What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-02-24 · 178 added, 149 removed, 154 unchanged (68% of the section changed)

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Factors that could cause or contribute to these differences include those discussed under the headings “Risk Factors” and “Forward-Looking Statements.”

We are primarily engaged in the development, manufacture and sale of our proprietary Omnipod System, a 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;

and its wireless companion, the handheld PDM/Controller.

The Omnipod System, which features discreet and easy-to-use devices, communicates wirelessly, provides for virtually pain-free automated cannula insertion and eliminates the need for MDI therapy or the use of 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.

In addition to the diabetes market space, we have partnered with pharmaceutical and biotechnology companies to tailor the Omnipod System technology platform for the delivery of subcutaneous drugs across other therapeutic areas.

Most of our drug delivery revenue currently consists of sales of pods to Amgen for use in the Neulasta® Onpro® kit, a delivery system for Amgen’s Neulasta to help reduce the risk of infection after intense chemotherapy.

Our mission is to improve the lives of people with diabetes.

To assist in achieving this mission, we are focused on the following key strategic imperatives:

• expanding access and awareness;

• delivering consumer-focused innovation;

• growing our global addressable market;

• driving operational excellence.

We are primarily engaged in the development, manufacture, and sale of our proprietary Omnipod System, a continuous insulin delivery system for people with insulin-dependent diabetes.

The Omnipod System features a small, lightweight, self-adhesive disposable tubeless Omnipod device that the user fills with insulin and wears directly on the body for up to three days at a time, which delivers personalized doses of insulin, and the PDM or Controller, a wireless handheld device that programs the Pod with the user’s personalized insulin-delivery instructions and wirelessly monitors the Pod’s operation.

The Omnipod System, includes:

Classic Omnipod, its next generation Omnipod DASH, and the most recent generation Omnipod 5, all of which eliminate the need for multiple daily injections using syringes or insulin pens or the use of pump and tubing.

Omnipod DASH features a secure Bluetooth enabled Pod and PDM with a color touch screen user interface supported by smartphone connectivity.

Omnipod 5, which builds on our Omnipod DASH mobile platform, is a tubeless automated insulin delivery system, that integrates with a continuous glucose monitor (“CGM”) to manage blood sugar and is fully controlled by a compatible personal smartphone or Omnipod 5 Controller.

The CGM is sold separately by a third party.

In addition, substantially all of our Drug Delivery revenue consists of sales of pods to Amgen for use in the Neulasta ® Onpro ® kit, a delivery system for Amgen’s Neulasta to help reduce the risk of infection after intense chemotherapy.

Our long-term financial objective is to sustain profitable growth.

To achieve this goal, our efforts have been focused on the launch of Omnipod 5, which recently received FDA clearance for individuals aged six years and older with type 1 diabetes.

Our limited market release of Omnipod 5 is underway.

Additionally, we have completed our FDA submission to expand Omnipod 5’s indication down to age two, and are planning for an expanded indication in 2022.

We have also recently completed our type 2 feasibility study and plan to conduct additional studies with the goal to further expand Omnipod 5’s indication to type 2 users.

In our efforts to bring Omnipod 5 to international markets, we have submitted for CE Marking in Europe under MDR.

In order to support our continued growth and the full commercial launch of Omnipod 5, we continue to focus on adding capacity to our U.S.

manufacturing plant.

During 2021, we began producing salable product on our third highly automated manufacturing line.

We have also taken steps to strengthen our global manufacturing capabilities.

We have optimized our operations in China by consolidating our production in that region into one location and we plan to invest in a new manufacturing plant in another international location to further diversify globally and increase efficiency to drive higher gross margins over time.

In 2021, we completed our full commercial launch of Omnipod DASH, our digital mobile Omnipod platform, in the countries we serve with our roll out in Canada.

Over the long term, we expect the introduction of Omnipod DASH throughout our international markets to be a growth driver as we increase our presence within our existing markets and enter into new countries.

We are continuing to expand internationally in a targeted and strategic manner.

During 2021, we increased our global footprint by expanding into Turkey and entered the Asia Pacific region with our launch in Australia.

we expect to enter additional countries in the Middle East.

Further, we are working to bring Omnipod 5 to our international markets.

Finally, we plan to continue to expand awareness of and access to our products, while also focusing on our product development efforts.

The latter includes enhancing the customer experience through digital product offerings.

Achieving the above strategic imperatives is expected to require additional investments in certain initiatives and personnel, as well as enhancements to our supply chain operation capacity, efficiency and effectiveness.

To achieve this goal, our efforts have been focused on the launch of Omnipod 5, which in 2022 received FDA clearance for individuals aged two years and older with type 1 diabetes.

Our limited market release of Omnipod 5 in the United States began in the first quarter, and in the third quarter we launched our U.S.

full market release.

We are also working to bring Omnipod 5 to our international markets.

We recently received CE Mark approval under the European MDR, and we are currently focused on further building our international teams and advancing our regulatory, reimbursement, and market development efforts.

We plan to launch Omnipod 5 in the U.K.

and Germany in 2023 and to continue our international roll out more broadly in 2024.

