INSULET CORP [PODD] Filings

10-Q 1 podd-20220630.htm 10-Q podd-20220630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________________

Form 10-Q

_____________________________________________________


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-33462

___________________________________________________________

INSULET CORPORATION

(Exact name of Registrant as specified in its charter)

__________________________________________________________________________________________________

Delaware

04-3523891

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification No.)

100 Nagog Park

Acton

Massachusetts

01720

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s Telephone Number, Including Area Code: (978) 600-7000

________________________________________________________________________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 Par Value Per Share	PODD	The NASDAQ Stock Market, LLC

As of July 29, 2022, the registrant had 69,403,602 shares of common stock outstanding.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements			3
Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2022 and December 31, 2021			3
Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2022 and 2021			4
Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the three and six months ended June 30, 2022 and 2021			5
Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the three and six months ended June 30, 2022 and 2021			6
Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2022 and 2021			8
Notes to Condensed Consolidated Financial Statements (Unaudited)			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			25
Item 4. Controls and Procedures			25

PART II. OTHER INFORMATION
Item 1. Legal Proceedings			26
Item 1A. Risk Factors			26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 3. Defaults Upon Senior Securities			26
Item 4. Mine Safety Disclosures			26
Item 5. Other Information			26
Item 6. Exhibits			26
Signatures			27

Table of Contents

PART I - FINANCIAL INFORMATION


Item 1.			Condensed Consolidated Financial Statements (Unaudited)

INSULET CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


(in millions, except share and per share data)	June 30, 2022		December 31, 2021
ASSETS
Current Assets
Cash and cash equivalents	$	708.6	$	791.6
Accounts receivable trade, less allowance for credit losses of $3.1 and $2.7	154.1		135.2
Accounts receivable trade, net — related party	52.5		25.8
Inventories	320.4		303.2
Prepaid expenses and other current assets	73.5		74.0
Total current assets	1,309.1		1,329.8
Property, plant and equipment, net	535.8		536.5
Other intangible assets, net	55.1		36.6
Goodwill	51.8		39.8
Other assets	161.9		106.1
Total assets	$	2,113.7	$	2,048.8
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	57.2	$	37.7
Accrued expenses and other current liabilities	192.5		164.3
Accrued expenses and other current liabilities — related party	3.3		1.7
Current portion of long-term debt	26.3		25.1
Total current liabilities	279.3		228.8
Long-term debt, net	1,385.2		1,248.8
Other liabilities	26.8		14.9
Total liabilities	1,691.3		1,492.5
Commitments and contingencies (Note 12)
Stockholders’ Equity
Preferred stock, $.001 par value, 5,000,000 authorized; none issued and outstanding	—		—
Common stock, $.001 par value, 100,000,000 authorized; 69,386,057 and 69,178,691 issued and outstanding	0.1		0.1
Additional paid-in capital	1,011.2		1,207.9
Accumulated deficit	(596.1)		(649.5)
Accumulated other comprehensive income (loss)	7.2		(2.2)
Total stockholders’ equity	422.4		556.3
Total liabilities and stockholders’ equity	$	2,113.7	$	2,048.8

The accompanying notes are an integral part of these condensed consolidated financial statements.

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INSULET CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended June 30,				Six Months Ended June 30,
(in millions, except share and per share data)	2022		2021		2022		2021
Revenue	$	243.9	$	259.9	$	490.9	$	510.0
Revenue from related party	55.5		3.3		103.9		5.5
Total revenue	299.4		263.2		594.8		515.5
Cost of revenue	109.1		80.5		194.8		165.3
Gross profit	190.3		182.7		400.0		350.2
Research and development expenses	42.6		40.1		85.7		80.8
Selling, general and administrative expenses	174.4		116.3		303.1		226.8
Operating (loss) income	(26.7)		26.3		11.2		42.6
Interest expense, net	(8.3)		(16.4)		(17.2)		(29.8)
Loss on extinguishment of debt	—		(40.1)		—		(40.1)
Other (expense) income, net	(1.1)		1.8		(0.8)		(0.8)
Loss before income taxes	(36.1)		(28.4)		(6.8)		(28.1)
Income tax benefit (expense)	1.1		3.4		(0.4)		3.1
Net loss	$	(35.0)	$	(25.0)	$	(7.2)	$	(25.0)

