Item 8. Financial Statements and Supplementary Data

Our financial statements as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019, 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	43
Consolidated Balance Sheets as of December 31, 2019 and 2018	45
Consolidated Statements of Operations for the Years ended December 31, 2019, 2018 and 2017	46
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2019, 2018 and 2017	47
Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2019, 2018 and 2017	48
Consolidated Statements of Cash Flows for the Years ended December 31, 2019, 2018 and 2017	49
Notes to Consolidated Financial Statements	50

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Insulet Corporation

Opinions on the financial statements and internal control over financial reporting

We have audited the accompanying consolidated balance sheets of Insulet Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and schedule (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.

Basis for opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements 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 regarding 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical audit matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and

we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition - Drug Delivery

As described in Note 4 to the consolidated financial statements, the Company’s revenue from drug delivery was $64.7 million for the year ended December 31, 2019. Drug delivery revenue is recognized over time based on the Company’s determination of the pattern over which control transfers to the customer. This transfer of control begins during the manufacturing process and continues through the final quality control inspection process until there is complete satisfaction of the performance obligation. We identified drug delivery revenue recognition and the associated unbilled receivable as a critical audit matter.

The principal considerations for our determination that this matter is a critical audit matter are as follows:

Accounting for drug delivery revenue requires the Company to select a method to measure progress towards the satisfaction of the performance obligation. This election of the most meaningful measure of progress by which to recognize drug delivery revenue requires the application of significant Management judgment. The Company elected the input method and selected a blend of cost and time to produce for measure of progress. Given the nature of the revenue being recognized, additional audit effort including modification of the nature and extent of our procedures beyond that of the Company’s other revenue streams was required.

Our audit procedures included, but were not limited to, the following:

•	We tested the design and operating effectiveness of controls relating to Management’s estimate of the measure of progress.

•	For the measure of progress, we inspected evidence related to the cost and length of the production cycle.

•	For revenue recognized on in-process or finished goods inventory not yet shipped to the customer (and the related unbilled receivable), we inspected customer orders, binding customer forecasts, inventory records, and confirmed inventory quantities directly with third parties when applicable.

Convertible Debt Offering and Note Repurchase

As described in Note 12 to the consolidated financial statements, the Company completed a private placement offering of $800 million in 0.375% Convertible Senior Notes (the “New Notes”), with the proceeds partially used to repurchase the previously outstanding 1.25% Convertible Senior Notes (the “Existing Notes”). We identified these transactions as a critical audit matter.

The principal considerations for our determination that this matter is a critical audit matter are as follows.

Accounting for the convertible debt offering and the repurchase of the Existing Notes was a significant unusual transaction that required extensive audit effort. This included the involvement of technical accounting specialists to evaluate Management’s conclusions surrounding the bifurcation of the notes between debt and equity and the extinguishment conclusion for the repurchase of the Existing Notes. Additionally, valuation specialists were included to determine the fair value of the equity component of the New Notes and the fair value of the Existing Notes utilized in the determination of the loss on extinguishment. This included the evaluation of the market yield input, which was derived using a Binomial Option Pricing Model.

Our audit procedures included, but were not limited to, the following:

•	We tested the control design and operating effectiveness related to the accounting for the transaction including Management’s evaluation of the qualifications of specialists and review of the work performed by the specialists.

•	We traced all key terms, and amounts to source documents, including the related offering memorandums and purchase agreements.

•	We supplemented the engagement team with technical accounting specialists to confirm Management’s accounting conclusions including the determination that the New Notes be bifurcated between debt and equity as well as the determination that the repurchase of a portion of the Existing Notes be accounted for as an extinguishment of debt.

•	With the assistance of valuation professionals with specialized skills and knowledge, we tested Management’s valuation of both the New Notes and the Existing Notes which included a recalculation of the related amounts and an assessment of the appropriateness of the methodology, inputs, and assumptions used.

/s/ GRANT THORNTON LLP

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

Boston, Massachusetts

February 25, 2020

INSULET CORPORATION

CONSOLIDATED BALANCE SHEETS

	As of December 31,
(in millions, except share and per share data)	2019				2018
ASSETS
Current Assets
Cash and cash equivalents	$	213.7			$	113.9
Short-term investments	162.4				175.0
Accounts receivable trade, less allowance for doubtful accounts of $3.8 and $3.6	69.3				63.3
Unbilled receivable	13.5				13.4
Inventories	101.0				71.4
Prepaid expenses and other current assets	31.1				24.3
Total current assets	591.0				461.3
Long-term investments	58.4				140.8
Property, plant and equipment, net	399.4				258.4
Other intangible assets, net	13.2				10.4
Goodwill	39.8				39.6
Other assets	41.1				18.2
Total assets	$	1,142.9			$	928.7
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	54.5			$	25.5
Accrued expenses and other current liabilities	103.2				90.2
Total current liabilities	157.7				115.7
Convertible debt, net	887.9				592.0
Other liabilities	21.4				8.9
Total liabilities	1,067.0				716.6
Commitment and Contingencies (Note 13)
Stockholders’ Equity
Preferred stock, $.001 par value:
Authorized: 5,000,000 shares at December 31, 2019 and 2018. Issued and outstanding: zero shares at December 31, 2019 and 2018.	—				—
Common stock, $.001 par value:
Authorized: 100,000,000 shares at December 31, 2019 and 2018. Issued and outstanding: 62,685,492 and 59,188,758 shares at December 31, 2019 and 2018, respectively.	0.1				0.1
Additional paid-in capital	749.0				898.5
Accumulated deficit	(672.0		)		(683.6		)
Accumulated other comprehensive loss	(1.2		)		(2.9		)
Total stockholders’ equity	75.9				212.1
Total liabilities and stockholders’ equity	$	1,142.9			$	928.7

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

INSULET CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended December 31,
(in millions, except share and per share data)	2019				2018				2017
Revenue	$	738.2			$	563.8			$	463.8
Cost of revenue	257.9				193.6				186.6
Gross profit	480.3				370.2				277.2
Operating expenses:
Research and development	129.7				90.5				75.7
Sales and marketing	185.1				146.2				124.2
General and administrative	115.5				106.1				84.7
Total operating expenses	430.3				342.8				284.6
Operating income (loss)	50.0				27.4				(7.4		)
Interest expense, net of portion capitalized	(34.6		)		(28.9		)		(21.2		)
Loss on extinguishment of debt	(8.7		)		—				(0.6		)
Interest and other income, net	7.8				6.7				2.6
Income (loss) before income taxes	14.5				5.2				(26.6		)
Income tax expense	(2.9		)		(1.9		)		(0.2		)
Net income (loss)	$	11.6			$	3.3			$	(26.8	)
Net income (loss) per share:
Basic	$	0.19			$	0.06			$	(0.46	)
Diluted	$	0.19			$	0.05			$	(0.46	)
Weighted-average number of common shares outstanding:
Basic	60,593,846				58,859,574				58,003,434
Diluted	62,304,348				61,008,024				58,003,434

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 millions)	2019				2018				2017
Net income (loss)	$	11.6			$	3.3			$	(26.8	)
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment, net of tax	0.6				(2.2		)		0.5
Unrealized gain (loss) on available-for-sale securities, net of tax	1.1				(0.2		)		(0.3		)
Total other comprehensive income (loss), net of tax	1.7				(2.4		)		0.2
Total comprehensive income (loss)	$	13.3			$	0.9			$	(26.6	)

