PENUMBRA INC, 10-K filed on 2/28/2017
Annual Report
Document and Entity Information Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Jan. 31, 2017
Jun. 30, 2016
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, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Amendment Flag
false 
 
 
Entity Common Stock, Shares Outstanding
 
31,941,821 
 
Entity Current Reporting Status
Yes 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Public Float
 
 
$ 1.5 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 13,236 
$ 19,547 
Marketable investments
115,517 
129,257 
Accounts receivable, net of doubtful accounts of $684 and $589 at December 31, 2016 and 2015, respectively
43,335 
29,444 
Inventories
73,012 
56,761 
Prepaid expenses and other current assets
18,727 
9,352 
Total current assets
263,827 
244,361 
Property and equipment, net
21,464 
8,951 
Deferred taxes
22,476 
10,143 
Other non-current assets
487 
393 
Total assets
308,254 
263,848 
Current liabilities:
 
 
Accounts payable
4,110 
2,567 
Accrued liabilities
31,690 
25,581 
Total current liabilities
35,800 
28,148 
Deferred Rent Credit, Noncurrent
5,083 
1,511 
Other non-current liabilities
824 
1,667 
Total liabilities
41,707 
31,326 
Commitments and contingencies (Note 7)
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.001 par value per share—5,000,000 shares authorized, none issued and outstanding at December 31, 2016 and 2015
Common stock, $0.001 par value per share—300,000,000 shares authorized, 31,108,828 issued and outstanding at December 31, 2016; 300,000,000 shares authorized, 29,897,860 issued and outstanding at December 31, 2015
31 
30 
Additional paid-in capital
273,865 
252,087 
Notes receivable from stockholders
(5)
Accumulated other comprehensive loss
(4,688)
(2,115)
Accumulated deficit
(2,661)
(17,475)
Total stockholders’ equity
266,547 
232,522 
Total liabilities and stockholders’ equity
$ 308,254 
$ 263,848 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 684 
$ 589 
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)
Preferred stock, shares outstanding (in shares)
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 (in shares)
31,108,828 
29,897,860 
Common stock, shares outstanding (in shares)
31,108,828 
29,897,860 
Consolidated Statements of Operations and Comprehensive Income (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Income Statement [Abstract]
 
 
 
Revenue
$ 263,317 
$ 186,095 
$ 125,510 
Cost of revenue
92,488 
62,037 
42,668 
Gross profit
170,829 
124,058 
82,842 
Operating expenses:
 
 
 
Research and development
23,875 
18,027 
15,575 
Sales, general and administrative
148,304 
101,852 
64,258 
Total operating expenses
172,179 
119,879 
79,833 
(Loss) Income from operations
(1,350)
4,179 
3,009 
Interest income, net
2,323 
541 
439 
Other expense, net
(1,842)
(696)
(309)
(Loss) Income before provision for (benefit from) income taxes
(869)
4,024 
3,139 
Provision for (benefit from) income taxes
(15,683)
1,659 
894 
Net income
14,814 
2,365 
2,245 
Foreign currency translation adjustments, net of tax
(2,631)
(1,308)
(1,423)
Unrealized gains (losses) on available-for-sale securities, net of tax
58 
57 
(237)
Comprehensive income
12,241 
1,114 
585 
Net (loss) income attributable to common stockholders
$ 14,814 
$ 1,084 
$ (833)
Net income (loss) per share attributable to common stockholders—Basic (in dollars per share)
$ 0.49 
$ 0.09 
$ (0.18)
Net income (loss) per share attributable to common stockholders—Diluted (in dollars per share)
$ 0.44 
$ 0.08 
$ (0.18)
Weighted average shares used to compute net income (loss) per share attributable to common stockholders—Basic (in shares)
30,464,583 
11,993,429 
4,609,375 
Weighted average shares used to compute net income (loss) per share attributable to common stockholders—Diluted (in shares)
33,478,078 
14,219,650 
4,609,375 
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit) (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Common Stock
Additional Paid-in Capital
Notes Receivable from Stockholders
Accumulated Other Comprehensive Income (Loss)
Accumulated Deficit
Beginning balance at Dec. 31, 2013
$ (8,062)
$ 4 
$ 6,269 
$ (138)
$ 796 
$ (14,993)
Beginning balance (in shares) at Dec. 31, 2013
 
4,391,588 
 
 
 
 
Increase (Decrease) in Temporary Equity [Roll Forward]
 
 
 
 
 
 
Repurchase of preferred stock
(6,344)
 
 
 
 
(6,344)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Repurchase of common stock
(1,040)
 
(292)
 
 
(748)
Repurchase of common stock (in shares)
 
(115,612)
 
 
 
 
Issuance of common stock
1,037 
1,036 
 
 
 
Issuance of common stock (in shares)
 
460,713 
 
 
 
 
Stock-based compensation
1,433 
 
1,433 
 
 
 
Forgiven notes receivable from stockholders
21 
 
 
21 
 
 
Foreign currency translation adjustment, net of tax
(1,423)
 
 
 
(1,423)
 
Unrealized gain (loss) on investments, net of tax
(237)
 
 
 
(237)
 
Net income
2,245 
 
 
 
 
2,245 
Ending balance at Dec. 31, 2014
(12,370)
8,446 
(117)
(864)
(19,840)
Ending balance (in shares) at Dec. 31, 2014
 
4,736,689 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Conversion of convertible preferred stock into common stock upon closing of IPO
111,467 
19 
111,448 
 
 
 
Conversion of convertible preferred stock into common stock upon closing of IPO (in shares)
 
19,510,410 
 
 
 
 
Shares issued upon closing of IPO
124,742 
124,737 
 
 
 
Shares issued upon closing of IPO (in shares)
 
4,600,000 
 
 
 
 
Repurchase of common stock
(342)
 
(342)
 
 
 
Repurchase of common stock (in shares)
 
(23,650)
 
 
 
 
Issuance of common stock
1,126 
1,125 
 
 
 
Issuance of common stock (in shares)
 
1,074,411 
 
 
 
 
Stock-based compensation
7,608 
 
7,608 
 
 
 
Forgiven notes receivable from stockholders
91 
 
 
91 
 
 
Foreign currency translation adjustment, net of tax
(1,308)
 
 
 
(1,308)
 
Unrealized gain (loss) on investments, net of tax
57 
 
 
 
57 
 
Net income
2,365 
 
 
 
 
2,365 
Shares held for tax withholdings
(2,525)
 
(2,525)
 
 
 
Excess tax benefit from stock-based compensation
1,590 
 
1,590 
 
 
 
Note received from a stockholder
21 
 
 
21 
 
 
Ending balance at Dec. 31, 2015
232,522 
30 
252,087 
(5)
(2,115)
(17,475)
Ending balance (in shares) at Dec. 31, 2015
 
29,897,860 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Issuance of common stock
3,168 
3,167 
 
 
 
Issuance of common stock (in shares)
 
1,043,223 
 
 
 
 
Issuance of common stock under employee stock purchase plan
214,025 
214,025 
 
 
 
 
Issuance of common stock under employee stock purchase plan
6,600 
 
6,578 
 
 
 
Stock-based compensation
14,657 
 
14,657 
 
 
 