Net loss per share:
Basic	$	(0.50)	$	(0.37)	$	(0.10)	$	(0.38)
Diluted	$	(0.50)	$	(0.37)	$	(0.10)	$	(0.38)
Weighted-average number of common shares outstanding (in thousands):
Basic	69,356		66,696		69,305		66,406
Diluted	69,356		66,696		69,305		66,406

The accompanying notes are an integral part of these condensed consolidated financial statements.

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INSULET CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)


	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2022		2021		2022		2021
Net loss	$	(35.0)	$	(25.0)	$	(7.2)	$	(25.0)
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment	(9.6)		(1.8)		(13.3)		(3.9)
Unrealized gain (loss) on cash flow hedges	4.6		(0.6)		22.7		(0.6)
Unrealized loss on available-for-sale securities	—		(0.1)		—		(0.3)
Total other comprehensive (loss) income, net of tax	(5.0)		(2.5)		9.4		(4.8)
Comprehensive (loss) income	$	(40.0)	$	(27.5)	$	2.2	$	(29.8)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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INSULET CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

Three Months Ended June 30, 2022


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Shareholders’ Equity
(dollars in millions)	Shares (in thousands)	Amount
Balance at March 31, 2022	69,320	$	0.1	$	995.5	$	(561.1)	$	12.2	$	446.7
Exercise of options to purchase common stock	24	—		0.8		—		—		0.8
Issuance of shares for employee stock purchase plan	27.0	—		4.9		—		—		4.9
Stock-based compensation expense	—	—		11.2		—		—		11.2
Restricted stock units vested, net of shares withheld for taxes	15.0	—		(1.2)		—		—		(1.2)
Net loss	—	—		—		(35.0)		—		(35.0)
Other comprehensive loss	—	—		—		—		(5.0)		(5.0)
Balance at June 30, 2022	69,386	$	0.1	$	1,011.2	$	(596.1)	$	7.2	$	422.4

Three Months Ended June 30, 2021


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Shareholders’ Equity
(dollars in millions)	Shares (in thousands)	Amount
Balance at March 31, 2021	66,213	$	0.1	$	1,248.3	$	(666.3)	$	3.2	$	585.3
Exercise of options to purchase common stock	121	—		4.7		—		—		4.7
Issuance of shares for employee stock purchase plan	17	—		3.8		—		—		3.8
Stock-based compensation expense	—	—		9.0		—		—		9.0
Restricted stock units vested, net of shares withheld for taxes	17	—		(1.2)		—		—		(1.2)
Extinguishment of conversion feature on 1.375% Notes, net of issuance costs	—	—		(737.7)		—		—		(737.7)
Issuance of shares for debt extinguishment	2,242	—		622.7		—		—		622.7
Net loss	—	—		—		(25.0)		—		(25.0)
Other comprehensive loss	—	—		—		—		(2.5)		(2.5)
Balance at June 30, 2021	68,610	$	0.1	$	1,149.6	$	(691.3)	$	0.7	$	459.1

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Six Months Ended June 30, 2022


