PENUMBRA INC, 10-Q filed on 5/7/2019
Quarterly Report
v3.19.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2019
Apr. 23, 2019
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-Q  
Document Period End Date Mar. 31, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
Amendment Flag false  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Common Stock, Shares Outstanding   34,737,497
v3.19.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Mar. 31, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 95,606 $ 67,850
Marketable investments 99,241 133,039
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
Inventories 121,691 115,741
Prepaid expenses and other current assets 11,869 12,200
Total current assets 423,086 410,726
Property and equipment, net 35,380 35,407
Operating lease right-of-use asset 42,376 0
Intangible assets, net 26,813 27,245
Goodwill 7,659 7,813
Deferred taxes 31,862 32,940
Other non-current assets 1,613 875
Total assets 568,789 515,006
Current liabilities:    
Accounts payable 7,692 8,176
Accrued liabilities 58,032 57,886
Current operating lease liabilities 3,688 0
Total current liabilities 69,412 66,062
Deferred rent 0 7,586
Non-current operating lease liabilities 46,070 0
Other non-current liabilities 16,644 18,943
Total liabilities 132,126 92,591
Commitments and contingencies
Stockholders’ equity:    
Common stock 34 34
Additional paid-in capital 419,514 415,084
Accumulated other comprehensive loss (2,578) (1,942)
Retained earnings 19,762 9,064
Total Penumbra, Inc. stockholders’ equity 436,732 422,240
Non-controlling interest (69) 175
Total stockholders’ equity 436,663 422,415
Total liabilities and stockholders’ equity $ 568,789 $ 515,006
v3.19.1
Consolidated Statements of Stockholders' Equity (Deficit) - USD ($)
Total
Common Stock
Additional Paid-in Capital
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 $ 400,408,000 $ 33,000 $ 396,810,000 $ 1,569,000 $ 1,996,000 $ 400,408,000  
Beginning balance (in shares) at Dec. 31, 2017   33,685,146          
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Stock Issued During Period, Value, New Issues 5,256,000 $ 0 5,256,000     5,256,000  
Shares issued (in shares)   53,256          
Issuance of common stock (in shares)   232,943          
Issuance of common stock 1,329,000 $ 1,000 1,328,000     1,329,000  
Shares held for tax withholdings (3,530,000)   (3,530,000)     (3,530,000)  
Shares held for tax withholdings (in shares)   38,677          
Stock-based compensation 4,435,000   4,435,000     4,435,000  
Other comprehensive loss 1,068,000     1,068,000   1,068,000  
Net income attributable to Penumbra, Inc. 5,491,000       5,491,000 5,491,000  
Net loss attributable to non-controlling interest 0           $ 0
Consolidated net income 5,491,000            
Ending balance (in shares) at Mar. 31, 2018   33,932,668          
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Total stockholders’ equity 414,921,000 $ 34,000 404,299,000 2,637,000 7,951,000 414,921,000 0
Total stockholders’ equity 422,415,000 $ 34,000 415,084,000 (1,942,000) 9,064,000 422,240,000 175,000
Beginning balance (in shares) at Dec. 31, 2018   34,437,339          
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Issuance of common stock (in shares)   140,598          
Issuance of common stock 1,071,000 $ 0 1,071,000     1,071,000  
Shares held for tax withholdings (2,098,000)   (2,098,000)     (2,098,000)  
Shares held for tax withholdings (in shares)   14,284          
Stock-based compensation 5,457,000   5,457,000     5,457,000  
Other comprehensive loss (636,000)     (636,000)   (636,000)  
Net income attributable to Penumbra, Inc. 10,698,000       10,698,000 10,698,000  
Net loss attributable to non-controlling interest (244,000)           (244,000)
Consolidated net income 10,454,000            
Ending balance (in shares) at Mar. 31, 2019   34,563,653          
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Total stockholders’ equity 436,663,000 $ 34,000 $ 419,514,000 $ (2,578,000) $ 19,762,000 $ 436,732,000 $ (69,000)
Cumulative effect adjustments $ 0            
v3.19.1
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Mar. 31, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Allowance for doubtful accounts $ 2,877 $ 2,782
v3.19.1
Condensed Consolidated Statements of Operations - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Income Statement [Abstract]    
Revenues $ 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 0 (951)
Consolidated net income 10,454 5,491
Net loss attributable to non-controlling interest (244) 0
Net income attributable to Penumbra, Inc. $ 10,698 $ 5,491
Net (loss) income per share attributable to common stockholders — Basic (in dollars per share) $ 0.31 $ 0.16
Net (loss) income per share attributable to common stockholders — Diluted (in dollars per share) $ 0.30 $ 0.15
Weighted average shares used to compute net (loss) income per share attributable to common stockholders — Basic (in shares) 34,507,279 33,846,142
Weighted average shares used to compute net (loss) income per share attributable to common stockholders — Diluted (in shares) 36,213,164 35,917,051
v3.19.1
Condensed Consolidated Statements of Comprehensive (Loss) Income - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Statement of Comprehensive Income [Abstract]    
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) 0
Comprehensive income attributable to Penumbra, Inc. $ 10,062 $ 6,559
v3.19.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Statement of Cash Flows [Abstract]    
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 0 951
Inventory write-downs 658 300
Deferred taxes 1,078 (2,209)
Change in fair value of contingent consideration 0 442
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 0 (352)
Purchases of marketable investments 0 (42,552)
Proceeds from sales of marketable investments 1,018 0
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)
Proceeds from capital contribution from non-controlling interest 0 (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) 0 5,256
Purchase of property and equipment funded through accounts payable and accrued liabilities $ 860 $ 427
v3.19.1
Organization and Description of Business
3 Months Ended
Mar. 31, 2019
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.
v3.19.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2019
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying condensed consolidated balance sheet as of March 31, 2019, the condensed consolidated statements of operations for the three months ended March 31, 2019 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 and 2018 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 as of December 31, 2018 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, the results of its operations for the three months ended March 31, 2019 and 2018, the changes in stockholders’ equity for the three months ended March 31, 2019 and 2018, and the cash flows for the three months ended March 31, 2019 and 2018. The results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or for any other future annual or interim period.
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, 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, 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, other than changes to the Company’s leasing policy described below in connection with the adoption of the guidance under Accounting Standards Codification (“ASC”) 842.
The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its majority-owned subsidiary. The portion of equity 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 for doubtful accounts, the amount of variable consideration included in the transaction price, warranty reserve, valuation of inventories, useful lives of property and equipment, operating 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.

