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Item 8. Financial Statements and Supplementary Data

2024-02-23 compared with 2023-02-21 · 111 added, 128 removed, 691 unchanged (26% of the section changed)

39 unchanged sentences

The communication of a critical audit matter 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.

Evaluation of net realizable value of inventory and excess and obsolete inventory liabilities

As discussed in Notes 1, 4 and 5 to the consolidated financial statements, the Company has inventories with a carrying value of $149.2 million and excess and obsolete inventory liabilities of $10.3 million as of December 31, 2022.

Evaluation of net realizable value of raw material and finished goods inventory and excess and obsolete component liabilities

As discussed in Notes 1, 4 and 5 to the consolidated financial statements, the Company has raw material and finished goods inventories with a carrying value of $133.0 million and excess and obsolete component liabilities of $32.2 million as of December 31, 2023.

The Company adjusts the inventory carrying value for excess or obsolete inventory based on assumptions about future demand for products, potential obsolescence of technology, product life cycle, and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds the estimated selling price.

These factors are impacted by market and economic conditions, technology changes and new product introductions and require significant estimates that may include elements that are uncertain.

The Company also records a liability and a charge to cost of revenue for estimated losses on inventory the Company is obligated to purchase from its manufacturers when the inventory has been rendered excess and obsolete due to manufacturing and engineering change orders resulting from design changes, manufacturing discontinuation of products by its suppliers, or in cases where the Company has committed inventory levels that greatly exceed projected demand.

We identified the evaluation of net realizable value of inventory and excess and obsolete inventory liabilities as a critical audit matter.

Evaluation of the Company’s forecasted demand, including the Company’s determination of the effect of market and economic conditions, technology and design changes, new product introductions, and discontinuation of products by its suppliers required significant auditor judgment.

The Company also records a liability and a charge to cost of revenue for estimated losses on components the Company is obligated to purchase from its manufacturers when the components have been rendered excess and obsolete due to manufacturing and engineering change orders resulting from design changes, manufacturing discontinuation of products by its suppliers, or in cases where the Company has committed component levels that greatly exceed projected demand.

During the fourth quarter of 2023, the Company took charges of $28.7 million to write down excess and obsolete inventory and accrue a liability for components at suppliers primarily associated with the Company’s legacy product family.

We identified the evaluation of net realizable value of inventory and excess and obsolete component liabilities as a critical audit matter.

Evaluation of the Company’s forecasted demand, including the Company’s determination of the effect of market and economic conditions, technology and design changes, new product introductions, and discontinuation of products both by the Company and its suppliers required significant auditor judgment.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s inventory process.

This included controls over the reviews of the estimates of the net realizable value of excess or obsolete inventory and liabilities for losses on inventory the Company is obligated to purchase from its manufacturers.

For a selection of inventory items, we (1) reperformed the analysis provided by the Company to assess the accuracy of the net realizable value of inventory by comparing historical sales activity, customer order backlog, or demand forecasts to the inventory on hand quantities, and (2) performed inquiries of Company’s personnel and inspected documents regarding market and economic conditions, technology and design changes, and new product introductions.

We evaluated the reasonableness of management’s assumptions used to estimate the excess and obsolete inventory liabilities considering (1) inquiries of Company’s personnel and inspection of documents regarding market and economic conditions, technology and design changes, or supplier discontinuations, (2) historical reimbursements to suppliers for excess and obsolete component inventory, and (3) the excess and obsolete liabilities and purchase commitment trends.

This included controls over the reviews of the estimates of the net realizable value of excess or obsolete raw material and finished goods inventory and liabilities for losses on components the Company is obligated to purchase from its manufacturers.

For a selection of inventory items owned by the Company, we (1) reperformed the analysis provided by the Company to assess the accuracy of the net realizable value of inventory by comparing historical sales activity, customer order backlog, or demand forecasts to the inventory on hand quantities, and (2) performed inquiries of Company’s personnel and inspected documents regarding product end of life announcements, technology and design changes, and new product introductions.

For a selection of components subject to the Company’s purchase commitments, we (1) evaluated the reasonableness of management’s assumptions used to estimate the excess and obsolete component liabilities by considering historical sales activity, customer order backlog, or demand forecasts of the related finished products and (2) performed inquiries of Company’s personnel and inspected documents regarding product end of life announcements, technology and design changes, new product introductions, and historical reimbursements to suppliers for excess and obsolete components.

We have served as the Company’s auditor since 2016.

