UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

_____________________________________________________



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2016~~2017



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-33462

INSULET CORPORATION

(Exact name of Registrant as specified in its charter)



Delaware		04-3523891
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

600 Technology Park Drive, Suite 200 Billerica, Massachusetts		01821
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (978) 600-7000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes xNo¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ~~Yes~~xNo¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x		Accelerated filer	¨

Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨

			Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of November ~~2, 2016,~~1, 2017, the registrant had ~~57,426,072~~58,187,756 shares of common stock outstanding.

INSULET CORPORATION

QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED

September 30, ~~2016~~2017

Table Of Contents



PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements	3
Consolidated Balance Sheets as of September 30, ~~2016~~2017 (Unaudited) and December 31, ~~2015~~2016	3
Consolidated Statements of Operations for the three and nine months ended September 30, ~~2016~~2017 and ~~2015~~2016 (Unaudited)	4
Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, ~~2016~~2017 and ~~2015~~2016 (Unaudited)	5
Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2016~~2017 and ~~2015~~2016 (Unaudited)	6
Condensed Notes to Consolidated Financial Statements (Unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3. Quantitative and Qualitative Disclosures About Market Risk	3634
Item 4. Controls and Procedures	3634

PART II. OTHER INFORMATION
Item 1. Legal Proceedings	3735
Item 1A. Risk Factors	3735
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3735
Item 3. Defaults Upon Senior Securities	3735
Item 4. Mine Safety Disclosures	3735
Item 5. Other Information	3735
Item 6. Exhibits	3836
Signatures	3937

PART I - FINANCIAL INFORMATION



Item 1.	Consolidated Financial Statements (Unaudited)

INSULET CORPORATION

CONSOLIDATED BALANCE SHEETS


(in thousands, except share data)	September 30, 2016			December 31, 2015
(in thousands, except share and per share data)							September 30, 2017			December 31, 2016
ASSETS	(Unaudited)						(Unaudited)
Current Assets
Cash and cash equivalents	$	215,402		$	122,672		$	102,233		$	137,174
Short-term investments (Note 5)	67,293			—
Accounts receivable, net (Note 9)	38,548			42,530
Inventories, net (Note 10)	32,663			12,024
Short-term investments							173,523			161,396
Accounts receivable, net							47,173			28,803
Inventories, net							35,054			35,514
Prepaid expenses and other current assets	7,901			4,283			8,037			7,073
Current assets of discontinued operations (Note 3)	—			9,252
Total current assets	361,807			190,761			366,020			369,960
Property and equipment, net (Note 2)	50,911			41,793
Other intangible assets, net (Note 11)	651			933
Property and equipment, net							88,491			44,753
Other intangible assets, net							4,369			2,041
Goodwill	39,730			39,607			39,854			39,677
Other assets	98			76			1,614			216
Long-term assets of discontinued operations (Note 3)	—			1,956
Total assets	$	453,197		$	275,126		$	500,348		$	456,647
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	18,212		$	15,213		$	28,648		$	13,160
Accrued expenses and other current liabilities (Note 12)	33,732			36,744
Accrued expenses and other current liabilities							44,897			41,228
Deferred revenue	1,247			2,361			1,395			1,309
Current portion of capital lease obligations (Note 7)	1,061			5,519
Current liabilities of discontinued operations (Note 3)	—			5,319
Total current liabilities	54,252			65,156			74,940			55,697
Capital lease obligations (Note 7)	—			269
Long-term debt, net (Note 6)	328,962			171,698
Long-term debt, net of discount							344,953			332,768
Other long-term liabilities	4,888			3,952			6,201			5,032
Total liabilities	388,102			241,075			426,094			393,497
Commitments and contingencies (Note 13)
Commitments and contingencies (Note 12)
Stockholders’ Equity
Preferred stock, $.001 par value:
Authorized: 5,000,000 shares at September 30, 2016 and December 31, 2015. Issued and outstanding: zero shares at September 30, 2016 and December 31, 2015.	—			—
Authorized: 5,000,000 shares at September 30, 2017 and December 31, 2016. Issued and outstanding: zero shares at September 30, 2017 and December 31, 2016.							—			—
Common stock, $.001 par value:
Authorized: 100,000,000 shares at September 30, 2016 and December 31, 2015. Issued and outstanding: 57,418,432 and 56,954,830 shares at September 30, 2016 and December 31, 2015, respectively.	57			57
Authorized: 100,000,000 shares at September 30, 2017 and December 31, 2016. Issued and outstanding: 58,156,128 and 57,457,967 shares at September 30, 2017 and December 31, 2016, respectively.							58			57
Additional paid-in capital	736,730			686,193			774,714			744,243
Accumulated other comprehensive loss	(387		)	(654		)	(123		)	(726		)
Accumulated deficit	(671,305		)	(651,545		)	(700,395		)	(680,424		)
Total stockholders’ equity	65,095			34,051			74,254			63,150
Total liabilities and stockholders’ equity	$	453,197		$	275,126		$	500,348		$	456,647

INSULET CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except share and per share data)	2016			2015			2016			2015
(in thousands, except per share data)													2017			2016			2017			2016
Revenue	$	94,871		$	71,393		$	263,414		$	180,092		$	121,775		$	94,871		$	333,244		$	263,414
Cost of revenue	39,230			39,823			113,265			88,814			48,151			39,230			135,583			113,265
Gross profit	55,641			31,570			150,149			91,278			73,624			55,641			197,661			150,149
Operating expenses:
Research and development	13,734			10,035			39,676			30,311			20,141			13,734			55,670			39,676
Sales and marketing	22,147			21,307			69,119			55,025			28,718			22,147			86,288			69,119
General and administrative	17,342			15,023			47,923			42,062			22,718			17,342			62,322			47,923
Total operating expenses	53,223			46,365			156,718			127,398			71,577			53,223			204,280			156,718
Operating income (loss)	2,418			(14,795		)	(6,569		)	(36,120		)	2,047			2,418			(6,619		)	(6,569		)
Interest expense	3,029			3,167			9,252			9,567			4,709			3,029			14,512			9,252
Other income, net	211			21			510			76
Other income (expense), net													556			211			1,478			510
Loss on extinguishment of long-term debt	2,551			—			2,551			—			—			2,551			—			2,551
Interest expense and other income, net	(5,369		)	(3,146		)	(11,293		)	(9,491		)	4,153			5,369			13,034			11,293
Loss from continuing operations before income taxes	(2,951		)	(17,941		)	(17,862		)	(45,611		)	(2,106		)	(2,951		)	(19,653		)	(17,862		)
Income tax expense (Note 15)	66			44			195			83
Income tax expense													121			66			318			195
Net loss from continuing operations	$	(3,017	)	$	(17,985	)	$	(18,057	)	$	(45,694	)	(2,227		)	(3,017		)	(19,971		)	(18,057		)
Loss from discontinued operations, net of tax ($0 and $18 for the three months ended September 30, 2016 and 2015, respectively and $408 and $68 for the nine months ended September 30, 2016 and 2015, respectively)	(64		)	(942		)	(1,703		)	(499		)
Loss from discontinued operations, net of tax ($0 for each of the three months ended September 30, 2017 and 2016 and $0 and $408 for the nine months ended September 30, 2017 and 2016, respectively)													—			(64		)	—			(1,703		)
Net loss	$	(3,081	)	$	(18,927	)	$	(19,760	)	$	(46,193	)	$	(2,227	)	$	(3,081	)	$	(19,971	)	$	(19,760	)
Net loss per share basic and diluted:
Net loss from continuing operations per share	$	(0.05	)	$	(0.32	)	$	(0.32	)	$	(0.81	)	$	(0.04	)	$	(0.05	)	$	(0.34	)	$	(0.32	)
Net loss from discontinued operations per share	$	—		$	(0.02	)	$	(0.03	)	$	(0.01	)	$	—		$	—		$	—		$	(0.03	)
Weighted-average number of shares used in calculating net loss per share	57,341,063			56,898,281			57,189,423			56,735,944			58,100			57,341			57,925			57,189

INSULET CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2016 2015 2016 2015
Net loss $ (3,081 ) $ (18,927 ) $ (19,760 ) $ (46,193 )
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment, net of tax (102 ) (457 ) 302
(454 )
Unrealized loss on available-for-sale securities (43 ) —
(35 ) —
Total other comprehensive (loss) income, net of tax (145 ) (457 ) 267
(454 )
Total comprehensive loss $ (3,226 ) $ (19,384 ) $ (19,493 ) $ (46,647 )



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2017			2016			2017			2016
Net loss	$	(2,227	)	$	(3,081	)	$	(19,971	)	$	(19,760	)
Other comprehensive income, net of tax
Foreign currency translation adjustment, net of tax	329			(102		)	594			302
Unrealized gain (loss) income on available-for-sale securities, net of tax	76			(43		)	9			(35		)
Total other comprehensive income (loss), net of tax	405			(145		)	603			267
Total comprehensive loss	$	(1,822	)	$	(3,226	)	$	(19,368	)	$	(19,493	)

INSULET CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2016			2015
(in thousands)							2017			2016
Cash flows from operating activities
Net loss	$	(19,760	)	$	(46,193	)	$	(19,971	)	$	(19,760	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization	10,474			11,406			10,533			10,474
Non-cash interest expense	6,117			5,721
Non-cash interest and other expense							12,185			6,117
Stock-based compensation expense	16,850			13,852			23,551			16,850
Loss on extinguishment of long-term debt	2,551			—			—			2,551
Provision for bad debts	1,889			2,762			1,502			1,889
Other	139			—			519			139
Changes in operating assets and liabilities:
Accounts receivable	2,994			5,286			(19,757		)	2,994
Inventories	(21,287		)	312			428			(21,287		)
Prepaid expenses and other assets	(3,268		)	42			(1,290		)	(3,268		)
Accounts payable, accrued expenses and other current liabilities	(632		)	11,782			10,502			(632		)
Deferred revenue	(982		)	703			537			(982		)
Other long-term liabilities	756			370			668			756
Net cash (used in) provided by operating activities	(4,159		)	6,043
Net cash provided by (used in) operating activities⁽¹⁾							19,407			(4,159		)
Cash flows from investing activities
Purchases of property and equipment	(19,205		)	(7,126		)
Purchases of short-term investments	(76,241		)	—
Receipts from the sale of short-term investments	8,905			—
Proceeds from divestiture of business, net (Note 3)	5,714			—
Acquisition of Canadian distribution business	—			(4,715		)
Purchases of property, equipment and software⁽²⁾							(47,813		)	(19,205		)
Purchases of investments							(115,056		)	(76,241		)
Receipts from the maturity or sale of investments							101,384			8,905
Proceeds from divestiture of business, net							—			5,714
Net cash used in investing activities	(80,827		)	(11,841		)	(61,485		)	(80,827		)
Cash flows from financing activities
Principal payments of capital lease obligations	(4,727		)	(4,283		)	(269		)	(4,727		)
Proceeds from issuance of convertible notes, net of issuance costs	333,904			—			—			333,904
Repayment of convertible notes	(153,628		)	—			—			(153,628		)
Proceeds from issuance of common stock, net of offering costs	4,848			7,043
Proceeds from exercise of stock options and issuance of common stock							10,735			4,848
Payment of withholding taxes in connection with vesting of restricted stock units	(2,839		)	(2,468		)	(3,816		)	(2,839		)
Net cash provided by financing activities	177,558			292			6,650			177,558
Effect of exchange rate changes on cash	158			(220		)	487			158
Net increase (decrease) in cash and cash equivalents	92,730			(5,726		)
Net (decrease) increase in cash and cash equivalents							(34,941		)	92,730
Cash and cash equivalents, beginning of period	122,672			151,193			137,174			122,672
Cash and cash equivalents, end of period	$	215,402		$	145,467		$	102,233		$	215,402
Non-cash investing and financing activities
Purchases of property and equipment under capital lease	$	—		$	5,721
Allocation to equity for conversion feature for issuance of convertible notes	$	66,689		$	—
Allocation to equity for conversion feature for the repurchase of convertible notes	$	(32,865	)	$	—

⁽¹⁾2016 includes activity related to discontinued operations. See Note 3 to the consolidated financial statements for discussion of discontinued operations.

⁽²⁾Cash outflows from purchases of property, equipment and software for the nine months ended September 30, 2017 includes $2.0 million of purchases made in prior periods that were included in accounts payable and accrued expenses as of December 31, 2016 and excludes $10.7 million of purchases made during the nine months ended September 30, 2017 that were included in accounts payable and accrued expenses as of September 30, 2017.

INSULET CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Nature of the Business

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

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

The Company announced on July 20, 2017 its plans to assume, on July 1, 2018, the distribution, sales, marketing, training and support activities of its Omnipod System across Europe following the expiration of its global distribution agreement with Ypsomed Distribution AG ("Ypsomed') on June 30, 2018. Until the expiration of the agreement, Ypsomed will remain the distributor of the Company's Omnipod products in Europe. The Company will be required to pay to Ypsomed a per unit fee for direct sales over the 12 month period following the expiration of the global distribution agreement of its Omnipod device to former customers of Ypsomed, as defined in the distribution agreement. The Company will recognize a liability for this fee as it sells its Omnipod device to these customers during the twelve-month period beginning July 1, 2018.

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

The Company acquired Neighborhood Holdings, Inc. and its wholly-owned subsidiaries (collectively, “Neighborhood Diabetes”) in June 2011. Through Neighborhood Diabetes, the Company provided customers with blood glucose testing supplies, traditional insulin pumps, pump supplies and pharmaceuticals and had the ability to process claims as either durable medical equipment or through pharmacy benefits. In February 2016, the Company sold Neighborhood Diabetes to Liberty Medical LLC ("Liberty Medical"). Additional information regarding the disposition and treatment of the Neighborhood Diabetes business as discontinued operations is provided in Note 3 to ~~the~~these consolidated financial ~~statements included in this Form 10-Q.~~statements.

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

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

In July 2015, the Company executed an asset purchase agreement whereby it acquired the Canadian Omnipod distribution operations from GlaxoSmithKline ("GSK"). With the acquisition, the Company assumed all distribution, sales, marketing, training and support activities for the Omnipod system in Canada.

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The unaudited consolidated financial statements in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles (“U.S. GAAP” or "GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, ~~2016~~2017 are not necessarily indicative of the results that may be expected for the full year ending December 31, ~~2016,~~2017, or for any other subsequent interim period.

The unaudited consolidated financial statements in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016.

Reclassification of Prior Period Balances

Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation including the reclassification of capitalized internal-use software costs from property and equipment to other intangible assets for the Company's audited consolidated financial statements, as recast to reflect Neighborhood Diabetes as discontinued operations, contained in our Current Report on Form 8-K filed with the SEC on September 6, 2016.year ended December 31, 2016 upon adoption of Accounting Standards Update ("ASU") 2016-19, Technical Corrections and Improvements.

