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 endedDecember 31, 2021 , included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission ("SEC") onFebruary 22, 2022 . 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 endedDecember 31, 2021 . 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 other healthcare providers to drive improved clinical and health outcomes. We believe that the cost-effectiveness of our products is attractive to our customers. Since our founding in 2004, we have had a strong track record of organic product development and commercial expansion that has established the foundation of our global organization. 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. We expect to continue to develop and build our portfolio of products, including our thrombectomy, embolization, access and immersive healthcare technologies, while iterating on our currently available products. 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 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,
•Neurosurgical - Artemis Neuro Evacuation Device
Our vascular products fall into two broad product families:
•Vascular thrombectomy - INDIGO System designed for mechanical thrombectomy, including aspiration catheters, separators, aspiration pump and accessories and Lightning, our next-generation aspiration system for peripheral thrombectomy 23
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•Peripheral embolization - RUBY Coil System,
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 six months endedJune 30, 2022 and 2021, 30.7% and 29.7% of our revenue, respectively, was generated from customers located outside ofthe United States . Our sales outside ofthe United States are denominated principally in the euro and Japanese yen, with some sales being denominated in other currencies. As a result, we have foreign exchange exposure but do not currently engage in hedging. We generated revenue of$412.2 million and$353.5 million for the six months endedJune 30, 2022 and 2021, respectively, an increase of$58.8 million . We generated an operating loss of$4.2 million and operating income of$23.8 million for the six months endedJune 30, 2022 and 2021, respectively.
COVID-19 Pandemic
InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout theU.S. and the world. In response, governments have issued orders restricting certain activities, and while our business falls within the category of healthcare operations, which are essential businesses permitted to continue operating during the COVID-19 pandemic, we have experienced, and expect to continue to experience, disruptions to our operations as a result of the pandemic. For example, hospital resources have been diverted to fight the pandemic, and many government agencies in conjunction with healthcare systems have recommended the deferral of elective and semi-elective medical procedures during the pandemic. Some of Penumbra's medical devices are used in certain procedures that theUnited States Centers for Medicare & Medicaid Services ("CMS") has indicated are "high-acuity" procedures that should not be postponed during the pandemic in itsMarch 18, 2020 recommendations, while other Penumbra devices are used in elective procedures that physicians may consider postponing. Many of the procedures in which our vascular products are used are elective in nature, whereas procedures in which our neuro products are used, such as stroke, tend to be more emergent in nature.
The impact of COVID-19 on our business remains fluid, and we continue to actively monitor the dynamic situation. We will continue to undertake the following specific actions and strategic priorities to navigate the pandemic:
•We have made changes to how we manufacture, inspect and ship our products to prioritize the health and safety of our employees and to operate under the protocols mandated by our local and state governments. While we are committed to continue to meet demand for our essential devices, we have implemented social distancing and other measures to protect the health and safety of our employees, which have reduced, and may continue to reduce, our manufacturing capacity. •We further strengthened our liquidity position by entering into a Credit Agreement (the "Credit Agreement") onApril 24, 2020 , withJPMorgan Chase Bank, N.A ., as administrative agent and lender, andBank of America, N.A . andCitibank, N.A . as lenders. The Credit Agreement is secured and provides for up to$100 million in available revolving borrowing capacity with an option, subject to certain conditions, for us to increase the aggregate borrowing capacity to up to$150 million . This revolving line of credit provides access to capital beyond the$204.4 million in cash, cash equivalents and marketable investments on our balance sheet as ofJune 30, 2022 , and we believe this will allow us to both navigate the current environment and emerge in a strong liquidity position after the pandemic. During the three months endedMarch 31, 2021 , we entered into an amended one-year credit agreement withJPMorgan Chase Bank, N.A ., as administrative agent and lender, andBank of America, N.A . andCitibank, N.A . as lenders. The amended Credit Agreement extended the maturity date fromApril 23, 2021 toFebruary 21, 2022 and had substantially the same terms and conditions as the prior credit agreement with certain changes including the exclusion of certain one-time charges and expenses incurred