A10 Networks, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm - Armanino LLP 65 Report of Independent Registered Public Accounting Firm - Deloitte & Touche LLP 68 Consolidated Balance Sheets as of December 31, 20 20 and 20 19 69 Consolidated Statements of Operations for the years ended December 31, 20 20 , 201 9 and 20 18 70 Consolidated Statements of Comprehensive Income ( Loss ) for the years ended December 31, 20 20 , 201 9 and 20 18 71 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 20 20 , 201 9 and 20 18 72 Consolidated Statements of Cash Flows for the years ended December 31, 20 20 , 201 9 and 20 18 73 Notes to Consolidated Financial Statements 74 64 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of A10 Networks, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheet of A10 Networks, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019 and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the two years ended December 31, 2020, and the related notes (collectively referred to as the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the two years ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting 65 A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition — Refer to Note 1 to the Consolidated Financial Statements Critical Audit Matter Description The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following: • Determination of multiple performance obligations and the transaction price allocated to each distinct performance obligation based on the relative standalone selling price • Determination whether the identified performance obligations are distinct • Estimation and utilization of a variety of complex assumptions in estimating standalone selling prices, including market conditions, estimates on the size and/or volume of the customer, and geographical factors Given these factors, the related audit effort in evaluating management’s judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment. How the Critical Audit Matter Was Addressed in the Audit Our principal audit procedures related to the Company’s revenue recognition for these customer agreements included the following: • We tested the design and operating effectiveness of controls relating to the revenue recognition process, including controls related to the process of identifying distinct performance obligations, in determining standalone selling prices and in allocating the transaction price to the distinct performance obligations • We selected a sample of customer agreements and performed the following procedures: ◦ Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement ◦ Tested management’s identification of all distinct performance obligations, including management’s allocation of the transaction price to each distinct performance obligation ◦ Tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized ◦ Assessed the accuracy and completeness of the underlying data used in management's determination of the relative standalone selling prices 66 ◦ Assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition /s/ Armanino LLP San Jose, California March 8, 2021 We have served as the Company’s auditor since 2019. 67 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of A10 Networks, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows of A10 Networks, Inc. and subsidiaries (the “Company”) for the year ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers in 2018 due to the adoption of Accounting Standards Update No. 2014-09 Revenue from Contracts with Customers (Topic 606) using the modified retrospective approach. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. /S/ DELOITTE & TOUCHE LLP San Jose, California March 15, 2019 (date of initial issuance) We have served as the Company’s auditor since 2011. In 2019, we became the predecessor auditor. 68 A10 NETWORKS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par value) December 31, 2020 December 31, 2019 ASSETS Current assets: Cash and cash equivalents $ 83,281 $ 45,742 Marketable securities 74,851 84,180 Accounts receivable, net of allowances of $41 and $52, respectively 51,051 53,566 Inventory 20,730 22,384 Prepaid expenses and other current assets 12,390 15,067 Total current assets 242,303 220,939 Property and equipment, net 7,888 7,656 Goodwill 1,307 1,307 Intangible assets 862 2,305 Other non-current assets 38,451 41,846 Total assets $ 290,811 $ 274,053 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 4,851 $ 7,592 Accrued liabilities 36,930 27,756 Deferred revenue, current 65,999 62,233 Total current liabilities 107,780 97,581 Deferred revenue, non-current 42,700 38,931 Other non-current liabilities 24,357 28,754 Total liabilities 174,837 165,266 Commitments and contingencies (Note 8) Stockholders' equity: Common stock, $0.00001 par value: 500,000 shares authorized; 76,346 and 77,580 shares issued and outstanding, respectively 1 1 Treasury stock, at cost: 5,578 and 678 shares, respectively ( 37,410 ) ( 4,870 ) Additional paid-in-capital 425,534 403,470 Accumulated other comprehensive income 98 251 Accumulated deficit ( 272,249 ) ( 290,065 ) Total stockholders' equity 115,974 108,787 Total liabilities and stockholders' equity $ 290,811 $ 274,053 See accompanying notes to consolidated financial statements. 69 A10 NETWORKS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Years Ended December 31, 2020 2019 2018 Revenue: Products $ 129,876 $ 121,920 $ 144,682 Services 95,651 90,708 87,541 Total revenue 225,527 212,628 232,223 Cost of revenue: Products 29,109 29,816 34,066 Services 21,039 19,065 17,830 Total cost of revenue 50,148 48,881 51,896 Gross profit 175,379 163,747 180,327 Operating expenses: Sales and marketing 77,732 92,783 103,214 Research and development 58,063 61,824 65,157 General and administrative 21,851 23,704 39,635 Restructuring expense — 2,530 — Total operating expenses 157,646 180,841 208,006 Income (loss) from operations 17,733 ( 17,094 ) ( 27,679 ) Non-operating income (expense): Interest expense ( 1 ) ( 237 ) ( 129 ) Interest and other income, net 1,407 919 1,273 Total non-operating income, net 1,406 682 1,144 Income (loss) before income taxes 19,139 ( 16,412 ) ( 26,535 ) Provision for income taxes 1,323 1,407 1,082 Net income (loss) $ 17,816 $ ( 17,819 ) $ ( 27,617 ) Net income (loss) per share: Basic $ 0.23 $ ( 0.23 ) $ ( 0.38 ) Diluted $ 0.22 $ ( 0.23 ) $ ( 0.38 ) Weighted-average shares used in computing net income (loss) per share: Basic 77,776 76,080 72,882 Diluted 80,019 76,080 72,882 See accompanying notes to consolidated financial statements. 70 A10 NETWORKS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) Years Ended December 31, 2020 2019 2018 Net income (loss) $ 17,816 $ ( 17,819 ) $ ( 27,617 ) Other comprehensive income (loss), net of tax: Unrealized gain (loss) on marketable securities ( 153 ) 395 ( 21 ) Comprehensive income (loss) $ 17,663 $ ( 17,424 ) $ ( 27,638 ) See accompanying notes to consolidated financial statements. 71 A10 NETWORKS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Common Stock Treasury stock, at cost Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders' Equity Shares Amount Balance at December 31, 2017 71,692 $ 1 $ ( 4,870 ) $ 360,403 $ ( 123 ) $ ( 257,025 ) $ 98,386 Cumulative effect adjustment from adoption of ASU 2014-09 — — — — — 12,396 12,396 Stock-based compensation expense — — — 17,038 — — 17,038 Common stock issued under employee equity incentive plans 2,609 — — 3,701 — — 3,701 Unrealized loss on marketable securities, net of tax — — — — ( 21 ) — ( 21 ) Net loss — — — — — ( 27,617 ) ( 27,617 ) Balance at December 31, 2018 74,301 1 ( 4,870 ) 381,142 ( 144 ) ( 272,246 ) 103,883 Stock-based compensation expense — — — 16,529 — — 16,529 Common stock issued under employee equity incentive plans 3,279 — — 5,799 — — 5,799 Unrealized loss on marketable securities, net of tax — — — — 395 — 395 Net loss — — — — — ( 17,819 ) ( 17,819 ) Balance at December 31, 2019 77,580 1 ( 4,870 ) 403,470 251 ( 290,065 ) 108,787 Stock-based compensation expense — — — 12,473 — — 12,473 Common stock issued under employee equity incentive plans 3,666 — — 9,591 — — 9,591 Repurchase of common stock ( 4,900 ) — ( 32,540 ) — — — ( 32,540 ) Unrealized gain on marketable securities, net of tax — — — — ( 153 ) — ( 153 ) Net Income — — — — — 17,816 17,816 Balance at December 31, 2020 76,346 $ 1 $ ( 37,410 ) $ 425,534 $ 98 $ ( 272,249 ) $ 115,974 See accompanying notes to consolidated financial statements. 72 A10 NETWORKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2020 2019 2018 Cash flows from operating activities: Net income (loss) $ 17,816 $ ( 17,819 ) $ ( 27,617 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 11,303 10,028 7,880 Stock-based compensation 12,310 16,529 17,038 Provision for doubtful accounts and sales returns ( 78 ) ( 190 ) 212 Other non-cash items 1,144 ( 153 ) ( 68 ) Changes in operating assets and liabilities: Accounts receivable 2,346 599 ( 6,119 ) Inventory 543 ( 5,648 ) ( 1,529 ) Prepaid expenses and other assets 1,141 ( 452 ) ( 2,434 ) Accounts payable ( 2,683 ) ( 621 ) ( 603 ) Accrued and other liabilities 3,909 ( 5,897 ) 3,116 Deferred revenue 7,535 3,198 7,331 Other — — 99 Net cash provided by (used in) operating activities 55,286 ( 426 ) ( 2,694 ) Cash flows from investing activities: Proceeds from sales of marketable securities 9,051 32,200 32,720 Proceeds from maturities of marketable securities 57,707 43,525 51,024 Purchases of marketable securities ( 57,992 ) ( 71,636 ) ( 86,823 ) Purchase of investment — — ( 1,000 ) Purchases of property and equipment ( 3,564 ) ( 4,340 ) ( 2,797 ) Net cash provided by (used in) investing activities 5,202 ( 251 ) ( 6,876 ) Cash flows from financing activities: Proceeds from issuance of common stock under employee equity incentive plans 9,591 5,799 3,701 Repurchases of common stock ( 32,540 ) — — Other — ( 1 ) ( 77 ) Net cash provided by (used in) financing activities ( 22,949 ) 5,798 3,624 Net increase (decrease) in cash and cash equivalents 37,539 5,121 ( 5,946 ) Cash and cash equivalents - beginning of year 45,742 40,621 46,567 Cash and cash equivalents - end of year $ 83,281 $ 45,742 $ 40,621 Supplemental Disclosures: Cash paid for income taxes, net of refunds $ 1,032 $ 934 $ 517 Cash paid for interest $ 4 $ 262 $ 100 Non-cash investing and financing activities: Inventory transfers to property and equipment $ 1,112 $ 1,193 $ 1,176 Purchases of property and equipment included in accounts payable $ 58 $ 10 $ 58 See accompanying notes to consolidated financial statements. 