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As filed with the Securities
and Exchange Commission on October 29, 2007
Registration Statement
No. 333-146810
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 1
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
INSULET CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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3841
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04-3523891
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(State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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9 Oak Park Drive
Bedford, Massachusetts
01730
(781) 457-5000
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Duane DeSisto
President and Chief Executive
Officer
Insulet Corporation
9 Oak Park Drive
Bedford, Massachusetts
01730
(781) 457-5000
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Raymond C. Zemlin, Esq.
Daniel P. Adams, Esq.
Goodwin Procter LLP
Exchange Place
Boston, Massachusetts 02109
(617) 570-1000
Fax: (617)
523-1231
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Gerald S. Tanenbaum, Esq.
Cahill Gordon & Reindel LLP
80 Pine Street
New York, New York 10104
(212) 701-3000
Fax: (212) 269-5420
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Approximate date of commencement of proposed sale to
public: As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following box. o
If this Form is used to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Amount of
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Title of Each Class
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Amount to be
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Offering Price
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Aggregate Offering
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Registration
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of Securities to be Registered
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Registered
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Per Unit(3)
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Price(3)
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Fee(3)
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Common stock, par value $0.01 per share(1)
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148,183 shares(2
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$
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23.21
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$
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3,439,328
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$
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106
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(1)
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Includes shares of our common stock
issuable upon exercise of the underwriters option to
purchase additional shares of our common stock.
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(2)
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The 148,183 shares of common
stock being registered in this Amendment No. 1 is in
addition to the 5,484,974 shares of common stock registered
pursuant to the registrants Registration Statement on
Form S-1
filed with the Securities and Exchange Commission on
October 19, 2007.
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(3)
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Estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(c)
under the Securities Act based on the average high and low
prices of our common stock as reported on The NASDAQ Global
Market on October 22, 2007.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell nor does it
seek an offer to buy these securities in any jurisdiction where
the offer or sale is not permitted.
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SUBJECT
TO COMPLETION, DATED OCTOBER 29, 2007
Prospectus
4,898,398 Shares
Common Stock
The selling stockholders identified in this prospectus are
selling 4,898,398 shares of our common stock. We will not
receive any of the proceeds from the sale of shares of our
common stock by the selling stockholders.
Our common stock is listed on The NASDAQ Global Market under the
symbol PODD. The last reported trading price of our
common stock on October 26, 2007 was $26.62 per share.
Investing in our common stock
involves a high degree of risk. See Risk Factors
beginning on page 9.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds to the selling stockholders, before expenses
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$
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$
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We have granted the underwriters an option for a period of
30 days to purchase up to 734,759 additional shares of our
common stock on the same terms and conditions set forth above to
cover overallotments, if any.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
The underwriters expect to deliver the shares of common stock to
investors on , 2007.
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JPMorgan |
Merrill
Lynch & Co. |
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Leerink
Swann |
Thomas
Weisel Partners LLC |
Canaccord
Adams |
, 2007
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We
and the selling stockholders are offering to sell, and seeking
offers to buy, shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
No action is being taken in any jurisdiction outside the
United States to permit a public offering of the common stock or
possession or distribution of this prospectus in that
jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are
required to inform themselves about and to observe any
restrictions as to this offering and the distribution of this
prospectus applicable to those jurisdictions.
OMNIPOD and the OMNIPOD design are registered trademarks of
ours, and INSULET and POD are trademarks of ours. Other
products, services and company names mentioned in this
prospectus are the service marks/trademarks of their respective
owners, including, but not limited to, FREESTYLE, which is a
registered trademark of Abbott Diabetes Care, Inc., and
NAVIGATOR, which is a registered trademark of Abbott
Laboratories.
Our estimates of market share and market size in this
prospectus were based on, in certain cases, public disclosure,
industry and trade publications and reports prepared by third
parties, which we believe to be reliable, but have not
independently verified.
This summary highlights information contained elsewhere in
this prospectus. Because this section is only a summary, it does
not contain all of the information that may be important to you
or that you should consider before making an investment
decision. For a more complete understanding of this offering, we
encourage you to read this entire prospectus, including the
information contained in the section entitled Risk
Factors. You should read the following summary together
with the more detailed information and consolidated financial
information and the notes thereto included in this prospectus.
In this prospectus, unless the context otherwise requires, the
terms Insulet, we, us,
our and our company refer to Insulet
Corporation, a Delaware corporation, and its wholly-owned
subsidiary.
Our
Business
We are a medical device company that develops, manufactures and
markets an innovative, discreet and
easy-to-use
insulin infusion system for people with insulin-dependent
diabetes. Our proprietary OmniPod Insulin Management System,
which consists of our OmniPod disposable insulin infusion device
and our handheld, wireless Personal Diabetes Manager, is the
only commercially-available insulin infusion system of its kind.
Conventional insulin pumps require people with insulin-dependent
diabetes to learn to use, manage and wear a number of cumbersome
components, including up to 42 inches of tubing. In
contrast, the OmniPod System features only two discreet,
easy-to-use
devices that eliminate the need for a bulky pump, tubing and
separate blood glucose meter, provide for virtually pain-free
automated cannula insertion, communicate wirelessly and
integrate a blood glucose meter. We believe that the OmniPod
Systems unique proprietary design offers significant
lifestyle benefits to people with insulin-dependent diabetes.
The U.S. Food and Drug Administration, or FDA, approved the
OmniPod System in January 2005 and we began commercial sale of
the OmniPod System in the United States in October 2005. Our
revenue for the years ended December 31, 2005 and 2006 and
the six months ended June 30, 2007 was $50,000,
$3.7 million and $5.2 million, respectively. We have
incurred a significant net loss since our inception, including a
net loss of $36.0 million for the year ended
December 31, 2006 and $24.2 million for the six months
ended June 30, 2007. As of June 30, 2007, we had an
accumulated deficit of $126.3 million. As we have grown our
business, our net loss has increased each quarter and we expect
our rate of loss to continue to increase on a quarterly basis
into 2008. To date, we have focused our sales and marketing
efforts in the Eastern and Midwestern United States. As of
September 30, 2007, we had approximately
3,200 patients using the OmniPod System in the United
States, which represents an increase of approximately
750 patients since June 30, 2007. Historically, the
growth in our quarterly revenue has not been consistent with our
quarterly patient growth due to a number of factors, including
the deferral of revenue received from new patients within
45 days prior to the end of a quarter and the timing and
average size of reorders from existing patients. Accordingly,
although our revenue for the third quarter of 2007 increased
compared to our revenue for the prior quarter, this increase is
not as large on a percentage basis as the increase in the number
of customers during the third quarter of 2007.
Our
Market
Diabetes is a chronic, life-threatening disease for which there
is no known cure. Diabetes is caused by the bodys
inability to produce or effectively utilize the hormone insulin.
This inability prevents the body from adequately regulating
blood glucose levels. Glucose, the primary source of energy for
cells, must be maintained at certain concentrations in the blood
in order to permit optimal cell function and health. In people
with diabetes, blood glucose levels fluctuate between very high
levels, a condition known as hyperglycemia, and very low levels,
a condition called hypoglycemia. Hyperglycemia can lead to
serious short-term complications, such as confusion, vomiting,
dehydration and loss of consciousness; long-term complications,
such as blindness, kidney disease, nervous system disease,
amputations, stroke and cardiovascular disease; or death.
Hypoglycemia can lead to confusion, loss of consciousness or
death.
The International Diabetes Federation, or IDF, estimated that
diabetes currently affects 246 million people worldwide.
The IDF expects that by 2025, 380 million people worldwide
will be affected by diabetes due to increasing overall life
expectancy, worsening diet trends, increasingly sedentary
lifestyles and the growing incidence of obesity.
Frost & Sullivan estimated that in 2006,
20.7 million people in the United States, or approximately
7% of the population, had diabetes, and reported that it
expected this number to increase to 23.9 million people by
2011. Diabetes is typically classified as either Type 1,
which is characterized by the bodys nearly complete
inability to produce insulin, or Type 2, which is the more
common form and is characterized by the bodys inability to
either properly utilize or produce enough insulin. Some Type 2
diabetes patients can control their blood glucose levels using
exercise, diet
and/or oral
medications. However, all Type 1 diabetes patients and a subset
of Type 2 diabetes patients require daily insulin therapy,
typically administered via
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injections or conventional insulin pumps, to survive.
Frost & Sullivan estimates that approximately 26% of
diagnosed Type 2 patients used insulin therapy in 2006.
Throughout this prospectus, we refer to both Type 1 diabetes and
insulin-requiring Type 2 diabetes as insulin-dependent diabetes.
Frost & Sullivan estimated that in 2006, there were
4.9 million people with insulin-dependent diabetes in the
United States.
Many healthcare professionals believe that blood glucose levels
are controlled more effectively when insulin therapy more
closely mimics the functioning of a normal pancreas; that is,
when it is more physiological. Intensive insulin management has
emerged as the best way for people with insulin-dependent
diabetes to achieve near-normal blood glucose levels. Today,
there are two primary methods for practicing intensive insulin
management: multiple daily injection, or MDI, therapy with
syringes or insulin pens, or continuous subcutaneous insulin
infusion, or CSII, therapy using conventional insulin pumps.
CSII therapy is considered the more physiological therapy of the
two, and several studies have proven its clinical superiority
over MDI therapy.
To date, CSII therapy has required the use of conventional
insulin pumps. Conventional insulin pumps are generally
pager-sized, cartridge-loaded devices typically worn on the
patients belt or in a pocket with up to 42 inches of
external tubing connected to a cannula that is manually inserted
beneath the patients skin using relatively large and
painful introducer needles. Conventional insulin pumps also
require patients to use a separate blood glucose meter.
According to Frost & Sullivan, the market for
equipment relating to CSII therapy, consisting of conventional
insulin pumps and pump supplies, was $564.4 million in 2003
and is expected to increase at a compounded annual growth rate
of 15.9% through 2010. Although CSII therapy has been shown to
be clinically superior to MDI therapy for managing diabetes, we
currently estimate that of the approximately 1.2 million
people with Type 1 diabetes in the United States, only
approximately 250,000, or 21%, of these people use CSII therapy.
Similarly, we believe that less than 1% of people with
insulin-requiring Type 2 diabetes used CSII therapy in
2006. We believe that the utilization of CSII therapy among
people with insulin-dependent diabetes has been impeded by the
obtrusive design, complexity and large up-front cost of
conventional insulin pumps.
Our
Solution: The OmniPod System
The OmniPod Insulin Management System utilizes award-winning
proprietary designs and technology to combine the functionality
of a conventional insulin pump with that of a blood glucose
meter in an innovative, discreet and
easy-to-use
two-part system consisting of the OmniPod and the Personal
Diabetes Manager.
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The OmniPod, measuring 1.6 x 2.4 x 0.7 inches and
weighing 1.2 ounces, is a small, lightweight, self-adhesive,
disposable insulin infusion device that the patient wears
directly on the skin beneath clothing for up to three days and
then replaces. During wear, the OmniPod delivers precise,
personalized doses of insulin through a small, flexible tube,
called a cannula, inserted beneath the skin once at the
beginning of wear via an automated, hands-free insertion
process. The OmniPod is watertight and does not need to be
removed for showering, swimming or exercise, thereby eliminating
the interruptions of therapy associated with the disconnecting
of conventional insulin pumps.
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The Personal Diabetes Manager, or PDM, measuring 2.6 x
4.3 x 1.0 inches, is a wireless, menu-driven, hand-held
device, similar in size and appearance to a personal digital
assistant. The patient uses the PDM to program the OmniPod with
personalized insulin delivery instructions and to check blood
glucose levels using FreeStyle test strips. The PDM facilitates
diabetes management by seamlessly integrating blood glucose
results into suggested bolus calculations, incorporating a food
reference library, and storing and displaying carbohydrate,
insulin delivery and blood glucose records in one device. The
PDM also features a large display, large font and a backlight to
enhance readability for people with various levels of vision
acuity in any setting. When the PDM is not in use, it can be
stored conveniently in a purse, pocket, backpack or briefcase.
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We believe that there is a very strong consumer element to
diabetes management. The OmniPod System was designed to provide
an innovative diabetes management solution to people with
insulin-dependent diabetes and expand the use of CSII therapy by
overcoming many of the key drawbacks of conventional insulin
pumps. A significant portion of our customers report being
former long-term insulin-injecting Type 1 diabetes patients
who have now decided to switch to CSII therapy. Based on these
reports, we believe we are expanding the
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market for CSII therapy by attracting MDI therapy users who had
previously foregone the proven clinical benefits of CSII
therapy. We believe that the OmniPod Systems proprietary
designs and unique functionality offer patients unprecedented
discretion, comfort and ease in using CSII therapy to manage
their diabetes, while providing a low up-front cost alternative
for patients and third-party payors and reducing the training
burden for healthcare professionals.
We believe that the following attributes of our solution will
lead to the rapid adoption of the OmniPod System as a leading
technology in CSII therapy:
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discreet, two-part design;
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no tubing;
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virtually pain-free automated cannula insertion;
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easy to train, learn and use; and
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low up-front cost and pay-as-you-go pricing structure.
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Our
Strategy
Our goals are to expand the use of CSII therapy and to become a
leading provider of CSII technology for people with
insulin-dependent diabetes. We believe that the OmniPod
Systems innovative design and
ease-of-use
will significantly expand the pool of candidates and the market
for CSII therapy and make it the CSII therapy system of choice
for healthcare professionals, people with insulin-dependent
diabetes and third-party payors. The principal elements of our
business strategy include:
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promoting awareness of the OmniPod System among thought leaders,
key academic centers, diabetes clinics and top
insulin-prescribing healthcare professionals;
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promoting awareness and trial experience of the OmniPod System
among people with insulin-dependent diabetes;
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expanding third-party payor coverage for the OmniPod System;
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enhancing our OmniPod production capabilities to increase
capacity and reduce per unit production costs;
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continuing research and development efforts to enhance the
features of the OmniPod System and reduce per unit production
costs; and
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maintaining a customer-focused approach.
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Our
Sales and Marketing Strategy
Our sales and marketing effort is focused on generating demand
and acceptance of the OmniPod System among healthcare
professionals, people with insulin-dependent diabetes and
third-party payors. We believe that focusing efforts on these
three key participants is important given the instrumental role
they each play in the decision-making process for diabetes
therapy. Our marketing strategy is to build awareness of the
benefits of the OmniPod System through a wide range of education
programs, patient demonstration programs, support materials and
events at the national, regional and local levels.
To date, we have focused our sales and marketing efforts in the
Eastern and Midwestern United States in order to align the
demand for the OmniPod System with our current capacity to
manufacture the OmniPod. As we automate and expand our
manufacturing capabilities, we plan to expand our sales and
marketing efforts across the United States and internationally
and commence broader
direct-to-consumer
campaigns.
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Our
Manufacturing Strategy
We believe a key contributing factor to the overall
attractiveness of the OmniPod System is the OmniPod disposable
insulin infusion device. To manufacture sufficient volumes of
the OmniPod, each of which is worn for up to three days and then
replaced, and to achieve a low per unit production cost, we have
designed the OmniPod to be manufactured through a highly
automated process.
We are currently producing the OmniPod on a partially automated
manufacturing line at our facility in Bedford, Massachusetts.
During 2008, we intend to complete the planned automation of
this manufacturing line. Pending construction and installation
of the remaining automated manufacturing equipment that we plan
to use, we are manually performing these steps in the
manufacturing process, which limits our ability to increase our
manufacturing capacity and to decrease our per unit cost of
goods sold, thereby causing us to incur negative gross margins.
In addition, we expect that during 2008, construction of a
partially automated manufacturing line will be completed at a
facility in China operated by a subsidiary of Flextronics
International Ltd. We currently purchase a sub-assembly of some
of the OmniPods components from Flextronics. Toward the
end of 2008, we intend to purchase complete OmniPods from
Flextronics. By purchasing OmniPods manufactured by Flextronics
in China while continuing to manufacture OmniPods on our
manufacturing line in Bedford, we will be able to substantially
increase production volumes for the OmniPod and reduce our per
unit production costs.
Our current OmniPod manufacturing capacity is approximately
45,000 OmniPods per month. By completing the planned automation
of our existing manufacturing line in Bedford, Massachusetts and
by purchasing complete OmniPods from Flextronics, we expect to
increase the production capacity of OmniPods to in excess
of 200,000 OmniPods per month toward the end of 2008.
Risk
Factors
Our business is subject to numerous risks as discussed more
fully in the section entitled Risk Factors
immediately following this prospectus summary. Principal risks
of our business include:
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We have incurred significant operating losses since inception,
are currently selling the OmniPod System at a loss and cannot
assure you that we will achieve profitability.
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We currently rely entirely on sales of our sole product, the
OmniPod System, to generate revenues. The failure of the OmniPod
System to achieve and maintain significant market acceptance or
any factors that negatively impact sales of this product will
adversely affect our business, financial condition and results
of operations.
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Our ability to achieve profitability from a current net loss
level will depend on our ability to reduce the per unit cost of
producing the OmniPod through the successful implementation of
our automated manufacturing strategy and our plan to purchase
complete OmniPods manufactured in China.
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We are dependent upon third-party suppliers, making us
vulnerable to supply problems and price fluctuations.
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Our financial condition or results of operations may be
adversely affected by international business risks.
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Failure to secure or retain adequate coverage or reimbursement
for the OmniPod System by third-party payors could adversely
affect our business, financial condition and results of
operations.
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We face competition from numerous competitors, most of whom have
far greater resources than we have, which may make it more
difficult for us to achieve significant market penetration and
which may allow them to develop additional products for the
treatment of diabetes that compete with the OmniPod System.
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The patent rights on which we rely to protect the intellectual
property underlying the OmniPod System may not be adequate,
which could enable third parties to use our technology and would
harm our continued ability to compete in the market.
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Claims that our current or future products infringe or
misappropriate the proprietary rights of others could adversely
affect our ability to sell those products and cause us to incur
additional costs.
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Our
Corporate Information
Insulet Corporation is a Delaware corporation formed in 2000.
Our principal offices are located at 9 Oak Park Drive, Bedford,
Massachusetts 01730, and our telephone number is
(781) 457-5000.
Our website address is
http://www.insulet.com.
We do not incorporate the information on, or accessible through,
our website into this prospectus, and you should not consider it
part of this prospectus.
5
The
Offering
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Common stock offered by the selling stockholders: |
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4,898,398 shares |
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Overallotment option: |
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734,759 shares |
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Common stock outstanding before and immediately following the
offering: |
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26,427,641 shares |
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Use of proceeds: |
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If the underwriters overallotment option is exercised in
full, we estimate that we will receive net proceeds from this
offering of approximately
$ , after deducting
underwriting discounts and estimated offering expenses that we
must pay. We intend to use any proceeds we receive for general
corporate purposes. We will not receive any of the proceeds from
the sale of shares of our common stock by the selling
stockholders. See the section entitled Use of
Proceeds. |
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Dividend policy: |
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We do not anticipate paying any cash dividends on our common
stock. |
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NASDAQ Global Market symbol: |
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PODD |
The number of shares of our common stock to be outstanding
immediately following this offering is based on
26,427,641 shares of our common stock outstanding as of
September 30, 2007, which excludes:
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2,865,687 shares of our common stock issuable upon the
exercise of outstanding stock options as of September 30,
2007, at a weighted average exercise price per share of $5.54;
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78,440 shares of our common stock issuable upon the exercise of
warrants outstanding as of September 30, 2007, at a
weighted average exercise price per share of $9.56;
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535,000 shares of our common stock reserved for future
issuance under our 2007 Stock Option and Incentive Plan as of
September 30, 2007 (subject to an annual increase through
January 1, 2012 equal to 3% of the number of shares of our
common stock outstanding as of each preceding December 31,
up to a maximum of 725,000 additional shares per year); and
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284,932 shares of our common stock reserved for future
issuance under our 2007 Employee Stock Purchase Plan as of
September 30, 2007.
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Unless otherwise indicated, the information in this prospectus
assumes that the underwriters will not exercise the
overallotment option granted to them by us.
6
Summary
Consolidated Financial Data
The summary consolidated financial data as of December 31,
2005 and 2006 and for the years ended December 31, 2004,
2005 and 2006 have been derived from our historical financial
statements audited by Ernst & Young LLP, an
independent registered public accounting firm, included in this
prospectus. The selected historical consolidated financial data
as of June 30, 2007 and for the six-month periods ended
June 30, 2006 and 2007 have been derived from our unaudited
consolidated financial statements included in this prospectus.
These unaudited consolidated financial statements have been
prepared on a basis consistent with our audited consolidated
financial statements. In the opinion of management, the
unaudited financial data reflect all adjustments, consisting
only of normal and recurring adjustments, necessary for a fair
statement of the results for those periods. The results of
operations for the interim periods are not necessarily
indicative of the results to be expected for the full year or
any future period. Historical results are not necessarily
indicative of the results to be expected in the future. The
following summary consolidated financial data should be read in
conjunction with Capitalization,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Selected
Consolidated Financial Data and our consolidated financial
statements and the accompanying notes to those consolidated
financial statements included in this prospectus.
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Six Months Ended
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Year Ended December 31,
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June 30,
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|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
|
|
|
$
|
50
|
|
|
$
|
3,663
|
|
|
$
|
1,102
|
|
|
$
|
5,220
|
|
Cost of revenue
|
|
|
|
|
|
|
1,530
|
|
|
|
15,660
|
|
|
|
7,339
|
|
|
|
11,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
|
|
|
|
(1,480
|
)
|
|
|
(11,997
|
)
|
|
|
(6,237
|
)
|
|
|
(6,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
9,026
|
|
|
|
10,764
|
|
|
|
8,094
|
|
|
|
3,808
|
|
|
|
4,990
|
|
General and administrative
|
|
|
3,950
|
|
|
|
5,490
|
|
|
|
8,389
|
|
|
|
3,324
|
|
|
|
5,457
|
|
Sales and marketing
|
|
|
1,177
|
|
|
|
3,771
|
|
|
|
6,165
|
|
|
|
2,545
|
|
|
|
6,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
14,153
|
|
|
|
20,025
|
|
|
|
22,648
|
|
|
|
9,677
|
|
|
|
16,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(14,153
|
)
|
|
|
(21,505
|
)
|
|
|
(34,645
|
)
|
|
|
(15,914
|
)
|
|
|
(23,206
|
)
|
Other income (expense), net
|
|
|
332
|
|
|
|
(131
|
)
|
|
|
(1,305
|
)
|
|
|
261
|
|
|
|
(1,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(13,821
|
)
|
|
|
(21,636
|
)
|
|
|
(35,950
|
)
|
|
|
(15,653
|
)
|
|
|
(24,232
|
)
|
Accretion of redeemable convertible preferred stock
|
|
|
(64
|
)
|
|
|
|
|
|
|
(222
|
)
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(13,885
|
)
|
|
$
|
(21,636
|
)
|
|
$
|
(36,172
|
)
|
|
$
|
(15,875
|
)
|
|
$
|
(24,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted(1)
|
|
$
|
(47.86
|
)
|
|
$
|
(70.95
|
)
|
|
$
|
(99.72
|
)
|
|
$
|
(45.89
|
)
|
|
$
|
(3.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares used in calculating net loss
per share
|
|
|
290,140
|
|
|
|
304,962
|
|
|
|
362,750
|
|
|
|
345,959
|
|
|
|
6,671,807
|
|
|
|
(1) |
See note 3 to our consolidated financial statements included in
this prospectus on
page FF-12
for an explanation of the method used to calculate basic and
diluted net loss per common share.
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of June 30,
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,660
|
|
|
$
|
33,231
|
|
|
$
|
119,818
|
|
|
|
|
|
Working capital
|
|
$
|
5,168
|
|
|
$
|
785
|
|
|
$
|
110,783
|
|
|
|
|
|
Total assets
|
|
$
|
16,792
|
|
|
$
|
57,140
|
|
|
$
|
149,140
|
|
|
|
|
|
Current debt
|
|
$
|
1,479
|
|
|
$
|
29,222
|
|
|
$
|
7,943
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
8,302
|
|
|
$
|
|
|
|
$
|
21,341
|
|
|
|
|
|
Other long-term liabilities
|
|
$
|
315
|
|
|
$
|
316
|
|
|
$
|
1,234
|
|
|
|
|
|
Redeemable convertible preferred stock
|
|
$
|
69,500
|
|
|
$
|
119,509
|
|
|
$
|
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
$
|
(66,091
|
)
|
|
$
|
(101,765
|
)
|
|
$
|
109,520
|
|
|
|
|
|
8
You should carefully consider the risk factors set forth
below as well as the other information contained in this
prospectus before investing in our common stock. Any of the
following risks could materially and adversely affect our
business, financial condition or results of operations. In such
a case, you may lose all or part of your investment. The risks
described below are not the only risks facing us. Additional
risks and uncertainties not currently known to us or those we
currently view to be immaterial may also materially adversely
affect our business, financial condition or results of
operations.
Risks
Relating to Our Business
We
have incurred significant operating losses since inception, are
currently selling the OmniPod System at a loss and cannot assure
you that we will achieve profitability.
Since our inception in 2000, we have incurred losses every
quarter. We began commercial sales of the OmniPod System in
October 2005 and we are currently not able to manufacture and
sell the OmniPod System at a cost and in volumes sufficient to
allow us to achieve profitability. For the quarter ended
June 30, 2007, our gross loss from the manufacture and sale
of the OmniPod System was $3.7 million. The extent of our
future operating losses and the timing of profitability are
highly uncertain, and we may never achieve or sustain
profitability. We have incurred a significant net loss since our
inception, including a net loss of $12.7 million for the
quarter ended June 30, 2007. As of June 30, 2007, we
had an accumulated deficit of $126.3 million. As we have
grown our business, our net loss has increased each quarter and
we expect our rate of loss to continue to increase on a
quarterly basis into 2008.
We
currently rely entirely on sales of our sole product, the
OmniPod System, to generate revenues. The failure of the OmniPod
System to achieve and maintain significant market acceptance or
any factors that negatively impact sales of this product will
adversely affect our business, financial condition and results
of operations.
Our sole product is the OmniPod System, which we introduced to
the market in October 2005. We expect to derive substantially
all of our revenue from the sale of this product. Accordingly,
our ability to generate revenues is entirely reliant on our
ability to market and sell the devices that comprise the OmniPod
System. Our sales of the OmniPod System may be negatively
impacted by many factors, including:
|
|
|
|
|
the failure of the OmniPod System to achieve acceptance among
opinion leaders in the diabetes treatment community,
insulin-prescribing physicians, third-party payors and people
with insulin-dependent diabetes;
|
|
|
|
manufacturing problems;
|
|
|
|
changes in reimbursement rates or policies relating to the
OmniPod System by third-party payors;
|
|
|
|
claims that any portion of the OmniPod System infringes on
patent rights or other intellectual property rights owned by
other parties;
|
|
|
|
adverse regulatory or legal actions relating to the OmniPod
System;
|
|
|
|
damage, destruction or loss of any of our automated assembly
units;
|
|
|
|
competitive pricing and related factors; and
|
|
|
|
results of clinical studies relating to the OmniPod System or
our competitors products.
|
If any of these events occurs, our ability to generate revenues
could be significantly reduced.
9
Our
ability to achieve profitability from a current net loss level
will depend on our ability to reduce the per unit cost of
producing the OmniPod through the successful implementation of
our automated manufacturing strategy and our plan to purchase
complete OmniPods manufactured in China.
Currently, the sale price of the OmniPod System is not
sufficient to cover our direct manufacturing costs. We are in
the process of completing the construction, testing and
installation of automated manufacturing equipment to be used in
the assembly of the OmniPod in order to increase our
manufacturing volume. Increased volumes will allow for volume
purchase discounts to reduce our raw material costs and improve
absorption of manufacturing overhead costs. During 2008, we
expect to complete the planned automation of our existing
manufacturing line at our facility in Bedford, Massachusetts.
Pending construction and installation of the remaining automated
manufacturing equipment that we plan to use, we are manually
performing these steps in the manufacturing process, which
limits our ability to increase our manufacturing capacity and
decrease our per unit cost of goods sold, thereby causing us to
incur negative gross margins. In addition, we expect that during
2008, construction of a partially automated manufacturing line
will be completed at a facility in China operated by a
subsidiary of Flextronics International Ltd. We cannot assure
you that we will successfully complete the planned automation of
our existing manufacturing line or subsequent lines in the
future, complete construction of the partially automated line in
China or otherwise reduce the per unit cost of manufacturing the
OmniPod. Failure to do so would limit our production capacity
and our ability to reduce raw material and manufacturing
overhead costs. If we are unable to reduce raw material and
manufacturing overhead costs through volume purchase discounts
and increased production capacity, our ability to achieve
profitability will be severely constrained.
We
are dependent upon third-party suppliers, making us vulnerable
to supply problems and price fluctuations.
We rely on a number of suppliers who manufacture the components
of the OmniPods and PDMs. For example, we rely on Phillips
Plastic Corporation to manufacture and supply a number of
injection molded components of the OmniPod, Freescale
Semiconductor, Inc. to manufacture and supply the application
specific integrated circuit that is incorporated into the
OmniPod and a subsidiary of Flextronics International Ltd. to
manufacture a sub-assembly of some of the OmniPods
components. Each of these suppliers is a sole-source supplier.
In addition, we have recently expanded the scope of our existing
contract manufacturing agreement with a subsidiary of
Flextronics International Ltd. in China to cover the supply of
complete OmniPods. We do not have long-term supply agreements
with most of our suppliers, and, in many cases, we make our
purchases on a purchase order basis. In some other cases, where
we do have agreements in place, our agreements with our
suppliers can be terminated by either party upon short notice.
Our suppliers may encounter problems during manufacturing due to
a variety of reasons, including failure to follow specific
protocols and procedures, failure to comply with applicable
regulations, equipment malfunction and environmental factors,
any of which could delay or impede their ability to meet our
demand. Our reliance on these third-party suppliers also
subjects us to other risks that could harm our business,
including:
|
|
|
|
|
we are not a major customer of many of our suppliers, and these
suppliers may therefore give other customers needs higher
priority than ours;
|
|
|
|
we may not be able to obtain adequate supply in a timely manner
or on commercially reasonable terms;
|
|
|
|
our suppliers, especially new suppliers, may make errors in
manufacturing that could negatively affect the efficacy or
safety of the OmniPod System or cause delays in shipment;
|
|
|
|
we may have difficulty locating and qualifying alternative
suppliers for our sole-source supplies;
|
|
|
|
switching components may require product redesign and submission
to the U.S. Food and Drug Administration, or FDA, of a
510(k) supplement;
|
|
|
|
our suppliers manufacture products for a range of customers, and
fluctuations in demand for the products these suppliers
manufacture for others may affect their ability to deliver
products to us in a timely manner; and
|
10
|
|
|
|
|
our suppliers may encounter financial hardships unrelated to our
demand, which could inhibit their ability to fulfill our orders
and meet our requirements.
|
We may not be able to quickly establish additional or
replacement suppliers, particularly for our sole-source
suppliers, in part because of the FDA approval process and
because of the custom nature of various parts we require. Any
interruption or delay in obtaining products from our third-party
suppliers, or our inability to obtain products from alternate
sources at acceptable prices in a timely manner, could impair
our ability to meet the demand of our customers and cause them
to cancel orders or switch to competing products.
|
|
|
Our
financial condition or results of operations may be adversely
affected by international business risks.
|
In order to reduce our cost of goods sold and increase our
production capacity, we increasingly rely on third party
suppliers located outside of the United States. For example, on
January 3, 2007, we entered into a non-exclusive contract
manufacturing agreement with a subsidiary of Flextronics
International Ltd. for the supply of a sub-assembly of some of
the OmniPods components. In the second quarter of 2007, we
received initial shipments of OmniPod sub-assemblies from
Flextronics under the agreement. On October 4, 2007, we
expanded the scope of that agreement to cover the production of
complete OmniPods. During 2008, we expect to complete the
construction of a partially automated manufacturing line at a
facility in China operated by Flextronics. As a result, our
business will become increasingly subject to risks associated
with doing business internationally, including:
|
|
|
|
|
changes in foreign currency exchange rates;
|
|
|
|
instability in the political or economic conditions;
|
|
|
|
trade protection measures, such as tariff increases, and import
and export licensing and control requirements;
|
|
|
|
potentially negative consequences from changes in tax laws;
|
|
|
|
difficulty in staffing and managing widespread operations;
|
|
|
|
difficulties associated with foreign legal systems;
|
|
|
|
differing protection of intellectual property; and
|
|
|
|
unexpected changes in regulatory requirements.
|
In particular, as the number of OmniPods manufactured in China
increases, our future success will depend in large part on our
ability to anticipate and effectively manage these and other
risks associated with doing business in China. Any of these
factors may have a material adverse effect on our production
capacity and, consequently, our business, financial condition
and results of operations.
Failure
to secure or retain adequate coverage or reimbursement for the
OmniPod System by third-party payors could adversely affect our
business, financial condition and results of
operations.
We expect that sales of the OmniPod System will be limited
unless a substantial portion of the sales price of the OmniPod
System is paid for by third-party payors, including private
insurance companies, health maintenance organizations, preferred
provider organizations and other managed care providers. As of
September 30, 2007, we had entered into contracts
establishing reimbursement for the OmniPod System with national
and regional third-party payors covering an estimated
96 million lives. These contracts provide reimbursement in
each of the 30 states in which we currently sell the
OmniPod System. While we anticipate entering into additional
contracts with other third-party payors doing business in these
states, we cannot assure you that we will be successful in doing
so. In addition, these contracts can generally be terminated by
the third-party payor without cause. Also, healthcare market
initiatives in the United States may lead third-party payors to
decline or reduce reimbursement for the OmniPod System.
Moreover, compliance with administrative procedures or
requirements of third-party payors may result in delays in
processing approvals by those payors for patients to obtain
coverage for the use of the OmniPod System. We are an approved
Medicare provider and current Medicare coverage for CSII therapy
does exist. However, existing Medicare coverage for CSII therapy
is based
11
on the pricing structure developed for conventional insulin
pumps. Currently, we believe that the coding verification for
Medicare reimbursement of the OmniPod System is inappropriate
and we are therefore in the process of seeking appropriate
coding verification. As a result, we have decided to focus our
initial efforts in establishing reimbursement for the OmniPod
System by negotiating contracts with private insurers. Failure
to secure or retain adequate coverage or reimbursement for the
OmniPod System by third-party payors could have a material
adverse effect on our business, financial condition and results
of operations.
We
face competition from numerous competitors, most of whom have
far greater resources than we have, which may make it more
difficult for us to achieve significant market penetration and
which may allow them to develop additional products for the
treatment of diabetes that compete with the OmniPod
System.
The medical device industry is intensely competitive, subject to
rapid change and significantly affected by new product
introductions and other market activities of industry
participants. The OmniPod System competes with a number of
existing insulin delivery devices as well as other methods for
the treatment of diabetes. Medtronic MiniMed, a division of
Medtronic, Inc., has been the market leader for many years and
has the majority share of the conventional insulin pump market
in the United States. Other significant suppliers in the United
States are Animas Corporation, a division of Johnson &
Johnson, and Deltec, a division of Smiths Medical MD, Inc. In
October 2006, following the lifting of an FDA ban on the import
of Disetronic insulin pumps, Roche Disetronic, a division of
Roche Diagnostics, announced its re-entry into the conventional
insulin pump market in the United States.
All of these competitors are large, well-capitalized companies
with significantly more market share and resources than we have.
As a consequence, they are able to spend more aggressively on
product development, marketing, sales and other product
initiatives than we can. Many of these competitors have:
|
|
|
|
|
significantly greater name recognition;
|
|
|
|
established relations with healthcare professionals, customers
and third-party payors;
|
|
|
|
established distribution networks;
|
|
|
|
additional lines of products, and the ability to offer rebates
or bundle products to offer higher discounts or other incentives
to gain a competitive advantage; and/or
|
|
|
|
greater financial and human resources for product development,
sales and marketing and patent litigation.
|
We also compete with multiple daily injection, or MDI, therapy,
which is substantially less expensive than CSII therapy. MDI
therapy has been made more effective by the introduction of
long-acting insulin analogs by both sanofi-aventis and Novo
Nordisk A/S. While we believe that CSII therapy, in general, and
the OmniPod System, in particular, have significant competitive
and clinical advantages over traditional MDI therapy,
improvements in the effectiveness of MDI therapy may result in
fewer people with insulin-dependent diabetes converting from MDI
therapy to CSII therapy than we expect and may result in
negative price pressure.
Our current competitors or other companies may at any time
develop additional products for the treatment of diabetes. For
example, there is an inhaled insulin product that was recently
introduced by Pfizer Inc., and other diabetes-focused
pharmaceutical companies, including Abbott Laboratories, Eli
Lilly and Company, MannKind Corporation, Novo Nordisk A/S and
Takeda Pharmaceuticals Company Limited, are developing similar
products. All of these competitors are large, well-capitalized
companies with significantly greater product development
resources than us. If an existing or future competitor develops
a product that competes with or is superior to the OmniPod
System, our revenues may decline. In addition, some of our
competitors may compete by changing their pricing model or by
lowering the price of their insulin delivery systems or
ancillary supplies. If these competitors products were to
gain acceptance by healthcare professionals, people with
insulin-dependent diabetes or third-party payors, a downward
pressure on prices could result. If prices were to fall, we may
not improve our gross margins or sales growth sufficiently to
achieve profitability.
12
Technological
breakthroughs in diabetes monitoring, treatment or prevention
could render the OmniPod System obsolete.
The diabetes treatment market is subject to rapid technological
change and product innovation. The OmniPod System is based on
our proprietary technology, but a number of companies, medical
researchers and existing pharmaceutical companies are pursuing
new delivery devices, delivery technologies, sensing
technologies, procedures, drugs and other therapeutics for the
monitoring, treatment
and/or
prevention of insulin-dependent diabetes. For example, FDA
approval of a commercially viable closed-loop system
that combines continuous real-time glucose sensing
or monitoring and automatic continuous subcutaneous insulin
infusion in a manner that delivers appropriate amounts of
insulin on a timely basis without patient direction could have a
material adverse effect on our revenues and future
profitability. We have an agreement with Abbott Diabetes Care,
Inc., a global healthcare company that develops continuous
glucose monitoring technology, to develop a product that will
integrate the receiver portion of Abbotts continuous
glucose monitor, the FreeStyle Navigator, with the OmniPod
System PDM. The FreeStyle Navigator is currently pending FDA
approval and is not available on the market. Medtronic, Inc. has
developed an FDA-approved product combining continuous glucose
sensing and CSII therapy and if we fail to do so, we may be at a
significant competitive disadvantage, which could negatively
impact our business. In addition, the National Institutes of
Health and other supporters of diabetes research are continually
seeking ways to prevent, cure or improve the treatment of
diabetes. Any technological breakthroughs in diabetes
monitoring, treatment or prevention could render the OmniPod
System obsolete, which may have a material adverse effect on our
business, financial condition and results of operations.
If
our existing license agreement with Abbott Diabetes Care, Inc.
is terminated or we fail to enter into new license agreements
allowing us to incorporate a blood glucose meter into the
OmniPod System, our business may be materially adversely
impacted.
Our rights to incorporate the FreeStyle blood glucose meter into
the OmniPod System are governed by a development and license
agreement with Abbott Diabetes Care, Inc., as the successor to
TheraSense, Inc. This agreement provides us with a
non-exclusive, fully paid, non-transferable and
non-sublicensable license in the United States under patents and
other relevant technical information relating to the FreeStyle
blood glucose meter during the term of the agreement. The term
of the agreement is for seven years, with automatic renewals for
subsequent three-year periods unless either party provides
written notice of termination at least 90 days prior to the
scheduled expiration of the then-current term. The current term
is scheduled to expire in January 2009. The agreement may also
be terminated by Abbott if it discontinues its FreeStyle blood
glucose meter or test strips or by either party if the other
party is acquired by a competitor of the first party or
materially breaches its obligations under the agreement.
Termination of this agreement could require us to either remove
the blood glucose meter from PDMs to be sold in the future,
which would impair the functionality of the OmniPod System, or
attempt to incorporate an alternative blood glucose meter into
the PDM, which would require us to acquire rights to or develop
an alternative blood glucose meter, incorporate it into the
OmniPod System and obtain regulatory approval for the new
OmniPod System. Any of these outcomes could have a material
adverse effect on our business, financial condition and results
of operations.
Additionally, in the future, we may need additional licenses to
intellectual property owned by third parties in order to
commercialize new products. If we cannot obtain these additional
licenses, we may not be able to develop or commercialize these
future products. Our rights to use technologies licensed to us
by third parties are not entirely within our control, and we may
not be able to continue selling the OmniPod System or sell
future products without these technologies.
The
patent rights on which we rely to protect the intellectual
property underlying the OmniPod System may not be adequate,
which could enable third parties to use our technology and would
harm our continued ability to compete in the
market.
Our success will depend in part on our continued ability to
develop or acquire commercially-valuable patent rights and to
protect these rights adequately. Our patent position is
generally uncertain and involves
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complex legal and factual questions. The risks and uncertainties
that we face with respect to our patents and other related
rights include the following:
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the pending patent applications we have filed or to which we
have exclusive rights may not result in issued patents or may
take longer than we expect to result in issued patents;
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the claims of any patents that are issued may not provide
meaningful protection;
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we may not be able to develop additional proprietary
technologies that are patentable;
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other parties may challenge patents, patent claims or patent
applications licensed or issued to us; and
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other companies may design around technologies we have patented,
licensed or developed.
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We also may not be able to protect our patent rights effectively
in some foreign countries. For a variety of reasons, we may
decide not to file for patent protection. Our patent rights
underlying the OmniPod System may not be adequate, and our
competitors or customers may design around our proprietary
technologies or independently develop similar or alternative
technologies or products that are equal or superior to ours
without infringing on any of our patent rights. In addition, the
patents licensed or issued to us may not provide a competitive
advantage. The occurrence of any of these events may have a
material adverse effect on our business, financial condition and
results of operations.
Other
rights and measures we have taken to protect our intellectual
property may not be adequate, which would harm our ability to
compete in the market.
In addition to patents, we rely on a combination of trade
secrets, copyright and trademark laws, confidentiality,
non-disclosure and assignment of invention agreements and other
contractual provisions and technical measures to protect our
intellectual property rights. While we currently require
employees, consultants and other third parties to enter into
confidentiality, non-disclosure or assignment of invention
agreements, or a combination thereof where appropriate, any of
the following could still occur:
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the agreements may be breached;
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we may have inadequate remedies for any breach;
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trade secrets and other proprietary information could be
disclosed to our competitors; or
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others may independently develop substantially equivalent or
superior proprietary information and techniques or otherwise
gain access to our trade secrets or disclose such technologies.
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If, for any of the above reasons, our intellectual property is
disclosed or misappropriated, it would harm our ability to
protect our rights and have a material adverse effect on our
business, financial condition and results of operations.
We
may need to initiate lawsuits to protect or enforce our patents
and other intellectual property rights, which could be expensive
and, if we lose, could cause us to lose some of our intellectual
property rights, which would harm our ability to compete in the
market.
We rely on patents to protect a portion of our intellectual
property and our competitive position. Patent law relating to
the scope of claims in the technology fields in which we operate
is still evolving and, consequently, patent positions in the
medical device industry are generally uncertain. In order to
protect or enforce our patent rights, we may initiate patent
litigation against third parties, such as infringement suits or
interference proceedings. Litigation may be necessary to:
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assert claims of infringement;
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enforce our patents;
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protect our trade secrets or know-how; or
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determine the enforceability, scope and validity of the
proprietary rights of others.
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Any lawsuits that we initiate could be expensive, take
significant time and divert managements attention from
other business concerns. Litigation also puts our patents at
risk of being invalidated or interpreted narrowly and our patent
applications at risk of not issuing. Additionally, we may
provoke third parties to assert claims against us. We may not
prevail in any lawsuits that we initiate and the damages or
other remedies awarded, if any, may not be commercially
valuable. The occurrence of any of these events may have a
material adverse effect on our business, financial condition and
results of operations.
Claims
that our current or future products infringe or misappropriate
the proprietary rights of others could adversely affect our
ability to sell those products and cause us to incur additional
costs.
Substantial litigation over intellectual property rights exists
in the medical device industry. We expect that we could be
increasingly subject to third-party infringement claims as our
revenues increase, the number of competitors grows and the
functionality of products and technology in different industry
segments overlaps. Third parties may currently have, or may
eventually be issued, patents on which our current or future
products or technologies may infringe. For example, we are aware
of certain patents and patent applications owned by our
competitors that cover different aspects of insulin infusion and
the related devices. Any of these third parties might make a
claim of infringement against us. In particular, Medtronic,
Inc., in a letter dated March 13, 2007, invited us to
discuss our taking a license to certain Medtronic
patents. The patents referenced by this letter relate to
technology that is material to our business. We have not had any
substantive discussions with Medtronic concerning this matter
since our receipt of this letter. While we believe that the
OmniPod System does not infringe these patents, we would
consider resolving the matter on reasonable terms. If we are
unable to reach agreement with Medtronic, Inc. on this matter,
they may sue us for infringement. We believe we would have
meritorious defenses to any such suit. Any litigation,
regardless of its outcome, would likely result in the
expenditure of significant financial resources and the diversion
of managements time and resources. In addition, litigation
in which we are accused of infringement may cause negative
publicity, adversely impact prospective customers, cause product
shipment delays, prohibit us from manufacturing, marketing or
selling our current or future products, require us to develop
non-infringing technology, make substantial payments to third
parties or enter into royalty or license agreements, which may
not be available on acceptable terms or at all. If a successful
claim of infringement were made against us and we could not
develop non-infringing technology or license the infringed or
similar technology on a timely and cost-effective basis, our
revenues may decrease substantially and we could be exposed to
significant liability. A court could enter orders that
temporarily, preliminarily or permanently enjoin us or our
customers from making, using, selling, offering to sell or
importing our current or future products, or could enter an
order mandating that we undertake certain remedial activities.
Claims that we have misappropriated the confidential information
or trade secrets of third parties can have a similar negative
impact on our reputation, business, financial condition or
results of operations.
We
are subject to extensive regulation by the U.S. Food and
Drug Administration, which could restrict the sales and
marketing of the OmniPod System and could cause us to incur
significant costs.
We sell medical devices that are subject to extensive regulation
by the FDA. These regulations relate to manufacturing, labeling,
sale, promotion, distribution and shipping. Before a new medical
device, or a new use of or claim for an existing product, can be
marketed in the United States, it must first receive either
510(k) clearance or pre-market approval from the FDA, unless an
exemption applies. We may be required to obtain a new 510(k)
clearance or pre-market approval for significant post-market
modifications to the OmniPod System. Each of these processes can
be expensive and lengthy, and entail significant user fees,
unless exempt. The FDAs process for obtaining 510(k)
clearance usually takes three to twelve months, but it can last
longer. The process for obtaining pre-market approval is much
more costly and uncertain and it generally takes from one to
three years, or longer, from the time the application is filed
with the FDA.
Medical devices may be marketed only for the indications for
which they are approved or cleared. We have obtained 510(k)
clearance for the current clinical applications for which we
market our OmniPod System, which includes the use of U-100,which
is a common form of insulin. However, our clearances can be
revoked if safety or effectiveness problems develop. Further, we
may not be able to obtain additional 510(k) clearances
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or pre-market approvals for new products or for modifications
to, or additional indications for, the OmniPod System in a
timely fashion or at all. Delays in obtaining future clearances
would adversely affect our ability to introduce new or enhanced
products in a timely manner which in turn would harm our revenue
and future profitability. We have made modifications to our
devices in the past and may make additional modifications in the
future that we believe do not or will not require additional
clearances or approvals. If the FDA disagrees, and requires new
clearances or approvals for the modifications, we may be
required to recall and to stop marketing the modified devices.
We also are subject to numerous post-marketing regulatory
requirements, which include quality system regulations related
to the manufacturing of our devices, labeling regulations and
medical device reporting regulations, which require us to report
to the FDA if our devices cause or contribute to a death or
serious injury, or malfunction in a way that would likely cause
or contribute to a death or serious injury. In addition, these
regulatory requirements may change in the future in a way that
adversely affects us. If we fail to comply with present or
future regulatory requirements that are applicable to us, we may
be subject to enforcement action by the FDA, which may include
any of the following sanctions:
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untitled letters, warning letters, fines, injunctions, consent
decrees and civil penalties;
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customer notification, or orders for repair, replacement or
refunds
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voluntary or mandatory recall or seizure of our current or
future products;
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administrative detention by the FDA of medical devices believed
to be adulterated or misbranded;
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imposing operating restrictions, suspension or shutdown of
production;
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refusing our requests for 510(k) clearance or pre-market
approval of new products, new intended uses or modifications to
the OmniPod System;
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rescinding 510(k) clearance or suspending or withdrawing
pre-market approvals that have already been granted; and
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criminal prosecution.
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The occurrence of any of these events may have a material
adverse effect on our business, financial condition and results
of operations.
If
we, our contract manufacturers or our component suppliers fail
to comply with the FDAs quality system regulations, the
manufacturing and distribution of our devices could be
interrupted, and our product sales and operating results could
suffer.
We, our contract manufacturers and our component suppliers are
required to comply with the FDAs quality system
regulations, which is a complex regulatory framework that covers
the procedures and documentation of the design, testing,
production, control, quality assurance, labeling, packaging,
sterilization, storage and shipping of our devices. The FDA
enforces its quality system regulations through periodic
unannounced inspections. We cannot assure you that our
facilities or our contract manufacturers or component
suppliers facilities would pass any future quality system
inspection. If our or any of our contract manufacturers or
component suppliers facilities fails a quality system
inspection, the manufacturing or distribution of our devices
could be interrupted and our operations disrupted. Failure to
take adequate and timely corrective action in response to an
adverse quality system inspection could force a suspension or
shutdown of our packaging and labeling operations or the
manufacturing operations of our contract manufacturers, or a
recall of our devices. If any of these events occurs, we may not
be able to provide our customers with the quantity of OmniPods
they require on a timely basis, our reputation could be harmed
and we could lose customers, any or all of which may have a
material adverse effect on our business, financial condition and
results of operations.
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Our
current or future products are subject to recalls even after
receiving FDA clearance or approval, which would harm our
reputation, business and financial results.
The FDA and similar governmental bodies in other countries have
the authority to require the recall of our current or future
products if we or our contract manufacturers fail to comply with
relevant regulations pertaining to manufacturing practices,
labeling, advertising or promotional activities, or if new
information is obtained concerning the safety or efficacy of
these products. A government-mandated recall could occur if the
FDA finds that there is a reasonable probability that the device
would cause serious, adverse health consequences or death. A
voluntary recall by us could occur as a result of manufacturing
defects, labeling deficiencies, packaging defects or other
failures to comply with applicable regulations. Any recall would
divert management attention and financial resources and harm our
reputation with customers. A recall involving the OmniPod System
would be particularly harmful to our business, financial
condition and results of operations because it is currently our
only product.
We
are subject to federal and state laws prohibiting
kickbacks and false or fraudulent claims, which, if
violated, could subject us to substantial penalties.
Additionally, any challenge to or investigation into our
practices under these laws could cause adverse publicity and be
costly to respond to, and thus could harm our
business.
A federal law commonly known as the Medicare/Medicaid
anti-kickback law, and several similar state laws, prohibit
payments that are intended to induce physicians or others either
to refer patients or to acquire or arrange for or recommend the
acquisition of healthcare products or services. These laws
constrain our sales, marketing and other promotional activities
by limiting the kinds of financial arrangements, including sales
programs, we may have with hospitals, physicians or other
potential purchasers of medical devices. Other federal and state
laws generally prohibit individuals or entities from knowingly
presenting, or causing to be presented, claims for payment from
Medicare, Medicaid or other third-party payors that are false or
fraudulent, or for items or services that were not provided as
claimed. Because we may provide some coding and billing
information to purchasers of the OmniPod System, and because we
cannot assure that the government will regard any billing errors
that may be made as inadvertent, these laws are potentially
applicable to us. In addition, these laws are potentially
applicable to us because we provide reimbursement to healthcare
professionals for training patients on the use of the OmniPod
System. Anti-kickback and false claims laws prescribe civil and
criminal penalties for noncompliance, which can be substantial.
Even an unsuccessful challenge or investigation into our
practices could cause adverse publicity, and be costly to
respond to, and thus could have a material adverse effect on our
business, financial condition and results of operations.
If
we are found to have violated laws protecting the
confidentiality of patient health information, we could be
subject to civil or criminal penalties, which could increase our
liabilities and harm our reputation or our
business.
There are a number of federal and state laws protecting the
confidentiality of certain patient health information, including
patient records, and restricting the use and disclosure of that
protected information. In particular, the U.S. Department
of Health and Human Services promulgated patient privacy rules
under the Health Insurance Portability and Accountability Act of
1996, or HIPAA. These privacy rules protect medical records and
other personal health information by limiting their use and
disclosure, giving individuals the right to access, amend and
seek accounting of their own health information and limiting
most use and disclosures of health information to the minimum
amount reasonably necessary to accomplish the intended purpose.
If we are found to be in violation of the privacy rules under
HIPAA, we could be subject to civil or criminal penalties, which
could increase our liabilities, harm our reputation and have a
material adverse effect on our business, financial condition and
results of operations.
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Product
liability suits, whether or not meritorious, could be brought
against us due to an alleged defective product or for the misuse
of our devices. These suits could result in expensive and
time-consuming litigation, payment of substantial damages, and
an increase in our insurance rates.
If our current or future products are defectively designed or
manufactured, contain defective components or are misused, or if
someone claims any of the foregoing, whether or not meritorious,
we may become subject to substantial and costly litigation.
Misusing our devices or failing to adhere to the operating
guidelines of the OmniPod System could cause significant harm to
patients, including death. In addition, if our operating
guidelines are found to be inadequate, we may be subject to
liability. Product liability claims could divert
managements attention from our core business, be expensive
to defend and result in sizable damage awards against us. While
we believe that we are reasonably insured against these risks,
we may not have sufficient insurance coverage for all future
claims. Any product liability claims brought against us, with or
without merit, could increase our product liability insurance
rates or prevent us from securing continuing coverage, could
harm our reputation in the industry and could reduce revenues.
Product liability claims in excess of our insurance coverage
would be paid out of cash reserves harming our financial
condition and adversely affecting our results of operations.
Our
ability to grow our revenues depends in part on our retaining a
high percentage of our customer base.
A key to driving our revenue growth is the retention of a high
percentage of our customers. We have developed retention
programs aimed at both the healthcare professionals and the
patients, which include appeals assistance, patient training,
24/7 customer support and an automatic re-order program for
patients. Since we began shipping the OmniPod System in October
2005, we have had a very high customer retention rate; however,
we cannot assure you that we will maintain this retention rate
in the future. The failure to retain a high percentage of our
customers would negatively impact our revenue growth and may
have a material adverse effect on our business, financial
condition and results of operations.
We
intend to sponsor market studies seeking to demonstrate certain
aspects of the efficacy of the OmniPod System, which may fail to
produce favorable results.
To help improve, market and sell the OmniPod System, we intend
to sponsor market studies to assess various aspects of its
functionality and its relative efficacy. The data obtained from
the studies may be unfavorable to the OmniPod System or may be
inadequate to support satisfactory conclusions. In addition, in
the future we may sponsor clinical trials to assess certain
aspects of the efficacy of the OmniPod System. If future
clinical trials fail to support the efficacy of our current or
future products, our sales may be adversely affected and we may
lose an opportunity to secure clinical preference from
prescribing clinicians, which may have a material adverse effect
on our business, financial condition and results of operations.
