,752 |
|
|
|
62,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11,424,662 |
|
|
|
6,931,899 |
|
|
|
11,424,662 |
|
|
|
6,931,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Accounts Receivable
The components of accounts receivable are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
(In thousands) |
|
Trade receivables |
|
$ |
22,541 |
|
|
$ |
15,738 |
|
Allowance for doubtful accounts |
|
|
(6,184 |
) |
|
|
(3,800 |
) |
|
|
|
|
|
|
|
|
|
$ |
16,357 |
|
|
$ |
11,938 |
|
|
|
|
|
|
|
|
8. Inventories
Inventories consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
(In thousands) |
|
Raw materials |
|
$ |
1,172 |
|
|
$ |
3,518 |
|
Work-in-process |
|
|
531 |
|
|
|
997 |
|
Finished goods |
|
|
7,472 |
|
|
|
12,355 |
|
|
|
|
|
|
|
|
|
|
$ |
9,175 |
|
|
$ |
16,870 |
|
|
|
|
|
|
|
|
The Company is currently producing the OmniPod on a partially automated manufacturing line at
a facility in China, operated by a subsidiary of Flextronics International Ltd. The Company also
produces certain sub-assemblies for the OmniPod as well as maintains packaging operations in its
facility in Bedford, Massachusetts. The Company purchases complete OmniPods from Flextronics,
pursuant to its agreement with Flextronics entered into on January 3, 2007 and revised on October
4, 2007. The initial term of the agreement is three years from January 3, 2007, with automatic
one-year renewals.
Inventories of finished goods were held at cost at September 30, 2009 and December 31, 2008.
The Company’s production process has a high degree of fixed costs and sales and production volumes
may vary significantly from one period to another.
9. Product Warranty Costs
The Company provides a four-year warranty on its PDMs and replaces any OmniPods that do not
function in accordance with product specifications. Warranty expense is estimated and recorded in
the period that shipment occurs. The expense is based on the Company’s historical experience and
the estimated cost to service the claims. A reconciliation of the changes in the Company’s product
warranty liability follows:
11
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
| |
|
(In thousands) |
|
|
(In thousands) |
|
Balance at the beginning of period |
|
$ |
2,609 |
|
|
$ |
1,500 |
|
|
$ |
2,268 |
|
|
$ |
865 |
|
Warranty expense |
|
|
638 |
|
|
|
1,103 |
|
|
|
2,574 |
|
|
|
2,873 |
|
Warranty claims settled |
|
|
(736 |
) |
|
|
(669 |
) |
|
|
(2,331 |
) |
|
|
(1,804 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
2,511 |
|
|
$ |
1,934 |
|
|
$ |
2,511 |
|
|
$ |
1,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of balance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term |
|
|
1,032 |
|
|
|
801 |
|
|
|
1,032 |
|
|
|
801 |
|
Long-term |
|
|
1,479 |
|
|
|
1,133 |
|
|
|
1,479 |
|
|
|
1,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total warranty balance |
|
$ |
2,511 |
|
|
$ |
1,934 |
|
|
$ |
2,511 |
|
|
$ |
1,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Commitments and Contingencies
Operating Leases
The Company leases its facilities, which are accounted for as operating leases. The leases
generally provide for a base rent plus real estate taxes and certain operating expenses related to
the leases. In February 2008, the Company entered into a non-cancelable lease for additional office
space in Bedford, Massachusetts. The lease expires in September 2010 and provides a renewal option
of five years and escalating payments over the life of the lease. In March 2008, the Company
extended the lease of its Bedford, Massachusetts headquarters facility containing research and
development and manufacturing space. Following the extension, the lease expires in September 2014.
The lease is non-cancelable and contains a five year renewal option and escalating payments over
the life of the lease. The Company also leases warehouse facilities in Billerica, Massachusetts.
This lease expires in December 2012.
The Company’s operating lease agreements contain scheduled rent increases which are being
amortized over the terms of the agreement using the straight-line method and are included in other
liabilities in the accompanying balance sheet. The Company has considered FASB ASC 840-20 Leases —
Operating Leases, in accounting for these lease provisions.
Indemnifications
In the normal course of business, the Company enters into contracts and agreements that
contain a variety of representations and warranties and provide for general indemnifications. The
Company’s exposure under these agreements is unknown because it involves claims that may be made
against the Company in the future, but have not yet been made. To date, the Company has not paid
any claims or been required to defend any action related to its indemnification obligations.
However, the Company may record charges in the future as a result of these indemnification
obligations.
In accordance with its bylaws, the Company has indemnification obligations to its officers and
directors for certain events or occurrences, subject to certain limits, while they are serving at
the Company’s request in such capacity. There have been no claims to date and the Company has a
director and officer insurance policy that enables it to recover a portion of any amounts paid for
future claims.
11. Equity
Stock-Based Compensation Plans
Activity under the Company’s stock option plans:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
|
| |
|
|
|
|
|
Average |
|
Aggregate |
| |
|
Number of |
|
Exercise |
|
Intrinsic |
| |
|
Options(#) |
|
Price($) |
|
Value($) |
| |
|
|
Balance, December 31, 2008 |
|
|
2,933,832 |
|
|
$ |
9.47 |
|
|
$ |
6,080,097 |
|
Granted |
|
|
1,259,440 |
|
|
|
6.75 |
|
|
|
|
|
Exercised |
|
|
(132,292 |
) |
|
|
2.51 |
|
|
$ |
631,830 |
(1) |
Canceled |
|
|
(433,703 |
) |
|
|
13.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009 |
|
|
3,627,277 |
|
|
$ |
8.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested, September 30, 2009 |
|
|
1,655,700 |
|
|
|
7.32 |
|
|
$ |
8,605,792 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest,
September 30, 2009 (3) |
|
|
2,964,841 |
|
|
|
|
|
|
|
|
|
|
|
|
| (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, 2009,
and the exercise price of the underlying options. |
12
|
|
|
| (3) |
|
Represents the number of vested options as of September
30, 2009, plus the number of unvested options expected
to vest as of September 30, 2009, based on the unvested
options outstanding at September 30, 2009, adjusted for
an estimated forfeiture rate of 16%. |
As of September 30, 2009 and 2008, no shares were contingently issued under the employee stock
purchase plan (“ESPP”), respectively. In the three and nine months ended September 30, 2009 and
2008, the Company recorded no significant stock-based compensation charges related to the ESPP.
Employee stock-based compensation expense under FASB ASC 718-10 Compensation — Stock
Compensation recognized in the three and nine months ended September 30, 2009 was $1.0 million and
$3.2 million, respectively. Employee stock-based compensation expense under FASB ASC 718-20
recognized in the three and nine months ended September 30, 2008 was $1.0 million and $2.6 million,
respectively.
12. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. The Company provided a valuation allowance for the full amount of its net
deferred tax asset for all periods because realization of any future tax benefit cannot be
determined as more likely than not, as the Company does not expect income in the near-term.
|
|
|
| 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 condensed consolidated financial statements and the accompanying notes to
those financial statements included in this Quarterly Report on Form 10-Q. This Quarterly Report on
Form 10-Q contains forward-looking statements. These forward-looking statements are based on our
current expectations and beliefs concerning future developments and their potential effects on us.
There can be no assurance that future developments affecting us will be those that we have
anticipated. These forward-looking statements involve a number of risks, uncertainties (some of
which are beyond our control) or other assumptions that may cause actual results or performance to
be materially different from those expressed or implied by these forward-looking statements. These
risks and uncertainties include, but are not limited to: our historical operating losses; our
dependence on the OmniPod System; our ability to achieve and maintain market acceptance of the
OmniPod System; our ability to increase customer orders and manufacturing volume; adverse changes
in general economic conditions; our ability to raise additional funds in the future; our ability to
anticipate and effectively manage risks associated with doing business internationally,
particularly in China; our dependence on third-party suppliers; our ability to obtain favorable
reimbursement from third-party payors for the OmniPod System and potential adverse changes in
reimbursement rates or policies relating to the OmniPod; potential adverse effects resulting from
competition; technological innovations adversely affecting our business; potential termination of
our license to incorporate a blood glucose meter into the OmniPod System; our ability to protect
our intellectual property and other proprietary rights; conflicts with the intellectual property of
third parties; adverse regulatory or legal actions relating to the OmniPod System; the potential
violation of federal or state laws prohibiting “kickbacks” and false and fraudulent claims or
adverse affects of challenges to or investigations into our practices under these laws; product
liability lawsuits that may be brought against us; unfavorable results of clinical studies relating
to the OmniPod System or the products of our competitors; our ability to attract and retain key
personnel; our ability to manage our growth; our ability to maintain compliance with the
restrictions and related to our indebtedness; our ability to successfully maintain effective
internal controls; the volatility of the price of our common stock; and other risks and
uncertainties described in Part II, Item 1A., “Risk Factors” of this Quarterly Report on Form 10-Q.
Should one or more of these risks or uncertainties materialize, or should any of our assumptions
prove incorrect, actual results may vary in material respects from those projected in these
forward-looking statements. We undertake no obligation to publicly update or revise any
forward-looking statements.
Overview
We are a medical device company that develops, manufactures and markets an insulin infusion
system for people with insulin-dependent diabetes. Our proprietary OmniPod Insulin Management
System consists of our disposable OmniPod insulin infusion device and our handheld, wireless
Personal Diabetes Manager.
The U.S. Food and Drug Administration, or FDA, approved the OmniPod System in January 2005 and
we began commercial sale of the OmniPod System in the United States in October 2005. We have
progressively expanded our marketing and sales efforts from an initial focus in the Eastern United
States, to having availability of the OmniPod System in the entire United States. We focus our
sales towards key diabetes practitioners, academic centers and clinics specializing in the
treatment of diabetic patients.
We believe a key contributing factor to the overall attractiveness of the OmniPod System is
the disposable OmniPod insulin infusion device. Each OmniPod is worn for up to three days before it
is replaced. In order to manufacture sufficient volumes of the OmniPod and achieve a low per unit
production cost, we have designed the OmniPod to be manufactured through a highly automated
process.
During 2008, construction was completed on a partially automated manufacturing line at a
facility in China operated by a
subsidiary of Flextronics International Ltd. We purchase complete OmniPods pursuant to our
agreement with Flextronics entered into on January 3, 2007 and revised on October 4, 2007. Under
the agreement, Flextronics has agreed to supply us, as a non-exclusive supplier, with OmniPods at
agreed upon prices per unit pursuant to a rolling 12-month forecast that we provide to Flextronics.
The initial term of the agreement is three years from January 3, 2007, with automatic one-year
renewals. The agreement may be terminated at any time by either party upon prior written notice
given no less than a specified number of days prior to the date of termination. The
13
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 were able to substantially increase production volumes for the OmniPod and reduce our per
unit production cost. We also produce certain sub-assemblies for the OmniPod as well as maintain
packaging operations at our facility in Bedford, Massachusetts.
Our OmniPod manufacturing capacity as of September 30, 2009 was in excess of 300,000 OmniPods
per month. 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 installation of automated manufacturing equipment, collaboration with contract manufacturers
and reduction of cost of supplies of raw materials and sub-assemblies, is important as we strive to
achieve profitability.
Our sales and marketing effort is focused on generating demand and acceptance of the OmniPod
System among healthcare professionals, people with insulin-dependent diabetes, third-party payors
and third-party distributors. Our marketing strategy is to build awareness for the benefits of the
OmniPod System through a wide range of education programs, patient demonstration programs, support
materials and events at the national, regional and local levels. In addition, 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.
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,
and we believe that substantially all of the units sold have been reimbursed by third-party payors,
subject to applicable deductible and co-payment amounts. As we expand our sales and marketing
initiatives and increase our manufacturing capacity, we will need to maintain and expand available
reimbursement for the OmniPod System.
Our continued growth is dependent on our ability to generate interest in our products through
sales and marketing activities. We are also dependent on our ability to effectively and correctly
evaluate the extent of patients’ reimbursement coverage under applicable reimbursement programs in
order to convert customer inquiries into shipments and revenue.
Since our inception in 2000, we have incurred losses every quarter. In the three and nine
months ended September 30, 2009, we incurred net losses of $24.7 million and $64.6 million,
respectively. As of September 30, 2009, we had an accumulated deficit of $315.0 million. We have
financed our operations through the private placement of debt and equity securities, public
offerings of our common stock, a private placement of our convertible debt and borrowings under
certain debt agreements. As of September 30, 2009, we had $85 million of convertible debt
outstanding and $32.5 million of outstanding debt relating to a Facility Agreement entered into
March 13, 2009 and amended on September 25, 2009. Since inception, we have received aggregate net
proceeds of $384.5 million from the issuance of redeemable convertible preferred stock, common
stock and debt.
Our long-term financial objective is to achieve and sustain profitable growth. Our efforts for
the remainder of 2009 will be focused primarily on continuing to reduce our per-unit production
costs through higher production volumes and planned cost reduction initiatives, expanding sales to
domestic markets, initiating sales to international markets and reducing our spending on
manufacturing overhead and operating expenses. The continued expansion of our manufacturing
capacity will help us to achieve lower material costs due to volume purchase discounts and improved
absorption of manufacturing overhead costs, reducing our cost of revenue as a percentage of
revenue. Achieving these objectives is expected to require additional investments in certain
personnel and initiatives to allow for us to increase our market penetration in the United States
market and enter certain international markets. We believe that we will continue to incur net
losses in the near term in order to achieve these objectives, particularly in light of the
recession in the United States and the slowdown of economic growth in the rest of the world which
is creating a challenging near term business environment. However, we believe that the
accomplishment of our near term objectives will have a positive impact on our financial condition
in the future.
