CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Nature of the Business
Insulet Corporation, the "Company," is primarily engaged in the development, manufacturing and sale of its proprietary Omnipod Insulin Management System (the “Omnipod System”), an innovative, discreet and easy-to-use insulin infusion 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 Personal Diabetes Manager ("PDM"). Conventional insulin pumps require people with insulin-dependent diabetes to learn to use, manage and wear a number of cumbersome components, including up to
42
inches of tubing. In contrast, 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.
The Company acquired Neighborhood Holdings, Inc. and its wholly-owned subsidiaries (collectively, “Neighborhood Diabetes”) in
June 2011
. Through Neighborhood Diabetes, the Company 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, the Company sold Neighborhood Diabetes to Liberty Medical LLC ("Liberty Medical"). Additional information regarding the disposition and treatment of the Neighborhood Diabetes business as discontinued operations is provided in Note
3
to the consolidated financial statements included in this Form 10-Q.
Commercial sales of the Omnipod System began in the United States in
2005
. The Company sells the Omnipod System and other diabetes management supplies in the United States through direct sales to customers or through its distribution partners. The Omnipod System is currently available in multiple countries in Europe, Canada and Israel.
In addition to using the Pod for insulin delivery, the Company also partners with global pharmaceutical and biotechnology companies to tailor the Omnipod technology platform for the delivery of subcutaneous drugs across multiple therapeutic areas.
In July 2015, the Company executed an asset purchase agreement whereby it acquired the Canadian Omnipod distribution operations from GlaxoSmithKline ("GSK"). With the acquisition, the Company assumed all distribution, sales, marketing, training and support activities for the Omnipod system in Canada.
Note
2
. Summary of Significant Accounting Policies
Basis of Presentation
The unaudited consolidated financial statements in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles (“U.S. GAAP” or "GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the
three and nine months ended September 30, 2016
are not necessarily indicative of the results that may be expected for the full year ending
December 31, 2016
, or for any other subsequent interim period.
The unaudited consolidated financial statements in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
and the Company's audited consolidated financial statements, as recast to reflect Neighborhood Diabetes as discontinued operations, contained in our Current Report on Form 8-K filed with the SEC on September 6, 2016.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in the application of certain of its significant accounting policies that may materially affect the reported amounts of assets, liabilities, equity, revenue and expenses. The most significant estimates used in these financial statements include the valuation of stock-based compensation expense, acquired businesses, accounts receivable, inventories, goodwill, deferred revenue, equity instruments, convertible debt, the lives of property and equipment and
intangible assets, as well as warranty and doubtful accounts allowance reserve calculations. Actual results may differ from those estimates.
Foreign Currency Translation
For foreign operations, asset and liability accounts are translated at exchange rates as of the balance sheet date; income and expenses are translated using weighted average exchange rates for the reporting period. Resulting translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders' equity. Gains and losses arising from transactions and translation of period-end balances denominated in currencies other than the functional currency, primarily the Canadian dollar, are included in other income, net, and were not material in the
three and nine months ended September 30, 2016
and
2015
.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For the purpose of the financial statement classification, the Company considers all highly-liquid investment instruments with original maturities of 90 days or less, when purchased, to be cash equivalents. Cash equivalents include money market mutual funds, corporate bonds, and certificates of deposit which are carried at their fair value. Outstanding letters of credit, related to security deposits for lease obligations, totaled
$1.2 million
as of
September 30, 2016
and
December 31, 2015
.
Investments
Investment securities consist of available-for-sale marketable securities and are carried at fair value with unrealized gains or losses included as a component of other comprehensive loss in shareholders' equity. Investments, exclusive of cash equivalents, with a stated maturity date of one year or less from the balance sheet date or that are expected to be used in current operations, are classified as short-term investments. Short-term investments include U.S. government and agency bonds, corporate bonds, and certificates of deposit.
The Company reviews investments for other-than-temporary impairment when the fair value of an investment is less than its amortized cost. If an available-for-sale security is other than temporarily impaired, the loss is charged to either earnings or shareholders' equity depending on the Company's intent and ability to retain the security until the full cost basis can be recovered.
Property and Equipment
Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful life of the respective assets. Leasehold improvements are amortized over their useful life or the life of the lease, whichever is shorter. Assets acquired under capital leases are amortized in accordance with the respective class of owned assets and the amortization is included with depreciation expense. Maintenance and repair costs are expensed as incurred.
Property and equipment included
$38.3 million
and
$28.2 million
of accumulated depreciation as of
September 30, 2016
and
December 31, 2015
, respectively.
Goodwill
Goodwill represents the excess of the cost of acquired businesses over the fair value of identifiable net assets acquired. The Company follows the provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) 350-20,
Intangibles - Goodwill and Other
(“ASC 350-20”). The Company performs an assessment of its goodwill for impairment on at least an annual basis or whenever events or changes in circumstances indicate there might be impairment. The Company's annual impairment test date is October 1st.
As the Company operates in
one
segment, the Company has considered whether that segment contains multiple reporting units. The Company has concluded that there is a single reporting unit as the Company does not have segment managers and discrete financial information below consolidated results is not reviewed on a regular basis. Based on this conclusion, goodwill is tested for impairment at the enterprise level. The Company has the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of its sole reporting unit is less than its carrying amount. This qualitative analysis is used as a basis for determining whether it is necessary to perform the two-step goodwill impairment analysis. If the Company determines that it is more likely than not that its fair value is less than its carrying amount, then the two-step goodwill impairment test will be performed. The first step compares the carrying value of the reporting unit to its fair value using a discounted cash flow analysis. If the reporting unit’s carrying value exceeds its fair value, the Company would record an impairment loss to the extent that the carrying value of goodwill
exceeds its implied fair value. There was
no
impairment of goodwill during the
three and nine months ended September 30, 2016
and
2015
.
Revenue Recognition
The Company generates most of its revenue from global sales of the Omnipod System. Revenue also includes sales of devices based on the Omnipod technology platform to global pharmaceutical and biotechnology companies for the delivery of subcutaneous drugs across multiple therapeutic areas.
Revenue recognition requires that persuasive evidence of a sales arrangement exists, delivery of goods occurs through transfer of title and risk and rewards of ownership, the selling price is fixed or determinable and collectability is reasonably assured. With respect to these criteria:
|
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•
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The evidence of an arrangement generally consists of a physician order form, a patient information form and, if applicable, third-party insurance approval for sales directly to patients or a purchase order for sales to a third-party distributor.
