PENUMBRA, INC. 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, 2019 , included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission ("SEC") onFebruary 26, 2020 . This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In some cases, you can identify these statements by forward-looking words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate," or "continue," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results 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, 2019 . 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. We believe that the cost-effectiveness of our products is attractive to our customers. Since our founding in 2004, we have invested heavily in our product development capabilities in our major markets: neuro and vascular. We have successfully developed, obtained regulatory clearance or approval for, and introduced products into the neurovascular market since 2007, vascular market since 2013 and neurosurgical market since 2014, respectively. We continue to expand our portfolio of product offerings, while developing and iterating on our currently available products. We expect to continue to develop and build our portfolio of products, including our thrombectomy, embolization and access technologies. Generally, when we introduce a next generation product or a new product designed to replace a current product, sales of the earlier generation product or the product replaced decline. Our research and development activities are centered around the development of new products and clinical activities designed to support our regulatory submissions and demonstrate the effectiveness of our products. To address the challenging and significant clinical needs of our two key markets, we developed products that fall into the following broad product offering families: Our neuro products fall into five broad product families: •Neuro thrombectomy - Penumbra System, including Penumbra 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,DDC and PX SLIM •Neurosurgical - Artemis Neuro Evacuation Device •Rehabilitation Tools - REAL Immersive System 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 •Vascular embolization - Ruby Coil System, LANTERN Delivery Microcatheter and the POD System (POD and POD Packing Coil) 25 -------------------------------------------------------------------------------- Table of Contents We sell our products to hospitals primarily through our direct sales organization inthe United States , most ofEurope ,Canada andAustralia , as well as through distributors in select international markets. In the six months endedJune 30, 2020 and 2019, 28.3% and 35.7% 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$242.4 million and$262.6 million for the six months endedJune 30, 2020 and 2019, respectively, a decrease of$20.2 million . We generated an operating loss of$17.0 million and operating income of$24.0 million for the six months endedJune 30, 2020 and 2019, 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 that need to continue during the COVID-19 outbreak, 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 outbreak. 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 outbreak 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 are undertaking 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 meeting demand for our essential devices, we have implemented social distancing and other measures to protect the health and safety of our employees, which have reduced, and may continue to reduce, our manufacturing capacity. •In order to strengthen our liquidity position, we issued and sold an aggregate of 865,963 shares of our common stock at a public offering price of$166.00 per share, less the underwriters' discounts and commissions, pursuant to an underwritten public offering inJune 2020 . We received approximately$134.8 million in net cash proceeds from the offering after deducting underwriting discounts and commissions of$8.6 million and other offering expenses of$0.4 million . •We further strengthened our liquidity position by entering into a Credit Agreement (the "Credit Agreement") onApril 24, 2020 , withJPMorgan Chase Bank, N.A ., as administrative agent and lender, andBank of America, N.A . andCitibank, N.A . as lenders. The Credit Agreement is secured and provides for up to$100 million in available revolving borrowing capacity with an option, subject to certain conditions, for us to increase the aggregate borrowing capacity to up to$150 million , and matures onApril 23, 2021 . This revolving line of credit provides access to capital beyond the$278.3 million in cash, cash equivalents and marketable investments on our balance sheet as ofJune 30, 2020 , and we believe this will allow us to both navigate the current environment