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, 2020 , included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission ("SEC") onFebruary 23, 2021 . 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, 2020 . 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 •Virtual Reality Platform - 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 and Lightning, our next-generation aspiration system for peripheral thrombectomy 23
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•Peripheral embolization - RUBY Coil System, LANTERN Delivery Microcatheter and the POD System (POD and POD Packing Coil) We support healthcare providers, hospitals and clinics in more than 100 countries. In the nine months endedSeptember 30, 2021 and 2020, 29.5% and 28.0% 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$543.6 million and$393.5 million for the nine months endedSeptember 30, 2021 and 2020, respectively, an increase of$150.1 million . We generated operating income of$32.6 million and an operating loss of$37.2 million for the nine months endedSeptember 30, 2021 and 2020, 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 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. •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$266.9 million in cash, cash equivalents and marketable investments on our balance sheet as ofSeptember 30, 2021 , 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 has substantially the same terms and conditions as the prior credit agreement with certain changes including the exclusion of certain one-time charges and expenses incurred during the fiscal quarters endedSeptember 30, 2020 andDecember 31, 2020 from the calculation of the financial covenants, reductions in interest rate floors applicable to revolving loans and other changes to borrowing mechanics under the Credit Agreement. As ofSeptember 30, 2021 , the Company was in compliance with the requirements in the amended Credit Agreement. As ofSeptember 30, 2021 , 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 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 24
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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, 2020 . 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 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. Due to the impact of the COVID-19 pandemic on our business during the quarter endedSeptember 30, 2020 , comparisons of our results of operations for the three and nine months endedSeptember 30, 2021 to the comparable period of the prior year may not be indicative of our performance in future periods as we saw an increase in elective procedures during the nine months endedSeptember 30, 2021 as COVID-19 vaccinations increased in theU.S. 25
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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. 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. 26
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Results of Operations
The following table sets forth the components of our condensed consolidated
statements of operations in dollars and as a percentage of revenue for the
periods presented:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands, except for percentages) (in thousands, except for percentages)
Revenue $ 190,117 100.0 % $ 151,076 100.0 % $ 543,579 100.0 % $ 393,514 100.0 %
Cost of revenue 70,205 36.9 60,153 39.8 193,644 35.6 149,652 38.0
Gross profit 119,912 63.1 90,923 60.2 349,935 64.4 243,862 62.0
Operating expenses:
Research and development 16,734 8.8 34,923 23.1 52,548 9.7 70,594 17.9
Sales, general and
administrative 94,397 49.7 76,158 50.4 264,831 48.7 210,465 53.5
Total operating expenses 111,131 58.5 111,081 73.5 317,379 58.4 281,059 71.4
Income (loss) from operations 8,781 4.6 (20,158) (13.3) 32,556 6.0 (37,197) (9.5)
Interest income, net 138 0.1 413 0.3 917 0.2 820 0.2
Other (expense) income, net (1,137) (0.6) 14 - (3,021) (0.6) (1,130) (0.3)
Income (loss) before income
taxes 7,782 4.1 (19,731) (13.1) 30,452 5.6 (37,507) (9.5)
(Benefit from) provision for
income taxes (249) (0.1) (9,855) (6.5) 3,196 0.6 (15,618) (4.0)
Consolidated net income (loss) $ 8,031 4.2 % $ (9,876) (6.5) % $ 27,256 5.0 % $ (21,889) (5.6) %
Net loss attributable to
non-controlling interest (819) (0.4) (1,061) (0.7) (2,661) (0.5) (2,539) (0.6)
Net income (loss) attributable
to Penumbra, Inc. $ 8,850 4.7 % $ (8,815) (5.8) % $ 29,917 5.5 % $ (19,350) (4.9) %
Three Months Ended September 30, 2021 Compared to the Three Months Ended
September 30, 2020
Revenue
Three Months Ended September 30, Change
2021 2020 $ %
(in thousands, except for percentages)
Vascular $ 105,465 $ 75,159 $ 30,306 40.3 %
Neuro 84,652 75,917 8,735 11.5 %
Total $ 190,117 $ 151,076 $ 39,041 25.8 %
Revenue increased $39.0 million , or 25.8%, to $190.1 million in the three months
ended September 30, 2021 , from $151.1 million in the three months ended
September 30, 2020 . Overall revenue growth is primarily due to an increase in
sales of new and existing products within our vascular and neuro businesses, as
well as a higher number of elective procedures performed as COVID-19 vaccination
rates increased. Given the current state of vaccinations and the spread of new
variants of the virus, it is possible that the increase in elective cases will
begin to normalize in future quarters.