In 2022, we completed our Omnipod 5 type 2 diabetes feasibility study and plan to begin a pivotal trial in 2023 with the goal of expanding Omnipod 5’s indication to type 2 users.

Additionally, to accelerate our efforts to secure reimbursement for Omnipod 5, we have fully enrolled individuals in a randomized control trial in the U.S.

and enrollment will begin soon in France.

We also continue to expand market access and awareness of Omnipod through our direct to consumer advertising programs and through growing our presence in the U.S.

pharmacy channel, where access to Omnipod 5 and Omnipod DASH is simpler and affordable, as no up-front investment is required.

As we continue our growth in the pharmacy channel, we plan to phase-out our Classic Omnipod in the U.S.

in 2023, since the vast majority of our customer base is no longer using this product.

Additionally, we continue to increase our presence within our existing markets and expand internationally in a targeted and strategic manner.

We opened an office in Dubai to serve as our primary local presence and regional infrastructure in the Middle East, launched Omnipod in Saudi Arabia, and expanded into the United Arab Emirates.

We have also been taking steps to continue strengthening our global manufacturing capabilities.

We are optimizing our operations in China by consolidating our production in that region into one location.

Further, in 2022 we broke ground on a new manufacturing plant in Malaysia to support our international expansion strategy, further ensure product supply, and drive higher gross margins over time.

We expect to begin production at this new manufacturing facility in 2024.

Finally, we continue to focus on our product development efforts, including AID offerings, such as choice of continuous glucose monitor and smartphone integration, and enhancing the customer experience through digital product and data capabilities.

We have also developed a basal-only Pod for individuals with type 2 diabetes and submitted our 510(k) application to the FDA in November.

We expect commercialization of the basal-only Pod in 2024.

Results of Operations

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Our Pods are intended to be used continuously for up to three days and then be replaced with a new disposable Pod.

We recently achieved a milestone of approximately 300,000 global customers using Omnipod.

As we grow our customer base, we generate an increasing portion of our revenue through recurring sales of our Pods, which provides consistent cash flow.

We recently achieved a milestone of 360,000 estimated global customers using Omnipod, including over 100,000 U.S.

customers using the Omnipod 5.

As we grow our customer base, we expect to generate an increasing portion of our revenues through recurring sales of our disposable Pods, which provides recurring revenue.

Our recurring revenue business model, alongside the Omnipod System’s unique patented design enables us to provide pump therapy at a low or no up-front investment in regions where reimbursement allows for it.

Our pay-as-you-go pricing model also reduces the risk to third-party payors.

During 2020 and 2021, we were subject to challenging conditions stemming from the coronavirus pandemic (“COVID-19” or the “pandemic”).

Containment efforts and responses to the pandemic have varied by individuals, businesses, state and local municipalities, and region.

We believe people were less likely to change the way they manage their diabetes during the pandemic for a variety of reasons including temporary closure of doctors’ offices or a general unwillingness to visit a doctor’s office or hospital during the pandemic, particularly since those with diabetes are deemed at higher risk of suffering complications from COVID-19.

While the pandemic had a negative impact on new customer starts and the effects will not be fully reflected in our results of operations and overall financial performance until future periods, we believe our overall recurring revenue model provides a solid financial foundation for strong cash flow generation.

Further, the pandemic had a positive impact on our Drug Delivery revenue.

We have also experienced and may continue to experience challenges stemming from the global supply chain disruption;

however, to date we have been able to successfully mitigate any disruption.

See “Risk Factors” in Part I, Item 1A of this Annual Report for further discussion of the possible impact of the COVID-19 pandemic on our business.

During 2022, we issued two voluntary MDCs, one in October for our Omnipod DASH PDM related to its battery and the other in November for our Omnipod 5 Controller related to the charging port and cable.

In addition to the estimated liability we recorded in 2022, we have a performance obligation to replace Omnipod DASH PDMs and Omnipod 5 Controllers sold subsequent to the MDC issuances, which is expected to negatively impact gross margins and net income in 2023, most notably in the first half of the year.

We have also experienced and expect to continue to experience challenges stemming from the global supply chain disruption that began during the coronavirus pandemic (“COVID-19”);

however, to date we have been able to successfully mitigate this disruption and ensure uninterrupted supply to our customers by increasing our inventory levels and taking other measures.

While our mitigation efforts and inflation have and are expected to continue to negatively impact gross margins and net income in 2023, we intend to continue to work to improve productivity to help offset these costs.

Comparison of the Years Ended December 31, 2022 and December 31, 2021

Years Ended December 31,

(In millions) 2021 2020 % Change Currency Impact Constant Currency (1)

(In millions) 2022 2021 % Change Currency

Impact Constant Currency (1)

Omnipod $ 884.8 $ 651.5 35.8 % — % 35.8 %

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Constant currency revenue growth of 22.2% was primarily driven by higher volume and, to a lesser extent, favorable sales channel mix.

This increase was partially offset by the normalization of inventory levels at distributors, which were elevated in the prior year due to the launch of Omnipod DASH.

Omnipod revenue for 2022 increased $233.3 million, or 35.8%, to $884.8 million, compared with $651.5 million in 2021.

