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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
Form 10-Q
 _____________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
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)
__________________________________________________________________________________________________
 
Delaware
 
04-3523891
 
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
100 Nagog Park
Acton
Massachusetts
 
01720
 
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (978600-7000
________________________________________________________________________________________________________
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       No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  
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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
Accelerated filer

 
 
 
 
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 Par Value Per Share
PODD
The NASDAQ Stock Market, LLC
As of April 30, 2020, the registrant had 63,084,855 shares of common stock outstanding.




TABLE OF CONTENTS
 
 
 
 
 
 
 



PART I - FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements (Unaudited)
INSULET CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in millions, except share and per share data)
March 31,
2020
 
December 31,
2019
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
201.4

 
$
213.7

Short-term investments
120.2

 
162.4

Accounts receivable trade, less allowance for credit losses of $4.1 and $3.8
80.1

 
69.3

Inventories
95.7

 
101.0

Prepaid expenses and other current assets
43.9

 
44.6

Total current assets
541.3

 
591.0

Long-term investments
60.8

 
58.4

Property, plant and equipment, net
412.4

 
399.4

Other intangible assets, net
12.4

 
13.2

Goodwill
39.6

 
39.8

Other assets
41.7

 
41.1

Total assets
$
1,108.2

 
$
1,142.9

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
36.4

 
$
54.5

Accrued expenses and other current liabilities
94.0

 
103.2

Total current liabilities
130.4

 
157.7

Convertible debt, net
899.0

 
887.9

Other liabilities
19.8

 
21.4

Total liabilities
1,049.2

 
1,067.0

Commitments and contingencies (Note 9)

 

Stockholders’ Equity
 
 
 
Preferred stock, $.001 par value, 5,000,000 authorized; none issued and outstanding

 

Common stock, $.001 par value, 100,000,000 authorized; 63,057,874 and 62,685,492 issued and outstanding
0.1

 
0.1

Additional paid-in capital
737.9

 
749.0

Accumulated deficit
(675.2
)
 
(672.0
)
Accumulated other comprehensive loss
(3.8
)
 
(1.2
)
Total stockholders’ equity
59.0

 
75.9

Total liabilities and stockholders’ equity
$
1,108.2

 
$
1,142.9


The accompanying condensed notes are an integral part of these consolidated financial statements.
3


INSULET CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 
Three Months Ended March 31,
(in millions, except share and per share data)
2020
 
2019
Revenue
$
198.0

 
$
159.6

Cost of revenue
71.1

 
52.9

Gross profit
126.9

 
106.7

Research and development expenses
35.5

 
32.5

Selling, general and administrative expenses
83.9

 
66.9

Operating income
7.5

 
7.3

Interest expense, net
(10.1
)
 
(4.8
)
Other income, net

 
2.2

(Loss) income before income taxes
(2.6
)
 
4.7

Income tax benefit (expense)
0.5

 
(0.3
)
Net (loss) income
$
(2.1
)
 
$
4.4

 
 
 
 
Net (loss) income per share:
 
 
 
Basic
$
(0.03
)
 
$
0.07

Diluted
$
(0.03
)
 
$
0.07

Weighted-average number of common shares outstanding:
 
 
 
Basic
62,883,672

 
59,355,031

Diluted
62,883,672

 
61,148,428


The accompanying condensed notes are an integral part of these consolidated financial statements.
4


INSULET CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)

 
Three Months Ended March 31,
(in millions)
2020
 
2019
Net (loss) income
$
(2.1
)
 
$
4.4

Other comprehensive loss, net of tax:
 
 
 
Currency translation adjustment
(3.4
)
 
(0.8
)
Unrealized gain on available-for-sale debt securities
0.8

 
0.6

Total other comprehensive loss, net of tax
(2.6
)
 
(0.2
)
Comprehensive (loss) income
$
(4.7
)
 
$
4.2


The accompanying condensed notes are an integral part of these consolidated financial statements.
5


INSULET CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)

Three Months Ended March 31, 2020
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Loss
 
Total
Shareholders’
Equity
(in millions, except share data)
Shares
 
Amount
 
 
Balance at December 31, 2019
62,685,492

 
$
0.1

 
$
749.0

 
$
(672.0
)
 
$
(1.2
)
 
$
75.9

Adoption of ASU 2016-13 (Note 1)

 

 

 
(1.1
)
 

 
(1.1
)
Exercise of options to purchase common stock
172,832

 

 
6.2

 

 

 
6.2

Stock-based compensation

 

 
7.9

 

 

 
7.9

Restricted stock units vested, net of shares withheld for taxes
199,550

 

 
(25.2
)
 

 