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 millions, except share data)	Shares			Amount
Balance, December 31, 2016	57,457,967			$	0.1			$	744.2			$	(680.5	)		$	(0.7	)		$	63.1
Exercise of options to purchase common stock	505,207			—				14.0				—				—				14.0
Issuance of shares for employee stock purchase plan	59,134			—				1.8				—				—				1.8
Stock-based compensation expense	—			—				31.9				—				—				31.9
Restricted stock units vested, net of shares withheld for taxes	297,040			—				(4.0		)		—				—				(4.0		)
Allocation to equity for conversion feature on 1.375% Notes, net of issuance costs	—			—				117.5				—				—				117.5
Extinguishment of conversion feature on 2% Notes, net of issuance costs	—			—				(39.2		)		—				—				(39.2		)
Net loss	—			—				—				(26.8		)		—				(26.8		)
Other comprehensive income	—			—				—				—				0.2				0.2
Balance, December 31, 2017	58,319,348			0.1				866.2				(707.3		)		(0.5		)		158.5
Exercise of options to purchase common stock	409,428			—				12.8				—				—				12.8
Issuance of shares for employee stock purchase plan	46,343			—				3.0				—				—				3.0
Stock-based compensation expense								37.5				—				—				37.5
Restricted stock units vested, net of shares withheld for taxes	413,639			—				(17.8		)		—				—				(17.8		)
Extinguishment of conversion feature on 2% Notes, net of issuance costs	—			—				(3.2		)		—				—				(3.2		)
Adoption of ASC 606 (Note 2)	—			—				—				20.4				—				20.4
Net income	—			—				—				3.3				—				3.3
Other comprehensive loss	—			—				—				—				(2.4		)		(2.4		)
Balance, December 31, 2018	59,188,758			0.1				898.5				(683.6		)		(2.9		)		212.1
Exercise of options to purchase common stock	1,340,297			—				46.6				—				—				46.6
Issuance of shares for employee stock purchase plan	51,502			—				4.3				—				—				4.3
Stock-based compensation expense	—			—				28.7				—				—				28.7
Restricted stock units vested, net of shares withheld for taxes	229,770			—				(8.6		)		—				—				(8.6		)
Conversion feature of 0.375% Notes, net of issuance costs	—			—				207.8				—				—				207.8
Extinguishment of conversion feature on 1.25% Notes, net of issuance costs	—			—				(642.3		)		—				—				(642.3		)
Issuance of shares for debt repayment	1,875,165			—				299.4				—				—				299.4
Purchase of capped call options	—			—				(85.4		)		—				—				(85.4		)
Net income	—			—				—				11.6				—				11.6
Other comprehensive income	—			—				—				—				1.7				1.7
Balance, December 31, 2019	62,685,492			$	0.1			$	749.0			$	(672.0	)		$	(1.2	)		$	75.9

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

INSULET CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
(in millions)	2019				2018				2017
Cash flows from operating activities
Net income (loss)	$	11.6			$	3.3			$	(26.8	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	27.9				15.6				13.9
Non-cash interest expense	35.6				29.3				18.0
Stock-based compensation expense	28.7				37.5				31.9
Loss on extinguishment of convertible debt	8.7				—				0.6
Provision for bad debts	4.5				3.4				1.9
Other	1.1				(0.4		)		0.1
Changes in operating assets and liabilities:
Accounts and unbilled receivable	(10.9		)		(22.9		)		(26.3		)
Inventories	(30.2		)		(38.8		)		1.7
Deferred revenue	2.0				(3.8		)		1.1
Prepaid expenses and other assets	(21.9		)		(11.6		)		(3.3		)
Accounts payable, accrued expenses and other current liabilities	36.2				21.2				27.3
Other long-term liabilities	5.1				3.1				1.2
Net cash provided by operating activities	98.4				35.9				41.3
Cash flows from investing activities
Capital expenditures	(163.7		)		(157.4		)		(73.8		)
Acquisition of intangible assets	(7.2		)		(5.0		)		(3.4		)
Purchases of investments	(150.6		)		(191.4		)		(298.0		)
Receipts from the maturity or sale of investments	247.9				169.3				164.4
Net cash used in investing activities	(73.6		)		(184.5		)		(210.8		)
Cash flows from financing activities
Principal payments of capital lease obligations	—				—				(0.3		)
Proceeds from issuance of convertible debt, net of issuance costs	780.2				—				391.6
Purchase of capped call options	(85.4		)		—				—
Repayment of convertible debt	(663.6		)		(6.7		)		(98.5		)
Proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan	50.9				15.8				15.8
Payment of withholding taxes in connection with vesting of restricted stock units	(8.6		)		(17.8		)		(4.1		)
Net cash provided by (used in) financing activities	73.5				(8.7		)		304.5
Effect of exchange rate changes on cash	1.5				(1.4		)		0.4
Net increase (decrease) in cash and cash equivalents	99.8				(158.7		)		135.4
Cash and cash equivalents, beginning of year	113.9				272.6				137.2
Cash and cash equivalents, end of year	$	213.7			$	113.9			$	272.6
Supplemental cash flow information
Cash paid for interest, net of amount capitalized	$	—			$	—			$	2.5
Cash paid for taxes	$	2.5			$	0.8			$	0.5
Purchases of property, plant and equipment included in accounts payable and accrued expenses	$	13.3			$	11.4			$	3.8

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, manufacture and sale of its proprietary Omnipod System, an innovative, continuous insulin delivery system for people with insulin-dependent diabetes. The Omnipod System features a small, lightweight, self-adhesive disposable tubeless Omnipod device that is worn on the body for up to three days at a time (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 multiple daily injections using syringes or insulin pens or the use of traditional pump and tubing. The Omnipod System consists of two product lines: the Omnipod Insulin Management System (“Omnipod”) and its next generation Omnipod DASHTM Insulin Management System (“Omnipod DASH” or “DASH”). Omnipod DASH features a secure Bluetooth enabled Pod and PDM with a color touch screen user interface supported by smartphone connectivity.

The Company generates most of its revenue from sales of the Omnipod System, which is sold in the U.S., Europe, Canada and the Middle East. The Omnipod System is sold either directly to end-users or indirectly through intermediaries. Intermediaries 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 in the United States.

In addition to selling 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 subcutaneous drugs across other therapeutic areas. The majority of the Company’s drug delivery revenue consists of sales of Pods to Amgen for use in the Neulasta Onpro kit, an innovative delivery system for Amgen’s white blood cell booster to help reduce the risk of infection after intense chemotherapy.

Note 2**. Summary of Significant Accounting Policies**

Basis of Presentation

The accompanying financial statements reflect the consolidated operations of Insulet Corporation and its subsidiaries. The consolidated financial statements have been prepared in United States dollars, in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of the consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results may differ from those estimates.

Principles of Consolidation

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

Reclassification of Prior Period Amounts

Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. Software license costs have been reallocated from general and administrative expenses to research and development and sales and marketing expenses based on license usage. These reclassifications have no effect on previously reported net income.