and emerge in a strong position after the pandemic. As ofJune 30, 2020 , there were no borrowings outstanding under the Credit Agreement. •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 saw recent positive trends in our business beginning in May and continuing throughJune 2020 , after experiencing negative impacts on business trends in April due to the COVID-19 outbreak, the general impact of COVID-19 on our business has been negative and we are unable to reliably predict the full impact that COVID-19 will have on our business due to numerous uncertainties, including the severity and duration of the outbreak, additional actions that may be taken by governmental authorities in response to the outbreak, the impact of the outbreak 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 II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q. 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. 26 -------------------------------------------------------------------------------- Table of Contents 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 outbreak 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 physicianswho use our products. •We must continue to successfully introduce new products that gain acceptance with specialist physicians and successfully transition from existing products to new products, ensuring adequate supply. In addition, as we introduce new products and expand our production capacity, we anticipate additional personnel will be hired and trained to build our inventory of components and finished goods in advance of sales, which may cause quarterly fluctuations in our operating results and financial condition. •Publications of clinical results by us, our competitors and other third parties can have a significant influence on whether, and the degree to which, our products are used by specialist physicians and the procedures and treatments those physicians choose to administer for a given condition. •The specialist physicianswho use our products may not perform procedures during certain times of the year, such as those periods when they are at major medical conferences or are away from their practices for other reasons, the timing of which occurs irregularly during the year and from year to year. •Most of our sales outside ofthe United States are denominated in the local currency of the country in which we sell our products. As a result, our revenue from international sales can be significantly impacted by fluctuations in foreign currency exchange rates. •The availability and levels of reimbursement within the relevant healthcare payment system for healthcare providers for procedures in which our products are used. In addition, we have experienced and expect to continue to experience meaningful variability in our quarterly revenue, gross profit and gross margin percentage as a result of a number of factors, including, but not limited to: the impact of COVID-19, the number of available selling days, which can be impacted by holidays; the mix of products sold; the geographic mix of where products are sold; the demand for our products and the products of our competitors; the timing of or failure to obtain regulatory approvals or clearances for products; increased competition; the timing of customer orders; inventory write-offs due to obsolescence; costs, benefits and timing of new product introductions; costs, benefits and timing of the acquisition and integration of businesses and product lines we may acquire; the availability and cost of components and raw materials; and fluctuations in foreign currency exchange rates. We may experience quarters in which we have significant revenue growth sequentially followed by quarters of moderate or no revenue growth. Additionally, we may experience quarters in which operating expenses, in particular research and development expenses, fluctuate depending on the stage and timing of product development. Components of Results of Operations Revenue. We sell our 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. 27 -------------------------------------------------------------------------------- Table of Contents 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 inAlameda andRoseville, California . Operating Expenses Research and Development ("R&D"). R&D expenses primarily consist of product development, clinical and regulatory expenses, materials, depreciation and other costs associated with the development of our products. R&D expenses also include salaries, benefits and other related costs, including stock-based compensation, for personnel and consultants. We 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 and information technology and human resource activities. Our SG&A expenses also include marketing trials, medical education, training, commissions, generally based on sales, to direct sales representatives, amortization of acquired intangible assets and acquisition-related costs. (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. 