 
(25.2
)
Net loss

 

 

 
(2.1
)
 

 
(2.1
)
Other comprehensive loss

 

 

 

 
(2.6
)
 
(2.6
)
Balance at March 31, 2020
63,057,874

 
$
0.1

 
$
737.9

 
$
(675.2
)
 
$
(3.8
)
 
$
59.0


Three Months Ended March 31, 2019
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Loss
 
Total
Shareholders’
Equity
(in millions, except share data)
Shares
 
Amount
 
 
Balance at December 31, 2018
59,188,758

 
$
0.1

 
$
898.5

 
$
(683.6
)
 
$
(2.9
)
 
$
212.1

Exercise of options to purchase common stock
269,473

 

 
9.0

 

 

 
9.0

Stock-based compensation

 

 
5.8

 

 

 
5.8

Restricted stock units vested, net of shares withheld for taxes
180,208

 

 
(7.5
)
 

 

 
(7.5
)
Net income

 

 

 
4.4

 

 
4.4

Other comprehensive loss

 

 

 

 
(0.2
)
 
(0.2
)
Balance at March 31, 2019
59,638,439

 
$
0.1

 
$
905.8

 
$
(679.2
)
 
$
(3.1
)
 
$
223.6











The accompanying condensed notes are an integral part of these consolidated financial statements.
6



INSULET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Three Months Ended March 31,
(in millions)
2020
 
2019
Cash flows from operating activities
 
 
 
Net (loss) income
$
(2.1
)
 
$
4.4

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
8.9

 
5.1

Non-cash interest
11.1

 
7.6

Stock-based compensation
7.9

 
5.8

Provision for credit losses
0.6

 
0.8

Other
0.8

 
(0.3
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(14.6
)
 
(6.7
)
Inventories
4.8

 
(2.7
)
Prepaid expenses and other assets
0.7

 
(1.7
)
Accounts payable, accrued expenses and other current liabilities
(20.4
)
 
(5.1
)
Other liabilities
(1.3
)
 
(0.7
)
Net cash (used in) provided by operating activities
(3.6
)
 
6.5

Cash flows from investing activities
 
 
 
Capital expenditures
(26.9
)
 
(44.4
)
Acquisition of intangible assets
(0.5
)
 
(0.9
)
Purchases of investments
(38.0
)
 
(2.1
)
Receipts from the maturity or sale of investments
78.8

 
55.0

Net cash provided by investing activities
13.4

 
7.6

Cash flows from financing activities
 
 
 
Proceeds from exercise of stock options
6.2

 
9.0

Payment of withholding taxes in connection with vesting of restricted stock units
(25.2
)
 
(7.5
)
Net cash (used in) provided by financing activities
(19.0
)
 
1.5

Effect of exchange rate changes on cash
(3.1
)
 
(0.2
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(12.3
)
 
15.4

Cash, cash equivalents and restricted cash at beginning of period
213.7

 
113.9

Cash, cash equivalents and restricted cash at end of period
$
201.4

 
$
129.3

 
 
 
 
Supplemental cash flow information:
 
 
 
Purchases of property and equipment included in accounts payable and accrued expenses
$
8.4

 
$
12.7




The accompanying condensed notes are an integral part of these consolidated financial statements.
7


INSULET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements reflect the consolidated operations of Insulet Corporation and its subsidiaries (“Insulet” or the “Company”). The unaudited consolidated financial statements have been prepared in United States dollars, in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of the consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results may differ from those estimates. In management’s opinion, the unaudited consolidated financial statements contain all normal recurring adjustments necessary for a fair statement of the interim results reported. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020, or for any other subsequent interim period.
The year-end balance sheet data was derived from audited consolidated financial statements. These unaudited consolidated financial statements do not include all of the annual disclosures required by GAAP; accordingly, they should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Accounts Receivable and Allowance for Credit Losses
Trade accounts receivable consist of amounts due from third-party payors, customers and intermediaries and are presented at amortized cost. The allowance for credit losses reflects an estimate of losses inherent in the Company’s accounts receivable portfolio determined based on historical experience, specific allowances for known troubled accounts and other available evidence. Accounts receivable are written off when management determines they are uncollectable.
The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the following portfolio segments and measures the allowance for credit losses using the following methods:
Direct Customer Receivables—The Company measures expected credit losses on direct customer receivables using an aging methodology. The risk of loss for direct customer receivables is higher than other portfolios. The Company relies on third-party payors to accept and timely process claims and on direct consumers to have the ability to pay. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and supportable forecasts.
Distributor Receivables—The Company measures expected credit losses on distributor receivables using an individual reserve methodology. The risk of loss in this portfolio is low based on the Company’s historical experience. The estimate of expected credit losses considers payment history as well as credit ratings of the distributors, in addition to current conditions and supportable forecasts.
National Healthcare System Receivables—The Company measures expected credit losses on national healthcare system receivables using an individual reserve methodology. The risk of loss in this portfolio is low based on the Company’s historical experience. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and supportable forecasts.
Shipping and Handling Costs
Shipping and handling costs are included in selling, general and administrative expenses and were $1.9 million and $2.6 million for the three months ended March 31, 2020 and 2019, respectively.

