# Insulet Corp: Form 10-Q for the period ended Sep 30, 2013

- Company: [Insulet Corp](/companies/podd.md) (CIK 1145197)
- Form: 10-Q
- Filed: 2013-11-07
- Accepted by EDGAR: Nov 7, 2013, 22:16 ET
- Period: 2013-09-30
- Accession: 0001145197-13-000035
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1145197/000114519713000035/podd-2013x09x30x10xq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1145197/000114519713000035/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-07-01 to 2013-09-30 | $61.1m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2013-01-01 to 2013-09-30 | $178.6m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2013-07-01 to 2013-09-30 | $33.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2013-01-01 to 2013-09-30 | $99.2m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2013-07-01 to 2013-09-30 | $27.4m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2013-01-01 to 2013-09-30 | $79.4m | us-gaap:GrossProfit |
| Research and development | 3 months, 2013-07-01 to 2013-09-30 | $5.8m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2013-01-01 to 2013-09-30 | $15.3m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2013-07-01 to 2013-09-30 | −$17.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2013-01-01 to 2013-09-30 | −$29.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2013-07-01 to 2013-09-30 | $100.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2013-01-01 to 2013-09-30 | $100.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2013-07-01 to 2013-09-30 | $5.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2013-01-01 to 2013-09-30 | $254.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-07-01 to 2013-09-30 | −$21.3m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2013-01-01 to 2013-09-30 | −$42.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-07-01 to 2013-09-30 | −$0.39 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2013-01-01 to 2013-09-30 | −$0.79 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 9 months, 2013-01-01 to 2013-09-30 | $6.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2013-01-01 to 2013-09-30 | $4.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2013-09-30 | $153.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2013-09-30 | $199.7m | us-gaap:AssetsCurrent |
| Total assets | at 2013-09-30 | $289.5m | us-gaap:Assets |
| Current liabilities | at 2013-09-30 | $48.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2013-09-30 | $168.1m | us-gaap:Liabilities |
| Long-term debt | at 2013-09-30 | $111.1m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2013-09-30 | $0 | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2013-09-30 | $121.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 47,376 characters.

*You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying notes to those financial statements included in this Quarterly Report on Form 10-Q . This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and of Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to: risks associated with our dependence on the OmniPod System; our ability to reduce production costs and increase customer orders and manufacturing volumes; adverse changes in general economic conditions; impact of healthcare reform legislation; our inability to raise additional funds in the future on acceptable terms or at all; potential supply problems or price fluctuations with sole source or other third-party suppliers on which we are dependent; failure by us to retain supplier pricing discounts and achieve satisfactory gross margins; failure by us to retain key supplier and payor partners; international business risks; our inability to obtain adequate coverage or reimbursement from third-party payors for the OmniPod System and potential adverse changes in reimbursement rates or policies relating to the OmniPod; failure to retain key partner payors and their members; failure to retain and manage successfully our Medicare and Medicaid business; potential adverse effects resulting from competition with competitors; technological innovations adversely affecting our business; potential termination of our license to incorporate a blood glucose meter into the OmniPod System; our ability to protect our intellectual property and other proprietary rights; conflicts with the intellectual property of third parties, including claims that our current or future products infringe the proprietary rights of others; adverse regulatory or legal actions relating to the OmniPod System; failure of our contract manufacturers or component suppliers to comply with FDA’s quality system regulations, the potential violation of federal or state laws prohibiting “kickbacks” or protecting patient health information, or any challenges to or investigations into our practices under these laws; product liability lawsuits that may be brought against us; reduced retention rates; unfavorable results of clinical studies relating to the OmniPod System or the products of our competitors; potential future publication of articles or announcement of positions by physician associations or other organizations that are unfavorable to our products; the concentration of substantially all of our manufacturing capacity at a single location in China and substantially all of our inventory at a single location in Massachusetts; our ability to attract and retain key personnel; our ability to manage our growth; fluctuations in quarterly results of operations; risks associated with potential future acquisitions; our ability to generate sufficient cash to service all of our indebtedness; the expansion of our distribution network; our ability to successfully maintain effective internal controls; the volatility of our common stock; risks related to future sales of our common stock or the conversion of the 3.75% Notes; potential limitations on our ability to use our net operating loss carryforwards; anti-takeover provisions in our organizational documents; and other risks and uncertainties described in our Annual Report on Form 10-K , which was filed with the Securities and Exchange Commission on February 28, 2013 in the section entitled “Risk Factors,” and in our other filings from time to time with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements.*

### Overview

We are primarily engaged in the development, manufacturing and sale of our proprietary OmniPod Insulin Management System (the “OmniPod System”), an innovative, discreet and easy-to-use insulin infusion system for people with insulin-dependent diabetes. The OmniPod System is the only commercially-available insulin infusion system of its kind. The OmniPod System features a unique disposable tubeless OmniPod which is worn on the body for approximately three days at a time and the handheld, wireless Personal Diabetes Manager (“PDM”). Conventional insulin pumps require people with insulin-dependent diabetes to learn to use, manage and wear a number of cumbersome components, including up to 42 inches of tubing. In contrast, the OmniPod System features two discreet, easy-to-use devices that eliminate the need for a bulky pump, tubing and separate blood glucose meter, provides for virtually pain-free automated cannula insertion, communicates wirelessly and integrates a blood glucose meter. We believe that the OmniPod System’s unique proprietary design offers significant lifestyle benefits to people with insulin-dependent diabetes.

