INSULET CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our selected financial data and our consolidated financial statements and the accompanying notes included in this annual report. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs, which are subject to risks, uncertainties and assumptions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed under the headings "Risk Factors" and "Forward-Looking Statements." Overview We are primarily engaged in the development, manufacture and sale of our proprietary Omnipod System, an innovative, continuous insulin delivery system for people with insulin-dependent diabetes. There are two primary types of insulin therapy practiced today: MDI therapy using syringes or insulin pens; and pump therapy using insulin pumps. Insulin pumps are used to perform continuous subcutaneous insulin infusion, or insulin pump therapy, and typically use a programmable device and an infusion set to administer insulin into a person's body. Insulin pump therapy has been shown to provide people with insulin-dependent diabetes with numerous advantages relative to MDI therapy. The Omnipod System features a small, lightweight, self-adhesive disposable tubeless Omnipod device that is worn on the body for up to three days at a time and its wireless companion, the handheld PDM. The Omnipod System, which features two discreet and easy-to-use devices, communicates wirelessly, provides for virtually pain-free automated cannula insertion and eliminates the need for traditional MDI therapy or the use of traditional pump and tubing. We believe that the Omnipod System's unique proprietary design and features allow people with insulin-dependent diabetes to manage their diabetes with unprecedented freedom, comfort, convenience and ease. The Omnipod is currently available inthe United States ,Canada and certain countries inEurope and theMiddle East . We sell the Omnipod through direct sales to consumers or through our distribution partners and most recently in theU.S. through the pharmacy channel. In addition to the diabetes market space, we have partnered with pharmaceutical and biotechnology companies to tailor the Omnipod System technology platform for the delivery of subcutaneous drugs across other therapeutic areas. Most of our drug delivery revenue currently consists of sales of Pods to Amgen for use in the Neulasta Onpro kit, an innovative delivery system for Amgen's white blood cell booster to help reduce the risk of infection after intense chemotherapy. Our mission is to improve the lives of people with diabetes. To assist in achieving this mission, we are focused on the following strategic objectives: • delivering consumer-focused innovation;
• ensuring the best customer experience globally;
• expanding our global footprint; and
• driving operational excellence.
In the first half of 2019, we began production at our new highly automated manufacturing facility inActon, Massachusetts , which also serves as our new global headquarters. We expect that, following start up related activities, the new facility will allow us to lower our manufacturing costs, increase supply redundancy, add capacity closer to our largest customer base and support growth. As ofDecember 31, 2019 , we had made cumulative investments of approximately$320 million in property, plant and infrastructure related to the new facility. We expect to continue to expand our investment in this facility in 2020 to support the growth of our business. Additionally, in the first half of 2019, we completed a full market launch of Omnipod DASH inthe United States . Omnipod DASH is our next-generation digital mobile Omnipod platform, featuring a secure Bluetooth enabled Pod and PDM with a color touch screen user interface supported by smartphone connectivity. In December of 2019, we introduced DASH to select European markets. In late 2019, we completed our pre-pivotal trial for Omnipod Horizon, a closed loop control system that utilizes the DASH mobile platform to allow the Pod to communicate with a continuous glucose monitor and help control insulin delivery utilizing an algorithm located on the Pod. InDecember 2019 , we began patient enrollment in our pivotal trial. We expect to launch Omnipod Horizon in the second half of 2020. While we expect Horizon to contribute to our long-term revenue growth, we do not expect it to meaningfully contribute to growth in 2020. Our long-term financial objective is to sustain profitable growth. To achieve this goal, we expect our efforts in 2020 to focus primarily on the launch of Omnipod Horizon inthe United States . In order to support our continued growth and the expected launch of Omnipod Horizon, in 2020 we also plan to focus on the startup of our second manufacturing line in ourActon facility and the installation of a thirdU.S. manufacturing line, which we expect to begin production on in 2021. Additionally, in 2020, we 34
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expect to enter five new countries inWestern Europe and theMiddle East and further roll out DASH inEurope andCanada to expand the commercial sale of Omnipod and our global footprint. While we expect these new countries to contribute to our long-term revenue growth, we do not expect them to have a meaningful contribution in 2020. Finally, we plan to continue our product development efforts and expand awareness of and access to our products. Achieving these objectives is expected to require additional investments in certain initiatives and personnel, as well as enhancements to our supply chain operation capacity, efficiency and effectiveness. Results of Operations Years Ended December 31, Years Ended December 31, (In millions) 2019 2018 Change $ Change % 2018 2017 Change $ Change % Revenue U.S. Omnipod$ 420.4 $ 323.5 $ 96.9 30 %$ 323.5 $ 271.6 $ 51.9 19 % International Omnipod 253.1 172.0 81.1 47 % 172.0 120.0 52.0 43 % Total Omnipod 673.5 495.5 178.0 36 % 495.5 391.6 103.9 27 % Drug Delivery 64.7 68.3 (3.6 ) (5 )% 68.3 72.2 (3.9 ) (5 )% Total revenue 738.2 563.8 174.4 31 % 563.8 463.8 100.0 22 % Cost of revenue 257.9 193.6 64.3 33 % 193.6 186.6 7.0 4 % Gross profit 480.3 370.2 110.1 30 % 370.2 277.2 93.0 34 % Gross margin 65.1 % 65.7 % 65.7 % 59.8 % Operating expenses: Research and development 129.7 90.5 39.2 43 % 90.5 75.7 14.8 20 % Sales and marketing 185.1 146.2 38.9 27 % 146.2 124.2 22.0 18 % General and administrative 115.5 106.1 9.4 9 % 106.1 84.7 21.4 25 % Total operating expenses 430.3 342.8 87.5 26 % 342.8 284.6 58.2 20 % Operating income (loss) 50.0 27.4 22.6 82 % 27.4 (7.4 ) 34.8 470 % Interest expense, net of portion capitalized (34.6 ) (28.9 ) (5.7 ) 20 % (28.9 ) (21.2 ) (7.7 ) 36 % Loss on extinguishment of debt (8.7 ) - (8.7 ) NM - (0.6 ) 0.6 NM Interest and other income, net 7.8 6.7 1.1 16 % 6.7 2.6 4.1 158 % Income (loss) before income taxes 14.5 5.2 9.3 179 % 5.2 (26.6 ) 31.8 120 % Income tax expense (2.9 ) (1.9 ) (1.0 ) 53 %
(1.9 ) (0.2 ) (1.7 ) 850 %
Net income (loss)
NM = Not meaningful Comparison of the Years EndedDecember 31, 2019 andDecember 31, 2018 Revenue Total revenue for 2019 increased$174.4 million , or 31%, to$738.2 million , compared with$563.8 million in 2018 due to strong growth in ourU.S. and International Omnipod revenue.U.S. Omnipod revenue increased$96.9 million , or 30%, to$420.4 million , primarily due to higher volumes as we continue to expand awareness of and access to the Omnipod, and increased sales through the pharmacy channel, which has higher average selling prices due in part to the fact that we offer the PDM for no charge. International Omnipod revenue increased$81.1 million , or 47%, to$253.1 million , primarily due to the continued adoption of our product and more favorable pricing as a result of our shift to direct sales of the Omnipod inEurope inJuly 2018 . Drug Delivery revenue decreased$3.6 million , or 5%, to$64.7 million , compared with 2018. For 2020, we expect strong Omnipod revenue growth driven by continued market penetration and continued volume growth of Omnipod DASH, primarily in theU.S. pharmacy channel, partially offset by lower Drug Delivery revenue, due to a lower demand forecast. Internationally, we expect higher revenues primarily due to increasing sales volume as a result of greater awareness and availability of the Omnipod and further roll out of Omnipod DASH inEurope andCanada . In theU.S. , we expect higher revenues primarily due to an increase in sales volume as a result of expanded payor coverage, greater awareness and availability of the Omnipod, commercial expansion strategies and the move into the pharmacy channel. Gross Margin Gross margin was 65.1% of revenue in 2019, compared with 65.7% in 2018. The decrease in gross margin was primarily due to start-up costs and inefficiencies related to our newU.S. manufacturing operations and product mix, which more than offset favorable distribution channel mix, favorable pricing following the expiration of our former distribution agreement inEurope and favorable geographic mix. We expect full year 2020 gross margin to be relatively consistent with 2019, which reflects the benefits of continued 35
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improvements in manufacturing and supply chain operations and the move into the pharmacy channel in theU.S. , offset by start-up costs and inefficiencies as we continue to ramp up ourU.S. manufacturing operations. Research and Development Research and development expenses for 2019 increased$39.2 million , or 43%, to$129.7 million , compared with$90.5 million in 2018. This increase was primarily due to an increase in research and development expenses related to Omnipod DASH and our Omnipod Horizon automated insulin delivery system. Research and development expenses also increased due to engineering and operational costs, such as training and start up activities, associated with our newly constructedU.S. manufacturing facility. We expect research and development spending for the full year 2020 to increase compared with 2019. Sales and Marketing Sales and marketing expenses for 2019 increased$38.9 million , or 27%, to$185.1 million , compared with$146.2 million in 2018. This increase was primarily attributable to investments to support our mid-2018 transition to direct sales of Omnipod inEurope , the expansion of ourU.S. sales force and investments in customer support. We expect sales and marketing expenses for the full year 2020 to increase compared with 2019 due to additional expansion of ourU.S. sales force and customer support personnel to facilitate our continued growth and expected entry into five new countries. General and Administrative General and administrative expenses for 2019 increased$9.4 million , or 9%, to$115.5 million , compared with$106.1 million in 2018. This increase was primarily attributable to increased personnel-related costs related to 2018 hires to support the establishment of our direct operations inEurope and increased depreciation related to our new headquarters facility, partially offset by$12.6 million of severance charges in 2018 related to the retirement of our former CEO, including stock-based compensation expense for the accelerated vesting of equity awards. We expect general and administrative expenses for 2020 to increase compared with 2019 as we continue to grow our business and make investments in our operating structure to support growth. Interest Expense, Net of Portion Capitalized Interest expense, net for 2019 increased$5.7 million , or 20%, to$34.6 million , compared with 2018. Interest expense, net for 2019 includes$9.5 million of cash interest expense and$35.6 million of non-cash interest expense associated with our convertible debt, partially offset by$10.5 million of interest capitalized as part of the cost of ourU.S. manufacturing facility. The increase in interest expense, net primarily resulted from a$6.3 million increase in non-cash interest expense resulting from net impact of the issuance of$800.0 million of 0.375% convertible notes and the repayment of$402.5 million principal amount of 1.25% convertible notes. We expect interest expense for 2020 to increase compared with 2019 due to the annualized impact of the higher non-cash interest expense associated with the 0.375% convertible notes, compared with the 1.25% convertible notes. Loss on Extinguishment of Debt During 2019, we incurred an$8.7 million loss on extinguishment of debt related to the repurchase of our 1.25% Notes. Interest and Other Income, Net Other income, net for 2019 increased$1.1 million , to$7.8 million , compared with$6.7 million in 2018. This increase was primarily due to a$1.8 million insurance settlement received, partially offset by a decrease in interest income on our investment portfolio. Income Tax Expense Income tax expense was$2.9 million and$1.9 million on pre-tax income of$14.5 million and$5.2 million for 2019 and 2018, respectively. Our effective tax rate was 19.8% and 37.0% for 2019 and 2018, respectively. The decrease in our effective tax rate primarily resulted from an increase in earnings in theU.S. , which has a full valuation allowance. See Note 18 to the consolidated financial statements for additional information on our income tax expense. Comparison of the Years EndedDecember 31, 2018 andDecember 31, 2017 Revenue Total revenue for 2018 increased$100.0 million , or 22%, to$563.8 million , compared with$463.8 million in 2017, primarily due to continued growth in our International andU.S. Omnipod revenue. International Omnipod revenue increased$52.0 million , or 43%, to$172.0 million , primarily due to both higher volumes and pricing as a result of our shift to direct sales of the Omnipod inEurope inJuly 2018 .U.S. Omnipod revenue increased$51.9 million , or 19%, to$323.5 million due to expanded access to and awareness of the Omnipod System. Our Drug Delivery revenue decreased$3.9 million , or 5%, to$68.3 million , primarily reflecting a lower number of shipments during the year, partially offset by the favorable impact of adoption of new accounting guidance that requires our drug delivery revenue to be recognized as the product is produced rather than at time of shipment as further described in Note 2 to the consolidated financial statements. 36
