PENUMBRA, INC. You should read the following discussion and analysis of our financial condition and results of operations together with the section of this report entitled "Selected Consolidated Financial Data" and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by these forward-looking statements. Overview Penumbra is a global healthcare company focused on innovative therapies. We design, develop, manufacture and market medical devices and have a broad portfolio of products that addresses challenging medical conditions in markets with significant unmet need. Our team focuses on developing, manufacturing and marketing novel products for use by specialist physicians and healthcare providers to drive improved clinical outcomes. We believe that the cost-effectiveness of our products is attractive to our customers. Since our founding in 2004, we have invested heavily in our product development capabilities in our major markets: neuro and vascular. We have successfully developed, obtained regulatory clearance or approval for, and introduced products into the neurovascular market since 2007, vascular market since 2013 and neurosurgical market since 2014, respectively. We continue to expand our portfolio of product offerings, while developing and iterating on our currently available products. We expect to continue to develop and build our portfolio of products, including 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 sell our products to hospitals primarily through our direct sales organization inthe United States , most ofEurope ,Canada andAustralia , as well as through distributors in select international markets. In 2019, 35.1% of our revenue was generated from customers located outside ofthe United States . Our sales outside ofthe United States are denominated principally in the euro and Japanese yen, with some sales being denominated in other currencies. As a result, we have foreign exchange exposure, but do not currently engage in hedging. We generated revenue of$547.4 million ,$444.9 million and$333.8 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. This represents annual increases of 23.0% and 33.3%, respectively. We generated operating income of$47.5 million and$1.2 million for the years endedDecember 31, 2019 and 2017. We generated an operating loss of$0.9 million for the year endedDecember 31, 2018 as a result of the$30.8 million acquired in-process research and development ("IPR&D") charge recorded in connection with the acquisition of a controlling interest in MVI which was accounted for as an asset acquisition in the third quarter of 2018. 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. These factors include: •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. In addition, as we introduce new products and expand our production capacity, we anticipate additional personnel will be hired and trained to build our inventory of components and finished goods in advance of sales, which may cause quarterly fluctuations in our operating results and 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. 49 -------------------------------------------------------------------------------- Table of Contents •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. •Most of our sales outside ofthe United States are denominated in the local currency of the country in which we sell our products. As a result, our revenue from international sales can be significantly impacted by fluctuations in foreign currency exchange rates. In addition, we have experienced and expect to continue to experience meaningful variability in our quarterly revenue, gross profit and gross margin percentage 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 due to obsolescence; costs, benefits and timing of new product introductions; costs, benefits and timing of the acquisition and integration of businesses and product lines we may acquire; the availability and cost of components and raw materials; and fluctuations in foreign currency exchange rates. We may experience quarters in which we have significant revenue growth sequentially followed by quarters of moderate or no revenue growth. Additionally, we may experience quarters in which operating expenses, in particular research and development expenses, fluctuate depending on the stage and timing of product development. Critical Accounting Policies and Use of Estimates Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles inthe United States . The preparation of our consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the applicable periods. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could materially change our results from those reported. Management evaluates its estimates, assumptions and judgments on an ongoing basis. Historically, our critical accounting estimates have not differed materially from actual results. However, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our consolidated statements of operations, liquidity and financial condition. We believe the following critical accounting policies involve significant areas where management applies judgments and estimates in the preparation of our consolidated financial statements. Leases The Company adopted the guidance under ASC 842 onJanuary 1, 2019 using the modified retrospective transition approach. There was no cumulative-effect adjustment recorded to retained earnings upon adoption. Under ASC 842, the Company determines if an arrangement is a lease at inception. In addition, the Company determines whether leases meet the classification criteria of a finance or operating lease at the lease commencement date considering: (1) whether the lease transfers ownership of the underlying asset to the lessee at the end of the lease term, (2) whether the lease contains a bargain purchase option, (3) whether the lease term is for a major part of the remaining economic life of the underlying asset, (4) whether the present value of the sum of the lease payments and residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset, and (5) whether the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. As ofDecember 31, 2019 , the Company's lease population consisted of operating and finance real estate, equipment and vehicle leases. As of the date of adoption of ASC 842 the Company did not have material finance leases. Operating leases are included in operating lease right-of-use assets, current operating lease liabilities, and non-current operating lease liabilities in our consolidated balance sheet. Finance leases are included in finance lease right-of-use assets, current finance lease liabilities, and non-current finance lease liabilities in our consolidated balance sheet. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses its incremental borrowing rate which requires management's judgement as the rate implicit in the lease is generally not readily determinable. The determination of the Company's incremental borrowing rate requires management judgment including the development of a synthetic credit rating and cost of debt as the Company currently does not carry any debt. The lease ROU assets also include adjustments for prepayments, accrued lease payments and exclude lease incentives. 