What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-08 compared with 2020-03-10 · 133 added, 123 removed, 281 unchanged (48% of the section changed)

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Risk Factors of this Form 10-K and elsewhere in this document.

We are a leading provider of secure application solutions and services that enable a new generation of intelligently connected companies with the ability to continuously improve cyber protection and digital responsiveness across dynamic Information Technology (“IT”) and network infrastructures.

Our portfolio of software and hardware solutions combines industry-leading performance and scale with advanced intelligent automation, machine learning, data driven analytics, and threat intelligence to ensure security and availability of customer applications across their multi-cloud and mobile infrastructure

networks, including on-premise, private and public clouds.

As the cyber threat landscape intensifies and network architectures evolve, we are committed to providing customers with greater connected intelligence to improve the security, visibility, automation, availability, flexibility, management and performance of their applications.

Our customers include leading cloud providers, web-scale businesses, service providers, government organizations and enterprises.

Our product portfolio seeks to address many of the aforementioned challenges and solution requirements.

We are a leading provider of networking solutions that enable next-generation networks focused on reliability, availability, scalability and cybersecurity.

Our portfolio supports customers operating in the cloud, on-premise or in hybrid environments providing rapid return on their investment as well as investment protection with best-in-class technical performance.

As cyber-attacks increase in volume and complexity, we integrate security as a key attribute in our solutions that further enable our customers to continue to adapt to market trends in cloud, internet of things and the ever increasing need for more data, building upon our strong global footprint and leadership in application and network infrastructure.

Our customers include leading service providers (cloud, telecommunications, multiple system operators, cable), government organizations, and enterprises.

Our product portfolio seeks to address many of the cyber protection challenges and solution requirements.

The portfolio consists of six secure application solutions;

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Since inception, our customer base has grown rapidly.

As of December 31, 2019 , we had sold products to approximately 6,020 end customers across 133 countries.

As of December 31, 2020, we had sold products to more than 7,290 end-customers worldwide.

We sell substantially all of our solutions through our high-touch sales organization as well as distribution channel partners, including distributors, value-added resellers and system integrators, and fulfill nearly all orders globally through such partners.

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During 2020, 43% of our total revenue was generated from the Americas, 30% from Japan and 27% from other geographical regions.

During 2018 , 48% of our total revenue was generated from the Americas, 24% from Japan and 28% from other geographical regions.

During 2019, 42% of our total revenue was generated from the Americas, 28% from Japan and 30% from

other geographical regions.

During 2018, 48% of our total revenue was generated from the Americas, 24% from Japan and 28% from other geographical regions.

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Our service provider customers accounted for 61%, 58% and 57% of our total revenue during 2020, 2019 and 2018, respectively.

As a result of the nature of our target market and the current stage of our development, a substantial portion of our revenue comes from a limited number of large customers and service providers and web giants, in any period.

Purchases from our ten largest end-customers accounted for 41%, 36% and 37% of our total revenue for 2020, 2019 and 2018, respectively.

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As of December 31, 2020, we had $83.3 million of cash and cash equivalents and $74.9 million of marketable securities.

Cash used in operating activities was $0.4 million in 2019 compared to $2.7 million of cash used in operating activities in 2018.

Cash provided by operating activities was $55.3 million in 2020 compared to $0.4 million of cash used in operating activities in 2019.

We intend to continue to invest for long-term growth.

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2020 2019 Increase (Decrease)

Percent of Total Revenue

Amount Percent of Total Revenue Amount Percent of Total Revenue Amount Percent

Products $ 129,876 57.6 % $ 121,920 57.3 % $ 7,956 6.5 %

Services 95,651 42.4 90,708 42.7 4,943 5.4 %

Total revenue 225,527 100.0 212,628 100.0 12,899 6.1 %

Cost of revenue:

Products 29,109 12.9 29,816 14.0 (707) (2.4) %

Services 21,039 9.3 19,065 9.0 1,974 10.4 %

Total cost of revenue 50,148 22.2 48,881 23.0 1,267 2.6 %

Gross profit 175,379 77.8 163,747 77.0 11,632 7.1 %

Operating expenses:

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Total operating expenses 157,646 69.9 180,841 85.0 (23,195) (12.8) %

Loss from operations

Income (loss) from operations 17,733 7.9 (17,094) (8.0) (34,827) 203.7 %

Non-operating income (expense):

Interest expense (1) — (237) (0.1) 236 (99.6) %

Interest and other income (expense), net

Interest and other income, net 1,407 0.6 919 0.4 488 53.1 %

Total non-operating income (expense), net 1,406 0.6 682 0.3 724 106.2 %

Loss before income taxes

Income (loss) before income taxes 19,139 8.5 (16,412) (7.7) 35,551 216.6 %

Provision for income taxes 1,323 0.6 1,407 0.7 (84) (6.0) %

Net income (loss) $ 17,816 7.9 % $ (17,819) (8.4) % $ 35,635 200.0 %

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2019 2018 Increase (Decrease)

Percent of Total Revenue

Amount Percent of Total Revenue Amount Percent of Total Revenue Amount Percent

Products $ 121,920 57.3 % $ 144,682 62.3 % $ (22,762) (15.7) %

Services 90,708 42.7 87,541 37.7 3,167 3.6 %

Total revenue 212,628 100.0 232,223 100.0 (19,595) (8.4) %

Cost of revenue:

Products 29,816 14.0 34,066 14.7 (4,250) (12.5) %

Services 19,065 9.0 17,830 7.6 1,235 6.9 %

Total cost of revenue 48,881 23.0 51,896 22.3 (3,015) (5.8) %

Gross profit 163,747 77.0 180,327 77.7 (16,580) (9.2) %

Operating expenses:

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General and administrative 23,704 11.1 39,635 17.1 (15,931) (40.2) %

Restructuring expense 2,530 1.2 — — 2,530 *

Total operating expenses 180,841 85.0 208,006 89.6 (27,165) (13.1) %

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Interest expense (237) (0.1) (129) (0.1) (108) 83.7 %

Interest and other income (expense), net

Interest and other income, net 919 0.4 1,273 0.6 (354) (27.8) %

Total non-operating income (expense), net 682 0.3 1,144 0.5 (462) (40.4) %

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Provision for income taxes 1,407 0.7 1,082 0.5 325 30.0 %

Net loss $ (17,819) (8.4) % $ (27,617) (11.9) % $ 9,798 (35.5) %

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Our products revenue primarily consists of revenue from sales of our hardware appliances upon which our software is installed.

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Our adoption of ASC 606, Revenue from Contracts with Customers, in January 2018 resulted in a $2.6 million increase in products revenue in 2018.

See Note 2 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for additional information.

See Note 2 Revenue, of the notes to consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

A summary of our total revenue is as follows (dollars in thousands):

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2020 2019 Increase (Decrease)

Percent of Total Revenue

Amount Percent of Total Revenue Amount Percent of Total Revenue Amount Percent

Products $ 129,876 58 % $ 121,920 57 % $ 7,956 7 %

Services 95,651 42 90,708 43 4,943 5 %

Total revenue $ 225,527 100 % $ 212,628 100 % $ 12,899 6 %

Revenue by geographic region:

Americas $ 98,150 43 % $ 89,944 42 % $ 8,206 9 %

Japan 67,050 30 59,454 28 7,596 13 %

Asia Pacific, excluding Japan 29,760 13 35,689 17 (5,929) (17) %

EMEA 30,567 14 27,541 13 3,026 11 %

Total revenue $ 225,527 100 % $ 212,628 100 % $ 12,899 6 %

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2019 2018 Increase (Decrease)

Percent of Total Revenue

Amount Percent of Total Revenue Amount Percent of Total Revenue Amount Percent

Products $ 121,920 57 % $ 144,682 62 % $ (22,762) (16) %

Services 90,708 43 87,541 38 3,167 4 %

Total revenue $ 212,628 100 % $ 232,223 100 % $ (19,595) (8) %

Revenue by geographic region:

Americas $ 89,944 42 % $ 112,506 48 % $ (22,562) (20) %

Japan 59,454 28 55,205 24 4,249 8 %

Asia Pacific, excluding Japan 35,689 17 36,897 16 (1,208) (3) %

EMEA 27,541 13 27,615 12 (74) — %

Total revenue $ 212,628 100 % $ 232,223 100 % $ (19,595) (8) %

2020 Revenue Compared to 2019 Revenue

Total revenue increased by $12.9 million, or 6%, in 2020 compared to 2019.