Foreign Currency Translation

For the foreign subsidiaries of the Company, assets and liabilities are translated into U.S. dollars using exchange rates as of the balance sheet date, and income and expenses are translated using the average exchange rates in effect for the related month. The net effect of these translation adjustments is reported in accumulated other comprehensive loss within stockholders’ equity on the consolidated balance sheet. Net realized and unrealized gains (losses) from foreign currency transactions are included in interest and other income, net in the consolidated statement of operations and were $0.6 million and $1.0 million for the years ended December 31, 2019 and 2018, respectively. The amount for 2017 was insignificant.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of 90 days or less at the time of purchase to be cash equivalents. Cash equivalents include money market mutual funds, commercial paper and U.S. government and agency bonds that are carried at cost, which approximates their fair value. Restricted cash that serves as collateral for outstanding letters of credit are included in cash and cash equivalents on the consolidated balance sheet.

Investments in Marketable Securities

Short-term and long-term investment securities consist of certificates of deposit, commercial paper, U.S. government and agency bonds and corporate bonds. Theses available-for-sale marketable securities are carried at fair value and unrealized gains and losses

are included as a component of other comprehensive loss in stockholders’ equity on the consolidated balance sheet. 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 on the consolidated balance sheet. 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 included in other income, net in the consolidated statement of operations.

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable consist of amounts due from third-party payors, customers and intermediaries and are presented net of an allowance for doubtful accounts. The allowance for doubtful accounts reflects an estimate of losses inherent in the Company’s accounts receivable portfolio determined based on historical experience, specific allowances for known troubled accounts and other available evidence. Accounts receivable are written off when management determines they are uncollectible.

Inventories

Inventories are stated at the lower of cost or net realizable value, with cost determined under the first-in, first-out method. The Company reduces the carrying value of inventories for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors in order to state inventories at net realizable value. Factors influencing these adjustments include inventories on hand compared to estimated future usage and sales. Work in process is calculated based upon a buildup of cost based on the stage of production. Manufacturing variances attributable to abnormally low production are expensed in the period incurred.

Contract Acquisition Costs

The Company incurs commission costs to obtain a contract related to new customer starts. These costs are capitalized as contract assets 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 costs are periodically reviewed for impairment.

Fair Value Measurements

Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. When estimating fair value, the Company may use one or all 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, the Company uses the following fair value hierarchy based on three levels of inputs:

Level 1 — observable inputs, such as quoted prices in active markets for identical assets or liabilities;

Level 2 — significant other observable inputs that are observable either directly or indirectly;

Level 3 — significant unobservable inputs for which there is little or no market data, which require the Company to develop its own assumptions.

Certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities are carried at cost, which approximates their fair value because of their short-term maturity. See Notes 5 and 12 for financial assets and liabilities held at carrying amount on the consolidated balance sheet and Note 6 for investments measured at fair value on a recurring basis.

Property, Plant and Equipment

Property, plant and equipment is stated at cost less accumulated depreciation. Major improvements are capitalized, while routine repairs and maintenance are expensed as incurred. Depreciation for property, plant and equipment, other than land and construction in progress, is based upon the following estimated useful lives using the straight-line method:

Building and building improvements	20 to 39 years
Leasehold improvements	Lesser of lease term or useful life of asset
Machinery and equipment	2 to 15 years
Furniture and fixtures	3 to 5 years

The Company assesses the recoverability of assets whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable. The Company recognizes an impairment loss if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows. The 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 based on their estimated fair values at the date of acquisition. The Company allocates the purchase price in excess of net tangible assets acquired to identifiable intangible assets. 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. 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.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price of an acquired entity over the amounts assigned to assets and liabilities assumed in a business combination. 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 may assess its goodwill for impairment initially using a qualitative approach to determine whether conditions exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. If management concludes, based on its assessment of relevant events, facts and circumstances that it is more likely that not that a reporting unit’s carrying value is greater than its fair value, then a quantitative analysis will be performed to determine if there is any impairment. Alternatively, the Company may elect to initially perform a quantitative analysis instead of starting with a qualitative analysis. In performing the quantitative 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.

Intangible assets acquired in a business combination are recorded at fair value, while intangible assets acquired in other transactions are recorded at cost and are stated at cost less accumulated amortization. Intangible assets with finite useful lives are amortized using the straight-line method over the following estimated useful lives of the assets:

Customer relationships	5 - 10 years
Internal-use software	3 - 10 years
Intellectual property	15 years

Amortization expense is included in operating expenses in the consolidated statement of operations. The Company reviews intangible assets for impairment by comparing the fair value of the assets, estimated using an income approach, with their carrying value. If the carrying value exceeds the fair value of the intangible asset, the Company recognizes an impairment equal to the difference between the carrying value of the asset and the present value of future cash flows. The Company assesses the remaining useful life and the recoverability of intangible assets whenever events or circumstances indicate that the carrying value of an asset may not be recoverable using undiscounted cash flows.

Leases

The Company determines if an arrangement includes a lease at inception. Lease agreements generally have lease and non-lease components, which are accounted for separately. At lease commencement, the Company recognizes operating lease liabilities equal to the present value of the lease payments and operating lease assets representing the right to use the underlying asset for the lease term. The Company assesses if it is reasonably certain to exercise lease options to extend or terminate the lease for inclusion or exclusion in the lease term when the Company measures the lease liability. As the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments. The Company’s incremental borrowing rate estimates a secured rate that reflects the term of the lease, the nature of the underlying asset and the economic environment. The Company excludes leases with an expected term of one year or less from recognition on the consolidated balance sheet. Operating lease assets includes lease payments made prior to lease commencement and excludes lease incentives and initial direct costs incurred. Lease expense is recognized on a straight-line basis over the lease term and is included in general and administrative expenses in the consolidated statements of operations.

Contingencies

The Company records a liability on the consolidated balance sheet for loss contingencies when a loss is 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.

Product Warranty

The Company provides a four-year warranty on its PDMs sold in the United States and Europe and a five-year warranty on PDMs sold in Canada and may replace Pods that do 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 in the consolidated statements of operations. Costs to service the claims reflect the current product cost. Since the Company continues to introduce new products and versions, the anticipated performance of the product over the warranty period is also considered in estimating warranty reserves.

Revenue Recognition

Effective January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, and its related amendments (collectively referred to as ASC 606) using the modified retrospective method for all contracts not completed as of the date of adoption. The cumulate effect of applying the new revenue standard resulted in a $20.4 million decrease to the opening balance of accumulated deficit upon adoption, primarily related to how revenue is recognized for the Company’s drug delivery product line and the capitalization of contract acquisition costs such as commissions. Financial information for 2017 has not been restated and continues to be reported under the guidance in effect prior to the adoption of ASC 606.

Revenue is recognized when a customer obtains control of the promised products. The amount of revenue recognized reflects the consideration 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:

•

Identify Contracts with Customers. The Company’s contracts with its direct customers generally consist of a physician order form, a customer 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.

•

Identify 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 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.

•

Determine 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 it is probable that a significant future reversal of cumulative revenue under the contract will not occur; otherwise, the Company reduces the variable consideration. The variable consideration in the Company’s contracts is not typically constrained and the Company’s contracts do not contain significant financing components.

