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 March 31, ~~2019~~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 every Interactive Data File required to be submitted 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 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☐

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 April ~~23, 2019,~~21, 2020, the registrant had ~~34,737,497~~35,074,352 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)

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Operations

Condensed Consolidated Statements of Comprehensive Income (Loss)

Condensed Consolidated Statements of Stockholders’ Equity

Condensed Consolidated Statements of Cash Flows

Notes to Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2624

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

3433

Item 4.

Controls and Procedures

3534

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1.1A.

~~Legal Proceedings~~Risk Factors

3635

~~Item 1A.~~

~~Risk Factors~~

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

3635

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosure

PART I - FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

Penumbra, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands)


	March 31, 2019			December 31, 2018				March 31, 2020		December 31, 2019
Assets							Assets
Current assets:							Current assets:
Cash and cash equivalents	$	95,606		$	67,850		Cash and cash equivalents	$	72,456	$	72,779
Marketable investments	99,241			133,039			Marketable investments	95,766		116,610
Accounts receivable, net of doubtful accounts of $2,877 and $2,782 at March 31, 2019 and December 31, 2018, respectively	94,679			81,896
Accounts receivable, net of allowance for credit losses of $2,055 and net of doubtful accounts of $2,946 at March 31, 2020 and December 31, 2019, respectively							Accounts receivable, net of allowance for credit losses of $2,055 and net of doubtful accounts of $2,946 at March 31, 2020 and December 31, 2019, respectively	103,963		105,901
Inventories	121,691			115,741			Inventories	166,152		152,992
Prepaid expenses and other current assets	11,869			12,200			Prepaid expenses and other current assets	15,403		14,852

Total current assets	423,086			410,726			Total current assets	453,740		463,134
Property and equipment, net	35,380			35,407			Property and equipment, net	58,698		51,812
Operating lease right-of-use assets	42,376			—			Operating lease right-of-use assets	43,168		43,717
Finance lease right-of-use assets							Finance lease right-of-use assets	39,287		39,924
Intangible assets, net	26,813			27,245			Intangible assets, net	25,024		25,407
Goodwill	7,659			7,813			Goodwill	7,509		7,656

Deferred taxes	31,862			32,940			Deferred taxes	32,945		31,305
Other non-current assets	1,613			875			Other non-current assets	3,869		2,946
Total assets	$	568,789		$	515,006		Total assets	$	664,240	$	665,901
Liabilities and Stockholders’ Equity							Liabilities and Stockholders’ Equity
Current liabilities:							Current liabilities:
Accounts payable	$	7,692		$	8,176		Accounts payable	$	15,843	$	15,111
Accrued liabilities	58,032			57,886			Accrued liabilities	65,335		67,630
Current operating lease liabilities	3,688			—			Current operating lease liabilities	4,435		4,142
Current finance lease liabilities							Current finance lease liabilities	2,461		4,165
Total current liabilities	69,412			66,062			Total current liabilities	88,074		91,048
Deferred rent	—			7,586

Non-current operating lease liabilities	46,070			—			Non-current operating lease liabilities	46,416		47,242
Non-current finance lease liabilities							Non-current finance lease liabilities	26,483		26,748
Other non-current liabilities	16,644			18,943			Other non-current liabilities	15,150		15,250
Total liabilities	132,126			92,591			Total liabilities	176,123		180,288
Commitments and contingencies (Note 9)							Commitments and contingencies (Note 9)
Stockholders’ equity:							Stockholders’ equity:
Common stock	34			34			Common stock	35		35
Additional paid-in capital	419,514			415,084			Additional paid-in capital	435,724		430,659

Accumulated other comprehensive loss	(2,578		)	(1,942		)	Accumulated other comprehensive loss	(4,575)		(2,324)
Retained earnings	19,762			9,064			Retained earnings	57,749		57,522
Total Penumbra, Inc. stockholders’ equity	436,732			422,240			Total Penumbra, Inc. stockholders’ equity	488,933		485,892
Non-controlling interest	(69		)	175			Non-controlling interest	(816)		(279)
Total stockholders’ equity	436,663			422,415			Total stockholders’ equity	488,117		485,613
Total liabilities and stockholders’ equity	$	568,789		$	515,006		Total liabilities and stockholders’ equity	$	664,240	$	665,901

See accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

Penumbra, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except share and per share amounts)


	Three Months Ended March 31,
	2020		2019
Revenue	$	137,329	$	128,439
Cost of revenue	49,320		44,529
Gross profit	88,009		83,910
Operating expenses:
Research and development	12,946		11,667
Sales, general and administrative	74,453		61,091

Total operating expenses	87,399		72,758
Income from operations	610		11,152
Interest income, net	299		733
Other (expense) income, net	(1,655)		24
(Loss) income before income taxes	(746)		11,909
(Benefit from) provision for income taxes	(1,634)		1,455


Consolidated net income	$	888	$	10,454
Net loss attributable to non-controlling interest	(537)		(244)
Net income attributable to Penumbra, Inc.	$	1,425	$	10,698







Net income attributable to Penumbra, Inc. per share:
Basic	$	0.04	$	0.31
Diluted	$	0.04	$	0.30
Weighted average shares outstanding:
Basic	35,042,912		34,507,279
Diluted	36,362,726		36,213,164

Three Months Ended March 31,
2019 2018
Revenue $ 128,439
$ 102,701
Cost of revenue 44,529
36,144
Gross profit 83,910
66,557
Operating expenses:
Research and development 11,667
8,013
Sales, general and administrative 61,091
54,499
Total operating expenses 72,758
62,512
Income from operations 11,152
4,045
Interest income, net 733
749
Other income (expense), net 24
(290 )
Income before income taxes and equity in losses of unconsolidated investee 11,909
4,504
Provision for (benefit from) income taxes 1,455
(1,938 )
Income before equity in losses of unconsolidated investee 10,454
6,442
Equity in losses of unconsolidated investee —
(951 )
Consolidated net income $ 10,454
$ 5,491
Net loss attributable to non-controlling interest (244 ) —
Net income attributable to Penumbra, Inc. $ 10,698
$ 5,491

Net income attributable to Penumbra, Inc. per share:
Basic $ 0.31
$ 0.16
Diluted $ 0.30
$ 0.15
Weighted average shares outstanding:
Basic 34,507,279
33,846,142
Diluted 36,213,164
35,917,051

See accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

Penumbra, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

(in thousands)


	Three Months Ended March 31,
	2020		2019
Consolidated net income	$	888	$	10,454
Other comprehensive loss, net of tax:
Foreign currency translation adjustments, net of tax	(1,634)		(1,098)
Net change in unrealized (losses) gains on available-for-sale securities, net of tax	(617)		462
Total other comprehensive loss, net of tax	(2,251)		(636)
Consolidated comprehensive (loss) income	(1,363)		9,818
Net loss attributable to non-controlling interest	(537)		(244)
Comprehensive (loss) income attributable to Penumbra, Inc.	$	(826)	$	10,062

Three Months Ended March 31,
2019 2018
Consolidated net income $ 10,454
$ 5,491
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments, net of tax (1,098 ) 1,386
Net change in unrealized gains (losses) on available-for-sale securities, net of tax 462
(318 )
Total other comprehensive (loss) income, net of tax (636 ) 1,068
Consolidated comprehensive income $ 9,818
$ 6,559
Net loss attributable to non-controlling interest (244 ) —
Comprehensive income attributable to Penumbra, Inc. $ 10,062
$ 6,559

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 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
—
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 —
—
—
—
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


	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, 2019	35,001,581	$	35	$	430,659		$	(2,324)	$	57,522	$	485,892	$	(279)	$	485,613
Issuance of common stock	81,485	—		396			—		—		396		—		396


Shares held for tax withholding	(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

⁽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.

Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Retained Earnings Total Penumbra, Inc. Stockholders’ Equity Non-Controlling Interest Total Stockholders’ Equity
Shares Amount
Balance at December 31, 2017 33,685,146
$ 33
$ 396,810
$ 1,569
$ 1,996
$ 400,408
$ —
$ 400,408
Issuance of common stock 232,943
1
1,328
—
—
1,329
—
1,329
Issuance of common stock pursuant to royalty buy-out 53,256
—
5,256
—
—
5,256
—
5,256
Shares held for tax withholdings (38,677 ) —
(3,530 ) —
—
(3,530 ) —
(3,530 )
Stock-based compensation —
—
4,435
—
—
4,435
—
4,435
Cumulative effect adjustments⁽¹⁾
—
—
—
—
464
464
—
464
Other comprehensive income —
—
—
1,068
—
1,068
—
1,068
Net income —
—
—
—
5,491
5,491
—
5,491
Balance at March 31, 2018 33,932,668
$ 34
$ 404,299
$ 2,637
$ 7,951
$ 414,921
$ —
$ 414,921


	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	—		1,071			—		—		1,071		—		1,071

Shares held for tax withholding	(14,284)	—		(2,098)			—		—		(2,098)		—		(2,098)
Stock-based compensation	—	—		5,457			—		—		5,457		—		5,457
Other comprehensive income	—	—		—			(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

~~(1) Cumulative effect adjustments relate~~.See accompanying notes to the ~~adoption~~unaudited condensed consolidated financial statements

Table of Accounting Standard Update (“ASU”) No. 2014-09 - Revenue from Contracts with Customers (“Topic 606”), ASU No. 2016-16 - Income Taxes (“Topic 740”), and ASU No. 2018-02 - Income Statement - Reporting Comprehensive Income (“Topic 220”).Contents

Penumbra, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


	Three Months Ended March 31,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income	$	888	$	10,454
Adjustments to reconcile consolidated net income to net cash used in operating activities:
Depreciation and amortization	2,959		1,804

Stock-based compensation	5,689		5,095



Inventory write-downs	1,097		658






Deferred taxes	(1,502)		1,078


Other	168		396
Changes in operating assets and liabilities:
Accounts receivable	(238)		(13,373)
Inventories	(15,090)		(6,728)
Prepaid expenses and other current and non-current assets	(1,544)		45
Accounts payable	921		(1,503)
Accrued expenses and other non-current liabilities	732		6
Net cash used in operating activities	(5,920)		(2,068)
CASH FLOWS FROM INVESTING ACTIVITIES:




Proceeds from sales of marketable investments	7,188		1,018
Proceeds from maturities of marketable investments	12,980		33,300

Purchases of property and equipment	(10,131)		(2,463)



Net cash provided by investing activities	10,037		31,855
CASH FLOWS FROM FINANCING ACTIVITIES:



Proceeds from exercises of stock options	396		1,071


Payment of employee taxes related to vested stock	(2,105)		(2,098)
Payments of finance lease obligations	(1,958)		—
Payment of acquisition-related obligations	(683)		(683)


Net cash used in financing activities	(4,350)		(1,710)
Effect of foreign exchange rate changes on cash and cash equivalents	(90)		(321)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(323)		27,756
CASH AND CASH EQUIVALENTS—Beginning of period	72,779		67,850
CASH AND CASH EQUIVALENTS—End of period	$	72,456	$	95,606
NONCASH INVESTING AND FINANCING ACTIVITIES:


Purchase of property and equipment funded through accounts payable and accrued liabilities	$	1,702	$	860



Right-of-use assets obtained in exchange for lease obligations	$	325	$	94

See accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

Penumbra, Inc.