during the fiscal quarters endedSeptember 30, 2020 andDecember 31, 2020 from the calculation of the financial covenants, reductions in interest rate floors applicable to revolving loans and other changes to borrowing mechanics under the Credit Agreement. In the first quarter of 2022, we entered into a further amended one-year credit agreement withJPMorgan Chase Bank, N.A ., as administrative agent and lender, andBank of America, N.A . andCitibank, N.A . as lenders. The amended Credit Agreement extended the maturity date fromFebruary 21, 2022 toFebruary 17, 2023 and has substantially the same terms and conditions as the prior credit agreement with certain changes to the reference benchmark interest rates, applicable margins and borrowing mechanics under the Credit Agreement, having the overall effect of lowering the interest rates payable by the Company on amounts borrowed under the Credit Agreement, and a reduction of the commitment fee payable on the average daily unused amount under the Credit Agreement to 0.25% per annum. As ofJune 30, 2022 , the Company was 24
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in compliance with the requirements in the amended Credit Agreement. As of
•We will continue to prioritize investments in our production capacity and flexibility, commercial channels, preparation for new product launches, and new product developments to help patients. While we began to see positive trends in certain areas of our business inMay 2020 , we remain mindful of the negative impacts on business trends we experienced inApril 2020 due to the COVID-19 pandemic. The general impact of COVID-19 on our business has been negative and we are unable to reliably predict the full impact that the COVID-19 pandemic 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 year endedDecember 31, 2021 . We will continue to evaluate the nature and extent of the impact of COVID-19 on our business, consolidated results of operations, and financial condition.
Factors Affecting Our Performance
There are a number of factors that have impacted, and we believe will continue to impact, our results of operations and growth. These factors include:
•The COVID-19 pandemic and measures taken in response thereto, which have negatively affected, and we expect will continue to negatively affect, our revenues and results of operations. Due to these impacts and measures, we may experience significant and unpredictable fluctuations in demand for certain of our products as hospital customers re-prioritize the treatment of patients and distributors adjust their operations to support the current demand level. •The rate at which we grow our salesforce and the speed at which newly hired salespeople become fully effective can impact our revenue growth or our costs incurred in anticipation of such growth. •Our industry is intensely competitive and, in particular, we compete with a number of large, well-capitalized companies. We must continue to successfully compete in light of our competitors' existing and future products and their resources to successfully market to the specialist physicians and other healthcare providerswho 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 other healthcare providers and the procedures and treatments those physicians and other healthcare providers choose to administer for a given condition. •The specialist physicianswho 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 ofthe United States are denominated in the local currency of the country in which we sell our products. As a result, our revenue from international sales can be significantly impacted by fluctuations in foreign currency exchange rates. •The availability and levels of reimbursement within the relevant healthcare payment system for healthcare providers for procedures in which our products are used. In addition, we have experienced and expect to continue to experience meaningful variability in our quarterly revenue, gross profit and gross margin percentage as a result of a number of factors, including, but not limited to: the impact of COVID-19, the number of available selling days, which can be impacted by holidays; the mix of products sold; the geographic mix of where products are sold; the demand for our products and the products of our competitors; the timing of or failure to 25
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obtain regulatory approvals or clearances for products; increased competition; the timing of customer orders; inventory write-offs due to obsolescence; costs, benefits and timing of new product introductions; costs, benefits and timing of the acquisition and integration of businesses and product lines we may acquire; the availability and cost of components and raw materials; and fluctuations in foreign currency exchange rates. Additionally, certain unique macroeconomic and geopolitical factors, including those as a result of the Russian invasion ofUkraine , may cause instability and volatility in the global financial markets and disruptions within the healthcare industry that may negatively impact our business. 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.
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
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 marketing trials, medical education, training, commissions, generally based on sales, to direct sales representatives, amortization of acquired intangible assets and acquisition-related costs.