•

Allocate Transaction Price to Performance Obligations. 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.

•

Recognize Revenue as Performance Obligations are Satisfied. 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 ownership. 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.

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. 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.

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.

Concentrated Insulin Delivery: 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 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 expenses.

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 $9.7 million, $6.6 million and $5.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Stock-Based Compensation

The Company measures stock-based compensation expense at the grant date based on the fair value of the award and recognizes the compensation expense over the requisite service period, which is generally the vesting period. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated 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. A valuation allowance is provided to reduce the deferred tax assets if, based on the available evidence, it is more likely than not that some or all the deferred tax assets will not be realized. 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.

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 most of its cash, and short-term and long-term investments with a limited number of financial institutions that have a high investment grade credit rating.

In addition to manufacturing the Omnipod System, the Company also purchases Omnipod Systems from Flex Ltd. As of both December 31, 2019 and 2018, liabilities to this vendor represented 10% of the combined balance of accounts payable and accrued expenses and other current liabilities. See Note 4 for customer concentration.

Recently Adopted Accounting Standards

Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 and its related amendments (collectively referred to as ASC 842). ASC 842 requires lessees to recognize

operating lease liabilities and operating lease assets, representing the right to use the underlying asset for the lease term, on the balance sheet for leases classified as operating leases. The Company adopted ASC 842 on January 1, 2019 using the modified retrospective method, whereby the new guidance is applied prospectively as of the date of adoption and prior periods are not restated. The Company elected the practical expedients that permit the Company to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for existing leases as of the effective date. Upon the adoption, the Company recorded operating lease liabilities of $10.8 million and operating lease assets of $8.8 million on its consolidated balance sheet. The difference between the value of the lease obligations and the operating lease assets was primarily attributable to a $1.1 million cease-use liability established in 2018 associated with the Company’s former headquarters, which was reclassified to an operating lease liability upon adoption of ASC 842. See Note 11 for additional information regarding leases.

Effective January 1, 2019, the Company early adopted 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 certain costs to implement a cloud computing arrangement that is a service contract to be capitalized consistent with the rules applicable to internal-use software capitalization projects. The Company adopted this new guidance prospectively. The Company defers eligible costs related to the implementation of cloud computing arrangements within other current and non-current assets and amortizes such costs over the expected term of the hosting arrangement to the same income statement line as the associated cloud operating expenses. Adoption of this standard resulted in the Company capitalizing $3.6 million of cloud computing implementation costs for the year ended December 31, 2019.

Note 3**. Segment and Geographic Data**

The Company operates under one reportable segment. Operating segments are defined as components of an enterprise for 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 (“CEO”) 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, as the Company’s current product offering primarily consists of the Omnipod System and drug delivery devices based on the Omnipod platform.

Geographic information about revenue, based on delivery location, is as follows:

	Years Ended December 31,
(in millions)	2019				2018				2017
United States	$	485.1			$	391.8			$	343.8
All other	253.1				172.0				120.0
Total	$	738.2			$	563.8			$	463.8

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

	As of December 31,
(in millions)	2019				2018
United States	$	363.0			$	232.3
China	35.9				25.6
Other	0.5				0.9
Total	$	399.4			$	258.8

Note 4**. Revenue and Contract Acquisition Costs**

The following table summarizes the Company’s disaggregated revenues:

	Years Ended December 31,
(in millions)	2019				2018				2017
U.S. Omnipod	$	420.4			$	323.5			$	271.6
International Omnipod	253.1				172.0				120.0
Total Omnipod	673.5				495.5				391.6
Drug Delivery	64.7				68.3				72.2
Total revenue	$	738.2			$	563.8			$	463.8

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

		Years Ended December 31,
		2019		2018		2017
Amgen, Inc.		*****		12%		15%
Ypsomed		*****		*		22%
Cardinal Health Inc. and affiliates		11%		12%		11%

• Represents less than 10% of revenue for the period.

Deferred revenue related to unsatisfied performance obligations was included in the following consolidated balance sheet accounts in the amounts shown:

		As of December 31,
(in millions)		2019				2018
Accrued expenses and other current liabilities		$	3.2			$	1.2
Other liabilities		1.0				0.9
Total deferred revenue		$	4.2			$	2.1

Revenue recognized for the year ended December 31, 2019 included in deferred revenue at the beginning of 2019 was $1.2 million. Revenue recognized during the 2018 included in deferred revenue at the beginning of 2018 was $2.4 million. No revenue was recognized for the years ended December 31, 2019 and 2018 from performance obligations satisfied or partially satisfied in previous periods.

Contract acquisition costs, representing capitalized commission costs related to new customers, net of amortization, were included in the following consolidated balance sheet accounts in the amounts shown:

		As of December 31,
(in millions)		2019				2018
Prepaid expenses and other current assets		$	9.5			$	7.3
Other assets		19.9				16.0
Total capitalized contract acquisition costs, net		$	29.4			$	23.3

The Company recognized $8.8 million and $6.9 million of amortization of capitalized contract acquisition costs for the years ended December 31, 2019 and 2018, respectively.

Note 5**. Cash and Cash Equivalents**

The following tables provide a summary of cash and cash equivalents as of December 31, 2019 and 2018 and the level in the fair value hierarchy in which those measurements fall:

(in millions)	Fair Value Measurements
December 31, 2019	Total				Level 1				Level 2 (1)
Cash	$	85.3			$	85.3			$	—
Money market mutual funds	115.5				115.5				—
Commercial paper	10.0								10.0
Restricted cash	2.9				2.9
Total cash and cash equivalents	$	213.7			$	203.7			$	10.0
December 31, 2018
Cash	$	64.0			$	64.0			$	—
Money market mutual funds	47.2				47.2				—
Restricted cash	2.7				2.7
Total cash and cash equivalents	$	113.9			$	113.9			$	—

(1) Fair value was determined using market prices obtained from third-party pricing sources.

Note 6**. Investments**

The Company’s short-term and long-term investments in debt securities had maturity dates that range from two months to two years at December 31, 2019. Realized gains or losses in each of the three years ended December 31, 2019, 2018 and 2017 were insignificant.

The following tables provides amortized costs, gross unrealized gains and losses, fair values and the level in the fair value hierarchy for the Company’s investments at December 31, 2019 and 2018:

(in millions)	Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value				Level 1				Level 2 (1)
December 31, 2019
U.S. government and agency bonds	$	94.7			$	0.3			$	—			$	95.0			$	85.0			$	10.0
Corporate bonds	51.0				0.1				—				51.1				—				51.1
Certificates of deposit	6.3				—				—				6.3				—				6.3
Commercial paper	10.0				—				—				10.0								10.0
Total short-term investments	$	162.0			$	0.4			$	—			$	162.4			$	85.0			$	77.4
U.S. government and agency bonds	$	52.9			$	0.1			$	(0.1	)		$	52.9			$	42.9			$	10.0
Corporate bonds	2.8				—				—				2.8				—				2.8
Certificates of deposit	2.7				—				—				2.7				—				2.7
Total long-term investments	$	58.4			$	0.1			$	(0.1	)		$	58.4			$	42.9			$	15.5
December 31, 2018
U.S. government and agency bonds	$	113.0			$	—			$	(0.5	)		$	112.5			$	69.6			$	42.9
Corporate bonds	56.2				—				(0.2		)		56.0				—				56.0
Certificates of deposit	6.5				—				—				6.5				—				6.5
Total short-term investments	$	175.7			$	—			$	(0.7	)		$	175.0			$	69.6			$	105.4
U.S. government and agency bonds	$	90.5			$	0.1			$	(0.2	)		$	90.4			$	64.1			$	26.3
Corporate bonds	46.7				—				—				46.7				—				46.7
Certificates of deposit	3.7				—				—				3.7				—				3.7
Total long-term investments	$	140.9			$	0.1			$	(0.2	)		$	140.8			$	64.1			$	76.7

(1) Fair value was determined using market prices obtained from third-party pricing sources.

