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Penumbra Inc - Quarter Report: 2023 September (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR 
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____ to _____         
Commission File Number: 001-37557
Penumbra, Inc.
(Exact name of registrant as specified in its charter)
Delaware05-0605598
(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification No.)

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

(510) 748-3200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, Par value $0.001 per sharePENThe New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes: ☒    No:  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes:  ☒    No:  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes:  ☐  No:  ☒
As of October 19, 2023, the registrant had 38,596,366 shares of common stock, par value $0.001 per share, outstanding.


Table of Contents


FORM 10-Q
TABLE OF CONTENTS
 
Page


Table of Contents

PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Penumbra, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands)
September 30, 2023December 31, 2022
Assets
Current assets:
Cash and cash equivalents$100,757 $69,858 
Marketable investments148,098 118,172 
Accounts receivable, net of allowance for credit losses of $3,155 and $862 at September 30, 2023 and December 31, 2022, respectively
206,615 203,384 
Inventories374,245 334,006 
Prepaid expenses and other current assets38,761 30,279 
Total current assets868,476 755,699 
Property and equipment, net65,632 65,015 
Operating lease right-of-use assets184,520 192,636 
Finance lease right-of-use assets31,364 33,323 
Intangible assets, net73,452 81,161 
Goodwill165,954 166,046 
Deferred taxes64,236 64,213 
Other non-current assets14,743 12,793 
Total assets$1,468,377 $1,370,886 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$27,996 $26,679 
Accrued liabilities104,184 106,300 
Current operating lease liabilities10,827 10,033 
Current finance lease liabilities2,071 1,920 
Total current liabilities145,078 144,932 
Non-current operating lease liabilities192,117 198,955 
Non-current finance lease liabilities23,779 24,865 
Other non-current liabilities3,265 3,276 
Total liabilities364,239 372,028 
Commitments and contingencies (Note 9)
Stockholders’ equity:
Common stock38 38 
Additional paid-in capital1,030,700 963,040 
Accumulated other comprehensive loss (7,240)(8,124)
Retained earnings80,640 43,904 
Total stockholders’ equity1,104,138 998,858 
Total liabilities and stockholders’ equity$1,468,377 $1,370,886 

See accompanying notes to the unaudited condensed consolidated financial statements
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Penumbra, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except share and per share amounts)
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Revenue$270,946 $213,678 $773,843 $625,917 
Cost of revenue93,228 78,351 278,192 229,137 
Gross profit177,718 135,327 495,651 396,780 
Operating expenses:
Research and development 20,958 21,320 62,481 61,443 
Sales, general and administrative 125,920 108,573 376,433 334,088 
Acquired in-process research and development18,215 — 18,215 — 
Total operating expenses 165,093 129,893 457,129 395,531 
Income from operations12,625 5,434 38,522 1,249 
Interest income (expense), net1,123 (43)2,516 (162)
Other (expense) income, net(444)(2,356)454 (4,323)
Income (loss) before income taxes13,304 3,035 41,492 (3,236)
Provision for income taxes4,090 5,306 4,756 2,643 
Net income (loss)$9,214 $(2,271)$36,736 $(5,879)
Net income (loss) per share:
Basic$0.24 $(0.06)$0.96 $(0.16)
Diluted$0.23 $(0.06)$0.94 $(0.16)
Weighted average shares outstanding:
Basic38,462,463 37,918,452 38,324,279 37,778,362 
Diluted39,219,966 37,918,452 39,183,635 37,778,362 

See accompanying notes to the unaudited condensed consolidated financial statements
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Penumbra, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
(in thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Net income (loss)$9,214 $(2,271)$36,736 $(5,879)
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments, net of tax(2,359)(2,812)(1,302)(7,013)
Net change in unrealized gains (losses) on available-for-sale securities, net of tax698 (383)2,186 (3,710)
Total other comprehensive (loss) income, net of tax(1,661)(3,195)884 (10,723)
Comprehensive income (loss)$7,553 $(5,466)$37,620 $(16,602)

See accompanying notes to the unaudited condensed consolidated financial statements

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Penumbra, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited)
(in thousands, except share amounts)
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossRetained Earnings Total Stockholders’ Equity
SharesAmount
Balance at December 31, 202238,107,977 $38 $963,040 $(8,124)$43,904 $998,858 
Issuance of common stock134,936 — 2,209 — — 2,209 
Issuance of common stock under employee stock purchase plan— — — — — — 
Shares held for tax withholdings(813)— (204)— — (204)
Stock-based compensation— — 13,781 — — 13,781 
Other comprehensive income— — — 1,263 — 1,263 
Net income — — — — 8,562 8,562 
Balance at March 31, 202338,242,100 $38 $978,826 $(6,861)$52,466 $1,024,469 
Issuance of common stock114,930 1,614 — — 1,614 
Issuance of common stock under employee stock purchase plan51,264 8,385 — — 8,385 
Shares held for tax withholdings(2,689)(822)— — (822)
Stock-based compensation— — 12,655 — — 12,655 
Other comprehensive income— — — 1,282 — 1,282 
Net income— — — — 18,960 18,960 
Balance at June 30, 202338,405,605 $38 $1,000,658 $(5,579)$71,426 $1,066,543 
Issuance of common stock95,927 834 — — 834 
Issuance of common stock under employee stock purchase plan— — — — — 
Issuance of common stock in connection with asset acquisition(1)
71,211 17,227 — — 17,227 
Shares held for tax withholdings(404)(123)— — (123)
Stock-based compensation12,104 — — 12,104 
Capital contribution from non-controlling interest— — — — — — 
Other comprehensive loss— — — (1,661)— (1,661)
Net income— — — — 9,214 9,214 
Balance at September 30, 202338,572,339 $38 $1,030,700 $(7,240)$80,640 $1,104,138 
    (1) Refer to Note “5. Asset Acquisition” for more information on the impact of the asset acquisition during the quarter ended September 30, 2023.

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Penumbra, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited)
(in thousands, except share amounts)
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossRetained Earnings Total Stockholders’ Equity
SharesAmount
Balance at December 31, 202137,578,483 $37 $910,614 $(2,630)$45,906 $953,927 
Issuance of common stock103,984 1 1,102 — — 1,103 
Shares held for tax withholdings(14,243)— (3,181)— — (3,181)
Stock-based compensation— — 10,716 — — 10,716 
Other comprehensive loss— — — (3,342)— (3,342)
Net income— — — — 79 79 
Balance at March 31, 202237,668,224 $38 $919,251 $(5,972)$45,985 $959,302 
Issuance of common stock158,735 — 3,466 — — 3,466 
Issuance of common stock under employee stock purchase plan66,098 — 7,998 — — 7,998 
Shares held for tax withholdings(12,950)— (1,900)— — (1,900)
Stock-based compensation— — 9,022 — — 9,022 
Other comprehensive loss— — — (4,186)— (4,186)
Net loss— — — — (3,687)(3,687)
Balance at June 30, 202237,880,107 $38 $937,837 $(10,158)$42,298 $970,015 
Issuance of common stock99,921 — 1,725 1,725 
Shares held for tax withholdings(11,737)— (1,887)— — (1,887)
Stock-based compensation— — 9,365 — — 9,365 
Other comprehensive loss— — — (3,195)— (3,195)
Net loss— — — (2,271)(2,271)
Balance at September 30, 202237,968,291 $38 $947,040 $(13,353)$40,027 $973,752 
See accompanying notes to the unaudited condensed consolidated financial statements
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Penumbra, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 Nine Months Ended September 30,
 20232022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)$36,736 $(5,879)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization20,218 17,880 
Stock-based compensation39,725 27,381 
Inventory write-downs5,250 2,051 
Deferred taxes(35)2,804 
Acquired in-process research and development18,215 — 
Other2,623 879 
Changes in operating assets and liabilities:
Accounts receivable(6,609)(57,357)
Inventories(46,466)(62,317)
Prepaid expenses and other current and non-current assets(10,288)(1,958)
Accounts payable2,054 13,090 
Accrued expenses and other non-current liabilities(351)6,165 
Proceeds from lease incentives— 263 
Net cash provided by (used in) operating activities61,072 (56,998)
CASH FLOWS FROM INVESTING ACTIVITIES:
Asset acquisition, net of cash acquired(988)— 
Purchases of marketable investments(73,370)— 
Proceeds from sales of marketable investments— 1,180 
Proceeds from maturities of marketable investments46,070 60,713 
Purchases of property and equipment(11,568)(15,736)
Other(500)— 
 Net cash (used in) provided by investing activities(40,356)46,157 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of stock options4,657 6,293 
Proceeds from issuance of stock under employee stock purchase plan8,385 7,998 
Payment of employee taxes related to vested stock(1,149)(6,968)
Payments of finance lease obligations(1,456)(1,299)
Other(155)(137)
Net cash provided by financing activities10,282 5,887 
Effect of foreign exchange rate changes on cash and cash equivalents(99)419 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS30,899 (4,535)
CASH AND CASH EQUIVALENTS—Beginning of period69,858 59,379 
CASH AND CASH EQUIVALENTS—End of period$100,757 $54,844 
NONCASH INVESTING AND FINANCING ACTIVITIES:
Right-of-use assets obtained in exchange for operating lease obligations$1,486 $51,495 
Right-of-use assets obtained in exchange for finance lease obligations$531 $278 
Purchase of property and equipment funded through accounts payable and accrued liabilities$1,275 $1,847 
Fair value of common stock issued as consideration in connection with an asset acquisition$17,227 $— 
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for amounts included in the measurement of operating lease liabilities$14,985 $13,017 
Cash paid for income taxes$4,029 $2,503 
See accompanying notes to the unaudited condensed consolidated financial statements
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Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

