Penumbra Inc (PEN) FY 2022 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Form 10-K. This discussion and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Form 10-K, our actual results could differ materially from the results described in or implied by these forward-looking statements.

Overview

Penumbra is a global healthcare company focused on innovative therapies. We design, develop, manufacture and market novel products and have a broad portfolio that addresses challenging medical conditions in markets with significant unmet need. Our team focuses on developing, manufacturing and marketing novel products for use by specialist physicians and healthcare providers to drive improved clinical outcomes and health. We believe that the cost-effectiveness of our products is attractive to our customers.

Since our founding in 2004, we have invested heavily in our product development capabilities in our major markets: neuro, vascular, and immersive healthcare. We have successfully developed, obtained regulatory clearance or approval for, and introduced products into the neurovascular market since 2007, vascular market since 2013, neurosurgical market since 2014, and immersive healthcare market since 2020, respectively. We continue to expand our portfolio of product offerings, while developing and iterating on our currently available products.

We expect to continue to develop and build our portfolio of products, including our thrombectomy, embolization and access and immersive technologies. Generally, when we introduce a next generation product or a new product designed to replace a current product, sales of the earlier generation product or the product replaced decline. Our research and development activities are centered around the development of new products and clinical activities designed to support our regulatory submissions and demonstrate the effectiveness of our products.

We sell our products to hospitals and other healthcare providers primarily through our direct sales organization in the United States, most of Europe, Canada and Australia, as well as through distributors in select international markets. In 2022, 30.2% of our revenue was generated from customers located outside of the United States. Our sales outside of the United States are denominated principally in the euro and Japanese yen, with some sales being denominated in other currencies. As a result, we have foreign exchange exposure, but do not currently engage in hedging.

We generated revenue of $847.1 million, $747.6 million and $560.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. This represents an annual increase of 13.3% and of 33.4%, respectively. We generated income from operations of $6.1 million for the year ended December 31, 2022, and losses from operations of $7.5 million and $38.9 million for the years ended December 31, 2021 and 2020, respectively.

COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which spread throughout the U.S. and the world. In response, governments issued orders restricting certain activities, and while our business falls within the category of healthcare operations, which are essential businesses that have generally been permitted to continue operating during the COVID-19 pandemic, we have experienced, and may continue to experience, disruptions to our operations as a result of the pandemic. For example, at times during the pandemic, hospital resources have been diverted to fight the pandemic, and many government agencies, in conjunction with healthcare systems, have recommended the deferral of elective and semi-elective medical procedures. In addition, the pandemic and the response thereto have impacted global supply chains and labor markets, resulting in cost inflation and raw material supply constraints, as well as an increase in employee turnover rates in certain jurisdictions, which has impacted, and may continue to impact, our business.

In order to navigate the pandemic, we made certain changes to how we manufacture, inspect and ship our products to prioritize the health and safety of our employees and to operate under the protocols mandated by our local and state governments. We took steps to strengthen our liquidity position, which included the issuance and sale of an aggregate of 865,963 shares of our common stock at a public offering price of $166.00 per share in an underwritten public offering in June 2020, pursuant to which we received approximately $134.8 million in net cash proceeds after deducting underwriting discounts and commissions of $8.6 million and other offering expenses of $0.4 million. We also entered into a Credit Agreement (the “Credit Agreement”) in April 2020 with JPMorgan Chase Bank, N.A., as administrative agent and lender, and Bank of America, N.A. and Citibank, N.A. as lenders, which is secured and provides for up to $100 million in available revolving

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borrowing capacity beyond the $188.0 million in cash, cash equivalents and marketable investments on our balance sheet as of December 31, 2022 with an option, subject to certain conditions, for us to increase the aggregate borrowing capacity to up to $150 million. The Credit Agreement originally matured on April 23, 2021 and was subsequently amended during the three months ended March 31, 2021, 2022 and 2023 to extend the maturity date and make other changes to the terms of the Credit Agreement. The Credit Agreement currently matures on February 16, 2024. Refer to Part II, Item 9B, “Other Information” and Note “8. Indebtedness” to our consolidated financial statements in Part II, Item 8 in this Form 10-K for more information.

While the acute phase of the pandemic has subsided due to the development and widespread availability of vaccines for COVID-19, we are unable to reliably predict the full impact that COVID-19 will have on our business due to numerous uncertainties, including the severity and duration of the pandemic, the global resurgences of cases, particularly as new variants of the virus spread, additional actions that may be taken by governmental authorities in response to the pandemic, the impact of the pandemic on the business of our customers, distributors and suppliers, other businesses and worldwide economies in general, our ability to have access to our customers to provide training and case support, and other factors identified in Part I, Item 1A “Risk Factors” in this Form 10-K. We will continue to evaluate the nature and extent of the impact of COVID-19 on our business, consolidated results of operations, and financial condition

Factors Affecting Our Performance

There are a number of factors that have impacted, and we believe will continue to impact, our results of operations and growth. These factors include:

•The COVID-19 pandemic and measures taken in response thereto, which have negatively affected, and may continue to negatively affect, our revenues and results of operations. For example, as a result of the pandemic and the response thereto, global supply chains have been impacted, and we may experience significant and unpredictable fluctuations in the availability and cost of components and raw materials used in our products.