If
future clinical studies or other articles are published, or
diabetes associations or other organizations announce positions
that are unfavorable to the OmniPod System, our sales efforts
and revenues may be negatively affected.
Future clinical studies or other articles regarding our existing
products or any competing products may be published that either
support a claim, or are perceived to support a claim, that a
competitors product is clinically more effective or easier
to use than the OmniPod System or that the OmniPod System is not
as effective or easy to use as we claim. Additionally, diabetes
associations or other organizations that may be viewed as
authoritative could endorse products or methods that compete
with the OmniPod System or otherwise announce positions that are
unfavorable to the OmniPod System. Any of these events may
negatively affect our sales efforts and result in decreased
revenues.
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If
we expand, or attempt to expand, into foreign markets, we will
be affected by new business risks that may adversely impact our
business, financial condition and results of
operations.
If we expand, or attempt to expand, into foreign markets, we
will be subject to new business risks, including:
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failure to fulfill foreign regulatory requirements on a timely
basis or at all to market the OmniPod System or other future
products;
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availability of, and changes in, reimbursement within prevailing
foreign health care payment systems;
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adapting to the differing laws and regulations, business and
clinical practices, and patient preferences in foreign countries;
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difficulties in managing foreign relationships and operations,
including any relationships that we establish with foreign
distributors or sales or marketing agents;
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limited protection for intellectual property rights in some
countries;
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difficulty in collecting accounts receivable and longer
collection periods;
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costs of enforcing contractual obligations in foreign
jurisdictions;
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recessions in economies outside of the United States;
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political instability and unexpected changes in diplomatic and
trade relationships;
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currency exchange rate fluctuations; and
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potentially adverse tax consequences.
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If we are successful in introducing our current or future
products into foreign markets, we will be affected by these
additional business risks, which may adversely impact our
business, financial condition and results of operations. In
addition, expansion into foreign markets imposes additional
burdens on our executive and administrative personnel, research
and sales departments and general managerial resources. Our
efforts to introduce our current or future products into foreign
markets may not be successful, in which case we may have
expended significant resources without realizing the expected
benefit. Ultimately, the investment required for expansion into
foreign markets could exceed the results of operations generated
from this expansion.
Substantially
all of our operations are currently conducted at a single
location and any disruption at our facility could increase our
expenses.
Substantially all of our operations are currently conducted at a
single location in Bedford, Massachusetts. We take precautions
to safeguard our facility, including insurance, health and
safety protocols and off-site storage of computer data. However,
a natural or other disaster, such as a fire or flood, could
cause substantial delays in our operations, damage or destroy
our manufacturing equipment or inventory, and cause us to incur
additional expenses. The insurance we maintain against fires,
floods and other natural disasters may not be adequate to cover
our losses in any particular case. With or without insurance,
damage to our manufacturing facility or our other property, or
to any of our suppliers, due to fire, flood or other natural
disaster or casualty event may have a material adverse effect on
our business, financial condition and results of operations.
Our
success will depend on our ability to attract and retain our
personnel.
We have benefited substantially from the leadership and
performance of our senior management, especially Duane DeSisto,
our President and Chief Executive Officer, and Carsten Boess,
our Chief Financial Officer. Our success will depend on our
ability to retain our current management and to attract and
retain qualified personnel in the future, including clinicians,
engineers and other highly skilled personnel. Competition for
senior management personnel, as well as clinicians and
engineers, is intense and there can be no assurances that we
will be able to retain our personnel. The loss of the services
of Mr. DeSisto, Mr. Boess, certain other members of
our senior management, clinicians or engineers could prevent or
delay the
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implementation and completion of our objectives, or divert
managements attention to seeking a qualified replacement.
Additionally, the sale and after-sale support of the OmniPod
System is logistically complex, requiring us to maintain an
extensive infrastructure of field sales personnel, diabetes
educators, customer support, insurance specialists, and billing
and collections personnel. We face considerable challenges in
recruiting, training, managing, motivating and retaining these
teams, including managing geographically dispersed efforts. If
we fail to maintain and grow an adequate pool of trained and
motivated personnel, our reputation could suffer and our
financial position could be adversely affected.
If
we do not effectively manage our growth, our business resources
may become strained, we may not be able to deliver the OmniPod
System in a timely manner and our results of operations may be
adversely affected.
To date, we have focused our sales and marketing efforts in the
Eastern and Midwestern United States. As we expand our sales
into the balance of the United States and internationally, we
will need to obtain coverage contracts with additional
third-party payors in those areas. Failure to obtain such
contracts would limit our ability to successfully penetrate
those areas. In addition, the geographic expansion of our
business will require additional manufacturing capacity to
supply those markets as well as additional sales and marketing
resources.
We expect to significantly increase our manufacturing capacity,
our personnel and the scope of our sales and marketing efforts
on a phased basis into the rest of the United States and
internationally. This growth, as well as any other growth that
we may experience in the future, will provide challenges to our
organization and may strain our management and operations. In
order to manage future growth, we will be required to improve
existing, and implement new, management systems, sales and
marketing efforts and distribution channels. We will need to
oversee the construction and operation of a manufacturing line
by Flextronics in China and manage our relation with Flextronics
going forward. We may also need to partner with additional
third-party suppliers to manufacture certain components of the
OmniPod System and complete the planned automation of our
existing line as well as subsequent lines in the future. A
transition to new suppliers may result in additional costs or
delays. We may misjudge the amount of time or resources that
will be required to effectively manage any anticipated or
unanticipated growth in our business or we may not be able to
manufacture sufficient inventory or attract, hire and retain
sufficient personnel to meet our needs. If we cannot scale our
business appropriately, maintain control over expenses or
otherwise adapt to anticipated and unanticipated growth, our
business resources may become strained, we may not be able to
deliver the OmniPod System in a timely manner and our results of
operations may be adversely affected.
Our
future capital needs are uncertain and we may need to raise
additional funds in the future, and these funds may not be
available on acceptable terms or at all.
We believe that our current cash and cash equivalents, including
the proceeds from our initial public offering in May 2007,
together with our short-term investments and the cash to be
generated from expected product sales, will be sufficient to
meet our projected operating requirements for at least the next
12 months. However, we may seek additional funds from
public and private stock offerings, borrowings under credit
lines or other sources. Our capital requirements will depend on
many factors, including:
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revenues generated by sales of the OmniPod System and any other
future products that we may develop;
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costs associated with adding further manufacturing capacity;
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costs associated with expanding our sales and marketing efforts;
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expenses we incur in manufacturing and selling the OmniPod
System;
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costs of developing new products or technologies and
enhancements to the OmniPod System;
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the cost of obtaining and maintaining FDA approval or clearance
of our current or future products;
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costs associated with any expansion;
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costs associated with capital expenditures;
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costs associated with litigation; and
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the number and timing of any acquisitions or other strategic
transactions.
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As a result of these factors, we may need to raise additional
funds, and these funds may not be available on favorable terms,
or at all. Furthermore, if we issue equity or debt securities to
raise additional funds, our existing stockholders may experience
dilution, and the new equity or debt securities may have rights,
preferences and privileges senior to those of our existing
stockholders. In addition, if we raise additional funds through
collaboration, licensing or other similar arrangements, it may
be necessary to relinquish valuable rights to our potential
future products or proprietary technologies, or grant licenses
on terms that are not favorable to us. If we cannot raise funds
on acceptable terms, we may not be able to enhance the OmniPod
System or develop new products, execute our business plan, take
advantage of future opportunities or respond to competitive
pressures or unanticipated customer requirements. If any of
these events occur, it could adversely affect our business,
financial condition and results of operations.
We
may experience significant fluctuations in our quarterly results
of operations.
The fluctuations in our quarterly results of operations have
resulted, and will continue to result, from numerous factors,
including:
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delays in shipping due to capacity constraints;
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practices of health insurance companies and other third-party
payors with respect to reimbursement for our current or future
products;
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market acceptance of the OmniPod System;
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our ability to manufacture the OmniPod efficiently;
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timing of regulatory approvals and clearances;
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new product introductions;
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competition; and
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timing of research and development expenditures.
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These factors, some of which are not within our control, may
cause the price of our stock to fluctuate substantially. In
particular, if our quarterly results of operations fail to meet
or exceed the expectations of securities analysts or investors,
our stock price could drop suddenly and significantly. We
believe the quarterly comparisons of our financial results are
not necessarily meaningful and should not be relied upon as an
indication of our future performance.
If
we choose to acquire or invest in new businesses, products or
technologies, instead of developing them ourselves, these
acquisitions or investments could disrupt our business and could
result in the use of significant amounts of equity, cash or a
combination of both.
From time to time we may seek to acquire or invest in new
businesses, products or technologies, instead of developing them
ourselves. Acquisitions and investments involve numerous risks,
including:
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the inability to complete the acquisition or investment;
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disruption of our ongoing businesses and diversion of management
attention;
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difficulties in integrating the acquired entities, products or
technologies;
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risks associated with acquiring intellectual property;
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difficulties in operating the acquired business profitably;
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the inability to achieve anticipated synergies, cost savings or
growth;
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potential loss of key employees, particularly those of the
acquired business;
|
|
|
|
difficulties in transitioning and maintaining key customer,
distributor and supplier relationships;
|
|
|
|
risks associated with entering markets in which we have no or
limited prior experience; and
|
|
|
|
unanticipated costs.
|
In addition, any future acquisitions or investments may result
in one or more of the following:
|
|
|
|
|
dilutive issuances of equity securities, which may be sold at a
discount to market price;
|
|
|
|
the use of significant amounts of cash;
|
|
|
|
the incurrence of debt;
|
|
|
|
the assumption of significant liabilities;
|
|
|
|
increased operating costs or reduced earnings;
|
|
|
|
financing obtained on unfavorable terms;
|
|
|
|
large one-time expenses; and
|
|
|
|
the creation of certain intangible assets, including goodwill,
the write-down of which in future periods may result in
significant charges to earnings.
|
Any of these factors could materially harm our stock price,
business, financial condition and results of operations.
Our
credit and security agreement contains restrictions and
covenants that may limit our operating flexibility and which, if
violated, could result in the acceleration of the amounts due
under this agreement.
On December 27, 2006, we entered into a credit and security
agreement with a group of lenders led by Merrill Lynch Capital
pursuant to which we borrowed $30.0 million in a term loan.
This term loan is secured by all of our assets other than our
intellectual property. The credit and security agreement imposes
certain limitations on us, including limitations on our ability
to do the following, subject to certain exceptions:
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|
|
transfer all or any part of our businesses or properties, other
than transfers done in the ordinary course of business;
|
|
|
|
engage in any business other than the business of designing,
manufacturing, distributing and selling drug delivery devices
and providing associated services or a reasonably related
business;
|
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|
|
merge or consolidate with or into any other business
organization;
|
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|
|
suffer or permit a change of control;
|
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|
|
incur additional indebtedness;
|
|
|
|
incur liens with respect to any of our properties;
|
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|
|
pay dividends or make any other distribution or payment on
account of or in redemption, retirement or purchase of any
capital stock;
|
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|
|
directly or indirectly acquire or own, or make any investment
in, any entity;
|
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|
directly or indirectly enter into or permit to exist any
transaction with any of our affiliates except transactions that
are on terms that are no less favorable to us than would be
obtained in an arms length transaction with a
non-affiliate;
|
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acquire any assets other than in the ordinary course of business;
|
22
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|
|
incur any liability for rental payments except in the ordinary
course of business; or
|
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|
|
enter into any sale and leaseback transaction.
|
Additionally, under the agreement, we must complete construction
of a second manufacturing line for the OmniPods by
March 31, 2009, which deadline may be extended to
June 30, 2009 in specified circumstances. Complying with
these restrictions and covenants may make it more difficult for
us to successfully execute our business strategy and compete
against companies who are not subject to similar restrictions
and covenants. Additionally, if we violate any of these
restrictions or covenants, our lenders under this agreement may
accelerate all of our outstanding indebtedness and other amounts
due under the credit and security agreement and, if we do not
pay these amounts, proceed against the collateral securing these
obligations.
We
will incur increased costs as a result of recently enacted and
proposed changes in laws and regulations relating to corporate
governance matters.
The laws and regulations affecting public companies, including
the provisions of the Sarbanes-Oxley Act of 2002 and rules
adopted thereunder by the Securities and Exchange Commission, or
SEC, will result in increased costs to us as a publicly-traded
company. As a public company, we are required to comply with
many of these rules and regulations, and will be required to
comply with additional rules and regulations in the future. For
example, we are evaluating our internal controls systems in
order to allow us to report on, and our independent registered
public accounting firm to attest to, our internal controls, as
required by Section 404 of the Sarbanes-Oxley Act. While we
anticipate being able to fully implement the requirements
relating to internal controls and all other aspects of
Section 404 in a timely fashion, we cannot be certain as to
the timing of completion of our evaluation, testing and
remediation actions or the impact of the same on our operations.
In addition, these efforts will divert managements time
and attention away from our business in order to ensure
compliance with these regulatory requirements. This diversion of
managements time and attention may have a material adverse
effect on our business, financial condition and results of
operations.
If
we are unable to successfully maintain effective internal
control over financial reporting, investors may lose confidence
in our reported financial information and our stock price and
our business may be adversely impacted.
As a public company, after an initial transition period, we will
be required to maintain internal control over financial
reporting and our management will be required to evaluate the
effectiveness of our internal control over financial reporting
as of the end of each fiscal year. Additionally, we will be
required to disclose in our annual reports on
Form 10-K
our managements assessment of the effectiveness of our
internal control over financial reporting and a registered
public accounting firms attestation report on this
assessment. If we are not successful in establishing effective
internal control over financial reporting, there could be
inaccuracies or omissions in the consolidated financial
information we are required to file with the Securities and
Exchange Commission. Additionally, even if there are no
inaccuracies or omissions, we will be required to publicly
disclose the conclusion of our management that our internal
control over financial reporting or disclosure controls and
procedures are not effective. These events could cause investors
to lose confidence in our reported financial information,
adversely impact our stock price, result in increased costs to
remediate any deficiencies, attract regulatory scrutiny or
lawsuits that could be costly to resolve and distract
managements attention, limit our ability to access the
capital markets or cause our stock to be delisted from The
NASDAQ Global Market or any other securities exchange on which
it is then listed.
Risks
Relating to Our Shares
The
price of our common stock may be volatile.
There has been a public market for our common stock only since
our initial public offering in May 2007. The market price of our
common stock following this offering will be affected by a
number of factors, including:
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|
|
|
|
failure to maintain and increase production capacity and reduce
per unit production costs;
|
|
|
|
changes in the availability of third-party reimbursement in the
United States or other countries;
|
23
|
|
|
|
|
volume and timing of orders for the OmniPod System;
|
|
|
|
developments in administrative proceedings or litigation related
to intellectual property rights;
|
|
|
|
issuance of patents to us or our competitors;
|
|
|
|
the announcement of new products or product enhancements by us
or our competitors;
|
|
|
|
the announcement of technological or medical innovations in the
treatment or diagnosis of diabetes;
|
|
|
|
changes in governmental regulations or in the status of our
regulatory approvals or applications;
|
|
|
|
developments in our industry;
|
|
|
|
publication of clinical studies relating to the OmniPod System
or a competitors product;
|
|
|
|
quarterly variations in our or our competitors results of
operations;
|
|
|
|
changes in earnings estimates or recommendations by securities
analysts; and
|
|
|
|
general market conditions and other factors, including factors
unrelated to our operating performance or the operating
performance of our competitors.
|
Future
sales of shares of our common stock in the public market, or the
perception that such sales may occur, may depress our stock
price and make it difficult for you to recover the full value of
your investment in our shares.
We have been a public company only since May 2007. For the three
month period ended September 30, 2007, the average daily
trading volume of our common stock on The NASDAQ Global Market
has been fewer than 87,000 shares. If our existing
stockholders or their distributees sell substantial amounts of
our common stock in the public market, the market price of our
common stock could decrease significantly. The perception in the
public market that our existing stockholders might sell shares
of common stock could also depress the trading price of our
common stock.
Upon completion of this offering, we will have
26,427,641 shares of common stock outstanding, assuming no
exercise of the underwriters option to purchase additional
shares and assuming no exercise of options or warrants after
September 30, 2007. Of our outstanding shares,
17,787,580 shares, including the shares being sold in this
offering by the selling stockholders, had been subject to
lock-up
agreements with the underwriters of our initial public offering
that will expire between November 14, 2007 and
December 2, 2007, depending on the date of our earnings
release for the quarterly period ended September 30, 2007
and whether any material events relating to us occur prior to
November 14, 2007.
In connection with this offering, all directors and executive
officers, the selling stockholders and certain other
stockholders have entered into new
lock-up
agreements with the underwriters of this offering. As a result
of these
lock-up
agreements, 11,943,840 shares of our common stock will be
subject to contractual restrictions on resale through the date
90 days after the date of this prospectus, which may be
extended in the event that we issue an earnings release, or in
the event that a material event relating to us occurs, on or
around the end of the lock-up period. These contractual
restrictions will not apply to sales made pursuant to Rule
10b5-1 trading plans entered into on or prior to
September 30, 2007. Holders of substantially all of the
shares of our common stock other than those issued in our
initial public offering have the right to require us to register
such shares for sale under the Securities Act in certain
circumstances and also have the right to include those shares in
a registration initiated by us. If we are required to include
the shares of our common stock of these stockholders pursuant to
these registration rights in a registration initiated by us,
sales made by such stockholders may adversely affect the price
of our common stock and our ability to raise needed capital. In
addition, if these stockholders exercise their demand
registration rights and cause a large number of shares to be
registered and sold in the public market or demand that we
register their shares on a shelf registration statement, such
sales or shelf registration may have an adverse effect on the
market price of our common stock.
The market price of shares of our common stock may drop
significantly if our existing stockholders sell a substantial
number of shares when the restrictions on resale lapse. A
decline in the price of shares of our
24
common stock might impede our ability to raise capital through
the issuance of additional shares of our common stock or other
equity securities.
Anti-takeover
provisions in our organizational documents and Delaware law may
discourage or prevent a change of control, even if an
acquisition would be beneficial to our stockholders, which could
affect our stock price adversely and prevent attempts by our
stockholders to replace or remove our current
management.
Our certificate of incorporation and bylaws contain provisions
that could delay or prevent a change of control of our company
or changes in our board of directors that our stockholders might
consider favorable. Some of these provisions:
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|
|
authorize the issuance of preferred stock which can be created
and issued by the board of directors without prior stockholder
approval, with rights senior to those of our common stock;
|
|
|
|
provide for a classified board of directors, with each director
serving a staggered three-year term;
|
|
|
|
prohibit our stockholders from filling board vacancies, calling
special stockholder meetings or taking action by written consent;
|
|
|
|
provide for the removal of a director only with cause and by the
affirmative vote of the holders of 75% or more of the shares
then entitled to vote at an election of our directors; and
|
|
|
|
require advance written notice of stockholder proposals and
director nominations.
|
In addition, we are subject to the provisions of
Section 203 of the Delaware General Corporation Law, which
may prohibit certain business combinations with stockholders
owning 15% or more of our outstanding voting stock. These and
other provisions in our certificate of incorporation, bylaws and
Delaware law could make it more difficult for stockholders or
potential acquirors to obtain control of our board of directors
or initiate actions that are opposed by our then-current board
of directors, including a merger, tender offer or proxy contest
involving our company. Any delay or prevention of a change of
control transaction or changes in our board of directors could
cause the market price of our common stock to decline.
We do
not intend to pay cash dividends.
We have never declared or paid cash dividends on our capital
stock. We currently intend to retain all available funds and any
future earnings for use in the operation and expansion of our
business and do not anticipate paying any cash dividends in the
foreseeable future. In addition, the terms of our existing debt
facility prohibits us from paying any dividends. As a result,
capital appreciation, if any, of our common stock will be your
sole source of potential gain for the foreseeable future.
25
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this prospectus, including under the
section entitled Managements Discussion and Analysis
of Financial Condition and Results of Operations and other
sections of this prospectus that are not purely historical, are
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934,
including, without limitation, statements regarding our or our
managements expectations, hopes, beliefs, intentions or
strategies regarding the future. Forward-looking statements in
this prospectus may include, for example, statements about:
|
|
|
|
|
our estimates regarding revenues, expenses, capital requirements
and needs for additional financing;
|
|
|
|
the timing of our completion of the planned automation of our
existing production line and the completion of a partially
automated manufacturing line at a facility in China operated by
a subsidiary of Flextronics International Ltd.
|
|
|
|
our manufacturing capacity in future periods;
|
|
|
|
our ability to reduce the per unit production cost of the
OmniPod;
|
|
|
|
our research, development, commercialization, and other
activities and projected expenditures;
|
|
|
|
our ability to obtain regulatory approvals for any future
products;
|
|
|
|
our intellectual property position;
|
|
|
|
our use of proceeds from this offering;
|
|
|
|
our cash needs;
|
|
|
|
our plans to pursue the use of the OmniPod System technology for
the delivery of drugs other than insulin;
|
|
|
|
the implementation of our business strategies, including our
alternative manufacturing strategies and the expansion of our
sales and marketing efforts across the United States and
internationally; and
|
|
|
|
our financial performance.
|
The forward-looking statements contained in this prospectus are
based on our current expectations and beliefs concerning future
developments and their potential effects on us. There can be no
assurance that future developments affecting us will be those
that we have anticipated. These forward-looking statements
involve a number of risks, uncertainties (some of which are
beyond our control) or other assumptions that may cause actual
results or performance to be materially different from those
expressed or implied by these forward-looking statements. These
risks and uncertainties include, but are not limited to, those
factors described in the section entitled Risk
Factors. Should one or more of these risks or
uncertainties materialize, or should any of our assumptions
prove incorrect, actual results may vary in material respects
from those projected in these forward-looking statements. We
undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be
required under applicable securities laws.
26
If the underwriters overallotment option is exercised in
full, we estimate that we will receive net proceeds from this
offering of approximately
$ ,
after deducting underwriting discounts and estimated offering
expenses that we must pay. We will not receive any of the
proceeds of the sale of shares of common stock by the selling
stockholders.
We intend to use our proceeds from this offering, if any, for
general corporate purposes, which may include:
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|
|
|
|
the completion and improvement of our existing automated line
and the construction of a second automated line to increase our
manufacturing capacity;
|
|
|
|
the expansion of our sales and marketing activities; and
|
|
|
|
the funding of research and development.
|
As of the date of this prospectus, we cannot estimate the amount
of proceeds, if any, which will be used for any of the purposes
described above. The amounts and timing of our actual
expenditures will depend on numerous factors, including the
implementation of our manufacturing strategy, the status of our
product development efforts, our sales and marketing activities,
the amount of cash generated or used by our operations and
competition. Accordingly, investors will be relying on the
judgment of our management regarding the application of the
proceeds of this offering, if any.
Until we use our proceeds of this offering, if any, for the
above purposes, we intend to invest the funds in short-term,
investment-grade, interest-bearing securities. We cannot predict
whether these investments will yield a favorable return.
We have never declared or paid any cash dividends on our common
stock. For the foreseeable future, we intend to retain any
earnings in our business, and we do not anticipate paying any
cash dividends. Whether or not to declare any dividends will be
at the discretion of our board of directors, considering
then-existing conditions, including the terms of our credit
arrangements as well as our financial condition and results of
operations, capital requirements, business prospects and other
factors that our board of directors considers relevant.
27
PRICE
RANGE OF OUR COMMON STOCK
Our common stock has been listed on The NASDAQ Global Market
under the trading symbol PODD since our initial
public offering on May 15, 2007. Prior to that time, there
was no public market for our common stock. The following table
sets forth the high and low closing sales prices of our common
stock, as reported by The NASDAQ Global Market, for each of the
periods listed.
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
High
|
|
|
Low
|
|
|
Second Quarter (commencing May 15, 2007)
|
|
$
|
15.96
|
|
|
$
|
13.84
|
|
Third Quarter
|
|
$
|
22.60
|
|
|
$
|
13.68
|
|
Fourth Quarter (through October 26, 2007)
|
|
$
|
26.62
|
|
|
$
|
21.25
|
|
The last reported sale price of our common stock on The NASDAQ
Global Market on October 26, 2007 was $26.62 per
share. As of September 30, 2007, we had approximately 58
holders of record of our common stock.
28
The following table presents our total capitalization as of
June 30, 2007. You should read this table together with our
consolidated financial statements and related notes appearing at
the end of this prospectus and the Managements
Discussion and Analysis of Financial Condition and Results of
Operations section of this prospectus.
|
|
|
|
|
|
|
As of June 30, 2007
|
|
|
|
(In thousands, except
|
|
|
|
share data)
|
|
|
|
(Unaudited)
|
|
|
Current debt
|
|
$
|
7,943
|
|
Long-term debt
|
|
|
21,341
|
|
Other long-term liabilities
|
|
|
1,234
|
|
Stockholders equity:
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000 shares authorized
and no shares outstanding
|
|
|
|
|
Common stock, $0.001 par value; 100,000,000 shares
authorized and 26,312,811 shares issued and outstanding
|
|
|
27
|
|
Additional paid-in capital
|
|
|
235,765
|
|
Accumulated deficit
|
|
|
(126,272
|
)
|
|
|
|
|
|
Total stockholders equity
|
|
|
109,520
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
140,038
|
|
|
|
|
|
|
29
SELECTED
CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of December 31,
2005 and 2006 and for the years ended December 31, 2002,
2003, 2004, 2005 and 2006 have been derived from our historical
financial statements audited by Ernst & Young LLP, an
independent registered public accounting firm, included in this
prospectus. The selected historical consolidated financial data
as of June 30, 2007 and for the six-month periods ended
June 30, 2006 and 2007 have been derived from our unaudited
consolidated financial statements included in this prospectus.
These unaudited consolidated financial statements have been
prepared on a basis consistent with our audited consolidated
financial statements. In the opinion of management, the
unaudited financial data reflect all adjustments, consisting
only of normal and recurring adjustments, necessary for a fair
statement of the results for those periods. The results of
operations for the interim periods are not necessarily
indicative of the results to be expected for the full year or
any future period. Historical results are not necessarily
indicative of the results to be expected in the future. The
following selected consolidated financial data should be read in
conjunction with Capitalization,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and the accompanying notes to those
consolidated financial statements included in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50
|
|
|
$
|
3,663
|
|
|
$
|
1,102
|
|
|
$
|
5,220
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,530
|
|
|
|
15,660
|
|
|
|
7,339
|
|
|
|
11,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,480
|
)
|
|
|
(11,997
|
)
|
|
|
(6,237
|
)
|
|
|
(6,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
9,458
|
|
|
|
8,659
|
|
|
|
9,026
|
|
|
|
10,764
|
|
|
|
8,094
|
|
|
|
3,808
|
|
|
|
4,990
|
|
General and administrative
|
|
|
2,534
|
|
|
|
2,809
|
|
|
|
3,950
|
|
|
|
5,490
|
|
|
|
8,389
|
|
|
|
3,324
|
|
|
|
5,457
|
|
Sales and marketing
|
|
|
680
|
|
|
|
546
|
|
|
|
1,177
|
|
|
|
3,771
|
|
|
|
6,165
|
|
|
|
2,545
|
|
|
|
6,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,672
|
|
|
|
12,014
|
|
|
|
14,153
|
|
|
|
20,025
|
|
|
|
22,648
|
|
|
|
9,677
|
|
|
|
16,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(12,672
|
)
|
|
|
(12,014
|
)
|
|
|
(14,153
|
)
|
|
|
(21,505
|
)
|
|
|
(34,645
|
)
|
|
|
(15,914
|
)
|
|
|
(23,206
|
)
|
Other income (expense), net
|
|
|
92
|
|
|
|
73
|
|
|
|
332
|
|
|
|
(131
|
)
|
|
|
(1,305
|
)
|
|
|
261
|
|
|
|
(1,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(12,580
|
)
|
|
|
(11,941
|
)
|
|
|
(13,821
|
)
|
|
|
(21,636
|
)
|
|
|
(35,950
|
)
|
|
|
(15,653
|
)
|
|
|
(24,232
|
)
|
Accretion of redeemable convertible preferred stock
|
|
|
(93
|
)
|
|
|
(77
|
)
|
|
|
(64
|
)
|
|
|
|
|
|
|
(222
|
)
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(12,673
|
)
|
|
$
|
(12,018
|
)
|
|
$
|
(13,885
|
)
|
|
$
|
(21,636
|
)
|
|
$
|
(36,172
|
)
|
|
$
|
(15,875
|
)
|
|
$
|
(24,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted(1)
|
|
$
|
(42.62
|
)
|
|
$
|
(44.16
|
)
|
|
$
|
(47.86
|
)
|
|
$
|
(70.95
|
)
|
|
$
|
(99.72
|
)
|
|
$
|
(45.89
|
)
|
|
$
|
(3.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares used in calculating net loss
per share
|
|
|
297,375
|
|
|
|
272,118
|
|
|
|
290,140
|
|
|
|
304,962
|
|
|
|
362,750
|
|
|
|
345,959
|
|
|
|
6,671,807
|
|
|
|
(1) |
See note 3 to our consolidated financial statements
included in this prospectus on page FF-12 for an
explanation of the method used to calculate basic and diluted
net loss per common share.
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of June 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,964
|
|
|
$
|
4,328
|
|
|
$
|
23,999
|
|
|
$
|
7,660
|
|
|
$
|
33,231
|
|
|
$
|
119,818
|
|
Working capital
|
|
$
|
15,435
|
|
|
$
|
2,841
|
|
|
$
|
22,151
|
|
|
$
|
5,168
|
|
|
$
|
785
|
|
|
$
|
110,783
|
|
Total assets
|
|
$
|
17,511
|
|
|
$
|
4,958
|
|
|
$
|
27,121
|
|
|
$
|
16,792
|
|
|
$
|
57,140
|
|
|
$
|
149,140
|
|
Current debt
|
|
$
|
|
|
|
$
|
11
|
|
|
$
|
11
|
|
|
$
|
1,479
|
|
|
$
|
29,222
|
|
|
$
|
7,943
|
|
Long-term debt, net of current portion
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,302
|
|
|
$
|
|
|
|
$
|
21,341
|
|
Other long-term liabilities
|
|
$
|
|
|
|
$
|
11
|
|
|
$
|
|
|
|
$
|
315
|
|
|
$
|
316
|
|
|
$
|
1,234
|
|
Redeemable convertible preferred stock
|
|
$
|
34,000
|
|
|
$
|
34,000
|
|
|
$
|
69,500
|
|
|
$
|
69,500
|
|
|
$
|
119,509
|
|
|
$
|
|
|
Total stockholders equity (deficit)
|
|
$
|
(18,653
|
)
|
|
$
|
(30,650
|
)
|
|
$
|
(44,509
|
)
|
|
$
|
(66,091
|
)
|
|
$
|
(101,765
|
)
|
|
$
|
109,520
|
|
31
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial
condition and results of operations in conjunction with our
selected financial data, our financial statements and the
accompanying notes to those financial statements included in
this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. As a result of
many factors, such as those set forth under the section entitled
Risk Factors and elsewhere in this prospectus, our
actual results may differ materially from those anticipated in
these forward-looking statements.
Overview
We are a medical device company that develops, manufactures and
markets an insulin infusion system for people with
insulin-dependent diabetes. Our proprietary OmniPod Insulin
Management System consists of our OmniPod disposable insulin
infusion device and our handheld, wireless Personal Diabetes
Manager.
Since inception and until 2005, we devoted substantially all of
our efforts to designing and developing the OmniPod System,
raising capital and recruiting personnel. As a result, we were
considered a development stage company pursuant to Statement of
Financial Accounting Standards, or SFAS, No. 7,
Accounting and Reporting by Development Stage
Enterprises, through December 31, 2005. The year 2006
was the first year during which we were an operating company and
were no longer in the development stage. In October 2005, we
shipped our first commercial OmniPod System. Since October 2005,
in order to align the demand for the OmniPod System with our
capacity to manufacture the OmniPod, we have engaged in limited
marketing efforts focused in the Eastern and Midwestern United
States and with some key diabetes practitioners, academic
centers and clinics elsewhere in the United States. Our total
revenues were $3.2 million and $5.2 million for the
three and six months ended June 30, 2007, respectively. As
of September 30, 2007, we had approximately
3,200 patients using the OmniPod System in the United
States, as compared to approximately 2,450 patients as of
June 30, 2007. Historically, the growth in our quarterly
revenue has not been consistent with our quarterly patient
growth due to a number of factors, including the deferral of
revenue received from new patients within 45 days prior to
the end of a quarter and the timing and average size of reorders
from existing patients. Accordingly, although our revenue for
the third quarter of 2007 increased compared to our revenue for
the prior quarter, this increase is not as large on a percentage
basis as the increase in the number of customers during the
third quarter of 2007.
At present, the expansion of our business is constrained by our
current capacity to manufacture the OmniPod insulin infusion
device, and our primary near-term goal is to expand the
production of OmniPods. Currently, the sale price of the OmniPod
System is not sufficient to cover our direct manufacturing
costs. Increasing our production capacity for OmniPods will
allow for volume purchase discounts to reduce our raw material
costs and improve absorption of manufacturing overhead costs.
During 2008, we expect to complete the planned automation of our
existing manufacturing line in Bedford, Massachusetts. Pending
construction and installation of the remaining automated
manufacturing equipment that we plan to use, we are manually
performing these steps in the manufacturing process, which
limits our ability to increase our manufacturing capacity and
decrease our
per-unit
cost of goods sold, thereby causing us to incur negative gross
margins. In addition, we expect that during 2008, construction
of a partially automated manufacturing line will be completed at
a facility in China operated by a subsidiary of Flextronics
International Ltd. By the end of 2008, we intend to purchase
complete OmniPods from Flextronics. No assurances can be given
that we will successfully complete the planned automation of our
existing manufacturing line, successfully implement our Asian
manufacturing strategy or otherwise reduce the
per-unit
cost of manufacturing the OmniPod. Failure to do so would limit
our production capacity and not allow us to achieve
per-unit
cost improvements, which could severely constrain our ability to
achieve profitability.
Additionally, as a medical device company, reimbursement from
third-party payors is an important element of our success. If
patients are not adequately reimbursed for the costs of using
the OmniPod System, it will be much more difficult for us to
penetrate the market. We continue to negotiate contracts
establishing reimbursement for the OmniPod System with national
and regional third-party payors, and we believe that
32
substantially all of the units sold have been reimbursed by
third-party payors, subject to applicable deductible and
co-payment amounts. As we expand our sales and marketing focus
and increase our manufacturing capacity, we will need to
maintain and expand available reimbursement for the OmniPod
System.
Since our inception in 2000, we have incurred losses every
quarter. In the three and six months ended June 30, 2007,
we incurred a net loss of $12.7 million and
$24.2 million, respectively. As of June 30, 2007, we
had an accumulated deficit of $126.3 million. We have
financed our operations through the private placement of equity
securities, secured indebtedness and an initial public offering
of our common stock. As of June 30, 2007, we had
$30.0 million of secured debt outstanding. Since inception,
we have received net proceeds of $232.9 million from the
issuance of redeemable convertible preferred stock and common
stock.
In May 2007, in our initial public offering, we issued and sold
7,700,000 shares of common stock at a price to the public
of $15.00 per share. In June 2007, we issued and sold an
additional 665,000 shares of common stock at a price to the
public of $15.00 per share pursuant to the underwriters
partial exercise of their over-allotment option. In connection
with the initial public offering, including the partial exercise
of the over-allotment option, we received total gross proceeds
of $125.5 million, or approximately $113.4 million in
net proceeds after deducting underwriting discounts and offering
expenses.
During the three months ended September 30, 2007, we expect
to incur an impairment charge related to certain production
machinery and equipment in the amount of approximately
$1.0 million. The expected impairment charge would result
from our ongoing improvements to our product design and
associated manufacturing processes, with the aim of achieving
lower unit costs, and the ongoing upgrades to our manufacturing
process, which has rendered certain equipment obsolete.
Our long-term financial objective is to achieve and sustain
profitable growth. Our efforts for the remainder of 2007 will be
focused primarily on expanding our production capacity, reducing
our per-unit
production costs and expanding our sales and marketing efforts
for the OmniPod System. The expansion of our manufacturing
capacity will allow us to increase production volumes which will
help us to achieve lower material costs due to volume purchase
discounts and improve the absorption of manufacturing overhead
costs. Achieving these objectives is expected to require
additional investments in manufacturing and additional hiring of
sales and administrative personnel with the goal of increasing
our market penetration. We believe that we will continue to
incur net losses in the near term in order to achieve these
objectives, although we believe that the accomplishment of these
combined efforts will have a positive impact on our financial
condition in the future.
Financial
Operations Overview
Revenues. Revenues are recognized in
accordance with Securities and Exchange Staff Accounting
Bulletin No. 104, or SAB 104, and Statement of
Financial Accounting Standards No. 48, Revenue
Recognition when the Right of Return Exists, or
SFAS 48. We derive all of our revenues from the sale of the
OmniPod System directly to patients. The OmniPod System is
comprised of two devices: the OmniPod, a disposable insulin
infusion device that the patient wears for up to three days and
then replaces; and the Personal Diabetes Manager, or PDM, a
handheld device much like a personal digital assistant that
wirelessly programs the OmniPod with insulin delivery
instructions, assists the patient with diabetes management and
incorporates a blood glucose meter. Revenues are derived from
the sale to new customers of OmniPods and Starter Kits, which
include the PDM, two OmniPods, the OmniPod System User Guide and
our Interactive Training CD, and from the follow-on sales of
OmniPods to existing customers. Customers generally order a
three-month supply of OmniPods. Our first commercial shipment
was in October 2005, and we recognized no revenue before this
time. During the years ended December 31, 2005 and 2006 and
the six months ended June 30, 2007, all of our revenues
were derived from sales within the United States. During that
period, we deferred recognition of revenue from the OmniPods and
Starter Kit shipped as part of a customers initial
shipment for thirty days during which time the items could be
returned and completely refunded (we changed prospectively to a
forty-five day right of return effective for shipments
subsequent to December 1, 2006). We had a balance of
deferred revenue of $763,000 as of June 30, 2007.
33
For the remainder of 2007, we expect our revenues to increase,
but we expect that this increase will continue to be limited by
our OmniPod manufacturing capacity. We expect our OmniPod
production capacity to grow as we continue the process of
automating our OmniPod manufacturing process and receive
increased supplies from Flextronics. Our current OmniPod
manufacturing capacity is approximately 45,000 OmniPods per
month. By completing the planned automation of our existing
manufacturing line in Bedford, Massachusetts production and by
purchasing complete OmniPods from Flextronics, we expect to
increase our capacity to in excess of 200,000 OmniPods per
month toward the end of 2008. However, we are still in the
process of designing and testing the custom equipment that we
will need in order to automate our OmniPod manufacturing process
and our Asian production strategy is still being implemented;
accordingly, we cannot be assured that our efforts will be
successful or that the expected production increases will be
realized. Additionally, increased revenues will be dependent
upon the success of our sales efforts and subject to many risk
and uncertainties.
Cost of revenues. Cost of revenues consists
primarily of raw material, labor, warranty and overhead costs
related to the OmniPod System. Cost of revenues also includes
depreciation, distribution, and freight and packaging costs.
Currently, the sale price of the OmniPod System is not
sufficient to cover the direct manufacturing costs. Accordingly,
inventory has been adjusted down to reflect the values at the
lower of cost or market. For the remainder of 2007, we expect
the cost of revenues to decrease as a percentage of revenues due
to expected reductions in
per-unit raw
materials costs associated with volume purchase discounts and
increases in our OmniPod manufacturing capacity as our OmniPod
manufacturing process becomes more automated. The increase in
our OmniPod manufacturing capacity is expected to reduce the
per-unit
cost of manufacturing the OmniPods by allowing us to spread our
fixed and semi-fixed overhead costs over a greater number of
units. However, if sales volumes do not increase or we are not
successful in our efforts to automate the OmniPod manufacturing
process, then the average cost of revenues per OmniPod may not
decrease and we may continue to realize negative gross margins.
Research and development. Research and
development expenses consist primarily of personnel costs within
our product development, regulatory and clinical functions, and
the costs of market studies and product development projects. We
expense all research and development costs as incurred. For the
remainder of 2007, we expect overall research and development
spending to be relatively consistent with current levels to
support our current research and development efforts, which are
focused primarily on increased functionality, design for ease of
use and reduction of production cost, as well as developing a
new OmniPod System that incorporates continuous glucose
monitoring technology.
Sales and marketing. Sales and marketing
expenses consist primarily of personnel costs within our sales,
marketing, reimbursement support, customer support and training
functions, sales commissions paid to our sales representatives
and costs associated with participation in medical conferences,
physician symposia and promotional activities, including
distribution of units used in our demonstration kit programs. In
2007, we expect sales and marketing expenses to more than double
compared to 2006 as we hire additional sales and marketing
personnel, incur additional sales commission expense related to
sales growth and expand our sales and marketing efforts, which
will include the implementation of broader direct-to-consumer
marketing programs and the roll-out of our Patient Demonstration
Kit Program.
General and administrative. General and
administrative expenses consist primarily of salaries and other
related costs for personnel serving the executive, finance,
information technology and human resource functions, as well as
legal fees, accounting fees, insurance costs and
facilities-related costs. We expect general and administrative
expenses to increase as we increase personnel.
Stock based compensation expense. Prior to
January 1, 2006, we accounted for our stock option plan
under the recognition and measurement provisions of APB Opinion
No. 25, Accounting for Stock Issued to Employees,
and related Interpretations, as permitted by the Financial
Accounting Standards Board Statement No. 123, Accounting
for Stock-Based Compensation, or SFAS 123. Effective
January 1, 2006, we adopted the fair value recognition
provisions of SFAS Statement No. 123 (revised 2004),
Share-Based Payment, or SFAS 123R, using the
prospective method and therefore we have not restated our
financial results for prior periods.
34
Results
of Operations for the Three and Six Months Ended June 30,
2007 and 2006
The following table presents certain statement of operations
information for the three and six months ended June 30,
2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
% Change
|
|
|
2006
|
|
|
2007
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
$
|
880
|
|
|
$
|
3,212
|
|
|
|
265
|
%
|
|
$
|
1,102
|
|
|
$
|
5,220
|
|
|
|
374
|
%
|
Cost of revenue
|
|
|
4,586
|
|
|
|
6,899
|
|
|
|
50
|
%
|
|
|
7,339
|
|
|
|
11,471
|
|
|
|
56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(3,706
|
)
|
|
|
(3,687
|
)
|
|
|
1
|
%
|
|
|
(6,237
|
)
|
|
|
(6,251
|
)
|
|
|
0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,053
|
|
|
|
2,520
|
|
|
|
23
|
%
|
|
|
3,808
|
|
|
|
4,990
|
|
|
|
31
|
%
|
General and administrative
|
|
|
1,773
|
|
|
|
2,798
|
|
|
|
58
|
%
|
|
|
3,324
|
|
|
|
5,457
|
|
|
|
64
|
%
|
Sales and marketing
|
|
|
1,475
|
|
|
|
3,404
|
|
|
|
131
|
%
|
|
|
2,545
|
|
|
|
6,508
|
|
|
|
156
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,301
|
|
|
|
8,722
|
|
|
|
65
|
%
|
|
|
9,677
|
|
|
|
16,955
|
|
|
|
75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(9,007
|
)
|
|
|
(12,409
|
)
|
|
|
38
|
%
|
|
|
(15,914
|
)
|
|
|
(23,206
|
)
|
|
|
46
|
%
|
Other income (expense), net
|
|
|
294
|
|
|
|
(263
|
)
|
|
|
189
|
%
|
|
|
261
|
|
|
|
(1,026
|
)
|
|
|
493
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,713
|
)
|
|
$
|
(12,672
|
)
|
|
|
45
|
%
|
|
$
|
(15,653
|
)
|
|
$
|
(24,232
|
)
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of the Three and Six Months Ended June 30, 2007 and
2006
Revenues
Our total revenues were $3.2 million for the three months
ended June 30, 2007 and $5.2 million for the six
months ended June 30, 2007, as compared to
$0.9 million and $1.1 million for the same periods in
2006. The increase in revenues is due to the increase in
customers from approximately 525 at June 30, 2006 to
approximately 2,450 at June 30, 2007.
Cost of
Revenues
Cost of revenues was $6.9 million for the three months
ended June 30, 2007 and $11.5 million for the six
months ended June 30, 2007, as compared to
$4.6 million and $7.3 million for the same periods in
2006. The increase is due to the increased sales volume. Cost of
revenues includes adjustment of inventory to lower cost or
market and indirect costs. Since the OmniPods are sold at a
price below direct manufacturing costs, inventory adjustments
reduced cost of revenues by $187,000 for the three months ended
June 30, 2007 to reflect valuation of inventory at the
lower of cost or market. The
per-unit
cost to manufacture the OmniPod has decreased at June 30,
2007 from the same period in 2006. This decrease is a result of
a reduced cost of raw materials and increased volumes which
improved the absorption of manufacturing overhead costs.
Research
and Development
Research and development expense increased $467,000, or 23%, to
$2.5 million for the three months ended June 30, 2007
and $1.2 million, or 31%, to $5.0 million for the six
months ended June 30, 2007. For the three months ended
June 30, 2007 the increase in expense was primarily
attributable to an increase of $315,000 in employee related
expenses associated with the hiring additional employees,
$137,000 in tools and supplies, $135,000 in travel expenses
partially offset by a reduction in prototype expenses. For the
six months ended June 30, 2007, the increase in expense was
primarily attributable to an increase of $679,000 in employee
related expenses, $219,000 in consulting services, $136,000 in
travel expenses, and $148,000 in tools and other expenses.
35
General
and Administrative
General and administrative expenses increased $1.0 million,
or 58%, to $2.8 million for the three months ended
June 30, 2007 and increased $2.1 million, or 64%, to
$5.5 million for the six months ended June 30, 2007.
For the three months ended June 30, 2007 the increase in
expenses was primarily due to an increase of $312,000 in
employee compensation and benefit costs associated with the
hiring of additional employees, $274,000 in consulting and legal
expenses, $204,000 in bad debt expense, $89,000 in increased
insurance expense, $79,000 in increased depreciation expense and
$67,000 in other expenses. For the six months ended
June 30, 2007, the increase in expense was primarily due to
an increase of $866,000 in employee compensation and benefit
costs associated with the hiring of additional employees,
$594,000 in consulting and legal expenses, $324,000 in bad debt
expense, $177,000 in increased depreciation expense, $132,000 in
increased insurance expense, and $40,000 in other expenses.
Sales and
Marketing
Sales and marketing expenses increased $1.9 million, or
131%, to $3.4 million for the three months ended
June 30, 2007, and increased $4.0 million or 156% to
$6.5 million for the six months ended June 30, 2007.
The increase in expenses for the three months ended
June 30, 2007 was primarily due to an increase of $722,000
in employee compensation and benefit costs resulting from the
hiring of additional employees in our sales and marketing
department, $648,000 in travel, printing and tradeshow expenses
used to support our selling efforts, $299,000 in patient
demonstration kit units and $199,000 in marketing consultants
which include our external trainers. For the six months ended
June 30, 2007 the increase in expenses was primarily due to
an increase of $1.3 million in patient demonstration kit
units, $1.2 million in employee compensation and benefit
costs resulting from the hiring of additional employees in our
sales and marketing department, $852,000 in travel, printing and
tradeshow expenses used to support our selling efforts, $416,000
in marketing consultants which include our external trainers and
$126,000 in other marketing expenses.
Other
Income (Expense)
Interest income was $713,000 and $1.0 million during the
three and six months ended June 30, 2007, respectively.
This represents an increase of $150,000 and $219,000 compared to
the same periods in 2006, caused primarily by higher cash
balances. Interest income was earned from cash deposits and
short-term interest bearing instruments. Interest expense was
$986,000 and $2.0 million during the three and six months
ended June 30, 2007, respectively. This represents an
increase of $718,000 and $1.4 million compared to the same
periods in 2006. The increase in interest expense was
attributable to the interest expense for the $30.0 million
term loan obtained in December 2006. In addition, we recorded
$10,000 of other income for the three months ended June 30,
2007 to reflect a decrease in the estimated fair value of the
warrants issued in connection with our debt notes.
36
Results
of Operations for the Fiscal Years Ended December 31, 2004,
2005 and 2006
The following table presents certain statement of operations
information for the years ended December 31, 2004, 2005 and
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
50
|
|
|
$
|
3,663
|
|
Cost of revenues
|
|
|
|
|
|
|
1,530
|
|
|
|
15,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
|
|
|
|
(1,480
|
)
|
|
|
(11,997
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
9,026
|
|
|
|
10,764
|
|
|
|
8,094
|
|
General and administrative
|
|
|
3,950
|
|
|
|
5,490
|
|
|
|
8,389
|
|
Sales and marketing
|
|
|
1,177
|
|
|
|
3,771
|
|
|
|
6,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
14,153
|
|
|
|
20,025
|
|
|
|
22,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(14,153
|
)
|
|
|
(21,505
|
)
|
|
|
(34,645
|
)
|
Other income (expense), net
|
|
|
332
|
|
|
|
(131
|
)
|
|
|
(1,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss(1)
|
|
$
|
(13,821
|
)
|
|
$
|
(21,636
|
)
|
|
$
|
(35,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net loss for the year ended December 31, 2006 includes
$307,000 for stock based compensation expense attributable to
common stockholders as required by SFAS 123R. We adopted
SFAS 123R on a prospective basis so previous periods are
not restated. |
Comparison
of the Years Ended December 31, 2006 and December 31,
2005
Revenues
Our total revenues were $3.7 million for the year ended
December 31, 2006 as compared to $50,000 for the year ended
December 31, 2005. We did not begin commercial shipment of
the OmniPod System until October 2005; therefore, we only had
three months of sales in 2005.
Cost of
Revenues
Cost of revenues for the year ended December 31, 2006 was
$15.7 million as compared to $1.5 million for the year
ended December 31, 2005. The increase is due to the
increased sales volume. Cost of revenues include inventory write
down and indirect costs. Since the OmniPods are sold at a price
below direct manufacturing costs, inventory was adjusted down
$1.5 million as of December 31, 2006 to reflect values
at the lower of cost or market. Stock based compensation expense
for the year ended December 31, 2006 allocated to cost of
revenues was $22,000.
Research
and Development
Research and development expense decreased $2.7 million, or
24.8%, to $8.1 million for the year ended December 31,
2006 from $10.8 million for the year ended
December 31, 2005. The decrease in research and development
expense was attributable to a reduction of $990,000 in employee
related expenses, $835,000 in consulting expenses, which was
attributable to the reduced need for design services in 2006,
$689,000 in temporary employees, $294,000 in tools and services
and an increase of $88,000 for stock based compensation expense.
General
and Administrative
General and administrative expenses increased $2.9 million,
or 52.8%, to $8.4 million for the year ended
December 31, 2006 from $5.5 million for the year ended
December 31, 2005. The increase in expenses was
37
primarily due to an increase of $1.3 million in employee
compensation and benefit costs, $521,000 in consulting expenses,
$170,000 in stock based compensation expense and $149,000 in bad
debt expense, as well as an expense of $771,000 related to the
disposal of equipment.
Sales and
Marketing
Sales and marketing expenses increased $2.4 million, or
63.5%, to $6.2 million for the year ended December 31,
2006 from $3.8 million for the same period in 2005. The
increase in expenses was primarily due to an increase of
$1.1 million in employee compensation and benefit costs
resulting from the hiring of fifteen additional employees in our
sales and marketing department, $677,000 in demonstration kit
units, $480,000 in marketing consultants, $466,000 in travel,
printing and tradeshow expenses used to support our selling
efforts and $27,000 of stock based compensation expense, offset
by a reduction in market research expenses of $360,000.
Other
Income (Expense)
Interest income was $1.4 million and $505,000 during the
years ended December 31, 2006 and 2005, respectively. This
represents an increase of $873,000. Interest income was earned
from investments in cash and cash equivalents. Interest income
increased primarily due to higher combined average cash and cash
equivalents resulting from the issuance of Series E
preferred stock in February 2006. Interest expense was
$1.8 million and $636,000 during the years ended
December 31, 2006 and 2005, respectively. This represents
an increase of $1.2 million. The increase in interest
expense was primarily attributable to the interest expense on
the $10.0 million loan from Lighthouse Capital
Partners V, L.P. that we borrowed in June 2005 including
the amortization of the discount associated with the warrant
issued in connection with the term loan. In addition, we
recorded $845,000 of other expense for the year ended
December 31, 2006 to reflect any increases in the estimated
fair value of the warrants, which resulted from our adoption of
Financial Accounting Standards Board Staff Position
150-5.
In December 2006, we repaid the remaining balance of the term
loan from Lighthouse Capital Partners in full with a portion of
the proceeds from a $30.0 million term loan from a group of
lenders led by Merrill Lynch Capital. See
Liquidity and Capital Resources.
Comparison
of Years Ended December 31, 2005 and December 31,
2004
Revenues
Our total revenues were $50,000 in 2005. Since we did not
commence commercial sales of the OmniPod System until October
2005, we had no revenues in the year ended December 31,
2004.
Cost of
Revenues
Cost of revenues for the year ended December 31, 2005 were
$1.5 million, attributable to the commercial sales of the
OmniPod System. Since we did not commence commercial sales of
the OmniPod System until October 2005, we did not have any cost
of revenues for the year ended December 31, 2004. Cost of
revenues include inventory writedown and indirect costs.
Research
and Development
Research and development expenses increased $1.7 million,
or 19.2%, to $10.8 million for the year ended
December 31, 2005 from $9.0 million for the year ended
December 31, 2004. The increase in expenses was primarily
due to an increase in expenses of $1.3 million in employee
compensation and benefit costs resulting from the hiring of
additional employees in our research and development department
and an increase in cost of temporary employees of $853,000,
partially offset by a decrease of $524,000 in outside consulting
costs.
38
General
and Administrative
General and administrative expenses increased $1.5 million,
or 39.0%, to $5.5 million for the year ended
December 31, 2005 from $3.9 million for the year ended
December 31, 2004. The increase in expenses was primarily
due to an increase of $884,000 in depreciation, an increase of
$490,000 in rent expense for our new facility and an increase of
$186,000 in employee compensation and benefit costs resulting
from the hiring of additional employees.
Sales and
Marketing
Sales and marketing expenses increased $2.6 million, or
220.3%, to $3.8 million for the year ended
December 31, 2005 from $1.2 million for the year ended
December 31, 2004. The increase in expenses was primarily
due to an increase of $1.2 million in employee compensation
and benefit costs resulting from the hiring of additional
employees in our sales and marketing department, $645,000
increase in travel and trade show expenses, $365,000 increase in
demonstration kit units and $337,000 increase in expenses
relating to marketing studies used to support our selling
efforts.
Other
Income (Expense)
Interest income was $505,000 and $333,000 for the years ended
December 31, 2005 and December 31, 2004, respectively,
representing an increase of $172,000. Interest income increased
primarily due to higher combined balance of average cash and
cash equivalents from the issuance of Series D preferred
stock. Interest expense was $636,000 for the year ended
December 31, 2005 and $1,000 for the year ended
December 31, 2004. The increase in interest expense was
primarily attributable to the interest associated with the
$10.0 million loan from Lighthouse Capital Partners that we
borrowed in June 2005, including the amortization of the debt
discount of $32,000 for the year ended December 31, 2005.
Liquidity
and Capital Resources
We commenced operations in 2000, and, to date, we have financed
our operations primarily through private placements of our
preferred stock, secured indebtedness and an initial public
offering of our common stock. As of June 30, 2007, we had
$30.0 million of secured debt outstanding. Since inception,
we have received net proceeds of $232.9 million from the
issuance of redeemable convertible preferred stock and common
stock. As of June 30, 2007, we had $119.8 million in
cash and cash equivalents. We believe that our current cash and
cash equivalents, including the net proceeds from our initial
public offering, together with our short-term investments and
the cash to be generated from expected product sales, will be
sufficient to meet our projected operating and debt service
requirements for at least the next twelve months.