1. Organization and Description of Business
Penumbra, Inc. (the “Company”) is a global healthcare company focused on innovative therapies. The Company designs, develops, manufactures and markets novel products and has a broad portfolio that addresses challenging medical conditions in markets with significant unmet need. The Company focuses on developing, manufacturing and marketing novel products for use by specialist physicians and other healthcare providers to drive improved clinical and health outcomes. The Company believes that the cost-effectiveness of our products is attractive to our customers.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying condensed consolidated balance sheet as of September 30, 2023, the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive income (loss), and the condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2023 and 2022, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022 are unaudited. The unaudited condensed consolidated financial statements included herein have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The condensed consolidated balance sheet data as of December 31, 2022 was derived from the audited financial statements as of that date.
The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly the Company’s financial position as of September 30, 2023, the results of its operations for the three and nine months ended September 30, 2023 and 2022, the changes in its comprehensive income (loss) and stockholders’ equity for the three and nine months ended September 30, 2023 and 2022, and its cash flows for the nine months ended September 30, 2023 and 2022. The results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or for any other future annual or interim period.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K. There have been no changes to the Company’s significant accounting policies during the nine months ended September 30, 2023, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, except for the granting of restricted stock units with performance conditions to senior management during the three months ended March 31, 2023 and the acquisition of In-Process Research and Development (“IPR&D”) in an asset acquisition during the three months ended September 30, 2023. Refer to Note “10. Stockholders’ Equity” for information on the Company’s accounting policy for equity awards with performance conditions and Note “5. Asset Acquisition” for information on the Company’s accounting policy for acquired IPR&D in an asset acquisition. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity accounts; disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to marketable investments, allowances for credit losses, the amount of variable consideration included in the transaction price, warranty reserve, valuation of inventories, useful lives of property and equipment, intangibles, operating and financing lease right-of-use (“ROU”) assets and liabilities, income taxes, contingent consideration and other contingencies, including the probability of achieving performance targets associated with equity awards with performance conditions, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which
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Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other data. Actual results could differ from those estimates.
Segments
The Company determined its operating segment on the same basis that it uses to evaluate its performance internally. The Company has one business activity: the design, development, manufacturing and marketing of innovative medical products, and operates as one operating segment. The Company’s chief operating decision-maker, its Chief Executive Officer, reviews its consolidated operating results for the purpose of allocating resources and evaluating financial performance.
3. Investments and Fair Value of Financial Instruments
Marketable Investments
The Company’s marketable investments have been classified and accounted for as available-for-sale. The following table presents the Company’s marketable investments as of September 30, 2023 and December 31, 2022 (in thousands):
September 30, 2023
Securities with net gains or losses in accumulated other comprehensive income (loss)
Amortized CostGross Unrealized GainsGross Unrealized LossesAllowance
 for
 Credit Loss		Fair Value
Commercial paper $47,842 $2 $(13)$— $47,831 
Certificate of deposit8,190 3 (1)— 8,192 
U.S. treasury13,079 — (302)$— 12,777 
U.S. agency and government sponsored securities2,999 — (31)— 2,968 
U.S. states and municipalities11,615 — (110)— 11,505 
Corporate bonds65,686 1 (862)— 64,825 
Total$149,411 $6 $(1,319)$— $148,098 
December 31, 2022
Securities with net gains or losses in accumulated other comprehensive income (loss)
Amortized CostGross Unrealized GainsGross Unrealized LossesAllowance
 for
 Credit Loss		Fair Value
U.S. treasury$14,482 $— $(478)$— $14,004 
U.S. agency and government sponsored securities6,999 — (176)— 6,823 
U.S. states and municipalities23,460 — (501)— 22,959 
Corporate bonds76,731 — (2,345)— 74,386 
Total$121,672 $— $(3,500)$— $118,172 
As of September 30, 2023, the total amortized cost basis of the Company’s available-for-sale securities in an unrealized loss position exceeded its fair value by $1.3 million, which was primarily attributable to widening credit spreads and rising interest rates since purchase. The Company reviewed its available-for-sale securities in an unrealized loss position and concluded that the decline in fair value was not related to credit losses and is recoverable. During the three and nine months ended September 30, 2023, no allowance for credit losses was recorded and instead the unrealized losses are reported as a component of accumulated other comprehensive loss.
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Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following tables present the gross unrealized losses and the fair value for those marketable investments that were in an unrealized loss position for less than twelve months or for twelve months or more as of September 30, 2023 and December 31, 2022 (in thousands):
September 30, 2023
Less than 12 months12 months or moreTotal
Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
Commercial paper$39,535 $(13)$— $— $39,535 $(13)
Certificate of deposit2,403 (1)— — 2,403 (1)
U.S. treasury8,454 (132)4,324 (170)12,778 (302)
U.S. agency and government sponsored securities— — 2,968 (31)2,968 (31)
U.S. states and municipalities— — 7,005 (110)7,005 (110)
Corporate bonds21,461 (25)40,150 (837)61,611 (862)
Total$71,853 $(171)$54,447 $(1,148)$126,300 $(1,319)
December 31, 2022
Less than 12 months12 months or moreTotal
Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
U.S. treasury$— $— $14,004 $(478)$14,004 $(478)
U.S. agency and government sponsored securities— — 6,823 (176)6,823 (176)
U.S. states and municipalities4,567 (68)13,772 (433)18,339 (501)
Corporate bonds15,327 (101)59,059 (2,244)74,386 (2,345)
Total$19,894 $(169)$93,658 $(3,331)$113,552 $(3,500)
The following table presents the contractual maturities of the Company’s marketable investments as of September 30, 2023 (in thousands):
September 30, 2023
 Amortized CostFair Value
Due in less than one year$141,700 $140,612 
Due in one to five years7,711 7,486 
Total$149,411 $148,098 
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
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Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company classifies its cash equivalents and marketable investments within Level 1 and Level 2, as it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs.
The Company determined the fair value of its Level 1 financial instruments, which are traded in active markets, using quoted market prices for identical instruments.
Marketable investments classified within Level 2 of the fair value hierarchy are valued based on other observable inputs, including broker or dealer quotations or alternative pricing sources. When quoted prices in active markets for identical assets or liabilities are not available, the Company relies on non-binding quotes from its investment managers, which are based on proprietary valuation models of independent pricing services. These models generally use inputs such as observable market data, quoted market prices for similar instruments, historical pricing trends of a security as relative to its peers. To validate the fair value determination provided by its investment managers, the Company reviews the pricing movement in the context of overall market trends and trading information from its investment managers. In addition, the Company assesses the inputs and methods used in determining the fair value in order to determine the classification of securities in the fair value hierarchy.
The Company did not hold any Level 3 marketable investments as of September 30, 2023 or December 31, 2022. During the nine months ended September 30, 2023 and 2022, the Company did not have any transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy. Additionally, the Company did not have any financial assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2023 or December 31, 2022.
The following tables set forth the Company’s financial assets measured at fair value by level within the fair value hierarchy as of September 30, 2023 and December 31, 2022 (in thousands):
 As of September 30, 2023
 Level 1Level 2Level 3Fair Value
Financial Assets
Cash equivalents:
Money market funds$35,400 $— $— $35,400 
Marketable investments:
Commercial paper— 47,831 — 47,831 
Certificate of deposit— 8,192 — 8,192 
U.S. treasury12,777 — — 12,777 
U.S. agency and government sponsored securities— 2,968 — 2,968 
U.S. states and municipalities— 11,505 — 11,505 
Corporate bonds— 64,825 — 64,825 
Total$48,177 $135,321 $— $183,498 
 As of December 31, 2022
 Level 1Level 2Level 3Fair Value
Financial Assets
Cash equivalents:
Money market funds$21,521 $— $— $21,521 
Marketable investments:
U.S. treasury14,004 — — 14,004 
U.S. agency and government sponsored securities— 6,823 — 6,823 
U.S. states and municipalities— 22,959 — 22,959 
Corporate bonds— 74,386 — 74,386 
Total$35,525 $104,168 $— $139,693 