50 -------------------------------------------------------------------------------- Table of Contents The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. Operating lease cost is recognized on a straight-line basis over the expected lease term. Finance lease cost is recognized as depreciation expense on a straight-line basis over the expected lease term and interest expense using the accelerated interest method of recognition. Lease agreements entered into after the adoption of ASC 842 that include lease and non-lease components are accounted for as a single lease component. Lease agreements with a noncancelable term of less than 12 months are not recorded on the Company's consolidated balance sheet. For more information about the impact of adoption and disclosures on the Company's leases, refer to Note "9. Leases." Revenue Recognition Revenue is comprised of product revenue net of returns, discounts, administration fees and sales rebates. We adopted the guidance under Topic 606 of the Accounting Standards Codification ("ASC") onJanuary 1, 2018 , using the modified retrospective method for all contracts not completed as of the date of adoption. Therefore, the financial information for the year endedDecember 31, 2017 has not been adjusted and continues to be reported under ASC 605 with the impact of the adoption reflected in opening retained earnings for the subsequent year. As a result of adoption, the cumulative impact to our retained earnings atJanuary 1, 2018 was$0.3 million . Under ASC 606, we recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenue from product sales is recognized either on the date of shipment or the date of receipt by the customer, but is deferred for certain transactions when control has not yet transferred. With respect to products that we consign to hospitals, which primarily consist of coils, we recognize revenue at the time hospitals utilize products in a procedure. The implementation of the new revenue standard did not have a material impact on the measurement or recognition of revenue from prior periods, however additional disclosures have been added in accordance with the guidance. Refer to Note "16. Revenues" to our consolidated financial statements in Part II, Item 8 of this Form 10-K for more information and disclosures on our revenue. We defer revenue for amounts that we have already invoiced our customers for and are ultimately expected to be recognized as revenue, but for which not all revenue recognition criteria have been met. Revenue is recorded at the net sales price, which includes estimates of variable consideration such as product returns utilizing historical return rates, rebates, discounts, and other adjustments to net revenue. To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price. Variable consideration is included in revenue only to the extent that it is probable that a significant reversal of the revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. During the year endedDecember 31, 2019 , we made no material changes in estimates for variable consideration. Our terms and conditions permit product returns and exchanges. We base our estimates for sales returns on actual historical returns over the prior three years and they are recorded as reductions in revenue at the time of sale. Upon recognition, we reduce revenue and cost of revenue for the estimated return. Return rates can fluctuate over time, but are sufficiently predictable to allow us to estimate expected future product returns. Income Taxes We account for income taxes using the asset and liability method, whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance to reduce the net deferred tax assets ("DTAs") to their estimated realizable value. The calculation of our DTAs involves the use of estimates, assumptions and judgments while taking into account estimates of the amounts and type of future taxable income. DTAs are reduced to their estimated realizable value by a valuation allowance when it is more likely than not that the future realization of all or some of the DTAs will not be achieved. Valuation allowances related to DTAs can be affected by changes to tax laws, statutory tax rates, and projections of future taxable income. The calculation of our current provision for income taxes involves the use of estimates, assumptions and judgments while taking into account current tax laws, interpretation of current tax laws and possible outcomes of future tax audits. We have established reserves to address potential exposures related to tax positions that could be challenged by tax authorities. Although we believe our estimates, assumptions and judgments to be reasonable, any changes in tax law or interpretation of tax law and the resolutions of potential tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements. 51 -------------------------------------------------------------------------------- Table of Contents We follow FASB ASC 740-10 "Accounting for Uncertainty in Income Taxes" that prescribes a financial statement recognition threshold and measurement attribute for uncertain tax positions taken or expected to be taken on our income tax returns, and also provides guidance on derecognition, classification, interest and penalty accrual, accounting in interim periods, and disclosure requirements. We include interest and penalties related to unrecognized tax benefits within income tax expense in the accompanying consolidated statements of operations. OnDecember 22, 2017 , the Tax Cuts and Jobs Act of 2017 ("the Tax Reform Act") was enacted. The Tax Reform Act significantly revised theU.S. corporate income tax regime. Also onDecember 22, 2017 , theSecurities and Exchange Commission issued Staff Accounting Bulletin 118 ("SAB 118"), which provided for a measurement period that should not extend beyond one year from the Tax Reform Act enactment date. As ofDecember 31, 2018 , we completed our accounting for the tax effects of the Tax Reform Act under FASB ASC 740 "Income Taxes" and therefore our financial statements reflect tax law interpretations based on authoritative guidance available to date. Legislative guidance continues to be issued which could have an impact on our current interpretations and accounting for the income tax effects. We will evaluate any additional legislative guidance associated with the Tax Reform Act, when released, and determine the tax impact on our financial statements, if any. Significant domestic DTAs were generated in recent years, primarily due to excess tax benefits from stock option exercises and vesting of restricted stock. As ofDecember 31, 2019 , we had approximately$89.3 million ,$78.6 million and$0.4 million of federal, state and foreign net operating loss carryforwards, respectively, available to offset future taxable income. The federal and state net operating loss carryforwards will begin to expire in 2036 and 2020, respectively. AtDecember 31, 2019 , we had research credits available to offset federal and state tax liabilities in the amount of$9.2 million and$10.5 million , respectively. The federal tax credits will begin to expire in 2024.California state tax credits have no expiration. We assess the ability to realize the benefits of our DTAs in each reporting period by evaluating all available positive and negative evidence, objective and subjective in nature, including (1) cumulative results of operations in recent years, (2) sources of recent pre-tax income, (3) estimates of future taxable income, (4) respective carryback and/or carryforward periods of tax attributes available to date, and (5) limitation on net operating loss ("NOL") utilization against taxable income. We also measure our current DTA balances against estimates of future income based on objectively verifiable operating results from the Company's recent history. As ofDecember 31, 2019 , our net DTA balance was$29.5 million , after reduction of a valuation allowance of$21.6 million . We do not maintain valuation allowances against any of our foreign