In June 2011, we acquired Neighborhood Holdings, Inc. and its wholly-owned subsidiaries (collectively, "Neighborhood Diabetes") in order to support our sales of the OmniPod System, expand our full suite diabetes management product offerings and obtain access to a larger number of insulin dependent patients. Through Neighborhood Diabetes, we are able to provide customers with blood glucose testing supplies, traditional insulin pumps, pump supplies and pharmaceuticals and have the ability to process claims as either durable medical equipment or through pharmacy benefits.

We began commercial sale of the OmniPod System in the United States in October 2005. We sell the OmniPod System and other diabetes management supplies in the United States through direct sales to customers or through our distribution partners. The OmniPod System is currently available in multiple countries in Europe through our exclusive distribution partner, Ypsomed Distribution AG (“Ypsomed”) and in Canada through our exclusive distribution partner, GlaxoSmithKline Inc. (“GSK”). In August 2011, we received CE Mark approval, and in December 2012 we received 510(k) clearance by the FDA for our new OmniPod System. The new OmniPod System is more than one-third smaller and one-quarter lighter than the original model, while maintaining the same features and operating capabilities. Ypsomed began selling the new OmniPod System in certain European countries in 2012. We began selling the new OmniPod System to new customers in the U.S. during the first quarter of 2013 and began converting the existing customer base during the second quarter of 2013. By the end of the third quarter, we completely transitioned our production to the the new OmniPod System.

We sell our proprietary OmniPod System as well as blood glucose testing supplies, traditional insulin pumps, pump supplies, pharmaceuticals and other products for the management and treatment of diabetes to people with diabetes. Through our infrastructure in the reimbursement, billing and collection areas, we are able to provide for adjudication of claims as either durable medical equipment or through pharmacy benefits. Claims are adjudicated under private insurers, Medicaid or Medicare. As we expand our sales and marketing focus, increase our manufacturing capacity, expand to additional international markets and broaden our high-touch patient model, we will need to maintain and expand available reimbursement for our product offerings.

Our sales and marketing effort is focused on generating demand and acceptance of the OmniPod System among key diabetes practitioners, academic medical centers, clinics, people with insulin-dependent diabetes, third-party payors, government agencies, and third-party distributors. Our marketing strategy is to build awareness for the benefits of the OmniPod System as well as our high-touch patient model through a wide range of education programs, social networking, patient demonstration programs, support materials, media advertisements and events at the national, regional and local levels. We are using third-party distributors to improve our access to managed care and government reimbursement programs, expand our commercial presence and provide access to additional potential patients. Our total revenue was $61.1 million and $178.6 million for the three and nine months ended September 30, 2013, respectively. Our total revenue was $54.8 million and $153.5 million for the three and nine months ended September 30, 2012, respectively.

We currently produce the OmniPod System on partially automated manufacturing lines at a facility in China operated by a subsidiary of Flextronics International Ltd. (“Flextronics”). We purchase complete OmniPods pursuant to our agreement with Flextronics. Under the agreement, Flextronics has agreed to supply us, as a non-exclusive supplier, with OmniPods at agreed upon prices per unit pursuant to a rolling forecast that we provide. The current term of the agreement expires in December 2017 and is automatically renewed for one-year terms subsequently. It may be terminated upon prior written notice given no less than a specified number of days prior to the date of termination. The specified number of days is intended to provide the parties with sufficient time to make alternative arrangements in the event of termination.

To achieve profitability, we continue to seek to increase manufacturing volume and reduce the per-unit production cost for the OmniPod. By increasing production volumes of the OmniPod, we have been able to reduce our per-unit raw material costs and improve absorption of manufacturing overhead costs. Our new OmniPod was designed to further lower the cost of the product through component sourcing, volume discounts and efficient manufacturing. The cost reductions are important as we strive to achieve profitability. We believe our current manufacturing capacity is sufficient to meet our expected 2013 demand for OmniPods.

We purchase certain other diabetes management supplies from manufacturers at contracted rates and supply these products to our customers. Based on market penetration, payor plans and other factors, certain manufacturers provide rebates based on product sold. We record these rebates as a reduction to cost of goods sold as they are earned.

