Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
 _____________________________________________________
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20152016
OR
¨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  x    No  ¨
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  x    No  ¨
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 filerx Accelerated filer¨
    
Non-accelerated filer¨(Do not check if a smaller reporting company)Smaller reporting company¨
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 5, 2015,2, 2016, the registrant had 56,928,57357,426,072 shares of common stock outstanding.


Table of Contents

INSULET CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
September 30, 20152016
TABLE OF CONTENTSTable Of Contents
 
 
Consolidated Balance Sheets as of September 30, 20152016 (Unaudited) and December 31, 20142015
Consolidated Statements of Operations for the three and nine months ended September 30, 20152016 and 20142015 (Unaudited)
Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 20152016 and 20142015 (Unaudited)
Consolidated Statements of Cash Flows for the nine months ended September 30, 20152016 and 20142015 (Unaudited)
  
 



PART I - FINANCIAL INFORMATION
Item 1.Consolidated Financial Statements (Unaudited)
INSULET CORPORATION
CONSOLIDATED BALANCE SHEETS
 September 30,
2015
 December 31,
2014
(In thousands, except share and per share data)(Unaudited)  
ASSETS   
Current Assets   
Cash and cash equivalents$145,467
 $151,193
Accounts receivable, net31,803
 39,882
Inventories, net13,019
 13,099
Prepaid expenses and other current assets4,049
 4,022
Total current assets194,338
 208,196
Property and equipment, net41,536
 37,069
Intangible assets, net13,039
 14,064
Goodwill39,823
 37,536
Other assets4,384
 5,291
Total assets$293,120
 $302,156
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Current Liabilities   
Accounts payable$15,614
 $14,659
Accrued expenses and other current liabilities35,547
 24,703
Deferred revenue2,256
 1,554
Current portion of capital lease obligations6,020
 3,380
Total current liabilities59,437
 44,296
Capital lease obligations1,061
 2,263
Long-term debt, net of discount173,870
 168,994
Other long-term liabilities3,619
 2,774
Total liabilities237,987
 218,327
Commitments and contingencies (Note 12)
 
Stockholders’ Equity   
Preferred stock, $.001 par value:   
Authorized: 5,000,000 shares at September 30, 2015 and December 31, 2014.
Issued and outstanding: zero shares at September 30, 2015 and December 31, 2014.

 
Common stock, $.001 par value:   
Authorized: 100,000,000 shares at September 30, 2015 and December 31, 2014.
Issued and outstanding: 56,914,557 and 56,299,022 shares at September 30, 2015 and December 31, 2014, respectively.
57
 56
Additional paid-in capital679,761
 661,811
Accumulated other comprehensive loss(467) (13)
Accumulated deficit(624,218) (578,025)
Total stockholders’ equity55,133
 83,829
Total liabilities and stockholders’ equity$293,120
 $302,156

The accompanying condensed notes are an integral part of these consolidated financial statements.
(in thousands, except share data)September 30,
2016
 December 31,
2015
ASSETS(Unaudited)  
Current Assets   
Cash and cash equivalents$215,402
 $122,672
Short-term investments (Note 5)67,293
 
Accounts receivable, net (Note 9)38,548
 42,530
Inventories, net (Note 10)32,663
 12,024
Prepaid expenses and other current assets7,901
 4,283
Current assets of discontinued operations (Note 3)
 9,252
Total current assets361,807
 190,761
Property and equipment, net (Note 2)50,911
 41,793
Other intangible assets, net (Note 11)651
 933
Goodwill39,730
 39,607
Other assets98
 76
Long-term assets of discontinued operations (Note 3)
 1,956
Total assets$453,197
 $275,126
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Current Liabilities   
Accounts payable$18,212
 $15,213
Accrued expenses and other current liabilities (Note 12)33,732
 36,744
Deferred revenue1,247
 2,361
Current portion of capital lease obligations (Note 7)1,061
 5,519
Current liabilities of discontinued operations (Note 3)
 5,319
Total current liabilities54,252
 65,156
Capital lease obligations (Note 7)
 269
Long-term debt, net (Note 6)328,962
 171,698
Other long-term liabilities4,888
 3,952
Total liabilities388,102
 241,075
Commitments and contingencies (Note 13)
 
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.

 
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
Additional paid-in capital736,730
 686,193
Accumulated other comprehensive loss(387) (654)
Accumulated deficit(671,305) (651,545)
Total stockholders’ equity65,095
 34,051
Total liabilities and stockholders’ equity$453,197
 $275,126
3


INSULET CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
  Three Months Ended September 30, Nine Months Ended September 30,
(In thousands, except share and per share data) 2015 2014 2015 2014
Revenue $87,303
 $74,985
 $224,106
 $216,159
Cost of revenue 51,652
 36,943
 121,273
 109,544
Gross profit 35,651
 38,042
 102,833
 106,615
Operating expenses:        
Research and development 10,035
 7,158
 30,311
 20,614
General and administrative 17,156
 18,890
 45,841
 52,661
Sales and marketing 24,194
 14,870
 63,406
 43,382
Total operating expenses 51,385
 40,918
 139,558
 116,657
Operating loss (15,734) (2,876) (36,725) (10,042)
Interest income 46
 32
 123
 92
Interest expense (3,167) (3,043) (9,435) (11,507)
Other expense, net (10) (677) (5) (1,302)
         
Loss on extinguishment of long-term debt 
 (4,260) 
 (23,203)
Interest and other expense, net (3,131) (7,948) (9,317) (35,920)
Loss before income taxes (18,865) (10,824) (46,042) (45,962)
Income tax expense (62) (21) (151) (138)
Net loss $(18,927) $(10,845) $(46,193) $(46,100)
Net loss per share basic and diluted $(0.33) $(0.19) $(0.81) $(0.83)
Weighted-average number of shares used in calculating net loss per share 56,898,281
 55,819,242
 56,735,944
 55,447,414

The accompanying condensed notes are an integral part of these consolidated financial statements.
  Three Months Ended September 30, Nine Months Ended September 30,
(In thousands, except share and per share data) 2016 2015 2016 2015
Revenue $94,871
 $71,393
 $263,414
 $180,092
Cost of revenue 39,230
 39,823
 113,265
 88,814
Gross profit 55,641
 31,570
 150,149
 91,278
Operating expenses:        
Research and development 13,734
 10,035
 39,676
 30,311
Sales and marketing 22,147
 21,307
 69,119
 55,025
General and administrative 17,342
 15,023
 47,923
 42,062
Total operating expenses 53,223
 46,365
 156,718
 127,398
Operating income (loss) 2,418
 (14,795) (6,569) (36,120)
Interest expense 3,029
 3,167
 9,252
 9,567
Other income, net 211
 21
 510
 76
Loss on extinguishment of long-term debt 2,551
 
 2,551
 
Interest expense and other income, net (5,369) (3,146) (11,293) (9,491)
Loss from continuing operations before income taxes (2,951) (17,941) (17,862) (45,611)
Income tax expense (Note 15) 66
 44
 195
 83
Net loss from continuing operations $(3,017) $(17,985) $(18,057) $(45,694)
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)
Net loss $(3,081) $(18,927) $(19,760) $(46,193)
Net loss per share basic and diluted:        
Net loss from continuing operations per share $(0.05) $(0.32) $(0.32) $(0.81)
Net loss from discontinued operations per share $
 $(0.02) $(0.03) $(0.01)
Weighted-average number of shares used in calculating net loss per share 57,341,063
 56,898,281
 57,189,423
 56,735,944
4


INSULET CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)

  Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2015 2014 2015 2014
Net loss $(18,927) $(10,845) $(46,193) $(46,100)
Other comprehensive loss, net of tax        
Foreign currency translation adjustment, net of tax (457) 1
 (454) 
Total other comprehensive loss, net of tax (457) 1
 (454) 
Total comprehensive loss $(19,384) $(10,844) $(46,647) $(46,100)

The accompanying condensed notes are an integral part of these consolidated financial statements.
  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)
5


INSULET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
  Nine Months Ended September 30,
(In thousands) 2015 2014
Cash flows from operating activities    
Net loss $(46,193) $(46,100)
Adjustments to reconcile net loss to net cash used in operating activities    
Depreciation and amortization 11,406
 9,168
Non-cash interest and other expense 5,721
 8,397
Stock-based compensation expense 13,852
 18,247
Loss on extinguishment of debt 
 23,203
Provision for bad debts 2,762
 2,669
Changes in operating assets and liabilities:    
Accounts receivable 5,286
 (16,747)
Inventories 312
 (198)
Deferred revenue 703
 (66)
Prepaid expenses and other assets 42
 1,242
Accounts payable, accrued expenses and other current liabilities 11,782
 3,861
Other long-term liabilities 370
 637
Net cash provided operating activities 6,043
 4,313
Cash flows from investing activities    
Purchases of property and equipment (7,126) (8,853)
Acquisition of Canadian distribution business (4,715) 
Net cash used in investing activities (11,841) (8,853)
Cash flows from financing activities    
Principal payments of capital lease obligations (4,283) (2,174)
Proceeds from issuance of long-term debt, net of issuance costs 
 194,576
Repayment of long-term debt 
 (189,521)
Proceeds from issuance of common stock, net of offering costs 7,043
 6,877
Payment of withholding taxes in connection with vesting of restricted stock units (2,468) (8,573)
Net cash provided by financing activities 292
 1,185
Effect of exchange rate changes on cash (220) 
Net (decrease) in cash and cash equivalents (5,726) (3,355)
Cash and cash equivalents, beginning of period 151,193
 149,727
Cash and cash equivalents, end of period $145,467
 $146,372
Non-cash investing and financing activities    
Allocation to equity for conversion feature for the 2% Notes $
 $35,638
Common stock issued in exchange for 3.75% Convertible Senior Notes $
 $12,564
Purchases of property and equipment under capital lease $5,721
 $1,474

The accompanying condensed notes are an integral part of these consolidated financial statements.
  Nine Months Ended September 30,
(In thousands) 2016 2015
Cash flows from operating activities    
Net loss $(19,760) $(46,193)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities    
Depreciation and amortization 10,474
 11,406
Non-cash interest expense 6,117
 5,721
Stock-based compensation expense 16,850
 13,852
Loss on extinguishment of long-term debt 2,551
 
Provision for bad debts 1,889
 2,762
Other 139
 
Changes in operating assets and liabilities:    
Accounts receivable 2,994
 5,286
Inventories (21,287) 312
Prepaid expenses and other assets (3,268) 42
Accounts payable, accrued expenses and other current liabilities (632) 11,782
Deferred revenue (982) 703
Other long-term liabilities 756
 370
Net cash (used in) provided by operating activities (4,159) 6,043
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)
Net cash used in investing activities (80,827) (11,841)
Cash flows from financing activities    
Principal payments of capital lease obligations (4,727) (4,283)
Proceeds from issuance of convertible notes, net of issuance costs 333,904
 
Repayment of convertible notes (153,628) 
Proceeds from issuance of common stock, net of offering costs 4,848
 7,043
Payment of withholding taxes in connection with vesting of restricted stock units (2,839) (2,468)
Net cash provided by financing activities 177,558
 292
Effect of exchange rate changes on cash 158
 (220)
Net increase (decrease) in cash and cash equivalents 92,730
 (5,726)
Cash and cash equivalents, beginning of period 122,672
 151,193
Cash and cash equivalents, end of period $215,402
 $145,467
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) $
6


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 OmniPodOmnipod Insulin Management System (the “OmniPod“Omnipod System”), an innovative, discreet and easy-to-use insulin infusion system for people with insulin-dependent diabetes. The OmniPodOmnipod System features a uniquesmall, lightweight, self-adhesive disposable tubeless OmniPodOmnipod device which is worn on the body for approximately three days at a time and its wireless companion, the handheld wireless Personal Diabetes Manager (“PDM”("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 OmniPodOmnipod 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 acquired Neighborhood Holdings, Inc. and its wholly-owned subsidiaries (collectively, “Neighborhood Diabetes”) in June 2011, in order to expand the Company’s full-suite diabetes management product offerings and obtain access to a larger number of insulin dependent patients.2011. Through Neighborhood Diabetes, the Company is able to provideprovided customers with blood glucose testing supplies, traditional insulin pumps, pump supplies and pharmaceuticals and hashad 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 consolidated financial statements included in this Form 10-Q.
Commercial sales of the OmniPodOmnipod System began in the United States in 2005. The Company sells the OmniPodOmnipod System and other diabetes management supplies in the United States through direct sales to customers or through its distribution partners. The OmniPodOmnipod System is currently available in multiple countries in Europe, Canada and in Canada.Israel.
OnIn 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 7, 2015, the Company executed an asset purchase agreement whereby it acquired the Canadian OmniPodOmnipod distribution operations from GlaxoSmithKline (GSK)("GSK"). With the acquisition, the Company assumed all distribution, sales, marketing, training and support activities for the OmniPodOmnipod system in Canada. Additional information regarding this acquisition is provided in note 3 to the consolidated financial statements included in this Form 10-Q.
Note 2. 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 month periodsmonths ended September 30, 20152016 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2015,2016, 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, 2014.2015 and 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.
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, acquired businesses, accounts receivable, inventories, goodwill, deferred revenue, equity instruments, convertible debt, the lives of property and equipment and

intangible assets, as well as warranty and doubtful accounts allowance reserve calculations. Actual results may differ from those estimates.
Foreign Currency Translation
For foreign operations, asset and liability accounts are translated at current exchange rates;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 of period-end balances denominated in currencies other than the functional currency, primarily the Canadian dollar, are included in other expense,income, net, and were not material for fiscal years 2015in the three and 2014.