In May 2007, in our initial public offering, we issued and sold
7,700,000 shares of common stock at a price to the public
of $15.00 per share. In June 2007, we issued and sold an
additional 665,000 shares of common stock at a price to the
public of $15.00 per share pursuant to the underwriters
partial exercise of their over-allotment option. In connection
with our initial public offering, including the partial exercise
of the over-allotment option, we received total net proceeds of
$113.4 million. We intend to use these proceeds in
connection with our efforts to expand our manufacturing
capacity, expand our sales and marketing activities and fund our
research and development, among other general corporate purposes.
The following table sets forth the amounts of cash used in
operating activities and net loss for each of the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash used in operating activities
|
|
$
|
(21,399
|
)
|
|
$
|
(12,225
|
)
|
Net loss
|
|
$
|
(24,232
|
)
|
|
$
|
(15,653
|
)
|
39
For the 2007 period, the increase in net cash used in operating
activities was attributable primarily to the growth of our
operations after adjustment for non-cash charges, such as
depreciation, amortization and stock-based compensation expense,
as well as to changes to working capital. Significant uses of
cash from operations include increases in accounts receivable
and increased inventory requirements for production, offset by
increases in accounts payable, accrued expenses and deferred
revenue.
The following table sets forth the amounts of cash used in
operating activities and net loss for each of the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash used in operating activities
|
|
$
|
(13,056
|
)
|
|
$
|
(20,321
|
)
|
|
$
|
(31,820
|
)
|
Net loss
|
|
$
|
(13,821
|
)
|
|
$
|
(21,636
|
)
|
|
$
|
(35,950
|
)
|
Net cash used in operating activities primarily represents our
net loss for the periods presented. The increase of
$11.5 million in cash used in operating activities for the
year ended December 31, 2006 compared to the year ended
December 31, 2005 was due primarily to an increase in net
loss of $14.3 million, increased net accounts receivable of
$1.4 million and an increase in inventory of
$2.5 million, partially offset by increases in accounts
payable and accrued expenses of $4.7 million.
The following table sets forth the amounts of cash used in
investing activities and cash provided by financing activities
for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash used in investing activities
|
|
$
|
(5,510
|
)
|
|
$
|
(6,870
|
)
|
Cash provided by financing activities
|
|
$
|
113,496
|
|
|
$
|
49,615
|
|
Cash used in investing activities in both periods was primarily
for the purchase of fixed assets for use in the development and
manufacturing of the OmniPod System. Cash provided by financing
activities in 2006 was primarily generated from the issuance of
preferred stock.
The following table sets forth the amounts of cash used in
investing activities and cash provided by financing activities
for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash used in investing activities
|
|
$
|
(2,708
|
)
|
|
$
|
(6,022
|
)
|
|
$
|
(12,587
|
)
|
Cash provided by financing activities
|
|
$
|
35,435
|
|
|
$
|
10,004
|
|
|
$
|
69,978
|
|
Cash used in investing activities was primarily for the purchase
of fixed assets for use in the development and manufacturing of
the OmniPod System. Cash provided by financing activities was
primarily generated from the issuance of preferred stock in
February 2006 and February 2004 and the issuance of
$30.0 million of long-term debt provided by a group of
lenders led by Merrill Lynch Capital in December 2006.
In February 2006, we sold 13,738,661 shares of
Series E preferred stock for net proceeds of
$49.8 million. In February 2004, we sold
14,669,421 shares of Series D preferred stock for net
proceeds of $35.4 million. All of these preferred shares
converted into shares of common stock on a
1-for-2.6267
basis upon the closing of our initial public offering.
On June 2, 2005, we entered into a term loan and security
agreement with Lighthouse Capital Partners V, L.P. pursuant
to which we borrowed $10.0 million. This term loan was
secured by all of our assets other than our intellectual
property. Our borrowings under the term loan bore interest at a
rate of 8% per annum. Interest was payable on a monthly basis
during the term of the loan and beginning on June 1, 2006,
we were required to repay the principal in 42 equal monthly
installments until the loan matured in December 2009. Upon the
40
prepayment or final maturity of the term loan, we were required
to pay the lender an additional amount equal to
$1.0 million of the original loan amount. In connection
with the term loan, we issued a warrant to the lender to
purchase up to 330,579 shares of Series D preferred
stock at a purchase price of $2.42 per share. The warrant
automatically converted into a warrant to purchase common stock
on a
1-for-2.6267
basis at a purchase price of $6.36 per share upon the closing of
our initial public offering. The cost of the warrant was being
amortized to interest expense over the 54 month life of
this term loan. The fair value of the warrant was calculated
using the Black-Scholes option pricing model with the following
assumptions: seven year expected life risk-free, interest rate
of 3.89% and no dividend yield.
On December 27, 2006, we entered into a credit and security
agreement with a group of lenders led by Merrill Lynch Capital
pursuant to which we borrowed $30.0 million in a term loan.
We used $9.5 million of the proceeds from this term loan to
repay all remaining amounts owed under the loan with Lighthouse
Capital Partners V, L.P. that we had entered into in June
2005. This term loan is secured by all of our assets other than
our intellectual property. Our borrowings under the term loan
bear interest at a floating rate equal to the LIBOR rate plus 6%
per annum. Interest is payable on a monthly basis during the
term of the loan and, beginning on October 1, 2007, we will
be required to repay the principal in 33 equal monthly
installments of $909,091. In addition, we are subject to loan
origination fees amounting to $900,000 for the costs incurred by
the lenders in making the funds available. We have capitalized
these costs as deferred financing costs. The deferred financing
cost will be amortized to interest expense over the entire
42-month
life of this term loan. This term loan is subject to
acceleration upon the occurrence of any fact, event or
circumstance that has resulted or could reasonably be expected
to result in a material adverse effect. Consequently, due to our
low cash resources, relative to our operating losses, prior to
our initial public offering, all of such debt was classified as
a current liability at December 31, 2006 in accordance with
the provisions set forth by FASB Technical
Bulletin No. 79-3
Subjective Acceleration Clauses in Long-Term Debt Agreements.
In connection with the term loan, we issued seven-year
warrants expiring in December 2013 to the lenders to purchase up
to 247,252 shares of Series E preferred stock at a
purchase price of $3.64 per share. The warrants automatically
converted into warrants to purchase common stock on a
1-for-
2.6267 basis at a purchase price of $9.56 per share upon the
closing of our initial public offering. At June 30, 2007,
the term loan principal was presented with its current and
non-current components separately, based on its stated repayment
schedule, as a result of the significant increase in our cash
reserves following the initial public offering of our common
stock in May 2007.
The credit and security agreement contains limitations, subject
to certain exceptions, on, among other things, our ability to
incur additional indebtedness or liens, make dividends or
distributions to our stockholders, repurchase shares of our
stock, acquire or dispose of any assets other than in the
ordinary course of business, make investments in other entities,
merge or consolidate with another entity or engage in a change
of control, a new business or a non-arms length
transaction with one of our affiliates. Additionally, under the
agreement, we are obligated to complete construction of a second
OmniPod manufacturing line by March 31, 2009, which
deadline may be extended to June 30, 2009 in specified
circumstances. If we are not in compliance with these covenants,
breach any representation or warranty in the credit and security
agreement, default in any payment due under the credit and
security agreement or related promissory notes or any other
indebtedness above a specified amount, fail to discharge a
judgment against us above a specified amount, cease to be
solvent or experience other insolvency related events, then the
administrative agent may declare all of the amounts owed under
the term loan immediately due and payable.
We lease our facilities, which are accounted for as operating
leases. The lease of our Bedford facility generally provides for
a base rent plus real estate taxes and certain operating
expenses related to the lease. We entered into a new lease for
our Bedford facility in 2004 which contains renewal options,
escalating payments and leasehold allowances over the life of
the lease. As of June 30, 2007, we had an outstanding
letter of credit which totaled $200,000 to cover our security
deposits for lease obligations. This letter of credit will
expire October 30, 2009.
During the remainder of 2007, we will be expending funds in
connection with, among other things, our efforts to expand our
automated manufacturing process and increase our production
capacity, and expand our sales and marketing activities. We
expect total capital expenditure purchases during 2007 to be at
least
41
$10.0 million in connection with our efforts to expand our
automated manufacturing process and increase our manufacturing
capacity.
Off-Balance
Sheet Arrangements
As of June 30, 2007, we did not have any off-balance sheet
financing arrangements.
Contractual
Obligations
The following table summarizes our principal contractual
obligations as of December 31, 2006. As of
December 31, 2006, we did not have contractual obligations
for any payments due in 2010 or beyond.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due in
|
|
Contractual Obligations
|
|
Total
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
Operating lease obligations
|
|
$
|
1,397,283
|
|
|
$
|
508,103
|
|
|
$
|
508,103
|
|
|
$
|
381,077
|
|
Purchase obligations for capital expenditures
|
|
|
9,901,631
|
|
|
|
9,901,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
11,298,914
|
|
|
$
|
10,409,734
|
|
|
$
|
508,103
|
|
|
$
|
381,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical
Accounting Policies and Estimates
Our financial statements are based on the selection and
application of generally accepted accounting principles, which
require us to make estimates and assumptions about future events
that affect the amounts reported in our financial statements and
the accompanying notes. Future events and their effects cannot
be determined with certainty. Therefore, the determination of
estimates requires the exercise of judgment. Actual results
could differ from those estimates, and any such differences may
be material to our financial statements. We believe that the
policies set forth below may involve a higher degree of judgment
and complexity in their application than our other accounting
policies and represent the critical accounting policies and
estimates used in the preparation of our financial statements.
If different assumptions or conditions were to prevail, the
results could be materially different from our reported results.
Revenue
Recognition
We generate revenue from sales of our OmniPod Insulin Management
System to diabetes patients. The initial sale to a new customer
typically includes OmniPods and a Starter Kit, which include the
PDM, two OmniPods, the OmniPod System User Guide and the OmniPod
System Interactive Training CD. We offer a
45-day right
of return for our Starter Kits sales (we changed from a
30-day right
of return effective for shipments prior to December 1,
2006). Subsequent sales to existing customers typically consist
of additional OmniPods. Revenue is recognized in accordance with
Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements, or SAB 104, which
requires that persuasive evidence of a sales arrangement exists,
delivery of goods occurs through transfer of title and risk and
rewards of ownership, the selling price is fixed or determinable
and collectibility is reasonably assured. With respect to these
criteria:
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The evidence of an arrangement generally consists of a physician
order form, a patient information form, and if applicable,
third-party insurance approval.
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Transfer of title and risk and rewards of ownership are passed
to the patient upon shipment from us.
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The selling prices for all sales are fixed and agreed with the
patient, and if applicable, the patients third-party
insurance provider(s) prior to shipment and are based on
established list prices or, in the case of certain third-party
insurers, contractually agreed upon prices.
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We have considered the requirements of Emerging Issues Task
Force, or EITF,
No. 00-21,
Revenue Arrangements with Multiple Deliverables, when
accounting for the OmniPods and Starter Kits.
EITF 00-21
requires that we assess whether the different elements qualify
for separate accounting. We recognize revenue for the initial
shipment to a patient or other third party once all elements
have been delivered and the right of return has expired.
42
We have applied Statement of Financial Accounting Standards
No. 48, Revenue Recognition When the Right of Return
Exists, or SFAS No. 48. In accordance with
SFAS No. 48, we defer the revenue and, to the extent
allowed, all related costs of all initial shipments until the
right of return has lapsed. We had deferred revenue of $763,000
and $284,000 as of June 30, 2007 and December 31,
2006, respectively.
We recognize subsequent sales of OmniPods upon shipment in
accordance with the provisions set forth by SAB 104.
Asset
Valuation
Asset valuation includes assessing the recorded value of certain
assets, including accounts receivable, inventory and fixed
assets. We use a variety of factors to assess valuation,
depending upon the asset. Accounts receivable consist of amounts
due from third-party payors and patients. We account for bad
debts using the allowance method. The bad debt allowances are
recorded in the period when the revenue is recorded. We base our
allowance on historical experience, assessment of specific risk,
discussions with individual customers or various assumptions and
estimates that are believed to be reasonable under the
circumstances. Actual results may differ materially from our
estimates. Fixed property and equipment is stated at cost and
depreciated using the straight-line method over the estimated
useful lives of the respective assets. Leasehold improvements
are amortized over their useful life or the life of the lease,
whichever is shorter. We review long-lived assets, including
property and equipment and intangibles, for impairment whenever
events or changes in business circumstances indicate that the
carrying amount of the assets may not be fully recoverable. An
impairment loss would be recognized when estimated undiscounted
future cash flows expected to result from the use of the asset
and its eventual disposition is less than its carrying amount.
Impairment, if any, is measured as the amount by which the
carrying amount of a long-lived asset exceeds its fair value. We
consider various valuation factors, principally discounted cash
flows, to assess the fair values of long-lived assets
Income
Taxes
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
or FIN No. 48, which clarifies the accounting for
uncertainty in income taxes recognized in an entitys
financial statements in accordance with SFAS No. 109.
FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. In addition, FIN 48 provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. We adopted FIN 48 on
January 1, 2007. The adoption of FIN 48 did not have a
material impact on our financial position or results of
operations. Upon adoption and as of June 30, 2007, we have
no unrecognized tax benefits recorded.
Stock
Based Compensation
Effective January 1, 2006, we adopted Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share Based Payment, or SFAS 123R, which is a
revision of Statement No. 123, or SFAS 123,
Accounting for Stock Based Compensation. SFAS 123R
supersedes Accounting Principles Board No. 25,
Accounting for Stock Issued to Employees, or APB 25, and
amends FASB Statement No. 95 Statement of Cash
Flows. SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Prior to January 1, 2006, we accounted for employee stock
based compensation in accordance with the provisions of APB 25
and FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation an
Interpretation of APB No. 25, and complied with the
disclosure provisions of SFAS 123, and related
SFAS No. 148, Accounting for Stock-Based
Compensation Transaction and Disclosure. Under
APB 25, compensation expense is based on the difference, if any,
on the date of the grant, between the fair value of the stock
and the exercise price of the option. The stock based
compensation is amortized using the straight-line method over
the vesting period.
SFAS 123R requires nonpublic companies that used the
minimum value method in SFAS 123R for either recognition or
pro forma disclosures to apply SFAS 123R using the
prospective-transition method. As such, we
43
will continue to apply APB 25 in future periods to equity awards
outstanding at the date of SFAS 123R adoption that were
measured using the minimum value method. In accordance with the
requirements of SFAS 123R, we will not present pro forma
disclosures for periods prior to the adoption of SFAS 123R,
as the estimated fair value of our stock options granted through
December 31, 2005 was determined using the minimum value
method.
Effective January 1, 2006 with the adoption of
SFAS 123R, we elected to use the Black-Scholes option
pricing model to determine the weighted-average fair value of
options granted. In accordance with SFAS 123R, we will
recognize the compensation expense of share-based awards on a
straight-line basis over the vesting period of the award.
The determination of the fair value of share-based payment
awards utilizing the Black-Scholes model is affected by the
stock price and a number of assumptions, including expected
volatility, expected life, risk-free interest rate and expected
dividends. Because our initial public offering was completed in
May 2007, we do not have sufficient history of market prices of
our common stock, and as such we estimate volatility in
accordance with Securities and Exchange Commissions Staff
Accounting Bulletin No. 107, Share-Based
Payment, or SAB 107, using historical volatilities of
comparable public entities. The expected life of the awards is
estimated based on the SEC Shortcut Approach as
defined in SAB 107, which is the midpoint between the
vesting date and the end of the contractual term. The risk-free
interest rate assumption is based on observed interest rates
appropriate for the terms of the awards. The dividend yield
assumption is based on company history and expectation of paying
no dividends. Forfeitures are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Stock based
compensation expense recognized in the financial statements in
2006 and thereafter is based on awards that are ultimately
expected to vest. We evaluate the assumptions used to value the
awards on a quarterly basis and if factors change and different
assumptions are utilized, stock based compensation expense may
differ significantly from what has been recorded in the past. If
there are any modifications or cancellations of the underlying
unvested securities, we may be required to accelerate, increase
or cancel any remaining unearned stock based compensation
expense.
Prior to April 1, 2006, the exercise prices for options
granted were set by our board of directors based upon guidance
set forth by the American Institute of Certified Public
Accountants in the AICPA Technical Practice Aid, Valuation
of Privately-Held-Company Equity Securities Issued as
Compensation. To that end, the board considered a number
of factors in determining the option price, including the
following factors: (1) prices for our preferred stock,
which we had sold to outside investors in arms-length
transactions, and the rights, preferences and privileges of our
preferred stock and common stock in the Series A through
Series E financing, (2) obtaining FDA 510(k)
clearance, (3) launching the OmniPod System and
(4) achievement of budgeted revenue and results.
In connection with the preparation of the financial statements
for our initial public offering, we retrospectively estimated
the fair value of our common stock based upon several factors,
including the following: (1) operating and financial
performance, (2) progress and milestones attained in the
business, (3) past sales of convertible preferred stock,
(4) the results of the retrospective independent
valuations, and (5) the expected valuation obtained in an
initial public offering. We believe this to have been a
reasonable methodology based on the factors above and based on
several arms length transactions involving our stock
supportive of the results produced by this valuation methodology.
Warrants
In connection with the term loans with Lighthouse Capital
Partners and a group of lenders led by Merrill Lynch Capital, we
issued warrants to the lenders to purchase shares of its
redeemable convertible preferred stock. Until the completion of
our initial public offering, these warrants were recorded as
warrants to purchase shares subject to redemption in
current liabilities in accordance with FASB Statement
No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity and FASB
Staff Position
No. 150-5
Issuers Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on
Shares That Are Redeemable, or
FSP 150-5.
44
Significant terms and fair values of warrants to purchase
redeemable convertible preferred stock are as follows (in
thousands except share and per share data):
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Shares as of
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Fair Value as of
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Expiration
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Exercise Price
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June 30,
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December 31,
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December 31,
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Stock
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Date
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per Share
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2007
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2006
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2006
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Series D preferred
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June 2, 2012
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$
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6.36
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125,853
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125,853
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$
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1,096
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Series E preferred
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Dec. 27, 2013
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9.56
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78,440
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94,128
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835
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Total
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204,293
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219,981
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$
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1,931
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In the three months ended June 30, 2007, a member of the
group of lenders led by Merrill Lynch Capital exercised their
right to convert 15,688 warrants into common stock, resulting in
the issuance of 5,688 shares of our common stock.
We recorded $835,000 fair value of the warrants for
Series E preferred stock as a discount to the term loan.
The costs of the warrants are being amortized to interest
expense over the
42-month
life of this term loan.
Upon the closing of our initial public offering in May 2007, all
outstanding warrants to purchase shares of our preferred stock
were converted into warrants to purchase shares of our common
stock and, as a result, are no longer be subject to
FSP 150-5
for periods ended or ending on or after that date. The aggregate
fair value of these warrants as of May 18, 2007, determined
to be $2,005,000, was reclassified from liabilities to
additional paid-in capital, a component of stockholders
equity, and we have ceased to record any related periodic fair
value adjustments.
We recorded interest income of approximately $10,000 in the
three months ended June 30, 2007, as the aggregate fair
value of warrants decreased from the value recorded at
March 31, 2007. The decrease in fair value is primarily
caused by a lower expected life for the warrants, considering
the existence of a market for our common stock.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or SFAS 157. This standard
defines fair value, establishes a framework for measuring fair
value in accounting principles generally accepted in the United
States, and expands disclosure about fair value measurements.
This pronouncement applies under other accounting standards that
require or permit fair value measurements. Accordingly, this
statement does not require any new fair value measurement. This
statement is effective for fiscal years beginning after
November 15, 2007, and for interim periods within those
fiscal years. We will be required to adopt SFAS 157 in the
first quarter of 2008. We are currently evaluating the
requirements of SFAS 157 and have not yet determined the
impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
115, or SFAS 159, which permits entities to choose to
measure many financial instruments and certain other items at
fair value. SFAS 159 is effective as of the beginning of an
entitys first fiscal year that begins after
November 15, 2007. We are currently evaluating the
requirements of SFAS 159 and have not yet determined the impact
on our consolidated financial statements.
Quantitative
and Qualitative Disclosures about Market Risk
We do not use derivative financial instruments in our investment
portfolio and have no foreign exchange contracts. Our financial
instruments consist of cash, cash equivalents, short-term
investments, accounts receivable, accounts payable, accrued
expenses and long-term obligations. We consider investments
that, when purchased, have a remaining maturity of 90 days
or less to be cash equivalents. The primary objectives of our
investment strategy are to preserve principal, maintain proper
liquidity to meet operating needs and maximize yields. To
minimize our exposure to an adverse shift in interest rates, we
invest mainly in cash equivalents and short-term investments and
maintain an average maturity of six months or less. We do not
believe that a 10% change in interest rates would have a
material impact on the fair value of our investment portfolio or
our interest income.
45
Overview
We are a medical device company that develops, manufactures and
markets an innovative, discreet and
easy-to-use
insulin infusion system for people with insulin-dependent
diabetes. Our proprietary OmniPod Insulin Management System,
which consists of our OmniPod disposable insulin infusion device
and our handheld, wireless Personal Diabetes Manager, is the
only commercially-available insulin infusion system of its kind.
Conventional insulin pumps require people with insulin-dependent
diabetes to learn to use, manage and wear a number of cumbersome
components, including up to 42 inches of tubing. In
contrast, the OmniPod System features only two discreet,
easy-to-use
devices that eliminate the need for a bulky pump, tubing and
separate blood glucose meter, provide for virtually pain-free
automated cannula insertion, communicate wirelessly and
integrate a blood glucose meter. We believe that the OmniPod
Systems unique proprietary design offers significant
lifestyle benefits to people with insulin-dependent diabetes.
The U.S. Food and Drug Administration, or FDA, approved the
OmniPod System in January 2005 and we began commercial sale of
the OmniPod System in the United States in October 2005. To
date, we have focused our sales and marketing efforts in the
Eastern and Midwestern United States. As of September 30,
2007, we had approximately 3,200 patients using the OmniPod
System in the United States.
Market
Opportunity
Diabetes is a chronic, life-threatening disease for which there
is no known cure. Diabetes is caused by the bodys
inability to produce or effectively utilize the hormone insulin.
This inability prevents the body from adequately regulating
blood glucose levels. Glucose, the primary source of energy for
cells, must be maintained at certain concentrations in the blood
in order to permit optimal cell function and health. In people
with diabetes, blood glucose levels fluctuate between very high
levels, a condition known as hyperglycemia, and very low levels,
a condition called hypoglycemia. Hyperglycemia can lead to
serious short-term complications, such as confusion, vomiting,
dehydration and loss of consciousness; long-term complications,
such as blindness, kidney disease, nervous system disease,
amputations, stroke and cardiovascular disease; or death.
Hypoglycemia can lead to confusion, loss of consciousness or
death.
The International Diabetes Federation, or IDF, estimated that
diabetes currently affects 246 million people worldwide.
The IDF expects that by 2025, 380 million people worldwide
will be affected by diabetes due to increasing overall life
expectancy, worsening diet trends, increasingly sedentary
lifestyles and the growing incidence of obesity.
Frost & Sullivan estimated that in 2006,
20.7 million people in the United States, or approximately
7% of the population, had diabetes, and reported that it
expected this number to increase to 23.9 million people by
2011.
Diabetes is typically classified as Type 1 or Type 2 diabetes.
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Type 1 diabetes is characterized by the bodys nearly
complete inability to produce insulin. It is frequently
diagnosed during childhood or adolescence. Individuals with Type
1 diabetes require daily insulin therapy, typically administered
via injections or conventional insulin pumps, to survive.
Frost & Sullivan estimated that in 2006,
1.2 million people in the United States had Type 1 diabetes.
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Type 2 diabetes, the more common form of diabetes, is
characterized by the bodys inability to either properly
utilize insulin or produce enough insulin. Historically, Type 2
diabetes has occurred in later adulthood, but its incidence is
increasing among the younger population due primarily to
increasing childhood obesity. Initially, many people with Type 2
diabetes attempt to manage their diabetes with improvements in
diet, exercise
and/or oral
medications. As their diabetes advances, some patients progress
to multiple drug therapy, which often includes insulin therapy.
Recent guidelines, including those published by the American
Diabetes Association in 2006, suggest more aggressive treatment
for people with Type 2 diabetes, including the early adoption of
insulin therapy and more frequent testing. It is now becoming
more accepted for insulin therapy to be started earlier in
people with Type 2 diabetes, and, in some cases, as part of the
initial treatment. Frost & Sullivan estimated that in
2006,
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19.5 million people in the United States had Type 2
diabetes, of which 14.1 million people have been diagnosed.
Frost & Sullivan also estimated that approximately 26%
of diagnosed Type 2 patients, or 3.7 million people,
used insulin therapy in 2006.
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Frost & Sullivan estimated that in 2006, there were
4.9 million people with insulin-dependent diabetes in the
United States. Throughout this prospectus, we refer to both Type
1 diabetes and insulin-requiring Type 2 diabetes as
insulin-dependent diabetes. Given the current growth
expectations for diabetes, we believe there will be increased
demand for better ways to treat diabetes through insulin therapy.
Managing
Diabetes
Diabetes
Management Challenges
Diabetes is often frustrating and difficult for patients to
manage. Blood glucose levels can be affected by the carbohydrate
and fat content of meals, exercise, stress, illness or impending
illness, hormonal releases, variability in insulin absorption
and changes in the effects of insulin on the body. For people
with insulin-dependent diabetes, many corrections, consisting of
the administration of additional insulin or ingestion of
additional carbohydrates, are needed throughout the day in order
to maintain blood glucose levels within normal ranges. Achieving
this result can be very difficult without multiple daily
injections of insulin or the use of continuous subcutaneous
insulin infusion, or CSII, therapy. Patients attempting to
control their blood glucose levels tightly to prevent the
long-term complications associated with fluctuations in blood
glucose levels are at greater risk for overcorrection and the
resultant hypoglycemia, which can cause confusion, loss of
consciousness or death. As a result, many patients have
difficulty managing their diabetes optimally. Additionally, the
time spent in managing diabetes, the swings in blood glucose
levels and the fear of hypoglycemia can all render diabetes
management overwhelming to patients and their families.
Current
Insulin Therapy
People with insulin-dependent diabetes need a continuous supply
of insulin, known as basal insulin, to provide for background
metabolic needs. In addition to basal insulin, people with
insulin-dependent diabetes require supplemental insulin, known
as bolus insulin, to compensate for carbohydrates ingested
during meals or snacks or for a high blood glucose level.
There are three primary types of insulin therapy practiced
today: conventional therapy; multiple daily injection, or MDI,
therapy using syringes or insulin pens; and CSII therapy using
conventional insulin pumps. Both MDI and CSII therapies are
considered intensive insulin management therapies.
Many healthcare professionals believe that blood glucose levels
are controlled more effectively when insulin therapy more
closely mimics the functioning of a normal pancreas; that is,
when it is more physiological. Before the mid-1990s,
conventional therapy, considered the least physiological
approach to insulin therapy, was the most widely-used insulin
therapy. Beginning in the 1990s, several landmark clinical
trials demonstrated the superiority of intensive insulin
management therapies over conventional therapies in delaying the
onset and reducing the severity of diabetes-related
complications. Intensive insulin management therapy in the
trials involved frequent blood glucose monitoring coupled with
MDI or CSII therapy. These trials included:
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the Diabetes Control and Complications Trial, which was
completed in 1993, showed that intensive insulin management
reduces the risk of eye, kidney and nerve disease in people with
Type 1 diabetes;
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the Epidemiology of Diabetes Interventions and Complications
Study, which was completed in 2005, showed that intensive
diabetes management in Type 1 diabetes also protects against the
occurrence of cardiovascular disease; and
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the United Kingdom Prospective Diabetes Study, which was
completed in 1997, demonstrated that intensive insulin
management significantly reduces the risk of eye, kidney and
nerve disease in people with Type 2 diabetes.
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47
Today, the goal of intensive insulin management is to achieve
near-normal blood glucose levels without risking hypoglycemia.
We believe that the results of these studies, coupled with newer
insulin formulations, have significantly expanded the use of
intensive insulin management therapies, and that many Type
1 patients manage their diabetes using an intensive insulin
management therapy. A significantly smaller percentage of people
with insulin-requiring Type 2 diabetes manage their diabetes
using an intensive insulin management therapy.
The following table summarizes the primary methods of insulin
therapy and what we believe to be the primary advantages and
disadvantages of each.
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Type of Therapy
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Advantages
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Disadvantages
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Conventional therapy
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1 to 2 injections of insulin per day, typically a mixture of a
long-acting and regular insulin
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Easiest to train, learn and administer Minimal up-front cost and lowest ongoing cost of supplies
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Least physiological approach, leading to highest long-term complication rates Painful daily injections required Hypoglycemic and hyperglycemic events are common
Severe diet and exercise restrictions
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MDI therapy
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1 to 2 injections per day of long-acting insulin or a mixture of long-acting and regular insulin plus
1 injection of a rapid-acting insulin before all meals and snacks and as needed
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Enables intensive therapy More physiological approach, leading to fewer long-term complications than conventional therapy Less complicated to teach, learn and administer than CSII therapy with conventional
insulin pumps Minimal up-front cost of supplies and lower ongoing cost of supplies than CSII therapy with conventional insulin pumps
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Less physiological approach than CSII therapy with conventional insulin pumps Frequent painful injections (as many as six per day are not unusual) Significant diet and exercise restrictions
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CSII therapy with
conventional insulin pumps
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Continuous infusion of basal rapid-acting insulin via
subcutaneous infusion set, with ability to infuse bolus
rapid-acting insulin before all meals and snacks and as needed;
infusion set is inserted once every three days on average
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Enables intensive therapy Most physiological approach, leading to fewer long-term complications than conventional therapy Fewest diet and exercise restrictions
Best glycemic control No painful injections
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Most complicated to teach, learn and administer Highest up-front and ongoing cost Cumbersome to wear and least discreet alternative
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In addition to the three primary therapies described above,
there is also an inhaled insulin product on the market. However,
current inhaled insulin technology is a newly-introduced
alternative therapy for people with insulin-dependent diabetes
and market acceptance of this therapy is undetermined.
48
CSII
Therapy Opportunity
CSII therapy is widely considered to be the most physiological
and most advanced of all insulin therapies. This therapy closely
mimics the action of a normally-functioning pancreas in that it
uses rapid-acting insulin and allows the patient to customize
basal and bolus insulin doses to meet their specific and varying
daily insulin needs. CSII therapy has also been shown to provide
people with insulin-dependent diabetes with numerous advantages
relative to MDI therapy, including:
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Best Glycemic Control. There have been several
studies demonstrating the superiority of CSII therapy over MDI
therapy. CSII therapy has been shown to provide better glycemic
control, reduced glycemic variability and a reduction in
hypoglycemic events as compared to MDI therapy. CSII therapy
also provides greater consistency in basal insulin absorption
over MDI therapy through the use of rapid-acting, as opposed to
long-acting, insulin and in bolus therapy through the ability to
bolus in smaller and more precise increments.
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Increased Lifestyle Flexibility. CSII therapy
gives patients flexibility with respect to eating and exercise.
With MDI therapy, patients must eat whether they are hungry or
not to compensate for peaking insulin, falling blood glucose
level or exercise. With CSII therapy, insulin peaking is reduced
and patients can generally handle falling blood glucose level or
exercise without being forced to eat by temporarily reducing
their basal rate of insulin. Moreover, CSII therapy frees the
patient from frequent painful injections.
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We believe that these advantages, coupled with wider adoption of
intensive insulin management therapies generally, have generated
demand for CSII therapy using conventional insulin pumps.
Frost & Sullivan estimated that the size of market for
equipment relating to CSII therapy, consisting of insulin pumps
and pump supplies, was $564.4 million in 2003 and is
expected to increase at a compounded annual growth rate of
15.9% through 2010.
Although the market for CSII therapy has been growing rapidly,
we believe that in 2006 this therapy had been adopted by only
about 250,000 patients, or 21% of the Type 1 population in
the United States, and less than 1% of the people with
insulin-requiring Type 2 diabetes. We believe that several
factors of conventional insulin pumps have limited the adoption
of CSII therapy among people with insulin-dependent diabetes.
These factors include:
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Obtrusive design. Conventional insulin pumps
can make a persons diabetes very obtrusive. Pumps are
about the size of a large pager and are typically worn on the
patients belt or in a pocket. To experience truly
continuous insulin infusion therapy, the patient must be
connected to the pump via up to 42 inches of tubing
24 hours a day, which interferes with normal movement,
sleep and exercise. The tubing can kink, leak or be accidentally
disconnected, resulting in inconsistent or interrupted insulin
delivery and requiring the patient to take the time to insert a
new infusion set. Additionally, patients often disconnect their
tubing and remove the pump in order to shower, swim and
exercise, which is both an inconvenience and an interruption of
continuous insulin therapy. Conventional insulin pumps also
require manual insertion of infusion sets which necessitates the
use of relatively large and painful introducer needles, causes
discomfort and can lead to scarring.
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Complexity. Conventional insulin pumps require
that patients manage numerous components, including the pump,
insulin reservoir, tubing, infusion set, insertion device,
batteries and separate blood glucose testing supplies.
Conventional insulin pumps also require a significant number of
steps to initiate insulin delivery, including connecting and
priming various components of the system and manually inserting
the infusion set, either with or without an insertion device. In
addition, most conventional insulin pumps have user interfaces
that require the user to learn specific coding instructions. As
a result, programming conventional insulin pumps and
interpreting pump messages can be difficult, which may limit the
use of advanced therapy features. These attributes make pumps
costly to teach and difficult to use, limiting a patients
ability to optimize their diabetes management. We
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believe that this significantly limits healthcare
professionals willingness to recommend CSII therapy and
the number of patients that they consider to be good candidates
for CSII therapy.
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Large up-front cost. Conventional insulin
pumps have a list price of between $5,000 and $6,500 as an
up-front investment, and the infusion sets, insulin reservoirs
and batteries cost up to $200 per month. These expenses are
generally at least partially covered by third-party payors, but
co-payments and deductibles can still render the large up-front
costs of pumps burdensome to the average person with
insulin-dependent diabetes. The large up-front costs of pumps
are also a significant burden for third-party payors, especially
given the relatively short average length of time patients
remain with the same health plan and the risk that they may
abandon CSII therapy.
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We believe that the relatively limited adoption of CSII therapy
to date among people with insulin-dependent diabetes has been
largely due to these shortcomings of conventional insulin pumps.
Our
Solution
The OmniPod Insulin Management System was specifically designed
to provide people with insulin-dependent diabetes with a
diabetes management solution which provides significant
lifestyle and other benefits and to expand the use of CSII
therapy by addressing the barriers presented by conventional
insulin pumps. A significant portion of our customers report
being former long-term insulin-injecting Type 1 diabetes
patients who have now decided to switch to CSII therapy. Based
on these reports, we believe we are expanding the market for
CSII therapy by attracting MDI therapy users who had previously
foregone the proven clinical benefits of CSII therapy. We
believe that the following attributes of our solution will lead
to the adoption of the OmniPod System as the leading technology
in CSII therapy and expand use of CSII therapy among people with
insulin-dependent diabetes:
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Discreet, two-part design. Unlike conventional
insulin pumps, the OmniPod System consists of just two discreet,
easy-to-use
devices that communicate wirelessly: the OmniPod, a small,
lightweight, disposable insulin infusion device worn beneath
clothing that integrates an infusion set, automated cannula
insertion, insulin reservoir, drive mechanism and batteries; and
the Personal Diabetes Manager, or PDM, a handheld device much
like a personal digital assistant that wirelessly programs the
OmniPod with insulin delivery instructions, assists the patient
with diabetes management and integrates a blood glucose meter.
The OmniPod will operate for at least 72 hours (but no more
than 80 hours) after it is first activated. We believe our
innovative patented design enables people with insulin-dependent
diabetes to experience all of the lifestyle benefits and
clinical superiority of CSII therapy in a more discreet and
convenient manner than possible with conventional insulin pumps.
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No tubing. The OmniPod Systems
innovative, proprietary design dramatically reduces the size of
the insulin delivery mechanism, thereby eliminating the need for
the external tubing required by conventional pumps. As a result
of this design, the OmniPod can be worn discreetly beneath
clothing and patients can move, dress, bathe, sleep and exercise
without the encumbrance of the up to 42 inches of tubing
required by conventional insulin pumps. In addition to
untethering people with insulin-dependent diabetes, the OmniPod
Systems lack of tubing eliminates interruptions in insulin
delivery resulting from kinking, leaking or disconnecting, which
leads to more consistent delivery of insulin.
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Virtually pain-free automated cannula
insertion. The OmniPod is the only CSII therapy
device to feature a fully automated, hands-free cannula
insertion system. This virtually pain-free insertion system
features the worlds fastest insertion and the
smallest-gauge introducer needle available for insulin infusion
systems. Cannula insertion is activated wirelessly using the
PDM, so the patient never sees or handles an introducer needle,
which we believe promotes consistent insertion, reduces patient
anxiety and increases the number of insertion sites available to
patients. We believe that the OmniPods proprietary
insertion system is a significant differentiating factor for
people with insulin-dependent diabetes who are frustrated with
the painful and cumbersome manual insertions required with
existing conventional pumps or frequent injections required by
MDI therapy.
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Easy to train, learn and use. We have designed
the OmniPod System to fit within the normal daily routines of
patients. The OmniPod System requires the fewest steps to start
insulin delivery of all CSII therapies on the market by
automating much of the process. In addition, the OmniPod System
consists of just two devices, as opposed to up to seven for
conventional insulin pumps. We have also designed the PDMs
user interface to be much more intuitive and user-friendly than
those used in conventional insulin pumps. As a result, the
OmniPod System is easier for patients to use, which reduces the
training burden on healthcare professionals. We believe that the
OmniPod Systems overall ease of use will make it very
attractive to those people with insulin-dependent diabetes who
are frustrated or discouraged by the conventional insulin pumps.
We also believe that the OmniPod Systems ease of use and
substantially lower training burden will help redefine which
diabetes patients are appropriate for CSII therapy, enabling
healthcare professionals to prescribe CSII therapy to a broader
pool of patients.
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Low up-front cost and pay-as-you-go pricing
structure. The OmniPod Systems unique
patented design and proprietary manufacturing process have
enabled us to provide CSII therapy at a relatively low up-front
investment without removing any of the functionality of
conventional insulin pumps. Whereas current list prices of
conventional insulin pumps require an up-front investment of
$5,000 to $6,500 and ongoing monthly supplies cost up to $200,
the current list price of our Starter Kit, which includes the
PDM, two OmniPods, the OmniPod System User Guide and our
Interactive Patient Training CD, is $800, and the OmniPods, each
worn for up to three days, have a list price of $34.50 per unit.
We believe this pay-as-you-go pricing model significantly
reduces the risk of investing in CSII therapy for third-party
payors and makes CSII therapy much more accessible for people
with insulin-dependent diabetes.
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The OmniPod System received a number of design and innovation
awards in 2006, including a Gold Medical Design Excellence Award
from Canon Communications LLC, a New England Innovation Award
from the Smaller Business Association of New England, a Gold
Industrial Design Excellence Award from the Industrial Designers
Society of America, and a Nixon Peabody/Smith & Nephew
Medical Device Innovation Award from the Massachusetts Medical
Device Industrial Council. We believe that the OmniPod
Systems proprietary designs and unique functionality offer
patients unprecedented discretion, comfort and ease in using
CSII therapy to manage their diabetes, while providing a low
up-front cost alternative for patients and third-party payors
and reducing the training burden associated with recommending
CSII therapy for healthcare professionals.
Our
Strategy
Our goals are to expand the use of CSII therapy and to become a
leading provider of CSII technology for people with
insulin-dependent diabetes. We believe that the OmniPod
Systems innovative design and
ease-of-use
will significantly expand the pool of candidates and the market
for CSII therapy and make it the CSII therapy system of choice
for healthcare professionals, people with insulin-dependent
diabetes and third-party payors. The principal elements of our
business strategy include:
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Promote awareness of the OmniPod System among thought
leaders, key academic centers, diabetes clinics and top
insulin-prescribing healthcare professionals. We
plan to use our healthcare professional sales force to cultivate
relationships with thought leaders, key academic centers,
clinics and top insulin-prescribing healthcare professionals
throughout the United States to help establish market acceptance
of the OmniPod System. We believe that early acceptance of the
OmniPod System by thought leaders and key recommenders will be
important in establishing the OmniPod System as the system of
choice for CSII therapy. We also plan to use our healthcare
professional sales force to educate the broader referral base of
physicians, certified diabetes educators and other clinicians
focused on diabetes about the advantages of the OmniPod System.
To date, in order to align the demand for the OmniPod System
with our capacity to manufacture the OmniPod, we have only
engaged in limited marketing efforts focused in the Eastern and
Midwestern United States and with some key diabetes
practitioners, academic centers and clinics elsewhere in the
United States. As we further automate and expand our
manufacturing capabilities, we plan to expand our sales and
marketing efforts across the
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United States and internationally, and commence broader
direct-to-consumer campaigns. We also intend to sponsor
marketing studies seeking to demonstrate certain aspects of the
efficacy of the OmniPod System.
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Promote awareness and trial experience of the OmniPod System
among people with insulin-dependent diabetes. As
our production capability expands, we plan to engage in an
increasing number of promotional activities directly targeted to
people with insulin-dependent diabetes. Given the OmniPod
Systems discreet and
easy-to-use
design, we believe we have a substantial advantage over our
competitors in promoting the lifestyle benefits of our solution
to patients. We have recently begun efforts to promote the
OmniPod System directly to people with insulin-dependent
diabetes through online
direct-to-consumer
channels and events. We also encourage diabetes patients to try
the OmniPod System through our Patient Demonstration Kit
Program, which offers them the opportunity to experience the
lifestyle and other benefits of the OmniPod System before making
a purchase. We believe that this program is unique to the
OmniPod System and will significantly differentiate the OmniPod
System from conventional insulin pumps.
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Expand third-party payor coverage for the OmniPod
System. Third-party payor reimbursement is an
extremely important determinant of patient use of CSII therapy.
As of September 30, 2007, we had entered into contracts
establishing reimbursement for the OmniPod System with national
and regional third-party payors covering an estimated
96 million lives. These contracts provide reimbursement in
each of the 30 states in which we currently sell the
OmniPod System. To date, we have primarily focused on
negotiating contracts with private insurers with a presence in
the areas where we have concentrated our initial sales and
marketing efforts, which has been in the Eastern and Midwestern
United States. We plan to continue to work with additional
third-party payors within these areas and, as we broaden our
sales and marketing focus in the remainder of the United States,
to enter into further coverage contracts.
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Enhance our OmniPod production capabilities to increase
capacity and reduce per unit production costs. We
are currently producing the OmniPod on a partially automated
manufacturing line at our Bedford, Massachusetts facility. As
part of our efforts to ensure that we have sufficient capacity
to meet future product demand and are able to achieve
appropriate cost efficiencies, in January 2007 we entered into a
contract manufacturing agreement with a subsidiary of
Flextronics International Ltd. in China for the supply of a
sub-assembly of some of the OmniPods components. In
October 2007, we expanded the scope that agreement to cover the
supply of completed OmniPods. During 2008, we intend to complete
the planned automation of our existing line and we expect
construction of a partially automated manufacturing line will be
completed at a facility in China operated by Flextronics. We
believe that the automation of our manufacturing process and the
successful implementation of our production strategy in China
will substantially reduce our per unit cost of goods sold,
leading to positive gross margins from a current negative level,
and enable us to significantly increase our production capacity,
while maintaining high levels of quality, reliability and
product safety.
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Continue research and development efforts to enhance the
features of the OmniPod System and reduce per unit production
costs. We plan to continue our research and
development efforts to maintain our technology leadership in
CSII therapy and reduce production costs of the OmniPod System.
Our current research and development efforts are focused
primarily on improving the functionality and design of the
OmniPod System as well as developing a new OmniPod System that
incorporates continuous glucose monitoring technology. We have
partnered with Abbott Diabetes Care Inc., a global healthcare
company that develops continuous glucose monitoring technology,
to develop a product that will integrate the receiver portion of
Abbotts continuous glucose monitor, the FreeStyle
Navigator, with the OmniPod System PDM. The FreeStyle Navigator
is currently pending FDA approval and is not available on the
market. We also plan to pursue the use of our proprietary
OmniPod System technology for the delivery of other medications
for the treatment of conditions other than diabetes.
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Maintain a customer-focused approach. The
easy-to-use
patented design and straightforward user interface of the
OmniPod System and our efficient and effective customer training
programs are
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intended to reduce the amount of time and effort associated with
training and supporting patients in the use of the OmniPod
System. We also provide direct technical support by telephone
and Internet 24 hours a day, 7 days a week to
patients, physicians and diabetes educators to promote safe and
successful use of the OmniPod System. We certify healthcare
professionals to train patients on the OmniPod System and
provide patients with
state-of-the-art
training tools. In addition, we have a team of in-house
insurance specialists who assist physicians and patients in
obtaining reimbursement from third-party payors. We believe that
our customer-focused approach is critical to facilitating rapid
conversion of new customers and creating life-long relationships
with our existing customers.
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The
OmniPod System
The OmniPod System utilizes proprietary designs and technology
to combine the functionality of a conventional insulin pump with
that of a blood glucose meter in an innovative, discreet and
easy-to-use
two-part system. We have achieved this patented design by
integrating the insulin reservoir, tubing, infusion set,
inserter, motor and power source of a conventional pump into one
device, the OmniPod, that can be worn directly on the skin, and
integrating the user interface and controls for the OmniPod, the
diabetes management software and a blood glucose meter into a
separate device, the PDM.
The
OmniPod
The OmniPod, measuring 1.6 x 2.4 x 0.7 inches and weighing
1.2 ounces, is a small, lightweight, self-adhesive disposable
insulin infusion device that the patient wears directly on the
skin beneath clothing for up to three days and then replaces.
During wear, the OmniPod delivers precise, personalized doses of
insulin through a small, flexible tube, called a cannula,
inserted beneath the skin once at the beginning of wear via an
automated, hands-free insertion process. The OmniPod is
watertight and does not need to be removed for showering,
swimming or exercise, thereby eliminating the interruptions of
therapy associated with the disconnecting of conventional
insulin pumps.
1 Automated cannula insertion system
2 Water tight housing
3 Insulin reservoir (capacity of 85 to 200
deliverable units)
4 Adhesive
5 Drive mechanism
6 Angled infusion set
7 Electronic circuitry for programming insulin
delivery and enabling wireless communications
8 Power supply (batteries)
OmniPod shown does not include all components.
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The
Personal Diabetes Manager
The PDM, measuring 2.6 x 4.3 x 1.0 inches, is a wireless,
menu-driven, hand-held device, similar in size and appearance to
a personal digital assistant. The patient uses the PDM to
program the OmniPod with personalized insulin delivery
instructions and to check blood glucose levels using FreeStyle
test strips. The PDM facilitates diabetes management by
seamlessly integrating blood glucose results into suggested
bolus calculations, incorporating a food reference library, and
storing and displaying carbohydrate, insulin delivery and blood
glucose records in one device. The PDM also features a large
display, large font and a backlight to enhance readability for
people with various levels of vision acuity in any setting. When
the PDM is not in use, it can be stored conveniently in a purse,
pocket, backpack or briefcase.
1 Large display with intuitive, menu-driven user
interface
2 FreeStyle blood glucose test strip port
3 Incorporated food reference library
4 Diabetes management record storage (up to 5,400
records)
5 Infrared port for data download
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Key
Design Elements
The key design elements of the OmniPod System include:
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Wireless communications. The OmniPod and the
PDM contain integrated electronic circuitry which enables
wireless communications between the two devices at a range of up
to two feet in any direction. The PDM is specifically linked to
the particular OmniPod in use via a wireless protocol
established during the OmniPod activation process, but the two
devices only communicate with each other during programming of
insulin delivery instructions and during OmniPod status checks.
This design enables secure, unique and discreet communications
between the OmniPod and the PDM, allowing the patient to manage
their diabetes with discretion and store the PDM separately when
it is not needed.
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Small, light weight and inexpensive drive
mechanism. The OmniPod provides safe, flexible
and precise insulin delivery using a small, lightweight and
inexpensive drive mechanism. This proprietary drive mechanism
enables millions of carefully-controlled, precise insulin pulses
in flow rates as small as 0.05 units per hour while
minimizing the risk of runaway insulin delivery and enabling the
device to be both wearable and disposable.
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Fully automated cannula insertion. The OmniPod
automatically inserts and immediately retracts the
smallest-gauge introducer needle available for insulin infusion
systems, leaving behind a nine millimeter cannula beneath the
skin at a forty-five degree angle. The entire process, which is
activated wirelessly by pressing a single button on the PDM,
takes less than one second, is fully automated and is virtually
pain-free for the patient. The automated insertion process
promotes consistent placement of the cannula beneath the skin,
reduces patient anxiety and increases the number of insertion
sites available to patients.
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Designed for automated manufacturability. The
OmniPod design incorporates a multi-shot, molded chassis that
serves as the backbone for all functional components in the
device. The chassis facilitates a
plug-and-play
assembly process that eliminates the need for all of the solder
and bonding operations traditionally required to create an
electromechanical device and enables high-speed, automated
manufacturing. This critical design element also reduces the
OmniPods part count, improves manufacturability and
quality and reduces production costs.
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Intuitive user interface. The PDM software
leverages the PDMs large display with an intuitive
menu-driven user interface. The patient is guided step-by-step
through all operations with directions in complete sentences and
plain English. The PDMs innovative Setup Wizard walks the
patient through the establishment of key starting parameters
such as the current time and date, initial basal rate, maximum
bolus dose and blood glucose level goals, as well as key
therapeutic options such as the temporary basal rate and
suggested bolus calculator settings.
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Fully-integrated blood glucose meter. The PDM
incorporates a blood glucose meter that eliminates the need for
the patient to carry a separate meter. The patient inserts a
FreeStyle test strip into the PDMs test strip port,
applies a blood sample of only 0.3 microliters, and the PDM,
using FreeStyle technology, displays a blood glucose result in
an average of seven seconds. The PDM facilitates diabetes
management by automatically integrating these blood glucose
results directly into suggested bolus calculations and diabetes
management records.
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Using
the OmniPod System
We designed the OmniPod System to simplify the use and training
of CSII therapy, with the fewest steps to starting insulin
delivery of any commercially-available CSII therapy system. We
believe that the OmniPod Systems simple use model will
enable more people with insulin-dependent diabetes to take
advantage of CSII therapy and will significantly reduce the
training burden for healthcare professionals recommending CSII
therapy.
Once the patient has completed the initial set-up of the PDM,
the patient simply:
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fills a new OmniPod with the amount of insulin needed for up to
three days. During fill, the PDM wirelessly downloads the
patients insulin delivery instructions to the OmniPod;
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applies the self-adhesive OmniPod to the preferred infusion
site; and
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presses Start on the PDM to activate virtually pain-free
automated cannula insertion and begin basal insulin delivery.
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Once insulin delivery is started, the patient uses the PDM to
adjust basal rates, program bolus doses, review diabetes
management history records and check blood glucose levels as
needed. At the end of three days or when the insulin supply is
depleted, the OmniPod System reminds the patient that they need
to change the OmniPod. The patient then removes the OmniPod, and
fills and applies a new one.
Sales and
Marketing
Our sales and marketing effort is focused on generating demand
and acceptance of the OmniPod System among healthcare
professionals, people with insulin-dependent diabetes and
third-party payors. Our marketing strategy is to build awareness
for the benefits of the OmniPod System through a wide range of
education programs, patient demonstration programs, support
materials and events at the national, regional and local levels.
As of September 30, 2007, we had a sales and marketing team
of 58 employees, which includes 28 employees in training
and customer support. To date, in order to align the demand for
the OmniPod System with our capacity to manufacture the OmniPod,
we have only engaged in limited marketing efforts focused in the
Eastern and Midwestern United States and with some key diabetes
practitioners, academic centers and clinics elsewhere in the
United States. As we further automate and expand our
manufacturing capabilities, we plan to expand our sales and
marketing efforts across the United States and internationally,
and commence broader
direct-to-consumer
campaigns.
Healthcare professional focused
initiatives. We believe that healthcare
professionals play an important role in selecting patients for
CSII therapy and educating them about CSII technology options.
As of September 30, 2007, our healthcare professional sales
force consisted of two Key Account managers and 16 territory
managers, who call on endocrinologists, internal medicine
physicians focused on diabetes and certified diabetes educators.
As of September 30, 2007, our territory managers were
supported by 14 clinical specialists who certify healthcare
professionals to train patients on the OmniPod and who provide
ongoing clinical expertise and support during initial customer
training. Our marketing to healthcare professionals focuses on
positioning the OmniPod System as an innovative continuous
insulin delivery system that makes CSII therapy easier to
recommend. We plan to augment our healthcare professional
focused marketing efforts with market studies to assess various
aspects of the OmniPod Systems functionality and relative
efficacy, which we believe will assist us in generating
additional patient demand for the OmniPod System among the
insulin-dependent diabetes population.
Some of our recent healthcare professional focused marketing
initiatives include:
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the Key Account/Key Opinion Leader Program through which we
cultivate relationships with industry thought leaders, key
academic centers, clinics and top insulin-prescribing healthcare
professionals throughout the United States in order to establish
market acceptance of the OmniPod System;
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presentations and product demonstrations at key industry
meetings including the American Diabetes Association Scientific
Sessions, the American Association of Diabetes Educators Annual
Meeting and the Diabetes Technology Meeting; and
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the OmniPod System
30-Day
Experience Program, through which clinicians can place their
first patient on the OmniPod System for 30 days at no
charge to gain personal experience with the OmniPod System and
experience the ease of training patients on the OmniPod System.
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Patient focused initiatives. We sell the
OmniPod System directly to patients through referrals from
healthcare professionals and through patient leads generated
through our promotional activities. Our marketing to patients
focuses on positioning the OmniPod System as an innovative
continuous insulin delivery system that makes diabetes a smaller
part of life and strongly promotes the lifestyle benefits
afforded by the OmniPod System.
Some of our recent patient focused marketing initiatives include:
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The Office Demonstration Kit Program, through which we provide
healthcare professionals with an OmniPod System Starter Kit to
enable them to demonstrate the OmniPod System to patients in the
office.
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Our Patient Demonstration Kit Program that provides patients
with a free trial of the OmniPod System by wearing a
saline-filled OmniPod for three days and using a virtual PDM.
This unique program enables potential customers to experience
the lifestyle benefits, virtually pain-free insertion and ease
of use of the OmniPod System before making a purchase. Given the
unique design of the OmniPod System, we believe that we are the
only manufacturer of CSII therapy devices capable of providing
this type of program and believe it will provide us with a
substantial advantage in marketing to patients that are
considering or skeptical about CSII therapy.
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Our website, http://www.MyOmniPod.com, including PodWatch, our
online newsletter, both of which have experienced substantial
traffic since we launched the OmniPod System. Our website has
been nominated for multiple design awards and includes product
photography, animated product demonstrations, video of the
OmniPod System in use and customer testimonials.
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Presentations and product demonstrations at our own OmniPod
System consumer information sessions and other patient-focused
diabetes conferences, events and support groups.
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Promotional materials distributed directly from us or through
the healthcare professional highlighting the benefits of the
OmniPod System.
