Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 and tubing, 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, as well as Canada and Israel.
In addition to the diabetes market space, we have partnered with pharmaceutical and biotechnology companies that utilize a customized form of the Omnipod System to deliver a drug over a specified interval of time, at a certain administered volume. The majority of our drug delivery revenue currently consists of sales of Amgen's Neulasta Onpro kit.
We are constructing a highly-automated manufacturing facility in Acton, Massachusetts, with planned production out of the facility beginning in early 2019. The facility will also serve as our global headquarters. We expect that the new facility will allow us to lower our manufacturing costs, increase supply redundancy, add capacity closer to our largest customer base and support growth. We expect capital expenditures for the construction of the Acton facility and related equipment purchases will approach $200 million when production begins in 2019 and will be funded by our cash flows from operations and proceeds from our senior convertible debt offerings.
We announced on July 20, 2017 our plans to assume, on July 1, 2018, all commercial activities (including, among other things, distribution, sales, marketing, training and support) of our Omnipod System across Europe following the expiration of our distribution agreement with our European distributor on June 30, 2018. Once we assume commercial activities following the expiration of the current distribution agreement, we expect our revenue and gross margins to increase, as average customer pricing in Europe is higher than the current distributor pricing to our European distributor. Throughout 2018, we expect to incur increased operating expenses as we invest in our European operations. 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.
Highlights and Recent Developments:
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|
•
|
In January 2018, we announced that CMS has issued guidance clarifying that Medicare Part D Plan Sponsors are permitted to provide coverage for products such as the Omnipod System under the Medicare Part D (prescription drug) program. The CMS guidance empowers us to begin working with Medicare Part D carriers to ensure beneficiaries living with diabetes have access to the Omnipod System. Securing Medicare Part D coverage also provides us with a direct pathway to gain Medicaid coverage at the state level, as many state-run Medicaid programs follow CMS prescription drug guidance to determine coverage. This allows access for lower-income individuals and families on Medicaid for whom Omnipod currently is not a covered option. The Company estimates that obtaining Medicare and Medicaid coverage extends Omnipod System coverage access to approximately 450,000 additional individuals with Type 1 diabetes in the United States.
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•
|
Also in January 2018, we submitted a premarket notification 510(k) to the FDA requesting clearance for commercial distribution of our DASH
TM
System, which is our next generation of the Omnipod System, featuring a secured Bluetooth Low Energy enabled Pod and PDM with a touch screen color user interface
|
supported by smartphone connectivity. Upon clearance, we would begin a limited commercial release of the product prior to a full market launch.
|
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•
|
In November 2017, we issued and sold $402.5 million in principal amount of 1.375% Convertible Senior Notes due in 2024 and repurchased $63.4 million in principal amount of our 2.0% Convertible Senior Notes due in 2019.
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•
|
In July 2017, we announced plans to assume distribution and commercial support for the Omnipod System in Europe as further discussed above. We believe that our strategy of accessing our customers directly in Europe will allow us to have better control over existing and future markets, be closer to our customers, gain a better understanding of innovation needs specific to the European market, and expand our customer base.
|
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•
|
During 2017, we began construction of our new, highly-automated U.S. manufacturing facility in Acton, Massachusetts. We believe that this manufacturing facility will allow us to lower our manufacturing costs, increase supply redundancy, add capacity closer our growing U.S. customer base and support our growth. The facility will also serve as our global headquarters.
|
2017
Revenue Results:
|
|
•
|
Total revenue of
$463.8 million
|
|
|
◦
|
U.S. Omnipod revenue of
$271.6 million
, an
18%
increase year over year
|
|
|
◦
|
International Omnipod revenue of
$120.0 million
, a
67%
increase year over year
|
|
|
◦
|
Drug Delivery revenue of
$72.2 million
, an
11%
increase year over year
|
Our long-term financial objective is to achieve and sustain profitable growth. We expect our efforts in
2018
and 2019 to focus primarily on the construction and commissioning of our U.S. manufacturing facility, the establishment of our European operations, the launch of new products, such as the DASH
TM
Omnipod System, continuing our product development efforts, and taking the necessary actions such as amending or creating payor or distributor contracts to allow us to service patients who receive benefits through the Medicare Part D and Medicaid programs. 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
2017
compared to
2016
, as well as
2016
compared to
2015
, and should be read in conjunction with the consolidated financial statements and accompanying notes included under Item 8 of this Form 10-K.
TABLE 1: RESULTS OF OPERATIONS
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|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
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|
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|
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|
|
Years Ended December 31,
|
|
Years Ended December 31,
|
(In Thousands)
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Omnipod
|
$
|
271,597
|
|
|
$
|
229,785
|
|
|
$
|
41,812
|
|
|
18
|
%
|
|
$
|
229,785
|
|
|
$
|
189,604
|
|
|
$
|
40,181
|
|
|
21
|
%
|
International Omnipod
|
119,953
|
|
|
71,889
|
|
|
48,064
|
|
|
67
|
%
|
|
71,889
|
|
|
40,339
|
|
|
31,550
|
|
|
78
|
%
|
Drug Delivery
|
72,218
|
|
|
65,315
|
|
|
6,903
|
|
|
11
|
%
|
|
65,315
|
|
|
33,950
|
|
|
31,365
|
|
|
92
|
%
|
Total Revenue
|
463,768
|
|
|
366,989
|
|
|
96,779
|
|
|
26
|
%
|
|
366,989
|
|
|
263,893
|
|
|
103,096
|
|
|
39
|
%
|
Cost of revenue
|
186,599
|
|
|
155,903
|
|
|
30,696
|
|
|
20
|
%
|
|
155,903
|
|
|
130,622
|
|
|
25,281
|
|
|
19
|
%
|
Gross profit
|
277,169
|
|
|
211,086
|
|
|
66,083
|
|
|
31
|
%
|
|
211,086
|
|
|
133,271
|
|
|
77,815
|
|
|
58
|
%
|
Gross margin
|
59.8
|
%
|
|
57.5
|
%
|
|
|
|
|
2.3
|
|
57.5
|
%
|
|
50.5
|
%
|
|
|
|
|
7
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
74,452
|
|
|
55,710
|
|
|
18,742
|
|
|
34
|
%
|
|
55,710
|
|
|
43,208
|
|
|
12,502
|
|
|
29
|
%
|
Sales and marketing
|
121,617
|
|
|
94,483
|
|
|
27,134
|
|
|
29
|
%
|
|
94,483
|
|
|
78,407
|
|
|
16,076
|
|
|
21
|
%
|
General and administrative
|
88,487
|
|
|
71,597
|
|
|
16,890
|
|
|
24
|
%
|
|
71,597
|
|
|
60,392
|
|
|
11,205
|
|
|
19
|
%
|
Total operating expenses
|
284,556
|
|
|
221,790
|
|
|
62,766
|
|
|
28
|
%
|
|
221,790
|
|
|
182,007
|
|
|
39,783
|
|
|
22
|
%
|
Operating loss
|
(7,387
|
)
|
|
(10,704
|
)
|
|
(3,317
|
)
|
|
(31
|
)%
|
|
(10,704
|
)
|
|
(48,736
|
)
|
|
(38,032
|
)
|
|
(78
|
)%
|
Interest expense and other, net
|
(19,187
|
)
|
|
(16,114
|
)
|
|
(3,073
|
)
|
|
19
|
%
|
|
(16,114
|
)
|
|
(12,654
|
)
|
|
(3,460
|
)
|
|
27
|
%
|
Loss from continuing operations before income taxes
|
(26,574
|
)
|
|
(26,818
|
)
|
|
(244
|
)
|
|
(1
|
)%
|
|
(26,818
|
)
|
|
(61,390
|
)
|
|
(34,572
|
)
|
|
(56
|
)%
|
Income tax expense
|
257
|
|
|
392
|
|
|
(135
|
)
|
|
(34
|
)%
|
|
392
|
|
|
212
|
|
|
180
|
|
|
85
|
%
|
Net loss from continuing operations
|
(26,831
|
)
|
|
(27,210
|
)
|
|
(379
|
)
|
|
(1
|
)%
|
|
(27,210
|
)
|
|
(61,602
|
)
|
|
(34,392
|
)
|
|
(56
|
)%
|
Loss from discontinued operations, net of tax
|
—
|
|
|
(1,669
|
)
|
|
(1,669
|
)
|
|
(100
|
)%
|
|
(1,669
|
)
|
|
(11,918
|
)
|
|
(10,249
|
)
|
|
(86
|
)%
|
Net loss
|
$
|
(26,831
|
)
|
|
$
|
(28,879
|
)
|
|
$
|
2,048
|
|
|
(7
|
)%
|
|
$
|
(28,879
|
)
|
|
$
|
(73,520
|
)
|
|
$
|
44,641
|
|
|
(61
|
)%
|
Comparison of the Years Ended December 31,
2017
and December 31,
2016
Revenue
Our total revenue increased to
$463.8 million
, up
$96.8 million
, or
26%
, in
2017
compared to
2016
, due to strong growth in our International Omnipod revenue, our U.S. Omnipod revenue and our on-body injection device for drug delivery. Our International Omnipod revenue increased to
$120.0 million
, up
$48.1 million
, or
67%
, primarily due to growth in distributor sales from continued adoption in existing and newer markets within Europe such as France. Our U.S. Omnipod revenue increased to
$271.6 million
, up
$41.8 million
, or
18%
, primarily due to growth in our installed base as we continue to expand awareness of the Omnipod System. Our drug delivery revenue increased to
$72.2 million
, up
$6.9 million
, or
11%
, due to growth in demand for our primary drug delivery device on greater market adoption of Amgen's Neulasta Onpro kit.
For
2018
, we expect strong revenue growth driven by our expansion in the U.S. and internationally, as well as the transition to direct distribution of our Omnipod System across Europe following the expiration of our global distribution agreement with our European distributor on June 30, 2018, partially offset by lower drug delivery revenue.
Cost of Revenue
Cost of revenue increased to
$186.6 million
, up
$30.7 million
, or
20%
, in
2017
compared to
2016
, primarily due to an increase in sales volumes, partially offset by improvements in supply chain operations in 2017.
Gross Margin
Gross margin increased to
59.8%
, up approximately
2.3
points, in
2017
compared to
2016
. The increase in gross margin was primarily due to improvements in supply chain operations, partially offset by the unfavorable mix impact of higher distributor sales in Europe. For
2018
, we expect gross margin to increase as compared to 2017 primarily due to improvements in supply chain operations and our assumption of distribution of our Omnipod System in Europe in the second half of 2018
.
Research and Development
Research and development expenses increased to
$74.5 million
, up
$18.7 million
, or
34%
, in
2017
compared to
2016
. The increase in research and development expenses in the current period 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, our concentrated insulin program and our artificial pancreas program. For
2018
, we expect overall research and development spending to increase as compared to 2017 primarily due to the development efforts on our ongoing projects.
Sales and Marketing
Sales and marketing expenses increased to
$121.6 million
, up
$27.1 million
, or
29%
, for
2017
, compared to
2016
. The increase in sales and marketing expenses in the current period was primarily due 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. We expect sales and marketing expenses in
2018
to increase as compared to 2017 due to the expansion of our sales force and customer support personnel and establishment of direct commercial operations in Europe.
General and Administrative
General and administrative expenses increased to
$88.5 million
, up
$16.9 million
, or
24%
, for
2017
, compared to
2016
. The increase in general and administrative expenses in the current period 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
2018
, we expect overall general and administrative expenses to increase as compared to 2017 as we continue to grow the business and make investments in our operating structure to support continued growth as well as the establishment of direct commercial operations in Europe.
Interest Expense and Other, Net
Interest expense and other, net, increased to
$19.2 million
, up
$3.1 million
, or
19%
, for
2017
, compared to
2016
. The increase in interest expense and other, net, in the current period was primarily due to a net increase in our outstanding long-term debt, partially offset by lower losses on the extinguishment of debt in 2017. Non-cash interest expense, which includes the amortization of deferred financing and debt issuance costs, increased
$7.9 million
and cash interest expense increased
$1.8 million
in 2017 as compared to 2016. These increases were partially offset by a
$1.9 million
reduction in losses on the extinguishment of debt in 2017, higher capitalization of interest, and higher interest income. We expect that our interest expense and other, net, will increase in 2018 compared to the prior year primarily due to an increase in non-cash interest expense associated with the issuance in November 2017 of our 1.375% Notes, partially offset by higher capitalization of interest due to increased capital expenditures associated with the construction of our Acton, Massachusetts facility.
Income Tax Expense
Income tax expense was not material to our results of operations in the years 2017 or 2016 as we have generated net operating losses to date and have fully reserved our net operating loss carryforwards. For more information on our income tax expense, please refer to Note 15 to the consolidated financial statements.
Comparison of the Years Ended December 31,
2016
and December 31,
2015
Revenue
Our total revenue increased to
$367.0 million
, up
$103.1 million
, or
39%
, in
2016
, compared to
2015
, primarily 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
$229.8 million
, up
$40.2 million
, or
21%
, primarily due to growth in our installed base of Omnipod users which was greatly driven by the expansion in 2015 and 2016 of our sales force and customer support personnel and strategic initiatives introduced in mid-2015 to expand awareness of the Omnipod System. The results for 2015 were also partially impacted by unfavorable distributor ordering patterns in the first quarter of 2015 which stabilized thereafter. Our International Omnipod revenue increased to
$71.9 million
, up
$31.6 million
, or
78%
, primarily due to growth in distributor sales from continued adoption in existing markets and to a lesser extent from entry into new markets. The results for 2015 included lower International Omnipod sales which partially resulted from unfavorable distributor ordering patterns in the first and second quarters of 2015, which stabilized thereafter. Our drug delivery revenue increased to
$65.3 million
, up
$31.4 million
due to strong growth in demand for our primary drug delivery device following regulatory approval in December 2014.
Cost of Revenue
Cost of revenue increased to
$155.9 million
, up
$25.3 million
, or
19%
, in
2016
compared to
2015
, primarily due to an increase in sales volumes, partially offset by $11.5 million of costs incurred during 2015 that were considered non-recurring in nature, along with supply chain operation efficiency and effectiveness improvements made in 2016.
