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

Executive Level Overview

We are primarily engaged in the development, manufacturing and sale of our proprietary 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 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 and tubing, provides for virtually pain-free automated cannula insertion, communicates wirelessly and integrates a blood glucose meter. We believe that the Omnipod System’s unique proprietary design and features allow people with insulin-dependent diabetes to manage their diabetes with unprecedented freedom, comfort, convenience, and ease.

We began commercial sale of the Omnipod System in the United States in 2005. We sell the Omnipod System in the United States through direct sales to customers or through our distribution partners. The Omnipod System is currently available in multiple countries in Europe, as well as Canada and Israel.

In addition to the diabetes market space, we have partnered with pharmaceutical and biotechnology companies that utilize a customized form of the Omnipod System to deliver a drug over a specified interval of time, at a certain administered volume. The majority of our drug delivery revenue currently consists of sales of Amgen's Neulasta Onpro kit.

We are constructing a highly-automated manufacturing facility in Acton, Massachusetts, with planned production out of the facility beginning in early 2019. The facility will also serve as our global headquarters. We expect that the new facility will allow us to lower our manufacturing costs, increase supply redundancy, add capacity closer to our largest customer base and support growth. We expect capital expenditures for the construction of the Acton facility and related equipment purchases will approach $200 million when production begins in 2019 and will be funded by our cash flows from operations and proceeds from our senior convertible debt offerings.

We announced on July 20, 2017 our plans to assume, on July 1, 2018, all commercial activities (including, among other things, distribution, sales, marketing, training and support) of our Omnipod System across Europe following the expiration of our distribution agreement with our European distributor on June 30, 2018. Once we assume commercial activities following the expiration of the current distribution agreement, we expect our revenue and gross margins to increase, as average customer pricing in Europe is higher than the current distributor pricing to our European distributor. Throughout 2018, we expect to incur increased operating expenses as we invest in our European operations. Once European operations are established, excluding nonrecurring transition-related costs, we expect that the assumption of direct distribution will be accretive to our consolidated results of operations.

Highlights and Recent Developments:

•

In January 2018, we announced that CMS has issued guidance clarifying that Medicare Part D Plan Sponsors are permitted to provide coverage for products such as the Omnipod System under the Medicare Part D (prescription drug) program. The CMS guidance empowers us to begin working with Medicare Part D carriers to ensure beneficiaries living with diabetes have access to the Omnipod System. Securing Medicare Part D coverage also provides us with a direct pathway to gain Medicaid coverage at the state level, as many state-run Medicaid programs follow CMS prescription drug guidance to determine coverage. This allows access for lower-income individuals and families on Medicaid for whom Omnipod currently is not a covered option. The Company estimates that obtaining Medicare and Medicaid coverage extends Omnipod System coverage access to approximately 450,000 additional individuals with Type 1 diabetes in the United States.

•	Also in January 2018, we submitted a premarket notification 510(k) to the FDA requesting clearance for commercial distribution of our DASH TM System, which is our next generation of the Omnipod System, featuring a secured Bluetooth Low Energy enabled Pod and PDM with a touch screen color user interface

supported by smartphone connectivity. Upon clearance, we would begin a limited commercial release of the product prior to a full market launch.

•	In November 2017, we issued and sold $402.5 million in principal amount of 1.375% Convertible Senior Notes due in 2024 and repurchased $63.4 million in principal amount of our 2.0% Convertible Senior Notes due in 2019.

•

In July 2017, we announced plans to assume distribution and commercial support for the Omnipod System in Europe as further discussed above. We believe that our strategy of accessing our customers directly in Europe will allow us to have better control over existing and future markets, be closer to our customers, gain a better understanding of innovation needs specific to the European market, and expand our customer base.

•	During 2017, we began construction of our new, highly-automated U.S. manufacturing facility in Acton, Massachusetts. We believe that this manufacturing facility will allow us to lower our manufacturing costs, increase supply redundancy, add capacity closer our growing U.S. customer base and support our growth. The facility will also serve as our global headquarters.

