Item 8. Financial Statements and Supplementary Data

Our financial statements as of December 31, 2018 and 2017 and for each of the three years in the period ended December 31, 2018, and the Report of the Registered Independent Public Accounting Firm are included in this report as listed in the index.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm	45
Consolidated Balance Sheets as of December 31, 2018 and 2017	46
Consolidated Statements of Operations for the Years ended December 31, 2018, 2017 and 2016	47
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2018, 2017 and 2016	48
Consolidated Statements of Stockholders' Equity for the Years ended December 31, 2018, 2017 and 2016	49
Consolidated Statements of Cash Flows for the Years ended December 31, 2018, 2017 and 2016	50
Notes to Consolidated Financial Statements	51

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Insulet Corporation

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of Insulet Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and schedule (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company’s internal control over financial reporting as of December 31, 2018, 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 25, 2019 expressed an unqualified opinion.

Basis for opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ GRANT THORNTON LLP

We have served as the Company's auditor since 2016.

Boston, Massachusetts

February 25, 2019

INSULET CORPORATION

CONSOLIDATED BALANCE SHEETS

	December 31, 2018				December 31, 2017
(In thousands, except share and per share data)
ASSETS
Current Assets
Cash and cash equivalents	$	113,906			$	272,577
Short-term investments	175,040				167,479
Accounts receivable, net	63,294				53,373
Unbilled receivable	13,378				—
Inventories	71,414				33,793
Prepaid expenses and other current assets	24,254				9,949
Total current assets	461,286				537,171
Long-term investments	140,784				125,549
Property and equipment, net	258,379				107,864
Other intangible assets, net	10,383				4,351
Goodwill	39,646				39,840
Other assets	18,266				1,969
Total assets	$	928,744			$	816,744
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	25,500			$	24,413
Accrued expenses and other current liabilities	88,973				59,256
Deferred revenue	1,184				2,356
Total current liabilities	115,657				86,025
Long-term debt, net	591,978				566,173
Other long-term liabilities	9,010				6,030
Total liabilities	716,645				658,228
Commitments and contingencies (Note 14)
Stockholders’ Equity
Preferred stock, $.001 par value:
Authorized: 5,000,000 shares at December 31, 2018 and 2017. Issued and outstanding: zero shares at December 31, 2018 and 2017	—				—
Common stock, $.001 par value:
Authorized: 100,000,000 shares at December 31, 2018 and 2017. Issued and outstanding: 59,188,758 and 58,319,348 shares at December 31, 2018 and 2017, respectively	59				58
Additional paid-in capital	898,559				866,206
Accumulated other comprehensive loss	(2,905		)		(493		)
Accumulated deficit	(683,614		)		(707,255		)
Total stockholders’ equity	212,099				158,516
Total liabilities and stockholders’ equity	$	928,744			$	816,744

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)	2018				2017				2016
Revenue	$	563,823			$	463,768			$	366,989
Cost of revenue	193,655				186,599				155,903
Gross profit	370,168				277,169				211,086
Operating expenses:
Research and development	88,606				74,452				55,710
Sales and marketing	142,321				121,617				94,483
General and administrative	111,818				88,487				71,597
Total operating expenses	342,745				284,556				221,790
Operating income (loss)	27,423				(7,387		)		(10,704		)
Interest expense	28,902				21,211				14,388
Interest income and other, net	6,705				2,633				825
Loss on extinguishment of long-term debt	—				609				2,551
Interest and other income (expense), net	(22,197		)		(19,187		)		(16,114		)
Income (loss) from continuing operations before income taxes	5,226				(26,574		)		(26,818		)
Income tax expense	1,934				257				392
Net income (loss) from continuing operations	3,292				(26,831		)		(27,210		)
Loss from discontinued operations, net of tax	—				—				(1,669		)
Net income (loss)	$	3,292			$	(26,831	)		$	(28,879	)
Net income (loss) from continuing operations per share:
Basic	$	0.06			$	(0.46	)		$	(0.48	)
Diluted	$	0.05			$	(0.46	)		$	(0.48	)
Net loss from discontinued operations per share basic and diluted	$	—			$	—			$	(0.03	)
Weighted-average number of shares used in calculating net income (loss) per share:
Basic	58,859,574				58,003,434				57,251,377
Diluted	61,008,024				58,003,434				57,251,377

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

INSULET CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Years Ended December 31,
(In thousands)	2018				2017				2016
Net income (loss)	$	3,292			$	(26,831	)		$	(28,879	)
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment, net of tax	(2,174		)		565				135
Unrealized loss on available-for-sale securities, net of tax	(238		)		(332		)		(207		)
Total other comprehensive (loss) income, net of tax	(2,412		)		233				(72		)
Total comprehensive income (loss)	$	880			$	(26,598	)		$	(28,951	)

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, 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
Exercise of options to purchase common stock	505,207			1				13,987												13,988
Issuance for employee stock purchase plan	59,134			—				1,817												1,817
Stock-based compensation expense								31,941												31,941
Restricted stock units vested, net of shares withheld for taxes	297,040			—				(4,054		)										(4,054		)
Allocation to equity for conversion feature on 1.375% Notes, net of issuance costs								117,458												117,458
Extinguishment of conversion feature on 2% Notes, net of issuance costs								(39,186		)										(39,186		)
Net loss												(26,831		)						(26,831		)
Other comprehensive income																233				233
Balance, December 31, 2017	58,319,348			58				866,206				(707,255		)		(493		)		158,516
Exercise of options to purchase common stock, net of shares withheld and retired to satisfy cashless exercises	409,428			1				12,798												12,799
Issuance for employee stock purchase plan	46,343			—				3,029												3,029
Stock-based compensation expense								37,521												37,521
Restricted stock units vested, net of shares withheld for taxes	413,639			—				(17,785		)										(17,785		)
Extinguishment of conversion feature on 2% Notes, net of issuance costs								(3,210		)										(3,210		)
Adoption of ASC 606 (Note 2)												20,349								20,349
Net income												3,292								3,292
Other comprehensive loss																(2,412		)		(2,412		)
Balance, December 31, 2018	59,188,758			$	59			$	898,559			$	(683,614	)		$	(2,905	)		$	212,099

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)	2018				2017				2016
Cash flows from operating activities
Net income (loss)	$	3,292			$	(26,831	)		$	(28,879	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization	15,646				13,854				13,833
Non-cash interest expense	29,282				18,008				10,068
Stock-based compensation expense	37,521				31,941				23,617
Loss on extinguishment of long-term debt	—				609				2,551
Provision for bad debts	3,382				1,922				2,070
Impairments and other	(401		)		89				6,234
Changes in operating assets and liabilities:
Accounts receivable	(22,879		)		(26,322		)		12,551
Inventories	(38,826		)		1,689				(24,103		)
Deferred revenue	(3,787		)		1,061				(849		)
Prepaid expenses and other assets	(11,601		)		(3,328		)		(2,621		)
Accounts payable, accrued expenses and other current liabilities	21,187				27,313				639
Other long-term liabilities	3,083				1,202				800
Net cash provided by operating activities(1)	35,899				41,207				15,911
Cash flows from investing activities
Purchases of property, equipment and intangible assets (2)	(162,354		)		(77,226		)		(22,115		)
Purchases of investments	(191,424		)		(297,965		)		(177,654		)
Receipts from the maturity or sale of investments	169,274				164,394				16,045
Proceeds from divestiture of business, net	—				—				5,714
Net cash used in investing activities	(184,504		)		(210,797		)		(178,010		)
Cash flows from financing activities
Principal payments of capital lease obligations	—				(269		)		(5,518		)
Proceeds from issuance of convertible notes, net of issuance costs	—				391,638				333,725
Repayment of convertible notes	(6,699		)		(98,572		)		(153,628		)
Proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan	15,815				15,804				4,854
Payment of withholding taxes in connection with vesting of restricted stock units	(17,781		)		(4,054		)		(2,866		)
Net cash (used in) provided by financing activities	(8,665		)		304,547				176,567
Effect of exchange rate changes on cash	(1,401		)		446				34
Net (decrease) increase in cash, cash equivalents and restricted cash	(158,671		)		135,403				14,502
Cash, cash equivalents and restricted cash, beginning of year (3)	272,577				137,174				122,672
Cash, cash equivalents and restricted cash, end of year (3)	$	113,906			$	272,577			$	137,174
Supplemental disclosure of cash flow information
Cash paid for interest, net of amount capitalized	$	—			$	2,476			$	3,687
Cash paid for taxes	$	795			$	462			$	932
Non-cash investing and financing activities
Allocation to equity for conversion feature for issuance of 1.375% convertible notes	$	—			$	120,710			$	—
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	$	—			$	(39,186	)		$	(32,865	)

(1) Includes activity related to discontinued operations for the year ended December 31, 2016. See Note 19 to the consolidated financial statements for discussion of discontinued operations.

