UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended September 30, ~~2017~~2020



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

For the transition period from_____ to _____

Commission File Number: 001-37557

Penumbra, Inc.

(Exact name of registrant as specified in its charter)



~~Delaware~~

	~~05-0605598~~
Delaware		05-0605598
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



One Penumbra Place ~~Alameda, CA~~		~~94502~~
~~(Address of principal executive offices)~~		~~(Zip code)~~

Alameda, CA 94502

(Address of principal executive offices, including zip code)

(510) 748-3200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, Par value $0.001 per share	PEN	The New York Stock Exchange

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: o☐

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: o☐

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

Large accelerated filer

x☒

Accelerated filer

o☐

Non-accelerated filer

o☐

~~(Do not check if a smaller reporting company)~~

Smaller reporting company

o☐

Emerging growth company

o☐

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

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

As of October ~~17, 2017,~~19, 2020, the registrant had ~~33,938,594~~36,311,239 shares of common stock, par value $0.001 per share, outstanding.

~~Penumbra, Inc.~~

Table of Contents

FORM 10-Q

TABLE OF CONTENTS



	Page
PART I. FINANCIAL INFORMATION
Item 1.		Condensed Consolidated Financial Statements (Unaudited)	2
		Condensed Consolidated Balance Sheets	2
		Condensed Consolidated Statements of Operations ~~and Comprehensive Income~~	3
		Condensed Consolidated Statements of Comprehensive (Loss) Income	4
		Condensed Consolidated Statements of Stockholders’ Equity	5
		Condensed Consolidated Statements of Cash Flows	47
		Notes to Condensed Consolidated Financial Statements	58
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	2324
Item 3.		Quantitative and Qualitative Disclosure about Market Risk	3336
Item 4.		Controls and Procedures	3437

PART II. OTHER INFORMATION
Item 1.		Legal Proceedings	3538
Item 1A.		Risk Factors	3538
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	3538
Item 3.		Defaults Upon Senior Securities	3539
Item 4.		Mine Safety Disclosure	3539
Item 5.		Other Information	3539
Item 6.		Exhibits	3640

Signatures

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

Penumbra, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands)


	September 30, 2017			December 31, 2016				September 30, 2020		December 31, 2019
Assets							Assets
Current assets:							Current assets:
Cash and cash equivalents	$	65,621		$	13,236		Cash and cash equivalents	$	80,115	$	72,779
Marketable investments	153,203			115,517			Marketable investments	188,611		116,610
Accounts receivable, net of doubtful accounts of $1,066 and $684 at September 30, 2017 and December 31, 2016, respectively.	47,964			43,335
Accounts receivable, net of allowance for credit losses of $2,133 and net of doubtful accounts of $2,946 at September 30, 2020 and December 31, 2019, respectively							Accounts receivable, net of allowance for credit losses of $2,133 and net of doubtful accounts of $2,946 at September 30, 2020 and December 31, 2019, respectively	112,817		105,901
Inventories	90,529			73,012			Inventories	191,547		152,992
Prepaid expenses and other current assets	14,464			18,727			Prepaid expenses and other current assets	17,109		14,852

Total current assets	371,781			263,827			Total current assets	590,199		463,134
Property and equipment, net	28,259			21,464			Property and equipment, net	64,906		51,812
Operating lease right-of-use assets							Operating lease right-of-use assets	41,778		43,717
Finance lease right-of-use assets							Finance lease right-of-use assets	38,798		39,924
Intangible assets, net	23,821			—			Intangible assets, net	10,640		25,407
Goodwill	7,449			—			Goodwill	8,004		7,656

Deferred taxes	22,503			22,476			Deferred taxes	47,910		31,305
Other non-current assets	5,281			487			Other non-current assets	8,068		2,946
Total assets	$	459,094		$	308,254		Total assets	$	810,303	$	665,901
Liabilities and Stockholders’ Equity							Liabilities and Stockholders’ Equity
Current liabilities:							Current liabilities:
Accounts payable	$	5,768		$	4,110		Accounts payable	$	14,544	$	15,111
Accrued liabilities	45,312			31,690			Accrued liabilities	87,691		67,630
Current operating lease liabilities							Current operating lease liabilities	4,484		4,142
Current finance lease liabilities							Current finance lease liabilities	1,336		4,165
Total current liabilities	51,080			35,800			Total current liabilities	108,055		91,048
Deferred rent	6,065			5,083

Non-current operating lease liabilities							Non-current operating lease liabilities	44,998		47,242
Non-current finance lease liabilities							Non-current finance lease liabilities	27,391		26,748
Other non-current liabilities	18,117			824			Other non-current liabilities	10,147		15,250
Total liabilities	75,262			41,707			Total liabilities	190,591		180,288
Commitments and contingencies (Note 7)
Commitments and contingencies (Note 9)							Commitments and contingencies (Note 9)
Stockholders’ equity:							Stockholders’ equity:
Common stock	33			31			Common stock	36		35
Additional paid-in capital	389,682			273,865			Additional paid-in capital	585,295		430,659

Accumulated other comprehensive income (loss)	1,204			(4,688		)	Accumulated other comprehensive income (loss)	101		(2,324)
Accumulated deficit	(7,087		)	(2,661		)
Retained earnings							Retained earnings	36,974		57,522
Total Penumbra, Inc. stockholders’ equity							Total Penumbra, Inc. stockholders’ equity	622,406		485,892
Non-controlling interest							Non-controlling interest	(2,694)		(279)
Total stockholders’ equity	383,832			266,547			Total stockholders’ equity	619,712		485,613
Total liabilities and stockholders’ equity	$	459,094		$	308,254		Total liabilities and stockholders’ equity	$	810,303	$	665,901

See accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

Penumbra, Inc.

Condensed Consolidated Statements of Operations ~~and Comprehensive Income~~

(unaudited)

(in thousands, except share and per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenue	$	151,076	$	139,502	$	393,514	$	402,142
Cost of revenue	60,153		43,504		149,652		128,306
Gross profit	90,923		95,998		243,862		273,836
Operating expenses:
Research and development	34,923		13,733		70,594		38,862
Sales, general and administrative	76,158		69,289		210,465		198,045

Total operating expenses	111,081		83,022		281,059		236,907
(Loss) income from operations	(20,158)		12,976		(37,197)		36,929
Interest income, net	413		759		820		2,276
Other income (expense), net	14		(772)		(1,130)		(819)
(Loss) income before income taxes	(19,731)		12,963		(37,507)		38,386
(Benefit from) provision for income taxes	(9,855)		1,963		(15,618)		683


Consolidated net (loss) income	$	(9,876)	$	11,000	$	(21,889)	$	37,703
Net loss attributable to non-controlling interest	(1,061)		(483)		(2,539)		(1,066)
Net (loss) income attributable to Penumbra, Inc.	$	(8,815)	$	11,483	$	(19,350)	$	38,769







Net (loss) income attributable to Penumbra, Inc. per share:
Basic	$	(0.24)	$	0.33	$	(0.54)	$	1.12
Diluted	$	(0.24)	$	0.32	$	(0.54)	$	1.07
Weighted average shares outstanding:
Basic	36,207,716		34,840,370		35,568,591		34,681,846
Diluted	36,207,716		36,271,394		35,568,591		36,243,222

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Revenue $ 83,911
$ 67,187
$ 237,713
$ 190,212
Cost of revenue 29,134
24,313
84,298
65,963
Gross profit 54,777
42,874
153,415
124,249
Operating expenses:
Research and development 8,132
6,497
23,260
17,762
Sales, general and administrative 45,962
37,740
132,846
106,685
Total operating expenses 54,094
44,237
156,106
124,447
Income (loss) from operations 683
(1,363 ) (2,691 ) (198 )
Interest income, net 658
631
1,926
1,700
Other expense, net (647 ) (360 ) (1,368 ) (856 )
Income (loss) before income taxes 694
(1,092 ) (2,133 ) 646
Provision for (benefit from) income taxes 456
(12,998 ) 2,293
(16,564 )
Net income (loss) 238
11,906
(4,426 ) 17,210
Foreign currency translation adjustments, net of tax 5,845
(898 ) 5,771
(1,731 )
Unrealized gain (loss) on available-for-sale securities, net of tax 54
(115 ) 121
254
Comprehensive income $ 6,137
$ 10,893
$ 1,466
$ 15,733
Net income (loss) $ 238
$ 11,906
$ (4,426 ) $ 17,210
Net income (loss) per share:
Basic $ 0.01
$ 0.39
$ (0.14 ) $ 0.57
Diluted $ 0.01
$ 0.35
$ (0.14 ) $ 0.52
Weighted average shares used to compute net income (loss) per share:
Basic 33,446,841
30,604,384
32,766,135
30,269,463
Diluted 35,664,272
33,755,383
32,766,135
33,367,618

See accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

Penumbra, Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(unaudited)

(in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Consolidated net (loss) income	$	(9,876)	$	11,000	$	(21,889)	$	37,703
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax	2,257		(2,606)		1,970		(2,854)
Net change in unrealized (losses) gains on available-for-sale securities, net of tax	(59)		110		455		786
Total other comprehensive income (loss), net of tax	2,198		(2,496)		2,425		(2,068)
Consolidated comprehensive (loss) income	$	(7,678)	$	8,504	$	(19,464)	$	35,635
Net loss attributable to non-controlling interest	(1,061)		(483)		(2,539)		(1,066)
Comprehensive (loss) income attributable to Penumbra, Inc.	$	(6,617)	$	8,987	$	(16,925)	$	36,701

See accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

Penumbra, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(in thousands, except share amounts)


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive (Loss) Income		Retained Earnings		Total Penumbra, Inc. Stockholders’ Equity		Non-Controlling Interest		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2019	35,001,581	$	35	$	430,659	$	(2,324)	$	57,522	$	485,892	$	(279)	$	485,613
Issuance of common stock	81,485	0		396		—		—		396		—		396


Shares held for tax withholdings	(12,058)	—		(2,105)		—		—		(2,105)		—		(2,105)
Stock-based compensation	—	—		6,774		—		—		6,774		—		6,774


Cumulative effect adjustment(1)	—	—		—		—		(1,198)		(1,198)		—		(1,198)


Other comprehensive loss	—	—		—		(2,251)		—		(2,251)		—		(2,251)
Net income (loss)	—	—		—		—		1,425		1,425		(537)		888
Balance at March 31, 2020	35,071,008	$	35	$	435,724	$	(4,575)	$	57,749	$	488,933	$	(816)	$	488,117


Issuance of common stock	68,153	0		667		—		—		667		124		791
Issuance of common stock under employee stock purchase plan	41,590	—		5,945		—		—		5,945		—		5,945
Issuance of common stock upon underwritten public offering, net of issuance cost	865,963	1		134,758		—		—		134,759		—		134,759
Shares held for tax withholdings	(10,304)	—		(1,768)		—		—		(1,768)		—		(1,768)
Stock-based compensation	—	—		5,740		—		—		5,740		—		5,740

Other comprehensive income	—	—		—		2,478		—		2,478		—		2,478
Net loss	—	—		—		—		(11,960)		(11,960)		(941)		(12,901)
Balance at June 30, 2020	36,036,410	$	36	$	581,066	$	(2,097)	$	45,789	$	624,794	$	(1,633)	$	623,161
Issuance of common stock	284,443	0		3,208		—		—		3,208		—		3,208

Shares held for tax withholdings	(21,735)	—		(4,764)		—		—		(4,764)		—		(4,764)
Stock-based compensation	—	—		5,785		—		—		5,785		—		5,785

Other comprehensive income	—	—		—		2,198		—		2,198		—		2,198
Net loss	—	—		—		—		(8,815)		(8,815)		(1,061)		(9,876)
Balance at September 30, 2020	36,299,118	$	36	$	585,295	$	101	$	36,974	$	622,406	$	(2,694)	$	619,712

(1) Cumulative effect adjustments relate to the adoption of Accounting Standard Update (“ASU”) No. 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Refer to Note “2. Summary of Significant Accounting Policies” for more information.

Table of Contents

Penumbra, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(in thousands, except share amounts)


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Total Penumbra, Inc. Stockholders’ Equity		Non-Controlling Interest		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2018	34,437,339	$	34	$	415,084	$	(1,942)	$	9,064	$	422,240	$	175	$	422,415
Issuance of common stock	140,598	0		1,071		—		—		1,071		—		1,071

Shares held for tax withholdings	(14,284)	—		(2,098)		—		—		(2,098)		—		(2,098)
Stock-based compensation	—	—		5,457		—		—		5,457		—		5,457
Other comprehensive loss	—	—		—		(636)		—		(636)		—		(636)
Net income (loss)	—	—		—		—		10,698		10,698		(244)		10,454
Balance at March 31, 2019	34,563,653	$	34	$	419,514	$	(2,578)	$	19,762	$	436,732	$	(69)	$	436,663
Issuance of common stock	259,080	1		1,194		—		—		1,195		—		1,195
Issuance of common stock under employee stock purchase plan	46,065	—		4,779		—		—		4,779		—		4,779
Shares held for tax withholdings	(82,295)	—		(11,281)		—		—		(11,281)		—		(11,281)
Stock-based compensation	—	—		5,014		—		—		5,014		—		5,014
Capital contribution from non-controlling interest	—	—		—		—		—		—		500		500
Other comprehensive income	—	—		—		1,064		—		1,064		—		1,064
Net Income (loss)	—	—		—		—		16,588		16,588		(339)		16,249
Balance at June 30, 2019	34,786,503	$	35	$	419,220	$	(1,514)	$	36,350	$	454,091	$	92	$	454,183
Issuance of common stock	142,716	0		1,301		—		—		1,301		—		1,301


Shares held for tax withholdings	(18,361)	—		(2,740)		—		—		(2,740)		—		(2,740)
Stock-based compensation	—	—		5,693		—		—		5,693		—		5,693

Other comprehensive loss	—	—		—		(2,496)		—		(2,496)		—		(2,496)
Net income (loss)	—	—		—		—		11,483		11,483		(483)		11,000
Balance at September 30, 2019	34,910,858	$	35	$	423,474	$	(4,010)	$	47,833	$	467,332	$	(391)	$	466,941

.See accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

Penumbra, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


								Nine Months Ended September 30,
								2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:							CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net (loss) income							Consolidated net (loss) income	$	(21,889)	$	37,703
Adjustments to reconcile consolidated net (loss) income to net cash (used in) provided by operating activities:							Adjustments to reconcile consolidated net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization							Depreciation and amortization	9,433		5,790

Stock-based compensation							Stock-based compensation	17,486		16,471

Inventory write-downs							Inventory write-downs	2,280		2,775

	Nine Months Ended September 30,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(4,426	)	$	17,210
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation and amortization	2,580			1,809
Amortization of premium on marketable investments	501			733
Stock-based compensation	13,092			10,800
Loss on non-marketable equity investments	703			—
Inventory write downs	996			1,190

Deferred taxes							Deferred taxes	(16,637)		101

Impairment of intangible asset							Impairment of intangible asset	2,500		0
Other	474			65			Other	3,200		735
Changes in operating assets and liabilities:							Changes in operating assets and liabilities:
Accounts receivable	704			(7,088		)	Accounts receivable	(7,443)		(21,520)
Inventories	(14,716		)	(14,018		)	Inventories	(39,940)		(27,860)
Prepaid expenses and other current and non-current assets	3,303			(22,895		)	Prepaid expenses and other current and non-current assets	(6,006)		(3,388)
Accounts payable	873			947			Accounts payable	(229)		3,323
Accrued expenses and other non-current liabilities	9,514			8,797			Accrued expenses and other non-current liabilities	26,086		7,755
Net cash provided by (used in) operating activities	13,598			(2,450		)
Net cash (used in) provided by operating activities							Net cash (used in) provided by operating activities	(31,159)		21,885
CASH FLOWS FROM INVESTING ACTIVITIES:							CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of a business, net of cash acquired	(9,253		)	—
Purchase of non-marketable investments	(5,130		)	—
Purchase of marketable investments	(139,317		)	(45,027		)

Lease payments made prior to commencement							Lease payments made prior to commencement	0		(4,081)
Purchases of marketable investments							Purchases of marketable investments	(120,014)		(29,550)
Proceeds from sales of marketable investments	28,167			2,504			Proceeds from sales of marketable investments	7,188		2,700
Proceeds from maturities of marketable investments	73,579			46,081			Proceeds from maturities of marketable investments	42,966		78,079
Acquisition of intangible assets from a licensing agreement	(2,500		)	—

Purchases of property and equipment	(6,805		)	(7,078		)	Purchases of property and equipment	(21,003)		(14,125)
Net cash used in investing activities	(61,259		)	(3,520		)

Other							Other	(3,060)		(2,000)
Net cash (used in) provided by investing activities							Net cash (used in) provided by investing activities	(93,923)		31,023
CASH FLOWS FROM FINANCING ACTIVITIES:							CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance cost	106,265			—
Proceeds from issuance of common stock upon underwritten public offering, net of issuance cost							Proceeds from issuance of common stock upon underwritten public offering, net of issuance cost	134,759		0
Proceeds from exercises of stock options	4,244			2,893			Proceeds from exercises of stock options	4,395		3,566
Proceeds from issuance of stock under employee stock purchase plan	2,914			3,783			Proceeds from issuance of stock under employee stock purchase plan	5,945		4,779
Payment of employee taxes related to vested restricted stock	(10,569		)	(2,024		)
Payment of obligations on debt and credit facilities	(940		)	—
Net cash provided by financing activities	101,914			4,652

Payment of employee taxes related to vested stock							Payment of employee taxes related to vested stock	(8,637)		(16,119)
Payments of finance lease obligations							Payments of finance lease obligations	(3,071)		0
Payment of acquisition-related obligations							Payment of acquisition-related obligations	(683)		(1,183)
Proceeds from capital contribution from non-controlling interest							Proceeds from capital contribution from non-controlling interest	0		500
Other							Other	(248)		0
Net cash provided by (used in) financing activities							Net cash provided by (used in) financing activities	132,460		(8,457)
Effect of foreign exchange rate changes on cash and cash equivalents	(1,868		)	(2,373		)	Effect of foreign exchange rate changes on cash and cash equivalents	(42)		(720)
Net Increase (Decrease) in Cash and Cash Equivalents	52,385			(3,691		)
NET INCREASE IN CASH AND CASH EQUIVALENTS							NET INCREASE IN CASH AND CASH EQUIVALENTS	7,336		43,731
CASH AND CASH EQUIVALENTS—Beginning of period	13,236			19,547			CASH AND CASH EQUIVALENTS—Beginning of period	72,779		67,850
CASH AND CASH EQUIVALENTS—End of period	$	65,621		$	15,856		CASH AND CASH EQUIVALENTS—End of period	$	80,115	$	111,581
NONCASH INVESTING AND FINANCING ACTIVITIES:							NONCASH INVESTING AND FINANCING ACTIVITIES:
Right-of-use assets obtained in exchange for operating lease obligations							Right-of-use assets obtained in exchange for operating lease obligations	$	1,086	$	1,738
Right-of-use assets obtained in exchange for finance lease obligations							Right-of-use assets obtained in exchange for finance lease obligations	$	1,624	$	0

Purchase of property and equipment funded through accounts payable and accrued liabilities	$	2,933		$	2,197		Purchase of property and equipment funded through accounts payable and accrued liabilities	$	1,517	$	2,925
Acquisition-related contingent consideration and working capital adjustment liabilities	$	4,897		$	—
Licensing agreement related contingent consideration	$	12,717		$	—

SUPPLEMENTAL CASH FLOW INFORMATION:							SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for amounts included in the measurement of operating lease liabilities							Cash paid for amounts included in the measurement of operating lease liabilities	$	5,649	$	5,059

See accompanying notes to the unaudited condensed consolidated financial statements

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Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization and Description of Business

Penumbra, Inc. (the “Company”) is a global healthcare company focused on ~~interventional~~innovative therapies. The Company designs, develops, manufactures and markets ~~innovative devices~~novel products and has a broad portfolio ~~of products~~ that addresses challenging medical conditions ~~and~~in markets with significant clinical needs across two major markets, neuro and peripheral vascular. The conditions that the Company’s products address include, among others, ischemic stroke, hemorrhagic stroke and various peripheral vascular conditions that can be treated through thrombectomy and embolization procedures.unmet need.

2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying condensed consolidated balance sheet as of September 30, ~~2017,~~2020, the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive (loss) income, and ~~comprehensive income~~the condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, and the condensed consolidated statements of cash flows for the nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 are unaudited. The unaudited condensed consolidated financial statements included herein have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The condensed consolidated balance sheet data as of December 31, ~~2016~~2019 was derived from the audited financial statements as of that date.

