UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
_____________________________________________________
|
| |
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172018
OR
|
| |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-33462
INSULET CORPORATION
(Exact name of Registrant as specified in its charter)
|
| | |
| Delaware | | 04-3523891 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
| | |
600 Technology Park Drive, Suite 200 Billerica, Massachusetts | | 01821 |
| (Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (978) 600-7000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
| | | | |
| Large accelerated filer | x | | Accelerated filer | ¨ |
| | | | |
| Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
| | | | | |
| | | | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 1, 2017,October 31, 2018, the registrant had 58,187,75659,077,244 shares of common stock outstanding.
INSULET CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED
September 30, 2017
Table Of ContentsTABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
|
| |
| Item 1. | Consolidated Financial Statements (Unaudited) |
INSULET CORPORATION
CONSOLIDATED BALANCE SHEETS
| | | (in thousands, except share and per share data) | September 30,
2017 | | December 31,
2016 | September 30,
2018 | | December 31,
2017 |
| ASSETS | (Unaudited) | | | (Unaudited) | | |
| Current Assets | | | | | | |
| Cash and cash equivalents | $ | 102,233 |
| | $ | 137,174 |
| $ | 126,563 |
| | $ | 272,577 |
|
| Short-term investments | 173,523 |
| | 161,396 |
| 163,281 |
| | 167,479 |
|
| Accounts receivable, net | 47,173 |
| | 28,803 |
| 69,950 |
| | 53,373 |
|
| Inventories, net | 35,054 |
| | 35,514 |
| |
| Prepaid expenses and other current assets | 8,037 |
| | 7,073 |
| |
| Unbilled receivable (Note 3) | | 9,963 |
| | — |
|
| Inventories | | 58,050 |
| | 33,793 |
|
| Prepaid expenses and other current assets (Note 9) | | 17,905 |
| | 9,949 |
|
| Total current assets | 366,020 |
| | 369,960 |
| 445,712 |
| | 537,171 |
|
| Long-term investments | | 145,539 |
| | 125,549 |
|
| Property and equipment, net | 88,491 |
| | 44,753 |
| 229,433 |
| | 107,864 |
|
| Other intangible assets, net | 4,369 |
| | 2,041 |
| 7,791 |
| | 4,351 |
|
| Goodwill | 39,854 |
| | 39,677 |
| 39,774 |
| | 39,840 |
|
| Other assets | 1,614 |
| | 216 |
| |
| Other assets (Note 9) | | 18,057 |
| | 1,969 |
|
| Total assets | $ | 500,348 |
| | $ | 456,647 |
| $ | 886,306 |
| | $ | 816,744 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
| Current Liabilities | | | | | | |
| Accounts payable | $ | 28,648 |
| | $ | 13,160 |
| $ | 26,845 |
| | $ | 24,413 |
|
| Accrued expenses and other current liabilities | 44,897 |
| | 41,228 |
| 68,169 |
| | 59,256 |
|
| Deferred revenue | 1,395 |
| | 1,309 |
| 2,210 |
| | 2,356 |
|
| Total current liabilities | 74,940 |
| | 55,697 |
| 97,224 |
| | 86,025 |
|
| Long-term debt, net of discount | 344,953 |
| | 332,768 |
| |
| Convertible debt, net (Note 5) | | 584,485 |
| | 566,173 |
|
| Other long-term liabilities | 6,201 |
| | 5,032 |
| 6,668 |
| | 6,030 |
|
| Total liabilities | 426,094 |
| | 393,497 |
| 688,377 |
| | 658,228 |
|
| Commitments and contingencies (Note 12) |
| |
|
| |
|
| Stockholders’ Equity | | | | | | |
| Preferred stock, $.001 par value: | | | | | | |
Authorized: 5,000,000 shares at September 30, 2017 and December 31, 2016. Issued and outstanding: zero shares at September 30, 2017 and December 31, 2016. | — |
| | — |
| |
Authorized: 5,000,000 shares at September 30, 2018 and December 31, 2017. Issued and outstanding: zero shares at September 30, 2018 and December 31, 2017.
| | — |
| | — |
|
| Common stock, $.001 par value: | | | | | | |
Authorized: 100,000,000 shares at September 30, 2017 and December 31, 2016.
Issued and outstanding: 58,156,128 and 57,457,967 shares at September 30, 2017 and December 31, 2016, respectively. | 58 |
| | 57 |
| |
Authorized: 100,000,000 at September 30, 2018 and December 31, 2017. Issued and outstanding: 59,068,586 and 58,319,348 at September 30, 2018 and December 31, 2017, respectively. | | 59 |
| | 58 |
|
| Additional paid-in capital | 774,714 |
| | 744,243 |
| 893,829 |
| | 866,206 |
|
| Accumulated other comprehensive loss | (123 | ) | | (726 | ) | (2,452 | ) | | (493 | ) |
| Accumulated deficit | (700,395 | ) | | (680,424 | ) | (693,507 | ) | | (707,255 | ) |
| Total stockholders’ equity | 74,254 |
| | 63,150 |
| 197,929 |
| | 158,516 |
|
| Total liabilities and stockholders’ equity | $ | 500,348 |
| | $ | 456,647 |
| $ | 886,306 |
| | $ | 816,744 |
|
INSULET CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands, except per share data) | 2017 | | 2016 | | 2017 | | 2016 | |
| (in thousands, except share and per share data) | | 2018 | | 2017 | | 2018 | | 2017 |
| Revenue | $ | 121,775 |
| | $ | 94,871 |
| | $ | 333,244 |
| | $ | 263,414 |
| $ | 151,076 |
| | $ | 121,775 |
| | $ | 398,916 |
| | $ | 333,244 |
|
| Cost of revenue | 48,151 |
| | 39,230 |
| | 135,583 |
| | 113,265 |
| 49,107 |
| | 48,151 |
| | 139,060 |
| | 135,583 |
|
| Gross profit | 73,624 |
| | 55,641 |
| | 197,661 |
| | 150,149 |
| 101,969 |
| | 73,624 |
| | 259,856 |
| | 197,661 |
|
| Operating expenses: | | | | | | | | | | | | | | |
| Research and development | 20,141 |
| | 13,734 |
| | 55,670 |
| | 39,676 |
| 21,762 |
| | 20,141 |
| | 60,092 |
| | 55,670 |
|
| Sales and marketing | 28,718 |
| | 22,147 |
| | 86,288 |
| | 69,119 |
| 34,922 |
| | 28,718 |
| | 102,660 |
| | 86,288 |
|
| General and administrative | 22,718 |
| | 17,342 |
| | 62,322 |
| | 47,923 |
| 38,420 |
| | 22,718 |
| | 85,914 |
| | 62,322 |
|
| Total operating expenses | 71,577 |
| | 53,223 |
| | 204,280 |
| | 156,718 |
| 95,104 |
| | 71,577 |
| | 248,666 |
| | 204,280 |
|
| Operating income (loss) | 2,047 |
| | 2,418 |
| | (6,619 | ) | | (6,569 | ) | 6,865 |
| | 2,047 |
| | 11,190 |
| | (6,619 | ) |
| Interest expense | 4,709 |
| | 3,029 |
| | 14,512 |
| | 9,252 |
| 6,846 |
| | 4,709 |
| | 22,054 |
| | 14,512 |
|
| Other income (expense), net | 556 |
| | 211 |
| | 1,478 |
| | 510 |
| |
| Loss on extinguishment of long-term debt | — |
| | 2,551 |
| | — |
| | 2,551 |
| |
| Other income, net | | 1,834 |
| | 556 |
| | 5,202 |
| | 1,478 |
|
| Interest expense and other income, net | 4,153 |
| | 5,369 |
| | 13,034 |
| | 11,293 |
| 5,012 |
| | 4,153 |
| | 16,852 |
| | 13,034 |
|
| Loss from continuing operations before income taxes | (2,106 | ) | | (2,951 | ) | | (19,653 | ) | | (17,862 | ) | |
| Income (loss) before income taxes | | 1,853 |
| | (2,106 | ) | | (5,662 | ) | | (19,653 | ) |
| Income tax expense | 121 |
| | 66 |
| | 318 |
| | 195 |
| 194 |
| | 121 |
| | 939 |
| | 318 |
|
| Net loss from continuing operations | (2,227 | ) | | (3,017 | ) | | (19,971 | ) | | (18,057 | ) | |
| Loss from discontinued operations, net of tax ($0 for each of the three months ended September 30, 2017 and 2016 and $0 and $408 for the nine months ended September 30, 2017 and 2016, respectively) | — |
| | (64 | ) | | — |
| | (1,703 | ) | |
| Net loss | $ | (2,227 | ) | | $ | (3,081 | ) | | $ | (19,971 | ) | | $ | (19,760 | ) | |
| Net loss per share basic and diluted: | | | | | | | | |
| Net loss from continuing operations per share | $ | (0.04 | ) | | $ | (0.05 | ) | | $ | (0.34 | ) | | $ | (0.32 | ) | |
| Net loss from discontinued operations per share | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.03 | ) | |
| Weighted-average number of shares used in calculating net loss per share | 58,100 |
| | 57,341 |
| | 57,925 |
| | 57,189 |
| |
| Net income (loss) | | $ | 1,659 |
| | $ | (2,227 | ) | | $ | (6,601 | ) | | $ | (19,971 | ) |
| Net income (loss) per share: | | | | | | | | |
| Basic | | $ | 0.03 |
| | $ | (0.04 | ) | | $ | (0.11 | ) | | $ | (0.34 | ) |
| Diluted | | $ | 0.03 |
| | $ | (0.04 | ) | | $ | (0.11 | ) | | $ | (0.34 | ) |
| Weighted-average number of shares used in calculating net income (loss) per share: | | | | | | | | |
| Basic | | 59,016,863 |
| | 58,099,593 |
| | 58,779,672 |
| | 57,924,920 |
|
| Diluted | | 61,146,466 |
| | 58,099,593 |
| | 58,779,672 |
| | 57,924,920 |
|
INSULET CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSINCOME (LOSS)
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Net loss | $ | (2,227 | ) | | $ | (3,081 | ) | | $ | (19,971 | ) | | $ | (19,760 | ) |
| Other comprehensive income, net of tax | | | | | | | |
| Foreign currency translation adjustment, net of tax | 329 |
| | (102 | ) | | 594 |
| | 302 |
|
| Unrealized gain (loss) income on available-for-sale securities, net of tax | 76 |
| | (43 | ) | | 9 |
| | (35 | ) |
| Total other comprehensive income (loss), net of tax | 405 |
| | (145 | ) | | 603 |
| | 267 |
|
| Total comprehensive loss | $ | (1,822 | ) | | $ | (3,226 | ) | | $ | (19,368 | ) | | $ | (19,493 | ) |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands) | 2018 | | 2017 | | 2018 | | 2017 |
| Net income (loss) | $ | 1,659 |
| | $ | (2,227 | ) | | $ | (6,601 | ) | | $ | (19,971 | ) |
| Other comprehensive income (loss), net of tax | | | | | | | |
| Foreign currency translation adjustment, net of tax | 4 |
| | 329 |
| | (1,055 | ) | | 594 |
|
| Unrealized (loss) gain on available-for-sale debt securities, net of tax | (70 | ) | | 76 |
| | (904 | ) | | 9 |
|
| Total other comprehensive (loss) income, net of tax | (66 | ) | | 405 |
| | (1,959 | ) | | 603 |
|
| Total comprehensive income (loss) | $ | 1,593 |
| | $ | (1,822 | ) | | $ | (8,560 | ) | | $ | (19,368 | ) |
INSULET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | | Nine Months Ended September 30, | Nine Months Ended September 30, |
| (in thousands) | 2017 | | 2016 | 2018 | | 2017 |
| Cash flows from operating activities | | | | | | |
| Net loss | $ | (19,971 | ) | | $ | (19,760 | ) | $ | (6,601 | ) | | $ | (19,971 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities | | | | |
| Adjustments to reconcile net income (loss) to net cash used in operating activities | | | | |
| Depreciation and amortization | 10,533 |
| | 10,474 |
| 11,254 |
| | 10,533 |
|
| Non-cash interest and other expense | 12,185 |
| | 6,117 |
| |
| Non-cash interest expense | | 21,790 |
| | 12,185 |
|
| Stock-based compensation expense | 23,551 |
| | 16,850 |
| 31,205 |
| | 23,551 |
|
| Loss on extinguishment of long-term debt | — |
| | 2,551 |
| |
| Provision for bad debts | 1,502 |
| | 1,889 |
| 2,588 |
| | 1,502 |
|
| Other | 519 |
| | 139 |
| (235 | ) | | 519 |
|
| Changes in operating assets and liabilities: | | | | | | |
| Accounts receivable | (19,757 | ) | | 2,994 |
| |
| Accounts receivable and unbilled receivable | | (24,581 | ) | | (19,757 | ) |
| Inventories | 428 |
| | (21,287 | ) | (25,279 | ) | | 428 |
|
| Prepaid expenses and other assets | (1,290 | ) | | (3,268 | ) | (5,258 | ) | | (1,290 | ) |
| Accounts payable, accrued expenses and other current liabilities | 10,502 |
| | (632 | ) | 2,938 |
| | 10,502 |
|
| Deferred revenue | 537 |
| | (982 | ) | (2,761 | ) | | 537 |
|
| Other long-term liabilities | 668 |
| | 756 |
| 400 |
| | 668 |
|
Net cash provided by (used in) operating activities(1) | 19,407 |
| | (4,159 | ) | |
| Net cash provided by operating activities | | 5,460 |
| | 19,407 |
|
| Cash flows from investing activities | | | | | | |
Purchases of property, equipment and software(2) | (47,813 | ) | | (19,205 | ) | |
Purchases of property, equipment and intangible assets (1) | | (127,559 | ) | | (47,813 | ) |
| Purchases of investments | (115,056 | ) | | (76,241 | ) | (145,575 | ) | | (115,056 | ) |
| Receipts from the maturity or sale of investments | 101,384 |
| | 8,905 |
| 129,415 |
| | 101,384 |
|
| Proceeds from divestiture of business, net | — |
| | 5,714 |
| |
| Net cash used in investing activities | (61,485 | ) | | (80,827 | ) | (143,719 | ) | | (61,485 | ) |
| Cash flows from financing activities | | | | | | |
| Principal payments of capital lease obligations | (269 | ) | | (4,727 | ) | — |
| | (269 | ) |
| Proceeds from issuance of convertible notes, net of issuance costs | — |
| | 333,904 |
| |
| Repayment of convertible notes | — |
| | (153,628 | ) | |
| Proceeds from exercise of stock options and issuance of common stock | 10,735 |
| | 4,848 |
| |
| Repayment of convertible debt | | (6,699 | ) | | — |
|
Proceeds from exercise of stock options (2) | | 13,464 |
| | 10,735 |
|
| Payment of withholding taxes in connection with vesting of restricted stock units | (3,816 | ) | | (2,839 | ) | (13,846 | ) | | (3,816 | ) |
| Net cash provided by financing activities | 6,650 |
| | 177,558 |
| |
| Net cash (used in) provided by financing activities | | (7,081 | ) | | 6,650 |
|
| Effect of exchange rate changes on cash | 487 |
| | 158 |
| (674 | ) | | 487 |
|
| Net (decrease) increase in cash and cash equivalents | (34,941 | ) | | 92,730 |
| |
| Cash and cash equivalents, beginning of period | 137,174 |
| | 122,672 |
| |
| Cash and cash equivalents, end of period | $ | 102,233 |
| | $ | 215,402 |
| |
| Net decrease in cash, cash equivalents and restricted cash | | (146,014 | ) | | (34,941 | ) |
| Cash, cash equivalents and restricted cash, beginning of period | | 272,577 |
| | 137,174 |
|
| Cash, cash equivalents and restricted cash, end of period | | $ | 126,563 |
| | $ | 102,233 |
|
(1)2016 includes activity related to discontinued operations. See Note 3 to the consolidated financial statements for discussion of discontinued operations.
(2) Cash outflows from purchases of property, equipment and softwareintangible assets for the nine months ended September 30, 20172018 includes $2.0$4.0 million of purchases made in prior periods that were included in accounts payable and accrued expenses as of December 31, 20162017 and excludes $10.7$12.7 million of purchases made during the nine months ended September 30, 20172018 that were included in accounts payable and accrued expenses as of September 30, 2017.2018.
(2) During the period, the Company acquired 9,733 shares of its common stock with a value of $0.8 million in return for the exercise of stock options. The acquired shares were subsequently retired.
INSULET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Nature of the Business
Insulet Corporation the "Company,"(the "Company") is primarily engaged in the development, manufacturing and sale of its proprietary Omnipod Insulin Management System (“Omnipod(the “Omnipod System”), an innovative, discreet and easy-to-use continuous insulin delivery system for people with insulin-dependent diabetes. There are twoprimary types of insulin therapy practiced today: multiple daily injection (“MDI”) therapy using syringes or insulin pens; and pump therapy using insulin pumps. Insulin pumps are used to perform continuous subcutaneous insulin infusion, or insulin pump therapy, and typically use a programmable device and an infusion set to administer insulin into the person’s body. Insulin pump therapy has been shown to provide people with insulin-dependent diabetes with numerous advantages relative to MDI therapy. The Company estimates that approximately one-third of the Type 1 diabetes population in the United States use insulin pump therapy, and that less than 10% of the Type 2 diabetes population in the United States who are insulin-dependent use insulin pump therapy.The Omnipod System features a small, lightweight, self-adhesive disposable tubeless Omnipod device, which is worn on the body for approximately three days at a time (the "Pod"), and its wireless companion, the handheld Personal Diabetes Manager ("PDM"). 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, theThe Omnipod System, which features only two discreet, easy-to-use devices, that eliminate the need for a bulky pump, tubing and separate blood glucose meter,communicates wirelessly, provides for virtually pain-free automated cannula insertion communicates wirelessly and integrates a blood glucose meter.eliminates the need for traditional MDI therapy or the use of traditional pump and tubing. The Company believes that the Omnipod System’s unique proprietary design and features allow people with insulin-dependent diabetes to manage their diabetes with unprecedented freedom, comfort, convenience, and ease.
Commercial sales of the Omnipod System began in the United States in 2005. The Company sells the Omnipod System in the United States through direct sales to customers or through its distribution partners.intermediaries. The Omnipod System is currently available in multiple countries in Europe, as well as in Canada and Israel.
The Company announced on July 20, 2017 its plans to assume, on On July 1, 2018, the distribution,Company commenced direct sales marketing, training and support activities of itsthe Omnipod System acrossin Europe following the expiration of its global distribution agreement on June 30, 2018 with Ypsomed Distribution AG ("Ypsomed') on June 30, 2018. UntilYpsomed" or the expiration of the agreement, Ypsomed will remain the distributor of the Company's Omnipod products in Europe. The Company will be required to pay to Ypsomed a per unit fee for direct sales over the 12 month period following the expiration of the global distribution agreement of its Omnipod device to former customers of Ypsomed, as defined in the distribution agreement. The Company will recognize a liability for this fee as it sells its Omnipod device to these customers during the twelve-month period beginning July 1, 2018."European Distributor").
In addition to using the Omnipod System for insulin delivery, the Company also partners with global pharmaceutical and biotechnology companies to tailor the Omnipod System technology platform for the delivery of subcutaneous drugs across multipleother therapeutic areas. The majority of the Company's drug delivery revenue currently consists of sales of Amgen's Neulasta Onpro kit.
The Company acquired Neighborhood Holdings, Inc.To lower manufacturing costs, increase supply redundancy, add capacity closer to its largest customer base and its wholly-owned subsidiaries (collectively, “Neighborhood Diabetes”) in June 2011. Through Neighborhood Diabetes,support growth, the Company provided customersis constructing a highly-automated manufacturing facility in Acton, Massachusetts, with blood glucose testing supplies, traditional insulin pumps, pump supplies and pharmaceuticals and had the ability to process claims as either durable medical equipment or through pharmacy benefits. In February 2016, the Company sold Neighborhood Diabetes to Liberty Medical LLC ("Liberty Medical"). Additional information regarding the disposition and treatmentplanned production out of the Neighborhood Diabetes businessfacility beginning in early 2019. The facility will also serve as discontinued operations is provided in Note 3 to these consolidated financial statements.the Company's global headquarters.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The unaudited consolidated financial statements in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles (“U.S. GAAP” or "GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 20172018 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017,2018, or for any other subsequent interim period.