(2) Cash outflows from purchases of property, equipment and intangible assets for the years ended December 31, 2018 and 2017 include $4.0 million and $2.0 million, respectively, of purchases made in prior periods that were included in accounts payable and accrued expenses as of December 31, 2017 and 2016, respectively, and exclude $11.5 million and $4.0 million of purchases made during the year ended December 31, 2018 and 2017, respectively, that were included in accounts payable and accrued expenses as of December 31, 2018 and 2017, respectively.

(3) Cash and cash equivalents includes restricted cash amounts totaling $2.7 million, $0.5 million and $1.2 million as of December 31, 2018, 2017 and 2016, respectively. See Note 2 to the consolidated financial statements.

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 System, an innovative, discreet and easy-to-use continuous insulin delivery system for people with insulin-dependent diabetes. There are two primary types of insulin therapy practiced today: multiple daily injection (“MDI”) therapy using syringes or insulin pens; and pump therapy using insulin pumps. Insulin pumps are used to perform continuous subcutaneous insulin infusion, or insulin pump therapy, and typically use a programmable device and an infusion set to administer insulin into the person’s body. Insulin pump therapy has been shown to provide people with insulin-dependent diabetes with numerous advantages relative to MDI therapy. The Company estimates that approximately one-third of the Type 1 diabetes population in the United States and less than one fifth of the Type 1 diabetes population outside the United States uses insulin pump therapy. 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 (the "Pod"), and its wireless companion, the handheld Personal Diabetes Manager ("PDM"). The Omnipod System, which features two discreet, easy-to-use devices, communicates wirelessly, provides for virtually pain-free automated cannula insertion and eliminates the need for traditional MDI therapy or the use of traditional pump and tubing. 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 Insulin Management System ("Omnipod") began in the United States in 2005. The Company sells the Omnipod through direct sales to customers or through intermediaries. The Omnipod is also currently available in multiple countries in Europe, as well as in Canada and Israel. On July 1, 2018, the Company commenced direct commercial operations for the Omnipod in Europe following the expiration of its distribution agreement on June 30, 2018 with Ypsomed Distribution AG ("Ypsomed" or the "European Distributor"). In June 2018, the FDA cleared for commercial sale the Company's Omnipod DASHTM Insulin Management System ("Omnipod DASH" or "DASH"), which is its next-generation digital mobile Omnipod platform within the Omnipod System family, featuring secured Bluetooth wireless technology for connectivity between the Pod and the color touchscreen smartphone PDM. The Company commenced a limited commercial release of Omnipod DASH in 2018 prior to a planned full market launch in the U.S. in the first half of 2019.

In addition to using the Omnipod System for insulin delivery, the Company also partners with global pharmaceutical and biotechnology companies to tailor the Omnipod System technology platform for the delivery of their drugs across other therapeutic areas. The majority of the Company's drug delivery revenue currently consists of sales of Amgen's Neulasta Onpro kit, an innovative delivery system for Amgen’s white blood cell booster to help reduce the risk of infection during intense chemotherapy.

To lower manufacturing costs, increase supply redundancy, add capacity closer to the Company's largest customer base and support growth, the Company has been constructing a highly-automated manufacturing facility in Acton, Massachusetts, which serves as its corporate headquarters. The facility was substantially complete in December 2018, with planned production out of the facility beginning in the first half of 2019.

In February 2016, the Company sold its Neighborhood Diabetes business, through which the Company provided customers with blood glucose testing supplies, traditional insulin pumps, pump supplies and pharmaceuticals. Additional information regarding the disposition and treatment of the Neighborhood Diabetes business as discontinued operations is provided in Note 19 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 accounting principles generally accepted in the United States ("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; the fair value of intangible assets; the valuation of inventory; the valuation of variable transaction price in its contracts with customers, such as rights of return, discounts and rebates; the valuation of deferred revenue associated with undelivered performance obligations in contracts with customers; the calculation of gains and losses, if any, on the retirement or conversion of convertible debt; the estimated useful lives of property and equipment and intangible assets; the amount of internal use software development costs that qualify for capitalization; the fair value of liabilities associated with leased facilities; the valuation allowance related to deferred income taxes; the estimated amount, if any, of accrued contingent liabilities as well as warranty and doubtful accounts allowance reserve calculations. Actual results may differ from those estimates.

Principles of Consolidation and Basis of Presentation

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.

Foreign Currency Translation

For the foreign subsidiaries of the Company, assets and liabilities 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 income (loss), a separate component of stockholders' equity. For the year ended December 31, 2018, net foreign currency realized and unrealized losses were approximately $1.0 million and were not material for the years 2017 and 2016.

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 and U.S. government and agency bonds, which are carried at cost which approximates their fair value. Included in the Company's cash and cash equivalents are restricted cash amounts set aside for collateral on outstanding letters of credit totaling $2.7 million as of December 31, 2018 and $0.5 million as of December 31, 2017.

Investments in Marketable Securities

Short-term and long-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 income (loss) in stockholders' equity. Investments with a stated maturity date of more than one year from the balance sheet date and that are not expected to be used in current operations, are classified as long-term investments. Short-term and long-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.

Fair Value Measurements

Fair value is defined 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 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 of assets and liabilities required to be measured or disclosed at fair value, the Company uses the following fair value hierarchy based on three levels of inputs 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.

Property and Equipment and Intangible Assets

Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful life of the respective assets. Intangible assets, such as internal use software or customer relationships acquired outside of a business combination, are recorded at cost and amortized over their expected period of benefit. Leasehold improvements are amortized over their useful life or the life of the lease, whichever is shorter. Maintenance and repair costs are expensed as incurred.

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.

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 its Chief Executive Officer is the CODM as the CEO 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 the Omnipod System and drug delivery devices based on the Omnipod platform. 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.

Goodwill

The Company performs an assessment of its goodwill for impairment annually on October 1 or whenever events or changes in circumstances indicate there might be impairment. Goodwill is evaluated for impairment at the reporting unit level. The Company has concluded that it operates in one segment that contains one reporting unit. In reaching this conclusion, the Company considered how components of the business are managed, whether discrete financial information at the component level is reviewed on a regular basis by segment management and whether components may be aggregated based on economic similarity. In performing its annual goodwill test, the Company utilizes a two-step approach. The first step compares the carrying value of the reporting unit to its fair value. If the reporting unit’s carrying value exceeds its fair value, the Company would perform the second step and record an impairment loss to the extent that the carrying value of the reporting unit's goodwill exceeds its implied fair value.

Accumulated Other Comprehensive Income (Loss)

Comprehensive income (loss) combines net income (loss) and other comprehensive items, which are reported as components of stockholders' equity, including foreign currency translation adjustments and unrealized gains and losses on available-for-sale marketable securities.

Changes in each element of accumulated other comprehensive income (loss), net of tax, were as follows:

(in thousands)		Foreign Currency Translation Adjustment				Unrealized losses on available-for-sale securities				Accumulated Other Comprehensive Items
Balance at December 31, 2017		$	46			$	(539	)		$	(493	)
Other comprehensive income (loss)		(2,174		)		(238		)		(2,412		)
Balance at December 31, 2018		$	(2,128	)		$	(777	)		$	(2,905	)

Revenue Recognition

The Company adopted Accounting Standards Codification 606 ("ASC 606") on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results in 2018 reflect the application of ASC 606 guidance while the reported results for 2017 and 2016 were prepared under the guidance of ASC 605, Revenue Recognition ("ASC 605"), which is also referred to as the "previous guidance". In accordance with the previous guidance, revenue was recognized when persuasive evidence of a sales arrangement existed, delivery of goods occurred through transfer of title and risk and rewards of ownership, the selling price was fixed or determinable and collectability was reasonably assured. In accordance with ASC 606, revenue is recognized when a customer obtains control of the promised products. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these products. To achieve this core principle, the Company applies the following five steps as outlined in ASC 606:

1. Identify the contract with a customer;

2. Identify the performance obligations in the contract;

3. Determine the transaction price;

4. Allocate the transaction price to performance obligations in the contract;

5. Recognize revenue when or as the Company satisfies a performance obligation.

The Company generates the majority of its revenue from sales of the Omnipod, which is sold in the U.S., Europe, Canada and Israel. The Omnipod is sold either directly to end-users or indirectly through intermediaries. Intermediaries generally include independent distributors who resell the Omnipod to end-users and wholesalers who sell the Company's product to end-users through the pharmacy channel.

•

Contracts with Customers. The Company's contracts with its direct customers generally consist of a physician order form, a patient information form and, if applicable, third-party insurance (payor) approval. Contracts with the Company's intermediaries are generally in the form of master service agreements against which firm purchase orders are issued. At the outset of the contract, the Company assesses the customer’s ability and intention to pay, which is based on a variety of factors including historical payment experience or, in the case of a new intermediary, published credit, credit references and other available financial information pertaining to the customer and, in the case of a new direct customer, an investigation of insurance eligibility.

