Insulet Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Insulet develops, manufactures and sells its OmniPod insulin management system and other diabetes-related products and supplies.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $69.2 million | $57.4 million | +21% |
| Gross profit | $32.8 million | $25.2 million | +30% |
| Gross margin | 47.4% | 43.9% | +3.5 percentage points |
| Operating expenses | $34.7 million | $31.4 million | +11% |
| Operating loss | $1.9 million | $6.2 million | Improved |
| Net loss | $6.1 million | $10.7 million | Loss narrowed 42% |
| Net loss per share, basic and diluted | $0.11 | $0.20 | Improved |
| Cash used in operating activities | $1.0 million | $1.2 million | Use decreased |
Higher revenue reflected continued OmniPod adoption in the U.S. and internationally, partly offset by reduced Medicare diabetes-testing-supply sales following the DMEPOS competitive bidding program. Gross margin improved as OmniPod unit costs fell with raw-material savings, supplier volume discounts and better overhead absorption. Research and development expense rose 54% to $6.8 million, primarily from employee-related costs and development supplies; general and administrative expense rose 9% to $14.3 million, including higher legal and employee costs. Sales and marketing expense decreased 2% to $13.7 million.
Balance sheet and liquidity
- Cash and cash equivalents were $145.6 million at March 31, 2014, down $4.1 million from year-end 2013. Net cash used in investing activities was $2.2 million, primarily for manufacturing equipment; financing activities used $0.9 million.
- Current assets were $199.9 million and current liabilities $43.1 million. Total assets were $288.5 million; total liabilities were $166.0 million.
- Convertible-note principal was $143.75 million, with a $116.3 million carrying value after unamortized discount. Capital lease obligations totaled approximately $7.4 million. The notes bear 3.75% interest and mature in June 2016.
- Accumulated deficit was $532.7 million. The company reported losses every quarter since its 2000 inception.
Outlook, risks and unusual items
- Management expects 2014 revenue to continue increasing as the company gains U.S. customers and expands internationally. It expects near-term net losses and says cash, together with expected sales cash generation, should cover projected operating and debt-service needs for at least 12 months. No numerical revenue or earnings guidance was provided.
- Management expects 2014 R&D spending to rise, sales and marketing expense to increase as the commercial team expands, and general and administrative expense to decrease versus 2013. It said current manufacturing capacity should meet expected 2014 OmniPod demand.
- The 3.75% notes became holder-convertible for the quarter ending June 30, 2014, following the share-price condition being met. Insulet may settle principal in cash, shares or a combination. Contractual obligations total $181.9 million, including $155.7 million of debt obligations and $9.1 million of capital-lease payments.
- Key business risks include dependence on OmniPod adoption and reimbursement, execution of cost reductions and growth, reliance on Flextronics as the sole-source complete OmniPod supplier, and manufacturing concentration in China. One vendor represented about 36% of accounts payable, accrued expenses and other current liabilities.
- Pending matters include a patent lawsuit by Becton, Dickinson and Company, with trial expected in summer 2014, and a Massachusetts Attorney General inquiry concerning historical prescription-refill practices. Management said it did not believe either represented material financial exposure, but the latter’s outcome could not be reasonably assessed.
- Other notable items: stock-based compensation was $4.4 million versus $3.0 million a year earlier; the company recognized $0.2 million of income from the fair-value increase in a notes-related call feature. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Track revenue mix and OmniPod adoption against the loss of Medicare testing-supply business, and assess whether gross-margin gains persist as volume grows.
- Review the June 2014 convertibility and redemption provisions of the $143.75 million notes, including potential cash settlement, dilution and debt-service implications.
- Monitor operating cash flow, receivables and inventory growth, and confirm the stated 12-month liquidity outlook.
- Assess Flextronics supply continuity, manufacturing cost reductions and capacity as customer demand expands.
- Follow developments in the BD litigation and Massachusetts inquiry, and any resulting financial or operational effects.