Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

Our financial statements as of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020, 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			41

Consolidated Balance Sheets as of December 31, 2020 and 2019			43

Consolidated Statements of Income for the Years ended December 31, 2020, 2019 and 2018			44

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018			45

Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2020, 2019 and 2018			46

Consolidated Statements of Cash Flows for the Years ended December 31, 2020, 2019 and 2018			47

Notes to Consolidated Financial Statements			48

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, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules included under Item 15(a) (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 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, 2020, 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 matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue Recognition - Drug Delivery

As described in Note 4 to the consolidated financial statements, the Company’s revenue from drug delivery was $69.5 million for the year ended December 31, 2020. 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 (and the related unbilled receivable), we inspected customer orders, binding customer forecasts, inventory records, and third party shipping documentation.

/s/ GRANT THORNTON LLP

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

Boston, Massachusetts

February 23, 2021

INSULET CORPORATION

CONSOLIDATED BALANCE SHEETS


	As of December 31,
(in millions, except share and per share data)	2020		2019
ASSETS
Current Assets
Cash and cash equivalents	$	907.2	$	213.7
Short-term investments	40.4		162.4
Accounts receivable trade, net	83.8		69.3
Inventories	154.3		101.0
Prepaid expenses and other current assets	63.0		44.6
Total current assets	1,248.7		591.0
Long-term investments	—		58.4
Property, plant and equipment, net	478.7		399.4
Other intangible assets, net	28.7		13.2
Goodwill	39.8		39.8
Other assets	77.0		41.1
Total assets	$	1,872.9	$	1,142.9
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	54.1	$	54.5
Accrued expenses and other current liabilities	138.1		103.2
Current portion of long-term debt	15.6		—
Total current liabilities	207.8		157.7
Long-term debt, net	1,043.7		887.9
Other liabilities	17.8		21.4
Total liabilities	1,269.3		1,067.0
Commitment and Contingencies (Note 13)
Stockholders’ Equity
Preferred stock, $.001 par value:
Authorized: 5,000,000 shares at December 31, 2020 and 2019. Issued and outstanding: zero shares at December 31, 2020 and 2019.	—		—
Common stock, $.001 par value:
Authorized: 100,000,000 shares at December 31, 2020 and 2019. Issued and outstanding: 66,017 and 62,685 shares at December 31, 2020 and 2019	0.1		0.1
Additional paid-in capital	1,264.3		749.0
Accumulated deficit	(666.3)		(672.0)
Accumulated other comprehensive income (loss)	5.5		(1.2)
Total stockholders’ equity	603.6		75.9
Total liabilities and stockholders’ equity	$	1,872.9	$	1,142.9

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

INSULET CORPORATION

CONSOLIDATED STATEMENTS OF INCOME


	Years Ended December 31,
(in millions, except share and per share data)	2020		2019		2018
Revenue	$	904.4	$	738.2	$	563.8
Cost of revenue	322.1		257.9		193.6
Gross profit	582.3		480.3		370.2
Research and development	146.8		132.3		94.8
Selling, general and administrative	384.0		298.0		248.0
Operating income	51.5		50.0		27.4
Interest expense, net	(45.1)		(27.7)		(21.3)
Loss on extinguishment of debt	—		(8.7)		—
Other income (expense), net	3.3		0.9		(0.9)
Income before income taxes	9.7		14.5		5.2
Income tax expense	(2.9)		(2.9)		(1.9)
Net income	$	6.8	$	11.6	$	3.3

Net income per share:
Basic	$	0.11	$	0.19	$	0.06
Diluted	$	0.10	$	0.19	$	0.05

Weighted-average number of common shares outstanding (in thousands):
Basic	64,735		60,594		58,860
Diluted	65,946		62,304		61,008

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

INSULET CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Years Ended December 31,
(in millions)	2020		2019		2018
Net income	$	6.8	$	11.6	$	3.3
Other comprehensive income, net of tax
Foreign currency translation adjustment	6.8		0.6		(2.2)
Unrealized (loss) gain on available-for-sale securities, net of tax	(0.1)		1.1		(0.2)
Total other comprehensive income (loss), net of tax	6.7		1.7		(2.4)
Total comprehensive income	$	13.5	$	13.3	$	0.9

