Insulet 10-Q 2021-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended September 30, 2021

OR

Commission File Number 001-33462

INSULET CORPORATION

(Exact name of Registrant as specified in its charter)

Registrant’s Telephone Number, Including Area Code: (978) 600-7000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

As of October 28, 2021, the registrant had 68,967,286 shares of common stock outstanding.

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PART I - FINANCIAL INFORMATION

INSULET CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes included in this quarterly report. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs, which are subject to risks, uncertainties and assumptions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed under the headings “Risk Factors” and “Forward-Looking Statements” in both our annual report on Form 10-K for the year ended December 31, 2020 and in this quarterly report.

Overview

We are primarily engaged in the development, manufacture and sale of our proprietary Omnipod® System (“Omnipod”), a continuous insulin delivery system for people with insulin-dependent diabetes. The Omnipod System features a small, lightweight, self-adhesive disposable tubeless Omnipod device (“Pod”) that is worn on the body for up to three days at a time; and its wireless companion, the handheld Personal Diabetes Manager (“PDM”). The Omnipod System, which features discreet and easy-to-use devices communicates wirelessly, provides for virtually pain-free automated cannula insertion and eliminates the need for traditional multiple daily injection therapy, using syringes or insulin pens, or the use of traditional pump and tubing.

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

Our mission is to improve the lives of people with diabetes. To assist in achieving this mission, we are focused on the following key strategic imperatives:

• expanding access and awareness;

• delivering consumer-focused innovation;

• growing our global addressable market; and

• driving operational excellence.

Our long-term financial objective is to sustain profitable growth. To achieve this goal, we expect our efforts in 2021 to focus primarily on our planned launch of the Omnipod® 5 Automated Insulin Delivery System (“Omnipod 5”), which is currently under review with the U.S. Food and Drug Administration (“FDA”). As previously reported in our Form 10-Q for the quarter ended June 30, 2021, we expect to receive FDA clearance and launch our limited commercial release late in the fourth quarter. This shift in timing from our original expectation is not expected to have a material impact on 2021 revenue.

In addition, we continue our efforts to expand the Omnipod 5 indication to preschoolers ages two to six, however the timing of our FDA submission is contingent upon the timing of Omnipod 5 clearance. We are planning for this expanded indication in 2022. In addition, we completed enrollment in our type 2 feasibility study and plan to conduct additional studies with the goal to further expand Omnipod 5’s indication to type 2 users.

In order to support our continued growth and the planned launch of Omnipod 5, we continue to focus on adding capacity to our U.S. manufacturing plant. During the second quarter of 2021, we began producing salable product on our third highly automated manufacturing line.

In 2021, we launched Omnipod DASH® Insulin Management System (“Omnipod DASH”), our next generation digital mobile Omnipod platform, in Canada. We are also continuing to expand internationally in a targeted and strategic manner. During the first quarter of 2021, we increased our global footprint by expanding into Turkey and during the third quarter of 2021, we expanded into Australia. Further, we are working on our strategy to enter additional markets in new regions.

Finally, we plan to continue our product development efforts and expand awareness of and access to our products. Achieving the above strategic imperatives is expected to require additional investments in certain initiatives and personnel, as well as enhancements to our supply chain operation capacity, efficiency and effectiveness.

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Results of Operations

Revenue

(1) Constant currency revenue growth is a non-GAAP financial measure which should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with GAAP. See “Management’s Use of Non-GAAP Measures.”

Total revenue for the three months ended September 30, 2021 increased $41.6 million, or 17.8%, to $275.6 million, compared with $234.0 million for the three months ended September 30, 2020. Constant currency revenue growth of 16.9% was primarily driven by higher volume.

Total revenue for the nine months ended September 30, 2021 increased $132.8 million, or 20.2%, to $791.1 million, compared with $658.3 million for the nine months ended September 30, 2020. Constant currency revenue growth of 17.5% was primarily driven by higher volume and, to a lesser extent, favorable sales channel mix.

U.S. Omnipod

U.S. Omnipod revenue for the three months ended September 30, 2021 increased $34.9 million, or 26.4%, to $167.2 million, compared with $132.3 million for the three months ended September 30, 2020. This increase was primarily due to higher volumes driven by growing our customer base, a benefit from the normalization of inventory levels at distributors in the prior year, and to a lesser extent, an increase due to growth through the pharmacy channel, where Pods have a higher average selling price due in part to the fact that we offer the PDM for no charge. U.S. Omnipod revenue for the three months ended September 30, 2021 includes $13.8 million of related party revenue. Additional information regarding our related party transactions is provided in Note 16 to the consolidated financial statements.

