PENUMBRA INC, 10-K filed on 2/26/2019
Annual Report
v3.10.0.1
Document and Entity Information Document and Entity Information - USD ($)
$ in Billions
12 Months Ended
Dec. 31, 2018
Feb. 12, 2019
Jun. 30, 2018
Document and Entity Information [Abstract]      
Entity Registrant Name Penumbra Inc    
Entity Central Index Key 0001321732    
Current Fiscal Year End Date --12-31    
Entity Filer Category Large Accelerated Filer    
Document Type 10-K    
Document Period End Date Dec. 31, 2018    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Amendment Flag false    
Entity Common Stock, Shares Outstanding   34,653,172  
Entity Current Reporting Status Yes    
Entity Well-known Seasoned Issuer Yes    
Entity Shell Company false    
Entity Voluntary Filers No    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Public Float     $ 4.3
v3.10.0.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 67,850 $ 50,637
Marketable investments 133,039 163,954
Accounts receivable, net of doubtful accounts of $2,782 and $1,290 at December 31, 2018 and December 31, 2017, respectively 81,896 58,007
Inventories 115,741 94,901
Prepaid expenses and other current assets 12,200 14,735
Total current assets 410,726 382,234
Property and equipment, net 35,407 30,899
Intangible assets, net 27,245 23,778
Goodwill 7,813 8,178
Long-term investments (Note 3) 0 3,872
Deferred taxes 32,940 26,690
Other non-current assets 875 1,016
Total assets 515,006 476,667
Current liabilities:    
Accounts payable 8,176 6,757
Accrued liabilities 57,886 44,825
Total current liabilities 66,062 51,582
Deferred rent 7,586 6,199
Other non-current liabilities 18,943 18,478
Total liabilities 92,591 76,259
Commitments and contingencies (Note 8)
Stockholders’ equity:    
Preferred stock, $.001 par value per share - 5,000,000 shares authorized, none issued and outstanding at December 31, 2018 and December 31, 2017 0 0
Common stock, $.001 par value per share - 300,000,000 shares authorized, 34,437,339 issued and outstanding at December 31, 2018; 300,000,000 shares authorized, 33,685,146 issued and outstanding at December 31, 2017 34 33
Additional paid-in capital 415,084 396,810
Accumulated other comprehensive (loss) income (1,942) 1,569
Retained earnings 9,064 1,996
Total Penumbra, Inc. stockholders’ equity 422,240 400,408
Non-controlling interest 175 0
Total stockholders’ equity 422,415 400,408
Total liabilities and stockholders’ equity $ 515,006 $ 476,667
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Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Dec. 31, 2018
Dec. 31, 2017
Statement of Financial Position [Abstract]    
Allowance for doubtful accounts $ 2,782 $ 1,290
Preferred stock, par value (in dollars per share) $ 0.001 $ 0.001
Preferred stock, shares authorized (in shares) 5,000,000 5,000,000
Preferred stock, shares issued (in shares) 0 0
Preferred stock, shares outstanding (in shares) 0 0
Common stock, par value (in dollars per share) $ 0.001 $ 0.001
Common stock, shares authorized (in shares) 300,000,000 300,000,000
Common Stock, Shares, Issued 34,437,339 33,685,146
Common stock, shares outstanding (in shares) 34,437,339 33,685,146
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Consolidated Statements of Operations - USD ($)
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Income Statement [Abstract]      
Revenues $ 444,938,000 $ 333,764,000 $ 263,317,000
Cost of revenue 152,405,000 116,622,000 92,488,000
Gross profit 292,533,000 217,142,000 170,829,000
Operating expenses:      
Research and development 36,165,000 31,661,000 23,875,000
Sales, general and administrative 226,385,000 184,316,000 148,304,000
Acquired in-process research and development 30,835,000 0 0
Total operating expenses 293,385,000 215,977,000 172,179,000
(Loss) income from operations (852,000) 1,165,000 (1,350,000)
Interest income, net 2,964,000 2,653,000 2,323,000
Other expense, net (504,000) (1,342,000) (1,842,000)
Income (loss) before income taxes and equity in losses of unconsolidated investee 1,608,000 2,476,000 (869,000)
Benefit from income taxes (4,403,000) (3,611,000) (15,683,000)
Income before equity in losses of unconsolidated investee 6,011,000 6,087,000 14,814,000
Equity in losses of unconsolidated investee (3,101,000) (1,430,000) 0
Consolidated net income 2,910,000 4,657,000 14,814,000
Net loss attributable to non-controlling interest (3,691,000) 0 0
Net income attributable to Penumbra, Inc. $ 6,601,000 $ 4,657,000 $ 14,814,000
Net income (loss) attributable to Penumbra, Inc. per share: Basic (in dollars per share) $ 0.19 $ 0.14 $ 0.49
Net income (loss) attributable to Penumbra, Inc. per share: Diluted (in dollars per share) $ 0.18 $ 0.13 $ 0.44
Weighted average shares outstanding: Basic (in shares) 34,138,176 32,978,065 30,464,583
Weighted average shares outstanding: Diluted (in shares) 36,086,821 35,319,103 33,478,078
v3.10.0.1
Consolidated Statements of Comprehensive (Loss) Income - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Statement of Comprehensive Income [Abstract]      
Consolidated net income (loss) $ 2,910 $ 4,657 $ 14,814
Other comprehensive (loss) income, net of tax:      
Foreign currency translation adjustments, net of tax (3,246) 6,387 (2,631)
Net change in unrealized gains (losses) on available-for-sale securities, net of tax (265) (130) 58
Total other comprehensive income (loss), net of tax (3,511) 6,257 (2,573)
Consolidated comprehensive (loss) income (601) 10,914 12,241
Net loss attributable to non-controlling interest (3,691) 0 0
Comprehensive income attributable to Penumbra, Inc. $ 3,090 $ 10,914 $ 12,241
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Consolidated Statements of Stockholders' Equity (Deficit) - USD ($)
$ in Thousands
Total
Common Stock
Additional Paid-in Capital
Notes Receivable from Stockholders
Accumulated Other Comprehensive Income (Loss)
Retained Earnings (Accumulated Deficit)
Total Penumbra, Inc. Stockholders’ Equity
Non-controlling Interest
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Total stockholders’ equity $ 232,522 $ 30 $ 252,087 $ (5) $ (2,115) $ (17,475) $ 232,522  
Beginning balance (in shares) at Dec. 31, 2015   29,897,860            
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Issuance of common stock (in shares)   1,043,223            
Issuance of common stock 3,168 $ 1 3,167       3,168  
Shares held for tax withholdings $ (2,624)   (2,624)       (2,624)  
Shares held for tax withholdings (in shares)   46,280            
Issuance of common stock under employee stock purchase plan (in shares) 214,025 214,025            
Issuance of common stock under employee stock purchase plan $ 6,578   6,578       6,578  
Stock-based compensation 14,657   14,657       14,657  
Note received from a stockholder 5     5     5  
Other comprehensive loss (2,573)       (2,573)   (2,573)  
Net income (loss) attributable to Penumbra, Inc. 14,814              
Net loss attributable to non-controlling interest 0              
Consolidated net income (loss) 14,814         14,814 14,814  
Ending balance at Dec. 31, 2016         (4,688)      
Ending balance (in shares) at Dec. 31, 2016   31,108,828            
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Total stockholders’ equity 266,547 $ 31 273,865 0 (4,688) (2,661) 266,547  
Stock Issued During Period, Value, New Issues 106,269 $ 2 106,267       106,269  
Shares issued (in shares)   1,495,000            
Issuance of common stock (in shares)   1,131,344            
Issuance of common stock 5,048 $ 0 5,048       5,048  
Shares held for tax withholdings $ (11,686)   (11,686)       (11,686)  
Shares held for tax withholdings (in shares)   141,711            
Issuance of common stock under employee stock purchase plan (in shares) 91,685 91,685            
Issuance of common stock under employee stock purchase plan $ 5,809   5,809       5,809  
Stock-based compensation 17,507   17,507       17,507  
Other comprehensive loss 6,257       6,257   6,257  
Net income (loss) attributable to Penumbra, Inc. 4,657              
Net loss attributable to non-controlling interest 0              
Consolidated net income (loss) 4,657         4,657 4,657  
Ending balance at Dec. 31, 2017 400,408       1,569      
Ending balance (in shares) at Dec. 31, 2017   33,685,146            
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Total stockholders’ equity 400,408 $ 33 396,810 0 1,569 1,996 400,408  
Stock Issued During Period, Value, New Issues 5,256 $ 0 5,256       5,256  
Shares issued (in shares)   53,256            
Issuance of common stock (in shares)   774,475            
Issuance of common stock 5,064 $ 1 5,063       5,064  
Shares held for tax withholdings $ (17,725)   (17,725)       (17,725)  
Shares held for tax withholdings (in shares)   149,882            
Issuance of common stock under employee stock purchase plan (in shares) 74,344 74,344            
Issuance of common stock under employee stock purchase plan $ 7,231   7,231       7,231  
Stock-based compensation 18,449   18,449       18,449  
Capital contribution from non-controlling interest 500             $ 500
