Certain 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 their short-term maturity. See Notes 3 and 8 for financial assets and liabilities held at carrying amount on the short-term maturityconsolidated balance sheet and Note 4 for investments measured at fair value on a recurring basis.
Note 5. Short-term InvestmentsInventories
The Company had no realized gains or losses as
Note 6. Convertible Debt
The Company had outstanding convertible debtGoodwill and related deferred financing 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 |
|
Interest expense related to the convertible notes was as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Contractual coupon interest | $ | 1,449 |
| | $ | 1,041 |
| | $ | 4,276 |
| | $ | 3,054 |
|
| Accretion of debt discount | 3,612 |
| | 1,901 |
| | 10,690 |
| | 5,330 |
|
| Amortization of debt issuance costs | 505 |
| | 222 |
| | 1,495 |
| | 785 |
|
| Loss on extinguishment of long-term debt | — |
| | 2,551 |
| | — |
| | 2,551 |
|
| Total interest and other expense | $ | 5,566 |
| | $ | 5,715 |
| | $ | 16,461 |
| | $ | 11,720 |
|
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 results from allocating a portion of the proceeds to the fair value of the conversion feature. The fair value of the debt discount 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, 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. This 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 been 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, 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, the Company included $283.1 million 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 are 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.
In September 2016, in connection with the issuance of $345 million in principal amount of the 1.25% Notes, the Company repurchased approximately $134.2 million in principal amount of the 2% Notes for $153.6 million. The extinguishment of the 2% Notes was accounted for separately from the issuance of the 1.25% Notes as both transactions were arm's-length in nature and were not contingent upon one another. The $153.6 million paid 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, and dividend yield. The Company allocated $121.4 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 connection 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 annum 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 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 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 million on its balance sheet in long-term debt related to the 2% Notes.
Note 7. Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period, excluding unvested restricted common shares. Diluted net loss per share is computed using the weighted average number of common shares outstanding and, when dilutive, potential common share equivalents from options, restricted stock units and warrants (using the treasury-stock method), and potential common shares from convertible securities (using the if-converted method). Because the Company reported a net loss for the 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, as the effect would have been anti-dilutive.
Potential dilutive common share equivalents consist of the following: |
| | | | | |
| | Three and Nine Months Ended September 30, |
| | 2017 | | 2016 |
| 2.00% Convertible Senior Notes | 1,442,433 |
| | 1,442,433 |
|
| 1.25% Convertible Senior Notes | 5,910,954 |
| | 5,910,954 |
|
| Unvested restricted stock units | 1,007,729 |
| | 971,814 |
|
| Outstanding options | 3,489,393 |
| | 3,541,936 |
|
| Total dilutive common share equivalents | 11,850,509 |
| | 11,867,137 |
|
Note 8. Accounts Receivable, Net
Accounts receivable consist of amounts due from third-party payors, patients, third-party distributors and government agencies. 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, discussions with individual customers or various assumptions and estimates that are believed to be reasonable under the circumstances. The Company believes the reserve is adequate to mitigate current collection risk.
Customers that represented greater than 10% of gross accounts receivable as of September 30, 2017 and December 31, 2016 were as follows: |
| | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| Amgen, Inc. | 13 | % | | 16 | % |
| Ypsomed | 28 | % | | 19 | % |
The components of accounts receivable are as follows: |
| | | | | | | |
| (in thousands) | September 30, 2017 | | December 31, 2016 |
| Trade receivables | $ | 50,210 |
| | $ | 31,714 |
|
| Allowance for doubtful accounts | (3,037 | ) | | (2,911 | ) |
| Total accounts receivable, net | $ | 47,173 |
| | $ | 28,803 |
|
Note 9. Inventories, Net
Inventories are held 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, 2017 and December 31, 2016. The Company reviews inventories for net realizable value based on quantities on hand and expectations of future use. Work in process is calculated based upon a buildup in the stage of completion using estimated labor inputs for each stage in production.
The components of inventories are as follows: |
| | | | | | | |
| | As of |
| (in thousands) | September 30, 2017 | | December 31, 2016 |
| Raw materials | $ | 2,289 |
| | $ | 1,911 |
|
| Work-in-process | 15,168 |
| | 15,681 |
|
| Finished goods, net | 17,597 |
| | 17,922 |
|
| Total inventories | $ | 35,054 |
| | $ | 35,514 |
|
Note 10. Other Intangible Assets, Net
The Company’s finite-lived intangible assets are stated at cost less accumulated amortization. The Company assesses its intangible and other long-lived assets for impairment whenever events or changeschange 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 measuredgoodwill for the six months ended June 30, 2021 was as the difference between thefollows:
| | | | | |
| (in millions) |
| Goodwill at December 31, 2020 | $ | 39.8 | |
| Foreign currency translation | 0.1 | |
| Goodwill at June 30, 2021 | $ | 39.9 | |
The gross carrying amount, accumulated amortization and the fairnet book value of the asset. The estimation of useful lives and expected cash flows requires 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 resultat the end of the July 2015 acquisition 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, based 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.
The components of other intangible assets areeach period were as follows:
| | | | | | | | | | | | | | | | June 30, 2021 | | December 31, 2020 |
| | As of | |
| | September 30, 2017 | | December 31, 2016 | |
| (in thousands) | 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 |
| |
| (in millions) | | (in millions) | Gross
Carrying Amount | | Accumulated Amortization | | Net
Book Value | | Gross
Carrying Amount | | Accumulated Amortization | | Net
Book Value |
| Customer relationships | | Customer relationships | $ | 43.4 | | | $ | (20.9) | | | $ | 22.5 | | | $ | 43.3 | | | $ | (18.3) | | | $ | 25.0 | |
| Internal-use software | 7,175 |
| | (3,229 | ) | | 3,946 |
| | 4,064 |
| | (2,551 | ) | | 1,513 |
| Internal-use software | 19.0 | | | (9.5) | | | 9.5 | | | 11.4 | | | (8.6) | | | 2.8 | |
| Intellectual property | | Intellectual property | 1.6 | | | (0.2) | | | 1.4 | | | 1.1 | | | (0.2) | | | 0.9 | |
| Total intangible assets | $ | 9,324 |
| | $ | (4,955 | ) | | $ | 4,369 |
| | $ | 6,058 |
| | $ | (4,017 | ) | | $ | 2,041 |
| Total intangible assets | $ | 64.0 | | | $ | (30.6) | | | $ | 33.4 | | | $ | 55.8 | | | $ | (27.1) | | | $ | 28.7 | |
Amortization expense for intangible assets was approximately $0.3$1.8 million and $0.3$0.7 million for the three months ended SeptemberJune 30, 20172021 and 2016,2020, respectively. Amortization expense for intangible assets was approximately $0.8$3.5 million and $0.9$1.5 million for the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, 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 |
| 2017 (remaining) | $ | 66 |
| | $ | 324 |
| | $ | 390 |
|
| 2018 | 159 |
| | 1,171 |
| | 1,330 |
|
| 2019 | 132 |
| | 881 |
| | 1,013 |
|
| 2020 | 66 |
| | 661 |
| | 727 |
|
| 2021 | — |
| | 578 |
| | 578 |
|
| Thereafter | — |
| | 331 |
| | 331 |
|
| Total | $ | 423 |
| | $ | 3,946 |
| | $ | 4,369 |
|
As of September 30, 2017, the weighted average amortization period of the Company’s intangible assets is approximately 3.9 years.
