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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
Form 10-Q
 _____________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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: (978) 600-7000
_____________________________________________________
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  x    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  x    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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
x
 
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
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  x
As of April 25, 2019, the registrant had 59,675,242 shares of common stock outstanding.




TABLE OF CONTENTS
 
 
 
 

 
 
 


Table of Contents

PART I - FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements (Unaudited)
INSULET CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
March 31,
2019
 
December 31,
2018
ASSETS
(Unaudited)
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
129,254

 
$
113,906

Short-term investments
187,120

 
175,040

Accounts receivable, net
68,655

 
63,294

Unbilled receivable
9,503

 
13,378

Inventories
73,822

 
71,414

Prepaid expenses and other current assets
28,028

 
24,254

Total current assets
496,382

 
461,286

Long-term investments
76,789

 
140,784

Property and equipment, net
299,605

 
258,379

Other intangible assets, net
11,484

 
10,383

Goodwill
39,694

 
39,646

Other assets
28,658

 
18,266

Total assets
$
952,612

 
$
928,744

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
26,833

 
$
25,500

Accrued expenses and other current liabilities
85,945

 
88,973

Deferred revenue
1,195

 
1,184

Total current liabilities
113,973

 
115,657

Convertible debt, net
599,601

 
591,978

Other long-term liabilities
15,408

 
9,010

Total liabilities
728,982

 
716,645

Stockholders’ Equity
 
 
 
Preferred stock, $.001 par value:
 
 
 
Authorized: 5,000,000 shares at March 31, 2019 and December 31, 2018.
Issued and outstanding: zero shares at March 31, 2019 and December 31, 2018.


 

Common stock, $.001 par value:
 
 
 
Authorized: 100,000,000 at March 31, 2019 and December 31, 2018.
Issued and outstanding: 59,638,439 and 59,188,758 at March 31, 2019 and December 31, 2018, respectively.
60

 
59

Additional paid-in capital
905,891

 
898,559

Accumulated other comprehensive loss
(3,085
)
 
(2,905
)
Accumulated deficit
(679,236
)
 
(683,614
)
Total stockholders’ equity
223,630

 
212,099

Total liabilities and stockholders’ equity
$
952,612

 
$
928,744


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

INSULET CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 
Three Months Ended March 31,
(in thousands, except share and per share data)
2019
 
2018
Revenue
$
159,555

 
$
123,578

Cost of revenue
52,859

 
47,763

Gross profit
106,696

 
75,815

Operating expenses:
 
 
 
Research and development
31,954

 
20,267

Sales and marketing
41,616

 
33,049

General and administrative
25,861

 
22,499

Total operating expenses
99,431

 
75,815

Operating income
7,265

 

Interest expense
6,615

 
7,918

Other income, net
4,054

 
1,682

Interest expense and other income, net
2,561

 
6,236

Income (loss) before income taxes
4,704

 
(6,236
)
Income tax expense
326

 
333

Net income (loss)
$
4,378

 
$
(6,569
)
Net income (loss) per share:
 
 
 
Basic
$
0.07

 
$
(0.11
)
Diluted
$
0.07

 
$

Weighted-average number of shares used in calculating net income (loss) per share:
 
 
 
Basic
59,355,031

 
58,482,786

Diluted
61,148,428

 
58,482,786


The accompanying condensed notes are an integral part of these consolidated financial statements.
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INSULET CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

 
Three Months Ended March 31,
(in thousands)
2019
 
2018
Net income (loss)
$
4,378

 
$
(6,569
)
Other comprehensive loss, net of tax
 
 
 
Foreign currency translation adjustment, net of tax
(815
)
 
(318
)
Unrealized gain (loss) on available-for-sale debt securities, net of tax
635

 
(725
)
Total other comprehensive loss, net of tax
(180
)
 
(1,043
)
Total comprehensive income (loss)
$
4,198

 
$
(7,612
)

The accompanying condensed notes are an integral part of these consolidated financial statements.
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INSULET CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)

Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2019:
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Loss
 
Total
Stockholders’
Equity
(In thousands, except share data)
Shares
 
Amount
 
 
Balance, December 31, 2018
59,188,758

 
$
59

 
$
898,559

 
$
(683,614
)
 
$
(2,905
)
 
$
212,099

Exercise of options to purchase common stock, net of shares withheld and retired to satisfy cashless exercises
269,473

 
1

 
9,060

 
 
 
 
 
9,061

Stock-based compensation expense
 
 
 
 
5,784

 
 
 
 
 
5,784

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

 

 
(7,512
)
 
 
 
 
 
(7,512
)
Net income
 
 
 
 
 
 
4,378

 
 
 
4,378

Other comprehensive loss
 
 
 
 
 
 
 
 
(180
)
 
(180
)
Balance, March 31, 2019
59,638,439

 
$
60

 
$
905,891

 
$
(679,236
)
 
$
(3,085
)
 
$
223,630


Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2018:
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Loss
 
Total
Stockholders’
Equity
(In thousands, except share data)
Shares
 
Amount
 
 
Balance, December 31, 2017
58,319,348

 
$
58

 
$
866,206

 
$
(707,255
)
 
$
(493
)
 
$
158,516

Exercise of options to purchase common stock, net of shares withheld and retired to satisfy cashless exercises
114,042

 

 
2,961

 
 
 
 
 
2,961

Stock-based compensation expense
 
 
 
 
8,181

 
 
 
 
 
8,181

Restricted stock units vested, net of shares withheld for taxes
289,852

 
1

 
(11,816
)
 
 
 
 
 
(11,815
)
Debt retirement
 
 
 
 
(12
)
 
 
 
 
 
(12
)
Adoption of ASC 606
 
 
 
 
 
 
20,349

 
 
 
20,349

Net loss
 
 
 
 
 
 
(6,569
)
 
 
 
(6,569
)
Other comprehensive loss
 
 
 
 
 
 
 
 
(1,043
)
 
(1,043
)
Balance, March 31, 2018
58,723,242

 
$
59

 
$
865,520

 
$
(693,475
)
 
$
(1,536
)
 
$
170,568



The accompanying condensed notes are an integral part of these consolidated financial statements.
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INSULET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Three Months Ended March 31,
(in thousands)
2019
 
2018
Cash flows from operating activities
 
 
 
Net income (loss)
$
4,378

 
$
(6,569
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
 
 
 
Depreciation and amortization
5,135

 
3,522

Non-cash interest expense
7,623

 
7,163

Stock-based compensation expense
5,784

 
8,181

Provision for bad debts
807

 
697

Other
(326
)
 
46

Changes in operating assets and liabilities:
 
 
 
Accounts receivable and unbilled receivable
(2,796
)
 
1,800

Inventories
(2,690
)
 
6,706

Prepaid expenses and other assets
(5,563
)
 
(3,324
)
Accounts payable, accrued expenses and other current liabilities
(5,256
)
 
(20,950
)
Deferred revenue
11

 
(2,165
)
Other long-term liabilities
(740
)
 
627

Net cash provided by (used in) operating activities
6,367

 
(4,266
)
Cash flows from investing activities
 
 
 
Purchases of property, equipment and intangible assets (1)
(45,255
)
 
(35,374
)
Purchases of investments
(2,156
)
 
(60,880
)
Receipts from the maturity or sale of investments
55,031

 
40,266

Net cash provided by (used in) investing activities
7,620

 
(55,988
)
Cash flows from financing activities
 
 
 
Repayment of convertible debt

 
(15
)
Proceeds from exercise of stock options (2)
9,061

 
2,961

Payment of withholding taxes in connection with vesting of restricted stock units
(7,512
)
 
(11,816
)
Net cash provided by (used in) financing activities
1,549

 
(8,870
)
Effect of exchange rate changes on cash
(188
)
 
(307
)
Net increase (decrease) in cash, cash equivalents and restricted cash
15,348

 
(69,431
)
Cash, cash equivalents and restricted cash, beginning of period
113,906

 
272,577

Cash, cash equivalents and restricted cash, end of period
$
129,254

 
$
203,146


(1) Cash outflows from purchases of property, equipment and intangible assets for the three months ended March 31, 2019 and 2018 include $11.5 million and $4.0 million, respectively, of purchases made in prior periods that were included in accounts payable and accrued expenses as of December 31, 2018 and 2017, respectively, and exclude $12.7 million and $17.5 million of purchases made during the three months ended March 31, 2019 and 2018, respectively, that were included in accounts payable and accrued expenses as of March 31, 2019 and 2018, respectively.
(2) During the period of three months ended March 31, 2019 and 2018, the Company acquired 3,609 and 8,243 shares of its common stock, respectively, with a value of $0.3 million and $0.7 million, respectively, in return for the exercise of stock options. The acquired shares were subsequently retired.


The accompanying condensed notes are an integral part of these consolidated financial statements.
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INSULET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Nature of the Business

Insulet Corporation (the "Company") is primarily engaged in the development, manufacturing and sale of its proprietary Omnipod® System, an innovative, discreet and easy-to-use continuous insulin delivery system for people with insulin-dependent diabetes. The Omnipod System consists of two product lines: the Omnipod Insulin Management System (“Omnipod”), which the Company has been selling since 2005, and its next generation Omnipod DASHTM Insulin Management System ("Omnipod DASH" or "DASH"), which began a U.S. limited market release in 2018. Collectively, we refer to these products as the "Omnipod System".