~~Condensed Consolidated Statements of Cash Flows~~

~~(unaudited)~~

~~(in thousands)~~

Three Months Ended March 31,
2019 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,454
$ 5,491
Adjustments to reconcile consolidated net income to net cash (used in) provided by operating activities:
Depreciation and amortization 1,804
1,399
Stock-based compensation 5,095
4,154
Loss on non-marketable equity investments —
951
Inventory write-downs 658
300
Deferred taxes 1,078
(2,209 )
Change in fair value of contingent consideration —
442
Other 396
389
Changes in operating assets and liabilities:
Accounts receivable (13,373 ) (6,109 )
Inventories (6,728 ) 208
Prepaid expenses and other current and non-current assets 45
2,986
Accounts payable (1,503 ) 622
Accrued expenses and other non-current liabilities 6
2,084
Net cash (used in) provided by operating activities (2,068 ) 10,708
CASH FLOWS FROM INVESTING ACTIVITIES:

Contributions to non-marketable investments —
(352 )
Purchases of marketable investments —
(42,552 )
Proceeds from sales of marketable investments 1,018
—
Proceeds from maturities of marketable investments 33,300
43,540
Purchases of property and equipment (2,463 ) (2,823 )
Net cash provided by (used in) investing activities 31,855
(2,187 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of stock options 1,071
1,328
Payment of employee taxes related to vested common and restricted stock (2,098 ) (3,530 )
Payment of acquisition-related obligations (683 ) (4,323 )
Other —
(219 )
Net cash used in financing activities (1,710 ) (6,744 )
Effect of foreign exchange rate changes on cash and cash equivalents (321 ) 391
NET INCREASE IN CASH AND CASH EQUIVALENTS 27,756
2,168
CASH AND CASH EQUIVALENTS—Beginning of period 67,850
50,637
CASH AND CASH EQUIVALENTS—End of period $ 95,606
$ 52,805
NONCASH INVESTING AND FINANCING ACTIVITIES:
Common shares issued as consideration in connection with a buyout agreement (Notes 9 and 10) $ —
$ 5,256
Purchase of property and equipment funded through accounts payable and accrued liabilities $ 860
$ 427

~~See accompanying notes to the unaudited condensed consolidated financial statements~~

~~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 innovative therapies. The Company designs, develops, manufactures and markets ~~medical devices~~novel products and has a broad portfolio ~~of products~~ that addresses challenging medical conditions ~~and~~in markets with significant ~~clinical needs.~~unmet need.

2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying condensed consolidated balance sheet as of March 31, ~~2019,~~2020, the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive income (loss), and the condensed consolidated statements of stockholders’ equity for the three months ended March 31, ~~2019~~2020 and ~~2018, the~~ ~~condensed consolidated statements of comprehensive income~~ ~~for the three months ended March 31,~~ 2019, ~~and 2018, the~~ ~~condensed consolidated statements of stockholders’ equity~~ ~~for the three months ended March 31, 2019 and 2018,~~ and the condensed consolidated statements of cash flows for the three months ended March 31, ~~2019~~2020 and ~~2018~~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, ~~2018~~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 March 31, ~~2019,~~2020, the results of its operations for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, the changes in comprehensive income and stockholders’ equity for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, and the cash flows for the three months ended March 31, ~~2019~~2020 and ~~2018.~~2019. The results for the three months ended March 31, ~~2019~~2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019~~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 months ended March 31, 2019 to conform to the presentation for the three months ended March 31, 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, ~~2018,~~2019, included in the Company’s Annual Report on Form 10-K. There have been no changes to the Company’s significant accounting policies during the three months ended March 31, ~~2019,~~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, ~~2018,~~2019, other than ~~changes to~~ the ~~Company’s leasing policy~~changes described below in connection with the adoption of the guidance under Accounting ~~Standards Codification~~Standard Update (“~~ASC”~~ASU”) ~~842.~~No. 2016-13.

The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its 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 balances and transactions have been 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,~~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.

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

~~Recently Adopted Accounting Standards~~

~~On January 1, 2019, the Company adopted Accounting Standard Update (“ASU”) No.~~ ~~2016-02, Leases (Topic 842), and its associated amendments~~ using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. There was no cumulative-effect adjustment recorded to retained earnings upon adoption. Under the standard, a lessee is required to recognize a lease liability and ROU asset for all leases. The new guidance also modified the classification criteria and requires additional disclosures to enable users 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 continues to depend primarily on its classification. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical lease classification, its assessment on whether a contract was or contains a lease, and its initial direct costs for any leases that existed prior to January 1, 2019. In addition, the Company elected the following transitional ~~practical expedients: (1) the short-term lease exception and (2) to not separate its non-lease components for its real estate, vehicle and equipment leases.~~ ~~The impact of adoption and additional disclosures required by the ASU have been included in “Significant Accounting Policies - Leases” below and in Note~~ ~~“8. Leases.”~~

~~Significant Accounting Policies - Leases~~

The Company adopted the guidance under ASC 842 on January 1, 2019 using the modified retrospective transition approach. There was no cumulative-effect adjustment recorded to retained earnings upon adoption.

Under ASC 842, the Company determines if an arrangement is a lease at inception. In addition, the Company determines whether leases meet the classification criteria of a finance or operating lease at the lease commencement date considering: (1) whether the lease transfers ownership of the underlying asset to the lessee at the end of the lease term, (2) whether the lease contains a bargain purchase option, (3) whether the lease term is for a major part of the remaining economic life of the underlying asset, (4) whether the present value of the sum of the lease payments and residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset, and (5) whether the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. As of March 31, 2019, the Company's contracts that contained a lease consisted of real estate, equipment and vehicle leases. As of the date of adoption of ASC 842 and March 31, 2019, the Company did not have material finance leases.

Operating leases are included in operating lease right-of-use assets, current operating lease liabilities, and non-current operating lease liabilities in our condensed consolidated balance sheet. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date if the rate implicit in the lease is not readily determinable. The determination of the Company’s incremental borrowing rate requires management judgment including, the development of a synthetic credit rating and cost of debt as the Company currently does not carry any debt. The operating lease ROU assets also include adjustments for prepayments, accrued lease payments and exclude lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. Operating lease cost is recognized on a straight-line basis over the expected lease term. Lease agreements entered into after the adoption of ASC 842 that include lease and non-lease components are accounted for as a single lease component. Lease agreements with a noncancelable term of less than 12 months are not recorded on the Company’s condensed consolidated balance sheet. For more information about the impact of adoption and disclosures on the Company’s leases, refer to Note “~~8. Leases~~.”

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.

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~Recent Accounting Guidance~~

Recently ~~Issued~~Adopted Accounting Standards

~~In June 2016,~~On January 1, 2020, the ~~Financial Accounting Standards Board (“FASB”) issued~~Company adopted ASU No. 2016-13, Financial ~~Instruments-Credit Losses.~~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 ~~changes how entities will measure credit losses~~significantly changed the impairment model for most financial assets and certain other instruments, ~~that are not~~including accounts receivable and available-for-sale securities.

For financial assets measured at ~~fair value~~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. The Company will recognize an~~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, on(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 ~~rather than deductions in amortized cost.~~ ~~In April 2019, the FASB issued ASU No. 2019-04 which provides~~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 ~~clarification and address stakeholders’ specific issues about certain aspects of the amendments in the previously issued ASU No. 2016-13.~~ The standard is effective for fiscal years and interim periods beginning after December 15, 2019. Early adoption is permitted for all periods beginning after December 15, 2018. The Company is currently evaluatinginformation on the impact of ~~adopting this standard.~~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.”

~~In August 2018,~~On January 1, 2020, the ~~FASB issued~~Company adopted ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value ~~Measurement~~.Measurement. The primary focus of the standard is to improve the effectiveness of the disclosure requirements for fair value measurements. The Company 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 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 allowance for credit losses on the Company’s accounts receivables.

The Company is also exposed to credit losses through its 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.

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 Policies Update - Accounts Receivable

Accounts receivable are measured at amortized cost less the allowances for credit losses. In accordance with ASU 2016-13, as of January 1, 2020, the Company 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 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 customer’s credit quality classification. Prior to the adoption of ASU 2016-13, the Company recognized losses when a loss was incurred or deemed probable.

At March 31, 2020, the Company reported $104.0 million of accounts receivable, net of credit losses of $2.1 million. Changes in the allowance for credit losses were not material for the three months ended March 31, 2020.

Recently Issued Accounting Standards

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes— Simplifying the Accounting for Income Taxes. The standard isintends to simplify and reduce the cost of accounting for 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 adds guidance to reduce complexity in certain areas, including accounting for franchise taxes that are partially based on income, transactions with a government that result with a step up in the tax basis of goodwill, enacted changes in tax law during interim periods, and allocating taxes to members of a consolidated group which are not subject to tax. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2019.~~ ~~An entity~~2020. Early adoption is permitted ~~to early adopt the removed or modified disclosures upon the issuance of the standard and may delay adoption of the additional disclosures until their effective date.~~ for all periods 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)

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 March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


	March 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Loss		Fair Value
Commercial paper	$	4,989	$	2	$	—	$	—	$	4,991
U.S. treasury	2,497		3		—		—		2,500
U.S. agency and government sponsored securities	2,499		30		—		—		2,529
U.S. states and municipalities	4,887		50		—		—		4,937
Corporate bonds	81,272		69		(532)		—		80,809

Total	$	96,144	$	154	$	(532)	$	—	$	95,766

March 31, 2019
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
Commercial paper $ 1,500
$ —
$ —
$ 1,500
U.S. treasury 2,400
—
(9 ) 2,391
U.S. agency and government sponsored securities 7,708
21
(14 ) 7,715
U.S. states and municipalities 3,631
1
—
3,632
Corporate bonds 84,039
94
(130 ) 84,003
Total $ 99,278
$ 116
$ (153 ) $ 99,241


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

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

December 31, 2018
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
Commercial paper $ 13,701
$ —
$ (3 ) $ 13,698
U.S. treasury 6,400
—
(22 ) 6,378
U.S. agency and government sponsored securities 7,699
18
(27 ) 7,690
U.S. states and municipalities 5,134
—
(12 ) 5,122
Corporate bonds 100,606
14
(469 ) 100,151
Total $ 133,540
$ 32
$ (533 ) $ 133,039

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

~~Penumbra, Inc.~~

~~Notes~~March 31, 2020, the total amortized cost basis of the Company’s impaired available-for-sale securities exceeded its fair value by $0.5 million. 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 months ended March 31, 2020 no 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 twelve months or for twelve months or more as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


	March 31, 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




Corporate bonds	$	60,387	$	(532)	$	—	$	—	$	60,387	$	(532)

Total	$	60,387	$	(532)	$	—	$	—	$	60,387	$	(532)

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

March 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
U.S. treasury $ —
$ —
$ 2,391
$ (9 ) $ 2,391
$ (9 )
U.S. agency and government sponsored securities —
—
4,211
(14 ) 4,211
(14 )
Corporate bonds 8,307
(6 ) 31,435
(124 ) 39,742
(130 )
Total $ 8,307
$ (6 ) $ 38,037
$ (147 ) $ 46,344
$ (153 )

December 31, 2018
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 $ 12,208
$ (3 ) $ —
$ —
$ 12,208
$ (3 )
U.S. treasury —
—
6,378
(22 ) 6,378
(22 )
U.S. agency and government sponsored securities 1,436
(5 ) 2,759
(22 ) 4,195
(27 )
U.S. states and municipalities 1,529
(5 ) 3,593
(7 ) 5,122
(12 )
Corporate bonds 58,961
(176 ) 33,215
(293 ) 92,176
(469 )
Total $ 74,134
$ (189 ) $ 45,945
$ (344 ) $ 120,079
$ (533 )


	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)	$	—	$	—	$	7,875	$	(3)

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

The following table presents the contractual maturities of the Company’s marketable investments as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


	March 31, 2019		December 31, 2018			March 31, 2020		December 31, 2019
	Fair Value		Fair Value			Fair Value		Fair Value
Due in less than one year	$	53,205	$	83,391	Due in less than one year	$	37,433	$	51,990
Due in one to five years	46,036		49,648		Due in one to five years	58,333		64,620
Total	$	99,241	$	133,039	Total	$	95,766	$	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.