28 -------------------------------------------------------------------------------- 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 EndedJune 30 , Six Months EndedJune 30, 2020 2019 2020 2019 (in thousands, except for percentages) (in thousands, except for percentages) Revenue$ 105,109 100.0 %$ 134,201 100.0 %$ 242,438 100.0 %$ 262,640 100.0 % Cost of revenue 40,179 38.2 40,273 30.0 89,499 36.9 84,802 32.3 Gross profit 64,930 61.8 93,928 70.0 152,939 63.1 177,838 67.7 Operating expenses: Research and development 22,725 21.6 13,462 10.0 35,671 14.7 25,129 9.6 Sales, general and administrative 59,854 56.9 67,665 50.4 134,307 55.4 128,756 49.0 Total operating expenses 82,579 78.6 81,127 60.5 169,978 70.1 153,885 58.6 (Loss) income from operations (17,649) (16.8) 12,801 9.5 (17,039) (7.0) 23,953 9.1 Interest income, net 108 0.1 784 0.6 407 0.2 1,517 0.6 Other income (expense), net 511 0.5 (71) (0.1) (1,144) (0.5) (47) - (Loss) income before income taxes (17,030) (16.2) 13,514 10.1 (17,776) (7.3) 25,423 9.7 Benefit from income taxes (4,129) (3.9) (2,735) (2.0) (5,763) (2.4) (1,280) (0.5) Consolidated net (loss) income$ (12,901) (12.3) %$ 16,249 12.1 %$ (12,013) (5.0) %$ 26,703 10.2 % Net loss attributable to non-controlling interest (941) (0.9) (339) (0.3) (1,478) (0.6) (583) (0.2) Net (loss) income attributable to Penumbra, Inc.$ (11,960) (11.4) %$ 16,588 12.4 %$ (10,535) (4.3) %$ 27,286 10.4 % Three Months EndedJune 30, 2020 Compared to the Three Months EndedJune 30, 2019 Revenue Three Months Ended June 30, Change 2020 2019 $ % (in thousands, except for percentages) Neuro$ 58,837 $ 81,547 $ (22,710) (27.8) % Vascular 46,272 52,654 (6,382) (12.1) % Total$ 105,109 $ 134,201 $ (29,092) (21.7) % Revenue decreased$29.1 million , or 21.7%, to$105.1 million in the three months endedJune 30, 2020 , from$134.2 million in the three months endedJune 30, 2019 . The overall decrease in our revenue is primarily due to a decline in our products sales within our neuro and vascular business as a result of the negative impact of the COVID-19 pandemic. Revenue from our neuro products decreased$22.7 million , or 27.8%, to$58.8 million in the three months endedJune 30, 2020 , from$81.5 million in the three months endedJune 30, 2019 . This was primarily attributable to decreased sales of our neuro thrombectomy products and neuro embolization products, which globally declined by 32.7% and 21.3% in the three months endedJune 30, 2020 , respectively. These decreases were primarily due to lower sales volume as a result of hospitals performing fewer procedures as well as a decline in international distribution sales, both primarily resulting from the response to the COVID-19 pandemic. Prices for our neuro products remained substantially unchanged during the period. Revenue from our vascular products decreased$6.4 million , or 12.1%, to$46.3 million in the three months endedJune 30, 2020 , from$52.7 million in the three months endedJune 30, 2019 . This decrease was driven by a decline in sales of our vascular embolization products and vascular thrombectomy products, which globally declined by 18.9% and 5.0% in the three months endedJune 30, 2020 , respectively. Similar to our neuro business, these decreases were primarily due to lower sales volume as a result of hospitals performing fewer procedures as well as a decline in international distribution sales, both 29 -------------------------------------------------------------------------------- Table of Contents primarily resulting from the response to the COVID-19 pandemic. Prices for our vascular products remained substantially unchanged during the period. Although we saw recent positive trends in our business in the US and other parts of the world beginning in May and continuing throughJune 2020 after experiencing negative impacts on business trends in April due to the COVID-19 outbreak, the general impact of COVID-19 on our business has been negative and we may continue to observe a negative impact on revenue in the third quarter due to COVID-19, particularly for our international sales, as our distributors try to navigate the pandemic and its impact on their own businesses. As a consequence, we cannot reliably estimate the extent to which the COVID-19 pandemic may negatively impact our revenue in the third quarter and beyond. Revenue by Geographic Area The following table presents revenue by geographic area, based on our customers' shipping destinations, for the three months endedJune 30, 2020 and 2019: Three Months Ended June 30, Change 2020 