In addition to using the Omnipod System for insulin delivery, the Company also partners with global pharmaceutical and biotechnology companies to tailor the Omnipod System technology platform for the delivery of their drugs across other therapeutic areas. The majority of the Company's drug delivery revenue currently consists of sales to Amgen supplying the Neulasta Onpro kit, an innovative delivery system for Amgen’s white blood cell booster to help reduce the risk of infection during intense chemotherapy.

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation
The unaudited consolidated financial statements in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles (“U.S. GAAP” or "GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019, or for any other subsequent interim period.
The unaudited consolidated financial statements in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in the application of certain of its significant accounting policies that may materially affect the reported amounts of assets, liabilities, equity, revenue and expenses. Actual results may differ from those estimates.

Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Summary of Significant Accounting Policies
The Company's significant accounting policies are described in Note 2, "Summary of Significant Accounting Policies", in the Company's Annual Report on Form 10-K for fiscal year 2018.

Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision-maker ("CODM") in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company has concluded its Chief Executive Officer ("CEO") is the CODM as the CEO is the ultimate decision maker for key operating decisions, determining the allocation of resources and assessing the financial performance of the Company. These decisions, allocations and assessments are performed by the CODM using consolidated financial information. The Company’s products are relatively consistent and manufacturing is centralized and consistent across product offerings. Based on these factors, key operating decisions and resource allocations are made by the CODM using consolidated financial data and as such the Company has concluded that it operates as one segment.

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Shipping and Handling Costs
The Company does not typically charge its customers for shipping and handling costs associated with shipping its product to its customers unless non-standard shipping and handling services are requested. These shipping and handling costs are included in general and administrative expenses and were $2.6 million and $1.0 million for the three months ended March 31, 2019 and 2018, respectively.

Reclassification of Prior Period Amounts
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. Software license costs have been reallocated from general and administrative expenses to research and development and sales and marketing expenses based on license usage. These reclassifications have no effect on previously reported net income.

Recently Adopted Accounting Standards
Effective January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 and its related amendments (collectively referred to as ASC 842) amends the guidance in former ASC Topic 840, Leases. The new standard increases transparency and comparability most significantly by requiring the recognition by lessees of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for those leases classified as operating leases. The Company adopted ASC 842 on January 1, 2019 using the modified retrospective method, whereby the new guidance is applied prospectively as of the date of adoption and prior periods are not to be restated. The Company elected the package of practical expedients which permits the Company to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. The Company also excludes leases with an expected term of less than one year from the application of ASC 842. The adoption of the lease standard did not change the Company's previously reported consolidated statements of operations and did not result in a cumulative catch-up adjustment to opening equity. Adoption of the lease standard had a material impact on its consolidated balance sheet (Note 13).
Effective January 1, 2019, the Company adopted ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). ASU 2017-12 updates the current hedge accounting guidance with the objective of improving the financial reporting of hedging activities by better portraying the economic results of an entity's risk management activities in its financial statements. As the Company currently does not use derivative financial instruments, this guidance did not have any impact on the Company's financial statements upon adoption.
Effective January 1, 2019, the Company early adopted ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). ASU 2018-15 requires that entities capitalize certain costs to implement a cloud computing arrangement that is a service contract consistent with the rules applicable to internal use software capitalization projects. The Company adopted this new guidance effective January 1, 2019, prospectively. Upon adoption, the Company defers eligible costs related to the implementation of cloud computing arrangements within other current and non-current assets and amortizes these costs over the expected term if the hosting arrangement to the same income statement line as the associated cloud operating expenses. Adoption of this standard resulted in the Company capitalizing $1.3 million of cloud computing implementation costs to the consolidated balance sheet for the period ending March 31, 2019.
Accounting Standards Issued and Not Yet Adopted
In January 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating "Step 2" from the goodwill impairment test, which requires an entity to calculate the implied fair value of goodwill to measure a goodwill impairment charge, and alternatively, requires an entity to measure the impairment of goodwill assigned to a reporting unit as the amount by which the carrying value of the assets and liabilities of the reporting unit, including goodwill, exceeds the reporting unit's fair value. The guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of ASU 2017-04 but does not expect it to be material to the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 modifies certain disclosure requirements related to fair value measurements primarily associated with Level 3 investments. The guidance is effective no later than January 1, 2020 for the Company and can be early-adopted prospectively in any interim period for certain disclosure requirements or retrospectively for others. The Company does not expect the adoption of this guidance to have a material impact on its fair value disclosures.
In June 2016, the FASB issued ASU 2016-13, Credit Losses (Topic 326) ("ASU 2016-13"). ASU 2016-13 requires that financial assets measured at amortized cost, such as trade receivables and contract assets, 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 asset. The new guidance requires enhanced disclosures related to trade receivables and associated credit losses. The guidance is effective beginning January 1, 2020. The adoption of this guidance is expected to increase the level of disclosures related to the Company's trade receivables and is not expected to have a material impact on its consolidated financial statements.

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Note 3. Revenue from Contracts with Customers

The following table summarizes revenue from contracts with customers for the three months ended March 31, 2019 and 2018:

 
Three months Ended March 31,
(in thousands)
2019
 
2018
U.S. Omnipod
$
86,103

 
$
70,272

International Omnipod
56,888

 
38,404

Total Diabetes Revenue:
142,991

 
108,676

Drug Delivery
16,564

 
14,902

Total
$
159,555

 
$
123,578


Revenue for customers comprising more than 10% of total revenue were as follows:
 
Three Months Ended March 31,


2019
 
2018
Amgen, Inc.
10%
 
12%
Ypsomed
*
 
27%
Cardinal Health Inc. and affiliates
10%
 
10%
* Represents less than 10% of consolidated revenue.
The aggregate amount of deferred revenue recorded on the balance sheet for unsatisfied performance obligations was $2.2 million and $2.1 million as of March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019 and December 31, 2018, respectively, $1.0 million and $0.9 million of deferred revenue is included within other long-term liabilities on the balance sheet and is expected to be satisfied over a course of less than five years. Revenue recognized during the three months ended March 31, 2019 and March 31, 2018 from amounts included in deferred revenue at the beginning of the period was approximately $0.9 million and  $2.1 million respectively. No revenue was recognized during the three months ended March 31, 2019 and March 31, 2018 from performance obligations satisfied or partially satisfied in previous periods.

Note 4. Investments and Fair Value

Cash and Cash Equivalents:
For the purpose of financial statement classification, the Company considers all highly-liquid investment instruments with original maturities of 90 days or less, when purchased, to be cash equivalents. Cash equivalents generally include money market mutual funds, U.S. government and agency bonds, and are carried at cost which approximates their fair value. Included in the Company's cash and cash equivalents are restricted cash amounts set aside for collateral on outstanding letters of credit totaling $2.7 million as of March 31, 2019 and $2.7 million as of December 31, 2018.

Marketable Securities:
The Company's short-term and long-term investments in debt securities have maturity dates that range from 1 days to 23 months as of March 31, 2019. The Company’s investment portfolio included approximately 74 available-for-sale debt securities that had insignificant unrealized loss positions as of March 31, 2019. The Company has the intent and ability to hold these investments until maturity whereby these unrealized losses are expected to be recovered. There were no charges recorded in the period for other-than-temporary declines in the fair value of available-for-sale debt securities. The Company's investments had insignificant realized gains or losses for the three months ended March 31, 2019.

To measure fair value of assets and liabilities required to be measured or disclosed at fair value, the Company uses the following fair value hierarchy based on three levels of inputs of which the first two are considered observable and the last unobservable:
Level 1 — quoted prices in active markets for identical assets or liabilities;
Level 2 — observable inputs other than quoted prices in active markets for identical assets or liabilities;
Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.


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The Company had no Level 3 assets or liabilities as of March 31, 2019.