Foreign currency translation adjustment, net of tax
(2,631)
 
 
 
(2,631)
 
Unrealized gain (loss) on investments, net of tax
58 
 
 
 
58 
 
Net income
14,814 
 
 
 
 
14,814 
Shares held for tax withholdings
(2,624)
 
(2,624)
 
 
 
Note received from a stockholder
 
 
 
 
Ending balance at Dec. 31, 2016
$ 266,547 
$ 31 
$ 273,865 
$ 0 
$ (4,688)
$ (2,661)
Ending balance (in shares) at Dec. 31, 2016
 
31,108,828 
 
 
 
 
Consolidated Statement of Convertible Preferred Stock and Stockholders’ Equity (Deficit) (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement of Stockholders' Equity [Abstract]
 
 
 
Foreign currency translation adjustment, tax
$ (3)
$ 117 
$ 245 
Unrealized gain on investments, tax
$ (32)
$ 66 
$ 168 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$ 14,814 
$ 2,365 
$ 2,245 
Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
2,300 
1,752 
800 
Amortization of premium on marketable investments
997 
83 
Stock-based compensation
14,637 
7,271 
1,433 
Provision for doubtful accounts
216 
(13)
150 
Inventory write downs
2,700 
1,200 
1,852 
Write off of note receivable
91 
21 
Loss on minority investment
150 
Loss on disposal of property and equipment
143 
43 
21 
Realized (gain) loss on marketable investments
(8)
541 
Deferred taxes
(12,378)
(3,204)
(892)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(14,560)
(11,063)
(7,426)
Inventories
(19,737)
(25,126)
(9,444)
Prepaid expenses and other current and non-current assets
(9,043)
(4,013)
(1,906)
Accounts payable
1,375 
132 
1,299 
Accrued expenses and other non-current liabilities
5,773 
9,289 
5,357 
Net cash used in operating activities
(12,807)
(20,689)
(6,389)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of marketable investments
(63,346)
(135,340)
(51,342)
Proceeds from sales of marketable investments
12,997 
54,998 
18,229 
Proceeds from Maturities, Prepayments and Calls of Available-for-sale Securities
64,671 
Purchases of property and equipment
(13,635)
(5,474)
(3,888)
Net cash provided by (used in) investing activities
687 
(85,816)
(37,001)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of preferred stock, net of issuance costs
57,212 
Proceeds from issuance of common stock issued in initial public offering, net of issuance costs
124,742 
Proceeds from exercises of stock options
3,172 
617 
1,036 
Proceeds from issuance of stock under employee stock purchase plan
6,578 
Repurchase of preferred stock
(8,311)
Repayment of credit facility
(6,000)
Repurchase of common stock and stock options
(1,040)
Payment of employee taxes related to vested common and restricted stock
(2,624)
(2,525)
Net cash provided by financing activities
7,126 
122,834 
42,897 
Effect of foreign exchange rate changes on cash and cash equivalents
(1,317)
(72)
(348)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(6,311)
16,257 
(841)
CASH AND CASH EQUIVALENTS—Beginning of period
19,547 
3,290 
4,131 
CASH AND CASH EQUIVALENTS—End of period
13,236 
19,547 
3,290 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest
160 
Cash paid for income taxes
2,149 
1,220 
3,086 
NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Conversion of convertible preferred stock into common stock
111,467 
Purchase of property and equipment funded through accounts payable
$ 1,442 
$ 143 
$ 44 
Organization and Description of Business
Organization and Description of Business
Organization and Description of Business
Penumbra, Inc. (the Company) is a global healthcare company focused on interventional therapies. The Company designs, develops, manufactures and markets innovative devices and has a broad portfolio of products that addresses challenging medical conditions and significant clinical needs across two major markets, neuro and peripheral vascular. The conditions that the Company’s products address include, among others, ischemic stroke, hemorrhagic stroke and various peripheral vascular conditions that can be treated through thrombectomy and embolization procedures.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
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, 2015 and 2014, to conform to the presentation for the year ended December 31, 2016. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts 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 provisions for doubtful accounts, sales return reserve, warranty reserves, valuation of inventories, useful lives of property and equipment, income taxes, the valuation of equity instruments and 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, its Chief Executive Officer, reviews its consolidated operating results for the purpose of allocating resources and evaluating financial performance.
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 loss in the consolidated balance sheets. Transactions denominated in foreign currency are translated at exchange rates at the date of transaction with foreign currency gains (losses) recorded in other expense, net in the consolidated statements of operations and comprehensive income. The Company recognized net foreign currency transaction losses of $0.7 million, $0.1 million and $0.3 million during the years ended December 31, 2016, 2015 and 2014, 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 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, 2016 and held cash in foreign banks of approximately $2.1 million and $1.9 million at December 31, 2016 and 2015, 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 years ended December 31, 2016, 2015 and 2014, one customer (a distributor) accounted for 11.5%, 10% and 12%, respectively, of the Company’s revenue. No customer accounted for greater than 10% of the Company’s accounts receivable balance as of December 31, 2016 or 2015.
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 money market funds and in highly liquid debt instruments of U.S. federal and municipal governments, and their agencies, and corporate debt securities. 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 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, 2016, 2015 or 2014.
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 market. Write downs are provided for raw materials, components or finished goods that are determined to be excessive or obsolete. Market value is determined as the lower of replacement cost or net realizable value. 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.
The estimate of excess quantities is subjective and primarily dependent on the Company’s estimates of future demand for a particular product or components or raw materials used in the manufacturing of such product. If the estimate of future demand is inaccurate based on actual sales, the Company may increase the write down for excess inventory and record a charge to inventory impairment in the accompanying consolidated statements of operations and comprehensive income. The Company periodically evaluates the carrying value of inventory on hand for potential excess amounts over demand using the same lower of cost or market approach that has been used to value the inventory. The Company also periodically evaluates inventory quantities in consideration of actual loss experience. As a result of these evaluations, the Company recognized total write downs of $2.7 million, $1.2 million and $1.9 million for the years ended December 31, 2016, 2015 and 2014, respectively.
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 and comprehensive income 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, 2016, 2015 or 2014.
Revenue Recognition
Revenue is comprised of product revenue net of returns, discounts, administration fees and sales rebates. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Evidence of an arrangement consists of customer orders and the Company typically considers delivery to have occurred once title and risk of loss has been transferred and the product has been delivered to the customer. The Company typically recognizes revenue when products are delivered to hospital customers or distributors. However, 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. The Company had a deferred revenue balance of $0.3 million and $0.6 million, as of December 31, 2016 and 2015, respectively.
The Company’s terms and conditions permit product returns and exchanges, and it records returns reserves in the period when revenue is recognized. Estimates are based on actual historical returns over the prior three years and 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.
Cost of Revenue
Cost of revenue includes direct and indirect costs associated with the manufacture of the Company’s products. Direct costs include material and labor, while indirect costs include inbound freight charges, receiving costs, inspection and testing costs, warehousing costs, royalty expense and other labor and overhead costs incurred in the manufacturing of products. Cost of revenue also includes stock-based compensation, warranty replacement costs, cost of revenue related to product return reserves and excess and obsolete inventory write-downs.
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, $0.5 million and $0.3 million for the years ended December 31, 2016, 2015 and 2014, 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 period during which service is required to be performed in exchange for the award, 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.
