PENUMBRA INC, 10-Q filed on 5/9/2017
Quarterly Report
Document and Entity Information Document
3 Months Ended
Mar. 31, 2017
Apr. 14, 2017
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
Penumbra Inc 
 
Entity Central Index Key
0001321732 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 31, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q1 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
33,627,160 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 109,383 
$ 13,236 
Marketable investments
122,256 
115,517 
Accounts receivable, net of doubtful accounts of $829 and $684 at March 31, 2017 and December 31, 2016, respectively
45,278 
43,335 
Inventories
79,187 
73,012 
Prepaid expenses and other current assets
14,554 
18,727 
Restricted cash
1,704 
 
Total current assets
372,362 
263,827 
Property and equipment, net
22,905 
21,464 
Deferred taxes
22,486 
22,476 
Other non-current assets
612 
487 
Total assets
418,365 
308,254 
Current liabilities:
 
 
Accounts payable
4,973 
4,110 
Accrued liabilities
33,591 
31,690 
Total current liabilities
38,564 
35,800 
Deferred Rent Credit, Noncurrent
5,501 
5,083 
Other non-current liabilities
828 
824 
Total liabilities
44,893 
41,707 
Commitments and contingencies
   
   
Stockholders’ equity:
 
 
Common stock
33 
31 
Additional paid-in capital
383,132 
273,865 
Accumulated other comprehensive loss
(3,926)
(4,688)
Accumulated deficit
(5,767)
(2,661)
Total stockholders’ equity
373,472 
266,547 
Total liabilities and stockholders’ equity
$ 418,365 
$ 308,254 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Financial Position [Abstract]
 
 
 
Allowance for doubtful accounts
$ 829 
$ 684 
$ 589 
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Income Statement [Abstract]
 
 
Revenue
$ 73,213 
$ 57,919 
Cost of revenue
25,504 
18,014 
Gross profit
47,709 
39,905 
Operating expenses:
 
 
Research and development
7,034 
5,001 
Sales, general and administrative
42,721 
33,069 
Total operating expenses
49,755 
38,070 
(Loss) Income from operations
(2,046)
1,835 
Interest income, net
644 
510 
Other expense, net
(349)
(224)
(Loss) Income before provision for (benefit from) income taxes
(1,751)
2,121 
Provision for (benefit from) income taxes
1,355 
(170)
Net (loss) income
(3,106)
2,291 
Foreign currency translation adjustments, net of tax
692 
1,048 
Unrealized gains on available-for-sale securities, net of tax
70 
281 
Comprehensive (loss) income
(2,344)
3,620 
Net income attributable to common stockholders
$ (3,106)
$ 2,291 
Net (loss) income per share attributable to common stockholders — Basic (in dollars per share)
$ (0.10)
$ 0.08 
Net (loss) income per share attributable to common stockholders — Diluted (in dollars per share)
$ (0.10)
$ 0.07 
Weighted average shares used to compute net (loss) income per share attributable to common stockholders — Basic (in shares)
31,611,841 
29,990,006 
Weighted average shares used to compute net (loss) income per share attributable to common stockholders — Diluted (in shares)
31,611,841 
33,023,495 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net (loss) income
$ (3,106)
$ 2,291 
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
 
 
Depreciation and amortization
700 
538 
Amortization of premium on marketable investments
299 
189 
Stock-based compensation
4,012 
3,015 
Provision for doubtful accounts
145 
11 
Inventory write downs
256 
317 
Loss on disposal of property and equipment
11 
Realized (gain) loss on marketable investments
(31)
Deferred taxes
(1)
1,329 
Changes in operating assets and liabilities:
 
 
Accounts receivable
(1,880)
(1,343)
Inventories
(6,057)
(9,083)
Prepaid expenses and other current and non-current assets
2,248 
(4,759)
Accounts payable
889 
1,350 
Accrued expenses and other non-current liabilities
4,766 
4,060 
Net cash provided by (used in) operating activities
2,194 
(2,074)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Purchase of marketable investments
(44,777)
(9,531)
Proceeds from sales of marketable investments
22,975 
500 
Proceeds from maturities of marketable investments
15,020 
11,750 
Purchases of property and equipment
(3,194)
(1,115)
Increase (Decrease) in Restricted Cash
(1,686)
Net cash (used in) provided by investing activities
(11,662)
1,604 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Proceeds from Issuance of Common Stock
106,563 
Proceeds from exercises of stock options
1,050 
129 
Payment of employee taxes related to vested restricted stock
(2,089)
(1,642)
Net cash provided by (used in) financing activities
105,524 
(1,513)
Effect of foreign exchange rate changes on cash and cash equivalents
91 
42 
Net Increase (Decrease) In Cash And Cash Equivalents
96,147 
(1,941)
CASH AND CASH EQUIVALENTS—Beginning of period
13,236 
19,547 
CASH AND CASH EQUIVALENTS—End of period
109,383 
17,606 
NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
Purchase of property and equipment funded through accounts payable and accrued liabilities
339 
334 
Deferred issuance costs not yet paid
$ 295 
$ 0 
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 condensed consolidated balance sheet as of March 31, 2017, the condensed consolidated statements of operations and comprehensive (loss) income for the three months ended March 31, 2017 and 2016, and the condensed consolidated statements of cash flows for the three months ended March 31, 2017 and 2016 are unaudited. The unaudited condensed consolidated financial statements included herein have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The condensed consolidated balance sheet as of December 31, 2016 was derived from the audited financial statements as of that date.
 The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly the Company’s financial position as of March 31, 2017, the results of its operations for the three months ended March 31, 2017 and 2016, and the cash flows for the three months ended March 31, 2017 and 2016. The results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or for any other future annual or interim period. Certain changes in presentation were made in the condensed consolidated financial statements for the three months ended March 31, 2016, to conform to the presentation for the three months ended March 31, 2017.
The Company elected to early adopt Accounting Standards Update (ASU) 2016-09 in the fourth quarter of 2016 which requires the Company to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The impact of adoption was the creation of deferred tax assets in the balance sheet and recognition of excess tax benefits in our provision for (benefit from) income taxes rather than paid-in capital for all periods in fiscal year 2016. The Company's adoption of ASU 2016-09 resulted in the recognition of excess tax benefits in the Company's benefit from income taxes rather than paid-in capital of $1.5 million for the three months ended March 31, 2016. In addition, the Company elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively to all periods presented.
Adoption of the new standard resulted in adjustments to our 2016 unaudited selected financial data previously reported in our Quarterly Report on Form 10-Q as follows:
 