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Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
4. Balance Sheet Components
Inventories
The following table shows the components of inventories as of September 30, 2023 and December 31, 2022 (in thousands):
 September 30, 2023December 31, 2022
Raw materials$110,094 $90,786 
Work in process43,225 26,793 
Finished goods220,926 216,427 
Inventories$374,245 $334,006 
Accrued Liabilities
The following table shows the components of accrued liabilities as of September 30, 2023 and December 31, 2022 (in thousands):
 September 30, 2023December 31, 2022
Payroll and employee-related cost$58,807 $60,480 
Accrued expenses11,920 10,902 
Deferred revenue8,274 9,158 
Other accrued liabilities25,183 25,760 
Total accrued liabilities$104,184 $106,300 
The following table shows the changes in the Company’s estimated product warranty accrual, included in accrued liabilities, for the nine months ended September 30, 2023 and twelve months ended December 31, 2022, respectively (in thousands):
 September 30, 2023December 31, 2022
Balance at the beginning of the period$5,370 $4,310 
Accruals of warranties issued1,473 2,451 
Settlements of warranty claims(1,030)(1,391)
Balance at the end of the period$5,813 $5,370 
5. Asset Acquisition
On September 29, 2023 (the “Closing Date”), the Company acquired an IPR&D asset in an asset acquisition. On the Closing Date, the Company recorded an $18.2 million charge to acquired IPR&D expense in the condensed consolidated statements of operations as the IPR&D asset had no alternative future use.
IPR&D acquired in an asset acquisition is recorded using the cost accumulation model and is immediately expensed if there is no alternative future use at the time of acquisition.
The total consideration transferred was allocated to the non-monetary assets acquired and liabilities assumed using the cost accumulation model based on their relative fair value. The following table summarizes the Closing Date fair value of the consideration transferred (in thousands):
Fair value of common stock consideration(1)
$17,227 
Payment of certain acquiree transaction costs and other liabilities on behalf of acquiree(2)
1,001 
Total purchase price$18,228 
(1)The fair value of the 71,211 shares of common stock issued as part of consideration transferred was determined based on the Closing Date market price of the Company’s common stock of $241.91.
(2)Transaction costs and other pre-existing liabilities paid on behalf of the acquiree as part of the consideration transferred for the IPR&D are presented in the investing activities section of the condensed consolidated statements of cash flows.
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Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
6. Intangible Assets
Acquired Intangible Assets
The following tables present details of the Company’s acquired finite-lived intangible assets as of September 30, 2023 and December 31, 2022 (in thousands, except weighted-average amortization period):
As of September 30, 2023Weighted-Average Amortization PeriodGross Carrying AmountAccumulated AmortizationNet
Finite-lived intangible assets:
Developed technology8.8 years$83,289 $(17,259)$66,030 
Customer relationships15.0 years6,303 (2,626)3,677 
Trade secrets and processes20.0 years5,256 (1,511)3,745 
Total intangible assets 9.7 years$94,848 $(21,396)$73,452 
As of December 31, 2022Weighted-Average
Amortization Period		Gross Carrying AmountAccumulated AmortizationNet
Finite-lived intangible assets:
Developed technology8.8 years$83,289 $(10,113)$73,176 
Customer relationships15.0 years6,383 (2,340)4,043 
Trade secrets and processes20.0 years5,256 (1,314)3,942 
Other5.0 years1,646 (1,646)— 
Total intangible assets9.6 years$96,574 $(15,413)$81,161 
The gross carrying amount and accumulated amortization of the customer relationships are the only intangible assets subject to foreign currency translation effects.
The following table presents the amortization expense recorded related to the Company’s finite-lived intangible assets for the three and nine months ended September 30, 2023 and 2022 (in thousands):
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Cost of revenue$66 $66 $197 $197 
Sales, general and administrative2,487 2,481 7,461 6,436 
Total$2,553 $2,547 $7,658 $6,633 
7. Goodwill
The following table presents the changes in goodwill during the nine months ended September 30, 2023 (in thousands):
Total Company
Balance as of December 31, 2022$166,046 
Foreign currency translation (92)
Balance as of September 30, 2023$165,954 
Goodwill Impairment Review
The Company reviews goodwill for impairment annually during the fourth quarter or more frequently if events or circumstances indicate that an impairment loss may have occurred. The Company determined there were no impairment indicators as of September 30, 2023.
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Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
8. Indebtedness
Credit Agreement
On April 24, 2020, the Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent and lender, and Bank of America, N.A. and Citibank, 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 originally matured on April 23, 2021. During the three months ended March 31, 2021 and 2022, the Credit Agreement was amended to extend the maturity date and make other changes to the terms of the Credit Agreement.
In the first quarter of 2023, the Company and JPMorgan Chase Bank, N.A., as administrative agent and lender, and Bank of America, N.A. and Citibank, N.A., as lenders, entered into Amendment No. 3 to the Credit Agreement. Pursuant to the amendment, (i) the maturity date of the Credit Agreement was extended from February 17, 2023 to February 16, 2024, (ii) certain changes were made to the reference benchmark interest rates, applicable margins and borrowing mechanics under the Credit Agreement, which have the overall effect of increasing the interest rates payable by the Company on amounts borrowed under the Credit Agreement, and (iii) the commitment fee payable on the average daily unused amount under the Credit Agreement was increased to 0.35% per annum.
The Credit Agreement requires the Company to maintain a minimum fixed charge coverage ratio and to not exceed a maximum leverage ratio. As of September 30, 2023, the Company was in compliance with these requirements.
As of September 30, 2023 and December 31, 2022, there were no borrowings outstanding under the Credit Agreement.
9. Commitments and Contingencies
Royalty Obligations
In March 2005, the Company entered into a license agreement that requires the Company to make minimum royalty payments to the licensor on a quarterly basis. In July 2019, the Company amended the license agreement to extend its term for an additional ten years and to increase the required minimum annual royalty payments by $0.2 million. As of both September 30, 2023 and December 31, 2022, the amended license agreement required minimum quarterly royalty payments of $0.3 million. Unless terminated earlier, the term of the amended license agreement shall expire June 30, 2029.
In April 2012, the Company entered into an agreement that requires the Company to pay, on a quarterly basis, a 5% royalty on sales of products covered under applicable patents. The first commercial sale of covered products occurred in April 2014. Unless terminated earlier, the royalty term for each applicable product shall continue for fifteen years following the first commercial sale of such patented product, or when the applicable patent covering such product has expired, whichever is sooner.
Royalty expense included in cost of revenue for the three months ended September 30, 2023 and 2022 was $0.7 million and $0.7 million, respectively, and for the nine months ended September 30, 2023 and 2022, was $2.0 million and $1.9 million, respectively.
Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
Indemnification
The Company enters into standard indemnification arrangements in the ordinary course of business. In many such arrangements, the Company agrees to indemnify, hold harmless, and reimburse the indemnified parties for losses suffered or incurred by the indemnified parties in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third-party with respect to the Company’s technology. The Company also agrees to indemnify many indemnified parties for product defect and similar claims. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable because it involves claims that may be made against the Company in the future, but have not yet been made.
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Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of the individual.
The Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. No liability associated with any of these indemnification requirements has been recorded to date.
Litigation
From time to time, the Company is subject to other claims and assessments in the ordinary course of business. The Company is not currently a party to any such litigation matter that, individually or in the aggregate, is expected to have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
10. Stockholders’ Equity
Common Stock
On September 29, 2023, the Company issued 71,211 shares of common stock as part of the total consideration transferred in connection with an asset acquisition.
Stock-based Compensation
Stock-based compensation expense is associated with restricted stock units (“RSUs”), RSUs with performance conditions (“PSUs”), stock options, and the Company’s Employee Stock Purchase Plan.
Certain RSUs granted to senior management during the three months ended March 31, 2023, will vest subject to the achievement of pre-established financial performance targets for the year ending December 31, 2023, and continued service. The fair value of these PSUs is based on the closing price of the Company's common stock on the date of grant. Stock-based compensation costs associated with these PSUs are recognized over the requisite service period of 4.25 years using graded vesting which results in more accelerated expense recognition compared to traditional time-based vesting over the same vesting period. Similarly, from time to time the Company grants performance-based RSUs to sales employees based on pre-established sales performance targets. Each reporting period, the Company monitors the probability of achieving the performance targets and may adjust periodic stock-based compensation expense based on its determination of the likelihood of achieving these performance targets and the estimated number of shares of common stock that will vest. The actual number of PSUs awarded is based on the actual performance during the performance period compared to the performance targets.
The following table sets forth the stock-based compensation expense included in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022 (in thousands):
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Cost of revenue$1,428 $1,020 $3,900 $2,756 
Research and development2,219 1,385 6,928 4,285 
Sales, general and administrative10,489 7,297 28,897 20,340 
Total$14,136 $9,702 $39,725 $27,381 
As of September 30, 2023, total unrecognized compensation cost related to unvested share-based compensation arrangements, excluding PSUs, was $60.5 million, which is expected to be recognized over a weighted average period of 2.8 years.
As of September 30, 2023, total unrecognized compensation cost related to unvested PSU share-based compensation arrangements was $18.1 million, which is expected to be recognized over a weighted average period of 3.5 years.
The total stock-based compensation cost capitalized in inventory was $1.7 million and $2.2 million as of September 30, 2023 and December 31, 2022, respectively.
11. Accumulated Other Comprehensive Income (Loss)
Other comprehensive (loss) income consists of two components: unrealized gains or losses on the Company’s available-for-sale marketable investments and gains or losses from foreign currency translation adjustments. Until realized and reported as a component of consolidated net income (loss), these comprehensive income (loss) items accumulate and are included within
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Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
accumulated other comprehensive income (loss). Unrealized gains and losses on the Company’s marketable investments are reclassified from accumulated other comprehensive income (loss) into earnings when realized upon sale, and are determined based on specific identification of securities sold. Gains and losses from the translation of assets and liabilities denominated in non-U.S. dollar functional currencies are included in accumulated other comprehensive income (loss).
The following table summarizes the changes in the accumulated balances during the period and includes information regarding the manner in which the reclassifications out of accumulated other comprehensive income (loss) into earnings affect the Company’s condensed consolidated statements of operations and condensed consolidated statements of comprehensive income (loss) (in thousands):    
Three Months Ended September 30, 2023Three Months Ended September 30, 2022
 Marketable
Investments		 Currency Translation
Adjustments		 Total Marketable
Investments		 Currency Translation
Adjustments		 Total
Balance, beginning of the period$(2,012)$(3,567)$(5,579)$(3,922)$(6,236)$(10,158)
Other comprehensive income (loss) before reclassifications:
Unrealized gains (losses) — marketable investments698 — 698 (383)— (383)
Foreign currency translation losses— (2,359)(2,359)— (2,812)(2,812)
Net of tax698 (2,359)(1,661)(383)(2,812)(3,195)
Net current-year other comprehensive income (loss)698 (2,359)(1,661)(383)(2,812)(3,195)
Balance, end of the period$(1,314)$(5,926)$(7,240)$(4,305)$(9,048)$(13,353)