The following table provides amortized cost, gross unrealized gains and losses, fair value and the level in the fair value hierarchy within which those measurements fall:
(in thousands)
Amortized cost
 
Gross Unrealized Gains
 
Gross Unrealized Gains (Losses)
 
Fair Value
 
Level 1
 
Level 2
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Money market mutual funds
$
26,644

 
$

 
$

 
$
26,644

 
$
26,644

 
$

Total cash equivalents
$
26,644

 
$

 
$

 
$
26,644

 
$
26,644

 
$

 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency bonds
$
104,649

 
$

 
$
(280
)
 
$
104,369

 
$
59,671

 
$
44,698

Corporate bonds
75,598

 
37

 
(113
)
 
75,522

 

 
75,522

Certificates of deposit
7,242

 

 
(13
)
 
7,229

 

 
7,229

Total short-term investments
$
187,489

 
$
37

 
$
(406
)
 
$
187,120

 
$
59,671

 
$
127,449

 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency bonds
$
59,877

 
$
164

 
$
(11
)
 
$
60,030

 
$
49,517

 
$
10,513

Corporate bonds
13,265

 
63

 

 
13,328

 

 
13,328

Certificates of deposit
3,420

 
11

 

 
3,431

 

 
3,431

Total long-term investments
$
76,562

 
$
238

 
$
(11
)
 
$
76,789

 
$
49,517

 
$
27,272

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Money market mutual funds
$
47,199

 
$

 
$

 
$
47,199

 
$
47,199

 
$

Total cash equivalents
$
47,199

 
$

 
$

 
$
47,199

 
$
47,199

 
$

 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency bonds
$
112,995

 
$

 
$
(486
)
 
$
112,509

 
$
69,605

 
$
42,904

Corporate bonds
56,235

 

 
(210
)
 
56,025

 

 
56,025

Certificates of deposit
6,506

 

 

 
6,506

 

 
6,506

Total short-term investments
$
175,736

 
$

 
$
(696
)
 
$
175,040

 
$
69,605

 
$
105,435

 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency bonds
$
90,458

 
$
99

 
$
(155
)
 
$
90,402

 
$
64,086

 
$
26,316

Corporate bonds
46,743

 
43

 
(68
)
 
46,718

 

 
46,718

Certificates of deposit
3,664

 

 

 
3,664

 

 
3,664

Total long-term investments
$
140,865

 
$
142

 
$
(223
)
 
$
140,784

 
$
64,086

 
$
76,698


 
 
 
 
 
 
 
 



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Note 5. Convertible Debt, Net
The Company had outstanding convertible debt and related debt issuance costs on its consolidated balance sheet as follows:
 
As of
(in thousands)
March 31, 2019
 
December 31, 2018
Principal amount of 1.25% Convertible Senior Notes, due September 2021
$
344,992

 
$
344,992

Principal amount of 1.375% Convertible Senior Notes, due November 2024
402,500

 
402,500

Unamortized debt discount
(136,673
)
 
(143,616
)
Debt issuance costs
(11,218
)
 
(11,898
)
Total convertible debt, net
$
599,601

 
$
591,978

Interest expense related to the convertible debt was as follows: 
 
Three Months Ended March 31,
(in thousands)
2019
 
2018
Contractual coupon interest
$
2,462

 
$
2,480

Accretion of debt discount
6,943

 
6,522

Amortization of debt issuance costs
680

 
641

Total interest expense related to convertible debt
$
10,085

 
$
9,643

Interest expense related to convertible debt for the three months ended March 31, 2019 is as follows:  
 
Three Months Ended March 31, 2019
(in thousands)
1.375%
 
1.25%
 
Total
Contractual coupon interest
$
1,384

 
$
1,078

 
$
2,462

Amortization of debt discount and issuance costs
3,879

 
3,744

 
7,623

  Total interest expense related to convertible debt

$
5,263

 
$
4,822

 
$
10,085

Total interest expense for the three months ended March 31, 2019 was $6.6 million, which includes the interest expense related to convertible debt of $10.1 million, net of capitalized interest expense of $3.5 million. Total interest expense for the three months ended March 31, 2018 was $7.9 million, which includes the interest expense related to convertible debt of $9.6 million, net of capitalized interest expense of $1.7 million.
Interest expense related to convertible debt for the three months ended March 31, 2018 is as follows:  
 
Three Months Ended March 31, 2018
(in thousands)
1.375%
 
1.25%
 
2.0%
 
Total
Contractual coupon interest
$
1,384

 
$
1,078

 
$
18

 
$
2,480

Amortization of debt discount and issuance costs
3,611

 
3,513

 
39

 
7,163

  Total interest expense related to convertible debt

$
4,995

 
$
4,591

 
$
57

 
$
9,643


The carrying amount and the estimated fair value of the Company's convertible debt, which is based on the Level 2 quoted market prices as of March 31, 2019 and December 31, 2018 are as follows:
 
As of
 
March 31, 2019
 
December 31, 2018
(in thousands)
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
1.375% Convertible Senior Notes, due November 2024
$
294,851

 
$
485,737

 
$
290,972

 
$
426,026

1.25% Convertible Senior Notes, due September 2021
304,750

 
558,887

 
301,006

 
483,851

  Total
$
599,601

 
$
1,044,624

 
$
591,978

 
$
909,877



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1.375% Convertible Senior Notes
In November 2017, the Company issued and sold $402.5 million in aggregate principal amount of 1.375% Convertible Senior Notes, due November 15, 2024 (the "1.375% Notes"). The interest rate on the notes is 1.375% per annum, payable semi-annually in arrears in cash on May 15 and November 15 of each year. Interest began accruing on November 10, 2017 and the first interest payment was made on May 15, 2018. The 1.375% Notes are convertible into the Company’s common stock at an initial conversion rate of 10.7315 shares of common stock per $1,000 principal amount of the 1.375% Notes, which is equivalent to a conversion price of approximately $93.18 per share, subject to adjustment under certain circumstances. The 1.375% Notes will be convertible prior to the close of business on the business day immediately preceding August 15, 2024 only under certain circumstances and during certain periods, and will be convertible on or after August 15, 2024 until the close of business on the second scheduled trading day immediately preceding November 15, 2024, regardless of those circumstances.
The Company recorded a debt discount of $120.7 million related to the 1.375% Notes resulting from the allocation of a portion of the proceeds to the fair value of the conversion feature reflecting a nonconvertible debt borrowing rate of 6.8% per annum. The debt discount was recorded as additional paid-in capital and is being amortized as non-cash interest expense over the seven year term of the 1.375% Notes. The Company also incurred debt issuance costs and other expenses related to the 1.375% Notes of approximately $10.9 million, of which $3.3 million was reclassified as a reduction to the value of the conversion feature allocated to equity. The remaining $7.6 million of debt issuance costs is presented as a reduction of debt in the consolidated balance sheet and is being amortized using the effective interest method as non-cash interest expense over the seven year term of the 1.375% Notes. As of March 31, 2019, the Company included $294.9 million on its balance sheet in long-term debt related to the 1.375% Notes.
1.25% Convertible Senior Notes
In September 2016, the Company issued and sold $345.0 million in principal amount of 1.25% Convertible Senior Notes, due September 15, 2021 (the "1.25% Notes"). The interest rate on the notes is 1.25% per annum, payable semi-annually in arrears in cash on March 15 and September 15 of each year. The 1.25% Notes are convertible into the Company’s common stock at an initial conversion rate of 17.1332 shares of common stock per $1,000 principal amount of the 1.25% Notes, which is equivalent to a conversion price of approximately $58.37 per share, subject to adjustment under certain circumstances. The 1.25% Notes will be convertible prior to the close of business on the business day immediately preceding June 15, 2021 only under certain circumstances and during certain periods, and will be convertible on or after June 15, 2021 until the close of business on the second scheduled trading day immediately preceding September 15, 2021, regardless of those circumstances.
The Company recorded a debt discount of $66.7 million related to the 1.25% Notes resulting from allocating a portion of the proceeds to the fair value of the conversion feature reflecting a nonconvertible debt borrowing rate of 5.8% per annum. The debt discount is being amortized as non-cash interest expense over the five year term of the 1.25% Notes. The Company incurred debt issuance costs and other expenses related to this offering of approximately $11.3 million, of which $2.2 million was reclassified as a reduction to the value of the amount allocated to equity. The remainder is presented as a reduction of debt in the consolidated balance sheet and is being amortized using the effective interest method as non-cash interest expense over the five year term of the 1.25% Notes. As of March 31, 2019, the Company has $304.8 million, net of discounts and issuance costs, on its balance sheet in long-term debt related to the 1.25% Notes.
2% Convertible Senior Notes
In June 2014, the Company issued and sold $201.3 million in principal amount of 2% Convertible Senior Notes due June 15, 2019 (the "2% Notes"). The 2% Notes were convertible into the Company’s common stock at an initial conversion rate of 21.5019 shares of common stock per $1,000 principal amount of the 2% Notes, which is equivalent to a conversion price of approximately $46.51 per share. In separately negotiated transactions, the Company repurchased $134.2 million in principal of the notes in September 2016 and $63.4 million in principal of the notes in November 2017. The Company elected to call the remaining notes in March 2018 and settled the outstanding principal and conversion feature of the notes for $6.7 million in cash in the second quarter of 2018. The Company allocated approximately $3.2 million of the settlement to the fair value of the equity component and $3.5 million to the debt component, which was consistent with the carrying value of the notes as of the settlement date, resulting in no gain or loss on extinguishment.

Note 6. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period, excluding unvested restricted common shares. Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding and, when dilutive, potential common share equivalents from outstanding stock options and restricted stock units (using the treasury-stock method), and potential common shares from the Company's convertible debt (using the if-converted method).