March 31, 2016
(In thousands)
As Reported
As Adjusted
Condensed Consolidated Balance Sheet Data:
 
 
Additional Paid-in-Capital
$
255,499

$
253,988

Accumulated deficit
$
(16,695
)
$
(15,184
)
Total stockholder' equity
$
238,048

$
238,048

 
 
 
 
Three Months Ended March 31, 2016
(In thousands, except percentage and per share amounts)
As Reported
As Adjusted
Condensed Consolidated Statements of Operations Data:
 
 
Provision for (benefit from) income taxes
$
1,341

$
(170
)
Net income
$
780

$
2,291

Net income per share
—Basic
$
0.03

$
0.08

—Diluted
$
0.02

$
0.07

Weighted average shares used to compute net income (loss) per share attributable to common stockholders
—Basic
29,990,006

29,990,006

—Diluted
32,486,516

33,023,495

 
 
 
 
Three Months Ended March 31, 2016
(In thousands)
As Reported
As Adjusted
Condensed Consolidated Statement of Cash Flow Data:
 
 
Net cash (used in) operating activities
$
(3,584
)
$
(2,074
)
Net cash (used in) financing activities
$
(3
)
$
(1,513
)

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2016 included in the Companys Annual Report on Form 10-K. There have been no changes to the Company’s significant accounting policies during the three months ended March 31, 2017, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity accounts; disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to marketable investments, provisions for doubtful accounts, sales return reserve, warranty reserves, valuation of inventories, useful lives of property and equipment, income taxes, 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 operating results for the purpose of allocating resources and evaluating financial performance. The Company determines revenue by geographic area, based on the destination to which it ships its products.
Recent Accounting Guidance
Recently Adopted Accounting Standards
In July 2015, the Financial Accounting Standards Board (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. In January 2017, the Company adopted the standard on a prospective basis and the adoption did not have a material impact on its financial position.
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 the Companys 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 these new standards as well as the transition method for implementation. The Company will be impacted by the new standard regarding the timing of its fulfillment of delivery criterion.
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.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, a consensus of the FASB Emerging Issues Task Force. The standard requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling the total beginning and end of period amounts shown on the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company does not expect the adoption of ASU 2016-18 to have a material impact on its consolidated financial statements.
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 measurement date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The Company classifies its cash equivalents and marketable investments within Level 1 and Level 2, as it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs.
The Company determined the fair value of its Level 1 financial instruments, which are traded in active markets, using quoted market prices for identical instruments.
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 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 March 31, 2017 or December 31, 2016.
During the three months ended March 31, 2017 and 2016, the Company did not record impairment charges related to its marketable investments, and the Company did not have any transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy.
The Company did not have any financial assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2017 or December 31, 2016.
The following table sets forth the Company’s financial assets and liabilities measured at fair value by level within the fair value hierarchy (in thousands):
 
 
As of March 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Commercial Paper
 
$

 
$
21,769

 
$

 
$
21,769

Money market funds
 
55,608

 

 

 
55,608

U.S. States and Municipalities
 

 
5,000

 

 
5,000

Corporate bonds
 

 
4,000

 

 
4,000

Marketable investments:
 
 
 
 
 
 
 
 
Commercial paper
 

 
13,610

 

 
13,610

U.S. Treasury
 
9,003

 


 

 
9,003

U.S. agency securities
 

 
6,837

 

 
6,837

U.S. states and municipalities
 

 
12,678

 

 
12,678

Corporate bonds
 

 
78,926

 

 
78,926

Non-U.S. government debt securities
 

 
1,202

 

 
1,202

Total
 
$
64,611

 
$
144,022


$


$
208,633

 
 