Fair Value Measurements
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. To measure fair value of assets and liabilities, the Company uses the following fair value hierarchy based on three levels of inputs:
Level 1—observable inputs, such as quoted prices in active markets for identical assets or liabilities;
Level 2—significant other observable inputs that are observable either directly or indirectly; and
Level 3—significant unobservable inputs for which there are little or no market data, which require the Company to develop its own assumptions.
Certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities are carried at cost, which approximates their fair value because of their short-term maturity. See Notes 3

8


and 8 for financial assets and liabilities held at carrying amount on the consolidated balance sheet and Note 4 for investments measured at fair value on a recurring basis.

Reclassification of Prior Period Amounts
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. A portion of facility costs and certain information technology costs have been allocated from selling, general and administrative to research and development expenses based on square foot and system usage, respectively. In addition, certain quality assurance costs were reclassified from research and development expenses to selling, general and administrative expenses. The net impact of these adjustments was a $0.6 million increase to research and development expenses and a corresponding decrease to selling, general and administrative expenses. There was no change to previously reported operating or net income. Further, the Company reclassified the $3.9 million change in unbilled receivables from the change in accounts and unbilled receivables to the change in prepaid expenses and other assets in the prior year statement of cash flows. This reclassification had no effect on previously reported net cash provided by operating activities.

Recently Adopted Accounting Standards
Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Credit Losses (Topic 326) (“ASU 2016-13”). ASU 2016-13 requires financial assets measured at amortized cost, such as the Company’s trade receivables and contract assets, to be presented net of expected credit losses, which may be estimated based on relevant information such as historical experience, current conditions and future expectation for each pool of similar financial assets. The new guidance also requires enhanced disclosures related to trade receivables and associated credit losses. The Company adopted ASU 2016-13 using the modified retrospective method, whereby the guidance is applied prospectively as of the date of adoption and prior periods are not restated. The cumulative effect of adopting ASU 2016-13 resulted in a $1.1 million increase to the opening balance of accumulated deficit upon adoption related to an increase in the allowance for credit losses on accounts receivable.
The following table presents the activity in the allowance for credit losses for the period ended March 31, 2020, comprised primarily of our direct consumer receivable portfolio. The allowance for credit losses of other portfolios is insignificant.
 
 
(in millions)
Balance at December 31, 2019
 
$
3.8

Effect of adoption
 
1.1

Balance at January 1, 2020
 
4.9

Provision for expected credit losses
 
0.6

Write-offs charged against allowance
 
(1.5
)
Recoveries of amounts previously written-off
 
0.1

Balance at March 31, 2020
 
$
4.1


Effective January 1, 2020, the Company adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 requires an entity to measure the impairment of goodwill assigned to a reporting unit as the amount by which the carrying value of the assets and liabilities of the reporting unit, including goodwill, exceeds the reporting units’ fair value. The adoption of this guidance had no impact on the consolidated financial statements.
Note 2. Revenue and Contract Acquisition Costs
The following table summarizes the Company’s disaggregated revenues:
 
Three Months Ended March 31,
(in millions)
2020
 
2019
U.S. Omnipod
$
116.6

 
$
86.1

International Omnipod
73.1

 
56.9

Total Omnipod
189.7

 
143.0

Drug Delivery
8.3

 
16.6

Total
$
198.0

 
$
159.6


During the three months ended March 31, 2020, the Company had two customers that represented 12% and 10% of total revenue, respectively. During the three months ended March 31, 2019, the Company had two customers that each represented 10% of the Company’s total revenue.