Nine Months Ended September 30, 2023Nine Months Ended September 30, 2022
Marketable
Investments		Currency Translation
Adjustments		TotalMarketable
Investments		Currency Translation
Adjustments		Total
Balance, beginning of the period$(3,500)$(4,624)$(8,124)$(595)$(2,035)$(2,630)
Other comprehensive income (loss) before reclassifications:
Unrealized gains (losses) — marketable investments2,186 — 2,186 (3,710)— (3,710)
Foreign currency translation losses— (1,302)(1,302)— (7,013)(7,013)
Net of tax2,186 (1,302)884 (3,710)(7,013)(10,723)
Net current-year other comprehensive income (loss) 2,186 (1,302)884 (3,710)(7,013)(10,723)
Balance, end of the period$(1,314)$(5,926)$(7,240)$(4,305)$(9,048)$(13,353)
12. Income Taxes
The Company’s income tax expense (benefit), deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. The Company is subject to income taxes in both the United States and foreign jurisdictions. Significant judgment and estimates are required in determining the consolidated income tax expense (benefit).
During interim periods, the Company generally utilizes the estimated annual effective tax rate (“AETR”) method which involves the use of forecasted information. Under the AETR method, the provision is calculated by applying the estimated AETR for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. Jurisdictions with tax assets for which the Company believes a tax benefit cannot be realized are excluded from the computation of its AETR.
In connection with an asset acquisition during the three months ended September 30, 2023, the Company recorded $18.2 million of IPR&D charge, which is not deductible for tax purposes. Refer to Note “5. Asset Acquisition” for more information. According to ASC 740-270-30-8 guidance for significant unusual or infrequently occurring items that are separately reported, the $18.2 million was excluded from the calculation of the Company’s estimated annual effective tax rate.
The Company’s provision for income taxes was $4.1 million and $4.8 million, for the three and nine months ended September 30, 2023, respectively, which was primarily due to tax expenses attributable to its worldwide profits and a discrete tax charge resulting from the non-deductible acquired in-process research and development expense associated with the asset acquisition, offset by excess tax benefits from stock-based compensation attributable to its U.S. jurisdiction. The Company’s
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Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
provision for income taxes was $5.3 million for the three months ended September 30, 2022, which was primarily due to tax expenses attributable to its worldwide profits, combined with tax deficiencies (shortfalls) expenses from stock-based compensation attributable to its U.S. jurisdiction. The Company’s provision for income taxes was $2.6 million for the nine months ended September 30, 2022, which was primarily due to tax expenses attributable to its foreign profits, combined with tax deficiencies (shortfall) expenses from stock-based compensation attributable to its U.S. jurisdiction.
The Company’s effective tax rate changed to 30.7% for the three months ended September 30, 2023 from 174.8% for the three months ended September 30, 2022, and to 11.5% for the nine months ended September 30, 2023 from (81.7)% for the nine months ended September 30, 2022, which were primarily due to small tax expenses over relatively large worldwide profits for the three and nine months in 2023 comparing to large tax expenses over relatively small worldwide profits for the three months and worldwide losses for the nine months in 2022, respectively.
Significant domestic deferred tax assets (“DTAs”) were generated in recent years, primarily due to excess tax benefits from stock option exercises and vesting of restricted stock units. The Company evaluates all available positive and negative evidence, objective and subjective in nature, in each reporting period to determine if sufficient taxable income will be generated to realize the benefits of its DTAs and, if not, a valuation allowance to reduce the DTAs is recorded.
As of September 30, 2023 and 2022, the Company maintains a valuation allowance against its Federal Research and Development Tax Credit DTAs as the Company could not conclude at the required more-likely-than-not level of certainty, that the benefit of these tax attributes would be realized prior to expiration. The Company intends to continue maintaining this full valuation allowance until there is sufficient evidence to reverse it. However, considering current earnings and anticipated future earnings, as well as the impact of IRC Section 174 requiring qualified research expenditures to be capitalized and amortized over 5 or 15 years, the Company anticipates net operating loss (“NOL”) utilization may be accelerated. As a consequence, the Company believes there is a reasonable possibility that sufficient positive evidence may become available to conclude this valuation allowance may no longer be needed within the next 12 months. Release of the valuation allowance will result in the recognition of Federal Research and Development Tax Credit DTAs and a decrease to income tax expenses for the period in which the release is recorded. The exact timing and amount of the valuation allowance release are highly dependent on the level of taxable income in future years. The Company will continue to closely monitor the need for this valuation allowance in each subsequent reporting period.
As of September 30, 2023 and 2022, the Company maintains a full valuation allowance against its California DTAs as the Company does not expect to generate sufficient future taxable income in California to realize the tax benefit due to the computation of California taxes under the single sales factor and non-conformity of the Section 174 capitalization rule.
The Company maintains that all foreign earnings, with the exception of a portion of the earnings of its German subsidiary, are permanently reinvested outside the United States and therefore deferred taxes attributable to such earnings are not provided for in the Company’s condensed consolidated financial statements as of September 30, 2023.
13. Net Income (Loss) per Share
The Company computed basic net income (loss) per share based on the weighted average number of shares of common stock outstanding during the period. The Company computed diluted net income (loss) per share based on the weighted average number of shares of common stock outstanding plus potentially dilutive common stock equivalents outstanding during the period using the treasury stock method. For the purposes of this calculation, stock options, restricted stock units and stock sold through the Company’s employee stock purchase plan are considered common stock equivalents.
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Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
A reconciliation of the numerator and denominator used in the calculation of the basic and diluted net income (loss) per share is as follows (in thousands, except share and per share amounts):
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Numerator:
Net income (loss)$9,214 $(2,271)$36,736 $(5,879)
Denominator:
Weighted average shares used to compute net income (loss) attributable to common stockholders:
Basic38,462,463 37,918,452 38,324,279 37,778,362 
Potential dilutive stock-based options and awards757,503 — 859,356 — 
Diluted39,219,966 37,918,452 39,183,635 37,778,362 
Net income (loss) per share:
Basic$0.24 $(0.06)$0.96 $(0.16)
Diluted$0.23 $(0.06)$0.94 $(0.16)
For the three months ended September 30, 2023 and 2022, outstanding stock-based awards of 13 thousand and 1.6 million shares, respectively, and for the nine months ended September 30, 2023 and 2022 outstanding stock-based awards of 11 thousand and 1.9 million shares, respectively, were excluded from the computation of diluted net income (loss) per share because their effect would have been anti-dilutive.
14. Revenues
Revenue Recognition
Revenue is recognized in an amount that reflects the consideration the Company expects to be entitled to in exchange for goods or services. All revenue recognized in the condensed consolidated statements of operations is considered to be revenue from contracts with customers.
The following table presents the Company’s revenues disaggregated by geography, based on the destination to which the Company ships its products, for the three and nine months ended September 30, 2023 and 2022 (in thousands):
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
United States$194,816 $148,819 $553,467 $434,583 
International76,130 64,859 220,376 191,334 
Total$270,946 $213,678 $773,843 $625,917 
The following table presents the Company’s revenues disaggregated by product category for the three and nine months ended September 30, 2023 and 2022 (in thousands):
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Vascular$171,407 $123,361 $466,940 $369,712 
Neuro99,539 90,317 306,903 256,205 
Total$270,946 $213,678 $773,843 $625,917 
China Distribution and Technology Licensing Agreement
In December 2020, the Company entered into a distribution and technology licensing arrangement with its existing distribution partner in China. In addition to modifying the Company’s standard distribution agreement with its partner in China, the Company agreed to license the technology for certain products to its partner in China to permit the manufacturing and commercialization of such products in China as well as provide certain regulatory support. During the three months ended March 31, 2022, the Company further amended the distribution agreement and entered into an additional license agreement,
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Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
pursuant to which the Company agreed to license the technology for additional products to its partner in China on substantially the same terms as the existing license agreement. Apart from the standard distribution agreement, the Company will receive fixed payments upon transferring its distinct licensed technology and providing related regulatory support and royalty payments on the down-stream sale of the licensed products.
During the three months ended September 30, 2023, the Company and its existing distribution partner in China entered into an additional licensing arrangement, pursuant to which the Company agreed to license the technology for additional products to its partner in China and will receive fixed payments upon transferring its distinct licensed technology and providing related regulatory support and royalty payments on the down-stream sale of the licensed products.
Performance Obligations
Delivery of products - The Company’s contracts with customers, other than the China licensing arrangements described above, typically contain a single performance obligation, delivery of the Company’s products. Satisfaction of that performance obligation occurs when control of the promised goods transfers to the customer, which is generally upon shipment for non-consignment sale agreements and upon utilization for consignment sale agreements.
Payment terms - The Company’s payment terms vary by the type and location of our customer. The timing between fulfillment of performance obligations and when payment is due is not significant and does not give rise to financing transactions. The Company did not have any contracts with significant financing components as of September 30, 2023.