The unaudited consolidated financial statements in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Reclassification of Prior Period Balances
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation including the reclassification of capitalized internal-use software costs from property and equipment to other intangible assets for the year ended December 31, 2016 upon adoption of Accounting Standards Update ("ASU") 2016-19, Technical Corrections and Improvements2017.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in the application of certain of its significant accounting policies that may materially affect the reported amounts of assets, liabilities, equity, revenue and expenses. The most significant estimates used in these financial statements include the valuation of stock-based compensation expense; the fair value of intangible assets acquired in businesses combinations; the valuation of inventory; the fair value of reporting units used to calculate the potential impairment of goodwill; the valuation of deferred revenue; the calculation of gains and losses, if any, on the retirement or conversion of convertible debt; the estimated useful lives of property and equipment and intangible assets; the amount of internal use software development costs that qualify for capitalization; the estimated amount, if any, of accrued contingent liabilities as well as warranty and doubtful accounts allowance reserve calculations. Actual results may differ from those estimates. See Note 3 related to the Company's adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, for a discussion of judgments associated with the recognition of revenue and deferral of cost to obtain a contract.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Foreign Currency TranslationSummary of Significant Accounting Policies
For foreign operations, asset and liability accountsThe Company's significant accounting policies are translated at exchange rates asdescribed in Note 2, "Summary of the balance sheet date; income and expenses are translated using weighted average exchange rates for the reporting period. Resulting translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders' equity. Gains and losses arising from transactions and revaluation of period-end balances denominated in currencies other than the local entity's functional currency are included in other income (expense)Significant Accounting Policies", net, and were not material in the three and nine months ended September 30, 2017 and 2016. Exposure to gains and losses from such transactions and revaluations are primarily related to Canadian dollar exchange rate fluctuations.
Cash and Cash Equivalents
For the purpose of financial statement classification, the Company considers all highly-liquid investment instruments with original maturities of 90 days or less, when purchased, to be cash equivalents. Cash equivalents include money market mutual funds, corporate bonds and certificates of deposit which are carried at cost which approximates their fair value. Included in the Company's cash and cash equivalents are restricted cash amounts set asideAnnual Report on Form 10-K for collateral on an outstanding letter of credit, related to a security deposit for a lease obligation, totaling $0.5 million as of September 30, 2017 and $1.2 million as of December 31, 2016.
Short-term Investments
Short-term investment securities consist of available-for-sale marketable securities and are carried at fair value with unrealized gains or losses included as a component of other comprehensive loss in stockholders' equity. Investments, exclusive of cash equivalents, with a stated maturity date of onefiscal year or less from the balance sheet date or that are expected to be used in current operations, are classified as short-term investments. Short-term investments include U.S. government and agency bonds, corporate bonds, and certificates of deposit.
The Company reviews investments for other-than-temporary impairment when the fair value of an investment is less than its amortized cost. If an available-for-sale security is other than temporarily impaired, the loss is charged to earnings.
Property and Equipment
Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful life of the respective assets. Leasehold improvements are amortized over their useful life or the life of the lease, whichever is shorter. Assets acquired under capital leases 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.
Property and equipment included $49.0 million and $39.0 million of accumulated depreciation as of September 30, 2017 and December 31, 2016, respectively.
Business Combinations
The Company recognizes the assets and liabilities assumed in business combinations on the basis of their fair values at the date of acquisition. The Company assesses the fair value of assets, including intangible assets, using a variety of methods and each asset is measured at fair value from the perspective of a market participant. The method used to estimate the fair values of intangible assets incorporates significant assumptions regarding the estimates a market participant would make in order to evaluate an asset, including a market participant’s use of the asset and the appropriate discount rates for a market participant. Assets recorded from the perspective of a market participant that are determined to not have economic use for the Company are expensed immediately. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. Transaction costs and restructuring costs associated with a business combination are expensed as incurred.2017.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision-maker ("CODM") in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company has concluded that its Chief Executive Officer ("CEO") is the CODM as hethe CEO is the ultimate decision maker for key operating decisions, determining the allocation of resources and assessing the financial performance of the Company. These decisions, allocations and assessments are performed by the CODM using consolidated financial information. Consolidated financial information is utilized by the CODM as the Company’s current product offering primarily consists of drug delivery and the Omnipod System. The Company’s products are relatively consistent and manufacturing is centralized and consistent across product offerings. Based on these factors, key operating decisions and resource allocations are made by the CODM using consolidated financial data and as such the Company has concluded that it operates as one segment.
Goodwill
Goodwill represents the excess of the cost of acquired businesses over the fair value of identifiable net assets acquired. The Company follows the provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) 350-20, Intangibles - Goodwill and Other (“ASC 350-20”). The Company performs an assessment of its goodwill for impairment on at least an annual basis or whenever events or changes in circumstances indicate there might be impairment. The Company's annual impairment test date is October 1st.
As the Company operates in one segment, the Company has considered whether that segment contains multiple reporting units. The Company has concluded that there is a single reporting unit as the Company does not have segment managers and discrete financial information below consolidated results is not reviewed on a regular basis. Based on this conclusion, goodwill is tested for impairment at the enterprise level. The Company has the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of its sole reporting unit is less than its carrying amount. This qualitative analysis is used as a basis for determining whether it is necessary to perform the two-step goodwill impairment analysis. If the Company determines that it is more likely than not that its fair value is less than its carrying amount, then the two-step goodwill impairment test will be performed. The first step compares the carrying value of the reporting unit to its fair value using either a market approach or a discounted cash flow analysis. If the carrying value of the reporting unit, including goodwill, exceeds its fair value, the Company will record an impairment loss to the extent that the reporting unit's carrying value exceeds its implied fair value as determined in step two of the impairment test. There was no impairment of goodwill during the three and nine months ended September 30, 2017 and 2016.
Revenue Recognition
The Company generates the majority of its revenue from sales of its Omnipod System to customers and third-party distributors who resell the products to patients with diabetes, and to a lesser extent from product sales to pharmaceutical companies who use the Company’s technology as a delivery method for their pharmaceuticals.
Revenue recognition 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 for sales directly to patients or a purchase order for sales to a third-party distributor.
Revenue is recognized when title and risk and rewards of ownership have transferred to the customer.
The selling prices for all sales are fixed and agreed with the patient or third-party distributor and, if applicable, the patient’s 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. Provisions for discounts, rebates and other adjustments to customers are established as a reduction to revenue in the same period the related sales are recorded.
The Company offers a 45-day right of return for sales of its Omnipod System in the United States, and a 90-day right of return for sales of its Omnipod System in Canada to new patients and defers revenue to reflect estimated sales returns in the same period that the related product sales are recorded. Returns are estimated through a comparison of the Company’s historical return data to its related sales. Historical rates of return are adjusted for known or expected changes in the marketplace when appropriate. When doubt exists about reasonable assuredness of collectibility from specific customers, the Company defers revenue from sales of products to those customers until payment is received.
As of September 30, 2017 and December 31, 2016, the Company had deferred revenue of $2.6 million and $1.9 million, respectively, which included $1.2 million and $0.6 million classified in other long-term liabilities as of September 30, 2017 and December 31, 2016, respectively. Deferred revenue primarily relates to undelivered elements within certain of the Company's developmental arrangements and other instances where the Company has not yet met the revenue recognition criteria.
Collaborative Arrangements
The Company enters into collaborative arrangements for ongoing initiatives to develop products. Although the Company does not consider any individual alliance to be material, certain of the more notable alliances are described below.
Eli Lilly and Company and Concentrated Insulins: In May 2013 and January 2016, the Company entered into agreements with Eli Lilly and Company to develop new versions of the Omnipod tubeless insulin delivery system specifically designed to deliver a concentrated form of insulin used by higher insulin-requiring patients with diabetes. Under the terms of these arrangements, the parties share the responsibility of the permissible costs that are incurred. Consideration received and payments made by the Company under the terms of the arrangements are recorded within research and development expense.
Shipping and Handling Costs
The Company does not typically charge its customers for shipping and handling costs associated with shipping its product to its customers unless non-standard shipping and handling services are requested. These shipping and handling costs are included in general and administrative expenses and were $1.3$2.2 million and $1.1$1.3 million for the three months ended September 30, 20172018 and 2016,2017, respectively, and were $3.5$4.6 million and $2.8$3.5 million for the nine months ended September 30, 2018 and 2017, and 2016, respectively.
Concentration of Credit Risk
Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, short-term investments and accounts receivable. The Company maintains the majority of its cash and short-term investments with one financial institution. Accounts are partially insured up to various amounts mandated by the Federal Deposit Insurance Corporation or by the foreign country where the account is held.
The Company purchases Omnipod Systems from Flex Ltd., its single source contract manufacturer. As of each of September 30, 2017 and December 31, 2016, liabilities to this vendor represented approximately 21% and 16%, respectively, of the combined balance of accounts payable, accrued expenses and other current liabilities.
Revenue for customers comprising more than 10% of total revenue were as follows:
|
| | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| Amgen, Inc. | 16% | | 17 | % | | 16% | | 17% |
| Ypsomed | 23% | | 16 | % | | 21% | | 15% |
| RGH Enterprises, Inc. | 11% | | 10 | % | | 10% | | 10% |
Other Significant Policies:
The following table identifies the Company's other significant accounting policies and the note and page where a detailed description of each policy can be found.
|
| | | | | |
| Note | 4 |
| Page | |
| | | | | |
| Convertible Debt | Note | 6 |
| Page | |
| | | | | |
| Note | 8 |
| Page | |
| | | | | |
| Note | 9 |
| Page | |
| | | | | |
| Other Intangible Assets | Note | 10 |
| Page | |
| | | | | |
| Accrued Expenses and Other Current Liabilities - Product Warranty Costs | Note | 11 |
| Page | |
| | | | | |
| Commitments and Contingencies | Note | 12 |
| Page | |
| | | | | |
| Note | 13 |
| Page | |
| | | | | |
| Note | 14 |
| Page | |
Recently Adopted Accounting Standards:
In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements ("ASU 2016-19"). ASU 2016-19 includes numerous technical corrections and clarifications to GAAP that are designed to remove inconsistencies in the board’s accounting guidance. Several provisions in this accounting guidance were effective immediately and did not have an impact on the Company’s consolidated financial statements. Additional provisions in this accounting guidance are effective for the Company in the current fiscal year, including the clarification that the license of internal-use software shall be accounted for as the acquisition of an intangible asset. The standard allows for prospective or retrospective adoption and the Company has elected retrospective adoption. As a result of adoption, the Company reclassified $4.1 million of gross internal-use software costs, net of accumulated amortization of $2.6 million, from property and equipment to other intangible assets as of December 31, 2016.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory ("ASU 2015-11"). ASU 2015-11 amends existing guidance and requires entities to measure most inventory at the lower of cost and net realizable value. The guidance is effective prospectively for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. Upon adoption, entities must disclose the nature of and reason for the accounting change. The Company adopted ASU 2015-11 on January 1, 2017 and its adoption did not have a material impact on the consolidated financial statements.
The Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09") on January 1, 2017 using the modified retrospective method. ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The adoption of ASU 2016-09 resulted in the Company increasing its deferred tax assets (tax effected) by approximately $23.8 million, which is offset by a full valuation allowance. Overall, adoption of the standard did not have a material impact on the Company's consolidated financial statements.
The Company adopted ASU 2016-18, Restricted Cash (a consensus of the Emerging Issues Task Force) ("ASU 2016-18") as of January 1, 2017 using the retrospective transition method. ASU 2016-18 requires the statement of cash flows to show the changes in the total of cash, cash equivalents, and restricted cash. As the Company includes restricted cash within cash and cash equivalents on the consolidated balance sheet and discloses the carrying value of restricted cash in the notes to the consolidated financial statements, there was no impact on the statement of cash flows upon the adoption of ASU 2016-18.
Accounting Standards Issued and Not Yet Adopted:
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 and its related amendments (collectively knownreferred to as ASC 606) requires that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under this guidance, an entity makes additional estimates regarding performance conditions and the allocation of variable consideration and must evaluate whether revenue derived from a
contract should be recognized at a point in time or over time. The guidance is effective in fiscal years beginning January 1, 2018, with early adoption permitted. The Company plans to adoptadopted the standard as of the required effective date of January 1, 2018 using the modified retrospective method. Under this method, the new guidance iswas applied to contracts that arewere not yet completed as of the date of adoptionJanuary 1, 2018 with the cumulative effect of initially applying the guidance recognized through accumulated deficit atas the date of initial application. See Note 3 "Revenue from Contracts with Customers".
The Company continues to evaluate the potential impact of ASC 606 on its consolidated financial statements and related disclosures. As part of the Company's assessment work to date, the Company has formed an implementation work team, completed training on the ASC 606 revenue recognition model and is continuing to review and finalize its conclusions relative to its contracts with customers. For the remainder of 2017, the Company plans to finalize its evaluation and implement any required policy, process, and internal control changes required as a result of that evaluation.
While the Company continues to assess all potential impacts of the new standard on its consolidated financial statements, the Company currently expects that the adoption of ASC 606 will accelerate the timing of revenue recognition relative to a portion of its drug delivery product line whereby revenue will be recognized as the product is produced pursuant to the customer’s firm purchase commitments (as opposed to at a point in time when the product is shipped to the customer) as the Company has an enforceable right to payment for performance completed to date and the inventory has no alternative use. Upon the adoption of ASC 606 using the modified retrospective method onEffective January 1, 2018, the Company expects to record an adjustment to accumulated deficit for the amount that would have been recognized in 2017 under the new guidance and would not have been recognized until shipment of the product in 2018 under the current guidance. In addition to the aforementioned impact on drug delivery revenue, the adoption of ASC 606 will impact the treatment of contract acquisition costs such as commissions, which will be capitalized and amortized over the expected period of benefit. Upon adoption, the Company expects to increase its current and other assets for the net value of commissions paid prior to adoption less amortization to date. The new standard will also require an enhanced level of disclosures in the Company’s quarterly and annual consolidated financial statements.
In January 2016, the FASB issuedadopted ASU 2016-01, ("ASU 2016-01"), Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities("ASU 2016-01"). ASU 2016-01 changes the current GAAP model for the accounting of equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Allwhereby equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification (changes in fair value reported in other comprehensive income (loss)) for equity securities with readily determinable fair values. In addition, the FASB clarified guidance relatedvalue are carried at fair value with changes reported in net income (loss) as opposed to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities.other comprehensive income (loss). The classification and measurement guidance will be effective in fiscal years beginning after December 15, 2017, and interim periods within those years. While the Company is continuing to evaluate the potential impact ofadopted ASU 2016-01 as of the Company anticipates thatrequired effective date of January 1, 2018. There was no impact on the new guidance may create some volatility in earnings related to changes in fair value of its short term marketable securities. The Company does not expectconsolidated financial statements upon the adoption of ASU 2016-01 to have a material impact on its consolidated financial statements.as of the effective date or as of and for the period ended September 30, 2018.
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15,Effective January 1, 2018, and interim periods within those years. Early adoption is permitted for all entities. While the Company is currently evaluating the impact of ASU 2016-02, the Company currently expects that the new guidance will require an increase in the Company's long-lived assets and a corresponding increase to long-term obligations associated with leased office and warehouse space.
In August 2016, the FASB issuedretrospectively adopted ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) ("ASU 2016-15"). ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. There was no impact on the consolidated statements of cash flows upon the adoption of ASU 2016-15.
Effective January 1, 2018, the Company adopted ASU 2017-09, Compensation-Stock Compensation (Topic 718):Scope of Modification Accounting. ("ASU 2017-09"). ASU 2017-09 specifies the types of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in accordance with Topic 718. The adoption of ASU 2017-09 did not have an impact on the Company's consolidated financial statements.
Effective January 1, 2018, the Company adopted ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"). ASU 2016-16 requires than an entity recognized the income tax effects of an intra-entity transfer of an asset, other than inventory, when the transfer occurs as opposed to when the asset is sold to a third party. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.
Accounting Standards Issued and Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 and its related amendments (collectively referred to as ASC 842) requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. ASC 842 will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2017,2018, and interim periods within those years. EarlyWhile the Company continues to assess all potential impacts of the standard and its method of adoption, is permittedthe Company expects to record right-of-use assets, with an associated amount recorded to lease obligations, on its balance sheet primarily related to its leased office and warehousing space. While the Company expects that the adoption of this standard will require updates to its processes and internal controls over financial reporting, the Company has concluded that it will not be required to implement new information systems to account for all entities. The Company is currently evaluating the impact of ASU 2016-15 but does not expect it to be material to the consolidated financial statements.its lease portfolio.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating "Step 2" from the goodwill impairment test,
which requires an entity to calculate the implied fair value of goodwill to measure a goodwill impairment charge, and alternatively, requires an entity to measure the impairment of goodwill assigned to a reporting unit as the amount by which the carrying value of the assets and liabilities of the reporting unit, including goodwill, exceeds the reporting unit's fair value. The guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of ASU 2017-04 but does not expect it to be material to the consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718):Scope of Modification Accounting. ("ASU 2017-09"). ASU 2017-09 specifies the types of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in accordance with Topic 718. The new standard is effective for the Company on January 1, 2018 and early adoption is permitted. The Company does not believe that the adoption of ASU 2017-09 will have a material impact on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. ("("ASU 2017-12"). ASU 2017-12 updates the current hedge accounting guidance with the objective of improving the financial reporting of hedging activities by better portraying the economic results of an entity's risk management activities in its financial statements. The new guidance is effective for the Company on January 1, 2019 and early adoption is permitted. As the Company currently does not use derivative financial instruments, this guidance is not expected to impact on Company's financial statements upon adoption.
In August 2018, the FASB issued ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 modifies certain disclosure requirements related to fair value measurements primarily associated with Level 3 investments. The guidance is effective no later than January 1, 2020 for the Company and can be early-adopted prospectively in any interim period for certain disclosure requirements or retrospectively for others. The Company does not expect the adoption of this guidance to have a material impact on its fair value disclosures.
In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). ASU 2018-15 requires that entities capitalize certain costs to implement a cloud computing arrangement that is service contract consistent with the rules applicable to internal use software capitalization projects. The guidance is effective no later than January 1, 2020 for the Company and can be early-adopted prospectively in any interim period or retrospectively. The Company is currently evaluating when and how it will adopt this new guidance. Upon adoption, the impactCompany would defer eligible costs related to the implementation of ASU 2017-12 on its consolidated financial statements.cloud computing arrangements within other current and non-current assets and amortize these costs to the same income statement line as the associated hosting fees.
Note 3. Discontinued OperationsRevenue from Contracts with Customers
In February 2016,The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. Under this method, the new guidance was applied to contracts that were not yet completed as of January 1, 2018 with the cumulative effect of initially applying the guidance recognized through accumulated deficit as the date of initial application. For contracts that were modified before the effective date, the Company sold Neighborhood Diabetesreflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price, which did not have a material effect on the adjustment to Liberty Medicalaccumulated deficit. The reported results for approximately $6.2 million2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as the "previous guidance". The adoption of ASC 606 represents a change in cash, which included $1.2 million of closing adjustments finalized in June 2016accounting principle that primarily impacts how revenue is recognized for the Company's drug delivery product line and paid by Liberty Medical. The results of operations, assets, and liabilities of Neighborhood Diabetes are classified as discontinued operations for all periods presented, except for certain corporate overhead costs which remain in continuing operations.
In connection with the 2016 disposition,how the Company entered intoaccounts for contract acquisition costs such as commissions. In accordance with ASC 606, revenue is recognized when a transition services agreement pursuantcustomer obtains control of the promised products. The amount of revenue recognized reflects the consideration to which Insulet provided various servicesthe Company expects to Liberty Medical on an interim transitional basis. The services generally commenced onbe entitled to receive in exchange for these products. To achieve this core principle, the closing date and terminated six monthsCompany applies the following five steps as outlined in ASC 606:
1) Identify the closing. Services provided by Insulet included certain information technology and back office support. The charges for such services were generally intended to allowcontract with a customer;
2) Identify the service provider to recover all out-of-pocket costs. Billings by Insulet under the transition services agreement were recorded as a reduction of the costs to provide the respective serviceperformance obligations in the applicable expense categorycontract;
3) Determine the transaction price;
4) Allocate the transaction price to performance obligations in the consolidated statements of operations. This transitional support provided Liberty Medicalcontract;
5) Recognize revenue when or as the time required to establish its stand-alone processes for such activities that were previously provided by Insulet as described above and did not constitute significant continuing support of Liberty Medical's operations. Total expenses incurred for such transition services, which were reimbursed in full, were $0.1 million and $0.8 millionCompany satisfies a performance obligation.
