INVE Technologies, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other parts of this Quarterly Report on Form 10-Q (“Quarterly Report”) contain forward-looking statements, within the meaning of the safe harbor provisions under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. Forward-looking statements reflect current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “will,” “believe,” “could,” “should,” “would,” “may,” “anticipate,” “intend,” “plan,” “estimate,” “expect,” “project” or the negative of these terms or other similar expressions. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A of this Report and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Risk Factors,” The following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2020. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law. Each of the terms the “Company,” “Identiv,” “we” and “us” as used herein refers collectively to Identiv, Inc. and its wholly-owned subsidiaries, unless otherwise stated. Overview Identiv is a global provider of secure identification and physical security. We are leveraging our Radio Frequency Identification (“RFID”) based physical device-management expertise as well as our physical access, video and analytics solutions to provide leading solutions as our customers, and our customers’ customers, embracing the Internet of Things (“IoT”). Customers in the technology and mobility, consumer, government, healthcare, education and other sectors rely on Identiv’s identification and access solutions. Identiv’s platform encompasses RFID and Near-Field Communication (“NFC”), cybersecurity, and the full spectrum of physical access, video, and audio security. We are bringing the benefits of the IoT to a wide range of physical, connected items. Identiv’s mission is to digitally enable every physical thing and every physical place on the planet. Our full continuum of security solutions is delivered through our platform of RFID enabled devices, mobile, client/server, cloud, web, dedicated hardware and software defined architectures. In doing so, we believe that we will create smart physical security and a smarter physical world. Segments We have organized our operations into two reportable business segments, principally by solution families: Identity and Premises. Our Identity segment includes products and solutions enabling secure access to information serving the logical access and cyber-security market, and protecting connected objects and information using RFID embedded security. Our Premises segment includes our solutions to address the premises security market for government and enterprise, including access control, video surveillance, analytics, audio, access readers and identities. Factors Affecting Our Performance Market Adoption Our financial performance depends on the pace, scope and depth of end-user adoption of our RFID products in multiple industries. That pace, scope and depth accelerated during 2020 causing large fluctuations in our operating results. During 2020, we saw several events that we believe are opening up the third wave of RFID deployments which is occurring at a much faster pace of growth than historically. We believe significant improvement in chip capabilities at lower costs, combined with the incorporation of the full NFC Data Exchange Format (“NDEF”) protocol by Apple in its iPhone 12 and iOS 14 has accelerated the opportunities for product engineers to integrate RFID into their products to create new and more engaging customer experiences, product reliability and performance. As the market hit this pivot point, we expanded both our capacity and technical leadership. We track growth indicators including design wins, customer launches and technology launches. We have made investments in our technology, world class quality and automation, and we believe that our competitive advantages will continue to drive growth. We believe the underlying, long-term trend is continued RFID adoption by multiple verticals. We also believe that expanding use cases fosters adoption across verticals and into other markets. In addition, we do not have any significant concentration of customers so we believe that our demand will continue to be resilient to the loss of any individual customer or application. 27 If RFID market adoption, and adoption of our products specifically, does not meet our expectations then our growth prospects and operating results will be adversely affected. If we are unable to meet end-user or customer volume or performance expectations, then our business prospects may be adversely affected. In contrast, if our RFID sales exceed expectations, then our revenue and profitability may be positively affected. Given the uncertainties of the specific timing of our new customer deployments, we cannot assure you that we have appropriate inventory and capacity levels or that we will not experience inventory shortfalls or overages in the future. We mitigate those risks by being deeply embedded in our customers design cycle, working with our chip partners on long lead time components, managing our limited capital equipment needs within a short cycle and future proofing our facilities with the most recent