The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly the Company’s financial position as of September 30, ~~2017,~~2020, the results of its operations for the three and nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, the changes in comprehensive (loss) income and stockholders’ equity for the three and nine months ended September 30, 2020 and 2019, and the cash flows for the nine months ended September 30, ~~2017~~2020 and ~~2016.~~2019. The results for the three and nine months ended September 30, ~~2017~~2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017~~2020 or for any other future annual or interim period. Certain changes in presentation were made in the condensed consolidated financial statements for the three and nine months ended September 30, ~~2016,~~2019 to conform to the presentation for the three and nine months ended September 30, ~~2017.~~

~~The Company elected to early adopt Accounting Standards Update (~~“~~ASU~~”) 2016-09 in the fourth quarter of 2016 which requires the Company to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The impact of adoption was the creation of deferred tax assets (“DTAs”) in the balance sheet and recognition of excess tax benefits in our provision for (benefit from) income taxes rather than paid-in capital for all periods in fiscal year 2016. The Company elected to apply the presentation requirements for cash flows related to excess tax ~~benefits retrospectively to all periods presented.~~

~~Adoption of the new standard resulted in adjustments to our 2016 unaudited selected financial data previously reported in our Quarterly Report on Form 10-Q as follows:~~

September 30, 2016
(In thousands) As Previously Reported As Adjusted
Condensed Consolidated Balance Sheet Data:
Prepaid expenses and other current assets $ 18,665
$ 19,209
Total current assets 267,223
267,767
Deferred taxes 13,394
22,059
Total assets 297,279
306,488
Other non-current liabilities 6,081
5,540
Total liabilities 43,425
42,884
Additional paid-in-capital 275,031
267,429
Accumulated deficit (17,616 ) (264 )
Total stockholders’ equity
253,854
263,604
Total liabilities and stockholders’ equity
297,279
306,488

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

Three Months Ended September 30, 2016 Nine Months Ended September 30, 2016
(In thousands, except per share amounts) As Previously Reported As Adjusted As Previously Reported As Adjusted
Condensed Consolidated Statements of Operations Data:
Provision for (benefit from) income taxes $ 14
$ (12,998 ) $ 787
$ (16,564 )
Net (loss) income $ (1,106 ) $ 11,906
$ (141 ) $ 17,210
Net (loss) income per share:
Basic $ (0.04 ) $ 0.39
$ 0.00
$ 0.57
Diluted $ (0.04 ) $ 0.35
$ 0.00
$ 0.52
Weighted average shares used to compute net (loss) income per share attributable to common stockholders:
Basic 30,604,384
30,604,384
30,269,463
30,269,463
Diluted 30,604,384
33,755,383
30,269,463
33,367,618

Nine Months Ended September 30, 2016
(In thousands) As Previously Reported As Adjusted
Condensed Consolidated Statement of Cash Flow Data:
Net cash used in operating activities $ (10,051 ) $ (2,450 )
Net cash provided by financing activities $ 12,253
$ 4,652
2020.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, ~~2016,~~2019, included in the Company’s Annual Report on Form 10-K. During the nine months ended September 30, 2017, the Company added accounting policies for goodwill, contingent consideration, intangible assets and non-marketable equity investments as described below. There have been no ~~other~~ changes to the Company’s significant accounting policies during the nine months ended September 30, ~~2017,~~2020, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2019, other than the changes described below in connection with the adoption of the guidance under Accounting Standard Update (“ASU”) No. 2016-13.

The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its ~~wholly-owned subsidiaries.~~majority-owned subsidiary. The portion of equity and consolidated net income not attributable to the Company is considered non-controlling interest and is classified separately in the condensed consolidated financial statements. Any subsequent changes in the Company’s ownership interest while the Company retains its controlling interest in its majority-owned subsidiary will be accounted for as equity transactions. All intercompany ~~accounts~~balances and transactions have been ~~eliminated.~~eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity accounts; disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to marketable investments, ~~provisions~~allowances for ~~doubtful accounts, sales return reserve,~~credit losses, the amount of variable consideration included in the transaction price, warranty reserve, valuation of inventories, useful lives of property and equipment, operating and financing lease right-of-use (“ROU”) assets and liabilities, income taxes, contingent consideration and other contingencies, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other data. Actual results could differ from those estimates.

~~Goodwill~~

Goodwill represents the excess of the purchase price of an acquired business or assets over the fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but is tested for impairment at least annually, or more frequently if events or circumstances indicate the carrying value may no longer be recoverable and that an impairment loss may have occurred. The Company continues to operate as one segment, which is considered to be the sole reporting unit, and therefore goodwill is tested for impairment at the consolidated level.

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Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

~~As of~~ ~~September 30, 2017, the Company’s goodwill is related to the acquisition of Crossmed S.p.a (“Crossmed”) during the third quarter of 2017. Refer to~~ ~~Note “5. Business Combination” and~~ ~~Note “6. Goodwill and Intangible Assets” for more information.~~

~~Contingent Consideration~~

~~As of September 30, 2017, the Company’s contingent consideration related to the acquisition of Crossmed and intangible assets through a licensing agreement.~~ ~~For more information with respect to the fair value of contingent consideration, refer to Note “5. Business Combination” and Note “6. Goodwill and Intangible Assets,” respectively.~~

~~Intangible Assets~~

~~Intangible assets consist of intangibles acquired through a licensing arrangement and the acquisition of Crossmed during the third quarter of 2017.~~

Indefinite-lived intangible assets relate to payments and future milestone payments, which are probable and estimable, for an exclusive right to licensed technology. The acquired licensed technology is accounted for as an indefinite-lived intangible asset until it reaches technological feasibility, which is determined on the basis of obtaining regulatory approval to market and commercialize the underlying products. Upon the commercialization of the underlying product, the capitalized amount will be amortized over its estimated useful life. Indefinite-lived intangible assets will be tested for impairment at least annually, or more frequently if events or circumstances indicate their carrying value may no longer be recoverable and that an impairment loss may have occurred.

Finite-lived intangible assets are amortized using the straight-line method over the estimated economic useful lives of the assets, which is the period during which expected cash flows support the fair value of such intangible assets. The Company will review finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When such an event occurs, management will determine whether there has been impairment by comparing the anticipated undiscounted future net cash flows to the related asset group’s carrying value. If an asset is considered impaired, the asset will be written down to the determined fair value based on discounted cash flows. Refer to Note “6. Goodwill and Intangible Assets” for more information on the Company’s intangible assets.

~~Non-Marketable Equity Investments~~

Entities in which the Company has at least a 20%, but not more than a 50%, interest are accounted for under the equity method unless it is determined that the Company has a controlling financial interest in the entity, in which case the entity would be consolidated. Non-marketable equity investments are classified as investments and included in ~~other non-current assets~~ on ~~the condensed consolidated balance sheet. The Company’s proportionate share of the operating results of its non-marketable equity method investments are recorded as profit or loss and included~~ ~~as a component of other expense, net,in the condensed~~ ~~consolidated statements of operations and comprehensive income.~~ ~~See Note “3. Investments and Fair Value of Financial Instruments” for further details.~~

Segments

The Company determined its operating segment on the same basis that it uses to evaluate its performance internally. The Company has ~~one~~1 business activity: the design, development, manufacturing and marketing of innovative devices, and operates as ~~one~~1 operating segment. The Company’s chief operating decision-maker, its Chief Executive Officer, reviews its consolidated operating results for the purpose of allocating resources and evaluating financial performance.

Recently Adopted Accounting Standards

On January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments—Credit Losses (“ASU 2016-13”) using the modified retrospective transition approach, with the impact upon adoption reflected in opening retained earnings. The comparative prior year information has not been adjusted and continues to be reported under legacy GAAP. The standard significantly changed the impairment model for most financial assets and certain other instruments, including accounts receivable and available-for-sale securities.

For financial assets measured at amortized cost, including our accounts receivable, the standard requires an entity to (1) estimate its lifetime expected credit losses upon recognition of the financial assets and establish an allowance to present the net amount expected to be collected, (2) recognize this allowance and changes in the allowance during subsequent periods through net income and (3) consider relevant information about past events, current conditions and reasonable and supportable forecasts in assessing the lifetime expected credit losses.

For available-for-sale debt securities, this standard made several targeted amendments to the existing other-than-temporary impairment model, including (1) requiring disclosure of the allowance for credit losses, (2) allowing reversals of the previously recognized credit losses until the entity has the intent to sell, is more-likely-than-not required to sell the securities or the maturity of the securities, (3) limiting impairment to the difference between the amortized cost basis and fair value and (4) not allowing entities to consider the length of time that fair value has been less than amortized cost as a factor in evaluating whether a credit loss exists.

As a result of adoption, the cumulative impact related to accounts receivable expected credit losses to our opening retained earnings at January 1, 2020 was $1.2 million. As of the adoption date, the difference between the amortized cost basis and fair value of the Company’s impaired available-for-sale securities held was not material. Accordingly, upon adoption there was no impact to our opening retained earnings for credit losses related to available-for-sale securities. For additional information on the impact of the adoption and disclosures required by ASU 2016-13, refer to the updates to significant accounting policies section below, Note “3. Investments and Fair Value of Financial Instruments” and Note “4. Balance Sheet Components.”

On January 1, 2020, the Company adopted ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The primary focus of the standard is to improve the effectiveness of the disclosure requirements for fair value measurements. The Company ~~assigns revenue~~had no significant changes to the fair value measurement related disclosures due to the adoption of the standard.

Updates to Significant Accounting Policies

As a result of the adoption of the ASU 2016-13, the Company has made the following updates to its significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Significant Accounting Policies Update - Credit Losses

The Company is exposed to credit losses primarily through our accounts receivable from sales of products on credit terms of one year or less. The Company performs ongoing credit evaluations of its customers, does not require collateral, and maintains allowances for potential credit losses on customer accounts. The Company monitors its ongoing credit exposure and concentration through active review of customers balances against contract terms, due dates, geographic ~~area based~~related risks and current economic conditions impacting our customers. Our activities include timely account reconciliation, dispute resolution and payment confirmation. Refer to “Significant Accounting Policies - Accounts Receivable” for more information on the ~~destination~~allowance for credit losses on the Company’s accounts receivables.

The Company is also exposed to ~~which it ships~~credit losses through its ~~products.~~

investments in available-for-sale securities. An investment is impaired if the fair value of the investment is less than its amortized cost basis. The Company reviews each impaired available-for-sale security held in its portfolio to determine whether the decline in fair value below its amortized cost basis is the result of credit losses or other factors. An allowance for credit losses is to be recorded as a charge to net income in an amount equal to the difference between the impaired security’s amortized cost basis and the amount expected to be collected over the lifetime of security, limited by the amount that the fair value is less than its amortized cost basis. Any remaining difference between its

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

amortized cost basis and fair value is deemed not to be due to expected credit losses and is recorded as a component of accumulated other comprehensive loss.

~~Recent~~The Company’s impairment review considers several factors to determine if an expected credit loss is present including the discounted present value of expected cash flows of the security, the capacity to hold a security or sell a security before recovery of the decline in amortized cost, the credit rating of the security and forecasted and historical factors that affect the value of the security.

See Note “3. Investments and Fair Value of Financial Instruments” for more information.

Significant Accounting ~~Guidance~~Policies Update - Accounts Receivable

~~Recently Adopted Accounting Standards~~

Accounts receivable are measured at amortized cost less the allowances for credit losses. In ~~July 2015, the Financial Accounting Standards Board (~~“~~FASB~~”) ~~issued~~accordance with ASU ~~No. 2015-11,~~ ~~Simplifying the Measurement~~2016-13, as of ~~Inventory~~, which requires an entity to measure most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. In January ~~2017,~~1, 2020, the Company ~~adopted~~measures expected credit losses for its accounts receivables utilizing a loss-rate approach. The allowance for expected credit losses assessment requires a degree of estimation and judgement. The expected loss-rate is calculated by utilizing historical credit losses incurred as percentage of the ~~standard on~~Company’s historical accounts receivable balances, pooled by customers with similar geographic credit risk characteristics. The loss-rate is adjusted for management’s expectations regarding current conditions and forecasts about future conditions which impact expected credit losses. The Company considers factors such as customers credit risk, geographic related risks and economic conditions that may affect a ~~prospective basis and~~customer’s credit quality classification. Prior to the adoption ~~did not have~~of ASU 2016-13, the Company recognized losses when a ~~material~~ ~~impact on its financial position.~~loss was incurred or deemed probable.

At September 30, 2020, the Company reported $112.8 million of accounts receivable, net of credit losses of $2.1 million. See Note “4. Balance Sheet Components” for more information.

Recently Issued Accounting Standards

In ~~May 2014,~~December 2019, the FASB issued ASU No. ~~2014-09,~~ ~~Revenue from Contracts with Customers, which outlines a comprehensive new revenue recognition model designed to depict~~2019-12, Income Taxes— Simplifying the ~~transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange~~Accounting for ~~those goods or services.~~ ~~In March 2016, the FASB issued ASU No. 2016-08,~~ ~~Revenue from Contracts with Customers~~—~~Principal versus Agent Considerations (Reporting Revenue Gross versus Net)~~,~~which further clarifies the implementation guidance on principal versus agent considerations contained in ASU No. 2014-09. In April 2016, the FASB issued ASU No. 2016-10,~~ ~~Revenue from Contracts with Customers~~—~~Identifying Performance Obligations and Licensing, which further clarifies the implementation guidance relating to identifying performance obligations and the licensing implementation guidance.~~ ~~In May 2016, the FASB issued ASU No. 2016-12,~~ ~~Revenue from Contracts with Customers~~—~~Narrow-Scope improvements and Practical Expedients, which further clarifies the implementation on narrow scope improvements and practical expedients.~~ ~~In December 2016, the FASB issued ASU No. 2016-20,~~ ~~Technical Corrections and Improvements to Topic 606~~—~~Revenue from Contracts with Customer~~s, ~~which makes minor corrections or minor improvements to the Codification related to ASU No. 2014-09 that are not expected to have a significant effect on the Company~~’~~s current accounting practice.~~ ~~In September 2017, the FASB issued ASU No. 2017-13,~~ Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments, (“ASU No. 2017-13”) which provides additional clarification and implementation guidance on the previously issued ASU No. 2014-09. These standards will be effective for the Company in the first quarter of 2018 pursuant to ASU No. 2015-14, ~~Revenue from Contracts with Customers~~-~~Deferral of the Effective Date~~,~~issued by the FASB in August 2015.~~Income Taxes. The ~~Company~~standard intends to ~~adopt~~simplify and reduce the ~~new standard on a modified retrospective basis on January 1, 2018. Under this method, the Company will record a cumulative-effect adjustment to the opening balance~~cost of ~~retained earnings in the initial year of adoption. The timing of revenue recognition based on the guidance related to transfer of control may result in acceleration of revenue recognition~~accounting for some contracts. The Company does not expect the impact of the new standard to be material, but it expands financial statement disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. As we continue our assessment through the remainder of 2017, our preliminary assessment is subject to change.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which amends the existing accounting standards for leases. In September 2017, the FASB issued ASU No. 2017-13 which provides additional clarification and implementation guidance on the previously issued ASU No. 2016-02. Under the new guidance, a lessee will be required to recognize a lease liability and right-of-use asset for all leases with terms in excess of twelve months.income taxes. The new guidance removes certain exceptions for recognizing deferred taxes for foreign investments, the incremental approach to performing intraperiod allocation, and calculating income taxes in interim periods for year to date losses that exceed anticipated full year losses. The standard also ~~modifies the classification criteria and~~adds guidance to reduce complexity in certain areas, including accounting for ~~sales-type and direct financing leases, and requires additional disclosures to enable users~~franchise taxes that are partially based on income, transactions with a government that result with a step up in the tax basis of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. Consistent with current guidance, a lessee’s recognition, measurement, and presentation of expenses and cash flows arising from ~~a lease will continue to depend primarily on its classification. The accounting standard is effective for fiscal years beginning after December 15, 2018, including~~goodwill, enacted changes in tax law during interim periods, ~~within those fiscal years,~~ and ~~must be applied using~~allocating taxes to members of a ~~modified retrospective approach. Early adoption is permitted.~~ ~~While the Company is continuing to assess all potential impacts of the standard, it expects that most of its lease commitments will be~~consolidated group which are not subject to tax. For public business entities, the ~~updated standard and recognized as lease liabilities and right-of-use assets upon adoption.~~

~~In June 2016, the FASB issued~~amendments in ASU ~~No. 2016-13,~~ ~~Financial Instruments-Credit Losses. The standard changes how entities will measure credit losses for most financial assets and certain other instruments that~~2019-12 are ~~not measured at fair value through net income. The Company will recognize an allowance for credit losses on available-for-sale securities rather than deductions in amortized cost. The standard is~~ effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2019.~~2020. Early adoption is permitted for all periods ~~beginning after December 15, 2018.~~in which financial statements have not yet been issued, including interim periods. The Company is currently evaluating the impact of adopting the new guidance.

In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments in this standard are effective for the Company for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period. The amendments in this standard should be applied prospectively. Under a prospective transition, the Company would apply the amendments at the beginning of the interim period that includes the adoption date. The Company is currently evaluating the impact of adopting the new standard.

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

~~In November 2016, the FASB issued ASU No. 2016-18,~~ ~~Statement of Cash Flows: Restricted Cash~~, ~~a consensus of the FASB Emerging Issues Task Force~~. The standard requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling the total beginning and end of period amounts shown on the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company does not expect the adoption of ASU 2016-18 to have a material impact on its consolidated financial statements.

~~In May 2017, the FASB issued ASU No. 2017-09,~~ ~~Compensation-Stock Compensation - Scope of Modification Accounting.~~ The standard provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This standard does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. The standard is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The guidance will be applied prospectively upon adoption. The Company does not expect the adoption of ASU 2017-09 to have a material impact on its consolidated financial statements, however the impact to share-based compensation expense will depend on the terms specified in any new changes to share-based payment awards subsequent to the adoption.

3. Investments and Fair Value of Financial Instruments

Marketable Investments

The Company’s marketable investments have been classified and accounted for as available-for-sale. The following table presents the Company’s marketable investments as of September 30, ~~2017~~2020 and December 31, ~~2016 were as follows~~2019 (in thousands):


	September 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Loss		Fair Value
Commercial paper	$	16,233	$	8	$	0	$	0	$	16,241

U.S. agency and government sponsored securities	7,844		10		0		0		7,854
U.S. states and municipalities	27,745		96		(1)		0		27,840
Corporate bonds	135,884		812		(20)		0		136,676

Total	$	187,706	$	926	$	(21)	$	0	$	188,611

September 30, 2017
Amortized Cost
Gross
Unrealized
Gains

Gross
Unrealized
Losses
Fair Value
Commercial paper $ 23,471
$ 2
$ (1 ) $ 23,472
U.S. Treasury 9,004
—
(4 ) 9,000
U.S. agency and government sponsored securities 3,600
—
(8 ) 3,592
U.S. states and municipalities 10,207
1
(4 ) 10,204
Corporate bonds 106,964
48
(77 ) 106,935
Total $ 153,246
$ 51
$ (94 ) $ 153,203


	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Commercial paper	$	7,456	$	1	$	0	$	7,457
U.S. treasury	4,972		7		0		4,979
U.S. agency and government sponsored securities	2,499		19		0		2,518
U.S. states and municipalities	4,889		4		0		4,893
Corporate bonds	96,484		282		(3)		96,763

Total	$	116,300	$	313	$	(3)	$	116,610

December 31, 2016
Amortized Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
Commercial paper $ 4,237
$ 1
$ —
$ 4,238
U.S. Treasury 4,996
—
—
4,996
U.S. agency and government sponsored securities 8,803
3
(12 ) 8,794
U.S. states and municipalities 27,429
1
(75 ) 27,355
Corporate bonds 69,009
36
(120 ) 68,925
Non-U.S. government debt securities 1,209
—
—
1,209
Total $ 115,683
$ 41
$ (207 ) $ 115,517

~~Table~~As of ~~Contents~~

~~Penumbra, Inc.~~

~~Notes~~September 30, 2020, the total amortized cost basis of the Company’s impaired available-for-sale securities exceeded its fair value by a 0minal amount. The Company reviewed its impaired available-for-sale securities and concluded that the decline in fair value was not related to ~~Condensed Consolidated Financial Statements~~

~~(unaudited)~~

credit losses and is recoverable. Accordingly, during the three and nine months ended September 30, 2020 0 allowance for credit losses was recorded and instead the unrealized losses are reported as a component of accumulated other comprehensive loss. Prior to the adoption of ASU 2016-13, the Company recognized losses, if any, in consolidated net income when the security was sold.