U.S. Omnipod revenue for the nine months ended September 30, 2021 increased $83.3 million, or 22.1%, to $461.0 million, compared with $377.7 million for the nine months ended September 30, 2020. This increase was primarily due to higher volumes driven by growing our customer base, and to a lesser extent, an increase due to growth through the pharmacy channel, where Pods have a higher average selling price due in part to the fact that we offer the PDM for no charge. U.S. Omnipod revenue for the nine months ended September 30, 2021 includes $19.3 million of related party revenue.

For full year 2021, we expect strong U.S. Omnipod revenue growth driven by volume growth of Omnipod DASH, primarily in the pharmacy channel, benefits of our efforts to drive expanded access and awareness, and further growth in our Omnipod customer base. This growth is expected to be partially offset by the lagging impact of COVID-19 on new customer starts and competition from automated insulin delivery systems.

International Omnipod

International Omnipod revenue for the three months ended September 30, 2021 increased $13.3 million, or 16.7%, to $93.1 million, compared with $79.8 million for the three months ended September 30, 2020. Excluding the 2.6% favorable impact of currency exchange, the remaining 14.1% increase in revenue was primarily driven by higher volumes as we continue to expand awareness and

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access to the Omnipod, partially offset by the normalization of inventory levels at distributors, which were elevated in the prior year due to the launch of Omnipod DASH.

International Omnipod revenue for the nine months ended September 30, 2021 increased $48.5 million, or 21.5%, to $274.6 million, compared with $226.1 million for the nine months ended September 30, 2020. Excluding the 7.9% favorable impact of currency exchange, the remaining 13.6% increase in revenue was primarily driven by higher volumes as we continue to expand awareness and access to the Omnipod, partially offset by the normalization of inventory levels at distributors, which were elevated in the prior year due to COVID-19 and the launch of Omnipod DASH.

For full year 2021, we expect higher International Omnipod revenue due to continued volume growth and market penetration aided by the ongoing adoption of Omnipod DASH throughout our international markets. We expect this revenue growth to be partially offset by the lagging impact of COVID-19 across several key international markets and competition from automated insulin delivery systems.

Drug Delivery

Drug Delivery revenue for the three months ended September 30, 2021 decreased $6.6 million, or 30.1%, to $15.3 million, compared with $21.9 million for the three months ended September 30, 2020. Drug Delivery sales volume was elevated in the prior year due to increased demand for Amgen’s Neulasta® Onpro® kit stemming from COVID-19.

Drug Delivery revenue for the nine months ended September 30, 2021 of $55.5 million was relatively level compared with the nine months ended September 30, 2020. For full year 2021, we expect drug delivery revenue to grow based on forecasted demand.

Operating Expenses

Cost of Revenue

Cost of revenue for the three months ended September 30, 2021 increased $4.7 million, or 5.7%, to $86.9 million, compared with $82.2 million for the three months ended September 30, 2020. Gross margin was 68.5% for the three months ended September 30, 2021, compared with 64.9% for the three months ended September 30, 2020. The 360 basis point increase in gross margin was primarily driven by improved manufacturing efficiencies and higher average selling price due to growth in the pharmacy channel, partially offset by the decrease in Drug Delivery revenue and the expected higher production costs as we continue to scale U.S. manufacturing.

Cost of revenue for the nine months ended September 30, 2021 increased $15.1 million, or 6.4%, to $252.2 million, compared with $237.1 million for the nine months ended September 30, 2020. Gross margin was 68.1% for the nine months ended September 30, 2021, compared with 64.0% for the nine months ended September 30, 2020. The 410 basis point increase in gross margin was primarily driven by improved manufacturing efficiencies, higher average selling price due to growth in the pharmacy channel, 90 basis points of favorable foreign currency exchange and a decrease in COVID-19 related costs, as the prior year period included two months of higher depreciation expense for under-utilized plant capacity, recruiting and screening expenses, expedited shipping costs and manufacturing incentives associated with our contract manufacturer in China. These increases were partially offset by expected higher production costs as we continue to scale U.S. manufacturing. For full year 2021, we expect gross margin to be in the range of 68% to 69%, which reflects the benefits of continued manufacturing improvements and revenue growth through the U.S. pharmacy channel.