(Benefit from) Provision For 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. 26
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Table of Contents Results of Operations The following table sets forth the components of our condensed consolidated statements of operations in dollars and as a percentage of revenue for the periods presented: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in thousands, except for percentages) (in thousands, except for percentages) Revenue$ 208,344 100.0 %$ 184,258 100.0 %$ 412,239 100.0 %$ 353,462 100.0 % Cost of revenue 74,309 35.7 65,572 35.6 150,786 36.6 123,439 34.9 Gross profit 134,035 64.3 118,686 64.4 261,453 63.4 230,023 65.1 Operating expenses: Research and development 19,559 9.4 17,738 9.6 40,123 9.7 35,814 10.1 Sales, general and administrative 114,615 55.0 90,636 49.2 225,515 54.7 170,434 48.2 Total operating expenses 134,174 64.4 108,374 58.8 265,638 64.4 206,248 58.4 (Loss) income from operations (139) (0.1) 10,312 5.6 (4,185) (1.0) 23,775 6.7 Interest (expense) income, net (72) 0.0 299 0.2 (119) - 779 0.2 Other expense, net (956) (0.5) (408) (0.2) (1,967) (0.5) (1,884) (0.5) (Loss) income before income taxes (1,167) (0.6) 10,203 5.5 (6,271) (1.5) 22,670 6.4 Provision for (benefit from) income taxes 2,520 1.2 1,904 1.0 (2,663) (0.6) 3,445 1.0 Consolidated net (loss) income$ (3,687) (1.8) %$ 8,299 4.5 %$ (3,608) (0.9) %$ 19,225 5.4 % Net loss attributable to non-controlling interest - - (932) (0.5) - - (1,842) (0.5) Net (loss) income attributable to Penumbra, Inc.$ (3,687) (1.8) %$ 9,231 5.0 %$ (3,608) (0.9) %$ 21,067 6.0 % Three Months EndedJune 30, 2022 Compared to the Three Months EndedJune 30, 2021 Revenue Three Months Ended June 30, Change 2022 2021 $ % (in thousands, except for percentages) Vascular$ 123,543 $ 100,684 $ 22,859 22.7 % Neuro 84,801 83,574 1,227 1.5 % Total$ 208,344 $ 184,258 $ 24,086 13.1 % Revenue increased$24.1 million , or 13.1%, to$208.3 million in the three months endedJune 30, 2022 , from$184.3 million in the three months endedJune 30, 2021 . Overall revenue growth is primarily due to an increase in sales of new and existing products within our vascular and neuro businesses. Revenue from our vascular products increased$22.9 million , or 22.7%, to$123.5 million in the three months endedJune 30, 2022 , from$100.7 million in the three months endedJune 30, 2021 . This increase was primarily attributable to increased revenue inChina andthe United States , sales of new products and further market penetration of our existing products. The increase in product sales was driven by sales of our vascular thrombectomy products and peripheral embolization products, which globally increased by 30.3% and 11.8%, respectively in the three months endedJune 30, 2022 . Prices for our vascular products remained substantially unchanged during the period. Revenue from our neuro products increased$1.2 million , or 1.5%, to$84.8 million in the three months endedJune 30, 2022 , from$83.6 million in the three months endedJune 30, 2021 . This increase in revenue was primarily attributable to sales of new products. The increase in sales of new products was driven by an increase in sales of our neuro access products, which globally increased by 14.1%, partially offset by a decrease in sales of our neuro embolization products and neuro thrombectomy products, which decreased by 22.9% and 0.6%, respectively in the three months endedJune 30, 2022 . Prices for our neuro products remained substantially unchanged during the period. 27
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Table of Contents Revenue by Geographic Area
The following table presents revenue by geographic area, based on our customers'
shipping destinations, for the three months ended
Three Months Ended June 30, Change 2022 2021 $ % (in thousands, except for percentages) United States$ 141,456 67.9 %$ 128,402 69.7 %$ 13,054 10.2 % International 66,888 32.1 % 55,856 30.3 % 11,032 19.8 % Total$ 208,344 100.0 %$ 184,258 100.0 %$ 24,086 13.1 %
Revenue from product sales in international markets increased
Gross Margin Three Months Ended June 30, Change 2022 2021 $ % (in thousands, except for percentages) Cost of revenue$ 74,309 $ 65,572 $ 8,737 13.3 % Gross profit$ 134,035 $ 118,686 $ 15,349 12.9 % Gross margin % 64.3 % 64.4 % Gross margin remained relatively flat, decreasing by 0.1 percentage points to 64.3% in the three months endedJune 30, 2022 , from 64.4% in the three months endedJune 30, 2021 . Gross margin is impacted by our ability to scale production capacity to support our expanding portfolio of products, which enabled us to navigate through some macroeconomic factors such as labor shortage, inflation and supply chain headwinds in the three months endedJune 30, 2022 , as well as our continued investments in COVID-19 related safety measures. We may see continued productivity improvements to offset higher inflation and supply chain pressures resulting in expansion of our gross margin in the future.