2017 Revenue Results:

•	Total revenue of $463.8 million

◦	U.S. Omnipod revenue of $271.6 million, an 18% increase year over year

◦	International Omnipod revenue of $120.0 million, a 67% increase year over year

◦	Drug Delivery revenue of $72.2 million, an 11% increase year over year

Our long-term financial objective is to achieve and sustain profitable growth. We expect our efforts in 2018 and 2019 to focus primarily on the construction and commissioning of our U.S. manufacturing facility, the establishment of our European operations, the launch of new products, such as the DASH TM Omnipod System, continuing our product development efforts, and taking the necessary actions such as amending or creating payor or distributor contracts to allow us to service patients who receive benefits through the Medicare Part D and Medicaid programs. Achieving these objectives is expected to require additional investments in certain personnel and initiatives, as well as enhancements to our supply chain operation capacity, efficiency and effectiveness. We believe that we will continue to incur net losses in the near term in order to achieve these objectives. However, we believe that the accomplishment of our near term objectives will have a positive impact on our financial condition in the future.

Components of Financial Operations

Revenue. We derive most of our revenue from global sales of the Omnipod System. Our revenue also includes sales of devices based on the Omnipod System technology platform to global pharmaceutical and biotechnology companies for the delivery of subcutaneous drugs across multiple therapeutic areas.

Cost of revenue. Cost of revenue consists primarily of raw material, labor, warranty, inventory reserve and overhead costs such as freight-in and depreciation, and the cost of products we acquire from third party suppliers.

Research and development. Research and development expenses consist primarily of personnel costs and outside services within our product development, regulatory and clinical functions, and product development projects. We generally expense research and development costs as incurred.

Sales and marketing. Sales and marketing expenses consist primarily of personnel costs within our sales, marketing, reimbursement support, customer care and training functions, sales commissions paid to our sales representatives, costs associated with promotional activities and participation in industry trade shows.

General and administrative. General and administrative expenses consist primarily of salaries and other related costs for personnel serving the executive, finance, legal, information technology and human resource functions, as well as legal fees, accounting fees, insurance costs, bad debt expenses, shipping, handling and facilities-related costs.

Results of Operations

This section discusses our consolidated results of operations for 2017 compared to 2016, as well as 2016 compared to 2015, and should be read in conjunction with the consolidated financial statements and accompanying notes included under Item 8 of this Form 10-K.

TABLE 1: RESULTS OF OPERATIONS
	Years Ended December 31,															Years Ended December 31,
(In Thousands)	2017				2016				$ Change				% Change			2016				2015				$ Change				% Change
Revenue
U.S. Omnipod	$	271,597			$	229,785			$	41,812			18	%		$	229,785			$	189,604			$	40,181			21	%
International Omnipod	119,953				71,889				48,064				67	%		71,889				40,339				31,550				78	%
Drug Delivery	72,218				65,315				6,903				11	%		65,315				33,950				31,365				92	%
Total Revenue	463,768				366,989				96,779				26	%		366,989				263,893				103,096				39	%
Cost of revenue	186,599				155,903				30,696				20	%		155,903				130,622				25,281				19	%
Gross profit	277,169				211,086				66,083				31	%		211,086				133,271				77,815				58	%
Gross margin	59.8		%		57.5		%						2.3			57.5		%		50.5		%						7
Operating expenses:
Research and development	74,452				55,710				18,742				34	%		55,710				43,208				12,502				29	%
Sales and marketing	121,617				94,483				27,134				29	%		94,483				78,407				16,076				21	%
General and administrative	88,487				71,597				16,890				24	%		71,597				60,392				11,205				19	%
Total operating expenses	284,556				221,790				62,766				28	%		221,790				182,007				39,783				22	%
Operating loss	(7,387		)		(10,704		)		(3,317		)		(31	)%		(10,704		)		(48,736		)		(38,032		)		(78	)%
Interest expense and other, net	(19,187		)		(16,114		)		(3,073		)		19	%		(16,114		)		(12,654		)		(3,460		)		27	%
Loss from continuing operations before income taxes	(26,574		)		(26,818		)		(244		)		(1	)%		(26,818		)		(61,390		)		(34,572		)		(56	)%
Income tax expense	257				392				(135		)		(34	)%		392				212				180				85	%
Net loss from continuing operations	(26,831		)		(27,210		)		(379		)		(1	)%		(27,210		)		(61,602		)		(34,392		)		(56	)%
Loss from discontinued operations, net of tax	—				(1,669		)		(1,669		)		(100	)%		(1,669		)		(11,918		)		(10,249		)		(86	)%
Net loss	$	(26,831	)		$	(28,879	)		$	2,048			(7	)%		$	(28,879	)		$	(73,520	)		$	44,641			(61	)%