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

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 tables set forth the Company’s financial assets measured at fair value by level within the fair value hierarchy as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


	As of March 31, 2020
	Level 1		Level 2		Level 3		Fair Value
Financial Assets
Cash equivalents:

Money market funds	$	42,546	$	—	$	—	$	42,546



Marketable investments:
Commercial paper	—		4,991		—		4,991
U.S. treasury	2,500		—		—		2,500
U.S. agency and government sponsored securities	—		2,529		—		2,529
U.S. states and municipalities	—		4,937		—		4,937
Corporate bonds	—		80,809		—		80,809
Total	2,500		93,266		—		95,766
Total	$	45,046	$	93,266	$	—	$	138,312

As of March 31, 2019
Level 1 Level 2 Level 3 Fair Value
Financial Assets
Cash equivalents:
Money market funds $ 44,331
$ —
$ —
$ 44,331
Marketable investments:
Commercial paper —
1,500
—
1,500
U.S. treasury 2,391
—
—
2,391
U.S. agency and government sponsored securities —
7,715
—
7,715
U.S. states and municipalities —
3,632
—
3,632
Corporate bonds —
84,003
—
84,003
Total $ 46,722
$ 96,850

$ —

$ 143,572
Financial Liabilities:
Contingent consideration obligations⁽¹⁾
$ —
$ —
$ 1,248
$ 1,248
Total $ —
$ —
$ 1,248
$ 1,248


	As of December 31, 2019
	Level 1		Level 2		Level 3		Fair Value
Financial Assets
Cash equivalents:
Commercial paper	$	—	$	9,474	$	—	$	9,474
Money market funds	24,054		—		—		24,054
Marketable investments:
Commercial paper	—		7,457		—		7,457
U.S. treasury	4,979		—		—		4,979
U.S. agency and government sponsored securities	—		2,518		—		2,518
U.S. states and municipalities	—		4,893		—		4,893
Corporate bonds	—		96,763		—		96,763
Total	4,979		111,631		—		116,610

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

Contingent Consideration Obligations

⁽¹⁾~~More~~As of March 31, 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 relates 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 three months ended March 31, 2020. For more information onrelated to the payment of the contingent consideration ~~obligations and the changes in fair value are presented below.~~

liabilities refer to Note “5. Business Combinations.”

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

As of December 31, 2018
Level 1 Level 2 Level 3 Fair Value
Financial Assets
Cash equivalents:
Commercial paper $ —
$ 10,967
$ —
$ 10,967
Money market funds 12,087
—
—
12,087
Marketable investments:
Commercial paper —
13,698
—
13,698
U.S. treasury 6,378
—
—
6,378
U.S. agency and government sponsored securities —
7,690
—
7,690
U.S. states and municipalities —
5,122
—
5,122
Corporate bonds —
100,151
—
100,151
Total $ 18,465
$ 137,628
$ —
$ 156,093
Financial Liabilities:
Contingent consideration obligations⁽¹⁾
$ —
$ —
$ 2,571
$ 2,571
Total $ —
$ —
$ 2,571
$ 2,571

⁽¹⁾~~More information on the contingent consideration obligations and the changes in fair value are presented below.~~

~~Contingent Consideration Obligations~~

As of March 31, 2019 and December 31, 2018, the Company’s contingent consideration liability relates to milestone payments due in connection with the acquisition of Crossmed and is classified as a Level 3 measurement for which fair value is derived from various inputs, including forecasted revenues during the earn-out milestone periods, revenue volatilities, discount rates, and estimates in the likelihood of achieving revenue-based milestones. The fair value of the contingent consideration liability is remeasured each reporting period. The following table presents quantitative information about certain unobservable inputs used in the Level 3 fair value measurement of the Company’s contingent consideration liability, other than the forecasted revenues during the earn-out milestone period:

Fair Value at March 31, 2019 (in thousands) Valuation Method Unobservable Inputs
Input
(range where applicable)
Crossmed:
Revenue-based milestones
$ 1,248
Monte Carlo Simulation Earn-out period over which revenue-based milestone payments are made 2019
Risk-adjusted discount rate 15%
Revenue volatilities for each type of revenue-based milestone 5.1% and 18.4%

The following tables summarize the changes in fair value of the contingent consideration obligation for the three months ended March 31, ~~2019~~2020 and March 31, ~~2018~~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	—
Foreign currency remeasurement	(20)
Balance at March 31, 2020	$	—

Fair Value of Contingent Consideration
Balance at December 31, 2018 $ 2,571
Payments of contingent consideration liabilities (1,296 )
Changes in fair value —
Foreign currency remeasurement (27 )
Balance at March 31, 2019 $ 1,248


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

Payments of contingent consideration liabilities	(1,296)
Changes in fair value	—
Foreign currency remeasurement	(27)
Balance at March 31, 2019	$	1,248

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

Fair Value of Contingent Consideration
Balance at December 31, 2017 $ 4,675
Payments of contingent consideration liabilities (3,017 )
Changes in fair value 442
Foreign currency remeasurement 133
Balance at March 31, 2018 $ 2,233

During the three months ended March 31, 2019, the were no changes to the fair value of the contingent consideration obligation. During the three months ended March 31, 2018, the fair value of the contingent consideration obligation increased by $0.4 million which was recorded in sales, general and administrative expense in the condensed consolidated statements of operations. The fair value of the contingent consideration increased as a result of updates to the underlying forecasts based on actual results to date and changes in estimates. For more information related to the payment of the contingent consideration liabilities refer to Note “5. Asset Acquisitions and Business Combinations.”

~~During the three months ended March 31, 2019 and 2018, the Company did not record impairment charges related to its marketable investments and the~~ Company did not hold any Level 3 marketable investments as of March 31, ~~2019~~2020 or December 31, ~~2018.~~2019. During the three months ended March 31, ~~2019~~2020 and ~~2018,~~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 March 31, ~~2019~~2020 or December 31, ~~2018.~~2019.

4. Balance Sheet Components

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	$	—	$	163	$	2,055

⁽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 three months ended March 31, 2020.

Inventories

The following table shows the components of inventories as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


	March 31, 2020		December 31, 2019
Raw materials	$	23,721	$	21,646
Work in process	20,865		21,651
Finished goods	121,566		109,695
Inventories	$	166,152	$	152,992

March 31,
2019 December 31,
2018
Raw materials $ 18,968
$ 18,829
Work in process 12,502
10,630
Finished goods 90,221
86,282
Inventories $ 121,691
$ 115,741

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Accrued Liabilities

The following table shows the components of accrued liabilities as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


	March 31, 2020		December 31, 2019
Payroll and employee-related cost	$	38,700	$	37,727
Accrued expenses	7,655		7,811
Sales return provision	1,803		1,821



Product warranty	2,331		2,318



Other acquisition-related costs⁽¹⁾	3,000		4,291
Other accrued liabilities	11,846		13,662
Total accrued liabilities	$	65,335	$	67,630

March 31,
2019 December 31,
2018
Payroll and employee-related cost $ 31,940
$ 33,838
Accrued expenses 5,094
4,088
Sales return provision 2,269
2,986
Product warranty 2,077
1,875
Contingent consideration & other acquisition-related costs⁽¹⁾
4,611
4,439
Other accrued liabilities 12,041
10,660
Total accrued liabilities $ 58,032
$ 57,886

⁽¹⁾Amount consists of ~~the current portion of~~a contingent ~~liabilities~~liability related to ~~(1) the cash milestone payments and working capital adjustment liabilities for the 2017 acquisition of Crossmed and (2)~~ an anti-dilution provision ~~for~~from the ~~2018~~ asset acquisition of ~~MVI. Refer to Note “5. Asset Acquisitions and Business Combinations” for more information on the acquisition of Crossmed and asset acquisition of MVI.~~MVI Health Inc (“MVI”) in 2018.

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

The following table shows the changes in the Company’s estimated product warranty accrual, included in accrued liabilities, as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


	March 31, 2019			December 31, 2018				March 31, 2020		December 31, 2019
Balance at the beginning of the period	$	1,875		$	1,088		Balance at the beginning of the period	$	2,318	$	1,875
Accruals of warranties issued	355			1,336			Accruals of warranties issued	195		1,065
Settlements of warranty claims	(153		)	(549		)	Settlements of warranty claims	(182)		(622)
Balance at the end of the period	$	2,077		$	1,875		Balance at the end of the period	$	2,331	$	2,318

Other Non-Current Liabilities

The following table shows the components of other non-current liabilities as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


	March 31, 2020		December 31, 2019
Deferred tax liabilities	$	3,903	$	4,005
Licensing-related cost⁽¹⁾	10,290		10,878

Other non-current liabilities	957		367
Total other non-current liabilities	$	15,150	$	15,250

March 31,
2019 December 31,
2018
Deferred tax liabilities $ 3,972
$ 4,171
Licensing-related cost⁽¹⁾
11,463
11,506
Asset acquisition-related costs⁽²⁾
1,000
2,500
Other non-current liabilities 209
766
Total other non-current liabilities $ 16,644
$ 18,943

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

⁽²⁾~~Asset acquisition-related costs represents the non-current portion of the probable contingent liability related to an anti-dilution provision for the 2018 asset acquisition of MVI.~~

5. ~~Asset Acquisitions and~~ Business Combinations

Payments Related to 2017 Crossmed Acquisition

On July 3, 2017, the Company completed its acquisition of Crossmed, a joint stock company organized under the laws of Italy. The purchase price measurement period was closed as of June 30, 2018.

The Company is obligated to pay additional consideration to the sellers of Crossmed (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 periods ended. There is no limit on the milestone payments that can be paid out. As of ~~March~~December 31, 2019, ~~and December 31, 2018,~~ the Company’s condensed consolidated balance sheet included ~~$1.3~~$1.2 million, ~~and $2.6 million, respectively,~~ in current liabilities primarily related to ~~additional consideration~~the final milestone payment due which was paid during the first quarter of 2020.

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

During the ~~sellers of Crossmed (the “Sellers”) for revenue-based~~three months ended March 31, 2020, the Company made $1.2 million in milestone payments ~~based on net revenue~~of which $0.5 million is presented in operating activities and $0.7 million is presented in financing activities in the ~~years ending December 31, 2018 and 2019, and other~~ ~~working capital and financial debt adjustments.~~ condensed consolidated statement of cash flows.

During the three months ended March 31, 2019, the Company made $1.3 million in milestone payments of which $0.6 million is presented in operating activities and $0.7 million is presented in financing activities in the condensed consolidated statement of cash flows. During the three months ended March 31, 2018, the Company made $4.3 million in payments to the Sellers which is presented in financing activities in the condensed consolidated statement of cash flows.

~~Payments Related to 2018 MVI Asset Acquisition~~

In 2017, the Company and Sixense Enterprises, Inc. (“Sixense”) formed MVI Health Inc. (“MVI”) as a privately-held joint venture for the purpose of exploring healthcare applications of virtual reality technology, with each party holding 50% of the issued and outstanding equity of MVI. On August 31, 2018 (“Transfer Agreement Closing Date”), the Company completed its asset acquisition of MVI ~~pursuant to a Stock Transfer Agreement (the “Transfer Agreement”) between the Company, MVI and Sixense~~ to obtain a controlling interest of MVI for $20.0 million, excluding the additional $4.5 million of probable future payments relating to an anti-dilution provision in the Transfer Agreement. Following the Transfer Agreement Closing Date, the Company owns a 90% controlling interest in MVI and Sixense retains the remaining 10% minority interest. During the year ended December 31, 2018, the Company contributed $0.5 million to MVI related to the anti-dilution provision. ~~As of~~ ~~December 31, 2018~~, ~~the Company’s condensed consolidated balance sheet included~~ ~~$1.5 million and $2.5 million, respectively,~~ ~~in current and non-current liabilities related to the anti-dilution provision in the Transfer Agreement. A~~s of March 31, 2019, the Company’s condensed consolidated balance sheet included $3.0 million and $1.0 million, respectively, in current and non-current liabilities related to the anti-dilution provision in the Transfer Agreement.