Note 11.7. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities arewere as follows: |
| | | | | | | |
| (in thousands) | September 30, 2017 | | December 31, 2016 |
| Employee compensation and related costs | $ | 27,389 |
| | $ | 21,999 |
|
| Professional and consulting services | 8,972 |
| | 6,753 |
|
| Supplier charges | 932 |
| | 2,886 |
|
| Warranty | 1,583 |
| | 1,642 |
|
| Other | 6,021 |
| | 7,948 |
|
| Total accrued expenses and other current liabilities | $ | 44,897 |
| | $ | 41,228 |
|
| | | | | | | | | | | |
| (in millions) | June 30, 2021 | | December 31, 2020 |
| Employee compensation and related costs | $ | 49.3 | | | $ | 53.1 | |
| Professional and consulting services | 22.9 | | | 19.1 | |
| Accrued rebates | 20.6 | | | 13.1 | |
| Supplier purchases | 4.5 | | | 7.1 | |
| Value added taxes payable | 2.9 | | | 5.0 | |
| Income taxes payable | 2.1 | | | 5.0 | |
| Accrued interest | 1.2 | | | 1.8 | |
| Other | 39.6 | | | 33.9 | |
| Accrued expenses and other current liabilities | $ | 143.1 | | | $ | 138.1 | |
Product Warranty Costs
The Company provides a four-year warranty on its PDMsPersonal Diabetes Managers (“PDMs”) sold in the United States and Europe and a five-year warranty on its PDMs sold in Canada and may replace any Omnipod SystemsPods that do not function in accordance with product specifications. The Company estimates its warranty obligation at the time the product is shipped based on historical experience and the estimated cost to service the claims. Since the Company continues to introduce new products and versions, the anticipated performance of the product over the warranty period is also considered in estimating warranty reserves. Warranty expense is recorded in cost of revenue onin the statementconsolidated statements of operations. Cost to service the claims reflects the current product cost, which has been decreasing over time. 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 reconciliationcost. Reconciliations of the changes in the Company’s product warranty liability iswere as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in millions) | 2021 | | 2020 | | 2021 | | 2020 |
| Product warranty liability at beginning of period | $ | 6.7 | | | $ | 8.3 | | | $ | 6.7 | | | $ | 8.5 | |
| Warranty expense | 2.3 | | | 2.7 | | | 4.9 | | | 5.2 | |
| Warranty claims settled | (2.5) | | | (2.9) | | | (5.1) | | | (5.6) | |
| Product warranty liability at the end of period | $ | 6.5 | | | $ | 8.1 | | | $ | 6.5 | | | $ | 8.1 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Balance at the beginning of the period | $ | 4,817 |
| | $ | 4,294 |
| | $ | 4,388 |
| | $ | 4,152 |
|
| Warranty expense | 1,483 |
| | 1,149 |
| | 3,123 |
| | 3,288 |
|
| Warranty claims settled | (1,303 | ) | | (1,101 | ) | | (2,514 | ) | | (3,098 | ) |
| Balance at the end of the period | $ | 4,997 |
| | $ | 4,342 |
| | $ | 4,997 |
| | $ | 4,342 |
|
Note 8. Debt
The components of debt consisted of the following:
| | | | | | | | | | | |
| (in millions) | June 30, 2021 | | December 31, 2020 |
| 1.375% Convertible Senior Notes due November 2024 | $ | 32.1 | | | $ | 402.5 | |
| 0.375% Convertible Senior Notes due September 2026 | 800.0 | | | 800.0 | |
| Term loan due May 2028 | 500.0 | | | 0 | |
| Equipment financing due May 2024 | 19.2 | | | 22.2 | |
| Equipment financing due November 2025 | 33.0 | | | 36.4 | |
| 5.15% Mortgage due November 2025 | 68.7 | | | 69.7 | |
| Unamortized debt discount | (179.9) | | | (252.5) | |
| Debt issuance costs | (17.0) | | | (19.0) | |
| Total debt | 1,256.1 | | | 1,059.3 | |
| Less: current portion | 20.9 | | | 15.6 | |
| Total long-term debt | $ | 1,235.2 | | | $ | 1,043.7 | |
1.375% Convertible Senior Notes
During the three months ended June 30, 2021, the Company repurchased $370.4 million in principal ($305.7 million net of discount and issuance costs) of its 1.375% Convertible Senior Notes due November 2024 (“1.375% Notes”) for $460.8 million in cash and the issuance of 2.2 million shares with a fair value of $622.7 million. The debt repurchase resulted in a $40.1 million loss on extinguishment, including cash paid to the note holders as an inducement to convert and transaction costs.
Senior Secured Credit Agreement
In May 2021, the Company entered into a senior secured credit agreement (the “Credit Agreement”), which includes a $500 million seven year senior secured term loan B (the “Term Loan”) for net proceeds of $489.5 million, which was used to fund the cash portion of the repurchase of the 1.375% Notes discussed above. The Term Loan bears interest at a rate of LIBOR plus 3.25%, with a 0.50% LIBOR floor, and contains leverage and fixed charge coverage ratio covenants, both of which are measured upon the occurrence of future debt. In addition, the Term Loan contains other customary covenants, none of which are considered restrictive to the Company’s operations.
Under the same agreement, the Company obtained a $60 million three year senior secured revolving credit facility (the “Revolving Credit Facility”), which bears interest at a rate of LIBOR plus an applicable margin of 2.75% to 3.25% based on the Company’s net leverage ratio. The Revolving Credit Facility contains a covenant to maintain a certain leverage ratio when there are amounts outstanding, in addition to other customary covenants, none of which are considered restrictive to the Company’s operations. NaN amount was outstanding under the Revolving Credit Facility at June 30, 2021.
Borrowings under the Credit Agreement are guaranteed by the Company’s wholly owned domestic subsidiaries, and are secured by substantially all assets of the Company and of each subsidiary guarantor, subject to certain exceptions. Additionally, borrowings under the Credit Agreement are senior to all of the Company’s unsecured indebtedness, including the convertible notes.
Fair Value of Debt
The carrying amount and the estimated fair value of the Company’s debt were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| (in millions) | Carrying
Value | | Estimated
Fair Value | | Carrying
Value | | Estimated Fair Value (1) |
1.375% Convertible Senior Notes due November 2024 (1) | $ | 26.6 | | | $ | 95.8 | | | $ | 323.9 | | | $ | 1,104.2 | |
0.375% Convertible Senior Notes due September 2026 (1) | 623.8 | | | 980.9 | | | 609.2 | | | 902.0 | |
Term loan due May 2028 (2) | 486.7 | | | $ | 500.6 | | | $ | 0 | | | $ | 0 | |
| Total | $ | 1,137.1 | | | $ | 1,577.3 | | | $ | 933.1 | | | $ | 2,006.2 | |
(1) Convertible debt is classified as Level 2 in the fair value hierarchy. Fair value was determined using the Company’s quoted stock price and the contractual conversion rate.
(2) Term debt is classified as Level 1 in the fair value hierarchy. Fair value was determined using quoted market prices.
|
| | | | | | | |
| (in thousands) | September 30, 2017 | | December 31, 2016 |
| Composition of balance: | | | |
| Short-term | $ | 1,583 |
| | $ | 1,642 |
|
| Long-term | 3,414 |
| | 2,746 |
|
| Total warranty liability: | $ | 4,997 |
| | $ | 4,388 |
|
Note 9. Derivative Instruments The Company manages interest rate exposure through the use of interest rate swap transactions with financial institutions acting as principal counterparties. In May 2021, the Company entered into 2 interest rate swap agreements that expire on April 30, 2025. Under the interest rate swap agreements, the Company receives variable rate interest payments and pays fixed interest rates on a total notional value of $480 million of its Term Loan. As a result of the interest rate swaps 96% of the Term Loan exposed to interest rate risk from changes in LIBOR is fixed at a rate of 4.20%. The Company has designated the interest rate swaps as cash flow hedges.
The fair value of interest rate swaps, which are classified as Level 2 in the fair value hierarchy, represent the estimated amounts the Company would receive or pay to terminate the contracts and is determined using industry standard valuation models and market-based observable inputs, including credit risk and interest rate yield curves. At June 30, 2021, the fair value of the interest rate swaps was a liability of $0.7 million.
Note 12.10. 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, three3 class action lawsuits were filed by shareholders in the U.S. District Court, for the District of Massachusetts, against the Company and certain individualthen current and former executives of the Company. TwoNaN suits subsequently were voluntarily dismissed. Arkansas Teacher Retirement System v. Insulet, et al., 1:15-cv-12345, which remains outstanding, allegesalleged that the Company (and certain then current and former 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. The lawsuit seeks, among other things, compensatory damages in connection withOn February 8, 2018, the Company’s allegedly inflated stock price between May 7, 2013parties executed a binding stipulation of settlement, under which all claims were released, and April 30, 2015, as well as
attorneys’a payment was made into an escrow account for the plaintiffs and the class they purport to represent. On August 6, 2018, the Court issued an order approving the settlement. On June 25, 2021, the Court issued an order on the plaintiffs’ motion for fees and costs.expenses, a final judgement approving the settlement, and an order of dismissal with prejudice. The Company currently cannot reasonably estimate a possible loss, or range of loss,had previously accrued fees and expenses in connection with this matter.matter for the amount of the final settlement liability that was not covered by insurance, the amount of which 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) was filed, and on October 13, 2017, a second derivative action (Carnazza(Carnazza v. DeSisto, et al.al., 1:17-cv-11977) 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 then 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. On June 28, 2021, the Court issued an order preliminarily approving the proposed settlement and scheduling a hearing to decide whether the proposed settlement should be finally approved for September 9, 2021. The Company currently cannotexpects that such fees and expenses payable to plaintiff’s counsel will be covered by the Company’s insurance.
In June 2020, Roche Diabetes Care, Inc. (“Roche”) filed a patent infringement lawsuit against the Company in the United States District Court for the District of Delaware alleging that the Company’s manufacture and sale of its Omnipod Insulin Management System, including OmniPods, Personal Diabetes Managers, and other components of the system, and kits in the United States infringed Roche’s now-expired U.S. Patent 7,931,613. Roche is seeking monetary damages and attorneys’ fees and costs. Since the patent expired in 2019, Roche is not seeking injunctive relief and the lawsuit will have no impact on ongoing sales of the Company’s products. The Company believes that it has meritorious defenses to Roche’s claims and intends to vigorously defend against them. The court has set a trial date of July 25, 2022. At this time, based on available information regarding this litigation, the Company is unable to reasonably assess the ultimate outcome of this case or determine an estimate, a possible loss, or range of loss,estimates, of potential losses, which could be material.
In July 2020, the Company filed a patent infringement claim against Roche Diabetes Care Limited (“Roche Ltd.”) in connectionthe United Kingdom alleging that Roche Ltd.’s manufacture and sale of the Accu-Chek® Solo insulin pump and its consumable components infringes European Patent No. 1 335 764 in the United Kingdom. The Company was seeking an injunction to last until expiry of the patent and monetary damages. A trial was held in May 2021 and the judge ultimately sided with Roche Ltd. on non-infringement and invalidity of the either of these actions.patent, which was slated to expire in August 2021. Accordingly, no injunction was issued and no monetary damages were awarded.