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Marketing research. In addition to our
initiatives focused on healthcare professionals and patients, we
also plan to continue evaluating the benefits of the OmniPod
System in marketing research efforts to assess certain aspects
of the efficacy of the OmniPod System.
Some potential studies include:
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an evaluation of the OmniPod System by various user
sub-populations,
such as very young pediatric patients, women with gestational
diabetes and cancer patients undergoing chemotherapy;
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an evaluation of the OmniPod System in the hospital setting,
both for diabetes patients and for glucose control in
non-diabetic patients after surgery, transplantation, trauma and
other circumstances in which normal metabolic function may be
disrupted; and
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our participation in studies funded by the Juvenile Diabetes
Research Foundation concerning the development of an artificial
pancreas.
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Training
and Customer Support
Given the chronic nature of diabetes, we believe that thorough
training and ongoing customer support are important to
developing a long-term relationship with the patient. We believe
that it is crucial for patients to be trained as the experts in
the management of their diabetes. At the same time, we believe
that providing
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reliable and effective customer support reduces patients
anxiety and contributes to overall product satisfaction. In
order to provide a complete training and customer support
solution, we utilize a combination of live training in the
office of the healthcare professional, interactive media, as
well as online and telephonic support that is available
24 hours a day, 7 days a week. As of September 30,
2007, we had a training and customer support team of
28 employees.
Training. We believe that the amount of effort
required for healthcare professional offices to train patients
to use CSII therapy has been a key barrier limiting penetration
of this therapy. With the fewest steps required to start insulin
delivery, the OmniPod System was designed to be easy to use and
to significantly reduce the burden associated with training
patients to use CSII therapy.
We are committed to ensuring that each patient receives product
training and education to take advantage of the benefits of the
OmniPod System. To facilitate and make the customer training as
efficient and effective as possible, we have developed an
Interactive Training CD that is included with the Starter Kit
shipped to new customers. The Interactive Training CD provides
patients with an overview of CSII therapy and educates patients
on how the OmniPod System works using easy-to-understand lessons
and interactive tutorials. Utilization of the Interactive
Training CD reduces product-related training time and allows
clinic staff to spend more time on basic diabetes management
training and therapy optimization.
Our training support for healthcare professional offices is
tailored to the individual needs of recommending offices. In
some cases, we certify office-based healthcare professionals to
train patients on the OmniPod System through our Certified Pod
Trainer Program. In addition, we may assist them with the first
customer training as part of the process of transitioning the
ongoing training responsibilities to these healthcare
professionals. In other cases, a member of our Certified Pod
Trainer consultant group will conduct the patient training for
an office that does not have the capability or capacity to
complete patient training. We have established a network of over
100 Certified Pod Trainers, or CPTs, who will conduct customer
training at the healthcare site. We provide all CPTs with a
training kit that includes a methodology and documentation for
training patients on effective use of the OmniPod System. We
believe the CPT Program is a valuable way for us to develop and
maintain relationships with key providers in the marketplace.
Customer Support. We seek to provide our
customers with high quality customer support, from product
ordering to insurance investigation, fulfillment and ongoing
support. We have integrated our customer support systems with
our sales, reimbursement, billing, telephone and website in
order to provide customers with seamless and reliable customer
support.
Our customer support staff is proactively involved with both
healthcare professionals and patients. When a patient initiates
their order for the OmniPod System, our customer support staff
assist the patient with completing order forms and collecting
additional data as required by the patients insurance
provider. Once the order forms are complete, we investigate the
patients insurance coverage for the OmniPod System and
contact the customer to notify them of benefits. We believe it
is important from a customer satisfaction perspective, as well
as a healthcare professional perspective, that we handle the
insurance investigation process efficiently and promptly. We
also offer healthcare professionals assistance in generating
insurance appeals for customers who are denied coverage. We
believe that our insurance investigation infrastructure will
enable us to effectively support the growing demand for the
OmniPod System.
Upon approval from the customer, the customers order is
shipped to the customers home and our customer support
staff notifies the provider of the ship date and reviews
training plans with the customer. A customer support
representative follows up with new customers at the first
re-order and patients can subsequently be placed on automatic
re-order for OmniPod supplies, simplifying the diabetes
management process and preventing patients from experiencing
inadvertent supply shortages.
Research
and Development
As of September 30, 2007, our research and development
staff consisted of 26 people, including 24 engineers with
expertise in mechanical, electrical and software engineering
disciplines. Our team of engineers has many years of experience
in relevant areas of the medical device industry, including
external and implantable insulin pumps, ambulatory pumps, heart
pumps, pacemakers, infusion sets and numerous other
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critical care devices. Our current research and development
efforts are focused primarily on increased functionality, design
for ease-of-use and reduction of production costs of the OmniPod
System.
We are also working toward the integration of our existing
OmniPod System with continuous glucose monitoring technology. We
have an agreement with Abbott Diabetes Care Inc., a global
healthcare company that develops continuous glucose monitoring
technology, to develop a system that will integrate the receiver
portion of Abbotts continuous glucose monitor, the
FreeStyle Navigator, with the OmniPod System PDM. The FreeStyle
Navigator is currently pending FDA approval and is not available
on the market. To date, the FDA has approved, as an adjunct to
traditional self-testing, a limited number of continuous glucose
monitoring systems, including those manufactured by Medtronic,
Inc. and DexCom Inc. All of these products have limited
capabilities, and none of them is labeled as a substitute for
current blood glucose testing where patients need to draw blood
for testing. This means that no continuous glucose monitor,
whether currently on the market or pending FDA approval, can be
used to determine insulin infusion amounts. It is unknown when,
if ever, any continuous glucose monitoring systems will be
approved as a replacement for current blood glucose monitors.
We believe that the potential uses of our proprietory OmniPod
System technology are not limited to the treatment of diabetes.
We plan to pursue the use of the OmniPod System technology for
the delivery of other medications that may be administered
subcutaneously in precise and varied doses over an extended
period of time. However, there can be no assurance that we will
be able to adapt the OmniPod System technology for such uses or
successfully compete in new areas.
Scientific
Advisory Board
Our scientific advisory board provides specific expertise in the
areas of clinical applications, physician education and research
and development relevant to our business. Scientific advisory
board members meet with our management from time to time to
discuss our present and long-term activities in these areas. Our
scientific advisory board members include:
Robert Sherwin, M.D.
(Chairman). Dr. Sherwin is C.N.H. Long
Professor of Medicine, Director of the Yale Center for Clinical
Investigation and Interim Section Chief of Endocrinology
and Metabolism at Yale University in New Haven, Connecticut.
John Buse, M.D., Ph.D. Dr. Buse
is Chief of the Division of Endocrinology and Director of the
Diabetes Care Center at the University of North Carolina in
Chapel Hill, North Carolina.
Steven Edelman, M.D. Dr. Edelman is
Professor of Medicine, Diabetes and Endocrinology at the
University of California in San Diego and Founder and
Director of Taking Control of Your Diabetes.
Lois Jovanovic, M.D. Dr. Jovanovic
is Chief Executive Officer and Chief Scientific Officer at the
Sansum Diabetes Research Institute in Santa Barbara,
California.
Francine Kaufman, M.D. Dr. Kaufman
is Chair of the Division of Endocrinology and Metabolism at the
Childrens Hospital Los Angeles and Professor of Pediatrics
at the University of Southern California School of Medicine in
Los Angeles, California.
Howard Wolpert, M.D. Dr. Wolpert is
Senior Physician and Director of the Insulin Pump Program at the
Joslin Diabetes Center at Harvard Medical School in Boston,
Massachusetts.
Manufacturing
and Quality Assurance
We believe a key contributing factor to the overall
attractiveness of the OmniPod System is the disposable OmniPod
insulin infusion device. To manufacture sufficient volumes of
the OmniPod, each of which is worn for up to three days and then
replaced, and to achieve a low per unit production cost, we have
designed the OmniPod to be manufactured through a highly
automated process.
Currently, the sale price of the OmniPod System is not
sufficient to cover our direct manufacturing costs. By
increasing our production volumes of the OmniPod, we will be
able to reduce our raw material costs and improve absorption of
manufacturing overhead costs. This is important to allow us to
achieve profitability.
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We are currently producing the OmniPod on a partially automated
manufacturing line at our facility in Bedford, Massachusetts.
During 2008, we intend to complete the planned automation of
this manufacturing line. Pending construction and installation
of the remaining automated manufacturing equipment that we plan
to use, we are manually performing these steps in the
manufacturing process, which limits our ability to increase our
manufacturing capacity and decrease our per unit cost of goods
sold, thereby causing us to incur negative gross margins. In
addition, we expect that during 2008 construction of a partially
automated manufacturing line will be completed at a facility in
China operated by a subsidiary of Flextronics International Ltd.
We currently purchase a sub-assembly of some of the
OmniPods components from Flextronics. Toward the end of
2008, we intend to purchase complete OmniPods from Flextronics.
On January 3, 2007, we entered into an agreement with a
subsidiary of Flextronics International Ltd. for the manufacture
and supply of a sub-assembly of the chassis for the OmniPods. On
October 4, 2007, we expanded the scope of this agreement to
cover the manufacture and supply of complete OmniPods. Under the
agreement, Flextronics has agreed to supply us, as a
non-exclusive supplier, with OmniPods at agreed upon prices per
unit pursuant to a rolling
12-month
forecast that we provide to Flextronics. The initial term of the
agreement is three years from January 3, 2007, with
automatic one-year renewals. The agreement may be terminated at
any time by either party upon prior written notice given no less
than a specified number of days prior to the date of
termination, which number of days is intended to provide the
parties with sufficient time to make alternative arrangements in
the event of termination. Pursuant to this agreement, we expect
to begin purchasing OmniPods from Flextronics following the
completion of the construction of the manufacturing line for the
OmniPod at one of Flextronics facilities in China. By
purchasing OmniPods manufactured by Flextronics in China while
continuing to manufacture OmniPods on our manufacturing line in
Bedford, we will be able to substantially increase production
volumes for the OmniPod and reduce our per unit production cost.
Our current OmniPod manufacturing capacity is approximately
45,000 OmniPods per month. By completing the planned automation
of our existing manufacturing line in Bedford, Massachusetts and
by purchasing complete OmniPods from Flextronics, we expect to
increase the production capacity of OmniPods to in excess
of 200,000 OmniPods per month toward the end of 2008.
We currently manufacture OmniPods at full capacity. During the
three months ended September 30, 2007, we expect to incur
an impairment charge related to certain production machinery and
equipment in the amount of approximately $1.0 million. The
expected impairment charge would result from our ongoing
improvements to our product design and associated manufacturing
processes, with the aim of achieving lower unit costs, and the
ongoing upgrades to our manufacturing process, which has
rendered certain equipment obsolete.
Currently, the OmniPod and PDM are assembled and tested in our
manufacturing facility in Bedford, Massachusetts. However, we
rely on outside vendors for most of the components, some
sub-assemblies, and various services used in the manufacture of
the OmniPod System. For example, we rely on Phillips Plastic
Corporation to manufacture and supply a number of injection
molded components of the OmniPod and on Freescale Semiconductor,
Inc. to manufacture and supply the application specific
integrated circuit that is incorporated into the OmniPod. In
addition, Flextronics currently supplies a sub-assembly of
certain components for the OmniPod, and during 2008 we intend to
purchase complete OmniPods from Flextronics. Each of these
suppliers is a sole-source supplier. We have never experienced
significant disruption of these components and services and we
have created safety stocks of our components to address changes
in market demand. However, for certain of these components,
arrangements for additional or replacement suppliers will take
time and result in delays, in part because of the FDA approval
process and because of the custom nature of various parts we
design. Any interruption or delay in the supply of components,
or our inability to obtain components from alternate sources at
acceptable prices in a timely manner, could harm our business,
financial condition and results of operations.
Generally, all outside vendors produce the components to our
specifications and in many instances to our designs and they are
audited annually by our Quality Assurance Department to ensure
conformity with the specifications, policies and procedures for
our devices. Our Quality Assurance Department also inspects and
tests our devices at various steps in the manufacturing cycle to
facilitate compliance with our devices stringent
specifications. We have received approval from TÜV America
Inc., a Notified Body to the International Standards
Organization, or ISO, of our quality system standards. These
approvals are ISO 13485 standards that
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include design control requirements. Certain processes utilized
in the manufacture and test of our devices have been verified
and validated as required by the FDA and other regulatory
bodies. As a medical device manufacturer, our manufacturing
facility and the facilities of our suppliers and sterilizer are
subject to periodic inspection by the FDA and certain
corresponding state agencies.
As of September 30, 2007, we had 91 employees in
operations, manufacturing and quality assurance.
Intellectual
Property
We believe that to maintain a competitive advantage, we must
develop and preserve the proprietary aspect of our technologies.
We rely on a combination of copyright, patent, trademark, trade
secret and other intellectual property laws, non-disclosure
agreements and other measures to protect our proprietary rights.
Currently, we require our employees, consultants and advisors to
execute non-disclosure agreements in connection with their
employment, consulting or advisory relationships with us, where
appropriate. We also require our employees, consultants and
advisors who we expect to work on our current or future products
to agree to disclose and assign to us all inventions conceived
during the work day, developed using our property or which
relate to our business. Despite any measures taken to protect
our intellectual property, unauthorized parties may attempt to
copy aspects of the OmniPod System or to obtain and use
information that we regard as proprietary.
Patents. As of September 30, 2007, we had
obtained 17 issued United States patents, and had
31 additional pending U.S. patent applications. We
believe it will take up to four years, and possibly longer, for
the most recent of these U.S. patent applications to result
in issued patents. Our issued U.S. patents expire between
2020 and 2022, assuming we pay all required maintenance fees. We
are also seeking patent protection for our proprietary
technology in Europe, China, Japan, India and other countries
and regions throughout the world. The issued patents and pending
patent applications cover, among other things:
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the basic architecture of the OmniPod System;
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the OmniPod shape memory alloy drive system;
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the OmniPod System cannula insertion system; and
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various novel aspects of the OmniPod System and potential next
generation OmniPod Systems.
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On January 23, 2002, we entered into a development and
license agreement with TheraSense, Inc., regarding the
incorporation of the FreeStyle blood glucose meter in the PDM.
TheraSense was subsequently acquired by Abbott Laboratories and
is currently a wholly-owned subsidiary of Abbott Laboratories
known as Abbott Diabetes Care, Inc. Under this agreement, we
were granted a non-exclusive, fully paid, non-transferable and
non-sublicensable license in the United States under patents and
other relevant technical information relating to the Abbott
FreeStyle blood glucose meter for the purpose of making, using
and selling the OmniPod System incorporating an Abbott FreeStyle
blood glucose meter. The term of the agreement is for
seven years, with automatic renewals for subsequent
three-year periods unless either party provides written notice
of termination at least 90 days prior to the scheduled
expiration of the then-current term. The current term is
scheduled to expire in January 2009. The agreement may also be
terminated by Abbott Diabetes Care, Inc. if it discontinues its
FreeStyle blood glucose meter or test strips or by either party
if the other party is acquired by a competitor of the first
party or materially breaches its obligations under the agreement.
In a letter dated March 13, 2007, Medtronic, Inc. invited
us to discuss our taking a license to certain Medtronic
patents. The patents referenced by this letter relate to
technology that is material to our business. We have not had any
substantive discussions with Medtronic concerning this matter
since our receipt of this letter. While we believe that the
OmniPod System does not infringe these patents, we would
consider resolving the matter on reasonable terms. If we are
unable to reach agreement with Medtronic, Inc. on this matter,
they may sue us for infringement. We believe we would have
meritorious defenses to any such suit.
Trademarks. We have registered the trademarks
OMNIPOD and the OMNIPOD design with the United States
Patent and Trademark Office on the Principal Register. We have
applied with the United States Patent and Trademark Office to
register the trademarks INSULET and POD. The INSULET mark is
subject to
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an ongoing opposition proceeding. The POD mark, which has been
allowed and for which the opposition period has expired, will be
registered upon filing a declaration of use.
Competition
The medical device industry is intensely competitive, subject to
rapid change and significantly affected by new product
introductions and other market activities of industry
participants. The OmniPod System competes with a number of
existing insulin delivery devices as well as other methods for
the treatment of diabetes. Medtronic MiniMed, a division of
Medtronic, Inc., has been the market leader for many years and
has the majority share of the conventional insulin pump market
in the United States. Other significant suppliers in the United
States are Animas Corporation, a division of Johnson &
Johnson, and Deltec, a division of Smiths Medical MD, Inc. In
October 2006, following the lifting of an FDA ban on the import
of Disetronic insulin pumps, Roche Disetronic, a division of
Roche Diagnostics, announced its re-entry into the conventional
insulin pump market in the United States.
All of these competitors are large, well-capitalized companies
with significantly more market share and resources than we have.
As a consequence, they are able to spend more aggressively on
product development, marketing, sales and other product
initiatives than we can. Many of these competitors have:
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significantly greater name recognition;
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established relations with healthcare professionals, customers
and third-party payors;
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established distribution networks;
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additional lines of products, and the ability to offer rebates
or bundle products to offer higher discounts or other incentives
to gain a competitive advantage;
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greater experience in conducting research and development,
manufacturing, clinical trials, marketing and obtaining
regulatory approval for products; and
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greater financial and human resources for product development,
sales and marketing and patent litigation.
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The OmniPod System and conventional insulin pumps, both of which
provide CSII therapy, also face competition from conventional
and MDI therapy, both of which are substantially less expensive
than CSII therapy, as well as from newer methods for the
treatment of diabetes, such as inhaled insulin. Existing
diabetes-focused pharmaceutical companies, including those
marketing or developing inhaled insulin products, include Abbott
Laboratories, Eli Lilly and Company, MannKind Corporation, Novo
Nordisk AS, Pfizer Inc. and Takeda Pharmaceuticals Company
Limited.
Government
Regulation
The OmniPod System is a medical device subject to extensive and
ongoing regulation by the U.S. Food and Drug
Administration, or FDA, and other regulatory bodies. FDA
regulations govern product design and development, pre-clinical
and clinical testing, manufacturing, labeling, storage,
pre-market clearance or approval, advertising and promotion, and
sales and distribution.
FDAs Pre-Market Clearance and Approval
Requirements. Unless an exemption applies, each
medical device we seek to commercially distribute in the United
States will require either a prior 510(k) clearance or a
pre-market approval, or PMA, from the FDA. We have obtained
510(k) clearance for the OmniPod System. We expect that the
product which we are developing that integrates continuous
glucose monitoring capability with our existing OmniPod System
would require a PMA. Both of these processes can be expensive
and lengthy and entail significant user fees, unless exempt.
In order to obtain pre-market approval and, in some cases, a
510(k) clearance, a product sponsor must conduct well controlled
clinical trials designed to test the safety and effectiveness of
the product. Conducting clinical trials generally entails a
long, expensive and uncertain process that is subject to delays
and failure at any stage. The data obtained from clinical trials
may be inadequate to support approval or clearance of a
submission. In addition, the occurrence of unexpected findings
in connection with clinical trials may prevent
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or delay obtaining approval or clearance. If we conduct clinical
trials, they may be delayed or halted, or be inadequate to
support approval or clearance.
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510(k) Clearance. To obtain 510(k) clearance
for any of our potential future devices (or for certain
modifications to devices that have received 510(k) clearance),
we must submit a pre-market notification demonstrating that the
proposed device is substantially equivalent to a previously
cleared 510(k) device or a pre-amendment device that was in
commercial distribution before May 28, 1976 for which the
FDA has not yet called for the submission of a PMA application.
The FDAs 510(k) clearance pathway generally takes from
three to twelve months from the date the application is
completed, but can take significantly longer. After a medical
device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would
constitute a significant change in its intended use, requires a
new 510(k) clearance.
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PMA. Devices deemed by the FDA to pose the
greatest risk, such as life-sustaining, life-supporting or
implantable devices, or devices deemed not substantially
equivalent to a previously cleared 510(k) device or device in
commercial distribution before May 28, 1976 for which PMAs
have not been required, generally require a PMA before they can
be commercially distributed. A PMA application must be supported
by extensive data, including technical, pre-clinical, clinical
trials, manufacturing and labeling to demonstrate to the
FDAs satisfaction the safety and effectiveness of the
device. After a PMA application is complete, the FDA begins an
in-depth review of the submitted information, which generally
takes between one and three years, but may take significantly
longer. After any pre-market approval, a new pre-market approval
application or application supplement may be required in the
event of modifications to the device, its labeling, intended use
or indication or its manufacturing process. In addition, any PMA
approval may be conditioned upon the manufacturer conducting
post-market surveillance and testing.
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Ongoing Regulation by FDA. Even after a device
receives clearance or approval and is placed on the market,
numerous regulatory requirements apply. These include:
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establishment registration and device listing;
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quality system regulation, which requires manufacturers,
including third party manufacturers, to follow stringent design,
testing, control, documentation and other quality assurance
procedures during all aspects of the manufacturing process;
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labeling regulations and FDA prohibitions against the promotion
of products for uncleared, unapproved or off-label
uses, and other requirements related to promotional activities;
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medical device reporting regulations, which require that
manufacturers report to the FDA if their device may have caused
or contributed to a death or serious injury or malfunctioned in
a way that would likely cause or contribute to a death or
serious injury if the malfunction were to recur;
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corrections and removals reporting regulations, which require
that manufacturers report to the FDA field corrections and
product recalls or removals if undertaken to reduce a risk to
health posed by the device or to remedy a violation of the
Federal Food, Drug and Cosmetic Act that may present a risk to
health; and
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post-market surveillance regulations, which apply when necessary
to protect the public health or to provide additional safety and
effectiveness data for the device.
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Failure to comply with applicable regulatory requirements can
result in enforcement action by the FDA, which may include any
of the following sanctions: fines, injunctions, civil or
criminal penalties, recall or seizure of our current or future
products, operating restrictions, partial suspension or total
shutdown of production, refusing our request for 510(k)
clearance or PMA approval of new products, rescinding previously
granted 510(k) clearances or withdrawing previously granted PMA
approvals.
We are subject to announced and unannounced inspections by the
FDA, and these inspections may include the manufacturing
facilities of our subcontractors. We received our first FDA
inspection of our facility in August 2006. During its
inspection, the FDA issued a Form 483, which is a notice of
inspection observations. Two minor items were identified and the
corrective action for both were initiated prior to the
completion of the inspection. The responses provided to the FDA
were deemed adequate and no further action was requested. We
received our second FDA inspection of our facility in August
2007. During its inspection, the FDA issued a Form 483, which
included
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five minor observations. Of those five observations, two were
corrected during the course of the inspection and reviewed to
the satisfaction of the FDA. Corrective actions relating to the
remaining three observations are underway. We expect that the
FDA will review those corrective actions during its next
inspection.
International sales of medical devices are subject to foreign
government regulations, which may vary substantially from
country to country. The time required to obtain approval by a
foreign country may be longer or shorter than that required for
FDA approval, and the requirements may differ. There is a trend
towards harmonization of quality system standards among the
European Union, United States, Canada and various other
industrialized countries.
Licensure. Several states require that durable
medical equipment, or DME, providers be licensed in order to
sell products to patients in that state. Certain of these states
require that DME providers maintain an in-state location.
Although we believe we are in compliance with all applicable
state regulations regarding licensure requirements, if we were
found to be noncompliant, we could lose our licensure in that
state, which could prohibit us from selling our current or
future products to patients in that state. In addition, we are
subject to certain state laws regarding professional licensure.
We believe that our certified diabetes educators are in
compliance with all such state laws. If our educators or we were
to be found non-compliant in a given state, we may need to
modify our approach to providing education, clinical support and
customer service.
Federal Anti-Kickback and Self-Referral
Laws. The Federal Anti-Kickback Statute prohibits
the knowing and willful offer, payment, solicitation or receipt
of any form of remuneration in return for, or to induce the:
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referral of a person;
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furnishing or arranging for the furnishing of items or services
reimbursable under Medicare, Medicaid or other governmental
programs; or
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purchase, lease, or order of, or the arrangement or
recommendation of the purchasing, leasing, or ordering of any
item or service reimbursable under Medicare, Medicaid or other
governmental programs.
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We provide the initial training to patients necessary for
appropriate use of the OmniPod System either through our own
diabetes educators or by contracting with outside diabetes
educators that have completed a Certified Pod Trainer training
course. Outside diabetes educators are reimbursed for their
services at fair market value. Although we believe that these
arrangements do not violate the law, regulatory authorities may
determine otherwise, especially as enforcement of this law
historically has been a high priority for the federal
government. In addition, because we may provide some coding and
billing information to purchasers of the OmniPod System, and
because we cannot assure that the government will regard any
billing errors that may be made as inadvertent, the federal
anti-kickback legislation may apply to us. Noncompliance with
the federal anti-kickback legislation can result in exclusion
from Medicare, Medicaid or other governmental programs,
restrictions on our ability to operate in certain jurisdictions,
as well as civil and criminal penalties, any of which could have
an adverse effect on our business and results of operations.
Federal law also includes a provision commonly known as the
Stark Law, which prohibits a physician from
referring Medicare or Medicaid patients to an entity providing
designated health services, including a company that
furnishes durable medical equipment, in which the physician has
an ownership or investment interest or with which the physician
has entered into a compensation arrangement. Violation of the
Stark Law could result in denial of payment, disgorgement of
reimbursements received under a noncompliant arrangement, civil
penalties, and exclusion from Medicare, Medicaid or other
governmental programs. Although we believe that we have
structured our provider arrangements to comply with current
Stark Law requirements, these arrangements may not expressly
meet the requirements for applicable exceptions from the law.
Additionally, as some of these laws are still evolving, we lack
definitive guidance as to the application of certain key aspects
of these laws as they relate to our arrangements with providers
with respect to patient training. We cannot predict the final
form that these regulations will take or the effect that the
final regulations will have on us. As a result, our provider
arrangements may ultimately be found to be not in compliance
with applicable federal law.
Federal False Claims Act. The Federal False
Claims Act provides, in part, that the federal government may
bring a lawsuit against any person whom it believes has
knowingly presented, or caused to be presented, a false or
fraudulent request for payment from the federal government, or
who has made a false statement or
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used a false record to get a claim approved. In addition,
amendments in 1986 to the Federal False Claims Act have made it
easier for private parties to bring qui tam
whistleblower lawsuits against companies. Penalties include
fines ranging from $5,500 to $11,000 for each false claim, plus
three times the amount of damages that the federal government
sustained because of the act of that person. At present, we do
not receive reimbursement from, or submit claims to, the federal
government, although we intend in the future to pursue
reimbursement coverage under one or more federal programs, such
as Medicare. In any event, we believe that we are in compliance
with the federal governments laws and regulations
concerning the filing of reimbursement claims.
Civil Monetary Penalties Law. The Federal
Civil Monetary Penalties Law prohibits the offering or
transferring of remuneration to a Medicare or Medicaid
beneficiary that the person knows or should know is likely to
influence the beneficiarys selection of a particular
supplier of Medicare or Medicaid payable items or services.
Noncompliance can result in civil money penalties of up to
$10,000 for each wrongful act, assessment of three times the
amount claimed for each item or service and exclusion from the
Federal healthcare programs. We believe that our arrangements
comply with the requirements of the Federal Civil Monetary
Penalties Law.
State Fraud and Abuse Provisions. Many states
have also adopted some form of anti-kickback and anti-referral
laws and false claims act. We believe that we are conforming to
such laws. Nevertheless, a determination of liability under such
laws could result in fines and penalties and restrictions on our
ability to operate in these jurisdictions.
Administrative Simplification of the Health Insurance
Portability and Accountability Act of 1996. The
Health Insurance Portability and Accountability Act of 1996, or
HIPAA, mandated the adoption of standards for the exchange of
electronic health information in an effort to encourage overall
administrative simplification and enhance the effectiveness and
efficiency of the healthcare industry. Ensuring privacy and
security of patient information is one of the key factors
driving the legislation. We believe we are in substantial
compliance with the applicable HIPAA regulations.
Third-Party
Reimbursement
Our products are generally purchased directly by patients, and
we generally bill third-party payors on behalf of our patients.
Our fulfillment and reimbursement systems are fully integrated
such that product is shipped only after confirmation of a valid
physicians order and current health insurance information.
We maintain an insurance benefits investigation department
consisting of three people to simplify and expedite claims
processing and to assist patients in obtaining third-party
reimbursement.
As of September 30, 2007, we had entered into contracts
establishing reimbursement for the OmniPod System with national
and regional third-party payors covering an estimated
96 million lives. To date, we have primarily focused on
negotiating contracts with third-party payors with a presence in
the areas where we have concentrated our initial sales and
marketing efforts, which has been on the East Coast and
Midwestern regions of the United States. We are continuing to
work with additional third-party payors within these areas and,
as we expand our sales and marketing focus, in the remainder of
the United States to establish coverage contracts. Our coverage
contracts with third-party payors typically have a term of
between one and three years and set coverage amounts during that
term.
We are an approved Medicare provider and current Medicare
coverage for CSII therapy does exist. However, existing Medicare
coverage for CSII therapy is based on the pricing structure
developed for conventional insulin pumps. Currently, we believe
that the coding verification for Medicare reimbursement of the
OmniPod System is inappropriate and we are therefore in the
process of seeking appropriate coding verification. As a result,
we have decided to focus our initial efforts in establishing
reimbursement for the OmniPod System on negotiating contracts
with private insurers.
Third-party payors may decline to reimburse for procedures,
supplies or services determined not to be medically
necessary or reasonable. In a limited number
of cases, some third-party payors have declined to reimburse for
a particular patient because such patient failed to meet its
criteria, most often because the patient already received
reimbursement for an insulin pump from that payor within the
warranty period, which is generally four years, or because the
patient does not meet their medical criteria for an insulin
infusion device.
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Common medical criteria for third-party payors approving
reimbursement for CSII therapy include a patient having elevated
A1c levels, a history of recurring hypoglycemia, fluctuations in
blood glucose levels prior to meals or upon waking or severe
glycemic variability. We try to deter and reverse decisions
denying reimbursement through education. Although our efforts
are usually successful, such reimbursement may become less
likely in the future as pressure increases for lower healthcare
costs, particularly near-term costs.
There is widespread concern that healthcare market initiatives
in the United States may lead third-party payors to decline or
further limit reimbursement. The extent to which third-party
payors may determine that use of the OmniPod System will save
costs or will at least be cost effective is highly uncertain,
and it is possible, especially for diabetes, that they will
merely focus on the lower initial costs associated with
injection therapy or will otherwise limit reimbursement for
insulin infusion systems or other products we develop. Because
of uncertainties regarding the possible healthcare reform
measures that could be proposed in the future and initiatives to
reduce costs by private payors, we cannot predict whether
reimbursement for our current or future products will be
affected or, if affected, the extent of any effect. The
unavailability of third-party coverage or the inadequacy of
reimbursement for our current or future products would adversely
affect our business, financial condition and results of
operations.
Employees
As of September 30, 2007, we had 206 full-time
employees, including 24 in field sales and sales administration,
five in marketing, one in clinical, nine in reimbursement, 13 in
customer care, 15 in training, 91 in operations, manufacturing
and quality assurance, 26 in engineering and research and
development and 22 in general and administrative functions. None
of our employees is represented by a collective bargaining
agreement and we have never experienced any work stoppage. We
believe that our employee relations are good.
Facilities
We lease approximately 53,000 square feet of manufacturing,
laboratory and office space at 9 Oak Park Drive, Bedford,
Massachusetts under a lease expiring in 2009.
Legal
Proceedings
We are not currently subject to any material pending legal
proceedings.
67
Executive
Officers and Directors
The following table shows information about our executive
officers and directors as of September 30, 2007.
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Name
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|
Age
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|
Position
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Duane DeSisto
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|
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53
|
|
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President, Chief Executive Officer and Director
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Carsten Boess
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|
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41
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Chief Financial Officer
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Luis Malavé
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|
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44
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|
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Chief Operating Officer
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Lars Boesgaard
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|
|
38
|
|
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Vice President of Finance
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Stephen Bubrick
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|
|
43
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|
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Vice President of Customer Care
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Robert Campbell
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|
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38
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|
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Vice President of Clinical Services and Research
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Ruthann DePietro
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|
|
48
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|
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Vice President of Quality and Regulatory Affairs
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John Garibotto
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|
|
42
|
|
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Vice President of Research, Development and Engineering
|
Shawna Gvazdauskas
|
|
|
51
|
|
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Vice President of Sales
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Kevin Schmid
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|
|
49
|
|
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Vice President of Manufacturing
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Jeff Smith
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|
|
48
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|
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Vice President of Marketing and Business Development
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R. Anthony Diehl, Esq.
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|
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39
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General Counsel
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Alison de Bord(1)(3)
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35
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|
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Director
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Gary Eichhorn(2)(3)
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53
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Director
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Ross Jaffe, M.D.(2)(3)
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49
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Director
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Charles Liamos(1)
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48
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Director
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Gordie Nye
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|
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52
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|
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Director
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Jonathan Silverstein(2)
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|
|
40
|
|
|
Director
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Steven Sobieski(1)
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|
|
50
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|
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Director
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|
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(1)
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Member of the audit committee.
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(2)
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Member of the compensation
committee.
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(3)
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Member of the nominating and
corporate governance committee.
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Duane DeSisto. Mr. DeSisto has served as
our President, Chief Executive Officer and a director since
2003. From 2002 to 2003, he served as our President, Chief
Financial Officer and acting Chief Executive Officer. From 2001
to 2002, he served as our Chief Financial Officer and Treasurer.
From 1999 to 2001, Mr. DeSisto served in various positions
at PaperExchange.com, Inc., a business solutions provider for
the pulp and paper industry, including as president, chief
executive officer and chief financial officer. From 1995 to
1999, Mr. DeSisto served as the chief financial officer of
FGX International Holdings Limited (formerly AAI-Foster Grant,
Inc.), an accessories wholesaler, where he had overall
responsibility for the accounting, information technology and
human resource departments. From 1986 to 1995, Mr. DeSisto
served as the chief financial officer of ZOLL Medical
Corporation, a medical device company specializing in
noninvasive resuscitation devices and related software
solutions. Mr. DeSisto currently serves on the board of
directors of LeMaitre Vascular, Inc. Mr. DeSisto earned a
Bachelor of Science from Providence College and a Master of
Business Administration from Bryant College.
Carsten Boess. Mr. Boess has served as
our Chief Financial Officer since June 2006. From 2005 to May
2006, he served as the executive vice president of finance on
the management team for Serono, Inc., a biotechnology company
focusing on reproductive health, metabolic endocrinology and
neurology. From 2004 to 2005, he served as the chief financial
officer for Alexion Pharmaceuticals, Inc., a biotechnology
company that develops antibody therapeutics. Mr. Boess
began his career at insulin-maker Novo Nordisk A/S in 1991 as
68
corporate controller and subsequently took on various
assignments including manager of investor relations and finance
for Novo Nordisk of North America, Inc., senior director of
finance and information technology for the North American
operations of Novozymes A/S and finally as vice president of
finance for the international operations of Novo Nordisk A/S.
Mr. Boess earned Bachelor and Masters degrees in economics
and finance from the University of Odense, Denmark.
Luis Malavé. Mr. Malavé has
served as our Chief Operating Officer since January 2007. He
also served as our Senior Vice President of Research,
Development and Engineering from 2003 to December 2006 and our
Vice President of Research and Development from 2002 to 2003.
From 1986 to 2002, he served in various positions at Medtronic
MiniMed, Inc., a company specializing in insulin infusion
systems for intensive insulin management, including as the
director of engineering and external products.
Mr. Malavé earned a Bachelor of Science from the
University of Minnesota, a Masters degree in software
engineering from the University of St. Thomas in
St. Paul and a Master of Business Administration from the
University of Maryland.
Lars Boesgaard. Lars Boesgaard has served as
our Vice President of Finance since June 2007. Prior to joining
us, Mr. Boesgaard served as director of financial services
for Alexion Pharmaceuticals, Inc., a biotechnology company that
develops antibody therapeutics, from 2004 to 2007. From 2000 to
2004, Mr. Boesgaard served as director of finance for
ACNielsen. Previously, he held various finance positions at Novo
Nordisk A/S. Mr. Boesgaard earned a Bachelor of Science
degree from Copenhagen Business School and a Masters in Business
Administration from the University of Western Ontario.
Stephen Bubrick. Stephen Bubrick has served as
our Vice President of Customer Care since August 2007. Prior to
joining us, Mr. Bubrick served as director of worldwide in
vivo marketing for Abbott Diabetes Care from 2004 to 2007.
Previously, he held various product development and
customer-interfacing positions at TheraSense Inc., a blood
glucose monitoring company acquired by Abbott Laboratories, and
United States and European customer service roles at LifeScan
Inc., a Johnson & Johnson company. Mr. Bubrick
earned a Bachelor of Arts degree from the University of
California, Berkeley.
Robert Campbell. Robert Campbell has served as
our Vice President of Clinical Services and Research since June
2007. Previously, he served as our director of innovation and
product research and held various marketing, sales, and clinical
roles since joining us in 2001. Previously, Mr. Campbell
held positions at the Joslin Diabetes Center, Primus
Telecommunications and the United States Department of
Agriculture. Mr. Campbell earned a Bachelor of Science
degree in Engineering from Humboldt State University.
Ruthann DePietro. Ms. DePietro has served
as our Vice President of Quality and Regulatory Affairs since
March 2006. From 2000 to 2005, she served as the vice president
in charge of quality and regulatory matters for ONUX Medical,
Inc., a medical device company focusing on innovative surgical
devices for minimally invasive and open procedures.
Ms. DePietro has also worked at Bard Vascular Systems, Bard
Interventional and USCI, each of which are divisions of C.R.
Bard, Inc., as well as Adam Spence Corporation and Mallinckrodt
Cardiology, in each case in positions relating to quality
assurance. Ms. DePietro earned a Bachelor of Science from
the University of Rochester and a Master of Business
Administration from Northeastern University.
John Garibotto. Mr. Garibotto has served
as our Vice President of Research, Development and Engineering
since January 2007. He also served as our Vice President of
Engineering from 2003 to December 2006 and Director of
Engineering from 2000 to 2003. From 1996 to 2000,
Mr. Garibotto served in various positions at Transvascular
Inc., a medical device company that developed a proprietary
platform delivery technology for certain intravascular
procedures that was purchased by Medtronic, Inc. in 2003.
Mr. Garibotto has also worked at Strato/Infusaid Inc. and
Lau Technologies. Mr. Garibotto earned a Bachelor of
Science from the University of Massachusetts, Lowell, and a
Master of Business Administration from Northeastern University.
Shawna Gvazdauskas. Ms. Gvazdauskas has
served as our Vice President of Sales since 2004. From 2002 to
2004, she served as the vice president of sales at TheraSense,
Inc., a blood glucose monitoring company that was acquired by
Abbott Laboratories in 2004. From 2001 to 2002, she served as
the national sales director for Ortho-Neutrogena, a division of
Neutrogena Corporation, a Johnson & Johnson company
that
69
manufactures and sells
over-the-counter
and prescription skin and hair care products. From 1998 to 2001,
Ms. Gvazdauskas was the director of professional sales at
Neutrogena Corporation. Ms. Gvazdauskas has also held sales
and sales management positions at Colgate Oral Pharmaceuticals,
MediSense, Inc., Pharmacia Opthalmics, Inc. and Syntex
Laboratories, Inc. Ms. Gvazdauskas earned a Bachelor of
Science from Worcester State College.
Kevin Schmid. Mr. Schmid has served as
our Vice President of Manufacturing since 2003. From 2000 to
2002, he served at JDS Uniphase Corporation as the manager of
production and advanced manufacturing. From 1995 to 2000,
Mr. Schmid served as the advanced engineering manager for
Bose Corporation. Mr. Schmid has also worked at American
Cyanamid, BIC Corporation, New Jersey Machine and Microtech
Association, in each case in positions relating to manufacturing
engineering. Mr. Schmid earned a Bachelor of Science from
the Clarkson University and a Master of Business Administration
from Sacred Heart University.
Jeff Smith. Mr. Smith has served as our
Vice President of Marketing and Business Development since
October 2004. He previously served as our Vice President of
Sales and Marketing from June 2004 to October 2004. He was
previously the vice president of sales and marketing at
MediSense Products/Abbott Laboratories from 1999 to 2004.
Mr. Smith earned a Bachelor of Science from Mount Allison
University, Canada.
R. Anthony
Diehl, Esq. Mr. Diehl has served as our
General Counsel since 2003. From 2001 to 2003, he was Of Counsel
at Bourque & Associates, P.A. where his practice
covered all areas of intellectual property law including patent,
trademark and copyright prosecution, counseling and litigation.
Mr. Diehl earned a Bachelor of Arts from Cornell University
and a Juris Doctor degree from Villanova University School of
Law.
Alison de Bord. Ms. de Bord has served on our
board of directors since 2004. She also serves on the board of
directors for Aegerion Pharmaceuticals, Inc. Prolacta
Bioscience, Inc., Sierra Surgical Technologies, Inc. and SurgRx,
Inc. Ms. de Bord has been affiliated with Alta Partners, a
venture capital firm in life sciences, since 2001 and is a
director of Alta Partners, VIII, L.P. Prior to joining Alta, she
was a senior associate in Robertson Stephens &
Companys Life Sciences Investment Banking Group from 1999
to 2001, with primary responsibilities for the execution of
corporate finance transactions including IPOs,
follow-on
equity and convertible preferred offerings. From 1995 to 1997,
she was an associate at Robertson, Stephens & Company,
where she focused on growth medical technology companies in the
equity research group. She began her career in the business
development group of Geron Corporation, a biotechnology company.
Ms. de Bord earned a Bachelor of Arts from Colgate
University and a Master of Business Administration from Columbia
Business School.
Gary Eichhorn. Mr. Eichhorn has served on
our board of directors since 2003. Mr. Eichhorn is
currently a management consultant and has served as the
president of Eichhorn Group LLC, a venture consulting firm,
since 2000. Mr. Eichhorn is on the board of directors of
two privately-held technology companies: Chosen
Security, Inc. and Eikonus, Inc., and is a member of the
National Association of Corporate Directors. Previously,
Mr. Eichhorn was the president, chief executive officer and
a director of Open Market Inc., an Internet commerce software
provider, from 1995 to 2000. From 1991 to 1995,
Mr. Eichhorn worked at Hewlett-Packard Company, most
recently serving as group vice president and general manager of
Hewlett Packards Medical Systems Group. From 1975 to 1991,
Mr. Eichhorn held various sales and management positions at
Digital Equipment Corporation, a computer company.
Mr. Eichhorn earned a Bachelor of Arts from Colgate
University and attended the Advanced Management Program at
Harvard Business School.
Ross Jaffe, M.D. Dr. Jaffe has served on
our board of directors since 2001. Dr. Jaffe is a managing
director of Versant Ventures, a healthcare-focused venture
capital firm that he co-founded in 1999. In addition, he
currently serves on the boards of directors of several privately
held companies, including Calypso Medical Technologies, Inc.,
Ablation Frontiers, Inc., NDO Surgical, Inc.,
Acclarent, Inc., Impedance Cardiology Systems, Inc.,
Vital Therapies, Inc. and Portaero, Inc. Dr. Jaffe is also
a partner at Brentwood Venture Capital, a private venture
capital firm that he has worked with since 1990. Dr. Jaffe
is a board-certified internist, having completed his residency
training in Internal Medicine/Primary Care at the University of
California, San Francisco, where he remained a part-time
attending physician until 1995. Before and during medical
school, he was an analyst for Lewin and Associates, a healthcare
consulting firm, and a research associate at Dartmouth Medical
School. Dr. Jaffe earned a Bachelor of Arts from Dartmouth
College, a Medical Degree from John Hopkins University and a
Master of Business Administration from Stanford University.
70
Charles Liamos. Mr. Liamos has served on
our board of directors since 2005. Mr. Liamos has been
associated with MedVenture Associates since September 2006,
first as the executive in residence and currently as a partner
in MedVenture Associates Management V Co., LLC,
which is the general partner of MedVenture
Associates V, L.P. and MedVenture
Affiliates V, L.P. From 2005 to 2006, Mr. Liamos
served as the president and chief executive officer of
FoviOptics, a medical device company that focused on blood
glucose monitoring. Before joining FoviOptics, Mr. Liamos
served as the chief operating officer and chief financial
officer of TheraSense, Inc. from 2001 to 2004, as its vice
president and chief financial officer from 1999 to 2001, and as
its director of purchasing and finance from 1998 to 1999. When
Abbott Laboratories acquired TheraSense in 2004, Mr. Liamos
was named group vice president of business operations for Abbott
Diabetes Care, Inc., and served on the committee that
integrated TheraSense into its new parent company. From 1995 to
1998, Mr. Liamos was the director of worldwide sourcing at
LifeScan, Inc., a division of Johnson & Johnson.
Mr. Liamos earned a Bachelor of Science from the University
of Vermont and is a graduate of the General Electric Financial
Management Program.
Gordie Nye. Mr. Nye has served on our
board of directors since 2005. Mr. Nye currently serves as
a general partner of Prism VentureWorks, a venture capital firm,
where he is a member of the life sciences investment team. In
addition, Mr. Nye currently serves on the boards of
directors of Aptus Endosystems, Inc., Atritech Corp, CoAxia,
Inc., iScience Surgical Inc., REVA Medical, Inc. and
Myocor, Inc. Prior to joining Prism in 2003, Mr. Nye served
as the chief executive officer of REVA Medical, Inc., the
developer of a resorbable, drug-eluting stent for the
interventional market. Mr. Nye was president, chief executive
officer and director of Critikon, a patient monitoring company
that was acquired by GE. Mr. Nye was also the president,
chief executive officer and a director of A Company,
a premier brand in the orthodontic appliance market that was
acquired by Sybron Dental Specialties, Inc. He has also held a
variety of marketing, sales and general management roles for
L.A. Gear, Olin Ski Company, Reebok, Ltd. and The Gillette
Company. He earned a Bachelor of Arts and a Master of Business
Administration, both from Dartmouth College.
Jonathan Silverstein. Mr. Silverstein has
served on our board of directors since February 2006.
Mr. Silverstein currently serves as a general partner at
OrbiMed Advisors LLC, a health sciences asset management firm, a
position he has held since 1998. In addition,
Mr. Silverstein currently serves on the boards of directors
of Adiana, Inc., Avanir Pharmaceuticals,
Cerapedics, Inc., Emphasys Medical, Inc., Enobia Pharma
Inc. and superDimension, Ltd. Prior to joining OrbiMed Advisors
LLC, Mr. Silverstein was a director of life sciences in the
investment banking department at Sumitomo Bank. Prior to
Mr. Silversteins tenure at Sumitomo Bank, he was an
associate at Hambro Resource Development. Mr. Silverstein
earned a Bachelor of Arts from Denison University, a Juris
Doctor degree from the University of San Diego School of Law and
a Master of Business Administration from the University of
San Diego.
Steven Sobieski. Mr. Sobieski has served
on our board of directors since December 2006. Mr. Sobieski
currently serves as chief financial officer and vice president
of finance and administration of LifeCell Corporation, a
position he has held since 2000. Prior to joining LifeCell
Corporation, Mr. Sobieski was vice president of finance at
Osteotech, Inc. From 1981 through 1991, he served in various
positions with Coopers & Lybrand, a public accounting
firm. Mr. Sobieski earned a Bachelor of Science from
Monmouth University and a Master of Business Administration from
Rutgers University. He is a Certified Public Accountant.
Board of
Directors
Our certificate of incorporation provides for a classified board
of directors consisting of three staggered classes of directors
(Class I, Class II and Class III). The members of
each class of our board of directors serve for staggered
three-year terms, with the terms of our Class I,
Class II and Class III directors expiring upon the
election and qualification of directors at the annual meetings
of stockholders held in 2008, 2009 and 2010, respectively. Our
Class I directors are Ms. de Bord and Messrs. Nye
and Silverstein, our Class II directors are Dr. Jaffe
and Messrs. Eichhorn and Liamos, and our Class III
directors are Messrs. DeSisto and Sobieski.
Our board of directors has determined that Ms. de Bord,
Dr. Jaffe and Messrs. Eichhorn, Jaffe, Liamos, Nye,
Silverstein and Sobieski are independent directors for purposes
of the applicable corporate governance rules contained in the
Marketplace Rules of the National Association of Securities
Dealers, Inc., or the Nasdaq rules.
71
Board
Committees
Our board of directors has an audit committee, a compensation
committee and a nominating and corporate governance committee.
Audit
Committee
The audit committee of our board of directors consists of Steven
Sobieski (Chairman), Charles Liamos and Alison de Bord. The
board of directors has determined that each member of the audit
committee is independent as that term is defined in
the rules of the SEC and the applicable Nasdaq rules. Our board
of directors has determined that Messrs. Sobieski and
Liamos each qualify as an audit committee financial
expert as such term is defined in the rules of the SEC.
The audit committee operates pursuant to a charter that was
approved by our board of directors. The purposes of the audit
committee are to, among other functions oversee our accounting
and financial reporting processes and the audits of our
financial statements, take, or recommend that our board of
directors take, appropriate action to oversee the
qualifications, independence and performance of our independent
auditors, and prepare the audit committee report required to be
included in our annual proxy statements.
Compensation
Committee
The compensation committee of our board of directors consists of
Gary Eichhorn (Chairman), Ross Jaffe, M.D. and Jonathan
Silverstein. The board of directors has determined that each
member of the compensation committee is independent
as that term is defined in the applicable Nasdaq rules. The
compensation committee operates pursuant to a charter that was
approved by our board of directors. The purposes of the
compensation committee are to, among other functions, discharge
our board of directors responsibilities relating to
compensation of our directors and executives, oversee our
overall compensation programs and prepare the compensation
committee report required to be included in our annual proxy
statement. See the section entitled Executive and Director
Compensation for a more detailed description of the
policies and procedures of our compensation committee.
Nominating
and Corporate Governance Committee
The nominating and corporate governance committee of our board
of directors consists of Ross Jaffe, M.D. (Chairman),
Alison de Bord and Gary Eichhorn. The board of directors has
determined that each member of the nominating and corporate
governance committee is independent as that term is
defined in the applicable Nasdaq rules. The nominating and
corporate governance committee operates pursuant to a charter
that was approved by our board of directors. The purposes of the
nominating and corporate governance committee are to, among
other functions, identify individuals qualified to become board
members, recommend that our board of directors select the
director nominees for election at each annual meeting of
stockholders and periodically review and recommend any changes
to our corporate governance guidelines to our board of directors.
72
EXECUTIVE
AND DIRECTOR COMPENSATION
Compensation
Discussion and Analysis
We provide what we believe is a competitive total compensation
package to our executive management team through a combination
of base salary, annual cash incentive bonuses, long-term equity
incentive compensation and broad-based benefits programs.
We place significant emphasis on pay for performance-based
incentive compensation, which is designed to reward our
executives based on the achievement of predetermined company and
individual goals. This Compensation Discussion and Analysis
explains our compensation objectives, policies and practices
with respect to our Chief Executive Officer, Chief Financial
Officer and the other three most highly-compensated executive
officers as determined in accordance with applicable SEC rules,
which are collectively referred to as the named executive
officers.
Objectives
of Our Executive Compensation Programs
Our compensation programs for our named executive officers are
designed to achieve the following objectives:
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attract and retain talented and experienced executives in the
highly competitive and dynamic medical device industry;
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motivate and reward executives whose knowledge, skills and
performance are critical to our success;
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align the interests of our executives and stockholders by
motivating executives to increase stockholder value and
rewarding executives when stockholder value increases;
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provide a competitive compensation package which is weighted
heavily towards pay for performance, and in which a significant
portion of total compensation is determined by company and
individual results and the creation of stockholder value;
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ensure fairness among the executive management team by
recognizing the contributions each executive makes to our
success;
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foster a shared commitment among executives by coordinating
their company and individual goals; and
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motivate our executives to manage our business to meet our
short- and long-term objectives, and reward them for meeting
these objectives.
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Our
Executive Compensation Programs
Our executive compensation primarily consists of base salary,
annual cash incentive bonuses, long-term equity incentive
compensation and broad-based benefits programs. Overall, we
designed our executive compensation programs to achieve the
objectives described above. In particular, consistent with the
significant emphasis we place on performance-based incentive
compensation, long-term equity incentive compensation in the
form of stock options constitutes a significant portion of our
total executive compensation. We also structured our annual cash
incentive bonuses to be primarily tied to the achievement of
predetermined performance goals.
Within the context of the overall objectives of our compensation
programs, we determined the specific amounts of compensation to
be paid to each of our executives in 2006 based on a number of
factors including:
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our understanding of the amount of compensation generally paid
by similarly situated companies to their executives with similar
roles and responsibilities;
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our executives performance during 2006 in general and as
measured against predetermined performance goals;
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the roles and responsibilities of our executives;
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73
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the individual experience and skills of, and expected
contributions from, our executives;
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the amounts of compensation being paid to our other executives;
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our executives historical compensation at our
company; and
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any contractual commitments we have made to our executives
regarding compensation.
|
Each of the primary elements of our executive compensation is
discussed in detail below, including a description of the
particular element and how it fits into our overall executive
compensation and a discussion of the amounts of compensation
paid to our named executive officers in 2006 under each of these
elements. In the descriptions below, we highlight particular
compensation objectives that we have designed specific elements
of our executive compensation program to address; however, it
should be noted that we have designed our compensation programs
to complement each other and collectively serve all of our
executive compensation objectives described above. Accordingly,
whether or not specifically mentioned below, we believe that
each element of our executive compensation program to a greater
or lesser extent serves each of our objectives.
Base
Salary
We pay our executives a base salary, which we review and
determine annually. We believe that a competitive base salary is
a necessary element of any compensation program that is designed
to attract and retain talented and experienced executives. We
also believe that attractive base salaries can motivate and
reward executives for their overall performance. Although base
salaries are established in part based on the individual
experience, skills and expected contributions during the coming
year of our executive and our executives performance
during the prior year, we do not view base salaries as primarily
serving our objective of paying for performance.
In 2006, we increased the base salaries of our named executive
officers as follows: Mr. DeSistos base salary
increased from $250,000 to $300,000 per year,
Mr. Malavés base salary increased from $231,000
to $240,000 per year, Ms. Gvazdauskas base
salary increased from $210,000 to $216,300 per year and
Mr. Smiths base salary increased from $210,000 to
$216,300 per year. Mr. DeSistos base salary was
increased in order to remain competitive based on our review of
market data and maintain a base salary structure among our
executives that, in our judgment, appropriately reflects their
respective roles and responsibilities. The base salaries of our
other executives reflected 3% to 4% increases. We initially
hired Mr. Boess in June 2006, and we established his base
salary at $275,000 per year. Our executives base
salaries reflect the initial base salaries that we negotiated
with each of our executives at the time of his or her initial
employment or promotion and our subsequent adjustments to these
amounts to reflect market increases, the growth and stage of
development of our company, our executives performance and
increased experience, any changes in our executives roles
and responsibilities and other factors. The initial base
salaries that we negotiated with our executives were based on
our understanding of base salaries for comparable positions at
similarly situated companies at the time, the individual
experience and skills of, and expected contribution from, each
executive, the roles and responsibilities of the executive, the
base salaries of our existing executives and other factors.
Annual
Cash Incentive Bonuses
Consistent with our emphasis on performance incentive
compensation programs, our executives are eligible to receive
annual cash incentive bonuses primarily based upon their
performance as measured against predetermined goals established
by us, including financial measures and the achievement of
strategic objectives. The primary objective of our annual cash
incentive bonuses is to motivate and reward our named executive
officers for meeting our short-term objectives using a
performance-based compensation program with objectively
determinable goals. In addition, we reserve a portion of each
executives annual cash incentive bonus to be paid at our
discretion based on the executives overall performance. We
maintain this discretionary portion of the annual cash incentive
bonuses in order to motivate our executives overall
performance and their performance relating to matters that are
not that specifically addressed in the predetermined performance
goals
74
that we set. We believe that every important aspect of executive
performance is not capable of being specifically quantified in a
predetermined objective goal. For example, events outside of our
control may occur after we have established the executives
performance goals for the year that require our executives to
focus their attention on different or other strategic objectives.
