Item 8. Financial Statements and Supplementary Data

Our financial statements as of December 31, 2016 and 2015 and for each of the three years in the period ended December 31, 2016, and the Reports of the Registered Independent Public Accounting Firms are included in this report as listed in the index.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firms	48
Consolidated Balance Sheets as of December 31, 2016 and 2015	50
Consolidated Statements of Operations for the Years ended December 31, 2016, 2015 and 2014	51
Consolidated Statements of Comprehensive Loss for the Years ended December 31, 2016, 2015 and 2014	52
Consolidated Statements of Stockholders' Equity for the Years ended December 31, 2016, 2015 and 2014	53
Consolidated Statements of Cash Flows for the Years ended December 31, 2016, 2015 and 2014	54
Notes to Consolidated Financial Statements	55

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Insulet Corporation

We have audited the accompanying consolidated balance sheet of Insulet Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2016, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2016. Our audit of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Insulet Corporation and subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2017 expressed an unqualified opinion.

/s/ GRANT THORNTON LLP

Boston, Massachusetts

February 27, 2017

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

Insulet Corporation

We have audited the accompanying consolidated balance sheet of Insulet Corporation as of December 31, 2015, and the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2015. Our audits also include the financial statement schedule listed in the Index at Item 15(a) for the years ended December 31, 2015 and 2014. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Insulet Corporation at December 31, 2015, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the years ended December 31, 2015 and 2014, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Boston, Massachusetts

February 29, 2016

(except for the effects of discontinued operations as discussed in Notes 2 and 3 as

to which the date is September 6, 2016)

INSULET CORPORATION

CONSOLIDATED BALANCE SHEETS

	December 31, 2016				December 31, 2015
(In thousands, except share and per share data)
ASSETS
Current Assets
Cash and cash equivalents	$	137,174			$	122,672
Short-term investments	161,396				—
Accounts receivable, net	28,803				42,530
Inventories, net	35,514				12,024
Prepaid expenses and other current assets	7,073				4,283
Current assets from discontinued operations	—				9,252
Total current assets	369,960				190,761
Property and equipment, net	46,266				41,793
Other intangible assets, net	528				933
Goodwill	39,677				39,607
Other assets	216				76
Long-term assets from discontinued operations	—				1,956
Total assets	$	456,647			$	275,126
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	13,160			$	15,213
Accrued expenses and other current liabilities	40,959				36,744
Deferred revenue	1,309				2,361
Current portion of capital lease obligations	269				5,519
Current liabilities from discontinued operations	—				5,319
Total current liabilities	55,697				65,156
Capital lease obligations	—				269
Long-term debt, net of discount	332,768				171,698
Other long-term liabilities	5,032				3,952
Total liabilities	393,497				241,075
Commitments and contingencies (Note 15)
Stockholders’ Equity
Preferred stock, $.001 par value:
Authorized: 5,000,000 shares at December 31, 2016 and 2015. Issued and outstanding: zero shares at December 31, 2016 and 2015	—				—
Common stock, $.001 par value:
Authorized: 100,000,000 shares at December 31, 2016 and 2015. Issued and outstanding: 57,457,967 and 56,954,830 shares at December 31, 2016 and 2015, respectively	57				57
Additional paid-in capital	744,243				686,193
Accumulated other comprehensive loss	(726		)		(654		)
Accumulated deficit	(680,424		)		(651,545		)
Total stockholders’ equity	63,150				34,051
Total liabilities and stockholders’ equity	$	456,647			$	275,126

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

INSULET CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended December 31,
(In thousands, except share and per share data)	2016				2015				2014
Revenue	$	366,989			$	263,893			$	231,321
Cost of revenue	155,903				130,622				104,195
Gross profit	211,086				133,271				127,126
Operating expenses:
Research and development	55,710				43,208				27,900
Sales and marketing	94,483				78,407				50,552
General and administrative	71,597				60,392				57,548
Total operating expenses	221,790				182,007				136,000
Operating loss	(10,704		)		(48,736		)		(8,874		)
Interest expense	14,388				12,712				14,578
Other income (expense), net	825				58				(1,225		)
Loss on extinguishment of long-term debt	2,551				—				23,203
Interest and other income (loss), net	(16,114		)		(12,654		)		(39,006		)
Loss from continuing operations before income taxes	(26,818		)		(61,390		)		(47,880		)
Income tax expense	392				212				60
Net loss from continuing operations	(27,210		)		(61,602		)		(47,940		)
Loss from discontinued operations, net of tax ($408, $79 and $82 for the years ended December 31, 2016, 2015 and 2014, respectively)	(1,669		)		(11,918		)		(3,560		)
Net loss	$	(28,879	)		$	(73,520	)		$	(51,500	)
Net loss from continuing operations per share basic and diluted	$	(0.48	)		$	(1.08	)		$	(0.86	)
Net loss from discontinued operations per share basic and diluted	$	(0.03	)		$	(0.21	)		$	(0.06	)
Weighted-average number of shares used in calculating net loss per share	57,251,377				56,785,646				55,628,542

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

INSULET CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

	Years Ended December 31,
(In thousands)	2016				2015				2014
Net loss	$	(28,879	)		$	(73,520	)		$	(51,500	)
Other comprehensive loss, net of tax
Foreign currency translation adjustment, net of tax	135				(641		)		6
Unrealized loss on available-for-sale securities, net of tax	(207		)
Total other comprehensive (loss) income, net of tax	(72		)		(641		)		6
Total comprehensive loss	$	(28,951	)		$	(74,161	)		$	(51,494	)

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

INSULET CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock							Additional Paid-in Capital				Accumulated Deficit				Accumulated Other Comprehensive Loss				Total Stockholders’ Equity
(In thousands, except share data)	Shares			Amount
Balance, December 31, 2013	54,870,424			$	55			$	651,086			$	(526,525	)		$	(19	)		$	124,597
Exercise of options to purchase common stock	754,522			1				11,084				—								11,085
Issuance for employee stock purchase plan	13,620			—				583				—								583
Stock-based compensation expense	—			—				22,432				—								22,432
Restricted stock units vested, net of shares withheld for taxes	311,921			—				(8,665		)		—								(8,665		)
Net impact of conversion of 3.75% Notes	—			—				(61,728		)		—								(61,728		)
Allocation to equity for conversion feature on 2% Notes, net of issuance costs	—			—				34,455				—								34,455
Issuance of common stock pursuant to conversion of debt	348,535			—				12,564				—								12,564
Net loss	—			—				—				(51,500		)						(51,500		)
Other comprehensive income																6				6
Balance, December 31, 2014	56,299,022			56				661,811				(578,025		)		(13		)		83,829
Exercise of options to purchase common stock	449,149			1				7,198				—								7,199
Issuance for employee stock purchase plan	22,039			—				652				—								652
Stock-based compensation expense	—			—				19,178				—								19,178
Restricted stock units vested, net of shares withheld for taxes	184,620			—				(2,646		)		—								(2,646		)
Net loss	—			—				—				(73,520		)						(73,520		)
Other comprehensive loss																(641		)		(641		)
Balance, December 31, 2015	56,954,830			57				686,193				(651,545		)		(654		)		34,051
Exercise of options to purchase common stock	242,962			—				4,832				—				—				4,832
Issuance for employee stock purchase plan	30,949			—				802				—				—				802
Stock-based compensation expense	—			—				23,638				—				—				23,638
Restricted stock units vested, net of shares withheld for taxes	229,226			—				(2,866		)		—				—				(2,866		)
Allocation to equity for conversion feature on 1.25% Notes, net of issuance costs	—			—				64,509				—				—				64,509
Extinguishment of conversion feature on 2% Notes, net of issuance costs	—			—				(32,865		)		—				—				(32,865		)
Net loss												(28,879		)						(28,879		)
Other comprehensive loss																(72		)		(72		)
Balance, December 31, 2016	57,457,967			$	57			$	744,243			$	(680,424	)		$	(726	)		$	63,150

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

INSULET CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
(In thousands)	2016				2015				2014
Cash flows from operating activities
Net loss	$	(28,879	)		$	(73,520	)		$	(51,500	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization	13,833				15,838				12,223
Non-cash interest and other expense	10,068				7,678				10,253
Stock-based compensation expense	23,617				19,178				22,519
Loss on extinguishment of long-term debt	2,551				—				23,203
Provision for bad debts	2,070				1,184				3,254
Impairment and other charges	6,234				9,086				—
Changes in operating assets and liabilities:
Accounts receivable	12,551				(9,793		)		(10,069		)
Inventories	(24,103		)		(722		)		(3,635		)
Deferred revenue	(849		)		809				654
Prepaid expenses and other assets	(2,621		)		(1,460		)		662
Accounts payable, accrued expenses and other current liabilities	639				17,986				525
Other long-term liabilities	800				1,184				831
Net cash provided by (used in) operating activities(1)	15,911				(12,552		)		8,920
Cash flows from investing activities
Purchases of property and equipment	(22,115		)		(10,608		)		(11,486		)
Purchases of short-term investments	(177,654		)		—				—
Receipts from the maturity or sale of short-term investments	16,045				—				—
Proceeds from divestiture of business, net	5,714				—				—
Acquisition of Canadian distribution business	—				(4,715		)		—
Net cash used in investing activities	(178,010		)		(15,323		)		(11,486		)
Cash flows from financing activities
Principal payments of capital lease obligations	(5,518		)		(5,576		)		(3,858		)
Proceeds from issuance of convertible notes, net of issuance costs	333,725				—				194,490
Repayment of convertible notes	(153,628		)		—				(189,521		)
Proceeds from issuance of common stock, net of offering costs	4,854				7,851				11,586
Payment of withholding taxes in connection with vesting of restricted stock units	(2,866		)		(2,646		)		(8,665		)
Net cash provided by (used in) financing activities	176,567				(371		)		4,032
Effect of exchange rate changes on cash	34				(275		)		—
Net increase (decrease) in cash and cash equivalents	14,502				(28,521		)		1,466
Cash and cash equivalents, beginning of period	122,672				151,193				149,727
Cash and cash equivalents, end of period	$	137,174			$	122,672			$	151,193
Supplemental disclosure of cash flow information
Cash paid for interest	$	3,687			$	4,025			$	4,657
Cash paid for taxes	$	932			$	109			$	124
Non-cash investing and financing activities
Allocation to equity for conversion feature for issuance of 2% convertible notes	$	—			$	—			$	35,638
Allocation to equity for conversion feature for issuance of 1.25% convertible notes	$	66,689			$	—			$	—
Allocation to equity for conversion feature for the repurchase of 2% convertible notes	$	(32,865	)		$	—			$	—
Common stock issued in exchange for 3.75% convertible notes	$	—			$	—			$	12,564
Purchases of property and equipment under capital lease	$	—			$	5,721			$	1,474

(1) Includes activity related to discontinued operations. See note 3 to the consolidated financial statements for discussion of discontinued operations.

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

INSULET CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of the Business

Insulet Corporation, the "Company," is primarily engaged in the development, manufacturing and sale of its proprietary Omnipod Insulin Management System (the “Omnipod System”), an innovative, discreet and easy-to-use continuous insulin delivery system for people with insulin-dependent diabetes. The Omnipod System features a small, lightweight, self-adhesive disposable tubeless Omnipod device which is worn on the body for approximately three days at a time and its wireless companion, the handheld Personal Diabetes Manager (“PDM”). Conventional insulin pumps require people with insulin-dependent diabetes to learn to use, manage and wear a number of cumbersome components, including up to 42 inches of tubing. In contrast, the Omnipod System features only two discreet, easy-to-use devices that eliminate the need for a bulky pump, tubing and separate blood glucose meter, provides for virtually pain-free automated cannula insertion, communicates wirelessly and integrates a blood glucose meter. The Company believes that the Omnipod System’s unique proprietary design and features allow people with insulin-dependent diabetes to manage their diabetes with unprecedented freedom, comfort, convenience, and ease.