expansion to accommodate several scenarios for growth potential. If end users with sizable projects change or delay them, we may experience significant fluctuation in revenue on a quarterly or annual basis, and we anticipate that uncertainty to continue to characterize our business for the foreseeable future. Seasonality and Other Factors In our business overall, we may experience variations in demand for our offerings from quarter to quarter, and typically experience a stronger demand cycle in the second half of our fiscal year. Sales of our physical access control solutions and related products to U.S. Government agencies are subject to annual government budget cycles and generally are highest in the third quarter of each year. Sales of our identity readers, many of which are sold to government agencies worldwide, are impacted by project schedules of government agencies, as well as roll-out schedules for application deployments. Further, this business is typically subject to seasonality based on differing commercial and global government budget cycles. Lower sales are expected in the U.S. in the first half, and in particular, the first quarter of the year, with higher sales typically in the second half of each year. In Asia-Pacific, with fiscal year-ends in March and June, order demand can be higher in the first quarter as customers attempt to complete projects before the end of the fiscal year. Accordingly, our net revenue levels in the first quarter each year often depend on the relative strength of project completions and sales mix between our U.S. customer base and our international customer base. Purchasing of our Products and Services for U.S. Federal Government Security Programs In addition to the general seasonality of demand, overall U.S. Federal Government expenditure patterns have a significant effect on demand for our products due to the significant portion of revenue that are typically sourced from U.S. Federal Government agencies. Drivers of growth included our technology strength and proven security solutions, work from home mandates, and continued strength in investments for security across a number of different agencies. We believe that the success and growth of our business will continue through the U.S. Federal Government focus on security and our successful procurement of government business. If there are changes in government purchasing policies or budgetary constraints there could be implications for our growth prospects and operating results. If we are unable to meet end-user or customer volume or performance expectations, then our business prospects may be adversely affected. Effects of the COVID-19 Pandemic on our Business. In March 2020, the World Health Organization characterized the coronavirus (“COVID-19”) a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy. In view of the rapidly changing business environment created by the uncertainty related to the depth and or duration of the impact resulting from COVID-19, we have experienced delays in our sales in select vertical markets and are currently unable to determine if there will be any continued disruption and the extent to which this may have future impact on our business . We continue to monitor the progression of the pandemic and its effect on our financial position, results of operations, and cash flows. 28 Results of Operations The following table includes net revenue and net profit information by business segment and reconciles gross profit to income (loss) before income tax provision (in thousands). Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 % Change 2021 2020 % Change Identity: Net revenue $ 18,745 $ 15,429 21 % $ 47,199 $ 36,938 28 % Gross profit 5,211 4,694 11 % 12,133 11,287 7 % Gross profit margin 28 % 30 % 26 % 31 % Premises: Net revenue 10,352 9,430 10 % 28,053 25,146 12 % Gross profit 5,907 5,191 14 % 15,517 13,810 12 % Gross profit margin 57 % 55 % 55 % 55 % Total: Net revenue 29,097 24,859 17 % 75,252 62,084 21 % Gross profit 11,118 9,885 12 % 27,650 25,097 10 % Gross profit margin 38 % 40 % 37 % 40 % Operating expenses: Research and development 2,088 2,380 (12 %) 6,556 7,398 (11 %) Selling and marketing 4,471 4,245 5 % 12,682 12,978 (2 %) General and administrative 2,400 2,118 13 % 7,120 6,460 10 % Decrease in fair value of earnout liability — — N/A — (261 ) N/A Restructuring and severance 99 163 (39 %) 761 1,645 (54 %) Total operating expenses: 9,058 8,906 2 % 27,119 28,220 (4 %) Income (loss) from operations 2,060 979 110 % 531 (3,123 ) (117 %) Non-operating income (expense): Interest expense, net (62 ) (407 ) (85 %) (451 ) (1,066 ) (58 %) Gain on forgiveness of Paycheck Protection Program note — — — 2,946 — N/A Gain on investment 611 — N/A 611 — N/A Foreign currency losses, net (48 ) (175 ) (73 %) (2 ) (119 ) (98 %) Income (loss) before income tax provision $ 2,561 $ 397 545 % $ 3,635 $ (4,308 ) (184 %) Geographic net revenue based on each customer’s ship-to location is as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 % Change 2021 2020 % Change Americas $ 19,667 $ 15,050 31 % $ 49,023 $ 42,588 15 % Europe and the Middle East 3,223 2,082 55 % 9,309 7,312 27 % Asia-Pacific 6,207 7,727 (20 %) 16,920 