9


Deferred revenue related to unsatisfied performance obligations was included in the following consolidated balance sheet accounts in the amounts shown:
(in millions)
March 31, 2020
 
December 31, 2019
Accrued expenses and other current liabilities
$
3.8

 
$
3.2

Other liabilities
0.9

 
1.0

Total deferred revenue
$
4.7

 
$
4.2


Revenue recognized during the three months ended March 31, 2020 included in deferred revenue at the beginning of 2020 was $1.4 million. Revenue recognized during the three months ended March 31, 2019 included in deferred revenue at the beginning of 2019 was $0.9 million.
Contract acquisition costs, representing capitalized commission costs related to new customers, net of amortization, were included in the following consolidated balance sheet accounts in the amounts shown:
(in millions)
March 31, 2020
 
December 31, 2019
Prepaid expenses and other current assets
$
9.9

 
$
9.5

Other assets
20.6

 
19.9

Total capitalized contract acquisition costs, net
$
30.5

 
$
29.4


The Company recognized $2.5 million and $2.0 million of amortization of capitalized contract acquisition costs during the three months ended March 31, 2020 and 2019, respectively.
Note 3. Cash and Cash Equivalents
The following table provides a summary of cash and cash equivalents and the level in the fair value hierarchy in which those measurements fall:
 
March 31, 2020
 
December 31, 2019
(in millions)
Total
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2 (1)
Cash
$
85.5

 
$
85.5

 
$

 
$
85.3

 
$
85.3

 
$

Money market mutual funds
113.0

 
113.0

 

 
115.5

 
115.5

 

Commercial paper

 

 

 
10.0

 

 
10.0

Restricted cash
2.9

 
2.9

 

 
2.9

 
2.9

 

Total cash and cash equivalents
$
201.4

 
$
201.4

 
$

 
$
213.7

 
$
203.7

 
$
10.0

(1) Fair value was determined using market prices obtained from third-party pricing sources.

10


Note 4. Investments
The Company’s short-term and long-term investments in debt securities had maturity dates that range from three months to two years at March 31, 2020. Realized gains or losses for both the three months ended March 31, 2020 and 2019 were insignificant.
The following table provides amortized costs, gross unrealized gains and losses, fair values and the level in the fair value hierarchy for the Company’s investments at March 31, 2020 and December 31, 2019:
(in millions)
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Level 1
 
Level 2 (1)
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency bonds
$
85.0

 
$
0.7

 
$

 
$
85.7

 
$
70.7

 
$
15.0

Corporate bonds
15.7

 

 

 
15.7

 

 
15.7

Certificates of deposit
6.4

 

 

 
6.4

 

 
6.4

Commercial Paper
12.4

 

 

 
12.4

 

 
12.4

Total short-term investments
$
119.5

 
$
0.7

 
$

 
$
120.2

 
$
70.7

 
$
49.5

 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency bonds
$
55.8

 
$
0.5

 
$

 
$
56.3

 
$
25.7

 
$
30.6

Corporate bonds
2.8

 

 

 
2.8

 

 
2.8

Certificates of deposit
1.7

 

 

 
1.7

 

 
1.7

Total long-term investments
$
60.3

 
$
0.5

 
$

 
$
60.8

 
$
25.7

 
$
35.1

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency bonds
$
94.7

 
$
0.3

 
$

 
$
95.0

 
$
85.0

 
$
10.0

Corporate bonds
51.0

 
0.1

 

 
51.1

 

 
51.1

Certificates of deposit
6.3

 

 

 
6.3

 

 
6.3

Commercial Paper
10.0

 

 

 
10.0

 

 
10.0

Total short-term investments
$
162.0

 
$
0.4

 
$

 
$
162.4

 
$
85.0

 
$
77.4

 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency bonds
$
52.9

 
$
0.1

 
$
(0.1
)
 
$
52.9

 
$
42.9

 
$
10.0

Corporate bonds
2.8

 

 

 
2.8

 

 
2.8

Certificates of deposit
2.7

 

 

 
2.7

 

 
2.7

Total long-term investments
$
58.4

 
$
0.1

 
$
(0.1
)
 
$
58.4

 
$
42.9

 
$
15.5


(1) Fair value was determined using market prices obtained from third-party pricing sources.
Note 5. Inventories
At the end of each period, inventories were comprised of the following:
(in millions)
March 31, 2020
 
December 31, 2019
Raw materials
$
29.7

 
$
23.3

Work-in-process
21.8

 
40.3

Finished goods
44.2

 
37.4

    Total inventories
$
95.7

 
$
101.0


Note 6. Goodwill and Other Intangible Assets, Net
The change in the carrying amount of goodwill for the three months ended March 31, 2020 was as follows:
 
(in millions)
Goodwill at December 31, 2019
$
39.8

Foreign currency translation
(0.2
)
Goodwill at March 31, 2020
$
39.6



11



The gross carrying amount, accumulated amortization and net book value of intangible assets at the end of each period were as follows:
 
March 31, 2020
 
December 31, 2019
(in millions)
Gross Carrying Amount
 
Accumulated Amortization
 
Net Book
Value
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Book
Value
Customer relationships (1)
$
9.9