The following tables present the gross unrealized losses and the fair value for those marketable investments that were in an unrealized loss position for less than ~~and more than~~ twelve months or for twelve months or more as of September 30, ~~2017~~2020 and December 31, ~~2016~~2019 (in thousands):


	September 30, 2020
	Less than 12 months				12 months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses



U.S. states and municipalities	$	3,426	$	(1)	$	0	$	0	$	3,426	$	(1)
Corporate bonds	24,665		(20)		0		0		24,665		(20)

Total	$	28,091	$	(21)	$	0	$	0	$	28,091	$	(21)

September 30, 2017
Less than 12 months 12 months or more Total
Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses
Commercial paper $ 10,959
$ (1 ) $ —
$ —
$ 10,959
$ (1 )
U.S. Treasury 9,000
(4 ) —
—
9,000
(4 )
U.S. agency and government sponsored securities 1,600
—
1,992
(8 ) 3,592
(8 )
U.S. states and municipalities 7,184
(4 ) —
—
7,184
(4 )
Corporate bonds 49,655
(48 ) 4,168
(29 ) 53,823
(77 )
Total $ 78,398
$ (57 ) $ 6,160
$ (37 ) $ 84,558
$ (94 )

December 31, 2016
Less than 12 months
Fair Value Gross Unrealized Losses
U.S. agency and government sponsored securities $ 3,291
$ (12 )
U.S. states and municipalities 22,286
(75 )
Corporate bonds 29,748
(120 )
Total $ 55,325
$ (207 )

~~As of December 31, 2016, there were no securities that had been in a loss position for more than twelve months.~~

~~The contractual maturities of the Company’s marketable investments as of September 30, 2017 and December 31, 2016 were as follows (in thousands):~~

September 30,
2017 December 31, 2016
Fair Value Fair Value
Due in less than one year $ 122,829
$ 71,051
Due in one to five years 30,374
44,466
Total $ 153,203
$ 115,517

~~Non-Marketable Equity Investments~~

~~In May 2017, the Company and an unrelated third-party formed a privately-held company, MVI Health Inc. (~~“~~MVI~~”), with each party holding 50% of the issued and outstanding equity of MVI. The Company accounted for its investment under the equity method and is not required to consolidate MVI under the voting model. As of ~~September 30, 2017, the Company determined that MVI was not a variable interest entity (“VIE”~~). The Company will reassess in subsequent periods whether MVI becomes a VIE due to changes in facts and circumstances, including changes to the sufficiency of the equity investment at risk, management and governance structure or capital structure. As of ~~September 30, 2017, the carrying value of the non-marketable equity investment was approximately $4.4 million, representing the Company~~’s ~~contributions to MVI offset by the Company~~’s share of equity method investee losses. The non-marketable equity method investment is included in other non-current assets on the condensed consolidated balance sheet. During the three and nine months ended ~~September 30, 2017, MVI recorded a net loss of $1.1 million and $1.4 million, respectively, from operating expenses in the same amounts.~~ The Company reflected its 50% share of investee losses for the three and nine months ended September 30, 2017, of $0.5 million and $0.7 million, respectively, as a component of other expense, net, in the condensed ~~consolidated statements of operations and comprehensive income. The Company held no non-marketable equity investments in~~ ~~2016~~.

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)


	December 31, 2019
	Less than 12 months				12 months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses




Corporate bonds	$	7,875	$	(3)	$	0	$	0	$	7,875	$	(3)

Total	$	7,875	$	(3)	$	0	$	0	$	7,875	$	(3)

The following table presents the contractual maturities of the Company’s marketable investments as of September 30, 2020 and December 31, 2019 (in thousands):


	September 30, 2020		December 31, 2019
	Fair Value		Fair Value
Due in less than one year	$	24,869	$	51,990
Due in one to five years	163,742		64,620
Total	$	188,611	$	116,610

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The Company classifies its cash equivalents and marketable investments within Level 1 and Level 2, as it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs.

The Company determined the fair value of its Level 1 financial instruments, which are traded in active markets, using quoted market prices for identical instruments.

Financial instruments classified within Level 2 of the fair value hierarchy are valued based on other observable inputs, including broker or dealer quotations or alternative pricing sources. When quoted prices in active markets for identical assets or liabilities are not available, the Company relies on non-binding quotes from its investment managers, which are based on proprietary valuation models of independent pricing services. These models generally use inputs such as observable market data, quoted market prices for similar instruments, or historical pricing trends of a security relative to its peers. To validate the fair value determination provided by its investment managers, the Company reviews the pricing movement in the context of overall market trends and trading information from its investment managers. In addition, the Company assesses the inputs and methods used in determining the fair value in order to determine the classification of securities in the fair value hierarchy.

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following ~~table sets~~tables set forth the Company’s financial assets measured at fair value by level within the fair value hierarchy as of September 30, 2020 and December 31, 2019 (in thousands):


	As of September 30, 2020
	Level 1		Level 2		Level 3		Fair Value
Financial Assets
Cash equivalents:

Money market funds	$	49,318	$	0	$	0	$	49,318



Marketable investments:
Commercial paper	0		16,241		0		16,241

U.S. agency and government sponsored securities	0		7,854		0		7,854
U.S. states and municipalities	0		27,840		0		27,840
Corporate bonds	0		136,676		0		136,676

Total	$	49,318	$	188,611	$	0	$	237,929

As of September 30, 2017
Level 1 Level 2 Total Fair Value
Financial Assets
Cash equivalents:
Commercial paper $ —
$ 9,084
$ 9,084
Money market funds 9,042
—
9,042
U.S. Treasury —
—
—
U.S. states and municipalities —
6,500
6,500
Marketable investments:
Commercial paper —
23,472
23,472
U.S. Treasury 9,000
—
9,000
U.S. agency and government sponsored securities —
3,592
3,592
U.S. states and municipalities —
10,204
10,204
Corporate bonds —
106,935
106,935
Total $ 18,042
$ 159,787

$ 177,829


	As of December 31, 2019
	Level 1		Level 2		Level 3		Fair Value
Financial Assets
Cash equivalents:
Commercial paper	$	0	$	9,474	$	0	$	9,474
Money market funds	24,054		0		0		24,054
Marketable investments:
Commercial paper	0		7,457		0		7,457
U.S. treasury	4,979		0		0		4,979
U.S. agency and government sponsored securities	0		2,518		0		2,518
U.S. states and municipalities	0		4,893		0		4,893
Corporate bonds	0		96,763		0		96,763


Total	$	29,033	$	121,105	$	0	$	150,138

Contingent Consideration Obligations

As of September 30, 2020 and December 31, 2019, there were no contingent consideration liabilities classified as Level 3. As of December 31, 2019, the Company’s contingent consideration liability balance of $1.2 million related to milestone payments due in connection with the 2017 acquisition of Crossmed S.p.a. (“Crossmed”) and was based on actual revenue performance for the year ended December 31, 2019 and not based on unobservable inputs. The Company made this payment during the nine months ended September 30, 2020. For more information related to the payment of the contingent consideration liabilities refer to Note “5. Business Combinations.”

The following tables summarize the changes in fair value of the contingent consideration obligation for the nine months ended September 30, 2020 and September 30, 2019 (in thousands):


	Fair Value of Contingent Consideration
Balance at December 31, 2019	$	1,206

Payments of contingent consideration liabilities	(1,186)
Changes in fair value	0
Foreign currency remeasurement	(20)
Balance at September 30, 2020	$	0

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)


	Fair Value of Contingent Consideration
Balance at December 31, 2018	$	2,571

Payments of contingent consideration liabilities	(1,296)
Changes in fair value	31
Foreign currency remeasurement	(68)
Balance at September 30, 2019	$	1,238

As of December 31, 2016
Level 1 Level 2 Total Fair Value
Financial Assets
Cash equivalents:
Money market funds $ 873
$ —
$ 873
Marketable investments:
Commercial paper —
4,238
4,238
U.S. Treasury 4,996
—
4,996
U.S. agency and government sponsored securities —
8,794
8,794
U.S. states and municipalities —
27,355
27,355
Corporate bonds —
68,925
68,925
Non-U.S. government debt securities —
1,209
1,209
Total $ 5,869
$ 110,521
$ 116,390

~~During the nine months ended September 30, 2017 and 2016, the Company did not record impairment charges related to its marketable investments and the~~The Company did not hold any Level 3 marketable investments as of September 30, ~~2017~~2020 or December 31, ~~2016.~~

In addition to the amounts presented above, the Company recorded contingent consideration liabilities at fair value during 2017. During the three months ended September 30, 2017, the Company acquired Crossmed and ~~recorded contingent consideration in the amount of $4.3 million. Also during the three months ended September 30, 2017, the Company~~ ~~entered into an exclusive technology license agreement and recorded contingent consideration in the amount of~~ ~~$12.7 million~~. These contingent consideration liabilities are classified as Level 3 measurements for which fair value is derived from significant unobservable inputs, such as projected revenue and estimates in the timing and likelihood of achieving revenue-based milestones. During the three months ended September 30, 2017, there were no changes in fair value for these contingent consideration liabilities~~. For more information with respect to the fair value of contingent consideration, refer to Note “5. Business Combination” and Note “6. Goodwill and Intangible Assets,” respectively.~~

2019. During the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, the Company did not have any transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy. Additionally, the Company did not have any financial assets and liabilities measured at fair value on a non-recurring basis as of September 30, ~~2017~~2020 or December 31, ~~2016.~~2019.

4. Balance Sheet Components

~~Prepaid Expenses and Other Current Assets~~Allowance for Credit Losses - Accounts Receivable

The Company’s allowance for credit losses related to accounts receivable balances was comprised of the following (in thousands):


	Balance At Beginning Of Period		Write-offs		Provision for credit loss		Balance At End Of Period
January 1, 2020 (1)	$	2,946	$	(2,361)	$	1,307	$	1,892
January 1, 2020 - March 31, 2020 (2)	$	1,892	$	0	$	163	$	2,055
April 1, 2020 - June 30, 2020 (2)	$	2,055	$	0	$	21	$	2,076
July 1, 2020 - September 30, 2020(2)	$	2,076	$	0	$	57	$	2,133

(1) On January 1, 2020, the Company recorded a $1.3 million adjustment to opening retained earnings upon the adoption of ASU 2016-13.

(2) The Company recorded a $0.2 million allowance for credit losses during the nine months ended September 30, 2020. The allowance for credit losses recorded during the three months ended September 30, 2020 was not material.

Inventories

The following table shows the components of ~~prepaid expenses and other current assets~~inventories as of September 30, ~~2017~~2020 and December 31, ~~2016~~2019 (in thousands):


	September 30, 2020		December 31, 2019
Raw materials	$	27,858	$	21,646
Work in process	21,568		21,651
Finished goods	142,121		109,695
Inventories	$	191,547	$	152,992

September 30,
2017 December 31,
2016
Prepaid tax $ 1,023
$ 4,656
Prepaid expenses 5,213
4,573
Other current assets 8,228
9,498
Prepaid expenses and other current assets $ 14,464
$ 18,727

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

~~Inventories~~

~~The following table shows the components of inventories as of September 30, 2017~~ ~~and~~ ~~December 31, 2016 (in thousands):~~

September 30,
2017 December 31,
2016
Raw materials $ 11,288
$ 11,367
Work in process 6,923
3,663
Finished goods 72,318
57,982
Inventories $ 90,529
$ 73,012

Accrued Liabilities

The following table shows the components of accrued liabilities as of September 30, ~~2017~~2020 and December 31, ~~2016~~2019 (in thousands):


	September 30, 2020		December 31, 2019
Payroll and employee-related cost	$	60,100	$	37,727
Accrued expenses	8,238		7,811
Sales return provision	1,463		1,821



Product warranty	2,881		2,318



Other acquisition-related costs(1)	3,000		4,291
Other accrued liabilities	12,009		13,662
Total accrued liabilities	$	87,691	$	67,630

September 30,
2017 December 31,
2016
Payroll and employee-related cost $ 22,244
$ 16,956
Sales return reserve 3,024
2,753
Preclinical and clinical trial cost 1,501
2,054
Royalty 946
802
Product warranty 1,066
1,254
Leasehold improvement expenditures 2,904
260
Acquisition-related liabilities¹
3,514
—
Other accrued liabilities 10,113
7,611
Total accrued liabilities $ 45,312
$ 31,690

¹~~Acquisition-related liabilities consistent~~(1) Amount consists of a contingent ~~consideration~~liability related to an anti-dilution provision from the ~~cash milestone payments and working capital adjustment liabilities for the~~asset acquisition of ~~Crossmed. Refer to Note “5. Business Combination” for more information.~~MVI Health Inc. (“MVI”) in 2018.

The following table shows the changes in the Company’s estimated product warranty accrual, included in accrued liabilities, as of September 30, ~~2017~~2020 and December 31, ~~2016~~2019 (in thousands):

September 30,
2017 December 31,
2016
Balance at the beginning of the period $ 1,254
$ 713
Accruals of warranties issued 289
1,176
Settlements of warranty claims (477 ) (635 )
Balance at the end of the period $ 1,066
$ 1,254

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~


	September 30, 2020		December 31, 2019
Balance at the beginning of the period	$	2,318	$	1,875
Accruals of warranties issued	1,193		1,065
Settlements of warranty claims	(630)		(622)
Balance at the end of the period	$	2,881	$	2,318

Other Non-Current Liabilities

The following table shows the components of other non-current liabilities as of September 30, ~~2017~~2020 and December 31, ~~2016~~2019 (in thousands):


	September 30, 2020		December 31, 2019
Deferred tax liabilities	$	4,340	$	4,005
Licensing-related cost(1)	0		10,878

Other non-current liabilities	5,807		367
Total other non-current liabilities	$	10,147	$	15,250

September 30,
2017 December 31,
2016
Deferred tax liabilities $ 3,299
$ 824
Licensing-related cost¹
12,717
—
Other non-current liabilities 2,101
—
Total other non-current liabilities $ 18,117
$ 824

¹(1) Amount relates to the non-current liability recorded for probable future milestone payments associated with the indefinite-lived intangible assets related to ~~be made under the licensing agreement~~licensed technology described in Note “6. ~~Goodwill and~~ Intangible ~~Assets,~~Assets.” ~~refer~~Refer therein for more information.

5. Business ~~Combination~~Combinations

Payments Related to 2017 Crossmed Acquisition

On July 3, 2017, ~~(the “Closing Date”),~~ the Company completed ~~the~~its acquisition of Crossmed, a joint stock company organized under the laws of Italy. ~~Crossmed is engaged in the business~~The purchase price measurement period was closed as of ~~distributing medical supplies and equipment in Italy, San Marino, the Vatican, and Switzerland. Crossmed~~June 30, 2018.

The Company was the Company’s exclusive distributor in Italy, San Marino and the Vatican and the acquisition provides the Company with a direct relationship with its customers in these regions. As of the Closing Date, Crossmed became a wholly-owned subsidiary of the Company and is being integrated into the Company’s core business. The acquisition of Crossmed does not result in any changesobligated to ~~the Company’s operating or reportable segment structure and the Company~~ ~~continues~~pay additional consideration to ~~operate as one operating segment.~~

~~The~~ ~~following table summarizes the Closing Date fair value of the consideration transferred (in thousands):~~

Cash, net of working capital and financial debt adjustments $ 9,918
Fair value of contingent consideration for milestone payments 4,343
Contract purchase price $ 14,261
Consideration for settlement of pre-existing receivable due from Crossmed to Penumbra 3,273
Total value of consideration transferred $ 17,534

~~Upon the Closing Date, the Company paid~~ the sellers of Crossmed ~~an initial payment of~~ ~~€8.2 million, or approximately~~ ~~$9.4 million, subject to post-closing adjustments for working capital and financial debt. The Company will pay additional consideration~~(the “Sellers”) in the form of milestone payments based on Crossmed’s net revenue and may be required to pay additional consideration based on incremental net revenue for each of the ~~years ending December 31, 2017, 2018 and 2019.~~periods ended. There is no limit on the milestone payments that can be paid out. ~~The Company recorded a~~As of December 31, 2019, the Company’s condensed consolidated balance sheet included $1.2 million, in current ~~and non-current liability in the amount of $3.0 million and $1.3 million as of September 30, 2017, respectively, for the fair value of contingent consideration~~liabilities primarily related to the ~~cash~~final milestone ~~payments. The contingent consideration is classified as a Level 3 measurement for~~payment due which fair value is derived from inputs that are unobservable and significant to the overall fair value measurement. The fair value of such milestone payments is estimated using a Monte Carlo simulation model that utilizes key assumptions including forecasted revenueswas paid during the ~~earn-out period and revenue and asset volatilities. The fair value~~first quarter of the contingent consideration liability will be evaluated each reporting period and changes in its fair value will be included in the Company’s results of operations. There were no changes to the Closing Date fair value of the contingent consideration during the three months ended September 30, 2017.

The preliminary allocation of the purchase price was based upon a preliminary valuation and the Company’s estimates and assumptions are subject to change within the measurement period (generally one year from the Closing Date).

2020.

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

~~The following table presents the preliminary allocation of the purchase price for Crossmed (in thousands):~~

Acquisition-Date Fair Value Estimated Useful Life of Finite-Lived Intangible Assets
Tangible assets acquired and (liabilities) assumed:
Accounts receivable $ 4,406

Inventories 1,343

Other current and non-current assets 1,316

Property and equipment, net 829

Accounts payable (740 )
Accrued liabilities and obligations for short-term debt and credit facilities (2,164 )
Deferred tax liabilities (2,472 )
Other non-current liabilities (797 )
Intangible assets acquired:
Customer relationships $ 6,790
15 years
Other 1,750
5 years
Goodwill 7,273

Total purchase price $ 17,534

Acquired intangible assets are classified as Level 3 measurements for which fair value is derived from valuations based on inputs that are unobservable and significant to the overall fair value measurement. The Company used the income approach, specifically the discounted cash flow method and the incremental cash flow approach, to derive the fair value of the customer relationships and other intangible assets. Customer relationships are direct relationships with physicians and hospitals performing procedures with the distributed products. Other intangibles consists of non-Penumbra supplier relationships and sub-distributor relationships with third parties used to sell products, both as of the Closing Date. The intangible assets are amortized on a straight-line basis over their assigned estimated useful lives. The acquired intangible assets will not be amortized for tax purposes. As a result, a $2.5 million deferred tax liability was recorded as of September 30, 2017.

~~The goodwill arising from the Crossmed acquisition is primarily attributed to expected synergies from future growth and assembled workforce. Goodwill will not be deductible for tax purposes.~~

~~The amount of Crossmed’s net revenue and net loss included in the Company’s condensed~~ ~~consolidated statements of operations and comprehensive income~~ ~~was $2.7 million and $0.3 million, respectively, for each of the three and nine months ended September 30, 2017~~

The following table presents certain unaudited pro forma information, for illustrative purposes only, for the three and nine months ended September 30, 2017, as if Crossmed had been acquired on January 1, 2016. The unaudited estimated pro forma information combines the historical results of Crossmed with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition taken place on January 1, 2016 and is not indicative of the Company’s future consolidated results. Additionally, the pro forma financial information does not include the impact of possible business model changes and does not reflect pro forma adjustments to conform accounting policies between Crossmed and the Company. The unaudited pro forma information is presented below (unaudited, in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Pro forma net revenue $ 83,911
$ 68,012
$ 240,506
$ 193,521
Pro forma net income (loss) 238
11,950
(4,695 ) 17,020

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~6. Goodwill and Intangible Assets~~

~~Goodwill~~

~~The following table presents the changes in goodwill during~~During the nine months ended September 30, ~~2017 (in thousands):~~

Total Company
Balance as of December 31, 2016 $ —
Acquisition of Crossmed⁽¹⁾
7,273
Foreign currency translation 176
Balance as of September 30, 2017 $ 7,449

¹~~Goodwill includes a $2.5~~2020, the Company made $1.2 million ~~adjustment for the relative impact~~in milestone payments of ~~recording the deferred tax liability associated with the acquired intangible assets of Crossmed. Refer to Note “5. Business Combination” for more information.~~

~~Goodwill~~which $0.5 million is ~~not amortized, but will be tested for impairment at least annually~~presented in operating activities and $0.7 million is presented in financing activities in the ~~fourth quarter, or more frequently if events or circumstances indicate~~condensed consolidated statement of cash flows.

During the ~~carrying value may no longer be recoverable~~nine months ended September 30, 2019, the Company made $1.3 million in milestone payments of which $0.6 million is presented in operating activities and ~~that an impairment loss may have occurred.~~$0.7 million is presented in financing activities in the condensed consolidated statement of cash flows.