Gross Margin
Gross margin increased to 57.5%, up approximately 7 points, in 2016 compared to 2015, primarily due to $11.5 million of costs incurred in 2015 that were considered non-recurring in nature, along with supply chain operation efficiencies and effectiveness improvements made in 2016.
Research and Development
Research and development expenses increased to
$55.7 million
, up
$12.5 million
, or
29%
, in
2016
compared to
2015
, primarily due to an increase in expenses related to our development projects, including our mobile application development which involves interaction with continuous glucose monitoring technology, artificial pancreas program, development efforts with Eli Lilly and Company for the use of concentrated insulin for patients with higher insulin-resistance and other Omnipod product improvement initiatives.
Sales and Marketing
Sales and marketing expenses increased to
$94.5 million
, up
$16.1 million
, or
21%
, for
2016
compared to
2015
, primarily due to an increase of $16.0 million in personnel-related expenses, including increased incentive compensation costs resulting from growth in the business, as well as costs associated with the expansion in 2015 of our sales force and customer support personnel.
General and Administrative
General and administrative expenses increased to
$71.6 million
, up
$11.2 million
, or
19%
, for
2016
compared to
2015
. This increase includes a charge of $6.1 million related to in-process internally developed software recorded in the fourth quarter of 2016 due to a change in our longer-term enterprise resource planning system requirements. In addition, the increase was also due to a $4.6 million increase that was primarily attributable to personnel-related costs on higher incentive compensation associated with growth in our business, as well as additional staff to support our growth expectations and fees paid for external consultants.
Interest Expense and Other, Net
Interest expense and other income, net increased to
$16.1 million
, up
$3.5 million
, or
27%
for
2016
compared to
2015
, due to $3.0 million of net additional interest expense associated with the issuance of the 1.25% Notes and a $2.6 million charge recorded for the extinguishment of debt related to the repurchase of $134.2 million in principal of the 2% Notes. This was partially offset from a slight decrease in capital lease interest expense.
Income Tax Expense
Income tax expense was not material to our results of operations in the years 2016 or 2015. For more information on our income tax expense, please refer to Note 15 to the consolidated financial statements.
Loss from Discontinued Operations, Net of Tax
The loss from discontinued operations decreased by approximately $10.2 million in 2016, compared to the year ended December 31, 2015. This decrease was primarily the result of a $9.1 million impairment charge recorded in the fourth quarter of 2015 for the long-lived assets of Neighborhood Diabetes which we sold in February 2016. As the Neighborhood Diabetes business was sold in February 2016, 2016 includes less than two months of full operations compared to a full year for 2015.
Liquidity and Capital Resources
As of December 31,
2017
, we had
$272.6 million
in cash and cash equivalents and
$293.0 million
in short-term and long-term investments. 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.
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. This facility will also serve as our global headquarters. As a result, capital expenditures have increased above historic levels to fund the construction of the Acton facility and related equipment purchases. As of December 31, 2017, investments in construction-in-progress related to the Acton facility were approximately $70 million. We expect that capital expenditures for this facility will approach $200 million when production begins in 2019.
In connection with our plans to assume, on July 1, 2018, all commercial activities of our Omnipod System across Europe following the expiration of our distribution agreement with our European distributor on June 30, 2018, we will be required to pay to the European distributor a per unit fee for sales of our Omnipod device, over the twelve months following the expiration of the global distribution agreement, to identified customers (as that term is defined in the distribution agreement) of the European distributor who had previously entered into an agreement with the distributor for the purchase of Omnipod devices. While the actual total fee could vary significantly, we estimate that the total fee could be in the range of approximately $10 million to $55 million. The fee will be determined and paid on a quarterly basis following the expiration of the distribution agreement and the actual amount of the fee will depend on a number of factors and will not be known until the number of qualifying sales of Omnipod devices is determined following each quarter beginning with the quarter ending September 30, 2018.
Convertible Senior Notes
In order to finance our operations and global expansion, we have periodically issued and sold Convertible Senior Notes, which are convertible into our common stock. As of December 31, 2017, the following Notes were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
Coupon
|
Principal Outstanding (in thousands)
|
Due Date
|
Initial Conversion Rate per Share of Common Stock
|
Conversion Price per Share of Common Stock
|
June 2014
|
2.000%
|
$
|
3,664
|
|
June 15, 2019
|
21.5019
|
$46.51
|
September 2016
|
1.250%
|
345,000
|
|
September 15, 2021
|
17.1332
|
$58.37
|
November 2017
|
1.375%
|
402,500
|
|
November 15, 2024
|
10.7315
|
$93.18
|
Total
|
|
$
|
751,164
|
|
|
|
|
Additional information regarding our debt issuances is provided in Note
11
to the consolidated financial statements included under Item 8 of this Form 10-K.
Capital Leases
As of December 31,
2017
, we had no capital leases outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Cash Flows
|
|
Years Ended December 31,
|
(In thousands)
|
|
2017
|
|
2016
|
|
2015
|
Cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
$
|
41,207
|
|
|
$
|
15,911
|
|
|
$
|
(12,552
|
)
|
Investing activities
|
|
(210,797
|
)
|
|
(178,010
|
)
|
|
(15,323
|
)
|
Financing activities
|
|
304,547
|
|
|
176,567
|
|
|
(371
|
)
|
Effect of exchange rate changes on cash
|
|
446
|
|
|
34
|
|
|
(275
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
135,403
|
|
|
$
|
14,502
|
|
|
$
|
(28,521
|
)
|
Included in our summary of cash flows for the years ended December 31, 2016 and 2015 are the results of our discontinued operations. Additional information regarding our discontinued operations is provided in Note 19 to the consolidated financial statements included under Item 8 of this Form 10-K.
Operating Activities
Our net cash provided by operating activities for the year ended December 31,
2017
was
$41.2 million
compared to net cash provided by operating activities of
$15.9 million
in the same period of
2016
, an increase of
$25.3 million
year over year. The increase in cash provided by operating activities in the current period is primarily due to reductions in working capital (excluding cash and cash equivalents and short-term investments) in the current period as compared to investments in working capital in 2016, which included additional inventory purchases in order to support customer demand. Reductions in working capital in the current period were primarily due to increases in accounts payable, accrued expenses and other liabilities, partially offset by increases in account receivable due to the growth of our business.
Our net cash provided by operating activities was
$15.9 million
for the year ended December 31,
2016
compared to net cash used in operating activities of
$12.6 million
in the same period in
2015
. The increase was primarily due to a lower net loss recorded for the year and improved customer collections, partially offset by timing of cash disbursements and additional inventory purchases in order to support customer demand and to allow for alternative shipping methods.
Investing Activities
Net cash used in investing activities for the year ended December 31,
2017
was
$210.8 million
compared to net cash used in investing activities of
$178.0 million
in
2016
, an increase of
$32.8 million
. The increase in investing activities in the current period is primarily due to an increase in capital expenditures, which were
$77.2 million
in 2017 compared to $22.1 million in 2016, primarily associated with the construction of our manufacturing facility in Acton, Massachusetts, partially offset by fewer net investments in marketable securities in the current period.
Net cash used in investing activities in the year ended December 31,
2016
was
$178.0 million
compared to
$15.3 million
in the same period of
2015
. In the year ended December 31, 2016, we invested $161.6 million in marketable securities (net of proceeds from redemptions and sales) driven by the net proceeds from the issuance of our 1.25% Notes. There were no such investments in 2015. In addition, the increase in investing activities related to higher capital expenditures of $22.1 million in 2016 compared to $10.6 million in 2015, primarily associated with investments in supply chain operations including $10.7 million for equipment in process of construction to support our U.S. manufacturing initiatives.
Financing Activities
Net cash provided by financing activities for the year ended December 31,
2017
was
$304.5 million
compared to
$176.6 million
in net cash provided by financing activities in
2016
, an increase of
$127.9 million
. The increase was primarily attributable to net proceeds of
$391.6 million
in November 2017 from the issuance of our 1.375% Notes as compared to $333.7 million of net proceeds from the issuance in 2016 of our 1.25% Notes, and lower repayments to retire outstanding debt in the current period as compared to 2016. In November 2017, we made payments of
$98.6 million
to extinguish
$63.4 million
of our outstanding 2% Notes as compared to $153.6 million of payments to extinguish a portion of our 2% Notes in 2016.
Net cash provided by financing activities in the year ended December 31,
2016
was
$176.6 million
compared to
$0.4 million
in net cash used in financing activities in the same period of
2015
. The increase was primarily
attributable to net proceeds of $333.7 million in September 2016 from the issuance of our 1.25% Notes, offset by repayments of $153.6 million to extinguish $134.2 million, or approximately 67%, of our outstanding 2% Notes.
Commitments and Contingencies
We lease 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.
The following table summarizes our principal obligations as of December 31,
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Contractual Obligations
(3)
|
|
Total
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Later
|
Operating lease obligations
|
|
$
|
13.1
|
|
|
$
|
3.0
|
|
|
$
|
3.0
|
|
|
$
|
2.6
|
|
|
$
|
2.4
|
|
|
$
|
2.1
|
|
|
$
|
—
|
|
Debt obligations: principal
(1)
|
|
751.2
|
|
|
—
|
|
|
3.7
|
|
|
—
|
|
|
345.0
|
|
|
—
|
|
|
402.5
|
|
Debt obligations: cash interest
(1)
|
|
54.1
|
|
|
9.9
|
|
|
9.9
|
|
|
9.8
|
|
|
8.6
|
|
|
5.5
|
|
|
10.4
|
|
Purchase obligations
(2)
|
|
140.9
|
|
|
128.3
|
|
|
12.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total contractual obligations
|
|
$
|
959.3
|
|
|
$
|
141.2
|
|
|
$
|
29.2
|
|
|
$
|
12.4
|
|
|
$
|
356.0
|
|
|
$
|
7.6
|
|
|
$
|
412.9
|
|
|
|
(1)
|
Debt obligations include principal and cash interest. Our senior convertible notes incur annual interest of 2%, 1.25% and 1.375%.
|
|
|
(2)
|
Our purchase obligations include commitments with certain of our suppliers, primarily for the purchase of Omnipod System components and manufacturing equipment along with other commitments to purchase goods or services in the normal course of business. We make such commitments through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. These amounts include approximately $58.0 million of commitments with three major suppliers for the construction of our Acton, Massachusetts manufacturing facility and the establishment of highly-automated manufacturing operations.
|
|
|
(3)
|
The contractual obligations table excludes a fee that we will be required to pay to our European distributor following the expiration of our global distribution agreement on June 30, 2018. The actual amount of the fee is uncertain and is dependent on a number of factors.
|
Legal Proceedings
The significant estimates and judgments related with establishing litigation reserves are discussed under "Legal Proceedings" in Note
12
of the consolidated financial statements included under Item 8 of this Form 10-K.
Off-Balance Sheet Arrangements
As of December 31,
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 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.
Based on the sensitivity of reported financial statement amounts to the underlying estimates and assumptions, the relatively more significant accounting policies applied by us have been identified by management as those associated with the following:
•
Revenue recognition
•
Fair value measurements
•
Accounts receivable and allowance for doubtful accounts
•
Inventories
•
Product warranty costs
•
Convertible debt
•
Commitments and contingencies
•
Stock-based compensation
Additional information on our critical accounting estimates and significant accounting policies, including references to applicable footnotes, is provided in Note
2
to the consolidated financial statements included under Item 8 of this Form 10-K.
Recent Accounting Pronouncements
Information with respect to recent accounting developments is provided in Note
2
to the consolidated financial statements included under Item 8 of this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts.
Our financial instruments consist of cash, cash equivalents, short-term and long-term investments, accounts receivable, accounts payable, accrued expenses, debt and long-term obligations. We consider investments that, when purchased, have a remaining maturity of 90 days or less to be cash equivalents.The primary objectives of our investment strategy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. To minimize our exposure to an adverse shift in interest rates, we invest in cash equivalents, short-term and long-term marketing securities. 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 December 31,
2017
, we had outstanding debt recorded on our consolidated balance sheet of
$566.2 million
, net of deferred financing costs and unamortized debt discount totaling
$185.0 million
, related to our Convertible Senior Notes. As the interest rates are fixed and the notes are not carried at fair value, changes in interest rates do not affect the value of our debt.
Our business is subject to risks, including, but not limited to: unique economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. We are primarily exposed to currency exchange rate fluctuations related to our subsidiary operation in Canada and, to a lesser extent, Europe. Currently, the majority of our sales outside of the U.S. are transacted in U.S. dollars and are not subject to material foreign currency fluctuations. We expect that as we establish our commercial operations in Europe during 2018 that our business will become more susceptible to foreign exchange rate volatility, primarily related to the Euro and the British Pound.
Fluctuations in foreign currency rates could affect our sales, cost of goods and operating margins and could result in exchange losses. In addition, currency devaluations can result in a loss if we hold deposits of that currency. A hypothetical 10% increase or decrease in foreign currencies that we transact in would not have a material adverse impact on our cash flows, financial condition or results of operations.
Item 8. Financial Statements and Supplementary Data
Our financial statements as of December 31,
2017
and
2016
and for each of the three years in the period ended December 31,
2017
, and the Reports of the Registered Independent Public Accounting Firms are included in this report as listed in the index.
|
|
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Insulet Corporation
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Insulet Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31,
2017
and 2016, the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for each of the two years in the period ended December 31,
2017
, and the related notes and schedule (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013
Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), and our report dated
February 21, 2018
expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2016.