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

6. Intangible Assets

Acquired Intangible Assets

The following tables present details of the Company’s acquired finite-lived and indefinite-lived intangible assets, as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands, except weighted-average amortization period):


March 31, 2019	Weighted-Average Amortization Period	Gross Carrying Amount		Accumulated Amortization			Net
As of March 31, 2020									As of March 31, 2020	Weighted-Average Amortization Period	Gross Carrying Amount		Accumulated Amortization		Net
Customer relationships	15.0 years	$	6,688	$	(781	)	$	5,907	Customer relationships	15.0 years	$	6,558	$	(1,203)	$	5,355
Trade secrets and processes	20.0 years	5,256		(329		)	4,927		Trade secrets and processes	20.0 years	5,256		(591)		4,665
Other	5.0 years	1,725		(603		)	1,122		Other	5.0 years	1,691		(930)		761
Total intangible assets subject to amortization	16.1 years	$	13,669	$	(1,713	)	$	11,956	Total intangible assets subject to amortization	16.5 years	$	13,505	$	(2,724)	$	10,781
Intangible assets related to licensed technology		14,857		—			14,857		Intangible assets related to licensed technology		14,243		—		14,243
Total intangible assets		$	28,526	$	(1,713	)	$	26,813	Total intangible assets		$	27,748	$	(2,724)	$	25,024

December 31, 2018
Weighted-Average
Amortization Period
Gross Carrying Amount Accumulated Amortization Net
Customer relationships 15.0 years $ 6,823
$ (681 ) $ 6,142
Trade secrets and processes 20.0 years 5,256
(263 ) 4,993
Other 5.0 years 1,759
(528 ) 1,231
Total intangible assets subject to amortization 16.0 years $ 13,838
$ (1,472 ) $ 12,366
Intangible assets related to licensed technology 14,879
—
14,879
Total intangible assets $ 28,717
$ (1,472 ) $ 27,245


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 customer relationships and other intangible assets subject to amortization relate to the acquisition of Crossmed during the third quarter of 2017. The gross carrying amount and accumulated amortization of these intangible assets are subject to foreign currency translation effects. Refer to Note “5. ~~Asset Acquisitions and~~ 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 during the first quarter of 2018, which is discussed further in Note “9. Commitments and Contingencies” ~~and~~ ~~Note “10. Stockholders’ Equity~~.”

The following table presents the amortization expense recorded related to the Company’s finite-lived intangible assets for the three months ended March 31, ~~2019~~2020 and March 31, ~~2018~~2019 (in thousands):


	Three Months Ended March 31,					Three Months Ended March 31,
	2019		2018			2020		2019
Cost of revenue	$	66	$	31	Cost of revenue	$	66	$	66

Sales, general and administrative	200		216		Sales, general and administrative	194		200
Total	$	266	$	247	Total	$	260	$	266

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

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

as an asset acquisition and recorded an indefinite-lived intangible asset 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 probable future milestone payments not yet paid. ~~As of~~ ~~March 31, 2019, the licensed technology is accounted for as an indefinite-lived intangible asset.~~ Upon the commercialization of the underlying product utilizing the licensed technology, the capitalized amount will be amortized over its estimated useful life.

At the end of each reporting period the Company adjusts the contingent liabilities to reflect the amount of future milestone payments that are probable to be paid. Prior to the commercialization of products utilizing the underlying technology, any changes in the contingent liability are recorded as an adjustment between the liability balances and the gross carrying amount of

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

the indefinite-lived intangible asset. During the three months ended March 31, ~~2019,~~2020, there were ~~no material~~0 changes to the contingent liability related to the ~~License Agreement.~~ exclusive technology license agreement.

As of March 31, ~~2019~~,2020, the balance of the contingent liability related to probable future milestone payments under the License Agreement was ~~$12.4~~$11.7 million, of which ~~$0.9~~$0.8 million and ~~$11.5~~$10.9 million were included in accrued liabilities and other non-current liabilities on the condensed consolidated balance sheet, respectively. As of December 31, ~~2018,~~2019, the balance of the contingent liability related to probable future milestone payments under the License Agreement was ~~$12.4~~$11.7 million, of which ~~$0.9~~$0.8 million and ~~$11.5~~$10.9 millionwere included in accrued liabilities and other non-current liabilities on the condensed consolidated balance sheet, respectively.

As of March 31, ~~2019~~,2020, the gross carrying amount of the indefinite-lived intangible asset was ~~$14.9 million. During~~$14.2 million. Indefinite-lived intangible assets are tested for impairment annually and more frequently if events or changes in circumstances between annual tests indicate that it is more likely than not that the asset is impaired. As a result of changes in general macroeconomic conditions related to the COVID-19 pandemic, the Company performed a qualitative assessment during the three months ended March 31, ~~2019, the~~2020 to determine whether it was more likely than not that its indefinite-lived intangible asset was impaired. The Company ~~noted~~determined that there was no ~~events or circumstances that indicate the carrying value~~ impairment of the ~~licensed technology may no longer be recoverable and that an impairment loss may have occurred.~~indefinite-lived intangible asset recorded on the condensed consolidated balance sheet as of March 31, 2020.

7. Goodwill

The following table presents the changes in goodwill during the three months ended March 31, ~~2019~~2020 (in thousands):

Total Company
Balance as of December 31, 2018 $ 7,813
Foreign currency translation (154 )
Balance as of March 31, 2019 $ 7,659


	Total Company
Balance as of December 31, 2019	$	7,656
Foreign currency translation	(147)
Balance as of March 31, 2020	$	7,509

Goodwill Impairment Review

The Company reviews goodwill for impairment annually during the fourth quarter ~~on October 31st,~~ or more frequently if events or circumstances indicate that an impairment loss may have occurred. ~~During~~As a result of changes in general macroeconomic conditions related to the COVID-19 pandemic, the Company performed a qualitative assessment during the three months ended March 31, ~~2019~~, ~~there were~~ no ~~events or changes in circumstances which triggered an impairment review~~.

~~8. Leases~~

~~Adoption of ASC Topic 842, “Leases”~~

2020 to determine whether it was more likely than not that its goodwill was impaired. The Company adopted the guidance under ASC 842 on January 1, 2019 using the modified retrospective transition approach. Therefore the comparative prior year information has not been adjusted and continues to be reported under ASC 840.

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~The impact~~determined that there was no impairment of the ~~adoption of ASC 842~~goodwill recorded on the ~~Company’s~~ condensed consolidated balance sheet as of ~~January 1, 2019 was as follows (in thousands):~~March 31, 2020.

December 31, 2018 Adjustments due to the adoption of Topic 842 January 1, 2019
Assets
    Prepaid expenses and other current assets⁽¹⁾
12,200
(424 ) 11,776
          Total current assets 410,726
(424 ) 410,302
    Operating lease right-of-use assets⁽¹⁾
—
43,277
43,277
          Total assets $ 515,006
$ 42,853
$ 557,859

Liabilities and Stockholders’ Equity
    Current liabilities:
       Accrued liabilities⁽²⁾
57,886
(132 ) 57,754
       Current operating lease liabilities⁽²⁾
—
3,608
3,608
          Total current liabilities 66,062
3,476
69,538
       Deferred rent⁽²⁾
7,586
(7,586 ) —
       Non-current operating lease liabilities⁽²⁾
—
46,963
46,963
          Total liabilities 92,591
42,853
135,444
             Total liabilities and stockholders’ equity $ 515,006
$ 42,853
$ 557,859

⁽¹⁾~~Upon the adoption of ASC 842, prepaid rent is included in the operating lease right-of-use assets.~~

⁽²⁾~~Upon the adoption of ASC 842, current and non-current deferred rent is included in the current and non-current operating lease liabilities.~~8. Leases

Lease Overview

As of December 31, ~~2018~~2019 and March 31, ~~2019~~,2020, the ~~Company's~~Company’s contracts that contained a lease consisted of real estate, equipment and vehicle leases.

The Company leases real estate for office and warehouse space primarily under ~~non-cancelable~~noncancelable operating leases that expire at various dates through ~~2031,~~2035, subject to the Company’s option to renew certain leases for an additional five to ~~fifteen~~ ~~years~~.15 years. The Company also leases other equipment and vehicles primarily under ~~non-cancelable~~noncancelable operating leases that expire at various dates through ~~2023.~~ 2024. As of ~~December 31, 2018 and~~ March 31, ~~2019~~,2020, the Company did not have material finance leases.

The following table presents the components of the Company’s lease cost, lease term and discount rate during the three months ended March 31, ~~2019~~ ~~(in~~2020 (in thousands, ~~expect~~except years and percentages):

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)


					Three Months Ended
	Three Months Ended March 31, 2019				March 31, 2020			March 31, 2019
Lease Cost				Lease Cost
Operating lease cost	$	1,768		Operating lease cost	$	1,887		$	1,768
Variable lease cost	758
Finance lease cost:				Finance lease cost:
Amortization of right-of-use assets				Amortization of right-of-use assets	671			—
Interest on lease liabilities				Interest on lease liabilities	395			—
Variable lease cost⁽¹⁾				Variable lease cost⁽¹⁾	1,453			758
Total lease costs	$	2,526		Total lease costs	$	4,406		$	2,526

Weighted Average Remaining Lease Term				Weighted Average Remaining Lease Term
Operating leases	10.6 years			Operating leases	9.8 years			10.6 years

Finance leases				Finance leases	14.8 years			—
Weighted Average Discount Rate				Weighted Average Discount Rate
Operating leases	6.2		%	Operating leases	6.19		%	6.20		%
Finance leases				Finance leases	5.42		%	—		%

⁽¹⁾Variable lease costs represent payments that are dependent on usage, a rate or index. Variable lease cost primarily relates to common area maintenance charges for its real estate leases as the Company elected not to separate non-lease components from lease components upon adoption of ASC 842.

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~Prior to January 1, 2019, the Company recorded operating lease rent expense under ASC 840 on a straight-line basis over the non-cancellable lease term. Rent expense for the three months ended March 31, 2018 was $1.4 million.~~

During the third quarter of ~~2018,~~2019, the Company signed a ~~fifteen~~15 year lease for ~~a manufacturing facility in Roseville,~~additional space at the Company’s headquarters located at 1310 Harbor Bay Business Park, Alameda, California (the ~~“Roseville~~“1310 Harbor Bay Lease”) which has not yet commenced as of March 31, ~~2019.~~2020. The ~~Roseville~~1310 Harbor Bay Lease is expected to commence upon substantial completion of lessor owned improvements toin connection with the development of the building which the Company anticipates will beoccur in ~~2020.~~the next two years.

In the fourth quarter of 2019, the 15 year term Roseville lease commenced once the building was made ready and available for its intended use. The Company determined that the Roseville lease is a non-cancelable finance lease which will expire in 2035.

The following table is a schedule, by years, of maturities of the Company's operating and finance lease liabilities as of March 31, ~~2019~~2020 (in thousands):


	Operating Lease Payments		Finance Lease Payments
Remainder of 2020	$	7,417	$	3,922
2021	6,896		2,455
2022	6,647		2,501
2023	6,466		2,550
2024	6,231		2,601
Thereafter	34,904		27,949

Total undiscounted lease payments⁽¹⁾	68,561		41,978
Less imputed interest	(17,710)		(13,034)
Present value of lease liabilities	$	50,851	$	28,944

Lease Payments⁽¹⁾
Remainder of 2019 $ 5,000
Year ending December 31, 2020 6,586
Year ending December 31, 2021 5,887
Year ending December 31, 2022 5,801
Year ending December 31, 2023 5,787
Year ending December 31, 2024 5,849
Thereafter 33,929
Total undiscounted lease payments $ 68,839
Less imputed interest (19,081 )
Present value of lease liabilities $ 49,758

⁽¹⁾The table above excludes the estimated future minimum lease payment for the ~~Roseville~~1310 Harbor Bay Lease due to ~~the~~ uncertainty around the timing of when the ~~Roseville~~1310 Harbor Bay Lease will commence and payments will be due. The total estimated lease payments over the ~~fifteen~~15 year lease term ~~is approximately $40.9 million. The table also excludes lease payments that were not fixed at commencement or modification.~~

~~The following table below shows~~will be calculated based on the ~~maturities~~total development costs incurred in connection with the development of the ~~Company’s operating lease liabilities previously disclosed under ASC 840~~ ~~as of December 31, 2018~~ ~~(in thousands):~~

Lease Payments⁽¹⁾
Year Ending December 31:
2019 $ 6,575
2020 6,571
2021 5,809
2022 5,772
2023 5,735
Thereafter 40,194
Total future minimum lease payments $ 70,656

⁽¹⁾~~The~~ ~~table~~ ~~above excludes the estimated future minimum lease payment for the Roseville Lease, due to the uncertainty around the timing of when the Roseville Lease will commence and payments~~building which will be ~~due.~~determined upon substantial completion of the building.