This increase was due to a $8.0 million increase in products revenue and a $4.9 million increase in services revenue.

Products revenue increased $8.0 million, or 7%, in 2020 compared to 2019 primarily driven by higher demand from our service provider and enterprise customers in the Americas, and from higher demand from service provider customers in Japan.

Services revenue increased $4.9 million, or 5%, in 2020 compared to 2019.

The increase was primarily attributable to the increase in PCS sales in connection with our increased installed customer base in Japan.

During 2020, $98.2 million, or 43% of total revenue, was generated from the Americas, which represents a 9% increase compared to 2019.

The increase was primarily due to higher products revenue driven by an increase in demand from our service provider customers.

During 2020, $67.1 million, or 30% of total revenue, was generated from Japan, which represents a 13% increase compared to 2019.

The increase was mainly due to increased revenue from our service provider customers.

During 2020, $29.8 million, or 13% of total revenue, was generated from the Asia Pacific region excluding Japan, which represents a 17% decrease compared to 2019.

The decrease was driven by lower revenues from our service provider and enterprise customers.

During 2020, $30.6 million, or 14% of total revenue, was generated from EMEA, which represented an 11% increase compared to 2019.

The increase was primarily due to higher products revenue driven by an increase in demand from our enterprise customers.

2019 Revenue Compared to 2018 Revenue

Total revenue decreased by $19.6 million, or 8%, in 2019 compared to 2018.

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During 2019, $27.5 million, or 13% of total revenue, was generated from EMEA, which remained relatively constant compared to 2018.

2018 Revenue Compared to 2017 Revenue

Total revenue decreased $3.2 million , or 1% , in 2018 compared to 2017 .

This decrease was due to a $5.2 million decrease in products revenue, partially offset by a $2.0 million increase in services revenue.

The decrease in products revenue was primarily driven by lower demand from our service provider customers in the Americas.

Revenues from service provider customers decreased 10% in 2018 compared to 2017.

Revenue from enterprise customers remained relatively constant in 2018 compared to 2017.

Products revenue decreased $5.2 million , or 3% , in 2018 compared to 2017 , primarily driven by lower demand from our service provider customers in the Americas, as well as decreases from EMEA, offset in part by a $2.6 million increase from the adoption of ASC 606 in 2018 and by the increase in products revenue primarily from Japan and Asia Pacific.

See Note 2 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for additional information related to our adoption of ASC 606.

Services revenue increased $2.0 million , or 2% , in 2018 compared to 2017 .

The increase was primarily attributable to the increase in PCS sales in connection with our increased installed customer base.

During 2018 , $112.5 million , or 48% , of total revenue was generated from the Americas, which represents a 8% decrease compared to 2017 .

The decrease was primarily due to lower products revenue driven by lower demand from our service providers in the Americas.

During 2018 , $55.2 million , or 24% , of total revenue was generated from Japan, which represents a 7% increase in revenue compared to 2017 .

The increase was mainly due to higher product revenues driven by higher demand from our srvice providers in Japan.

During 2018 , $36.9 million , or 16% , of total revenue was generated from the Asia Pacific regions excluding Japan, which represents a 11% increase compared to 2017 .

The increase was driven primarily by higher products revenue as well as higher services revenue from PCS sales in connection with our increased installed customer base.

During 2018 , $27.6 million , or 12% , of total revenue was generated from EMEA, which remained relatively consistent from 2017.