 
$
(3.0
)
 
$
6.9

 
$
9.9

 
$
(2.8
)
 
$
7.1

Internal-use software
12.0

 
(7.4
)
 
4.6

 
12.0

 
(6.8
)
 
5.2

Intellectual property
1.0

 
(0.1
)
 
0.9

 
1.0

 
(0.1
)
 
0.9

Total
$
22.9

 
$
(10.5
)
 
$
12.4

 
$
22.9

 
$
(9.7
)
 
$
13.2


(1) Includes customer relationships acquired from the Company’s former European distributor. See Note 9.
Amortization expense for intangible assets was $0.8 million and $0.6 million for the three months ended March 31, 2020 and 2019, respectively. Amortization expense associated with intangible assets included on the Company’s balance sheet as of March 31, 2020 is expected to be as follows:
Years Ending December 31,
(in millions)
2020 (remaining)
$
2.4

2021
2.4

2022
1.9

2023
1.2

2024
1.0

Thereafter
3.5

     Total
$
12.4


Note 7. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities were as follows:
(in millions)
March 31, 2020
 
December 31, 2019
Employee compensation and related costs
$
32.6

 
$
45.8

Professional and consulting services
15.3

 
19.3

Accrued rebates
8.4

 
7.5

Supplier purchases
7.1

 
2.4

Value added taxes payable
2.7

 
1.8

Accrued interest on debt
2.3

 
1.7

Other
25.6

 
24.7

Accrued expenses and other current liabilities
$
94.0

 
$
103.2


Product Warranty Costs
The Company provides a four-year warranty on Personal Diabetes Managers (“PDMs”) sold in the United States and Europe and a five-year warranty on PDMs sold in Canada and may replace Pods that do not function in accordance with product specifications. The Company estimates its warranty at the time the product is shipped based on historical experience and the estimated cost to service the claims. Since the Company continues to introduce new products and versions, the anticipated performance of the product over the warranty period is also considered in estimating warranty reserves. Warranty expense is recorded in cost of revenue in the consolidated statements of operations. Cost to service the claims reflects the current product cost.
The following table is a summary of the activity related to the Company’s product warranty liability: 
 
Three Months Ended March 31,
(in millions)
2020
 
2019
Product warranty liability at beginning of period
$
8.5

 
$
6.4

Warranty expense
2.5

 
2.2

Warranty claims settled
(2.7
)
 
(2.3
)
Product warranty liability at the end of period
$
8.3

 
$
6.3



12


Note 8. Convertible Debt, Net
The components of outstanding convertible debt consisted of the following:
(in millions)
March 31, 2020
 
December 31, 2019
1.375% Convertible Senior Notes, due November 2024
$
402.5

 
$
402.5

0.375% Convertible Senior Notes, due September 2026
800.0

 
800.0

Unamortized debt discount
(284.5
)
 
(294.8
)
Debt issuance costs
(19.0
)
 
(19.8
)
Total convertible debt, net
$
899.0

 
$
887.9


The carrying amount and the estimated fair value of the Company’s convertible debt, which is based on the Level 2 quoted market prices, were as follows:
 
March 31, 2020
 
December 31, 2019
(in millions)
Carrying Value
 
Estimated
Fair Value
(1)
 
Carrying Value
 
Estimated
Fair Value
(1)
1.375% Convertible Senior Notes, due November 2024
$
311.0