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Supplemental cash flow information related to leases during the three months ended March 31, 2020 and March 31, 2019 are as follows (in thousands):


	Three Months Ended
	March 31, 2020		March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,842	$	1,623
Financing cash flows from finance leases	$	1,958	$	—
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	325	$	94
Finance leases	$	—	$	—

Three Months Ended
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 1,623

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

9. Commitments and 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. As of ~~both~~ March 31, 2019, ~~and December 31, 2018,~~ the license agreement required minimum ~~annual~~ royalty payments of ~~$0.1~~$0.1 million ~~in equal quarterly installments.~~ quarterly. On each January 1, the quarterly calendar year minimum royalty 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 license agreement shall continue until the expiration of the last to expire patent that covers that licensed product or for the period of fifteen years following the first commercial sale of such licensed product, whichever is longer. The first commercial sale of covered products occurred in June 2007. In July 2019, the Company amended the license agreement to extend the term for an additional ten years. As of March 31, 2020, the amended license agreement required minimum royalty payments of $0.3 million quarterly through 2027.

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 terminated earlier, the royalty term for each applicable product shall continue for fifteen years following the first commercial sale of such patented product, or when the applicable patent covering such product has expired, whichever is sooner.

~~In November 2013, the Company entered into an agreement that required the Company to pay, on a quarterly basis, a 3%~~ ~~royalty on the first $5.0 million in sales and a 1% royalty on sales thereafter of products covered under applicable patents. The agreement was terminated effective January 1, 2018.~~

In April 2015, the Company entered into a royalty agreement that required the Company to pay a 2% royalty on sales of certain products covered by the agreement, on a quarterly basis, in exchange for certain trade secrets and processes which were used to develop such covered products. The Company began the first commercial sale of the covered products in July 2015. In the first quarter of 2018, the Company entered into a buyout agreement (the “Buyout Agreement”) in which future royalty payments under the royalty agreement were canceled in exchange for shares of the Company’s common stock with a fair value of $5.3 million. The Company recorded an intangible asset equal to the ~~$5.3 million buyout amount which will be amortized into cost of sales over the period in which the Company receives future economic benefit~~. After determining that the pattern of future cash flows associated with this intangible asset could not be reliably estimated with a high level of precision, the Company concluded that the intangible asset will be amortized on a straight‑line basis over its estimated useful life. For more information refer to Note “~~10. Stockholders’ Equity~~.”

Royalty expense included in cost of revenue for the three months ended March 31, 2020 and 2019, was $0.7 million and ~~2018, was~~ $1.1 million, ~~and $0.7 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. ~~Asset Acquisitions and~~ Business Combinations” and Note “6. Intangible Assets” 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.

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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

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.

10. Stockholders’ Equity

~~Common Stock~~

In the first quarter of 2018, the Company issued 53,256 fully vested restricted stock units with a fair value of $5.3 million in connection with the Buyout Agreement, as discussed in Note “9. Commitments and Contingencies.” The Company recorded the $5.3 million fair value of the shares issued to additional-paid in capital on the condensed consolidated balance sheet upon the issuance of the awards, with the associated expense being amortized into cost of sales ~~over the period in which the Company receives future economic benefit from~~ ~~the buyout.~~

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 three months ended March 31, 2019~~ is set forth below:


	Number of Shares	Weighted-Average Exercise Price
Balance at December 31, 2019	1,379,075	$	21.02
Exercised	(42,913)	9.23
Canceled/Forfeited	—	—
Balance at March 31, 2020	1,336,162	21.40

Number of Shares
Weighted-Average
Exercise Price
Balance at December 31, 2018 1,688,881
$ 18.91
Exercised (89,451 ) 11.97
Canceled/Forfeited (3,175 ) 21.94
Balance at March 31, 2019 1,596,255
19.29

Restricted Stock and Restricted Stock Units

Activity of unvested restricted stock awards and restricted stock units under the Plans during the three months ended March 31, ~~2019~~2020 is set forth below:

Number of Shares
Weighted -Average
Grant Date Fair Value
Unvested at December 31, 2018 451,463
$ 57.29
Granted 63,113
146.80
Vested (51,147 ) 60.82
Canceled/Forfeited (1,350 ) 92.69
Unvested at March 31, 2019 462,079
69.02


	Number of Shares	Weighted -Average Grant Date Fair Value
Unvested at December 31, 2019	371,206	$	130.47
Granted	68,436	161.47
Released/Vested - Restricted Stock/RSUs	(38,572)	92.23
Canceled/Forfeited	(725)	135.68
Unvested at March 31, 2020	400,345	139.44

As of March 31, ~~2019, 449,313~~2020, 377,044 restricted stock awards and restricted stock units are expected to vest.

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

Stock-based Compensation

The following table sets forth the stock-based compensation expense included in the Company’s condensed consolidated statements of operations for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 (in thousands):


	Three Months Ended March 31,
	2020		2019
Cost of revenue	$	648	$	291
Research and development	874		524
Sales, general and administrative	4,167		4,280
Total	$	5,689	$	5,095

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Three Months Ended March 31,
2019 2018
Cost of revenue $ 291
$ 219
Research and development 524
368
Sales, general and administrative 4,280
3,567
Total $ 5,095
$ 4,154

As of March 31, ~~2019,~~2020, total unrecognized compensation cost was ~~$25.8~~$46.8 million related to unvested share-based compensation arrangements which is expected to be recognized over a weighted average period of ~~2.5~~3.0 years.

The total stock-based compensation cost capitalized in inventory was ~~$0.5~~$0.8 million and ~~$0.4~~$0.8 million as of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

11. Accumulated Other Comprehensive ~~(Loss) Income~~Loss

Other comprehensive ~~(loss) income~~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, these comprehensive income (loss) items accumulate and are included within accumulated other comprehensive ~~(loss) income.~~loss. Unrealized gains and losses on the Company’s marketable investments are reclassified from accumulated other comprehensive ~~(loss) income~~loss into earnings when realized upon sale, and are determined 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 ~~(loss) income.~~loss.

The following table summarizes the changes in the accumulated balances during the ~~three months ended March 31, 2019 and March 31, 2018,~~period and includes information regarding the manner in which the reclassifications out of accumulated other comprehensive ~~(loss) income~~loss into earnings affect the Company’s condensed consolidated statements of operations and consolidated statements of comprehensive income (loss) ~~income~~ (in thousands):


	Three Months Ended March 31, 2020										Three Months Ended March 31, 2019
	Marketable Investments		Currency Translation Adjustments		Total		Marketable Investments		Currency Translation Adjustments		Total
Balance, beginning of the period	$	238	$	(2,562)	$	(2,324)	$	(500)	$	(1,442)	$	(1,942)
Other comprehensive income (loss) before reclassifications:
Unrealized (loss) gain — marketable investments	(689)		—		(689)		462		—		462
Foreign currency translation losses	—		(1,634)		(1,634)		—		(1,098)		(1,098)
Income tax effect — expense (benefit)	72		—		72		—		—		—
Net of tax	$	(617)	$	(1,634)	$	(2,251)	$	462	$	(1,098)	$	(636)
Amounts reclassified from accumulated other comprehensive income (loss) to consolidated net income:
Realized gain — marketable investments	—		—		—		—		—		—
Income tax effect — expense (benefit)	—		—		—		—		—		—
Net of tax	—		—		—		—		—		—
Net current-year other comprehensive income (loss)	(617)		(1,634)		(2,251)		462		(1,098)		(636)
Balance, end of the period	$	(379)	$	(4,196)	$	(4,575)	$	(38)	$	(2,540)	$	(2,578)

Three Months Ended March 31, 2019 Three Months Ended March 31, 2018
Marketable
Investments Currency Translation
Adjustments Total Marketable
Investments Currency Translation
Adjustments Total
Balance at beginning of the period $ (500 ) $ (1,442 ) $ (1,942 ) $ (235 ) $ 1,804
$ 1,569
Other comprehensive (loss) income before reclassifications:
Unrealized gain (losses)— marketable investments 462
—
462
(386 ) —
(386 )
Foreign currency translation (losses) gains —
(1,098 ) (1,098 ) —
1,608
1,608
Income tax effect — benefit (expense) —
—
—
68
(222 ) (154 )
Net of tax 462
(1,098 ) (636 ) (318 ) 1,386
1,068
Amounts reclassified from accumulated other comprehensive income to earnings:
Income tax effect — expenses —
—
—
—
—
—
Net of tax —
—
—
—
—
—
Net current-year other comprehensive (loss) income 462
(1,098 ) (636 ) (318 ) 1,386
1,068
Balance at end of the period $ (38 ) $ (2,540 ) $ (2,578 ) $ (553 ) $ 3,190
$ 2,637

12. Income Taxes

The Company’s income tax expense, 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.

~~Table of Contents~~

~~Penumbra, Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

During interim periods, the Company generally utilizes the estimated annual effective tax rate method which involves the use of forecasted information. Under this method, the provision is calculated by applying an estimate of the annual effective tax rate 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.

The Company’s benefit from income taxes was $1.6 million for the three months ended March 31, 2020, which was primarily due to tax benefits attributable to its worldwide loss as a result of the COVID-19 pandemic impact and excess tax benefits from stock-based compensation attributable to its United States jurisdiction. The effective tax rate was 219.0% for the three months ended March 31, 2020, which was due to larger tax benefits over smaller worldwide loss. The Company’s

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

provision for income taxes was $1.5 million for the three months ended March 31, 2019, compared to a $1.9 million of tax benefit for the three months ended March 31, 2018. The Company’s effective tax rate changed to 12.2% for the three months ended March 31, 2019, compared to (43.0)% for the three months ended March 31, 2018. ~~The Company’s provision for (benefit from) income taxes for the three months ended March 31, 2019 and 2018 were~~which was primarily due to income taxes attributable to its worldwide ~~profits~~profit offset by excess tax benefits from stock-based compensation attributable to ~~the Company’s U.S.~~its United States jurisdiction. The ~~change in~~effective tax rate was ~~primarily attributable to income taxes on higher worldwide profits combined with lower excess stock-based compensation tax benefits~~12.2% for the three months ended March 31, 2019, ~~when compared~~which was due to smaller tax expenses over larger worldwide profit.

On March 27, 2020, the President signed into law the “Coronavirus Aid, Relief, and Economic Security Act” (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 months ended March 31, ~~2018.~~

The 2017 Tax Reform Act significantly revised the U.S. corporate income tax regime. In addition, the Securities and Exchange Commission issued Staff Accounting Bulletin 118 (“SAB 118”), which provided a measurement period, that should not extend beyond one year from the Tax Reform Act enactment date. In the period ended December 31, 2018, the Company completed its accounting for the tax effects of the Tax Reform Act under FASB ASC 740 “Income Taxes” based on authoritative guidance available to date. The Company will continue to evaluate the impact of further guidance from federal and state tax authorities on the financial statements and determine if any adjustments to the previously recorded tax effects of the Tax Reform Act under ASC 740 will be required.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. The Company evaluates all available positive and negative evidence, objective and subjective in nature, in each reporting period to determine if sufficient taxable income will be generated to realize the benefits of its DTAs and, if not, a valuation allowance to reduce the DTAs is recorded. As of March 31, ~~2019~~2020 and ~~2018,~~2019, the Company maintains a valuation allowance against its Federal Research and Development Tax Credit and California DTAs as the Company could not conclude at the required more-likely-than-not level of certainty, that the benefit of these tax attributes would be realized prior to expiration. As of March 31, 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 solely generated by MVI.

The Company maintains that all foreign earnings, with the exception of a portion of the earnings of its 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 March 31, ~~2019.~~2020. The Company will repatriate foreign earnings only to the extent doing so will not result in any material ~~U.S.~~United States tax consequences. Thus, deferred taxes on any potential future repatriation of a portion of the earnings of its German subsidiary were not reflected in the Company’s condensed consolidated financial statements as of March 31, ~~2019.~~2020.