•The rate at which we grow our salesforce and the speed at which newly hired salespeople become fully effective can impact our revenue growth or our costs incurred in anticipation of such growth.

•Our industry is intensely competitive and, in particular, we compete with a number of large, well-capitalized companies. We must continue to successfully compete in light of our competitors’ existing and future products and their resources to successfully market to the specialist physicians who use our products.

•We must continue to successfully introduce new products that gain acceptance with specialist physicians and other healthcare providers and successfully transition from existing products to new products, ensuring adequate supply. In addition, as we introduce new products and expand our production capacity, we anticipate additional personnel will be hired and trained to build our inventory of components and finished goods in advance of sales, which may cause quarterly fluctuations in our operating results and financial condition.

•Publications of clinical results by us, our competitors and other third parties can have a significant influence on whether, and the degree to which, our products are used by specialist physicians and the procedures and treatments those physicians choose to administer for a given condition.

•The specialist physicians who use our interventional products may not perform procedures during certain times of the year, such as those periods when they are at major medical conferences or are away from their practices for other reasons, the timing of which occurs irregularly during the year and from year to year.

•Most of our sales outside of the United States are denominated in the local currency of the country in which we sell our products. As a result, our revenue from international sales can be significantly impacted by fluctuations in foreign currency exchange rates.

•The availability and levels of reimbursement within the relevant healthcare payment system for healthcare providers for procedures in which our products are used.

In addition, we have experienced and expect to continue to experience meaningful variability in our quarterly revenue, gross profit and gross margin percentage as a result of a number of factors, including, but not limited to: the 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

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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. For example, during the year ended December 31, 2021, we incurred $15.0 million of non-recurring personnel-related expenses associated with the development of our Thunderbolt product.

Critical Accounting Policies and Use of Estimates

Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the applicable periods. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could materially change our results from those reported. Management evaluates its estimates, assumptions and judgments on an ongoing basis. Historically, our critical accounting estimates have not differed materially from actual results. However, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our consolidated statements of operations, liquidity and financial condition.

We believe the following critical accounting policies involve significant areas where management applies judgments and estimates in the preparation of our consolidated financial statements.

Leases

We determine if an arrangement is a lease at inception. In addition, we determine whether leases meet the classification criteria of a finance or operating lease at the lease commencement date considering: (1) whether the lease transfers ownership of the underlying asset to the lessee at the end of the lease term, (2) whether the lease contains a bargain purchase option, (3) whether the lease term is for a major part of the remaining economic life of the underlying asset, (4) whether the present value of the sum of the lease payments and residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset, and (5) whether the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. As of December 31, 2022, our lease population consisted of operating and finance real estate, equipment and vehicle leases.

Operating leases are included in operating lease right-of-use assets, current operating lease liabilities, and non-current operating lease liabilities in our consolidated balance sheet. Finance leases are included in finance lease right-of-use assets, current finance lease liabilities, and non-current finance lease liabilities in our consolidated balance sheet. ROU assets represent the our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use our incremental borrowing rate which requires our management’s judgement as the rate implicit in the lease is generally not readily determinable. The determination of the our incremental borrowing rate requires management judgment including the development of a synthetic credit rating and cost of debt as we currently does not carry any debt. The lease ROU assets also include adjustments for prepayments, accrued lease payments and exclude lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. Operating lease cost is recognized on a straight-line basis over the expected lease term. Finance lease cost is recognized as depreciation expense on a straight-line basis over the expected lease term and interest expense using the accelerated interest method of recognition. Lease agreements entered into after the adoption of ASC 842 that include lease and non-lease components are accounted for as a single lease component. Lease agreements with a noncancelable term of less than 12 months are not recorded on our consolidated balance sheet. For more information about our leases, refer to Note “9. Leases.”

Revenue Recognition

Revenue is primarily comprised of product revenue net of returns, discounts, administration fees and sales rebates. We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenue from product sales is recognized either on the date of shipment or the date of receipt by the customer, but is deferred for certain transactions when control has not yet transferred. With respect to products that we consign to hospitals, which primarily consist of coils, we recognize revenue at the time hospitals utilize products in a procedure. Refer to Note “16. Revenues” to our consolidated financial statements in Part II, Item 8 of this Form 10-K for more information and disclosures on our revenue.

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Certain arrangements with customers contain multiple performance obligations. For these contracts, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which we separately sell the products or services. If a standalone selling price is not directly observable, then we estimate the standalone selling prices considering market conditions and entity-specific factors including, but not limited to, the expected cost and margin of the products and services, geographies, and other market conditions. The use of alternative estimates could result in a different amount of revenue deferral.

We defer revenue for amounts that we have already invoiced our customers for and are ultimately expected to be recognized as revenue, but for which not all revenue recognition criteria have been met.

Revenue is recorded at the net sales price, which includes estimates of variable consideration such as product returns utilizing historical return rates, rebates, discounts, and other adjustments to net revenue. To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price. Variable consideration is included in revenue only to the extent that it is probable that a significant reversal of the revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. During the year ended December 31, 2022, we made no material changes in estimates for variable consideration.

Our terms and conditions permit product returns and exchanges. We base our estimates for sales returns on actual historical returns over the prior three years and they are recorded as reductions in revenue at the time of sale. Upon recognition, we reduce revenue and cost of revenue for the estimated return. Return rates can fluctuate over time, but are sufficiently predictable to allow us to estimate expected future product returns.