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 (Income)		Total Stockholders’ Equity
(dollars in millions)	Shares (in thousands)	Amount
Balance, December 31, 2017	58,319	$	0.1	$	866.2	$	(707.3)	$	(0.5)	$	158.5
Exercise of options to purchase common stock	410	—		12.8		—		—		12.8
Issuance of shares for employee stock purchase plan	46	—		3.0		—		—		3.0
Stock-based compensation	—	—		37.5		—		—		37.5
Restricted stock units vested, net of shares withheld for taxes	414	—		(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	59,189	0.1		898.5		(683.6)		(2.9)		212.1
Exercise of options to purchase common stock	1,340	—		46.6		—		—		46.6
Issuance of shares for employee stock purchase plan	51	—		4.3		—		—		4.3
Stock-based compensation	—	—		28.7		—		—		28.7
Restricted stock units vested, net of shares withheld for taxes	230	—		(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	—		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	0.1		749.0		(672.0)		(1.2)		75.9
Adoption of ASU 2016-13 (Note 1)	—	—		—		(1.1)		—		(1.1)
Issuance of common stock	2,370	—		477.5		—		—		477.5
Exercise of options to purchase common stock	674	—		25.7		—		—		25.7
Issuance of shares for employee stock purchase plan	38	—		6.0		—		—		6.0
Stock-based compensation	—	—		35.9		—		—		35.9
Restricted stock units vested, net of shares withheld for taxes	250	—		(29.8)		—		—		(29.8)
Net income	—	—		—		6.8		—		6.8
Other comprehensive income	—	—		—		—		6.7		6.7
Balance, December 31, 2020	66,017	$	0.1	$	1,264.3	$	(666.3)	$	5.5	$	603.6

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)	2020		2019		2018
Cash flows from operating activities
Net income	$	6.8	$	11.6	$	3.3
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	55.4		27.9		15.6
Non-cash interest	45.2		35.6		29.3
Stock-based compensation	35.9		28.7		37.5
Loss on extinguishment of convertible debt	—		8.7		—
Provision for credit losses	3.3		4.5		3.4
Other	0.8		1.1		(0.4)
Changes in operating assets and liabilities:
Accounts receivable	(15.6)		(10.8)		(14.6)
Inventories	(50.5)		(30.2)		(38.8)
Prepaid expenses and other assets	(32.2)		(22.0)		(19.9)
Accounts payable	7.1		25.6		(5.4)
Accrued expenses and other liabilities	27.8		17.7		25.9
Net cash provided by operating activities	84.0		98.4		35.9
Cash flows from investing activities
Capital expenditures	(129.0)		(163.7)		(157.4)
Acquisition of intangible assets	(37.5)		(7.2)		(5.0)
Purchases of investments	(37.9)		(150.6)		(191.4)
Receipts from the maturity or sale of investments	218.4		247.9		169.3
Net cash provided by (used in) investing activities	14.0		(73.6)		(184.5)
Cash flows from financing activities
Proceeds from issuance of common stock, net of issuance costs	477.5		—		—
Proceeds from mortgage, net of issuance cost	68.3		—		—
Proceeds from equipment financing	60.0		—		—
Proceeds from issuance of convertible debt, net of issuance cost	—		780.2		—
Purchase of capped call options	—		(85.4)		—
Repayment of convertible debt	—		(663.6)		(6.7)
Proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan	31.7		50.9		15.8
Payment of withholding taxes in connection with vesting of restricted stock units	(29.8)		(8.6)		(17.8)
Other	(2.2)		—		—
Net cash provided by (used in) financing activities	605.5		73.5		(8.7)
Effect of exchange rate changes on cash	4.8		1.5		(1.4)
Net increase (decrease) in cash, cash equivalents, and restricted cash	708.3		99.8		(158.7)
Cash, cash equivalents, and restricted cash, beginning of year	213.7		113.9		272.6
Cash, cash equivalents, and restricted cash, end of year (Note 5)	$	922.0	$	213.7	$	113.9

Supplemental cash flow information
Cash paid for interest, net of amount capitalized	$	2.6	$	—	$	—
Cash paid for taxes	$	3.0	$	2.5	$	0.8
Purchases of property, plant and equipment included in accounts payable and accrued expenses	$	6.7	$	13.3	$	11.4

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 (“Pod”) that is worn on the body for up to three days at a time, 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, a 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. A portion of facility costs and certain information technology costs have been allocated from selling, general and administrative to research and development expenses based on square foot and system usage, respectively and certain quality assurance costs were reclassified from research and development expenses to selling, general and administrative expenses. The net impact of these adjustments was a $2.6 million and $4.3 million increase to research and development expenses and decrease to selling, general and administrative expenses for the years ended December 31, 2019 and December 31, 2018, respectively. There was no change to previously reported operating or 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 other income (expense), net in the consolidated statement of income and were $3.2 million, $0.6 million and $1.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.