Revenue from our vascular products increased $30.3 million , or 40.3%, to $105.5
million in the three months ended September 30, 2021 , from $75.2 million in the
three months ended September 30, 2020 . This increase was driven by sales of our
vascular thrombectomy products and peripheral embolization products, which
globally increased by 55.4% and 22.2%, respectively in the three months ended
September 30, 2021 . These increases were primarily due to higher sales volume as
a result of sales of new products, further market penetration of our existing
products, and an increase in the number of elective procedures performed. Prices
for our vascular products remained substantially unchanged during the period.
Revenue from our neuro products increased $8.7 million , or 11.5%, to $84.7
million in the three months ended September 30, 2021 , from $75.9 million in the
three months ended September 30, 2020 . This increase in revenue from our neuro
products was primarily attributable to increased revenue in China , sales of new
products, and further market penetration of our existing
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products. These increases were driven by an increase in sales of our neuro access products, neuro embolization products and neuro thrombectomy products which globally increased by 34.3%, 8.1% and 1.7%, respectively, in the three months endedSeptember 30, 2021 . Prices for our neuro products remained substantially unchanged during the period. Revenue by Geographic Area The following table presents revenue by geographic area, based on our customers' shipping destinations, for the three months endedSeptember 30, 2021 and 2020: Three Months Ended September 30, Change 2021 2020 $ % (in thousands, except for percentages) United States$ 134,834 70.9 %$ 109,656 72.6 %$ 25,178 23.0 % International 55,283 29.1 % 41,420 27.4 % 13,863 33.5 % Total$ 190,117 100.0 %$ 151,076 100.0 %$ 39,041 25.8 % Revenue from product sales in international markets increased$13.9 million , or 33.5%, to$55.3 million in the three months endedSeptember 30, 2021 , from$41.4 million in the three months endedSeptember 30, 2020 . Revenue from international sales represented 29.1% and 27.4% of our total revenue for the three months endedSeptember 30, 2021 and 2020, respectively. Gross Margin Three Months Ended September 30, Change 2021 2020 $ % (in thousands, except for percentages) Cost of revenue $ 70,205$ 60,153 $ 10,052 16.7 % Gross profit$ 119,912 $ 90,923 $ 28,989 31.9 % Gross margin % 63.1 % 60.2 % Gross margin increased 2.9 percentage points to 63.1% in the three months endedSeptember 30, 2021 , from 60.2% in the three months endedSeptember 30, 2020 , primarily due to benefits from higher volume and stable product mix. 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. As such, as we continue to accelerate investments in our production capacity, our gross margin may be negatively impacted in the short term. Research and Development ("R&D") Three Months Ended September 30, Change 2021 2020 $ % (in thousands, except for percentages) R&D$ 16,734 $ 34,923 $ (18,189) (52.1) % R&D as a percentage of revenue 8.8 %
23.1 %
R&D expenses decreased by$18.2 million , or 52.1%, to$16.7 million in the three months endedSeptember 30, 2021 , from$34.9 million in the three months endedSeptember 30, 2020 . The decrease was primarily due to$13.2 million of one-time, non-recurring personnel-related expenses associated with the launch of our Lightning product in the third quarter of 2020 and a$2.6 million decrease in product development and testing costs. We have made investments, and plan to continue to make investments, in the development of our products, which may include hiring additional research and development employees. 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 September 30, Change
2021 2020 $ %
(in thousands, except for percentages)
SG&A $ 94,397 $ 76,158 $ 18,239 23.9 %
SG&A as a percentage of revenue 49.7 % 50.4 %
SG&A expenses increased by$18.2 million , or 23.9%, to$94.4 million in the three months endedSeptember 30, 2021 , from$76.2 million in the three months endedSeptember 30, 2020 . The increase was primarily due to a$5.9 million increase in personnel-related expenses driven by an increase in headcount and related expenses to support our growth, a$3.5 million increase in travel-related expenses as most domestic travel and other in-person activities returned to pre-COVID-19 levels in the current period, a$3.4 million increase in cost related to marketing events, and a$1.9 million increase in infrastructure costs. 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. As part of our ongoing investment in our growth, we are anticipating one-time expenses associated with theSixense acquisition (See Note "15. Subsequent Events" to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information). 