Product returns - The Company may allow customers to return products purchased at the Company’s discretion. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period in which the related product revenue is recognized. The Company currently estimates product return liabilities using its own historic sales information, trends, industry data, and other relevant data points.
Warranties - The Company offers its standard warranty to all customers and it is not available for sale on a standalone basis. The Company’s standard warranty represents its guarantee that its products function as intended, are free from defects, and comply with agreed-upon specifications and quality standards. This assurance does not constitute a service and is not a separate performance obligation.
Transaction Price
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, the Company estimates the amount of variable consideration that should be included in the transaction price. When determining if variable consideration should be constrained, management considers whether there are factors that could result in a significant reversal of revenue and the likelihood of a potential reversal. 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. These estimates are reassessed each reporting period. During the three and nine months ended September 30, 2023, the Company made no material changes in estimates for variable consideration. When the Company performs shipping and handling activities after control of goods is transferred to the customer, they are considered as fulfillment activities, and costs are accrued for when the related revenue is recognized. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues.
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Penumbra, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Contract assets and liabilities
The following information summarizes the Company’s contract assets and liabilities, net as of September 30, 2023 and December 31, 2022 (in thousands):
September 30, 2023December 31, 2022
Contract assets$5,694 $— 
Contract liabilities$7,802 $8,783 
Contract assets for the periods presented primarily represent the difference between the revenue that was recognized based on the relative standalone selling price of the related performance obligations satisfied and the contractual billing terms in the licensing arrangements.
Contract liabilities represents amounts that the Company has already invoiced and are ultimately expected to be recognized as revenue, but for which not all revenue recognition criteria have been met and is recognized as the associated performance obligations are satisfied. Revenue recognized during the three and nine months ended September 30, 2023 relating to contract liabilities as of June 30, 2023 and December 31, 2022 was $0.1 million and $1.0 million, respectively.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2022, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 23, 2023.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you can identify these statements by forward-looking words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations, but these words are not the exclusive means for identifying such statements. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results and timing expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. Except as may be required by law, we assume no obligation to update these forward-looking statements or the reasons that results could differ from these forward-looking statements. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Overview
Penumbra 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 novel products for use by specialist physicians and healthcare providers to drive improved clinical outcomes and health. 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, vascular, and immersive healthcare. We have successfully developed, obtained regulatory clearance or approval for, and introduced products into the neurovascular market since 2007, vascular market since 2013, neurosurgical market since 2014, and immersive healthcare market since 2020, 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 and immersive 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.
To address the challenging and significant clinical needs of our key markets, we have developed products that fall into the following broad product families:
Our neuro products fall into four broad product families:
•Neuro thrombectomy - Penumbra System, including Penumbra RED, JET, ACE catheters and the 3D Revascularization Device, Penumbra ENGINE and other components and accessories
•Neuro embolization - Penumbra SMART COIL, Penumbra Coil 400, POD400 and PAC400
•Neuro access - delivery catheters, consisting of Neuron, Neuron MAX Select, BENCHMARK, BMX96, BMX81, DDC, PX SLIM and SENDit
•Neurosurgical - Artemis Neuro Evacuation Device
Our vascular products fall into two broad product families:
•Vascular thrombectomy - INDIGO System designed for continuous or modulated aspiration, computer assisted vacuum thrombectomy, including aspiration catheters, microprocessor-controlled software algorithms that orchestrate the interaction of our pump and catheters, separators, aspiration pump and accessories
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•Peripheral embolization - RUBY Coil System, Ruby LP, LANTERN Delivery Microcatheter and the POD System (POD and POD Packing Coil)
Our immersive healthcare products fall into one broad product family:
•REAL Immersive System - portfolio of products that leverages immersive computer-based technologies to deliver engaging, immersive therapeutics to promote better health, motor function and cognition
We support healthcare providers, hospitals and clinics in more than 100 countries. In the nine months ended September 30, 2023 and 2022, 28.5% and 30.6% of our revenue, respectively, was generated from customers located outside of the United States. Our sales outside of the United States are denominated principally in the euro and Japanese yen, with 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 $773.8 million and $625.9 million for the nine months ended September 30, 2023 and 2022, respectively, an increase of $147.9 million. We generated income from operations of $38.5 million, which includes the $18.2 million acquired in-process research and development (“IPR&D”) charge recorded in connection with an asset acquisition, and $1.2 million for the nine months ended September 30, 2023 and 2022, respectively.
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 may continue to negatively affect, our revenues and results of operations. For example, as a result of the pandemic and the response thereto, global supply chains have been impacted, and we may experience significant and unpredictable fluctuations in the availability and cost of components and raw materials used in our products.
•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 and other healthcare providers who use our products.
•We must continue to successfully introduce new products that gain acceptance with specialist physicians and other healthcare providers 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.
•The specialist physicians who use our interventional 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 of the 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 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
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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.
COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which spread throughout the U.S. and the world. In response, governments issued orders restricting certain activities, and while our business falls within the category of healthcare operations, which are essential businesses that have generally been permitted to continue operating during the COVID-19 pandemic, we have experienced, and may continue to experience, disruptions to our operations as a result of the pandemic. For example, at times during the pandemic, 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. In addition, the pandemic and the response thereto have impacted global supply chains and labor markets, resulting in cost inflation and raw material supply constraints, as well as an increase in employee turnover rates in certain jurisdictions, which has impacted, and may continue to impact, our business. In order to navigate the pandemic, we made certain 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 the acute phase of the pandemic has subsided due to the development and widespread availability of vaccines for COVID-19,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, particularly as new variants of the virus spread, 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. 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.
Components of Results of Operations
Revenue. We sell our interventional products directly to hospitals and other healthcare providers 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. In addition, we record write-downs or write-offs of inventory in the event that a portion of our inventory becomes excess or obsolete.
We manufacture substantially all of our products in our manufacturing facilities in Alameda and Roseville, 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 generally expense R&D costs as they are incurred, with the exception of certain costs incurred for the development of computer software for internal use related to our REAL Immersive System offerings. We capitalize certain costs when it is determined that it is probable that the project will be completed and the software will be used to perform the function intended, and the preliminary project stage is completed. Capitalized internal use software development costs are included in property and equipment, net within the condensed consolidated balance sheets.
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, information technology and human resource activities. Our SG&A expenses also include
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marketing trials, medical education, training, commissions, generally based on sales, to direct sales representatives, amortization of acquired intangible assets and acquisition-related costs.
Provision For (Benefit from) Income Taxes
We are taxed at the rates applicable within each jurisdiction in which we operate. The composite income tax rate, tax provisions, deferred tax assets (“DTAs”) 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.
Results of Operations
The following table sets forth the components of our condensed consolidated statements of operations in dollars and as a percentage of revenue for the periods presented:
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
 (in thousands, except for percentages)(in thousands, except for percentages)
Revenue$270,946 100.0 %$213,678 100.0 %$773,843 100.0 %$625,917 100.0 %
Cost of revenue93,228 34.4 78,351 36.7 278,192 35.9 229,137 36.6 
Gross profit177,718 65.6 135,327 63.3 495,651 64.1 396,780 63.4 
Operating expenses:
Research and development20,958 7.7 21,320 10.0 62,481 8.1 61,443 9.8 
Sales, general and administrative125,920 46.5 108,573 50.8 376,433 48.6 334,088 53.4 
Acquired in-process research and development18,215 6.7 — — 18,215 2.4 — — 
Total operating expenses165,093 60.9 129,893 60.8 457,129 59.1 395,531 63.2 
Income from operations12,625 4.7 5,434 2.5 38,522 5.0 1,249 0.2 
Interest income (expense), net1,123 0.4 (43)0.0 2,516 0.3 (162)— 
Other (expense) income, net(444)(0.2)(2,356)(1.1)454 0.1 (4,323)(0.7)
Income (loss) before income taxes13,304 4.9 3,035 1.4 41,492 5.4 (3,236)(0.5)
Provision for income taxes4,090 1.5 5,306 2.5 4,756 0.6 2,643 0.4 
Net income (loss)$9,214 3.4 %$(2,271)(1.1)%$36,736 4.7 %$(5,879)(0.9)%

