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 novel products and have a broad portfolio that addresses challenging medical conditions in markets with significant unmet need. Our team focuses on developing, manufacturing and marketing medical devices 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. 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 2020, 28.6% 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$560.4 million ,$547.4 million and$444.9 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. This represents an annual increase of 2.4% and of 23.0%, respectively. We generated operating losses of$38.9 million and$0.9 million for the years endedDecember 31, 2020 and 2018, respectively. The operating loss for the year endedDecember 31, 2018 occurred 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. We generated operating income of$47.5 million for the year endedDecember 31, 2019 . COVID-19 Pandemic InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic, which has spread throughout theU.S. and the world. In response, governments have issued orders restricting certain activities, and while our business falls within the category of healthcare operations, which are essential businesses currently permitted to continue operating during the COVID-19 pandemic, we have experienced, and expect to continue to experience, disruptions to our operations as a result of the pandemic. For example, hospital resources have been diverted to fight the pandemic, and many government agencies in conjunction with healthcare systems have recommended the deferral of elective and semi-elective medical procedures during the pandemic. Some of Penumbra's medical devices are used in certain procedures that theUnited States Centers for Medicare & Medicaid Services has indicated are "high-acuity" procedures that should not be postponed during the pandemic in itsMarch 18, 2020 recommendations, while other Penumbra devices are used in elective procedures that physicians may consider postponing. Many of the procedures in which our vascular products are used are elective in nature, whereas procedures in which our neuro products are used, such as stroke, tend to be more emergent in nature. The impact of COVID-19 on our business remains fluid, and we continue to actively monitor the dynamic situation. We will continue to undertake the following specific actions and strategic priorities to navigate the pandemic: •We have made changes to how we manufacture, inspect and ship our products to prioritize the health and safety of our employees and to operate under the protocols mandated by our local and state governments. While we are committed to 54 -------------------------------------------------------------------------------- Table of Contents continue meeting demand for our essential devices, we have implemented social distancing and other measures to protect the health and safety of our employees, which have reduced, and may continue to reduce, our manufacturing capacity. •In order to strengthen our liquidity position, we issued and sold an aggregate of 865,963 shares of our common stock at a public offering price of$166.00 per share, less the underwriters' discounts and commissions, pursuant to an underwritten public offering inJune 2020 . We received approximately$134.8 million in net cash proceeds from the offering after deducting underwriting discounts and commissions of$8.6 million and other offering expenses of$0.4 million . •We further strengthened our liquidity position by entering into a Credit Agreement (the "Credit Agreement") onApril 24, 2020 , withJPMorgan Chase Bank, N.A ., as administrative agent and lender, andBank of America, N.A . andCitibank, N.A . as lenders. The Credit Agreement is secured and provides for up to$100 million in available revolving borrowing capacity with an option, subject to certain conditions, for us to increase the aggregate borrowing capacity to up to$150 million , and matures onApril 23, 2021 . This revolving line of credit provides access to capital beyond the$264.8 million in cash, cash equivalents and marketable investments on our balance sheet as ofDecember 31, 2020 , and we believe this will allow us to both navigate the current environment and emerge in a strong liquidity position after the pandemic. As ofDecember 31, 2020 , the Company was not in compliance with the requirement in the Credit Agreement to maintain a minimum fixed charge coverage ratio. The Company subsequently entered into an amended one-year credit agreement withJPMorgan Chase Bank, N.A ., as administrative agent and lender, andBank of America, N.A . andCitibank, N.A . as lenders. The amended Credit Agreement extended the maturity date fromApril 23, 2021 toFebruary 21, 2022 and has substantially the same terms and conditions as the prior credit agreement with certain changes including the exclusion of certain one-time charges and expenses incurred during the fiscal quarters endedSeptember 30, 2020 andDecember 31, 2020 from the calculation of the financial covenants, reductions in interest rate floors applicable to revolving loans and other changes to borrowing mechanics under the Credit Agreement. The Company is now in compliance with the requirements in the amended Credit Agreement. As ofDecember 31, 2020 , there were no borrowings outstanding under the Credit Agreement. Refer to Part II, Item 9B "Other Information" and Note "9. Indebtedness" to our consolidated financial statements in Part II, Item 8 in this Annual Report on Form 10-K for more information. •We will continue to