Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____ to _____         
Commission File Number: 001-37557
 
Penumbra, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
05-0605598
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

One Penumbra Place
Alameda, CA
 
94502
(Address of principal executive offices)
 
(Zip code)

(510) 748-3200
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes: x    No:  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes:  x    No:  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
o
 
Accelerated Filer
o
 
 
 
 
Non-accelerated filer
x
(Do not check if a smaller reporting Company)
Smaller Reporting Company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes:  o  No:  x
As of July 15, 2016, the registrant had 31,054,604 shares of common stock, par value $0.001 per share, outstanding.
 


Table of Contents

Penumbra, Inc.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


2

Table of Contents

Penumbra, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands)
 
 
June 30,
2016
 
December 31,
2015
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
13,914

 
$
19,547

Marketable investments
 
125,949

 
129,257

Accounts receivable, net of doubtful accounts of $661 and $589 at June 30, 2016 and December 31, 2015, respectively
 
34,577

 
29,444

Inventories
 
68,406

 
56,761

Prepaid expenses and other current assets
 
17,406

 
9,352

Total current assets
 
260,252

 
244,361

Property and equipment, net
 
11,864

 
8,951

Deferred taxes
 
11,422

 
10,143

Other non-current assets
 
441

 
393

Total assets
 
$
283,979

 
$
263,848

Liabilities and Stockholders’ Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Accounts payable
 
$
4,070

 
$
2,567

Accrued liabilities
 
28,119

 
25,581

Total current liabilities
 
32,189

 
28,148

Other non-current liabilities
 
4,199

 
3,178

Total liabilities
 
36,388

 
31,326

Commitments and contingencies (Note 5)
 


 


Stockholders’ Equity:
 
 
 
 
Common stock
 
30

 
30

Additional paid-in capital
 
266,650

 
252,087

Notes receivable from stockholder
 

 
(5
)
Accumulated other comprehensive loss
 
(2,579
)
 
(2,115
)
Accumulated deficit
 
(16,510
)
 
(17,475
)
Total stockholders’ equity
 
247,591

 
232,522

Total liabilities and stockholders’ equity
 
$
283,979

 
$
263,848

See accompanying notes to the unaudited condensed consolidated financial statements

3

Table of Contents

Penumbra, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(unaudited)
(in thousands, except share and per share amounts)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Revenue
 
$
65,106

 
$
42,311

 
$
123,025

 
$
81,263

Cost of revenue
 
23,636

 
14,936

 
41,650

 
27,160

Gross profit
 
41,470

 
27,375

 
81,375

 
54,103

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
6,264

 
4,792

 
11,265

 
7,983

Sales, general and administrative
 
35,876

 
26,396

 
68,945

 
45,943

Total operating expenses
 
42,140

 
31,188

 
80,210

 
53,926

(Loss) Income from operations
 
(670
)
 
(3,813
)
 
1,165

 
177

Interest income, net
 
559

 
177

 
1,069

 
385

Other expense, net
 
(272
)
 
(542
)
 
(496
)
 
(498
)
(Loss) Income before provision for income taxes
 
(383
)
 
(4,178
)
 
1,738

 
64

(Benefit from) Provision for income taxes
 
(568
)
 
(1,507
)
 
773

 
233

Net income (loss)
 
185

 
(2,671
)
 
965

 
(169
)
Foreign currency translation adjustments, net of tax
 
(1,881
)
 
327

 
(833
)
 
(589
)
Unrealized gains on available-for-sale securities, net of tax
 
88

 
193

 
369

 
220

Comprehensive (loss) income
 
$
(1,608
)
 
$
(2,151
)
 
$
501

 
$
(538
)
Net income (loss) attributable to common stockholders (Note 9)
 
$
185

 
$
(553
)
 
$
965

 
$
(34
)
Net income (loss) per share attributable to common stockholders
—Basic
 
$
0.01

 
$
(0.11
)
 
$
0.03

 
$
(0.01
)
—Diluted
 
$
0.01

 
$
(0.11
)
 
$
0.03

 
$
(0.01
)
Weighted average shares used to compute net income (loss) per share attributable to common stockholders
—Basic
 
30,210,322

 
5,096,151

 
30,100,162

 
5,000,375

—Diluted
 
32,693,684

 
5,096,151

 
32,542,253

 
5,000,375

See accompanying notes to the unaudited condensed consolidated financial statements

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Table of Contents

Penumbra, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
 
Six Months Ended June 30,
 
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income (loss)
 
$
965

 
$
(169
)
Adjustments to reconcile net income to net cash used in operating activities:
 

 

Depreciation and amortization
 
1,146

 
745

Amortization of premium on marketable investments
 
445

 

Stock-based compensation
 
6,537

 
3,616

Excess tax benefit from stock-based compensation
 
(4,373
)
 

Provision for (release of) doubtful accounts
 
72

 
(101
)
Inventory write downs
 
824

 
304

Write off of note receivable
 

 
85

(Release of) provision for sales returns
 
(208
)
 
223

Loss on disposal of property and equipment
 
59

 
12

Realized (gain) loss on marketable investments
 
(2
)
 
541

Provision for product warranty
 
23

 
176

Deferred taxes
 
(207
)
 

Changes in operating assets and liabilities:
 

 

Accounts receivable
 
(5,058
)
 
(4,940
)
Inventories
 
(12,035
)
 
(11,321
)
Prepaid expenses and other current and non-current assets
 
(5,508
)
 
(2,759
)
 Accounts payable
 
1,330

 
548

Accrued expenses and other non-current liabilities
 
3,435

 
4,709

Net cash used in operating activities
 
(12,555
)
 
(8,331
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchase of marketable investments
 
(27,467
)
 
(4,069
)
Proceeds from sales of marketable investments
 
28,962

 
52,160

Proceeds from maturities of marketable investments
 
2,504

 

Purchases of property and equipment
 
(3,695
)
 