Income Taxes

We account for income taxes using the asset and liability method, whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance to reduce the net deferred tax assets (“DTAs”) to their estimated realizable value.

The calculation of our DTAs involves the use of estimates, assumptions and judgments while taking into account estimates of the amounts and type of future taxable income. DTAs are reduced to their estimated realizable value by a valuation allowance when it is more likely than not that the future realization of all or some of the DTAs will not be achieved. Valuation allowances related to DTAs can be affected by changes to tax laws, statutory tax rates, and projections of future taxable income.

The calculation of our current provision for income taxes involves the use of estimates, assumptions and judgments while taking into account current tax laws, interpretation of current tax laws and possible outcomes of future tax audits. We have established reserves to address potential exposures related to tax positions that could be challenged by tax authorities. Although we believe our estimates, assumptions and judgments to be reasonable, any changes in tax law or interpretation of tax law and the resolutions of potential tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.

We follow FASB ASC 740-10 “Accounting for Uncertainty in Income Taxes” that prescribes a financial statement recognition threshold and measurement attribute for uncertain tax positions taken or expected to be taken on our income tax returns, and also provides guidance on derecognition, classification, interest and penalty accrual, accounting in interim periods, and disclosure requirements. We include interest and penalties related to unrecognized tax benefits within income tax expense in the accompanying consolidated statements of operations.

As of December 31, 2022, our net DTA balance on a consolidated basis was $63.3 million, after reduction of a valuation allowance of $46.7 million. We had approximately $148.9 million and $93.6 million of federal and state net operating loss (“NOL”) carryforwards, respectively, available to offset future taxable income. The federal NOL has an indefinite carryforward period but is limited to offset 80% of taxable income in the year utilized. The state NOL carryforwards have various carryover periods and will begin to expire as early as 2023. As of December 31, 2022, we had federal research and development tax credits of $27.1 million which are generally carried forward for 20 years. We maintained a full valuation allowance against our federal research and development tax credit DTAs net of ACS 740-10 reserve. We had California state research and development tax credits of $24.9 million that may be carried forward indefinitely.

Significant domestic DTAs were generated in recent years, primarily due to excess tax benefits from stock option exercises and vesting of restricted stock, as well as operating expenditures including research and development. The recent Sixense acquisition also generated significant domestic DTAs in the year ended December 31, 2021. We assess the ability to realize the benefits of our DTAs in each reporting period by evaluating all available positive and negative evidence, objective and subjective in nature, including (1) cumulative results of operations in recent years, (2) sources of recent pre-tax income, (3)

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estimates of future taxable income, (4) respective carryback and/or carryforward periods of tax attributes available to date, and (5) limitation on NOL utilization against taxable income. Despite the domestic pretax loss in the year ended December 31, 2022, we determined that we would be in a three-year cumulative adjusted taxable income position, had it not been for the impact of excess tax deductions from stock-based compensation. We also measured our current DTA balances against estimates of future income based on objectively verifiable operating results from our recent history.

We considered our projection of future taxable income in conjunction with relevant provisions of the Tax Reform Act, including but not limited to, the indefinite carryforward period for NOL generated in years beginning on or after January 1, 2018. After an evaluation of all available qualitative and quantitative evidence, both positive and negative in nature, we concluded that sufficient future taxable income will be generated to realize the benefits of our domestic DTAs prior to expiration, other than our federal research and development tax credit DTAs. The tax attribute ordering rules provide that to offset taxable income, NOL must be used prior to the utilization of tax credits. NOL utilization will be limited to 80% of taxable income, which may provide an opportunity for us to use a portion of our tax credits. Accordingly, we cannot assert, at the required more-likely-than-not level of certainty, that we will be able to realize the full benefit of our federal research and development tax credit DTAs, with a limited 20-year carryforward period that will begin to expire in 2026. As a result, we maintained a full valuation allowance against our federal research and development tax credit DTAs net of ASC 740-10 reserve as of December 31, 2022. We intend to continue maintaining this full valuation allowance until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, due to the change of IRC Section 174 requiring qualified research expenditures to be capitalized and amortized over 5 or 15 years for tax purposes, in the future, we may accelerate our NOL utilization in the coming years. As a consequence, we determined there is a reasonable possibility that a portion of this valuation allowance may no longer be needed. The exact timing and amount of the valuation allowance release is highly dependent on the level of taxable income in future years. We will continue to closely monitor the need for this valuation allowance in each subsequent reporting period.

As of December 31, 2022, we do not maintain valuation allowance against any of our foreign DTAs as we believe, at the required more-likely-than-not level of certainty, that our foreign subsidiaries will generate sufficient future taxable income to realize the benefit of their DTAs in full. A full valuation allowance also remains against our California DTA balances.

Goodwill

Goodwill represents the excess of the purchase price of an acquired business or assets over the fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but is tested for impairment at least annually, or more frequently if events or circumstances indicate the carrying value may no longer be recoverable and that an impairment loss may have occurred. Circumstances that could trigger an impairment test include, but are not limited to, a significant adverse change in the business climate or legal factors, an adverse action or assessment by a regulator, change in customers, target market and strategy, unanticipated competition, loss of key personnel, or change in reporting units. We operate as one segment, which is considered to be the sole reporting unit, and therefore goodwill is tested for impairment at the consolidated level.