Since our inception in 2000, we have incurred losses every quarter. In the three and nine months ended September 30, 2013, we incurred net losses of $21.3 million and $42.5 million, respectively. As of September 30, 2013, we had an accumulated deficit of $524.0 million. We have financed our operations through private placements of debt and equity securities, public offerings of our common stock, issuances of convertible debt and borrowings under certain other debt agreements. As of September 30, 2013, we had $143.8 million of convertible debt outstanding which matures in June 2016.

Our long-term financial objective is to achieve and sustain profitable growth. Our efforts in the remainder of 2013 will be focused primarily on the production of, and customer transition to, our new OmniPod System as well as the expansion of our customer base in the United States and internationally. Achieving these objectives is expected to require additional investments in certain personnel and initiatives. We believe that we will continue to incur net losses in the near term in order to achieve these objectives. However, we believe that the accomplishment of our near term objectives will have a positive impact on our financial condition in the future.

In January 2013, we sold 4.7 million shares of our common stock at a price of $20.75 per share, resulting in net proceeds to us of $92.8 million. We believe that our cash and cash equivalents, together with the cash expected to be generated from product sales, will be sufficient to meet our projected operating and debt service requirements for the next twelve months.

### Financial Operations Overview

*Revenue.* We derived most of our revenue from the sale of the OmniPod System and other diabetes related products including blood glucose testing supplies, traditional insulin pumps, pump supplies and pharmaceuticals to customers and third-party distributors who resell the product to customers. The OmniPod System is comprised of two devices: the OmniPod, a disposable insulin infusion device that the patient wears for up to three days and then replaces; and the PDM, a handheld device much like a personal digital assistant that wirelessly programs the OmniPod with insulin delivery instructions, assists the patient with diabetes management and incorporates a blood glucose meter.

In June 2011, we entered into a development agreement with a U.S. based pharmaceutical company (the “Development Agreement”). Under the Development Agreement, we are required to perform design, development, regulatory, and other services to support the pharmaceutical company as it works to obtain regulatory approval to use our drug delivery technology as a delivery method for its pharmaceutical. Over the term of the Development Agreement, we have and expect to continue to invoice amounts as we meet certain defined deliverable milestones. Revenue on the Development Agreement is recognized using a proportional performance methodology based on costs incurred and total payments under the agreement. The impact of changes in the expected total effort or contract payments are recognized as a change in estimate using the cumulative catch-up method.

As of September 30, 2013 and December 31, 2012, we had deferred revenue of $0.6 million and $5.4 million, respectively. These amounts include product-related revenue and unrecognized amounts related to the Development Agreement.

For the year ending December 31, 2013 we expect our revenue to continue to increase as we transition our customers to our new OmniPod System, leverage our high-touch patient model to gain new customers in the United States and continue expansion in Europe, Canada and certain other international markets. Increased revenue will be dependent upon the success of our sales efforts, our ability to produce our new OmniPods in sufficient volumes as our patient base grows, the successful transition to our new OmniPod System, the impact of competive bidding on certain durable medical equipment items including mail-order diabetes testings supplies, and other risks and uncertainties.

*Cost of revenue.* Cost of revenue consists primarily of raw material, labor, warranty and overhead costs such as freight, depreciation and other costs related to the OmniPod System, the cost of products we acquire from third party suppliers, and costs incurred related to the Development Agreement. Cost of revenue will continue to increase in line with an increase in revenue.

*Research and development.* Research and development expenses consist primarily of personnel costs within our product development, regulatory and clinical functions, and the costs of clinical studies and product development projects. We expense all research and development costs as incurred. For the remainder of the year ending December 31, 2013, we expect overall research and development spending to remain consistent with current levels.

*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 the year ending December 31, 2013, we expect general and administrative expenses to decrease as compared to current levels as we incurred significant one-time costs related to the transition to the new OmniPod System and the resolution of our outstanding litigation with Medtronic Minimed Inc.

*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 the year ending December 31, 2013, we expect sales and marketing expenses to decrease slightly compared to current levels as certain costs associated with the launch of the new OmniPod are not expected to recur.

### Results of Operations

The following table presents certain statement of operations information for the three and nine months ended September 30, 2013 and 2012:

*(In thousands)*

*(In thousands)*

|  | Three Months Ended September 30, 2013 | 2012 | % Change | Nine Months Ended September 30, 2013 | 2012 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenue | $61,103 | $54,752 | 12% | $178,551 | $153,541 | 16% |
| Cost of revenue | 33,708 | 30,362 | 11% | 99,168 | 86,524 | 15% |
| Gross profit | 27,395 | 24,390 | 12% | 79,383 | 67,017 | 18% |
| Operating expenses: |  |  |  |  |  |  |
| Research and development | 5,771 | 6,559 | 12% | 15,341 | 18,512 | 17% |
| General and administrative | 23,530 | 12,731 | 85% | 50,525 | 38,416 | 32% |
| Sales and marketing | 15,407 | 13,571 | 14% | 42,858 | 39,974 | 7% |
| Total operating expenses | 44,708 | 32,861 | 36% | 108,724 | 96,902 | 12% |
| Operating loss | (17,313) | (8,471) | 104% | (29,341) | (29,885) | 2% |
| Other expense, net | (3,972) | (3,918) | 1% | (12,879) | (11,645) | 11% |
| Income tax expense | (5) | (28) | 82% | (254) | (143) | 78% |
| Net loss | $(21,290) | $(12,417) | 71% | $(42,474) | $(41,673) | 2% |