Research and Development ("R&D")
Three Months Ended June 30, Change 2022 2021 $ % (in thousands, except for percentages) R&D$ 19,559 $ 17,738 $ 1,821 10.3 % R&D as a percentage of revenue 9.4 % 9.6 % R&D expenses increased by$1.8 million , or 10.3%, to$19.6 million in the three months endedJune 30, 2022 , from$17.7 million in the three months endedJune 30, 2021 . The increase was primarily due to a$3.8 million increase in personnel-related expenses driven by an increase in headcount and a$0.6 million increase in infrastructure costs to support our growth, partially offset by a$2.6 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 are anticipating future payments 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. 28
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Sales, General and Administrative ("SG&A")
Three Months Ended June 30, Change 2022 2021 $ % (in thousands, except for percentages) SG&A$ 114,615 $ 90,636 $ 23,979 26.5 % SG&A as a percentage of revenue 55.0 % 49.2 % SG&A expenses increased by$24.0 million , or 26.5%, to$114.6 million in the three months endedJune 30, 2022 , from$90.6 million in the three months endedJune 30, 2021 . The increase was primarily due to a$8.7 million increase in personnel-related expenses driven by an increase in headcount and related expenses to support our growth, a$4.6 million increase in infrastructure costs, a$3.1 million increase in travel and other in-person related expenses, a$2.5 million increase in information technology expenses and other professional services primarily associated with our Enterprise Resource Planning ("ERP") system implementation, a$2.5 million increase in costs related to marketing events, and a$1.8 million amortization expense of finite lived intangible assets acquired in connection with theSixense acquisition. 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 in infrastructure to support the business. Provision for Income Taxes Three Months Ended June 30, Change 2022 2021 $ % (in thousands, except for percentages) Provision for income taxes$ 2,520 $ 1,904 $ 616 32.4 % Effective tax rate (215.9) % 18.7 % Our provision for income taxes was$2.5 million for the three months endedJune 30, 2022 , which was primarily due to tax deficiencies (shortfalls) expenses from stock-based compensation attributable to ourU.S. jurisdiction as a result of stock price fluctuation, offset by tax benefits attributable to our worldwide losses. Our provision for income taxes was$1.9 million for the three months endedJune 30, 2021 , which was primarily due to tax expenses attributable to our worldwide profits, offset by excess tax benefit from stock-based compensation attributable to ourU.S. jurisdiction. The effective tax rate was (215.9)% for the three months endedJune 30, 2022 , compared to 18.7% for the three months endedJune 30, 2021 . Our change in effective tax rate was primarily attributable to large tax expenses over relatively small worldwide losses for the three months endedJune 30, 2022 , when compared to small tax expenses over relatively large worldwide profits for the three months endedJune 30, 2021 . Six Months EndedJune 30, 2022 Compared to the Six Months EndedJune 30, 2021 Revenue Six Months Ended June 30, Change 2022 2021 $ % (in thousands, except for percentages) Vascular$ 246,352 $ 189,849 $ 56,503 29.8 % Neuro 165,887 163,613 2,274 1.4 % Total$ 412,239 $ 353,462 $ 58,777 16.6 % Revenue increased$58.8 million , or 16.6%, to$412.2 million in the six months endedJune 30, 2022 , from$353.5 million in the six months endedJune 30, 2021 . Overall revenue growth is primarily due to an increase in sales of new and existing products within our vascular and neuro businesses. Revenue from our vascular products increased$56.5 million , or 29.8%, to$246.4 million in the six months endedJune 30, 2022 , from$189.8 million in the six months endedJune 30, 2021 . This increase was driven by sales of our vascular thrombectomy products and peripheral embolization products, which globally increased by 36.5% and 19.5%, respectively, in the six months endedJune 30, 2022 . These increases were primarily due to higher sales volume as a result of sales of new products and further market penetration of our existing products. Prices for our vascular products remained substantially unchanged during the period. 29