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•
|
Transfer of title and risk and rewards of ownership are passed to the patient or third-party distributor upon shipment of the products.
|
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•
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The selling prices for all sales are fixed and agreed with the patient or third-party distributor and, if applicable, the patient’s third-party insurance provider(s) prior to shipment and are based on established list prices or, in the case of certain third-party insurers, contractually agreed upon prices. Provisions for discounts, rebates and other adjustments to customers are established as a reduction to revenue in the same period the related sales are recorded.
|
The Company offers a
45
-day right of return for sales of its Omnipod System to patients in the United States, and a
90
-day right of return for sales of its Omnipod System to patients in Canada, and defers revenue to reflect estimated sales returns in the same period that the related product sales are recorded. Returns are estimated through a comparison of the Company’s historical return data to its related sales. Historical rates of return are adjusted for known or expected changes in the marketplace. When doubt exists about reasonable assuredness of collectability from specific customers, the Company defers revenue from sales of products to those customers until payment is received.
As of
September 30, 2016
and
December 31, 2015
, the Company had deferred revenue of
$1.8 million
and
$2.5 million
, respectively, which included
$0.5 million
and
$0.2 million
classified in other long-term liabilities in each period as of
September 30, 2016
and
December 31, 2015
, respectively. Deferred revenue primarily relates to undelivered elements within certain of the Company's developmental arrangements and other instances where the Company has not yet met the revenue recognition criteria.
Shipping and Handling Costs
The Company does not typically charge its customers for shipping and handling costs associated with shipping its product to its customers. These shipping and handling costs are included in general and administrative expenses and were
$1.1 million
and
$0.6 million
for the
three months ended September 30, 2016 and 2015
, respectively and were
$2.8 million
and
$1.6 million
for the
nine months ended September 30, 2016 and 2015
, respectively.
Concentration of Credit Risk
Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, short term investments and accounts receivable. The Company maintains the majority of its cash and short term investments with
one
financial institution.
The Company purchases Omnipods from Flextronics International Ltd., its single source supplier. As of
September 30, 2016
and
December 31, 2015
, liabilities to this vendor represented approximately
29%
and
28%
of the combined balance of accounts payable, accrued expenses and other current liabilities, respectively.
Revenue for customers comprising more than 10% of total revenue were as follows:
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Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Amgen, Inc.
|
|
17%
|
|
10%
|
|
17%
|
|
10%
|
Ypsomed Distribution AG
|
|
16%
|
|
15%
|
|
15%
|
|
11%
|
RGH Enterprises, Inc.
|
|
10%
|
|
14%
|
|
10%
|
|
13%
|
Reclassification of Prior Period Balance
Certain reclassifications have been made to prior periods amounts to conform to the current period financial statement presentation including adjusting footnotes within to reflect the presentation of discontinued operations. These reclassifications have no effect on the previously reported net loss.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers
("ASU 2014-09"). ASU 2014-09 requires that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Under this guidance, a company makes additional estimates regarding performance conditions and the allocation of variable consideration. The guidance is effective in fiscal years beginning January 1, 2018, with early adoption permitted. The Company is currently evaluating the impact of ASU 2014-09. The Company has not yet selected a transition method nor has it determined the effect of the standard on its consolidated financial position and results of operations.
In June 2014, the FASB issued ASU No. 2014-12,
Compensation - Stock Compensation (Topic 718), Accounting for Share-Based Payments when the terms of an award provide that a performance target could be achieved after the requisite service period
("ASU 2014-12"). ASU 2014-12 clarifies the period over which compensation cost would be recognized in awards with a performance target that affects vesting and that could be achieved after the requisite service period. Compensation cost would be recognized over the required service period, if it is probable that the performance condition will be achieved. The guidance is effective in fiscal years beginning after January 1, 2016, with early adoption permitted. The Company has adopted ASU 2014-12 on January 1, 2016 and its adoption did not have an impact on the consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements- Going Concern ("ASU 2014-15").
ASU No. 2014-15 requires management to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The new standard is effective for fiscal years ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. The Company has concluded that if this standard had been adopted as of
September 30, 2016
, substantial doubt about the Company’s ability to continue as a going concern would not exist.
In July 2015, the FASB issued ASU No. 2015-11,
Simplifying the Measurement of Inventory
("ASU 2015-11"). ASU 2015-11 amends existing guidance and requires entities to measure most inventory at the lower of cost and net realizable value. The guidance is effective prospectively for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. Upon adoption, entities must disclose the nature of and reason for the accounting change. The Company is currently evaluating the impact of ASU 2015-11.
In September 2015, the FASB issued ASU No. 2015-16,
Business Combinations,
Simplifying the Accounting for Measurement Period Adjustments
("ASU 2015-16"). ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. The guidance is effective in 2016 for calendar year-end public entities. Early adoption is permitted. The Company has adopted ASU 2015-16 on January 1, 2016 and its adoption did not have an impact on the consolidated financial statements.
In January 2016, the FASB issued Accounting Standards Update 2016-01 ("ASU 2016-01"),
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
. ASU 2016-01 changes the current GAAP model for the accounting of equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. All equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification (changes in fair value reported in other comprehensive income (loss)) for equity securities with readily determinable fair values. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The classification and measurement guidance will be effective in fiscal years beginning after December 15, 2017, and interim periods within those years. The Company is currently evaluating the impact of ASU 2016-01.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
("ASU 2016-02"). ASU 2016-02 requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The
guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of ASU 2016-02.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of ASU 2016-09.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)
("ASU 2016-15") . ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of ASU 2016-15.
Other Significant Policies:
The following table identifies the Company's other significant accounting policies and the note and page where a detailed description of each policy can be found.
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Note
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4
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Page
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Convertible Debt
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Note
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6
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Page
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Note
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9
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Page
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Note
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10
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Page
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Other Intangible Assets
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Note
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11
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Page
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Accrued Expenses and Other Current Liabilities- Product Warranty Costs
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Note
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12
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Page
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|
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|
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Note
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14
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Page
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|
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Note
|
15
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|
Page
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Segment Reporting
|
Note
|
16
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Page
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Note
3
. Discontinued Operations
In February 2016, the Company sold Neighborhood Diabetes to Liberty Medical for approximately
$6.2 million
in cash, which included
$1.2 million
of closing adjustments finalized in June 2016 and paid by Liberty Medical. The results of operations, assets, and liabilities of Neighborhood Diabetes, are classified as discontinued operations for all periods presented, except for certain corporate overhead costs which remain in continuing operations.