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/(Benefit from) from Income Taxes Three Months Ended September 30, Change 2021 2020 $ % (in thousands, except for percentages) Provision for (benefit from) income taxes$ (249) $ (9,855) $ 9,606 (97.5) % Effective tax rate (3.2) % 49.9 % Our benefit from income taxes was$0.2 million for the three months endedSeptember 30, 2021 , which was primarily due to tax expense attributable to our worldwide profit, offset by excess tax benefit from stock-based compensation attributable to ourU.S. jurisdiction. Our benefit from income taxes was$9.9 million for the three months endedSeptember 30, 2020 , which was primarily due to tax benefit attributable to our worldwide loss as a result of the COVID-19 pandemic impact, combined with excess tax benefit from stock-based compensation attributable to ourU.S. jurisdiction. The effective tax rate was (3.2)% for the three months endedSeptember 30, 2021 , compared to 49.9% for the three months endedSeptember 30, 2020 . Our change in effective tax rate was primarily attributable to small tax benefit over relatively large worldwide profit for the three months endedSeptember 30, 2021 , when compared to large tax benefit over relatively small worldwide loss for the three months endedSeptember 30, 2020 . In addition, the anticipated payments related to research and development milestones and one-time expenses associated with theSixense acquisition may result in a future tax benefit. Nine Months EndedSeptember 30, 2021 Compared to the Nine Months EndedSeptember 30, 2020 Revenue Nine Months Ended September 30, Change 2021 2020 $ % (in thousands, except for percentages) Vascular$ 295,314 $ 180,684 $ 114,630 63.4 % Neuro 248,265 212,830 35,435 16.6 % Total$ 543,579 $ 393,514 $ 150,065 38.1 % Revenue increased$150.1 million , or 38.1%, to$543.6 million in the nine months endedSeptember 30, 2021 , from$393.5 million in the nine months endedSeptember 30, 2020 . Overall revenue growth is primarily due to an increase in sales of new and existing products within our vascular and neuro businesses, as well as a higher number of elective procedures performed as COVID-19 vaccination rates increased. Given the current state of vaccinations and the spread of new variants of the virus, it is possible that the increase in elective cases will begin to normalize in future quarters. Revenue from our vascular products increased$114.6 million , or 63.4%, to$295.3 million in the nine months endedSeptember 30, 2021 , from$180.7 million in the nine months endedSeptember 30, 2020 . This increase was driven by sales of 29
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our vascular thrombectomy products and peripheral embolization products, which globally increased by 85.2% and 38.5%, respectively, in the nine months endedSeptember 30, 2021 . These increases were primarily due to higher sales volume as a result of sales of new products, further market penetration of our existing products, and an increase in the number of elective procedures performed. Prices for our vascular products remained substantially unchanged during the period. Revenue from our neuro products increased$35.4 million , or 16.6%, to$248.3 million in the nine months endedSeptember 30, 2021 , from$212.8 million in the nine months endedSeptember 30, 2020 . This increase in revenue from our neuro products was primarily attributable to increased revenue inChina , 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, neuro embolization products and neuro thrombectomy products which globally increased by 51.0%, 14.6% and 3.2%, respectively, in the nine months endedSeptember 30, 2021 . Prices for our neuro products remained substantially unchanged during the period. Revenue by Geographic Area The following table presents revenue by geographic area, based on our customer's shipping destination, for the nine months endedSeptember 30, 2021 and 2020: Nine Months Ended September 30, Change 2021 2020 $ % (in thousands, except for percentages) United States$ 383,306 70.5 %$ 283,473 72.0 %$ 99,833 35.2 % International 160,273 29.5 % 110,041 28.0 % 50,232 45.6 % Total$ 543,579 100.0 %$ 393,514 100.0 %$ 150,065 38.1 % Revenue from sales in international markets increased$50.2 million , or 45.6%, to$160.3 million in the nine months endedSeptember 30, 2021 , from$110.0 million in the nine months endedSeptember 30, 2020 . Revenue from international sales represented 29.5% and 28.0% of our total revenue for the nine months endedSeptember 30, 2021 and 2020, respectively. Gross Margin Nine Months Ended September 30, Change 2021 2020 $ % (in thousands, except for percentages) Cost of revenue$ 193,644 $ 149,652 $ 43,992 29.4 % Gross profit$ 349,935 $ 243,862 $ 106,073 43.5 % Gross margin % 64.4 % 62.0 % Gross margin increased 2.4 percentage points to 64.4% in the nine months endedSeptember 30, 2021 , from 62.0% in the nine months endedSeptember 30, 2020 , primarily due to benefits from higher volume and stable product mix. 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. As such, as we continue to accelerate investments in our production capacity, our gross margin may be negatively impacted in the short term. Research and Development ("R&D") Nine Months Ended September 30, Change 2021 2020 $ % (in thousands, except for percentages) R&D$ 52,548 $ 70,594 $ (18,046) (25.6) % R&D as a percentage of revenue 9.7 %
17.9 %
R&D expenses decreased by$18.0 million , or 25.6%, to$52.5 million in the nine months endedSeptember 30, 2021 , from$70.6 million in the nine months endedSeptember 30, 2020 . The decrease was primarily due to a$9.1 million one-time, non-recurring personnel-related expenses associated with the launch of our Lightning product in the third quarter of 2020 and a$9.1 million decrease in product development and testing costs. We have made investments, and plan to continue to make investments, in the development of our products, which may include hiring additional research and development employees. 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 30
