IMPINJ INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements containing words such as “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” “estimate,” or similar expressions constitute forward-looking statements. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. They include, but are not limited to, statements about: • our market opportunity; • the adoption of RAIN technology and solutions; • our ability to compete effectively against competitors and competing technologies; • our market share and product leadership; • our business model, strategic plans and product-development plans; • the impact of any future health outbreak or pandemic, including a potential resurgence of Covid-19 on our business, operations and financial condition as well as on macroeconomic conditions; • our future financial performance, including our average selling prices, or ASPs, gross margins and the dependency of our future financial performance on macroeconomic conditions; • the performance of third parties on which we rely for product development, manufacturing, assembly and testing; and our relationship with other third parties on which we rely for product distribution, sales, integration and deployment; • our ability to adequately protect our intellectual property; • the regulatory environment for our products and services; and • our leadership in industry and standards-setting bodies. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, including those factors discussed in Part II, Item 1A (Risk Factors). Considering the significant uncertainties and risks inherent in these forward-looking statements, you should not regard these statements as a representation or warranty by us or anyone else that we will achieve our objectives and plans in any specified time frame, or at all, or as predictions of future events. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Our Business Our vision is a world in which every item that enterprises manufacture, transport and sell, and that people own, use and recycle, is wirelessly and ubiquitously connected to the cloud. And a world in which the ownership, history and linked information for every one of those items is seamlessly available to enterprises and people. We call our expansive vision a Boundless Internet of Things, or IoT. We design and sell a platform that enables that wireless item-to-cloud connectivity and with which we and our partners innovate Internet of Things, or IoT, solutions. We have enabled connectivity for more than 100 billion items to date, delivering item visibility and improving operational efficiencies for retailers, supply chain and logistics, or SC&L providers, restaurants and food-service providers, airlines, automobile manufacturers, healthcare companies and many more. We are today focused on extending item connectivity from tens of billions to trillions of items, and delivering item data not just to enterprises but to people, so they too can derive value from their connected items. We believe the Boundless IoT we are enabling will, in the not-too-distant future, give people ubiquitous access to cloud-based digital twins of every item, each storing the item’s history and linked information and helping people explore and learn about the item. We believe that that connectivity will transform the world. We and our partner ecosystem build item-visibility solutions using products that we design and either sell or license, including silicon RAIN radios; manufacturing, test, encoding and reading systems, software and cloud services that encapsulate our solutions know-how and intellectual property. We sell two types of silicon integrated circuit, or IC, radios. The first are endpoint ICs that store a serialized number to wirelessly identify an item. Our partners embed endpoint ICs into an item or its packaging. The ICs may also contain a cryptographic key to authenticate the item. The second are reader ICs that our partners use in finished readers to wirelessly discover, inventory and engage the endpoint ICs. Those readers may also protect an item or consumer, for example by authenticating the item as genuine or privatizing the item by rendering the endpoint IC unresponsive without the consumer first providing a password. Our manufacturing, test and encoding systems enable partner products and facilitate enterprise deployments. Our reading 19 Table of Contents systems comprise high-performance finished readers and gateways for autonomous reading solutions. Our software and cloud services focus on solutions enablement. We sell our products, individually or as a whole platform offering primarily with or through our partner ecosystem. That ecosystem comprises original equipment manufacturers, or OEMs, tag service bureaus, original device manufacturers, or ODMs, systems integrators, or SIs, value-added resellers, or VARs, independent software vendors, or ISVs, and other solution partners. Our silicon radios