7


Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimatesnine months ended September 30, 2016 and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting periods. The most significant estimates used in these financial statements include the valuation of; stock-based compensation expense, acquired businesses, accounts receivable, inventories, goodwill, deferred revenue, and equity instruments, the lives of property and equipment and intangible assets, as well as warranty and doubtful accounts allowance reserve calculations. Actual results may differ from those estimates.2015.
Principles of Consolidation
The unaudited consolidated financial statements in this Quarterly Report on Form 10-Q 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 liquidhighly-liquid investment instruments with original maturities of 90 days or less, when purchased, to be cash equivalents. Cash equivalents include money market accounts,mutual funds, corporate bonds, and certificates of deposit which are carried at cost which approximates their fair value. Outstanding letters of credit, related to security deposits for lease obligations, totaled $1.2 million as of September 30, 20152016 and December 31, 2014.2015.
Investments
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' 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.
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.
Business Combinations
The Company recognizes the assetsProperty and liabilities assumed in business combinations on the basisequipment included $38.3 million and $28.2 million of their fair values at the dateaccumulated depreciation as of acquisition. The Company assesses the fair value of assets, including intangible assets, using a variety of methodsSeptember 30, 2016 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.December 31, 2015, respectively.
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 FASB ASCFinancial 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.
TheAs the Company continues to operateoperates in one segment, whichthe Company has considered whether that segment contains multiple reporting units. The Company has concluded that there is considered to be the solea single reporting unit as the Company does not have segment managers and therefore,discrete financial information below consolidated results is not reviewed on a regular basis. Based on this conclusion, goodwill wasis tested for impairment at the enterprise level. The Company performs an annual goodwill impairment test unless interim indicators of impairment exist. 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 a discounted cash flow analysis. If the reporting unit’s carrying value exceeds its fair value, the Company would record an impairment loss to the extent that the carrying value of goodwill

exceeds its implied fair value. There werewas no indicatorsimpairment of goodwill impairment during the three and nine months ended September 30, 2015 or 2014.2016 and 2015.

8


Revenue Recognition
The Company generates nearly allmost of its revenue from global sales of its OmniPod Systemthe Omnipod System. Revenue also includes sales of devices based on the Omnipod technology platform to global pharmaceutical and other diabetes related products including blood glucose testing supplies, traditional insulin pumps, pump supplies and pharmaceuticals to customers and third-party distributors who resellbiotechnology companies for the products to patients with diabetes.delivery of subcutaneous drugs across multiple therapeutic areas.
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 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 title and risk and rewards of ownership are passed to the patient or third-party distributor upon shipment of the products.
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 rebatesother 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 right of return for sales of its OmniPodOmnipod System to patients in the United States, and a 90-day right of return for sales of its OmniPodOmnipod 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 when appropriate.marketplace. When doubt exists about reasonable assuredness of collectability from specific customers, the Company defers revenue from sales of products to those customers until payment is received.
In June 2011,As of September 30, 2016 and December 31, 2015, the Company entered into a development agreement with a U.S. based pharmaceutical company (the "Development Agreement”). Under the Development Agreement, the Company was required to perform design, development, regulatory, and other services to support the pharmaceutical company as it worked to obtain regulatory approval to use the Company’s drug delivery technology as a delivery method for its pharmaceutical. Over the term of the Development Agreement, the Company has invoiced amounts based upon meeting certain deliverable milestones. Revenue on the Development Agreement was recognized using a proportional performance methodology based on efforts incurred and total payments under the agreement. The impact of changes in the expected total effort or contract payments was recognized as a change in estimate using the cumulative catch-up method. The pharmaceutical company received regulatory approval and now purchases product from the Company for use with its pharmaceutical under a supply agreement. Product revenue under this arrangement is recognized at the time that all of the revenue recognition criteria are met, typically upon shipment.
The Companyhad deferred revenue of $2.4$1.8 million and $1.6$2.5 million, respectively, which included $0.5 million and $0.2 million classified in other long-term liabilities in each period as of September 30, 20152016 and December 31, 20142015, respectively. Deferred revenue asprimarily relates to undelivered elements within certain of September 30, 2015 included $0.2 million classified inthe Company's developmental arrangements and other long term liabilities.
International OmniPodinstances where the Company has not yet met the revenue accounted for approximately 16% and 11% of total revenue in the third quarter and first nine months of 2015, respectively, compared to approximately 17% for the same periods in 2014.recognition criteria.
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. These shipping and handling costs are included in general and administrative expenses.expenses and were $1.1 million and $0.6 million for the three months ended September 30, 2016 and 2015, respectively and were $2.8 million and $1.6 million for the nine months ended September 30, 2016 and 2015, respectively.
Concentration of Credit Risk
Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents.equivalents, short term investments and accounts receivable. The Company maintains the majority of its cash and short term investments with twoone financial institutions.institution.
The Company purchases complete OmniPodsOmnipods from Flextronics International Ltd., its single source supplier. As of September 30, 20152016 and December 31, 2014,2015, liabilities fromto this vendor represented approximately 26%29% and 24%28% of the combined balance of accounts payable, accrued expenses and other current liabilities, respectively.

9


In the three months ended September 30, 2015 and 2014, twoRevenue for customers represented 12% and 11%, and 15% andcomprising more than 10% of total revenue respectively. In the nine months ended September 30, 2015, one customer represented 11% of total revenue. In the nine months ended September 30, 2014, two customers represented 15% and 12% of total revenue, respectively.were as follows:
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, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company’s current product offering primarily consists of diabetes supplies, including the OmniPod System as well as other diabetes related products and supplies such as blood glucose testing supplies, traditional insulin pumps, pump supplies, and pharmaceuticals. The Company’s current product offering is marketed to a single customer type. As the Company sells a single product type, management operates the business as a single entity.
  Three Months Ended September 30, Nine Months Ended September 30,


 2016 2015 2016 2015
Amgen, Inc. 17% 10% 17% 10%
Ypsomed Distribution AG 16% 15% 15% 11%
RGH Enterprises, Inc. 10% 14% 10% 13%


Reclassification of Prior Period Balance
Certain reclassifications have been made to prior periods amounts to conform to the current period financial statement presentation.presentation including adjusting footnotes within to reflect the presentation of discontinued operations. These reclassifications have no effect on the previously reported net income.loss.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASUAccounting 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 may makemakes additional estimates regarding performance conditions and the allocation of variable consideration. The guidance is effective in fiscal years beginning after 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 ourits consolidated financial position and results of operations.
In June 2014, the FASB issued ASU No. 2014-12, 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 ("ASU 2014-12"). ASU 2014-12 clarifies the period over which compensation cost would be recognized in awards with a performance target that affects vesting 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 is currently evaluatinghas adopted ASU 2014-12 on January 1, 2016 and its adoption did not have an impact on the impact of ASU 2014-12.consolidated financial statements.
In April 2015,August 2014, the FASB issued ASU No. 2015-03,2014-15, Simplifying the Presentation of Debt Issuance Costs Financial Statements- Going Concern ("ASU 2014-15").("ASU 2015-03"). ASU 2015-03 amends existing guidanceNo. 2014-15 requires management to requireevaluate whether there is substantial doubt about the presentation of debt issuance costs in the balance sheetentity’s ability to continue as a deduction fromgoing concern within one year after the carrying amount ofdate that the related debt liability instead of a deferred charge.financial statements are issued.  The guidancenew standard is effective for fiscal years ending after December 15, 2016 and interim periods within annual reporting periods beginning after December 15, 2015, and must be applied retrospectively.2016.  Early adoption is permitted. Had theThe Company adopted ASU 2015-03, other noncurrent assets and long-term debt would both havehas concluded that if this standard had been $4.1 million and $5.0 million loweradopted as of September 30, 2015 and December 31, 2014, respectively.2016, substantial doubt about the Company’s ability to continue as a going concern would not exist.
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 on January 1, 2016 and its adoption did not have an impact on the consolidated financial statements.
In January 2016, the FASB issued Accounting Standards Update 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 Company is currently evaluating the impact of ASU 2015-16.2016-01.

10



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 Company is currently evaluating the impact of ASU 2016-02.
In March 2016, 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 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 classification in the statement of cash flows. The guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of ASU 2016-09.
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.    
Other Significant Policies:
The following table identifies the Company's other significant accounting policies and the note and page where a detailed description of each policy can be found.
Note4
PageNote4
Page
   
Convertible DebtNote6
Page
      
Note8
PageNote9
Page
      
Note9
PageNote10
Page
      
Note10
Page
Other Intangible AssetsNote11
Page
      
Note11
Page
Accrued Expenses and Other Current Liabilities- Product Warranty CostsNote12
Page
      
Note13
Page
Note14
Page
      
Note14
PageNote15
Page
   
Segment ReportingNote16
Page

11


Note 3. Business CombinationsDiscontinued Operations
On July 7, 2015,In February 2016, the Company executed an asset purchase agreement with GlaxoSmithKline (GSK) whereby the Company acquired GSK's assets associated with the Canadian distributionsold Neighborhood Diabetes to Liberty Medical for approximately $6.2 million in cash, which included $1.2 million of the Company's products. With the acquisition, the Company assumed all distribution, sales, marketing, trainingclosing adjustments finalized in June 2016 and support activities for the OmniPod system in Canada through its wholly-owned subsidiary, Insulet Canada Corporation.
paid by Liberty Medical. The acquisition allows the Company to establish a local presence in Canada that enables it to engage directly with healthcare providers and OmniPod users. The aggregate purchase priceresults of approximately $4.7 million consisted of cash paid at closing, subject to certain adjustments.
The Company has accounted for the acquisition as a business combination. Under business combination accounting, theoperations, 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 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 acquisition date, at theircosts to provide the respective fair values, and consolidated withservice in the Company. The excess of the purchase price over the fair value of net assets acquired was recorded as goodwill. The operating results of GSK Canada have been includedapplicable expense category in the consolidated financial statements since July 7, 2015,of operations. This transitional support is to provide Liberty Medical the date the acquisition was completed. These results are not materialtime required to our revenues or operating results.
Prior to the acquisition the Company had a pre-existing relationship with GSK. As a result of the acquisition, the pre-existing relationship was settledestablish its stand-alone processes for such activities that were previously provided by Insulet with Insulet repurchasing the $0.5as described above and does 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 of inventory held by GSK at the date of the asset purchase. The inventory repurchased had been sold to GSK during the second quarter of 2015, however no revenue was recognized by Insulet on these sales given the expectation to repurchase. As the inventory was repurchased at cost, there were no gains or losses associated with this transaction. This transaction was accountedand $0.8 million for separately from the business combination.
The table below details the consideration transferred to acquire GSK (in thousands):
Cash $5,000
Employment liability transfer fee (285)
Total consideration $4,715
The fair value of the assets acquired and liabilities assumed was determined based on information that was available to management at the time the financial statements were prepared and are preliminary, subject to the completion of an independent third party valuation.
The preliminary fair value of the assets acquired and liabilities assumed was:
Goodwill $2,403
Contractual relationships 2,100
Inventory 230
Assumed liabilities (18)
  $4,715
During the three and nine months ended September 30, 2015,2016.
Following the disposition, the Company incurred transaction costsentered 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 sales transacted through Neighborhood Diabetes prior to the divestiture that were previously eliminated in consolidation were $0.3 million and $2.0 million for the nine months ended September 30, 2016 and 2015, respectively. These amounts were historically reported in the Neighborhood Diabetes revenue results and are being presented based on current market terms of products sold to the Neighborhood Diabetes subsidiary of Liberty Medical.
Post divestiture, Omnipod sales to the Neighborhood Diabetes subsidiary of Liberty Medical were $0 million and $0.4 million for the three and nine months ended September 30, 2016, respectively.
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:
  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)
(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.
Depreciation and amortization expense included in discontinued operations was $0 million and $0.8 million for the three months ended September 30, 2016 and 2015, respectively. Depreciation and amortization expense included in discontinued operations was $0.1 million consisting primarily of legal fees, which have been recorded as general and administrative expenses. $2.6 million for the nine months ended September 30, 2016 and 2015, respectively.

