INSULET CORP (PODD) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with 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, 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; and

•driving operational excellence.

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. In 2022. 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.

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Results of Operations

The discussion of our results of operations for 2019 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 for the fiscal year ended December 31, 2020 filed with the Securities and Exchange Commission on February 24, 2021.

Factors Affecting Operating Results

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. 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.

Comparison of the Years Ended December 31, 2021 and December 31, 2020

Revenue

(1) Constant currency revenue growth is a non-GAAP financial measure which should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with GAAP. See “Management’s Use of Non-GAAP Measures.”

Total revenue for 2021 increased $194.4 million, or 21.5%, to $1,098.8 million, compared with $904.4 million in 2020. Constant currency revenue growth of 19.7% 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.

U.S. Omnipod

U.S. Omnipod revenue for 2021 increased $124.6 million, or 23.6%, to $651.5 million, compared with $526.9 million in 2020. 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. U.S. 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.

International Omnipod

International Omnipod revenue for 2021 increased $51.9 million, or 16.9%, to $359.9 million, compared with $308.0 million in 2020. 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

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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.

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.

Operating Expenses

Cost of Revenue

Cost of revenue for 2021 increased $24.6 million, or 7.6%, to $346.7 million, compared with $322.1 million in 2020. Gross margin was 68.4% in 2021, compared with 64.4% in 2020. 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.

We expect gross margin for 2022 to be in the range of 67% to 68%. 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.

Research and Development

Research and development expenses for 2021 increased $13.3 million, or 9.1%, to $160.1 million, compared with $146.8 million in 2020. This increase was primarily due to year-over-year headcount additions to support our continued investment in development of Omnipod products. We expect research and development spending in 2022 to increase compared with 2021 as we continue to invest in advancing our innovation and clinical pipeline and contend with inflation.

Selling, General and Administrative

Selling, general and administrative expenses for 2021 increased $82.0 million, or 21.4%, to $466.0 million, compared with $384.0 million in 2020. 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 20th 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.

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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.

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.

Income Tax Expense

Income tax expense was $3.7 million on pre-tax income of $20.5 million for 2021 and $2.9 million on pre-tax income of $9.7 million for 2020. Our effective tax rate was 18.2% and 29.6% for 2021 and 2020, respectively. The decrease in our effective tax rate was primarily driven by an increase 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.

Adjusted EBITDA

The table below presents reconciliations of Adjusted EBITDA, a non-GAAP financial measure, to net income, the most directly comparable financial measure prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”):

(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.

Non-GAAP Financial Measures

Management uses the following non-GAAP financial measures:

Constant currency revenue growth represents the change in revenue between current and prior year periods using the exchange rate in effect during the applicable prior year period. We present constant currency revenue growth because we believe it provides meaningful information regarding our results on a consistent and comparable basis. Management uses this non-GAAP financial measure, in addition to financial measures in accordance with GAAP, to evaluate our operating results. 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

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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.

These non-GAAP financial measures should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with GAAP. In addition, the above definitions may differ from similarly titled measures used by others. Non-GAAP financial measures exclude the effect of items that increase or decrease our reported results of operations; accordingly, we strongly encourage investors to review our consolidated financial statements in their entirety.

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.

Debt

To finance our operations and global expansion, we have periodically issued convertible senior notes, which are convertible into our common stock. As of December 31, 2021, the following notes were outstanding:

(1) Per $1,000 face value of notes.

In connection with the issuance of the 0.375% Convertible Senior Notes (“0.375% Notes”), we purchased 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 0.375% Notes. 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. Additional information regarding our debt is provided in Note 15 to the consolidated financial statements.

Summary of Cash Flows

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. 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. 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

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costs. 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.

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.

Capital Spending—Capital expenditures were $111.9 million and $129.0 million in 2021 and 2020, 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 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.

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.

Payment of Taxes for Restricted Stock Net Settlements—Payments for taxes related to net restricted and performance stock unit settlements were $28.2 million and $29.8 million in 2021 and 2020, 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.

Commitments and Contingencies

Contractual Obligations—A summary of our contractual obligations and commitments for debt, operating lease obligations and other obligations at December 31, 2021 is presented in the following table:

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(1)Interest on debt and lease obligations are projected for future periods using the interest rates in effect as of December 31, 2021. Certain of these projected interest payments may differ in the future based on changes in market interest rates.

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

(3)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.

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.

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 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 sold, historical experience, trends, specific known market events and, as available, channel inventory data. Rebates charged against gross sales amounted to $143.3 million, $82.5 million and $59.1 million in 2021, 2020 and 2019, 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 $87.4 million for 2021. 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

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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.

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.