DTAs as we believe, at the required more-likely-than-not level of certainty, that our foreign subsidiaries will generate sufficient future taxable income to realize the benefit of their DTAs in full. In the period endedDecember 31, 2019 , we measured our domestic net operating loss ("NOL") DTA balances against projections of future taxable income with consideration of relevant provisions of the Tax Reform Act, including but not limited to, the indefinite carryforward period for NOLs generated in years beginning on or afterJanuary 1, 2018 . We also considered our three year cumulative income position, exclusive of the impact of excess tax deductions from stock-based compensation. We concluded that sufficient taxable income will be generated to realize the benefit of our domestic NOLs in full. The Tax Reform Act extended the carryforward period of net operating losses generated in tax years beginning on or afterJanuary 1, 2018 such that the losses may be carried forward indefinitely, subject to an annual limitation of 80% of taxable income. The tax attribute ordering rules provide that to offset taxable income, net operating losses must be used prior to the utilization of tax credits. Accordingly, we cannot assert, at the required more-likely-than-not level of certainty, that we will be able to realize the benefit of our federal research and development tax credit DTAs, with a limited 20 year carryforward period, prior to expiration. After an evaluation of all available qualitative and quantitative evidence, both positive and negative in nature, we concluded that sufficient future taxable income will be generated to realize the benefits of our domestic DTAs prior to expiration, other than our federal research and development tax credit DTAs which are expected to expire before their utilization. As a result, in the period endedDecember 31, 2019 , we continued to record a valuation allowance against our federal research and development tax credit. In addition, we continue to maintain a full valuation allowance against our California DTAs. Our DTA balance also includes$3.1 million of tax attributes gained upon acquisition of a majority interest ownership in MVI. The acquired DTAs are subject to Separate Return Limitation Year ("SRLY") rules which will limit the utilization of pre-acquisition tax attributes to offset future taxable income solely generated by MVI. As ofDecember 31, 2019 , we could not conclude, at the required more-likely-than-not level of certainty, that MVI will generate sufficient taxable income to realize the benefit of its tax attributes prior to expiration and so a$3.1 million valuation allowance was recorded against the DTAs acquired from MVI. 52 -------------------------------------------------------------------------------- Table of Contents We will continue to closely monitor the need for a valuation allowance against current and additional DTAs generated in each subsequent reporting period. The need for a valuation allowance can be impacted by actual operating results, forecasted financial performance, and variances between the two, and the rate at which future DTAs are generated. If our management was to determine that we would not be able to realize all or a portion of our net DTAs in the future, a valuation allowance related charge to earnings would be reflected in that period, which could have a material adverse impact on our financial condition and results of operations. If our management was to determine that we would be able to realize all net DTAs in the future, a reduction of the valuation allowance would be reflected as a benefit to earnings in that period, which could have a material positive impact on our financial condition and results of operations. GoodwillGoodwill represents the excess of the purchase price of an acquired business or assets over the fair value of the identifiable assets acquired and liabilities assumed.Goodwill is not amortized, but is tested for impairment at least annually, or more frequently if events or circumstances indicate the carrying value may no longer be recoverable and that an impairment loss may have occurred. Circumstances that could trigger an impairment test include, but are not limited to, a significant adverse change in the business climate or legal factors, an adverse action or assessment by a regulator, change in customers, target market and strategy, unanticipated competition, loss of key personnel, or change in reporting units. We operate as one segment, which is considered to be the sole reporting unit, and therefore goodwill is tested for impairment at the consolidated level. The authoritative guidance allows an entity to assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If an entity determines that as a result of the qualitative assessment that it is more likely than not (i.e. greater than 50% likelihood) that the fair value of a reporting unit is less than its carrying amount, then the quantitative test is required. Otherwise, no further testing is required. The quantitative goodwill impairment test requires us to estimate and compare the fair value of our reporting unit with its carrying value. Application of the goodwill impairment test requires judgments, including: identification of the reporting units, assigning goodwill to reporting units, a qualitative assessment to determine whether there are any impairment indicators, and determining the fair value of each reporting unit. Qualitative factors may include, but are not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, cost factors, and entity specific factors such as strategies, overall financial performance (both current and projected) and market capitalization. In the fourth quarter of 2019 and 2018, we performed qualitative assessments for goodwill impairment and determined there we no indicators of impairment. Refer to Note "8.Goodwill " to our consolidated financial statements in Part II, Item 8 of this Form 10-K for more information. Valuation of Intangible Assets The valuation of identifiable intangible assets acquired in a business combination or asset acquisitions are determined based on detailed valuations that use information and assumptions provided by management. In determining the fair value of identifiable intangible assets, management provides its best estimates of inputs and assumptions that a market participant would use. Certain estimates used in this process include the amount and timing of projected milestone-based payments on sales that are considered probable and estimable, the amount and timing of projected future cash flows of each acquired intangible asset, the discount rate used to discount those cash flows to present value, the assessment of the asset's life cycle, and the consideration of legal, technical, regulatory, economic, and competitive risks. Indefinite-lived intangible assets are tested for impairment at least annually in the fourth quarter of each year, or more frequently if events or circumstances indicate that it is more likely than not that the asset is impaired. In conducting the annual impairment test for its indefinite-lived intangible assets, we may first perform a qualitative assessment to determine whether it is more likely than not (greater than 50% likelihood) that an indefinite-lived intangible asset is impaired. In accordance with the authoritative guidance, we may elect to bypass the qualitative assessment and proceed directly to the quantitative test to compare the fair value of the indefinite-lived intangible asset to the carrying amount. If we perform the quantitative test for indefinite-lived