13. Net Income Attributable to Penumbra, Inc. Per Share

The ~~Company’s~~Company computed basic net income attributable to Penumbra, Inc. per share ~~is calculated by dividing the net income attributable to Penumbra, Inc. by~~based on the weighted average number of shares of common stock outstanding ~~for~~during the period. The Company computed diluted net income 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~~ESPP are considered common stock equivalents.

~~Table of Contents~~

~~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 income ~~per share for the three months ended March 31, 2019 and 2018~~attributable to Penumbra, Inc. is as follows (in thousands, except share and per share amounts):


	Three Months Ended March 31,
	2020		2019
Numerator:
Net income attributable to Penumbra, Inc.	$	1,425	$	10,698



Denominator:
Weighted average shares used to compute net income attributable to common stockholders:
Basic	35,042,912		34,507,279
Potential dilutive stock-based options and awards	1,319,814		1,705,885

Diluted	36,362,726		36,213,164
Net income attributable to Penumbra, Inc. per share:
Basic	$	0.04	$	0.31
Diluted	$	0.04	$	0.30

Three Months Ended March 31,
2019 2018
Numerator:
Net income attributable to Penumbra, Inc. $ 10,698
$ 5,491
Denominator:
Weighted average shares used to compute net income:
Basic 34,507,279
33,846,142
Effect of dilutive securities from stock-based benefit plans, as calculated using treasury stock method 1,705,885
2,070,909
Diluted 36,213,164
35,917,051
Net income attributable to Penumbra, Inc. per share from:
Basic $ 0.31
$ 0.16
Diluted $ 0.30
$ 0.15

~~Outstanding common stock equivalents of 57 thousand and 24 thousand shares for~~For the three months ended March 31, 2020 and 2019 outstanding stock-based awards of 18 thousand and ~~2018,~~57 thousand shares respectively, were excluded from the computation of diluted net income attributable to Penumbra, Inc. per share because their effect would have been anti-dilutive.

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

14. Revenues

Revenue Recognition

Revenue is recognized in an amount that reflects the consideration the Company expects to be entitled to in exchange for ~~those~~ goods or services. All revenue recognized in the ~~income statement~~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 months ended March 31, ~~2019~~2020 and ~~2018~~2019 (in thousands):


	Three Months Ended March 31,
	2020		2019
United States	$	95,774	$	82,511

Other International	41,555		45,928
Total	$	137,329	$	128,439

Three Months Ended March 31,
2019 2018
United States $ 82,511
$ 65,801
Japan 9,522
10,682
Other International 36,406
26,218
Total $ 128,439
$ 102,701

The following table presents the Company’s revenues disaggregated by product category, for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 (in thousands):


	Three Months Ended March 31,					Three Months Ended March 31,
	2019		2018			2020		2019
Neuro	$	81,471	$	71,433	Neuro	$	78,076	$	81,471
Vascular	46,968		31,268		Vascular	59,253		46,968
Total	$	128,439	$	102,701	Total	$	137,329	$	128,439

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.

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 March 31, ~~2019~~.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 ~~re-assessed~~reassessed each

2422

Table of Contents

Penumbra, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

reporting period as required. During the three months ended March 31, ~~2019,~~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.

15. Subsequent Events

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 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.

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 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 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 $50 million, resulting in a maximum available principal amount under the Credit Agreement of $150 million. The Credit Agreement provides a sublimit of up to $10 million for letters of credit, a sublimit of up to $10 million for swing-line loans, and a sublimit of up to $15 million for borrowings in available foreign currencies.

Table of Contents

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, ~~2018,~~2019, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 26, ~~2019.~~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 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 Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~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 innovative therapies. We design, develop, manufacture and market ~~medical devices~~novel products and have a broad portfolio ~~of products~~ that addresses challenging medical conditions ~~and~~in markets with significant ~~clinical needs across our major markets.~~ unmet need. Our team focuses on developing, manufacturing and marketing novel products for use by specialist physicians and healthcare providers to drive improved clinical 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 major markets: neuro and vascular. We ~~launched our first neuro product in~~have successfully developed, obtained regulatory clearance or approval for, and introduced products into the neurovascular market since 2007, ~~our first~~ 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 broad product families:

•Neuro thrombectomy - Penumbra System, ~~designed for mechanical thrombectomy,~~ including Penumbra JET, ~~and~~ ACE ~~reperfusion catheters, aspiration tubing, aspiration pump,~~ and the 3D Revascularization Device, Penumbra ENGINE and other components and accessories

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

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

•Neurosurgical - Artemis Neuro Evacuation Device

•Rehabilitation Tools - REAL Immersive System

Our vascular products fall into two broad product families:

•Vascular thrombectomy - Indigo System designed for mechanical thrombectomy, including aspiration catheters, separators, aspiration pump and accessories

•Vascular embolization - Ruby Coil System, LANTERN Delivery Microcatheter and the POD System (POD and POD Packing Coil) ~~and the Penumbra LANTERN Delivery Microcatheter~~

Table of Contents

We sell our products to hospitals 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 three months ended March 31, 2020 and 2019, 30.3% and ~~2018,~~ 35.8% ~~and 35.9%~~ 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 ~~$128.4~~$137.3 million and ~~$102.7~~$128.4 million for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively, an increase of ~~$25.7~~$8.9 million. We generated operating income of ~~$11.2~~$0.6 million and ~~$4.0~~$11.2 million for the three months ended March 31, 2020 and 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 that need to continue 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 are undertaking 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.

•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 $168.2 million in cash, cash equivalents and marketable investments on our balance sheet as of March 31, ~~2018, respectively.~~2020, and we believe this will allow us to both navigate the current environment and emerge in a strong position after the pandemic.

•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 began to observe more notable negative impacts on business trends in March due to the COVID-19 outbreak, we are unable to reliably predict the full impact that COVID-19 will have on our business due to numerous uncertainties, including the severity and duration of the outbreak, 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 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.

Table of Contents

•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. 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 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.

Components of Results of Operations

Revenue. We sell our products directly to hospitals and through distributors for use in procedures performed by specialist physicians to treat patients in two key markets: neuro and vascular disease. We sell our products through purchase orders, and we do not have long term purchase commitments from our customers. Revenue from product sales is recognized either on the date of shipment or the date of receipt by the ~~customer.~~customer, but is deferred for certain transactions when 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

Table of Contents

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.

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 sales, to direct sales representatives, amortization of acquired intangible assets and acquisition-related costs.

(Benefit from) Provision For Income ~~Tax Expense.~~Taxes

We are taxed at the rates applicable within each jurisdiction in which we operate. The composite income tax rate, tax provisions, deferred tax assets 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 deferred tax assets and deferred tax liabilities and the potential valuation allowance recorded against our net 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.

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 March 31,
	2020						2019
	(in thousands, except for percentages)
Revenue	$	137,329	100.0	%	$	128,439	100.0	%
Cost of revenue	49,320		35.9		44,529		34.7
Gross profit	88,009		64.1		83,910		65.3
Operating expenses:
Research and development	12,946		9.4		11,667		9.1
Sales, general and administrative	74,453		54.2		61,091		47.6

Total operating expenses	87,399		63.6		72,758		56.6
Income from operations	610		0.4		11,152		8.7
Interest income, net	299		0.2		733		0.6
Other (expense) income, net	(1,655)		(1.2)		24		—
(Loss) income before income taxes	(746)		(0.5)		11,909		9.3
(Benefit from) provision for income taxes	(1,634)		(1.2)		1,455		1.1


Consolidated net income	$	888	0.6		$	10,454	8.1
Net loss attributable to non-controlling interest	(537)		(0.4)		(244)		(0.2)
Net income attributable to Penumbra, Inc.	$	1,425	1.0		$	10,698	8.3

Three Months Ended March 31,
2019 2018
(in thousands, except for percentages)
Revenue $ 128,439
100.0 % $ 102,701
100.0 %
Cost of revenue 44,529
34.7
36,144
35.2
Gross profit 83,910
65.3
66,557
64.8
Operating expenses:
Research and development 11,667
9.1
8,013
7.8
Sales, general and administrative 61,091
47.6
54,499
53.1
Total operating expenses 72,758
56.6
62,512
60.9
Income from operations 11,152
8.7
4,045
3.9
Interest income, net 733
0.6
749
0.7
Other income (expense), net 24
—
(290 ) (0.3 )
Income before income taxes and equity in losses of unconsolidated investee 11,909
9.3
4,504
4.4
Provision for (benefit from) income taxes 1,455
1.1
(1,938 ) (1.9 )
Income before equity in losses of unconsolidated investee 10,454
8.1
6,442
6.3
Equity in losses of unconsolidated investee —
—
(951 ) (0.9 )
Consolidated net income $ 10,454
8.1 % $ 5,491
5.3 %
Net loss attributable to non-controlling interest (244 ) (0.2 ) —
—
Net income attributable to Penumbra, Inc. $ 10,698
8.3 % $ 5,491
5.3 %

Table of Contents

Three Months Ended March 31, ~~2019~~2020 Compared to the Three Months Ended March 31, ~~2018~~2019

Revenue


	Three Months Ended March 31,				Change					Three Months Ended March 31,						Change
	2019		2018		$		%			2020		2019		$		%
	(in thousands, except for percentages)									(in thousands, except for percentages)
Neuro	$	81,471	$	71,433	$	10,038	14.1	%	Neuro	$	78,076	$	81,471	$	(3,395)	(4.2)	%
Vascular	46,968		31,268		15,700		50.2	%	Vascular	59,253		46,968		12,285		26.2	%
Total	$	128,439	$	102,701	$	25,738	25.1	%	Total	$	137,329	$	128,439	$	8,890	6.9	%

Revenue increased ~~$25.7~~$8.9 million, or ~~25.1%~~6.9%, to $137.3 million in the three months ended March 31, 2020, from $128.4 million in the three months ended March 31, ~~2019,~~2019. Sales of new and existing products within our vascular businesses drove the overall revenue increase in the quarter, which was partially offset by a decline in sales of products within our neuro business.

Revenue from ~~$102.7~~our neuro products decreased $3.4 million, or 4.2%, to $78.1 million in the three months ended March 31, ~~2018. Our revenue growth resulted~~2020, from further market penetration of our existing products and sales of new products. Sales within our neuro and vascular businesses accounted for approximately 40% and 60% of the revenue increase, respectively, in the three months ended March 31, 2019.

~~Revenue from our neuro products increased $10.0 million, or 14.1%, to~~ $81.5 million in the three months ended March 31, ~~2019, from $71.4 million in the three months ended March 31, 2018.~~2019. This was primarily attributable to ~~increased~~decreased sales of our Penumbra System and neuro embolization products, which accounted for approximately ~~90%~~(140)% and slightly less than (20)% of the total change in neuro revenue,. ~~Our~~ respectively. This change was primarily attributable to decreased sales in Japan as a result of reimbursement changes and on-going discussions with our distributor partner. This decline was partially offset by an increase in sales of our neuro ~~product sales experienced strong momentum~~access products, which increased by approximately 70% of the total neuro revenue change, due to further market penetration and growth in the market for endovascular treatment of stroke, which led to an increase in the number of procedures performed by specialist physicians using these products. This growth was partially offset by a decrease in sales of our neuro embolization products, which decreased by approximately 20% of the total change in neuro revenue, as demand for our neuro embolization products fluctuates from period to period due to the number of procedures performed. Prices for our neuro products remained substantially unchanged during the period. Excluding Japan, revenue from our neuro products increased 5.1% in the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Revenue from our vascular products increased ~~$15.7~~$12.3 million, or ~~50.2%~~26.2%, to $59.3 million in the three months ended March 31, 2020, from $47.0 million in the three months ended March 31, ~~2019, from $31.3 million in the three months ended March 31, 2018.~~2019. This increase was driven by sales of our Indigo System products, which accounted for approximately ~~half~~55% of the vascular revenue increase in the three months ended March 31, ~~2019.~~2020. This increase was ~~primarily attributable to~~driven by further market penetration which led to increases in the number of procedures performed by specialist physicians using our products. Prices for our vascular products remained substantially unchanged during the period.