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive (Loss) Income		Total Shareholders’ Equity
(dollars in millions)	Shares (in thousands)	Amount
Balance at December 31, 2021	69,179	$	0.1	$	1,207.9	$	(649.5)	$	(2.2)	$	556.3
Adoption of ASU 2020-06 (Note 1)	—	—		(207.7)		60.6		—		(147.1)
Issuance of common stock	—	—		—		—		—		—
Exercise of options to purchase common stock	52.0	—		1.9		—		—		1.9
Issuance of shares for employee stock purchase plan	27	—		4.9		—		—		4.9
Stock-based compensation expense	—	—		20.7		—		—		20.7
Restricted stock units vested, net of shares withheld for taxes	128	—		(16.5)		—		—		(16.5)
Net loss	—	—		—		(7.2)		—		(7.2)
Other comprehensive income	—	—		—		—		9.4		9.4
Balance at June 30, 2022	69,386	$	0.1	$	1,011.2	$	(596.1)	$	7.2	$	422.4

Six Months Ended June 30, 2021


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Shareholders’ Equity
(dollars in millions)	Shares (in thousands)	Amount
Balance at December 31, 2020	66,017	$	0.1	$	1,264.3	$	(666.3)	$	5.5	$	603.6
Exercise of options to purchase common stock	164	—		6.2		—		—		6.2
Issuance of shares for employee stock purchase plan	17	—		3.8		—		—		3.8
Stock-based compensation expense	—	—		17.6		—		—		17.6
Restricted stock units vested, net of shares withheld for taxes	170	—		(27.3)		—		—		(27.3)
Extinguishment of conversion feature on 1.375% Notes, net of issuance costs	—	—		(737.7)		—		—		(737.7)
Issuance of shares for debt extinguishment	2,242	—		622.7		—		—		622.7
Net loss	—	—		—		(25.0)		—		(25.0)
Other comprehensive loss	—	—		—		—		(4.8)		(4.8)
Balance at June 30, 2021	68,610	$	0.1	$	1,149.6	$	(691.3)	$	0.7	$	459.1

The accompanying notes are an integral part of these condensed consolidated financial statements.

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INSULET CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six Months Ended June 30,
(in millions)	2022		2021
Cash flows from operating activities
Net loss	$	(7.2)	$	(25.0)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	31.1		28.0
Stock-based compensation expense	20.7		17.6
Non-cash interest expense	2.8		23.5
Loss on extinguishment of debt	—		40.1
Provision for credit losses	1.9		2.1
Other	1.0		1.1
Changes in operating assets and liabilities:
Accounts receivable	(24.7)		(24.6)
Accounts receivable — related party	(26.7)		(1.3)
Inventories	(24.0)		(45.0)
Prepaid expenses and other assets	(23.3)		(23.6)
Accounts payable	20.1		(4.4)
Accrued expenses and other liabilities	38.2		(5.3)
Accrued expenses and other liabilities — related party	1.7		—
Net cash provided by (used in) operating activities	11.6		(16.8)
Cash flows from investing activities
Capital expenditures	(27.4)		(52.8)
Acquisition of intangible assets	(7.6)		(3.8)
Acquisition	(26.0)		—
Cash paid for investments	(7.8)		—
Receipts from the maturity or sale of marketable securities	—		22.5
Net cash used in investing activities	(68.8)		(34.1)
Cash flows from financing activities
Proceeds from issuance of convertible debt, net of issuance costs	—		489.5
Repayment of convertible debt	—		(460.8)
Repayment of equipment financings	(8.6)		(6.4)
Repayment of mortgage	(1.1)		(1.0)
Repayment of term loan	(2.5)		—
Payment of debt issuance costs	—		(4.0)
Proceeds from exercise of stock options	1.9		6.2
Proceeds from issuance of common stock under employee stock purchase plan	4.9		3.8
Payment of withholding taxes in connection with vesting of restricted stock units	(16.5)		(27.3)
Net cash used in financing activities	(21.9)		—
Effect of exchange rate changes on cash	(3.5)		(1.7)
Net decrease in cash, cash equivalents and restricted cash	(82.6)		(52.6)
Cash, cash equivalents and restricted cash at beginning of period (Note 3)	806.4		922.0
Cash, cash equivalents and restricted cash at end of period (Note 3)	$	723.8	$	869.4

Supplemental noncash information:
Purchases of property and equipment included in accounts payable and accrued expenses	$	4.9	$	5.6
Purchases of intangible assets included in accounts payable and accrued expenses	$	2.4	$	3.5
Lease liabilities arising from obtaining right-of-use assets	$	12.0	$	0.5

The accompanying notes are an integral part of these condensed consolidated financial statements.