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

Balance Sheet Components
Balance Sheet Components
Balance Sheet Components
Cash and Cash Equivalents
The majority of the Company’s cash is held by one financial institution in the United States in an amount that exceeds federally insured limits. The Company maintained investments that were not federally insured in the form of money market funds during the periods presented. The Company also held cash in foreign banks of approximately $3.5 million and $2.1 million at March 31, 2017 and December 31, 2016, respectively, which was not federally insured. The Company has not experienced any losses on its deposits of cash and cash equivalents.
Restricted Cash
The Company had restricted cash of $1.7 million at March 31, 2017 and no restricted cash at December 31, 2016. The restricted cash is held in one of the Company’s foreign banks and has a temporary restriction pending final incorporation of an international subsidiary. The Company anticipates the restriction to be lifted before the end of the year.
Accounts Receivable, Net
The Company’s allowance for doubtful accounts comprised of the following (in thousands):
Allowance for Doubtful Accounts
 
March 31,
2017
 
December 31,
2016
Balance at the beginning of the period
 
$
684

 
$
589

Charged to costs and expenses
 
145

 
216

Deductions
 

 
(121
)
Balance at the end of the period
 
$
829

 
$
684

One customer (a distributor) accounted for 10% and 11% of the Company’s revenue during the three months ended March 31, 2017 and 2016, respectively. No customer accounted for greater than 10% of the Company’s accounts receivable balance as of March 31, 2017 or December 31, 2016.
Prepaid Expenses and Other Current Assets
The Company’s prepaid expenses and other current assets as of March 31, 2017 and December 31, 2016 were comprised of the following (in thousands):
 
 
March 31,
2017
 
December 31,
2016
Prepaid Tax
 
$
1,887

 
$
4,656

Prepaid expenses
 
4,871

 
4,573

Income tax receivable
 
4,587

 
4,536

Other current assets
 
3,209

 
4,962

Prepaid expenses and other current assets
 
$
14,554

 
$
18,727



 Marketable Investments
The Company’s marketable investments as of March 31, 2017 and December 31, 2016 were as follows (in thousands):
 
 
March 31, 2017
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Commercial paper
 
$
13,610

 
$
1

 
$
(1
)
 
$
13,610

U.S. Treasury
 
9,002

 
4

 
(3
)
 
9,003

U.S. agency securities
 
6,847

 

 
(10
)
 
6,837

U.S. states and municipalities
 
12,687

 
2

 
(11
)
 
12,678

Corporate bonds
 
79,004

 
30

 
(108
)
 
78,926

Non-U.S. government debt securities
 
1,202

 

 


 
1,202

Total
 
$
122,352

 
$
37

 
$
(133
)
 
$
122,256

 
 
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


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 March 31, 2017 and December 31, 2016 (in thousands):
 
 
March 31, 2017
 
 
Fair Value
 
Gross Unrealized Losses
Commercial paper
 
$
7,977

 
$
(1
)
US Treasury
 
4,994

 
(3
)
US Agency securities
 
4,892

 
(10
)
U.S. States and Municipalities
 
9,947

 
(11
)
Corporate bonds
 
43,741

 
(108
)
Total
 
$
71,551

 
$
(133
)
 
 
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
)

As of March 31, 2017 and December 31, 2016, there were no securities that had been in a loss position for more than twelve months.
The contractual maturities of the Company’s marketable investments as of March 31, 2017 and December 31, 2016 were as follows (in thousands):
 
March 31,
2017
 
December 31, 2016
 
Fair Value
Due in one year
$
105,348

 
$
71,051

Due in one to five years
16,908

 
44,466

Total
$
122,256

 
$
115,517


 
Inventories
Inventories are stated at the lower of cost (determined under the first-in first-out method) or market. Inventory quantities are reviewed 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 components of inventories as of March 31, 2017 and December 31, 2016 consisted of the following (in thousands):
 
 
March 31,
2017
 
December 31,
2016
Raw materials
 
$
9,910

 
$
11,367

Work in process
 
4,420

 
3,663

Finished goods
 
64,857

 
57,982

Inventories
 
$
79,187

 
$
73,012


Property and Equipment, Net
Property and equipment, net as of March 31, 2017 and December 31, 2016 consisted of the following (in thousands):
 
 
March 31,
2017
 
December 31,
2016
Machinery and equipment
 
$
10,457

 
$
9,734

Furniture and fixtures
 
4,598

 
4,246

Leasehold improvements
 
10,291

 
10,207

Software
 
1,641

 
1,221

Computers
 
1,118

 
884

Construction in progress
 
2,453

 
2,193

Total property and equipment
 
30,558

 
28,485

Less: Accumulated depreciation and amortization
 
(7,653
)
 
(7,021
)
Property and equipment, net
 
$
22,905

 
$
21,464


Depreciation and amortization expense was $0.7 million and $0.5 million for the three months ended March 31, 2017 and 2016, respectively.
Accrued Liabilities
The following table shows the components of accrued liabilities as of March 31, 2017 and December 31, 2016 (in thousands):
 