6. Intangible Assets

Acquired Intangible Assets

The following ~~table presents~~tables present details of the Company’s acquired ~~definite-lived~~finite-lived and indefinite-lived intangible assets, as of September 30, 2020 and December 31, 2019 (in thousands, except weighted-average amortization period):


As of September 30, 2020									As of September 30, 2020	Weighted-Average Amortization Period	Gross Carrying Amount		Accumulated Amortization		Net
Customer relationships									Customer relationships	15.0 years	$	6,989	$	(1,515)	$	5,474
Trade secrets and processes									Trade secrets and processes	20.0 years	5,256		(723)		4,533
Other									Other	5.0 years	1,804		(1,171)		633
Total intangible assets									Total intangible assets	16.5 years	$	14,049	$	(3,409)	$	10,640

As of September 30, 2017	Weighted-Average Amortization Period	Gross Carrying Amount		Accumulated Amortization			Net
Customer relationships	15 years	$	7,044	$	(168	)	$	6,876
Other	5 years	1,815		(87		)	1,728
Total intangible assets subject to amortization		$	8,859	$	(255	)	$	8,604
Intangible assets related to licensed technology		15,217		—			15,217
Total intangible assets		$	24,076	$	(255	)	$	23,821


As of December 31, 2019	Weighted-Average Amortization Period	Gross Carrying Amount		Accumulated Amortization		Net
Customer relationships	15.0 years	$	6,686	$	(1,114)	$	5,572
Trade secrets and processes	20.0 years	5,256		(526)		4,730
Other	5.0 years	1,724		(862)		862
Total intangible assets subject to amortization	16.4 years	$	13,666	$	(2,502)	$	11,164
Intangible assets related to licensed technology		14,243		—		14,243
Total intangible assets		$	27,909	$	(2,502)	$	25,407

The ~~total~~customer relationships and other intangible assets subject to amortization relate to the acquisition of Crossmed during the third quarter of 2017. ~~During both~~The gross carrying amount and accumulated amortization of these intangible assets are subject to foreign currency translation effects. Refer to Note “5. Business Combinations” for more information. The Company’s $5.3 million trade secrets and processes intangible asset was recognized in connection with a royalty buyout agreement entered into during the first quarter of 2018.

The following table presents the amortization expense recorded related to the Company’s finite-lived intangible assets for the three and nine months ended September 30, ~~2017, the Company recorded amortization expense of $0.3 million in sales, general~~2020 and ~~administrative expense related to the Company’s finite-lived intangible assets~~. ~~Refer to~~ ~~Note “5. Business Combination”~~ ~~for more information.~~September 30, 2019 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Cost of revenue	$	66	$	66	$	197	$	197

Sales, general and administrative	206		196		594		594
Total	$	272	$	262	$	791	$	791

Licensed technology

During the third quarter of 2017, the Company entered into an exclusive technology license agreement (the “License Agreement”) that required the Company to pay an upfront payment to the licensor of $2.5 million and future revenue milestone-based payments on sales of products covered by the licensed intellectual property. The Company accounted for the transaction as an asset acquisition and recorded an indefinite-lived intangible asset ~~of $15.2 million~~as it was determined to have alternative future use. The Company recorded an indefinite-lived intangible asset equal to the total payments made and expected to be made under the License Agreement and a corresponding contingent liability for the future milestone payments. The licensed technology is accounted for as an indefinite-lived intangible asset. Once regulatory approval is received to market and commercialize products utilizing the underlying technology, the Company will begin amortizing the intangible asset. As of September 30, 2017, the Company has recorded a contingent consideration liability of $12.7 million included in other non-current liabilities on the consolidated balance sheet related to probable future milestone payments under the Licensing Agreement. The contingent consideration is classified as Level 3 measurement for which fair value is derived from valuation based on inputs that are unobservable and significant to the overall fair value measurement. The fair value of such milestone payments is estimated using key assumptions which include projected revenue and estimates in the timing of when the revenue-based milestones are earned. The fair value of the contingent consideration liability will be evaluated each reporting period.not yet paid.

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

At the end of each reporting period the Company adjusted the contingent liability to reflect the amount of future milestone payments that were probable to be paid. Prior to the commercialization of products utilizing the underlying technology, any changes in the contingent liability were recorded as an adjustment between the liability balances and the gross carrying amount of the indefinite-lived intangible asset. As of September 30, 2020, there was 0 contingent liability balance related to probable future milestone payments under the License Agreement. As of December 31, 2019, the balance of the contingent liability related to probable future milestone payments under the License Agreement was $11.7 million, of which $0.8 million and $10.9 million were included in accrued liabilities and other non-current liabilities on the condensed consolidated balance sheet, respectively.

~~7. Commitments and Contingencies~~

~~Lease Commitments~~

Indefinite-lived intangible assets are tested for impairment annually during the fourth quarter or more frequently if events or changes in circumstances between annual tests indicate that it is more likely than not that the asset is impaired. The Company ~~leases~~determined that an impairment existed in the second quarter of 2020 as a result of a triggering event in July that provided additional information about a condition that existed as of the June 30, 2020 balance sheet date. As a result, the Company wrote-off the full carrying value of the indefinite-lived intangible asset and its ~~offices under non-cancelable operating~~related contingent liability, and ~~capital leases that expire at various dates from 2029 to 2031. Rent~~recognized an impairment loss of $2.5 million in research and development expense ~~for non-cancelable operating leases with scheduled rent increases is recognized on a straight-line basis over~~in the ~~lease term. Rent expense for~~consolidated statement of operations during the nine months ended September 30, 2020. There was 0 impairment loss recorded in the consolidated statement of operations during the three months ended September 30, ~~2017 and 2016 was $1.4 million and $1.4 million, respectively and for~~2020. There were 0 indefinite-lived intangible assets as of September 30, 2020.

7. Goodwill

The following table presents the changes in goodwill during the nine months ended September 30, ~~2017~~2020 (in thousands):


	Total Company
Balance as of December 31, 2019	$	7,656
Foreign currency translation	348
Balance as of September 30, 2020	$	8,004

Goodwill Impairment Review

The Company reviews goodwill for impairment annually during the fourth quarter or more frequently if events or circumstances indicate that an impairment loss may have occurred. The Company determined that there was 0 impairment of goodwill as of September 30, 2020.

8. Indebtedness

Credit Agreement

On April 24, 2020, the Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent and ~~2016 was $4.3~~lender, and Bank of America, N.A. and Citibank, N.A. as lenders. The Credit Agreement is secured and provides for up to $100 million in available revolving borrowing capacity with an option, subject to certain conditions, for the Company to increase the aggregate borrowing capacity to up to $150 million, and ~~$3.8 million, respectively.~~matures on April 23, 2021.

The revolving loans under the Credit Agreement will be available for general corporate purposes, including working capital and capital expenditures. In addition to allowing borrowings in US dollars, the ~~Company’s lease commitments also require it~~Credit Agreement provides for borrowings in euros, Pounds Sterling and any other currency that is subsequently approved by JPMorgan and each lender. The initial commitment of the lenders under the Credit Agreement is $100 million. Subject to ~~make~~customary conditions and the approval of any lender whose commitment would be increased, the Company has the option to increase the maximum principal amount available under the Credit Agreement by up to an additional ~~payments during~~$50 million, resulting in a maximum available principal amount under the ~~lease term~~Credit Agreement of $150 million. The Credit Agreement provides a sublimit of up to $10 million for ~~taxes, insurance~~letters of credit, a sublimit of up to $10 million for swing-line loans, and ~~other operating expenses.~~ a sublimit of up to $15 million for borrowings in available foreign currencies.

The Credit Agreement requires the Company to maintain a minimum fixed charge coverage ratio and to not exceed a maximum leverage ratio. As of September 30, 2020, the Company was not in compliance with the minimum fixed charge coverage ratio requirement. The Company ~~leases its~~ ~~other equipment~~subsequently obtained a waiver of such non-compliance from the lenders under ~~non-cancelable operating~~the Credit Agreement.

As of September 30, 2020, there were 0 borrowings outstanding under the Credit Agreement.

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Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

9. Commitments and ~~capital leases that expire at various dates through 2021.~~Contingencies

Royalty Obligations

In March 2005, the Company entered into a license agreement that requires the Company to make minimum royalty payments to the licensor on a quarterly basis. In July 2019, the Company amended the license agreement to extend its term for an additional ten years and to increase the required minimum annual royalty payments by $0.2 million. As of both September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, the amended license agreement required minimum annual royalty payments of ~~$0.1~~$0.3 million payable in equal quarterly installments. On each January 1, the quarterly calendar year minimum royalty ~~will~~shall be adjusted to equal the prior year’s minimum royalty adjusted by a percentage equal to the percentage change in the “consumer price index for all urban consumers” for the prior calendar year as reported by the U.S. Department of Labor. Unless terminated earlier, the term of the amended license agreement ~~will continue until the expiration of the last to~~shall expire ~~patent that covers that licensed product or 2022, whichever is longer.~~June 30, 2029.

In April 2012, the Company entered into an agreement that requires the Company to pay, on a quarterly basis, a 5% royalty on sales of products covered under applicable patents. The first commercial sale of covered products occurred in April 2014. Unless ~~the agreement is~~ terminated earlier, the royalty term for each applicable product ~~will~~shall continue ~~until~~for fifteen years following the ~~expirations~~first commercial sale of such patented product, or when the applicable ~~patents~~patent covering such product ~~or 2029,~~has expired, whichever is ~~longer.~~

~~In November 2013, the Company entered into an agreement that requires the Company to pay, on a quarterly basis, a 3%~~ royalty on the first $5 million in sales and a 1% royalty on sales thereafter of products covered under applicable patents. Unless the agreement is terminated earlier, the royalty for each covered product shall continue until 2030.

In April 2015, the Company entered into a royalty agreement that requires the Company to pay, on a quarterly basis, a 2% royalty on sales of certain products covered by the agreement. Unless the royalty agreement is terminated earlier, the royalty term for each covered product shall continue until 2035.sooner.

Royalty expense included in cost of revenue for the three months ended September 30, ~~2017~~2020 and ~~2016~~2019, was ~~$1.0~~$0.7 million and ~~$0.7~~$0.8 million, respectively, and for the nine months ended September 30, ~~2017~~2020 and ~~2016~~2019, was ~~$3.0~~$1.8 million and ~~$2.1~~$3.0 million, respectively.

Contingencies

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. Refer to Note “3. Investments and Fair Value of Financial Instruments,” Note “5. Business ~~Combination”~~Combinations,” Note “6. Intangible Assets” and Note ~~“6. Goodwill and Intangible Assets”~~“8. Indebtedness” for more information on contingent liabilities recorded on the condensed consolidated balance sheet.

Indemnification

The Company enters into standard indemnification arrangements in the ordinary course of business. In many such arrangements, the Company agrees to indemnify, hold harmless, and reimburse the indemnified parties for losses suffered or incurred by the indemnified parties in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third-party with respect to the Company’s technology. The Company also agrees to indemnify many ~~purchasers~~indemnified parties for product defect and similar claims. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable because it involves claims that may be made against the Company in the future, but have not yet been made.

The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of the individual.

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

The Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. No liability associated with any of these indemnification requirements has been recorded to date.

Litigation

The Company was contacted in 2015 by the attorney for a potential product liability claimant who allegedly suffered injuries as a result of an aneurysm procedure in which the Penumbra Coil 400 was used. On February 19, 2016, a complaint for damages was filed on behalf of this claimant against the Company and the hospital involved in the procedure (~~Montgomery v. Penumbra, Inc., et al.,~~ ~~Case No. 16-2-04050-1 SEA, Superior Court of the State of Washington, King County). The suit alleges liability primarily under the Washington Product Liability Act~~ ~~(“WPLA”)~~ ~~and sought both compensatory and punitive damages without a specific damages claim.~~ ~~Based on the Company’s preliminary motion, the punitive damages claim was dismissed in May 2016, along with several of the other causes of actions subsumed by the WPLA.~~ ~~In recent submissions, plaintiffs claimed economic and non-economic damag~~es in an amount substantially in excess of the Company’s insurance coverage. The parties reached a preliminary agreement to settle this matter on confidential terms at a mediation held November 1, 2017. The settlement is subject to finalization and does not have a material financial impact on the Company. If for any reason the settlement is not finalized, the case would continue in the discovery phase, with a trial currently set for April 2018. The Company would continue to vigorously defend the litigation, as the Company believes there are substantial questions regarding causation, liability and damages. If the case proceeds to trial, the results of any jury trial and the damages that a jury might award are inherently uncertain.

From time to time, the Company is subject to other claims and assessments in the ordinary course of business. The Company is not currently a party to any such litigation matter that, individually or in the aggregate, is expected to have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

8.10. Stockholders’ Equity

Common Stock

In ~~March 2017,~~June 2020 the Company issued and sold an aggregate of ~~1,495,000~~865,963 shares of common stock at a public offering price of ~~$76.00~~$166.00 per share, less the ~~underwriters~~’underwriters’ discounts and commissions, pursuant to an underwritten public ~~offering~~.offering. The

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Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Company received approximately ~~$106.3~~$134.8 million in net cash proceeds after deducting underwriting discounts and commissions of ~~$6.8~~$8.6 million and other offering expenses of ~~$0.5 million.~~$0.4 million.

Equity Incentive Plans

Stock Options

Activity of stock options under the ~~Penumbra, Inc.~~ 2005 ~~Stock~~ Plan, ~~the Penumbra, Inc.~~ 2011 ~~Equity Incentive~~ Plan and ~~the Amended and Restated Penumbra, Inc.~~ 2014 ~~Equity Incentive~~ Plan (collectively, the ~~“Plans”~~"Plans") ~~during the nine months ended September 30, 2017~~ is set forth below:

Number of Shares
Weighted-Average
Exercise Price
Balance at December 31, 2016 2,876,955
$ 14.63
Options exercised (678,825 ) 6.21
Options canceled (2,866 ) 16.98
Balance at September 30, 2017 2,195,264
17.24


	Number of Shares	Weighted-Average Exercise Price
Balance at December 31, 2019	1,379,075	$	21.02
Exercised	(300,711)	14.20
Canceled/Forfeited	0	0
Balance at September 30, 2020	1,078,364	22.91

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~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

Restricted Stock and Restricted Stock Units

Activity of unvested restricted stock awards and restricted stock units under the Plans during the nine months ended September 30, ~~2017~~2020 is set forth below:


	Number of Shares	Weighted -Average Grant Date Fair Value
Unvested at December 31, 2019	371,206	$	130.47
Granted	122,386	176.48
Released/Vested - Restricted Stock/RSUs	(133,370)	108.95
Canceled/Forfeited	(9,843)	141.05
Unvested at September 30, 2020	350,379	154.43

Number of Shares
Weighted -Average
Grant Date Fair Value
Unvested at December 31, 2016 1,002,944
$ 29.44
Granted 99,638
80.04
Vested (325,023 ) 24.79
Canceled/Forfeited (20,687 ) 45.22
Unvested and expected to vest at September 30, 2017 756,872
37.67
As of September 30, 2020, 322,290 restricted stock awards and restricted stock units are expected to vest.

Stock-based Compensation

The following table sets forth the stock-based compensation expense included in the Company’s condensed consolidated statements of operations ~~and comprehensive income~~ for the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016			2020		2019		2020		2019
Cost of revenue	$	316	$	83	$	817	$	742	Cost of revenue	$	589	$	334	$	1,644	$	954
Research and development	352		251		913		790		Research and development	865		805		2,630		2,006
Sales, general and administrative	3,819		3,930		11,362		9,268		Sales, general and administrative	4,784		5,102		13,212		13,511
Total	$	4,487	$	4,264	$	13,092	$	10,800	Total	$	6,238	$	6,241	$	17,486	$	16,471

As of September 30, ~~2017,~~2020, total unrecognized compensation cost was ~~$30.2~~$46.2 million related to unvested share-based compensation arrangements which is expected to be recognized over a weighted average period of ~~2.4~~2.9 years.

The total stock-based compensation cost capitalized in inventory was ~~$0.2~~$1.1 million and ~~$0.4~~$0.8 million as of September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively.

9.11. Accumulated Other Comprehensive Income (Loss)

Other comprehensive ~~income (loss)~~loss consists of two components: unrealized gains or losses on the Company’s available-for-sale marketable investments and gains or losses from foreign currency translation adjustments. Until realized and reported as a component of consolidated net (loss) income, ~~(loss),~~ these comprehensive (loss) income ~~(loss)~~ items accumulate and are included within accumulated other comprehensive income (loss). Unrealized gains and losses on the Company’s marketable investments are reclassified from accumulated other comprehensive income (loss) into earnings when realized upon sale, and are determined

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Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

based on specific identification of securities sold. Gains and losses from the translation of assets and liabilities denominated in non-U.S. dollar functional currencies are included in accumulated other comprehensive income (loss).

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

The following table summarizes the changes in the accumulated balances during the ~~three and nine months ended September 30, 2017 and 2016,~~period and includes information regarding the manner in which the reclassifications out of accumulated other comprehensive income (loss) into earnings affect the Company’s condensed consolidated statements of operations and consolidated statements of comprehensive (loss) income (in thousands):


	Three Months Ended September 30, 2020						Three Months Ended September 30, 2019
	Marketable Investments		Currency Translation Adjustments		Total		Marketable Investments		Currency Translation Adjustments		Total
Balance, beginning of the period	$	752	$	(2,849)	$	(2,097)	$	176	$	(1,690)	$	(1,514)
Other comprehensive (loss) income before reclassifications:
Unrealized (loss) gain — marketable investments	(77)		—		(77)		110		—		110
Foreign currency translation gains (losses)	—		2,257		2,257		—		(2,606)		(2,606)
Income tax effect — expense	18		0		18		0		0		0
Net of tax	(59)		2,257		2,198		110		(2,606)		(2,496)
Amounts reclassified from accumulated other comprehensive income (loss) to consolidated net (loss) income:
Realized gain (loss) — marketable investments	0		0		0		0		0		0
Income tax effect — expense (benefit)	0		0		0		0		0		0
Net of tax	0		0		0		0		0		0
Net current-year other comprehensive (loss) income	(59)		2,257		2,198		110		(2,606)		(2,496)
Balance, end of the period	$	693	$	(592)	$	101	$	286	$	(4,296)	$	(4,010)


	Nine Months Ended September 30, 2020						Nine Months Ended September 30, 2019
	Marketable Investments		Currency Translation Adjustments		Total		Marketable Investments		Currency Translation Adjustments		Total
Balance at beginning of the period	$	238	$	(2,562)	$	(2,324)	$	(500)	$	(1,442)	$	(1,942)
Other comprehensive income (loss) before reclassifications:
Unrealized gain — marketable investments	594		—		594		786		—		786
Foreign currency translation gains (losses)	—		1,970		1,970		—		(2,854)		(2,854)
Income tax effect — expense	(139)		0		(139)		0		0		0
Net of tax	455		1,970		2,425		786		(2,854)		(2,068)
Amounts reclassified from accumulated other comprehensive income (loss) to consolidated net (loss) income:
Realized gain (loss)— marketable investments	0		0		0		0		0		0
Income tax effect — expense	0		0		0		0		0		0
Net of tax	0		0		0		0		0		0
Net current-year other comprehensive income (loss)	455		1,970		2,425		786		(2,854)		(2,068)
Balance at end of the period	$	693	$	(592)	$	101	$	286	$	(4,296)	$	(4,010)

Three Months Ended September 30, 2017 Three Months Ended September 30, 2016
Marketable
Investments Currency Translation
Adjustments Total Marketable
Investments Currency Translation
Adjustments Total
Balance at beginning of the period $ (38 ) $ (4,657 ) $ (4,695 ) $ 206
$ (2,785 ) $ (2,579 )
Other comprehensive income before reclassifications:
Unrealized gains (losses) — marketable investments 54
—
54
(178 ) —
(178 )
Foreign currency translation gains (losses) —
5,845
5,845
—
(901 ) (901 )
Income tax effect — benefit —
—
—
63
3
66
Net of tax 54
5,845
5,899
(115 ) (898 ) (1,013 )
Amounts reclassified from accumulated other comprehensive income to earnings:
Realized losses — marketable investments —
—
—
1
—
1
Income tax effect — expense —
—
—
(1 ) —
(1 )
Net of tax —
—
—
—
—
—
Net current-year other comprehensive income (loss) 54
5,845
5,899
(115 ) (898 ) (1,013 )
Balance at end of the period $ 16
$ 1,188
$ 1,204
$ 91
$ (3,683 ) $ (3,592 )

Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
Marketable
Investments Currency Translation
Adjustments Total Marketable
Investments Currency Translation
Adjustments Total
Balance at beginning of the period $ (105 ) $ (4,583 ) $ (4,688 ) $ (163 ) $ (1,952 ) $ (2,115 )
Other comprehensive income before reclassifications:
Unrealized gains —marketable investments 157
—
157
401
—
401
Foreign currency translation gains (losses) —
5,771
5,771
—
(1,732 ) (1,732 )
Income tax effect — (expense) benefit —
—
—
(145 ) 1
(144 )
Net of tax 157
5,771
5,928
256
(1,731 ) (1,475 )
Amounts reclassified from accumulated other comprehensive income to earnings:
Realized gains — marketable investments (36 ) —
(36 ) (3 ) —
(3 )
Income tax effect — benefit —
—
—
1
—
1
Net of tax (36 ) —
(36 ) (2 ) —
(2 )
Net current-year other comprehensive income (loss) 121
5,771
5,892
254
(1,731 ) (1,477 )
Balance at end of the period $ 16
$ 1,188
$ 1,204
$ 91
$ (3,683 ) $ (3,592 )

~~10.~~12. Income Taxes

The Company’s income tax expense, ~~DTAs~~deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. The Company is subject to income taxes in both the United States and foreign jurisdictions. Significant judgment and estimates are required in determining the consolidated income tax expense.