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INSULET CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements reflect the consolidated operations of Insulet Corporation and its subsidiaries (“Insulet” or the “Company”). The unaudited 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 amounts 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. In management’s opinion, the unaudited consolidated financial statements contain all normal recurring adjustments necessary for a fair statement of the interim results reported. Operating results for the six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022, or for any other subsequent interim period.

The year-end balance sheet data was derived from audited consolidated financial statements. These unaudited consolidated financial statements do not include all of the annual disclosures required by GAAP; accordingly, they should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Reclassification of Prior Period Amounts

Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. The Company reclassified the change in unbilled receivables from the change in prepaid expenses and other current assets to the change in accounts receivable in the prior year statement of cash flows in the amount of $6.4 million. There was no change to previously reported net cash used in operating activities.

Investments

The Company has investments in privately-held companies in which the Company’s interest is less than 20.0%, the Company does not exercise significant influence over the investee, and the investment does not have a readily determinable fair value. These investments are carried at cost less impairment, if any. If an observable price change is identified, the investment is measured at its fair value as of the date that the observable transaction occurred with the adjustments reflected in other (expense) income in the Company’s consolidated statements of operations.

In January and May 2022, the Company made strategic investments in two companies in the amount of $5.0 million and $2.8 million, respectively. As of June 30, 2022 and December 31, 2021, the total carrying value of the Company’s investments was $8.7 million and $0.9 million, respectively.

Shipping and Handling Costs

Shipping and handling costs are included in selling, general and administrative expenses and were $3.1 million and $2.6 million for the three months ended June 30, 2022 and 2021, respectively, and were $6.2 million and $4.7 million for the six months ended June 30, 2022 and 2021, respectively.

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. 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; and

Level 3—significant unobservable inputs for which there are 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 3 and 10 for financial assets and liabilities held at carrying amount on the consolidated balance sheet and Note 11 for derivative instruments measured at fair value on a recurring basis.

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Recently Adopted Accounting Standard

Effective January 1, 2022, the Company adopted Accounting Standards Update (“ASU”) 2020-06, Debt - Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity using the modified retrospective method for convertible debt instruments outstanding as of the date of adoption. Under ASU 2020-06, a convertible debt instrument is generally reported as a single liability at its amortized cost with no separate accounting for embedded conversion features. Consequently, the effective interest rate of convertible debt instruments is closer to the coupon interest rate under the new guidance. The following table shows the adjustments made to the consolidated balance sheet as of January 1, 2022 as a result of adopting the new guidance.


(in millions)	As Reported Prior to ASU 2020-06		Adjustments		As Adjusted Under ASU 2020-06
	December 31, 2021		January 1, 2022		January 1, 2022
Long-term debt, net (1)	$	1,248.8	$	147.1	$	1,395.9
Additional paid-in-capital (2)	$	1,207.9	$	(207.7)	$	1,000.2
Accumulated deficit (3)	$	(649.5)	$	60.6	$	(588.9)

(1) The increase in debt resulted from the derecognition of the discount associated with the embedded conversion feature, offset by the remaining debt issuance costs reclassified out of equity.

(2) The decrease in additional paid-in-capital resulted from the derecognition of the embedded conversion feature and debt issuance costs bifurcated to equity.

(3) The decrease to accumulated deficit represents the cumulative interest expense recognized related to the amortization of the bifurcated conversion option and debt issuance costs.

In addition to the adjustments in the table above, the Company wrote-off the related deferred tax liabilities with a corresponding adjustment to the valuation allowance, resulting in no net impact to the cumulative adjustment recorded to accumulated deficit. Adoption of this standard had no impact on the Company’s diluted earnings per share as the Company historically calculated earnings per share using the if-converted method.