•

Performance Obligations. The performance obligations in contracts for the delivery of the Omnipod to new end-users, either directly to end-users or through intermediaries, primarily consist of the PDM and the initial and subsequent quantity of Pods ordered. In the Company's judgment, these performance obligations are capable of being distinct and distinct in the context of the contract in that the customer can benefit from from each item in conjunction with other readily available resources and the transfer of the PDM and the Pods is separately identifiable in the contract with the customer.

•

Transaction Price. The price charged for the PDM and Pods is dependent on the Company's pricing as established with third party payors and intermediaries. The Company provides a right of return for sales of its Omnipod to new end-users. The Company also provides for certain rebates and discounts for sales of its product through intermediaries. These rights of return, discounts and rebates represent variable consideration and reduce the transaction price at the outset of the contract based on the Company's estimates, which are primarily based on the expected value method using historical and other data (such as product return trends or forecast sale volumes) related to actual product returns, discounts and rebates paid in each market in which the Omnipod is sold. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur; otherwise, the Company must reduce (constrain) the variable consideration. There were no constraints recorded to variable consideration and none of the Company's contracts contain a significant financing component.

•

Allocation of Transaction Price. The Company allocates the transaction price to each performance obligation based on its relative stand-alone selling price, which is determined based on the price at which the Company typically sells the deliverable or, if the performance obligation is not typically sold separately, the stand-alone selling price is estimated based on cost plus a reasonable profit margin or the price that a third party would charge for a similar product or service.

•

Recognition of Revenue. The Company transfers the Omnipod at a point in time, which is determined based on when the customer gains control of the product. Generally, intermediaries in the U.S. obtain control upon shipment based on the contractual terms including right to payment and transfer of title and risk of loss. For sales directly to end-users and international intermediaries, control is generally transferred at the time of delivery based on customary business practices related to risk of ownership, including transfer of title and risk of loss.

The Company's drug delivery product line includes sales of a modified version of the Omnipod to pharmaceutical and biotechnology companies who use the Company’s technology as a delivery method for their drugs. Under ASC 606, for the majority of this product line, revenue is recognized as the product is produced pursuant to the customer’s firm purchase commitments as the Company has an enforceable right to payment for performance completed to date and the inventory has no alternative use to the Company. Judgment is required in the assessment of progress toward completion of in-process inventory. The Company recognizes revenue over time using a blend of costs incurred to date relative to total estimated costs at completion and time incurred to date relative to total production time to measure progress toward the satisfaction of its performance obligations. The Company believes that both incurred cost and elapsed time reflect the value generated, which best depicts the transfer of control to the customer. Contract costs include third party costs as well as an allocation of manufacturing overhead. Changes from quarter to quarter in quantity and stage of production of in-process inventory could have a significant quarterly impact on revenue.

The Company had deferred revenue of $2.1 million and $3.2 million as of December 31, 2018 and 2017, respectively. Deferred revenue included $0.9 million and $0.9 million classified in other long-term liabilities as of December 31, 2018 and 2017, respectively. Deferred revenue represents the value of performance obligations that are not yet delivered for which cash has been received or for which the Company has an unconditional right to invoice. The Company recognized $2.4 million of revenue during the year ended December 31, 2018 that was included in deferred revenue at the beginning of the period.

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, the following more notable alliance is 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 System specifically designed to deliver Eli Lilly's 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 the Omnipod System, specifically designed to deliver Eli Lilly's Humalog ® 200 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 Eli Lilly's Humalog ® U-100 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 $6.6 million, $5.0 million and $4.1 million in the years ended December 31, 2018, 2017 and 2016, respectively.

Concentration of Credit Risk

Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, short-term and long-term investments in marketable securities and accounts receivable. The Company maintains the majority of its cash and short-term and long-term investments with a limited number of financial institutions. 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, 2018 and December 31, 2017, liabilities to this vendor represented approximately 10% and 20%, respectively, of the combined balance of accounts payable, accrued expenses and other current liabilities.

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

		Twelve Months Ended December 31,
		2018		2017		2016
Amgen, Inc.		12%		15%		17%
Ypsomed		*		22%		16%
Cardinal Health Inc. and affiliates		12%		11%		10%

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

Recently Adopted Accounting Standards

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, and its related amendments (collectively referred to as ASC 606), which requires that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. Under this method, the new guidance was applied to contracts that were not yet completed as of January 1, 2018 with the cumulative effect of initially applying the guidance recognized through accumulated deficit as of the date of initial application. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price, which did not have a material effect on the adjustment to accumulated deficit.

The adoption of ASC 606 represents a change in accounting principle that primarily impacts how revenue is recognized for the Company's drug delivery product line and how the Company accounts for contract acquisition costs such as commissions. The following table shows the adjustments made to accounts on the consolidated balance sheet as of January 1, 2018 as a result of adopting the new guidance. The table also compares the reported consolidated balance sheet accounts as of December 31, 2018 that were impacted by the new guidance to pro forma balance sheet amounts had the previous guidance been in effect.

	As Reported under ASC 605				Adjustments				As Adjusted under ASC 606				As Reported under ASC 606				Adjustments				Pro forma under ASC 605
(in thousands)	12/31/2017				1/1/2018				1/1/2018				12/31/2018				12/31/2018				12/31/2018
Assets
Unbilled receivable (a)	$	—			$	5,119			$	5,119			$	13,378			$	(13,378	)		$	—
Inventories	$	33,793			$	(753	)		$	33,040			$	71,414			$	1,777			$	73,191
Prepaid expenses and other current assets (b)	$	9,949			$	5,568			$	15,517			$	24,254			$	(7,277	)		$	16,977
Total current assets	$	537,171			$	9,934			$	547,105			$	461,286			$	(18,878	)		$	442,408
Other assets (b)	$	1,969			$	13,326			$	15,295			$	18,266			$	(15,988	)		$	2,278
Total assets	$	816,744			$	23,260			$	840,004			$	928,744			$	(34,866	)		$	893,878
Liabilities and Stockholder's Equity
Deferred revenue (c)	$	2,356			$	2,625			$	4,981			$	1,184			$	(779	)		$	405
Total current liabilities	$	86,025			$	2,625			$	88,650			$	115,657			$	(779	)		$	114,878
Other long-term liabilities	$	6,030			$	271			$	6,301			$	9,010			$	(271	)		$	8,739
Total liabilities	$	658,228			$	2,896			$	661,124			$	716,645			$	(1,050	)		$	715,595
Accumulated deficit	$	(707,255	)		$	20,349			$	(686,906	)		$	(683,614	)		$	(33,800	)		$	(717,414	)
Total stockholders' equity	$	158,516			$	20,364			$	178,880			$	212,099			$	(33,816	)		$	178,283
Total liabilities and stockholders' equity	$	816,744			$	23,260			$	840,004			$	928,744			$	(34,866	)		$	893,878

(a) Unbilled receivable reflects revenue for a portion of the Company's drug delivery product line as the product is produced. The unbilled receivable is reclassified to accounts receivable as the product is completed, shipped and billed to the customer.

(b) Prepaid expenses and other current and non-current assets include contract acquisition costs, such as commissions, related to the sale of the Omnipod. These costs are amortized over the estimated period of benefit.

(c) The adoption of ASC 606 required the Company to record a contract liability, or deferred revenue, on January 1, 2018, primarily associated with a volume-based pricing discount granted to the Company's European Distributor at the outset of the distribution contract in 2010. The deferred revenue was recognized as revenue through the completion of the distributor contract during the first half of 2018.

The following summarizes the significant changes on the Company’s consolidated statement of operations for the year ended December 31, 2018 as a result of the adoption of ASC 606 on January 1, 2018 compared to if the Company had continued to recognize revenue under ASC 605:

		Year ended December 31, 2018
(in thousands, except per share amounts)		As reported under ASC 606				Adjustments				Pro forma under ASC 605
U.S. Omnipod		$	323,528			$	(59	)		$	323,469
International Omnipod (a)		172,020				(1,787		)		170,233
Drug Delivery (b)		68,275				(8,259		)		60,016
Revenue		$	563,823			$	(10,105	)		$	553,718
Cost of revenue		$	193,655			$	(1,024	)		$	192,631
Gross profit		$	370,168			$	(9,081	)		$	361,087
Sales and marketing (c)		$	142,321			$	4,370			$	146,691
Total operating expenses		$	342,745			$	4,370			$	347,115
Operating income		$	27,423			$	(13,451	)		$	13,972
Income (loss) before income taxes		$	5,226			$	(13,451	)		$	(8,225	)
Net income (loss)		$	3,292			$	(13,451	)		$	(10,159	)
Net income (loss) per share: basic		$	0.06			$	(0.23	)		$	(0.17	)
Net income (loss) per share: diluted		$	0.05			$	(0.23	)		$	(0.18	)

(a) International Omnipod revenue under ASC 606 includes the amortization of a material right associated with a volume-based pricing discount granted to the Company's European Distributor at the outset of the distribution contract in 2010. The deferred revenue was recognized as revenue through the completion of the distributor contract during the first half of 2018.