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Revenue from our neuro products increased$2.3 million , or 1.4%, to$165.9 million in the six months endedJune 30, 2022 , from$163.6 million in the six months endedJune 30, 2021 . This increase in revenue from our neuro products was primarily attributable to increased revenue inChina andthe United States , 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 which globally increased by 7.6%, partially offset by a decrease in sales of our neuro embolization and neuro thrombectomy products of 15.0% and 0.9%, respectively, in the six months endedJune 30, 2022 . 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 six months ended
Six Months Ended June 30, Change 2022 2021 $ % (in thousands, except for percentages) United States$ 285,764 69.3 %$ 248,472 70.3 %$ 37,292 15.0 % International 126,475 30.7 % 104,990 29.7 % 21,485 20.5 % Total$ 412,239 100.0 %$ 353,462 100.0 %$ 58,777 16.6 % Revenue from sales in international markets increased$21.5 million , or 20.5%, to$126.5 million in the six months endedJune 30, 2022 , from$105.0 million in the six months endedJune 30, 2021 . Revenue from international sales represented 30.7% and 29.7% of our total revenue for the six months endedJune 30, 2022 and 2021, respectively. Gross Margin Six Months Ended June 30, Change 2022 2021 $ % (in thousands, except for percentages) Cost of revenue$ 150,786 $ 123,439 $ 27,347 22.2 % Gross profit$ 261,453 $ 230,023 $ 31,430 13.7 % Gross margin % 63.4 % 65.1 % Gross margin decreased 1.7 percentage points to 63.4% in the six months endedJune 30, 2022 , from 65.1% in the six months endedJune 30, 2021 , primarily due to higher labor and logistics costs as a result of manufacturing transfer activities and higher labor absenteeism due to the Omicron variant during the three months endedMarch 31, 2022 . Gross margin is impacted by our ability to scale production capacity to support our expanding portfolio of products as well as our continued investments in COVID-19 related safety measures. We may see continued productivity improvements to offset higher inflation and supply chain pressures resulting in expansion of our gross margin in the future.
Research and Development ("R&D")
Six Months Ended June 30, Change 2022 2021 $ % (in thousands, except for percentages) R&D$ 40,123 $ 35,814 $ 4,309 12.0 % R&D as a percentage of revenue 9.7 % 10.1 % R&D expenses increased by$4.3 million , or 12.0%, to$40.1 million in the six months endedJune 30, 2022 , from$35.8 million in the six months endedJune 30, 2021 . The increase was primarily due to a$8.0 million increase in personnel-related expenses driven by an increase in headcount and a$1.3 million increase in infrastructure costs to support our growth, partially offset by a$5.4 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 are anticipating future payments 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. 30
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Sales, General and Administrative (SG&A)
Six Months Ended June 30, Change 2022 2021 $ % (in thousands, except for percentages) SG&A$ 225,515 $ 170,434 $ 55,081 32.3 % SG&A as a percentage of revenue 54.7 % 48.2 % SG&A expenses increased by$55.1 million , or 32.3%, to$225.5 million in the six months endedJune 30, 2022 , from$170.4 million in the six months endedJune 30, 2021 . The increase was primarily due to a$23.3 million increase in personnel-related expense driven by an increase in headcount and related expenses to support our growth, a$7.9 million increase in travel and other in-person expenses, a$7.7 million increase in infrastructure costs, a$6.9 million increase in cost related to marketing events, a$4.2 million increase in information technology expenses and other professional services primarily associated with our ERP system implementation, and a$3.5 million amortization expense of finite lived intangible assets acquired in connection with theSixense acquisition. 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 in infrastructure to support the business.