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 business activity: the design, development, manufacturing and marketing of innovative devices, and operates as one 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.
Recent Accounting Guidance
Recently Issued Accounting Standards
In June 2016, the Financial Accounting Standards Board (“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. In April 2019, the FASB issued ASU No. 2019-04 which provides 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 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. 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.
v3.19.1
Investments and Fair Value of Financial Instruments
3 Months Ended
Mar. 31, 2019
Fair Value Disclosures [Abstract]  
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 following table presents the Company’s marketable investments as of March 31, 2019 and December 31, 2018 (in thousands):
 
 
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, 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


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 and December 31, 2018 (in thousands):
 
 
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
)

The following table presents the contractual maturities of the Company’s marketable investments as of March 31, 2019 and December 31, 2018 (in thousands):
 
 
March 31, 2019
 
December 31, 2018
 
 
Fair Value
 
Fair Value
Due in less than one year
 
$
53,205

 
$
83,391

Due in one to five years
 
46,036

 
49,648

Total
 
$
99,241

 
$
133,039


Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The Company classifies its cash equivalents and marketable investments within Level 1 and Level 2, as it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs.
The Company determined the fair value of its Level 1 financial instruments, which are traded in active markets, using quoted market prices for identical instruments.
Financial instruments classified within Level 2 of the fair value hierarchy are valued based on other observable inputs, including broker or dealer quotations or alternative pricing sources. When quoted prices in active markets for identical assets or liabilities are not available, the Company relies on non-binding quotes from its investment managers, which are based on proprietary valuation models of independent pricing services. These models generally use inputs such as observable market data, quoted market prices for similar instruments, or historical pricing trends of a security relative to its peers. To validate the fair value determination provided by its investment managers, the Company reviews the pricing movement in the context of overall market trends and trading information from its investment managers. In addition, the Company assesses the inputs and methods used in determining the fair value in order to determine the classification of securities in the fair value hierarchy.
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 and December 31, 2018 (in thousands):
 
 
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

 
(1) More information on the contingent consideration obligations and the changes in fair value are presented below.
 