(b) ASC 606 accelerated the recognition of revenue and fulfillment costs related to certain drug delivery contracts for which recognition was previously recorded when the product was shipped to the customer and is recorded as the product is produced under ASC 606. During the year ended December 31, 2018, $8.3 million of revenue was recognized due to changes in quantity and stage of production of in-process inventory during the year.

(c) ASC 606 resulted in the amortization of capitalized commission costs that were recorded as part of the cumulative effect adjustment upon adoption and during the twelve months ended December 31, 2018. Amortization of these capitalized costs to selling and marketing expenses, net of commission costs that were capitalized during the year, reduced sales and marketing expenses during the period.

		Year Ended December 31, 2018
Statement of Cash Flows (in thousands)		As Reported under ASC 606				Adjustments				Pro Forma under ASC 605
Net income (loss)		$	3,292			$	(13,451	)		$	(10,159	)
Adjustments to reconcile net loss to net cash used in operating activities
Non-cash items		85,430				—				85,430
Changes in operating assets and liabilities:										—
Accounts receivable and unbilled receivable		(22,879		)		8,259				(14,620		)
Inventories		(38,826		)		(1,024		)		(39,850		)
Prepaid expenses and other assets		(11,601		)		4,370				(7,231		)
Accounts payable, accrued expenses and other current liabilities		21,187				—				21,187
Deferred revenue		(3,787		)		1,846				(1,941		)
Other long-term liabilities		3,083				—				3,083
Net cash provided by operating activities		$	35,899			$	—			$	35,899

The adoption of ASC 606 had no net impact on the Company’s cash used in operating, investing or financing activities.

Other Accounting Standards Adopted in 2018

Effective January 1, 2018, the Company adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 changed the GAAP model for the accounting of equity investments, whereby equity investments with readily determinable fair value are carried at fair value with changes reported in net income as opposed to other comprehensive income. The Company adopted ASU 2016-01 as of the required effective date of January 1, 2018. There was no impact on the consolidated financial statements upon the adoption of ASU 2016-01 as of the effective date or as of and for the year ended December 31, 2018.

Effective January 1, 2018, the Company retrospectively adopted 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. There was no impact on the consolidated statements of cash flows upon the adoption of ASU 2016-15.

Effective January 1, 2018, the Company adopted ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ("ASU 2017-09"). ASU 2017-09 specifies the types of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in accordance with Topic 718. The adoption of ASU 2017-09 did not have an impact on the Company's consolidated financial statements.

Effective January 1, 2018, the Company adopted ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"). ASU 2016-16 requires that an entity recognized the income tax effects of an intra-entity transfer of an asset, other than inventory, when the transfer occurs as opposed to when the asset is sold to a third party. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.

Accounting Pronouncements Issued and Not Yet Adopted as of December 31, 2018

In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 and its related amendments (collectively referred to as ASC 842) requires entities to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and to recognize expense on their income statements over the lease term. ASC 842 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. The Company adopted ASC 842 on January 1, 2019 using the modified retrospective method, whereby the new guidance will be applied prospectively as of the date of adoption and prior periods will not be restated. While the Company continues to calculate all potential impacts of the standard, the Company expects to record right-of-use assets of approximately $7 million to $9 million, and associated lease obligations of approximately $9 million to $11 million, on its balance sheet primarily related to its leased office and warehousing space. The difference between the approximate value of the right-of-use assets and the approximate value of the lease obligations is attributable to deferred rent and a cease-use liability, as further described in Note 12, which will be reclassified against the right-of-use assets upon adoption of ASC 842. The Company expects to elect certain available practical expedients upon adoption of the new guidance, including practical expedients that provide that an entity need not reassess whether an existing contract contains a lease and allows entities to carry forward the classification of current operating and capital leases into the new operating and financing classifications. The Company will also exclude leases with an expected term of less than one year from the application of ASC 842. In determining the estimated value of the right-use assets and lease liabilities provided above, the Company considered the remaining contractual term of the lease as well as the likelihood that the lease will be renewed. The Company discounted the estimated lease liability using its incremental borrowing rate, which is based on its unsecured borrowing rate as observed in recent convertible note transactions, adjusted for the estimated impact of collateralization.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating "Step 2" from the goodwill impairment test, which requires an entity to calculate the implied fair value of goodwill to measure a goodwill impairment charge, and alternatively, requires an entity to measure the impairment of goodwill assigned to a reporting unit as the amount by which the carrying value of the assets and liabilities of the reporting unit, including goodwill, exceeds the reporting unit's fair value. The guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted for all entities. The Company does not expect the adoption of ASU 2017-04 to have an impact on its consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). ASU 2017-12 updates the current hedge accounting guidance with the objective of improving the financial reporting of hedging activities by better portraying the economic results of an entity's risk management activities in its financial statements. The Company adopted the new guidance on January 1, 2019 prospectively. As the Company currently does not currently use derivative financial instruments, the guidance did not have a material impact on Company's financial statements upon adoption.

In August 2018, the FASB issued ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 modifies certain disclosure requirements related to fair value measurements primarily associated with Level 3 investments. The guidance is effective no later than January 1, 2020 for the Company and may be early-adopted prospectively in any interim period for certain disclosure requirements or retrospectively for others. The Company does not expect the adoption of this guidance to have a material impact on its fair value disclosures.

In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). ASU 2018-15 requires that entities capitalize certain costs to implement a cloud computing arrangement that is service contract consistent with the rules applicable to internal use software capitalization projects. The Company adopted this new guidance effective January 1, 2019 prospectively. Upon adoption, the Company will defer eligible costs related to the implementation of cloud computing arrangements within other current and non-current assets and will amortize these costs to the same income statement line as the associated cloud operating expenses.

In June 2016, the FASB issued ASU 2016-13, Credit Losses (Topic 326) ("ASU 2016-13"). ASU 2016-13 requires that financial assets measured at amortized cost, such as trade receivables and contract assets, be presented net of expected credit losses, which may be estimated based on relevant information such as historical experience, current conditions, and future expectation for each pool of similar financial asset. The new guidance requires enhanced disclosures related to trade receivables and associated credit losses. The guidance is effective beginning January 1, 2020. The adoption of this guidance is expected to increase the level of disclosures related to the Company's trade receivables and is not expected to have a material impact 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	4		Page	59
Accounts Receivable and Allowance for Doubtful Accounts	Note	6		Page	61
Inventories	Note	7		Page	62
Product Warranty Costs	Note	11		Page	64
Convertible Debt	Note	13		Page	65
Commitments and Contingencies	Note	14		Page	67
Stock-Based Compensation	Note	15		Page	68

Note 3. Segment Reporting

As further described in Note 2, the Company has concluded that it operates as one segment. The following table summarizes revenue from contracts with customers:

	Years Ended December 31,
(in thousands)	2018				2017				2016
U.S. Omnipod	$	323,528			$	271,597			$	229,785
International Omnipod	172,020				119,953				71,889
Drug Delivery	68,275				72,218				65,315
Total	$	563,823			$	463,768			$	366,989

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

	Years Ended December 31,
(in thousands)	2018				2017				2016
United States	$	391,803			$	343,815			$	295,100
All other	172,020				119,953				71,889
Total	$	563,823			$	463,768			$	366,989

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

(in thousands)	December 31, 2018				December 31, 2017
United States	$	232,263			$	89,404
China	25,626				18,217
Other	861				434
Total	$	258,750			$	108,055

Note 4. Fair Value Measurements

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.

Asset and Liabilities Measured at Fair Value on a Recurring Basis.

The following tables provide a summary of assets that are measured at fair value on a recurring basis as of December 31, 2018 and 2017, aggregated by the level in the fair value hierarchy within which those measurements fall:

December 31, 2018	Fair Value Measurements
(in thousands)	Total				Level 1				Level 2				Level 3
Money market mutual funds	$	47,199			$	47,199			$	—			$	—
Total cash equivalents	$	47,199			$	47,199			$	—			$	—
U.S. government and agency bonds	$	112,509			$	69,605			$	42,904			$	—
Corporate bonds	56,025				—				56,025				—
Certificates of deposit	6,506				—				6,506				—
Total short-term investments	$	175,040			$	69,605			$	105,435			$	—
U.S. government and agency bonds	$	90,402			$	64,086			$	26,316			$	—
Corporate bonds	46,718				—				46,718				—
Certificates of deposit	3,664				—				3,664				—
Total long-term investments	$	140,784			$	64,086			$	76,698			$	—

December 31, 2017	Fair Value Measurements
(in thousands)	Total				Level 1				Level 2				Level 3
Money market mutual funds	$	236,936			$	236,936			$	—			$	—
U.S. government and agency bonds	5,000				5,000				—				—
Total cash equivalents	$	241,936			$	241,936			$	—			$	—
U.S. government and agency bonds	$	112,076			$	90,703			$	21,373			$	—
Corporate bonds	47,681				—				47,681				—
Certificates of deposit	7,722				—				7,722				—
Total short-term investments	$	167,479			$	90,703			$	76,776			$	—
U.S. government and agency bonds	$	92,464			$	49,651			$	42,813			$	—
Corporate bonds	27,812				—				27,812				—
Certificates of deposit	5,273				—				5,273				—
Total long-term investments	$	125,549			$	49,651			$	75,898			$	—

Fair Value of Assets and Liabilities Disclosed on a Recurring Basis.