The Company determined that there was no value to the reacquisitionfollowing is a summary of the Canada exclusivity contract due toNeighborhood 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, net2,019
Prepaid expenses and other current assets1,376
Total current assets of discontinued operations9,252
Intangible assets, net1,788
Goodwill140
Other non-current assets28
Total long-term assets of discontinued operations1,956
Total assets of discontinued operations$11,208
LIABILITIES 
Accounts payable$3,436
Accrued expenses and other current liabilities1,883
Current liabilities of discontinued operations5,319
Total liabilities of discontinued operations$5,319
Net operating cash flows provided by discontinued operations in the contribution charges ofthree 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 contractual relationships.nine months ended September 30, 2016 and 2015 were $(2.0) million and $3.2 million, respectively.
Note 4. Fair Value Measurements
The Company adopted the Financial Accounting Standards Board (“FASB”)FASB Accounting Standards Codification (“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.

12


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
The assets and liabilities subject to fair value measurement standards at September 30, 2015 and December 31, 2014 are cash equivalents, consisting of money market funds, and long-term debt which are both based on Level 1 inputs.
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 financial assets that are measured at fair value on a recurring basis as of September 30, 20152016, and December 31, 2014,2015, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
 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 bonds1,900
 
 1,900
 
Certificates of deposit445
 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 bonds25,540
 
 25,540
 
Certificates of deposit12,721
 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
 Total Level 1 Level 2 Level 3
September 30, 2015       
   Cash Equivalents - Money Market Funds$108,196
 $108,196
 $
 $
December 31, 2014       
   Cash Equivalents - Money Market Funds$123,141
 $123,141
 $
 $
(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 debt is based on the Level 12 quoted market prices for the same or similar issues and includedincludes the impact of the conversion features.
The carrying amounts, net of unamortized discounts and issuance costs, and the estimated fair values of financial instrumentsthe Company's convertible debt as of September 30, 20152016, and December 31, 2014,2015, are as follows (in thousands):
 September 30, 2015 December 31, 2014
 
Carrying
Value
 
Estimated Fair
Value
 Carrying
Value
 Estimated Fair
Value
2% Convertible Senior Notes$173,870
 $185,504
 $168,994
 $237,475
 September 30, 2016 December 31, 2015
 
Carrying
Value
 
Estimated Fair
Value
 Carrying
Value
 Estimated Fair
Value
2% Convertible Senior Notes$59,058
 $73,832
 $171,698
 $207,882
        
1.25% Convertible Senior Notes$269,904
 $339,163
 $
 $


Note 5. Short-term Investments
The Company's short-term investments are classified as available-for-sale and amortized costs, gross unrealized holding gains and losses, and fair values at September 30, 2016 are as follows (in thousands):
 Amortized cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
September 30, 2016       
U.S. government and agency bonds$29,036
 $2
 $(6) $29,032
Corporate bonds25,571
 
 (31) 25,540
Certificates of deposit12,721
 
 
 12,721
Total short-term investments$67,328
 $2
 $(37) $67,293
The Company issued $201.3 million in principalhad no short-term investments at December 31, 2015.

Note 6. Debt
The following table shows the gross and net carrying amount of 2% Notes (as defined below) in June 2014. The carrying value ofthe Company's convertible debt (in thousands):
 September 30,
2016
 December 31, 2015
Principal amount of the 2% Convertible Senior Notes$67,084
 $201,250
Principal amount of the 1.25% Convertible Senior Notes345,000
 
Unamortized debt discount(73,148) (25,704)
Deferred financing costs(9,974) (3,848)
Long-term debt, net carrying amount$328,962
 $171,698
Interest expense related to the 2% Notes at September 30, 2015 includes a debt discount of $27.4 million which is being amortized as non-cash interest expense overand the term of the 2% Notes. The decrease in the estimated fair values of these liabilities from December 31, 2014 to September 30, 2015 represents the impact of the quoted bond prices at those dates.

13


Note 5. Debt
The Company had outstanding convertible debt and related deferred financing costs on its consolidated balance sheet1.25% Notes was as follows (in thousands): 
 As of
 September 30,
2015
 December 31, 2014
Principal amount of the 2% Convertible Senior Notes$201,250
 $201,250
Unamortized debt discount(27,380) (32,256)
Long-term debt, net of discount$173,870
 $168,994
Deferred financing costs$4,130
 $4,974
Interest expense related to the 3.75% Notes (as defined below) and the 2% Notes was included in interest and other expense on the consolidated statements of operations as follows (in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
 2015 2014 2015 2014
Contractual coupon interest$1,007
 $962
 $3,019
 $3,583
Accretion of debt discount1,650
 1,548
 4,876
 6,431
Amortization of debt issuance costs281
 277
 844
 615
Loss on extinguishment of long-term debt
 4,260
 
 23,203
Total interest and other expense$2,938
 $7,047
 $8,739
 $33,832
 Three Months Ended September 30, Nine Months Ended September 30,
 2016 2015 2016 2015
Contractual coupon interest$1,041
 $1,007
 $3,054
 $3,019
Amortization of debt discount1,901
 1,650
 5,330
 4,876
Amortization of debt issuance costs222
 281
 785
 844
Total interest expense from the Notes$3,164
 $2,938
 $9,169
 $8,739
3.75% 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.
As of December 31, 2013, the 5.375% Notes were repaid in full and no amounts remained on the Company's balance sheet related to these notes.

14


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.
No cash interest expense was recorded related to the 3.75% Notes in the three and nine months ended September 30, 2015 and the three months ended September 30, 3014. Cash interest expense related to the 3.75% Notes outstanding was $2.4 million in the nine months ended September 30, 2014. There was no non-cash interest expense recorded in the three and nine months ended September 30, 2015 and the three months ended September 30, 2014 related to the 3.75% Notes, compared to $4.9 million in the nine months ended September 30, 2014.
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 DecemberJune 15 and JuneDecember 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.

15


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 other assetsa 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 million in principal amount of 1.25% Convertible Senior Notes due September 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 both the three months ended September 30, 2016 and 2015, and 2014,respectively. Cash interest expense related to the 2% Notes was $2.9 million and $3.0 million and $1.2 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 2014,$1.9 million in the three months ended September 30, 2016 and 2015, respectively. Non-cash interest expense related to the 2% Notes was $1.9$5.6 million and $1.8 million in the three months ended September 30, 2015 and 2014, respectively, and $5.7 million and $2.1 million in the nine months ended September 30, 20152016 and 2014,2015, respectively.
As of September 30, 2016 and December 31, 2015, the Company included $173.9$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 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 million, of which $2.1 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 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 million in the three and nine month periods ended September 30, 2016. Non-cash interest expense related to the 1.25% Notes was $0.5 million in the three and nine month periods ended September 30, 2016.
As of September 30, 2016, the Company included $269.9 million on its balance sheet in long-term debt related to the 1.25% Notes.
Note 6.7. Capital Lease Obligations
As of September 30, 20152016, and December 31, 2014,2015, the Company has approximately $13.7 million and $8.0 million of manufacturing equipment acquired under capital leases, respectively. The obligations under theincluded in property and equipment. As of September 30, 2016, one capital leases arelease remains outstanding and is being repaid in equal monthly installments over a 24 to 36month termsterm and includeincludes principal and interest payments with an effective interest rate of 13% to 17%.
The assets have been recorded at $13.7 million and are included in property and equipment on the Company's balance sheet as of September 30, 2015. The assets acquired under capital leases are being amortized on a straight-line basis over 5five years in accordance with the Company's policy for depreciation of manufacturing equipment. Amortization expense on assets acquired under capital leases is included with depreciation expense. Amortization expense related to these capital leased assets was $0.6$0.7 million and $0.3$0.6 million in the three months ended September 30, 2016 and 2015, and 2014, respectively,respectively. Amortization expense was $2.1 million and $1.7 million and $1.0 million in the nine months ended September 30, 2016 and 2015, and 2014, respectively.
Assets heldpurchased under capital leases and held consist of the following (in thousands):
As of
September 30, 2015 December 31, 2014September 30, 2016 December 31, 2015
Manufacturing equipment$13,705
 $7,984
$13,705
 $13,705
Less: Accumulated amortization(3,623) (1,885)(6,401) (4,346)
Total$10,082
 $6,099
$7,304
 $9,359
The aggregate future minimum lease payments related to thesethe capital leaseslease as of September 30, 20152016, are as follows (in thousands):
Years Ending December 31,
Minimum Lease
Payments
Minimum Lease
Payments
2015 (remaining)$1,762
20165,639
2016 (remaining)$808
2017269
269
Total future minimum lease payments$7,670
$1,077
Interest expense(589)16
Total capital lease obligations$7,081
$1,061

16


The Company recorded $0.3$0.1 million and $0.4$0.3 million of interest expense on the capital leases in the three months ended September 30, 20152016 and 2014,2015, respectively. The Company recorded $0.3 million and $1.0 million of interest expense on capital leases in both the nine month periodsmonths ended September 30, 2016 and 2015, and 2014.respectively.

Note 7.8. 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, 20152016 and 2014,2015, 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,
2015 20142016 2015
2.00% Convertible Senior Notes4,327,257
 4,327,257
1,442,433
 4,327,257
1.25% Convertible Senior Notes5,910,954
 
Unvested restricted stock units862,044
 786,850
971,814
 862,044
Outstanding options2,959,320
 1,549,211
3,541,936
 2,959,320
Total dilutive common shares8,148,621
 6,663,318
Total dilutive common share equivalents11,867,137
 8,148,621
Note 8.9. Accounts Receivable and Allowance for Doubtful Accounts
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.
Accounts receivable from one customerCustomers that represented approximately 13%greater than 10% of gross accounts receivable as of September 30, 2015. As of 2016 and December 31, 20142015 were as follows: accounts receivable from two customers represented approximately 19% and 10% of gross accounts receivable, respectively.
 September 30, 2016 December 31, 2015
Amgen, Inc.29% 22%
Ypsomed Distribution AG15% 19%
The components of accounts receivable from continuing operations are as follows (in thousands):
 As of
September 30,
2015
 December 31, 2014
Trade receivables$37,709
 $45,719
Allowance for doubtful accounts(5,906) (5,837)
    Total accounts receivable$31,803
 $39,882
 September 30, 2016 December 31, 2015
Trade receivables, gross$42,391
 $46,668
Allowance for doubtful accounts(3,843) (4,138)
    Total accounts receivable, net$38,548
 $42,530
Note 9.10. Inventories
Inventories are held at the lower of cost or market, determined under the first-in, first-out method.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, 20152016 and December 31, 2014.2015. 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 Company periodically reviews inventories for net realizable value based on quantities on hand and expectations of future use.
Inventories consistThe components of the followinginventories from continuing operations are as follows (in thousands):
As of
September 30,
2015
 December 31, 2014September 30, 2016 December 31, 2015
Raw materials$967
 $853
$1,477
 $632
Work-in-process200
 254
5,508
 1,960
Finished goods, net11,852
 11,992
25,678
 9,432
Total inventories$13,019
 $13,099
$32,663
 $12,024