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 required to be set aside in connection with

equipment financings or that serves as collateral for outstanding letters of credit and bank guarantees is included in other assets and 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 accumulated other comprehensive income (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 (expense), net in the consolidated statement of income.

Accounts Receivable and Allowance for Credit Losses

Trade accounts receivable consist of amounts due from third-party payors, customers and intermediaries and are presented at amortized cost. The allowance for credit losses 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.

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the following portfolio segments and measures the allowance for credit losses using the following methods:

Direct Customer Receivables—The Company measures expected credit losses on direct customer receivables using an aging methodology. The risk of loss for direct customer receivables is higher than other portfolios. The Company relies on third-party payors to accept and timely process claims and on direct consumers to have the ability to pay. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and supportable forecasts.

Distributor Receivables—The Company measures expected credit losses on distributor receivables using an individual reserve methodology. The risk of loss in this portfolio is low based on the Company’s historical experience. The estimate of expected credit losses considers payment history as well as credit ratings of the distributors, in addition to current conditions and supportable forecasts.

National Healthcare System Receivables—The Company measures expected credit losses on national healthcare system receivables using an individual reserve methodology. The risk of loss in this portfolio is low based on the Company’s historical experience. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and supportable forecasts.

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 than 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 based on the pattern in which the economic benefits of the assets are estimated to be consumed over the following estimated useful lives of the assets:


Customer relationships			14 years
Internal-use software			3 to 5 years
Intellectual property			15 years

Amortization expense is included in selling, general and administrative expenses in the consolidated statement of income. 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.

Cloud Computing Arrangements

The Company capitalizes costs incurred to implement cloud computing arrangements that are service contracts 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. As of December 31, 2020 and 2019, the Company had net capitalized implementation costs of $24.2 million and $3.5 million, respectively. Amortization expense recorded during the period ended December 31, 2020 was $1.4 million and was insignificant for the period ended December 31, 2019.

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.

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 revenue in the consolidated statements of income. 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.

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 end-users and certain of our distributors and wholesalers. 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.

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 selling, general and administrative expenses and were $10.1 million, $9.7 million and $6.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Advertising Costs

The Company expenses advertising costs as they are incurred. Advertising expenses were $30.0 million, $11.2 million and $10.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Stock-Based Compensation

The Company measures stock-based compensation on 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 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 two contract manufacturers. As of December 31, 2020, neither of these vendors represented 10% or more of the combined balance of accounts payable and accrued expenses and other current liabilities. As of December 31, 2019, one of these vendors 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, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Credit Losses (Topic 326) (“ASU 2016-13”). ASU 2016-13 requires financial assets measured at amortized cost, such as the Company’s trade receivables and contract assets, to 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 assets. The new guidance also requires enhanced disclosures related to trade receivables and associated credit losses. The Company adopted ASU 2016-13 using the modified retrospective method, whereby the guidance is applied prospectively as of the date of adoption and prior periods are not restated. The cumulative effect of adopting ASU 2016-13 resulted in a $1.1 million increase to the opening balance of accumulated deficit upon adoption related to an increase in the allowance for credit losses on accounts receivable.

The following table presents the activity in the allowance for credit losses, which is comprised primarily of our direct consumer receivable portfolio. The allowance for credit losses of other portfolios is insignificant.


	Year Ended
(in millions)	December 31, 2020
Credit losses at the beginning of the year	$	3.8
Effect of adoption	1.1
Credit losses at the beginning of the year, after adoption	4.9
Provision for expected credit losses	3.3
Write-offs charged against allowance	(5.8)
Recoveries of amounts previously written-off	0.5
Credit losses at the end of the year	$	2.9

Effective January 1, 2020, the Company adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 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 units’ fair value. The adoption of this guidance had no impact on the consolidated financial statements.

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 customer location, is as follows:


	Years Ended December 31,
(in millions)	2020		2019		2018
United States(1)	$	596.4	$	485.1	$	391.8
International	308.0		253.1		172.0
Total	$	904.4	$	738.2	$	563.8

(1) Includes U.S. Omnipod and Drug Delivery revenues.

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


	As of December 31,
(in millions)	2020		2019
United States	$	409.7	$	363.0
China	66.2		35.9
Other	2.8		0.5
Total	$	478.7	$	399.4

Note 4. Revenue and Contract Acquisition Costs

The following table summarizes the Company’s disaggregated revenues:


	Years Ended December 31,
(in millions)	2020		2019		2018
U.S. Omnipod	$	526.9	$	420.4	$	323.5
International Omnipod	308.0		253.1		172.0
Total Omnipod	834.9		673.5		495.5
Drug Delivery	69.5		64.7		68.3
Total revenue	$	904.4	$	738.2	$	563.8

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


	Years Ended December 31,
	2020	2019	2018
Anda, Inc.	11%	*	*
Cardinal Health Inc. and affiliates	10%	11%	12%
Amgen, Inc.	*****	*	12%

Represents less than 10% of revenue for the period.