 
March 31,
2017
 
December 31,
2016
Payroll and employee-related cost
 
$
19,223

 
$
16,956

Sales return reserve
 
2,940

 
2,753

Preclinical and clinical trial cost
 
1,877

 
2,054

Deferred revenue
 
357

 
344

Product warranty
 
1,087

 
1,254

Sales tax and VAT payable
 
548

 
733

Income tax payable
 
354

 
174

Other accrued liabilities
 
7,205

 
7,422

Total accrued liabilities
 
$
33,591

 
$
31,690


The estimated product warranty accrual as of March 31, 2017 and December 31, 2016 was as follows (in thousands):
 
 
March 31,
2017
 
December 31,
2016
Balance at the beginning of the period
 
$
1,254

 
$
713

Accruals of warranties issued
 
39

 
1,176

Settlements of warranty claims
 
(206
)
 
(635
)
Balance at the end of the period
 
$
1,087

 
$
1,254

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. Rent expense for non-cancelable operating leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Rent expense for the three months ended March 31, 2017 and 2016 was $1.4 million and $1.1 million, respectively. In addition, the Company's lease commitments also require it to make additional payments during the lease term for taxes, insurance and other operating expenses. The Company leases its other equipment under non-cancelable operating leases that expire at various dates through 2021.
Royalty Obligations
In March 2005, the Company entered into a license agreement that requires the Company to make minimum royalty payments to the licensor on a quarterly basis. As of both March 31, 2017 and December 31, 2016, the license agreement required minimum annual royalty payments of $0.1 million in equal quarterly installments. On each January 1, the quarterly calendar year minimum royalty will 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 will continue until the expiration of the last to expire patent that covers that licensed product or 2022, whichever is longer.
In April 2012, the Company entered into an agreement that requires the Company to pay, on a quarterly basis, a 5% royalty on sales of products covered under applicable patents. Unless the agreement is terminated earlier, the royalty term for each applicable product will continue until the expirations of the applicable patent covering such product or 2029, whichever is longer.
In November 2013, the Company entered into an agreement that requires the Company to pay, on a quarterly basis, a 3% royalty on the first $5 million in sales and a 1% royalty on sales thereafter of products covered under applicable patents. Unless the agreement is terminated earlier, the royalty for each covered product shall continue until 2030.
In April 2015, the Company entered into a royalty agreement that requires the Company to pay, on a quarterly basis, a 2% royalty on sales of certain products covered by the agreement. Unless the royalty agreement is terminated earlier, the royalty term for each covered product shall continue until 2035.
Royalty expense included in cost of sales for the three months ended March 31, 2017 and 2016 was $0.8 million and $0.7 million, respectively.
Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
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 an aneurysm procedure in which the Penumbra Coil 400 was used. On February 19, 2016, a complaint for damages was filed on behalf of this claimant against 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.
Stockholder's Equity
Stockholder's Equity
Stockholder's Equity
Common Stock
In March 2017, the Company issued and sold an aggregate of 1,495,000 shares of common stock at a public offering price of $76.00 per share, less the underwriters’ discounts and commissions, pursuant to an underwritten public offering. The Company received approximately $106.3 million in net cash proceeds after deducting underwriting discounts and commissions of $6.8 million and other offering expenses of $0.5 million.
Equity Incentive Plans
Stock Options
Activity of stock options under the Penumbra, Inc. 2005 Stock Plan, the Penumbra, Inc. 2011 Equity Incentive Plan and the Amended and Restated Penumbra, Inc. 2014 Equity Incentive Plan (collectively the “Plans”) during the three months ended March 31, 2017 is set forth below:
 
 
Number
of Shares
 
Weighted-
Average
Exercise
Price
Balance at December 31, 2016
 
2,876,955

 
$
14.63

Options exercised
 
(383,457
)
 
2.73

Options canceled
 
(969
)
 
10.56

Balance at March 31, 2017
 
2,492,529

 
16.47

 
Restricted Stock and Restricted Stock Units
The following table summarizes the activity of unvested restricted stock and restricted stock units under the Plans during the three months ended March 31, 2017 is set forth below: 
 
 
Number
of Shares
 
Weighted Average
Grant Date
Fair Value
Unvested at December 31, 2016
 
1,002,944

 
$
29.44

Granted
 
58,660

 
76.47

Vested
 
(115,685
)
 
15.63

Canceled/Forfeited
 
(18,125
)
 
41.31

Unvested and expected to vest at March 31, 2017
 
927,794

 
25.84


Stock-based Compensation
The following table sets forth the stock-based compensation expense included in the Company's condensed consolidated statements of operations and comprehensive (loss) income for the three months ended March 31, 2017 and 2016 (in thousands):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Cost of sales
 