73 Notes to Consolidated Financial Statements 1. Description of Business and Summary of Significant Accounting Policies Description of Business A10 Networks, Inc. (together with our subsidiaries, the “Company”, “we”, “our” or “us”) was incorporated in California in 2004 and reincorporated in Delaware in March 2014. We are headquartered in San Jose, California and have wholly-owned subsidiaries throughout the world including Asia and Europe. 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 product portfolio seeks to address many of the cyber protection challenges and solution requirements. The portfolio consists of six secure application solutions; Thunder Application Delivery Controller (“ADC”), Lightning Application Delivery Controller (“Lightning ADC”), Thunder Carrier Grade Networking (“CGN”), Thunder Threat Protection System (“TPS”), Thunder SSL Insight (“SSLi”) and Thunder Convergent Firewall (“CFW”), and two intelligent management and automation tools; Harmony Controller and aGalaxy TPS. Our solutions are available in a variety of form factors, such as optimized hardware appliances, bare metal software, containerized software, virtual appliances and cloud-native software. Basis of Presentation The accompanying consolidated financial statements include those of A10 Networks, Inc. and its subsidiaries, and have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). All intercompany accounts and transactions have been eliminated in consolidation. Reclassifications Certain prior year amounts have been reclassified to conform to current year presentation in the consolidated revenues by geographic region in Note 12 Geographic Information, in the notes to consolidated financial statements. We have combined in the “Americas” region, revenues from the United States with revenues from Latin America. A portion of the prior period balance for Additional paid-in capital on the Company’s consolidated balance sheet as of December 31, 2019 has been reclassified to Treasury stock, at cost, to conform to the current period presentation. This reclassification did not have a material impact on the previously reported financial statements. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Those estimates and assumptions affect revenue recognition and deferred revenue, the allowance for doubtful accounts, the sales return reserve, the valuation of inventory, the fair value of marketable securities, contingencies and litigation, accrued liabilities, deferred commissions and the determination of fair value of stock-based compensation. These estimates are based on information available as of the date of the consolidated financial statements; therefore, actual results could differ from management’s estimates. Significant Accounting Policies Cash and Cash Equivalents Cash and cash equivalents include bank deposits and short-term, highly liquid investments purchased with an original maturity of 90 days or less. Our cash equivalents consist of money market funds. Marketable securities We classify our investments in debt securities as available-for-sale and record these investments at fair value. We may sell these investments at any time before their maturities. Accordingly, we classified our securities, including those with maturities exceeding twelve months, as current assets and included in marketable securities in the consolidated balance sheets. 74 Unrealized gains and losses are reported in accumulated other comprehensive income (loss), net of taxes, in the consolidated statements of stockholders’ equity. Realized gains and losses are determined based on the specific identification method. Realized gains and losses and other-than-temporary impairment charges, if any, on marketable securities are reported in interest and other income, net as incurred in the consolidated statements of operations. We regularly review our investment portfolio to identify and evaluate investments that have indicators of possible impairment. Investments are considered impaired when a decline in fair value is judged to be other-than-temporary. If the cost of an individual investment exceeds its fair value, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, and our intent and ability to hold the investment. Once a decline in fair value is determined to be other-than-temporary, we will record an impairment charge and establish a new cost basis in the investment. Fair Value Measurement Our financial instruments consist of cash, cash equivalents, marketable securities, accounts receivable and accounts payable. Our cash equivalents are measured and recorded at fair value on a recurring basis. Marketable securities are comprised of certificates of deposit, corporate securities, U.S. Treasury and agency securities, commercial paper and asset-backed securities and are measured at fair value on a recurring basis. Accounts receivable and accounts payable are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment. Financial instruments recorded at fair value are measured and classified using the three-level valuation hierarchy as described below: Level 1 — observable inputs for identical assets or liabilities, such as quoted prices in active markets. Level 2 — inputs other than the quoted prices in active markets that are observable either directly or indirectly. Level 3 — unobservable inputs in which there is little or no market data, which requires us to develop our own assumptions when pricing the financial instruments. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are recorded at invoice amounts, net of allowances for doubtful accounts. We evaluate the collectability of our accounts receivable based on known collection risks and historical experience. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us (for examples, bankruptcy filings or substantial downgrading of credit ratings), we record a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we record reserves for bad debts based on the length of time the receivables are past due and our historical experience of collections and write-offs. Inventory Inventory is stated at the lower of cost or net realizable value. Inventory cost is determined using first-in, first-out method. We evaluate inventory for excess and obsolete products, based on management’s assessment of future demand and market conditions. 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 consolidated statements of operations. Property and Equipment, Net Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Depreciation on property and equipment, excluding leasehold improvements, ranges from one to three years . Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the remaining lease term. Amortization on leasehold improvements ranges from one to seven years . 75 Leases The Company determines if an arrangement is a lease at inception. For leases where the Company is the lessee, right-of-use (“ROU”) assets represent the Company’s right to use the underlying asset for the term of the lease and are included within other non-current assets in the consolidated balance sheets, and the lease liabilities represent an obligation to make lease payments arising from the lease and are recorded within accrued liabilities and other non-current liabilities in the consolidated balance sheets. Lease liabilities are recognized at the lease commencement date based on the present value of the future lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the commencement date of the underlying lease arrangement to determine the present value of lease payments. The ROU asset is determined based on the lease liability initially established and reduced for any prepaid lease payments and any lease incentives received. The lease term to calculate the ROU asset and related lease liability includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. The Company’s lease agreements generally do not contain any material variable lease payments, residual value guarantees or restrictive covenants. The Company elected the package of practical expedients permitted under the transition guidance, which allowed for the carry-forward of the Company’s historical lease classification and assessment on whether a contract is or contains a lease. The Company elected to not apply the new standard’s recognition requirements to leases with an initial term of 12 months or less and instead elected to recognize lease payments in the consolidated statements of operations on a straight-line basis over the lease term. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while expense for financing leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition. The Company accounts for lease components and non-lease components as a single lease component. Goodwill Goodwill represents the excess of purchase consideration over the fair values of assets acquired and liabilities assumed in a business combination. Goodwill is not amortized but is reviewed for possible impairment annually in the fourth quarter or more frequently if impairment indicators arise. We have identified a single reporting unit for the purpose of our goodwill impairment tests, and the fair value of our reporting unit has been determined by our enterprise value. We may elect to utilize a qualitative assessment to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying value. If, after assessing the qualitative factors, we determine that it is more likely than not that the fair value of our reporting unit is less than its carrying value, an impairment analysis will be performed. We compare the fair value of our reporting unit with its carrying amount and if the carrying value of the reporting unit exceeds its fair value, an impairment loss will be recognized for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill. We did not identify impairment of goodwill for any periods presented. See the Recently Adopted Accounting Pronouncements section below for a discussion on the adoption of ASU 2017-04 in January 2020, which simplifies the goodwill impairment review process. Intangible Assets Intangible assets are recorded at fair value and amortized on a straight-line basis over their estimated useful lives, which range from 5 to 11 years. We evaluate our intangible assets for impairment at least annually and when indicators of impairment may exist. There were no impairment charges to our intangible assets during the years ended December 31, 2020, 2019 and 2018. Impairment of Long-Lived Assets We evaluate our property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of our long-lived assets may not be recoverable. Recoverability of an asset group is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value. Revenue Recognition We recognize revenue, net of applicable taxes, when we transfer control of promised goods or services to our customers in an amount that reflects the consideration to which we expect to be entitled to in exchange for those goods or services. 