We establish the target amount of our annual cash incentive
bonuses at a level that represents a meaningful portion of our
executives currently paid out cash compensation, and set
additional threshold and maximum performance levels above and
below these target levels. In establishing these levels, in
addition to considering the incentives that we want to provide
to our executives, we also consider the bonus levels for
comparable positions at similarly situated companies, our
historical practices and any contractual commitments that we
have relating to executive bonuses.
In 2006, we established a target annual cash incentive bonus for
each of our executives of between 20% and 25% of his or her base
salary, depending on the executives role. Of this amount,
for each of our executives other than Mr. Boess, 20% to 25%
of the bonus was reserved to be paid at our discretion based on
the executives overall performance. Because Mr. Boess
joined our company midway through the year, his entire bonus for
2006 was discretionary and it was prorated to reflect the
portion of the year that he worked for our company. The amount
of the discretionary portion of the annual cash incentive bonus
paid to each of our executives was based on our assessment of
their overall performance during the year. The remainder of the
annual cash incentive bonus for each of our other executives was
based on their achievement of a number of predetermined
performance goals. The goals for 2006 related to obtaining and
supporting a predetermined number of customers, meeting a
specific financial goal of budgeted earnings before income tax,
depreciation and amortization for Mr. DeSisto and budgeted
spending limits for each other executive, and, for each
executive, achieving other specific individualized strategic
objectives. A specified percentage of the annual cash incentive
bonus is payable based on the achievement of each of the
different performance goals, and generally, for each goal, the
executive has the ability to earn between 50% and 125% of the
target bonus amount. Overall, the targets for the performance
measures were set at levels that we believed to be achievable
with strong performance by our executives. Although we cannot
always predict the different events that will impact our
business during an upcoming year, we set our performance goals
for the target amount of annual incentive cash bonuses at levels
that we believe will be achieved by our executives a majority of
the time. Our maximum and threshold levels for these performance
goals are determined in relation to our target levels, are
intended to provide for correspondingly greater or lesser
incentives in the event that performance is within a specified
range above or below the target level, and are correspondingly
easier or harder to achieve. We set the performance goals for
the maximum amount at a level that we believe will be achieved
in some years, but will not be achieved a majority of the time.
Long-Term
Equity Incentive Compensation
We grant long-term equity incentive awards in the form of stock
options to executives as part of our total compensation package.
Consistent with our emphasis on performance-based incentive
compensation, these awards represent a significant portion of
total executive compensation. We use long-term equity incentive
awards in order to align the interests of our executives and our
stockholders by providing our executives with strong incentives
to increase stockholder value and a significant reward for doing
so. Based on the early stage of our companys development
and the incentives we are trying to provide to our executives,
we have chosen to use stock options, which derive value
exclusively from increases in stockholder value, as opposed to
restricted stock or other forms of equity awards. Our decisions
regarding the amount and type of long-term equity incentive
compensation and relative weighting of these awards among total
executive compensation have also been based on our understanding
of market practices of similarly situated companies and our
negotiations with our executives in connection with their
initial employment or promotion by our company.
Stock option awards provide our executive officers with the
right to purchase shares of our common stock at a fixed exercise
price typically for a period of up to ten years, subject to
continued employment with our company. Stock options are earned
on the basis of continued service to us and have generally
vested over four years, beginning with one-fourth vesting one
year after the date of grant, then pro-rata vesting monthly
thereafter. Prior to our initial public offering, all stock
option awards were made pursuant to our 2000 Stock
75
Option and Incentive Plan. Following the closing of our initial
public offering in May 2007, option awards are made pursuant to
our 2007 Stock Option and Incentive Plan. See
Potential Payments Upon Termination or
Change-in-Control
for a discussion of the
change-in-control
provisions related to stock options.
The exercise price of each stock option granted under our 2000
Stock Option and Incentive Plan or to be granted under our 2007
Stock Option and Incentive Plan is based on the fair market
value of our common stock on the grant date. Historically, the
fair market value of our common stock for purposes of
determining the exercise price of stock options has been
determined by our board of directors based on its analysis of a
number of factors including, among others, the total company
valuation implied by the most recent venture capital round of
financing, the market value of similarly situated public
companies, our anticipated future risks and opportunities, the
rights and preferences of our preferred stock existing at the
time and the discounts customarily applicable to common stock of
privately-held companies. More recently, our board of directors
has based its determination on independent appraisals by an
outside valuation consultant. Following our initial public
offering, all stock options continue to be granted with an
exercise price equal to the fair market value of our common
stock on the date of grant, but fair market value is defined as
the closing market price of a share of our common stock on the
date of grant. We do not have any program, plan or practice of
setting the exercise price based on a date or price other than
the fair market value of our common stock on the grant date.
We have granted all of our stock options to executives as
incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended, subject to the volume
limitations contained in the Internal Revenue Code. Generally,
for stock options that do not qualify as incentive stock
options, we are entitled to a tax deduction in the year in which
the stock options are exercised equal to the spread between the
exercise price and the fair market value of the stock for which
the stock option was exercised. The holders of the stock options
are generally taxed on this same amount in the year of exercise.
For stock options that qualify as incentive stock options, we do
not receive a tax deduction and the holder of the stock option
may receive more favorable tax treatment than he or she would
for a non-qualified stock option. Historically, we have granted
primarily incentive stock options in order to provide these
potential tax benefits to our executives, particularly given the
limited expected benefits to our company of the tax deductions
as a result of our historical net losses.
We have made grants to our named executive officers on a
periodic, but not necessarily annual, basis. In 2006, we
considered a number of factors in determining what, if any,
stock options to grant to our executives, including:
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the number of shares subject to, and exercise price of,
outstanding options, both vested and unvested, held by our
executives;
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the vesting schedule of the unvested stock options held by our
executives; and
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the amount and percentage of our total equity on a diluted basis
held by our executives.
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We determined not to make any new stock option grants to our
executives in 2006, other than to Mr. Boess who joined our
company in June 2006. The size of Mr. Boesss stock
option grant was based on a number of factors, including our
negotiations with Mr. Boess, our understanding of options
granted for comparable positions of similarly situated
companies, Mr. Boesss individual experience and
skills, the expected contributions from, and role and
responsibilities of, Mr. Boess as our Chief Financial
Officer and the initial stock option grants made to, and the
number of stock options held by, our other executives.
Broad-Based
Benefits Programs
All full-time employees, including our named executive officers,
may participate in our health and welfare benefit programs,
including medical, dental and vision care coverage, disability
insurance and life insurance, employee stock purchase plan and
our 401(k) plan.
Our
Executive Compensation Process
The compensation committee of our board of directors is
primarily responsible for determining the compensation for our
executives. The board of directors has determined that each
member of the compensation
76
committee is independent as that term is defined in
the applicable Nasdaq rules. In determining executive
compensation, our compensation committee annually reviews the
performance of our executives with our Chief Executive Officer,
and our Chief Executive Officer makes recommendations to our
compensation committee with respect to the appropriate base
salary, annual cash incentive bonus payments and performance
measures and grants of long-term equity incentive awards for
each of our executives. Historically, our compensation committee
has then made recommendations to our board of directors, and our
board of directors has approved our executive compensation.
Prior to the completion of our initial public offering in May
2007, we were a privately-held company and most of our directors
and compensation committee members were appointed by and
affiliated with our largest stockholders. As a result, the total
amount of compensation that we paid to our executives, the types
of executive compensation programs we maintained and the amount
of compensation paid to our executives under each program had
been determined by our compensation committee and board of
directors based on their understanding of executive compensation
for comparable positions at similarly situated companies,
experience in making these types of decisions and judgment
regarding the appropriate amounts and types of executive
compensation to pay. Additionally, the number of shares
available to be granted under our 2000 Stock Option and
Incentive Plan has been limited by agreements entered into with
our stockholders. In connection with our initial public
offering, our compensation committee engaged an independent
compensation consultant, Watson Wyatt Worldwide, to assist us in
reviewing our executive compensation programs and appropriately
adjusting these programs following our initial public offering.
As a public company, we expect to rely more heavily on
independent compensation consultants and other more formal
market data regarding comparable companies executive
compensation programs and amounts in determining executive
compensation than we have in the past.
Summary
of Executive Compensation
The following table sets forth certain information with respect
to compensation for the year ended December 31, 2006 earned
by or paid to our Chief Executive Officer, Chief Financial
Officer and our three other most highly-compensated executive
officers, as determined in accordance with applicable SEC rules,
which are collectively referred to as the named executive
officers.
SUMMARY
COMPENSATION TABLE
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Non-Equity
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Name and Principal
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Option
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Incentive Plan
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All Other
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Position
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Year
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Salary
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Bonus
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Awards(1)
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Compensation
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Compensation(2)
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Total
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Duane DeSisto
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2006
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$
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283,846
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$
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13,125
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$
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76,303
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$
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36,563
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$
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3,513
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$
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413,350
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President and Chief
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Executive Officer
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Carsten Boess
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2006
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155,480
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31,900
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177,349
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364,729
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Chief Financial Officer(3)
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Luis Malavé
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2006
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238,818
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12,012
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19,575
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27,628
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2,864
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300,897
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Chief Operating Officer(4)
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Shawna Gvazdauskas
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2006
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215,330
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8,652
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16,058
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27,038
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2,528
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269,606
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Vice President of Sales
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Jeff Smith
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2006
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215,330
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8,652
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19,269
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24,875
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2,441
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270,567
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Vice President of
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Marketing and Business
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Development
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77
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(1)
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Based on the dollar amount
recognized for financial statement reporting purposes with
respect to the year ended December 31, 2006 in accordance
with SFAS 123R, excluding the impact of forfeitures, and
assuming that we used the prospective transition method for
reporting awards granted prior to 2006. The assumptions we used
for calculating the grant date fair values are set forth in
notes 2 and 10 to our consolidated financial statements
included in this prospectus.
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(2)
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Represents 401(k) matching
contributions that we made.
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(3)
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Mr. Boess joined our company
in June 2006, and his annual base salary for 2006 was $275,000.
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(4)
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Mr. Malavé served as our
Senior Vice President of Research, Development and Engineering,
until December 31, 2006. On January 2, 2007, he was
named our Chief Operating Officer.
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Grants of
Plan-Based Awards
The following table sets forth certain information with respect
to grants of plan-based awards for the year ended
December 31, 2006 to the named executive officers.
2006
GRANTS OF PLAN-BASED AWARDS
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All Other Option
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Exercise or
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Estimated Possible Payouts
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Awards: Number
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Base Price
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Under Non-Equity
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of Securities
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of Option
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Incentive Plan Awards
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Underlying
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Awards
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Grant Date
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Name
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Grant Date
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Threshold
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Target
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Maximum
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Options(#)
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($/Sh)(1)
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Fair Value(2)
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Duane DeSisto
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$
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33,750
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$
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60,000
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$
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73,125
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Carsten Boess
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6/1/2006
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209,353
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$
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6.47
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$
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1,213,266
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Luis Malavé
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22,823
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36,036
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42,643
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Shawna Gvazdauskas
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17,304
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34,608
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43,260
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Jeff Smith
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21,533
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32,445
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40,556
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(1)
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The exercise price of the option
grant to Mr. Boess was the price determined, at the time,
to be the fair market value of our common stock on the grant
date by our board of directors. Our board of directors
determination was based on a number of factors including, among
others, the total company valuation implied by the most recent
prior venture capital round of financing, the market value of
similarly situated public companies, our anticipated future
risks and opportunities, the rights and preferences of our
preferred stock existing at the time and the discounts
customarily applicable to common stock of privately-held
companies. In connection with the preparation of the financial
statements for our initial public offering, we performed a
retrospective determination of fair value of our common stock
since January 1, 2006. For these purposes, we determined
the fair value of our common stock to be $8.04 on June 1,
2006, the date of Mr. Boesss grant. On April 16,
2007, the exercise price of Mr. Boesss option was
increased to $8.04 per share.
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(2)
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Based on the aggregate grant date
fair value computed in accordance with SFAS 123R. The
assumptions we used for calculating the grant date fair values
are set forth in notes 2 and 10 to our consolidated
financial statements included in this prospectus.
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Discussion
of Summary Compensation and Grants of Plan-Based Awards
Tables
Our executive compensation policies and practices, pursuant to
which the compensation set forth in the Summary Compensation
Table and the Grants of Plan Based Awards Table was paid or
awarded, are described above under
Compensation Discussion and Analysis. A
summary of certain material terms of our compensation plans and
arrangements is set forth below.
Employment
Agreements
As of December 31, 2006, we had employment agreements with
Duane DeSisto, our President and Chief Executive Officer;
Carsten Boess, our Chief Financial Officer; and Jeff Smith, our
Vice President of Marketing and Business Development. As of
December 31, 2006, we did not have currently effective
employment agreements with Luis Malavé, our Chief Operating
Officer (formerly our Senior Vice President of Research,
Development and Engineering); or Shawna Gvazdauskas, our Vice
President of Sales. We did enter into employment agreements with
Mr. Malavé and Ms. Gvazdauskas when we initially
hired them, but these agreements have since expired.
Additionally, in June 2007, our employment agreement with
Mr. Smith expired. The following is a description of the
material terms of our employment agreements with
Messrs. DeSisto, Boess and Smith that were in effect as of
December 31, 2006.
78
Mr. DeSisto. We entered into an
employment agreement with Mr. DeSisto effective as of
March 1, 2005, which provides for a two-year initial term
of employment that is automatically extended for additional
one-year periods unless either party notifies the other of
non-extension at least 45 days prior to the end of a term.
The current term of the agreement is schedule to expire on
February 29, 2008. Under the agreement, we agreed to pay
Mr. DeSisto an annual base salary determined by our board
of directors that may not be less than $250,000. Additionally,
in the event that Mr. DeSistos employment agreement
is terminated by us without cause, as defined in the employment
agreement, and Mr. DeSisto signs a release acceptable to
us, we will be obligated to continue to pay Mr. DeSisto his
base salary for a period of twelve months following termination.
Our obligation to make these severance payments is subject to
Mr. DeSistos continued compliance with his
confidentiality, non-compete and non-solicitation obligations
under his non-competition and non-solicitation agreement and
employee nondisclosure and developments agreement with us.
Mr. Boess. We entered into an employment
agreement with Mr. Boess effective as of June 1, 2006,
which provides for a two-year term of employment from
June 1, 2006. Under the agreement, Mr. Boesss
initial base salary was established at $275,000, subject to
annual review by our Chief Executive Officer. We also agreed to
grant Mr. Boess a stock option to purchase
209,353 shares of our common stock at an exercise price
equal to fair market value on the date of grant. In the event
that Mr. Boesss employment agreement is terminated by
us without cause, as defined in the employment agreement, and
Mr. Boess signs a release acceptable to us, we will be
obligated to continue to pay Mr. Boess his base salary for
a period of six months following termination. Our obligation to
make these severance payments is also subject to
Mr. Boesss continued compliance with his
confidentiality, non-compete and non-solicitation obligations
under his non-competition and non-solicitation agreement and
employee non-disclosure and developments agreement with us.
Mr. Smith. We entered into an employment
agreement with Mr. Smith effective as of June 14,
2004, which provides for a three-year term of employment from
June 14, 2004. Under the agreement, Mr. Smiths
initial base salary was established at $200,000, subject to
annual review by our Chief Executive Officer. In the event that
Mr. Smiths employment agreement was terminated by us
without cause, as defined in the employment agreement, and
Mr. Smith signed a release acceptable to us, we would have
been obligated to continue to pay Mr. Smith his base salary
for a period of six months following termination. Our obligation
to make these severance payments was also subject to
Mr. Smiths continued compliance with his
confidentiality, non-compete and non-solicitation obligations
under his non-competition and non-solicitation agreement and
employee non-disclosure and developments agreement with us. Our
employment agreement with Mr. Smith expired in June 2007.
In addition to these employment agreements, each of our named
executive officers has entered into a non-competition and
non-solicitation agreement and an employee non-disclosure and
developments agreement with us, which provide for protection or
our confidential information, assignment to us of intellectual
property developed by our executives and non-compete and
non-solicitation obligations that are effective while the
executive is employed by us and for a period of 12 months
thereafter.
Annual
Cash Incentive Bonuses
In 2006, we established target annual cash incentive bonuses for
each of our named executive officers as a percentage of that
executives base salary, as follows:
Mr. DeSisto 25%; Mr. Boess
20%; Mr. Malavé 20%;
Ms. Gvazdauskas 20%; and
Mr. Smith 20%. The following percentages of
these total target annual cash incentive bonuses were reserved
to be paid at our discretion based on the executives
overall performance: Mr. DeSisto 20%;
Mr. Boess 100%;
Mr. Malavé 25%;
Ms. Gvazdauskas 20%; and
Mr. Smith 25%. The discretionary bonus amounts
paid are reported as Bonus in the Summary
Compensation Table. Mr. Boesss bonus for 2006 was prorated
to reflect the fact that he joined our company in June 2006. The
remainder of the bonuses were paid based on the executives
achievement of a number of predetermined performance goals, as
described above under Our Executive
Compensation Programs Annual Cash Incentive
Bonuses. Generally, for each goal, the executive had the
ability to earn between 50% and 125% of the target bonus amount
based on the level of achievement of that goal. The bonuses paid
upon the achievement of these predetermined performance goals
are reported as Non-Equity Incentive Plan
Compensation in the Summary Compensation Table.
79
Additionally, in the 2006 Grants of Plan-Based Awards table, the
Estimated Possible Payouts under Non-Equity Incentive Plan
Awards column for each of the executives, other than
Mr. Boess, relates to the portion of our annual cash
incentive bonuses that was payable upon the achievement of these
predetermined performance goals. The threshold payouts represent
the payout that would have been received if each performance
goal was met at the minimum level, the target represents the
payout that would have been received if each performance goal
was met at the target level and the maximum represents the
payout that would have been received if each performance goal
was met at the maximum level.
2006
Stock Option Grants
In 2006, we granted Mr. Boess a stock option under our 2000
Stock Option and Incentive Plan to purchase 209,353 shares
of our common stock at an exercise price of $6.47 per
share. On April 16, 2007, the exercise price of
Mr. Boesss option was increased to $8.04. This stock
option has a term of ten years and may be exercised at any time
and from time to time prior to its expiration for all or a
portion of such option shares. This stock option vests over four
years with 25% of the total award vesting after one year and the
remainder vesting in equal monthly installments each month
thereafter for 36 months. Additionally, if Mr. Boess
is unable to obtain permanent resident status before the
expiration of his H1-B visa, which is currently scheduled to
expire on May 31, 2009, and he has cooperated with us in an
effort to obtain permanent resident status and is in good
standing with us at the time of expiration of his H1-B visa, the
vesting of this stock option will accelerate and all unvested
stock options at the time of expiration of his H1-B visa will
vest. Vesting of this stock option is also subject to
acceleration in connection with a
change-in-control
as described in Potential Payments Upon
Termination or
Change-in-Control.
2000
Stock Option and Incentive Plan
Our 2000 Stock Option and Incentive Plan was initially adopted
by our board of directors and approved by our stockholders in
October 2000. Following our initial public offering in May 2007,
no additional grants are being made under our 2000 Stock Option
and Incentive Plan.
As a matter of practice, most stock options issued under our
2000 Stock Option and Incentive Plan have been issued as
incentive stock options, subject to the volume limitations
contained in the Internal Revenue Code, and subject to a
four-year vesting period, with 25% of the total award vesting
after one year and the remainder vesting in equal monthly
installments each month thereafter for 36 months.
Additionally, most of the stock options granted under our 2000
Stock Option and Incentive Plan, including all stock options
issued prior to December 20, 2006, allow for the exercise
of unvested options at any time after the options were issued,
provided that the vesting terms will continue to apply to the
shares acquired upon such an exercise and any unvested shares
will be subject to repurchase by us at the exercise price paid
to acquire the shares. After termination of an optionee, he or
she may exercise his or her vested options for the period of
time stated in the stock option agreement issued under our 2000
Stock Option and Incentive Plan. Generally, if termination is
due to death or disability, the vested option will remain
exercisable for 180 days; if termination is for cause, the
option may no longer be exercised; and, in all other cases, the
vested options will remain exercisable for three months. In
addition, each stock option we have granted under our 2000 Stock
Option and Incentive Plan generally expires ten years after the
issuance of such option, regardless of whether the optionee has
been terminated.
2007
Stock Option and Incentive Plan
Background. Our 2007 Stock Option and
Incentive Plan was adopted by our board of directors and
approved by our stockholders in April 2007.
Administration. Our compensation committee of
our board of directors is responsible for administering our 2007
Stock Option and Incentive Plan. Under our 2007 Stock Option and
Incentive Plan, the plan administrator has the power to
determine the terms of the awards, including the officers,
employees, non-employee directors and key persons (including
consultants and prospective employees) who will receive
80
awards, the exercise price, the number of shares subject to each
award, the vesting schedule and exercisability of awards and the
form of consideration payable upon exercise of an option.
Eligibility. All of our officers, employees,
non-employee directors and key persons (including consultants
and prospective employees) are eligible to be granted awards
under our 2007 Stock Option and Incentive Plan.
Number of Shares Available for
Issuance. The maximum number of shares of our
common stock that are authorized for issuance under our 2007
Stock Option and Incentive Plan currently is
535,000 shares, which amount will be increased on
January 1, 2008, and on each January 1 thereafter
through January 1, 2012, by a number of shares equal to 3%
of the number of shares of our common stock outstanding as of
the immediately preceding December 31, up to the maximum
increase of 725,000 additional shares per year. In addition,
each share of deferred stock, restricted stock, unrestricted
stock or performance shares awarded under the 2007 Stock Option
and Incentive Plan will count as 1.5 shares against the
total pool of shares available for issuance under the plan.
Shares issued under the 2007 Stock Option and Incentive Plan may
be authorized but unissued shares or shares reacquired by us.
Any shares subject to awards that are forfeited, canceled, held
back upon exercise of an option or settlement of an award to
cover the exercise price or tax withholding, reacquired by us
prior to vesting, satisfied without the issuance of shares or
otherwise terminated (other than by exercise) shall be added
back to the shares available for issuance under the 2007 Stock
Option and Incentive Plan. Upon the occurrence of a merger,
consolidation, recapitalization, reclassification, stock split,
stock dividend, combination of shares or the like, the plan
administrator will make an appropriate or proportionate
adjustment in the shares reserved for issuance under, and the
number of shares or exercise price applicable to any award
outstanding under, the 2007 Stock Option and Incentive Plan.
Types of Awards. The plan administrator may
grant the following types of awards under our 2007 Stock Option
and Incentive Plan: stock options; stock appreciation rights;
deferred stock awards; restricted stock; unrestricted stock;
cash based awards; performance share awards; or dividend
equivalent rights. Stock options awarded under our 2007 Stock
Option and Incentive Plan may be nonqualified stock options or
incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended. With the exception of
incentive stock options, the plan administrator may grant, from
time to time, any of the types of awards under our 2007 Stock
Option and Incentive Plan to our officers, employees,
non-employee directors and key persons (including consultants
and prospective employees). Incentive stock options may only be
granted to our employees.
Stock Options. A stock option is the right to
acquire shares of our common stock at a fixed price for a fixed
period of time and generally is subject to a vesting
requirement. We typically grant options subject to a four-year
vesting period, with 25% of the total award vesting after one
year and the remainder vesting in equal quarterly installments
each quarter thereafter for 36 months. In the event we are
acquired or are otherwise subject to a change in control, all of
the outstanding options granted under our 2007 Stock Option and
Incentive Plan will become fully vested. A stock option will be
in the form of a nonqualified stock option or an incentive stock
option. The exercise price is set by the plan administrator but
cannot be less than 100% of the fair market value of our common
stock on the date of grant, or, in the case of incentive stock
options granted to an employee who owns 10% or more of total
combined voting power of our common stock, or a 10% owner, the
exercise price cannot be less than 110% of the fair market value
of our common stock on the date grant. The term of a stock
option may not exceed ten years or five years in the case of
incentive stock options granted to a 10% owner. After an
optionees employment with us is terminated, he or she may
exercise his or her vested options for the period of time stated
in the stock option agreement. Generally, if termination is due
to death or disability, the vested option will remain
exercisable for 180 days; if termination is for cause, the
option may no longer be exercised; and, in all other cases, the
vested options will remain exercisable for three months.
However, an option may not be exercised later than its
expiration date.
Amendment and Discontinuance; Term. Our board
of directors may at any time amend or discontinue our 2007 Stock
Option and Incentive Plan, and the plan administrator may at any
time amend or cancel any outstanding award for the purpose of
satisfying changes in law or for any other lawful purpose, but
no such action will adversely affect rights under any
outstanding awards without the holders consent. To the
extent required by applicable laws or rules, plan amendments may
be subject to stockholder approval. Unless
81
terminated earlier, our 2007 Stock Option and Incentive Plan
will expire on the tenth anniversary of its effective date.
2007
Employee Stock Purchase Plan
Our 2007 Employee Stock Purchase Plan was adopted by our board
of directors and approved by our stockholders in April 2007 and
became effective upon the closing of our initial public offering
in May 2007. Our 2007 Employee Stock Purchase Plan authorizes
the issuance of up to a total of 380,000 shares of our
common stock to participating employees.
All of our employees who have been employed by us for at least
six months and whose customary employment is for more than
20 hours a week are eligible to participate in our 2007
Employee Stock Purchase Plan. Any employee who owns 5% or more
of the voting power or value of our stock is not eligible to
purchase shares under our 2007 Employee Stock Purchase Plan.
We will make one or more offerings each year to our employees to
purchase stock under our 2007 Employee Stock Purchase Plan. The
first offering began on the date of the closing of our initial
public offering and will end on December 31, 2007.
Subsequent offerings will usually begin on each January 1
and July 1 and will continue for six-month periods,
referred to as offering periods. Each employee eligible to
participate on the date of the closing of our initial public
offering was automatically deemed to be a participant in the
initial offering period.
Each employee who is a participant in our 2007 Employee Stock
Purchase Plan may purchase shares by authorizing payroll
deductions of up to 10% of his or her cash compensation during
an offering period. Unless the participating employee has
previously withdrawn from the offering, his or her accumulated
payroll deductions will be used to purchase common stock on the
last business day of the offering period at a price equal to 85%
of the fair market value of the common stock on the last day of
the offering period. Under applicable tax rules, an employee may
purchase no more than $25,000 worth of common stock, valued at
the start of the purchase period, under our 2007 Employee Stock
Purchase Plan in any calendar year.
The accumulated payroll deductions of any employee who is not a
participant on the last day of an offering period will be
refunded. An employees rights under our 2007 Employee
Stock Purchase Plan terminate upon voluntary withdrawal from the
plan or when the employee ceases employment for any reason.
Our 2007 Employee Stock Purchase Plan may be terminated or
amended by our board of directors at any time. An amendment that
increases the number of shares of our common stock that is
authorized under our 2007 Employee Stock Purchase Plan and
certain other amendments require the approval of our
stockholders.
82
Outstanding
Equity Awards
The following table sets forth certain information with respect
to outstanding equity awards at December 31, 2006 with
respect to the named executive officers.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END 2006
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Option Awards
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Number of Securities
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Underlying
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Option
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Unexercised Options
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Exercise
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Option
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Name
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Exercisable(1)(#)
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Price($)
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Expiration Date
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Duane DeSisto
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47,588
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(2)
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.486
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6/28/2011
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114,364
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1.190
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10/9/2012
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38,070
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1.190
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7/22/2013
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80,017
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2.500
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2/23/2014
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39,995
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2.500
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2/23/2014
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293,993
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3.600
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2/9/2015
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Carsten Boess
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209,353
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(3)
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6.470
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6/1/2016
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Luis Malavé
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38,070
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(4)
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.486
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6/5/2012
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9,517
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(4)
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.486
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7/17/2012
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64,358
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1.190
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10/9/2012
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9,517
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(4)
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1.190
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6/30/2013
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68,525
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2.500
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2/23/2014
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4,352
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2.500
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2/23/2014
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35,918
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3.600
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5/4/2015
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Shawna Gvazdauskas
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114,211
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(5)
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2.500
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7/8/2014
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Jeff Smith
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137,054
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(6)
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2.500
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7/8/2014
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(1)
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All options may be exercised at any
time, whether vested or not, but, upon termination of
employment, we may repurchase any unvested shares at the
exercise price paid for the shares. Unless otherwise noted:
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each option is subject
to a four-year vesting period, with 25% of the total award
vesting one year after the grant date and the remainder vesting
in equal monthly installments each month thereafter for
36 months, subject to continued employment; and
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the expiration date for
each option is the date that is ten years after the grant date.
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See Potential
Payments Upon Termination or
Change-in-Control
for a description of the acceleration provisions upon
termination or
change-in-control.
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(2)
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This option vested 25% on
July 9, 2001 with the remainder vesting in equal monthly
installments each month for 36 months following
July 9, 2002.
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(3)
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If Mr. Boess is unable to
obtain permanent resident status before the expiration of his
H1-B visa, which is currently scheduled to expire on
May 31, 2009, and he has cooperated with us in an effort to
obtain permanent resident status and is in good standing with us
at the time of expiration of his H1-B visa, the vesting of this
stock option will accelerate and all unvested stock options at
the time of expiration of his H1-B visa will vest.
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(4)
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This option vested 25% on
February 1, 2003 with the remainder vesting in equal
monthly installments each month thereafter for 36 months.
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(5)
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This option vested 25% on
July 1, 2005 with the remainder vesting in equal monthly
installments each month thereafter for 36 months.
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(6)
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This option vested 25% on
June 14, 2005 with the remainder vesting in equal monthly
installments each month thereafter for 36 months.
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83
Potential
Payments Upon Termination or
Change-in-Control
In the event that any of Mr. DeSistos,
Mr. Boesss or Mr. Smiths employment
agreement is terminated by us without cause and he
signs a release acceptable to us, he will be entitled to
continue to be paid his base salary for a period of six months,
in the case of Mr. Boess and Mr. Smith, or twelve
months, in the case of Mr. DeSisto, as applicable,
following termination. Additionally, these named executive
officers will be entitled to payment for any accrued unused
vacation time. Notwithstanding the foregoing, our obligation to
make these severance payments to any of these named executive
officers is subject to that executives continued
compliance with his confidentiality, non-compete and
non-solicitation obligations under his non-competition and
non-solicitation agreement and employee non-disclosure and
developments agreement with us. We agreed to provide severance
payments to these executives in these circumstances based on our
negotiations with each of our executives at the time they joined
our company and in order to provide a total compensation package
that we believed to be competitive. In June 2007, our employment
agreement with Mr. Smith expired and, as a result, the
severance benefits described above are no longer applicable to
Mr. Smith.
Cause means any of the following: the failure or
refusal of the named executive officer to render services to us
in accordance with his obligations under the employment
agreement or a determination by us that the named executive
officer has failed to perform the duties of his employment;
disloyalty, gross negligence, dishonesty, breach of fiduciary
duty or breach of the terms of the employment agreement or the
other agreements executed in connection therewith; the
commission by the named executive officer of an act of fraud,
embezzlement or disregard of our rules or policies or the
commission by the named executive officer of any other action
which injures us; acts which, in the judgment of our board of
directors, would tend to generate adverse publicity toward us;
the commission, or plea of nolo contendere, by the named
executive officer of a felony; the commission of an act which
constitutes unfair competition with us or which induces any of
our customers to breach a contract with us; or a breach by the
named executive officer of the terms of the non-competition and
non-solicitation agreement or the employee non-disclosure and
developments agreement between us and the named executive
officer.
If Mr. DeSisto, Mr. Boess or Mr. Smith had been
terminated without cause on December 31, 2006, the
approximate value of the severance benefits, assuming three
weeks of accrued unused vacation time, under the employment
agreement for each such named executive officer would have been
as follows: Mr. DeSisto $317,308, Mr. Boess $153,365,
and Mr. Smith $120,629. Also, any remaining unvested
options granted to such named executive officer under the 2000
Stock Option and Incentive Plan would have ceased vesting on
that date.
If Mr. DeSisto, Mr. Boess or Mr. Smith had been
terminated for cause or if such named executive officer had
terminated his employment for any reason, the approximate value
of the severance benefits, assuming three weeks of accrued
unused vacation time, under the employment agreement for each
such named executive officer would have been as follows:
Mr. DeSisto $17,308, Mr. Boess $15,865, and
Mr. Smith $12,479. Also, any remaining unvested options
granted to such named executive officer under the 2000 Stock
Option and Incentive Plan would have ceased vesting on that date.
Upon a
change-in-control,
a named executive officer will be entitled to accelerated
vesting for 50% of any remaining unvested options granted under
the 2000 Stock Option and Incentive Plan and 100% of any
unvested options granted under the 2007 Stock Options and
Incentive Plan. Further, in the event that, within twelve months
following a
change-in-control,
a named executive officers employment is terminated
without cause, he or she experiences a material negative change
in his or her compensation or responsibilities or he or she is
required to be based at a location more than 50 miles from
his or her current work location, any remaining unvested options
granted under the 2000 Stock Option and Incentive Plan will
become fully vested.
Change-in-control
means any of the following: a sale or other disposition of all
or substantially all of our assets; or a merger or consolidation
after which our voting securities outstanding immediately before
the transaction cease to represent at least a majority of the
combined voting power of the successor entitys outstanding
voting securities immediately after the transaction. We agreed
to provide payments to these executives in these circumstances
in order to provide a total compensation package that we
believed to be
84
competitive. Additionally, the primary purpose of our
equity-based incentive awards is to align the interests of our
executives and our stockholders and provide our executives with
strong incentives to increase stockholder value over time. As
change-in-control
transactions typically represent events where our stockholders
are realizing the value of their equity interests in our
company, we believe it is appropriate for our executives to
share in this realization of stockholder value, particularly
where their employment is terminated in connection with the
change-in-control
transaction. We believe that this acceleration of vesting will
also help to better align the interests of our executives with
our stockholders in pursuing and engaging in these transactions.
If a
change-in-control
had occurred on December 31, 2006, the value of 50% of any
remaining unvested options granted under the 2000 Stock Option
and Incentive Plan for each named executive officer, calculated
based on the spread between the exercise price of the unvested
options and an assumed fair market value of our stock on
December 31, 2006 of $15.00, which was the initial public
offering price for our common stock, would have been
approximately as follows: Mr. DeSisto $1,166,000,
Mr. Boess $893,000, Mr. Smith $322,000,
Mr. Malavé $257,000 and Ms. Gvazdauskas $303,000.
If a
change-in-control
had occurred on December 31, 2006 and on that date each
named executive officer had been terminated without cause,
experienced a material negative change in his or her
compensation or responsibilities or was required to be based at
a location more than 50 miles from his or her current work
location, the value of any remaining unvested options granted
under the 2000 Stock Option and Incentive Plan for each named
executive officer, calculated based on the spread between the
exercise price of the unvested options and an assumed fair
market value of our stock on December 31, 2006 of $15.00,
which was the initial public offering price for our common
stock, would have been approximately as follows:
Mr. DeSisto $2,332,000, Mr. Boess $1,786,000,
Mr. Smith $644,000, Mr. Malavé $514,000 and
Ms. Gvazdauskas $606,000.
Director
Compensation
During 2006, our director compensation policy was to pay only
our non-employee directors who were not representatives of the
venture capital funds who hold shares of our capital stock
(Charles Liamos, Gary Eichhorn and Steven Sobieski) the
following compensation:
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an annual retainer of $25,000; and
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upon initial election to our board of directors and every three
years thereafter, a grant of options to purchase
19,035 shares of our common stock that are subject to a
three-year vesting period, with 50% of the total award vesting
on the first anniversary of the grant date and an additional 25%
vesting on each of the next two anniversaries of the grant date,
subject to continued service as a director.
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Beginning in 2007, we increased the compensation for these
non-employee directors to include an additional $10,000 annual
retainer for any of these directors who serves as chairman of
the audit committee of our board of directors and an audit
committee meeting fee for each of these directors serving on the
audit committee of $1,750 per audit committee meeting
attended by that director.
Mr. Sobieski joined our board of directors on
December 20, 2006 and, accordingly, was granted an option
to purchase 19,035 shares of our common stock on that date;
however, Mr. Sobieski will not receive any amount as an
annual retainer for 2006. Mr. Liamos and Mr. Eichhorn
have both been directors since prior to 2006.
We currently pay all of our non-employee directors the following
compensation:
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an annual retainer of $25,000;
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a $1,000 fee for each meeting attended (except that the fee for
the audit committee chairman will be $1,750 for each audit
committee meeting attended);
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an additional annual retainer of $10,000 to the audit committee
chairman;
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an additional annual retainer of $6,000 to each of the
compensation committee chairman, nominating and corporate
governance committee chairman and lead director;
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upon initial election to our board of directors, a grant of an
option to purchase 9,520 shares of our common
stock; and
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85
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an annual grant of an option to purchase 3,810 shares of
our common stock, such grant to be made effective on the third
business day following our annual stockholders meeting.
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All options granted to non-employee directors will have an
exercise price equal to the closing price of our common stock on
the date of grant and will vest 50% on the first anniversary of
the grant date and 25% on each of the second and third such
anniversaries, subject to continued service as a director.
The following table sets forth certain information with respect
to our director compensation during the year ended
December 31, 2006.
2006
DIRECTOR COMPENSATION TABLE
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Fees Earned or
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Name
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Paid in Cash
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Option Awards(1)
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Total
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Gary Eichhorn
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$
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25,000
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$
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10,564
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$
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35,564
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Charles Liamos
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$
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25,000
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$
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10,524
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$
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35,524
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Steve Sobieski
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$
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2,342
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$
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2,342
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Other Non-Employee Directors
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(1)
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Based on the dollar amount
recognized for financial statement reporting purposes with
respect to the year ended December 31, 2006 in accordance
with SFAS 123R, excluding the impact of forfeitures, and
assuming that we used the prospective transition method for
reporting awards granted prior to 2006. The assumptions we used
for calculating the grant date fair values are set forth in
notes 2 and 10 to our consolidated financial statements
included in this prospectus. During 2006, we granted
Mr. Sobieski a stock option to purchase 19,035 shares
of our common stock, which had an aggregate grant date fair
value computed in accordance with SFAS 123R of $142,790. No
other stock option grants were made to directors during 2006. As
of December 31, 2006, our non-employee directors held
options that had been granted by us as director compensation to
purchase the following number of shares of our common stock:
Mr. Eichhorn 52,651 shares;
Mr. Liamos 19,035 shares; and
Mr. Sobieski 19,035 shares.
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In addition to the compensation described above, we also
reimburse all non-employee directors for their reasonable
out-of-pocket
expenses incurred in attending meetings of our board of
directors or any committees thereof.
Compensation
Committee Interlocks and Insider Participation
Upon our initial public offering in May 2007, none of our
executive officers served as a member of the board of directors
or compensation committee, or other committee serving an
equivalent function, of any other entity that had one or more of
its executive officers serving as a member of our board of
directors or compensation committee. None of the persons who
were members of our compensation committee at such time have
ever been employed by us.
86
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Issuances
of Preferred Stock
Since January 2004, we have engaged in transactions regarding
sales of our preferred stock to certain of our stockholders that
beneficially own at least 5% of our voting securities and are
affiliated with certain of our directors. In February 2004, we
sold an aggregate of 14,669,421 shares of our Series D
Preferred Stock at a purchase price of $2.42 per share. In
February 2006, we sold an aggregate of 13,738,661 shares of
our Series E Preferred Stock at a purchase price of
$3.64 per share.
The following table summarizes the shares of our preferred stock
purchased in these transactions by our 5% stockholders and
entities affiliated with our directors. Each share of
Series D Preferred Stock and Series E Preferred Stock
listed below converted at the closing of our initial public
offering in May 2007 into 0.3807 shares of our common stock.
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Series D
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Series E
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Preferred
|
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Preferred
|
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Investor
|
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Stock
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Stock
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Funds Affiliated with Alta Partners III, Inc.(1)
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3,305,785
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1,168,817
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Caduceus Private Investments II, LP(2)
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2,750,230
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Caduceus Private Investments (QP) II, LP(2)
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1,029,742
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UBS Juniper Crossover Fund, L.L.C.(2)
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340,907
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International Life Sciences Fund III (LP1), L.P.(3)
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1,526,298
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1,107,333
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|
International Life Sciences Fund III (LP2), L.P.(3)
|
|
|
61,155
|
|
|
|
44,368
|
|
International Life Sciences Fund III Strategic Partners,
L.P.(3)
|
|
|
15,165
|
|
|
|
11,002
|
|
International Life Sciences Fund III Co-investment, L.P.(3)
|
|
|
18,836
|
|
|
|
13,666
|
|
MedVen Affiliates IV, L.P.(4)
|
|
|
32,851
|
|
|
|
13,104
|
|
MedVenture Associates IV, L.P.(4)
|
|
|
1,206,818
|
|
|
|
481,401
|
|
Pequot Offshore Private Equity Partners III, L.P.(5)
|
|
|
203,728
|
|
|
|
135,914
|
|
Pequot Private Equity Fund III, L.P.(5)
|
|
|
1,445,210
|
|
|
|
964,149
|
|
Prism Venture Partners III, L.P.(6)
|
|
|
2,031,399
|
|
|
|
1,600,220
|
|
Prism Venture Partners III-A, L.P.(6)
|
|
|
61,101
|
|
|
|
48,132
|
|
Versant Venture Capital I, L.P.(7)
|
|
|
1,272,337
|
|
|
|
252,748
|
|
Versant Side Fund I, L.P.(7)
|
|
|
24,894
|
|
|
|
4,945
|
|
Versant Affiliates
Fund I-A,
L.P.(7)
|
|
|
27,660
|
|
|
|
5,495
|
|
Versant Affiliates
Fund I-B,
L.P.(7)
|
|
|
58,085
|
|
|
|
11,538
|
|
Federated Kaufmann Fund, a Portfolio of Federated Equity Funds
|
|
|
|
|
|
|
2,747,253
|
|
|
|
|
(1)
|
|
Alta Partners III, Inc. provides
investment advisory services to several venture capital funds
including, Alta BioPharma Partners III, L.P., Alta BioPharma
Partners III GmbH & Co. Beteiligungs KG and Alta
Embarcadero BioPharma Partners III, LLC which are beneficial
owners of more than 5% of our voting securities. Jean Deleage,
Alix Marduel, Farah Champsi, Edward Penhoet and Edward Hurwitz
(collectively known as the Principals) are directors
of Alta BioPharma Management III, LLC (which is the general
partner of Alta BioPharma Partners III, L.P. and the managing
limited partner of Alta BioPharma Partners III GmbH & Co.
Beteiligungs KG), and managers of Alta Embarcadero BioPharma
Partners III, LLC. As directors and managers of such funds, they
may be deemed to share voting and investment powers for the
shares held by the foregoing funds. The principals of Alta
Partners III, Inc. disclaim beneficial ownership of all such
shares held by the foregoing funds, except to the extent of
their proportionate pecuniary interests therein. Ms. de Bord,
one of our directors, is an employee of Alta Partners, and a
member of Alta BioPharma Management III, LLC (which is a general
partner of Alta BioPharma Partners III, L.P. and the managing
limited partner of Alta BioPharma Partners III GmbH & Co.
Beteiligungs KG). She does not have sole or shared voting power
over the shares owned by Alta BioPharma Partners III, L.P., Alta
BioPharma Partners III GmbH & Co. Beteiligungs KG, or Alta
Embarcadero BioPharma Partners III, LLC. She disclaims
beneficial ownership of all such shares held by all of the
foregoing funds, except to the extent of her proportionate
pecuniary interest therein.
|
|
(2)
|
|
OrbiMed Capital II GP LLC,
which is the beneficial owner of more than 5% of our voting
securities, is the general partner of each of Caduceus Private
Investments II, LP and Caduceus Private Investments
(QP) II, LP. Mr. Silverstein, one of our directors, is
a partner of OrbiMed Capital II GP LLC and OrbiMed Advisors LLC,
which is the investment advisor to, and a member of the managing
member of UBS Juniper Crossover Fund, L.L.C.
|
|
(3)
|
|
ILSF III, LLC is the general
partner of International Life Sciences Fund III (GP), L.P.,
which is the general partner of each of International Life
Sciences Fund III (LP1), L.P., International Life Sciences
Fund III (LP2), L.P., International Life Sciences
Fund III Strategic Partners, L.P. and International Life
Sciences Fund III Co-investment, L.P. ILSF III, LLC.
|
87
|
|
|
(4)
|
|
Mr. Liamos, one of our
directors, is affiliated with MedVenture Associates
Management IV Co., LLC, which is the general partner of
each of MedVen Affiliates IV, L.P. and MedVenture Associates IV,
L.P.
|
|
(5)
|
|
Pequot Capital Management, Inc. is
the investment manager/advisor of, and exercises sole investment
discretion over, Pequot Private Equity Fund III, L.P. and
Pequot Offshore Private Equity Partners III, L.P., and as
such, has voting and dispositive power over these shares. Arthur
J. Samberg is the executive officer, director and controlling
shareholder of Pequot Capital Management, Inc. Juliet Tammenoms
Bakker, one of our former directors, currently serves as a
consultant to Pequot Capital Management, Inc. Ms. Tammenoms
Bakker was a Managing Director of Pequot Capital Management,
Inc. prior to serving as a consultant to Pequot Capital
Management, Inc.
|
|
(6)
|
|
Prism Venture Partners III,
LLC is the general partner of Prism Investment
Partners III, L.P., which is the general partner of each of
Prism Venture Partners III, L.P. and Prism Venture
Partners III-A, L.P. Prism Venture Partners III, LLC
and Prism Investment Partners III, L.P. are beneficial
owners of more than 5% of our voting securities. Mr. Nye,
one of our directors, is affiliated with Prism Venture
Partners III, LLC.
|
|
(7)
|
|
Versant Ventures I, L.L.C.,
which is the beneficial owner of more than 5% of our voting
securities, is the general partner of each of Versant Venture
Capital I, L.P., Versant Side Fund I, L.P., Versant
Affiliates
Fund I-A,
L.P. and Versant Affiliates
Fund I-B,
L.P. Dr. Jaffe, one of our directors, is a managing
director of Versant Ventures I, L.L.C.
|
In connection with the sale of our preferred stock in each of
these transactions, we entered into agreements with the
purchasers of our preferred stock that provided for, among other
things, registration rights, participation rights, rights of
first refusal, co-sale rights, agreements regarding the number
and election of our directors and various reporting obligations.
Upon the closing of our initial public offering in May 2007, our
ongoing obligations under these agreements, except for our
obligations regarding registration rights, terminated.
Under these registration rights, holders of at least 40% of all
of the then outstanding registrable shares, or 40% of the then
outstanding registrable shares issued upon conversion of the
Series E preferred stock, may require that we register
registrable shares for public resale on two occasions, provided
that the second occasion may not be less than 12 months
after the first occasion. However, we are only required to
register registrable shares pursuant to such a request if either:
|
|
|
|
|
the shares to be registered have a value of at least
$10 million and the anticipated sale price in the offering
results in an implied equity valuation of our company
immediately prior to the registration of over
$200 million; or
|
|
|
|
the shares to be registered represent at least 25% of all of the
then outstanding registrable shares or 25% of the then
outstanding registrable shares issued upon conversion of the
Series E preferred stock.
|
These registration rights are only exercisable beginning six
months after the closing of our initial public offering;
however, we have agreed to allow the holders of registrable
shares to exercise these registration rights with respect to
this offering. In addition, holders of at least ten percent of
the registrable shares may require that we register their shares
for public resale on
Form S-3
on one or more occasions, but not more than twice in any
12-month
period, if we are eligible to use
Form S-3
or any successor thereto and the value of the securities to be
registered is at least $5 million. All holders of
registrable shares are entitled to include their registrable
shares in any registration requested under these registration
rights. Additionally, if we elect to register any of our equity
securities for any public offering, other than on a
Form S-4,
Form S-8
or an equivalent form, all holders of at least 2% of the then
outstanding registrable shares are entitled to include their
registrable shares in the registration. However, we may reduce
the number of the shares of these holders included in our
registration if, in the opinion of the managing underwriter, the
inclusion of these shares would adversely affect the marketing
of the shares we are selling in the registration; provided that
we may not reduce the number of these shares to less than 30% of
the total number registered. We generally will pay all expenses
in connection with any registration, other than underwriting
discounts.
Policies
and Procedures With Respect to Related Party
Transactions
In accordance with its written charter, our audit committee,
which is comprised of all independent directors, is responsible
for reviewing all related party transactions for potential
conflict of interest situations on an ongoing basis, and the
approval of the audit committee is required for all such
transactions. The term related party transactions
refers to transactions required to be disclosed in our filings
with the SEC pursuant to Item 404 of
Regulation S-K.
88
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table sets forth certain information concerning
beneficial ownership as of September 30, 2007 of shares of
our common stock by:
|
|
|
|
|
each person known by us to beneficially own 5% or more of our
common stock;
|
|
|
|
each of our directors;
|
|
|
|
each of our named executive officers;
|
|
|
|
all of our directors and executive officers as a group; and.
|
|
|
|
each other selling stockholder.
|
The number of common shares beneficially owned by
each stockholder is determined under rules issued by the SEC
regarding the beneficial ownership of securities. This
information is not necessarily indicative of beneficial
ownership for any other purpose. Under these rules, beneficial
ownership of common stock includes (1) any shares as to
which the person or entity has sole or shared voting power or
investment power and (2) any shares as to which the person
or entity has the right to acquire beneficial ownership within
60 days after September 30, 2007, including any shares
that could be purchased by the exercise of options or warrants
at or within 60 days after September 30, 2007. All of
the stock options that we granted to our executive officers and
directors under our 2000 Stock Option and Incentive Plan prior
to December 20, 2006 may be exercised for all of the shares
issuable thereunder, whether or not they are vested; provided
that any shares issued upon exercise of an unvested stock option
will remain subject to the same vesting restrictions as the
stock option that was exercised. Accordingly, all of the shares
subject to these stock options are considered beneficially owned
by our executive officers and directors as of September 30,
2007. Each stockholders percentage ownership before this
offering is based on 26,427,641 shares of our common stock
outstanding as of September 30, 2007 plus the number of
shares of our common stock that may be acquired by such
stockholder upon exercise of options that are exercisable at or
within 60 days after September 30, 2007. Each
stockholders percentage ownership after this offering is
calculated in the same manner as percentage ownership before
this offering, except that it also gives effect to such
stockholders sale of shares in this offering. We have granted
the underwriters an option to purchase up to
734,759 additional shares of our common stock to cover
overallotments, if any, and the table below assumes no exercise
of that option.