Cost of Revenue, Gross Profit and Gross Margin

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A summary of our cost of revenue is as follows (dollars in thousands):

Years Ended December 31,

Increase (Decrease)

Years Ended December 31, Increase (Decrease)

2020 2019 Amount Percent

Cost of revenue:

Products $ 29,109 $ 29,816 $ (707) (2) %

Services 21,039 19,065 1,974 10 %

Total cost of revenue $ 50,148 $ 48,881 $ 1,267 3 %

Years Ended December 31,

Increase (Decrease)

Years Ended December 31, Increase (Decrease)

2019 2018 Amount Percent

Cost of revenue:

Products $ 29,816 $ 34,066 $ (4,250) (12) %

Services 19,065 17,830 1,235 7 %

Total cost of revenue $ 48,881 $ 51,896 $ (3,015) (6) %

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2020 2019 Increase (Decrease)

Amount Gross Margin Amount Gross Margin Amount Gross Margin

Gross profit:

Products $ 100,767 77.6 % $ 92,104 75.5 % $ 8,663 2.1 %

Services 74,612 78.0 % 71,643 79.0 % 2,969 (1.0) %

Total gross profit $ 175,379 77.8 % $ 163,747 77.0 % $ 11,632 0.8 %

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2019 2018 Increase (Decrease)

Amount Gross Margin Amount Gross Margin Amount Gross Margin

Gross profit:

Products $ 92,104 75.5 % $ 110,616 76.5 % $ (18,512) (1.0) %

Services 71,643 79.0 % 69,711 79.6 % 1,932 (0.6) %

Total gross profit $ 163,747 77.0 % $ 180,327 77.7 % $ (16,580) (0.7) %

2020 Gross Margin Compared to 2019 Gross Margin

Products gross margin decreased by 1.0% in 2019 compared to 2018 primarily driven by changes in product and geographic mix.

Products gross margin increased by 2.1% in 2020 compared to 2019 primarily driven by changes in product and geographic mix.

Services gross margin decreased by 1.0% in 2020 compared to 2019 primarily due to higher personnel related support costs.

2019 Gross Margin Compared to 2018 Gross Margin

Products gross margin increased by 0.7% in 2018 compared to 2017 primarily driven by a favorable impact from our product mix.

Services gross margin decreased by 0.5% in 2018 compared to 2017 primarily due to higher costs of inventory used to provide hardware replacements to end customers under PCS contracts and higher personnel related support costs.

Products gross margin decreased by 1.0% in 2019 compared to 2018 primarily driven by changes in product and geographic mix.

Services gross margin decreased by 0.6% in 2019 compared to 2018 primarily due to higher personnel related support costs.

Operating Expenses

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A summary of our operating expenses is as follows (dollars in thousands):

Years Ended December 31,

Increase (Decrease)

Years Ended December 31, Increase (Decrease)

2020 2019 Amount Percent

Operating expenses:

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Years Ended December 31,

Increase (Decrease)

Years Ended December 31, Increase (Decrease)

2019 2018 Amount Percent

Operating expenses:

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General and administrative 23,704 39,635 (15,931) (40) %

Restructuring expense 2,530 — 2,530 *

Total operating expenses $ 180,841 $ 208,006 $ (27,165) (13) %

* not meaningful

Sales and Marketing

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period as required by ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers .

See Note 2 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for additional information.

The decrease in sales and marketing expenses in 2019 compared to 2018 was primarily due to a 14% decrease in headcount, resulting in $5.7 million lower commissions and bonus, $1.3 million lower salary, $0.9 million lower travel and entertainment and $0.8 million lower depreciation.

The increase in sales and marketing expenses in 2018 compared to 2017 was primarily attributable to a $6.0 million increase in sales commissions driven by higher bookings and higher average commission rate in 2018, offset by a $1.3 million decrease in sales commissions from the adoption of ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers, in 2018.

The increase in sales and marketing expenses was also offset by a $2.4 million decrease in employee compensation and benefits driven primarily by decreased headcount resulted from improved sales productivity and a $0.8 million decrease in contractor costs.

We expect sales and marketing expenses to decrease in 2020 as a result of the restructuring plan implemented in the fourth quarter of 2019.

See Note 2 Revenue, of the notes to consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

The $15.1 million decrease in sales and marketing expenses in 2020 compared to 2019 was primarily due to a 12% decrease in headcount, resulting in a $9.6 million decrease in salary and benefit expenses, a $4.1 million decrease in travel and entertainment and a $1.1 million decrease in marketing expenses.