2019 $ % (in thousands, except for percentages) United States$ 78,043 74.2 %$ 86,374 64.4 %$ (8,331) (9.6) % International 27,066 25.8 % 47,827 35.6 % (20,761) (43.4) % Total$ 105,109 100.0 %$ 134,201 100.0 %$ (29,092) (21.7) % Revenue from product sales in international markets decreased$20.8 million , or 43.4%, to$27.1 million in the three months endedJune 30, 2020 , from$47.8 million in the three months endedJune 30, 2019 . Revenue from international sales represented 25.8% and 35.6% of our total revenue for the three months endedJune 30, 2020 and 2019, respectively. Gross Margin Three Months Ended June 30, Change 2020 2019 $ % (in thousands, except for percentages) Cost of revenue$ 40,179 $ 40,273 $ (94) (0.2) % Gross profit$ 64,930 $ 93,928 $ (28,998) (30.9) % Gross margin % 61.8 % 70.0 % Gross margin decreased 8.2 percentage points to 61.8% in the three months endedJune 30, 2020 , from 70.0% in the three months endedJune 30, 2019 . The decrease in gross margin was primarily driven by a decline in revenue in the second quarter of 2020, primarily due to the impacts of COVID-19 discussed above, and by additional period expense incurred as we made the decision to continue to pay all of our direct manufacturing workforce full-time wages while reducing the labor capacity per shift to implement social distancing and other protective measures for the health and safety of our employees. Accordingly, certain labor costs were expensed as incurred in the three months endedJune 30, 2020 . We may observe a decrease in overall demand for our products in the third quarter of 2020 due to the impact of the COVID-19 pandemic. As a result, our gross margin will be lower as a function of volume absorption and continued investments in ramping up our infrastructure. However, we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our gross margin in the third quarter and beyond due to numerous uncertainties with respect to the COVID-19 pandemic and response thereto. Research and Development ("R&D") Three Months Ended June 30, Change 2020 2019 $ % (in thousands, except for percentages) R&D$ 22,725 $ 13,462 $ 9,263 68.8 % R&D as a percentage of revenue 21.6 % 10.0 % R&D expenses increased by$9.3 million , or 68.8%, to$22.7 million in the three months endedJune 30, 2020 , from$13.5 million in the three months endedJune 30, 2019 . The increase was primarily due to a$5.6 million increase in product development and testing costs. 30 -------------------------------------------------------------------------------- Table of Contents We have made investments, and plan to continue to make investments, in the development of our products, which may include hiring additional research and development employees. In addition, we have experienced in the past, and may continue to experience in the future, variability in expenses incurred due to the timing and costs of clinical trials and product development. Sales, General and Administrative ("SG&A") Three Months Ended June 30, Change 2020 2019 $ % (in thousands, except for percentages) SG&A$ 59,854 $ 67,665 $ (7,811) (11.5) % SG&A as a percentage of revenue 56.9 %
50.4 %
SG&A expenses decreased by$7.8 million , or 11.5%, to$59.9 million in the three months endedJune 30, 2020 , from$67.7 million in the three months endedJune 30, 2019 . The decrease was primarily due to a$5.1 million decrease in cost related to marketing events, a$4.6 million decrease in travel-related expenses, partially offset by a$1.1 million increase in infrastructure cost, and a$0.9 million increase in personnel-related expense. Our operating expenses in the second quarter of 2020 reflected reductions in expenditures from activities restricted by COVID-19, such as travel and entertainment expenses. We expect additional reductions in expenses related to the current environment and we have implemented other cost control measures. While certain spending may continue to decrease in the third quarter of 2020 as a result of the pandemic and such measures, we expect an increase in sales-related activities and we will continue to prioritize our investments in production capacity and flexibility, commercial channels, and preparation for new product launches to support our customers. Benefit from Income Taxes Three Months Ended June 30, Change 2020 2019 $ % (in thousands, except for percentages) Benefit from income taxes$ (4,129) $ (2,735) $ (1,394) 51.0 % Effective tax rate 24.2 % (20.2) % During interim periods, we generally utilize the estimated annual effective tax rate ("AETR") method which involves the use of forecasted information. However, for the three months endedJune 30, 2020 , the estimated AETR method yielded unconventional results and would not provide a reliable estimate of income taxes. Therefore, we