51 unchanged sentences

General and administrative 100,395 76,275 55,779

Restructuring charges (benefit) — ( 786 ) 6,286

Restructuring benefit — — ( 786 )

Total operating expenses 492,731 382,818 282,649

15 unchanged sentences

Other comprehensive income (loss), net of tax:

Unrealized loss on available-for-sale marketable securities, net ( 1,521 ) ( 179 ) —

Unrealized gain (loss) on available-for-sale marketable securities, net 1,701 ( 1,521 ) ( 179 )

Foreign currency translation adjustments, net 113 ( 632 ) 50

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Additional Other Total

Common Stock Paid-in Comprehensive Accumulated Treasury Stockholders’

Shares Amount Capital Loss Deficit Stock Equity

Common Stock Paid-in Comprehensive Accumulated Stockholders’

Shares Amount Capital Loss Deficit Equity

Balance as of December 31, 2020 62,122 $ 1,553 $ 948,055 $ ( 191 ) $ ( 669,092 ) $ 280,325

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Issuance of common stock under equity incentive plans, net of forfeitures 2,152 54 25,570 — — 25,624

Issuance of common stock in connection with public offering, net of expenses 3,220 82 59,981 — — — 60,063

Treasury stock retirement ( 134 ) ( 39,852 ) — — 39,986 —

Net income — — — — 238,378 238,378

Other comprehensive income — — — 663 — — 663

Other comprehensive loss — — — ( 129 ) — ( 129 )

Balance as of December 31, 2021 64,274 1,607 997,855 ( 320 ) ( 430,714 ) 568,428

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Issuance of common stock under equity incentive plans, net of forfeitures 1,527 38 32,111 — — 32,149

Repurchase of common stock including excise tax ( 2,210 ) ( 55 ) ( 86,589 ) — — ( 86,644 )

Net income — — — — 29,325 29,325

Other comprehensive loss — — — ( 2,153 ) — — ( 2,153 )

Other comprehensive income — — — 1,814 — 1,814

Balance as of December 31, 2023 65,052 1,627 1,078,393 ( 659 ) ( 360,379 ) 718,982

11 unchanged sentences

Net accretion of available-for-sale securities ( 4,199 ) ( 1,146 ) —

Asset retirements and write-downs — — 3,914

Changes in operating assets and liabilities:

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Proceeds from common stock issuances related to employee benefit plans 32,149 27,456 25,624

Repurchases of common stock ( 86,397 ) — —

Payments related to financing arrangements ( 11,678 ) ( 2,393 ) ( 1,241 )

Proceeds from the sale of common stock in connection with public offering, net of expenses — — 60,063

Proceeds from line of credit — — 30,000

Payments related to the line of credit — — ( 60,285 )

Net cash provided by financing activities 25,063 24,383 42,147

Net cash provided by (used in) financing activities ( 65,926 ) 25,063 24,383

Effect of exchange rate changes on cash and cash equivalents 256 ( 424 ) 11

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Such investments are recorded at fair value and unrealized holding gains and losses are reported as a separate component of comprehensive loss in the stockholders’ equity until realized.

Realized gains and losses on sales of marketable securities, if any, are determined on the specific identification method and are reclassified from accumulated other comprehensive loss to results of operations as “Other income (expense), net.” Realized gains and losses were not significant for the years ended December 31, 2022 and 2021, respectively.

Realized gains and losses on sales of marketable securities, if any, are determined on the specific identification method and are reclassified from accumulated other comprehensive loss to results of operations as “Other expense, net.” Realized gains and losses were not significant for the years ended December 31, 2023 and 2022, respectively.

For the Company’s available-for-sale debt securities in an unrealized loss position, the Company determines whether a credit loss exists.

In this assessment, among other factors, the Company considers the extent to which the fair value is less than the amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security.

If factors indicate a credit loss exists, an allowance for credit loss will be recorded to “Other income (expense), net,” limited by the amount that the fair value is less than the amortized cost basis.

If factors indicate a credit loss exists, an allowance for credit loss will be recorded to “Other expense, net,” limited by the amount that the fair value is less than the amortized cost basis.

The amount of fair value change relating to all other factors will be recognized in other comprehensive loss.

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Inventory, which primarily consists of finished goods purchased from CMs or ODMs, is stated at the lower of cost (determined by the first-in, first-out method) or market value.

Shipments from suppliers before the Company receives them are recorded as

in-transit inventory when title and the significant risks and rewards of ownership have passed to the Company.

Inbound shipping costs and U.S.

tariffs are included in cost of inventory.

addition, from time to time, the Company procures component inventory primarily as a result of manufacturing discontinuation of critical components by suppliers.

In addition, from time to time, the Company procures component inventory primarily as a result of manufacturing discontinuation of critical components by suppliers.

The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based on the Company’s estimate of demand for its products, potential obsolescence of technology, product life cycles and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds its estimated selling price.

The Company also evaluates its supplier purchase commitments, which have increased significantly due to extended lead-times in the current supply chain environment, and records a liability for excess and obsolete components based on its estimated demand of our products, potential obsolescence of technology and product life cycles.

These factors are impacted by market and economic conditions, technology changes and new product introductions and require significant estimates that may include elements that are uncertain.

The Company also evaluates its supplier purchase commitments, which remain elevated due to the extended lead-times during the global pandemic-induced supply chain challenges, and records a liability for excess and obsolete components based on its estimated demand of our products, potential obsolescence of technology and product life cycles.