intangible assets, we generally use a discounted cash flow method based on the present value of projected cash flows to estimate fair value. Assumptions used in these cash flow projections are generally consistent with our internal forecasts and discounted using a rate that is reflective of the inherent risks and uncertainties associated with the projected cash flows of the business. Management believes the assumptions used for the impairment tests are consistent with those that would be utilized by a market participant performing similar analysis and valuations. Adverse changes in future market conditions or weaker operating results compared to our expectations may impact our projected cash flows, which could result in a potential impairment charge to the carrying value of our indefinite-lived intangible asset. In the fourth quarter of 2019, we performed a qualitative impairment analysis on our indefinite-lived intangible asset and determined that it was not more likely than not that the asset was impaired. Refer to Note "7. Intangible Assets" to our consolidated financial statements in Part II, Item 8 of this Form 10-K for more information. 53 -------------------------------------------------------------------------------- Table of Contents Finite-lived intangible assets are amortized over the estimated economic useful lives of the assets, which is the period during which expected cash flows support the fair value of such intangible assets. We review finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such an event occurs, management determines whether there has been impairment by comparing the anticipated undiscounted future net cash flows to the related asset group's carrying value. If an asset is considered impaired, the asset will be written down to the determined fair value based on discounted cash flows. We also periodically review the useful lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the underlying intangible asset. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase. Valuation of Contingent Consideration Liabilities Certain agreements the Company enters into, including business combinations, involve the potential payment of future consideration that is contingent upon certain performance and revenue milestones being achieved. Contingent consideration obligations incurred in connection with a business combination are recorded at their fair values on the acquisition date and remeasured at their fair values each subsequent reporting period using Level 3 inputs until the related contingencies are resolved. The resulting changes in fair values are recognized generally within sales, general and administrative expense, depending on the nature of the contingent consideration liability, in the consolidated statements of operations. The fair value of our contingent consideration is determined using aMonte-Carlo valuation model that simulates outcomes based on management estimates. Significant increases or decreases in the fair value of our contingent consideration liabilities can result from a number of factors, including changes in the timing and amount of projected revenue, our estimates of the likelihood of achieving certain milestones, as well as changes in discount periods and rates. Asset acquisitions are accounted for using a cost accumulation and allocation model and the cost of the acquisition is allocated to the assets acquired and liabilities assumed. Contingent consideration obligations incurred in connection with an asset acquisition are recorded when it is probable that they will occur and they can be reasonably estimated. Significant increases or decreases in our contingent consideration obligations incurred in connection with can result from a number of factors, including but not limited to, changes in the timing and amount of projected revenue and our estimates of the likelihood of achieving certain milestones. 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 vascular disease. We sell our products through purchase orders, and we do not have long term purchase commitments from our customers. Revenue from product sales is recognized either on the date of shipment or the date of receipt by the customer, but is deferred for certain transactions when control has not yet transferred. With respect to products that 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 facilities inAlameda andRoseville, 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. 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 and human resource activities. Our SG&A expenses also include marketing trials, medical education, training, commissions, generally based on sales, to direct sales representatives, amortization of acquired intangible assets and acquisition-related costs. 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 deferred tax liabilities and the potential valuation allowance recorded against our net DTAs. Deferred tax assets and liabilities are 54 -------------------------------------------------------------------------------- Table of Contents 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 DTAs will not be achieved. Results of Operations The following table sets forth the components of our consolidated statements of operations in dollars and as a percentage of revenue for the periods presented: Year Ended December 31, 2019 2018 2017 (in thousands, except for percentages) Revenue$ 547,405 100.0 %$ 444,938 100.0 %$ 333,764 100.0 % Cost of revenue 175,441 32.0 % 152,405 34.3 % 116,622 34.9 % Gross profit 371,964 68.0 % 292,533 65.7 % 217,142 65.1 % Operating expenses: Research and development 51,723 9.5 % 36,165 8.1 % 31,661 9.5 % Sales, general and administrative 272,733 49.8 % 226,385 50.9 % 184,316 55.2 % Acquired in-process research and development - - % 30,835 6.9 % - - % Total operating expenses 324,456 59.3 % 293,385 65.9 % 215,977 64.7 % Income (loss) from operations 47,508 8.7 % (852) (0.2) % 1,165 0.3 % Interest income, net 2,854 0.5 % 2,964 0.7 % 2,653 0.8 % Other expense, net (227) - % (504) (0.1) % (1,342) (0.4) % Income before income taxes and equity in losses of unconsolidated investee 50,135 9.2 % 1,608 0.4 % 2,476 0.7 % Provision for (benefit from) income taxes 3,131 0.6 % (4,403) (1.0) % (3,611) (1.1) % Income before equity in losses of unconsolidated investee 47,004 8.6 % 6,011 1.4 % 6,087 1.8 % Equity in losses of unconsolidated investee - - % (3,101) (0.7) % (1,430) (0.4) % Consolidated net income$ 47,004 8.6 %$ 2,910 0.7 %$ 4,657 1.4 % Net loss attributable to non-controlling interest (1,454) (0.3) % (3,691) (0.8) % - - % Net income attributable to Penumbra, Inc.