determined that using the discrete effective tax rate method, which involves the use of year-to-date information, would provide a more reliable estimate of income taxes for the current period. Our benefit from income taxes was$4.1 million for the three months endedJune 30, 2020 , which was primarily due to tax benefits attributable to our worldwide losses as a result of the COVID-19 pandemic impact and excess tax benefits from stock-based compensation attributable to ourU.S. jurisdiction. The effective tax rate was 24.2% for the three months endedJune 30, 2020 . Our benefit from income taxes was$2.7 million for the three months endedJune 30, 2019 , which was primarily due to excess tax benefits from stock-based compensation attributable to ourU.S. jurisdiction, offset by income taxes attributable to our worldwide profits. The effective tax rate was (20.2)% for the three months endedJune 30, 2019 . Using the discrete method instead of the AETR method to compute income taxes for the three months endedJune 30, 2020 achieved a more reasonable comparison of the effective tax rates when compared to the three months endedJune 30, 2019 . Our change in effective tax rate was primarily attributable to larger tax benefits over worldwide losses for the three months endedJune 30, 2020 , when compared to smaller tax benefits over worldwide profits for the three months endedJune 30, 2019 . 31 -------------------------------------------------------------------------------- Table of Contents Six Months EndedJune 30, 2020 Compared to the Six Months EndedJune 30, 2019 Revenue Six Months Ended June 30, Change 2020 2019 $ % (in thousands, except for percentages) Neuro$ 136,913 $ 163,018 $ (26,105) (16.0) % Vascular 105,525 99,622 5,903 5.9 % Total$ 242,438 $ 262,640 $ (20,202) (7.7) % Revenue decreased$20.2 million , or 7.7%, to$242.4 million in the six months endedJune 30, 2020 , from$262.6 million in the six months endedJune 30, 2019 . The decline in sales of products within our neuro business drove the overall change in revenue, which was partially offset by sales of new and existing products within our vascular business. Revenue from our neuro products decreased$26.1 million , or 16.0%, to$136.9 million in the six months endedJune 30, 2020 , from$163.0 million in the six months endedJune 30, 2019 . This was primarily attributable to decreased sales of our neuro thrombectomy products and neuro embolization products, which globally declined by 20.7% and 13.2% in the six months endedJune 30, 2020 , respectively. This decrease was primarily attributable to decreased sales inJapan as a result of reimbursement changes and on-going discussions with our distributor partner, as well as to lower sales volume as a result of hospitals performing fewer procedures as well as a decline in international distribution sales, both primarily as well as a decline in international distribution sales, both primarily resulting from the response to the COVID-19 pandemic. Prices for our neuro products remained substantially unchanged during the period. Revenue from our vascular products increased$5.9 million , or 5.9%, to$105.5 million in the six months endedJune 30, 2020 , from$99.6 million in the six months endedJune 30, 2019 . This increase was driven by sales of our vascular thrombectomy products, which globally increased by 11.4% in the six months endedJune 30, 2020 . This increase was primarily due to higher sales volume as a result of hospitals performing more procedures using our products prior to the COVID-19 pandemic, partially offset by hospitals performing fewer procedures as well as a decline in international distribution sales, both primarily resulting from the response to the COVID-19 pandemic. Prices for our vascular products remained substantially unchanged during the period. Revenue by Geographic Area The following table presents revenue by geographic area, based on our customer's shipping destination, for the six months endedJune 30, 2020 and 2019: Six Months Ended June 30, Change 2020 2019 $ % (in thousands, except for percentages) United States$ 173,817 71.7 %$ 168,885 64.3 %$ 4,932 2.9 % Other International 68,621 28.3 % 93,755 35.7 % (25,134) (26.8) % Total$ 242,438 100.0 %$ 262,640 100.0 %$ (20,202) (7.7) % Revenue from sales in international markets decreased$25.1 million , or 26.8%, to$68.6 million in the six months endedJune 30, 2020 , from$93.8 million in the six months endedJune 30, 2019 . Revenue from international sales represented 28.3% and 35.7% of our total revenue for the six months endedJune 30, 2020 and 2019, respectively. Gross Margin Six Months Ended June 30, Change 2020 2019 $ % (in thousands, except for percentages) Cost of revenue$ 89,499 $ 84,802 $ 4,697 5.5 % Gross profit$ 152,939 $ 177,838 $ (24,899) (14.0) % Gross margin % 63.1 % 67.7 % Gross margin decreased 4.6 percentage points to 63.1% in the six months endedJune 30, 2020 , from 67.7% in the six months endedJune 30, 2019 . The decrease in gross margin was primarily driven by a decline in revenue in the six months endedJune 30, 2020 , primarily due to the impacts of COVID-19 discussed above, and by additional period expense incurred as 32 -------------------------------------------------------------------------------- Table of Contents we made the decision to continue to pay all of our direct manufacturing workforce full-time wages while reducing the labor capacity per shift to implement social distancing and other protective measures for the health and safety of our employees. Accordingly, certain labor costs were expensed as incurred in the six months endedJune 30, 2020 . We may observe a decrease in overall demand for our products in the third quarter of 2020 due to the impact of the COVID-19 pandemic. As a result, our gross margin will be lower as a function of volume absorption and continued investments in ramping up our infrastructure. However, we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our gross margin in the third quarter and beyond due to numerous uncertainties with respect to the COVID-19 pandemic and response thereto. Research and Development ("R&D") Six Months Ended June 30, Change 2020 2019 $ % (in thousands, except for percentages) R&D$ 35,671 $ 25,129 $ 10,542 42.0 % R&D as a percentage of revenue 14.7 % 9.6 % R&D expenses increased by$10.5 million , or 42.0%, to$35.7 million in the six months endedJune 30, 2020 , from$25.1 million in the six months endedJune 30, 2019 . The increase was primarily due to a$4.9 million increase in product development and testing costs, and a$2.7 million increase in personnel-related expenses primarily due to an increase in headcount to support our growth. We have made investments, and plan to continue to make investments, in the development of our products, which may include hiring additional research and development employees. In addition, we have experienced in the past, and may continue to experience in the future, variability in expenses incurred due to the timing and costs of clinical trials and product development. Sales, General and Administrative (SG&A) Six Months Ended June 30, Change 2020 2019 $ % (in thousands, except for percentages) SG&A$ 134,307 $ 128,756 $ 5,551 4.3 % SG&A as a percentage of revenue 55.4 % 49.0 % SG&A expenses increased by$5.6 million , or 4.3%, to$134.3 million in the six months endedJune 30, 2020 , from$128.8 million in the six months endedJune 30, 2019 . The increase was primarily due to a$9.3 million increase in personnel-related expense, a$2.9 million increase in infrastructure costs, partially offset by a$4.4 million decrease in cost related to marketing events, and a$4.4 million decrease in travel-related expenses. Our operating expenses in the six months endedJune 30, 2020 reflected reductions in expenditures from activities restricted by COVID-19, such as travel and entertainment expenses. We expect additional reductions in expenses related to the current environment and we have implemented other cost control measures. While certain spending may continue to decrease in the third quarter of 2020 as a result of the pandemic and such measures, we expect an increase in sales-related activities and we will continue to prioritize our investments in production capacity and flexibility, commercial channels, and preparation for new product launches to support our customers. Benefit from Income Taxes Six Months Ended June 30, Change 2020 2019 $ % (in thousands, except for percentages) Benefit from income taxes$ (5,763) $ (1,280) $ (4,483) 350.2 % Effective tax rate 32.4 % (5.0) % During interim periods, we generally utilize the estimated annual effective tax rate ("AETR") method which involves the use of forecasted information. However, for the six months endedJune 30, 2020 , the estimated AETR method yielded unconventional results and would not provide a reliable estimate of income taxes. Therefore, we determined that using the discrete effective tax rate method, which involves the use of year-to-date information, would provide a more reliable estimate of income taxes for the current period. 