(3,073
)
Net cash provided by investing activities
 
304

 
45,018

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Payment of deferred issuance costs
 

 
(964
)
Proceeds from exercises of stock options
 
1,493

 
515

Proceeds from issuance of stock under employee stock purchase plan
 
3,783

 

Excess tax benefit from stock-based compensation
 
4,373

 

Payment of employee taxes related to vested restricted stock
 
(1,846
)
 
(2,525
)
Net cash provided by (used in) financing activities
 
7,803

 
(2,974
)
Effect of foreign exchange rate changes on cash and cash equivalents
 
(1,185
)
 
(239
)
Net (Decrease) Increase In Cash And Cash Equivalents
 
(5,633
)
 
33,474

CASH AND CASH EQUIVALENTS—Beginning of period
 
19,547

 
3,290

CASH AND CASH EQUIVALENTS—End of period
 
$
13,914

 
$
36,764

NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
Purchase of property and equipment funded through accounts payable and accrued liabilities
 
$
560

 
$
483

Deferred issuance costs not yet paid
 
$

 
$
620

See accompanying notes to the unaudited condensed consolidated financial statements

5

Table of Contents

Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Organization and Description of Business
Penumbra, Inc. (the “Company”) is a global interventional therapies company that designs, develops, manufactures and markets innovative medical devices. The Company 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.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying condensed consolidated balance sheet as of June 30, 2016, the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2016 and 2015, and the condensed consolidated statements of cash flows for the six months ended June 30, 2016 and 2015 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, 2015 was derived from the audited financial statements as of that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
 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 June 30, 2016, the results of its operations for the three and six months ended June 30, 2016 and 2015, and the cash flows for the six months ended June 30, 2016 and 2015. The results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or for any other future annual or interim period.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2015 included in the Companys Annual Report on Form 10-K. There have been no changes to the Company’s significant accounting policies during the six months ended June 30, 2016, 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, 2015.
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.

6

Table of Contents
Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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. 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 impact of adopting these standards.
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 is currently evaluating the impact of adopting this standard.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The new standard is effective for annual periods and interim periods beginning after December 15, 2017 and, upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this standard.
In February 2016, the FASB issued ASU 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. The Company is currently evaluating the impact of adopting this standard.
In March 2016, the FASB issued ASU No. 2016-09, Stock CompensationImprovements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The accounting standard is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. Early adoption is permitted in any interim or annual period. The Company is currently evaluating the impact of adopting this standard.
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.

7

Table of Contents
Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

3. 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 and internal assumptions of the independent pricing services. 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 June 30, 2016 or December 31, 2015.
During the three and six months ended June 30, 2016 and 2015, 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 June 30, 2016 or December 31, 2015.

8

Table of Contents
Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

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 June 30, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
279

 
$

 
$

 
$
279

Marketable investments:
 
 
 
 
 
 
 
 
Commercial paper
 

 
10,134

 

 
10,134

U.S. Treasury
 
15,512

 


 

 
15,512

U.S. agency securities
 

 
13,521

 

 
13,521

U.S. states and municipalities
 

 
15,938

 

 
15,938

Corporate bonds
 

 
65,081

 

 
65,081

Non-U.S. government debt securities
 

 
5,763

 

 
5,763

Total
 
$
15,791

 
$
110,437


$


$
126,228

 
 
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

4. 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 excess of federally insured limits. The Company maintained investments in money market funds that were not federally insured during the periods presented and held cash in foreign banks of approximately $2.7 million and $1.9 million at June 30, 2016 and December 31, 2015, respectively, that were not federally insured. The Company has not experienced any losses on its deposits of cash and cash equivalents.
Accounts Receivable, Net
The Company’s allowance for doubtful accounts comprised of the following (in thousands):
Allowance for Doubtful Accounts
 
June 30,
2016
 
December 31,
2015
Balance at the beginning of the period
 
$
589

 
$
602

Charged to costs and expenses
 
72

 
(13
)
Deductions
 

 

Balance at the end of the period
 
$
661

 
$
589


9

Table of Contents
Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

One customer (a distributor) accounted for 10% of the Company’s revenue for each of the three and six months ended June 30, 2016 and 2015. No customer accounted for greater than 10% of the Company’s accounts receivable balance as of June 30, 2016 or December 31, 2015.
Prepaid Expenses and Other Current Assets
The Company’s prepaid expenses and other current assets as of June 30, 2016 and December 31, 2015 were comprised of the following (in thousands):
 
 
June 30,
2016
 
December 31,
2015
Prepaid Tax
 
$
6,892

 
$
2,736

Prepaid expenses
 
4,753

 
4,706

Income tax receivable
 
3,273

 
606

Other current assets
 
2,488

 
1,304

Prepaid expenses and other current assets
 
$
17,406

 
$
9,352


 Marketable Investments
The Company’s marketable investments as of June 30, 2016 and December 31, 2015 were as follows (in thousands):
 
 
June 30, 2016
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Commercial paper
 
$
10,128

 
$
6

 
$

 
$
10,134

U.S. Treasury
 
15,478

 
34

 

 
15,512

U.S. agency securities
 
13,487

 
34

 

 
13,521

U.S. states and municipalities
 
15,927

 
11

 

 
15,938

Corporate bonds
 
64,847

 
236

 
(2
)
 
65,081

Non-U.S. government debt securities
 
5,762

 
5

 
(4
)
 
5,763

Total
 
$
125,629

 
$
326

 
$
(6
)
 
$
125,949

 
 
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


10

Table of Contents
Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

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 June 30, 2016 and December 31, 2015 (in thousands):
 
 
June 30, 2016
 
 
Fair Value
 
Gross Unrealized Losses
U.S. States and Municipalities
 
2,022

 

Corporate bonds
 
8,174

 
(2
)
Non-U.S. government debt securities
 
1,836

 
(4
)
Total
 
$
12,032

 
$
(6
)
 