At December 31, 2020, the Company had one customer that accounted for 15% of consolidated net accounts receivable. No customer accounted for more than 10% of consolidated net accounts receivable at December 31, 2019**.**

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)	2020		2019
Accrued expenses and other current liabilities	$	5.4	$	3.2
Other liabilities	1.0		1.0
Total deferred revenue	$	6.4	$	4.2

Revenue recognized from amounts included in deferred revenue at the beginning of each respective period was as follows:


	As of December 31,
(in millions)	2020		2019	2018
Deferred revenue recognized	$	1.8	1.2	2.4

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)	2020		2019
Prepaid expenses and other current assets	$	11.0	$	9.5
Other assets	21.9		19.9
Total capitalized contract acquisition costs, net	$	32.9	$	29.4

The Company recognized $10.6 million, $8.8 million, and $6.9 million of amortization of capitalized contract acquisition costs for the years ended December 31, 2020, 2019, and 2018, respectively.

The Company had unbilled receivables of $11.6 million and $13.5 million at December 31, 2020 and 2019, respectively.

Note 5. Cash and Cash Equivalents

The following table provides a summary of cash and cash equivalents as of December 31, 2020 and 2019 and the level in the fair value hierarchy in which those measurements fall:


	As of December 31,
(in millions)	2020		2019
Cash	$	164.6	$	85.3
Money market mutual funds	739.8		115.5
Commercial paper	—		10.0
Restricted cash	2.8		2.9
Total cash and cash equivalents	907.2		213.7
Restricted cash included in other assets	14.8		—
Total cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows	$	922.0	$	213.7

The restricted cash included in other assets on the consolidated balance sheet is held as a compensating balance against long-term borrowings.

All cash and cash equivalents are level 1, except for commercial paper, which is level 2. The fair value of commercial paper 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 one year at December 31, 2020. Realized gains or losses in each of the three years ended December 31, 2020, 2019 and 2018 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, 2020 and 2019:


(in millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Level 1		Level 2 (1)
December 31, 2020
U.S. government and agency bonds	$	35.1	$	0.2	$	—	$	35.3	$	35.3	$	—
Corporate bonds	2.8		0.1		—		2.9		—		2.9
Certificates of deposit	2.2		—		—		2.2		—		2.2
Total short-term investments	$	40.1	$	0.3	$	—	$	40.4	$	35.3	$	5.1

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

(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,
2020			2019
Raw materials	$	30.7		$	23.3
Work-in-process	59.6			40.3
Finished goods	64.0			37.4
Total inventories	$	154.3		$	101.0

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)	2020			2019
Land		$	2.5		$	2.5
Building and building improvements		147.3			116.9
Machinery and equipment		318.7			194.8
Furniture and fixtures		14.8			12.7
Leasehold improvements		4.4			1.6
Construction in process		119.6			161.5
Total property, plant and equipment		607.3			490.0
Less: accumulated depreciation		(128.6)			(90.6)
Property, plant and equipment, net		$	478.7		$	399.4

Depreciation expense related to property and equipment was $38.0 million, $25.2 million and $13.8 million for the years ended December 31, 2020, 2019 and 2018, respectively. Construction in process primarily consists of manufacturing equipment located at the Company’s U.S. manufacturing facility in Acton, Massachusetts and new contract manufacturer in China, most of which is expected to be placed into service during 2021.

Note 9. Goodwill and Other Intangible Assets, Net

Goodwill

The changes in the carrying amount of goodwill for 2020 and 2019 were as follows:


	Years Ended December 31,
(in millions)	2020		2019
Beginning balance	$	39.8	$	39.6

Foreign currency adjustment	—		0.2
Ending balance	$	39.8	$	39.8

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,
2020							2019
(in millions)	Gross Carrying Amount		Accumulated Amortization		Net Book Value			Gross Carrying Amount		Accumulated Amortization		Net Book Value
Customer relationships (1)	$	43.3	$	(18.3)	$	25.0		$	9.9	$	(2.8)	$	7.1
Internal-use software	11.4		(8.6)		2.8			12.0		(6.8)		5.2
Intellectual property	1.1		(0.2)		0.9			1.0		(0.1)		0.9
Total intangible assets	$	55.8	$	(27.1)	$	28.7		$	22.9	$	(9.7)	$	13.2