The Company discloses the fair value of its outstanding convertible debt. The carrying amount and the estimated fair value of the Company's convertible debt, which is based on the Level 2 quoted market prices as of December 31, 2018 and 2017 are as follows:

	As of
	December 31, 2018								December 31, 2017
(in thousands)	Carrying Value				Estimated Fair Value				Carrying Value				Estimated Fair Value
2% Convertible Senior Notes	$	—			$	—			$	3,421			$	5,467
1.375% Convertible Senior Notes	290,972				426,026				276,172				407,652
1.25% Convertible Senior Notes	301,006				483,851				286,580				450,881
Total	$	591,978			$	909,877			$	566,173			$	864,000

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

As further described in Note 12, during the year ended December 31, 2018 the Company recorded a liability in the amount of $1.1 million related to a leased facility that has been partially vacated as a result of the Company's relocation of its global headquarters to Acton, Massachusetts. The fair value of the liability, a Level 3 measurement, was based on the lease payments that will continue to be incurred less an estimate of sublease income, which took into account the current market rates for similar office space and the risks related to obtaining a subtenant. The Company had no Level 3 assets or liabilities as of December 31, 2017.

Note 5. Investments

As of December 31, 2018, The Company's short-term and long-term investments in debt securities had maturity dates that range from 15 days to 23 months and included 64 available-for-sale debt securities that had insignificant unrealized loss positions. The Company has the intent and ability to hold these investments until maturity whereby unrealized losses are expected to be recovered. There were no charges recorded during the three years ended December 31, 2018 for other-than-temporary declines in the fair value of the Company's investments. Realized gains or losses in each of the three years ended December 31, 2018 were insignificant.

Amortized costs, gross unrealized holding gains and losses, and fair values at December 31, 2018 and 2017 are as follows:

(in thousands)	Amortized cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
December 31, 2018
U.S. government and agency bonds	$	112,995			$	—			$	(486	)		$	112,509
Corporate bonds	56,235				—				(210		)		56,025
Certificates of deposit	6,506				—				—				6,506
Total short-term investments	$	175,736			$	—			$	(696	)		$	175,040
U.S. government and agency bonds	$	90,458			$	99			$	(155	)		$	90,402
Corporate bonds	46,743				43				(68		)		46,718
Certificates of deposit	3,664				—				—				3,664
Total long-term investments	$	140,865			$	142			$	(223	)		$	140,784

(in thousands)	Amortized cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
December 31, 2017
U.S. government and agency bonds	$	112,311			$	—			$	(235	)		$	112,076
Corporate bonds	47,713				3				(35		)		47,681
Certificates of deposit	7,722				—				—				7,722
Total short-term investments	$	167,746			$	3			$	(270	)		$	167,479
U.S. government and agency bonds	$	92,677			$	—			$	(213	)		$	92,464
Corporate bonds	27,871				—				(59		)		27,812
Certificates of deposit	5,273				—				—				5,273
Total long-term investments	$	125,821			$	—			$	(272	)		$	125,549

Note 6. Accounts Receivable, Net

Accounts receivable consist of amounts due from third-party payors, patients, and intermediaries. 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, and discussions with individual customers. The Company believes the reserve is adequate to mitigate current collection risk. No customer accounted for more than 10% of gross accounts receivable as of December 31, 2018.

Customers that represented 10% or greater of gross accounts receivable as of December 31, 2017 were as follows:

	As of December 31, 2017
Amgen, Inc.	10	%
Ypsomed	31	%

The components of accounts receivable are as follows:

(in thousands)	As of
December 31, 2018				December 31, 2017
Trade receivables	$	66,904			$	55,914
Allowance for doubtful accounts	(3,610		)		(2,541		)
Total accounts receivable	$	63,294			$	53,373

Note 7. Inventories

Inventories are carried 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, 2018 and 2017. 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 of cost based on the stage of production.

The components of inventories are as follows:

(in thousands)	As of
December 31, 2018				December 31, 2017
Raw materials	$	10,347			$	2,146
Work-in-process	30,222				23,918
Finished goods	30,845				7,729
Total inventories	$	71,414			$	33,793

Note 8. Prepaid Expenses and Other Assets

The components of prepaid expenses and other current assets are as follows:		As of
(in thousands)		December 31, 2018				December 31, 2017
Prepaid expenses and other current assets		$	16,977			$	9,949
Capitalized contract acquisition costs, current portion		7,277				—
Total prepaid expenses and other current assets		$	24,254			$	9,949

The components of other assets are as follows:		As of
(in thousands)		December 31, 2018				December 31, 2017
Other assets		$	2,278			$	1,969
Capitalized contract acquisition costs, net of current portion		15,988				—
Total other assets		$	18,266			$	1,969

Effective with the adoption of ASC 606 on January 1, 2018, the Company capitalizes commission costs that are related to new patient starts. These costs are deferred in other assets, net of the short term portion included in prepaid and other current assets. Costs to obtain a contract are amortized as sales and marketing expense on a straight line basis over the expected period of benefit, which considers future product upgrades for which a commission would be paid. These capitalized costs are periodically reviewed for impairment. The Company recognized $6.9 million of amortization of capitalized commission costs during the year ended December 31, 2018. There were no impairments to capitalized costs to obtain a contract recorded during the period.

Note 9. 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, 2018				December 31, 2017
Land	n/a		$	2,525			$	2,525
Building	39		35,543				—
Machinery and equipment	2-10		85,163				60,878
Lab equipment	3-7		1,446				1,038
Computers and hardware	3-5		6,623				3,659
Office furniture and fixtures	3-5		14,963				2,521
Leasehold improvements	*		1,443				1,425
Construction in process	—		176,101				87,397
Total property and equipment			$	323,807			$	159,443
Less: accumulated depreciation			(65,428		)		(51,579		)
Total property and equipment, net			$	258,379			$	107,864

---

• Lesser of lease term or useful life of asset.

Depreciation expense related to property and equipment was $13.8 million, $12.7 million and $12.6 million for the years ended December 31, 2018, 2017 and 2016, respectively. The Company capitalized $10.2 million, $3.1 million and $0.5 million of interest in the years ended December 31, 2018, 2017 and 2016. Construction in process mainly consists of highly-automated manufacturing equipment located at the Company's U.S. manufacturing facility in Acton, Massachusetts. The majority of the equipment is expected to be placed into service during 2019.

Note 10. Goodwill and Other Intangible Assets, Net

Goodwill

The Company has $39.6 million of goodwill on its balance sheet from prior business acquisitions. There were no impairments of goodwill during the years ended December 31, 2018, 2017 or 2016.

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

	Years Ended December 31,
	2018				2017
(In thousands)
Beginning balance	$	39,840			$	39,677
Foreign currency adjustment	(194		)		163
Ending balance	$	39,646			$	39,840

Intangible Assets, Net

The Company’s finite-lived intangible assets are stated at cost less accumulated amortization. Intangible assets include customer relationships acquired in prior business acquisitions and from the Company's former European Distributor. See Note 14 for a discussion of the Company's accounting for estimated fees owed to its former European Distributor following the expiration of its distribution agreement on June 30, 2018.

The components of other intangible assets are as follows:

	As of
December 31, 2018												December 31, 2017
(in thousands)	Gross Carrying Amount				Accumulated Amortization				Net Book Value				Gross Carrying Amount				Accumulated Amortization				Net Book Value
Customer and contractual relationships	$	6,109			$	(1,880	)		$	4,229			$	2,135			$	(1,764	)		$	371
Internal-use software	11,262				(5,108		)		6,154				7,545				(3,565		)		3,980
Total intangible assets	$	17,371			$	(6,988	)		$	10,383			$	9,680			$	(5,329	)		$	4,351

Amortization expense for intangible assets was approximately $1.8 million, $1.2 million and $1.2 million for the years ended December 31, 2018, 2017 and 2016, respectively. Amortization expense is recorded in operating expenses in the consolidated statements of operations.

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

(in thousands)
Years Ending December 31,	Customer and Contractual Relationships				Internal-Use Software				Total
2019	$	552			$	2,184			$	2,736
2020	488				1,965				2,453
2021	425				1,573				1,998
2022	425				391				816
2023	425				39				464
Thereafter	1,914				2				1,916
Total	$	4,229			$	6,154			$	10,383

As of December 31, 2018, the weighted average amortization periods of the Company’s customer and contractual relationships intangible assets and internal use software intangible assets are approximately 9 years and 3 years, respectively.