The authoritative guidance allows an entity to assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If an entity determines that as a result of the qualitative assessment that it is more likely than not (i.e. greater than 50% likelihood) that the fair value of a reporting unit is less than its carrying amount, then the quantitative test is required. Otherwise, no further testing is required. The quantitative goodwill impairment test requires us to estimate and compare the fair value of our reporting unit with its carrying value.

Application of the goodwill impairment test requires judgments, including: identification of the reporting units, assigning goodwill to reporting units, a qualitative assessment to determine whether there are any impairment indicators, and determining the fair value of each reporting unit. Qualitative factors may include, but are not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, cost factors, and entity specific factors such as strategies, overall financial performance (both current and projected) and market capitalization. In the fourth quarter of 2022 and 2021, we performed qualitative assessments for goodwill impairment and determined there were no indicators of impairment. Refer to Note “7. Goodwill” to our consolidated financial statements in Part II, Item 8 of this Form 10-K for more information.

Valuation of Assets Acquired and Liabilities Assumed in a Business Combination

For material acquisitions, of which there were none in 2022, we may engage independent appraisers to assist with the determination of the fair value of certain assets acquired and liabilities assumed using recognized business valuation methodologies and information and assumptions provided by our management.

In determining the fair value of certain identifiable assets acquired or liabilities assumed, management may utilize valuation techniques consistent with the income approach, market approach, or cost approach and provide its best estimates of

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inputs and assumptions that a market participant would use. Certain estimates used in the cost approach include the total cost and time to reconstruct a substitute asset of comparable utility adjusted for any obsolescence, a developer’s expected profit margin, and any opportunity costs lost over the period to reconstruct the substitute asset. Certain estimates used in the income approach may include the amount and timing of projected future cash flows, the discount rate used to discount those cash flows to present value, the assessment of the asset’s life cycle, and the consideration of legal, technical, regulatory, economic, and competitive risks.

Impairment of Intangible Assets

Indefinite-lived intangible assets consist of in-process research and development as of December 31, 2021. Indefinite-lived intangible assets are tested for impairment at least annually in the fourth quarter of each year, or more frequently if events or circumstances indicate that it is more likely than not that the asset is impaired. In conducting the annual impairment test for its indefinite-lived intangible assets, we may first perform a qualitative assessment to determine whether it is more likely than not (i.e. greater than 50% likelihood) that an indefinite-lived intangible asset is impaired. In accordance with the authoritative guidance, we may elect to bypass the qualitative assessment and proceed directly to the quantitative test to compare the fair value of the indefinite-lived intangible asset to the carrying amount. If the fair value of the asset is less than the carrying amount, an impairment loss would be recognized in an amount equal to the difference between the carrying amount and the fair value.

During the third quarter of 2022, the in-process research and development indefinite-lived intangible asset acquired in the fourth quarter of 2021 in connection with the Sixense acquisition was reclassified to a finite-lived developed technology intangible asset upon the completion of the in-process research and development project. In the second quarter of 2020, due to a triggering event, the acquired exclusive right to licensed technology indefinite-lived intangible asset was determined to be impaired and we wrote-off the full carrying amount of the asset. Refer to Note “6. Intangible Assets” to our consolidated financial statements in Part II, Item 8 of this Form 10-K for more information.

Finite-lived intangible assets are amortized over the estimated economic useful lives of the assets, which is the period during which expected cash flows support the fair value of such intangible assets. We review finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such an event occurs, management determines whether there has been impairment by comparing the anticipated undiscounted future net cash flows to the related asset group’s carrying value. If an asset is considered impaired, the asset will be written down to the determined fair value based on discounted cash flows. We also periodically review the useful lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the underlying intangible asset. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase. Refer to Note “6. Intangible Assets” to our consolidated financial statements in Part II, Item 8 of this Form 10-K for more information.

Components of Results of Operations

Revenue. We sell our products directly to hospitals and through distributors for use in procedures performed by specialist physicians to treat patients in two key markets: neuro and vascular disease. We sell our products through purchase orders, and we do not have long-term purchase commitments from our customers. Revenue from product sales is recognized either on the date of shipment or the date of receipt by the customer, but is deferred for certain transactions when control has not yet transferred. With respect to products that we consign to hospitals, which primarily consist of coils, we recognize revenue at the time hospitals utilize products in a procedure. Revenue also includes shipping and handling costs that we charge to customers.

Cost of Revenue. Cost of revenue consists primarily of the cost of raw materials and components, personnel costs, including stock-based compensation, inbound freight charges, receiving costs, inspection and testing costs, warehousing costs, royalty expense, shipping and handling costs and other labor and overhead costs incurred in the manufacturing of products. We manufacture substantially all of our products in our manufacturing facilities in Alameda and Roseville, California.

Operating Expenses

Research and Development (“R&D”). R&D expenses primarily consist of product development, clinical and regulatory expenses, materials, depreciation and other costs associated with the development of our products. R&D expenses also include salaries, benefits and other related costs, including stock-based compensation, for personnel and consultants. We expense R&D costs as they are incurred.