Unless otherwise indicated below, to our knowledge, all persons
named in the table have sole voting and investment power with
respect to their shares of our common stock, except to the
extent authority is shared by spouses under community property
laws.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership
|
|
|
|
|
|
Beneficial Ownership
|
|
|
|
Prior to Offering
|
|
|
|
|
|
After Offering
|
|
|
|
Number of
|
|
|
|
|
|
Shares Being
|
|
|
Number of
|
|
|
|
|
Name and Address(1)
|
|
Shares
|
|
|
Percentage
|
|
|
Offered(2)
|
|
|
Shares
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Duane DeSisto(3)
|
|
|
614,027
|
|
|
|
2.3
|
%
|
|
|
|
|
|
|
614,027
|
|
|
|
2.3
|
%
|
Carsten Boess(4)
|
|
|
209,353
|
|
|
|
*
|
|
|
|
|
|
|
|
209,353
|
|
|
|
*
|
|
Luis Malavé(5)
|
|
|
230,257
|
|
|
|
*
|
|
|
|
|
|
|
|
230,257
|
|
|
|
*
|
|
Jeff Smith(6)
|
|
|
137,054
|
|
|
|
*
|
|
|
|
|
|
|
|
137,054
|
|
|
|
*
|
|
Shawna Gvazdauskas(7)
|
|
|
114,211
|
|
|
|
*
|
|
|
|
|
|
|
|
114,211
|
|
|
|
*
|
|
Alison de Bord(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary Eichhorn(9)
|
|
|
52,651
|
|
|
|
*
|
|
|
|
|
|
|
|
52,651
|
|
|
|
*
|
|
Ross Jaffe(10)
|
|
|
2,127,943
|
|
|
|
8.1
|
|
|
|
|
|
|
|
2,127,943
|
|
|
|
8.1
|
|
Charles T. Liamos(11)
|
|
|
19,035
|
|
|
|
*
|
|
|
|
|
|
|
|
19,035
|
|
|
|
*
|
|
Gordie Nye(12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jonathan Silverstein(13)
|
|
|
1,568,841
|
|
|
|
5.9
|
|
|
|
|
|
|
|
1,568,841
|
|
|
|
5.9
|
|
Steven T. Sobieski
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Directors and Executive Officers as a group
(19 persons)(14)
|
|
|
5,579,503
|
|
|
|
19.8
|
|
|
|
|
|
|
|
5,579,503
|
|
|
|
19.8
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership
|
|
|
|
|
|
Beneficial Ownership
|
|
|
|
Prior to Offering
|
|
|
|
|
|
After Offering
|
|
|
|
Number of
|
|
|
|
|
|
Shares Being
|
|
|
Number of
|
|
|
|
|
Name and Address(1)
|
|
Shares
|
|
|
Percentage
|
|
|
Offered(2)
|
|
|
Shares
|
|
|
Percentage
|
|
|
More Than 5% Holders and Other Selling Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alta Partners III, Inc.(15)
|
|
|
1,703,505
|
|
|
|
6.4
|
|
|
|
|
|
|
|
1,192,455
|
|
|
|
4.5
|
|
Alta BioPharma Management III, LLC(16)
|
|
|
1,665,054
|
|
|
|
6.3
|
|
|
|
|
|
|
|
1,165,537
|
|
|
|
4.4
|
|
Alta BioPharma Partners III, L.P.(17)
|
|
|
1,560,269
|
|
|
|
5.9
|
|
|
|
468,081
|
|
|
|
1,092,188
|
|
|
|
4.1
|
|
Alta BioPharma Partners GmbH & Co. Beteiligungs KG(17)
|
|
|
104,785
|
|
|
|
*
|
|
|
|
31,436
|
|
|
|
73,349
|
|
|
|
*
|
|
Alta Embarcadero Bio Pharma Partners III, LLC(17)
|
|
|
38,451
|
|
|
|
*
|
|
|
|
11,535
|
|
|
|
26,916
|
|
|
|
*
|
|
Samuel D. Isaly(18)
|
|
|
1,568,841
|
|
|
|
5.9
|
|
|
|
|
|
|
|
1,568,841
|
|
|
|
5.9
|
|
OrbiMed Capital GP II LLC(19)
|
|
|
1,439,056
|
|
|
|
5.4
|
|
|
|
|
|
|
|
1,439,056
|
|
|
|
5.4
|
|
Schroder Ventures Managers Inc.(20)
|
|
|
1,496,850
|
|
|
|
5.7
|
|
|
|
|
|
|
|
912,598
|
|
|
|
3.5
|
|
Schroder Ventures International Life Sciences Fund II Group
Co-Investment Scheme(21)
|
|
|
25,221
|
|
|
|
*
|
|
|
|
9,845
|
|
|
|
15,376
|
|
|
|
*
|
|
Schroder Ventures International Life Sciences Fund II L.P.1(21)
|
|
|
877,020
|
|
|
|
3.3
|
|
|
|
342,318
|
|
|
|
534,702
|
|
|
|
2.0
|
|
Schroder Ventures International Life Sciences Fund II L.P.2(21)
|
|
|
373,519
|
|
|
|
1.4
|
|
|
|
145,792
|
|
|
|
227,727
|
|
|
|
*
|
|
Schroder Ventures International Life Sciences Fund II L.P.3(21)
|
|
|
99,540
|
|
|
|
*
|
|
|
|
38,853
|
|
|
|
60,687
|
|
|
|
*
|
|
Schroder Ventures International Life Sciences Fund II Strategic
Partners L.P(21)
|
|
|
13,529
|
|
|
|
*
|
|
|
|
5,281
|
|
|
|
8,248
|
|
|
|
*
|
|
Schroder Ventures Investments Limited(22)
|
|
|
108,021
|
|
|
|
*
|
|
|
|
42,163
|
|
|
|
65,858
|
|
|
|
*
|
|
Pequot Capital Management, Inc.(23)
|
|
|
2,134,289
|
|
|
|
8.1
|
|
|
|
|
|
|
|
1,067,144
|
|
|
|
4.0
|
|
Pequot Offshore Private Equity Partners III, L.P.(24)
|
|
|
263,693
|
|
|
|
1.0
|
|
|
|
131,847
|
|
|
|
131,846
|
|
|
|
*
|
|
Pequot Private Equity Fund III, L.P.(24)
|
|
|
1,870,596
|
|
|
|
7.1
|
|
|
|
935,298
|
|
|
|
935,298
|
|
|
|
3.5
|
|
Prism Venture Partners III, LLC(25)
|
|
|
3,688,992
|
|
|
|
14.0
|
|
|
|
|
|
|
|
2,646,242
|
|
|
|
10.0
|
|
Prism Investment Partners III, L.P.(25)
|
|
|
3,688,992
|
|
|
|
14.0
|
|
|
|
|
|
|
|
2,646,242
|
|
|
|
10.0
|
|
Prism Venture Partners III, L.P.(26)
|
|
|
3,579,037
|
|
|
|
13.5
|
|
|
|
1,011,795
|
|
|
|
2,567,242
|
|
|
|
9.7
|
|
Prism Venture Partners III-A, L.P.(26)
|
|
|
109,955
|
|
|
|
*
|
|
|
|
30,955
|
|
|
|
79,000
|
|
|
|
*
|
|
Versant Ventures I, L.L.C.(27)
|
|
|
2,127,943
|
|
|
|
8.1
|
|
|
|
|
|
|
|
2,127,943
|
|
|
|
8.1
|
|
Versant Venture Capital I, L.P.(28)
|
|
|
1,957,713
|
|
|
|
7.4
|
|
|
|
|
|
|
|
1,957,713
|
|
|
|
7.4
|
|
International Life Sciences
Fund III (LP1), L.P.(29)
|
|
|
1,002,638
|
|
|
|
3.8
|
|
|
|
391,349
|
|
|
|
611,289
|
|
|
|
2.3
|
|
International Life Sciences
Fund III (LP2), L.P.(29)
|
|
|
40,173
|
|
|
|
*
|
|
|
|
15,680
|
|
|
|
24,493
|
|
|
|
|
|
International Life Sciences Fund III Co-Investment,
L.P.(29)
|
|
|
12,372
|
|
|
|
*
|
|
|
|
4,830
|
|
|
|
7,542
|
|
|
|
*
|
|
International Life Sciences Fund III Strategic
Partners, L.P.(29)
|
|
|
9,961
|
|
|
|
*
|
|
|
|
3,889
|
|
|
|
6,072
|
|
|
|
*
|
|
Community Investment Partners IV, L.P., LLLP(30)
|
|
|
48,055
|
|
|
|
*
|
|
|
|
48,055
|
|
|
|
|
|
|
|
|
|
MedVen Affiliates IV, L.P.(31)
|
|
|
17,494
|
|
|
|
*
|
|
|
|
17,494
|
|
|
|
|
|
|
|
|
|
MedVentures Associates IV, L.P.(31)
|
|
|
642,714
|
|
|
|
2.4
|
|
|
|
642,714
|
|
|
|
|
|
|
|
|
|
Dow Employees Pension Plan(32)
|
|
|
457,539
|
|
|
|
1.7
|
|
|
|
228,000
|
|
|
|
229,539
|
|
|
|
*
|
|
Union Carbide Employees Pension Plan(32)
|
|
|
305,026
|
|
|
|
1.2
|
|
|
|
152,500
|
|
|
|
152,526
|
|
|
|
*
|
|
SVB Financial Group(33)
|
|
|
15,688
|
|
|
|
*
|
|
|
|
15,688
|
|
|
|
|
|
|
|
|
|
Teachers Insurance and Annuity Association of America(34)
|
|
|
524,263
|
|
|
|
2.0
|
|
|
|
173,000
|
|
|
|
351,263
|
|
|
|
1.3
|
|
|
|
|
*
|
|
Represents less than 1% of the
outstanding shares of our common stock.
|
|
(1)
|
|
Unless otherwise indicated, the
address of each stockholder is
c/o Insulet
Corporation, 9 Oak Park Drive, Bedford, Massachusetts 01730.
|
|
(2)
|
|
The shares listed in this column
include only those shares being sold directly by each of the
selling stockholders.
|
|
(3)
|
|
Includes 614,027 shares of our
common stock (of which 514,316 are or will be vested) issuable
upon the exercise of options exercisable on or within
60 days after September 30, 2007.
|
90
|
|
|
(4)
|
|
Includes 209,353 shares of our
common stock (of which 74,110 are or will be vested) issuable
upon the exercise of options exercisable on or within
60 days after September 30, 2007.
|
|
(5)
|
|
Includes 230,257 shares of our
common stock (of which 212,135 are or will be vested) issuable
upon the exercise of options exercisable on or within
60 days after September 30, 2007.
|
|
(6)
|
|
Includes 137,054 shares of our
common stock (of which 116,934 are or will be vested) issuable
upon the exercise of options exercisable on or within
60 days after September 30, 2007.
|
|
(7)
|
|
Includes 114,211 shares of our
common stock (of which 91,963 are or will be vested) issuable
upon the exercise of options exercisable on or within
60 days after September 30, 2007.
|
|
(8)
|
|
Ms. de Bord is a member of Alta
BioPharma Management III, LLC, which is the general partner of
Alta BioPharma Partners III, L.P. and the managing limited
partner of Alta BioPharma Partners III GmbH & Co.
Beteiligungs KG. Ms. de Bord is also affiliated with Alta
Embarcadero BioPharma Partners III, LLC. Alta BioPharma
Partners III GmbH & Co. Beteiligungs KG
beneficially owns 104,785 shares of common stock, Alta
BioPharma Partners III, L.P. beneficially owns
1,560,269 shares of our common stock and Alta Embarcadero
BioPharma Partners III, LLC beneficially owns 38,451 shares
of our common stock. Ms. de Bord does not possess voting and/or
investment power over the shares held by these entities and
disclaims beneficial ownership of the shares held by these
entities, except to the extent of her pecuniary interests.
|
|
(9)
|
|
Includes 10,711 shares of our
common stock (of which 3,573 are or will be vested) issuable
upon the exercise of options exercisable on or within
60 days after September 30, 2007 and
41,940 shares of our common stock beneficially owned by
Mr. Eichhorn.
|
|
(10)
|
|
Includes 1,957,713 shares of
our common stock beneficially owned by Versant Venture
Capital I, L.P., 38,301 shares of our common stock
beneficially owned by Versant Side Fund I, L.P.,
42,557 shares of our common stock beneficially owned by
Versant Affiliates
Fund I-A,
L.P. and 89,372 shares of our common stock beneficially
owned by Versant Affiliates
Fund I-B,
L.P. Dr. Jaffe is a managing director of Versant
Ventures I, L.L.C., which is the general partner of each of
Versant Venture Capital I, L.P., Versant Side
Fund I, L.P., Versant Affiliates
Fund I-A,
L.P. and Versant Affiliates
Fund I-B,
L.P. Dr. Jaffe disclaims beneficial ownership of the shares
held by Versant Venture Capital I, L.P., Versant Side
Fund I, L.P., Versant Affiliates
Fund I-A,
L.P. and Versant Affiliates
Fund I-B,
L.P., except to the extent of his pecuniary interests.
|
|
(11)
|
|
Includes 19,035 shares of our
common stock (of which 9,517 are or will be vested) issuable
upon the exercise of options exercisable on or within
60 days after September 30, 2007. Mr. Liamos is
affiliated with MedVenture Associates Management IV Co.,
LLC, which is the general partner of each of MedVen Affiliates
IV, L.P. and MedVenture Associates IV, L.P. MedVen Affiliates
IV, L.P. beneficially owns 17,494 shares of our common
stock and MedVenture Associates IV, L.P. beneficially owns
642,714 shares of our common stock. Mr. Liamos does
not possess voting and/or investment power over the shares held
by these entities and disclaims beneficial ownership of the
shares held by these entities, except to the extent of his
pecuniary interests.
|
|
(12)
|
|
Mr. Nye is affiliated with
Prism Venture Partners III, LLC, which is the general partner of
Prism Investment Partners III, L.P., which is the general
partner of each of Prism Venture Partners III, L.P. and Prism
Venture Partners III-A, L.P. Prism Venture Partners III, L.P.
beneficially owns 3,579,037 shares of our common stock and
Prism Venture Partners III-A, L.P. beneficially owns
109,955 shares of our common stock beneficially owned by
Prism Venture Partners III-A, L.P. Mr. Nye does not possess
voting and/or investment power over the shares held by these
entities and disclaims beneficial ownership of the shares held
by these entities, except to the extent of his pecuniary
interests.
|
|
(13)
|
|
Includes 1,047,028 shares of
our common stock beneficially owned by Caduceus Private
Investments II, LP, 392,028 shares of our common stock
beneficially owned by Caduceus Private Investments (QP) II, LP
and 129,785 shares of our common stock beneficially owned
by UBS Juniper Crossover Fund, L.L.C. Mr. Silverstein is a
partner of OrbiMed Capital GP II LLC, which is the general
partner of each of Caduceus Private Investments II, LP and
Caduceus Private Investments (QP) II, LP. Mr. Silverstein
is also a partner of OrbiMed Advisors LLC, which is the
investment advisor to, and a member of the managing member of
UBS Juniper Crossover Fund, L.L.C. Mr. Silverstein
disclaims beneficial ownership of the shares held by Caduceus
Private Investments II, LP, Caduceus Private Investments (QP)
II, LP and UBS Juniper Crossover Fund, L.L.C., except to the
extent of his pecuniary interests.
|
|
(14)
|
|
Includes an aggregate of
1,750,668 shares of our common stock (of which 1,343,865
are or will be vested) issuable upon the exercise of options
exercisable on or within 60 days after September 30,
2007. See also notes (3) (13) above.
|
|
(15)
|
|
Includes 1,560,269 shares of
our common stock beneficially owned by Alta BioPharma Partners
III, L.P., 104,786 shares of our common stock beneficially
owned by Alta BioPharma Partners III GmbH & Co.
Beteiligungs KG, and 38,452 shares of our common stock
beneficially owned by Alta Embarcadero BioPharma Partners III,
LLC. Alta Partners III, Inc. provides investment advisory
services to several venture capital funds including, Alta
BioPharma Partners III, L.P., Alta BioPharma Partners III
GmbH & Co. Beteiligungs KG and Alta Embarcadero
BioPharma Partners III, LLC. Jean Deleage, Alix Marduel, Farah
Champsi, Edward Penhoet and Edward Hurwitz (collectively, the
Alta principals) are managing directors of Alta
BioPharma Management III, LLC (which is the general partner of
Alta BioPharma Partners III, L.P. and the managing limited
partner of Alta BioPharma Partners III GmbH & Co.
Beteiligungs KG), and managers of Alta Embarcadero BioPharma
Partners III, LLC. As managing directors and managers of such
funds, they may be deemed to share voting and investment powers
for the shares held by the foregoing funds. The Alta principals
disclaim beneficial ownership of all such shares held by the
foregoing funds, except to the extent of their proportionate
pecuniary interests therein. The address of Alta Partners III,
Inc. is One Embarcadero Center, Suite 3700,
San Francisco, CA 94111.
|
|
(16)
|
|
Includes 104,785 shares of our
common stock beneficially owned by Alta BioPharma
Partners III GmbH & Co. Beteiligungs KG and
1,560,269 shares of our common stock beneficially owned by
Alta BioPharma Partners III, L.P. Alta BioPharma Management III,
LLC is the general partner of Alta BioPharma Partners III, L.P.
and the managing limited partner of Alta BioPharma
Partners III GmbH & Co. Beteiligungs KG. Jean
Deleage, Alix Marduel, Farah Champsi, Edward Hurwitz and Edward
Penhoet (collectively, the Alta principals) are
directors of Alta BioPharma Management III, LLC. The Alta
principals may be deemed to share voting and investment powers
over the shares held by the funds. The Alta principals disclaim
beneficial ownership of all such shares held by the funds,
except to the extent of their proportionate pecuniary interest
therein. The address of Alta BioPharma Management III, LLC is
One Embarcadero Center, 37th Floor, San Francisco,
California 94118.
|
|
(17)
|
|
The address of each of Alta
BioPharma Partners III, L.P., Alta BioPharma Partners III
GmbH & Co. Beteiligungs KG and Alta Embarcadero
BioPharma Partners III, LLC is One Embarcadero Center, 37th
Floor, San Francisco, California 94118.
|
|
(18)
|
|
Includes 1,047,028 shares of
our common stock beneficially owned by Caduceus Private
Investments II, LP and 392,028 shares of our common stock
beneficially owned by Caduceus Private Investments (QP) II, LP
and 129,785 shares of our common stock beneficially owned
by UBS Juniper Crossover Fund, L.L.C., OrbiMed Capital GP II LLC
is the general partner of each of Caduceus Private Investments
II, LP and Caduceus Private Investments (QP) II, LP. Samuel D.
Isaly, a natural person (Isaly), owns a controlling
interest in the outstanding limited liability company interests
of OrbiMed Capital GP II LLC pursuant to the terms of the
limited liability company agreement of such entity. As a result,
Isaly and OrbiMed Capital GP II LLC share power to direct the
vote and to direct the disposition of such shares. Isaly owns a
controlling interest in OrbiMed Advisors LLC which is the
investment advisor to, and a managing member of UBS Juniper
Crossover Fund, L.L.C. Isaly disclaims beneficial ownership of
the shares held by Caduceus Private Investments II, LP, Caduceus
Private Investments (QP) II, LP and UBS Juniper Crossover Fund,
L.L.C. except to the extent
|
91
|
|
|
|
|
of his pecuniary interest therein.
The address of OrbiMed Capital GP II LLC is 767 Third Avenue,
30th Floor, New York, New York 10017.
|
|
|
|
(19)
|
|
Includes 1,047,028 shares of
our common stock beneficially owned by Caduceus Private
Investments II, LP and 392,028 shares of our common stock
beneficially owned by Caduceus Private Investments (QP) II, LP.,
OrbiMed Capital GP II LLC is the general partner of each of
Caduceus Private Investments II, LP and Caduceus Private
Investments (QP) II, LP. Samuel D. Isaly, a natural person
(Isaly), owns a controlling interest in the
outstanding limited liability company interests of OrbiMed
Capital GP II LLC pursuant to the terms of the limited liability
company agreement of such entity. As a result, Isaly and OrbiMed
Capital GP II LLC share power to direct the vote and to direct
the disposition of such shares. The address of OrbiMed Capital
GP II LLC is 767 Third Avenue, 30th Floor, New York, New York
10017.
|
|
(20)
|
|
Includes 877,020 shares of our
common stock held by Schroder Ventures International Life
Sciences Fund II L.P.1 (ILSF LP1), 373,519 shares of
our common stock held by Schroder Ventures International Life
Sciences Fund II L.P.2 (ILSF LP2), 99,540 shares of
our common held by Schroder Ventures International Life Sciences
Fund II L.P.3 (ILSF LP3), 13,529 shares of common
stock held by Schroder Ventures International Life Sciences Fund
II Strategic Partners L.P. (Strategic Partners),
25,221 shares of our common stock held by SITCO Nominees Ltd. -
VC 01903 as Nominee of Schroder Ventures International Life
Sciences Fund II Group Co-Investment Scheme (SITCO
Nominees) and 108,021 of our common stock held by SV
(Nominees) Limited as Nominee of Schroder Ventures Investments
Limited (SVIL). Schroder Venture Managers Inc.
(SVMI), the general partner of each of ILSF
LP1, ILSF LP2, ILSF LP3 and Strategic Partners, may be deemed to
share voting and dispositive power over the shares held by ILSF
LP1, ILSF LP2, ILSF LP3 and Strategic Partners, as well as the
shares held by SITCO Nominees and SVIL which co-invest with the
funds pursuant to parallel investment agreements. ILSF LP1,
ILSF LP2, ILSF LP3, Strategic Partners, SITCO Nominees and SVIL
(each a Schroder entity, or collectively the
Funds) may be deemed to beneficially own the shares
held by each other Schroder entity because of certain
contractual relationships among the Funds and their affiliates.
Peter Everson, Gary Carr, Deborah Speight, Nicola Walker, Scott
Burns and Gordon Purvis are directors of SVMI. The address of
SVMI is c/o 22 Church Street, Hamilton HM 11, Bermuda.
|
|
(21)
|
|
The address of each of ILSF LP1,
ILSF LP2, ILSF LP3, Strategic Partners and SITCO Nominees is
c/o Schroder
Venture Managers Limited, 22 Church Street, Hamilton HM 11,
Bermuda.
|
|
(22)
|
|
The address of Schroder Ventures
Investments Limited is
c/o Schroder
Venture Managers Limited, 22 Church Street, Hamilton HM 11,
Bermuda.
|
|
(23)
|
|
Includes 263,693 shares of our
common stock beneficially owned by Pequot Offshore Private
Equity Partners III, L.P. and 1,870,596 shares of our
common stock beneficially owned by Pequot Private Equity
Fund III, L.P. Pequot Capital Management, Inc. is the
investment manager/advisor of, and exercises sole investment
discretion over, Pequot Private Equity Fund III, L.P. and
Pequot Offshore Private Equity Partners III, L.P., and as such,
has voting and dispositive power over these shares. Arthur J.
Samberg is the executive officer, director and controlling
shareholder of Pequot Capital Management, Inc. Juliet Tammenoms
Bakker, one of our former directors, currently serves as a
consultant to Pequot Capital Management, Inc. Ms. Tammenons
Bakker was a Managing Director of Pequot Capital Management,
Inc. prior to serving as a consultant to Pequot Capital
Management, Inc. The address of Pequot Capital Management, Inc.
is
c/o Pequot
Capital Management, Inc., 500 Nyala Farm Road, Westport,
Connecticut 06880.
|
|
(24)
|
|
The address of each of Pequot
Offshore Private Equity Partners III, L.P. and Pequot Private
Equity Fund III, L.P. is
c/o Pequot
Capital Management, Inc., 500 Nyala Farm Road, Westport,
Connecticut 06880.
|
|
(25)
|
|
Includes 3,579,037 shares of
our common stock beneficially owned by Prism Venture Partners
III, L.P. and 109,955 shares of our common stock
beneficially owned by Prism Venture Partners III-A, L.P. Prism
Venture Partners III, LLC is the general partner of Prism
Investment Partners III, L.P., which is the general partner of
each of Prism Venture Partners III, L.P. and Prism Venture
Partners III-A, L.P. William M. Seifert and John L.
Brooks, III (the Prism principals) are managing
directors of Prism Venture Partners III and Prism Venture
Partners III-A. The Prism principals may be deemed to share
voting and investment powers over the shares held by the funds.
The Prism principals disclaim beneficial ownership of all such
shares held by the fund, except to the extent of their
proportionate pecuniary interest therein. The address of Prism
Venture Partners III, LLC and Prism Investment Partners III,
L.P. is 117 Kendrick Street, Suite 200, Needham,
Massachusetts 02494.
|
|
(26)
|
|
The address of each of Prism
Venture Partners III, L.P. and Prism Venture Partners III-A,
L.P. is 117 Kendrick Street, Suite 200, Needham,
Massachusetts 02494.
|
|
(27)
|
|
Includes 1,957,713 shares of
our common stock beneficially owned by Versant Venture
Capital I, L.P., 38,301 shares of our common stock
beneficially owned by Versant Side Fund I, L.P.,
42,557 shares of our common stock beneficially owned by
Versant Affiliates
Fund I-A,
L.P. and 89,372 shares of our common stock beneficially
owned by Versant Affiliates
Fund I-B,
L.P. Versant Ventures I, L.L.C. is the general partner of
each of Versant Venture Capital I, L.P., Versant Side
Fund I, L.P., Versant Affiliates
Fund I-A,
L.P. and Versant Affiliates
Fund I-B,
L.P. Versant Ventures I, LLC has the voting and dispositive
control of the Insulet shares owned by Versant Venture
Capital I, LP. No one limited partner in Versant Venture
Capital I L.P. owns 10% or more of Versant Venture
Capital I, L.P. and no natural persons have an ownership
interest in Versant Venture Capital I, L.P. The managing
directors of Versant Ventures I, LLC are Brian G. Atwood,
Samuel D. Colella, Ross Jaffe, M.D., William J. Link,
Barbara N. Lubash, Donald M. Milder and Rebecca R. Robertson
(collectively the Versant principals). The Versant
principals may be deemed to share voting and investment powers
over the shares held by the funds. The Versant principals
disclaim beneficial ownership of all such shares held by the
fund, except to the extent of their proportionate pecuniary
interest therein. The address of Versant Ventures I, L.L.C.
is 3000 Sand Hill Road, Bldg. 4, Suite 210, Menlo Park,
California 94025.
|
|
(28)
|
|
The address of Versant Venture
Capital I, L.P. is 3000 Sand Hill Road, Bldg. 4,
Suite 210, Menlo Park, California 94025.
|
|
(29)
|
|
The address of each of
International Life Sciences Fund III (LP1), L.P.,
International Life Sciences Fund III (LP2), L.P.,
International Life Sciences Fund III Strategic Partners,
L.P. and International Life Sciences Fund III
Co-investment, L.P. is
c/o SV
Life Sciences Advisers, LLC, 60 State Street, Suite 3650,
Boston, Massachusetts 02109.
|
|
(30)
|
|
The address of Community Investment
Partners IV, L.P., LLLP is
c/o CIP
Management L.P., LLLP, The Jones Financial Companies, L.L.L.P.,
12555 Manchester Road, St. Louis, MO 63131.
|
|
(31)
|
|
The address of each of MedVen
Affiliates IV, L.P. and MedVentures Associates IV, L.P. is
c/o MedVenture
Associates, 5980 Horton Street, Suite 390, Emeryville, CA
94608.
|
|
(32)
|
|
The address of each of Dow
Employees Pension Plan and Union Carbide Employees
Pension Plan is
c/o Diamond
Capital Management, Inc., 1320 Waldo Avenue, Dorinco 100,
Midland, MI 48674.
|
|
|
|
(33)
|
|
Includes 15,688 shares of our
common stock issuable upon the exercise of warrants exercisable
on or within 60 days after September 30, 2007. The address of
SVB Financial Group is 3003 Tasman Drive, HA 200,
Santa Clara, CA 95054.
|
|
|
|
(34)
|
|
The address of Teachers Insurance
and Annuity Association of America is 730 Third Avenue, New
York, NY 10017.
|
92
DESCRIPTION
OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares
of our common stock, $0.001 par value per share, and
5,000,000 shares of undesignated preferred stock,
$0.001 par value per share. The following description of
our capital stock does not purport to be complete and is subject
to, and qualified in its entirety by, our Eighth Amended and
Restated Certificate of Incorporation and our Amended and
Restated By-Laws, which are exhibits to the registration
statement of which this prospectus forms a part, and by
applicable law. We refer in this section to our Eighth Amended
and Restated Certificate of Incorporation as our certificate of
incorporation, and we refer to our Amended and Restated By-Laws
as our by-laws.
Common
Stock
Holders of our common stock are entitled to one vote per share
on matters to be voted on by stockholders and also are entitled
to receive such dividends, if any, as may be declared from time
to time by our board of directors in its discretion out of funds
legally available therefor. Holders of our common stock have
exclusive voting rights for the election of our directors and
all other matters requiring stockholder action, except with
respect to amendments to our certificate of incorporation that
alter or change the powers, preferences, rights or other terms
of any outstanding preferred stock if the holders of such
affected series of preferred stock are entitled to vote on such
an amendment.
Upon our liquidation or dissolution, the holders of our common
stock will be entitled to receive pro rata all assets remaining
available for distribution to stockholders after payment of all
liabilities and provision for the liquidation of any shares of
preferred stock at the time outstanding. Our common stock has no
preemptive or other subscription rights, and there are no
conversion rights or redemption or sinking fund provisions with
respect to such stock. The payment of dividends on our common
stock is subject to the prior payment of dividends on any
outstanding preferred stock.
Preferred
Stock
Our certificate of incorporation provides that up to
5,000,000 shares of undesignated preferred stock may be
issued from time to time in one or more series. Our board of
directors is authorized to fix the voting rights, if any,
designations, powers, preferences, the relative participating,
optional or other special rights and any qualifications,
limitations and restrictions thereof, applicable to the shares
of each series. Our board of directors is able to, without
stockholder approval, issue preferred stock with voting and
other rights that could adversely affect the voting power and
other rights of the holders of the common stock and could have
anti-takeover effects. As of September 30, 2007, no shares
of our preferred stock were outstanding and we have no present
plans to issue any shares of preferred stock. The ability of our
board of directors to issue preferred stock without stockholder
approval could have the effect of delaying, deferring or
preventing a change of control of us or the removal of existing
management.
Certain
Anti-Takeover Provisions of Delaware Law and our Certificate of
Incorporation and By-Laws
We are subject to the provisions of Section 203 of the
Delaware General Corporation Law, which generally has an
anti-takeover effect for transactions not approved in advance by
our board of directors, including discouraging attempts that
might result in a premium over the market price for the shares
of our common stock held by stockholders. In general,
Section 203 prohibits a publicly held Delaware corporation
from engaging in a business combination with an
interested stockholder for a three-year period
following the time that such stockholder becomes an interested
stockholder, unless the business combination is approved in a
prescribed manner. A business combination includes,
among other things, a merger, asset or stock sale or other
transaction resulting in a financial benefit to the interested
stockholder. An interested stockholder is a person
who, together with affiliates and associates, owns, or did own
within three years prior to the determination of interested
stockholder status, 15% or more of the corporations voting
stock. Under
93
Section 203, a business combination between a corporation
and an interested stockholder is prohibited unless it satisfies
one of the following conditions:
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before the stockholder became interested, the board of directors
approved either the business combination or the transaction
which resulted in the stockholder becoming an interested
stockholder; or
|
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|
upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the voting stock
outstanding, shares owned by:
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persons who are directors and also officers, and
|
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employee stock plans, in some instances; or
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at or after the time the stockholder became interested, the
business combination was approved by the board of directors of
the corporation and authorized at an annual or special meeting
of the stockholders by the affirmative vote of at least
two-thirds of the outstanding voting stock which is not owned by
the interested stockholder.
|
Staggered
Board of Directors
Our certificate of incorporation and by-laws provide that our
board of directors be classified into three classes of directors
of approximately equal size. As a result, in most circumstances,
a person can gain control of our board only by successfully
engaging in a proxy contest at two or more annual meetings.
Stockholder
Action; Special Meeting of Stockholders
Our certificate of incorporation provides that our stockholders
may not take any action by written consent, but only may take
action at duly called annual or special meetings of
stockholders. Our by-laws further provide that special meetings
of our stockholders may be only called by our board of directors
with a majority vote of our board of directors.
Advance
Notice Requirements for Stockholder Proposals and Director
Nominations
Our by-laws provide that stockholders seeking to bring business
before our annual meeting of stockholders, or to nominate
candidates for election as directors at our annual meeting of
stockholders, must provide timely notice of their intent in
writing. To be timely, a stockholders notice needs to be
delivered to our principal executive offices not later than the
close of business on the 90th day nor earlier than the
close of business on the 120th day prior to the first
anniversary of the preceding years annual meeting of
stockholders. For the first annual meeting of stockholders after
the closing of our initial public offering, a stockholders
notice shall be timely if delivered to our principal executive
offices not later than the 90th day prior to the scheduled
date of the annual meeting of stockholders or the 10th day
following the day on which public announcement of the date of
our annual meeting of stockholders is first made or sent by us.
Our by-laws will also specify certain requirements as to the
form and content of a stockholders meeting. These
provisions may preclude our stockholders from bringing matters
before our annual meeting of stockholders or from making
nominations for directors at our annual meeting of stockholders.
Authorized
But Unissued Shares
Our authorized but unissued shares of common stock and preferred
stock are available for future issuances without stockholder
approval and could be utilized for a variety of corporate
purposes, including future offerings to raise additional
capital, corporate acquisitions, employee benefit plans and
stockholder rights plans. The existence of authorized but
unissued and unreserved common stock and preferred stock could
render more difficult or discourage an attempt to obtain control
of us by means of a proxy contest, tender offer, merger or
otherwise.
94
Removal
of Directors
Our certificate of incorporation provides that a director on our
board of directors may be removed from office only with cause
and only by the affirmative vote of the holders of 75% or more
of the shares then entitled to vote at an election of our
directors.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
Computershare Trust Company, N.A.
Listing
Our common stock is listed on The NASDAQ Global Market under the
symbol PODD.
95
MATERIAL
U.S. FEDERAL INCOME TAX CONSEQUENCES TO
NON-U.S. HOLDERS
General
The following is a general discussion of the material
U.S. federal income and estate tax consequences of the
ownership and disposition of common stock that may be relevant
to you if you are a
non-U.S. Holder.
In general, a
non-U.S. Holder
is any person or entity that is, for U.S. federal income
tax purposes, a foreign corporation, a nonresident alien
individual or a foreign estate or trust. The test for whether an
individual is a resident of the United States for
U.S. federal estate tax purposes differs from the test used
for U.S. federal income tax purposes. Some individuals,
therefore, may be
non-U.S. Holders
for purposes of the federal income tax discussion, but not for
purposes of the federal estate tax discussion, and vice versa.
This discussion is based on current law, which is subject to
change, possibly with retroactive effect, or different
interpretations that could affect the tax consequences described
herein. This discussion is limited to
non-U.S. Holders
who hold their shares of common stock as capital assets.
Moreover, this discussion is for general information only and
does not address all the tax consequences that may be relevant
to you in light of your personal circumstances, nor does it
discuss special tax provisions that may apply to you if you
relinquished U.S. citizenship or residence.
If you are an individual, you may, in many cases, be deemed to
be a resident alien, as opposed to a nonresident alien, by
virtue of being present in the United States for at least
31 days in the current calendar year and for an aggregate
of at least 183 days during a three-year period ending in
the current calendar year. For the aggregate days test, all of
the days present in the current year, one-third of the days
present in the immediately preceding year, and one-sixth of the
days present in the second preceding year are counted. Resident
aliens generally are subject to U.S. federal income tax in
the same manner as U.S. citizens.
If a partnership (including any entity or arrangement treated as
a partnership for U.S. federal income tax purposes) holds
common stock, the U.S. federal income tax treatment of a
partner in the partnership generally will depend upon the status
of the partner and the activities of the partnership. If you are
a partner of a partnership holding common stock, you should
consult your own tax advisor regarding the U.S. federal
income tax consequences to you of the purchase, ownership and
disposition of common stock.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT
A TAX ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON
STOCK AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE AS A RESULT
OF YOUR PARTICULAR SITUATION OR UNDER THE LAWS OF ANY
U.S. STATE, MUNICIPALITY, FOREIGN OR OTHER TAXING
JURISDICTION.
Dividends
We currently do not expect to pay any cash dividends on our
common stock. However if, contrary to our expectations,
dividends are paid on the common stock out of our current or
accumulated earnings and profits, as a
non-U.S. Holder,
you generally will be subject to withholding of
U.S. federal income tax at a 30% rate or at a lower rate as
may be specified by an applicable income tax treaty, unless the
dividends are effectively connected with a U.S. trade or
business as discussed below. To claim the benefit of a lower
rate under an income tax treaty, you must properly file with the
payer an Internal Revenue Service
Form W-8BEN,
or successor form, claiming an exemption from or reduction in
withholding under the applicable tax treaty.
If dividends are considered effectively connected with the
conduct of a trade or business by you within the United States
and, where a tax treaty applies, are attributable to a
U.S. permanent establishment of yours, those dividends
generally will not be subject to withholding tax, but instead
will be subject to U.S. federal income tax on a net basis
at applicable graduated individual or corporate rates, provided
you file an Internal Revenue Service
Form W-8ECI,
or successor form, with the payer. If you are a foreign
corporation, any effectively connected dividends may, under
certain circumstances, be subject to an additional branch
profits tax at a rate of 30% or at a lower rate as may be
specified by an applicable income tax treaty.
96
You must comply with either the certification procedures
described above, or, in the case of payments made outside the
United States with respect to an offshore account, certain
documentary evidence procedures, directly or under certain
circumstances through an intermediary, to obtain the benefits of
a reduced rate under an income tax treaty with respect to
dividends paid with respect to your common stock. In addition,
if you are required to provide an Internal Revenue Service
Form W-8ECI
or successor form, as discussed above, you must also provide
your tax identification number.
If you are eligible for a reduced rate of U.S. withholding
tax pursuant to an income tax treaty but do not provide the
payer with an Internal Revenue Service
Form W-8BEN,
you may obtain a refund of any excess amounts withheld by filing
an appropriate claim for refund with the Internal Revenue
Service.
Gain on
Disposition of Common Stock
As a
non-U.S. Holder,
you generally will not be subject to U.S. federal income
tax on any gain recognized on the sale or other disposition of
common stock unless:
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the gain is considered effectively connected with the conduct of
a trade or business by you within the United States and, where a
tax treaty applies, is attributable to a U.S. permanent
establishment of yours (and, in which case, if you are a foreign
corporation, you may be subject to an additional branch profits
tax at a rate of 30% or at a lower rate as may be specified by
an applicable income tax treaty);
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you are an individual who is present in the United States
for 183 or more days in the taxable year of the sale or
disposition and other conditions are met; or
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we are or have been a U.S. real property holding
corporation, or a USRPHC, for
U.S. federal income tax purposes. We believe that we are
not currently, and are not likely to become, a USRPHC. If we
were to become a USRPHC, then gain on the sale or other
disposition of common stock by you generally still would not be
subject to U.S. federal income tax provided:
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the common stock was regularly traded on an established
securities market; and
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you do not actually or constructively own more than 5% of the
common stock at any time during the shorter of the five-year
period preceding the disposition or your holding period.
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Federal
Estate Tax
If you are an individual, common stock held at the time of your
death will be included in your gross estate for
U.S. federal estate tax purposes, and may be subject to
U.S. federal estate tax, unless an applicable estate tax
treaty provides otherwise. You should consult your tax advisor
for a full discussion of U.S. federal estate tax treatment.
Information
Reporting and Backup Withholding Tax
We must report annually to the Internal Revenue Service and to
you the amount of dividends paid to you and the tax withheld
with respect to those dividends, regardless of whether
withholding was required. Copies of the information returns
reporting those dividends and withholding may also be made
available to the tax authorities in the country in which you
reside under the provisions of an applicable income tax treaty
or other applicable agreements.
Backup withholding is currently imposed at a rate of 28% on
certain payments to persons that fail to furnish identifying
information to the payer. As a
non-U.S. Holder,
you generally will not be subject to backup withholding assuming
you properly certify your
non-U.S. status.
If you fail to provide such certification, you may be subject to
the greater of the backup withholding rate and any other
withholding rate that would otherwise apply to dividends paid on
your common stock as described above. In addition, if you fail
to provide such certification, backup withholding may apply to
proceeds from a disposition of your common stock. However,
backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules generally may be
refunded (or allowed as a credit against your U.S. federal
income tax liability), provided certain required information is
provided in a timely manner to the Internal Revenue Service.
97
J.P. Morgan Securities Inc. and Merrill Lynch, Pierce, Fenner
& Smith Incorporated are acting as joint bookrunners, and
Leerink Swann LLC, Thomas Weisel Partners LLC and Canaccord
Adams Inc. are acting as co-managers for this offering.
We, the selling stockholders and the underwriters named below
have entered into an underwriting agreement covering the common
stock to be sold in this offering. Each underwriter has
severally agreed to purchase, and the selling stockholders have
agreed to sell to the underwriters, the number of shares of
common stock set forth opposite its name in the following table.
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Name
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|
Number of Shares
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J.P. Morgan Securities Inc.
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Merrill Lynch, Pierce, Fenner & Smith Incorporated
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Leerink Swann LLC
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Thomas Weisel Partners LLC
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Canaccord Adams Inc.
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Total
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4,898,398
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The underwriting agreement provides that if the underwriters
take any of the shares presented in the table above, then they
must take all of the shares. No underwriter is obligated to take
any shares allocated to a defaulting underwriter except under
limited circumstances. The underwriting agreement provides that
the obligations of the underwriters are subject to certain
conditions precedent, including the absence of any material
adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel, each
selling stockholder and our independent auditors.
The underwriters are offering the shares of common stock,
subject to the prior sale of shares, when, as and if such shares
are delivered to and accepted by them. The underwriters will
initially offer to sell shares to the public at the initial
public offering price shown on the front cover page of this
prospectus. The underwriters may sell shares to securities
dealers at a discount of up to
$ per share from the initial
public offering price. Any such securities dealers may resell
shares to certain other brokers or dealers at a discount of up
to $ per share from the
initial public offering price. After the initial public
offering, the underwriters may vary the public offering price
and other selling terms.
If the underwriters sell more shares than the total number shown
in the table above, the underwriters have the option to purchase
from us up to an additional 734,759 shares of common stock
to cover such sales. They may exercise this option during the
30-day
period from the date of this prospectus. If any shares are
purchased under this option, the underwriters will purchase
shares in approximately the same proportion as shown in the
table above. If any additional shares of common stock are
purchased, the underwriters will offer the additional shares on
the same terms as those on which the initial shares are being
offered.
The following table shows the per share and total underwriting
discounts that the selling stockholders and we will pay to the
underwriters. These amounts are shown assuming both no exercise
and full exercise of the underwriters option to purchase
additional shares.
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Paid for by
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Paid for by
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Insulet Corporation
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Selling Stockholders
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Without
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With Full
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Without
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With Full
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Overallotment
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Overallotment
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Overallotment
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Overallotment
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Exercise
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Exercise
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Exercise
|
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Exercise
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Per share
|
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|
$
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|
$
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|
$
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$
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Total
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|
$
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|
|
$
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$
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$
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The underwriters have advised us that they may make short sales
of our common stock in connection with this offering, resulting
in the sale by the underwriters of a greater number of shares
than they are required to purchase pursuant to the underwriting
agreement. The short position resulting from those short sales
will be deemed a covered short position to the
extent that it does not exceed the shares subject to the
underwriters overallotment option and will be deemed a
naked short position to the extent that it exceeds
that number. A
98
naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure
on the trading price of the common stock in the open market that
could adversely affect investors who purchase shares in this
offering. The underwriters may reduce or close out their covered
short position either by exercising the overallotment option or
by purchasing shares in the open market. In determining which of
these alternatives to pursue, the underwriters will consider the
price at which shares are available for purchase in the open
market as compared to the price at which they may purchase
shares through the overallotment option. Any naked
short position will be closed out by purchasing shares in the
open market. Similar to the other stabilizing transactions
described below, open market purchases made by the underwriters
to cover all or a portion of their short position may have the
effect of preventing or retarding a decline in the market price
of our common stock following this offering. As a result, our
common stock may trade at a price that is higher than the price
that otherwise might prevail in the open market.
The underwriters have advised us that, pursuant to Regulation M
under the Exchange Act, they may engage in transactions,
including stabilizing bids or the imposition of penalty bids,
that may have the effect of stabilizing or maintaining the
market price of the shares of common stock at a level above that
which might otherwise prevail in the open market. A
stabilizing bid is a bid for or the purchase of
shares of common stock on behalf of the underwriters for the
purpose of fixing or maintaining the price of the common stock.
A penalty bid is an arrangement permitting the
underwriters to claim the selling concession otherwise accruing
to an underwriter or syndicate member in connection with the
offering if the common stock originally sold by that underwriter
or syndicate member is purchased by the underwriters in the open
market pursuant to a stabilizing bid or to cover all or part of
a syndicate short position. The underwriters have advised us
that stabilizing bids and open market purchases may be effected
on The NASDAQ Global Market, in the
over-the-counter
market or otherwise and, if commenced, may be discontinued at
any time.
One or more of the underwriters may facilitate the marketing of
this offering online directly or through one of its affiliates.
In those cases, prospective investors may view offering terms
and a prospectus online and, depending upon the particular
underwriter, place orders online or through their financial
advisor.
We estimate that our total expenses for this offering, excluding
underwriting discounts, will be approximately $830,000.
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act.
We and our executive officers and directors, the selling
stockholders and certain holders of our outstanding common stock
and common stock equivalents have agreed that, until
90 days after the date of this prospectus, none of them
will, directly or indirectly, offer, sell, offer to sell,
contract to sell or otherwise dispose of any shares of our
common stock, other than in this offering, without prior written
consent of J.P. Morgan Securities Inc. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, except in limited
circumstances. Additionally, this
lock-up
period may be extended in the event that we issue an earnings
release, or in the event that a material event relating to us
occurs, on or around the end of the
lock-up
period. During the term of the lock-up, we may issue shares of
common stock under our existing equity compensation plans or in
connection with a bona fide merger or acquisition transaction.
Also, the
lock-up
restrictions will not apply to sales made pursuant to
Rule 10b5-1
trading plans entered into on or prior to September 30,
2007.
Our common stock is listed on The NASDAQ Global Market under the
symbol PODD.
From time to time in the ordinary course of their respective
businesses, certain of the underwriters and their affiliates
perform various financial advisory, investment banking and
commercial banking services for us and our affiliates. Merrill
Lynch Capital, a division of Merrill Lynch Business Services,
Inc., an affiliate of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, an underwriter in this offering, is a lender
and the administrative agent under a $30.0 million secured
term loan provided to us in December 2006. Merrill Lynch Capital
received warrants to purchase 115,384 shares of our
Series E Preferred Stock at a purchase price of $3.64 per
share in connection with its commitment of $14.0 million
under the term loan. The warrants automatically converted into
warrants to purchase common stock on a 1-for-2.6267 basis at a
purchase price of $9.56 per share upon the closing of our
initial public offering.
99
The validity of the shares of our common stock offered by this
prospectus will be passed upon for us by Goodwin Procter
LLP, Boston, Massachusetts.
Legal matters in connection with this offering will be passed
upon for the underwriters by Cahill Gordon & Reindel
LLP, New York, New York.
The consolidated financial statements of Insulet Corporation at
December 31, 2006 and 2005, and for each of the three years
in the period ended December 31, 2006, appearing in this
Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and
auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on
Form S-1
under the Securities Act of 1933, as amended, with respect to
the shares of our common stock we are offering by this
prospectus. This prospectus does not contain all of the
information included in the registration statement. For further
information about us and our common stock, you should refer to
the registration statement and the exhibits and schedules filed
with the registration statement. Whenever we make reference in
this prospectus to any of our contracts, agreements or other
documents, the references are not necessarily complete, and you
should refer to the exhibits attached to the registration
statement for copies of the actual contract, agreement or other
document.
We also file annual, quarterly and current reports, proxy
statements and other information with the SEC. You can read our
SEC filings, including the registration statement, over the
Internet at the SECs website at http://www.sec.gov.
Additionally, we make our SEC filings available free of charge
through our website, www.insulet.com.
You may read and copy any document we file with the SEC at its
public reference facility at 100 F Street, N.E.,
Washington, D.C. 20549. You may also obtain copies of those
documents at prescribed rates by writing to the Public Reference
Section of the SEC at 100 F Street, N.E., Washington, D.C.
20549. Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
facilities.
100
INSULET
CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Page
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Unaudited Financial Statements
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F-1
|
|
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F-2
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F-3
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|
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F-4
|
|
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Audited Financial Statements
|
|
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|
FF-1
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|
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FF-2
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|
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FF-3
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|
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FF-4
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FF-5
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FF-6
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INSULET
CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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As of
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As of
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|
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December 31,
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June 30,
|
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|
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2006
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|
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2007
|
|
|
|
(In thousands,
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|
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|
except share data)
|
|
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|
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(Unaudited)
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|
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ASSETS
|
Currents Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
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33,231
|
|
|
$
|
119,818
|
|
Accounts receivable, net
|
|
|
1,417
|
|
|
|
2,633
|
|
Inventories
|
|
|
3,390
|
|
|
|
4,129
|
|
Prepaid expenses and other current assets
|
|
|
1,827
|
|
|
|
1,248
|
|
|
|
|
|
|
|
|
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Total current assets
|
|
|
39,865
|
|
|
|
127,828
|
|
Property and equipment, net
|
|
|
16,999
|
|
|
|
20,490
|
|
Other assets
|
|
|
276
|
|
|
|
822
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
57,140
|
|
|
$
|
149,140
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY (DEFICIT)
|
Currents Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,450
|
|
|
$
|
5,485
|
|
Accrued expenses
|
|
|
4,193
|
|
|
|
2,854
|
|
Deferred revenue
|
|
|
284
|
|
|
|
763
|
|
Current portion of long-term debt
|
|
|
29,222
|
|
|
|
7,943
|
|
Preferred stock warrant liability
|
|
|
1,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
39,080
|
|
|
|
17,045
|
|
Long-term debt, net of current portion
|
|
|
|
|
|
|
21,341
|
|
Other long-term liabilities
|
|
|
316
|
|
|
|
1,234
|
|
|
|
|
|
|
|
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Total liabilities
|
|
|
39,396
|
|
|
|
39,620
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|
Redeemable convertible preferred stock, $0.001 par
value:
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|
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|
|
|
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|
|
Authorized: zero and 46,408,050 shares at June 30,
2007 and December 31, 2006
|
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|
|
|
|
|
|
Issued and outstanding Series A: zero and
1,000,000 shares stated at liquidation and redemption value
at June 30, 2007 and December 31, 2006, respectively
|
|
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1,000
|
|
|
|
|
|
Issued and outstanding Series B: zero and
5,945,946 shares stated at liquidation and redemption value
at June 30, 2007 and December 31, 2006, respectively
|
|
|
11,000
|
|
|
|
|
|
Issued and outstanding Series C: zero and
10,476,191 shares stated at liquidation and redemption
value at June 30, 2007 and December 31, 2006,
respectively
|
|
|
22,000
|
|
|
|
|
|
Issued and outstanding Series D: zero and
14,669,421 shares stated at liquidation and redemption
value at June 30, 2007 and December 31, 2006,
respectively
|
|
|
35,500
|
|
|
|
|
|
Issued and outstanding Series E: zero and
13,738,661 shares stated at liquidation and redemption
value at June 30, 2007 and December 31, 2006,
respectively
|
|
|
50,009
|
|
|
|
|
|
Stockholders equity (deficit)
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value: Authorized 5,000,000 and
zero shares at June 30, 2007 and December 31, 2006,
respectively. Issued and outstanding zero shares at
June 30, 2007 and December 31, 2006
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value:
|
|
|
|
|
|
|
|
|
Authorized: 100,000,000 and 65,000,000 shares authorized at
June 30, 2007 and December 31, 2006, respectively
|
|
|
|
|
|
|
|
|
Issued: 26,312,811 and 457,076 shares at June 30, 2007
and December 31, 2006, respectively
|
|
|
1
|
|
|
|
27
|
|
Additional paid-in capital
|
|
|
293
|
|
|
|
235,765
|
|
Accumulated deficit
|
|
|
(102,040
|
)
|
|
|
(126,272
|
)
|
Subscription receivable
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(101,765
|
)
|
|
|
109,520
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit)
|
|
$
|
57,140
|
|
|
$
|
149,140
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-1
INSULET
CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except share and per share data)
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
|
$
|
880
|
|
|
$
|
3,212
|
|
|
$
|
1,102
|
|
|
$
|
5,220
|
|
Cost of revenue
|
|
|
4,586
|
|
|
|
6,899
|
|
|
|
7,339
|
|
|
|
11,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(3,706
|
)
|
|
|
(3,687
|
)
|
|
|
(6,237
|
)
|
|
|
(6,251
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,053
|
|
|
|
2,520
|
|
|
|
3,808
|
|
|
|
4,990
|
|
General and administrative
|
|
|
1,773
|
|
|
|
2,798
|
|
|
|
3,324
|
|
|
|
5,457
|
|
Sales and marketing
|
|
|
1,475
|
|
|
|
3,404
|
|
|
|
2,545
|
|
|
|
6,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,301
|
|
|
|
8,722
|
|
|
|
9,677
|
|
|
|
16,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(9,007
|
)
|
|
|
(12,409
|
)
|
|
|
(15,914
|
)
|
|
|
(23,206
|
)
|
Interest income
|
|
|
563
|
|
|
|
713
|
|
|
|
798
|
|
|
|
1,017
|
|
Interest expense
|
|
|
(269
|
)
|
|
|
(986
|
)
|
|
|
(537
|
)
|
|
|
(1,969
|
)
|
Change in value of preferred stock warrant liability
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(8,713
|
)
|
|
|
(12,672
|
)
|
|
|
(15,653
|
)
|
|
|
(24,232
|
)
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(8,713
|
)
|
|
$
|
(12,672
|
)
|
|
$
|
(15,875
|
)
|
|
$
|
(24,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(24.77
|
)
|
|
$
|
(0.99
|
)
|
|
$
|
(45.89
|
)
|
|
$
|
(3.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares used in calculating net loss
per share
|
|
|
351,748
|
|
|
|
12,791,190
|
|
|
|
345,959
|
|
|
|
6,671,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-2
INSULET
CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(15,653
|
)
|
|
$
|
(24,232
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,146
|
|
|
|
2,019
|
|
Amortization of debt discount
|
|
|
28
|
|
|
|
119
|
|
Redeemable convertible preferred stock warrant expense
|
|
|
|
|
|
|
74
|
|
Stock compensation expense
|
|
|
154
|
|
|
|
507
|
|
Provision for bad debts
|
|
|
74
|
|
|
|
389
|
|
Non cash interest expense
|
|
|
|
|
|
|
(57
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(716
|
)
|
|
|
(1,605
|
)
|
Inventory
|
|
|
(1,130
|
)
|
|
|
(739
|
)
|
Prepaids and other current assets
|
|
|
176
|
|
|
|
579
|
|
Other assets
|
|
|
1
|
|
|
|
(546
|
)
|
Accounts payable and accrued expenses
|
|
|
3,511
|
|
|
|
696
|
|
Other long term liabilities
|
|
|
182
|
|
|
|
918
|
|
Deferred revenue
|
|
|
2
|
|
|
|
479
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(12,225
|
)
|
|
|
(21,399
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(6,870
|
)
|
|
|
(5,510
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(6,870
|
)
|
|
|
(5,510
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from sale of Series E preferred stock, net of
issuance cost
|
|
|
49,787
|
|
|
|
|
|
Principal payments of long term debt
|
|
|
(207
|
)
|
|
|
|
|
Proceeds from issuance of common stock, net of offering expenses
|
|
|
35
|
|
|
|
113,496
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
49,615
|
|
|
|
113,496
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
30,520
|
|
|
|
86,587
|
|
Cash and cash equivalents, beginning of year
|
|
|
7,660
|
|
|
|
33,231
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
38,180
|
|
|
$
|
119,818
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
400
|
|
|
$
|
1,472
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities
|
|
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock
|
|
$
|
222
|
|
|
$
|
|
|
Conversion of preferred stock to common stock upon initial
public offering
|
|
$
|
|
|
|
$
|
119,509
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-3
INSULET
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Insulet Corporation (the Company) is principally
engaged in the development, manufacture and marketing of an
insulin infusion system for people with insulin-dependent
diabetes. The Company was incorporated in Delaware in 2000 and
has its corporate headquarters in Bedford, Massachusetts. Since
inception, the Company has devoted substantially all of its
efforts to designing, developing and marketing the OmniPod
Insulin Management System. The Company was considered a
development stage company pursuant to Statement of Financial
Accounting Standards (SFAS) No. 7,
Accounting and Reporting by Development Stage
Enterprises, through December 31, 2005. The year 2006
was the first year during which the Company was an operating
company and was no longer in the development stage. The Company
commercially launched the OmniPod Insulin Management System in
August 2005 after receiving FDA 510(k) approval in January 2005.
The first commercial product was shipped in October 2005. In May
2007, the Company completed an initial public offering of its
common stock.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Unaudited
Interim Financial Statements
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for the complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three
and six month periods ended June 30, 2007 are not
necessarily indicative of the results that may be expected for
the full fiscal year ending December 31, 2007.
The condensed consolidated balance sheet at December 31,
2006 has been derived from the audited consolidated financial
statements at that date but does not include all of the
information and notes required by generally accepted accounting
principles for complete financial statements.
The condensed consolidated financial statements should be read
in conjunction with the Companys consolidated financial
statements and notes thereto contained in this prospectus.
Use of
Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue
and expense during the reporting periods. The most significant
estimates used in these financial statements include the
valuation of inventories and equity instruments, the lives of
property and equipment, and warranty and bad debt reserve
calculations. Actual results may differ from those estimates.
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Sub-Q Solutions,
Inc. All material intercompany balances and transactions have
been eliminated in consolidation. To date there has been no
activity in Sub-Q Solutions, Inc.
F-4
INSULET
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Cash
and Cash Equivalents
For the purposes of the financial statement classification, the
Company considers all highly liquid investment instruments with
original maturities of ninety days or less, when purchased, to
be cash equivalents. Cash equivalents consist of money market
accounts and are carried at cost, which approximates their fair
values. Outstanding letters of credit, principally relating to
security deposits for lease obligations, totaled $200,000 as of
June 30, 2007 and December 31, 2006.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due from third-party
payors and patients. In estimating whether accounts receivable
can be collected, the Company analyzes payor and patient
concentrations, payor and patient credit-worthiness, and
competitive benchmarks. Any allowances are recorded in the
period when the revenue is recorded, and allowances are adjusted
currently for any changes in estimated collections.
Bad debt expense for the three and six months ended
June 30, 2007 amounted to $270,000 and $389,000,
respectively. There were $26,000 and $52,000 in write-offs or
other adjustments to the allowance for doubtful accounts during
the three months and six months ended June 30, 2007,
respectively. There were no write-offs during 2006.
Inventories
Inventories are valued at the lower of actual cost or market,
using the
first-in,
first-out (FIFO) method. Inventory has been written
down to market for all periods presented as the Company
currently manufactures its product at a loss. Work in process is
calculated based upon a build up in the stage of completion
using estimated labor inputs for each stage in production. Costs
for Personal Diabetes Managers (PDMs) and OmniPods
include raw material, labor and manufacturing overhead. The
Company evaluates inventory valuation on a quarterly basis for
obsolete or slow-moving items.
Property &
Equipment
Property and equipment is stated at cost and depreciated using
the straight-line method over the estimated useful lives of the
respective assets. Leasehold improvements are amortized over
their useful life or the life of the lease, whichever is
shorter. Assets capitalized under capital lease are amortized in
accordance with the respective class of owned assets and the
amortization is included with depreciation expense. Maintenance
and repair costs are expensed as incurred.
Impairment
of Property & Equipment
The Company reviews the carrying value of its property and
equipment to assess the recoverability of these assets whenever
events indicate that impairment may have occurred. As part of
this assessment, the Company reviews the future undiscounted
operating cash flows expected to be generated by those assets.