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in the application of certain of its significant accounting policies that may materially affect the reported amounts of assets, liabilities, equity, revenue and expenses. The most significant estimates used in these financial statements include the valuation of stock-based compensation ~~expense,~~expense; the fair value of intangible assets acquired in businesses ~~accounts receivable, inventories, goodwill,~~combinations; the valuation of inventory; the fair value of reporting units used to calculate the potential impairment of goodwill; the valuation of deferred ~~revenue, equity instruments,~~revenue; the calculation of gains and losses, if any, on the retirement or conversion of convertible ~~debt,~~debt; the estimated useful lives of property and equipment and

intangible ~~assets,~~assets; the amount of internal use software development costs that qualify for capitalization; the estimated amount, if any, of accrued contingent liabilities as well as warranty and doubtful accounts allowance reserve calculations. Actual results may differ from those estimates.

Principles of Consolidation

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

Foreign Currency Translation

For foreign operations, asset and liability accounts are translated at exchange rates as of the balance sheet date; income and expenses are translated using weighted average exchange rates for the reporting period. Resulting translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders' equity. Gains and losses arising from transactions and ~~translation~~revaluation of period-end balances denominated in currencies other than the local entity's functional currency ~~primarily the Canadian dollar,~~ are included in other income (expense), net, and were not material in the three and nine months ended September 30, ~~2016~~2017 and ~~2015.~~2016. Exposure to gains and losses from such transactions and revaluations are primarily related to Canadian dollar exchange rate fluctuations.

~~Principles of Consolidation~~

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

Cash and Cash Equivalents

For the purpose of ~~the~~ financial statement classification, the Company considers all highly-liquid investment instruments with original maturities of 90 days or less, when purchased, to be cash equivalents. Cash equivalents include money market mutual funds, corporate bonds and certificates of deposit which are carried at cost which approximates their fair value. ~~Outstanding letters~~Included in the Company's cash and cash equivalents are restricted cash amounts set aside for collateral on an outstanding letter of credit, related to a security ~~deposits~~deposit for a lease ~~obligations, totaled $1.2~~obligation, totaling $0.5 million as of September 30, ~~2016~~2017 and $1.2 million as of December 31, ~~2015.~~2016.

Short-term Investments

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

The Company reviews investments for other-than-temporary impairment when the fair value of an investment is less than its amortized cost. If an available-for-sale security is other than temporarily impaired, the loss is charged to ~~either earnings or shareholders' equity depending on the Company's intent and ability to retain the security until the full cost basis can be recovered.~~earnings.

Property and Equipment

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

Property and equipment included ~~$38.3~~$49.0 million and ~~$28.2~~$39.0 million of accumulated depreciation as of September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively.

Business Combinations

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

Segment Reporting

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

Goodwill

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

As the Company operates in one segment, the Company has considered whether that segment contains multiple reporting units. The Company has concluded that there is a single reporting unit as the Company does not have segment managers and discrete financial information below consolidated results is not reviewed on a regular basis. Based on this conclusion, goodwill is tested for impairment at the enterprise level. The Company has the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of its sole reporting unit is less than its carrying amount. This qualitative analysis is used as a basis for determining whether it is necessary to perform the two-step goodwill impairment analysis. If the Company determines that it is more likely than not that its fair value is less than its carrying amount, then the two-step goodwill impairment test will be performed. The first step compares the carrying value of the reporting unit to its fair value using either a market approach or a discounted cash flow analysis. If the ~~reporting unit’s~~ carrying value of the reporting unit, including goodwill, exceeds its fair value, the Company ~~would~~will record an impairment loss to the extent that the reporting unit's carrying value ~~of goodwill~~

exceeds its implied fair ~~value.~~value as determined in step two of the impairment test. There was no impairment of goodwill during the three and nine months ended September 30, ~~2016~~2017 and ~~2015.~~2016.

Revenue Recognition

The Company generates ~~most~~the majority of its revenue from ~~global~~ sales of its Omnipod System to customers and third-party distributors who resell the ~~Omnipod System. Revenue also includes~~products to patients with diabetes, and to a lesser extent from product sales ~~of devices based on~~to pharmaceutical companies who use the ~~Omnipod~~Company’s technology ~~platform to global pharmaceutical and biotechnology companies~~as a delivery method for ~~the delivery of subcutaneous drugs across multiple therapeutic areas.~~their pharmaceuticals.

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

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

~~Transfer of~~Revenue is recognized when title and risk and rewards of ownership ~~are passed~~have transferred to the ~~patient or third-party distributor upon shipment of the products.~~customer.

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

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

As of September 30, ~~2016~~2017 and December 31, ~~2015~~,2016, the Company had deferred revenue of ~~$1.8~~$2.6 million and ~~$2.5~~$1.9 million, respectively, which included ~~$0.5~~$1.2 million and ~~$0.2~~$0.6 million classified in other long-term liabilities ~~in each period~~ as of September 30, ~~2016~~2017 and December 31, ~~2015~~,2016, respectively. Deferred revenue primarily relates to undelivered elements within certain of the Company's developmental arrangements and other instances where the Company has not yet met the revenue recognition criteria.

Collaborative Arrangements

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

Eli Lilly and Company and Concentrated Insulins: In May 2013 and January 2016, the Company entered into agreements with Eli Lilly and Company to develop new versions of the Omnipod tubeless insulin delivery system specifically designed to deliver a concentrated form of insulin used by higher insulin-requiring patients with diabetes. Under the terms of these arrangements, the parties share the responsibility of the permissible costs that are incurred. Consideration received and payments made by the Company under the terms of the arrangements are recorded within research and development expense.

Shipping and Handling Costs

The Company does not typically charge its customers for shipping and handling costs associated with shipping its product to its ~~customers.~~customers unless non-standard shipping and handling services are requested. These shipping and handling costs are included in general and administrative expenses and were ~~$1.1~~$1.3 million and ~~$0.6~~$1.1 million for the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively, and were ~~$2.8~~$3.5 million and ~~$1.6~~$2.8 million for the nine months ended September 30, 2017 and 2016, ~~and 2015,~~ respectively.

Concentration of Credit Risk

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

The Company purchases ~~Omnipods~~Omnipod Systems from ~~Flextronics International~~Flex Ltd., its single source ~~supplier.~~contract manufacturer. As of each of September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, liabilities to this vendor represented approximately ~~29%~~21% and ~~28%~~16%, respectively, of the combined balance of accounts payable, accrued expenses and other current ~~liabilities, respectively.~~liabilities.

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


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended September 30,			Nine Months Ended September 30,
	2016	2015	2016	2015	2017	2016		2017	2016
Amgen, Inc.	17%	10%	17%	10%	16%	17	%	16%	17%
Ypsomed Distribution AG	16%	15%	15%	11%
Ypsomed					23%	16	%	21%	15%
RGH Enterprises, Inc.	10%	14%	10%	13%	11%	10	%	10%	10%

~~Reclassification~~Other Significant Policies:

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

Certain reclassifications have been made to prior periods amounts to conform to the current period financial statement presentation including adjusting footnotes within to reflect the presentation of discontinued operations. These reclassifications have no effect on the previously reported net loss.

~~Recent~~



Fair Value Measurements	Note	4	Page	14

Convertible Debt	Note	6	Page	16

Accounts Receivable and Allowance for Doubtful Accounts	Note	8	Page	18

Inventories	Note	9	Page	19

Other Intangible Assets	Note	10	Page	19

Accrued Expenses and Other Current Liabilities - Product Warranty Costs	Note	11	Page	20

Commitments and Contingencies	Note	12	Page	21

Equity: Stock-Based Compensation	Note	13	Page	22

Income Taxes	Note	14	Page	25

Recently Adopted Accounting ~~Pronouncements~~Standards:

In ~~May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09,~~ ~~Revenue from Contracts with Customers~~ ("ASU 2014-09"). ASU 2014-09 requires that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Under this guidance, a company makes additional estimates regarding performance conditions and the allocation of variable consideration. The guidance is effective in fiscal years beginning January 1, 2018, with early adoption permitted. The Company is currently evaluating the impact of ASU 2014-09. The Company has not yet selected a transition method nor has it determined the effect of the standard on its consolidated financial position and results of operations.

~~In June 2014,~~December 2016, the FASB issued ASU ~~No. 2014-12,~~2016-19, ~~Compensation - Stock Compensation (Topic 718), Accounting for Share-Based Payments when the terms of an award provide that a performance target could be achieved after the requisite service period~~Technical Corrections and Improvements ("ASU ~~2014-12"~~2016-19"). ASU ~~2014-12 clarifies~~2016-19 includes numerous technical corrections and clarifications to GAAP that are designed to remove inconsistencies in the ~~period over which compensation cost would be recognized~~board’s accounting guidance. Several provisions in ~~awards with a performance target that affects vesting~~this accounting guidance were effective immediately and that could be achieved after the requisite service period. Compensation cost would be recognized over the required service period, if it is probable that the performance condition will be achieved. The guidance is effective in fiscal years beginning after January 1, 2016, with early adoption permitted. The Company has adopted ASU 2014-12 on January 1, 2016 and its adoption did not have an impact on the Company’s consolidated financial statements.

~~In August 2014,~~ Additional provisions in this accounting guidance are effective for the ~~FASB issued ASU No. 2014-15,~~ ~~Presentation of Financial Statements- Going Concern ("ASU 2014-15").~~ ~~ASU No. 2014-15 requires management to evaluate whether there is substantial doubt about~~Company in the ~~entity’s ability to continue as a going concern within one~~current fiscal year, ~~after~~including the ~~date~~clarification that the ~~financial statements are issued.~~license of internal-use software shall be accounted for as the acquisition of an intangible asset. The ~~new~~ standard ~~is effective~~allows for ~~fiscal years ending after December 15, 2016~~prospective or retrospective adoption and ~~interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. The~~the Company has ~~concluded that if this standard had been adopted~~elected retrospective adoption. As a result of adoption, the Company reclassified $4.1 million of gross internal-use software costs, net of accumulated amortization of $2.6 million, from property and equipment to other intangible assets as of ~~September 30, 2016, substantial doubt about the Company’s ability to continue as a going concern would not exist.~~December 31, 2016.

In July 2015, the FASB issued ASU ~~No.~~ 2015-11, Simplifying the Measurement of Inventory ("ASU 2015-11"). ASU 2015-11 amends existing guidance and requires entities to measure most inventory at the lower of cost and net realizable value. The guidance is effective prospectively for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. Upon adoption, entities must disclose the nature of and reason for the accounting change. The Company ~~is currently evaluating the impact of ASU 2015-11.~~

~~In September 2015, the FASB issued ASU No. 2015-16,~~ ~~Business Combinations,Simplifying the Accounting for Measurement Period Adjustments~~ ("ASU 2015-16"). ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. The guidance is effective in 2016 for calendar year-end public entities. Early adoption is permitted. The Company has adopted ASU ~~2015-16~~2015-11 on January 1, ~~2016~~2017 and its adoption did not have ana material impact on the consolidated financial statements.

The Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09") on January 1, 2017 using the modified retrospective method. ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The adoption of ASU 2016-09 resulted in the Company increasing its deferred tax assets (tax effected) by approximately $23.8 million, which is offset by a full valuation allowance. Overall, adoption of the standard did not have a material impact on the Company's consolidated financial statements.

The Company adopted ASU 2016-18, Restricted Cash (a consensus of the Emerging Issues Task Force) ("ASU 2016-18") as of January 1, 2017 using the retrospective transition method. ASU 2016-18 requires the statement of cash flows to show the changes in the total of cash, cash equivalents, and restricted cash. As the Company includes restricted cash within cash and cash equivalents on the consolidated balance sheet and discloses the carrying value of restricted cash in the notes to the consolidated financial statements, there was no impact on the statement of cash flows upon the adoption of ASU 2016-18.

Accounting Standards Issued and Not Yet Adopted:

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 and its related amendments (collectively known as ASC 606) requires that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under this guidance, an entity makes additional estimates regarding performance conditions and the allocation of variable consideration and must evaluate whether revenue derived from a

contract should be recognized at a point in time or over time. The guidance is effective in fiscal years beginning January 1, 2018, with early adoption permitted. The Company plans to adopt the standard as of the required effective date using the modified retrospective method. Under this method, the new guidance is applied to contracts that are not yet completed as of the date of adoption with the cumulative effect of initially applying the guidance recognized through accumulated deficit at the date of initial application.

The Company continues to evaluate the potential impact of ASC 606 on its consolidated financial statements and related disclosures. As part of the Company's assessment work to date, the Company has formed an implementation work team, completed training on the ASC 606 revenue recognition model and is continuing to review and finalize its conclusions relative to its contracts with customers. For the remainder of 2017, the Company plans to finalize its evaluation and implement any required policy, process, and internal control changes required as a result of that evaluation.

While the Company continues to assess all potential impacts of the new standard on its consolidated financial statements, the Company currently expects that the adoption of ASC 606 will accelerate the timing of revenue recognition relative to a portion of its drug delivery product line whereby revenue will be recognized as the product is produced pursuant to the customer’s firm purchase commitments (as opposed to at a point in time when the product is shipped to the customer) as the Company has an enforceable right to payment for performance completed to date and the inventory has no alternative use. Upon the adoption of ASC 606 using the modified retrospective method on January 1, 2018, the Company expects to record an adjustment to accumulated deficit for the amount that would have been recognized in 2017 under the new guidance and would not have been recognized until shipment of the product in 2018 under the current guidance. In addition to the aforementioned impact on drug delivery revenue, the adoption of ASC 606 will impact the treatment of contract acquisition costs such as commissions, which will be capitalized and amortized over the expected period of benefit. Upon adoption, the Company expects to increase its current and other assets for the net value of commissions paid prior to adoption less amortization to date. The new standard will also require an enhanced level of disclosures in the Company’s quarterly and annual consolidated financial statements.

In January 2016, the FASB issued ~~Accounting Standards Update~~ASU 2016-01 ("ASU 2016-01"), Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 changes the current GAAP model for the accounting of equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. All equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification (changes in fair value reported in other comprehensive income (loss)) for equity securities with readily determinable fair values. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The classification and measurement guidance will be effective in fiscal years beginning after December 15, 2017, and interim periods within those years. ~~The~~While the Company is ~~currently evaluating~~continuing to evaluate the potential impact of ASU ~~2016-01.~~2016-01, the Company anticipates that the new guidance may create some volatility in earnings related to changes in fair value of its short term marketable securities. The Company does not expect the adoption of ASU 2016-01 to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU ~~No.~~ 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The

guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted for all entities. ~~The~~While the Company is currently evaluating the impact of ASU ~~2016-02.~~

~~In March 2016,~~2016-02, the ~~FASB issued ASU 2016-09,~~ ~~Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting~~ ~~("ASU 2016-09"). ASU 2016-09 simplifies several aspects of~~Company currently expects that the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classificationnew guidance will require an increase in the ~~statement of cash flows. The guidance is effective for annual reporting periods beginning after December 15, 2016,~~Company's long-lived assets and ~~interim periods within those years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of ASU 2016-09.~~a corresponding increase to long-term obligations associated with leased office and warehouse space.