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The following table sets forth the components used in the computation of basic and diluted net income (loss) per share for the three months ended March 31, 2019. Because the Company reported a net loss for the three months ended March 31, 2018, all potential dilutive common shares have been excluded from the computation of the diluted net loss per share for the three months ended March 31, 2018, as the effect would have been anti-dilutive.
 (in thousands, except share and per share data)
Three months ended March 31, 2019
Numerator:
 
Net income
$
4,378

Denominator:
 
Weighted average common shares outstanding
59,355,031

Effective of dilutive potential common share equivalents
 
Stock options
1,524,315

Restricted stock units
269,082

Convertible debt

Shares used for diluted net income per share
61,148,428

Net income per share:
 
Basic
$
0.07

Diluted
$
0.07

For the three months ended March 31, 2019, certain potential outstanding shares from stock options, restricted stock units and convertible debt were excluded from the computation of diluted net income per share because the effect of including these items was anti-dilutive. Additionally, certain performance-based restricted stock units were excluded from the computation of diluted net income per share because the underlying performance conditions for such restricted stock units had not been met as of these dates.
The number of potential common share equivalents excluded from the computation of diluted net income (loss) per share for the three months ended March 31, 2019 and 2018 are as follows:
 
Three Months Ended March 31,
 
2019
 
2018
1.375% Convertible Senior Notes
4,319,429

 
4,319,429

2.00% Convertible Senior Notes

 
78,589

1.25% Convertible Senior Notes
5,910,954

 
5,910,954

Unvested restricted stock units
360,278

 
970,802

Stock options
280,887

 
3,433,110

Total potential common share equivalents excluded from computation of diluted net income (loss) per share
10,871,548

 
14,712,884

Note 7. Accounts Receivable, Net
Accounts receivable consist of amounts due from third-party payors, patients and third-party intermediaries. The Company records an allowance for doubtful accounts at the time potential collection risk is identified. The Company estimates its allowance based on historical experience, assessment of specific risk, and discussions with individual customers. The Company believes the reserve is adequate to mitigate current collection risk. There were no customers that represented greater than 10% of gross accounts receivable as of March 31, 2019 and December 31, 2018, respectively.
 
 
 
 
The components of accounts receivable are as follows:
 
As of
(in thousands)
March 31, 2019
 
December 31, 2018
Trade receivables
$
72,513

 
$
66,904

Allowance for doubtful accounts
(3,858
)
 
(3,610
)
    Total accounts receivable, net
$
68,655

 
$
63,294



14



Note 8. Inventories
Inventories are carried at the lower of cost or market, determined under the first-in, first-out method, and include the costs of material, labor and overhead. Inventory has been recorded at cost, or net realizable value as appropriate, as of March 31, 2019 and December 31, 2018. The Company reviews inventories for net realizable value based on quantities on hand and expectations of future use. Work in process is calculated based upon a buildup in the stage of completion using estimated labor inputs for each stage in production.
The components of inventories are as follows:
 
As of
(in thousands)
March 31, 2019
 
December 31, 2018
Raw materials
$
12,246

 
$
10,347

Work-in-process
30,922

 
30,222

Finished goods
30,654

 
30,845

    Total inventories
$
73,822

 
$
71,414


Note 9. Prepaid Expenses and Other Assets
The components of prepaid expenses and other current assets are as follows:
 
As of
(in thousands)
 
March 31, 2019
 
December 31, 2018
Prepaid expenses and other current assets
 
$
20,122

 
$
16,977

Capitalized contract acquisition costs, current portion
 
7,906

 
7,277

Total prepaid expenses and other current assets
 
$
28,028

 
$
24,254


The components of other assets are as follows:
 
As of
(in thousands)
 
March 31, 2019
 
December 31, 2018
Other assets
 
$
3,161

 
$
2,278

Capitalized contract acquisition costs, net of current portion
 
17,211

 
15,988

Right of use asset - lease (Note 13)
 
8,286

 

   Total other assets
 
$
28,658

 
$
18,266

The Company capitalizes commission costs that are related to new patient starts. These costs are deferred in other assets, net of the short term portion included in prepaid and other current assets. Costs to obtain a contract are amortized as sales and marketing expense on a straight line basis over the expected period of benefit, which considers future product upgrades for which a commission would be paid. These capitalized costs are periodically reviewed for impairment. As of March 31, 2019, capitalized contract acquisition costs were $25.1 million, including a current balance of $7.9 million and a non-current balance of $17.2 million. The Company recognized $2.0 million of amortization of capitalized commission costs during the three months ended March 31, 2019. There were no impairments to capitalized costs to obtain a contract recorded during the period.


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Note 10. Goodwill and Other Intangible Assets, Net
Goodwill
The Company has $39.7 million of goodwill on its balance sheet from prior business acquisitions. The Company performs an assessment of its goodwill for impairment on at least an annual basis or whenever events or changes in circumstances indicate there might be an impairment. The Company's annual impairment test date is October 1st. There was no impairment of goodwill during the three months ended March 31, 2019.
Intangible Assets, Net
The Company’s finite-lived intangible assets are stated at cost less accumulated amortization and include customer relationships acquired in prior business acquisitions and from the Company's former European Distributor. See Note 12 for a discussion of the Company's accounting for estimated fees owed to its former European Distributor following the expiration of its distribution agreement on June 30, 2018.
The components of other intangible assets are as follows:
 
As of
 
March 31, 2019
 
December 31, 2018
(in thousands)
Gross Carrying Amount
 
Accumulated Amortization
 
Net Book Value
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Book Value
Customer and contractual relationships
$
8,423

 
$
(2,087
)
 
$
6,336

 
$
6,109

 
$
(1,880
)
 
$
4,229

Internal-use software
10,702

 
(5,554
)
 
5,148

 
11,262

 
(5,108
)
 
6,154

Total intangible assets
$
19,125

 
$
(7,641
)
 
$
11,484

 
$
17,371

 
$
(6,988
)
 
$
10,383


Amortization expense for intangible assets was approximately $0.6 million and $0.4 million for the three months ended March 31, 2019 and 2018, respectively. Amortization expense is recorded in general and administrative expenses in the consolidated statements of operations.
Amortization expense expected for the next five years and thereafter is as follows:
(in thousands)
 
 
 
 
 
Years Ending December 31,
Customer and Contractual Relationships
 
Internal-Use Software
 
Total
2019 (remaining)
$
598

 
$
1,312

 
$
1,910

2020
732

 
1,593

 
2,325

2021
668

 
1,154

 
1,822

2022
668

 
565

 
1,233

2023
668

 
178

 
846

Thereafter
3,002

 
346

 
3,348

     Total
$
6,336

 
$
5,148

 
$
11,484

As of March 31, 2019, the weighted average amortization period of the Company’s customer and contractual relationships intangible assets and internal-use software intangible assets are approximately 9.1 years and 3.6 years, respectively.


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Note 11. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities are as follows:
 
As of
(in thousands)
March 31, 2019
 
December 31, 2018
Employee compensation and related costs
$
31,184

 
$
37,822

Professional and consulting services
15,405

 
14,925

Supplier charges
7,496

 
7,742

Value added taxes payable
7,898

 
8,463

Warranty
2,665

 
2,701

Other
21,297

 
17,320

Total accrued expenses and other current liabilities
$
85,945

 
$
88,973

Product Warranty Costs
The Company generally provides a four-year warranty on its PDMs sold in the United States and Europe and a five-year warranty on its PDMs sold in Canada and may replace any Omnipod that does 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. Warranty expense is recorded in cost of goods sold on the consolidated statement of operations. Cost to service the claims reflects the current product cost. As these estimates are based on historical experience, and the Company continues to introduce new products and versions, the Company also considers the anticipated performance of the product over its warranty period in estimating warranty reserves.
A reconciliation of the changes in the Company’s product warranty liability is as follows: 
 
Three Months Ended March 31,
(in thousands)
2019
 
2018
Product warranty liability at the beginning of the period
$
6,379

 
$
5,337

Warranty expense
2,219

 
1,972

Warranty claims settled
(2,315
)
 
(1,923
)
Product warranty liability at the end of the period
$
6,283

 
$
5,386

Composition of balance:
As of
(in thousands)
March 31, 2019
 
December 31, 2018
Short-term
$
2,665

 
$
2,701

Long-term
3,618

 
3,678

Total warranty liability:
$
6,283

 
$
6,379


Note 12. Commitments and Contingencies
Legal Proceedings
Between May 5, 2015 and June 16, 2015, three class action lawsuits were filed by shareholders in the U.S. District Court, for the District of Massachusetts, against the Company and certain individual current and former executives of the Company. Two suits subsequently were voluntarily dismissed. Arkansas Teacher Retirement System v. Insulet, et al., 1:15-cv-12345, (“ATRS”) alleged that the Company (and certain executives) committed violations of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 by making allegedly false and misleading statements about the Company’s business, operations, and prospects. On February 8, 2018, the parties executed a binding stipulation of settlement, under which all claims were released and a payment was made to the plaintiffs and the class they purport to represent. On August 6, 2018, the Court issued an order approving the settlement. The Company had previously accrued fees and expenses in connection with this matter for the amount of the final settlement liability that was not covered by insurance, which amount was not material to the Company's consolidated financial statements.