follow the RAIN industry’s air-interface standard for their core functionality. We create partner and enterprise preference for our radios and solutions by adding differentiated features into our products, and supporting or licensing those features across our platform, to deliver solutions capabilities and performance that surpasses mix-and-match solutions built from competitor products. Factors Affecting Our Performance Inventory Supply Most of our revenue derives from endpoint ICs that our partners embed into or onto enterprise items and is therefore affected by macroeconomic trends. Further, we sell most of our products, both endpoint ICs and systems, through partners and distributors, limiting our visibility to enterprise demand. We work closely with those partners and distributors to gain as accurate a view as possible, however, correctly forecasting demand for our products and identifying market shifts in a timely manner remains a challenge. As a result, we sometimes experience inventory overages or shortages. Inventory overages can increase expenses, expose us to product obsolescence and/or increased reserves and negatively affect our business. Inventory shortages can cause long lead times, missed opportunities, market-share losses and/or damaged customer relationships, also negatively affecting our business. In 2021 and 2022, demand for our endpoint ICs increased while worldwide wafer demand also increased, leading to wafer shortfalls for many semiconductor companies, including us. These wafer shortfalls prevented us from fully meeting customer demand and, in some cases, caused customers to cancel orders, qualify alternative suppliers or purchase from our competitors. In 2023, macroeconomic conditions led to softness in demand and inventory overages. Product Adoption and Unit Growth Rates Enterprises have significantly adopted RAIN in retail apparel, our largest market, and SC&L, but the rate of adoption and unit growth rates have been uneven and unpredictable. From 2010 to 2023, our overall endpoint IC sales volumes increased at a 26% compounded annual growth rate; however, we have experienced uneven growth rates in various periods. Regardless of the uneven pace of retail, SC&L and other industry adoption and growth rates, we believe the long-term trend is continued RAIN adoption and growth and we intend to continue investing in developing new products and expanding our product offerings for the foreseeable future. However, we cannot predict whether historical annual growth rates are indicative of the pace of future growth. Our systems business, at least for readers and gateways, depends significantly on large-scale deployments at discrete end users, and deployment timing causes large yearly variability in our systems revenue. For example, we generated 14% of total 2019 revenue from a gateway deployment at a large North American SC&L provider. We did not have comparable project-based revenue in 2020. Similarly, in 2021, we generated 13% of our quarterly revenue from a project-based gateway deployment for RAIN-based self-checkout and loss prevention at a large Europe-based global retailer. We did not have comparable project-based revenue in 2022, 2023 or first-half 2024. Seasonality and Pricing We typically negotiate pricing with most of our endpoint IC OEMs with an effective date of the first quarter of the calendar year. In the past, this negotiation typically resulted in reduced revenue and gross margins in the first quarter compared to prior periods, which then normalized in subsequent quarters as we reduced costs and adjust product mix by migrating those OEMs and end users to newer, lower-cost products. Endpoint IC volumes tend to be lower in the fourth quarter than in the third quarter. System sales tend to be higher in the fourth quarter and lower in the first quarter, we believe due to the availability of residual funding for capital expenditures prior to the end of many end users’ fiscal years. We did not see these seasonal trends in 2023 and may not see them in 2024. Whether and when these trends will return is not clear. We do expect continued quarter-to-quarter revenue variability due to changing macroeconomic conditions. 