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

~~Other Significant Policies:~~

~~The following table identifies~~In January 2017, the ~~Company's other significant~~FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies the accounting ~~policies and~~for goodwill impairments by eliminating "Step 2" from the ~~note and page where a detailed description of each policy can be found.~~

Fair Value Measurements
Note 4
Page
13

Convertible Debt Note 6
Page
15

Accounts Receivable and Allowance for Doubtful Accounts
Note 9
Page
19

Inventories
Note 10
Page
19

Other Intangible Assets Note 11
Page
20

Accrued Expenses and Other Current Liabilities- Product Warranty Costs Note 12
Page
21

Equity- Stock-Based Compensation
Note 14
Page
22

Income Taxes
Note 15
Page
25

Segment Reporting Note 16
Page
26
goodwill impairment test,

which requires an entity to calculate the implied fair value of goodwill to measure a goodwill impairment charge, and alternatively, requires an entity to measure the impairment of goodwill assigned to a reporting unit as the amount by which the carrying value of the assets and liabilities of the reporting unit, including goodwill, exceeds the reporting unit's fair value. The guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of ASU 2017-04 but does not expect it to be material to the consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718):Scope of Modification Accounting. ("ASU 2017-09"). ASU 2017-09 specifies the types of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in accordance with Topic 718. The new standard is effective for the Company on January 1, 2018 and early adoption is permitted. The Company does not believe that the adoption of ASU 2017-09 will have a material impact on its consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. ("ASU 2017-12"). ASU 2017-12 updates the current hedge accounting guidance with the objective of improving the financial reporting of hedging activities by better portraying the economic results of an entity's risk management activities in its financial statements. The new guidance is effective for the Company on January 1, 2019 and early adoption is permitted. The Company is currently evaluating the impact of ASU 2017-12 on its consolidated financial statements.

Note 3. Discontinued Operations

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

In connection with the 2016 disposition, the Company entered into a transition services agreement pursuant to which Insulet ~~is providing~~provided various services to Liberty Medical on an interim transitional basis. The services generally commenced on the closing date and terminated six months following the closing. Services provided by Insulet included certain information technology and back office support. The charges for such services were generally intended to allow the service provider to recover all out-of-pocket costs. Billings by Insulet under the transition services agreement were recorded as a reduction of the costs to provide the respective service in the applicable expense category in the consolidated statements of operations. This transitional support ~~is to provide~~provided Liberty Medical the time required to establish its stand-alone processes for such activities that were previously provided by Insulet as described above and ~~does~~did not constitute significant continuing support of Liberty Medical's operations. Total expenses incurred for such transition services, which were reimbursed in full, were $0.1 million and $0.8 million for the three and nine months ended September 30, ~~2016.~~2016, respectively. No expenses were incurred for such transition services for the three and nine months ended September 30, 2017.

Following the disposition, the Company entered into a distribution agreement with the Neighborhood Diabetes subsidiary of Liberty Medical to continue to act as a distributor for the Company's products. ~~For the three months ended September 30, 2016 and 2015, revenue from continued operations as presented in the consolidated statement of operations include $0 million and $0.8 million, respectively.~~ Omnipod System sales transacted through Neighborhood Diabetes prior to the divestiture that were previously eliminated in consolidation were ~~$0.3~~$0.0 million and ~~$2.0~~$0.3 million for the three and nine months ended September 30, 2016, ~~and 2015,~~ respectively. ~~These amounts were~~This amount was historically reported in the Neighborhood Diabetes revenue results and ~~are~~is being presented based on current market terms of products sold to the Neighborhood Diabetes subsidiary of Liberty Medical.

Post divestiture, Omnipod System sales to the Neighborhood Diabetes subsidiary of Liberty Medical were $0$0.0 million and $0.4 million for the three and nine months ended September 30, 2016, respectively. There were no sales of the Omnipod System to this entity in 2017.

The following is a summary of the operating results of Neighborhood Diabetes included in discontinued operations for the three and nine months ended September 30, ~~2016 and 2015:~~2016:

Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2016 2015 2016 2015
Discontinued operations:
Revenue ⁽¹⁾
$ —
$ 15,910
$ 7,730
$ 44,014
Cost of revenue 133
11,829
5,502
32,459
Gross profit (133 ) 4,081
2,228
11,555
Operating expenses:
     Sales and marketing —
2,887
1,542
8,381
     General and administrative (69 ) 2,133
1,853
3,779
          Total operating expenses (69 ) 5,020
3,395
12,160
Interest and other income (expense), net —
15
(128 ) 174
Loss from discontinued operations before taxes (64 ) (924 ) (1,295 ) (431 )
Income tax expense —
18
408
68
Net loss from discontinued operations $ (64 ) $ (942 ) $ (1,703 ) $ (499 )



(In thousands)	Three Months Ended September 30, 2016			Nine Months Ended September 30, 2016
Discontinued operations:
Revenue ⁽¹⁾	$	—		$	7,730
Cost of revenue	133			5,502
Gross profit	(133		)	2,228
Total operating, interest and other (income) expenses ⁽²⁾	(69		)	3,523
Loss from discontinued operations before taxes	(64		)	(1,295		)
Income tax expense	—			408
Net loss from discontinued operations	$	(64	)	$	(1,703	)


⁽¹⁾	Revenue ~~for the nine months ended September 30, 2016~~ includes revenue from the operations of Neighborhood Diabetes through date of sale in February 2016.


⁽²⁾	Includes $1.3 million loss on sale of Neighborhood Diabetes for the nine months ended September 30, 2016.

There were no results from discontinued operations for Neighborhood Diabetes for the three and nine months ended September 30, 2017.

Depreciation and amortization expense included in discontinued operations was $0$0.0 million and ~~$0.8~~$0.1 million for the three and nine months ended September 30, 2016, ~~and 2015,~~ respectively. ~~Depreciation~~There was no depreciation and amortization expense included in discontinued operations ~~was $0.1 million and $2.6 million~~ for the three and nine months ended September 30, ~~2016 and 2015, respectively.~~

~~The following is a summary of the Neighborhood Diabetes assets and liabilities presented as discontinued operations as of December 31, 2015:~~

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

2017.

Net operating cash flows ~~provided by discontinued operations~~used in ~~the three months ended September 30, 2016 and 2015, were $0 million and $4.1 million, respectively. Net operating cash flows (used in) provided by~~ discontinued operations in the nine months ended September 30, 2016 ~~and 2015~~ were ~~$(2.0) million and $3.2 million, respectively.~~$2.0 million. There were no net operating cash flows used in discontinued operations in the nine months ended September 30, 2017.

Note 4. Fair Value Measurements

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

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

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

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

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

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

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

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

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

The following table provides a summary of assets that are measured at fair value as of September 30, ~~2016,~~2017 and December 31, ~~2015,~~2016, aggregated by the level in the fair value hierarchy within which those measurements ~~fall (in thousands):~~fall:

Fair Value Measurements
Total Level 1 Level 2 Level 3
September 30, 2016
Recurring fair value measurements:
Cash equivalents:

Money market mutual funds $ 200,355
$ 200,355
$ —
$ —
Corporate bonds 1,900
—
1,900
—
Certificates of deposit 445
445
—
—
Total cash equivalents $ 202,700
$ 200,800
$ 1,900
$ —
Short-term investments:
U.S. government and agency bonds $ 29,032
$ 15,018
$ 14,014
$ —
Corporate bonds 25,540
—
25,540
—
Certificates of deposit 12,721
12,721
—
—
Total short-term investments $ 67,293
$ 27,739
$ 39,554
$ —

December 31, 2015
Recurring fair value measurements:
Cash equivalents:
Money market mutual funds $ 98,223
$ 98,223
$ —
$ —
Non-recurring fair value measurements:
Long-term assets of discontinued operations ⁽¹⁾
$ 1,788
$ —
$ —
$ 1,788



	Fair Value Measurements
(in thousands)	Total		Level 1		Level 2		Level 3
September 30, 2017
Recurring fair value measurements:
Cash equivalents:
Money market mutual funds	$	45,343	$	45,343	$	—	$	—
Total cash equivalents	$	45,343	$	45,343	$	—	$	—
Short-term investments:
U.S. government and agency bonds	$	113,294	$	92,344	$	20,950	$	—
Corporate bonds	47,625		—		47,625		—
Certificates of deposit	12,604		—		12,604		—
Total short-term investments	$	173,523	$	92,344	$	81,179	$	—

December 31, 2016
Recurring fair value measurements:
Cash equivalents:
Money market mutual funds	$	93,467	$	93,467	$	—	$	—
Corporate bonds	4,203		—		4,203		—
Certificates of deposit	735		—		735		—
Total cash equivalents	$	98,405	$	93,467	$	4,938	$	—
Short-term investments:
U.S. government and agency bonds	$	79,093	$	49,963	$	29,130	$	—
Corporate bonds	56,653		—		56,653		—
Certificates of deposit	25,650		—		25,650		—
Total short-term investments	$	161,396	$	49,963	$	111,433	$	—

⁽¹⁾

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

Debt

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

The carrying amounts, net of unamortized discounts and issuance costs, and the estimated fair values of the Company's convertible debt as of September 30, ~~2016,~~2017 and December 31, ~~2015,~~2016 are as ~~follows (in thousands):~~follows:


	September 30, 2016				December 31, 2015				September 30, 2017				December 31, 2016
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
(in thousands)									Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
2% Convertible Senior Notes	$	59,058	$	73,832	$	171,698	$	207,882	$	61,849	$	84,097	$	59,737	$	71,909

1.25% Convertible Senior Notes	$	269,904	$	339,163	$	—	$	—	$	283,104	$	391,196	$	273,031	$	320,969

Note 5. Short-term Investments

The Company's short-term investments are classified as available-for-sale and ~~amortized~~have maturity dates that range from zero months to 12.5 months as of September 30, 2017. The investments are all classified as short-term as they are available for current operations. Amortized costs, gross unrealized holding gains and losses, and fair values at September 30,

2017 and December 31, 2016 are as ~~follows (in thousands):~~follows:


	Amortized cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2016
(in thousands)										Amortized cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2017
U.S. government and agency bonds	$	29,036	$	2	$	(6	)	$	29,032	$	113,456	$	—	$	(162	)	$	113,294
Corporate bonds	25,571		—		(31		)	25,540		47,660		1		(37		)	47,624
Certificates of deposit	12,721		—		—			12,721		12,605		—		—			12,605
Total short-term investments	$	67,328	$	2	$	(37	)	$	67,293	$	173,721	$	1	$	(199	)	$	173,523

December 31, 2016
U.S. government and agency bonds										$	79,211	$	—	$	(118	)	$	79,093
Corporate bonds										56,742		—		(89		)	56,653
Certificates of deposit										25,650		—		—			25,650
Total short-term investments										$	161,603	$	—	$	(207	)	$	161,396

The Company had no ~~short-term investments at~~realized gains or losses as of September 30, 2017 or December 31, ~~2015.~~2016.

Note 6. Convertible Debt

The ~~following table shows the gross and net carrying amount of the Company's~~Company had outstanding convertible debt ~~(in thousands):~~and related deferred financing costs on its consolidated balance sheet as follows:


	September 30, 2016			December 31, 2015			As of
(in thousands)							September 30, 2017			December 31, 2016
Principal amount of the 2% Convertible Senior Notes	$	67,084		$	201,250		$	67,084		$	67,084
Principal amount of the 1.25% Convertible Senior Notes	345,000			—			345,000			345,000
Unamortized debt discount	(73,148		)	(25,704		)	(58,994		)	(69,684		)
Deferred financing costs	(9,974		)	(3,848		)	(8,137		)	(9,632		)
Long-term debt, net carrying amount	$	328,962		$	171,698
Long-term debt, net of discount							$	344,953		$	332,768

Interest expense related to the ~~2% Notes and the 1.25% Notes~~convertible notes was as ~~follows (in thousands):~~follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
(in thousands)									2017		2016		2017		2016
Contractual coupon interest	$	1,041	$	1,007	$	3,054	$	3,019	$	1,449	$	1,041	$	4,276	$	3,054
Amortization of debt discount	1,901		1,650		5,330		4,876
Accretion of debt discount									3,612		1,901		10,690		5,330
Amortization of debt issuance costs	222		281		785		844		505		222		1,495		785
Total interest expense from the Notes	$	3,164	$	2,938	$	9,169	$	8,739
Loss on extinguishment of long-term debt									—		2,551		—		2,551
Total interest and other expense									$	5,566	$	5,715	$	16,461	$	11,720

~~3.75%~~1.25% Convertible Senior Notes

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

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

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

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

In June 2014, in connection with the issuance of $201.3 million in principal amount of 2% Convertible Senior Notes due June 15, 2019 (the “2% Notes”), the Company repurchased approximately $114.9 million in principal amount of the 3.75% Notes for $160.7 million, a premium of $45.8 million over the principal amount. Investors that held approximately $80.0 million of 3.75% Notes purchased approximately $98.2 million in principal amount of the 2% Notes. The repurchase of the 3.75% Notes was treated as an extinguishment of debt since the fair value of the conversion feature changed by more than 10%. The extinguishment of the 3.75% Notes was accounted for separately from the issuance of the 2% Notes. The $160.7 million paid to extinguish the debt was allocated to debt and equity based on their respective fair values immediately prior to the transaction. The Company allocated $112.4 million of the payment to the debt and $48.3 million to equity.

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

Beginning on June 20, 2014, the Company had the right to redeem the 3.75% Notes, at its option, in whole or in part, if the last reported sale price per share of the Company’s common stock was at least 130% of the conversion price then in effect for at least 20 trading days during a period of 30 consecutive trading days. In June 2014, the Company met the redemption requirements and notified holders of its intent to redeem the outstanding $28.8 million in principal amount of 3.75% Notes in July 2014. Prior to the redemption date, holders of $28.5 million in principal amount of 3.75% Notes exercised their right to convert their outstanding 3.75% Notes. The Company settled this conversion of the 3.75% Notes in July 2014 by providing cash of $28.5 million for the principal amount of the outstanding 3.75% Notes converted and issuing 348,535 shares of common stock for the conversion premium totaling $12.6 million, for a total consideration paid of $41.1 million. The Company settled the redemption of the remaining $0.3 million in principal amount in exchange for a cash payment of $0.3 million representing principal and accrued and unpaid interest. The Company allocated $27.9 million of the total consideration paid to the debt and $13.5 million to equity.

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

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

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

~~2% Convertible Senior Notes~~

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

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

In September 2016, ~~in connection with~~ the ~~issuance of $345~~Company issued and sold $345.0 million in principal amount of 1.25% Convertible Senior Notes, due September 15, 2021 (the "1.25% Notes")~~, the Company repurchased approximately $134.2 million in principal amount of the 2% Notes for $153.6 million (excluding accrued interest of $0.7 million)~~. The extinguishment of the 2% Notes was accounted for separately from the issuance of the 1.25% Notes as both transactions were viewed as arm's-length in nature and were not contingent upon one another. The $153.6 million paid to extinguish the debt was allocated to debt and equity based on their respective fair values immediately prior to the transaction. The fair value of the debt was estimated using a trinomial lattice model based on the following inputs: Company's stock price, expected volatility, term to maturity, risk-free interest rate, and dividend yield. The Company allocated $121.4 million of the payment to the debt and $32.9 million to equity.

The Company recorded a loss on extinguishment of debt of $2.6 million in connection with the repurchase and redemption of the 2% Notes during the three and nine months ended September 30, 2016, representing the excess of the $121.4 million allocated to the debt over its carrying value, net of unamortized debt discount, deferred financing costs and accrued interest.