Comparison of the Years Ended December 31, 2017 and December 31, 2016

Revenue

Our total revenue increased to $463.8 million, up $96.8 million, or 26%, in 2017 compared to 2016, due to strong growth in our International Omnipod revenue, our U.S. Omnipod revenue and our on-body injection device for drug delivery. Our International Omnipod revenue increased to $120.0 million, up $48.1 million, or 67%, primarily due to growth in distributor sales from continued adoption in existing and newer markets within Europe such as France. Our U.S. Omnipod revenue increased to $271.6 million, up $41.8 million, or 18%, primarily due to growth in our installed base as we continue to expand awareness of the Omnipod System. Our drug delivery revenue increased to $72.2 million, up $6.9 million, or 11%, due to growth in demand for our primary drug delivery device on greater market adoption of Amgen's Neulasta Onpro kit.

For 2018, we expect strong revenue growth driven by our expansion in the U.S. and internationally, as well as the transition to direct distribution of our Omnipod System across Europe following the expiration of our global distribution agreement with our European distributor on June 30, 2018, partially offset by lower drug delivery revenue.

Cost of Revenue

Cost of revenue increased to $186.6 million, up $30.7 million, or 20%, in 2017 compared to 2016, primarily due to an increase in sales volumes, partially offset by improvements in supply chain operations in 2017.

Gross Margin

Gross margin increased to 59.8%, up approximately 2.3 points, in 2017 compared to 2016. The increase in gross margin was primarily due to improvements in supply chain operations, partially offset by the unfavorable mix impact of higher distributor sales in Europe. For 2018, we expect gross margin to increase as compared to 2017 primarily due to improvements in supply chain operations and our assumption of distribution of our Omnipod System in Europe in the second half of 2018.

Research and Development

Research and development expenses increased to $74.5 million, up $18.7 million, or 34%, in 2017 compared to 2016. The increase in research and development expenses in the current period was primarily due to an increase in expenses related to our development projects, including our digital mobile Omnipod platform, which involves interaction with continuous glucose monitoring technology, our concentrated insulin program and our artificial pancreas program. For 2018, we expect overall research and development spending to increase as compared to 2017 primarily due to the development efforts on our ongoing projects.

Sales and Marketing

Sales and marketing expenses increased to $121.6 million, up $27.1 million, or 29%, for 2017, compared to 2016. The increase in sales and marketing expenses in the current period was primarily due increased personnel-related expenses associated with the expansion of our customer support, market access and sales force personnel, investments to support our assumption in mid-2018 of direct commercial support for Omnipod in Europe, and increased advertising expenses associated with direct to patient marketing activities. We expect sales and marketing expenses in 2018 to increase as compared to 2017 due to the expansion of our sales force and customer support personnel and establishment of direct commercial operations in Europe.

General and Administrative

General and administrative expenses increased to $88.5 million, up $16.9 million, or 24%, for 2017, compared to 2016. The increase in general and administrative expenses in the current period was primarily attributable to increased personnel-related costs and fees related to external consultants and professional service providers to support the growth in our business. For 2018, we expect overall general and administrative expenses to increase as compared to 2017 as we continue to grow the business and make investments in our operating structure to support continued growth as well as the establishment of direct commercial operations in Europe.

Interest Expense and Other, Net

Interest expense and other, net, increased to $19.2 million, up $3.1 million, or 19%, for 2017, compared to 2016. The increase in interest expense and other, net, in the current period was primarily due to a net increase in our outstanding long-term debt, partially offset by lower losses on the extinguishment of debt in 2017. Non-cash interest expense, which includes the amortization of deferred financing and debt issuance costs, increased $7.9 million and cash interest expense increased $1.8 million in 2017 as compared to 2016. These increases were partially offset by a $1.9 million reduction in losses on the extinguishment of debt in 2017, higher capitalization of interest, and higher interest income. We expect that our interest expense and other, net, will increase in 2018 compared to the prior year primarily due to an increase in non-cash interest expense associated with the issuance in November 2017 of our 1.375% Notes, partially offset by higher capitalization of interest due to increased capital expenditures associated with the construction of our Acton, Massachusetts facility.