### Comparison of the Three and Nine Months ended September 30, 2013 and 2012

#### Revenue

Our total revenue was $61.1 million and $178.6 million for the three and nine months ended September 30, 2013, respectively, compared to $54.8 million and $153.5 million for the same periods in 2012. The increase in the three and nine month periods is due to continued adoption of the OmniPod System by patients in the United States and internationally. This increase was offset by a decrease in revenue related to certain mail-order diabetic testing supplies such as blood glucose testing strips and lancets to Medicare beneficiaries that we no longer are eligible to service under the Medicare Durable Medical Equipment, Prosthetics, Orthotics, and Supplies ("DMEPOS") Competitive Bidding Program, which began on July 1, 2013.

#### Cost of Revenue

Cost of revenue was $33.7 million and $99.2 million for the three and nine months ended September 30, 2013, respectively, compared to $30.4 million and $86.5 million for the same periods in 2012. The increase in cost of revenue reflects the higher sales volumes as our patient base continues to increase.

#### Research and Development

Research and development expenses decreased $0.8 million, or 12%, to $5.8 million for the three months ended September 30, 2013, compared to $6.6 million for the same period in 2012. The decrease was primarily a result of a decrease of $0.9 million in outside services associated with the development and regulatory approval of the new OmniPod System and a $0.8 million decrease in supplies and consumables used in development efforts on our ongoing projects. These decreases were offset by a $0.8 million increase in employee related and travel expenses.

Research and development expenses decreased $3.2 million, or 17%, to $15.3 million for the nine months ended September 30, 2013, compared to $18.5 million for the same period in 2012. The decrease was primarily a result of a decrease of $3.5 million in outside services associated with the development and regulatory approval of the new OmniPod System and a $0.9 million decrease in supplies and consumables used in development efforts on our ongoing projects, offset by a $1.2 million increase in employee related expenses.

#### General and Administrative

General and administrative expenses increased $10.8 million, or 85%, to $23.5 million for the three months ended September 30, 2013 compared to $12.7 million for the same period in 2012. This increase was primarily the result of an increase of $7.3 million in legal expenses largely related to the Medtronic patent litigation settlement, an expense of $2.5 million related to equipment which is no longer expected to be used in our manufacturing process, an increase of $0.8 million of shipping expenses as volumes of patient shipments increased, an increase of $0.5 million in bad debt expense, and an increase of $0.5 million in employee related expenses including stock-based compensation. These increases were partially offset by a decrease of $0.7 million related to sales and use tax compliance and a decrease of $0.3 million in amortization expense related to the customer relationship asset acquired in the June 2011 acquisition of Neighborhood Diabetes.

General and administrative expenses increased $12.1 million, or 32%, to $50.5 million for the nine months ended September 30, 2013 compared to $38.4 million for the same period in 2012. This increase was primarily the result of an increase of $8.3 million in legal expense mainly related to the Medtronic patent litigation settlement, an expense of $2.5 million related to equipment which is no longer expected to be used in our manufacturing process, an increase of $1.6 million in bad debt expense, an increase of $1.3 million in employee related expenses including stock-based compensation, and an increase of $0.9 million of shipping expenses as volumes of patient shipments increased. These increases were partially offset by a decrease of $1.1 million in administrative and consulting fees, a decrease of $0.8 million in amortization expense related to the customer relationship asset acquired in the June 2011 acquisition of Neighborhood Diabetes, and a decrease of $0.6 million related to sales and use tax compliance.

#### Sales and Marketing

Sales and marketing expenses increased $1.8 million, or 14%, to $15.4 million for the three months ended September 30, 2013, compared to $13.6 million for the same period in 2012. This increase was primarily a result of a $1.4 million increase in costs associated with the launch of the new OmniPod System, and an increase of $1.0 million in costs related to customer support functions and strategic planning initiatives. These increases were offset by a decrease of $0.6 million of employee related expenses including stock-based compensation and travel related expenses.

Sales and marketing expenses increased $2.9 million, or 7%, to $42.9 million for the nine months ended September 30, 2013, compared to $40.0 million for the same period in 2012. This increase was primarily a result of a $0.9 million net increase in costs associated with the launch of the new OmniPod System and other advertising expenses and a $2.0 million increase in costs related to customer support functions and strategic planning initiatives.