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Note 10.11. Other Intangible Assets
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. The estimated lifeDiabetes 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 acquired tradenamelong-lived asset is 15 years.group, which included intangible assets, exceeded the undiscounted cash flows expected to be generated from the asset group. The estimated useful lifeCompany compared the fair value of the acquiredintangible 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 asset is 10 years. Intangibleand tradename intangible assets. During the three months ended March 31, 2016, the remaining balance of the other intangible assets associated with determinable estimated lives are amortized over these lives.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 the nine months ended September 30, 2015 as a result of the July 2015 acquisition of its Canadian distribution business (see Footnote 3 for further description).business. The Company determined that the estimated useful life of the contractual relationship asset is 5 years and is amortizing the asset over the estimated lives, based on the expected cash flows of the assets, accordingly. assets.
The amortizationcomponents of other intangible assets are as follows (in thousands):
 September 30, 2016 December 31, 2015
 Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value
Contractual relationships, net$2,039
 $(1,388) $651
 $1,933
 $(1,000) $933
Total intangible assets$2,039
 $(1,388) $651
 $1,933
 $(1,000) $933
Amortization expense for intangible assets, excluding discontinued operations, was approximately $0.1 million and $0.3 million for the three and nine months ended September 30, 2016, respectively. Amortization expense for intangible assets, excluding discontinued operations, was approximately $0.5 million and $0.5 million for the three and nine months ended September 30, 2015. Amortization expense for the year ending December 31, 2015, is expected to be approximately $1.0 million.
Other intangible assets consist of the following (in thousands):
 As of
September 30, 2015 December 31, 2014
 Cost Accumulated Amortization Net Book Value Cost Accumulated Amortization Net Book Value
Customer and contractual relationships, net(1)
$32,099
 $(21,051) $11,048
 $30,100
 $(18,167) $11,933
Tradename2,800
 (809) 1,991
 2,800
 (669) 2,131
Total intangible assets$34,899
 $(21,860) $13,039
 $32,900
 $(18,836) $14,064
(1)
Includes foreign currency translation loss of approximately $0.1 million.
Amortization expense related to other intangible assets was approximately $1.2 million and $0.9 million for the three months ended September 30, 2015 and 2014, respectively. Amortization expense was approximately $3.0 millionis recorded in general and $3.1 million foradministrative expenses in the nine months ended September 30, 2015 and 2014, respectively.consolidated statements of operations.
Amortization expense expected for the next five years and thereafter is as follows (in thousands):
Amortization Expense
Years Ending December 31,Customer and Contractual Relationships Tradename TotalContractual Relationships
2015 (remaining)$1,214
 $47
 $1,261
20162,914
 187
 3,101
2016 (remaining)$111
20172,184
 187
 2,371
185
20181,774
 187
 1,961
158
20191,438
 187
 1,625
132
202065
Thereafter1,524
 1,196
 2,720

Total$11,048
 $1,991
 $13,039
$651
As of September 30, 20152016, the weighted average amortization period of the Company’s intangible assets is approximately 6.34.25 years.

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Note 11. 12. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities are as follows (in thousands):
 September 30, 2016 December 31, 2015
Employee compensation and related items19,529
 16,856
Professional and consulting services5,958
 5,654
Suppliers643
 4,981
Other7,602
 9,253
Total accrued expenses and other current liabilities$33,732
 $36,744
Product Warranty Costs
The Company provides a four-year warranty on its PDMs sold in the United States and a five-yearfive year warranty on its PDMs sold in Canada and may replace any OmniPodsOmnipods 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. Cost to serviceWarranty expense is recorded in cost of goods sold on the claims reflects the current product cost which has been decreasing over time.statement of operations. 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): 
 Three Months Ended September 30, Nine Months Ended September 30,
 2015 2014 2015 2014
Balance at the beginning of the period$3,167
 $2,505
 $2,614
 $3,090
Warranty expense(1)
1,579
 596
 3,300
 1,139
Warranty claims settled(992) (566) (2,160) (1,694)
Balance at the end of the period$3,754
 $2,535
 $3,754
 $2,535
 Three Months Ended September 30, Nine Months Ended September 30,
 2016 2015 2016 2015
Balance at the beginning of the period$4,294
 $3,167
 $4,152
 $2,614
Warranty expense1,149
 1,579
 3,288
 3,300
Warranty claims settled(1,101) (992) (3,098) (2,160)
Balance at the end of the period$4,342
 $3,754
 $4,342
 $3,754
(1)
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):
Includes $0.5 million of warranty expense related to product that was shipped during the three months ending September 30, 2015 that did not meet the Company's quality expectations.
As of
September 30,
2015
 December 31,
2014
September 30, 2016 December 31, 2015
Composition of balance:      
Short-term$1,925
 $981
$1,640
 $1,592
Long-term1,829
 1,633
2,702
 2,560
$3,754
 $2,614
$4,342
 $4,152
Note 12.13. Commitments and Contingencies
Operating Leases
The Company leases its facilities in Massachusetts, New York, Florida,California, Canada and Singapore. 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.
In 2013, the Company entered into a new lease agreement for approximately 90,000 square feet of laboratory and office space for its corporate headquarters in Billerica, Massachusetts. The lease term began in August 2014 and expires in October 2022 and contains escalating payments over the life of the lease. In 2015, the Company extended its Singapore lease which now expires in July 2016. In 2014, the Company amended its existing lease for warehouse space in Billerica, Massachusetts which extended the term and increased the approximate square footage under the lease. The lease now expires in September 2019. Additionally, in 2014, the Company amended its existing lease for office space in New York which now expires in January 2019. The Company's Florida lease expires inDecember 2015. In the second quarter of 2015, the Company entered into a new lease agreement of office space in Ontario, Canada. The lease term began in June 2015 and expires in May 2018.
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.
The aggregate future minimum lease payments related to these leases as of September 30, 20152016, are as follows (in thousands):

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Years Ending December 31,
Minimum Lease
Payments
Minimum Lease
Payments
2015 (remaining)$573
20162,290
2016 (remaining)$624
20172,327
2,449
20182,308
2,383
20192,181
2,390
20202,383
Thereafter6,080
4,515
Total$15,759
$14,744
Legal Proceedings
In October 2013, the Company received a letter from the Office of the Massachusetts Attorney General contending that prior to September 2012 Neighborhood Diabetes engaged in improper sales practices by automatically refilling certain prescriptions for MassHealth patients. The Company responded to this letter, stating that Neighborhood Diabetes’ refill practices during the period in question were appropriate and consistent with applicable laws. The Company entered into a Settlement and Release Agreement and paid approximately $1.5 million in connection with the settlement of this matter in the first quarter of 2015.
The Company is in the process of responding to a revised audit report received in NovemberDecember 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.  Due in part to the preliminary natureAs of this matter,December 31, 2015, the Company currently cannot reasonably estimatehad determined that it was probable that a possible loss or rangehad been incurred and recorded an aggregate liability of loss, in connection with this matter.
$0.4 million through general and administrative expense, which was reduced to $0.3 million during the three months ended September 30, 2016. The Company ischange in the process of responding toliability was recorded in discontinued operations.
In May 2016, the Company reached a draft audit report received in June 2015 fromsettlement 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. Due in part toThe settlement amount for this audit was consistent with the preliminary nature of this matter,amount previously accrued.
In April 2016, the Company currently cannot reasonably estimate a possible loss, or range of loss, in connection with this matter.
The Company received a warning letter from the FDA in June 2015 that related to the release of certain lots of OmniPods that did not conform to final acceptance criteria. A voluntary recall of the identified lots was issued and the Company incurred $0.1 million as warranty expense. The Company has replied to the FDA’s letter, and received a response indicating that its corrective actions appear to have adequately addressed the issue outlined in the letter.
The Company has reached a settlement agreement for $0.5 million with the Massachusetts Department of Revenue for sales and use tax audits related to Neighborhood Diabetes. Based on the settlement agreement, the Company recordedInsulet Corporation, which resulted in a liability of $0.8$0.2 million which was a reduction of itsthe previously recorded liability of $3.7 million in connection withand a credit to general and administrative expenses during the settlement of this matter at June 30, 2015.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 Company currently cannot reasonably estimate a possible loss, or range of loss, in connection with this matter.
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 13.14. 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, 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.

20


The Company uses the Black-Scholes option pricing model to determine the weighted-average fair value of options granted. The Companygranted and determines the intrinsic value of restricted stock and 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 for awards with performance conditions. Compensation expense is recognized over the vesting period of the awards.
The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the stock price and a number ofthe following assumptions, including expected volatility, expected life of the awards, the risk-free interest rate, and expected dividends.the dividend yield. The expected volatility 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. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of the awards. The dividend yield assumption is based on Company history and an expectation of paying no dividends. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense recognized in the financial statements is based on awards that are ultimately expected to vest. The 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.
In July 2014, in connection with the extinguishment of $28.5 million in principal amount of 3.75% Notes, the Company issued 348,535 shares of its common stock to the holders representing the conversion premium.
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. Stock-based compensation expense related to share-based awards recognized in the three month periodsmonths ended September 30, 20152016 and 20142015 was $6.1 million and $4.2 million, and $9.6 million, respectively, and was calculated based onupon when the awards are ultimately expected to vest. Stock-based compensation expense related to the share-based awards recognized in the nine month periodsmonths ended September 30, 2016 and 2015 and 2014 was $13.8$16.9 million and $18.2$13.8 million, respectively, and was also calculated based on when the awards are ultimately expected to vest.
At September 30, 20152016, the Company had $41.7$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 of grant, employees, officers, non-employee directors or key persons (including consultants and prospective employees) 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, 2015, 912,9172016, 4,404,847 shares remain available for future issuance under the 2007 Plan.
InThe 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, 2015, the Company awarded 194,500 shares of performance-based incentive stock options.2016 that include vesting periods that may be accelerated. The stock options were granted under 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.

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The following summarizes the activity under the Company’s stock option plans:
plans in the nine months ended September 30, 2016:
 
Number of
Options (#)
 
Weighted Average
Exercise Price ($)
 
Aggregate
Intrinsic
Value ($)
     (In thousands)
Balance, December 31, 20141,847,669
 $26.99
  
Granted1,838,876
 32.62
  
Exercised(1)
(432,525) 15.79
 $8,386
Canceled(294,700) 34.15
  
Balance, September 30, 20152,959,320
 $31.41
 $4,284
Vested, September 30, 2015(2)
883,047
 $27.31
 $4,060
Vested and expected to vest, September 30, 2015(2)(3)
2,669,160
 
 $4,275
 
Number of
Options (#)
 
Weighted Average
Exercise Price ($)
 
Aggregate
Intrinsic
Value ($)
     (In thousands)
Balance, December 31, 20152,999,199
 $31.37
  
Granted967,918
 $31.32
  
Exercised(1)
(226,296) $19.54
 $4,440
Canceled(198,885) $32.60
  
Balance, September 30, 20163,541,936
 $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
     
(1) 
The aggregate intrinsic value was calculated based on the positive difference between the estimatedpre-tax fair value of the Company’s common stock as of the date of exercise and the exercise price of the underlying options.
(2) 
The aggregate intrinsic value was calculated based on the positive pre-tax difference between the estimated fair valueclosing price of the Company’s common stock as of September 30, 2015,2016, and the exercise price of the underlying options.
(3) 
Represents the number of vested options as of September 30, 2015,2016, plus the number of unvested options expected to vest as of September 30, 2015,2016, based on the unvested options outstanding at September 30, 2015,2016, adjusted for the estimated forfeiture.