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Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

During interim periods, the Company generally utilizes the estimated annual effective tax rate (“AETR”) method which involves the use of forecasted information. Under ~~this~~the AETR method, the provision is calculated by applying ~~an estimate of~~ the ~~annual effective tax rate~~estimated AETR for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. Jurisdictions with tax assets for which the Company believes a tax benefit cannot be realized are excluded from the computation of its ~~annual effective tax rate.~~ AETR.

The Company’s ~~effective tax rate changed to 65.7%~~benefit from income taxes for the three months ended September 30, ~~2017,~~2020 was $9.9 million, compared to ~~1,190.3%~~$2.0 million of tax expense for the three months ended September 30, ~~2016.~~2019. The Company’s ~~effective tax rate changed to (107.5)%~~benefit from income taxes for the nine months ended September 30, ~~2017,~~2020 was $15.6 million, compared to ~~(2,564.1)%~~$0.7 million of tax expense for the nine months ended September 30, ~~2016.~~2019. The ~~change in rate for both reporting periods was primarily attributable to~~

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~excluding the tax benefits associated with the~~ Company’s U.S. jurisdiction due to the partial valuation allowance recorded against its domestic DTAs as of September 30, 2017, and the year-to-date tax impact associated with intra-entity asset transfers. The effective tax ratesbenefit from income taxes for the three and nine months ended September 30, ~~2016 include~~2020 was primarily due to tax benefits attributable to its worldwide losses, combined with excess tax benefits from stock-based compensation attributable to its U.S. jurisdiction. The Company’s provision for income taxes for the ~~retroactive adoption of ASU 2016-09.~~

~~The Company generated significant domestic DTAs in the year ended December 31, 2016~~three and nine ~~month period~~months ended September 30, ~~2017,~~2019 was primarily due to income taxes attributable to its worldwide profits, offset by excess tax benefits from stock-based compensation attributable to its U.S. jurisdiction.

The Company’s effective tax rate changed to 49.9% for the ~~significant~~three months ended September 30, 2020, compared to 15.1% for the three months ended September 30, 2019. The Company’s effective tax rate changed to 41.6% for the nine months ended September 30, 2020, compared to 1.8% for the nine months ended September 30, 2019. The Company’s change in effective tax rate was primarily attributable to large tax benefits over worldwide losses for the three and nine months ended September 30, 2020, when compared to small tax expenses over worldwide profits for the three and nine months ended September 30, 2019.

On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provides certain tax relief. The CARES Act did not have a material impact to the income tax provision of the Company for the three and nine months ended September 30, 2020.

Significant domestic deferred tax assets (“DTAs”) were generated in recent years, primarily due to excess tax benefits from stock option exercises and vesting of restricted ~~stock upon application of ASU 2016-09 in the third quarter September 30, 2016.~~stock. The Company ~~assessed its ability to realize the benefits of its domestic DTAs prior to expiration by evaluating~~evaluates all available positive and negative evidence, objective and subjective in nature, ~~including (1) cumulative results of operations~~ in ~~recent years, (2) sources of recent pre-tax losses, (3) estimates of future~~each reporting period to determine if sufficient taxable income ~~(4)~~will be generated to realize the ~~length~~benefits of ~~net operating loss (“NOL”) carryforward periods,~~its DTAs and, ~~(5)~~if not, a valuation allowance to reduce the ~~ability to carry back losses to prior years. The~~DTAs is recorded. As of September 30, 2020 and 2019, the Company ~~determined it would be in~~maintains a ~~three-year cumulative taxable income position, had it not been for the impact of excess tax deductions from stock-based compensation under ASU 2016-09,~~valuation allowance against its Federal Research and attributes recent period operating losses to operating expenses incurred to invest in the future growth of the business. The Company also measured its current DTA balances against estimates of future income based on objectively verifiable operating results from the Company’s recent history,Development Tax Credit and California DTAs as ~~well as estimates of future income that incorporates the Company’s forecasted operating results for fiscal 2017.~~

~~Due to the significant amount of additional stock-based compensation excess tax deductions available upon adoption of ASU 2016-9,~~ the Company could not conclude at the required more-likely-than-not level of certainty, that ~~sufficient~~the benefit of these tax attributes would be realized prior to expiration. As of September 30, 2020 and 2019, the Company also maintains a valuation allowance against DTAs acquired from MVI which are subject to Separate Return Limitation Year (“SRLY”) rules that limit the utilization of the pre-acquisition tax attributes to offset future taxable income ~~will be~~solely generated ~~to realize~~by MVI.

The Company maintains that all foreign earnings, with the ~~full benefit~~exception of a portion of the earnings of its ~~domestic DTAs~~German subsidiary, are permanently reinvested outside the United States and therefore deferred taxes attributable to such are not provided for in the Company’s condensed consolidated financial statements as of September 30, ~~2017 prior~~2020.

13. Net (Loss) Income Attributable to expiration. As such, a partial valuation allowance was recorded against the Company’s domestic DTAs as of September 30, 2017 in the amount of $18.6 million, which was approximately the same amount as the stock-based compensation excess tax benefits created during the nine months ended September 30, 2017. Penumbra, Inc. Per Share

The Company will continue to closely monitor the need for an additional valuation allowance against its existing domestic DTAs and any additional DTAs that are generated in each subsequent reporting period, which can be impacted by actual operating results compared to the Company’s forecast.

~~Consistent with prior periods, the Company maintained a full valuation allowance against its California and Canada DTAs as of~~ ~~September 30, 2017~~.

~~11. Net Income (Loss) per Share~~

~~The Company’s~~computed basic net (loss) income ~~(loss)~~attributable to Penumbra, Inc. per share ~~is calculated by dividing the net income (loss) by~~based on the weighted average number of shares of common stock outstanding ~~for~~during the period. The Company computed diluted net (loss) income ~~(loss)~~attributable to Penumbra, Inc. per share ~~is computed by giving effect to all potential~~based on the weighted average number of shares of common stock outstanding plus potentially dilutive common stock equivalents outstanding ~~for~~during the ~~period.~~period using the treasury stock method. For the purposes of this calculation, stock options, ~~to purchase common stock,~~ restricted stock, restricted stock units and stock sold through the Company’s employee stock purchase plan are considered common stock equivalents.

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Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

A reconciliation of the numerator and denominator used in the calculation of the basic and diluted net (loss) income ~~(loss)~~attributable to Penumbra, Inc. per share ~~for the three and nine months ended September 30, 2017 and 2016~~ is as follows (in thousands, except share and per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Numerator:
Net (loss) income attributable to Penumbra, Inc.	$	(8,815)	$	11,483	$	(19,350)	$	38,769



Denominator:
Weighted average shares used to compute net income attributable to common stockholders:
Basic	36,207,716		34,840,370		35,568,591		34,681,846
Potential dilutive stock-based options and awards	0		1,431,024		0		1,561,376

Diluted	36,207,716		36,271,394		35,568,591		36,243,222
Net (loss) income attributable to Penumbra, Inc. per share:
Basic	$	(0.24)	$	0.33	$	(0.54)	$	1.12
Diluted	$	(0.24)	$	0.32	$	(0.54)	$	1.07

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Net income (loss) per share:
Numerator
Net income (loss)—basic and diluted $ 238
$ 11,906
$ (4,426 ) $ 17,210
Denominator
Weighted average shares used to compute net income (loss)
—Basic
33,446,841
30,604,384
32,766,135
30,269,463
Potential dilutive stock-based awards, as calculated using treasury stock method 2,217,431
3,150,999
—
3,098,155
Weighted average shares used to compute income (loss)
—Diluted
35,664,272
33,755,383
32,766,135
33,367,618
Net income (loss) per share from:

Basic $ 0.01
$ 0.39
$ (0.14 ) $ 0.57
Diluted $ 0.01
$ 0.35
$ (0.14 ) $ 0.52

~~Outstanding stock-based awards of 21,150 and 166,950 shares for~~For the three months ended September 30, ~~2017~~2020 and ~~2016, respectively, and 3.0~~2019 outstanding stock-based awards of 1.8 million and ~~199,450~~65 thousand shares respectively, and for the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019 outstanding stock-based awards of 1.9 million and 76 thousand shares respectively, were excluded from the computation of diluted net (loss) income ~~(loss)~~attributable to Penumbra, Inc. per share because their effect would have been anti-dilutive.

14. Revenues

Revenue Recognition

Revenue is recognized in an amount that reflects the consideration the Company expects to be entitled to in exchange for goods or services. All revenue recognized in the condensed consolidated statements of operations is considered to be revenue from contracts with customers.

The following table presents the Company’s revenues disaggregated by geography, based on the destination to which the Company ships its products, for the three and nine months ended September 30, 2020 and 2019 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
United States	$	109,656	$	90,272	$	283,473	$	259,157

International	41,420		49,230		110,041		142,985
Total	$	151,076	$	139,502	$	393,514	$	402,142

The following table presents the Company’s revenues disaggregated by product category, for the three and nine months ended September 30, 2020 and 2019 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Neuro	$	75,917	$	83,247	$	212,830	$	246,265
Vascular	75,159		56,255		180,684		155,877
Total	$	151,076	$	139,502	$	393,514	$	402,142

Performance Obligations

Delivery of products - The Company’s contracts with customers typically contain a single performance obligation, delivery of Penumbra products. Satisfaction of that performance obligation occurs when control of the promised goods transfers to the customer, which is generally upon shipment for non-consignment sale agreements and upon utilization for consignment sale agreements.

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Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Payment terms - The Company’s payment terms vary by the type and location of our customer. The timing between fulfillment of performance obligations and when payment is due is not significant and does not give rise to financing transactions. The Company did not have any contracts with significant financing components as of September 30, 2020.

Product returns - The Company may allow customers to return products purchased at the Company’s discretion. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities using its own historic sales information, trends, industry data, and other relevant data points.

Warranties - The Company offers its standard warranty to all customers and it is not available for sale on a standalone basis. The Company’s standard warranty represents its guarantee that its products function as intended, are free from defects, and comply with agreed-upon specifications and quality standards. This assurance does not constitute a service and is not a separate performance obligation.

Transaction Price

Revenue is recorded at the net sales price, which includes estimates of variable consideration such as product returns utilizing historical return rates, rebates, discounts, and other adjustments to net revenue. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price. When determining if variable consideration should be constrained, management considers whether there are factors that could result in a significant reversal of revenue and the likelihood of a potential reversal. Variable consideration is included in revenue only to the extent that it is probable that a significant reversal of the revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. These estimates are reassessed each reporting period as required. During the three and nine months ended September 30, 2020, the Company made no material changes in estimates for variable consideration. When the Company performs shipping and handling activities after control of goods is transferred to the customer, they are considered as fulfillment activities, and costs are accrued for when the related revenue is recognized. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, ~~2016,~~2019, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ~~(SEC)~~(“SEC”) on February ~~28, 2017.~~26, 2020.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you can identify these statements by forward-looking words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results and timing expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” ~~included~~ in ~~this Quarterly Report on Form 10-Q and~~Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. Except as may be required by law, we assume no obligation to update these forward-looking statements or the reasons that results could differ from these forward-looking statements. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

Overview

Penumbra ~~(“we,” “our,” “us,” “Penumbra,” and the “Company”)~~ is a global healthcare company focused on ~~interventional~~innovative therapies. We design, develop, manufacture and market ~~innovative devices~~novel products and have a broad portfolio ~~of products~~ that addresses challenging medical conditions ~~and~~in markets with significant clinical needs across two major markets, neuro and peripheral vascular. The conditions that our products address include, among others, ischemic stroke, hemorrhagic stroke and various peripheral vascular conditions that can be treated through thrombectomy and embolization procedures.

unmet need. Our team focuses on developing, manufacturing and marketing novel products for use by specialist physicians ~~including interventional neuroradiologists, neurosurgeons, interventional neurologists, interventional radiologists~~ and ~~vascular surgeons. We design our products to provide these specialist physicians with a means~~healthcare providers to drive improved clinical ~~outcomes, and we~~outcomes. We believe that the cost-effectiveness of our products is attractive to our ~~hospital~~ customers.

Since our founding in 2004, we have invested heavily in our product development capabilities in our ~~two key~~major markets: neuro and ~~peripheral~~ vascular. We ~~launched our first~~have successfully developed, obtained regulatory clearance or approval for, and introduced products into the neurovascular ~~product in~~market since 2007, ~~our first peripheral~~ vascular ~~product in~~market since 2013 and neurosurgical market since 2014, respectively. We continue to expand our ~~first neurosurgical~~portfolio of product ~~in 2014.~~ offerings, while developing and iterating on our currently available products.

We expect to continue to develop and build our portfolio of products, ~~based on~~including our thrombectomy, embolization and access technologies. Generally, when we introduce a next generation product or a new product designed to replace a current product, sales of the earlier generation product or the product replaced decline. Our research and development activities are centered around the development of new products and clinical activities designed to support our regulatory submissions and demonstrate the effectiveness of our products.

To address the challenging and significant clinical needs of our two key markets, we developed products that fall into the following broad product offering families:

Our neuro products fall into ~~four~~five broad product families:

•Neuro thrombectomy - ~~the~~ Penumbra System, ~~consisting of reperfusion catheters and separators, aspiration tubing and aspiration pump,~~including Penumbra JET, ACE and the 3D ~~revascularization device~~Revascularization Device, Penumbra ENGINE and other components and accessories

•Neuro embolization - Penumbra SMART COIL, Penumbra Coil 400, POD400 and ~~Penumbra SMART COIL~~PAC400

•Neuro access - delivery catheters, consisting of Neuron, Neuron MAX, Select, BENCHMARK, ~~DDC; microcatheters, consisting of~~DDC and PX SLIM ~~and Velocity~~

•Neurosurgical - ~~the~~ Artemis Neuro Evacuation Device

•Rehabilitation Tools - REAL Immersive System

Our ~~peripheral~~vascular products fall into two broad product families:

~~Peripheral~~•Vascular thrombectomy - ~~the Indigo~~INDIGO System ~~consisting of~~designed for mechanical thrombectomy, including aspiration catheters, separators, aspiration pump and accessories and Lightning 12, our next-generation aspiration system for peripheral thrombectomy

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•Peripheral embolization - ~~the Ruby~~RUBY Coil System, ~~POD System, POD Packing Coil, and the Penumbra~~ LANTERN Delivery Microcatheter

and the POD System (POD and POD Packing Coil)

We sell our products to hospitals and other healthcare providers primarily through our direct sales organization in the United States, most of Europe, Canada and Australia, as well as through distributors in select international markets. In the nine months ended September 30, ~~2017~~2020 and ~~2016, 33.7%~~2019, 28.0% and ~~33.0%~~35.6% of our revenue, respectively, was generated from customers located outside of the United States. Our sales outside of the United States are denominated principally in the euro and Japanese yen, with some sales being denominated in other currencies. As a result, we have foreign exchange exposure but do not currently engage in hedging.

We generated revenue of ~~$237.7~~$393.5 million and ~~$190.2~~$402.1 million for the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively, ~~an increase~~a decrease of ~~25.0%.~~$8.6 million. We generated an operating loss of ~~$2.7~~$37.2 million and ~~$0.2~~operating income of $36.9 million for the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the U.S. and the world. In response, governments have issued orders restricting certain activities, and while our business falls within the category of healthcare operations, which are essential businesses currently permitted to continue operating during the COVID-19 outbreak, we have experienced, and expect to continue to experience, disruptions to our operations as a result of the pandemic. For example, hospital resources have been diverted to fight the pandemic, and many government agencies in conjunction with healthcare systems have recommended the deferral of elective and semi-elective medical procedures during the outbreak. Some of Penumbra’s medical devices are used in certain procedures that the United States Centers for Medicare & Medicaid Services (“CMS”) has indicated are “high-acuity” procedures that should not be postponed during the outbreak in its March 18, 2020 recommendations, while other Penumbra devices are used in elective procedures that physicians may consider postponing. Many of the procedures in which our vascular products are used are elective in nature, whereas procedures in which our neuro products are used, such as stroke, tend to be more emergent in nature.

The impact of COVID-19 on our business remains fluid, and we continue to actively monitor the dynamic situation. We will continue to undertake the following specific actions and strategic priorities to navigate the pandemic:

•We have made changes to how we manufacture, inspect and ship our products to prioritize the health and safety of our employees and to operate under the protocols mandated by our local and state governments. While we are committed to continue meeting demand for our essential devices, we have implemented social distancing and other measures to protect the health and safety of our employees, which have reduced, and may continue to reduce, our manufacturing capacity.

•In order to strengthen our liquidity position, we issued and sold an aggregate of 865,963 shares of our common stock at a public offering price of $166.00 per share, less the underwriters’ discounts and commissions, pursuant to an underwritten public offering in June 2020. We received approximately $134.8 million in net cash proceeds from the offering after deducting underwriting discounts and commissions of $8.6 million and other offering expenses of $0.4 million.

•We further strengthened our liquidity position by entering into a Credit Agreement (the “Credit Agreement”) on April 24, 2020, with JPMorgan Chase Bank, N.A., as administrative agent and lender, and Bank of America, N.A. and Citibank, N.A. as lenders. The Credit Agreement is secured and provides for up to $100 million in available revolving borrowing capacity with an option, subject to certain conditions, for us to increase the aggregate borrowing capacity to up to $150 million, and matures on April 23, 2021. This revolving line of credit provides access to capital beyond the $268.7 million in cash, cash equivalents and marketable investments on our balance sheet as of September 30, 2020, and we believe this will allow us to both navigate the current environment and emerge in a strong liquidity position after the pandemic. As of September 30, 2020, the Company was not in compliance with the requirement in the Credit Agreement to maintain a minimum fixed charge coverage ratio. The Company subsequently obtained a waiver of such non-compliance from the lenders under the Credit Agreement. As of September 30, 2020, there were no borrowings outstanding under the Credit Agreement.

•We will continue to prioritize investments in our production capacity and flexibility, commercial channels, preparation for new product launches, and new product developments to help patients.

While we have seen positive trends in certain areas of our business beginning in May, we remain mindful of the negative impacts on business trends we experienced in April due to the COVID-19 outbreak. The general impact of COVID-19 on our business has been negative and we are unable to reliably predict the full impact that COVID-19 will have on our business due to

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numerous uncertainties, including the severity and duration of the outbreak, the global resurgences of cases, additional actions that may be taken by governmental authorities in response to the outbreak, the impact of the outbreak on the business of our customers, distributors and suppliers, other businesses and worldwide economies in general, our ability to have access to our customers to provide training and case support, and other factors identified in Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q. We will continue to evaluate the nature and extent of the impact of COVID-19 on our business, consolidated results of operations, and financial condition.

Factors Affecting Our Performance

There are a number of factors that have impacted, and we believe will continue to impact, our results of operations and growth. These factors include:

•The COVID-19 outbreak and measures taken in response thereto, which have negatively affected, and we expect will continue to negatively affect, our revenues and results of operations. Due to these impacts and measures, we may experience significant and unpredictable fluctuations in demand for certain of our products as hospital customers re-prioritize the treatment of patients and distributors adjust their operations to support the current demand level.

•The rate at which we grow our salesforce and the speed at which newly hired salespeople become fully effective can impact our revenue growth or our costs incurred in anticipation of such growth.

•Our industry is intensely competitive and, in particular, we compete with a number of large, well-capitalized companies. We must continue to successfully compete in light of our competitors’ existing and future products and their resources to successfully market to the specialist physicians who use our products.

•We must continue to successfully introduce new products that gain acceptance with specialist physicians and successfully transition from existing products to new products, ensuring adequate ~~supply while avoiding excess inventory of older products and resulting inventory write-downs or write-offs.~~supply. In addition, as we introduce new products and expand our production capacity, we ~~generally hire and train~~anticipate additional personnel will be hired and trained to build our inventory of components and finished goods in advance of sales, which may cause quarterly fluctuations in our operating results and financial condition.

•Publications of clinical results by us, our competitors and other third parties can have a significant influence on whether, and the degree to which, our products are used by specialist physicians and the procedures and treatments those physicians choose to administer for a given condition.