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Gross Margin Cost of revenue was 65.7% of revenue in 2018, compared with 59.8% in 2017. The significant increase in gross margin was primarily due to favorable pricing resulting from our shift to direct sales inEurope following the expiration of our former distributor agreement and lower product cost as a result of continued improvements in manufacturing and supply chain operations. Research and Development Research and development expenses for 2018 increased$14.8 million , or 20%, to$90.5 million , compared with$75.7 million in 2017. This increase in research and development expenses was primarily due to an increase in expenses related to Omnipod DASH and our Omnipod Horizon automated insulin delivery system. Research and development expenses also increased due to engineering and operational costs, such as training and start up activities, associated with our newly constructedU.S. manufacturing facility at which production began in 2019. Sales and Marketing Sales and marketing expenses for 2018 increased$22.0 million , or 18% to$146.2 million in 2018, compared with$124.2 million in 2017. This increase in sales and marketing expenses was primarily due to investments to support our mid-2018 transition to direct sales of Omnipod inEurope as well as the expansion of ourU.S. sales force and customer support personnel. These increases were partially offset by the capitalization of commission costs related to new customer contracts in connection with the adoption of new revenue recognition guidance described in Note 2 to the consolidated financial statements. General and Administrative General and administrative expenses for 2018 increased$21.4 million , or 25%, to$106.1 million , compared with$84.7 million in 2017. This increase in general and administrative expenses was primarily due to$12.6 million of severance charges associated with the retirement of our former CEO, of which$8.2 million related to stock-based compensation expense for the accelerated vesting of equity awards. General and administrative expenses also increased due to personnel costs to support the establishment of our direct commercial operations inEurope . Interest Expense, Net of Portion Capitalized Interest expense, net for 2018 increased$7.7 million , or 36%, to$28.9 million , compared with to 2017. Interest expense, net for 2018 includes$9.8 million of cash interest expense and$29.3 million of non-cash interest expense associated with our convertible debt, partially offset by$10.2 million of interest capitalized as part of the cost of ourU.S. manufacturing facility. The increase in interest expense, net was primarily due to the full year effect of interest expense associated with our 1.375% Notes, which were issued inNovember 2017 , partially offset by a$7.1 million increase in capitalized interest. Interest and Other Income, Net Interest and other income, net increased$4.1 million , to$6.7 million for 2018, compared with 2017. This increase was primarily due to an increase in interest income on our investment portfolio. Income Tax Expense Income tax expense was$1.9 million in 2018, compared with$0.2 million in 2017. The increase of$1.7 million in income tax expense was primarily due to growth in our international operations where we do not have net operating loss carryforwards. See Note 18 to the consolidated financial statements for additional information on our income tax expense. Liquidity and Capital Resources As ofDecember 31, 2019 , we had$213.7 million in cash and cash equivalents and$220.8 million of investments in marketable securities. 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. Convertible Debt To finance our operations and global expansion, we have periodically issued convertible senior notes, which are convertible into our common stock. InSeptember 2019 , we issued$800.0 million aggregate principal amount of 0.375% Convertible Senior Notes dueSeptember 2026 . The net proceeds of$780.2 million were used to partially fund the redemption of our 1.25% Convertible Senior Notes dueSeptember 2021 and for the purchase of capped call options ("Capped Calls") on our common stock. By entering into the Capped Calls, we expect to reduce the potential dilution to our common stock (or, in the event the conversion is settled in cash, to provide a source of cash to settle a portion of our cash payment obligation) in the event that at the time of conversion our stock price exceeds the conversion price under the Convertible Senior Notes. The Capped Calls have an initial strike price of$335.90 per share and cover 3.5 million shares of our common stock. 37
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As of
Initial
Conversion Conversion
Principal Rate per Price
Outstanding Share of per Share of
Issuance Date Coupon (in millions) Due Date Common Stock Common Stock
November 2017 1.375% $ 402.5 November 2024 10.7315 $93.18
September 2019 0.375% 800.0 September 2026 4.4105 $226.73
Total $ 1,202.5
Additional information regarding our debt issuances is provided in Note 12 to
the consolidated financial statements.
Summary of Cash Flows
Years Ended December 31,
(in millions) 2019 2018
Cash provided by (used in):
Operating activities $ 98.4 $ 35.9
Investing activities (73.6 ) (184.5 )
Financing activities 73.5 (8.7 )
Effect of exchange rate changes on cash 1.5 (1.4 )
Net increase (decrease) in cash and cash equivalents $ 99.8 $ (158.7 )
The discussion of our operating, financing and investing activities for 2017 has been omitted from this Form 10-K but can be found in Item 7. Management's Discussion and Analysis and Results of Operations in our Form 10-K/A for the fiscal year endedDecember 31, 2018 filed with theSecurities and Exchange Commission onFebruary 28, 2019 . Operating Activities Net cash provided by operating activities of$98.4 million in 2019 was primarily attributable to net income, as adjusted for non-cash interest, stock-based compensation, depreciation and amortization, partially offset by a$19.7 million working capital cash outflow. The working capital outflow was driven by a$30.2 million increase in inventories and a$21.9 million increase in prepaid expenses and other assets, partially offset by a$36.2 million increase in accounts payable, accrued expenses and other current liabilities, primarily driven by timing of payments. The increase in inventories was primarily due to an increase in raw materials and finished goods related to the startup of ourU.S. manufacturing plant and an increase in work-in-process to support demand for our product. The increase in prepaid expenses and other assets was primarily driven by an increase in operating lease assets resulting from new leases entered into during the year and an increase in deferred commissions. Net cash provided by operating activities of$35.9 million in 2018 was primarily attributable to net income, as adjusted for stock-based compensation, non-cash interest, depreciation and amortization, partially offset by a$52.8 million working capital cash outflow. The working capital outflow was driven by a$38.8 million increase in inventories to support higher demand for our product and a$22.9 million increase in accounts and unbilled receivables driven by our shift to direct sales of the Omnipod inEurope and the adoption of new revenue guidance onJanuary 1, 2018 , which resulted in recording$13.4 million of unbilled revenue atDecember 31, 2018 . Investing Activities Net cash used in investing activities was$73.6 million and$184.5 million in 2019 and 2018, respectively.Capital Spending-Capital expenditures were$163.7 million and$157.4 million for 2019 and 2018, respectively, primarily associated with the construction of our manufacturing and corporate headquarters facility inActon, Massachusetts . We expect capital expenditures for 2020 to be relatively consistent with 2019 as we continue to expand manufacturing capacity to support our growth and the launch of Omnipod Horizon. We expect to fund our capital expenditures using a combination of existing cash and investments as well as cash generated from operations. Purchases and Sales of Investments-During 2019, net sales of marketable securities were$97.3 million , compared with net purchases of marketable securities of$22.1 million for 2018. The increase in net sales of marketable securities was driven by a shift in a portion of our investment portfolio to investments that are classified as cash equivalents in order to satisfy future cash needs. Financing Activities Net cash provided by financing activities was$73.5 million in 2019, compared with net cash used in financing activities of$8.7 million in 2018. 38
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Debt Issuance and Repayment-As previously discussed under "Convertible Debt" during 2019, we received net proceeds of$780.2 million from the issuance of our 0.375% Notes. We used$663.6 million of the proceeds to partially fund the redemption of our 1.25% Notes and$85.4 million to purchase Capped Calls. During 2018, we paid$6.7 million to settle all our outstanding 2% Notes. Option Exercises and Issuance of Shares Under Employee Stock Purchase Plan ("ESPP")-Total proceeds from option exercises and the issuance of common stock under our ESPP increased$35.1 million to$50.9 million in 2019, compared with$15.8 million in 2018. This increase was primarily driven by option exercises stemming from the retirement of our former CEO and the departure of other executives, partially offset by a$9.2 million decrease in payments of withholding taxes related to net restricted share settlements. The decrease in tax payments was driven by a reduction in the vesting of restricted shares in 2019, compared with 2018, which was also due to the retirement of our former CEO and departure of other executives in 2018 and 2019, respectively. Commitments and Contingencies Contractual Obligations-A summary of our contractual obligations and commitments for debt, operating lease obligations and other obligations atDecember 31, 2019 is presented in the following table: (in millions) Total 2020 2021 2022 2023 2024 Thereafter Operating lease obligations$ 20.6 $ 4.7 $ 5.0 $ 4.7 $ 2.3 $ 2.4 $ 1.5 Debt obligations 1,202.5 - - - - 402.5 800.0 Interest payments 46.9 8.5 8.5 8.5 8.5 7.8 5.1 Purchase obligations (1) 158.7 115.8 40.9 2.0 - - - Total contractual obligations$ 1,428.7 $ 129.0 $ 54.4 $ 15.2 $ 10.8 $ 412.7 $ 806.6
(1) Purchase obligations include commitments for the purchase of Omnipod System
components, commitments related to establishing additional manufacturing
capabilities and other commitments for purchases of goods or services in the
normal course of business. These commitments are derived from purchase
orders, supplier contracts and open orders based on projected demand
information.
Following the expiration of an agreement with a former European distributor on
June 30, 2018 , we were required to pay a quarterly per-unit fee for Omnipod
sales to certain customers of the former European distributor for a one-year
period through June 30, 2019 . The methodology applicable for determining the
total fee under the distribution agreement is subject to an active arbitration
proceeding in Switzerland . The final amount of the fee could vary significantly
depending on the number of customers who count for purposes of calculating the
fee under the terms of the agreement; accordingly, this fee has been excluded
from the contractual obligations table above. We estimate that the final
aggregate fee for the applicable twelve-month period could be in the range of $5
million to $55 million . We paid $3.8 million and $1.3 million of this fee during
2019 and 2018, respectively.
Off-Balance Sheet Arrangements
As of December 31, 2019 , we had various outstanding letters of credit and bank
guarantees totaling $2.9 million , none of which are individually significant.
The Company has restricted cash that serves as collateral for these outstanding
letters of credit and bank guarantees that is included in cash and cash
equivalents on the consolidated balance sheet.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with U.S.
GAAP requires management to use judgment in making estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue and expenses,
and related disclosure of contingent assets and liabilities. The following
accounting policies are based on, among other things, judgments and assumptions
made by management that include inherent risks and uncertainties. Management's
estimates are based on the relevant information available at the end of each
period.
Revenue Recognition
We recognize revenue when a customer obtains control of the promised products in
an amount that reflects the net consideration to which we expect to be entitled.
We sell products both direct to consumers and through distributors who resell
the products to consumers. Transaction price is typically based on contracted
rates less any estimates of claim denials and historical reimbursement
experience, guidelines and payor mix, and less estimated variable consideration
adjustments including rebates. Recognizing revenue requires us to exercise
judgment and use estimates that can have a significant impact on the amount and
timing of revenue we report. We exercise significant judgment when we determine
the transaction price, including variable consideration adjustments. The amount
of variable consideration that is included in the transaction price is included
in revenue only to the extent that it is probable that a significant reversal in
the amount of the cumulative revenue recognized will not occur in a future
period. We estimate reductions to our revenues for rebates paid to distributors
in the United States and Canada and pharmacy benefit managers ("PBM") in the
United States . Rebates are based on contractual arrangements, which may vary.