These factors are impacted by market and economic conditions, competitive dynamics, technology changes and new product introductions and require significant estimates that may include elements that are uncertain.

Actual demand may differ from forecasted demand and may have a material effect on gross profit.

If inventory is written down, a new cost basis is established that cannot be increased in future periods.

Shipments from suppliers before the Company receives them are recorded as in-transit inventory when title and the significant risks and rewards of ownership have passed to the Company.

For example, during the fourth quarter of 2023, the Company took charges of $ 28.7 million to write down excess and obsolete inventory and accrue a liability for components at suppliers primarily associated with the Company’s legacy product family that existed before its shift to an all-platform model.

During 2023, customers moved to the Company’s platform model at a faster rate than originally anticipated, leaving the Company with excess finished goods and related components at suppliers.

Contract Costs

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The Company evaluates its tax positions and estimates its current tax exposure along with assessing temporary differences that result from different book to tax treatment of items not currently deductible for tax purposes.

These differences result in deferred tax assets and liabilities on the Company’s Consolidated Balance Sheets, which are estimated based upon the

difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates that will be in effect when these differences reverse.

These differences result in deferred tax assets and liabilities on the Company’s Consolidated Balance Sheets, which are estimated based upon the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates that will be in effect when these differences reverse.

In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the Company’s Consolidated Statements of Comprehensive Income become deductible expenses under applicable income tax laws or loss or credit carryforwards are utilized.

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Management judgment is required in determining its provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets.

In the third quarter of 2021, the Company reversed the majority of its valuation allowance and recorded on its balance sheet U.S.

federal and certain state deferred tax assets of $ 162.0 million.

As of December 31, 2022, the Company determined that positive evidence continues to outweigh negative evidence and concluded that it was more likely than not that its U.S.

federal and state (with the exception of California) deferred tax assets are realizable.

The Company currently maintains a valuation allowance of $ 29.9 million for certain U.S.

federal and California deferred tax assets.

Newly Adopted Accounting Standards

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government securities 92,277 106,750

Commercial paper 28,992 80,812

government agency securities 43,521 23,632

Commercial paper 14,139 28,992

Corporate debt securities 7,000 3,168

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The carrying amounts of the Company’s money market funds approximate their fair values due to their nature, duration and short maturities.

As of December 31, 2022, all marketable securities were due in two years or less.

As of December 31, 2023, all marketable securities were due in three years or less.

The amortized cost and fair value of marketable securities as of December 31, 2023 were as follows (in thousands):

Amortized Cost Gross Unrealized Gains (Losses) Fair Value

government securities $ 102,167 $ 80 $ 102,247

Commercial paper 47,003 ( 28 ) 46,975

government agency securities 43,573 ( 52 ) 43,521

Corporate debt securities 6,999 1 7,000

$ 199,742 $ 1 $ 199,743

The amortized cost and fair value of marketable securities as of December 31, 2022 were as follows (in thousands):

Amortized Cost Gross Unrealized Losses Fair Value

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Municipal securities 101 ( 1 ) 100

Total marketable securities $ 203,670 $ ( 1,699 ) $ 201,971

Unrealized gains and losses were not significant as of December 31, 2021.

$ 203,671 $ ( 1,700 ) $ 201,971

Fair Value Measurements

14 unchanged sentences

Corporate debt securities — 7,000 7,000

Municipal securities — 100 100

$ 104,809 $ 97,497 $ 202,306

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Depreciation and amortization expenses were $ 16.6 million, $ 14.3 million and $ 15.0 million for the years ended December 31, 2023, 2022 and 2021, respectively.

Other long-term assets consisted of the following (in thousands):

Intangible asset $ 4,253 $ 6,885

Other long-term assets 14,889 6,800

$ 19,142 $ 13,685

Intangible Asset Acquisition

In March 2018, and as amended in December 2020, the Company entered into an agreement with a vendor to develop a certain software product and related enhancements pursuant to which the Company is obligated to make revenue-share payments under the program, subject to aggregate fixed revenue-share payments of $ 15.8 million.

The payments are based on a revenue-share rate applied to revenue from the developed-product and the corresponding hardware sales through March 2024.

If the minimum revenue-share payments are not achieved by the end of that period, a true-up payment will be due.

As of December 31, 2022, the liability, including accrued interest, was $ 11.4 million, of which $ 7.2 million is included in “Accrued liabilities” and $ 4.2 million in “Other long-term liabilities” in the accompanying Consolidated Balance Sheet.

As of December 31, 2021, the liability, including accrued interest, was $ 13.2 million, of which $ 4.7 million was included in “Accrued liabilities” and $ 8.5 million in other “Other long-term liabilities.”