#### Other Expense, Net

Other expense, net mainly consists of interest income and interest and other expense. Net interest and other expense was $4.0 million for the three months ended September 30, 2013 compared to $3.9 million for the same period in 2012. Net interest and other expense was $12.9 million for the nine months ended September 30, 2013 compared to $11.6 million for the same period in 2012. The increase in net interest and other expense is primarily the result of higher non-cash interest on the 5.375% Notes and the 3.75% Notes based on their effective interest rates and the $0.3 million charge recorded for the extinguishment of debt related to the exchange of 620,122 shares of common stock for $13 million in principal amount of the 5.375% Notes (as defined below).

#### Income Tax Expense

Income tax expense was de minimus for each of the three months ended September 30, 2013 and 2012. Income tax expense was $0.3 million and $0.1 million for the nine months ended September 30, 2013 and 2012, respectively. Income tax expense is comprised of a current and deferred portion. The current portion primarily related to state, local and foreign taxes and the deferred portion primarily related to federal and state tax amounts.

### Liquidity and Capital Resources

We commenced operations in 2000 and to date we have financed our operations primarily through private placements of common and preferred stock, secured indebtedness, public offerings of our common stock and issuances of convertible debt. As of September 30, 2013, we had $153.9 million in cash and cash equivalents. We believe that our current cash and cash equivalents, together with the cash expected to be generated from sales, will be sufficient to meet our projected operating and debt service requirements for at least the next twelve months.

### Equity

In January 2013, in a public offering, we issued and sold 4,715,000 shares of our common stock at a price of $20.75 share. In connection with the offering, we received total gross proceeds of $97.8 million, or approximately $92.8 million in net proceeds after deducting underwriting discounts and offering expenses.

In May 2013, we entered into an Exchange Agreement with a holder of our 5.375% Notes. Under the Exchange Agreement, we issued 620,122 shares of our common stock to the holder in exchange for the extinguishment of $13 million in principal amount of the 5.375% Notes. In June 2013, in connection with the repayment of the remaining $2 million in principal amount of the 5.375% Notes, we issued 26,523 shares of our common stock to the holders representing the conversion value in excess of the principal amount as per the conversion terms of the 5.375% Notes.

### Debt

We had outstanding debt and related financing costs on our consolidated balance sheet as follows (in thousands):

|  | As of September 30, 2013 | December 31, 2012 |
| --- | ---: | ---: |
| Principal amount of the 5.375% Convertible Senior Notes | $— | $15,000 |
| Principal amount of the 3.75% Convertible Senior Notes | 143,750 | 143,750 |
| Unamortized discount | (32,633) | (40,591) |
| Total debt | 111,117 | 118,159 |
| Current portion of long-term debt | — | 14,429 |
| Long-term debt | $111,117 | $103,730 |
| Deferred financing costs | $1,560 | $2,004 |

Interest and other expense related to the 5.375% Senior Notes (as defined below) and the 3.75% Senior Notes (as defined below) was included in interest and other expense on the consolidated statements of operations as follows (in thousands):

|  | Three Months Ended September 30, 2013 | 2012 | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Contractual coupon interest | $1,347 | $1,549 | $4,356 | $4,647 |
| Accretion of debt discount | 2,447 | 2,420 | 7,958 | 7,111 |
| Loss on debt extinguishment | — | — | 325 | — |
| Amortization of debt issuance costs | 146 | 148 | 443 | 445 |
| Total interest and other expense | $3,940 | $4,117 | $13,082 | $12,203 |

### 5.375% Convertible Senior Notes

In June 2008, we sold $85.0 million in 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 was 5.375% per annum on the principal amount from June 16, 2008, payable semi-annually in arrears in cash on December 15 and June 15 of each year. The 5.375% Notes were 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 were 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 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 was amortized as non-cash interest expense over the five year term of the 5.375% Notes. We incurred deferred financing costs related to this offering of approximately $3.5 million, of which $1.1 million has been reclassified as an offset to the value of the amount allocated to equity. The remainder was recorded as other assets in the consolidated balance sheet and was amortized as non-cash interest expense over the five year term of the 5.375% Notes.

In June 2011, in connection with the issuance of $143.8 million in principal amount of 3.75% Convertible Notes due June 2016 (the “3.75% Notes”), we repurchased $70 million in principal amount of the 5.375% Notes for $85.1 million, a 21.5% premium on the principal amount. The investors that held the $70 million in principal amount of repurchased 5.375% Notes purchased $59.5 million in principal amount of the 3.75% Notes and retained approximately $13.5 million in principal amount of the remaining 5.375% Notes. These investors’ combined $73.0 million in principal amount of convertible debt ($13.5 million of 5.375% Notes and $59.5 million of 3.75% Notes) was considered to be a modification of a portion of the 5.375% Notes. See the section entitled “3.75% Convertible Senior Notes” below.