76 We derive revenue from two sources: (i) products revenue, which includes hardware, perpetual software license and subscription revenue; and (ii) services revenue, which includes post contract support (“PCS”), professional services, and training. A substantial portion of our revenue is from sales of our products and services through distribution channel partners, such as resellers and distributors. We apply the following five-step revenue recognition model: • Identification of the contract, or contracts, with a customer • Identification of the performance obligations in the contract • Determination of the transaction price • Allocation of the transaction price to the performance obligations in the contract • Recognition of revenue when, or as, performance obligations are satisfied. 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 discernible pattern of transfer related to these promises. Billed but unearned PCS revenue is included in deferred revenue. Professional service revenue primarily consists of the fees we earn related to installation and consulting services. We recognize revenue from professional services upon delivery or completion of performance. Professional service arrangements are typically short term in nature and are largely completed within 30 to 90 days from the start of service. Revenue is recognized for training when the training course is delivered. Contracts with Multiple Performance Obligations Most of our contracts with customers, other than renewals of PCS, contain multiple performance obligations with a combination of products and PCS. Products and PCS generally qualify as distinct performance obligations. Our hardware includes embedded ACOS software, which together deliver the essential functionality of our products. For contracts which contain multiple performance obligations, we allocate revenue to each distinct performance obligation based on the standalone selling price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation. We use a range of amounts to estimate SSP for products and PCS sold together in a contract to determine whether there is a discount to be allocated based on the relative SSP of the various products and PCS. If we do not have an observable SSP, such as when we do not sell a product or service separately, then SSP is estimated using judgment and considering all reasonably available information such as market conditions and information about the size and/or purchase volume of the customer. We generally use a range of amounts to estimate SSP for individual products and services based on multiple factors including, but not limited to the sales channel (reseller, distributor or end-customer), the geographies in which our products and services are sold, and the size of the end-customer. We account for multiple contracts with a single partner as one arrangement if the contractual terms and/or substance of those agreements indicate that they may be so closely related that they are, in effect, parts of a single contract. We may occasionally accept returns to address customer satisfaction issues even though there is generally no contractual provision for such returns. We estimate returns for sales to customers based on historical returns rates applied against current-period shipments. Specific customer returns and allowances are considered when determining our sales return reserve estimate. Our policy applies to the accounting for individual contracts. However, we have elected a practical expedient to apply the guidance to a portfolio of contracts or performance obligations with similar characteristics so long as such application would not differ materially from applying the guidance to the individual contracts (or performance obligations) within that portfolio. Consequently, we have chosen to apply the portfolio approach when possible, which we do not believe will happen frequently. 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. 77 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. Deferred Contract Acquisition Costs We capitalize certain contract acquisition costs consisting of incremental sales commissions incurred to obtain customer contracts. Deferred commissions related to product revenues are recognized upon transfer of control to customers. Deferred commissions related to services revenue are recognized as the related performance obligations are met. Deferred commissions that will be recognized during the succeeding 12-month period are recorded as prepaid expenses and other current assets, and the remaining portion is recorded as other non-current assets. Amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of operations. Research and Development Costs Research and development efforts are focused on new product development and on developing additional functionality for our existing products. These expenses consist of personnel costs, and to a lesser extent, prototype materials, depreciation and certain allocated facilities and information technology costs. We expense research and development costs as incurred. Capitalization of Internally Developed Software to be Marketed and Sold In the first quarter of 2020, we began capitalizing software engineering labor costs related to certain long-term projects that are expected to take more than a year to complete. We account for the capitalization of labor costs under ASC Topic 985-20, Software to be Sold, Leased or Marketed . During the year ended December 31, 2020, capitalized labor costs totaled $ 1.6 million and is included in property and equipment in the consolidated balance sheets. Stock-Based Compensation Stock-based compensation expense is measured on the grant date based on the fair value of the award and recognized on a straight-line basis over the requisite service period, reduced for actual forfeitures. The fair values of restricted stock units (“RSUs”) are estimated using our stock price on the grant date. The fair value of options and employee stock purchase rights is estimated using the Black-Scholes model on the grant date. The Black-Scholes model determines the fair value of share-based payment awards based on assumptions including expected term, stock price volatility, and risk-free interest rate. The fair value of market performance-based restricted stock units (“PSUs”) is valued using the Monte Carlo simulation model, which uses the stock price, expected volatility and risk-free interest rate to determine the fair value. Warranty Costs Our appliance hardware and software generally carry a warranty period of 90 days. Estimates of future warranty costs are based on historical returns and the application of the historical return rates to our in-warranty installed base. Warranty costs to repair or replace items sold to customers have been insignificant for the years ended December 31, 2020, 2019 and 2018. Foreign Currency The functional currency of our foreign subsidiaries is the U.S. dollar. Transactions denominated in non-functional currencies are remeasured to the functional currency at the average exchange rate for the period. Non-functional currency monetary assets and liabilities are remeasured to the functional currency using the exchange rate in effect at the balance sheet date, and non-monetary assets and liabilities are remeasured at historical exchange rates. Gains and losses related to remeasurement are recorded in interest and other income, net in the consolidated statements of operations. Income Taxes We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or in our tax returns. Estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred income tax assets, which arise from temporary differences and carryforwards. Deferred income tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe, based upon the weight of available evidence, that it is more likely than not that all or a portion of deferred tax assets will not be realized, a valuation allowance is established through an adjustment to income tax expense. 78 The factors used to assess the likelihood of realization of our deferred tax assets include our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Assumptions represent our best estimates and involve inherent uncertainties and the application of our judgment. We account for uncertainty in income taxes recognized in our consolidated financial statements by regularly reviewing our tax positions and benefits to be realized. We recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained upon examination by taxing authorities. The provision for income taxes excludes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties. Advertising Costs Advertising costs are expensed when incurred. Advertising costs were $ 0.4 million, $ 0.5 million and $ 0.