In connection with the 2016 disposition, the Company entered into a transition services agreement pursuant to which Insulet is providing various services to Liberty Medical on an interim transitional basis. The services generally commenced on the closing date and terminated
six months
following the closing. Services provided by Insulet included certain information technology and back office support. The charges for such services were generally intended to allow the service provider to recover all out-of-pocket costs. Billings by Insulet under the transition services agreement were recorded as a reduction of the costs to provide the respective service in the applicable expense category in the consolidated statements of operations. This transitional support is to provide Liberty Medical the time required to establish its stand-alone processes for such activities that were previously provided by Insulet as described above and does not constitute significant continuing support of Liberty Medical's operations. Total expenses incurred for such transition services, which were reimbursed in full, were
$0.1 million
and
$0.8 million
for the
three and nine months ended September 30, 2016
.
Following the disposition, the Company entered into a distribution agreement with the Neighborhood Diabetes subsidiary of Liberty Medical to continue to act as a distributor for the Company's products. For the
three months ended September 30, 2016 and 2015
, revenue from continued operations as presented in the consolidated statement of operations include
$0 million
and
$0.8 million
, respectively. Omnipod sales transacted through Neighborhood Diabetes prior to the divestiture that were previously eliminated in consolidation were
$0.3 million
and
$2.0 million
for the
nine months ended September 30, 2016 and 2015
, respectively. These amounts were historically reported in the Neighborhood Diabetes revenue results and are being presented based on current market terms of products sold to the Neighborhood Diabetes subsidiary of Liberty Medical.
Post divestiture, Omnipod sales to the Neighborhood Diabetes subsidiary of Liberty Medical were
$0 million
and
$0.4 million
for the
three and nine months ended September 30, 2016
, respectively.
The following is a summary of the operating results of Neighborhood Diabetes included in discontinued operations for the
three and nine months ended September 30, 2016
and
2015
:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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(In thousands)
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2016
|
|
2015
|
|
2016
|
|
2015
|
Discontinued operations:
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Revenue
(1)
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$
|
—
|
|
|
$
|
15,910
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|
|
$
|
7,730
|
|
|
$
|
44,014
|
|
Cost of revenue
|
|
133
|
|
|
11,829
|
|
|
5,502
|
|
|
32,459
|
|
Gross profit
|
|
(133
|
)
|
|
4,081
|
|
|
2,228
|
|
|
11,555
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
—
|
|
|
2,887
|
|
|
1,542
|
|
|
8,381
|
|
General and administrative
|
|
(69
|
)
|
|
2,133
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|
|
1,853
|
|
|
3,779
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Total operating expenses
|
|
(69
|
)
|
|
5,020
|
|
|
3,395
|
|
|
12,160
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Interest and other income (expense), net
|
|
—
|
|
|
15
|
|
|
(128
|
)
|
|
174
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Loss from discontinued operations before taxes
|
|
(64
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)
|
|
(924
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)
|
|
(1,295
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)
|
|
(431
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)
|
Income tax expense
|
|
—
|
|
|
18
|
|
|
408
|
|
|
68
|
|
Net loss from discontinued operations
|
|
$
|
(64
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)
|
|
$
|
(942
|
)
|
|
$
|
(1,703
|
)
|
|
$
|
(499
|
)
|
|
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(1)
|
Revenue for the nine months ended September 30, 2016 includes revenue from the operations of Neighborhood Diabetes through date of sale in February 2016.
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Depreciation and amortization expense included in discontinued operations was
$0 million
and
$0.8 million
for the three months ended September 30, 2016 and 2015, respectively. Depreciation and amortization expense included in discontinued operations was
$0.1 million
and
$2.6 million
for the nine months ended September 30, 2016 and 2015, respectively.
The following is a summary of the Neighborhood Diabetes assets and liabilities presented as discontinued operations as of December 31, 2015:
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(in thousands)
|
December 31,
2015
|
ASSETS
|
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Accounts receivable, net
|
$
|
5,857
|
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Inventories, net
|
2,019
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Prepaid expenses and other current assets
|
1,376
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Total current assets of discontinued operations
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9,252
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Intangible assets, net
|
1,788
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Goodwill
|
140
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Other non-current assets
|
28
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Total long-term assets of discontinued operations
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1,956
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Total assets of discontinued operations
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$
|
11,208
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LIABILITIES
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Accounts payable
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$
|
3,436
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Accrued expenses and other current liabilities
|
1,883
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Current liabilities of discontinued operations
|
5,319
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Total liabilities of discontinued operations
|
$
|
5,319
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Net operating cash flows provided by discontinued operations in the
three months ended September 30, 2016 and 2015
, were
$0 million
and
$4.1 million
, respectively. Net operating cash flows (used in) provided by discontinued operations in the
nine months ended September 30, 2016 and 2015
were
$(2.0) million
and
$3.2 million
, respectively.
Note
4
. Fair Value Measurements
The Company adopted the FASB Accounting Standards Codification (“ASC”) 820,
Fair Value Measurements and Disclosures
(“ASC 820”) related to the fair value measurement of certain of its assets and liabilities. ASC 820 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. When estimating fair value, depending on the nature and complexity of the asset or liability, the Company may use one or all of the following approaches:
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•
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Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.
|
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•
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Cost approach, which is based on the cost to acquire or construct comparable assets less an allowance for functional and/or economic obsolescence.
|
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•
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Income approach, which is based on the present value of the future stream of net cash flows.
|
To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, as described in ASC 820, of which the first two are considered observable and the last unobservable:
Level 1 — quoted prices in active markets for identical assets or liabilities
Level 2 — observable inputs other than quoted prices in active markets for identical assets or liabilities
Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions
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 the short-term maturity of these financial instruments.