Equity instruments issued to non-employees are recorded at their fair value on the measurement date and are subject to periodic adjustments as the underlying equity instruments vest. The fair value of these equity instruments are 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 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 deferred tax assets 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 deferred tax asset 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 displays comprehensive income and its components as part of the consolidated statements of operations.
Net Income (Loss) Per Share of Common Stock
The Company’s basic net income (loss) per share attributable to common stockholders is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the period. The diluted net income (loss) per share attributable to common stockholders 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 common stock warrants are considered common stock equivalents.
The Company calculated its basic and diluted net income per share attributable to common stockholders for the years ended December 31, 2015 and 2014 in conformity with the two-class method required for companies with participating securities. Under the two-class method, the Company determined whether it had net income attributable to common stockholders, which included the results of operations less current period preferred stock non-cumulative dividends. If it was determined that the Company did have net income attributable to common stockholders during a period, the related undistributed earnings were then allocated between common stock and the preferred stock based on the weighted average number of shares outstanding during the period to determine the numerator for the basic net income per share attributable to common stockholders. In computing diluted net income attributable to common stockholders, undistributed earnings were re-allocated to reflect the potential impact of dilutive securities to determine the numerator for the diluted net income per share attributable to common stockholders.
Recent Accounting Guidance
Recently Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board (FASB) issued a new standard that changes the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when stock awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also allows the Company to repurchase more of an employee’s vesting shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on the consolidated statement of cash flows, and provides an accounting policy election to account for forfeitures as they occur. The new standard is effective for us beginning January 1, 2017, with early adoption permitted.
We elected to early adopt the new guidance in the fourth quarter of 2016 which requires us to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The impact of adoption was the creation of deferred tax assets in the balance sheet and recognition of excess tax benefits in our provision for (benefit from) income taxes rather than paid-in capital for all periods in fiscal year 2016. Adoption of the new standard resulted in the recognition of excess tax benefits in our benefit from income taxes rather than paid-in capital of $17.2 million for the year ended December 31, 2016.
As part of the $17.2 million recognition of excess tax benefits in our benefit from income taxes, the Company elected to carry back the NOL generated in 2016 to the 2014 and 2015 tax years, which resulted in a $3.3 million discrete tax benefit for the year ended December 31, 2016.
Additional amendments to the accounting for income taxes and minimum statutory withholding tax requirements had no impact to retained earnings, where the cumulative effect of these changes are required to be recorded. We have elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.
We elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively to all periods presented which resulted in an increase to net cash from operations and decrease to net cash from financing of $1.6 million for the year ended December 31, 2015 and no impact for the year ended December 31, 2014. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented on our consolidated cash flows statements since such cash flows have historically been presented as a financing activity.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which outlines a comprehensive new revenue recognition model designed to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with CustomersPrincipal versus Agent Considerations (Reporting Revenue Gross versus Net), which further clarifies the implementation guidance on principal versus agent considerations contained in ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with CustomersIdentifying Performance Obligations and Licensing, which further clarifies the implementation guidance relating to identifying performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with CustomersNarrow-Scope improvements and Practical Expedients, which further clarifies the implementation on narrow scope improvements and practical expedients. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606Revenue from Contracts with Customers, which makes minor corrections or minor improvements to the Codification related to ASU No. 2014-09 that are not expected to have a significant effect on current accounting practice. These standards will be effective for the Company in the first quarter of 2018 pursuant to ASU No. 2015-14, Revenue from Contracts with Customers-Deferral of the Effective Date, issued by the FASB in August 2015. The Company is currently evaluating the financial statement impact of adopting the new standard as well as the transition method for implementation. The Company will be impacted by the new standard regarding the timing of fulfillment of delivery criterion.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which requires an entity to measure most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The accounting standard is effective prospectively for annual periods beginning after December 15, 2016, and interim periods therein. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company does not expect the adoption of this ASU to have a significant impact on our financial position.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which amends the existing accounting standards for leases. 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. The accounting standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and must be applied using a modified retrospective approach. Early adoption is permitted. While the Company is continuing to assess all potential impacts of the standard, it expects that most of its lease commitments will be subject to the updated standard and recognized as lease liabilities and right-of-use assets upon adoption.
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.
Initial Public Offering (IPO)
Initial Public Offering (IPO)
Initial Public Offering (IPO)
The Company closed its IPO on September 23, 2015, in which it sold 4.6 million shares of common stock at an offering price of $30.00 per share and raised $124.7 million in net proceeds after deducting underwriting discounts and commissions of $9.7 million and other offering expenses of $3.6 million.
Upon the closing of the IPO, all outstanding shares of convertible preferred stock of the Company were automatically converted into 19,510,410 shares of common stock on a one-for-one basis.
8. Preferred Stock and Common Stock
Preferred Stock
The Company has 5,000,000 of authorized preferred stock issuable. There is no preferred stock outstanding as of December 31, 2016 and 2015.
Common Stock
Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the board of directors, subject to the prior rights of holders of all classes of stock outstanding.
Common and Preferred Stock Repurchase
The Company’s board of directors approved the repurchase of 70,612 shares of common stock, 45,000 stock options and 45,611 of preferred stock from shareholders in May 2014 for $13.20 per share for a total purchase price of $2.0 million. For the repurchased shares of common stock and stock options, the Company charged the difference between the purchase and market prices of $0.5 million to expense. For the repurchased preferred shares, the excess between the purchase and the issuance price of $0.5 million was treated as a deemed dividend. In addition, the Company closed a tender offer in July 2014 to repurchase shares of preferred stock from existing shareholders at a purchase price of $13.20 per share, repurchasing 584,052 shares of preferred stock for a total purchase price of $7.7 million. The excess between the purchase and the issuance price of $5.8 million was treated as a deemed dividend. The repurchased shares of common and preferred stock were retired and remained as authorized but unissued.
Fair Value of Financial Instruments
Fair Value of Financial Instruments
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 Company did not own any Level 3 financial assets or liabilities as of December 31, 2016 or 2015.
The Company did not have any financial assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2016 and 2015.
During the years ended December 31, 2016, 2015 and 2014, the Company did not record any impairment charges related to its marketable investments, and the Company did not have any transfers between Level 1, Level 2 and Level 3 of 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, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
873