Research and Development Expenses

Research and development expenses for the three months ended September 30, 2021 decreased $1.3 million, or 3.4%, to $37.5 million, compared with $38.8 million for the three months ended September 30, 2020. This decrease was primarily due to a shift in resources and certain costs from our Omnipod 5 clinical efforts to our commercial strategy, partially offset by year-over-year headcount additions to support our continued investment in development of Omnipod products.

Research and development expenses for the nine months ended September 30, 2021 increased $9.8 million, or 9.0%, to $118.3 million, compared with $108.5 million for the nine months ended September 30, 2020. This increase was primarily due to year-over-year headcount additions to support our continued investment in development of Omnipod products. We expect research and development spend for the full year 2021 to increase compared with 2020 as we continue to invest in advancing our innovation and clinical pipeline.

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Selling, General and Administrative Expenses

Selling general and administrative expenses for the three months ended September 30, 2021 increased $28.3 million, or 31.7%, to $117.5 million, compared with $89.2 million for the three months ended September 30, 2020. This increase was primarily attributable to year-over-year headcount additions, mainly to support international expansion, information technology, sales, and customer service personnel, an increase in direct to consumer advertising spend, as well as a shift in resources and certain costs from our Omnipod 5 clinical efforts to our commercial strategy.

Selling general and administrative expenses for the nine months ended September 30, 2021 increased $90.4 million, or 35.6%, to $344.3 million, compared with $253.9 million for the nine months ended September 30, 2020. This increase was primarily attributable to year-over-year headcount additions to support our growth, an increase in direct to consumer advertising spend, a shift in resources and certain costs from our Omnipod 5 clinical efforts to our commercial strategy, as well as costs related to international expansion. We expect selling, general and administrative expenses to increase in 2021 compared with 2020 due to expansion of our sales force, direct-to-consumer advertising, investments to expand market acceptance and access for our products, and investments in our operating structure to facilitate operational efficiencies and continued growth.

Non-Operating Items

Interest Expense, Net

Net interest expense increased $4.9 million to $16.3 million for the three months ended September 30, 2021, compared with $11.4 million for the three months ended September 30, 2020. This increase was primarily driven by $6.3 million of cash interest expense associated with the $500 million senior secured term loan B (the “Term Loan”) entered into in May 2021, partially offset by a $3.1 million decrease in the accretion of debt discount primarily due to the repurchase and conversion of a portion of our 1.375% Convertible Senior Notes due November 2024 (“1.375% Notes”).

Net interest expense increased $13.5 million to $46.1 million for the nine months ended September 30, 2021, compared with $32.6 million for the nine months ended September 30, 2020. This increase was primarily driven by $12.5 million of cash interest expense associated with the Term Loan entered into in May 2021.

Loss on Extinguishment of Debt

During the three months ended September 30, 2021, we incurred a $1.5 million loss on extinguishment of debt related to the conversion of a portion of our 1.375% Notes. During the nine months ended September 30, 2021, we incurred a $41.6 million loss on extinguishment of debt related to the repurchase and conversion of a portion of our 1.375% Notes. Refer to Note 8 to the consolidated financial statements for additional information.

Other Income (Expense), Net

During the three months ended September 30, 2021, we had other expense of $0.7 million, compared with other income of $1.0 million for the three months ended September 30, 2020. The $1.7 million decrease in other income was primarily driven by unrealized and realized foreign currency losses due to the change in exchange rates.

During the nine months ended September 30, 2021, we had other expense of $1.5 million, compared with other income of $2.0 million for the nine months ended September 30, 2020. The $3.5 million decrease in other income was primarily driven by unrealized foreign currency losses due to the change in exchange rates.

Income Tax Expense, Net

Income tax expense was $2.6 million and $1.8 million for the three months ended September 30, 2021 and 2020, respectively, resulting in effective tax rates of 16.9% and 13.3%. The increase in the effective tax rate was primarily driven by the jurisdictional distribution of profits and losses.

Income tax benefit was $0.5 million for the nine months ended September 30, 2021, compared with an income tax expense of $4.3 million for the nine months ended September 30, 2020, resulting in effective tax rates of 4.4% and 15.3% for the nine months ended September 30, 2021 and 2020, respectively. The decrease in the effective tax rate was primarily driven by the jurisdictional distribution of profits and losses.

In the United States, we have net operating loss carryforwards that reduce taxable profits and a full valuation allowance against net deferred tax assets. Additionally, we have not recorded tax benefits for current year losses in the United Kingdom due to valuation allowance requirements following a transfer of intellectual property that occurred during the first quarter of 2021.