In May 2013, we entered into an Exchange Agreement with a holder of our 5.375% Notes. Under the Exchange Agreement, we purchased $13 million in principal amount of the 5.375% Notes in exchange for 620,122 shares of our common stock and a cash payment of $0.3 million, representing accrued and unpaid interest. Furthermore, we recorded a loss on extinguishment of debt of $0.3 million which was included in interest and other expense in the nine months ended September 30, 2013.

In June 2013, we repaid the remaining outstanding principal and accrued interest on the 5.375% Notes in accordance with their terms. In addition to a cash payment of $2.1 million, representing principal and accrued and unpaid interest, we issued 26,523 shares of our common stock to the holders representing the conversion value in excess of the principal amount as per the terms of the 5.375% Notes.

No cash interest expense was recorded related to the 5.375% Notes in the three month period ended September 30, 2013. Cash interest expense related to the 5.375% Notes was $0.2 million in the three month period ended September 30, 2012. Cash interest expense related to the 5.375% Notes was $0.3 million and $0.6 million in the nine month periods ended September 30, 2013 and 2012, respectively.

### 3.75% Convertible Senior Notes

In June 2011, we sold $143.8 million in principal amount of the 3.75% Notes. The interest rate on the notes is 3.75% per annum, payable semi-annually in arrears in cash on December 15 and June 15 of each year. The 3.75% Notes are convertible into our common stock at an initial conversion rate of 38.1749 shares of common stock per $1,000 principal amount of the 3.75% Notes, which is equivalent to a conversion price of approximately $26.20 per share, subject to adjustment under certain circumstances. The 3.75% Notes are convertible prior to March 15, 2016 only upon the occurrence of certain circumstances. On and after March 15, 2016 and prior to the close of business on the second scheduled trading day immediately preceding the final maturity date of the 3.75% Notes, the notes may be converted without regard to the occurrence of any such circumstances. The 3.75% Notes and any unpaid interest will be convertible at our option for cash, shares of our common stock or a combination of cash and shares of our common stock for the principal amount. We intend to settle the principal in cash.

We may not redeem the 3.75% Notes prior to June 20, 2014. From June 20, 2014 to June 20, 2015, we may redeem the 3.75% Notes, at our option, in whole or in part, only if the last reported sale price per share of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during a period of 30 consecutive trading days. On and after June 20, 2015, we may redeem the 3.75% Notes, at our option (without regard to such sale price condition), in whole or in part. If a fundamental change, as defined in the Indenture for the 3.75% Notes, occurs at any time prior to maturity, holders of the 3.75% Notes may require us to repurchase their notes in whole or in part for cash equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest. If a holder elects to convert their 3.75% Notes upon the occurrence of a make-whole fundamental change, as defined in the Indenture for the 3.75% Notes, the holder may be entitled to receive an additional number of shares of common stock on the conversion date. These additional shares are intended to compensate the holders for the loss of the time value of the conversion option and are set forth in the Indenture to the 3.75% Notes. In no event will the number of shares issuable upon conversion of a 3.75% Note exceed 50.5816 per $1,000 principal amount (subject to adjustment as described in the Indenture for the 3.75% Notes). The 3.75% Notes are unsecured.

We identified certain features related to a portion of the 3.75% Notes, including the holders’ ability to require us to repurchase their notes and the higher interest payments required in an event of default, which are considered embedded derivatives and should be bifurcated and accounted for at fair value. We assess the value of each of these embedded derivatives at each balance sheet date. At September 30, 2013, we determined that these derivatives had de minimus value.

In connection with the issuance of the 3.75% Notes, we repurchased $70 million in principal amount of the 5.375% Notes for $85.1 million, a 21.5% premium on the principal amount. The investors that held the $70 million in principal amount of repurchased 5.375% Notes purchased $59.5 million in principal amount of the 3.75% Notes and retained approximately

$13.5 million in principal amount of the remaining 5.375% Notes. This transaction was treated as a modification of the existing 5.375% Notes. We accounted for this modification of a portion of the 5.375% Notes separately from the issuance of the remainder of the 3.75% Notes.

Prior to the transaction, the $70 million in principal amount of repurchased 5.375% Notes had a debt discount of $10.5 million. This amount remained in debt discount related to the $73 million in principal amount of modified debt. We recorded an additional debt discount of $15.1 million related to the premium payment in connection with the repurchase and $0.2 million related to the increase in the value of the conversion feature. The portion of the debt discount related to the value of the conversion feature was recorded as additional paid-in capital. The total debt discount of $25.8 million related to the modified debt is being amortized as non-cash interest expense at the effective rate of 16.5% over the five year term of the modified debt. We paid transaction fees of approximately $2.0 million related to the modification which were recorded as interest expense at the time of the modification.