At September 30, 20152016 there were 2,959,3203,541,936 options outstanding with a weighted average exercise price of $31.41$32.05 and a weighted average remaining contractual life of 8.68.3 years. At September 30, 20152016 there were 883,0471,347,219 options exercisable with a weighted average exercise price of $27.31$31.63 and a weighted average remaining contractual life of 6.97.4 years.
Employee stock-based compensation expense related to stock options in the three month periodsmonths ended September 30, 20152016 and 20142015 was $2.0$2.6 million and $2.3$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 and 2014 was $7.0$7.4 million and $5.2$7.0 million, respectively, and was based on awards ultimately expected to vest. At September 30, 20152016, the Company had $22.1$22.3 million of total unrecognized compensation expense related to stock options that will be recognized over a weighted average vesting period of 1.52.6 years.
EmployeeRestricted Stock Purchase PlanUnits
As of September 30, 2015 and September 30, 2014, the Company had no shares contingently issued under the employee stock purchase plan (“ESPP”). In the three and nine months ended September 30, 2015 and 2014, the Company recorded no significant stock-based compensation charges related to the ESPP.
Restricted Stock Units
In the nine months ended September 30, 2015,2016, the Company awarded 696,926581,777 restricted stock units to certain employees and non-employee members of the Board of Directors, which included 114,287153,992 restricted stock units subject to the achievement of performance conditions (performance-based restricted stock units). The number of performance-based restricted stock units granted during the nine months ended September 30, 20152016 that are expected to vest may vary based on the Company's quarterly evaluation of the probability of the performance criteria being achieved. The Company recognized stock compensation expense of $0.4$0.9 million and $2.0 million in the three and nine months ended2015 as it expects a portion of the September 30, 2016 for performance-based restricted stock units granted will be earnedthat are expected to vest based on its evaluation of the performance criteria at September 30, 2015.2016. The Company recognized stock compensation expense of $0.4 million and $0.4 million in the three and nine months ended September 30, 2015 for performance-based restricted stock units. Performance awards are amortized over the service period using an accelerated attribution method. The restricted stock units were granted under the 2007 Plan and vest annually over a three year period from the grant date.
The restricted stock units granted during the nine months ended September 30, 2016 have a weighted average fair value of $30.68$29.69 per share based on the closing price of the Company’s common stock on the date of grant. The restricted stock units granted during the nine months ended September 30, 2015grant and were valued at approximately $21.4$17.3 million on their grant date, and thedate. The Company is recognizing the compensation expense over the vesting period. Approximately $2.6 million and $1.7 million and $7.3 million of stock compensation expense related to the vesting of restricted stock units was recognized in the three months ended September 30, 20152016 and 2014, respectively. Approximately2015 and $7.3 million and $6.3 million in the nine months ended September 30, 2016 and $13.0 million2015 of stock-based compensation expense related to the vesting of non-performance based restricted stock units was recognized inusing the nine months ended September 30, 2015 and 2014, respectively.straight line method. Approximately $19.6$24.7 million of the fair value of the restricted stock units, including performance-based restricted stock units remained unrecognized as of September 30, 20152016 and will be recognized over a weighted average

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period of 1.3 years.2 year. 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:
units in the nine months ended September 30, 2016:
Number of
Shares (#)
 
Weighted
Average
Fair Value ($)
Number of
Shares (#)
 
Weighted
Average Grant Date
Fair Value ($)
Balance, December 31, 2014746,612
 $31.40
Balance, December 31, 2015811,965
 $32.30
Granted696,926
 30.68
581,777
 29.69
Vested(253,870) 28.23
(309,024) 30.73
Forfeited(327,624) 33.34
(112,904) 33.23
Balance, September 30, 2015862,044
 $31.01
Balance, September 30, 2016971,814
 $31.14
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 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 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 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 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.
As of September 30, 2016, the Company had no shares contingently issued under the ESPP. The Company recorded approximately $0.1 million 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.
Note 14.15. 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. A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. 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 20112013 through 20132015 and 2010 through 2013,2015, 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, 20152016 and December 31, 20142015, the Company provided a valuation allowance for the full amount of its net deferred tax asset because it is not 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,Three Months Ended September 30, Nine Months Ended September 30,
2015 2014 2015 20142016 2015 2016 2015
Current$44
 $6
 $84
 $59
$71
 $44
 $283
 $83
Deferred18
 15
 67
 79
(5) 
 (88) 
Total$62
 $21
 $151
 $138
Income tax expense$66
 $44
 $195
 $83
InIncome tax expense from discontinued operations was not significant in the three months ended September 30, 2016 and 2015. Income tax expense from discontinued operations was $0.4 million and $0.1 million in the nine months ended September 30, 20152016 and 2014, the current portion of income tax expense primarily related to state and foreign taxes, and the deferred portion primarily related to U.S. Federal and State amounts.2015, respectively.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting and the amounts used for income tax purposes as well as federal and state net operating losses and tax credit carryforwards.

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In the future, theThe Company will generate additionalhas generated deferred tax assets and liabilities related to its amortization of acquired intangible assetsgoodwill for tax purposes because these long-lived intangible assets arethe goodwill is not amortized for financial reporting purposes. The tax amortization in future years will givegives rise to a temporary difference and a tax liability, which will only reverse at the time of ultimate saledisposition or further impairment of the underlying intangible assets.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 the deferred tax asset related to the net operating loss carryforward for tax purposes that will be generated by the same amortization.assets.

The Company had no unrecognized tax benefits at September 30, 2015.2016.
Note 15. Change

16. 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 Accounting Estimate
deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company capitalizes eligible software development costs, including salarieshas 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 payroll-related costs of employees who devote time toassessing the development. Capitalization begins when a detail program design is completed and technological feasibility has been established. These costs are amortized on a straight-line basis over the estimated useful life. In the second quarter of 2015, based on changes in onefinancial performance of the Company's ongoing projects,Company. These decisions, allocations and assessments are performed by the Company determined thatCODM using consolidated financial information. Consolidated financial information is utilized by the detailed program designs were no longer sufficiently complete to establish technological feasibility of this project. As such, all costs previously capitalized for this project, approximately $1.3 million, and all subsequent costs incurred through September 30, 2015, have been recorded to research and development expense. This change in estimate increased research and development expense inCODM as the three and nine months ended September 30, 2015 by approximately $2.6 million and $7.3 million, respectively.
The Company records inventory at cost according to ASU No. 330, Inventory ("ASU 330"). In the third quarter of 2015, the Company identified that certain lots of OmniPods had increased complaints relating to the deploymentCompany’s current product offering primarily consists of the needle mechanism.Omnipod System and drug delivery. The Company believes that all goods produced withCompany’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 specific tooling changes of needle mechanism components are subject to replacement, including certain OmniPod lots heldCODM using consolidated financial data and as inventory at September 30, 2015. As such the Company has determinedconcluded that it will not recover any amounts related to this inventory. Accordingly, this change in estimate increased our cost ofthey operate as one segment.
Worldwide revenue infor the three and nine months ended September 30, 2015 by approximately $6.4 million.Company's products is categorized as follows (in thousands):

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 Three Months Ended September 30, Nine Months Ended September 30,
 2016 2015 2016 2015
U.S. Omnipod$59,641
 $50,738
 $166,691
 $135,835
International Omnipod19,107
 13,570
 51,046
 24,990
Drug Delivery16,123
 7,085
 45,677
 19,267
Total$94,871
 $71,393
 $263,414
 $180,092
Geographic information about revenue, based on the region of the customer's shipping location, is as follows (in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
 2016 2015 2016 2015
United States$75,764
 $57,823
 $212,368
 $155,102
All other19,107
 13,570
 51,046
 24,990
Total$94,871
 $71,393
 $263,414
 $180,092
Geographic information about long-lived assets, net, excluding goodwill and other intangible assets is as follows (in thousands):
 September 30, 2016 December 31, 2015
United States$25,431
 $13,018
China25,477
 28,638
Other101
 213
Total$51,009
 $41,869

Item 2.Management’s
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 OmniPodOmnipod 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 secure and retain adequate coverage or reimbursement for the OmniPodOmnipod System by third-party payors and potential adverse changes in reimbursement rates or policies relating to the OmniPodOmnipod 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 OmniPodOmnipod 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 OmniPodOmnipod 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;

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product liability lawsuits that may be brought against us;
reduced retention rates of our customer base;
unfavorable results of clinical studies relating to the OmniPodOmnipod 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 OmniPodOmnipod 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 attract and retain personnel;
our ability to manage our growth;
fluctuations in quarterly results of operations;
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;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 26, 201529, 2016 in the section entitled “Risk Factors,” 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 Insulin ManagementOmnipod System, (the “OmniPod System”), an innovative, discreet and easy-to-use continuous insulin infusiondelivery system for people with insulin-dependent diabetes. The OmniPodOmnipod System features a uniquesmall, lightweight, self-adhesive disposable tubeless OmniPodOmnipod device which is worn on the body for approximately three days at a time and its wireless companion, the handheld wireless Personal Diabetes Manager (“PDM”).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 OmniPodOmnipod 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 OmniPodOmnipod System’s unique proprietary design offers significant lifestyle benefits toand features allow people with insulin-dependent diabetes.
We acquired Neighborhood Holdings, Inc.diabetes to manage their diabetes with unprecedented freedom, comfort, convenience, and its wholly-owned subsidiaries (collectively, “Neighborhood Diabetes”) in June 2011. Through Neighborhood Diabetes, we are able to provide customers with blood glucose testing supplies, traditional insulin pumps, pump supplies and pharmaceuticals and have the ability to process claims as either durable medical equipment or through pharmacy benefits.ease.
We executed an asset purchase agreement with GlaxoSmithKline (GSK) whereby we acquired assets associated with the Canadian distribution of the Company's products. With the acquisition, we assumed all distribution, sales, marketing, training and support activities for the OmniPod system in Canada. Additional information regarding this acquisition is provided in note 3 to the consolidated financial statements included in this Form 10-Q.


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We began commercial sale of the OmniPodOmnipod System in the United States in 2005. We sell the OmniPodOmnipod System and other diabetes management supplies in the United States through direct sales to customers or through our distribution partners. The OmniPodOmnipod 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.
We sell our proprietary OmniPod System as well asIn addition to using the Pod for insulin delivery, we also partner with global pharmaceutical and biotechnology companies to tailor the Omnipod 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 other products forhad the management and treatment of diabetesability to people with diabetes. Through our infrastructure in the reimbursement, billing and collection areas, we are able to provide for adjudication ofprocess claims as either durable medical equipment or through pharmacy benefits. Claims are adjudicated under private insurers, Medicaid or Medicare. AsIn February 2016, we expandsold Neighborhood Diabetes to Liberty Medical. Additional information regarding the disposition and treatment of our sales and marketing focus, increase our manufacturing capacity and expand to additional international markets, we will need to maintain and expand available reimbursement for our product offerings.
Our sales and marketing effortNeighborhood Diabetes business as discontinued operations is focused on generating demand and acceptance of the OmniPod System among key diabetes practitioners, academic medical centers, clinics, people with insulin-dependent diabetes, third-party payors, government agencies, and third-party distributors. Our marketing strategy is to build awareness for the benefits of the OmniPod System through a wide range of education programs, social networking, patient demonstration programs, support materials, media advertisements and events at the national, regional and local levels. We are using third-party distributors to improve our access to managed care and government reimbursement programs, expand our commercial presence and provide access to additional potential patients. Our total revenue was $87.3 million and $224.1 million for the three and nine months ended September 30, 2015, compared to $75.0 million and $216.2 million, respectively,provided in the corresponding 2014 periods.
We currently produce the OmniPod System on partially automated manufacturing lines at a facility in China operated by a subsidiary of Flextronics International Ltd. (“Flextronics”). We purchase complete OmniPods pursuant to our agreement with Flextronics. Under the agreement, Flextronics has agreed to supply us, as a non-exclusive supplier, with OmniPods at agreed upon prices per unit pursuant to a rolling forecast that we provide. The current term of the agreement expires in December 2017 and is automatically renewed for one-year terms subsequently. It may be terminated upon prior written notice given no less than a specified number of days priornote 3 to the dateconsolidated financial statements included in this Form 10-Q.
Third Quarter 2016 Revenue Results:
Total revenue of termination. The specified number of days is intended to provide the parties with sufficient time to make alternative arrangements in the event of termination.
We seek to increase manufacturing volumes and reduce the per-unit production cost for the OmniPod. By increasing production volumes of the OmniPod, we expect to reduce our per-unit raw material costs and improve absorption of manufacturing overhead costs. We continue to seek to sustain or reduce our cost per OmniPod through reductions in the bill of material as well as through manufacturing efficiencies. We believe our current manufacturing capacity is sufficient to meet our expected 2015 demand for OmniPods.
We purchase certain other diabetes management supplies from manufacturers at contracted rates and supply these products to our customers. Based on market penetration, payor plans and other factors, certain manufacturers provide rebates based on product sold. We record these rebates as a reduction to cost of goods sold as they are earned.
Since our inception in 2000, we have incurred losses every quarter. In the three and nine months ended September 30, 2015, we incurred net losses of $18.9$94.9 million and $46.2 million, respectively. As of September 30, 2015, we had an accumulated deficit of $624.2 million. We have financed our operations through private placements of debt and equity securities, public offerings of our common stock, issuances of convertible debt and borrowings under certain other debt agreements. As of September 30, 2015, we had $201.3 million of convertible debt outstanding which matures in June 2019.
U.S. Omnipod revenue of $59.6 million
International Omnipod revenue of $19.1 million
Drug Delivery revenue of $16.1 million
Our long-term financial objective is to achieve and sustain profitable growth. Our efforts in 2015 will be2016 are focused primarily on the global expansion of our customer base in the United States and internationally.increasing our operating performance. Achieving these objectives is expected to requirerequiring additional investments in certain personnel and initiatives.initiatives, as well as enhancements to our manufacturing efficiency and effectiveness. We believe that we willmay continue to incur net losses in the near term in order to achieve these objectives. However, we believe that the accomplishment of our near termnear-term objectives will have a positive impact on our financial condition in the future.
At September 30, 2015, we had cash and cash equivalents totaling $145.5 million. We believe that our cash and cash equivalents, together with the cash expected to be generated from product sales, will be sufficient to meet our projected operating and debt service requirements for the next twelve months.