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. AlthoughOther than as described above, the Company is unable to quantifydoes not expect the exact financial impact of anyoutcome of these matters,proceedings, either individually or in the Company believes that noneaggregate, to have a material adverse effect on its results of these currently pending matters will have an outcome material to its financial condition or business.operations.
Note 11. Accumulated Other Comprehensive Income (Loss)
Changes in the components of accumulated other comprehensive income (loss), net of tax, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 | | Six Months Ended June 30, 2021 |
| (in millions) | Foreign Currency Translation Adjustment | | Unrealized Gain on Available-for-sale Securities | | Unrealized Loss on Cash Flow Hedges | | Accumulated Other Comprehensive Income | | Foreign Currency Translation Adjustment | | Unrealized Gain on Available-for-sale Securities | | Unrealized Loss on Cash Flow Hedges | | Accumulated Other Comprehensive Income |
| Balance at beginning of period | $ | 3.1 | | | $ | 0.1 | | | $ | 0 | | | $ | 3.2 | | | $ | 5.2 | | | $ | 0.3 | | | $ | 0 | | | $ | 5.5 | |
| Other comprehensive loss before reclassifications | (1.8) | | | (0.1) | | | (1.0) | | | (2.9) | | | (3.9) | | | (0.3) | | | (1.0) | | | (5.2) | |
| Amounts reclassified to net loss | $ | 0 | | | $ | 0 | | | $ | 0.4 | | | $ | 0.4 | | | $ | 0 | | | $ | 0 | | | $ | 0.4 | | | $ | 0.4 | |
| Balance at the end of period | $ | 1.3 | | | $ | 0 | | | $ | (0.6) | | | $ | 0.7 | | | $ | 1.3 | | | $ | 0 | | | $ | (0.6) | | | $ | 0.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 |
| (in millions) | Foreign Currency Translation Adjustment | | Unrealized Gain on Available-for-sale Securities | | Accumulated Other Comprehensive Loss | | Foreign Currency Translation Adjustment | | Unrealized Gain on Available-for-sale Securities | | Accumulated Other Comprehensive Loss |
| Balance at beginning of period | $ | (5.0) | | | $ | 1.2 | | | $ | (3.8) | | | $ | (1.6) | | | $ | 0.4 | | | $ | (1.2) | |
| Other comprehensive income (loss) | 0.6 | | | (0.4) | | | 0.2 | | | (2.8) | | | 0.4 | | | (2.4) | |
| Balance at the end of period | $ | (4.4) | | | $ | 0.8 | | | $ | (3.6) | | | $ | (4.4) | | | $ | 0.8 | | | $ | (3.6) | |
Note 12. Interest Expense, Net
Interest expense, net was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in millions) | 2021 | | 2020 | | 2021 | | 2020 |
| Contractual interest, net of interest rate swaps | $ | 6.8 | | | $ | 2.2 | | | $ | 10.5 | | | $ | 4.3 | |
| Accretion of debt discount | 10.7 | | | 10.5 | | | 21.7 | | | 20.9 | |
| Amortization of debt issuance costs | 1.0 | | | 0.7 | | | 1.8 | | | 1.4 | |
| Capitalized interest | (1.9) | | | (1.6) | | | (3.8) | | | (3.2) | |
| Interest expense, net of portion capitalized | 16.6 | | | 11.8 | | | 30.2 | | | 23.4 | |
| Interest income | (0.2) | | | (0.7) | | | (0.4) | | | (2.2) | |
| Interest expense, net | $ | 16.4 | | | $ | 11.1 | | | $ | 29.8 | | | $ | 21.2 | |
Note 13. EquityStock-Based Compensation Expense
Compensation expense related to stock-based awards was recorded as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in millions) | 2021 | | 2020 | | 2021 | | 2020 |
| Cost of revenue | $ | 0.1 | | | $ | 0.1 | | | $ | 0.2 | | | $ | 0.2 | |
| Research and development expenses | 2.0 | | | 2.3 | | | 3.9 | | | 5.0 | |
| Selling, general and administrative expenses | 6.9 | | | 3.4 | | | 13.5 | | | 8.5 | |
| Total | $ | 9.0 | | | $ | 5.8 | | | $ | 17.6 | | | $ | 13.7 | |
Note 14. Income Taxes
The Company’s effective tax rate for the three and six months ended June 30, 2021 was 12.1% and 11.2%, compared with 17.2% and 17.0% for the three and six months ended June 30, 2020, respectively. Income tax benefits have not been recorded for losses in jurisdictions where valuation allowances exist against net deferred tax assets. The Company accountshad a full valuation allowance against its net deferred tax assets in the United Kingdom and the United States at June 30, 2021, and a full valuation allowance against its net deferred tax assets in the United States at December 31, 2020. The Company had 0 uncertain tax positions at both June 30, 2021 and December 31, 2020.
Note 15. Net (Loss) Income Per Share
Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding for stock-based compensation under the provisionsperiod. Diluted net (loss) income per share is computed using the weighted average number of ASC 718-10, Compensation — Stock Compensation (“ASC 718-10”), which requires all share-based payments to employeescommon shares outstanding and, directors, including grants ofwhen dilutive, common share equivalents from outstanding stock options and restricted stock units to be recognized(using the treasury-stock method), and potential common shares from the Company’s convertible notes (using the if-converted method). The weighted-average number of common shares used in the computation of basic and diluted net income statement based on their fair values. Share-based payments that contain performance conditions are recognized when such conditions are probable of being achieved.per share were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| Weighted average number of common shares outstanding, basic | 66,696 | | | 64,371 | | | 66,406 | | | 63,627 | |
| Stock options | 0 | | | 1,087 | | | 0 | | | 1,130 | |
| Restricted stock units | 0 | | | 121 | | | 0 | | | 213 | |
| Weighted average number of common shares outstanding, diluted | 66,696 | | | 65,579 | | | 66,406 | | | 64,970 | |
The number of common share equivalents excluded from the computation of diluted net (loss) income per share because either the effect would have been anti-dilutive, or the performance criteria related to the units had not yet been met, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| 1.375% Convertible Senior Notes due November 2024 | 3,657 | | | 4,319 | | | 3,988 | | | 4,319 | |
| 0.375% Convertible Senior Notes due September 2026 | 3,528 | | | 3,528 | | | 3,528 | | | 3,528 | |
| Restricted stock units | 283 | | | 299 | | | 364 | | | 357 | |
| Stock options | 788 | | | 67 | | | 809 | | | 52 | |
| Total | 8,256 | | | 8,213 | | | 8,689 | | | 8,256 | |
Note 16. Related Party Transactions
In February 2021, the Company grants share-based awards to employees inentered into a distribution agreement, the formterms of options to purchasewhich are consistent with those prevailing at arm's-length. The spouse of one of the members of 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 valueBoard of options granted and determines the intrinsic value of restricted stock units based on the closing price of 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 onDirectors is an accelerated basis for awards with performance conditions. Compensation expense is recognized over the vesting periodexecutive officer of the awards.
The following table reflects the Company's stock-based compensation expense related to share-based awards recognized indistributor. During the three and ninesix months ended SeptemberJune 30, 20172021, the Company recorded $3.3 million and 2016:$5.5 million, respectively, of net revenues from the distributor. At June 30, 2021, the Company had $1.3 million of net accounts receivable due from the distributor on its condensed consolidated balance sheet.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Unamortized Expense | | Weighted Average Remaining Expense Period (Years) |
| ($ in thousands) | 2017 | | 2016 | | 2017 | | 2016 | | At September 30, 2017 |
| Stock options | $ | 3,127 |
| | $ | 2,578 |
| | $ | 8,815 |
| | $ | 7,372 |
| | $ | 18,264 |
| | 2.4 |
| Restricted stock units | 5,621 |
| | 3,439 |
| | 14,358 |
| | 9,359 |
| | 30,411 |
| | 1.9 |
| Employee stock purchase plan | 149 |
| | 71 |
| | 379 |
| | 142 |
| | 99 |
| | 0.2 |
| Total | $ | 8,897 |
| | $ | 6,088 |
| | $ | 23,552 |
| | $ | 16,873 |
| | $ | 48,774 |
| | |
Equity Award PlansNote 17. Subsequent Events
In May 2007,July 2021, $20.0 million in conjunction with the Company's initial public offering,principal of 1.375% Notes were converted into approximately 215,000 shares.
In July 2021, the Company adoptedentered into a $43.1 million equipment financing transaction secured by machinery and equipment associated with one of its 2007 Stock Option and Incentive Plan (the "2007 Plan").highly automated manufacturing lines located in Acton, Massachusetts. The 2007 Plan was amended and restated in November 2008, May 2012 and May 2015 to provide for the issuanceequipment financing has a term 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 four7 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.of approximately 4.25%.
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 plans during the nine months ended September 30, 2017:
|
| | | | | | | | | | | | |
| | 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 |
| | |
| |
(1)
| The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common 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. |
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 $7.3 million in the nine months ended September 30, 2017 and 2016, respectively, of stock-based compensation expense related to the vesting of non-performance based restricted stock units was recognized. Under the terms of the awards, the Company will issue shares of common stock on each of the vesting dates.