20 Table of Contents Results of Operations The following table presents our results of operations for the periods indicated: Three Months Ended June 30, Six Months Ended June 30, (in thousands, except percentages) 2024 2023 Change 2024 2023 Change Revenue $ 102,495 $ 85,986 $ 16,509 $ 179,320 $ 171,883 $ 7,437 Gross profit $ 57,516 $ 43,814 $ 13,702 $ 95,064 $ 87,344 $ 7,720 Gross margin 56.1 % 51.0 % 5.1 % 53.0 % 50.8 % 2.2 % Income (loss) from operations $ 9,046 $ (8,369 ) $ 17,415 $ (2,687 ) $ (12,811 ) $ 10,124 Three months ended June 30, 2024 compared with three months ended June 30, 2023 Revenue and gross profit increased, due primarily to higher endpoint IC revenue partially offset by lower systems revenue. The endpoint IC revenue increase was driven primarily by licensing revenue as well as higher endpoint IC shipment volumes when compared to the prior-year period. Systems revenue decreased, due primarily to lower shipment volumes. Gross margin increased, due primarily to the high-margin licensing revenue contribution, slightly offset by a decrease in product margins due to revenue mix between endpoint ICs and systems. Income from operations increased, due primarily to increased gross profit and decreased operating expenses. The operating expense decrease was due to lower general and administrative costs, sales and marketing costs and amortization of intangibles, partially offset by higher research and development costs. Six months ended June 30, 2024 compared with six months ended June 30, 2023 Revenue and gross profit increased, due primarily to higher endpoint IC revenue partially offset by lower systems revenue. The endpoint IC revenue increase was driven primarily by licensing revenue as well as higher endpoint IC shipment volumes when compared to the prior-year period. Systems revenue decreased, due primarily to lower shipment volumes. Gross margin increased, due primarily to the high-margin licensing revenue contribution. Loss from operations decreased, due primarily to increased gross profit and decreased operating expenses. The operating expense decrease was due primarily to lower general and administrative costs and sales and marketing costs, partially offset by higher research and development and restructuring costs. Revenue Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 Change 2024 2023 Change Endpoint ICs $ 89,392 $ 64,905 $ 24,487 $ 150,898 $ 131,954 $ 18,944 Systems 13,103 21,081 (7,978 ) 28,422 39,929 (11,507 ) Total revenue $ 102,495 $ 85,986 $ 16,509 $ 179,320 $ 171,883 $ 7,437 We currently derive substantially all our revenue from sales of endpoint ICs, reader ICs, readers, gateways, test and measurement solutions and licensing. We sell our endpoint ICs and test and measurement solutions primarily to inlay manufacturers; our reader ICs primarily to OEMs and ODMs through distributors; and our readers and gateways to solutions providers, VARs and SIs, also primarily through distributors. We expect endpoint IC sales to represent the majority of our revenue for the foreseeable future. Three months ended June 30, 2024 compared with three months ended June 30, 2023 Endpoint IC revenue increased $24.5 million, due to a $15.0 million increase in licensing revenue and a $17.7 million increase in shipment volumes, partially offset by a $8.2 million decrease from lower ASP due primarily to a product mix shift within the 300mm products, and to a lesser extent, short term special pricing incentives on legacy products. The product mix shift within the 300mm products was due primarily to higher contribution from authentication ICs in prior year. Systems revenue decreased $8.0 million, due primarily to a decrease in shipment volumes. Reader and gateway revenues decreased $3.4 million and $3.9 million, respectively, and non-recurring engineering revenue decreased $0.5 million. These decreases were partially offset by an increase in reader IC revenue due to increased shipment volumes. 21 Table of Contents Six months ended June 30, 2024 compared with six months ended June 30, 2023 Endpoint IC revenue increased $18.9, million due to a $15.0 million increase in licensing revenue that did not occur in the prior-year period and a $15.2 million increase in shipment volumes, partially offset by a $11.3 million decrease from lower ASP due primarily to a product mix shift within the 300mm products, and to a lesser extent, short term special pricing incentives on legacy products. The product mix shift within the 300mm products was due primarily to higher contribution from authentication ICs in prior year. Systems revenue decreased by $11.5 million due primarily to a decrease in shipment volumes. Reader revenue decreased $6.9 million, gateway revenue decreased $5.4 million, reader IC revenue decreased $1.6 million and nonrecurring engineering revenue decreased $0.5 million. The decrease was partially offset by an increase of $2.9 million from test and measurement solutions revenue. Gross Profit and Gross Margin Three Months Ended June 30, Six Months Ended June 30, (in thousands, except percentages) 2024 2023 Change 2024 2023 Change Cost of revenue $ 44,979 $ 42,172 $ 2,807 $ 84,256 $ 84,539 $ (283 ) Gross profit 57,516 43,814 13,702 95,064 87,344 7,720 Gross margin 56.1 % 51.0 % 5.1 % 53.0 % 50.8 % 2.2 % Cost of revenue includes costs associated with manufacturing our endpoint ICs, reader ICs, readers, gateways and test and measurement solutions, including direct materials and outsourced manufacturing costs as well as associated overhead costs such as logistics, quality control, planning and procurement. Cost of revenue also includes charges for excess and obsolescence