Our estimates are based on products
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sold, historical experience, trends and, as available, channel inventory data. Rebates charged against gross sales amounted to$59.1 million ,$34.1 million and$16.1 million in 2019, 2018 and 2017, respectively. Provisions for rebates, sales discounts and returns, are accounted for as a reduction of sales when revenue is recognized and are included within accounts receivable trade or accrued expenses and other current liabilities on our consolidated balance sheets, based upon the recipient of the rebate. If the actual amounts of consideration that we receive differ from our estimates, we would adjust our estimates and that would affect reported revenue in the period that such variances become known. Our drug delivery product line includes sales of a modified version of the Omnipod to pharmaceutical and biotechnology companies who use our technology as a delivery method for their drugs. Revenue from the drug delivery product was$64.7 million for 2019. Revenue for this product line is recognized as the product is produced. Accounting for drug delivery revenue requires us to select a method to measure progress towards the satisfaction of the performance obligation. This election of the most meaningful measure of progress by which to recognize drug delivery revenue requires the application of judgment. We elected the input method and selected a blend of cost and time to produce as the measure of progress. Accordingly, revenue is recognized over time using a blend of costs incurred to date relative to total estimated costs at completion and time incurred to date relative to total production time to measure progress toward the satisfaction of our performance obligations. We believe that both incurred cost and elapsed time reflect the value generated, which best depicts the transfer of control to the customer. Contract costs include third party costs as well as an allocation of manufacturing overhead. Changes from quarter to quarter in quantity and stage of production of in-process inventory could have a significant quarterly impact on revenue. Product Warranty We provide a four-year warranty on our PDMs sold inthe United States andEurope and a five-year warranty on PDMs sold inCanada and may replace Pods that do not function in accordance with product specifications. We estimate our warranty obligation 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 in the consolidated statements of operations. Costs to service the claims reflect the current product cost. Since we continue to introduce new products and versions, the anticipated performance of the product over the warranty period is also considered in estimating warranty reserves. Changes to the actual replacement rates, which are evaluated quarterly, could have a material impact on our estimated warranty reserve. Accounts Receivable and Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We evaluate the collectability of our accounts receivable based on a combination of factors. We regularly analyze customer accounts, review the length of time receivables are outstanding, review historical loss rates and assess current economic trends that may impact the level of credit losses in the future. Our allowance for doubtful accounts has generally been adequate to cover our actual credit losses. However, since we cannot reliably predict future changes in the financial stability of our customers, we may need to increase our reserves if the financial conditions of our customers deteriorate. Contingencies We are involved in various legal proceedings that arise in the ordinary course of business as further discussed in Note 13 to our consolidated financial statements, including an ongoing arbitration proceeding with a former European distributor. Accruals recorded for various contingencies including legal proceedings, self-insurance and other claims, are based on judgment, both regarding the probability of losses and range of loss, and, where applicable, include the consideration of opinions of internal and/or external legal counsel. When a range is established but a best estimate cannot be made, we record the minimum loss contingency amount, which could be zero. An estimate is often initially developed substantially earlier than the ultimate loss is known and is reevaluated each accounting period. As information becomes known, additional loss provision is recorded when either a best estimate can be made, or the minimum loss amount is increased. When events result in an expectation of a more favorable outcome than previously expected, our best estimate is changed to a lower amount. We record receivables from third-party insurers up to the amount of the related liability when we have determined that existing insurance policies will provide reimbursement. In making this determination, we consider applicable deductibles, policy limits and the historical payment experience of the insurance carriers. Accounting Standards Issued and Not Yet Adopted as ofDecember 31, 2019 InDecember 2019 , theFinancial Accounting Standards Board ("FASB") issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminates certain exceptions in the current guidance regarding the approach for intraperiod tax allocations, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This new guidance also simplifies the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies such things as the accounting for transactions that result in a step up in the tax basis of goodwill. The guidance is effective for us beginning in the first quarter of 2021 with early adoption permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements. 40
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InJanuary 2017 , the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 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 us beginning in the first quarter of 2020. Early adoption is permitted. We do not expect the adoption of this guidance to impact our consolidated financial statements. InJune 2016 , the FASB issued ASU 2016-13, Credit Losses (Topic 326) ("ASU 2016-13"). ASU 2016-13 requires financial assets measured at amortized cost, such as our trade receivables and contract assets, to be presented net of expected credit losses, which may be estimated based on relevant information such as historical experience, current conditions and future expectation for each pool of similar financial assets. The new guidance also requires enhanced disclosures related to trade receivables and associated credit losses. The guidance is effective for us beginning in the first quarter of 2020. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements. Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "targets," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, results of operations and financial condition. Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements. The risk factors discussed in "Risk Factors" could cause our results to differ materially from those expressed in forward-looking statements. In addition, there may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. We expressly disclaim any obligation to update these forward-looking statements other than as required by law. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk The primary objectives of our investment strategy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. To minimize our exposure to an adverse shift in interest rates, we invest mainly in cash equivalents and short-term investments in a variety of securities, including money market funds,U.S. Treasury debt and corporate debt securities. Due to the short-term nature of our investments, we believe that we have no material exposure to interest rate risk. Market Price Sensitive Instruments As ofDecember 31, 2019 , we had outstanding debt related to our convertible senior notes recorded on our consolidated balance sheet of$887.9 million , net of unamortized discount and issuance costs totaling$314.6 million . Changes in the fair value of our outstanding debt, which could be impacted by changes in interest rates, are not recorded in these consolidated financial statements as the debt is accounted for at cost less unamortized discount and issuance costs. The fair value of the debt, which was$1.35 billion as ofDecember 31, 2019 , is also impacted by changes in our stock price. In order to reduce potential equity dilution, in connection with the issuance of$800.0 million aggregate principal amount of 0.375% Notes, we entered into capped call options "Capped Calls". We expect the Capped Calls to reduce the potential dilution to our common stock (or, in the event the conversion is settled in cash, to provide a source of cash to settle a portion of our cash payment obligation) in the event that at the time of conversion our stock price exceeds the conversion price under the 0.375% Notes. The Capped Calls have an initial strike price of$335.90 per share and cover 3.5 million shares of common stock. Foreign Currency Exchange Risk Foreign currency risk arises from our investments in subsidiaries owned and operated in non-U.S. countries. Such risk is also a result of transactions with customers in countries outsidethe United States . Approximately 34% of our revenue was denominated in foreign currencies for the year endedDecember 31, 2019 . As our business in regions outside ofthe United States continues to increase, we will be increasingly exposed to foreign currency exchange risk related to our foreign operations. The cost of revenue related to revenue generated outside ofthe United States is primarily denominated inU.S. dollars; however, operating costs related to these revenues are largely denominated in the same respective currencies, thereby partially limiting our transaction risk exposure. Fluctuations in the rate of exchange betweenthe United States dollar and foreign currencies, primarily the Euro, British Pound and Canadian Dollar, could adversely affect our financial results, including our revenues, revenue growth rates, gross margins, income and losses as well as assets and liabilities. 41
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We have intercompany receivables and payables from our foreign subsidiaries that are denominated in foreign currencies, principally the Euro, the British pound and the Canadian dollar. Fluctuations from the beginning to the end of a reporting period result in the revaluation of our foreign currency-denominated intercompany receivables and payables, generating currency translation gains or losses. Net realized and unrealized gains (losses) from foreign currency transactions are included in interest and other income, net in the consolidated statement of operations and amounted to$0.6 million for the year endedDecember 31, 2019 . Item 8. Financial Statements and Supplementary Data Our financial statements as ofDecember 31, 2019 and 2018 and for each of the three years in the period endedDecember 31, 2019 , and the Report of the Registered Independent Public Accounting Firm are included in this report as listed in the index. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm
43
Consolidated Balance Sheets as ofDecember 31, 2019 and 2018
45
Consolidated Statements of Operations for the Years ended
46
Consolidated Statements of Comprehensive I ncome (Loss) for the Years
Ended
47
Consolidated Statements of Stockholders' Equity for the Years ended
48
Consolidated Statements of Cash Flows for the Years ended
49
Notes to Consolidated Financial Statements 50
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Insulet Corporation
Opinions on the financial statements and internal control over financial
reporting
We have audited the accompanying consolidated balance sheets of Insulet
Corporation (a Delaware corporation) and subsidiaries (the "Company") as of
December 31, 2019 and 2018, and the related consolidated statements of
operations, comprehensive income (loss), changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2019 ,
and the related notes and schedule (collectively referred to as the "financial
statements"). We also have audited the Company's internal control over financial
reporting as of December 31, 2019 , based on criteria established in the 2013
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO").
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2019 and 2018, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2019 in conformity with
accounting principles generally accepted in the United States of America . Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2019 , based on
criteria established in the 2013 Internal Control-Integrated Framework issued by
COSO.
Basis for opinions
The Company's management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
Company's financial statements and an opinion on the Company's internal control
over financial reporting based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States )
("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 audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the financial statements 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 regarding 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. Our
audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
Definition and limitations of internal control over financial reporting
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Critical audit matters
The critical audit matters communicated below are matters arising from the
current period audit of the financial statements that were communicated or
required to be communicated to the audit committee and that: (1) relate to
accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on
the financial statements, taken as a whole, and
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we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition - Drug Delivery As described in Note 4 to the consolidated financial statements, the Company's revenue from drug delivery was$64.7 million for the year endedDecember 31, 2019 . Drug delivery revenue is recognized over time based on the Company's determination of the pattern over which control transfers to the customer. This transfer of control begins during the manufacturing process and continues through the final quality control inspection process until there is complete satisfaction of the performance obligation. We identified drug delivery revenue recognition and the associated unbilled receivable as a critical audit matter. The principal considerations for our determination that this matter is a critical audit matter are as follows: Accounting for drug delivery revenue requires the Company to select a method to measure progress towards the satisfaction of the performance obligation. This election of the most meaningful measure of progress by which to recognize drug delivery revenue requires the application of significant Management judgment. The Company elected the input method and selected a blend of cost and time to produce for measure of progress. Given the nature of the revenue being recognized, additional audit effort including modification of the nature and extent of our procedures beyond that of the Company's other revenue streams was required. Our audit procedures included, but were not limited to, the following: • We tested the design and operating effectiveness of controls relating to
Management's estimate of the measure of progress.
• For the measure of progress, we inspected evidence related to the cost and
length of the production cycle.
• For revenue recognized on in-process or finished goods inventory not yet
shipped to the customer (and the related unbilled receivable), we
inspected customer orders, binding customer forecasts, inventory records,
and confirmed inventory quantities directly with third parties when
applicable.
Convertible Debt Offering and Note Repurchase As described in Note 12 to the consolidated financial statements, the Company completed a private placement offering of$800 million in 0.375% Convertible Senior Notes (the "New Notes"), with the proceeds partially used to repurchase the previously outstanding 1.25% Convertible Senior Notes (the "Existing Notes"). We identified these transactions as a critical audit matter. The principal considerations for our determination that this matter is a critical audit matter are as follows. Accounting for the convertible debt offering and the repurchase of the Existing Notes was a significant unusual transaction that required extensive audit effort. This included the involvement of technical accounting specialists to evaluate Management's conclusions surrounding the bifurcation of the notes between debt and equity and the extinguishment conclusion for the repurchase of the Existing Notes. Additionally, valuation specialists were included to determine the fair value of the equity component of the New Notes and the fair value of the Existing Notes utilized in the determination of the loss on extinguishment. This included the evaluation of the market yield input, which was derived using a Binomial Option Pricing Model. Our audit procedures included, but were not limited to, the following: • We tested the control design and operating effectiveness related to the accounting for the transaction including Management's evaluation of the qualifications of specialists and review of the work performed by the specialists.
• We traced all key terms, and amounts to source documents, including the
related offering memorandums and purchase agreements.
• We supplemented the engagement team with technical accounting specialists
to confirm Management's accounting conclusions including the determination
that the New Notes be bifurcated between debt and equity as well as the
determination that the repurchase of a portion of the Existing Notes be
accounted for as an extinguishment of debt.
• With the assistance of valuation professionals with specialized skills and
knowledge, we tested Management's valuation of both the New Notes and the
Existing Notes which included a recalculation of the related amounts and
an assessment of the appropriateness of the methodology, inputs, and
assumptions used.
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2016.