The $10.4 million decrease in sales and marketing expenses in 2019 compared to 2018 was primarily due to a 14% decrease in headcount, resulting in a $7.0 million decrease in salary and benefit expenses, a $0.9 million decrease in travel and entertainment and $0.8 million decrease in depreciation.

In 2021, we expect sales and marketing expenses to remain at 2020 levels as we continue to actively control costs.

Research and Development

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We expense research and development costs as incurred.

The decrease in research and development expenses in 2019 compared to 2018 was primarily driven by a $2.5 million reduction in employee bonuses, $0.8 million lower salary and $0.5 million lower depreciation expense due to lower lab equipment expenditures.

The increase in research and development expenses in 2018 compared to 2017 was primarily driven by a $2.3 million increase in employee bonuses and a $0.9 million increase in consultant fees, offset by a $1.1 million decrease in salaries and wages due to a change of geographic mix in headcount.

We expect research and development expenses for 2020 to decrease compared to 2019 as a result of the restructuring plan implemented in the fourth quarter of 2019.

The $3.8 million decrease in research and development expenses in 2020 compared to 2019 was primarily due to a decrease in salary and benefit expenses, partially offset by an increase in facility expense.

The $3.3 million decrease in research and development expenses in 2019 compared to 2018 was primarily due to a decrease in salary and benefit expenses.

In 2021, we expect research and development expenses to remain at 2020 levels as we continue to actively control costs.

General and Administrative

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Professional services primarily consist of fees for outside accounting, tax, legal, recruiting and other administrative services.

The decrease in general and administrative expenses in 2019 compared to 2018 was primarily due to $10.1 million lower legal fees, $1.4 million lower audit-related costs, $1.7 million lower contractor and consultant expense (all related to the prior year litigation settlement, investigation and restatement efforts), $1.0 million lower commission and bonus, $2.3 million reduction in general IT expenses and $0.4 million lower recruiting costs.

The increase in general and administrative expenses in 2018 compared to 2017 was primarily attributable to the $8.6 million internal investigation related fees we incurred in 2018 as we previously disclosed, a $1.6 million increase in contractor and consultant fees primarily for supporting the accounting function and a $0.8 million increase in employee compensation and benefits.

We expect general and administrative expenses for 2020 to decrease compared to 2019 as a result of the restructuring plan implemented in the fourth quarter of 2019.

The $1.9 million decrease in general and administrative expenses in 2020 compared to 2019 was primarily due to a decrease in consulting and contractor fees, partially offset by an increase in business operations and facility expenses.

The $15.9 million decrease in general and administrative expenses in 2019 compared to 2018 was primarily due to $10.1 million lower legal fees, $1.4 million lower audit-related costs, $1.7 million lower contractor and consultant expense (all related to the 2018 litigation settlement, investigation and restatement efforts), $1.0 million lower commission and bonus, $2.3 million reduction in general IT expenses and $0.4 million lower recruiting costs.

In 2021, we expect general and administrative expenses to remain at 2020 levels as we continue to actively control costs.

Restructuring Expense

In October 2019, we began implementing a restructuring plan in our ongoing efforts to reduce operating costs and focus on advanced technologies.

The restructuring plan, when complete, is expected to result in a workforce reduction of approximately 5% of our workforce and the closure and consolidation of certain U.S.

The restructuring plan resulted in a reduction of approximately 5% of our workforce and the closure and consolidation of certain U.S.

and international office facilities.

We expect to complete the restructuring by the end of the second fiscal quarter of 2020.

The restructuring was completed by the end of the second fiscal quarter of 2020.

We recorded restructuring expenses of $2.5 million in the fourth quarter of 2019, which included the following (in thousands):

Cost of revenue

Sales and marketing

Research and development

General and administrative

Total restructuring expense

Cost of revenue Sales and marketing Research and development General and administrative Total restructuring expense

Employee severance and related payroll taxes $ 28 $ 1,355 $ 340 $ 194 $ 1,917

Facilities closure expenses 435 89 524

As of December 31, 2019, we had accrued but unpaid restructuring costs of $1.5 million included in accrued liabilities on the Consolidated Balance Sheets.