Note 11. Accrued Expenses and Other Current Liabilities

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

	Years Ended December 31,
(in thousands)	2018				2017
Employee compensation and related costs	$	37,822			$	34,942
Professional and consulting services	14,925				9,273
Supplier charges	7,742				3,542
Value added taxes payable	8,463				—
Warranty	2,701				1,653
Other	17,320				9,846
Total accrued expenses and other current liabilities	$	88,973			$	59,256

Product Warranty Costs

The Company generally provides a four-year warranty on its PDMs sold in the United States and Europe and a five-year warranty on its PDMs sold in Canada and may replace any Omnipod that does not function in accordance with product specifications. The Company estimates its warranty obligation at the time the product is shipped based on historical experience and the estimated cost to service the claims. Warranty expense is recorded in cost of goods sold. Warranty claims settled reflects the current product cost. 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)	2018				2017
Product warranty liability at the beginning of the period	$	5,337			$	4,388
Warranty expense	7,779				6,127
Warranty claims settled	(6,737		)		(5,178		)
Product warranty liability at the end of the period	$	6,379			$	5,337

	As of
(in thousands)	December 31, 2018				December 31, 2017
Composition of balance:
Short-term	$	2,701			$	1,653
Long-term	3,678				3,684
Product warranty liability at the end of the period	$	6,379			$	5,337

Note 12. Lease Exit Liability

In December 2018, the Company relocated its global headquarters to its newly constructed and owned facility in Acton, Massachusetts. As a result of the relocation of employees and operations, a significant portion of its leased facility in Billerica, Massachusetts, previously serving as the Company's global headquarters, was vacated and ceased to be utilized by the Company. The lease had a remaining term of approximately four years as of the cease-use date. Accordingly, management recorded an exit charge of $1.1 million, representing the fair value of the liability associated with vacated space, net of deferred rent. In addition, the Company recorded $0.3 million of impairments related to the remaining net book value of leasehold improvements and furniture and fixtures associated with the vacated space. The exit and impairment charges are included in general and administrative expenses.

The following table rolls forward the lease exit liability:

(in thousands)	Year Ended December 31, 2018
Beginning balance at December 31, 2017	$	—
Lease exit charge	1,090
Cash payments	—
Ending balance at December 31, 2018	$	1,090

Note 13. Convertible Debt, Net

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

	As of
(in thousands)	December 31, 2018				December 31, 2017
Principal amount of 2.0% Convertible Senior Notes	$	—			$	3,664
Principal amount of 1.25% Convertible Senior Notes, due September 2021	344,992				345,000
Principal amount of 1.375% Convertible Senior Notes, due November 2024	402,500				402,500
Unamortized debt discount	(143,616		)		(170,448		)
Debt issuance costs	(11,898		)		(14,543		)
Total convertible debt, net	$	591,978			$	566,173

Interest expense related to the convertible debt is as follows:

	Years Ended December 31,
(in thousands)	2018				2017				2016
Contractual coupon interest	$	9,844			$	6,282			$	4,467
Accretion of debt discount	26,663				15,931				8,800
Amortization of debt issuance costs	2,619				2,077				1,270
Total interest expense related to convertible debt	$	39,126			$	24,290			$	14,537

Interest expense related to convertible debt for the year ended December 31, 2018 is as follows:

(in thousands)	1.375%				1.25%				2.0%				Total
Contractual coupon interest	$	5,512			$	4,313			$	19			$	9,844
Amortization of debt discount and issuance costs	14,789				14,433				60				29,282
Total interest expense	$	20,301			$	18,746			$	79			$	39,126

1.375% Convertible Senior Notes

In November 2017, the Company issued and sold $402.5 million in aggregate principal amount of 1.375% Convertible Senior Notes, due November 15, 2024 (the "1.375% Notes"). The interest rate on the notes is 1.375% per annum, payable semi-annually in arrears in cash on May 15 and November 15 of each year. Interest began accruing on November 10, 2017 and the first interest payment was made on May 15, 2018. The 1.375% Notes are convertible into the Company’s common stock at an initial conversion rate of 10.7315 shares of common stock per $1,000 principal amount of the 1.375% Notes, which is equivalent to a conversion price of approximately $93.18 per share, subject to adjustment under certain circumstances. The 1.375% Notes will be convertible prior to the close of business on the business day immediately preceding August 15, 2024 only under certain circumstances and during certain periods, and will be convertible on or after August 15, 2024 until the close of business on the second scheduled trading day immediately preceding November 15, 2024, regardless of those circumstances.

The Company recorded a debt discount of $120.7 million related to the 1.375% Notes resulting from the allocation of a portion of the proceeds to the fair value of the conversion feature reflecting a nonconvertible debt borrowing rate of 6.8% per annum. This debt discount was recorded as additional paid-in capital and is being amortized as non-cash interest expense over the seven year term of the 1.375% Notes. The Company also incurred debt issuance costs and other expenses related to the 1.375% Notes of approximately $10.9 million, of which $3.3 million was reclassified as a reduction to the value of the conversion feature allocated to equity. The remaining $7.6 million of debt issuance costs is presented as a reduction of debt in the consolidated balance sheet and is being amortized using the effective interest method as non-cash interest expense over the seven year term of the 1.375% Notes.

The 1.375% 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 Securities and Exchange Commission ("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 1.375% 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 nominal value at the balance sheet date.

As of December 31, 2018, the Company included $291.0 million, net of unamortized discount and issuance costs, on its consolidated balance sheet in long-term debt related to the 1.375% Notes.

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. 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 reflecting a nonconvertible debt borrowing rate of 5.8% per annum. The 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 was 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 and is being amortized using the effective interest method 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 a nominal value at the balance sheet date.

As of December 31, 2018, the Company has $301.0 million, net of discounts and issuance costs, on its consolidated 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 2% Notes were 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. In separately negotiated transactions, the Company repurchased $134.2 million in principal of the notes in September 2016 and $63.4 million in principal of the notes in November 2017. The Company elected to call the remaining notes in March 2018 and settled the outstanding principal and conversion feature of the notes for $6.7 million in cash in the second quarter of 2018. The Company allocated approximately $3.2 million of the settlement to the fair value of the equity component and $3.5 million to the debt component, which was consistent with the carrying value of the notes as of the settlement date, resulting in no gain or loss on extinguishment.

Note 14. 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.

Operating Leases

The Company leases warehousing space in the U.S. and office space globally under leases expiring from April 2019 to January 2026. Rental expense under operating leases was $3.3 million, $2.8 million and $2.5 million in the years ended December 31, 2018, 2017 and 2016, respectively. The aggregate future minimum lease payments related to these leases as of December 31, 2018 are as follows:

(in thousands)
Years Ending December 31,	Minimum Lease Payments
2019	$	3,311
2020	2,947
2021	2,892
2022	2,568
2023	263
Thereafter	548
Total	$	12,529

Legal Proceedings

Between May 5, 2015 and June 16, 2015, three class action lawsuits were filed by shareholders in the U.S. District Court, for the District of 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, (“ATRS”) alleged 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. On February 8, 2018, the parties executed a binding stipulation of settlement, under which all claims were released and a payment was made to the plaintiffs and the class they purport to represent. On August 6, 2018, the Court issued an order approving the settlement. The Company had previously accrued fees and expenses in connection with this matter for the amount of the final settlement liability that was not covered by insurance, which amount was not material to the Company's consolidated financial statements.

In addition, on April 26, 2017, a derivative action (Walker v. DeSisto, et al., 1:17-cv-10738) (“Walker”) was filed, and on October 13, 2017, a second derivative action (Carnazza v. DeSisto, et al., 1:17-cv-11977) (“Carnazza”) was filed, both on behalf of the Company, each by a shareholder in the U.S. District Court for the District of Massachusetts against the Company (as a nominal defendant) and certain individual current and former officers and directors of the Company. The allegations in the actions are substantially similar to those alleged in the securities class action. The actions seek, among other things, damages, disgorgement of certain types of compensation or profits, and attorneys’ fees and costs. On July 11, 2018, the parties executed a binding stipulation of settlement, under which all claims were released and a payment of attorneys’ fees and reimbursement of expenses will be paid to plaintiffs’ counsel, subject to the Court’s approval. On July 13, 2018, the plaintiffs filed a motion for preliminary approval of the settlement, which is pending. The Company expects that such fees and expenses payable to plaintiff's counsel will be covered by the Company's insurance.

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.

Fees To Former European Distributor

Following the expiration of its distribution agreement on June 30, 2018, the Company is required to pay to its former European Distributor a quarterly per-unit fee for Omnipod sales by the Company between July 1, 2018 and June 30, 2019 to certain customers of the former European Distributor. The Company is recognizing a liability and an associated intangible asset for this fee as qualifying sales occur. The actual total fee could vary significantly depending on the number of customers who count for purposes of calculating the fee under the terms of the distribution agreement, and the methodology applicable for determining this number under the agreement is subject to an active arbitration proceeding between the parties in Switzerland. The Company estimates that the final aggregate fee for the applicable twelve-month period could be in the range of approximately

$10 million to $55 million. As of December 31, 2018, the Company has recognized approximately $4.1 million for fees related to Omnipod devices sold to qualifying customers from the period July 1, 2018 through December 31, 2018.