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In addition, on April 26, 2017, a derivative action (Walker v. DeSisto, et al., 1:17-cv-10738) (“Walker”) was filed, and on October 13, 2017, a second derivative action (Carnazza v. DeSisto, et al., 1:17-cv-11977) (“Carnazza”) was filed, both on behalf of the Company, each by a shareholder in the U.S. District Court for the District of Massachusetts against the Company (as a nominal defendant) and certain individual current and former officers and directors of the Company. The allegations in the actions are substantially similar to those alleged in the securities class action. The actions seek, among other things, damages, disgorgement of certain types of compensation or profits, and attorneys’ fees and costs. On July 11, 2018, the parties executed a binding stipulation of settlement, under which all claims were released and a payment of attorneys’ fees and reimbursement of expenses will be paid to plaintiffs’ counsel, subject to the Court’s approval. On July 13, 2018, the plaintiffs filed a motion for preliminary approval of the settlement, which is pending. The Company expects that such fees and expenses payable to plaintiff's counsel will be covered by the Company's insurance.

The Company is, from time to time, involved in the normal course of business in various legal proceedings, including intellectual property, contract, employment and product liability suits. Although the Company is unable to quantify the exact financial impact of any of these matters, the Company believes that none of these currently pending matters will have an outcome material to its financial condition or business.
Fees To Former European Distributor
Following the expiration of its distribution agreement on June 30, 2018, the Company is required to pay to its former European Distributor a quarterly per-unit fee for Omnipod sales by the Company between July 1, 2018 and June 30, 2019 to certain customers of the former European Distributor. The Company is recognizing a liability and an associated intangible asset for this fee as qualifying sales occur. The actual total fee could vary significantly depending on the number of customers who count for purposes of calculating the fee under the terms of the distribution agreement, and the methodology applicable for determining this number under the agreement is subject to an active arbitration proceeding between the parties in Switzerland. The Company estimates that the final aggregate fee for the applicable twelve-month period could be in the range of approximately $10 million to $55 million. As of March 31, 2019, the Company has recognized approximately $6.4 million for fees related to Omnipod devices sold to qualifying customers during the period from July 1, 2018 through March 31, 2019.

Note 13. Leases

In February 2016, the FASB issued guidance codified in ASC Topic 842, Leases, which amends the guidance in former ASC Topic 840, Leases. The new standard increases transparency and comparability most significantly by requiring the recognition by lessees of right-of-use assets and lease liabilities on the balance sheet for those leases classified as operating leases. The Company adopted ASC 842 on January 1, 2019. In accordance with the new lease standard, the Company determines if an arrangement is a lease at inception. Operating leases are included in other assets, other current liabilities, and other long-term liabilities on our consolidated balance sheets. The Company does not have any significant finance leases. On January 1, 2019, upon the adoption of ASC 842, the Company recorded right-of-use assets of $8.8 million and an operating lease liability of $10.8 million on its consolidated balance sheet. The difference between the approximate value of the right-of-use assets and the approximate value of the lease obligations is attributable to a cease-use liability and deferred rent.
Operating lease right-of-use assets (ROU) and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
As of March 31, 2019, the Company's right-of-use assets obtained in exchange for lease obligations are $8.3 million included in other assets and total operating lease liabilities of $10.2 million included in other current liabilities and other long-term liabilities on the consolidated balance sheet.
The Company has an operating lease of approximately 100,000 square feet of laboratory and office space in Billerica, Massachusetts. The lease expires in November 2022 and contains escalating payments over its life. Additionally, the Company leases approximately 29,000 square feet of warehousing space in Billerica, Massachusetts under a lease expiring in September 2019. The Company also leases international and certain other U.S. facilities. These operating leases expire at various dates through 2026, some of which may include options to extend the leases for up to 5 years, and some of which may include options to terminate the leases at certain times within the lease term. In the normal course of business, it is expected that these leases will be renewed.
The Company's total operating lease cost was approximately $0.9 million and $0.8 million for the three months ended March 31, 2019 and March 31, 2018, respectively. Operating lease cost is recorded in general and administrative expenses in the consolidated statements of operations.

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There have been no material changes to the Company's lease obligation in the three months ended March 31, 2019.
The future minimum undiscounted lease payments under operating leases as of March 31, 2019 are as follows:
Years Ending December 31,
 
(in thousands)
 
2019 (remaining)
 
$
2,484

 
2020
 
2,954

 
2021
 
2,899

 
2022
 
2,575

 
2023
 
269

 
Thereafter
 
561

 
    Total future minimum lease payments
 
11,742

 
Less: imputed interest
 
(1,548
)
 
    Total future minimum lease payments
 
$
10,194

 
 
 
 
 
Amounts recognized in consolidated balance sheet as of March 31, 2019
 
 
 
Other current liabilities
 
$
2,315

 
Other long-term liabilities
 
7,879

 
   Total operating lease liabilities
 
$
10,194

 
The Company's operating cash outflows from operating leases for the three months ended March 31, 2019 and March 31, 2018 were $0.8 million and $0.6 million, respectively.
As of March 31, 2019, the weighted average remaining lease term for operating leases is approximately 3.9 years.
As of March 31, 2019, the weighted-average discount rate used to determine the operating lease liability is 6.7%.
As of March 31, 2019, the Company has no additional operating leases that have not yet commenced.

Note 14. Stock-Based Compensation and Stockholder' Equity
The Company grants stock options, and both time-based and performance-based restricted stock units under its 2017 Stock Option and Incentive Plan and offers employees the opportunity to purchase its common stock through an Employee Stock Purchase Plan. The following table reflects the Company's stock-based compensation expense related to share-based awards recognized in the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
Unamortized Expense
 
Weighted Average Remaining Expense Period (Years)
($ in thousands)
2019
 
2018
 
At March 31, 2019
Stock options
$
1,640

 
$
2,359

 
$
13,562

 
2.6
Restricted stock units
3,744

 
5,528

 
38,641

 
2.2
Employee stock purchase plan
400

 
294

 
267

 
0.2
Total
$
5,784

 
$
8,181

 
$
52,470

 
 


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The following summarizes stock option activity during the three months ended March 31, 2019:
 
Number of
Options (#)
 
Weighted Average
Exercise Price ($)
 
Aggregate
Intrinsic
Value ($ in thousands)
 
Weighted Average
Remaining Contractual Term (Years)
Outstanding at December 31, 2018
3,077,624

 
$
39.16

 
 
 
 
Granted
114,040

 
92.16

 
 
 
 
Exercised
(273,082
)
 
34.45

 
$
15,810

 
 
Cancelled
(35,965
)
 
38.32

 
 
 
 
Outstanding at March 31, 2019
2,882,617

 
$
41.71

 
$
153,897

 
5.5
Vested, March 31, 2019
2,191,005

 
$
36.21

 
$
129,008

 
4.6
Vested or expected to vest, March 31, 2019 (1)
2,743,607

 

 
$
149,128

 
 
(1) 
Represents total outstanding stock options as of March 31, 2019, adjusted for estimated forfeitures.

The following table summarizes the status of the Company’s restricted stock units during the three months ended March 31, 2019:
 
Number of
Shares (#)
 
Weighted
Average
Fair Value ($)
Outstanding at December 31, 2018
752,207

 
$
55.02

Granted
261,650

 
91.64

Vested
(266,448
)
 
42.70

Forfeited
(13,163
)
 
64.61

Outstanding at March 31, 2019
734,246

 
$
72.37


Note 15. Income Taxes
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes (“ASC 740-10”). The Tax Cuts and Jobs Act ("Tax Reform Act") was enacted into law in December 2017. Among other changes, the Tax Reform Act subjects the Company to current tax on global intangible low-taxed income ("GILTI") earned by certain of its foreign subsidiaries. The Company has elected to recognize the income tax related to GILTI as a period expense in the period the tax is incurred or expected to occur. The inclusion of GILTI had no impact on the Company's income tax expense or effective tax rate in the period due to the full valuation allowance applied to the U.S. entity.
The Company files federal, state and foreign tax returns. These returns are generally open to examination by the relevant tax authorities from three to four years from the date they are filed, although there is variation by jurisdiction. The tax filings relating to the Company's US federal and state tax returns are currently open to examination for tax years 2015 through 2017 and 2014 through 2017, respectively. In addition, the Company has generated tax losses since its inception in 2000 until 2018, and beginning in 2018 forward, the Company expects to generate taxable income. The years in which losses were generated may be subject to examination if the losses are carried forward and utilized in future years.
As of March 31, 2019 and December 31, 2018, the Company has provided a full valuation allowance against its domestic US federal and state net deferred tax asset because it is not more likely than not that the future tax benefit will be realized. In addition, the Company has a net deferred tax asset in foreign jurisdictions where no valuation allowance is recorded as it is more likely than not that the future tax benefit will be realized. As of March 31, 2019, the Company had no uncertain tax positions.
Income tax expense was $0.3 million and $0.3 million for the three months ended March 31, 2019 and 2018. Income tax expense for both was primarily driven by state taxes in the United States and taxable income generated in foreign jurisdictions, mainly the United Kingdom and Canada. 