Boston, Massachusetts
February 21, 2018
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Insulet Corporation
We have audited the accompanying consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows of Insulet Corporation for the year ended December 31, 2015. Our audit also includes the financial statement schedule listed in the Index at Item 15(a) for the year ended December 31, 2015. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of its operations and its cash flows of Insulet Corporation for the year ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the year ended December 31, 2015 when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 29, 2016
(except for the effects of discontinued operations as discussed in Note 19 as to which the date is September 6, 2016 and the effects of the adoption of ASU 2016-19 and ASU 2016-18 as discussed in Notes 2 and 7, as to which the date is February 21, 2018 )
INSULET CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
December 31,
2016
|
(In thousands, except share and per share data)
|
|
|
|
ASSETS
|
|
|
|
Current Assets
|
|
|
|
Cash and cash equivalents
|
$
|
272,577
|
|
|
$
|
137,174
|
|
Short-term investments
|
167,479
|
|
|
161,396
|
|
Accounts receivable, net
|
53,373
|
|
|
28,803
|
|
Inventories
|
33,793
|
|
|
35,514
|
|
Prepaid expenses and other current assets
|
9,949
|
|
|
7,073
|
|
Total current assets
|
537,171
|
|
|
369,960
|
|
Long-term investments
|
125,549
|
|
|
—
|
|
Property and equipment, net
|
107,864
|
|
|
44,753
|
|
Other intangible assets, net
|
4,351
|
|
|
2,041
|
|
Goodwill
|
39,840
|
|
|
39,677
|
|
Other assets
|
1,969
|
|
|
216
|
|
Total assets
|
$
|
816,744
|
|
|
$
|
456,647
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current Liabilities
|
|
|
|
Accounts payable
|
$
|
24,413
|
|
|
$
|
13,160
|
|
Accrued expenses and other current liabilities
|
59,256
|
|
|
41,228
|
|
Deferred revenue
|
2,356
|
|
|
1,309
|
|
Total current liabilities
|
86,025
|
|
|
55,697
|
|
Long-term debt, net
|
566,173
|
|
|
332,768
|
|
Other long-term liabilities
|
6,030
|
|
|
5,032
|
|
Total liabilities
|
658,228
|
|
|
393,497
|
|
Commitments and contingencies (Note 12)
|
|
|
|
Stockholders’ Equity
|
|
|
|
Preferred stock, $.001 par value:
|
|
|
|
Authorized: 5,000,000 shares at December 31, 2017 and 2016.
Issued and outstanding: zero shares at December 31, 2017 and 2016
|
—
|
|
|
—
|
|
Common stock, $.001 par value:
|
|
|
|
Authorized: 100,000,000 shares at December 31, 2017 and 2016.
Issued and outstanding: 58,319,348 and 57,457,967 shares at December 31, 2017 and 2016, respectively
|
58
|
|
|
57
|
|
Additional paid-in capital
|
866,206
|
|
|
744,243
|
|
Accumulated other comprehensive loss
|
(493
|
)
|
|
(726
|
)
|
Accumulated deficit
|
(707,255
|
)
|
|
(680,424
|
)
|
Total stockholders’ equity
|
158,516
|
|
|
63,150
|
|
Total liabilities and stockholders’ equity
|
$
|
816,744
|
|
|
$
|
456,647
|
|
The accompanying notes are an integral part of these consolidated financial statements.
56
INSULET CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(In thousands, except share and per share data)
|
2017
|
|
2016
|
|
2015
|
Revenue
|
$
|
463,768
|
|
|
$
|
366,989
|
|
|
$
|
263,893
|
|
Cost of revenue
|
186,599
|
|
|
155,903
|
|
|
130,622
|
|
Gross profit
|
277,169
|
|
|
211,086
|
|
|
133,271
|
|
Operating expenses:
|
|
|
|
|
|
Research and development
|
74,452
|
|
|
55,710
|
|
|
43,208
|
|
Sales and marketing
|
121,617
|
|
|
94,483
|
|
|
78,407
|
|
General and administrative
|
88,487
|
|
|
71,597
|
|
|
60,392
|
|
Total operating expenses
|
284,556
|
|
|
221,790
|
|
|
182,007
|
|
Operating loss
|
(7,387
|
)
|
|
(10,704
|
)
|
|
(48,736
|
)
|
Interest expense
|
21,211
|
|
|
14,388
|
|
|
12,712
|
|
Interest income and other, net
|
2,633
|
|
|
825
|
|
|
58
|
|
Loss on extinguishment of long-term debt
|
609
|
|
|
2,551
|
|
|
—
|
|
Interest and other income (expense), net
|
(19,187
|
)
|
|
(16,114
|
)
|
|
(12,654
|
)
|
Loss from continuing operations before income taxes
|
(26,574
|
)
|
|
(26,818
|
)
|
|
(61,390
|
)
|
Income tax expense
|
257
|
|
|
392
|
|
|
212
|
|
Net loss from continuing operations
|
(26,831
|
)
|
|
(27,210
|
)
|
|
(61,602
|
)
|
Loss from discontinued operations, net of tax ($408 and $79 for the years ended December 31, 2016 and 2015, respectively)
|
—
|
|
|
(1,669
|
)
|
|
(11,918
|
)
|
Net loss
|
$
|
(26,831
|
)
|
|
$
|
(28,879
|
)
|
|
$
|
(73,520
|
)
|
|
|
|
|
|
|
Net loss from continuing operations per share basic and diluted
|
$
|
(0.46
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(1.08
|
)
|
Net loss from discontinued operations per share basic and diluted
|
$
|
—
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.21
|
)
|
Weighted-average number of shares used in calculating net loss per share
|
58,003,434
|
|
|
57,251,377
|
|
|
56,785,646
|
|
The accompanying notes are an integral part of these consolidated financial statements.
57
INSULET CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(In thousands)
|
2017
|
|
2016
|
|
2015
|
Net loss
|
$
|
(26,831
|
)
|
|
$
|
(28,879
|
)
|
|
$
|
(73,520
|
)
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
Foreign currency translation adjustment, net of tax
|
565
|
|
|
135
|
|
|
(641
|
)
|
Unrealized loss on available-for-sale securities, net of tax
|
(332
|
)
|
|
(207
|
)
|
|
—
|
|
Total other comprehensive income (loss), net of tax
|
233
|
|
|
(72
|
)
|
|
(641
|
)
|
Total comprehensive loss
|
$
|
(26,598
|
)
|
|
$
|
(28,951
|
)
|
|
$
|
(74,161
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
58
INSULET CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Accumulated Other Comprehensive Loss
|
|
Total
Stockholders’
Equity
|
(In thousands, except share data)
|
Shares
|
|
Amount
|
|
Balance, December 31, 2014
|
56,299,022
|
|
|
$
|
56
|
|
|
$
|
661,811
|
|
|
$
|
(578,025
|
)
|
|
$
|
(13
|
)
|
|
$
|
83,829
|
|
Exercise of options to purchase common stock
|
449,149
|
|
|
1
|
|
|
7,198
|
|
|
—
|
|
|
—
|
|
|
7,199
|
|
Issuance for employee stock purchase plan
|
22,039
|
|
|
—
|
|
|
652
|
|
|
—
|
|
|
—
|
|
|
652
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
19,178
|
|
|
—
|
|
|
—
|
|
|
19,178
|
|
Restricted stock units vested, net of shares withheld for taxes
|
184,620
|
|
|
—
|
|
|
(2,646
|
)
|
|
—
|
|
|
—
|
|
|
(2,646
|
)
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(73,520
|
)
|
|
—
|
|
|
(73,520
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
(641
|
)
|
|
(641
|
)
|
Balance, December 31, 2015
|
56,954,830
|
|
|
57
|
|
|
686,193
|
|
|
(651,545
|
)
|
|
(654
|
)
|
|
34,051
|
|
Exercise of options to purchase common stock
|
242,962
|
|
|
—
|
|
|
4,832
|
|
|
—
|
|
|
—
|
|
|
4,832
|
|
Issuance for employee stock purchase plan
|
30,949
|
|
|
—
|
|
|
802
|
|
|
—
|
|
|
—
|
|
|
802
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
23,638
|
|
|
—
|
|
|
—
|
|
|
23,638
|
|
Restricted stock units vested, net of shares withheld for taxes
|
229,226
|
|
|
—
|
|
|
(2,866
|
)
|
|
—
|
|
|
—
|
|
|
(2,866
|
)
|
Allocation to equity for conversion feature on 1.25% Notes, net of issuance costs
|
—
|
|
|
—
|
|
|
64,509
|
|
|
—
|
|
|
—
|
|
|
64,509
|
|
Extinguishment of conversion feature on 2% Notes, net of issuance costs
|
—
|
|
|
—
|
|
|
(32,865
|
)
|
|
—
|
|
|
—
|
|
|
(32,865
|
)
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(28,879
|
)
|
|
—
|
|
|
(28,879
|
)
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
(72
|
)
|
|
(72
|
)
|
Balance, December 31, 2016
|
57,457,967
|
|
|
57
|
|
|
744,243
|
|
|
(680,424
|
)
|
|
(726
|
)
|
|
63,150
|
|
Exercise of options to purchase common stock
|
505,207
|
|
|
1
|
|
|
13,987
|
|
|
—
|
|
|
—
|
|
|
13,988
|
|
Issuance for employee stock purchase plan
|
59,134
|
|
|
—
|
|
|
1,817
|
|
|
—
|
|
|
—
|
|
|
1,817
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
31,941
|
|
|
—
|
|
|
—
|
|
|
31,941
|
|
Restricted stock units vested, net of shares withheld for taxes
|
297,040
|
|
|
—
|
|
|
(4,054
|
)
|
|
—
|
|
|
—
|
|
|
(4,054
|
)
|
Allocation to equity for conversion feature on 1.375% Notes, net of issuance costs
|
—
|
|
|
—
|
|
|
117,458
|
|
|
—
|
|
|
—
|
|
|
117,458
|
|
Extinguishment of conversion feature on 2% Notes, net of issuance costs
|
—
|
|
|
—
|
|
|
(39,186
|
)
|
|
—
|
|
|
—
|
|
|
(39,186
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
(26,831
|
)
|
|
|
|
|
(26,831
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
233
|
|
|
233
|
|
Balance, December 31, 2017
|
58,319,348
|
|
|
$
|
58
|
|
|
$
|
866,206
|
|
|
$
|
(707,255
|
)
|
|
$
|
(493
|
)
|
|
$
|
158,516
|
|
The accompanying notes are an integral part of these consolidated financial statements.
59
INSULET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(In thousands)
|
2017
|
|
2016
|
|
2015
|
Cash flows from operating activities
|
|
|
|
|
|
Net loss
|
$
|
(26,831
|
)
|
|
$
|
(28,879
|
)
|
|
$
|
(73,520
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
|
|
|
|
|
|
Depreciation and amortization
|
13,854
|
|
|
13,833
|
|
|
15,838
|
|
Non-cash interest expense
|
18,008
|
|
|
10,068
|
|
|
7,678
|
|
Stock-based compensation expense
|
31,941
|
|
|
23,617
|
|
|
19,178
|
|
Loss on extinguishment of long-term debt
|
609
|
|
|
2,551
|
|
|
—
|
|
Provision for bad debts
|
1,922
|
|
|
2,070
|
|
|
1,184
|
|
Impairments and other
|
89
|
|
|
6,234
|
|
|
9,086
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
(26,322
|
)
|
|
12,551
|
|
|
(9,793
|
)
|
Inventories
|
1,689
|
|
|
(24,103
|
)
|
|
(722
|
)
|
Deferred revenue
|
1,061
|
|
|
(849
|
)
|
|
809
|
|
Prepaid expenses and other assets
|
(3,328
|
)
|
|
(2,621
|
)
|
|
(1,460
|
)
|
Accounts payable, accrued expenses and other current liabilities
|
27,313
|
|
|
639
|
|
|
17,986
|
|
Other long-term liabilities
|
1,202
|
|
|
800
|
|
|
1,184
|
|
Net cash provided by (used in) operating activities
(1)
|
41,207
|
|
|
15,911
|
|
|
(12,552
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
Purchases of property, equipment and software
(2)
|
(77,226
|
)
|
|
(22,115
|
)
|
|
(10,608
|
)
|
Purchases of investments
|
(297,965
|
)
|
|
(177,654
|
)
|
|
—
|
|
Receipts from the maturity or sale of investments
|
164,394
|
|
|
16,045
|
|
|
—
|
|
Proceeds from divestiture of business, net
|
—
|
|
|
5,714
|
|
|
—
|
|
Acquisition of business
|
—
|
|
|
—
|
|
|
(4,715
|
)
|
Net cash used in investing activities
|
(210,797
|
)
|
|
(178,010
|
)
|
|
(15,323
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
Principal payments of capital lease obligations
|
(269
|
)
|
|
(5,518
|
)
|
|
(5,576
|
)
|
Proceeds from issuance of convertible notes, net of issuance costs
|
391,638
|
|
|
333,725
|
|
|
—
|
|
Repayment of convertible notes
|
(98,572
|
)
|
|
(153,628
|
)
|
|
—
|
|
Proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan
|
15,804
|
|
|
4,854
|
|
|
7,851
|
|
Payment of withholding taxes in connection with vesting of restricted stock units
|
(4,054
|
)
|
|
(2,866
|
)
|
|
(2,646
|
)
|
Net cash provided by (used in) financing activities
|
304,547
|
|
|
176,567
|
|
|
(371
|
)
|
Effect of exchange rate changes on cash
|
446
|
|
|
34
|
|
|
(275
|
)
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
135,403
|
|
|
14,502
|
|
|
(28,521
|
)
|
Cash, cash equivalents and restricted cash, beginning of year
(3)
|
137,174
|
|
|
122,672
|
|
|
151,193
|
|
Cash, cash equivalents and restricted cash, end of year
(3)
|
$
|
272,577
|
|
|
$
|
137,174
|
|
|
$
|
122,672
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
Cash paid for interest
|
$
|
2,476
|
|
|
$
|
3,687
|
|
|
$
|
4,025
|
|
Cash paid for taxes
|
$
|
462
|
|
|
$
|
932
|
|
|
$
|
109
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
Allocation to equity for conversion feature for issuance of 1.375% convertible notes
|
$
|
120,710
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Allocation to equity for conversion feature for issuance of 1.25% convertible notes
|
$
|
—
|
|
|
$
|
66,689
|
|
|
$
|
—
|
|
Allocation to equity for conversion feature for the repurchase of 2% convertible notes
|
$
|
(39,186
|
)
|
|
$
|
(32,865
|
)
|
|
$
|
—
|
|
Purchases of property and equipment under capital lease
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,721
|
|
(1)
Includes activity related to discontinued operations for the years ended December 31, 2016 and 2015. See Note
19
to the consolidated financial statements for discussion of discontinued operations.