If impairment is indicated through this review, the carrying
amount of the asset would be reduced to its estimated fair value.
Revenue
Recognition
The Company generates revenue from sales of its OmniPod Insulin
Management System to diabetes patients. The initial sale to a
new customer typically includes OmniPods and a Starter Kit,
which include the PDM, two OmniPods, the OmniPod System User
Guide and the OmniPod System Interactive Training CD. The
Company offers a
45-day right
of return for its Starter Kits sales (the Company changed from a
30-day right
of return effective for shipments prior to December 1,
2006). Subsequent sales to existing customers typically consist
of additional OmniPods. Revenue is recognized in accordance with
Staff Accounting
F-5
INSULET
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Bulletin No. 104, Revenue Recognition in Financial
Statements (SAB 104), which requires that
persuasive evidence of a sales arrangement exists, delivery of
goods occurs through transfer of title and risk and rewards of
ownership, the selling price is fixed or determinable and
collectibility is reasonably assured. With respect to these
criteria:
|
|
|
|
|
The evidence of an arrangement generally consists of a physician
order form, a patient information form, and if applicable,
third-party insurance approval.
|
|
|
|
Transfer of title and risk and rewards of ownership are passed
to the patient upon shipment from the Company.
|
|
|
|
The selling prices for all sales are fixed and agreed with the
patient, and if applicable, the patients third-party
insurance provider(s) prior to shipment and are based on
established list prices or, in the case of certain third-party
insurers, contractually agreed upon prices.
|
The Company has considered the requirements of Emerging Issues
Task Force (EITF)
No. 00-21,
Revenue Arrangements with Multiple Deliverables, when
accounting for the OmniPods and Starter Kits.
EITF 00-21
requires that the Company assess whether the different elements
qualify for separate accounting. The Company recognizes revenue
for the initial shipment to a patient or other third party once
all elements have been delivered and the right of return has
expired.
The Company has applied Statement of Financial Accounting
Standards (SFAS) No. 48, Revenue Recognition
When the Right of Return Exists. In accordance with
SFAS No. 48, the Company defers the revenue and, to
the extent allowed, all related costs of all initial shipments
until the right of return has lapsed. The Company had deferred
revenue of $763,000 and $284,000 as of June 30, 2007 and
December 31, 2006, respectively.
The Company recognizes subsequent sales of OmniPods upon
shipment in accordance with the provisions set forth by
SAB 104.
Concentration
of Credit Risk
Financial instruments that subject the Company to credit risk
consist primarily of cash and cash equivalents. The Company
maintains the majority of its cash with one accredited financial
institution. Although revenues are recognized from shipments
directly to patients, the majority of shipments are billed to
third party insurance payors.
Research
and Development
The Companys research and development expenses consist of
engineering, product development, quality assurance, clinical
function and regulatory expenses. These expenses are primarily
comprised of employee compensation, including salary, benefits
and stock-based compensation. The Company also incurs expenses
related to consulting fees, materials and supplies, and
marketing studies, including data management and associated
travel expenses. Research and development costs are expensed as
incurred.
Income
Taxes
In June 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income
Taxes, which clarifies the accounting for uncertainty
in income taxes recognized in an entitys financial
statements in accordance with SFAS No. 109.
FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. In addition, FIN 48 provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after
December 15, 2006.
F-6
INSULET
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
The Company adopted FIN 48 on January 1, 2007. The
adoption of FIN 48 did not have a material impact on the
Companys financial position or results of operations. Upon
adoption and as of June 30, 2007, the Company had no
unrecognized tax benefits recorded.
The Company files federal and state tax returns. The Company has
accumulated significant losses since its inception in 2000.
Since the net operating losses may potentially be utilized in
future years to reduce taxable income, all of the Companys
tax years remain open to examination by the major taxing
jurisdictions to which the Company is subject.
The Company recognizes estimated interest and penalties for
uncertain tax positions in income tax expense. Upon adoption and
as of June 30, 2007, the Company had no interest and
penalty accrual or expense.
Stock
Based Compensation
Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share Based Payment
(SFAS 123R), which is a revision of Statement
No. 123 (SFAS 123) Accounting for Stock
Based Compensation. SFAS 123R supersedes Accounting
Principles Board (APB) No. 25, Accounting
for Stock Issued to Employees (APB 25), and
amends FASB Statement No. 95 Statement of Cash
Flows. SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Prior to January 1, 2006, the Company accounted for
employee stock based compensation in accordance with the
provisions of APB 25 and FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock
Compensation an Interpretation of APB
No. 25, and complied with the disclosure provisions of
SFAS 123, and related SFAS No. 148, Accounting
for Stock-Based Compensation Transaction and
Disclosure. Under APB 25, compensation expense is based on
the difference, if any, on the date of the grant, between the
fair value of the stock and the exercise price of the option.
The stock based compensation is amortized using the
straight-line method over the vesting period.
SFAS 123R requires nonpublic companies that used the
minimum value method in SFAS 123R for either recognition or
pro forma disclosures to apply SFAS 123R using the
prospective-transition method. As such, the Company will
continue to apply APB 25 in future periods to equity awards
outstanding at the date of SFAS 123R adoption that were
measured using the minimum value method. In accordance with the
requirements of SFAS 123R, the Company will not present pro
forma disclosures for periods prior to the adoption of
SFAS 123R, as the estimated fair value of the
Companys stock options granted through December 31,
2005 was determined using the minimum value method.
Effective January 1, 2006 with the adoption of
SFAS 123R, the Company elected to use the Black-Scholes
option pricing model to determine the weighted-average fair
value of options granted. In accordance with SFAS 123R, the
Company will recognize the compensation expense of share-based
awards on a straight-line basis over the vesting period of the
award.
The determination of the fair value of share-based payment
awards utilizing the Black-Scholes model is affected by the
stock price and a number of assumptions, including expected
volatility, expected life, risk-free interest rate and expected
dividends. Due to the recent completion of its initial public
offering, the Company does not have sufficient history of market
prices of its common stock as it was not a public company, and
as such estimates volatility in accordance with Securities and
Exchange Commissions Staff Accounting
Bulletin No. 107, Share-Based Payment
(SAB 107) using historical volatilities of
comparable public entities. The expected life of the awards is
estimated based on the SEC Shortcut Approach as
defined in SAB 107, which is the midpoint between the
vesting date and the end of the contractual term. The risk-free
interest rate assumption is based on observed interest rates
appropriate for the terms of the awards. The dividend yield
assumption is based on company history and expectation of paying
no dividends. Forfeitures are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those
F-7
INSULET
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
estimates. Stock based compensation expense recognized in the
financial statements in 2006 and thereafter is based on awards
that are ultimately expected to vest. The Company evaluates the
assumptions used to value the awards on a quarterly basis and if
factors change and different assumptions are utilized, stock
based compensation expense may differ significantly from what
has been recorded in the past. If there are any modifications or
cancellations of the underlying unvested securities, the Company
may be required to accelerate, increase or cancel any remaining
unearned stock based compensation expense.
Prior to April 1, 2006, the exercise prices for options
granted were set by the Companys board of directors based
upon guidance set forth by the American Institute of Certified
Public Accountants (AICPA) in the AICPA Technical
Practice Aid, Valuation of Privately-Held-Company Equity
Securities Issued as Compensation. To that end, the board
considered a number of factors in determining the option price,
including the following factors: (1) prices for the
Companys preferred stock, which the Company had sold to
outside investors in arms-length transactions, and the rights,
preferences and privileges of the Companys preferred stock
and common stock in the Series A through Series E
financing, (2) obtaining FDA 510(k) clearance,
(3) launching the OmniPod System and (4) achievement
of budgeted revenue and results.
In connection with the preparation of the financial statements
for the initial public offering, the Company retrospectively
estimated the fair value of its common stock based upon several
factors, including the following: (1) operating and
financial performance, (2) progress and milestones attained
in the business, (3) past sales of convertible preferred
stock, (4) the results of the retrospective independent
valuations, and (5) the expected valuation obtained in an
initial public offering. The Company believes this to have been
a reasonable methodology based on the factors above and based on
several arms length transactions involving the
Companys stock supportive of the results produced by this
valuation methodology.
See Note 7 for a summary of the stock option activity under
our stock based employee compensation plan.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157). This
standard defines fair value, establishes a framework for
measuring fair value in accounting principles generally accepted
in the United States, and expands disclosure about fair value
measurements. This pronouncement applies under other accounting
standards that require or permit fair value measurements.
Accordingly, this statement does not require any new fair value
measurement. This statement is effective for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. The Company will be required to adopt
SFAS 157 in the first quarter of fiscal year 2008. The
Company is currently evaluating the requirements of
SFAS 157 and has not yet determined the impact on its
financial statements.
In February 2007, the FASB issued SFAS No. 159,
Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB
Statement 115 (SFAS 159), which permits
entities to choose to measure many financial instruments and
certain other items at fair value. SFAS 159 is effective as
of the beginning of an entitys first fiscal year that
begins after November 15, 2007. The Company is currently
evaluating the requirements of SFAS 159 and has not yet
determined the impact on its financial statements.
Basic net loss per share is computed by dividing net loss
attributable to common stockholders by the weighted average
number of common shares outstanding for the period, excluding
unvested restricted common shares. For all periods presented
there were no unvested restricted common shares. Diluted net
loss per share is computed using the weighted average number of
common shares outstanding and, when dilutive, potential common
share equivalents from options and warrants (using the
treasury-stock method), and potential common shares from
convertible securities (using the if-converted method). Because
the Company reported a net loss
F-8
INSULET
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
for the three and six months ended June 30, 2007 and 2006,
respectively, all potential common shares have been excluded
from the computation of the dilutive net loss per share for all
periods presented because the effect would have been
antidilutive. Such potential common share equivalents consist of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Series A redeemable convertible preferred stock
|
|
|
|
|
|
|
380,705
|
|
|
|
|
|
|
|
380,705
|
|
Series B redeemable convertible preferred stock
|
|
|
|
|
|
|
2,263,651
|
|
|
|
|
|
|
|
2,263,651
|
|
Series C redeemable convertible preferred stock
|
|
|
|
|
|
|
3,988,337
|
|
|
|
|
|
|
|
3,988,337
|
|
Series D redeemable convertible preferred stock
|
|
|
|
|
|
|
5,584,722
|
|
|
|
|
|
|
|
5,584,722
|
|
Series E redeemable convertible preferred stock
|
|
|
|
|
|
|
5,230,376
|
|
|
|
|
|
|
|
5,230,376
|
|
Outstanding options
|
|
|
2,765,148
|
|
|
|
2,406,206
|
|
|
|
2,511,691
|
|
|
|
2,173,256
|
|
Outstanding warrants
|
|
|
204,293
|
|
|
|
125,853
|
|
|
|
219,981
|
|
|
|
125,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,969,441
|
|
|
|
19,979,850
|
|
|
|
2,731,672
|
|
|
|
19,746,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
1,895
|
|
|
$
|
1,177
|
|
Work-in-process
|
|
|
572
|
|
|
|
367
|
|
Finished goods
|
|
|
1,662
|
|
|
|
1,846
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,129
|
|
|
$
|
3,390
|
|
|
|
|
|
|
|
|
|
|
Inventory was adjusted by $580,000 and $1.5 million as of
June 30, 2007 and December 31, 2006, respectively, to
reflect values at the lower of cost or market. At June 30,
2007 and December 31, 2006, 40% and 54%, respectively, of
the reported finished goods inventory is valued below the
Companys cost. The Companys production process has a
high degree of fixed costs due to the early stage of capacity
build-up and
market penetration of its products. Consequently, sales and
production volumes have not been adequate to result in
per-unit
costs that are lower than the current market price for the
Companys products.
|
|
5.
|
Indebtedness
and Warrants to Purchase Shares Subject to Redemption
|
Loan
and Security Agreements
On June 2, 2005, the Company entered into a
$10.0 million term loan and security agreement with
Lighthouse Capital Partners V, L.P. Interest on this term
loan was set at a rate of 8%. This term loan required only
interest payments through June 1, 2006. After that date,
the principal and interest was payable ratably over
42 months. At the end of the amortization period of the
term loan, the Company was obligated to make a final payment of
$1.0 million, which was being amortized as interest expense
over the life of the loan. Upon
F-9
INSULET
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
payment of the term loan in December 2006, the remaining
unamortized balance of the final $1.0 million payment was
recognized as interest expense.
In connection with this term loan, the Company issued a warrant
to the lender to purchase up to 330,579 shares of
Series D preferred stock. The Company recorded the $251,000
fair value of the warrant as a discount to the term loan. The
cost of the warrant was being amortized to interest expense over
the 54-month
life of this term loan. The remaining balance of the discount
was expensed upon payment of the term loan in December 2006.
On December 27, 2006, the Company entered into a credit and
security agreement with a group of lenders led by Merrill Lynch
Capital pursuant to which the Company borrowed
$30.0 million in a term loan. The Company used
$9.5 million of the proceeds from this term loan to repay
all amounts owed under the term loan with Lighthouse Capital
Partners V, L.P. This term loan is secured by all the
assets of the Company other than its intellectual property. The
borrowings under the term loan bear interest at a floating rate
equal to the LIBOR rate plus 6% per annum. Interest is payable
on a monthly basis during the term of the loan and, beginning on
October 1, 2007, principal will be repaid in 33 equal
monthly installments of $909,091. This term loan is also subject
to a loan origination fee amounting to $900,000. The Company has
capitalized these costs as deferred financing costs as of
December 31, 2006. The deferred cost asset will be
amortized to interest expense over the
42-month
life of this term loan. This term loan is subject to
acceleration upon the occurrence of any fact, event or
circumstance that has resulted or could reasonably be expected
to result in a material adverse effect. Consequently, such term
loan was classified as a current liability at December 31,
2006 in accordance with the provisions set forth by FASB
Technical
Bulletin No. 79-3
Subjective Acceleration Clause in Long-Term Debt Agreements. At
June 30, 2007, the term loan principal has been presented
in the Companys consolidated balance sheet with its
current and non-current components stated separately. Subsequent
to the Companys initial public offering of common stock in
May 2007, and the receipt of proceeds from the offering, the
provisions set forth by FASB Technical
Bulletin No. 79-3
Subjective Acceleration Clause in Long-Term Debt Agreements
no longer caused the Companys debt to be classified as
current.
In connection with this term loan, the Company issued warrants
to the lenders to purchase up to 247,252 of Series E
preferred stock. The Company recorded the $835,000 fair value of
the warrants as a discount to the term loan. The costs of the
warrants are being amortized to interest expense over the
42-month
life of this term loan.
Warrants
In connection with the term loans with Lighthouse Capital
Partners and a group of lenders led by Merrill Lynch Capital,
the Company issued warrants to the lenders to purchase shares of
its redeemable convertible preferred stock. Prior to the
Companys initial public offering, these warrants were
recorded as warrants to purchase shares subject to
redemption in current liabilities in accordance with FASB
Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity
and FASB Staff Position
No. 150-5
Issuers Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on
Shares That Are Redeemable (FSP-150).
Upon the closing of the Companys initial public offering,
all warrants converted into warrants to purchase shares of
common stock at a ratio of one share of common stock for every
2.6267 shares of redeemable convertible preferred stock. In
connection with this conversion, the exercise prices of the
warrants were also adjusted to an exercise price of $6.36 per
share in the case of the Series D warrant and an exercise
price of $9.56 per share in the case of the Series E
warrants.
F-10
INSULET
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Significant terms and fair values of warrants to purchase common
stock are as follows (in thousands except share and per share
data), and reflecting the conversion ratio of 2.6267 redeemable
convertible preferred stock for each one common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares as of
|
|
|
Fair Value as of
|
|
|
|
Expiration
|
|
|
Exercise Price
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
Stock
|
|
Date
|
|
|
per Share
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
Series D preferred
|
|
|
June 2, 2012
|
|
|
$
|
6.36
|
|
|
|
125,853
|
|
|
|
125,853
|
|
|
$
|
1,096
|
|
Series E preferred
|
|
|
Dec. 27, 2013
|
|
|
|
9.56
|
|
|
|
78,440
|
|
|
|
94,128
|
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
204,293
|
|
|
|
219,981
|
|
|
$
|
1,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the three months ended June 30, 2007, a member of the
group of lenders led by Merrill Lynch Capital exercised their
right to convert 15,688 warrants into common stock, resulting in
the issuance of 5,688 common shares.
The Company recorded $835,000 fair value of the warrants for
Series E preferred stock as a discount to the term loan.
The fair value of the warrants is being amortized to interest
expense over the
42-month
life of this term loan
Upon the closing of the Companys initial public offering
on May 18, 2007, all outstanding warrants to purchase
shares of the Companys preferred stock were converted into
warrants to purchase shares of common stock and, as a result,
are no longer be subject to
FSP 150-5
for periods ended or ending on or after that date. The aggregate
fair value of these warrants as of May 18, 2007, determined
to be $2,005,000, was reclassified from liabilities to
additional paid-in capital, a component of stockholders
equity. No periodic fair value adjustments will be made in
future periods.
The Company recorded other income of approximately $10,000 in
the three months ended June 30, 2007, as the aggregate fair
value of warrants decreased from the value recorded at
March 31, 2007. The decrease in fair value is primarily
caused by a lower expected life for the warrants, considering
the existence of a market for the Companys common stock.
|
|
6.
|
Commitments
and Contingencies
|
Operating
Leases
The Company leases its facilities, which are accounted for as
operating leases. The leases generally provide for a base rent
plus real estate taxes and certain operating expenses related to
the leases. The Company entered into a new lease in 2004 which
contains renewal options, escalating payments and leasehold
allowances over the life of the lease. The Company has
considered FASB Technical
Bulletin 88-1,
Issues Relating to Accounting for Leases, and FASB Technical
Bulletin 85-3,
Accounting for Operating Leases with Scheduled Rent Increases,
in accounting for these lease provisions.
Legal
Proceedings
The Company is currently not subject to any material pending
legal proceedings.
Indemnifications
In the normal course of business, the Company enters into
contracts and agreements that contain a variety of
representations and warranties and provide for general
indemnifications. The Companys exposure under these
agreements is unknown because it involves claims that may be
made against the Company in the future, but have not yet been
made. To date, the Company has not paid any claims or been
required to defend any
F-11
INSULET
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
action related to its indemnification obligations. However, the
Company may record charges in the future as a result of these
indemnification obligations.
In accordance with its bylaws, the Company has indemnification
obligations to its officers and directors for certain events or
occurrences, subject to certain limits, while they are serving
at the Companys request in such capacity. There have been
no claims to date and the Company has a director and officer
insurance policy that enables it to recover a portion of any
amounts paid for future claims.
On April 12, 2007, the Companys Board of Directors
approved a
1-for-2.6267
reverse stock split of the Companys common stock, which
was executed on May 10, 2007. All share and per share
amounts of common and preferred stock in the accompanying
consolidated financial statements have been restated for all
periods to give retroactive effect to the stock split.
On May 18, 2007, the Company issued and sold
7,700,000 shares of common stock at a price to the public
of $15.00 per share. On June 12, 2007, the Company issued
and sold an additional 665,000 shares of common stock at a
price to the public of $15.00 per share pursuant to the
underwriters partial exercise of their over-allotment
option. In connection with the initial public offering, the
Company received total gross proceeds of $125.5 million, or
approximately $113.4 million in net proceeds after
deducting underwriting discounts and offering expenses.
In the three months ended June 30, 2007, 15,688 warrants
issued in relation to the Companys term loan were
converted into common stock, resulting in the issuance of 5,688
common shares. In addition, 8,888 and 37,256 common shares were
issued related to exercises of employee stock options in the
three and six months ending June 30, 2007, respectively.
Redeemable
Convertible Preferred Stock Conversion
Upon the closing of the initial public offering of the
Companys common stock, all redeemable convertible
preferred stock converted to common stock.
Stock
Option Plans
On May 18, 2007, upon the closing of the Companys
initial public offering, the Companys 2007 Stock Option
and Incentive Plan (the 2007 Plan) became effective
and the Companys board of directors determined not to make
any further grants under the Companys 2000 Stock Option
and Incentive Plan. Under the 2007 Plan, awards may be granted
to persons who are, at the time of grant, employees, officers,
non-employee directors or key persons (including consultants and
prospective employees) of the Company. The 2007 Plan provides
for the granting of stock options, stock appreciation rights,
deferred stock awards, restricted stock, unrestricted stock,
cash-based awards, performance share awards or dividend
equivalent rights. The Company has reserved 535,000 shares
of common stock for issuance under the 2007 Plan, which amount
will be increased on January 1, 2008, and on each January 1
thereafter through January 1, 2012, by a number of shares
equal to 3% of the number of shares of common stock of the
Company outstanding as of the immediately preceding
December 31, or 725,000 shares. At June 30, 2007,
433,632 options were available for future grant.
Under the Companys 2000 Stock Option and Incentive Plan
(the 2000 Plan), options could be granted to persons
who were, at the time of grant, employees, officers, or
directors of, or consultants or advisors to, the Company. The
2000 Plan provided for the granting of non-statutory stock
options, incentive stock options, stock bonuses, and rights to
acquire restricted stock. The option price at the date of grant
was determined by the Board of Directors and, in the case of
incentive stock options, could not be less than the fair market
value of the common stock at the date of grant, as determined by
the Board of Directors. Options granted under the
F-12
INSULET
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
2000 Plan generally vest over a period of four years and expire
10 years from the date of grant. The provisions of the Plan
limit the exercise of incentive stock options. At the time of
grant, options are typically immediately exercisable, but
subject to restrictions. The restrictions generally lapse over a
period of four years.
Activity under the Companys Stock Option Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
Options(#)
|
|
|
Price($)
|
|
|
Value($)
|
|
|
Balance, December 31, 2006
|
|
|
2,318,250
|
|
|
|
3.15
|
|
|
|
|
|
Granted
|
|
|
499,206
|
|
|
|
12.98
|
|
|
|
|
|
Exercised
|
|
|
(37,256
|
)
|
|
|
0.95
|
|
|
|
428,116
|
(1)
|
Canceled
|
|
|
(15,052
|
)
|
|
|
5.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2007
|
|
|
2,765,148
|
|
|
|
5.06
|
|
|
|
25,285,827
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested, June 30, 2007
|
|
|
1,949,109
|
|
|
|
2.13
|
|
|
|
23,532,816
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest, June 30, 2007(3)
|
|
|
2,488,080
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value was calculated based on the
positive difference between the estimated fair value of the
Companys common stock as of the date of exercise and the
exercise price of the underlying options. |
|
(2) |
|
The aggregate intrinsic value was calculated based on the
positive difference between the estimated fair value of the
Companys common stock as of June 30, 2007, and the
exercise price of the underlying options. |
|
(3) |
|
Represents the number of vested options as of June 30,
2007, plus the number of unvested options expected to vest as of
June 30, 2007, based on the unvested options outstanding at
June 30, 2007, adjusted for an estimated forfeiture rate of
10.02%. |
Employee
Stock-Based Awards Granted On or Subsequent to January 1,
2006
Effective January 1, 2006, the Company adopted
SFAS 123R, using the prospective transition method, which
requires the measurement and recognition of compensation expense
for all share-based payment awards made to the Companys
employees, directors and consultants. The Companys
financial statements as of and for the year ended
December 31, 2006 reflect the impact of SFAS 123R. In
accordance with the prospective transition method, the
Companys financial statements for prior periods have not
been restated to reflect, and do not include, the impact of
SFAS 123R. Stock-based compensation expense recognized is
based on the value of the portion of stock-based awards that is
ultimately expected to vest. Stock-based compensation expense
recognized in the Companys statements of operations during
the year ended December 31, 2006 includes compensation
expense for stock-based awards based on the fair value estimated
in accordance with the provisions of SFAS 123R. The Company
attributes the value of stock-based compensation to expense
using the straight-line method, which was previously used for
its pro forma information required under SFAS 123.
The weighted average estimated fair value of the employee stock
options granted was $9.2284 and $5.7913 per share for the three
months ended June 30, 2007 and 2006, respectively. The
weighted average estimated fair value of the employee stock
options granted was $8.5183 and $5.0717 per share for the six
months ended June 30, 2007 and 2006, respectively.
The Company uses the Black-Scholes option pricing model to
determine the fair value of stock options. The determination of
the fair value of stock-based payment awards on the date of
grant using a pricing model is affected by the Companys
stock price as well as assumptions regarding a number of complex
and subjective variables. The estimated grant date fair values
of the employee stock options were calculated using the Black-
F-13
INSULET
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Scholes option pricing model, based on the following assumptions
for the three and six months ended June 30, 2007 and 2006,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Risk-free interest rate
|
|
|
4.81
|
%
|
|
|
5.05
|
%
|
|
|
4.81
|
%
|
|
|
4.89
|
%
|
Expected term (in years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
Dividend yield
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Expected volatility
|
|
|
67.00
|
%
|
|
|
71.36
|
%
|
|
|
67.00
|
%
|
|
|
71.36
|
%
|
Risk-free interest rate. The risk-free
interest rate is based on U.S. Treasury zero-coupon issues
with remaining terms similar to the expected term on the options.
Expected volatility. Expected volatility
measures the amount that a stock price has fluctuated or is
expected to fluctuate during a period. The Company determines
volatility based on an analysis of comparable companies.
Expected term. The expected term of stock
options represents the period the stock options are expected to
remain outstanding and is based on the SEC Shortcut
Approach as defined in SAB 107, Share-Based
Payments, which is the midpoint between the vesting date and
the end of the contractual term.
Dividend yield. The Company has never declared
or paid any cash dividends and does not plan to pay cash
dividends in the foreseeable future, and, therefore, used an
expected dividend yield of zero in the valuation model.
Forfeitures. SFAS 123R also requires the
Company to estimate forfeitures at the time of grant, and revise
those estimates in subsequent periods if actual forfeitures
differ from those estimates. The Company uses historical data to
estimate pre-vesting option forfeitures and record stock-based
compensation expense only for those awards that are expected to
vest. If the Companys actual forfeiture rate is materially
different from its estimate, the stock-based compensation
expense could be significantly different from what the Company
has recorded in the current period.
The amount of stock-based compensation expense that is expected
to be recognized for outstanding, unvested options as of
June 30, 2007 is as follows (in thousands):
|
|
|
|
|
2007
|
|
$
|
762
|
|
2008
|
|
|
1,487
|
|
2009
|
|
|
1,487
|
|
2010
|
|
|
1,156
|
|
2011
|
|
|
254
|
|
|
|
|
|
|
|
|
$
|
5,146
|
|
Employee stock-based compensation expense under SFAS 123R
recognized in the three and six months ended June 30, 2007
was $298,000 and $507,000, respectively. For the same periods in
2006, employee stock-based compensation recognized was $126,000
and $154,000, respectively.
At June 30, 2007, the Company had $5,146,000 of total
unrecognized compensation expense under SFAS 123R, net of
estimated forfeitures. The expense will be recognized over a
weighted-average period of approximately two years.
F-14
INSULET
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
The Company provided a valuation allowance for the full amount
of its net deferred tax asset for all periods because
realization of any future tax benefit cannot be sufficiently
assured as we do not expect income in the near-term.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes.
Contract
Manufacturing Agreement
On October 4, 2007, the Company entered into a first
addendum to that certain non-exclusive contract manufacturing
agreement, dated January 3, 2007, between the Company and a
subsidiary of Flextronics International Ltd.
(Flextronics). Pursuant to the original
manufacturing agreement, Flextronics has been providing a
sub-assembly of components to the Companys OmniPod
disposable insulin infusion device. This first addendum expands
the scope of the services to be provided by Flextronics under
this manufacturing agreement to include the production of the
OmniPod device itself towards the end of 2008.
F-15
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Insulet Corporation
We have audited the accompanying consolidated balance sheets of
Insulet Corporation, as of December 31, 2006 and 2005, and
the related consolidated statements of operations, redeemable
convertible preferred stock and stockholders deficit, and
cash flows for each of the three years ended December 31,
2006. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
Since the date of completion of our audit of the accompanying
financial statements and initial issuance of our report thereon
dated April 3, 2007, except for Note 14, as to which
the date was May 10, 2007 which report contained an
explanatory paragraph regarding the Companys ability to
continue as a going concern, the Company, as discussed in
Note 1, has completed an initial public offering which
resulted in net proceeds of approximately $113.4 million.
Therefore, the conditions that raised substantial doubt about
whether the Company will continue as a going concern no longer
exist.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Insulet Corporation at December 31, 2006 and 2005, and
the results of its operations and its cash flows for each of the
three years ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standard No. 123R,
Share Based Payments, using the
prospective-transition method.
/s/ Ernst & Young LLP
Boston, Massachusetts
April 3, 2007, except for Note 1, Going Concern
and Liquidity, as to
which the date is October 17, 2007,
and Note 14, as to
which the date is May 10, 2007
FF-1
INSULET
CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currents assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,660
|
|
|
$
|
33,231
|
|
|
|
|
|
Restricted cash
|
|
|
550
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
140
|
|
|
|
1,417
|
|
|
|
|
|
Inventories
|
|
|
864
|
|
|
|
3,390
|
|
|
|
|
|
Prepaid and other current assets
|
|
|
469
|
|
|
|
1,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
9,683
|
|
|
|
39,865
|
|
|
|
|
|
Property and equipment, net
|
|
|
7,054
|
|
|
|
16,999
|
|
|
|
|
|
Other assets
|
|
|
55
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,792
|
|
|
$
|
57,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,624
|
|
|
$
|
3,450
|
|
|
|
|
|
Accrued expenses
|
|
|
1,296
|
|
|
|
4,193
|
|
|
|
|
|
Deferred revenue
|
|
|
116
|
|
|
|
284
|
|
|
|
|
|
Current debt
|
|
|
1,479
|
|
|
|
29,222
|
|
|
|
|
|
Warrants to purchase shares subject to redemption (see
Note 7)
|
|
|
|
|
|
|
1,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,515
|
|
|
|
39,080
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
8,302
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
315
|
|
|
|
316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,132
|
|
|
|
39,396
|
|
|
|
|
|
Redeemable convertible preferred stock, $0.001 par
value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized: 32,422,137 shares at December 31, 2005,
and 46,408,050 shares at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and outstanding Series A: 1,000,000 shares
stated at liquidation and redemption value December 31,
2005 and 2006 and none pro forma
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
|
Issued and outstanding Series B: 5,945,946 shares
stated at liquidation and redemption value December 31,
2005 and 2006 and none pro forma
|
|
|
11,000
|
|
|
|
11,000
|
|
|
|
|
|
Issued and outstanding Series C: 10,476,191 shares
stated at liquidation and redemption value December 31,
2005 and 2006 and none pro forma
|
|
|
22,000
|
|
|
|
22,000
|
|
|
|
|
|
Issued and outstanding Series D: 14,669,421 shares
stated at liquidation and redemption value December 31,
2005 and 2006 and none pro forma
|
|
|
35,500
|
|
|
|
35,500
|
|
|
|
|
|
Issued and outstanding Series E: 13,738,661 shares
stated at liquidation and redemption value December 31,
2006 and none pro forma
|
|
|
|
|
|
|
50,009
|
|
|
|
|
|
Redeemable convertible preferred stock warrant: See Note 7
and none pro forma
|
|
|
251
|
|
|
|
|
|
|
|
|
|
Stockholders (deficit) equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized: 50,000,000 shares at December 31, 2005 and
65,000,000 at December 31, 2006 and 65,000,000 shares
pro forma;
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued: 311,508 and 457,076 shares at December 31,
2005 and 2006, respectively, and 17,904,867 shares pro forma
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
Additional paid-in capital
|
|
|
28
|
|
|
|
293
|
|
|
|
|
|
Accumulated deficit
|
|
|
(66,058
|
)
|
|
|
(102,040
|
)
|
|
|
|
|
Deferred compensation
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
Subscription receivable
|
|
|
(30
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
(66,091
|
)
|
|
|
(101,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
16,792
|
|
|
$
|
57,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
FF-2
INSULET
CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenue
|
|
$
|
|
|
|
$
|
50
|
|
|
$
|
3,663
|
|
Cost of revenue
|
|
|
|
|
|
|
1,530
|
|
|
|
15,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
|
|
|
|
(1,480
|
)
|
|
|
(11,997
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
9,026
|
|
|
|
10,764
|
|
|
|
8,094
|
|
General and administrative
|
|
|
3,950
|
|
|
|
5,490
|
|
|
|
8,389
|
|
Sales and marketing
|
|
|
1,177
|
|
|
|
3,771
|
|
|
|
6,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
14,153
|
|
|
|
20,025
|
|
|
|
22,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(14,153
|
)
|
|
|
(21,505
|
)
|
|
|
(34,645
|
)
|
Interest income
|
|
|
333
|
|
|
|
505
|
|
|
|
1,378
|
|
Interest expense
|
|
|
(1
|
)
|
|
|
(636
|
)
|
|
|
(1,838
|
)
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
(845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(13,821
|
)
|
|
|
(21,636
|
)
|
|
|
(35,950
|
)
|
Accretion of redeemable convertible preferred stock
|
|
|
(64
|
)
|
|
|
|
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
|
(13,885
|
)
|
|
|
(21,636
|
)
|
|
|
(36,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(47.86
|
)
|
|
$
|
(70.95
|
)
|
|
$
|
(99.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares used in calculating net loss
per share
|
|
|
290,140
|
|
|
|
304,962
|
|
|
|
362,750
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
FF-3
INSULET
CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
CHANGES IN STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
Series B
|
|
Series C
|
|
Series D
|
|
Series D
|
|
Series E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
Redeemable
|
|
Redeemable
|
|
Redeemable
|
|
Warrant for
|
|
Redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
Convertible
|
|
Convertible
|
|
Convertible
|
|
Redeemable
|
|
Convertible
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Total
|
|
|
Preferred Stock
|
|
Preferred Stock
|
|
Preferred Stock
|
|
Preferred Stock
|
|
Convertible
|
|
Preferred Stock
|
|
|
Common Stock
|
|
Paid-in
|
|
Accumulated
|
|
Deferred
|
|
Subscription
|
|
Stockholders
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Preferred Stock
|
|
Shares
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Compensation
|
|
Receivable
|
|
Deficit
|
|
|
(In thousands, except share data)
|
Balance at January 1, 2004
|
|
|
1,000,000
|
|
|
|
1,000
|
|
|
|
5,945,946
|
|
|
|
11,000
|
|
|
|
10,476,191
|
|
|
|
22,000
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283,057
|
|
|
|
1
|
|
|
|
|
|
|
|
(30,587
|
)
|
|
|
(34
|
)
|
|
|
(30
|
)
|
|
|
(30,650
|
)
|
Issuance of Series D preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,669,421
|
|
|
|
35,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(64
|
)
|
Exercise of options to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,542
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Deferred compensation expense related to stock options issued to
nonemployees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
Compensation expense related to stock options issued to
nonemployees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
16
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,821
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
1,000,000
|
|
|
|
1,000
|
|
|
|
5,945,946
|
|
|
|
11,000
|
|
|
|
10,476,191
|
|
|
|
22,000
|
|
|
|
14,669,421
|
|
|
|
35,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
296,599
|
|
|
|
1
|
|
|
|
|
|
|
|
(44,422
|
)
|
|
|
(58
|
)
|
|
|
(30
|
)
|
|
|
(44,509
|
)
|
Exercise of options to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,909
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Deferred compensation expense related to stock options issued to
nonemployees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
Issuance of warrants to purchase Series D preferred stock
in connection with debt issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense related to stock options issued to
nonemployees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
39
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,636
|
)
|
|
|
|
|
|
|
|
|
|
|
(21,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
1,000,000
|
|
|
|
1,000
|
|
|
|
5,945,946
|
|
|
|
11,000
|
|
|
|
10,476,191
|
|
|
|
22,000
|
|
|
|
14,669,421
|
|
|
|
35,500
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
311,508
|
|
|
|
1
|
|
|
|
28
|
|
|
|
(66,058
|
)
|
|
|
(32
|
)
|
|
|
(30
|
)
|
|
|
(66,091
|
)
|
Issuance of Series E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,738,661
|
|
|
|
49,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(222
|
)
|
Reclass of warrant in accordance with
FAS 150-5
(See Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,568
|
|
|
|
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
191
|
|
Deferred compensation expense related to stock options issued to
nonemployees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
32
|
|
|
|
|
|
|
|
|
|
Compensation expense related to stock options issued to
employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
307
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,950
|
)
|
|
|
|
|
|
|
|
|
|
|
(35,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
1,000,000
|
|
|
$
|
1,000
|
|
|
|
5,945,946
|
|
|
$
|
11,000
|
|
|
|
10,476,191
|
|
|
$
|
22,000
|
|
|
|
14,669,421
|
|
|
$
|
35,500
|
|
|
$
|
|
|
|
|
13,738,661
|
|
|
$
|
50,009
|
|
|
|
|
457,076
|
|
|
$
|
1
|
|
|
$
|
293
|
|
|
$
|
(102,040
|
)
|
|
$
|
|
|
|
$
|
(19
|
)
|
|
$
|
(101,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
FF-4
INSULET
CORPORATION
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,821
|
)
|
|
$
|
(21,636
|
)
|
|
$
|
(35,950
|
)
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
323
|
|
|
|
1,203
|
|
|
|
2,421
|
|
|
|
|
|
Amortization of debt discount
|
|
|
|
|
|
|
33
|
|
|
|
219
|
|
|
|
|
|
Redeemable convertible preferred stock warrant expense
|
|
|
|
|
|
|
|
|
|
|
845
|
|
|
|
|
|
Stock compensation expense
|
|
|
16
|
|
|
|
39
|
|
|
|
307
|
|
|
|
|
|
Provision for bad debts
|
|
|
|
|
|
|
14
|
|
|
|
149
|
|
|
|
|
|
Non cash interest expense
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
Loss on disposal of assets
|
|
|
69
|
|
|
|
|
|
|
|
771
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
|
|
|
(154
|
)
|
|
|
(1,426
|
)
|
|
|
|
|
Inventory
|
|
|
|
|
|
|
(864
|
)
|
|
|
(2,526
|
)
|
|
|
|
|
Prepaids and other current assets
|
|
|
(172
|
)
|
|
|
(187
|
)
|
|
|
(1,358
|
)
|
|
|
|
|
Other assets
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
(221
|
)
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
533
|
|
|
|
801
|
|
|
|
4,723
|
|
|
|
|
|
Other long-term liabilities
|
|
|
|
|
|
|
315
|
|
|
|
1
|
|
|
|
|
|
Deferred revenue
|
|
|
|
|
|
|
116
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(13,056
|
)
|
|
|
(20,321
|
)
|
|
|
(31,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchasing of property and equipment
|
|
|
(2,708
|
)
|
|
|
(5,472
|
)
|
|
|
(13,137
|
)
|
|
|
|
|
(Increase) decrease in restricted cash
|
|
|
|
|
|
|
(550
|
)
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,708
|
)
|
|
|
(6,022
|
)
|
|
|
(12,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of Series D preferred stock, net of
issuance cost
|
|
|
35,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of Series E preferred stock, net of
issuance cost
|
|
|
|
|
|
|
|
|
|
|
49,787
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
|
|
|
|
10,000
|
|
|
|
30,000
|
|
|
|
|
|
Principal payments of long term-debt
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
10
|
|
|
|
15
|
|
|
|
180
|
|
|
|
|
|
Proceeds from payment of subscription receivable
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
Principal payments under capital lease
|
|
|
(11
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
35,435
|
|
|
|
10,004
|
|
|
|
69,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
19,671
|
|
|
|
(16,339
|
)
|
|
|
25,571
|
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
4,328
|
|
|
|
23,999
|
|
|
|
7,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
23,999
|
|
|
$
|
7,660
|
|
|
$
|
33,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1
|
|
|
$
|
473
|
|
|
$
|
1,760
|
|
|
|
|
|
Non-cash financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock
|
|
$
|
64
|
|
|
$
|
|
|
|
$
|
222
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
FF-5
INSULET
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004, 2005 and 2006
|
|
1.
|
Nature of
the Business
|
Insulet Corporation (the Company), located in
Bedford Massachusetts, is principally engaged in the
development, manufacture and commercialization of an insulin
infusion system for people with insulin-dependent diabetes. The
Company was incorporated in Delaware on July 20, 2000.
Since inception, the Company has devoted substantially all of
its efforts to designing and developing the OmniPod Insulin
Management System, raising capital and recruiting personnel. As
a result, the Company was considered a development stage company
pursuant to Statement of Financial Accounting Standards
(SFAS) No. 7, Accounting and Reporting by
Development Stage Enterprises, through December 31,
2005. The year 2006 is the first year during which the Company
is an operating company and is no longer in the development
stage. The Company commercially launched the OmniPod Insulin
Management System in August 2005 after receiving FDA 510(k)
approval in January 2005. The first commercial product was
shipped in October 2005.
The OmniPod Insulin Management System was designed to allow
patients to make diabetes a smaller part of life while providing
the benefits of CSII therapy. The OmniPod System utilizes
award-winning proprietary designs and technology to combine the
functionality of a conventional insulin pump with that of a
blood glucose meter in an innovative, discreet and easy-to-use
two-part system that includes:
|
|
|
|
|
the OmniPod a small, lightweight, self-adhesive,
disposable insulin infusion device that is worn directly on the
skin for up to three days and then replaced. The OmniPod
delivers insulin according to instructions transmitted
wirelessly from the Personal Diabetes Manager
(PDM); and
|
|
|
|
the PDM a wireless, menu-driven, hand-held device
that is used to program the OmniPod with personalized insulin
delivery instructions, monitor the operation of the OmniPod, and
check blood glucose levels using blood glucose test strips.
|
Going
Concern and Liquidity (updated through October 17,
2007)
The Company has incurred significant operating losses since
inception generating an accumulated deficit at December 31,
2006 of $102.0 million, and is currently selling the
OmniPod System at a loss. The future success of the Company is
dependent on its ability to obtain additional working capital to
develop and market its products, grow the business, and
ultimately upon its ability to attain future profitable
operations. The Company expects losses to continue into the
foreseeable future as it continues to implement its automated
manufacturing strategy and commercialize its products.
Prior to its initial public offering in May 2007, the Company
funded its cash needs through the issuance of equity securities
and debt financing. The Company completed an additional equity
financing through the sale of its Series E redeemable
convertible preferred stock (see Note 9) and entered into a
$30.0 million credit and security agreement to fund working
capital needs and general corporate purposes (see Note 7). Prior
to the completion of the Companys initial public offering
there was substantial doubt about the Companys ability to
continue as a going concern.
On May 18, 2007, the Company issued and sold
7,700,000 shares of common stock at a price to the public
of $15.00 per share. On June 12, 2007, the Company issued
and sold an additional 665,000 shares of common stock at a
price to the public of $15.00 per share pursuant to the
underwriters partial exercise of their over-allotment
option. In connection with the initial public offering, the
Company received total gross proceeds of $125.5 million, or
approximately $113.4 million in net proceeds after
deducting underwriting discounts and offering expenses.
Following receipt of proceeds from the Companys initial
public offering, the conditions that raised substantial doubt
about whether the Company will continue as a going concern no
longer exist.
FF-6
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of
Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenue and expense during the reporting
periods. The most significant estimates used in these financial
statements include the valuation of inventories and equity
instruments and the lives of property and equipment. Actual
results could differ from those estimates.
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary,
Sub-Q
Solutions, Inc. Sub-Q Solutions, Inc. was established on
January 27, 2006. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Sub-Q
Solutions, Inc. is a C corporation organized and existing under
the laws of the State of Delaware. All of the shares of
Sub-Q
Solutions, Inc. are owned by Insulet Corporation. To date there
has been no activity in
Sub-Q
Solutions, Inc.
Certain
Risks and Uncertainties
The Company is subject to risks common to companies in the
medical device industry, including, but not limited to,
development by the Company or its competitors of new
technological innovations, dependence on key personnel, reliance
on third party manufacturers, protection of proprietary
technology, and compliance with regulatory requirements.
Fair
Value of Financial Instruments
Certain of the Companys financial instruments, including
cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and other liabilities are carried at
cost, which approximates their fair value because of the
short-term maturity of these financial instruments. Based on the
borrowing rates currently available to the Company for loans
with similar terms, the carrying value of the notes payable and
capital lease obligations approximate their fair values.
Cash,
Cash Equivalents and Restricted Cash
For the purposes of the financial statement classification, the
Company considers all highly liquid investment instruments with
original maturities of ninety days or less, when purchased,
to be cash equivalents. Cash equivalents consist of money market
accounts and are carried at cost. This approximates their fair
values. Outstanding letters of credit, principally relating to
security deposits for lease obligations, totaled $500,000 at
December 31, 2005 and $200,000 at December 31, 2006.
Restricted cash was used as collateral for a letter of credit
and potential related fees.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due from third-party
payors and patients. In estimating the collectability of
accounts receivable, the Company analyzes payor and patient
concentrations, payor and patient credit-worthiness, and
competitive benchmarks. These allowances are recorded in the
period when the revenue is recorded. The allowances are adjusted
currently for any changes in estimated collections.
Bad debt expense for the years ended December 31, 2005 and
2006 amounted to $14,000 and $149,000, respectively. There were
no write-offs or other adjustments to the allowance for doubtful
accounts during the years ended December 31, 2005 and 2006.
As the Company began selling its product during 2005, no
revenue, related accounts receivable or bad debt expense was
recorded during the year ended December 31, 2004.
FF-7
Inventories
Inventories are valued at the lower of actual cost or market,
using the
first-in,
first-out (FIFO) method. Inventory has been written
down to market for all periods presented as the Company
currently manufactures its product at a loss. Work in process is
calculated based upon a build up in the stage of completion
using estimated labor inputs for each stage in production. Costs
for PDMs and OmniPods include raw material, labor and
manufacturing overhead. The Company evaluates inventory
valuation on a quarterly basis for obsolete or slow-moving items.
Property &
Equipment
Property and equipment is stated at cost and depreciated using
the straight-line method over the estimated useful lives of the
respective assets. Leasehold improvements are amortized over
their useful life or the life of the lease, whichever is
shorter. Assets capitalized under capital lease are amortized in
accordance with the respective class of owned assets and the
amortization is included with depreciation expense. Maintenance
and repair costs are expensed as incurred.
Impairment
of Property & Equipment
The Company reviews the carrying value of its property and
equipment to assess the recoverability of these assets whenever
events indicate that impairment may have occurred. As part of
this assessment, the Company reviews the future undiscounted
operating cash flows expected to be generated by those assets.
If impairment is indicated through this review, the carrying
amount of the asset would be reduced to its estimated fair value.
Revenue
Recognition
The Company generates revenue from the sale of its OmniPod
Insulin Management System to diabetes patients. The initial sale
to a new customer typically includes OmniPods and Starter Kits,
which include the Personal Diabetes Manager (PDM),
two OmniPods, the OmniPod System User Guide and the OmniPod
System Interactive Training CD. The Company offers a
30-day right
of return for its Starter Kits sales (the Company changed
prospectively to a 45-day right of return effective for
shipments subsequent to December 1, 2006). Subsequent sales
to existing customers typically consist of OmniPods sales.
Revenues are recognized in accordance with Staff Accounting
Bulletin No. 104, Revenue Recognition in Financial
Statements (SAB 104), which requires that
persuasive evidence of a sales arrangement exists, delivery of
goods occurs through transfer of title and risk and rewards of
ownership, the selling price is fixed or determinable and
collectibility is reasonably assured. With respect to these
criteria:
|
|
|
|
|
The evidence of an arrangement generally consists of a physician
order form, a patient information form, and if applicable,
third-party insurance approval.
|
|
|
|
Transfer of title and risk and rewards of ownership are passed
to the patient upon shipment from the Company.
|
|
|
|
The selling prices for all sales are fixed and agreed with the
patient, and if applicable, the patients third-party
insurance provider(s) prior to shipment and are based on
established list prices or, in the case of certain third-party
insurers, contractually agreed upon prices.
|
The Company has considered the requirements of Emerging Issues
Task Force (EITF)
No. 00-21,
Revenue Arrangements with Multiple Deliverables, when
accounting for the OmniPods and Starter Kits.
EITF 00-21
requires that the Company assess whether the different elements
qualify for separate accounting. The Company recognizes revenue
for the Starter Kits once all elements have been delivered and
the right of return has expired.
The Company has applied Statement of Financial Accounting
Standards (SFAS) No. 48, Revenue Recognition
When the Right of Return Exists. In accordance with
SFAS No. 48, the Company defers the revenue and, to
the extent allowed, all related costs of all initial shipments
until the right of return has lapsed. The Company had deferred
revenue of $284,000 and $116,000 as of December 31, 2006
and 2005, respectively.
FF-8
The Company recognizes subsequent sales of OmniPods upon
shipment in accordance with the provisions set forth by
SAB 104.
Shipping
and Handling Costs
The Company does not bill its customers for shipping and
handling costs associated with shipping its product to its
customers. These shipping and handling costs are included in
cost of revenues.
Concentration
of Credit Risk
Financial instruments that subject the Company to credit risk
primarily consist of cash and cash equivalents. The Company
maintains the majority of its cash with one accredited financial
institution.
Although revenues are recognized from shipments directly to
patients, the majority of shipments are billed to third party
insurance payors. For the year ended December 31, 2005, the
two largest third party payors accounted for 27% and 8% of gross
revenue and accounts receivable balances. For the year ended
December 31, 2006, the three largest third party payors
accounted for 15%, 9% and 7% of gross revenue and 9%, 8% and 7%
of accounts receivable balances.
Research
and Development
The Companys research and development expenses consist of
engineering, product development, quality assurance, clinical
function and regulatory expenses. These expenses are primarily
related to employee compensation, including salary, benefits and
stock-based compensation. The Company also incurs expense
related to consulting fees, materials and supplies, and
marketing studies, including data management and associated
travel expenses. Research and development costs are expensed as
incurred.
Advertising
Expense
Advertising costs are expensed as incurred. Advertising costs
were $9,000, $233,000 and $668,000 for the years ended
December 31, 2004, 2005 and 2006, respectively.
Segment
Reporting
SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information, establishes standards
for reporting information about operating segments in annual
financial statements and in interim financial reports issued to
stockholders. 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, or decision making group, in deciding
how to allocate resources to an individual segment and in
assessing performance of the segment. In light of the
Companys current product offering, and other
considerations, management has determined that the primary form
of internal reporting is aligned with the offering of the
OmniPod System. Therefore, the Company believes that it operates
in one segment.
Foreign
Currency Transaction Gain or Loss
Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other
than the functional currency are included in the results of
operations as incurred. Foreign currency transaction gains
included in operations were $16,000 in the year ended
December 31, 2004. There were no foreign currency
transaction gains or losses in the years ended December 31,
2005 and 2006.
Income
Taxes
The Company accounts for income taxes using the liability method
as set forth in SFAS No. 109, Accounting for Income
Taxes. Deferred income tax assets and liabilities are
determined based upon differences between financial reporting
and tax bases of assets and liabilities. They are measured using
the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
FF-9
Stock
Based Compensation
Effective January 1, 2006, the Company adopted
SFAS No. 123 (revised 2004), Share Based
Payment, or SFAS 123R, which is a revision of Statement
No. 123 (SFAS 123) Accounting for Stock
Based Compensation. SFAS 123R supersedes Accounting
Principles Board (APB) No. 25, Accounting
for Stock Issued to Employees (APB 25), and
amends Financial Accounting Standards Board (FASB)
Statement No. 95 Statement of Cash Flows.
SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the income statement based on their fair values. Pro forma
disclosure is no longer an alternative.
Prior to January 1, 2006, the Company accounted for
employee stock based compensation in accordance with the
provisions of APB 25 and FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock
Compensation an Interpretation of APB
No. 25, and complied with the disclosure provisions of
SFAS 123, and related SFAS No. 148, Accounting
for Stock-Based Compensation Transaction and
Disclosure. Under APB 25, compensation expense is based
on the difference, if any, on the date of the grant, between the
fair value of the stock and the exercise price of the option.
The stock based compensation is amortized using the
straight-line method over the vesting period.
SFAS 123R requires nonpublic companies that used the
minimum value method in SFAS 123R for either recognition or
pro forma disclosures to apply SFAS 123R using the
prospective-transition method. As such, the Company will
continue to apply APB 25 in future periods to equity awards
outstanding at the date of SFAS 123Rs adoption that
were measured using the minimum value method. In accordance with
the requirements of SFAS 123R, the Company will not present
pro forma disclosures for periods prior to the adoption of
SFAS 123R, as the estimated fair value of the
Companys stock options granted through December 31,
2005 was determined using the minimum value method.
Effective January 1, 2006 with the adoption of
SFAS 123R, the Company elected to use the Black-Scholes
option pricing model to determine the weighted-average fair
value of options granted. In accordance with SFAS 123R, the
Company will recognize the compensation expense of share-based
awards on a straight-line basis over the vesting period of the
award. Stock based compensation expense recognized under
SFAS 123R for the year ended December 31, 2006 was
$307,000.
The determination of the fair value of share-based payment
awards utilizing the Black-Scholes model is affected by the
stock price and a number of assumptions, including expected
volatility, expected life, risk-free interest rate and expected
dividends. The Company does not have a history of market prices
of its common stock as it is not a public company, and as such
estimates volatility in accordance with Securities and Exchange
Commissions Staff Accounting Bulletin No. 107,
Share-Based Payment (SAB 107) using historical
volatilities of similar public entities. The expected life of
the awards is estimated based on the SEC Shortcut
Approach as defined in SAB 107, which is the
midpoint between the vesting date and the end of the contractual
term. The risk-free interest rate assumption is based on
observed interest rates appropriate for the terms of the awards.
The dividend yield assumption is based on company history and
expectation of paying no dividends. Forfeitures are estimated at
the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Stock
based compensation expense recognized in the financial
statements in 2006 and thereafter is based on awards that are
ultimately expected to vest. The Company evaluates the
assumptions used to value the awards on a quarterly basis and if
factors change and different assumptions are utilized, stock
based compensation expense may differ significantly from what
has been recorded in the past. If there are any modifications or
cancellations of the underlying unvested securities, the Company
may be required to accelerate, increase or cancel any remaining
unearned stock based compensation expense.
Prior to April 1, 2006, the exercise prices for options
granted were set by the Companys board of directors based
upon guidance set forth by the American Institute of Certified
Public Accountants (AICPA) in the AICPA Technical Practice Aid,
Valuation of Privately-Held-Company Equity Securities
Issued as Compensation, or the AICPA Practice Aid. To that
end, the board considered a number of factors in determining the
option price, including the following factors: (1) prices
for the Companys preferred stock, which the Company had
sold to outside investors in arms-length transactions, and the
rights, preferences and privileges of the Companys
preferred stock and common stock in the Series A through
Series E financing,
FF-10
(2) obtaining FDA 510(k) clearance, (3) launching the
OmniPod System and (4) achievement of budgeted revenue and
results.
In connection with the preparation of the financial statements
for this offering, the Company retrospectively estimated the
fair value of its common stock based upon several factors,
including the following factors: (1) operating and
financial performance, (2) progress and milestones attained
in the business, (3) past sales of convertible preferred
stock, (4) the results of the retrospective independent
valuations, and (5) the expected valuation obtained in an
initial public offering. The Company believes this to have been
a reasonable methodology based on the factors above and based on
several arms-length transactions involving the
Companys stock supportive of the results produced by this
valuation methodology.
See Note 10 for a summary of the stock option activity
under our stock based employee compensation plan.