The following table provides a summary of assets that are measured at fair value as of
September 30, 2016
, and
December 31, 2015
, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
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|
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Fair Value Measurements
|
|
Total
|
|
Level 1
|
|
Level 2
|
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Level 3
|
September 30, 2016
|
|
|
|
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Recurring fair value measurements:
|
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|
|
|
|
|
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Cash equivalents:
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
200,355
|
|
|
$
|
200,355
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate bonds
|
1,900
|
|
|
—
|
|
|
1,900
|
|
|
—
|
|
Certificates of deposit
|
445
|
|
|
445
|
|
|
—
|
|
|
—
|
|
Total cash equivalents
|
$
|
202,700
|
|
|
$
|
200,800
|
|
|
$
|
1,900
|
|
|
$
|
—
|
|
Short-term investments:
|
|
|
|
|
|
|
|
U.S. government and agency bonds
|
$
|
29,032
|
|
|
$
|
15,018
|
|
|
$
|
14,014
|
|
|
$
|
—
|
|
Corporate bonds
|
25,540
|
|
|
—
|
|
|
25,540
|
|
|
—
|
|
Certificates of deposit
|
12,721
|
|
|
12,721
|
|
|
—
|
|
|
—
|
|
Total short-term investments
|
$
|
67,293
|
|
|
$
|
27,739
|
|
|
$
|
39,554
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
98,223
|
|
|
$
|
98,223
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-recurring fair value measurements:
|
|
|
|
|
|
|
|
Long-term assets of discontinued operations
(1)
|
$
|
1,788
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,788
|
|
|
|
(1)
|
Long-term assets of discontinued operations relate to the asset group of the Neighborhood Diabetes business which consists of definite lived intangible assets and property and equipment. During the fourth quarter of 2015, the Company recognized an impairment charge on this asset group totaling
$9.1 million
, which represented the difference between the fair value of the asset group and the carrying value. As a result of the impairment, the asset group was recorded at fair value as of December 31, 2015. The fair value for the asset group was determined using the direct cash flows expected to be received from the disposition of the asset group, which was completed in February 2016 (level 3 input).
|
Debt
The estimated fair value of debt is based on the Level 2 quoted market prices for the same or similar issues and includes the impact of the conversion features.
The carrying amounts, net of unamortized discounts and issuance costs, and the estimated fair values of the Company's convertible debt as of
September 30, 2016
, and
December 31, 2015
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Carrying
Value
|
|
Estimated Fair
Value
|
|
Carrying
Value
|
|
Estimated Fair
Value
|
2% Convertible Senior Notes
|
$
|
59,058
|
|
|
$
|
73,832
|
|
|
$
|
171,698
|
|
|
$
|
207,882
|
|
|
|
|
|
|
|
|
|
1.25% Convertible Senior Notes
|
$
|
269,904
|
|
|
$
|
339,163
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Note 5. Short-term Investments
The Company's short-term investments are classified as available-for-sale and amortized costs, gross unrealized holding gains and losses, and fair values at
September 30, 2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
September 30, 2016
|
|
|
|
|
|
|
|
U.S. government and agency bonds
|
$
|
29,036
|
|
|
$
|
2
|
|
|
$
|
(6
|
)
|
|
$
|
29,032
|
|
Corporate bonds
|
25,571
|
|
|
—
|
|
|
(31
|
)
|
|
25,540
|
|
Certificates of deposit
|
12,721
|
|
|
—
|
|
|
—
|
|
|
12,721
|
|
Total short-term investments
|
$
|
67,328
|
|
|
$
|
2
|
|
|
$
|
(37
|
)
|
|
$
|
67,293
|
|
The Company had
no
short-term investments at December 31, 2015.
Note
6
. Debt
The following table shows the gross and net carrying amount of the Company's convertible debt (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31, 2015
|
Principal amount of the 2% Convertible Senior Notes
|
$
|
67,084
|
|
|
$
|
201,250
|
|
Principal amount of the 1.25% Convertible Senior Notes
|
345,000
|
|
|
—
|
|
Unamortized debt discount
|
(73,148
|
)
|
|
(25,704
|
)
|
Deferred financing costs
|
(9,974
|
)
|
|
(3,848
|
)
|
Long-term debt, net carrying amount
|
$
|
328,962
|
|
|
$
|
171,698
|
|
Interest expense related to the
2%
Notes and the
1.25%
Notes was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Contractual coupon interest
|
$
|
1,041
|
|
|
$
|
1,007
|
|
|
$
|
3,054
|
|
|
$
|
3,019
|
|
Amortization of debt discount
|
1,901
|
|
|
1,650
|
|
|
5,330
|
|
|
4,876
|
|
Amortization of debt issuance costs
|
222
|
|
|
281
|
|
|
785
|
|
|
844
|
|
Total interest expense from the Notes
|
$
|
3,164
|
|
|
$
|
2,938
|
|
|
$
|
9,169
|
|
|
$
|
8,739
|
|
3.75% Convertible Senior Notes
In
June 2011
, the Company sold
$143.8 million
in principal amount of
3.75%
Convertible Senior Notes due
June 15, 2016
(the "3.75% Notes"). The interest rate on the notes was 3.75% per annum, payable semi-annually in arrears in cash on
December 15
and
June 15
of each year. The 3.75% Notes were convertible into the Company’s common stock at an initial conversion rate of
38.1749
shares of common stock per
$1,000
principal amount of the 3.75% Notes, which was equivalent to a conversion price of approximately
$26.20
per share.
In connection with the issuance of the 3.75% Notes, the Company repurchased
$70 million
in principal amount of its
5.375%
Convertible Senior Notes due
June 15, 2013
(the "5.375% Notes") for
$85.1 million
, a
21.5%
premium on the principal amount. The investors that held the
$70 million
in principal amount of repurchased 5.375% Notes purchased
$59.5 million
in principal amount of the 3.75% Notes and retained approximately
$13.5 million
in principal amount of the remaining 5.375% Notes. These investors’ combined
$73.0 million
in principal amount of convertible debt (
$13.5 million
of 5.375% Notes and
$59.5 million
of 3.75% Notes) was considered to be a modification of a portion of the 5.375% Notes and was accounted for separately from the issuance of the remainder of the 3.75% Notes.
The Company recorded a total debt discount of
$25.8 million
related to the modified debt. This discount consisted of
$10.5 million
related to the remaining debt discount on the
$70 million
in principal amount of 5.375% Notes repurchased,
$15.1 million
related to the premium payment in connection with the repurchase and
$0.2 million
related to the increase in the value of the conversion feature. The total debt discount was being amortized as non-cash interest expense at the effective rate of
16.5%
over the
five
year term of the modified debt. Additionally, the Company paid transaction fees of approximately
$2.0 million
related to the modification, which were recorded as interest and other expense at the time of the modification.
Of the
$143.8 million
in principal amount of 3.75% Notes issued in June 2011,
$84.3 million
in principal amount was considered to be an issuance of new debt. The Company recorded a debt discount of
$26.6 million
related to the
$84.3 million
in principal amount of 3.75% Notes. The debt discount was recorded as additional paid-in capital to reflect the value of its nonconvertible debt borrowing rate of
12.4%
per annum and was being amortized as non-cash interest expense over the
five
year term of the 3.75% Notes. The Company incurred deferred financing costs related to this offering of approximately
$2.8 million
, of which
$0.9 million
has been reclassified as an offset to the value of the amount allocated to equity. The remainder was recorded as other assets in the consolidated balance sheet and was being amortized as non-cash interest expense over the
five
year term of the 3.75% Notes.