Sales, General and Administrative (“SG&A”). SG&A expenses primarily consist of salaries, benefits and other related costs, including stock-based compensation, for personnel and consultants engaged in sales, marketing, finance, legal, compliance, administrative, facilities and information technology and human resource activities. Our SG&A expenses also include

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marketing trials, medical education, training, commissions, generally based on sales, to direct sales representatives, amortization of acquired intangible assets and acquisition-related costs.

Income Tax Expense. We are taxed at the rates applicable within each jurisdiction in which we operate. The composite income tax rate, tax provisions, deferred tax assets and deferred tax liabilities will vary according to the jurisdiction in which profits arise. Tax laws are complex and subject to different interpretations by management and the respective governmental taxing authorities, and require us to exercise judgment in determining our income tax provision, our deferred tax assets and deferred tax liabilities and the potential valuation allowance recorded against our net DTAs. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not that the future realization of all or some of the DTAs will not be achieved.

Results of Operations

The following table sets forth the components of our consolidated statements of operations in U.S. dollars and as a percentage of revenue for the periods presented:

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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Revenue

Revenue increased $99.5 million, or 13.3%, to $847.1 million in 2022, from $747.6 million in 2021. The increase in overall revenue was primarily due to an increase in sales of new and existing products within our vascular and neuro businesses.

Revenue from our vascular products increased $90.5 million, or 22.1%, to $499.4 million in 2022, from $408.9 million in 2021. This increase in revenue from our vascular products was primarily attributable to increased revenue in the United States and China and was driven by sales of our vascular thrombectomy products and peripheral embolization products, which globally increased by 27.7% and 13.6%, respectively, in the year ended December 31, 2022. These increases were primarily due to higher sales volume as a result of sales of new products and further market penetration of our existing products. Prices for our vascular medical devices remained substantially unchanged during the period.

Revenue from our neuro products increased $9.0 million, or 2.7%, to $347.7 million in the year ended December 31, 2022, from $338.7 million in the year ended December 31, 2021. This increase in revenue from our neuro products was primarily attributable to increased revenue in the United States, sales of new products, and further market penetration of our existing products. This increase was driven by an increase in sales of our neuro access products and neuro thrombectomy products, which globally increased by 7.2% and 2.8%, respectively, partially offset by a decrease in sales of our neuro embolization products of 14.1% in the year ended December 31, 2022. Prices for our neuro medical devices remained substantially unchanged during the period.

Revenue by Geographic Area

The following table presents revenue by geographic area, based on our customers’ shipping destinations:

Revenue from sales in international markets increased $35.6 million, or 16.2%, to $255.4 million in 2022, from $219.8 million in 2021. Revenue from international sales represented 30.2% and 29.4% of our total revenue in 2022 and 2021, respectively.

Gross Margin

Gross margin remained relatively flat, decreasing by 0.4% percentage points to 63.2% in 2022, from 63.6% in 2021. Gross margin is impacted by our ability to scale production capacity to support our expanding portfolio of products, which enabled us to navigate through some macroeconomic factors such as labor shortages, inflation, and supply chain headwinds. We may see continued productivity improvements to offset inflation and supply chain pressures resulting in expansion of our gross margin in the future.

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Research and Development (“R&D”)

R&D expenses decreased by $25.1 million or 24.1%, to $79.4 million in 2022, from $104.6 million in 2021. The decrease was primarily due to $17.6 million of one-time, non-recurring expense associated with the accelerated vesting of options related to the Sixense acquisition in 2021 and a $6.3 million decrease in product development and testing costs. This was partially offset by a $1.7 million increase in infrastructure costs to support our growth.

We have continued to make investments, and plan to continue to make investments, in the development of our products. As part of our ongoing investment in the development of our products, we may make 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.

Sales, General and Administrative (“SG&A”)

SG&A expenses increased by $71.4 million, or 18.9%, to $449.7 million in 2022, from $378.3 million in 2021. Excluding the $8.2 million of one-time, non-recurring expense associated with the accelerated vesting of options related to the Sixense acquisition in 2021, the increase was primarily due to a $20.3 million increase in personnel-related expense driven by an increase in headcount and related expenses to support our growth, a $11.9 million increase in infrastructure costs, a $8.8 million increase in travel and other in-person expenses, a $7.9 million increase in costs related to marketing events, a $6.3 million amortization expense of finite lived intangible assets acquired in connection with the Sixense acquisition, and a $5.8 million increase in information technology expenses and other professional services primarily associated with our ERP system implementation.

As we continue to invest in our growth, we have expanded and may continue to expand our sales, marketing, and general and administrative teams through the hiring of additional employees in critical roles that support our strategic initiatives. In addition, we have experienced in the past, and may continue to experience in the future, variability in expenses incurred due to the timing and costs of investments to support the business.

Provision for (Benefit from) Income Taxes

Our provision for income taxes was $5.9 million in 2022, which was primarily due to income taxes imposed on our worldwide profits, combined with tax deficiencies (shortfalls) from stock-based compensation attributable to our U.S. jurisdiction as a result of stock price fluctuation. Our benefit from income taxes was $13.1 million in 2021, which was primarily due to tax benefits from our worldwide losses, combined with excess tax benefits from stock-based compensation attributable to our U.S. jurisdiction. Our effective tax rate was 151.4% in 2022, compared to 125.0% in 2021. Our change in effective tax rate was primarily attributable to larger tax expenses over small worldwide profits for the year ended December 31, 2022, compared to larger tax benefits over small worldwide losses for the year ended December 31, 2021.