Accrued liabilities consisted of the following (in thousands):

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Professional and consulting fees 7,717 7,307

Current portion of revenue-share payments 7,210 4,731

Current portion of warranty and retrofit 6,377 7,076

Customer advances or rebates 5,967 5,653

Current portion of warranty and retrofit 5,655 6,377

Taxes payable 4,317 4,581

Operating leases 4,142 3,949

Freight 3,649 3,997

Litigation settlement 3,250 —

Business events 2,938 3,167

Product returns 2,897 2,961

Freight 1,510 3,649

Current portion of revenue-share payments — 7,210

Other 8,911 7,527

7 unchanged sentences

Balance at end of year $ 8,029 $ 8,386 $ 9,594

Accrued Restructuring Charges

The Company initiated a restructuring plan in 2020 to accelerate the Company’s platform future and to align with a work-from-anywhere culture.

The Company incurred restructuring charges of approximately $ 6.3 million, consisting of facilities-related charges and severance and other termination related benefits for the year ended December 31, 2020.

In the fourth quarter of 2021, as a result of subleasing the abandoned portion of the Company’s San Jose headquarters, the Company reversed $ 0.8 million in facilities-related charges due to the expected recovery of accrued common areas maintenance fees.

As of December 31, 2022, the Company had no accrued restructuring charges in the accompanying Consolidated Balance Sheet.

Commitments and Contingencies

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The Company leases its headquarters office space in San Jose, California under a lease agreement that expires in December 2025.

The future minimum lease payments under the lease are $ 7.3 million and are included in the table for the year ended December 31, 2022 above.

The future minimum lease payments under the lease are $ 5.0 million as of December 31, 2023 and are included in the tables above.

The above tables also include future minimum lease payments for the Company's office facilities in Petaluma, California;

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The sublease commenced in August 2022 for a term of 39 months.

The Company received $ 0.3 million in sublease income in 2022.

The Company received $ 0.8 million and $ 0.3 million in sublease income in 2023 and 2022, respectively.

Future minimum payments consisted of the following as of December 31, 2023 (in thousands):

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Purchase Commitments

The Company’s CMs and ODMs place orders for certain component inventory in advance based upon the Company’s build forecasts in order to reduce manufacturing lead times and ensure adequate component supply.

The Company’s CMs and ODMs place orders for component inventory based upon the Company’s build forecasts and pursuant to stated component lead times to ensure adequate component supply.

The components are used by the CMs and ODMs to build the products included in the build forecasts.

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The Company incurs a liability when the CMs and ODMs convert the component inventory to a finished product and takes ownership of the finished goods inventory.

In the event of termination of services with a manufacturing partner, the Company has purchased, and may be required to purchase in the future, certain of the

remaining components inventory held by the CM or ODM as well as any outstanding orders pursuant to the contractual provisions with such CM or ODM.

orders resulting from design changes, manufacturing discontinuation of products by its suppliers, or in cases where the Company has committed inventory levels that greatly exceed projected demand.

In the event of termination of services with a manufacturing partner, the Company has purchased, and may be required to purchase in the future, certain of the remaining components inventory held by the CM or ODM as well as any outstanding orders pursuant to the contractual provisions with such CM or ODM.

The estimated excess and obsolete component liabilities related to manufacturing and engineering change orders, termination of manufacturing partners and other factors are included in “Accrued liabilities” in the accompanying Consolidated Balance Sheets, because the corresponding component parts have not been received by the Company.

The amounts were $ 32.2 million and $ 10.3 million as of December 31, 2023 and 2022, respectively.

The Company records the related charges in “Cost of revenue” in its Consolidated Statements of Comprehensive Income.

As of December 31, 2023 and 2022, the Company had approximately $ 176.3 million and $ 340.6 million, respectively, of outstanding purchase commitments for inventories to be delivered by its suppliers, including CMs and ODMs.

The Company has from time to time, and subject to certain conditions, reimbursed certain suppliers for component inventory purchases when this inventory has been rendered excess or obsolete, for example due to manufacturing and engineering change orders resulting from design changes, manufacturing discontinuation of products by its suppliers, or in cases where the Company has committed inventory levels that greatly exceed projected demand.

The estimated excess and obsolete inventory liabilities related to such manufacturing and engineering change orders and other factors, which are included in accrued liabilities in the accompanying Consolidated Balance Sheets, were $ 10.3 million and $ 7.6 million as of December 31, 2022 and 2021, respectively.

The Company records the related charges in cost of systems revenue in its Consolidated Statements of Comprehensive Income.

From time to time, the Company is involved in various legal proceedings arising from the normal course of business activities.

The Company is not currently a party to any legal proceedings that, if determined adversely to the Company, in management’s opinion, are currently expected to individually or in the aggregate have a material adverse effect on the Company’s business, operating results or financial condition taken as a whole.

The Company is not currently a party to any legal proceeding that, if determined adversely to the Company, in management’s opinion, is currently expected to individually or in the aggregate have a material adverse effect on the Company’s business, operating results or financial condition taken as a whole.

Indemnifications

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No dividends have been declared or paid as of December 31, 2023.