Facility Agreement and Common Stock Warrants
On March 13, 2009, we entered into a Facility Agreement with certain institutional accredited
investors, pursuant to which the investors agreed to loan us up to $60 million, subject to the
terms and conditions set forth in the Facility Agreement. Following the initial disbursement of
$27.5 million on March 31, 2009, we could, but were not required to, draw down on the facility in
$6.5 million increments at any time until November 2010 provided that we met certain financial
performance milestones. In connection with this financing, we paid Deerfield Management Company,
L.P., an affiliate of the lead lender, a one-time transaction fee of $1.2 million. Total financing
costs, including the transaction fee, were $3.0 million and were being amortized as interest
expense over the 42 months of the Facility Agreement.
The amounts initially drawn under the Facility Agreement accrued interest at a rate of 9.75%
per annum, and the undrawn amounts under the Facility Agreement accrued interest at a rate of 2.75%
per annum. Accrued interest is payable quarterly in cash in arrears beginning on June 1, 2009. We
had the right to prepay any amounts owed without penalty unless the prepayment is in connection
with a major transaction.
On September 25, 2009, we entered into an Amendment to the Facility Agreement whereby we
agreed to repay the $27.5 million
of outstanding debt and promptly draw down the remaining $32.5 million available under the
Facility Agreement. The lender agreed to eliminate all future
performance-related milestones
associated with the remaining $32.5 million available on the credit facility and reduce the annual
interest rate on any unborrowed funds to 8.5%. In addition, the lender agreed to forego the
remaining warrants to purchase an additional 1.5 million shares of common stock that would have
been issued upon future draws. 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
14
shares of
our common stock to the lenders at $9.63 per share. We received aggregate proceeds of $27.5
million in connection with the sale of our shares. All subsequent references to the “Facility
Agreement” refer to the Facility Agreement entered into on March 13, 2009 and amended on September
25, 2009.
All principal amounts outstanding under the Facility Agreement are payable in September
2012. Any amounts drawn under the Facility Agreement may become immediately due and payable upon (i)
an “event of default,” as defined in the Facility Agreement, in which case the lenders would have
the right to require us to re-pay 100% of the principal amount of the loan, plus any accrued and
unpaid interest thereon, or (ii) the consummation of certain change of control transactions, in
which case the lenders would have the right to require us to re-pay 106% of the outstanding
principal amount of the loan, plus any accrued and unpaid interest thereon. The Facility Agreement
also provides for higher interest rates to be paid by us in certain events.
Because the consummation of certain change in control transactions would result in the payment
of a premium of the outstanding principal, the premium feature is a derivative that is required to
be bifurcated from the host debt instrument and recorded at fair value at each quarter end. As a
higher interest rate could be paid by us upon the occurrence of certain events, the higher interest
feature is also considered a derivative. The higher interest payment does not meet the criteria to
be accounted for separately. Any changes in fair value of the premium feature will be recorded as
interest expense and the difference between the face value of the outstanding principal on the
Facility Agreement and the amount remaining after the bifurcation will be recorded as a discount to
be amortized over the term of the Facility Agreement. At September 30, 2009, the premium feature
associated with the Facility Agreement had no value as we do not currently expect a change in
control transaction to occur. The embedded derivatives related to the Facility Agreement will be
reassessed and marked-to-market through earnings on a quarterly basis.
At September 30, 2009, $32.5 million of outstanding debt related to the Facility Agreement is
included in long-term debt in the condensed consolidated balance sheet. Upon repayment of the
initial tranche of the Facility Agreement, we recognized approximately $7.6 million as interest
expense. Of the $7.6 million of interest expense, $6.4 million related to the debt discount for
the unamortized balance of the fair value of the warrants issued on March 13, 2009 and the
transaction fee paid to the lenders and $1.2 million related to the remaining deferred financing
costs. Approximately $9.0 million and $10.5 million of interest expense was recorded in the three
and nine months ended September 30, 2009, respectively. Of the $9.0 million recorded in the three
months ended September 30, 2009, approximately $0.9 million relates to cash interest, $0.5 million
relates to amortization of the debt discount and deferred financing costs and $7.6 million relates
to the charge taken for the unamortized portion of the debt discount and deferred financing costs.
Of the $10.5 million recorded in the nine months ended September 30, 2009, approximately $1.8
million relates to cash interest, $1.1 million relates to amortization of the debt discount and
deferred financing costs and $7.6 million relates to the charge taken for the unamortized portion
of the debt discount and deferred financing costs. The difference between the amount paid and the
carrying value of the outstanding amounts under the Facility Agreement was recognized as a $7.6
million loss from extinguishment of debt.
On March 13, 2009, in connection with the execution of the Facility Agreement, we issued to
the lenders fully exercisable warrants to purchase an aggregate of 3.75 million shares of common
stock at an exercise price of $3.13 per share. Pursuant to the original terms of the Facility
Agreement, the Company would have been required to issue additional warrants to purchase 1.5
million shares upon drawing down the remaining $32.5 million under the facility. In connection
with the Amendment to the Facility Agreement in September 2009, the lenders agreed to forego the additional warrants that would have been issued upon future draws.
If we issue or sell shares of our common stock (other than (i) pursuant to a registered public
offering or shelf takedown, (ii) in a transaction that does not require shareholder approval, (iii)
to partners in connection with a joint venture, distribution or other partnering arrangement in a
transaction that does not require shareholder approval, (iv) upon the exercise of options granted
to our employees, officers, directors and consultants, (v) of restricted stock to, or purchases of,
our common stock under our employee stock purchase plan by employees, officers, directors or
consultants or (vi) upon the exercise of the warrants) after March 13, 2009, we will issue
concurrently therewith additional warrants to purchase such number of shares of common stock as
will entitle the lenders to maintain the same beneficial ownership in us after the issuance as they
had prior to such issuance, as adjusted on a pro rata basis for repayments of the outstanding
principal amount under the loan, with such warrants being issued at an exercise price equal to the
greater of $3.13 per share and the closing price of the common stock on the date immediately prior
to the issuance.
All warrants issued under the Facility Agreement remain unexercised as of September 30, 2009,
expire on March 13, 2015 and contain certain limitations that prevent the holder from acquiring
shares upon exercise of a warrant that would result in the number of shares beneficially owned by
it to exceed 9.98% of the total number of shares of our common stock then issued and outstanding.
In addition, upon certain change of control transactions, or upon certain “events of default”
(as defined in the warrant agreement), the holder has the right to net exercise the warrants for an
amount of shares of our common stock equal to the Black-Scholes value of the shares issuable under
the warrants divided by 95% of the closing price of the common stock on the day immediately prior
to the consummation of such change of control or event of default, as applicable. In certain
circumstances where a warrant or portion of a warrant is not net exercised in connection with a
change of control or event of default, the holder will be paid an amount in cash equal to the
Black-Scholes value of such portion of the warrant not treated as a net exercise.
In accordance with FASB ASC 460-10 Guarantees — Overall, the warrants issued in connection
with the Facility Agreement
qualify for permanent classification as equity and their relative fair value of $6.1 million on
issuance date was recorded as additional paid in capital and debt discount. The unamortized value
of the warrants was recorded as interest expense in the quarter ended September 30, 2009, in
connection with the repayment and termination of the initial disbursement.
15
Convertible Notes and Repayment and Termination of Term Loan
In June 2008, we sold $85 million principal amount of 5.375% Convertible Senior Notes due June
15, 2013 (the “5.375% Notes”) in a private placement to qualified institutional buyers pursuant to
Rule 144A under the Securities Act of 1933, as amended. The interest rate on the notes is 5.375%
per annum on the principal amount from June 16, 2008, payable semi-annually in arrears in cash on
December 15 and June 15 of each year, beginning December 15, 2008. The 5.375% Notes are convertible
into our common stock at an initial conversion rate of 46.8467 shares of common stock per $1,000
principal amount of the 5.375% Notes, which is equivalent to a conversion price of approximately
$21.35 per share, representing a conversion premium of 34% to the last reported sale price of our
common stock on the NASDAQ Global Market on June 10, 2008, subject to adjustment under certain
circumstances, at any time beginning on March 15, 2013 or under certain other circumstances and
prior to the close of business on the business day immediately preceding the final maturity date of
the notes. The 5.375% Notes will be convertible for cash up to their principal amount and shares of
our common stock for the remainder of the conversion value in excess of the principal amount. We do
not have the right to redeem any of the 5.375% Notes prior to maturity. If a fundamental change, as
defined in the Indenture for the 5.375% Notes, occurs at any time prior to maturity, holders of the
5.375% Notes may require us to repurchase their notes in whole or in part for cash equal to 100% of
the principal amount of the notes to be repurchased, plus accrued and unpaid interest, including
any additional interest, 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 adopted certain provisions of FASB ASC 470-20 Debt — Debt with Conversion and Other
Options, on January 1, 2009. FASB ASC 470-20 clarifies that convertible debt instruments that may
be settled in cash upon conversion should be separated between the liability and equity components
in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. These provisions of FASB ASC 470-20 were applied retrospectively
to all periods presented. Accordingly, 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 beginning June 15, 2008 over the 5 year life of the 5.375%
Notes.
We incurred interest expense of approximately $2.2 million and $6.7 million for the three and
nine months ended September 30, 2009, related to the 5.375% Notes. Of the $2.2 million recorded in
the three months ended September 30, 2009, approximately $1.1 million relates to additional
interest expense recognized under these provisions of FASB ASC 470-20. Of the $6.7 million recorded
in the nine months ended September 30, 2009, approximately $3.2 million relates to additional
interest expense recognized under these provisions of FASB ASC 470-20. 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 in the condensed consolidated balance sheet and is being amortized as a component of
interest expense over the five year term of the 5.375% Notes.
At September 30, 2009, the outstanding amounts related to the 5.375% Notes of $63.4 million
are included in long-term debt in the condensed consolidated balance sheet and reflect the debt
discount of $21.6 million. At December 31, 2008, the outstanding amounts related to the 5.375%
Notes of $60.2 million are included in long-term debt and have been retroactively restated as
required by FASB ASC 470-20 to reflect the debt discount of $24.8 million. The debt discount
includes the equity allocation of $25.8 million (which represents $26.9 million less the $1.1
million of allocated financing costs) offset by the accretion of the debt discount through interest
expense from the issuance date in 2008 over the 5 year life of the notes. We recorded $1.1 million
and $3.2 million of interest expense related to the debt discount in the three and nine months
ended September 30, 2009, respectively. At September 30, 2009, the 5.375% Notes have a remaining
life of 3.75 years. The statement of operations for the 2008 periods subsequent to the debt
issuance on June 15, 2008, has been retroactively restated to reflect the additional interest
expense pursuant to FASB ASC 470-20. We recorded $1.0 million and $1.1 million of interest expense
related to the debt discount in the three and nine months ended September 30, 2008, respectively.
We received net proceeds of approximately $81.5 million from this offering. Approximately
$23.2 million of the proceeds from this offering were used to repay and terminate our outstanding
term loan, and we are using the remainder for general corporate purposes. On June 16, 2008, we
repaid the entire outstanding principal balance, plus accrued and unpaid interest, under our
existing term loan in the aggregate of approximately $21.8 million. Additionally, we paid a
prepayment fee related to the term loan of approximately $0.4 million, a termination fee related to
the term loan of $0.9 million, and incurred certain other expenses related to the repayment and
termination of the term loan. We incurred interest expense related to the term loan of
approximately $0 and $1.5 million for the three and nine months ended September 30, 2008,
respectively. The term loan was subject to a loan origination fee of $0.9 million, which was
recorded in the condensed consolidated balance sheet and was amortized as a component of interest
expense over the term of the loan. The remaining balance of deferred financing costs of
approximately $0.6 million was written off at the repayment and termination date. In connection
with this term loan, we issued warrants to the lenders to purchase up to 247,252 shares of Series E
preferred stock at a purchase price of $3.64 per share. The warrants automatically converted into
warrants to purchase
common stock on a 1-for-2.6267 basis at a purchase price of $9.56 per share at the closing of our
initial public offering in May 2007. We recorded the $0.8 million fair value of the warrants as a
discount to the term loan. Upon repayment and termination of the term loan, we recognized
approximately $0.5 million as interest expense for the unamortized balance of the warrants’ fair
value. The difference between the amount paid, including the prepayment fee, and the carrying value
of the term loan, including the remaining deferred financing costs and unamortized warrants to
purchase common stock, was recognized as a $1.5 million loss from early extinguishment of the term
loan.
16
Financial Operations Overview
Revenue. Revenue is recognized in accordance with FASB ASC 605-10, Revenue Recognition —
Overall and FASB ASC 605-25 Revenue — Multiple Element Arrangements. We derive nearly all of our
revenue from the sale of the OmniPod System directly to patients and third-party distributors who
resell the product to diabetes patients. The OmniPod System is comprised of two devices: the
OmniPod, a disposable insulin infusion device that the patient wears for up to three days and then
replaces; and the Personal Diabetes Manager (“PDM”), a handheld device much like a personal digital
assistant that wirelessly programs the OmniPod with insulin delivery instructions, assists the
patient with diabetes management and incorporates a blood glucose meter. Revenue is derived from
the sale to new customers or third-party distributors of OmniPods and Starter Kits, which include
the PDM, two OmniPods, the OmniPod System User Guide and OmniPod System Interactive Training CD,
and from the subsequent sales of additional OmniPods to existing customers. Customers generally
order a three-month supply of OmniPods. For the three and nine months ended September 30, 2009, and
for preceding periods, materially all of our revenue was derived from sales within the United
States.