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

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

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

Cash interest expense related to the 2% Notes was $0.9 million and $1.0 million in the three months ended September 30, 2016 and 2015, respectively. Cash interest expense related to the 2% Notes was $2.9 million and $3.0 million in the nine months ended September 30, 2016 and 2015, respectively.

Non-cash interest expense related to the 2% Notes was $1.6 million and $1.9 million in the three months ended September 30, 2016 and 2015, respectively. Non-cash interest expense related to the 2% Notes was $5.6 million and $5.7 million in the nine months ended September 30, 2016 and 2015, respectively.

~~As of September 30, 2016 and December 31, 2015, the Company included $59.1 million and $171.7 million, respectively, on its balance sheet in long-term debt related to the 2% Notes.~~

~~1.25% Convertible Senior Notes~~

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

The Company recorded a debt discount of $66.7 million related to the 1.25% Notes which results from allocating a portion of the proceeds to the fair value of the conversion feature. The fair value of the debt discount was estimated using a

trinomial lattice model based on the following inputs: Company's stock price, expected volatility, term to maturity, risk-free interest rate, and dividend yield. The debt discount was recorded as additional paid-in capital and the remaining liability reflects the value of the Company’s nonconvertible debt borrowing rate of 5.8% per annum. This debt discount is being amortized as non-cash interest expense over the five year term of the 1.25% Notes. The Company incurred debt

issuance costs and other expenses related to this offering of approximately ~~$11.1~~$11.3 million, of which ~~$2.1~~$2.2 million has been reclassified as a reduction to the value of the amount allocated to equity. The remainder is presented as a reduction of debt in the consolidated balance sheet, is being amortized using the effective interest method, and is recorded as non-cash interest expense over the five year term of the 1.25% Notes.

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

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

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

Cash interest expense related to the 1.25% Notes was ~~$0.2~~$1.1 million and $3.3 million in the three and nine ~~month periods~~months ended September 30, ~~2016.~~2017, respectively. Non-cash interest expense related to the 1.25% Notes was ~~$0.5~~comprised of the amortization of the debt discount and debt issuance costs and was $3.4 million and $10.1 million in the three and nine ~~month periods~~months ended September 30, ~~2016.~~2017, respectively.

As of September 30, ~~2016,~~2017, the Company included ~~$269.9~~$283.1 million on its balance sheet in long-term debt related to the 1.25% Notes.

2% Convertible Senior Notes

~~Note 7. Capital Lease Obligations~~

AsIn June 2014, the Company issued and sold $201.3 million in principal amount of ~~September 30, 2016,~~2% Convertible Senior Notes due June 15, 2019 (the "2% Notes"). The interest rate on the notes is 2% per annum, payable semi-annually in arrears in cash on June 15 and December ~~31, 2015,~~15 of each year. The 2% Notes are convertible into the Company’s common stock at an initial conversion rate of 21.5019 shares of common stock per $1,000 principal amount of the 2% Notes, which is equivalent to a conversion price of approximately $46.51 per share, subject to adjustment under certain circumstances.

The Company ~~has~~recorded a debt discount of $35.6 million related to the 2% Notes. The debt discount was recorded as additional paid-in capital to reflect the value of the Company’s nonconvertible debt borrowing rate of 6.2% per annum. This debt discount is being amortized as non-cash interest expense over the five year term of the 2% Notes. The Company incurred deferred financing costs related to this offering of approximately ~~$13.7~~$6.7 million, of ~~manufacturing equipment acquired under capital leases, included~~which $1.2 million has been reclassified as an offset to the value of the amount allocated to equity. The remainder is recorded as a reduction to debt in ~~property and equipment. As of September 30, 2016, one capital lease remains outstanding~~the consolidated balance sheet and is being ~~repaid~~amortized as non-cash interest expense over the five year term of the 2% Notes.

In September 2016, in ~~equal monthly installments over~~connection with the issuance of $345 million in principal amount of the 1.25% Notes, the Company repurchased approximately $134.2 million in principal amount of the 2% Notes for $153.6 million. The extinguishment of the 2% Notes was accounted for separately from the issuance of the 1.25% Notes as both transactions were arm's-length in nature and were not contingent upon one another. The $153.6 million paid to extinguish the debt was allocated to debt and equity based on their respective fair values immediately prior to the transaction. The fair value of the debt was estimated using a ~~24 month~~trinomial lattice model based on the following inputs: Company's stock price, expected volatility, term ~~and includes principal and interest payments with an effective~~to maturity, risk-free interest rate, and dividend yield. The Company allocated $121.4 million of ~~13%.~~the payment to the debt and $32.9 million to equity.

The ~~assets acquired under capital leases are being amortized~~Company recorded a loss on ~~a straight-line basis over five years~~extinguishment of debt of $2.6 million in ~~accordance~~connection with the ~~Company's policy~~repurchase and redemption of the 2% Notes during the year ended December 31, 2016, representing the excess of the $121.4 million allocated to the debt over its carrying value, net of unamortized debt discount, deferred financing costs and accrued interest.

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

If the Company is purchased by a company outside of the U.S., then additional taxes may be required to be paid by the Company under ~~capital leases is included with depreciation expense. Amortization~~the terms of the 2% Notes.

Cash interest expense related to ~~these capital leased assets~~the 2% Notes was ~~$0.7~~$0.3 million and ~~$0.6~~$0.9 million in the three months ended September 30, 2017 and 2016, ~~and 2015,~~ respectively. ~~Amortization~~Cash interest expense related to the 2% Notes was ~~$2.1~~$1.0 million and ~~$1.7~~$2.9 million in the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively.

~~Assets purchased under capital leases and held consist of the following (in thousands):~~

September 30, 2016 December 31, 2015
Manufacturing equipment $ 13,705
$ 13,705
Less: Accumulated amortization (6,401 ) (4,346 )
Total $ 7,304
$ 9,359

~~The aggregate future minimum lease payments~~Non-cash interest expense related to the ~~capital lease as~~2% Notes was comprised of ~~September 30, 2016, are as follows (in thousands):~~

Years Ending December 31,
Minimum Lease
Payments
2016 (remaining) $ 808
2017 269
Total future minimum lease payments $ 1,077
Interest expense 16
Total capital lease obligations $ 1,061

~~The Company recorded $0.1~~the amortization of the debt discount and debt issuance costs and was $0.7 million and ~~$0.3~~$1.6 million ~~of interest expense on capital leases~~ in the three months ended September 30, 2017 and 2016, respectively. Non-cash interest expense related to the 2% Notes was comprised of the amortization of the debt discount and ~~2015, respectively. The Company recorded $0.3~~debt issuance costs and was $2.1 million and ~~$1.0~~$5.6 million ~~of interest expense on capital leases~~ in the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively.

As of September 30, 2017, the Company included $61.8 million on its balance sheet in long-term debt related to the 2% Notes.

Note 8.7. Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period, excluding unvested restricted common shares. Diluted net loss per share is computed using the weighted average number of common shares outstanding and, when dilutive, potential common share equivalents from options, restricted stock units and warrants (using the treasury-stock method), and potential common shares from convertible securities (using the if-converted method). Because the Company reported a net loss for the three and nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, all potential dilutive common shares have been excluded from the computation of the diluted net loss per share for all periods presented, as the effect would have been anti-dilutive.

Potential dilutive common share equivalents consist of the following:


	Three and Nine Months Ended September 30,		Three and Nine Months Ended September 30,
	2016	2015	2017	2016
2.00% Convertible Senior Notes	1,442,433	4,327,257	1,442,433	1,442,433
1.25% Convertible Senior Notes	5,910,954	—	5,910,954	5,910,954
Unvested restricted stock units	971,814	862,044	1,007,729	971,814
Outstanding options	3,541,936	2,959,320	3,489,393	3,541,936
Total dilutive common share equivalents	11,867,137	8,148,621	11,850,509	11,867,137

Note 9.8. Accounts Receivable, ~~and Allowance for Doubtful Accounts~~Net

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

Customers that represented greater than 10% of gross accounts receivable as of September 30, ~~2016~~2017 and December 31, ~~2015~~2016 were as follows:


					As of
	September 30, 2016		December 31, 2015		September 30, 2017		December 31, 2016
Amgen, Inc.	29	%	22	%	13	%	16	%
Ypsomed Distribution AG	15	%	19	%
Ypsomed					28	%	19	%

The components of accounts receivable ~~from continuing operations~~ are as ~~follows (in thousands):~~follows:


	September 30, 2016			December 31, 2015
Trade receivables, gross	$	42,391		$	46,668
(in thousands)							September 30, 2017			December 31, 2016
Trade receivables							$	50,210		$	31,714
Allowance for doubtful accounts	(3,843		)	(4,138		)	(3,037		)	(2,911		)
Total accounts receivable, net	$	38,548		$	42,530		$	47,173		$	28,803

Note ~~10.~~9. Inventories, Net

Inventories are held at the lower of cost or market, determined under the first-in, first-out method, and include the costs of material, labor and overhead. Inventory has been recorded at cost, or net realizable value as appropriate, as of September 30, ~~2016~~2017 and December 31, ~~2015.~~2016. The Company reviews inventories for net realizable value based on quantities on hand and expectations of future use. Work in process is calculated based upon a buildup in the stage of completion using estimated labor inputs for each stage in production.

The components of inventories ~~from continuing operations~~ are as ~~follows (in thousands):~~follows:


	September 30, 2016		December 31, 2015		As of
(in thousands)					September 30, 2017		December 31, 2016
Raw materials	$	1,477	$	632	$	2,289	$	1,911
Work-in-process	5,508		1,960		15,168		15,681
Finished goods, net	25,678		9,432		17,597		17,922
Total inventories	$	32,663	$	12,024	$	35,054	$	35,514

Note ~~11.~~10. Other Intangible Assets, Net

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

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

~~The Company recorded~~ $2.1 million of other intangible assets in 2015 as a result of the July 2015 acquisition of its Canadian distribution business. The Company determined that the estimated useful life of the contractual relationship asset is 5 years and is amortizing the asset over their estimated lives, based on the expected cash flows of the assets.

The Company adopted ASU 2016-19 on January 1, 2017 and, as a result, reclassified $1.5 million of net internal-use software costs from property and equipment to other intangible assets as of December 31, 2016.

The components of other intangible assets are as ~~follows (in thousands):~~follows:


	September 30, 2016							December 31, 2015							As of
	Gross Carrying Amount		Accumulated Amortization			Net Book Value		Gross Carrying Amount		Accumulated Amortization			Net Book Value		September 30, 2017							December 31, 2016
Contractual relationships, net	$	2,039	$	(1,388	)	$	651	$	1,933	$	(1,000	)	$	933
(in thousands)															Gross Carrying Amount		Accumulated Amortization			Net Book Value		Gross Carrying Amount		Accumulated Amortization			Net Book Value
Customer and contractual relationships, net															$	2,149	$	(1,726	)	$	423	$	1,994	$	(1,466	)	$	528
Internal-use software															7,175		(3,229		)	3,946		4,064		(2,551		)	1,513
Total intangible assets	$	2,039	$	(1,388	)	$	651	$	1,933	$	(1,000	)	$	933	$	9,324	$	(4,955	)	$	4,369	$	6,058	$	(4,017	)	$	2,041

Amortization expense for intangible assets ~~excluding discontinued operations,~~ was approximately ~~$0.1~~$0.3 million and $0.3 million for the three ~~and nine~~ months ended September 30, 2017 and 2016, respectively. Amortization expense for intangible assets ~~excluding discontinued operations,~~ was approximately ~~$0.5~~$0.8 million and ~~$0.5~~$0.9 million for the ~~three and~~ nine months ended September 30, ~~2015,~~2017 and 2016, respectively. Amortization expense is recorded in general and administrative expenses in the consolidated statements of operations.

Amortization expense expected for the next five years and thereafter is as ~~follows (in thousands):~~follows:


(in thousands)
Years Ending December 31,	Contractual Relationships		Customer and Contractual Relationships		Internal-Use Software		Total
2016 (remaining)	$	111
2017	185
2017 (remaining)			$	66	$	324	$	390
2018	158		159		1,171		1,330
2019	132		132		881		1,013
2020	65		66		661		727
2021			—		578		578
Thereafter	—		—		331		331
Total	$	651	$	423	$	3,946	$	4,369

As of September 30, ~~2016~~,2017, the weighted average amortization period of the Company’s intangible assets is approximately ~~4.25~~3.9 years.

Note ~~12.~~11. Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities are as ~~follows (in thousands):~~follows:


	September 30, 2016		December 31, 2015
Employee compensation and related items	19,529		16,856
(in thousands)					September 30, 2017		December 31, 2016
Employee compensation and related costs					$	27,389	$	21,999
Professional and consulting services	5,958		5,654		8,972		6,753
Suppliers	643		4,981
Supplier charges					932		2,886
Warranty					1,583		1,642
Other	7,602		9,253		6,021		7,948
Total accrued expenses and other current liabilities	$	33,732	$	36,744	$	44,897	$	41,228

Product Warranty Costs

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

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
(in thousands)													2017			2016			2017			2016
Balance at the beginning of the period	$	4,294		$	3,167		$	4,152		$	2,614		$	4,817		$	4,294		$	4,388		$	4,152
Warranty expense	1,149			1,579			3,288			3,300			1,483			1,149			3,123			3,288
Warranty claims settled	(1,101		)	(992		)	(3,098		)	(2,160		)	(1,303		)	(1,101		)	(2,514		)	(3,098		)
Balance at the end of the period	$	4,342		$	3,754		$	4,342		$	3,754		$	4,997		$	4,342		$	4,997		$	4,342

The composition of the product warranty liability balance is reported on the consolidated balance sheets in accrued expenses and other current liabilities and other long-term liabilities as follows (in thousands):


	September 30, 2016		December 31, 2015
(in thousands)					September 30, 2017		December 31, 2016
Composition of balance:
Short-term	$	1,640	$	1,592	$	1,583	$	1,642
Long-term	2,702		2,560		3,414		2,746
	$	4,342	$	4,152
Total warranty liability:					$	4,997	$	4,388

Note ~~13.~~12. Commitments and Contingencies

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

Operating Leases

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

The Company leases approximately 100,000 square feet of laboratory and office space for its corporate headquarters in Billerica, Massachusetts. The leases expire in November 2022 and contain escalating payments over the life of each lease. Additionally, the Company leases approximately 29,000 square feet of warehousing space in Billerica, Massachusetts under a lease expiring in September 2019. The Company leases other facilities in Canada, China, the United Kingdom, California and Tennessee containing a total of approximately 11,000 square feet under leases expiring from 2017 to 2020.

Certain of the Company’s operating lease agreements contain scheduled rent increases. Rent expense is recorded using the straight-line method and deferred rent is included in other ~~current and long-term~~ liabilities in the accompanying balance sheets. The Company has considered ~~FASB~~ ASC 840-20, Leases in accounting for these lease provisions. Rental expense under operating leases was $0.7 million and $0.7 million for the three months ended September 30, 2017 and 2016. Rental expense under operating leases was $2.1 million and $1.9 million for the nine months ended September 30, 2017 and 2016.