In August 2020, the Company completed an underwritten public offering of 3,220,000 shares of its common stock at $ 20.00 per share, including a full exercise by the underwriters of their option to purchase an additional 420,000 shares of Common Stock, resulting in net proceeds of $ 60.1 million, after deducting the underwriting discount and expenses paid by the Company.

Stock Repurchase Program

In July 2022, the Company’s Board of Directors authorized a one-year stock repurchase program for up to $ 100 million of the Company’s common stock.

Under the repurchase program, repurchases can be made from time to time using a variety of

methods, which may include open market purchases, privately negotiated transactions or otherwise, all in accordance with the rules of the SEC and other applicable legal requirements.

The specific timing, price and size of the purchases will depend on prevailing stock prices, general economic and market conditions, and other considerations consistent with the Company’s capital allocation strategy.

The repurchase program does not obligate the Company to acquire a particular amount of common stock, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion.

During the year ended December 31, 2022, no repurchases were made under the program.

The Company maintains a common stock repurchase program.

Under the repurchase program, repurchases can be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions or otherwise, all in accordance with the rules of the SEC and other applicable legal requirements.

The specific timing, price and size of the purchases depends on prevailing stock prices, general economic and market conditions, and other considerations consistent with the Company’s capital allocation strategy.

The repurchase program does not obligate the Company to acquire a particular amount of common stock, and the repurchase program may be suspended or discontinued at any time at the

Company’s discretion.

During the year ended December 31, 2023, the Company purchased 2.2 million shares of common stock for $ 86.4 million at an average price per share of $ 39.09 .

As of December 31, 2023, the remaining authorized balance under this program was $ 113.6 million.

Equity Incentive Plans

Stock Options

At the Company’s 2019 annual meeting of stockholders, the stockholders approved the 2019 Equity Incentive Award Plan (the “2019 Plan”).

The 2019 Plan supersedes and replaces the 2010 Equity Incentive Award Plan (the “2010 Plan”) and preceding plans.

2019 Equity Incentive Award Plan

The 2019 Equity Incentive Award Plan (the “2019 Plan”) supersedes and replaces the 2010 Equity Incentive Award Plan (the “2010 Plan”) and preceding plans.

The terms and conditions of the 2010 Plan will continue to govern any outstanding awards granted under the 2010 Plan.

1 unchanged sentence

The 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units or other stock or cash-based awards and dividend equivalents to eligible individuals.

At the Company’s 2022 annual meeting of stockholders, the stockholders approved an increase in the number of shares of common stock issuable under the 2019 Plan by 1.5 million shares.

As of December 31, 2022, there were 6.0 million shares available for issuance under the 2019 Plan.

Stock options granted under the 2019 Plan are granted at a price not less than 100 % of the fair market value of the common stock on the date of grant.

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The options have a maximum term of ten years .

In February 2021, PSOs exercisable for up to an aggregate of 0.7 million shares of common stock were granted to certain Company executives with a grant date exercise price of $ 36.74 per share.

The actual number of shares earned is contingent upon achievement of annual corporate financial targets for bookings and non-GAAP net income for 2021 (collectively, the “2021 Performance Targets”) during the one-year performance period.

Under the 2021 Performance Targets, if the non-GAAP net income is below 80 % of target or bookings are below 90 % of target, no shares would be awarded.

From this base, shares are awarded on a 50 % weighting for both non-GAAP net income and bookings up to 100 % for each 2021 Performance Target using a sliding scale.

In February 2022, the Compensation Committee of the Company’s Board of Directors certified the results against the 2021 Performance Targets and awarded 97 % of PSOs subject to the four-year services condition.

As such, 25 % of the awarded shares of the PSOs were vested on that date, and the remaining 75 % of the shares of common stock will vest in substantially equal quarterly installments over the subsequent 36 months, subject to the executive’s continuous service with the Company through the respective vesting dates.

At the Company’s 2023 annual meeting of stockholders, the stockholders approved an increase in the number of shares of common stock issuable under the 2019 Plan by 1.5 million shares.

As of December 31, 2023, there were 5.0 million shares available for issuance under the 2019 Plan.

In February 2022, PSOs covering an aggregate of 0.7 million shares of common stock were awarded to certain executives with a grant date exercise price of $ 55.96 per share.

The actual number of shares underlying the PSOs that could become eligible to vest and become exercisable, or earned, was contingent upon achievement of annual corporate financial targets for bookings and non-GAAP operating income for 2022 (together, the “2022 Performance Targets”) during the one-year performance period.

In February 2023, the Compensation Committee of the Board of Directors certified achievement of the 2022 Performance Targets and determined that 100 % of the shares underlying the PSOs were earned, subject to the four-year service condition.

As such, 25 % of the awarded shares underlying the PSOs were vested and became exercisable on the first anniversary of the grant date, and the remaining 75 % of the shares of common stock will vest and become exercisable in substantially equal quarterly installments over the subsequent three years, subject to the executive’s continued service with the Company through the respective vesting dates.