The following table summarizes revenue from contracts with customers for the three and nine months ended September 30, 2016, respectively. No expenses were incurred for2018 and 2017:
|
| | | | | | | | | | | | | | | |
| | Three months | | Nine months |
| (in thousands) | 2018 | | 2017 | | 2018 | | 2017 |
| U.S. Omnipod | $ | 81,970 |
| | $ | 70,065 |
| | $ | 230,289 |
| | $ | 195,081 |
|
| International Omnipod | 50,214 |
| | 32,481 |
| | 117,127 |
| | 84,200 |
|
| Drug Delivery | 18,892 |
| | 19,229 |
| | 51,500 |
| | 53,963 |
|
| Total | $ | 151,076 |
| | $ | 121,775 |
| | $ | 398,916 |
| | $ | 333,244 |
|
U.S. and International Omnipod
The Company generates the majority of its revenue from sales of its Omnipod, which is sold in the U.S., Europe, Canada and Israel. The Omnipod is sold either directly to end users or indirectly through intermediaries, such transition servicesas independent distributors who resell the Omnipod to end users or wholesalers who sell the Company's product to end users through the pharmacy channel.
Contracts with Customers. The Company's contracts with its direct customers generally consist of a physician order form, a patient information form and, if applicable, third-party insurance (payor) approval. Contracts with the Company's intermediaries are generally in the form of master service agreements against which firm purchase orders are issued. At the outset of the contract, the Company assesses the customer’s ability and intention to pay, which is based on a variety of factors including historical payment experience or, in the case of a new intermediary, published credit, credit references and other available financial information pertaining to the customer and in the case of a new direct customer, an investigation of insurance eligibility.
Performance Obligations. The performance obligations in contracts for the threedelivery of the Omnipod to new end users, either directly to end users or through intermediaries, primarily consist of the PDM and nine months ended September 30, 2017.
Following the disposition,initial and subsequent quantity of Pods ordered. To the extent a contract includes multiple promised items, the Company entered into a distribution agreement withmust apply judgment to determine whether promised items are capable of being distinct and distinct in the Neighborhood Diabetes subsidiarycontext of Liberty Medical to continue to actthe contract. If these criteria are not met, the promised services are accounted for as a distributorcombined performance obligation.
Transaction Price. The price charged for the PDM and Pods is dependent on the Company's products.pricing as established with third party payors and intermediaries. The Company provides a right of return for sales of its Omnipod Systemto new patients. The Company also provides for certain rebates and discounts for sales transactedof its product through Neighborhood Diabetes priorintermediaries. These rights of return, discounts and rebates represent variable consideration and reduce the transaction price at the outset of the contract based on the Company's estimates, which are primarily based on the expected value method using historical and other data related to actual product returns, discounts and rebates paid in each market in which the divestiture that were previously eliminated in consolidation were $0.0 million and $0.3 million for the three and nine months ended September 30, 2016, respectively. This amount was historically reportedOmnipod is sold. Variable consideration is included in the Neighborhood Diabetestransaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue results and is being presented based on current market terms of products sold tounder the Neighborhood Diabetes subsidiary of Liberty Medical.
Post divestiture, Omnipod System sales to the Neighborhood Diabetes subsidiary of Liberty Medical were $0.0 million and $0.4 million for the three and nine months ended September 30, 2016, respectively.contract will not occur. There were no constraints recorded to variable consideration and none of the Company's contracts as of January 1, 2018 or September 30, 2018 contained a significant financing component.
Allocation of Transaction Price. The Company allocates the transaction price to each performance obligation based on its relative stand-alone selling price, which is determined based on the price at which the Company typically sells the deliverable or, if the performance obligation is not typically sold separately, the stand-alone selling price is estimated based on cost plus a reasonable profit margin or the price that a third party would charge for a similar product or service.
Recognition of Revenue. The Company transfers the Omnipod at a point in time, which is determined based on when the customer gains control of the product. Generally, intermediaries in the U.S. obtain control upon shipment based on the contractual terms including right to payment and transfer of title and risk of loss. For sales directly to end users and international intermediaries, control is generally transferred at the time of delivery based on customary business practices related to risk of ownership.
Drug Delivery
The Company's drug delivery product line includes sales of a modified version of the Omnipod System to pharmaceutical and biotechnology companies who use the Company’s technology as a delivery method for their drugs. Under ASC 606, for the majority of this entityproduct line, revenue is recognized as the product is produced pursuant to the customer’s firm purchase commitments as the Company has an enforceable right to payment for performance completed to date and the inventory has no alternative use to the Company. Judgment is required in 2017.the assessment of progress toward completion of in-process inventory. The Company recognizes revenue over time using a blend of costs incurred to date relative to total estimated costs at completion and time incurred to date relative to total production time to measure progress toward the satisfaction of its performance obligations. The Company believes that both incurred cost and elapsed time reflect the value generated, which best depicts the transfer of control to the customer. Contract costs include third party costs as well as an allocation of manufacturing overhead. Changes from quarter to quarter in quantity and stage of production of in-process inventory could have a significant quarterly impact on revenue.
Financial Statement Impact of Adopting ASC 606
The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to accumulated deficit as of the adoption date. The following table shows the adjustments made to accounts on the consolidated balance sheet as of January 1, 2018 as a result of adopting the new guidance. The table also compares the reported consolidated balance sheet accounts as of September 30, 2018 that were impacted by the new guidance to pro forma balance sheet amounts had the previous guidance been in effect.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As Reported | | Adjustments | | As Adjusted | | As Reported | | Adjustments | | Pro forma |
| (in thousands) | 12/31/2017 | | 1/1/2018 | | 1/1/2018 | | 9/30/2018 | | 9/30/2018 | | 9/30/2018 |
| Unbilled receivable (a) | $ | — |
| | $ | 5,119 |
| | $ | 5,119 |
| | $ | 9,963 |
| | $ | (9,963 | ) | | $ | — |
|
| Inventories | 33,793 |
| | (753 | ) | | 33,040 |
| | 58,050 |
| | 1,430 |
| | 59,480 |
|
| Prepaid expenses and other current assets (b) | 9,949 |
| | 5,568 |
| | 15,517 |
| | 17,905 |
| | (6,869 | ) | | 11,036 |
|
| Total current assets | 537,171 |
| | 9,934 |
| | 547,105 |
| | 445,712 |
| | (15,402 | ) | | 430,310 |
|
| Other assets (b) | 1,969 |
| | 13,326 |
| | 15,295 |
| | 18,057 |
| | (15,567 | ) | | 2,490 |
|
| Total assets | 816,744 |
| | 23,260 |
| | 840,004 |
| | 886,306 |
| | (30,969 | ) | | 855,337 |
|
| Deferred revenue (c) | 2,356 |
| | 2,625 |
| | 4,981 |
| | 2,210 |
| | (771 | ) | | 1,439 |
|
| Total current liabilities | 86,025 |
| | 2,625 |
| | 88,650 |
| | 97,224 |
| | (771 | ) | | 96,453 |
|
| Other long-term liabilities | 6,030 |
| | 271 |
| | 6,301 |
| | 6,668 |
| | (270 | ) | | 6,398 |
|
| Total liabilities | 658,228 |
| | 2,896 |
| | 661,124 |
| | 688,377 |
| | (1,041 | ) | | 687,336 |
|
| Accumulated deficit | (707,255 | ) | | 20,349 |
| | (686,906 | ) | | (693,507 | ) | | (29,937 | ) | | (723,444 | ) |
| Total stockholders' equity | 158,516 |
| | 20,364 |
| | 178,880 |
| | 197,929 |
| | (29,928 | ) | | 168,001 |
|
| Total liabilities and stockholders' equity | 816,744 |
| | 23,260 |
| | 840,004 |
| | 886,306 |
| | (30,969 | ) | | 855,337 |
|
(a) Unbilled receivable that reflects revenue for a portion of the Company's drug delivery product line as the product is produced. The unbilled receivable is reclassified to accounts receivable as the product is completed and shipped to the customer.
(b) Other current and non-current assets include contract acquisition costs related to the sale of the Omnipod. These costs are amortized over the estimated period of benefit.
(c) The adoption of ASC 606 required the Company to record a contract liability, or deferred revenue, on January 1, 2018, primarily associated with a volume-based pricing discount granted to the Company's European Distributor at the outset of the distribution contract in 2010. The deferred revenue was recognized as revenue through the completion of the distributor contract during the first half of 2018.
The following is a summarysummarizes the significant changes on the Company’s consolidated statement of the operating results of Neighborhood Diabetes included in discontinued operations for the three and nine months ended September 30, 2016:2018 as a result of the adoption of ASC 606 on January 1, 2018 compared to if the Company had continued to recognize revenue under ASC 605:
|
| | | | | | | |
| (In thousands) | Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2016 |
| Discontinued operations: | | | |
Revenue (1) | $ | — |
| | $ | 7,730 |
|
| Cost of revenue | 133 |
| | 5,502 |
|
| Gross profit | (133 | ) | | 2,228 |
|
Total operating, interest and other (income) expenses (2) | (69 | ) | | 3,523 |
|
| Loss from discontinued operations before taxes | (64 | ) | | (1,295 | ) |
| Income tax expense | — |
| | 408 |
|
| Net loss from discontinued operations | $ | (64 | ) | | $ | (1,703 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, 2018 | | Nine months ended September 30, 2018 |
| (in thousands, except per share amounts) | | As reported | | Adjustments | | Pro forma | | As reported | | Adjustments | | Pro forma |
| U.S. Omnipod | | $ | 81,970 |
| | $ | (135 | ) | | $ | 81,835 |
| | $ | 230,289 |
| | $ | (9 | ) | | $ | 230,280 |
|
| International Omnipod (a) | | 50,214 |
| | 53 |
| | 50,267 |
| | 117,127 |
| | (1,845 | ) | | 115,282 |
|
| Drug Delivery (b) | | 18,892 |
| | 3,995 |
| | 22,887 |
| | 51,500 |
| | (4,844 | ) | | 46,656 |
|
| Revenue | | 151,076 |
| | 3,913 |
| | 154,989 |
| | 398,916 |
| | (6,698 | ) | | 392,218 |
|
| Cost of revenue | | 49,107 |
| | 674 |
| | 49,781 |
| | 139,060 |
| | (677 | ) | | 138,383 |
|
| Gross profit | | 101,969 |
| | 3,239 |
| | 105,208 |
| | 259,856 |
| | (6,021 | ) | | 253,835 |
|
| Sales and marketing (c) | | 34,922 |
| | 394 |
| | 35,316 |
| | 102,660 |
| | 3,567 |
| | 106,227 |
|
| Total operating expenses | | 95,104 |
| | 394 |
| | 95,498 |
| | 248,666 |
| | 3,567 |
| | 252,233 |
|
| Operating income | | 6,865 |
| | 2,845 |
| | 9,710 |
| | 11,190 |
| | (9,588 | ) | | 1,602 |
|
| Income (loss) before income taxes | | 1,853 |
| | 2,845 |
| | 4,698 |
| | (5,662 | ) | | (9,588 | ) | | (15,250 | ) |
| Net income (loss) | | $ | 1,659 |
| | $ | 2,845 |
| | $ | 4,504 |
| | $ | (6,601 | ) | | $ | (9,588 | ) | | $ | (16,189 | ) |
| Net income (loss) per share: basic | | $ | 0.03 |
| | $ | 0.05 |
| | $ | 0.08 |
| | $ | (0.11 | ) | | $ | (0.17 | ) | | $ | (0.28 | ) |
| Net income (loss) per shares: diluted | | $ | 0.03 |
| | $ | 0.04 |
| | $ | 0.07 |
| | $ | (0.11 | ) | | $ | (0.17 | ) | | $ | (0.28 | ) |
(a) International Omnipod revenue under ASC 606 includes the amortization of a material right associated with a volume-based pricing discount granted to the Company's European Distributor at the outset of the distribution contract in 2010. The deferred revenue was recognized as revenue through the completion of the distributor contract during the first half of 2018. | |
(1)
| Revenue includes revenue from the operations of Neighborhood Diabetes through date of sale in February 2016. |
| |
(2)
| Includes $1.3 million loss on sale of Neighborhood Diabetes for the nine months ended September 30, 2016.
|
There were no results from discontinued operations(b) ASC 606 accelerated the recognition of revenue and fulfillment costs related to certain drug delivery contracts for Neighborhood Diabetes forwhich recognition was previously recorded when the product was shipped to the customer and is recorded as the product is produced under ASC 606. During the three and nine months ended September 30, 2017.
Depreciation and amortization expense included in discontinued operations2018, revenue was $0.0lower by $4.0 million and $0.1higher by $4.8 million, forrespectively, due to changes in quantity and stage of production of in-process inventory relative to the prior period.
(c) ASC 606 resulted in the amortization of capitalized commission costs that were recorded as part of the cumulative effect adjustment upon adoption and during the nine months ended September 30, 2018. Amortization of these capitalized costs to sellingand marketing expenses, net of commission costs that were capitalized in the three and nine month periods, reduced sales and marketing expenses in each period.
|
| | | | | | | | | | | | |
| | | Nine Months Ended September 30, 2018 |
| Statement of Cash Flows (in thousands) | | As Reported | | Adjustments | | Pro Forma |
| Net loss | | $ | (6,601 | ) | | $ | (9,588 | ) | | $ | (16,189 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities | | | | | | |
| Non-cash items | | 66,602 |
| | — |
| | 66,602 |
|
| Changes in operating assets and liabilities: | | | | | | — |
|
| Accounts receivable and unbilled receivable | | (24,581 | ) | | 4,844 |
| | (19,737 | ) |
| Inventories | | (25,279 | ) | | (677 | ) | | (25,956 | ) |
| Prepaid expenses and other assets | | (5,258 | ) | | 3,567 |
| | (1,691 | ) |
| Accounts payable, accrued expenses and other current liabilities | | 2,938 |
| | — |
| | 2,938 |
|
| Deferred revenue | | (2,761 | ) | | 1,854 |
| | (907 | ) |
| Other long-term liabilities | | 400 |
| | — |
| | 400 |
|
| Net cash provided by operating activities | | $ | 5,460 |
| | $ | — |
| | $ | 5,460 |
|
The adoption of ASC 606 had no net impact on the Company’s cash used in operating, investing or financing activities.
Revenue recognized during the three and nine months ended September 30, 2016, respectively. There was no depreciation and amortization expense2018 from amounts included in discontinued operations fordeferred revenue at the beginning of the period was approximately $0.6 million and $2.5 million, respectively. No revenue was recognized during the three and nine months ended September 30, 2017.2018 from performance obligations satisfied or partially satisfied in previous periods. As of September 30, 2018, unbilled receivable associated with the Company's drug delivery product line increased by $4.8 million relative to the beginning of the year due to an increase in the quantity and stage of production of in-process inventory during the year. There were no contract modifications entered into during the three and nine months ended September 30, 2018 impacting the Company’s unbilled receivable or deferred revenue.
Net operating
Revenue for customers comprising more than 10% of total revenue were as follows:
|
| | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| Amgen, Inc. | 12% | | 16% | | 13% | | 16% |
| Ypsomed and affiliates | * | | 23% | | 11% | | 21% |
| Cardinal Health Inc. and affiliates | 12% | | 11% | | 12% | | 10% |
* Represents less than 10% of consolidated revenue.
Note 4. Investments and Fair Value
Cash and Cash Equivalents:
For the purpose of financial statement classification, the Company considers all highly-liquid investment instruments with original maturities of 90 days or less, when purchased, to be cash flows usedequivalents. Cash equivalents include money market mutual funds, corporate bonds, U.S. government and agency bonds, and certificates of deposit, and are carried at cost which approximates their fair value. Included in discontinued operationsthe Company's cash and cash equivalents are restricted cash amounts set aside for collateral on outstanding letters of credit totaling $2.7 million as of September 30, 2018 and $0.5 million as of December 31, 2017.
Marketable Securities:
The Company's short-term and long-term investments in debt securities have maturity dates that range from 11 days to 23.9 months as of September 30, 2018. The Company’s investment portfolio included approximately 75 available-for-sale debt securities that had insignificant unrealized loss positions as of September 30, 2018. The Company has the intent and ability to hold these investments until maturity whereby these unrealized losses are expected to be recovered. There were no charges recorded in the period for other-than-temporary declines in the fair value of available-for-sale debt securities. The Company's investments had insignificant realized gains or losses for the nine months ended September 30, 2016 were $2.0 million. There were no net operating cash flows used in discontinued operations in the nine months ended September 30, 2017.2018.
Note 4. Fair Value Measurements
The Company applies ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) related to theTo measure fair value measurement of certain of its assets and liabilities. ASC 820 defines fair value as the price that wouldliabilities required to be received for an assetmeasured or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. When estimating fair value, depending on the nature and complexity of the asset or liability, the Company may use one or all of the following approaches:
Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.
Cost approach, which is based on the cost to acquire or construct comparable assets less an allowance for functional and/or economic obsolescence.
Income approach, which is based on the present value of the future stream of net cash flows.
To measuredisclosed at fair value, the Company uses the following fair value hierarchy based on three levels of inputs as described in ASC 820, of which the first two are considered observable and the last unobservable:
Level 1 — quoted prices in active markets for identical assets or liabilitiesliabilities;
Level 2 — observable inputs other than quoted prices in active markets for identical assets or liabilitiesliabilities;
Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptionsassumptions.
CertainThe Company had no Level 3 assets or liabilities as of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities are carried at cost, which approximates their fair value because of the short-term maturity of these financial instruments.September 30, 2018.
The following table provides a summary of assets that are measured atamortized cost, gross unrealized gains and loses, fair value as of September 30, 2017 and December 31, 2016, aggregated by the level in the fair value hierarchy within which those measurements fall: | | | | Fair Value Measurements | | | | | | | | | | | |
| (in thousands) | Total | | Level 1 | | Level 2 | | Level 3 | Amortized cost | | Gross Unrealized Gains (Losses) | | Fair Value | | Level 1 | | Level 2 |
| September 30, 2017 | | | | | | | | |
| Recurring fair value measurements: | | | | | | | | |
| Cash equivalents: |
| |
| |
| |
| |
| September 30, 2018 | | | | | | | | | | |
| Money market mutual funds | $ | 45,343 |
| | $ | 45,343 |
| | $ | — |
| | $ | — |
| $ | 66,141 |
| | $ | — |
| | $ | 66,141 |
| | $ | 66,141 |
| | $ | — |
|
| Total cash equivalents | $ | 45,343 |
| | $ | 45,343 |
| | $ | — |
| | $ | — |
| $ | 66,141 |
| | $ | — |
| | $ | 66,141 |
| | $ | 66,141 |
| | $ | — |
|
| Short-term investments: | | | | | | | | |
| | | | | | | | | | | |
| U.S. government and agency bonds | $ | 113,294 |
| | $ | 92,344 |
| | $ | 20,950 |
| | $ | — |
| $ | 120,832 |
| | $ | (444 | ) | | $ | 120,388 |
| | $ | 77,128 |
| | $ | 43,260 |
|
| Corporate bonds | 47,625 |
| | — |
| | 47,625 |
| | — |
| 38,897 |
| | (108 | ) | | 38,789 |
| | — |
| | 38,789 |
|
| Certificates of deposit | 12,604 |
| | — |
| | 12,604 |
| | — |
| 4,104 |
| | — |
| | 4,104 |
| | — |
| | 4,104 |
|
| Total short-term investments | $ | 173,523 |
| | $ | 92,344 |
| | $ | 81,179 |
| | $ | — |
| $ | 163,833 |
| | $ | (552 | ) | | $ | 163,281 |
| | $ | 77,128 |
| | $ | 86,153 |
|
| | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | |
| Recurring fair value measurements: | | | | | | | | |
| Cash equivalents: | | | | | | | | |
| Money market mutual funds | $ | 93,467 |
| | $ | 93,467 |
| | $ | — |
| | $ | — |
| |
| U.S. government and agency bonds | | $ | 96,038 |
| | $ | (646 | ) | | $ | 95,392 |
| | $ | 73,652 |
| | $ | 21,740 |
|
| Corporate bonds | 4,203 |
| | — |
| | 4,203 |
| | — |
| 44,808 |
| | (245 | ) | | 44,563 |
| | — |
| | 44,563 |
|
| Certificates of deposit | 735 |
| | — |
| | 735 |
| | — |
| 5,584 |
| | — |
| | 5,584 |
| | — |
| | 5,584 |
|
| Total long-term investments | | $ | 146,430 |
| | $ | (891 | ) | | $ | 145,539 |
| | $ | 73,652 |
| | $ | 71,887 |
|
| | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | |
| Money market mutual funds | | $ | 236,936 |
| | $ | — |
| | $ | 236,936 |
| | $ | 236,936 |
| | $ | — |
|
| U.S government and agency bonds | | $ | 5,000 |
| | — |
| | $ | 5,000 |
| | $ | 5,000 |
| | — |
|
| Total cash equivalents | $ | 98,405 |
| | $ | 93,467 |
| | $ | 4,938 |
| | $ | — |
| $ | 241,936 |
| | $ | — |
| | $ | 241,936 |
| | $ | 241,936 |
| | $ | — |
|
| Short-term investments: | | | | | | | | |
| | | | | | | | | | | |
| U.S. government and agency bonds | $ | 79,093 |
| | $ | 49,963 |
| | $ | 29,130 |
| | $ | — |
| $ | 112,311 |
| | $ | (235 | ) | | $ | 112,076 |
| | $ | 90,703 |
| | $ | 21,373 |
|
| Corporate bonds | 56,653 |
| | — |
| | 56,653 |
| | — |
| 47,713 |
| | (32 | ) | | 47,681 |
| | — |
| | 47,681 |
|
| Certificates of deposit | 25,650 |
| | — |
| | 25,650 |
| | — |
| 7,722 |
| | — |
| | 7,722 |
| | — |
| | 7,722 |
|
| Total short-term investments | $ | 161,396 |
| | $ | 49,963 |
| | $ | 111,433 |
| | $ | — |
| $ | 167,746 |
| | $ | (267 | ) | | $ | 167,479 |
| | $ | 90,703 |
| | $ | 76,776 |
|
| | | | | | | | | | | |
| U.S. government and agency bonds | | $ | 92,677 |
| | $ | (213 | ) | | $ | 92,464 |
| | $ | 49,651 |
| | $ | 42,813 |
|
| Corporate bonds | | 27,871 |
| | (59 | ) | | 27,812 |
| | — |
| | 27,812 |
|
| Certificates of deposit | | 5,273 |
| | — |
| | 5,273 |
| | — |
| | 5,273 |
|
| Total long-term investments | | $ | 125,821 |
| | $ | (272 | ) | | $ | 125,549 |
| | $ | 49,651 |
| | $ | 75,898 |
|
Debt
The estimated fair value of the Company's convertible debt is based on the Level 2 quoted market prices for the same or similar issues and includes the impact of the conversion features.
The carrying amounts, net of unamortized discounts and issuance costs, and the estimated fair values of the Company's convertible debt as of September 30, 2017 and December 31, 2016 are as follows:
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (in thousands) | Carrying Value | | Estimated Fair Value | | Carrying
Value | | Estimated Fair
Value |
| 2% Convertible Senior Notes | $ | 61,849 |
| | $ | 84,097 |
| | $ | 59,737 |
| | $ | 71,909 |
|
| | | | | | | | |
| 1.25% Convertible Senior Notes | $ | 283,104 |
| | $ | 391,196 |
| | $ | 273,031 |
| | $ | 320,969 |
|
Note 5. Short-term Investments
The Company's short-term investments are classified as available-for-sale and have maturity dates that range from zero months to 12.5 months as of September 30, 2017. The investments are all classified as short-term as they are available for current operations. Amortized costs, gross unrealized holding gains and losses, and fair values at September 30,
2017 and December 31, 2016 are as follows: |
| | | | | | | | | | | | | | | |
| (in thousands) | Amortized cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| September 30, 2017 | | | | | | | |
| U.S. government and agency bonds | $ | 113,456 |
| | $ | — |
| | $ | (162 | ) | | $ | 113,294 |
|
| Corporate bonds | 47,660 |
| | 1 |
| | (37 | ) | | 47,624 |
|
| Certificates of deposit | 12,605 |
| | — |
| | — |
| | 12,605 |
|
| Total short-term investments | $ | 173,721 |
| | $ | 1 |
| | $ | (199 | ) | | $ | 173,523 |
|
| | | | | | | | |
| December 31, 2016 | | | | | | | |
| U.S. government and agency bonds | $ | 79,211 |
| | $ | — |
| | $ | (118 | ) | | $ | 79,093 |
|
| Corporate bonds | 56,742 |
| | — |
| | (89 | ) | | 56,653 |
|
| Certificates of deposit | 25,650 |
| | — |
| | — |
| | 25,650 |
|
| Total short-term investments | $ | 161,603 |
| | $ | — |
| | $ | (207 | ) | | $ | 161,396 |
|
The Company had no realized gains or losses as of September 30, 2017 or December 31, 2016.
Note 6. Convertible Debt, Net
The Company had outstanding convertible debt and related deferred financingdebt issuance costs on its consolidated balance sheet as follows: |
| | | | | | | |
| | As of |
| (in thousands) | September 30, 2017 | | December 31, 2016 |
| Principal amount of the 2% Convertible Senior Notes | $ | 67,084 |
| | $ | 67,084 |
|
| Principal amount of the 1.25% Convertible Senior Notes | 345,000 |
| | 345,000 |
|
| Unamortized debt discount | (58,994 | ) | | (69,684 | ) |
| Deferred financing costs | (8,137 | ) | | (9,632 | ) |
| Long-term debt, net of discount | $ | 344,953 |
| | $ | 332,768 |
|
|
| | | | | | | |
| | As of |
| (in thousands) | September 30, 2018 | | December 31, 2017 |
| Principal amount of 2.0% Convertible Senior Notes, due June 2019 | $ | — |
| | $ | 3,664 |
|
| Principal amount of 1.25% Convertible Senior Notes, due September 2021 | 344,992 |
| | 345,000 |
|
| Principal amount of 1.375% Convertible Senior Notes, due November 2024 | 402,500 |
| | 402,500 |
|
| Unamortized debt discount | (150,439 | ) | | (170,448 | ) |
| Debt issuance costs | (12,568 | ) | | (14,543 | ) |
| Total convertible debt, net | $ | 584,485 |
| | $ | 566,173 |
|
Interest expense related to the convertible notesdebt was as follows:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Contractual coupon interest | $ | 1,449 |
| | $ | 1,041 |
| | $ | 4,276 |
| | $ | 3,054 |
| $ | 2,440 |
| | $ | 1,449 |
| | $ | 7,382 |
| | $ | 4,276 |
|
| Accretion of debt discount | 3,612 |
| | 1,901 |
| | 10,690 |
| | 5,330 |
| 6,702 |
| | 3,612 |
| | 19,840 |
| | 10,690 |
|
| Amortization of debt issuance costs | 505 |
| | 222 |
| | 1,495 |
| | 785 |
| 661 |
| | 505 |
| | 1,950 |
| | 1,495 |
|
| Loss on extinguishment of long-term debt | — |
| | 2,551 |
| | — |
| | 2,551 |
| |
| Total interest and other expense | $ | 5,566 |
| | $ | 5,715 |
| | $ | 16,461 |
| | $ | 11,720 |
| |
| Total interest expense related to convertible debt | | $ | 9,803 |
| | $ | 5,566 |
| | $ | 29,172 |
| | $ | 16,461 |
|
Interest expense related to convertible debt for the three and nine months ended September 30, 2018 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
| (in thousands) | 1.375% | | 1.25% | | Total | | 1.375% | | 1.25% | | 2.0% | | Total |
| Contractual coupon interest | $ | 1,362 |
| | $ | 1,078 |
| | $ | 2,440 |
| | $ | 4,129 |
| | $ | 3,234 |
| | $ | 19 |
| | $ | 7,382 |
|
| Amortization of debt discount and issuance costs | 3,736 |
| | 3,627 |
| | 7,363 |
| | 11,001 |
| | 10,729 |
| | 60 |
| | 21,790 |
|
| Total interest expense | $ | 5,098 |
| | $ | 4,705 |
| | $ | 9,803 |
| | $ | 15,130 |
| | $ | 13,963 |
| | $ | 79 |
| | $ | 29,172 |
|
Interest expense related to convertible debt for the three and nine months ended September 30, 2017 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
| (in thousands) | 1.25% | | 2.0% | | Total | | 1.25% | | 2.0% | | Total |
| Contractual coupon interest | $ | 1,102 |
| | $ | 347 |
| | $ | 1,449 |
| | $ | 3,259 |
| | $ | 1,017 |
| | $ | 4,276 |
|
| Amortization of debt discount and issuance costs | 3,403 |
| | 714 |
| | 4,117 |
| | 10,073 |
| | 2,112 |
| | 12,185 |
|
| Total interest expense | $ | 4,505 |
| | $ | 1,061 |
| | $ | 5,566 |
| | $ | 13,332 |
| | $ | 3,129 |
| | $ | 16,461 |
|
The carrying amount and the estimated fair value of the Company's convertible debt, which is based on the Level 2 quoted market prices as of September 30, 2018 and December 31, 2017 are as follows:
|
| | | | | | | | | | | | | | | |
| | As of |
| | September 30, 2018 | | December 31, 2017 |
| (in thousands) | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| 2% Convertible Senior Notes, due June 2019 | $ | — |
| | $ | — |
| | $ | 3,421 |
| | $ | 5,467 |
|
| 1.375% Convertible Senior Notes, due November 2024 | 287,183 |
| | 515,627 |
| | 276,172 |
| | 407,652 |
|
| 1.25% Convertible Senior Notes, due September 2021 | 297,302 |
| | 630,041 |
| | 286,580 |
| | 450,881 |
|
| Total | $ | 584,485 |
| | $ | 1,145,668 |
| | $ | 566,173 |
| | $ | 864,000 |
|
1.375% Convertible Senior Notes
In November 2017, the Company issued and sold $402.5 million in aggregate principal amount of 1.375% Convertible Senior Notes, due November 15, 2024 (the "1.375% Notes"). The interest rate on the notes is 1.375% per annum, payable semi-annually in arrears in cash on May 15 and November 15 of each year. Interest began accruing on November 10, 2017 and the first interest payment was made on May 15, 2018. The 1.375% Notes are convertible into the Company’s common stock at an initial conversion rate of 10.7315 shares of common stock per $1,000 principal amount of the 1.375% Notes, which is equivalent to a conversion price of approximately $93.18 per share, subject to adjustment under certain circumstances. The 1.375% Notes will be convertible prior to the close of business on the business day immediately preceding August 15, 2024 only under certain circumstances and during certain periods, and will be convertible on or after August 15, 2024 until the close of business on the second scheduled trading day immediately preceding November 15, 2024, regardless of those circumstances.
The Company recorded a debt discount of $120.7 million related to the 1.375% Notes resulting from the allocation of a portion of the proceeds to the fair value of the conversion feature reflecting a nonconvertible debt borrowing rate of 6.8% per annum. The debt discount was recorded as additional paid-in capital and is being amortized as non-cash interest expense over the seven year term of the 1.375% Notes. The Company also incurred debt issuance costs and other expenses related to the 1.375% Notes of approximately $10.9 million, of which $3.3 million was reclassified as a reduction to the value of the conversion feature allocated to equity. The remaining $7.6 million of debt issuance costs is presented as a reduction of debt in the consolidated balance sheet and is being amortized using the effective interest method as non-cash interest expense over the seven year term of the 1.375% Notes. As of September 30, 2018, the Company included $287.2 million on its balance sheet in long-term debt related to the 1.375% Notes.
1.25% Convertible Senior Notes
In September 2016, the Company issued and sold $345.0 million in principal amount of 1.25% Convertible Senior Notes, due September 15, 2021 (the "1.25% Notes").The interest rate on the notes is 1.25% per annum, payable semi-annually in arrears in cash on March 15 and September 15 of each year. Interest began accruing on September 13, 2016; the first interest payment was paid in March 2017. The 1.25% Notes are convertible into the Company’s common stock at an initial conversion rate of 17.1332 shares of common stock per $1,000 principal amount of the 1.25% Notes, which is equivalent to a conversion price of approximately $58.37 per share, subject to adjustment under certain circumstances. The 1.25% Notes will be convertible prior to the close of business on the business day immediately preceding June 15, 2021 only under certain circumstances and during certain periods, and will be convertible on or after June 15, 2021 until the close of business on the second scheduled trading day immediately preceding September 15, 2021, regardless of those circumstances.
The Company recorded a debt discount of $66.7 million related to the 1.25% Notes which resultsresulting from allocating a portion of the proceeds to the fair value of the conversion feature. The fair value of the debt discount was estimated usingfeature reflecting a
trinomial lattice model based on the following inputs: Company's stock price, expected volatility, term to maturity, risk-free interest rate, and dividend yield. The debt discount was recorded as additional paid-in capital and the remaining liability reflects the value of the Company’s nonconvertible debt borrowing rate of 5.8% per annum. ThisThe debt discount is being amortized as non-cash interest expense over the five year term of the 1.25% Notes. The Company incurred debt issuance costs and other expenses related to this offering of approximately $11.3 million, of which $2.2 million has beenwas reclassified as a reduction to the value of the amount allocated to equity. The remainder is presented as a reduction of debt in the consolidated balance sheet and is being amortized using the effective interest method and is recorded as non-cash interest expense over the five year term of the 1.25% Notes.
The 1.25% Notes contain provisions that allow for additional interest to holders of the notes upon failure to timely file documents or reports that the Company is required to file with the SEC. The additional interest is at a rate of 0.50% per annum of the principal amounts of the notes outstanding for a period of 360 days.
If the Company merges or consolidates with a foreign entity, then additional taxes may be required to be paid by the Company under the terms of the 1.25% Notes.
The Company determined that the higher interest payments required and tax payments required in certain circumstances are considered embedded derivatives and should be bifurcated and accounted for at fair value. The Company assesses the value of the embedded derivatives at each balance sheet date. The derivatives had de minimis value at the balance sheet date.
Cash interest expense related to the 1.25% Notes was $1.1 million and $3.3 million in the three and nine months ended September 30, 2017, respectively. Non-cash interest expense related to the 1.25% Notes was comprised of the amortization of the debt discount and debt issuance costs and was $3.4 million and $10.1 million in the three and nine months ended September 30, 2017, respectively.
As of September 30, 2017,2018, the Company included $283.1has $297.3 million, net of discounts and issuance costs, on its balance sheet in long-term debt related to the 1.25% Notes.
2% Convertible Senior Notes
In June 2014, the Company issued and sold $201.3 million in principal amount of 2% Convertible Senior Notes due June 15, 2019 (the "2% Notes"). The interest rate on the notes is 2% per annum, payable semi-annually in arrears in cash on June 15 and December 15 of each year. The 2% Notes arewere convertible into the Company’s common stock at an initial conversion rate of 21.5019 shares of common stock per $1,000 principal amount of the 2% Notes, which is equivalent to a conversion price of approximately $46.51 per share, subject to adjustment under certain circumstances.
The Company recorded a debt discount of $35.6 million related to the 2% Notes. The debt discount was recorded as additional paid-in capital to reflect the value of the Company’s nonconvertible debt borrowing rate of 6.2% per annum. This debt discount is being amortized as non-cash interest expense over the five year term of the 2% Notes. The Company incurred deferred financing costs related to this offering of approximately $6.7 million, of which $1.2 million has been reclassified as an offset to the value of the amount allocated to equity. The remainder is recorded as a reduction to debt in the consolidated balance sheet and is being amortized as non-cash interest expense over the five year term of the 2% Notes.
share. In September 2016, in connection with the issuance of $345 million in principal amount of the 1.25% Notes,separately negotiated transactions, the Company repurchased approximately $134.2 million in principal amount of the 2% Notes for $153.6 million. The extinguishmentnotes in September 2016 and $63.4 million in principal of the 2% Notes was accounted for separately fromnotes in November 2017. The Company elected to call the issuanceremaining notes in March 2018 and settled the outstanding principal and conversion feature of the 1.25% Notes as both transactions were arm's-lengthnotes for $6.7 million in nature and were not contingent upon one another.cash in the second quarter of 2018. The $153.6Company allocated approximately $3.2 million paidof the settlement to extinguish the debt was allocated to debt and equity based on their respective fair values immediately prior to the transaction. The fair value of the debt was estimated using a trinomial lattice model based on the following inputs: Company's stock price, expected volatility, term to maturity, risk-free interest rate,equity component and dividend yield. The Company allocated $121.4$3.5 million of the payment to the debt and $32.9 million to equity.
The Company recorded a loss on extinguishment of debt of $2.6 million in connectioncomponent, which was consistent with the repurchase and redemption of the 2% Notes during the year ended December 31, 2016, representing the excess of the $121.4 million allocated to the debt over its carrying value net of unamortized debt discount, deferred financing costs and accrued interest.
The 2% Notes contain provisions that allow for additional interest to the holders of the notes upon the failure to timely file documents or reports that the Company is required to file with the SEC. The additional interest is at a rate of 0.25% per annumas of the principal amount of the notes outstanding for the first 180 days and 0.50% per annum of the principal amount of the notes outstanding for a period up to 360 days.
If the Company is purchased by a company outside of the U.S., then additional taxes may be required to be paid by the Company under the terms of the 2% Notes.
The Company determined that the higher interest and tax payments requiredsettlement date, resulting in certain circumstances are considered embedded derivatives and should be bifurcated and accounted for at fair value. The Company assesses the value of the embedded derivatives at each balance sheet date. The derivatives had de minimis value at the balance sheet date.
Cash interest expense related to the 2% Notes was $0.3 million and $0.9 million in the three months ended September 30, 2017 and 2016, respectively. Cash interest expense related to the 2% Notes was $1.0 million and $2.9 million in the nine months ended September 30, 2017 and 2016, respectively.
Non-cash interest expense related to the 2% Notes was comprised of the amortization of the debt discount and debt issuance costs and was $0.7 million and $1.6 million in the three months ended September 30, 2017 and 2016, respectively. Non-cash interest expense related to the 2% Notes was comprised of the amortization of the debt discount and debt issuance costs and was $2.1 million and $5.6 million in the nine months ended September 30, 2017 and 2016, respectively.
As of September 30, 2017, the Company included $61.8 millionno gain or loss on its balance sheet in long-term debt related to the 2% Notes.extinguishment.
Note 7.6. Net LossIncome (Loss) Per Share
Basic net lossincome (loss) per share is computed by dividing net lossincome (loss) by the weighted average number of common shares outstanding for the period, excluding unvested restricted common shares. Diluted net lossincome (loss) per share is computed using the weighted average number of common shares outstanding and, when dilutive, potential common share equivalents from outstanding stock options and restricted stock units and warrants (using the treasury-stock method), and potential common shares from the Company's convertible securitiesdebt (using the if-converted method).
The following table sets forth the components used in the computation of basic and diluted net income (loss) per share for the three and nine months ended September 30, 2018. Because the Company reported a net loss for the three and nine months ended September 30, 2017, and 2016, all potential dilutive common shares have been excluded from the computation of the diluted net loss per share for all periods presented,the three and nine months ended September 30, 2017, as the effect would have been anti-dilutive.
|
| | | | | | | |
| | September 30, 2018 |
| (in thousands, except share and per share data) | Three months ended | | Nine months ended |
| Numerator: | | | |
| Net income (loss) | $ | 1,659 |
| | $ | (6,601 | ) |
| Denominator: | | | |
| Weighted average common shares outstanding | 59,016,863 |
| | 58,779,672 |
|
| Effective of dilutive potential common share equivalents | | | |
| Stock options | 1,719,796 |
| | — |
|
| Restricted stock units | 409,807 |
| | — |
|
| Convertible debt | — |
| | — |
|
| Shares used for diluted net income (loss) per share | 61,146,466 |
| | 58,779,672 |
|
| Net income (loss) per share: | | | |
| Basic | $ | 0.03 |
| | $ | (0.11 | ) |
| Diluted | $ | 0.03 |
| | $ | (0.11 | ) |
For the three months ended September 30, 2018, certain potential outstanding shares from stock options, restricted stock units and convertible debt were excluded from the computation of diluted net income per share because the effect of including these items was anti-dilutive. Additionally, certain performance-based restricted stock units were excluded from the computation of diluted net income per share because the underlying performance conditions for such restricted stock units had not been met as of these dates.
The number of potential common share equivalents consistexcluded from the computation of diluted net income (loss) per share for the following:three and nine months ended September 30, 2018 and 2017 are as follows:
| | | | Three and Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three and Nine Months Ended September 30, |
| | 2017 | | 2016 | 2018 | | 2018 | | 2017 |
| 1.375% Convertible Senior Notes | | 4,319,429 |
| | 4,319,429 |
| | — |
|
| 2.00% Convertible Senior Notes | 1,442,433 |
| | 1,442,433 |
| — |
| | — |
| | 1,442,433 |
|
| 1.25% Convertible Senior Notes | 5,910,954 |
| | 5,910,954 |
| 5,910,954 |
| | 5,910,954 |
| | 5,910,954 |
|
| Unvested restricted stock units | 1,007,729 |
| | 971,814 |
| 300,438 |
| | 865,206 |
| | 1,007,729 |
|
| Outstanding options | 3,489,393 |
| | 3,541,936 |
| |
| Total dilutive common share equivalents | 11,850,509 |
| | 11,867,137 |
| |
| Outstanding stock options | | 223,183 |
| | 3,117,326 |
| | 3,489,393 |
|
| Total potential common share equivalents excluded from computation of diluted net income (loss) per share | | 10,754,004 |
| | 14,212,915 |
| | 11,850,509 |
|
Note 8.7. Accounts Receivable, Net
Accounts receivable consist of amounts due from third-party payors, patients and third-party distributors and government agencies.intermediaries. The Company records an allowance for doubtful accounts at the time potential collection risk is identified. The Company estimates its allowance based on historical experience, assessment of specific risk, and discussions with individual customers or various assumptions and estimates that are believed to be reasonable under the circumstances.customers. The Company believes the reserve is adequate to mitigate current collection risk.
Customers There were no customers that represented greater than 10% of gross accounts receivable as of September 30, 2017 and December 31, 2016 were as follows:2018. |
| | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| Amgen, Inc. | 13 | % | | 16 | % |
| Ypsomed | 28 | % | | 19 | % |
The components of accounts receivable are as follows: | | | | | | | As of |
| (in thousands) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| Trade receivables | $ | 50,210 |
| | $ | 31,714 |
| $ | 73,428 |
| | $ | 55,914 |
|
| Allowance for doubtful accounts | (3,037 | ) | | (2,911 | ) | (3,478 | ) | | (2,541 | ) |
| Total accounts receivable, net | $ | 47,173 |
| | $ | 28,803 |
| $ | 69,950 |
| | $ | 53,373 |
|
Note 9.8. Inventories Net
Inventories are heldcarried at the lower of cost or market, determined under the first-in, first-out method, and include the costs of material, labor and overhead. Inventory has been recorded at cost, or net realizable value as appropriate, as of September 30, 20172018 and December 31, 2016.2017. The Company reviews inventories for net realizable value based on quantities on hand and expectations of future use. Work in process is calculated based upon a buildup in the stage of completion using estimated labor inputs for each stage in production.
The components of inventories are as follows: | | | | As of | As of |
| (in thousands) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| Raw materials | $ | 2,289 |
| | $ | 1,911 |
| $ | 5,390 |
| | $ | 2,146 |
|
| Work-in-process | 15,168 |
| | 15,681 |
| 17,187 |
| | 23,918 |
|
| Finished goods, net | 17,597 |
| | 17,922 |
| 35,473 |
| | 7,729 |
|
| Total inventories | $ | 35,054 |
| | $ | 35,514 |
| $ | 58,050 |
| | $ | 33,793 |
|
Note 9. Prepaid Expenses and Other Assets
|
| | | | | | | | |
| The components of prepaid expenses and other current assets are as follows: | | As of |
| (in thousands) | | September 30, 2018 | | December 31, 2017 |
| Prepaid expenses and other current assets | | $ | 11,036 |
| | $ | 9,949 |
|
| Capitalized contract acquisition costs, current portion | | 6,869 |
| | — |
|
| Total prepaid expenses and other current assets | | $ | 17,905 |
| | $ | 9,949 |
|
|
| | | | | | | | |
| The components of other assets are as follows: | | As of |
| (in thousands) | | September 30, 2018 | | December 31, 2017 |
| Other assets | | $ | 2,487 |
| | $ | 1,969 |
|
| Capitalized contract acquisition costs, net of current portion | | 15,570 |
| | — |
|
| Total other assets | | $ | 18,057 |
| | $ | 1,969 |
|
The Company capitalizes commission costs that are related to new patient starts. These costs are deferred in other assets, net of the short term portion included in prepaid and other current assets. Costs to obtain a contract are amortized as sales and marketing expense on a straight line basis over the expected period of benefit, which considers future product upgrades for which a commission would be paid. These capitalized costs are periodically reviewed for impairment. As of September 30, 2018, capitalized contract acquisition costs were $22.4 million, including a current balance of $6.9 million and a non-current balance of $15.6 million. The Company recognized $5.0 million of amortization of capitalized commission costs during the nine months ended September 30, 2018. There were no impairments to capitalized costs to obtain a contract recorded during the period.
Note 10. Goodwill and Other Intangible Assets, Net
Goodwill
The Company has $39.8 million of goodwill on its balance sheet from prior business acquisitions. The Company performs an assessment of its goodwill for impairment on at least an annual basis or whenever events or changes in circumstances indicate there might be an impairment. The Company's annual impairment test date is October 1st. There was no impairment of goodwill during the three and nine months ended September 30, 2018.
Intangible Assets, Net
The Company’s finite-lived intangible assets are stated at cost less accumulated amortization. The Company assesses its intangibleamortization and other long-lived assetsinclude customer relationships acquired in prior business acquisitions and from the Company's former European Distributor. See Note 12 for impairment whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable. The Company recognizes an impairment loss for intangibles and other finite-lived assets if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows. Any such impairment loss is measured as the difference between the carrying amount and the fair valuediscussion of the asset. The estimation of useful lives and expected cash flows requiresCompany's accounting for estimated fees owed to its former European Distributor following the Company to make significant judgments regarding future periods that are subject to some factors outside its control. Changes in these estimates can result in significant revisions to the carrying value of these assets and may result in material charges to the results of operations.
The Company recorded $2.1 million of other intangible assets in 2015 as a result of the July 2015 acquisitionexpiration of its Canadian distribution business. The Company determined that the estimated useful life of the contractual relationship asset is 5 years and is amortizing the asset over their estimated lives, basedagreement on the expected cash flows of the assets.
The Company adopted ASU 2016-19 on January 1, 2017 and, as a result, reclassified $1.5 million of net internal-use software costs from property and equipment to other intangible assets as of December 31, 2016.June 30, 2018.
The components of other intangible assets are as follows:
| | | | As of | As of |
| | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| (in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| Customer and contractual relationships, net | $ | 2,149 |
| | $ | (1,726 | ) | | $ | 423 |
| | $ | 1,994 |
| | $ | (1,466 | ) | | $ | 528 |
| |
| Customer and contractual relationships | | $ | 4,078 |
| | $ | (1,859 | ) | | $ | 2,219 |
| | $ | 2,135 |
| | $ | (1,764 | ) | | $ | 371 |
|
| Internal-use software | 7,175 |
| | (3,229 | ) | | 3,946 |
| | 4,064 |
| | (2,551 | ) | | 1,513 |
| 10,271 |
| | (4,699 | ) | | 5,572 |
| | 7,545 |
| | (3,565 | ) | | 3,980 |
|
| Total intangible assets | $ | 9,324 |
| | $ | (4,955 | ) | | $ | 4,369 |
| | $ | 6,058 |
| | $ | (4,017 | ) | | $ | 2,041 |
| $ | 14,349 |
| | $ | (6,558 | ) | | $ | 7,791 |
| | $ | 9,680 |
| | $ | (5,329 | ) | | $ | 4,351 |
|
Amortization expense for intangible assets was approximately $0.3$0.5 million and $0.3 million for the three months ended September 30, 20172018 and 2016,2017, respectively. Amortization expense for intangible assets was approximately $0.8$1.3 million and $0.9$0.8 million for the nine months ended September 30, 20172018 and 2016,2017, respectively. Amortization expense is recorded in general and administrative expenses in the consolidated statements of operations.
Amortization expense expected for the next five years and thereafter is as follows: | | | (in thousands) | | | | | | | | | | |
| Years Ending December 31, | Customer and Contractual Relationships | | Internal-Use Software | | Total | Customer and Contractual Relationships | | Internal-Use Software | | Total |
| 2017 (remaining) | $ | 66 |
| | $ | 324 |
| | $ | 390 |
| |
| 2018 | 159 |
| | 1,171 |
| | 1,330 |
| |
| 2018 (remaining) | | $ | 90 |
| | $ | 465 |
| | $ | 555 |
|
| 2019 | 132 |
| | 881 |
| | 1,013 |
| 334 |
| | 1,767 |
| | 2,101 |
|
| 2020 | 66 |
| | 661 |
| | 727 |
| 266 |
| | 1,505 |
| | 1,771 |
|
| 2021 | — |
| | 578 |
| | 578 |
| 200 |
| | 1,080 |
| | 1,280 |
|
| 2022 | | 200 |
| | 571 |
| | 771 |
|
| Thereafter | — |
| | 331 |
| | 331 |
| 1,129 |
| | 184 |
| | 1,313 |
|
| Total | $ | 423 |
| | $ | 3,946 |
| | $ | 4,369 |
| $ | 2,219 |
| | $ | 5,572 |
| | $ | 7,791 |
|
As of September 30, 2017,2018, the weighted average amortization period of the Company’s customer and contractual relationships intangible assets isand internal-use software intangible assets are approximately 3.9 years.9.1 years and 3.5 years , respectively.
Note 11. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities are as follows: | | | | | | | As of |
| (in thousands) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| Employee compensation and related costs | $ | 27,389 |
| | $ | 21,999 |
| $ | 32,265 |
| | $ | 34,942 |
|
| Professional and consulting services | 8,972 |
| | 6,753 |
| 10,190 |
| | 9,273 |
|
| Supplier charges | 932 |
| | 2,886 |
| 3,863 |
| | 3,542 |
|
| Warranty | 1,583 |
| | 1,642 |
| 2,303 |
| | 1,653 |
|
| Other | 6,021 |
| | 7,948 |
| 19,548 |
| | 9,846 |
|
| Total accrued expenses and other current liabilities | $ | 44,897 |
| | $ | 41,228 |
| $ | 68,169 |
| | $ | 59,256 |
|
Product Warranty Costs
The Company generally provides a four-year warranty on its PDMs sold in the United States and Europe and a five-year warranty on its PDMs sold in Canada and may replace any Omnipod Systems that dodoes not function in accordance with product specifications. The Company estimates its warranty at the time the product is shipped based on historical experience and the estimated cost to service the claims. Warranty expense is recorded in cost of revenuegoods sold on the statement of operations. Cost to service the claims reflects the current product cost, which has been decreasing over time.cost. As these estimates are based on historical experience, and the Company continues to introduce new products and versions, the Company also considers the anticipated performance of the product over its warranty period in estimating warranty reserves.
A reconciliation of the changes in the Company’s product warranty liability is as follows:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Balance at the beginning of the period | $ | 4,817 |
| | $ | 4,294 |
| | $ | 4,388 |
| | $ | 4,152 |
| |
| Product warranty liability at the beginning of the period | | $ | 5,503 |
| | $ | 4,817 |
| | $ | 5,337 |
| | $ | 4,388 |
|
| Warranty expense | 1,483 |
| | 1,149 |
| | 3,123 |
| | 3,288 |
| 1,763 |
| | 1,483 |
| | 5,264 |
| | 3,123 |
|
| Warranty claims settled | (1,303 | ) | | (1,101 | ) | | (2,514 | ) | | (3,098 | ) | (1,548 | ) | | (1,303 | ) | | (4,883 | ) | | (2,514 | ) |
| Balance at the end of the period | $ | 4,997 |
| | $ | 4,342 |
| | $ | 4,997 |
| | $ | 4,342 |
| |
| Product warranty liability at the end of the period | | $ | 5,718 |
| | $ | 4,997 |
| | $ | 5,718 |
| | $ | 4,997 |
|
| | | Composition of balance: | | As of |
| (in thousands) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| Composition of balance: | | | | |
| Short-term | $ | 1,583 |
| | $ | 1,642 |
| $ | 2,303 |
| | $ | 1,653 |
|
| Long-term | 3,414 |
| | 2,746 |
| 3,415 |
| | 3,684 |
|
| Total warranty liability: | $ | 4,997 |
| | $ | 4,388 |
| $ | 5,718 |
| | $ | 5,337 |
|
Note 12. Commitments and Contingencies
The Company records a liability in the consolidated financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed.
Operating Leases
The Company leases facilities in Massachusetts, California, Tennessee, the United Kingdom, Canada and China. The Company’s leases 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 leases approximately 100,000 square feet of laboratory and office space for its corporate headquarters in Billerica, Massachusetts. The leases expire in November 2022 and contain escalating payments over the life of each lease. Additionally, the Company leases approximately 29,000 square feet of warehousing space in Billerica, Massachusetts under a lease expiring in September 2019. The Company leases other facilities in Canada, China, the United Kingdom, California and Tennessee containing a total of approximately 11,000 square feet under leases expiring from 2017 to 2020.
Certain of the Company’s operating lease agreements contain scheduled rent increases. Rent expense is recorded using the straight-line method and deferred rent is included in other liabilities in the accompanying balance sheets. The Company has considered ASC 840-20, Leases in accounting for these lease provisions. Rental expense under operating leases was $0.7 million and $0.7 million for the three months ended September 30, 2017 and 2016. Rental expense under operating leases was $2.1 million and $1.9 million for the nine months ended September 30, 2017 and 2016.
The aggregate future minimum lease payments related to these leases as of September 30, 2017 are as follows: |
| | | |
(in thousands) Years Ending December 31, | Minimum Lease Payments |
| 2017 (remaining) | $ | 725 |
|
| 2018 | 2,702 |
|
| 2019 | 2,681 |
|
| 2020 | 2,402 |
|
| 2021 | 2,383 |
|
| Thereafter | 2,131 |
|
| Total | $ | 13,024 |
|
Legal Proceedings
In December 2015, the Company received a revised audit report on behalf of the Centers for Medicare and Medicaid Services and the State of New York alleging overpayment of certain Medicaid claims to Neighborhood Diabetes. As of December 31, 2015, the Company had determined that it was probable that a loss had been incurred and recorded an aggregate liability of $0.4 million within loss from discontinued operations, which was subsequently reduced to $0.3 million during 2016. The change in the liability was recorded in discontinued operations. In June 2017, the Company reached an agreement to settle the claim for $0.3 million, which was subsequently paid in July 2017.
In May 2016, the Company reached a settlement agreement for $0.5 million with the Connecticut Department of Social Services Office of Quality Assurance relating to an audit alleging overpayment of certain Medicaid claims to Neighborhood Diabetes. The settlement amount for this audit was consistent with the amount previously accrued.
In April 2016, the Company reached a settlement agreement for $0.5 million with the Massachusetts Department of Revenue for sales and use tax audits related to Insulet Corporation, which resulted in a $0.2 million reduction of the previously recorded liability and a credit to general and administrative expenses during 2016.
Between May 5, 2015 and June 16, 2015, three class action lawsuits were filed by shareholders in the U.S. District Court, for the District of Massachusetts, against the Company and certain individual current and former executives of the Company. Two suits subsequently were voluntarily dismissed. Arkansas Teacher Retirement System v. Insulet, et al., 1:15-cv-12345, which remains outstanding, alleges(“ATRS”) alleged that the Company (and certain executives) committed violations of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 by making allegedly false and misleading statements about the Company’s business, operations, and prospects. On February 8, 2018, the parties executed a binding stipulation of settlement, under which all claims were released and a payment was made to the plaintiffs and the class they purport to represent. On August 6, 2018, the Court issued an order finally approving the settlement. The lawsuit seeks, among other things, compensatory damages in connection with the Company’s allegedly inflated stock price between May 7, 2013 and April 30, 2015, as well as
attorneys’Company had previously accrued fees and costs. The Company currently cannot reasonably estimate a possible loss, or range of loss,expenses in connection with this matter.matter for the amount of the final settlement liability that was not covered by insurance, which amount was not material to the Company's consolidated financial statements.
OnIn addition, on April 26, 2017, a derivative action (Walker(Walker v. DeSisto, et al., 1:17-cv-10738) (“Walker”) was filed, and on October 13, 2017, a second derivative action (Carnazza(Carnazza v. DeSisto, et al.al., 1:17-cv-11977) (“Carnazza”) was filed, both on behalf of the Company, each by a shareholder in the U.S. District Court for the District of Massachusetts against the Company (as a nominal defendant) and certain individual current and former officers and directors of the Company. Both actions were filed as related actions to the securities class action referenced above, and theThe allegations in the actions are substantially similar to those alleged in the securities class action. The actions seek, among other things, damages, disgorgement of certain types of compensation or profits, and attorneys’ fees and costs. On July 11, 2018, the parties executed a binding stipulation of settlement, under
which all claims were released and a payment of attorneys’ fees and reimbursement of expenses will be paid to plaintiffs’ counsel, subject to the Court’s approval. On July 13, 2018, the plaintiffs filed a motion for preliminary approval of the settlement, which is pending. The Company currently cannot reasonably estimate a possible loss, or range of loss, in connection withexpects that such fees and expenses payable to plaintiff's counsel will be covered by the either of these actions.Company's insurance.
The Company is, from time to time, involved in the normal course of business in various legal proceedings, including intellectual property, contract, employment and product liability suits. Although the Company is unable to quantify the exact financial impact of any of these matters, the Company believes that none of these currently pending matters will have an outcome material to its financial condition or business.
Fees To Former European Distributor
Following the expiration of its distribution agreement on June 30, 2018, the Company is required to pay to its former European Distributor a quarterly per unit fee for sales of its Omnipod device to identified customers (as that term is defined in the distribution agreement) of the former European Distributor over the twelve months following the expiration of the distribution agreement. The Company is recognizing a liability and an associated intangible asset for this fee as qualifying sales of the Omnipod device are made to these identified customers during the twelve-month period between July 1, 2018 and June 30, 2019. The actual total fee could vary significantly depending on the number of customers who qualify as eligible to be considered for purposes of calculating the fee under the terms of the distribution agreement, which is under dispute between the parties, and the number of Omnipod devices sold to those customers over the twelve month period. The Company estimates that the total fee could be in the range of approximately $10 million to $55 million over the twelve month period. The Company has accrued approximately $2 million for fees related to Omnipod devices sold to qualifying customers for the three months ended September 30, 2018.
Operating Leases
The Company leases approximately100,000 square feet of laboratory and office space for its corporate headquarters in Billerica, Massachusetts. The lease expires in November 2022 and contains escalating payments over the its life. Additionally, the Company leases approximately 29,000 square feet of warehousing space in Billerica, Massachusetts under a lease expiring in September 2019. The Company also leases international and U.S. facilities under leases expiring from October 2018 to June 2021. Rental expense under operating leases was $0.9 million and $2.6 million for the three and nine months ended September 30, 2018, respectively. There have been no material changes to the Company's lease obligation in the nine months ended September 30, 2018.
Note 13. Equity
The Company accounts for stock-based compensation under the provisions of ASC 718-10, Stock-Based Compensation — Stock Compensation (“ASC 718-10”), which requires all share-based payments to employees and directors, including grants of stock options and restricted stock units, to be recognized in the income statement based on their fair values. Share-based payments that contain performance conditions are recognized when such conditions are probable of being achieved.Stockholder' Equity
The Company grants share-based awards to employees in the form ofstock options, to purchase the Company’s common stock, the ability to purchase stock at a discounted price under the employee stock purchase plan and restricted stock units. The Company uses the Black-Scholes option pricing model to determine the weighted-average fair value of options grantedboth time-based and determines the intrinsic value ofperformance-based restricted stock units based onunder its 2017 Stock Option and Incentive Plan and offers employees the closing price ofopportunity to purchase its common stock on the date of grant. The Company recognizes the compensation expense of share-based awards on a straight-line basis for awards with only service conditions and onthrough an accelerated basis for awards with performance conditions. Compensation expense is recognized over the vesting period of the awards.
Employee Stock Purchase Plan. The following table reflects the Company's stock-based compensation expense related to share-based awards recognized in the three and nine months ended September 30, 20172018 and 2016:2017:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Unamortized Expense | | Weighted Average Remaining Expense Period (Years) | Three Months Ended September 30, | | Nine Months Ended September 30, | | Unamortized Expense | | Weighted Average Remaining Expense Period (Years) |
| ($ in thousands) | 2017 | | 2016 | | 2017 | | 2016 | | At September 30, 2017 | 2018 | | 2017 | | 2018 | | 2017 | | At September 30, 2018 |
| Stock options | $ | 3,127 |
| | $ | 2,578 |
| | $ | 8,815 |
| | $ | 7,372 |
| | $ | 18,264 |
| | 2.4 | $ | 3,957 |
| | $ | 3,127 |
| | $ | 8,587 |
| | $ | 8,815 |
| | $ | 13,632 |
| | 2.5 |
| Restricted stock units | 5,621 |
| | 3,439 |
| | 14,358 |
| | 9,359 |
| | 30,411 |
| | 1.9 | 11,835 |
| | 5,621 |
| | 21,734 |
| | 14,358 |
| | 25,054 |
| | 1.9 |
| Employee stock purchase plan | 149 |
| | 71 |
| | 379 |
| | 142 |
| | 99 |
| | 0.2 | 296 |
| | 149 |
| | 884 |
| | 379 |
| | 197 |
| | 0.2 |
| Total | $ | 8,897 |
| | $ | 6,088 |
| | $ | 23,552 |
| | $ | 16,873 |
| | $ | 48,774 |
| | $ | 16,088 |
| | $ | 8,897 |
| | $ | 31,205 |
| | $ | 23,552 |
| | $ | 38,883 |
| |
Equity Award Plans
In May 2007, in conjunction with the Company's initial public offering, the Company adopted its 2007 Stock Option and Incentive Plan (the "2007 Plan"). The 2007 Plan was amended and restated in November 2008, May 2012 and May 2015 to provide for the issuance of additional shares and to amend certain other provisions. Under the 2007 Plan, awards were granted to persons who were, at the time of grant, employees, officers, non-employee directors or key persons (including consultants and prospective employees) of the Company or the Company's subsidiaries. The 2007 Plan provided for the grant of stock options, restricted stock units, stock appreciation rights, deferred stock awards, restricted stock, unrestricted stock, cash-based awards, performance share awards or dividend equivalent rights. Options granted under the 2007 Plan generally vest over a period of four years and expire ten years from the date of grant. In May 2017, the Company adopted the 2017 Stock Option and Incentive Plan (the "2017 Plan"), which has replaced the 2007 Plan as the means by which the Company makes equity and cash awards. Effective May 18, 2017, the 2017 Plan became effective (the "2017 Plan Effective Date") and the Company ceased granting awards from the 2007 Plan. Outstanding awards under the 2007 Plan remain subject to the terms of the 2007 Plan. Under the 2017 Plan, awards may be granted to persons who are, at the time of grant, employees, officers, non-employee directors, consultants, or advisers of the Company or the Company's subsidiaries and affiliates. The 2017 Plan provides for the grant of stock options, restricted stock units, stock appreciation rights, deferred stock awards, restricted stock, unrestricted stock, cash-based awards, performance share awards or dividend equivalent rights. Stock options granted under the 2017 Plan generally vest over a period of four years and expire ten years from the date of grant. Shares of stock subject to awards granted under the 2007 Plan and the 2017 Plan that are forfeited, expire or otherwise terminate without delivery generally become available for future issuance under the 2017 Plan. As of September 30, 2017, approximately 5.1 million shares remain available for future grant under the 2017 Plan.
Stock Options
The Company awarded34,500 shares of performance-based incentive stock options in the nine months ended September 30, 2017. There were 55,000 shares of performance-based incentive stock options awarded in the nine months ended September 30, 2016. The stock options were granted under the 2007 and 2017 Plans and vest over a four year period from the grant date with the potential of an accelerated vesting period pursuant to the achievement of certain performance conditions.
The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the stock price and the following assumptions, including expected volatility, expected life of the awards, the risk-free interest rate, and the dividend yield.
Expected volatility measures the amount that a stock price has fluctuated or is expected to fluctuate during a period and is computed over expected terms based upon the historical volatility of the Company's stock.
The expected life of the awards is estimated based on the midpoint scenario, which combines historical exercise data with hypothetical exercise data for outstanding options, as the Company believes this data currently represents the best estimate of the expected life of a new employee option. The Company stratifies its employee population into two groups based upon organizational hierarchy.
The risk-free interest rate assumption is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.
The dividend yield assumption is based on Company history and expectation of paying no dividends. 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.
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 is based on awards that are ultimately expected to vest. If the Company’s 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 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.
The estimated grant date fair values of the employee stock options were calculated using the Black-Scholes option pricing model.
The following summarizes the activity under the Company’s stock option plansactivity during the nine months ended September 30, 2017:2018:
|
| | | | | | | | | | | | |
| | Number of Options (#) | | Weighted Average Exercise Price ($) | | Aggregate Intrinsic Value ($ in 000s) | | Weighted Average Remaining Contractual Term (Years) |
| Balance, December 31, 2016 | 3,441,303 |
| | $ | 32.27 |
| | | | |
| Granted | 519,231 |
| | 45.23 |
| | | | |
Exercised(1) | (385,345 | ) | | 26.11 |
| | $ | 7,696 |
| | |
| Canceled | (85,796 | ) | | 34.82 |
| | | | |
| Balance, September 30, 2017 | 3,489,393 |
| | $ | 34.82 |
| | $ | 70,718 |
| | 7.8 |
Vested, September 30, 2017(2) | 1,860,596 |
| | $ | 33.41 |
| | $ | 40,326 |
| | 7.1 |
Vested or expected to vest, September 30, 2017(2)(3) | 3,282,804 |
| |
| | $ | 67,057 |
| | |
|
| | | | | | | | | | | | |
| | Number of Options (#) | | Weighted Average Exercise Price ($) | | Aggregate Intrinsic Value ($ in thousands) | | Weighted Average Remaining Contractual Term (Years) |
| Outstanding at December 31, 2017 | 3,377,220 |
| | $ | 35.10 |
| | | | |
| Granted | 287,199 |
| | 77.05 |
| | | | |
| Exercised | (384,887 | ) | | 33.11 |
| | $ | 21,419 |
| | |
| Cancelled | (162,206 | ) | | 40.45 |
| | | | |
| Outstanding at September 30, 2018 | 3,117,326 |
| | $ | 38.94 |
| | $ | 208,898 |
| | 7.1 |
| Vested, September 30, 2018 | 2,077,854 |
| | $ | 34.40 |
| | $ | 148,671 |
| | 6.6 |
Vested or expected to vest, September 30, 2018 (1) | 3,019,139 |
| |
| | $ | 203,882 |
| | |
| |
(1) | The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s commonRepresents total outstanding stock as of the date of exercise and the exercise price of the underlying options. The aggregate intrinsic value of options exercised in the nine months ended September 30, 2017 and 2016 was $7.7 million and $4.4 million, respectively.
|
| |
(2)
| The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common stock as of September 30, 2017, and the exercise price of the underlying options. |
| |
(3)
| Represents the number of vested options as of September 30, 2017, plus the number of unvested options expected to vest.2018, adjusted for estimated forfeitures. |
Restricted Stock Units
In the nine months ended September 30, 2017, the Company awarded 432,877 restricted stock units to certain employees and non-employee members of the Board of Directors, which included 168,857 restricted stock units subject to the achievement of performance conditions (performance-based restricted stock units). For performance-based restricted stock units for which the performance criteria has not yet been achieved, the Company recognized stock compensation expense of $1.8 million and $4.0 million in the three and nine months ended September 30, 2017 as it expects a portion of the performance-based restricted stock units granted in 2016 and 2017 will be earned based on its evaluation of the performance criteria at December 31, 2017 and December 31, 2019, respectively. An additional $0.1 million and $0.4 million of stock compensation expense was recognized in the three and nine months ended September 30, 2017, respectively, for performance-based restricted stock units for which the performance criteria has been achieved. The restricted stock units were granted under the 2007 and 2017 Plans and generally vest annually over a one or three year period from the grant date, except for the performance-based restricted stock units, which follow different vesting patterns.
The restricted stock units granted during the nine months ended September 30, 2017 have a weighted average fair value of $47.48 per share based on the closing price of the Company’s common stock on the date of grant and were valued at approximately $20.6 million on their grant date. The Company is recognizing the compensation expense over the vesting period. Approximately $3.8 million and $2.6 million in the three months ended September 30, 2017 and 2016, respectively, of stock-based compensation expense related to the vesting of non-performance based restricted stock units was recognized. Approximately $10.0 million and $7.3 million in the nine months ended September 30, 2017 and 2016, respectively, of stock-based compensation expense related to the vesting of non-performance based restricted stock units was recognized. Under the terms of the awards, the Company will issue shares of common stock on each of the vesting dates.
The following table summarizes the status of the Company’s restricted stock units during the nine months ended September 30, 2017:2018: | | | | Number of Shares (#) | | Weighted Average Fair Value ($) | Number of Shares (#) | | Weighted Average Fair Value ($) |
| Balance, December 31, 2016 | 962,219 |
| | $ | 31.14 |
| |
| Outstanding at December 31, 2017 | | 994,364 |
| | $ | 38.08 |
|
| Granted | 432,877 |
| | 47.48 |
| 328,342 |
| | 75.51 |
|
Adjustment (1) | | 147,301 |
| | 29.54 |
|
| Vested | (375,050 | ) | | 31.51 |
| (526,638 | ) | | 33.59 |
|
| Forfeited | (12,317 | ) | | 34.23 |
| (78,163 | ) | | 44.58 |
|
| Balance, September 30, 2017 | 1,007,729 |
| | $ | 37.98 |
| |
| Outstanding at September 30, 2018 | | 865,206 |
| | $ | 52.98 |
|
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (“ESPP”) authorizes the issuance of up(1) Certain performance-based restricted stock units are subject to a totalthree-year vesting period subject to meeting performance targets and continued employment. During the three months ended March 31, 2018, the Compensation Committee of 380,000 shares of common stock to participating employees. The Company will make one or more offerings each year to eligible employees to purchase stock under the ESPP. Between January 1, 2008 and June 30, 2016, offering periods began on the first business day occurring on or after each January 1 and July 1 and ended on the last business day occurring on or before the following June 30 and December 31, respectively. Beginning as of July 1, 2016, offering periods begin on the first business day occurring on or after each December 1 and June 1 and will end on the last business day occurring on or before the following May 31 and November 30, respectively. In order to permit a transition to the new offering cycle, a one-time offering period began on July 1, 2016 and ended on November 30, 2016.
Each employee who is a participant in the Company’s ESPP may purchase up to a maximum of 800 shares per offering period or $25,000 worth of common stock, valued at the start of the purchase period, per year by authorizing payroll deductions of up to 10% of his or her base salary. Unless the participating employee withdraws from the offering period, his or her accumulated payroll deductions will be used to purchase common stock.
For all offering periods ending on or before June 30, 2016, the purchase price for each share purchased was 85% of the fair market value of the common stock on the last day of the offering period. For all offering periods beginning on or after July 1, 2016, the purchase price for each share purchased is 85% of the lower of (i) the fair market value of the common stock on the first day of the offering period or (ii) the fair market value of the common stock on the last day of the offering period.
The accumulated payroll deductions of any employee who is not a participant on the last day of an offering period will be refunded. An employee’s rights under the ESPP terminate upon voluntary withdrawal from the plan or when the employee ceases employment with the Company for any reason.
The ESPP may be terminated or amended by the Board of Directors determined that the performance was achieved at any time. An amendment200% of target for certain performance-based awards issued in 2016, resulting in an adjustment to increase the number of shares of common stock that is authorized under the ESPP, and certain other amendments, require the approval of stockholders.will ultimately vest for these awards.
Note 14. Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect in the years in which the differences are expected to reverse. The Company reviews its deferred tax assets for recoverability considering historical profitability, projected future taxable income, and the expected timing of the reversals of existing temporary differences and tax planning strategies. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company follows the provisions ofaccordance with ASC 740-10, Income Taxes (“ASC 740-10”). The Tax Cuts and Jobs Act ("Tax Reform Act"), which was enacted in December 2017, significantly changed U.S. tax law by, among other things, lowering corporate income tax rates to a flat 21% rate effective January 1, 2018 and imposing a tax on accounting for uncertaintydeemed repatriated earnings of foreign subsidiaries. The Company recognized the impact of the Tax Reform Act in income taxes recognizedthe consolidated financial statements as of December 31, 2017. In accordance with Staff Accounting Bulletin No. 118 ("SAB 118"), the Company recorded provisional amounts reflecting the impact of certain requirements of the Tax Reform Act in its consolidated financial statements. ASC 740-10 prescribesstatements and related disclosures as of December 31, 2017, including a recognition thresholdreduction in net operating losses in 2017 of $0.8 million offset by an associated reduction in the valuation allowance of the $0.8 million related to the deemed repatriation. The deemed repatriation tax computation will be finalized in conjunction with the filing of the Company's federal and measurement attribute forstate tax returns in the financial statement recognitionfourth quarter and measurementare not expected to vary significantly from the original estimate. The Tax Reform Act also subjects the Company to current tax on global intangible low-taxed income, or ("GILTI") earned by certain of its foreign subsidiaries. The Company has elected to recognize the income tax related to GILTI as a period expense in the period the tax position takenis incurred or expected to be taken in a tax return. In addition, ASC 740-10 provides guidanceoccur for the year ended December 31, 2018. The inclusion of GILTI had no impact on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company recognizes estimated interest and penalties for uncertain tax positions inthe Company's income tax expense.expense or effective tax rate in the period due to the full valuation allowance applied to the U.S. entity.
The Company files federal, state and foreign tax returns. These returns are generally open to examination by the relevant tax authorities from three to four years from the date they are filed. The tax filings relating to the Company's federal and state tax returns are currently open to examination for tax years 20142015 through 2016 and 20122014 through 2016, respectively. In addition, the Company has generated tax losses since its inception in 2000. These years may be subject to examination if the losses are carried forward and utilized in future years.
At
As of September 30, 20172018 and December 31, 2016,2017, the Company has provided a full valuation allowance against its domestic net deferred tax asset because it is not more likely than not that the future tax benefit will be realized. In addition, the Company has a net deferred tax asset in foreign jurisdictions where no valuation allowance is recorded as it is more likely than not that the future tax benefit will be realized.
As of September 30, 2018, the Company had no uncertain tax positions.
Income tax expense was $0.2 million and $0.1 million for each of the three months ended September 30, 20172018 and 2016.2017. Income tax expense was $0.3$0.9 million and $0.2$0.3 million for the nine months ended September 30, 20172018 and 2016,2017, respectively. Income tax expense for both periods in the current year was primarily driven by taxable income generated in foreign jurisdictions, mainly the United Kingdom and Canada.
The Company had no unrecognized tax benefits at September 30, 2017.
15. Segment Reporting
As further described in Note 2, the Company has concluded that it operates as one segment.
Worldwide revenue for the Company's products is categorized as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| U.S. Omnipod | $ | 70,065 |
| | $ | 59,641 |
| | $ | 195,081 |
| | $ | 166,691 |
|
| International Omnipod | 32,481 |
| | 19,107 |
| | 84,200 |
| | 51,046 |
|
| Drug Delivery | 19,229 |
| | 16,123 |
| | 53,963 |
| | 45,677 |
|
| Total | $ | 121,775 |
| | $ | 94,871 |
| | $ | 333,244 |
| | $ | 263,414 |
|
Geographic information about revenue, based on the region of the customer's shipping location, is as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| United States | $ | 89,294 |
| | $ | 75,764 |
| | $ | 249,044 |
| | $ | 212,368 |
|
| All other | 32,481 |
| | 19,107 |
| | 84,200 |
| | 51,046 |
|
| Total | $ | 121,775 |
| | $ | 94,871 |
| | $ | 333,244 |
| | $ | 263,414 |
|
Geographic information about long-lived assets, net, excluding goodwill and other intangible assets is as follows:
|
| | | | | | | |
| (in thousands) | September 30, 2017 | | December 31, 2016 |
| United States | $ | 68,106 |
| | $ | 19,341 |
|
| China | 20,456 |
| | 25,431 |
|
| Other | 60 |
| | 197 |
|
| Total | $ | 88,622 |
| | $ | 44,969 |
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying condensed notes to those financial statements included in this Quarterly Report on Form 10-Q. This Quarterly Reportquarterly report on Form 10-Q contains forward-looking statements. Forward-looking statements whichrelate 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 made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and of Section 21E of the Securities Exchange Act of 1934. Theseonly predictions. We have based these forward-looking statements are basedlargely on our current expectations and beliefs concerningprojections about future developmentsevents and their potential effects on us. There can be no assurance that future developments affecting us will be thosefinancial trends that we have anticipated. Thesebelieve may affect our business, results of operations and financial condition.
The outcomes of the events described in 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:
risks associated with our dependence on our principal product, the Omnipod System;
fluctuations in quarterly results of operations;
our ability to sustain or reduce production costs and increase customer orders and manufacturing volumes;
adverse changes in general economic conditions;
impact of healthcare reform laws;
our inability to raise additional funds in the future on acceptable terms or at all;
potential 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;
failure to retain supplier pricing discounts and achieve satisfactory gross margins;
failure to retain key supplier and payor partners;
international business risks;
our inability to effectively assume the distribution and commercial support for our Omnipod System in Europe following the expiration of our global distribution agreement with Ypsomed on June 30, 2018;
our inability to secure and retain adequate coverage or reimbursement for the Omnipod System by third-party payors and potential adverse changes in reimbursement rates or policies relating to the Omnipod System;
failure to retain key payor partners and their members;
failure to retain and manage successfully our Medicare and Medicaid business;
potential adverse effects resulting from competition;
reliance on information technology systems and our ability to control related risks, including a cyber-attack or other breach or disruption of these systems;
technological breakthroughs and innovations adversely affecting our business, and our own new product development initiatives may prove to be ineffective or not commercially successful;
potential termination of our license to incorporate a blood glucose meter into the Omnipod System, or our inability to enter into new license agreements;
challenges to the further development of our non-insulin drug delivery business;
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;
our products and operations are subject to extensive government regulation, which could restrict our ability to carry on or expand our operations;
failure of our contract manufacturers or component suppliers to comply with the FDA’s quality system regulations;
potential adverse impact resulting from a recall, or discovery of serious safety issues, of our products;
the potential violation of federal or state laws prohibiting “kickbacks” or protecting the confidentiality of patient health information, or any challenge to or investigation into our practices under these laws;
product liability lawsuits that may be brought against us;
reduced retention rates of our customer base;
unfavorable results of clinical studies relating to the Omnipod System or the products of our competitors;
potential future publication of articles or announcement of positions by diabetes associations or other organizations that are unfavorable to the Omnipod System;
the concentration of substantially all of our manufacturing operations at a single location in China and substantially all of our inventory at a single location in Massachusetts;
our ability to effectively manage the construction of our planned manufacturing facility in the U.S.;
our ability to attract and retain personnel;
our ability to manage our growth;
risks, associated with potential future acquisitions or investments in new businesses;
our ability to generate sufficient cash to service all of our indebtedness;
the expansion of our distribution network;
our ability to successfully maintain effective internal control over financial reporting;
the volatility of the price of our common stock;
risks related to future sales of our common stock or the conversion of any of our 2% Convertible Senior Notes due June 15, 2019 and 1.25% Convertible Senior Notes due September 15, 2021;
potential indemnification obligations in connection with the disposition of our former Neighborhood Diabetes supplies business;
potential limitations on our ability to use our net operating loss carryforwards; and
anti-takeover provisions in our organizational documents.
The factors discussed above are not intended to be a complete statement of all risks and uncertainties and should be evaluated with all other risksfactors described in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on February 28, 201722, 2018 in the section entitled “Risk Factors" as updated by Item 1A "Risk Factors" herein, and in our other filings from time to time with the Securities and Exchange Commission. Should oneAccordingly, you should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect,occur, and actual results may vary in material respectscould differ materially from those projected in thesethe forward-looking statements. The forward-looking statements made in this quarterly report on Form 10-Q relate only to events as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements.statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
Executive Level Overview
We are primarily engaged in the development, manufacturing and sale of our proprietary Omnipod System, an innovative, discreet and easy-to-use continuous insulin delivery system for people with insulin-dependent diabetes. There are twoprimary types of insulin therapy practiced today: MDI therapy using syringes or insulin pens; and pump therapy using insulin pumps. Insulin pumps are used to perform continuous subcutaneous insulin infusion, or insulin pump therapy, and typically use a programmable device and an infusion set to administer insulin into the person’s body. Insulin pump therapy has been shown to provide people with insulin-dependent diabetes with numerous advantages relative to MDI therapy. We estimate that approximately one-third of the Type 1 diabetes population in the United States use insulin pump therapy, and that less than 10% of the Type 2 diabetes population in the United States who are insulin-dependent use insulin pump therapy.The Omnipod System features a small, lightweight, self-adhesive disposable tubeless Omnipod device which is worn on the body for approximately three days at a time and its wireless companion, the handheld PDM. 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, theThe Omnipod System, which features only two discreet, easy-to-use devices, that eliminate the need for a bulky pump, tubing and separate blood glucose meter,communicates wirelessly, provides for virtually pain-free automated cannula insertion communicates wirelessly and integrates a blood glucose meter.eliminates the need for traditional MDI therapy or the use of traditional pump and tubing. We believe that the Omnipod System’s unique proprietary design and features allow people with insulin-dependent diabetes to manage their diabetes with unprecedented freedom, comfort, convenience, and ease.
We began commercial sale of the Omnipod System in the United States in 2005. We sell the Omnipod System in the United States through direct sales to customers or through our distribution partners. The Omnipod System is currently available in multiple countries in Europe, as well as Canada and Israel. On July 1, 2018 we assumed all commercial activities (including, among other things, distribution, sales, marketing, training and support) for our Omnipod System across Europe following the expiration of our prior distribution agreement with our former European Distributor on June 30, 2018.
In addition to using the Omnipod System for insulin delivery, we also partner with global pharmaceutical and biotechnology companies to tailor the Omnipod System technology platform for the delivery of subcutaneous drugs across multipleother therapeutic areas.
We are constructing a highly-automated manufacturing facility in Acton, Massachusetts, with planned production out of the facility beginning in early 2019. The facility will also serve as our global headquarters. We expect that, following start up related activities, the new facility will allow us to lower our manufacturing costs, increase supply redundancy, add capacity closer to our largest customer base and support growth. We expect capital expenditures for the construction of the Acton facility and related equipment purchases will be approximately $200 million when production begins in 2019 and will be funded by our cash flows from operations and proceeds from our senior convertible debt offerings.
In June 2011,January 2018, we acquired Neighborhood Diabetes. Through Neighborhood Diabetes, we provided customers with blood glucose testing supplies, traditional insulin pumps, pump supplies and pharmaceuticals and had the ability to process claims as either durable medical equipment or through pharmacy benefits. In February 2016, we sold Neighborhood Diabetes to Liberty Medical. Additional information regarding the sale of Neighborhood Diabetes is provided in Note 3 to the consolidated financial statements included in this Form 10-Q.
We announced on July 20, 2017 our plans to assume, on July 1, 2018, the distribution, sales, marketing, training and support activities of our Omnipod System across Europe following the expiration of our global distribution agreement with Ypsomed on June 30, 2018. Until the expiration of the distribution agreement, Ypsomed will remain the distributor of our Omnipod products in Europe. We do not expect that the anticipated transition will have a material impact on our financial trendsCenters for the remainder of 2017. Once we assume direct distribution and commercial support following the expiration of the distribution agreement with Ypsomed on June 30, 2018, we expect our revenue and gross marginsMedicare & Medicaid Services ("CMS") has issued guidance clarifying that Medicare Part D Plan Sponsors are permitted to increase, as average customer pricing in Europe is higher than our current distributor pricing to Ypsomed. Throughout 2018, we expect to incur increased operating expenses as we invest in our European operations. In addition, we will be required to pay to Ypsomed a per unit feeprovide coverage for direct sales over the 12 months following the expiration of the global distribution agreement of our Omnipod device to former customers of Ypsomed, as defined in the distribution agreement. The actual amount of the fee is dependent on a number of factors,products such as the European Omnipod customer installed baseSystem under the Medicare Part D (prescription drug) program. We have been securing coverage with Medicare Part D carriers to ensure beneficiaries living with diabetes have access to the Omnipod System. Securing Medicare Part D coverage also provides us with a direct pathway to increased Medicaid coverage at the state level, as ofmany state-run Medicaid programs follow CMS prescription drug guidance to determine coverage. This allows access for lower-income individuals and families on Medicaid for whom Omnipod currently is not a covered option. We estimate that obtaining Medicare and Medicaid coverage extends Omnipod System coverage access to approximately 450,000 additional individuals with Type 1 diabetes in the United States.
In June 30, 2018, the numberU.S. Food and Drug Administration ("FDA") provided clearance for the commercial distribution of customersour DASH TM System, which is our next-generation digital mobile Omnipod platform, featuring a secured Bluetooth enabled Pod and PDM with a touch screen color user interface supported by smartphone connectivity. We commenced a U.S. limited commercial release of Omnipod DASH TM in Q3 2018 prior to a full market launch in early 2019.
On September 10, 2018, we announced that Shacey Petrovic, President and Chief Operating Officer, will succeed Patrick Sullivan as our Chief Executive Officer effective January 1, 2019. Timothy J. Scannell, who choose to continue to purchase Omnipod devices overhas served as a member of Insulet’s Board for the successive 12 months,last four years, will become Chairman, effective January 1, 2019. Ms. Petrovic joined Insulet’s Board effective with the announcement. In accordance with the terms of his employment agreement and the volume of the devices soldCompany's Amended and Restated Executive Severance Plan, Mr. Sullivan is entitled to these customers during the 12-month period following the expiration of the distribution agreement. While the actual fee could vary significantly, assuming the continued growth of Omnipod in Europe through June 30, 2018,severance payments, equity acceleration rights and limited attrition in the 12 months thereafter, we estimate that the fee could total approximately $50 million. Once European operations are established, excluding nonrecurring transition-related costs, we expect that the assumption of direct distribution will be accretive to our consolidated results of operations.other benefits.
Third Quarter 20172018 Revenue Results:
Total revenue of $121.8$151.1 million
U.S. Omnipod revenue of $82.0 million
| |
◦ | International Omnipod revenue of $50.2 million Drug Delivery revenue of $18.9 million U.S. Omnipod revenue of $70.1 million
|
| |
◦ | International Omnipod revenue of $32.5 million
|
| |
◦ | Drug Delivery revenue of $19.2 million
|
Our long-term financial objective is to achieve and sustain profitable growth. OurWe expect our efforts in 2017 are2018 and 2019 to focus primarily focused on constructing and commissioning our U.S. manufacturing facility, continuing to establish our European operations, launching new products, such as the expansion ofDASH TM Omnipod System, continuing our customer base in the United Statesproduct development efforts, and internationally, increasing our gross profitworking with Medicare, Medicaid and product development.commercial payors and intermediaries to expand access. Achieving these objectives is expected to require additional investments in certain personnel and initiatives, as well as enhancements to our supply chain operation capacity, efficiency and effectiveness. We believe that we willmay continue to incur net losses in the near term in order to achieve these objectives. However, we believe that the accomplishment of our near-termnear term objectives will have a positive impact on our financial condition in the future.
Components of Financial Operations
Revenue. We derive mostthe majority of our revenue from global sales of the Omnipod System. Our revenue also includes sales of devices based on the Omnipod System technology platform to global pharmaceutical and biotechnology companies for the subcutaneous delivery of subcutaneous drugs across multiple therapeutic areas.
Cost of revenue. Cost of revenue consists primarily of raw material, labor, warranty, inventory reservescrap and excess and obsolescence adjustments, and overhead costs such as freight-in and depreciation and the cost of products we acquire from third party suppliers.
Research and development. Research and development expenses consist primarily of personnel costs and outside services within our product development, regulatory and clinical functions and product development projects. We generally expense research and development costs as incurred.
Sales and marketing. Sales and marketing expenses consist primarily of personnel costs within our sales, marketing, reimbursement support and customer care and training functions, as well as sales commissions paid to our sales representatives, costs associated with promotional activities and participation in industry trade shows. Commission costs that are direct and incremental to obtaining a new customer are capitalized and amortized to sales and marketing expense over the expected period of benefit.
General and administrative. General and administrative expenses consist primarily of salaries and other related costs for personnel serving the executive, finance, legal, information technology and human resource functions, as well as legal fees, accounting fees, insurance costs, bad debt expenses, shipping, handling and facilities-related costs.costs including depreciation of office facility-related property and equipment.
Results of Operations
This section discusses our consolidated results of operations for the third quarter and the nine months ended September 30, 20172018 compared to the same periods of 2016,2017, and should be read in conjunction with the consolidated financial statements and accompanying condensed notes included in this Form 10-Q. | TABLE 1: RESULTS OF OPERATIONS | | | (Unaudited) | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in Thousands) | 2017 | | 2016 | | Change $ | | Change % | | 2017 | | 2016 | | Change $ | | Change % | |
| (in thousands) | | 2018 | | 2017 | | Change $ | | Change % | | 2018 | | 2017 | | Change $ | | Change % |
| Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Omnipod | $ | 70,065 |
| | $ | 59,641 |
| | $ | 10,424 |
| | 17 | % | | $ | 195,081 |
| | $ | 166,691 |
| | $ | 28,390 |
| | 17 | % | $ | 81,970 |
| | $ | 70,065 |
| | $ | 11,905 |
| | 17 | % | | $ | 230,289 |
| | $ | 195,081 |
| | $ | 35,208 |
| | 18 | % |
| International Omnipod | 32,481 |
| | 19,107 |
| | 13,374 |
| | 70 | % | | 84,200 |
| | 51,046 |
| | 33,154 |
| | 65 | % | 50,214 |
| | 32,481 |
| | 17,733 |
| | 55 | % | | 117,127 |
| | 84,200 |
| | 32,927 |
| | 39 | % |
| Drug Delivery | 19,229 |
| | 16,123 |
| | 3,106 |
| | 19 | % | | 53,963 |
| | 45,677 |
| | 8,286 |
| | 18 | % | 18,892 |
| | 19,229 |
| | (337 | ) | | (2 | )% | | 51,500 |
| | 53,963 |
| | (2,463 | ) | | (5 | )% |
| Total revenue | 121,775 |
| | 94,871 |
| | 26,904 |
| | 28 | % | | 333,244 |
| | 263,414 |
| | 69,830 |
| | 27 | % | 151,076 |
| | 121,775 |
| | 29,301 |
| | 24 | % | | 398,916 |
| | 333,244 |
| | 65,672 |
| | 20 | % |
| Cost of revenue | 48,151 |
| | 39,230 |
| | 8,921 |
| | 23 | % | | 135,583 |
| | 113,265 |
| | 22,318 |
| | 20 | % | 49,107 |
| | 48,151 |
| | 956 |
| | 2 | % | | 139,060 |
| | 135,583 |
| | 3,477 |
| | 3 | % |
| Gross profit | 73,624 |
| | 55,641 |
| | 17,983 |
| | 32 | % | | 197,661 |
| | 150,149 |
| | 47,512 |
| | 32 | % | 101,969 |
| | 73,624 |
| | 28,345 |
| | 38 | % | | 259,856 |
| | 197,661 |
| | 62,195 |
| | 31 | % |
| Gross margin | 60.5 | % | | 58.6 | % | | | |
|
| | 59.3 | % | | 57.0 | % | |
|
| |
|
| 67.5 | % | | 60.5 | % | | | |
|
| | 65.1 | % | | 59.3 | % | |
|
| |
|
|
| Operating expenses: | | | | | | | | | | | | |
|
| |
|
| | | | | | | | | | | | |
|
| |
|
|
| Research and development | 20,141 |
| | 13,734 |
| | 6,407 |
| | 47 | % | | 55,670 |
| | 39,676 |
| | 15,994 |
| | 40 | % | 21,762 |
| | 20,141 |
| | 1,621 |
| | 8 | % | | 60,092 |
| | 55,670 |
| | 4,422 |
| | 8 | % |
| Sales and marketing | 28,718 |
| | 22,147 |
| | 6,571 |
| | 30 | % | | 86,288 |
| | 69,119 |
| | 17,169 |
| | 25 | % | 34,922 |
| | 28,718 |
| | 6,204 |
| | 22 | % | | 102,660 |
| | 86,288 |
| | 16,372 |
| | 19 | % |
| General and administrative | 22,718 |
| | 17,342 |
| | 5,376 |
| | 31 | % | | 62,322 |
| | 47,923 |
| | 14,399 |
| | 30 | % | 38,420 |
| | 22,718 |
| | 15,702 |
| | 69 | % | | 85,914 |
| | 62,322 |
| | 23,592 |
| | 38 | % |
| Total operating expenses | 71,577 |
| | 53,223 |
| | 18,354 |
| | 34 | % | | 204,280 |
| | 156,718 |
| | 47,562 |
| | 30 | % | 95,104 |
| | 71,577 |
| | 23,527 |
| | 33 | % | | 248,666 |
| | 204,280 |
| | 44,386 |
| | 22 | % |
| Operating income (loss) | 2,047 |
| | 2,418 |
| | (371 | ) | | (15 | )% | | (6,619 | ) | | (6,569 | ) | | (50 | ) | | 1 | % | 6,865 |
| | 2,047 |
| | 4,818 |
| | (235 | )% | | 11,190 |
| | (6,619 | ) | | 17,809 |
| | 269 | % |
| Interest expense and other, net | 4,153 |
| | 5,369 |
| | (1,216 | ) | | (23 | )% | | 13,034 |
| | 11,293 |
| | 1,741 |
| | 15 | % | 5,012 |
| | 4,153 |
| | 859 |
| | 21 | % | | 16,852 |
| | 13,034 |
| | 3,818 |
| | 29 | % |
| Loss from continuing operations before income taxes | (2,106 | ) | | (2,951 | ) | | 845 |
| | (29 | )% | | (19,653 | ) | | (17,862 | ) | | (1,791 | ) | | 10 | % | |
| Income (loss) before income taxes | | 1,853 |
| | (2,106 | ) | | 3,959 |
| | 188 | % | | (5,662 | ) | | (19,653 | ) | | 13,991 |
| | 71 | % |
| Income tax expense | 121 |
| | 66 |
| | 55 |
| | 83 | % | | 318 |
| | 195 |
| | 123 |
| | 63 | % | 194 |
| | 121 |
| | 73 |
| | 60 | % | | 939 |
| | 318 |
| | 621 |
| | 195 | % |
| Net loss from continuing operations | (2,227 | ) | | (3,017 | ) | | 790 |
| | (26 | )% | | (19,971 | ) | | (18,057 | ) | | (1,914 | ) | | 11 | % | |
| Loss from discontinued operations, net of tax | — |
| | (64 | ) | | 64 |
| | (100 | )% | | — |
| | (1,703 | ) | | 1,703 |
| | (100 | )% | |
| Net loss | $ | (2,227 | ) | | $ | (3,081 | ) | | $ | 854 |
| | (28 | )% | | $ | (19,971 | ) | | $ | (19,760 | ) | | $ | (211 | ) | | 1 | % | |
| Net income (loss) | | $ | 1,659 |
| | $ | (2,227 | ) | | $ | 3,886 |
| | 174 | % | | $ | (6,601 | ) | | $ | (19,971 | ) | | $ | 13,370 |
| | 67 | % |
Revenue
Our total revenue increased to $121.8$151.1 million, up $26.9$29.3 million, or 28%24%, in the third quarter of 20172018 compared to the third quarter of 2016,2017, primarily due to strongcontinued growth in our international and U.S. Omnipod revenue, International Omnipod revenue and our on-body injection device for drug delivery.revenue. Our U.S. Omnipod revenue increased to $70.1$82.0 million, up $10.4$11.9 million, or 17%, primarily due to growth in our installedOmnipod customer base of Omnipod users as we continue to expand awareness of and access to the Omnipod System. Our International Omnipod revenue increased to $32.5$50.2 million, up $13.4$17.7 million, or 70%55%, primarily due toover the prior period. The growth in distributorour international revenue was driven by both higher volumes and more favorable pricing as a result of our commencement of direct sales from continued adoption in existing and newer markets such as France.of our Omnipod System across Europe following the expiration of our distribution agreement with our former European Distributor on June 30, 2018. Our drug delivery revenue increased to $19.2 million, up $3.1 million, or 19%, due to strong growth in demand for our primary drug delivery device on greater market adoption of Amgen's Neulasta Onpro kit.was essentially flat year over year.
Our total revenue increased to $333.2$398.9 million, up $69.8 million, or 27%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, due to strong growth in our U.S. Omnipod revenue, International Omnipod revenue and our on-body injection device for drug delivery. Our U.S. Omnipod revenue increased to $195.1 million, up $28.4 million, or 17%, primarily due to growth in our installed base of Omnipod users as we continue to expand awareness of the Omnipod System. Our International Omnipod revenue increased to $84.2 million, up $33.2 million, or 65%, primarily due to growth in distributor sales from continued adoption in existing and newer markets such as France. Our drug delivery revenue increased to $54.0 million, up $8.3 million, or 18%, due to strong growth in demand for our primary drug delivery device on greater market adoption of Amgen's Neulasta Onpro kit.
For the year ending December 31, 2017, we expect strong revenue growth across all of our product lines as we continue our expansion in the U.S. and internationally.
Cost of Revenue
Cost of revenue increased to $48.2 million, up $8.9 million, or 23%, in the third quarter of 2017 compared to the same period in 2016 and increased to $135.6 million, up $22.3$65.7 million, or 20%, in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, due to strong growth in our U.S. Omnipod revenue and international Omnipod revenue. Our U.S. Omnipod revenue increased to $230.3 million, up $35.2 million, or 18%, primarily due to growth in our Omnipod customer base as we continue to expand awareness of and access to the Omnipod System. Our international Omnipod revenue increased to $117.1 million, up $32.9 million, or 39%,due to the continued adoption of our product in existing international markets and by both higher volumes and more favorable pricing as a result of our commencement of direct sales of our Omnipod System across Europe following the expiration of our distribution agreement with our former European Distributor on June 30, 2018. Our drug delivery revenue was down 5% year over year primarily reflecting a lower number of shipments in the period.
For the year ending December 31, 2018, we expect strong revenue growth driven by our international growth, driven by the transition to direct distribution of our Omnipod System across Europe, and our continued expansion of patient access in the U.S. market, partially offset by lower drug delivery revenue.
Cost of Revenue
Cost of revenue increased to $49.1 million, up $1.0 million, or 2%, in the third quarter of 2018 compared to the same period in 2016,2017 due to increased sales volumes, partially offset by improvements in supply-chain operations. Cost of revenue increased to $139.1 million, up $3.5 million, or 3%, in the nine months ended September 30, 2018 compared to the same period in 2017, reflecting an increase in sales volumes partially offset by improvements in supply chain operations.gross margins.
Gross Margin
Gross margin increased to 60%67.5%, up 1.9%700 basis points in the third quarter of 20172018 compared to the same period in 2016.2017. Gross margin for the nine months ended September 30, 20172018 was 59%65.1% compared with 57%59.3% for the nine months ended September 30, 2016.2017. The margin increase in each period was primarily due to our assumption of commercial activities in Europe in mid-2018, which allowed us to contract directly with our customers. Gross margins in each period also increased due to improvements in supply chain operations, partially offset by the unfavorable mix impact of higher distributor sales in Europe.
Foroperations. We expect gross margin to increase for the year ending December 31, 2017, we expect gross margin to increase2018 as compared to 20162017 primarily due to improvements in supply chain operations partially offset by the unfavorable mix impactand our assumption of higher distributor salescommercial activities associated with of our Omnipod System in Europe.
Research and Development
Research and development expenses increased to $20.1$21.8 million, up $6.4$1.6 million, or 47%8%, for the three month period ended September 30, 20172018 compared to the same period in 20162017 and increased to $55.7$60.1 million, up $16.0$4.4 million, or 40%8%, for the nine months ended September 30, 20172018 compared to the same period in 2016.2017. The increase in both periods was primarily due to an increase in expenses related to our development projects, including our digital mobile Omnipod platform, which involves interaction with continuous glucose monitoring technology, and our artificial pancreas program.
DASH TM System. For the year ending December 31, 2017,2018, we expect overall research and development spending to increase as compared to 20162017 due to the development efforts on our on-going projects described above.projects.
Sales and Marketing
Sales and marketing expenses increased to $28.7$34.9 million, up $6.6$6.2 million, or 30%22%, for the three month period ended September 30, 20172018 compared to the same period in 20162017 and increased to $86.3$102.7 million, up $17.2$16.4 million, or 25%19%, for the nine months ended September 30, 20172018 compared to the same period in 2016. The increase in sales and marketing expenses in both periods was2017. These increases were primarily attributable to increased personnel-related expenses associated with the expansion of our customer support, market access and sales force personnel, investments to support our assumption in mid-2018 of direct commercial support for Omnipod in Europe, and increased advertising expenses associated with direct to patient marketing activities.
Europe. For the year ending December 31, 2017,2018, we expect sales and marketing expense to increase as compared to 20162017 due to the sales and marketing effortseffort as described above.above, partially offset by the capitalization of commission costs under ASC 606.
General and Administrative
General and administrative expenses increased to $22.7$38.4 million, up $5.4$15.7 million, or 31%69%, for the three month period ended September 30, 20172018 compared to the same period in 20162017 and increased to $62.3$85.9 million, up $14.4$23.6 million, or 30%38%, for the nine monthsmonth period ended September 30, 20172018 compared to the same period in 2016.2017. This increase was primarily attributable to severance-related charges related to the retirement of our CEO, including $8.2 million of stock-based compensation for the acceleration of share-based award vesting and $4.4 million for the accrual of cash severance benefits. In addition, general and administrative expenses increased due to increased personnel-related costs and fees related to external consultants and professional service providers toour assumption in mid-2018 of direct support the growthfor Omnipod in our business.
Europe. For the year ending December 31, 2017,2018, we expect overall general and administrative expenses to increase as compared to 2016 as we continue2017 due to grow the business and make investments in our operating structure to support this continued growth.growth and the aforementioned expenses related to our CEO's retirement.
Interest Expense and Other, Net
Interest expense and other, net, decreasedincreased to $4.2$5.0 million, down $1.2up $0.9 million, or 23%21%, for the three month period ended September 30, 20172018 compared to the same period in 20162017 and increased to $13.0$16.9 million, up $1.7$3.8 million, or 15%29%, for the nine monthsmonth period ended September 30, 2017 compared to the same period2018. The increase in 2016. The decrease in the three month periodboth periods is primarily due to a $2.6 million charge related to the extinguishmenteffect of debt in the prior period, partially offset by additional interest expense, including cash interest expense of $1.4 million and non-cash interest associated with the issuanceof $3.7 million, related to our 1.375% Notes, which were issued in September 2016 of 1.25% convertible senior notes, which increased our net outstanding long-term debt. The increase in the nine month period is due to a net increase on our outstanding long-term debt,November 2017, partially offset by a lower effectivereduction in interest rateexpense related to our 2% Notes, which were retired in 2018, and an increase in interest income on outstanding debt. Please refer to Liquidity and Capital Resources for further discussion of our convertible debt.
investments in marketable securities.
Liquidity and Capital Resources
As of September 30, 2017,2018, we had $102.2$126.6 million in cash and cash equivalents and $173.5$308.8 million of investments in short-term investments.marketable securities. We believe that our current liquidity together with the cash expected to be generated from sales, will be sufficient to meet our projected operating, investing and debt service requirements for at least the next twelve months.
To lower our manufacturing costs, increase supply redundancy, add capacity closer to our largest customer base and support growth, we are constructing a highly-automated manufacturing facility in Acton, Massachusetts, with planned production out of the facility beginning in 2019. We expectThis facility will also serve as our global headquarters. As a result, capital expenditures to increasehave increased above historic levels to fund the construction of the manufacturingActon facility and related equipment purchases. As of September 30, 2018, investments in the Acton facility were approximately $168.3 million. We believeexpect that capital expenditures for this facility will approach $200 million when production begins in 2019.
In connection with our current liquidityassumption on July 1, 2018, of all commercial activities of our Omnipod System across Europe following the expiration of our distribution agreement with our European Distributor on June 30, 2018, we are required to pay to the European Distributor a per unit fee for sales of our Omnipod device over the subsequent twelve months following the expiration of the global distribution agreement. The fee will be sufficientbased on our sales of the Omnipod device to meet our projected expenditures associatedidentified customers (as that term is defined in the distribution agreement) of the European Distributor who had previously entered into an agreement with this project.
Convertible Debt
In September 2016, we issued and sold $345.0 million in principal amountthe distributor for the purchase of 1.25% Convertible Senior Notes due September 15, 2021 ("1.25% Notes").Omnipod devices. The interest rateactual total fee could vary significantly depending on the notes is 1.25% per annum, payable semi-annuallynumber of customers who qualify as eligible to be considered for purposes of calculating the fee under the terms of the distribution agreement and the number of Omnipod devices sold to those customers over the twelve month period. While the actual total fee could vary significantly, we estimate that the total fee could be in arrears in cashthe range of approximately $10 million to $55 million over the twelve month period. The fee will be determined and paid on March 15a quarterly basis following the expiration of the distribution agreement and September 15 of each year. Interest began accruing on September 13, 2016; the first interest payment was paid in March 2017. The 1.25% Notes are convertible into our common stock at an initial conversion rate of 17.1332 shares of common stock per $1,000 principalactual amount of the 1.25% Notes, which is equivalent tofee will depend on a conversion pricenumber of approximately $58.37 per share, subject to adjustment under certain circumstances. The 1.25% Notes will be convertible prior to the close of business on the business day immediately preceding June 15, 2021 only under certain circumstances and during certain periods,factors and will not be convertible on or after June 15, 2021known until the closenumber of business onqualifying sales of Omnipod devices is determined following each quarter beginning with the second scheduled trading day immediately precedingquarter ending September 15, 2021, regardless of those circumstances.
Cash interest expense30, 2018. We have accrued approximately $2 million for fees related to the 1.25% Notes was $1.1 million and $3.3 million in the three and nine months ended September 30, 2017, respectively. Non-cash interest expense relatedOmnipod devices sold to the 1.25% Notes of $3.4 million and $10.1 million was comprised of the amortization of the debt discount and debt issuance costs in the three and nine months ended September 30, 2017, respectively.
In June 2014, we issued and sold $201.3 million in principal amount of 2% Convertible Senior Notes due June 15, 2019 ("2% Notes"). The interest rate on the notes is 2% per annum, payable semi-annually in arrears in cash on June 15 and December 15 of each year. The 2% Notes are convertible into our common stock at an initial conversion rate of 21.5019 shares of common stock per $1,000 principal amount of the 2% Notes, which is equivalent to a conversion price of approximately $46.51 per share, subject to adjustment under certain circumstances.
In September 2016, in connection with the issuance of $345.0 million in principal amount of 1.25% Notes discussed above, we repurchased approximately $134.2 million in principal amount of the 2% Notesqualifying customers for $154.3 million, including $0.7 million of accrued interest. The $154.3 million paid to extinguish the debt was allocated to debt and equity based on their respective fair values immediately prior to the transaction. We allocated $121.4 million of the payment to the debt and $32.9 million to equity.
Cash interest expense related to the 2% Notes was $0.3 million and $0.9 million in the three months ended September 30, 20172018.
Convertible Debt
To finance our operations and 2016, respectively,global expansion, we have periodically issued and was $1.0 million and $2.9 million in the nine months endedsold Convertible Senior Notes, which are convertible into our common stock. As of September 30, 2017 and 2016, respectively.2018, the following notes were outstanding:
Non-cash interest expense related to the |
| | | | | | | |
| Issuance Date | Coupon | Principal Outstanding (in thousands) | Due Date | Initial Conversion Rate per Share of Common Stock | Conversion Price per Share of Common Stock |
| September 2016 | 1.250% | $ | 344,992 |
| September 15, 2021 | 17.1332 | $58.37 |
| November 2017 | 1.375% | 402,500 |
| November 15, 2024 | 10.7315 | $93.18 |
| Total | | $ | 747,492 |
| | | |
We called our 2% Notes of $0.7 millionin March 2018 and $1.6 million was comprised ofsettled the amortization of the debt discount and debt issuance costsoutstanding notes in the three months ended September 30, 2017 and 2016, respectively. Non-cash interest expense related to the 2% Notes of $2.1 million and $5.6 million was comprised of the amortization of the debt discount and debt issuance costs in the nine months ended September 30, 2017 and 2016, respectively.
May 2018. Additional information regarding our debt issuances is provided in Note 65 to the consolidated financial statements included in this Form 10-Q.
| | | | | Nine Months Ended September 30, | | Nine Months Ended Sept 30, |
| (In thousands) | | 2017 | | 2016 | | 2018 | | 2017 |
| Cash provided by (used in): | | | | | | | | |
| Operating activities | | $ | 19,407 |
| | $ | (4,159 | ) | | $ | 5,460 |
| | $ | 19,407 |
|
| Investing activities | | (61,485 | ) | | (80,827 | ) | | (143,719 | ) | | (61,485 | ) |
| Financing activities | | 6,650 |
| | 177,558 |
| | (7,081 | ) | | 6,650 |
|
| Effect of exchange rate changes on cash | | 487 |
| | 158 |
| | (674 | ) | | 487 |
|
| Net (decrease) increase in cash and cash equivalents | | $ | (34,941 | ) | | $ | 92,730 |
| |
| Net decrease in cash and cash equivalents | | | $ | (146,014 | ) | | $ | (34,941 | ) |
Operating Activities
Our net cash provided by operating activities for the nine months ended September 30, 20172018 was $19.4$5.5 million,compared tonet cash used inprovided by operating activities of $4.2$19.4 million in the same period of 2016, an increase of $23.6 million.2017. The increasedecrease in cash provided by operating activities in the current period is primarily due to additionalinvestments in working capital, including inventory, purchasesaccounts receivable and prepaid and other assets, in 2016part associated with our assumption of direct operations in order to support customer demandEurope in mid-2018, and to allow for alternative shipping methods, the growth of our businessa reduction in the current period and the timing of cash disbursements. This impact wasaccounts payable, partially offset by an increaseimprovements in accounts receivable, which was primarily due to an increase in sales.operating results.
Investing Activities
Our net cash used in investing activities for the nine months ended September 30, 20172018 was $61.5$143.7 million compared to $80.8$61.5 million in the same period of 2016. Investing2017. The increase in cash used in investing activities in the current period is primarily consists of $47.8due to $127.6 million ofincrease in capital expenditures, primarily associated with investments in our supply chain operations, which include approximately $29.8$105.3 million for facility and equipment in process of construction to support our U.S. manufacturing initiatives, and $13.7 million of investments in marketable securities, net of sales and maturities. Cash used in investing activities in the nine months ended September 30, 2016 primarily related to investments in marketable securities of $76.2 million.initiatives.
Financing Activities
Our net cash provided byused in financing activities for the nine months ended September 30, 20172018 was $7.1 million as compared to net cash provided by financing activities of $6.7 million which in the same period of 2017. The increase in cash used in financing activities was
primarily includesdue to a $10.0 million increase in payments for amounts withheld for taxes related to the vesting of restricted stock units and $6.7 million in payments for the settlement of our 2% Notes, partially offset by an increase in proceeds from the exercise of stock options, as compared to net cash of $177.6 million provided in the same period of 2016. The decrease in cash provided by financing activities in the current period as compared to the same period in the prior year was primarily attributable to proceeds from the issuance of our 1.25% Notes, net of the retirement of our 2% Notes as further described above, that occurred in the nine months ended September 30, 2016 where no such convertible debt financing activity occurred in the current period.options.
Commitments and Contingencies
We primarily lease our facilities in Massachusetts, California, Tennessee,and the United Kingdom, Canada and China.Kingdom. These leases are accounted for as operating leases and generally provide for a base rent plus real estate taxes and certain operating expenses related to the leases. Certain of our operating lease agreements contain scheduled rent increases. Rent expense is recorded using the straight-line method and deferred rent is included in other liabilities in the accompanying consolidated balance sheets.
Legal Proceedings
The significant estimates and judgments related with establishing litigation reserves are discussed under "Legal Proceedings" in Note 12 to the consolidated financial statements included in this Form 10-Q.
Off-Balance Sheet Arrangements
As of September 30, 2017,2018, we did not have any off-balance sheet financing arrangements.
Critical Accounting Policies and Estimates
Our financial statements are based on the selection and application of generally accepted accounting principles, which require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying condensed notes. Future events and their effects cannot be determined with certainty.
Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements.
We have reviewed our policies and estimates to determine our critical accounting policies for the nine months ended September 30, 2017.2018. We have made no material changes to the critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2016.2017 other than our accounting policies related to revenue recognition and our policies related to the accounting for commissions expense as a result of the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, which was adopted on January 1, 2018 as further described in Notes 3 and 9 to the consolidated financial statements included in this Form 10-Q.
Recent Accounting Pronouncements
Information with respect to recent accounting pronouncements is provided in Note 2 to the consolidated financial statements included in this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We currently do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash, cash equivalents, short-term and long-term investments, accounts receivable, accounts payable, accrued expenses, debt and long-term obligations. 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 short-term investments and cash equivalents. We do not believe that a 10% change in interest rates would have a material impact on the fair value of our investment portfolio or our interest income.
As of September 30, 2017,2018, we had outstanding debt related to our Convertible Senior Notes recorded on our consolidated balance sheet of $345.0$584.5 million, net of unamortized discount and issuance costs totaling $163.0 million. Changes in the fair value of our deferred financing costs and unamortizedoutstanding debt, discount totaling $67.1 million, related to our 2% and 1.25% Notes. As the interest rates are fixed,which could be impacted by changes in interest rates, doare not affectrecorded in these consolidated financial statements as the debt is accounted for at cost less unamortized discount and issuance costs. The fair value of the debt, which is disclosed in Note 5 to the consolidated financial statements, is also impacted by changes on our debt.stock price.
Our business is subject to risks, including, but not limited to: unique economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. WeA substantial portion of our operations are primarily exposedlocated in the United States, and the majority of our sales since inception have been made in United States dollars. Accordingly, we have assessed that we do not have any material net exposure to foreign currency exchange rate fluctuations at this time. However, as our business in markets outside of the United States continues to increase, we will be exposed to foreign currency exchange risk related to our subsidiary operationforeign operations. Fluctuations in Canada. The majoritythe rate of exchange between the United States dollar and foreign currencies, primarily the Euro, Canadian Dollar, and the British Pound, could adversely affect our sales outside of the U.S. are currently transacted in U.S. dollarsfinancial results, including our revenues, revenue growth rates, gross margins, income and are not subjectlosses as well as assets and liabilities.
We will continue to materialmonitor and evaluate our internal processes relating to foreign currency fluctuations.
Fluctuations in foreign currency rates could affect our revenue, costexchange, including the potential use of revenue and operating margins and could result in exchange losses. In addition, currency devaluations can result in a loss if we hold deposits of that currency. A hypothetical 10% increase or decrease in foreign currencies that we transact in would not have a material adverse impact on our business, financial condition or results of operations.hedging strategies.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017.2018. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2017,2018, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the nine months ended September 30, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding our material pending legal proceedings, which is incorporated herein by reference, is provided in Note 12 to the consolidated financial statements in this Form 10-Q.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016,2017, which could materially affect our business, financial condition or future results. These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Other than the risks listed below, there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.
Our planned assumption on July 1, 2018 of the distribution, sales, marketing, training and support activities of our Omnipod System in Europe following the expiration of our current third-party global distribution agreement creates several business and operational risks related to the future sales of our Omnipod System in Europe.risk associated with Brexit.
On July 20, 2017, we announced our planJune 23, 2016, the United Kingdom ("U.K.") held a referendum in which voters approved an exit from the European Union, commonly referred to assume, on July 1, 2018, the distribution, sales, marketing, training and support activities of our Omnipod System across Europe following the expiration of our global distribution agreement with Ypsomed on June 30, 2018. Until the expirationas “Brexit.” As a result of the agreement, Ypsomedreferendum, the U.K. government is attempting to negotiate the terms of the its future relationship with the European Union. Although it is unknown what those terms will remain the distributor of our Omnipod products in Europe. While we do not expect this transition to materially affect our financial trends for the remainder of 2017, there could be, a negative effect on our sales during the transition period if Ypsomed places more emphasis on selling its own proprietary products and other products, instead of ours, during this period, thereby reducing our sales. In addition, to retain current revenue streams after July 1, 2018, we will need to secure the existing customer installed base of Omnipod users in Europe, and there can be no assurance that we will succeed in doing so. More generally, if we are unable to effectively establish direct distribution and commercial support for the Omnipod System in Europe in a timely manner (which may include hiring employees in many of these jurisdictions), we may not be able to service the current Omnipod users in Europe and grow the business as we anticipate. We expect to incur increased operating expenses as we invest in these European operations, and it is possible that there will be greater restrictions on imports and exports and on the ultimate economic benefits that we derive from these investments could be less than anticipated, or that such expected economic benefits could fail to materialize at all. Anymovement of people between the foregoing risks could negatively affect our future revenuesU.K. and depending on severity, potentially cause a materially adverse effect onEuropean Union countries, and increased regulatory complexities associated with operating our business in the U.K. and results of operations.Europe.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
|
| | |
| Number | | Description |
| | | |
| | Amendment No. 16, entered into effective as of August 15, 2018, to Supply Agreement, dated November 21, 2013, between Amgen Inc. and Insulet Corporation. |
| | | |
| | Form ofOffer Letter between Shacey Petrovic and Insulet Corporation, 2017 Stock Optiondated September 10, 2018 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 14, 2018).
|
| | |
| | Retirement Agreement between Patrick J. Sullivan and IncentiveInsulet Corporation, dated September 10, 2018 (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed September 14, 2018).
|
| | |
| | Amended and Restated Executive Severance Plan, Performance Vesting Restricted Stock Unit Agreement for Officerseffective as of January 1, 2019 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 22, 2018).
|
| | | |
| | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer. |
| | | |
| | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer. |
| | | |
| | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer and Chief Financial Officer. |
| | | |
| 101 | | The following materials from Insulet Corporation’s Quarterly Report on Form 10-Q for the quarter ended JuneSeptember 30, 20172018 formatted in XBRL (eXtensible Business Reporting Language), as follows: |
| | | |
| | | (i) Consolidated Balance Sheets as of September 30, 20172018 (Unaudited) and December 31, 20162017 |
| | | |
| | | (ii) Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 20172018 and 20162017 (Unaudited) |
| | | |
| | | (iii) Consolidated Statements of Comprehensive LossIncome (Loss) for the Three and Nine Months Ended September 30, 20172018 and 20162017 (Unaudited) |
| | | |
| | | (iv) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 20172018 and 20162017 (Unaudited) |
| | | |
| | | (iv) Condensed Notes to Consolidated Financial Statements (Unaudited) |
| | | |
| * | | This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. |
| | |
| + | | Confidential treatment requested as to certain portions of this exhibit.
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | |
| | | INSULET CORPORATION (Registrant) |
| | | |
| Date: | November 2, 20171, 2018 | /s/ Patrick J. Sullivan |
| | | Patrick J. Sullivan |
| | | Chief Executive Officer (Principal Executive Officer) |
|
| | |
| | | |
| Date: | November 2, 20171, 2018 | /s/ Michael L. Levitz |
| | | Michael L. Levitz |
| | | Chief Financial Officer (Principal Financial and Accounting Officer) |