Our effective tax rate is driven by (1) income or loss before taxes, (2) permanent differences in taxable income for tax and financial reporting purposes, (3) tax expense attributable to our foreign jurisdictions, (4) changes to the valuation allowance

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maintained against our deferred tax assets, and (5) discrete tax adjustments such as excess tax expenses or benefits related to stock-based compensation. Our income tax provision is subject to volatility as the amount of excess tax expenses and 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 under U.S. GAAP. In addition, changes in tax law or our interpretation thereof, and changes to our valuation allowance could cause us to experience an effective tax rate significantly different from previous periods.

We maintained a full valuation allowance against our federal research and development tax credit DTAs net of ASC 740-10 reserve as of December 31, 2022. We intend to continue maintaining this full valuation allowance until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, due to the change of IRC section 174 requiring qualified research expenditures to be capitalized and amortized over 5 or 15 years for tax purposes, in the future, we may accelerate our NOL utilization. As a consequence, we determined there is a reasonable possibility that a portion of this valuation allowance may no longer be needed. The exact timing and amount of the valuation allowance release is highly dependent on the level of taxable income in future years. We will continue to closely monitor the need for this valuation allowance in each subsequent reporting period.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Revenue

Revenue increased $187.2 million, or 33.4%, to $747.6 million in 2021, from $560.4 million in 2020. The increase in overall revenue was primarily due to an increase in sales of new and existing medical devices 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 medical devices increased $141.1 million, or 52.7%, to $408.9 million in 2021, from $267.8 million in 2020. This increase was driven by sales of our vascular thrombectomy medical devices and peripheral embolization medical devices, which globally increased by 65.6% and 36.9%, respectively, in the year ended December 31, 2021. These increases were primarily due to high sales volume as a result of sales of new medical devices, further market penetration of our existing medical devices, and an increase in the number of elective procedures. Prices for our vascular medical devices remained substantially unchanged during the period.

Revenue from our neuro medical devices increased $46.1 million, or 15.7%, to $338.7 million in the year ended December 31, 2021, from $292.6 million in the year ended December 31, 2020. This increase was primarily attributable to increased revenue in China due to the license agreement entered into in December 2020, sales of new medical devices, and further market penetration of our existing medical devices. This increase was driven by an increase in sales of our neuro access medical devices, neuro embolization medical devices and neuro thrombectomy medical devices which globally increased by 45.4%, 10.0% and 5.2%, respectively, in the twelve months ended December 31, 2021. Prices for our neuro medical devices remained substantially unchanged during the period.

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Revenue by Geographic Area

The following table presents revenue by geographic area and from countries that exceeded 10% of our total revenue, based on our customers’ shipping destinations:

Revenue from sales in international markets increased $59.7 million, or 37.3%, to $219.8 million in 2021, from $160.1 million in 2020. Revenue from international sales represented 29.4% and 28.6% of our total revenue in 2021 and 2020, respectively.

Gross Margin

Gross margin increased by 3.3% percentage points to 63.6% in 2021, from 60.3% in 2020, which included a one-time, non-recurring $18.4 million reduction in gross profit as a result of the December 2020 voluntary recall of our JET 7 Reperfusion Catheter with Xtra Flex technology (“JET 7 Xtra Flex”). While gross margin is impacted by higher labor and logistics costs due to the impact of inflation, our ability to scale production capacity to support our expanding portfolio of medical devices as well as our continued investments in COVID-19 related safety measures allowed the Company to navigate the labor and supply chain disruptions. As such, with our accelerated investments in our production capacity, our gross margin may be positively impacted in the future.

Research and Development (“R&D”)

R&D expenses increased by $14.5 million or 16.1%, to $104.6 million in 2021, from $90.0 million in 2020. The increase was primarily due to $17.6 million of one-time, non-recurring expense associated with the accelerated vesting of options related to the Sixense acquisition and a $11.0 million increase in personnel-related expense driven by an increase in headcount and related expenses to support our growth. This was partially offset by a $15.4 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. In addition, we have experienced in the past, and may continue to experience in the future, variability in expenses incurred due to the timing and costs of clinical trials and product development, which may include additional personnel-related expenses in conjunction with the launch of new products.

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Sales, General and Administrative (“SG&A”)

SG&A expenses increased by $91.3 million, or 31.8%, to $378.3 million in 2021, from $287.1 million in 2020. The increase was primarily due to a $48.4 million increase in personnel-related expense driven by an increase in headcount and related expenses to support our growth, a $9.5 million increase in cost related to marketing events as well as a $9.4 million increase in travel-related expense as most domestic travel and other in-person activities returned to pre-COVID-19 levels in 2021, $8.2 million of one-time, non-recurring expense associated with the accelerated vesting of options related to the Sixense acquisition, and a $4.9 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. In addition, we have experienced in the past, and may continue to experience in the future, variability in expenses incurred due to the timing and costs of investments in infrastructure to support the business.