$
309

 
$
9

Research and development
 
253

 
258

Sales, general and administrative
 
3,450

 
2,748

Total
 
$
4,012

 
$
3,015


As of March 31, 2017, total unrecognized compensation cost was $34.6 million related to unvested share-based compensation arrangements which is expected to be recognized over a weighted average period of 2.7 years.
The total stock-based compensation cost capitalized in inventory was $0.4 million and $0.4 million as of March 31, 2017 and December 31, 2016, respectively.
Accumulated Other Comprehensive (Loss) Income
Accumulated Other Comprehensive (Loss) Income
Accumulated Other Comprehensive (Loss) Income
Other comprehensive income consists of two components: unrealized gains or losses on the Company’s available-for-sale marketable investments, and gains or losses from foreign currency translation adjustments. Until realized and reported as a component of net income, these comprehensive income items accumulate and are included within accumulated other comprehensive (loss) income. Unrealized gains and losses on the Company’s marketable investments are reclassified from accumulated other comprehensive (loss) income into earnings when realized upon sale, and are determined based on specific identification of securities sold. Gains and losses from the translation of assets and liabilities denominated in non-U.S. dollar functional currencies are included in accumulated other comprehensive (loss) income.
The following table summarizes the changes in the accumulated balances during the three months ended March 31, 2017 and 2016, and includes information regarding the manner in which the reclassifications out of accumulated other comprehensive (loss) income into earnings affect the Company’s condensed consolidated statements of operations and comprehensive (loss) income (in thousands):
 
 
Three Months Ended March 31, 2017
 
Three Months Ended March 31, 2016
 
 
 Marketable
Investments
 
 Currency Translation
Adjustments
 
 Total
 
 Marketable
Investments
 
 Currency Translation
Adjustments
 
 Total
Balance at beginning of the period
 
$
(105
)
 
$
(4,583
)
 
$
(4,688
)
 
$
(163
)
 
$
(1,952
)
 
$
(2,115
)
Other comprehensive income before reclassifications:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains —marketable investments
 
101

 

 
101

 
441

 

 
441

Foreign currency translation gains
 

 
692

 
692

 

 
1,043

 
1,043

Income tax effect—benefit (expense)
 

 

 

 
(160
)
 
5

 
(155
)
Net of tax
 
101

 
692

 
793

 
281

 
1,048

 
1,329

Amounts reclassified from accumulated other comprehensive income to earnings:
 
 
 
 
 
 
 
 
 
 
 
 
Realized losses (gains)—marketable investments
 
(31
)
 

 
(31
)
 

 

 

Income tax effect—(expense) benefit
 

 

 

 

 

 

Net of tax
 
(31
)
 

 
(31
)
 

 

 

Net current-year other comprehensive income
 
70

 
692

 
762

 
281

 
1,048

 
1,329

Balance at end of the period
 
$
(35
)
 
$
(3,891
)
 
$
(3,926
)
 
$
118

 
$
(904
)
 
$
(786
)
Income Taxes
Income Taxes
Income Taxes
The Company’s income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. The Company is subject to income taxes in both the United States and foreign jurisdictions. Significant judgment and estimates are required in determining the consolidated income tax expense.
During interim periods, the Company generally utilizes the estimated annual effective tax rate method which involves the use of forecasted information. Under this method, the provision is calculated by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. The Company’s effective tax rate decreased to (77.4%) for the three months ended March 31, 2017, compared to (8.0%) for the three months ended March 31, 2016, which includes the retroactive adoption of ASU 2016-09. The decrease in rate was primarily attributable to recording a partial valuation allowance against the deferred tax assets (“DTAs”) as of March 31, 2017 and the year-to-date tax impact from recognizing the deferred tax assets associated with intra-entity asset transfers.
As of March 31, 2017, the Company determined there were significant DTAs that needed to be assessed if the DTAs were more likely than not to be realized. Significant DTAs were created in the year ended December 31, 2016 and three month ended March 31, 2017, driven by stock option exercises and vesting of restricted stock and the excess tax benefits resulting from the application of ASU 2016-09. The Company assessed its ability to realize the net DTAs by evaluating all available positive and negative evidence, including (1) cumulative results of operations in recent years, (2) sources of recent pre-tax losses, (3) estimates of future taxable income, and (4) the length of NOLs carryforward periods. The Company would be in a 3-year cumulative taxable income position, had it not been for the impact of a $74.9 million excess tax deduction of stock based compensation under ASU 2016-09. Additionally, the Company considered the length of NOL carryforward periods and an objectively verifiable estimate of future income based on operating results from the Company’s recent history, as well as an estimate of future income that incorporates the Company's forecasted operating results for fiscal 2017. The Company believes that the recent period operating losses are attributable to operating expenses incurred to invest in the future growth of the business. Due to the significant amount of additional stock based compensation excess tax deduction generated, the Company determined that the negative evidence outweighed the positive evidence and that it is not more-likely-than-not that sufficient taxable income will be generated to realize all of the DTAs as of March 31, 2017. As such, a partial valuation allowance was recorded against the Company’s domestic DTAs as of March 31, 2017 in the amount of $9.8 million, which was approximately the same amount as the stock based compensation excess tax benefits created during the three months ended March 31, 2017. The Company will continue to closely monitor the need for an additional valuation allowance against its domestic DTAs that are generated in each subsequent reporting period which can be impacted by actual operating results compared to the Company's forecast.
Consistent with prior periods, the Company maintained a full valuation allowance against its California and Canada DTAs as of March 31, 2017.
Net (Loss) Income per Share of Common Stock attributable to Common Stockholders
Net (loss) Income per Share of Common Stock attributable to Common Stockholders
Net (Loss) Income per Share
The Company’s basic net income per share is calculated by dividing the net income by the weighted average number of shares of common stock outstanding for the period. The diluted net (loss) income per share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock, restricted stock and common stock warrants are considered common stock equivalents.
A reconciliation of the numerator and denominator used in the calculation of the basic and diluted net (loss) income per share for the three months ended March 31, 2017 and 2016 is as follows (in thousands, except share and per share amounts):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Net (loss) income per share:
 