(2)
Cash outflows from purchases of property, equipment and software for the year ended December 31, 2017 include
$2.0 million
of purchases made in prior periods that were included in accounts payable and accrued expenses as of December 31, 2016 and exclude
$4.0 million
of purchases made during the year ended December 31, 2017 that were included in accounts payable and accrued expenses as of December 31, 2017.
(3)
Cash and cash equivalents includes restricted cash amounts totaling
$0.5 million
,
$1.2 million
and
$1.2 million
as of December 31, 2017, 2016 and 2015, respectively. See Note 2 to the consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
60
INSULET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 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 and tubing, provides for virtually pain-free automated cannula insertion, communicates wirelessly and integrates a blood glucose meter. The Company believes that the Omnipod System’s unique proprietary design and features allow people with insulin-dependent diabetes to manage their diabetes with unprecedented freedom, comfort, convenience, and ease.
Commercial sales of the Omnipod System began in the United States in 2005. The Company sells the Omnipod System in the United States through direct sales to customers or through its distribution partners. The Omnipod System is currently available in multiple countries in Europe, as well as in Canada and Israel.
To lower manufacturing costs, increase supply redundancy, add capacity closer to its largest customer base and support growth, the Company is constructing a highly-automated manufacturing facility in Acton, Massachusetts with planned production out of the facility beginning in early 2019. The facility will also serve as the Company's global headquarters.
The Company announced on July 20, 2017 its plans to assume, on July 1, 2018, all commercial activities (including, among other things, distribution, sales, marketing, training and support) of its Omnipod System across Europe following the expiration of its distribution agreement with
Ypsomed Distribution AG ("Ypsomed" or the "European distributor")
on June 30, 2018.
Until the expiration of the distribution agreement, the Company's current distribution agreement for its Omnipod products in Europe will remain in effect.
The Company will be required to pay to the European distributor a per unit fee for sales of the Company's Omnipod device, over the twelve months following the expiration of the distribution agreement, to identified customers, as that term is defined in the distribution agreement, of the European distributor who had previously entered into an agreement with the distributor for the purchase of Omnipod devices. The Company expects to recognize a liability for this fee as qualifying sales of its Omnipod device are made to these identified customers during the twelve-month period beginning July 1, 2018.
In addition to using the Omnipod for insulin delivery, the Company also partners with global pharmaceutical and biotechnology companies to tailor the Omnipod System technology platform for the delivery of subcutaneous drugs across multiple therapeutic areas.
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
19
to these consolidated financial statements.
Note
2
. Summary of Significant Accounting Policies
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions in the application of certain of its significant accounting policies that may materially affect the reported amounts of assets, liabilities, equity, revenue
and expenses. The most significant estimates used in these financial statements include the valuation of stock-based compensation expense; the fair value of intangible assets acquired in businesses combinations; the valuation of inventory; the valuation of deferred revenue; the calculation of gains and losses, if any, on the retirement or conversion of convertible debt; the estimated useful lives of property and equipment and intangible assets; the amount of internal use software development costs that qualify for capitalization; the valuation allowance related to deferred income taxes, the estimated amount, if any, of accrued contingent liabilities as well as warranty and doubtful accounts allowance reserve calculations. Actual results may differ from those estimates.
Principles of Consolidation and Basis of Presentation
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. Certain reclassifications, primarily related to internal-use software intangible assets, have been made to prior period amounts to conform to the current period financial statement presentation.
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 interest and other income (expense), net, and were not material for fiscal years
2017
,
2016
and
2015
.
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 cost which approximates their fair value. Included in the Company's cash and cash equivalents are restricted cash amounts set aside for collateral on outstanding letters of credit related to lease obligations totaling
$0.5 million
as of December 31,
2017
and
$1.2 million
as of December 31,
2016
.
Investments in Marketable Securities
Short-term and long-term investment securities consist of available-for-sale marketable securities and are carried at fair value with unrealized gains or losses included as a component of other comprehensive loss in stockholders' equity. Investments, exclusive of cash equivalents, with a stated maturity date of more than one year from the balance sheet date and that are not expected to be used in current operations, are classified as long-term investments. Short-term and long-term investments include U.S. government and agency bonds, corporate bonds, and certificates of deposit.
The Company reviews investments for other-than-temporary impairment when the fair value of an investment is less than its amortized cost. If an available-for-sale security is other than temporarily impaired, the loss is charged to earnings.
Property and Equipment
Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful life of the respective assets. Leasehold improvements are amortized over their useful life or the life of the lease, whichever is shorter. Assets acquired under capital leases are amortized in accordance with the respective class of owned assets and the amortization is included with depreciation expense. Maintenance and repair costs are expensed as incurred.
Business Combinations
The Company recognizes the assets and liabilities assumed in business combinations on the basis of their fair values at the date of acquisition. The Company assesses the fair value of assets, including intangible assets, using a variety of methods and each asset is measured at fair value from the perspective of a market participant. The method used to estimate the fair values of intangible assets incorporates significant assumptions regarding the estimates a market participant would make in order to evaluate an asset, including a market participant’s use of the asset and the appropriate discount rates for a market participant. Assets recorded from the perspective of a market participant that are determined to not have economic use for the Company are expensed immediately. Any excess purchase price
over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. Transaction costs and restructuring costs associated with a business combination are expensed as incurred.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision-maker ("CODM") in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company has concluded that its Chief Executive Officer 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 it operates as
one
segment.
Goodwill
Goodwill represents the excess of the cost of acquired businesses over the fair value of identifiable net assets acquired. The Company follows the provisions of Financial Accounting Standards Board ("FASB") ASC 350-20,
Intangibles - Goodwill and Other
(“ASC 350-20”) whereby 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.
Goodwill is evaluated for impairment at the reporting unit level. As the Company operates in
one
segment, the Company has considered whether that segment contains multiple components which represent separate reporting units. The Company has concluded that it has a single reporting unit. In reaching this conclusion, the Company considered how components of the business are managed, whether discrete financial information at the component level is reviewed on a regular basis by segment management and whether components may be aggregated based on economic similarity.
In performing that annual goodwill test, the Company utilizes the two-step approach as currently prescribed by ASC 350-20. The first step compares the carrying value of the reporting unit to its fair value. If the reporting unit’s carrying value exceeds its fair value, the Company would perform the second step and record an impairment loss to the extent that the carrying value of the reporting unit's goodwill exceeds its implied fair value. There were
no
impairments of goodwill during the years ended December 31,
2017
,
2016
or
2015
.
The following table presents the change in carrying amount of goodwill during the period indicated:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(In thousands)
|
2017
|
|
2016
|
Goodwill:
|
|
|
|
Beginning balance
|
$
|
39,677
|
|
|
$
|
39,607
|
|
Foreign currency adjustment
|
163
|
|
|
70
|
|
Ending balance
|
$
|
39,840
|
|
|
$
|
39,677
|
|
Revenue Recognition
The Company generates the majority of its revenue from sales of its Omnipod System directly to patients and through third-party distributors.
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:
|
|
•
|
The evidence of an arrangement generally consists of a physician order form, a patient information form and, if applicable, third-party insurance approval for sales directly to patients or a purchase order for sales to a third-party distributor.
|
|
|
•
|
Revenue is recognized when title and risk and rewards of ownership have transferred to the customer.
|
|
|
•
|
The selling prices for all sales are fixed and agreed with the patient or third-party distributor and, if applicable, the patient’s third-party insurance provider(s) prior to shipment and are based on established list prices or, in the case of certain third-party insurers, contractually agreed upon prices. Provisions for discounts, rebates and other adjustments to customers are established as a reduction to revenue in the same period the related sales are recorded.
|
The Company offers a
45
-day right of return for sales of its Omnipod System in the United States, and a
90
-day right of return for sales of its Omnipod System in Canada to new patients and defers revenue to reflect estimated sales returns in the same period that the related product sales are recorded. Returns are estimated through a comparison of the Company’s historical return data to its related sales. Historical rates of return are adjusted for known or expected changes in the marketplace when appropriate. When doubt exists about reasonable assuredness of collectability from specific customers, the Company defers revenue from sales of products to those customers until payment is received.
The Company had deferred revenue of
$3.2 million
and
$1.9 million
as of December 31,
2017
and
2016
, respectively. Deferred revenue included
$0.9 million
and
$0.6 million
classified in other long-term liabilities as of December 31,
2017
and
2016
, respectively. Deferred revenue relates to undelivered elements within certain of the Company's developmental arrangements and other instances where the Company has not yet met the revenue recognition criteria.
Collaborative Arrangements
The Company enters into collaborative arrangements for ongoing initiatives to develop products. Although the Company does not consider any individual alliance to be material, the following more notable alliances are described below.
Eli Lilly and Concentrated insulins
: In May 2013, the Company entered into an agreement with Eli Lilly and Company (Eli Lilly) to develop a new version of the Omnipod System specifically designed to deliver Humulin
®
R U-500 insulin, a concentrated form of insulin used by people with highly insulin resistant Type 2 diabetes. In January 2016, the Company entered into a development agreement with Eli Lilly to develop a new version of Insulet's Omnipod tubeless insulin delivery system, specifically designed to deliver Lilly's Humalog
®
200 units/mL insulin, a concentrated form of insulin used by higher insulin-requiring patients with diabetes that provides the same dose of insulin in half the volume of Lilly's Humalog
®
U-100 insulin. Under the terms of these arrangements, the parties share the responsibility of the permissible costs that are incurred. Any amounts incurred in excess of the permissible shared costs that are the responsibility of one party becomes due and payable by the other party. Consideration received and payments made by the Company under the terms of the arrangements are recorded within research and development expense.
Shipping and Handling Costs
The Company does not typically charge its customers for shipping and handling costs associated with shipping its product to its customers unless non-standard shipping and handling services are requested. These shipping and handling costs are included in general and administrative expenses and were
$5.0 million
,
$4.1 million
and
$3.7 million
in the years ended December 31,
2017
,
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 and long-term investments in marketable securities and accounts receivable. The Company maintains the majority of its cash and short-term and long-term investments with
one
financial institution. Accounts are partially insured up to various amounts mandated by the Federal Deposit Insurance Corporation or by the foreign country where the account is held.
The Company purchases Omnipod Systems from Flex Ltd., its single source supplier. As of December 31,
2017
and December 31,
2016
, liabilities to this vendor represented approximately
20%
and
16%
, respectively, of the combined balance of accounts payable, accrued expenses and other current liabilities.
Revenue for customers comprising more than 10% of total revenue were as follows:
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Amgen, Inc.
|
|
15%
|
|
17%
|
|
10%
|
Ypsomed Distribution AG
|
|
22%
|
|
16%
|
|
12%
|
RGH Enterprises, Inc.
|
|
11%
|
|
10%
|
|
13%
|
Recently Adopted Accounting Standards
During 2017, the Company retrospectively adopted Accounting Standards Update ("ASU") 2016-19,
Technical Corrections and Improvements,
which included clarification that the license of internal-use software shall be accounted for as the acquisition of an intangible asset. As a result of adoption, the Company reclassified
$4.1 million
of gross internal-use software costs, net of accumulated amortization of
$2.6 million
, from property and equipment to other intangible assets as of December 31, 2016.
Effective January 1, 2017, the Company adopted ASU 2015-11,
Simplifying the Measurement of Inventory,
which requires entities to measure most inventory at the lower of cost and net realizable value. The adoption of this guidance did not have a material impact on the consolidated financial statements.
Effective January 1, 2017, the Company adopted ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09") using the modified retrospective method. ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The adoption of ASU 2016-09 resulted in the Company increasing its deferred tax assets by approximately
$23.8 million
, which was offset by a full valuation allowance. The adoption of the standard did not have a material impact on the Company's consolidated financial statements.
Effective January 1, 2017, the Company adopted ASU 2016-18,
Restricted Cash (a consensus of the Emerging Issues Task Force)
("ASU 2016-18") using the retrospective transition method. ASU 2016-18 requires the statement of cash flows to show the changes in the total of cash, cash equivalents, and restricted cash. There was no significant impact on the statement of cash flows upon the adoption of ASU 2016-18.
Accounting Pronouncements Issued and Not Yet Adopted as of December 31, 2017
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
("ASU 2014-09"). ASU 2014-09 and its related amendments (collectively referred to as ASC 606) requires that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under this guidance, an entity makes additional estimates regarding performance conditions and the allocation of variable consideration and must evaluate whether revenue derived from a contract should be recognized at a point in time or over time.
The Company adopted the standard as of the required effective date of January 1, 2018 using the modified retrospective method. Under this method, the new guidance was applied to contracts that were not yet completed as of January 1, 2018 with the cumulative effect of initially applying the guidance recognized through accumulated deficit as the date of initial application. In addition to the enhanced footnote disclosures related to customer contracts, the Company anticipates that the most significant impact of the new standard will relate to the timing of revenue recognition relative to a portion of its drug delivery product line, the deferral and amortization of contract acquisition costs such as commissions and a material right granted to the Company's European distributor in 2010.
The quantitative ranges provided below are estimates of the expected effects of the Company’s adoption of ASC 606 as of the time of preparation of this Annual Report on Form 10-K. The anticipated accounting impacts described below will have no impact on cash flows.
|
|
i.
|
Drug Delivery Revenue.
The adoption of ASC 606 will accelerate the timing of revenue recognition relative to a portion of the Company's drug delivery product line whereby revenue will be recognized as the product is produced pursuant to the customer’s firm purchase commitments as the Company has an enforceable right to payment for performance completed to date and the inventory has no alternative use to the Company. This guidance is in contrast to legacy accounting guidance whereby revenue is recognized when the product is shipped to the customer. Upon the adoption of ASC 606 on January 1, 2018, the Company expects to record a contract asset on its consolidated balance sheet of approximately
$4 million
to
$6 million
to reflect revenue that would have been recognized upon shipment of the product in 2018 under ASC 605 but will not be under ASC 606 as it would have been recognized in 2017 as the product was produced. The impact on the Company's drug delivery revenue in 2018 and forward will depend on the timing of drug delivery inventory production levels.
|
|
|
ii.
|
Material Right.
The adoption of ASC 606 will require the Company to record a contract liability on January 1, 2018 of approximately
$1 million
to
$3 million
associated with a volume-based pricing discount granted to the Company's European distributor at the outset of the distribution contract in 2010. The contract liability will be classified as deferred revenue and will be recognized as revenue through the completion of the distributor contract during the first half of 2018.
|
|
|
iii.
|
Contract Acquisition Costs.
The adoption of ASC 606 will impact the treatment of contract acquisition costs, such as commissions, which will be capitalized and amortized over the expected period of benefit. Upon adoption, the Company expects to increase its current and other assets by approximately
$18 million
to
$20 million
for the net value of cumulative commissions paid prior to adoption less amortization to date. The new guidance will likely have an accretive impact to the Company's earnings in 2018 as the Company continues to increase its customer base.
|
The deferred tax assets and liabilities resulting from these adjustments will be substantially offset by an associated adjustment to the Company valuation allowance. Therefore, as the Company currently maintains a full valuation allowance against its domestic net deferred tax assets, the Company does not expect the adoption of ACS 606 to have a significant impact on its deferred tax balances or income tax expense in 2018.
Effective January 1, 2018, the Company adopted ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
("ASU 2016-01"). ASU 2016-01 changes the current GAAP model for the accounting of equity investments, whereby equity investments with readily determinable fair value will be carried at fair value with changes reported in net income (loss) as opposed to other comprehensive income (loss). The classification and measurement guidance was effective January 1, 2018 for the Company. As the Company held no available for sale equity investments on December 31, 2017, there was no impact on the consolidated financial statements upon the adoption of ASU 2016-01.
Effective January 1, 2018, the Company adopted ASU 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)
("ASU 2016-15"). ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The Company does not expect that the adoption of this guidance will have an impact on the consolidated statement of cash flows.
Effective January 1, 2018, the Company adopted ASU 2017-09,
Compensation-Stock Compensation (Topic 718):
Scope of Modification Accounting
("ASU 2017-09"). ASU 2017-09 specifies the types of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in accordance with Topic 718. The new standard is effective for the Company on January 1, 2018 and early adoption is permitted. The adoption of ASU 2017-09 did not have an impact on the Company's consolidated financial statements.
Effective January 1, 2018, the Company adopted ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
("ASU 2016-16"). ASU 2016-16 requires than an entity recognized the income tax effects of an intra-entity transfer of an asset, other than inventory, when the transfer occurs as opposed to when the asset is sold to a third party. The Company does not expect that the adoption of this guidance will have a material impact on the consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12,
Targeted Improvements to Accounting for Hedging Activities
("ASU 2017-12"). ASU 2017-12 updates the current hedge accounting guidance with the objective of improving the financial reporting of hedging activities by better portraying the economic results of an entity's risk management activities in its financial statements. The new guidance is effective for the Company on January 1, 2019 and early adoption is permitted. The Company is currently evaluating the impact of ASU 2017-12 on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
("ASU 2016-02"). ASU 2016-02 requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. The new guidance 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 the Company on January 1, 2019 and is expected to be applicable to all leases in place as of the beginning of the earliest reporting period. The Company does not expect to early-adopt the guidance. While the Company is currently evaluating the impact of ASU 2016-02, the Company currently expects that the new guidance will require an increase in the Company's long-lived assets and a corresponding increase to long-term obligations associated with leased office and warehouse space.
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating "Step 2" from the goodwill impairment test, which requires an entity to calculate the implied fair value of goodwill to measure a goodwill impairment charge, and alternatively, requires an entity to measure the impairment of goodwill assigned to a reporting unit as the amount by which the carrying value of the assets and liabilities of the reporting unit, including goodwill, exceeds the reporting unit's fair value. The guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of ASU 2017-04 but does not expect it to be material to the consolidated financial statements.
Other Significant Policies:
The following table identifies the Company's other significant accounting policies and the note and page where a detailed description of each policy can be found.
|
|
|
|
|
|
|
|
Note
|
3
|
|
Page
|
|
|
Note
|
5
|
|
Page
|
|
|
Note
|
6
|
|
Page
|
|
Product Warranty Costs
|
Note
|
9
|
|
Page
|
|
Convertible Debt
|
Note
|
11
|
|
Page
|
|
Commitments and Contingencies
|
Note
|
12
|
|
Page
|
|
Stock-Based Compensation
|
Note
|
13
|
|
Page
|
|
Note
3
. Fair Value Measurements
The Company applies 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:
|
|
•
|
Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.
|
|
|
•
|
Cost approach, which is based on the cost to acquire or construct comparable assets less an allowance for functional and/or economic obsolescence.
|
|
|
•
|
Income approach, which is based on the present value of the future stream of net cash flows.
|
To 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 December 31,
2017
and
2016
, aggregated by the level in the fair value hierarchy within which those measurements fall:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
(in thousands)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
December 31, 2017
|
|
|
|
|
|
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
236,936
|
|
|
$
|
236,936
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. government and agency bonds
|
5,000
|
|
|
5,000
|
|
|
—
|
|
|
—
|
|
Corporate bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Certificates of deposit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total cash equivalents
|
$
|
241,936
|
|
|
$
|
241,936
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short-term investments:
|
|
|
|
|
|
|
|
U.S. government bonds
|
$
|
112,076
|
|
|
$
|
90,703
|
|
|
$
|
21,373
|
|
|
$
|
—
|
|
Corporate bonds
|
47,681
|
|
|
—
|
|
|
47,681
|
|
|
—
|
|
Certificates of deposit
|
7,722
|
|
|
—
|
|
|
7,722
|
|
|
—
|
|
Total short-term investments
|
$
|
167,479
|
|
|
$
|
90,703
|
|
|
$
|
76,776
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
U.S. government and agency bonds
|
$
|
92,464
|
|
|
$
|
49,651
|
|
|
$
|
42,813
|
|
|
$
|
—
|
|
Corporate bonds
|
27,812
|
|
|
—
|
|
|
27,812
|
|
|
—
|
|
Certificates of deposit
|
5,273
|
|
|
—
|
|
|
5,273
|
|
|
—
|
|
Total long-term investments
|
$
|
125,549
|
|
|
$
|
49,651
|
|
|
$
|
75,898
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
93,467
|
|
|
$
|
93,467
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate bonds
|
4,203
|
|
|
—
|
|
|
4,203
|
|
|
—
|
|
Certificates of deposit
|
735
|
|
|
—
|
|
|
735
|
|
|
—
|
|
Total cash equivalents
|
$
|
98,405
|
|
|
$
|
93,467
|
|
|
$
|
4,938
|
|
|
$
|
—
|
|
Short-term investments:
|
|
|
|
|
|
|
|
U.S. government and agency bonds
|
$
|
79,093
|
|
|
$
|
49,963
|
|
|
$
|
29,130
|
|
|
$
|
—
|
|
Corporate bonds
|
56,653
|
|
|
—
|
|
|
56,653
|
|
|
—
|
|
Certificates of deposit
|
25,650
|
|
|
—
|
|
|
25,650
|
|
|
—
|
|
Total short-term investments
|
$
|
161,396
|
|
|
$
|
49,963
|
|
|
$
|
111,433
|
|
|
$
|
—
|
|
Convertible Debt
The estimated fair value of the Company's convertible debt is based on the Level 2 quoted market prices for the same or similar issues and includes the impact of the conversion features.
The carrying amounts, net of unamortized discounts and issuance costs, and the estimated fair values of the Company's convertible debt as of December 31,
2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
(in thousands)
|
Carrying
Value
|
|
Estimated Fair
Value
|
|
Carrying
Value
|
|
Estimated Fair
Value
|
2% Convertible Senior Notes
|
$
|
3,421
|
|
|
$
|
5,467
|
|
|
$
|
59,737
|
|
|
$
|
71,909
|
|
1.375% Convertible Senior Notes
|
276,172
|
|
|
407,652
|
|
|
—
|
|
|
—
|
|
1.25% Convertible Senior Notes
|
286,580
|
|
|
450,881
|
|
|
273,031
|
|
|
320,969
|
|
Total
|
$
|
566,173
|
|
|
$
|
864,000
|
|
|
$
|
332,768
|
|
|
$
|
392,878
|
|
Note
4
. Investments
The Company's short-term and long-term investments have maturity dates that range from
15 days
to
23
months as of December 31,
2017
. Amortized costs, gross unrealized holding gains and losses, and fair values at December 31,
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Amortized cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
December 31, 2017
|
|
|
|
|
|
|
|
U.S. government and agency bonds
|
$
|
112,311
|
|
|
$
|
—
|
|
|
$
|
(235
|
)
|
|
$
|
112,076
|
|
Corporate bonds
|
47,713
|
|
|
3
|
|
|
(35
|
)
|
|
47,681
|
|
Certificates of deposit
|
7,722
|
|
|
—
|
|
|
—
|
|
|
7,722
|
|
Total short-term investments
|
$
|
167,746
|
|
|
$
|
3
|
|
|
$
|
(270
|
)
|
|
$
|
167,479
|
|
|
|
|
|
|
|
|
|
U.S. government and agency bonds
|
$
|
92,677
|
|
|
$
|
—
|
|
|
$
|
(213
|
)
|
|
$
|
92,464
|
|
Corporate bonds
|
27,871
|
|
|
—
|
|
|
(59
|
)
|
|
27,812
|
|
Certificates of deposit
|
5,273
|
|
|
—
|
|
|
—
|
|
|
5,273
|
|
Total long-term investments
|
$
|
125,821
|
|
|
$
|
—
|
|
|
$
|
(272
|
)
|
|
$
|
125,549
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
U.S. government and agency bonds
|
$
|
79,211
|
|
|
$
|
—
|
|
|
$
|
(118
|
)
|
|
$
|
79,093
|
|
Corporate bonds
|
56,742
|
|
|
—
|
|
|
(89
|
)
|
|
56,653
|
|
Certificates of deposit
|
25,650
|
|
|
—
|
|
|
—
|
|
|
25,650
|
|
Total short-term investments
|
$
|
161,603
|
|
|
$
|
—
|
|
|
$
|
(207
|
)
|
|
$
|
161,396
|
|
|
|
|
|
|
|
|
|
Total long-term investments
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company's realized gains or losses in the years ended December 31, 2017 and 2016 were insignificant.
Note
5
. Accounts Receivable, Net
Accounts receivable consist of amounts due from third-party payors, patients, and third-party distributors. 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 December 31,
2017
, and
2016
were as follows:
|
|
|
|
|
|
|
|
As of
|
|
December 31, 2017
|
|
December 31, 2016
|
Amgen, Inc.
|
10
|
%
|
|
16
|
%
|
Ypsomed Distribution AG
|
31
|
%
|
|
19
|
%
|
The components of accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
As of
|
December 31, 2017
|
|
December 31, 2016
|
Trade receivables
|
$
|
55,914
|
|
|
$
|
31,714
|
|
Allowance for doubtful accounts
|
(2,541
|
)
|
|
(2,911
|
)
|
Total accounts receivable
|
$
|
53,373
|
|
|
$
|
28,803
|
|
Note
6
. 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 December 31,
2017
and
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:
|
|
|
|
|
|
|
|
|
(in thousands)
|
As of
|
December 31, 2017
|
|
December 31, 2016
|
Raw materials
|
$
|
2,146
|
|
|
$
|
1,911
|
|
Work-in-process
|
23,918
|
|
|
15,681
|
|
Finished goods, net
|
7,729
|
|
|
17,922
|
|
Total inventories
|
$
|
33,793
|
|
|
$
|
35,514
|
|
Note
7
. Property and Equipment, Net
Property and equipment related to continuing operations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
(Years)
|
|
As of
|
(in thousands)
|
December 31, 2017
|
|
December 31, 2016
|
Land
|
n/a
|
|
$
|
2,525
|
|
|
$
|
—
|
|
Machinery and equipment
|
2-7
|
|
60,878
|
|
|
53,246
|
|
Lab equipment
|
3-7
|
|
1,038
|
|
|
694
|
|
Computers
|
3-5
|
|
3,659
|
|
|
2,833
|
|
Office furniture and fixtures
|
3-5
|
|
2,521
|
|
|
1,960
|
|
Leasehold improvement
|
*
|
|
1,425
|
|
|
1,126
|
|
Construction in process
|
—
|
|
87,397
|
|
|
23,859
|
|
Total property and equipment
|
|
|
$
|
159,443
|
|
|
$
|
83,718
|
|
Less: accumulated depreciation
|
|
|
(51,579
|
)
|
|
(38,965
|
)
|
Total property and equipment, net
|
|
|
$
|
107,864
|
|
|
$
|
44,753
|
|
____________________________________
* Lesser of lease term or useful life of asset.
Depreciation expense related to property and equipment from continuing operations was
$12.7 million
,
$12.6 million
and
$11.0 million
for the years ended December 31,
2017
,
2016
and
2015
, respectively. Depreciation expense from discontinued operations was not significant during those same periods. The Company recorded
$3.1 million
,
$0.5 million
and
$0.2 million
of capitalized interest in the years ended December 31,
2017
,
2016
and
2015
.
Construction in process mainly consists of construction of the Company's highly-automated manufacturing facility in Acton, Massachusetts with planned production out of the facility beginning in early 2019.
Note
8
. 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 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.
During 2016, the Company restructured its plan for an internally developed ERP system in order to leverage current third-party software available and scale conversion based on the Company's evolving ERP needs. As a result, the Company recorded a charge of
$6.1 million
, included in general and administrative expenses, related to this in-process internally developed software.
The Company recorded
$2.1 million
of other intangible assets in 2015 as a result of the acquisition of its Canadian distribution business (see Note 18 for further description). The Company determined that the estimated useful life of the contractual relationship asset is
5 years
and is amortizing the asset over its estimated life, based on the expected cash flows of the assets, accordingly.