The aggregate future minimum lease payments related to these leases as of September 30, ~~2016~~,2017 are as ~~follows (in thousands):~~follows:


Years Ending December 31,	Minimum Lease Payments
2016 (remaining)	$	624
2017	2,449
(in thousands) Years Ending December 31,			Minimum Lease Payments
2017 (remaining)			$	725
2018	2,383		2,702
2019	2,390		2,681
2020	2,383		2,402
2021			2,383
Thereafter	4,515		2,131
Total	$	14,744	$	13,024

Legal Proceedings

~~The~~In December 2015, the Company ~~is in the process of responding to~~received a revised audit report ~~received in December 2015~~ on behalf of the Centers for Medicare and Medicaid Services and the State of New York alleging overpayment of certain Medicaid claims to Neighborhood Diabetes. As of December 31, 2015, the Company had determined that it was probable that a loss had been incurred and recorded an aggregate liability of $0.4 million ~~through general and administrative expense,~~within loss from discontinued operations, which was subsequently reduced to $0.3 million during ~~the three months ended September 30,~~ 2016. The change in the liability was recorded in discontinued operations. In June 2017, the Company reached an agreement to settle the claim for $0.3 million, which was subsequently paid in July 2017.

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

In April 2016, the Company reached a settlement agreement for $0.5 million with the Massachusetts Department of Revenue for sales and use tax audits related to Insulet Corporation, which resulted in a $0.2 million reduction of the previously recorded liability and a credit to general and administrative expenses during ~~the three months ending March 31,~~ 2016.

Between May 5, 2015 and June 16, 2015, three class action lawsuits were filed by shareholders in the U.S. District Court, Massachusetts, against the Company and certain individual current and former executives of the Company. Two suits subsequently were voluntarily dismissed. Arkansas Teacher Retirement System v. Insulet, et al., 1:15-cv-12345, which remains outstanding, alleges that the Company (and certain executives) committed violations of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 by making allegedly false and misleading statements about the Company’s business, operations, and prospects. The lawsuit seeks, among other things, compensatory damages in connection with the Company’s allegedly inflated stock price between May 7, 2013 and April 30, 2015, as well as

attorneys’ fees and costs. ~~Due in part to the preliminary nature of this matter, the~~The Company currently cannot reasonably estimate a possible loss, or range of loss, in connection with this matter.

On April 26, 2017, a derivative action (Walker v. DeSisto, et al., 1:17-cv-10738) was filed, and on October 13, 2017, a second derivative action (Carnazza v. DeSisto, et al., 1:17-cv-11977) was filed, both on behalf of the Company, each by a shareholder in the U.S. District Court of Massachusetts against the Company (as a nominal defendant) and certain individual current and former officers and directors of the Company. Both actions were filed as related actions to the securities class action referenced above, and 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. The Company currently cannot reasonably estimate a possible loss, or range of loss, in connection with the either of these actions.

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

Note ~~14.~~13. Equity

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

The Company grants share-based awards to employees in the form of options to purchase the Company’s common stock, the ability to purchase stock at a discounted price under the employee stock purchase plan and restricted stock units. The Company uses the Black-Scholes option pricing model to determine the weighted-average fair value of options granted and determines the intrinsic value of restricted stock units based on the closing price of its common stock on the date of grant. The Company recognizes the compensation expense of share-based awards on a straight-line basis for awards with only service conditions and on an accelerated ~~method~~basis for awards with performance conditions. Compensation expense is recognized over the vesting period of the awards.

The following table reflects the Company's stock-based compensation expense related to share-based awards recognized in the three and nine months ended September 30, 2017 and 2016:



	Three Months Ended September 30,				Nine Months Ended September 30,				Unamortized Expense		Weighted Average Remaining Expense Period (Years)
($ in thousands)	2017		2016		2017		2016		At September 30, 2017
Stock options	$	3,127	$	2,578	$	8,815	$	7,372	$	18,264	2.4
Restricted stock units	5,621		3,439		14,358		9,359		30,411		1.9
Employee stock purchase plan	149		71		379		142		99		0.2
Total	$	8,897	$	6,088	$	23,552	$	16,873	$	48,774

Equity Award Plans

In May 2007, in conjunction with the Company's initial public offering, the Company adopted its 2007 Stock Option and Incentive Plan (the "2007 Plan"). The 2007 Plan was amended and restated in November 2008, May 2012 and May 2015 to provide for the issuance of additional shares and to amend certain other provisions. Under the 2007 Plan, awards were granted to persons who were, at the time of grant, employees, officers, non-employee directors or key persons (including consultants and prospective employees) of the Company or the Company's subsidiaries. The 2007 Plan provided for the grant of stock options, restricted stock units, stock appreciation rights, deferred stock awards, restricted stock, unrestricted stock, cash-based awards, performance share awards or dividend equivalent rights. Options granted under the 2007 Plan generally vest over a period of four years and expire ten years from the date of grant. In May 2017, the Company adopted the 2017 Stock Option and Incentive Plan (the "2017 Plan"), which has replaced the 2007 Plan as the means by which the Company makes equity and cash awards. Effective May 18, 2017, the 2017 Plan became effective (the "2017 Plan Effective Date") and the Company ceased granting awards from the 2007 Plan. Outstanding awards under the 2007 Plan remain subject to the terms of the 2007 Plan. Under the 2017 Plan, awards may be granted to persons who are, at the time of grant, employees, officers, non-employee directors, consultants, or advisers of the Company or the Company's subsidiaries and affiliates. The 2017 Plan provides for the grant of stock options, restricted stock units, stock appreciation rights, deferred stock awards, restricted stock, unrestricted stock, cash-based awards, performance share awards or dividend equivalent rights. Stock options granted under the 2017 Plan generally vest over a period of four years and expire ten years from the date of grant. Shares of stock subject to awards granted under the 2007 Plan and the 2017 Plan that are forfeited, expire or otherwise terminate without delivery generally become available for future issuance under the 2017 Plan. As of September 30, 2017, approximately 5.1 million shares remain available for future grant under the 2017 Plan.

Stock Options

The Company awarded34,500 shares of performance-based incentive stock options in the nine months ended September 30, 2017. There were 55,000 shares of performance-based incentive stock options awarded in the nine months ended September 30, 2016. The stock options were granted under the 2007 and 2017 Plans and vest over a four year period from the grant date with the potential of an accelerated vesting period pursuant to the achievement of certain performance conditions.

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

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

The expected life of the awards is estimated based on the midpoint scenario, which

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

The risk-free interest rate assumption is based on ~~observed interest rates appropriate for~~U.S. Treasury zero-coupon issues with remaining terms similar to the ~~terms of~~expected term on the ~~awards.~~ options.

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

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

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

Stock-based compensation expense related to share-based awards recognized in the three months ended September 30, 2016 and 2015 was $6.1 million and $4.2 million, respectively, based upon when the awards are ultimately expected to vest. Stock-based compensation expense related to the share-based awards recognized in the nine months ended September 30, 2016 and 2015 was $16.9 million and $13.8 million, respectively, and was also calculated based on when the awards are ultimately expected to vest.

At ~~September 30, 2016, the Company had $47.0 million of total unrecognized compensation expense related to unvested stock options and restricted stock units.~~

~~Stock Options~~

~~In May 2007, in conjunction with the Company's initial public offering, the Company adopted its 2007 Stock Option and Incentive Plan (the "2007 Plan").~~ The 2007 Plan was amended and restated in November 2008, May 2012 and May 2015 to provide for the issuance of additional shares and to amend certain other provisions. Under the 2007 Plan, awards may be granted to persons who are, at the time ofestimated grant ~~employees, officers, non-employee directors or key persons (including consultants and prospective employees)~~date fair values of the Company. The 2007 Plan provides for the granting of stock options, restricted stock units, stock appreciation rights, deferred stock awards, restricted stock, unrestricted stock, cash-based awards, performance share awards or dividend equivalent rights. Options granted under the 2007 Plan generally vest over a period of four years and expire ten years from the date of grant. As of September 30, 2016, 4,404,847 shares remain available for future issuance under the 2007 Plan.

The Company awarded 194,500 shares of incentive stock options in 2015 and an additional 55,000 shares of incentive stock options during the nine months ended September 30, 2016 that include vesting periods that may be accelerated. Theemployee stock options were ~~granted under~~calculated using the 2007 Plan and vest over a four year period from the grant date with the potential of an accelerated vesting period pursuant to the achievement of certain performance conditions. Performance awards are amortized over the service period using an accelerated attribution method.Black-Scholes option pricing model.

The following summarizes the activity under the Company’s stock option plans induring the nine months ended September 30, ~~2016:~~2017:

Number of
Options (#)

Weighted Average
Exercise Price ($)

Aggregate
Intrinsic
Value ($)
(In thousands)
Balance, December 31, 2015 2,999,199
$ 31.37

Granted 967,918
$ 31.32

Exercised⁽¹⁾
(226,296 ) $ 19.54
$ 4,440
Canceled (198,885 ) $ 32.60

Balance, September 30, 2016 3,541,936
$ 32.05
$ 32,243
Vested, September 30, 2016⁽²⁾
1,347,219
$ 31.63
$ 12,837
Vested and expected to vest, September 30, 2016⁽²⁾⁽³⁾
3,230,071

$ 29,427



	Number of Options (#)		Weighted Average Exercise Price ($)		Aggregate Intrinsic Value ($ in 000s)		Weighted Average Remaining Contractual Term (Years)
Balance, December 31, 2016	3,441,303		$	32.27
Granted	519,231		45.23
Exercised⁽¹⁾	(385,345	)	26.11		$	7,696
Canceled	(85,796	)	34.82
Balance, September 30, 2017	3,489,393		$	34.82	$	70,718	7.8
Vested, September 30, 2017⁽²⁾	1,860,596		$	33.41	$	40,326	7.1
Vested or expected to vest, September 30, 2017⁽²⁾⁽³⁾	3,282,804				$	67,057


⁽¹⁾	The aggregate intrinsic value was calculated based on the positive difference between the ~~pre-tax~~estimated fair value of the Company’s common stock as of the date of exercise and the exercise price of the underlying options. The aggregate intrinsic value of options exercised in the nine months ended September 30, 2017 and 2016 was $7.7 million and $4.4 million, respectively.


⁽²⁾	The aggregate intrinsic value was calculated based on the positive ~~pre-tax~~ difference between the ~~closing price~~estimated fair value of the Company’s common stock as of September 30, ~~2016,~~2017, and the exercise price of the underlying options.


⁽³⁾	Represents the number of vested options as of September 30, ~~2016,~~2017, plus the number of unvested options expected to ~~vest as of September 30, 2016, based on the unvested options outstanding at September 30, 2016, adjusted for the estimated forfeiture.~~vest.

At ~~September 30, 2016~~ ~~there were 3,541,936 options outstanding with a weighted average exercise price of $32.05 and a weighted average remaining contractual life of 8.3 years. At~~ ~~September 30, 2016~~ ~~there were 1,347,219 options exercisable with a weighted average exercise price of $31.63 and a weighted average remaining contractual life of 7.4 years.~~

Employee stock-based compensation expense related to stock options in the three months ended September 30, 2016 and 2015 was $2.6 million and $2.0 million, respectively, and was based on awards ultimately expected to vest. Employee stock-based compensation expense related to stock options in the nine months ended September 30, 2016 and 2015 was $7.4 million and $7.0 million, respectively, and was based on awards ultimately expected to vest. At ~~September 30, 2016, the Company had $22.3 million of total unrecognized compensation expense related to stock options that will be recognized over a weighted average vesting period of 2.6 years.~~

Restricted Stock Units

In the nine months ended September 30, ~~2016,~~2017, the Company awarded ~~581,777~~432,877 restricted stock units to certain employees and non-employee members of the Board of Directors, which included ~~153,992~~168,857 restricted stock units subject to the achievement of performance conditions (performance-based restricted stock units). ~~The number of~~For performance-based restricted stock units ~~granted during the nine months ended September 30, 2016 that are expected to vest may vary based on the Company's quarterly evaluation of the probability of~~for which the performance criteria ~~being achieved. The~~has not yet been achieved, the Company recognized stock compensation expense of ~~$0.9~~$1.8 million and ~~$2.0~~$4.0 million in the three and nine months ended September 30, ~~2016 for~~2017 as it expects a portion of the performance-based restricted stock units ~~that are expected to vest~~granted in 2016 and 2017 will be earned based on its evaluation of the performance criteria at ~~September 30, 2016. The Company recognized~~December 31, 2017 and December 31, 2019, respectively. An additional $0.1 million and $0.4 million of stock compensation expense ~~of $0.4 million and $0.4 million~~was recognized in the three and nine months ended September 30, ~~2015~~2017, respectively, for performance-based restricted stock ~~units. Performance awards are amortized over~~units for which the ~~service period using an accelerated attribution method.~~performance criteria has been achieved. The restricted stock units were granted under the 2007 ~~Plan~~ and 2017 Plans and generally vest annually over a one or three year period from the grant ~~date.~~date, except for the performance-based restricted stock units, which follow different vesting patterns.

The restricted stock units granted during the nine months ended September 30, ~~2016~~2017 have a weighted average fair value of ~~$29.69~~$47.48 per share based on the closing price of the Company’s common stock on the date of grant and were valued at approximately ~~$17.3~~$20.6 million on their grant date. The Company is recognizing the compensation expense over the vesting period. Approximately ~~$2.6~~$3.8 million and ~~$1.7~~$2.6 million in the three months ended September 30, 2017 and 2016, ~~and 2015 and $7.3 million and $6.3 million in the nine months ended September 30, 2016 and 2015~~respectively, of stock-based compensation expense related to the vesting of non-performance based restricted stock units was ~~recognized using~~recognized. Approximately $10.0 million and $7.3 million in the ~~straight line method. Approximately $24.7 million~~nine months ended September 30, 2017 and 2016, respectively, of stock-based compensation expense related to the ~~fair value~~vesting of ~~the~~non-performance based restricted stock units ~~including performance-based restricted stock units remained unrecognized as of~~ ~~September 30, 2016~~ ~~and will be recognized over a weighted average period of 2 year.~~was recognized. Under the terms of the awards, the Company will issue shares of common stock on each of the vesting dates.

The following table summarizes the status of the Company’s restricted stock units induring the nine months ended September 30, ~~2016:~~2017:


	Number of Shares (#)		Weighted Average Grant Date Fair Value ($)		Number of Shares (#)		Weighted Average Fair Value ($)
Balance, December 31, 2015	811,965		$	32.30
Balance, December 31, 2016					962,219		$	31.14
Granted	581,777		29.69		432,877		47.48
Vested	(309,024	)	30.73		(375,050	)	31.51
Forfeited	(112,904	)	33.23		(12,317	)	34.23
Balance, September 30, 2016	971,814		$	31.14
Balance, September 30, 2017					1,007,729		$	37.98

Employee Stock Purchase Plan

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

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

participating employee withdraws from the offering period, his or her accumulated payroll deductions will be used to purchase common stock.

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

AsThe accumulated payroll deductions of ~~September 30, 2016,~~any employee who is not a participant on the last day of an offering period will be refunded. An employee’s rights under the ESPP terminate upon voluntary withdrawal from the plan or when the employee ceases employment with the Company ~~had no~~for any reason.