 
 
 
Numerator
 
 
 
 
Net (loss) income—basic and diluted
 
$
(3,106
)
 
$
2,291

Denominator
 
 
 
 
Weighted average shares used to compute net (loss) income
—Basic
 
31,611,841

 
29,990,006

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

 
3,033,489

Weighted average shares used to compute net income
—Diluted
 
31,611,841

 
33,023,495

Net (loss) income per share
—Basic
 
$
(0.10
)
 
$
0.08

—Diluted
 
$
(0.10
)
 
$
0.07


For the three months ended March 31, 2017 and 2016, outstanding stock-based awards of 3.5 million and 12,500 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, for the three months ended March 31, 2017 and 2016 was as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
United States
 
$
48,487

 
$
39,412

Japan
 
7,642

 
6,161

Other International
 
17,084

 
12,346

Total
 
$
73,213

 
$
57,919


The following table sets forth revenue by product category, for the three months ended March 31, 2017 and 2016 was as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Neuro
 
$
50,249

 
$
41,284

Peripheral Vascular
 
22,964

 
16,635

Total
 
$
73,213

 
$
57,919


The Company does not have significant long-lived assets outside the United States.
Summary of Significant Accounting Policies (Policies)
Basis of Presentation and Consolidation
The accompanying condensed consolidated balance sheet as of March 31, 2017, the condensed consolidated statements of operations and comprehensive (loss) income for the three months ended March 31, 2017 and 2016, and the condensed consolidated statements of cash flows for the three months ended March 31, 2017 and 2016 are unaudited. The unaudited condensed consolidated financial statements included herein have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The condensed consolidated balance sheet as of December 31, 2016 was derived from the audited financial statements as of that date.
 The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly the Company’s financial position as of March 31, 2017, the results of its operations for the three months ended March 31, 2017 and 2016, and the cash flows for the three months ended March 31, 2017 and 2016. The results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or for any other future annual or interim period. Certain changes in presentation were made in the condensed consolidated financial statements for the three months ended March 31, 2016, to conform to the presentation for the three months ended March 31, 2017.
The Company elected to early adopt Accounting Standards Update (ASU) 2016-09 in the fourth quarter of 2016 which requires the Company to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The impact of adoption was the creation of deferred tax assets in the balance sheet and recognition of excess tax benefits in our provision for (benefit from) income taxes rather than paid-in capital for all periods in fiscal year 2016. The Company's adoption of ASU 2016-09 resulted in the recognition of excess tax benefits in the Company's benefit from income taxes rather than paid-in capital of $1.5 million for the three months ended March 31, 2016. In addition, the Company elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively to all periods presented.
Adoption of the new standard resulted in adjustments to our 2016 unaudited selected financial data previously reported in our Quarterly Report on Form 10-Q as follows:
 
March 31, 2016
(In thousands)
As Reported
As Adjusted
Condensed Consolidated Balance Sheet Data:
 
 
Additional Paid-in-Capital
$
255,499

$
253,988

Accumulated deficit
$
(16,695
)
$
(15,184
)
Total stockholder' equity
$
238,048

$
238,048

 
 
 
 
Three Months Ended March 31, 2016
(In thousands, except percentage and per share amounts)
As Reported
As Adjusted
Condensed Consolidated Statements of Operations Data:
 
 
Provision for (benefit from) income taxes
$
1,341

$
(170
)
Net income
$
780

$
2,291

Net income per share
—Basic
$
0.03

$
0.08

—Diluted
$
0.02

$
0.07

Weighted average shares used to compute net income (loss) per share attributable to common stockholders
—Basic
29,990,006

29,990,006

—Diluted
32,486,516

33,023,495

 
 
 
 
Three Months Ended March 31, 2016
(In thousands)
As Reported
As Adjusted
Condensed Consolidated Statement of Cash Flow Data:
 
 
Net cash (used in) operating activities
$
(3,584
)
$
(2,074
)
Net cash (used in) financing activities
$
(3
)
$
(1,513
)