•The specialist physicians who use our products may not perform procedures during certain times of the year, such as those periods when they are at major medical conferences or are away from their practices for other reasons, the timing of which occurs irregularly during the year and from year to year.

•Most of our sales outside of the United States are denominated in the local currency of the country in which we sell our products. As a result, our revenue from international sales can be significantly impacted by fluctuations in foreign currency exchange rates.

•The availability and levels of reimbursement within the relevant healthcare payment system for healthcare providers for procedures in which our products are used.

In addition, we have experienced and expect to continue to experience meaningful variability in our quarterly revenue, gross profit and gross margin percentage as a result of a number of factors, including, but not limited to: the impact of COVID-19, the number of available selling days, which can be impacted by holidays; the mix of products sold; the geographic mix of where products are sold; the demand for our products and the products of our competitors; the timing of or failure to obtain regulatory approvals or clearances for products; increased competition; the timing of customer orders; inventory write-offs ~~and write-downs;~~due to obsolescence; costs, benefits and timing of new product introductions; costs, benefits and timing of the acquisition and integration of businesses and product lines we may acquire; the availability and cost of components and raw materials; and fluctuations in foreign currency exchange rates. We may experience quarters in which we have significant revenue growth sequentially followed by quarters of moderate or no revenue growth. Additionally, we may experience quarters in which operating expenses, in particular research and development expenses, fluctuate depending on the stage and timing of product development.

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Components of Results of Operations

Revenue.We sell our products directly to hospitals and other healthcare providers and through distributors for use in procedures performed by specialist physicians to treat patients in two key markets: neuro and ~~peripheral~~ vascular disease. We sell our products through purchase orders, and we do not have long term purchase commitments from our customers. ~~We typically recognize revenue~~Revenue from product sales is recognized either on the date of shipment or the date of receipt by the customer, but is deferred for certain transactions when ~~products are delivered to our hospital customers or distributors. However, with~~control has not yet transferred. With respect to products that we consign to hospitals, which primarily consist of coils, we recognize revenue at the time hospitals utilize products in a procedure. Revenue also includes shipping and handling costs that we charge to customers.

Cost of Revenue.Cost of revenue consists primarily of the cost of raw materials and components, personnel costs, including stock-based compensation, inbound freight charges, receiving costs, inspection and testing costs, warehousing costs, royalty expense, shipping and handling costs, and other labor and overhead costs incurred in the manufacturing of products. In addition, we record write-downs or write-offs of inventory in the event that a portion of our inventory becomes excess or obsolete.

We manufacture substantially all of our products in our manufacturing ~~facility at our campus~~facilities in Alameda and Roseville, California.

Operating Expenses

Research and Development ~~(R&D)~~(“R&D”). R&D expenses primarily consist of product development, clinical and regulatory expenses, materials, depreciation and other costs associated with the development of our products. R&D expenses also include salaries, benefits and other related costs, including stock-based compensation, for personnel and consultants. We generally expense R&D costs as they are ~~incurred.~~incurred, with the exception of certain costs incurred for the development of computer software for internal use related to our REAL Immersive System offerings. We capitalize certain costs when it is determined that it is probable that the project will be completed and the software will be used to perform the function intended, and the preliminary project stage is completed. Capitalized internal use software development costs are included in property and equipment, net within the condensed consolidated balance sheets.

~~We expect our R&D expenses to continue to increase as we innovate and develop new products, add personnel, engage in ongoing clinical research and expand our information technologies.~~

Sales, General and Administrative ~~(SG&A)~~(“SG&A”).SG&A expenses primarily consist of salaries, benefits and other related costs, including stock-based compensation, for personnel and consultants engaged in sales, marketing, finance, legal, compliance, administrative, facilities and information technology and human resource activities. Our SG&A expenses also include marketing trials, medical education, training, commissions, generally based on ~~a percentage of~~ sales, to direct sales representatives, amortization of acquired intangible assets and acquisition-related ~~costs~~.costs.

~~We expect our SG&A expenses to continue to increase as we expand our marketing programs, information technologies, operations and salesforce.~~(Benefit from) Provision For Income Taxes

~~Income Tax Expense.~~ We are taxed at the rates applicable within each jurisdiction in which we operate. The composite income tax rate, tax provisions, ~~DTAs~~deferred tax assets (“DTAs”) and deferred tax liabilities will vary according to the jurisdiction in which profits arise. Tax laws are complex and subject to different interpretations by management and the respective governmental taxing authorities, and require us to exercise judgment in determining our income tax provision, our ~~DTAs~~deferred tax assets and deferred tax liabilities and the potential valuation allowance recorded against our net ~~deferred tax assets.~~DTAs. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not that the future realization of all or some of the DTAs will not be achieved.

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Results of Operations

The following table sets forth the components of our condensed consolidated statements of operations in dollars and as a percentage of revenue for the periods presented:


	Three Months Ended September 30,								Nine Months Ended September 30,
	2020				2019				2020				2019
	(in thousands, except for percentages)								(in thousands, except for percentages)
Revenue	$	151,076	100.0	%	$	139,502	100.0	%	$	393,514	100.0	%	$	402,142	100.0	%
Cost of revenue	60,153		39.8		43,504		31.2		149,652		38.0		128,306		31.9
Gross profit	90,923		60.2		95,998		68.8		243,862		62.0		273,836		68.1
Operating expenses:
Research and development	34,923		23.1		13,733		9.8		70,594		17.9		38,862		9.7
Sales, general and administrative	76,158		50.4		69,289		49.7		210,465		53.5		198,045		49.2

Total operating expenses	111,081		73.5		83,022		59.5		281,059		71.4		236,907		58.9
(Loss) income from operations	(20,158)		(13.3)		12,976		9.3		(37,197)		(9.5)		36,929		9.2
Interest income, net	413		0.3		759		0.5		820		0.2		2,276		0.6
Other income (expense), net	14		—		(772)		(0.6)		(1,130)		(0.3)		(819)		(0.2)
(Loss) income before income taxes	(19,731)		(13.1)		12,963		9.3		(37,507)		(9.5)		38,386		9.5
(Benefit from) provision for income taxes	(9,855)		(6.5)		1,963		1.4		(15,618)		(4.0)		683		0.2


Consolidated net (loss) income	$	(9,876)	(6.5)	%	$	11,000	7.9	%	$	(21,889)	(5.6)	%	$	37,703	9.4	%
Net loss attributable to non-controlling interest	(1,061)		(0.7)		(483)		(0.3)		(2,539)		(0.6)		(1,066)		(0.3)
Net (loss) income attributable to Penumbra, Inc.	$	(8,815)	(5.8)	%	$	11,483	8.2	%	$	(19,350)	(4.9)	%	$	38,769	9.6	%

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(in thousands, except for percentages)
Revenue $ 83,911
100.0 % $ 67,187
100.0 % $ 237,713
100.0 % $ 190,212
100.0 %
Cost of revenue 29,134
34.7
24,313
36.2
84,298
35.5
65,963
34.7
Gross profit 54,777
65.3
42,874
63.8
153,415
64.5
124,249
65.3
Operating expenses:
Research and development 8,132
9.7
6,497
9.7
23,260
9.8
17,762
9.3
Sales, general and administrative 45,962
54.8
37,740
56.2
132,846
55.9
106,685
56.1
Total operating expenses 54,094
64.5
44,237
65.8
156,106
65.7
124,447
65.4
Income (loss) from operations 683
0.8
(1,363 ) (2.0 ) (2,691 ) (1.1 ) (198 ) (0.1 )
Interest income, net 658
0.8
631
0.9
1,926
0.8
1,700
0.9
Other expense, net (647 ) (0.8 ) (360 ) (0.5 ) (1,368 ) (0.6 ) (856 ) (0.5 )
Income (loss) before income taxes 694
0.8
(1,092 ) (1.6 ) (2,133 ) (0.9 ) 646
0.3
Provision for (benefit from) income taxes 456
0.5
(12,998 ) (19.3 ) 2,293
1.0
(16,564 ) (8.7 )
Net income (loss) $ 238
0.3 % $ 11,906
17.7 % $ (4,426 ) (1.9 )% $ 17,210
9.0 %

Three Months Ended September 30, ~~2017~~2020 Compared to the Three Months Ended September 30, ~~2016~~2019

Revenue


	Three Months Ended September 30,				Change					Three Months Ended September 30,				Change
	2017		2016		$		%			2020		2019		$		%
	(in thousands, except for percentages)									(in thousands, except for percentages)
Neuro	$	58,670	$	47,534	$	11,136	23.4	%	Neuro	$	75,917	$	83,247	$	(7,330)	(8.8)	%
Peripheral Vascular	25,241		19,653		5,588		28.4	%
Vascular									Vascular	75,159		56,255		18,904		33.6	%
Total	$	83,911	$	67,187	$	16,724	24.9	%	Total	$	151,076	$	139,502	$	11,574	8.3	%

Revenue increased ~~$16.7~~$11.6 million, or ~~24.9%~~8.3%, to ~~$83.9~~$151.1 million in the three months ended September 30, ~~2017,~~2020, from ~~$67.2~~$139.5 million in the three months ended September 30, ~~2016. Our~~2019. The overall growth in our revenue ~~growth resulted from~~is primarily due to an increase in products sales within our vascular business as a result of sales of new products and further market penetration of our existing products, ~~and~~partially offset by a decline in sales of ~~new~~ products ~~or products with new indications. Increased sales~~ within our neuro business.

Revenue from our neuro products decreased $7.3 million, or 8.8%, to $75.9 million in the three months ended September 30, 2020, from $83.2 million in the three months ended September 30, 2019. This decrease was primarily attributable to decreased sales of our neuro thrombectomy products which globally declined by 23.2% in the three months ended September 30, 2020. This decrease was primarily attributable to decreased sales in Japan as a result of reimbursement changes, on-going discussions with our distributor partner, and ~~peripheral vascular businesses accounted for approximately two-thirds~~the paused launch of our new stroke product in that market. This decline was partially offset by an increase in sales of our neuro access and ~~one-third of the revenue increase,~~neuro embolization products, which globally increased by 35.0% and 9.7%, respectively in the three months ended September 30, ~~2017.~~

~~Revenue from our neuro products increased $11.1 million, or 23.4%, to $58.7 million in the three months ended September 30, 2017, from $47.5 million in the three months ended September 30, 2016.~~ ~~This was primarily attributable to increased sales of our Penumbra System and neuro access products, which accounted for~~ ~~approximately~~ ~~75% and slightly less than 20% of the neuro revenue increase, respectively. Our neuro product sales experienced strong momentum~~2020, due to further market penetration and growth in the market for endovascular treatment of stroke. ~~The overall market growth has led to increases in the number of procedures performed by specialist physicians using our products. Further, there was greater demand for our neuro access products, which can fluctuate from period to period due to the number of procedures performed.~~ Prices for our neuro products remained substantially unchanged during the period.

Revenue from our ~~peripheral~~ vascular products increased ~~$5.6~~$18.9 million, or ~~28.4%~~33.6%, to ~~$25.2~~$75.2 million in the three months ended September 30, ~~2017,~~2020, from ~~$19.7~~$56.3 million in the three months ended September 30, ~~2016.~~2019. This increase was ~~primarily attributable to increased~~driven by sales of

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our ~~Indigo System~~vascular thrombectomy products and peripheral embolization products, which ~~accounted for approximately half of the peripheral vascular revenue increase~~globally increased by 49.3% and 17.4%, respectively in the three months ended September 30, ~~2017.~~2020. This increase was ~~driven by~~primarily due to higher sales volume as a result of sales of new products and further market penetration ~~which led to increases in the number~~ of ~~procedures performed by specialist physicians using~~ our existing products. Prices for our ~~peripheral~~ vascular products remained substantially unchanged during the period.

Revenue by Geographic Area

The following table presents revenue by geographic area, ~~and from countries that exceeded 10% of our total revenue,~~ based on our customers’ shipping ~~destinations:~~destinations, for the three months ended September 30, 2020 and 2019:


	Three Months Ended September 30,								Change						Three Months Ended September 30,								Change
	2017				2016				$			%			2020				2019				$		%
	(in thousands, except for percentages)														(in thousands, except for percentages)
United States	$	55,652	66.4	%	$	44,380	66.1	%	$	11,272		25.4	%	United States	$	109,656	72.6	%	$	90,272	64.7	%	$	19,384	21.5	%
Japan	8,499		10.1	%	8,859		13.2	%	(360		)	(4.1	)%
Other International	19,760		23.5	%	13,948		20.7	%	5,812			41.7	%

International														International	41,420		27.4	%	49,230		35.3	%	(7,810)		(15.9)	%
Total	$	83,911	100.0	%	$	67,187	100.0	%	$	16,724		24.9	%	Total	$	151,076	100.0	%	$	139,502	100.0	%	$	11,574	8.3	%

Revenue from product sales in international markets ~~increased $5.5~~decreased $7.8 million, or ~~23.9%~~15.9%, to ~~$28.3~~$41.4 million in the three months ended September 30, ~~2017,~~2020, from ~~$22.8~~$49.2 million in the three months ended September 30, ~~2016.~~2019. Revenue from international sales represented ~~33.6%~~27.4% and ~~33.9%~~35.3% of our total revenue for the three months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

Gross Margin


	Three Months Ended September 30,						Change
	2020			2019			$		%
	(in thousands, except for percentages)
Cost of revenue	$	60,153		$	43,504		$	16,649	38.3	%
Gross profit	$	90,923		$	95,998		$	(5,075)	(5.3)	%
Gross margin %	60.2		%	68.8		%

Three Months Ended September 30, Change
2017 2016 $ %
(in thousands, except for percentages)
Cost of revenue $ 29,134
$ 24,313
$ 4,821
19.8 %
Gross profit $ 54,777
$ 42,874
$ 11,903
27.8 %
Gross margin % 65.3 % 63.8 %

Gross margin ~~increased 1.5~~decreased 8.6 percentage points to ~~65.3%~~60.2% in the three months ended September 30, ~~2017,~~2020, from ~~63.8%~~68.8% in the three months ended September 30, ~~2016.~~ ~~The increase in~~2019. This gross margin ~~was primarily due~~decrease is driven by three components: (i) incremental investments on COVID-19 related safety measures, which include trade-offs made in productivity and capacity; (ii) accelerated investments in direct labor hires and production support to enable production scale-up in our Alameda and Roseville manufacturing facilities, respectively, undertaken to support new product launches and ~~geographic mix.~~meet increasing demand in a less efficient manufacturing environment; and (iii) unabsorbed manufacturing variances from the second quarter of 2020 that resulted from inventory sold through in the third quarter.

Research and Development ~~(R&D)~~(“R&D”)


	Three Months Ended September 30,						Change					Three Months Ended September 30,						Change
	2017			2016			$		%			2020			2019			$		%
	(in thousands, except for percentages)											(in thousands, except for percentages)
R&D	$	8,132		$	6,497		$	1,635	25.2	%	R&D	$	34,923		$	13,733		$	21,190	154.3	%
R&D as a percentage of revenue	9.7		%	9.7		%					R&D as a percentage of revenue	23.1		%	9.8		%

R&D expenses increased by ~~$1.6~~$21.2 million, or ~~25.2%~~154.3%, to ~~$8.1~~$34.9 million in the three months ended September 30, ~~2017,~~2020, from ~~$6.5~~$13.7 million in the three months ended September 30, ~~2016.~~2019. The increase was primarily due to a ~~$1.2~~$16.3 million increase in personnel-related expenses, which primarily includes one-time, non-recurring expenses associated with the launch of our Lightning product, and a $4.6 million increase in product development and testing costs.

We have made investments, and plan to continue to make investments, in the development of our products, which may include hiring additional research and development employees. In addition, we have experienced in the past, and may continue to experience in the future, variability in expenses incurred due to the timing and costs of clinical ~~trial costs~~trials and ~~a $0.5 million increase in personnel-related expenses. This was partially offset by a $0.2 million decrease in consultant and contractor expenses.~~product development.

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Sales, General and Administrative ~~(SG&A)~~(“SG&A”)


	Three Months Ended September 30,						Change					Three Months Ended September 30,						Change
	2017			2016			$		%			2020			2019			$		%
	(in thousands, except for percentages)											(in thousands, except for percentages)
SG&A	$	45,962		$	37,740		$	8,222	21.8	%	SG&A	$	76,158		$	69,289		$	6,869	9.9	%
SG&A as a percentage of revenue	54.8		%	56.2		%					SG&A as a percentage of revenue	50.4		%	49.7		%

SG&A expenses increased by ~~$8.2~~$6.9 million, or ~~21.8%~~9.9%, to ~~$46.0~~$76.2 million in the three months ended September 30, ~~2017,~~2020, from ~~$37.7~~$69.3 million in the three months ended September 30, ~~2016.~~2019. The increase was primarily due to a ~~$6.0~~$12.7 million increase in personnel-related expenses, ~~largely attributable to an increase~~partially offset by a $3.9 million decrease in ~~headcount to support our growth, a $0.6 million increase~~cost related to marketing events, and a ~~$0.5 million increase in legal, accounting and other services. This was partially offset by a $1.2~~$2.8 million decrease ~~related~~in travel-related expenses.

As we continue to ~~a benefit from a net refund~~invest in our growth, we have expanded and may continue to expand our sales, marketing, and general and administrative teams through the hiring of ~~previously paid medical device excise tax.~~additional employees. In addition, we have experienced in the past, and may continue to experience in the future, variability in expenses incurred due to the timing and costs of investments in infrastructure to support the business.

(Benefit from) Provision for Income Taxes


												Three Months Ended September 30,						Change
	Three Months Ended September 30,						Change					2020			2019			$		%
	2017			2016			$		%			(in thousands, except for percentages)
	(in thousands, except for percentages)
Provision for (Benefit from) income taxes	$	456		$	(12,998	)	$	13,454	103.5	%
(Benefit from) provision for income taxes											(Benefit from) provision for income taxes	$	(9,855)		$	1,963		$	(11,818)	(602.0)	%
Effective tax rate	65.7		%	1,190.3		%					Effective tax rate	49.9		%	15.1		%

Our ~~provision for our~~benefit from income taxes ~~increased $13.5~~was $9.9 million ~~to $0.5 million in the three months ended September 30, 2017, from $13.0 million of tax benefit in the three months ended September 30, 2016. Our effective tax rate changed to 65.7%~~ for the three months ended September 30, ~~2017, compared~~2020, which was primarily due to ~~1,190.3%~~tax benefits attributable to our worldwide losses, combined with excess tax benefits from stock-based compensation attributable to our U.S. jurisdiction. Our provision for income taxes was $2.0 million for the three months ended September 30, ~~2016. Our~~2019, which was primarily due to income taxes attributable to our worldwide profits, offset by excess tax benefits from stock-based compensation attributable to our U.S. jurisdiction. The effective tax rate was 49.9% for the three months ended September 30, ~~2016 includes~~2020, compared to 15.1% for the ~~retroactive adoption of ASU 2016-09. The~~three months ended September 30, 2019. Our change in ~~the~~effective tax rate was primarily attributable to ~~the exclusion of~~large tax benefits ~~attributable to our U.S. jurisdiction due to~~over worldwide losses for the ~~partial valuation allowance recorded against our domestic DTAs as of~~three months ended September 30, ~~2017 but including~~2020, when compared to small tax ~~benefits attributable to our domestic DTAs as of~~expenses over worldwide profits for the three months ended September 30, ~~2016, and the tax impact associated with intra-entity asset transfers.~~2019.

Nine Months Ended September 30, ~~2017~~2020 Compared to the Nine Months Ended September 30, ~~2016~~2019

Revenue


	Nine Months Ended September 30,				Change					Nine Months Ended September 30,				Change
	2017		2016		$		%			2020		2019		$		%
	(in thousands, except for percentages)									(in thousands, except for percentages)
Neuro	$	165,122	$	134,180	$	30,942	23.1	%	Neuro	$	212,830	$	246,265	$	(33,435)	(13.6)	%
Peripheral Vascular	72,591		56,032		16,559		29.6	%
Vascular									Vascular	180,684		155,877		24,807		15.9	%
Total	$	237,713	$	190,212	$	47,501	25.0	%	Total	$	393,514	$	402,142	$	(8,628)	(2.1)	%

Revenue ~~increased $47.5~~decreased $8.6 million, or ~~25.0%~~2.1%, to ~~$237.7~~$393.5 million in the nine months ended September 30, ~~2017,~~2020, from ~~$190.2~~$402.1 million in the nine months ended September 30, ~~2016. Our~~2019. The decline in overall revenue ~~growth resulted from further market penetration~~is primarily due to a decrease in sales of ~~our~~

~~existing~~ products ~~and~~within our neuro business, partially offset by an increase in sales of new and existing products ~~or products with new indications. Increased sales~~ within our vascular business.