 
$

 
$

 
$
873

Marketable investments:
 
 
 
 
 
 
 
 
Commercial paper
 

 
4,238

 

 
4,238

U.S. Treasury
 
4,996

 

 

 
4,996

U.S. Agency securities
 

 
8,794

 

 
8,794

U.S. States and Municipalities
 

 
27,355

 

 
27,355

Corporate bonds
 

 
68,925

 

 
68,925

Non-U.S. Government debt securities
 

 
1,209

 

 
1,209

Total
 
$
5,869

 
$
110,521

 
$

 
$
116,390

 
 
As of December 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Commercial paper
 
$

 
$
9,850

 
$

 
$
9,850

Money market funds
 
252

 

 

 
252

Marketable investments:
 
 
 
 
 
 
 
 
Commercial paper
 

 
22,332

 

 
22,332

U.S. Treasury
 
15,436

 

 

 
15,436

U.S. Agency securities
 

 
21,464

 

 
21,464

U.S. States and Municipalities
 

 
2,084

 

 
2,084

Corporate bonds
 

 
61,002

 

 
61,002

Non-U.S. Government debt securities
 

 
6,939

 

 
6,939

Total
 
$
15,688

 
$
123,671

 
$

 
$
139,359

Balance Sheet Components
Balance Sheet Components
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
 
Balance At
End Of
Year
For the year ended:
 
 
 
 
 
 
 
 
December 31, 2014
 
$
471

 
$
150

 
$
(19
)
 
$
602

December 31, 2015
 
602

 
(13
)
 

 
589

December 31, 2016
 
589

 
216

 
(121
)
 
684


Prepaid Expenses and Other Current Assets
The Company’s prepaid expenses and other current assets comprised of the following (in thousands):
 
 
December 31,
 
 
2016
 
2015
Prepaid taxes
 
$
4,656

 
$
2,736

Prepaid expenses
 
4,573

 
4,706

Income tax receivable
 
4,536

 
606

Other current assets
 
4,962

 
1,304

Prepaid expenses and other current assets
 
$
18,727

 
$
9,352

 
Marketable Investments
The Company’s marketable investments as of December 31, 2016 and 2015 were as follows (in thousands):
 
 
December 31, 2016
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Commercial paper
 
$
4,237

 
$
1

 
$

 
$
4,238

U.S. Treasury
 
4,996

 

 

 
4,996

U.S. Agency securities
 
8,803

 
3

 
(12
)
 
8,794

U.S. States and Municipalities
 
27,429

 
1

 
(75
)
 
27,355

Corporate bonds
 
69,009

 
36

 
(120
)
 
68,925

Non-U.S. Government debt securities
 
1,209

 

 

 
1,209

Total
 
$
115,683

 
$
41

 
$
(207
)
 
$
115,517

 
 
December 31, 2015
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Commercial paper
 
$
22,328

 
$
5

 
$
(1
)
 
$
22,332

U.S. Treasury
 
15,459

 
4

 
(27
)
 
15,436

U.S. Agency securities
 
21,497

 
1

 
(34
)
 
21,464

U.S. States and Municipalities
 
2,086

 

 
(2
)
 
2,084

Corporate bonds
 
61,188

 
3

 
(189
)
 
61,002

Non-U.S. Government debt securities
 
6,954

 
1

 
(16
)
 
6,939

Total
 
$
129,512

 
$
14

 
$
(269
)
 
$
129,257


 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 as of December 31, 2016 and 2015 (in thousands):
 
 
December 31, 2016
 
 
Fair Value
 
Gross Unrealized Losses
U.S. Agency securities
 
3,291

 
(12
)
U.S. States and Municipalities
 
22,286

 
(75
)
Corporate bonds
 
29,748

 
(120
)
Total
 
$
55,325

 
$
(207
)
 
 
December 31, 2015
 
 
Fair Value
 
Gross Unrealized Losses
Commercial paper
 
$
4,746

 
$
(1
)
U.S. Treasury
 
12,453

 
(27
)
U.S. Agency securities
 
13,475

 
(34
)
U.S. States and Municipalities
 
2,084

 
(2
)
Corporate bonds
 
59,163

 
(189
)
Non-U.S. government debt securities
 
5,881

 
(16
)
Total
 
$
97,802

 
$
(269
)

As of December 31, 2016 and 2015, there were no securities that had been in a loss position for more than twelve months.
The contractual maturities of the Company’s marketable investments as of December 31, 2016 and 2015 were as follows (in thousands):
 
 
December 31,
 
 
2016
 
2015
Marketable Investments
 
Fair Value
 
Fair Value
Due in one year
 
$
71,051

 
$
62,983

Due in one to five years
 
44,466

 
66,274

Total
 
$
115,517

 
$
129,257


 
Inventories
The components of inventories consisted of the following (in thousands):
 
 
December 31,
 
 
2016
 
2015
Raw materials
 
$
11,367

 
$
9,176

Work in process
 
3,663

 
2,746

Finished goods
 
57,982

 
44,839

Inventories
 
$
73,012

 
$
56,761


Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
 
 
December 31,
 
 
2016
 
2015
Machinery and equipment
 
$
9,734

 
$
8,559

Furniture and fixtures
 
4,246

 
2,091

Leasehold improvements
 
10,207

 
1,564

Software
 
1,221

 
666

Computers
 
884

 
565

Construction in progress
 
2,193

 
577

Total property and equipment
 
28,485

 
14,022

Less: Accumulated depreciation and amortization
 
(7,021
)
 
(5,071
)
Property and equipment, net
 
$
21,464

 
$
8,951


Depreciation and amortization expense was $2.3 million, $1.8 million and $0.8 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Accrued Liabilities
The following table shows the components of accrued liabilities (in thousands):
 
 
December 31,
 
 
2016
 
2015
Payroll and employee-related cost
 
$
16,956

 
$
13,653

Sales return reserve
 
2,753

 
3,247

Preclinical and clinical trial cost
 
2,054

 
1,330

Deferred revenue
 
344

 
526

Product warranty
 
1,254

 
713

Sales and VAT tax payable
 
733

 
531

Income tax payable
 
174

 
308

Other accrued liabilities
 
7,422

 
5,273

Total accrued liabilities
 
$
31,690

 
$
25,581


The estimated product warranty accrual was as follows (in thousands):
 
 
December 31,
 
 
2016
 
2015
 
2014
Balance at the beginning of the year
 
$
713

 
$
314

 
$
323

Accruals of warranties issued
 
1,176

 
752

 
149

Settlements of warranty claims
 
(635
)
 
(353
)
 
(158
)
Balance at the end of the year
 
$
1,254

 
$
713

 
$
314

Credit Facility
Credit Facility
Credit Facility
In May 2012, the Company entered into a revolving credit facility of $15.0 million with Wells Fargo Bank, National Association. The credit facility was collateralized by the Company’s investment balances. The interest on the credit facility was based on the daily one-month London Inter-Bank Offered Rate, plus 1.75% and was payable monthly. The credit facility contained customary covenants for credit facilities of this type, including limitations on disposition of assets and changes in control. In May 2014, in conjunction with its Series F preferred stock financing, the Company paid the outstanding balance on the credit facility and terminated the credit facility.
Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
Lease Commitments
The Company leases its offices under non-cancelable operating leases that expire at various dates from 2029 to 2031, subject to our option to renew certain leases for an additional five to fifteen years. From time to time through December 31, 2025, if any space in any of the buildings located in the same business park as our campus becomes vacant, that space will be added to the lease at the then current base monthly rental rate. The maximum additional space that could be added under this provision of the lease is 117,325 square feet of which 15,882 square feet was added to the lease in 2016. The additional space could potentially result in approximately $1.5 million of annual rent expense based on current terms of the lease. The table below does not include the Company’s potential obligation for the additional space(s) that may be added to the lease by the landlord. The Company leases its other equipment under non-cancelable operating leases that expire at various dates through 2021.
Rent expense for the years ended December 31, 2016, 2015 and 2014 was $5.2 million, $3.2 million and $1.8 million, respectively. In addition to the amounts included in the table below, certain lease agreements require the Company to make payments during the lease term for taxes, insurance and other operating expenses.
 Future minimum lease payments under the non-cancelable operating leases as of December 31, 2016 are as follows (in thousands):
 