In March 2008, we received a cash payment from Abbott Diabetes Care, Inc. (“Abbott”) for an
agreement fee in connection with execution of the first amendment to the development and license
agreement with Abbott. We are recognizing the payment as revenue over the 5 year term of the
agreement. Under the amended Abbott agreement, beginning July 1, 2008, Abbott agreed to pay us an
amount for services performed by us in connection with each sale of a PDM that includes an Abbott
Discrete Blood Glucose Monitor to certain customers. We recognize the revenue related to this
portion of the Abbott agreement at the time we meet the criteria for revenue recognition, typically
at the time the revenue is recognized on the sale of the PDM to a new patient. In the three and
nine months ended September 30, 2009, we recognized $2.3 million and $4.5 million of revenue
related to the Abbott agreement, respectively. In the three and nine months ended September 30,
2008, we recognized $1.2 million and $1.4 million of revenue related to the Abbott agreement,
respectively. There was no impact to cost of revenue related to this agreement.
As of September 30, 2009 and December 31, 2008, we had deferred revenue of $4.6 million and
$4.0 million, respectively, which includes product-related revenue as well as the unrecognized
portion of the agreement fee related to the Abbott agreement.
Cost of revenue. Cost of revenue consists primarily of raw materials, labor, warranty and
overhead costs related to the OmniPod System. Cost of revenue also includes depreciation, freight
and packaging costs. For the remainder of 2009, we expect the cost of revenue to decrease as a
percentage of revenue due to increases in our OmniPod manufacturing capacity as the supply of
complete OmniPods and subassemblies from Flextronics increases, expected reductions in per-unit raw
materials costs associated with planned cost reduction initiatives and reduction in our scrap and
other period expenses. The increase in our OmniPod production volume is expected to reduce the
per-unit cost of manufacturing the OmniPods by allowing us to spread our fixed and semi-fixed
overhead costs over a greater number of units. However, if sales volumes do not continue to
increase, then the average cost of revenue per OmniPod may not decrease.
Research and development. Research and development expenses consist primarily of personnel
costs within our product development, regulatory and clinical functions, as well as the costs of
market studies and product development projects. We expense all research and development costs as
incurred. For the remainder of 2009, we expect overall research and development spending to be in
line with current levels in order to support our current research and development efforts, which
are focused primarily on increased functionality, improved design for ease of use and reduction of
production cost, as well as developing a new OmniPod System that incorporates continuous glucose
monitoring technology.
Sales and marketing. Sales and marketing expenses consist primarily of personnel costs within
our sales, marketing, reimbursement support, customer support and training functions, sales
commissions paid to our sales representatives and costs associated with participation in medical
conferences, physician symposia and promotional activities, including distribution of units used in
our demonstration kit programs. For the remainder of 2009, we expect sales and marketing expenses
to decrease as a percentage of sales as we believe we have aligned our sales and marketing efforts
with our current business needs.
General and administrative. General and administrative expenses consist primarily of salaries
and other related costs for personnel serving the executive, finance, information technology and
human resource functions, as well as legal fees, accounting fees, insurance costs, bad debt
expenses, shipping, handling and facilities-related costs. For the remainder of 2009, we expect
general and administrative expenses to continue to decrease slightly from current levels.
Results of Operations
The following table presents certain statement of operations information for the three and
nine months ended September 30, 2009 and 2008:
17
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
| |
|
2009 |
|
|
(Restated) |
|
|
% Change |
|
|
2009 |
|
|
(Restated) |
|
|
% Change |
|
| |
|
(In thousands) |
|
| |
|
(Unaudited) |
|
Revenue |
|
$ |
18,735 |
|
|
$ |
10,110 |
|
|
|
85 |
% |
|
$ |
45,821 |
|
|
$ |
24,198 |
|
|
|
89 |
% |
Cost of revenue |
|
|
12,936 |
|
|
|
10,197 |
|
|
|
27 |
% |
|
|
34,858 |
|
|
|
29,980 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
5,799 |
|
|
|
(87 |
) |
|
|
|
|
|
|
10,963 |
|
|
|
(5,782 |
) |
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
3,404 |
|
|
|
3,263 |
|
|
|
4 |
% |
|
|
9,880 |
|
|
|
9,569 |
|
|
|
3 |
% |
General and administrative |
|
|
6,246 |
|
|
|
6,308 |
|
|
|
1 |
% |
|
|
19,575 |
|
|
|
16,900 |
|
|
|
16 |
% |
Sales and marketing |
|
|
9,629 |
|
|
|
10,176 |
|
|
|
5 |
% |
|
|
28,905 |
|
|
|
29,735 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
19,279 |
|
|
|
19,747 |
|
|
|
2 |
% |
|
|
58,360 |
|
|
|
56,204 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(13,480 |
) |
|
|
(19,834 |
) |
|
|
32 |
% |
|
|
(47,397 |
) |
|
|
(61,986 |
) |
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(11,245 |
) |
|
|
(1,832 |
) |
|
|
514 |
% |
|
|
(17,212 |
) |
|
|
(3,588 |
) |
|
|
380 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(24,725 |
) |
|
$ |
(21,666 |
) |
|
|
14 |
% |
|
$ |
(64,609 |
) |
|
$ |
(65,574 |
) |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the Three and Nine Months Ended September 30, 2009 and 2008
Revenue
Our total revenue was $18.7 million and $45.8 million for the three and nine months ended
September 30, 2009, respectively, compared to $10.1 million and $24.2 million for the same periods
in 2008. The increase in revenue is primarily due to an increased number of patients using the
OmniPod System and an increase in sales to distributors. In addition to the increase in the number
of reorders from our growing patient base, the increase in patients also resulted in additional
revenue related to the Abbott agreement of $2.3 million and $4.5 million in the three and nine
months ended September 30, 2009, respectively, compared to $1.2 million and $1.4 million in the
same periods in 2008. We expect our revenue to continue to increase as we continue to add new
patients and generate an increased number of reorders based on our expanding patient base. In
addition, we will continue to recognize additional revenue related to the Abbott agreement.
Cost of Revenue
Cost of revenue was $12.9 million and $34.9 million for the three and nine months ended
September 30, 2009, compared to $10.2 million and $30.0 million for the same periods in 2008. The
increase is due to significantly increased sales volume offset by efficiencies resulting from
increased manufacturing capacity, cost reduction initiatives, lower depreciation and increased
utilization of Flextronics as the sole manufacturer of complete OmniPods. The per-unit cost to
manufacture the OmniPod decreased in the three and nine months ended September 30, 2009, compared
to the same periods in 2008, resulting in a significant improvement of our gross margin.
Research and Development
Research and development expenses increased $0.1 million, or 4%, to $3.4 million for the three
months ended September 30, 2009 compared to $3.3 million for the same period in 2008. Research and
development expenses increased $0.3 million, or 3%, to $9.9 million for the nine months ended
September 30, 2009 compared to $9.6 million for the same period in 2008. For the three months ended
September 30, 2009, the slight increase in research and development expenses was primarily
attributable to an increase of $0.2 million in employee related expenses including stock-based
compensation, offset by a decrease in outside services. For the nine months ended September 30,
2009, the slight increase in research and development expenses was primarily attributable to an
increase of $0.6 million in employee related expenses including stock-based compensation, and an
increase of $0.2 million in travel related expenses offset primarily by a decrease of $0.6 million
in outside services.
General and Administrative
General and administrative expenses decreased $0.1 million, or 1%, to $6.2 million for the
three months ended September 30, 2009, compared to $6.3 million for the same period in 2008.
General and administrative expenses increased $2.7 million, or 16%, to $19.6 million for the nine
months ended September 30, 2009, compared to $16.9 million for the same period in 2008. For the
three months ended September 30, 2009, the decrease in general and administrative expenses was
primarily due to a decrease of $0.5 million in outside services, $0.3 million for insurance, office
supplies and travel-related expenses. These decreases were offset by an increase of $0.5 million in
employee compensation and benefit costs, including stock-based compensation and an increase in
allowances and write-offs for doubtful trade accounts receivables of $0.3 million. For the nine
months ended September 30, 2009, the increase in general and administrative expenses was primarily
due to an increase of $1.4 million in employee compensation and benefit costs, including
stock-based compensation and employee severance expense, $0.8 million in allowances and write-offs
for doubtful trade accounts receivables, and $0.3 million in depreciation expense. These increases
were offset by a decrease in outside services costs of $0.2 million.
18
Sales and Marketing
Sales and marketing expenses decreased $0.5 million, or 5%, to $9.6 million for the three
months ended September 30, 2009, compared to $10.2 million for the same period in 2008. Sales and
marketing expenses decreased $0.8 million, or 3%, to $28.9 million for the nine months ended
September 30, 2009, compared to $29.7 million for the same period in 2008. For the three months
ended September 30, 2009, the decrease in sales and marketing expenses was primarily due to a
decrease of $0.7 million in samples and Patient Demonstration Kits and $0.2 million in travel
related expenses. These decreases were offset by an increase of $0.4 million in outside consulting
services, which include our external trainers. For the nine months ended September 30, 2009, the
decrease in sales and marketing expenses was primarily due to a decrease of $2.9 million in samples
and Patient Demonstration Kits and $0.2 million for convention fees. This was offset by an an increase of
$0.8 million in outside consulting services, which include our external trainers, and an increase of
$1.6 million in employee compensation and benefit costs resulting from the growing sales
organization and higher commissions and related taxes in connection with increased sales volumes.
Other Income (Expense)
Net interest expense was $11.2 million for the three months ended September 30, 2009, compared
to $1.8 million for the same period in 2008. Net interest expense was $17.2 million for the nine
months ended September 30, 2009, compared to $3.6 million for the same period in 2008. For the
three months ended September 30, 2009, the increase in net interest expense was primarily caused by
interest incurred on the credit facility entered into in March 2009 and the write-off of
$7.6 million for the remaining unamortized value of the warrants, transaction fee and deferred
financing costs in connection with the amendment of the credit facility in September 2009. During the
nine months ended September 30, 2009, we recorded cash and non-cash interest expense related to the
5.375% Notes of $6.7 million. In addition, in the nine months ended September 30, 2009, we recorded
approximately $10.5 million of interest expense related to the Facility Agreement we entered into
in March 2009. Net interest expense in the nine months ended September 30, 2008 also included $2.4
million of cash and non-cash interest on the 5.375% Notes and $1.5 million related to the repayment
and termination of our term loan. We anticipate net interest expense to decrease significantly from
current levels throughout the remainder of 2009.
Liquidity and Capital Resources
We commenced operations in 2000 and to date we have financed our operations primarily through
private placement of common and preferred stock, secured indebtedness, public offerings of our
common stock and issuance of convertible debt. As of September 30, 2009, we had $72.7 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.
Financial Resources
On March 13, 2009, we entered into a Facility Agreement with certain institutional accredited
investors, pursuant to which the investors agreed to loan us up to $60 million, subject to the
terms and conditions set forth in the Facility Agreement. Following the initial disbursement of
$27.5 million on March 31, 2009, we could, but were not required to, draw down on the facility in
$6.5 million increments at any time until November 2010 provided that we met certain financial
performance milestones. In connection with this financing, we paid Deerfield Management Company,
L.P., an affiliate of the lead lender, a one-time transaction fee of $1.2 million. Total financing
costs, including the transaction fee, as of June 30, 2009 were $3.0 million. The amounts initially
drawn under the Facility Agreement accrued interest at a rate of 9.75% per annum, and the undrawn
amounts under the Facility Agreement accrued interest at a rate of 2.75% per annum. Accrued
interest is payable quarterly in cash in arrears beginning on June 1, 2009. We had the right to
prepay any amounts owed without penalty unless the prepayment is in connection with a major
transaction.
On September 25, 2009, we entered into an Amendment to the Facility Agreement whereby we
agreed to repay the $27.5 million of outstanding debt and promptly draw down the remaining $32.5
million available under the Facility Agreement. The lender agreed to eliminate all future
performance-related milestones associated with the remaining $32.5 million available on the credit
facility and reduce the annual interest rate on any borrowed funds to 8.5%. In addition, the
lender agreed to forego the remaining warrants to purchase an additional 1.5 million shares of
common stock that would have been issued upon future draws. 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.
The Amendment to the Facility Agreement closed on September 30, 2009.
We received aggregate
proceeds of $27.5 million in connection with the sale of our shares. All principal amounts
outstanding under the Facility Agreement are payable in September 2012.
On March 13, 2009 in connection with the execution of the Facility Agreement, we issued to the
lenders fully exercisable warrants to purchase an aggregate of 3.75 million shares of common stock
at an exercise price of $3.13 per share. Pursuant to the Facility Agreement, the Company would have
been required to issue additional warrants to purchase 1.5 million shares upon drawing down the
remaining $32.5 million under the facility. In connection with the Amendment of the Facility
Agreement in September 2009, the lenders agreed to forego the additional
warrants that would have been issued upon future draws. At September 30, 2009, all warrants issued
under the Facility Agreement remained unexercised.
In June 2008, we sold $85 million principal amount of 5.375% Convertible Senior Notes due June
15, 2013 (the “5.375% Notes”) in a private placement to qualified institutional buyers pursuant to
Rule 144A under the Securities Act of 1933, as amended. The interest rate on the notes is 5.375% per annum
on the principal amount from June 16, 2008, payable semi-annually in arrears in cash on December 15 and June 15 of each year, beginning December 15,
2008. The 5.375% Notes are convertible into 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
19
to a conversion price of approximately $21.35 per share, representing a conversion premium of 34%
to the last reported sale price of our common stock on the NASDAQ Global Market on June 10, 2008,
per $1,000 principal amount of the 5.375% Notes, subject to adjustment under certain circumstances,
at any time beginning on March 15, 2013 or under certain other circumstances and prior to the close
of business on the business day immediately preceding the final maturity date of the notes. The
5.375% Notes will be convertible for cash up to their principal amount and shares of our common
stock for the remainder of the conversion value in excess of the principal amount. We do not have
the right to redeem any of the 5.375% Notes prior to maturity. If a fundamental change, as defined
in the Indenture for the 5.375% Notes, occurs at any time prior to maturity, holders of the 5.375%
Notes may require us to repurchase their notes in whole or in part for cash equal to 100% of the
principal amount of the notes to be repurchased, plus accrued and unpaid interest, including any
additional interest, to, but excluding, the date of repurchase.