(Benefit from) Provision For Income Taxes
Six Months Ended June 30, Change 2022 2021 $ % (in thousands, except for percentages) (Benefit from) provision for income taxes$ (2,663) $ 3,445 $ (6,108) (177.3) % Effective tax rate 42.5 % 15.2 % Our benefit from income taxes was$2.7 million for the six months endedJune 30, 2022 , which was primarily due to tax benefits attributable to our worldwide losses, offset by tax deficiencies (shortfalls) expenses from stock-based compensation attributable to ourU.S. jurisdiction as a result of stock price fluctuation. Our provision for income taxes was$3.4 million for the six months endedJune 30, 2021 , which was primarily due to tax expenses attributable to our worldwide profits, offset by excess tax benefits from stock-based compensation attributable to ourU.S. jurisdiction. The effective tax rate was 42.5% for the six months endedJune 30, 2022 , compared to 15.2% for the six months endedJune 30, 2021 . Our change in effective tax rate was primarily attributable to large tax benefits over relatively small worldwide losses for the six months endedJune 30, 2022 , when compared to small tax expenses over relatively large worldwide profits for the six months endedJune 30, 2021 . 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 expenses or benefits related to stock-based compensation. Our income tax provision can be volatile as the amount of excess tax expenses or benefits 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 underU.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.
Liquidity and Capital Resources
As ofJune 30, 2022 , we had$572.4 million in working capital, which included$58.2 million in cash and cash equivalents and$146.1 million in marketable investments. As ofJune 30, 2022 , we held approximately 26.0% of our cash and cash equivalents in foreign entities. 31
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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 during the COVID-19 pandemic, onApril 24, 2020 we entered into a Credit Agreement (the "Credit Agreement") withJPMorgan Chase Bank, N.A ., as administrative agent and lender, andBank of America, N.A . andCitibank, N.A . as lenders. The Credit Agreement is secured and provides for up to$100 million in available revolving borrowing capacity with an option, subject to certain conditions, for us to increase the aggregate borrowing capacity to up to$150 million , and was set to mature onApril 23, 2021 . During the three months endedMarch 31, 2021 , we entered into an amended one-year credit agreement withJPMorgan Chase Bank, N.A ., as administrative agent and lender, andBank of America, N.A . andCitibank, N.A . as lenders. The amended Credit Agreement extended the maturity date fromApril 23, 2021 toFebruary 21, 2022 and had substantially the same terms and conditions as the prior credit agreement with certain changes including the exclusion of certain one-time charges and expenses incurred during the fiscal quarters endedSeptember 30, 2020 andDecember 31, 2020 from the calculation of the financial covenants, reductions in interest rate floors applicable to revolving loans and other changes to borrowing mechanics under the Credit Agreement. In the first quarter of 2022, the Company entered into a further amended one-year credit agreement withJPMorgan Chase Bank, N.A ., as administrative agent and lender, andBank of America, N.A . andCitibank, N.A . as lenders. The amended Credit Agreement extended the maturity date fromFebruary 21, 2022 toFebruary 17, 2023 and has substantially the same terms and conditions as the prior credit agreement with certain changes to the reference benchmark interest rates, applicable margins and borrowing mechanics under the Credit Agreement, having the overall effect of lowering the interest rates payable by the Company on amounts borrowed under the Credit Agreement, and a reduction of the commitment fee payable on the average daily unused amount under the Credit Agreement to 0.25% per annum. 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 our 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.