Note 15. Stock-Based Compensation

Stock-Based Compensation

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

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 related to share-based awards recognized in the years ended December 31, 2018, 2017 and 2016 was as follows:

	Year Ended December 31,												Unamortized Expense				Weighted Average Remaining Expense Period (Years)
($ in thousands)	2018				2017				2016				At December 31, 2018
Stock options	$	10,569			$	11,647			$	9,923			$	11,668			2.3
Restricted stock units	25,737				19,718				13,628				20,927				1.7
Employee stock purchase plan	1,215				576				226				666				0.4
Total	$	37,521			$	31,941			$	23,777			$	33,261

Equity Award Plans

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 were granted to persons who were, at the time of grant, employees, officers, non-employee directors or key persons of the Company or the Company's subsidiaries. The 2007 Plan provided for the grant 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. In May 2017, the Company adopted the 2017 Stock Option and Incentive Plan (the "2017 Plan"), which has replaced the 2007 Plan as the means by which the Company makes equity and cash awards. Effective May 18, 2017, the 2017 Plan became effective (the "2017 Plan Effective Date") and the Company ceased granting awards from the 2007 Plan. Outstanding awards under the 2007 Plan remain subject to the terms of the 2007 Plan. Under the 2017 Plan, awards may be granted to persons who are, at the time of grant, employees, officers, non-employee directors, consultants, or advisers of the Company or the Company's subsidiaries and affiliates. The 2017 Plan provides for the grant 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. Stock options granted under the 2017 Plan generally vest over a period of four years and expire ten years from the date of grant. Shares of stock subject to awards granted under the 2007 Plan and the 2017 Plan that are forfeited, expire or otherwise terminate without delivery generally become available for future issuance under the 2017 Plan. As of December 31, 2018, 4.4 million shares remain available for future issuance under the 2017 Plan.

Stock Options

The calculation of the fair value of stock options is affected by the stock price on the grant date, the expected volatility of the Company's stock over the expected term of the award, the expected life of the award, the risk-free interest rate, and the dividend yield. 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.

The estimated grant date fair values of stock options were based on the following assumptions:

	Years Ended December 31,
	2018		2017		2016
Risk-free interest rate	2.22% - 2.95%		1.66% - 1.85%		0.99% - 1.91%
Expected term (in years)	4.5 - 5.4		4.7 - 5.3		5.1 - 5.4
Dividend yield	—		—		—
Expected volatility	39% - 41%		38% - 39%		38% - 40%

The weighted average grant date fair value per share of options granted for the years ended December 31, 2018, 2017 and 2016 was $30.34, $17.28 and $11.60, respectively.

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

	Number of Options (#)			Weighted Average Exercise Price ($)				Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value ($)
										(In thousands)
Outstanding at December 31, 2017	3,377,220			$	35.10
Granted	292,389			77.27
Exercised	(421,588	)		32.61						$	23,482
Canceled	(170,397	)		40.44
Outstanding at December 31, 2018	3,077,624			$	39.16			5.7		$	124,174
Vested, December 31, 2018	2,318,684			$	35.26			4.9		$	102,168
Vested or expected to vest, December 31, 2018(1)	3,001,343			$	38.69			5.6		$	122,407

(1)	Represents total outstanding stock options as of December 31, 2018, adjusted for estimated forfeitures.

The aggregate intrinsic value of stock options exercised was calculated based on the positive difference between the estimated fair value of the Company’s common stock and the exercise price of the underlying options. The aggregate intrinsic value of options exercised in the years ended December 31, 2017 and 2016 was $11.8 million and $4.6 million, respectively.

The aggregate intrinsic value for outstanding awards as of December 31, 2018 was calculated based on the positive difference between the Company’s closing stock price of $79.32 on December 31, 2018 and the exercise price of the underlying options.

Restricted Stock Units

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

	Number of Shares (#)			Weighted Average Fair Value ($)
Outstanding at December 31, 2017	994,364			$	38.08
Granted	332,677			75.70
Adjustment for performance achievement	147,301			29.54
Vested	(640,104	)		34.81
Forfeited	(82,031	)		45.55
Outstanding at December 31, 2018	752,207			$	55.02

The restricted stock units granted during the year ended December 31, 2018 were valued at approximately $25.2 million on their grant date. The Company recognizes compensation expense for restricted stock units over the vesting period. Restricted stock units granted during 2018 include 114,569 awards subject to the achievement of performance conditions (performance-based restricted stock units). These performance-based restricted stock units generally vest over a three-year period from the grant date and include both a service and performance component. Certain of these restricted stock units could ultimately vest at up to 200% of the target award depending on the achievement of the performance criteria. During 2018, the Compensation Committee of the Board of Directors determined that the performance criteria was achieved at 200% for certain performance-based awards issued in 2016, resulting in an adjustment to the shares that will ultimately vest for these awards. The Company records stock-based compensation for these awards based on its estimate of the number of awards that will ultimately vest.

The following table provides further information related to the Company's restricted stock units:

		Year ended December 31,
($ in thousands)		2018				2017				2016
Stock-based compensation:
Performance-based restricted stock units		$	11,750			$	6,420			$	3,393
Time-based restricted stock units		13,987				13,298				10,235
Total stock-based compensation for restricted stock units		$	25,737			$	19,718			$	13,628

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 makes one or more offerings each year to eligible employees to purchase stock under the ESPP. Offering periods begin on the first business day occurring on or after each December 1 and June 1 and end on the last business day occurring on or before the following May 31 and November 30, respectively.

Each employee who is a participant in the Company’s ESPP may annually 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, 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. The purchase price for each share purchased is 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 Company issued 46,343, 59,134 and 30,949 shares of common stock in 2018, 2017 and 2016, respectively, to employees participating in the ESPP. The Company recorded approximately $1.2 million, $0.6 million and $0.2 million of stock-based compensation expense related to the ESPP in each of the years ended December 31, 2018, 2017 and 2016, respectively.

Note 16. 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. The Company offers 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. In addition, the Company offers similar defined contribution plans for eligible employees in its foreign subsidiaries. The total amount contributed by the Company to these defined contribution plans was $3.6 million, $3.0 million and $1.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Note 17. Income Taxes

The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes (“ASC 740-10”), 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 enacted tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. As of December 31, 2018, the Company had no uncertain tax positions.

The Tax Cuts and Jobs Act ("Tax Reform Act") that was signed into law on December 22, 2017, significantly changed the U.S tax law by, among other things, lowering the corporate income tax rates, implementing a territorial tax system, expanding the tax base, imposing a tax on deemed repatriated earnings of foreign subsidiaries, taxing certain foreign earnings to the U.S. through global intangible low-taxed income ("GILTI"), modifying officer's compensation limitations and creating new limitations on deductible interest expense. The Company recognized the impact of the Tax Reform Act in its consolidated financial statements for the year ended December 31, 2017. In accordance with Staff Accounting Bulletin No. 118 ("SAB 118"), the Company had a measurement period up to one year beginning on December 22, 2017 to obtain, analyze and prepare the information needed to complete the accounting requirements of the Tax Reform Act. The Company completed the analysis allowed under SAB 118 when it finalized the deemed repatriation tax computation in conjunction with the filing of the Company's 2017 federal and state tax returns. There was no change in the provision amount recorded of $0.8 million.

For the year ended December 31, 2018, the Company calculated both the new limitation on interest expense and the modified officer’s compensation limitation. However, there was no impact on the Company’s income tax expense or effective tax rate in the period due to the full valuation allowance applied to the U.S. entity.

The Company has elected to recognize the income tax related to GILTI as a period expense in the period the tax is incurred or expected to occur for the year ended December 31, 2018. The inclusion of GILTI had no impact on the Company's income tax expense or effective tax rate in the period due to the full valuation allowance applied to the U.S. entity.

The Company files federal, state and foreign tax returns. These returns are generally open to examination by the relevant tax authorities from two to four years from the date they are filed or, in certain circumstances, from the end of the accounting

period. The tax filings relating to the Company's federal and state tax returns are currently open to examination for tax years 2015 through 2017 and 2014 through 2017, respectively. In addition, the Company has generated tax losses from inception in 2000 until 2017 and beginning 2018, the Company is expected to generate taxable income. These years may be subject to examination if the losses are carried forward and utilized in future years.

At December 31, 2018 and 2017, the Company provided a full valuation allowance against its domestic net deferred tax asset as, in the judgment of the Company, 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 as, in the judgment of the Company, 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)	2018				2017				2016
Current:
Federal	$	—			$	—			$	—
State	209				151				52
Non-U.S.	2,094				603				539
Total current expense	2,303				754				591
Deferred:
Federal	3				(347		)		—
State	(12		)		91				—
Non-U.S.	(360		)		(241		)		(199		)
Total deferred expense	(369		)		(497		)		(199		)
Total income tax expense	$	1,934			$	257			$	392

Income tax expense from discontinued operations was $0.4 million for the year ended December 31, 2016 and was primarily generated from federal deferred taxes.