Note 2. Revenue and Contract Acquisition Costs

The following table summarizes the Company’s disaggregated revenue:


	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2022		2021		2022		2021
U.S. Omnipod	$	196.4	$	150.5	$	370.5	$	293.8
International Omnipod	89.4		91.6		184.8		181.5
Total Omnipod	285.8		242.1		555.3		475.3
Drug Delivery	13.6		21.1		39.5		40.2
Total revenue	$	299.4	$	263.2	$	594.8	$	515.5

The percentages of total revenue for customers that represent 10% or more of total revenue was as follows:


	Three Months Ended June 30,		Six Months Ended June 30,
	2022	2021	2022	2021
Distributor A	19%	*	18%	*
Distributor B	16%	12%	14%	11%
Distributor C	*	14%	*	14%
Distributor D	16%	*	13%	*

* Represents less than 10% of revenue for the period.

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Deferred revenue related to unsatisfied performance obligations was included in the following consolidated balance sheet accounts in the amounts shown:


(in millions)	June 30, 2022		December 31, 2021
Accrued expenses and other current liabilities	$	6.3	$	3.5
Other liabilities	1.6		1.5
Total deferred revenue	$	7.9	$	5.0

Revenue recognized from amounts included in deferred revenue at the beginning of each respective period was as follows:


	Three Months Ended June 30,			Six Months Ended June 30,
(in millions)	2022		2021	2022		2021
Deferred revenue recognized	$	0.3	0.2	$	1.6	3.9

Contract acquisition costs, representing capitalized commission costs related to new customers, net of amortization, were included in the following consolidated balance sheet captions in the amounts shown:


(in millions)	June 30, 2022		December 31, 2021
Prepaid expenses and other current assets	$	14.0	$	13.3
Other assets	27.8		26.1
Total capitalized contract acquisition costs, net	$	41.8	$	39.4

The Company recognized $3.6 million and $3.0 million of amortization of capitalized contract acquisition costs during the three months ended June 30, 2022 and 2021, respectively. The Company recognized $7.0 million and $6.0 million of amortization of capitalized contract acquisition costs during the six months ended June 30, 2022 and 2021, respectively.

Note 3. Cash and Cash Equivalents

The following table provides a summary of cash and cash equivalents:


(in millions)	June 30, 2022		December 31, 2021
Cash	$	106.2	$	159.3
Money market mutual funds	551.2		630.7
Time deposits	50.0		—
Restricted cash	1.2		1.6
Total cash and cash equivalents	708.6		791.6
Restricted cash included in other assets	15.2		14.8
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows	$	723.8	$	806.4

The restricted cash included in other assets on the consolidated balance sheet is primarily held as a compensating balance against long-term borrowings.

All cash and cash equivalents are Level 1 in the fair value hierarchy.

Note 4. Accounts Receivable

At the end of each period, accounts receivable were comprised of the following:


(in millions)	June 30, 2022		December 31, 2021
Accounts receivable trade, net	$	119.5	$	101.2
Unbilled receivable	34.6		34.0
Accounts receivable, net	$	154.1	$	135.2

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The percentages of total net accounts receivable trade for customers that represent 10% or more of total net accounts receivable trade was as follows:


	June 30, 2022	December 31, 2021
Distributor A	31%	21%
Distributor B	11%	*
Distributor D	19%	15%

* Represents less than 10% of net accounts receivable trade as of period end.