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022
Revenue
 Three Months Ended September 30,Change
 20232022$%
 (in thousands, except for percentages)
Vascular$171,407 $123,361 $48,046 38.9 %
Neuro99,539 90,317 9,222 10.2 %
Total$270,946 $213,678 $57,268 26.8 %
Revenue increased $57.3 million, or 26.8%, to $270.9 million in the three months ended September 30, 2023, from $213.7 million in the three months ended September 30, 2022. Overall revenue growth was primarily due to an increase in sales of new and existing products within our vascular and neuro businesses.
Revenue from our vascular products increased $48.0 million, or 38.9%, to $171.4 million in the three months ended September 30, 2023, from $123.4 million in the three months ended September 30, 2022. This increase was driven by a 50.2% increase in sales of our vascular thrombectomy products in the United States and primarily attributable to sales of new products
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and further market penetration of our existing products. Prices for our vascular products remained substantially unchanged during the period.
Revenue from our neuro products increased $9.2 million, or 10.2%, to $99.5 million in the three months ended September 30, 2023, from $90.3 million in the three months ended September 30, 2022. This increase was primarily attributable to sales of new products in United States and Europe and further market penetration of our existing products. The increase in product sales was driven by an increase in sales of our neuro access products and neuro thrombectomy products, which globally increased by 12.9% and 10.3%, respectively, in the three months ended September 30, 2023, partially offset by a decrease in sales of our neuro embolization products, which decreased by 18.8% in the three months ended September 30, 2023. Prices for our neuro products remained substantially unchanged during the period.
Revenue by Geographic Area
The following table presents revenue by geographic area, based on our customers’ shipping destinations, for the three months ended September 30, 2023 and 2022:
Three Months Ended September 30,Change
20232022$%
 (in thousands, except for percentages)
United States$194,816 71.9 %$148,819 69.6 %$45,997 30.9 %
International76,130 28.1 %64,859 30.4 %11,271 17.4 %
Total$270,946 100.0 %$213,678 100.0 %$57,268 26.8 %
Revenue from product sales in international markets increased $11.3 million, or 17.4%, to $76.1 million in the three months ended September 30, 2023, from $64.9 million in the three months ended September 30, 2022. Revenue from international sales represented 28.1% and 30.4% of our total revenue for the three months ended September 30, 2023 and 2022, respectively.
Gross Margin
 Three Months Ended September 30,Change
 20232022$%
 (in thousands, except for percentages)
Cost of revenue$93,228 $78,351 $14,877 19.0 %
Gross profit$177,718 $135,327 $42,391 31.3 %
Gross margin %65.6 %63.3 %
Gross margin increased by 2.3 percentage points to 65.6% in the three months ended September 30, 2023, from 63.3% in the three months ended September 30, 2022. Gross margin is impacted by product mix, regional mix, and production initiatives to support demand and create future efficiencies. As such, with favorable product mix, improvement in productivity, and by leveraging our fixed costs on higher volume of new product sales during the year, our gross margin may be positively impacted in the future.
Research and Development (“R&D”)
 Three Months Ended September 30,Change
 20232022$%
 (in thousands, except for percentages)
R&D$20,958 $21,320 $(362)(1.7)%
R&D as a percentage of revenue7.7 %10.0 %
R&D expenses decreased by $0.4 million, or 1.7%, to $21.0 million in the three months ended September 30, 2023, from $21.3 million in the three months ended September 30, 2022. The decrease was primarily due to a $1.6 million decrease in product development and testing costs, partially offset by a $1.2 million increase in personnel-related expenses.
We have continued to make investments, and plan to continue to make investments, in the development of our products. As part of our ongoing investment in the development of our products, we may incur additional expenses related to research and development milestones. In addition, we have experienced in the past, and may continue to experience in the future, variability in expenses incurred due to the timing and costs of clinical trials and product development, which may include additional personnel-related expenses in conjunction with the launch of new products.
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Sales, General and Administrative (“SG&A”)
 Three Months Ended September 30,Change
 20232022$%
 (in thousands, except for percentages)
SG&A$125,920 $108,573 $17,347 16.0 %
SG&A as a percentage of revenue46.5 %50.8 %
SG&A expenses increased by $17.3 million, or 16.0%, to $125.9 million in the three months ended September 30, 2023, from $108.6 million in the three months ended September 30, 2022. The increase was primarily due to a $11.0 million increase in personnel-related expenses driven by an increase in headcount and related expenses to support our growth and a $3.0 million increase in costs related to marketing events.
As we continue to invest in our growth, we have expanded and may continue to expand our sales, marketing, and general and administrative teams through the hiring of additional employees in critical roles that support our strategic initiatives. In addition, we have experienced in the past, and may continue to experience in the future, variability in expenses incurred due to the timing and costs of investments to support the business.
Acquired In-Process Research and Development
 Three Months Ended September 30,Change
 20232022$%
 (in thousands, except for percentages)
Acquired in-process research and development$18,215 $— $18,215 not meaningful
Acquired in-process research and development as a percentage of revenue6.7 %— %
During the three months ended September 30, 2023, we recorded an $18.2 million acquired IPR&D charge in connection with an asset acquisition.
Provision for income taxes
 Three Months Ended September 30,Change
 20232022$%
 (in thousands, except for percentages)
Provision for income taxes$4,090 $5,306 $(1,216)(22.9)%
Effective tax rate30.7 %174.8 %
Our provision for income taxes was $4.1 million for the three months ended September 30, 2023, which was primarily due to tax expenses attributable to our worldwide profits and a discrete tax charge resulting from the non-deductible IPR&D charge associated with an asset acquisition (see Note “5. Asset Acquisition” to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information), offset by excess tax benefits from stock-based compensation attributable to our U.S. jurisdiction. Our provision for income taxes was $5.3 million for the three months ended September 30, 2022, which was primarily due to tax expenses attributable to our worldwide profits, combined with tax deficiencies (shortfalls) expenses from stock based compensation attributable to our U.S. jurisdiction as a result of stock price fluctuation.