 
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 June 30, 2016 and December 31, 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 June 30, 2016 and December 31, 2015 were as follows (in thousands):
 
June 30,
2016
 
December 31, 2015
 
Fair Value
Due in one year
$
105,284

 
$
62,983

Due in one to five years
20,665

 
66,274

Total
$
125,949

 
$
129,257

 
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 June 30, 2016 and December 31, 2015 consisted of the following (in thousands):
 
 
June 30,
2016
 
December 31,
2015
Raw materials
 
$
10,560

 
$
9,176

Work in process
 
3,175

 
2,746

Finished goods
 
54,671

 
44,839

Inventories
 
$
68,406

 
$
56,761


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Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Property and Equipment, Net
Property and equipment, net as of June 30, 2016 and December 31, 2015 consisted of the following (in thousands):
 
 
June 30,
2016
 
December 31,
2015
Machinery and equipment
 
$
9,366

 
$
8,559

Furniture and fixtures
 
2,808

 
2,091

Leasehold improvements
 
2,360

 
1,564

Software
 
1,003

 
666

Computers
 
671

 
565

Construction in progress
 
1,857

 
577

Total property and equipment
 
18,065

 
14,022

Less: Accumulated depreciation and amortization
 
(6,201
)
 
(5,071
)
Property and equipment, net
 
$
11,864

 
$
8,951

Depreciation and amortization expense was $0.6 million and $0.4 million for the three months ended June 30, 2016 and 2015, respectively, and was $1.1 million and $0.7 million for the six months ended June 30, 2016 and 2015, respectively.

Accrued Liabilities
The following table shows the components of accrued liabilities as of June 30, 2016 and December 31, 2015 (in thousands):
 
 
June 30,
2016
 
December 31,
2015
Payroll and employee-related expenses
 
$
15,401

 
$
13,653

Sales return reserve
 
3,040

 
3,247

Preclinical and clinical trial cost
 
1,769

 
1,330

Deferred revenue
 
411

 
526

Product warranty
 
735

 
713

Sales tax payable
 
497

 
531

Income tax payable
 
139

 
308

Other accrued liabilities
 
6,127

 
5,273

Total accrued liabilities
 
$
28,119

 
$
25,581

The estimated product warranty accrual as of June 30, 2016 and December 31, 2015 was as follows (in thousands):
 
 
June 30,
2016
 
December 31,
2015
Balance at the beginning of the period
 
$
713

 
$
314

Provision for product warranty
 
345

 
752

Settlements of product warranty claims
 
(323
)
 
(353
)
Balance at the end of the period
 
$
735

 
$
713


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Table of Contents
Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

5. Commitments and Contingencies
Lease Commitments
The Company leases its offices and other equipment 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 June 30, 2016 and 2015 was $1.3 million and $0.8 million, respectively and for the six months ended June 30, 2016 and 2015 was $2.4 million and $1.4 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.
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 June 30, 2016 and December 31, 2015, 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 June 30, 2016 and 2015 was $0.7 million and $0.4 million, respectively and for the six months ended June 30, 2016 and 2015 was $1.4 million and $0.8 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 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.

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Table of Contents
Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

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 the Company 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. As formal discovery has only recently commenced, 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.
6. Stock-Based Compensation
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 six months ended June 30, 2016 is set forth below:
 
 
Number
of Shares
 
Weighted-
Average
Exercise
Price
Balance at December 31, 2015
 
3,755,345

 
$
12.13

Options exercised
 
(253,555
)
 
5.80

Options canceled
 
(11,983
)
 
19.13

Balance at June 30, 2016
 
3,489,807

 
12.56

 
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 six months ended June 30, 2016 is set forth below: 
 
 
Number
of Shares
 
Weighted Average
Grant Date
Fair Value
Unvested at December 31, 2015
 
849,571

 
$
15.12

Granted
 
132,800

 
46.30

Vested
 
(128,675
)
 
14.38

Canceled/Forfeited
 
(5,000
)
 
7.75

Unvested and expected to vest at June 30, 2016
 
848,696

 
20.16

Employee Stock Purchase Plan
Under the Penumbra, Inc. Employee Stock Purchase Plan (“ESPP”), employees purchased 148,354 shares for $3.8 million during each of the three and six months ended June 30, 2016.

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Table of Contents
Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Stock-based Compensation
The following table sets forth the stock-based compensation expense included in the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2016 and 2015 (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Cost of sales
 
$
651

 
$
71

 
$
660

 
$
130

Research and development
 
281

 
160

 
539

 
182

Sales, general and administrative
 
2,590

 
3,030

 
5,338

 
3,304

Total
 
$
3,522

 
$
3,261

 
$
6,537

 
$
3,616

As of June 30, 2016, total unrecognized compensation cost was $27.6 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 $0.6 million and $0.3 million as of June 30, 2016 and December 31, 2015, respectively.

7. Accumulated Other Comprehensive Income (Loss)
Other comprehensive income (loss) consists of two components: unrealized gains or losses on the Company’s available-for-sale marketable investments, and gains or losses from foreign currency translation adjustments. Until realized and reported as a component of net income, these comprehensive income items accumulate and are included within accumulated other comprehensive income (loss). Unrealized gains and losses on the Company’s marketable investments are reclassified from accumulated other comprehensive income (loss) into earnings when realized upon sale, and are determined based on specific identification of securities sold. Gains and losses from the translation of assets and liabilities denominated in non-U.S. dollar functional currencies are included in accumulated other comprehensive income (loss).
The following table summarizes the changes in the accumulated balances during the three and six months ended June 30, 2016 and 2015, and includes information regarding the manner in which the reclassifications out of accumulated other comprehensive income (loss) into earnings affect the Company’s condensed consolidated statements of operations and comprehensive income (loss) (in thousands):
 
 
Three Months Ended June 30, 2016
 
Three Months Ended June 30, 2015
 
 
 Marketable
Investments
 
 Currency Translation
Adjustments
 
 Total
 
 Marketable
Investments
 
 Currency Translation
Adjustments
 
 Total
Balance at beginning of the period
 
$
118

 
$
(904
)
 
$
(786
)
 
$
(193
)
 
$
(1,560
)
 
$
(1,753
)
Other comprehensive income before reclassifications:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses)—marketable investments
 
138

 

 
138

 
(179
)
 

 
(179
)
Foreign currency translation gains (losses)
 

 
(1,875
)
 
(1,875
)
 

 
347

 
347

Income tax effect—benefit (expense)
 
(49
)
 
(6
)
 
(55
)
 
44

 
(20
)
 
24

Net of tax
 
89

 
(1,881
)
 
(1,792
)
 
(135
)
 
327

 
192

Amounts reclassified from accumulated other comprehensive income to earnings:
 
 
 
 
 
 
 
 
 
 
 
 
Realized (gains) losses—marketable investments
 
(2
)
 

 
(2
)
 
511

 

 
511

Income tax effect—benefit (expense)
 
1

 

 
1

 
(183
)
 

 
(183
)
Net of tax
 
(1
)
 

 
(1
)
 
328

 

 
328

Net current-year other comprehensive income (loss)
 
88

 
(1,881
)
 
(1,793
)
 
193

 
327

 
520

Balance at end of the period
 
$
206

 
$
(2,785
)
 
$
(2,579
)
 
$

 
$
(1,233
)
 
$
(1,233
)


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Table of Contents
Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 
 
Six Months Ended June 30, 2016
 
Six Months Ended June 30, 2015
 
 
 Marketable
Investments
 
 Currency Translation
Adjustments
 
 Total
 
 Marketable
Investments
 
 Currency Translation
Adjustments
 
 Total
Balance at beginning of the period
 
$
(163
)
 
$
(1,952
)
 
$
(2,115
)
 
$
(220
)
 
$
(644
)
 
$
(864
)
Other comprehensive income before reclassifications:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses)—marketable investments
 
580

 

 
580

 
(162
)
 

 
(162
)
Foreign currency translation gains (losses)
 

 
(832
)
 
(832
)
 

 
(681
)
 
(681
)
Income tax effect—benefit (expense)
 
(209
)
 
(1
)
 
(210
)
 
36

 
92

 
128

Net of tax
 
371

 
(833
)
 
(462
)
 
(126
)
 
(589
)
 
(715
)
Amounts reclassified from accumulated other comprehensive income to earnings:
 
 
 
 
 
 
 
 
 
 
 
 
Realized (gains) losses—marketable investments
 
(3
)
 

 
(3
)
 
541

 

 
541

Income tax effect—benefit
 
1

 

 
1

 
(195
)
 

 
(195
)
Net of tax
 
(2
)
 

 
(2
)
 
346

 

 
346

Net current-year other comprehensive income (loss)
 
369

 
(833
)
 
(464
)
 
220

 
(589
)
 
(369
)
Balance at end of the period
 
$
206

 
$
(2,785
)
 
$
(2,579
)
 
$

 
$
(1,233
)
 
$
(1,233
)
8. 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 judgments and estimates are required in determining the consolidated income tax expense. The interim period effective tax rate is based on a forecast of the Company’s full year results.
The Company’s effective tax rate increased to 148.3% for the three months ended June 30, 2016, compared to 36.1% for the three months ended June 30, 2015 primarily attributable to forecasted income and losses. The effective tax rate decreased to 44.5% for the six months ended June 30, 2016, compared to 364.1% for the six months ended June 30, 2015 primarily attributable to forecasted income and losses.
9. Net Income per Share of Common Stock attributable to Common Stockholders
The Company calculated its basic and diluted net income per share attributable to common stockholders for the three and six months ended June 30, 2015 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.
The Company’s basic net income per share attributable to common stockholders is calculated by dividing the net income by the weighted average number of shares of common stock outstanding for the period. The diluted net income 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.

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Table of Contents
Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

A reconciliation of the numerator and denominator used in the calculation of the basic and diluted net income per share attributable to common stockholders for the three and six months ended June 30, 2016 and 2015 is as follows (in thousands, except share and per share amounts):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Net income per share:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Net income (Loss)
 
$
185

 
$
(2,671
)
 
$
965

 
$
(169
)
Less: Undistributed income attributable to preferred stockholders
 

 
2,118

 

 
135

Net income (Loss) attributable to common stockholders—basic and diluted
 
$
185

 
$
(553
)
 
$
965

 
$
(34
)
Denominator
 
 
 
 
 
 
 
 
Weighted average shares used to compute net income attributable to common stockholders
—Basic
 
30,210,322

 
5,096,151

 
30,100,162

 
5,000,375

Potential dilutive options and ESPP shares, as calculated using treasury stock method
 
2,088,651

 

 
2,074,286

 

Potential dilutive restricted stock and restricted stock units, as calculated using treasury stock method
 
394,711

 

 
367,805

 

Weighted average shares used to compute net income attributable to common stockholders
—Diluted
 
32,693,684

 
5,096,151

 
32,542,253

 
5,000,375

Net income (Loss) per share attributable to common stockholders
—Basic
 
$
0.01

 
$
(0.11
)
 
$
0.03

 
$
(0.01
)
—Diluted
 
$
0.01

 
$
(0.11
)
 
$
0.03

 
$
(0.01
)
 
The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net income per share of common stock for the periods presented, because the effect of including them would have been anti-dilutive: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Options and ESPP to purchase common stock
 

 
2,485,392

 
4,007

 
2,485,392

Restricted stock and restricted stock units
 
15,210

 
755,771

 
34,928

 
755,771

Total
 
15,210

 
3,241,163

 
38,935

 
3,241,163


10. 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 and six months ended June 30, 2016 and 2015 was as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
United States
 
$
43,692

 
$
27,619

 
$
83,104

 
$
53,970

Japan
 
6,570

 
4,152

 
12,730

 
8,610

Other International
 
14,844

 
10,540

 
27,191

 
18,683

Total
 
$
65,106

 
$
42,311

 
$
123,025

 
$
81,263


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Table of Contents
Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

The following table sets forth revenue by product category (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Neuro
 
$
45,362

 
$
34,400

 
$
86,646

 
$
66,054

Peripheral Vascular
 
19,744

 
7,911

 
36,379

 
15,209

Total
 
$
65,106

 
$
42,311

 
$
123,025

 
$
81,263

The Company does not have significant long-lived assets outside the U.S.

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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2015, included in our Annual Report on Form 10-K filed with the SEC on March 8, 2016.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you can identify these statements by forward-looking words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2015. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. Except as may be required by law, we assume no obligation to update these forward-looking statements or the reasons that results could differ from these forward-looking statements. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Overview
Penumbra, Inc. (“we,” “our,” “us,” “Penumbra,” and the “Company”) is a global interventional therapies company that designs, develops, manufactures and markets innovative medical devices. We have 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 our products address include, among others, ischemic stroke, hemorrhagic stroke and various peripheral vascular conditions that can be treated through thrombectomy and embolization procedures.
We are an established company focused on the neuro and peripheral vascular markets. We sell our products to hospitals, primarily through our salesforce, as well as through distributors in select international markets. We focus on developing, manufacturing and marketing products for use by specialist physicians, including interventional neuroradiologists, neurosurgeons, interventional neurologists, interventional radiologists and vascular surgeons. We design our products to provide these specialist physicians with a means to drive improved clinical outcomes through faster and safer procedures.
Since our founding in 2004, we have invested heavily in our product development capabilities in our two key markets: neuro and peripheral vascular. We launched our first neurovascular product in 2007, our first peripheral vascular product in 2013 and our first neurosurgical product in 2014. To date, we have launched 16 product brands, and we expect to continue to develop and build our portfolio of products based on our thrombectomy, embolization and access technologies. Generally, when we introduce a next generation product or a new product designed to replace a current product, sales of the earlier generation product or the product replaced decline. Our research and development activities are centered around the development of new products and clinical activities designed to support our regulatory submissions and demonstrate the effectiveness of our products.
We manufacture substantially all of our products at our campus in Alameda, California, and stock inventory of raw materials, components and finished goods primarily at that location. We rely on a single or limited number of suppliers for certain raw materials and components, and we generally have no long-term supply arrangements with our suppliers, as we order on a purchase order basis. We ship all of our products to our hospital customers and distributors worldwide pursuant to purchase orders. We typically recognize revenue when products are delivered to our hospital customers or distributors, other than our coils, which we ship to our hospital customers on a consignment basis, and for which we recognize revenue when the hospital customers utilize products in a procedure.
Hospitals purchase our products for use in procedures performed by their specialist physicians, generally seeking reimbursement from third party payors for procedures performed. We believe that the cost-effectiveness of our products is attractive to our hospital customers.
In the six months ended June 30, 2016 and 2015, 32.4% and 33.6% of our revenue, respectively, was generated from customers located outside of the United States. Our sales outside of the United States are denominated principally in the Euro and Japanese Yen, with our sales in the United Kingdom being denominated in British Pounds. As a result, we have foreign exchange exposure, but do not currently engage in hedging. In the six months ended June 30, 2016, no single hospital and only one distributor accounted for more than 10% of our sales.

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Table of Contents

We sell our products to hospitals primarily through our direct sales organization in the United States, most of Europe, Canada and Australia, as well as through distributors in select international markets. In the six months ended June 30, 2016, we generated revenue of $123.0 million as compared to $81.3 million for the six months ended June 30, 2015, which represents an increase of 51.4%, and in the six months ended June 30, 2016, we generated $1.2 million in operating income as compared to operating income of $0.2 million for the six months ended June 30, 2015, which represents an increase of 558.2%.
Factors Affecting Our Performance
There are a number of factors that have impacted, and we believe will continue to impact, our results of operations and growth. For example: 
The rate at which we grow our salesforce and the speed at which newly hired salespeople become fully effective can impact our revenue growth or our costs incurred in anticipation of such growth.
Our industry is intensely competitive and, in particular, we compete with a number of large, well-capitalized companies. We must continue to successfully compete in light of our competitors’ existing and future products and their resources to successfully market to the specialist physicians who use our products.
We must continue to successfully introduce new products that gain acceptance with specialist physicians and successfully transition from existing products to new products, ensuring adequate supply while avoiding excess inventory of older products and resulting inventory write-downs or write-offs. In addition, as we introduce new products, we generally hire and train additional personnel and build our inventory of components and finished goods in advance of sales, which may cause quarterly fluctuations in our financial condition.
Publications of clinical results by us, our competitors and other third parties can have a significant influence on whether, and the degree to which, our products are used by specialist physicians and the procedures and treatments those physicians choose to administer for a given condition.
The specialist physicians who use our products may not perform procedures during certain times of the year, such as those periods when they are at major medical conferences or are away from their practices for other reasons, the timing of which occurs irregularly during the year and from year to year.
In addition, we have experienced and expect to continue to experience meaningful variability in our quarterly revenue, gross profit and gross margin as a result of a number of factors, including, but not limited to: the number of available selling days, which can be impacted by holidays; the mix of products sold; the geographic mix of where products are sold; the demand for our products and the products of our competitors; the timing of or failure to obtain regulatory approvals or clearances for products; increased competition; the timing of customer orders; inventory write-offs and write-downs; costs, benefits and timing of new product introductions; the availability and cost of components and raw materials; and fluctuations in foreign currency exchange rates. We experience quarters in which we have significant revenue growth sequentially followed by quarters of moderate or no revenue growth. Additionally, we experience quarters in which operating expenses, in particular research and development expenses, fluctuate depending on the stage and timing of product development.
Components of Results of Operations
Revenue. We sell our products directly to hospitals and through distributors for use in procedures performed by specialist physicians to treat patients in two key markets: neuro and peripheral vascular disease. We sell our products through purchase orders, and we do not have long-term purchase commitments from our customers. We typically recognize revenue when products are delivered to our hospital customers or distributors. However, with respect to products that we consign to hospitals, which primarily consist of coils, we recognize revenue at the time hospitals utilize products in a procedure. Revenue also includes shipping and handling costs that we charge to customers.
Cost of Revenue. Cost of revenue consists primarily of the cost of raw materials and components, personnel costs, including stock-based compensation, inbound freight charges, receiving costs, inspection and testing costs, warehousing costs, royalty expense, shipping and handling costs and other labor and overhead costs incurred in the manufacturing of products. We manufacture substantially all of our products in our manufacturing facility at our campus in Alameda, California.
Operating Expenses
Research and Development (R&D). R&D expenses primarily consist of product development, clinical and regulatory expenses, materials, depreciation and other costs associated with the development of our products. R&D expenses also include salaries, benefits and other related costs, including stock-based compensation, for personnel and consultants. We expense R&D costs as they are incurred.
We expect our R&D expenses to continue to increase in absolute terms as we innovate and develop new products, add personnel and engage in ongoing clinical research.

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Sales, General and Administrative (SG&A). SG&A expenses primarily consist of salaries, benefits and other related costs, including stock-based compensation, for personnel and consultants engaged in sales, marketing, finance, legal, compliance, administrative, facilities and information technology, medical education and training and human resource activities. Our SG&A expenses also include commissions, generally based on a percentage of sales, to direct sales representatives and the medical device excise tax, which was approximately 2.3% of U.S. sales in 2015. The medical device excise tax has been suspended for a two-year period commencing January 1, 2016; however, it could be reinstated.
We expect our SG&A expenses to continue to increase in absolute terms as we expand our salesforce, marketing programs and operations, including those related to operating as a public company.
Income Tax Expense. We are taxed at the rates applicable within each jurisdiction in which we operate. The composite income tax rate, tax provisions, deferred tax assets and deferred tax liabilities will vary according to the jurisdiction in which profits arise. Tax laws are complex and subject to different interpretations by management and the respective governmental taxing authorities, and require us to exercise judgment in determining our income tax provision, our deferred tax assets and liabilities and the potential valuation allowance recorded against our net deferred tax assets. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not that the future realization of all or some of the deferred tax assets will not be achieved.
Results of Operations
The following table sets forth the components of our condensed consolidated statements of operations in dollars and as a percentage of revenue for the periods presented:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except for percentages)
Revenue
$
65,106

 
100.0
 %
 
$
42,311

 
100.0
 %
 
$
123,025

 
100.0
 %
 
$
81,263

 
100.0
 %
Cost of revenue
23,636

 
36.3
 %
 
14,936

 
35.3
 %
 
41,650

 
33.9
 %
 
27,160

 
33.4
 %
Gross profit
41,470

 
63.7
 %
 
27,375

 
64.7
 %
 
81,375

 
66.1
 %
 
54,103

 
66.6
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
6,264

 
9.6
 %
 
4,792

 
11.3
 %
 
11,265

 
9.2
 %
 
7,983

 
9.8
 %
Sales, general and administrative
35,876

 
55.1
 %
 
26,396

 
62.4
 %
 
68,945

 
56.0
 %
 
45,943

 
56.5
 %
Total operating expenses
42,140

 
64.7
 %
 
31,188

 
73.7
 %
 
80,210

 
65.2
 %
 
53,926

 
66.4
 %
Income (expense) from operations
(670
)
 
(1.0
)%
 
(3,813
)
 
(9.0
)%
 
1,165

 
0.9
 %
 
177

 
0.2
 %
Interest income, net
559

 
0.9
 %
 
177

 
0.4
 %
 
1,069

 
0.9
 %
 
385

 
0.5
 %
Other expense, net
(272
)
 
(0.4
)%
 
(542
)
 
(1.3
)%
 
(496
)
 
(0.4
)%
 
(498
)
 
(0.6
)%
Income before provision for (benefit from) income taxes
(383
)
 
(0.6
)%
 
(4,178
)
 
(9.9
)%
 
1,738

 
1.4
 %
 
64

 
0.1
 %
Provision for (benefit from) income taxes
(568
)
 
(0.9
)%
 
(1,507
)
 
(3.6
)%
 
773

 
0.6
 %
 
233

 
0.3
 %
Net income (loss)
$
185

 
0.3
 %
 
$
(2,671
)
 
(6.3
)%
 
$
965

 
0.8
 %
 
$
(169
)
 
(0.2
)%
Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015
Revenue
 
Three Months Ended June 30,
 
Change
 
2016
 
2015
 
$
 
%
 
(in thousands, except for percentages)
Neuro
$
45,362

 
$
34,400

 
$
10,962

 
31.9
%
Peripheral Vascular
19,744

 
7,911

 
11,833

 
149.6
%
Total
$
65,106

 
$
42,311

 
$
22,795

 
53.9
%
Revenue increased $22.8 million, or 53.9%, to $65.1 million in the three months ended June 30, 2016, from $42.3 million in the three months ended June 30, 2015. Our revenue growth resulted from increased sales due to expansion of our salesforce headcount by 43%, further market penetration of our existing products and sales of new products or products with new

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indications. Increased sales within our neuro and peripheral vascular businesses each accounted for approximately half of the revenue increase in the three months ended June 30, 2016.
Revenue from sales in the U. S. increased $16.1 million, or 58.2%, to $43.7 million in the three months ended June 30, 2016, from $27.6 million in the three months ended June 30, 2015. Revenue from sales in international markets increased $6.7 million, or 45.8%, to $21.4 million in the three months ended June 30, 2016, from $14.7 million in the three months ended June 30, 2015. Revenue from international sales represented 32.9% and 34.7% of our total revenue for the three months ended June 30, 2016 and 2015, respectively.
Revenue from our neuro products increased $11.0 million, or 31.9%, to $45.4 million in the three months ended June 30, 2016, from $34.4 million in the three months ended June 30, 2015. Our neuro product sales experienced strong momentum due to further market penetration and growth in the market following the presentation and publication of MR. CLEAN trial results in the fourth quarter of 2014, and the presentation and publication of additional trial results in the first quarter of 2015, all of which support endovascular treatment of stroke. We believe that these published trial results have led to increases in the number of procedures performed by specialist physicians using our products. Increased sales of Penumbra System products accounted for slightly more than half of the neuro revenue increase in the three months ended June 30, 2016. Further, increased sales of our neuro embolization products accounted for approximately 30% of the neuro revenue increase period over period. This increase was due to greater demand for our neuro coil products, which can fluctuate from period to period due to the number of procedures performed in a given period using our products. Prices for our neuro products remained substantially flat during the period.
Revenue from our peripheral vascular products increased $11.8 million, or 149.6%, to $19.7 million in the three months ended June 30, 2016, from $7.9 million in the three months ended June 30, 2015. Our peripheral embolization and peripheral thrombectomy products experienced strong volume growth in the period, primarily due to the focused efforts of our dedicated peripheral vascular salesforce, which was established in the second half of 2014, and further market penetration of our products. Increased sales of Indigo System products accounted for slightly more than two thirds of the peripheral vascular revenue increase in the three months ended June 30, 2016. Prices for our peripheral vascular products remained substantially flat during the period.
Gross Profit and Gross Margin
 
Three Months Ended June 30,
 
Change
 
2016
 
2015
 
$
 
%
 
(in thousands, except for percentages)
Cost of revenue
$
23,636

 
$
14,936

 
$
8,700

 
58.2
%
Gross profit
$
41,470

 
$
27,375

 
$
14,095

 
51.5
%
Gross margin %
63.7
%
 
64.7
%
 
 
 
 
Gross profit increased $14.1 million, or 51.5%, to $41.5 million in the three months ended June 30, 2016, from $27.4 million in the three months ended June 30, 2015. The increase in gross profit was primarily due to an increase in revenue from sales of our neuro and peripheral vascular products.    
Gross margin decreased 1.0 percentage point to 63.7% in the three months ended June 30, 2016, from 64.7% in the three months ended June 30, 2015. The decrease in gross margin was due to geographic and product mix, new product launches and additional costs associated with hiring and training additional personnel.
Research and Development (R&D)
 
Three Months Ended June 30,
 
Change
 
2016
 
2015
 
$
 
%
 
(in thousands, except for percentages)
R&D
$
6,264

 
$
4,792

 
$
1,472

 
30.7
%
R&D as a percentage of revenue
9.6
%
 
11.3
%
 
 
 
 
R&D expenses increased by $1.5 million, or 30.7%, to $6.3 million in the three months ended June 30, 2016, from $4.8 million in the three months ended June 30, 2015. The increase was primarily due to a $0.6 million increase in consultant and contractor expenses, $0.4 million increase in personnel-related expense due to a 43% increase in headcount and a $0.3 million increase in facilities and information technology expense.

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Sales, General and Administrative (SG&A)
 
Three Months Ended June 30,
 
Change
 
2016
 
2015
 
$
 
%
 
(in thousands, except for percentages)
SG&A
$
35,876

 
$
26,396

 
$
9,480

 
35.9
%
SG&A as a percentage of revenue
55.1
%
 
62.4
%
 
 
 
 
SG&A expenses increased by $9.5 million, or 35.9%, to $35.9 million in the three months ended June 30, 2016, from $26.4 million in the three months ended June 30, 2015. The increase was primarily due to a $5.2 million increase in personnel-related expense due to a 44% increase in headcount, a $1.1 million increase in travel-related expenses and a $1.1 million increase in facilities and information technology expense.
Provision for Income Taxes 
 
Three Months Ended June 30,
 
Change
 
2016
 
2015
 
$
 
%
 
(in thousands, except for percentages)
Provision for (benefit from) income taxes
$
(568
)
 
$
(1,507
)
 
$
939

 
(62.3
)%
Effective tax rate
148.3
%
 
36.1
%
 
 
 
 
Our benefit from income taxes decreased $0.9 million, to $0.6 million in the three months ended June 30, 2016, from $1.5 million in the three months ended June 30, 2015. Our effective tax rate increased to 148.3% for the three months ended June 30, 2016, compared to 36.1% for the three months ended June 30, 2015 primarily attributable to forecasted income and losses. The effective tax rate is based on a forecast of our full year results.
Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
Revenue
 
Six Months Ended June 30,
 
Change
 
2016
 
2015
 
$
 
%
 
(in thousands, except for percentages)
Neuro
$
86,646

 
$
66,054

 
$
20,592

 
31.2
%
Peripheral Vascular
36,379

 
15,209

 
21,170

 
139.2
%
Total
$
123,025

 
$
81,263

 
$
41,762

 
51.4
%
Revenue increased $41.8 million, or 51.4%, to $123.0 million in the six months ended June 30, 2016, from $81.3 million in the six months ended June 30, 2015. Our revenue growth resulted from increased sales due to expansion of our salesforce headcount by 43%, further market penetration of our existing products and sales of new products or products with new indications. Increased sales within our neuro and peripheral vascular businesses each accounted for approximately half of the revenue increase in the six months ended June 30, 2016.
Revenue from sales in the U. S. increased $29.1 million, or 54.0%, to $83.1 million in the six months ended June 30, 2016, from $54.0 million in the six months ended June 30, 2015. Revenue from sales in international markets increased $12.6 million, or 46.3%, to $39.9 million in the six months ended June 30, 2016, from $27.3 million in the six months ended June 30, 2015. Revenue from international sales represented 32.4% and 33.6% of our total revenue for the six months ended June 30, 2016 and 2015, respectively.
Revenue from our neuro products increased $20.6 million, or 31.2%, to $86.6 million in the six months ended June 30, 2016, from $66.1 million in the six months ended June 30, 2015. Our neuro product sales experienced strong momentum due to further market penetration and growth in the market following the presentation and publication of MR. CLEAN trial results in the fourth quarter of 2014, and the presentation and publication of additional trial results in the first quarter of 2015, all of which support endovascular treatment of stroke. We believe that these published trial results have led to increases in the number of procedures performed by specialist physicians using our products. Increased sales of Penumbra System products accounted for slightly more than half of the neuro revenue increase in the six months ended June 30, 2016. Further, increased sales of our neuro embolization products accounted for slightly more than one quarter of the neuro revenue increase period over period. This increase was due to greater demand for our neuro coil products, which can fluctuate from period to period due to the number of procedures performed in a given period using our products. Prices for our neuro products remained substantially flat during the period.

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Revenue from our peripheral vascular products increased $21.2 million, or 139.2%, to $36.4 million in the six months ended June 30, 2016, from $15.2 million in the six months ended June 30, 2015. Our peripheral embolization and peripheral thrombectomy products experienced strong volume growth in the period, primarily due to the focused efforts of our dedicated peripheral vascular salesforce, which was established in the second half of 2014, and further market penetration of our products. Increased sales of Indigo System products accounted approximately two thirds of the peripheral vascular revenue increase in the six months ended June 30, 2016. Prices for our peripheral vascular products remained substantially flat during the period.
Gross Profit and Gross Margin
 
Six Months Ended June 30,
 
Change
 
2016
 
2015
 
$
 
%
 
(in thousands, except for percentages)
Cost of revenue
$
41,650

 
$
27,160

 
$
14,490

 
53.4
%
Gross profit
$
81,375

 
$
54,103

 
$
27,272

 
50.4
%
Gross margin %
66.1
%
 
66.6
%
 
 
 
 
Gross profit increased $27.3 million, or 50.4%, to $81.4 million in the six months ended June 30, 2016, from $54.1 million in the six months ended June 30, 2015. The increase in gross profit was primarily due to an increase in revenue from sales of our neuro and peripheral vascular products.
Gross margin decreased 0.5 percentage point to 66.1% in the six months ended June 30, 2016, from 66.6% in the six months ended June 30, 2015. The decrease in gross margin was due to geographic and product mix, new product launches and additional costs associated with hiring and training additional personnel.
Research and Development (R&D)
 
Six Months Ended June 30,
 
Change
 
2016
 
2015
 
$
 
%
 
(in thousands, except for percentages)
R&D
$
11,265

 
$
7,983

 
$
3,282

 
41.1
%
R&D as a percentage of revenue
9.2
%
 
9.8
%
 
 
 
 
R&D expenses increased by $3.3 million, or 41.1%, to $11.3 million in the six months ended June 30, 2016, from $8.0 million in the six months ended June 30, 2015. The increase was primarily due to a $1.3 million increase in personnel-related expense due to a 43% increase in headcount, a $0.8 million increase in consultant and contractor expenses and a $0.7 million increase in facilities and information technology expense.
Sales, General and Administrative (SG&A)
 
Six Months Ended June 30,
 
Change
 
2016
 
2015
 
$
 
%
 
(in thousands, except for percentages)
SG&A
$
68,945

 
$
45,943

 
$
23,002

 
50.1
%
SG&A as a percentage of revenue
56.0
%
 
56.5
%
 
 
 
 
SG&A expenses increased by $23.0 million, or 50.1%, to $68.9 million in the six months ended June 30, 2016, from $45.9 million in the six months ended June 30, 2015. The increase was primarily due to a $13.7 million increase in personnel-related expense due to a 44% increase in headcount, a $2.1 million increase due to expanded marketing programs and a $2.1 million increase in travel-related expenses.
Provision for Income Taxes 
 
Six Months Ended June 30,
 
Change
 
2016
 
2015
 
$
 
%
 
(in thousands, except for percentages)
Provision for income taxes
$
773

 
$
233

 
$
540

 
nm
Effective tax rate
44.5
%
 
364.1
%
 
 
 
 

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Table of Contents

Our provision from income taxes increased $0.5 million, to $0.8 million in the six months ended June 30, 2016, from $0.2 million in the six months ended June 30, 2015. Our effective tax rate decreased to 44.5% for the six months ended June 30, 2016, compared to 364.1% for the six months ended June 30, 2015 primarily attributable to forecasted income and losses. The effective tax rate is based on a forecast of our full year results.
Liquidity and Capital Resources
As of June 30, 2016, we had $228.1 million in working capital, which included $13.9 million in cash and $125.9 million in marketable investments.
In addition to our existing cash and cash equivalents and marketable investment balances, our principal source of liquidity is our accounts receivable. We believe these sources will be sufficient to meet our liquidity requirements for at least the next 12 months. Our principal liquidity requirements are to fund our operations, including our research and development, and capital expenditures. To facilitate our growth, we may also lease or purchase additional facilities. We expect to continue to make investments as we launch new products, expand our manufacturing operations and further expand into international markets. We may, however, require or elect to secure additional financing as we continue to execute our business strategy. If we require or elect to raise additional funds, we may do so through equity or debt financing, which may not be available on acceptable terms, could result in dilution to our stockholders and could require us to agree to covenants that limit our operating flexibility.
 
June 30,
2016
 
December 31,
2015
 
(in thousands)
Cash and cash equivalents
$
13,914

 
$
19,547