Stock-based compensation expense of $ 6.2 million and $ 10.1 million was recognized for the years ended December 31, 2023 and 2022, respectively, related to these awards.

Also, in February 2022, the Compensation Committee granted PSOs exercisable for up to an aggregate of 0.7 million shares of common stock to certain Company executives with a grant date exercise price of $ 55.96 per share, using the same plan design as 2021 but with 2022 annual corporate financial targets for bookings and non-GAAP net operating income (collectively, the “2022 Performance Targets”).

In February 2023, the Compensation Committee of the Company’s Board of Directors certified the results against the 2022 Performance Targets and awarded 100 % of PSOs subject to the four-year service condition.

Stock-based compensation expense of $ 10.1 million was recognized for the year ended December 31, 2022 related to these awards.

In February 2023, PSOs covering an aggregate of 1.2 million shares of common stock were awarded to certain executives with a grant date average exercise price of $ 51.57 per share.

The actual number of shares underlying the PSOs that could become earned is contingent upon achievement of annual corporate financial targets for bookings and non-GAAP operating income for 2023 (together, the “2023 Performance Targets”) during the one-year performance period, with equal weighting for each measure.

If either of the 2023 Performance Targets are achieved below 80 % of target, no shares will be deemed earned for that measure and the corresponding PSOs will be forfeited.

If both 2023 Performance Targets are achieved at or above the minimum threshold of 80 %, then 50 % of the shares allocable to each 2023 Performance Target will be deemed earned, with an increasing percentage of shares being earned for achievement above the minimum threshold, up to 125 % of the shares allocable to the target.

Each 2023 Performance Target result is then weighted by 50 %, and the combined total determines the number of shares underlying the PSOs that are deemed earned, up to a maximum of 100 % of the shares underlying the PSOs.

During June 2023, the Compensation Committee approved an adjustment to the 2023 Performance Targets, resulting in incremental compensation cost of $ 4.9 million that is recognized over the vesting period of the awards.

Upon certification of achievement, any shares underlying the PSOs that are not deemed earned are immediately forfeited, and 25 % of the shares underlying the PSOs that are deemed earned immediately vest and become exercisable upon the first anniversary of the grant date, with the remaining 75 % of the earned shares vesting and becoming exercisable in substantially equal quarterly installments over the subsequent three years, in each case, subject to the executive’s continued service with the Company through the respective vesting dates.

In February 2024, the Compensation Committee certified the achievement related to the adjusted 2023 Performance Targets and determined that 54.5 % of shares underlying the PSOs were earned, subject to the on-going service condition.

As such, 45.5 % of the shares underlying the PSOs were immediately forfeited, 25 % of the earned shares underlying the PSOs became vested and exercisable on the first anniversary of the grant date, and the remaining 75 % of the earned shares underlying the PSOs will vest in substantially equal quarterly installments over the subsequent three years, subject to the executive’s continued service with the Company through the respective vesting dates.

Stock-based compensation expense of $ 9.2 million was recognized for the year ended December 31, 2023 related to the PSOs.

The following table summarizes the stock option activity under the Company’s equity incentive plans (in thousands, except per share data):

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The price of common stock purchased under the ESPP is 85 % of the lower of the fair market value of the common stock on the commencement date and the end date of each six-month offering period.

At the Company’s 2022 annual meeting of stockholders, the stockholders approved an increase in the number of shares of common stock issuable under the ESPP by 1.3 million shares.

The total shares authorized for issuance under the ESPP increased from 11.1 million shares to 12.4 million shares.

The total shares authorized for issuance under the ESPP is 12.4 million shares.

As of December 31, 2023, there were 4.5 million shares available for issuance under the ESPP.

1 unchanged sentence

As of December 31, 2023, unrecognized stock-based compensation expense of $ 0.4 million related to the ESPP is expected to be recognized over a remaining service period of 0.1 years.

The NQ ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to 25 % of their eligible compensation.

The NQ ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to 25 % of their eligible recurring compensation.

Eligible employees have the right to (a) purchase the maximum number of whole shares of common stock that can be purchased with the elected payroll deductions during each offering period for which the employee is enrolled at a purchase price equal to the closing price of the Company’s common stock on the last day of such offering period and (b) receive an equal number of shares of the Company’s common stock that are subject to a risk of forfeiture in the event the employee terminates employment within the one year period immediately following the purchase date.

Beginning in the second quarter of 2022, the NQ ESPP provides quarterly offering periods from May 8 th through August 7 th , August 8 th through November 7 th , November 8 th through February 7 th and February 8 th through May 7 th of each year.

A transition period began on May 15 th and ended on August 7 th .

The NQ ESPP provides quarterly offering periods from February 8 th through May 7 th , May 8 th through August 7 th , August 8 th through November 7 th and November 8 th through February 7 th of each year, with a maximum of 0.25 million shares allocated per purchase period.

At the Company’s 2023 annual meeting of stockholders, the stockholders approved an increase in the number of shares of common stock issuable under the NQ ESPP by 1.2 million shares.

