Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2018

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions in the application of certain of its significant accounting policies that may materially affect the reported amounts of assets, liabilities, equity, revenue and expenses. The most significant estimates used in these financial statements include the valuation of stock-based compensation expense; the fair value of intangible assets; the valuation of inventory; the valuation of variable transaction price in its contracts with customers, such as rights of return, discounts and rebates; the valuation of deferred revenue associated with undelivered performance obligations in contracts with customers; the calculation of gains and losses, if any, on the retirement or conversion of convertible debt; the estimated useful lives of property and equipment and intangible assets; the amount of internal use software development costs that qualify for capitalization; the fair value of liabilities associated with leased facilities; the valuation allowance related to deferred income taxes; the estimated amount, if any, of accrued contingent liabilities as well as warranty and doubtful accounts allowance reserve calculations. Actual results may differ from those estimates.

Principles of Consolidation and Basis of Presentation

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

Foreign Currency Translation

For the foreign subsidiaries of the Company, assets and liabilities are translated at exchange rates as of the balance sheet date; income and expenses are translated using weighted average exchange rates for the reporting period. Resulting translation adjustments are reported in accumulated other comprehensive income (loss), a separate component of stockholders' equity. For the year ended December 31, 2018, net foreign currency realized and unrealized losses were approximately $1.0 million and were not material for the years 2017 and 2016.

Cash and Cash Equivalents

For the purpose of the financial statement classification, the Company considers all highly-liquid investment instruments with original maturities of 90 days or less, when purchased, to be cash equivalents. Cash equivalents include money market mutual funds and U.S. government and agency bonds, which are carried at cost which approximates their fair value. Included in the Company's cash and cash equivalents are restricted cash amounts set aside for collateral on outstanding letters of credit totaling $2.7 million as of December 31, 2018 and $0.5 million as of December 31, 2017.

Investments in Marketable Securities

Short-term and long-term investment securities consist of available-for-sale marketable securities and are carried at fair value with unrealized gains or losses included as a component of other comprehensive income (loss) in stockholders' equity. Investments with a stated maturity date of more than one year from the balance sheet date and that are not expected to be used in current operations, are classified as long-term investments. Short-term and long-term investments include U.S. government and agency bonds, corporate bonds, and certificates of deposit. The Company reviews investments for other-than-temporary impairment when the fair value of an investment is less than its amortized cost. If an available-for-sale security is other than temporarily impaired, the loss is charged to earnings.

Fair Value Measurements

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. When estimating fair value, depending on the nature and complexity of the asset or liability, the Company may use one or all of the following approaches:


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


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


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

To measure fair value of assets and liabilities required to be measured or disclosed at fair value, the Company uses the following fair value hierarchy based on three levels of inputs of which the first two are considered observable and the last unobservable:

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

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

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

Property and Equipment and Intangible Assets

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

The Company assesses its intangible and other long-lived assets for impairment whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable. The Company recognizes an impairment loss for intangibles and other finite-lived assets if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows. Any such impairment loss is measured as the difference between the carrying amount and the fair value of the asset.

Business Combinations

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

Segment Reporting

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

Goodwill

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

Accumulated Other Comprehensive Income (Loss)

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

Revenue Recognition

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

1) Identify the contract with a customer;

2) Identify the performance obligations in the contract;

3) Determine the transaction price;

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

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

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

•

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

•

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

•

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

•

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

•

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

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

Collaborative Arrangements

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

Eli Lilly and Concentrated insulins: In May 2013, the Company entered into an agreement with Eli Lilly and Company (Eli Lilly) to develop a new version of the Omnipod System specifically designed to deliver Eli Lilly's Humulin^® R U-500 insulin, a concentrated form of insulin used by people with highly insulin resistant Type 2 diabetes. In January 2016, the Company entered into a development agreement with Eli Lilly to develop a new version of the Omnipod System, specifically designed to deliver Eli Lilly's Humalog ^® 200 insulin, a concentrated form of insulin used by higher insulin-requiring patients with diabetes that provides the same dose of insulin in half the volume of Eli Lilly's Humalog ^® U-100 insulin. Under the terms of these arrangements, the parties share the responsibility of the permissible costs that are incurred. Any amounts incurred in excess of the permissible shared costs that are the responsibility of one party becomes due and payable by the other party. Consideration received and payments made by the Company under the terms of the arrangements are recorded within research and development expense.

Shipping and Handling Costs

The Company does not typically charge its customers for shipping and handling costs associated with shipping its product to its customers unless non-standard shipping and handling services are requested.

Concentration of Credit Risk

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

The Company purchases Omnipod Systems from Flex Ltd., its single source supplier.