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trials and product development, which may include additional personnel-related expenses in conjunction with the launch of new products. Sales, General and Administrative (SG&A)
Nine Months Ended September 30, Change
2021 2020 $ %
(in thousands, except for percentages)
SG&A $ 264,831 $ 210,465 $ 54,366 25.8 %
SG&A as a percentage of revenue 48.7 % 53.5 %
SG&A expenses increased by$54.4 million , or 25.8%, to$264.8 million in the nine months endedSeptember 30, 2021 , from$210.5 million in the nine months endedSeptember 30, 2020 . The increase was primarily due to a$35.3 million increase in personnel-related expense driven by an increase in headcount and related expenses to support our growth, a$5.8 million increase in travel-related expenses and a$5.2 million increase in cost related to marketing events as most domestic travel and other in-person activities returned to pre-COVID-19 levels in the current period, and a$1.9 million increase in infrastructure costs. 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. As part of our ongoing investment in our growth, we are anticipating one-time expenses associated with theSixense acquisition (See Note "15. Subsequent Events" to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information). 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 (Benefit from) Income Taxes Nine Months Ended September 30, Change 2021 2020 $ % (in thousands, except for percentages) Provision for (benefit from) income taxes$ 3,196 $ (15,618) $ 18,814 (120.5) % Effective tax rate 10.5 % 41.6 % Our provision for income taxes was$3.2 million for the nine months endedSeptember 30, 2021 , which was primarily due to tax expense attributable to our worldwide profit, offset by excess tax benefit from stock-based compensation attributable to ourU.S. jurisdiction. Our benefit from income taxes was$15.6 million for the nine months endedSeptember 30, 2020 , which was primarily due to tax benefit attributable to our worldwide loss as a result of the COVID-19 pandemic impact, combined with excess tax benefit from stock-based compensation attributable to ourU.S. jurisdiction. The effective tax rate was 10.5% for the nine months endedSeptember 30, 2021 , compared to 41.6% for the nine months endedSeptember 30, 2020 . Our change in effective tax rate was primarily attributable to small tax expense over relatively large worldwide profit for the nine months endedSeptember 30, 2021 , when compared to large tax benefit over relatively small worldwide loss for the nine months endedSeptember 30, 2020 . In addition, the anticipated payments related to research and development milestones and one-time expenses associated with theSixense acquisition may result in a future tax benefit. 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 profit or tax benefit attributable to our worldwide losses, 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 in fluctuations in our effective tax rate. Liquidity and Capital Resources As ofSeptember 30, 2021 , we had$551.9 million in working capital, which included$66.3 million in cash and cash equivalents and$200.6 million in marketable investments. As ofSeptember 30, 2021 , we held approximately 26.2% of our cash and cash equivalents in foreign entities. 31
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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 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 has substantially the same terms and conditions as the prior credit agreement with certain changes including the exclusion of certain one-time charges and expenses incurred during the fiscal quarters endedSeptember 30, 2020 andDecember 31, 2020 from the calculation of the financial covenants, reductions in interest rate floors applicable to revolving loans and other changes to borrowing mechanics under the Credit Agreement. See Note "7. 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 fourth quarter and beyond. The following table summarizes our cash and cash equivalents, marketable investments and selected working capital data as ofSeptember 30, 2021 andDecember 31, 2020 : September 30, 2021 December 31, 2020 (in thousands) Cash and cash equivalents $ 66,290 $ 69,670 Marketable investments 200,637 195,162 Accounts receivable, net 120,074 114,608 Accounts payable 13,679 14,109 Accrued liabilities 93,222 85,795 Working capital(1) 551,928 511,770
(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:
Nine
Months Ended
2021 2020
(in thousands) Cash and cash equivalents and restricted cash at beginning of period
$ 69,670 $ 72,779
Net cash provided by (used in) operating activities 18,772 (31,159)
Net cash used in investing activities (20,396) (93,923)
Net cash (used in) provided by financing activities (2,125) 132,460
Cash and cash equivalents and restricted cash at end of period 66,290 80,115
Net Cash Provided By (Used In) Operating Activities
Net cash provided by (used in) operating activities consists primarily of
consolidated net income (loss) adjusted for certain non-cash items (including
depreciation and amortization, stock-based compensation expense, inventory
write-downs, impairment of intangible assets, and changes in deferred tax
balances), and the effect of changes in working capital and other activities.