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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, results of operations and financial condition.
The outcomes of the events described in these forward-looking statements are subject to risks, uncertainties and other factors described in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on February 26, 2019 in the section entitled “Risk Factors" and in other filings made by us from time to time with the Securities and Exchange Commission. Accordingly, you should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements. The forward-looking statements made in this quarterly report on Form 10-Q relate only to events as of the date of this report. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

Executive Level Overview
We are primarily engaged in the development, manufacturing and sale of our proprietary Omnipod System, an innovative, discreet and easy-to-use continuous insulin delivery system for people with insulin-dependent diabetes. There are two primary types of insulin therapy practiced today: MDI therapy using syringes or insulin pens; and pump therapy using insulin pumps. Insulin pumps are used to perform continuous subcutaneous insulin infusion, or insulin pump therapy, and typically use a programmable device and an infusion set to administer insulin into the person’s body. Insulin pump therapy has been shown to provide people with insulin-dependent diabetes with numerous advantages relative to MDI therapy. We estimate that approximately one-third of the Type 1 diabetes population in the United States and less than one fifth of the Type 1 diabetes population outside of the United States use insulin pump therapy. An even smaller portion of the Type 2 diabetes population in the United States who are insulin-dependent use insulin pump therapy. The Omnipod System features a small, lightweight, self-adhesive disposable tubeless Omnipod device which is worn on the body for approximately three days at a time and its wireless companion, the handheld PDM. The Omnipod System, which features two discreet, easy-to-use devices, communicates wirelessly, provides for virtually pain-free automated cannula insertion and eliminates the need for traditional MDI therapy or the use of traditional pump and tubing. We believe that the Omnipod System’s unique proprietary design and features allow people with insulin-dependent diabetes to manage their diabetes with unprecedented freedom, comfort, convenience, and ease.

We began commercial sale of the Omnipod in the United States in 2005. We sell the Omnipod through direct sales to customers or through our distribution partners. The Omnipod is currently available in multiple countries in Europe, as well as Canada and Israel. On July 1, 2018 we assumed all commercial activities (including, among other things, distribution, sales, marketing, training and support) for our Omnipod System across Europe following the expiration of our prior distribution agreement with our former European Distributor on June 30, 2018.

In addition to the diabetes market space, we have partnered with pharmaceutical and biotechnology companies to tailor the Omnipod System technology platform for the delivery of subcutaneous drugs across other therapeutic areas. The majority of our drug delivery revenue currently consists of sales of pods to Amgen supplying the Neulasta Onpro kit, an innovative delivery system for Amgen’s white blood cell booster to help reduce the risk of infection during intense chemotherapy.

We have substantially completed the construction of a highly-automated manufacturing facility in Acton, Massachusetts, with planned production out of the facility beginning in the second quarter of 2019. The facility also serves as our global headquarters. We expect that, following start up related activities, the new facility will allow us to lower our manufacturing costs, increase supply redundancy, add capacity closer to our largest customer base and support growth. From the purchase of this facility in late 2016 through March 31, 2019, capital expenditures for the construction of the Acton facility and related equipment purchases have been approximately $233 million. In 2019, we expect to invest additional capital in this facility to support our growth, funded by our existing cash and investments.


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In January 2018, we announced that the Centers for Medicare & Medicaid Services ("CMS") has issued guidance clarifying that Medicare Part D Plan Sponsors may provide coverage for products such as the Omnipod System under the Medicare Part D (prescription drug) program. We have been securing coverage with Medicare Part D carriers to ensure beneficiaries living with diabetes have access to the Omnipod System. Securing Medicare Part D coverage also provides us with a direct pathway to increased Medicaid coverage at the state level, as many state-run Medicaid programs follow CMS prescription drug guidance to determine coverage. This allows access for lower-income individuals and families on Medicaid for whom Omnipod currently is not a covered option. In April 2018, we also significantly increased our market access when we secured in-network coverage of Omnipod with United Healthcare, the largest commercial payer in the United States.

In June 2018, the FDA provided clearance for the commercial distribution of our DASH TM System, which is our next-generation digital mobile Omnipod platform, featuring a secured Bluetooth enabled Pod and PDM with a touch screen color user interface supported by smartphone connectivity. We began a U.S. full market release of Omnipod DASH TM at the end of the first quarter of 2019.
  
First Quarter 2019 Revenue Results:
Total revenue of $159.6 million
U.S. Omnipod revenue of $86.1 million
International Omnipod revenue of $56.9 million
Drug Delivery revenue of $16.6 million
Our long-term financial objective is to sustain profitable growth. We expect our efforts in 2019 to focus primarily on constructing and commissioning our U.S. manufacturing facility, continuing to establish our European operations, launching new products, such as the DASH TM Omnipod System, continuing our product development efforts, and working with Medicare, Medicaid and commercial payors and intermediaries to expand access. Achieving these objectives is expected to require additional investments in certain initiatives and personnel, as well as enhancements to our supply chain operation capacity, efficiency and effectiveness.

Components of Financial Operations
Revenue.  We derive the majority of our revenue from global sales of the Omnipod System. We also sell devices based on the Omnipod System technology to global pharmaceutical and biotechnology companies for the delivery of their drugs across therapeutic areas.
Cost of revenue. Cost of revenue consists primarily of raw material, labor, warranty, inventory scrap and excess and obsolescence adjustments, and overhead costs such as freight-in and depreciation and the cost of products we acquire from third party suppliers.
Research and development. Research and development expenses consist primarily of personnel costs, license fees and outside service expenses within our product development, regulatory and clinical functions as well as innovations related to our global supply chain and manufacturing process. Research and development expenses also include engineering and operational costs, such as training and start up activities, associated with our newly constructed U.S. manufacturing facility. We generally expense research and development costs as incurred.
Sales and marketing. Sales and marketing expenses consist primarily of personnel costs within our sales, marketing, reimbursement support and customer care functions, as well as sales commissions paid to our sales representatives, costs associated with promotional activities and participation in industry trade shows. Commission costs that are direct and incremental to obtaining a new customer are capitalized and amortized to sales and marketing expense over the expected period of benefit.
General and administrative. General and administrative expenses consist primarily of salaries and other related costs for personnel serving the executive, finance, legal, information technology support and human resource functions, as well as legal fees, accounting fees, insurance costs, bad debt expenses, shipping, handling and facilities-related costs including depreciation of office facility-related property and equipment.


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Results of Operations
This section discusses our consolidated results of operations for the first quarter and the three months ended March 31, 2019 compared to the same period of 2018, and should be read in conjunction with the consolidated financial statements and accompanying condensed notes included in this Form 10-Q.
TABLE 1: RESULTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
(in thousands)
2019
 
2018
 
Change $
 
Change %
Revenue:
 
 
 
 
 
 
 
U.S. Omnipod
$
86,103

 
$
70,272

 
$
15,831

 
23
 %
International Omnipod
56,888

 
38,404

 
18,484

 
48
 %
Total Diabetes Revenue
142,991

 
108,676

 
34,315

 
32
 %
Drug Delivery
16,564

 
14,902

 
1,662

 
11
 %
Total revenue
159,555

 
123,578

 
35,977

 
29
 %
Cost of revenue
52,859

 
47,763

 
5,096

 
11
 %
Gross profit
106,696

 
75,815

 
30,881

 
41
 %
Gross margin
66.9
%
 
61.4
%
 
 
 


Operating expenses:
 
 
 
 
 
 
 
Research and development
31,954

 
20,267

 
11,687

 
58
 %
Sales and marketing
41,616

 
33,049

 
8,567

 
26
 %
General and administrative
25,861

 
22,499

 
3,362

 
15
 %
Total operating expenses
99,431

 
75,815

 
23,616

 
31
 %
Operating income (loss)
7,265

 

 
7,265

 


Interest expense and other, net
2,561

 
6,236

 
(3,675
)
 
(59
)%
Income (loss) before income taxes
4,704

 
(6,236
)
 
10,940

 
175
 %
Income tax expense
326

 
333

 
(7
)
 
(2
)%
Net income (loss)
$
4,378

 
$
(6,569
)
 
$
10,947

 
167
 %
Revenue
Our total revenue increased to $159.6 million, up $36.0 million, or 29%, in the first quarter of 2019 compared to the first quarter of 2018, primarily due to continued growth in our International and U.S. Omnipod revenue. Our International Omnipod revenue increased to $56.9 million, up $18.5 million, or 48%, over the same period in 2018. The growth in our international revenue was driven by favorable pricing as a result of our commencement of direct sales of our Omnipod System across Europe following the expiration of our distribution agreement with our former European Distributor on June 30, 2018. Our U.S. Omnipod revenue increased to $86.1 million, up $15.8 million, or 23%, primarily due to growth in our Omnipod customer base as we continue to expand awareness of and access to the Omnipod System. Our drug delivery revenue increased to $16.6 million, up $1.7 million, or 11% over the same period in 2018. The growth in our drug delivery revenue is due to higher volume during the period.
   