Legal fees 89 89

$ 28 $ 1,790 $ 429 $ 283 $ 2,530

Interest Expense

Interest expense consists primarily of interest expense and amortization of debt issuance costs.

In the past, interest expense has primarily consisted of interest expense and amortization of debt issuance costs.

We elected to allow our credit facility to expire in November 2019 without renewal.

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Interest expense was immaterial in 2020, 2019 and 2018.

Interest and Other Income (Expense), Net

Interest and Other Income, Net

Interest income consists primarily of interest income earned on our cash and cash equivalents and marketable securities.

Other income (expense) consists primarily of foreign currency exchange gains and losses.

Interest and other income (expense), net, had an unfavorable change of $0.4 million , or 28% , in 2019 compared to 2018 primarily driven by a $0.7 million increase in foreign exchange loss, partially offset by a $0.4 million increase in interest income.

Interest and other income (expense), net, had a favorable change of $0.3 million , or 29% , in 2018 compared to 2017 primarily due to a $0.7 million increase in interest income, offset by a $0.3 million increase in foreign exchange loss.

Other income (expense), net consists primarily of foreign currency exchange gains and losses.

Interest and other income, net, had a favorable change of $0.5 million, or 53%, in 2020 compared to 2019 primarily driven by a $1.4 million increase in foreign exchange gain, partially offset by a $0.9 million decrease in interest income.

Interest and other income, net, had an unfavorable change of $0.4 million, or 28%, in 2019 compared to 2018 primarily driven by a $0.7 million increase in foreign exchange loss, partially offset by a $0.4 million increase in interest income.

Provision for Income Taxes

We recorded an income tax provision of $1.4 million , $1.1 million and $1.2 million for the years ended December 31, 2019, 2018 and 2017 , respectively, which primarily consisted of foreign taxes.

We recorded an income tax provision of $1.3 million, $1.4 million and $1.1 million for the years ended December 31, 2020, 2019 and 2018, respectively, which primarily consisted of foreign income taxes.

We currently maintain a valuation allowance on federal and state deferred tax assets, and we will continue to maintain a valuation allowance against all of our U.S.

and certain foreign deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of this allowance.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).

The Tax Act makes broad and complex changes to the U.S.

tax code including, but not limited to:

(1) reducing the U.S.

federal corporate tax rate from 35 percent to 21 percent;

(2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries;

(3) generally eliminating U.S.

federal income taxes on dividends from foreign subsidiaries;

(4) requiring a current inclusion in U.S.

federal taxable income of certain earnings of controlled foreign corporations;

(5) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing

AMT credits can be realized;

(6) creating the base erosion anti-abuse tax, a new minimum tax;

(7) creating a new limitation on deductible interest expense;

and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

As a result of the reduction in the U.S.

corporate income tax rate, we revalued our U.S.

net deferred tax asset at December 31, 2017.

The revaluation is based on the rates at which the U.S.

net deferred tax assets are expected to reverse in the future.

There was no impact to the balance sheet and income statement due to the full valuation allowance placed on the deferred tax assets for the U.S.

See Note 11 to the consolidated financial statements in Part II, Item 8 for further details.

See Note 11 Income Taxes, of the note to consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further details regarding the Company’s taxes.

Liquidity and Capital Resources

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We believe that our existing cash and cash equivalents and marketable securities will be sufficient to meet our anticipated cash needs for at least the next 12 months.

Our future capital requirements will depend on many factors, including our growth rate, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the introduction of new and enhanced product and service offerings and the continuing market acceptance of our products.

product and service offerings and the continuing market acceptance of our products.

In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all.

If we are unable to raise additional capital when desired, our business, operating results and financial condition could be adversely affected.

In addition, as described in Note 8 in the Notes to the Consolidated Financial Statements in this report, we are currently, or from time to time, involved in ongoing litigation.

On May 17, 2020, we entered into a Common Stock Repurchase and Option Exchange Agreement (the “Repurchase Agreement”) with Lee Chen, the Company’s founder and its former Chairman, President and Chief Executive Officer.

Pursuant to the Repurchase Agreement, we repurchased 2.2 million shares of common stock from Mr.