$ 48,458 8.9 %$ 6,601 1.5 %$ 4,657 1.4 % Year EndedDecember 31, 2019 Compared to Year EndedDecember 31, 2018 Revenue Year Ended December 31, Change 2019 2018 $ % (in thousands, except for percentages) Neuro$ 331,685 $ 294,333 $ 37,352 12.7 % Vascular 215,720 150,605 65,115 43.2 % Total$ 547,405 $ 444,938 $ 102,467 23.0 % Revenue increased$102.5 million , or 23.0%, to$547.4 million in 2019, from$444.9 million in 2018. Our revenue growth resulted from further market penetration of our existing products and sales of new products. Increased sales within our neuro and vascular businesses accounted for approximately 35% and approximately 65% of the revenue increase, respectively, in the year endedDecember 31, 2019 . These revenue increases take into account a shift in revenue from neuro to vascular as a result of our peripheral embolization launch inJapan in the fourth quarter of 2018. Revenue from our neuro products increased$37.4 million , or 12.7%, to$331.7 million in 2019, from$294.3 million in 2018. This was primarily attributable to increased sales of our Penumbra System and neuro access products, which increased by approximately 85% and approximately 35% of the total change in neuro revenue, respectively. Our neuro product sales experienced strong momentum due to further market penetration and growth in the market for endovascular treatment of stroke, which led to an increase in the number of procedures performed by specialist physicians using these products. This growth was 55 -------------------------------------------------------------------------------- Table of Contents partially offset by a decrease in sales of our neuro embolization products, which decreased by approximately 20% of the total change in neuro revenue, as demand for our neuro embolization products fluctuates from period to period due to the number of procedures performed. Prices for our neuro products remained substantially unchanged during the period. Revenue from our vascular products increased$65.1 million , or 43.2%, to$215.7 million in 2019, from$150.6 million in 2018. This was primarily attributable to increased sales of our Indigo System products, which accounted for approximately 55% of the vascular revenue increase for the year endedDecember 31, 2019 . This increase was driven by further market penetration which led to increases in the number of procedures performed by specialist physicians using our products. Prices for our vascular products remained substantially unchanged during the period. Revenue by Geographic Area The following table presents revenue by geographic area, based on our customers' shipping destinations: Year Ended December 31, Change 2019 2018 $ % (in thousands, except for percentages) United States$ 355,222 64.9 %$ 290,716 65.3 %$ 64,506 22.2 % Japan 42,520 7.8 % 41,805 9.4 % 715 1.7 % Other International 149,663 27.3 % 112,417 25.3 % 37,246 33.1 % Total$ 547,405 100.0 %$ 444,938 100.0 %$ 102,467 23.0 % Revenue from sales in international markets increased$38.0 million , or 24.6%, to$192.2 million in 2019, from$154.2 million in 2018. Revenue from international sales represented 35.1% and 34.7% of our total revenue in 2019 and 2018, respectively. Gross Margin Year Ended December 31, Change 2019 2018 $ % (in thousands, except for percentages) Cost of revenue$ 175,441 $ 152,405 $ 23,036 15.1 % Gross profit$ 371,964 $ 292,533 $ 79,431 27.2 % Gross margin % 68.0 % 65.7 % Gross margin increased by 2.3 percentage points to 68.0% in 2019, from 65.7% in 2018. The increase in gross margin was primarily due to improvements in production productivity. Research and Development ("R&D") Year Ended December 31, Change 2019 2018 $ % (in thousands, except for percentages) R&D$ 51,723 $ 36,165 $ 15,558 43.0 % R&D as a percentage of revenue 9.4 % 8.1 % R&D expenses increased by$15.6 million or 43.0%, to$51.7 million in 2019, from$36.2 million in 2018. The increase was primarily due to a$6.9 million increase in personnel-related expenses primarily due to an increase in headcount to support our growth, and a$6.8 million increase in product development and testing costs. We have made investments, and plan to continue to make investments, in the development of our products, which may include hiring additional research and development employees. In addition, we have experienced in the past, and may continue to experience in the future, variability in expenses incurred due to the timing and costs of clinical trials. Sales, General and Administrative ("SG&A") 56
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Year Ended December 31, Change
2019 2018 $ %
(in thousands, except for percentages)
SG&A $ 272,733 $ 226,385 $ 46,348 20.5 %
SG&A as a percentage of revenue 49.8 % 50.9 %
SG&A expenses increased by $46.3 million , or 20.5%, to $272.7 million in 2019,
from $226.4 million in 2018. The increase was primarily due to a $26.9 million
increase in personnel-related expenses driven by an increase in headcount to
support our growth and a $7.5 million increase related to marketing events.
As we continue to invest in our growth, we have expanded and expect to continue
to expand our sales, marketing, general and administrative teams through the
hiring of additional employees. In addition, we have experienced in the past,
and may continue to experience in the future, variability in expenses incurred
due to the timing and costs of investments in infrastructure to support the
business.
Acquired In-Process Research and Development
Year Ended December 31, Change
2019 2018 $ %
(in thousands, except for percentages)
Acquired in-process research and development $ - $ 30,835 $ (30,835) (100.0) %
Acquired in-process research and development as
a percentage of revenue - % 6.9 %
During 2018, we recorded a$30.8 million acquired IPR&D charge in connection with the acquisition of a controlling interest in MVI which was accounted for as an asset acquisition. There were no acquired IPR&D charges during the year endedDecember 31, 2019 . Provision for (Benefit from) Income Taxes Year Ended December 31, Change 2019 2018 $ % (in thousands, except for percentages) Provision for (benefit from) income taxes$ 3,131 $ (4,403) $ 7,534 (171.1) % Effective tax rate 6.2 % (273.8) % Our provision for income taxes increased$7.5 million , to$3.1 million in 2019, from a benefit of$4.4 million in 2018. Our effective tax rate changed to 6.2% in 2019, compared to (273.8)% in 2018. The tax provision for the year endedDecember 31, 2019 was primarily due to income taxes attributable to our worldwide profits, offset by excess tax benefits from stock-based compensation associated with our US jurisdiction. The tax benefit for the year endedDecember 31, 2018 was primarily due to the inclusion of excess tax benefits from stock-based compensation associated with our US jurisdiction, offset by income taxes attributable to our foreign jurisdictions and a tax charge resulting from the IPR&D expense associated with the acquisition of a controlling interest in MVI, which is not deductible for tax purposes. Our effective tax rate is driven by (1) permanent differences in taxable income for tax and financial reporting purposes, (2) tax expense attributable to our foreign jurisdictions, (3) changes to the valuation allowance maintained against our deferred tax assets, and (4) discrete tax adjustments such as excess tax benefits related to stock-based compensation. Our income tax provision is subject to volatility as the amount of excess tax benefits can fluctuate from period to period based on the price of our stock, the volume of share-based grants settled or vested, and the fair value assigned to equity awards underU.S. GAAP. In addition, changes in tax law or our interpretation thereof, and changes to our valuation allowance could cause us to experience an effective tax rate significantly different from previous periods. 57