Net cash provided by operating activities was $18.8 million during the nine
months ended September 30, 2021 and consisted of consolidated net income of
$27.3 million and non-cash items of $39.6 million , offset by net changes in
operating assets and liabilities of $48.0 million . The change in operating
assets and liabilities includes an increase in inventories of $45.8 million to
support our growth, an increase in prepaid expenses and other current and
non-current assets of $7.1 million , an increase in accounts receivable of $7.0
million , and a decrease in accounts payable of $1.2 million . This was partially
offset by an increase in accrued expenses and other non-current liabilities of
$9.8 million and proceeds of $3.2 million received related to lease incentives
from operating leases.
Net cash used in operating activities was $31.2 million during the nine months
ended September 30, 2020 and consisted of consolidated net loss of $21.9 million
and net changes in operating assets and liabilities of $27.5 million , offset by
non-cash items of $18.3 million . The change in operating assets and liabilities
includes an increase in inventories of $39.9 million , an increase in accounts
receivable of $7.4 million and an increase in prepaid expenses and other current
and non-current assets of $6.0 million . This was partially offset by an increase
in accrued expenses and other non-current liabilities of $26.1 million .
Net Cash Used In Investing Activities
Net cash used in investing activities relates primarily to proceeds from
maturities and sales of marketable investments, net of purchases, and capital
expenditures.
Net cash used in investing activities was $20.4 million during the nine months
ended September 30, 2021 and primarily consisted of purchases of marketable
investments, net of proceeds from maturities and sales, of $7.2 million , and
capital expenditures of $13.1 million .
Net cash used in investing activities was $93.9 million during the nine months
ended September 30, 2020 and consisted of purchases of marketable investments,
net of proceeds from maturities and sales, of $69.9 million , and capital
expenditures of $21.0 million .
Net Cash (Used In) Provided By Financing Activities
Net cash (used in) 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 certain
acquisition-related payments, and proceeds from exercises of stock options and
issuance of common stock.
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Net cash used in financing activities was$2.1 million during the nine months endedSeptember 30, 2021 and primarily consisted of$10.5 million of payments of employee taxes related to vested restricted stock and restricted stock units and$1.1 million in payments towards finance leases. This was partially offset by 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$2.2 million . Net cash provided by financing activities was$132.5 million during the nine months endedSeptember 30, 2020 and primarily consisted of proceeds from the issuance of common stock, net of issuance costs, of$134.8 million , proceeds from the issuance of common stock under our employee stock purchase plan of$5.9 million , and proceeds from exercises of stock options of$4.4 million . This was partially offset by$8.6 million of payments of employee taxes related to vested restricted stock and restricted stock units,$3.1 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 in 2017. Contractual Obligations and Commitments During the nine months endedSeptember 30, 2021 , the Company entered into new leases, and modified existing leases for certain properties. See Note "8. 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. During the nine months endedSeptember 30, 2021 , we entered into a$7.3 million non-cancelable supply agreement to purchase a fixed amount of materials used in our manufacturing process. There have been no other material changes to our contractual obligations and commitments as ofSeptember 30, 2021 from those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 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, 2020 . 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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