The Company adopted ASU 2016-19 on January 1, 2017 and, as a result, reclassified
$4.1 million
of gross internal-use software costs, net of accumulated amortization of
$2.6 million
, from property and equipment to other intangible assets as of December 31, 2016.
Other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
December 31, 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
|
$
|
2,135
|
|
|
$
|
(1,764
|
)
|
|
$
|
371
|
|
|
$
|
1,994
|
|
|
$
|
(1,466
|
)
|
|
$
|
528
|
|
Internal use software
|
7,545
|
|
|
(3,565
|
)
|
|
3,980
|
|
|
4,064
|
|
|
(2,551
|
)
|
|
1,513
|
|
Total intangible assets
|
$
|
9,680
|
|
|
$
|
(5,329
|
)
|
|
$
|
4,351
|
|
|
$
|
6,058
|
|
|
$
|
(4,017
|
)
|
|
$
|
2,041
|
|
Amortization expense was approximately
$1.2 million
and
$1.2 million
for the years ended December 31,
2017
and
2016
, respectively. Amortization expense is recorded in general and administration 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
|
2018
|
$
|
165
|
|
|
$
|
1,235
|
|
|
$
|
1,400
|
|
2019
|
138
|
|
|
984
|
|
|
1,122
|
|
2020
|
68
|
|
|
744
|
|
|
812
|
|
2021
|
—
|
|
|
623
|
|
|
623
|
|
2022
|
—
|
|
|
383
|
|
|
383
|
|
Thereafter
|
—
|
|
|
11
|
|
|
11
|
|
Total
|
$
|
371
|
|
|
$
|
3,980
|
|
|
$
|
4,351
|
|
As of December 31,
2017
, the weighted average amortization periods of the Company’s customer and contractual relationships intangible assets and internal use software intangible assets are approximately
3
years and
4
years, respectively.
Note
9
. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities related to continuing operations consist of the following:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
2017
|
|
2016
|
Employee compensation and related costs
|
$
|
34,942
|
|
|
$
|
21,999
|
|
Professional and consulting services
|
9,273
|
|
|
6,753
|
|
Supplier charges
|
3,542
|
|
|
2,886
|
|
Warranty
|
1,653
|
|
|
1,642
|
|
Accrued interest
|
2,030
|
|
|
1,303
|
|
Accrued freight
|
1,148
|
|
|
595
|
|
Other
|
6,668
|
|
|
6,050
|
|
Total accrued expenses and other current liabilities
|
$
|
59,256
|
|
|
$
|
41,228
|
|
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 Omnipod that does 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. Cost to service the claims reflects the current product cost. As these estimates are based on historical experience, and the Company continues to introduce new products and versions, the Company also considers the anticipated performance of the product over its warranty period in estimating warranty reserves.
A reconciliation of the changes in the Company’s product warranty liability is as follows:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
2017
|
|
2016
|
Product warranty liability at the beginning of the period
|
$
|
4,388
|
|
|
$
|
4,152
|
|
Warranty expense
|
6,127
|
|
|
4,602
|
|
Warranty claims settled
|
(5,178
|
)
|
|
(4,366
|
)
|
Product warranty liability at the end of the period
|
$
|
5,337
|
|
|
$
|
4,388
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in thousands)
|
December 31, 2017
|
|
December 31, 2016
|
Composition of balance:
|
|
|
|
Short-term
|
$
|
1,653
|
|
|
$
|
1,642
|
|
Long-term
|
3,684
|
|
|
2,746
|
|
Product warranty liability at the end of the period
|
$
|
5,337
|
|
|
$
|
4,388
|
|
Note
10
. Capital Lease Obligations
As of December 31,
2016
, the Company had approximately
$13.7 million
of manufacturing equipment acquired under capital leases, which is included in property and equipment. During 2017, the Company made final minimum lease payments of
$0.3 million
and at the expiration of these leases title to the equipment was transferred to the Company. These assets were depreciated on a straight-line basis over
5
years. Depreciation expense related to these assets was
$2.7 million
,
$2.7 million
and
$2.5 million
in the years ended December 31,
2017
,
2016
and
2015
, respectively. As of December 31, 2017, the Company had
no
assets under capital lease and
no
future minimum lease payments due under capital leases. The Company recorded
$0.4 million
and
$1.2 million
of interest expense on capital leases in the years ended December 31,
2016
, and
2015
, respectively. Interest expense on capital leases was not significant in 2017.
Note
11
. Convertible Debt
The Company had outstanding convertible debt and related deferred financing costs on its consolidated balance sheet as follows:
|
|
|
|
|
|
|
|
|
|
As of
|
(in thousands)
|
December 31, 2017
|
|
December 31, 2016
|
Principal amount of 2.0% Convertible Senior Notes
|
$
|
3,664
|
|
|
$
|
67,084
|
|
Principal amount of 1.25% Convertible Senior Notes
|
345,000
|
|
|
345,000
|
|
Principal amount of 1.375% Convertible Senior Notes
|
402,500
|
|
|
—
|
|
Unamortized debt discount
|
(170,448
|
)
|
|
(69,684
|
)
|
Deferred financing costs
|
(14,543
|
)
|
|
(9,632
|
)
|
Long-term debt, net of discount and issuance costs
|
$
|
566,173
|
|
|
$
|
332,768
|
|
Interest expense related to the convertible notes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
2017
|
|
2016
|
|
2015
|
Contractual coupon interest
|
$
|
6,282
|
|
|
$
|
4,467
|
|
|
$
|
4,025
|
|
Accretion of debt discount
|
15,931
|
|
|
8,800
|
|
|
6,552
|
|
Amortization of debt issuance costs
|
2,077
|
|
|
1,270
|
|
|
1,126
|
|
Total interest expense related to convertible notes
|
$
|
24,290
|
|
|
$
|
14,537
|
|
|
$
|
11,703
|
|
Interest expense related to convertible notes for the year ended December 31, 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
1.375%
|
|
1.25%
|
|
2.0%
|
|
Total
|
Contractual coupon interest
|
$
|
769
|
|
|
$
|
4,336
|
|
|
$
|
1,177
|
|
|
$
|
6,282
|
|
Amortization of debt discount and issuance costs
|
1,998
|
|
|
13,549
|
|
|
2,461
|
|
|
18,008
|
|
Total interest expense
|
$
|
2,767
|
|
|
$
|
17,885
|
|
|
$
|
3,638
|
|
|
$
|
24,290
|
|
1.375% Convertible Senior Notes
In November 2017, the Company issued and sold
$402.5 million
in aggregate principal amount of
1.375%
Convertible Senior Notes, due November 15, 2024 (the "
1.375%
Notes"). The interest rate on the notes is
1.375%
per annum, payable semi-annually in arrears in cash on May 15 and November 15 of each year. Interest began accruing on November 10, 2017 and the first interest payment is due on May 15, 2018. The
1.375%
Notes are convertible into the Company’s common stock at an initial conversion rate of
10.7315
shares of common stock per
$1,000
principal amount of the
1.375%
Notes, which is equivalent to a conversion price of approximately
$93.18
per share, subject to adjustment under certain circumstances. The
1.375%
Notes will be convertible prior to the close of business on the business day immediately preceding August 15, 2024 only under certain circumstances and during certain periods, and will be convertible on or after August 15, 2024 until the close of business on the second scheduled trading day immediately preceding November 15, 2024, regardless of those circumstances.
The Company recorded a debt discount of
$120.7 million
related to the
1.375%
Notes resulting from the allocation of a portion of the proceeds to the fair value of the conversion feature. The debt discount was recorded as additional paid-in capital and the remaining liability reflects a nonconvertible debt borrowing rate of
6.8%
per annum. This debt discount is being amortized as non-cash interest expense over the
seven
year term of the
1.375%
Notes. The Company also incurred debt issuance costs and other expenses related to the
1.375%
Notes of approximately
$10.9 million
, of which
$3.3 million
has been reclassified as a reduction to the value of the conversion feature allocated to equity. The remaining
$7.6 million
of debt issuance costs is presented as a reduction of debt in the consolidated balance sheet and is being amortized using the effective interest method as non-cash interest expense over the
seven
year term of the
1.375%
Notes.
The
1.375%
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
1.375%
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 nominal value at the balance sheet date.
As of December 31, 2017, the Company included
$276.2 million
, net of unamortized discount and issuance costs, on its consolidated balance sheet in long-term debt related to the
1.375%
Notes.
1.25% Convertible Senior Notes
In September 2016, the Company issued and sold
$345.0 million
in principal amount of
1.25%
Convertible Senior Notes, due
September 15, 2021
. The 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. 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 a nominal value at the balance sheet date.
As of December 31, 2017, the Company included
$286.6 million
, net of unamortized discount and issuance costs, on its consolidated 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.
Upon issuance of the notes, the Company recorded a debt discount of
$35.6 million
, which was recorded as additional paid-in capital to reflect the value of the Company’s nonconvertible debt borrowing rate of
6.2%
per annum. The debt discount is being amortized as non-cash interest expense over the
five
year term of the
2%
Notes. Financing costs related to this offering were approximately
$6.7 million
, of which
$1.2 million
was classified to equity and the remainder was 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 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, which is classified as a Level 3 measurement, 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.
In November 2017, the Company used
$98.6 million
of the net proceeds from the
1.375%
Notes to repurchase approximately
$63.4 million
principal amount of its outstanding
2.0%
Convertible Senior Notes due 2019 (the "
2%
Notes") pursuant to individually negotiated transactions. The extinguishment of the
2%
Notes was accounted for separately from the issuance of the
1.375%
Notes as both transactions were arm's-length in nature and were not contingent upon one another. The amount paid to extinguish these notes was allocated between debt in the amount
$59.4 million
and equity in the amount of
$39.2 million
based on their respective fair values immediately prior to the transaction. The fair value of the debt, which is considered a Level 3 measurement, was determined by comparing the effective yield-to-maturity of the repurchased 2% Notes as of the extinguishment date to the market yield for non-convertible debt with similar characteristics. The Company recorded a loss on extinguishment of debt of
$0.6 million
in connection with the repurchase of the
2%
Notes during the year ended December 31, 2017, representing the excess of the amount allocated to the debt over the principal amount of the debt plus accrued interest, net of unamortized debt discount and deferred financing costs.
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. 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 a nominal value at the balance sheet date.
As of December 31,
2017
, the Company included
$3.4 million
, net of unamortized discount and issuance costs, on its consolidated balance sheet in long-term debt related to the
2%
Notes.
Note
12
. Commitments and Contingencies
The Company records a liability in the consolidated financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed.
Operating Leases
The Company leases facilities in Massachusetts, California, Tennessee, the United Kingdom, Canada and China. The Company’s leases are accounted for as operating leases. The leases generally provide for a base rent plus real estate taxes and certain operating expenses related to the leases.
The Company leases approximately
100,000
square feet of laboratory and office space for its corporate headquarters in Billerica, Massachusetts. The lease expires in
November 2022
and contain escalating payments over the life of the 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
14,000
square feet under leases expiring from April 2018 to December 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 consolidated balance sheets. Rental expense from continuing operations under operating leases was
$2.8 million
,
$2.5 million
and
$1.9 million
in the years ended December 31,
2017
,
2016
and
2015
, respectively.
The aggregate future minimum lease payments related to these leases as of December 31,
2017
are as follows:
|
|
|
|
|
(in thousands)
|
|
Years Ending December 31,
|
Minimum Lease
Payments
|
2018
|
3,025
|
|
2019
|
2,961
|
|
2020
|
2,611
|
|
2021
|
2,383
|
|
2022
|
2,131
|
|
Thereafter
|
—
|
|
Total
|
$
|
13,111
|
|
Legal Proceedings
Between May 5, 2015 and June 16, 2015, three class action lawsuits were filed by shareholders in the U.S. District Court, for the District of Massachusetts, against the Company and certain individual current and former executives of the Company. Two suits subsequently were voluntarily dismissed.
Arkansas Teacher Retirement System v. Insulet, et al.
, 1:15-cv-12345, (“ATRS”) 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. In addition, on April 26, 2017, a derivative action (Walker v. DeSisto, et al., 1:17-cv-10738) (“Walker”) was filed, and on October 13, 2017, a second
derivative action (Carnazza v. DeSisto, et al., 1:17-cv-11977) (“Carnazza”) was filed, both on behalf of the Company, each by a shareholder in the U.S. District Court for the District of Massachusetts against the Company (as a nominal defendant) and certain individual current and former officers and directors of the Company. Both actions were filed as related actions to the securities class action referenced above, and the 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 December 14, 2017, following a series of negotiations, the Company, the individual defendants and their insurers reached an agreement in principle with the plaintiffs in the ATRS matter, individually and on behalf of the respective classes they purport to represent, to settle and release all claims with respect to the matter, subject to final court approval. Under the terms of the agreement in principle, a payment would be made to the plaintiffs and the classes they purport to represent. The Company has accrued fees and expenses in connection with this matter up to and including the amount of any expected residual settlement liability that would not be covered by insurance, and such amount is not material to the Company's consolidated financial statements. The parties have filed a motion for preliminary approval of the settlement with the court and it is currently under review. Although the Company currently believes that the settlement is likely to be consummated and approved, there can be no assurance that the settlement will receive court approval on the terms proposed by the parties. In the event that the settlement is not approved by the court, the Company would not be able to reasonably estimate the possible uninsured loss, or range of uninsured loss, to the Company in connection with an alternative resolution of 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
13
. Stock-Based Compensation and Stockholders' Equity
Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of ASC 718-10,
Compensation — Stock Compensation
(“ASC 718-10”), which requires all share-based payments to employees and directors, including grants of stock options and restricted stock units, to be recognized in the income statement based on their fair values. Share-based payments that contain performance conditions are recognized when such conditions are probable of being achieved.
The Company grants share-based awards to employees in the form of options to purchase the Company’s common stock, the ability to purchase stock at a discounted price under the employee stock purchase plan and restricted stock units. The Company uses the Black-Scholes option pricing model to determine the weighted-average fair value of options 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 basis for awards with performance conditions. Compensation expense is recognized over the vesting period of the awards.
Stock-based compensation from continuing operations related to share-based awards recognized in the years ended December 31,
2017
,
2016
and
2015
was
$31.9 million
,
$23.8 million
and
$18.7 million
, respectively. At December 31,
2017
, the Company had
$41.2 million
of total unrecognized compensation expense related to unvested stock options and restricted stock units.
Equity Award Plans
In May 2007, in conjunction with the Company's initial public offering, the Company adopted its 2007 Stock Option and Incentive Plan (the "2007 Plan"). The 2007 Plan was amended and restated in November 2008, May 2012 and May 2015 to provide for the issuance of additional shares and to amend certain other provisions. Under the 2007 Plan, awards were granted to persons who were, at the time of grant, employees, officers, non-employee directors or key persons (including consultants and prospective employees) of the Company or the Company's subsidiaries. The 2007 Plan provided for the grant of stock options, restricted stock units, stock appreciation rights,
deferred stock awards, restricted stock, unrestricted stock, cash-based awards, performance share awards or dividend equivalent rights. Options granted under the 2007 Plan generally vest over a period of
four
years and expire
ten
years from the date of grant. In May 2017, the Company adopted the 2017 Stock Option and Incentive Plan (the "2017 Plan"), which has replaced the 2007 Plan as the means by which the Company makes equity and cash awards. Effective May 18, 2017, the 2017 Plan became effective (the "2017 Plan Effective Date") and the Company ceased granting awards from the 2007 Plan. Outstanding awards under the 2007 Plan remain subject to the terms of the 2007 Plan. Under the 2017 Plan, awards may be granted to persons who are, at the time of grant, employees, officers, non-employee directors, consultants, or advisers of the Company or the Company's subsidiaries and affiliates. The 2017 Plan provides for the grant of stock options, restricted stock units, stock appreciation rights, deferred stock awards, restricted stock, unrestricted stock, cash-based awards, performance share awards or dividend equivalent rights. Stock options granted under the 2017 Plan generally vest over a period of
four
years and expire
ten
years from the date of grant. Shares of stock subject to awards granted under the 2007 Plan and the 2017 Plan that are forfeited, expire or otherwise terminate without delivery generally become available for future issuance under the 2017 Plan.
As of December 31,
2017
,
5.1 million
shares remain available for future issuance under the 2017 Plan.
Stock Options
In the years ended December 31, 2017, 2016 and 2015, the Company awarded
34,500
,
65,000
and
194,500
shares of performance-based incentive stock options, respectively. These stock options were granted under the 2007 and 2017 Plans and vest over a
four
year period from the grant date with the potential of an accelerated vesting period pursuant to the achievement of certain performance conditions.
The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the stock price and the following assumptions, including expected volatility, expected life of the awards, the risk-free interest rate, and the dividend yield.
|
|
•
|
Expected volatility measures the amount that a stock price has fluctuated or is expected to fluctuate during a period and is computed over expected terms based upon the historical volatility of the Company's stock.
|
|
|
•
|
The expected life of the awards is estimated based on the midpoint scenario, which combines historical exercise data with hypothetical exercise data for outstanding options, as the Company believes this data currently represents the best estimate of the expected life of a new employee option. The Company stratifies its employee population into two groups based upon organizational hierarchy.
|
|
|
•
|
The risk-free interest rate assumption is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.
|
|
|
•
|
The dividend yield assumption is based on Company history and expectation of paying no dividends. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation.
|
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense recognized in the financial statements is based on awards that are ultimately expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.
The Company evaluates the assumptions used to value the awards on a quarterly basis and if factors change and different assumptions are utilized, stock-based compensation expense may differ significantly from what has been recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.
The estimated grant date fair values of the employee stock options were calculated using the Black-Scholes option pricing model, based on the following assumptions:
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Risk-free interest rate
|
1.66% - 1.85%
|
|
0.99% - 1.91%
|
|
1.16% - 1.75%
|
Expected term (in years)
|
4.7 - 5.3
|
|
5.1 - 5.4
|
|
4.9 - 5.3
|
Dividend yield
|
—
|
|
—
|
|
—
|
Expected volatility
|
38% - 39%
|
|
38% - 40%
|
|
37% - 38%
|
The weighted average grant date fair value per share of options granted for the years ended December 31,
2017
,
2016
and
2015
was
$17.28
,
$11.60
and
$11.09
, respectively.
The following summarizes the activity under the Company’s stock option plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options (#)
|
|
Weighted Average
Exercise Price ($)
|
|
Weighted Average Remaining Contractual Term
|
|
Aggregate
Intrinsic
Value ($)
|
|
|
|
|
|
|
|
(In thousands)
|
Outstanding at December 31, 2016
|
3,441,303
|
|
|
$
|
32.27
|
|
|
|
|
|
Granted
|
543,045
|
|
|
45.99
|
|
|
|
|
|
Exercised
|
(505,207
|
)
|
|
27.72
|
|
|
|
|
$
|
11,846
|
|
Canceled
|
(101,921
|
)
|
|
34.29
|
|
|
|
|
|
Outstanding at December 31, 2017
|
3,377,220
|
|
|
$
|
35.10
|
|
|
7.6
|
|
$
|
114,505
|
|
Vested, December 31, 2017
|
1,934,398
|
|
|
$
|
33.51
|
|
|
7.0
|
|
$
|
68,654
|
|
Vested or expected to vest, December 31, 2017
(1)
|
3,211,982
|
|
|
$
|
34.93
|
|
|
7.6
|
|
$
|
109,462
|
|
|
|
(1)
|
Represents total outstanding stock options as of December 31,
2017
, adjusted for the estimated forfeiture.
|
The aggregate intrinsic value of stock options exercised was calculated based on the positive difference between the estimated fair value of the Company’s common stock and the exercise price of the underlying options. The aggregate intrinsic value of options exercised in the years ended December 31,
2016
and
2015
was
$4.6 million
and
$8.6 million
, respectively.
The aggregate intrinsic value for outstanding awards as of December 31, 2017 was calculated based on the positive difference between the Company’s closing stock price of
$69.00
on December 31, 2017 and the exercise price of the underlying options.
Employee stock-based compensation from continuing operations related to stock options in the years ended December 31,
2017
,
2016
and
2015
was
$11.6 million
,
$9.9 million
and
$9.1 million
, respectively, and was based on awards ultimately expected to vest. Stock-based compensation from discontinued operations related to stock options was not significant for these periods. At December 31,
2017
, the Company had
$15.5 million
of total unrecognized compensation expense related to stock options that will be recognized over a weighted average vesting period of
2.4
years.
Restricted Stock Units
In the years ended December 31,
2017
and
2016
, the Company awarded
436,066
and
592,783
restricted stock units, respectively, to certain employees and non-employee members of the Board of Directors, which included
169,394
and
154,991
restricted stock units, respectively, 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 as of December 31,
2017
, the Company recognized stock compensation expense of
$5.9 million
and
$2.4 million
in
2017
and
2016
, respectively, as it expects a portion of the performance-based restricted stock units granted will be earned based on its evaluation of the performance criteria. An additional
$0.5 million
and
$1.0 million
of stock compensation expense was recognized in
2017
and
2016
, respectively, for performance-based restricted stock units for which the performance criteria had been achieved as of the end of these
periods. The restricted stock units 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 in
2017
have a weighted average fair value of
$47.64
per share based on the closing price of the Company’s common stock on the date of grant. The restricted stock units granted during the year ended December 31,
2017
were valued at approximately
$20.8 million
on their grant date, and the Company is recognizing the compensation expense over the vesting period. Approximately
$13.3 million
,
$10.2 million
and
$8.1 million
of stock-based compensation expense from continuing operations related to the vesting of non-performance based restricted stock units was recognized in the years ended December 31,
2017
,
2016
and
2015
, respectively. Employee stock-based compensation expense from discontinued operations related to the vesting of non-performance based restricted stock was not significant for the three year period ended December 31, 2017.
Approximately
$25.7 million
of the fair value of restricted stock units, including performance-based restricted stock units, remained unrecognized as of December 31,
2017
and will be recognized over a weighted average period of
1.8
years. Under the terms of the awards, the Company will issue shares of common stock on each of the vesting dates.
The following table summarizes the status of the Company’s restricted stock units:
|
|
|
|
|
|
|
|
|
Number of
Shares (#)
|
|
Weighted
Average
Fair Value ($)
|
Outstanding at December 31, 2016
|
962,219
|
|
|
$
|
31.14
|
|
Granted
|
436,066
|
|
|
47.64
|
|
Vested
|
(386,284
|
)
|
|
31.79
|
|
Forfeited
|
(17,637
|
)
|
|
33.68
|
|
Outstanding at December 31, 2017
|
994,364
|
|
|
$
|
38.08
|
|
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 makes one or more offerings each year to eligible employees to purchase stock under the ESPP. Offering periods begin on the first business day occurring on or after each December 1 and June 1 and end on the last business day occurring on or before the following May 31 and November 30, respectively.
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. 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 Company issued
59,134
shares of common stock in
2017
,
30,949
shares of common stock in
2016
and
22,039
shares of common stock in
2015
to employees participating in the ESPP. The Company recorded approximately
$0.6 million
,
$0.2 million
and
$0.1 million
of stock-based compensation expense related to the ESPP in each of the years ended December 31,
2017
,
2016
and
2015
.
Stockholders' Equity
Shareholder Rights Plan
In November 2008, the Board of Directors of the Company adopted a shareholder rights plan (the "Shareholder Rights Plan”), as set forth in the Shareholder Rights Agreement between the Company and the rights agent, the purpose of which is, among other things, to enhance the ability of the Board of Directors to protect shareholder interests and to ensure that shareholders receive fair treatment in the event any coercive takeover attempt of the Company is made in the future. The Shareholder Rights Plan could make it more difficult for a third party to
acquire, or could discourage a third party from acquiring, the Company or a large block of the Company’s common stock. The Shareholder Rights Plan is scheduled to expire in November 2018.
In connection with the adoption of the Shareholder Rights Plan, the Board of Directors of the Company declared a dividend distribution of one preferred stock purchase right (a “Right”) for each outstanding share of common stock to stockholders of record as of the close of business on November 15, 2008. In addition, one Right will automatically attach to each share of common stock issued between November 15, 2008 and the distribution date. The Rights currently are not exercisable and are attached to and trade with the outstanding shares of common stock. Under the Shareholder Rights Plan, the Rights become exercisable if a person or group becomes an “acquiring person” by acquiring
15%
or more of the outstanding shares of common stock or if a person or group commences a tender offer that would result in that person or group owning
15%
or more of the common stock. The Board of Directors, from time to time, can and has taken action to allow certain shareholders to acquire more than
15%
of the outstanding shares of common stock under certain conditions. If a person or group becomes an “acquiring person,” each holder of a Right (other than the acquiring person) would be entitled to purchase, at the then-current exercise price, such number of shares of the Company’s preferred stock which are equivalent to shares of common stock having a value of twice the exercise price of the Right. If the Company is acquired in a merger or other business combination transaction after any such event, each holder of a Right would then be entitled to purchase, at the then-current exercise price, shares of the acquiring company’s common stock having a value of twice the exercise price of the Right.
Note 14. Defined Contribution Plan
The Insulet 401(k) Retirement Plan (the “401(k) Plan”) is a defined contribution plan in the form of a qualified 401(k) plan in which substantially all employees are eligible to participate upon hire. Eligible employees may elect to contribute
100%
of their eligible compensation up to the IRS maximum. The Company has the option of making both matching contributions and discretionary profit-sharing contributions to the 401(k) Plan. Since 2011, the Company has offered a discretionary match of
50%
for the first
6%
of an employee’s salary that was contributed to the 401(k) Plan. The Company match vests after the employee attains
one
year of service. The total amount contributed by the Company under the 401(k) Plan in continuing operations was
$3.0 million
,
$1.6 million
and
$1.6 million
for the years ended December 31,
2017
,
2016
and
2015
, respectively. Contributions in discontinued operations were not significant during those same periods.
Note
15
. Income Taxes
The Company accounts for income taxes in accordance with ASC 740-10,
Income Taxes
(“ASC 740-10”) 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 enacted tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. As of December 31, 2017, the Company had
no
uncertain tax positions.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act ("Tax Reform Act"). The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system, expanding the tax base and imposing a tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate federal income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The Company has recognized the impact of the Tax Reform Act in these consolidated financial statements and related disclosures. Staff Accounting Bulletin No. 118 ("SAB 118") provides Companies with guidance on accounting for the impact of the Tax Reform Act. Specifically, SAB 118 provides for a measurement period, not to exceed one year, that begins on the date of enactment of December 22, 2017, and ends when the Company has obtained, prepared, and analyzed information
needed to complete accounting requirements. In accordance with SAB 118, the Company recorded provisional amounts reflecting the impact of the Tax Reform Act in these consolidated financial statements and related disclosures. The impact of the remeasurement of the Company’s U.S. deferred tax assets and liabilities to 21% resulted in a tax benefit of approximately
$0.3 million
consisting of a reduction of the deferred tax assets of
$60.5 million
offset by a reduction in the valuation allowance of
$60.8 million
. The Company recorded
no
tax expense related to the deemed repatriation tax consisting of a reduction in net operating losses in 2017 of
$0.8 million
offset by a reduction in the valuation allowance of the
$0.8 million
. The impact of the deemed repatriation tax computation is still open due to finalization of the earnings and profits of the Company's foreign subsidiaries, as well as the Company’s evaluation of certain elections and guidance.
The Company files federal, state and foreign tax returns. These returns are generally open to examination by the relevant tax authorities from
two
to
four
years from the date they are filed or, in certain circumstances, from the end of the accounting period. 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 2013 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 December 31,
2017
and
2016
, the Company provided a full valuation allowance against its domestic net deferred tax asset as, in the judgment of the Company, 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, in the judgment of the Company, it is more likely than not that the future tax benefit will be realized.