During the final month of the first quarter, we began to observe a negative impact on revenue due to hospitals deferring certain elective and semi-elective procedures as they responded to the COVID-19 pandemic, with the impact being seen predominantly in our vascular business. As the COVID-19 pandemic is expected to continue to cause strain on hospital resources, coupled with recommended deferrals of certain procedures, most notably vascular procedures, we expect the volume of certain procedures in which our products are used to decline in the second quarter of 2020. However, we cannot reliably estimate the extent to which the COVID-19 pandemic will negatively impact procedure volume in the second quarter and beyond.

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 March 31, 2020 and 2019:


	Three Months Ended March 31,								Change						Three Months Ended March 31,													Change
	2019				2018				$			%			2020						2019						$	%
	(in thousands, except for percentages)														(in thousands, except for percentages)
United States	$	82,511	64.2	%	$	65,801	64.1	%	$	16,710		25.4	%	United States	$	95,774	69.7	%	$	82,511	64.2	%	$	13,263	16.1	%
Japan	9,522		7.4	%	10,682		10.4	%	(1,160		)	(10.9	)%
Other International	36,406		28.4	%	26,218		25.5	%	10,188			38.9	%

International														International	41,555		30.3	%	45,928		35.8	%	(4,373)		(9.5)	%
Total	$	128,439	100.0	%	$	102,701	100.0	%	$	25,738		25.1	%	Total	$	137,329	100.0	%	$	128,439	100.0	%	$	8,890	6.9	%

Revenue from product sales in international markets ~~increased $9.0~~decreased $4.4 million, or ~~24.5%~~9.5%, to $41.6 million in the three months ended March 31, 2020, from $45.9 million in the three months ended March 31, ~~2019, from $36.9 million in the three months ended March 31, 2018.~~2019. Revenue from international sales represented ~~35.8%~~30.3% and ~~35.9%~~35.8% of our total revenue for the three months ended March 31, 2020 and 2019, ~~and 2018,~~ respectively.

Table of Contents

Gross Margin


	Three Months Ended March 31,								Change
	2020			2019			$		%
	(in thousands, except for percentages)
Cost of revenue	$	49,320		$	44,529		$	4,791	10.8	%
Gross profit	$	88,009		$	83,910		$	4,099	4.9	%
Gross margin %	64.1		%	65.3		%

Three Months Ended March 31, Change
2019 2018 $ %
(in thousands, except for percentages)
Cost of revenue $ 44,529
$ 36,144
$ 8,385
23.2 %
Gross profit $ 83,910
$ 66,557
$ 17,353
26.1 %
Gross margin % 65.3 % 64.8 %

Gross margin ~~remained relatively flat, increasing~~ ~~by 0.5~~decreased 1.2 percentage points to 64.1% in the three months ended March 31, 2020, from 65.3% in the three months ended March 31, ~~2019, from 64.8%~~2019. The decrease in gross margin was primarily driven by additional period expense incurred as we made the decision to continue to pay all of our direct manufacturing workforce full-time wages while reducing the labor capacity per shift to implement social distancing and other protective measures for the health and safety of our employees. Accordingly, certain labor costs were expensed as incurred in the three months ended March 31, ~~2018.~~2020.

As a result of an expected decrease in overall demand for our products in the second quarter of 2020 due to the impact of the COVID-19 pandemic, we expect our gross margin will be lower as a function of volume absorption. However, we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our gross margin in the second quarter and beyond.

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


	Three Months Ended March 31,								Change
	2020			2019			$		%
	(in thousands, except for percentages)
R&D	$	12,946		$	11,667		$	1,279	11.0	%
R&D as a percentage of revenue	9.4		%	9.1		%

Three Months Ended March 31, Change
2019 2018 $ %
(in thousands, except for percentages)
R&D $ 11,667
$ 8,013
$ 3,654
45.6 %
R&D as a percentage of revenue 9.1 % 7.8 %

R&D expenses increased by ~~$3.7~~$1.3 million, or ~~45.6%~~11.0%, to $12.9 million in the three months ended March 31, 2020, from $11.7 million in the three months ended March 31, ~~2019, from $8.0 million in the three months ended March 31, 2018.~~2019. The increase was primarily due to a $1.6 million ~~increase~~ ~~in product development and testing costs and a $1.4 million~~ increase in personnel-related expenses ~~primarily due to~~driven by an increase in headcount to support our ~~growth.~~growth, partially offset by a $0.7 million decrease 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 trials.

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


	Three Months Ended March 31,								Change
	2020			2019			$		%
	(in thousands, except for percentages)
SG&A	$	74,453		$	61,091		$	13,362	21.9	%
SG&A as a percentage of revenue	54.2		%	47.6		%

Three Months Ended March 31, Change
2019 2018 $ %
(in thousands, except for percentages)
SG&A $ 61,091
$ 54,499
$ 6,592
12.1 %
SG&A as a percentage of revenue 47.6 % 53.1 %

SG&A expenses increased by ~~$6.6~~$13.4 million, or ~~12.1%~~21.9%, to $74.5 million in the three months ended March 31, 2020, from $61.1 million in the three months ended March 31, ~~2019, from $54.5 million in the three months ended March 31, 2018.~~2019. The increase was primarily due to a ~~$5.0~~$8.4 million increase in personnel-related expenses largely attributable to an increase in headcount and a $1.8 million increase in facilities costs to support our ~~growth~~growth.

Our operating expenses in the first quarter of 2020 reflected limited reductions in expenditures from activities restricted by COVID-19, such as travel and ~~a $1.0 million~~ ~~increase~~entertainment expenses. In the near term, we expect additional reductions in expenses related to ~~marketing events.~~

Asthe current environment and we have implemented other cost control measures. While certain spending may decrease in the second quarter of 2020 as a result of such measures, we will continue to ~~invest in~~prioritize our growth, we have expanded and expect to continue to expand our sales, marketing, 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~~production capacity and flexibility, commercial channels, and preparation for new product launches to support ~~the business.~~our customers.

Table of Contents

(Benefit from) Provision for ~~(Benefit from)~~ Income Taxes


	Three Months Ended March 31,								Change
	2020			2019			$		%
	(in thousands, except for percentages)
(Benefit from) provision for income taxes	$	(1,634)		$	1,455		$	(3,089)	(212.3)	%
Effective tax rate	219.0		%	12.2		%

Three Months Ended March 31, Change
2019 2018 $ %
(in thousands, except for percentages)
Provision for (benefit from) income taxes $ 1,455
$ (1,938 ) $ 3,393
(175.1 )%
Effective tax rate 12.2 % (43.0 )%

Our benefit from income taxes was $1.6 millionfor the three months ended March 31, 2020, which was primarily due to tax benefits attributable to our worldwide loss as a result of the COVID-19 pandemic impact and excess tax benefits from stock-based compensation attributable to our United States jurisdiction. The effective tax rate was 219.0% for the three months ended March 31, 2020, which was due to larger tax benefits over smaller worldwide loss. Our provision for income taxes was $1.5 million for the three months ended March 31, 2019, compared to $1.9 million of tax benefit for the three months ended March 31, 2018. Our effective tax rate changed to 12.2% for the three months ended March 31, 2019, compared to (43.0)% for the three months ended March 31, 2018. ~~Our provision for (benefit from) income taxes for the three months ended March 31, 2019 and 2018 were~~which was primarily due to income taxes attributable to our worldwide ~~profits~~profit offset by excess tax benefits from stock-based compensation attributable to our ~~U.S.~~United States jurisdiction. ~~Our change in~~The effective tax rate was ~~primarily attributable to income taxes on higher worldwide profits combined with lower stock-based compensation excess tax benefit generated in~~12.2% for the three months ended March 31, 2019, ~~when compared~~which was due to ~~the three months ended March 31, 2018.~~

~~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. Valuation allowances can be affected by changes to~~smaller tax laws, statutory tax rates, and projections of future taxable income. Changes to the valuation allowance could cause us to experience an effective tax rate significantly different from previous periods.expenses over larger worldwide profit.

Prospectively, our effective tax rate will likely be driven by (1) permanent differences in taxable income for tax and financial reporting purposes, (2) tax expense attributable to our worldwide profits, and (3) discrete tax 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.

Liquidity and Capital Resources

As of March 31, ~~2019,~~2020, we had ~~$353.7~~$365.7 million in working capital, which included ~~$95.6~~$72.5 million in cash and cash equivalents and ~~$99.2~~$95.8 million in marketable investments. As of March 31, ~~2019,~~2020, we held approximately ~~27.8%~~24.8% of our cash and cash equivalents in foreign entities.

In March 2017, we issued and sold an aggregate of 1,495,000 shares of our common stock at public offering price of $76.00 per share, less the underwriters’ discounts and commissions, pursuant to an underwritten public offering. We received approximately $106.3 million in net cash proceeds after deducting underwriting discounts and commissions of $6.8 million and other offering expenses of $0.5 million. We will continue to use the net proceeds from this 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 offering, we are investing the net proceeds in investment grade, interest bearing securities.

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. See Note “15. Subsequent Events” to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.

We believe 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, expand manufacturing operations which includes, but is not limited to, maintaining sufficient levels of inventory to meet the anticipated demand of our customers, ~~funding~~fund research and development activities and ~~funding~~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, ~~which~~ could result in dilution to our stockholders, changes to our capital structure, and could require us to agree to covenants that limit our operating flexibility.

As a result of the COVID-19 pandemic, we expect to experience reduced cash flow from operations in the second quarter of 2020 as a result of decreased revenues and potentially slower accounts receivable collections. Moreover, we are focused on ensuring that we have adequate supplies on hand given the potential disruption of the COVID-19 pandemic to our suppliers and their supply chain and, accordingly, we expect to continue to increase inventory during the second quarter of 2020 and beyond. However, we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our cash flow from operations in the second quarter and beyond.

Table of Contents

The following table summarizes our cash and cash equivalents, marketable investments and selected working capital data as of March 31, ~~2019~~2020 and December 31, ~~2018:~~2019:


	March 31, 2020		December 31, 2019
	(in thousands)
Cash and cash equivalents	$	72,456	$	72,779
Marketable investments	95,766		116,610
Accounts receivable, net	103,963		105,901
Accounts payable	15,843		15,111
Accrued liabilities	65,335		67,630
Working capital⁽¹⁾	365,666		372,086

March 31,
2019 December 31,
2018
(in thousands)
Cash and cash equivalents $ 95,606
$ 67,850
Marketable investments 99,241
133,039
Accounts receivable, net 94,679
81,896
Accounts payable 7,692
8,176
Accrued liabilities 58,032
57,886
Working capital⁽¹⁾
353,674
344,664
__________________

~~__________________~~

⁽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:


	Three Months Ended March 31,
	2020		2019
	(in thousands)
Cash and cash equivalents and restricted cash at beginning of period	$	72,779	$	67,850
Net cash used in operating activities	(5,920)		(2,068)
Net cash provided by investing activities	10,037		31,855
Net cash used in financing activities	(4,350)		(1,710)
Cash and cash equivalents and restricted cash at end of period	72,456		95,606

Three Months Ended March 31,
2019 2018
(in thousands)
Cash and cash equivalents and restricted cash at beginning of period $ 67,850
$ 50,637
Net cash (used in) provided by operating activities (2,068 ) 10,708
Net cash provided by (used in) investing activities 31,855
(2,187 )
Net cash used in financing activities (1,710 ) (6,744 )
Cash and cash equivalents and restricted cash at end of period 95,606
52,805

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

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

Net cash used in operating activities was $5.9 million during the three months ended March 31, 2020 and consisted of consolidated net income of $0.9 million and non-cash items of $8.4 million, offset by net changes in operating assets and liabilities of $15.2 million. The change in operating assets and liabilities includes an increase in inventories of $15.1 million to support our growth, an increase in prepaid expenses and other current and non-current assets of $1.5 million, and an increase in accounts receivable of $0.2 million. This was partially offset by an increase in accounts payable of $0.9 million to support our ongoing business activities and an increase in accrued expenses and other non-current liabilities of $0.7 million.