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

Intangible asset amortization expense was $17.4 million, $2.7 million and $1.8 million for the years ended December 31, 2020, 2019 and 2018, respectively. Amortization expense associated with the intangible assets included on the Company’s consolidated balance sheet as of December 31, 2020 is expected to be as follows:


Years Ending December 31,	(in millions)
2021	$	6.5
2022	5.1
2023	3.9
2024	3.0
2025	2.3

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)	2020		2019
Employee compensation and related costs	$	53.1	$	45.8
Professional and consulting services	19.1		19.3
Accrued rebates	13.1		7.5
Supplier purchases	7.1		2.4
Value added taxes payable	5.0		1.8
Other	40.7		26.4
Accrued expenses and other current liabilities	$	138.1	$	103.2

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


	Years Ended December 31,
(in millions)	2020		2019
Product warranty liability at beginning of year	$	8.5	$	6.4
Warranty expense	10.7		13.4
Warranty claims settled	(12.5)		(11.3)
Product warranty liability at end of year	$	6.7	$	8.5

Note 11. Leases

As of December 31, 2020, 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, and some include options to terminate the leases at certain times within the lease term. As of December 31, 2020, the Company included options to extend certain leases for 5 years in the measurement of the lease liability.

As of December 31, 2020, operating lease assets and operating lease liabilities were included in the following consolidated balance sheet accounts in the amounts shown:


	Years Ended December 31,
(in millions)	2020		2019
Operating lease asset:
Other assets	$	14.9	$	16.1
Operating lease liabilities:
Accrued expenses and other current liabilities	$	4.9	$	3.6
Other liabilities	12.0		14.4
Total operating lease liabilities	$	16.9	$	18.0

The Company’s total operating lease cost was $5.4 million and $4.3 million for the years ended December 31, 2020 and 2019, respectively. Total rental expense was $3.3 million for the year ended December 31, 2018. Cash paid for amounts included in the measurement of lease liabilities was $4.6 million and $3.6 million for the years ended December 31, 2020 and 2019, respectively. Operating lease liabilities arising from obtaining operating lease assets was $2.5 million and $9.8 million for the years ended December 31, 2020 and 2019, respectively.

Maturities of lease liabilities as of December 31, 2020 are as follows:


Years Ending December 31,	(in millions)
2021	$	5.6
2022	5.4
2023	2.9
2024	2.8
2025	1.9
Thereafter	0.1
Total future minimum lease payments	18.7
Less: imputed interest	(1.8)
Present value of future minimum lease payments	$	16.9

As of December 31, 2020, the weighted average remaining lease term for operating leases was 3.8 years and the weighted-average discount rate used to determine the operating lease liability was 5.6%.

Note 12. Debt

The components of debt consisted of the following:


	As of December 31,
(in millions)	2020		2019
1.375% Convertible Senior Notes, due November 2024	$	402.5	$	402.5
0.375% Convertible Senior Notes, due September 2026	800.0		800.0
Equipment financing, due May 2024	22.2		—
Equipment financing, due November 2025	36.4		—
5.15% Mortgage, due November 2025	69.7		—
Unamortized debt discount	(252.5)		(294.8)
Debt issuance costs	(19.0)		(19.8)
Total debt	1,059.3		887.9
Less: current portion	15.6		—
Total long term-debt	$	1,043.7	$	887.9

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 to then 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 recorded as a reduction to the value of the conversion feature allocated to equity. The remaining $7.6 million of debt issuance costs was recorded 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.

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 to then 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 recorded 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 each balance sheet date 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.

1.25% 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.

Equipment Financings

In October 2020, the Company entered into a Master Equipment Lease Agreement for a loan of $60.0 million secured by two manufacturing lines located at the Company’s Acton, Massachusetts manufacturing facility. The loan for the first manufacturing line is payable over 42 months and has an effective interest rate of 5.8%. The loan for the second manufacturing line is payable over 60 months and has an effective interest rate of 4.8%.

5.15% Mortgage

In October 2020, the Company entered into a Mortgage Loan Agreement (the “Mortgage”), which provides for a $70.0 million loan with an effective interest rate of 5.7%. Proceeds under the Mortgage are secured by the Company’s Acton, Massachusetts headquarters. The Mortgage is repayable in monthly installments of $0.5 million, with the outstanding principal balance of the loan due in November 2025. The Mortgage contains customary covenants, none of which are considered restrictive to the Company’s operations.