Our effective tax rate changed to 30.7% for the three months ended September 30, 2023 from 174.8% for the three months ended September 30, 2022, primarily due to small tax expenses over relatively large worldwide profits for the three months in 2023 comparing to large tax expenses over relatively small worldwide profits for the three months in 2022.

Prospectively, our effective tax rate will likely be driven by (1) permanent differences in taxable income for tax and financial reporting purposes, (2) tax expense or benefit attributable to our worldwide financial result, and (3) discrete tax adjustments such as excess tax benefits or deficiencies related to stock-based compensation. Our income tax provision is subject to volatility as the amount of excess tax benefits or deficiencies 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 under U.S. GAAP.

As of September 30, 2023 and 2022, we maintain a valuation allowance against our Federal Research and Development Tax Credit DTAs as we could not conclude at the required more-likely-than-not level of certainty, that the benefit of these tax attributes would be realized prior to expiration. We intend to continue maintaining this full valuation allowance until there is
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sufficient evidence to reverse it. However, considering current earnings and anticipated future earnings, as well as the impact of IRC Section 174 requiring qualified research expenditures to be capitalized and amortized over 5 or 15 years, we anticipate net operating loss (“NOL”) utilization may be accelerated. As a consequence, we believe there is a reasonable possibility that sufficient positive evidence may become available to conclude this valuation allowance may no longer be needed within the next 12 months. Release of the valuation allowance will result in the recognition of Federal Research and Development Tax Credit DTAs and a decrease to income tax expenses for the period in which the release is recorded. The exact timing and amount of the valuation allowance release are highly dependent on the level of taxable income in future years. We will continue to closely monitor the need for this valuation allowance in each subsequent reporting period.
Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022
Revenue
 Nine Months Ended September 30,Change
 20232022$%
 (in thousands, except for percentages)
Vascular$466,940 $369,712 $97,228 26.3 %
Neuro306,903 256,205 50,698 19.8 %
Total$773,843 $625,917 $147,926 23.6 %
Revenue increased $147.9 million, or 23.6%, to $773.8 million in the nine months ended September 30, 2023, from $625.9 million in the nine months ended September 30, 2022. Overall revenue growth was primarily due to an increase in sales of new and existing products within our vascular and neuro businesses.
Revenue from our vascular products increased $97.2 million, or 26.3%, to $466.9 million in the nine months ended September 30, 2023, from $369.7 million in the nine months ended September 30, 2022. This increase in revenue from our vascular products was primarily attributable to increased revenue in the United States and was driven by sales of our vascular thrombectomy products and peripheral embolization products, which globally increased by 34.6% and 12.2%, respectively, in the nine months ended September 30, 2023. These increases were primarily due to higher sales volume in the United States 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 increased $50.7 million, or 19.8%, to $306.9 million in the nine months ended September 30, 2023, from $256.2 million in the nine months ended September 30, 2022. This increase in revenue from our neuro products was primarily attributable to increased revenue in the United States and Europe, sales of new products, and further market penetration of our existing products. This increase was driven by an increase in sales of our neuro access products and neuro thrombectomy products, which globally increased by 24.9% and 20.1%, respectively, in the nine months ended September 30, 2023, partially offset by a decrease in sales of our neuro embolization products of 16.2% in the nine months ended September 30, 2023. Prices for our neuro products remained substantially unchanged during the period.
Revenue by Geographic Area
The following table presents revenue by geographic area, based on our customer’s shipping destination, for the nine months ended September 30, 2023 and 2022:
 Nine Months Ended September 30,Change
20232022$%
 (in thousands, except for percentages)
United States$553,467 71.5 %$434,583 69.4 %$118,884 27.4 %
International220,376 28.5 %191,334 30.6 %29,042 15.2 %
Total$773,843 100.0 %$625,917 100.0 %$147,926 23.6 %
Revenue from sales in international markets increased $29.0 million, or 15.2%, to $220.4 million in the nine months ended September 30, 2023, from $191.3 million in the nine months ended September 30, 2022. Revenue from international sales represented 28.5% and 30.6% of our total revenue for the nine months ended September 30, 2023 and 2022, respectively.
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Gross Margin
 Nine Months Ended September 30,Change
 20232022$%
 (in thousands, except for percentages)
Cost of revenue$278,192 $229,137 $49,055 21.4 %
Gross profit$495,651 $396,780 $98,871 24.9 %
Gross margin %64.1 %63.4 %
Gross margin increased by 0.7 percentage point to 64.1% in the nine months ended September 30, 2023, from 63.4% in the nine months ended September 30, 2022. Gross margin is impacted by product mix, regional mix, start-up costs associated with new product launches, and production initiatives to support demand and create future efficiencies. As such, with favorable product mix, improvement in productivity, and by leveraging our fixed costs on higher volume of new product sales during the year, our gross margin may be positively impacted in the future.
Research and Development (“R&D”)
 Nine Months Ended September 30,Change
 20232022$%
 (in thousands, except for percentages)
R&D$62,481 $61,443 $1,038 1.7 %
R&D as a percentage of revenue8.1 %9.8 %
R&D expenses increased by $1.0 million, or 1.7%, to $62.5 million in the nine months ended September 30, 2023, from $61.4 million in the nine months ended September 30, 2022. The increase was primarily due to a $3.8 million increase in personnel-related expenses, partially offset by a $3.1 million decrease in product development and testing costs.
We have continued to make investments, and plan to continue to make investments, in the development of our products. As part of our ongoing investment in the development of our products, we may incur additional expenses related to research and development milestones. 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, which may include additional personnel-related expenses in conjunction with the launch of new products.

Sales, General and Administrative (SG&A)
 Nine Months Ended September 30,Change
 20232022$%
 (in thousands, except for percentages)
SG&A$376,433 $334,088 $42,345 12.7 %
SG&A as a percentage of revenue
48.6 %53.4 %
SG&A expenses increased by $42.3 million, or 12.7%, to $376.4 million in the nine months ended September 30, 2023, from $334.1 million in the nine months ended September 30, 2022. The increase was primarily due to a $30.7 million increase in personnel-related expense driven by an increase in headcount and related expenses to support our growth and a $4.9 million increase in costs related to marketing events.
As we continue to invest in our growth, we have expanded and may continue to expand our sales, marketing, and general and administrative teams through the hiring of additional employees in critical roles that support our strategic initiatives. In addition, we have experienced in the past, and may continue to experience in the future, variability in expenses incurred due to the timing and costs of investments to support the business.
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Acquired In-Process Research and Development
 Nine Months Ended September 30,Change
 20232022$%
 (in thousands, except for percentages)
Acquired in-process research and development$18,215 $— $18,215 not meaningful
Acquired in-process research and development as a percentage of revenue2.4 %— %
During the nine months ended September 30, 2023, we recorded an $18.2 million acquired IPR&D charge in connection with an asset acquisition.
Provision for income taxes
 Nine Months Ended September 30,Change
 20232022$%
 (in thousands, except for percentages)
Provision for income taxes$4,756 $2,643 $2,113 79.9 %
Effective tax rate11.5 %(81.7)%
Our provision for income taxes was $4.8 million for the nine months ended September 30, 2023, which was primarily due to tax expenses attributable to our worldwide profits and a discrete tax charge resulting from the non-deductible IPR&D charge associated with an asset acquisition (see Note “5. Asset Acquisition” to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information), offset by excess tax benefits from stock-based compensation attributable to our U.S. jurisdiction. Our benefit from income taxes was $2.6 million for the nine months ended September 30, 2022, which was primarily due to tax expenses attributable to our foreign profits, combined with tax deficiencies (shortfalls) expenses from stock-based compensation attributable to our U.S. jurisdiction as a result of stock price fluctuation.

The effective tax rate changed to 11.5% for the nine months ended September 30, 2023 from (81.7)% for the nine months ended September 30, 2022, primarily due to small tax expenses over relatively large worldwide profits for the nine months in 2023 comparing to large tax expenses over relatively small worldwide losses for the nine months in 2022.

Prospectively, our effective tax rate will likely be driven by (1) permanent differences in taxable income for tax and financial reporting purposes, (2) tax expense or benefit attributable to our worldwide financial results, and (3) discrete tax adjustments such as excess tax benefits or deficiencies related to stock-based compensation. Our income tax provision can be volatile as the amount of excess tax benefits or deficiencies can fluctuate from period to period due to the price of our stock, the volume of share-based grants exercised or vested, and the fair value assigned to equity awards under U.S. GAAP. In addition, changes in tax law or our interpretation thereof, and changes to our valuation allowance could result in fluctuations in our effective tax rate.

As of September 30, 2023 and 2022, we maintain a valuation allowance against our Federal Research and Development Tax Credit DTAs as we could not conclude at the required more-likely-than-not level of certainty, that the benefit of these tax attributes would be realized prior to expiration. We intend to continue maintaining this full valuation allowance until there is sufficient evidence to reverse it. However, considering current earnings and anticipated future earnings, as well as the impact of IRC Section 174 requiring qualified research expenditures to be capitalized and amortized over 5 or 15 years, we anticipate net operating loss (“NOL”) utilization may be accelerated. As a consequence, we believe there is a reasonable possibility that sufficient positive evidence may become available to conclude this valuation allowance may no longer be needed within the next 12 months. Release of the valuation allowance will result in the recognition of Federal Research and Development Tax Credit DTAs and a decrease to income tax expenses for the period in which the release is recorded. The exact timing and amount of the valuation allowance release are highly dependent on the level of taxable income in future years. We will continue to closely monitor the need for this valuation allowance in each subsequent reporting period.