In June 2014, in connection with the issuance of
$201.3 million
in principal amount of 2% Convertible Senior Notes due
June 15, 2019
(the “2% Notes”), the Company repurchased approximately
$114.9 million
in principal amount of the 3.75% Notes for
$160.7 million
, a premium of
$45.8 million
over the principal amount. Investors that held approximately
$80.0 million
of 3.75% Notes purchased approximately
$98.2 million
in principal amount of the 2% Notes. The repurchase of the 3.75% Notes was treated as an extinguishment of debt since the fair value of the conversion feature changed by more than 10%. The extinguishment of the 3.75% Notes was accounted for separately from the issuance of the 2% Notes. The
$160.7 million
paid to extinguish the debt was allocated to debt and equity based on their respective fair values immediately prior to the transaction. The Company allocated
$112.4 million
of the payment to the debt and
$48.3 million
to equity.
The 3.75% Notes were convertible at the option of the holder during the quarter ended June 30, 2014 since the last reported sales price per share of the Company's common stock was equal to or greater than
130%
of the conversion price for at least
20
of the
30
trading days ended on March 31, 2014. The 3.75% Notes and any unpaid interest were convertible at the Company’s option for cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock.
Beginning on
June 20, 2014
, the Company had the right to redeem the 3.75% Notes, at its option, in whole or in part, if the last reported sale price per share of the Company’s common stock was at least
130%
of the conversion price then in effect for at least
20
trading days during a period of
30
consecutive trading days. In June 2014, the Company met the redemption requirements and notified holders of its intent to redeem the outstanding
$28.8 million
in principal amount of 3.75% Notes in July 2014. Prior to the redemption date, holders of
$28.5 million
in principal amount of 3.75% Notes exercised their right to convert their outstanding 3.75% Notes. The Company settled this conversion of the 3.75% Notes in July 2014 by providing cash of
$28.5 million
for the principal amount of the outstanding 3.75% Notes converted and issuing
348,535
shares of common stock for the conversion premium totaling
$12.6 million
, for a total consideration paid of
$41.1 million
. The Company settled the redemption of the remaining
$0.3 million
in principal amount in exchange for a cash payment of
$0.3 million
representing principal and accrued and unpaid interest. The Company allocated
$27.9 million
of the total consideration paid to the debt and
$13.5 million
to equity.
The Company recorded a loss on extinguishment of debt of
$23.2 million
in connection with the repurchase and redemption of the 3.75% Notes during the year ended December 31, 2014, representing the excess of the
$140.3 million
allocated to the debt over its carrying value, net of deferred financing costs.
Certain features related to a portion of the 3.75% Notes, including the holders’ ability to require the Company to repurchase their notes and the higher interest payments required in an event of default, were considered embedded derivatives and were required to be bifurcated and accounted for at fair value. The Company assessed the value of these embedded derivatives at each balance sheet date.
As of December 31, 2014,
no
amounts remain outstanding related to the 3.75% Notes.
2% Convertible Senior Notes
In June 2014, the Company sold
$201.3 million
in principal amount of the
2%
Notes due
June 15, 2019
. 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
1.25%
Convertible Senior Notes due September 2021 (the "1.25% Notes"), the Company repurchased approximately
$134.2 million
in principal amount of the 2% Notes for
$153.6 million
(excluding accrued interest of
$0.7 million
). The extinguishment of the 2% Notes was accounted for separately from the issuance of the 1.25% Notes as both transactions were viewed as 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 three and nine months ended September 30, 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 $
0.9 million
and $
1.0 million
in the
three months ended September 30, 2016 and 2015
, respectively. Cash interest expense related to the 2% Notes was $
2.9 million
and $
3.0 million
in the
nine months ended September 30, 2016 and 2015
, respectively.
Non-cash interest expense related to the 2% Notes was $
1.6 million
and
$1.9 million
in the
three months ended September 30, 2016 and 2015
, respectively. Non-cash interest expense related to the 2% Notes was $
5.6 million
and $
5.7 million
in the
nine months ended September 30, 2016 and 2015
, respectively.
As of
September 30, 2016
and
December 31, 2015
, the Company included
$59.1 million
and
$171.7 million
, respectively, on its balance sheet in long-term debt related to the 2% Notes.
1.25% Convertible Senior Notes
In September 2016, the Company sold
$345.0 million
in principal amount of the
1.25%
Notes, which mature on September 15, 2021.
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 is due on March 15, 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
$11.1 million
, of which
$2.1 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
$0.2 million
in the three and nine month periods ended September 30, 2016. Non-cash interest expense related to the 1.25% Notes was $
0.5 million
in the three and nine month periods ended September 30, 2016.
As of
September 30, 2016
, the Company included
$269.9 million
on its balance sheet in long-term debt related to the 1.25% Notes.
Note
7
. Capital Lease Obligations
As of
September 30, 2016
, and
December 31, 2015
, the Company has approximately
$13.7 million
of manufacturing equipment acquired under capital leases, included in property and equipment. As of
September 30, 2016
, one capital lease remains outstanding and is being repaid in equal monthly installments over a
24
month term and includes principal and interest payments with an effective interest rate of
13%
.
The assets acquired under capital leases are being amortized on a straight-line basis over
five
years in accordance with the Company's policy for depreciation of manufacturing equipment. Amortization expense on assets acquired under capital leases is included with depreciation expense. Amortization expense related to these capital leased assets was
$0.7 million
and
$0.6 million
in the
three months ended September 30, 2016 and 2015
, respectively. Amortization expense was
$2.1 million
and
$1.7 million
in the
nine months ended September 30, 2016 and 2015
, respectively.
Assets purchased under capital leases and held consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Manufacturing equipment
|
$
|
13,705
|
|
|
$
|
13,705
|
|
Less: Accumulated amortization
|
(6,401
|
)
|
|
(4,346
|
)
|
Total
|
$
|
7,304
|
|
|
$
|
9,359
|
|
The aggregate future minimum lease payments related to the capital lease as of
September 30, 2016
, are as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
Minimum Lease
Payments
|
2016 (remaining)
|
$
|
808
|
|
2017
|
269
|
|
Total future minimum lease payments
|
$
|
1,077
|
|
Interest expense
|
16
|
|
Total capital lease obligations
|
$
|
1,061
|
|
The Company recorded
$0.1 million
and
$0.3 million
of interest expense on capital leases in the
three months ended September 30, 2016 and 2015
, respectively. The Company recorded
$0.3 million
and
$1.0 million
of interest expense on capital leases in the
nine months ended September 30, 2016 and 2015
, respectively.
Note 8. 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, 2016
and
2015
, 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,
|
|
2016
|
|
2015
|
2.00% Convertible Senior Notes
|
1,442,433
|
|
|
4,327,257
|
|
1.25% Convertible Senior Notes
|
5,910,954
|
|
|
—
|
|
Unvested restricted stock units
|
971,814
|
|
|
862,044
|
|
Outstanding options
|
3,541,936
|
|
|
2,959,320
|
|
Total dilutive common share equivalents
|
11,867,137
|
|
|
8,148,621
|
|
Note
9
. Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due from distributors, third-party payors, patients, 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 accounts receivable as of
September 30, 2016
and
December 31, 2015
were as follows:
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Amgen, Inc.
|
29
|
%
|
|
22
|
%
|
Ypsomed Distribution AG
|
15
|
%
|
|
19
|
%
|
The components of accounts receivable from continuing operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Trade receivables, gross
|
$
|
42,391
|
|
|
$
|
46,668
|
|
Allowance for doubtful accounts
|
(3,843
|
)
|
|
(4,138
|
)
|
Total accounts receivable, net
|
$
|
38,548
|
|
|
$
|
42,530
|
|
Note
10
. Inventories
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, 2016
and
December 31, 2015
. 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 from continuing operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Raw materials
|
$
|
1,477
|
|
|
$
|
632
|
|
Work-in-process
|
5,508
|
|
|
1,960
|
|
Finished goods, net
|
25,678
|
|
|
9,432
|
|
Total inventories
|
$
|
32,663
|
|
|
$
|
12,024
|
|
Note
11
. Other Intangible Assets
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 changes in circumstances suggest that the carrying value of an asset may not be recoverable. The Company recognizes an impairment loss for intangibles and other finite-lived assets if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows. Any such impairment loss is measured as the difference between the carrying amount and the fair 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
$32.9 million
of other intangible assets as a result of the acquisition of Neighborhood Diabetes in 2011. In December 2015, the Company completed a long-lived asset impairment test for Neighborhood Diabetes and determined that the carrying value of the long-lived asset group, which included intangible assets, exceeded the undiscounted cash flows expected to be generated from the asset group. The Company compared the fair value of the intangible assets and the related asset group, which was estimated based on the subsequent sales price of the asset group as of February 2016. An impairment charge of
$9.0 million
was recorded within general and administrative expenses for the year ended December 31, 2015. The impairment charge was allocated on a pro-rata basis based on the carrying value of the assets within the asset group. As a result, impairment charges of approximately
$7.4 million
and
$1.6 million
, respectively, were recorded on the customer relationship and tradename intangible assets. During the three months ended March 31, 2016, the remaining balance of the other intangible assets associated with the acquisition of Neighborhood Diabetes were removed from the balance sheet as part of the divestiture and included in the calculated loss of disposal. No further impairment was recorded upon the sale.
The Company recorded
$2.1 million
of other intangible assets in 2015 as a result 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 based on the expected cash flows of the assets.
The components of other intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Book Value
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Book Value
|
Contractual relationships, net
|
$
|
2,039
|
|
|
$
|
(1,388
|
)
|
|
$
|
651
|
|
|
$
|
1,933
|
|
|
$
|
(1,000
|
)
|
|
$
|
933
|
|
Total intangible assets
|
$
|
2,039
|
|
|
$
|
(1,388
|
)
|
|
$
|
651
|
|
|
$
|
1,933
|
|
|
$
|
(1,000
|
)
|
|
$
|
933
|
|
Amortization expense for intangible assets, excluding discontinued operations, was approximately $
0.1 million
and
$0.3 million
for the
three and nine months ended September 30, 2016
, respectively. Amortization expense for intangible assets, excluding discontinued operations, was approximately
$0.5 million
and
$0.5 million
for the
three and nine months ended September 30, 2015
, 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,
|
Contractual Relationships
|
2016 (remaining)
|
$
|
111
|
|
2017
|
185
|
|
2018
|
158
|
|
2019
|
132
|
|
2020
|
65
|
|
Thereafter
|
—
|
|
Total
|
$
|
651
|
|
As of
September 30, 2016
, the weighted average amortization period of the Company’s intangible assets is approximately
4.25 years
.
Note
12
. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Employee compensation and related items
|
19,529
|
|
|
16,856
|
|
Professional and consulting services
|
5,958
|
|
|
5,654
|
|
Suppliers
|
643
|
|
|
4,981
|
|
Other
|
7,602
|
|
|
9,253
|
|
Total accrued expenses and other current liabilities
|
$
|
33,732
|
|
|
$
|
36,744
|
|
Product Warranty Costs
The Company provides a
four
-year warranty on its PDMs sold in the United States and a
five
year warranty on its PDMs sold in Canada and may replace any Omnipods that do not function in accordance with product specifications. The Company estimates its warranty at the time the product is shipped based on historical experience and the estimated cost to service the claims. Warranty expense is recorded in cost of goods sold on the statement of operations. As these estimates are based on historical experience, and the Company continues to introduce new products and versions, the Company also considers the anticipated performance of the product over its warranty period in estimating warranty reserves.
A reconciliation of the changes in the Company’s product warranty liability is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Balance at the beginning of the period
|
$
|
4,294
|
|
|
$
|
3,167
|
|
|
$
|
4,152
|
|
|
$
|
2,614
|
|
Warranty expense
|
1,149
|
|
|
1,579
|
|
|
3,288
|
|
|
3,300
|
|
Warranty claims settled
|
(1,101
|
)
|
|
(992
|
)
|
|
(3,098
|
)
|
|
(2,160
|
)
|
Balance at the end of the period
|
$
|
4,342
|
|
|
$
|
3,754
|
|
|
$
|
4,342
|
|
|
$
|
3,754
|
|
The composition of the product warranty liability balance is reported on the consolidated balance sheets in accrued expenses and other current liabilities and other long-term liabilities as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Composition of balance:
|
|
|
|
Short-term
|
$
|
1,640
|
|
|
$
|
1,592
|
|
Long-term
|
2,702
|
|
|
2,560
|
|
|
$
|
4,342
|
|
|
$
|
4,152
|
|
Note
13
. Commitments and Contingencies
Operating Leases
The Company leases its facilities in Massachusetts, California, Canada and Singapore. 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.
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 current and long-term liabilities in the accompanying balance sheets. The Company has considered FASB ASC 840-20,
Leases
in accounting for these lease provisions.