and warranty costs. Our gross margin varies from period to period based on the mix of endpoint IC and systems; underlying product margins driven by changes in mix, ASPs or costs; as well as from inventory excess and obsolescence charges. Three months ended June 30, 2024 compared with three months ended June 30, 2023 Gross profit increased, due primarily to increased endpoint IC revenue, partially offset by decreased systems revenue. Gross margin increased, due primarily to high-margin licensing revenue recognized in the second quarter of 2024 that did not occur in the prior-year period, slightly offset by a decrease in product margins due to revenue mix between endpoint ICs and systems. Six months ended June 30, 2024 compared with six months ended June 30, 2023 Gross profit increased, due primarily to increased endpoint IC revenue partially offset by decreased systems revenue. Gross margin increased, due primarily to high-margin licensing revenue recognized in the year that did not occur in the prior year. Operating Expenses Research and Development Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 Change 2024 2023 Change Research and development $ 24,924 $ 23,403 $ 1,521 $ 47,443 $ 45,838 $ 1,605 Research and development expense comprises primarily personnel expenses (salaries, benefits and other employee related costs) and stock-based compensation expense for our product-development personnel; product development costs which include external consulting and service costs, prototype materials and other new-product development costs; and an allocated portion of infrastructure costs which include occupancy, depreciation and software costs. We expect research and development expense to increase in absolute dollars in future periods as we continue to focus on new product development and introductions. Three months ended June 30, 2024 compared with three months ended June 30, 2023 Research and development expense increased $1.5 million, due primarily to increases of $2.6 million in personnel expenses related to higher bonus achievement and higher taxes associated with equity vesting; $0.7 million in stock-based compensation expense primarily related to increased outstanding equity grants; and $0.4 million in infrastructure costs; partially offset by a $2.0 million decrease in product development costs due to timing. 22 Table of Contents Six months ended June 30, 2024 compared with six months ended June 30, 2023 Research and development expense increased $1.6 million, due primarily to increases of $3.2 million in personnel expenses from higher bonus achievement, higher headcount primarily related to our acquisition of Voyantic and higher taxes associated with equity vesting; $1.4 million in stock-based compensation expense primarily related to increased outstanding equity grants; and $0.7 million in infrastructure costs; partially offset by a $3.5 million decrease in product development costs due to timing. Sales and Marketing Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 Change 2024 2023 Change Sales and marketing $ 9,827 $ 10,632 $ (805 ) $ 20,003 $ 20,605 $ (602 ) Sales and marketing expense comprises primarily personnel expenses (salaries, incentive sales compensation, or commission, benefits and other employee-related costs) and stock-based compensation expense for our sales and marketing personnel; travel, advertising and promotional expenses; and an allocated portion of infrastructure costs which include occupancy, depreciation and software costs. Three months ended June 30, 2024 compared with three months ended June 30, 2023 Sales and marketing expense decreased $0.8 million, due primarily to decreases in personnel expenses resulting from a decrease in headcount, partially offset by higher bonus achievement. Six months ended June 30, 2024 compared with six months ended June 30, 2023 Sales and marketing expense decreased $0.6 million, due primarily to decreases of $0.5 million in personnel expenses resulting from a decrease in headcount, partially offset by higher bonus achievement. General and Administrative Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 Change 2024 2023 Change General and administrative $ 13,223 $ 16,002 $ (2,779 ) $ 26,588 $ 31,566 $ (4,978 ) General and administrative expense comprises primarily personnel expenses (salaries, benefits and other employee related costs) and stock-based compensation expense for our executive, finance, human resources and information technology personnel; legal, accounting and other professional service fees; travel and insurance expense; and an allocated portion of infrastructure costs which include occupancy, depreciation and software costs. Three months ended June 30, 2024 compared with three months ended June 30, 2023 General and administrative expense decreased $2.8 million, due primarily to a decrease of $5.5 million in professional services related to decreased legal fees and