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Adjusted EBITDA

The table below presents reconciliations of Adjusted EBITDA, a non-GAAP financial measure, to net income (loss), the most directly comparable financial measure prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”):

Non-GAAP Financial Measures

Management uses the following non-GAAP financial measures:

Constant currency revenue growth represents the change in revenue between current and prior year periods using a constant currency, the exchange rate in effect during the applicable prior year period. We present constant currency revenue growth because we believe it provides meaningful information regarding our results on a consistent and comparable basis. Management uses this non-GAAP financial measure, in addition to financial measures in accordance with accounting principles generally accepted in the United States (“GAAP”), to evaluate our operating results. It is also one of the performance metrics that determines management incentive compensation.

Adjusted EBITDA represents net income (loss) plus net interest expense, income tax expense (benefit), depreciation and amortization, stock-based compensation and other significant unusual items, as applicable. We present Adjusted EBITDA because management uses it as a supplemental measure in assessing our operating performance, and we believe that it is helpful to investors, and other interested parties as a measure of our comparative operating performance from period to period. Adjusted EBITDA is a commonly used measure in determining business value and we use it internally to report results.

These non-GAAP financial measures should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with GAAP. In addition, the above definitions may differ from similarly titled measures used by others. Non-GAAP financial measures exclude the effect of items that increase or decrease our reported results of operations; accordingly, we strongly encourage investors to review our consolidated financial statements in their entirety.

Liquidity and Capital Resources

As of September 30, 2021, we had $856.6 million in cash and cash equivalents. Additionally, we have a $60 million three year senior secured revolving credit facility (“Revolving Credit Facility”), which expires in 2024. At September 30, 2021, no amount was outstanding under the Revolving Credit Facility. The Revolving Credit Facility contains a covenant to maintain a specified leverage ratio under certain conditions when there are amounts outstanding under the facility. It also contains other customary covenants, none of which are considered restrictive to our operations. We believe that our current liquidity will be sufficient to meet our projected operating, investing and debt service requirements for at least the next twelve months.

Debt

To finance our operations and global expansion, we have periodically issued convertible senior notes, which are convertible into our common stock. As of September 30, 2021, the following notes were outstanding:

(1) Per $1,000 face value of notes.

In October 2021, we issued a notice of redemption for all of our outstanding 1.375% Notes. On November 15, 2021, we will redeem any 1.375% Notes that have not been converted, redeemed or repurchased prior to that date at a redemption price in cash equal to

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100% of the principal amount of the 1.375% Notes to be redeemed. We intend to satisfy our conversion obligation of each $1,000 principal amount by delivering shares of our common stock, and cash in lieu of any fractional shares.

During the nine months ended September 30, 2021, we obtained a $500 million seven year Term Loan for net proceeds of $489.5 million, which we used to fund the cash portion of the repurchase of the 1.375% Notes due November 2024. Additional information regarding our debt is provided in Note 8 to the consolidated financial statements.

Revision to Nine Months Ended September 30, 2020 Condensed Consolidated Cash Flow Statement

In February 2021, we identified an error in the presentation of certain cash flow activity that impacted several line items within our previously issued Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2020. While these items affected cash flows from operating and investing activities, they had no impact on the net increase (decrease) in cash and cash equivalents or net income. We assessed the materiality of the misstatement in accordance with ASC 250-10, Accounting Changes and Error Corrections, and concluded that this misstatement was not material to our previously issued consolidated financial statements. We have restated the accompanying Condensed Consolidated Statement of Cash Flow from amounts previously reported to correct this matter. The following table presents a summary of the impact of the restatement on our Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2020.

(1) Certain prior period amounts have been reclassified to conform to the current period cash flow statement presentation.

Summary of Cash Flows

Operating Activities

Net cash used in operating activities of $42.6 million for the nine months ended September 30, 2021 was primarily attributable to net loss, as adjusted for depreciation and amortization, loss on extinguishment of debt, non-cash interest, and stock-based compensation expense, partially offset by a $175.0 million working capital cash outflow. The working capital outflow was driven by a $108.1 million increase in inventories, a $32.7 million increase in prepaid expenses and other assets and a $35.5 million increase in accounts receivable. The increase in inventories was driven by a planned inventory build to satisfy demand and the addition of our third highly automated manufacturing line. The increase in prepaid expenses and other assets was primarily driven by an increase in cloud computing implementation costs. Finally, the increase in accounts receivable was primarily due to an increase in International Omnipod revenue and sales in the U.S. pharmacy channel, both of which generally have longer payment terms.