Commercial sales of the Omnipod System began in the United States in 2005. The Company sells the Omnipod System in the United States through direct sales to customers or through its distribution partners. The Omnipod System is currently available in multiple countries in Europe, Canada and Israel.

In addition to using the Omnipod for insulin delivery, the Company also partners with global pharmaceutical and biotechnology companies to tailor the Omnipod System technology platform for the delivery of subcutaneous drugs across multiple therapeutic areas.

The Company acquired Neighborhood Holdings, Inc. and its wholly-owned subsidiaries (collectively, “Neighborhood Diabetes”) in June 2011. Through Neighborhood Diabetes, the Company provided customers with blood glucose testing supplies, traditional insulin pumps, pump supplies and pharmaceuticals and had the ability to process claims as either durable medical equipment or through pharmacy benefits. In February 2016, the Company sold Neighborhood Diabetes to Liberty Medical LLC ("Liberty Medical"). Additional information regarding the disposition and treatment of the Neighborhood Diabetes business as discontinued operations is provided in note 3 to these consolidated financial statements.

Note 2. Summary of Significant Accounting Policies

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in the application of certain of its significant accounting policies that may materially affect the reported amounts of assets, liabilities, equity, revenue and expenses. The most significant estimates used in these financial statements include the valuation of stock-based compensation expense, acquired businesses, accounts receivable, inventories, goodwill, deferred revenue, equity instruments, convertible debt, the lives of property and equipment and intangible assets, as well as warranty and doubtful accounts allowance reserve calculations. Actual results may differ from those estimates.

Foreign Currency Translation

For foreign operations, asset and liability accounts are translated at exchange rates as of the balance sheet date; income and expenses are translated using weighted average exchange rates for the reporting period. Resulting translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders' equity. Gains and losses arising from transactions and translation of period-end balances denominated in currencies other than the functional currency, primarily the Canadian dollar, are included in other income (expense), net, and were not material for fiscal years 2016, 2015 and 2014.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

For the purpose of the financial statement classification, the Company considers all highly-liquid investment instruments with original maturities of 90 days or less, when purchased, to be cash equivalents. Cash equivalents

include money market mutual funds, corporate bonds, and certificates of deposit which are carried at cost which approximates their fair value. Included in the Company's cash and cash equivalents are amounts set aside for collateral on outstanding letters of credit, related to security deposits for lease obligations, totaling $1.2 million as of December 31, 2016 and December 31, 2015.

Short-term Investments

Short-term investment securities consist of available-for-sale marketable securities and are carried at fair value with unrealized gains or losses included as a component of other comprehensive loss in stockholders' equity. Investments, exclusive of cash equivalents, with a stated maturity date of one year or less from the balance sheet date or that are expected to be used in current operations, are classified as short-term investments. Short-term investments include U.S. government and agency bonds, corporate bonds, and certificates of deposit.

The Company reviews investments for other-than-temporary impairment when the fair value of an investment is less than its amortized cost. If an available-for-sale security is other than temporarily impaired, the loss is charged to earnings.

Property and Equipment

Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful life of the respective assets. Leasehold improvements are amortized over their useful life or the life of the lease, whichever is shorter. Assets acquired under capital leases are amortized in accordance with the respective class of owned assets and the amortization is included with depreciation expense. Maintenance and repair costs are expensed as incurred.

Business Combinations

The Company recognizes the assets and liabilities assumed in business combinations on the basis of their fair values at the date of acquisition. The Company assesses the fair value of assets, including intangible assets, using a variety of methods and each asset is measured at fair value from the perspective of a market participant. The method used to estimate the fair values of intangible assets incorporates significant assumptions regarding the estimates a market participant would make in order to evaluate an asset, including a market participant’s use of the asset and the appropriate discount rates for a market participant. Assets recorded from the perspective of a market participant that are determined to not have economic use for the Company are expensed immediately. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. Transaction costs and restructuring costs associated with a business combination are expensed as incurred.

Segment Reporting

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision-maker ("CODM") in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company has concluded that their Chief Executive Officer is the CODM as he is the ultimate decision maker for key operating decisions, determining the allocation of resources and assessing the financial performance of the Company. These decisions, allocations and assessments are performed by the CODM using consolidated financial information. Consolidated financial information is utilized by the CODM as the Company’s current product offering primarily consists of drug delivery and the Omnipod System. The Company’s products are relatively consistent and manufacturing is centralized and consistent across product offerings. Based on these factors, key operating decisions and resource allocations are made by the CODM using consolidated financial data and as such the Company has concluded that they operate as one segment.

Goodwill

Goodwill represents the excess of the cost of acquired businesses over the fair value of identifiable net assets acquired. The Company follows the provisions of Financial Accounting Standards Board ("FASB") ASC 350-20, Intangibles - Goodwill and Other (“ASC 350-20”). The Company performs an assessment of its goodwill for impairment on at least an annual basis or whenever events or changes in circumstances indicate there might be impairment. The Company's annual impairment test date is October 1st.

The majority of the Company's goodwill resulted from the acquisition of Neighborhood Diabetes in June 2011. This goodwill largely reflects operational synergies and expansion of product offerings across markets complementary to the existing core Omnipod offerings.

As the Company operates in one segment, the Company has considered whether that segment contains multiple reporting units. The Company has concluded that there is a single reporting unit as the Company does not

have segment managers and discrete financial information below consolidated results is not reviewed on a regular basis. Based on this conclusion, goodwill was tested for impairment at the enterprise level. The Company performs an annual goodwill impairment test unless interim indicators of impairment exist. The Company has the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of its sole reporting unit is less than its carrying amount. This qualitative analysis is used as a basis for determining whether it is necessary to perform the two-step goodwill impairment analysis. If the Company determines that it is more likely than not that its fair value is less than its carrying amount, then the two-step goodwill impairment test will be performed. The first step compares the carrying value of the reporting unit to its fair value using a discounted cash flow analysis. If the reporting unit’s carrying value exceeds its fair value, the Company would record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value. There was no impairment of goodwill during the years ended December 31, 2016, 2015 or 2014. As a result of the sale of Neighborhood Diabetes, goodwill totaling $0.1 million was allocated to the discontinued business on the disposition date using the relative fair value approach and was included in long-term assets from discontinued operations as of December 31, 2015.

The following table presents the change in carrying amount of goodwill from continuing operations during the period indicated:

	Years Ended December 31,
(In thousands)	2016				2015
Goodwill:
Beginning balance	$	39,607			$	37,396
Goodwill as a result of acquisition	—				2,403
Foreign currency adjustment	70				(192		)
Ending balance	$	39,677			$	39,607

Revenue Recognition

The Company generates the majority of its revenue from sales of its Omnipod System to customers and third-party distributors who resell the products to patients with diabetes.

Revenue recognition requires that persuasive evidence of a sales arrangement exists, delivery of goods occurs through transfer of title and risk and rewards of ownership, the selling price is fixed or determinable and collectability is reasonably assured. With respect to these criteria:

•	The evidence of an arrangement generally consists of a physician order form, a patient information form and, if applicable, third-party insurance approval for sales directly to patients or a purchase order for sales to a third-party distributor.

•	Transfer of title and risk and rewards of ownership are passed to the patient or third-party distributor upon shipment of the products.

•

The selling prices for all sales are fixed and agreed with the patient or third-party distributor and, if applicable, the patient’s third-party insurance provider(s) prior to shipment and are based on established list prices or, in the case of certain third-party insurers, contractually agreed upon prices. Provisions for discounts, rebates and other adjustments to customers are established as a reduction to revenue in the same period the related sales are recorded.

The Company offers a 45-day right of return for sales of its Omnipod System in the United States, and a 90-day right of return for sales of its Omnipod System in Canada to new patients and defers revenue to reflect estimated sales returns in the same period that the related product sales are recorded. Returns are estimated through a comparison of the Company’s historical return data to its related sales. Historical rates of return are adjusted for known or expected changes in the marketplace when appropriate. When doubt exists about reasonable assuredness of collectability from specific customers, the Company defers revenue from sales of products to those customers until payment is received.

In June 2011, the Company entered into a development agreement with a U.S. based pharmaceutical company (the "Development Agreement”). Under the Development Agreement, the Company was required to perform design, development, regulatory, and other services to support the pharmaceutical company as it worked to obtain regulatory approval to use the Company’s drug delivery technology as a delivery method for its pharmaceutical. Over the term of the Development Agreement, the Company has invoiced amounts based upon meeting certain deliverable milestones. Revenue on the Development Agreement was recognized using a

proportional performance methodology based on efforts incurred and total payments under the agreement. The impact of changes in the expected total effort or contract payments was recognized as a change in estimate using the cumulative catch-up method. The pharmaceutical company received regulatory approval and now purchases product from the Company for use with its pharmaceutical under a supply agreement. Product revenue under this arrangement is recognized at the time that all of the revenue recognition criteria are met, typically upon shipment.

The Company had deferred revenue of $1.9 million and $2.5 million as of December 31, 2016 and 2015, respectively. Deferred revenue included $0.6 million and $0.2 million classified in other long-term liabilities as of December 31, 2016 and 2015, respectively. Deferred revenue primarily relates to undelivered elements within certain of the Company's developmental arrangements and other instances where the Company has not yet met the revenue recognition criteria.

Collaborative Arrangements

The Company enters into collaborative arrangements for ongoing initiatives to develop products. Although the Company does not consider any individual alliance to be material, certain of the more notable alliances are described below.

Eli Lilly and Concentrated insulins: In May 2013, the Company entered into an agreement with Eli Lilly and Company (Eli Lilly) to develop a new version of the Omnipod insulin pump specifically designed to deliver Humulin R U-500 insulin, a concentrated form of insulin used by people with highly insulin resistant Type 2 diabetes. In January 2016, the Company entered into a development agreement with Eli Lilly to develop a new version of Insulet's Omnipod tubeless insulin delivery system, specifically designed to deliver Lilly's Humalog 200 units/mL insulin, a concentrated form of insulin used by higher insulin-requiring patients with diabetes that provides the same dose of insulin in half the volume of Lilly's Humalog U100 insulin. Under the terms of these arrangements, the parties share the responsibility of the permissible costs that are incurred. Any amounts incurred in excess of the permissible shared costs that are the responsibility of one party becomes due and payable by the other party. Consideration received and payments made by the Company under the terms of the arrangements are recorded within research and development expense.

Shipping and Handling Costs

The Company does not typically charge its customers for shipping and handling costs associated with shipping its product to its customers unless non-standard shipping and handling services are requested. These shipping and handling costs are included in general and administrative expenses and were $4.1 million, $3.7 million and $2.3 million in the years ended December 31, 2016, 2015 and 2014, respectively.

Concentration of Credit Risk

Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, short-term investments and accounts receivable. The Company maintains the majority of its cash and short-term investments with one financial institution. Accounts are partially insured up to various amounts mandated by the Federal Deposit Insurance Corporation or by the foreign country where the account is held.