The ESPP may be terminated or amended by the Board of Directors at any time. An amendment to increase the number of shares ~~contingently issued~~of common stock that is authorized under the ~~ESPP. The Company recorded approximately $0.1 million~~ESPP, and certain other amendments, require the approval of stock-based compensation expense in the three months ended September 30, 2016 and approximately $0.1 million of stock-based compensation expense in the nine months ended September 30, 2016 related to the ESPP. In the three and nine months ended September 30, 2015, the Company recorded no significant stock-based compensation charges related to the ESPP.stockholders.

Note ~~15.~~14. Income Taxes

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

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

The Company files federal, state and foreign tax returns. These returns are generally open to examination by the relevant tax authorities from three to four years from the date they are filed. The tax filings relating to the Company's federal and state tax returns are currently open to examination for tax years ~~2013~~2014 through ~~2015~~2016 and ~~2010~~2012 through ~~2015,~~2016, respectively. In addition, the Company has generated tax losses since its inception in 2000. These years may be subject to examination if the losses are carried forward and utilized in future years.

At September 30, ~~2016~~2017 and December 31, ~~2015~~,2016, the Company provided a full valuation allowance ~~for the full amount of~~against its domestic net deferred tax asset because it is not more likely than not that the future tax benefit will be realized. In addition, the Company has a net deferred tax asset in foreign jurisdictions where no valuation allowance is recorded as it is more likely than not that the future tax benefit will be realized.

~~Income tax expense from continuing operations consists of the following (in thousands):~~

Three Months Ended September 30, Nine Months Ended September 30,
2016 2015 2016 2015
Current $ 71
$ 44
$ 283
$ 83
Deferred (5 ) —
(88 ) —
Income tax expense $ 66
$ 44
$ 195
$ 83

Income tax expense ~~from discontinued operations~~ was ~~not significant in~~$0.1 million for each of the three months ended September 30, ~~2016~~2017 and ~~2015.~~2016. Income tax expense ~~from discontinued operations~~ was ~~$0.4~~$0.3 million and ~~$0.1~~$0.2 million infor the nine months ended September 30, 2017 and 2016, ~~and 2015,~~ respectively.

~~The Company has~~ Income tax expense for both periods was primarily driven by income generated deferred tax liabilities related to its amortization of acquired goodwill for tax purposes because the goodwill is not amortized for financial reporting purposes. The tax amortization gives rise to a temporary difference and a tax liability, which will only reverse at the time of ultimate disposition or impairment of the underlying goodwill. Due to the uncertain timing of this reversal, the temporary difference cannot be considered as a source of future taxable income for purposes of determining a valuation allowance; therefore, the tax liability cannot be used to offset deferred tax assets.

in foreign jurisdictions, mainly Canada.

The Company had no unrecognized tax benefits at September 30, ~~2016.~~2017.

~~16.~~15. Segment Reporting

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision-maker ("CODM")As further described in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company has concluded that their Chief Executive Officer is the CODM as he is the ultimate decision maker for key operating decisions, determining the allocation of resources and assessing the financial performance of the Company. These decisions, allocations and assessments are performed by the CODM using consolidated financial information. Consolidated financial information is utilized by the CODM as the Company’s current product offering primarily consists of the Omnipod System and drug delivery. The Company’s products are relatively consistent and manufacturing is centralized and consistent across product offerings. Based on these factors, key operating decisions and resource allocations are made by the CODM using consolidated financial data and as suchNote 2, the Company has concluded that ~~they operate~~it operates as one segment.

Worldwide revenue for the Company's products is categorized as ~~follows (in thousands):~~follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
(in thousands)									2017		2016		2017		2016
U.S. Omnipod	$	59,641	$	50,738	$	166,691	$	135,835	$	70,065	$	59,641	$	195,081	$	166,691
International Omnipod	19,107		13,570		51,046		24,990		32,481		19,107		84,200		51,046
Drug Delivery	16,123		7,085		45,677		19,267		19,229		16,123		53,963		45,677
Total	$	94,871	$	71,393	$	263,414	$	180,092	$	121,775	$	94,871	$	333,244	$	263,414

Geographic information about revenue, based on the region of the customer's shipping location, is as ~~follows (in thousands):~~follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
(in thousands)									2017		2016		2017		2016
United States	$	75,764	$	57,823	$	212,368	$	155,102	$	89,294	$	75,764	$	249,044	$	212,368
All other	19,107		13,570		51,046		24,990		32,481		19,107		84,200		51,046
Total	$	94,871	$	71,393	$	263,414	$	180,092	$	121,775	$	94,871	$	333,244	$	263,414

Geographic information about long-lived assets, net, excluding goodwill and other intangible assets is as ~~follows (in thousands):~~follows:


	September 30, 2016		December 31, 2015
(in thousands)					September 30, 2017		December 31, 2016
United States	$	25,431	$	13,018	$	68,106	$	19,341
China	25,477		28,638		20,456		25,431
Other	101		213		60		197
Total	$	51,009	$	41,869	$	88,622	$	44,969

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying condensed notes to those financial statements included in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and of Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements.

These risks and uncertainties include, but are not limited to:

risks associated with our dependence on our principal product, the Omnipod System;

fluctuations in quarterly results of operations;

our ability to sustain or reduce production costs and increase customer orders and manufacturing volumes;

adverse changes in general economic conditions;

impact of healthcare reform laws;

our inability to raise additional funds in the future on acceptable terms or at all;

potential supply problems or price fluctuations with sole source or third-party suppliers on which we are dependent;

the potential establishment of a competitive bid program;

failure to retain supplier pricing discounts and achieve satisfactory gross margins;

failure to retain key supplier and payor partners;

international business risks;

our inability to effectively assume the distribution and commercial support for our Omnipod System in Europe following the expiration of our global distribution agreement with Ypsomed on June 30, 2018;

our inability to secure and retain adequate coverage or reimbursement for the Omnipod System by third-party payors and potential adverse changes in reimbursement rates or policies relating to the Omnipod System;

failure to retain key payor partners and their members;

failure to retain and manage successfully our Medicare and Medicaid business;

potential adverse effects resulting from competition;

reliance on information technology systems and our ability to control related risks, including a cyber-attack or other breach or disruption of these systems;

technological breakthroughs and innovations adversely affecting our business, and our own new product development initiatives may prove to be ineffective or not commercially successful;

potential termination of our license to incorporate a blood glucose meter into the Omnipod System, or our inability to enter into new license agreements;

challenges to the further development of our non-insulin drug delivery business;

our ability to protect our intellectual property and other proprietary rights; conflicts with the intellectual property of third-parties, including claims that our current or future products infringe or misappropriate the proprietary rights of others;

adverse regulatory or legal actions relating to the Omnipod System;

our products and operations are subject to extensive government regulation, which could restrict our ability to carry on or expand our operations;

failure of our contract manufacturers or component suppliers to comply with the FDA’s quality system regulations;

potential adverse impact resulting from a recall, or discovery of serious safety issues, of our products;

the potential violation of federal or state laws prohibiting “kickbacks” or protecting the confidentiality of patient health information, or any challenge to or investigation into our practices under these laws;

product liability lawsuits that may be brought against us;

reduced retention rates of our customer base;

unfavorable results of clinical studies relating to the Omnipod System or the products of our competitors;

potential future publication of articles or announcement of positions by diabetes associations or other organizations that are unfavorable to the Omnipod System;

the concentration of substantially all of our manufacturing operations at a single location in China and substantially all of our inventory at a single location in Massachusetts;

our ability to effectively manage the construction of our planned manufacturing facility in the U.S.;

our ability to attract and retain personnel;

our ability to manage our growth;

risks associated with potential future acquisitions or investments in new businesses;

our ability to generate sufficient cash to service all of our indebtedness;

the expansion of our distribution network;

our ability to successfully maintain effective internal control over financial reporting;

the volatility of the price of our common stock;

risks related to future sales of our common stock or the conversion of any of our 2% Convertible Senior Notes due June 15, 2019 and 1.25% Convertible Senior Notes due September 15, 2021;

potential indemnification obligations in connection with the disposition of our former Neighborhood Diabetes supplies business;

potential limitations on our ability to use our net operating loss carryforwards; and

anti-takeover provisions in our organizational documents.

The factors discussed above are not intended to be a complete statement of all risks and uncertainties and should be evaluated with all other risks described in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on February ~~29, 2016~~28, 2017 in the section entitled “Risk ~~Factors,”~~Factors" as updated by Item 1A "Risk Factors" herein, and in our other filings from time to time with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements.

Executive Level Overview

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

We began commercial sale of the Omnipod System in the United States in 2005. We sell the Omnipod System ~~and other diabetes management supplies~~ in the United States through direct sales to customers or through our distribution partners. The Omnipod System is currently available in multiple countries in Europe, Canada and Israel. In July 2015, we executed an asset purchase agreement with GSK whereby we acquired assets associated with the Canadian distribution of our products and we assumed the distribution, sales, marketing, training and support activities for the Omnipod system in Canada.

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

In June 2011, we acquired Neighborhood Diabetes. Through Neighborhood Diabetes, we provided customers with blood glucose testing supplies, traditional insulin pumps, pump supplies and pharmaceuticals and had the ability to process claims as either durable medical equipment or through pharmacy benefits. In February 2016, we sold Neighborhood Diabetes to Liberty Medical. Additional information regarding the ~~disposition and treatment~~sale of ~~our~~ Neighborhood Diabetes ~~business as discontinued operations~~ is provided in ~~note~~Note 3 to the consolidated financial statements included in this Form 10-Q.

We announced on July 20, 2017 our plans to assume, on July 1, 2018, the distribution, sales, marketing, training and support activities of our Omnipod System across Europe following the expiration of our global distribution agreement with Ypsomed on June 30, 2018. Until the expiration of the distribution agreement, Ypsomed will remain the distributor of our Omnipod products in Europe. We do not expect that the anticipated transition will have a material impact on our financial trends for the remainder of 2017. Once we assume direct distribution and commercial support following the expiration of the distribution agreement with Ypsomed on June 30, 2018, we expect our revenue and gross margins to increase, as average customer pricing in Europe is higher than our current distributor pricing to Ypsomed. Throughout 2018, we expect to incur increased operating expenses as we invest in our European operations. In addition, we will be required to pay to Ypsomed a per unit fee for direct sales over the 12 months following the expiration of the global distribution agreement of our Omnipod device to former customers of Ypsomed, as defined in the distribution agreement. The actual amount of the fee is dependent on a number of factors, such as the European Omnipod customer installed base as of June 30, 2018, the number of customers who choose to continue to purchase Omnipod devices over the successive 12 months, and the volume of the devices sold to these customers during the 12-month period following the expiration of the distribution agreement. While the actual fee could vary significantly, assuming the continued growth of Omnipod in Europe through June 30, 2018, and limited attrition in the 12 months thereafter, we estimate that the fee could total approximately $50 million. Once European operations are established, excluding nonrecurring transition-related costs, we expect that the assumption of direct distribution will be accretive to our consolidated results of operations.

Third Quarter ~~2016~~2017 Revenue Results:

Total revenue of ~~$94.9~~$121.8 million


◦	U.S. Omnipod revenue of ~~$59.6~~$70.1 million


◦	International Omnipod revenue of ~~$19.1~~$32.5 million


◦	Drug Delivery revenue of ~~$16.1~~$19.2 million

Our long-term financial objective is to achieve and sustain profitable growth. Our efforts in ~~2016~~2017 are primarily focused ~~primarily~~ on the ~~global~~ expansion of our customer base in the United States and internationally, increasing our ~~operating performance.~~gross profit and product development. Achieving these objectives is ~~requiring~~expected to require additional investments in certain personnel and initiatives, as well as enhancements to our ~~manufacturing~~supply chain operation capacity, efficiency and effectiveness. We ~~may~~believe that we will continue to incur net losses in the near term in order to achieve these objectives. However, we believe that the accomplishment of our near-term objectives will have a positive impact on our financial condition in the future.

Components of Financial Operations

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

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

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

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

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

Results of Operations

This section discusses our consolidated results of operations for the third quarter and the ~~first~~ nine months ~~of 2016~~ended September 30, 2017 compared to the same periods of ~~2015,~~2016, and should be read in conjunction with the consolidated financial statements and accompanying condensed notes included in this Form 10-Q.

TABLE 1: RESULTS OF OPERATIONS (Unaudited)
TABLE 1: RESULTS OF OPERATIONS																							TABLE 1: RESULTS OF OPERATIONS

	Three Months Ended September 30,											Nine Months Ended September 30,
(In Thousands)	2016			2015			Change $			Change %		2016			2015			Change $			Change %
(Unaudited)																							Three Months Ended September 30,											Nine Months Ended September 30,
(in Thousands)																							2017			2016			Change $			Change %		2017			2016			Change $			Change %
Revenue:
U.S. Omnipod	$	59,641		$	50,738		$	8,903		18	%	$	166,691		$	135,835		$	30,856		23	%	$	70,065		$	59,641		$	10,424		17	%	$	195,081		$	166,691		$	28,390		17	%
International Omnipod	19,107			13,570			5,537			41	%	51,046			24,990			26,056			104	%	32,481			19,107			13,374			70	%	84,200			51,046			33,154			65	%
Drug Delivery	16,123			7,085			9,038			128	%	45,677			19,267			26,410			137	%	19,229			16,123			3,106			19	%	53,963			45,677			8,286			18	%
Total revenue	94,871			71,393			23,478			33	%	263,414			180,092			83,322			46	%	121,775			94,871			26,904			28	%	333,244			263,414			69,830			27	%
Cost of revenue	39,230			39,823			(593		)	(1	)%	113,265			88,814			24,451			28	%	48,151			39,230			8,921			23	%	135,583			113,265			22,318			20	%
Gross profit	55,641			31,570			24,071			76	%	150,149			91,278			58,871			64	%	73,624			55,641			17,983			32	%	197,661			150,149			47,512			32	%
Gross margin	58.6		%	44.2		%						57.0		%	50.7		%						60.5		%	58.6		%						59.3		%	57.0		%
Operating expenses:
Research and development	13,734			10,035			3,699			37	%	39,676			30,311			9,365			31	%	20,141			13,734			6,407			47	%	55,670			39,676			15,994			40	%
Sales and marketing	22,147			21,307			840			4	%	69,119			55,025			14,094			26	%	28,718			22,147			6,571			30	%	86,288			69,119			17,169			25	%
General and administrative	17,342			15,023			2,319			15	%	47,923			42,062			5,861			14	%	22,718			17,342			5,376			31	%	62,322			47,923			14,399			30	%
Total operating expenses	53,223			46,365			6,858			15	%	156,718			127,398			29,320			23	%	71,577			53,223			18,354			34	%	204,280			156,718			47,562			30	%
Operating income (loss)	2,418			(14,795		)	(17,213		)	(116	)%	(6,569		)	(36,120		)	(29,551		)	(82	)%	2,047			2,418			(371		)	(15	)%	(6,619		)	(6,569		)	(50		)	1	%
Interest expense and other income, net	(5,369		)	(3,146		)	2,223			71	%	(11,293		)	(9,491		)	1,802			19	%
Interest expense and other, net																							4,153			5,369			(1,216		)	(23	)%	13,034			11,293			1,741			15	%
Loss from continuing operations before income taxes																							(2,106		)	(2,951		)	845			(29	)%	(19,653		)	(17,862		)	(1,791		)	10	%
Income tax expense	66			44			22			50	%	195			83			112			135	%	121			66			55			83	%	318			195			123			63	%
Net loss from continuing operations																							(2,227		)	(3,017		)	790			(26	)%	(19,971		)	(18,057		)	(1,914		)	11	%
Loss from discontinued operations, net of tax	(64		)	(942		)	(878		)	(93	)%	(1,703		)	(499		)	1,204			241	%	—			(64		)	64			(100	)%	—			(1,703		)	1,703			(100	)%
Net loss	$	(3,081	)	$	(18,927	)	$	(15,846	)	(84	)%	$	(19,760	)	$	(46,193	)	$	(26,433	)	(57	)%	$	(2,227	)	$	(3,081	)	$	854		(28	)%	$	(19,971	)	$	(19,760	)	$	(211	)	1	%

Revenue

Our total revenue increased to ~~$94.9~~$121.8 million, up ~~$23.5~~$26.9 million, or ~~33%~~28%, in the third quarter of ~~2016~~2017 compared to the third quarter of ~~2015,~~2016, due to strong growth in our U.S. Omnipod revenue, International Omnipod revenue and our on-body injection device for drug delivery. Our U.S. Omnipod revenue increased to $70.1 million, up $10.4 million, or 17%, primarily due to growth in our installed base of Omnipod users ~~which was driven by the expansion in 2015 of our sales force and customer support personnel and strategic initiatives introduced in mid-2015~~as we continue to expand awareness of the Omnipod System. Our International Omnipod revenue increased to $32.5 million, up $13.4 million, or 70%, primarily due to growth in distributor sales from continued adoption in existing and newer markets ~~and to a lesser extent from entry into new markets.~~such as France. Our drug delivery revenue increased to $19.2 million, up $3.1 million, or 19%, due to strong growth in demand for our primary drug delivery device ~~following regulatory approval in December 2014.~~on greater market adoption of Amgen's Neulasta Onpro kit.