 
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 and March 31, 2018 (in thousands):
 
 
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, 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 or December 31, 2018. During the three months ended March 31, 2019 and 2018, 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 or December 31, 2018.
v3.19.1
Balance Sheet Components
3 Months Ended
Mar. 31, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Balance Sheet Components
4. Balance Sheet Components
Inventories
The following table shows the components of inventories as of March 31, 2019 and December 31, 2018 (in thousands):
 
 
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


Accrued Liabilities
The following table shows the components of accrued liabilities as of March 31, 2019 and December 31, 2018 (in thousands):
 
 
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 contingent liabilities 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 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.
The following table shows the changes in the Company’s estimated product warranty accrual, included in accrued liabilities, as of March 31, 2019 and December 31, 2018 (in thousands):
 
 
March 31,
2019
 
December 31,
2018
Balance at the beginning of the period
 
$
1,875

 
$
1,088

Accruals of warranties issued
 
355

 
1,336

Settlements of warranty claims
 
(153
)
 
(549
)
Balance at the end of the period
 
$
2,077

 
$
1,875


Other Non-Current Liabilities
The following table shows the components of other non-current liabilities as of March 31, 2019 and December 31, 2018 (in thousands):
 
 
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 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.
v3.19.1
Asset Acquisitions & Business Combination
3 Months Ended
Mar. 31, 2019
Business Combinations [Abstract]  
Asset Acquisitions and Business Combinations
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. As of March 31, 2019 and December 31, 2018, the Company’s condensed consolidated balance sheet included $1.3 million and $2.6 million, respectively, in current liabilities primarily related to additional consideration due to the sellers of Crossmed (the “Sellers”) for revenue-based milestone payments, based on net revenue in the years ending December 31, 2018 and 2019, and other working capital and financial debt adjustments. 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. As 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.
v3.19.1
Intangible Assets
3 Months Ended
Mar. 31, 2019
Intangible Assets, Net (Excluding Goodwill) [Abstract]  
Intangible Assets
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 and December 31, 2018 (in thousands, except weighted-average amortization period):
March 31, 2019
 
Weighted-Average Amortization Period
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Customer relationships
 
15.0 years
 
$
6,688

 
$
(781
)
 
$
5,907

Trade secrets and processes
 
20.0 years
 
5,256

 
(329
)
 
4,927

Other
 
5.0 years
 
1,725

 
(603
)
 
1,122

Total intangible assets subject to amortization
 
16.1 years
 
$
13,669

 
$
(1,713
)
 
$
11,956

Intangible assets related to licensed technology
 
 
 
14,857

 

 
14,857

Total intangible assets
 
 
 
$
28,526

 
$
(1,713
)
 
$
26,813

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


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 and March 31, 2018 (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Cost of revenue
 
$
66

 
$
31

Sales, general and administrative
 
200

 
216

Total
 
$
266

 
$
247


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 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 the indefinite-lived intangible asset. During the three months ended March 31, 2019, there were no material changes to the contingent liability related to the License Agreement. As of March 31, 2019, the balance of the contingent liability related to probable future milestone payments under the License 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 condensed consolidated balance sheet, respectively. As of December 31, 2018, the balance of the contingent liability related to probable future milestone payments under the License 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 March 31, 2019, the gross carrying amount of the indefinite-lived intangible asset was $14.9 million. During the three months ended March 31, 2019, the Company noted no events or circumstances that indicate the carrying value of the licensed technology may no longer be recoverable and that an impairment loss may have occurred.
v3.19.1
Goodwill
3 Months Ended
Mar. 31, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill
7. Goodwill
The following table presents the changes in goodwill during the three months ended March 31, 2019 (in thousands):
 
 
Total Company
Balance as of December 31, 2018
 
$
7,813

Foreign currency translation
 
(154
)
Balance as of March 31, 2019
 
$
7,659


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 the three months ended March 31, 2019, there were no events or changes in circumstances which triggered an impairment review.
v3.19.1
Leases
3 Months Ended
Mar. 31, 2019
Leases [Abstract]  
Leases
8. Leases
Adoption of ASC Topic 842, “Leases”
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.
The impact of the adoption of ASC 842 on the Company’s condensed consolidated balance sheet as of January 1, 2019 was as follows (in thousands):
 
 
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.
Lease Overview
As of December 31, 2018 and March 31, 2019, the 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 operating leases that expire at various dates through 2031, subject to the Company’s option to renew certain leases for an additional five to fifteen years. The Company also leases other equipment and vehicles primarily under non-cancelable operating leases that expire at various dates through 2023. As of December 31, 2018 and March 31, 2019, 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 thousands, expect years and percentages):
 
 
Three Months Ended
March 31, 2019
Operating lease cost
 
$
1,768

Variable lease cost
 
758

Total lease costs
 
$
2,526

 
 
 
Weighted Average Remaining Lease Term
 
 
Operating leases
 
10.6 years

 
 
 
Weighted Average Discount Rate
 
 
Operating leases
 
6.2
%

 
(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.