Maturity of Debt

The maturity of debt as of December 31, 2020 is as follows:


Years Ending December 31,	(in millions)
2021	$	15.6
2022	15.9
2023	16.7
2024	415.4
2025	67.2

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, 2020 and 2019 are as follows:


	As of December 31,
	2020				2019
(in millions)	Carrying Value		Estimated Fair Value (1)		Carrying Value		Estimated Fair Value (1)
1.375% Convertible Senior Notes	$	323.9	$	1,104.2	$	306.9	$	512.8
0.375% Convertible Senior Notes	609.2		902.0		581.0		840.0
Total	$	933.1	$	2,006.2	$	887.9	$	1,352.8

(1) Fair value was determined using the Company’s quoted stock price and contractual conversion rate.

The Mortgage and equipment financings carrying values of $69.7 million and $58.6 million, respectively, approximate their fair values.

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 then 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 then current and former 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 into an escrow account for 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, the amount of which 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 then 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.

In June 2020, Roche Diabetes Care, Inc. (“Roche”) filed a patent infringement lawsuit against the Company in the United States District Court for the District of Delaware alleging that the Company’s manufacture and sale of its Omnipod Insulin Management System, Omnipod Starter Kit and Omnipod 10 Pod Pack in the United States infringed Roche’s now-expired U.S. Patent 7,931,613. Roche is seeking monetary damages and attorneys’ fees and costs. Since the patent expired in 2019, Roche is not seeking injunctive relief and the lawsuit will have no impact on ongoing sales of the Company’s products. The Company believes that it has meritorious defenses to Roche’s claims and intends to vigorously defend against them. The court has set a trial date of July 25, 2022. At this time, based on available information regarding this litigation, the Company is unable to reasonably assess the ultimate outcome of this case or determine an estimate, or range of estimates, of potential losses, which could be material.

In July 2020, the Company filed a patent infringement claim against Roche Diabetes Care Limited (“Roche Ltd.”) in the United Kingdom alleging that Roche Ltd.’s manufacture and sale of the Accu-Chek® Solo insulin pump and its consumable components infringes European Patent No. 1 335 764 in the United Kingdom. The Company is seeking an injunction to last until expiry of the patent and monetary damages. Roche Ltd. has responded to the complaint and argues that the patent is invalid and not infringed.

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. Other than as described above, 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 was subject to an arbitration proceeding in Switzerland. In December 2020, Insulet entered into a settlement agreement with the former distributor pursuant to which the Company paid the distributor an additional one-time payment of $36.2 million, for a total fee of $41.2 million, representing the cost to acquire the customer relationships. This amount was recorded as an intangible asset on the consolidated balance sheet. Since the customer relationships were acquired on July 1, 2018, the Company recorded cumulative amortization in the amount of $14.6 million during the fourth quarter of 2020, as if the total fee for the intangible

asset had been amortized since the acquisition date.

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, 2020, 3.6 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, 2020, 2019 and 2018 was recorded as follows:


	Year Ended December 31,
(in millions)	2020		2019		2018
Cost of revenue	$	1.2	$	1.0	$	0.8
Research and development	10.9		9.1		8.2
Selling, general and administrative	23.8		18.6		28.5
Total	$	35.9	$	28.7	$	37.5

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, 2019	1,729,512	$	45.39
Granted	68,832	$	202.18
Exercised	(674,542)	$	38.39		$	115.9
Forfeited and canceled	(45,314)	$	89.64
Outstanding at December 31, 2020	1,078,488	$	57.99	5.4	$	213.2
Vested, December 31, 2020	868,407	$	43.33	4.8	$	184.4
Vested or expected to vest, December 31, 2020	1,056,479	$	56.36	5.4	$	210.5

The aggregate intrinsic value of options exercised for the years ended December 31, 2019 and 2018 was $119.2 million and $23.5 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,
	2020		2019		2018
Risk-free interest rate	0.3% - 1.4%		1.8% - 2.6%		2.2% - 2.9%
Expected life of options (in years)	4.5		4.4 - 4.8		4.5 - 5.4
Dividend yield	—%		—%		—%
Expected stock price volatility	39.5% - 41.7%		40.1% - 40.5%		38.7% - 40.7%
Fair value per option	$	69.90	$	34.98	$	30.34

As of December 31, 2020, there was $6.7 million of unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a weighted average period of 2.5 years.