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Investing Activities

Net cash used in investing activities was $46.3 million for the nine months ended September 30, 2021, compared with net cash provided by investing activities of $83.3 million for the nine months ended September 30, 2020.

Capital Spending—Capital expenditures were $80.1 million and $78.2 million for the nine months ended September 30, 2021 and 2020, respectively, and primarily related to the purchase of equipment to increase our manufacturing capacity. We expect capital expenditures for 2021 to decrease compared with 2020. We continue to further invest in our global manufacturing operations to support our growth, as well as investments in our strategic initiatives, although the timing of certain projects has shifted. We expect to fund our capital expenditures using existing cash.

Purchases and Sales of Investments—Proceeds from maturities of marketable securities were $39.5 million for the nine months ended September 30, 2021, compared with net proceeds from maturities of $162.1 million for the nine months ended September 30, 2020. The $122.6 million decrease was driven by the prior year shift of a portion of our investment portfolio to investments classified as cash equivalents.

Financing Activities

Net cash provided by financing activities was $42.2 million for the nine months ended September 30, 2021, compared with $475.4 million for nine months ended September 30, 2020.

Debt Issuance and Repayments—During the nine months ended September 30, 2021, we received net proceeds of $489.5 million from the issuance of the Term Loan and used $460.8 million of the proceeds to partially fund the repurchase of a portion of our 1.375% Notes. In addition, we received net proceeds of $43.1 million from an equipment financing transaction and made $9.6 million in aggregate principal payments on all of our equipment financings.

Option Exercises and Payment of Taxes for Restricted Stock Net Settlements—Total proceeds from option exercises and issuance of employee stock purchase plan shares was $14.4 million and $24.8 million for the nine months ended September 30, 2021 and 2020, respectively. The $10.4 million decrease was primarily driven by fewer option exercises by our former chief executive officer. Payments for taxes related to net restricted and performance stock unit settlements were $27.6 million and $26.9 million for the nine months ended September 30, 2021 and 2020, respectively.

Legal Proceedings

The significant estimates and judgments related to establishing litigation reserves are discussed under “Legal Proceedings” in Note 10 to the consolidated financial statements included in this Form 10-Q.

Off-Balance Sheet Arrangements

As of September 30, 2021, we had various outstanding letters of credit and bank guarantees totaling $1.4 million, none of which is individually significant. We have restricted cash that serves as collateral for these outstanding letters of credit and bank guarantees that are included in cash and cash equivalents on our consolidated balance sheet.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.

Our accounting policies for revenue recognition and contingencies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. There have been no significant changes to the above critical accounting policies or in the underlying accounting assumptions and estimates used in such policies from those disclosed in our annual consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Accounting Standards Issued and Not Yet Adopted

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by eliminating certain separation models. Under ASU 2020-06, a convertible debt instrument will generally be reported as a single liability at its amortized cost with no separate accounting for embedded conversion features. Consequently, the interest rate of convertible debt instruments will be closer to the coupon interest rate. In addition, ASU 2020-06 eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The guidance is effective for us beginning in the first quarter of 2022. Based on the carrying value of our convertible debt as of September 30, 2021 and subsequent conversion of 1.375% Notes expected in the fourth quarter, the adoption of this guidance on January 1, 2022 is expected to result in an approximate $210 million decrease in additional

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paid in capital from the derecognition of the bifurcated equity component, $150 million increase in debt from the derecognition of the discount associated with the bifurcated equity component and $60 million decrease to the opening balance of accumulated deficit, representing the cumulative interest expense recognized related to the amortization of the bifurcated conversion option. We expect to write-off the related deferred tax liabilities with a corresponding adjustment to the valuation allowance, resulting in no net impact to the cumulative adjustment to retained earnings. Adoption of this standard will have no impact on our diluted earnings per share as we calculate earnings per share using the if-converted method.

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, results of operations and financial condition.