Lease Payments
Year Ending December 31:
 
2017
$
5,554

2018
5,568

2019
5,610

2020
5,642

2021
5,234

     Thereafter
50,919

Total future minimum lease payments
$
78,527


Purchase Commitments
The Company had non-cancellable purchase obligations to suppliers at December 31, 2016 of $3.5 million.
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 December 31, 2016 and 2015, the license agreement requires 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 15 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 a 5% royalty on sales of products covered under applicable patents, on a quarterly basis. The first commercial sale of covered products occurred in April 2014. Unless terminated earlier, the royalty term for each applicable product shall continue for 15 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 requires the Company to pay, on a quarterly basis, a 3% royalty on the first $5 million in sales and a 1% royalty on sales thereafter of products covered under applicable patents. Unless the agreement is terminated earlier, the royalty for each covered product shall continue until 2030.
In April 2015, the Company entered into a royalty agreement that requires the Company to pay a 2% royalty on sales of certain products covered by the agreement, on a quarterly basis. The Company began the first commercial sale of the covered products in July 2015. Unless terminated earlier, the royalty term for each covered product shall continue for 20 years following the first commercial sale of the covered products.
Royalty expense included in cost of sales for the years ended December 31, 2016, 2015 and 2014 was $2.9 million, $2.0 million and $1.1 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.
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
The Company was contacted in 2015 by the attorney for a potential product liability claimant who allegedly suffered injuries as a result of aneurysm procedure in which the Penumbra Coil 400 was used. On February 19, 2016, a complaint for damages was filed on behalf of this claimant against Penumbra and the hospital involved in the procedure (Montgomery v. Penumbra, Inc., et al., Case No. 16-2-04050-1 SEA, Superior Court of the State of Washington, King County). The suit alleges liability primarily under the Washington Product Liability Act and seeks both compensatory and punitive damages without a specific damages claim. Counsel for the claimant previously indicated that he expects that a jury could award $35 million in damages were this matter to go to trial. This amount is substantially in excess of the Company’s insurance coverage. The hospital defendant had requested indemnification from the Company but was dismissed from the case in July 2016. The case is in the discovery phase, and the Company is unable to assess the merits of the plaintiff’s case. The Company intends to vigorously defend the litigation, as the Company believes there will be substantial questions regarding causation, liability and damages.
From time to time, the Company is subject to claims and assessments in the ordinary course of business. The Company is not currently a party to any 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.
Preferred Stock and Common Stock
Preferred Stock and Common Stock
Initial Public Offering (IPO)
The Company closed its IPO on September 23, 2015, in which it sold 4.6 million shares of common stock at an offering price of $30.00 per share and raised $124.7 million in net proceeds after deducting underwriting discounts and commissions of $9.7 million and other offering expenses of $3.6 million.
Upon the closing of the IPO, all outstanding shares of convertible preferred stock of the Company were automatically converted into 19,510,410 shares of common stock on a one-for-one basis.
8. Preferred Stock and Common Stock
Preferred Stock
The Company has 5,000,000 of authorized preferred stock issuable. There is no preferred stock outstanding as of December 31, 2016 and 2015.
Common Stock
Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the board of directors, subject to the prior rights of holders of all classes of stock outstanding.
Common and Preferred Stock Repurchase
The Company’s board of directors approved the repurchase of 70,612 shares of common stock, 45,000 stock options and 45,611 of preferred stock from shareholders in May 2014 for $13.20 per share for a total purchase price of $2.0 million. For the repurchased shares of common stock and stock options, the Company charged the difference between the purchase and market prices of $0.5 million to expense. For the repurchased preferred shares, the excess between the purchase and the issuance price of $0.5 million was treated as a deemed dividend. In addition, the Company closed a tender offer in July 2014 to repurchase shares of preferred stock from existing shareholders at a purchase price of $13.20 per share, repurchasing 584,052 shares of preferred stock for a total purchase price of $7.7 million. The excess between the purchase and the issuance price of $5.8 million was treated as a deemed dividend. The repurchased shares of common and preferred stock were retired and remained as authorized but unissued.
Stock Option Plans
Stock Option Plans
Stock Option Plans
2005 Stock Plan
The Company adopted the Penumbra, Inc. 2005 Stock Plan (the 2005 Plan) in January 2005. The 2005 Plan was subsequently amended and restated in 2006, 2007, 2008 and 2010. As of December 31, 2016 and 2015, the Company had granted options to purchase 5,431,017 and 5,431,017 shares of common stock, respectively, under the 2005 Plan, of which options to purchase 1,002,307 and 1,757,282 shares of common stock were outstanding, and options to purchase 4,263 and 12,339 shares of common stock had been early exercised and were unvested and subject to repurchase, as of December 31, 2016 and 2015, respectively. Under the 2005 Plan, the board of directors could grant incentive stock options (ISOs), nonqualified stock options (NSOs), and/or stock awards to eligible persons, including employees, nonemployees, directors, consultants and other independent advisors who provide services to the Company. Stock purchase rights could also be granted under the 2005 Plan. The board of directors had the authority to determine to whom options would be granted, the number of options, the term and the exercise price. ISOs could only be granted to Company employees, which include officers and directors of the Company. NSOs and stock purchase rights could be granted to employees and consultants. For individuals holding more than 10% of the voting rights of all classes of stock, the exercise price for an ISO could not be less than 110% of fair market value. Options granted under the 2005 Plan permitted an optionee to exercise options immediately upon grant irrespective of the vesting term. Options generally vest annually at a rate of 1/4 after the first year and 1/48 per month thereafter. The term of the options is no longer than five years for ISOs, for which the grantee owns greater than 10% of the voting power of all classes of stock and no longer than 10 years for all other options.
2011 Equity Incentive Plan
The Company adopted the Penumbra, Inc. 2011 Equity Incentive Plan (the 2011 Plan) in October 2011. As of December 31, 2016 and 2015, the Company had granted options to purchase 145,000 and 145,000 shares of common stock, respectively, under the 2011 Plan, of which options to purchase 145,000 and 145,000 shares of common stock were outstanding at December 31, 2016 and 2015, respectively. As of December 31, 2016 and 2015, the Company had granted 505,000 and 505,000 shares of restricted stock under the 2011 Plan, of which 150,125 and 249,125 shares were unvested and subject to forfeiture and 9,667 and 4,667 shares had been forfeited as of December 31, 2016 and 2015, respectively. Under the 2011 Plan, the board of directors could grant ISOs, NSOs, restricted stock, and/or RSUs to eligible persons, including employees, directors and consultants who provide services to the Company. Stock Appreciation Rights (SAR) could also be granted under the 2011 Plan. The board of directors had the authority to determine to whom options would be granted, the number of options, the term and the exercise price. ISOs could only be granted to Company employees, which include officers and directors of the Company. NSOs, SARs, restricted stock and RSUs could be granted to employees and consultants. For individuals holding more than 10% of the voting rights of all classes of stock, the exercise price for an ISO could not be less than 110% of fair market value. Stock options granted under the 2011 Plan generally have a contractual life of ten years, and generally vest over a period of four years.
Amended and Restated 2014 Equity Incentive Plan
The Company adopted the Penumbra, Inc. 2014 Equity Incentive Plan in May 2014. The plan was amended and restated as of September 17, 2015 (as amended and restated, the 2014 Plan). The 2014 Plan replaced the 2011 Plan and the 2005 Plan and no further equity awards may be granted under the 2011 Plan or the 2005 Plan. Under the 2014 Plan, 5,733,259 shares of common stock were reserved for issuance and as of December 31, 2016, 3,683,576 shares of common stock were available for grant. As of December 31, 2016 and 2015, the Company had granted options to purchase 1,857,900 and 1,857,900 shares of common stock under the 2014 Plan, 1,729,648 and 1,853,063 of which were outstanding and 21,886 and 4,421 of which had been forfeited as of December 31, 2016 and 2015, respectively. The Company had granted 673,361 and 673,361 shares of restricted stock under the 2014 Plan, as of December 31, 2016 and 2015, respectively, of which 494,896 and 508,646 shares were unvested and subject to forfeiture as of such dates. The Company had granted 427,896 and 91,800 shares of RSU under the 2014 Plan, as of December 31, 2016 and 2015, respectively, of which 357,923 and 91,800 shares were unvested and subject to forfeiture as of such dates.
Employee Stock Purchase Plan
The Penumbra, Inc. Employee Stock Purchase Plan (the ESPP), became effective on September 17, 2015. The ESPP initially reserved 600,000 shares of common stock for purchase under the ESPP, with the number of shares reserved for purchase automatically increasing each year pursuant to an “evergreen” provision set forth in the ESPP. As of December 31, 2016, 684,953 shares of common stock were reserved for issuance. All qualifying employees of the Company and its designated subsidiaries are eligible to participate in the ESPP. Each offering to the Company’s employees to purchase stock under the ESPP will begin on each May 20 and November 20 and will end on the following November 19 and May 19, respectively, each referred to as offering periods, except that the first offering period under the ESPP began on September 17, 2015 and ended on May 19, 2016. Under the ESPP, each employee may purchase shares by authorizing payroll deductions at a minimum of 1% and up to 15% of his or her eligible compensation for each pay period during the offering period. Unless the participating employee withdraws from the offering, his or her accumulated payroll deductions will be used to purchase the Company’s common stock on the last business day of the offering period at a price equal to 85% of the fair market value of the common stock on either the first or the last day of the offering period, whichever is lower, provided that no more than 2,000 shares of the Company’s common stock or such other lesser maximum number established by the ESPP administrator may be purchased by any one employee during each offering period. Under applicable tax rules, an employee may purchase no more than $25,000 worth of common stock, valued at the start of the purchase period (corresponding to an offering period), under the ESPP in any calendar year. As of December 31, 2016, 214,025 shares of common stock have been issued under the plan.
Early Exercises
Stock options granted under the 2005 Plan, 2011 Plan and 2014 Plan allow the board of directors to grant awards to provide employee option holders the right to elect to exercise unvested options in exchange for restricted common stock. Unvested shares, which amounted to 4,263 and 12,339 as of December 31, 2016 and 2015, respectively, were subject to a repurchase right held by the Company at the original issue price in the event the optionees’ employment was terminated either voluntarily or involuntarily. For exercises of employee options, this right lapses according to the vesting schedule designated on the associated option grant. The repurchase terms are considered to be a forfeiture provision. The shares purchased by the employees pursuant to the early exercise of stock options are not deemed to be issued or outstanding for accounting purposes until those shares vest, though they are legally issued and outstanding. In addition, cash received from employees for exercise of unvested options is treated as a refundable deposit shown as a liability on the consolidated balance sheets. As of December 31, 2016 and 2015, cash received related to unvested shares totaled $0.03 million and $0.1 million, respectively. Amounts recorded are transferred into common stock and additional paid-in-capital as the shares vest.
Stock Options
Activity of stock options under the 2005 Plan, 2011 Plan and 2014 Plan is set forth below:
 