Note 7**. Inventories**

At the end of each period, inventories were comprised of the following:

(in millions)	As of December 31,
2019				2018
Raw materials	$	23.3			$	10.4
Work-in-process	40.3				30.2
Finished goods	37.4				30.8
Total inventories	$	101.0			$	71.4

Note 8**. Property, Plant and Equipment, Net**

Property, plant and equipment at cost and accumulated depreciation were as follows:

		As of December 31,
(in millions)	2019**(1)**				2018
Land		$	2.5			$	2.5
Building and building improvements		116.9				44.2
Machinery and equipment		194.8				93.3
Furniture and fixtures		12.7				6.3
Leasehold improvements		1.6				1.4
Construction in process		161.5				176.1
Total property, plant and equipment		490.0				323.8
Less: accumulated depreciation		(90.6		)		(65.4		)
Property, plant and equipment, net		$	399.4			$	258.4

(1) Reclassification of prior period amounts were made from furniture and fixtures to building and building improvements to conform with current period financial statement presentation.

Depreciation expense related to property and equipment was $25.2 million, $13.8 million and $12.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. Construction in process primarily consists of manufacturing equipment located at the Company’s U.S. manufacturing facility in Acton, Massachusetts, which is expected to be placed into service during 2020.

Note 9**. Goodwill and Other Intangible Assets, Net**

Goodwill

The changes in the carrying amount of goodwill for 2019 and 2018 were as follows:

	Years Ended December 31,
(in millions)	2019				2018
Beginning balance	$	39.6			$	39.8
Foreign currency adjustment	0.2				(0.2		)
Ending balance	$	39.8			$	39.6

Intangible Assets, Net

The gross carrying amount, accumulated amortization and net book value of intangible assets at the end of each period were as follows:

	As of December 31,
2019												2018
(in millions)	Gross Carrying Amount				Accumulated Amortization				Net Book Value				Gross Carrying Amount				Accumulated Amortization				Net Book Value
Customer relationships (1)	$	9.9			$	(2.8	)		$	7.1			$	6.1			$	(1.9	)		$	4.2
Internal-use software	12.0				(6.8		)		5.2				11.3				(5.1		)		6.2
Intellectual property	1.0				(0.1		)		0.9				—				—				—
Total intangible assets	$	22.9			$	(9.7	)		$	13.2			$	17.4			$	(7.0	)		$	10.4

(1) Includes customer relationships acquired from the Company’s former European distributor. See Note 13.

Intangible asset amortization expense was $2.7 million, $1.8 million and $1.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. Amortization expense associated with the intangible assets included on the Company’s balance sheet as of December 31, 2019 is expected to be as follows:

Years Ending December 31,		(in millions)
2020		$	2.9
2021		2.4
2022		1.9
2023		1.3
2024		1.2
Thereafter		3.5
Total		$	13.2

Note 10**. Accrued Expenses and Other Current Liabilities**

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

	As of December 31,
(in millions)	2019				2018
Employee compensation and related costs	$	45.8			$	37.8
Professional and consulting services	19.3				14.9
Accrued rebates	7.5				2.8
Supplier purchases	2.4				7.7
Value added taxes payable	1.8				8.5
Other	26.4				18.5
Accrued expenses and other current liabilities	$	103.2			$	90.2

Reconciliations of the changes in the Company’s product warranty liability were as follows:

	Years Ended December 31,
(in millions)	2019				2018
Product warranty liability at beginning of year	$	6.4			$	5.3
Warranty expense	13.4				7.8
Warranty claims settled	(11.3		)		(6.7		)
Product warranty liability at end of year	$	8.5			$	6.4

Note 11**. Leases**

As of December 31, 2019, the Company leased certain office spaces, laboratory space, warehouse space and automobiles, all of which were classified as operating leases. Certain of the Company’s operating leases include escalating rental payments, some include the option to extend for up to 5 years, and some include options to terminate the leases at certain times within the lease term. As of December 31, 2019, the Company included options to extend certain leases for 5 years in the measurement of the lease liability.

As of December 31, 2019, operating lease assets and operating lease liabilities were included in the following consolidated balance sheet accounts in the amounts shown:

		(in millions)
Operating lease asset:
Other assets		$	16.1
Operating lease liabilities:
Accrued expenses and other current liabilities		$	3.6
Other liabilities		14.4
Total		$	18.0

The Company’s total operating lease cost was $4.3 million for the year ended December 31, 2019. Total rental expense was $3.3 million and $2.8 million for the years ended December 31, 2018 and 2017, respectively. Cash paid for amounts included in the measurement of lease liabilities was $3.6 million for the year ended December 31, 2019. Operating lease liabilities arising from obtaining operating lease assets was $9.8 million for the year ended December 31, 2019.

Maturities of lease liabilities as of December 31, 2019 are as follows:

Years Ending December 31,		(in millions)
2020		$	4.5
2021		5.0
2022		4.7
2023		2.3
2024		2.4
Thereafter		1.5
Total future minimum lease payments		20.4
Less: imputed interest		(2.4		)
Present value of future minimum lease payments		$	18.0

As of December 31, 2019, the weighted average remaining lease term for operating leases was 4.4 years and the weighted-average discount rate used to determine the operating lease liability was 5.9%.

Note 12**. Convertible Debt, Net**

The components of outstanding convertible debt consisted of the following:

	As of December 31,
(in millions)	2019				2018
1.25% Convertible Senior Notes, due September 2021	$	—			$	345.0
1.375% Convertible Senior Notes, due November 2024	402.5				402.5
0.375% Convertible Senior Notes, due September 2026	800.0				—
Unamortized debt discount	(294.8		)		(143.6		)
Debt issuance costs	(19.8		)		(11.9		)
Total convertible debt, net	$	887.9			$	592.0

0.375% Convertible Senior Notes

In September 2019, the Company issued $800.0 million aggregate principal amount of 0.375% Convertible Senior Notes due September 2026 (the “0.375% Notes”). The notes are convertible into the Company’s common stock at an initial conversion rate of 4.4105 shares of common stock per $1,000 principal amount of the notes, which is equivalent to a conversion price of $226.73

per share, subject to adjustment under certain circumstances. The notes will be convertible June 1, 2026 through August 28, 2026 and prior thereto under certain circumstances.

The Company recorded a debt discount of $213.0 million related to the 0.375% 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 5.29% per annum. The Company also incurred debt issuance costs and other expenses of $19.8 million, of which $5.3 million was reclassified as a reduction to the value of the conversion feature allocated to equity. The remaining $14.5 million of debt issuance costs was recorded as a reduction of debt on the consolidated balance sheet. The net proceeds of $780.2 million were used to fund the redemption of the Company’s 1.25% Convertible Senior Notes due September 2021 (the “1.25% Notes”) and to purchase capped call options (“Capped Calls”), both of which are discussed below.

Additional interest of 0.5% per annum is payable if the Company fails to timely file required documents or reports with the Securities and Exchange Commission (“SEC”). If the Company merges or consolidates with a foreign entity, the Company may be required to pay additional taxes. The Company determined that the higher interest payments and tax payments required in certain circumstances were embedded derivatives that should be bifurcated and accounted for at fair value. The Company assessed the value of the embedded derivatives at December 31, 2019 and determined it had nominal value.

In conjunction with the issuance of the 0.375% Notes, the Company paid $85.4 million to enter into Capped Calls on the Company’s common stock with certain counterparties, which was recorded as a reduction to additional paid-in capital on the consolidated balance sheet. By entering into the Capped Calls, the Company expects to reduce the potential dilution to its common stock (or, in the event the conversion is settled in cash, to provide a source of cash to settle a portion of its cash payment obligation) in the event that at the time of conversion its stock price exceeds the conversion price under the 0.375% Notes. The Capped Calls have an initial strike price of $335.90 per share, which represents a premium of 100% over the last reported sale price of the Company’s common stock of $167.95 per share on the date of the transaction. The Capped Calls cover 3.5 million shares of common stock.

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 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 notes, which is equivalent to a conversion price of $93.18 per share, subject to adjustment under certain circumstances. The notes will be convertible August 15, 2024 through November 13, 2024 and prior thereto only under certain 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. The Company also incurred debt issuance costs and other expenses of $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 was presented as a reduction of debt on the consolidated balance sheet.

Additional interest of 0.5% per annum is payable if the Company fails to timely file required documents or reports with the SEC. If the Company merges or consolidates with a foreign entity, the Company may be required to pay additional taxes. The Company determined that the higher interest payments and tax payments required in certain circumstances were embedded derivatives that should be bifurcated and accounted for at fair value. The Company assessed the value of the embedded derivatives at each balance sheet date and determined it had nominal value.

1.25% Convertible Senior Notes

In 2019, the Company repurchased its $345.0 million principal amount ($312.0 million net of discount and issuance costs) 1.25% Notes for total consideration of $963.0 million comprised of $663.6 million in cash and $299.4 million representing the fair value of the 1.87 million shares issued. The Company allocated $642.3 million of the settlement to the fair value of the equity component and $320.7 million to the debt component, which resulted in an $8.7 million loss on extinguishment.

2% Convertible Senior Notes

In 2017, the Company repurchased $63.4 million in principal of its 2% Convertible Senior Notes due June 2019 (the “2% Notes”). The Company called the remaining 2% Notes in 2018 and settled the outstanding principal and conversion feature for $6.7 million in cash. The Company allocated $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.

Fair Value

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, 2019 and 2018 are as follows:

	As of December 31,
	2019							2,019		2018
(in millions)	Carrying Value				Estimated Fair Value (1)					Carrying Value				Estimated Fair Value (1)
1.25% Convertible Senior Notes	—				—					301.0				483.9
1.375% Convertible Senior Notes	306.9				512.8					291.0				426.0
0.375% Convertible Senior Notes	581.0				840.0					—				—
Total	$	887.9			$	1,352.8				$	592.0			$	909.9

(1) Fair value was determined using market prices obtained from third-party pricing sources.

Note 13**. Commitments and Contingencies**

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, but took the plaintiffs’ motion for fees and expenses under advisement, which motion remains pending. 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. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its results of operations.

Fees to Former European Distributor

Following the expiration of an agreement with a former European distributor on June 30, 2018, the Company was required to pay a quarterly per-unit fee for Omnipod sales to certain customers of the former European distributor for a one-year period through June 30, 2019. The Company recognized a liability and an associated intangible asset for this fee as qualifying sales occurred. The methodology applicable for determining the total fee under the distribution agreement is subject to an active arbitration proceeding in Switzerland. The final amount of the fee could vary significantly depending on the number of customers who count for purposes of calculating the fee under the terms of the agreement. The Company estimates that the final aggregate fee is in the range of $5 million to $55 million. As of December 31, 2019 and 2018, the Company had accrued $2.7 million and $2.9 million, respectively, for fees related to Omnipod devices sold to qualifying customers. The associated gross intangible asset for the fee was $7.8 million and $4.2 million as of December 31, 2019 and 2018, respectively.

Note 14**. Stock-Based Compensation**

Equity Award Plan

In May 2017, the Company adopted the 2017 Stock Option and Incentive Plan (the “2017 Plan”), which replaced its previous stock option and incentive plan (the “2007 Plan”). The 2017 Plan provides for a maximum of 5.2 million shares to be issued, in addition to the number of shares related to awards outstanding under the 2007 Plan that are terminated by expiration, forfeiture or cancellation. The shares can be issued as 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. As of December 31, 2019, 3.9 million shares remain available for future issuance under the 2017 Plan.

Stock-Based Compensation

Compensation cost related to stock-based awards recognized for the years ended December 31, 2019, 2018 and 2017 was recorded as follows:

	Year Ended December 31,
(in millions)	2019				2018				2017
Cost of revenue	$	1.0			$	0.8			$	0.5
Research and development	9.1				8.2				5.9
Sales and marketing	7.8				7.6				8.8
General and administrative	10.8				20.9				16.7
Total	$	28.7			$	37.5			$	31.9

Stock Options

Options are granted to purchase common shares at prices that are equal to the fair market value of the shares on the date the options are granted. Options generally vest in equal annual installments over a period of four years and expire 10 years after the date of grant. The grant-date fair value of options, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.

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

	Number of Options			Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in millions)
Outstanding at December 31, 2018	3,077,624			$	39.16
Granted	125,640			93.16
Exercised	(1,345,386	)		35.02						$	119.2
Forfeited and canceled	(128,366	)		51.55
Outstanding at December 31, 2019	1,729,512			$	45.39			5.4		$	217.6
Vested, December 31, 2019	1,361,514			$	38.71			4.7		$	180.4
Vested or expected to vest, December 31, 2019	1,689,570			$	44.59			5.3		$	213.9

The aggregate intrinsic value of options exercised for the years ended December 31, 2018 and 2017 was $23.5 million and $11.8 million, respectively.

The Company uses the Black-Scholes pricing model to determine the fair value of options granted. 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. The assumptions used in the Black-Scholes pricing model for options granted during each year, along with the weighted-average grant-date fair values, were as follows:

	Years Ended December 31,
	2019				2018				2017
Risk-free interest rate	1.8% - 2.6%				2.2% - 2.9%				1.7% - 1.9%
Expected life of options (in years)	4.4 - 4.8				4.5 - 5.4				4.7 - 5.3
Dividend yield	—%				—%				—%
Expected stock price volatility	40.1% - 40.5%				38.7% - 40.7%				38.5% - 39.1%
Fair value per option	$	34.98			$	30.34			$	17.28

As of December 31, 2019, there was $7.6 million of unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a weighted average period of 2.4 years.