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. Segment Information An operating segment is a component of an enterprise for which its discrete financial information is available and its operating results are regularly reviewed by our chief operating decision maker for resource allocation decisions and performance assessment. Our chief operating decision maker is our Chief Executive Officer. Our Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating resources and assessing performance of the Company. Accordingly, we have one reportable segment and one operating segment. Vendor Business Concentration We rely on third parties to manufacture our hardware appliances and we purchase raw materials from third-party vendors. We outsource substantially all of our manufacturing services to three independent manufacturers. In addition, we purchase certain strategic component inventory which is consigned to our third-party manufacturers. Other hardware components included in our products are sourced from various suppliers by our manufacturers and are principally industry standard parts and components that are available from multiple vendors. Concentration of Credit Risk and Significant Customers Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, marketable securities and accounts receivable. Our cash, cash equivalents and marketable securities are held and invested in high-credit quality financial instruments by recognized financial institutions and are subject to minimum credit risk. Our accounts receivable are unsecured and represent amounts due to us based on contractual obligations of our customers. We mitigate credit risk in respect to accounts receivable by performing periodic credit evaluations based on a number of factors, including past transaction experience, evaluation of credit history and review of the invoicing terms of the contract. We generally do not require our customers to provide collateral to support accounts receivable. Significant customers, including distribution channel partners and direct customers (“end-customers”), are those which represent 10% or more of our total revenue for each period presented or our gross accounts receivable balance as of each respective balance sheet date. Revenues from our significant customers as a percentage of our total revenue are as follows: Years Ended December 31, 2020 2019 2018 Customer A (a distribution channel partner) * * 14 % Customer B (a distribution channel partner) * 12 % 10 % Customer C (a distribution channel partner) * 14 % * Customer D (a distribution channel partner) 10 % * * 79 * represents less than 10% of total revenue As of December 31, 2020, two customers accounted for 17 % and 10 % of our total gross accounts receivable. As of December 31, 2019, two customers accounted for 17 % and 12 % of our total gross accounts receivable. Recently Adopted Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as subsequently amended, which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition . This ASU requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the capitalization of incremental customer acquisition costs and amortization of these costs over the contract period or estimated customer life which resulted in the recognition of a deferred commission asset on our consolidated balance sheet. The Company adopted ASU No. 2014-09 and its related amendments (collectively “ASC 606”) on January 1, 2018 using the modified retrospective method. See Note 2 Revenue, for disclosure on the impact of adopting this standard. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and subsequent amendments to the initial guidance, in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under prior generally accepted accounting principles. ASU No. 2016-02, as amended, requires that a lessee recognize a liability to make lease payments (the lease liability) and a right-of-use asset (“ROU”) representing its right to use the underlying asset for the lease term on the balance sheet. The Company adopted the standard effective January 1, 2019, using the modified retrospective method, which resulted in the recognition of right-of-use assets of approximately $ 6.0 million and lease liabilities for operating leases of approximately $ 6.8 million on the Company’s consolidated balance sheets, with no material impact to its consolidated statements of operations. See Note 5 Leases, for further information regarding the impact of the adoption of ASU No. 2016-02 on the Company's consolidated financial statements. Effective January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments-Credit Losses : Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), as amended, using a modified retrospective approach, with certain exceptions allowed. The standard amends the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the incurred-loss model with an expected-loss model. This new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than by reducing the carrying amount under the current, other-than-temporary-impairment model. The adoption of ASU 2016-13 did not have a significant impact on the Company’s consolidated financial statements. In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test referenced in Accounting Standards Codification (“ASC”) 350, Intangibles - Goodwill and Other (“ASC 350”). As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, including any interim impairment tests within those annual periods, with early application permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. In January 2020, the Company adopted ASU 2017-04, and the adoption did not have a material impact on the Company’s consolidated financial statements. In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) : Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 118. These amendments add SEC guidance to the FASB Accounting Standards Codification regarding the Tax Cuts and Jobs Act pursuant to the issuance of SAB 118. The amendments are effective upon addition to the FASB Codification and did not have a material impact on the Company’s consolidated financial statements. Effective January 1, 2020, the Company adopted ASU No. 2018-13, Fair Value Measurement (Topic 820 - Changes to the Disclosure Requirements for the Fair Value Measurement) (“ASU 2018-13”). Under ASU 2018-13, entities will no longer 80 be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. The adoption of ASU 2018-13 did not have a significant impact on the Company’s consolidated financial statements. In November 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . The amendments in this update improve consistent application of and simplify U.S. GAAP for Topic 740 by clarifying and amending existing guidance for, among other items, intra-period allocation, reporting tax law changes and losses in interim periods, state and local taxes not fully based on income and recognition of deferred tax liability related to certain transactions. There is also new guidance related to consolidated group reporting and tax impacts resulting from business combinations. The guidance is effective for public entities for fiscal years beginning after December 15, 2020 and for interim periods within those fiscal years. The Company adopted this guidance effective January 1, 2021 and does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements. In October 2020, the FASB issued ASU No. 2020-10, Codification Improvements . The amendments in this ASU improve the consistency of the codification and reorganize the guidance into appropriate sections providing less opportunities for disclosures to be missed. The amendments in this update do not change GAAP and are not expected to result in a significant change in practice. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company adopted this guidance on January 1, 2021 and does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements. 81 2. Revenue ASC 606 Adoption Impact On January 1, 2018, the Company adopted ASC 606 applying the modified retrospective method. The Company recognized the cumulative effect of initially applying the new guidance as an adjustment to the opening balance of accumulated deficit as of the adoption date. The Company applied ASC 606 to all contracts that were not completed at the date of initial application. Comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods. In connection with the adoption of ASC 606, the Company also adopted ASC No. 340-40, Other Assets and Deferred Costs - Contracts with Customers , which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, ASC No. 606 and ASC No. 340-40 are referred to as the “new standard.” Adoption of the new standard resulted in changes to the Company’s accounting policies for revenue recognition, commissions expense and deferred commissions as discussed below. The Company recorded a reduction to opening accumulated deficit of $ 12.4 million as of January 1, 2018 due to the cumulative impact of adopting the new standard as follows: • A decrease in total deferred revenue of $ 4.0 million primarily due to the removal of the limitation on contingent revenue that would have accelerated revenue recognition for certain of our historical revenue contracts; and • Recognition of a deferred commissions asset of $ 8.4 million on our consolidated balance sheet due to the requirement under the new standard to recognize incremental customer acquisition costs in our consolidated statement of operations as the related performance obligations are met as compared to the previous recognition to expense as incurred. Impact on the Consolidated Financial Statements The following table summarize the impact of ASC 606 on the Company’s Consolidated Statement of Operations for the year ended December 31, 2018: Selected Consolidated Statement of Operations Line Items Year Ended December 31, 2018 (in thousands, except per share amounts) As Reported Adjustments Increase (Decrease) Balance Without Adopting the New Standard Revenue - products $ 144,682 $ ( 2,594 ) $ 142,088 Revenue - services 87,541 — 87,541 Total revenue 232,223 ( 2,594 ) 229,629 Gross profit 180,327 ( 2,594 ) 177,733 Sales and marketing 103,214 1,345 104,559 Total operating expenses 208,006 1,345 209,351 Loss from operations ( 27,679 ) ( 3,939 ) ( 31,618 ) Net loss ( 27,617 ) ( 3,939 ) ( 31,556 ) Basic and diluted net loss per share $ ( 0.38 ) $ ( 0.43 ) 82 Contract Balances The following table reflects contract balances with customers (in thousands): As of As of Balance Sheet Line Reference December 31, 2020 December 31, 2019 Accounts receivables, net $ 51,051 $ 53,566 Deferred revenue, current 65,999 62,233 Deferred revenue, non-current 42,700 38,931 The Company receives payment from customers based upon billing cycles. Invoice payment terms typically range from 30 to 90 days. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets include amounts related to the Company’s contractual right to consideration for performance obligations not yet billed, and are included in prepaid and other current assets in the Company’s Consolidated Balance Sheets. The contract assets amount was immaterial as of December 31, 2020 and 2019. Deferred revenue primarily consists of amounts that have been invoiced but not yet recognized as revenue and consists of performance obligations pertaining to support and subscription services. During the years ended December 31, 2020 and 2019, the Company recognized revenue of $ 61.8 million and $ 63.2 million, respectively, related to deferred revenue at the beginning of the period. Deferred revenue consisted of the following (in thousands): December 31, 2020 December 31, 2019 Deferred revenue: Products $ 7,358 $ 6,593 Services 101,341 94,571 Total deferred revenue 108,699 101,164 Less: current portion ( 65,999 ) ( 62,233 ) Non-current portion $ 42,700 $ 38,931 Deferred Contract Acquisition Costs As of December 31, 2020, the current and non-current portions of deferred contract acquisition costs totaled $ 5.3 million and $ 3.7 million, respectively, and the related amortization was $ 6.5 million for the year ended December 31, 2020. As of December 31, 2019, the current and non-current portions of deferred contract acquisition costs totaled $ 6.2 million and $ 3.3 million, respectively, and the related amortization was $ 7.4 million for the year ended December 31, 2019. For the years ended December 31, 2020, 2019 and 2018, the Company had no impairment loss in relation to the costs capitalized and no asset impairment charges related to contract assets. Remaining Performance Obligations Remaining performance obligations represent contracted revenues that are non-cancellable and have not yet been recognized due to unsatisfied or partially satisfied performance obligations, which include deferred revenues and amounts that will be invoiced and recognized as revenues in future periods. 83 The Company expects to recognize revenue on the remaining performance obligations as follows (in thousands): December 31, 2020 Within 1 year $ 65,999 Next 2 to 3 years 32,824 Thereafter 9,876 Total $ 108,699 3. Restructuring In October 2019, the Company implemented a restructuring plan (the “2019 restructuring plan”) in its ongoing efforts to reduce operating costs and focus on advanced technologies. Expense related to the 2019 restructuring plan was accrued for in 2019, which resulted in a reduction of approximately 5 % of the Company’s workforce and the closure and consolidation of certain U.S. and international office facilities. The Company 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 Employee severance and related payroll taxes $ 28 $ 1,355 $ 340 $ 194 $ 1,917 Facilities closure expenses 435 89 524 Legal fees 89 89 $ 28 $ 1,790 $ 429 $ 283 $ 2,530 The 2019 restructuring plan was completed prior to June 30, 2020 and as of December 31, 2020, the Company’s restructuring accrual was fully paid. 4. Marketable Securities and Fair Value Measurements Marketable Securities Marketable securities, classified as available-for-sale, consisted of the following (in thousands): December 31, 2020 December 31, 2019 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Certificates of deposit $ 2,150 $ — $ — $ 2,150 $ 10,548 $ 10 $ — $ 10,558 Corporate securities 45,070 83 ( 8 ) 45,145 51,745 207 ( 1 ) 51,951 U.S. Treasury and agency securities 9,493 12 — 9,505 9,222 3 — 9,225 Commercial paper 12,136 — — 12,136 500 — 500 Asset-backed securities 5,904 11 — 5,915 11,914 32 — 11,946 Total $ 74,753 $ 106 $ ( 8 ) $ 74,851 $ 83,929 $ 252 $ ( 1 ) $ 84,180 During the years ended December 31, 2020 and 2019, the Company did not reclassify any amount to earnings from accumulated other comprehensive income (loss) related to unrealized gains or losses. The following table summarizes the cost and estimated fair value of marketable securities based on stated effective maturities as of December 31, 2020 (in thousands): 84 Amortized Cost Fair Value Less than 1 year $ 58,717 $ 58,754 Mature in 1 - 3 years 16,036 16,097 Total $ 74,753 $ 74,851 All available-for-sale securities are classified as current because they are available for use in current operations. Marketable securities in an unrealized loss position consisted of the following (in thousands): Less Than 12 Months 12 Months or More Total As of December 31, 2020 Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Certificates of deposit $ — $ — $ — $ — $ — $ — Corporate securities 20,355 ( 8 ) — — 20,355 ( 8 ) U.S. Treasury and agency securities — — — — — — Commercial paper — — — — — — Asset-backed securities — — — — — — Total $ 20,355 $ ( 8 ) $ — $ — $ 20,355 $ ( 8 ) Less Than 12 Months 12 Months or More Total As of December 31, 2019 Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Certificates of deposit $ — $ — $ — $ — $ — $ — Corporate securities 2,996 ( 1 ) — — 2,996 ( 1 ) U.S. Treasury and agency securities — — — — — — Commercial paper — — — — — — Asset-backed securities — — — — — — Total $ 2,996 $ ( 1 ) $ — $ — $ 2,996 $ ( 1 ) Based on evaluation of securities that have been in a continuous loss position, the Company determined all gross unrealized losses on its marketable securities as of December 31, 2020 were temporary in nature and related primarily to interest rate shifts rather than changes in the underlying credit quality of the securities in a loss position. The Company has the ability to hold these investments until maturity, or for at least the foreseeable future. As such, no decline has been deemed to be other-than-temporary by the Company. 85 Fair Value Measurements The following is a summary of the Company’s cash, cash equivalents and marketable securities measured at fair value on a recurring basis (in thousands): December 31, 2020 December 31, 2019 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Cash $ 62,388 $ — $ — $ 62,388 $ 35,546 $ — $ — $ 35,546 Cash equivalents 20,893 — — 20,893 10,196 — — 10,196 Certificates of deposit — 2,150 — 2,150 — 10,558 — 10,558 Corporate securities — 45,145 — 45,145 — 51,951 — 51,951 U.S. Treasury and agency securities — 9,505 — 9,505 — 9,225 — 9,225 Commercial paper — 12,136 — 12,136 — 500 — 500 Asset-backed securities — 5,915 — 5,915 — 11,946 — 11,946 Total $ 83,281 $ 74,851 $ — $ 158,132 $ 45,742 $ 84,180 $ — $ 129,922 There were no transfers between Level 1 and Level 2 fair value measurement categories during the years ended December 31, 2020 and 2019. 5. Leases The Company leases various facilities in the United States, Asia and Europe under non-cancellable operating lease arrangements that expire on various dates through July 2027. These arrangements require the Company to pay certain operating expenses, such as taxes, repairs and insurance, and contain renewal and escalation clauses. The table below presents the Company’s right-of-use assets and lease liabilities as of December 31, 2020 (in thousands): December 31, 2020 Operating leases Right-of-use assets: Other non-current assets $ 28,240 Total right-of-use assets $ 28,240 Lease liabilities: Accrued liabilities $ 5,260 Other non-current liabilities 23,498 Total operating lease liabilities $ 28,758 The aggregate future lease payments for the Company’s operating leases as of December 31, 2020 were as follows (in thousands): 86 2021 $ 6,064 2022 4,840 2023 4,414 2024 4,518 2025 4,625 Thereafter 7,148 Total lease payments 31,609 Less: imputed interest ( 2,851 ) Present value of lease liabilities $ 28,758 The components of lease costs were as follows (in thousands): Year Ended December 31, 2020 Operating lease costs $ 6,548 Short-term lease costs 254 Total lease costs $ 6,802 Average lease terms and discount rates for the Company’s operating leases were as follows (in thousands): December 31, 2020 Weighted-average remaining term (in years) 6.2 Weighted-average discount rate 3.14 % Supplemental cash flow information for the Company’s operating leases were as follows (in thousands): Year Ended December 31, 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 6,291 Right-of-use assets obtained in exchange for new lease liabilities $ 868 Corporate Headquarters Lease On May 2, 2019, the Company entered into a sublease agreement (the “Sublease”) with Marvell Semiconductor, Inc. (“Sublandlord”) for its corporate headquarters and research and development space located at 2300 Orchard Parkway, San Jose, California, 95131 (the “Premises”). The term of the Sublease is approximately eight years and began on December 1, 2019, the date the Company commenced business operations at the Premises. The Sublease provides for monthly base rent of approximately $ 262,000 per month for the first year with annual increases thereafter. The total base rent through the end of the term of the Sublease will total approximately $ 33.8 million. In addition to base rent, the Company will also be responsible for operating and other facility expenses. The Company has accounted for the lease under ASC 842 and recorded a right-of-use asset of $ 30.0 million included in other non-current assets and recorded lease liabilities of $ 3.3 million and $ 26.7 million, included in accrued liabilities and other non-current liabilities, respectively, in the consolidated balance sheets as of December 31, 2019. 6. Other Balance Sheet Accounts Details 87 Allowance for Doubtful Accounts The following table presents the changes in the Company’s allowance for doubtful accounts (in thousands): December 31, 2020 December 31, 2019 Allowance for doubtful accounts, beginning balance $ 52 $ 319 Increase (decrease) of provision 78 ( 72 ) Write-offs ( 89 ) ( 195 ) Allowance for doubtful accounts, ending balance $ 41 $ 52 Inventory Inventory consisted of the following (in thousands): December 31, 2020 December 31, 2019 Raw materials $ 8,395 $ 9,495 Finished goods 12,335 12,889 Total inventory $ 20,730 $ 22,384 Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consisted of the following (in thousands): December 31, 2020 December 31, 2019 Prepaid expenses $ 3,818 $ 6,163 Deferred contract acquisition costs 5,345 6,231 Other 3,227 2,673 Prepaid expenses and other current assets $ 12,390 $ 15,067 Property and Equipment, Net Property and equipment, net, consisted of the following (in thousands): Useful Life December 31, 2020 December 31, 2019 (in years) Equipment 1-3 $ 25,286 $ 22,702 Software 1-3 765 726 Furniture and fixtures 1-3 652 459 Leasehold improvements 1-7 3,616 5,440 Construction in progress 1,677 — Property and equipment, gross 31,996 29,327 Less: accumulated depreciation ( 24,108 ) ( 21,671 ) Property and equipment, net $ 7,888 $ 7,656 Depreciation expense on property and equipment was $ 4.2 million, $ 5.0 million and $ 6.