 
Number
of Shares
 
Weighted
Average
Exercise
Price
 
Weighted Average Remaining Contractual Life (in Years)
 
Aggregate Intrinsic Value (in thousands)
Balance, December 31, 2015
 
3,755,345

 
$
12.13

 
 
 
 
Exercised
 
(860,424
)
 
3.62

 
 
 
 
Canceled/Forfeited
 
(17,966
)
 
17.68

 
 
 
 
Balance, December 31, 2016
 
2,876,955

 
$
14.63

 
 
 
 
Vested and expected to vest—December 31, 2016
 
2,858,851

 
$
14.58

 
6.71
 
$
140,713

Exercisable—December 31, 2016
 
1,694,078

 
$
9.89

 
5.49
 
$
91,330

 
The total intrinsic value of stock options exercised during the year ended December 31, 2016, 2015 and 2014 was $53.1 million, $13.1 million and $3.8 million, respectively. The intrinsic value is calculated as the difference between the estimated fair value of the Company’s common stock at the exercise date and the exercise price of the stock option.
The weighted average grant date fair value of the employee stock options was $9.69 and $3.69 per share during the years ended 2015 and 2014, respectively.

Restricted Stock and Restricted Stock Units
The activity of unvested restricted stock and restricted stock units under the Plans during the year ended December 31, 2016 is set forth below:
 
 
Number
of Shares
 
Weighted Average
Grant Date
Fair Value
Unvested at December 31, 2015
 
849,571

 
$
15.12

Granted
 
336,096

 
62.25

Vested
 
(174,723
)
 
23.30

Canceled/Forfeited
 
(8,000
)
 
21.38

Unvested at December 31, 2016
 
1,002,944

 
$
29.44


The fair value of the restricted stock and restricted stock units that vested during the year ended December 31, 2016, 2015 and 2014 was $9.9 million, $4.0 million and $0.4 million, respectively.
Employee Stock Purchase Plan
Under the Penumbra, Inc. ESPP, employees purchased 214,025 shares for $6.6 million during the year ended December 31, 2016.
Stock-based Compensation
The Company uses the Black-Scholes option pricing model to determine the fair value of stock options and ESPP. The valuation model for stock compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation including the expected term (weighted average period of time that the options granted are expected to be outstanding); volatility of the Company’s common stock and an assumed-risk-free interest rate.
The Company used the following assumptions in its Black-Scholes option pricing model to determine the fair value of equity settled awards:
 
 
Equity Settled Awards
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Expected term (in years)
 