The maximum number of shares of common stock currently authorized for issuance under the NQ ESPP is 6.3 million shares, with a maximum of 0.3 million shares allocated per purchase period.

As of December 31, 2022, there were 3.0 million shares available for issuance under the NQ ESPP, including the stockholder-approved 0.8 million share increase.

The maximum number of shares of common stock currently authorized for issuance under the NQ ESPP is 7.5 million shares.

As of December 31, 2023, there were 3.4 million shares available for issuance under the NQ ESPP.

During the year ended December 31, 2023, 0.9 million shares were purchased and issued.

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Cost of revenue $ 2,913 $ 2,700 $ 1,458

Products $ 1,666 $ 790 $ 575

Services 1,034 668 450

Sales and marketing 16,893 12,001 6,728

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In addition, the Company applies an estimated forfeiture rate to awards granted and records stock-based compensation expense only for those awards that are expected to vest.

Forfeiture rates are estimated at the time of grant based on the Company’s historical experience.

Forfeiture rates are estimated at the time of grant based on the Company’s

historical experience.

Further, to the extent the Company’s actual forfeiture rate is different from management’s estimate, stock-based compensation is adjusted accordingly.

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Balance as of December 31, 2021 $ ( 179 ) $ ( 141 ) $ ( 320 )

Other comprehensive income (loss) ( 179 ) 50 ( 129 )

Balance as of December 31, 2021 ( 179 ) ( 141 ) ( 320 )

Other comprehensive loss ( 1,521 ) ( 632 ) ( 2,153 )

Balance as of December 31, 2022 ( 1,700 ) ( 773 ) ( 2,473 )

Other comprehensive income 1,701 113 1,814

Balance as of December 31, 2023 $ 1 $ ( 660 ) $ ( 659 )

Assets and liabilities of the Company’s wholly owned foreign subsidiaries are translated from their respective functional currencies at exchange rates in effect at the balance sheet date, and revenue and expenses are translated at the monthly average exchanges rates.

These translations result in differences called foreign currency translation adjustments.

Realized foreign currency transaction gains or losses were not significant during the years ended December 31, 2022, 2021 and 2020 and are recorded in “Other income (expense), net” in the Company's Consolidated Statements of Comprehensive Income.

Realized gains and losses on sales of available-for-sale marketable securities, if any, are reclassified from accumulated other comprehensive loss to “Other income (expense), net” in our Consolidated Statements of Comprehensive Income.

Realized foreign currency transaction gains or losses were not significant during the years ended December 31, 2023, 2022 and 2021 and are recorded in “Other expense, net” in the Company's Consolidated Statements of Comprehensive Income.

Realized gains and losses on sales of available-for-sale marketable securities, if any, are reclassified from accumulated other comprehensive loss to “Other expense, net” in our Consolidated Statements of Comprehensive Income.

The domestic and foreign components of income before incomes taxes were as follows (in thousands):

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R&D tax credits ( 13.5 ) ( 9.1 ) ( 1.9 )

Foreign income inclusion 1.0 — —

tax impact of foreign operations ( 2.4 ) 7.8 —

Stock-based compensation 8.8 — ( 12.8 )

Other permanent items 2.5 1.2 0.7

Tax true-up — ( 0.2 ) ( 0.4 )

Provision to return adjustments ( 9.7 ) ( 0.4 ) ( 0.3 )

Valuation allowance — 1.3 ( 208.3 )

Net operating loss expiration / attribute expiration 5.5 ( 13.1 ) 37.4

Base erosion anti-abuse tax 6.8 — —

Attribute expiration 0.8 5.5 ( 13.1 )

Uncertain tax positions 4.7 1.7 3.2

15.6 % 24.1 % ( 228.1 ) %

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Tax credit carryforwards 58,349 56,717

Inventory 16,592 5,986

Accruals and reserves 6,684 4,949

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Stock-based compensation 12,087 7,417

Lease liability 2,277 2,346

Capitalized R&D 93,340 67,925

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Fixed assets ( 1,484 ) ( 2,648 )

Right of use assets ( 1,710 ) ( 1,602 )

Intangible assets ( 3,160 ) ( 1,498 )

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In performing its analysis, the Company used the most updated plans and estimates that it currently uses to manage the underlying business and calculated the ability to utilize its deferred tax assets.

The valuation allowance increased by $ 0.7 million from 2021 to 2022.

The valuation allowance decreased by less than $ 0.1 million from 2022 to 2023.

The Company continues to maintain a valuation allowance of $ 29.9 million on certain U.S.

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As of December 31, 2023, the Company had U.S.

federal and state net operating losses of approximately $ 205.2 million and $ 24.0 million, respectively.

federal net operating loss carryforwards will expire at various dates through 2039 if not utilized.

The state net operating loss carryforwards will expire at various dates through 2039 if not utilized.

state net operating losses of approximately $ 16.5 million which will expire at various dates through 2039 if not utilized.