12,184 39 % Total $ 29,097 $ 24,859 17 % $ 75,252 $ 62,084 21 % Percentage of net revenue: Americas 68 % 61 % 65 % 69 % Europe and the Middle East 11 % 8 % 12 % 12 % Asia-Pacific 21 % 31 % 23 % 19 % Total 100 % 100 % 100 % 100 % 29 Net Revenue Net revenue for the three months ended September 30, 2021 was $29.1 million, an increase of 17% compared with $24.9 million for the comparable period of 2020 . Net revenue in the Americas was $19.7 million for the three months ended September 30, 2021, an increase of 31% compared to $15.1 million for the comparable period of 2020. Net revenue in Europe, the Middle East, and Asia-Pacific was $9.4 million for the three months ended September 30, 2021, a decrease of 4% compared with the comparable period of 2020. Net revenue for the nine months ended September 30, 2021 was $75.3 million, an increase of 21% compared with $62.1 million for the comparable period of 2020 . Net revenue in the Americas was $49.0 million for the nine months ended September 30, 2021, an increase of 15% compared to $42.6 million for the comparable period of 2020. Net revenue in Europe, the Middle East, and Asia-Pacific was $26.2 million for the nine months ended September 30, 2021, an increase of 35% compared with the comparable period of 2020 . Identity Segment Net revenue in our Identity segment was $18.7 million for the three months ended September 30, 2021, an increase of 21% compared with $15.4 million for the comparable period of 2020. For the nine months ended September 30, 2021, n et revenue in this segment was $47.2 million , an increase of 28% compared with $36.9 million for the comparable period of 2020. Net revenue in this segment for the three and nine months ended September 30, 2021 represented 64% and 63%, respectively, of our net revenue, compared to 62% and 59% in the comparable periods of the prior year . Net revenue in the Americas was $10.2 million for the three months ended September 30, 2021, an increase of 64% compared with $6.2 million for the comparable period of 2020. For the nine months ended September 30, 2021 net revenue in the Americas was $23.4 million, an increase of 20% compared with $19.5 million for the comparable period of 2020. The increases were primarily due to higher sales of RFID transponder products and smart card readers associated with the increased demand for transponder and smart card reader products beginning in the second quarter of 2020 with shelter in place actions underway which drove the need for more work from home technologies. In addition, sales of access cards increased in the nine months ended September 30, 2021 as sales to commercial consumers in select market verticals, including retail, banking and travel, began to rebound in 2021. Net revenue in Europe, the Middle East, and the Asia-Pacific for the three months ended September 30, 2021 was $8.6 million, a decrease of 7% compared with $9.2 million in the comparable period of 2020, while net revenue for the nine months ended September 30, 2021 was $23.8 million, an increase of 37% compared with $17.5 million in the comparable period of 2020. The decrease in the three months ended September 30, 2021 compared to the comparable period of 2020 was primarily attributable to the timing of project rollout schedules associated with RFID transponder sales to mobile phone and consumer products contract manufacturers in the Asia-Pacific, with a substantial portion of the products delivered in the first half of 2021 compared to the comparable period of 2020. The increase in the nine months ended September 30, 2021 is due to higher sales of RFID transponder products to mobile phone and consumer products contract manufacturers noted above. Sales of RFID and NFC products and smart card readers comprise a significant proportion of our net revenue in these regions. RFID transponder products comprised approximately 70% and 67% of net revenue in these regions for the three and nine months ended September 30, 2021, respectively, compared to 72% and 62% in the comparable periods of the prior year. Smart card reader products comprised 20% and 22% of net revenue in these regions for the three and nine months ended September 30, 2021, respectively, compared to 19% and 26% in the comparable periods of the prior year . Premises Segment Net revenue in our Premises segment was $10.4 million for the three months ended September 30, 2021 , an increase of 10% compared with $9.4 million for the comparable period of 2020. For the nine months ended September 30, 2021, n et revenue in this segment was $28.1 million , an increase of 12% compared with $25.1 million for the comparable period of 2020. Net revenue in our Premises segment for the three and nine months ended September 30, 2021 represented 36% and 37%, respectively, of our net revenue, compared to 38% and 41% in the comparable periods of the prior year . Net revenue in the Americas was $9.5 million for the three months ended September 30, 2021, an increase of 7% compared with $8.9 million for the comparable period of 2020. For the nine months ended September 30, 2021 net revenue in the Americas was $25.7 million, an increase of 11% compared with $23.1 million for the comparable period of 2020. The increases were primarily due to a rebound in sales of Hirsch Velocity hardware and software products to consumers in select commercial verticals, growth in sales to the federal government, and higher sales of video technology and analytics software products . Net revenue from our Premises solution for security programs within various U.S. government agencies and commercial customers for access control and video solutions, as well as reader, controller and appliance products, in the three and nine months ended September 30, 2021 represented 48% and 52%, respectively, of our net revenue in the Americas. 