We received net proceeds of approximately $81.5 million from this offering. On June 16, 2008,
we used a portion of the net proceeds to repay the entire outstanding principal balance, plus
accrued and unpaid interest, under our then-existing term loan in the aggregate of approximately
$21.8 million in its entirety. Additionally, we paid a prepayment fee related to the term loan of
approximately $0.4 million, a termination fee related to the term loan of $0.9 million, and
incurred certain other expenses related to the repayment and termination of the term loan.
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, |
| |
|
2009 |
|
2008 |
| |
|
(In thousands) |
Cash used in operating activities
|
|
$ |
(39,465 |
) |
|
$ |
(65,635 |
) |
Net loss
|
|
$ |
(64,609 |
) |
|
$ |
(65,574 |
) |
For each of the periods above, the net cash used in operating activities was attributable
primarily to the growth of our operations after adjustment for non-cash charges, such as
depreciation, amortization of the debt discount and stock-based compensation expense as well as
changes to working capital. Significant uses of cash from operations include an increase in
accounts receivable. The increase in accounts receivable is primarily attributable to our increased
sales, and to some extent increased aging of receivable balances. Accounts receivables are shown
net of increased allowances for doubtful accounts in the consolidated balance sheets. Cash used in
operating activities is partly offset by decreases in inventory and other assets and an increase in
deferred revenue.
Investing Activities
The following table sets forth the amounts of cash used in investing activities and cash
provided by financing activities for each of the periods indicated:
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30, |
| |
|
2009 |
|
2008 |
| |
|
(In thousands) |
Cash used in investing activities |
|
$ |
(1,968 |
) |
|
$ |
(9,441 |
) |
Cash provided by financing activities |
|
$ |
57,464 |
|
|
$ |
54,622 |
|
Cash used in investing activities in both periods was primarily for the purchase of fixed
assets for use in the development and manufacturing of the OmniPod System. Our cash used in
investing activities has decreased significantly in the nine months ended September 30, 2009,
compared to the nine months ended September 30, 2008 as we completed building the majority of our
manufacturing equipment in 2008. Capital expenditures are expected to remain at lower levels in
2009 compared to 2008. Cash provided by financing activities in the nine months ended September 30,
2009 mainly consisted of the net proceeds from the Facility Agreement entered into on March 13,
2009 and amended on September 25, 2009 and the sale of shares in connection with the amendment on
September 25, 2009. Cash provided by financing activities in the nine months ended September 30,
2008, mainly consisted of the net proceeds from the 5.375% Convertible Notes issued in June 2008,
offset by the redemption of the existing term loan.
Lease Obligations
We lease our facilities, which are accounted for as operating leases. The lease of our
facilities in Bedford and Billerica, Massachusetts, generally provides for a base rent plus real
estate taxes and certain operating expenses related to the lease. All operating leases contain
renewal options and escalating payments over the life of the lease. As of September 30, 2009, we
had an outstanding letter of credit which totaled $0.2 million to cover our security deposits for
lease obligations. This letter of credit will expire on October 30, 2009.
Off-Balance Sheet Arrangements
As of September 30, 2009, we did not have any off-balance sheet financing arrangements.
20
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 most of our revenue from sales of our OmniPod Insulin Management System to
diabetes patients or third-party distributors who resell the product to diabetes patients. The
initial sale to a new customer or a third-party distributor typically includes OmniPods and a
Starter Kit, which include the PDM, two OmniPods, the OmniPod System User Guide and the OmniPod
System Interactive Training CD. Subsequent sales to existing customers typically consist of
additional OmniPods.
Revenue is recognized in accordance with FASB ASC 605-10, Revenue Recognition — Overall,,
which requires that persuasive evidence of a sales arrangement exists, delivery of goods occurs
through transfer of title and risk and rewards of ownership, the selling price is fixed or
determinable and collectibility is reasonably assured. With respect to these criteria:
| |
• |
|
The evidence of an arrangement generally consists of a
physician order form, a patient information form, and if
applicable, third-party insurance approval for sales
directly to patients or a purchase order for sales to a
third-party distributor. |
| |
| |
• |
|
Transfer of title and risk and rewards of ownership are
passed to the patient upon transfer to the third party
carrier; transfer of title and risk and rewards of
ownership are passed to the distributor typically upon
their receipt 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 have considered the requirements of FASB ASC 605-25 Revenue — Multiple Element
Arrangements, when accounting for the OmniPods and Starter Kits. FASB ASC 605-25 requires us to
assess whether the different elements qualify for separate accounting. We recognize revenue for the
initial shipment to a patient or other third party once all elements have been delivered.
We offer a 45-day right of return for our Starter Kits sales, and in accordance with FASB ASC
605-15, Revenue — Products, we defer revenue to reflect estimated sales returns in the same period
that the related product sales are recorded. Returns are estimated through a comparison of
historical return data to their related sales. Historical rates of return are adjusted for known or
expected changes in the marketplace when appropriate. Historically, sales returns have amounted to
approximately 3% of gross product sales.
When doubt exists about reasonable assuredness of collectibility from specific customers, we
defer revenue from sales of products to those customers until payment is received.
In March 2008, we received a cash payment from Abbott Diabetes Care, Inc. (“Abbott”) for an
agreement fee in connection with execution of the first amendment to the development and license
agreement between us and Abbott. We recognize the agreement fee received from Abbott over the
5-year term of the agreement, and the non-current portion of the agreement fee is included in other
long-term liabilities. Under the amended Abbott agreement, beginning July 1, 2008, Abbott agreed to
pay us an amount for services performed by us in connection with each sale of a PDM that includes
an Abbott Discrete Blood Glucose Monitor to certain customers. We recognize the revenue related to
this portion of the Abbott agreement at the time we meet the criteria for revenue recognition,
typically at the time the revenue is recognized on the sale of the PDM to a new patient. In the
three and nine months ended September 30, 2009, we recognized $2.3 million and $4.5 million of
revenue related to the Abbott agreement, respectively. In the three and nine months ended September
30, 2008, we recognized $1.2 million and $1.4 million of revenue related to the Abbott agreement,
respectively. There was no impact to cost of revenue related to this agreement.
Restructuring Expense and Impairment of Assets
As part of our efforts to pursue improved gross margins, leverage operational efficiencies and
better pursue opportunities for low-cost supplier sourcing of asset costs, we periodically perform
an evaluation of our manufacturing processes and review the carrying value of our property and
equipment to assess the recoverability of these assets whenever events indicate that impairment may
have occurred. As part of this assessment, we review the planned use of the assets as well as the
future undiscounted operating cash flows expected to be generated by those assets. If impairment is
indicated through this review, the carrying amount of the asset would be reduced to its estimated
fair value. This review of manufacturing processes and equipment can result in restructuring
activity or an impairment of assets based on current net book value and potential future use of the
assets.
Our restructuring expenses may also include workforce reduction and related costs for one-time
termination benefits provided to employees who are involuntarily terminated under the terms of a one-time benefit arrangement. We
record these one-time termination benefits upon incurring the liability provided that the employees
are notified, the plan is approved by the appropriate level of
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management, the employees to be terminated and the expected completion date are identified and the
benefits the identified employees will be paid are established. Significant changes to the plan are
not expected when we record the costs. In recording the workforce reduction and related costs, we
estimate related costs such as taxes and outplacement services which may be provided under the
plan. If changes in these estimated services occur, we may be required to record or reverse
restructuring expenses associated with these workforce reduction and related costs.
Asset Valuation
Asset valuation includes assessing the recorded value of certain assets, including accounts
receivable, inventory and fixed assets. We use a variety of factors to assess valuation, depending
upon the asset. Actual results may differ materially from our estimates. Fixed property and
equipment is stated at cost and depreciated using the straight-line method over the estimated
useful lives of the respective assets. Leasehold improvements are amortized over their useful life
or the life of the lease, whichever is shorter. We review long-lived assets, including property and
equipment and intangibles, for impairment whenever events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully recoverable. We also review assets
under construction to ensure certainty of their future installation and integration into the
manufacturing process. An impairment loss would be recognized when estimated undiscounted future
cash flows expected to result from the use of the asset and its eventual disposition is less than
its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of
a long-lived asset exceeds its fair value. We consider various valuation factors, principally
discounted cash flows, to assess the fair values of long-lived assets.
Income Taxes
We file federal and state tax returns. We have accumulated significant losses since our
inception in 2000. Since the net operating losses may potentially be utilized in future years to
reduce taxable income, all of our tax years remain open to examination by the major taxing
jurisdictions to which we are subject.
We recognize estimated interest and penalties for uncertain tax positions in income tax
expense. As of September 30, 2009, we had no interest and penalty accrual or expense.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due from third-party payors, patients and third-party
distributors. In estimating whether accounts receivable can be collected, we perform evaluations of
customers and continuously monitor collections and payments and estimate an allowance for doubtful
accounts based on the aging of the underlying invoices, experience to date and any payor-specific
collection issues that have been identified.
Adoption of New Accounting Standards
FASB ASC 470-20, Debt — Debt with Conversion and Other Options, clarifies that convertible
debt instruments that may be settled in cash upon conversion should be separated between the
liability and equity components in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FASB ASC 470-20 should be
applied retrospectively to all periods presented. The cumulative effect of the change in accounting
principle on prior periods was recognized as of the beginning of the first period presented. We
adopted these provisions of FASB ASC 470-20 as of January 1, 2009 and reclassified $26.9 million of
our long-term debt to equity as of the issuance date of the convertible notes. During the three and
nine months ended September 30, 2009, we recorded $1.1 million and $3.2 million, respectively, of
additional interest expense related to these provisions of FASB ASC 470-20. During the three and
nine months ended September 30, 2008, we recorded $1.0 million and $1.1 million of additional
interest expense related to these provisions of FASB ASC 470-20, respectively.
We adopted the provisions of FASB ASC 855-10, Subsequent Events — Overall, as of June 30,
2009. FASB ASC 855-10 provides guidance to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before financial statements are
issued or are available to be issued. FASB ASC 855-10 also requires entities to disclose the date
through which subsequent events were evaluated as well as the rationale for why that date was
selected. This disclosure should alert all users of financial statements that an entity has not
evaluated subsequent events after that date in the set of financial statements being presented.
FASB ASC 855-10 requires additional disclosures only, and therefore
did not have an impact on our condensed consolidated financial
statements. We have evaluated subsequent events
through October 26, 2009, the date we have issued this Quarterly Report on Form 10-Q.
We
adopted the Financial Accounting Standards Board Accounting Standards
Codification in the three months ended September 30, 2009. The FASB Accounting Standards Codification (“Codification”) has become the
single source of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in accordance with GAAP. All
existing accounting standard documents are superseded by the Codification and any accounting
literature not included in the Codification will not be authoritative. However, rules and
interpretive releases of the Securities and Exchange Commission (“SEC”) issued under the authority
of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. All references made to
GAAP in our consolidated financial statements now use the new Codification numbering system. The
Codification does not change or alter existing GAAP and, therefore, did not have a material impact
on our condensed consolidated financial statements.
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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, short-term
investments, 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 and short-term investments
and maintain an average maturity of six months or less. 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, 2009, we had outstanding debt recorded at $63.4 million related to our
5.375% Notes and $32.5 million related to our Facility Agreement. As the interest rates on the
5.375% Notes and the Facility Agreement are fixed, changes in interest rates do not affect the
value of our debt.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of September 30, 2009, 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, our chief executive officer and chief financial officer have concluded
that they believe that, as of the end of the period covered by this Quarterly Report on Form 10-Q,
our disclosure controls and procedures were effective at the 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 September 30, 2009 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Set forth below are certain risk factors that could harm our business, results of operations
and financial condition. You should carefully read the following risk factors, together with the
financial statements, related notes and other information contained in this Form 10-Q and in our
Annual Report on Form 10-K for the year ended December 31, 2008. This Form 10-Q contains
forward-looking statements that contain risks and uncertainties. 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.
Risks Relating to Our Business
We have incurred significant operating losses since inception and cannot assure you that we will achieve profitability.
Since our inception in 2000, we have incurred losses every quarter. We began commercial sales
of the OmniPod System in October 2005. Beginning in the second half of 2008, we have been able to
manufacture and sell the OmniPod System at a cost and in volumes sufficient to allow us to achieve
a positive gross margin. For the nine months ended September 30, 2009, our gross profit from the
manufacture and sale of the OmniPod System was $11.0 million. Although we have achieved a positive
gross margin, we still operate at a substantial net loss. Our net losses for the nine months ended
September 2009, and the years ended December 31, 2008 and 2007 were $64.6 million, $94.8 million
and $53.5 million, respectively. The extent of our future operating losses and the timing of
profitability are highly uncertain, and we may never achieve or sustain profitability. We have
incurred a significant net loss since our inception, and as of September 30, 2009, we had an
accumulated deficit of $315.0 million.
We currently rely entirely on sales of our sole product, the OmniPod System, to generate revenues.
The failure of the OmniPod System to achieve and maintain significant market acceptance or any
factors that negatively impact sales of this product will adversely affect our business, financial
condition and results of operations.
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Our sole product is the OmniPod System, which we introduced to the market in October 2005. We
expect to continue to derive substantially all of our revenue from the sale of this product.
Accordingly, our ability to generate revenue is entirely reliant on our ability to market and sell
the devices that comprise the OmniPod System. Our sales of the OmniPod System may be negatively
impacted by many factors, including:
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the failure of the OmniPod System to achieve wide acceptance among
opinion leaders in the diabetes treatment community,
insulin-prescribing physicians, third-party payors and people with
insulin-dependent diabetes; |
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manufacturing problems; |
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actual or perceived quality problems; |
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changes in reimbursement rates or policies relating to the OmniPod
System by third-party payors; |
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claims that any portion of the OmniPod System infringes on patent
rights or other intellectual property rights owned by other parties; |
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adverse regulatory or legal actions relating to the OmniPod System; |
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damage, destruction or loss of any of our automated assembly units; |
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conversion of patient referrals to actual sales of the OmniPod System; |
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collection of receivables from our customers; |
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attrition rates of customers ceasing to use the OmniPod System; |
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competitive pricing and related factors; and |
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results of clinical studies relating to the OmniPod System or our competitors’ products. |
If any of these events occurs, our ability to generate revenue could be significantly reduced.
Our ability to achieve profitability from a current net loss level will depend on our ability
to reduce the per unit cost of producing the OmniPod by increasing our customer orders and
manufacturing volume.
Currently, the gross profit from the sale of the OmniPod System is not sufficient to cover our
operating expenses. To achieve profitability, we need to, among other things, reduce the per unit
cost of the OmniPod. This can be achieved by increasing our manufacturing volume, which will allow
for volume purchase discounts to reduce our raw material costs and improve absorption of
manufacturing overhead costs. During 2008, we completed construction of a partially automated
manufacturing line at a facility in China operated by a subsidiary of Flextronics International
Ltd. Our manufacturing capacity at September 30, 2009 was in excess of 300,000 OmniPods per month.
If we are unable to reduce raw material and manufacturing overhead costs through volume purchase
discounts and increased production capacity, our ability to achieve profitability will be severely
constrained. Any increase in manufacturing volumes must be supported by a concomitant increase in
customer orders. The occurrence of one or more factors that negatively impact our sales of the
OmniPod System may prevent us from achieving our desired increase in manufacturing volume, which
would prevent us from attaining profitability.
Adverse changes in general economic conditions in the United States could adversely affect us.
We are subject to the risks arising from adverse changes in general economic market
conditions. The U.S. economy remains extremely sluggish as it seeks to recover from a severe
recession and unprecedented turmoil. The U.S. economy continues to suffer from market volatility,
difficulties in the financial services sector, tight credit markets, softness in the housing
markets, concerns of inflation, reduced corporate profits and capital spending, significant job
losses, reduced consumer spending, and continuing economic uncertainties. The turmoil and the
uncertainty about future economic conditions could negatively impact our current and prospective
customers, adversely affect the financial ability of health insurers to pay claims, adversely
impact our expenses and ability to obtain financing of our operations, cause delays or other
problems with key suppliers and increase the risk of counterparty failures. We cannot predict the
timing, strength or duration of this severe global economic downturn or subsequent recovery.
Healthcare spending in the United States has been, and is expected to continue to be,
negatively affected by these recessionary trends. For example, patients who have lost their jobs
may no longer be covered by an employee-sponsored health insurance plan and patients reducing their
overall spending may eliminate purchases requiring co-payments. Since the sale of the OmniPod
System to a new patient is generally dependent on the availability of third-party reimbursement and
normally requires the patient to make a significant co-payment, the impacts of the recession on our
potential customers may reduce the referrals generated by our sales force and thereby reduce our
customer orders. Similarly, the impacts of the recession on our existing patients may cause some of
them to
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cease purchasing OmniPods and to return to MDI or other less-costly therapies, which would cause
our attrition rate to increase. Any decline in new customer orders or increase in our customer
attrition rate will reduce our revenues, which in turn will make it more difficult to achieve the
per unit cost-savings which are expected to be attained through increases in our manufacturing
volume.
The severe recession has impacted the financial stability of many private health insurers. As
a result, it has been reported that some insurers are scrutinizing claims more rigorously and
delaying or denying reimbursement more often. Since the sale of the OmniPod System is generally
dependent on the availability of third-party reimbursement, any delay or decline in such
reimbursement will adversely affect our revenues.
Healthcare reform legislation could adversely affect our revenue and financial condition.
In recent years, there have been numerous initiatives on the federal and state levels for
comprehensive reforms affecting the payment for, the availability of and reimbursement for
healthcare services in the United States. These initiatives have ranged from proposals to
fundamentally change federal and state healthcare reimbursement programs, including providing
comprehensive healthcare coverage to the public under governmental funded programs, to minor
modifications to existing programs. Recently, President Obama and members of Congress have proposed
significant reforms to the U.S. healthcare system. Both the U.S. Senate and House of
Representatives have conducted hearings about U.S. healthcare reform and a number of bills have
been proposed in Congress. A leading proposal includes an excise tax on the medical device industry
that would be payable based on revenue, not income. In addition, recent legislation and many of
these proposed bills include funding to assess the comparative effectiveness of medical devices. It
is unclear what impact the excise tax proposal or the comparative effectiveness analysis would have
on the OmniPod System or our financial results. The ultimate content or timing of any future
healthcare reform legislation, and its impact on medical device companies such as us, is impossible
to predict. If significant reforms are made to the healthcare system in the United States, or in
other jurisdictions, those reforms may have a material adverse effect on our financial condition
and results of operations.
We may need to raise additional funds in the future, and these funds may not be available on
acceptable terms or at all.
Our capital requirements will depend on many factors, including:
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revenues generated by sales of the OmniPod System and any other future products that we
may develop; |
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costs associated with adding further manufacturing capacity; |
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costs associated with expanding our sales and marketing efforts in the United States
and internationally; |
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expenses we incur in manufacturing and selling the OmniPod System; |
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costs of developing new products or technologies and enhancements to the OmniPod System; |
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the cost of obtaining and maintaining FDA approval or clearance of our current or
future products; |
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costs associated with any expansion; |
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costs associated with capital expenditures; |
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costs associated with litigation; and |
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the number and timing of any acquisitions or other strategic transactions. |
We believe that our current cash and cash equivalents, including the net proceeds from our
public and private offerings and draw downs on our credit facility, together with the cash to be
generated from expected product sales, will be sufficient to meet our projected operating
requirements through at least the end of 2010.
We may in the future seek additional funds from public and private stock offerings, borrowings
under credit lines or other sources. If we issue equity or debt securities to raise additional
funds, our existing stockholders may experience dilution, and the new equity or debt securities may
have rights, preferences and privileges senior to those of our existing stockholders. In addition,
if we raise additional funds through collaboration, licensing or other similar arrangements, it may
be necessary to relinquish valuable rights to our potential future products or proprietary
technologies, or grant licenses on terms that are not favorable to us.
The facility agreement we entered into on March 13, 2009, as amended on September 25, 2009,
with certain institutional accredited investors, contains restrictions on our ability to incur
certain indebtedness without the prior consent of our lenders. In addition, our ability to raise
additional capital may be adversely impacted by current economic conditions, including the effects
of the recent disruptions to the credit and financial markets in the United States and worldwide.
As a result of these and other factors, we do not know whether additional capital will be available
when needed, or that, if available, we will be able to obtain future additional
capital on terms favorable to us or our stockholders.
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If we are unable to raise additional capital due to these or other factors, we may need to
further manage our operational expenses to reflect these external factors, including potentially
curtailing our planned development activities. If we cannot raise additional funds in the future on
acceptable terms, we may not be able to develop new products, execute our business plan, take
advantage of future opportunities or respond to competitive pressures or unanticipated customer
requirements. If any of these events occur, it could adversely affect our business, financial
condition and results of operations.
We are dependent upon third-party suppliers, making us vulnerable to supply problems and price
fluctuations.
We rely on a number of suppliers who manufacture the components of the OmniPods and PDMs. For
example, we rely on Phillips Plastic Corporation to manufacture and supply a number of injection
molded components of the OmniPod and Freescale Semiconductor, Inc. to manufacture and supply the
application specific integrated circuit that is incorporated into the OmniPod. In addition, we
expanded the scope of our existing contract manufacturing agreement with a subsidiary of
Flextronics International Ltd. in China to provide the supply of complete OmniPods. We do not have
long-term supply agreements with most of our suppliers, and, in many cases, we make our purchases
on a purchase order basis. In some other cases, where we do have agreements in place, our
agreements with our suppliers can be terminated by either party upon short notice. For example, the
initial term of our agreement with Flextronics is three years from January 3, 2007, with automatic
one-year renewals, and 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. Additionally, our
suppliers may encounter problems during manufacturing due to a variety of reasons, including
failure to follow specific protocols and procedures, failure to comply with applicable regulations,
equipment malfunction and environmental factors, any of which could delay or impede their ability
to meet our demand. Our reliance on these third-party suppliers also subjects us to other risks
that could harm our business, including:
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we are not a major customer of many of our suppliers, and these
suppliers may therefore give other customers’ needs higher priority
than ours; |
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we may not be able to obtain adequate supply in a timely manner or on
commercially reasonable terms; |
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our suppliers, especially new suppliers, may make errors in
manufacturing that could negatively affect the efficacy or safety of
the OmniPod System or cause delays in shipment; |
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we may have difficulty locating and qualifying alternative suppliers
for our sole-source supplies; |
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switching components may require product redesign and submission to
the U.S. Food and Drug Administration, or FDA, of a 510(k) supplement; |
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our suppliers manufacture products for a range of customers, and
fluctuations in demand for the products these suppliers manufacture
for others may affect their ability to deliver products to us in a
timely manner; and |
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our suppliers may encounter financial hardships unrelated to our
demand, which could inhibit their ability to fulfill our orders and
meet our requirements. |
We may not be able to quickly establish additional or replacement suppliers, particularly for
our sole-source suppliers, in part because of the FDA approval process and because of the custom
nature of various parts we require. Any interruption or delay in obtaining products from our
third-party suppliers, or our inability to obtain products from alternate sources at acceptable
prices in a timely manner, could impair our ability to meet the demand of our customers and cause
them to cancel orders or switch to competing products.
Our financial condition or results of operations may be adversely affected by international
business risks.
In order to reduce our cost of goods sold and increase our production capacity, we
increasingly rely on third-party suppliers located outside the United States. For example,
currently all of our OmniPods are manufactured on a partially automated manufacturing line at a
facility in China operated by Flextronics International Ltd. As a result, our business is subject
to risks associated with doing business internationally, including:
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instability in the political or economic conditions; |
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trade protection measures, such as tariff increases, and import and
export licensing and control requirements; |
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potentially negative consequences from changes in tax laws; |
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difficulty in staffing and managing widespread operations; |
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difficulties associated with foreign legal systems; |
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changes in foreign currency exchange rates; |
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differing protection of intellectual property; and |
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unexpected changes in regulatory requirements. |
In particular, our future success will depend in large part on our ability to anticipate and
effectively manage these and other risks associated with doing business in China. Any of these
factors may have a material adverse effect on our production capacity and, consequently, our
business, financial condition and results of operations.
Failure to secure or retain adequate coverage or reimbursement for the OmniPod System by
third-party payors could adversely affect our business, financial condition and results of
operations.
We expect that sales of the OmniPod System will be limited unless a substantial portion of the
sales price of the OmniPod System is paid for by third-party payors, including private insurance
companies, health maintenance organizations, preferred provider organizations and other managed
care providers. We currently have contracts establishing reimbursement for the OmniPod System with
national and regional third-party payors which provide reimbursement for patients residing in all
50 states. While we anticipate entering into additional contracts with other third-party payors, we
cannot assure you that we will be successful in doing so. In addition, these contracts can
generally be terminated by the third-party payor without cause. Also, healthcare market initiatives
in the United States may lead third-party payors to decline or reduce reimbursement for the OmniPod
System. Moreover, compliance with administrative procedures or requirements of third-party payors
may result in delays in processing approvals by those payors for patients to obtain coverage for
the use of the OmniPod System. We are an approved Medicare provider and current Medicare coverage
for CSII therapy does exist. However, existing Medicare coverage for CSII therapy is based on the
pricing structure developed for conventional insulin pumps. Currently, we believe that the coding
verification for Medicare reimbursement of the OmniPod System is inappropriate and we are therefore
in the process of seeking appropriate coding verification. As a result, we have focused our efforts
in establishing reimbursement for the OmniPod System by negotiating contracts with private
insurers. Failure to secure or retain adequate coverage or reimbursement for the OmniPod System by
third-party payors could have a material adverse effect on our business, financial condition and
results of operations.
We face competition from numerous competitors, most of whom have far greater resources than we
have, which may make it more difficult for us to achieve significant market penetration and which
may allow them to develop additional products for the treatment of diabetes that compete with the
OmniPod System.
The medical device industry is intensely competitive, subject to rapid change and
significantly affected by new product introductions and other market activities of industry
participants. The OmniPod System competes with a number of existing insulin delivery devices as
well as other methods for the treatment of diabetes. Medtronic MiniMed, a division of Medtronic,
Inc., has been the market leader for many years and has the majority share of the conventional
insulin pump market in the United States. Other significant suppliers in the United States include
Animas Corporation, a division of Johnson & Johnson, and Roche Diagnostics, a division of F.
Hoffman-La Roche Ltd.
All of these competitors are large, well-capitalized companies with significantly more market
share and resources than we have. As a consequence, they are able to spend more aggressively on
product development, marketing, sales and other product initiatives than we can. Many of these
competitors have:
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significantly greater name recognition; |
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established relations with healthcare professionals, customers and third-party payors; |
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established distribution networks; |
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additional lines of products, and the ability to offer rebates or bundle products to
offer higher discounts or other incentives to gain a competitive advantage; and/or |
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greater financial and human resources for product development, sales and marketing
and patent litigation. |
We also compete with multiple daily injection, or MDI, therapy, which is substantially less
expensive than CSII therapy. MDI therapy has been made more effective by the introduction of
long-acting insulin analogs by both sanofi-aventis and Novo Nordisk A/S. While we believe that CSII
therapy, in general, and the OmniPod System, in particular, have significant competitive and
clinical advantages over traditional MDI therapy, improvements in the effectiveness of MDI therapy
may result in fewer people with insulin-dependent diabetes converting from MDI therapy to CSII
therapy than we expect and may result in negative price pressure.
In addition to the established insulin pump competitors a number of companies (including
current competitors) are working to develop and market new insulin “patch” pumps or “multi channel”
pump devices (insulin and glucagon). These companies are at various stages of development. The
companies of which we are aware working in this area include Medtronic, Inc., Medingo Ltd.,
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NiliMEDIX Ltd, Sensile Medical AG, M2 Medical, Inc., Phluid Corporation, Seattle Medical
Technologies, Inc., Starbridge Systems Ltd., Novo Nordisk A/S and Abbott Laboratories.
Our current competitors or other companies may at any time develop additional products for the
treatment of diabetes. For example, other diabetes-focused pharmaceutical companies, including
Abbott Laboratories, Eli Lilly and Company, Novo Nordisk A/S and Takeda Pharmaceuticals Company
Limited, are developing similar products. All of these competitors are large, well-capitalized
companies with significantly greater product development resources than us. If an existing or
future competitor develops a product that competes with or is superior to the OmniPod System, our
revenues may decline. In addition, some of our competitors may compete by changing their pricing
model or by lowering the price of their insulin delivery systems or ancillary supplies. If these
competitors’ products were to gain acceptance by healthcare professionals, people with
insulin-dependent diabetes or third-party payors, a downward pressure on prices could result. If
prices were to fall, we may not improve our gross margins or sales growth sufficiently to achieve
profitability.
Technological breakthroughs in diabetes monitoring, treatment or prevention could render the
OmniPod System obsolete.
The diabetes treatment market is subject to rapid technological change and product innovation.
The OmniPod System is based on our proprietary technology, but a number of companies, medical
researchers and existing pharmaceutical companies are pursuing new delivery devices, delivery
technologies, sensing technologies, procedures, drugs and other therapeutics for the monitoring,
treatment and/or prevention of insulin-dependent diabetes. For example, FDA approval of a
commercially viable “closed-loop” system that combines continuous “real-time” glucose sensing or
monitoring and automatic continuous subcutaneous insulin infusion in a manner that delivers
appropriate amounts of insulin on a timely basis without patient direction could have a material
adverse effect on our revenues and future profitability. We have an agreement with Abbott Diabetes
Care, Inc., a global healthcare company that develops continuous glucose monitoring technology, to
develop a product that will integrate the receiver portion of Abbott’s continuous glucose monitor,
the FreeStyle Navigator, with the OmniPod System PDM. The FreeStyle Navigator has recently received
FDA approval. We have a similar agreement with DexCom, Inc., a leading provider of continuous
glucose monitoring systems for people with diabetes, to develop a product that will integrate the
receiver portion of DexCom’s continuous glucose monitor, currently marketed as the SEVEN System,
with the OmniPod System PDM. Medtronic, Inc. has developed an FDA-approved product combining
continuous glucose sensing and CSII therapy and if we fail to do so, we may be at a significant
competitive disadvantage, which could negatively impact our business. In addition, the National
Institutes of Health and other supporters of diabetes research are continually seeking ways to
prevent, cure or improve the treatment of diabetes. Any technological breakthroughs in diabetes
monitoring, treatment or prevention could render the OmniPod System obsolete, which may have a
material adverse effect on our business, financial condition and results of operations.
If our existing license agreement with Abbott Diabetes Care, Inc. is terminated or we fail to enter
into new license agreements allowing us to incorporate a blood glucose meter into the OmniPod
System, our business may be materially adversely impacted.
Our rights to incorporate the FreeStyle blood glucose meter into the OmniPod System are
governed by a development and license agreement with Abbott Diabetes Care, Inc., as the successor
to TheraSense, Inc. This agreement provides us with a non-exclusive, fully paid, non-transferable
and non-sublicensable license in the United States under patents and other relevant technical
information relating to the FreeStyle blood glucose meter during the term of the agreement. On
March 3, 2008 we entered into a first amendment of the agreement pursuant to which the term of the
original agreement was extended until February 2013, with automatic renewals for subsequent
one-year periods thereafter, and the license granted therein was extended to cover Israel as well
as the United States. The agreement may be terminated by Abbott if it discontinues its FreeStyle
blood glucose meter or test strips or by either party if the other party is acquired by a
competitor of the first party or materially breaches its obligations under the agreement.
Termination of this agreement could require us to either remove the blood glucose meter from PDMs
to be sold in the future, which would impair the functionality of the OmniPod System, or attempt to
incorporate an alternative blood glucose meter into the PDM, which would require us to acquire
rights to or develop an alternative blood glucose meter, incorporate it into the OmniPod System and
obtain regulatory approval for the new OmniPod System. Any of these outcomes could have a material
adverse effect on our business,financial condition and results of operations.
In addition, Abbott and a number of other major blood glucose monitor manufacturers were sued
for patent infringement by Roche Diagnostics pursuant to a complaint dated November 21, 2007. The
complaint alleges that the blood glucose monitors currently manufactured by Abbott and others
infringe one or more recently-issued Roche patents. Abbott has indemnified us against losses
arising from claims of infringement like these and, if our use of the Freestyle blood glucose meter
were to be enjoined and Abbott was unable to obtain a license as required by our contract, then we
would need to obtain rights to an alternative non-infringing blood glucose meter, incorporate it
into the OmniPod System and obtain regulatory approval for the new OmniPod System. Any of these
outcomes could have a material adverse effect on our business, financial condition and results of
operations.
In the future, we may need additional licenses to intellectual property owned by third parties
in order to commercialize new products. If we cannot obtain these additional licenses, we may not
be able to develop or commercialize these future products. Our rights to use technologies licensed
to us by third parties are not entirely within our control, and we may not be able to continue
selling the OmniPod System or sell future products without these technologies.
The patent rights on which we rely to protect the intellectual property underlying the OmniPod
System may not be adequate, which could enable third parties to use our technology and would harm
our continued ability to compete in the market.
Our success will depend in part on our continued ability to develop or acquire
commercially-valuable patent rights and to protect
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these rights adequately. Our patent position is generally uncertain and involves complex legal
and factual questions. The risks and uncertainties that we face with respect to our patents and
other related rights include the following:
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the pending patent applications we have filed or to which we have exclusive rights may
not result in issued patents or may take longer than we expect to result in issued
patents; |
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the claims of any patents that are issued may not provide meaningful protection; |
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we may not be able to develop additional proprietary technologies that are patentable; |
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other parties may challenge patents, patent claims or patent applications licensed or
issued to us; and |
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other companies may design around technologies we have patented, licensed or developed. |
We also may not be able to protect our patent rights effectively in some foreign countries.
For a variety of reasons, we may decide not to file for patent protection. Our patent rights
underlying the OmniPod System may not be adequate, and our competitors or customers may design
around our proprietary technologies or independently develop similar or alternative technologies or
products that are equal or superior to ours without infringing on any of our patent rights. In
addition, the patents licensed or issued to us may not provide a competitive advantage. The
occurrence of any of these events may have a material adverse effect on our business, financial
condition and results of operations.
Other rights and measures we have taken to protect our intellectual property may not be adequate,
which would harm our ability to compete in the market.
In addition to patents, we rely on a combination of trade secrets, copyright and trademark
laws, confidentiality, non-disclosure and assignment of invention agreements and other contractual
provisions and technical measures to protect our intellectual property rights. Despite these
measures, any of our intellectual property rights could, however, be challenged, invalidated,
circumvented or misappropriated. While we currently require employees, consultants and other third
parties to enter into confidentiality, non-disclosure or assignment of invention agreements, or a
combination thereof where appropriate, any of the following could still occur:
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the agreements may be breached; |
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we may have inadequate remedies for any breach; |
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trade secrets and other proprietary information could be disclosed to our competitors; or |
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others may independently develop substantially equivalent or superior proprietary
information and techniques or otherwise gain access to our trade secrets or disclose
such technologies. |
If, for any of the above reasons, our intellectual property is disclosed or misappropriated,
it would harm our ability to protect our rights and have a material adverse effect on our business,
financial condition and results of operations.
We may need to initiate lawsuits to protect or enforce our patents and other intellectual property
rights, which could be expensive and, if we lose, could cause us to lose some of our intellectual
property rights, which would harm our ability to compete in the market.
We rely on patents to protect a portion of our intellectual property and our competitive
position. Patent law relating to the scope of claims in the technology fields in which we operate
is still evolving and, consequently, patent positions in the medical device industry are generally
uncertain. In order to protect or enforce our patent rights, we may initiate patent litigation
against third parties, such as infringement suits or interference proceedings. Litigation may be
necessary to:
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assert claims of infringement; |
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enforce our patents; |
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protect our trade secrets or know-how; or |
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determine the enforceability, scope and validity of the proprietary rights of others. |
Any lawsuits that we initiate could be expensive, take significant time and divert
management’s attention from other business concerns. Litigation also puts our patents at risk of
being invalidated or interpreted narrowly and our patent applications at risk of not issuing.
Additionally, we may provoke third parties to assert claims against us. We may not prevail in any
lawsuits that we initiate and
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the damages or other remedies awarded, if any, may not be commercially valuable. The
occurrence of any of these events may have a material adverse effect on our business, financial
condition and results of operations.
Claims that our current or future products infringe or misappropriate the proprietary rights of
others could adversely affect our ability to sell those products and cause us to incur additional
costs.
Substantial litigation over intellectual property rights exists in the medical device
industry. We expect that we could be increasingly subject to third-party infringement claims as our
revenues increase, the number of competitors grows and the functionality of products and technology
in different industry segments overlaps. Third parties may currently have, or may eventually be
issued, patents on which our current or future products or technologies may infringe. For example,
we are aware of certain patents and patent applications owned by our competitors that cover
different aspects of insulin infusion and the related devices. Any of these third parties might
make a claim of infringement against us. In particular, Medtronic, Inc., in a letter received in
March 2007, invited us to discuss our “taking a license to certain Medtronic patents.” The patents
referenced by this letter relate to technology that is material to our business. We have not had
any substantive discussions with Medtronic concerning this matter since our receipt of this letter.
In addition, in a letter received in September 2009, Becton, Dickinson and Company offered to grant
us a license under a certain patent pursuant to terms to be negotiated. The patent referenced by
this letter relates to technology that is potentially material to our business; however, we believe
that the OmniPod System does not infringe this patent. We have not had any substantive
discussions with Becton, Dickinson and Company concerning this matter since our receipt of this
letter.
Any litigation, regardless of its outcome, would likely result in the expenditure of
significant financial resources and the diversion of management’s time and resources. In addition,
litigation in which we are accused of infringement may cause negative publicity, adversely impact
prospective customers, cause product shipment delays, prohibit us from manufacturing, marketing or
selling our current or future products, require us to develop non-infringing technology, make
substantial payments to third parties or enter into royalty or license agreements, which may not be
available on acceptable terms or at all. If a successful claim of infringement were made against us
and we could not develop non-infringing technology or license the infringed or similar technology
on a timely and cost-effective basis, our revenues may decrease substantially and we could be
exposed to significant liability. A court could enter orders that temporarily, preliminarily or
permanently enjoin us or our customers from making, using, selling, offering to sell or importing
our current or future products, or could enter an order mandating that we undertake certain
remedial activities. Claims that we have misappropriated the confidential information or trade
secrets of third parties can have a similar negative impact on our reputation, business, financial
condition or results of operations.
We are subject to extensive regulation by the U.S. Food and Drug Administration, which could
restrict the sales and marketing of the OmniPod System and could cause us to incur significant
costs.
We sell medical devices that are subject to extensive regulation by the FDA. These regulations
relate to manufacturing, labeling, sale, promotion, distribution and shipping. Before a new medical
device, or a new use of or claim for an existing product, can be marketed in the United States, it
must first receive either 510(k) clearance or pre-market approval from the FDA, unless an exemption
applies. We may be required to obtain a new 510(k) clearance or pre-market approval for significant
post-market modifications to the OmniPod System. Each of these processes can be expensive and
lengthy, and entail significant user fees, unless exempt. The FDA’s process for obtaining 510(k)
clearance usually takes three to twelve months, but it can last longer. The process for obtaining
pre-market approval is much more costly and uncertain and it generally takes from one to three
years, or longer, from the time the application is filed with the FDA.
Medical devices may be marketed only for the indications for which they are approved or
cleared. We have obtained 510(k) clearance for the current clinical applications for which we
market our OmniPod System, which includes the use of U-100, which is a common form of insulin.
However, our clearances can be revoked if safety or effectiveness problems develop. Further, we may
not be able to obtain additional 510(k) clearances or pre-market approvals for new products or for
modifications to, or additional indications for, the OmniPod System in a timely fashion or at all.
Delays in obtaining future clearances would adversely affect our ability to introduce new or
enhanced products in a timely manner which in turn would harm our revenue and future profitability.
We have made modifications to our devices in the past and may make additional modifications in the
future that we believe do not or will not require additional clearances or approvals. If the FDA
disagrees, and requires new clearances or approvals for the modifications, we may be required to
recall and to stop marketing the modified devices. We also are subject to numerous post-marketing
regulatory requirements, which include quality system regulations related to the manufacturing of
our devices, labeling regulations and medical device reporting regulations, which require us to
report to the FDA if our devices cause or contribute to a death or serious injury, or malfunction
in a way that would likely cause or contribute to a death or serious injury. In addition, these
regulatory requirements may change in the future in a way that adversely affects us. If we fail to
comply with present or future regulatory requirements that are applicable to us, we may be subject
to enforcement action by the FDA, which may include any of the following sanctions:
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untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; |
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customer notification, or orders for repair, replacement or refunds; |
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voluntary or mandatory recall or seizure of our current or future products; |
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administrative detention by the FDA of medical devices believed to be adulterated or
misbranded; |
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imposing operating restrictions, suspension or shutdown of production; |
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refusing our requests for 510(k) clearance or pre-market approval of new products, new
intended uses or modifications to the OmniPod System; |
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rescinding 510(k) clearance or suspending or withdrawing pre-market approvals that have
already been granted; and |
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criminal prosecution. |
The occurrence of any of these events may have a material adverse effect on our business,
financial condition and results of operations.
If we, our contract manufacturers or our component suppliers fail to comply with the FDA’s
quality system regulations, the manufacturing and distribution of our devices could be interrupted,
and our product sales and operating results could suffer.
We, our contract manufacturers and our component suppliers are required to comply with the
FDA’s quality system regulations, which is a complex regulatory framework that covers the
procedures and documentation of the design, testing, production, control, quality assurance,
labeling, packaging, sterilization, storage and shipping of our devices. The FDA enforces its
quality system regulations through periodic unannounced inspections. We cannot assure you that our
facilities or our contract manufacturers’ or component suppliers’ facilities would pass any future
quality system inspection. If our or any of our contract manufacturers’ or component suppliers’
facilities fails a quality system inspection, the manufacturing or distribution of our devices
could be interrupted and our operations disrupted. Failure to take adequate and timely corrective
action in response to an adverse quality system inspection could force a suspension or shutdown of
our packaging and labeling operations or the manufacturing operations of our contract
manufacturers, or a recall of our devices. If any of these events occurs, we may not be able to
provide our customers with the quantity of OmniPods they require on a timely basis, our reputation
could be harmed and we could lose customers, any or all of which may have a material adverse effect
on our business, financial condition and results of operations.
Our current or future products are subject to recalls even after receiving FDA clearance or
approval, which would harm our reputation, business and financial results.
The FDA and similar governmental bodies in other countries have the authority to require the
recall of our current or future products if we or our contract manufacturers fail to comply with
relevant regulations pertaining to manufacturing practices, labeling, advertising or promotional
activities, or if new information is obtained concerning the safety or efficacy of these products.
A government-mandated recall could occur if the FDA finds that there is a reasonable probability
that the device would cause serious, adverse health consequences or death. A voluntary recall by us
could occur as a result of manufacturing defects, labeling deficiencies, packaging defects or other
failures to comply with applicable regulations. Any recall would divert management attention and
financial resources and harm our reputation with customers. A recall involving the OmniPod System
would be particularly harmful to our business, financial condition and results of operations
because it is currently our only product.
We are subject to federal and state laws prohibiting “kickbacks” and false or fraudulent claims,
which, if violated, could subject us to substantial penalties. Additionally, any challenge to or
investigation into our practices under these laws could cause adverse publicity and be costly to
respond to, and thus could harm our business.
A federal law commonly known as the Medicare/Medicaid anti-kickback law, and several similar
state laws, prohibit payments that are intended to induce physicians or others either to refer
patients or to acquire or arrange for or recommend the acquisition of healthcare products or
services. These laws constrain our sales, marketing and other promotional activities by limiting
the kinds of financial arrangements, including sales programs, we may have with hospitals,
physicians or other potential purchasers of medical devices. Other federal and state laws generally
prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for
payment from Medicare, Medicaid or other third-party payors that are false or fraudulent, or for
items or services that were not provided as claimed. Because we may provide some coding and billing
information to purchasers of the OmniPod System, and because we cannot assure that the government
will regard any billing errors that may be made as inadvertent, these laws are potentially
applicable to us. In addition, these laws are potentially applicable to us because we provide
reimbursement to healthcare professionals for training patients on the use of the OmniPod System.
Anti-kickback and false claims laws prescribe civil and criminal penalties for noncompliance, which
can be substantial. Even an unsuccessful challenge or investigation into our practices could cause
adverse publicity, and be costly to respond to, and thus could have a material adverse effect on
our business, financial condition and results of operations.
If we are found to have violated laws protecting the confidentiality of patient health information,
we could be subject to civil or criminal penalties, which could increase our liabilities and harm
our reputation or our business.
There are a number of federal and state laws protecting the confidentiality of certain patient
health information, including patient
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records, and restricting the use and disclosure of that protected information. In particular,
the U.S. Department of Health and Human Services promulgated patient privacy rules under the Health
Insurance Portability and Accountability Act of 1996, or HIPAA. These privacy rules protect medical
records and other personal health information by limiting their use and disclosure, giving
individuals the right to access, amend and seek accounting of their own health information and
limiting most use and disclosures of health information to the minimum amount reasonably necessary
to accomplish the intended purpose. If we are found to be in violation of the privacy rules under
HIPAA, we could be subject to civil or criminal penalties, which could increase our liabilities,
harm our reputation and have a material adverse effect on our business, financial condition and
results of operations.
Product liability suits, whether or not meritorious, could be brought against us due to an alleged
defective product or for the misuse of our devices. These suits could result in expensive and
time-consuming litigation, payment of substantial damages, and an increase in our insurance rates.
If our current or future products are defectively designed or manufactured, contain defective
components or are misused, or if someone claims any of the foregoing, whether or not meritorious,
we may become subject to substantial and costly litigation. Misusing our devices or failing to
adhere to the operating guidelines of the OmniPod System could cause significant harm to patients,
including death. In addition, if our operating guidelines are found to be inadequate, we may be
subject to liability. Product liability claims could divert management’s attention from our core
business, be expensive to defend and result in sizable damage awards against us. While we believe
that we are reasonably insured against these risks, we may not have sufficient insurance coverage
for all future claims. Any product liability claims brought against us, with or without merit,
could increase our product liability insurance rates or prevent us from securing continuing
coverage, could harm our reputation in the industry and could reduce revenues. Product liability
claims in excess of our insurance coverage would be paid out of cash reserves harming our financial
condition and adversely affecting our results of operations.
Our ability to grow our revenues depends in part on our retaining a high percentage of our customer
base.
A key to driving our revenue growth is the retention of a high percentage of our customers. We
have developed retention programs aimed at both the healthcare professionals and the patients,
which include appeals assistance, patient training, 24/7 customer support and an automatic re-order
program for patients. Since we began shipping the OmniPod System in October 2005, we have had a
satisfactory customer retention rate; however, we cannot assure you that we will maintain this
retention rate in the future. Current uncertainty in global economic conditions, rising
unemployment and negative financial news may negatively affect product demand and other related
matters. If demand for our products fluctuates as a result of economic conditions or otherwise, our
ability to attract and retain customers could be harmed. The failure to retain a high percentage of
our customers would negatively impact our revenue growth and may have a material adverse effect on
our business, financial condition and results of operations.
We have sponsored, and expect to continue to sponsor market studies seeking to demonstrate certain
aspects of the efficacy of the OmniPod System, which may fail to produce favorable results.
To help improve, market and sell the OmniPod System, we have sponsored, and expect to continue
to sponsor market studies to assess various aspects of its functionality and its relative efficacy.
The data obtained from the studies may be unfavorable to the OmniPod System or may be inadequate to
support satisfactory conclusions. In addition, in the future we may sponsor clinical trials to
assess certain aspects of the efficacy of the OmniPod System. If future clinical trials fail to
support the efficacy of our current or future products, our sales may be adversely affected and we
may lose an opportunity to secure clinical preference from prescribing clinicians, which may have a
material adverse effect on our business, financial condition and results of operations.
If future clinical studies or other articles are published, or diabetes associations or other
organizations announce positions that are unfavorable to the OmniPod System, our sales efforts and
revenues may be negatively affected.
Future clinical studies or other articles regarding our existing products or any competing
products may be published that either support a claim, or are perceived to support a claim, that a
competitor’s product is clinically more effective or easier to use than the OmniPod System or that
the OmniPod System is not as effective or easy to use as we claim. Additionally, diabetes
associations or other organizations that may be viewed as authoritative could endorse products or
methods that compete with the OmniPod System or otherwise announce positions that are unfavorable
to the OmniPod System. Any of these events may negatively affect our sales efforts and result in
decreased revenues.
If we expand, or attempt to expand, into foreign markets, we will be affected by new business risks
that may adversely impact our business, financial condition and results of operations.
If we expand, or attempt to expand, into foreign markets, we will be subject to new business
risks, including:
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failure to fulfill foreign regulatory requirements on a timely basis or at all to
market the OmniPod System or other future products; |
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availability of, and changes in, reimbursement within prevailing foreign health
care payment systems; |
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adapting to the differing laws and regulations, business and clinical practices,
and patient preferences in foreign countries; |
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difficulties in managing foreign relationships and operations, including any
relationships that we establish with foreign partners, distributors or sales or
marketing agents; |
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limited protection for intellectual property rights in some countries; |
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difficulty in collecting accounts receivable and longer collection periods; |
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costs of enforcing contractual obligations in foreign jurisdictions; |
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recessions in economies outside of the United States; |
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political instability and unexpected changes in diplomatic and trade relationships; |
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currency exchange rate fluctuations; and |
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potentially adverse tax consequences. |
If we are successful in introducing our current or future products into foreign markets, we
will be affected by these additional business risks, which may adversely impact our business,
financial condition and results of operations. In addition, expansion into foreign markets imposes
additional burdens on our executive and administrative personnel, research and sales departments
and general managerial resources. Our efforts to introduce our current or future products into
foreign markets may not be successful, in which case we may have expended significant resources
without realizing the expected benefit. Ultimately, the investment required for expansion into
foreign markets could exceed the results of operations generated from this expansion.
Substantially all of our operations are conducted at a single location and substantially all of our
inventory is held at a single location. Any disruption at either of these locations could increase
our expenses.
Substantially all of our manufacturing of complete OmniPods is currently conducted at a single
location on a manufacturing line owned by us at a facility located in China, operated by a
subsidiary of Flextronics International, Ltd. We take precautions to ensure Flextronics safeguards
our assets, including insurance and health and safety protocols. However, a natural or other
disaster, such as a fire or flood, could cause substantial delays in our operations, damage or
destroy our manufacturing equipment, and cause us to incur additional expenses. The insurance we
maintain may not be adequate to cover our losses in any particular case. With or without insurance,
damage to our manufacturing equipment, or to any of our suppliers, may have a material adverse
effect on our business, financial condition and results of operations.
In addition, substantially all of our inventory is held at a single location in Billerica,
Massachusetts. We take precautions to safeguard our facility, including insurance, health and
safety protocols and off-site storage of computer data. However, a natural or other disaster, such
as a fire or flood, could cause substantial delays in our operations, damage or destroy our
inventory, and cause us to incur additional expenses. The insurance we maintain against fires,
floods and other natural disasters may not be adequate to cover our losses in any particular case.
With or without insurance, damage to our facility or our other property, due to fire, flood or
other natural disaster or casualty event may have a material adverse effect on our business,
financial condition and results of operations.
Our success will depend on our ability to attract and retain personnel.
We have benefited substantially from the leadership and performance of our senior management.
Our success will depend on our ability to retain our current management and to attract and retain
qualified personnel in the future, including clinicians, engineers and other highly skilled
personnel. Competition for senior management personnel, as well as clinicians and engineers, is
intense and there can be no assurances that we will be able to retain our personnel. The loss of
the services certain members of our senior management, clinicians or engineers could prevent or
delay the implementation and completion of our objectives, or divert management’s attention to
seeking a qualified replacement.
Additionally, the sale and after-sale support of the OmniPod System is logistically complex,
requiring us to maintain an extensive infrastructure of field sales personnel, diabetes educators,
customer support, insurance specialists, and billing and collections personnel. We face
considerable challenges in recruiting, training, managing, motivating and retaining these teams,
including managing geographically dispersed efforts. If we fail to maintain and grow an adequate
pool of trained and motivated personnel, our reputation could suffer and our financial position
could be adversely affected.
If we do not effectively manage our growth, our business resources may become strained, we may not
be able to deliver the OmniPod System in a timely manner and our results of operations may be
adversely affected.
Since the commercial launch of the OmniPod system, we have progressively expanded our
marketing efforts throughout the entire United States. As we expand our sales internationally, we will need to
obtain reimbursement agreements with government agencies or private
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third-party payors in those countries. Failure to obtain such agreements would limit our
ability to successfully penetrate those foreign markets. In addition, the geographic expansion of
our business will require additional manufacturing capacity to supply those markets as well as
additional sales and marketing resources.
We expect to continue to increase our manufacturing capacity, our personnel and the scope of
our U.S. and international sales and marketing efforts. This growth, as well as any other growth
that we may experience in the future, will provide challenges to our organization and may strain
our management and operations. In order to manage future growth, we will be required to improve
existing, and implement new, management systems, sales and marketing efforts and distribution
channels. We will need to manage our relationship with Flextronics going forward. We may also need
to partner with additional third-party suppliers to manufacture certain components of the OmniPod
System and complete additional manufacturing lines in the future. A transition to new suppliers may
result in additional costs or delays. We may misjudge the amount of time or resources that will be
required to effectively manage any anticipated or unanticipated growth in our business or we may
not be able to manufacture sufficient inventory or attract, hire and retain sufficient personnel to
meet our needs. If we cannot scale our business appropriately, maintain control over expenses or
otherwise adapt to anticipated and unanticipated growth, our business resources may become
strained, we may not be able to deliver the OmniPod System in a timely manner and our results of
operations may be adversely affected.
We may experience significant fluctuations in our quarterly results of operations.
The fluctuations in our quarterly results of operations have resulted, and will continue to
result, from numerous factors, including:
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delays in shipping due to capacity constraints; |
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practices of health insurance companies and other third-party payors
with respect to reimbursement for our current or future products; |
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market acceptance of the OmniPod System; |
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our ability to manufacture the OmniPod efficiently; |
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timing of regulatory approvals and clearances; |
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new product introductions; |
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competition; and |
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timing of research and development expenditures. |
These factors, some of which are not within our control, may cause the price of our stock to
fluctuate substantially. In particular, if our quarterly results of operations fail to meet or
exceed the expectations of securities analysts or investors, our stock price could drop suddenly
and significantly. We believe the quarterly comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an indication of our future performance.
If we choose to acquire or invest in new businesses, products or technologies, instead of
developing them ourselves, these acquisitions or investments could disrupt our business and could
result in the use of significant amounts of equity, cash or a combination of both.
From time to time we may seek to acquire or invest in new businesses, products or
technologies, instead of developing them ourselves. Acquisitions and investments involve numerous
risks, including:
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• |
|
the inability to complete the acquisition or investment; |
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• |
|
disruption of our ongoing businesses and diversion of management attention; |
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• |
|
difficulties in integrating the acquired entities, products or technologies; |
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• |
|
risks associated with acquiring intellectual property; |
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• |
|
difficulties in operating the acquired business profitably; |
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• |
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the inability to achieve anticipated synergies, cost savings or growth; |
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• |
|
potential loss of key employees, particularly those of the acquired business; |
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• |
|
difficulties in transitioning and maintaining key customer, distributor and supplier
relationships; |
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• |
|
risks associated with entering markets in which we have no or limited prior experience; and |
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• |
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unanticipated costs. |
34
In addition, any future acquisitions or investments may result in one or more of the
following:
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• |
|
dilutive issuances of equity securities, which may be sold at a discount to market price; |
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• |
|
the use of significant amounts of cash; |
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• |
|
the incurrence of debt; |
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• |
|
the assumption of significant liabilities; |
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• |
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increased operating costs or reduced earnings; |
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• |
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financing obtained on unfavorable terms; |
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• |
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large one-time expenses; and |
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• |
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the creation of certain intangible assets, including goodwill, the write-down of which
in future periods may result in significant charges to earnings. |
Any of these factors could materially harm our stock price, business, financial condition and
results of operations.
We may not be able to generate sufficient cash to service all of our indebtedness, including our
5.375% Convertible Senior Notes due June 15, 2013 and amounts outstanding under our Facility
Agreement due September 15, 2012. We may be forced to take other actions to satisfy our
obligations under our indebtedness or we may experience a financial failure.
Our ability to make scheduled payments or to refinance our debt obligations depends on our
financial and operating performance, which is subject to prevailing economic and competitive
conditions and to certain financial, business and other factors beyond our control. We cannot
assure you that we will maintain a level of cash flows from operating activities sufficient to
permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash
flows and capital resources are insufficient to fund our debt service obligations, we may be forced
to reduce or delay capital expenditures, sell assets or operations, seek additional capital or
restructure or refinance our indebtedness, including the notes. We cannot assure you that we would
be able to take any of these actions, that these actions would be successful and permit us to meet
our scheduled debt service obligations or that these actions would be permitted under the terms of
our future debt agreements. In the absence of sufficient operating results and resources, we could
face substantial liquidity problems and might be required to dispose of material assets or
operations to meet our debt service and other obligations. We may not be able to consummate those
dispositions or obtain sufficient proceeds from those dispositions to meet our debt service and
other obligations then due.
We need to expand our distribution network to maintain and grow our business and revenues. If we
fail to expand and maintain an effective sales force or successfully develop our relationship with
distributors, our business, prospects and brand may be materially and adversely affected.
We currently promote, market and sell the majority of our OmniPod Systems through our own
direct sales force. In addition, we currently utilize a limited number of domestic distributors to
augment our sales efforts. We cannot assure you that we will be able to successfully develop our
relationships with third-party distributors. If we fail to do so, our sales could fail to grow or
could decline, and our ability to grow our business could be adversely affected. Distributors that
are in the business of selling other medical products may not devote a sufficient level of
resources and support required to generate awareness of our products and grow or maintain product
sales. If our distributors are unwilling or unable to market and sell our products, or if they do
not perform to our expectations, we could experience delayed or reduced market acceptance and sales
of our products.
If we are unable to successfully maintain effective internal control over financial reporting,
investors may lose confidence in our reported financial information and our stock price and our
business may be adversely impacted.
As a public company, we are required to maintain internal control over financial reporting and
our management is required to evaluate the effectiveness of our internal control over financial
reporting as of the end of each fiscal year. Additionally, we are required to disclose in our
Annual Reports on Form 10-K our management’s assessment of the effectiveness of our internal
control over financial reporting and a registered public accounting firm’s attestation report on
this assessment. If we are not successful in maintaining effective internal control over financial
reporting, there could be inaccuracies or omissions in the consolidated financial information we
are required to file with the Securities and Exchange Commission. Additionally, even if there are
no inaccuracies or omissions, we will be required to publicly disclose the conclusion of our
management that our internal control over financial reporting or disclosure controls and procedures
are not effective. These events could cause investors to lose confidence in our reported financial
information, adversely impact our stock price, result in increased costs to remediate any
deficiencies, attract regulatory scrutiny or lawsuits that could be costly to resolve and distract
management’s attention, limit our ability to access the capital markets or cause our stock to be
delisted from The NASDAQ Global Market or any other securities exchange on which it is then listed.
35
The price of our common stock may be volatile.
There has been a public market for our common stock only since our initial public offering in
May 2007. The market price of our common stock is affected by a number of factors, including:
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• |
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failure to maintain and increase production capacity and reduce per unit production costs; |
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• |
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changes in the availability of third-party reimbursement in the United States or other
countries; |
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• |
|
volume and timing of orders for the OmniPod System; |
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• |
|
developments in administrative proceedings or litigation related to intellectual property
rights; |
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• |
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issuance of patents to us or our competitors; |
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• |
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the announcement of new products or product enhancements by us or our competitors; |
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• |
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the announcement of technological or medical innovations in the treatment or diagnosis of
diabetes; |
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• |
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changes in governmental regulations or in the status of our regulatory approvals or
applications; |
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• |
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developments in our industry; |
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• |
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publication of clinical studies relating to the OmniPod System or a competitor’s product; |
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• |
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quarterly variations in our or our competitors’ results of operations; |
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• |
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changes in earnings estimates or recommendations by securities analysts; and |
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• |
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general market conditions and other factors, including factors unrelated to our operating
performance or the operating performance of our competitors. |
At times, the fluctuations in the market price of our common stock have often been unrelated
or disproportionate to our operating performance. These forces reached unprecedented levels in the
second half of 2008, resulting in the bankruptcy or acquisition of, or government assistance to,
several major domestic and international financial institutions and a material decline in economic
conditions. In particular, the U.S. equity markets experienced significant price and volume
fluctuations that have affected the market prices of equity securities of many technology
companies. During the nine months ended September 30, 2009, our stock price has experienced
volatility, with the closing price of our common stock on the NASDAQ Global Market having ranged
from $2.67 on March 11, 2009 to $11.25 on September 11, 2009. These broad market and industry
factors could materially and adversely affect the market price of our stock, regardless of our
actual operating performance.
Future sales of shares of our common stock in the public market, or the perception that such sales
may occur, may depress our stock price.
We have been a public company only since May 2007. For the three month period ended September
30, 2009, the average daily trading volume of our common stock on The NASDAQ Global Market has been
fewer than 300,000 shares. If our existing stockholders or their distributees sell substantial
amounts of our common stock in the public market, the market price of our common stock could
decrease significantly. The perception in the public market that our existing stockholders might
sell shares of common stock could also depress the trading price of our common stock. In addition,
certain stockholders, including the holders of the warrants to purchase 3.75 million shares of our
common stock issued in connection with the March 13, 2009 facility agreement, have rights, subject
to some conditions, to require us to file registration statements covering their share or to
include their shares in registration statements that we may file for ourselves or other
stockholders.
A decline in the price of shares of our common stock might impede our ability to raise capital
through the issuance of additional shares of our common stock or other equity securities.
Anti-takeover provisions in our organizational documents, our shareholder rights plan and Delaware law may discourage or prevent
a change of control, even if an acquisition would be beneficial to our stockholders, which could
affect our stock price adversely and prevent attempts by our stockholders to replace or remove our
current management.
36
Our certificate of incorporation and bylaws contain provisions that could delay or prevent a
change of control of our company or
changes in our board of directors that our stockholders might consider favorable. Some of
these provisions:
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• |
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authorize the issuance of preferred stock which can be created and issued by the
board of directors without prior stockholder approval, with rights senior to
those of our common stock; |
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• |
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provide for a classified board of directors, with each director serving a
staggered three-year term; |
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• |
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prohibit our stockholders from filling board vacancies, calling special
stockholder meetings or taking action by written consent; |
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• |
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provide for the removal of a director only with cause and by the affirmative
vote of the holders of 75% or more of the shares then entitled to vote at an
election of our directors; and |
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• |
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require advance written notice of stockholder proposals and director nominations. |
In addition, we are subject to the provisions of Section 203 of the Delaware General
Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or
more of our outstanding voting stock. These and other provisions in our certificate of
incorporation, bylaws and Delaware law could make it more difficult for stockholders or potential
acquirors to obtain control of our board of directors or initiate actions that are opposed by our
then-current board of directors, including a merger, tender offer or proxy contest involving our
company. Any delay or prevention of a change of control transaction or changes in our board of
directors could cause the market price of our common stock to decline.
In addition, in November 2008, our board of directors adopted a shareholder rights plan,
implementing what is commonly known as a “poison pill.” This poison pill significantly increases
the costs that would be incurred by an unwanted third party acquirer if such party owns or
announces its intent to commence a tender offer for more than 15% of our outstanding common stock
or otherwise “triggers” the poison pill by exceeding the applicable stock ownership threshold. The
existence of this poison pill could delay, deter or prevent a takeover of us.
Our
ability to use net operating loss carryforwards may be subject to
limitation.
Section 382 of the U.S. Internal Revenue Code of 1986, as amended, imposes an annual limit on the
amount of net operating loss carryforwards that may be used to offset taxable income when a
corporation has undergone significant changes in its stock ownership or equity structure. Our
ability to use net operating losses is limited by prior changes in our ownership, and may be
further limited by any future issuances of common stock
or by the consummation of other transactions. As a result, if we earn net taxable income, our
ability to use net operating loss carryforwards to offset U.S. federal taxable income may become
subject to limitations, which could potentially result in increased future tax liabilities for us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
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|
|
| Exhibit |
|
|
| Number |
|
Description of Document |
|
|
|
4.1
|
|
Shareholder Rights Agreement, dated as of November 14, 2008,
between Insulet Corporation and Computershare Trust Company, N.A.,
as Rights Agent (incorporated herein by reference to the
Registration Statement on Form 8-A filed on November 20, 2008). |
|
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4.2
|
|
Amendment, dated September 25, 2009, to Shareholder Rights
Agreement, dated as of November 14, 2008, between Insulet
Corporation and Computershare Trust Company, N.A., as Rights Agent
(incorporated herein by reference to the Registration Statement on
Form 8-A/A filed on September 28, 2009). |
|
|
|
10.1
|
|
Securities Purchase Agreement dated September 25, 2009 by and
between Insulet Corporation and certain investors named therein
(incorporated herein by reference to the Current Report on Form
8-K filed on September 28, 2009). |
|
|
|
10.2
|
|
Amendment to Facility Agreement, dated September 25, 2009, by and
between Insulet Corporation and the lenders named therein
(incorporated herein by reference to the Current Report on Form
8-K filed on September 28, 2009). |
|
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|
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. |
37
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.
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INSULET CORPORATION
(Registrant)
|
|
| Date: October 26, 2009 |
/s/ Duane DeSisto
|
|
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Duane DeSisto |
|
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President and Chief Executive Officer
(Principal Executive Officer) |
|
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|
|
| Date: October 26, 2009 |
/s/ Brian Roberts
|
|
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Brian Roberts |
|
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Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
38
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Document |
|
|
|
4.1
|
|
Shareholder Rights Agreement, dated as of November 14, 2008,
between Insulet Corporation and Computershare Trust Company, N.A.,
as Rights Agent (incorporated herein by reference to the
Registration Statement on Form 8-A filed on November 20, 2008). |
|
|
|
4.2
|
|
Amendment, dated September 25, 2009, to Shareholder Rights
Agreement, dated as of November 14, 2008, between Insulet
Corporation and Computershare Trust Company, N.A., as Rights Agent
(incorporated herein by reference to the Registration Statement on
Form 8-A/A filed on September 28, 2009). |
|
|
|
10.1
|
|
Securities Purchase Agreement dated September 25, 2009 by and
between Insulet Corporation and certain investors named therein
(incorporated herein by reference to the Current Report on Form
8-K filed on September 28, 2009). |
|
|
|
10.2
|
|
Amendment to Facility Agreement, dated September 25, 2009, by and
between Insulet Corporation and the lenders named therein
(incorporated herein by reference to the Current Report on Form
8-K filed on September 28, 2009). |
|
|
|
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. |