~~Total~~Our total revenue increased to ~~$263.4~~$333.2 million, up ~~$83.3~~$69.8 million, or ~~46% for~~27%, in the nine months ended September 30, ~~2016,~~2017 compared ~~with~~to the ~~same period in 2015, primarily~~nine months ended September 30, 2016, due to strong growth in our U.S. Omnipod revenue, International Omnipod revenue and our on-body injection device for drug delivery. Our U.S. Omnipod revenue increased to $195.1 million, up $28.4 million, or 17%, primarily due to growth in our installed base of Omnipod users ~~which was greatly driven by the expansion in 2015 of our sales force and customer support personnel and strategic initiatives introduced in mid-2015~~as we continue to expand awareness of the Omnipod System. ~~The results for the first nine months of 2015 also were partially impacted by unfavorable distributor ordering patterns in the first quarter of 2015 which stabilized thereafter.~~ Our International Omnipod revenue increased to $84.2 million, up $33.2 million, or 65%, primarily due to growth in distributor sales from continued adoption in existing and newer markets and to a lesser extent from entry into new markets. The results for the first nine months of 2015 included lower International Omnipod sales which partially resulted from unfavorable distributor ordering patterns in the first and second quarters of 2015 which stabilized thereafter.such as France. Our drug delivery revenue increased to $54.0 million, up $8.3 million, or 18%, due to strong growth in demand for our primary drug delivery device ~~following regulatory approval in December 2014.~~on greater market adoption of Amgen's Neulasta Onpro kit.

For the year ending December 31, ~~2016,~~2017, we expect strong revenue growth ~~compared to 2015,~~ across all of our product lines as we continue our expansion in the U.S. and internationally. We expect strong growth of approximately 20% in our worldwide Omnipod installed base. We also expect that the revenue from our drug delivery devices will be a higher relative percentage of our overall growth in 2016, as compared to 2015, as we increase commercial sales.

Cost of Revenue

Cost of revenue ~~decreased~~increased to ~~$39.2~~$48.2 million, ~~down $0.6~~up $8.9 million, or 23%, in the third quarter of ~~2016~~2017 compared to the same period in 2015, due to approximately $7.7 million of costs incurred during the third quarter of 2015, considered non-recurring in nature, associated with certain product which ultimately did not meet our quality expectations, along with manufacturing efficiency2016 and ~~effectiveness improvements made in 2016. This decrease was partially offset by an increase in sales volumes.~~

~~Total cost of revenue~~ increased to ~~$113.3~~$135.6 million, up ~~$24.5~~$22.3 million, ~~for~~or 20%, in the nine months ended September 30, ~~2016,~~2017 compared to the same period in ~~2015, primarily due to~~2016, reflecting an increase in sales volumes, partially offset by ~~$10.2 million of costs incurred during the first nine months of 2015 that were considered non-recurring~~improvements in ~~nature, along with manufacturing efficiency and effectiveness improvements made in 2016.~~supply chain operations.

Gross Margin

Gross margin ~~was approximately 59%~~increased to 60%, up 1.9% in the third quarter of ~~2016,~~2017 compared ~~with 44%~~to the same period in the third quarter of 2015. The margin improvement was mainly due to $7.7 million of costs in the third quarter of 2015 that were considered non-recurring in nature along with manufacturing efficiency and effectiveness improvements made in 2016.

Gross margin for the nine months ended September 30, ~~2016~~2017 was ~~57%~~59% compared with ~~51%~~57% for the nine months ended September 30, ~~2015.~~2016. The margin ~~improvement~~increase in each period was ~~mainly~~primarily due to ~~$10.2 million~~improvements in supply chain operations, partially offset by the unfavorable mix impact of ~~costs~~higher distributor sales in ~~the first nine months of 2015 that were considered non-recurring in nature along with manufacturing efficiency and effectiveness improvements made in 2016.~~Europe.

For the year ending December 31, ~~2016,~~2017, we expect gross margin to increase as compared to ~~2015~~2016 primarily due to ~~$10.2 million~~improvements in supply chain operations, partially offset by the unfavorable mix impact of ~~costs incurred~~higher distributor sales in ~~the first nine months of 2015 that were considered non-recurring in nature along with improvements to our manufacturing efficiency and effectiveness as demonstrated in the first nine months of 2016.~~

Europe.

Research and Development

Research and development expenses increased to $20.1 million, up $6.4 million, or 47%, for the three month period ended September 30, ~~2016 were $13.7 million~~2017 compared ~~with $10.0 million for~~to the same period in ~~2015.~~2016 and increased to $55.7 million, up $16.0 million, or 40%, for the nine months ended September 30, 2017 compared to the same period in 2016. The ~~approximate $3.7 million~~ increase in both periods was ~~the result of~~primarily due to an increase in expenses related to our development projects, including our ~~artificial pancreas program,~~digital mobile ~~application development including~~Omnipod platform, which involves interaction with continuous glucose monitoring technology, ~~development efforts with Eli Lilly~~ and ~~Company for the use of concentrated insulin for patients with higher insulin-resistance and other Omnipod product improvement initiatives.~~

Research and development expenses for the nine months ended September 30, 2016, were $39.7 million compared with $30.3 million for the same period in 2015. The approximate $9.4 million increase was the result of expenses related to our development projects, including our artificial pancreas program, mobile application development including interaction with continuous glucose monitoring technology, development efforts with Eli Lilly and Company for the use of concentrated insulin for patients with higher insulin-resistance and other Omnipod product improvement initiatives.program.

For the year ending December 31, ~~2016,~~2017, we expect overall research and development spending to increase as compared to 2016 due to the development efforts on our on-going projects including our artificial pancreas program, mobile application development including interaction with continuous glucose monitoring technology, development efforts with Eli Lilly and Company for the use of concentrated insulin, and the continued investment to support the use our technology as a delivery platform for other pharmaceuticals.

described above.

Sales and Marketing

Sales and marketing expenses increased to $28.7 million, up $6.6 million, or 30%, for the three month period ended September 30, ~~2016 were $22.1 million~~2017 compared ~~with $21.3 million for~~to the same period in ~~2015. The approximate $0.8~~2016 and increased to $86.3 million, ~~increase was mainly the result of a $1.4~~up $17.2 million, increase in personnel-related expenses, including increased incentive compensation costs on growth in the business, as well as costs associated with the expansion in 2015 of our sales force and customer support personnel, partially offset by a reduction in expenses associated with outside service providers.

~~Sales and marketing expenses~~or 25%, for the nine months ended September 30, ~~2016 were $69.1 million~~2017 compared to ~~$55.0 million for~~ the same period in ~~2015.~~2016. The ~~approximate $14.1 million increase was mainly the result of a $14.5 million~~ increase in personnel-related expenses, including increased incentive compensation costs resulting from growth in the business, as well as costs associated with the expansion in 2015 of our sales force and customer support personnel, partially offset by a reduction in expenses associated with outside service providers. Additionally, there was an increase in costs associated with marketing efforts, new market opportunities and other strategic initiatives introduced in mid-2015 as we continue to expand awareness of the Omnipod System and our on-body injection devices for delivery of other pharmaceuticals.

~~We expect~~ sales and marketing expenses in both periods was primarily attributable to increased personnel-related expenses associated with the expansion of our customer support, market access and sales force personnel, investments to support our assumption in mid-2018 of direct commercial support for Omnipod in Europe, and increased advertising expenses associated with direct to patient marketing activities.

For the year ending December 31, ~~2016~~2017, we expect sales and marketing expense to increase as ~~we see the full-year impact of the 2015 commercial team expansion~~compared to 2016 due to sales and ~~invest in initiatives that will enhance awareness, customer satisfaction and drive increased adoption of the Omnipod System,~~marketing efforts as ~~well as increased adoption of our technology as a delivery platform for other pharmaceuticals.~~

described above.

General and Administrative

General and administrative expenses increased to $22.7 million, up $5.4 million, or 31%, for the three month period ended September 30, ~~2016 were $17.3 million~~2017 compared ~~with $15.0 million for~~to the same period in ~~2015. The approximate $2.3~~2016 and increased to $62.3 million, increase was primarily attributable to personnel-related costs on higher incentive compensation associated with growth in our business, as well as additional staff to support our growth expectations and fees paid for external consultants.

~~General and administrative expenses~~up $14.4 million, or 30%, for the nine months ended September 30, ~~2016 were $47.9 million~~2017 compared to ~~$42.1 million for~~ the same period in ~~2015. The approximate $5.9 million~~2016. This increase was ~~mainly due~~primarily attributable to ~~employee compensation~~increased personnel-related costs and fees ~~paid for~~related to external ~~consultants.~~consultants and professional service providers to support the growth in our business.

For the year ending December 31, ~~2016,~~2017, we expect overall general and administrative expenses to increase as compared to ~~2015~~2016 as we continue to grow the business and make investments in our operating structure to support this continued growth.

Interest Expense and Other, ~~Income,~~ Net

Interest expense and other, ~~income,~~ net, decreased to $4.2 million, down $1.2 million, or 23%, for the three month period ended September 30, ~~2016, were $5.4 million~~2017 compared ~~with $3.1 million for~~to the same period in ~~2015. The approximate $2.2~~2016 and increased to $13.0 million, ~~increase was mainly due to a $2.6~~up $1.7 million, charge recorded for the extinguishment of debt related to the repurchase of $134.2 million in principal of the 2% Notes. This was partially offset from a slight decrease in capital lease interest expense.

~~Interest and other expense~~or 15%, for the nine months ended September 30, ~~2016, were $11.3 million~~2017 compared to ~~$9.5 million~~the same period in ~~2015.~~2016. The ~~approximate $1.8 million increase was mainly~~decrease in the three month period is primarily due to a $2.6 million charge ~~recorded for~~related to the extinguishment of debt ~~related to~~in the ~~repurchase of $134.2 million in principal of the 2% Notes. This was~~prior period, partially offset ~~from~~by additional interest expense, including cash and non-cash interest, associated with the issuance in September 2016 of 1.25% convertible senior notes, which increased our net outstanding long-term debt. The increase in the nine month period is due to a ~~slight decrease in capital lease~~net increase on our outstanding long-term debt, partially offset by a lower effective interest ~~expense.~~rate on outstanding debt. Please refer to Liquidity and Capital Resources for further discussion of our convertible debt.

Liquidity and Capital Resources

As of September 30, ~~2016~~,2017, we had ~~$215.4~~$102.2 million in cash and cash equivalents and ~~$67.3~~$173.5 million in short-term investments. We believe that our current liquidity, together with the cash expected to be generated from sales, will be sufficient to meet our projected operating and debt service requirements for at least the next twelve months.

To lower our manufacturing costs, increase supply redundancy, add capacity closer to our largest customer base and support growth, we are constructing a highly-automated manufacturing facility in Acton, Massachusetts with planned production out of the facility beginning in 2019. We expect capital expenditures to increase above historic levels to fund the construction of the manufacturing facility and related equipment purchases. We believe that our current liquidity will be sufficient to meet our projected expenditures associated with this project.

Convertible Debt

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

Cash interest expense related to the 1.25% Notes was ~~$0.2~~$1.1 million and $3.3 million in the three and nine ~~month periods~~months ended September 30, ~~2016.~~2017, respectively. Non-cash interest expense related to the 1.25% Notes of $3.4 million and $10.1 million was ~~$0.5 million~~comprised of the amortization of the debt discount and debt issuance costs in the three and nine ~~month periods~~months ended September 30, ~~2016.~~2017, respectively.

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

In September 2016, in connection with the issuance of $345.0 million in principal amount of 1.25% ~~Convertible Senior~~ Notes ~~due September 2021~~ discussed above, we repurchased approximately $134.2 million in principal amount of the 2% Notes for ~~$153.6~~$154.3 million, ~~(excluding~~including $0.7 million of accrued interest of $0.7 million). The extinguishment of the 2% Notes was accounted for separately from the issuance of the 1.25% Notes as both transactions were viewed as arm's-length in nature and were not contingent upon one another.interest. The $154.3 million paid to extinguish the debt was allocated to debt and equity based on their respective fair values immediately prior to the transaction. We allocated $121.4 million of the payment to the debt and $32.9 million to equity.

Cash interest expense related to the 2% Notes was ~~$0.9~~$0.3 million and ~~$1.0~~$0.9 million in the three months ended September 30, 2017 and 2016, respectively, and ~~2015, respectively. Cash interest expense related to the 2% Notes~~ was ~~$2.9~~$1.0 million and ~~$3.0~~$2.9 million in the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively.

Non-cash interest expense related to the 2% Notes ~~was~~of $0.7 million and $1.6 million was comprised of the amortization of the debt discount and ~~$1.9 million~~debt issuance costs in the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively. Non-cash interest expense related to the 2% Notes ~~was~~of $2.1 million and $5.6 million was comprised of the amortization of the debt discount and ~~$5.7 million~~debt issuance costs in the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively.

Additional information regarding our debt issuances is provided in Note 6 to the consolidated financial statements included in this Form 10-Q.

~~Capital Leases~~

As of September 30, 2016 and December 31, 2015, we have approximately $13.7 million of manufacturing equipment acquired under capital leases. As of September 30, 2016, one capital lease remains outstanding and is being repaid in equal monthly installments over a 24 month term and includes principal and interest payments with an effective interest rate of 13%.