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2016 included in the Companys Annual Report on Form 10-K. There have been no changes to the Company’s significant accounting policies during the three months ended March 31, 2017, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity accounts; disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to marketable investments, provisions for doubtful accounts, sales return reserve, warranty reserves, valuation of inventories, useful lives of property and equipment, income taxes, 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 operating results for the purpose of allocating resources and evaluating financial performance. The Company determines revenue by geographic area, based on the destination to which it ships its products.
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 the Companys 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 these new standards as well as the transition method for implementation. The Company will be impacted by the new standard regarding the timing of its fulfillment of delivery criterion.
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.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, a consensus of the FASB Emerging Issues Task Force. The standard requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling the total beginning and end of period amounts shown on the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company does not expect the adoption of ASU 2016-18 to have a material impact on its consolidated financial statements.
Summary of Significant Accounting Policies (Tables)
Schedule of New Accounting Pronouncements and Changes in Accounting Principles
Adoption of the new standard resulted in adjustments to our 2016 unaudited selected financial data previously reported in our Quarterly Report on Form 10-Q as follows:
 
March 31, 2016
(In thousands)
As Reported
As Adjusted
Condensed Consolidated Balance Sheet Data:
 
 
Additional Paid-in-Capital
$
255,499

$
253,988

Accumulated deficit
$
(16,695
)
$
(15,184
)
Total stockholder' equity
$
238,048

$
238,048

 
 
 
 
Three Months Ended March 31, 2016
(In thousands, except percentage and per share amounts)
As Reported
As Adjusted
Condensed Consolidated Statements of Operations Data:
 
 
Provision for (benefit from) income taxes
$
1,341

$
(170
)
Net income
$
780

$
2,291

Net income per share
—Basic
$
0.03

$
0.08

—Diluted
$
0.02

$
0.07

Weighted average shares used to compute net income (loss) per share attributable to common stockholders
—Basic
29,990,006

29,990,006

—Diluted
32,486,516

33,023,495

 
 
 
 
Three Months Ended March 31, 2016
(In thousands)
As Reported
As Adjusted
Condensed Consolidated Statement of Cash Flow Data:
 
 
Net cash (used in) operating activities
$
(3,584
)
$
(2,074
)
Net cash (used in) financing activities
$
(3
)
$
(1,513
)
Fair Value of Financial Instruments (Tables)
Schedule of Fair Value of Assets and Liabilities
The following table sets forth the Company’s financial assets and liabilities measured at fair value by level within the fair value hierarchy (in thousands):
 
 
As of March 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Commercial Paper
 
$

 
$
21,769

 
$

 
$
21,769

Money market funds
 
55,608

 

 

 
55,608

U.S. States and Municipalities
 

 
5,000

 

 
5,000

Corporate bonds
 

 
4,000

 

 
4,000

Marketable investments:
 
 
 
 
 
 
 
 
Commercial paper
 

 
13,610

 

 
13,610

U.S. Treasury
 
9,003

 


 

 
9,003

U.S. agency securities
 

 
6,837

 

 
6,837

U.S. states and municipalities
 

 
12,678

 

 
12,678

Corporate bonds
 

 
78,926

 

 
78,926

Non-U.S. government debt securities
 

 
1,202

 

 
1,202

Total
 
$
64,611

 
$
144,022


$


$
208,633

 
 
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

Balance Sheet Components (Tables)
The Company’s allowance for doubtful accounts comprised of the following (in thousands):
Allowance for Doubtful Accounts
 
March 31,
2017
 
December 31,
2016
Balance at the beginning of the period
 
$
684

 
$
589

Charged to costs and expenses
 
145

 
216

Deductions
 

 
(121
)
Balance at the end of the period
 
$
829

 
$
684

The Company’s prepaid expenses and other current assets as of March 31, 2017 and December 31, 2016 were comprised of the following (in thousands):
 
 
March 31,
2017
 
December 31,
2016
Prepaid Tax
 
$
1,887

 
$
4,656

Prepaid expenses
 
4,871

 
4,573

Income tax receivable
 
4,587

 
4,536

Other current assets
 
3,209

 
4,962

Prepaid expenses and other current assets
 
$
14,554

 
$
18,727

The Company’s marketable investments as of March 31, 2017 and December 31, 2016 were as follows (in thousands):
 
 
March 31, 2017
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Commercial paper
 
$
13,610

 
$
1

 
$
(1
)
 
$
13,610

U.S. Treasury
 
9,002

 
4

 
(3
)
 
9,003

U.S. agency securities
 
6,847

 

 
(10
)
 
6,837

U.S. states and municipalities
 
12,687

 
2

 
(11
)
 
12,678

Corporate bonds
 
79,004

 
30

 
(108
)
 
78,926

Non-U.S. government debt securities
 
1,202

 

 


 
1,202

Total
 
$
122,352

 
$
37

 
$
(133
)
 
$
122,256

 
 
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

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 March 31, 2017 and December 31, 2016 (in thousands):
 
 
March 31, 2017
 
 
Fair Value
 
Gross Unrealized Losses
Commercial paper
 
$
7,977

 
$
(1
)
US Treasury
 
4,994

 
(3
)
US Agency securities
 
4,892

 
(10
)
U.S. States and Municipalities
 
9,947

 
(11
)
Corporate bonds
 
43,741

 
(108
)
Total
 
$
71,551

 
$
(133
)
 
 
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
)
The contractual maturities of the Company’s marketable investments as of March 31, 2017 and December 31, 2016 were as follows (in thousands):
 