Boston, Massachusetts
February 25, 2020
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INSULET CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31,
(in millions, except share and per share data) 2019 2018
ASSETS
Current Assets
Cash and cash equivalents $ 213.7 $ 113.9
Short-term investments 162.4 175.0
Accounts receivable trade, less allowance for doubtful
accounts of $3.8 and $3.6 69.3 63.3
Unbilled receivable 13.5 13.4
Inventories 101.0 71.4
Prepaid expenses and other current assets 31.1 24.3
Total current assets 591.0 461.3
Long-term investments 58.4 140.8
Property, plant and equipment, net 399.4 258.4
Other intangible assets, net 13.2 10.4 Goodwill 39.8 39.6 Other assets 41.1 18.2 Total assets$ 1,142.9 $ 928.7 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable$ 54.5 $ 25.5 Accrued expenses and other current liabilities 103.2 90.2 Total current liabilities 157.7 115.7 Convertible debt, net 887.9 592.0 Other liabilities 21.4 8.9 Total liabilities 1,067.0 716.6 Commitment and Contingencies (Note 13) Stockholders' Equity Preferred stock,$.001 par value: Authorized: 5,000,000 shares atDecember 31, 2019 and 2018. Issued and outstanding: zero shares atDecember 31, 2019 and 2018. -
-
Common stock,$.001 par value: Authorized: 100,000,000 shares atDecember 31, 2019 and 2018. Issued and outstanding: 62,685,492 and 59,188,758 shares at December 31, 2019 and 2018, respectively. 0.1 0.1 Additional paid-in capital 749.0 898.5 Accumulated deficit (672.0 ) (683.6 ) Accumulated other comprehensive loss (1.2 ) (2.9 ) Total stockholders' equity 75.9
212.1
Total liabilities and stockholders' equity$ 1,142.9
The accompanying notes are an integral part of these consolidated financial
statements.
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INSULET CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
(in millions, except share and per share data) 2019 2018 2017
Revenue $ 738.2 $ 563.8 $ 463.8
Cost of revenue 257.9 193.6 186.6
Gross profit 480.3 370.2 277.2
Operating expenses:
Research and development 129.7 90.5 75.7
Sales and marketing 185.1 146.2 124.2
General and administrative 115.5 106.1 84.7
Total operating expenses 430.3 342.8 284.6
Operating income (loss) 50.0 27.4 (7.4 )
Interest expense, net of portion capitalized (34.6 ) (28.9 ) (21.2 )
Loss on extinguishment of debt (8.7 ) - (0.6 )
Interest and other income, net 7.8 6.7 2.6
Income (loss) before income taxes 14.5 5.2 (26.6 )
Income tax expense (2.9 ) (1.9 ) (0.2 )
Net income (loss) $ 11.6 $ 3.3 $ (26.8 )
Net income (loss) per share:
Basic $ 0.19 $ 0.06 $ (0.46 )
Diluted $ 0.19 $ 0.05 $ (0.46 )
Weighted-average number of common shares outstanding:
Basic 60,593,846 58,859,574 58,003,434
Diluted 62,304,348 61,008,024 58,003,434
The accompanying notes are an integral part of these consolidated financial
statements.
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INSULET CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31,
(in millions) 2019 2018 2017
Net income (loss) $ 11.6 $ 3.3 $ (26.8 )
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment, net of
tax 0.6 (2.2 ) 0.5
Unrealized gain (loss) on available-for-sale
securities, net of tax 1.1 (0.2 ) (0.3 )
Total other comprehensive income (loss), net of
tax 1.7 (2.4 ) 0.2
Total comprehensive income (loss) $ 13.3 $
0.9
The accompanying notes are an integral part of these consolidated financial
statements.
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INSULET CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Total
(in millions, except share Paid-in Accumulated Accumulated Other Stockholders' data)
Shares Amount Capital
Deficit Comprehensive Loss Equity
Balance,
(680.5 ) $ (0.7 ) $ 63.1
Exercise of options to
purchase common stock 505,207 - 14.0 - - 14.0
Issuance of shares for
employee stock purchase plan 59,134 - 1.8 - - 1.8
Stock-based compensation
expense - - 31.9 - - 31.9
Restricted stock units
vested, net of shares
withheld for taxes 297,040 - (4.0 ) - - (4.0 )
Allocation to equity for
conversion feature on 1.375%
Notes, net of issuance costs - - 117.5 - - 117.5
Extinguishment of conversion
feature on 2% Notes, net of
issuance costs - - (39.2 ) - - (39.2 )
Net loss - - - (26.8 ) - (26.8 )
Other comprehensive income - - - - 0.2 0.2
Balance, December 31, 2017 58,319,348 0.1 866.2 (707.3 ) (0.5 ) 158.5
Exercise of options to
purchase common stock 409,428 - 12.8 - - 12.8
Issuance of shares for
employee stock purchase plan 46,343 - 3.0 - - 3.0
Stock-based compensation
expense 37.5 - - 37.5
Restricted stock units
vested, net of shares
withheld for taxes 413,639 - (17.8 ) - - (17.8 )
Extinguishment of conversion
feature on 2% Notes, net of
issuance costs - - (3.2 ) - - (3.2 )
Adoption of ASC 606 (Note 2) - - - 20.4 - 20.4
Net income - - - 3.3 - 3.3
Other comprehensive loss - - - - (2.4 ) (2.4 )
Balance, December 31, 2018 59,188,758 0.1 898.5 (683.6 ) (2.9 ) 212.1
Exercise of options to
purchase common stock 1,340,297 - 46.6 - - 46.6
Issuance of shares for
employee stock purchase plan 51,502 - 4.3 - - 4.3
Stock-based compensation
expense - - 28.7 - - 28.7
Restricted stock units
vested, net of shares
withheld for taxes 229,770 - (8.6 ) - - (8.6 )
Conversion feature of 0.375%
Notes, net of issuance costs - - 207.8 - - 207.8
Extinguishment of conversion
feature on 1.25% Notes, net
of issuance costs - - (642.3 ) - - (642.3 )
Issuance of shares for debt
repayment 1,875,165 - 299.4 - - 299.4
Purchase of capped call
options - - (85.4 ) - - (85.4 )
Net income - - - 11.6 - 11.6
Other comprehensive income - - - - 1.7 1.7
Balance,
(672.0 ) $ (1.2 ) $ 75.9 The accompanying notes are an integral part of these consolidated financial
statements.
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INSULET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(in millions) 2019 2018 2017
Cash flows from operating activities
Net income (loss) $ 11.6 $ 3.3 $ (26.8 )
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 27.9 15.6 13.9
Non-cash interest expense 35.6 29.3 18.0
Stock-based compensation expense 28.7 37.5 31.9
Loss on extinguishment of convertible debt 8.7 - 0.6
Provision for bad debts 4.5 3.4 1.9
Other 1.1 (0.4 ) 0.1
Changes in operating assets and liabilities:
Accounts and unbilled receivable (10.9 ) (22.9 ) (26.3 )
Inventories (30.2 ) (38.8 ) 1.7
Deferred revenue 2.0 (3.8 ) 1.1
Prepaid expenses and other assets (21.9 ) (11.6 ) (3.3 ) Accounts payable, accrued expenses and other current liabilities
36.2 21.2 27.3
Other long-term liabilities 5.1 3.1 1.2
Net cash provided by operating activities 98.4 35.9 41.3
Cash flows from investing activities
Capital expenditures (163.7 ) (157.4 ) (73.8 )
Acquisition of intangible assets (7.2 ) (5.0 ) (3.4 )
Purchases of investments (150.6 ) (191.4 ) (298.0 )
Receipts from the maturity or sale of investments 247.9 169.3 164.4
Net cash used in investing activities (73.6 ) (184.5 ) (210.8 )
Cash flows from financing activities
Principal payments of capital lease obligations - - (0.3 ) Proceeds from issuance of convertible debt, net of issuance costs
780.2 - 391.6
Purchase of capped call options (85.4 ) - -
Repayment of convertible debt (663.6 ) (6.7 ) (98.5 )
Proceeds from exercise of stock options and issuance
of common stock under employee stock purchase plan 50.9 15.8 15.8
Payment of withholding taxes in connection with
vesting of restricted stock units (8.6 ) (17.8 ) (4.1 )
Net cash provided by (used in) financing activities 73.5 (8.7 ) 304.5
Effect of exchange rate changes on cash 1.5 (1.4 ) 0.4
Net increase (decrease) in cash and cash equivalents 99.8 (158.7 ) 135.4
Cash and cash equivalents, beginning of year 113.9 272.6 137.2
Cash and cash equivalents, end of year $ 213.7 $
113.9
Supplemental cash flow information Cash paid for interest, net of amount capitalized $ - $ -$ 2.5 Cash paid for taxes$ 2.5 $
0.8
$ 13.3 $ 11.4 $ 3.8
The accompanying notes are an integral part of these consolidated financial
statements.
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INSULET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of the Business
Insulet Corporation (the "Company") is primarily engaged in the development,
manufacture and sale of its proprietary Omnipod System, an innovative,
continuous insulin delivery system for people with insulin-dependent diabetes.
The Omnipod System features a small, lightweight, self-adhesive disposable
tubeless Omnipod device that is worn on the body for up to three days at a time
(the "Pod"), and its wireless companion, the handheld Personal Diabetes Manager
("PDM"). The Omnipod System, which features two discreet, easy-to-use devices,
communicates wirelessly, provides for virtually pain-free automated cannula
insertion and eliminates the need for multiple daily injections using syringes
or insulin pens or the use of traditional pump and tubing. The Omnipod System
consists of two product lines: the Omnipod Insulin Management System ("Omnipod")
and its next generation Omnipod DASHTM Insulin Management System ("Omnipod DASH"
or "DASH"). Omnipod DASH features a secure Bluetooth enabled Pod and PDM with a
color touch screen user interface supported by smartphone connectivity.
The Company generates most of its revenue from sales of the Omnipod System,
which is sold in the U.S. , Europe , Canada and the Middle East . The Omnipod
System is sold either directly to end-users or indirectly through
intermediaries. Intermediaries include independent distributors who resell the
Omnipod to end-users and wholesalers who sell the Company's product to end-users
through the pharmacy channel in the United States .
In addition to selling the Omnipod System for insulin delivery, the Company also
partners with global pharmaceutical and biotechnology companies to tailor the
Omnipod System technology platform for the delivery of subcutaneous drugs across
other therapeutic areas. The majority of the Company's drug delivery revenue
consists of sales of Pods to Amgen for use in the Neulasta Onpro kit, an
innovative delivery system for Amgen's white blood cell booster to help reduce
the risk of infection after intense chemotherapy.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements reflect the consolidated operations of
Insulet Corporation and its subsidiaries. The consolidated financial statements
have been prepared in United States dollars, in accordance with accounting
principles generally accepted in the United States of America (GAAP). The
preparation of the consolidated financial statements in conformity with GAAP
requires management to make use of estimates and assumptions that affect the
reported amount of assets and liabilities, disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses. Actual results
may differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany balances and transactions have
been eliminated.
Reclassification of Prior Period Amounts
Certain reclassifications have been made to prior period amounts to conform to
the current period financial statement presentation. Software license costs have
been reallocated from general and administrative expenses to research and
development and sales and marketing expenses based on license usage. These
reclassifications have no effect on previously reported net income.
Foreign Currency Translation
For the foreign subsidiaries of the Company, assets and liabilities are
translated into U.S. dollars using exchange rates as of the balance sheet date,
and income and expenses are translated using the average exchange rates in
effect for the related month. The net effect of these translation adjustments is
reported in accumulated other comprehensive loss within stockholders' equity on
the consolidated balance sheet. Net realized and unrealized gains (losses) from
foreign currency transactions are included in interest and other income, net in
the consolidated statement of operations and were $0.6 million and $1.0 million
for the years ended December 31, 2019 and 2018, respectively. The amount for
2017 was insignificant.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of 90 days
or less at the time of purchase to be cash equivalents. Cash equivalents include
money market mutual funds, commercial paper and U.S. government and agency bonds
that are carried at cost, which approximates their fair value. Restricted cash
that serves as collateral for outstanding letters of credit are included in cash
and cash equivalents on the consolidated balance sheet.