.50
 
 6.08—6.25
 
6.25
Expected volatility
 
40%
 
45%
 
45%
Risk-free interest rate
 
0.48%
 
 1.56%—1.78%
 
1.76%—2.02%
Expected dividend rate
 
0%
 
0%
 
0%

The Company did not grant any options during the year ended December 31, 2016.
Fair Value of Common Stock. Prior to the IPO, the fair value of the shares of common stock underlying the Company's stock options was determined by the Company’s board of directors. Because there was no public market for the Company’s common stock and in the absence of recent arm’s-length cash sales transactions of the Company’s common stock with independent third parties, the Company’s board of directors determined the fair value of the Company’s common stock by considering at the time of grant a number of objective and subjective factors. The intent of the Company’s board of directors was for all options granted to be exercisable at a price per share not less than the per share fair value of the Company’s common stock underlying those options on the date of grant. The estimated fair value of the Company’s common stock was determined at each valuation date in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.
Weighted Average Expected Term. The Company derived the expected term using the “simplified” method (the expected term is determined as the average of the time-to-vesting and the contractual life of the options), as the Company had limited historical information to develop expectations about future exercise patterns and post vesting employment termination behavior.
Volatility. Since there was no public market through mid-September 2015 for the Company’s common stock and lack of company-specific historical volatility, the Company has determined the share price volatility for options granted based on an analysis of the volatility used by a peer group of publicly traded medical device companies. In evaluating similarity, the Company considered factors such as industry, stage of life cycle and size.
Risk-Free Interest Rate. The risk-free interest rate is based upon U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the options.
Dividend Yield. The Company has never paid any dividends and does not plan to pay dividends in the foreseeable future, and therefore, used an expected dividend yield of zero in the valuation model.
Forfeitures. The Company is required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and record stock based compensation expense only for those awards that are expected to vest. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period that the estimates are revised.
The following table sets forth the stock-based compensation expense included in the consolidated statements of operations (in thousands):
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Cost of sales
 
$
1,132

 
$
316

 
$
267

Research and development
 
1,020

 
444

 
96

Sales, general and administrative
 
12,485

 
6,511

 
1,070

 
 
$
14,637

 
$
7,271

 
$
1,433


As of December 31, 2016, total unrecognized compensation cost was $34.7 million related to unvested share-based compensation arrangements which is expected to be recognized over a weighted average period of 2.8 years.
The total stock-based compensation cost capitalized in inventory was $0.4 million and $0.3 million as of December 31, 2016 and 2015, respectively. The total stock-based compensation cost capitalized in inventory was insignificant as of December 31, 2014.
Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Loss
Other comprehensive loss consists of two components: unrealized gains or losses on the Company's available-for-sale marketable investments, and gains or losses from foreign currency translation adjustments. Until realized and reported as a component of net income, these comprehensive income (loss) items accumulate and are included within accumulated other comprehensive loss. Unrealized gains and losses on our marketable investments are reclassified from accumulated other comprehensive loss into earnings when realized upon sale, and are determined based on specific identification of securities sold. Gains and losses from the translation of assets and liabilities denominated in non-U.S. dollar functional currencies are included in accumulated other comprehensive loss.
The following table summarizes the changes in the accumulated balances during the period, and includes information regarding the manner in which the reclassifications out of accumulated other comprehensive loss into earnings affect our consolidated statements of operations (in thousands):
 
 
Year Ended December 31, 2016
 
Year Ended December 31, 2015
 
 
 Marketable
Investments
 
 Currency Translation
Adjustments
 
 Total
 
 Marketable
Investments
 
 Currency Translation
Adjustments
 
 Total
Balance, beginning of the year
 
$
(163
)
 
$
(1,952
)
 
$
(2,115
)
 
$
(220
)
 
$
(644
)
 
$
(864
)
Other comprehensive income before reclassifications:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses)—marketable investments
 
98

 

 
98

 
(417
)
 

 
(417
)
Foreign currency translation (losses) gains
 

 
(2,628
)
 
(2,628
)
 

 
(1,425
)
 
(1,425
)
Income tax effect—(expense) benefit
 
(35
)
 
(3
)
 
(38
)
 
128

 
117

 
245

Net of tax
 
63

 
(2,631
)
 
(2,568
)
 
(289
)
 
(1,308
)
 
(1,597
)
Amounts reclassified from accumulated other comprehensive loss to earnings:
 
 
 
 
 
 
 
 
 
 
 
 
Realized (gains) losses—marketable investments
 
(8
)
 

 
(8
)
 
540

 

 
540

Income tax effect—benefit (expense)
 
3

 

 
3

 
(194
)
 

 
(194
)
Net of tax
 
(5
)
 

 
(5
)
 
346

 

 
346

Net current-year other comprehensive income (loss)
 
58

 
(2,631
)
 
(2,573
)
 
57

 
(1,308
)
 
(1,251
)
Balance, end of the year
 
$
(105
)
 
$
(4,583
)
 
$
(4,688
)
 
$
(163
)
 
$
(1,952
)
 
$
(2,115
)
Employee Benefit Plans
Employee Benefit Plans
Employee Benefit Plans
The Company offers a retirement savings plan under Section 401(k) of the Internal Revenue Code (IRC) to its eligible U.S. employees whereby they may contribute up to the maximum amount permitted by the IRC. In the third quarter of 2015, the Company began 401(k) matching of eligible compensation under the plan, subject to a maximum dollar threshold. Contribution expense was $0.8 million and $0.3 million for the years ended December 31, 2016 and 2015, respectively.
Income Taxes
Income Taxes
Income Taxes
The Company’s income tax expense (benefit), 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 judgments and estimates are required in determining the consolidated income tax expense (benefit).
The Company is incorporated in the United States and operates in various countries with different tax laws and rates. A portion of the Company’s income or (loss) before taxes and the provision for (benefit from) income taxes are generated from international operations.
Income or (loss) before income taxes for the years ended December 31, 2016, 2015 and 2014 is summarized as follows:
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
United States
 
$
(944
)
 
$
2,955

 
$
2,230

Foreign
 
75

 
1,069

 
909

     Total income (loss) before provision for (benefit from) income taxes
 
$
(869
)
 
$
4,024

 
$
3,139


Income tax provision or (benefit) in 2016, 2015 and 2014 is comprised of federal, state, and foreign taxes.
The components of the provision for (benefit from) income taxes are summarized as follows:
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Current:
 
 
 
 
 
 
     Federal
 
$
(3,872
)
 
$
3,815

 
$
1,155

     State
 
304

 
603

 
274

     Foreign
 
772

 
492

 
323

          Total current
 
(2,796
)
 
4,910

 
1,752

Deferred:
 
 
 
 
 
 
     Federal
 
(11,909
)
 
(3,025
)
 
(625
)
     State
 
(785
)
 
(251
)
 
(116
)
     Foreign
 
(193
)
 
25

 
(117
)
          Total deferred
 
(12,887
)
 
(3,251
)
 
(858
)
     Provision for (benefit from) income taxes
 
$
(15,683
)
 
$
1,659

 
$
894


The Company’s actual provision for tax or (benefit from tax) differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax income as a result of the following:
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Income tax at federal statutory rate
 
34.0
 %
 
34.0
 %
 
34.0
 %
State income taxes, net of federal benefit
 
75.9

 
1.9

 
3.2

Foreign taxes differential
 
(63.0
)
 
(9.0
)
 
5.2

Prepaid tax ASC 810-10
 
59.0

 
2.1

 
(8.9
)
IRC 199 deduction
 

 
(7.4
)
 
(7.0
)
Stock-based compensation
 
1,474.0

 
14.8

 
6.0

Non- deductible meals and entertainment
 
(92.6
)
 
5.6

 
5.8

Imputed interest
 
(30.7
)
 
4.7

 
6.6

Tax credits
 
395.5

 
(11.6
)
 
(12.1
)
Other
 
(47.4
)
 
3.6

 
2.8

Change in valuation allowance
 
0.3

 
2.5

 
(7.1
)
     Effective tax rate
 
1,805.0
 %
 
41.2
 %
 
28.5
 %

Deferred income tax assets and liabilities consist of the following:
 
 
December 31,
 
 
2016
 
2015
Deferred tax assets
 
 
 
 
     Net operating loss carryforwards
 
$
5,983

 
$
1,000

     Tax credits
 
6,260

 
1,355

     Accruals and reserves
 
7,668

 
5,048

     Stock-based compensation
 
3,703

 
1,352

     Translation adjustment
 
690

 
715

     UNICAP adjustments
 
4,721

 
3,840

     Other
 
938

 
870

Gross deferred tax assets
 
29,963

 
14,180

     Valuation allowance
 
(6,062
)
 
(2,702
)
Total deferred tax assets
 
23,901

 
11,478

Deferred tax liabilities
 
 
 
 
     Depreciation and amortization
 
(1,425
)
 
(1,335
)
Total deferred tax liabilities
 
(1,425
)
 
(1,335
)
Net deferred tax assets
 
$
22,476

 
$
10,143


As of December 31, 2014, the Company released the valuation allowance against the German net deferred tax assets of $0.3 million. As of December 31, 2015, the Company maintained a full valuation allowance against the net deferred tax assets of California and Canada. As of December 31, 2016, the Company adopted ASU 2016-09 and the impact of the adoption was creation of additional deferred tax assets of NOL and credits carryforwards. The Company assessed the ability to realize its net deferred tax assets by evaluating all available evidence, both positive and negative, including (1) cumulative results of operations in recent years, (2) sources of recent losses, (3) estimates of future taxable income and (4) the length of net operating loss carryforward periods. As a result, the Company continued to maintain a full valuation allowance against the net deferred tax assets of California and Canada at December 31, 2016, but determined a valuation allowance was not necessary for remaining deferred tax assets.
The valuation allowance against net deferred tax assets changed as follows:
 
 
December 31,
 
 
2016
 
2015
 
2014
Balance at the beginning of the year
 
$
2,702

 
$
2,945

 
$
3,860

     Release of valuation allowance
 

 
(243
)
 
(321
)
     Other reserves and deferrals
 
3,360

 

 
(594
)
Balance at the end of the year
 
$
6,062

 
$
2,702

 
$
2,945


At December 31, 2016, the Company had approximately $10.7 million, $32.7 million and $1.3 million of federal, state and foreign net operating loss carryforwards, respectively, available to offset future taxable income. The federal net operating loss carryforwards are generally carried forward for 20 years. The state net operating loss carryforwards will begin to expire in 2020. At December 31, 2016, the Company had federal research credits of $3.6 million and California state tax credits of $5.0 million. The federal research credits are generally carried forward for 20 years. California state tax credits may be carried forward indefinitely.
IRC Sections 382 and 383 limit the use of net operating losses and business credits if there is a change in ownership. In 2009, the Company determined there were changes in ownership in 2004 and 2008, which did not cause any impairment of tax attributes.
Included in the $3.8 million balance of unrecognized tax benefits as of December 31, 2016 is $2.1 million of tax benefits that, if recognized, would affect the effective tax rate.
A reconciliation of the change in the gross unrecognized tax benefits from January 1, 2014 to December 31, 2016, is as follows:
 
 
December 31,
 
 
2016
 
2015
 
2014
Beginning Balance
 
$
3,619

 
$
1,726

 
$
1,325

Gross increase for tax positions of current year
 
1,213

 
1,023

 
401

Gross increase for tax positions of prior years
 
250

 
1,062

 

Gross decrease for tax positions of prior years
 
(648
)
 

 

Settlement
 
(387
)
 

 

Lapse of statute of limitations
 
(220
)
 
(192
)
 

Ending Balance
 
$
3,827

 
$
3,619

 
$
1,726


The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Income tax expense for the years ended December 31, 2016, 2015 and 2014 included interest and penalties that were not material. As of December 31, 2016 and 2015 the Company had approximately $0.1 million and $0.1 million respectively, of accrued interest and penalties attributable to uncertain tax positions.
The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. Due to net operating loss and credit carryovers, the tax years ending December 31, 2004 through December 31, 2016 remain subject to examination by federal and state tax authorities. In Australia and Canada, tax years ending December 31, 2009 through December 31, 2016 generally remain subject to examination by tax authorities. In Germany, tax years ending December 31, 2013 through December 31, 2016 remain subject to examination by tax authorities.
The Company does not anticipate any significant changes in the balance of gross unrecognized tax benefits over the next 12 months.
Net Income (Loss) per Share of Common Stock attributable to Common Stockholders
Net Income (Loss) per Share of Common Stock attributable to Common Stockholders
Net Income (Loss) per Share of Common Stock attributable to Common Stockholders
A reconciliation of the numerator and denominator used in the calculation of the basic and diluted net income (loss) per share attributable to common stockholders is as follows (in thousands, except share and per share amounts):
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Net income (loss) per share:
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
Net income
 
$
14,814

 
$
2,365

 
$
2,245

Less: Deemed dividend paid to convertible preferred stockholders upon repurchase
 

 

 
(6,344
)
Less: Undistributed income attributable to convertible preferred stockholders
 

 
(1,281
)
 

Add: Undistributed loss attributable to convertible preferred stockholders
 

 

 
3,266

Net income attributable to common stockholders—basic and diluted
 
$
14,814

 
$
1,084

 
$
(833
)
Denominator
 
 
 
 
 
 
Weighted average shares used to compute net income (loss) attributable to common stockholders—Basic
 
30,464,583

 
11,993,429

 
4,609,375

Potential dilutive stock-based awards, as calculated using treasury stock method
 
3,013,495

 
2,226,221

 

Weighted average shares used to compute net income (loss) attributable to common stockholders—Diluted
 
33,478,078

 
14,219,650

 
4,609,375

Net income (loss) per share attributable to common stockholders
—Basic
 
$
0.49

 
$
0.09

 
$
(0.18
)
—Diluted
 
$
0.44

 
$
0.08

 
$
(0.18
)

For the years ended December 31, 2016, 2015 and 2014, outstanding stock-based awards of  0.3 million, 1.4 million and 3.3 million shares, respectively, were excluded from the computation of diluted net income per share because their effect would have been anti-dilutive.
Geographic Areas and Product Sales
Geographic Areas and Product Sales
Geographic Areas and Product Sales
The Company’s revenue by geographic area, based on the destination to which the Company ships its products, was as follows (in thousands):
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
United States
 
$
176,104

 
$
127,311

 
$
82,965

Japan
 
30,284

 
19,016

 
14,699

Other International
 
56,929

 
39,768

 
27,846

Total
 
$
263,317

 
$
186,095

 
$
125,510


The following table sets forth revenue by product category (in thousands):
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Neuro
 
$
185,533

 
$
141,410

 
$
106,242

Peripheral Vascular
 
77,784

 
44,685

 
19,268

Total
 
$
263,317