The aggregate future minimum lease payments related to these leases as of
September 30, 2016
, are as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
Minimum Lease
Payments
|
2016 (remaining)
|
$
|
624
|
|
2017
|
2,449
|
|
2018
|
2,383
|
|
2019
|
2,390
|
|
2020
|
2,383
|
|
Thereafter
|
4,515
|
|
Total
|
$
|
14,744
|
|
Legal Proceedings
The Company is in the process of responding to a revised audit report received in December 2015 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
through general and administrative expense, which was reduced to
$0.3 million
during the three months ended September 30, 2016. The change in the liability was recorded in discontinued operations.
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 the three months ending March 31, 2016.
Between
May 5, 2015
and
June 16, 2015
,
three
class action lawsuits were filed by shareholders in the U.S. District Court, Massachusetts, against the Company and certain individual current and former executives of the Company.
Two
suits subsequently were voluntarily dismissed.
Arkansas Teacher Retirement System v. Insulet, et al.
, 1:15-cv-12345, which remains outstanding, alleges that the Company (and certain executives) committed violations of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 by making allegedly false and misleading statements about the Company’s business, operations, and prospects. The lawsuit seeks, among other things, compensatory damages in connection with the Company’s allegedly inflated stock price between May 7, 2013 and April 30, 2015, as well as attorneys’ fees and costs. Due in part to the preliminary nature of this matter, the Company currently cannot reasonably estimate a possible loss, or range of loss, in connection with this matter.
The Company is, from time to time, involved in the normal course of business in various legal proceedings, including intellectual property, contract employment and product liability suits. Although the Company is unable to quantify the exact financial impact of any of these matters, the Company believes that none of these currently pending matters will have an outcome material to its financial condition or business.
Note
14
. Equity
The Company accounts for stock-based compensation under the provisions of FASB ASC 718-10,
Compensation — Stock Compensation
(“ASC 718-10”), which requires all share-based payments to employees, including grants of employee stock options and restricted stock units, to be recognized in the income statement based on their fair values. Share-based payments that contain performance conditions are recognized when such conditions are probable of being achieved.
The Company uses the Black-Scholes option pricing model to determine the weighted-average fair value 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 on an accelerated method for awards with performance conditions. Compensation expense is recognized over the vesting period of the awards.
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. The expected volatility 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. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of the awards. The dividend yield assumption is based on Company history and an expectation of paying no dividends. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense recognized in the financial statements is based on awards that are ultimately expected to vest. The Company evaluates the assumptions used to value the awards on a quarterly basis and if factors change and different assumptions are utilized, stock-based compensation expense may differ significantly from what has been recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.
Stock-based compensation expense related to share-based awards recognized in the
three months ended September 30, 2016 and 2015
was
$6.1 million
and
$4.2 million
, respectively, based upon when the awards are ultimately expected to vest. Stock-based compensation expense related to the share-based awards recognized in the
nine months ended September 30, 2016 and 2015
was
$16.9 million
and
$13.8 million
, respectively, and was also calculated based on when the awards are ultimately expected to vest.
At
September 30, 2016
, the Company had
$47.0 million
of total unrecognized compensation expense related to unvested stock options and restricted stock units.
Stock Options
In May 2007, in conjunction with the Company's initial public offering, the Company adopted its 2007 Stock Option and Incentive Plan (the "2007 Plan"). The 2007 Plan was amended and restated in November 2008, May 2012 and May 2015 to provide for the issuance of additional shares and to amend certain other provisions. Under the 2007 Plan, awards may be granted to persons who are, at the time of grant, employees, officers, non-employee directors or key persons (including consultants and prospective employees) of the Company. The 2007 Plan provides for the granting of stock options, restricted stock units, stock appreciation rights, deferred stock awards, restricted stock, unrestricted stock, cash-based awards, performance share awards or dividend equivalent rights. Options granted under the 2007 Plan generally vest over a period of
four
years and expire
ten
years from the date of grant. As of
September 30, 2016
,
4,404,847
shares remain available for future issuance under the 2007 Plan.
The Company awarded
194,500
shares of incentive stock options in 2015 and an additional
55,000
shares of incentive stock options during the nine months ended September 30, 2016 that include vesting periods that may be accelerated. The stock options were granted under the 2007 Plan and vest over a
four
year period from the grant date with the potential of an accelerated vesting period pursuant to the achievement of certain performance conditions. Performance awards are amortized over the service period using an accelerated attribution method.
The following summarizes the activity under the Company’s stock option plans in the
nine months ended September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options (#)
|
|
Weighted Average
Exercise Price ($)
|
|
Aggregate
Intrinsic
Value ($)
|
|
|
|
|
|
(In thousands)
|
Balance, December 31, 2015
|
2,999,199
|
|
|
$
|
31.37
|
|
|
|
Granted
|
967,918
|
|
|
$
|
31.32
|
|
|
|
Exercised
(1)
|
(226,296
|
)
|
|
$
|
19.54
|
|
|
$
|
4,440
|
|
Canceled
|
(198,885
|
)
|
|
$
|
32.60
|
|
|
|
Balance, September 30, 2016
|
3,541,936
|
|
|
$
|
32.05
|
|
|
$
|
32,243
|
|
Vested, September 30, 2016
(2)
|
1,347,219
|
|
|
$
|
31.63
|
|
|
$
|
12,837
|
|
Vested and expected to vest, September 30, 2016
(2)(3)
|
3,230,071
|
|
|
|
|
$
|
29,427
|
|
|
|
(1)
|
The aggregate intrinsic value was calculated based on the positive difference between the pre-tax fair value of the Company’s common stock as of the date of exercise and the exercise price of the underlying options.
|
|
|
(2)
|
The aggregate intrinsic value was calculated based on the positive pre-tax difference between the closing price of the Company’s common stock as of
September 30, 2016
, and the exercise price of the underlying options.
|
|
|
(3)
|
Represents the number of vested options as of
September 30, 2016
, plus the number of unvested options expected to vest as of
September 30, 2016
, based on the unvested options outstanding at
September 30, 2016
, adjusted for the estimated forfeiture.
|
At
September 30, 2016
there were
3,541,936
options outstanding with a weighted average exercise price of
$32.05
and a weighted average remaining contractual life of
8.3 years
. At
September 30, 2016
there were
1,347,219
options exercisable with a weighted average exercise price of
$31.63
and a weighted average remaining contractual life of
7.4
years.
Employee stock-based compensation expense related to stock options in the
three months ended September 30, 2016 and 2015
was
$2.6 million
and
$2.0 million
, respectively, and was based on awards ultimately expected to vest. Employee stock-based compensation expense related to stock options in the
nine months ended September 30, 2016 and 2015
was
$7.4 million
and
$7.0 million
, respectively, and was based on awards ultimately expected to vest. At
September 30, 2016
, the Company had
$22.3 million
of total unrecognized compensation expense related to stock options that will be recognized over a weighted average vesting period of
2.6
years.