prioritize investments in our production capacity and flexibility, commercial channels, preparation for new product launches, and new product developments to help patients. While we have seen positive trends in certain areas of our business beginning inMay 2020 , we remain mindful of the negative impacts on business trends we experienced inApril 2020 due to the COVID-19 pandemic. The general impact of COVID-19 on our business has been negative and we are unable to reliably predict the full impact that COVID-19 will have on our business due to numerous uncertainties, including the severity and duration of the pandemic, the global resurgences of cases, additional actions that may be taken by governmental authorities in response to the pandemic, the impact of the pandemic on the business of our customers, distributors and suppliers, other businesses and worldwide economies in general, our ability to have access to our customers to provide training and case support, and other factors identified in Part I, Item 1A "Risk Factors" in this Annual Report on Form 10-K. We will continue to evaluate the nature and extent of the impact of COVID-19 on our business, consolidated results of operations, and financial condition. 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 COVID-19 pandemic and measures taken in response thereto, which have negatively affected, and we expect will continue to negatively affect, our revenues and results of operations. Due to these impacts and measures, we may experience significant and unpredictable fluctuations in demand for certain of our products as hospital customers re-prioritize the treatment of patients and distributors adjust their operations to support the current demand level. •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. 55 -------------------------------------------------------------------------------- Table of Contents •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. •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. •The availability and levels of reimbursement within the relevant healthcare payment system for healthcare providers for procedures in which our products are used. 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 impact of COVID-19, 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, 2020 , 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 56 -------------------------------------------------------------------------------- Table of Contents 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. 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 "10. Leases." Revenue Recognition Revenue is primarily comprised of product revenue net of returns, discounts, administration fees and sales rebates. 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. Refer to Note "17. Revenues" to our consolidated financial statements in Part II, Item 8 of this Form 10-K for more information and disclosures on our revenue. Certain arrangements with customers contain multiple performance obligations. For these contracts, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which we separately sell the products or services. If a standalone selling price is not directly observable, then we estimate the standalone selling prices considering market conditions and entity-specific factors including, but not limited to, the expected cost and margin of the products and services, geographies, and other market conditions. The use of alternative estimates could result in a different amount of revenue deferral. 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, 2020 , 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 57 -------------------------------------------------------------------------------- Table of Contents the resolutions of potential tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements. 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. During the year endedDecember 31, 2020 , the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") and the Consolidated Appropriations Act (the "CAA") were enacted, which provides certain tax relief to business taxpayers. Both Acts did not have a material impact to our financial statements for the year endedDecember 31, 2020 . 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, 2020 , we had approximately$142.3 million ,$93.1 million and$0.2 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 expire from 2036 and 2021, respectively. AtDecember 31, 2020 , we had research credits available to offset federal and state tax liabilities in the amount of$14.1 million and$14.5 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, 2020 , our net DTA balance was$48.5 million , after reduction of a valuation allowance of$28.8 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, 2020 , 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 . Despite the operational loss in the year endedDecember 31, 2020 primarily due to the COVID-19 pandemic, we determined that we would be in a three-year cumulative taxable income position, had it not been for the impact of excess tax deductions from stock-based compensation. 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, 2020 , 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, 2020 , 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. 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 58 -------------------------------------------------------------------------------- Table of Contents 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. 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 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. 59 -------------------------------------------------------------------------------- Table of Contents 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, 2020 2019 2018 (in thousands, except for percentages) Revenue$ 560,412 100.0 %$ 547,405 100.0 %$ 444,938 100.0 % Cost of revenue 222,237 39.7 % 175,441 32.0 % 152,405 34.3 % Gross profit 338,175 60.3 % 371,964 68.0 % 292,533 65.7 % Operating expenses: Research and development 90,049 16.2 % 51,723 9.5 % 36,165 8.1 % Sales, general and administrative 287,068 51.2 % 272,733 49.8 % 226,385 50.9 % Acquired in-process research and development - - % - - % 30,835 6.9 % Total operating expenses 377,117 67.3 % 324,456 59.3 % 293,385 65.9 % (Loss) income from operations (38,942) (6.9) % 47,508 8.7 % (852) (0.2) % Interest income, net 1,267 0.2 % 2,854 0.5 % 2,964 0.7 % Other expense, net (343) (0.1) % (227) - % (504) (0.1) % (Loss) income before income taxes and equity in losses of unconsolidated investee (38,018) (6.8) % 50,135 9.2 % 1,608 0.4 % (Benefit from) provision for income taxes (18,761) (3.3) % 3,131 0.6 % (4,403) (1.0) % (Loss) income before equity in losses of unconsolidated investee (19,257) (3.4) % 47,004 8.6 % 6,011 1.4 % Equity in losses of unconsolidated investee - - % - - % (3,101) (0.7) % Consolidated net (loss) income$ (19,257) (3.4) %$ 47,004 8.6 %$ 2,910 0.7 % Net loss attributable to non-controlling interest (3,555) (0.6) % (1,454) (0.3) % (3,691) (0.8) % Net (loss) income attributable to Penumbra, Inc.$ (15,702) (2.8) %$ 48,458 8.9 %$ 6,601 1.5 % 60
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Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Revenue Year Ended December 31, Change 2020 2019 $ % (in thousands, except for percentages) Vascular$ 267,783 $ 215,720 $ 52,063 24.1 % Neuro 292,629 331,685 (39,056) (11.8) % Total$ 560,412 $ 547,405 $ 13,007 2.4 % Revenue increased$13.0 million , or 2.4%, to$560.4 million in 2020, from$547.4 million in 2019. The increase in overall revenue was primarily due to an increase in sales of new and existing products within our vascular business, partially offset by a decrease in sales within our neuro business. Revenue from our vascular products increased$52.1 million , or 24.1%, to$267.8 million in 2020, from$215.7 million in 2019. This increase was driven by sales of our vascular thrombectomy products and peripheral embolization products, which globally increased by 38.6% and 9.3%, respectively, in the year endedDecember 31, 2020 . This increase was primarily due to high sales volume as a result of sales of new products and further market penetration of our existing products. Prices for our vascular products remained substantially unchanged during the period. Revenue from our neuro products decreased$39.1 million , or 11.8%, to$292.6 million in the year endedDecember 31, 2020 , from$331.7 million in the year endedDecember 31, 2019 . This was primarily attributable to decreased sales of our neuro thrombectomy products and neuro embolization products, which globally declined by 19.3% and 2.6%, respectively, and partially offset by an increase in sales of new and existing products within our neuro access products in the twelve months endedDecember 31, 2020 . This decrease was primarily attributable to: (i) decreased sales inJapan as a result of reimbursement changes and on-going discussions with our distributor partner, and (ii) lower sales volume as a result of hospitals performing fewer procedures and a decline in other international distribution sales, all primarily resulting from the response to the COVID-19 pandemic by hospitals and our distributors. Prices for our neuro 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 2020 2019 $ % (in thousands, except for percentages) United States$ 400,270 71.4 %$ 355,222 64.9 %$ 45,048 12.7 % Other International 160,142 28.6 % 192,183 35.1 % (32,041) (16.7) % Total$ 560,412 100.0 %$ 547,405 100.0 %$ 13,007 2.4 % Revenue from sales in international markets decreased$32.0 million , or 16.7%, to$160.1 million in 2020, from$192.2 million in 2019. Revenue from international sales represented 28.6% and 35.1% of our total revenue in 2020 and 2019, respectively. Gross Margin Year Ended December 31, Change 2020 2019 $ % (in thousands, except for percentages) Cost of revenue$ 222,237 $ 175,441 $ 46,796 26.7 % Gross profit$ 338,175 $ 371,964 $ (33,789) (9.1) % Gross margin % 60.3 % 68.0 % Gross margin decreased by 7.7% percentage points to 60.3% in 2020, from 68.0% in 2019. This decrease in gross margin was primarily driven by four components: (i) incremental investments in COVID-19 related safety measures, which include trade-offs made in productivity and capacity; (ii) accelerated investments in direct labor hires and production support to enable production scale-up in ourAlameda andRoseville manufacturing facilities, respectively, undertaken to support new product launches and meet increasing demand in a less efficient manufacturing environment; (iii) unabsorbed manufacturing variances 61 -------------------------------------------------------------------------------- Table of Contents due to lower production volume in the first and second quarters of 2020 and (iv) a one-time, non-recurring$18.4 million reduction in gross profit during the year endedDecember 31, 2020 as a result of theDecember 2020 voluntary recall of JET 7 Xtra Flex. Research and Development ("R&D") Year Ended December 31, Change 2020 2019 $ % (in thousands, except for percentages) R&D$ 90,049 $ 51,723 $ 38,326 74.1 % R&D as a percentage of revenue 16.1 % 9.4 % R&D expenses increased by$38.3 million or 74.1%, to$90.0 million in 2020, from$51.7 million in 2019. The increase was primarily due to a$20.3 million increase in personnel-related expenses, which primarily includes one-time, non-recurring personnel-related expenses associated with the launch of our Lightning product, and a$14.9 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 and product development. Sales, General and Administrative ("SG&A") Year Ended December 31, Change 2020 2019 $ % (in thousands, except for percentages) SG&A$ 287,068 $ 272,733 $ 14,335 5.3 % SG&A as a percentage of revenue 51.2 % 49.8 % SG&A expenses increased by$14.3 million , or 5.3%, to$287.1 million in 2020, from$272.7 million in 2019. The increase was primarily due to a$29.3 million increase in personnel-related expense and a$4.5 million increase in infrastructure costs, partially offset by a$11.1 million decrease in cost related to marketing events, and a$10.9 million decrease in travel-related 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. (Benefit from) Provision for Income Taxes Year Ended December 31, Change 2020 2019 $ % (in thousands, except for percentages) Provision for (benefit from) income taxes$ (18,761) $ 3,131 $ (21,892) (699.2) % Effective tax rate 49.3 % 6.2 % Our benefit from income taxes was$18.8 million in 2020, which was primarily due to tax benefits attributable to our worldwide losses, combined with excess tax benefits from stock-based compensation attributable to ourU.S. jurisdiction. Our provision for income taxes was$3.1 million in 2019, which was primarily due to income taxes attributable to our worldwide profits, offset by excess tax benefits from stock-based compensation attributable to ourU.S. jurisdiction. Our effective tax rate changed to 49.3% in 2020, compared to 6.2% in 2019. The change in effective tax rate was primarily attributable to large tax benefits over worldwide losses for the year endedDecember 31, 2020 , when compared to small tax expense over worldwide profits for the year endedDecember 31, 2019 . 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 62 -------------------------------------------------------------------------------- Table of Contents 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. 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 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 and from countries that exceeded 10% of our total revenue, 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. 63 --------------------------------------------------------------------------------
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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")
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 64
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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 ourU.S. 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 ourU.S. 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. Quarterly Results of Operations For our unaudited quarterly results of operations for the eight quarters endedDecember 31, 2020 , please see Note "18. 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. 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. 65 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources As ofDecember 31, 2020 , we had$511.8 million in working capital, which included$69.7 million in cash and cash equivalents and$195.2 million in marketable investments. As ofDecember 31, 2020 , we held approximately 25.0% of our cash and cash equivalents in foreign entities. InJune 2020 , we issued and sold an aggregate of 865,963 shares of our common stock at a public offering price of$166.00 per share, less the underwriters' discounts and commissions, pursuant to an underwritten public offering. We received approximately$134.8 million in net cash proceeds after deducting underwriting discounts and commissions of$8.6 million and other offering expenses of$0.4 million . We intend 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. In order to further strengthen our liquidity position and financial flexibility during the COVID-19 pandemic, onApril 24, 2020 we entered into a Credit Agreement (the "Credit Agreement") withJPMorgan Chase Bank, N.A ., as administrative agent and lender, andBank of America, N.A . andCitibank, N.A . as lenders. The Credit Agreement is secured and provides for up to$100 million in available revolving borrowing capacity with an option, subject to certain conditions, for the Company to increase the aggregate borrowing capacity to up to$150 million , and matures onApril 23, 2021 . As ofDecember 31, 2020 , the Company was not in compliance with the requirement in the Credit Agreement to maintain a minimum fixed charge coverage ratio. The Company subsequently entered into an amended one-year credit agreement withJPMorgan Chase Bank, N.A ., as administrative agent and lender, andBank of America, N.A . andCitibank, N.A . as lenders. The amended Credit Agreement extended the maturity date fromApril 23, 2021 toFebruary 21, 2022 and has substantially the same terms and conditions as the prior credit agreement with certain changes including the exclusion of certain one-time charges and expenses incurred during the fiscal quarters endedSeptember 30, 2020 andDecember 31, 2020 from the calculation of the financial covenants, reductions in interest rate floors applicable to revolving loans and other changes to borrowing mechanics under the Credit Agreement. The Company is now in compliance with the requirements in the amended Credit Agreement. As ofDecember 31, 2020 , there were no borrowings outstanding under the Credit Agreement. Refer to Part II, Item 9B "Other Information" and Note "9. Indebtedness" to our consolidated financial statements in Part II, Item 8 in this Annual Report on Form 10-K for more information. 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 operations and information technology 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. While we have strengthened our liquidity position, as a result of the COVID-19 pandemic, we cannot reliably estimate the extent to which the COVID-19 pandemic may impact our cash flow from operations. The following table summarizes our cash and cash equivalents, marketable investments and selected working capital data as ofDecember 31, 2020 andDecember 31, 2019 : Year Ended December 31, 2020 2019 (in thousands) Cash and cash equivalents$ 69,670 $ 72,779 Marketable investments 195,162 116,610 Accounts receivable, net 114,608 105,901 Accounts payable 14,109 15,111 Accrued liabilities 85,795 67,630 Working capital(1) 511,770 372,086 66
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(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,
2020 2019 2018
(in thousands)
Cash and cash equivalents at beginning of year $ 72,779 $ 67,850 $ 50,637
Net cash (used in) provided by operating activities (33,242) 26,652 28,808
Net cash used in investing activities (104,149) (12,711) (385)
Net cash provided by (used in) financing activities 134,917 (8,959) (9,815)
Cash and cash equivalents at end of year 69,670 72,779 67,850
Net Cash (Used In) Provided By Operating Activities Net cash (used in) 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, and acquired IPR&D charges), and the effect of changes in working capital and other activities. Net cash (used in) operating activities was$33.2 million in 2020 and consisted of net loss of$19.3 million and non-cash items of$37.2 million offset by net changes in operating assets and liabilities of$51.2 million . The change in operating assets and liabilities includes an increase in inventories of$57.0 million to support our revenue growth, an increase in prepaid expenses and other current and non-current assets of$8.9 million , an increase in accounts receivable of$8.3 million , and a decrease in accounts payable of$0.3 million . This was partially offset by an increase in accrued expenses and other non-current liabilities of$23.3 million primarily as a result of the growth in our business activities as well as liabilities incurred related to our voluntary recall inDecember 2020 . 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 Used In Investing Activities Net cash used in investing activities relates primarily to purchases of marketable investments, consideration transferred in connection with asset acquisitions, 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$104.1 million in 2020 and primarily consisted of purchases of marketable investments, net of proceeds from maturities and sales, of$76.3 million and capital expenditures of$24.8 million . 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 67 -------------------------------------------------------------------------------- Table of Contents 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 Provided By (Used In) Financing Activities Net cash provided by (used in) financing activities primarily relates to proceeds from issuance of common stock upon underwritten public offering, payments of employee taxes related to vested restricted stock units, payments towards the reduction of our finance lease obligations and certain acquisition-related payments, and proceeds from exercises of stock options and issuances of common stock. Net cash provided by financing activities was$134.9 million in 2020 and primarily consisted of proceeds from the issuance of common stock, net of issuance costs, of$134.8 million , proceeds from the issuance of stock under our employee stock purchase plan of$11.3 million and proceeds from exercises of stock options of$5.2 million . This was partially offset by$10.1 million of payments of employee taxes related to vested restricted stock units, payments related to finance lease obligations of$3.4 million and payments related to contingent consideration in connection with our acquisition in 2017 of$0.7 million . 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$5.1 million . Contractual Obligations and Commitments The following table summarizes our contractual obligations as ofDecember 31, 2020 : Payments Due by Period Less Than More than Total One Year 1-3 Years 3-5 Years Five Years (in thousands) Rent obligations(1)$ 100,626 $ 8,769 $ 17,567 $ 17,794 $ 56,496 Equipment lease obligations(2) 4,423 1,574$ 2,084 765 - Purchase commitments(3) 14,066 12,717 907 442 - Total$ 119,115 $ 23,060 $ 20,558 $ 19,001 $ 56,496 (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$3.2 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. AtDecember 31, 2020 , the liability recorded for uncertain tax positions, excluding associated interest and penalties, was approximately$2.5 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, 2020 , 2019 and 2018 was$2.5 million ,$3.8 million and$3.4 million , respectively. For more information on these royalty obligations, refer to Note "11. 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 68 -------------------------------------------------------------------------------- Table of Contents 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. 69
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