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Financial Operations Overview
Revenue.  We derive most of our revenue from the saleglobal sales of the OmniPod SystemOmnipod System. Our revenue also includes sales of devices based on the Omnipod technology platform to global pharmaceutical and other diabetes related products including blood glucose testing supplies, traditional insulin pumps, pump supplies and other pharmaceuticals to customers and third-party distributors who resellbiotechnology companies for the product to customers. The OmniPod System is compriseddelivery of two devices: the OmniPod, a disposable insulin infusion device that the patient wears for up to three days and then replaces; and the PDM, a handheld device much like a personal digital assistant that wirelessly programs the OmniPod with insulin delivery instructions, assists the patient with diabetes management and incorporates a blood glucose meter. Revenue with respect to the OmniPod system is primarily attributable to stand-alone OmniPod sales.subcutaneous drugs across multiple therapeutic areas.
In June 2011, we entered into a development agreement with a U.S. based pharmaceutical company (the "Development Agreement”). Under the Development Agreement, we were required to perform design, development, regulatory, and other services to support the pharmaceutical company as it worked to obtain regulatory approval to use our drug delivery technology as a delivery method for its pharmaceutical. The pharmaceutical company received regulatory approval in December 2014 and now purchases product from us for use with its pharmaceutical under a supply agreement. Product revenue under this arrangement is recognized at the time that all of the revenue recognition criteria are met, typically upon shipment.
As of September 30, 2015 and December 31, 2014, we had deferred revenue of $2.4 million and $1.6 million, respectively. Total deferred revenue as of September 30, 2015 included $0.2 million classified in long term liabilities.
For the year ending December 31, 2015, we expect our revenue to continue to increase as we gain new customers in the United States; continue expansion in Europe, Canada, and certain other international markets and increase commercial sales with our drug delivery partners. In the three months ended September 30, 2015, new patient starts in the United States increased by 24%. New patient starts in any given quarter generally represent less than 10% of revenue in that three month period and therefore are an early indicator of future growth in our recurring revenue model rather than an explanation of growth for a given quarter. Increased revenue is dependent upon the success of our sales efforts, our customer retention and our ability to produce OmniPods in sufficient volumes as our patient base grows and is subject to other risks and uncertainties, including the potential for a reduction in on-hand inventory levels amongst our distributors.
Cost of revenue.    Cost of revenue consists primarily of raw material, labor, warranty, inventory reserve and overhead costs such as freightfreight-in and depreciation related to the OmniPod System and the cost of products we acquire from third party suppliers. Cost of revenue will continue to increase as our revenue increases.
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 all research and development costs as incurred, unless theseincurred.
Sales and marketing.    Sales and marketing expenses consist primarily of personnel costs meet the criteriawithin our sales, marketing, reimbursement support, customer care and training functions, sales commissions paid to be capitalized as internal use software or software to be sold, leased or marketed. For the year ending December 31, 2015, we expect overall researchour sales representatives, costs associated with promotional activities and development spending to increase from our 2014 spend as we increase development efforts on our on-going projects including continued improvements to the manufacturing process of the OmniPod System, the development of a new PDM, the integration with continuous glucose monitoring technology, a development effort with Eli Lilly and Company to further address the needs of Type 2 diabetes patients with OmniPod technology and the ability to use our technology as a delivery platform for other pharmaceuticals.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. For the year ending December 31, 2015, we incurred significant nonrecurring costs including those related to the transition of our management team, however overall we expect general and administrative expenses to decrease as compared to our 2014 spending because we incurred significant costs in 2014 to resolve our then outstanding litigation with Becton, Dickinson and Company.
Sales and marketing.    Sales and marketing expenses consist primarily of personnel costs within our sales, marketing, reimbursement support, customer support and training functions, sales commissions paid to our sales representatives and costs associated with participation in medical conferences, physician symposia and promotional activities, including distribution of units used in our demonstration kit programs. We expect sales and marketing expenses in the year ending December 31, 2015 to increase compared to 2014 as we expand our

28


commercial team and invest in initiatives that will enhance awareness and drive increased adoption of the OmniPod System as well as increased adoption of our technology as a delivery platform for other pharmaceuticals.
Results of Operations
This section discusses our consolidated results of operations for thethird quarter and the first nine months of 20152016 compared to the same periods in 2014,of 2015, 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
TABLE 1: RESULTS OF OPERATIONS (Unaudited)TABLE 1: RESULTS 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)2015 2014 $ Change % Change 2015 2014 $ Change % Change2016 2015 Change $ Change % 2016 2015 Change $ Change %
Revenue$87,303
 $74,985
 $12,318
 16 % $224,106
 $216,159
 $7,947
 4 %
Revenue:               
U.S. Omnipod$59,641
 $50,738
 $8,903
 18 % $166,691
 $135,835
 $30,856
 23 %
International Omnipod19,107
 13,570
 5,537
 41 % 51,046
 24,990
 26,056
 104 %
Drug Delivery16,123
 7,085
 9,038
 128 % 45,677
 19,267
 26,410
 137 %
Total revenue94,871
 71,393
 23,478
 33 % 263,414
 180,092
 83,322
 46 %
Cost of revenue51,652
 36,943
 14,709
 40 % 121,273
 109,544
 11,729
 11 %39,230
 39,823
 (593) (1)% 113,265
 88,814
 24,451
 28 %
Gross profit35,651
 38,042
 (2,391) (6)% 102,833
 106,615
 (3,782) (4)%55,641
 31,570
 24,071
 76 % 150,149
 91,278
 58,871
 64 %
Gross margin40.8% 50.7%     45.9% 49.3%    58.6% 44.2%     57.0% 50.7% 

 

Operating expenses:                           

 

Research and development10,035
 7,158
 2,877
 40 % 30,311
 20,614
 9,697
 47 %13,734
 10,035
 3,699
 37 % 39,676
 30,311
 9,365
 31 %
Sales and marketing22,147
 21,307
 840
 4 % 69,119
 55,025
 14,094
 26 %
General and administrative17,156
 18,890
 (1,734) (9)% 45,841
 52,661
 (6,820) (13)%17,342
 15,023
 2,319
 15 % 47,923
 42,062
 5,861
 14 %
Sales and marketing24,194
 14,870
 9,324
 63 % 63,406
 43,382
 20,024
 46 %
Total operating expenses51,385
 40,918
 10,467
 26 % 139,558
 116,657
 22,901
 20 %53,223
 46,365
 6,858
 15 % 156,718
 127,398
 29,320
 23 %
Operating loss(15,734) (2,876) 12,858
 447 % (36,725) (10,042) 26,683
 266 %
Interest and other expense, net(3,131) (7,948) (4,817) (61)% (9,317) (35,920) (26,603) (74)%
Operating income (loss)2,418
 (14,795) (17,213) (116)% (6,569) (36,120) (29,551) (82)%
Interest expense and other income, net(5,369) (3,146) 2,223
 71 % (11,293) (9,491) 1,802
 19 %
Income tax expense(62) (21) 41
 195 % (151) (138) 13
 9 %66
 44
 22
 50 % 195
 83
 112
 135 %
Loss from discontinued operations, net of tax(64) (942) (878) (93)% (1,703) (499) 1,204
 241 %
Net loss$(18,927) $(10,845) $8,082
 75 % $(46,193) $(46,100) $93
  %$(3,081) $(18,927) $(15,846) (84)% $(19,760) $(46,193) $(26,433) (57)%
Revenue
Our total revenue increased to $87.3$94.9 million,, up $12.3$23.5 million, or 16%33%, in the third quarter of 20152016 compared to the third quarter of 2014,2015, 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 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 to expand awareness of the Omnipod System. Our International Omnipod revenue increased primarily due to growth in distributor sales from continued adoption in existing markets and to a lesser extent from entry into new markets. Our drug delivery revenue increased due to strong growth in demand for our drug delivery device following regulatory approval in December 2014.
Total revenue increased to $263.4 million, up $83.3 million, or 46% for the nine months ended September 30, 2016, compared with the same period in 2015, primarily due to strong growth in our U.S. Omnipod revenue, International Omnipod revenue and our on-body injection device for drug delivery. Our U.S. Omnipod revenue increased 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 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 primarily due to growth in distributor sales from continued adoption in existing markets and to a lesser extent from entry into new markets. The results for 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. Our drug delivery revenue increased due to strong growth in demand for our drug delivery device following regulatory approval in December 2014.
For the year ending December 31, 2016, we expect strong revenue growth, compared to 2015, across all of our product lines led byas 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 U.S. OmniPod revenue and our on-body injection devices for drug delivery. Our U.S. OmniPod revenue increased to $50.0 million, up $5.2 million, or 12%, reflecting growth in our installed base of OmniPod users. Our international OmniPod revenue increased to $13.5 million, up $1.1 million, or 9%, primarily reflecting growth in our direct business following the acquisition of our Canadian distributor in July 2015. Our drug delivery revenue increased to $7.1 million, up $4.8 million, due to growth in demand for our on-body injection devices following regulatory approval of our primary device in December 2014. Our Neighborhood Diabetes revenue increased to $16.7 million, up $1.2 million, or 8%, reflecting growth in patient demand.
Total revenue increased $7.9 million in the first nine months of 2015 compared to the same period in 2014, primarily the result of an increase in our on-body injection devices for drug delivery and an increase in U.S. OmniPod revenue, offset by lower international OmniPod revenue. Our U.S. OmniPod revenue increased to $133.9 million, up $3.9 million, or 3%, reflecting growth in our installed base of OmniPod users, offset by lower distributor shipments in the first half of 20152016, as compared to 2014. Our international OmniPod revenue decreased to $24.9 million, down $11.8 million, or 32%, primarily reflecting lower distributor revenues due to changes in distributor ordering patterns and a lower transfer price to our distributor in 2015. Our drug delivery revenue increased to $19.3 million, up $14.7 million, due to growth in demand for our on-body injection devices following regulatory approval of our primary device in December 2014. Our Neighborhood Diabetes revenue increased to $46.0 million, up $1.1 million, or 2%, reflecting growth in patient demand.2015, as we increase commercial sales.

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Cost of Revenue
Cost of revenue increased $14.7decreased to $39.2 million, down $0.6 million in the third quarter of 20152016 compared to the third quarter of 2014 primarilysame 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, these costs include a specific reservealong with manufacturing efficiency and effectiveness improvements made in 2016. This decrease was partially offset by an increase in sales volumes.
Total cost of $6.4revenue increased to $113.3 million, up $24.5 million for certain product in inventories atthe nine months ended September 30, 2016, compared to the same period in 2015, and approximately $1.3primarily due to an increase in sales volumes, partially offset by $10.2 million from inefficiencies related to reduced production levels and increased warranty reserveof costs incurred during the third quarter. We expect to record an additional specific reserve of $1.0 million for certain product produced in this configuration in the fourth quarter of 2015. In the first nine months of 2015 cost of revenue increased $11.7 million compared to the same periodthat were considered non-recurring in 2014, due primarily to the specific inventory reserve incurred during the third quarter of 2015.nature, along with manufacturing efficiency and effectiveness improvements made in 2016.

Gross Margin
Gross margin was approximately 59% in the third quarter of 2016, compared with 44% 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 was 57% compared with 51% for the nine months ended September 30, 2015. The margin improvement was mainly due to $10.2 million of costs in the first nine months of 2015 decreased by approximately 10that were considered non-recurring in nature along with manufacturing efficiency and 3 points, respectively,effectiveness improvements made in 2016.
For the year ending December 31, 2016, we expect gross margin to increase compared to the same periods in 2014. The decreases for both comparisons2015 primarily resulted from approximately $7.7due to $10.2 million of costs incurred duringin the third quarterfirst nine months of 2015 associatedthat were considered non-recurring in nature along with certain product which did not meetimprovements to our quality expectations,manufacturing efficiency and effectiveness as well as lower royalty revenues in 2015 as compared to 2014 and a decreasedemonstrated in the transfer price to our international OmniPod distributor in 2015 as compared to 2014.first nine months of 2016.