This increase was primarily due to higher volumes driven by growing our customer base and, to a lesser extent, an increase due to growth through the pharmacy channel, where Pods have a higher average selling price from our pay-as-you-go pricing model in which we offer the PDM for no charge.

This increase was partially offset by the impact of the pandemic on our recurring revenue.

Omnipod revenue for 2021 includes $58.2 million of related party revenue that resulted from a shift in certain revenues from one distributor to another.

Additional information regarding our related party transactions is provided in Note 5.

In 2022, we expect strong Omnipod revenue growth driven by continued volume growth of Omnipod DASH, primarily in the pharmacy channel.

This increase was primarily due to higher Omnipod 5 and Omnipod DASH volumes driven by growing our customer base and, to a lesser extent, growth through the pharmacy channel, where Pods have a higher average selling price due in part to the fact that we offer the PDM/Controller for no charge.

Existing customer conversions to Omnipod 5 also contributed to the revenue increase as some users fill both their starter kit and their first month of refills simultaneously.

Omnipod revenue for 2022 includes $249.9 million of related party revenue, compared with $58.2 million in 2021.

The $191.7 million increase primarily resulted from a shift in certain revenues from one distributor to another as we worked to extend our reach through the pharmacy channel.

Additional information regarding our related party transactions is provided in Note 5 to our consolidated financial statements.

In 2023, we expect strong Omnipod revenue growth driven by continued volume growth of Omnipod 5 in the pharmacy channel, continued adoption of Omnipod DASH, and the benefits of our recurring revenue model.

International Omnipod

International Omnipod revenue for 2022 increased $3.1 million, or 0.9%, to $363.0 million, compared with $359.9 million in 2021.

Excluding the 5.3% favorable impact of currency exchange, the remaining 11.6% increase was primarily due to higher volumes as we continue to expand awareness and access to the Omnipod, partially offset by the normalization of inventory

levels at distributors, which were elevated in the prior year due to the launch of Omnipod DASH and the impact of the pandemic on our recurring revenue.

In 2022, we expect higher International Omnipod revenue due to continued volume growth and market penetration aided by the ongoing adoption of Omnipod DASH throughout our international markets.

We expect this revenue growth to be partially offset by competition from AID systems and the impact of the pandemic on our recurring revenue.

Excluding the 11.2% unfavorable impact of currency exchange, the remaining 12.1% increase was primarily due to higher volumes as we continue to expand awareness and access to Omnipod DASH, partially offset by increased competition from AID systems.

In 2023, we expect higher International Omnipod revenue due to continued volume growth driven by the ongoing adoption of Omnipod DASH, partially offset by competition from AID systems and an unfavorable impact of currency exchange.

Drug Delivery

Drug Delivery revenue for 2021 increased $17.9 million, or 25.8%, to $87.4 million, compared with $69.5 million in 2020.

This increase was primarily driven by increased production volume due to higher demand from our partner.

In 2022, we expect Drug Delivery revenue to decline as production levels that were elevated during the pandemic normalize.

Drug Delivery revenue for 2022 decreased $29.9 million, or 34.2%, to $57.5 million, compared with $87.4 million in 2021.

This decrease was primarily driven by a decline in production volume due to lower demand from our partner.

In 2023, we expect Drug Delivery revenue to decline due to a lower demand forecast from our partner.

Operating Expenses

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Gross margin was 61.7% in 2022, compared with 68.4% in 2021.

The 400 basis point increase in gross margin was primarily driven by improved manufacturing efficiencies, higher average selling price due to growth in the pharmacy channel and a decrease in COVID-19 related costs, as the prior year included a period expense for two months of depreciation for under-utilized plant capacity, recruiting and screening expenses, expedited shipping costs and manufacturing incentives totaling $8.5 million, primarily associated with our contract manufacturer in Shenzhen, China.

These increases were partially offset by higher production costs as we continue to scale U.S manufacturing.

The 6.7 point decrease in gross margin was primarily driven by a $57.9 million net charge, or 4.5 points, associated with the voluntary MDCs we issued in 2022.

The decrease was also driven by higher expected production costs in the U.S.

as manufacturing continues to ramp and become a larger portion of our total production and higher costs associated with Omnipod 5 production.

These decreases were partially offset by higher average selling price due to growth in the pharmacy channel, where Pods have a higher average selling price due in part to the fact that we offer the PDM/Controller for no charge.

We expect gross margin for 2023 to be in the range of 65% to 66%.

We anticipate gross margin will be negatively impacted by unfavorable product mix, higher costs associated with Omnipod 5 production, and continued higher production costs as we further scale U.S.

manufacturing, and contend with inflation and global supply chain disruptions.

We believe these higher costs will be partially offset by the benefits of continued improvements in global manufacturing and supply chain operations and increased volumes in the pharmacy channel.

We anticipate gross margin to increase due to significant costs associated with the MDCs in 2022, most of which we do not expect to recur in 2023 and higher volume in the pharmacy channel and favorable geographical sales mix.

We believe these increases will be partially offset by continued higher production costs as we further scale U.S.

manufacturing, unfavorable product line mix due to higher costs associated with Omnipod 5 production, and higher costs as we contend with inflation.