The outcomes of the events described in these forward-looking statements are subject to risks, uncertainties and assumptions. These risks and uncertainties include, but are not limited to:

• risks associated with public health crises and pandemics, such as the COVID-19 global pandemic, including the duration of the outbreak, government actions and restrictive measures implemented in response, supply chain disruptions, delays in clinical trials, and other impacts to the business, or on our ability to execute business continuity plans;

• risks associated with our dependence on our principal product platform, the Omnipod System, and our ability to design, develop, manufacture and commercialize future products;

• our ability to reduce production costs and increase customer orders and manufacturing volumes;

• adverse changes in general economic conditions;

• the impact of healthcare reform laws;

• supply problems or price fluctuations with sole source or third-party suppliers on which we are dependent;

• the potential establishment of a competitive bid program for conventional insulin pumps;

• failure to retain key suppliers and/or supplier pricing discounts and achieve satisfactory gross margins;

• international business risks, including regulatory, commercial and logistics risks associated with selling our products in Europe due to the separation of the United Kingdom from the European Union (Brexit);

• our inability to secure and retain adequate coverage or reimbursement from third-party payors for the Omnipod System or future products and potential adverse changes in reimbursement rates or policies relating to the Omnipod System or future products;

• failure to retain key payor partners and their members;

• adverse effects resulting from competition;

• technological change and product innovation adversely affecting our business;

• changes to or termination of our license to incorporate a blood glucose meter into the Omnipod System or our inability to enter into new license or other agreements with respect to the Omnipod System’s current or future features;

• challenges to the future development of our non-insulin drug delivery product line;

• our ability to protect our intellectual property and other proprietary rights;

• conflicts with the intellectual property of third parties, including claims that our current or future products infringe or misappropriate the proprietary rights of others;

• adverse regulatory or legal actions relating to the Omnipod System or future products;

• failure of our contract manufacturers or component suppliers to comply with the FDA’s quality system regulations;

• potential adverse impacts resulting from a recall, or discovery of serious safety issues, of the Omnipod System;

• the potential violation of the U.S. Foreign Corrupt Practices Act or any other federal, state or foreign anti-bribery/anti-corruption laws or laws prohibiting “kickbacks” or protecting the confidentiality of health information or other protected personal information, or any challenge to or investigation into our practices under these laws;

• product liability and other lawsuits that may be brought against us, including stemming from off-label use of our product;

• breaches or failures of our product or information technology systems, including by cyber-attack;

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• reduced retention rates of our customer base;

• unfavorable results of clinical studies relating to the Omnipod System or future products, or the products of our competitors;

• future publication of articles or announcement of positions by diabetes associations or other organizations that are unfavorable to the Omnipod System;

• the concentration of our manufacturing operations and storage of our inventory in a limited number of locations;

• our ability to attract and retain personnel;

• our ability to scale our business to support revenue growth;

• fluctuations in quarterly results of operations;

• risks associated with potential future acquisitions or investments in new businesses;

• our ability to generate sufficient cash to service all of our indebtedness or raise additional funds on acceptable terms or at all;

• the expansion of our distribution network;

• the volatility of the trading price of our common stock;

• risks related to future sales of our common stock or the conversion of any of our convertible debt;

• potential limitations on our ability to use our net operating loss carryforwards; and

• anti-takeover provisions in our organizational documents.

The risk factors discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 and in this Quarterly Report could cause our results to differ materially from those expressed in forward-looking statements. In addition, there may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. Actual results could differ materially from those projected in the forward-looking statements; accordingly, you should not rely upon forward-looking statements as predictions of future events. We expressly disclaim any obligation to update these forward-looking statements other than as required by law.

Interest Rate Risk

Our exposure to changes in interest rates is associated with borrowings under our Revolving Credit Facility and our Term Loan, both of which are variable-rate debt. At September 30, 2021, no amounts were outstanding under our Revolving Credit Facility. In May 2021, we entered into two interest rate swap agreements to effectively convert $480 million of our term loan borrowings from a variable rate to a fixed rate. These interest rate swaps are intended to mitigate the exposure to fluctuations in interest rates and qualify for hedge accounting treatment as cash flow hedges. A 100 basis point increase or decrease in interest rates relative to interest rates as of September 30, 2021 would decrease or increase our annual earnings, respectively, by approximately $0.2 million.

Refer to “Part II. Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of our market price sensitive instruments and foreign currency exchange risk.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (“the Exchange Act”), as amended, is recorded, processed, summarized and reported within the specified time periods, and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2021. Based on the evaluation, our chief executive officer and chief financial officer concluded that, as of that date, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Information regarding our material pending legal proceedings, which is incorporated herein by reference, is provided in Note 10 to the consolidated financial statements in this Form 10-Q.

Refer to the “Risks Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of risks to which our business, financial condition, results of operations and cash flows are subject. There have been no material changes to the risk factors disclosed in the aforementioned Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.