Research and Development
Research and development expenses increased $2.9 million to $10.0 million for the three monthsmonth period ended September 30, 2015,2016 were $13.7 million compared to $7.2with $10.0 million for the same period in 2014.2015. The approximate $3.7 million increase was primarily 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 ongoing efforts to improve our current product.Company for the use of concentrated insulin for patients with higher insulin-resistance and other Omnipod product improvement initiatives.
Research and development expenses increased $9.7 million to $30.3 million for the nine months ended September 30, 2015,2016, were $39.7 million compared to $20.6with $30.3 million for the same period in 2014.2015. The approximate $9.4 million increase was primarily the result of an $8.9 million increase in expenses related to our development projects.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.
For the year ending December 31, 2016, we expect overall research and development spending to increase 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.

Sales and Marketing
Sales and marketing expenses for the three month period ended September 30, 2016 were $22.1 million compared with $21.3 million for the same period in 2015. The approximate $0.8 million increase was mainly the result of a $1.4 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 for the nine months ended September 30, 2016 were $69.1 million compared to $55.0 million for the same period in 2015. 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 a $1.1 millionan increase in employee relatedcosts 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 including costs relatedin the year ending December 31, 2016 to increase as we see the additionfull-year impact of employeesthe 2015 commercial team expansion and higher management transition costs.invest in initiatives that will enhance awareness, customer satisfaction and drive increased adoption of the Omnipod System, as well as increased adoption of our technology as a delivery platform for other pharmaceuticals.

General and Administrative
General and administrative expenses decreased $1.7 million to $17.2 million for the three monthsmonth period ended September 30, 2015,2016 were $17.3 million compared to $18.9with $15.0 million for the same period in 2014,2015. The approximate $2.3 million increase was primarily the result of a $4.9 million decreaseattributable to personnel-related costs on higher incentive compensation associated with growth in employee related expenses including stock compensation and severance payments. This decrease was offset by an increase in legal, audit, professional services fees and consulting fees of approximately $1.9 million,our business, as well as an increase in shipping costs of $0.4 million. The higher legal, audit,additional staff to support our growth expectations and professional fees were primarily a result of the Company's review of historic revenue transactions.paid for external consultants.
General and administrative expenses decreased $6.8 million to $45.8 million for the nine months ended September 30, 2015,2016 were $47.9 million compared to $52.7$42.1 million for the same period in 2014.2015. The decreaseapproximate $5.9 million increase was primarilymainly due to employee compensation costs and fees paid for external consultants.
For the result ofyear ending December 31, 2016, we expect overall general and administrative expenses to increase as compared to 2015 as we continue to grow the Becton Dickinson patent litigation settlementbusiness and make investments in our operating structure to support this continued growth.

Interest Expense and Other Income, Net
Interest expense and other legal fees of approximately $8.4 million included in 2014 and a $1.1 million decrease in employee related expenses. The decrease was partially offset by an increase in consulting fees and information technology spending of approximately $1.5 million and $0.4 million, respectively.
Sales and Marketing
Sales and marketing expenses increased $9.3 million to $24.2 millionincome, net for the three monthsmonth period ended September 30, 2015,2016, were $5.4 million compared to $14.9with $3.1 million for the same period in 2014.2015. The approximate $2.2 million increase was mainly the result of a $5.4 million increase in employee related expenses due to a $2.6 million charge recorded for the additionextinguishment of employeesdebt related to the repurchase of $134.2 million in our sales force and customer support areasprincipal of the 2% Notes. This was partially offset from a slight decrease in 2015 as compared to 2014 and a $2.7 million increase in costs associated with marketing campaigns, new market opportunitiescapital lease interest expense.
Interest and other strategic initiatives as we continue to expand awareness of the OmniPod System and our on-body injection devices for drug delivery. Additionally, we incurred increases in advertising and other selling costs as well as in travel and entertainment costs of approximately $0.7 million and $0.5 million, respectively. We also incurred additional sales and marketing expenses following our acquisition of our Canadian distributor in July 2015, including $0.5 million of amortization of acquired intangibles.

30


Sales and marketing expenses increased $20.0 million to $63.4 millionexpense for the nine months ended September 30, 2015,2016, were $11.3 million compared to $43.4$9.5 million for the same period in 2014.2015. The approximate $1.8 million increase was mainly the result of a $12.5 million increase in employee related expenses due to the addition of employees in our sales force and customer support areas in 2015 as compared to 2014. Additionally, we incurred a $5.9$2.6 million increase in costs associated with marketing campaigns as we continue to expand awareness of the OmniPod System and our on-body injection devices for drug delivery and an additional $1.2 million increase in travel and entertainment costs. We also incurred additional sales and marketing expenses following our acquisition of our Canadian distributor towards in July 2015, including $0.5 million of amortization of acquired intangibles.
Interest and Other Expense, Net
Interest and other expense, net was $3.1 million and $9.3 millioncharge recorded for the three and nine months ended September 30, 2015, compared to $7.9 million and $35.9 million for three and nine months ended September 30, 2014. Decreases in interest and other expense, net in the third quarter and first nine monthsextinguishment of 2015 compared to the third quarter and first nine months of 2014 was primarilydebt related to the loss from extinguishmentrepurchase of long-term debt$134.2 million in principal of $4.3 million and $23.2 million, respectively. The decrease also resultedthe 2% Notes. This was partially offset from a 2%slight decrease in capital lease interest rate on our long-term debt in 2015 compared to a 3.75% interest rate in the prior period.expense.
Income Tax Expense
Income tax expense was $0.1 million and de minimis in the three months ended September 30, 2015 and 2014, respectively, and $0.2 million and $0.1 million for the nine months ended September 30, 2015 and 2014, respectively. Income tax expense is comprised of a current and deferred portion. The current portion primarily related to state and foreign taxes and the deferred portion primarily related to federal and state tax amounts. Additional information regarding income tax expenses is provided in note 14 to the consolidated financial statements included in this Form 10-Q.
Liquidity and Capital Resources
We commenced operations in 2000 and to date we have financed our operations primarily through private placements of common and preferred stock, secured indebtedness, public offerings of our common stock and issuances of convertible debt.
As of September 30, 20152016, we had $145.5$215.4 million in cash and cash equivalents.equivalents and $67.3 million in short-term investments. We believe that our current cash and cash equivalents,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.
EquityDebt
In July 2014, in connection with the extinguishment of $28.5September 2016, we sold $345.0 million in principal amount of 3.75%the 1.25% Notes, (as defined below), we issued 348,535 shares of common stock to the holders representing the conversion value in excess of the principal amount.
Additional information about our common stock issuances is provided in note 13 to the consolidated financial statements included in this Form 10-Q.

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Debt
We had outstanding convertible debt and related deferred financing costswhich mature on our consolidated balance sheet as follows (in thousands):
  As of
  September 30,
2015
 December 31, 2014
Principal amount of the 2% Convertible Senior Notes $201,250
 $201,250
Unamortized debt discount (27,380) (32,256)
Long-term debt, net of discount $173,870
 $168,994
Deferred financing costs $4,130
 $4,974
Interest expense related to the 3.75% Notes and the 2% Notes was included in interest and other expense on the consolidated statements of operations as follows (in thousands):
  Three Months Ended September 30, Nine Months Ended September 30,
  2015 2014 2015 2014
Contractual coupon interest $1,007
 $962
 $3,019
 $3,583
Accretion of debt discount 1,650
 1,548
 4,876
 6,431
Amortization of debt issuance costs 281
 277
 844
 615
Loss on extinguishment of long-term debt 
 4,260
 
 23,203
Total interest and other expense $2,938
 $7,047
 $8,739
 $33,832
3.75% Convertible Senior Notes
In June 2011, we sold $143.8 million in principal amount of 3.75% Convertible Senior Notes due JuneSeptember 15, 2016 (the "3.75% Notes"). 2021.The interest rate on the notes was 3.75%is 1.25% per annum, payable semi-annually in arrears in cash on DecemberMarch 15 and JuneSeptember 15 of each year. Interest began accruing on September 13, 2016; the first interest payment is due on March 15, 2017. The 3.75%1.25% Notes wereare convertible into our common stock at an initial conversion rate of 38.174917.1332 shares of common stock per $1,000 principal amount of the 3.75%1.25% Notes, which wasis equivalent to a conversion price of approximately $26.20$58.37 per share.
In connection withshare, subject to adjustment under certain circumstances. The 1.25% Notes will be convertible prior to the issuanceclose of business on the 3.75% Notes, we repurchased $70 million in principal amount of the 5.375% Convertible Senior Notes duebusiness day immediately preceding June 15, 2013 (the "5.375% Notes") for $85.1 million. The investors that held2021 only under certain circumstances and during certain periods, and will be convertible on or after June 15, 2021 until the $70 million in principal amountclose of repurchased 5.375% Notes purchased $59.5 million in principal amountbusiness on the second scheduled trading day immediately preceding September 15, 2021, regardless 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.those circumstances.
We recorded a total debt discount of $25.8 million
Cash interest expense related to the modified debt. This discount consisted of $10.51.25% Notes was $0.2 million in the three and nine month periods ended September 30, 2016. Non-cash interest expense related to the remaining debt discount on the $701.25% Notes was $0.5 million in principal amount of 5.375% Notes repurchased, $15.1 million related to the premium payment in connection with the repurchasethree 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, we paid transaction fees of approximately $2.0 million related to the modification, which were recorded as interest expense and other expense at the time of the modification.
As of December 31, 2013, the 5.375% Notes were repaid in full and no amounts remained on our balance sheet related to these notes.nine month periods ended September 30, 2016.
In June 2014, in connection with the issuance ofwe sold $201.3 million in principal amount of 2% Convertible Senior Notes due June 15, 2019 (the “2% Notes”"2% Notes"), we repurchased approximately $114.9 million in principal amount of the 3.75% Notes for $160.7 million. 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 accounted for separately from the issuance of the 2% Notes and allocated to debt and equity based on their respective fair values immediately prior to the transaction.
In June 2014, we met the redemption requirements of the 3.75% Notes and notified holders of our intent to redeem the outstanding $28.8 million principal amount in July 2014. Prior to the redemption date, holders of $28.5 million in principal amount of 3.75% Notes notified us that they exercised their right to convert their outstanding 3.75% Notes. We settled this conversion of the 3.75% Notes in July 2014 by providing cash of $28.5 million for the

32


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. We 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. We allocated $27.9 million of the total consideration paid to the debt and $13.5 million to equity, and 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.
No cash interest expense was recorded related to the 3.75% Notes in both the three and nine months ended September 30, 2015 and the three months ended September 30, 2014. Cash interest expense related to the outstanding 3.75% Notes was $2.4 million in the nine months ended September 30, 2014.
As of December 31, 2014, no amounts remained outstanding related to the 3.75% Notes.
2% Convertible Senior Notes
In June 2014 we 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 DecemberJune 15 and JuneDecember 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.
We recorded a debt discountIn September 2016, in connection with the issuance of $35.6$345.0 million related to the 2% Notes. The debt discount was recorded as additional paid-in capital to reflect the valuein principal amount of our nonconvertible debt borrowing rate of 6.2% per annum. This debt discount is being amortized as non-cash interest expense over the five year term1.25% Convertible Senior Notes due September 2021 discussed above, we repurchased approximately $134.2 million in principal amount of the 2% Notes. We incurred deferred financing costs related to this offeringNotes for $153.6 million (excluding accrued interest 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.$0.7 million). The remainder is recorded as other assets in the consolidated balance sheet and is being amortized as non-cash interest expense over the five year termextinguishment of the 2% Notes.
We determined that the higher interest and tax payments required in certain circumstances are considered embedded derivatives and should be bifurcated andNotes was accounted for at fair value. We assessseparately from the valueissuance of the embedded derivatives at each balance sheet date.1.25% Notes as both transactions were viewed as arm's-length in nature and were not contingent upon one another. The derivatives had de minimis value at$154.3 million paid to extinguish the balance sheet date.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 million and $1.0 million in both the three months ended September 30, 2016 and 2015, and 2014,respectively. Cash interest expense related to the 2% Notes was $2.9 million and $3.0 million and $1.2 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 2014,$1.9 million in the three months ended September 30, 2016 and 2015, respectively. Non-cash interest expense related to the 2% Notes was $1.9$5.6 million and $1.8 million in the three months ended September 30, 2015 and 2014, respectively, and $5.7 million and $2.1 million in the nine months ended September 30, 2016 and 2015, and 2014, respectively.
As of September 30, 2015, we included $173.9 million on the balance sheet in long-term debt related to the 2% Notes.
Additional information regarding our debt issuances is provided in note 5Note 6 to the consolidated financial statements included in this Form 10-Q.
Capital Leases
As of September 30, 20152016 and December 31, 2014,2015, we have approximately $13.7 million and $8.0 million of manufacturing equipment acquired under capital leases, respectively. The obligations under theleases. As of September 30, 2016, one capital leases arelease remains outstanding and is being repaid in equal monthly installments over a 24 to 36 month termsterm and includeincludes principal and interest payments with an effective interest rate of 13%.
Additional information regarding our capital leases is provided in note 7 to 17%. The assets have been recorded at $13.7 million and arethe consolidated financial statements included in property and equipment on our balance sheet asthis Form 10-Q.
Summary of September 30, 2015.