Restricted Stock Units
In the
nine months ended September 30, 2016
, the Company awarded
581,777
restricted stock units to certain employees and non-employee members of the Board of Directors, which included
153,992
restricted stock units subject to the achievement of performance conditions (performance-based restricted stock units). The number of performance-based restricted stock units granted during the
nine months ended September 30, 2016
that are expected to vest may vary based on the Company's quarterly evaluation of the probability of the performance criteria being achieved. The Company recognized stock compensation expense of
$0.9 million
and
$2.0 million
in the
three and nine months ended September 30, 2016
for performance-based restricted stock units that are expected to vest based on its evaluation of the performance criteria at September 30, 2016. The Company recognized stock compensation expense of
$0.4 million
and
$0.4 million
in the
three and nine months ended September 30, 2015
for performance-based restricted stock units. Performance awards are amortized over the service period using an accelerated attribution method. The restricted stock units were granted under the 2007 Plan and vest over a
three
year period from the grant date.
The restricted stock units granted during the
nine months ended September 30, 2016
have a weighted average fair value of
$29.69
per share based on the closing price of the Company’s common stock on the date of grant and were valued at approximately
$17.3 million
on their grant date. The Company is recognizing the compensation expense over the vesting period. Approximately
$2.6 million
and
$1.7 million
in the
three months ended September 30, 2016 and 2015
and
$7.3 million
and
$6.3 million
in the
nine months ended September 30, 2016 and 2015
of stock-based compensation expense related to the vesting of non-performance based restricted stock units was recognized using the straight line method. Approximately
$24.7 million
of the fair value of the restricted stock units, including performance-based restricted stock units remained unrecognized as of
September 30, 2016
and will be recognized over a weighted average period of
2
year. Under the terms of the awards, the Company will issue shares of common stock on each of the vesting dates.
The following table summarizes the status of the Company’s restricted stock units in the
nine months ended September 30, 2016
:
|
|
|
|
|
|
|
|
|
Number of
Shares (#)
|
|
Weighted
Average Grant Date
Fair Value ($)
|
Balance, December 31, 2015
|
811,965
|
|
|
$
|
32.30
|
|
Granted
|
581,777
|
|
|
29.69
|
|
Vested
|
(309,024
|
)
|
|
30.73
|
|
Forfeited
|
(112,904
|
)
|
|
33.23
|
|
Balance, September 30, 2016
|
971,814
|
|
|
$
|
31.14
|
|
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, an offering period will 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 will end 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
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 will be
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.
As of
September 30, 2016
, the Company had
no
shares contingently issued under the ESPP. The Company recorded approximately
$0.1 million
of stock-based compensation expense in the
three months ended September 30, 2016
and approximately
$0.1 million
of stock-based compensation expense in the
nine months ended September 30, 2016
related to the ESPP. In the three and nine months ended September 30, 2015, the Company recorded no significant stock-based compensation charges related to the ESPP.
Note
15
. 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 FASB 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 2013 through 2015 and 2010 through 2015, 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, 2016
and
December 31, 2015
, the Company provided a valuation allowance for the full amount of its net deferred tax asset because it is not more likely than not that the future tax benefit will be realized.
Income tax expense from continuing operations consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Current
|
$
|
71
|
|
|
$
|
44
|
|
|
$
|
283
|
|
|
$
|
83
|
|
Deferred
|
(5
|
)
|
|
—
|
|
|
(88
|
)
|
|
—
|
|
Income tax expense
|
$
|
66
|
|
|
$
|
44
|
|
|
$
|
195
|
|
|
$
|
83
|
|
Income tax expense from discontinued operations was not significant in the three months ended September 30, 2016 and 2015. Income tax expense from discontinued operations was $
0.4 million
and $
0.1 million
in the nine months ended September 30, 2016 and 2015, respectively.
The Company has generated deferred tax liabilities related to its amortization of acquired goodwill for tax purposes because the goodwill is not amortized for financial reporting purposes. The tax amortization gives rise to a temporary difference and a tax liability, which will only reverse at the time of ultimate disposition or impairment of the underlying goodwill. Due to the uncertain timing of this reversal, the temporary difference cannot be considered as a source of future taxable income for purposes of determining a valuation allowance; therefore, the tax liability cannot be used to offset deferred tax assets.
The Company had
no
unrecognized tax benefits at
September 30, 2016
.
16
. Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision-maker ("CODM") in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company has concluded that their Chief Executive Officer is the CODM as he is the ultimate decision maker for key operating decisions, determining the allocation of resources and assessing the financial performance of the Company. These decisions, allocations and assessments are performed by the CODM using consolidated financial information. Consolidated financial information is utilized by the CODM as the Company’s current product offering primarily consists of the Omnipod System and drug delivery. The Company’s products are relatively consistent and manufacturing is centralized and consistent across product offerings. Based on these factors, key operating decisions and resource allocations are made by the CODM using consolidated financial data and as such the Company has concluded that they operate as
one
segment.
Worldwide revenue for the Company's products is categorized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
U.S. Omnipod
|
$
|
59,641
|
|
|
$
|
50,738
|
|
|
$
|
166,691
|
|
|
$
|
135,835
|
|
International Omnipod
|
19,107
|
|
|
13,570
|
|
|
51,046
|
|
|
24,990
|
|
Drug Delivery
|
16,123
|
|
|
7,085
|
|
|
45,677
|
|
|
19,267
|
|
Total
|
$
|
94,871
|
|
|
$
|
71,393
|
|
|
$
|
263,414
|
|
|
$
|
180,092
|
|
Geographic information about revenue, based on the region of the customer's shipping location, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
United States
|
$
|
75,764
|
|
|
$
|
57,823
|
|
|
$
|
212,368
|
|
|
$
|
155,102
|
|
All other
|
19,107
|
|
|
13,570
|
|
|
51,046
|
|
|
24,990
|
|
Total
|
$
|
94,871
|
|
|
$
|
71,393
|
|
|
$
|
263,414
|
|
|
$
|
180,092
|
|
Geographic information about long-lived assets, net, excluding goodwill and other intangible assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
United States
|
$
|
25,431
|
|
|
$
|
13,018
|
|
China
|
25,477
|
|
|
28,638
|
|
Other
|
101
|
|
|
213
|
|
Total
|
$
|
51,009
|
|
|
$
|
41,869
|
|