 
$
512.8

 
$
306.9

 
$
512.8

0.375% Convertible Senior Notes, due September 2026
588.0

 
819.8

 
581.0

 
840.0

  Total
$
899.0

 
$
1,332.6

 
$
887.9

 
$
1,352.8

(1) Fair value was determined using market prices obtained from third-party pricing sources.
Note 9. Commitments and Contingencies
Legal Proceedings
Between May 5, 2015 and June 16, 2015, three class action lawsuits were filed by shareholders in the U.S. District Court, for the District of Massachusetts, against the Company and certain then current and former executives of the Company. Two suits subsequently were voluntarily dismissed. Arkansas Teacher Retirement System v. Insulet, et al., 1:15-cv-12345, (“ATRS”) alleged that the Company (and certain then current and former executives) committed violations of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 by making allegedly false and misleading statements about the Company’s business, operations and prospects. On February 8, 2018, the parties executed a binding stipulation of settlement, under which all claims were released, and a payment was made into an escrow account for the plaintiffs and the class they purport to represent. On August 6, 2018, the Court issued an order approving the settlement, but took the plaintiffs’ motion for fees and expenses under advisement, which motion remains pending. The Company had previously accrued fees and expenses in connection with this matter for the amount of the final settlement liability that was not covered by insurance, the amount of which was not material to the Company’s consolidated financial statements.
In addition, on April 26, 2017, a derivative action (Walker v. DeSisto, et al., 1:17-cv-10738) (“Walker”) was filed, and on October 13, 2017, a second derivative action (Carnazza v. DeSisto, et al., 1:17-cv-11977) (“Carnazza”) was filed, both on behalf of the Company, each by a shareholder in the U.S. District Court for the District of Massachusetts against the Company (as a nominal defendant) and certain individual then current and former officers and directors of the Company. The allegations in the actions are substantially similar to those alleged in the securities class action. The actions seek, among other things, damages, disgorgement of certain types of compensation or profits, and attorneys’ fees and costs. On July 11, 2018, the parties executed a binding stipulation of settlement, under which all claims were released, and a payment of attorneys’ fees and reimbursement of expenses will be paid to plaintiffs’ counsel, subject to the Court’s approval. On July 13, 2018, the plaintiffs filed a motion for preliminary approval of the settlement, which is pending. The Company expects that such fees and expenses payable to plaintiff’s counsel will be covered by the Company’s insurance.
The Company is, from time to time, involved in the normal course of business in various legal proceedings, including intellectual property, contract, employment and product liability suits. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its results of operations.
Fees to Former European Distributor
Following the expiration of an agreement with a former European distributor on June 30, 2018, the Company was required to pay a quarterly per-unit fee for Omnipod sales to certain customers of the former European distributor for a one-year period through June 30, 2019. The Company recognized a liability and an associated intangible asset for this fee as qualifying sales occurred. The methodology applicable for determining the total fee under the distribution agreement is subject to an active arbitration proceeding in Switzerland. The final amount of the fee could vary significantly depending on the number of customers who count for purposes of calculating the fee under the terms of the agreement. The Company estimates that the final aggregate fee is in the range of $5 million to $55 million. As of both March 31, 2020 and December 31, 2019, the Company had $2.7 million accrued related to this matter. The associated gross intangible asset was $7.8 million at both March 31, 2020 and December 31, 2019.

13


Note 10. Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss, net of tax, were as follows:
 
 
Three months ended March 31, 2020
(in millions)
 
Foreign Currency Translation Adjustment
 
Unrealized Gain on Available-for-sale Securities
 
Accumulated Other Comprehensive Loss
Balance at December 31, 2019
 
$
(1.6
)
 
$
0.4

 
$
(1.2
)
Other comprehensive (loss) income
 
(3.4
)
 
0.8

 
(2.6
)
Balance at March 31, 2020
 
$
(5.0
)
 
$
1.2

 
$
(3.8
)

 
 
Three months ended March 31, 2019
(in millions)
 
Foreign Currency Translation Adjustment
 
Unrealized Loss on Available-for-sale Securities
 
Accumulated Other Comprehensive Loss
Balance at December 31, 2018
 
$
(2.2
)
 
$
(0.7
)
 
$
(2.9
)
Other comprehensive (loss) income
 
(0.8
)
 
0.6

 
(0.2
)
Balance at March 31, 2019
 
$
(3.0
)
 
$
(0.1
)
 
$
(3.1
)

Note 11. Interest Expense
Interest expense, net was as follows: 
 
Three Months Ended March 31,
(in millions)
2020
 
2019
Contractual coupon interest
$
2.1

 
$
2.5

Accretion of debt discount
10.4

 
6.9

Amortization of debt issuance costs
0.7

 
0.7

Capitalized interest
(1.6
)
 
(3.5
)
     Interest expense, net of portion capitalized
11.6

 
6.6

Interest income
(1.5
)
 
(1.8
)
Interest expense, net
$
10.1

 
$
4.8


Note 12. Stock-Based Compensation
Compensation expense related to stock-based awards was recorded as follows:
 
Three Months Ended March 31,
(in millions)
2020
 
2019
Cost of revenue
$
0.1

 
$
0.3

Research and development expenses
2.7

 
1.8

Selling, general and administrative expenses
5.1

 
3.7

Total
$
7.9

 
$
5.8


Note 13. Income Taxes
The Company’s effective tax rate for the three months ended March 31, 2020 was 18.4%, compared with 6.9% for the three months ended March 31, 2019. Income tax benefits have not been recorded for losses in jurisdictions where valuation allowances exist against net deferred tax assets, primarily in the United States. As of March 31, 2020 and December 31, 2019, the Company maintained a full valuation allowance against its U.S. net deferred tax assets based on the determination that it is not more likely than not these future benefits will be realized before expiration. The Company had no uncertain tax positions at both March 31, 2020 and December 31, 2019.
In April 2020, new interpretations of a German tax law related to intellectual property and withholding tax were released. The Company is currently evaluating if these new interpretations, applicable to corporate multinationals, will have an impact on the consolidated financial statements.