Asset acquisition date fair value of non-controlling interest 3,366             3,366
Other comprehensive loss (3,511)       (3,511)   (3,511)  
Net income (loss) attributable to Penumbra, Inc. 6,601           6,601  
Net loss attributable to non-controlling interest (3,691)             (3,691)
Consolidated net income (loss) 2,910         6,601    
Ending balance at Dec. 31, 2018 422,240       (1,942)      
Ending balance (in shares) at Dec. 31, 2018   34,437,339            
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Total stockholders’ equity $ 422,415 $ 34 $ 415,084 $ 0 $ (1,942) $ 9,064 $ 422,240 $ 175
v3.10.0.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Statement of Cash Flows [Abstract]      
Consolidated net income (loss) $ 2,910 $ 4,657 $ 14,814
Adjustments to reconcile net income to net cash provided by (used in) operating activities:      
Depreciation and amortization 6,168 3,781 2,297
(Accretion of discount) amortization of premium on marketable investments (161) 591 997
Stock-based compensation 18,422 17,812 14,637
Loss on non-marketable equity investments 3,101 1,430 0
Provision for doubtful accounts 1,563 606 216
Inventory write-offs and write-downs 1,700 1,037 2,667
Deferred taxes (6,480) (4,288) (12,378)
Acquired in-process research and development 30,835 0 0
Business Combination, Contingent Consideration Arrangements, Change in Amount of Contingent Consideration, Liability 950 109 0
Other 60 445 135
Changes in operating assets and liabilities:      
Accounts receivable (25,762) (9,118) (14,560)
Inventories (22,288) (18,826) (19,737)
Prepaid expenses and other current and non-current assets 2,231 2,436 (9,043)
Accounts payable 1,329 1,851 1,375
Accrued expenses and other non-current liabilities 14,230 10,168 5,773
Net cash provided by (used in) operating activities 28,808 12,691 (12,807)
CASH FLOWS FROM INVESTING ACTIVITIES:      
Asset acquisition (Note 3) and acquisition of business (Note 5), net of cash acquired (20,414) (9,253) 0
Contributions to non-marketable investments (1,382) (5,265) 0
Purchases of marketable investments (108,227) (189,658) (63,346)
Proceeds from sales of marketable investments 12,129 28,752 12,997
Proceeds from maturities of marketable investments 127,112 112,803 64,671
Acquisition of intangible assets from a licensing agreement 0 (2,500) 0
Purchases of property and equipment (9,603) (12,532) (13,635)
Net cash (used in) provided by investing activities (385) (77,653) 687
CASH FLOWS FROM FINANCING ACTIVITIES:      
Proceeds from issuance of common stock upon underwritten public offering, net of issuance cost 0 106,267 0
Proceeds from exercises of stock options 5,064 5,048 3,172
Proceeds from issuance of stock under employee stock purchase plan 7,231 5,809 6,578
Payment of obligations on debt and credit facilities (404) (1,079) 0
Payment of employee taxes related to vested common and restricted stock (17,725) (11,686) (2,624)
Payment of acquisition-related obligations 4,481 0 0
Proceeds from capital contribution from non-controlling interest 500 0 0
Net cash (used in) provided by financing activities (9,815) 104,359 7,126
Effect of foreign exchange rate changes on cash and cash equivalents (1,395) (1,996) (1,317)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,213 37,401 (6,311)
CASH AND CASH EQUIVALENTS—Beginning of period 50,637 13,236 19,547
CASH AND CASH EQUIVALENTS—End of period 67,850 50,637 13,236
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:      
Cash paid for income taxes 156 141 2,149
NONCASH INVESTING AND FINANCING ACTIVITIES:      
Common shares issued as consideration in connection with a buyout agreement (Notes 6, 8 and 9) 5,256 0 0
Purchase of property and equipment funded through accounts payable and accrued liabilities 1,037 977 1,442
Asset acquisition (Note 3) and acquisition of business (Note 5) related contingent and working capital liabilities 4,000 6,067 0
Licensing agreement related contingent liabilities $ 0 $ 12,717 $ 0
v3.10.0.1
Organization and Description of Business
12 Months Ended
Dec. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Organization and Description of Business
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 and has a broad portfolio of products that addresses challenging medical conditions and significant clinical needs.
v3.10.0.1
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2018
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). Certain changes in presentation were made in the consolidated financial statements for the year ended December 31, 2017 and 2016, to conform to the presentation for the year ended December 31, 2018.
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its majority-owned subsidiary, MVI Health Inc. (“MVI”). On August 31, 2018, the Company acquired a controlling interest in MVI. The portion of equity not attributable to the Company is considered non-controlling interest and was recorded at fair value as of the acquisition date. The amounts attributable to non-controlling interest are classified separately in the consolidated financial statements. Any subsequent changes in the Company’s ownership interest while the Company retains its controlling interest in MVI will be accounted for as equity transactions. Refer to Note “3. Investments and Fair Value of Financial Instruments” for more information on the asset acquisition of MVI. 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 for doubtful accounts, the amount of variable consideration included in the transaction price, warranty reserve, valuation of inventories, useful lives of property and equipment, 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.
Segments
The Company determined its operating segment on the same basis that it uses to evaluate its performance internally. The Company has one business activity: the design, development, manufacturing and marketing of innovative medical devices, and operates as one operating segment. The Company’s chief operating decision-maker (“CODM”), its Chief Executive Officer, reviews its consolidated operating results for the purpose of allocating resources and evaluating financial performance. The Company’s entity-wide disclosures are included in Note “14. Revenues.”
Foreign Currency Translation
The Company’s consolidated financial statements are prepared in United States Dollars (“USD”). Its foreign subsidiaries use their local currency as their functional currency and maintain their records in the local currency. Accordingly, the assets and liabilities of these subsidiaries are translated into USD using the current exchange rates in effect at the balance sheet date and equity accounts are translated into USD using historical rates. Revenues and expenses are translated using the average exchange rates in effect for the year involved. The resulting foreign currency translation adjustments are recorded in accumulated other comprehensive income (loss) in the consolidated balance sheets. Transactions denominated in currencies other than the respective functional currencies are translated at exchange rates as of the date of transaction with foreign currency gains and losses recorded in other expense, net in the consolidated statements of operations. The Company realized net foreign currency transaction losses of $0.9 million, $1.0 million and $0.7 million during the years ended December 31, 2018, 2017 and 2016, respectively.
As the Company’s international operations grow, its risks associated with fluctuation in currency rates will become greater, and the Company will continue to reassess its approach to managing this risk. In addition, currency fluctuations or a weakening USD can increase the costs of the Company’s international expansion. To date, the Company has not entered into any foreign currency hedging contracts.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, marketable investments (as described in greater detail in this footnote under the header “Cash, Cash Equivalents and Marketable Investments” below) and accounts receivable. The majority of the Company’s cash is held by one financial institution in the U. S. in excess of federally insured limits. The Company maintained investments in money market funds that were not federally insured during the year ended December 31, 2018 and held cash in foreign entities of approximately $23.4 million and $15.0 million at December 31, 2018 and 2017, respectively, which was not federally insured.
The Company’s revenue has been derived from sales of its products in the United States and international markets. The Company uses both its own salesforce and independent distributors to sell its products. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of entities comprising the Company’s customer base. The Company performs ongoing credit evaluations of its customers, including its distributors, does not require collateral, and maintains allowances for potential credit losses on customer accounts when deemed necessary.