Income Tax Expense

Income tax expense was not material to our results of operations in the years 2017 or 2016 as we have generated net operating losses to date and have fully reserved our net operating loss carryforwards. For more information on our income tax expense, please refer to Note 15 to the consolidated financial statements.

Comparison of the Years Ended December 31, 2016 and December 31, 2015

Revenue

Our total revenue increased to $367.0 million, up $103.1 million, or 39%, in 2016, compared to 2015, primarily due to strong growth in our U.S. Omnipod revenue, International Omnipod revenue and our on-body injection device for drug delivery. Our U.S. Omnipod revenue increased to $229.8 million, up $40.2 million, or 21%, primarily due to growth in our installed base of Omnipod users which was greatly driven by the expansion in 2015 and 2016 of our sales force and customer support personnel and strategic initiatives introduced in mid-2015 to expand awareness of the Omnipod System. The results for 2015 were also partially impacted by unfavorable distributor ordering patterns in the first quarter of 2015 which stabilized thereafter. Our International Omnipod revenue increased to $71.9 million, up $31.6 million, or 78%, primarily due to growth in distributor sales from continued adoption in existing markets and to a lesser extent from entry into new markets. The results for 2015 included lower International Omnipod sales which partially resulted from unfavorable distributor ordering patterns in the first and second quarters of 2015, which stabilized thereafter. Our drug delivery revenue increased to $65.3 million, up $31.4 million due to strong growth in demand for our primary drug delivery device following regulatory approval in December 2014.

Cost of Revenue

Cost of revenue increased to $155.9 million, up $25.3 million, or 19%, in 2016 compared to 2015, primarily due to an increase in sales volumes, partially offset by $11.5 million of costs incurred during 2015 that were considered non-recurring in nature, along with supply chain operation efficiency and effectiveness improvements made in 2016.

Gross Margin

Gross margin increased to 57.5%, up approximately 7 points, in 2016 compared to 2015, primarily due to $11.5 million of costs incurred in 2015 that were considered non-recurring in nature, along with supply chain operation efficiencies and effectiveness improvements made in 2016.

Research and Development

Research and development expenses increased to $55.7 million, up $12.5 million, or 29%, in 2016 compared to 2015, primarily due to an increase in expenses related to our development projects, including our mobile application development which involves interaction with continuous glucose monitoring technology, artificial pancreas program, development efforts with Eli Lilly and Company for the use of concentrated insulin for patients with higher insulin-resistance and other Omnipod product improvement initiatives.

Sales and Marketing

Sales and marketing expenses increased to $94.5 million, up $16.1 million, or 21%, for 2016 compared to 2015, primarily due to an increase of $16.0 million in personnel-related expenses, including increased incentive compensation costs resulting from growth in the business, as well as costs associated with the expansion in 2015 of our sales force and customer support personnel.

General and Administrative

General and administrative expenses increased to $71.6 million, up $11.2 million, or 19%, for 2016 compared to 2015. This increase includes a charge of $6.1 million related to in-process internally developed software recorded in the fourth quarter of 2016 due to a change in our longer-term enterprise resource planning system requirements. In addition, the increase was also due to a $4.6 million increase that was primarily attributable to personnel-related costs on higher incentive compensation associated with growth in our business, as well as additional staff to support our growth expectations and fees paid for external consultants.

Interest Expense and Other, Net

Interest expense and other income, net increased to $16.1 million, up $3.5 million, or 27% for 2016 compared to 2015, due to $3.0 million of net additional interest expense associated with the issuance of the 1.25% Notes and a $2.6 million charge recorded for the extinguishment of debt related to the repurchase of $134.2 million in principal of the 2% Notes. This was partially offset from a slight decrease in capital lease interest expense.

Income Tax Expense

Income tax expense was not material to our results of operations in the years 2016 or 2015. For more information on our income tax expense, please refer to Note 15 to the consolidated financial statements.

Loss from Discontinued Operations, Net of Tax

The loss from discontinued operations decreased by approximately $10.2 million in 2016, compared to the year ended December 31, 2015. This decrease was primarily the result of a $9.1 million impairment charge recorded in the fourth quarter of 2015 for the long-lived assets of Neighborhood Diabetes which we sold in February 2016. As the Neighborhood Diabetes business was sold in February 2016, 2016 includes less than two months of full operations compared to a full year for 2015.