Net cash used in operating activities was $2.1 million during the three months ended March 31, 2019 and consisted of a consolidated net income of $10.5 million and non-cash items of $9.0 million, offset by net changes in operating assets and liabilities of $21.6 million. The change in operating assets and liabilities includes an increase in accounts receivable of $13.4 million, an increase in inventories of $6.7 million toto support our revenue growth and a decrease in accounts payable of $1.5 million.

~~Net cash provided by operating activities was $10.7 million during the three months ended March 31, 2018 and consisted of net income of $5.5 million~~ ~~and non-cash items of~~ ~~$5.4 million, offset by net changes in operating assets and liabilities of~~ ~~$0.2 million. The change in operating assets and liabilities includes an increase in accounts receivable of~~ ~~$6.1 million, partially offset by a decrease in~~ ~~prepaid expenses and other current and non-current assets of~~ ~~$3.0 million, an increase in accrued expenses and other non-current liabilities of~~ ~~$2.1 million, an increase in accounts payable of $0.6 million~~ ~~as a result of the growth in our business activities and a decrease in inventories of~~ ~~$0.2 million.~~

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

Net cash provided by ~~(used in)~~ investing activities relates primarily to proceeds from maturities and sales of marketable investments offset by capital expenditures.

Net cash provided by investing activities was $10.0 million during the three months ended March 31, 2020 and consisted of proceeds from maturities and sales of marketable investments of $20.2 million, partially offset by ~~purchases of marketable investments,~~ capital expenditures ~~and contributions towards non-marketable investments.~~of $10.1 million.

Net cash provided by investing activities was $31.9 million during the three months ended March 31, 2019 and consisted of proceeds from maturities and sales of marketable investments of $34.3 million, partially offset by capital expenditures of $2.5 million.

~~Net cash~~ ~~used in~~ ~~investing activities was $2.2 million during the three months ended March~~

31 ~~2018 and consisted~~

Table of ~~capital expenditures of $2.8 million and contributions towards~~ ~~non-marketable investments of~~ ~~$0.4 million, partially offset by proceeds from~~ ~~maturities of marketable investments, net of purchases, of$1.0 million.~~Contents

Net Cash Used In Financing Activities

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

Net cash used in financing activities was $4.4 million during the three months ended March 31, 2020 and primarily consisted of $2.1 million of payments of employee taxes related to vested restricted stock and restricted stock units, $2.0 million in payments towards finance lease, and $0.7 million related to contingent consideration payments made in the first quarter of 2020 in connection with our acquisition in 2017. This was partially offset by proceeds from exercises of stock options of $0.4 million.

Net cash used in financing activities was $1.7 million during the three months ended March 31, 2019 and primarily consisted of $2.1 million of payments of employee taxes related to vested restricted stock and restricted stock units and $0.7 million related to contingent consideration payments made in the first quarter of 2019 in connection with our acquisition in 2017. This was partially offset by proceeds from exercises of stock options of $1.1 million.

Financing activities in the three months ended March 31, 2018 used net cash of $6.7 million due to $4.3 million of payments made in the first quarter of 2018 in connection with our acquisition in 2017 and $3.5 million of payments of employee taxes related to vested restricted stock units and restricted stock. This was partially offset by proceeds from exercises of stock options of $1.3 million.

Contractual Obligations and Commitments

There have been no ~~other~~ material changes to our contractual obligations and commitments as of March 31, ~~2019~~2020 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019 other than described in Note “15. Subsequent Events” of this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

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

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.

There have been no 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, ~~2018,~~ ~~other than the adoption of Accounting Standards Codification (“ASC”) 842 during the first quarter of~~ 2019. ~~The impact of adoption and its effects on our accounting policies and estimates are described in Note “2. Summary of Significant Accounting Policies” and Note “8. Leases~~” ~~to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q~~.

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.“2. Summary of Significant Accounting ~~Policies~~”Policies” to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Table of Contents

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 ~~$95.6~~$72.5 million as of March 31, ~~2019,~~2020, which consisted of funds held in general checking and savings accounts. In addition, we had marketable investments of ~~$99.2~~$95.8 million, which consisted primarily of commercial paper, corporate bonds, non-U.S. government debt securities, U.S. agency and government sponsored securities, U.S. states and municipalities and U.S. Treasury. 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. 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 March 31, 2020.

Table of Contents

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

An evaluation as of March 31, ~~2019~~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 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 March 31, ~~2019.~~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 March 31, ~~2019~~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.

Table of Contents

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 1A. RISK FACTORS.

There have been no material changes to our risk factors reported or new factors identified since the filing of our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, which was filed with the SEC on February 26, ~~2019.~~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 initial impacts of this pandemic in the three months ended March 31, 2020 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 combatting COVID-19. This guidance and any similar guidance issued in the future could result in the deferral of procedures in which our products are used, which could reduce demand for our products. 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 have experienced, and may in the future 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 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 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.

None.

Table of Contents

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURE.

None.

ITEM 5. OTHER INFORMATION.

None.

Table of Contents

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 March 31, ~~2019~~2020 formatted in Inline Extensible Business Reporting Language ~~(XBRL)~~(iXBRL) includes: (i) Condensed Consolidated Balance Sheets as of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, (iii) Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2019, ~~and 2018,~~ (iv) ~~Condensed~~ Consolidated Statements of Cash Flows for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, and (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.

Table of Contents

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: May 7, ~~2019~~2020
	By:	/s/ ~~Sri Kosaraju~~Maggie Yuen
		~~Sri Kosaraju~~Maggie Yuen
		Chief Financial Officer ~~and Head of Strategy~~
		(Principal Financial ~~and Accounting~~ Officer)



	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income		Retained Earnings		Total Penumbra, Inc. Stockholders’ Equity			Non-Controlling Interest		Total Stockholders’ Equity
	Shares		Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income		Retained Earnings		Total Penumbra, Inc. Stockholders’ Equity			Non-Controlling Interest		Total Stockholders’ Equity
Balance at December 31, 2017	33,685,146		$	33	$	396,810		$	1,569	$	1,996	$	400,408		$	—	$	400,408
Issuance of common stock	232,943		1		1,328			—		—		1,329			—		1,329
Issuance of common stock pursuant to royalty buy-out	53,256		—		5,256			—		—		5,256			—		5,256
Shares held for tax withholdings	(38,677	)	—		(3,530		)	—		—		(3,530		)	—		(3,530		)
Stock-based compensation	—		—		4,435			—		—		4,435			—		4,435
Cumulative effect adjustments⁽¹⁾	—		—		—			—		464		464			—		464
Other comprehensive income	—		—		—			1,068		—		1,068			—		1,068
Net income	—		—		—			—		5,491		5,491			—		5,491
Balance at March 31, 2018	33,932,668		$	34	$	404,299		$	2,637	$	7,951	$	414,921		$	—	$	414,921



	As of March 31, 2019
	Level 1		Level 2		Level 3		Fair Value
Financial Assets
Cash equivalents:
Money market funds	$	44,331	$	—	$	—	$	44,331
Marketable investments:
Commercial paper	—		1,500		—		1,500
U.S. treasury	2,391		—		—		2,391
U.S. agency and government sponsored securities	—		7,715		—		7,715
U.S. states and municipalities	—		3,632		—		3,632
Corporate bonds	—		84,003		—		84,003
Total	$	46,722	$	96,850	$	—	$	143,572
Financial Liabilities:
Contingent consideration obligations⁽¹⁾	$	—	$	—	$	1,248	$	1,248
Total	$	—	$	—	$	1,248	$	1,248



	As of December 31, 2018
	Level 1		Level 2		Level 3		Fair Value
Financial Assets
Cash equivalents:
Commercial paper	$	—	$	10,967	$	—	$	10,967
Money market funds	12,087		—		—		12,087
Marketable investments:
Commercial paper	—		13,698		—		13,698
U.S. treasury	6,378		—		—		6,378
U.S. agency and government sponsored securities	—		7,690		—		7,690
U.S. states and municipalities	—		5,122		—		5,122
Corporate bonds	—		100,151		—		100,151
Total	$	18,465	$	137,628	$	—	$	156,093
Financial Liabilities:
Contingent consideration obligations⁽¹⁾	$	—	$	—	$	2,571	$	2,571
Total	$	—	$	—	$	2,571	$	2,571



	Fair Value at March 31, 2019 (in thousands)		Valuation Method	Unobservable Inputs	Input (range where applicable)
Crossmed: Revenue-based milestones	$	1,248	Monte Carlo Simulation	Earn-out period over which revenue-based milestone payments are made	2019
				Risk-adjusted discount rate	15%
				Revenue volatilities for each type of revenue-based milestone	5.1% and 18.4%



	Fair Value of Contingent Consideration
Balance at December 31, 2017	$	4,675
Payments of contingent consideration liabilities	(3,017		)
Changes in fair value	442
Foreign currency remeasurement	133
Balance at March 31, 2018	$	2,233



	Total Company
Balance as of December 31, 2018	$	7,813
Foreign currency translation	(154		)
Balance as of March 31, 2019	$	7,659



	December 31, 2018		Adjustments due to the adoption of Topic 842			January 1, 2019
Assets
Prepaid expenses and other current assets⁽¹⁾	12,200		(424		)	11,776
Total current assets	410,726		(424		)	410,302
Operating lease right-of-use assets⁽¹⁾	—		43,277			43,277
Total assets	$	515,006	$	42,853		$	557,859

Liabilities and Stockholders’ Equity
Current liabilities:
Accrued liabilities⁽²⁾	57,886		(132		)	57,754
Current operating lease liabilities⁽²⁾	—		3,608			3,608
Total current liabilities	66,062		3,476			69,538
Deferred rent⁽²⁾	7,586		(7,586		)	—
Non-current operating lease liabilities⁽²⁾	—		46,963			46,963
Total liabilities	92,591		42,853			135,444
Total liabilities and stockholders’ equity	$	515,006	$	42,853		$	557,859



	Lease Payments⁽¹⁾
Remainder of 2019	$	5,000
Year ending December 31, 2020	6,586
Year ending December 31, 2021	5,887
Year ending December 31, 2022	5,801
Year ending December 31, 2023	5,787
Year ending December 31, 2024	5,849
Thereafter	33,929
Total undiscounted lease payments	$	68,839
Less imputed interest	(19,081		)
Present value of lease liabilities	$	49,758



	Lease Payments⁽¹⁾
Year Ending December 31:
2019	$	6,575
2020	6,571
2021	5,809
2022	5,772
2023	5,735
Thereafter	40,194
Total future minimum lease payments	$	70,656



	Number of Shares		Weighted -Average Grant Date Fair Value
Unvested at December 31, 2018	451,463		$	57.29
Granted	63,113		146.80
Vested	(51,147	)	60.82
Canceled/Forfeited	(1,350	)	92.69
Unvested at March 31, 2019	462,079		69.02



	Three Months Ended March 31, 2019									Three Months Ended March 31, 2018
	Marketable Investments			Currency Translation Adjustments			Total			Marketable Investments			Currency Translation Adjustments			Total
Balance at beginning of the period	$	(500	)	$	(1,442	)	$	(1,942	)	$	(235	)	$	1,804		$	1,569
Other comprehensive (loss) income before reclassifications:
Unrealized gain (losses)— marketable investments	462			—			462			(386		)	—			(386		)
Foreign currency translation (losses) gains	—			(1,098		)	(1,098		)	—			1,608			1,608
Income tax effect — benefit (expense)	—			—			—			68			(222		)	(154		)
Net of tax	462			(1,098		)	(636		)	(318		)	1,386			1,068
Amounts reclassified from accumulated other comprehensive income to earnings:
Income tax effect — expenses	—			—			—			—			—			—
Net of tax	—			—			—			—			—			—
Net current-year other comprehensive (loss) income	462			(1,098		)	(636		)	(318		)	1,386			1,068
Balance at end of the period	$	(38	)	$	(2,540	)	$	(2,578	)	$	(553	)	$	3,190		$	2,637