The following table summarizes the status of the Company’s restricted stock units during the nine months ended September 30, 2017: |
| | | | | | |
| | Number of Shares (#) | | Weighted Average Fair Value ($) |
| Balance, December 31, 2016 | 962,219 |
| | $ | 31.14 |
|
| Granted | 432,877 |
| | 47.48 |
|
| Vested | (375,050 | ) | | 31.51 |
|
| Forfeited | (12,317 | ) | | 34.23 |
|
| Balance, September 30, 2017 | 1,007,729 |
| | $ | 37.98 |
|
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (“ESPP”) authorizes the issuance of up to a total 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 at any time. An amendment to increase the number of shares of common stock that is authorized under the ESPP, and certain other amendments, require the approval of stockholders.
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 of ASC 740-10, Income Taxes (“ASC 740-10”) on accounting for uncertainty in income taxes recognized in its financial statements. ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, ASC 740-10 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company recognizes estimated interest and penalties for uncertain tax positions in income tax expense.
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 2014 through 2016 and 2012 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 September 30, 2017 and December 31, 2016, the Company 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.
Income tax expense was $0.1 million for each of the three months ended September 30, 2017 and 2016. Income tax expense was $0.3 million and $0.2 million for the nine months ended September 30, 2017 and 2016, respectively. Income tax expense for both periods was primarily driven by income generated in foreign jurisdictions, mainly 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'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
You should read theThe following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying condensed notes included in this quarterly report. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs, which are subject to risks, uncertainties and assumptions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed under the headings “Risk Factors” and “Forward-Looking Statements” in both our annual report on Form 10-K for the year ended December 31, 2020 and in this quarterly report.
Overview
We are primarily engaged in the development, manufacture and sale of our proprietary Omnipod® System (“Omnipod”), a continuous insulin delivery system for people with insulin-dependent diabetes. The Omnipod System features a small, lightweight, self-adhesive disposable tubeless Omnipod device (“Pod”) that is worn on the body for up to three days at a time; and its wireless companion, the handheld Personal Diabetes Manager. The Omnipod System, which features discreet and easy-to-use devices communicates wirelessly, provides for virtually pain-free automated cannula insertion and eliminates the need for traditional multiple daily injection therapy, using syringes or insulin pens, or the use of traditional pump and tubing.
In addition to the diabetes market space, we have partnered with pharmaceutical and biotechnology companies to tailor the Omnipod System technology platform for the delivery of subcutaneous drugs across other therapeutic areas. Most of our drug delivery revenue currently consists of sales of pods to Amgen for use in the Neulasta® Onpro® kit, a delivery system for Amgen’s white blood cell booster to help reduce the risk of infection after intense chemotherapy.
Our mission is to improve the lives of people with diabetes. To assist in achieving this mission, we are focused on the following key strategic imperatives:
•expanding access and awareness;
•delivering consumer-focused innovation;
•growing our global addressable market; and
•driving operational excellence.
Our long-term financial objective is to sustain profitable growth. To achieve this goal, we expect our efforts in 2021 to focus primarily on our planned launch of the Omnipod® 5 Automated Insulin Delivery System (“Omnipod 5”), which is currently under review with the U.S. Food and Drug Administration (“FDA”). This review is taking longer than we had anticipated. We now expect to receive FDA clearance and launch our limited commercial release in the second half of the year, most likely late in the fourth quarter. This shift in timing is not expected to have a material impact on 2021 revenue.
In addition, we continue our efforts to expand the Omnipod 5 indication to preschoolers ages two to six, however the timing of our FDA submission is contingent upon the timing of Omnipod 5 clearance. We are now planning for this expanded indication in 2022. In addition, we completed enrollment in our Type 2 feasibility study and plan to conduct additional studies with the goal to further expand Omnipod 5’s indication to Type 2 users.
In order to support our continued growth and the planned launch of Omnipod 5, we continue to focus on adding capacity to our U.S. manufacturing plant. During the quarter, we began producing salable product on our third highly automated manufacturing line.
In 2021, we launched Omnipod DASH® Insulin Management System (“Omnipod DASH”), our next generation digital mobile Omnipod platform, in Canada. We are also continuing to expand internationally in a targeted and strategic manner. During the first quarter of 2021, we increased our global footprint by expanding into Turkey and we also expect to enter Australia this year. Further, we are working on our strategy to enter additional markets in new regions.
Finally, we plan to continue our product development efforts and expand awareness of and access to our products. Achieving the above strategic imperatives is expected to require additional investments in certain initiatives and personnel, as well as enhancements to our supply chain operation capacity, efficiency and effectiveness.
Results of Operations
Revenue
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| Three Months Ended June 30, | | | | | | |
| (dollars in millions) | 2021 | | 2020 | | Percent
Change | | Currency
Impact | | Constant Currency (1) |
| U.S. Omnipod | $ | 150.5 | | | $ | 128.8 | | | 16.8 | % | | — | % | | 16.8 | % |
| International Omnipod | 91.6 | | | 73.2 | | | 25.1 | % | | 11.7 | % | | 13.4 | % |
| Total Omnipod | 242.1 | | | 202.0 | | | 19.9 | % | | 4.3 | % | | 15.6 | % |
| Drug Delivery | 21.1 | | | 24.3 | | | (13.2) | % | | — | % | | (13.2) | % |
| Total revenue | $ | 263.2 | | | $ | 226.3 | | | 16.3 | % | | 3.8 | % | | 12.5 | % |
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| Six Months Ended June 30, | | | | | | |
| (dollars in millions) | 2021 | | 2020 | | Percent
Change | | Currency
Impact | | Constant Currency (1) |
| U.S. Omnipod | $ | 293.8 | | | $ | 245.4 | | | 19.7 | % | | — | % | | 19.7 | % |
| International Omnipod | 181.5 | | | 146.3 | | | 24.1 | % | | 10.7 | % | | 13.4 | % |
| Total Omnipod | 475.3 | | | 391.7 | | | 21.3 | % | | 4.0 | % | | 17.3 | % |
| Drug Delivery | 40.2 | | | 32.6 | | | 23.3 | % | | — | % | | 23.3 | % |
| Total revenue | $ | 515.5 | | | $ | 424.3 | | | 21.5 | % | | 3.7 | % | | 17.8 | % |
(1) Constant currency revenue growth is a non-GAAP financial measure which should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with GAAP. See “Management’s Use of Non-GAAP Measures.”
Total revenue for the three months ended June 30, 2021 increased $36.9 million, or 16.3%, to $263.2 million, compared with $226.3 million for the three months ended June 30, 2020. Constant currency revenue growth of 12.5% was primarily driven by higher volume and, to a lesser extent, favorable sales channel mix.
Total revenue for the six months ended June 30, 2021 increased $91.2 million, or 21.5%, to $515.5 million, compared with $424.3 million for the six months ended June 30, 2020. Constant currency revenue growth of 17.8% was primarily driven by higher volume and, to a lesser extent, favorable sales channel mix.
U.S. Omnipod
U.S. Omnipod revenue for the three months ended June 30, 2021 increased $21.7 million, or 16.8%, to $150.5 million, compared with $128.8 million for the three months ended June 30, 2020. This increase was primarily due to higher volumes driven by growing our customer base, and to a lesser extent, an increase due to growth through the pharmacy channel, where Pods have a higher average selling price due in part to the fact that we offer the PDM for no charge. This increase was partially offset by a decrease in days-on-hand inventory at distributors since COVID-19 supply chain urgency has normalized.
U.S. Omnipod revenue for the six months ended June 30, 2021 increased $48.4 million, or 19.7%, to $293.8 million, compared with $245.4 million for the six months ended June 30, 2020. This increase was primarily due to higher volumes driven by growing our customer base, and to a lesser extent, an increase due to growth through the pharmacy channel, where Pods have a higher average selling price due in part to the fact that we offer the PDM for no charge. For full year 2021, we expect strong U.S. Omnipod revenue growth driven by volume growth of Omnipod DASH, primarily in the pharmacy channel, benefits of our efforts to drive expanded access and awareness, and further growth in our Omnipod customer base.
International Omnipod
International Omnipod revenue for the three months ended June 30, 2021 increased $18.4 million, or 25.1%, to $91.6 million, compared with $73.2 million for the three months ended June 30, 2020. Excluding the 11.7% favorable impact of currency exchange, the remaining 13.4% increase in revenue was primarily driven by higher volumes as we continue to expand awareness and access to the Omnipod.
International Omnipod revenue for the six months ended June 30, 2021 increased $35.2 million, or 24.1%, to $181.5 million, compared with $146.3 million for the six months ended June 30, 2020. Excluding the 10.7% favorable impact of currency exchange, the remaining 13.4% increase in revenue was primarily driven by higher volumes as we continue to expand awareness and access to the Omnipod, partially offset by a decrease in days-on-hand inventory at distributors since COVID-19 supply chain urgency has normalized. For full year 2021, we expect higher International Omnipod revenue due to continued volume growth and market penetration aided by the full launch of Omnipod DASH throughout our international markets. We expect this revenue growth to be
partially offset by the lagging impact of lower new customer starts in 2020 and the first half of 2021 stemming from COVID-19 and related challenges.