30 Net revenue in Europe, the Middle East, and Asia-Pacific for the three months ended September 30, 2021 was $0.9 million, an increase of 50 % compared $0.6 million with the comparable period of 2020 , while net revenue for the nine months ended September 30, 2021 was $2.4 million, an increase of 17% compared with $2. 0 million in the comparable period of 2020 . The increase s in these regions are primarily project driven and can vary period to period. As a general trend, U.S. Federal agencies continue to be subject to security improvement mandates under programs such as Homeland Security Presidential Directive-12 (“HSPD-12”) and reiterated in memoranda from the Office of Management and Budget (“OMB M-11-11”). We believe that our solutions for trusted physical access is an attractive offering to help federal agency customers move towards compliance with federal directives and mandates. To address sales opportunities in the United States in general and with our U.S. Government customers in particular, we focus on a strong U.S. sales organization and our sales presence in Washington D.C. More recently, in response to the new needs for health and safety in the physical security market overall, due to the COVID-19 pandemic, we have released products to address these trends. During 2020, we launched our contact tracing downloadable extension for our Velocity access system, our occupancy tracking system based on our 3VR platform, our MobilisID touchless reader and our temperature tracking tag. In addition, with the economic impact of the COVID-19 pandemic continuing to create uncertainty for our customers, we have released several products which are subscription based and which allow payments over time for our physical access and video solutions as a service. Gross Profit and Gross Margin Gross profit for the three months ended September 30, 2021 was $11.1 million, or 38% of net revenue, compared with $9.9 million, or 40% of net revenue in the comparable period of 2020. Gross profit for the nine months ended September 30, 2021 was $27.7 million, or 37% of net revenue, compared with $25.1 million, or 40% of net revenue in the comparable period of 2020. Gross profit represents net revenue less direct cost of product sales, manufacturing overhead, other costs directly related to preparing the product for sale including freight, scrap, inventory adjustments and amortization, where applicable. Identity Segment In our Identity segment, gross profit in the three and nine months ended September 30, 2021 was $5.2 million and $12.1 million, respectively. Gross profit in the three and nine months ended September 30, 2020 was $4.7 million and $11.3 million, respectively. Gross profit margins in this segment decreased to 28% in the three months ended September 30, 2021 from 30% in the comparable period of 2020 and decreased to 26% in the nine months ended September 30, 2021 from 31% in the comparable period of 2020. The decreases were primarily attributable to near-term investments in technology and manufacturing processes and systems, as well as changes in product mix, with a higher proportion of lower margin RFID transponder product sales in 2021 compared to the comparable period in 2020. Premises Segment In our Premises segment, gross profit was $5.9 million in the three months ended September 30, 2021 compared with $5.2 million in the comparable period of 2020. Gross profit margins in this segment increased to 57% in the three months ended September 30, 2021 from 55% in the comparable period of 2020 primarily due to product mix, with higher sales of higher margin video analytics software compared to the comparable period in 2020. Gross profit was $15.5 million in the nine months ended September 30, 2021 compared with $13.8 million in the comparable period of 2020. Gross profit margins in this segment in the nine months ended September 30, 2021 were comparable to the comparable period in 2020. We expect there will be variation in our total gross profit from period to period, as our gross profit has been and will continue to be affected primarily by varying mix among our products. Within each product category, gross margins have tended to be consistent, but over time may be affected by a variety of factors, including, without limitation, competition, product pricing, the volume of sales in any given quarter, manufacturing volumes, product configuration and mix, the availability of new products, product enhancements, software and services, risk of inventory write-downs and the cost and availability of components. 