transaction expenses in current year. This decrease was partially offset by increases of $1.7 million in personnel expenses primarily from higher bonus achievement and higher taxes associated with equity vesting and $0.8 million in stock compensation expense due primarily to increased outstanding equity grants. Six months ended June 30, 2024 compared with six months ended June 30, 2023 General and administrative expense decreased $5.0 million, due primarily to a decrease of $8.5 million in professional services due primarily to decreased legal fees and transaction expenses in the current year. This decrease was offset by an increase of $2.0 million in personnel expenses from higher bonus achievement, higher headcount and higher taxes associated with equity vesting, as well as an increase of $1.4 million in stock-based compensation expense, due primarily to increased outstanding equity grants. Amortization of Intangibles Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 Change 2024 2023 Change Amortization of intangibles $ 496 $ 2,146 $ (1,650 ) $ 1,905 $ 2,146 $ (241 ) 23 Table of Contents Three months ended June 30, 2024 compared with three months ended June 30, 2023 Amortization of intangibles decreased $1.7 million. The decrease relates to the intangibles acquired as part of our April 3, 2023 acquisition of Voyantic Oy. Certain intangible assets acquired had a useful life of less than 1 year, resulting in a higher amortization expense in the prior-year period. Six months ended June 30, 2024 compared with six months ended June 30, 2023 Amortization of intangibles decreased $241,000. The decrease relates to the intangibles acquired as part of our April 3, 2023 acquisition of Voyantic Oy. Certain intangible assets acquired had a useful life of less than 1 year, resulting in a higher amortization expense in the prior-year period. Restructuring Costs Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 Change 2024 2023 Change Restructuring costs $ — $ — $ — $ 1,812 $ — $ 1,812 Three months ended June 30, 2024 compared with three months ended June 30, 2023 There were no restructuring costs for the three months ended June 30, 2024 and 2023. Six months ended June 30, 2024 compared with six months ended June 30, 2023 The increase in restructuring costs relates to the restructuring we initiated on February 7, 2024. See Note 12, Restructuring for further details. Other Income, net Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 Change 2024 2023 Change Other income, net $ 2,122 $ 1,165 $ 957 $ 3,414 $ 2,530 $ 884 Other income, net comprises primarily interest income on our short-term investments. Three months ended June 30, 2024 compared with three months ended June 30, 2023 Other income, net increased from the prior period due to increased interest income given higher invested balances and higher interest rates. Six months ended June 30, 2024 compared with six months ended June 30, 2023 Other income, net increased from the prior period due to increased interest income given higher invested balances and higher interest rates. Income From Settlement of Litigation Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 Change 2024 2023 Change Income from settlement of litigation $ — $ — $ — $ 45,000 $ — $ 45,000 Three months ended June 30, 2024 compared with three months ended June 30, 2023 There was no income from litigation for the three months ended June 30, 2024 and 2023. 24 Table of Contents Six months ended June 30, 2024 compared with six months ended June 30, 2023 The increase in income from settlement of litigation relates to the Settlement Agreement with NXP on March 13, 2024. See Note 6, Commitments and Contingencies for further details. Interest Expense Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 Change 2024 2023 Change Interest expense $ 1,217 $ 1,211 $ 6 $ 2,433 $ 2,420 $ 13 Interest expense comprises primarily cash interest and amortization of debt issuance costs on our debt. Three months ended June 30, 2024 compared with three months ended June 30, 2023 Interest expense was comparable for the periods. Six months ended June 30, 2024 compared with six months ended June 30, 2023 Interest expense was comparable for the periods. Income Tax Expense Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 Change 2024 2023 Change Income tax benefit $ 12 $ 349 $ (337 ) $ 13 $ 277 $ (264 ) We are subject to federal and state income taxes in the United States and foreign jurisdictions. Income tax expense decreased $0.3 million for the three and six months ended June 30, 2024 compared to the prior-year periods due to changes in our estimated effective tax rate after we acquired Voyantic Oy. Non-GAAP Financial Measures Our key non-GAAP performance measures include adjusted EBITDA and non-GAAP net income (loss), as defined below. We use adjusted EBITDA and non-GAAP net income (loss) as key measures to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operating plans. We believe these measures provide useful information for period-to-period comparisons of our business to allow investors and others to understand and evaluate our operating results in the same manner as our management and board of directors. Our presentation of these non-GAAP financial measures is not meant to be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP, and our non-GAAP measures may be different from similarly termed non-GAAP measures used by other companies. 