Drug Delivery
Drug Delivery revenue for the three months ended June 30, 2021 decreased $3.2 million, or 13.2%, to $21.1 million, compared with $24.3 million for the three months ended June 30, 2020, due to elevated volume in the prior year due to the COVID-19 pandemic.
Drug Delivery revenue for the six months ended June 30, 2021 increased $7.6 million, or 23.3%, to $40.2 million, compared with $32.6 million for the six months ended June 30, 2020, due to increased demand for Amgen’s Neulasta® Onpro® kit which includes our pods. For full year 2021, we expect drug delivery revenue to decline or grow slightly dependent upon forecasted demand.
Operating Expenses
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| Three Months Ended June 30, |
| 2021 | | 2020 |
| (dollars in millions) | Amount | | Percent of Revenue | | Amount | | Percent of Revenue |
| Cost of revenue | $ | 80.5 | | | 30.6 | % | | $ | 83.8 | | | 37.0 | % |
| Research and development expenses | $ | 40.1 | | | 15.2 | % | | $ | 34.2 | | | 15.1 | % |
| Selling, general and administrative expenses | $ | 116.3 | | | 44.2 | % | | $ | 80.8 | | | 35.7 | % |
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| Six Months Ended June 30, |
| 2021 | | 2020 |
| (dollars in millions) | Amount | | Percent of Revenue | | Amount | | Percent of Revenue |
| Cost of revenue | $ | 165.3 | | | 32.1 | % | | $ | 154.9 | | | 36.5 | % |
| Research and development expenses | $ | 80.8 | | | 15.7 | % | | $ | 69.7 | | | 16.4 | % |
| Selling, general and administrative expenses | $ | 226.8 | | | 44.0 | % | | $ | 164.7 | | | 38.8 | % |
Cost of Revenue
Cost of revenue for the three months ended June 30, 2021 decreased $3.3 million, or 3.9%, to $80.5 million, compared with $83.8 million for the three months ended June 30, 2020. Gross margin was 69.4% for the three months ended June 30, 2021, compared with 63.0% for the three months ended June 30, 2020. The 640 basis point increase in gross margin was primarily driven by improved manufacturing and supply chain efficiencies, 130 basis points of favorable foreign currency exchange, a 120 basis point decrease in COVID-19 related costs, and a higher average selling price due to growth in the pharmacy channel. These increases were partially offset by expected higher production costs as we continue to scale U.S. manufacturing.
Cost of revenue for the six months ended June 30, 2021 increased $10.4 million, or 6.7%, to 165.3, compared with $154.9 million for the six months ended June 30, 2020. Gross margin was 67.9% for the six months ended June 30, 2021, compared with 63.5% for the six months ended June 30, 2020. The 440 basis point increase in gross margin was primarily driven by improved manufacturing and supply chain efficiencies, higher average selling price due to growth in the pharmacy channel, 120 basis points of favorable foreign currency exchange, and a 110 basis point decrease in COVID-19 related costs. These increases were partially offset by expected higher production costs as we continue to scale U.S. manufacturing. For full year 2021, we expect gross margin to be in the range of 68% to 69%, which reflects expected revenue growth both in the U.S. and internationally, including in the pharmacy channel, and the benefits of continued improvements in manufacturing and supply chain operations. In addition, we expect to benefit from lower COVID-19 related costs.
Research and Development Expenses
Research and development expenses for the three months ended June 30, 2021 increased $5.9 million, or 17.3%, to $40.1 million, compared with $34.2 million for the three months ended June 30, 2020. This increase was primarily due to year-over-year headcount additions to support our continued investment in development of Omnipod products.
Research and development expenses for the six months ended June 30, 2021 increased $11.1 million, or 15.9%, to $80.8 million, compared with $69.7 million for the six months ended June 30, 2020. This increase was primarily due to year-over-year headcount additions to support our continued investment in development of Omnipod products. We expect research and development spend for the full year 2021 to increase compared with 2020 as we continue to invest in advancing our innovation and clinical pipeline.
Selling, General and Administrative Expenses
Selling general and administrative expenses for the three months ended June 30, 2021 increased $35.5 million, or 43.9%, to $116.3 million, compared with $80.8 million for the three months ended June 30, 2020. This increase was primarily attributable to year-over-year headcount additions, mainly to support international expansion, information technology, sales, and customer service personnel, an
increase in direct to consumer advertising spend, as well as a shift in resources and certain costs from our Omnipod 5 clinical efforts to our commercial strategy as we mature as a company.
Selling general and administrative expenses for the six months ended June 30, 2021 increased $62.1 million, or 37.7%, to $226.8 million, compared with $164.7 million for the six months ended June 30, 2020. This increase was primarily attributable to year-over-year headcount additions, mainly to support international expansion, information technology, sales, and customer service personnel, an increase in direct to consumer advertising spend, a shift in resources and certain costs from our Omnipod 5 clinical efforts to our commercial strategy as we mature as a company, as well as commercial costs related to international expansion. We expect selling, general and administrative expenses to increase in 2021 compared with 2020 due to expansion of our sales force, direct-to-consumer advertising, investments to expand market acceptance and access for our products, and investments in our operating structure to facilitate operational efficiencies and continued growth.
Non-Operating Items
Interest Expense, Net
Net interest expense increased $5.3 million to $16.4 million for the three months ended June 30, 2021, compared with $11.1 million for the three months ended June 30, 2020. This increase was driven by $4.6 million of cash interest expense associated with the $500 million senior secured term loan B (the “Term Loan”) entered into in May 2021, and the mortgage and equipment financings that occurred in the fourth quarter of 2020 and a $0.5 million decrease in interest income due to lower market rates and a shift in a portion of our investment portfolio to more liquid investments.
Net interest expense increased $8.6 million to $29.8 million for the six months ended June 30, 2021, compared with $21.2 million for the six months ended June 30, 2020. This increase was driven by $6.2 million of cash interest expense associated with the Term Loan entered into in May 2021, and the mortgage and equipment financings that occurred in the fourth quarter of 2020 and a $1.8 million decrease in interest income due to lower market rates and a shift in a portion of our investment portfolio to more liquid investments.
Loss on Extinguishment of Debt
During the three and six months ended June 30, 2021, we incurred a $40.1 million loss on extinguishment of debt related to the repurchase of a portion of our 1.375% Convertible Senior Notes due November 2024 (“1.375% Notes”). Refer to Note 8 to the consolidated financial statements for additional information.
Other Income (Expense), Net
During the three months ended June 30, 2021, we had other income, net of $1.8 million, compared with $1.0 million for the three months ended June 30, 2020. The $0.8 million increase in other income was primarily driven by unrealized foreign currency gains due to the change in exchange rates.
During the six months ended June 30, 2021, we had other expense of $0.8 million, compared with income of $1.0 million for the six months ended June 30, 2020. The $1.8 million decrease in other income was primarily driven by unrealized foreign currency losses due to the change in exchange rates.
Income Tax Expense, Net
Income tax benefit was $3.4 million for the three months ended June 30, 2021, compared with an income tax expense of $3.0 million for the three months ended June 30, 2020, resulting in effective tax rates of 12.1% and 17.2% for the three months ended June 30, 2021 and 2020, respectively. The decrease in the effective tax rate was primarily driven by the jurisdictional distribution of profits and losses. In the United States, we have net operating loss carryforwards that reduce taxable profits and a full valuation allowance against net deferred tax assets.
Income tax benefit was $3.1 million for the six months ended June 30, 2021, compared with an income tax expense of $2.5 million for the six months ended June 30, 2020, resulting in effective tax rates of 11.2% and 17.0% for the six months ended June 30, 2021 and 2020, respectively. The decrease in the effective tax rate was primarily driven by the jurisdictional distribution of profits and losses. In the United States, we have net operating loss carryforwards that reduce taxable profits and a full valuation allowance against net deferred tax assets. Additionally, we have not recorded tax benefits for current year losses in the United Kingdom due to valuation allowance requirements following a transfer of intellectual property that occurred during the three months ended March 31, 2021.
Adjusted EBITDA
The table below presents reconciliations of Adjusted EBITDA, a non-GAAP financial measure, to net (loss) income, the most directly comparable financial measure prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”):
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in millions) | 2021 | | 2020 | | 2021 | | 2020 |
| Net (loss) income | $ | (25.0) | | | $ | 14.4 | | | $ | (25.0) | | | $ | 12.3 | |
| Interest expense, net | 16.4 | | | 11.1 | | | 29.8 | | | 21.2 | |
| Income tax (benefit) expense | (3.4) | | | 3.0 | | | (3.1) | | | 2.5 | |
| Depreciation and amortization | 15.2 | | | 9.9 | | | 28.0 | | | 18.8 | |
| Stock-based compensation expense | 9.0 | | | 5.8 | | | 17.6 | | | 13.7 | |
| Loss on extinguishment of debt | 40.1 | | | — | | | 40.1 | | | — | |
| Adjusted EBITDA | $ | 52.3 | | | $ | 44.2 | | | $ | 87.4 | | | $ | 68.5 | |
Non-GAAP Financial Measures
Management uses the following non-GAAP financial measures:
Constant currency revenue growth represents the change in revenue between current and prior year periods using a constant currency, the exchange rate in effect during the applicable prior year period. We present constant currency revenue growth because we believe it provides meaningful information regarding our results on a consistent and comparable basis. Management uses this non-GAAP financial measure, in addition to financial measures in accordance with accounting principles generally accepted in the United States (“GAAP”), to evaluate our operating results. It is also one of the performance metrics that determines management incentive compensation.