Restricted Stock Units

Restricted Stock Units (“RSUs”) generally vest in equal annual installments over a three-year period, however during the fourth quarter of 2020, the Company issued a company-wide grant, a significant portion of which immediately vested. 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, 2019	352,287	$	83.44
Granted	137,647	211.77
Vested	(206,257)	100.29
Forfeited	(23,990)	120.64
Outstanding at December 31, 2020	259,687	$	134.90

The weighted-average grant-date fair value per share of RSUs granted was $96.62 and $76.03 for the years ended December 31, 2019 and 2018, respectively. The total fair value of RSUs vested was $20.7 million, $11.6 million and $14.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020, there was $22.5 million of unrecognized compensation cost related to time-based RSUs, which is expected to be recognized over a weighted-average period of 1.8 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, 2019	299,156	$	73.35
Granted	141,942	202.23
Vested	(187,660)	48.66
Forfeited	(23,349)	105.58
Outstanding at December 31, 2020 (1)	230,089	$	110.63

(1) Based on 154% achievement of the performance metrics, approximately 83,000 shares of Insulet were earned for awards that were granted in 2018 for the performance period ended December 31, 2020. These shares vested in February 2021.

The weighted-average grant-date fair value per share of PSUs granted was $95.91 and $75.07 for the years ended December 31, 2019 and 2018, respectively. The total fair value of PSUs vested was $9.1 million, $3.2 million and $7.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020, there was $12.4 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 participate 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 38,313, 51,502 and 46,343 shares of common stock for the years ended December 31, 2020, 2019 and 2018, respectively, to employees participating in the ESPP. As of December 31, 2020, 508,762 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,
	2020	2019	2018
Risk-free interest rate	0.1% - 0.2%	1.6% - 2.3%	2.1% - 2.5%
Expected term (in years)	0.5	0.5	0.5
Dividend yield	—%	—%	—%
Expected stock price volatility	29.7% - 38.5%	27.5% - 31.4%	23.4% - 27.0%

The weighted average grant date fair value of the six-month option inherent in the ESPP was $55.10, $46.30, and $26.01, for the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020, 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 Income (Loss)

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


(in millions)	Foreign Currency Translation Adjustment		Unrealized (Losses) Gains on Available-for-sale Securities		Accumulated Other Comprehensive Income (Loss)
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)
Other comprehensive income (loss)	6.8		(0.1)		6.7

Balance, December 31, 2020	$	5.2	$	0.3	$	5.5

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 6% 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 $5.4 million, $5.3 million and $3.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Note 17. Interest Expense, Net

Interest expense, net of portion capitalized was as follows:


	Years Ended December 31,
(in millions)	2020		2019		2018
Contractual interest	$	9.5	$	9.5	$	9.8
Accretion of debt discount	42.3		32.8		26.7
Amortization of debt issuance costs	2.9		2.8		2.6
Capitalized interest	(6.6)		(10.5)		(10.2)
Interest expense, net of portion capitalized	48.1		34.6		28.9
Interest income	(3.0)		(6.9)		(7.6)
Interest expense, net	$	45.1	$	27.7	$	21.3

Note 18. Income Taxes

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


	Years Ended December 31,
(in millions)	2020		2019		2018
U.S.	$	(1.6)	$	2.5	$	(3.0)
Foreign	11.3		12.0		8.2
Income before income taxes	$	9.7	$	14.5	$	5.2

Income tax expense consists of the following:


	Years Ended December 31,
(in millions)	2020		2019		2018
Current:
U.S. State	$	0.2	$	0.2	$	0.2
Foreign	4.0		3.4		2.1
Total current expense	4.2		3.6		2.3
Deferred:
U.S. Federal	—		(0.1)		—

Foreign	(1.3)		(0.6)		(0.4)
Total deferred expense	(1.3)		(0.7)		(0.4)
Income tax expense	$	2.9	$	2.9	$	1.9

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


	Years Ended December 31,
	2020		2019		2018
U.S. statutory rate	21.0	%	21.0	%	21.0	%
Foreign rate differential	7.0		4.2		(2.4)
State taxes, net of federal benefit	1.3		1.3		2.9
Tax credits	(40.5)		(15.4)		(13.7)
Stock-based compensation	(311.1)		(158.7)		(159.1)
Loss on extinguishment of debt	—		14.8		—
Non-deductible officers’ compensation	30.0		1.9		81.3
Permanent items	2.1		3.0		16.8
Foreign income taxed in the U.S.	(21.0)		19.0		26.1
Change in valuation allowance	336.2		130.6		67.0
Other	4.6		(1.9)		(2.9)
Effective income tax rate	29.6	%	19.8	%	37.0	%

As of December 31, 2020, 2019 and 2018 the Company had no uncertain tax positions.