During the year ended December 31, 2018, no customer accounted for greater than 10% of the Company’s revenue. During December 31, 2017 and 2016, one customer, a distributor, accounted for 10.1% and 11.5%, respectively, of the Company’s revenue. No customer accounted for greater than 10% of the Company’s accounts receivable balance as of December 31, 2018 or 2017.
Significant Risks and Uncertainties
The Company is subject to risks common to medical device companies including, but not limited to, new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, product liability, uncertainty of market acceptance of products and the potential need to obtain additional financing. The Company is dependent on third party suppliers, in some cases single-source suppliers.
There can be no assurance that the Company’s products will continue to be accepted in the marketplace, nor can there be any assurance that any future products can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed, if at all.
The Company’s products require approval or clearance from the FDA prior to commencing commercial sales in the United States. There can be no assurance that the Company’s products will receive all of the required approvals or clearances. Approvals or clearances are also required in foreign jurisdictions in which the Company sells its products. If the Company is denied such approvals or clearances or such approvals or clearances are delayed, it may have a material adverse impact on the Company’s results of operations, financial position and liquidity.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities.
Cash, Cash Equivalents and Marketable Investments
The Company invests its cash primarily in highly liquid corporate debt securities, debt instruments of U.S. federal and municipal governments, and their agencies, and in money market funds. All highly liquid investments with stated maturities of three months or less from the date of purchase are classified as cash equivalents; all highly liquid investments with stated maturities of greater than three months are classified as marketable investments. The majority of the Company’s cash and investments are held in U.S. banks.
The Company determines the appropriate classification of its investments in marketable investments at the time of purchase and re-evaluates such designation at each balance sheet date. The Company’s marketable investments have been classified and accounted for as available-for-sale. Investments with remaining maturities of more than one year are viewed by the Company as available to support current operations and are classified as current assets under the caption marketable investments in the accompanying consolidated balance sheets. Investments in marketable investments are carried at fair value, with the unrealized gains and losses reported as a component of accumulated other comprehensive income (loss). Any realized gains or losses on the sale of marketable investments are determined on a specific identification method, and such gains and losses are reflected as a component of other income (expense), net.
Impairment of Marketable Investments
After determining the fair value of available-for-sale debt instruments, unrealized gains or losses on these securities are recorded to accumulated other comprehensive income (loss) until either the security is sold or the Company determines that the decline in value is other-than-temporary. The primary differentiating factors that the Company considers in classifying impairments as either temporary or other-than-temporary impairments is the intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value, the length of the time and the extent to which the market value of the investment has been less than cost, the financial condition, and near-term prospects of the issuer. There were no other-than-temporary impairments for the years ended December 31, 2018, 2017 or 2016.
Non-Marketable Equity Investments
Entities in which the Company has at least a 20%, but not more than a 50%, interest are accounted for under the equity method unless it is determined that the Company has a controlling financial interest in the entity, in which case the entity would be consolidated. Non-marketable equity investments are classified as long-term investments on the consolidated balance sheet. The Company’s proportionate share of the operating results of its non-marketable equity method investments are recorded as profit or loss and presented in equity in losses of unconsolidated investee, in the consolidated statements of operations. See Note “3. Investments and Fair Value of Financial Instruments” for further details.
Accounts Receivable
Accounts receivable are stated at invoice value less estimated allowances for doubtful accounts. The Company continually monitors customer payments and maintains a reserve for estimated losses resulting from its customers’ inability to make required payments. The Company considers factors such as historical experience, credit quality, age of the accounts receivable balances, geographic related risks and economic conditions that may affect a customer’s ability to pay. In cases where there are circumstances that may impair a specific customer’s ability to meet its financial obligations, a specific allowance is recorded against amounts due, and thereby reduces the net recognized receivable to the amount reasonably believed to be collectible.
Inventories
Inventories are stated at the lower of cost (determined under the first-in first-out method) or net realizable value. Write-downs are provided for raw materials, components or finished goods that are determined to be excessive or obsolete. The Company regularly reviews inventory quantities in consideration of actual loss experience, projected future demand and remaining shelf life to record a provision for excess and obsolete inventory when appropriate. As a result of these evaluations, the Company recognized total write-offs and write-downs of $1.7 million, $1.0 million, and $2.7 million for the years ended December 31, 2018, 2017 and 2016.
Property and Equipment, net
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life. Machinery and equipment and furniture and fixtures are depreciated over a five to ten year period and computers and software are depreciated over two to five years. Upon retirement or sale, the cost and the related accumulated depreciation are removed from the consolidated balance sheet and the resulting gain or loss is reflected in operations. Maintenance and repairs are charged to consolidated statements of operations as incurred.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When such an event occurs, management determines whether there has been impairment by comparing the anticipated undiscounted future net cash flows to the related asset group’s carrying value. If an asset is considered impaired, the asset is written down to fair value, which is determined based either on discounted cash flows or appraised value, depending on the nature of the asset. There was no impairment of long-lived assets during the years ended December 31, 2018, 2017 or 2016.
Contingent Consideration
Certain agreements the Company enters into, including business combinations, involve the potential payment of future consideration that is contingent upon certain performance and revenue milestones being achieved. A contingent consideration liability is recorded at the acquisition date at fair value and is remeasured each reporting period with the change in fair value recognized generally within sales, general and administrative expense, depending on the nature of the contingent consideration liability, in the consolidated statements of operations.
As of December 31, 2018 and 2017, the Company’s contingent consideration relates to milestone payments for the acquisition of Crossmed S.p.A. (“Crossmed”). For more information with respect to the fair value of contingent consideration, refer to Note “5. Business Combination.”
Intangible Assets
Intangible assets primarily consist of purchased rights to licensed technology, customer relationships, and trade secrets and processes.
Indefinite-lived intangible assets relate to an exclusive right to licensed technology. The acquired 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. Indefinite-lived intangible assets are tested for impairment at least annually, in the fourth quarter, or more frequently if events or circumstances indicate that it is more likely than not that the asset is impaired. If the fair value of the asset is less than the carrying amount, an impairment loss would be recognized in an amount equal to the difference between the carrying amount and the fair value. Refer to Note “6. Intangible Assets” for more information on the Company’s intangible assets.
Finite-lived intangible assets are amortized over the estimated economic useful lives of the assets, which is the period during which expected cash flows support the fair value of such intangible assets. The Company reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. When such an event occurs, management determines whether there has been impairment by comparing the anticipated undiscounted future net cash flows to the related asset group’s carrying value. Refer to Note “6. Intangible Assets” for more information on the Company’s intangible assets.