Note 5. Inventories

At the end of each period, inventories were comprised of the following:


(in millions)	June 30, 2022		December 31, 2021
Raw materials	$	87.3	$	70.0
Work in process	64.3		112.6
Finished goods	168.8		120.6
Total inventories	$	320.4	$	303.2

Note 6. Cloud Computing Costs

Capitalized costs to implement cloud computing arrangements at cost and accumulated amortization were as follows:


(in millions)	June 30, 2022		December 31, 2021
Short-term portion	$	16.1	$	18.4
Long-term portion	68.2		49.2
Total capitalized implementation costs	84.3		67.6
Less: accumulated amortization	(9.4)		(4.4)
Capitalized implementation costs, net	$	74.9	$	63.2

Amortization expense is recognized on a straight-line basis over the expected term of the hosting arrangements, which range from three to five years. Amortization expense was $3.7 million and $0.8 million for the three months ended June 30, 2022 and 2021, respectively, and was $5.0 million and $1.3 million for the six months ended June 30, 2022 and 2021, respectively.

Note 7. Acquisition

On January 3, 2022, the Company acquired substantially all of the assets related to the manufacture and production of Shape-Memory Alloy (“SMA”) wire assemblies that are used in the production of Omnipods from Dynalloy, Inc., a maker of dynamic alloys. The aggregate purchase price was $29.0 million, of which $26.0 million was paid in cash upon closing. The Company retained the remaining $3.0 million as a holdback to satisfy any post-closing working capital adjustment and to secure the seller’s indemnification obligations under the purchase agreement. The Company will release any remaining holdback funds to the seller twelve months from the closing date. Transaction costs were expensed as incurred and were not material.

The following table summarizes the preliminary fair value allocation of the assets acquired at the date of acquisition:


(in millions)
Inventories	$	0.5
Property, plant and equipment	0.9
Other assets	0.2
Goodwill (tax deductible)	12.0
Developed technology (15 year useful life)	15.4
Total assets acquired	$	29.0

The primary factor that contributed to an acquisition price in excess of the fair value of assets acquired and the establishment of goodwill was the expected cost savings resulting from the integration of a supplier.

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Note 8. Goodwill and Other Intangible Assets, Net

The change in the carrying amount of goodwill for the period is as follows:


(in millions)
Goodwill at December 31, 2021	$	39.8
Acquisition (Note 7)	12.0
Goodwill at June 30, 2022	$	51.8

The gross carrying amount, accumulated amortization and net book value of intangible assets at the end of each period were as follows:


	June 30, 2022						December 31, 2021
(in millions)	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
Customer relationships	$	43.3	$	(25.5)	$	17.8	$	43.4	$	(23.4)	$	20.0
Internal-use software	32.3		(11.1)		21.2		25.5		(10.2)		15.3
Developed technology	15.4		(0.5)		14.9		—		—		—
Intellectual property	1.5		(0.3)		1.2		1.6		(0.3)		1.3
Total intangible assets	$	92.5	$	(37.4)	$	55.1	$	70.5	$	(33.9)	$	36.6

Amortization expense for intangible assets was $1.7 million and $1.8 million for the three months ended June 30, 2022 and 2021, respectively. Amortization expense for intangible assets was $3.5 million and $3.5 million for the six months ended June 30, 2022 and 2021, respectively.

Note 9. Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities were as follows:


(in millions)	June 30, 2022		December 31, 2021
Employee compensation and related costs	$	56.8	$	70.3
Accrued rebates	38.6		28.7
Professional and consulting services	23.5		22.8
Accrued legal settlement (Note 12)	20.0		—
Supplier purchases	6.1		4.7
Other	47.5		37.8
Accrued expenses and other current liabilities	$	192.5	$	164.3

Product Warranty Costs

The Company provides a four-year warranty on Personal Diabetes Managers (“PDMs”) and Controllers sold in the United States and PDMs sold in Europe, a five-year warranty on PDMs sold in Canada, 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. Since the Company continues to introduce new products and versions, the anticipated performance of the product over the warranty period is also considered in estimating warranty reserves. Warranty expense is recorded in cost of revenue in the consolidated statements of operations. Cost to service the claims reflects the current product cost. Reconciliations of the changes in the Company’s product warranty liability were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2022		2021		2022		2021
Product warranty liability at beginning of period	$	6.9	$	6.7	$	6.8	$	6.7
Warranty expense	8.1		2.3		11.1		4.9
Warranty claims settled	(3.4)		(2.5)		(6.3)		(5.1)
Product warranty liability at the end of period	$	11.6	$	6.5	$	11.6	$	6.5