31 Operating Expenses Information about our operating expenses for the three and nine months ended September 30, 2021 and 2020 is set forth below (dollars in thousands). Research and Development Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 % Change 2021 2020 % Change Research and development $ 2,088 $ 2,380 (12 %) $ 6,556 $ 7,398 (11 %) as a % of net revenue 7 % 10 % 9 % 12 % Research and development expenses consist primarily of employee compensation and fees for the development of hardware, software and firmware products. We focus the bulk of our research and development activities on the continued development of existing products and the development of new offerings for emerging market opportunities. Research and development expenses for the three and nine months ended September 30, 2021 decreased compared to the comparable prior year periods primarily due to lower headcount and related costs, partially offset by higher external contractor costs. Selling and Marketing Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 % Change 2021 2020 % Change Selling and marketing $ 4,471 $ 4,245 5 % $ 12,682 $ 12,978 (2 %) as a % of net revenue 15 % 17 % 17 % 21 % Selling and marketing expenses consist primarily of employee compensation as well as amortization expense of certain intangible assets, customer lead generation activities, tradeshow participation, advertising and other marketing and selling costs. Selling and marketing expenses for the three months ended September 30, 2021 increased compared to the comparable prior year period primarily due to higher tradeshow and advertising costs, partially offset by lower headcount and related costs and lower amortization expense associated with intangible assets that were fully amortized in the fourth quarter of 2020. Selling and marketing expenses for the nine months ended September 30, 2021 decreased compared to the prior year period primarily due to the lower intangible asset amortization noted above, and higher recruiting fees in the prior year period. These decreases were partially offset by higher tradeshow and advertising costs in 2021. General and Administrative Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 % Change 2021 2020 % Change General and administrative $ 2,400 $ 2,118 13 % $ 7,120 $ 6,460 10 % as a % of net revenue 8 % 9 % 9 % 10 % General and administrative expenses consist primarily of compensation expenses for employees performing administrative functions, and professional fees incurred for legal, auditing and other consulting services. General and administrative expenses for the three and nine months ended September 30, 2021 increased compared to the prior year periods primarily due t o higher professional fees and external contractor costs, as well as an increase in bad debt expense. 32 Decrease in Fair Value of Earnout Liability Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 % Change 2021 2020 % Change Decrease in fair value of earnout liability $ — $ — N/A $ — $ (261 ) N/A The decrease in earnout consideration expense of $261,000 during the nine months ended September 30, 2020 was attributable to the decrease in the fair value of the earnout liability associated with a prior acquisition, representing the settlement date fair value of the shares issued and the recorded earnout liability. Restructuring and Severance Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 % Change 2021 2020 % Change Restructuring and severance $ 99 $ 163 (39 %) $ 761 $ 1,645 (54 %) Restructuring expenses incurred during the three and nine months ended September 30, 2021 consists of facility rental related costs of $67,000 and $523,000, respectively, and severance related costs of $32,000 and $238,000, respectively. Facility rental related costs during the nine months ended September 30, 2021, included a charge of $281,000 resulting from the impairment of a right-of-use operating lease asset for office space we vacated in the first quarter of 2021. Restructuring expenses incurred during the three and nine months ended September 30, 2020 consists of severance related costs of $145,000 and $229,000, respectively, and facility rental related costs associated with office space from a prior acquisition of $18,000 and $1,416,000, respectively, which included a charge of $1,199,000 associated with the impairment of the right-of-use operating lease asset, which was subleased, but went into default due to non-payment of rent beginning April 1, 2020. Sublease income of $198,000 was received in the first quarter of 2020, however, since the first quarter of 2020, no rental payments have been received. Non-operating Income (Expense) Information about our non-operating income (expense) for the three and nine months ended September 30, 2021 and 2020 is set forth below (dollars in thousands). Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 % Change 2021 2020 % Change Interest expense, net $ (62 ) $ (407 ) (85 %) $ (451 ) $ (1,066 ) (58 %) Gain on forgiveness of Paycheck Protection Program note $ — $ — — $ 2,946 $ — N/A Gain on investment $ 611 $ — N/A $ 611 $ — N/A Foreign currency losses, net $ (48 ) $ (175 ) (73 %) $ (2 ) $ (119 ) (98 %) Interest expense, net consists of interest on financial liabilities, amortization of debt issuance costs, and interest accretion expense for a liability on a contractual payment obligation arising from our acquisition of Hirsch Electronics Corporation. The decrease in interest expense for the three and nine months ended September 30, 2021 compared to the comparable periods of 2020 was primarily attributable to lower borrowings outstanding under our revolving loan facility with our lender, and lower amounts outstanding under our contractual payment obligation. See Note 7, Contractual Payment Obligation and Note 8, Financial Liabilities , in the accompanying notes to our unaudited condensed consolidated financial statements for more information. On May 7, 2021, the principal and accrued interest amounts outstanding of approximately $2.9 million under our promissory note pursuant to the Paycheck Protection Program had been forgiven. As a result, we recorded a gain on forgiveness of the promissory note of $2.9 million in the second quarter of 2021. Gain on investment of $611,000 in the third quarter of 2021 was from the proceeds received in connection with the acquisition of a private company that we had invested in, which had been fully impaired and had no carrying value. Changes in currency valuation in the periods mainly were the result of exchange rate movements between the U.S. dollar, the Indian Rupee, the Canadian dollar, and the euro. Our foreign currency gains and losses primarily result from the valuation of current assets and liabilities denominated in a currency other than the functional currency of the respective entity in the local financial statements. 33 Income Tax Provision Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 % Change 2021 2020 % Change Income tax provision $ (21 ) $ (8 ) 163 % $ (94 ) $ (99 ) (5 %) Effective tax rate 1 % 2 % 3 % (2 %) As of September 30, 2021, our deferred tax assets are fully offset by a valuation allowance. Accounting Standards Codification (“ASC”) 740, Income Taxes , provides for the recognition of deferred tax assets if realization of such assets is more-likely-than-not. Based upon the weight of available evidence, which includes historical operating performance, reported cumulative net losses since inception and difficulty in accurately forecasting our future results, we provided a full valuation allowance against all of our net U.S. and foreign deferred tax assets. We reassess the need for our valuation allowance on a quarterly basis. If it is later determined that a portion or all of the valuation allowance is not required, it generally will be a benefit to the income tax provision in the period such determination is made. We recorded an income tax provision during the three and nine months ended September 30, 2021 and 2020. The effective tax rates for the three and nine months ended September 30, 2021 and 2020 differ from the federal statutory rate of 21% primarily due to a change in valuation allowance, and the provision or benefit in certain foreign jurisdictions, which are subject to higher tax rates. Liquidity and Capital Resources As of September 30, 2021, our working capital, defined as current assets less current liabilities, was $53.4 million, an increase of $41.5 million compared to $11.9 million as of December 31, 2020. As of September 30, 2021, our cash balance was $29.2 million. Sale of Common Stock On April 7, 2021, we sold an aggregate of 3,779,342 shares of our common stock at a public offering price of $10.65 per share in an underwritten public offering. We received net proceeds of approximately $37.7 million from the sale of the common stock in the public offering, after deducting the underwriting discount and other offering related expenses of $2.5 million. East West Bank On February 8, 2017, we entered into a loan and security agreement with East West Bank (“EWB”). Following subsequent amendments, on February 8, 2021 we amended and restated the Loan and Security Agreement in its entirety (the “Loan and Security Agreement”). The Loan and Security Agreement provides for a $20.0 million revolving loan facility subject to a borrowing base and a $4.0 million non-formula revolving loan facility that is not subject to a borrowing base. The maturity date of the main revolving loan facility is February 8, 2023. Our obligations under the Loan and Security Agreement are collateralized by substantially all of our assets. As of September 30, 2021, there were no amounts outstanding under our Loan and Security Agreement. See Note 8, Financial Liabilities in the accompanying notes to our unaudited condensed consolidated financial statements for more information. April 21 Funds On May 5, 2020, we issued secured subordinated promissory notes in an aggregate principal amount of $4.0 million (the “Notes”) to 21 April Fund, LP and 21 April Fund, Ltd. (collectively referred to as the “April 21 Funds”) pursuant to a Note and Warrant Purchase Agreement entered into with the April 21 Funds (the “Note Purchase Agreement”). The Notes were collateralized by our assets, but subordinate to our obligations to EWB under the Loan and Security Agreement. Proceeds from the sale of the Notes were only to be used for