Investments in Marketable Securities
Short-term and long-term investment securities consist of certificates of
deposit, commercial paper, U.S. government and agency bonds and corporate bonds.
Theses available-for-sale marketable securities are carried at fair value and
unrealized gains and losses
50
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are included as a component of other comprehensive loss in stockholders' equity
on the consolidated balance sheet. Investments 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 on the
consolidated balance sheet. 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 included in other income, net in the
consolidated statement of operations.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable consist of amounts due from third-party payors,
customers and intermediaries and are presented net of an allowance for doubtful
accounts. The allowance for doubtful accounts reflects an estimate of losses
inherent in the Company's accounts receivable portfolio determined based on
historical experience, specific allowances for known troubled accounts and other
available evidence. Accounts receivable are written off when management
determines they are uncollectible.
Inventories
Inventories are stated at the lower of cost or net realizable value, with cost
determined under the first-in, first-out method. The Company reduces the
carrying value of inventories for those items that are potentially excess,
obsolete or slow-moving based on changes in customer demand, technology
developments or other economic factors in order to state inventories at net
realizable value. Factors influencing these adjustments include inventories on
hand compared to estimated future usage and sales. Work in process is calculated
based upon a buildup of cost based on the stage of production. Manufacturing
variances attributable to abnormally low production are expensed in the period
incurred.
Contract Acquisition Costs
The Company incurs commission costs to obtain a contract related to new customer
starts. These costs are capitalized as contract assets in other assets, net of
the short-term portion included in prepaid and other current assets. Costs to
obtain a contract are amortized as sales and marketing expense on a
straight-line basis over the expected period of benefit, which considers future
product upgrades for which a commission would be paid. These costs are
periodically reviewed for impairment.
Fair Value Measurements
Fair value is defined as the price that would be received from the sale of an
asset or paid to transfer a liability in the principal or most advantageous
market in an orderly transaction between market participants on the measurement
date. When estimating fair value, the Company may use one or all 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 of assets and liabilities, the Company uses the following
fair value hierarchy based on three levels of inputs:
Level 1 - observable inputs, such as quoted prices in active markets for
identical assets or liabilities;
Level 2 - significant other observable inputs that are observable either
directly or indirectly;
Level 3 - significant unobservable inputs for which there is little or no market
data, which require the Company 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
their short-term maturity. See Notes 5 and 12 for financial assets and
liabilities held at carrying amount on the consolidated balance sheet and Note 6
for investments measured at fair value on a recurring basis.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation.
Major improvements are capitalized, while routine repairs and maintenance are
expensed as incurred. Depreciation for property, plant and equipment, other than
land and construction in progress, is based upon the following estimated useful
lives using the straight-line method:
Building and building improvements 20 to 39 years
Leasehold improvements Lesser of lease term or useful life of asset
Machinery and equipment 2 to 15 years
Furniture and fixtures 3 to 5 years
51-------------------------------------------------------------------------------- The Company assesses the recoverability of assets whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable. The Company recognizes an impairment loss if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows. The impairment loss is measured as the difference between the carrying amount and the fair value of the asset. Business Combinations The Company recognizes the assets and liabilities assumed in business combinations based on their estimated fair values at the date of acquisition. The Company allocates the purchase price in excess of net tangible assets acquired to identifiable intangible assets. 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. 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. Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price of an acquired entity over the amounts assigned to assets and liabilities assumed in a business combination. The Company performs an assessment of its goodwill for impairment annually onOctober 1 or whenever events or changes in circumstances indicate there might be impairment. Goodwill is evaluated for impairment at the reporting unit level. The Company may assess its goodwill for impairment initially using a qualitative approach to determine whether conditions exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. If management concludes, based on its assessment of relevant events, facts and circumstances that it is more likely that not that a reporting unit's carrying value is greater than its fair value, then a quantitative analysis will be performed to determine if there is any impairment. Alternatively, the Company may elect to initially perform a quantitative analysis instead of starting with a qualitative analysis. In performing the quantitative test, the Company utilizes a two-step approach. 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. Intangible assets acquired in a business combination are recorded at fair value, while intangible assets acquired in other transactions are recorded at cost and are stated at cost less accumulated amortization. Intangible assets with finite useful lives are amortized using the straight-line method over the following estimated useful lives of the assets: Customer relationships 5 - 10 years Internal-use software 3 - 10 years Intellectual property 15 years Amortization expense is included in operating expenses in the consolidated statement of operations. The Company reviews intangible assets for impairment by comparing the fair value of the assets, estimated using an income approach, with their carrying value. If the carrying value exceeds the fair value of the intangible asset, the Company recognizes an impairment equal to the difference between the carrying value of the asset and the present value of future cash flows. The Company assesses the remaining useful life and the recoverability of intangible assets whenever events or circumstances indicate that the carrying value of an asset may not be recoverable using undiscounted cash flows. Leases The Company determines if an arrangement includes a lease at inception. Lease agreements generally have lease and non-lease components, which are accounted for separately. At lease commencement, the Company recognizes operating lease liabilities equal to the present value of the lease payments and operating lease assets representing the right to use the underlying asset for the lease term. The Company assesses if it is reasonably certain to exercise lease options to extend or terminate the lease for inclusion or exclusion in the lease term when the Company measures the lease liability. As the Company's leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments. The Company's incremental borrowing rate estimates a secured rate that reflects the term of the lease, the nature of the underlying asset and the economic environment. The Company excludes leases with an expected term of one year or less from recognition on the consolidated balance sheet. Operating lease assets includes lease payments made prior to lease commencement and excludes lease incentives and initial direct costs incurred. Lease expense is recognized on a straight-line basis over the lease term and is included in general and administrative expenses in the consolidated statements of operations. 52 --------------------------------------------------------------------------------
Contingencies
The Company records a liability on the consolidated balance sheet for loss contingencies when a loss is 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. Product Warranty The Company provides a four-year warranty on its PDMs sold inthe United States andEurope and a five-year warranty on PDMs sold inCanada and may replace Pods that do not function in accordance with product specifications. The Company estimates its warranty obligation at the time the product is shipped based on historical experience and the estimated cost to service the claims. Warranty expense is recorded in cost of goods sold in the consolidated statements of operations. Costs to service the claims reflect the current product cost. Since the Company continues to introduce new products and versions, the anticipated performance of the product over the warranty period is also considered in estimating warranty reserves. Revenue Recognition EffectiveJanuary 1, 2018 , the Company adopted ASU 2014-09, Revenue from Contracts with Customers, and its related amendments (collectively referred to as ASC 606) using the modified retrospective method for all contracts not completed as of the date of adoption. The cumulate effect of applying the new revenue standard resulted in a$20.4 million decrease to the opening balance of accumulated deficit upon adoption, primarily related to how revenue is recognized for the Company's drug delivery product line and the capitalization of contract acquisition costs such as commissions. Financial information for 2017 has not been restated and continues to be reported under the guidance in effect prior to the adoption of ASC 606. Revenue is recognized when a customer obtains control of the promised products. The amount of revenue recognized reflects the consideration the Company expects to be entitled to receive in exchange for these products. To achieve this core principle, the Company applies the following five steps: • Identify Contracts with Customers. The Company's contracts with its direct
customers generally consist of a physician order form, a customer information
form and, if applicable, third-party insurance (payor) approval. Contracts
with the Company's intermediaries are generally in the form of master service
agreements against which firm purchase orders are issued. At the outset of
the contract, the Company assesses the customer's ability and intention topay, which is based on a variety of factors including historical payment
experience or, in the case of a new intermediary, published credit, credit
references and other available financial information pertaining to the
customer and, in the case of a new direct customer, an investigation of
insurance eligibility.
• Identify Performance Obligations. The performance obligations in contracts
for the delivery of the Omnipod to new end-users, either directly to
end-users or through intermediaries, primarily consist of the PDM and the
initial and subsequent quantity of Pods ordered. In the Company's judgment,
these performance obligations are capable of being distinct and distinct in
the context of the contract in that the customer can benefit from each item
in conjunction with other readily available resources and the transfer of the
PDM and the Pods is separately identifiable in the contract with the
customer.
• Determine Transaction Price. The price charged for the PDM and Pods is
dependent on the Company's pricing as established with third party payors and
intermediaries. The Company provides a right of return for sales of its
Omnipod to new end-users. The Company also provides for certain rebates and
discounts for sales of its product through intermediaries. These rights of
return, discounts and rebates represent variable consideration and reduce the
transaction price at the outset of the contract based on the Company's
estimates, which are primarily based on the expected value method using
historical and other data (such as product return trends or forecast sale
volumes) related to actual product returns, discounts and rebates paid in
each market in which the Omnipod is sold. Variable consideration is included
in the transaction price if it is probable that a significant future reversal
of cumulative revenue under the contract will not occur; otherwise, the
Company reduces the variable consideration. The variable consideration in the
Company's contracts is not typically constrained and the Company's contracts
do not contain significant financing components.
• Allocate Transaction Price to Performance Obligations. The Company allocates
the transaction price to each performance obligation based on its relative
stand-alone selling price, which is determined based on the price at which
the Company typically sells the deliverable or, if the performance obligation
is not typically sold separately, the stand-alone selling price is estimated
based on cost plus a reasonable profit margin or the price that a third party
would charge for a similar product or service.
• Recognize Revenue as Performance Obligations are Satisfied. The Company
transfers the Omnipod at a point in time, which is determined based on when
the customer gains control of the product. Generally, intermediaries in the
right to payment and transfer of title and risk of ownership. For sales
directly to end-users and international intermediaries, control is generally
transferred at the time of delivery based on customary business practices
related to risk of ownership, including transfer of title.