25 Table of Contents Adjusted EBITDA We define adjusted EBITDA as net income (loss) determined in accordance with GAAP, excluding, if applicable for the periods presented, the effects of stock-based compensation; depreciation and amortization; restructuring costs; settlement income and related costs; induced conversion expense; other income, net; interest expense; acquisition related expense and related purchase accounting adjustments; and income tax benefit (expense). During the year ended December 31, 2023, we revised our definition of adjusted EBITDA to exclude acquisition related expenses, related purchase accounting adjustments and amortization of intangibles in connection with our Voyantic Oy acquisition. During the three months ended March 31, 2024, we further revised our definition of adjusted EBITDA to exclude settlement income. We have excluded these items because we do not believe they reflect our core operations and us excluding them enables more consistent evaluation of our operating performance. The revision to our definition of adjusted EBITDA did not impact adjusted EBITDA for any previously reported periods because there was no impact of a similar nature in such prior periods affecting comparability. The following table presents a reconciliation of net loss to adjusted EBITDA: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 Change 2024 2023 Change Net income (loss) $ 9,963 $ (8,066 ) $ 18,029 $ 43,307 $ (12,424 ) $ 55,731 Adjustments: Other income, net (2,122 ) (1,165 ) (957 ) (3,414 ) (2,530 ) (884 ) Interest expense 1,217 1,211 6 2,433 2,420 13 Income tax expense (benefit) (12 ) (349 ) 337 (13 ) (277 ) 264 Depreciation and amortization 2,999 4,273 (1,274 ) 6,908 6,066 842 Stock-based compensation 14,705 13,148 1,557 26,495 23,372 3,123 Restructuring costs — — — 1,812 — 1,812 Acquisition related expense 79 630 (551 ) 986 1,672 (686 ) Purchase accounting adjustments — 276 (276 ) — 276 (276 ) Income on settlement of litigation — — — (45,000 ) — (45,000 ) Adjusted EBITDA $ 26,829 $ 9,958 $ 16,871 $ 33,514 $ 18,575 $ 14,939 Non-GAAP Net Income (Loss) We define non-GAAP net income as net income (loss), excluding, if applicable for the periods presented, the effects of stock-based compensation; depreciation and amortization; restructuring costs; settlement income and related costs; induced conversion expense; acquisition related expense and related purchase accounting adjustments; and the corresponding income tax impacts of adjustments to net income (loss). During the year ended December 31, 2023, we revised our definition of non-GAAP net income to adjust for acquisition related expenses, related purchase accounting adjustments and amortization of intangibles in connection with our Voyantic Oy acquisition. During the three months ended March 31, 2024, we further revised our definition of non-GAAP net income to exclude settlement income. The revisions to our definition of non-GAAP net income did not impact non-GAAP net income for any previously reported periods because there was no impact of a similar nature in such prior periods affecting comparability. Additionally, during the year ended December 31, 2023, we revised our definition of non-GAAP net income (loss) to adjust for income tax effects of adjustments to net income (loss), calculated at the statutory rate for current and historical periods. We have revised the prior period amounts to conform to our current period presentation. 26 Table of Contents The following table presents a reconciliation of net loss to non-GAAP net income (loss): Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 Change 2024 2023 Change Net income (loss) $ 9,963 $ (8,066 ) $ 18,029 $ 43,307 $ (12,424 ) $ 55,731 Adjustments: Depreciation and amortization 2,999 4,273 (1,274 ) 6,908 6,066 842 Stock-based compensation 14,705 13,148 1,557 26,495 23,372 3,123 Restructuring costs — — — 1,812 — 1,812 Acquisition related expense 79 630 (551 ) 986 1,672 (686 ) Purchase accounting adjustments — 276 (276 ) — 276 (276 ) Income on settlement of litigation — — — (45,000 ) — (45,000 ) Income tax effects of adjustments (1) (2,433 ) (965 ) (1,468 ) (3,024 ) (1,783 ) (1,241 ) Non-GAAP net income $ 25,313 $ 9,296 $ 16,017 $ 31,484 $ 17,179 $ 14,305 (1) The tax effects of the adjustments are calculated using the statutory rate, taking into consideration the nature of the item and relevant taxing jurisdiction. Liquidity and Capital Resources As of June 