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Table of Contents Year EndedDecember 31, 2018 Compared to Year EndedDecember 31, 2017 Revenue Year Ended December 31, Change 2018 2017 $ % (in thousands, except for percentages) Neuro$ 294,333 $ 232,446 $ 61,887 26.6 % Vascular 150,605 101,318 49,287 48.6 % Total$ 444,938 $ 333,764 $ 111,174 33.3 % Revenue increased$111.2 million , or 33.3%, to$444.9 million in 2018, from$333.8 million in 2017. Our revenue growth resulted from further market penetration of our existing products and sales of new products. Increased sales within our neuro and vascular businesses accounted for approximately 55% and 45% of the revenue increase, respectively, in the year endedDecember 31, 2018 . Revenue from our neuro products increased$61.9 million , or 26.6%, to$294.3 million in 2018, from$232.4 million in 2017. This was primarily attributable to increased sales of our Penumbra System and neuro access products, which accounted for approximately 85% and slightly less than 20% of the neuro revenue increase, respectively. Our neuro product sales experienced strong momentum due to further market penetration and growth in the market for endovascular treatment of stroke, which led to an increase in the number of procedures performed by specialist physicians using these products. This growth was partially offset by a decrease in sales of our neuro embolization products, which decreased by slightly less than 5% of the total change in neuro revenue, as demand for our neuro embolization products fluctuates from period to period due to the number of procedures performed. Prices for our neuro products remained substantially unchanged during the period. Revenue from our vascular products increased$49.3 million , or 48.6%, to$150.6 million in 2018, from$101.3 million in 2017. This was primarily attributable to increased sales of our Indigo System products, which accounted for slightly more than 45% of the vascular revenue increase for the year endedDecember 31, 2018 . This increase was driven by further market penetration which led to increases in the number of procedures performed by specialist physicians using our products. Prices for our vascular products remained substantially unchanged during the period. Revenue by Geographic Area The following table presents revenue by geographic area and from countries that exceeded 10% of our total revenue, based on our customers' shipping destinations: Year Ended December 31, Change 2018 2017 $ % (in thousands, except for percentages) United States$ 290,716 65.3 %$ 219,173 65.7 %$ 71,543 32.6 % Japan 41,805 9.4 % 33,790 10.1 %$ 8,015 23.7 % Other International 112,417 25.3 % 80,801 24.2 %$ 31,616 39.1 % Total$ 444,938 100.0 %$ 333,764 100.0 %$ 111,174 33.3 % Revenue from sales in international markets increased$39.6 million , or 34.6%, to$154.2 million in 2018, from$114.6 million in 2017. Revenue from international sales represented 34.7% and 34.3% of our total revenue in 2018 and 2017, respectively. Gross Margin Year Ended December 31, Change 2018 2017 $ % (in thousands, except for percentages) Cost of revenue$ 152,405 $ 116,622 $ 35,783 30.7 % Gross profit$ 292,533 $ 217,142 $ 75,391 34.7 % Gross margin % 65.7 % 65.1 % Gross margin increased by 0.6 percentage points percentage points to 65.7% in 2018, from 65.1% in 2017. The increase in gross margin was primarily due to a more favorable product and geographic mix. 58 -------------------------------------------------------------------------------- Table of Contents Research and Development ("R&D") Year Ended December 31, Change 2018 2017 $ % (in thousands, except for percentages) R&D$ 36,165 $ 31,661 $ 4,504 14.2 % R&D as a percentage of revenue 8.1 % 9.5 % R&D expenses increased by$4.5 million or 14.2%, to$36.2 million in 2018, from$31.7 million in 2017. The increase was primarily due to a$4.3 million increase in personnel-related expenses primarily due to an increase in headcount to support our growth and a$3.2 million increase in product development and testing costs. This was partially offset by a$2.5 million decrease in clinical trial costs and a$0.8 million decrease in consultant and contractor expenses. We have made investments, and plan to continue to make investments, in the development of our products, which includes hiring additional research and development employees. We expect our R&D expenditures in 2019 to significantly increase over 2018 levels due to the full year inclusion of R&D expenses from the acquisition of a controlling interest in MVI onAugust 31, 2018 . In addition, we have experienced in the past, and may continue to experience in the future, variability in expenses incurred due to the timing and costs of clinical trials. Sales, General and Administrative ("SG&A") Year Ended December 31, Change 2018 2017 $ % (in thousands, except for percentages) SG&A$ 226,385 $ 184,316 $ 42,069 22.8 % SG&A as a percentage of revenue 50.9 % 55.2 % SG&A expenses increased by$42.1 million , or 22.8%, to$226.4 million in 2018, from$184.3 million in 2017. The increase was primarily due to a$30.8 million increase in personnel-related expenses driven by an increase in headcount to support our growth, a$3.5 million increase in travel-related expenses, a$1.2 million increase related to a benefit recorded in the third quarter of the prior year due to a net refund of previously paid medical device excise tax, and a$1.0 million increase in information technology expenses. As we continue to invest in our growth, we have expanded and expect to continue to expand our sales, marketing, general and administrative teams through the hiring of additional employees. In addition, we have experienced in the past, and may continue to experience in the future, variability in expenses incurred due to the timing and costs of investments in infrastructure to support the business.Acquired In-Process Research and Development Year Ended December 31, Change 2018 2017 $ % (in thousands, except for percentages) Acquired in-process research and development$ 30,835 $ -$ 30,835 not meaningful Acquired in-process research and development as a percentage of revenue 6.9 % - % During the year endedDecember 31, 2018 , we recorded a$30.8 million acquired IPR&D charge in connection with the acquisition of a controlling interest in MVI which was accounted for as an asset acquisition. Benefit from Income Taxes Year Ended December 31, Change 2018 2017 $ % (in thousands, except for percentages) Benefit from income taxes$ (4,403) $ (3,611) $ (792) 21.9 % Effective tax rate (273.8) % (145.8) % Our benefit from income taxes increased$0.8 million , to a benefit of$4.4 million in 2018, from a benefit of$3.6 million in 2017. Our effective tax rate changed to (273.8)% in 2018, compared to (145.8)% in 2017. The tax benefit for the twelve months endedDecember 31, 2018 was primarily attributable to the inclusion of excess tax benefits from stock-based compensation associated with our US jurisdiction, offset by income taxes attributable to our foreign jurisdictions and a tax charge resulting 59 -------------------------------------------------------------------------------- Table of Contents from the IPR&D expense associated with the acquisition of a controlling interest in MVI, which is not deductible for tax purposes. The tax benefit for the twelve months endedDecember 31, 2017 was primarily attributable to excess tax benefits from stock-based compensation associated with our US jurisdiction, offset by income taxes attributable to our foreign jurisdictions, establishing a valuation allowance against our federal research and development tax credit deferred tax asset, and an adjustment to deferred income tax expense due to the reducedU.S. corporate income tax rate pursuant to the Tax Reform Act. Our effective tax rate is driven by (1) permanent differences in taxable income for tax and financial reporting purposes, (2) tax expense attributable to our foreign jurisdictions, (3) changes to the valuation allowance maintained against our deferred tax assets, and (4) discrete tax adjustments such as excess tax benefits related to stock-based compensation. Our income tax provision is subject to volatility as the amount of excess tax benefits can fluctuate from period to period based on the price of our stock, the volume of share-based grants settled or