Research and Development

Research and development expenses for 2022 increased $20.1 million, or 12.6%, to $180.2 million, compared with $160.1 million in 2021.

This increase was primarily due to year-over-year headcount additions to support our continued investment in development of Omnipod products.

This increase was primarily due to year-over-year headcount additions to support our continued investment in development of Omnipod products, partially offset by lower outside services used for clinical activities.

We expect research and development spending in 2023 to increase compared with 2022 as we continue to invest in advancing our innovation and clinical pipeline and contend with inflation.

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Selling, general and administrative expenses for 2022 increased $121.8 million, or 26.1%, to $587.8 million, compared with $466.0 million in 2021.

This increase was primarily attributable to year-over-year headcount additions, mainly to support international expansion, information technology, sales and commercial operations, a $14.1 million increase in advertising expense driven by our direct-to-consumer advertising campaign and online advertising, as well as a shift in resources and certain costs from our Omnipod 5 clinical efforts to our commercial strategy.

These increases were partially offset by $14.6 million of cumulative amortization expense in the prior year related to the resolution of a purchase price contingency associated with the acquisition of customer relationships from a former European distributor in 2018, and $4.8 million of stock-based compensation expense in the prior year resulting from a company-wide 20 th anniversary equity grant to non-executives, a significant portion of which vested immediately.

We expect selling, general and administrative expenses to increase in 2022 compared with 2021 due to expansion of our sales force and customer support personnel, investments to expand market acceptance and access for the Omnipod System, including direct-to-consumer advertising, and investments in our operating structure to facilitate operational efficiencies and continued growth.

This increase was primarily attributable to year-over-year headcount additions, mainly to support information technology and commercial operations and $25.2 million of legal charges related to the settlement of a patent infringement lawsuit, associated legal fees, and the settlement of a contract dispute.

To a lesser extent, these increases were due to an increase in investments to expand market acceptance and access to Omnipod, higher travel and entertainment expenses due to increased activity as COVID-19 restrictions have lifted, an increase in software license fees driven by investments in new systems to support our growing business and headcount additions, and higher amortization of cloud computing implementation costs.

Additionally, selling, general and administrative expenses include $3.4 million of costs associated with the retirement and advisory services of our former chief executive officer.

These increases were partially offset by a decrease in direct-to-consumer advertising resulting from the timing of spend.

We expect selling, general and administrative expenses to increase in 2023 compared with 2022 due to investments in our operating structure to facilitate operational efficiencies and continued growth, including customer support and a new enterprise

resource planning system.

Additionally, we plan to make investments to support the Omnipod System, including market acceptance and access, and the phased launch of Omnipod 5 in our international markets.

Non-Operating Items

Interest Expense, Net

Interest expense, net for 2021 increased $16.1 million, or 35.7%, to $61.2 million, compared with $45.1 million in 2020.

This increase was primarily driven by cash interest expense associated with the Term Loan entered into in May 2021.

As discussed under “ Accounting Standards Issued and Not Yet Adopted as of December 31, 2021, ” in January 2022, we adopted Accounting Standards Update 2020-06, Accounting for Convertible Debt Instruments and Contracts in an Entity's Own Equity (“ASU 2020-06”) , which eliminated most of the non-cash interest expense associated with our convertible notes.

Accordingly, we expect net interest expense to decrease approximately $30 million in 2022 compared with 2021.

Interest expense, net for 2022 decreased $34.5 million, or 56.4%, to $26.7 million, compared with $61.2 million in 2021.

This decrease was primarily driven by the adoption of Accounting Standards Update 2020-06, Accounting for Convertible Debt Instruments and Contracts in an Entity's Own Equity (“ASU 2020-06”), which eliminated most of the non-cash interest expense associated with our convertible notes.

Refer to Recently Adopted Accounting Standard in Note 2 to our consolidated financial statements for additional information.

Loss on Extinguishment of Debt

During 2021, we incurred a $42.4 million loss on extinguishment of debt related to the repurchase and conversion of all of our outstanding 1.375% Notes.

Refer to Note 15 to the consolidated financial statements for additional information.

Other (Expense) Income, Net

During 2021, we had other expense, net of $1.9 million, compared with other income, net of $3.3 million in 2020.

The $5.2 million decrease was primarily driven by unrealized foreign currency losses due to the change in exchange rates.

Refer to Note 15 to our consolidated financial statements for additional information.

Other Expense, Net

Other expense, net for 2022 decreased $0.8 million to $1.1 million, compared with $1.9 million in 2021.

The decrease was primarily driven by an increase in unrealized foreign currency gains, which was partially offset by realized foreign currency losses.

Income Tax Expense

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Our effective tax rate was 53.4% and 18.2% for 2022 and 2021, respectively.

The decrease in our effective tax rate was primarily driven by an increase in pre-tax income in the U.S.

The increase in our effective tax rate was primarily driven by a decrease in pre-tax income in the U.S.

where we have net operating loss carryforwards to reduce taxable profits and a full valuation allowance against deferred tax assets.

Additionally, we have not recorded tax benefits for current year losses in the United Kingdom due to valuation allowance requirements following a transfer of intellectual property that occurred during 2021.