14


Note 14. Net (Loss) Income Per Share
Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding for the period. Diluted net (loss) income per share is computed using the weighted average number of common shares outstanding and, when dilutive, common share equivalents from outstanding stock options and restricted stock units (using the treasury-stock method), and potential common shares from the Company’s convertible notes (using the if-converted method). The weighted-average number of common shares used in the computation of basic and diluted net (loss) income per share were as follows:
 
Three Months Ended March 31,
(in millions)
2020
 
2019
Weighted average number of common shares outstanding, basic
62,883,672

 
59,355,031

Stock options

 
1,524,315

Restricted stock units

 
269,082

Weighted average number of common shares outstanding, diluted
62,883,672

 
61,148,428


The number of common share equivalents excluded from the computation of diluted net (loss) income per share because either the effect would have been anti-dilutive, or the performance criteria related to the units had not yet been met, were as follows:
 
Three Months Ended March 31,
 
2020
 
2019
1.25% Convertible Senior Notes

 
5,910,954

1.375% Convertible Senior Notes
4,319,429

 
4,319,429

0.375% Convertible Senior Notes
3,528,400

 

Unvested restricted stock units
537,878

 
360,278

Stock options
1,613,980

 
280,887

Total
9,999,687

 
10,871,548



15


Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes included in this quarterly report. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs and involve risks, uncertainties and assumptions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed under the headings “Risk Factors” and “Forward-Looking Statements” in both our annual report on Form 10-K for the year ended December 31, 2019 and in this quarterly report.
Overview
We are primarily engaged in the development, manufacture and sale of our proprietary Omnipod® System (“Omnipod”), an innovative, continuous insulin delivery system for people with insulin-dependent diabetes. There are two primary types of insulin therapy practiced today: multiple daily injection (“MDI”) therapy using syringes or insulin pens; and pump therapy using insulin pumps. Insulin pumps are used to perform continuous subcutaneous insulin infusion, or insulin pump therapy, and typically use a programmable device and an infusion set to administer insulin into a person’s body. Insulin pump therapy has been shown to provide people with insulin-dependent diabetes with numerous advantages relative to MDI therapy. The Omnipod System features a small, lightweight, self-adhesive disposable tubeless Omnipod device (“Pod”) that is worn on the body for up to three days at a time; and its wireless companion, the handheld Personal Diabetes Manager. The Omnipod System, which features discreet and easy-to-use devices communicates wirelessly, provides for virtually pain-free automated cannula insertion and eliminates the need for traditional MDI therapy or the use of traditional pump and tubing. We believe that the Omnipod System’s unique proprietary design and features allow people with insulin-dependent diabetes to manage their diabetes with unprecedented freedom, comfort, convenience and ease.
In addition to the diabetes market space, we have partnered with pharmaceutical and biotechnology companies to tailor the Omnipod System technology platform for the delivery of non-insulin subcutaneous drugs across other therapeutic areas. Most of our drug delivery revenue currently consists of sales of Pods to Amgen for use in the Neulasta® Onpro® kit, an innovative delivery system for Amgen’s white blood cell booster to help reduce the risk of infection after intense chemotherapy.
Our mission is to improve the lives of people with diabetes. To assist in achieving this mission, we are focused on the following key strategic imperatives:
delivering consumer-focused innovation;
ensuring the best customer experience globally;
expanding our global footprint; and
driving operational excellence.
Our long-term financial objective is to sustain profitable growth. To achieve this goal, we expect our efforts in 2020 to focus primarily on the pivotal trial for Omnipod, powered by Horizon™, in the United States. In order to support our continued growth and the expected launch of Omnipod, powered by Horizon in the first half 2021, we continue to focus on adding capacity to our U.S. manufacturing plant. During the first quarter of 2020, we began producing salable product on our second manufacturing line in the U.S. and we plan to install a third line in the second half of 2020, on which production is expected in 2021.
Additionally, in 2020, we had planned to further roll out our Omnipod DASHTM Insulin Management System (“Omnipod DASH”), our next generation digital mobile Omnipod platform, in Europe and Canada and enter five new countries in Western Europe and the Middle East to expand the commercial sale of Omnipod and our global footprint. We are still committed to the further roll out of Omnipod DASH and to entering new countries, although the timing has shifted to early 2021 primarily due to the coronavirus pandemic discussed under Recent Developments below. This change in expected timing will not have a material impact on our 2020 revenues since we did not expect these actions to have a meaningful contribution in 2020, although they are expected to contribute to our long-term growth.
Finally, we plan to continue our product development efforts and expand awareness of and access to our products. Achieving the above strategic imperatives is expected to require additional investments in certain initiatives and personnel, as well as enhancements to our supply chain operation capacity, efficiency and effectiveness.
Recent Developments
A novel strain of coronavirus (COVID-19) was identified in China in December 2019, and subsequently declared a pandemic by the World Health Organization in March 2020. The COVID-19 outbreak in China resulted in abnormally low production at our contract manufacturer in China during the first two months of the quarter. As a result, we incurred incremental depreciation expense for under- utilized plant capacity for the first two months of the quarter. In response to this outbreak, we took measures to ensure our ability to continue to provide product to our customers, including providing manufacturing incentives to our contract manufacturer in China and utilizing expedited, but more costly, shipping measures to transport product from China. In addition, we implemented strict screening and additional sanitation measures.