No provision for income taxes has been provided on undistributed earnings of the Company's foreign subsidiaries, except for Canada, because such earnings are indefinitely reinvested in the foreign operations. The Company has recorded a deferred tax liability for withholding tax that could be incurred upon repatriation of earnings from its Canadian subsidiary, the amount of which is not significant. A deferred tax liability related to the repatriation of approximately $24.3 million indefinitely reinvested earnings would not be material to the Company’s consolidated financial statements, primarily due to treaty-based withholding tax rates in the jurisdictions in which the Company operates.

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 U.S. federal and state tax returns are currently open to examination for tax years 2017 through 2019. The Company is currently under exam in Ontario, Canada. There are no uncertain tax positions or adjustments associated with the exam at this time. In addition, the Company's U.S. net operating loss carryforwards from 2001 and forward may be subject to examination if the losses are utilized in future years.

Interest and penalties are classified as a component of income tax expense and were not material for any period presented.

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


	As of December 31,
(in millions)	2020		2019
Deferred tax assets:
Net operating loss carryforwards	$	173.8	$	144.6
Tax credits	21.3		15.2
Capital loss carryforwards	12.2		12.7
Stock-based compensation	5.8		8.9
Other	15.4		13.8
Total deferred tax assets	228.5		195.2
Deferred tax liabilities:
Prepaid assets	(3.5)		(2.1)
Depreciation and amortization	(6.9)		(2.2)
Amortization of debt discount	(60.6)		(73.4)
Capitalized contract acquisition costs	(7.5)		(7.1)
Other	(4.6)		(5.0)
Total deferred tax liabilities	(83.1)		(89.8)
Net deferred tax asset before valuation allowance	145.4		105.4
Valuation allowance	(143.4)		(104.4)
Net deferred tax asset	$	2.0	$	1.0

The Company maintained a valuation allowance of $143.4 million and $104.4 million at December 31, 2020 and 2019, respectively, against U.S. federal and state deferred tax assets, as management has determined that it is more-likely-than-not that these net deferred tax assets will not be realized. The valuation allowance is based on cumulative tax losses in the U.S. and the uncertainty of generating future taxable income in the U.S. to utilize our loss and credit carryforwards. The $39.0 million increase in the Company’s valuation allowance during the year ended December 31, 2020 was primarily due to current-year net operating losses in the U.S.

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


	Years Ended December 31,
(in millions)	2020		2019
U.S. Federal	$	732.4	$	607.4
State	$	341.3	$	298.8
Foreign	$	5.4	$	—

For U.S. federal tax purposes, $192.1 million of the net operating losses have an indefinite carryforward period. The remaining U.S. federal carryforwards, if not utilized, will begin to expire in 2021 and will continue to expire through 2037, and the state net operating loss carryforwards expire through 2040. 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 in the U.S. Research and development and other tax credits were $22.8 million and $16.1 million at December 31, 2020 and 2019, respectively. If not utilized, federal research and development credits will begin to expire in 2022. These loss and credit carryforwards, which may be utilized in a future period, may be subject to limitations based on changes in the ownership of the Company ordinary shares.

Note 19. Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income 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 weighted-average number of common shares used in the computation of basic and diluted net income per share were as follow:


	Years Ended December 31,
(in thousands)	2020	2019	2018
Weighted average number of common shares outstanding, basic	64,735	60,594	58,860
Stock options	1,025	1,487	1,678
Restricted stock units	186	223	470

Weighted average number of common shares outstanding, diluted	65,946	62,304	61,008

The number of common share equivalents excluded from the computation of diluted net income 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,
(in thousands)	2020	2019	2018

1.25% Convertible Senior Notes	—	—	5,911
1.375% Convertible Senior Notes	4,319	4,319	4,319
0.375% Convertible Senior Notes	3,528	3,528	—
Unvested restricted stock units	282	431	290
Outstanding stock options	58	13	237

Total	8,187	8,291	10,757

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

The following table sets forth activities in the Company’s valuation allowance accounts:


Description	Balance at Beginning of Year		Additions Charged to Costs and Expenses		Other(1)		Deductions		Balance at End of Year
(in millions)
Year Ended December 31, 2020
Allowance for credit losses	$	3.8	$	3.3	$	1.1	$	(5.3)	$	2.9
Reserve for rebates	$	12.1	$	82.5	$	—	$	(77.7)	$	16.9
Deferred tax valuation allowance	$	104.4	$	61.7	$	—	$	(22.7)	$	143.4
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

(1) Increase in allowance for credit losses from the adoption of ASU 2016-13, Credit Losses (Topic 326). Refer to Note 2 to the consolidated financial statements included in Item 8 for additional information.

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