Recent
Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48,
Accounting for the Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting
uncertainty in tax positions. This interpretation requires that
the Company recognize in its financial statements the impact of
a tax position if that position is more likely than not of being
sustained on audit, based on the technical merits of the
position. The provisions of FIN 48 are effective as of the
beginning of its 2007 fiscal year, with the cumulative effect,
if any, of the change in accounting principle recorded as an
adjustment to opening retained earnings. The Company is
evaluating the impact that FIN 48 will have on its
financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157). This
standard defines fair value, establishes a framework for
measuring fair value in accounting principles generally accepted
in the United States, and expands disclosure about fair value
measurements. This pronouncement applies under other accounting
standards that require or permit fair value measurements.
Accordingly, this statement does not require any new fair value
measurement. This statement is effective for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. The Company will be required to adopt
SFAS 157 in the first quarter of fiscal year 2008. The
Company is currently evaluating the requirements of
SFAS 157 and has not yet determined the impact on its
financial statements.
FF-11
Basic net loss per share is computed by dividing net loss
attributable to common stockholders by the weighted average
number of common shares outstanding for the period, excluding
unvested restricted common shares. As of December 31, 2004
there were 3,090 unvested restricted common shares. For all of
the other years presented there were no unvested restricted
common shares. Diluted net loss per share is computed using the
weighted average number of common shares outstanding and, when
dilutive, potential common share equivalents from options and
warrants (using the treasury-stock method), and potential common
shares from convertible securities (using the if-converted
method). Because the Company reported a net loss for the years
ended December 31, 2004, 2005 and 2006, all potential
common shares have been excluded from the computation of the
dilutive net loss per share for all periods presented because
the effect would have been antidilutive. Such potential common
share equivalents consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Series A redeemable convertible preferred stock
|
|
|
380,705
|
|
|
|
380,705
|
|
|
|
380,705
|
|
Series B redeemable convertible preferred stock
|
|
|
2,263,651
|
|
|
|
2,263,651
|
|
|
|
2,263,651
|
|
Series C redeemable convertible preferred stock
|
|
|
3,988,337
|
|
|
|
3,988,337
|
|
|
|
3,988,337
|
|
Series D redeemable convertible preferred stock
|
|
|
5,584,722
|
|
|
|
5,584,722
|
|
|
|
5,584,722
|
|
Series E redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
5,230,376
|
|
Outstanding options
|
|
|
1,539,526
|
|
|
|
2,097,192
|
|
|
|
2,318,250
|
|
Outstanding warrants
|
|
|
|
|
|
|
125,853
|
|
|
|
219,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,756,941
|
|
|
|
14,440,460
|
|
|
|
19,986,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
380
|
|
|
$
|
1,177
|
|
Work-in-process
|
|
|
40
|
|
|
|
367
|
|
Finished goods
|
|
|
444
|
|
|
|
1,846
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
864
|
|
|
$
|
3,390
|
|
|
|
|
|
|
|
|
|
|
Inventory was adjusted by $182,000 and $1.5 million as of
December 31, 2005 and 2006, respectively, to reflect values
at the lower of cost or market. At December 31, 2005 and
2006, 51% and 54%, respectively, of the total inventory is
valued at below the Companys cost. The Companys
production process has a high degree of fixed costs and due to
the early stage of market acceptance for its products, sales and
production volumes may vary significantly from one period to
another. Consequently, sales and production volumes have not
been adequate to provide for per unit costs that are lower than
the current market price for the Companys products.
FF-12
|
|
5.
|
Property
and Equipment
|
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
As of
|
|
|
|
Useful Life
|
|
December 31,
|
|
|
|
(Years)
|
|
2005
|
|
|
2006
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Machinery and equipment
|
|
5
|
|
$
|
3,738
|
|
|
$
|
8,559
|
|
Construction in process
|
|
|
|
|
2,060
|
|
|
|
7,987
|
|
Computer
|
|
3
|
|
|
644
|
|
|
|
975
|
|
Software
|
|
3
|
|
|
711
|
|
|
|
1,061
|
|
Leasehold improvements
|
|
*
|
|
|
1,443
|
|
|
|
1,730
|
|
Office furniture and fixtures
|
|
5
|
|
|
339
|
|
|
|
703
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
|
$
|
8,935
|
|
|
$
|
21,015
|
|
Less: Accumulated depreciation
|
|
|
|
|
(1,881
|
)
|
|
|
(4,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
7,054
|
|
|
$
|
16,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Lesser of term of lease or useful life of asset.
|
Depreciation expense related to property and equipment was
$1.2 million and $2.4 million for the years ended
December 31, 2005 and 2006, respectively.
Construction in process consists of machinery and equipment in
the process of being constructed for use in the Companys
automated manufacturing process. Depreciation on the machinery
and equipment does not begin until the machinery and equipment
are installed and integrated into the manufacturing process.
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Sales commissions
|
|
$
|
|
|
|
$
|
150
|
|
Employee compensation and related expense
|
|
|
702
|
|
|
|
879
|
|
Professional services
|
|
|
317
|
|
|
|
774
|
|
Interest expense
|
|
|
127
|
|
|
|
|
|
Construction in process
|
|
|
35
|
|
|
|
397
|
|
Warranty reserve
|
|
|
2
|
|
|
|
111
|
|
Other
|
|
|
113
|
|
|
|
1,882
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
1,296
|
|
|
$
|
4,193
|
|
|
|
|
|
|
|
|
|
|
Product
Warranty Costs
The Company provides a four-year warranty on its PDMs and
replaces any OmniPods that do not function in accordance with
product specifications. Warranty expense is recorded in the
period that shipment
FF-13
occurs. The expense is based on historical experience and the
estimated cost to service the claims. A reconciliation of the
changes in the Companys product warranty liability is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Balance at the beginning of the period
|
|
$
|
|
|
|
$
|
9
|
|
Warranty expense
|
|
|
11
|
|
|
|
522
|
|
Warranty claims settled
|
|
|
(2
|
)
|
|
|
(338
|
)
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
9
|
|
|
$
|
193
|
|
|
|
|
|
|
|
|
|
|
Composition of balance:
|
|
|
|
|
|
|
|
|
Short-term
|
|
|
2
|
|
|
|
111
|
|
Long-term
|
|
|
7
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
Total warranty balance
|
|
$
|
9
|
|
|
$
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Indebtedness
and Warrants to Purchase Shares Subject to Redemption
|
Loan
and Security Agreements
On June 2, 2005, the Company entered into a
$10.0 million term loan and security agreement with
Lighthouse Capital Partners V, L.P. Interest on this term loan
was charged at a rate of 8%. This term loan required only
interest payments through June 1, 2006. After that date,
the principal and interest was payable ratably over
42 months. At the end of the amortization period of the
term loan, the Company was obligated to make a final payment of
$1.0 million, which was being amortized as interest expense
over the life of the loan. Upon payment of the term loan in
December 2006, the remaining unamortized balance of the final
$1.0 million payment was recognized as interest expense.
In connection with this term loan, the Company issued a warrant
to the lender to purchase up to 330,579 shares of
Series D preferred stock. The Company recorded the $251,000
fair value of the warrant as a discount to the term loan. The
cost of the warrant was being amortized to interest expense over
the 54-month
life of this term loan. The remaining balance of the discount
was expensed upon payment of the term loan in December 2006.
On December 27, 2006, the Company entered into a credit and
security agreement with a group of lenders led by Merrill Lynch
Capital pursuant to which the Company borrowed
$30.0 million in a term loan. The Company used
$9.5 million of the proceeds from this term loan to repay
all amounts owed under the term loan with Lighthouse Capital
Partners V, L.P. This term loan is secured by all the assets of
the Company other than its intellectual property. The borrowings
under the term loan bear interest at a floating rate equal to
the LIBOR rate plus 6% per annum. Interest is payable on a
monthly basis during the term of the loan and, beginning on
October 1, 2007, principal will be paid in 33 equal monthly
installments of $909,091. This term loan is also subject to a
loan origination fee amounting to $900,000. The Company has
capitalized these costs as deferred financing costs as of
December 31, 2006. The deferred cost asset will be
amortized to interest expense over the
42-month
life of this term loan. This term loan is subject to
acceleration upon the occurrence of any fact, event or
circumstance that has resulted or could reasonably be expected
to result in a material adverse effect. Consequently, such debt
has been classified as a current liability at December 31,
2006 in accordance with the provisions set forth by FASB
Technical Bulletin No.
79-3
Subjective Acceleration Clause in Long-Term Debt Agreements.
In connection with this term loan, the Company issued warrants
to the lenders to purchase up to 247,252 of Series E
preferred stock. The Company recorded the $835,000 fair value of
the warrants as a discount to the term loan. The costs of the
warrants are being amortized to interest expense over the
42-month
life of this term loan.
FF-14
Warrants
In connection with the term loans with Lighthouse Capital
Partners and a group of lenders led by Merrill Lynch Capital,
the Company issued warrants to the lenders to purchase shares of
its redeemable convertible preferred stock. These warrants have
been recorded as warrants to purchase shares subject to
redemption in current liabilities in accordance with FASB
Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity and FASB Staff Position
No. 150-5
Issuers Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on
Shares That Are Redeemable.
Significant terms and fair values of warrants to purchase
redeemable convertible preferred stock are as follows (in
thousands except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Shares as of
|
|
|
Fair Value as of
|
|
|
|
|
|
|
Price
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
Stock
|
|
Expiration Date
|
|
|
Per Share
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
Series D preferred
|
|
|
June 2, 2012
|
|
|
$
|
2.42
|
|
|
|
330,579
|
|
|
|
330,579
|
|
|
$
|
251
|
|
|
$
|
1,096
|
|
Series E preferred
|
|
|
December 27, 2013
|
|
|
$
|
3.64
|
|
|
|
|
|
|
|
247,252
|
|
|
|
|
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
330,579
|
|
|
|
577,831
|
|
|
$
|
251
|
|
|
$
|
1,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All warrants automatically convert upon the closing of an
initial public offering into warrants to purchase shares of
common stock on a
1-for-2.6267
basis at an exercise price of $6.36 per share in the case
of the Series D warrant and an exercise price of $9.56 per
share in the case of the Series E warrants.
The Company recorded the $251,000 and $835,000 fair value of the
warrants for Series D and Series E preferred stock, respectively
as a discount to the term loans.
The fair value of the Series D warrants was calculated at
issuance and as of December 31, 2005 using the
Black-Scholes option-pricing model with the following
assumptions: 7 and 6.5 year expected lives, risk-free
interest rate of 3.89%, expected volatility of 20%, and no
dividend yield. The fair value of the Series D and
Series E warrants was calculated as of December 31,
2006, and the fair value of the Series E warrants was
calculated upon issuance on December 27, 2006, using the
Black-Scholes option-pricing model with the following
assumptions: 5.5 (Series D) and 7 year
(Series E) expected lives, risk-free interest rate of
4.64%, expected volatility of 71.36%, and no dividend yield.
The Company recorded $845,000 of other expense for the year
ended December 31, 2006 to reflect increases in the
estimated fair value of the Series D warrants during the
period.
|
|
8.
|
Commitments
and Contingencies
|
Operating
Leases
The Company leases its facilities, which are accounted for as
operating leases. The leases generally provide for a base rent
plus real estate taxes and certain operating expenses related to
the leases. The Company entered into a new lease in 2004 which
contains renewal options, escalating payments and leasehold
allowances over the life of the lease. The Company has
considered FASB Technical
Bulletin 88-1,
Issues Relating to Accounting for Leases, and FASB
Technical
Bulletin 85-3,
Accounting for Operating Leases with Scheduled Rent
Increases, in accounting for these lease provisions.
FF-15
The Company leases its corporate office under a long-term,
noncancelable lease with two five-year renewal options with
aggregate future minimum lease payments as of December 31,
2006, as follows (in thousands):
|
|
|
|
|
|
|
Minimum
|
|
Year
|
|
lease payments
|
|
|
2007
|
|
$
|
508
|
|
2008
|
|
|
508
|
|
2009
|
|
|
381
|
|
|
|
|
|
|
Total
|
|
$
|
1,397
|
|
|
|
|
|
|
Rent expense of approximately $468,000, $958,000 and $863,000
was charged to operations as of December 31, 2004, 2005 and
2006, respectively. A total of 30% of rent expense was charged
to cost of revenue through December 31, 2006. One of the
Companys operating lease agreements contains scheduled
rent increases, which are being amortized over the terms of the
agreement using the straight-line method, and are included in
other long-term liabilities in the accompanying consolidated
balance sheet. Deferred rent was $367,000 as of
December 31, 2006.
Capital
Leases
The Company leased certain software that is accounted for as
capital leases. Amortization of such software is included in
depreciation and amortization expense. The Company made a final
payment of $22,000 in December 2005.
Legal
Proceedings
The Company is not currently subject to any material pending
legal proceedings.
Indemnifications
In the normal course of business, the Company enters into
contracts and agreements that contain a variety of
representations and warranties and provide for general
indemnifications. The Companys exposure under these
agreements is unknown because it involves claims that may be
made against the Company in the future, but have not yet been
made. To date, the Company has not paid any claims or been
required to defend any action related to its indemnification
obligations. However, the Company may record charges in the
future as a result of these indemnification obligations.
In accordance with its bylaws, the Company has indemnification
obligations to its officers and directors for certain events or
occurrences, subject to certain limits, while they are serving
at the Companys request in such capacity. There have been
no claims to date and the Company has a director and officer
insurance policy that enables it to recover a portion of any
amounts paid for future claims.
|
|
9.
|
Redeemable
Convertible Preferred Stock and Stockholders
Deficit
|
Common
Stock
In 2006, the Companys amended and restated certificate of
incorporation authorized the Company to issue
65,000,000 shares of $0.001 par value common stock.
Common stockholders are entitled to dividends as and when
declared by the board of directors, subject to the rights of
holders of all classes of stock outstanding having priority
rights as to dividends. There have been no dividends declared to
date. The holder of each share of common stock is entitled to
one vote.
Redeemable
Convertible Preferred Stock
During October 2000, the Company issued 500,000 shares of
Series A redeemable convertible preferred stock
(Series A Preferred) to investors at
$1.00 per share with net cash proceeds of $486,375.
FF-16
During February 2001, the Company issued 500,000 shares of
Series A redeemable convertible preferred stock
(Series A Preferred) to investors at
$1.00 per share with net cash proceeds of $494,766.
During June 2001, the Company issued 5,945,946 shares of
Series B redeemable convertible preferred stock
(Series B Preferred) to investors at
$1.85 per share with net cash proceeds of $10,930,598.
During September 2002, the Company issued 10,476,191 shares
of Series C redeemable convertible preferred stock
(Series C Preferred) to investors at
$2.10 per share with net cash proceeds of $21,871,834.
During February 2004, the Company issued 14,669,421 shares
of Series D redeemable convertible preferred stock
(Series D Preferred) to investors at
$2.42 per share with net cash proceeds of $35,436,234 and
during June 2005 issued to an investor a warrant to purchase
330,579 shares of Series D Preferred
(Series D Warrant).
During February 2006, the Company issued 13,738,661 shares
of Series E redeemable convertible preferred stock
(Series E Preferred) to investors at
$3.64 per share with net cash proceeds of $49,787,108 and
during December 2006 issued to investors warrants to purchase
247,252 shares of Series E Preferred (Series E
Warrants).
The holders of the convertible preferred stock have various
rights and preferences as follows:
Conversion. The Preferred Stock is convertible
into the Companys Common Stock at the option of the
holder, at any time, based upon the conversion price defined in
the Sixth Amended and Restated Certificate of Incorporation, as
amended. The conversion price of each respective series of the
Preferred Stock is subject to adjustment upon the occurrence of
certain dilutive events, such as a stock split. The conversion
price of the Series A Preferred is $2.63 per share;
the conversion price of the Series B Preferred is $4.86;
the conversion price of the Series C Preferred is $5.52;
the conversion price of the Series D Preferred is
$6.36 per share; and the conversion price of the
Series E Preferred is $9.56 per share. The Preferred
Stock will automatically convert into the Companys Common
Stock (a) upon the consummation of a qualified public
offering from which the aggregate net proceeds equal or exceed
$50,000,000 and in which the price per share is at least $14.32,
or the equivalent price after adjustment for certain events or
(b) upon approval of the holders of (i) at least
two-thirds (2/3) of the outstanding Preferred Stock voting or
consenting, as the case may be, together as a single class and
(ii) at least two-thirds (2/3) of the outstanding
Series E Preferred voting or consenting, as the case may
be, together as a separate class.
Dividends. The holders of the Preferred Stock
are entitled to receive dividends only when and if declared by
the Board of Directors out of funds legally available for that
purpose at the following rates: Series A Preferred
$0.08 per share; Series B Preferred $0.15 per
share; Series C Preferred $0.17 per share;
Series D Preferred $0.20 per share; and Series E
Preferred $0.29 per share. The holders of the Preferred
Stock shall be entitled to receive such dividends prior and in
preference to any declaration or payment of any dividend
(payable other than in Common Stock or other securities and
rights convertible into or other entitling the holder thereof to
receive, directly or indirectly, additional shares of Common
Stock) on the Common Stock. Any partial payment shall be made
ratably in proportion to the payment each holder would receive
if the full amount of such dividends were paid. Dividends do not
accrue and are not cumulative.
Except in limited circumstances, whenever any dividend is
declared on any shares of Common Stock, then prior to paying any
Common Stock dividend, the Company shall pay to the holders of
the Preferred Stock at the time of payment thereof the Common
Stock dividend which would have been paid on the shares of
Common Stock issuable upon conversion of the Preferred Stock had
the Preferred Stock been converted immediately prior to the date
on which a record is taken for such Common Stock dividend, or,
if no record is taken, the date as to which the record holders
of Common Stock entitled to such dividend are to be determined.
Voting Rights. The holders of the Preferred
Stock are entitled to the number of votes equal to the number of
Common Stock shares into which they are convertible. Except as
otherwise provided by the Sixth Amended and Restated Certificate
of Incorporation, as amended, or by law, the preferred
stockholders vote with the Common Stockholders as a single class
on all actions to be taken by the stockholders of the
FF-17
Company. At any time when any shares of Series E Preferred
are outstanding, except where the vote or written consent of the
holders of a greater number of shares of the Company is required
by law or by the Sixth Amended and Restated Certificate of
Incorporation, as amended, the votes of at least two-thirds
(2/3) of the then-outstanding shares of Series E Preferred
will be required for the approval of certain events relating to
amendments to the Companys certificate of incorporation or
by-laws, increases to the authorized shares of Series E
Preferred, and the authorization or issuance of any security
having equal or senior rights with the Series E Preferred.
As long as at least 11,457,555 shares of Preferred Stock
remain outstanding, except where the vote or written consent of
the holders of a greater number of shares of the Company is
required by law or by the Sixth Amended and Restated Certificate
of Incorporation, as amended, the votes of at least two-thirds
(2/3) of the then-outstanding shares of Preferred Stock, voting
together as a single class, will be required for the approval of
certain events relating to the liquidation, dissolution, or
winding-up
of the Company; amendment of the certificate of incorporation;
purchase of or payment of cash dividends on Common Stock;
creation of a new class of stock or convertible debt
obligations; election of and changes to the number of directors
of the Company; and authorization, issuance, or purchase of
additional preferred stock.
Redemption. At any time after February 3,
2011, upon the request of the holders of at least two-thirds of
the outstanding shares of the Preferred Stock, voting together
as a single class, the Company shall redeem all outstanding
shares of Preferred Stock. The redemption prices of the
Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, and Series E Preferred
shall be $1.00, $1.85, $2.10, $2.42 and $3.64 per share,
respectively, plus an amount equal to such dividends declared
but unpaid thereon until the applicable redemption dates. If the
funds of the Company legally available for redemption of shares
of Preferred Stock on a Redemption Date are insufficient to
redeem the total number of outstanding shares of Preferred Stock
the holders of shares of Series E Preferred to be redeemed
shall, prior to the redemption of any shares of Series A
Preferred, shares of Series B Preferred, shares of
Series C Preferred or shares of Series D Preferred,
share ratably in any funds legally available for redemption of
such shares. If the funds of the Company legally available for
redemption of shares of Preferred Stock are insufficient to
redeem the total number of outstanding shares of Preferred
Stock, after the outstanding shares of Series E Preferred
have been redeemed, the holders of shares of Series D
Preferred to be redeemed shall share ratably in any funds
legally available for redemption of such shares. If the funds of
the Company legally available for redemption of shares of
Preferred Stock are insufficient to redeem the total number of
outstanding shares of Preferred Stock, after the outstanding
shares of Series E Preferred and Series D Preferred
have been redeemed, the holders of shares of Series A
Preferred, Series B Preferred and Series C Preferred
to be redeemed shall share ratably in ay funds legally available
for redemption of such shares.
Liquidation Preferences Liquidation, Dissolution, or
Winding-Up. In
the event of a voluntary or involuntary liquidation,
dissolution, or
winding-up
of the Company, the holders of the Series E Preferred shall
be entitled, before any distribution is made to any class or
series of stock ranking in liquidation junior to the
Series E Preferred, to be paid an amount equal to
$3.64 per share or an appropriately adjusted amount, plus
an amount equal to any dividends declared but unpaid thereon
(the Series E Liquidation Preference Payments).
Immediately following the Series E Liquidation Preference
Payments, the holders of the Series D Preferred shall be
entitled, before any distribution is made to any class or series
of stock ranking in liquidation junior to the Series D
Preferred, to be paid an amount equal to $2.42 per share or
an appropriately adjusted amount, plus an amount equal to any
dividends declared but unpaid thereon (the Series D
Liquidation Preference Payments). Immediately following
the Series D Liquidation Preference Payments, the holders
of Series C Preferred shall be entitled, at the same time,
to be paid an amount equal to $2.10 per share or an
appropriately adjusted amount, plus an amount equal to any
dividends declared but unpaid thereon (the Series C
Liquidation Preference Payments). Immediately following
the Series C Liquidation Preference Payments, the holders
of Series A Preferred and Series B Preferred shall be
entitled, at the same time, to be paid an amount equal to
$1.00 per share or an appropriately adjusted amount and
$1.85 per share or an appropriately adjusted amount,
respectively, plus an amount equal to any dividends declared but
unpaid (the Series A Liquidation Preference Payments
and Series B Liquidation Preference Payments). If
upon the liquidation, dissolution, or
winding-up
of the Company the assets to be distributed among the holders of
the Series E Preferred is
FF-18
insufficient to permit payment to the holders of Series E
Preferred under the Series E Liquidation Preference
Payments, then the entire assets of the Company legally
available for distribution shall be distributed ratably among
the holders of the Series E Preferred in proportion to the
preferential amount each such holder is otherwise entitled to
receive. If, upon such liquidation event, after the holders of
Series E Preferred have been paid in full in accordance
with the Series E Liquidation Preference Payments, the
remaining assets to be distributed among the holders of
Series D Preferred is insufficient to permit payment to the
holders of Series D Preferred, then the entire assets of
the Company legally available for distribution shall be
distributed ratably among the holders of the Series D
Preferred in proportion to the preferential amount each such
holder is otherwise entitled to receive. If, upon such
liquidation event, after the holders of Series D Preferred
have been paid in full in accordance with the Series D
Liquidation Preference Payments, the remaining assets to be
distributed among the holders of Series C Preferred is
insufficient to permit payment to the holders of Series C
Preferred, then the remaining assets of the Company legally
available for distribution shall be distributed ratably among
the holder of Series C Preferred in proportion to the
preferential amount each such holder is otherwise entitled to
receive. If, upon such liquidation event, after the holders of
Series C Preferred have been paid in full in accordance
with the Series C Liquidation Preference Payments, the
remaining assets to be distributed among the holders of
Series A Preferred and Series B Preferred are
insufficient to permit payment to the holders of Series A
Preferred and Series B Preferred, then the remaining assets
of the Company legally available for distribution shall be
distributed ratably among the holders of Series A Preferred
and Series B Preferred in proportion to the preferential
amount each such holder is otherwise entitled to receive.
Right of First Offer. Subject to certain
limited exceptions, for each future sale by the Company of its
shares, the Company granted to each investor that holds at least
1,000,000 shares of Restricted Stock (Major Investor) the
right to purchase up to the portion of shares equal to the
proportion that the number of shares of Common Stock issued and
held, or issuable upon conversion of the Preferred Stock then
held, by such Major Investor, bears to the total number of
shares of Common Stock issued and outstanding, including all
shares of outstanding capital stock convertible into Common
Stock. Restricted Stock shall mean Common Stock and
shares of Common Stock issuable or issued upon the conversion of
the Preferred Shares and other shares of Common Stock now owned
by investors. In the event that any Major Investor fails to
exercise its right of first offer, the exercising Major
Investors shall be entitled to obtain that portion of the shares
not subscribed for by the nonexercising Major Investor at the
same proportion calculated above.
10. Stock
Option Plan
Under the Companys 2000 Stock Option and Incentive Plan
(the Plan), options may be granted to persons who
are, at the time of grant, employees, officers, or directors of,
or consultants or advisors to, the Company. The Plan provides
for the granting of nonstatutory stock options, incentive stock
options, stock bonuses, and rights to acquire restricted stock.
The option price at the date of grant is determined by the Board
of Directors and, in the case of incentive stock options, may
not be less than the fair market value of the common stock at
the date of grant, as determined by the Board of Directors.
Options generally vest over a period of four years and expire
10 years from the date of grant. The provisions of the Plan
limit the exercise of incentive stock options. At the time of
grant, options are typically immediately exercisable, but
subject to restrictions. The restrictions generally lapse over a
period of four years. The Company has reserved
3,314,828 shares of common stock for issuance under the
Plan. At December 31, 2006, 586,397 options are available
for future grant.
FF-19
The Plan activity follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
Options(#)
|
|
|
Price($)
|
|
|
Value($)
|
|
|
Balance, January 1, 2004
|
|
|
946,660
|
|
|
|
0.99
|
|
|
|
|
|
Granted
|
|
|
743,512
|
|
|
|
2.55
|
|
|
|
|
|
Exercised
|
|
|
(13,542
|
)
|
|
|
0.71
|
|
|
|
24,248(
|
1)
|
Canceled
|
|
|
(137,104
|
)
|
|
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
1,539,526
|
|
|
|
1.73
|
|
|
|
|
|
Granted
|
|
|
598,031
|
|
|
|
3.65
|
|
|
|
|
|
Exercised
|
|
|
(14,909
|
)
|
|
|
0.97
|
|
|
|
38,349(
|
1)
|
Canceled
|
|
|
(25,456
|
)
|
|
|
2.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
2,097,192
|
|
|
|
2.27
|
|
|
|
|
|
Granted
|
|
|
441,391
|
|
|
|
6.62
|
|
|
|
|
|
Exercised
|
|
|
(145,568
|
)
|
|
|
1.23
|
|
|
|
1,109,488(
|
1)
|
Canceled
|
|
|
(74,765
|
)
|
|
|
2.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
2,318,250
|
|
|
|
3.15
|
|
|
|
18,715,952(
|
2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested, December 31, 2004
|
|
|
618,863
|
|
|
|
0.78
|
|
|
|
|
|
Vested, December 31, 2005
|
|
|
1,093,561
|
|
|
|
1.28
|
|
|
|
|
|
Vested, December 31 2006
|
|
|
1,639,938
|
|
|
|
1.78
|
|
|
|
16,764,377(
|
2)
|
Vested and expected to vest, December 31, 2006(3)
|
|
|
2,085,961
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value was calculated based on the
positive difference between the estimated fair value of the
Companys common stock as of the date of exercise and the
exercise price of the underlying options. |
|
(2) |
|
The aggregate intrinsic value was calculated based on the
positive difference between the estimated fair value of the
Companys common stock as of December 31, 2006, and
the exercise price of the underlying options. |
|
(3) |
|
Represents the number of vested options as of December 31,
2006, plus the number of unvested options expected to vest as of
December 31, 2006, based on the unvested options
outstanding at December 31, 2006, adjusted for the
estimated forfeiture rate of 10.02%. |
The options outstanding and currently exercisable by exercise
price at December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
|
|
Number of
|
|
|
Exercise
|
|
Contractual
|
|
Exercise Prices($)
|
|
Options(#)
|
|
|
Price($)
|
|
Life(Years)
|
|
|
0.26-1.13
|
|
|
180,041
|
|
|
|
0
|
.486
|
|
|
5.1
|
|
1.16-2.23
|
|
|
446,256
|
|
|
|
1
|
.19
|
|
|
5.9
|
|
2.26-3.36
|
|
|
713,300
|
|
|
|
2
|
.55
|
|
|
7.4
|
|
3.39-4.49
|
|
|
525,466
|
|
|
|
3
|
.60
|
|
|
8.2
|
|
4.52-5.59
|
|
|
54,897
|
|
|
|
4
|
.86
|
|
|
9.0
|
|
5.62-6.72
|
|
|
360,605
|
|
|
|
6
|
.32
|
|
|
9.4
|
|
6.75-11.58
|
|
|
37,685
|
|
|
|
11
|
.22
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,318,250
|
|
|
|
3
|
.15
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FF-20
Stock-based
Compensation for Non-Employees
Stock-based compensation expense related to stock options
granted to non-employees is recognized as the options vest. The
Company believes that the value of the stock options is more
reliably measurable than the fair value of the services
received. The fair value of the stock options granted is
calculated at each reporting date using the Black-Scholes option
pricing model.
Stock-based compensation expense recorded for options granted to
non-employees for the years ended December 31, 2004, 2005
and 2006 was $23,000, $40,000 and $0, respectively.
Stock-based
Compensation Associated with Awards for Employees
Employee
Stock-based Awards Prior to January 1, 2006
Compensation costs for employee stock options granted prior to
January 1, 2006, the date the Company adopted
SFAS 123R, were accounted for using the intrinsic-value
method of accounting as prescribed by APB No. 25, as
permitted by SFAS 123. Under APB No. 25, compensation
expense for employee stock options is based on the excess, if
any, of the fair market value of the Companys common stock
over the option exercise price on the measurement date, which is
typically the date of grant. All options granted were intended
to be exercisable at a price per share not less than fair market
value of the shares of the Companys stock underlying those
options on their respective dates of grant. The board of
directors determined these fair market values in good faith
based on the best information available to the board of
directors and Companys management at the time of grant.
Employee
Stock-Based Awards Granted On or Subsequent to January 1,
2006
Effective January 1, 2006, the Company adopted
SFAS 123R, using the prospective transition method, which
requires the measurement and recognition of compensation expense
for all share-based payment awards made to the Companys
employees, directors and consultants. The Companys
financial statements as of and for the year ended
December 31, 2006 reflect the impact of SFAS 123R. In
accordance with the prospective transition method, the
Companys financial statements for prior periods have not
been restated to reflect, and do not include, the impact of
SFAS 123R. Stock-based compensation expense recognized is
based on the value of the portion of stock-based awards that is
ultimately expected to vest. Stock-based compensation expense
recognized in the Companys statements of operations during
the year ended December 31, 2006 includes compensation
expense for stock-based awards based on the fair value estimated
in accordance with the provisions of SFAS 123R. The Company
attributes the value of stock-based compensation to expense
using the straight-line method, which was previously used for
its pro forma information required under SFAS 123.
The weighted average estimated fair value of the employee stock
options granted was $0.5323, $0.8006 and $5.3704 per share
for the years ended December 31, 2004, 2005 and 2006,
respectively.
The Company uses the Black-Scholes option pricing model to
determine the fair value of stock options. The determination of
the fair value of stock-based payment awards on the date of
grant using a pricing model is affected by our stock price as
well as assumptions regarding a number of complex and subjective
variables. The estimated grant date fair values of the employee
stock options were calculated using the Black-Scholes option
pricing model, based on the following assumptions for the year
ended December 31, 2006:
|
|
|
|
|
Risk-free interest rate
|
|
|
4.29-5.19
|
%
|
Expected term (in years)
|
|
|
6.25
|
|
Dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
71.36
|
%
|
Risk-free interest rate. The risk-free
interest rate is based on U.S. Treasury zero-coupon issues
with remaining terms similar to the expected term on the options.
Expected volatility. Expected volatility
measures the amount that a stock price has fluctuated or is
expected to fluctuate during a period. The Company determines
volatility based on an analysis of comparable companies.
FF-21
Expected term. The expected term of stock
options represents the period the stock options are expected to
remain outstanding and is based on the SEC Shortcut
Approach as defined in SAB 107, Share-Based
Payments, which is the midpoint between the vesting date and
the end of the contractual term.
Dividend yield. The Company has never declared
or paid any cash dividends and does not plan to pay cash
dividends in the foreseeable future, and, therefore, used an
expected dividend yield of zero in the valuation model.
Forfeitures. SFAS 123R also requires the
Company to estimate forfeitures at the time of grant, and revise
those estimates in subsequent periods if actual forfeitures
differ from those estimates. The Company uses historical data to
estimate pre-vesting option forfeitures and record stock-based
compensation expense only for those awards that are expected to
vest. If the Companys actual forfeiture rate is materially
different from its estimate, the stock-based compensation
expense could be significantly different from what the Company
has recorded in the current period.
The amount of stock-based compensation expense that is expected
to be recognized for outstanding, unvested options as of
December 31, 2006 over the next four years is as follows
(in thousands):
|
|
|
|
|
2007
|
|
$
|
550
|
|
2008
|
|
|
473
|
|
2009
|
|
|
424
|
|
2010
|
|
|
149
|
|
|
|
|
|
|
|
|
$
|
1,596
|
|
The weighted average grant date fair value of options granted
for the year ended December 31, 2006 was $2.0445. Employee
stock-based compensation expense under SFAS 123R recognized
in the year ended December 31, 2006 was $307,000 and was
calculated based on awards ultimately expected to vest.
SFAS 123R requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates.
At December 31, 2006, the Company had $1,596,000 of total
unrecognized compensation expense under SFAS 123R, net of
estimated forfeitures that will be recognized over a
weighted-average period of four years.
|
|
11.
|
Defined
Contribution Plan
|
The Insulet 401(k) Retirement Plan is a defined contribution
plan in the form of a qualified 401(k) plan, in which
substantially all employees are eligible to participate upon the
first day of the month following 30 days of service.
Eligible employees may elect to contribute, subject to certain
IRS limits, from 1% to 20% of their compensation. The Company
has the option of making both matching contributions and
discretionary profit-sharing contributions to the plan. During
2003, the Company offered a discretionary match of 25% of the
first 4% of an employees salary that was contributed to
the 401(k) plan. The Company match vests over a four-year period
(25% per year). The total amount contributed by the Company
was $48,000, $38,000 and $72,000 for years ended
December 31, 2004, 2005 and 2006, respectively.
FF-22
A reconciliation of income tax expense (benefit) at the
statutory federal income tax rate as reflected in the financial
statements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Tax at U.S. statutory rate
|
|
|
(34.00
|
)%
|
|
|
(34.00
|
)%
|
|
|
(34.00
|
)%
|
State taxes, net of federal benefit
|
|
|
(6.27
|
)
|
|
|
(6.27
|
)
|
|
|
(6.27
|
)
|
Tax credits
|
|
|
(3.30
|
)
|
|
|
(2.62
|
)
|
|
|
(1.88
|
)
|
Change in valuation allowance
|
|
|
43.51
|
|
|
|
42.74
|
|
|
|
40.49
|
|
Other
|
|
|
0.06
|
|
|
|
0.15
|
|
|
|
1.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
12,095
|
|
|
$
|
19,176
|
|
|
$
|
34,113
|
|
Start up expenditures
|
|
|
5,109
|
|
|
|
6,818
|
|
|
|
5,726
|
|
Tax credits
|
|
|
1,537
|
|
|
|
2,105
|
|
|
|
2,833
|
|
Other
|
|
|
438
|
|
|
|
375
|
|
|
|
847
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
|
|
|
|
|
|
|
|
|
|
|
(333
|
)
|
Depreciation
|
|
|
(40
|
)
|
|
|
(88
|
)
|
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,139
|
|
|
|
28,386
|
|
|
|
42,916
|
|
Valuation allowance
|
|
|
(19,139
|
)
|
|
|
(28,386
|
)
|
|
|
(42,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liabilities)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company provided a valuation allowance for the full amount
of its net deferred tax asset for all periods because
realization of any future tax benefit cannot be sufficiently
assured as we do not expect income in the near-term.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes.
At December 31, 2006, the Company had approximately
$84.7 million and $2.8 million of federal net
operating loss carryforwards and research and development and
other tax credits, respectively, that, if not utilized, will
begin to expire in 2020 for federal tax purposes and in 2005 for
state tax purposes. As of December 31, 2005, the Company
had approximately $47.6 million and $2.1 million of
federal net operating loss carryforwards and research and
development and other tax credits, respectively. The utilization
of such net operating loss carryforwards and realization of tax
benefits in future years depends predominantly upon having
taxable income. Under the provisions of the Internal Revenue
Code, certain substantial changes in the Companys
ownership may result in a limitation on the amount of net
operating loss carryforwards and tax credit carryforwards which
may be used in future years. As there were significant issuances
of Series C, Series D and Series E redeemable
convertible preferred stock in 2003, 2005 and 2006,
respectively, to mostly new investors, it is probable that there
will be a yearly limitation placed on the amount of net
operating loss and tax credit carryforwards available for use in
future years.
FF-23
|
|
13.
|
Quarterly
Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 2006
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
|
(In thousands, except for share data)
|
|
|
Revenue
|
|
$
|
1,641
|
|
|
$
|
920
|
|
|
$
|
880
|
|
|
$
|
222
|
|
Gross loss
|
|
|
(2,301
|
)
|
|
$
|
(3,459
|
)
|
|
$
|
(3,706
|
)
|
|
$
|
(2,531
|
)
|
Net loss
|
|
|
(10,880
|
)
|
|
$
|
(9,417
|
)
|
|
$
|
(8,713
|
)
|
|
$
|
(6,940
|
)
|
Net loss per share actual
|
|
$
|
(27.00
|
)
|
|
$
|
(26.48
|
)
|
|
$
|
(24.77
|
)
|
|
$
|
(20.41
|
)
|
Net loss per share pro forma(1)
|
|
|
(0.61
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.43
|
)
|
|
|
|
(1) |
|
Pro forma numbers assume all preferred stock is converted
1-for-2.6267 into common stock in connection with this offering. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 2005
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
|
(In thousands, except for share data)
|
|
|
Revenue
|
|
$
|
50
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Gross loss
|
|
$
|
(1,480
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net loss
|
|
$
|
(6,514
|
)
|
|
$
|
(6,102
|
)
|
|
$
|
(4,927
|
)
|
|
$
|
(4,093
|
)
|
Net loss per share actual
|
|
$
|
(20.91
|
)
|
|
$
|
(19.59
|
)
|
|
$
|
(16.46
|
)
|
|
$
|
(13.77
|
)
|
Net loss per share pro forma(1)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.33
|
)
|
|
|
|
(1) |
|
Pro forma numbers assume all preferred stock is converted
1-for-2.6267 into common stock in connection with this offering. |
Contract
Manufacturing Agreement
On January 3, 2007, the Company entered into a
non-exclusive contract manufacturing agreement with a subsidiary
of Flextronics International Ltd. for the supply of a
sub-assembly of some of the OmniPods components. Under
this agreement, the Company provides to Flextronics, on a
monthly basis, a rolling 12-month forecast indicating the
Companys monthly requirements. The first 90 days of
such forecast constitutes the Companys written purchase
order for all work to be completed by Flextronics during that
period.
Reverse
Stock Split
On April 12, 2007, the Companys board of directors
approved a 1 for 2.6267 reverse stock split of the
Companys common stock, which was executed on May 10,
2007. All share and per share amounts of common stock in the
accompanying consolidated financial statements have been
restated for all periods to give retroactive effect to the stock
split.
FF-24
4,898,398 Shares
Common Stock
PROSPECTUS
JPMorgan
Merrill Lynch &
Co.
Leerink Swann
Thomas Weisel Partners
LLC
Canaccord Adams
,
2007
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
The following table sets forth the estimated expenses (excluding
the underwriting discount) expected to be incurred in connection
with the issuance and distribution of the common stock
registered hereby:
|
|
|
|
|
SEC registration fee
|
|
$
|
4,014
|
|
FINRA filing fee
|
|
|
13,574
|
|
Accounting fees and expenses
|
|
|
200,000
|
|
Legal fees and expenses
|
|
|
400,000
|
|
Printing expenses
|
|
|
200,000
|
|
Miscellaneous
|
|
|
12,412
|
|
Total
|
|
$
|
830,000
|
|
|
|
|
|
|
The amounts set forth above, except for the SEC registration fee
and the FINRA filing fee, are estimated.
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
Section 145 of the General Corporation Law of the State of
Delaware provides that a corporation has the power to indemnify
a director, officer, employee, or agent of the corporation and
certain other persons serving at the request of the corporation
in related capacities against expenses (including
attorneys fees), judgments, fines and amounts paid in
settlements actually and reasonably incurred by the person in
connection with an action, suit or proceeding to which he is or
is threatened to be made a party by reason of such position, if
such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the
corporation, and, in any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful, except
that, in the case of actions brought by or in the right of the
corporation, no indemnification shall be made with respect to
any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to
the extent that the Court of Chancery or other adjudicating
court determines that, despite the adjudication of liability but
in view of all of the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem
proper.
As permitted by the Delaware General Corporation Law, our Eighth
Amended and Restated Certificate of Incorporation, or
certificate of incorporation, includes a provision that
eliminates the personal liability of our directors for monetary
damages for breach of fiduciary duty as a director, except for
liability (1) for any breach of the directors duty of
loyalty to us or our stockholders, (2) for acts or
omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (3) under
section 174 of the Delaware General Corporation Law
(regarding unlawful dividends and stock purchases) or
(4) for any transaction from which the director derived an
improper personal benefit.
As permitted by the Delaware General Corporation Law, our
Amended and Restated By-laws, or by-laws, provide that
(1) we are required to indemnify our directors and officers
to the fullest extent permitted by the Delaware General
Corporation Law, subject to certain very limited exceptions,
(2) we may indemnify other employees as set forth in the
Delaware General Corporation Law, (3) we are required to
advance expenses, as incurred, to our directors in connection
with a legal proceeding to the fullest extent permitted by the
Delaware General Corporation Law, subject to certain very
limited exceptions, and may do so for our executive officers and
other employees and (4) the rights conferred in our by-laws
are not exclusive.
At present, there is no pending litigation or proceeding
involving any of our directors, officers or employees with
respect to which we may have indemnification obligations.
II-1
The indemnification provisions in our certificate of
incorporation and by-laws may be sufficiently broad to permit
indemnification of our directors and executive officers for
liabilities arising under the Securities Act of 1933.
We have obtained liability insurance for our officers and
directors.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities
|
Set forth below is information regarding shares of capital stock
issued, warrants issued and options granted, by us within the
past three years in transactions that were not registered under
the Securities Act. Also included is the consideration, if any,
received by us for such shares, warrants and options and
information relating to the section of the Securities Act, or
rules of the SEC under which exemption from registration was
claimed. Certain of the transactions described below involved
directors, officers and five percent stockholders. See
Certain Relationships and Related Party
Transactions. No underwriters were involved in any of the
following sales of securities.
The securities described in paragraphs (a)(i) and
(b) below were issued to U.S. investors in reliance
upon exemptions from the registration provisions of the
Securities Act set forth in Section 4(2) thereof relative
to sales by an issuer not involving any public offering, to the
extent an exemption from such registration was required. All
purchasers of shares of our preferred stock described below
represented to us in connection with their purchase that they
were accredited investors and were acquiring the shares for
investment and not distribution, that they could bear the risks
of the investment and that they understood that the securities
must be held indefinitely unless a subsequent disposition was
registered under the Securities Act or exempt from registration.
The purchasers received written disclosures that the securities
had not been registered under the Securities Act and that any
resale must be made pursuant to a registration or an available
exemption from registration.
The issuance of stock options and the common stock issued upon
the exercise of stock options as described in
paragraphs (a)(ii) and (c) below were issued pursuant
to written compensatory benefit plans or arrangements with our
employees, directors and consultants, in reliance on the
exemption provided by Rule 701 promulgated under the
Securities Act, as well as Section 4(2) of the Securities
Act. On July 17, 2007, we filed a registration statement on
Form S-8
to register, among other things, the issuance of all shares of
common stock issuable upon the exercise of all then outstanding
stock options.
The common stock issued upon the conversion of warrants and our
Preferred Stock as described in paragraphs (a)(iii) and
(iv) below was issued in reliance on the exemption from
registration set forth in Section 3(a)(9) of the Securities
Act relating to exchanges of securities.
II-2
|
|
(a)
|
Issuances
of Capital Stock
|
(i) In February 2006, we issued an aggregate of
13,738,661 shares of our Series E Preferred Stock for
an aggregate purchase price of $50,008,726.04, or $3.64 per
share, to the following purchasers:
|
|
|
|
|
|
|
Shares of
|
|
|
Series E Preferred
|
Name of Stockholder
|
|
Stock
|
|
Alta BioPharma Partners III GmbH & Co.,
Beteiligungs KG
|
|
|
71,896
|
|
Alta BioPharma Partners III, L.P.
|
|
|
1,070,538
|
|
Alta Embarcadero BioPharma Partners III, LLC
|
|
|
26,383
|
|
MedVenture Associates IV, L.P.
|
|
|
481,401
|
|
MedVen Affiliates IV, L.P.
|
|
|
13,104
|
|
SightLine Healthcare Fund IV, L.P.
|
|
|
142,110
|
|
Teachers Insurance and Annuity Association of America
|
|
|
240,721
|
|
Dow Employees Pension Plan
|
|
|
210,084
|
|
Union Carbide Employees Pension Plan
|
|
|
140,056
|
|
Caduceus Private Investments II, LP
|
|
|
2,750,230
|
|
Caduceus Private Investments (QP) II, LP
|
|
|
1,029,742
|
|
UBS Juniper Crossover Fund, L.L.C.
|
|
|
340,907
|
|
International Life Sciences Fund III (LP1), L.P.
|
|
|
1,107,333
|
|
International Life Sciences Fund III (LP2), L.P.
|
|
|
44,368
|
|
International Life Sciences Fund III Strategic Partners,
L.P.
|
|
|
11,002
|
|
International Life Sciences Fund III Co-investment,
L.P.
|
|
|
13,666
|
|
Pequot Offshore Private Equity Partners III, L.P.
|
|
|
135,914
|
|
Pequot Private Equity Fund III, L.P.
|
|
|
964,149
|
|
Prism Venture Partners III, L.P.
|
|
|
1,600,220
|
|
Prism Venture Partners III-A, L.P.
|
|
|
48,132
|
|
Versant Venture Capital I, L.P.
|
|
|
252,748
|
|
Versant Side Fund I, L.P.
|
|
|
4,945
|
|
Versant Affiliates
Fund I-A,
L.P.
|
|
|
5,495
|
|
Versant Affiliates
Fund I-B,
L.P.
|
|
|
11,538
|
|
Federated Kaufmann Fund, a Portfolio of Federated Equity Funds
|
|
|
2,747,253
|
|
Aphelion Medical Fund, L.P.
|
|
|
49,451
|
|
Red Abbey Venture Partners (QP), LP
|
|
|
164,945
|
|
Red Abbey Venture Partners, LP
|
|
|
45,890
|
|
Red Abbey CEOs Fund, LP
|
|
|
8,945
|
|
Kelly L. Close
|
|
|
5,495
|
|
(ii) From October 2004 through July 16, 2007, we
issued an aggregate of 202,387 shares of common stock to
our officers, directors, consultants, employees and advisors
pursuant to the exercise of stock options under our 2000 Stock
Option and Incentive Plan. The aggregate exercise price paid
upon the exercise of these options was $225,619.99.
(iii) In May 2007, a member of the group of lenders led by
Merrill Lynch Capital exercised its right to convert 15,688
warrants into common stock, resulting in the issuance of
5,688 shares of common stock. Additionally, in September
2007, Lighthouse Capital Partners V, L.P. exercised its right to
convert a warrant into common stock, resulting in the issuance
of 89,821 shares of common stock.
II-3
(iv) On May 18, 2007, upon the closing of our initial
public offering, all shares of our Preferred Stock automatically
converted
1-for-2.6267
into shares of common stock, which resulted in the issuance of
17,447,791 shares of common stock.
(i) On June 2, 2005, we issued a warrant to purchase
330,579 shares of our Series D Preferred Stock, which
had an exercise price of $2.42 per share, to Lighthouse
Capital Partners V, L.P. in connection with the procurement
of financing from this warrant holder.
(ii) On December 27, 2006, we issued warrants to
purchase the following number of shares of our Series E
Preferred Stock, which had an exercise price of $3.64 per
share, to the following persons in connection with the
procurement of financing from them:
|
|
|
|
|
|
|
Shares of
|
|
|
Series E Preferred
|
Name of Warrantholder
|
|
Stock
|
|
Merrill Lynch Capital
|
|
|
115,384
|
|
General Electric Capital Corporation
|
|
|
49,450
|
|
Oxford Finance Corporation
|
|
|
41,209
|
|
Silicon Valley Bank
|
|
|
41,209
|
|
Upon the closing of our initial public offering, all shares of
our Preferred Stock automatically converted 1-for-2.6267 into
shares of common stock, which resulted in the warrants
automatically becoming warrants to purchase the following number
of shares of our common stock:
|
|
|
|
|
|
|
Shares of
|
|
Name of Warrantholder
|
|
Common Stock
|
|
|
Lighthouse Capital Partners V, L.P.
|
|
|
125,853
|
|
Merrill Lynch
|
|
|
43,927
|
|
General Electric Capital Corporation
|
|
|
18,825
|
|
Oxford Finance Corporation
|
|
|
15,688
|
|
Silicon Valley Bank
|
|
|
15,688
|
|
Subsequent to the closing of our initial public offering,
Lighthouse Capital Partners V, L.P. and Oxford Finance
Corporation have net exercised their warrants for an aggregate
of 95,509 shares of our common stock.
|
|
(c)
|
Grant of
Stock Options
|
As of July 17, 2007, options to purchase
2,685,941 shares of common stock were outstanding under our
2000 Stock Option and Incentive Plan. All such options were
granted between January 4, 2001 and May 18, 2007 to
our officers, directors, consultants, employees and advisors.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules
|
See the Exhibit Index on the page immediately preceding the
exhibits for a list of exhibits filed as part of this
registration statement on
Form S-1,
which Exhibit Index is incorporated herein by reference.
|
|
(b)
|
Financial
Statement Schedules
|
No financial statement schedules are provided because the
information called for is not required or is shown either in the
financial statements or the notes thereto.
II-4
(a) The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Bedford, Commonwealth of
Massachusetts, on October 26, 2007.
INSULET CORPORATION
Duane DeSisto
President and Chief Executive Officer
Pursuant to the requirement of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the
following person in the capacities and on the date indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Duane
DeSisto
Duane
DeSisto
|
|
President and Chief Executive Officer and Director (Principal
Executive Officer)
|
|
October 26, 2007
|
|
|
|
|
|
/s/ Carsten
Boess
Carsten
Boess
|
|
Chief Financial Officer (Principal Financial and Accounting
Officer)
|
|
October 26, 2007
|
|
|
|
|
|
*
Alison
de Bord
|
|
Director
|
|
October 26, 2007
|
|
|
|
|
|
*
Gary
Eichhorn
|
|
Director
|
|
October 26, 2007
|
|
|
|
|
|
*
Ross
Jaffe, M.D.
|
|
Director
|
|
October 26, 2007
|
|
|
|
|
|
*
Charles
Liamos
|
|
Director
|
|
October 26, 2007
|
|
|
|
|
|
*
Gordie
Nye
|
|
Director
|
|
October 26, 2007
|
|
|
|
|
|
*
Jonathan
Silverstein
|
|
Director
|
|
October 26, 2007
|
|
|
|
|
|
*
Steven
Sobieski
|
|
Director
|
|
October 26, 2007
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Duane
DeSisto
Duane
DeSisto
Attorney-in-Fact
|
|
|
|
|
II-6
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement
|
|
3
|
.1(4)
|
|
Eighth Amended and Restated Certificate of Incorporation of
Insulet Corporation
|
|
3
|
.2(4)
|
|
Amended and Restated By-laws of Insulet Corporation
|
|
4
|
.1(1)
|
|
Specimen certificate for shares of common stock
|
|
5
|
.1
|
|
Opinion of Goodwin Procter LLP as to the legality of the
securities
|
|
10
|
.1(2)+
|
|
Development and License Agreement between TheraSense, Inc. and
Insulet Corporation, dated January 23, 2002
|
|
10
|
.2(3)
|
|
Lease between William J. Callahan and Insulet Corporation, dated
July 15, 2004
|
|
10
|
.3(3)
|
|
Credit and Security Agreement by and among Insulet Corporation,
Sub-Q Solutions, Inc., the lenders party thereto and Merrill
Lynch Capital, as Administrative Agent, dated as of
December 27, 2006
|
|
10
|
.4(1)
|
|
Insulet Corporation 2000 Stock Option and Incentive Plan
|
|
10
|
.5(1)
|
|
Form of Non-Qualified Stock Option Agreement under the 2000
Stock Option and Incentive Plan
|
|
10
|
.6(1)
|
|
Form of Incentive Stock Option Agreement under the 2000 Stock
Option and Incentive Plan
|
|
10
|
.7(1)
|
|
Insulet Corporation 2007 Stock Option and Incentive Plan
|
|
10
|
.8(1)
|
|
Non-Qualified Stock Option Agreement for Employees under the
2007 Stock Option and Incentive Plan
|
|
10
|
.9(1)
|
|
Non-Qualified Stock Option Agreement for Non-Employee Directors
under the 2007 Stock Option and Incentive Plan
|
|
10
|
.10(1)
|
|
Restricted Stock Award Agreement under the 2007 Stock Option and
Incentive Plan
|
|
10
|
.11(1)
|
|
Incentive Stock Option Agreement under the 2007 Stock Option and
Incentive Plan
|
|
10
|
.12(1)
|
|
Insulet Corporation 2007 Employee Stock Purchase Plan
|
|
10
|
.13(1)
|
|
Employment Agreement between Duane DeSisto and Insulet
Corporation, dated May 4, 2005
|
|
10
|
.14(1)
|
|
Employment Agreement between Carsten Boess and Insulet
Corporation, dated May 9, 2006
|
|
10
|
.15(1)
|
|
Employment Agreement between Ruthann DePietro and Insulet
Corporation, dated February 8, 2006
|
|
10
|
.16(1)
|
|
Form of Employee Non-Competition and Non-Solicitation Agreement
by and between Insulet Corporation and each of its executive
officers
|
|
10
|
.17+*
|
|
Master Supply Agreement between Insulet Corporation and
Flextronic Marketing (L) Ltd., dated January 3, 2007
|
|
10
|
.18+*
|
|
Addendum to Master Supply Agreement between Insulet Corporation
and Flextronic Marketing (L) Ltd., dated
October 4, 2007
|
|
21
|
.1*
|
|
List of Subsidiaries
|
|
23
|
.1
|
|
Consent of Goodwin Procter LLP (included in Exhibit 5.1
hereto)
|
|
23
|
.2
|
|
Consent of Ernst & Young LLP
|
|
24
|
.1*
|
|
Power of Attorney (included in signature page)
|
|
|
|
+ |
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment. |
|
|
|
(1) |
|
Incorporated by reference to Amendment No. 2 to our
Registration Statement on
Form S-1
(File No. 333-140694)
filed April 25, 2007. |
|
(2) |
|
Incorporated by reference to Amendment No. 3 to our
Registration Statement on
Form S-1
(File No. 333-140694)
filed May 8, 2007. |
|
(3) |
|
Incorporated by reference to our Registration Statement on
Form S-1
(File No. 333-140694)
filed February 14, 2007. |
|
(4) |
|
Incorporated by reference to our Registration Statement on
Form S-8
(No. 333-144636)
filed
July 17, 2007. |