33 -------------------------------------------------------------------------------- Table of Contents Our benefit from income taxes was$5.8 million for the six months endedJune 30, 2020 , which was primarily due to tax benefits attributable to our worldwide losses as a result of the COVID-19 pandemic impact and excess tax benefits from stock-based compensation attributable to ourU.S. jurisdiction. The effective tax rate was 32.4% for the six months endedJune 30, 2020 . Our benefit from income taxes was$1.3 million for the six months endedJune 30, 2019 , which was primarily due to excess tax benefits from stock-based compensation attributable to ourU.S. jurisdiction, offset by income taxes attributable to our worldwide profits. The effective tax rate was (5.0)% for the six months endedJune 30, 2019 . Using the discrete method instead of the AETR method to compute income taxes for the six months endedJune 30, 2020 achieved a more reasonable comparison of the effective tax rates when compared to the six months endedJune 30, 2019 . Our change in effective tax rate was primarily attributable to larger tax benefits over worldwide losses for the six months endedJune 30, 2020 , when compared to smaller tax benefits over worldwide profits for the six months endedJune 30, 2019 . 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 attributable to our worldwide profits, and (3) discrete tax adjustments such as excess tax benefits related to stock-based compensation. Our income tax provision is subject to volatility as the amount of excess tax benefits can fluctuate from period to period based on the price of our stock, the volume of share-based grants settled or vested, and the fair value assigned to equity awards underU.S. GAAP. In addition, changes in tax law or our interpretation thereof, and changes to our valuation allowance could result with fluctuations in our effective tax rate. Liquidity and Capital Resources As ofJune 30, 2020 , we had$498.3 million in working capital, which included$134.4 million in cash and cash equivalents and$143.9 million in marketable investments. As ofJune 30, 2020 , we held approximately 11.0% of our cash and cash equivalents in foreign entities. InJune 2020 , we issued and sold an aggregate of 865,963 shares of our common stock at a public offering price of$166.00 per share, less the underwriters' discounts and commissions, pursuant to an underwritten public offering. We received approximately$134.8 million in net cash proceeds from the offering after deducting underwriting discounts and commissions of$8.6 million and other offering expenses of$0.4 million . We intend to use the net proceeds from the offering for general corporate purposes, including working capital, continued development of our products, including research and development and clinical trials, potential acquisitions and other business opportunities. Pending the use of the net proceeds from the offering, we are investing the net proceeds in investment grade, interest bearing securities. In addition to our existing cash and cash equivalents and marketable investment balances, our principal source of liquidity is our accounts receivable. In order to further strengthen our liquidity position and financial flexibility during the COVID-19 pandemic, onApril 24, 2020 we entered into a Credit Agreement (the "Credit Agreement") withJPMorgan Chase Bank, N.A ., as administrative agent and lender, andBank of America, N.A . andCitibank, N.A . as lenders. The Credit Agreement is secured and provides for up to$100 million in available revolving borrowing capacity with an option, subject to certain conditions, for the Company to increase the aggregate borrowing capacity to up to$150 million , and matures onApril 23, 2021 . 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 IT infrastructures and further expand into international markets. We may, however, require or elect to secure additional financing as we continue to execute our business strategy. If we require or elect to raise additional funds, we may do so through equity or debt financing, which may not be available on favorable terms, could result in dilution to our stockholders, could result in changes to our capital structure, and could require us to agree to covenants that limit our operating flexibility. As a result of the COVID-19 pandemic, we may experience reduced cash flow from operations in the third quarter of 2020 as a result of decreased revenues and potentially slower accounts receivable collections. Moreover, we are focused on ensuring that we have adequate supplies on hand given the potential disruption of the COVID-19 pandemic to our suppliers and their supply chain and, accordingly, we expect to continue to increase inventory during the third quarter of 2020 and beyond. However, we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our cash flow from operations in the third quarter and beyond. 