See Note 22 to the consolidated financial statements for additional information on our income tax expense.

Refer to Note 22 to our consolidated financial statements for additional information on our income tax expense.

Adjusted EBITDA

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Depreciation and amortization 63.2 57.4

Stock-based compensation (2)

Stock-based compensation expense 38.6 34.4

Voluntary MDCs (1)

Legal costs (2)

CEO transition costs (3)

Loss on extinguishment of debt (4)

Adjusted EBITDA $ 224.8 $ 215.9

(1) The year ended December 31, 2020 includes $14.6 million of cumulative amortization expense associated with customer relationships that were acquired in 2018.

For more information see Note 17 to the consolidated financial statements.

(2) The year ended December 31, 2020 includes $7.3 million of stock-based compensation expense related to a company-wide 20th anniversary equity grant (excluding executives), a significant portion of which immediately vested.

(1) Represents net charge recorded for the estimated costs associated with the voluntary MDCs.

Refer to Note 13 to our consolidated financial statements for additional information.

(2) Includes a $20.0 million charge to settle patent infringement litigation with Roche, associated legal fees, and a $3.6 million charge to settle a contract dispute.

Refer to Note 17 to our consolidated financial statements for additional information.

(3) Represents costs associated with the retirement and advisory services of our former chief executive officer, including $2.3 million of accelerated stock-based compensation expense.

(4) Relates to the repurchase and conversion of all of our outstanding 1.375% Notes.

Refer to Note 15 to our consolidated financial statements for additional information.

Non-GAAP Financial Measures

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It is also one of the performance metrics that determines management incentive compensation.

Adjusted EBITDA represents net income (loss) plus net interest expense, income tax expense (benefit), depreciation and amortization, stock-based compensation and other significant unusual items, as applicable.

We present Adjusted EBITDA because management uses it as a supplemental measure in assessing our operating performance, and we believe that it is helpful

to investors, and other interested parties as a measure of our comparative operating performance from period to period.

Adjusted EBITDA represents net income (loss) plus net interest expense, income tax expense (benefit), depreciation and amortization, stock-based compensation expense and other significant transactions or events, such as legal settlements, medical device corrections, and loss on extinguishment of debt, that affect the period-to-period comparability of our operating performances, as applicable.

We present Adjusted EBITDA because management uses it as a supplemental measure in assessing our operating performance, and we believe that it is helpful to investors, and other interested parties as a measure of our comparative operating performance from period to period.

Adjusted EBITDA is a commonly used measure in determining business value and we use it internally to report results.

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Liquidity and Capital Resources

As of December 31, 2021, we had $791.6 million in cash and cash equivalents.

Additionally, we have a $60 million three year senior secured revolving credit facility (“Revolving Credit Facility”), which expires in 2024.

At December 31, 2021, no amount was outstanding under the Revolving Credit Facility.

The Revolving Credit Facility contains a covenant to maintain a specified leverage ratio under certain conditions when there are amounts outstanding under the facility.

It also contains other customary covenants, none of which are considered restrictive to our operations.

We believe that our current liquidity will be sufficient to meet our projected operating, investing and debt service requirements for at least the next twelve months.

Capitalization

The following table contains several key measures to gauge our financial condition and liquidity at the end of each year:

As of December 31,

(in millions) 2022 2021

Cash and cash equivalents $ 674.7 $ 791.6

Current portion of long-term debt $ 27.5 $ 25.1

Long-term debt, net $ 1,374.3 $ 1,248.8

Total debt, net $ 1,401.8 $ 1,273.9

Total stockholders’ equity $ 476.4 $ 556.3

Debt-to-total capital ratio 75 % 70 %

Net debt-to-total capital ratio 39 % 26 %

The increase in debt and the decrease in stockholders’ equity was primarily due to the adoption of ASU 2020-06.

Refer to Recently Adopted Accounting Standard in Note 2 to our consolidated financial statements for additional information.

Convertible Debt

To finance our operations and global expansion, we have periodically issued convertible senior notes, which are convertible into our common stock.

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The Capped Calls have an initial strike price of $335.90 per share and cover 3.5 million shares of our common stock.

During 2021, we obtained a $500 million seven year Term Loan for net proceeds of $489.5 million, which we used to fund the cash portion of the repurchase of our 1.375% Convertible Senior Notes due November 2024 (“1.375% Notes”).

The Term Loan contains covenants restricting or limiting our ability to incur additional indebtedness, make asset dispositions, create or permit liens, sell, transfer or exchange assets, guarantee certain indebtedness, and make acquisitions and other investments.

Credit Agreement

We have a $100 million three-year senior secured revolving credit facility (“Revolving Credit Facility”), which expires in 2024.

At December 31, 2022, no amount was outstanding under the Revolving Credit Facility.

The Revolving Credit Facility contains a covenant to maintain a specified leverage ratio under certain conditions when there are amounts outstanding under the facility.

It also contains other customary covenants, none of which are considered restrictive to our operations.

Additionally, we have a seven year term loan, which matures in 2028, that contains covenants restricting or limiting our ability to incur additional indebtedness, make asset dispositions, create or permit liens, sell, transfer or exchange assets, guarantee certain indebtedness, and make acquisitions and other investments.