30, 2024, we had cash, cash equivalents and short-term investments of $220.2 million, comprising cash deposits held at major financial institutions and short-term investments in a variety of securities, including U.S. government securities, treasury bills, corporate notes and bonds, commercial paper, asset-backed securities and money market funds. As of June 30, 2024, we had working capital of $39.4 million. Historically, we have funded our operations primarily through cash generated from operations and by issuing equity securities, convertible-debt offerings and/or borrowing under our prior senior credit facility. In 2023, our principal uses of cash were increases in our inventory balance, our acquisition of Voyantic Oy and capital expenditures. We believe, based on our current operating plan, that our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for at least the next 12 months. Over the longer term, we plan to continue investing to enhance and extend our platform. If our available funds are insufficient to fund our future activities or execute our strategy, then we may raise additional capital through equity, equity-linked or debt financing, to the extent such funding sources are available. Alternatively, we may need to reduce expenses to manage liquidity; however, any such reductions could adversely impact our business and competitive position. Sources of Funds From time to time, we may explore additional financing sources and ways to reduce our cost of capital, including equity, equity-linked and debt financing. In addition, in connection with any future acquisitions, we may pursue additional financing which may be debt, equity or equity-linked financing or a combination thereof. We can provide no assurance that any additional financing will be available to us on acceptable terms. 2021 Notes In November 2021, we issued convertible notes due 2027 in an aggregate principal amount of $287.5 million which we refer to as the 2021 Notes. The 2021 Notes are our senior unsecured obligation, bearing interest at a fixed rate of 1.125% per year, payable semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2022. The 2021 Notes are convertible into cash, shares of our common stock or a combination thereof, at our election, and will mature on May 15, 2027 unless earlier repurchased, redeemed or converted in accordance with the indenture terms. The net proceeds from the 2021 Notes were approximately $278.4 million after initial debt issuance costs, fees and expenses. We used approximately $183.6 million of the net proceeds to repurchase approximately $76.4 million aggregate principal amount of convertible notes due 2026, or the 2019 Notes through individual privately negotiated transactions concurrent with the 2021 Notes offering. We used $17.6 million to repurchase the remaining $9.85 million aggregate principal of the 2019 Notes through individual privately negotiated transactions in June 2022. We will use the rest of the net proceeds for general corporate purposes. For further information on the terms of this debt, please refer to Note 7 to our condensed consolidated financial statements included elsewhere in this report. 27 Table of Contents Cash Flows The following table shows a summary of our cash flows for the periods indicated: Six Months Ended June 30, (in thousands) 2024 2023 Net cash provided by (used in) operating activities $ 105,619 $ (49,104 ) Net cash provided by (used in) investing activities 5,465 68,991 Net cash provided by financing activities 8,844 5,753 Operating Cash Flows For the six months ended June 30, 2024, we generated $105.6 million of net cash from operating activities. These net cash proceeds were due primarily to $78.4 million of net income adjusted for non-cash items and $27.2 million in working capital due primarily to lower inventory. For the six months ended June 30, 2023, we used $49.1 million of net cash from operating activities. This net cash usage was due primarily to $65.2 million in working capital due primarily to higher inventory and accounts receivable offset by higher accounts payable and $16.1 million of net loss adjusted for non-cash items. Investing Cash Flows For the six months ended June 30, 2024, we generated $5.5 million of net cash from investing activities. These net cash proceeds were due primarily to investment maturities of $13.0 million, partially offset by cash paid for equipment purchases of $7.6 million. For the six months ended June 30, 2023, we generated $69.0 million of net cash from investing activities. These net cash proceeds were due primarily to investment maturities of $92.4 million and investment sales of $13.4 million, respectively, partially offset by cash paid for the Voyantic Oy acquisition of $23.4 million and net property and equipment purchases of $13.2 million. Financing Cash Flows For the six months ended June 30, 2024, we generated $8.8 million of net cash from financing