expenses incurred by us in connection with our provisions of goods and services under a statement of work with a third party. The Notes had an initial term of nine months and did not bear interest during that period. However, if the Notes were not repaid on or before the nine-month anniversary of issuance, (a) the Notes would thereafter bear interest of 8% per annum, payable quarterly, and (b) additional warrants to purchase common stock would be issuable to the April 21 Funds for each month all or a portion of the Notes remained unpaid. In the event the Notes were not paid in full by the first anniversary of their issuance, May 5, 2021, they would thereafter bear interest of 12% per annum, payable quarterly, and additional warrants would be issuable to the April 21 Funds. On February 5, 2021, we entered into an amendment to our secured subordinated promissory note with April 21 Funds, which extended the initial term of the Notes to March 31, 2021. As a result of the amendment, if the Notes were repaid on or before March 31, 2021, we would incur no further interest on the Notes, or be obligated to issue additional warrants. On March 31, 2021, April 21 Funds waived any additional warrants issuable, and interest payable, to April 21 Funds through May 5, 2021. On April 13, 2021, we repaid the remaining principal amount outstanding of $2.8 million. 34 Paycheck Protection Program On April 9, 2020, we entered into a promissory note (the “PPP Note”) under the Paycheck Protection Program established under Section 1102 of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The PPP Note was dated April 8, 2020 with EWB. We borrowed a principal amount of approximately $2.9 million. The interest on the PPP Note was 1.0% per annum. The PPP Note was payable two years from the date of the PPP Note, and there was no prepayment penalty. All interest which accrues during the initial six months of the loan period was deferred and payable on the maturity date of the PPP Note. Notes issued under the CARES Act may be eligible for forgiveness in whole or in part in accordance with Small Business Administration rules established for the Paycheck Protection Program. On May 7, 2021, the principal and accrued interest amounts outstanding of approximately $2.9 million under our promissory note pursuant to the Paycheck Protection Program had been forgiven. As a result, we recorded a gain on forgiveness of the PPP Note debt of $2.9 million in the second quarter of 2021. As our previously unremitted earnings have been subjected to U.S. federal income tax, we expect any repatriation of these earnings to the U.S. would not incur significant additional taxes related to such amounts. However, our estimates are provisional and subject to further analysis. Generally, most of our foreign subsidiaries have accumulated deficits and cash and cash equivalents that are held outside the United States are typically not cash generated from earnings that would be subject to tax upon repatriation if transferred to the United States. We have access to the cash held outside the United States to fund domestic operations and obligations without any material income tax consequences. As of September 30, 2021, the amount of cash included at such subsidiaries was $5.2 million. We have not, nor do we anticipate the need to, repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements. While we recorded net income during the period, we have historically incurred operating losses and negative cash flows from operating activities, and we may incur losses in the future. As of September 30, 2021, we had a total accumulated deficit of $407.1 million. We believe our existing cash balance, together with cash generated from operations and available credit under our Loan and Security Agreement will be sufficient to satisfy our working capital needs to fund operations for the next twelve months. We may also use cash to acquire or invest in complementary businesses, technologies, services or products that would change our cash requirements. We may also choose to finance our business through public or private equity offerings, debt financings or other arrangements. However, there can be no assurance that additional capital will be available to us or that such capital will be available to us on acceptable terms. If we raise funds by issuing equity securities, dilution to stockholders could result. Debt or any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings could impose significant restrictions on our operations. The incurrence of additional indebtedness or the issuance of certain debt or equity securities could result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely affect our ability to conduct our business. Our Loan and Security Agreement imposes restrictions on our operations, increases our fixed payment obligations and has restrictive covenants. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our common stock to decline. If we are not able to secure additional funding when needed, we may have to curtail or reduce the scope of our business or forgo potential business opportunities. 