While we have strengthened our liquidity position, we cannot reliably estimate the extent to which the COVID-19 pandemic may impact our cash flow from operations in the third quarter and beyond.
The following table summarizes our cash and cash equivalents, marketable investments and selected working capital data as ofJune 30, 2022 andDecember 31, 2021 : June 30, 2022 December 31, 2021 (in thousands) Cash and cash equivalents$ 58,234 $ 59,379 Marketable investments 146,135 195,496 Accounts receivable, net 187,389 133,940 Accounts payable 23,096 13,421 Accrued liabilities 111,405 99,796 Working capital(1) 572,357 558,277
(1)Working capital consists of total current assets less total current liabilities.
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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: Six Months EndedJune 30, 2022 2021
(in thousands) Cash and cash equivalents and restricted cash at beginning of period
$ 59,379 $ 69,670 Net cash used in operating activities (44,089) (17,678) Net cash provided by investing activities 36,371 29,435 Net cash provided by financing activities 6,490 559
Cash and cash equivalents and restricted cash at end of period 58,234
82,277
Net cash used in operating activities consists primarily of consolidated net income adjusted for certain non-cash items (including depreciation and amortization, stock-based compensation expense, inventory write-downs, and changes in deferred tax balances), and the effect of changes in working capital and other activities. Net cash used in operating activities was$44.1 million during the six months endedJune 30, 2022 and consisted of consolidated net loss of$3.6 million and non-cash items of$27.4 million , offset by net changes in operating assets and liabilities of$67.9 million . The change in operating assets and liabilities includes an increase in accounts receivable of$54.3 million due to timing of receipt of payment, an increase in inventories of$36.1 million to support our growth, and an increase in prepaid expenses and other current and non-current assets of$2.5 million . This was partially offset by an increase in accrued expenses and other non-current liabilities of$15.7 million , an increase in accounts payable of$9.0 million , and proceeds of$0.2 million received related to lease incentives from operating leases. Net cash used in operating activities was$17.7 million during the six months endedJune 30, 2021 and consisted of consolidated net income of$19.2 million and non-cash items of$29.1 million , offset by net changes in operating assets and liabilities of$66.0 million . The change in operating assets and liabilities includes an increase in inventories of$41.5 million to support our growth, an increase in accounts receivable of$22.9 million , and an increase in prepaid expenses and other current and non-current assets of$5.8 million . This was partially offset by an increase in accrued expenses and other non-current liabilities of$5.0 million .
Net Cash Provided By Investing Activities
Net cash provided by investing activities relates primarily to proceeds from maturities of marketable investments, net of purchases, and capital expenditures.
Net cash provided by investing activities was
Net cash provided by investing activities was$29.4 million during the six months endedJune 30, 2021 and primarily consisted of proceeds from maturities and sales of marketable investments, net purchases, of$36.9 million , partially offset by capital expenditures of$7.3 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. 33
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Net cash provided by financing activities was$6.5 million during the six months endedJune 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$4.6 million . This was partially offset by$5.1 million of payments of employee taxes related to vested restricted stock units and$0.9 million in payments towards finance leases. Net cash provided by financing activities was$0.6 million during the six months endedJune 30, 2021 and primarily consisted of proceeds from the issuance of common stock under our employee stock purchase plan of$7.4 million and proceeds from exercises of stock options of$1.0 million . This was partially offset by$7.0 million of payments of employee taxes related to vested restricted stock and restricted stock units and$0.7 million in payments towards finance leases.
Contractual Obligations and Commitments
During the six months endedJune 30, 2022 , the Company entered into new leases and modified existing leases for certain properties. See Note "9. Leases" to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding our future lease obligations. There have been no other material changes to our contractual obligations and commitments as ofJune 30, 2022 from those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Critical Accounting Policies and Estimates
We have prepared our financial statements in accordance withU.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 endedDecember 31, 2021 .
Recently Issued Accounting Standards
For information with respect to recently issued accounting standards and the impact of these standards on our condensed consolidated financial statements, see Note "2. Summary of Significant Accounting Policies" to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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