Restricted Stock Units

Restricted Stock Units (“RSUs”) generally vest in equal annual installments over a three-year period. The grant-date fair value of RSUs, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. The Company determines the fair value of restricted stock units based on the closing price of its common stock on the date of grant.

RSU activity is as follows:

	Number of Shares			Weighted Average Fair Value
Outstanding at December 31, 2018	416,811			$	56.51
Granted	218,810			96.62
Vested	(231,647	)		50.13
Forfeited	(51,687	)		71.32
Outstanding at December 31, 2019	352,287			$	83.44

The weighted-average grant-date fair value per share of RSUs granted was $96.62, $76.03 and $46.13 for the years ended December 31, 2019, 2018 and 2017, respectively. The total fair value of RSUs vested was $11.6 million, $14.7 million and $11.4 million for the years ended December 31, 2019, 2018 and 2017, respectively.

As of December 31, 2019, there was $18.9 million of unrecognized compensation cost related to time-based RSUs, which is expected to be recognized over a weighted-average period of 1.9 years.

Performance Stock Units

Performance stock units (“PSUs”) generally vest over a three-year period from the grant date and include both a service and performance component. Stock-based payments that contain performance conditions are recognized when such conditions are probable of being achieved. Certain of these performance stock units could ultimately vest at up to 200% of the target award depending on the achievement of the performance criteria.

PSU activity is as follows:

	Number of Shares			Weighted Average Fair Value
Outstanding at December 31, 2018	335,396			$	53.17
Granted	81,118			95.91
Vested	(93,088	)		34.27
Forfeited	(24,270	)		62.32
Outstanding at December 31, 2019 (1)	299,156			$	73.35

(1) Based on 200% achievement of the performance metrics, approximately 172,000 shares of Insulet were earned for awards that were granted in 2017 for the performance period ended December 31, 2019. These shares vested in February 2020.

The weighted-average grant-date fair value per share of PSUs granted was $95.91, $75.07 and $50.02 for the years ended December 31, 2019, 2018 and 2017, respectively. The total fair value of PSUs vested was $3.2 million, $7.6 million and $0.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.

As of December 31, 2019, there was $12.2 million of unrecognized compensation cost related to PSUs, which is expected to be recognized over a weighted-average period of 1.9 years.

Employee Stock Purchase Plan

The Employee Stock Purchase Plan (“ESPP”) authorizes the issuance of up to 880,000 shares of common stock to participating employees. Employees that 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 by authorizing payroll deductions of up to 10% of their base salary. The purchase price for each share purchased is 85% of the lower of the fair market value of the common stock on the first or last day of the offering period. The Company issued 51,502, 46,343 and 59,134 shares of common stock for the years ended December 31, 2019, 2018 and 2017, respectively, to employees participating in the ESPP. As of December 31, 2019, 547,075 shares remain available for future issuance under the ESPP Plan.

The Company uses the Black-Scholes pricing model to determine the fair value of shares purchased under the ESPP. The calculation of the fair value of shares purchased is affected by the stock price on the purchase date, the expected volatility of the Company’s stock over the expected term, the risk-free interest rate and the dividend yield. The estimated fair value of shares purchased under the ESPP were based on the following assumptions:

	Years Ended December 31,
	2019		2018		2017
Risk-free interest rate	1.6% - 2.3%		2.1% - 2.5%		1.1% - 1.5%
Expected term (in years)	0.5		0.5		0.5
Dividend yield	—%		—%		—%
Expected stock price volatility	27.5% - 31.4%		23.4% - 27.0%		22.9% - 26.7%

The weighted average grant date fair value of the six-month option inherent in the ESPP was $46.30, $26.01, and $15.18, for the years ended December 31, 2019, 2018 and 2017, respectively.

As of December 31, 2019, there was $1.0 million of unrecognized compensation cost related to the ESPP. This cost is expected to be recognized over a weighted average period of 0.4 years.

Note 15**. Accumulated Other Comprehensive Loss**

Changes in the components of accumulated other comprehensive loss, net of tax, were as follows:

(in millions)		Foreign Currency Translation Adjustment				Unrealized Losses on Available-for-sale Securities				Accumulated Other Comprehensive Loss
Balance, December 31, 2016		$	(0.5	)		$	(0.2	)		$	(0.7	)
Other comprehensive income (loss)		0.5				(0.3		)		0.2
Balance, December 31, 2017		—				(0.5		)		(0.5		)
Other comprehensive loss		(2.2		)		(0.2		)		(2.4		)
Balance, December 31, 2018		(2.2		)		(0.7		)		(2.9		)
Other comprehensive income		0.6				1.1				1.7
Balance, December 31, 2019		$	(1.6	)		$	0.4			$	(1.2	)

Note 16**. Defined Contribution Plan**

The Company maintains a tax-qualified 401(k) retirement plan in the United States. The Company generally makes a matching contribution equal to 50% of each employee’s elective contribution to the plan up to six percent of the employee’s eligible pay. In addition, the Company offers defined contribution plans for eligible employees in its foreign subsidiaries. The total amount contributed by the Company to these defined contribution plans was $5.3 million, $3.6 million and $3.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Note 17**. Interest Expense**

Interest expense, net of portion capitalized was follows:

	Years Ended December 31,
(in millions)	2019				2018				2017
Contractual coupon interest	$	9.5			$	9.8			$	6.3
Accretion of debt discount	32.8				26.7				15.9
Amortization of debt issuance costs	2.8				2.6				2.1
Capitalized interest	(10.5		)		(10.2		)		(3.1		)
Interest expense, net of portion capitalized	$	34.6			$	28.9			$	21.2

Note 18**. Income Taxes**

The U.S. and foreign components of income (loss) before income taxes were as follows:

	Years Ended December 31,
(in millions)	2019				2018				2017
U.S.	$	2.5			$	(3.0	)		$	(27.7	)
Foreign	12.0				8.2				1.1
Income (loss) before income taxes	$	14.5			$	5.2			$	(26.6	)

Income tax expense consists of the following:

	Years Ended December 31,
(in millions)	2019				2018				2017
Current:
State	$	0.2			$	0.2			$	0.1
Foreign	3.4				2.1				0.6
Total current expense	3.6				2.3				0.7
Deferred:
Federal	(0.1		)		—				(0.3		)
Foreign	(0.6		)		(0.4		)		(0.2		)
Total deferred expense	(0.7		)		(0.4		)		(0.5		)
Income tax expense	$	2.9			$	1.9			$	0.2

Reconciliations of the federal statutory income rate to the Company’s effective income tax rate are as follows:

	Years Ended December 31,
	2019			2018				2017
U.S. statutory rate	21.0	%		21.0	%			34.0	%
Foreign rate differential	4.2			(2.4	)	—		0.3
State taxes, net of federal benefit	1.3			2.9				10.2
Tax credits	(15.4	)		(13.7	)			13.3
Stock-based compensation	(158.7	)		(159.1	)			33.6
Loss on extinguishment of debt	14.8			—				—
Non-deductible officers’ compensation	1.9			81.3				(20.2	)
Permanent items	3.0			16.8				(14.0	)
Foreign income taxed in the U.S.	19.0			26.1				—
Change in valuation allowance	130.6			67.0				(57.9	)
Other	(1.9	)		(2.9	)			(0.3	)
Effective income tax rate	19.8	%		37.0	%			(1.0	)%

As of December 31, 2019, 2018 and 2017 the Company had no uncertain tax positions.