35 The following summarizes our cash flows for the nine months ended September 30 , 20 2 1 and 20 20 (in thousands): Nine Months Ended September 30, 2021 2020 Net cash provided by (used in) operating activities $ 5 $ (5,325 ) Net cash used in investing activities (1,312 ) (928 ) Net cash provided by financing activities 19,560 8,976 Effect of exchange rates on cash and cash equivalents (444 ) 188 Net increase in cash and cash equivalents 17,809 2,911 Cash and cash equivalents at beginning of period 11,409 9,383 Cash and cash equivalents at end of period $ 29,218 $ 12,294 Cash flows from operating activities Cash provided by operating activities for the nine months ended September 30, 2021 of less than $0.1 million was primarily due to net income of $3.5 million , and adjustments for certain non-cash items of $0.4 million, consisting primarily of depreciation, amortization, amortization of debt issuance costs, stock-based compensation, gain on forgiveness of the Paycheck Protection Program note and impairment of a right-of-use operating lease asset, offset by a decrease in cash from net changes in operating assets and liabilities of $3.9 million. Cash used in operating activities for the nine months ended September 30, 2020 of $5.3 million was primarily due to net loss of $4.4 million, a decrease in cash from net changes in operating assets and liabilities of $6.9 million, partially offset by adjustments for certain non-cash items of $6.0 million, consisting primarily of impairment of right-of-use operating lease assets, decrease in fair value of earnout liability, depreciation, amortization, amortization of debt issuance costs, and stock-based compensation. Cash flows from investing activities Cash used in investing activities for the nine months ended September 30, 2021 of $1.3 million was primarily due to $1.9 million of capital investment expenditures in our manufacturing facility in Singapore and our research and development facility in Germany, partially offset by $0.6 million related to the proceeds from an investment. Cash used in investing activities for the nine months ended September 30, 2020 of $0.9 million related primarily to capital investment expenditures in our manufacturing facility in Singapore. Cash flows from financing activities Cash provided by financing activities during the nine months ended September 30, 2021 was primarily due to net proceeds of $37.7 million received from the sale of common stock in our underwritten public offering, partially offset by net repayments under our revolving loan facility of $14.6 million, repayments of April 21 Funds promissory notes of $2.8 million and taxes paid related to net share settlement of restricted stock units of $0.9 million. Cash provided by financing activities during the nine months ended September 30, 2020 was primarily due to the issuance of secured subordinated promissory notes to April 21 Funds of $4.0 million, proceeds received under the Payment Protection Program of $2.9 million , and net borrowings under our revolving loan and term loan facilities of $2.7 million , partially offset by taxes paid related to net share settlement of restricted stock units of $0.6 million. 36 Off-Balance Sheet Arrangements We have not entered into off-balance sheet arrangements, or issued guarantees to third parties, except as disclosed in Note 7, Contractual Payment Obligation . Climate Change We believe that neither climate change, nor governmental regulations related to climate change, have had any material effect on our business, financial condition or results of operations. Critical Accounting Policies and Estimates Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires management to establish accounting policies that contain estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. These policies relate to revenue recognition, inventory, income taxes, goodwill, intangible and long-lived assets and stock-based compensation. We have other important accounting policies and practices; however, once adopted, these other policies either generally do not require us to make significant estimates or assumptions or otherwise only require implementation of the adopted policy and not a judgment as to the policy itself. Management bases its estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Despite our intention to establish accurate estimates and assumptions, actual results may differ from these estimates under different assumptions or conditions. During the three months ended September 30, 2021, management believes there have been no significant changes to the items that we disclosed within our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020. Recent Accounting Pronouncements See Note 2, S ignificant Accounting Policies and Recent Accounting Pronouncements, in the accompanying notes to our unaudited condensed consolidated financial statements in Item 1 of Part I of this Quarterly Report for a description of recent accounting pronouncements, which is incorporated herein by reference. 10b5-1 Trading Plans From time to time, we expect our executive officers and directors will enter into written trading plans pursuant to Rule 10b5-1 of the Securities and Exchange Act of 1934. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not required. 37