Income tax expense from continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
151
|
|
|
52
|
|
|
72
|
|
Non-U.S.
|
603
|
|
|
539
|
|
|
321
|
|
Total current expense
|
754
|
|
|
591
|
|
|
393
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(347
|
)
|
|
—
|
|
|
—
|
|
State
|
91
|
|
|
—
|
|
|
—
|
|
Non-U.S.
|
(241
|
)
|
|
(199
|
)
|
|
(181
|
)
|
Total deferred expense
|
(497
|
)
|
|
(199
|
)
|
|
(181
|
)
|
Total income tax expense
|
$
|
257
|
|
|
$
|
392
|
|
|
$
|
212
|
|
Income tax expense from discontinued operations was
$0.4 million
for the year ended December 31, 2016 and was primarily generated from federal deferred taxes. Income tax expense from discontinued operations was
not
significant for the year ended December 31, 2015.
The following table reconciles the federal statutory income rate to the Company's effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Tax at U.S. statutory rate
|
34.00
|
%
|
|
34.00
|
%
|
|
34.00
|
%
|
Changes from statutory rate:
|
|
|
|
|
|
State taxes, net of federal benefit
|
10.21
|
|
|
(10.86
|
)
|
|
3.06
|
|
Tax credits
|
13.28
|
|
|
0.03
|
|
|
1.51
|
|
Permanent items
|
(0.55
|
)
|
|
(11.03
|
)
|
|
(2.09
|
)
|
Change in enacted rates
|
0.98
|
|
|
—
|
|
|
—
|
|
Change in valuation allowance
|
(57.91
|
)
|
|
(13.45
|
)
|
|
(37.11
|
)
|
Other
|
(0.98
|
)
|
|
(0.15
|
)
|
|
0.28
|
|
Effective income tax rate
|
(0.97
|
)%
|
|
(1.46
|
)%
|
|
(0.35
|
)%
|
Pre-tax income attributable to the Company's operations located outside the U.S. was approximately
$1.1 million
,
$0.8 million
and
$0.3 million
for
2017
,
2016
and
2015
, respectively. In general, it is the Company's practice and intention to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of December 31,
2017
, the Company has chosen to indefinitely reinvest approximately
$6.4 million
of earnings of certain of its non-U.S. subsidiaries. To the extent the Company repatriates its foreign earnings, certain withholding taxes and state taxes may apply. No provision has been recorded for taxes that could be incurred upon repatriation. The deferred tax liability related to repatriation of these earnings would not be material to the company's consolidated financial statements.
Significant components of the Company’s deferred tax assets (liabilities) consists of the following:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
Net operating loss carryforwards
|
$
|
129,184
|
|
|
$
|
169,203
|
|
Start up expenditures
|
462
|
|
|
929
|
|
Tax credits
|
12,705
|
|
|
8,007
|
|
Provision for bad debts
|
824
|
|
|
1,330
|
|
Depreciation and amortization
|
3,068
|
|
|
6,368
|
|
Capital loss carryforwards
|
12,850
|
|
|
18,961
|
|
Stock-based compensation
|
9,799
|
|
|
10,359
|
|
Other
|
4,449
|
|
|
4,701
|
|
Total deferred tax assets
|
$
|
173,341
|
|
|
$
|
219,858
|
|
Deferred tax liabilities:
|
|
|
|
Prepaid assets
|
$
|
(1,326
|
)
|
|
$
|
(1,173
|
)
|
Amortization of acquired intangibles
|
(5
|
)
|
|
(33
|
)
|
Amortization of debt discount
|
(43,083
|
)
|
|
(25,977
|
)
|
Goodwill
|
(633
|
)
|
|
(855
|
)
|
Other
|
(259
|
)
|
|
(313
|
)
|
Total deferred tax liabilities
|
$
|
(45,306
|
)
|
|
$
|
(28,351
|
)
|
Valuation allowance
|
$
|
(127,927
|
)
|
|
$
|
(191,922
|
)
|
Net deferred tax liabilities
|
$
|
108
|
|
|
$
|
(415
|
)
|
The Company has recorded a deferred tax liability related to the tax basis in acquired goodwill that is not amortized for financial reporting purposes. The deferred tax liability will only reverse at the time of further impairment of the 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 deferred tax liability cannot be used to offset the deferred tax asset related to the net operating loss carryforward for tax purposes. The Tax Reform Act limits certain deductions and these limitations may impact the value of existing deferred tax assets. The Company will continue to review the impact of these limitations as regulatory guidance is issued.
A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the U.S. deferred tax assets will not be realized. After consideration of the available evidence, both positive and negative, the Company has determined that a
$127.9 million
valuation allowance at December 31,
2017
is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The Company provided a valuation allowance for the full amount of its domestic net deferred tax asset for the years ended December 31,
2017
and
2016
because it is not more likely than not that the future tax benefit will be realized. In the year ended December 31,
2017
, the Company’s valuation allowance decreased to
$127.9 million
from the balance at December 31,
2016
of
$191.9 million
. The change in the valuation allowance is primarily attributable to the reduction in the U.S. federal tax rate from 34% to 21% as a result of the 2017 Tax Reform Act, which had an impact of reducing the valuation allowance by approximately
$60.8 million
. Additional movement in the valuation allowance from December 31, 2016 to December 31, 2017 is comprised of an increase of approximately
$15.6 million
to offset current year net deferred tax asset and liability changes, a decrease of approximately
$42.6 million
to offset the net deferred tax liability related to the debt discount and deferred financing costs related to the Company’s
1.375%
Notes issued during the year ended December 31, 2017, and an increase of approximately
$23.8 million
increase related to the adoption of ASU 2016-09 related to accounting for stock-based compensation.
At December 31,
2017
, the Company had approximately
$543.6 million
,
$250.6 million
and
$12.7 million
of gross federal net operating loss carryforwards, state net operating loss carryforwards and research and development and other tax credits, respectively. If not utilized, these federal carryforwards will begin to expire in 2020 and will continue to expire through 2037, and the state carryforwards will continue to expire through 2037. At December 31, 2016, the Company had approximately
$535.7 million
,
$216.2 million
and
$8.0 million
of federal net operating loss carryforwards, state net operating loss carryforwards and research and development and other tax credits, respectively from continuing operations. The utilization of such net operating loss carryforwards and the realization of tax benefits in future years depends predominantly upon the Company's ability to generate taxable income. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company's ownership may result in a limitation on the amount of net operating loss carryforwards which may be used in future years whereby there would be a yearly limitation placed on the amount of net operating loss available for use in future years. Additionally, it is probable that a portion of the research and development tax credit carryforward may not be available to offset future income.
As a result of certain realization requirements of ASC 718, the table of deferred tax assets and liabilities does not include certain deferred tax assets as of December 31,
2016
that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting. Upon adoption of ASU 2016-09 on January 1, 2017, the Company recorded
$23.8 million
of deferred tax assets, less a full valuation allowance related to these amounts.
Note 16. 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 years ended December 31,
2017
,
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:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
1.375% Convertible Senior Notes
|
4,319,429
|
|
|
—
|
|
|
—
|
|
2.00% Convertible Senior Notes
|
78,783
|
|
|
1,442,433
|
|
|
4,327,257
|
|
1.25% Convertible Senior Notes
|
5,910,954
|
|
|
5,910,954
|
|
|
—
|
|
Unvested restricted stock units
|
994,364
|
|
|
962,219
|
|
|
811,965
|
|
Outstanding stock options
|
3,377,220
|
|
|
3,441,303
|
|
|
2,999,199
|
|
Total dilutive common shares
|
14,680,750
|
|
|
11,756,909
|
|
|
8,138,421
|
|
Note
17
. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
2017
|
|
2016
|
|
2015
|
U.S. Omnipod
|
$
|
271,597
|
|
|
$
|
229,785
|
|
|
$
|
189,604
|
|
International Omnipod
|
119,953
|
|
|
71,889
|
|
|
40,339
|
|
Drug Delivery
|
72,218
|
|
|
65,315
|
|
|
33,950
|
|
Total
|
$
|
463,768
|
|
|
$
|
366,989
|
|
|
$
|
263,893
|
|
Geographic information about revenue, based on the region of the customer's shipping location, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
2017
|
|
2016
|
|
2015
|
United States
|
$
|
343,815
|
|
|
$
|
295,100
|
|
|
$
|
223,554
|
|
All other
|
119,953
|
|
|
71,889
|
|
|
40,339
|
|
Total
|
$
|
463,768
|
|
|
$
|
366,989
|
|
|
$
|
263,893
|
|
Geographic information about long-lived assets, net, excluding goodwill and other intangible assets is as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2017
|
|
December 31, 2016
|
United States
|
$
|
89,404
|
|
|
$
|
19,341
|
|
China
|
18,217
|
|
|
25,431
|
|
Other
|
434
|
|
|
197
|
|
Total
|
$
|
108,055
|
|
|
$
|
44,969
|
|
Note 18. Business Combination
On July 7, 2015, the Company executed an asset purchase agreement with GlaxoSmithKline ("GSK") whereby the Company acquired GSK's assets associated with the Canadian distribution of the Company's products. The acquisition was accounted for as a business combination. With the acquisition, the Company assumed all distribution, sales, marketing, training and support activities for the Omnipod System in Canada through its wholly-owned subsidiary, Insulet Canada Corporation. The acquisition allowed the Company to establish a local presence in Canada that enabled it to engage directly with healthcare providers and Omnipod users.
The aggregate purchase price of approximately
$4.7 million
consisted of cash paid at closing and was allocated to the fair value of assets acquired and liabilities assumed as follows:
|
|
|
|
|
(in thousands)
|
|
Goodwill
|
$
|
2,403
|
|
Contractual relationships
|
2,100
|
|
Inventory step-up
|
230
|
|
Assumed liabilities
|
(18
|
)
|
|
$
|
4,715
|
|
Note
19
. 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 various services were provided to Liberty Medical on an interim transitional basis. Total expenses incurred for such transition services were
$0.9 million
for the year ended December 31, 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. Omnipod sales transacted through Neighborhood Diabetes prior to the divestiture that were previously eliminated in consolidation were
$0.3 million
and
$2.8 million
for the years ended December 31,
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 System sales to the Neighborhood Diabetes subsidiary of Liberty Medical were
$0.4 million
for the year ended December 31, 2016.
The following is a summary of the operating results of Neighborhood Diabetes included in discontinued operations for the year ended December 31,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Discontinued operations:
|
|
|
|
|
Revenue
(1)
|
|
$
|
7,730
|
|
|
$
|
60,332
|
|
Cost of revenue
|
|
5,468
|
|
|
45,449
|
|
Gross profit
|
|
2,262
|
|
|
14,883
|
|
Operating expenses:
|
|
|
|
|
Sales and marketing
|
|
1,542
|
|
|
9,945
|
|
General and administrative
(2) (3)
|
|
1,853
|
|
|
16,967
|
|
Total operating expenses
|
|
3,395
|
|
|
26,912
|
|
Operating loss
|
|
(1,133
|
)
|
|
(12,029
|
)
|
Interest and other income (expense), net
|
|
(128
|
)
|
|
190
|
|
Loss from discontinued operations before taxes
|
|
(1,261
|
)
|
|
(11,839
|
)
|
Income tax expense
|
|
408
|
|
|
79
|
|
Net loss from discontinued operations
|
|
$
|
(1,669
|
)
|
|
$
|
(11,918
|
)
|
(1)
Revenue for the year ended December 31, 2016 includes revenue from operations of Neighborhood Diabetes through the date of sale in February 2016.
(2)
Included in general and administration expenses for the year ended December 31, 2015 was a charge of
$9.1 million
related to the impairment of Neighborhood Diabetes asset group.
(3)
Included in general and administration expenses for the year ended December 31, 2015 was
$0.5 million
of stock-based compensation expense from discontinued operations related to share-based awards. Stock-based compensation expense from discontinued operations related to share-based awards was not significant for the year ended December 31, 2016.
Depreciation and amortization expense included in discontinued operations was
$0.0 million
,
$0.1 million
, and
$3.3 million
for the years ended December 31,
2017
,
2016
and
2015
, respectively. There were no assets or liabilities presented as discontinued operations as of December 31, 2017 or December 31, 2016. Net operating cash flows used in discontinued operations in the years ended December 31,
2017
,
2016
and 2015 were
$0.0 million
,
$2.0 million
, and
$3.2 million
, respectively.
20. Quarterly Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Quarters Ended
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
(In thousands, except per share data)
|
|
Revenue
|
$
|
130,524
|
|
|
$
|
121,775
|
|
|
$
|
109,756
|
|
|
$
|
101,713
|
|
Gross profit
|
79,508
|
|
|
73,624
|
|
|
64,639
|
|
|
59,398
|
|
Operating (loss) income
|
(768
|
)
|
|
2,047
|
|
|
(3,358
|
)
|
|
(5,308
|
)
|
Net loss
|
$
|
(6,860
|
)
|
|
$
|
(2,227
|
)
|
|
$
|
(7,767
|
)
|
|
$
|
(9,977
|
)
|
Net loss per share
|
$
|
(0.12
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Quarters Ended
|
|
December 31
(1)
|
|
September 30
|
|
June 30
|
|
March 31
|
(In thousands, except per share data)
|
|
Revenue
|
$
|
103,575
|
|
|
$
|
94,871
|
|
|
$
|
87,330
|
|
|
$
|
81,213
|
|
Gross profit
|
60,937
|
|
|
55,641
|
|
|
50,457
|
|
|
44,051
|
|
Operating (loss) income
|
(4,135
|
)
|
|
2,418
|
|
|
(1,288
|
)
|
|
(7,699
|
)
|
Net loss from continuing operations, net of taxes
|
(9,153
|
)
|
|
(3,017
|
)
|
|
(4,351
|
)
|
|
(10,689
|
)
|
Income (loss) from discontinued operations, net of taxes
|
34
|
|
|
(64
|
)
|
|
153
|
|
|
(1,792
|
)
|
Net loss
|
$
|
(9,119
|
)
|
|
$
|
(3,081
|
)
|
|
$
|
(4,198
|
)
|
|
$
|
(12,481
|
)
|
Net loss per share from continuing operations
|
$
|
(0.16
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.19
|
)
|
Net loss per share from discontinued operations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.03
|
)
|
|
|
(1)
|
Included in net loss from continuing operations for the fourth quarter of 2016 was a charge of
$6.1 million
related to in-process internally developed software.
|