For 2019, we expect strong revenue growth driven by continued Omnipod expansion globally, partially offset by lower drug delivery revenue. Internationally, we expect higher revenues primarily due to increasing sales as a result of greater awareness and availability for the Omnipod and the full year effect of more favorable pricing as a result of our mid-2018 transition to direct commercial operations in Europe. In the U.S., we expect higher revenues primarily due to increasing sales as a result of expanded payor coverage, greater awareness and availability for the Omnipod, and additional expansion of our U.S. sales force and customer support personnel to support our continued growth.
Cost of Revenue
Cost of revenue increased to $52.9 million, up $5.1 million, or 11%, in the first quarter of 2019 compared to the same period in 2018 due to increased sales volumes, partially offset by improvements in manufacturing and supply chain operations.
Gross Margin
Gross margin increased to 66.9%, up 550 basis points in the first quarter of 2019 compared to the same period in 2018. The increase in gross margin was due primarily to (i) favorable pricing following expiration of our former distributor agreement in Europe and (ii) lower product cost as a result of continued improvements in manufacturing and supply chain operations. For 2019, we expect full year gross margins to be relatively consistent with 2018, as the benefits of continued improvements in manufacturing and supply chain operations and the full year effect of our mid-2018 assumption of direct commercial operations in Europe is expected to be offset by start-up costs and inefficiencies as we ramp up our new U.S. manufacturing operations.

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Research and Development
Research and development expenses increased to $32.0 million, up $11.7 million, or 58%, for the three month period ended March 31, 2019 compared to the same period in 2018. The increase in research and development expenses was primarily due to an increase in expenses related to our development projects, including Omnipod DASH, and our Omnipod Horizon automated insulin delivery system. Research and development expenses also increased due to engineering and operational costs, such as training and start up activities, associated with our newly constructed U.S. manufacturing facility, with planned production beginning in the second quarter of 2019. For 2019, we expect overall research and development spending to increase as compared to 2018 primarily due to the development efforts for our ongoing projects.
Sales and Marketing
Sales and marketing expenses increased to $41.6 million, up $8.6 million, or 26%, for the three month period ended March 31, 2019 compared to the same period in 2018. These increases were primarily attributable to investments to support our assumption in mid-2018 of direct commercial support for Omnipod in Europe as well as the expansion of our U.S. sales force and customer support personnel. We expect sales and marketing expenses in 2019 to increase as compared to 2018 due to additional expansion of our U.S. sales force and customer support personnel to support our continued growth and the full year effect of our mid-2018 assumption of direct commercial operations in Europe.
General and Administrative
General and administrative expenses increased to $25.9 million, up $3.4 million, or 15%, for the three month period ended March 31, 2019 compared to the same period in 2018. This increase was primarily attributable to severance-related charges for certain executives as well as increased personnel-related costs and fees related to our assumption in mid-2018 of direct support for Omnipod in Europe. For 2019, we expect overall general and administrative expenses to increase as compared to 2018 as we continue to grow the business and make investments in our operating structure to support continued growth as well as the full-year effect of our establishment of direct commercial operations in Europe in 2018.
Interest Expense and Other, Net
Interest expense and other, net, decreased to $2.6 million, down $3.7 million, or 59%, for the three month period ended March 31, 2019 compared to the same period in 2018. The decrease is primarily due to an increase in interest capitalized as part of the cost of our U.S. manufacturing facility along with an insurance recovery settlement received of $1.8 million for damaged inventory in excess of our cost.

Liquidity and Capital Resources
As of March 31, 2019, we had $129.3 million in cash and cash equivalents and $263.9 million of investments in marketable securities. We believe that our current liquidity will be sufficient to meet our projected operating, investing and debt service requirements for at least the next twelve months.
To lower our manufacturing costs, increase supply redundancy, add capacity closer to our largest customer base and support growth, we are constructing a highly-automated manufacturing facility in Acton, Massachusetts, with planned production out of the facility beginning in the second quarter of 2019. This facility serves as our global headquarters. As a result, capital expenditures have increased above historic levels to fund the construction of the Acton facility and related equipment purchases. As of March 31, 2019 investments in the Acton facility were approximately $233 million. We expect capital expenditures in 2019 to be relatively consistent with 2018 as we continue to expand capacity in our U.S. operations in support of our growth and profitability objectives.
In connection with our assumption on July 1, 2018, of all commercial activities of our Omnipod System across Europe following the expiration of our distribution agreement with our European Distributor on June 30, 2018, we are required to pay to the former
European Distributor a per-unit fee for Omnipod sales by us between July 1, 2018 and June 30, 2019 to certain customers of the former European Distributor. We are recognizing a liability and an associated intangible asset for this fee as qualifying sales occur. The actual total fee could vary significantly depending on the number of customers who count for purposes of calculating the fee under the terms of the distribution agreement, and the methodology applicable for determining this number under the agreement is subject to an active arbitration proceeding between the parties in Switzerland. We estimate that the final aggregate fee for the applicable twelve-month period could be in the range of approximately $10 million to $55 million.

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Convertible Debt
To finance our operations and global expansion, we have periodically issued and sold Convertible Senior Notes, which are convertible into our common stock. As of March 31, 2019, the following notes were outstanding:
Issuance Date
Coupon
Principal Outstanding (in thousands)
Due Date
Initial Conversion Rate per Share of Common Stock
Conversion Price per Share of Common Stock
September 2016
1.250%
$
344,992

September 15, 2021
17.1332
$58.37
November 2017
1.375%
402,500

November 15, 2024
10.7315
$93.18
Total
 
$
747,492

 
 
 

We called our 2% Notes in March 2018 and settled the outstanding notes in May 2018. Additional information regarding our debt issuances is provided in Note 5 to the consolidated financial statements included in this Form 10-Q.
Summary of Cash Flows
 
 
Three Months Ended March 31,
(In thousands)
 
2019
 
2018
Cash provided by (used in):
 
 
 
 
Operating activities
 
$
6,367

 
$
(4,266
)
Investing activities
 
7,620

 
(55,988
)
Financing activities
 
1,549

 
(8,870
)
Effect of exchange rate changes on cash
 
(188
)
 
(307
)
Net increase (decrease) in cash and cash equivalents
 
$
15,348

 
$
(69,431
)

Operating Activities
Our net cash provided by operating activities for the three months ended March 31, 2019 was $6.4 million, compared to net cash used in operating activities of $4.3 million in the same period of 2018. The increase in cash provided by operating activities in the current period is primarily due to the generation of positive net income in the period compared to a net loss in the same period of 2018 as well as favorable working capital.
Investing Activities
Our net cash provided by investing activities for the three months ended March 31, 2019 was $7.6 million compared to net cash used in investing activities of $56.0 million in the same period of 2018. The decrease in investing activities in the current year is primarily due to lower net purchases of marketable securities, partially offset by an increase in capital expenditures in the current period, primarily associated with the construction of our manufacturing and corporate headquarters facility in Acton, Massachusetts.
Financing Activities
Our net cash provided by financing activities for the three months ended March 31, 2019 was $1.5 million as compared to net cash used in financing activities of $8.9 million in the same period of 2018. The change was primarily attributable to higher proceeds from exercise of employee stock options, net of payments made for withholding taxes in connection with vesting of restricted stock units.
Commitments and Contingencies
We primarily lease our facilities in Massachusetts, California, and the United Kingdom. Refer to Note 13 to the consolidated financial statements included in this Form 10-Q for further information regarding our leases.
Legal Proceedings
The significant estimates and judgments related with establishing litigation reserves are discussed under "Legal Proceedings" in Note 12 to the consolidated financial statements included in this Form 10-Q.

Off-Balance Sheet Arrangements
As of March 31, 2019, we did not have any off-balance sheet financing arrangements.


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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 condensed notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements.
We have reviewed our policies and estimates to determine our critical accounting policies for the three months ended March 31, 2019. We have made no material changes to the critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2018 other than our accounting policies related to leases as a result of the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842), which was adopted on January 1, 2019 as further described in Note 13 to the consolidated financial statements included in this Form 10-Q.
Recent Accounting Pronouncements
Information with respect to recent accounting pronouncements is provided in Note 2 to the consolidated financial statements included in this Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
We currently do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash, cash equivalents, short-term and long-term investments, accounts receivable, accounts payable, accrued expenses, debt and long-term obligations. The primary objectives of our investment strategy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. To minimize our exposure to an adverse shift in interest rates, we invest mainly in short-term investments and cash equivalents. We do not believe that a 10% change in interest rates would have a material impact on the fair value of our investment portfolio or our interest income.
As of March 31, 2019, we had outstanding debt related to our Convertible Senior Notes recorded on our consolidated balance sheet of $599.6 million, net of unamortized discount and issuance costs totaling $147.9 million. Changes in the fair value of our outstanding debt, which could be impacted by changes in interest rates, are not recorded in these consolidated financial statements as the debt is accounted for at cost less unamortized discount and issuance costs. The fair value of the debt, which is disclosed in Note 5 to the consolidated financial statements, is also impacted by changes on our stock price.
Our business is subject to risks, including, but not limited to: unique economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. A substantial portion of our operations are located in the United States, and the majority of our sales since inception have been made in United States dollars. Accordingly, we have assessed that we do not have any material net exposure to foreign currency exchange rate fluctuations at this time. However, as our business in markets outside of the United States continues to increase, we will be exposed to foreign currency exchange risk related to our foreign operations. Fluctuations in the rate of exchange between the United States dollar and foreign currencies, primarily the Euro, Canadian Dollar, and the British Pound, could adversely affect our financial results, including our revenues, revenue growth rates, gross margins, income and losses as well as assets and liabilities.
We will continue to monitor and evaluate our internal processes relating to foreign currency exchange, including the potential use of hedging strategies.

Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on

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the evaluation of our disclosure controls and procedures as of March 31, 2019, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding our material pending legal proceedings, which is incorporated herein by reference, is provided in Note 12 to the consolidated financial statements in this Form 10-Q.

Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition or future results. These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3. Defaults Upon Senior Securities
None.

Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information
None.

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Item 6. Exhibits
Number
 
Description
 
 
 
10.1   
 
Offer Letter between Wayde D. McMillan and Insulet Corporation, dated January 3, 2019 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 7, 2019).
 
 
 
       
Offer Letter between John W. Kapples and Insulet Corporation, dated January 22, 2019.

 
 
 
 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
 
 
 
 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
 
 
 
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer and Chief Financial Officer.
 
 
 
101
 
The following materials from Insulet Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 formatted in XBRL (eXtensible Business Reporting Language), as follows:
 
 
 
 
 
(i) Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018
 
 
 
 
 
(ii) Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (Unaudited)
 
 
 
 
 
(iii) Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018 (Unaudited)
 
 
 
 
 
(iv) Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2019 and 2018 (Unaudited)
 
 
 
 
 
(v) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (Unaudited)
 
 
 
 
 
(vi) Condensed Notes to Consolidated Financial Statements (Unaudited)
 
 
 
*
 
This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
INSULET CORPORATION
 
(Registrant)
 
 
 
Date:
May 2, 2019
/s/ Shacey Petrovic
 
 
Shacey Petrovic
 
 
Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
Date:
May 2, 2019
/s/ Wayde McMillan
 
 
Wayde McMillan
 
 
Chief Financial Officer
(Principal Financial Officer)



29
Exhibit
Exhibit 10.2


                                                                                  
January 22, 2019

John W. Kapples
72 Ledgeways
Wellesley Hills, MA 02481-1410

Dear Jack:

Insulet Corporation (“Company”) is pleased to offer you the full-time position of Senior Vice President, Secretary and General Counsel reporting to me. We are excited about the prospect of you joining Insulet and look forward to your meaningful contributions to the Company as we embark on an exciting new chapter in the Company’s history. This offer of employment is contingent upon the satisfactory completion of professional references and a background check prior to your start date. We will determine a mutually beneficial start date upon acceptance of this offer.

Your salary will be $15,769.23 biweekly (equivalent to $410,000 on an annualized basis), paid in accordance with the Company’s normal payroll practices as established or modified from time to time. You will be eligible to participate in our annual bonus program beginning fiscal year 2019 with a target bonus opportunity that is equal to sixty percent (60%) of your annual base salary. Payout typically takes place in the first quarter following the end of the calendar plan year.

The Company is committed to sharing its continued success with its employees through long-term incentive opportunities. You will be eligible to participate in the Company’s long-term incentive program, which currently provides for annual equity awards. For fiscal 2019, the Company will issue an award to you with a grant date fair value equal to seven hundred fifty thousand dollars ($750,000) (“FY19 Annual Equity Award”). The grant date of the FY19 Annual Equity Award will be the same grant date as determined by the Compensation Committee of the Company’s Board of Directors for grants of fiscal year 2019 annual equity awards to Company employees, assuming you have joined us as an employee by such date. If you have not joined us as an employee by such date, the Company grants off-cycle equity awards on the first trading day of each month and, therefore, the grant date for your FY19 Annual Equity Award under these circumstances will be the first trading day of the month that immediately follows your employment commencement date. Fifty percent (50%) of the FY19 Annual Equity Award will be delivered to you in the form of performance restricted stock units (“PRSUs”) and the remaining fifty percent (50%) will be delivered to you in equal portions of RSUs (i.e., 25% of the grant date fair value) and stock options (i.e., 25% of the grant date fair value). The actual number of PRSUs and RSUs granted to you for the FY19 Annual Equity Award will be calculated by dividing the grant date value of the respective award by the closing price of a share of Company common stock on the grant date. The actual number of stock options granted to you for your FY19 Annual Equity Award will be calculated by dividing the dollar value of the option award by the Black-Scholes option valuation of the closing price of a share of Company common stock on the grant date. These awards will vest on the same terms and conditions as established by the Compensation Committee of the Board of Directors for purposes of the fiscal 2019 annual equity award. The material terms of these equity awards will be contained in a terms and conditions document which will be issued to you at the time of grant. The terms and conditions document under which each award is issued shall govern.




In addition, you will receive a sign-on equity award, with a grant date fair value of seven hundred fifty thousand dollars ($750,000), which will be delivered to you in the form of restricted stock units (“RSUs”).  The actual number of RSUs granted to you for your sign-on award will be calculated by dividing the dollar value of the RSU award by the closing price of a share of Insulet common stock on the grant date.  These RSUs will vest in substantially equal installments on the first, second and third anniversary of the grant date.  The grant date for your sign-on equity award will be the first trading day of the month that immediately follows your employment commencement date. The material terms of your sign-on award will be contained in a terms and conditions document which will be issued to you at the time of grant.  The terms and conditions document under which each award is issued shall govern.

You will be eligible for severance and change in control benefits pursuant and subject to the terms of the Insulet Corporation Amended and Restated Executive Severance Plan (“Severance Plan”). You will also be eligible to participate in the Company’s employee benefits programs to the same extent as, and subject to the same terms, conditions and limitations applicable to, other similarly-situated employees of the Company. For a more detailed understanding of these employee benefits and the applicable eligibility requirements, please consult the summary plan descriptions for the programs.

By signing this offer letter, you confirm that you will not disclose any confidential information from any other employer to Insulet. You will be required to sign the Company’s standard Inventions, Non-Disclosure, Non-Solicitation, Non-Servicing and Non-Competition Agreement for Massachusetts Employees as a condition of your employment with the Company.

Also, just as the Company regards the protection of our trade secrets and other confidential information as a matter of great importance, we also respect that you may have obligations to your present or other prior employer (including safeguarding its confidential information), and we expect you to honor them as well. To that end, we expect that you will not take any documents or other confidential information from your employer of any kind, if and when you depart. Further, you should not bring with you to the Company, or use in the performance of your responsibilities for the Company, any confidential or proprietary business information, materials or documents of a former employer.

While we are hopeful and confident that our relationship will be mutually rewarding, satisfactory and sustaining, this letter shall not be construed as an agreement, either express or implied, to employ you for any stated term, and shall in no way alter the Company’s policy of employment at will, under which both you and the Company remain free to end the employment relationship, for any reason, at any time, with or without notice. Similarly, nothing in this letter shall be construed as an agreement, either express or implied, to pay you any compensation or grant you any benefit beyond the end of your employment with the Company, except as otherwise provided in the Severance Plan. Also, this letter constitutes our entire offer regarding the terms and conditions of your employment by the Company, and it supersedes any prior agreements, or other promises or statements (whether oral or written) regarding the offered terms of employment. Your employment with Insulet shall be governed by and construed under the internal laws of the Commonwealth of Massachusetts, without giving effect to conflict of law principles.




On your first day of work, you should plan to arrive at our Acton offices at 8:45am and check in with the Receptionist upon arrival.  For the purpose of completing the I-9 form, please bring with you sufficient documentation to demonstrate your eligibility to work in the United States of America. As required by federal law, this verification must occur by the third day of your employment.

It is with great pleasure that we welcome you to Insulet! We recognize that our success is the direct result of the contributions made by our dedicated and talented workforce. We look forward to further strengthening the Insulet team with your contributions.

Best regards,
 
 
 
/s/ Shacey Petrovic
Shacey Petrovic

President and Chief Executive Officer





Acceptance: Your signature below confirms your acceptance of the offer to join Insulet as Senior Vice President, Secretary and General Counsel and also confirms you have reviewed the job description for this position and that you meet the minimum qualifications required of this role.   Please indicate your anticipated start date below.

 
 
 
/s/ John W. Kapples
 
3/4/2019
Signature
 
Start Date




Exhibit
EXHIBIT 31.1


CERTIFICATION
I, Shacey Petrovic, certify that:    
1.
I have reviewed this Quarterly Report on Form 10-Q of Insulet Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 
 
 
 
 
 
/s/ Shacey Petrovic
Shacey Petrovic
Chief Executive Officer
 
 
 
Date:
May 2, 2019
 


Exhibit
EXHIBIT 31.2

CERTIFICATION
I, Wayde McMillan, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Insulet Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 
 
 
 
 
 
/s/ Wayde McMillan
Wayde McMillan
Chief Financial Officer
 
 
 
Date:
May 2, 2019
 


Exhibit
EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Insulet Corporation, a Delaware corporation (the “Company”), does hereby certify with respect to the Quarterly Report of the Company on Form 10-Q for the period ended March 31, 2019, as filed with the Securities and Exchange Commission (the “Report”) that, to their knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
 
 
 
 
 
 
 
/s/ Shacey Petrovic                            
Shacey Petrovic
Chief Executive Officer
 
 
 
Date:
May 2, 2019
 
 
 
 
 
 
 
 
 
 
/s/ Wayde McMillan
Wayde McMillan
Chief Financial Officer
 
 
 
Date:
May 2, 2019