~~Additional information regarding our capital leases is provided in note 7 to the consolidated financial statements included in this Form 10-Q.~~

Summary of Cash Flows


	Nine Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2016			2015			2017			2016
Cash (used in) provided by:
Cash provided by (used in):
Operating activities	$	(4,159	)	$	6,043		$	19,407		$	(4,159	)
Investing activities	(80,827		)	(11,841		)	(61,485		)	(80,827		)
Financing activities	177,558			292			6,650			177,558
Effect of exchange rate changes on cash	158			(220		)	487			158
Net increase (decrease) in cash and cash equivalents	$	92,730		$	(5,726	)
Net (decrease) increase in cash and cash equivalents							$	(34,941	)	$	92,730

Operating Activities

Our net cash provided by operating activities for thenine months ended September 30, 2017 was $19.4 million compared to net cash used in operating activities ~~for the nine months ended September 30, 2016 was~~of $4.2 million ~~compared to $6.0 million~~in the same period of 2016, an increase of $23.6 million. The increase in cash provided by operating activities in the ~~same~~current period ~~of 2015. The increase was~~is primarily due to additional inventory purchases in 2016 in order to support customer demand and to allow for alternative shipping methods, ~~which~~the growth of our business in ~~turn is expected to lower our distribution costs,~~the current period and the timing of cash disbursements. This impact was partially offset by ~~a lower net loss recorded for the period.~~an increase in accounts receivable, which was primarily due to an increase in sales.

Investing Activities

Our net cash used in investing activities for thenine months ended September 30, ~~2016~~2017 was ~~$80.8~~$61.5 million compared to ~~$11.8~~$80.8 million in ~~2015. In~~ the ~~nine months ended September 30, 2016, we invested $76.2~~same period of 2016. Investing activities in the current period primarily consists of $47.8 million ~~into short-term investments. There were no such investments in 2015. In addition, the increase in investing activities relates to higher~~of capital ~~purchases for the nine months ended 2016 compared to 2015,~~expenditures, primarily associated with investments in our supply chain operations, ~~including $9.8~~which include approximately $29.8 million for facility and equipment in process of construction to support our U.S. manufacturing ~~initiatives.~~initiatives, and $13.7 million of investments in marketable securities, net of sales and maturities. Cash used in investing activities in the nine months ended September 30, 2016 primarily related to investments in marketable securities of $76.2 million.

Financing Activities

~~We had~~Our net cash provided by financing activities for thenine months ended September 30, 2017 was $6.7 million, which primarily includes proceeds from the exercise of stock options, as compared to net cash of $177.6 million provided in the same period of 2016. The decrease in cash provided by financing activities in the current period as compared to the same period in the prior year was primarily attributable to proceeds from the issuance of our 1.25% Notes, net of the retirement of our 2% Notes as further described above, that occurred in the nine months ended September 30, 2016 ~~of $177.6 million compared to $0.3 million~~where no such convertible debt financing activity occurred in ~~2015. The increase was primarily attributable to net proceeds of $333.9 million in September 2016 from~~ the ~~issuance of the 1.25% Notes, offset by repayments of $153.6 million for extinguishment of approximately 67% of our outstanding 2% Notes.~~current period.

Commitments and Contingencies

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

Certain of our operating lease agreements contain scheduled rent increases. Rent expense is recorded using the straight-line method and deferred rent is included in other liabilities in the accompanying consolidated balance sheets.

~~The following table summarizes our principal obligations as of September 30, 2016 (in thousands):~~

Contractual obligations Total 2016 (remaining) 2017 2018 2019 2020 Later
Operating lease obligations $ 14,744
$ 624
$ 2,449
$ 2,383
$ 2,390
$ 2,383
$ 4,515
Debt obligations (1) 437,673
671
5,655
5,655
72,068
4,312
349,312
Capital lease obligations (2) 1,077
808
269
—
—
—
—
Purchase obligations (3) 63,274
21,885
31,757
9,632
—
—
—
Total contractual obligations $ 516,768
$ 23,988
$ 40,130
$ 17,670
$ 74,458
$ 6,695
$ 353,827

~~__________________~~

~~(1) Debt obligations include principal and interest. Our senior convertible notes pay interest of 2% and 1.25% per annum.~~

~~(2) The effective interest rate on our capital lease obligations is 13%. Future interest payments are included in the amount of capital lease obligations presented.~~

(3) Our purchase obligations include commitments with certain of our suppliers, primarily for the purchase of Omnipod System components and manufacturing equipment along with other commitments to purchase goods or services in the normal course of business. We make such commitments through a combination of purchase orders, supplier contracts, and open orders based on projected demand information.

Legal Proceedings

The significant estimates and judgments related with establishing litigation reserves are discussed under "Legal Proceedings" in Note 1312 to the consolidated financial statements included in this Form 10-Q.

Off-Balance Sheet Arrangements

As of September 30, ~~2016~~2017, we did not have any off-balance sheet financing arrangements.

Critical Accounting Policies and Estimates

Our financial statements are based on the selection and application of generally accepted accounting principles, which require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying condensed notes. Future events and their effects cannot be determined with certainty.

Therefore, the determination of estimates requires the exercise of judgment.

Actual results could differ from those estimates, and any such differences may be material to our financial statements.

We have reviewed our policies and estimates to determine our critical accounting policies for the nine months ended September 30, ~~2016.~~2017. We have made no material changes to the critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016.

Recent Accounting Pronouncements

Information with respect to recent accounting ~~developments~~pronouncements is provided in ~~note~~Note 2 to the consolidated financial statements included in this Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash, cash equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses, debt and long-term obligations. We consider investments that, when purchased, have a remaining maturity of 90 days or less to be cash equivalents. The primary objectives of our investment strategy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. To minimize our exposure to an adverse shift in interest rates, we invest mainly in short-term investments and cash equivalents. We do not believe that a 10% change in interest rates would have a material impact on the fair value of our investment portfolio or our interest income.

As of September 30, ~~2016,~~2017, we had outstanding debt recorded on our consolidated balance sheet of ~~$412.1~~$345.0 million, ~~gross~~net of our deferred financing costs and unamortized debt discount totaling $67.1 million, related to our 2% and 1.25% ~~Notes; and $1.1 million related to capital lease obligations.~~Notes. As the interest rates are fixed, changes in interest rates do not affect the value of our ~~debt or capital lease obligations.~~debt.

~~Foreign Currency Exchange Risk.~~ Our business is subject to risks, including, but not limited to: unique economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. We are primarily exposed to currency exchange rate fluctuations related to our subsidiary operation in Canada. The majority of our sales outside of the U.S. are currently transacted in U.S. dollars and are not subject to material foreign currency fluctuations.

Fluctuations in foreign currency rates could affect our ~~sales,~~revenue, cost of ~~goods~~revenue and operating margins and could result in exchange losses. In addition, currency devaluations can result in a loss if we hold deposits of that currency. A hypothetical 10% increase or decrease in foreign currencies that we transact in would not have a material adverse impact on our business, financial condition or results of operations.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

AsOur management, with the participation of ~~September 30, 2016,~~ our ~~management conducted an evaluation of~~chief executive officer and chief financial officer, evaluated the effectiveness ~~of the design and operation~~ of our disclosure controls and procedures ~~(as such~~as of September 30, 2017. The term is“disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)~~) under the supervision and with the participation of our chief executive officer and chief financial officer. In designing and evaluating our disclosure~~ means controls and other procedures ~~we and our management recognize~~of a company that ~~any controls and procedures, no matter how well~~are designed ~~and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required~~ to ~~apply its judgment in evaluating and implementing possible controls and procedures. Based upon~~ensure that evaluation of our disclosure controls and procedures as of September 30, 2016, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by a company in the reports that ~~we file~~it files or ~~submit~~submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and ~~forms, including ensuring~~forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that ~~such material~~ information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to ~~our~~the company’s management, including ~~our chief~~its principal executive ~~officer~~ and ~~our chief~~principal financial ~~officer,~~officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2017, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the ~~three~~nine months ended September 30, ~~2016~~2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding our material pending legal proceedings, which is incorporated herein by reference, is provided in Note 1312 to the consolidated financial statements in this Form 10-Q.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2015,~~2016, which could materially affect our business, financial condition or future results. These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. ~~There~~Other than the risks listed below, there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2015 except~~2016.

Our planned assumption on July 1, 2018 of the distribution, sales, marketing, training and support activities of our Omnipod System in Europe following the expiration of our current third-party global distribution agreement creates several business and operational risks related to the future sales of our Omnipod System in Europe.

On July 20, 2017, we announced our plan to assume, on July 1, 2018, the distribution, sales, marketing, training and support activities of our Omnipod System across Europe following the expiration of our global distribution agreement with Ypsomed on June 30, 2018. Until the expiration of the agreement, Ypsomed will remain the distributor of our Omnipod products in Europe. While we do not expect this transition to materially affect our financial trends for the ~~following:~~

Weremainder of 2017, there could be a negative effect on our sales during the transition period if Ypsomed places more emphasis on selling its own proprietary products and other products, instead of ours, during this period, thereby reducing our sales. In addition, to retain current revenue streams after July 1, 2018, we will need to secure the existing customer installed base of Omnipod users in Europe, and there can be no assurance that we will succeed in doing so. More generally, if we are unable to effectively establish direct distribution and commercial support for the Omnipod System in Europe in a timely manner (which may include hiring employees in many of these jurisdictions), we may not be able to ~~generate sufficient cash~~service the current Omnipod users in Europe and grow the business as we anticipate. We expect to ~~service~~incur increased operating expenses as we invest in these European operations, and it is possible that the ultimate economic benefits that we derive from these investments could be less than anticipated, or that such expected economic benefits could fail to materialize at all. Any of the foregoing risks could negatively affect our ~~indebtedness represented by our 2% Convertible Senior Notes due June 15, 2019~~future revenues and, ~~our 1.25% Convertible Senior Notes due September 15, 2021. We may be forced to take other actions to satisfy our obligations under our indebtedness or we may experience~~depending on severity, potentially cause a ~~financial failure.~~

In 2014, we sold $201.3 million in principal amount of 2% Convertible Senior Notes, due in 2019. In September 2016, we sold $345 million in principal amount of 1.25% Convertible Senior Notes, due in 2021. In connection with the issuance of $345 million in 1.25% Convertible Senior Notes, we repurchased $134.2 million of our outstanding 2% Convertible Senior Notes. Our ability to make scheduled payments or to refinance the 2% and 1.25% Convertible Senior Notes or other debt obligations dependsmaterially adverse effect on our ~~financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial,~~ business and ~~other factors beyond our control. We cannot assure you that we will maintain a level~~results of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness, including the 2% and 1.25% Convertible Senior Notes. We cannot assure you that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our future debt agreements. In the absence of sufficient operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or obtain sufficient proceeds from those dispositions to meet our debt service and other obligations when due.

operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits



Number		Description

~~4.1~~		~~Indenture, dated as~~
10.1		Form of ~~September 13, 2016, between~~ Insulet Corporation 2017 Stock Option and ~~Wells Fargo Bank, National Association, as Trustee (previously filed as Exhibit 4.1 to the Company's Current Report on Form 8-K on September 13, 2016 and incorporated by reference herein)~~Incentive Plan Performance Vesting Restricted Stock Unit Agreement for Officers

~~4.2~~		Form of 1.25% Convertible Senior Notes due 2021 (included in Exhibit 4.1) (previously filed as Exhibit 4.2 to the Company's Current Report on Form 8-K on September 13, 2016 and incorporated by reference herein)

~~4.3~~		Amendment No. 2 to Shareholder Rights Agreement dated August 30, 2016 (previously filed as Exhibit 4.1 to the Company's Current Report on Form 8-K on August 30, 2016 and incorporated by reference herein)

~~10.1+~~		~~Materials Supplier Agreement between Insulet Corporation and Flextronics Medical Sales and Marketing, Ltd., dated September 1, 2016~~

~~10.2+~~		~~Master Equipment and Services Agreement between Insulet Corporation and ATS Automation Tooling Systems Inc., dated August 31, 2016~~

31.1		Certification ~~of Patrick J. Sullivan, Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted~~ pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002 by Chief Executive Officer.

31.2		Certification ~~of Michael L. Levitz, Chief Financial Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted~~ pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002 by Chief Financial Officer.

~~32.1~~ 32.1*		Certification ~~of Patrick J. Sullivan, Chief Executive Officer, and Michael L. Levitz, Chief Financial Officer,~~ pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002, by Chief Executive Officer and Chief Financial Officer.

101		The following materials from Insulet Corporation’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2016,~~2017 formatted in XBRL (eXtensible Business Reporting Language), as follows:

		(i) Consolidated Balance Sheets as of September 30, ~~2016~~2017 (Unaudited) and December 31, ~~2015~~2016

		(ii) Consolidated Statements of Operations for the Three and Nine Months Ended September 30, ~~2016~~2017 and ~~September 30, 2015~~2016 (Unaudited)

		(iii) Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, ~~2016~~2017 and ~~September 30, 2015~~2016 (Unaudited)

		(iv) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2016~~2017 and ~~September 30, 2015~~2016 (Unaudited)

		(iv) Condensed Notes to Consolidated Financial Statements (Unaudited)

+*		~~Application has been made~~This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the ~~Securities and Exchange Commission for confidential treatment~~liability of ~~certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with~~that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities ~~and~~Act of 1933 or the Securities Exchange ~~Commission.~~
		Act of 1934.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		INSULET CORPORATION (Registrant)

Date:	November ~~4, 2016~~2, 2017	/s/ Patrick J. Sullivan
		Patrick J. Sullivan
		Chief Executive Officer (Principal Executive Officer)




Date:	November ~~4, 2016~~2, 2017	/s/ Michael L. Levitz
		Michael L. Levitz
		Chief Financial Officer (Principal Financial and Accounting Officer)

3937



	September 30, 2016			December 31, 2015
Manufacturing equipment	$	13,705		$	13,705
Less: Accumulated amortization	(6,401		)	(4,346		)
Total	$	7,304		$	9,359



	Number of Options (#)		Weighted Average Exercise Price ($)		Aggregate Intrinsic Value ($)
					(In thousands)
Balance, December 31, 2015	2,999,199		$	31.37
Granted	967,918		$	31.32
Exercised⁽¹⁾	(226,296	)	$	19.54	$	4,440
Canceled	(198,885	)	$	32.60
Balance, September 30, 2016	3,541,936		$	32.05	$	32,243
Vested, September 30, 2016⁽²⁾	1,347,219		$	31.63	$	12,837
Vested and expected to vest, September 30, 2016⁽²⁾⁽³⁾	3,230,071				$	29,427



Contractual obligations	Total		2016 (remaining)		2017		2018		2019		2020		Later
Operating lease obligations	$	14,744	$	624	$	2,449	$	2,383	$	2,390	$	2,383	$	4,515
Debt obligations (1)	437,673		671		5,655		5,655		72,068		4,312		349,312
Capital lease obligations (2)	1,077		808		269		—		—		—		—
Purchase obligations (3)	63,274		21,885		31,757		9,632		—		—		—
Total contractual obligations	$	516,768	$	23,988	$	40,130	$	17,670	$	74,458	$	6,695	$	353,827