Liquidity and Capital Resources

As of December 31, 2017, we had $272.6 million in cash and cash equivalents and $293.0 million in short-term and long-term investments. We believe that our current liquidity will be sufficient to meet our projected operating, investing and debt service requirements for at least the next twelve months.

To lower our manufacturing costs, increase supply redundancy, add capacity closer to our largest customer base and support growth, we are constructing a highly-automated manufacturing facility in Acton, Massachusetts, with planned production out of the facility beginning in 2019. This facility will also serve as our global headquarters. As a result, capital expenditures have increased above historic levels to fund the construction of the Acton facility and related equipment purchases. As of December 31, 2017, investments in construction-in-progress related to the Acton facility were approximately $70 million. We expect that capital expenditures for this facility will approach $200 million when production begins in 2019.

In connection with our plans to assume, on July 1, 2018, all commercial activities of our Omnipod System across Europe following the expiration of our distribution agreement with our European distributor on June 30, 2018, we will be required to pay to the European distributor a per unit fee for sales of our Omnipod device, over the twelve months following the expiration of the global distribution agreement, to identified customers (as that term is defined in the distribution agreement) of the European distributor who had previously entered into an agreement with the distributor for the purchase of Omnipod devices. While the actual total fee could vary significantly, we estimate that the total fee could be in the range of approximately $10 million to $55 million. The fee will be determined and paid on a quarterly basis following the expiration of the distribution agreement and the actual amount of the fee will depend on a number of factors and will not be known until the number of qualifying sales of Omnipod devices is determined following each quarter beginning with the quarter ending September 30, 2018.

Convertible Senior Notes

In order to finance our operations and global expansion, we have periodically issued and sold Convertible Senior Notes, which are convertible into our common stock. As of December 31, 2017, the following Notes were outstanding:

Issuance Date	Coupon	Principal Outstanding (in thousands)			Due Date	Initial Conversion Rate per Share of Common Stock	Conversion Price per Share of Common Stock
June 2014	2.000%	$	3,664		June 15, 2019	21.5019	$46.51
September 2016	1.250%	345,000			September 15, 2021	17.1332	$58.37
November 2017	1.375%	402,500			November 15, 2024	10.7315	$93.18
Total		$	751,164

Additional information regarding our debt issuances is provided in Note 11 to the consolidated financial statements included under Item 8 of this Form 10-K.

Capital Leases

As of December 31, 2017, we had no capital leases outstanding.

Summary of Cash Flows		Years Ended December 31,
(In thousands)		2017				2016				2015
Cash provided by (used in):
Operating activities		$	41,207			$	15,911			$	(12,552	)
Investing activities		(210,797		)		(178,010		)		(15,323		)
Financing activities		304,547				176,567				(371		)
Effect of exchange rate changes on cash		446				34				(275		)
Net increase (decrease) in cash and cash equivalents		$	135,403			$	14,502			$	(28,521	)

Included in our summary of cash flows for the years ended December 31, 2016 and 2015 are the results of our discontinued operations. Additional information regarding our discontinued operations is provided in Note 19 to the consolidated financial statements included under Item 8 of this Form 10-K.

Operating Activities

Our net cash provided by operating activities for the year ended December 31, 2017 was $41.2 million compared to net cash provided by operating activities of $15.9 million in the same period of 2016, an increase of $25.3 million year over year. The increase in cash provided by operating activities in the current period is primarily due to reductions in working capital (excluding cash and cash equivalents and short-term investments) in the current period as compared to investments in working capital in 2016, which included additional inventory purchases in order to support customer demand. Reductions in working capital in the current period were primarily due to increases in accounts payable, accrued expenses and other liabilities, partially offset by increases in account receivable due to the growth of our business.

Our net cash provided by operating activities was $15.9 million for the year ended December 31, 2016 compared to net cash used in operating activities of $12.6 million in the same period in 2015. The increase was primarily due to a lower net loss recorded for the year and improved customer collections, partially offset by timing of cash disbursements and additional inventory purchases in order to support customer demand and to allow for alternative shipping methods.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2017 was $210.8 million compared to net cash used in investing activities of $178.0 million in 2016, an increase of $32.8 million. The increase in investing activities in the current period is primarily due to an increase in capital expenditures, which were $77.2 million in 2017 compared to $22.1 million in 2016, primarily associated with the construction of our manufacturing facility in Acton, Massachusetts, partially offset by fewer net investments in marketable securities in the current period.