Additional information regarding our debt is provided in Note 15 to the consolidated financial statements.

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.

Summary of Cash Flows

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(in millions) 2022 2021

Cash (used in) provided by:

Cash provided by (used in):

Operating activities $ 119.0 $ (68.1)

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Effect of exchange rate changes on cash (4.3) (5.5)

Net (decrease) increase in cash, cash equivalents, and restricted cash $ (115.6) $ 708.3

Net decrease in cash, cash equivalents, and restricted cash $ (116.7) $ (115.6)

Operating Activities

Net cash used in operating activities of $68.1 million in 2021 was primarily attributable to net income, as adjusted for depreciation and amortization, loss on extinguishment of debt, non-cash interest, and stock-based compensation, partially offset by a $263.6 million working capital cash outflow.

Net cash provided by operating activities of $119.0 million in 2022 was primarily attributable to net income, as adjusted for depreciation and amortization and stock-based compensation expense, partially offset by a $2.5 million working capital cash outflow.

The working capital outflow was driven by a $36.8 million increase in prepaid expenses and other assets, a $51.8 million increase in accounts receivable, and a $49.1 million increase in inventories, partially offset by a $137.6 million increase in accrued expenses and other liabilities.

The increase in prepaid expenses and other assets was primarily driven by an increase in cloud computing implementation costs.

The increase in accounts receivable was primarily due to an increase in sales in the U.S.

pharmacy channel, which has longer payment terms, partially offset by a decrease in unbilled accounts receivable related to lower production volumes of our Drug Delivery product.

The increase in inventories was primarily driven by a planned inventory build to satisfy demand.

Finally, the increase in accrued expenses and other liabilities was primarily driven by the voluntary MDCs issued for our Omnipod DASH PDMs and Omnipod 5 Controllers, an increase in rebates due to growth in the pharmacy channel and an increase in compensation costs due to higher incentive compensation achievement and head count additions.

Net cash used in operating activities of $68.1 million in 2021 was primarily attributable to net income, as adjusted for depreciation and amortization, loss on extinguishment of debt, non-cash interest, and stock-based compensation expense, partially offset by a $263.6 million working capital cash outflow.

The working capital outflow was driven by a $154.4 million increase in inventories, a $71.3 million increase in accounts receivable and a $46.7 million increase in prepaid expenses and other assets, partially offset by a $24.4 million increase in accrued expenses and other liabilities.

The increase in inventories was primarily driven by a planned inventory build to satisfy demand and the addition of our third highly automated manufacturing line.

The increase in accounts receivable was primarily due to an increase in U.S.

The increase in accounts receivable was primarily due to an increase in sales in the U,S.

pharmacy channel, which has longer payment terms.

The increase in prepaid expenses and other assets was primarily driven by an increase in cloud computing implementation

Finally, the increase in accrued expenses and other liabilities was primarily driven by an increase in rebates due to growth in the pharmacy channel and higher compensation costs due to head count additions.

Net cash provided by operating activities of $84.0 million in 2020 was primarily attributable to net income, as adjusted for depreciation and amortization, non-cash interest, and stock-based compensation, partially offset by a $63.4 million working capital cash outflow.

The working capital outflow was driven by a $50.5 million increase in inventories and a $34.1 million increase in prepaid expenses and other assets, partially offset by a $27.8 million increase in accrued expenses and other liabilities.

The increase in inventories was primarily driven by a planned inventory build associated with the further roll out of Omnipod DASH and an increase in work in progress inventory due to additional capacity from our new contract manufacturer.

The increase in prepaid expenses and other assets was primarily driven by an increase in software licenses due to head count additions, and an increase in software-as-a-service to support our strategic initiatives.

The increase in accrued expenses and other liabilities, primarily driven by manufacturing operations costs associated with the addition of our contract manufacturer in Kunshan (Shanghai), China, as well as an increase in pharmacy rebates due to the growth in the pharmacy channel.

The increase in prepaid expenses and other assets was primarily driven by an increase in cloud computing implementation costs.

Investing Activities

Net cash used in investing activities was $82.7 million in 2021, compared with net cash provided by investing activities of $14.0 million in 2020.

We had $191.1 million of net cash used in investing activities in 2022, compared with $82.7 million in 2021.

Capital Spending —Capital expenditures were $122.9 million and $111.9 million in 2022 and 2021, respectively, and primarily related to the purchase of equipment to increase our manufacturing capacity.

We expect capital expenditures for 2022 to increase compared with 2021 as we continue to invest in manufacturing capabilities to support our growth and new product launches.

We expect capital expenditures for 2023 to decrease compared with 2022 given our significant investments to build capacity in 2022, including acceleration of some of our spending on machinery and equipment for our new Malaysia manufacturing facility that is under construction.

We expect to fund our capital expenditures using existing cash.

Purchases and Sales of Investments —Proceeds from maturities of marketable securities were $40.0 million in 2021, compared with net proceeds from maturities of $180.5 million for 2020.

The $140.5 million decrease was driven by the prior year shift of a portion of our investment portfolio to investments that are classified as cash equivalents.

Acquisition of Intangible Assets —In 2020, following the resolution of a purchase price contingency associated with our 2018 acquisition of customer relationships from a former European distributor, we paid the distributor an additional $36.2 million for a total purchase price of $41.2 million.

We had previously paid the distributor $3.8 million in 2019 and the remainder in 2018.

Investments in Developed Software— Investments in developed software were $12.9 million and $10.8 million in 2022 and 2021, respectively, and primarily related to investments in projects to support our cloud-based capabilities.

Acquisitions and Investments —In 2022, we paid $26.0 million to acquire substantially all the assets related to the manufacture and production of shape-memory alloy wire assemblies that are used in the production of Omnipods from Dynalloy, Inc.

and $21.5 million to acquire developed technology and patents from AGC.

In addition we paid $7.8 million for strategic investments in two private companies.

Sales of Marketable Securities —The $40.0 million decrease in cash receipts from maturities of marketable securities in 2021 was driven by the prior year shift of a portion of our investment portfolio to investments that are classified as cash equivalents.

Financing Activities

Net cash provided by financing activities was $40.7 million in 2021, compared with $605.5 million in 2020.

Debt Issuance and Repayment —During 2021, we received net proceeds of $489.5 million from the issuance of the Term Loan and used $460.9 million of the proceeds to partially fund the cash portion of the repurchase of a portion of our 1.375% Notes.

In addition, we received net proceeds of $43.1 million from an equipment financing transaction and made $22.3 million in debt principal payments, which primarily related to our equipment financings.

In 2020, we received net proceeds of $68.3 million upon entering into a mortgage of our Acton facility.

Additionally, we received net proceeds of $60.0 million upon entering into two equipment financing transactions.

Issuance of Common Stock —In 2020, we sold 2.4 million common shares for $478.7 million in an underwritten registered offering.

Net proceeds from the offering were $477.5 million.

The proceeds provided us with additional liquidity to mitigate risk and allowed us to continue investing in the growth of our business and our strategic initiatives.

Option Exercises and Employee Stock Purchase Plan Proceeds —Total proceeds from option exercises was $15.4 million and $25.7 million in 2021 and 2020, respectively.

The $10.3 million decrease was primarily driven by fewer option exercises by our former chief executive officer.

Total proceeds from issuance of employee stock purchases was $8.1 million and $6.0 million in 2021 and 2020, respectively.

The $2.1 million increase was primarily driven by growth in plan participation.

We had $40.3 million of net cash used in financing activities in 2022, compared with $40.7 million of net cash provided by financing activities in 2021.

Debt Issuance and Repayment —During 2022, we made $24.5 million in aggregate principal payments on our equipment financings, mortgage, and term loan, compared with $22.3 million in 2021.

The $2.2 million increase is due to entering the term loan and an additional equipment financing in the second and third quarters of 2021, respectively.

During 2021, we received net proceeds of $489.5 million from the issuance of the term loan and used $460.9 million of cash to partially fund the repurchase of a portion of our 1.375% Notes.

We also received net proceeds of $43.1 million from the equipment financing transaction entered into in 2021.

Prepayments of Finance Lease Obligation— During 2022, we made $15.3 million in upfront payments upon entering into an agreement to acquire real estate in Malaysia.

Refer to Note 14 to the consolidated financial statements for additional information regarding this lease.

Option Exercises and Employee Stock Purchase Plan Proceeds —Total proceeds from option exercises and issuance of employee stock purchase plan shares were $16.3 million and $23.5 million in 2022 and 2021, respectively.

The $7.2 million decrease was primarily driven by option exercises in the prior year by our former chief executive officer who retired in 2018.

Payment of Taxes for Restricted Stock Net Settlements —Payments for taxes related to net restricted and performance stock unit settlements were $16.8 million and $28.2 million in 2022 and 2021, respectively.

The decrease in payments for taxes related to restricted stock net settlements was driven by a decrease in vesting of restricted shares in 2021, compared with 2020 driven by the immediate vesting of a significant portion of a company-wide 20th anniversary equity grant in the prior year.

The $11.4 million decrease was primarily driven by vesting of performance stock units in the prior year by our former chief executive officer who retired in 2018.

Commitments and Contingencies

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218.0 42.9 260.9

Operating lease obligations (1)

Lease obligations (1)

6.1 42.3 48.4

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Certain of these projected interest payments may differ in the future based on changes in market interest rates.

Additional information regarding our leases is provided in Note 14 to the consolidated financial statements.

(2) Excludes the impact of the interest rate swaps discussed in Note 16 to our consolidated financial statements.

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These commitments are derived from purchase orders, supplier contracts and open orders based on projected demand information.

Legal Proceedings —Roche Diabetes Care, Inc.

(“Roche”) filed a patent infringement lawsuit against us and is seeking monetary damages and attorneys’ fees and costs.

Since the patent expired in 2019, Roche is not seeking injunctive relief and the lawsuit will have no impact on ongoing sales of our products.

We believe that we have meritorious defenses to Roche’s claims and intend to vigorously defend against them.

At this time, based on available information regarding this litigation, we are unable to reasonably assess the ultimate outcome of this case or determine an estimate, or range of estimates, of potential losses, which could be material;

accordingly, we have excluded this exposure from the contractual obligations table above.