March 31,
2017
 
December 31, 2016
 
Fair Value
Due in one year
$
105,348

 
$
71,051

Due in one to five years
16,908

 
44,466

Total
$
122,256

 
$
115,517

The components of inventories as of March 31, 2017 and December 31, 2016 consisted of the following (in thousands):
 
 
March 31,
2017
 
December 31,
2016
Raw materials
 
$
9,910

 
$
11,367

Work in process
 
4,420

 
3,663

Finished goods
 
64,857

 
57,982

Inventories
 
$
79,187

 
$
73,012

Property and equipment, net as of March 31, 2017 and December 31, 2016 consisted of the following (in thousands):
 
 
March 31,
2017
 
December 31,
2016
Machinery and equipment
 
$
10,457

 
$
9,734

Furniture and fixtures
 
4,598

 
4,246

Leasehold improvements
 
10,291

 
10,207

Software
 
1,641

 
1,221

Computers
 
1,118

 
884

Construction in progress
 
2,453

 
2,193

Total property and equipment
 
30,558

 
28,485

Less: Accumulated depreciation and amortization
 
(7,653
)
 
(7,021
)
Property and equipment, net
 
$
22,905

 
$
21,464

The following table shows the components of accrued liabilities as of March 31, 2017 and December 31, 2016 (in thousands):
 
 
March 31,
2017
 
December 31,
2016
Payroll and employee-related cost
 
$
19,223

 
$
16,956

Sales return reserve
 
2,940

 
2,753

Preclinical and clinical trial cost
 
1,877

 
2,054

Deferred revenue
 
357

 
344

Product warranty
 
1,087

 
1,254

Sales tax and VAT payable
 
548

 
733

Income tax payable
 
354

 
174

Other accrued liabilities
 
7,205

 
7,422

Total accrued liabilities
 
$
33,591

 
$
31,690

The estimated product warranty accrual as of March 31, 2017 and December 31, 2016 was as follows (in thousands):
 
 
March 31,
2017
 
December 31,
2016
Balance at the beginning of the period
 
$
1,254

 
$
713

Accruals of warranties issued
 
39

 
1,176

Settlements of warranty claims
 
(206
)
 
(635
)
Balance at the end of the period
 
$
1,087

 
$
1,254

Stockholder's Equity (Tables)
Activity of stock options under the Penumbra, Inc. 2005 Stock Plan, the Penumbra, Inc. 2011 Equity Incentive Plan and the Amended and Restated Penumbra, Inc. 2014 Equity Incentive Plan (collectively the “Plans”) during the three months ended March 31, 2017 is set forth below:
 
 
Number
of Shares
 
Weighted-
Average
Exercise
Price
Balance at December 31, 2016
 
2,876,955

 
$
14.63

Options exercised
 
(383,457
)
 
2.73

Options canceled
 
(969
)
 
10.56

Balance at March 31, 2017
 
2,492,529

 
16.47

The following table summarizes the activity of unvested restricted stock and restricted stock units under the Plans during the three months ended March 31, 2017 is set forth below: 
 
 
Number
of Shares
 
Weighted Average
Grant Date
Fair Value
Unvested at December 31, 2016
 
1,002,944

 
$
29.44

Granted
 
58,660

 
76.47

Vested
 
(115,685
)
 
15.63

Canceled/Forfeited
 
(18,125
)
 
41.31

Unvested and expected to vest at March 31, 2017
 
927,794

 
25.84

The following table sets forth the stock-based compensation expense included in the Company's condensed consolidated statements of operations and comprehensive (loss) income for the three months ended March 31, 2017 and 2016 (in thousands):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Cost of sales
 
$
309

 
$
9

Research and development
 
253

 
258

Sales, general and administrative
 
3,450

 
2,748

Total
 
$
4,012

 
$
3,015

Accumulated Other Comprehensive (Loss) Income (Tables)
Schedule of Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in the accumulated balances during the three months ended March 31, 2017 and 2016, and includes information regarding the manner in which the reclassifications out of accumulated other comprehensive (loss) income into earnings affect the Company’s condensed consolidated statements of operations and comprehensive (loss) income (in thousands):
 
 
Three Months Ended March 31, 2017
 
Three Months Ended March 31, 2016
 
 
 Marketable
Investments
 
 Currency Translation
Adjustments
 
 Total
 
 Marketable
Investments
 
 Currency Translation
Adjustments
 
 Total
Balance at beginning of the period
 
$
(105
)
 
$
(4,583
)
 
$
(4,688
)
 
$
(163
)
 
$
(1,952
)
 
$
(2,115
)
Other comprehensive income before reclassifications:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains —marketable investments
 
101

 

 
101

 
441

 

 
441

Foreign currency translation gains
 

 
692

 
692

 

 
1,043

 
1,043

Income tax effect—benefit (expense)
 

 

 

 
(160
)
 
5

 
(155
)
Net of tax
 
101

 
692

 
793

 
281

 
1,048

 
1,329

Amounts reclassified from accumulated other comprehensive income to earnings:
 
 
 
 
 
 
 
 
 
 
 
 
Realized losses (gains)—marketable investments
 
(31
)
 

 
(31
)
 

 

 

Income tax effect—(expense) benefit