Net cash used in investing activities in the year ended December 31, 2016 was $178.0 million compared to $15.3 million in the same period of 2015. In the year ended December 31, 2016, we invested $161.6 million in marketable securities (net of proceeds from redemptions and sales) driven by the net proceeds from the issuance of our 1.25% Notes. There were no such investments in 2015. In addition, the increase in investing activities related to higher capital expenditures of $22.1 million in 2016 compared to $10.6 million in 2015, primarily associated with investments in supply chain operations including $10.7 million for equipment in process of construction to support our U.S. manufacturing initiatives.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2017 was $304.5 million compared to $176.6 million in net cash provided by financing activities in 2016, an increase of $127.9 million. The increase was primarily attributable to net proceeds of $391.6 million in November 2017 from the issuance of our 1.375% Notes as compared to $333.7 million of net proceeds from the issuance in 2016 of our 1.25% Notes, and lower repayments to retire outstanding debt in the current period as compared to 2016. In November 2017, we made payments of $98.6 million to extinguish $63.4 million of our outstanding 2% Notes as compared to $153.6 million of payments to extinguish a portion of our 2% Notes in 2016.

Net cash provided by financing activities in the year ended December 31, 2016 was $176.6 million compared to $0.4 million in net cash used in financing activities in the same period of 2015. The increase was primarily

attributable to net proceeds of $333.7 million in September 2016 from the issuance of our 1.25% Notes, offset by repayments of $153.6 million to extinguish $134.2 million, or approximately 67%, of our outstanding 2% Notes.

Commitments and Contingencies

We lease facilities in Massachusetts, California, Tennessee, the United Kingdom, Canada and China. These leases are accounted for as operating leases and generally provide for a base rent plus real estate taxes and certain operating expenses related to the leases. Certain of our 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 consolidated balance sheets.

The following table summarizes our principal obligations as of December 31, 2017:

(In millions)
Contractual Obligations (3)		Total				2018				2019				2020				2021				2022				Later
Operating lease obligations		$	13.1			$	3.0			$	3.0			$	2.6			$	2.4			$	2.1			$	—
Debt obligations: principal (1)		751.2				—				3.7				—				345.0				—				402.5
Debt obligations: cash interest (1)		54.1				9.9				9.9				9.8				8.6				5.5				10.4
Purchase obligations(2)		140.9				128.3				12.6				—				—				—				—
Total contractual obligations		$	959.3			$	141.2			$	29.2			$	12.4			$	356.0			$	7.6			$	412.9

(1)	Debt obligations include principal and cash interest. Our senior convertible notes incur annual interest of 2%, 1.25% and 1.375%.

(2)

Our purchase obligations include commitments with certain of our suppliers, primarily for the purchase of Omnipod System components and manufacturing equipment along with other commitments to purchase goods or services in the normal course of business. We make such commitments through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. These amounts include approximately $58.0 million of commitments with three major suppliers for the construction of our Acton, Massachusetts manufacturing facility and the establishment of highly-automated manufacturing operations.

(3)	The contractual obligations table excludes a fee that we will be required to pay to our European distributor following the expiration of our global distribution agreement on June 30, 2018. The actual amount of the fee is uncertain and is dependent on a number of factors.

Legal Proceedings

The significant estimates and judgments related with establishing litigation reserves are discussed under "Legal Proceedings" in Note 12 of the consolidated financial statements included under Item 8 of this Form 10-K.

Off-Balance Sheet Arrangements

As of December 31, 2017, we did not have any off-balance sheet financing arrangements.

Critical Accounting Policies and Estimates

Our financial statements are based on the selection and application of generally accepted accounting principles, which require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements.

Based on the sensitivity of reported financial statement amounts to the underlying estimates and assumptions, the relatively more significant accounting policies applied by us have been identified by management as those associated with the following:

• Revenue recognition

• Fair value measurements

• Accounts receivable and allowance for doubtful accounts

• Inventories

• Product warranty costs

• Convertible debt

• Commitments and contingencies

• Stock-based compensation

Additional information on our critical accounting estimates and significant accounting policies, including references to applicable footnotes, is provided in Note 2 to the consolidated financial statements included under Item 8 of this Form 10-K.

Recent Accounting Pronouncements

Information with respect to recent accounting developments is provided in Note 2 to the consolidated financial statements included under Item 8 of this Form 10-K.