Goodwill
Goodwill represents the excess of the purchase price of an acquired business or assets over the fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but is tested for impairment annually in the fourth quarter, or more frequently if events or circumstances indicate the carrying value may no longer be recoverable and that an impairment loss may have occurred. The Company operates as one segment, which is considered to be the sole reporting unit, and therefore goodwill is tested for impairment at the consolidated level. Refer to Note “5. Business Combination” and Note “7. Goodwill” for more information.
Revenue Recognition
Revenue is comprised of product revenue net of returns, discounts, administration fees and sales rebates. The Company adopted the guidance under ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. Therefore, the comparative prior year information has not been adjusted and continues to be reported under ASC 605 with the impact of the adoption reflected in opening retained earnings in 2018. Under ASC 606, the Company recognizes revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenue from product sales is recognized either on the date of shipment or the date of receipt by the customer, but is deferred for certain transactions when control has not yet transferred. With respect to products that the Company consigns to hospitals, which primarily consist of coils, the Company recognizes revenue at the time hospitals utilize products in a procedure.
Deferred revenue represents amounts that the Company has already invoiced its customers and that are ultimately expected to be recognized as revenue, but for which not all revenue recognition criteria have been met. As of December 31, 2018 and December 31, 2017, respectively, the Company's deferred revenue balance was not material.
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. 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.
The Company’s terms and conditions permit product returns and exchanges. The Company bases its estimates for sales returns on actual historical returns over the prior three years and they are recorded as reductions in revenue at the time of sale. Upon recognition, the Company reduces revenue and cost of revenue for the estimated return. Return rates can fluctuate over time, but are sufficiently predictable to allow the Company to estimate expected future product returns.
For more information and disclosures on the Company’s revenue, refer to Note “14. Revenues.”
Shipping Costs
Shipping and handling costs charged to customers are recorded as revenue. Shipping and handling costs are included in cost of revenue.
Research and Development (“R&D”) Costs
R&D costs primarily consist of product development, clinical and regulatory expenses, materials, depreciation and other costs associated with the development of the Company’s products. R&D costs also include related personnel and consultants’ salaries, benefits and related costs, including stock-based compensation. The Company expenses R&D costs as they are incurred.
The Company’s clinical trial accruals are based on estimates of patient enrollment and related costs at clinical investigator sites. The Company estimates preclinical and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on its behalf. In accruing service fees, the Company estimates the time period over which services will be performed and the level of patient enrollment and activity expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.
Advertising Costs
Advertising costs are included in sales, general and administrative expenses and are expensed as incurred. Advertising costs were $0.5 million, $0.7 million and $0.5 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Stock-Based Compensation
The Company recognizes the cost of stock-based compensation in the financial statements based upon fair value. The fair value of restricted stock and restricted stock unit (“RSU”) awards is determined based on the number of units granted and the closing price of the Company’s common stock as of the grant date. The fair value of each purchase under the employee stock purchase plan (“ESPP”) is estimated at the beginning of the offering period using the Black-Scholes option pricing model. The fair value of stock options is determined as of the grant date using the Black-Scholes option pricing model. The Company’s determination of the fair value of equity-settled awards is impacted by the price of the Company’s common stock as well as changes in assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the expected term that awards will remain outstanding, expected common stock price volatility over the term of the awards, risk-free interest rates and expected dividends.
The fair value of an award is recognized over the requisite service period (usually the vesting period) on a straight-line basis. Stock-based compensation expense recognized at fair value includes the impact of estimated forfeitures. The Company estimates future forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. To the extent actual forfeiture results differ from the estimates, the difference is recorded as a cumulative adjustment in the period forfeiture estimates are revised. No compensation cost is recorded for awards that do not vest.
Prior to the adoption of Accounting Standard Update (“ASU”) No. 2018-07, “Compensation – Stock Compensation,” the Company recorded its equity instruments issued to non-employees at their fair value on the measurement date and were subject to periodic adjustments as the Company remeasured the fair value of the non-employee awards at each reporting period prior to vesting and at the vesting dates of each non-employee award. In the third quarter of 2018, the Company adopted ASU 2018-07 and recognizes the fair value of non-employee awards over the requisite service period (usually the vesting period) on a straight-line basis. Therefore, equity instruments issued to non-employees are recorded at their fair value on the grant date in the same manner as employee awards. The fair value of these equity instruments is expensed over the service period.
Estimates of the fair value of equity-settled awards as of the grant date using valuation models, such as the Black-Scholes option pricing model, are affected by assumptions regarding a number of complex variables. Changes in the assumptions can materially affect the fair value of the award and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require significant analysis and judgment to develop. For all stock options granted prior to the Company’s IPO, the Company estimated the volatility data based on a study of publicly traded industry peer companies. For purposes of identifying these peer companies, the Company considered the industry, stage of development, size and financial leverage of potential comparable companies. The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award. For all stock options granted to date, the Company used the Staff Accounting Bulletin, No. 110 (“SAB 110”) simplified method to calculate the expected term, which is the average of the contractual term and vesting period.
Income Taxes
The Company accounts for income taxes using the asset and liability method, whereby deferred tax asset (“DTA”) and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance to reduce the net DTAs to their estimated realizable value.
The calculation of the Company’s current provision for income taxes involves the use of estimates, assumptions and judgments while taking into account current tax laws, interpretation of current tax laws and possible outcomes of future tax audits. The Company has established reserves to address potential exposures related to tax positions that could be challenged by tax authorities. Although the Company believes its estimates, assumptions and judgments to be reasonable, any changes in tax law or its interpretation of tax laws and the resolutions of potential tax audits could significantly impact the amounts provided for income taxes in the Company’s consolidated financial statements.
The calculation of the Company’s DTA balance involves the use of estimates, assumptions and judgments while taking into account estimates of the amounts and type of future taxable income. Actual future operating results and the underlying amount and type of income could differ materially from the Company’s estimates, assumptions and judgments thereby impacting the Company’s financial position and results of operations.
The Company follows the guidance relating to accounting for uncertainty in income taxes, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in the Company’s income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.