53-------------------------------------------------------------------------------- The Company's drug delivery product line includes sales of a modified version of the Omnipod to pharmaceutical and biotechnology companies who use the Company's technology as a delivery method for their drugs. For the majority of this product line, revenue is recognized as the product is produced pursuant to the customer's firm purchase commitments as the Company has an enforceable right to payment for performance completed to date and the inventory has no alternative use to the Company. Judgment is required in the assessment of progress toward completion of in-process inventory. The Company recognizes revenue over time using a blend of costs incurred to date relative to total estimated costs at completion and time incurred to date relative to total production time to measure progress toward the satisfaction of its performance obligations. The Company believes that both incurred cost and elapsed time reflect the value generated, which best depicts the transfer of control to the customer. Contract costs include third party costs as well as an allocation of manufacturing overhead. 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 alliance is described below. Concentrated Insulin Delivery: InMay 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 Eli Lilly's Humulin® R U-500 insulin, a concentrated form of insulin used by people with highly insulin resistant Type 2 diabetes. InJanuary 2016 , the Company entered into a development agreement with Eli Lilly to develop a new version of the Omnipod System, specifically designed to deliver Eli Lilly's Humalog® 200 insulin, a concentrated form of insulin that provides the same dose of insulin in half the volume of Eli 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 expenses. 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$9.7 million ,$6.6 million and$5.0 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Stock-Based Compensation The Company measures stock-based compensation expense at the grant date based on the fair value of the award and recognizes the compensation expense over the requisite service period, which is generally the vesting period. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Income Taxes The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated 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. A valuation allowance is provided to reduce the deferred tax assets if, based on the available evidence, it is more likely than not that some or all the deferred tax assets will not be realized. 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. 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 most of its cash, and short-term and long-term investments with a limited number of financial institutions that have a high investment grade credit rating. In addition to manufacturing the Omnipod System, the Company also purchases Omnipod Systems from Flex Ltd. As of bothDecember 31, 2019 and 2018, liabilities to this vendor represented 10% of the combined balance of accounts payable and accrued expenses and other current liabilities. See Note 4 for customer concentration. Recently Adopted Accounting Standards EffectiveJanuary 1, 2019 , the Company adopted Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 and its related amendments (collectively referred to as ASC 842). ASC 842 requires lessees to recognize 54 -------------------------------------------------------------------------------- operating lease liabilities and operating lease assets, representing the right to use the underlying asset for the lease term, on the balance sheet for leases classified as operating leases. The Company adopted ASC 842 onJanuary 1, 2019 using the modified retrospective method, whereby the new guidance is applied prospectively as of the date of adoption and prior periods are not restated. The Company elected the practical expedients that permit the Company to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for existing leases as of the effective date. Upon the adoption, the Company recorded operating lease liabilities of$10.8 million and operating lease assets of$8.8 million on its consolidated balance sheet. The difference between the value of the lease obligations and the operating lease assets was primarily attributable to a$1.1 million cease-use liability established in 2018 associated with the Company's former headquarters, which was reclassified to an operating lease liability upon adoption of ASC 842. See Note 11 for additional information regarding leases. EffectiveJanuary 1, 2019 , the Company early adopted ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). ASU 2018-15 requires certain costs to implement a cloud computing arrangement that is a service contract to be capitalized consistent with the rules applicable to internal-use software capitalization projects. The Company adopted this new guidance prospectively. The Company defers eligible costs related to the implementation of cloud computing arrangements within other current and non-current assets and amortizes such costs over the expected term of the hosting arrangement to the same income statement line as the associated cloud operating expenses. Adoption of this standard resulted in the Company capitalizing$3.6 million of cloud computing implementation costs for the year endedDecember 31, 2019 . Note 3. Segment and Geographic DataThe Company operates under one reportable segment. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated on a regular basis by the chief operating decision-maker ("CODM") in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company has concluded that its Chief Executive Officer ("CEO") is the CODM as the CEO is the ultimate decision maker for key operating decisions, determining the allocation of resources and assessing the financial performance of the Company. These decisions, allocations and assessments are performed by the CODM using consolidated financial information, as the Company's current product offering primarily consists of the Omnipod System and drug delivery devices based on the Omnipod platform. Geographic information about revenue, based on delivery location, is as follows: Years Ended December 31, (in millions) 2019 2018 2017 United States$ 485.1 $ 391.8 $ 343.8 All other 253.1 172.0 120.0 Total$ 738.2 $ 563.8 $ 463.8
Geographic information about long-lived assets, net, excluding goodwill and other intangible assets is as follows:
As of December 31,
(in millions) 2019 2018
United States $ 363.0 $ 232.3
China 35.9 25.6
Other 0.5 0.9
Total $ 399.4 $ 258.8
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Note 4. Revenue and Contract Acquisition Costs
The following table summarizes the Company's disaggregated revenues:
Years Ended December 31,
(in millions) 2019 2018 2017
U.S. Omnipod $ 420.4 $ 323.5 $ 271.6
International Omnipod 253.1 172.0 120.0
Total Omnipod 673.5 495.5 391.6
Drug Delivery 64.7 68.3 72.2
Total revenue $ 738.2 $ 563.8 $ 463.8
Revenue for customers comprising 10% or more of total revenue was as follows:
Years Ended December 31,
2019 2018 2017
Amgen, Inc. * 12% 15%
Ypsomed * * 22%Cardinal Health Inc. and affiliates 11% 12% 11%
* Represents less than 10% of revenue for the period. Deferred revenue related to unsatisfied performance obligations was included in the following consolidated balance sheet accounts in the amounts shown:
As of December 31 ,
(in millions) 2019 2018
Accrued expenses and other current liabilities$ 3.2 $ 1.2 Other liabilities 1.0 0.9 Total deferred revenue$ 4.2 $ 2.1 Revenue recognized for the year endedDecember 31, 2019 included in deferred revenue at the beginning of 2019 was$1.2 million . Revenue recognized during the 2018 included in deferred revenue at the beginning of 2018 was$2.4 million . No revenue was recognized for the years endedDecember 31, 2019 and 2018 from performance obligations satisfied or partially satisfied in previous periods. Contract acquisition costs, representing capitalized commission costs related to new customers, net of amortization, were included in the following consolidated balance sheet accounts in the amounts shown: As of December 31, (in millions) 2019
2018
Prepaid expenses and other current assets$ 9.5 $
7.3
Other assets 19.9
16.0
Total capitalized contract acquisition costs, net$ 29.4 $
23.3
The Company recognized
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Note 5. Cash and Cash Equivalents The following tables provide a summary of cash and cash equivalents as ofDecember 31, 2019 and 2018 and the level in the fair value hierarchy in which those measurements fall: (in millions) Fair Value Measurements December 31, 2019 Total Level 1 Level 2 (1) Cash$ 85.3 $ 85.3 $ - Money market mutual funds 115.5 115.5 - Commercial paper 10.0 10.0 Restricted cash 2.9 2.9
Total cash and cash equivalents
$ 64.0 $ 64.0 $ - Money market mutual funds 47.2 47.2 - Restricted cash 2.7 2.7 Total cash and cash equivalents$ 113.9 $ 113.9 $ - (1) Fair value was determined using market prices obtained from third-party pricing sources. Note 6. Investments The Company's short-term and long-term investments in debt securities had maturity dates that range from two months to two years atDecember 31, 2019 . Realized gains or losses in each of the three years endedDecember 31, 2019 , 2018 and 2017 were insignificant. The following tables provides amortized costs, gross unrealized gains and losses, fair values and the level in the fair value hierarchy for the Company's investments atDecember 31, 2019 and 2018: Gross Unrealized Gross Unrealized (in millions) Amortized Cost Gains Losses Fair Value Level 1 Level 2 (1) December 31, 2019 U.S. government and agency bonds $ 94.7 $ 0.3 $ -$ 95.0 $ 85.0 $ 10.0 Corporate bonds 51.0 0.1 - 51.1 - 51.1 Certificates of deposit 6.3 - - 6.3 - 6.3 Commercial paper 10.0 - - 10.0 10.0 Total short-term investments $ 162.0 $ 0.4 $
-
U.S. government and agency bonds $ 52.9 $ 0.1$ (0.1 ) $ 52.9 $ 42.9 $ 10.0 Corporate bonds 2.8 - - 2.8 - 2.8 Certificates of deposit 2.7 - - 2.7 - 2.7 Total long-term investments $ 58.4 $ 0.1 $
(0.1 )
- $ (0.5 ) $ 112.5 $ 69.6 $ 42.9
Corporate bonds 56.2 - (0.2 ) 56.0 - 56.0
Certificates of deposit 6.5 - - 6.5 - 6.5
Total short-term investments $ 175.7 $ - $
(0.7 )
U.S. government and agency bonds $ 90.5 $ 0.1$ (0.2 ) $ 90.4 $ 64.1 $ 26.3 Corporate bonds 46.7 - - 46.7 - 46.7 Certificates of deposit 3.7 - - 3.7 - 3.7 Total long-term investments $ 140.9 $ 0.1 $
(0.2 )
(1) Fair value was determined using market prices obtained from third-party pricing sources.
57
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Note 7. Inventories
At the end of each period, inventories were comprised of the following:
As of December 31,
(in millions) 2019 2018
Raw materials $ 23.3 $ 10.4
Work-in-process 40.3 30.2
Finished goods 37.4 30.8
Total inventories $ 101.0 $ 71.4 Note 8. Property, Plant and Equipment, Net Property, plant and equipment at cost and accumulated depreciation were as follows:
As of December 31,
(in millions) 2019(1) 2018
Land $ 2.5 $ 2.5 Building and building improvements 116.9 44.2 Machinery and equipment
194.8 93.3
Furniture and fixtures 12.7 6.3
Leasehold improvements 1.6 1.4
Construction in process 161.5 176.1
Total property, plant and equipment 490.0 323.8 Less: accumulated depreciation
(90.6 ) (65.4 )
Property, plant and equipment, net
(1) Reclassification of prior period amounts were made from furniture and fixtures to building and building improvements to conform with current period financial statement presentation. Depreciation expense related to property and equipment was$25.2 million ,$13.8 million and$12.7 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Construction in process primarily consists of manufacturing equipment located at the Company'sU.S. manufacturing facility inActon, Massachusetts , which is expected to be placed into service during 2020. Note 9. Goodwill and Other Intangible Assets,Net Goodwill The changes in the carrying amount of goodwill for 2019 and 2018 were as follows: Years Ended December 31, (in millions) 2019 2018 Beginning balance$ 39.6 $ 39.8 Foreign currency adjustment 0.2 (0.2 ) Ending balance$ 39.8 $ 39.6 58
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Intangible Assets, Net The gross carrying amount, accumulated amortization and net book value of intangible assets at the end of each period were as follows:
As of December 31,
2019 2018
Gross Carrying Accumulated Gross Carrying Accumulated
(in millions) Amount Amortization Net Book Value Amount Amortization Net Book Value
Customer relationships (1) $ 9.9
7.1 $ 6.1$ (1.9 ) $ 4.2 Internal-use software 12.0 (6.8 ) 5.2 11.3 (5.1 ) 6.2 Intellectual property 1.0 (0.1 ) 0.9 - - - Total intangible assets$ 22.9 $ (9.7 ) $ 13.2$ 17.4 $ (7.0 ) $ 10.4 (1) Includes customer relationships acquired from the Company's former European distributor. See Note 13. Intangible asset amortization expense was$2.7 million ,$1.8 million and$1.2 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Amortization expense associated with the intangible assets included on the Company's balance sheet as ofDecember 31, 2019 is expected to be as follows: Years Ending December 31, (in millions) 2020 $ 2.9 2021 2.4 2022 1.9 2023 1.3 2024 1.2 Thereafter 3.5 Total $ 13.2
Note 10. Accrued Expenses and Other Current Liabilities The components of accrued expenses and other current liabilities were as follows:
As of December 31,
(in millions) 2019 2018
Employee compensation and related costs
19.3 14.9
Accrued rebates 7.5 2.8
Supplier purchases 2.4 7.7
Value added taxes payable 1.8 8.5
Other 26.4 18.5
Accrued expenses and other current liabilities
Reconciliations of the changes in the Company's product warranty liability were
as follows:
Years Ended December 31,
(in millions) 2019 2018
Product warranty liability at beginning of year $ 6.4 $ 5.3
Warranty expense 13.4 7.8
Warranty claims settled (11.3 )
(6.7 )
Product warranty liability at end of year
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Note 11. Leases
As of December 31, 2019 , the Company leased certain office spaces, laboratory
space, warehouse space and automobiles, all of which were classified as
operating leases. Certain of the Company's operating leases include escalating
rental payments, some include the option to extend for up to 5 years, and some
include options to terminate the leases at certain times within the lease term.
As of December 31, 2019 , the Company included options to extend certain leases
for 5 years in the measurement of the lease liability.
As of December 31, 2019 , operating lease assets and operating lease liabilities
were included in the following consolidated balance sheet accounts in the
amounts shown:
(in millions)
Operating lease asset:
Other assets $ 16.1
Operating lease liabilities:
Accrued expenses and other current liabilities $ 3.6
Other liabilities 14.4
Total $ 18.0
The Company's total operating lease cost was $4.3 million for the year ended
December 31, 2019 . Total rental expense was $3.3 million and $2.8 million for
the years ended December 31, 2018 and 2017, respectively. Cash paid for amounts
included in the measurement of lease liabilities was $3.6 million for the year
ended December 31, 2019 . Operating lease liabilities arising from obtaining
operating lease assets was $9.8 million for the year ended December 31, 2019 .
Maturities of lease liabilities as of December 31, 2019 are as follows:
Years Ending December 31, (in millions)
2020 $ 4.5
2021 5.0
2022 4.7
2023 2.3
2024 2.4
Thereafter 1.5
Total future minimum lease payments 20.4
Less: imputed interest (2.4 )
Present value of future minimum lease payments
As ofDecember 31, 2019 , the weighted average remaining lease term for operating leases was 4.4 years and the weighted-average discount rate used to determine the operating lease liability was 5.9%. Note 12. Convertible Debt, Net The components of outstanding convertible debt consisted of the following: As of December 31, (in millions) 2019 2018
1.25% Convertible Senior Notes, due
-
Unamortized debt discount (294.8 ) (143.6 )
Debt issuance costs (19.8 ) (11.9 )
Total convertible debt, net $ 887.9 $ 592.0
0.375% Convertible Senior Notes
In September 2019 , the Company issued $800.0 million aggregate principal amount
of 0.375% Convertible Senior Notes due September 2026 (the "0.375% Notes"). The
notes are convertible into the Company's common stock at an initial conversion
rate of 4.4105 shares of common stock per $1,000 principal amount of the notes,
which is equivalent to a conversion price of $226.73
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per share, subject to adjustment under certain circumstances. The notes will be
convertible June 1, 2026 through August 28, 2026 and prior thereto under certain
circumstances.