34 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our cash and cash equivalents, marketable investments and selected working capital data as ofJune 30, 2020 andDecember 31, 2019 : June 30, 2020 December 31, 2019 (in thousands) Cash and cash equivalents$ 134,381 $ 72,779 Marketable investments 143,914 116,610 Accounts receivable, net 97,613 105,901 Accounts payable 14,432 15,111 Accrued liabilities 57,718 67,630 Working capital(1) 498,283 372,086 __________________ (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: Six Months Ended June 30, 2020 2019 (in thousands) Cash and cash equivalents and restricted cash at beginning of period$ 72,779 $ 67,850 Net cash used in operating activities (27,609) (165) Net cash (used in) provided by investing activities (44,507) 16,742 Net cash provided by (used in) financing activities 134,111 (7,018) Cash and cash equivalents and restricted cash at end of period 134,381 77,261Net Cash Used In Operating Activities 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$27.6 million during the six months endedJune 30, 2020 and consisted of consolidated net loss of$12.0 million and net changes in operating assets and liabilities of$34.5 million , offset by non-cash items of$18.9 million . The change in operating assets and liabilities includes an increase in inventories of$31.9 million , and an increase in prepaid expenses and other current and non-current assets of$4.3 million . This was partially offset by an decrease in accounts receivable of$6.8 million and other non-current liabilities of$5.1 million . Net cash used in operating activities was$0.2 million during the six months endedJune 30, 2019 and consisted of a consolidated net income of$26.7 million and non-cash items of$14.5 million , offset by net changes in operating assets and liabilities of$41.4 million . The change in operating assets and liabilities includes an increase in inventories of$18.5 million to support our revenue growth, an increase in accounts receivable of$17.6 million , an increase in prepaid expenses and other current and non-current assets of$3.8 million and a decrease in accrued expenses and other non-current liabilities of$1.9 million , partially offset by an increase in accounts payable of$0.4 million as a result of growth in our business activities.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 and by capital expenditures. Net cash used in investing activities was$44.5 million during the six months endedJune 30, 2020 and consisted of purchases of marketable investments, net of proceeds from maturities and sales, of$25.6 million , and capital expenditures of$16.9 million . Net cash provided by investing activities was$16.7 million during the six months endedJune 30, 2019 and consisted of proceeds from maturities and sales of marketable investments, net of purchases, of$24.0 million , partially offset by capital expenditures of$6.2 million . 35 -------------------------------------------------------------------------------- Table of Contents Net Cash Provided By (Used In) Financing Activities Net cash provided by (used in) 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 certain acquisition-related payments, and proceeds from exercises of stock options and issuance of common stock. Net cash provided by financing activities was$134.1 million during the six months endedJune 30, 2020 and primarily consisted of proceeds from the issuance of common stock net of issuance cost of$134.8 million , proceeds from the issuance of common stock under our employee stock purchase plan of$5.9 million , and proceeds from exercises of stock options of$1.2 million . This was partially offset by$3.9 million of payments of employee taxes related to vested restricted stock and restricted stock units,$3.0 million in payments towards finance leases, and$0.7 million related to contingent consideration payments made in the first quarter of 2020 in connection with our acquisition of Crossmed S.p.a. in 2017. Net cash used in financing activities was$7.0 million during the six months endedJune 30, 2019 and primarily consisted of$13.4 million of payments of employee taxes related to vested restricted stock and restricted stock units and$1.2 million primarily related to contingent consideration payments made in the first quarter of 2019 in connection with our acquisition of Crossmed S.p.a. in 2017. This was partially offset by proceeds from the issuance of common stock under our employee stock purchase plan of$4.8 million and proceeds from stock option exercises of$2.3 million . Contractual Obligations and Commitments There have been no material changes to our contractual obligations and commitments as ofJune 30, 2020 from those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Off-Balance Sheet Arrangements We do not have any significant off-balance sheet arrangements or holdings in variable interest entities. 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, 2019 . 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. 36
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