16


China, where we manufacture a significant portion of our products, has begun to experience recovery from COVID-19 and we have been able to produce at normal capacity since March. Additionally, our second highly automated manufacturing line in our U.S. manufacturing plant has provided additional manufacturing redundancy to help mitigate manufacturing risks stemming from COVID-19. Once fully ramped, we expect the two highly-automated lines in our U.S. manufacturing plant to provide us with capacity in the U.S. that is equivalent to all our current lines in China. Refer to Item 1A. Risk Factors for a discussion of COVID-19 risks.
Results of Operations
 
Three Months Ended March 31,
 
 
 
 
 
 
(dollars in millions)
2020
 
2019
 
Percent Change
 
Currency Impact
 
Constant Currency (1)
Revenue:
 
 
 
 
 
 
 
 
 
U.S. Omnipod
$
116.6

 
$
86.1

 
35.4
 %
 
 %
 
35.4
 %
International Omnipod
73.1

 
56.9

 
28.5
 %
 
(3.4
)%
 
31.9
 %
Total Omnipod
189.7

 
143.0

 
32.7
 %
 
(1.3
)%
 
34.0
 %
Drug Delivery
8.3

 
16.6

 
(50.0
)%
 
 %
 
(50.0
)%
Total
$
198.0

 
$
159.6

 
24.1
 %
 
(1.2
)%
 
25.3
 %
(1) Constant currency revenue growth is a non-GAAP financial measure, which should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with GAAP. See “Management’s Use of Non-GAAP Measures.”
Revenue
Total revenue for the three months ended March 31, 2020 increased $38.4 million, or 24.1%, to $198.0 million, compared with $159.6 million for the three months ended March 31, 2019. Excluding the 1.2% unfavorable impact of currency exchange, the remaining 25.3% increase in revenue was primarily driven by higher volume and, to a lesser extent, favorable sales channel mix. These increases were partially offset by a decline in Drug Delivery revenue.
U.S. Omnipod
U.S. Omnipod revenue for the three months ended March 31, 2020 increased $30.5 million, or 35.4%, to $116.6 million, compared with $86.1 million for the three months ended March 31, 2019. This increase was primarily due to higher volumes driven by growing our customer base, the launch of Omnipod DASH at the end of the first quarter of 2019 and growth through the pharmacy channel. Pod prices in the pharmacy channel have higher average selling prices due in part to the fact that we offer the PDM for no charge. For full year 2020, we expect strong Omnipod revenue growth driven by continued market penetration and volume growth of Omnipod DASH, primarily in the pharmacy channel.
International Omnipod
International Omnipod revenue for the three months ended March 31, 2020 increased $16.2 million, or 28.5%, to $73.1 million, compared with $56.9 million for the three months ended March 31, 2019. Excluding the 3.4% unfavorable impact of currency exchange, the remaining 31.9% increase in revenue was primarily driven by higher volumes as we continue to expand awareness and access to the Omnipod. Similar to in the U.S, for the full year 2020, we expect higher International Omnipod revenue due to continued volume growth and market penetration.
Drug Delivery
Drug Delivery revenue for the three months ended March 31, 2020 decreased $8.3 million, or 50.0%, to $8.3 million, compared with $16.6 million for the three months ended three months ended March 31, 2019, due to a shift in the timing of production between the first and second quarter. For full year 2020, we expect Drug Delivery revenue to decline due to a lower demand forecast.

Operating Expenses
 
Three Months Ended March 31,
 
2020
 
2019
(dollars in millions)
Amount
 
Percent of Revenue
 
Amount
 
Percent of Revenue
Cost of revenue
$
71.1

 
35.9
%
 
$
52.9

 
33.1
%
Research and development expenses
$
35.5

 
17.9
%