The Company includes interest and penalties related to unrecognized tax benefits within income tax expense in the accompanying consolidated statements of operations.
Comprehensive Income
Comprehensive income consists of net income, unrealized gains or losses on available-for-sale investments and the effects of foreign currency translation adjustments. The Company presents comprehensive income and its components in the consolidated statements of comprehensive (loss) income.
Net Income (Loss) Per Share of Common Stock
The Company’s basic net income (loss) attributable to Penumbra, Inc. per share is calculated by dividing the net income attributable to Penumbra, Inc. per share by the weighted average number of shares of common stock outstanding for the period. The diluted net income (loss) per share attributable to Penumbra, Inc. is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock, restricted stock and restricted stock units are considered common stock equivalents.
Recent Accounting Guidance
Recently Adopted Accounting Standards
In the first quarter of 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), and its associated amendments. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company applied the five step method outlined in the ASU to all revenue streams and elected to utilize the modified retrospective implementation method. The additional disclosures required by the ASU have been included in Note “14. Revenues.”
In the first quarter of 2018, the Company adopted ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, a consensus of the Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force. Under the standard, restricted cash and restricted cash equivalent amounts are presented within cash and cash equivalents when reconciling the total beginning and ending amounts shown on the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet is required. The adoption of this standard did not have a material impact to the statement of cash flow for the years ended December 31, 2018, 2017 and 2016, as the Company did not hold any restricted cash as of December 31, 2018, 2017 and 2016.
In the first quarter of 2018, the Company adopted ASU No. 2017-09, Compensation - Stock Compensation - Scope of Modification Accounting. The standard provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This standard does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. The standard is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The guidance was adopted on a prospective basis in the first quarter of 2018 and did not have any impact upon adoption.
In the first quarter of 2018, the Company adopted ASU No. 2018-02, Income Statement - Reporting Comprehensive Income. The standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”). The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for any interim and annual financial statements that have not yet been issued. The Company elected to early adopt this standard on a prospective basis in the first quarter of 2018 and reclassify the stranded tax effects resulting from the Tax Reform Act from accumulated other comprehensive income to retained earnings. There were no additional income tax effects resulting from the Tax Reform Act reclassified from accumulated comprehensive income to retained earnings. The adoption of this standard did not have a material impact on the Company’s financial position.
In the first quarter of 2018, the Company adopted ASU No. 2018-05, Income Taxes (“Topic 740”): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which included amendments to expand income tax accounting and disclosure guidance pursuant to SEC Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the SEC in December 2017. SAB 118 provides guidance on accounting for the income tax effects of the Tax Reform Act. Refer to Note “12. Income Taxes” for more information and disclosures related to this amended guidance.
In the third quarter of 2018, the Company adopted ASU No. 2018-07, Compensation – Stock Compensation (“Topic 718”): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting and reporting for share-based payments granted to nonemployees for goods and services. Under the new guidance, payments to nonemployees would be more closely aligned with the requirements for share-based payments granted to employees. The standard is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted, but no earlier than the Company's adoption date of ASC 606. The Company adopted the standard on a prospective basis in the third quarter of 2018 and the adoption did not have a material impact on the Company’s financial statements.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases, which amends the existing accounting standards for leases. In September 2017, the FASB issued ASU No. 2017-13 which provides additional clarification and implementation guidance on the previously issued ASU No. 2016-02. Under the new guidance, a lessee will be required to recognize a lease liability and right-of-use asset for all leases with terms in excess of twelve months. The new guidance also modifies the classification criteria and accounting for sales-type and direct financing leases, 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 will continue to depend primarily on its classification. In July 2018, the FASB issued ASU No. 2018-10 and ASU No. 2018-11, which further clarifies the application of the guidance issued under ASU No. 2016-02 and provides updates to transition methods and practical expedients. ASU No. 2018-11 provides an optional transition method in addition to the existing transition method which allows entities, at the adoption date, to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The accounting standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption is permitted.
The Company has completed its initial assessment of the impact of the new leasing standard on the Company’s financial statements and internal controls; including its evaluation of key policy elections. The Company intends to adopt the new standard and related amendments under the optional transitional method as of January 1, 2019. Under this method, the Company is allowed to record a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption and not restate prior periods. Additionally, the Company expects to elect the transitional practical expedients such that the Company will not reassess whether contracts are leases and will retain lease classification and initial direct costs for leases existing prior to the adoption of the new standard. The Company also expects to make the following transitional practical expedients elections: (1) elect the short term lease exception, (2) not elect hindsight and (3) elect to not separate its nonlease components for its real estate, vehicle and equipment leases. While substantially complete, the Company is still in the process of finalizing its evaluation of the effect of ASC 842 on the Company’s financial statements, disclosures, and internal controls. The Company estimates its total assets and total liabilities on the consolidated balance sheet will increase by approximately $38.0 million to $46.0 million due to the recognition of right-of-use assets and lease liabilities upon adoption, net of the impact of eliminating existing deferred rent liabilities and pre-paid assets related to its leasing arrangements. This estimated range is based on the Company's current lease portfolio but could be impacted by changes to the lease portfolio, including the total number of leases, lease commencement and end dates and lease termination expectations, as well as changes in anticipated lease incremental borrowing rates. The Company does not expect the adoption of ASU No. 2016-02, as amended, to have a material impact to the Company’s consolidated statements of operations or consolidated statements of cash flows.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses. The standard changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The Company will recognize an allowance for credit losses on available-for-sale securities rather than deductions in amortized cost. The standard is effective for fiscal years and interim periods beginning after December 15, 2019. Early adoption is permitted for all periods beginning after December 15, 2018. The Company is currently evaluating the impact of adopting this standard.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The primary focus of the standard is to improve the effectiveness of the disclosure requirements for fair value measurements. The standard is effective for fiscal years and interim periods beginning after December 15, 2019. An entity 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. The Company is currently evaluating the impact of adopting this standard.
v3.10.0.1
Investments and Fair Value of Financial Instruments
12 Months Ended
Dec. 31, 2018
Fair Value Disclosures [Abstract]  
Investments and Fair Value of Financial Instruments
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 Company’s marketable investments as of December 31, 2018 and 2017 were as follows (in thousands):
 