vested, and the fair value assigned to equity awards underU.S. GAAP. In addition, changes in tax law or our interpretation thereof, and changes to our valuation allowance could cause us to experience an effective tax rate significantly different from previous periods. Quarterly Results of Operations For our unaudited quarterly results of operations for the eight quarters endedDecember 31, 2019 , please see Note "17. Selected Quarterly Financial Data (Unaudited)" in Part II, Item 8 of this Annual Report on Form 10-K. Our quarterly results of operations should be read in conjunction with the consolidated financial statements and related notes thereto. We have prepared the unaudited information on the same basis as our audited consolidated financial statements. Our operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year. Our unaudited quarterly results tables include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our consolidated financial position and operating results for the quarters presented. Seasonal fluctuations, underlying business trends have affected, and are likely to continue to affect, our business. Commercial queries typically increase significantly in the fourth quarter of each year. These seasonal trends have caused, and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates. Our revenue and gross profit increased sequentially for all quarters presented. However, we may have quarters for which we experience significant revenue and gross profit growth followed by quarters with limited revenue and gross profit growth due to a number of factors, including mix of products sold, limited growth in demand and the effects of hiring and integrating new sales people and their transition into existing or new sales territories. Other factors affecting our revenue and gross profit growth include acceptance of new products by specialist physicians and successfully transitioning these physicians to new products from existing products, buildup of inventory of new products and write downs or write offs of inventory of older products, introduction of new products by competitors, publication of clinical results that may influence specialist physicians and the fact that the specialist physicians who use our products may not perform procedures during certain times of the year due to their attendance at major medical conferences or for other reasons, the time of which occurs irregularly during the year and from year to year. Liquidity and Capital Resources As ofDecember 31, 2019 , we had$372.1 million in working capital, which included$72.8 million in cash and cash equivalents and$116.6 million in marketable investments. As ofDecember 31, 2019 , we held approximately 23.8% of our cash and cash equivalents in foreign entities. InMarch 2017 , we issued and sold an aggregate of 1,495,000 shares of our common stock at public offering price of$76.00 per share, less the underwriters' discounts and commissions, pursuant to an underwritten public offering. We received approximately$106.3 million in net cash proceeds after deducting underwriting discounts and commissions of$6.8 million and other offering expenses of$0.5 million . We will continue to use the net proceeds from this offering for general corporate purposes, including working capital, continued development of our products, including research and development and clinical trials, potential acquisitions and other business opportunities. Pending the use of the net proceeds from this offering, we are investing the net proceeds in investment grade, interest bearing securities. In addition to our existing cash and cash equivalents and marketable investment balances, our principal source of liquidity is our accounts receivable. We believe these sources of liquidity will be sufficient to meet our liquidity requirements for at least the next 12 months. Our principal liquidity requirements are to fund our operations, expand manufacturing operations which includes, but is not limited to, maintaining sufficient levels of inventory to meet the anticipated demand of our customers, fund research and development activities and fund our capital expenditures. We may also lease or purchase additional facilities to facilitate our growth. We expect to continue to make investments as we launch new products, expand our manufacturing 60 -------------------------------------------------------------------------------- Table of Contents operations and IT infrastructures and further expand into international markets. We may, however, require or elect to secure additional financing as we continue to execute our business strategy. If we require or elect to raise additional funds, we may do so through equity or debt financing, which may not be available on favorable terms, could result in dilution to our stockholders and could require us to agree to covenants that limit our operating flexibility. The following table summarizes our cash and cash equivalents, marketable investments and selected working capital data as ofDecember 31, 2019 andDecember 31, 2018 : Year Ended December 31, 2019 2018 (in thousands) Cash and cash equivalents$ 72,779 $ 67,850 Marketable investments 116,610 133,039 Accounts receivable, net 105,901 81,896 Accounts payable 15,111 8,176 Accrued liabilities 67,630 57,886 Working capital(1) 372,086 344,664 (1) Working capital consists of total current assets less total current liabilities. The following table sets forth, for the periods indicated, our beginning balance of cash and cash equivalents, net cash flows provided by (used in) operating, investing and financing activities and our ending balance of cash and cash equivalents: Year Ended December 31, 2019 2018 2017 (in thousands)
Cash and cash equivalents at beginning of year
26,652 28,808 12,691
Net cash used in investing activities (12,711) (385) (77,653)
Net cash (used in) provided by financing activities (8,959) (9,815) 104,359
Cash and cash equivalents at end of year 72,779 67,850 50,637
Net Cash Provided by Operating Activities Net cash provided by operating activities consists primarily of net income adjusted for certain non-cash items (including depreciation and amortization, stock-based compensation expense, loss on non-marketable equity investments, provision for doubtful accounts, inventory write-offs and write-downs, changes in deferred tax balances, acquired IPR&D charges and changes in the fair value of contingent consideration), and the effect of changes in working capital and other activities. Net cash provided by operating activities was$26.7 million in 2019 and consisted of net income of$47.0 million and non-cash items of$36.5 million offset by net changes in operating assets and liabilities of$56.8 million . The change in operating assets and liabilities includes an increase in inventories of$41.4 million to support our revenue growth, an increase in accounts receivable of$25.0 million , an increase in prepaid expenses and other current and non-current assets of$4.0 million , partially offset by an increase in accrued expenses and other non-current liabilities of$7.6 million , and an increase in accounts payable of$6.0 million as a result of the growth in our business activities. Net cash provided by operating activities was$28.8 million in 2018 and consisted of net income of$2.9 million and non-cash items of$56.2 million offset by net changes in operating assets and liabilities of$30.3 million . The change in operating assets and liabilities includes an increase in accounts receivable of$25.8 million , the increase in inventories of$22.3 million to support our revenue growth, partially