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. 88 Intangible Assets Purchased intangible assets, net, consisted of the following (in thousands): December 31, 2020 December 31, 2019 Cost Accumulated Amortization Net Cost Accumulated Amortization Net Developed technology $ 5,050 $ ( 4,545 ) $ 505 $ 5,050 $ ( 3,535 ) $ 1,515 Patents 2,936 ( 2,579 ) 357 2,936 ( 2,146 ) 790 Total $ 7,986 $ ( 7,124 ) $ 862 $ 7,986 $ ( 5,681 ) $ 2,305 Amortization expense related to purchased intangible assets was $ 1.4 million for each of the years ended December 31, 2020, 2019 and 2018. Purchased intangible assets will be amortized over a remaining weighted average useful life of 0.6 years. Future amortization expense for purchased intangible assets as of December 31, 2020 is as follows (in thousands): Fiscal Year 2021 862 Other non-current assets Other non-current assets consisted of the following (in thousands): December 31, 2020 December 31, 2019 Right-of-use assets $ 28,240 $ 33,014 Deferred contract acquisition costs 3,714 3,297 Deposits 2,746 2,338 Net deferred tax assets 944 1,171 Other 2,807 2,026 Total other non-current assets $ 38,451 $ 41,846 Accrued Liabilities Accrued liabilities consisted of the following (in thousands): December 31, 2020 December 31, 2019 Accrued compensation and benefits $ 19,725 $ 12,227 Accrued tax liabilities 3,748 4,354 Lease liabilities 5,260 5,109 Other 8,197 6,066 Total accrued liabilities $ 36,930 $ 27,756 Other Non-Current Liabilities 89 Other non-current liabilities consisted of the following (in thousands): December 31, 2020 December 31, 2019 Lease liabilities $ 23,498 $ 28,046 Other 859 708 Total other non-current liabilities $ 24,357 $ 28,754 7. Credit Facility In November 2016, the Company 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 sub-facility. Loan advances under the revolving facility were available up to the full $ 25.0 million when the balance of the Company’s cash, cash equivalents and marketable securities minus outstanding revolving loans and letters of credit equaled or exceeded $ 50.0 million. If this “net cash” fell below $ 50.0 million, loan advances were determined based on a borrowing base equal to a specified percentage of the value of the Company’s eligible accounts receivable. Loans bore interest, at the Company’s option, at (i) the prime rate reported in The Wall Street Journal, minus 0.50 % or (ii) a LIBOR rate determined in accordance with the 2016 Credit Facility, plus 2.50 %. Over the term of the 2016 Credit Facility, the Company paid customary closing fees, commitment fees and letter of credit fees related to the facility. In September 2018, the Company entered into an amendment with SVB to reduce the unused revolving credit facility fee on the 2016 Credit Facility from 0.4 % to 0.3 %. The Company’s obligations under the 2016 Credit Facility were secured by substantially all of the Company’s assets, excluding intellectual property. The 2016 Credit Facility required the Company to maintain compliance with customary affirmative and negative covenants, including compliance with an adjusted quick ratio of not less than 1.50 :1.00, and restricted the Company’s ability to pay cash dividends or make other distributions on our common stock. The Company elected to allow the 2016 Credit Facility to expire without renewal on the maturity date of November 1, 2019. There were no outstanding loans or advances as of the maturity date. The Company currently has no plans to enter into any new borrowing facilities. 8. Commitments and Contingencies Legal Proceedings Litigation From time to time, we may be party or subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. Some of these proceedings involve claims that are subject to substantial uncertainties and unascertainable damages. We make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Unless otherwise specifically disclosed in this note, we have determined that no provision for liability nor disclosure is required related to any claim against us because: (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial. On March 22, 2018, the Company, and certain of its current and former executive officers, were named as defendants in a putative class action lawsuit filed in the United States District Court for the Northern District of California, captioned Shah v. A10 Networks, Inc. et al., 3:18-cv-01772-VC (the “Securities Action”). On August 31, 2018, the court appointed a lead plaintiff. On October 5, 2018, the lead plaintiff filed an amended complaint. The amended complaint named the same 90 defendants as the initial complaint, in addition to one of the Company’s former executive vice presidents. The amended complaint asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Company and individual defendants filed motions to dismiss the amended complaint. On February 21, 2019, the court granted the motions to dismiss with leave to amend within 21 days. The lead plaintiff did not file an amended complaint by the Court-ordered deadline. Instead, on March 21, 2019, the lead plaintiff filed a notice of appeal in the United States Court of Appeals for the Ninth Circuit. On April 5, 2019, the clerk of court suspended briefing on the appeal and ordered that, by April 26, 2019, appellants shall either move for voluntary dismissal or show cause why the appeal should not be dismissed for lack of jurisdiction. On April 25, 2019, appellants moved to voluntarily dismiss the appeal without prejudice, and that motion was granted on May 1, 2019. The district court entered final judgment dismissing lead plaintiff’s claims on May 8, 2019. The lead plaintiff subsequently filed a notice of appeal on June 6, 2019. The parties filed a stipulated motion to voluntarily dismiss the appeal on October 7, 2019, with each side to bear its own costs. The Court of Appeals granted the stipulated motion to dismiss on October 10, 2019. On May 30, 2018, certain of our current and former directors and officers were named as defendants in a putative shareholder derivative lawsuit filed in the United States District Court for the Northern District of California, captioned Moulton v. Chen et al., 3:18-cv-03223-VC (the “Derivative Action”). We were also named as a nominal defendant. The complaint in the Derivative Action alleged breaches of fiduciary duties and other related claims in connection with purported misrepresentations related to internal controls and revenues and alleged failures to ensure that financial statements were made in accordance with generally accepted accounting principles. Plaintiff sought unspecified damages allegedly sustained by the Company, restitution, and other relief. On July 11, 2018 the Derivative Action was stayed until a motion to dismiss in the Securities Action was granted with prejudice or denied in whole or in part. Following dismissal of the Securities Action, the plaintiff voluntarily dismissed his claims on June 7, 2019. Investigations The U.S. Securities and Exchange Commission (“SEC”) conducted a private investigation into possible violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), and 13(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13a-14, 13a-15, and 13b2-1 thereunder. The Company cooperated with the SEC regarding this investigation. The SEC staff informed the Company on September 6, 2019 that it had concluded its investigation and did not intend to recommend an enforcement action to the SEC. Lease Commitments The Company leases various operating spaces in the United States, Asia and Europe under non-cancelable operating lease arrangements that expire on various dates through July 2027. These arrangements require us to pay certain operating expenses, such as taxes, repairs and insurance, and contain renewal and escalation clauses. The Company recognizes rent expense under these arrangements on a straight-line basis over the term of the lease. The Company has open purchase commitments with third-party contract manufacturers with facilities in Taiwan to supply nearly all of our finished goods inventories, spare parts, and accessories. These purchase orders are expected to be paid within one year of the issuance date. 91 The following table summarizes our non-cancelable operating leases as of December 31, 2020 (in thousands): Years Ending December 31, Operating Leases and Other Contractual Obligation 2021 $ 6,064 2022 4,840 2023 4,414 2024 4,518 2025 4,625 Thereafter 7,148 Total $ 31,609 Rent expense was $ 6.7 million, $ 4.8 million and $ 4.