 
December 31, 2018
 
 
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 securities 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

 
 
December 31, 2017
 
 
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair Value
Commercial paper
 
$
19,941

 
$

 
$
(8
)
 
$
19,933

U.S. treasury
 
6,402

 

 
(28
)
 
6,374

U.S. agency securities and government sponsored securities
 
4,787

 

 
(18
)
 
4,769

U.S. states and municipalities
 
12,510

 

 
(23
)
 
12,487

Corporate bonds
 
120,648

 
23

 
(280
)
 
120,391

Total
 
$
164,288

 
$
23

 
$
(357
)
 
$
163,954


The following tables present the gross unrealized losses and the fair value for those marketable investments that were in an unrealized loss position for less than and more than twelve months as of December 31, 2018 and 2017 (in thousands):
 
 
December 31, 2018
 
 
Less than 12 months
 
More than 12 months
 
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 securities 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, 2017
 
 
Less than 12 months
 
More than 12 months
 
Total
 
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Commercial paper
 
$
19,933

 
$
(8
)
 
$

 
$

 
$
19,933

 
$
(8
)
U.S. treasury
 
6,374

 
(28
)
 

 

 
6,374

 
(28
)
U.S. agency securities and government sponsored securities
 
2,778

 
(9
)
 
1,991

 
(9
)
 
4,769

 
(18
)
U.S. states and municipalities
 
10,092

 
(23
)
 

 

 
10,092

 
(23
)
Corporate bonds
 
93,284

 
(188
)
 
10,201

 
(92
)
 
103,485

 
(280
)
Total
 
$
132,461

 
$
(256
)
 
$
12,192

 
$
(101
)
 
$
144,653

 
$
(357
)

The contractual maturities of the Company’s marketable investments as of December 31, 2018 and 2017 were as follows (in thousands):
 
 
December 31,
 
 
2018
 
2017
Marketable Investments
 
Fair Value
 
Fair Value
Due in one year
 
$
83,391

 
$
104,272

Due in one to five years
 
49,648

 
59,682

Total
 
$
133,039

 
$
163,954


Non-Marketable Equity Investments
In the second quarter of 2017, the Company and Sixense Enterprises, Inc. (“Sixense”) formed 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 entered into a Stock Transfer Agreement (the “Transfer Agreement”) between the Company, MVI and Sixense, to purchase an additional 40% of the equity interest in MVI from Sixense for an initial cash purchase price of $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.
Prior to the Transfer Agreement Closing Date, the Company accounted for its investment in MVI under the equity method and was not required to consolidate MVI and determined that MVI was not a variable interest entity (“VIE”). Furthermore, pursuant to agreements between the parties at the time of MVI’s formation, the Company was obligated to perform certain services or make additional cash contributions to MVI for no additional equity interest. These services included, but were not limited to, information technology, accounting, other administrative services and research and development. The Company’s contributions made prior to the Transfer Agreement Closing Date are presented as a component of the “Contributions to non-marketable investments” in the consolidated statements of cash flows.
As of December 31, 2017, the carrying value of the non-marketable equity investment was approximately $3.9 million, representing the Company’s contributions to MVI offset by the Company’s share of equity method investee losses, and is presented in long-term investments on the consolidated balance sheet. For the year ended December 31, 2017, MVI had no revenue and recorded a net loss of $2.9 million. For the eight months ended August 31, 2018, prior to the Transfer Agreement Closing Date, MVI had no revenue and recorded a net loss of $6.2 million. The Company reflected its 50% share of MVI’s losses as equity in losses of unconsolidated investee in the consolidated statements of operations through the Transfer Agreement Closing Date.
Prior to the Transfer Agreement Closing Date, the unconsolidated balance sheet of MVI had total assets of $5.2 million, total liabilities of $1.0 million and total equity of $4.2 million. As of December 31, 2017, the unconsolidated balance sheet of MVI primarily consists of cash remaining from the initial investment and intangible assets totaling $7.9 million.
Impact of Transfer Agreement on Non-Marketable Equity Investments
The Company accounted for the Transfer Agreement as an asset acquisition, as it was determined that the transaction did not meet the definition of a business under the framework of the authoritative accounting guidance for business combinations. The total consideration transferred has been allocated to the non-monetary assets acquired and liabilities assumed based on their relative fair value.
The following table presents the components of the consideration transferred at fair value as of the Transfer Agreement Closing Date (amounts presented in thousands):
 
 
Amount
Cash transferred
 
$
20,000

Anti-dilution protection at Transfer Agreement Closing Date
 
4,500

Carrying amount of Penumbra’s equity method investment in MVI
 
2,202

Fair value of the remaining non-controlling interest
 
3,365

Total consideration transferred
 
$
30,067


In addition to the cash transferred, the consideration included a probable contingent liability related to an anti-dilution provision whereby the Company may be obligated to contribute funds for the issuance of additional shares of MVI to Sixense with an aggregate value of up to $4.5 million. 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 current and non-current portion of the related liability was $1.5 million and $2.5 million, respectively. The consideration transferred also included the $2.2 million carrying amount of the Company’s equity method investment in MVI as of the Transfer Agreement Closing Date, which was written-off as part of the accounting for the Transfer Agreement. The Company also recorded $3.4 million in non-controlling interest on the consolidated financial statements related to the fair value of the remaining minority interest held by Sixense as of the Transfer Agreement Closing Date.
The primary asset acquired in the Transfer Agreement constitutes an in-process research and development asset (“IPR&D”). Due to the nature of the other assets acquired and liabilities assumed, the difference between the fair value of the consideration transferred and the fair value of the tangible net liabilities acquired was allocated solely to the IPR&D. The Company recorded a charge of $30.8 million to acquired in-process research and development expense in the consolidated statements of operations at the Transfer Agreement Closing Date because the Company determined that (1) the IPR&D asset had not yet reached technological feasibility and MVI had not yet obtained the appropriate regulatory approval for any products and (2) the asset had no alternative future use as of the Transfer Agreement Closing Date. Following the Transfer Agreement Closing Date, the financial results of MVI have been consolidated into the accompanying consolidated financial statements, with the amounts attributable to the non-controlling interest classified separately.
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 reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The Company classifies its cash equivalents and marketable investments within Level 1 and Level 2, as it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs.
The Company determined the fair value of its Level 1 financial instruments, which are traded in active markets, using quoted market prices for identical instruments.
Marketable investments 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, historical pricing trends of a security as 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.
The following tables set forth the Company’s financial assets and liabilities measured at fair value by level within the fair value hierarchy (in thousands):
 
 
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
 
$

 
$

 
$
2,571

 
$
2,571

Total
 
$

 
$

 
$
2,571

 
$
2,571

 
 
As of December 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Commercial paper
 
$

 
$
9,185

 
$

 
$
9,185

Money market funds
 
2,264

 

 

 
2,264

Marketable investments:
 
 
 
 
 
 
 
 
Commercial paper
 

 
19,933

 

 
19,933

U.S. treasury
 
6,374

 

 

 
6,374

U.S. agency and government sponsored securities
 

 
4,769

 

 
4,769

U.S. states and municipalities
 

 
12,487

 

 
12,487

Corporate bonds
 

 
120,391

 

 
120,391

Total
 
$
8,638

 
$
166,765

 
$

 
$
175,403

Financial Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration obligations
 
$

 
$

 
$
4,675

 
$
4,675

Total
 
$

 
$

 
$
4,675

 
$
4,675


Contingent Consideration Obligations
As of December 31, 2018 and December 31, 2017, 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 timing and likelihood of achieving revenue-based milestones. The fair value of the contingent consideration liability is remeasured each reporting period. Of the $2.6 million contingent consideration liability as of December 31, 2018, $1.3 million relates to a liability based on actual revenue performance for the year ended December 31, 2018 and is not based on unobservable inputs. Accordingly, only the portion of the contingent consideration liability based on unobservable inputs is included in the table below. 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 December 31, 2018 (in thousands)
 
Valuation Method
 
Unobservable Inputs
 
Inputs
Crossmed:
Revenue-based milestones
 
$
1,268

 
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 table summarizes the changes in fair value of the contingent consideration obligation for the year ended December 31, 2018 (in thousands):
 
 
Fair Value of Contingent Consideration
Balance at December 31, 2017
 
$
4,675

Payments of contingent consideration liabilities
 
(3,017
)
Changes in fair value
 
950

Foreign currency remeasurement
 
(37
)
Balance at December 31, 2018
 
$
2,571


During the year ended December 31, 2018, the fair value of the contingent consideration obligation increased by $1.0 million, which was recorded in sales, general and administrative expense in the 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 refer to Note “5. Business Combination.”
During the years ended December 31, 2018, 2017, and 2016, 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 December 31, 2018 and 2017. During the year ended December 31, 2018 and 2017, 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 December 31, 2018 and 2017.
v3.10.0.1
Balance Sheet Components
12 Months Ended
Dec. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Balance Sheet Components
4. Balance Sheet Components
Accounts Receivable, Net
The Company’s allowance for doubtful accounts comprised of the following (in thousands):
 
 
Balance At
Beginning Of Year
 
Charged To Costs And Expenses
 
Deductions(1)
 
Balance At
End Of Year
For the year ended:
 
 
 
 
 
 
 
 
December 31, 2016
 
$
589

 
$
216

 
$
(121
)
 
$
684

December 31, 2017
 
684

 
606

 

 
1,290

December 31, 2018
 
1,290

 
1,563

 
(71
)
 
2,782


 
(1) Represents the effect of currency translation adjustments and write-offs of uncollectible accounts, net of recoveries.
 Inventories
The components of inventories consisted of the following (in thousands):
 
 
December 31,
 
 
2018
 
2017
Raw materials
 
$
18,829

 
$
13,529

Work in process
 
10,630

 
6,073

Finished goods
 
86,282

 
75,299

Inventories
 
$
115,741

 
$
94,901


Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
 
 
December 31,
 
 
2018
 
2017
Machinery and equipment
 
$
15,400

 
$
12,456

Furniture and fixtures
 
7,140

 
6,458

Leasehold improvements
 
17,665

 
15,926

Software
 
4,095

 
3,547

Computers
 
3,289

 
1,737

Construction in progress
 
3,234

 
1,326

Total property and equipment
 
50,823

 
41,450

Less: Accumulated depreciation and amortization
 
(15,416
)
 
(10,551
)
Property and equipment, net
 
$
35,407

 
$
30,899


Depreciation and amortization expense, excluding intangible assets, was $5.1 million, $3.4 million and $2.3 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Accrued Liabilities
The following table shows the components of accrued liabilities as of December 31, 2018 and 2017 (in thousands):
 
 
December 31,
2018
 
December 31,
2017
Payroll and employee-related expenses
 
$
33,838

 
$
22,001

Accrued expenses
 
4,088

 
3,927

Sales return reserve
 
2,986

 
3,035

Product warranty
 
1,875

 
1,088

Contingent consideration & other acquisition-related costs(1)
 
4,439

 
4,752

Other accrued liabilities
 
10,660

 
10,022

Total accrued liabilities
 
$
57,886

 
$
44,825


 
(1) Acquisition-related costs consist of the current portion of contingent liabilities related to (1) the cash milestone payments and working capital adjustment liabilities for the acquisition of Crossmed and (2) an anti-dilution provision for the asset acquisition of MVI. Refer to Note “5. Business Combination” for more information on the acquisition of Crossmed and Note “3. Investments and Fair Value of Financial Instrumentsfor more information on the MVI asset acquisition.
The following table shows the changes in the Company’s estimated product warranty accrual, included in accrued liabilities, as of December 31, 2018, 2017 and 2016 (in thousands):
 
 
December 31,
 
 
2018
 
2017
 
2016
Balance at the beginning of the year
 
$
1,088

 
$
1,254

 
$
713

Accruals of warranties issued
 
1,336

 
471

 
1,176

Settlements of warranty claims
 
(549
)
 
(637
)
 
(635
)
Balance at the end of the year
 
$
1,875

 
$
1,088

 
$
1,254


Other Non-Current Liabilities
The following table shows the components of other non-current liabilities as of December 31, 2018 and 2017 (in thousands):
 
 
December 31,
 
 
2018
 
2017
Deferred tax liabilities
 
$
4,171

 
$
3,299

Licensing-related cost(1)
 
11,506

 
12,717

Asset acquisition-related costs(2)
 
2,500

 

Other non-current liabilities
 
766

 
2,462

Total other non-current liabilities
 
$
18,943

 
$
18,478

 
(1) Amount relates to the non-current liability recorded for probable future milestone payments to be made under the licensing agreement 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 asset acquisition of MVI. Refer to Note “3. Investments and Fair Value of Financial Instruments” for more information on the MVI asset acquisition.
v3.10.0.1
Business Combination
12 Months Ended
Dec. 31, 2018
Business Combinations [Abstract]  
Business Combination
5. Business Combination
On July 3, 2017 (the “Closing Date”), the Company completed the acquisition of Crossmed, a joint stock company organized under the laws of Italy. Crossmed is engaged in the business of distributing medical supplies and equipment in Italy, San Marino, Vatican City and Switzerland. Crossmed was the Company’s exclusive distributor in Italy, San Marino, and Vatican City and the acquisition provides the Company with a direct relationship with its customers in these regions. As of the Closing Date, Crossmed became a wholly-owned subsidiary of the Company and was integrated into the Company’s core business. The acquisition of Crossmed did not result in any changes to the Company’s operating or reportable segment structure and the Company continues to operate as one operating segment.
The following table summarizes the Closing Date fair value of the consideration transferred, reflecting the measurement period adjustments recorded in the fourth quarter of 2017 (in thousands):
 
 
Fair Value of Consideration Transferred
Cash, net of working capital and financial debt adjustments
 
$
11,088

Fair value of contingent consideration for milestone payments
 
4,343

Contract purchase price
 
$
15,431

Consideration for settlement of pre-existing receivable due from Crossmed to Penumbra
 
3,273

Total value of consideration transferred
 
$
18,704


On the Closing Date, the Company paid the sellers of Crossmed an initial payment of €8.2 million, or approximately $9.4 million, subject to post-closing adjustments for working capital and financial debt. The Company is also obligated to pay additional consideration 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 the year ended December 31, 2017, and each of the years ending December 31, 2018 and 2019. There is no limit on the milestone payments that can be paid out. As of December 31, 2017, the fair value of the current and non-current portion of the related liabilities for the future cash milestone payments on the consolidated balance sheet was $2.9 million and $1.7 million, respectively. As of December 31, 2018, the fair value of the liability related to the future cash milestone payments was $2.6 million and was classified as a current liability on the consolidated balance sheet. For more information with respect to the nature and fair value of the Company’s contingent consideration obligations, refer to Note “3. Investments and Fair Value of Financial Instruments.”
During the year ended December 31, 2018, the Company made $4.5 million in cash payments to the Sellers, of which $3.0 million related to the achievement of the 2017 milestones and the remainder related to working capital and financial debt adjustments. These payments have been presented as a component of financing activities in the consolidated statement of cash flows due to the nature and timing of the payments.
The purchase price measurement period was closed as of June 30, 2018. The following table presents the allocation of the purchase price for Crossmed, reflecting the measurement period adjustments recorded in 2017 (in thousands):
 
 
Acquisition-Date Fair Value
 
Estimated Useful Life of Finite-Lived Intangible Assets
Tangible assets acquired and (liabilities) assumed:
 
 
 
 
Accounts receivable
 
$
4,406

 
 
Inventories
 
1,343

 
 
Other current and non-current assets(1)
 
1,596

 
 
Property and equipment, net
 
829

 
 
Accounts payable
 
(740
)
 
 
Accrued liabilities and obligations for short-term debt and credit facilities(1)
 
(1,868
)
 
 
Deferred tax liabilities
 
(2,472
)
 
 
Other non-current liabilities
 
(797
)
 
 
Intangible assets acquired:
 
 
 
 
Customer relationships
 
$
6,790

 
15 years
Other
 
1,750

 
5 years
Goodwill(1)
 
7,867

 
 
Total purchase price(1)
 
$
18,704

 
 
 
(1) During the fourth quarter of 2017, the Company recorded $1.2 million in measurement period adjustments which increased the purchase price, primarily related to working capital and financial debt adjustments.
Acquired intangible assets are classified as Level 3 measurements for which fair value is derived from valuations based on inputs that are unobservable and significant to the overall fair value measurement. The Company used the income approach, specifically the discounted cash flow method and the incremental cash flow approach, to derive the fair value of the customer relationships and other intangible assets. Customer relationships are direct relationships with physicians and hospitals performing procedures with the distributed products. Other intangibles consists of non-Penumbra supplier relationships and sub-distributor relationships with third parties used to sell products, both as of the Closing Date. The intangible assets are amortized on a straight-line basis over their assigned estimated useful lives. The amortization of the acquired intangible assets are not deductible for tax purposes. As a result, a $2.5 million deferred tax liability was recorded as of the Closing Date.
The goodwill arising from the Crossmed acquisition is primarily attributed to expected synergies from future growth and assembled workforce. Goodwill is not deductible for tax purposes.
Crossmed’s net revenue in the Company’s consolidated statements of operations was $6.2 million for the year ended December 31, 2017. Crossmed’s net income included in the Company’s consolidated statements of operations was $0.2 million for the year ended December 31, 2017.
The following table presents certain unaudited pro forma information, for illustrative purposes only, for the years ended December 31, 2017 and 2016, as if Crossmed had been acquired on January 1, 2016. The unaudited estimated pro forma information combines the historical results of Crossmed with the Company’s consolidated historical results and includes certain pro forma adjustments, including intangible asset amortization and the elimination of pre-acquisition sales Penumbra made to Crossmed for the respective periods. The pro forma information may not be indicative of what would have occurred had the acquisition taken place on January 1, 2016, and may not be indicative of the Company’s future consolidated results. Additionally, the pro forma financial information does not include the impact of possible business model changes and does not reflect pro forma adjustments to conform accounting policies between Crossmed and the Company. The unaudited pro forma information is presented below (unaudited, in thousands):
 
 
December 31,
 
 
2017
 
2016
Pro forma net revenue
 
$
336,557

 
$
268,262

Pro forma net income
 
5,992

 
14,816

v3.10.0.1
Intangible Assets
12 Months Ended
Dec. 31, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
Intangible Assets
6. Intangible Assets
The following table presents details of the Company’s acquired finite-lived and indefinite-lived intangible assets as of December 31, 2018 and December 31, 2017, (in thousands, except weighted-average amortization period):
As of 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, 2017
 
Weighted-Average
Amortization Period
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Customer relationships
 
15.0 years
 
$
7,141

 
$
(238
)
 
$
6,903

Other
 
5.0 years
 
1,841

 
(183
)
 
1,658

Total intangible assets subject to amortization
 
13.1 years
 
$
8,982

 
$
(421
)
 
$
8,561

Intangible assets related to licensed technology
 
 
 
15,217

 

 
15,217

Total intangible assets
 
 
 
$
24,199

 
$
(421
)
 
$
23,778


The customer relationships and other intangible assets subject to amortization relate to the Company’s 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. Business Combination for more information. The Company’s 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 “8. Commitments and Contingencies” and Note “9. Stockholders’ Equity.” The Company’s licensed technology intangible asset is discussed further below in this footnote.
The following table presents the amortization recorded related to the Company’s finite-lived intangible assets (in thousands)
 
 
Year Ended December 31,
 
 
2018
 
2017
Cost of revenue
 
$
263

 
$

Sales, general and administrative
 
832

 
418

Total
 
$
1,095

 
$
418


The Company did not hold any intangible assets during the year ended December 31, 2016.
As of December 31, 2018, expected amortization expense for the unamortized acquired intangible assets for the next five years and thereafter is as follows (in thousands):
 
Amortization Expense
2019
$
1,069

2020
1,069

2021
1,069

2022
894

2023
718

Thereafter
7,547

Total amortization
$
12,366


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 recorded an 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 December 31, 2018, 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 the indefinite-lived intangible asset. During the year ended December 31, 2018, the contingent liability related to the exclusive technology license agreement decreased by $0.3 million. The changes in the contingent liability balance were due to changes in the underlying revenue forecasts used to estimate the probable future milestone payments. As of December 31, 2018, the balance of the contingent liability related to probable future milestone payments under the Licensing Agreement was $12.4 million, of which $0.9 million and $11.5 million were included in accrued liabilities and other non-current liabilities on the consolidated balance sheet, respectively. As of December 31, 2017, the balance of the contingent liability related to probable future milestone payments under the Licensing Agreement was $12.7 million which was included in other non-current liabilities on the consolidated balance sheet.
As of December 31, 2018, the gross carrying amount of the indefinite-lived intangible asset was $14.9 million. The Company completed its annual impairment analysis of its indefinite-lived intangible asset during the fourth quarter of 2018 and determined that there was no impairment of the indefinite-lived intangible asset.