Revenue from our neuro products decreased $33.4 million, or 13.6%, to $212.8 million in the nine months ended September 30, 2020, from $246.3 million in the nine months ended September 30, 2019. This was primarily attributable to decreased sales of our neuro thrombectomy products and ~~peripheral vascular businesses accounted for approximately two-thirds~~neuro embolization products, which globally declined by 21.6% and ~~one-third of the revenue increase,~~6.2%, respectively, in the nine months ended September 30, ~~2017.~~

~~Revenue from our neuro products increased $30.9 million, or 23.1%, to $165.1 million in the nine months ended September 30, 2017, from $134.2 million in the nine months ended September 30, 2016.~~ 2020. This decrease was primarily attributable ~~to increased~~to: (i) decreased sales in Japan as a result of reimbursement changes, on-going discussions with our distributor partner, and the paused launch of our ~~Penumbra System~~new stroke product in that market, and ~~neuro access products which accounted for slightly more than 60%~~(ii) lower sales volume as a result of hospitals performing fewer procedures and ~~approximately 20%~~a

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decline in other international distribution sales, all primarily resulting from the ~~neuro revenue increase, respectively.~~ Our neuro product sales experienced strong momentum due to further market penetration and growth in the market for endovascular treatment of stroke. The overall market growth has led to increases in the number of procedures performed by specialist physicians using our products. Further, there was greater demand for our neuro access products which can fluctuate from period to period dueresponse to the ~~number of procedures performed in a given period using~~COVID-19 pandemic by hospitals and our ~~products.~~distributors. Prices for our neuro products remained substantially unchanged during the period.

Revenue from our ~~peripheral~~ vascular products increased ~~$16.6~~$24.8 million, or ~~29.6%~~15.9%, to ~~$72.6~~$180.7 million in the nine months ended September 30, ~~2017,~~2020, from ~~$56.0~~$155.9 million in the nine months ended September 30, ~~2016. This was primarily attributable to increased sales of Indigo System products, which accounted for slightly more than half of the peripheral vascular revenue increase.~~2019. This increase was driven by sales of our vascular thrombectomy products and peripheral embolization products, which globally increased by 25.1% and 6.5%, respectively, in the nine months ended September 30, 2020. This increase was primarily due to high sales volume as a result of sales of new products and further market penetration ~~which led to increases in the number~~ of ~~procedures performed by specialist physicians using~~ our existing products. Prices for our ~~peripheral~~ vascular products remained substantially unchanged during the period.

Revenue by Geographic Area

The following table presents revenue by geographic area, ~~and from countries that exceeded 10% of our total revenue,~~ based on our ~~customers’~~customer’s shipping ~~destinations:~~

destination, for the nine months ended September 30, 2020 and 2019:


	Nine Months Ended September 30,								Change					Nine Months Ended September 30,								Change
	2017				2016				$		%			2020				2019				$		%
	(in thousands, except for percentages)													(in thousands, except for percentages)
United States	$	157,559	66.3	%	$	127,484	67.1	%	$	30,075	23.6	%	United States	$	283,473	72.0	%	$	259,157	64.4	%	$	24,316	9.4	%
Japan	24,483		10.3	%	21,589		11.3	%	2,894		13.4	%
Other International	55,671		23.4	%	41,139		21.6	%	14,532		35.3	%

International													International	110,041		28.0	%	142,985		35.6	%	(32,944)		(23.0)	%
Total	$	237,713	100.0	%	$	190,212	100.0	%	$	47,501	25.0	%	Total	$	393,514	100.0	%	$	402,142	100.0	%	$	(8,628)	(2.1)	%

Revenue from sales in international markets ~~increased $17.4~~decreased $32.9 million, or ~~27.8%~~23.0%, to ~~$80.2~~$110.0 million in the nine months ended September 30, ~~2017,~~2020, from ~~$62.7~~$143.0 million in the nine months ended September 30, ~~2016.~~2019. Revenue from international sales represented ~~33.7%~~28.0% and ~~33.0%~~35.6% of our total revenue for the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

Gross Margin


	Nine Months Ended September 30,						Change
	2020			2019			$		%
	(in thousands, except for percentages)
Cost of revenue	$	149,652		$	128,306		$	21,346	16.6	%
Gross profit	$	243,862		$	273,836		$	(29,974)	(10.9)	%
Gross margin %	62.0		%	68.1		%

Nine Months Ended September 30, Change
2017 2016 $ %
(in thousands, except for percentages)
Cost of revenue $ 84,298
$ 65,963
$ 18,335
27.8 %
Gross profit $ 153,415
$ 124,249
$ 29,166
23.5 %
Gross margin % 64.5 % 65.3 %

Gross margin decreased ~~0.8~~6.1 percentage points to ~~64.5%~~62.0% in the nine months ended September 30, ~~2017,~~2020, from ~~65.3%~~68.1% in the nine months ended September 30, ~~2016.~~ ~~The~~2019. This decrease in gross margin ~~was primarily due~~is driven by three components: (i) incremental investments on COVID-19 related safety measures, which include trade-offs made in productivity and capacity; (ii) accelerated investments in direct labor hires and production support to enable production scale-up in our Alameda and Roseville manufacturing facilities, respectively, undertaken to support new product launches ~~additional costs associated with hiring new personnel~~ and ~~product~~meet increasing demand in a less efficient manufacturing environment; and ~~geographic mix.~~(iii) unabsorbed manufacturing variances due to lower production volume in the first and second quarters of 2020.

Research and Development ~~(R&D)~~(“R&D”)


	Nine Months Ended September 30,						Change					Nine Months Ended September 30,						Change
	2017			2016			$		%			2020			2019			$		%
	(in thousands, except for percentages)											(in thousands, except for percentages)
R&D	$	23,260		$	17,762		$	5,498	31.0	%	R&D	$	70,594		$	38,862		$	31,732	81.7	%
R&D as a percentage of revenue	9.8		%	9.3		%					R&D as a percentage of revenue	17.9		%	9.7		%

R&D expenses increased by ~~$5.5~~$31.7 million, or ~~31.0%~~81.7%, to ~~$23.3~~$70.6 million in the nine months ended September 30, ~~2017,~~2020, from ~~$17.8~~$38.9 million in the nine months ended September 30, ~~2016.~~2019. The increase was primarily due to a ~~$4.4~~$19.1 million increase in personnel-related expenses, which primarily includes one-time, non-recurring expenses associated with the launch of our Lightning product, and a $9.5 million increase in product development and testing costs.

We have made investments, and ~~clinical trial costs~~plan to continue to make investments, in the development of our products, which may include hiring additional research and ~~a $1.7 million increase~~development employees. In addition, we have experienced in ~~personnel-related~~the past, and may continue to experience in the future, variability in expenses incurred due to ~~an increase in headcount. This was partially offset by a $0.5 million decrease in consultant~~the timing and ~~contractor expenses~~costs of clinical trials and ~~a $0.2 million decrease in outside services.~~product development.

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Sales, General and Administrative (SG&A)


	Nine Months Ended September 30,						Change					Nine Months Ended September 30,						Change
	2017			2016			$		%			2020			2019			$		%
	(in thousands, except for percentages)											(in thousands, except for percentages)
SG&A	$	132,846		$	106,685		$	26,161	24.5	%	SG&A	$	210,465		$	198,045		$	12,420	6.3	%
SG&A as a percentage of revenue	55.9		%	56.1		%					SG&A as a percentage of revenue	53.5		%	49.2		%

SG&A expenses increased by ~~$26.2~~$12.4 million, or ~~24.5%~~6.3%, to ~~$132.8~~$210.5 million in the nine months ended September 30, ~~2017,~~2020, from ~~$106.7~~$198.0 million in the nine months ended September 30, ~~2016.~~2019. The increase was primarily due to a ~~$22.4~~$22.0 million increase in personnel-related expense ~~due to an~~and a $3.5 million increase in ~~headcount to support our growth and a $1.5 million increase related to marketing events. This increase was~~infrastructure costs, partially offset by a ~~$1.2~~$8.3 million decrease in cost related to marketing events, and a $7.3 million decrease in travel-related expenses.

As we continue to invest in our growth, we have expanded and may continue to expand our sales, marketing, and general and administrative teams through the hiring of additional employees. In addition, we have experienced in the past, and may continue to experience in the future, variability in expenses incurred due to the timing and costs of investments in infrastructure to support the business.

(Benefit from) Provision For Income Taxes


	Nine Months Ended September 30,						Change
	2020			2019			$		%
	(in thousands, except for percentages)
(Benefit from) provision for income taxes	$	(15,618)		$	683		$	(16,301)	(2,386.7)	%
Effective tax rate	41.6		%	1.8		%

Our benefit from ~~a net refund of previously paid medical device excise tax.~~

~~Provision for Income Taxes~~

Nine Months Ended September 30, Change
2017 2016 $ %
(in thousands, except for percentages)
Provision for (Benefit from) income taxes $ 2,293
$ (16,564 ) $ 18,857
113.8 %
Effective tax rate (107.5 )% (2,564.1 )%

~~Our provision for~~ income taxes ~~increased $18.9~~was $15.6 million ~~to $2.3 million in the nine months ended September 30, 2017, from $16.6 million of tax benefit in the nine months ended September 30, 2016. Our effective tax rate changed to (107.5)%~~ for the nine months ended September 30, ~~2017, compared~~2020, which was primarily due to ~~(2,564.1)%~~tax benefits attributable to our worldwide losses, combined with excess tax benefits from stock-based compensation attributable to our U.S. jurisdiction. Our provision for income taxes was $0.7 million for the nine months ended September 30, ~~2016. Our~~2019, which was primarily due to income taxes attributable to our worldwide profits, offset by excess tax benefits from stock-based compensation attributable to our U.S. jurisdiction. The effective tax rate was 41.6% for nine months ended September 30, 2020, compared to 1.8% for the nine months ended September 30, ~~2016 includes the retroactive adoption of ASU 2016-09. The~~2019. Our change in effective tax rate was primarily attributable to ~~the exclusion of~~large tax benefits ~~attributable to our US jurisdiction due to~~over worldwide losses for the ~~partial valuation allowance recorded against our domestic DTAs as of~~nine months ended September 30, ~~2017 but including~~2020, when compared to small tax ~~benefits attributable to our domestic DTAs as of~~expenses over worldwide profits for the nine months ended September 30, ~~2016, and the tax impact from recognizing the deferred tax assets associated with intra-entity asset transfers.~~2019.

Prospectively, our effective tax rate will likely be driven by (1) ~~exclusion of the~~permanent differences in taxable income for tax ~~benefits attributable to the U.S. jurisdiction due to valuation allowances recorded against domestic DTAs generated in subsequent periods,~~and financial reporting purposes, (2) tax expense ~~associated with~~attributable to our ~~foreign operations~~worldwide profit or tax benefit attributable to our worldwide losses, and (3) discrete tax ~~impact associated~~adjustments such as excess tax benefits related to stock-based compensation. Our income tax provision is subject to volatility as the amount of excess tax benefits can fluctuate from period to period based on the price of our stock, the volume of share-based grants settled or vested, and the fair value assigned to equity awards under U.S. GAAP. In addition, changes in tax law or our interpretation thereof, and changes to our valuation allowance could result with ~~intra-entity asset transfers.~~fluctuations in our effective tax rate.

Liquidity and Capital Resources

As of September 30, ~~2017,~~2020, we had ~~$320.7~~$482.1 million in working capital, which included ~~$65.6~~$80.1 million in cash and cash equivalents and ~~$153.2~~$188.6 million in marketable investments. As of September 30, ~~2017,~~2020, we held approximately ~~24.9%~~22.9% of our cash and cash equivalents in foreign ~~banks.~~entities.

In ~~March 2017,~~June 2020, we issued and sold an aggregate of ~~1,495,000~~865,963 shares of our common stock at a public offering price of ~~$76.00~~$166.00 per share, less the underwriters’ discounts and commissions, pursuant to an underwritten public offering. We received approximately ~~$106.3~~$134.8 million in net cash proceeds from the offering after deducting underwriting discounts and commissions of ~~$6.8~~$8.6 million and other offering expenses of ~~$0.5~~$0.4 million. We intend to use the net proceeds from ~~this~~the offering for general corporate purposes, including working capital, continued development of our products, including research and development and clinical trials, potential acquisitions and other business opportunities. Pending the use of the net proceeds from ~~this~~the offering, we are investing the net proceeds in investment grade, interest bearing securities.

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In addition to our existing cash and cash equivalents and marketable investment balances, our principal source of liquidity is our accounts receivable. In order to further strengthen our liquidity position and financial flexibility during the COVID-19 pandemic, on April 24, 2020 we entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent and lender, and Bank of America, N.A. and Citibank, N.A. as lenders. The Credit Agreement is secured and provides for up to $100 million in available revolving borrowing capacity with an option, subject to certain conditions, for the Company to increase the aggregate borrowing capacity to up to $150 million, and matures on April 23, 2021. As of September 30, 2020, the Company was not in compliance with the requirement in the Credit Agreement to maintain a minimum fixed charge coverage ratio. The Company subsequently obtained a waiver of such non-compliance from the lenders under the Credit Agreement. As of September 30, 2020, there were no borrowings outstanding under the Credit Agreement. See Note “8. Indebtedness” to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.

We believe ~~these~~our sources of liquidity will be sufficient to meet our liquidity requirements for at least the next 12 months. Our principal liquidity requirements are to fund our operations, ~~including~~expand manufacturing operations which includes, but is not limited to, maintaining sufficient levels of inventory to meet the anticipated demand of our customers, fund research and development activities and fund our capital expenditures. We may also lease or purchase additional facilities to facilitate our growth. We expect to continue to make investments as we launch new products, expand our manufacturing operations and IT infrastructures and further expand into international

markets. We may, however, require or elect to secure additional financing as we continue to execute our business strategy. If we require or elect to raise additional funds, we may do so through equity or debt financing, which may not be available on favorable terms, could result in dilution to our stockholders, could result in changes to our capital structure, and could require us to agree to covenants that limit our operating flexibility.

While we have strengthened our liquidity position, as a result of the COVID-19 pandemic, we cannot reliably estimate the extent to which the COVID-19 pandemic may impact our cash flow from operations in the fourth quarter and beyond.

The following table summarizes our cash and cash equivalents, marketable investments and selected working capital data as of September 30, ~~2017~~2020 and December 31, ~~2016:~~2019:


	September 30, 2020		December 31, 2019
	(in thousands)
Cash and cash equivalents	$	80,115	$	72,779
Marketable investments	188,611		116,610
Accounts receivable, net	112,817		105,901
Accounts payable	14,544		15,111
Accrued liabilities	87,691		67,630
Working capital(1)	482,144		372,086

September 30,
2017 December 31,
2016
(in thousands)
Cash and cash equivalents $ 65,621
$ 13,236
Marketable investments 153,203
115,517
Accounts receivable, net 47,964
43,335
Accounts payable 5,768
4,110
Accrued liabilities 45,312
31,690
Working capital(1)
320,701
228,027
__________________

~~__________________~~

(1)Working capital consists of total current assets less total current liabilities.


⁽¹⁾	~~Working capital consists of total current assets less total current liabilities.~~

The following table sets forth, for the periods indicated, our beginning balance of cash and cash equivalents, net cash flows provided by (used in) operating, investing and financing activities and our ending balance of cash and cash equivalents:

Nine Months Ended September 30,
2017 2016
(in thousands)
Cash and cash equivalents at beginning of period $ 13,236
$ 19,547
Net cash provided by (used in) operating activities 13,598
(2,450 )
Net cash used in investing activities (61,259 ) (3,520 )
Net cash provided by financing activities 101,914
4,652
Cash and cash equivalents at end of period 65,621
15,856


	Nine Months Ended September 30,
	2020		2019
	(in thousands)
Cash and cash equivalents and restricted cash at beginning of period	$	72,779	$	67,850
Net cash (used in) provided by operating activities	(31,159)		21,885
Net cash (used in) provided by investing activities	(93,923)		31,023
Net cash provided by (used in) financing activities	132,460		(8,457)
Cash and cash equivalents and restricted cash at end of period	80,115		111,581

Net Cash (Used In) Provided ~~by (Used in)~~By Operating Activities

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Net cash (used in) provided by ~~(used in)~~ operating activities consists primarily of consolidated net (loss) income adjusted for certain non-cash items (including depreciation and amortization, ~~inventory write downs,~~ stock-based compensation expense, ~~amortization of premium on marketable investments~~inventory write-downs, and changes in deferred tax balances), and the effect of changes in working capital and other activities.

Net cash ~~provided by~~used in operating activities was ~~$13.6~~$31.2 million during the nine months ended September 30, ~~2017~~2020 and consisted of consolidated net loss of ~~$4.4~~$21.9 million and ~~non-cash items of $18.3 million, offset by~~ net changes in operating assets and liabilities of ~~$0.3~~$27.5 million, offset by non-cash items of $18.3 million. The change in operating assets and liabilities ~~include the~~includes an increase in inventories of ~~$14.7~~$39.9 million, ~~to support our revenue growth,~~an increase in accounts receivable of $7.4 million and an increase in prepaid expenses and other current and non-current assets of $6.0 million. This was partially offset by an increase in accrued expenses and other non-current liabilities of $9.5 million, a decrease in prepaid expenses and other current and non-current assets of $3.3 million, an increase in accounts payable of $0.9 million as a result of the growth in our business activities and a decrease in accounts receivable of $0.7$26.1 million.

Net cash ~~used in~~provided by operating activities was ~~$2.5~~$21.9 million during the nine months ended September 30, ~~2016~~2019 and consisted of a consolidated net income of ~~$17.2~~$37.7 million and non-cash items of ~~$14.6~~$25.9 million, offset by net changes in operating assets and liabilities of ~~$34.3~~$41.7 million. The change in operating assets and liabilities includes ~~the~~an increase in inventories of ~~$14.0~~$27.9 million to support our revenue growth, an increase in accounts receivable of $21.5 million, and an increase in prepaid expenses and other current and non-current assets of ~~$22.9 million and an increase in accounts receivable of $7.1~~$3.4 million, partially offset by an increase in accrued expenses and other non-current liabilities of ~~$8.8~~$7.8 million, and an increase in accounts payable of ~~$0.9~~$3.3 million as a result of ~~the~~ growth in our business activities.

Net Cash ~~Used in~~(Used In) Provided By Investing Activities

Net cash ~~used in~~(used in) provided by investing activities relates primarily to ~~proceeds from sales or maturities of marketable investments, offset by~~ purchases of marketable investments, ~~the acquisition~~net of ~~a business, non-marketable investments~~proceeds from maturities and sales, and capital expenditures.

Net cash used in investing activities was ~~$61.3~~$93.9 million during the nine months ended September 30, ~~2017~~2020 and consisted of ~~net~~ purchases ~~from sales and maturities~~ of marketable investments, ~~of $37.6 million, the acquisition of a business,~~ net of ~~cash~~

~~acquired~~proceeds from maturities and sales, of ~~$9.3~~$69.9 million, and capital expenditures of ~~$6.8 million, purchase of non-marketable investments of $5.1 million and purchases of intangibles of $2.5~~$21.0 million.

Net cash ~~used in~~provided by investing activities was ~~$3.5~~$31.0 million during the nine months ended September 30, ~~2016~~2019 and consisted of ~~capital expenditures~~proceeds from maturities and sales of ~~$7.1~~marketable investments, net of purchases, of $51.2 million, partially offset by ~~net proceeds from sales and maturities~~capital expenditures of ~~marketable investments of $3.6~~$14.1 million.

Net Cash Provided byBy (Used In) Financing Activities

Net cash provided by (used in) financing activities primarily relates to ~~capital raising~~payments of employee taxes related to vested restricted stock units, payments towards the reduction of our finance lease obligations and certain acquisition-related payments, and proceeds from exercises of stock options and issuance of common stock.

Net cash provided by financing activities ~~through equity or debt financing.~~

~~Financing activities in~~was $132.5 million during the nine months ended September 30, ~~2017 provided net cash~~2020 and primarily consisted of ~~$101.9 million due to~~ proceeds from the issuance of common stock, net of issuance ~~cost~~costs, of ~~$106.3~~$134.8 million, proceeds from the issuance of common stock under our employee stock purchase plan of ~~$2.9~~$5.9 million, and proceeds from exercises of stock options of ~~$4.2~~$4.4 million. This was partially offset by ~~payment~~$8.6 million of payments of employee taxes related to vested restricted stock and restricted stock units, $3.1 million in payments towards finance leases, and $0.7 million related to contingent consideration payments made in the first quarter of ~~$10.6~~2020 in connection with our acquisition of Crossmed in 2017.