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. Guarantees and Indemnifications In the normal course of business, we provide indemnifications to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Other guarantees or indemnification arrangements include guarantees of product and service performance, and standby letters of credit for lease facilities and corporate credit cards. We have not recorded a liability related to these indemnifications and guarantee provisions and our guarantees and indemnification arrangements have not had any significant impact on our consolidated financial statements to date. 92 9. Equity Incentive Plans, Stock-Based Compensation and Stock Repurchase Program Equity Incentive Plans 2014 Equity Incentive Plan The 2014 Equity Incentive Plan (the “2014 Plan”) provides for the granting of stock options, restricted stock awards, restricted stock units (“RSUs”), market performance-based RSUs (“PSUs”), stock appreciation rights, performance units and performance shares to our employees, consultants and members of our board of directors. In June 2015, our board of directors adopted and our stockholders approved an amendment and restatement of the 2014 Plan, which increased the number of shares available for issuance under the 2014 Plan by the number of shares granted under the 2008 Stock Plan (the “2008 Plan”) that were or may in the future be canceled or otherwise forfeited or repurchased after March 20, 2014. As of December 31, 2020, we had 10,725,127 shares available for future grant under the 2014 Plan. The shares authorized for the 2014 Plan increase annually by the least of (i) 8,000,000 shares, (ii) 5 % of the outstanding shares of common stock on the last day of our immediately preceding fiscal year, or (iii) such other amount as determined by our Board of Directors. In November 2020, our Board of Directors determined the current shares authorized under the 2014 Plan were sufficient for the time being and decided not to increase the number of shares authorized in 2021. To date, the Company has granted stock options, RSUs and PSUs under the 2014 Plan. Stock options expire no more than 10 years from the grant date and generally vest over four years . In the case of an incentive stock option granted to an employee, who at the time of grant, owns stock representing more than 10 % of the total combined voting power of all classes of stock, the per share exercise price will be no less than 110 % of the fair market value per share on the date of grant, and the incentive stock option will expire no later than five years from the date of grant. For incentive stock options granted to any other employees and nonstatutory stock options granted to employees, consultants, or members of our Board of Directors, the per share exercise price will be no less than 100 % of the fair market value per share on the date of grant. RSUs and PSUs generally vest from one to four years . 2014 Employee Stock Purchase Plan The 2014 Employee Stock Purchase Plan (the “2014 Purchase Plan”) was suspended effective March 16, 2018 due to the delay of the Form 10-K filing for the year ended December 31, 2017. In October 2018, the Board of Directors approved amending the 2014 Purchase Plan (the “Amended 2014 Purchase Plan”) in order to, among other things, reduce the maximum contribution participants can make under the plan from 15 % to 10 % of eligible compensation. The Amended 2014 Purchased Plan also reflects revised offering periods, which were changed from 24 months to six months in duration and that begin on or about December 1 and June 1 each year, starting in December 2018. The Amended 2014 Purchase Plan permits eligible employees to purchase shares of our common stock through payroll deductions with up to 10% of their pre-tax eligible earnings subject to certain Internal Revenue Code (“IRC”) limitations. The purchase price of the shares is 85 % of the lower of the fair market value of our common stock on the first day of a six-month offering period or the relevant purchase date. In addition, no participant may purchase more than 1,500 shares of common stock in each purchase period. Employees purchased 581,634 shares at an average price of $ 5.67 and with an aggregate intrinsic value of $ 1.0 million during the year ended December 31, 2020, and purchased 662,362 shares at an average price of $ 5.14 and with an intrinsic value of $ 0.8 million during the year ended December 31, 2019. During 2018, there were no stock purchases by employees under the Amended 2014 Purchase Plan or the 2014 Purchase Plan. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares. As of December 31, 2020, we had 1,821,186 shares available for future issuance under the Amended 2014 Purchase Plan. 93 Stock-Based Compensation A summary of our stock-based compensation expense is as follows (in thousands): Years Ended December 31, 2020 2019 2018 Stock-based compensation by type of award: Stock options $ 209 $ 648 $ 1,353 Stock awards 10,938 14,882 10,445 Employee stock purchase rights (1) 1,163 999 5,240 Total $ 12,310 $ 16,529 $ 17,038 Stock-based compensation by category of expense: Cost of revenue $ 1,357 $ 1,500 $ 1,602 Sales and marketing 3,018 5,765 5,667 Research and development 4,241 6,039 6,631 General and administrative 3,694 3,225 3,138 Total $ 12,310 $ 16,529 $ 17,038 (1) Amount for the year ended December 31, 2018 includes $ 4.1 million of accelerated stock-based compensation expense. In March 2018, as a result of a suspension of the 2014 Purchase Plan due to our non-timely filing status, all unrecognized stock-based compensation expense related to ESPP under the 2014 Purchase Plan was accelerated and recognized within the consolidated statement of operations. As of December 31, 2020, the Company had $ 24.4 million of unrecognized stock-based compensation expense related to unvested stock-based awards, including ESPP under our Amended 2014 Purchase Plan, which will be recognized over a weighted-average period of 2.7 years. Fair Value Determination: The fair values of stock options and employee stock purchase rights were estimated as of the grant date using the Black-Scholes option-pricing model with the following assumptions: Stock Options (1) Employee Stock Purchase Rights Year Ended December 31, Years Ended December 31, 2018 2020 2019 2018 Expected term (in years) 4.8 0.5 0.5 0.5 Risk-free interest rate 3.1 % 0.1 % 2.3 % 2.6 % Expected volatility 37 % 59 % 34 % 28 % Dividend rate — % — % — % — % (1) The Company did not grant stock options in the years ended December 31, 2020 and 2019. • Expected Term . We estimate the expected life of options based on an analysis of our historical experience of employee exercise and post-vesting termination behavior considered in relation to the contractual life of the option. The expected term for the employee stock purchase rights is based on the term of the purchase period. • Risk-Free Interest Rate . The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected terms of stock options and the employee stock purchase rights. 94 • Expected Volatility . For stock options, due to the limited trading history of our own common stock, we determined the share price volatility factor based on a combination of the historical volatility of our own common stock and the historical volatility of our peer group for the stock options. For employee stock purchase rights, we used the historical volatility of our own common stock. • Dividend Rate . The expected dividend was assumed to be zero as we have never paid dividends and do not anticipate paying any dividends in the foreseeable future. Stock Options The following tables summarize our stock option activities and related information: Number of Shares (thousands) Weighted-Average Exercise Price Per Share Weighted-Average Remaining Contractual Term (years) Aggregate Intrinsic Value (1) (thousands) Outstanding as of December 31, 2019 3,702 $ 5.57 Granted — — Exercised ( 1,298 ) 4.85 Canceled ( 731 ) 7.15 Outstanding as of December 31, 2020 1,673 $ 5.44 2.67 $ 7,520 Vested and exercisable as of December 31, 2020 1,673 $ 5.44 2.67 $ 7,520 (1) The aggregate intrinsic value represents the excess of the closing price of our common stock of $ 9.86 as of December 31, 2020 over the exercise price of the outstanding in-the-money options. Following is additional information pertaining to our stock option activities (in thousands, except per share data): Years Ended December 31, 2020 2019 2018 Weighted-average grant date fair value of options granted (per share) $ — $ — $ 2.19 Intrinsic value of options exercised (1) $ 2,778 $ 1,930 $ 2,629 (1) Intrinsic value of options exercised is the difference between the closing price of our common stock at the time of exercise and the exercise price paid. Stock Awards The Company has granted RSUs to its employees, consultants and members of its Board of Directors, and PSUs to certain executives and employees. The Company’s PSUs have market performance-based vesting conditions as well as service-based vesting conditions. As of December 31, 2020, there were 3,753,620 RSUs and 1,134,103 PSUs outstanding. 95 The following table summarizes our stock award activities and related information: Number of Shares (thousands) Weighted-Average Grant Date Fair Value Per Share Weighted-Average Remaining Vesting Term (years) Nonvested as of December 31, 2019 6,148 $ 6.59 Granted 2,018 6.74 Released ( 1,786 ) 6.79 Canceled ( 1,492 ) 6.56 Nonvested as of December 31, 2020 4,888 $ 6.59 2.13 Following is additional information pertaining to our stock award activities (in thousands, except per share data): Years Ended December 31, 2020 2019 2018 Weighted-average grant date fair value of stock awards granted (per share) $ 6.74 $ 6.74 $ 5.95 Total fair value of stock awards released (vested) during the period $ 12,129 $ 12,183 $ 9,714 Repurchase Agreement On May 17, 2020, the Company 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, the Company 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. Stock Repurchase Program On September 17, 2020, the Company’s Board of Directors 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, the Company repurchased a total of 2.7 million shares for a total cost of $ 19.2 million and as of December 31, 2020, the Company had $ 30.8 million available to repurchase shares under this program. Under the program, repurchased shares are held in treasury at cost. The Company’s 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. 