The Company purchases Omnipod Systems from Flex Ltd., its single source supplier. As of December 31, 2016 and December 31, 2015, liabilities to this vendor represented approximately 16% and 28% of the combined balance of accounts payable, accrued expenses and other current liabilities, respectively.

Revenue for customers comprising more than 10% of total revenue were as follows:

		Twelve Months Ended December 31,
		2016		2015		2014
Amgen, Inc.		17%		10%		*
Ypsomed Distribution AG		16%		12%		19%
RGH Enterprises, Inc.		10%		13%		14%

• Customer represents less than 10% of revenue for the period.

Reclassification of Prior Period Balances

Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation including adjusting footnotes to reflect the presentation of discontinued operations as further discussed in note 3. These reclassifications have no effect on the previously reported net loss.

Subsequent Events

Events occurring subsequent to December 31, 2016 have been evaluated for potential recognition or disclosure in the consolidated financial statements.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 requires that a company recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Under this guidance, a company makes additional estimates regarding performance conditions and the allocation of variable consideration and must evaluate whether revenue derived from a contract should be recognized at a point in time or over time. The guidance is effective in fiscal years beginning January 1, 2018, with early adoption permitted. The Company plans to adopt the standard as of the required effective date. The Company is currently evaluating the impact of ASU 2014-09. As part of the Company's assessment work to-date, the Company has formed an implementation work team, completed training on the new ASU’s revenue recognition model and is continuing its contract review and documentation, for which to date the Company has made significant progress. Over the course of 2017, the Company plans to finalize its evaluation and implement any required policy, process, and internal control changes required as a result of that evaluation. The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company has not yet selected a transition method nor has it determined the full effect of the standard on its consolidated financial position and results of operations.

In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718), Accounting for Share-Based Payments when the terms of an award provide that a performance target could be achieved after the requisite service period ("ASU 2014-12"). ASU 2014-12 clarifies the period over which compensation cost would be recognized in awards with a performance target that affects vesting and that could be achieved after the requisite service period. Compensation cost would be recognized over the required service period, if it is probable that the performance condition will be achieved. The guidance is effective in fiscal years beginning after January 1, 2016, with early adoption permitted. The Company adopted ASU 2014-12 on January 1, 2016 and its adoption did not have an impact on the consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements- Going Concern ("ASU 2014-15"). ASU No. 2014-15 requires management to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The new standard is effective for fiscal years ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. The Company has adopted the standard as of December 31, 2016 and has concluded that substantial doubt about the Company’s ability to continue as a going concern does not exist.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory ("ASU 2015-11"). ASU 2015-11 amends existing guidance and requires entities to measure most inventory at the lower of cost and net realizable value. The guidance is effective prospectively for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. Upon adoption, entities must disclose the nature of and reason for the accounting change. The Company is currently evaluating the impact of ASU 2015-11 but does not expect it to be material to the consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations, Simplifying the Accounting for Measurement Period Adjustments ("ASU 2015-16"). ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. The guidance is effective in 2016 for calendar year-end public entities. Early adoption is permitted. The Company has adopted ASU 2015-16 on January 1, 2016 and its adoption did not have an impact on the consolidated financial statements.

In January 2016, the FASB issued Accounting Standards Update 2016-01 ("ASU 2016-01"), Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 changes the current GAAP model for the accounting of equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. All equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification (changes in fair value reported in other comprehensive income (loss)) for equity securities with readily determinable fair values. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The classification and measurement guidance will be effective in fiscal years beginning after December 15, 2017, and interim periods within those years. The Company is currently evaluating the impact of ASU 2016-01.

In February 2016, the FASB issued ASU No. 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of ASU 2016-02.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted for all entities. Had the standard been adopted as of December 31, 2016, the Company's deferred tax assets (tax effected) would have increased by approximately $23.8 million, which would have been offset by a full valuation allowance. Overall, the Company does not expect adoption of the standard to have a material impact on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) ("ASU 2016-15"). ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of ASU 2016-15 but does not expect it to be material to the consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash (a consensus of the Emerging Issues Task Force) ("ASU 2016-18"). ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of ASU 2016-18 but does not expect it to be material to the consolidated financial statements.

In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements ("ASU 2016-19"). ASU 2016-19 includes numerous technical corrections and clarifications to GAAP that are designed to remove inconsistencies in the board’s accounting guidance. Several provisions in this accounting guidance are effective immediately which did not have an impact on the Company’s consolidated financial statements. Additional provisions in this accounting guidance are effective for the Company in annual financial reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact that the adoption of the additional provisions in this accounting guidance may have on its consolidated financial statements.

Other Significant Policies:

The following table identifies the Company's other significant accounting policies and the note and page where a detailed description of each policy can be found.

Fair Value Measurements	Note	5		Page	64
Convertible Debt	Note	7		Page	66
Accounts Receivable and Allowance for Doubtful Accounts	Note	10		Page	71
Inventories	Note	11		Page	71
Other Intangible Assets	Note	13		Page	73
Accrued Expenses and Other Current Liabilities- Product Warranty Costs	Note	14		Page	74
Commitments and Contingencies	Note	15		Page	75
Equity - Stock-Based Compensation	Note	16		Page	76
Income Taxes	Note	18		Page	80

Note 3. Discontinued Operations

In February 2016, the Company sold Neighborhood Diabetes to Liberty Medical for approximately $6.2 million in cash, which included $1.2 million of closing adjustments finalized in June 2016 and paid by Liberty Medical. The results of operations, assets, and liabilities of Neighborhood Diabetes, are classified as discontinued operations for all periods presented, except for certain corporate overhead costs which remain in continuing operations.

In connection with the 2016 disposition, the Company entered into a transition services agreement pursuant to which Insulet is providing various services to Liberty Medical on an interim transitional basis. The services generally commenced on the closing date and terminated six months following the closing. Services provided by Insulet included certain information technology and back office support. The charges for such services were generally intended to allow the service provider to recover all out-of-pocket costs. Billings by Insulet under the transition services agreement were recorded as a reduction of the costs to provide the respective service in the applicable expense category in the consolidated statements of operations. This transitional support is to provide Liberty Medical the time required to establish its stand-alone processes for such activities that were previously provided by Insulet as described above and does not constitute significant continuing support of Liberty Medical's operations. Total expenses incurred for such transition services, which are reimbursed in full, were $0.9 million for the year ended December 31, 2016.

Following the disposition, the Company entered into a distribution agreement with the Neighborhood Diabetes subsidiary of Liberty Medical to continue to act as a distributor for the Company's products. Omnipod sales transacted through Neighborhood Diabetes prior to the divestiture that were previously eliminated in consolidation were $0.3 million, $2.8 million and $2.3 million for the years ended December 31, 2016, 2015 and 2014, respectively. These amounts were historically reported in the Neighborhood Diabetes revenue results and are being presented based on current market terms of products sold to the Neighborhood Diabetes subsidiary of Liberty Medical.

Post divestiture, Omnipod System sales to the Neighborhood Diabetes subsidiary of Liberty Medical were $0.4 million for the year ended December 31, 2016.

The following is a summary of the operating results of Neighborhood Diabetes included in discontinued operations for the year ended December 31, 2016, 2015 and 2014:

	Years Ended December 31,
(In thousands)	2016				2015				2014
Discontinued operations:
Revenue (1)	$	7,730			$	60,332			$	57,399
Cost of revenue	5,468				45,449				41,237
Gross profit	2,262				14,883				16,162
Operating expenses:
Sales and marketing	1,542				9,945				10,292
General and administrative (2)	1,853				16,967				9,293
Total operating expenses	3,395				26,912				19,585
Operating Loss	(1,133		)		(12,029		)		(3,423		)
Interest and other income (expense), net	(128		)		190				(55		)
Loss from discontinued operations before taxes	(1,261		)		(11,839		)		(3,478		)
Income tax expense	408				79				82
Net loss from discontinued operations	$	(1,669	)		$	(11,918	)		$	(3,560	)

(1) Revenue for the year ended December 31, 2016 includes revenue from operations of Neighborhood Diabetes through the date of sale in February 2016.

(2) Included in general and administration expenses for the year ended December 31, 2015 was a charge of $9.1 million related to the impairment of Neighborhood Diabetes asset group.

Depreciation and amortization expense included in discontinued operations was $0.1 million, $3.3 million and $4.5 million for the years ended December 31, 2016, 2015 and 2014, respectively.

The following is a summary of the Neighborhood Diabetes assets and liabilities presented as discontinued operations:

(in thousands)	December 31, 2015
ASSETS
Accounts receivable, net	$	5,857
Inventories, net	2,019
Prepaid expenses and other current assets	1,376
Total current assets of discontinued operations	9,252
Intangible assets, net	1,788
Goodwill	140
Other non-current assets	28
Total long-term assets of discontinued operations	1,956
Total assets of discontinued operations	$	11,208
LIABILITIES
Accounts payable	$	3,436
Accrued expenses and other current liabilities	1,883
Current liabilities of discontinued operations	5,319
Total liabilities of discontinued operations	$	5,319

Net operating cash flows used in discontinued operations in the years ended December 31, 2016 and 2015 were $2.0 million and $3.2 million, respectively. Net operating cash flows provided by discontinued operations in the year ended December 31, 2014 was $0.2 million.

4. Business Combination

On July 7, 2015, the Company executed an asset purchase agreement with GlaxoSmithKline (GSK) whereby the Company acquired GSK's assets associated with the Canadian distribution of the Company's products. With the acquisition, the Company assumed all distribution, sales, marketing, training and support activities for the Omnipod System in Canada through its wholly-owned subsidiary, Insulet Canada Corporation.

The acquisition allows the Company to establish a local presence in Canada that enables it to engage directly with healthcare providers and Omnipod users. The aggregate purchase price of approximately $4.7 million consisted of cash paid at closing, subject to certain adjustments.

The Company has accounted for the acquisition as a business combination. Under business combination accounting, the assets and liabilities were recorded as of the acquisition date, at their respective fair values, and consolidated with the Company. The excess of the purchase price over the fair value of net assets acquired was recorded as goodwill and largely reflects operational synergies complimentary to the existing business. The operating results of GSK Canada have been included in the consolidated financial statements since July 7, 2015, the date the acquisition was completed. These results are not material to the Company's revenues or operating results.

Prior to the acquisition the Company had a pre-existing relationship with GSK. As a result of the acquisition, the pre-existing relationship was settled by Insulet, with Insulet repurchasing the $0.5 million of inventory held by GSK at the date of the asset purchase. The inventory repurchased had been sold to GSK during the second quarter of 2015, however no revenue was recognized by Insulet on these sales given the expectation to repurchase. As the inventory was repurchased at cost, there were no gains or losses associated with this transaction. This transaction was accounted for separately from the business combination.

The table below details the consideration transferred to acquire GSK.

(in thousands)
Cash	$	5,000
Employment liability transfer fee	(285		)
Total consideration	$	4,715

The assets acquired and liabilities assumed were recorded at fair value at date of acquisition as follows:

(in thousands)
Goodwill	$	2,403
Contractual relationships	2,100
Inventory step-up	230
Assumed liabilities	(18		)
	$	4,715

During the year ended December 31, 2015, the Company incurred transaction costs of $0.1 million, consisting primarily of legal fees, which have been recorded as general and administrative expenses. The Company determined that there was no value to the reacquisition of the Canada exclusivity contract due to the contribution charges of the contractual relationships.