Net cash used in financing activities was $8.5 million ~~and payment of obligation in debt and credit facilities of $0.9 million.~~

~~Financing activities in~~during the nine months ended September 30, ~~2016 provided net cash~~2019 and primarily consisted of ~~$4.7~~$16.1 million ~~due~~of payments of employee taxes related to vested restricted stock and restricted stock units and $1.2 million primarily related to contingent consideration payments made in the first quarter of 2019 in connection with our acquisition of Crossmed in 2017. This was partially offset by proceeds from the issuance of common stock under our employee stock purchase plan of ~~$3.8~~$4.8 million and proceeds from stock option exercises of ~~stock options of $2.9 million, partially offset by payment of employee taxes related to vested restricted stock of $2.0~~$3.6 million.

Contractual Obligations and Commitments

~~During the three months ended September 30, 2017, we acquired Crossmed and~~ ~~recorded liabilities for future acquisition-related payments in the amount of $4.9 million~~ ~~related to contingent consideration and working capital adjustments. Also during the three months ended September 30, 2017, we~~ ~~entered into an exclusive technology license agreement and recorded a long-term liability of~~ ~~$12.7 million for~~ ~~future revenue milestone-based payments.~~ For information with respect to these contractual obligations and commitments, refer to Note “5. Business Combination” and Note “6. Goodwill and Intangible Assets,” respectively, to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

There have been no ~~other~~ material changes to our contractual obligations and commitments as of September 30, ~~2017 have~~2020 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019.

Off-Balance Sheet Arrangements

We do not have any significant off-balance sheet arrangements or holdings in variable interest entities.

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Critical Accounting Policies and Estimates

We have prepared our financial statements in accordance with U.S. GAAP. Our preparation of these financial statements requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosures at the date of the financial statements, as well as revenue and expenses recorded during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions.

~~As a result of transactions completed in the third quarter of 2017, the Company has included the following additional critical accounting policies and estimates:~~

~~Goodwill~~

Goodwill represents the excess of the purchase price of an acquired business or assets over the fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but is tested for impairment at least annually, or more frequently if events or circumstances indicate the carrying value may no longer be recoverable and that an impairment loss may have occurred. We will continue to operate as one segment, which is considered to be the sole reporting unit, and therefore goodwill is tested for impairment at the consolidated level.

~~Valuation of Intangible Assets~~

The fair value of identifiable intangible assets acquired in a business combination or through licensing arrangements is determined based on detailed valuations that use information and assumptions provided by management, which consider

management’s best estimates of inputs and assumptions that a market participant would use. These estimates include the amount and timing of projected milestone-based payments on sales that are considered probable and estimable, the amount and timing of projected future cash flows of each acquired intangible asset, the discount rate used to discount those cash flows to present value, the assessment of the asset’s life cycle, and the consideration of legal, technical, regulatory, economic, and competitive risks.

Finite-lived intangible assets are amortized using the straight-line method over the estimated economic useful lives of the assets, which is the period during which expected cash flows support the fair value of such intangible assets. We will review finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such an event occurs, management will determine whether there has been impairment by comparing the anticipated undiscounted future net cash flows to the related asset group’s carrying value. If an asset is considered impaired, the asset will be written down to the determined fair value based on discounted cash flows. We also periodically review the useful lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the underlying intangible asset. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase.

In addition, the fair value of indefinite-lived intangible assets will be tested for impairment at least annually, or more frequently if events or circumstances indicate their value may no longer be recoverable and that an impairment loss may have occurred.

~~Valuation of Contingent Consideration Liabilities~~

Certain agreements the Company enters into, including business combinations and licensing agreements, involve the potential payment of future consideration that is contingent upon certain performance and revenue milestones being achieved. Contingent consideration related to business combinations is recorded at the acquisition date at fair value and is remeasured each reporting period using Level 3 inputs with the change in fair value is recognized within sales, general and administrative expense in the consolidated statements of operations and comprehensive income. Contingent consideration is recorded at the acquisition date at fair value and is remeasured each reporting period using Level 3 inputs. The fair value may be determined using a single approach or a combination or approaches. These include an income approach based on various revenue and cost assumptions and applying a probability-weighted average to each outcome and/or a Monte-Carlo valuation model that simulates outcomes based on management estimates. Significant increases or decreases ~~in the fair value of our contingent consideration liabilities can result from changes~~ in ~~discount periods and rates, as well as changes in the timing and amount of projected revenue or estimates in the timing or likelihood of achieving revenue-based milestones.~~

There have been no ~~other~~ material changes to our critical accounting policies from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019.

Recently Issued Accounting Standards

For information with respect to recently issued accounting standards and the impact of these standards on our condensed consolidated financial statements, see Note “2. Summary of Significant Accounting Policies” to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to various market risks, which may result in potential losses arising from adverse changes in market rates, such as interest rates and foreign exchange rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes and do not believe we are exposed to material market risk with respect to our cash and cash equivalents and/or our marketable investments.

Interest Rate Risk. We had cash and cash equivalents of ~~$65.6~~$80.1 million as of September 30, ~~2017,~~2020, which consisted of funds held in general checking and savings accounts. In addition, we had marketable investments of ~~$153.2~~$188.6 million, which consisted primarily of commercial paper, corporate bonds, ~~non-U.S. government debt securities,~~ U.S. agency and government sponsored securities, and U.S. states and ~~municipalities and U.S. Treasury.~~municipalities. Our investment policy is focused on the preservation of capital and supporting our liquidity needs. Under the policy, we invest in highly rated securities, while limiting the amount of credit exposure to any one issuer other than the U.S. government. We do not invest in financial instruments for trading or speculative purposes, nor do we use leveraged financial instruments. We utilize external investment managers who adhere to the guidelines of our investment policy. The revolving loans under our Credit Agreement bear interest at: 1) the adjusted LIBO rate or adjusted EURIBO rate, as applicable, plus an applicable rate, for euro currency revolving borrowing; or 2) an alternate base rate plus an applicable rate, for revolving borrowing in U.S. Dollars. As of September 30, 2020, there were no borrowings outstanding under the Credit Agreement. A hypothetical 100 basis point change in interest rates would not have a material impact on the value of our cash and cash equivalents or marketable investments.

Foreign Exchange Risk Management. We operate in countries other than the United States, and, therefore, we are exposed to foreign currency risks. We bill most sales outside of the United States in local currencies, primarily euro and Japanese yen, with some sales being denominated in other currencies. We expect that the percentage of our sales denominated in foreign currencies may increase in the foreseeable future as we continue to expand into international markets. When sales or expenses are not denominated in U.S. dollars, a fluctuation in exchange rates could affect our net income. We do not believe our net income attributable to Penumbra, Inc. would be materially impacted by an immediate 10% adverse change in foreign exchange rates. We do not currently hedge our exposure to foreign currency exchange rate fluctuations; however, we may choose to hedge our exposure in the future.

We do not believe that inflation and changes in prices had a significant impact on our results of operations as of and for ~~any periods presented on our condensed consolidated financial statements.~~the period ended September 30, 2020.

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ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

An evaluation as of September 30, ~~2017~~2020 was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our “disclosure controls and procedures,” which are defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ~~(“the Exchange~~(the “Exchange Act”), as controls and other procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at September 30, ~~2017.~~2020.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarterly period ended September 30, ~~2017~~2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our principal executive officer and principal financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

~~We were contacted~~For information with respect to Legal Proceedings, see Note “9. Commitments and Contingencies” to our condensed consolidated financial statements in 2015 by the attorney for a potential product liability claimant who allegedly suffered injuries as a result of an aneurysm procedure in which the Penumbra Coil 400 was used. On February 19, 2016, a complaint for damages was filed on behalfPart I, Item 1 of this claimant against the Company and the hospital involved in the procedure (Montgomery v. Penumbra, Inc., et al., Case No. 16-2-04050-1 SEA, Superior Court of the State of Washington, King County). The suit alleges liability primarily under the Washington Product Liability Act (“WPLA”) and sought both compensatory and punitive damages without a specific damages claim. BasedQuarterly Report on the Company’s preliminary motion, the punitive damages claim was dismissed in May 2016, along with several of the other causes of actions subsumed by the WPLA. In recent submissions, plaintiffs claimed economic and non-economic damages in an amount substantially in excess of our insurance coverage. The parties reached a preliminary agreement to settle this matter on confidential terms at a mediation held November 1, 2017. The settlement is subject to finalization and does not have a material financial impact on the Company. If for any reason the settlement is not finalized, the case would continue in the discovery phase, with a trial currently set for April 2018. We ~~would continue to vigorously defend the litigation, as we believe there are substantial questions regarding causation, liability and damages.~~ ~~If the case proceeds to trial, the results of any jury trial and the damages that a jury might award are inherently uncertain.~~Form 10-Q.

From time to time, we are subject to other claims and assessments in the ordinary course of business. We are not currently a party to any such litigation matter that, individually or in the aggregate, is expected to have a material adverse effect on our business, financial condition, results of operations or cash flows.

ITEM 1A. RISK FACTORS.

There have been no material changes to our risk factors reported in, or new factors identified since the filing of, our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2019, which was filed with the SEC on February ~~28, 2017.~~26, 2020, except as set forth below.

The ongoing effects of the COVID-19 pandemic could adversely affect our business, financial condition, results of operations, or cash flows.

In December 2019, a strain of coronavirus, known as COVID-19, surfaced in Wuhan, China and resulted in an outbreak throughout the world. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. Governments, public institutions, and other organizations in countries and localities throughout the world have taken and are continuing to take certain emergency measures to combat the spread of COVID-19, including implementation of restrictions on travel and orders that restrict the operations of institutions such as schools and businesses. While the full impact of the COVID-19 outbreak and government response is not yet known, we have experienced negative impacts from this pandemic and it could materially harm our business, results of operations and financial condition in the future.

For example, on March 18, 2020, the United States Centers for Medicare & Medicaid Services released guidance for U.S. healthcare providers recommending the delay of elective surgeries and non-essential medical, surgical, and dental procedures in order to preserve personal protective equipment, beds, and ventilators for use in combating COVID-19. This guidance and similar guidance from other public health authorities resulted in the deferral of procedures in which our products are used, which thereby reduced demand for our products in the relevant periods. Any similar guidance in the future could also further reduce demand for our products in future periods. Furthermore, once the COVID-19 pandemic subsides there may be constraints in the capacities and financial resources of hospitals and other healthcare providers to perform procedures that had been deferred due to COVID-19, which could have an adverse effect on demand for our products following the end of the pandemic. Many hospitals have also implemented restrictions on vendor access, potentially limiting our ability to provide product and case support.

In addition, due to domestic and international governmental orders restricting certain activities in response to COVID-19, including in Alameda, California, where our corporate headquarters and many of our operations, including our principal manufacturing facility, are located, we continue to experience certain disruptions in our business, including changes to our on-site operations to reduce manufacturing capacity and implement social distancing, reductions in our suppliers’ ability to source, maintain inventory and ship raw materials in alignment with our demands, work stoppages, slowdowns and delays, including having most of our employees working outside of our offices, travel restrictions, reduced access to our customers for product training and case support, and cancellation of events, delays in product development efforts and related clinical trials and regulatory clearances and approvals, and other negative impacts on our capacity to manufacture, our suppliers’ capacity to source and ship raw materials and our distributors’ ability to sell and support the use of our products.

The COVID-19 pandemic has also caused significant uncertainty and volatility in global financial markets and the trading prices for the common stock of medical device companies, including Penumbra. Due to such volatility, we may not be able to raise additional capital, if needed, on favorable terms, or at all. Further adverse economic events resulting from the COVID-19 pandemic, including a prolonged recession, depression or other sustained economic downturn, could materially and adversely affect our business, access to capital markets and the value of our common stock.

The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. We do not yet know the full extent of potential impacts on our business, healthcare systems, the medical device industry or the global economy as a whole. However, these effects could adversely impact our business, financial condition, results of operations, or cash flows.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

~~Issuer Purchases~~None.

Table of ~~Equity Securities~~Contents

Period
(a)
Total Number of Shares Purchased₍₁₎

(b)
Average Price Paid per Share

(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

(d)
Maximum Dollar Value of Shares of Shares that May Yet be Purchased Under the Plans or Programs
July 1, 2017 - July 31, 2017 —
—
—
—
August 1, 2017 - August 31, 2017 463
86.65
—
—
September 1, 2017 - September 30, 2017 —
—
—
—
Total 463
86.65
—
—

⁽¹⁾During the three months ended September 30, 2017, the Company withheld 463 shares of restricted stock at an aggregate cost of approximately $40,119, as permitted by the applicable equity award agreements, to satisfy employee tax withholding requirements related to the vesting of restricted stock awards.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURE.

None.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS.

Exhibit Number

Description

Form

File No.

Exhibit(s)

Filing Date

31.1*

Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*

Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1**

Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.

101*

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2017~~2020 formatted in Inline Extensible Business Reporting Language ~~(XBRL) include:~~(iXBRL): (i) Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019, (ii) Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, (iii) Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, and ~~(iv)~~(v) Notes to ~~Condensed~~ Consolidated Financial Statements.

104*

Cover Page Interactive Data File (formatted as iXBRL with applicable taxonomy extension information contained in Exhibit 101).

* Filed herewith.

** Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.



		PENUMBRA, INC.
Date: November ~~7, 2017~~2, 2020
	By:	/s/ ~~Sri Kosaraju~~Maggie Yuen
		~~Sri Kosaraju~~Maggie Yuen
		Chief Financial Officer ~~and Head of Strategy~~
		(Principal Financial ~~and Accounting~~ Officer)



	September 30, 2016
(In thousands)	As Previously Reported			As Adjusted
Condensed Consolidated Balance Sheet Data:
Prepaid expenses and other current assets	$	18,665		$	19,209
Total current assets	267,223			267,767
Deferred taxes	13,394			22,059
Total assets	297,279			306,488
Other non-current liabilities	6,081			5,540
Total liabilities	43,425			42,884
Additional paid-in-capital	275,031			267,429
Accumulated deficit	(17,616		)	(264		)
Total stockholders’ equity	253,854			263,604
Total liabilities and stockholders’ equity	297,279			306,488



	Three Months Ended September 30, 2016						Nine Months Ended September 30, 2016
(In thousands, except per share amounts)	As Previously Reported			As Adjusted			As Previously Reported			As Adjusted
Condensed Consolidated Statements of Operations Data:
Provision for (benefit from) income taxes	$	14		$	(12,998	)	$	787		$	(16,564	)
Net (loss) income	$	(1,106	)	$	11,906		$	(141	)	$	17,210
Net (loss) income per share:
Basic	$	(0.04	)	$	0.39		$	0.00		$	0.57
Diluted	$	(0.04	)	$	0.35		$	0.00		$	0.52
Weighted average shares used to compute net (loss) income per share attributable to common stockholders:
Basic	30,604,384			30,604,384			30,269,463			30,269,463
Diluted	30,604,384			33,755,383			30,269,463			33,367,618



	September 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Commercial paper	$	23,471	$	2	$	(1	)	$	23,472
U.S. Treasury	9,004		—		(4		)	9,000
U.S. agency and government sponsored securities	3,600		—		(8		)	3,592
U.S. states and municipalities	10,207		1		(4		)	10,204
Corporate bonds	106,964		48		(77		)	106,935
Total	$	153,246	$	51	$	(94	)	$	153,203



	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Commercial paper	$	4,237	$	1	$	—		$	4,238
U.S. Treasury	4,996		—		—			4,996
U.S. agency and government sponsored securities	8,803		3		(12		)	8,794
U.S. states and municipalities	27,429		1		(75		)	27,355
Corporate bonds	69,009		36		(120		)	68,925
Non-U.S. government debt securities	1,209		—		—			1,209
Total	$	115,683	$	41	$	(207	)	$	115,517



	As of December 31, 2016
	Level 1		Level 2		Total Fair Value
Financial Assets
Cash equivalents:
Money market funds	$	873	$	—	$	873
Marketable investments:
Commercial paper	—		4,238		4,238
U.S. Treasury	4,996		—		4,996
U.S. agency and government sponsored securities	—		8,794		8,794
U.S. states and municipalities	—		27,355		27,355
Corporate bonds	—		68,925		68,925
Non-U.S. government debt securities	—		1,209		1,209
Total	$	5,869	$	110,521	$	116,390



	September 30, 2017		December 31, 2016
Prepaid tax	$	1,023	$	4,656
Prepaid expenses	5,213		4,573
Other current assets	8,228		9,498
Prepaid expenses and other current assets	$	14,464	$	18,727



Cash, net of working capital and financial debt adjustments	$	9,918
Fair value of contingent consideration for milestone payments	4,343
Contract purchase price	$	14,261
Consideration for settlement of pre-existing receivable due from Crossmed to Penumbra	3,273
Total value of consideration transferred	$	17,534



	Acquisition-Date Fair Value			Estimated Useful Life of Finite-Lived Intangible Assets
Tangible assets acquired and (liabilities) assumed:
Accounts receivable	$	4,406
Inventories	1,343
Other current and non-current assets	1,316
Property and equipment, net	829
Accounts payable	(740		)
Accrued liabilities and obligations for short-term debt and credit facilities	(2,164		)
Deferred tax liabilities	(2,472		)
Other non-current liabilities	(797		)
Intangible assets acquired:
Customer relationships	$	6,790		15 years
Other	1,750			5 years
Goodwill	7,273
Total purchase price	$	17,534



	Total Company
Balance as of December 31, 2016	$	—
Acquisition of Crossmed⁽¹⁾	7,273
Foreign currency translation	176
Balance as of September 30, 2017	$	7,449



	Number of Shares		Weighted-Average Exercise Price
Balance at December 31, 2016	2,876,955		$	14.63
Options exercised	(678,825	)	6.21
Options canceled	(2,866	)	16.98
Balance at September 30, 2017	2,195,264		17.24



	Number of Shares		Weighted -Average Grant Date Fair Value
Unvested at December 31, 2016	1,002,944		$	29.44
Granted	99,638		80.04
Vested	(325,023	)	24.79
Canceled/Forfeited	(20,687	)	45.22
Unvested and expected to vest at September 30, 2017	756,872		37.67



	Three Months Ended September 30, 2017									Three Months Ended September 30, 2016
	Marketable Investments			Currency Translation Adjustments			Total			Marketable Investments			Currency Translation Adjustments			Total
Balance at beginning of the period	$	(38	)	$	(4,657	)	$	(4,695	)	$	206		$	(2,785	)	$	(2,579	)
Other comprehensive income before reclassifications:
Unrealized gains (losses) — marketable investments	54			—			54			(178		)	—			(178		)
Foreign currency translation gains (losses)	—			5,845			5,845			—			(901		)	(901		)
Income tax effect — benefit	—			—			—			63			3			66
Net of tax	54			5,845			5,899			(115		)	(898		)	(1,013		)
Amounts reclassified from accumulated other comprehensive income to earnings:
Realized losses — marketable investments	—			—			—			1			—			1
Income tax effect — expense	—			—			—			(1		)	—			(1		)
Net of tax	—			—			—			—			—			—
Net current-year other comprehensive income (loss)	54			5,845			5,899			(115		)	(898		)	(1,013		)
Balance at end of the period	$	16		$	1,188		$	1,204		$	91		$	(3,683	)	$	(3,592	)



	Nine Months Ended September 30, 2017									Nine Months Ended September 30, 2016
	Marketable Investments			Currency Translation Adjustments			Total			Marketable Investments			Currency Translation Adjustments			Total
Balance at beginning of the period	$	(105	)	$	(4,583	)	$	(4,688	)	$	(163	)	$	(1,952	)	$	(2,115	)
Other comprehensive income before reclassifications:
Unrealized gains —marketable investments	157			—			157			401			—			401
Foreign currency translation gains (losses)	—			5,771			5,771			—			(1,732		)	(1,732		)
Income tax effect — (expense) benefit	—			—			—			(145		)	1			(144		)
Net of tax	157			5,771			5,928			256			(1,731		)	(1,475		)
Amounts reclassified from accumulated other comprehensive income to earnings:
Realized gains — marketable investments	(36		)	—			(36		)	(3		)	—			(3		)
Income tax effect — benefit	—			—			—			1			—			1
Net of tax	(36		)	—			(36		)	(2		)	—			(2		)
Net current-year other comprehensive income (loss)	121			5,771			5,892			254			(1,731		)	(1,477		)
Balance at end of the period	$	16		$	1,188		$	1,204		$	91		$	(3,683	)	$	(3,592	)



Period	(a) Total Number of Shares Purchased₍₁₎	(b) Average Price Paid per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Dollar Value of Shares of Shares that May Yet be Purchased Under the Plans or Programs
July 1, 2017 - July 31, 2017	—	—	—	—
August 1, 2017 - August 31, 2017	463	86.65	—	—
September 1, 2017 - September 30, 2017	—	—	—	—
Total	463	86.65	—	—