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

	Year Ended December 31,
	2018			2017				2016
Tax at U.S. statutory rate	21.00	%		34.00	%			34.00	%
Changes from statutory rate:
Foreign rate differential	(2.39	)		0.34		—		0.23
State taxes, net of federal benefit	2.88			10.21				(10.86	)
Tax credits	(13.70	)		13.28				0.03
Share-based compensation	(159.10	)		33.61				(14.02	)
Non-deductible officer's compensation	81.29			(20.18	)			(12.95	)
Permanent items	16.79			(13.98	)			15.93
Foreign income taxed in the U.S.	26.09			—				—
Change in enacted rates	—			0.98				—
Change in valuation allowance	67.03			(57.91	)			(13.45	)
Other	(2.88	)		(1.32	)			(0.37	)
Effective income tax rate	37.01	%		(0.97	)%			(1.46	)%

Pre-tax income attributable to the Company's operations located outside the U.S. was approximately $8.2 million, $1.1 million and $0.8 million for 2018, 2017 and 2016, 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, 2018, the Company has chosen to indefinitely reinvest approximately $13.6 million of earnings of certain of its non-U.S. subsidiaries. To the extent the Company repatriates its foreign earnings, certain withholding taxes and state taxes may apply. No provision has been recorded for taxes that could be incurred upon repatriation. The deferred tax liability related to repatriation of these earnings would not be material to the company's consolidated financial statements.

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

	Year Ended December 31,
(in thousands)	2018				2017
Deferred tax assets:
Net operating loss carryforwards	$	124,871			$	129,184
Start up expenditures	288				462
Tax credits	13,041				12,705
Provision for bad debts	1,105				824
Depreciation and amortization	3,463				3,068
Capital loss carryforwards	12,620				12,850
Stock-based compensation	9,339				9,799
Other	6,066				4,449
Total deferred tax assets	$	170,793			$	173,341
Deferred tax liabilities:
Prepaid assets	$	(1,977	)		$	(1,326	)
Amortization of debt discount	(35,648		)		(43,083		)
Goodwill	(642		)		(633		)
Capitalized contract acquisition costs	(5,801		)		—
Other	(218		)		(264		)
Total deferred tax liabilities	$	(44,286	)		$	(45,306	)
Valuation allowance	$	(126,314	)		$	(127,927	)
Net deferred taxes	$	193			$	108

The Company has recorded a deferred tax liability related to the tax basis in acquired goodwill that is not amortized for financial reporting purposes. The deferred tax liability will only reverse at the time of further impairment of the goodwill. 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 deferred tax liability cannot be used to offset the deferred tax asset related to the net operating loss carryforward for tax purposes. The U.S. Tax Reform Act limits certain deductions and these limitations may impact the value of existing deferred tax assets. The Company will continue to review the impact of these limitations as regulatory guidance is issued.

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 U.S. deferred tax assets will not be realized. After consideration of the available evidence, both positive and negative, the Company has determined that a $126.3 million valuation allowance at December 31, 2018 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, 2018 and 2017 because it is not more likely than not that the future tax benefit will be realized. In the year ended December 31, 2018, the Company’s valuation allowance decreased to $126.3 million from the balance at December 31, 2017 of $127.9 million.

At December 31, 2018, the Company had approximately $528.1 million, $246.4 million and $13.0 million of gross 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 2037, and the state carryforwards will continue to expire through 2037. At December 31, 2017, the Company had approximately $543.6 million, $250.6 million and $12.7 million of federal net operating loss carryforwards, state net operating loss carryforwards and research and development and other tax credits, respectively. The utilization of such net operating loss carryforwards and the realization of tax benefits in future years depends predominantly upon the Company's ability to generate 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 whereby there would 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.

Note 18. Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period, excluding unvested restricted common shares. Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding and, when dilutive, potential common share equivalents from outstanding stock options and restricted stock units (using the treasury-stock method), and potential common shares from the Company's convertible notes (using the if-converted method).

The following table sets forth the components used in the computation of basic and diluted net income (loss) per share for the three years ended December 31, 2018:

(in thousands, except share and per share data)		Year Ended December 31, 2018				Year Ended December 31, 2017				Year Ended December 31, 2016
Numerator:
Net income (loss) from continuing operations (1)		$	3,292			$	(26,831	)		$	(27,210	)
Denominator:
Weighted average common shares outstanding		58,859,574				58,003,434				57,251,377
Effective of dilutive potential common share equivalents
Stock options		1,678,535				—				—
Restricted stock units		469,915				—				—
Shares used for diluted net income (loss) per share		61,008,024				58,003,434				57,251,377
Net income (loss) per share:
Basic		$	0.06			$	(0.46	)		$	(0.48	)
Diluted		$	0.05			$	(0.46	)		$	(0.48	)

(1) In 2016, the Company reported a net loss from discontinued operations of $1.7 million, which generated net loss per basic and diluted share of $0.03.

For the year ended December 31, 2018, certain potential dilutive common shares from stock options, restricted stock units and convertible debt were excluded from the computation of diluted net income per share because the effect of including these items was anti-dilutive. In addition, certain performance-based restricted stock units were excluded from the computation of diluted net income per share because the underlying performance conditions for such restricted stock units had not been met as of the end of the year.

As the Company reported net losses for the years ended December 31, 2017 and 2016, all potential dilutive common shares have been excluded from the computation of diluted net loss per share in those periods as the effect would have been anti-dilutive.

The number of potential common share equivalents excluded from the computation of diluted net income (loss) per share for the years ended December 31, 2018, 2017 and 2016 are as follows:

	Years Ended December 31,
	2018			2017			2016
1.375% Convertible Senior Notes	4,319,429			4,319,429			—
2.00% Convertible Senior Notes	—			78,783			1,442,433
1.25% Convertible Senior Notes	5,910,954			5,910,954			5,910,954
Unvested restricted stock units	289,974			994,364			962,219
Outstanding stock options	236,648			3,377,220			3,441,303
Total potential common share equivalents excluded from computation of diluted net income (loss) per share	10,757,005			14,680,750			11,756,909

Note 19. Discontinued Operations

In February 2016, the Company sold Neighborhood Diabetes to Liberty Medical LLC ("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 various services were provided to Liberty Medical on an interim transitional basis. Total expenses incurred for such transition services were $0.9 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:

	December 31, 2016
(In thousands)
Discontinued operations:
Revenue (1)	$	7,730
Cost of revenue	5,468
Gross profit	2,262
Operating expenses:
Sales and marketing	1,542
General and administrative	1,853
Total operating expenses	3,395
Operating loss	(1,133		)
Interest and other income (expense), net	(128		)
Loss from discontinued operations before taxes	(1,261		)
Income tax expense	408
Net loss from discontinued operations	$	(1,669	)

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

There were no assets or liabilities presented as discontinued operations as of December 31, 2018 or December 31, 2017. Net operating cash flows used in discontinued operations in the year ended December 31, 2016 were $2.0 million.

Note 20. Quarterly Data (Unaudited)

	2018 Quarters Ended
	December 31				September 30 (1)				June 30				March 31
(In thousands, except per share data)
Revenue	$	164,907			$	151,076			$	124,262			$	123,578
Gross profit	$	110,312			$	101,969			$	82,072			$	75,815
Operating income	$	16,233			$	6,865			$	4,325			$	—
Net income (loss)	$	9,893			$	1,659			$	(1,691	)		$	(6,569	)
Net income (loss) per share:
Basic	$	0.17			$	0.03			$	(0.03	)		$	(0.11	)
Diluted	$	0.16			$	0.03			$	(0.03	)		$	(0.11	)

(1) Included in operating income and net income from continuing operations for the third quarter of 2018 was a charge of $12.6 million for severance-related costs associated with the retirement of the Company's former CEO, of which $8.2 million related to stock-based compensation for the acceleration of share-based awards and the remainder represented cash severance benefits.

	2017 Quarters Ended
	December 31				September 30				June 30				March 31
(In thousands, except per share data)
Revenue	$	130,524			$	121,775			$	109,756			$	101,713
Gross profit	$	79,508			$	73,624			$	64,639			$	59,398
Operating (loss) income	$	(768	)		$	2,047			$	(3,358	)		$	(5,308	)
Net loss	$	(6,860	)		$	(2,227	)		$	(7,767	)		$	(9,977	)
Net loss per share	$	(0.12	)		$	(0.04	)		$	(0.13	)		$	(0.17	)

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, 2018
Allowance for doubtful accounts	$	2,541			$	3,382			$	2,314			$	3,609
Deferred tax valuation allowance	$	127,927			$	13,938			$	15,551			$	126,314
Year Ended December 31, 2017
Allowance for doubtful accounts	$	2,911			$	1,923			$	2,293			$	2,541
Deferred tax valuation allowance	$	191,922			$	14,232			$	78,227			$	127,927
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

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