96 10. Net Income (Loss) Per Share Basic net income (loss) per share is computed using the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding for the period plus potential dilutive common shares, including stock options, RSUs, PSUs and employee stock purchase rights, unless the potential common shares are anti-dilutive. Since we had net losses in the years ended December 31, 2019 and 2018, none of the potential dilutive common shares were included in the computation of diluted shares for these periods, as inclusion of such shares would have been anti-dilutive. The following table presents common shares related to potentially dilutive shares excluded from the calculation of diluted net income (loss) per share as their effect would have been anti-dilutive (in thousands): Years Ended December 31, 2020 2019 2018 Stock options, RSUs, PSUs and employee stock purchase rights 822 9,199 9,621 97 11. Income Taxes The geographical breakdown of income (loss) before income taxes is as follows (in thousands): Years Ended December 31, 2020 2019 2018 Domestic income (loss) $ 15,455 $ ( 20,345 ) $ ( 29,658 ) Foreign income 3,684 3,933 3,123 Income (loss) before income taxes $ 19,139 $ ( 16,412 ) $ ( 26,535 ) The provision for income taxes consisted of the following (in thousands): Years Ended December 31, 2020 2019 2018 Current provision for income taxes: State $ 40 $ 49 $ 44 Foreign 1,057 1,716 953 Total current 1,097 1,765 997 Deferred tax expense (benefit): Federal 2 3 ( 13 ) Foreign 224 ( 361 ) 98 Total deferred 226 ( 358 ) 85 Provision for income taxes $ 1,323 $ 1,407 $ 1,082 The reconciliation of the statutory federal income taxes and the provision for income tax is as follows (in thousands, except percentages): Years Ended December 31, 2020 2019 2018 Amount Percentage Amount Percentage Amount Percentage Tax at statutory rate $ 4,019 21.0 % $ ( 3,447 ) 21.0 % $ ( 5,572 ) 21.0 % State tax - net of federal benefits 31 0.2 42 ( 0.3 ) 39 ( 0.1 ) Foreign rate differential 507 2.6 363 ( 2.2 ) 258 ( 1.0 ) Changes in federal valuation allowance ( 3,281 ) ( 17.1 ) 4,695 ( 28.6 ) 6,430 ( 24.2 ) Change in federal tax rate due to Tax Cuts and Jobs Act — — — — — — Stock-based compensation 781 4.1 578 ( 3.5 ) 1,950 ( 7.3 ) Non-deductible meals and entertainment expenses 219 1.2 287 ( 1.8 ) 342 ( 1.3 ) Other permanent items 364 1.9 257 ( 1.6 ) 351 ( 1.3 ) Federal tax credits - net of uncertain tax positions ( 1,035 ) ( 5.4 ) ( 1,809 ) 11.0 ( 2,634 ) 9.9 Expenses for uncertain tax positions — — 166 ( 1.0 ) 137 ( 0.5 ) Other ( 282 ) ( 1.5 ) 275 ( 1.6 ) ( 219 ) 0.7 $ 1,323 7.0 % $ 1,407 ( 8.6 ) % $ 1,082 ( 4.1 ) % 98 Deferred tax balances are comprised of the following (in thousands): December 31, 2020 December 31, 2019 Deferred tax assets: Net operating loss carryforwards $ 42,251 $ 46,273 Research and development credits, net of uncertain tax positions 27,743 25,386 Accruals, reserves, and other 12,026 12,021 Stock-based compensation 2,362 3,306 Depreciation and amortization 1,537 2,219 Operating lease liability 6,049 7,061 Gross deferred tax assets 91,968 96,266 Valuation allowance ( 82,938 ) ( 85,743 ) Total deferred tax assets 9,030 10,523 Deferred tax liabilities: Deferred contract acquisition costs ( 2,068 ) ( 2,245 ) Operating lease right-of-use asset ( 5,996 ) ( 7,088 ) Other ( 22 ) ( 19 ) Total deferred tax liabilities ( 8,086 ) ( 9,352 ) Net deferred tax assets $ 944 $ 1,171 Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance and the recorded cumulative net losses in prior fiscal periods, we recorded a full valuation allowance of $ 82.9 million and $ 85.7 million against the U.S. net deferred tax assets as of December 31, 2020 and 2019, respectively. For the years ended December 31, 2020 and 2019, the valuation allowance decreased by $ 2.8 million and increased by $ 7.1 million, respectively. As of December 31, 2020 and 2019, we had U.S. federal net operating loss (“NOL”) carryforwards of $ 177.0 million and $ 193.8 million, respectively, and state NOL carryforwards of $ 78.0 million and $ 84.6 million, respectively. The federal NOL carryforwards will expire at various dates beginning in the year ending December 31, 2033, if not utilized. The state NOL carryforwards expire in various years ending between 2023 and 2039, if not utilized. The Tax Cuts and Jobs Act of 2017 (the “Tax Act”), as modified by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, among other things, includes changes to the rules governing NOLs. NOLs arising in tax years beginning after December 31, 2017 are subject to an 80% of taxable income limitation (as calculated before taking the NOLs into account) for tax years beginning after December 31, 2020. In addition, NOLs arising in tax years 2018, 2019, and 2020 are subject to a five year carryback and indefinite carryforward, while NOLs arising in tax years beginning after December 31, 2020 also are subject to indefinite carryforward but cannot be carried back. Additionally, as of December 31, 2020 and 2019, we had U.S. federal research and development credit carryforwards of $ 16.4 million and $ 15.3 million, respectively, and state research and development credit carryforwards of $ 18.2 million and $ 16.4 million, respectively. The federal credit carryforwards will begin to expire at various dates beginning in 2025 while the state credit carryforwards can be carried over indefinitely. Utilization of the NOL and credit carryforwards may be subject to an annual limitation provided for in the IRC Section 382 and similar state codes. Any annual limitation could result in the expiration of NOL and credit carryforwards before utilization. With respect to our undistributed foreign subsidiaries’ earnings we consider those earnings to be indefinitely reinvested and, accordingly, no related provision for U.S. federal and state income taxes has been provided. Our intention has not changed subsequent to the one-time transition tax under the Tax Act. Upon distribution of those earnings in the form of dividends or otherwise, we may be subject to both U.S. income taxes subject to an adjustment for foreign tax credits and withholding taxes in the various countries. As of December 31, 2020 and 2019, the undistributed earnings approximated $ 16.0 million and $ 13.6 million, respectively. Our undistributed earnings through December 31, 2017, have been taxed under the one-time transition tax under the Tax Act. 99 Uncertain Tax Positions As of December 31, 2020, 2019 and 2018, we had gross unrecognized tax benefits of $ 4.6 million, $ 4.4 million and $ 4.2 million, respectively. Accrued interest expense related to unrecognized tax benefits is not recognized as part of our income tax provision in our consolidated statements of operations and is immaterial for the years ended December 31, 2020 and 2019. Our policy for classifying interest and penalties associated with unrecognized income tax benefits is to exclude such items in income tax expense. The activity related to the unrecognized tax benefits is as follows (in thousands): Years Ended December 31, 2020 2019 2018 Gross unrecognized tax benefits—beginning balance $ 4,441 $ 4,191 $ 3,782 Increases (decreases) related to tax positions from prior years ( 268 ) ( 280 ) ( 266 ) Increases related to tax positions taken during current year 412 530 675 Decreases related to tax positions taken during the current year — — — Gross unrecognized tax benefits—ending balance $ 4,585 $ 4,441 $ 4,191 These amounts are related to certain deferred tax assets with a corresponding valuation allowance. As of December 31, 2020, the total amount of unrecognized tax benefits, if recognized, that would affect the effective tax rate is $ 0.8 million. We do not anticipate a material change to our unrecognized tax benefits over the next twelve months. Unrecognized tax benefits may change during the next twelve months for items that arise in the ordinary course of business. The Company is subject to taxation in the United States, various states, and several foreign jurisdictions. Because the Company has NOL and credit carryforwards, there are open statutes of limitations in which federal, state and foreign taxing authorities may examine our tax returns for all years from 2005 through the current period. The Company is not currently under examination by any taxing authorities. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law. The CARES Act includes provisions relating to refundable payroll tax credits, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to the tax depreciation methods for qualified improvement property. The CARES Act has an immaterial impact on the Company’s income taxes. 100 12. Geographic Information The following table depicts the disaggregation of revenue by geographic region based on the ship to location of our customers and is consistent with how we evaluate our financial performance (in thousands): Years Ended December 31, 2020 2019 2018 Americas $ 98,150 $ 89,944 $ 112,506 Japan 67,050 59,454 55,205 Asia Pacific, excluding Japan 29,760 35,689 36,897 EMEA 30,567 27,541 27,615 Total $ 225,527 $ 212,628 $ 232,223 The following table is a summary of our long-lived assets which include property and equipment, net and right-of-use assets based on the physical location of the assets (in thousands): December 31, 2020 December 31, 2019 Americas $ 32,558 $ 35,964 Japan 1,566 2,689 Other 2,004 2,017 Total $ 36,128 $ 40,670 13. Employee Benefit Plan The Company has a profit sharing plan that qualifies under Section 401(k) of the IRC which is offered to all of its United States employees. Participants in the plan may elect to contribute up to $ 19,500 of their annual compensation to the plan for the 2020 calendar year. Individuals who are 50 or older may contribute an additional $ 6,500 of their annual income. The Company typically matches 50 % of the first 6 % of the employee’s eligible compensation for a maximum employer contribution of $ 2,500 per participant per year. The Company temporarily suspended its employer matching contribution in June 2020 due to cost savings measures, although the Company re-instated its employer matching contributions effective March 1, 2021. The Company’s matching contributions totaled $ 0.4 million, $ 0.7 million and $ 1.0 million during the years ended December 31, 2020, 2019 and 2018, respectively. 14. Selected Quarterly Financial Data (Unaudited) Selected quarterly financial data for 2020 and 2019 is as follows (in thousands, except per share amounts): Quarter Ended March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 Revenue $ 53,764 $ 52,500 $ 56,608 $ 62,655 Gross profit $ 41,622 $ 41,078 $ 43,485 $ 49,194 Net income (loss) $ ( 297 ) $ 3,808 $ 6,464 $ 7,841 Net income (loss) per share - basic $ — $ 0.05 $ 0.08 $ 0.10 Net income (loss) per share - diluted $ — $ 0.05 $ 0.08 $ 0.10 101 Quarter Ended March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 Revenue $ 50,290 $ 49,189 $ 52,833 $ 60,316 Gross profit $ 38,040 $ 37,918 $ 40,913 $ 46,876 Net income (loss) $ ( 12,272 ) $ ( 5,771 ) $ 173 $ 51 Net income (loss) per share - basic $ ( 0.16 ) $ ( 0.08 ) $ — $ — Net income (loss) per share - diluted $ ( 0.16 ) $ ( 0.08 ) $ — $ — 102 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 103