Note 5. Fair Value Measurements

The Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”) related to the fair value measurement of certain of its assets and liabilities. ASC 820 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. When estimating fair value, depending on the nature and complexity of the asset or liability, the Company may use one or all of the following approaches:

•	Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.

•	Cost approach, which is based on the cost to acquire or construct comparable assets less an allowance for functional and/or economic obsolescence.

•	Income approach, which is based on the present value of the future stream of net cash flows.

To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, as described in ASC 820, of which the first two are considered observable and the last unobservable:

Level 1 — quoted prices in active markets for identical assets or liabilities

Level 2 — observable inputs other than quoted prices in active markets for identical assets or liabilities

Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions

Certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities are carried at cost, which approximates their fair value because of the short-term maturity of these financial instruments.

The following table provides a summary of assets that are measured at fair value as of December 31, 2016 and 2015, aggregated by the level in the fair value hierarchy within which those measurements fall:

	Fair Value Measurements
(in thousands)	Total				Level 1				Level 2				Level 3
December 31, 2016
Recurring fair value measurements:
Cash equivalents:
Money market mutual funds	$	93,467			$	93,467			$	—			$	—
Corporate bonds	$	4,203			$	—			$	4,203			$	—
Certificates of deposit	$	735			$	—			$	735			$	—
Total cash equivalents	$	98,405			$	93,467			$	4,938			$	—
Short-term investments:
U.S. government and agency bonds	$	79,093			$	49,963			$	29,130			$	—
Corporate bonds	$	56,653			$	—			$	56,653			$	—
Certificates of deposit	$	25,650			$	—			$	25,650			$	—
Total short-term investments	$	161,396			$	49,963			$	111,433			$	—
December 31, 2015
Recurring fair value measurements:
Cash equivalents:
Money market mutual funds	$	98,223			$	98,223			$	—			$	—
Non-recurring fair value measurements:
Long-term assets of discontinued operations (1)	$	1,800			$	—			$	—			$	1,800

(1)

Long-lived assets held and used relate to the asset group of the Neighborhood Diabetes business which consists of definite lived intangible assets and property and equipment. During the fourth quarter of 2015, the Company recognized an impairment charge on this asset group totaling $9.1 million, which represented the difference between the fair value of the asset group and the carrying value. As a result of the impairment, the asset group was recorded at fair value as of December 31, 2015. The fair value for the asset group was determined using the direct cash flows expected to be received from the disposition of the asset group, which was completed in February 2016 (level 3 input).

Debt

The estimated fair value of debt is based on the Level 2 quoted market prices for the same or similar issues and included the impact of the conversion features.

The carrying amounts, net of unamortized discounts and issuance costs, and the estimated fair values of the Company's convertible debt as of December 31, 2016 and 2015 are as follows:

	December 31, 2016								December 31, 2015
(in thousands)	Carrying Value				Estimated Fair Value				Carrying Value				Estimated Fair Value
2% Convertible Senior Notes	$	59,737			$	71,909			$	171,698			$	207,882
1.25% Convertible Senior Notes	$	273,031			$	320,969			$	—			$	—

Note 6. Short-term Investments

The Company's short-term investments are classified as available-for-sale and have maturity dates that range from zero months to 19 months as of December 31, 2016. The investments are all classified as short-term as they are available for current operations. Amortized costs, gross unrealized holding gains and losses, and fair values at December 31, 2016 are as follows:

(in thousands)	Amortized cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
December 31, 2016
U.S. government and agency bonds	$	79,211			$	—			$	(118	)		$	79,093
Corporate bonds	56,742				—				(89		)		56,653
Certificates of deposit	25,650				—				—				25,650
Total short-term investments	$	161,603			$	—			$	(207	)		$	161,396

The Company had no realized gains or losses in 2016. The Company had no short-term investments at December 31, 2015.

Note 7. Convertible Debt

The Company had outstanding convertible debt and related deferred financing costs on its consolidated balance sheet as follows:

	As of
(in thousands)	December 31, 2016				December 31, 2015
Principal amount of the 2% Convertible Senior Notes	$	67,084			$	201,250
Principal amount of the 1.25% Convertible Senior Notes	345,000				—
Unamortized debt discount	(69,684		)		(25,704		)
Deferred financing costs	(9,632		)		(3,848		)
Long-term debt, net of discount	$	332,768			$	171,698

Interest expense related to the convertible notes is as follows:

	Years Ended December 31,
(in thousands)	2016				2015				2014
Contractual coupon interest	4,467				4,025				4,657
Accretion of debt discount	8,800				6,552				8,007
Amortization of debt issuance costs	1,270				1,126				895
Loss on extinguishment of long-term debt	2,551				—				23,203
Total interest and loss on extinguishment	$	17,088			$	11,703			$	36,762

1.25% Convertible Senior Notes

In September 2016, the Company issued and sold $345.0 million in principal amount of 1.25% Convertible Senior Notes, due September 15, 2021 (the "1.25% Notes"). The interest rate on the notes is 1.25% per annum, payable semi-annually in arrears in cash on March 15 and September 15 of each year. Interest began accruing on September 13, 2016; the first interest payment is due on March 15, 2017. The 1.25% Notes are convertible into the Company’s common stock at an initial conversion rate of 17.1332 shares of common stock per $1,000 principal amount of the 1.25% Notes, which is equivalent to a conversion price of approximately $58.37 per share, subject to adjustment under certain circumstances. The 1.25% Notes will be convertible prior to the close of business on the business day immediately preceding June 15, 2021 only under certain circumstances and during certain periods, and will be convertible on or after June 15, 2021 until the close of business on the second scheduled trading day immediately preceding September 15, 2021, regardless of those circumstances.

The Company recorded a debt discount of $66.7 million related to the 1.25% Notes which results from allocating a portion of the proceeds to the fair value of the conversion feature. The fair value of the debt discount was estimated using a trinomial lattice model based on the following inputs: Company's stock price, expected volatility, term to maturity, risk-free interest rate, and dividend yield. The debt discount was recorded as additional paid-in capital and the remaining liability reflects the value of the Company’s nonconvertible debt borrowing rate of 5.8% per annum. This debt discount is being amortized as non-cash interest expense over the five year term of the 1.25% Notes. The Company incurred debt issuance costs and other expenses related to this offering of approximately $11.3 million, of which $2.2 million has been reclassified as a reduction to the value of the amount

allocated to equity. The remainder is presented as a reduction of debt in the consolidated balance sheet, is being amortized using the effective interest method, and is recorded as non-cash interest expense over the five year term of the 1.25% Notes.

The 1.25% Notes contain provisions that allow for additional interest to holders of the notes upon failure to timely file documents or reports that the Company is required to file with the SEC. The additional interest is at a rate of 0.50% per annum of the principal amounts of the notes outstanding for a period of 360 days.

If the Company merges or consolidates with a foreign entity, then additional taxes may be required to be paid by the Company under the terms of the 1.25% Notes.

The Company determined that the higher interest payments required and tax payments required in certain circumstances are considered embedded derivatives and should be bifurcated and accounted for at fair value. The Company assesses the value of the embedded derivatives at each balance sheet date. The derivatives had de minimis value at the balance sheet date.

Cash interest expense related to the 1.25% Notes in the year ended December 31, 2016 was $1.3 million. Non-cash interest expense related to the 1.25% Notes was comprised of the amortization of the debt discount and debt issuance costs and in the year ended December 31, 2016 was $3.8 million.

As of December 31, 2016, the Company included $273.0 million on its balance sheet in long-term debt related to the 1.25% Notes.

2% Convertible Senior Notes

In June 2014, the Company issued and sold $201.3 million in principal amount of 2% Convertible Senior Notes due June 15, 2019 (the “2% Notes”). The interest rate on the notes is 2% per annum, payable semi-annually in arrears in cash on June 15 and December 15 of each year. The 2% Notes are convertible into the Company’s common stock at an initial conversion rate of 21.5019 shares of common stock per $1,000 principal amount of the 2% Notes, which is equivalent to a conversion price of approximately $46.51 per share, subject to adjustment under certain circumstances.

The Company recorded a debt discount of $35.6 million related to the 2% Notes. The debt discount was recorded as additional paid-in capital to reflect the value of the Company’s nonconvertible debt borrowing rate of 6.2% per annum. This debt discount is being amortized as non-cash interest expense over the five year term of the 2% Notes. The Company incurred deferred financing costs related to this offering of approximately $6.7 million, of which $1.2 million has been reclassified as an offset to the value of the amount allocated to equity. The remainder is recorded as a reduction to debt in the consolidated balance sheet and is being amortized as non-cash interest expense over the five year term of the 2% Notes.

In September 2016, in connection with the issuance of $345 million in principal amount of the 1.25% Notes, the Company repurchased approximately $134.2 million in principal amount of the 2% Notes for $153.6 million. The extinguishment of the 2% Notes was accounted for separately from the issuance of the 1.25% Notes as both transactions were viewed as arm's-length in nature and were not contingent upon one another. The $153.6 million paid to extinguish the debt was allocated to debt and equity based on their respective fair values immediately prior to the transaction. The fair value of the debt was estimated using a trinomial lattice model based on the following inputs: Company's stock price, expected volatility, term to maturity, risk-free interest rate, and dividend yield. The Company allocated $121.4 million of the payment to the debt and $32.9 million to equity.

The Company recorded a loss on extinguishment of debt of $2.6 million in connection with the repurchase and redemption of the 2% Notes during the year ended December 31, 2016, representing the excess of the $121.4 million allocated to the debt over its carrying value, net of unamortized debt discount, deferred financing costs and accrued interest.

The 2% Notes contain provisions that allow for additional interest to the holders of the notes upon the failure to timely file documents or reports that the Company is required to file with the SEC. The additional interest is at a rate of 0.25% per annum of the principal amount of the notes outstanding for the first 180 days and 0.50% per annum of the principal amount of the notes outstanding for a period up to 360 days.

If the Company is purchased by a company outside of the US, then additional taxes may be required to be paid by the Company under the terms of the 2% Notes.

The Company determined that the higher interest and tax payments required in certain circumstances are considered embedded derivatives and should be bifurcated and accounted for at fair value. The Company assesses the value of the embedded derivatives at each balance sheet date. The derivatives had de minimis value at the balance sheet date.

Cash interest expense related to the 2% Notes in the years ended December 31, 2016, 2015 and 2014 was $3.2 million, $4.0 million and $2.3 million, respectively.

Non-cash interest expense related to the 2% Notes was comprised of the amortization of the debt discount and debt issuance costs and in the years ended December 31, 2016, 2015 and 2014 was $6.3 million, $7.7 million and $4.0 million, respectively.

As of December 31, 2016, the Company included $59.7 million on its balance sheet in long-term debt related to the 2% Notes.

3.75% Convertible Senior Notes

In June 2011, the Company issued and sold $143.8 million in principal amount of 3.75% Convertible Senior Notes due June 15, 2016 (the "3.75% Notes"). The interest rate on the notes was 3.75% per annum, payable semi-annually in arrears in cash on December 15 and June 15 of each year. The 3.75% Notes were convertible into the Company’s common stock at an initial conversion rate of 38.1749 shares of common stock per $1,000 principal amount of the 3.75% Notes, which was equivalent to a conversion price of approximately $26.20 per share.