(Benefit from) Provision for Income Taxes

Our benefit from income taxes was $13.1 million in 2021, compared to $18.8 million in 2020. Our effective tax rate was 125.0% in 2021, compared to 49.3% in 2020. Our effective tax rate in 2021 and 2020 included tax benefits attributable to our worldwide losses, combined with excess tax benefits from stock-based compensation attributable to our U.S. jurisdiction. Our change in effective tax rate was primarily due to smaller worldwide losses recorded for the year ended December 31, 2021, compared to the year ended December 31, 2020 with consistent tax benefit between the two years. The effective tax rate in 2021 was amplified by the relatively smaller worldwide loss.

Our effective tax rate is driven by (1) income or loss before taxes, (2) permanent differences in taxable income for tax and financial reporting purposes, (3) tax expense attributable to our foreign jurisdictions, (4) changes to the valuation allowance maintained against our deferred tax assets, and (5) 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 under U.S. GAAP. In addition, changes in tax law or our interpretation thereof, and changes to our valuation allowance could cause us to experience an effective tax rate significantly different from previous periods.

Quarterly Results of Operations

For our unaudited quarterly results of operations for the eight quarters ended December 31, 2022, please see Note “17. Selected Quarterly Financial Data (Unaudited)” to our consolidated financial statements in Part II, Item 8 of this Form 10-K.

Our quarterly results of operations should be read in conjunction with the consolidated financial statements and related notes thereto. We have prepared the unaudited information on the same basis as our audited consolidated financial statements. Our operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year. Our unaudited quarterly results tables include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our consolidated financial position and operating results for the quarters presented. Seasonal fluctuations, underlying business trends have affected, and are likely to continue to affect, our business. Commercial queries typically increase significantly in the fourth quarter of each year. These seasonal trends have caused, and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates.

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However, we may have quarters for which we experience significant revenue and gross profit growth followed by quarters with limited revenue and gross profit growth due to a number of factors, including mix of products sold, limited growth in demand and the effects of hiring and integrating new sales people and their transition into existing or new sales territories. Other factors affecting our revenue and gross profit growth include acceptance of new products by specialist physicians and successfully transitioning these physicians to new products from existing products, buildup of inventory of new products and write downs or write offs of inventory of older products, introduction of new products by competitors, publication of clinical results that may influence specialist physicians and the fact that the specialist physicians who use our products may not perform procedures during certain times of the year due to their attendance at major medical conferences or for other reasons, the time of which occurs irregularly during the year and from year to year.

Liquidity and Capital Resources

As of December 31, 2022, we had $610.8 million in working capital, which included $69.9 million in cash and cash equivalents and $118.2 million in marketable investments. As of December 31, 2022, we held approximately 21.2% of our cash and cash equivalents in foreign entities.

In June 2020, we issued and sold an aggregate of 865,963 shares of our common stock at a public offering price of $166.00 per share, less the underwriters’ discounts and commissions, pursuant to an underwritten public offering. We received approximately $134.8 million in net cash proceeds after deducting underwriting discounts and commissions of $8.6 million and other offering expenses of $0.4 million. The net proceeds from this offering is to support general corporate purposes, including working capital, continued development of our products, including research and development and clinical trials, potential acquisitions and other business opportunities. Pending the use of the net proceeds from this offering, we invested 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, on April 24, 2020 we entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent and lender, and Bank of America, N.A. and Citibank, N.A. as lenders. The Credit Agreement is secured and provides for up to $100 million in available revolving borrowing capacity with an option, subject to certain conditions, for the Company to increase the aggregate borrowing capacity to up to $150 million, and originally matured on April 23, 2021. During the three months ended March 31, 2021, 2022 and 2023, the Credit Agreement was amended to extend the maturity date and make other changes to the terms of the Credit Agreement. The Credit Agreement currently matures on February 16, 2024.

As of December 31, 2022, the Company was in compliance with the requirements in the Credit Agreement to maintain a minimum fixed charge coverage ratio and to not exceed a maximum leverage ratio. As of December 31, 2022, there were no borrowings outstanding under the Credit Agreement. Refer to Part II Item 9B “Other Information” and Note “8. Indebtedness” to our consolidated financial statements in Part II, Item 8 in this Form 10-K for more information.

We believe these sources of liquidity will be sufficient to meet our liquidity requirements for at least the next 12 months. Our principal liquidity requirements are to fund our operations, expand manufacturing operations which includes, but is not limited to, maintaining sufficient levels of inventory to meet the anticipated demand of our customers, fund research and development activities and fund our capital expenditures. We may also lease or purchase additional facilities to facilitate our growth. We expect to continue to make investments as we launch new products, expand our manufacturing operations and information technology infrastructures and further expand into international markets. We may, however, require or elect to secure additional financing as we continue to execute our business strategy. If we require or elect to raise additional funds, we may do so through equity or debt financing, which may not be available on favorable terms, could result in dilution to our stockholders and could require us to agree to covenants that limit our operating flexibility.

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The following table summarizes our cash and cash equivalents, marketable investments and selected working capital data as of December 31, 2022 and December 31, 2021:

(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:

Net Cash (Used In) Provided By Operating Activities

Net cash (used in) provided by operating activities consists primarily of net income adjusted for certain non-cash items (including depreciation and amortization, stock-based compensation expense, inventory write-offs and write-downs, changes in deferred tax balances, and the effect of changes in working capital and other activities).