activities. These net cash proceeds were due to stock-option exercises and our employee stock purchase plan, offset by $4.6 million of cash paid for the earnout payment related to the Voyantic Oy acquisition. For the six months ended June 30, 2023, we generated $5.8 million of net cash from financing activities. These net cash proceeds were due primarily to $5.8 million from stock-option exercises and our employee stock purchase plan. Cash Requirements and Contractual Obligations Our primary cash requirements are for operating expenses and capital expenditures. Our operating expenses have generally increased as we invest in sales and marketing and in developing products and technologies that we believe have the potential to drive long-term business growth. Convertible Notes – As of June 30, 2024 the principal balance outstanding on the 2021 Notes is $287.5 million. Refer to Note 7 of our Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for maturity date, stated interest rate and additional information on our 2021 Notes. Operating Lease Obligations – Our lease portfolio comprises primarily operating leases for our office space. For additional information regarding our operating leases, see Note 11 of our Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2023. Purchase Commitments – Purchase commitments as of June 30, 2024 total $27.8 million and comprise noncancelable commitments to purchase inventory. Off-Balance-Sheet Arrangements Since inception, we have not had any relationships with unconsolidated entities, such as entities often referred to as structured finance or special-purpose entities, or financial partnerships that would have been established for the purpose of facilitating off-balance-sheet arrangements or for another contractually narrow or limited purpose. 28 Table of Contents Critical Accounting Policies and Significant Estimates We have prepared our condensed consolidated financial statements in accordance with GAAP. Our preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates and assumptions. For information on our critical accounting policies and estimates, see Part II, Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of our Annual Report on Form 10-K for the year ended December 31, 2023. Item 3. Quantitative and Qualitati ve Disclosures About Market Risk. We are exposed to market risks in the ordinary course of our business. Interest Rate Risk Under our current investment policy, we invest our excess cash in money market funds, U.S. government securities, corporate bonds and notes and commercial paper. Our current investment policy seeks first to preserve principal, second to provide liquidity for our operating and capital needs and third to maximize yield without putting our principal at risk. We do not enter into investments for trading or speculative purposes. We had cash, cash equivalents and short-term investments of $220.2 million as of June 30, 2024. Our investments are exposed to market risk due to fluctuations in prevailing interest rates, which may reduce the yield on our investments or their fair value. Because most of our investment portfolio is short-term in nature, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio, and therefore we do not expect our results of operations or cash flows to be materially affected by a sudden change in market interest rates. Our convertible notes have fixed interest rates, thus a hypothetical 100 basis point increase in interest rates would not impact interest expense. Inflation Risk We do not believe that inflation has had a material effect on our business, financial condition or results of operations. To date, we have been able to substantially offset higher product costs by increasing our product selling prices. If our product costs became subject to significant future inflationary pressures, then we may not be able to fully offset these higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations. 29 Table of Contents Foreign Currency Exchange Risk We are subject to risks associated with transactions that are denominated in currencies other than our functional currency and the effects of translating amounts denominated in a foreign currency to the U.S. dollar as a normal part of our reporting process. The functional currency of the majority of our foreign subsidiaries is the U.S. dollar. Accordingly, gains and losses resulting from remeasuring transactions denominated in currencies other than U.S. dollars are included in other income, net on the consolidated statements of operations. One of our European subsidiaries utilize Euros as their functional currency, which results in a translation adjustment that we include as a component of accumulated other comprehensive income. For any of the periods presented, we did not have material impact from exposure to foreign currency fluctuation. As we grow operations, our exposure to foreign currency risk will likely become more significant.