Of the $143.8 million in principal amount of 3.75% Notes issued in June 2011, $84.3 million in principal amount was considered to be an issuance of new debt. We recorded a debt discount of $26.6 million related to the $84.3 million in principal amount of 3.75% Notes. The debt discount was recorded as additional paid-in capital to reflect the value of our nonconvertible debt borrowing rate of 12.4% per annum. This debt discount is being amortized as non-cash interest expense over the five year term of the 3.75% Notes. We incurred deferred financing costs related to this offering of approximately $2.8 million, of which $0.9 million has been reclassified as an offset to the value of the amount allocated to equity. The remainder is recorded as other assets in the consolidated balance sheet and is being amortized as non-cash interest expense over the five year term of the 3.75% Notes.

Cash interest expense related to the $143.8 million in principal amount of 3.75% Notes was $1.3 million in each of the three month periods ended September 30, 2013 and 2012. Cash interest expense related to the $143.8 million in principal amount of 3.75% Notes was $4.0 million in each of the nine month periods ended September 30, 2013 and 2012.

As of September 30, 2013, we included $111.1 million on our balance sheet in long-term debt related to the 3.75% Notes. The 3.75% Notes have a remaining term of 2.75 years.

### Capital Leases

In the nine months ended September 30, 2103, we acquired $9.0 million of manufacturing equipment under capital leases. The $9.0 million obligation under the capital leases will be repaid in equal monthly installments over the 36 month terms of the leases and includes principal and interest payments with an effective interest rate of 17%. In the third quarter of 2013, the Company recorded a $2.5 million charge to expense the value of equipment as it was no longer expected to be used in our manufacturing process. The underlying assets have been recorded at their fair value of $6.5 million and are included in property and equipment on our balance sheet as of September 30, 2013. The assets acquired under capital leases are being amortized on a straight-line basis over 5 years in accordance with our policy for depreciation of manufacturing equipment. Amortization expense on assets acquired under capital leases is included with depreciation expense.

The aggregate future minimum lease payments related to these capital leases as of September 30, 2013, are as follows (in thousands):

| Year Ending December 31, | Minimum Lease Payments |
| --- | ---: |
| 2013 (remaining) | 954 |
| 2014 | 3,815 |
| 2015 | 3,815 |
| 2016 | 2,409 |
| Total | $10,993 |

We recorded $0.1 million of interest expense on the capital leases in the three and nine months ended September 30, 2013.

#### Operating Activities

The following table sets forth the amounts of cash provided by (used in) operating activities and net loss for each of the periods indicated:

*(In thousands)*

|  | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| Cash provided by (used in) operating activities | $6,866 | $(23,466) |
| Net loss | $(42,474) | $(41,673) |

In the nine months ended September 30, 2013, the net cash provided by operating activities was primarily attributable to our continued focus on profitability. In the nine months ended September 30, 2012, the net cash used in operating activities was attributable primarily to the growth of our operations after adjustments for non-cash expenses. Adjustments for non-cash items were approximately $33.8 million and $25.5 million in the nine months ended September 30, 2013 and 2012, respectively. Non-cash items mainly consist of depreciation and amortization, stock-based compensation, non-cash interest and other expense, and impairment and other charges.

Cash provided by operations in the nine months ended September 30, 2013 included a decrease in inventories of $9.5 million and an increase in accounts payable, accrued expenses and other current liabilities of $16.7 million, offset in part by a decrease of $4.9 million in deferred revenue, an increase in accounts receivable of $5.1 million and an increase in prepaid expenses and other current assets of $1.4 million. The decrease in inventories and increase in accounts payable, accrued expenses and other current liabilities are largely related to the scale up of our manufacturing operations as we transition our customer base to our new OmniPod System. The decrease of deferred revenues relates to the recognition of revenue billed in prior periods as we meet the revenue recognition criteria. The increase in accounts receivable largely relates to the timing of shipments to customers and overall expansion of our customer base. Uses of cash from operations in the nine months ended September 30, 2012 include an increase in accounts receivable of $9.3 million and an increase in inventories of $3.3 million, offset in part by an increase in accounts payable and accruals of $8.7 million.

#### Investing and Financing Activities

The following table sets forth the amounts of cash used in investing activities and cash provided by financing activities for each of the periods indicated:

*(In thousands)*

|  | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| Cash used in investing activities | $(4,517) | $(8,936) |
| Cash provided by financing activities | $94,263 | $1,890 |

Cash used in investing activities in the nine months ended September 30, 2013 and 2012 was primarily for the purchase of manufacturing equipment for use in the production of our new OmniPod System.

Cash provided by financing activities in the nine months ended September 30, 2013 was mainly related to the net proceeds from the issuance of common stock in connection with the public offering and exercise of employee stock options. Cash provided by financing activities in the nine months ended September 30, 2012 mainly related to net proceeds from the issuance of common stock related to exercises of employee stock options offset by our payment of taxes in connection with the vesting of the restricted stock units in the period.