Chen for approximately $13.3 million.

The common shares repurchased are held in treasury and accounted for under the cost method.

On September 17, 2020, we issued a press release announcing that our Board of Directors had approved a stock repurchase program of up to $50 million of its common stock over a period of twelve months.

During the year ended December 31, 2020, we repurchased a total of 2.7 million shares for a total cost of $19.2 million under this program and as of December 31, 2020 we had $30.8 million available to repurchase shares.

Our stock repurchase program does not obligate us to acquire any specific number of shares.

Shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.

To date, all repurchases under this program have occurred in the open market.

In addition, as described in Note 8 Commitments and Contingencies, in the notes to consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K, we may be currently, or may be from time to time, involved in ongoing litigation.

Any adverse settlements or judgments in any litigation could have a material adverse impact on our results of operations, cash balances and cash flows in the period in which such events occur.

Credit Agreements

In November 2016, we entered into a loan and security agreement (the “2016 Credit Facility”) with Silicon Valley Bank (“SVB”) as the lender.

The 2016 Credit Facility provided a three-year, $25.0 million revolving credit facility, which included a maximum of $25.0 million letter of credit subfacility.

We elected to allow the 2016 Credit Facility to expire without renewal in November 2019.

We currently have no plans to enter into any debt or financing arrangement.

Statements of Cash Flows

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Years Ended December 31,

Cash (used in) provided by:

2020 2019 2018

Cash provided by (used in):

Operating activities $ 55,286 $ (426) $ (2,694)

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Our cash flows from operating activities will continue to be affected principally by the extent to which we increase spending on our business and our working capital requirements.

During the year ended December 31, 2019 , cash used in operating activities was $0.4 million , consisting of net loss of $17.8 million , non-cash charges of $26.2 million and an unfavorable net change in operating assets and liabilities of $8.8 million .

During the year ended December 31, 2020, cash provided by operating activities was $55.3 million, consisting of net income of $17.8 million, non-cash charges of $24.7 million and a favorable net change in operating assets and liabilities of $12.8 million.

Our non-cash charges consisted primarily of stock-based compensation expense of $12.3 million and depreciation and amortization expenses of $11.3 million.

The net change in our operating assets and liabilities primarily reflects cash inflows from the changes in deferred revenue of $7.5 million, accrued liabilities and other of $3.9 million, accounts receivable of $2.3 million and prepaid expenses and other assets of $1.1 million, partially offset by cash outflows from changes in accounts payable of $2.7 million.

The unfavorable change in accounts payable was due to the timing of payments to our vendors.

During the year ended December 31, 2019, cash used in operating activities was $0.4 million, consisting of net loss of $17.8 million, non-cash charges of $26.2 million and an unfavorable net change in operating assets and liabilities of $8.8 million.

Our non-cash charges consisted primarily of stock-based compensation expense of $16.5 million and depreciation and

amortization expenses of $10.0 million.

The net change in our operating assets and liabilities primarily reflects an outflow from the changes in accrued liabilities and other of $5.9 million and inventory of $5.6 million, partially offset by an inflow from changes in deferred revenue of $3.2 million.

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The unfavorable change in inventory was due to the timing of shipments.

During the year ended December 31, 2017, cash provided by operating activities was $14.3 million, consisting of a net loss of $10.8 million, a cash decrease resulting from the net change in operating assets and liabilities of $1.4 million and non-cash charges of $26.4 million.

Our non-cash charges consisted primarily of stock-based compensation of $17.2 million, depreciation and amortization of $8.5 million and provision for doubtful accounts and sales returns allowance of $1.1 million.

The net change in our operating assets and liabilities primarily reflects an inflow from the changes in accounts receivable of $12.4 million and deferred revenue of $3.0 million, and an outflow from the change in accrued liabilities of $8.9 million, inventory of $4.7 million, prepaid expenses and other assets of $2.4 million and accounts payable of $0.9 million.

The decrease in accounts receivable was primarily due to the timing of billing and cash collections.

The increase in deferred revenue was primarily due to higher contract renewals.

The decrease in accrued liabilities was primarily due to lower accrued bonuses and commissions.