Adjusted EBITDA represents net income (loss) plus net interest expense, income tax expense (benefit), depreciation and amortization, stock-based compensation and other significant unusual items, as applicable. We present Adjusted EBITDA because management uses it as a supplemental measure in assessing our operating performance, and we believe that it is helpful to investors, and other interested parties as a measure of our comparative operating performance from period to period. Adjusted EBITDA is a commonly used measure in determining business value and we use it internally to report results.
These non-GAAP financial measures should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with GAAP. In addition, the above definitions may differ from similarly titled measures used by others. Non-GAAP financial measures exclude the effect of items that increase or decrease our reported results of operations; accordingly, we strongly encourage investors to review our consolidated financial statements in their entirety.
Liquidity and Capital Resources
As of June 30, 2021, we had $854.6 million in cash and cash equivalents and $17.5 million of investments in marketable securities. Additionally, we have a $60 million three year senior secured revolving credit facility (“Revolving Credit Facility”), which expires in 2024. At June 30, 2021, no amount was outstanding under the Revolving Credit Facility. The Revolving Credit Facility contains a covenant to maintain a certain leverage ratio, in addition to other customary covenants, none of which are considered restrictive to our operations. We believe that our current liquidity will be sufficient to meet our projected operating, investing and debt service requirements for at least the next twelve months.
Debt
To finance our operations and global expansion, we have periodically issued convertible senior notes, which are convertible into our common stock. As of June 30, 2021, the following notes were outstanding:
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| Issuance Date | | Coupon | | Principal Outstanding
(in millions) | | Due Date | | Conversion Rate (1) | | Conversion Price per Share of Common Stock |
| November 2017 | | 1.375% | | $ | 32.1 | | | November 2024 | | 10.7315 | | $ | 93.18 | |
| September 2019 | | 0.375% | | 800.0 | | | September 2026 | | 4.4105 | | $ | 226.73 | |
| Total | | | | $ | 832.1 | | | | | | | |
(1) Per $1,000 face value of notes.
In July 2021, $20.0 million in principal of 1.375% Notes were converted into approximately 215,000 shares, which we expect to result in a loss on extinguishment of debt of approximately $2 million.
During the three months ended June 30, 2021, we obtained a $500 million seven year Term Loan for net proceeds of $489.5 million, which we used to fund the cash portion of repurchase of the 1.375% Notes due November 2024. Additional information regarding our debt is provided in Note 8 to the consolidated financial statements.
Summary of Cash Flows
| | | | | | | | | | | |
| Six Months Ended June 30, |
| (in millions) | 2021 | | 2020 |
| Cash (used in) provided by: | | | |
| Operating activities | $ | (16.8) | | | $ | 22.8 | |
| Investing activities | (34.1) | | | 80.6 | |
| Financing activities | — | | | 464.9 | |
| Effect of exchange rate changes on cash | (1.7) | | | (2.9) | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (52.6) | | | $ | 565.4 | |
Operating Activities
Net cash used in operating activities of $16.8 million for the six months ended June 30, 2021 was primarily attributable to net loss, as adjusted for loss on extinguishment of debt, depreciation and amortization, non-cash interest, and stock-based compensation expense, partially offset by a $104.2 million working capital cash outflow. The working capital outflow was driven by a $45.0 million increase in inventories, a $30.0 million increase in prepaid expenses and other assets and a $19.5 million increase in accounts receivable. The increase in inventories was driven by a planned inventory build to satisfy demand and the addition of our third highly automated manufacturing line. The increase in prepaid expenses and other assets was driven by an increase in cloud computing implementation costs and an increase in unbilled revenue resulting from higher percentage of completion for our Drug Delivery product. Finally, the increase in accounts receivable was primarily due to an increase in International Omnipod revenue and sales in the U.S. pharmacy channel, both of which generally have longer payment terms.
Investing Activities
Net cash used in investing activities was $34.1 million for the six months ended June 30, 2021, compared with net cash provided by investing activities of $80.6 million for the six months ended June 30, 2020.
Capital Spending—Capital expenditures were $52.8 million and $51.7 million for the six months ended June 30, 2021 and 2020, respectively, and primarily related to the purchase of equipment to increase our manufacturing capacity. We expect capital expenditures for 2021 to increase compared with 2020 as we continue to further invest in our global manufacturing operations to support our growth, as well as investments in our strategic initiatives. We expect to fund our capital expenditures using existing cash and investments.
Purchases and Sales of Investments—Proceeds from maturities of marketable securities were $22.5 million for the six months ended June 30, 2021, compared with net proceeds from maturities of $132.8 million for the six months ended June 30, 2020. The $110.3 million decrease was driven by the prior year shift in a portion of our investment portfolio to investments classified as cash equivalents.
Financing Activities
We had no cash provided by financing activities for the six months ended June 30, 2021, compared with $464.9 million for six months ended June 30, 2020.
Debt Issuance and Repayments—During the six months ended June 30, 2021, we received net proceeds of $489.5 million from the issuance of the Term Loan and used $460.8 million of cash to partially fund the repurchase of a portion of our 1.375% Notes. Additionally, we spent $6.4 million on principal payments associated with our equipment financings.
Option Exercises and Payment of Taxes for Restricted Stock Net Settlements—Total proceeds from option exercises and issuance of employee stock purchase plan shares was $10.0 million and $14.2 million for the six months ended June 30, 2021 and 2020, respectively. The $4.2 million decrease was primarily driven by fewer option exercises by our former chief executive officer. Payments for taxes related to net restricted and performance stock unit settlements were $27.3 million and $26.8 million for the six months ended June 30, 2021 and 2020, respectively.
Legal Proceedings
The significant estimates and judgments related to establishing litigation reserves are discussed under “Legal Proceedings” in Note 10to the consolidated financial statements included in this QuarterlyForm 10-Q.
Off-Balance Sheet Arrangements
As of June 30, 2021, we had various outstanding letters of credit and bank guarantees totaling $2.8 million, none of which is individually significant. We have restricted cash that serves as collateral for these outstanding letters of credit and bank guarantees that are included in cash and cash equivalents on our consolidated balance sheet.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.
Our accounting policies for revenue recognition and contingencies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. There have been no significant changes to the above critical accounting policies or in the underlying accounting assumptions and estimates used in such policies from those disclosed in our annual consolidated financial statements and accompanying notes included in our Annual Report on Form 10-Q. 10-K for the year ended December 31, 2020.
Accounting Standards Issued and Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by eliminating certain separation models. Under ASU 2020-06, a convertible debt instrument will generally be reported as a single liability at its amortized cost with no separate accounting for embedded conversion features. Consequently, the interest rate of convertible debt instruments will be closer to the coupon interest rate. In addition, ASU 2020-06 eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The guidance is effective for us beginning in the first quarter of 2022. Based on the carrying value of our convertible debt as of June 30, 2021 and subsequent conversion of 1.375% Notes in July 2021, the adoption of this guidance on January 1, 2022 is expected to result in an approximate $215 million decrease in additional paid in capital from the derecognition of the bifurcated equity component, $155 million increase in debt from the derecognition of the discount associated with the bifurcated equity component and $60 million decrease to the opening balance of accumulated deficit, representing the cumulative interest expense recognized related to the amortization of the bifurcated conversion option. We expect to write-off the related deferred tax liabilities with a corresponding adjustment to the valuation allowance, resulting in no net impact to the cumulative adjustment to retained earnings. Adoption of this standard will have no impact on our diluted earnings per share as we calculate earnings per share using the if-converted method.
FORWARD-LOOKING STATEMENTS
This Quarterly 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 ofare subject to 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.
and assumptions. These risks and uncertainties include, but are not limited to:
•risks associated with public health crises and pandemics, such as the COVID-19 global pandemic, including the duration of the outbreak, government actions and restrictive measures implemented in response, supply chain disruptions, delays in clinical trials, and other impacts to the business, or on our ability to execute business continuity plans;
•risks associated with our dependence on our principal product platform, the Omnipod System;
fluctuations in quarterly results of operations;
System, and our ability to sustain ordesign, develop, manufacture and commercialize future products;
•our ability to reduce production costs and increase customer orders and manufacturing volumes;
•adverse changes in general economic conditions;
•the impact of healthcare reform laws;
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;program for conventional insulin pumps;
•failure to retain key suppliers and/or supplier pricing discounts and achieve satisfactory gross margins;
failure to retain key supplier and payor partners;
•international business risks;
risks, including regulatory, commercial and logistics risks associated with selling our inability to effectively assume the distribution and commercial support for our Omnipod Systemproducts in Europe followingdue to the expirationseparation of our global distribution agreement with Ypsomed on June 30, 2018;the United Kingdom from the European Union (Brexit);
•our inability to secure and retain adequate coverage or reimbursement from third-party payors for the Omnipod System by third-party payorsor future products and potential adverse changes in reimbursement rates or policies relating to the Omnipod System;System or future products;
•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•technological change and our ability to control related risks, including a cyber-attack or other breach or disruption of these systems;
technological breakthroughs and innovationsproduct innovation adversely affecting our business, and our own new product development initiatives may provebusiness;
•changes 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;or other agreements with respect to the Omnipod System’s current or future features;
•challenges to the furtherfuture development of our non-insulin drug delivery business;product line;
•our ability to protect our intellectual property and other proprietary rights;
•conflicts with the intellectual property of third-parties,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;System or future products;
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 impactimpacts resulting from a recall, or discovery of serious safety issues, of our products;the Omnipod System;
•the potential violation of the U.S. Foreign Corrupt Practices Act or any other federal, state or stateforeign anti-bribery/anti-corruption laws or laws prohibiting “kickbacks” or protecting the confidentiality of patient health information or other protected personal information, or any challenge to or investigation into our practices under these laws;
•product liability and other lawsuits that may be brought against us;us, including stemming from off-label use of our product;
•breaches or failures of our product or information technology systems, including by cyber-attack;
•reduced retention rates of our customer base;
•unfavorable results of clinical studies relating to the Omnipod System or future products, or the products of our competitors;
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 allstorage of our inventory atin a single location in Massachusetts;limited number of locations;
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 managescale our business to support revenue growth;
•fluctuations in quarterly results of operations;
•risks associated with potential future acquisitions or investments in new businesses;
•our ability to generate sufficient cash to service all of our indebtedness;indebtedness or raise additional funds on acceptable terms or at all;
•the expansion of our distribution network;
our ability to successfully maintain effective internal control over financial reporting;
•the volatility of the trading price of our common stock;
•risks related to future sales of our common stock or the conversion of any of our 2% Convertible Senior Notes due June 15, 2019 and 1.25% Convertible Senior Notes due September 15, 2021;convertible debt;
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 risk factors discussed above are not intended to be a complete statement of all risks and uncertainties and should be evaluated with all other risks described in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on February 28, 2017 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 one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements.
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. 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, the Omnipod System features only two discreet, easy-to-use devices that eliminate the need for a bulky pump, tubing and separate blood glucose meter, provides for virtually pain-free automated cannula insertion, communicates wirelessly and integrates a blood glucose meter. 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, Canada and Israel.
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 multiple therapeutic areas.
In June 2011, 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 trends 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 margins 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 fee 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, such as the European Omnipod customer installed base as of June 30, 2018, the number of customers who choose to continue to purchase Omnipod devices over the successive 12 months, and the volume of the devices sold 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, 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.
Third Quarter 2017 Revenue Results:
Total revenue of $121.8 million
| |
◦ | U.S. Omnipod revenue of $70.1 million
|
| |
◦ | International Omnipod revenue of $32.5 million
|
| |
◦ | Drug Delivery revenue of $19.2 million
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Our long-term financial objective is to achieve and sustain profitable growth. Our efforts in 2017 are primarily focused on the expansion of our customer base in the United States and internationally, increasing our gross profit and product development. 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 will continue to incur net losses in the near term in order to achieve these objectives. However, we believe that the accomplishment of our near-term objectives will have a positive impact on our financial condition in the future.
Components of Financial Operations
Revenue. We derive most 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 delivery of subcutaneous drugs across multiple therapeutic areas.
Cost of revenue. Cost of revenue consists primarily of raw material, labor, warranty, inventory reserve 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, customer care and training functions, sales commissions paid to our sales representatives, costs associated with promotional activities and participation in industry trade shows.
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.
Results of Operations
This section discusses our consolidated results of operations for the third quarter and the nine months ended September 30, 2017 compared to the same periods of 2016, 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, |
| (in Thousands) | 2017 | | 2016 | | Change $ | | Change % | | 2017 | | 2016 | | Change $ | | Change % |
| Revenue: | | | | | | | | | | | | | | | |
| U.S. Omnipod | $ | 70,065 |
| | $ | 59,641 |
| | $ | 10,424 |
| | 17 | % | | $ | 195,081 |
| | $ | 166,691 |
| | $ | 28,390 |
| | 17 | % |
| International Omnipod | 32,481 |
| | 19,107 |
| | 13,374 |
| | 70 | % | | 84,200 |
| | 51,046 |
| | 33,154 |
| | 65 | % |
| Drug Delivery | 19,229 |
| | 16,123 |
| | 3,106 |
| | 19 | % | | 53,963 |
| | 45,677 |
| | 8,286 |
| | 18 | % |
| Total revenue | 121,775 |
| | 94,871 |
| | 26,904 |
| | 28 | % | | 333,244 |
| | 263,414 |
| | 69,830 |
| | 27 | % |
| Cost of revenue | 48,151 |
| | 39,230 |
| | 8,921 |
| | 23 | % | | 135,583 |
| | 113,265 |
| | 22,318 |
| | 20 | % |
| Gross profit | 73,624 |
| | 55,641 |
| | 17,983 |
| | 32 | % | | 197,661 |
| | 150,149 |
| | 47,512 |
| | 32 | % |
| Gross margin | 60.5 | % | | 58.6 | % | | | |
|
| | 59.3 | % | | 57.0 | % | |
|
| |
|
|
| Operating expenses: | | | | | | | | | | | | |
|
| |
|
|
| Research and development | 20,141 |
| | 13,734 |
| | 6,407 |
| | 47 | % | | 55,670 |
| | 39,676 |
| | 15,994 |
| | 40 | % |
| Sales and marketing | 28,718 |
| | 22,147 |
| | 6,571 |
| | 30 | % | | 86,288 |
| | 69,119 |
| | 17,169 |
| | 25 | % |
| General and administrative | 22,718 |
| | 17,342 |
| | 5,376 |
| | 31 | % | | 62,322 |
| | 47,923 |
| | 14,399 |
| | 30 | % |
| Total operating expenses | 71,577 |
| | 53,223 |
| | 18,354 |
| | 34 | % | | 204,280 |
| | 156,718 |
| | 47,562 |
| | 30 | % |
| Operating income (loss) | 2,047 |
| | 2,418 |
| | (371 | ) | | (15 | )% | | (6,619 | ) | | (6,569 | ) | | (50 | ) | | 1 | % |
| Interest expense and other, net | 4,153 |
| | 5,369 |
| | (1,216 | ) | | (23 | )% | | 13,034 |
| | 11,293 |
| | 1,741 |
| | 15 | % |
| Loss from continuing operations before income taxes | (2,106 | ) | | (2,951 | ) | | 845 |
| | (29 | )% | | (19,653 | ) | | (17,862 | ) | | (1,791 | ) | | 10 | % |
| Income tax expense | 121 |
| | 66 |
| | 55 |
| | 83 | % | | 318 |
| | 195 |
| | 123 |
| | 63 | % |
| 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 | % |
Revenue
Our total revenue increased to $121.8 million, up $26.9 million, or 28%, in the third quarter of 2017 compared to the third quarter of 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 $70.1 million, up $10.4 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 $32.5 million, up $13.4 million, or 70%, primarily due to growth in distributor sales from continued adoption in existing and newer markets such as France. 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.
Our total revenue increased to $333.2 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 million, or 20%, in the nine months ended September 30, 2017 compared to the same period in 2016, reflecting an increase in sales volumes, partially offset by improvements in supply chain operations.
Gross Margin
Gross margin increased to 60%, up 1.9% in the third quarter of 2017 compared to the same period in 2016. Gross margin for the nine months ended September 30, 2017 was 59% compared with 57% for the nine months ended September 30, 2016. The margin increase in each period was primarily due to improvements in supply chain operations, partially offset by the unfavorable mix impact of higher distributor sales in Europe.
For the year ending December 31, 2017, we expect gross margin to increase as compared to 2016 primarily due to improvements in supply chain operations, partially offset by the unfavorable mix impact of higher distributor sales in Europe.
Research and Development
Research and development expenses increased to $20.1 million, up $6.4 million, or 47%, for the three month period ended September 30, 2017 compared to the same period in 2016 and increased to $55.7 million, up $16.0 million, or 40%, for the nine months ended September 30, 2017 compared to the same period in 2016. 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.
For the year ending December 31, 2017, we expect overall research and development spending to increase as compared to 2016 due to the development efforts on our on-going projects described above.
Sales and Marketing
Sales and marketing expenses increased to $28.7 million, up $6.6 million, or 30%, for the three month period ended September 30, 2017 compared to the same period in 2016 and increased to $86.3 million, up $17.2 million, or 25%, for the nine months ended September 30, 2017 compared to the same period in 2016. The increase in sales and marketing expenses in both periods was 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.
For the year ending December 31, 2017, we expect sales and marketing expense to increase as compared to 2016 due to sales and marketing efforts as described above.
General and Administrative
General and administrative expenses increased to $22.7 million, up $5.4 million, or 31%, for the three month period ended September 30, 2017 compared to the same period in 2016 and increased to $62.3 million, up $14.4 million, or 30%, for the nine months ended September 30, 2017 compared to the same period in 2016. This increase was primarily attributable to increased personnel-related costs and fees related to external consultants and professional service providers to support the growth in our business.
For the year ending December 31, 2017, we expect overall general and administrative expenses to increase as compared to 2016 as we continue to grow the business and make investments in our operating structure to support this continued growth.
Interest Expense and Other, Net
Interest expense and other, net, decreased to $4.2 million, down $1.2 million, or 23%, for the three month period ended September 30, 2017 compared to the same period in 2016 and increased to $13.0 million, up $1.7 million, or 15%, for the nine months ended September 30, 2017 compared to the same period in 2016. The decrease in the three month period is primarily due to a $2.6 million charge related to the extinguishment of debt in the prior period, partially offset by additional interest expense, including cash and non-cash interest, associated with the issuance 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, partially offset by a lower effective interest rate on outstanding debt. Please refer to Liquidity and Capital Resources for further discussion of our convertible debt.
Liquidity and Capital Resources
As of September 30, 2017, we had $102.2 million in cash and cash equivalents and $173.5 million in short-term investments. We believe that our current liquidity, together with the cash expected to be generated from sales, will be sufficient to meet our projected operating 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 expect capital expenditures to increase above historic levels to fund the construction of the manufacturing facility and related equipment purchases. We believe that our current liquidity will be sufficient to meet our projected expenditures associated with this project.
Convertible Debt
In September 2016, we issued and sold $345.0 million in principal amount of 1.25% Convertible Senior Notes due September 15, 2021 ("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 our 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.
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 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% Notes 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, 2017 and 2016, respectively, and 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 of $0.7 million and $1.6 million was comprised of the amortization of the debt discount and debt issuance costs 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.
Additional information regarding our debt issuances is provided in Note 6 to the consolidated financial statements included in this Form 10-Q.
|
| | | | | | | | |
| | | Nine Months Ended September 30, |
| (In thousands) | | 2017 | | 2016 |
| Cash provided by (used in): | | | | |
| Operating activities | | $ | 19,407 |
| | $ | (4,159 | ) |
| Investing activities | | (61,485 | ) | | (80,827 | ) |
| Financing activities | | 6,650 |
| | 177,558 |
|
| Effect of exchange rate changes on cash | | 487 |
| | 158 |
|
| Net (decrease) increase in cash and cash equivalents | | $ | (34,941 | ) | | $ | 92,730 |
|
Operating Activities
Our net cash provided by operating activities for thenine months ended September 30, 2017 was $19.4 million compared to net cash used in operating activities of $4.2 million in the same period of 2016, an increase of $23.6 million. The increase in cash provided by operating activities in the current period is primarily due to additional inventory purchases in 2016 in order to support customer demand and to allow for alternative shipping methods, the growth of our business in the current period and the timing of cash disbursements. This impact was partially offset by an increase in accounts receivable, which was primarily due to an increase in sales.
Investing Activities
Our net cash used in investing activities for thenine months ended September 30, 2017 was $61.5 million compared to $80.8 million in the same period of 2016. Investing activities in the current period primarily consists of $47.8 million of capital expenditures, primarily associated with investments in our supply chain operations, which include approximately $29.8 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.
Financing Activities
Our net cash provided by financing activities for thenine months ended September 30, 2017 was $6.7 million, which primarily includes 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.
Commitments and Contingencies
We lease our facilities in Massachusetts, California, Tennessee, the United Kingdom, Canada and China. 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, 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. We have made no material changes to the critical accounting policies describedFactors” in our Annual Report on Form 10-K for the year ended December 31, 2016.
Recent Accounting Pronouncements
Information with respect to recent accounting pronouncements is provided in Note 2 to the consolidated financial statements included2020 and in this Form 10-Q.Quarterly Report could cause our results to differ materially from those expressed in forward-looking statements. In addition, there may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. Actual results could differ materially from those projected in the forward-looking statements; accordingly, you should not rely upon forward-looking statements as predictions of future events. We expressly disclaim any obligation to update these forward-looking statements other than as required by law.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Interest Rate Risk
Our financial instruments consist of cash, cash equivalents, short-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, we had outstanding debt recorded on our consolidated balance sheet of $345.0 million, net of our deferred financing costs and unamortized debt discount totaling $67.1 million, related to our 2% and 1.25% Notes. As the interest rates are fixed, changes in interest rates do not affect the valueis associated with borrowings under our Revolving Credit Facility and our Term Loan, both of which are variable-rate debt. At June 30, 2021, no amounts were outstanding under our Revolving Credit Facility. In May 2021, we entered into two interest rate swap agreements to effectively convert $480 million of our debt.term loan borrowings from a variable rate to
a fixed rate. These interest rate swaps are intended to risks, including, but not limited to: unique economic conditions, changesmitigate the exposure to fluctuations in political climate, differing tax structures, other regulationsinterest rates and restrictions, and foreign exchange rate volatility. We are primarily exposed to currency exchange rate fluctuations related to our subsidiary operation in Canada. The majority of our sales outside of the U.S. are currently transacted in U.S. dollars and are not subject to material foreign currency fluctuations.
Fluctuations in foreign currency rates could affect our revenue, cost 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.qualify for hedge accounting treatment as cash flow hedges. A hypothetical 10%100 basis point increase or decrease in interest rates relative to interest rates as of June 30, 2021 would decrease or increase our annual earnings, respectively, by approximately $0.2 million.
Refer to “Part II. Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of our market price sensitive instruments and foreign currencies that we transact in would not have a material adverse impact on our business, financial condition or results of operations.currency exchange risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (“the Exchange Act”), as amended, is recorded, processed, summarized and reported within the specified time periods, and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017. The term “disclosure controls and procedures,” as(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange ActAct) as 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.June 30, 2021. Based on the evaluation, of our disclosure controls and procedures as of September 30, 2017, our chief executive officer and chief financial officer concluded that, as of suchthat date, our disclosure controls and procedures were effective at a reasonable assurance level.effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the ninethree months ended SeptemberJune 30, 20172021 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 1210 to the consolidated financial statements in this Form 10-Q.
Item 1A. Risk Factors
In additionPlease refer to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk“Risks Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2016,2020 for a discussion of risks to which could materially affect our business, financial condition, or future results. These risksresults of operations and cash flows 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, theresubject. There have been no material changes in ourto the risk factors from those disclosed in ourthe aforementioned Annual Report on Form 10-K for the year ended December 31, 2016.Report.
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.
On July 20, 2017, we announced our plan 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 agreement, Ypsomed 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 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. Any of the foregoing risks could negatively affect our future revenues and, depending on severity, potentially cause a materially adverse effect on our business and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.Subsequent to the three months ended June 30, 2021, we issued securities that were not registered under the Securities Act and were not previously disclosed in a Current Report on Form 8-K or Quarterly Report on Form 10-Q as listed below. All of the securities discussed in this Item 2 were issued in reliance on the exemption from registration under Section 3(a)(9) of the Securities Act of 1933, as amended (the “Securities Act”).
On July 2, 2021, we issued 74,347 shares of our common stock to certain holders of our 1.375% Convertible Senior Notes due 2024 (the “Notes”) upon the conversion of $6.928 million aggregate principal amount of the Notes by such holders.
On July 8, 2021, we issued 98,428 shares of our common stock to certain holders of the Notes upon the conversion of $9.172 million aggregate principal amount of the Notes by such holders. On July 19, 2021, we issued 42,035 shares of our common stock to certain holders of the Notes upon the conversion of $3.917 million aggregate principal amount of the Notes by such holders.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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| Number | | Description |
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| | Form of Insulet Corporation 2017 Stock Option and Incentive Plan Performance Vesting Restricted Stock Unit Agreement for Officers |
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| | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer. |
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| | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer. |
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| | 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. |
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101 | | Credit Agreement, dated as of May 4, 2021, by and among Insulet Corporation, the lenders and other parties thereto and Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 5, 2021). |
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| 101 | | The following materials from Insulet Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 20172021 formatted in XBRL (eXtensibleiXBRL (Inline eXtensible Business Reporting Language), as follows: |
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| | (i) Condensed Consolidated Balance Sheets (Unaudited) as of SeptemberJune 30, 2017 (Unaudited)2021 and December 31, 20162020 |
| | |
| | (ii) Condensed Consolidated Statements of Operations (Unaudited) for the Threethree and Nine Months Ended Septembersix months ended June 30, 20172021 and 2016 (Unaudited)2020 |
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| | (iii) Condensed Consolidated Statements of Comprehensive Loss(Loss) Income (Unaudited) for the Threethree and Nine Months Ended Septembersix months ended June 30, 20172021 and 2016 (Unaudited)2020 |
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| | (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and six months ended June 30, 2021 and 2020 |
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| | (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended Septembersix months ended June 30, 20172021 and 2016 (Unaudited)2020 |
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| | (iv)(vi) Condensed Notes (Unaudited) to Consolidated Financial Statements (Unaudited) |
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| * | | 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.Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | INSULET CORPORATION (Registrant) |
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| Date: | November 2, 2017August 5, 2021 | /s/ Patrick J. SullivanShacey Petrovic |
| | Patrick J. SullivanShacey Petrovic |
| | Chief Executive Officer
(Principal Executive Officer)
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| | | | | | | | |
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| Date: | August 5, 2021 | /s/ Wayde McMillan |
Date: | November 2, 2017 | /s/ Michael L. LevitzWayde McMillan |
| | Michael L. Levitz |
| | Chief Financial Officer
(Principal Financial and Accounting Officer)
|