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, the Company signed a fifteen year lease for a manufacturing facility in Roseville, California (the “Roseville Lease”) which has not yet commenced as of March 31, 2019. The Roseville Lease is expected to commence upon substantial completion of lessor owned improvements to the building which the Company anticipates will be in 2020.
The following table is a schedule, by years, of maturities of the Company's lease liabilities as of March 31, 2019 (in thousands):
 
 
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 Lease, due to the uncertainty around the timing of when the Roseville Lease will commence and payments will be due. The total estimated lease payments over the fifteen 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 the maturities 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 will be due.
Supplemental cash flow information related to leases during the three months ended March 31, 2019 are as follows (in thousands):
 
 
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

v3.19.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
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 million in equal quarterly installments. 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 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, 2019 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 for product defect and similar claims. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable because it involves claims that may be made against the Company in the future, but have not yet been made.
The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of the individual.
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.
v3.19.1
Stockholder's Equity
3 Months Ended
Mar. 31, 2019
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stockholder's Equity
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”) during the three months ended March 31, 2019 is set forth below:
 
 
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 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


As of March 31, 2019, 449,313 restricted stock awards and restricted stock units are expected to vest.
Stock-based Compensation
The following table sets forth the stock-based compensation expense included in the Company’s condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018 (in thousands):
 
 
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, total unrecognized compensation cost was $25.8 million related to unvested share-based compensation arrangements which is expected to be recognized over a weighted average period of 2.5 years.
The total stock-based compensation cost capitalized in inventory was $0.5 million and $0.4 million as of March 31, 2019 and December 31, 2018, respectively.
v3.19.1
Accumulated Other Comprehensive Income (Loss)
3 Months Ended
Mar. 31, 2019
Equity [Abstract]  
Accumulated Other Comprehensive Income (Loss)
11. Accumulated Other Comprehensive (Loss) Income
Other comprehensive (loss) income 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 net (loss) income, these comprehensive income (loss) items accumulate and are included within accumulated other comprehensive (loss) income. Unrealized gains and losses on the Company’s marketable investments are reclassified from accumulated other comprehensive (loss) income 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.
The following table summarizes the changes in the accumulated balances during the three months ended March 31, 2019 and March 31, 2018, and includes information regarding the manner in which the reclassifications out of accumulated other comprehensive (loss) income into earnings affect the Company’s condensed consolidated statements of operations and consolidated statements of comprehensive (loss) income (in thousands):
 
 
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

v3.19.1
Income Taxes
3 Months Ended
Mar. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes
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.
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 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 primarily due to income taxes attributable to its worldwide profits offset by excess tax benefits from stock-based compensation attributable to the Company’s U.S. jurisdiction. The change in rate was primarily attributable to income taxes on higher worldwide profits combined with lower excess stock-based compensation tax benefits for the three months ended March 31, 2019, when compared to 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.
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 and 2018, 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, 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 financial statements as of March 31, 2019. The Company will repatriate foreign earnings only to the extent doing so will not result in any material U.S. 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 financial statements as of March 31, 2019.
v3.19.1
Net Income per Share
3 Months Ended
Mar. 31, 2019
Earnings Per Share [Abstract]  
Net Income per Share
13. Net Income Attributable to Penumbra, Inc. Per Share
The Company’s basic net income attributable to Penumbra, Inc. per share is calculated by dividing the net income attributable to Penumbra, Inc. by the weighted average number of shares of common stock outstanding for the period. The diluted net income per share 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, restricted stock units and stock sold through the Company’s employee stock purchase plan are considered common stock equivalents.
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 is as follows (in thousands, except share and per share amounts):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Numerator:
 
 
 
 
Net income attributable to Penumbra, Inc.
 
$
10,698

 
$
5,491