In connection with the issuance of the 3.75% Notes, the Company repurchased $70 million in principal amount of its 5.375% Convertible Senior Notes due June 15, 2013 (the "5.375% Notes") for $85.1 million, a 21.5% premium on the principal amount. The investors that held the $70 million in principal amount of repurchased 5.375% Notes purchased $59.5 million in principal amount of the 3.75% Notes and retained approximately $13.5 million in principal amount of the remaining 5.375% Notes. These investors’ combined $73.0 million in principal amount of convertible debt ($13.5 million of 5.375% Notes and $59.5 million of 3.75% Notes) was considered to be a modification of a portion of the 5.375% Notes and was accounted for separately from the issuance of the remainder of the 3.75% Notes.

The Company recorded a total debt discount of $25.8 million related to the modified debt. This discount consisted of $10.5 million related to the remaining debt discount on the $70 million in principal amount of 5.375% Notes repurchased, $15.1 million related to the premium payment in connection with the repurchase and $0.2 million related to the increase in the value of the conversion feature. The total debt discount was being amortized as non-cash interest expense at the effective rate of 16.5% over the five year term of the modified debt. Additionally, the Company paid transaction fees of approximately $2.0 million related to the modification, which were recorded as interest and other expense at the time of the modification.

Of the $143.8 million in principal amount of 3.75% Notes issued in June 2011, $84.3 million in principal amount was considered to be an issuance of new debt. The Company recorded a debt discount of $26.6 million related to the $84.3 million in principal amount of 3.75% Notes. The debt discount was recorded as additional paid-in capital to reflect the value of its nonconvertible debt borrowing rate of 12.4% per annum and was being amortized as non-cash interest expense over the five year term of the 3.75% Notes. The Company incurred deferred financing costs related to this offering of approximately $2.8 million, of which $0.9 million has been reclassified as an offset to the value of the amount allocated to equity. The remainder was recorded as other assets in the consolidated balance sheet and was being amortized as non-cash interest expense over the five year term of the 3.75% Notes.

In June 2014, in connection with the issuance of $201.3 million in principal amount of the 2% Notes, the Company repurchased approximately $114.9 million in principal amount of the 3.75% Notes for $160.7 million, a premium of $45.8 million over the principal amount. Investors that held approximately $80.0 million of 3.75% Notes purchased approximately $98.2 million in principal amount of the 2% Notes. The repurchase of the 3.75% Notes was treated as an extinguishment of debt since the fair value of the conversion feature changed by more than 10%. The extinguishment of the 3.75% Notes was accounted for separately from the issuance of the 2% Notes. The $160.7 million paid to extinguish the debt was allocated to debt and equity based on their respective fair values immediately prior to the transaction. The Company allocated $112.4 million of the payment to the debt and $48.3 million to equity.

The 3.75% Notes were convertible at the option of the holder during the quarter ended June 30, 2014 since the last reported sales price per share of the Company's common stock was equal to or greater than 130% of the conversion price for at least 20 of the 30 trading days ended on March 31, 2014. The 3.75% Notes and any unpaid interest were convertible at the Company’s option for cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock.

Beginning on June 20, 2014, the Company had the right to redeem the 3.75% Notes, at its option, in whole or in part, if the last reported sale price per share of the Company’s common stock was at least 130% of the conversion price then in effect for at least 20 trading days during a period of 30 consecutive trading days. In June 2014, the Company met the redemption requirements and notified holders of its intent to redeem the outstanding

$28.8 million in principal amount of 3.75% Notes in July 2014. Prior to the redemption date, holders of $28.5 million in principal amount of 3.75% Notes exercised their right to convert their outstanding 3.75% Notes. The Company settled this conversion of the 3.75% Notes in July 2014 by providing cash of $28.5 million for the principal amount of the outstanding 3.75% Notes converted and issuing 348,535 shares of common stock for the conversion premium totaling $12.6 million, for a total consideration paid of $41.1 million. The Company settled the redemption of the remaining $0.3 million in principal amount in exchange for a cash payment of $0.3 million representing principal and accrued and unpaid interest. The Company allocated $27.9 million of the total consideration paid to the debt and $13.5 million to equity.

The Company recorded a loss on extinguishment of debt of $23.2 million in connection with the repurchase and redemption of the 3.75% Notes during the year ended December 31, 2014, representing the excess of the $140.3 million allocated to the debt over its carrying value, net of deferred financing costs.

Certain features related to a portion of the 3.75% Notes, including the holders’ ability to require the Company to repurchase their notes and the higher interest payments required in an event of default, were considered embedded derivatives and were required to be bifurcated and accounted for at fair value. The Company assessed the value of these embedded derivatives at each balance sheet date.

No cash interest expense was recorded related to the 3.75% Notes in the years ended December 31, 2016 and 2015. Cash interest expense related to the 3.75% Notes in the year ended December 31, 2014 was $2.4 million.

No non-cash interest expense was recorded in the years ended December 31, 2016 and 2015 related to the 3.75% Notes. Non-cash interest expense related to the 3.75% Notes in the year ended December 31, 2014 was $4.9 million.

As of December 31, 2014, no amounts remain outstanding related to the 3.75% Notes.

Note 8. Capital Lease Obligations

As of December 31, 2016 and 2015, the Company had approximately $13.7 million of manufacturing equipment acquired under capital leases, included in property and equipment. As of December 31, 2016, one capital lease remained outstanding and is being repaid in equal monthly installments over a 24 month term, ending in the first quarter of 2017, and includes principal and interest payments with an effective interest rate of 13%.

The assets acquired under capital leases are being amortized on a straight-line basis over 5 years in accordance with the Company's policy for depreciation of manufacturing equipment. Amortization expense on assets acquired under capital leases is included with depreciation expense. Amortization expense related to these capital leased assets was $2.7 million, $2.5 million and $1.3 million in the years ended December 31, 2016, 2015 and 2014, respectively.

Assets acquired under capital leases consist of the following:

	As of
(in thousands)	December 31, 2016				December 31, 2015
Manufacturing equipment	$	13,705			$	13,705
Less: Accumulated amortization	(7,086		)		(4,346		)
Total	$	6,619			$	9,359

The aggregate future minimum lease payments related to these capital leases as of December 31, 2016 are as follows:

(in thousands)
Years Ending December 31,	Minimum Lease Payments
2017	$	269
Total future minimum lease payments	$	269
Interest expense	—
Total capital lease obligations	$	269

The Company recorded $0.4 million, $1.2 million and $1.2 million of interest expense on capital leases in the years ended December 31, 2016, 2015, and 2014, respectively.

Note 9. Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period, excluding unvested restricted common shares. Diluted net loss per share is computed using the weighted average number of common shares outstanding and, when dilutive, potential common share equivalents from options, restricted stock units and warrants (using the treasury-stock method), and potential common shares from convertible securities (using the if-converted method). Because the Company reported a net loss for the years ended December 31, 2016, 2015 and 2014, all potential dilutive common shares have been excluded from the computation of the diluted net loss per share for all periods presented, as the effect would have been anti-dilutive.

Potential dilutive common share equivalents consist of the following:

	Years Ended December 31,
	2016			2015			2014
2.00% Convertible Senior Notes	1,442,433			4,327,257			4,327,257
1.25% Convertible Senior Notes	5,910,954			—			—
Unvested restricted stock units	962,219			811,965			746,612
Outstanding stock options	3,441,303			2,999,199			1,847,669
Total dilutive common shares	11,756,909			8,138,421			6,921,538

Note 10. Accounts Receivable, Net

Accounts receivable consist of amounts due from third-party payors, patients, third-party distributors and government agencies. The Company records an allowance for doubtful accounts at the time potential collection risk is identified. The Company estimates its allowance based on historical experience, assessment of specific risk, discussions with individual customers or various assumptions and estimates that are believed to be reasonable under the circumstances. The Company believes the reserve is adequate to mitigate current collection risk.

Customers that represented greater than 10% of gross accounts receivable as of December 31, 2016, and 2015 were as follows:

	As of
	December 31, 2016			December 31, 2015
Amgen, Inc.	16	%		22	%
Ypsomed Distribution AG	19	%		19	%

The components of accounts receivable from continuing operations are as follows:

(in thousands)	As of
December 31, 2016				December 31, 2015
Trade receivables	$	31,714			$	46,668
Allowance for doubtful accounts	(2,911		)		(4,138		)
Total accounts receivable	$	28,803			$	42,530

Refer to note 3 for accounts receivable related to discontinued operations.

Note 11. Inventories, Net

Inventories are held at the lower of cost or market, determined under the first-in, first-out method, and include the costs of material, labor and overhead. Inventory has been recorded at cost, or net realizable value as appropriate, as of December 31, 2016 and 2015. The Company reviews inventories for net realizable value based on quantities on hand and expectations of future use. Work in process is calculated based upon a buildup in the stage of completion using estimated labor inputs for each stage in production.

The components of inventories from continuing operations are as follows:

(in thousands)	As of
December 31, 2016				December 31, 2015
Raw materials	$	1,911			$	632
Work-in-process	15,681				1,960
Finished goods, net	17,922				9,432
Total inventories	$	35,514			$	12,024

Refer to note 3 for inventories related to discontinued operations, which were fully comprised of finished goods as of December 31, 2015.

In the third quarter of 2015, the Company identified that certain lots of Omnipods had increased complaints relating to the deployment of the needle mechanism. Omnipods produced with the specific tooling changes of needle mechanism components were subject to replacement, including certain Omnipod lots that were held as inventory. As such, the Company determined that it would not recover any amounts related to this inventory. Accordingly, this change in estimate increased the Company's cost of revenue in the year ended December 31, 2015 by approximately $7.3 million.

Note 12. Property and Equipment, Net

Property and equipment related to continuing operations consist of the following:

	Estimated Useful Life (Years)		As of
(in thousands)	December 31, 2016				December 31, 2015
Machinery and equipment	2-5		$	53,246			$	49,059
Lab equipment	2-3		694				1,615
Computers	3		2,833				2,067
Software	3		3,786				2,566
Office furniture and fixtures	3-5		1,960				1,468
Leasehold improvement	*		1,126				927
Construction in process	—		24,137				12,275
Total property and equipment			$	87,782			$	69,977
Less: accumulated depreciation			(41,516		)		(28,184		)
Total property and equipment, net			$	46,266			$	41,793

---

• Lesser of lease term or useful life of asset.

Property and equipment from discontinued operations were not significant as of December 31, 2015.

Depreciation expense related to property and equipment from continuing operations was $13.3 million, $11.4 million and $7.7 million for the years ended December 31, 2016, 2015 and 2014, respectively. Depreciation expense from discontinued operations was not significant during those same periods. The Company recorded $0.5 million, $0.2 million and $0.2 million of capitalized interest in the years ended December 31, 2016, 2015 and 2014.

Construction in process mainly consists of infrastructure improvements and internal use software. Depreciation on software does not begin until the assets are integrated into the current systems.

During the year ended December 31, 2015, the Company wrote-off $5.4 million of fully depreciated assets, as the assets were no longer in use. No gain or loss was recognized in the year ended December 31, 2015 related to the write-off of these assets. During the year ended December 31, 2016, the Company wrote-off no fully depreciated assets.

During 2016, the Company restructured its plan for an internally developed ERP system to leverage current third-party software available and scale conversion based on the Company's evolving ERP needs. As a result, the Company recorded a charge of $6.1 million included in general and administrative expenses related to in-process internally developed software.

The Company capitalizes eligible software development costs, including salaries and payroll-related costs of employees who devote time to the development. Capitalization begins when a detail program design is completed and technological feasibility has been established. These costs are amortized on a straight-line basis over the estimated useful life. In the second quarter of 2015, based on changes in one of the Company's ongoing projects, the Company determined that the detailed program designs were no longer sufficiently complete to establish technological feasibility of this project. As such, all costs previously capitalized for this project, approximately $1.3 million within property and equipment, net, and all subsequent costs incurred through December 31, 2015, approximately $9.2 million, have been recorded to research and development expense in the year ended December 31, 2015.

Note 13. Other Intangible Assets

The Company’s finite-lived intangible assets are stated at cost less accumulated amortization. The Company assesses its intangible and other long-lived assets for impairment whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable. The Company recognizes an impairment loss for intangibles and other finite-lived assets if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows. Any such impairment loss is measured as the difference between the carrying amount and the fair value of the asset. The estimation of useful lives and expected cash flows requires the Company to make significant judgments regarding future periods that are subject to some factors outside its control. Changes in these estimates can result in significant revisions to the carrying value of these assets and may result in material charges to the results of operations.

The Company recorded $32.9 million of other intangible assets as a result of the acquisition of Neighborhood Diabetes in 2011. In December 2015, the Company completed a long-lived asset impairment test for Neighborhood Diabetes and determined that the carrying value of the long-lived asset group, which included intangible assets, exceeded the undiscounted cash flows expected to be generated from the asset group. The Company compared the fair value of the intangible assets and the related asset group, which was estimated based on the subsequent sales price of the asset group as of February 2016. As a result, an impairment charge of $9.0 million was recorded within loss from discontinued operations for the year ended December 31, 2015. The impairment charge was allocated on a pro-rata basis based on the carrying value of the assets within the asset group. As a result, impairment charges of approximately $7.4 million and $1.6 million, respectively, were recorded on the customer relationship and trade name intangible assets which are included within long-term assets from discontinued operations on the balance sheet. During the three months ended March 31, 2016, the remaining balance of the other intangible assets associated with the acquisition of Neighborhood Diabetes was removed from the balance sheet as part of the divestiture and included in the calculated loss of disposal. No further impairment was recorded upon the sale.

The Company recorded $2.1 million of other intangible assets in the year ended December 31, 2015 as a result of the July 2015 acquisition of its Canadian distribution business (see note 4 for further description). The Company determined that the estimated useful life of the contractual relationship asset is 5 years and is amortizing the asset over the estimated lives, based on the expected cash flows of the assets, accordingly.

Other intangible assets consist of the following:

	As of
December 31, 2016												December 31, 2015
(in thousands)	Gross Carrying Amount				Accumulated Amortization				Net Book Value				Gross Carrying Amount				Accumulated Amortization				Net Book Value
Customer and contractual relationships, net (1) (2)	$	1,994			$	(1,466	)		$	528			$	3,399			$	(1,000	)		$	2,399
Tradename (3)	—				—				—				322				—				322
Total intangible assets (4)	$	1,994			$	(1,466	)		$	528			$	3,721			$	(1,000	)		$	2,721

(1)	Includes foreign currency translation loss of approximately $0.1 million.

(2)	The customer relationships asset includes $1.5 million of both the gross carrying amount and net book value, respectively, that are included in long-term assets from discontinued operations on the balance sheet as of December 31, 2015.

(3)	The tradename asset is included in long-term assets from discontinued operations on the balance sheet as of December 31, 2015.

(4)

As a result of the impairment recorded on the Neighborhood Diabetes asset group, the Company recorded an impairment charge of approximately $9.0 million on the related Neighborhood Diabetes intangible assets, which was recorded through discontinued operations. This resulted in the gross carrying value and accumulated amortization of the Neighborhood Diabetes intangibles being reduced by $31.1 million and $22.1 million, respectively, at December 31, 2015.

Amortization expense from continuing operations was approximately $0.4 million and $1.0 million for the years ended December 31, 2016 and 2015, respectively. There was no amortization expense from continuing operations in the year ended December 31, 2014. Amortization expense from discontinued operations was approximately $0.1 million, $3.3 million and $4.0 million for the years ending December 31, 2016, 2015 and 2014 respectively. Amortization expense is recorded in general and administration expenses in the consolidated statements of operations.

Amortization expense expected for the next five years and thereafter from continuing operations is as follows:

(in thousands)
Years Ending December 31,	Customer and Contractual Relationships
2017	$	181
2018	154
2019	129
2020	64
Total	$	528

As of December 31, 2016, the weighted average amortization period of the Company’s intangible assets is approximately 4 years.

Note 14. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities related to continuing operations consist of the following:

	Years Ended December 31,
(in thousands)	2016				2015
Employee compensation and related costs	$	21,999			$	16,856
Professional and consulting services	6,753				5,654
Sales and use tax	299				1,163
Supplier charges	2,886				4,981
Warranty	1,642				1,592
Other	7,380				6,498
Total accrued expenses and other current liabilities	$	40,959			$	36,744

Product Warranty Costs

The Company provides a four-year warranty on its PDMs sold in the United States and a five-year warranty on its PDMs sold in Canada and may replace any Omnipods that do not function in accordance with product specifications. The Company estimates its warranty at the time the product is shipped based on historical experience and the estimated cost to service the claims. Warranty expense is recorded in cost of goods sold on the statement of operations. Cost to service the claims reflects the current product cost which has been decreasing over time. As these estimates are based on historical experience, and the Company continues to introduce new products and versions, the Company also considers the anticipated performance of the product over its warranty period in estimating warranty reserves.

A reconciliation of the changes in the Company’s product warranty liability is as follows:

	Years Ended December 31,
(in thousands)	2016				2015
Balance at the beginning of the period	$	4,152			$	2,614
Warranty expense	4,602				4,964
Warranty claims settled	(4,366		)		(3,426		)
Balance at the end of the period	$	4,388			$	4,152

	As of
(in thousands)	December 31, 2016				December 31, 2015
Composition of balance:
Short-term	$	1,642			$	1,592
Long-term	2,746				2,560
	$	4,388			$	4,152

Note 15. Commitments and Contingencies

The Company records a liability in the consolidated financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed.

As of December 31, 2016, the Company had a commitment of $8.8 million for the purchase of property that will be used for the Company's manufacturing facility in the United States and was subsequently paid in February 2017. Total purchase price for the property was $9.3 million.

Operating Leases

The Company leases its facilities in Massachusetts, California, Tennessee, Canada and China. The Company’s leases are accounted for as operating leases. The leases generally provide for a base rent plus real estate taxes and certain operating expenses related to the leases.

The Company leases approximately 100,000 square feet of laboratory and office space for its corporate headquarters in Billerica, Massachusetts. The leases expire in November 2022 and contain escalating payments over the life of the lease. Additionally, the Company leases approximately 29,000 square feet of warehousing space in Billerica, Massachusetts under a lease expiring in September 2019. The Company leases other facilities in Canada, China, California and Tennessee containing a total of approximately 4,000 square feet under leases expiring from May 2017 to May 2018.

Certain of the Company’s operating lease agreements contain scheduled rent increases. Rent expense is recorded using the straight-line method and deferred rent is included in other liabilities in the accompanying balance sheets. The Company has considered FASB ASC 840-20, Leases in accounting for these lease provisions. Rental expense from continuing operations under operating leases was $2.5 million, $1.9 million and $1.4 million in the years ended December 31, 2016, 2015 and 2014, respectively.

The aggregate future minimum lease payments related to these leases from continuing operations as of December 31, 2016 are as follows:

(in thousands)
Years Ending December 31,	Minimum Lease Payments
2017	2,560
2018	2,468
2019	2,455
2020	2,383
2021	2,383
Thereafter	2,131
Total	$	14,380

Legal Proceedings

The Company is in the process of responding to a revised audit report received in December 2015 on behalf of the Centers for Medicare and Medicaid Services and the State of New York alleging overpayment of certain Medicaid claims to Neighborhood Diabetes. As of December 31, 2015, the Company had determined that it was probable that a loss had been incurred and recorded an aggregate liability of $0.4 million recorded within loss from discontinued operations, which was reduced to $0.3 million during 2016 (which remains the Company’s current estimate of such liability). The change in the liability was recorded in discontinued operations.

In May 2016, the Company reached a settlement agreement for $0.5 million with the Connecticut Department of Social Services Office of Quality Assurance relating to an audit alleging overpayment of certain Medicaid claims to Neighborhood Diabetes. The settlement amount for this audit was consistent with the amount previously accrued.

In April 2016, the Company reached a settlement agreement for $0.5 million with the Massachusetts Department of Revenue for sales and use tax audits related to Insulet Corporation, which resulted in a $0.2 million reduction of the previously recorded liability and a credit to general and administrative expenses during 2016.

Between May 5, 2015 and June 16, 2015, three class action lawsuits were filed by shareholders in the U.S. District Court, Massachusetts, against the Company and certain individual current and former executives of the Company. Two suits subsequently were voluntarily dismissed. Arkansas Teacher Retirement System v. Insulet, et al., 1:15-cv-12345, which remains outstanding, alleges that the Company (and certain executives) committed violations of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 by making allegedly false and misleading statements about the Company’s business, operations, and prospects. The lawsuit seeks, among other things, compensatory damages in connection with the Company’s allegedly inflated stock price between May 7, 2013 and April 30, 2015, as well as attorneys' fees and costs. Due in part to the preliminary nature of this matter, the Company currently cannot reasonably estimate a possible loss, or range of loss, in connection with this matter.

The Company is, from time to time, involved in the normal course of business in various legal proceedings, including intellectual property, contract, employment and product liability suits. Although the Company is unable to quantify the exact financial impact of any of these matters, the Company believes that none of these currently pending matters will have an outcome material to its financial condition or business.

Note 16. Equity

The Company accounts for stock-based compensation under the provisions of FASB ASC 718-10, Compensation — Stock Compensation (“ASC 718-10”), which requires all share-based payments to employees and directors, including grants of stock options and restricted stock units, to be recognized in the income statement based on their fair values. Share-based payments that contain performance conditions are recognized when such conditions are probable of being achieved.

In July 2014, in connection with the extinguishment of $28.5 million in principal amount of the 3.75% Notes, the Company issued 348,535 shares of its common stock to the holders representing the conversion premium.

The Company grants share-based awards to employees in the form of options to purchase the Company’s common stock, the ability to purchase stock at a discounted price under the employee stock purchase plan and restricted stock units. The Company uses the Black-Scholes option pricing model to determine the weighted-average fair value of options granted and determines the intrinsic value of restricted stock units based on the closing price of its common stock on the date of grant. The Company recognizes the compensation expense of

share-based awards on a straight-line basis for awards with only service conditions and on an accelerated basis for awards with performance conditions. Compensation expense is recognized over the vesting period of the awards.

Stock-based compensation expense from continuing operations related to share-based awards recognized in the years ended December 31, 2016, 2015 and 2014 was $23.8 million, $18.7 million and $22.0 million, respectively, and was calculated on awards ultimately expected to vest. Stock-based compensation expense from discontinued operations related to share-based awards was not significant for the year ended December 31, 2016. Stock-based compensation expense from discontinued operations related to share-based awards for the years ended December 31, 2015 and 2014 was $0.5 million and $0.5 million, respectively. At December 31, 2016, the Company had $41.5 million of total unrecognized compensation expense related to unvested stock options and restricted stock units.

Stock Options

In May 2007, in conjunction with the Company's initial public offering, the Company adopted its 2007 Stock Option and Incentive Plan (the "2007 Plan"). The 2007 Plan was amended and restated in November 2008, May 2012 and May 2015 to provide for the issuance of additional shares and to amend certain other provisions. Under the 2007 Plan, awards may be granted to persons who are, at the time of grant, employees, officers, non-employee directors or key persons (including consultants and prospective employees) of the Company. The 2007 Plan provides for the granting of stock options, restricted stock units, stock appreciation rights, deferred stock awards, restricted stock, unrestricted stock, cash-based awards, performance share awards or dividend equivalent rights. Options granted under the 2007 Plan generally vest over a period of four years and expire ten years from the date of grant. As of December 31, 2016, 4,487,991 shares remain available for future issuance under the 2007 Plan.

In the year ended December 31, 2015 the Company awarded 194,500 shares of performance-based incentive stock options. In the year ended December 31, 2016 the Company awarded 65,000 shares of performance-based incentive stock options. The stock options were granted under the 2007 Plan and vest over a four year period from the grant date with the potential of an accelerated vesting period pursuant to the achievement of certain performance conditions.

The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the stock price and the following assumptions, including expected volatility, expected life of the awards, the risk-free interest rate, and the dividend yield.

•	Expected volatility measures the amount that a stock price has fluctuated or is expected to fluctuate during a period and is computed over expected terms based upon the historical volatility of the Company's stock.

•	The expected life of the awards is estimated based on the midpoint scenario, which combines historical exercise data with hypothetical exercise data for outstanding options, as the Company believes this data currently represents the best estimate of the expected life of a new employee option. The Company stratifies its employee population into two groups based upon organizational hierarchy.

•	The risk-free interest rate assumption is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.

•	The dividend yield assumption is based on Company history and expectation of paying no dividends. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation.

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense recognized in the financial statements is based on awards that are ultimately expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.

The Company evaluates the assumptions used to value the awards on a quarterly basis and if factors change and different assumptions are utilized, stock-based compensation expense may differ significantly from what has been recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.

The estimated grant date fair values of the employee stock options were calculated using the Black-Scholes option pricing model, based on the following assumptions:

	Years Ended December 31,
	2016		2015		2014
Risk-free interest rate	0.99% - 1.91%		1.16% - 1.75%		0.12% - 1.98%
Expected term (in years)	5.07 - 5.38		4.86 - 5.25		1.0 - 6.25
Dividend yield	—		—		—
Expected volatility	38% - 40%		37% - 38%		37% - 63%

The weighted average grant date fair value of options granted for the years ended December 31, 2016, 2015 and 2014 was $11.60, $11.09 and $15.88, respectively.

The following summarizes the activity under the Company’s stock option plans:

	Number of Options (#)			Weighted Average Exercise Price ($)				Aggregate Intrinsic Value ($)
								(In thousands)
Balance, December 31, 2015	2,999,199			$	31.37			—
Granted	1,049,862			31.85				—
Exercised(1)	(242,962	)		19.89				$	4,646
Canceled	(364,796	)		31.92				—
Balance, December 31, 2016	3,441,303			$	32.27			$	20,196
Vested, December 31, 2016(2)	1,503,811			$	31.89			$	9,325
Vested and expected to vest, December 31, 2016(2)(3)	3,167,755							$	18,648

(1)	The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common stock as of the date of exercise and the exercise price of the underlying options. The aggregate intrinsic value of options exercised in the years ended December 31, 2016, 2015 and 2014 was $4.6 million, $8.6 million and $20.4 million, respectively,

(2)	The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common stock as of December 31, 2016, and the exercise price of the underlying options.

(3)	Represents the number of vested options as of December 31, 2016, plus the number of unvested options expected to vest as of December 31, 2016, based on the unvested options outstanding at December 31, 2016 adjusted for the estimated forfeiture.

At December 31, 2016 there were 3,441,303 options outstanding (vested and unvested) with a weighted average exercise price of $32.27 and a weighted average remaining contractual life of 7.9 years. Of this amount, at December 31, 2016, there were 1,503,811 vested options exercisable with a weighted average exercise price of $31.89 and a weighted average remaining contractual life of 6.6 years and 1,663,944 options expected to vest with a weighted average exercise price of $32.57 and a weighted average remaining contractual life of 8.8 years.

Employee stock-based compensation expense from continuing operations related to stock options in the years ended December 31, 2016, 2015 and 2014 was $9.9 million, $9.1 million and $7.6 million, respectively, and was based on awards ultimately expected to vest. Employee stock-based compensation expense from discontinued operations related to stock options was not significant for the year ended December 31, 2016. Employee stock-based compensation expense from discontinued operations related to stock options for the years ended December 31, 2015 and 2014 was $0.1 million and $0.1 million. At December 31, 2016, the Company had $19.0 million of total unrecognized compensation expense related to stock options that will be recognized over a weighted average vesting period of 2.5 years.

Restricted Stock Units

In the year ended December 31, 2016, the Company awarded 592,783 restricted stock units to certain employees and non-employee members of the Board of Directors, which included 154,991 restricted stock units subject to the achievement of performance conditions (performance-based restricted stock units). For performance-based restricted stock units for which the performance criteria has not yet been achieved, the Company recognized stock compensation expense of $2.4 million in 2016 as it expects a portion of the performance-based restricted

stock units granted will be earned based on its evaluation of the performance criteria at December 31, 2016. An additional $1.0 million of stock compensation expense was recognized in 2016 for performance-based restricted stock units for which the performance criteria has been achieved as of December 31, 2016. The restricted stock units were granted under the 2007 Plan and generally vest annually over a one or three year period from the grant date, except for the performance-based restricted stock units, which follow different vesting patterns.

The restricted stock units granted have a weighted average fair value of $29.85 per share based on the closing price of the Company’s common stock on the date of grant. The restricted stock units granted during the year ended December 31, 2016 were valued at approximately $17.7 million on their grant date, and the Company is recognizing the compensation expense over the vesting period. Approximately $10.2 million, $8.1 million and $14.3 million of stock-based compensation expense from continuing operations related to the vesting of non-performance based restricted stock units was recognized in the years ended December 31, 2016, 2015 and 2014, respectively. Employee stock-based compensation expense recognized from discontinued operations related to the vesting of non-performance based restricted stock units was not significant for the year ended December 31, 2016. Employee stock-based compensation expense from discontinued operations related to the vesting of non-performance based restricted stock for the years ended December 31, 2015 and 2014 was $0.4 million and $0.4 million, respectively. Approximately $22.4 million of the fair value of the restricted stock units remained unrecognized as of December 31, 2016 and will be recognized over a weighted average period of 1.8 years. Under the terms of the awards, the Company will issue shares of common stock on each of the vesting dates.

The following table summarizes the status of the Company’s restricted stock units:

	Number of Shares (#)			Weighted Average Fair Value ($)
Balance, December 31, 2015	811,965			$	30.58
Granted	592,783			29.85
Vested	(317,470	)		31.01
Forfeited	(125,059	)		33.02
Balance, December 31, 2016	962,219			$	31.14

Employee Stock Purchase Plan

The Employee Stock Purchase Plan (“ESPP”) authorizes the issuance of up to a total of 380,000 shares of common stock to participating employees. The Company will make one or more offerings each year to eligible employees to purchase stock under the ESPP. Between January 1, 2008 and June 30, 2016, offering periods began on the first business day occurring on or after each January 1 and July 1 and ended on the last business day occurring on or before the following June 30 and December 31, respectively. Beginning as of July 1, 2016, offering periods begin on the first business day occurring on or after each December 1 and June 1 and will end on the last business day occurring on or before the following May 31 and November 30, respectively. In order to permit a transition to the new offering cycle, a one-time offering period began on July 1, 2016 and ended on November 30, 2016.

Each employee who is a participant in the Company’s ESPP may purchase up to a maximum of 800 shares per offering period or $25,000 worth of common stock, valued at the start of the purchase period, per year by authorizing payroll deductions of up to 10% of his or her base salary. Unless the participating employee withdraws from the offering period, his or her accumulated payroll deductions will be used to purchase common stock.

For all offering periods ending on or before June 30, 2016, the purchase price for each share purchased was 85% of the fair market value of the common stock on the last day of the offering period. For all offering periods beginning on or after July 1, 2016, the purchase price for each share purchased will be 85% of the lower of (i) the fair market value of the common stock on the first day of the offering period or (ii) the fair market value of the common stock on the last day of the offering period.

The accumulated payroll deductions of any employee who is not a participant on the last day of an offering period will be refunded. An employee’s rights under the ESPP terminate upon voluntary withdrawal from the plan or when the employee ceases employment with the Company for any reason.

The ESPP may be terminated or amended by the Board of Directors at any time. An amendment to increase the number of shares of common stock that is authorized under the ESPP, and certain other amendments, require the approval of stockholders.

The Company issued 30,949 shares of common stock in 2016, 22,039 shares of common stock in 2015 and 13,620 shares of common stock in 2014 to employees participating in the ESPP. The Company recorded approximately $0.2 million, $0.1 million and $0.1 million of stock-based compensation expense related to the ESPP in each of the years ended December 31, 2016, 2015 and 2014.

Shareholder Rights Plan

In November 2008, the Board of Directors of the Company adopted a shareholder rights plan (the "Shareholder Rights Plan”), as set forth in the Shareholder Rights Agreement between the Company and the rights agent, the purpose of which is, among other things, to enhance the ability of the Board of Directors to protect shareholder interests and to ensure that shareholders receive fair treatment in the event any coercive takeover attempt of the Company is made in the future. The Shareholder Rights Plan could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, the Company or a large block of the Company’s common stock.

In connection with the adoption of the Shareholder Rights Plan, the Board of Directors of the Company declared a dividend distribution of one preferred stock purchase right (a “Right”) for each outstanding share of common stock to stockholders of record as of the close of business on November 15, 2008. In addition, one Right will automatically attach to each share of common stock issued between November 15, 2008 and the distribution date. The Rights currently are not exercisable and are attached to and trade with the outstanding shares of common stock. Under the Shareholder Rights Plan, the Rights become exercisable if a person or group becomes an “acquiring person” by acquiring 15% or more of the outstanding shares of common stock or if a person or group commences a tender offer that would result in that person or group owning 15% or more of the common stock. The Board of Directors, from time to time, can and has taken action to allow certain shareholders to acquire more than 15% of the outstanding shares of common stock under certain conditions. If a person or group becomes an “acquiring person,” each holder of a Right (other than the acquiring person) would be entitled to purchase, at the then-current exercise price, such number of shares of the Company’s preferred stock which are equivalent to shares of common stock having a value of twice the exercise price of the Right. If the Company is acquired in a merger or other business combination transaction after any such event, each holder of a Right would then be entitled to purchase, at the then-current exercise price, shares of the acquiring company’s common stock having a value of twice the exercise price of the Right.

Note 17. Defined Contribution Plan

The Insulet 401(k) Retirement Plan (the “401(k) Plan”) is a defined contribution plan in the form of a qualified 401(k) plan, in which substantially all employees are eligible to participate upon hire. Eligible employees may elect to contribute 100% of their eligible compensation up to the IRS maximum. The Company has the option of making both matching contributions and discretionary profit-sharing contributions to the 401(k) Plan. Since 2011, the Company has offered a discretionary match of 50% for the first 6% of an employee’s salary that was contributed to the 401(k) Plan. The Company match vests after the employee attains one year of service. The total amount contributed by the Company under the 401(k) Plan in continuing operations was $1.6 million, $1.6 million and $1.1 million for the years ended December 31, 2016, 2015 and 2014, respectively. Contributions in discontinued operations were not significant during those same periods.

Note 18. Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect in the years in which the differences are expected to reverse. The Company reviews its deferred tax assets for recoverability considering historical profitability, projected future taxable income, and the expected timing of the reversals of existing temporary differences and tax planning strategies. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company follows the provisions of FASB ASC 740-10, Income Taxes (“ASC 740-10”) on accounting for uncertainty in income taxes recognized in its financial statements. ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, ASC 740-10 provides guidance on derecognition, classification,

interest and penalties, accounting in interim periods, disclosure and transition. The Company recognizes estimated interest and penalties for uncertain tax positions in income tax expense.

The Company files federal, state and foreign tax returns. These returns are generally open to examination by the relevant tax authorities from three to four years from the date they are filed. The tax filings relating to the Company's federal and state tax returns are currently open to examination for tax years 2013 through 2015 and 2012 through 2015, respectively. In addition, the Company has generated tax losses since its inception in 2000. These years may be subject to examination if the losses are carried forward and utilized in future years.

At December 31, 2016 and December 31, 2015, the Company provided a full valuation allowance against its domestic net deferred tax asset because it is not more likely than not that the future tax benefit will be realized. In addition, the Company has a net deferred tax asset in foreign jurisdictions where no valuation allowance is recorded, because it is more likely than not that the future tax benefit will be realized.

Income tax expense from continuing operations consists of the following:

	Years Ended December 31,
(in thousands)	2016				2015				2014
Current:
Federal	$	—			$	—			$	—
State	52				72				57
Non-U.S.	539				321				3
Total current expense	591				393				60
Deferred:
Federal	—				—				—
State	—				—				—
Non-U.S.	(199		)		(181		)		—
Total deferred expense	(199		)		(181		)		—
Total income tax expense	$	392			$	212			60

Income tax expense from discontinued operations was $0.4 million for the year ended 2016 and was primarily generated from federal deferred taxes. Income tax expense from discontinued operations was not significant for the years ended December 31, 2015 and 2014.

The following table reconciles the federal statutory income rate to the Company's effective income tax rate:

	Year Ended December 31,
	2016			2015			2014
Tax at U.S. statutory rate	34.00	%		34.00	%		34.00	%
Changes from statutory rate:
State taxes, net of federal benefit	(10.86	)		3.06			1.56
Tax credits	0.03			1.51			1.36
Permanent items	(11.03	)		(2.09	)		(1.32	)
Change in valuation allowance	(13.45	)		(37.11	)		(32.13	)
Other	(0.15	)		0.28			(3.60	)
Effective income tax rate	(1.46	)%		(0.35	)%		(0.13	)%

Pre-tax income attributable to the Company's operations located outside the U.S. was approximately $0.8 million, $0.3 million and $0.1 million for 2016, 2015 and 2014, respectively. In general, it is the Company's practice and intention to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of December 31, 2016, the Company has chosen to indefinitely reinvest approximately $0.8 million of earnings of certain of its non-U.S. subsidiaries. Generally, such amounts become subject to U.S taxation upon the remittance of dividends and under certain other circumstances. No provision has been recorded for U.S. income taxes that could be incurred upon repatriation. It is not practicable to estimate the amount of the deferred tax liability related to such earnings.

Significant components of the Company’s deferred tax assets (liabilities) consists of the following:

	Year Ended December 31,
(in thousands)	2016				2015
Deferred tax assets:
Net operating loss carryforwards	$	169,203			$	172,815
Start up expenditures	929				1,168
Tax credits	8,007				8,173
Provision for bad debts	1,330				1,724
Depreciation and amortization	6,368				2,472
Capital loss carryforward	18,961				—
Other	15,060				13,022
Total deferred tax assets	$	219,858			$	199,374
Deferred tax liabilities:
Prepaids	$	(1,173	)		$	(1,249	)
Amortization of acquired intangibles	(33		)		—
Amortization of debt discount	(25,977		)		(9,503		)
Goodwill	(855		)		(383		)
Other	(313		)		—
Total deferred tax liabilities	$	(28,351	)		$	(11,135	)
Valuation allowance	$	(191,922	)		$	(188,442	)
Net deferred tax liabilities	$	(415	)		$	(203	)

The Company has recorded a deferred tax liability related to the tax basis in an acquired intangible asset that is not amortized for financial reporting purposes. The deferred tax liability will only reverse at the time of ultimate sale or further impairment of the underlying intangible assets. Due to the uncertain timing of this reversal, the temporary difference cannot be considered as a source of future taxable income for purposes of determining a valuation allowance; therefore, the tax liability cannot be used to offset the deferred tax asset related to the net operating loss carryforward for tax purposes that will be generated by the same amortization.

A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of the available evidence, both positive and negative, the Company has determined that a $191.9 million valuation allowance at December 31, 2016 is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The Company provided a valuation allowance for the full amount of its domestic net deferred tax asset for the years ended December 31, 2016 and 2015 because it is not more likely than not that the future tax benefit will be realized. In the year ended December 31, 2016, the Company’s valuation allowance increased to $191.9 million from the balance at December 31, 2015 of $188.4 million. The change in the valuation allowance is primarily attributable to the capital loss carryforward generated in the current year that resulted from the sale of the Neighborhood Diabetes business, partially offset additional deferred tax liabilities recognized for the amortization of debt discount in the current year.

At December 31, 2016, the Company had approximately $535.7 million, $216.2 million and $8.0 million of federal net operating loss carryforwards, state net operating loss carryforwards and research and development and other tax credits, respectively. If not utilized, these federal carryforwards will begin to expire in 2020 and will continue to expire through 2036, and the state carryforwards will continue to expire through 2036. At December 31, 2015, the Company had approximately $532.0 million, $285.6 million and $8.2 million of federal net operating loss carryforwards, state net operating loss carryforwards and research and development and other tax credits, respectively from continuing operations. The utilization of such net operating loss carryforwards and the realization of tax benefits in future years depends predominantly upon having taxable income. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company's ownership may result in a limitation on the amount of net operating loss carryforwards which may be used in future years. There will be a yearly limitation placed on the amount of net operating loss available for use in future years. Additionally, it is probable that a portion of the research and development tax credit carryforward may not be available to offset future income.

As a result of certain realization requirements of ASC 718, the table of deferred tax assets and liabilities does not include certain deferred tax assets as of December 31, 2016 and December 31, 2015 that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting. Equity will be increased by $23.8 million if and when such deferred tax assets are ultimately realized. The Company utilizes ASC 740 ordering when excess tax benefits have been realized. Upon adoption of ASU 2016-09 in 2017, these deferred tax assets are expected to be added to the Company’s table of deferred tax assets and liabilities, with an offsetting amount recorded to the valuation allowance.

The Company had no unrecognized tax benefits at December 31, 2016.

19. Segment Reporting

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision-maker ("CODM") in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company has concluded that their Chief Executive Officer is the CODM as he is the ultimate decision maker for key operating decisions, determining the allocation of resources and assessing the financial performance of the Company. These decisions, allocations and assessments are performed by the CODM using consolidated financial information. Consolidated financial information is utilized by the CODM as the Company’s current product offerings and primarily consists of the Omnipod System and drug delivery. The Company’s products are relatively consistent and manufacturing is centralized and consistent across product offerings. Based on these factors, key operating decisions and resource allocations are made by the CODM using consolidated financial data and as such the Company has concluded that it operates as one segment.

Worldwide revenue for the Company's products is categorized as follows:

	Years Ended December 31,
(in thousands)	2016				2015				2014
U.S. Omnipod	$	229,785			$	189,604			$	175,950
International Omnipod	71,889				40,339				50,025
Drug Delivery	65,315				33,950				5,346
Total	$	366,989			$	263,893			$	231,321

Geographic information about revenue, based on the region of the customer's shipping location, is as follows:

	Years Ended December 31,
(in thousands)	2016				2015				2014
United States	$	295,100			$	223,554			$	181,296
All other	71,889				40,339				50,025
Total	$	366,989			$	263,893			$	231,321

Geographic information about long-lived assets, net, excluding goodwill and other intangible assets is as follows:

(in thousands)	December 31, 2016				December 31, 2015
United States	$	20,854			$	13,018
China	25,431				28,638
Other	197				213
Total	$	46,482			$	41,869

20. Quarterly Data (Unaudited)

	2016 Quarters Ended
	December 31(1)				September 30				June 30				March 31
(In thousands, except per share data)
Revenue	$	103,575			$	94,871			$	87,330			$	81,213
Gross profit	60,937				55,641				50,457				44,051
Operating income (loss)	(4,135		)		2,418				(1,288		)		(7,699		)
Net loss from continuing operations, net of taxes	(9,153		)		(3,017		)		(4,351		)		(10,689		)
Income (loss) from discontinued operations, net of taxes	34				(64		)		153				(1,792		)
Net loss	$	(9,119	)		$	(3,081	)		$	(4,198	)		$	(12,481	)
Net loss per share from continuing operations	$	(0.16	)		$	(0.05	)		$	(0.08	)		$	(0.19	)
Net loss per share from discontinued operations	$	—			$	—			$	—			$	(0.03	)

(1)	Included in net loss from continuing operations for the fourth quarter of 2016 was a charge of $6.1 million related to in-process internally developed software.

	2015 Quarters Ended
	December 31(2)				September 30				June 30				March 31
(In thousands, except per share data)
Revenue	$	83,801			$	71,393			$	60,551			$	48,148
Gross profit	41,993				31,570				30,515				29,193
Operating loss	(12,617		)		(14,794		)		(14,059		)		(7,266		)
Net loss from continuing operations, net of taxes	(15,909		)		(17,984		)		(17,267		)		(10,442		)
Income (loss) from discontinued operations, net of taxes	(11,418		)		(943		)		1,835				(1,392		)
Net loss	$	(27,327	)		$	(18,927	)		$	(15,432	)		$	(11,834	)
Net loss per share from continuing operations	$	(0.28	)		$	(0.31	)		$	(0.30	)		$	(0.18	)
Net loss per share from discontinued operations	$	(0.20	)		$	(0.02	)		$	0.03			$	(0.03	)

(2)	Included in loss from discontinued operations for the fourth quarter of 2015 was a charge of $9.1 million related to the impairment of the Neighborhood Diabetes asset group.

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

The following table sets forth activities in the Company's accounts receivable reserve and deferred tax valuation allowance accounts:

Description	Balance at Beginning of Period				Additions Charged to Costs and Expenses				Deductions				Balance at End of Period
(In thousands)
Year Ended December 31, 2016
Allowance for doubtful accounts(1)	$	4,454			$	2,069			$	3,612			$	2,911
Deferred tax valuation allowance(1)	193,405				7,599				9,082				191,922
Year Ended December 31, 2015
Allowance for doubtful accounts(1)	$	5,837			$	1,184			$	2,567			$	4,454
Deferred tax valuation allowance(1)	165,020				28,418				33				193,405
Year Ended December 31, 2014
Allowance for doubtful accounts(1)	$	7,133			$	3,254			$	4,550			$	5,837
Deferred tax valuation allowance(1)	158,323				21,070				14,373				165,020

(1) Includes the amount classified as discontinued operations on the balance sheet and related activity.