Liquidity and Capital Resources
As of September 30, 2023, we had $723.4 million in working capital, which included $100.8 million in cash and cash equivalents and $148.1 million in marketable investments. As of September 30, 2023, we held approximately 16.9% of our cash and cash equivalents in foreign entities.
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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, on April 24, 2020 we entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent and lender, and Bank of America, N.A. and Citibank, 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. The Credit Agreement originally matured on April 23, 2021 and was subsequently amended during the three months ended March 31, 2021, 2022 and 2023 to extend the maturity date and make other changes to the terms of the Credit Agreement. The Credit Agreement currently matures on February 16, 2024. See Note “8. Indebtedness” to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q 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, could result in changes to our capital structure, 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 of September 30, 2023 and December 31, 2022:
 September 30, 2023December 31, 2022
 (in thousands)
Cash and cash equivalents$100,757 $69,858 
Marketable investments148,098 118,172 
Accounts receivable, net206,615 203,384 
Accounts payable27,996 26,679 
Accrued liabilities104,184 106,300 
Working capital(1)
723,398 610,767 
(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:
 Nine Months Ended September 30,
 20232022
 (in thousands)
Cash and cash equivalents and restricted cash at beginning of period$69,858 $59,379 
Net cash provided by (used in) operating activities61,072 (56,998)
Net cash (used in) provided by investing activities(40,356)46,157 
Net cash provided by financing activities10,282 5,887 
Cash and cash equivalents and restricted cash at end of period100,757 54,844 
Net Cash Provided By (Used In) Operating Activities
Net cash provided by (used in) operating activities consists primarily of consolidated net income adjusted for certain non-cash items (including depreciation and amortization, stock-based compensation expense, acquired in-process research and development, inventory write-downs, and changes in deferred tax balances), and the effect of changes in working capital and other activities.
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Net cash provided by operating activities was $61.1 million during the nine months ended September 30, 2023 and consisted of consolidated net income of $36.7 million and non-cash items of $86.0 million, offset by net changes in operating assets and liabilities of $61.7 million. The change in operating assets and liabilities primarily relates to an increase in inventories of $46.5 million to support our growth, an increase in accounts receivable of $6.6 million due to timing of invoicing and collections, and an increase in prepaid expenses and other current and non-current assets of $10.3 million. This was partially offset by an increase in accounts payable of $2.1 million due to timing of payments.
Net cash used in operating activities was $57.0 million during the nine months ended September 30, 2022 and consisted of consolidated net loss of $5.9 million and non-cash items of $51.0 million, offset by net changes in operating assets and liabilities of $102.1 million. The change in operating assets and liabilities includes an increase in inventories of $62.3 million to support our growth, an increase in accounts receivable of $57.4 million due to timing of receipt of payment, and an increase in prepaid expenses and other current and non-current assets of $2.0 million. This was partially offset by an increase in accounts payable of $13.1 million, an increase in accrued expenses and other non-current liabilities of $6.2 million, and proceeds of $0.3 million received related to lease incentives from operating leases.
Net Cash (Used In) Provided By Investing Activities
Net cash (used in) provided by investing activities relates primarily to purchases of marketable investments, net of proceeds from maturities and sales, capital expenditures and payments in connection with asset acquisitions.
Net cash used in investing activities was $40.4 million during the nine months ended September 30, 2023 and primarily consisted of $27.3 million in purchases of marketable investments, net of proceeds from maturities, capital expenditures of $11.6 million and $1.0 million in payments in connection with an asset acquisition.
Net cash provided by investing activities was $46.2 million during the nine months ended September 30, 2022 and primarily consisted of proceeds from maturities and sales of marketable investments of $61.9 million, partially offset by capital expenditures of $15.7 million.
Net Cash Provided By Financing Activities
Net cash provided by financing activities primarily relates to payments of employee taxes related to vested restricted stock units, payments towards the reduction of our finance lease obligations, and proceeds from exercises of stock options and issuance of common stock under our employee stock purchase plan.
Net cash provided by financing activities was $10.3 million during the nine months ended September 30, 2023 and primarily consisted of proceeds from the issuance of common stock under our employee stock purchase plan of $8.4 million and proceeds from exercises of stock options of $4.7 million, partially offset by $1.5 million in payments towards finance leases and $1.1 million of payments of employee taxes related to vested restricted stock units.
Net cash provided by financing activities was $5.9 million during the nine months ended September 30, 2022 and primarily consisted of proceeds from the issuance of common stock under our employee stock purchase plan of $8.0 million and proceeds from exercises of stock options of $6.3 million. This was partially offset by $7.0 million of payments of employee taxes related to vested restricted stock units and $1.3 million in payments towards finance leases.
Contractual Obligations and Commitments
There have been no other material changes to our contractual obligations and commitments as of September 30, 2023 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Critical Accounting Policies and Estimates
We have prepared our financial statements in accordance with U.S. GAAP. Our preparation of these financial statements requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosures at the date of the financial statements, as well as revenue and expenses recorded during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting policies from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2022.
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Recently Issued Accounting Standards
No recently issued accounting standards are expected to impact the Company.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to various market risks, which may result in potential losses arising from adverse changes in market rates, such as interest rates and foreign exchange rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes and do not believe we are exposed to material market risk with respect to our cash and cash equivalents or our marketable investments.
Interest Rate Risk. We had cash and cash equivalents of $100.8 million as of September 30, 2023, which consisted of funds held in money market funds, general checking and savings accounts. In addition, we had marketable investments of $148.1 million, which consisted primarily of corporate bonds, certificate of deposit, U.S. agency and government sponsored securities, and U.S. states and municipalities. Our investment policy is focused on the preservation of capital and supporting our liquidity needs. Under the policy, we invest in highly rated securities, while limiting the amount of credit exposure to any one issuer other than the U.S. government. We do not invest in financial instruments for trading or speculative purposes, nor do we use leveraged financial instruments. We utilize external investment managers who adhere to the guidelines of our investment policy. The revolving loans under the Credit Agreement bear interest at: (1) the adjusted EURIBOR rate, plus an applicable rate, for euro currency revolving borrowing; or (2) an alternate base rate, daily simple SOFR, or adjusted term SOFR rate, as applicable, plus an applicable rate, for revolving borrowing in U.S. dollars. As of September 30, 2023, there were no borrowings outstanding under the Credit Agreement. A hypothetical 100 basis point change in interest rates would not have a material impact on the value of our cash and cash equivalents or marketable investments.
Foreign Exchange Risk Management. We operate in countries other than the United States, and, therefore, we are exposed to foreign currency risks. We bill most sales outside of the United States in local currencies, primarily euro and Japanese yen, with some sales being denominated in other currencies. We expect that the percentage of our sales denominated in foreign currencies may increase in the foreseeable future as we continue to expand into international markets. When sales or expenses are not denominated in U.S. dollars, a fluctuation in exchange rates could affect our net income. We do not believe our net income would be materially impacted by an immediate 10% adverse change in foreign exchange rates. We do not currently hedge our exposure to foreign currency exchange rate fluctuations; however, we may choose to hedge our exposure in the future.
While our gross margin for the nine months ended September 30, 2023 was primarily impacted by product mix, regional mix, start-up costs associated with new product launches, and production initiatives to support demand and create future efficiencies, changes in prices did not have a significant impact on our results of operations for any periods presented on our consolidated financial statements.

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ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
An evaluation as of September 30, 2023 was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our “disclosure controls and procedures,” which are defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as controls and other procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at September 30, 2023.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarterly period ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our principal executive officer and principal financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.
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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.
For information with respect to Legal Proceedings, see Note “9. Commitments and Contingencies” to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
On April 7, 2023, a former contractor who had been retained by the Company through a third party staffing agency filed a putative class action lawsuit as well as a Private Attorney General Act (“PAGA”) representative action complaint against the Company in the Superior Court of the State of California for the County of Alameda, on behalf of the contractor and similarly situated Company contractors and employees in California, alleging various claims pursuant to the California Labor Code related to wages, overtime, meal and rest breaks, reimbursement of business expenses, wage statements and records, and other similar allegations. Additionally, on April 10, 2023, a current employee of the Company filed a PAGA representative action complaint against the Company in the Superior Court of the State of California for the County of Alameda, on behalf of the employee and similarly situated Company employees in California, alleging similar claims. The complaints seek payment of various alleged unpaid wages, penalties, interest and attorneys’ fees in unspecified amounts. The Company believes the claims lack merit, and intends to defend itself vigorously. Given the early stage of these proceedings, it is not yet possible to reliably determine any potential liability that could result from these matters. Accordingly, the Company has not accrued any amount for potential losses associated with these matters.

ITEM 1A. RISK FACTORS.
There have been no material changes to our risk factors reported in, or new risk factors identified since the filing of, our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 23, 2023.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
As partial consideration for an acquisition, which closed on September 29, 2023, the Company issued 71,211 shares of its common stock representing purchase consideration calculated by using the closing price of the Company’s common stock on September 29, 2023. See Note “5. Asset Acquisition” to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.

The issuance of shares of common stock by the Company in connection with the acquisition was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), in reliance on Section 4(a)(2) of the Securities Act, on the basis that, among other factors: (1) such issuance did not involve a public offering of securities; (2) no underwriter was involved with the issuance, and no commissions were paid; (3) all purchasers of the securities had access to information about the Company necessary to make an informed investment decision; (4) all purchasers are able to bear the economic risk of their investment and are aware that the securities were not registered under the Securities Act and cannot be re-offered or re-sold unless they are registered or are qualified for sale pursuant to an exemption from registration; and (5) appropriate legends were placed upon the book-entry positions representing the shares.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.

ITEM 4. MINE SAFETY DISCLOSURE.
None.

ITEM 5. OTHER INFORMATION.
Rule 10b5-1 Trading Plans
During the quarterly period ended September 30, 2023, certain of our directors and officers adopted or terminated trading plans, each of which was or is, as applicable, intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act (the “Rule 10b5-1 Trading Arrangements”). Each Rule 10b5-1 Trading Arrangement was entered into or terminated, as applicable, during an open trading window under our Securities Trading Policy. The following table presents the material terms of each Rule 10b5-1 Trading Arrangement adopted or terminated by our officers and directors during the three
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months ended September 30, 2023, other than terms with respect to the price at which the individual executing the Rule 10b5-1 Trading Arrangement is authorized to trade:

Name and Title of Officer or DirectorPlan ActionPlan Action DatePlan DurationTotal Securities to be Sold
Lambert Shiu, Chief Accounting Officer
Adoption8/31/202311/30/2023 -5/10/20249,204
Thomas Wilder, Director
Adoption8/14/202311/13/2023 - 8/30/2024840
Thomas Wilder, Director
Termination(1)
8/14/20238/7/2023 - 1/12/2024680
(1)As of the termination date of his Rule 10b5-1 Trading Arrangement, Mr. Wilder had sold 340 shares of common stock
under the terms thereof.

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ITEM 6. EXHIBITS.
Exhibit NumberDescriptionFormFile No.Exhibit(s)Filing Date
Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.
101The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 formatted in Inline Extensible Business Reporting Language (iXBRL) includes: (i) Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2023 and 2022, (iii) Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022, and (v) Notes to Condensed Consolidated Financial Statements.
104Cover Page Interactive Data File (formatted as iXBRL with applicable taxonomy extension information contained in Exhibit 101).
* Furnished herewith.
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 PENUMBRA, INC.
Date: November 2, 2023 
 By: /s/ Maggie Yuen
 Maggie Yuen
 Chief Financial Officer
(Principal Financial Officer)

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