Additionally, the Company has U.S.

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states research and development credits of approximately $ 44.9 million, $ 49.7 million and $ 2.7 million as of December 31, 2023, respectively.

federal research and development credits have begun to expire in 2022 and will continue to expire at various dates through 2042.

federal research and development credits will expire at various dates through 2043 if not utilized.

The California research and development credits have no expiration date.

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The Company recognizes accrued interest and penalties related to unrecognized tax benefits as interest expense and income tax expense, respectively, in its Consolidated Statements of Comprehensive Income.

The following table reconciles the Company’s unrecognized tax benefits (in thousands):

T he Company’s unrecognized tax benefits were as follows (in thousands):

Years Ended December 31,

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Net Income Per Common Share

The following table sets forth the computation of basic and diluted net income per common share for the periods indicated (in thousands, except per share data):

The computation of basic and diluted net income per common share for the periods indicated was as follows (in thousands, except per share data):

Years Ended December 31,

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Geographic Information:

The following is a summary of revenue disaggregated by geographic region based upon the location of the customers (in thousands):

A summary of revenue disaggregated by geographic region based upon the location of the customers was as follows (in thousands):

Years Ended December 31,

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United States $ 944,201 $ 786,802 $ 565,964

Europe 54,265 26,916 45,879

Americas excluding U.S.

32,696 41,892 45,719

Europe 26,916 45,879 22,925

Middle East & Africa 7,457 10,885 19,018

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$ 1,039,593 $ 867,827 $ 679,394

The Company’s property and equipment, net of accumulated depreciation, are located in the following geographical areas (in thousands):

The Company’s property and equipment, net of accumulated depreciation, were located in the following geographical areas (in thousands):

United States $ 25,231 $ 21,785

China 3,385 3,220

India 845 829

$ 29,461 $ 25,834

Contract Asset

The primary contract asset is revenue recognized on professional services contracts where the services are transferred to the customer over time, which has yet to be billed, and is classified to remaining performance obligations within accounts receivable.

Contract assets include amounts recognized as revenue prior to the Company’s contractual right to bill the customer.

Amounts are billed in accordance with the agreed-upon contractual terms.

The balance as of December 31, 2023 was $ 4.7 million of which the Company expects to bill 67 % of the balance during 2024.

The balance as of December 31, 2021 was $ 1.7 million of which $ 0.3 million remained in the Company's Consolidated Balance Sheet at December 31, 2022.

The increase in the contract asset was driven by the timing and volume of professional services contracts.

Contract Liability

Deferred revenue was $ 61.5 million and $ 58.6 million as of December 31, 2023 and 2022, respectively.

The increase in deferred revenue of $ 9.1 million is primarily driven by cash payments received or due in advance of satisfying the Company's performance obligations during the year being greater than the $ 26.8 million of revenue recognized that was included in the deferred revenue balance at the beginning of the year.

Revenue allocated to remaining performance obligations represent contract revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods.

This amount was $ 199.0 million as of December 31, 2022, and the Company expects to recognize 35 % of such revenue over the next 12 months and the remainder thereafter.

The increase in deferred revenue of $ 2.9 million is primarily driven by cash payments received or due in advance of satisfying the Company's performance obligations and balances reclassified to contract assets during the year being greater than the $ 29.2 million of revenue recognized that was included in the deferred revenue balance at the beginning of the year.

Revenue allocated to remaining performance obligations (“RPOs”) represents contract revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods but excludes variable consideration where the monthly invoicing is based on usage or where actual usage exceeds the minimum commitment.

RPOs were $ 242.5 million as of December 31, 2023, and the Company expects to recognize as revenue 39 % of this amount over the next 12 months and a majority of the remainder over the two years thereafter.

Contract Costs

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As of December 31, 2023 and 2022, the unamortized balance of deferred commissions was $ 12.0 million and $ 11.2 million, respectively.

For the year ended December 31, 2022 the amount of amortization was $ 4.0 million, compared to $ 1.4 million for the year ended December 31, 2021.

There was no impairment loss in relation to the costs capitalized for either period.

For the years ended December 31, 2023, 2022 and 2021, the amount of amortization was $ 6.5 million, $ 4.0 million and $ 1.4 million, respectively.

There was no impairment loss in relation to the costs capitalized for these respective periods.

Concentration of Customer Risk

No customer accounted for more than 10% of the Company’s revenue for the years ended December 31, 2023, 2022 and 2021.

Lumen Technologies, Inc.

(formerly CenturyLink, Inc.), the Company’s only greater-than-10%-of-revenue customer, represented 11 % of revenue for the year ended December 31, 2020.

One customer represented 11 % of the Company’s accounts receivable as of December 31, 2022.

One customer represented 19 % and 11 % of the Company’s accounts receivable as of December 31, 2023 and 2022, respectively.

Another customer represented 14 % of the Company’s accounts receivable as of December 31, 2023.

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data