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, 2019, the Company has chosen to indefinitely reinvest its earnings of its non-U.S. subsidiaries, except Canada. To the extent the Company repatriates its foreign earnings, certain withholding taxes and state taxes may apply. The Company has recorded a deferred tax liability for tax that could be incurred upon repatriation of the Canada earnings, the amount of which is not significant. A deferred tax liability related to the repatriation of the indefinitely reinvested earnings would not be material to the Company’s consolidated financial statements.

The Company files federal, state and foreign tax returns, which are subject to examination by the relevant tax authorities. The tax filings relating to the Company’s federal and state tax returns are currently open to examination for tax years 2016 through 2018 and 2015 through 2018, respectively. The Company is currently under exam in Ontario, Canada. In addition, the Company generated tax losses from inception in 2000. These years may be subject to examination if the losses are carried forward and utilized in future years.

The components of the net deferred tax asset at the end of each year are as follows:

	As of December 31,
(in millions)	2019				2018
Deferred tax assets:
Net operating loss carryforwards	$	144.6			$	124.9
Tax credits	15.2				13.0
Provision for bad debts	1.2				1.1
Depreciation and amortization	—				3.5
Capital loss carryforwards	12.7				12.6
Stock-based compensation	8.9				9.3
Other	12.6				6.4
Total deferred tax assets	195.2				170.8
Deferred tax liabilities:
Prepaid assets	(2.1		)		(2.0		)
Depreciation and amortization	(2.2		)		—
Amortization of debt discount	(73.4		)		(35.7		)
Capitalized contract acquisition costs	(7.1		)		(5.8		)
Other	(5.0		)		(0.8		)
Total deferred tax liabilities	(89.8		)		(44.3		)
Net deferred tax asset before valuation allowance	105.4				126.5
Valuation allowance	(104.4		)		(126.3		)
Net deferred tax asset	$	1.0			$	0.2

The valuation allowances for deferred tax assets of $104.4 million and $126.3 million at December 31, 2019 and 2018, respectively, relate primarily to U.S. tax loss carryforwards that management believes are not more likely than not to be utilized. The $21.9 million decrease in the Company’s valuation allowance during the year ended December 31, 2019 was primarily due to the issuance of convertible debt discussed in Note 12.

The Company’s net operating loss carryforwards consist of the following:

	Years Ended December 31,
(in millions)	2019				2018
Gross federal net operating loss carryforwards	$	607.4			$	528.1
State operating loss carryforwards	298.8				246.4
Total	$	906.2			$	774.5

For U.S. federal tax purposes, $66.8 million of the net operating losses have an indefinite carryforward period. The remaining federal carryforwards, if not utilized, will begin to expire in 2020 and will continue to expire through 2037, and the state carryforwards will continue to expire through 2038. 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. Research and

development and other tax credits were $16.1 million and $13.0 million at December 31, 2019 and 2018, respectively. If not utilized, federal research and development credits will begin to expire in 2022.

Note 19**. 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. Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding and, when dilutive, 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 table below sets forth the components used in the computation of basic and diluted net income (loss) per share:

	Years Ended December 31,
(in millions, except share and per share data)	2019				2018				2017
Numerator:
Net income (loss)	$	11.6			$	3.3			$	(26.8	)
Denominator:
Weighted average number of common shares outstanding, basic	60,593,846				58,859,574				58,003,434
Effect of dilutive common share equivalents
Stock options	1,486,973				1,678,535				—
Restricted stock units	223,529				469,915				—
Weighted average number of common shares outstanding, diluted	62,304,348				61,008,024				58,003,434
Net income (loss) per share:
Basic	$	0.19			$	0.06			$	(0.46	)
Diluted	$	0.19			$	0.05			$	(0.46	)

The number of common share equivalents excluded from the computation of diluted net income (loss) per share because either the effect would have been anti-dilutive, or the performance criteria related to the units had not yet been met were as follows:

	Years Ended December 31,
	2019			2018			2017
2.00% Convertible Senior Notes	—			—			78,783
1.25% Convertible Senior Notes	—			5,910,954			5,910,954
1.375% Convertible Senior Notes	4,319,429			4,319,429			4,319,429
0.375% Convertible Senior Notes	3,528,400			—			—
Unvested restricted stock units	430,593			289,974			994,364
Outstanding stock options	12,820			236,648			3,377,220
Total common share equivalents excluded from computation of diluted net income (loss) per share	8,291,242			10,757,005			14,680,750

Note 20**. Quarterly Data (Unaudited)**

	2019 Quarters Ended
(in millions, except per share data)	March 31				June 30				September 30 (1)				December 31 (2)
Revenue	$	159.6			$	177.1			$	192.1			$	209.4
Gross profit	$	106.7			$	116.4			$	123.1			$	134.1
Net income	$	4.4			$	1.4			$	0.8			$	5.0
Net income per share:
Basic	$	0.07			$	0.02			$	0.01			$	0.08
Diluted	$	0.07			$	0.02			$	0.01			$	0.08

(1) Net income includes a $6.4 million loss on extinguishment of debt incurred in connection with the repurchase of the Company’s 1.25% Convertible Senior Notes.

(2) Net income includes a $2.3 million loss on extinguishment of debt incurred in connection with the repurchase of the Company’s 1.25% Convertible Senior Notes.

	2018 Quarters Ended
(in millions, except per share data)	March 31				June 30				September 30 (3)				December 31
Revenue	$	123.6			$	124.2			$	151.1			$	164.9
Gross profit	$	75.8			$	82.1			$	102.0			$	110.3
Net income (loss)	$	(6.6	)		$	(1.7	)		$	1.7			$	9.9
Net income (loss) per share:
Basic	$	(0.11	)		$	(0.03	)		$	0.03			$	0.17
Diluted	$	(0.11	)		$	(0.03	)		$	0.03			$	0.16

(3) Net income includes a charge of $12.6 million for severance costs associated with the retirement of the Company’s former CEO, of which $8.2 million represented stock-based compensation expense for the accelerated vesting of share-based equity awards.

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

The following table sets forth activities in the Company’s accounts receivable reserve, reserve for rebates 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 millions)
Year Ended December 31, 2019
Allowance for doubtful accounts		$	3.6			$	4.5			$	(4.3	)		$	3.8
Reserve for rebates		$	8.6			$	59.1			$	(55.6	)		$	12.1
Deferred tax valuation allowance		$	126.3			$	43.6			$	(65.5	)		$	104.4
Year Ended December 31, 2018
Allowance for doubtful accounts		$	2.5			$	3.4			$	(2.3	)		$	3.6
Reserve for rebates		$	6.3			$	34.1			$	(31.8	)		$	8.6
Deferred tax valuation allowance		$	127.9			$	13.9			$	(15.5	)		$	126.3
Year Ended December 31, 2017
Allowance for doubtful accounts		$	2.9			$	1.9			$	(2.3	)		$	2.5
Reserve for rebates		$	1.4			$	16.1			$	(11.2	)		$	6.3
Deferred tax valuation allowance		$	191.9			$	14.2			$	(78.2	)		$	127.9