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At September 30, 2015, $6.0 million was included in current liabilities and $1.1 million was included in long-term liabilities on our balance sheet related to these capital leases. The aggregate future minimum lease payments related to these capital leases as of September 30, 2015, are as follows (in thousands):Cash Flows
Years Ending December 31,
Minimum Lease
Payments
2015 (remaining)$1,762
20165,639
2017269
Total future minimum lease payments$7,670
Interest expense(589)
Total capital lease obligations$7,081
  
Nine Months Ended
September 30,
(In thousands) 2016 2015
Cash (used in) provided by:    
Operating activities $(4,159) $6,043
Investing activities (80,827) (11,841)
Financing activities 177,558
 292
Effect of exchange rate changes on cash 158
 (220)
Net increase (decrease) in cash and cash equivalents $92,730
 $(5,726)
We recorded $0.3 million and $0.4 million of interest expense on the capital leasesOperating Activities
Our net cash used in both the three months ended September 30, 2015 and 2014, respectively. We recorded $1.0 million in bothoperating activities for the nine months ended September 30, 20152016 was $4.2 million compared to $6.0 million provided by operating activities in the same period of 2015. The increase was primarily due to additional inventory purchases in order to support customer demand and 2014.to allow for alternative shipping methods which in turn is expected to lower our distribution costs, partially offset by a lower net loss recorded for the period.
OperatingInvesting Activities
The following table sets forth the amounts of
Our net cash used in operatinginvesting activities and net loss for each of the periods indicated (in thousands):
  Nine Months Ended September 30,
  2015 2014
Cash provided by operating activities $6,043
 $4,313
Net loss $(46,193) $(46,100)
nine months ended September 30, 2016 was $80.8 million compared to $11.8 million in 2015. In the nine months ended September 30, 2016, we invested $76.2 million into short-term investments. There were no such investments in 2015. In addition, the increase in investing activities relates to higher capital purchases for the nine months ended 2016 compared to 2015, primarily associated with investments in supply chain operations including $9.8 million for equipment in process of construction to support our U.S. manufacturing initiatives.
Financing Activities
We had net cash provided by operatingfinancing activities was primarily attributable to operations after adjustments for non-cash and other expenses of approximately $33.7 million and changes in operating assets and liabilities of $18.5 million. Non-cash and other items included depreciation and amortization of $11.4 million, stock-based compensation of $13.8 million, provision for bad debts of $2.8 million and non-cash interest and other expense of $5.7 million. Changes in operating assets and liabilities primarily consisted of an increase of $11.8 million in accounts payable, accrued expenses, and other current liabilities and a decrease in accounts receivable of $5.3 million.
Non-cash and other items provided by operating activities was $61.7 million in the nine months ended September 30, 2014, and included a loss from the extinguishment2016 of debt of $23.2$177.6 million depreciation and amortization of $9.2compared to $0.3 million stock-based compensation of $18.2 million, non-cash interest and other expense of $8.4 million and provision for bad debts of $2.7 million.
Investing and Financing Activities
in 2015. The following table sets forth the amounts of cash used in investing activities and cash provided by (used in) financing activities for each of the periods indicated (in thousands):
  Nine Months Ended September 30,
  2015 2014
Cash used in investing activities $(11,841) $(8,853)
Cash provided by financing activities $292
 $1,185
Cash used in investing activities in the nine months ended September 30, 2015increase was primarily relatedattributable to purchasesnet proceeds of property and equipment, of which the majority related to the purchase of manufacturing equipment for use$333.9 million in the production of the OmniPod System, as well as the acquisition of our Canadian distributor in July 2015.
Cash used in investing activities in the nine months ended September 30, 2014 as primarily related to purchases of property and equipment, of which the majority related to the purchase of manufacturing equipment for use in the production of the OmniPod System.
Cash provided by financing activities in the nine months ended September 30, 2015 was mainly related to the net proceeds2016 from the issuance of common stock related to exercises of employee stock optionsthe 1.25% Notes, offset by repayments of $153.6 million for extinguishment of approximately 67% of our payment of taxes in connection with the vesting of the restricted stock units in the period and payment of certain

34


capital lease obligations. Cash provided by financing activities in the nine months ended September 30, 2014 mainly related to the net proceeds from the issuance of long-term debt and common stock related to exercises of employee stock options offset by our repayment of debt and payment of taxes in connection with the vesting of the restricted stock units in the period.outstanding 2% Notes.
Commitments and Contingencies
We lease our facilities in Massachusetts, New York, Florida,California, Canada and Singapore. Our 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. In 2013, we entered into a new lease agreement for approximately 90,000 square feet of laboratory and office space for our corporate headquarters in Billerica, Massachusetts. The lease term began in August 2014 and expires in October 2022 and contains escalating payments over the life of the lease. In 2015, we extended our Singapore lease which now expires in July 2016. In 2014, we amended our existing lease for warehouse space in Billerica, Massachusetts which extended the term and increased the approximate square footage under the lease. The lease now expires in September 2019. Additionally, in 2014, we amended our existing lease for office space in New York which now expires in January 2019. Our Florida lease expires inDecember 2015. In the second quarter of 2015, we entered into a new lease agreement of office space in Ontario, Canada. The lease term began in June 2015 and expires in May 2018.
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, 20152016 (in thousands):
  Payments Due in
Contractual Obligations Total 2015 (remaining) 2016 2017 2018 2019 Later
Operating lease obligations $15,759
 $573
 $2,290
 $2,327
 $2,308
 $2,181
 $6,080
Debt obligations(1)
 216,176
 1,006
 4,025
 4,025
 4,025
 203,095
 
Capital lease obligations(2)
 7,670
 1,762
 5,639
 269
 
 
 
Purchase obligations 3,250
 1,250
 2,000
 
 
 
 
Total contractual obligations $242,855
 $4,591
 $13,954
 $6,621
 $6,333
 $205,276
 $6,080
Contractual obligationsTotal 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)
The interest rate on the convertible debt is 2% per annum. We have
(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 future payments of interest on the long-term debt in our obligations.
(2)
The effective interest rate on the capital lease obligations is 13-17%. We have included future payments of interest on the capital leases in our obligations.
We are in the processamount of respondingcapital 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 revised audit report receivedcombination 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 November 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. Due in partNote 13 to the preliminary nature ofconsolidated financial statements included in this matter, the Company currently cannot reasonably estimate a possible loss, or range of loss, in connection with this matter.Form 10-Q.
We are in the process of responding to a draft audit report received in June 2015 from the Connecticut Department of Social Services Office of Quality Assurance alleging overpayment of certain Medicaid claims to Neighborhood Diabetes.  Due in part to the preliminary nature of this matter, the Company currently cannot reasonably estimate a possible loss, or range of loss, in connection with this matter.
We received a warning letter from the FDA in June 2015 that related to the release of certain lots of OmniPods that did not conform to final acceptance criteria. A voluntary recall of the identified lots was issued and the Company accrued $0.1 million as warranty expense. The Company has replied to the FDA’s letter, and received a response indicating that its corrective actions appear to have adequately addressed the issue outlined in the letter.
We have reached a settlement agreement with the Massachusetts Department of Revenue for sales and use tax audits related to Neighborhood Diabetes. Based on the settlement agreement, we recorded a liability of $0.8 million, which was a reduction of our previously recorded liability of $3.7 million in connection with the settlement of this matter at June 30, 2015.
Between May 5, 2015 and June 16, 2015, three class action lawsuits were filed by shareholders in the U.S. District Court, Massachusetts, against us 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 violations of Sections 10(b) and 20(a) and Rule 10b-5 of the

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Securities Exchange Act of 1934 by making allegedly false and misleading statements about our business, operations, and prospects. The lawsuit seeks, among other things, compensatory damages in connection with the our 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, we currently cannot reasonably estimate a possible loss, or range of loss, in connection with this matter.
Off-Balance Sheet Arrangements
As of September 30, 20152016, 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, 2015.2016. 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, 2014.2015.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014,Information with respect to recent accounting developments is provided in note 2 to the FASB issued 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 may make additional estimates regarding performance conditions and the allocation of variable consideration. The guidance is effective in fiscal years beginning after January 1, 2017, with early adoption permitted. We are currently evaluating the impact of ASU 2014-09. We have not yet selected a transition method nor have we determined the effect of the standard on our consolidated financial position and results of operations.statements included in this Form 10-Q.
In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718), Accounting for Share-Based Payments when the terms of an award provide that a performance target could be achieve after the requisite service period ("ASU 2014-12"). ASU 2014-12 clarifies the period over which compensation cost would be recognized in awards with a performance target that affects vesting 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. We are currently evaluating the impact of ASU 2014-12.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). ASU 2015-03 amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. The guidance is effective for annual reporting periods beginning after December 15, 2015, and must be applied retrospectively. Early adoption is permitted. Had we adopted ASU 2015-03, other noncurrent assets and long-term debt would both have been $4.1 million and $5.0 million lower as of September 30, 2015 and December 31, 2014, respectively.
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. We are currently evaluating the impact of ASU 2015-11.
In September 2015, the FASB issued ASU No. 2015-16, 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. Early adoption is permitted. We are currently evaluating the impact of ASU 2015-16.

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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 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, 2015,2016, we had outstanding debt recorded on our consolidated balance sheet of $201.3$412.1 million, gross of deferred financing costs and unamortized debt discount, related to our 2% Notes and $7.11.25% Notes; and $1.1 million related to capital lease obligations. As the interest rates are fixed, changes in interest rates do not affect the value of our debt or capital lease obligations.
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 transacted in U.S. dollars and are not subject to material foreign currency fluctuations.
Fluctuations in foreign currency rates could affect our sales, cost of goods 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
As of September 30, 2015,2016, our management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, (as such term is 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 controls and procedures, we and our management recognize that any controls and procedures, no matter how well 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 that evaluation of our disclosure controls and procedures as of September 30, 2015,2016, 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 in the reports that we file or submit 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 that such material information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 20152016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding our legal proceedings is provided in note 12Note 13 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, 2014,2015, 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 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 for the following:

We may not be able to generate sufficient cash to service our indebtedness represented by our 2% Convertible Senior Notes due June 15, 2019 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 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 depends 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 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.


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.

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Item 6. Exhibits
Exhibit
Number
 Description
4.1Indenture, dated as of DocumentSeptember 13, 2016, between Insulet Corporation 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)
4.2Form 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)
4.3Amendment 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, President and 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.
   
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.
   
32.1 Certification of Patrick J. Sullivan, President and 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.
   
101 The following materials from Insulet Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015,2016, formatted in XBRL (eXtensible Business Reporting Language), as follows:
   
  (i) Consolidated Balance Sheets as of September 30, 20152016 (Unaudited) and December 31, 20142015
   
  (ii) Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 20152016 and September 30, 20142015 (Unaudited)
   
  (iii) Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 20152016 and September 30, 20142015 (Unaudited)
   
  (iv) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 20152016 and September 30, 20142015 (Unaudited)
   
  (iv) Condensed Notes to Consolidated Financial Statements (Unaudited)
+Application has been made to the Securities and Exchange Commission for confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission.

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrantRegistrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
INSULET CORPORATION
 
(Registrant)
  
Date: November 6, 20154, 2016/s/ Patrick J. Sullivan
 Patrick J. Sullivan
 
President and Chief Executive Officer
(Principal Executive Officer)
 
  
Date: November 6, 20154, 2016/s/ Michael L. Levitz
 Michael L. Levitz
 
Chief Financial Officer
(Principal Financial and Accounting Officer)



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