The Company recorded a debt discount of $213.0 million related to the 0.375%
Notes resulting from the allocation of a portion of the proceeds to the fair
value of the conversion feature reflecting a nonconvertible debt borrowing rate
of 5.29% per annum. The Company also incurred debt issuance costs and other
expenses of $19.8 million , of which $5.3 million was reclassified as a reduction
to the value of the conversion feature allocated to equity. The remaining $14.5
million of debt issuance costs was recorded as a reduction of debt on the
consolidated balance sheet. The net proceeds of $780.2 million were used to fund
the redemption of the Company's 1.25% Convertible Senior Notes due September
2021 (the "1.25% Notes") and to purchase capped call options ("Capped Calls"),
both of which are discussed below.
Additional interest of 0.5% per annum is payable if the Company fails to timely
file required documents or reports with the Securities and Exchange Commission
("SEC"). If the Company merges or consolidates with a foreign entity, the
Company may be required to pay additional taxes. The Company determined that the
higher interest payments and tax payments required in certain circumstances were
embedded derivatives that should be bifurcated and accounted for at fair value.
The Company assessed the value of the embedded derivatives at December 31, 2019
and determined it had nominal value.
In conjunction with the issuance of the 0.375% Notes, the Company paid $85.4
million to enter into Capped Calls on the Company's common stock with certain
counterparties, which was recorded as a reduction to additional paid-in capital
on the consolidated balance sheet. By entering into the Capped Calls, the
Company expects to reduce the potential dilution to its common stock (or, in the
event the conversion is settled in cash, to provide a source of cash to settle a
portion of its cash payment obligation) in the event that at the time of
conversion its stock price exceeds the conversion price under the 0.375% Notes.
The Capped Calls have an initial strike price of $335.90 per share, which
represents a premium of 100% over the last reported sale price of the Company's
common stock of $167.95 per share on the date of the transaction. The Capped
Calls cover 3.5 million shares of common stock.
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 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 notes, which is equivalent to a conversion price of $93.18 per
share, subject to adjustment under certain circumstances. The notes will be
convertible August 15, 2024 through November 13, 2024 and prior thereto only
under certain circumstances.
The Company recorded a debt discount of $120.7 million related to the 1.375%
Notes resulting from the allocation of a portion of the proceeds to the fair
value of the conversion feature reflecting a nonconvertible debt borrowing rate
of 6.8% per annum. The Company also incurred debt issuance costs and other
expenses of $10.9 million , of which $3.3 million was reclassified as a reduction
to the value of the conversion feature allocated to equity. The remaining $7.6
million of debt issuance costs was presented as a reduction of debt on the
consolidated balance sheet.
Additional interest of 0.5% per annum is payable if the Company fails to timely
file required documents or reports with the SEC . If the Company merges or
consolidates with a foreign entity, the Company may be required to pay
additional taxes. The Company determined that the higher interest payments and
tax payments required in certain circumstances were embedded derivatives that
should be bifurcated and accounted for at fair value. The Company assessed the
value of the embedded derivatives at each balance sheet date and determined it
had nominal value.
1.25% Convertible Senior Notes
In 2019, the Company repurchased its $345.0 million principal amount ($312.0
million net of discount and issuance costs) 1.25% Notes for total consideration
of $963.0 million comprised of $663.6 million in cash and $299.4 million
representing the fair value of the 1.87 million shares issued. The Company
allocated $642.3 million of the settlement to the fair value of the equity
component and $320.7 million to the debt component, which resulted in an $8.7
million loss on extinguishment.
2% Convertible Senior Notes
In 2017, the Company repurchased $63.4 million in principal of its 2%
Convertible Senior Notes due June 2019 (the "2% Notes"). The Company called the
remaining 2% Notes in 2018 and settled the outstanding principal and conversion
feature for $6.7 million in cash. The Company allocated $3.2 million of the
settlement to the fair value of the equity component and $3.5 million to the
debt component, which was consistent with the carrying value of the notes as of
the settlement date, resulting in no gain or loss on extinguishment.
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Fair Value
The carrying amount and the estimated fair value of the Company's convertible
debt, which is based on the Level 2 quoted market prices as of December 31, 2019
and 2018 are as follows:
As of December 31,
2019 2,019 2018
Carrying Estimated Carrying Estimated
(in millions) Value Fair Value (1) Value Fair Value (1)
1.25% Convertible Senior Notes - - 301.0 483.9
1.375% Convertible Senior Notes 306.9 512.8 291.0 426.0
0.375% Convertible Senior Notes 581.0 840.0 - -
Total $ 887.9 $ 1,352.8 $ 592.0 $ 909.9
(1) Fair value was determined using market prices obtained from third-party
pricing sources.
Note 13. Commitments and Contingencies
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") alleged that the
Company (and certain executives) committed violations of Sections 10(b) and
20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 by making allegedly
false and misleading statements about the Company's business, operations, and
prospects. On February 8, 2018 , the parties executed a binding stipulation of
settlement, under which all claims were released, and a payment was made to the
plaintiffs and the class they purport to represent. On August 6, 2018 , the Court
issued an order approving the settlement, but took the plaintiffs' motion for
fees and expenses under advisement, which motion remains pending. The Company
had previously accrued fees and expenses in connection with this matter for the
amount of the final settlement liability that was not covered by insurance,
which amount was not material to the Company's consolidated financial
statements.
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. 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 July 11, 2018 , the parties executed a binding
stipulation of settlement, under which all claims were released, and a payment
of attorneys' fees and reimbursement of expenses will be paid to plaintiffs'
counsel, subject to the Court's approval. On July 13, 2018 , the plaintiffs filed
a motion for preliminary approval of the settlement, which is pending. The
Company expects that such fees and expenses payable to plaintiff's counsel will
be covered by the Company's insurance.
The Company is, from time to time, involved in the normal course of business in
various legal proceedings, including intellectual property, contract, employment
and product liability suits. The Company does not expect the outcome of these
proceedings, either individually or in the aggregate, to have a material adverse
effect on its results of operations.
Fees to Former European Distributor
Following the expiration of an agreement with a former European distributor on
June 30, 2018 , the Company was required to pay a quarterly per-unit fee for
Omnipod sales to certain customers of the former European distributor for a
one-year period through June 30, 2019 . The Company recognized a liability and an
associated intangible asset for this fee as qualifying sales occurred. The
methodology applicable for determining the total fee under the distribution
agreement is subject to an active arbitration proceeding in Switzerland . The
final amount of the fee could vary significantly depending on the number of
customers who count for purposes of calculating the fee under the terms of the
agreement. The Company estimates that the final aggregate fee is in the range of
$5 million to $55 million . As of December 31, 2019 and 2018, the Company had
accrued $2.7 million and $2.9 million , respectively, for fees related to Omnipod
devices sold to qualifying customers. The associated gross intangible asset for
the fee was $7.8 million and $4.2 million as of December 31, 2019 and 2018,
respectively.
62
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Note 14. Stock-Based Compensation
Equity Award Plan
In May 2017 , the Company adopted the 2017 Stock Option and Incentive Plan (the
"2017 Plan"), which replaced its previous stock option and incentive plan (the
"2007 Plan"). The 2017 Plan provides for a maximum of 5.2 million shares to be
issued, in addition to the number of shares related to awards outstanding under
the 2007 Plan that are terminated by expiration, forfeiture or cancellation. The
shares can be issued as 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. As of December 31, 2019 , 3.9 million shares remain available for future
issuance under the 2017 Plan.
Stock-Based Compensation
Compensation cost related to stock-based awards recognized for the years ended
December 31, 2019 , 2018 and 2017 was recorded as follows:
Year Ended December 31,
(in millions) 2019 2018 2017
Cost of revenue $ 1.0 $ 0.8 $ 0.5
Research and development 9.1 8.2 5.9
Sales and marketing 7.8 7.6 8.8
General and administrative 10.8 20.9 16.7
Total $ 28.7 $ 37.5 $ 31.9
Stock Options
Options are granted to purchase common shares at prices that are equal to the
fair market value of the shares on the date the options are granted. Options
generally vest in equal annual installments over a period of four years and
expire 10 years after the date of grant. The grant-date fair value of options,
adjusted for estimated forfeitures, is recognized as expense on a straight-line
basis over the requisite service period, which is generally the vesting period.
The following summarizes the activity under the Company's stock option plans:
Weighted
Average
Remaining Aggregate
Contractual Intrinsic
Number of Weighted Average Term (in Value
Options Exercise Price years) (in millions)
Outstanding at December 31, 2018 3,077,624 $ 39.16
Granted 125,640 93.16
Exercised (1,345,386 ) 35.02 $ 119.2
Forfeited and canceled (128,366 ) 51.55
Outstanding at December 31, 2019 1,729,512 $ 45.39 5.4 $ 217.6
Vested, December 31, 2019 1,361,514 $ 38.71 4.7 $ 180.4
Vested or expected to vest,
December 31, 2019 1,689,570 $ 44.59 5.3 $ 213.9
The aggregate intrinsic value of options exercised for the years ended December
31, 2018 and 2017 was $23.5 million and $11.8 million , respectively.