offset by an increase in accrued expenses and other non-current liabilities of$14.2 million , a decrease in prepaid expenses and other current and non-current assets of$2.2 million , and an increase in accounts payable of$1.3 million as a result of the growth in our business activities. Net cash provided by operating activities was$12.7 million in 2017 and consisted of net income of$4.7 million and non-cash items of$21.5 million offset by net changes in operating assets and liabilities of$13.5 million . The change in operating 61 -------------------------------------------------------------------------------- Table of Contents assets and liabilities includes the increase in inventories of$18.8 million to support our revenue growth, an increase in accounts receivable of$9.1 million , partially offset by an increase in accrued expenses and other non-current liabilities of$10.2 million , a decrease in prepaid expenses and other current and non-current assets of$2.4 million , and an increase in accounts payable of$1.9 million as a result of the growth in our business activities.Net Cash Used in Investing Activities Net cash used in investing activities relates primarily to purchases of marketable investments, the acquisition of assets or a business, capital expenditures, payments for leases that have not yet commenced, and non-marketable investments, partially offset by proceeds from maturities and sales of marketable investments. Net cash used in investing activities was$12.7 million in 2019 and consisted of capital expenditures of$22.1 million , and payments for leases that have not yet commenced of$6.6 million , partially offset by proceeds from maturities and sales of marketable investments, net of purchases, of$18.0 million . Net cash used in investing activities was$0.4 million in 2018 and consisted of$20.4 million in payments, net of cash acquired, for the asset acquisition of MVI, capital expenditures of$9.6 million and contributions to non-marketable investments of$1.4 million . This was partially offset by proceeds from the maturities and sales of marketable investments, net of purchases, of$31.0 million . Net cash used in investing activities was$77.7 million in 2017 and consisted of purchases of marketable investments, net of sales and maturities, of$48.1 million , capital expenditures of$12.5 million ,$9.3 million related to the acquisition of Crossmed net of cash acquired, purchase of non-marketable investments of$5.3 million , and purchases of intangible assets of$2.5 million .Net Cash (Used In) Provided by Financing Activities Net cash used in and provided by financing activities primarily relates to capital raising activities through equity, certain acquisition-related payments and payments related to finance lease obligations. Net cash used in financing activities was$9.0 million in 2019 and primarily consisted of payments of employee taxes related to vested common and restricted stock of$18.5 million , payments related to finance lease obligations of$2.6 million and payments related to contingent consideration payments in connection with our acquisition in 2017 of$1.8 million , partially offset by proceeds from the issuance of stock under our employee stock purchase plan of$9.0 million and proceeds from exercises of stock options of$4.1 million . Net cash used in financing activities was$9.8 million in 2018 and primarily consisted of payments of employee taxes related to vested common and restricted stock of$17.7 million and payments related to the 2017 acquisition of Crossmed of$4.5 million , partially offset by proceeds from the issuance of stock under our employee stock purchase plan of$7.2 million and proceeds from exercises of stock options of$5.1 million . Financing activities in 2017 provided net cash of$104.4 million due to proceeds from the issuance of common stock net of issuance costs of$106.3 million , proceeds from the issuance of stock under our employee stock purchase plan of$5.8 million and proceeds from exercises of stock options of$5.0 million . This was partially offset by payment of employee taxes related to vested common and restricted stock of$11.7 million and payment of debt obligations and credit facilities of$1.1 million . Contractual Obligations and Commitments The following table summarizes our contractual obligations as ofDecember 31, 2019 : Payments Due by Period Less Than More than Total One Year 1-3 Years 3-5 Years Five Years (in thousands) Rent obligations(1)$ 112,522 $ 11,808
1,732 1,086 556 78 12
Purchase commitments(3) 15,099 13,231 984 884 -
Licensing arrangement obligations(4) 11,743 865 10,878 - -
Acquisition-related obligations(5) 1,291 1,291 - - -
Total $ 142,387 $ 28,281 $ 30,278 $ 18,799 $ 65,029
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(1)Our rent obligations in the table above exclude the 1310 HarborBay Lease and potential obligations for additional space(s) that may be added to our lease by our landlord in the future. For example, if any space becomes vacant in any of the buildings located in the same business park as our corporate headquarters and manufacturing facilities inAlameda, California through 2035, that space will be added to the lease. The additional space could potentially result in approximately$3.1 million of annual rent expense based on current terms of the lease. The Company has a right of first offer to lease any space that becomes available after such date. (2)We lease equipment and automobiles primarily under operating leases. (3)Purchase commitments primarily consist of contracts with suppliers to purchase raw materials to be used to manufacture products. (4)During the year endedDecember 31, 2017 , we entered into an exclusive technology license agreement that requires us to make future revenue milestone-based payments on sales of products covered by the licensed intellectual property. While the agreement is cancelable, the future payments are estimable and probable as ofDecember 31, 2019 . Refer to Note "6. Intangible Assets" for more information. (5)Acquisition-related obligations consist of the fair value of contingent consideration related to future cash milestone payments related to the acquisition of Crossmed as ofDecember 31, 2019 . Refer to Note "5. Business Combinations" in Part II, Item 8 of this Annual Report on Form 10-K for more information. AtDecember 31, 2019 , the liability recorded for uncertain tax positions, excluding associated interest and penalties, was approximately$1.7 million , which are not included in the table above. The ultimate amount and timing of any related future cash settlements cannot be predicted with reasonable certainty. The amounts in the table above do not reflect royalty obligations under a license agreement as amounts due thereunder fluctuate depending on sales levels. Royalty expense included in cost of sales for the years endedDecember 31, 2019 , 2018 and 2017 was$3.8 million ,$3.4 million and$4.1 million , respectively. For more information on these royalty obligations, refer to Note "10. Commitments and Contingencies" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K. Off-Balance Sheet Arrangements We do not have any significant off-balance sheet arrangements or holdings in variable interest entities. Recently Issued Accounting Standards For information with respect to recently issued accounting standards and the impact of these standards on our consolidated financial statements, refer to Note "2. Summary of Significant Accounting Policies" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K. 63
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