#### Commitments and Contingencies

We lease facilities in Massachusetts, New York, Florida, and Singapore. We account for these leases as operating leases. The leases generally provide for a base rent plus real estate taxes and certain operating expenses related to the leases. We have extended the leases of our facilities in Bedford and Billerica, Massachusetts. Following these extensions, these leases expire in September 2014. The leases for Bedford contain a five-year renewal option and escalating payments over the life of the leases.

During the year ended December 31, 2012, we terminated a lease for one of our corporate office spaces in Bedford, Massachusetts. The lease termination resulted in no material impact to our financial statements. During the same period, we entered into a new lease agreement for an additional 26,500 square feet in Bedford, Massachusetts. This lease expires in September 2014 and includes escalating payments over its term. During the nine months ended September 30, 2013, we extended the lease of our Woburn location. Following the extension, the lease expires in December 2014. The leases in Florida, New York, and Singapore expire in December 2013, April 2015, and July 2015, respectively.

Certain of our operating lease agreements contain scheduled rent increases, which are being amortized over the terms of the agreements using the straight-line method and are included in other liabilities on our balance sheet.

The following table summarizes our principal obligations as of September 30, 2013 (in thousands):

| Contractual Obligations | Payments Due in Total | 2013 Remaining | 2014 | 2015 | 2016 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Operating lease obligations | $1,591 | $361 | $1,134 | $96 | $— |
| Debt obligations (1) | 158,350 | 1,347 | 5,391 | 5,391 | 146,221 |
| Capital lease obligations (2) | 10,993 | 954 | 3,815 | 3,815 | 2,409 |
| Total contractual obligations | $170,934 | $2,662 | $10,340 | $9,302 | $148,630 |

(1) The interest rate on the convertible debt is 3.75% per annum. We have included future payments of interest on the long-term debt in our obligations.

(2) The effective interest rate on the capital lease obligations is 17%. We have included future payments of interest on the capital lease in our obligations.

At September 30, 2013, we are subject to an on-going sales and use tax audit by the Massachusetts Department of Revenue related to Neighborhood Diabetes for a period prior to the acquisition. Under the Merger Agreement, we have been indemnified by the former Stockholders of Neighborhood Diabetes for any liability resulting from or related to any tax attributable to pre-acquisition periods. We have recorded a contingent liability in current liabilities and a corresponding indemnification asset in current assets related to the estimated sales tax payable to the state of Massachusetts for the period under audit.

### Off-Balance Sheet Arrangements

As of September 30, 2013, we did not have any off-balance sheet financing arrangements.

### Critical Accounting Policies and Estimates

Our financial statements are based on the selection and application of generally accepted accounting principles, which require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements. We have reviewed our policies and estimates to determine our critical accounting policies for the nine months ended September 30, 2013. We have made no material changes to the critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2012.

### Recent Accounting Pronouncements

In July 2012, the FASB issued ASU No. 2012-02 *Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“*ASU No. 2012-02”). ASU No. 2012-02 gives a company the option to first assess qualitative factors to determine whether it is more-likely-than-not that the indefinite-lived intangible is impaired. Qualitative factors include related events and circumstances that could affect the significant inputs used in determining the fair value of the indefinite-lived intangible asset. The guidance is effective in fiscal years beginning after September 15, 2012. We adopted the guidance in the first quarter of 2013. The adoption of the guidance did not have a material impact on our financial statements.

## Market risk

As filed, 1,095 characters.

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash, cash equivalents, accounts receivable, accounts payable, accrued expenses and long-term obligations. We consider investments that, when purchased, have a remaining maturity of 90 days or less to be cash equivalents. The primary objectives of our investment strategy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. To minimize our exposure to an adverse shift in interest rates, we invest mainly in cash equivalents. We do not believe that a 10% change in interest rates would have a material impact on the fair value of our investment portfolio or our interest income.

As of September 30, 2013, we had outstanding debt recorded on our consolidated balance sheet of $143.8 million related to our 3.75% Notes and $8.7 million related to capital lease obligations. As the interest rates are fixed, changes in interest rates do not affect the value of our debt or capital lease obligations.

## Controls and procedures

As filed, 1,912 characters.

### Disclosure Controls and Procedures

As of September 30, 2013, 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 (the “Exchange Act”)) under the supervision and with the participation of our chief executive officer and chief financial officer. In designing and evaluating our disclosure controls and procedures, we and our management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation of our disclosure controls and procedures as of September 30, 2013, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 698 characters.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition or future results. These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

Filed Nov 7, 2013.
Source: SEC EDGAR, the filing index for accession 0001145197-13-000035. Last ingested by Listed: Nov 4, 2026, 16:38 ET. No prices; not investment advice.