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Note 10. Debt

The components of debt consisted of the following:


(in millions)	June 30, 2022		December 31, 2021
0.375% Convertible Senior Notes due September 2026	800.0		800.0
Term loan due May 2028	495.0		497.5
Revolving Credit Facility expires May 2024	—		—
Equipment financing due May 2024	12.8		16.0
Equipment financing due November 2025	26.1		29.6
Equipment financing due July 2028	36.3		38.2
5.15% Mortgage due November 2025	66.6		67.7
Unamortized debt discount	(8.3)		(159.9)
Debt issuance costs	(17.0)		(15.2)
Total debt, net	1,411.5		1,273.9
Less: current portion	26.3		25.1
Total long-term debt, net	$	1,385.2	$	1,248.8

0.375% Convertible Senior Notes

The Company’s 0.375% Convertible Senior Notes due September 2026 (the “Notes”) have an effective interest rate of 0.76%. 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 per share, subject to adjustment under certain circumstances. The notes will be convertible June 1, 2026 through August 28, 2026 by its holders for any reason and prior to then under certain circumstances and be settled with cash, shares, or a combination of both.

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 each balance sheet date and determined it had nominal value.

In conjunction with the issuance of the Notes, the Company paid $85.4 million to enter into capped call options (“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 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.

Senior Secured Credit Agreement

In May 2022, the Company increased the borrowing capacity under the Revolving Credit Facility by $10.0 million bringing the total borrowing capacity to $70.0 million.

1.375% Convertible Senior Notes

During the three months ended June 30, 2021, the Company repurchased $370.4 million in principal ($305.7 million net of discount and issuance costs) of its 1.375% Convertible Senior Notes due November 2024 (“1.375% Notes”) for $460.8 million in cash and the issuance of 2.2 million shares with a fair value of $622.7 million. The debt repurchase resulted in a $40.1 million loss on extinguishment, including cash paid to the note holders as an inducement to convert and transaction costs.

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Fair Value of Debt

The carrying amount and the estimated fair value of the Company’s debt were as follows:


	June 30, 2022				December 31, 2021
(in millions)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value (1)
0.375% Convertible Senior Notes (1)	787.4		769.0		638.8		938.8
Term loan (2)	483.7		467.8		485.2		498.1
Equipment Financings (3)	75.1		75.1		83.7		83.7
5.15% Mortgage (3)	65.3		65.3		66.2		66.2
Total	$	1,411.5	$	1,377.2	$	1,273.9	$	1,586.8

(1) The Notes are classified as Level 2 in the fair value hierarchy. Fair value was determined using the Company’s quoted stock price and the contractual conversion rate.

(2) Term debt is classified as Level 1 in the fair value hierarchy. Fair value was determined using quoted market prices.

(3) The equipment financings and mortgage are classified as Level 3 in the fair value hierarchy. The fair values were determined using the cost bases of the financial liabilities, which approximate their carrying values.

Note 11. Derivative Instruments

The Company is exposed to certain risks relating to its business operations. Risks that relate to interest rate exposure are managed by using interest rate swaps with financial institutions acting as principal counterparties. Changes in a derivative financial instrument’s fair value are recognized in earnings unless specific hedge criteria are met, in which case changes in fair value are recognized as adjustments to other comprehensive income.

Under the Company’s interest rate swap agreements, the Company receives variable rate interest payments and pays fixed interest rates on a total notional value of $480 million of its term loan through April 2025. As a result of the interest rate swaps 97% of the term loan exposed to interest rate risk from changes in LIBOR is fixed at a rate of 4.20%. The Company has designated the interest rate swaps as cash flow hedges.

The fair value of interest rate swaps, which are c