The Company uses the Black-Scholes pricing model to determine the fair value of
options granted. The calculation of the fair value of stock options is affected
by the stock price on the grant date, the expected volatility of the Company's
stock over the expected term of the award, the expected life of the award, the
risk-free interest rate and the dividend yield. The assumptions used in the
Black-Scholes pricing model for options granted during each year, along with the
weighted-average grant-date fair values, were as follows:
63
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Years Ended December 31,
2019 2018 2017
Risk-free interest rate 1.8% - 2.6% 2.2% - 2.9% 1.7% - 1.9%
Expected life of options (in years) 4.4 - 4.8 4.5 - 5.4 4.7 - 5.3
Dividend yield -% -% -%
Expected stock price volatility 40.1% - 40.5% 38.7% - 40.7% 38.5% - 39.1% Fair value per option
$ 34.98 $ 30.34 $ 17.28 As ofDecember 31, 2019 , there was$7.6 million of unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a weighted average period of 2.4 years. Restricted Stock Units Restricted Stock Units ("RSUs") generally vest in equal annual installments over a three-year period. The grant-date fair value of RSUs, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. The Company determines the fair value of restricted stock units based on the closing price of its common stock on the date of grant. RSU activity is as follows: Weighted Number of Average Shares Fair Value
Outstanding at
218,810 96.62
Vested (231,647 ) 50.13
Forfeited (51,687 ) 71.32
Outstanding at
The weighted-average grant-date fair value per share of RSUs granted was$96.62 ,$76.03 and$46.13 for the years endedDecember 31, 2019 , 2018 and 2017, respectively. The total fair value of RSUs vested was$11.6 million ,$14.7 million and$11.4 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. As ofDecember 31, 2019 , there was$18.9 million of unrecognized compensation cost related to time-based RSUs, which is expected to be recognized over a weighted-average period of 1.9 years. Performance Stock Units Performance stock units ("PSUs") generally vest over a three-year period from the grant date and include both a service and performance component. Stock-based payments that contain performance conditions are recognized when such conditions are probable of being achieved. Certain of these performance stock units could ultimately vest at up to 200% of the target award depending on the achievement of the performance criteria. PSU activity is as follows: Weighted Number of Average Shares Fair Value
Outstanding at
81,118 95.91
Vested (93,088 ) 34.27
Forfeited (24,270 ) 62.32
Outstanding at
(1) Based on 200% achievement of the performance metrics, approximately 172,000 shares ofInsulet were earned for awards that were granted in 2017 for the performance period endedDecember 31, 2019 . These shares vested inFebruary 2020 . The weighted-average grant-date fair value per share of PSUs granted was$95.91 ,$75.07 and$50.02 for the years endedDecember 31, 2019 , 2018 and 2017, respectively. The total fair value of PSUs vested was$3.2 million ,$7.6 million and$0.9 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. 64 -------------------------------------------------------------------------------- As ofDecember 31, 2019 , there was$12.2 million of unrecognized compensation cost related to PSUs, which is expected to be recognized over a weighted-average period of 1.9 years. Employee Stock Purchase Plan The Employee Stock Purchase Plan ("ESPP") authorizes the issuance of up to 880,000 shares of common stock to participating employees. Employees that participant in the Company's ESPP may annually purchase up to a maximum of 800 shares per offering period or$25,000 worth of common stock by authorizing payroll deductions of up to 10% of their base salary. The purchase price for each share purchased is 85% of the lower of the fair market value of the common stock on the first or last day of the offering period. The Company issued 51,502, 46,343 and 59,134 shares of common stock for the years endedDecember 31, 2019 , 2018 and 2017, respectively, to employees participating in the ESPP. As ofDecember 31, 2019 , 547,075 shares remain available for future issuance under the ESPP Plan. The Company uses the Black-Scholes pricing model to determine the fair value of shares purchased under the ESPP. The calculation of the fair value of shares purchased is affected by the stock price on the purchase date, the expected volatility of the Company's stock over the expected term, the risk-free interest rate and the dividend yield. The estimated fair value of shares purchased under the ESPP were based on the following assumptions: Years Ended December 31, 2019 2018 2017 Risk-free interest rate 1.6% - 2.3% 2.1% - 2.5% 1.1% - 1.5% Expected term (in years) 0.5 0.5 0.5 Dividend yield -% -% -%
Expected stock price volatility 27.5% - 31.4% 23.4% - 27.0% 22.9% - 26.7%
The weighted average grant date fair value of the six-month option inherent in the ESPP was$46.30 ,$26.01 , and$15.18 , for the years endedDecember 31, 2019 , 2018 and 2017, respectively. As ofDecember 31, 2019 , there was$1.0 million of unrecognized compensation cost related to the ESPP. This cost is expected to be recognized over a weighted average period of 0.4 years. Note 15. Accumulated Other Comprehensive Loss Changes in the components of accumulated other comprehensive loss, net of tax, were as follows: Foreign Currency Unrealized Losses on Translation Available-for-sale Accumulated Other (in millions) Adjustment Securities Comprehensive Loss Balance, December 31, 2016 $ (0.5 ) $ (0.2 ) $ (0.7 ) Other comprehensive income (loss) 0.5 (0.3 ) 0.2 Balance, December 31, 2017 - (0.5 ) (0.5 ) Other comprehensive loss (2.2 ) (0.2 ) (2.4 ) Balance, December 31, 2018 (2.2 ) (0.7 ) (2.9 ) Other comprehensive income 0.6 1.1 1.7 Balance, December 31, 2019 $ (1.6 ) $ 0.4 $ (1.2 ) Note 16. Defined Contribution Plan The Company maintains a tax-qualified 401(k) retirement plan inthe United States . The Company generally makes a matching contribution equal to 50% of each employee's elective contribution to the plan up to six percent of the employee's eligible pay. In addition, the Company offers defined contribution plans for eligible employees in its foreign subsidiaries. The total amount contributed by the Company to these defined contribution plans was$5.3 million ,$3.6 million and$3.0 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. 65 -------------------------------------------------------------------------------- Note 17. Interest Expense Interest expense, net of portion capitalized was follows: Years Ended December 31, (in millions) 2019 2018 2017 Contractual coupon interest$ 9.5 $ 9.8 $ 6.3 Accretion of debt discount 32.8 26.7 15.9 Amortization of debt issuance costs 2.8 2.6
2.1
Capitalized interest (10.5 ) (10.2 )
(3.1 )
Interest expense, net of portion capitalized
Note 18. Income Taxes TheU.S. and foreign components of income (loss) before income taxes were as follows: Years Ended December 31, (in millions) 2019 2018 2017 U.S.$ 2.5 $ (3.0 ) $ (27.7 ) Foreign 12.0 8.2 1.1
Income (loss) before income taxes
Income tax expense consists of the following:
Years Ended December 31,
(in millions) 2019 2018 2017
Current:
State $ 0.2 $ 0.2 $ 0.1
Foreign 3.4 2.1 0.6
Total current expense 3.6 2.3 0.7
Deferred:
Federal (0.1 ) - (0.3 )
Foreign (0.6 ) (0.4 ) (0.2 )
Total deferred expense (0.7 ) (0.4 ) (0.5 )
Income tax expense $ 2.9 $ 1.9 $ 0.2 Reconciliations of the federal statutory income rate to the Company's effective income tax rate are as follows:
Years Ended December 31,
2019 2018 2017
U.S. statutory rate 21.0 % 21.0 % 34.0 %
Foreign rate differential 4.2 (2.4 ) - 0.3
State taxes, net of federal benefit 1.3 2.9 10.2 Tax credits
(15.4 ) (13.7 ) 13.3
Stock-based compensation (158.7 ) (159.1 ) 33.6
Loss on extinguishment of debt 14.8 - -
Non-deductible officers' compensation 1.9 81.3 (20.2 ) Permanent items
3.0 16.8 (14.0 )
Foreign income taxed in the U.S. 19.0 26.1 -
Change in valuation allowance 130.6 67.0 (57.9 )
Other (1.9 ) (2.9 ) (0.3 )
Effective income tax rate 19.8 % 37.0 % (1.0 )%
66-------------------------------------------------------------------------------- As ofDecember 31, 2019 , 2018 and 2017 the Company had no uncertain tax positions. In general, it is the Company's practice and intention to reinvest the earnings of its non-U.S. subsidiaries in those operations. As ofDecember 31, 2019 , the Company has chosen to indefinitely reinvest its earnings of its non-U.S. subsidiaries, exceptCanada . To the extent the Company repatriates its foreign earnings, certain withholding taxes and state taxes may apply. The Company has recorded a deferred tax liability for tax that could be incurred upon repatriation of theCanada earnings, the amount of which is not significant. A deferred tax liability related to the repatriation of the indefinitely reinvested earnings would not be material to the Company's consolidated financial statements. The Company files federal, state and foreign tax returns, which are subject to examination by the relevant tax authorities. The tax filings relating to the Company's federal and state tax returns are currently open to examination for tax years 2016 through 2018 and 2015 through 2018, respectively. The Company is currently under exam inOntario, Canada . In addition, the Company generated tax losses from inception in 2000. These years may be subject to examination if the losses are carried forward and utilized in future years. The components of the net deferred tax asset at the end of each year are as follows: As of December 31, (in millions) 2019 2018 Deferred tax assets: Net operating loss carryforwards$ 144.6 $ 124.9 Tax credits 15.2 13.0 Provision for bad debts 1.2 1.1 Depreciation and amortization - 3.5 Capital loss carryforwards 12.7 12.6 Stock-based compensation 8.9 9.3 Other 12.6 6.4 Total deferred tax assets 195.2 170.8 Deferred tax liabilities: Prepaid assets (2.1 ) (2.0 ) Depreciation and amortization (2.2 ) - Amortization of debt discount (73.4 ) (35.7 ) Capitalized contract acquisition costs (7.1 ) (5.8 ) Other (5.0 ) (0.8 ) Total deferred tax liabilities (89.8 ) (44.3 ) Net deferred tax asset before valuation allowance 105.4 126.5 Valuation allowance (104.4 ) (126.3 ) Net deferred tax asset$ 1.0 $ 0.2 The valuation allowances for deferred tax assets of$104.4 million and$126.3 million atDecember 31, 2019 and 2018, respectively, relate primarily toU.S. tax loss carryforwards that management believes are not more likely than not to be utilized. The$21.9 million decrease in the Company's valuation allowance during the year endedDecember 31, 2019 was primarily due to the issuance of convertible debt discussed in Note 12. The Company's net operating loss carryforwards consist of the following: Years Ended December
31,
(in millions) 2019
2018
Gross federal net operating loss carryforwards$ 607.4 $ 528.1 State operating loss carryforwards 298.8 246.4 Total$ 906.2 $ 774.5 ForU.S. federal tax purposes,$66.8 million of the net operating losses have an indefinite carryforward period. The remaining federal carryforwards, if not utilized, will begin to expire in 2020 and will continue to expire through 2037, and the state carryforwards will continue to expire through 2038. 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. Research and 67 -------------------------------------------------------------------------------- development and other tax credits were$16.1 million and$13.0 million atDecember 31, 2019 and 2018, respectively. If not utilized, federal research and development credits will begin to expire in 2022. Note 19. Net Income (Loss) Per Share Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding and, when dilutive, common share equivalents from outstanding stock options and restricted stock units (using the treasury-stock method), and potential common shares from the Company's convertible notes (using the if-converted method). The table below sets forth the components used in the computation of basic and diluted net income (loss) per share: Years Ended December 31, (in millions, except share and per share data) 2019 2018 2017
Numerator:
Net income (loss) $ 11.6 $ 3.3 $ (26.8 )
Denominator:
Weighted average number of common shares 60,593,846 58,859,574 58,003,434
outstanding, basic
Effect of dilutive common share equivalents
Stock options 1,486,973 1,678,535 -
Restricted stock units 223,529 469,915 -
Weighted average number of common shares 62,304,348 61,008,024 58,003,434
outstanding, diluted
Net income (loss) per share:
Basic $ 0.19 $ 0.06 $ (0.46 )
Diluted $ 0.19 $ 0.05 $ (0.46 )
The number of common share equivalents excluded from the computation of diluted
net income (loss) per share because either the effect would have been
anti-dilutive, or the performance criteria related to the units had not yet been
met were as follows:
Years Ended December 31,
2019 2018 2017
2.00% Convertible Senior Notes - - 78,783
1.25% Convertible Senior Notes - 5,910,954
5,910,954
1.375% Convertible Senior Notes 4,319,429 4,319,429
4,319,429
0.375% Convertible Senior Notes 3,528,400 -
-
Unvested restricted stock units 430,593 289,974
994,364
Outstanding stock options 12,820 236,648
3,377,220
Total common share equivalents excluded from
computation of diluted net income (loss) per
share 8,291,242 10,757,005 14,680,750
68--------------------------------------------------------------------------------
Note 20. Quarterly Data (Unaudited)
2019 Quarters Ended
(in millions, except per share data) March 31 June 30 September 30 (1) December 31 (2)
Revenue $ 159.6 $ 177.1 $ 192.1 $ 209.4
Gross profit $ 106.7 $ 116.4 $ 123.1 $ 134.1
Net income $ 4.4 $ 1.4 $ 0.8 $ 5.0
Net income per share:
Basic $ 0.07 $ 0.02 $ 0.01 $ 0.08
Diluted $ 0.07 $ 0.02 $ 0.01 $ 0.08
(1) Net income includes a $6.4 million loss on extinguishment of debt incurred
in connection with the repurchase of the Company's 1.25% Convertible Senior
Notes.
(2) Net income includes a $2.3 million loss on extinguishment of debt incurred
in connection with the repurchase of the Company's 1.25% Convertible Senior
Notes.
2018 Quarters Ended
(in millions, except per share data) March 31 June 30 September 30 (3) December 31 Revenue$ 123.6 $ 124.2 $ 151.1$ 164.9 Gross profit$ 75.8 $ 82.1 $ 102.0$ 110.3 Net income (loss)$ (6.6 ) $ (1.7 ) $ 1.7 $ 9.9 Net income (loss) per share: Basic$ (0.11 ) $ (0.03 ) $ 0.03$ 0.17 Diluted$ (0.11 ) $ (0.03 ) $ 0.03$ 0.16
(3) Net income includes a charge of
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