Recent Accounting Pronouncements

Recently Adopted Accounting Standards

Revenue from Contracts with Customers

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

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



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

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

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

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

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



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

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

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

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



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

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

Other Accounting Standards Adopted in 2018

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

Effective January 1, 2018, the Company retrospectively adopted ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) ("ASU 2016-15"). ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. There was no impact on the consolidated statements of cash flows upon the adoption of ASU 2016-15.

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

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

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

In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 and its related amendments (collectively referred to as ASC 842) requires entities to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and to recognize expense on their income statements over the lease term. ASC 842 will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. The Company adopted ASC 842 on January 1, 2019 using the modified retrospective method, whereby the new guidance will be applied prospectively as of the date of adoption and prior periods will not be restated. While the Company continues to calculate all potential impacts of the standard, the Company expects to record right-of-use assets of approximately $7 million to $9 million, and associated lease obligations of approximately $9 million to $11 million, on its balance sheet primarily related to its leased office and warehousing space. The difference between the approximate value of the right-of-use assets and the approximate value of the lease obligations is attributable to deferred rent and a cease-use liability, as further described in Note 12, which will be reclassified against the right-of-use assets upon adoption of ASC 842. The Company expects to elect certain available practical expedients upon adoption of the new guidance, including practical expedients that provide that an entity need not reassess whether an existing contract contains a lease and allows entities to carry forward the classification of current operating and capital leases into the new operating and financing classifications. The Company will also exclude leases with an expected term of less than one year from the application of ASC 842. In determining the estimated value of the right-use assets and lease liabilities provided above, the Company considered the remaining contractual term of the lease as well as the likelihood that the lease will be renewed. The Company discounted the estimated lease liability using its incremental borrowing rate, which is based on its unsecured borrowing rate as observed in recent convertible note transactions, adjusted for the estimated impact of collateralization.

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

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

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

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

In June 2016, the FASB issued ASU 2016-13, Credit Losses (Topic 326) ("ASU 2016-13"). ASU 2016-13 requires that financial assets measured at amortized cost, such as trade receivables and contract assets, be presented net of expected credit losses, which may be estimated based on relevant information such as historical experience, current conditions, and future expectation for each pool of similar financial asset. The new guidance requires enhanced disclosures related to trade receivables and associated credit losses. The guidance is effective beginning January 1, 2020. The adoption of this guidance is expected to increase the level of disclosures related to the Company's trade receivables and is not expected to have a material impact on its consolidated financial statements.

Fair Value of Financial Instruments

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.

Accounts Receivable, Net

Accounts receivable consist of amounts due from third-party payors, patients, and intermediaries. The Company records an allowance for doubtful accounts at the time potential collection risk is identified. The Company estimates its allowance based on historical experience, assessment of specific risk, and discussions with individual customers. The Company believes the reserve is adequate to mitigate current collection risk.

Inventories, Net

Inventories are carried at the lower of cost or market, determined under the first-in, first-out method, and include the costs of material, labor and overhead. Inventory has been recorded at cost, or net realizable value as appropriate, as of December 31, 2018 and 2017. The Company reviews inventories for net realizable value based on quantities on hand and expectations of future use. Work in process is calculated based upon a buildup of cost based on the stage of production.

Product Warranty

Product Warranty Costs

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

Stock-Based Compensation

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

Income Taxes

The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes (“ASC 740-10”), which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect in the years in which the differences are expected to reverse. The Company reviews its deferred tax assets for recoverability considering historical profitability, projected future taxable income, and the expected timing of the reversals of existing temporary differences and tax planning strategies. The effect of a change in enacted tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. As of December 31, 2018, the Company had no uncertain tax positions.

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

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

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

The Company files federal, state and foreign tax returns. These returns are generally open to examination by the relevant tax authorities from two to four years from the date they are filed or, in certain circumstances, from the end of the accounting period. The tax filings relating to the Company's federal and state tax returns are currently open to examination for tax years 2015 through 2017 and 2014 through 2017, respectively. In addition, the Company has generated tax losses from inception in 2000 until 2017 and beginning 2018, the Company is expected to generate taxable income. These years may be subject to examination if the losses are carried forward and utilized in future years.

At December 31, 2018 and 2017, the Company provided a full valuation allowance against its domestic net deferred tax asset as, in the judgment of the Company, it is not more likely than not that the future tax benefit will be realized. In addition, the Company has a net deferred tax asset in foreign jurisdictions where no valuation allowance is recorded as, in the judgment of the Company, it is more likely than not that the future tax benefit will be realized.