Refer to Note 17 to our consolidated financial statements for additional information regarding this matter.

Off-Balance Sheet Arrangements

As of December 31, 2022, we had various letters of credit totaling $18.6 million.

During 2022, the Company entered into a $20 million uncommitted letter of credit facility.

In conjunction with the execution of an agreement to acquire real estate in Malaysia, including land and building, a letter of credit of $17.2 million was issued under this facility to backstop a bank guarantee for the same amount.

The bank guarantee serves as security for the building while under construction.

Additional information regarding our letters of credit is provided in Note 17 to the consolidated financial statements.

Critical Accounting Policies and Estimates

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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.

We sell products both through distributors, who resell the products to consumers, and directly 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.

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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.

If the actual amounts of consideration that we receive differ from our estimates, we adjust our estimates, which affects 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.

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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.

that both incurred cost and elapsed time reflect the value generated, which best depicts the transfer of control to the customer.

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.

Contingencies

We are involved in various legal proceedings that arise in the ordinary course of business as further discussed in Note 17 to our consolidated financial statements, including a patent infringement case with Roche.

Accruals recorded and related disclosures 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 of December 31, 2021

In August 2020, the FASB issued ASU 2020-06, which simplifies the accounting for convertible instruments by eliminating certain separation models.

Under ASU 2020-06, a convertible debt instrument will generally be reported as a single liability at its amortized cost with no separate accounting for embedded conversion features.

Consequently, the effective interest rate of convertible debt instruments will be closer to the coupon interest rate.

In addition, ASU 2020-06 eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method.

The guidance is effective for us beginning in the first quarter of 2022.

Adoption of ASU 2020-06 as of January 1, 2022, resulted in a $213 million decrease in additional paid in capital from the derecognition of the bifurcated equity component, a $151 million increase in debt from the derecognition of the discount associated with the bifurcated equity component and a $62 million decrease to the opening balance of accumulated deficit, representing the cumulative interest expense recognized related to the amortization of the bifurcated conversion option.

Additionally, we expect to write-off the related deferred tax liabilities with a corresponding adjustment to the valuation allowance, resulting in no net impact to the cumulative adjustment to retained earnings.

Adoption of this standard will have no impact on our diluted earnings per share as we calculate earnings per share using the if-converted method.

Product Warranty

We provide a four-year warranty on our PDMs and Controllers sold in the United States and Europe and a five-year warranty on PDMs sold in Canada.

In addition, we 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, which include the current product cost, reclaim costs, shipping and handling costs and direct and incremental distribution and customer service support costs.

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.

In 2022, we issued voluntary MDCs for the Omnipod DASH PDM and the Omnipod 5 Controller and accrued an associated warranty reserve of $68.9 million, which was subsequently reduced by $11.0 million primarily due to significantly fewer customers requesting a replacement Omnipod DASH PDM prior to our updated PDM being available.

The remaining $54.6 million warranty reserve at December 31, 2022 includes an estimate regarding the number of:

• customers expected to request a replacement Omnipod 5 Controller;

• PDMs/Controllers that will be distributed by third parties and the cost of distribution assistance outside the U.S.;

• additional customer support personnel, their cost and the length of time they will be needed;

• old PDMs expected to be returned for disposal and the cost of reclaim

Changes in these assumptions could have a material impact on our estimated warranty reserve related to the MDCs.

Intangible Assets

Certain of our intangible assets have been acquired through business combinations or asset purchases that include multiple components, both of which have required us to perform valuations.

Our valuations involve assumptions, including, revenue and/or revenue growth rates associated with acquired assets, customer attrition rates, discount rate rates, royalty rates, tax rates, expected product development plans, product lifecycles, and obsolescence.

In 2022, we entered into an Asset Purchase Agreement pursuant to which we made a one-time payment of $25.0 million for the acquisition of technology and patents and the release of future obligations to AGC, including any future royalty obligations.

This amount, together with transaction costs, was allocated between the assets acquired and the settlement component based on estimated relative fair value.

The valuation of these intangible assets included assumptions based on future revenues, royalty rates, and obsolescence curves related to our Omnipod 5 product.

In addition, since certain of the intangible assets were classified as defensive assets, the valuation included an assumption related to the probability that a claim made by Insulet would be successful.

As a result of the relative fair value allocation, values of $12.0 million and $9.5 million were assigned to acquired technology and patents, respectively, and the settlement component was estimated to have a value of $3.6 million.

Changes in these assumptions could impact the values assigned to the intangible assets acquired and, accordingly have a material impact on the amount attributed to the settlement component in our results of operations.

Inventory Reserves

We reduce the carrying value of inventories for 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.

During 2022, we charged $8.4 million to the consolidated statement of operations for excess and obsolete inventory, including $4.8 million related to the phase-out of Classic Omnipod.

The determination of this charge involved assumptions regarding the number of PDMs expected to be utilized to satisfy warranty claims during the phase-out period and the length of time we will continue to offer Classic Omnipod outside the United States.

Forward-Looking Statements

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What changed 10-K

Item 7. Management’s Discussion and Analysis