Net cash used in operating activities was $55.7 million in 2022 and consisted of net loss of $2.0 million and net changes in operating assets and liabilities of $121.5 million offset by non-cash items of $67.9 million. The change in operating assets and liabilities includes an increase in inventories of $74.6 million to support our revenue growth, an increase in accounts receivable of $69.9 million, and an increase in prepaid expenses and other current and non-current assets of $1.2 million. This was partially offset by an increase in accounts payable of $13.4 million, an increase in accrued expenses and other non-current liabilities of $10.5 million primarily as a result of the growth in our business activities and proceeds of $0.3 million received related to lease incentives from operating leases.

Net cash provided by operating activities was $9.5 million in 2021 and consisted of net income of $2.6 million and non-cash items of $73.6 million offset by net changes in operating assets and liabilities of $66.7 million. The change in operating assets and liabilities includes an increase in inventories of $51.6 million to support our revenue growth, an increase in accounts receivable of $21.3 million, an increase in prepaid expenses and other current and non-current assets of $13.0 million, and a decrease in accounts payable of $1.6 million. This was partially offset by an increase in accrued expenses and other non-current liabilities of $17.1 million primarily as a result of the growth in our business activities and proceeds of $3.7 million received related to lease incentives from operating leases.

Net cash used in operating activities was $33.2 million in 2020 and consisted of net loss of $19.3 million and non-cash items of $37.2 million offset by net changes in operating assets and liabilities of $51.2 million. The change in operating assets and liabilities includes an increase in inventories of $57.0 million to support our revenue growth, an increase in prepaid expenses and other current and non-current assets of $8.9 million, an increase in accounts receivable of $8.3 million, and a decrease in accounts payable of $0.3 million. This was partially offset by an increase in accrued expenses and other non-current liabilities of $23.3 million primarily as a result of the growth in our business activities as well as liabilities incurred related to our voluntary recall in December 2020.

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Net Cash Provided By (Used In) Investing Activities

Net cash provided by (used in) investing activities relates primarily to purchases of marketable investments, capital expenditures, payments for leases that have not yet commenced, partially offset by proceeds from maturities and sales of marketable investments.

Net cash provided by investing activities was $54.8 million in 2022 and primarily consisted of proceeds from maturities and sales of marketable investments of $74.1 million, partially offset by capital expenditures of $19.3 million.

Net cash used in investing activities was $21.7 million in 2021 and primarily consisted of capital expenditures of $21.2 million and purchases of marketable investments, net of proceeds from maturities and sales, of $3.1 million. This was partially offset by $2.9 million cash acquired in connection with the Sixense acquisition.

Net cash used in investing activities was $104.1 million in 2020 and primarily consisted of purchases of marketable investments, net of proceeds from maturities and sales, of $76.3 million and capital expenditures of $24.8 million.

Net Cash Provided By Financing Activities

Net cash provided by financing activities primarily relates to proceeds from issuance of common stock upon

underwritten public offering, payments of employee taxes related to vested restricted stock units, payments towards the reduction of our finance lease obligations and certain acquisition-related payments, and proceeds from exercises of stock options and issuances of common stock.

Net cash provided by financing activities was $11.6 million in 2022 and primarily consisted of proceeds from the issuance of stock under our employee stock purchase plan of $13.8 million and proceeds from exercises of stock options of $7.8 million. This was partially offset by $8.0 million of payments of employee taxes related to vested restricted stock units and payments related to finance lease obligations of $1.8 million.

Net cash provided by financing activities was $0.8 million in 2021 and primarily consisted of proceeds from the issuance of stock under our employee stock purchase plan of $13.7 million and proceeds from exercises of stock options of $4.7 million. This was partially offset by $15.8 million of payments of employee taxes related to vested restricted stock units and payments related to finance lease obligations of $1.5 million.

Net cash provided by financing activities was $134.9 million in 2020 and primarily consisted of proceeds from the issuance of common stock, net of issuance costs, of $134.8 million, proceeds from the issuance of stock under our employee stock purchase plan of $11.3 million and proceeds from exercises of stock options of $5.2 million. This was partially offset by $10.1 million of payments of employee taxes related to vested restricted stock units, payments related to finance lease obligations of $3.4 million and payments related to contingent consideration in connection with our acquisition in 2017 of $0.7 million.

Contractual Obligations and Commitments

In the normal course of business, the Company enters into contracts and commitments that obligate us to make payments in the future. Our contractual obligations consist primarily of: non-cancelable operating and finance leases and purchase commitments. Information regarding our obligations relating to lease arrangements and purchase commitments, as well as amounts recorded for uncertain tax positions, are provided in Part II, Item 8, “Financial Statements and Supplementary Data”of this Form 10-K in Note “9. Leases”, Note “10. Commitments and Contingencies”, and Note “14. Income Taxes”, respectively.

The Company is also subject to certain royalty obligations under a license agreement with amounts due thereunder fluctuating depending on sales levels. Royalty expense included in cost of sales for the years ended December 31, 2022, 2021 and 2020 was $2.5 million, $2.3 million and $2.5 million, respectively. For more information on these royalty obligations, refer to Note “10. Commitments and Contingencies” to our consolidated financial statements in Part II, Item 8 of this Form 10-K.

Recently Issued Accounting Standards

For information with respect to recently issued accounting standards and the impact of these standards on our consolidated financial statements, refer to Note “2. Summary of Significant Accounting Policies” to our consolidated financial statements in Part II, Item 8 of this Form 10-K.

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