The increase in inventory was primarily due to lower product shipments.

The increase in prepaid expenses and other assets was primarily due to prepaid royalties, software subscription renewals and prepaid expenses and deposit related to a sales event.

The decrease in accounts payable was primarily due to the timing of vendor invoice payments.

Cash Flows from Investing Activities

During the year ended December 31, 2020, cash provided by investing activities was $5.2 million, consisting of proceeds from sales and maturities of marketable securities of $66.8 million, partially offset by purchases of marketable securities of $58.0 million and property and equipment of $3.6 million.

During the year ended December 31, 2019, cash used in investing activities was $0.3 million, consisting of purchases of property and equipment of $4.3 million, marketable securities of $71.6 million, partially offset by proceeds from sales and maturities of marketable securities of $75.7 million.

During the year ended December 31, 2018, cash used in investing activities was $6.9 million, consisting of purchases of property and equipment of $2.8 million, marketable securities of $86.8 million and investment of $1.0 million, partially offset by proceeds from sales and maturities of marketable securities of $83.7 million.

During the year ended December 31, 2017, cash used in investing activities was $5.1 million, consisting of purchases of property and equipment of $5.7 million and marketable securities of $87.4 million, partially offset by proceeds from sales and maturities of marketable securities of $88.0 million.

Cash Flows from Financing Activities

During the year ended December 31, 2020, cash used in financing activities was $22.9 million consisting primarily of $32.5 million of cash used to repurchase our common stock, partially offset by $9.6 million of cash proceeds from common stock issuances under our equity incentive plans.

During the year ended December 31, 2019, cash provided by financing activities was $5.8 million consisting primarily of proceeds from common stock issuances under our equity incentive plans.

During the year ended December 31, 2018, cash used in financing activities was $3.6 million consisting primarily of proceeds from common stock issuances under our equity incentive plans.

During the year ended December 31, 2017, cash provided by financing activities was $8.4 million, primarily consisting of proceeds from common stock issuances under our equity incentive plans of $12.2 million, partially offset by repurchase and retirement of common stock of $3.1 million and payment of contingent consideration of $0.7 million.

Contractual Obligations

1 unchanged sentence

The following table summarizes our contractual obligations as of December 31, 2020 (in thousands):

Total Less Than

1 Year 1 to 3 Years 3 to 5 Years More than

Operating leases $ 31,609 $ 6,064 $ 13,772 $ 9,359 $ 2,414

12 unchanged sentences

Inventory write-downs, once established, are not reversed as they establish a new cost basis for the inventory.

Inventory write downs are included as a component of cost of products revenue in the accompanying consolidated statements of operations.

Inventory write downs are included as a component of cost of products revenue in the consolidated statements of operations.

Revenue Recognition

11 unchanged sentences

PCS revenue includes arrangements for software support and technical support for our products.

PCS is offered under renewable, fee-based contracts, which include technical support, hardware repair and replacement parts, bug fixes, patches, and unspecified upgrades on a when-and-if available basis.

Revenue for PCS services is recognized on a straight-line basis over the service contract term, which is typically one year, but can be up to five years as there is no discernable pattern of transfer related to these promises.

PCS is offered under renewable, fee-based contracts, which includes technical support, hardware repair and replacement parts, bug fixes, patches, and unspecified upgrades on a when-and-if available basis.

Revenue for PCS services is recognized on a straight-line basis over

the service contract term, which is typically one year, but can be up to five years as there is no discernible pattern of transfer related to these promises.

Billed but unearned PCS revenue is included in deferred revenue.

20 unchanged sentences

Additionally, we will evaluate a portfolio of data, when possible, in various situations, including accounting for commissions, rights of return and transactions with variable consideration.

We report revenue net of sales taxes.

We include shipping charges billed to customers in revenue and the related shipping costs are included in cost of product revenue.

Recent Accounting Pronouncements

Refer to Note 1 in Item 8 of this Form 10-K for information related to recent accounting pronouncements.

Refer to Note 1 Description of Business and Summary of Significant Accounting Policies, in the notes to consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for information related to recent accounting pronouncements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis